In re Raejean S. Bonham dba World Plus
Bankruptcy No. F95-00897
Unofficial Web Site
On April 10, 1998 Bankruptcy Judge Herbert A. Ross issued an 89 page memorandum decision granting the trustee's Motion for Substantive Consolidation. Because of the length of the decision, it is broken into two parts, linkedthrough the Table of Contents. Part I contains the Introduction and Facts; Part II contains the Issues, Legal Analysis and Conclusion. NOTE: Formatting here is slightly different than in the printed version because of the limitations of hypertext markup language, the formatting code for the World Wide Web.
THIS IS PART I
UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF ALASKA
605 West 4th Avenue, Room 138, Anchorage, AK 99501-2296 (Phone
907/271-2655)
|
In re |
Case No. F95-00897-HAR |
|
RAEJEAN BONHAM, aka Jean Bonham, aka Jeannie Bonham, dba World Plus, Debtor(s) |
MEMORANDUM DECISION FOR ALLOWANCE OF SUBSTANTIVE CONSOLIDATION |
1. INTRODUCTION Larry Compton, the chapter 7 trustee, filed a motion to consolidate the estate of the individual debtor, RaeJean Bonham, with the estates of two non-debtors, World Plus, Inc. (WPI) and Atlantic Pacific Funding Corp. (APFC), two corporations closely held by Bonham.
The trustee asks that consolidation be effective as of December 19, 1995, the date that the involuntary bankruptcy proceeding was commenced against Ms. Bonham. The trustee seeks to fix that date for avoidance proceedings with respect to any transfers made by Bonham, WPI, and APFC.
There are no assets in these estates of significant value, except the avoidance recoveries. Ms. Bonham operated a Ponzi scheme through investment contracts issued in the name of WPI and APFC in the four or five years before December 19, 1995. If consolidation is not permitted, the creditors of Bonham, WPI and APFC, totaling over $50 million dollars in claims filed in this bankruptcy (the largest percentage coming from losses related to the investment contracts) will recover nothing.
There has been vigorous opposition to consolidation from the targets of the avoidance actions filed by the trustee. Appendix A is a table setting out the voluminous pleadings on this issue.
The trustee has filed over 600 adversary proceedings seeking avoidance of payments by WPI and APFC to investment contract participants. If the consolidation is denied, most or all of these avoidance actions will fail and the creditors will receive nothing.
Whether or not to allow substantive consolidation is generally a fact-driven decision. For that reason, the facts the court relies on are extensively set forth in Part 2 of this Memorandum Decision. The case law uniformly holds that substantive consolidation should be sparingly used, with an eye to possible negative effects on creditors. Yet, there are cases where substantive consolidation is justly applied.
The bar is set even higher with respect to the substantive consolidation of non-debtors. Nonetheless, this is an appropriate case to invoke the doctrine. In balancing the interests of the parties, I find that they favor granting the substantive consolidation of the WPI and APFC estates with the estate of RaeJean Bonham.
The procedure to raise the issue has been fair. The effective date of the substantive consolidation of this case with the estates of WPI and APFC shall be December 19, 1995.
2.1. Procedural Background-
2.1.1. On December 19, 1995, an involuntary chapter 7 petition was filed by various creditors against RaeJean Bonham, aka Jean Bonham, aka Jeannie Bonham, dba World Plus.
2.1.2. On December 20, 1995, a hearing was held on the motion of the petitioning creditors to appoint an interim trustee. Larry Compton was appointed the interim trustee during this involuntary chapter 7 proceeding. [See, Order, Docket Entry 5].
2.1.3. The debtor, RaeJean Bonham, initially contested the involuntary chapter 7. However, at a hearing on January 8, 1996, she agreed to the petition and the appointment of a chapter 11 trustee, and converted the case to chapter 11. On January 9, 1996, the court entered an Order For Relief And Voluntarily Conversion To A Chapter 11 Case (Docket Entry 38, filed January 9, 1996).
2.1.4. RaeJean Bonham filed a voluntary chapter 11 petition on January 5, 1996, Case No. F96-00013-HAR, listing as debtors herself, APFC, and WPI. The petition states in Bonham's handwriting: "This is an individual filing - these are names of corporations in which debtor was a former shareholder. RSB." No activity had taken place in that case, and no schedules, statements or lists had been filed. At the hearing on January 8, 1996, the court indicated that it would dismiss the voluntary case, F96-00013-HAR, and an Order Dismissing Voluntary Petition was entered (Docket Entry 5, filed January 9, 1996). There was no notice to interested parties of the intent to dismiss, except to those appearing at the hearing.
2.1.5. The chapter 11 trustee, Larry Compton, investigated the operations of the debtor-in-possession, and concluded that he could not continue the business. Among other things, the purported business (selling tickets procured with frequent flyer mileage, which the debtor or her related companies purchased from third parties) appeared to conflict with an injunction that had been entered against RaeJean Bonham and World Plus, Inc. in the United States District Court for the Northern District of Georgia, Delta Air Lines, Inc. v Robert Y. Seward, et al., Case No. 93-CV-1036-HTW. The debtor acquired funds with the promise of exorbitant interest rates for the alleged purpose of purchasing frequent flyer mileage to conduct the ticket sales business. The trustee shortly concluded that the ticket sales business was a front for a Ponzi investment scheme. After hearing testimony on January 29, 1996, the court converted the chapter 11 case to chapter 7 (Docket Entry 147, filed January 30, 1996). Larry Compton was appointed chapter 7 trustee (Docket Entry 143, filed January 29, 1996).
2.1.6. There have been approximately 1,111 proofs of claim filed for over $53 million. Most of these claims, to the exclusion of the Delta Air Lines settlement (Docket Entry 1364, filed August 26, 1997), and a handful of others, arise from the investment operations of the debtor or her related corporations, WPI or APFC.
2.1.7. Minimal net proceeds are expected from the liquidation of personal assets of the debtor. Therefore, there are virtually no assets in this case except the potentiality of the trustee recovering on fraudulent transfers or preference actions. The trustee has commenced approximately 613 adversary proceedings to recover fraudulent and preferential transfers from investors of the debtor, WPI or APFC.
