In re Raejean S. Bonham dba World Plus
Bankruptcy No. F95-00897
Unofficial Web Site
U.S. District Judge James Singleton has issued a lengthy decision in the World Plus BRA recovery actions on substantive consolidation. The Trustee prevailed.
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF ALASKA
|LARRY D. COMPTON, TRUSTEE,
ROBERT BALE, et al.,
|Case No. A99-0009 CV (JKS
Bonham Recovery Action ("BRA") Defendants claim that Plaintiff, Trustee Larry Compton, lacks standing, as a matter of law, to avoid and recover payments of the non-debtor corporations owned and operated by RaeJean Bonham ("Bonham") to investors. Defendants proceed with this motion pursuant to Federal Rule of Bankruptcy Procedure 7012, incorporating Federal Rule of Civil Procedure 12(b)(6). See Bankr. Rule 7012, 11 U.S.C.A
In their motion, Defendants state:
In discussions with the undersigned lead/liaison counsel, the trustee's counsel has postulated that, as the order granting substantive consolidation was entered in the main case, it was not affected by the withdrawal of the reference and remains a settled issue which cannot be re-opened in these proceedings. Defendants, on the other hand, take the position that the withdrawn adversary proceedings are before this court and in order to maintain his causes of action as set out in his complaints, the trustee must establish all necessary predicates. One of those predicates is his standing, an issue which this court must address in the context of the withdrawn proceedings.
See Docket No. 89 at 4. Thus, Defendants argue that (a) trustees do not have standing to prosecute causes of action that are not property of the bankruptcy estate or do not arise under the bankruptcy code; (b) substantive consolidation does not transform a non-debtor into a debtor; (c) substantive consolidation is improper here unless the trustee can establish that the investors of World Plus, Inc. ("WPI") and Atlantic Pacific Funding Corporation ("APFC") were knowing participants in Bonham's fraudulent scheme; (d) nunc pro tunc substantive consolidation cannot be granted; and that (e) an adversary proceeding is required for substantive consolidation. See Docket No. 89.
Should the Court disagree with Defendants' understanding of preliminary procedural matters, the standing question essentially resolves itself in favor of Plaintiff. Thus, the Court must first query whether the Order Granting Trustee's Motion for Substantive Consolidation of World Plus, Inc. and Atlantic Pacific Funding Corporation With Debtor entered in the main case, see Docket No. 137, Exh. H; In re Bonham, 226 B.R. 56 (Bankr. D. Alaska 1998) (accompanying Memorandum Decision for Allowance of Substantive Consolidation), was in clear error, as provided for in the doctrine of the law of the case. Should such error be found in the Bankruptcy Court's decision, the Court has the power to accept the motion at hand as an appeal of that decision and rule accordingly. Should no error be found, the Court is next lead to query whether the order granting substantive consolidation was affected by the withdrawal of the reference and is thereby open to re-evaluation in these proceedings. Should the question be answered in the affirmative, the Court must then consider the question of Plaintiff's standing. Should the initial answer be "no," the Court again considers Defendants' motion an appeal of the substantive consolidation entered by Judge Ross and evaluates it accordingly, under a "clear error" standard of review.
FACTUAL AND PROCEDURAL BACKGROUND
According to Judge Ross's Report and Recommendation to United States District Court Regarding Motions to Withdraw the Reference, see Docket No. 1, Exh. I at 7,1 this action began in 1995, with the filing of an involuntary Chapter 7 petition by assorted creditors against Bonham. Bonham consented to the petition on or about January 6, 1996, and converted the case to Chapter 11. Plaintiff was appointed Trustee. Upon investigation, Plaintiff concluded that the ticket sales business purportedly run by Bonham was, in fact, a front for a Ponzi investment scheme. The matter was converted back into a Chapter 7 case; Plaintiff remained Trustee.
Over eleven hundred proofs of claim have been filed for over $53 million.2 Most of these claims arise from the investment operations of Bonham or her related corporations, WPI and APFC.3 Thus, Plaintiff filed a motion in Bankruptcy Court to consolidate the estate of Bonham, the individual debtor, with the estates of WPI and APFC, two non-debtor corporations found to be closely held by Bonham. The primary assets of each of the non-debtor estates was the avoidance recoveries: Bonham operated the alleged scheme through investment contracts issued in the names of WPI and APFC during the four or five years prior to the 1995 commencement of the involuntary bankruptcy action filed against her. According to Judge Ross, "[i]f consolidation were not permitted, the creditors of Bonham, WPI and APFC, totaling more than $50 million in claims filed in this bankruptcy (the largest percentage coming from losses related to the investment contracts), would recover nothing." See Docket No. I at 8.4 Judge Ross notes the "Vigorous opposition to consolidation" from the targets of the BRA avoidance actions filed by Plaintiff. Id
On April 10, 1998, the Bankruptcy Court entered a memorandum decision allowing the substantive consolidation urged by Plaintiff, In re Bonham, 226 B.R. 56 (Bankr. D. Alaska 1998). This Court consolidated the fourteen separate appeals filed in response to the memorandum, and remanded the matter back to the Bankruptcy Court until such time as the matter became ripe for review.
A. The Standard for Dismissal Under Rule 12(b)(6)
For purposes of a motion to dismiss, all material allegations in the complaint will be taken as true and construed in the light most favorable to the plaintiff. See Hishon v. King & Spalding, 467 U.S. 69, 73 (1984); Smile Care, 88 F.3d at 782-83; M Indus., Inc. v. Kaplan, 792 F.2d 896, 898 (9th Cir. 1986); United States v. City ofRedwood City, 640 F.2d 963, 967 (9th Cir. 1981). The Federal Rules require only a short and plain statement of the claim that gives the defendant fair notice of the claim and the grounds upon which it rests. See Hishon, 467 U.S. at 73; Fidelity Fin. Corp. v. Federal Home Loan Bank, 792 F.2d 1432, 1435 (9th Cir. 1986), cert. denied, 479 U.S. 1064 (1987). Even where recovery is unlikely based on the pleadings, a plaintiff may still offer evidence in support of the complaint. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974); Re&ood, 640 F.2d at 967. Finally, a motion for dismissal under Rule 12(b)(6) may not be granted "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief " Conley v. Gibson, 3 5 5 U.S. 41, 45-46; Smile Care Dental Group v. Delta Dental Plan, 88 F.3d 780, 783 (9th Cir. 1996); Russell v. Landrieu, 621 F.2d 1037, 1039 (9th Cir. 1980).
B. The Doctrine of the Law of the Case
The Supreme Court of the United States has sought to eliminate courts' potential to "send litigants into a vicious circle of litigation." Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 816 (1988). In adopting the doctrine of the law of the case, the Supreme Court has recognized "'the practice of courts generally to refuse to reopen what has been decided,"' by positing that "'when a court decides upon a rule of law, that decision should continue to govern the same issues in subsequent stages in the same case."' Id (quoting Messinger v. Anderson, 225 U.S. 43 6, 444 (1912); Arizona v. California, 460 U.S. 605, 618 (1983)). Thus, "a court is generally precluded from reconsidering an issue that has already been decided," unless, among other factors, the first decision was clearly erroneous." See United States v. Alexander, 106 F.3d 874, 876 (9th Cir. 1991) (internal quotation omitted). The doctrine is not exclusive to the appellate/trial relationship: "Federal courts routinely apply law-of-the-case principles to transfer decisions of coordinate courts." Id As described below, because a bankruptcy court constitutes "a unit of the district court," see 28 U. S.C. § 15 1, the coordinate label is appropriate to the relationship between this Court and that of Judge Ross.
C. The Order Granting Consolidation of the Main Case
As stated above, the Bankruptcy Court ordered the substantive consolidation contested in Defendants' motion to dismiss. According to Defendants,
The trustee maintains that his standing derives from the nunc pro tunc substantive consolidation of the non-debtor. corporations with the bankruptcy estate of RaeJean Bonham. The trustee's misguided utilization of substantive consolidation for this purpose accomplished the following: (1) bringing two non-debtor corporations into an individual debtor's pending bankruptcy case, (2) sub silentio "deeming" those entities to be debtors, (3) vesting the existing trustee with avoiding powers over the non-debtors' transactions and (4) "backdating" the non-debtor's nonexistent bankruptcy, filing to that of the individual debtor. There is no precedent in all of bankruptcy jurisprudence for such an extraordinary expansion of the substantive consolidation concept to accomplish any of these results and nothing in the Code or judicial decisions supports the Trustee's position.
