Perkins v. Haines - Answer Brief

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No. 10-10683-BB

UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT _______________________

WILLIAMS F. PERKINS, PLAN TRUSTEE FOR INTERNATIONAL MANAGEMENT

ASSOCIATES, LLCPlaintiff-Appellant,

v.

ANEA Y. HAINES, ET AL.

Defendants-Appellees.

_______________________

On Appeal from the United States Bankruptcy Court for the Northern District of Georgia, No. 06-62966-PWB (The Honorable Paul W. Bonapfel, District Judge)

_______________________

BRIEF OF DEFENDANTS-APPELLEES GEORGE R. CURTIS, SR. LIVING TRUST, GEORGE R. CURTIS, SR., BETTY CURTIS, DAVID LAIRD FAMILY TRUST, DAVID

LAIRD, DEBORAH H. LAIRD, KEITH O. BURKS, JAMES H. SHELTON, JAMESSHELTON, III, CORNELL SHELTON,TBC CAPITAL INC., X-SPURTS INVESTMENT

CLUB OF ATLANTA, LLC, JOHN L. CARTER, DEXTER M. PAGE, WILLIAM L.

HUTCHINSON, JR., RICARDO A. ARZU, PHILLIP E. HADLEY, ERICH G. RANDOLPH, LAVERNE HAMILTON-JONES, MARTIN D. JEFFRIES, MARCO D. COLEMAN, DAVID WISNESKI, MICHELE F. WISNESKI, LAWRENCE HOOPER,

GREGORY HOOPER, ATLANTA PERINATAL ASSOCIATES, P.C., SYRETHAANDREWS, ALICIA DORSEY, CAROL GRONE, BRADFORD BOOTSTAYLOR, WILLIE

J. CLAY, RAYSHAWN F. CLAY, CARTOPIA, LLC, DECKO QUALITY SERVICES, LLC, CLAY REAL ESTATE HOLDINGS, INC., ANNETTE K. BOND, MT. NEBO

BAPTIST LIFE CENTER, INC. AND VALERIE PEOPLES _______________________

TIMOTHY W. MUNGOVAN

NIXON PEABODY LLP100 SUMMER STREET BOSTON, MASSACHUSETTS 02110PH. 617-345-1000; FAX 617-345-1300FOR GEORGE RUSSELL CURTIS, SR. LIVING TRUST , GEORGE RUSSELL CURTIS, SR., BETTY CURTIS, DAVID LAIRD FAMILY TRUST, DAVIDLAIRD, AND DEBORAH H. LAIRD July 1, 2010

Case: 10-10683 Date Filed: 07/01/2010 Page: 1 of 74

www.floridalegalblog.org



TIMOTHY W. MUNGOVAN (MASS. BAR

# 600702)JONATHAN SABLONE (MASS. BAR #

632998)LEE HARRINGTON (MASS. BAR #

643239)JOSHUA BARLOW (MASS. BAR #

667472)NIXON PEABODY LLP100 SUMMER STREET BOSTON, MA 02110617.345.1000

THOMAS M. BYRNE (GA. BAR # 101350)ANGELA R. FOX (GA. BAR # 131077)SUTHERLAND ASBILL & BRENNAN

LLP999 PEACHTREE STREET, NEATLANTA, GEORGIA 30309-3996404.853.8000

ATTORNEYS FOR DEFENDANTS –

APPELLEES KEITH O. BURKS, JAMES H. SHELTON, JAMES SHELTON, III, CORNELL

SHELTON AND TBC CAPITAL INC.


APPELLEES GEORGE RUSSELL CURTIS, SR. LIVING TRUST, GEORGE RUSSELL

CURTIS, SR. AND BETTY CURTIS


APPELLEES DAVID LAIRD FAMILY

TRUST, DAVID LAIRD, AND DEBORAH

H. LAIRD

JONATHAN H. FAIN, ESQ. (GA. BAR #

254114)JONATHAN H. FAIN & ASSOC., PC66 LENOX POINTE ATLANTA, GEORGIA 30324404.968.2600


APPELLEES X-SPURTS INVESTMENT

CLUB OF ATLANTA, LLC, JOHN L. CARTER, DEXTER M. PAGE, WILLIAM L. HUTCHINSON, JR., RICARDO A. ARZU

AND PHILLIP E. HADLEY

KEVIN A. STINE (GA. BAR # 682588)

JOSHUA TROPPER (GA. BAR # 716790)BAKER, DONELSON, BEARMAN, CALDWELL & BERKOWITZ, PCSUITE 1600, MONARCH PLAZA 3414 PEACHTREE ROAD, N.E.ATLANTA, GA 30326404.577.6000


APPELLEES ERICH G. RANDOLPH AND

LAVERNE HAMILTON-JONES





HEATHER D. BROWN (GA. BAR #

100169)MARK A. KELLEY (GA. BAR # 412325)KITCHENS KELLEY GAYNES, PCELEVEN PIEDMONT CENTER, SUITE 9003495 PIEDMONT ROAD, N.E.ATLANTA, GA 30305404.237.4100

ATTORNEYS FOR DEFENDANT –

APPELLEE MARTIN D. JEFFRIES

SHARON M. LEWONSKI (GA. BAR #

451818)EPSTEIN BECKER & GREEN, P.C.945 EAST PACES FERRY RD., SUITE 2700ATLANTA, GA 30326-13805404.923.9000

ATTORNEYS FOR DEFENDANT – APPELLEE

MARCO D. COLEMAN

CHRISTOPHER D. PHILLIPS (GA. BAR #

575913)LAMBERTH, CIFELLI, STOKES,ELLIS & NASON, P.A.3343 PEACHTREE ROAD, N.E.EAST TOWER, SUITE 550ATLANTA, GA 30326-1022


APPELLEES DAVID WISNESKI AND

MICHELE FRANCINE WISNESKI

SBLEND A. SBLENDORIO (CA. BAR #

109903)

CATOSHA L. WOODS (CA. BAR # 228640)

HOGE, FENTON, JONES & APPEL, INC.4309 HACIENDA DRIVE, SUITE 350PLEASANTON, CA 94588TELEPHONE: 925.460.3365


APPELLEES LAWRENCE HOOPER AND

GREGORY HOOPER

ADMITTED P RO H AC V ICE

WILLIAM R. LESTER (GA. BAR #

447725)SEGAL, FRYER, SHUSTER &

LESTER, P.C.1050 CROWN POINTE PKWY., SUITE 410ATLANTA, GA 3033877.668.9300


APPELLEES ATLANTA PERINATAL

ASSOCIATES, P.C., SYRETHA

ANDREWS, ALICIA DORSEY, CAROL

GRONE, DEXTER M. PAGE AND

BRADFORD BOOTSTAYLOR

PAUL M. SPIZZIRRI (GA. BAR # 672752)SPIZZIRRI LAW OFFICESMIDTOWN PROSCENIUM CENTER, 1170 PEACHTREE STREET N.E., SUITE 1200ATLANTA, GA 30309800.714.7471


APPELLEES WILLIE J. CLAY, RAYSHAWN

FRANCIS CLAY, CARTOPIA, LLC, DECKO

QUALITY SERVICES, LLC, AND CLAY

REAL ESTATE HOLDINGS, INC.





JAMES K. KNIGHT, JR. (GA. BAR #

425750)401 ATLANTA STREET MARIETTA, GA 30060770.428.5250

ATTORNEY FOR DEFENDANT –

APPELLEE ANNETTE K. BOND

GREGORY T. BAILEY (GA. BAR # 032075)571 CULBERSON STREET

ATLANTA, GA 30310

404.397.1975

ATTORNEY FOR DEFENDANT – APPELLEE

MT. NEBO BAPTIST LIFE CENTER, INC.





C-1 of 12

CERTIFICATE OF INTERESTED PERSONS AND

CORPORATE DISCLOSURE STATEMENT

Abdur-Rabbani, Ibrahim

Adams, Edwana

Anand, Esq., Justin

Anderson, Ivy

Andrews, Syretha

Atlanta Perinatal Associates, P.C.

Atlanta Verve, LLC

Atwater, Stephen

Arzu, Ricardo A.

Bailey, Erroll J.

Bailey, Esq., Gregory T.

Baker, Scott G.

Baker, Donelson, Bearman, Caldwell & Berkowitz, P.C.

Barlow, Esq., Joshua S.

Barrett, Thomas

Bates, Esq. Bryan E., counsel to Committee of Investors formed pursuant to Plan

of Reorganization

Bernardino, Esq., Colin M., counsel to William F. Perkins, Plan Trustee

Bishop, Blaine E., member of Committee of Investors formed pursuant to Plan of





C-2 of 12

Reorganization

Bishop, J. Michael

Bonapfel, Judge Paul W., Bankruptcy Judge

Bond, Annette K.

Bootstaylor, Bradford

Bradylyons, Esq., Morgan

Braxton, James

Broadfoot, Esq., Herbert C.

Bronner, James

Bronner, Nathaniel

Bronner, Simone

Brossard, Mario & Charisse

Brown, Esq., Heather D.

Brumbaugh, Esq., Thomas D.

Bryan, Delmena

Burkes, Keith O.

Burnett, Theodore

Busskohl, Charles, member of Committee of Investors formed pursuant to Plan of

Reorganization

Byrne, Esq., Thomas M.





C-3 of 12

Carter, John L.

Carter, Michael

Cartopia, LLC

Central Georgia Anesthesia Services, PC

Champagne, Jessie & Joyce

Clay, Rayshawn F.

Clay, Willie J.

Clay Real Estate Holdings, Inc.

Coleman, Esq., Michael V.

Coleman, Marco D.

Costell, Esq., Jeffrey Lee

Cranshaw, Esq., David W.

Culton, Leroy

Curtis, Betty

Curtis, George R., Sr.

Cutright, Eric

Daniels, Jerry A.

Daniels, LLC, Jerry A.

Danowitz, Esq., Edward F.

David Laird Family Trust





C-5 of 12

Fox, Esq., Angela R.

Friday, Kheisha

Frison, Jr., Lee A.

Fryer, Schuster & Lester, P.C.

Gallassero, William J.

Gardner, Joseph and Lydia

Gayle, Raquel M.

Gebhardt, Esq., Guy G.

Geddes, Dr., Lloyd

George R. Curtis, Sr. Living Trust

Georgia Department of Revenue

Gist, Keenan P.

Gordon, David E., counsel to Committee of Investors formed pursuant to Plan of

Reorganization

Greenberg Traurig LLP

Grone, Carol

Grover, Jaswinder S., member of Committee of Investors formed pursuant to Plan

of Reorganization

GTO Development, LLC

Hadley, Phillip E.





C-6 of 12

Haines, Aena Y.

Hall, Duvall & Claude

Hall, Evelyn

Hall, Keeling

Hamilton-Jones, Laverne

Harley-Lewis, Erinn F.

Harrington, Esq., Lee

Hays & Associates

Herbert, Glenn M.

Hinckson, Terrence

Hines, Bruce A. and Cynthia

Hoge Fenton Jones & Appel, Inc.

Holbein, Esq., Michael F.

Hooper, Gregory

Hooper, Lawrence

Hutchinson, Jr., William L.

IMA Real Estate Fund, LLC, Debtor

Internal Revenue Service

International Management Associates, LLC, Debtor

International Management Associates Advisory Group, LLC, Debtor





C-7 of 12

International Management Associates Platinum Group, LLC, Debtor

International Management Associates Emerald Fund, LLC, Debtor

International Management Associates Taurus Fund, LLC, Debtor

International Management Associates Growth & Income Fund, LLC, Debtor

International Management Associates Sunset Fund, LLC, Debtor

International Medical Systems, LLC

Investment Law Group of Gillett, Mottern

Jackson, Linda C.

Jeffries, Martin D.

Jeter, George L.