2.2. Background Of World Plus and World Plus, Inc.-
2.2.1. RaeJean Bonham operated a proprietorship known as "World Plus" before April 1991. The stated purpose of the business was to purchase frequent flyer miles available from various airlines and use them to acquire tickets, which she then sold to the public. Sometime prior to 1989, World Plus began issuing short term investment contracts for returns of 50% within 60 to 90 working days. World Plus later offered investment contracts returning 50% for 6 to 8 months, and contracts for 20% over 6 months. Beginning in June 1995, World Plus began issuing contracts for 50% interest for periods as short as 10 days. (See, Affidavit of Larry D. Compton ["Compton Affidavit"], Exhibit 35).
2.2.2. RaeJean Bonham incorporated World Plus, Inc. (WPI) on April 22, 1991. (See, Compton Affidavit, Exhibit 8).
2.2.3. Bonham was the incorporator of WPI, its registered agent and sole director. The only other officer of WPI was Bonham's husband, Steve Bonham, who was listed as vice president. (See, Compton Affidavit, Exhibit 9). Steve Bonham denies he was significantly involved in the affairs of WPI, and claims that his wife, RaeJean, ran the business.
2.2.4. RaeJean Bonham is the sole shareholder of WPI, but WPI never issued stock certificates or recorded ownership in any stock register for WPI.
2.2.5. There is no evidence of WPI holding any shareholder meetings, and there are no minutes of director meetings.
2.2.6. WPI never filed any income tax returns with the Internal Revenue Service or the State of Alaska.
2.2.7. There are no financial statements for WPI. Larry Compton is a licensed certified public accountant and panel trustee in Alaska. As such, he has a great deal of forensic accounting experience in investigating the financial records of debtors and testing them for fraud. In this case, Mr. Compton, after diligent inquiries, has been unable to locate income statements, balance sheets, cash journals, and the normal accounting records one would expect in a business that handled as much cash as debtor, WPI, and APFC.
2.2.8. WPI was involuntarily dissolved by the State of Alaska on September 18, 1995. (See, Compton Affidavit, Exhibit 10).
2.3. Background of Atlantic Pacific Funding Corp.-
2.3.1. RaeJean Bonham began to issue investment contracts under the name of APFC in the fall of 1992. The bulk of APFC investment contracts were issued in 1993 and 1994. These investment contracts were purportedly for the purpose of purchasing frequent flyer miles from third parties for resale through her ostensible business. The first investment contract by APFC, which the trustee has located to date, was issued on October 30, 1992, to Jack C. Mellor for 50% return in 6 months. (See, Compton Affidavit, Exhibit 36).
2.3.2. When Ms. Bonham first began to issue investment contracts under the name of APFC, she does not appear to have been shareholder, officer, director, or otherwise an agent of APFC, a Nevada corporation. Her husband, Steve, denies he had any significant role in the operation of APFC, and claims that his wife, RaeJean, ran the business.
2.3.3. On September 21, 1992, Irma D. Butler, a customer service coordinator for Laughlin Associates, Inc., incorporated APFC in Nevada.
2.3.4. On February 19, 1993, Bonham signed a Nevada Headquarters Program or Contract Office Service Package with Laughlin Associates to provide corporate services and a Nevada base. (See, Compton Affidavit, Exhibit 13). As part of the corporate profile of APFC, Bonham instructed Laughlin to take daily phone messages, stating that Bonham was currently "out of the office" and inform Bonham of the phone calls so she could return them from her Fairbanks office. Bonham also completed a Mail Forwarding Service Agreement and Application For Delivery of Mail Through Agent, instructing Laughlin to forward her mail to a Fairbanks post office box. On this agreement, Bonham described APFC's business as "travel." (See, Compton Affidavit, Exhibit 14).
2.3.5. On February 24, 1993, Bonham opened Account No. 25101940 in the name of RaeJean S. Bonham, dba Atlantic Pacific Funding Corporation, with First National Bank of Anchorage (the FNBA Account). The initial deposit was a check in the amount of $5,000 drawn on WPI's Key Bank Account No. 125200879. (See, Compton Affidavit, Exhibit 12).
2.3.6. On March 19, 1993, Bonham signed an Application for Business License for Carson City, Nevada on behalf of APFC. RaeJean Bonham is shown as the president, and the nature of business is noted as "travel." (See, Compton Affidavit, Exhibit 15).
2.3.7. On March 22, 1993, George Johnson signed a bill of sale on APFC letterhead acknowledging receipt of $1,000 from APFC for payment "in full for the purchase of this corporation from RaeJean Bonham." (See, Compton Affidavit, Exhibit 16).
2.3.8. On May 6, 1993, Carson City, Nevada issued a business license effective through December 31, 1993. The licensee was stated as: "Bonham, RaeJean S. Atlantic Pacific Funding, Inc." (See, Compton Affidavit, Exhibit 17).
2.3.9. On or about September 15, 1993, the State of Nevada requested a List of Officers, Directors, and Agent for APFC. Laughlin Associates, Inc. is shown as the corporation's duly appointed resident agent. Charles Ferrara was listed as the president, secretary, and treasurer of APFC. (See, Compton Affidavit, Exhibit 18).
2.3.10. On October 1, 1993, Bonham signed a Consent to Action Without a Meeting of the Shareholders of Atlantic Pacific Funding, Inc., by which Charles Ferrara was removed as director and she was named director of APFC. Bonham used preprinted forms supplied by Laughlin Associates. The accompanying Acceptance of Office is signed by Bonham and dated February 14, 1994. (See, Compton Affidavit, Exhibit 21).
2.3.11. In February 1994, Bonham completed a subsequent List of Officers, Directors, and Agent, identifying herself as the president, secretary, treasurer, and sole director of APFC. (See, Compton Affidavit, Exhibit 19). Bonham submitted another List of Officers, Directors, and Agent for APFC in August 1994, identifying herself as president, secretary and treasurer, but did not disclose the directors of the corporation. The address of the corporation is that of Laughlin Associates at 2533 N. Carson, #1185, Carson City, NV 89706. (See, Compton Affidavit, Exhibit 20).
2.3.12. The debtor's files also contain Minutes of Annual Meeting of Board of Directors of APFC, and Minutes of Annual Meeting of Stockholders of APFC, both reflecting that they were held on September 24, 1994. (See, Compton Affidavit, Exhibit 22).
2.3.13. No stock certificates appear to have been issued or logged onto a stock ledger reflecting Bonham's ownership of the stock of APFC.