See Docket No. 89 at 5-6.
To the contrary, Judge Ross's memorandum granting the consolidation takes great pains to lay out both the precedent and judicial decisions which support the consolidation in this case. Beginning with Defendants' first claim of impropriety, this section will outline the statutory and caselaw with regard to each of Defendants' consolidation-based grievances.
1. Consolidation of the Non-Debtors Into an Individual Debtor's Case
Section 105 of the Bankruptcy Code, embodying the general equitable powers of the courts, has been interpreted to provide authority to grant substantive consolidation of parties. See 11 U.S. C. § 105(a). See also In re Augie/Resivo Baking Co., Ltd, 860 F.2d 515, 518 n. I (2d. Cir. 1988) ("Courts have found the power to consolidate substantively in the court's general equitable powers as set forth in 11 U. S.C. § 105 (1982 & Supp. IV 1986)."); In re Crown Machine & Welding, Inc., 100 BR. 25, 26-27 (Bankr. D. Mont. 1989) (following Augie/Restivo in a Chapter 11 context); In re Nite Lite Inns, 17 BR. 367, 371 (Bankr. S.D. Cal. 1982) ("Substantive consolidation is not specifically provided for in the Code except in relation to joint debtors under 11 U.S.C. §302 (b)."). The doctrine of substantive consolidation has been largely formulated by caselaw. See In re Standard Brands Paint Co., 154 BR. 563, 567 (C.D. Cal. 1993) (citing Sally Schultz Neely, Substantive Consolidation: Historical Development and Contemporary Problems (62nd Annual Meeting of the Nat'l Conference of Bankr. Judges 1988)).5
"The sole purpose of substantive consolidation is to ensure the equitable treatment of all creditors." Augie/Restivo, 860 F.2d at 518. See also In re Tito Castro Const., Inc., 14 BR. 569, 571 (Bankr. D. P.R. 198 1) ("The major purpose in a substantive consolidation is to pool assets and liabilities and to eliminate inter-entity claims.") (internal quotations omitted). As the Bankruptcy Court's decision makes indelibly clear, substantive consolidation, of any parties, whether debtors or non-debtors, is not an act to be undertaken whimsically. See Bonham, 226 BR. at 76 ("Substantive consolidation should not be used as a mere device of convenience, e.g., to overcome accounting difficulties, where it would unfairly impair the vested rights of some of the creditors."). See also id. ("In general, a court should be convinced that injustice would occur absent consolidation.") (citing In re Snider Bros., Inc., 18 BR. 230, 23 5 (Bankr. D. Mass. 1982) (analyzing Soviero v. Franklin Nat I Bank, 328 F.2d 446 (2d. Cir. 1964)); Nite Lite Inns, 17 B.R. at 371 ("In the past courts have substantively consolidated debtors' estates where the consolidation was warranted; however, the power to consolidate has been used sparingly because of the possibility of unfair treatment of creditors of one or more of the separate estates.") (citing Sampsell v. Imperial Paper & Color Corp., 3 13 U. S. 215 (194 1); Chemical Bank N. Y Trust Co. v. Kheel, 3 69 F. 2d 845 (2d Cir. 1966)). Thus, in large part, consolidation is dependant on a showing that absent such administration, creditors would suffer prejudice. See In re Estrada, 224 BR. 132 (Bankr. S.D. Cal. 1998).
Many tests exist under which a court can evaluate the propriety of substantive consolidation. See Bonham, 226 BR. at 81-93. However, while other circuit courts have developed precedence on the issue, see e.g., Augiel/Rstivo, 860 F.2d at 518-19; Eastgroup Properties v. Southern Motel Assoc., Ltd, 935 F.2d 245, 249 (1 ith Cir. 1991), the Ninth Circuit has yet to develop its own test, or advocate the use of a test developed by another court. See StandardBrands, 154 BR. at 568 ('The Ninth Circuit has not articulated a test for substantive consolidation. Nor did the court find a Ninth Circuit BAP decision articulating a test for substantive consolidation.") (footnote omitted). Therefore, it is necessary to consider the primary factors employed by other courts in considering the issue. These factors, as provided for fully in In re Vecco Construction Industries, Inc., 4 BR. 407 (Bankr. E.D. Va. 1980)6 are as follows: (1) the degree of difficulty in segregating and ascertaining individual assets and liability; (2) the presence or absence of consolidated financial statements; (3) the profitability of consolidation at a single physical location; (4) the commingling of assets and business functions; (5) the unity of interests and ownership between the various corporate entities; (6) the existence of parent and inter-corporate guarantees on loans; (7) the transfer of assets without formal observance of corporate formalities. See 4 BR. at 410.
Fortunately, the factors vary imperceptibly between the courts; there appears to be no one factor rejected by one particular court, nor does there seem to be a factor overwhelmingly weighted as against the others. See Eastgroup, 935 F.2d at 250 ("No single factor is likely to be determinative in the court's inquiry."); Snider Bros., 18 BR. at 234 ("There is no one set of elements which, if established, will mandate consolidation in every instance. Moreover, the fact that corporate formalities may have been ignored, or that different debtors are associated in business in some way, does not by itself lead inevitably to the conclusion that it would be equitable to merge otherwise separate estates."). Some courts have reduced the factors; in one of the leading tests under the current Code, the D.C. Circuit Court of Appeals describes a three-part process by which to evaluate a request for consolidation. The court in In re Auto-Train Corp., Inc., 8 10 F.2d 270 (D.C. Cir. 1987), found that
Before ordering consolidation a court must conduct a searching inquiry to ensure that consolidation yields benefits offsetting the harm it inflicts on objecting. parties. The proponent must show not only a substantial identity between the entities to be consolidated but also that consolidation is necessary to avoid some harm or realize some benefit. At this point, a creditor may object on the grounds that it relied on the separate credit of one of the entities and that it will be prejudiced by the consolidations. If a creditor makes such a showing, the court may order consolidation only if it determines that the demonstrated benefits of consolidation "heavily" outweigh the harm.
810 F.2d at 276 (internal citation omitted). See also Eastgroup, 935 F.2d at 249 (adopting the Auto-Train test).
Courts have found the first part of the Auto-Train test to be a composite of the Vecco factors, and interpreted the "substantial identity" requirement broadly. See Eastgroup, 935 F.2d at 249-50 ("In making his prima facie case for consolidation, the proponent of consolidation may want to frame his argument using the seven factors outlines in In re Vecco Construction lndustries, Inc. . . . . as examples of information that may be useful to courts charged with deciding whether there is a substantial identity between the entities to be consolidated and whether consolidation is necessary to avoid some harm or to realize some benefit."); StandardBrands, 154 B.R. at 569 ("[M]any courts use a variety of factors to determine substantial identity.").
However, as distilled in the Second Circuit's Augie/Restivo, "these considerations are merely variants on two critical factors: (i) whether creditors dealt with the entities as a single economic unit and did not rely on their separate identity in extending credit, or (ii) whether the affairs of the debtors are so entangled that consolidation will benefit all creditors." See 860 F.2d at 518 (internal quotations and citation omitted). The entanglement must be severe to justify consolidation on that point. See id at 519 ("Resort to consolidation in such circumstances ... should not be Pavlovian. Rather, substantive consolidation should be used only after it has been determined that all creditors will benefit because untangling [the debtors' affairs, including assets and business functions] is either impossible or so costly as to consume the assets."); Tito Castro, 14 BR. at 571 ("A substantive consolidation enables the Court to disregard separate corporate entities, to pierce their corporate veils in order to reach assets for the satisfaction of debts of related corporations.... [T]he corporate veil cannot be disregarded merely because it would make for efficient and economical administration of debtor's estate.") (internal quotation and citation omitted). Therefore, it is understood that substantive consolidation may be denied despite the necessity of "enormous effort" on the part of the trustee in tracing the separate companies assets and liabilities. See Bonham, 226 BR. at 82. See also Augie/Restivo, 860 F.2d at 519.
"Because the Ninth Circuit Court of Appeals has not articulated a substantive consolidation test, the bankruptcy court is free to choose between the test articulated by the D.C. Circuit in AutoTrain and the test articulated by the Second Circuit in Augie/Restivo." Standard Brands, 154 BR. at 571. As in the StandardBrands case, "[h]ere it is not necessary to choose, because both the D.C. Circuit test and the Second Circuit test are met." Id.