Johnson, William E., member of Committee of Investors formed pursuant to Plan

of Reorganization

Jonathan H. Fain and Associates, P.C.

Jones, Laverne

Jones, Vicki L.

July, Clarence & Valerie

Kaufman, Esq., Mark S., counsel to Committee of Investors formed pursuant to

Plan of Reorganization

Kelley, Esq., Mark A.

Kilpatrick Stockton LLP, counsel to William F. Perkins, Plan Trustee





C-8 of 12

Kitchens, Kelley, Gaynes, P.C.

Knight, Jr., Esq., James K.

LaBriola, Esq., Stephen T.

Laird, David

Laird, Deborah H.

Lamberth, Cifelli, Stokes & Stout, P.A.

Layne, Esq., Bernadine H.

Lester, Esq., William R.

Lewonski, Esq., Sharon M.

Louis, Charles H.

Mair, Manuel F.

Mair, Suzanne

Maughan, John & Roxanne

McBryan, Esq., Louis G.

McDade, William

McDonnell, Esq., Robert H.

McKenna Long & Aldridge LLP, counsel to Committee of Investors formed

pursuant to Plan of Reorganization

McManners, Thomas P.

Meir, Esq., Dennis S., counsel to William F. Perkins, Plan Trustee





C-9 of 12

Miller, Hyacinth

Mills, III, Esq., John W., former counsel to William F. Perkins, Plan Trustee

Monnin, Esq., Paul

Moore, Joseph

Mottern, Esq., Robert J.

Mt. Nebo Baptist Life Center, Inc.

Mungovan, Esq., Timothy W.

Noble, Horace

Nixon Peabody, LLP

O’Neal, Roger L., member of Committee of Investors formed pursuant to Plan of

Reorganization

Office of United States Trustee

Page, Dexter M.

Paris, Calvin

Passyn, Esq., Juanita A.

Peoples, Valerie

Peoples-Wisneski, Michelle

Perkins, William F., Plan Trustee

Perkins, William T.

Perman, Jenny Lynn





C-10 of 12

Perman, Todd

Phillips, Esq., Christopher D.

Pinkney, Carol

Pinkney, Laura

Pinkney, Roland

Platinum II Fund, LP, Debtor

Pollack, Charles I.

Porter, Jr., John C.

Qudsi, Mustafa

Randolph, Erich G.

Redfern, Fred C. & Sherri D.

Reese, James Eric

Regan, Sr., Stephen

Ricciardi, Anthony

Robison, David and Joni

Roger O’Neal Family Trust

Rossi, Elayne R.

Rue, James A.

Sablone, Esq., Jonathan

Sacca, Esq., James R.





C-11 of 12

Sblendorio, Esq., Sblend A.

Secret, Esq., Akil Kenneth

Seymour, Booker T.

Shelton, Cornell

Shelton, III, J.

Shelton, James

Spikes, Takeo

Spizzirri, Esq., Paul M.

Spizzirri Law Offices

Star 6 Investments, Ltd.

Steele, Algernon O.

Stein, Esq., Grant T.

Stine, Esq., Kevin

Sutherland Asbill & Brennan, LLP

Tarabadkar, Dr., Sanjiwan

TBC Capital, Inc.

Thompkins, Karen

Tillett, Colleen H., former counsel to William F. Perkins, Plan Trustee

Treace, R. Jeneane

Trigg, Esq., Mark G.





C-12 of 12

Tropper, Esq., Joshua

U.S. Securities and Exchange Commission

Wang, Ben Chang

Whonder, Ernest

Williams, Chasta N.

Williams-Cochrane, Rodney

Williamson, J. Robert

Wilson, Craig A. & Carole

Wisneski, David

Wisneski, Michelle F.

Withers, Bruce & Renee

Woods, Esq., Catosha L.

Work, Frederick T.

Worthy-Pickett, Cheryl

X-Spurts Investment Club of Atlanta, LLC





i

TABLE OF CONTENTS

TABLE OF CONTENTS........................................................................................... i

TABLE OF CITATIONS.........................................................................................iii

I. STATEMENT OF THE ISSUES ................................................................... 1

II. STATEMENT OF THE CASE ...................................................................... 1

A. PROCEDURAL HISTORY.......................................................................... 1

B. STATEMENT OF THE FACTS.................................................................... 5

C. STANDARD OF REVIEW .......................................................................... 7

III. SUMMARY OF THE ARGUMENT ............................................................. 7

IV. ARGUMENT.................................................................................................. 9

A. AS VICTIMS OF A PONZI SCHEME, THE DEFRAUDED INVESTORS GAVE

“VALUE” WHEN THEY REDEEMED SOME OR ALL OF THEIR INVESTED

PRINCIPAL ACCORDING TO THE “GENERAL RULE.” ................................. 9

1. Under the “general rule,” the Defrauded Investors held a claimfor rescission immediately upon making their investment in the

fraudulent scheme and, when the Defrauded Investors redeemedsome or all of their principal, their rescission claim was reducedby each dollar of principal redeemed......................................... 9

2. The “general rule” is consistent with well settled concepts usedto evaluate whether a transferee gave value............................. 12

3. The definitions of “value”, “claim” and “debt” set forth in theBankruptcy Code and applicable state statutes support the“general rule.” .......................................................................... 15

B. THE DISTINCTION BETWEEN “DEBT” AND “EQUITY” IS IRRELEVANT TO

THE “FOR VALUE” ANALYSIS IN THE CONTEXT OF A PONZI SCHEME. .... 19

1. As the Bankruptcy Court found, “[t]he case law does not makethe distinction the Trustee proposes.”...................................... 19





ii

2. The Trustee’s distinction based on the form of the DefraudedInvestors’ investment is based on a fundamentalmisunderstanding of Eby.......................................................... 25

3. Terry Manufacturing is inapposite to the facts before this Court................................................................................................... 34

C. THE TRUSTEE’S “POLICY” ARGUMENTS CANNOT OVERCOME HIS CLASH

WITH WELL-SETTLED LAW. .................................................................. 36

1. The Bankruptcy Court’s ruling is premised on bedrock bankruptcy principles of claim priority and equal treatment of similarly situated claimants...................................................... 36

2. The Trustee relies on inapplicable portions of the BankruptcyCode to support his contrived argument. ................................. 37

D. THE TRUSTEE’S PROPOSED MODE OF “REDISTRIBUTION” IS NO FAIRER

THAN THAT IMPOSED BY THE “GENERAL RULE.” .................................. 38

E. THE TRUSTEE’S ARGUMENT IS PRECLUDED BY THE DOCTRINES OF RES

JUDICATA AND ESTOPPEL. ..................................................................... 41

1. The Trustee is barred by the doctrine of res judicata fromclaiming that the Defrauded Investors are not debt-holders. ... 43

2. The Trustee is also barred by the doctrine of estoppel fromclaiming that the Defrauded Investors are not debt-holders. ... 45

V. CONCLUSION............................................................................................. 47





iii

TABLE OF CITATIONS

Page(s)

CASES

Ainsworth v. Perreault,

563 S.E. 2d 135 (Ga. Ct. App. 2002)................................................................. 11

Atlanta Retail, Inc. v. Eastman Kodak Co. (In re Atlanta Retail, Inc.),294 B.R. 186 (Bankr. N.D. Ga. 2003) ............................................................... 46

Battle v. Liberty Mut. Fire Ins. Co.,623 S.E.2d 541 (Ga. Ct. App. 2005).................................................................. 46

Burnes v. Pemco Aeroplex, Inc.,291 F.3d 1282 (11th Cir. 2002) ......................................................................... 45

Camp v. Carithers,65 S.E. 583 (Ga. Ct. App. 1909)........................................................................ 11

Daniel v. Dalton News Co.,172 S.E. 727 (Ga. Ct. App. 1934)...................................................................... 11

Dicello v. Jenkins (In re International Loan Network, Inc.),160 B.R. 1 (Bankr. D.C. 1993) .......................................................................... 10

Donell v. Kowell,533 F.3d 762 (9th Cir. 2008) ...................................................................... passim

Eubanks v. FDIC ,977 F.2d 166 (5th Cir. 1992) ............................................................................. 43

First Union Commercial Corp. v. Nelson Mullins, Riley & Scarborough (In

re Varat Enters., Inc.),81 F.3d 1310 (4th Cir. 1996) ............................................................. 4, 34, 37, 43

Gray v. Manklow (In re Optical Techs., Inc.),246 F.3d 1332 (11th Cir. 2001) ..................................................................... 7, 41

Gunnin v. Dement,

422 S.E. 2d 893 (Ga. Ct. App. 1992)................................................................. 11





iv

Hildebrandt v. Ill. Dep't of Natural Res.,347 F.3d 1014 (7th Cir. 2003) ........................................................................... 41

Hovis v. General Dynamics Corp. (In re Hovis),396 B.R. 895 (D.S.C. 2007)............................................................................... 45

In re Chase & Sanborn Corp.,904 F.2d 588 (11th Cir. 1990) ........................................................................... 16

In re Hedged-Investments Associates, Inc.,84 F.3d 1286 (10th Cir. 1996) ............................................................... 31, 32, 33

In re Terry Mfg Co., Inc.,2007 WL 274319 (M.D. Ala 2007) ............................................................. 34, 35

In re USinternetworking, Inc.,310 B.R. 274 (Bankr. D. Md. 2004) .................................................................. 45

In re Young,294 F. 1 (4th Cir. 1923)...................................................................................... 27

Jobin v. Cervenka (In re M&L Bus. Mach. Co.),194 B.R. 496 (D. Colo. 1996)............................................................................ 10

Jobin v. McKay (In re M&L Bus. Mach. Co.),84 F.3d 1330 (10th Cir. 1996) ............................................................... 10, 17, 20

Johnson v. Studholme,

619 F.Supp. 1347 (D. Colo. 1985)......................................................... 31, 32, 41

Kingsley v. Wetzel (In re Kingsley),518 F.3d 874 (11th Cir. 2008) ............................................................................. 7

Kovacs v. Hanson (In re Hanson),373 B.R. 522 (N.D. Ohio 2007)......................................................................... 13

Levine v. Custom Carpet Shop, Inc. (In re Flooring Am., Inc.),302 B.R. 394 (Bankr. N.D. Ga. 2003) ............................................................... 17

Lisle v. John Wiley & Sons, Inc. (In re Wilkinson),196 Fed. Appx. 337 (6th Cir. 2006)................................................................... 13





v

Mazzeo v. United States (in Re Mazzeo),131 F.3d 295 (2d Cir. 1997)......................................................................... 17, 18

Merrill v. Abbott (In re Independent Clearing House, Inc.),77 B.R. 843 (D. Utah 1987)................................................................... 10, 17, 20

Midwest Holding # 7, LLC v. Anderson (In re Tanner Family, LLC),556 F.3d 1194 (11th Cir. 2009) ......................................................................... 16

Official Comm. of Asbestos Pers. Injury Claimants v. Sealed Air

Corporation (In re W.R. Grace & Co.),281 B.R. 852 (Bankr. D. Del. 2002) .................................................................. 14

Rauch v. Shanahan,189 S.E. 2d 111 (Ga. Ct. App. 1972)................................................................. 11

Rosenberg v. Collins,624 F.2d 659 (5th Cir. 1980) ............................................................................. 10

Scholes v. African Enter., Inc.,

854 F. Supp. 1315 (N.D. Ill. 1994) .............................................................. 10, 31

Scholes v. Ames,

850 F.Supp. 707 (N.D. Ill. 1994)....................................................................... 31

Southmark Corp. v. Trotter, Smith & Jacobs,442 S.E.2d 265 (Ga. Ct. App. 1994).................................................................. 45

Wootton v. Barge (In re Cohen),875 F.2d 508 (5th Cir 1989)................................................................................ 42

Wyle v. C.H. Rider & Family (In re United Energy Corp.),944 F.2d 589 (9th Cir 1991) ....................................................................... passim

STATUTES

11 U.S.C. § 101 ................................................................................................ passim

11 U.S.C. § 544 ......................................................................................................... 2

11 U.S.C. § 548 ................................................................................................ passim

11 U.S.C. § 1102 ....................................................................................................... 1





vi

11 U.S.C. § 1141 ..................................................................................................... 43

O.C.G.A. § 13-5-5................................................................................................... 11

O.C.G.A. § 18-2-73................................................................................................. 16

O.C.G.A. § 18-2-78.......................................................................................... passim

O.C.G.A. § 23-2-60................................................................................................. 11

OTHER AUTHORITIES

Fed. R. Bankr. P. 7056 .............................................................................................. 7

Fed. R. Civ. P. 56 ...................................................................................................... 7





I. STATEMENT OF THE ISSUES

Whether, as a matter of law, defrauded investor defendants who each made

an investment in a debtor entity, which at all relevant times was operated as a

Ponzi scheme, and thereafter received redemptions of their principal investment

received such redemptions “for value” as required to establish a defense to

fraudulent transfer claims under 11 U.S.C. § 548(c) and O.C.G.A. § 18-2-78(a) or

similar state laws.