2.3.14. The trustee has located no documentation regarding capitalization of the corporation or its asset base.
2.3.15. APFC never filed an income tax return with the IRS or the State of Alaska.
2.3.16. No financial statements for APFC have been located despite the trustee's diligent search and requests for production of information and records from RaeJean Bonham.
2.3.17. APFC never registered to do business in Alaska.
2.3.18. Bonham sent a letter dated February 9, 1994, on APFC letterhead to WPI and APFC investors. This letter stated that WPI and APFC were registered only in the states of Alaska and Nevada. She admonished her investors not to tell anyone, including financial institutions, about her investment program. (See, Compton Affidavit, Exhibit 23). Some of the investors have denied seeing this letter.
2.3.19. APFC had no employees.
2.3.20. APFC had no business other than the issuance of investment contracts, collecting invested funds, and paying investors of APFC and WPI. APFC was no longer a viable Nevada corporation after October 1, 1995. (See, Compton Affidavit, Exhibit 71).
2.4. Business of Selling Airline Tickets Procured With Frequent Flyer Miles-
2.4.1. WPI and World Plus, the proprietorship operated by RaeJean Bonham prior to the incorporation of WPI, sold frequent flyer tickets to the general public. RaeJean Bonham testified in various proceedings before this court that she purchased large blocks of frequent flyer miles from large corporations, some of them Fortune 500 corporations. The trustee, Larry Compton, has found no proof of such purchases, and no inventory of miles. There are no records regarding the procurement and disposition of any such miles. The court finds that Bonham's testimony in this respect was false.
2.4.2. Bonham appears to have purchased some frequent flyer miles from various brokerage firms dealing in frequent flyer mileage. After making an airline reservation, an employee of WPI would receive payment from the customer and would order a frequent flyer ticket from a broker. The broker would procure the ticket from an individual frequent flyer member. The broker would take 50% of the ticket price at the time of the order, and receive the balance upon delivery of the ticket.
2.4.3. Since 1991, the largest part of WPI tickets were with Delta Air Lines and, in 1994, Bonham estimated that 90% of the reservations were placed with Delta Air Lines.
2.4.4. The trustee has located limited records purporting to detail the sales of frequent flyer tickets for 1991, 1992 and 1994 (including January 1995). This information included the sales price of each ticket and the cost of the ticket recorded on a monthly basis. The trustee has not found similar information for any other year. The debtor's records show that in 1991 and 1992, World Plus/WPI sold approximately 100 tickets a month, but by 1994, the number had fallen to approximately 50 tickets per month with a gross profit of approximately $5,000 - $6,000 per month. The sales of tickets for this period, according to the debtor's records, were as follows:
|
Date - 1991 |
No. of Tickets |
Amount Sold |
Cost of Goods |
Gross Profit |
Profit per Ticket |
|
Jan-91 |
120 |
$64,830 |
$55,660 |
$9,170 |
$76 |
|
Feb-91 |
75 |
$43,872 |
$36,100 |
$7,772 |
$105 |
|
Mar-91 |
146 |
$83,520 |
$68,600 |
$14,920 |
$102 |
|
Apr-91 |
65 |
$35,002 |
$30,415 |
$4,587 |
$71 |
|
May-91 |
67 |
$36,270 |
$37,706 |
($1,436) |
$0 |
|
Jun-91 |
136 |
$70,920 |
$61,825 |
$9,095 |
$67 |
|
Jul-91 |
80 |
$39,829 |
$35,655 |
$4,174 |
$52 |
|
Aug-91 |
91 |
$49,815 |
$41,100 |
$8,715 |
$96 |
|
Sep-91 |
48 |
$27,974 |
$22,295 |
$5,679 |
$118 |
|
Oct-91 |
69 |
$39,255 |
$31,055 |
$8,200 |
$119 |
|
Nov-91 |
112 |
$59,808 |
$50,712 |
$9,096 |
$81 |
|
Dec-91 |
245 |
$129,900 |
$110,710 |
$19,190 |
$78 |
|
TOTAL |
1254 |
$680,995 |
$581,833 |
$99,162 |
$79 |
|
Date - 1992 |
No. of Tickets |
Amount Sold |
Cost of Goods |
Gross Profit |
Profit per Ticket |
|
Jan-92 |
113 |
$63,976 |
$53,289 |
$10,687 |
$95 |
|
Feb-92 |
71 |
$39,819 |
$32,030 |
$7,789 |
$110 |
|
Mar-92 |
92 |
$50,805 |
$42,250 |
$8,555 |
$93 |
|
Apr-92 |
114 |
$61,889 |
$53,205 |
$8,684 |
$76 |
|
May-92 |
74 |
$40,502 |
$34,280 |
$6,222 |
$84 |
|
Jun-92 |
153 |
$78,023 |
$67,335 |
$10,688 |
$70 |
|
Jul-92 |
147 |
$78,310 |
$67,305 |
$11,005 |
$75 |
|
Aug-92 |
123 |
$64,452 |
$55,879 |
$8,573 |
$70 |
|
Sep-92 |
76 |
$40,405 |
$34,746 |
$5,659 |
$75 |
|
Oct-92 |
93 |
$50,395 |
$41,750 |
$8,645 |
$93 |
|
Nov-92 |
148 |
$77,055 |
$66,938 |
$10,117 |
$68 |
|
Dec-92 |
271 |
$141,045 |
$121,623 |
$19,422 |
$72 |
|
TOTAL |
1,475 |
$786,676 |
$670,630 |
$116,046 |
$79 |
|
Date-1994 (Incl. 01/95) |
No. of Tickets |
Amount Sold |
Cost of Goods |
Gross Profit |
Profit per Ticket |
|
Jan-94 |
48 |
$26,320 |
$21,290 |
$5,030 |
$105 |
|
Feb-94 |
41 |
$24,168 |
$18,810 |
$5,358 |
$131 |
|
Mar-94 |
50 |
$34,870 |
$28,307 |
$6,563 |
$131 |
|
Apr-94 |
23 |
$32,140 |
$25,790 |
$6,350 |
$233 |
|
May-94 |
45 |
$25,295 |
$21,030 |
$4,265 |
$95 |
|
Jun-94 |
129 |
$65,615 |
$53,595 |
$12,020 |
$93 |
|
Jul-94 |
94 |
$53,094 |
$44,280 |
$8,814 |
$94 |
|
Aug-94 |
82 |
$46,615 |
$38,755 |
$7,860 |
$96 |
|
Sep-94 |
57 |
$32,640 |
$26,720 |
$5,920 |
$104 |
|
Oct-94 |
52 |
$31,100 |
$25,820 |
$5,280 |
$102 |
|
Nov-94 |
51 |
$28,847 |
$24,484 |
$4,363 |
$86 |
|
Dec-94 |
95 |
$53,240 |
$48,678 |
$4,562 |
$48 |
|
Jan-95 |
17 |
$9,590 |
$8,388 |
$1,202 |
$71 |
|
TOTAL |
784 |
$463,533 |
$385,947 |
$77,586 |
$99 |
(See, Exhibit 33 to the Compton Affidavit, Docket Entry 732, and Exhibit 84 to the Supplemental Affidavit of Larry D. Compton [Supplemental Affidavit], Docket Entry 1281)
2.4.5. The gross profit figures shown in ¶ 2.4.4, are prior to the deduction of overhead expenses such as rent, employee salaries, insurance, etc.