The burden of proof is on the proponent of consolidation. See Tito Castro, 14 BR. at 571. Plaintiff has presented sufficient evidence to show substantial identity between Bonham, WPI and APFC, which the Bankruptcy Court has discussed in its memorandum. See Bonham, 226 BR. at 61- 65, 68-69, 95-98, 101. Despite Defendants' protest that "[t]he Trustee has presented proof that the investors dealt with the corporations, not Ms. Bonham," and that "there is no massive co-mingling of assets,"'7 see Docket No. 89 at 36, the basis for a finding of substantial identity lies in the fraudulent structure of the non-debtor corporations. A background of both WPI and APFC are provided in the Bankruptcy Court's memorandum. See Bonham, 226 BR. at 61 (WPI), 61-63 (APFC).8
Because WPI and APFC appear to have been used solely for the purpose of carrying on the Ponzi operation, it was common for Bonham herself to interchange one organization for the other: in her voluntary Chapter I I filing, she listed as debtors herself, WPI and APFC, see id. at 60; she alternatively listed herself on bank and cash management accounts as "RaeJean S. Bonham, d.b.a. Atlantic Pacific Funding Corporation," see id. at 62, "World Plus -- RaeJean Bonham," see id. at 68, "World Plus, Inc. d.b.a. Atlantic Pacific Funding," see id., "World Plus, Inc. d.b.a. Atlantic Pacific Funding Corp.," and, by March 1995, had created deposit stamps that read "For Deposit Only Atlantic Pacific Funding Corp. d.b.a. Atlantic Pacific Corp., World Plus, Inc. For Deposit Only Atlantic Pacific Funding Corp. d.b.a. Atlantic Pacific Funding World Plus." Id at 68. The Bankruptcy Court noted that 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.
Bonham directly and frequently deposited funds from WPI investments into APFC's bank account. Bonham would take checks made paya e to WPI and endorse the check for deposit in APFC's [First National Bank of Anchorage] account. Other times, Bonham would simply line out "WPI" as payee and write "Atlantic - Pacific."
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 [I]t 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).
Id. at 69.
As alluded to above, the commingling did not end with WPI and APFC. Bonham used funds from both "businessee' to pay her personal expenses, purchasing luxury items and paying for vacations and her children's educational expenses. See id at 72-73. The trustee has discovered direct payments, detailed in the Bankruptcy Court's memorandum, to Bonham's personal creditors by WPI. Id
The question of substantial identity can be summarized by the following statement of the Bankruptcy Court: "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." Id. at 71.
There remains, then, the question of whether creditors dealt with the entities in the same indiscriminate fashion that Bonham herself seems to have, and "did not," in the words of the Second Circuit, "rely on their separate identity in extending credit." Augie/Restivo, 860 F.2d at 518. That this prong of the test is satisfied is beyond dispute.
However, it appears that Judge Ross misinterprets the requirement. On the record submitted to the Bankruptcy Court, no error can be found in Judge Ross's determination that, "[t]he creditors dealt principally with her, and she arbitrarily assigned WPI or APFC to the investment contract." Bonham, 226 BR. at 101. However, Augie/Restivo and the cases outlined below require creditors to have dealt with the debtor and the parties to be consolidated as one indistinct unit. It does not look to the co-existence of the parties to be consolidated alone. Thus, while it is certainly instructive that WPI and APFC operated in the interdependent manner described by the Bankruptcy Court, the inquiry to be conducted here must focus on the relationships between Bonham and each of her closely held corporations.
In cases highlighting the creditor reliance issue, courts of appeals have found that the main factor to be considered is whether the entities "held themselves out to the public and to their creditors as separate corporations," see Eastgroup, 935 F.2d at 25 1, or "maintained the appearance of separate corporations in the public's eye," see Auto-Train, 8 10 F.2d at 277-78, with less importance placed on whether or not the entities "operated internally as one." Id at 277. But cf. Augie/Restivo, 860 F.2d at 519 ("the fact that the trade creditors may have believed that they were dealing with a single entity does not justify consolidation," where one corporation's claims are definitively superior to those of another). Again, the Ninth Circuit Court of Appeals has yet to adopt one of the afore- mentioned cases as the test under which to evaluate substantive consolidation, and it is therefore open to this Court to determine whether the internal or external appearance of unity is determinative of this issue. However, the circumstances of the case at hand are so indicative of fraud that neither the internal nor the external appearance of operations suggests a separate corporate identity attributable to Bonham versus WPI and APFC.
Bonham incorporated WPI in 199 1, prior to which time she operated a proprietorship known as only "World Plus." See Bonham, 226 BR. at 61. Bonham alone held the incorporation, was its only agent, its only director, and its lone shareholder. See id9 Furthermore,
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,
Id. at 67.
By 1994, Bonham identified herself as president, secretary, treasurer and sole director of APFC. See Bonham, 226 BR. at 62. APFC, as stated, never filed a federal or state tax return, id, nor did it register to do business in Alaska, id. at 63, or have any employees. Id As such, it can be said "APFC had no business other than the issuance of investment contracts, collecting invested funds, and paying investors of APFC and WPI." Id. Even the task of paying investors was not always undertaken by APFC; this was entirely dependent on from which set of checks Bonham chose to issue the payment. Id.
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 Bonharn were index cards on the individual investor. Even those index cards do not reference which entity issued which contract.
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.
Id at 67. This situation is further exacerbated by the above-detailed interuse of names on the various accounts held by Bonham.
Moreover, based on the commingling of personal and business funds described above, Bonham could not with any gravity assert that all payments were made of corporate funds and not her personal savings. Thus, investors were undoubtedly paid with Bonham's personal funds, further defeating any notion that creditors operated in reliance on separate corporate structures.
While the caselaw demands an interidentity between debtor and non-debtor, and not necessarily the same degree of association between the two non-debtor entities, here the complete interrelation is both telling and informative. All three players (Bonham, WPI, and APFC) are essentially one Bonham, despite the capricious assignment of the "d.b.a." identity dealt a particular creditor. As surmised by the Bankruptcy Court,
the affairs of Bonham, WPI and APFC were hopelessly entangled. Also, Targets apparently dealt with WPI and APFC interchangeably dealing solely through-RaeJean Bonham. There was an overall pattern of shuffling of funds between WPI and APFC, and a haphazard assignment of investment contracts to either WPI or APFC. at Bonham's whim. The Targets appear to have relied on the exorbitant return as opposed to any particular corporate identity.
Id at 97 (emphasis added). Thus,
Given the debtor's indiscriminate use of the corporations, it is impossible to separate the assets and liabilities of Bonham, VVTI and APFC. It is implausible to believe that investors relied on the separate credit of one corporation as opposed to the other, the degree to which the corporations were intertwined and dominated by Bonham.
Id. at 74. Because reliance cannot be proven, Defendants cannot show that they will be prejudiced by the substantive consolidation.
2. "Deeming" the Non-Debtors Debtors
Of course, the eyebrows of propriety are raised when non-debtors are substantively consolidated with debtors. However, courts have the power to "modify" consolidation where appropriate and necessary. See, e. g., In re United Stairs Corp., 176 B.R. 3 5 9, 3 68-69 (Bankr. D.N.J. 1995) ("[I]t is accepted that a non-debtor entity may be consolidated with a debtor under appropriate circumstances Where the debtor and non-debtor entities are alter egos of each other extraordinary circumstances are present.") (citing Sampsell v. Imperial Paper & Color Corp., 3 13 U.S. 215 (194 1); In re Lease-A-Fleet, Inc., 141 BR. 869, 872-73 (Bankr. E.D. Pa. 1902)); In re Tureaud, 45 BR. 65 8, 662 (Bankr. N.D. Okla. 1985) ("Under its general equitable powers, I I U.S.C.A. § 105(a), a bankruptcy court may substantively consolidate affiliate corporations within a pending case when the assets and liabilities of different entities are dealt with as if the assets were held by, and the liabilities were incurred by a single entity."); Bonham, 226 BR. at 83 ("Most of the non-debtor cases acknowledge that consolidating a non-debtor's estate with the case of an existing debtor is a much more sensitive matter than consolidating existing debtorsNonetheless, there are cases in which substantive consolidation of non-debtors is the appropriate procedure and/or remedy under the given facts.").