II. STATEMENT OF THE CASE

A. PROCEDURAL HISTORY

On March 16, 2006 (the “Petition Date”), the substantively-consolidated

debtors (the “Debtors”) each filed voluntary petitions for relief under Chapter 11 of

Title 11 of the United States Code (the “Bankruptcy Code”). On March 27, 2006,

the United States Trustee appointed a committee of investors pursuant to 11 U.S.C.

§ 1102(a) (the “Committee”). On April 20, 2006, the United States Trustee

appointed William F. Perkins (the “Trustee”) as Chapter 11 trustee of the Debtors.

The Defendants-Appellees set forth on Exhibit A hereto are each defrauded

investor defendants (the “Defrauded Investors”)1 in certain adversary proceedings

1 In an effort to streamline the appeal process, and to minimize the burden onthe Court, the Defrauded Investors have agreed to prepare and file a unifiedbrief in response to the Trustee’s Principal Brief. Because the argumentsadvanced in this Brief are common to all Defendants-Appellees – not just the

(Footnote continued on next page)





2

(the “Avoidance Actions”) commenced against them by the Trustee. The Trustee

filed 108 adversary proceedings in which he seeks to avoid and recover transfers

which the Debtors made to the investor Defendants-Appellees as a return of some

or all of their principal investments and, in some cases, as a distribution of

allegedly fictitious profits.

The Trustee seeks recovery of the challenged transfers based on his powers

of avoidance and recovery under fraudulent transfer law at 11 U.S.C. §

548(a)(1)(A) and (B) or applicable state law pursuant to 11 U.S.C. § 544(b). The

Trustee argues that the Debtors’ estate should recover the challenged transfers

because they were not an exchange “for value.”

In response, the Defrauded Investors have asserted their affirmative statutory

defenses including, inter alia, a defense under 11 U.S.C. § 548(c) and analogous

state law. Section 548(c) provides that a transferee “that takes for value and in

good faith…may retain any interest transferred…to the extent that such transferee

gave value to the debtor in exchange for such transfer.” 11 U.S.C. § 548(c).

Similarly, under applicable state law, “[a] transfer…is not voidable…against a

(Footnote continued from previous page)

Defrauded Investors – the Court should treat this Brief as having been filed forthe benefit of all Defendants-Appellees.





3

person who took in good faith and for a reasonably equivalent value.” O.C.G.A. §

18-2-78.

Pursuant to Rule 7056 of the Federal Rules of Bankruptcy Procedure, the

Trustee filed a motion (the “Motion for Partial Summary Judgment”) seeking an

order by the Bankruptcy Court that, as a matter of law, the Defrauded Investors

cannot establish the “for value” element of their affirmative defense on grounds

that redemptions of principal received by the Defrauded Investors were not

transfers of “value.” Doc. 4. For purposes of considering the Trustee’s Motion for

Partial Summary Judgment, the Bankruptcy Court consolidated the Avoidance

Actions into a single Miscellaneous Proceeding.2 Doc. 1. On December 1, 2009,

the Bankruptcy Court entered an Order (the “Order”) denying the Trustee’s Motion

for Partial Summary Judgment. Doc. 38.

In its Order, the Bankruptcy Court recognized the “general rule” in the

context of a Ponzi scheme which “is that a defrauded investor receives ‘value’ to

the extent of the principal amount of its investment but not with regard to any

payments in excess of principal.”3 Doc. 38 at p. 6. The Bankruptcy Court rejected

2 Miscellaneous Proceeding No. 09-MP-601, United States Bankruptcy Courtfor the Northern District of Georgia.

3 The Bankruptcy Court limited its focus to the issue of avoidance and recoveryof principal contributions by the Defrauded Investors and did not address the






4

the Trustee’s argument that the “general rule” cannot apply in the Avoidance

Actions because the investors acquired equity positions in the Debtors for three

reasons.

The Bankruptcy Court’s analysis was straight-forward and clear. First,

“well-established case law” has “uniformly established” the general rule allowing

“a defrauded investor to retain payments it receives up to the amount of its

invested principal” and “interpretation of the fraudulent transfer laws has made no

distinction based on the form of the investment.” Id . at pp. 11-12. Second , the

Bankruptcy Court concluded that “no principled basis exists for a different result

depending on the technical form of the fraudulent investment” because “it is the

substance, not the form, of the transactions” that “governs the reallocation of assets

in the aftermath of the collapse of the Ponzi scheme.” Id . at p. 12. Third , the

Bankruptcy Court found that bankruptcy law principles recognizing the priority of

debt creditors over the equity interests of an enterprise’s owners do nothing to

further the Trustee’s argument because in a Ponzi scheme any reallocation of the

debtor’s assets “is limited to the same class, that is, persons who have been


issue of whether payments in excess of principal could be avoided andrecovered by the Trustee. Doc. 38 at p. 8, n. 9.





5

fraudulently induced into unknowingly participating in the fictitious scheme.” Id .

at pp. 12-13.

Concurrent with the issuance of its Order, the Bankruptcy Court certified the

legal question presented for immediate review by this Court. Doc. 39. The

Trustee then filed a Petition for Leave to Appeal from the Bankruptcy Court’s

Order, which this Court granted by order dated February 17, 2010. The Trustee

filed his Principal Brief with this Court on April 23, 2010. The Defrauded

Investors now jointly submit this Responsive Brief.

B. STATEMENT OF THE FACTS

In order to address the legal issue before it, the Bankruptcy Court assumed,

for purposes of the Trustee’s Motion for Partial Summary Judgment only, the

Trustee established his prima facie case for the recovery of fraudulent transfers

from the Defrauded Investors.4 Doc. 38 at p. 8. As set forth in the Bankruptcy

Court’s Order and Certification of Direct Appeal, for the purposes of this appeal

the following facts are assumed: (i) Kirk Wright formed the Debtors purportedly to

manage and operate as hedge funds, each of which was structured either as a

4 The Bankruptcy Court’s assumption of these facts, however, did “not

constitute a determination of any of the assumed facts.” Doc. 38 at p. 8.Therefore, even if the Trustee prevails he must still “establish the existence of a Ponzi scheme and, for each [Defrauded Investor], the factual and legal basesfor a determination that each transfer in question is recoverable as a fraudulenttransfer.” Id . at pp. 8-9.





6

limited liability company or a limited partnership; (ii) in reality, Wright used the

Debtors at all material times to operate a fraudulent Ponzi scheme whereby capital

contributions made into the Debtors by later investors were used to knowingly pay

earlier investors more than their investments were actually worth, including

nonexistent principal and fictitious profits, to perpetuate the illusion that the

Debtors had positive investment gains, to keep existing investors from seeking

recovery of their investments, and to induce prospective investors to make new

investments; (iii) each of the Defrauded Investors made a capital contribution

through execution of a limited liability company agreement, a limited partnership

agreement, and/or a subscription agreement with one or more of the Debtors such

that the Defrauded Investors held an interest in one or more of the Debtors

denominated as a membership unit or a limited partnership interest; (iv) during the

operation of the scheme, investors requested and received transfers from the

Debtors, representing returns of principal and/or purported profits on their

investments; and (v) at some time during the operation of the scheme, each

Defrauded Investor received one or more transfers of property from one or more of

the Debtors on account of such Defrauded Investor’s interest in one or more of the

Debtors. Id . at pp. 9-10; Doc. 39 at pp. 2-3.





7

C. STANDARD OF REVIEW

A bankruptcy court's ruling as to summary judgment is reviewed de novo,

applying the same legal standard used by the bankruptcy court. See Kingsley v.

Wetzel (In re Kingsley), 518 F.3d 874, 876 (11th Cir. 2008) (applying the same

standard for summary judgment as the bankruptcy court); Gray v. Manklow (In re

Optical Techs., Inc.), 246 F.3d 1332, 1334 (11th Cir. 2001) (explaining "that an

appellate court reviews a bankruptcy court's grant of summary judgment de novo");

Fed. R. Bankr. P. 7056 (making Fed. R. Civ. P. 56's summary judgment standard

applicable in bankruptcy adversary proceedings). Summary judgment is proper "if

the pleadings, the discovery and disclosure materials on file, and any affidavits

show that there is no genuine issue as to any material fact and that the movant is

entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c)(2). This Court must

view all evidence and make all reasonable inferences in favor of the nonmoving

party in making this determination. In re Optical Techs., Inc., 246 F.3d at 1334.

III. SUMMARY OF THE ARGUMENT

The Trustee’s Principal Brief conflicts with decades of well-settled case law.

At the behest, and upon the advice of the Committee,5 the Trustee urges the Court

5 While the Trustee was the nominal proponent of the Motion for PartialSummary Judgment and this appeal, the Committee and its legal counsel were






8

to hold that victimized investors, like the Defrauded Investors, who have restitution

and rescission claims against an enterprise that is determined to be a Ponzi scheme,

cannot meet the “for value” prong of a fraudulent transfer defense under either

state or bankruptcy law. In essence, the Trustee argues, without support and

against the weight of precedent, that “value” for the purposes of establishing a

defense to avoidance and recovery does not exist under a restitution theory when

the initial investment at issue is “equity” rather than “debt.” The Trustee argues

that such equity investments should not be “transmuted” retroactively into debt for

the purposes of establishing a defense to avoidance and recovery. According to the

Trustee, this “transmutation” should not occur because the claims at issue are

unasserted “latent” restitution claims and, therefore, are not yet antecedent. Thus,

the Trustee concludes that no “value” was given in exchange for the challenged

transfers because the “equity” redeemed was worthless.

As discussed below, the Trustee’s position collides with a wave of contrary

case law, as the Trustee largely concedes. The only bankruptcy court case that the

Trustee can find to support his position did not involve a Ponzi scheme.

Overwhelmed by precedent, as recognized by the Bankruptcy Court in its Order,


the principal architects of the Motion for Partial Summary Judgment and theTrustee’s Principal Brief. See PBr. at p. 3, n. 2.





9

the Trustee’s argument necessarily relies on rhetorical flourishes and invented

terminology such as “claims2” and “transmutation without articulation” that is

apparently intended to create some counterweight to established law. The

Trustee’s reliance on terminology, unavailing below, must also fail here on appeal

in the face overwhelming contrary authority.

For the reasons set forth below, the Defrauded Investors respectfully request

that the Court affirm the Bankruptcy Court’s Order denying the Trustee’s Motion

for Partial Summary Judgment.

IV. ARGUMENT

A. AS VICTIMS OF A PONZI SCHEME, THE DEFRAUDED INVESTORS GAVE

“VALUE” WHEN THEY REDEEMED SOME OR ALL OF THEIR INVESTED

PRINCIPAL ACCORDING TO THE “GENERAL RULE.”