2.4.6. Other than the ticket information described in ¶ 2.4.4, the investor information described in ¶ 2.7.3, and check registers, there are no ledgers, financial statements, or accounting information for Bonham, World Plus, WPI, or APFC. In addition, the debtor has not cooperated with the trustee's investigation and her answers to the trustee's questions have been inconsistent, evasive, and not credible. She has frustrated the trustee's efforts to reconstruct her business activities. The trustee has attempted to reconstruct the debtor's financial records based on the canceled checks issued by World Plus, WPI, and APFC, and the monthly bank statements for those entities obtained from the relevant financial institutions under subpoena, or from federal agencies that have subpoenaed the debtor's records. Using available check registers, trustee's counsel has created a Quicken database detailing the debtor's deposits, payments, and transfers to the extent possible. The database has substantially complete deposit and payment detail for non-cash items for the years 1990 and 1992-1995.
2.4.7. The trustee has attempted to analyze all cash deposits which he located in the records of debtor, WPI and APFC, and has identified approximately $2.4 million of such deposits. Even assuming that these are all ticket revenues and were added to the gross profits shown in ¶ 2.4.4, there would probably have been a profit in 1992 and 1995, but still a loss in 1990, 1993, and 1994.
2.4.8. The ticket sales business did not generate sufficient revenue to cover the debt service on the investment contracts. That debt service was covered by procuring subsequent investment contracts, the proceeds of which were used to pay the obligations on prior investment contracts.
2.5. Delta Air Lines Suit-
A complaint was filed in Delta Air Lines, Inc. v Robert Y. Seward, et al., Case No. 93-CV-1036-HTW, in the United States District Court for the Northern District of Georgia in early May 1993. On May 13, 1993, the Georgia District Court entered a preliminary injunction prohibiting the defendant ticket suppliers from selling frequent flyer tickets on Delta Air Lines. An amended complaint was filed on September 13, 1993, adding WPI, RaeJean Bonham, Steven Bonham, and other defendants. That complaint alleged, among other things, that Bonham's ticket brokering defrauded Delta and tortiously interfered with Delta's business relations. On or about January 30, 1995, the Georgia District Court granted Delta's motion for partial summary judgment determining Bonham's and the other defendants' liability to Delta. On September 29, 1995, the Georgia District Court entered a permanent injunction prohibiting the defendant ticket suppliers from selling frequent flyer tickets on Delta Air Lines to, among others, World Plus.
2.6. Investment Contract Business (The Ponzi Scheme)-
2.6.1. Throughout Ms. Bonham's operation of the business, as an individual, as WPI, and as APFC, investment contracts were offered to investors with very high rates of return for relatively short periods. For example, a number of the contracts were for 50% return on investments within 60 to 90 days, although they varied to as low as 20% to 50% for a period of 6 to 8 months.
2.6.2. As the investment business got in trouble due to the pyramid nature of its capital needs, WPI offered as high as 50% on a contract for as short as 10 days.
2.6.3. Bonham, WPI, and APFC dealt with investors who were located in 42 separate states. These 1,000+ investors had over 6,000 investment contracts, of which over 2,000 separate contracts were issued in 1995.
2.6.4. The trustee's investigation has shown that WPI and APFC (and perhaps to a small extent, Bonham, as a sole proprietor in 1991) had the following investment contract obligations outstanding at the end of each calendar year:
|
Year |
Contract Obligations as of 12/31 |
Number of Contracts as of 12/31 |
Number of TicketsNeeded to Sell at $550 per ticket |
|
1991 |
$1,447,500 |
109 |
2,631 |
|
1992 |
$1,330,000 |
85 |
2,418 |
|
1993 |
$21,440,000 |
1030 |
38,981 |
|
1994 |
$25,637,000 |
1263 |
46,612 |
|
1995 |
$22,363,468 |
1144 |
40,660 |
(See, Supplemental Affidavit, Exhibit 88).
Assuming a ticket was sold to a buyer for $550 per ticket, all of which was applied to revenue, the last column indicates how many tickets would have been required to be sold to cover the principal amount of the contracts issued, without even considering the exorbitant interest promised. Bonham and the corporations' actual ticket activity, as reflected in ¶ 2.4.4, was not even close to the actual number of tickets needed.
2.7. Relationships Between World Plus, Inc. and Atlantic Pacific Funding Corp.-
2.7.1. The trustee has determined that WPI routinely transferred investment funds to APFC. For the years ending December 31, 1993, 1994, and 1995, WPI directly transferred the following amounts to APFC's FNBA account:
|
Payor |
Payee |
Period |
Amount |
|
WPI |
Atlantic Pacific |
2/23/93-12/31/93 |
197,000 |
|
WPI |
Atlantic Pacific |
1/1/94-12/31/94 |
1,436,500 |
|
WPI |
Atlantic Pacific |
1/1/95-12/31/95 |
$2,200,000 |
|
TOTAL |
$3,833,500 |
(See, Compton Affidavit, Exhibit 37).
2.7.2. Bonham did not formally notify investors who had dealt with her individually, that she had incorporated WPI in April 1991, and that they were now investing in a corporation that had never been capitalized. Thus, investors with contracts issued by World Plus prior to April 1991, held contracts against a sole proprietorship. Yet, if they rolled the contract over after April 1991, the new contract was with a new entity, WPI.