The argument against substantive consolidation of non-debtors attacks first the use of Sampsell to authorize consolidation, and second, the reading of § 105(a) as granting the bankruptcy courts latitude in determining an equitable resolution. See Christopher J. Predko, Substantive Consolidation Involving Non-Debtors: Conceptual and Jurisdictional Difficulties in Bankruptcy, 41 Wayne L. Rev. 1741, 1765-66 (Summer, 1995). However, even among those who argue that a strict reading of both Sampsell and the equitable grant of power in the Bankruptcy Code does not afford a court power to order substantive consolidation, there is an agreement that
the only appropriate context in which a non-debtor's estate should be consolidated with that of a debtor is when the non-debtor is the alter ego of the debtor. If a true alter ego situation exists, the action would actually be nothing more than appending a bankruptcy case to attach a pool of assets that should have been included since the commencement of the bankruptcy case. Moreover, the creditors of the true alter ego non-debtor would not be prejudiced by such action because, as a requirement under the alter ego theory, the debtor and non-debtor would have represented themselves as one entity in business transactions. Furthermore, the true alter ego non-debtor would not be heard to complain of due process or unfairness because the non-debtor's rights would have been accounted for in the treatment of its alter ego debtor.
Id at 1763-64 (footnote omitted). The questionable applicability of the alter ego analysis is discussed in Section F(2) of this Order.
The Bankruptcy Court uses a case allowing substantive consolidation of non-debtors, In re 1438 Meridian Place, N. W., Inc., 15 BR. 89 (Bankr. D.C. 1981), from which to deduce factors to be considered in determining the appropriateness of such consolidation. The factors are drawn from a discussion of piercing the corporate veil; while the Bankruptcy Court vacillates on the applicability of a piercing the corporate veil analysis to substantive consolidation actions, see Bonham, 226 B.R. at 77, but cf. id at 114-116, because the link between non-debtors and debtor is often superficially masked by corporate structures, the factors are suitably applied within the context of substantive consolidation as well. Thus, the Bankruptcy Court found that the proponent of substantive consolidation of non-debtors should show that the following factors are satisfied: "(a) a failure to observe corporate formalities; (b) absence of relevant corporate financial records; (c) under- capitalization; (d) principal officers dominating all the corporations; and, (e) commingling of funds." See id. at 84 (citing Meridian Place, 15 B.R. at 96 n. 10). In formulating these factors, the Meridian Place court suggested that
[t]he conclusion to disregard the corporate entity may not, however, rest on a single factor but must involve a consideration of the aforementioned enumerated factors; in addition, the particular situation must generally present an element of injustice or
fundamental unfairness. Undercapitalization, disregard of corporate formalities and the like coupled with an element of injustice fraud or fundamental unfairness has been regarded fairly uniformly to constitute a basi's for an imposition of individual liability under the doctrine.'
See 15 BR. at 96 n. 10 (quoting I Fletcher, Encyclopedia of the Law of Private Corporations, §41.3 at 43 (Supp. 198 1)).
Under the emerging caselaw, facts supporting consolidation of non-debtors and debtors include: use of common bank accounts for income and expenses, out of which debtor's personal expenses are also paid, see Meridian Place; transfer of property to the non-debtor corporation as a means of defrauding, hindering or delaying the individual's creditors, see Sampsell; treatment of non-debtor corporations as an instrumentality, using raw materials, physical space, stationary as needed regardless of "corporate niceties" by the sole director, see United Stairs Corp.; undocumented loans made by the debtor to the entities, and vice versa, and between the non-debtor entities themselves, see In re Creditors Serv. Corp., 195 B.R. 680 (Bankr. S.D. Ohio 1996); non-debtor's payment of debtor's personal credit cards, see id (discussing inverse situation). Taken together, these can generally seen to form an "alter ego" test."10
The Bankruptcy Court has summarized some of the facts behind its grant of substantive consolidation
- RaeJean Bonham was the sole shareholder of each corporation. She and her husband Steve were the only officers. Steve has denied an active role in the corporations. RaeJean has indicated she "is" WPI. See, Pars.2.2.3, 2.2.4 and 2.3.2.
- Ms. Bonham observed few corporate formalities (or either WPI or APFC. She had few corporate books, including minutes, stock registers, or resolutions, except perhaps those that were require! by banks to open accounts. See, Pars.12.2.5 - 2.2. and 2.3.12 - 2.3.17.
- Money flowed between the three entities (Bonham, WPI and APFC) freely and usually without a legitimate business purpose. On the contrary, one can infer a corrupt purpose in transferring funds between WPI and APFC, since the use of APFC seems to coincide with the Alaska securities investigation of WPI, and it is probable that Bonham merely put up another corporate shell to operate her Ponzi scheme. See Pars. 12.4 and 2.6 regarding the limited nature of the ticket sales business compared to the aggressive nature of the investment scheme; Par. 2.9 regarding the Alaska Securities Investigation; 12.3 regarding the coinciding establishment of APFC; and, 12.8 regarding the various bank accounts.
- Bonham had no computer data bases of investors or other business activity. There are no standard financial accounting records, or other records which were organized in a way that the assets and liabilities of Bonham, WPI and APFC can be readily sorted out and segregated. Most of Bonham's money came from investors, whose investments were tunneled through WPI or APFC. Sometimes, investors wrote their checks to WPI and were issued contracts by APFC. Sometimes contracts
were rolled over from WPI to APFC and vice versa. Funds from one corporation were used to pay the investment contracts written on the names of the others. See, Par. 2.2.7.
- Bonham freely used money from the investors to support a fashionable lifestyle for herself, her husband, and her children, providing for their home, vehicles, oats, education, and recreation. See, Par. 2.11.
- All investors dealt directly with RaeJean Bonham, the individual. Although they indicated they only dealt with her as agent, none indicated they had any specific financial information about WPI or APFC other than the fact that it paid them and perhaps others exorbitant returns. See, Pars. 12.12.4 - 2.12.8.
Bonham, 226 BR. at 96 (citations to internal paragraph structure).
Balanced against these factors is the harm to be suffered creditors in the substantive consolidation. However, in the case at hand, "there are no substantial assets in either WPI or APFC, and the estate will only benefit from the avoidance recoveries" afforded through the substantive consolidation. See id at 90.
The caselaw cited by Defendants does nothing to discourage consolidation. Citing Anaconda Building Materials Co. v. Newland, 336 F.2d 625 (9th Cir. 1964), Defendants attempt to argue that the prejudicial dangers of consolidation burden the facts of the case at hand. In discussing Anaconda's denial of consolidation, Defendants suggest that
[t]he reason for such denial is compelling, here: 'The parent corporation, in the main, benefitted from the operation of the subsidiaries, and not vice versa. Such benefits received by the parent corporation were sometimes the result of improper action on behalf of the parent corporation...[T]he Parent occasionally had the uncompensated use of money of the [subsidiaries] for the benefit of the creditors of the parent.'. . . Here, there is no evidence that RaeJean Bonham's individual creditors were harmed by her improper transfer of assets to World Plus, Inc. or Atlantic Pacific Funding Corporation such that payments made by those corporations to their investors should be recovered for the benefit of Bonham's creditors.
See Docket No. 89 at 23-24 (quoting Anaconda, 336 F.2d at 627) (emphasis added). Defendants appear to have misinterpreted Anaconda, drawing from it a wholesale rejection of substantive consolidation, as opposed to a denial of it on the facts of that case. See Docket No. 137 at 12. Defendants have also missed the point with regard to the evils sought to be avoided through substantive consolidation. Instead of being solely concerned with the creditors of the individual debtor, the court entertaining a motion for substantive consolidation looks to the general fairness which will either result from or be hampered by consolidation.
Defendants also sorely underestimate Bonham's activities over the past decade. ' Nothing in the record reflects that Bonham's "occasional" misuse of funds lead to the present litigation, or that her actions were predominantly proper, as Defendants imply. See Docket No. 89 at 23-24. Defendants also allege that Plaintiff sought substantive consolidation capriciously, "because all entities involved Ms. Bonham." See id at 25. As has been shown, the interrelation of Bonham, WPI and APFC stretched beyond Bonham simply having one hand in each corporate pocket.
Based on the information before it, and, indeed, the information before this Court, there is nothing to indicate that the Bankruptcy Court committed clear error in ordering the substantive consolidation in this case. It is not only appropriate, but well-founded. To do otherwise would have been to afford a substantial miscarriage of justice.