1. Under the “general rule,” the Defrauded Investors held a

claim for rescission immediately upon making their

investment in the fraudulent scheme and, when theDefrauded Investors redeemed some or all of their

principal, their rescission claim was reduced by each dollar

of principal redeemed.

In fraudulent transfer actions seeking recovery under a theory of

“constructive fraud,”6 the plaintiff trustee must establish, inter alia, that the debtor

received less than reasonably equivalent value in exchange for the challenged

6 The Trustee has neither alleged nor presented evidence that any of theDefrauded Investors are liable for actual fraud.





10

transfer. See 11 U.S.C. § 548(a)(1)(B). Conversely, a defendant in a constructive

fraud case can establish a defense to the action if it can demonstrate that it received

the transfer in “good faith” and “for value.” See id .; O.C.G.A. § 18-2-78(a).

In Ponzi scheme cases, courts have uniformly held that a claim for

restitution or rescission arises against the fraudster at the time that the investment

is made for the amount of money invested in the scheme. See e.g. Wyle v. C.H.

Rider & Family (In re United Energy Corp.), 944 F.2d 589, 596 (9th Cir 1991);

Rosenberg v. Collins, 624 F.2d 659, 661 (5th Cir. 1980); Scholes v. African Enter.,

Inc., 854 F. Supp. 1315, 1326 (N.D. Ill. 1994). When an investor redeems some or

all of its principal, each dollar of principal redeemed reduces the defrauded

investor’s corresponding restitution or rescission claim. See e.g. Jobin v. McKay

(In re M&L Bus. Mach. Co.), 84 F.3d 1330, 1340-41 (10th Cir. 1996); In re United

Energy Corp., 944 F.2d at 595; Jobin v. Cervenka (In re M&L Bus. Mach. Co.),

194 B.R. 496, 501 (D. Colo. 1996); Merrill v. Abbott (In re Independent Clearing

House, Inc.), 77 B.R. 843, 861 (D. Utah 1987); Dicello v. Jenkins (In re

International Loan Network, Inc.), 160 B.R. 1, * 12 (Bankr. D.C. 1993). Courts

have uniformly held in Ponzi scheme cases that this return of principal satisfies an

antecedent debt and constitutes “value” for the purposes of establishing a defense

to fraudulent transfer claims under 11 U.S.C. § 548(c) and O.C.G.A. § 18-2-78(a)

or correlative state laws. See id .





11

Under Georgia law, the Defrauded Investors held the same substantive rights

to rescission or restitution arising at the time of their initial investments. It is well

settled that fraudulent inducement of an investment is actionable in Georgia. See

Gunnin v. Dement, 422 S.E. 2d 893, 896 (Ga. Ct. App. 1992) (affirming jury

verdict in favor of defrauded investor in motorcycle franchise on claim for

rescission); Daniel v. Dalton News Co., 172 S.E. 727, 728-29 (Ga. Ct. App. 1934);

Camp v. Carithers, 65 S.E. 583, 585-86 (Ga. Ct. App. 1909). The defrauded

investor holds a right to rescission or restitution. See Ainsworth v. Perreault, 563

S.E. 2d 135, 137 (Ga. Ct. App. 2002) (“a party alleging fraudulent inducement”

can either “(1) affirm the contract and sue for damages from the fraud or breach; or

(2) promptly rescind the contract and sue in tort for fraud.”); Daniel, 173 S.E. at

729 (“the general rule that contracts obtained by fraud may be avoided by the party

defrauded, applies to a stock subscription induced by the fraud of the company

through its authorized agent”); accord O.C.G.A. § 23-2-60 (“Fraud will authorize

equity to annul conveyances, however solemnly executed.”); O.C.G.A. § 13-5-5

(“Fraud renders contracts voidable at the election of the injured party.”). Where,

as here, no interest is actually delivered in return for an investor’s initial payment,

explicit election to rescind and recover the full principal is not required because no

other relief is available. See Rauch v. Shanahan, 189 S.E. 2d 111, 113-14 (Ga. Ct.

App. 1972).





12

In this case, the Bankruptcy Court correctly applied what it called the

“general rule,”7 in concluding that the Defrauded Investors gave value – in the

form of a reduction in their rescission claim – at the time that they redeemed some

or all of their invested principal. Doc. 38 at pp. 6-7; See Donell v. Kowell, 533

F.3d 762, 777-78 (9th Cir. 2008) ("Up to the amount that 'profit' payments return

the innocent investor's initial outlay, these payments are settlements against the

defrauded investor's restitution claim. Up to this amount, therefore, there is an

exchange of 'reasonably equivalent value' for the defrauded investor's outlay"). As

a result, the Bankruptcy Court properly denied the Trustee’s Motion for Summary

Judgment.

2. The “general rule” is consistent with well settled concepts

used to evaluate whether a transferee gave value.

The fundamental issue here is whether the Debtors received “value.”

“Reasonably equivalent value” compares what the “debtor surrendered and what

the debtor received irrespective of what any third party may have gained or lost.”

In re United Energy Corp., 944 F.2d at 597. “A transfer that alters the amount of

the debtor's assets and/or liabilities, while not altering net worth, is a transfer for

7 Even the Trustee admits that the Bankruptcy Court followed the “generalrule.” Principal Brief (“PBr.”) at p. 8.





13

reasonably equivalent value.” Kovacs v. Hanson (In re Hanson), 373 B.R. 522,

526 (N.D. Ohio 2007). As one court noted, a trustee cannot “ignore[ ] the fact that

[the debtor]'s net worth remained the same after the transfer….‘the focus should be

on the overall effect on the debtor's net worth after the transfer.’” Lisle v. John

Wiley & Sons, Inc. (In re Wilkinson), 196 Fed. Appx. 337, 343 (6th Cir. 2006).

Here, the Debtors’ net worth remained unchanged as a result of the Debtors’

payment of principal to the Defrauded Investors because, pursuant to the “general

rule,” the Debtors’ exposure to the Defrauded Investor’s rescission claim was

reduced dollar-for-dollar by the payment of redeemed principal. As such, the

Debtor received value in exchange for returning principal to the Defrauded

Investors in the form of a reduced debt on the rescission claim.

The Trustee primarily attacks this notion by arguing that the Defrauded

Investors were “equity investors” and as such, the value of their “investment” was

zero the minute that they invested their money with the fraudster. Precedent

dictates, however, that the Defrauded Investors did not “invest” in the Debtors’

Ponzi scheme, as there never was any “equity” for them to purchase with their

investments. See In re United Energy Corp., 944 F.2d at 595-96; Donell, 533 F.3d

at 772. In Donell, the Ninth Circuit concluded that the defrauded investors did not

“invest” at all with the Defendants, reasoning that “Payments of amounts up to the

value of the initial investment are not, however, considered a 'return of principal,'





14

because the initial payment is not considered a true investment.” Donell, 533 F.3d

at 772. Therefore, any amounts returned to the investor up to the amount of his or

her investment “are considered to be exchanged for ‘reasonably equivalent value,’

and thus not fraudulent, because they proportionally reduce the investors’ rights of

restitution.” Id. (citing United Energy Corp., 944 F.2d at 595). This Court should

follow the reasoning of the Donell Court, and conclude that any amounts returned

to the Defrauded Investors up to the amount of his or her investment are

considered to be exchanged for reasonably equivalent value and thus not

fraudulent, because they proportionally reduce the Defrauded Investors’ rights of

restitution.

Further, there is no basis on which to embrace the Trustee’s notion that the

Defrauded Investors’ inability or failure to articulate their restitution claims

somehow renders those claims meaningless or controverts the Bankruptcy Code.

Once again, the Trustee’s theory is contrary to existing authority. In Official

Comm. of Asbestos Pers. Injury Claimants v. Sealed Air Corporation (In re W.R.

Grace & Co.), 281 B.R. 852, 862 (Bankr. D. Del. 2002), the Court observed that

“[i]t cannot matter that the claimants themselves may have been unaware of their

own claim…a cause of action may exist before its owner is aware of it….[t]his

expansive language must negate any residual inference that a right to payment

must be known and asserted to be a claim.” Here, contrary to the Trustee’s





15

argument, whether the Defrauded Investors knew about their claims for restitution

has no effect on either (i) the creation of the right to rescission or restitution (which

arose precisely because the Defrauded Investors did not know about it at the time),

or (ii) the satisfaction of it (the Debtors owed the Defrauded Investors’ their

money; if the Debtors paid that debt without the Defrauded Investors ever learning

about the fraud, then the liability for restitution would still be satisfied).

3. The definitions of “value”, “claim” and “debt” set forth in

the Bankruptcy Code and applicable state statutes support

the “general rule.”

In challenging the general rule concerning “value,” the Trustee points to the

term “antecedent debt” in the Bankruptcy Code and applicable state law. In doing

so, the Trustee effectively defines “value” to mean that the Defrauded Investors

could have given “value” only where “what was originally a loan or a contractual

agreement” gave rise to their claim against a debtor. PBr. at pp. 13-14. Tellingly,

the Trustee ignores the definitions of “debt” and “claim” set forth in the

Bankruptcy Code, which, when read together, support the application of the

general rule. Id .

“Value” includes the satisfaction of a present or antecedent debt of the

debtor. See 11 U.S.C. § 548(d)(2)(A) (defining “value” as “property, or

satisfaction or securing of a present or antecedent debt of the debtor, but does not

include an unperformed promise to furnish support to the debtor or to a relative of





16

the debtor . . .” ); see also O.C.G.A. § 18-2-73(a) (stating the “value” is given for a

transfer if, in exchange for the transfer, “property is transferred or an antecedent

debt is secured or satisfied . . . .”). By definition, therefore, the Defrauded

Investors gave “value” in redeeming some or all of their principal investment if the

transfer satisfied a “debt” of the Debtors.

The intellectual underpinning for the general rule is set forth in the

definitions of “debt” and “claim” under the Bankruptcy Code. The Bankruptcy

Code defines “debt” as “liability on a claim.” 11 U.S.C. § 101(12). The

Bankruptcy Code defines “claim” broadly to include, without limitation, “ a right

to payment, whether or not such right is reduced to judgment, liquidated,

unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal,

equitable, secured, or unsecured . . .” 11 U.S.C. § 101(5)(A) (emphasis supplied).

Many courts, including this one, have acknowledged the coextensive use of

the terms “debt” and “claim” in the Bankruptcy Code. See e.g. Midwest Holding #

7, LLC v. Anderson (In re Tanner Family, LLC), 556 F.3d 1194, 1196 (11th Cir.

2009) (“By making the terms debt and claim coextensive, Congress has adopt[ed] [

] the broadest possible definition of debt….Accordingly, a debtor incurs a debt to a

creditor when the creditor has a claim against the debtor, even if the claim is

unliquidated, unmatured, unfixed, or contingent.”) (emphasis in original; internal

quotations and citations omitted); In re Chase & Sanborn Corp., 904 F.2d 588, 595





17

(11th Cir. 1990) (“It is established that ‘debt’ is to be given a broad and expansive

reading for purposes of the Bankruptcy Code”).

This “co-extensive” use of the terms “debt” and “claim” has caused courts to

conclude that a defrauded investor’s claim for rescission constitutes a “debt.”

For example, in In re Independent Clearing House Co., the Court held that:

From the time [an investor] entrusted his money to the debtors, he hada claim against the debtors for the return of his money. We believethat the Code’s definition of ‘debt’ and its related terms is broad

enough to cover the debtors’ obligation to return a defendant’s

principal undertaking, whether that obligation was based on the contract between the debtors and [the investor] or was based on [the

investor’s] right to restitution.