2.7.3. The overwhelming majority of the investors with multiple investments after 1992, indiscriminately received contracts from both WPI and APFC. Bonham never made any distinction as to which entity would issue the investment contract. The sole records of investments maintained by Bonham were index cards on the individual investor. Even those index cards do not reference which entity issued which contract. (See, Supplemental Affidavit, Exhibit 103).
2.7.4. Nor did the fact that an investor paid money to WPI ensure that WPI would issue the investment contract (or that payment to APFC would result in an investment contract from APFC). To further complicate matters, on maturity APFC often paid the obligations of WPI, and if the investor rolled all or part of the investment contract into a new contract, it was not necessarily issued by the same corporation.
2.8. Bank Accounts-
2.8.1. Bonham, WPI and APFC held and operated several bank accounts for the years 1989-1995. The trustee has discovered the following accounts:
|
Bank Name and Account Number |
Key Bank Account No. 075019140 |
Key Bank Account No. 07001307100 |
First Natl Bank of Anch. Acct No. 2510 194 0 |
Merrill Lynch CMA Account No. 28H-07015 |
Denali State Bank Account No. 102-8281 |
|
Name on Account (per bank statement) |
Steve or RaeJean Bonham |
World Plus until 6/91; thereafter, World Plus, Inc. |
Until 11/93: RaeJean Bonham, dba Atlantic Pacific Funding Corp After 11/93: Atlantic Pacific Funding Corp. [bank statements for all years sent to Fairbanks address] |
World Plus, Inc. |
World Plus, Inc., dba Atlantic Pacific Funding, Inc. |
|
Account name on checks |
Steve or RaeJean Bonham, dba S&S Services |
World Plus until 12/91; thereafter, World Plus, Inc. |
Atlantic Pacific Funding Corp.-[until 11/93: Fairbanks address; thereafter, Nevada address] |
World Plus, Inc., dba Atlantic Pacific |
World Plus, Inc. |
|
Date Opened |
12/8/87 |
1/11/88 |
2/26/93 |
10/4/95 |
8/9/95 |
|
Date Closed |
Nov-95 |
8/10/95 |
10/20/95 |
12/29/95 |
10/9/95 |
2.8.2. The checks used for WPI's Key Bank Account No. 07001307100, show that the account was originally a business account in the name of "World Plus - RaeJean Bonham." (See, Compton Affidavit, Exhibit 82).
2.8.3. Bonham opened Account No. 2510 194 0 at First National Bank of Anchorage on February 26, 1993, in the name of RaeJean Bonham, dba Atlantic Pacific Funding Corporation. Bonham opened the account with a $5,000 deposit from WPI. At the time Bonham opened the FNBA account, APFC operated as the "dba" of RaeJean Bonham, and was funded in large part by investments payable to WPI. In November 1993, the bank statements were changed to read "Atlantic Pacific Funding Corporation."
2.8.4. The trustee's investigation indicates that the debtor's records show that WPI transferred approximately $3.8 million to APFC. These records also reflect over $700,000 in transfers from APFC to WPI. There are no records setting forth the relationship between the corporations. There are no records reflecting or recording the transfer of funds between the corporations, or giving any basis for the transfers. (See, Compton Affidavit, Exhibit 37).
2.8.5. Bonham directly and frequently deposited funds from WPI investments into APFC's bank account. Bonham would take checks made payable to WPI and endorse the check for deposit in APFC's FNBA account. Other times, Bonham would simply line out "WPI" as payee and write "Atlantic Pacific." (See, Compton Affidavit, Exhibits 38 and 40).
2.8.6. By at least March 1995, Bonham had created deposit stamps that read:
FOR DEPOSIT ONLY
ATLANTIC PACIFIC FUNDING CORP.
DBA ATLANTIC PACIFIC FUNDING
WORLD PLUS
(See, Compton Affidavit, Exhibit 41).
2.8.7. In August 1995, Bonham opened Account No. 102-8281 with Denali State Bank. The name on the account according to the bank statements was "WORLD PLUS INC DBA ATLANTIC PACIFIC FUNDING." Investment checks were endorsed with a deposit stamp that read: "WORLD PLUS INC. dba ATLANTIC PACIFIC FUNDING." (See, Compton Affidavit, Exhibits 42 and 43).
2.8.8. In October 1995, Bonham opened a cash management account in Juneau with Merrill Lynch Pierce Fenner & Smith, Account No. 28H-07015. Bonham requested that the account be set up as "WORLD PLUS INC. DBA ATLANTIC PACIFIC FUNDING CORP." Merrill Lynch refused and required Bonham to choose one name or the other. Bonham opened the account in the name of WPI. However, her checks on the account still read: "WORLD PLUS INC. DBA ATLANTIC PACIFIC FUNDING CORP." (See, Compton Affidavit, Exhibits 44 and 45).
2.8.9. Bonham also began to deposit investment funds into the joint account with her husband Steve Bonham, Key Bank Account No. 075019140. In the months of September and October 1995, Bonham deposited a total of $502,185 into this account. For the two months prior to September, she had deposited a total of $10,088.91. The money did not stay in the account for long, as by the end of October 1995, the account had a negative balance of $3,651.64.
|
Key Bank Account No. 075019140 |
Jul-95 |
Aug-95 |
Sep-95 |
Oct-95 |
|
Deposits |
$1,379.91 |
$8,709.00 |
$193,108.05 |
$309,076.95 |
|
Withdrawals |
$0.00 |
$0.00 |
$56,000.00 |
$42,025.00 |
|
Checks Paid |
$479.76 |
$8,321.45 |
$135,029.99 |
$270,703.59 |
|
Deposits less Withdrawals and Checks Paid |
$900.15 |
$387.55 |
$2,078.01 |
($3,651.64) |
(See, Compton Affidavit, Exhibit 46).
2.8.10. At about the same time, Bonham began to transfer investment income from one investor directly to another investor in satisfaction of a prior investment contract. Bonham would endorse the check to another investor or add his or her name as an additional payee. To date, the trustee has discovered approximately 10 lateral transfers in the amount of $20,000. (See, Compton Affidavit, Exhibit 70).
2.8.11. At the time of the petition date, the only account that was still open was the Cash Management Account with Merrill Lynch Pierce Fenner & Smith.