3. The Trustee's Avoiding Powers Over the Non-Debtors' Transactions
Under Chapter 7 of the Bankruptcy Code, the estate is made up of all interests held by the debtor on the date of the petition. See 2 Robert E. Ginsberg, Bankruptcy: Text, Statutes, Rules 1641-43 (2d ed. 1990) (citing 11 U.S. C. § 54 1 (a)(1)). Once property has been deemed property of the estate, it remains such regardless of whether the property changes form (i.e., tangible property sold for cash results in the cash proceeds belonging to the estate). See Hardage v. Herring Nat'l Bank, 837 F.2d 1319, 1323 (5th Cir. 1988). Under what is known as the "avoiding powers," the trustee of the estate has the power to pursue his own causes of action to recover money or property. See 11 U.S.C. §§ 542-553. See also Ginsburg, supra, at 1074.1 (Supp. 1990).
Under the most applicable of these powers,
The trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily --
(A) made such transfer or incurred such obligation with actual intent to hinder delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted; or
(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
. . . . .
(ii)(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor's ability to pay as such debts matured.
11 U.S.C.A. § 548(a) (West 1993 & Supp. 1999). Once the determination is made that the non-debtor corporations are to be substantively consolidated with the debtor for the purposes of this litigation, it is resolved that the obligations incurred or transfers made by the non-debtor corporations are part and parcel to those of the debtor over which the trustee has power to avoid; as detailed in the preceding section, the non-debtors have essentially been deemed debtors. As stated by the United States Bankruptcy Court for the Northern District of Georgia, "[s]ubstantive consolidation is essentially a complex turnover proceeding because the debtor is asking the non- debtor affiliated entity to bring into the estate assets in which the debtor asserts an inseparable interest." In re Munford, 115 B.R. 390, 398 (Bankr, N.D. Ga. 1990). Here, it is Plaintiff who seeks to bring those assets into the estate based on the same inseparability of interests.
In essence, the avoiding powers operate to unite all parties and property properly the subject of the litigation. Caselaw on point is non-existent. However, it would be against the furtherance of justice accomplished by the substantive consolidation to deny Plaintiff the power to avoid obligations incurred by WPI and APFC.
4. Nunc Pro Tunc Consolidation
The remaining question, whether Plaintiff has presented sufficient evidence that substantive consolidation is necessary to avoid some harm or realize some benefit, can only be answered in the affirmative; in answering this question, a rationale for nunc pro tunc consolidation emerges.
In presenting a prima facie case for substantive consolidation, Plaintiff argued, and the Bankruptcy Court agreed, that because most if not all of the transactions at issue in Bonham's Ponzi scheme involved the use of WPI and APFC, a refusal to substantively consolidate the entities with Bonham's estate would result in harm to creditors: the bulk of Bonham's transactions would be unreachable because they were not made by Bonham doing business as Bonham. Likewise, because most if not all of the transactions at issue in Bonham's Ponzi scheme eventuated prior to the 1995 petition, a refusal to substantively consolidate the entities with Bonham's estate would result in a related but distinct harm: the bulk of Bonham's transactions would be unreachable under the applicable United States Code provision, I I U.S. C. § 548. This provision has a one-year statute of limitations, which would afford recovery of only those transfers made after January 22, 1996. See 11 U.S.C.A. § 548(a) (1993 & Supp. 1999); In re Bonham, 224 B.R. 114, 116 (Bankr. D. Alaska 1998) (citing In re Agricultural Research & Tech. Group, Inc., 916 F.2d 528, 534 (9th Cir. 1990)) ("Payments from a Ponzi scheme within one year of the petition date by a debtor in a bankruptcy are deemed to be fraudulent conveyances because they defraud creditors under I I U.S.C. § 548(a)(1)."). The two issues are interrelated within the context of nunc pro tunc consolidation.
The policy in guarding against nunc pro tunc consolidation is described in Auto-Train:
Were bankruptcy courts permitted to consolidate entities nunc pro tunc without regard to transferees' reliance on an entity's apparent separateness, a sign of weakness in any member of a family of corporations would lead creditors to descend on each member, strong or weak, to claim their pound of flesh. Such a rule would also sharpen people's natural reluctance to extend credit to any affiliate of a financially troubled corporation. This in turn would imperil the ability of financially sound affiliates to continue operations and help the more troubled ones out of their predicament.
810 F.2d at 277. The test is a cost-benefit analysis, similar to that pursued with respect to
Because the consolidation proceeding will already have established a substantial identity between the entities to be consolidated, this inquiry begins with the proponent of nunc pro tunc making a showing that nunc pro tunc is necessary to achieve some benefit or avoid some harm. Following this showing, a potential preference holder may challenge the nunc pro tunc entry of the consolidation order by establishing that it relied on the separate credit of one of the entities to be consolidated and that it will be harmed by the shift in filing dates. If a potential preference holder meets this burden, the court must then determine whether the benefits of nunc pro tunc outweigh its detriments.
Id Thus, where a court subjects a party to an early preference date without considering a creditor's reliance on the separateness of the entities in evaluating potential prejudice, nunc pro tunc will be found improper. See id at 277-278.
The initial key to the nunc pro tunc inquiry is the issue of separateness. Because it has been clearly established that Bonham, WPI and APFC operated and were perceived as a single entity, the Court must only look to whether the Bankruptcy Court erred in its finding that "[s]ince those entities are alter egos of RaeJean Bonham, the effective date of the substantive consolidation should be the date of the involuntary proceeding, December 19, 1995." Bonham, 226 BR. at 101.
As described by the Bankruptcy Court, the dilemma posed by the case at hand is that by the time of the petition, Bonham's Ponzi-centered activities were on the decline. Both WPI and APFC had been decertified, and the rate of new investments had slowed. See id. at 98. Thus, the Bankruptcy Court found that
[i]f the effective date for the purpose of substantive consolidation for WPI and APFC is January 22, 1997, the one-year statute of limitations under 11 U.S.C.A. § 548(a) would only cover transfers made after January 22, 1996. In other words, no fraudulent transfer under § 548 would be recoverable for payments on contracts nominally with WPI or APFC.
Id.; see also 11 U.S.C. § 548(a).
The Bankruptcy Court likened the situation at issue here to that found in In re Evans Temple Church of God in Christ and Community Center, 5 5 BR. 976 (Bankr. N.D. Ohio 1986), also involving fraudulent transfers. See 226 BR. at 100-01. There, the court found that substantive consolidation's goal of protecting unsecured creditors of the inseparable debtors and the preference provision's purpose in assuring "equality of distribution among all creditors" combined to mandate nunc pro tunc where inseparability and absence of reliance on the separateness of creditors co-exist. See Evans, 55 BR. at 982-983. The court found a common filing date requisite to the achievement of these goals. Id. at 983. Judge Ross's Bankruptcy Court found the facts of Evans "analogous to the reality of Bonham's Ponzi operations," see Bonham, 226 BR. at 101, and ordered the consolidation nunc pro tunc. See id. at 102.
Bonham's illicit operation necessitated her deceit of the State of Alaska. As detailed by the Bankruptcy Court, the State's securities investigation of Bonham, WPI and APFC began in 1992. At that time, the Alaska Securities Examiner, Ed Watkins ("Watkins") informed Bonham that her investment contracts might have the status of a security. Bonham lead Watkins to believe that she would cease issuance and rollovers of the contracts pending resolution of the matter. See Bonham, 226 BR. at 69. Plaintiff now alleges that, despite her representation to Watkins, Bonham in fact issued more than ninety new contracts through WPI during the year of investigation, 1992-1993. See id.