In re Independent Clearing House Co., 77 B.R. at 857 (emphasis supplied); see

also In re M&L Bus. Mach. Co., 84 F.3d at 1340-41; In re United Energy Corp.,

944 F.2d at 595-96 (“The Code does not require that a ‘debt’ be a contractual

liability. Instead, ‘debt’ is defined as a liability on a ‘right to payment, whether or

not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent,

matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured. .

. .’”) (emphasis supplied); accord Mazzeo v. United States (in Re Mazzeo), 131

F.3d 295, 302 (2d Cir. 1997) ("[T]he term 'debt' is sufficiently broad to cover any

possible obligation to make payment.") (emphasis supplied; quotation marks and

citation omitted); Levine v. Custom Carpet Shop, Inc. (In re Flooring Am., Inc.),

302 B.R. 394, 400 (Bankr. N.D. Ga. 2003).





18

These cases establish that an exchange “for value” is not limited to an

exchange in satisfaction of a traditional debt instrument, as the Trustee contends.

Instead, the “value” element under Section 548(c) and applicable state law is

satisfied by an exchange in satisfaction of “any possible obligation” of the debtor

to make payment, In Re Mazzeo, 131 F.3d at 302, including the “liquidated,

unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal,

equitable, secured, or unsecured” rights of transferees. See 11 U.S.C. § 101(5)(A).

The Defrauded Investors’ claims for rescission against the Debtors, which even the

Trustee admits arose at the time of the initial investment in the Ponzi scheme, PBr.

at p. 17, fit within the broad, coextensive definitions of “claim” and “debt” set

forth in the Bankruptcy Code. Thus, the exchange of these rescission claims for

redeemed principal constitutes an exchange “for value” under Section 548(c).

Given this simple and logical explanation, the Trustee’s theory of

“transmutation” is exposed for what it is -- a rhetorical device intended to

complicate and de-legitimize the Defrauded Investors’ valid claim that they gave

value when then redeemed some or all of their principal. As between the

Defrauded Investors’ Code-based explanation, and the Trustee’s transmutation

theory, the Court should apply the principle of “Occam’s razor,” which has been

loosely translated to mean that the simplest explanation is often the best. Here, the

simple explanation is the right one. There is no need for a “claim” to “transmute”





19

into “debt” because the definition of “claim” is co-extensive with the definition of

“debt.” Under the Bankruptcy Code, they are already one and the same.

B. THE DISTINCTION BETWEEN “DEBT” AND “EQUITY” IS IRRELEVANT

TO THE “FOR VALUE” ANALYSIS IN THE CONTEXT OF A PONZI

SCHEME.

Faced with a “general rule” expressly counter to his position, the Trustee has

labored to present a distinction between this case and the litany of cases reciting

and endorsing the “general rule” based on the form of the Defrauded Investors’

initial investment. This distinction is irrelevant for at least three reasons.

1. As the Bankruptcy Court found, “[t]he case law does not

make the distinction the Trustee proposes.”

The Bankruptcy Court correctly found that “[t]he case law does not make

the distinction the Trustee proposes” concerning “debt” versus “equity” in a Ponzi

scheme context. Doc. 38 at p. 10. Courts have routinely found that a fraudulent

inducement claim lies for each defrauded defendant in an avoidance action,

regardless of whether the investor was induced to invest in a debt instrument or an

equity instrument. For example, in In re Independent Clearing House Co., the

Court held that:

If there was not a valid contract between the debtors and [an investor],before the transfer [the investor] would have had a claim forrestitution, to prevent the debtors’ unjust enrichment. See Restatementof Restitution § 1 (1936). If there was a valid contract that gave the

[investor] an equity interest in the debtors’ business, as the trusteecontends, the [investor] would still have had a right to restitution if





20

the debtors’ fraud induced him to enter into the contract. SeeRestatement (Second) of Contracts, §§ 164 & 376 (1979).

In re Independent Clearing House, 77 B.R. at 857, n. 24 (emphasis supplied). The

Trustee cites to no legal authorities or public policy rationale for treating defrauded

investors differently, based simply on whether their investments are characterized

as debt or equity. Nor does the Trustee offer any legal support for the proposition

that an innocent investor who is duped into acquiring an interest in a limited

liability company or limited partnership has no right of rescission for fraudulent

inducement, just as any other defrauded party to a contract would have under

applicable bankruptcy or state law.

The Trustee’s attempts at distinguishing cases from other Circuits that

support the Defrauded Investors’ position similarly fail. For example, In re M & L

Business Machine Co. involved an investor entering into a contract to invest with

the debtor that was later determined to be a Ponzi scheme. In re M & L Business

Machine Co., 84 F.3d 1330. The Tenth Circuit affirmed the lower court’s

determination that the pre-petition payments from the debtor to the investor

constituted “value” within the meaning of Section 548 because the investor had the

right to rescind the contract and seek restitution of the amounts invested under

Colorado law. Id . at 1341-1342. The Defrauded Investors here have the same

substantive rights under Georgia law as the investors in M & L Business Machine

Co. See id.; Section IV. A. 1., supra.





21

Similarly, the Trustee cites Donell as another example of investors who held

“antecedent debt claims,” rather than equity interests, in a limited liability

company or limited partnership. PBr. at 24-25. The Ninth Circuit, however, never

made such a distinction in its opinion. To the contrary, the Donell Court broadly

stated:

Where causes of action are brought under UFTA againstPonzi scheme investors, the general rule is that to theextent innocent investors have received payments inexcess of the amounts of principal that they originally

invested, those payments are avoidable as fraudulenttransfers[.]

Donell, 533 F.3d at 770. And where innocent investors receive payments that are

less than their respective investments in the fraudulent enterprise, the Ninth Circuit

held that payments are not avoidable, without any characterization of such

payments as dividends, debt service, redemptions, or otherwise:

If the net [of deposits vs. withdrawals] is negative, thegood faith investor is not liable because paymentsreceived in amounts less than the initial investment,being payments against the good faith losing investor’sas-yet unsatisfied restitution claim against the Ponzischeme perpetrator, are not avoidable within the meaningof UFTA.

Id. at 771 (internal citations omitted).8

8 The Ninth Circuit further explains: “Payments of amounts up to the value of the initial investment are not, however, considered a ‘return of principal,’






22

Two other Ninth Circuit decisions demonstrate that the critical test for

“value” in a fraud case is not “was it debt or equity?” but rather “was there fraud

and, if so, did the fraud exist at the time of the initial investment?” In In re United

Energy Corp., the Ninth Circuit reasoned that because the investors were duped

into the initial investment, they had acquired a claim for rescission and restitution

at the time they invested. In re United Energy, 944 F.2d at 596 (“[The investors]

clearly had claims for rescission and restitution which arose when they

[invested]”). The United Energy Court explicitly held that the investors’ claims for

rescission and restitution existed at the time of investment “regardless of whether

there existed a contractual right to the return of principal” because the Code does

not require recovery on “a contractual liability” for an exchange of “value.” Id . at

595.

Relying on In re United Energy Corp., the trustee in In re AFI Holdings

sued a limited partner to avoid a fraudulent transfer. See 525 F.3d 700 (9th Cir

2008). The partner argued that he was entitled to keep the funds transferred to him


because the initial payment is not considered a true investment.” Donnell, 533

F.3d. at 772. Any amounts returned to the investor up to the amount of his orher investment “are considered to be exchanged for ‘reasonably equivalentvalue,’ and thus not fraudulent, because they proportionally reduce theinvestors’ rights of restitution.” Id. (citing In re United Energy Corp., 944F.2d at 595).





23

because he paid reasonably equivalent value for the transfers. See id. The trustee

argued that the transfers were essentially a distribution on account of a partnership

interest relative to an investor’s capital contribution and were not reasonably

equivalent. See id. at 704. The court held that, because the partner was duped into

his initial investment, the good faith exception was not barred as a matter of law, in

determining whether the trustee could avoid the transfers under the Bankruptcy

Code. See id . at 708.

The Ninth Circuit found that, because the partner was initially duped into

becoming a partner, and because the fraudulent enterprise was already in existence

at the time of the initial investment, the partner had a claim for restitution that

arose at the time of his initial buy-in. See id. at 708-709. In reaching this

conclusion, the court found that the rights of a defrauded investor are created at the

time of the investment. See id. at 708. A defrauded investor is entitled to a claim

for rescission and restitution based on the fraud.

Just as in AFI Holdings, the Defrauded Investors here were defrauded into

making their initial investments with the Debtors and, therefore, acquired

restitution claims the moment they invested funds into the enterprise, regardless of

the form of the investment (i.e., as equity partners or contract obligees). Id. at 708.

The Defrauded Investors did not intend to invest in a Ponzi scheme; the legitimate

enterprise in which they thought that they were investing never existed. The type





24

of fictitious interest that a defrauded investor receives from a Ponzi scheme

operator is irrelevant to determining whether that investor is entitled to assert a

restitution claim up to the amount of its initial investment.

As demonstrated by In re AFI Holdings, the Ninth Circuit’s most recent

pronouncement on this issue, and In re United Energy Corp., the critical inquiry is

whether Ponzi scheme investors were duped into their initial investment and

acquired a right for rescission and restitution concurrent with their investment. Id.

at 708-709; In re United Energy Corp., 944 F.2d at 596, n. 7. The Trustee attempts

to diminish In re AFI Holding by claiming that it “blithely” applied the “general

rule” and “failed to conduct any reasoned analysis” regarding the Trustee’s

contrived distinction based on the form (i.e., equity or debt) of the subject initial

investment. PBr. at pp. 39-40. This conclusory assertion adds nothing to the

discussion, and is essentially identical to the position that the trustee advanced in

In re AFI Holding. The Ninth Circuit rejected that position, stating:

The Trustee argues that the parties did not expresslyexchange the restitution claim for the $89,824.17, andinstead, AFI transferred the money on account of [thedefrauded investor’s] partnership interest. Althoughcircumstances of the exchange were cloaked in terms of a

partnership interest, we delve beyond the ‘form’ to the‘substance’ of the transaction. See United Energy, 944F.2d at 596.

As noted above, the record demonstrates that Eisenberg’soperation was a Ponzi scheme before [the investor]provided his principal ‘investment,’ and thus well before





25

the transfers were made from AFI to [the investor].Because of this, [the investor] acquired a restitution claimat the time he bought into Eisenberg’s Ponzi scheme, justas the investors in United Energy acquired a restitutionclaim at the time they bought their solar modules. Id. at

596. It is this restitution claim, in toto, that [the investor]exchanged when AFI returned [the investor’s] principal‘investment’ amount.

AFI Holdings, 525 F. 3d at 708. Consistent with the Ninth Circuit’s reasoning, the

Bankruptcy Court held that “[t]he substance, not the form, of the transaction

properly governs the reallocation of assets in the aftermath of the collapse of [a]

Ponzi scheme.” Doc. 38 at p. 12.

2. The Trustee’s distinction based on the form of the

Defrauded Investors’ investment is based on a fundamental

misunderstanding of Eby.

The holding in Eby is straightforward: that a rescission claim based on

fraudulent inducement arises at the time of a defrauded investor’s initial

investment. Eby, 1 F.2d at 973. This holding directly supports the Defrauded

Investors’ position that the Debtors’ fraud gave rise to a claim for rescission equal

to the amount of their invested capital at the time of the investment and that the

subsequent exchange of such rescission claims upon redeeming their investment

constitutes giving “value” under Section 548(c). The Trustee spends a significant

portion of his brief attempting to “distinguish” the facts in Eby and its progeny

from the present case, and then arguing that those court’s following Eby

“misinterpreted” the decision. The Trustee is wrong.





26

The Trustee claims that Eby has no application to the current case because

the investors in Eby maintained a “debt-based investment claim” “that arose from

the initial investment in the scheme.” PBr. at p. 20. According to the Trustee, “the

existence of another claim based on the latent fraud claim in Eby in no way affects

the ultimate outcome of the value exchange analysis” and, therefore, Eby’s

recognition that a fraudulent inducement claim arises at the time of a defrauded

investor’s initial investment “must be recognized as surplusage.” PBr. at pp. 20-

21.