2.8.12. The debtor's use of WPI and APFC bank accounts as well as her own in such an indiscriminate and arbitrary fashion, has completely intermingled and confused the true financial receipts and disbursements of each entity. Given the debtor's lack of cooperation and apparent untrustworthy testimony in various proceedings before this court, it is unlikely that the trustee could ever, at any reasonable cost, sort out the true nature of the financial operations and structure of the three parties (Bonham, WPI, and APFC). The debtor has not only been untruthful in this court, but in previous securities investigations by the State of Idaho and the State of Alaska.
2.9. The State of Alaska Securities Investigation-
2.9.1. On September 4, 1992, Ed Watkins, Alaska Securities Examiner, spoke to RaeJean Bonham who told him that she had no idea the investment contracts might be a security. Bonham represented to Watkins that there would be no new investment sales and no rollovers would occur until the matter was resolved. (See, Compton Affidavit, Exhibit 47).
2.9.2. Despite her assurances to the State of Alaska, Bonham continued to issue investment contracts. Counsel for the trustee has identified over 90 additional investment contracts signed with WPI during the period of the State of Alaska's investigation, September 1992 - March 1993.
2.9.3. Bonham wrote a letter to the "Investors of World Plus, Inc." dated September 28, 1992. Specifically, Bonham informed her investors:
It has come to my attention once again that a few investors have been violating the understood agreement that this a confidential program and is not to be discussed with anyone. It is extremely important to observe this rule in the program and not give out any information to family members, friends or financial institutions.
(See, Compton Affidavit, Exhibit 49). Some investors deny receiving this letter.
2.9.4. On November 17, 1992, Richard Hompesch, WPI's Alaska counsel, wrote to Ed Watkins about the WPI investigation, enclosing a list of active investors showing the date they first became involved and total invested. (See, Compton Affidavit, Exhibit 50).
2.9.5. Hompesch wrote Watkins on February 9, 1993, about the WPI investments in response to Watkins' stated concerns over the investment program. In his letter, Hompesch enclosed a list of investors and the investment balances. (See, Compton Affidavit, Exhibit 51).
2.9.6. Hompesch wrote another letter to Watkins on February 26, 1993, in which he attached a revised list of investors showing 17 contracts coming due in March 1993, for a total of $280,000. (See, Compton Affidavit, Exhibit 53). Hompesch also provided a schedule of contracts that had been paid since September 1992, which indicated $285,000 had been paid to 21 investors.
2.9.7. In March 1993, Hompesch submitted to the Alaska Department of Commerce & Economic Development (the DCED), WPI's application to offer exempt securities. (See, Compton Affidavit, Exhibit 54). In his letter, Hompesch stated that all of the outstanding contracts would be paid on or before March 12, 1993. Id. In reality, WPI and APFC, who had just begun issuing investment contracts, had over $2 million in outstanding contracts as of March 31, 1993. (See, Supplemental Affidavit, Exhibit 89).
2.9.8. Hompesch stated: "Assuming that all prior sales have been resolved to your satisfaction and that all investors are paid in full, World Plus, Inc. would like to begin selling new contracts on March 15, 1993, totaling approximately $300,000." (See, Compton Affidavit, Exhibit 54). Hompesch enclosed a Notice of Exempt Offering for WPI to raise up to $500,000 through contracts bearing 20% interest which would be limited to no more than 25 Alaska residents. Id.
2.9.9. On May 24, 1994, Hompesch wrote to Lawrence Carroll, Senior Securities Examiner for the State of Alaska DCED, to renew the Notice of Exempt Offering, and stated that there were no outstanding investment contracts. (See, Supplemental Affidavit, Exhibit 90).
2.9.10. Attached to the letter is Bonham's affidavit stating that "[a]t this time, World Plus, Inc. and Atlantic Pacific Funding Corporation have paid in full all contracts previously issued by the corporations. At this time, there are no outstanding or unpaid contracts to any investors." Id. This affidavit was incorrect. In fact, during the period from March 15, 1993, through May 24, 1994, WPI and APFC issued over 2,000 investment contracts in the principal amount of $45,710,000. (See, Supplemental Affidavit, Exhibit 91). A review of Exhibit 91 demonstrates that many of the investment contracts for this period were issued by APFC in an effort to circumvent the State of Alaska's registration requirements.
2.9.11. The DCED renewed WPI's exempt status to permit it to issue investment contracts at 20% per annum, to 15 or fewer Alaska residents, the total investment not to exceed $250,000. However, the DCED did require WPI to report the status of its investments every three months.
2.9.12. On September 8, 1994, Hompesch disclosed $220,000 in investments with 14 investors. (See, Supplemental Affidavit, Exhibit 93). Additionally, Hompesch informed the DCED that APFC had issued no new investment contracts. In reality, for the period of June 10, 1994, through September 8, 1994, WPI and APFC issued over 500 new investment contracts having a face amount of $11,765,000. (See, Supplemental Affidavit, Exhibit 94).
2.9.13. On December 12, 1994, Hompesch made his second disclosure to the DCED concerning the status of WPI's and APFC's investment program. (See, Supplemental Affidavit, Exhibit 95). Hompesch wrote that the only new investor since the September report was Ray Patterson, and that the only other change was a reduction in Arlyss Borjesson's investment from $15,000 to $5,000. Again, Hompesch stated that APFC "sold no contracts."
2.9.14. In fact, during this period WPI and APFC issued over 600 new contracts totaling $14,254,000 in principal, according to the debtor's records. (See, Supplemental Affidavit, Exhibit 96).
2.9.15. In his report for the first quarter of 1995, Hompesch informed the DCED that "neither Alaska Pacific Funding nor World Plus, Inc. has made any sales nor has had any investment change since our last report on December 12, 1994." (See, Supplemental Affidavit, Exhibit 97).
2.9.16. However, since December 12, 1994, WPI and APFC had, in fact, issued over 650 new contracts worth $14,458,000 in principal. (See, Supplemental Affidavit, Exhibit 98).
2.9.17. On June 14, 1995, Hompesch again informed the DCED that neither WPI nor APFC had made any new investments, and that no changes had occurred since the March 1995, report. (See, Supplemental Affidavit, Exhibit 99).
2.9.18. Actually, during this period WPI issued over 800 new investment contracts with a principal value of $16,177,000. (See, Supplemental Affidavit, Exhibit 100).
2.9.19. On September 13, 1995, Hompesch filed his last report with the DCED detailing 11 investors with $18,000 invested with WPI. (See, Supplemental Affidavit, Exhibit 101).