In March 1993, WPI's counsel, Richard Hompesch ("Hompesch") provided the Alaska Department of Commerce & Economic Development ("DCED") with an application to offer exempt securities, stating that satisfaction of all outstanding contracts would be completed by March 12, 1993. At that time, and based on his representation that all outstanding contracts would be paid as noted above, Hompesch requested permission for WPI to begin issuing new contracts worth approximately $300,000 later that month. On May 24, 1994, Hompesch wrote DCED and represented that no outstanding contracts with WPI or APFC existed. Attached to that letter was a sworn statement of Bonham supporting the application and reiterating the denial of any outstanding contracts. According to the Bankruptcy Court's findings based on Plaintiff 's investigation, over $2 million in outstanding contracts existed between WPI and APFC as of March 31, 1993, id at 70; between March 15, 1993 through May 24, 1994, WPI and APFC contracted with investors for over $45 million. Id. Between September and December of 1994, WPI and APFC issued contracts totaling over $14 million in principal sums, according to Bonham's limited records. Id. In the first quarter of 1995, the corporations issued contracts to the same amount, and increased to $16 million in investment contracts during the period between March 1995 and June 14, 1995. In the three months between June 14, 1995 and September 13, 1995, WPI and APFC issued another $15 million in contracts. Plaintiff has calculated a return of 50% interest on these contracts. Id. at 70-71.11 At all times, Hompesch's reports grossly understated the amount. of contracts issued (usually listing between zero and eleven investors as opposed to the six hundred to eight hundred contracts actually issued), and the amount in dollars represented by these contracts (usually stating figures in the ten to twenty thousand dollar range). See id at 70-71.
According to the Bankruptcy Court, the difficulties to be had by the BRA Defendants in asserting reliance solely on either WPI or APFC and not on Bonham was determinative of the issue. Referring to the scheme as "a key person operation," the Bankruptcy Court reiterated its position that "funds were indiscriminately transferred back and forth between WPI and APFC. Creditors who sent the check in might use WPI's name as payee only to have it endorsed over to APFC at Bonham's whim," and that payments to creditors were issued from the entities in the sarne either/or manner. See id. at 10 1. The benefit gained from the nunc pro tunc consolidation is elucidated by the harm caused absent the nunc pro tunc: failing to grant the consolidation nunc pro tunc is akin to denying jurisdiction over the majority of the Ponzi scheme, thus substantially and detrimentally minimizing the recovery available:
If the facts were that the BRA defendants in fact invested funds that were used in the ticket sales business and had been paid by the ticket sales business, they would have a good argument for avoiding a nunc pro tunc consolidation. In reality, however, their investment was, knowingly or unknowingly, in an illegal Ponzi scheme....There is fairness in treating the Targets like the Claimants, and allowing the equitable distribution features of the Bankruptcy Code to operate for both Claimants and Targets rather than have the Claimants bear the entire burden of Bonham's Ponzi scheme.
Id As evidenced by the 1995 decertification of both corporations and as affected by the Alaska Division of Securities virtual shut-down of Bonham's operations, transfers made after 1996 were minimal. To set the cut-off date so late along the timeline of Bonham's actions would be to obstruct recovery of the majority of fraudulent transfers. A showing of clear error in the nunc pro tunc consolidation cannot be made. Thus, the Bankruptcy Court properly set the date for substantive consolidation at December 19, 1995
5. The Necessity of an Adversary Proceeding
Defendants allege that an adversary proceeding is required for substantive consolidation. However, "[n]owhere does the Bankruptcy Code explicitly specify the notice that a trustee must give of the type of hearing here at issue." Auto-Train, 810 F.2d at 278 (citing Bankr. Rule 2002, 11 U.S.C.A.). The District of Columbia Circuit has therefore held Bankruptcy Rule 9014 to apply. See id. That Rule requires "reasonable notice and opportunity to be heard ... (to] be afforded the party against whom relief is sought." See Bankr. Rule 9014, 11 U.S.C.A. This Rule reflects the "constitutional minimum ... requiring that notice be 'reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections."' See Auto-Train, 8 10 F.2d at 278 (quoting Mullane v. Central Hanover Trust Co., 339 U.S. 306 (1950))
Defendants misapply Auto-Train, deducing from its factual analysis that in all instances, "notice was inadequate to apprise the typical prospective party in interest that the consolidation sought ~vas to be given retroactive effect." See Docket No. 89 at 47 (quoting Auto-Train, 8 10 F.2d at 279). In Auto-Train, the trustee filed a motion to amend the caption of the existing petition to thereby achieve substantive consolidation. See 810 F.2d at 273. While the court in Auto-Train denied the suitability of notice to the facts of that case, it did not hold that an adversary proceeding was at all times requisite to afford parties due process in the face of a consolidation. See id at 279 ("Whether notice presents a fair recital of the proposed action is somewhat a function of its method of delivery. A person is far more likely to consult an attorney when he receives personal notice in the mail than when he happens upon a blurb in a newspaper directed to a broad class. Thus where notice is given solely by publication, its content cannot be considered adequate solely because an attorney can discern its meaning.") (emphasis added). The proper analysis appears to be a query as to whether due process was afforded interested parties.
In the present case, Plaintiff used a motion, served on all BRA Defendants, to which responses in opposition of consolidation were received in approximately 200-300 of the individual adversary proceedings. See Bonham, 226 BR. at 94. However, unlike the situation in cases cited by Defendants, see, e.g., In re Julien Co., 120 BR. 930 (Bankr. W.D. Tenn. 1990); In re Alpha & Omega Realty Inc., 36 BR. 416 (Bankr. D. Idaho 1984), cases of limited application to this litigation, neither the debtor nor the non-debtors here contest consolidation. See Bonham, 226 BR. at 93. Yet Defendants press that Plaintiff should have filed a voluntary petition as a predicate to substantive consolidation. See id at 94.
Using a due process analysis of the circumstances surrounding the BRA, the Bankruptcy Court concluded that the motion practice employed by Plaintiff was "the most effective procedure" available to Plaintiff. See id. To have held an adversary proceeding would have required Plaintiff to delay filing the petition until such time as he had gathered enough information to do so - time which Plaintiff would have spent butting heads with a taciturn Bonham. The Bankruptcy Court found that the delay would have relegated Plaintiff to a date outside of the statutory limitation in which to bring § 548 actions against the transfers which occurred, in bulk prior to 1995. See id. The Bankruptcy Court also questioned the viability of bringing an adversary proceeding where so many Defendants are involved: "An adversary proceeding would have been a cumbersome way to bring this issue to the court. Should the trustee have named the 600 BRA defendants in one large adversary? How would they have been served.? With individual subpoenas or by notice? Who would have represented their interests?" See id Drawing a distinction between those cases concerning only one non-debtor entity's interests, where only one party would require service, and the case at hand, the Bankruptcy Court found that logistical considerations coupled with the actual due process afforded the parties to this litigation had made Plaintiffs actions appropriate in light of the procedural due process restrictions on substantive consolidation. See id.
D. Jurisdiction Over An Appeal of the Order Granting Substantive Consolidation.
Plaintiff suggests that the question of whether the substantive consolidation of Bonham, WPI and APFC was so egregious as to permit the grant of Defendants' motion is a matter that has been answered by, and must therefore be appealed to the Bankruptcy Court. See Docket No. 137 at 17-19. However, the rules of this Court indicate otherwise. District of Alaska Local Rule 74. 1, in pertinent part, states:
In an appeal from a judgment or decision of the Bankruptcy Court certified to this court the appellant, within 15 days from the certification of the record, shall serve and Ele a brief , . . Unless otherwise ordered, 40 days after filing the certified record, oral argument shall be set by the court if deemed required.
D. Ak. LR 74. 1 (c) (emphasis added). The rule allows a decision of the Bankruptcy Court to be appealed in this Court. It is a question only of whether that decision has been certified to this Court. See id
Under 28 U.S. C. § 151
the bankruptcy judges in regular active service shall constitute a unit of the districtcourt to be known as the bankruptcy court for that district. Each bankruptcy judge, as a judicial officer of the district court, may exercise the authority conferred under this chapter with respect to any action, suit, or proceeding and may preside alone and hold a regular or special session of the court, except as otherwise provided by law or by rule or order of the district court.
28 U.S. C. § 151. Under §15 8 of that Title, Federal district courts have jurisdiction to hear appeals
(1) from final judgments, orders and decrees;
(2) from interlocutory orders and decrees issued under section 112 1 (d) of title 11 increasing or, reducing the time periods referred to in section 112 1 of such title; and
(3) with leave of court, from other interlocutory orders and decrees; and, with leave of court, from interlocutory orders and decrees or bankruptcy judges entered in cases and proceedings referred to the bankruptcy judges under section 157 of this title. An appeal under this subsection shall be taken only to the district court for the judicial district in which the bankruptcy judge is serving.
See id 158(a). The Code continues, in pertinent part:
Subject to subsection (b), each appeal under subsection (a) shall be heard by a 3-Judge panel of the bankruptcy appellate panel service established under subsection (b)(1) unless (A) the appellant elects at the time of filing the appeal; or (B) any other party elects, not later than 30 days after service of notice of the appeal; to have such appeal heard by the district court.