Nothing in Eby supports this assertion. To the contrary, the scheme

described in Eby and the nature of the defrauded investors’ interests in that scheme

are closely analogous to the (assumed) facts in this case. In fact, the Eby fraudster,

Mr. Young, ran what can be fairly described as a progenitor to the modern “hedge

fund.” Young solicited investors to whom he issued receipts and whose monies

were “to be placed to the credit of the customer in an account opened and managed

by [Young], for the purpose of buying and selling any securities traded on the New

York Stock Exchange.” Eby, 1 F.2d at 971-72 (internal quotation omitted). Young

was allowed as “compensation for his management of the account one-third of the





27

net profits produced to the customer.”9 Id . at 972. The enterprise made monthly

settlements to each investor and each investor maintained “the right to withdraw all

or any part of his account upon 30 days' written notice.”10 Id .

Young regularly distributed referral “commissions” and “profits” to his

customers despite the enterprise’s substantial actual losses. In re Young, 294 F. 1,

1 (4th Cir. 1923).11 These distributions were “taken from the principal sums

deposited by his customers” in furtherance of Young’s Ponzi scheme. Id . Mr.

Ashley was one such customer. Eby, 1 F.2d at 972. Ashley made payments to

Young totaling $3,000 and received distributions totaling $4,576.68 (his entire

principal investment and $1,576.68 in so-called “profits”). Id . It was the order of

Young’s payments to Ashley, however, which required to Eby Court to issue its

key holding. Ashley received distributions of $1,576.68 in “profit” prior to his

written request for redemption of his principal investment. Id . Subsequently,

9 Under the exemplar documents relied upon by the Trustee here, the Debtorswere similarly entitled to retain a portion of “profits” as an “incentiveallocation,” while the Debtors’ manager collected “management fees” and“performance fees.” See e.g. Doc. 6-3 at pp. 5-6; Doc. 6-4 at p. 15.

10 Here, the Debtors also allowed investors to withdraw all or part of theirinvestments upon 30 days’ written notice to the Debtors. See e.g. Doc. 6-8 at

p. 44; Doc 6-7 at p. 18.11 In re Young is a companion case to Eby, which determined the relative rightsof defrauded investors to distributions from the residual estate, holding thatdistribution to defrauded investors was to be in proportion to their principalinvestment net of any profits they received. See In re Young, 294 F. 1 at 4.





28

Ashley received a lump sum payment of his $3,000 principal pursuant to his

written request. Id .

The trustee in bankruptcy sued Ashley to recover all of the payments made

to him through three separate claims:

(1) For the recovery of the payment of $3,000, as apreference within four months of bankruptcy; (2) for therecovery, as a preference within four months, of $1,423.32, the difference between $3,000, the sum paidto Young by Ashley and $1,576.68, the amount paid toAshley by Young under the form of "profits"; (3) for the

recovery of the sum of $1,576.68 paid by Young toAshley as profits, on the allegation that it was paid byYoung to Ashley without consideration as a gratuity, andin fraud of the rights of Young's creditors.

Id . The Eby Court addressed each of the trustee’s claims independently. With

regard to the claim “(3),” the trustee’s claim for recovery of the initial $1,576.68

received by Ashley, the Eby Court determined that this amount “should not be

returned as a preference” because “Ashley had no reason to suppose Young to be

insolvent” at the time. Id . at 973.

The Eby Court then addressed the intuitive notion of simply disposing of

these initial payments of “profit,” where there was no actual profit to be had, as a

fraud upon “the rights of Young’s creditors” (i.e., a fraudulent transfer). Id . at 972-

73. The Eby Court dismissed this notion, holding that, at the time Young paid

$1,576.68 to Ashley, Young owed Ashley $3,000 “which Ashley had a right to

recover from him from the moment that he was deceived into paying it.” Id . at





29

973 (emphasis supplied). Thus, at the time of that payment “Ashley received the

money in good faith” and “Young’s debt of $3,000 to Ashley was reduced” by the

amount of $1,576.68.12 Id .

Despite the Trustee’s belabored arguments to the contrary, this holding is

anything but “surplusage.” The Eby Court addressed each of the trustee’s claims

independently, including his claim that Ashley’s initial redemption of principal

was “in fraud of the rights of Young’s creditors.” Id . at 972-73. The Eby Court

held this redemption was not “in fraud” on grounds that Ashley maintained a

countervailing rescission claim “ from the moment that he was deceived ” into

investing. Id . at 973. The Eby Court engaged in a separate analysis of Ashley’s

redemption pursuant to his request for return of $3,000 in “principal” and

irrespective of whether that later transfer was made pursuant to an equity or debt

interest. Therefore, Eby’s holding is quite simple and precisely on point – in the

aftermath of a Ponzi scheme defrauded investors have claims for rescission or

12 Based on the same concept, the Eby Court affirmed a jury verdict in favor of Ashley with regard to the trustees’ claim “(2),” allowing him to retain the

remaining $1,423.32 Young later paid to him (as part of a lump $3,000payment). Eby, 1 F.2d at 973. As to claim “(1),” the Eby Court upheld a juryverdict in favor of the trustee, in part, for recovery of the $1,576.68 Youngpaid to Ashley (as part of a lump $3,000 payment) on grounds that it waswithout consideration and “therefore a fraud on Young’s creditors.” Id .





30

restitution, which arise at the time of their initial investment, and, therefore, they

have given due consideration for any redemptions of principal. See id .

Nothing in the decision supports the claim that investors held a “debt-

based”13 investment claim against Young (as distinct from a debt-based restitution

claim) or that the investors’ principal was not at risk. There is also nothing in the

decision that would support the view that the Eby Court based its holding on a

finding or belief that the investors held debt interests, as opposed to equity

interests, in the debtor. Because there is no basis on which to conclude that the

investors in Eby held debt interests or that Eby’s holding is in any way

“surplusage,” the Trustee’s tortured “claims2” construct collapses.

As with his treatment of Eby, the Trustee attempts in vain to distinguish the

cases that similarly protect distributions of principal to “equity holders” from

avoidance actions in the aftermath of a Ponzi scheme. PBr. at pp. 36-57. The

Defrauded Investors have already discussed above the relevance of AFI Holding

and other Eby progeny and the Trustee’s flawed efforts to distinguish them. The

13 The Trustee mischaracterizes the Eby Court’s reference to “debt.” PBr. at p.19. Rather than using the word “debt” to describe the nature of Ashley’s initial

investment in the fraudulent enterprise, the Eby Court simply characterizesAshley’s rescission claim, arising at the very moment he was deceived intoinvesting, as a “debt” Young owed to him. Eby, 1 F.2d at 973. The Trusteetakes the Eby Court’s reference to “debt” out of context in an effort to give itdeeper meaning.





31

Trustee also briefly addresses, but fails to diminish, two other cases - Scholes and

In re Hedged-Investments Associates, Inc. PBr. at pp. 36-37.

The first of these two cases, Scholes v. Ames, 850 F.Supp. 707 (N.D. Ill.

1994), involves an equity receiver operating under Illinois law, as opposed to a

bankruptcy trustee. There, the equity receiver sued two investors who purchased

limited partnership interests in what turned out to be a fraudulent Ponzi scheme.

Id. at 709. The equity receiver only sought to recover fictitious profits from those

investors, based on fraudulent conveyance, unjust enrichment, and constructive

trust claims under Illinois law. Id. at 710. The district court in Scholes did not

even discuss, let alone reject, the proposition that the defrauded investors had

claims for rescission and restitution under applicable non-bankruptcy law. It

would appear those claims were unnecessary in Scholes because the equity receiver

never tried to recover the principal sums invested, unlike the Trustee here. The

equity receiver focused solely on the fictitious profits.14

14 The district court in Scholes relied, in part, on another equity receiver case, Johnson v. Studholme, 619 F.Supp. 1347 (D. Colo. 1985). See Scholes, 850F.Supp at 714-715. The Johnson decision provides insight into the inherentproblem with any attempt to re-allocate losses among the various investors,

even as to fictitious profits:Some investors who received ‘fictitious profits’ mayhave spent the money on education or other necessitiesmany years ago. What else in equity and good conscienceshould plaintiffs who received money in good faith






32

The Trustee’s interpretation of In re Hedged-Investments Associates, Inc., 84

F.3d 1286 (10th Cir. 1996), is similarly flawed. See PBr. at pp. 36-37. In re

Hedged-Investments involved purported equity participation in limited

partnerships, as some of the debtor entities were organized here, and the Tenth

Circuit affirmed the generally accepted principle that an investor has a valid

restitution claim against the defrauding party to recover the amount of principal

that he or she invested. In re Hedged Investments , 84 F.3d at 1289. While

focusing on the Tenth Circuit’s treatment of the subject investor’s fictitious profits,

the Trustee utterly ignores key portions of the decision that debunk the Trustee’s

so-called “transmutation” theory altogether:


pursuant to an ‘investment contract’ have done? In

contrast, some investors who lost money may have beenspeculators who were prepared to lose their investments.There is simply no neat answer to the various equitiesinvolved here where the investors never knew each otherand were equally at fault for trusting [the Ponzi schemeoperator]. ‘Unexpected gains or losses by equallyinnocent parties may present similar problems, notcapable of resolution by unjust enrichment principles.’

Law of Remedies, § 4.1 (1973). There is no precedent in

law or equity for applying unjust enrichment principlesin these circumstances. In such circumstances the

courts may simply leave the parties where they were

found.

Johnson, 619 F.Supp. at 1350 (emphasis supplied).





33

Ms. Buchanan [the investor defendant] received thetransfers at issue after already receiving approximately$1 million more than her original $750,000 investment.The district court found that since Ms. Buchananreceived more than she invested she did not have a viableclaim for fraud. In effect, the district court determined

Ms. Buchanan had already received restitution and

therefore was entitled to no remedy. The district court’s

observations are correct insofar as restitution is the

remedy to which Ms. Buchanan would be entitled [.]

Id. at 1289 (emphasis supplied).

In other words, the Trustee completely missed (or ignored) the point that the

Tenth Circuit had determined that an investor who held a limited partnership

interest (as opposed to a promissory note or other debt instrument) has the same

claim of restitution against the Ponzi scheme operator. Id. Because the investor

there had already received payments in excess of her principal investment, she

“had already received restitution [.]” Id. at 1289. The nature of the investment – a

limited partnership interest as opposed to a promissory note – was, is, and should

continue to be immaterial to the investor’s right to restitution.

The Trustee is no more successful in his analysis of the key third case from

the Ninth Circuit, AFI Holding. As the Defrauded Investors discussed in greater

detail above, AFI Holding also involved investment in a limited partnership

operating as a Ponzi scheme and, once again, the Ninth Circuit endorsed and

applied the uniform rule that investors in a Ponzi scheme acquire claims for

rescission at the time of their initial investment and that upon redemption of their





34

investment those rescission claims were exchanged for their return of their

principal. 525 F.3d at 708.

In light of Eby, and the unbroken line of more recent cases that follow it, the

Trustee’s contrived “claim2” analysis and “transmutation” theory are completely

unsupported. The Trustee has manufactured a convoluted theory to confuse a

simple and straightforward principle -- a party who is fraudulently induced to make

an investment, of any kind and in any form, may rescind the transaction and

recover his or her principal investment in restitution.

3. Terry Manufacturing is inapposite to the facts before this

Court.

The Trustee relies on In re Terry Mfg Co., Inc., 2007 WL 274319 (M.D. Ala

2007), for the proposition that equity holders are not entitled to recharacterize

dividend distributions as claims for the purpose of establishing a “for value”

defense to an avoidance action. See PBr. at 42-44. However, Terry is

distinguishable from this case for at least two reasons.