2.9.20. That report was also materially deceptive, as from June 15, 1995, through September 13, 1995, WPI issued over 750 contracts totaling $15,636,231 in principal. (See, Supplemental Affidavit, Exhibit 102). Some of these contracts were for two to three months. These contracts did not state the interest rate on the face of the contract, but did state the total amount due from WPI upon maturity. The trustee has calculated that the investment contracts maturing in two to three months returned 50% interest.
2.9.21. Through a series of falsehoods, directly and through her attorney, Bonham intentionally mislead the State of Alaska for over three years, during which time she issued tens of millions of dollars in investment contracts. Bonham used WPI and APFC to perpetuate her fraud, and these single-owner corporations should not be recognized as valid entities in order to shelter them, or their owner, from liability.
2.10. The State of Idaho Securities Investigation-
2.10.1. On November 17, 1993, James Burns, Securities Investigator, Idaho Department of Finance, wrote to RaeJean Bonham requesting information regarding solicitation of investments in Idaho. (See, Compton Affidavit, Exhibit 56). Bonham responded to the request for information on December 21, 1993, on APFC letterhead with a Nevada address, sending names of Idaho investors in WPI and APFC. (See, Compton Affidavit, Exhibit 57). She explained her business as buying large blocks of frequent flyer miles. She also explained that all lenders were Alaska residents when they first invested, but some later moved to Idaho. Id. The investors she identified were: Robert Beeson (c/o Chuck Joy), John Davidson, Howard Hall, Sherman Hart (c/o John Hart), Betty Jordan, Al Knapp, Donna Kreiensieck, and Niki LeClair. Bonham convinced her Idaho investors to write letters of support for APFC. (See, Compton Affidavit, Exhibit 58).
2.10.2. On January 20, 1994, Bonham, on APFC letterhead, responded to Burns' request for information on the investment contracts. She again stated that she never solicited investments in Idaho. Rather, according to her, people contacted her to invest, to see if there was an "open slot." To explain her business, she wrote:
Atlantic Pacific Funding Corporation is my company I use to buy blocks of airline miles from large corporations at a cheaper price and WPI is my travel company which sells airline tickets to the public. We sell those tickets at a much higher price than what we purchased them for, enabling us to pay the interest to my investors.
(See, Compton Affidavit, Exhibit 59).
2.10.3 James Burns wrote to Bonham on February 3, 1994, informing her that the Nevada Corporations Department records showed someone else as the president, secretary and treasurer. (See, Compton Affidavit, Exhibit 60).
2.10.4. On February 16, 1994, Cumer Green, Bonham's Idaho counsel, wrote to James Burns, enclosing a recent filing in Nevada to revise the officers and directors to show Bonham as the president, treasurer, and secretary, as well as sole shareholder. The only other officer was Steve Bonham, her husband. Green explained that there was an oversight and Bonham's omission from the biennial report was just a housekeeping item that needed to be done. (See, Compton Affidavit, Exhibit 61).
2.10.5. Approximately a week later, Ed Watkins, Alaska DCED, wrote to Bonham's Alaska counsel, Daniel Winfree, of Winfree & Hompesch, to inform Bonham that WPI's exemption from registration for WPI would not be renewed unless the Idaho securities investigation was resolved. (See, Compton Affidavit, Exhibit 62).
2.10.6. The State of Idaho concluded its investigation on April 5, 1994, when the Idaho Securities Bureau (Department of Finance) issued its Agreement and Order against RaeJean Bonham, WPI and APFC regarding the sales of unregistered securities by unlicenced sales persons and disclosure violations per the settlement agreement. (See, Compton Affidavit, Exhibit 73).
2.10.7. As part of the Agreement and Order, Bonham on behalf of herself personally, WPI, and APFC promised not to offer or issue any new investment contracts to Idaho residents unless she qualified the securities with the Idaho Department of Finance. Id. at ¶ 4. Bonham also promised to pay $2,500 as a fine to the State of Idaho.
2.10.8. After the conclusion of the Idaho investigation, Hompesch wrote to Lawrence Carroll regarding WPI's Notice of Exempt Offering. (See, Compton Affidavit, Exhibit 63). Hompesch enclosed a proposed Notice of Exempt Offering, a copy of the Agreement and Order of the Idaho investigation, and an affidavit from Bonham stating that all outstanding investors had been paid in full and there were no outstanding contracts. Id. Lawrence P. Carroll responded to Hompesch's letter on June 6, 1994. (See, Compton Affidavit, Exhibit 64). Under the agreement for WPI and APFC to offer exempt securities, WPI and APFC were required to file a report on September 15, 1994, and every three months thereafter. Additionally, Carroll wrote, Id.:
Please understand that we are concerned that the limitations imposed by the Statutes are observed, and that there be no commingling of funds from other entities or other jurisdictions.Please note, as well, that the exemption at AS 45.55.140(b)(5)(B) is limited to Alaska residents only.
2.10.9. Hompesch acknowledged and accepted the State of Alaska's conditions by letter on June 16, 1994. (See, Compton Affidavit, Exhibit 65). Again, this did not deter Bonham, as she continued to bring in new investors through both APFC and WPI.
2.10.10. Bonham, through either WPI or APFC, issued approximately 80 investment contracts to Idaho residents after the Agreement and Order. (See, Supplemental Affidavit, Exhibit 92). Neither she, WPI, nor APFC ever paid the $2,500 fine.
2.10.11. Through another separate series of falsehoods, directly and through counsel, Bonham lied and defrauded the State of Idaho, all the while continuing her Ponzi scheme. Bonham used WPI and APFC to perpetuate this fraud and these single-owner corporations should not be recognized as valid entities in order to shelter them, or their owner, from liability.
2.11. Transfers For Personal Benefit-
2.11.1. Through various individual adversary proceedings during the course of this bankruptcy, the court has determined that RaeJean Bonham has used proceeds from WPI to finance her personal credit cards, housing, food, travel, and entertainment. Although WPI was a Sub S corporation, there is no indication that RaeJean Bonham properly accounted for withdrawals from WPI as salary or dividends, but rather used the corporation to pay her personal expenses.
2.11.2. The trustee has established in other proceedings that WPI or World Plus transferred approximately $200,000 to S&S Services, the proprietorship of RaeJean Bonham's husband, Steven Bonham. (See, Compton Affidavit, Exhibit 66 at ¶ 37).