See id § 158(c).12
That is not to negate the superceding doctrine of the "law of the case." Under this doctrine,
a court is generally precluded from reconsiderig an issue that has already been decided by the same court, or a higher court in the identical case. The doctrine is not a limitation on a tribunal's power, but rather a guide to discretion. A court may have discretion to depart from the law of the case where: 1) the first decision was clearly erroneous; 2) an intervening change in the law has occurred; 3) the evidence on remand is substantially different; 4) other changed circumstances exist; or 5) a manifest injustice would otherwise result. Failure to apply the doctrine of the law of the case absent one of the requisite condition constitutes an abuse of discretion.
United States v. Alexander, 106 F.3d 874, 876 (9th Cir. 1997) (internal citations omitted) Alexander instructed that a review of the initial district court's factual findings is for clear error and that court's decision must not be reversed "as long as the findings are plausible in light of the record viewed in its entirety, even if we would have weighed the evidence differently had we been the trier of fact." Id at 877. Because the case at bar has not been affected by an intervening change in the law, or substantially different evidence or circumstances, it is necessary only to query whether the decision of Judge Ross to consolidate the matter was "clearly erroneous," and whether proceeding under the order granting substantive consolidation would result in a "manifest injustice." Id As stated above, the reverse is true; failing to observe the substantive consolidation would result in grave injustice to all involved in Bonham's operation.
The Trustee's claim as to the impropriety of this Court's adjudication of the matter is meritless. However, the issue is made moot by the superseding impropriety of the motion to dismiss.
E. The Withdrawal of the Reference and Its Effect On the Order Granting Consolidation
Section 157 of Title 28 of the United States Code allows a district court to withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown. The district court shall on timely motion of a party, so withdraw a proceeding if the court determines that resolution of the proceeding requires consideration of both title I I and other laws of the United States regulating organizations or activities affecting interstate commerce. 28 U.S. C. § 157(d). While Defendants' "Factual Issues" section sets out the question of whether the withdrawal of the reference affected the substantive consolidation, see Docket No. 89 at 4, their brief does not address the issue further, except to offer that the "withdrawn adversary proceedings are before this court and in order to maintain his causes of action as set out in his complaints, the trustee must establish all necessary predicates," as an introduction to the standing question which is the focus of their motion to dismiss. See id
The aims of a withdrawal of the reference are uniformity, economy and efficiency. See, e.g., In re Ames Dep't Stores, Inc., 190 BR. 157 (Bankr. S.D.N.Y. 1995); Hatzel & Buehler, Inc. v. Central Hudson Gas & Elec. Corp., 106 BR. 3 67 (Bankr. D. Del. 1989). Because the goals of substantive consolidation, discussed supra, and those of the withdrawal of the reference are in harmony, Defendants' suggestion that the withdrawal would have the effect of essentially reinitiating and replicating previously decided factual and procedural issues is without merit.
F. The Question of Standing:
1. Standing Requirements: Generally
As with any party to an action, if Plaintiff is found to lack standing, the action must be dismissed. "In essence the question of standing is whether the litigant is entitled to have the court decide the merits of the dispute or of particular issues." Warth v. Seldin, 422 U.S. 490, 498 (1975). See also id at 498-99 ("As an aspect of justiciability, the standing question is whether the plaintiff has 'alleged such a personal stake in the outcome of the controversy' as to warrant his invocation of federal-court jurisdiction and to justify exercise of the court's remedial powers on his behalf (quoting Baker v. Carr, 369 U.S. 186, 204 (1962))
Of particular relevance to this Court is the requirement that "[f]or purposes of ruling on a motion to dismiss for want of standing, both the trial and reviewing courts must accept as true all material allegations of the complaint, and must construe the complaint in favor of the complaining party." Warth, 422 U.S. at 501 (citing Jenkins v. McKeithen, 395 U.S. 411, 421-22 (1969)). This already strong presumption in favor of justiciability is augmented by affording a plaintiff the opportunity "to supply, by amendment to the complaint or by affidavits, further particularized allegations or fact deemed supportive of plaintiff's standing. If, after this opportunity, the plaintiffs standing does not adequately appear from all materials of record, the complaint must be dismissed." Warth, 422 U.S. at 501-02.
2. Standing: "Reverse" Piercing and the Alter Ego Doctrine
Defendants correctly maintain that the Trustee has the burden of establishing his standing, citing Hirsch v. Arthur Andersen & Co., 72 F.3d 1085, 1092 (2d Cir. 1995). Plaintiff has standing to assert the causes of action under Title 11 of the United States Code. See 11 U.S. C. § 544(b).
In their motion, Defendants imply that Plaintiff argues that he has standing in the action against participants in Bonham's alleged scheme through a "reverse piercing" of the corporate veil theory tying Bonham's corporations, WPI and APFC, to the litigation.13 In fact, Plaintiff footnotes such an argument only in rebuttal to Defendants' brief, which, by employing caselaw such as Williams v. California First Bank, 859 F. 2d 664 (9th Cir. 1988) and In re Ozark Restaurant Equipment Co., Inc., 816 F.2d 1222 (8th Cir. 1987), implies that the state law doctrine of piercing the corporate veil is determinative of the matter at hand. See Docket No. 137 at 19, n.36 (citing Towe Antique Ford Found v. IRS, 999 F. 2d 1387 (9th Cir. 1993) ("TAFF')). According to Plaintiff, "Alaska courts have not ruled on the availability of reverse piercing, but recognize that where a shareholder uses a corporation as a mere instrumentality, the corporation is not entitled to separate recognition." See Docket No. 137 at 19 06 (citing Jackson v. General Elec. Co., 514 P.2d 1170 (Alaska 1973) (involving a parent-subsidiary relationship)).
As stated by the Supreme Court of Alaska in a later case, such piercing is appropriate where one uses a corporation as "a shield for his activities in violation of the declared public policy or statute of the State." Uchitel Co. v. Telephone Co., 646 P.2d 229, 235 (Alaska 1982). The Uchitel court found that
when ... the corporation is so operated that it is a mere instrumentality or alter ego of the sole or dominant shareholder and a shield for his activities in violation of the declared public policy or statute of the State, the corporate entity will be disregarded and the shareholder treated as one and the same person, it being immaterial whether the sole dominant shareholder, is an individual or another corporation.
In TAFF, the Ninth Circuit found that while "[o]rdinarily, courts are called upon to apply the alter ego doctrine in cases where a party seeks to hold an individual liable for a business entity's debts," it was permissible for the United States to attempt "to reach the assets of a corporation, TAFF, in order to satisfy the tax debt owed by Towe." See 999 F.2d at 1390. Although TAFF dealt with reverse piercing in the context of taxpayer debt, the Ninth Circuit intones that this is just one context appropriate to the doctrine, and not the exclusive arena for its exercise: "'Courts have not hesitated to ignore the fiction of separateness and approve a piercing of the corporate veil when the corporate device frustrates clear intendment of the law. The Government's inability otherwise to satisfy legitimate tax debts may clearly form a sound basis for such disregard of corporate form."' See id at 1391 (quoting Valley Finance, Inc. v. United States, 629 F.2d 162, 171-72 (D.C. Cir. 1980)). Thus, whether this Court could permissibly afford standing via WPI and APFC is a question of whether Bonham's individual form "frustrates clear intendment of the law." Id at 1391. Balanced on the same scale with any frustration is the propriety of the Bankruptcy Court's order of substantive consolidation.
In determining whether a corporation is an alter ego of the individual, the law of the forum state is applied. See Wolfe v. United States, 806 F.2d 1410, 1411 n.3 (9th Cir. 1986), cert. denied, 482 U.S. 927 (1987). The Supreme Court of Alaska has followed the criteria laid out by that court in Jackson v. General Electric Co., 514 P. 2d 1170 (Alaska 1973) in determining whether or not a finding of alter ego status, in either its concave and convex forms, is appropriate. See Jackson, 514 P. 2d at 1172-73. Jackson dealt with the alter ego issue within the context of the parent-subsidiary relationship; it has been applied by the Supreme Court of Alaska outside of that context as well. See Elliot v. Brown, 569 P.2d 1323 (Alaska 1977) (whether corporation is alter ego of corporation's president for purposes of intentional tort).