First, Terry did not involve a Ponzi scheme. Terry Manufacturing was a

viable business entity that had contracted with both the Department of Defense and

McDonalds to manufacture uniforms. In re Terry Mfg Co., Inc., 2007 WL 274319

at *4. The principals/managers looted the company’s finances, filed false financial

statements and paid shareholder dividends to keep up the façade that Terry was a

profitable business entity, when it was insolvent. Id . at *5.





35

Second , the holding in Terry is fundamentally inapposite to the present

matter because the trustee in that case sued to avoid dividend payments to equity

partners; Terry was not a case where the trustee was seeking to avoid payments

from investors whose initial investment was procured through fraud. Id. at * 5-7.

Terry did not involve a Ponzi scheme in which new investors’ money was used to

fund distributions to prior investors. There is no finding in Terry that new

shareholder dollars were used to pay dividends to existing shareholders. In Terry,

the trustee sought to recover dividends paid to shareholder defendants. The nature

of a “dividend” (commonly defined as money earned on stock holdings, that

represents a share of profits paid in proportion to the share of ownership) does not

lend itself to a Section 548(c) defense because a right to a dividend “accompanies”

the equity interest manifest in the shares; the shareholder does not “give up”

anything when receiving a dividend on equity. They do not give up shares, nor is

their investment diluted by the dividend. Here, the challenged payments were not

treated as dividends and the Trustee does not allege so. Terry is therefore readily

distinguished from the present cases.





36

C. THE TRUSTEE’S “POLICY” ARGUMENTS CANNOT OVERCOME HIS

CLASH WITH WELL-SETTLED LAW.

1. The Bankruptcy Court’s ruling is premised on bedrock

bankruptcy principles of claim priority and equal treatment

of similarly situated claimants.

The Bankruptcy Court, in considering and dispensing with the Trustee’s

erroneous position that payments made on account of equity investments (as

distinct from debt obligations) requires a different result in the context of a Ponzi

scheme held that any different treatment traditionally rendered to debt holders

versus equity holders is irrelevant because all of the claimants made the same type

of “investment” in the Debtors’ scheme. Doc. 38 at p. 12. While, traditionally, the

Bankruptcy Code draws distinctions between debt and equity for purposes of

establishing claims priority, that notion is not relevant here because, as the

Bankruptcy Court correctly concluded, all of the Defrauded Investors occupy the

“the same class” in terms of claims priority. Even assuming that the Trustee was

correct that the claims at issue here are equity claims and not debt claims, the net

effect of ignoring the general rule embraced by the Bankruptcy Court to effect the

Trustee’s redistribution scheme would not accomplish the Bankruptcy Code’s goal

of prioritizing debt claims over equity claims because all the claims here belong to

Defrauded Investors who, by the Trustee’s logic, all hold equity claims.





37

2. The Trustee relies on inapplicable portions of the

Bankruptcy Code to support his contrived argument.

Toward the end of the Trustee’s Principal Brief, the Trustee makes two

statutory arguments that no court has ever accepted. See PBr. at pp. 50-55. First,

the Trustee argues that allowing “transmutation” of the equity claims into debt is

inconsistent with Section 510(b) of the Bankruptcy Code. Id . at pp. 50-52. But

this argument conflates two provisions and aims of the Bankruptcy Code,

effectively transmuting statutory “apples” to “oranges.” Section 510(b) is a claims

priority provision dealing with claims arising in connection with the purchase and

sale of stock. The Defrauded Investors are not seeking to elevate equity claims

above creditor claims. They hold claims based on their rights of rescission and are

merely articulating an element of a defense to a fraudulent transfer action based on

those claims. The present action does not raise issues of claims priority or

distribution of estate assets.

Second , the Trustee looks to the equitable treatment of similarly situated

creditors in plan provision sections of the Bankruptcy Code, such as Section 1123

and 1129. Id . at pp. 53-55. The cited provisions deal with voting rights under a

plan by holders of allowed claims against the estate. They do not consider the

merits of the underlying claims, nor do they deal with establishing defenses to

avoidance actions under Section 548. The Defrauded Investors do not challenge

the overarching bankruptcy policy that seeks equitable treatment of similarly





38

situated creditors. But the Trustee’s avoidance actions are not part of the claims

resolution or plan voting processes. More importantly, the Trustee’s misplaced

reliance on these unrelated provisions of the Bankruptcy Code draws the

fundamental flaw in his position into specific relief; the Defrauded Investors are

not asserting claims or defenses based on an equity interest. The Defrauded

Investors are seeking to establish a defense based on a long-recognized legal claim

for rescission.

D. THE TRUSTEE’S PROPOSED MODE OF “REDISTRIBUTION” IS NO

FAIRER THAN THAT IMPOSED BY THE “GENERAL RULE.”

The Trustee posits that eschewing the “general rule” and subscribing to his

proposed mode of redistribution is the more equitable approach. PBr. at p. 11. In

essence, the Trustee argues that his redistribution scheme is more fair because, in

his view, “it levels the playing field” for all defrauded investors. Not only does

this facile redistribution scheme fly in the face of decades of established law,15 but

there is simply no way to establish that the Trustee’s method produces a fairer

result.

15

A fact not lost on the Bankruptcy Court which considered and dismissed theseeming elegance of the Trustee’s redistribution model, holding to the“general rule” and finding no “sound basis . . . for creating a different rulebased on the equity nature of the fraudulently induced investments.” Doc. 38at p. 13.





39

Under the Trustee’s proposed scheme, the playing field is not leveled; there

will still be “winners” and “losers” as there are under the “general rule,” divided by

an arbitrary moment in time where, on one side, some defrauded investors retain

some portion of their redemptions while others are subject to avoidance and

recovery. The Trustee’s scheme does not, and cannot, eliminate the divide

between winners and losers. It only shifts the arbitrary moment in time dividing the

two groups.

The Trustee's approach is no more fair, and may be less fair, than the current

system (applying the “general rule”). For example, one only need to consider the

effect of the application of the statute of limitations pursuant to the applicable

fraudulent conveyance provisions of the Bankruptcy Code. See 11 U.S.C. §

548(a)(1) (a trustee may only avoid transfers “made or incurred on or within 2

years before the date of the filing of the petition”).

Given the statute of limitations, earlier investors in a Ponzi scheme, whose

redemptions cannot be clawed back because they were received outside the period

circumscribed by the statute of limitations, will retain their entire redemptions and

false profits, while those defrauded investors whose redemptions were received

within the statutory “look back” period are subject to avoidance actions. The

Trustee’s proposed redistribution scheme, without any basis in law, arbitrarily

imposes a burden on a new group of innocent investors while failing to address the





40

impact of the redistribution to the “ones that got away.” The innocent defrauded

investors whose redemptions occurred closer to the operative petition date will be

made to bear the very burden the Trustee purports to seek to eradicate; paying the

freight for other investors who are allowed to keep all of their distributions from

debtors simply by dint of good fortune and timing of redeeming outside the statute

of limitations.

Additionally, there is no certainty that the Trustee’s proposed arbitrary

redistribution scheme would provide any increased benefit to creditors. The

arbitrary scheme would no doubt invite significant litigation with the attendant

administrative costs. These costs would be incurred in pursuing claims against

defrauded investors who, in many instances are or may be incapable of paying

funds back to the Estate because they do not have the resources to do so. The

Trustee’s proposed scheme would cause uncertainty, provoke litigation and

provide little real hope of realizing any additional dividend for creditors because

the administrative costs would actually cause a dilution of estate assets.

Where, as here, there is little or nothing in the Estate to distribute to

investors, how is it “more fair” to claw back redemptions, especially when some

Defrauded Investor/Defendants are judgment proof and will have nothing to return

to the Estate? And where some Defrauded Investors/Defendants will have to pay





41

and others will not? Like many utopian ideas, the Trustee’s proposal collapses in

the face of practical challenges.

Where, as in the present matter, all investors are innocent victims, they

ought, as the “general rule” holds, to be left as they were at the time that the fraud

was exposed. Any other result is an artificial plan of redistribution, plain and

simple. See Johnson, 619 F.Supp. at 1350. The Trustee’s proposed approach is no

more elegant, and no fairer, than the system of rules imposed by the Bankruptcy

Code, the rules of Civil Procedure and simple notions of fairness imbedded in due

process. What the Trustee proposes is to supplant a redistribution scheme that is

framed by statute, rules and a long-standing general rule of law with a more

arbitrary system that is based on none of those certainties. There is nothing

inherently “more fair” about the Trustee’s redistribution scheme.

E. THE TRUSTEE’S ARGUMENT IS PRECLUDED BY THE DOCTRINES OF

RES JUDICATA AND ESTOPPEL.

In addition to the uniform sound precedent underlying the rulings of the

Bankruptcy Court, this Court has other bases on which to uphold a denial of the

Motion for Summary Judgment. See In re Optical Techs., Inc., 246 F.3d at 1334;

see also Hildebrandt v. Ill. Dep't of Natural Res., 347 F.3d 1014, 1032 (7th Cir.

2003) (court of appeals may affirm district court's ruling on summary judgment on

any ground supported by record). The Trustee’s arguments on appeal are

precluded by the res judicata effect of the Trustee’s own confirmed plan of





42

liquidation (the “Plan”), as well as by the doctrine of estoppel.16 The confirmed

Plan characterizes the Defrauded Investors as holders of “Investor Tort Claims,” a

defined term in the Plan. See Doc. 6-2. Even without the Plan’s definition, the

meaning of the term is plain on its face; the Defrauded Investors are tort claimants,

in the Trustee’s own words.

Nevertheless, the Trustee continues to urge the Court to find that the

Defrauded Investors be treated as mere equity holders, even though the Plan

mentions nothing about characterizing the Defrauded Investors as equity holders,

nor anything about an “articulation” prerequisite to achieve tort claimant status.

To the contrary, in the Plan and the accompanying Second Amended Disclosure

Statement with Respect to the Trustee’s Plan of Liquidation (the “Disclosure

Statement”), the Trustee expressly “articulates” that the Defrauded Investors are

16 The same principles apply to the positions taken by the Trustee in pursuingpreference claims against the Defrauded Investors in connection with thisbankruptcy. Pursuit of a preferential transfer under Section 547 of theBankruptcy Code requires that the transfer the trustee seeks to avoid andrecover be made on “account of an antecedent debt.” Courts applyingpreference law in the context of Ponzi schemes have held that a defraudedinvestor is a “creditor” holding an “antecedent debt” based on the sameprincipal discussed above that the defrauded investor’s principal investment

gives rise to an immediate claim for rescission or restitution. See e.g. Woottonv. Barge (In re Cohen), 875 F.2d 508, 509 (5th Cir 1989). If the DefraudedInvestors hold “claims” on account of antecedent debt in the Trustee’spreference actions, surely they hold such claims for the purposes of establishing defenses under Section 548(c).





43

tort claimants. See Doc. 6-1 and 6-2. The Trustee, having solicited votes for the

Plan, and having obtained an order of the Bankruptcy Court approving that plan,

should not be allowed to change his fundamental position now.

1. The Trustee is barred by the doctrine of res judicata from

claiming that the Defrauded Investors are not debt-holders.

The confirmed Plan sets forth the terms of the liquidation in this case, and

the Trustee is bound by those terms. 11 U.S.C. § 1141(a); see e.g. Eubanks v.

FDIC , 977 F.2d 166 (5th Cir. 1992) (res judicata effect of confirmed plan

precluded debtors from bringing suit against banks on claim that should have been

raised as defense or counterclaim to banks’ proof of claim that was not objected

to); see also First Union Commercial Corp. v. Nelson Mullins, Riley &

Scarborough (In re Varat Enters., Inc.), 81 F.3d 1310 (4th Cir. 1996) (confirmed

plan has res judicata effect).