2.11.3. The trustee has also established by his affidavit and in other proceedings before this court the following direct payments to Bonham's personal creditors by World Plus or WPI:
|
Date |
Amount |
Item |
|
Since January, 1990 |
$11,652.60 |
GMAC - Automobile payments |
|
Since January, 1990 |
$6,573.67 |
Saupe Enterprises - Heating Oil |
|
Since January, 1990 |
$8,306.07 |
GVEA - Utility bills |
|
Since January, 1990 |
$24,651.00 |
Mortgage payments on the Bonham's personal residence |
|
$26,843.00 |
Life insurance premiums for policies on the lives of Steve & RaeJean Bonham |
|
|
TOTAL |
$78,026.34 |
(See, Compton Affidavit, Exhibit 66 at ¶¶ 40-44)
2.11.4. World Plus or WPI made the following payments to purchase personal goods or equipment for RaeJean or Steve Bonham or on their behalf:
|
Date |
Ck # |
Amount |
Payee |
Item |
|
Sept. 7, 1990 |
2723 |
$24,000.00 |
Mike Gutman |
Case 580D Backhoe |
|
3-Jun-91 |
3530 |
$19,000.00 |
WJR, Ltd. |
Case 580D Backhoe |
|
Feb. 19, 1992 |
4556 |
$7,000.00 |
Gail McQuade |
1992 Harley Davidson motorcycle |
|
Jan. 14, 1993 |
5548 |
$3,000.00 |
Craig Taylor Equip. Co. |
Melroe 853 Bobcat Loader |
|
Jan. 18, 1993 |
5563 |
$22,130.00 |
Craig Taylor Equip. Co. |
Melroe 853 Bobcat Loader |
|
Dec. 14,1994 |
7262 |
$15,408.45 |
Farthest North Harley Davidson |
1995 Harley Davidson Motorcycle |
|
TOTAL |
$90,538.45 |
(See, Compton Affidavit, Exhibit 66 at ¶¶ 10-29).
2.11.5. World Plus purchased or supplied money for the partial purchase price of motor vehicles for Bonham's children, Stephanie and Steven Shane Bonham. WPI paid monthly stipends to Stephanie Bonham while she attended college. World Plus occasionally paid Stephanie's rent and tuition, and paid for vacations. (See, Compton Affidavit, Exhibit 66).
2.12. Benefits vs. Burdens of Consolidation; Reliance of the Investors on WPI or APFC-
2.12.1. Investors in World Plus, WPI and APFC have claims against RaeJean Bonham for unpaid amounts due under the investment contracts, given her violations of Alaska and federal laws regulating the sale of securities. APFC appears to have no, or minimal, creditors as it ceased to issue investment contracts in 1994, though Bonham continued to use the corporation to hide investment funds and make payments to WPI investors until the fall of 1995.
2.12.2. WPI and APFC are dissolved and defunct corporations. There are no meaningful assets for the creditors of WPI or APFC to recover outside of bankruptcy. Consolidation will not diminish any recovery by a creditor of WPI or APFC. Nor, will consolidation diminish the recovery of the creditors of RaeJean Bonham, given the lack of corporate independence.
2.12.3. Creditors of the corporations will recover little, or nothing, absent substantive consolidation of WPI and APFC with the Bonham estate nunc pro tunc as of December 19, 1995, the date of the involuntary petition against RaeJean Bonham.
2.12.4. The parties objecting to substantive consolidation are all defendants in the adversary proceedings brought by the trustee. They have filed a number of declarations stating that each of them relied on the separate credit of the corporations, WPI and APFC, and that they did not rely on the credit of RaeJean Bonham. These declarations are identified on the following table:
|
Attorney Name |
Docket Entries |
Notes |
|
GOERIG, George |
1285-1300 |
Declarant states that they knew that other investors had contacted state agencies and alleges only dealt with WPI or APFC, and Bonham only as agent. |
|
ROSIE, John (Pro Se) |
1284 |
Alleges only dealt with WPI or APFC, and Bonham only as agent. |
|
BURNS, John |
1268, 1275 |
Alleges only dealt with WPI or APFC, and Bonham only as agent. |
|
MACDONALD, Michael |
1282 |
Alleges only dealt with WPI or APFC, and Bonham only as agent. |
|
DAVISON, Bruce |
1280 |
Alleges only dealt with WPI or APFC, and Bonham only as agent. |
|
AMBARIAN, Brad |
1179-1203 |
Declarant states that they knew that other investors had contacted state agencies and alleges only dealt with WPI or APFC, and Bonham only as agent. |
|
COPELAND, Rebecca |
1235-1264 |
Alleges only dealt with WPI or APFC, and Bonham only as agent. |
Some of the declarations (e.g., those filed by George Goerig's and Brad Ambarian's clients) indicate that the declarant "knew other investors had contacted the Alaska state agency which regulated securities and that agency had represented that WPI or APFC were in compliance with relevant laws of Alaska, including those governing corporations and the issuance of securities." None of the declarations give any detail about the specific financial information relied on. All are conclusionary, boilerplate statements that the investors relied on WPI and APFC, and only dealt with RaeJean Bonham as agent of the corporation. None had any financial information about WPI and APFC.
2.12.5. Those investors with investments prior to WPI's incorporation on April 22, 1991, held claims against Bonham personally, and their declarations directly contradict their testimony. Even after Bonham began operating though WPI and APFC, she was the only one who dealt or negotiated with investors to sell investment contracts and the only one who issued them either in her own name or on behalf of WPI and APFC.
2.12.6. Declarants also blur the line between WPI and APFC. Given the debtor's indiscriminate use of the corporations, it is impossible to separate the assets and liabilities of Bonham, WPI and APFC. It is implausible to believe that investors relied on the separate credit of one corporation as opposed to the other, given the degree to which the corporations were intertwined and dominated by Bonham.
2.12.7. None of the declarants state that he or she reviewed any financial statement or other accounting before investing. It is uncontroverted that the corporations never issued a financial statement and never filed corporate tax returns.
2.12.8. The declarants do not reference any specific facts in support of their statements that they relied on the separate credit of WPI and APFC. RaeJean Bonham has testified that she personally handled each investment; no other party for WPI and APFC was involved. She used the corporate identities indiscriminately and often interchangeably. The self-serving statements of the investors' personal beliefs are not credible evidence that they relied on the credit of one or the other corporate entities as opposed to RaeJean Bonham.
On to Part II of the Memorandum Decision
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