In Elliot, the Supreme Court of Alaska found that
The corporate veil may not be pierced merely because [one] controls the activities of the corporation. Rather, the veil may be pierced only if the corporate form is used "to defeat public convenience, justify wrong, commit fraud, or defend crime." . . . This doctrine requires considerably more than mere control; it exists to prevent a party from obtaining an advantage through deceptive or manipulative conduct.
Elliot, 569 P.2d at 1326. An argument can clearly be made that Bonham so used WPI and APFC; however, the argument may be somewhat misplaced:
Practically, substantive consolidation is similar to the state law remedy of piercing the corporate veil based on a finding that the entities are alter egos. Piercing the corporate veil, however, is not a prerequisite to the utilization of the bankruptcy law remedy of substantive consolidation. The bankruptcy remedy of substantive consolidation ensures the equitable distribution of property to all creditors, while on the other hand, piercing the corporate veil is a limited merger for the benefit of a particular creditor.
In re Creditors Service Corp., 195 BR. 680, 689 (Bankr. S.D. Ohio 1996) (Chapter 7 case affording grand substantive consolidation of debtor with non-debtor entities and with an individual owning all of the debtor's shares) (internal citation omitted). See also Bonham, 226 BR. at 77 ("The law of substantive consolidation is federal bankruptcy law. In some cases, an alter ego analysis is involved in determining if entities should be consolidated. The use of an alter ego analysis does not, however, deprive the bankruptcy court of jurisdiction to consider substantive consolidation."). Nevertheless, in the case at hand the caselaw regarding substantive consolidation is more applicable than that of reverse piercing. See, e.g., Williams v. California First Bank, 859 F.2d 664 (9th Cir. 1988) (holding that no trustee has power to assert general causes of action, such as an alter ego claim, on behalf of bankrupt estate's creditors); Hirsch v. Arthur Andersen & Co., 72 F.3d 1085 (2d Cir. 1995) (trustee lacked standing to assert malpractice claims on behalf of debtor as against accounting firm with whom debtors had participated in perpetuating fraud against investors). The alter ego and reverse piercing cases highlight the difference between the cause of action available under state law and the procedural move of substantive consolidation. Thus, "[t]he trustee need not dispute these cases because they do not address the federal bankruptcy law concept of substantive consolidation, and deal only with the state law regarding alter ego, piercing and reverse piercing of corporate entities." Bonham, 226 BR. at 77.
Despite this distinction between substantive consolidation and the piercing of the corporate veil, the Bankruptcy Court has determined that The corporate veil of )ATI and APFC should be pierced and RaeJean Bonham declared the alter ego of WPI and APFC under these facts. In Alaska, a person who uses a corporation to comn-dt fraud or engage in cnn-dnal activity should not be permitted to hide behind the corporate veil. Rather, the person should be treated as the corporation's alter ego. In re Bonham, 224 BR. 114, 116 (Bankr. D. Alaska 1998) (citing Elliot v. Brown, 569 P.2d 1323, 1326 (Alaska 1977)). Such a finding supports the substantive consolidation and settles the standing issue.
IT IS THEREFORE ORDERED:
In granting the substantive consolidation of Bonham with non-debtor corporations WPI and APFC, the Bankruptcy Court committed no clear error. As such, and finding no injustice to creditors to arise from the substantive consolidation, this Court is obligated, under the doctrine of the law of the case, to uphold Judge Ross's determination. Because the substantive consolidation necessarily afforded Plaintiff standing with regard to the non-debtor corporations, and because the substantive consolidation was not affected by the withdrawal of the reference, this Defendants' Motion to Dismiss Trustee's Complaints For Lack of Standing at Docket No. 89-1 is DENIED.
Dated at Anchorage, Alaska, this 22 day of February, 2000.
||JAMES K. SINGLETON, JR.
United States District Judge
Back to Unofficial World Plus Home Page
1 This Order also relies on the facts as set out in Judge Ross's companion memorandum to his Order Granting Substantive Consolidation. See Bonham, 226 BR. 56 (Bankr. D. Alaska 1998). In that memorandum, Judge Ross states in a footnote:
I have largely adopted the findings of fact proposed by the trustee. I am aware of the caution that a trial court should not blindly rubber stamp the findings proposed by the prevailing party. In this case, however, the facts involve a great deal of financial analysis and the inferences that are drawn from them.... Accordingly, I have adapted and used the trustee's proposed findings which sets this material out extensively. Before doing so, I have checked the record for accuracy. I have reviewed the parties' evidentiary submissions, and I have sat through the involuntary trial and many other proceedings involving RaeJean Bonham. I believe the trustee's proposed findings fairly state the facts.
Id. at 60 n. I (internal citation omitted). The motion to dismiss standard outlined below instructs that the Court take Plaintiff's word on the facts of the case. See Fed. R. Civ. P. 12(b)(6).
2 Because of the nature of this lawsuit, it is helpful to note the two types of creditors involved. For consistency's sake, in keeping with the Bankruptcy Court, this Order will refer to 'Targets" and "Claimants." Targets are those creditors of WPI, APFC and/or Bonham who received a return on their "investment" before Bonham's 1995 bankruptcy petition, but are subject to avoidance claims under the one-year statute of limitations described in Part B(4) of this 3rder. Claimants are those creditors who will receive payment from whatever assets are recovered by Plaintiff (according to the Bankruptcy Court, this payment will "probably [be] less than fifty-cents on the dollar"). See Bonham, 226 BR. at 95.
3 Plaintiff represents that APFC was "not involved in ticket sales at all, and ... existed solely to perpetuate the Ponzi scheme fraud on the investors." See Docket No. 137, Exh. E at 66.
4 The applicable section of the Bankruptcy Code, I I U.S.C.A. § 548(a), has a one-year atute of limitations, which would only afford recovery of transfers made after January 22, 1996. ks evidenced by the 1995 decertification of both corporations and as affected by the Alaska Division of Securities virtual shut-down of Bonham's operations, see Bonham, 226 B.R. at 97, transfers made after 1996 were minimal; as set out later in this Order, to set the cut-off date so ate along the timeline of Bonham's actions would be to obstruct recovery of the majority of fraudulent transfers, which occurred prior to the 1995 involuntary petition.
5 A history of this case law is detailed in the Bankruptcy Court's memorandum, Sections .3 - 4.5. See Bonham, 226 BR. at 77-93.
6 Although formulated under the prior Bankruptcy Act, Vecco is cited in many present-day cases. See StandardBrands, 154 BR. at 568 (citing, e.g., Eastgroup, 935 F.2d at 249).
7 As outlined by the Bankruptcy Court, the shell corporations of WPI and APFC had no assets (effectively negating a possibility of actual commingling). See Bonham, 226 BR. at 90.
8 For example,
World Plus, Inc. and Atlantic Pacific Funding Corporation apparently never filed any federal or state tax returns. I did find an unsigned draft 1992 federal income tax return, Form 1120S, for World Plus, Inc., prepared by Maynard & Associates, and an unsigned draft amended 1992 Form 1120S prepared by Robinson & Sinz. The two returns differ dramatically from each other, and are probably based, at least in part, on inaccurate information supplied by the debtor.
See Docket No. 52, Aff. of Larry Compton at 9. Footnotes to the above paragraph indicate that "[e].g., Maynard's tax return lists $7,244,556 in gross receipts and $2,805,426 in cost of goods, whereas Robinson & Sinz's tax return shows $4,557,997 in gross revenues against $1,343,451 cost of goods." Id., n.3. Moreover, "[t]he Robinson & Sinz files, which my attorneys subpoenaed, include a handwritten notation that 'our level of confidence is low at this time.' Id, n. 4.
9 Like APFC, WPI has never filed income tax returns, either federally or within Alaska. See Bonham, 226 BR. at 6 1. Remarkably, given the investment volume of the corporation, Plaintiff, "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." See id.
10 See infra, Part F(2).
11 Each of the above-described periods marks a report submitted by Hompesch to DCED.
12 An appeal under subsections (a) and (b) of this section shall be taken in the same manner as appeals in civil proceedings generally are taken to the courts of appeals from the district courts and in the time provided by Rule 8002 of the Bankruptcy Rules. See Bankr. Rule 8002, 11 U.S.C.A.
13 Neither Plaintiff, WPI nor APFC have contested the substantive consolidation in this case. See Bonham, 226 BR. at 93.
Back to Unofficial World Plus Home Page