The Plan expressly states that the Defrauded Investors in these adversary

proceedings hold “Investor Tort Claims.” The term “Investor Tort Claim” is

defined as “Claims of Persons who purchased Interests in one or more of the

Debtors for damages arising from the purchase of such Interests.” Doc. 6-2 at p.

10. The Plan even refers to the Defrauded Investors in some instances as “Investor

Creditors,” and creditors are defined by the Bankruptcy Code as any “entity that

has a claim against the debtor that arose . . . before the order for relief.…” Doc. 6-

2; 11 U.S.C. § 101(10)(A). The Bankruptcy Code in turn defines “debt” as any





44

“liability on a claim.” 11 U.S.C. § 101(12). Thus, by recognizing that the

Defrauded Investors hold “tort claims” and are “creditors,” the Plan affirmatively

recognizes that the Defrauded Investors are debt-holders.

The Disclosure Statement offered in connection with the Plan articulates the

Defrauded Investors’ status as tort claimants in order to claim that the alleged

Ponzi scheme was insolvent from its inception. See Doc. 6-1 at p. 32 (“[B]ecause

a Ponzi scheme entity has liabilities based on investor claims against it (though,

here, unasserted prior to IMA’s bankruptcy), that are premised on fraudulent

inducement to invest [a Ponzi scheme is insolvent from its inception.]”). Similarly,

in the Disclosure Statement section titled “Answer to Questions About the Plan”

there is a statement that “[u]nder the Plan, each Holder of an Investor Tort Claim

will have an Allowed Claim in the amount of the outstanding balance of its actual

cash Investment .” Id . at p. 20. (emphasis supplied). To inform the Defrauded

Investors that they will have Allowed Claims in the amounts of their actual cash

investments, and then take the position that the Defrauded Investors’ actual cash

investments were worthless for purposes of Section 548(c) is not only inconsistent

but misleading. The Trustee’s position that the Defrauded Investors’ restitution or

rescission claims do not constitute “value” for purposes of Section 548(c) is

facially at odds with the Plan’s clear characterization of the Defrauded Investors as

tort claimants.





45

2. The Trustee is also barred by the doctrine of estoppel from

claiming that the Defrauded Investors are not debt-holders.

The binding effect of the confirmed Plan is reinforced by the fact the Trustee

proposed the Plan and solicited investor Defrauded Investors’ votes for

confirmation. The Trustee should be estopped, therefore, from asserting an

inconsistent position now, after creditors have voted on the Plan and it has been

confirmed by an order of the Bankruptcy Court.

As the Eleventh Circuit has explained, “[j]udicial estoppel is applied to the

calculated assertion of divergent sworn positions. The doctrine is designed to

prevent parties from making a mockery of justice by inconsistent pleadings.”

Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282, 1285 (11th Cir. 2002) (quoting

Am. Nat’l Bank of Jacksonville v. FDIC , 710 F.2d 1528, 1536 (11th Cir. 1983)).

Courts have applied the doctrine of judicial estoppel to prevent debtors from

taking positions that were not specifically referred to in their confirmed plans. See

Hovis v. General Dynamics Corp. (In re Hovis), 396 B.R. 895 (D.S.C. 2007)

(debtor was precluded on judicial estoppel grounds from bringing breach of

contract claim not listed in confirmed Chapter 11 plan); In re USinternetworking,

Inc., 310 B.R. 274 (Bankr. D. Md. 2004) (judicial estoppel barred debtor from

bringing breach of contract claim not specifically referred to in plan); see also

Southmark Corp. v. Trotter, Smith & Jacobs, 442 S.E.2d 265, 267 (Ga. Ct. App.

1994) (failure to disclose claim in Chapter 11 plan precluded plaintiffs from





46

asserting those claims in later state court action); Battle v. Liberty Mut. Fire Ins.

Co., 623 S.E.2d 541, 543 (Ga. Ct. App. 2005) (Chapter 7 debtor that failed to list

house as asset was precluded by judicial estoppel from bringing claim against

insurer to recover damages to property).

More generally, principles of equitable estoppel also apply to preclude the

Trustee from taking a position inconsistent with his confirmed Plan. Equitable

estoppel applies under the following conditions:

The person against whom the estoppel is to apply musthave actual or constructive knowledge of the facts andmust have induced, through his words or conduct,another to rely upon the purported representation. Theparty seeking to assert estoppel must have neitherknowledge or reasonable means or opportunity of obtaining knowledge of the facts and must have reliedupon the other party’s representation to his detriment.

Atlanta Retail, Inc. v. Eastman Kodak Co. (In re Atlanta Retail, Inc.), 294 B.R.

186, 197 (Bankr. N.D. Ga. 2003) (quoting Choat v. Rome Indus., Inc., 462 F. Supp.

728, 730 (N.D. Ga. 1978)).

Here the Plan clearly characterized the Defrauded Investors as tort

claimants. The Defrauded Investors’ votes were solicited by the Trustee based on

the contents of the Plan and Disclosure Statement. The Bankruptcy Court

confirmed the Plan. The Trustee accordingly should be estopped from denying

that the Defrauded Investors are tort claimants by now claiming that they are mere

“equity” holders. Even ignoring the overwhelming body of case law standing





47

opposed to the Trustee’s novel theories of fraudulent transfer law, the Trustee’s

Motion should be denied because he is not entitled, given prior positions staked out

in the underlying bankruptcy case, to make it.

V. CONCLUSION

For the foregoing reasons, the Court should affirm the Bankruptcy Court’s

Order finding that the Defrauded Investors, who received redemptions of their

principal investment, received such redemptions “for value” as required to

establish a defense to fraudulent transfer claims under 11 U.S.C. § 548(c) and

O.C.G.A. § 18-2-78(a) or similar state laws.

Respectfully submitted,

/s/ Joshua S. Barlow

/s/ Lee Harrington

/s/ Timothy W. Mungovan____________

Timothy W. Mungovan (Mass. Bar # 600702)

Jonathan Sablone (Mass. Bar # 632998)Lee Harrington (Mass. Bar # 643239)Joshua S. Barlow (Mass. Bar # 667472)NIXON PEABODY LLP100 Summer StreetBoston, MA 02110617.345.1000

Attorneys for Defendants – Appellees George

Russell Curtis, Sr. Living Trust, GeorgeRussell Curtis, Sr. Betty Curtis, David LairdFamily Trust, David Laird, and Deborah H.Laird

Dated: July 1, 2010





CERTIFICATE OF COMPLIANCE WITH RULE 32(a)

1. This brief complies with the type-volume limitation set forth in Fed.

R. App. P. 32(a)(7), because the brief contains 11,267 words,

excluding the parts of the brief exempted by Fed. R. App. P.

32(a)(7)(B)(iii).

2. This brief complies with the typeface requirements of Fed. R. App. P.

32(a)(5) and the type style requirements of Fed. R. App. P. 32(a)(6)

because this brief has been prepared in a proportionally spaced

typeface using Times New Roman in 14 point font.






CERTIFICATE OF SERVICE

I hereby certify that on July 1, 2010, I caused to be served a copy of the

foregoing via the Court’s ECF System and/or first class mail on the following

parties.

John W. Mills, Esq.Colin Bernardino, Esq.Counsel for the Trustee,William F. PerkinsKilpatrick Stockton1100 Peachtree St. NE,Suite 2800

Atlanta, GA 30309-4528

Mark S. Kaufman, Esq.Brian E. Bates, Esq.Counsel for Committee of InvestorsMcKenna Long Aldridge303 Peachtree St. NE, Suite5300

Atlanta, GA 30308-3265

Morgan Bradylyons, Esq.Counsel for Amicus CuriaeU.S. Securities andExchange Commission100 F St. NEWashington, DC 20549-8030

Paul M Spizzirri, Esq.Counsel for Willie J. Clay,et al.Spizzirri Law Offices1170 Peachtree St., Suite1200Atlanta, GA 30309

Sharon M. Lewonski, Esq.Counsel for Marco D.ColemanEpstein, Becker & Green,P.C.945 East Paces Ferry Rd.,Suite 2700Atlanta, Georgia 30326

Jonathan H Fain, Esq.Counsel for X-SpurtsInvestment Club of Atlanta,LLC, et al.Jonathan H. Fain andAssoc., PC66 Lenox PointeAtlanta, GA 30324

Robert J. Mottern, Esq.Counsel for James Bronner,et al.Investment Law Group of Gillett,Mottern115 Perimeter Center PlaceSouth Terraces, Suite 170Atlanta, GA 30346

Thomas M. Byrne, Esq.Angela R. Fox, Esq.Counsel for Keith O. Burks,et al.Sutherland Asbill &Brennan LLP999 W Peachtree St., NWAtlanta, Georgia 30309-3819

Sblend A. Sblendorio, Esq.Catosha L. Woods, Esq.Counsel for LawrenceHooper, et al.Hoge Fenton Jones &Appel, Inc.4309 Hacienda Dr., Suite350Pleasanton, CA 94588

Gregory T. Bailey, Esq.

Counsel for Mt. NeboBaptist Life Center, Inc.571 Culberson StreetAtlanta, GA 30310

Christopher D. Phillips,

Esq.Counsel for DavidWisneski, et al.Lamberth, Cifelli, Stokes &Stout, P.A.3343 Peachtree Rd. NE,Suite 550Atlanta, GA 30326-1428

Kevin A. Stine, Esq.

Joshua Tropper, Esq.Counsel for Erich G.Randolph, et al.Baker, Donelson, Bearman,Caldwell & Berkowitz, P.C.3414 Peachtree Rd. NEAtlanta, GA 30326-1153





Valerie Peoples3320 Hagger WayEast Point, GA 30344

Heather D. Brown, Esq.Mark A. Kelley, Esq.Counsel for Martin D.Jeffries

Kitchens, Kelley, Gaynes,P.C.3495 Piedmont Road NE,Suite 11-900Atlanta, GA 30305-1755

William R. Lester, Esq.Counsel for Dexter M.Page, et al.Fryer, Schuster & Lester,

P.C.1050 Crown Pointe Pkwy.,Suite 410Atlanta, GA 30338

James K. Knight, Jr., Esq.Counsel for Annette K.Bond401 Atlanta St.

Marietta, GA 30060






EXHIBIT A

Schedule of Joining Defrauded Investors

Willie J. Clay, Rayshawn Francis Clay, Cartopia, LLC, Decko Quality Services,

LLC, Clay Real Estate Holdings, Inc. (07-06156)

Marco D. Coleman (07-06285)

X-Spurts Investment Club of Atlanta, LLC, John L. Carter, Dexter M. Page,

William L. Hutchinson, Jr., Ricardo A. Arzu, and Phillip E. Hadley (07-06287)

David Wisneski (08-06099)

Keith O. Burks (08-06113)

Michelle Peoples-Wisneski (08-06128)

Annette K. Bond (08-06130)

Cornell Shelton (08-06154)

Valerie Peoples (08-06162)

Atlanta Perinatal Associates, P.C., Syretha Andrews, Alicia Dorsey, Carol Grone,

Dexter M. Page, Bradford Bootstaylor (08-06185)

Gregory Hooper (08-06187)Lawrence Hooper (08-06188)

SyTBC Capital, Inc. (08-06191)

Mt. Nebo Baptist Life Center, Inc. (08-06206)

George Russell Curtis, Sr. Living Trust, George Russell Curtis, Sr., Betty Curtis

(08-06215)

LaVerne Jones (08-06221)

Erich G. Randolph (08-06239)

David Laird Family Trust, David Laird, Deborah H. Laird (08-06225)

James Shelton, III (08-06232)

James Shelton (08-06234)





Martin D. Jeffries (08-06241)


Perkins v. Haines - Answer Brief

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Transcript of Perkins v. Haines - Answer Brief