Tolz v. Gawlick (In Re Forex Fidelity International) ( 2007 )

[DO NOT PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
FILED
------------------------------------------- U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
No. 06-10672 January 5, 2007
Non-Argument Calendar THOMAS K. KAHN
-------------------------------------------- CLERK
D.C. Docket Nos.
05-60746-CV-WPD & 99-20146-BKC-PG
In Re: FOREX FIDELITY INTERNATIONAL,
Debtor.
________________________________________________________
MARIKA TOLZ,
Plaintiff-Appellant,
versus
OLITA CHERSE HARDIN,
JUSTIN S. SALLUSTO,
RONALD C. GEORGE,
E. MICHAEL THOMAS,
MARY HARDIN,
Defendants-Appellees.
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Appeal from the United States District Court
for the Southern District of Florida
----------------------------------------------------------------
(January 5, 2007)
Before EDMONDSON, Chief Judge, DUBINA and CARNES, Circuit Judges.
PER CURIAM:
This bankruptcy case presents an appeal by the trustee of the debtor, Forex
Fidelity International, Inc. (“Forex”), of an order issued by the district court
affirming the bankruptcy court’s decision not to avoid as preferences certain
payments made to Forex’s creditors.1 No reversible error has been shown; we
affirm.
Forex, which operated a business for its customers to purchase and trade
foreign currency pursuant to a customer account agreement, filed a voluntary
petition under Chapter 11 of the Bankruptcy Code on 8 January 1999.2 In the fall
of 1998, less than 90 days before Forex filed for bankruptcy, various customers
requested -- and received -- a return of deposits given to Forex. These customers
included Olita Cherese Hardin, Justin S. Sallusto, Ronald C. George, E. Michael
Thomas, and Mary Hardin (the “Hardin defendants”).3 Marika Tolz, the
1
We note that Tolz v. Gawlick, No. 06-10771, another appeal by the trustee in this case, is
pending before us. In Gawlick, as in the present appeal, Forex’s trustee appeals the district court’s
decision affirming the bankruptcy court’s conclusion that transfers made by Forex were not
avoidable as preferences. The instant case was not consolidated with the Gawlick case by the district
court; and these cases have not been consolidated on appeal.
2
Forex’s bankruptcy case was converted to Chapter 7 on 1 March 1999.
3
The Trustee brought a complaint to recover preferential transfers against each creditor
individually; but the bankruptcy court consolidated the cases of the Hardin defendants.
2
bankruptcy trustee for Forex (the “Trustee”), filed complaints against the Hardin
defendants under 11 U.S.C. § 547(b) to avoid preferential transfers made to them.
The case proceeded to trial in the bankruptcy court in September 2004.
After a bench trial, the bankruptcy court rejected the argument raised by the
Hardin defendants that the stockbroker defense of 11 U.S.C. § 546(e) applied to
prevent the Trustee from avoiding the transfers in this case. But the bankruptcy
court did find that the Trustee could not avoid payments made to the Hardin
defendants as preferences because the payments were made in the ordinary course
of business pursuant to 11 U.S.C. § 547(c)(2) (the “ordinary-course-of-business-
defense”). In reaching this decision, the bankruptcy court determined that Forex
had not operated a Ponzi scheme, noting in particular that Forex did not offer a
guaranteed high rate of return to investors and that the record lacked evidence that
funds from later investors were used to pay earlier investors. The bankruptcy
court also explained that, at an earlier hearing, the Trustee conceded that Forex did
not operate a Ponzi scheme.4
The Trustee appealed to the district court, arguing that the bankruptcy court
had erred in finding that Forex had not operated a Ponzi or Ponzi-type scheme and
4
At that hearing, the Trustee instead argued that Forex operated a scheme with “some similar
characteristics [of a Ponzi scheme,] but it’s not exactly a Ponzi scheme, like you’d read out of
Black’s Law [D]ictionary.”
3
that the ordinary-course-of-business-defense applied. The district court affirmed
the bankruptcy court on all claims.
On appeal, the Trustee argues that the ordinary-course-of-business-defense
does not apply to the transactions that Forex conducted with the Hardin
defendants. Because we are the “second court of review of a bankruptcy court’s
judgment,” we examine independently the bankruptcy court’s factual and legal
determinations; and we use the same standards of review as the district court. In
re Issac Leaseco, Inc., 389 F.3d 1205, 1209 (11th Cir. 2004).
“A determination of ordinary business terms under section [547(c)(2)] is a
question of fact subject to the clearly erroneous standard of review. A conclusion
by the district court that the factual findings of the bankruptcy court are not clearly
erroneous is normally entitled to some persuasive weight.” Id. (internal quotation
and citation omitted). And “[c]lear error is a highly deferential standard of
review.” Holton v. City of Thomasville Sch. Dist., 425 F.3d 1325, 1350 (11th Cir.
2005). A “finding is clearly erroneous when although there is evidence to support
it, the reviewing court on the entire evidence is left with the definite and firm
conviction that a mistake has been committed.” Anderson v. City of Bessemer
City, 105 S.Ct. 1504, 1511 (1985) (internal quotation omitted). “This standard
plainly does not entitle a reviewing court to reverse the finding of the trier of fact
4
simply because it is convinced that it would have decided the case differently.”
Holton, 425 F.3d at 1351 (quotation omitted).
Under 11 U.S.C. § 547(b), a trustee may avoid preferential transfers made
“to or for the benefit of a creditor” by the debtor on or within 90 days before the
debtor filed his bankruptcy petition. But a trustee may not avoid some transfers:
(A) in payment of a debt incurred by the debtor in the ordinary course
of business or financial affairs of the debtor and the transferee;
(B) made in the ordinary course of business or financial affairs of the
debtor and the transferee; and
(C) made according to ordinary business terms.
11 U.S.C. § 547(c)(2) (1999).5 The purpose of the ordinary-course-of-business
defense is “to leave undisturbed normal financial relations.” In re Craig Oil Co.,
785 F.2d 1563, 1566 (11th Cir. 1986) (internal quotation omitted). The defense
“should protect those payments which do not result from unusual debt collection
or payment practices.” Id.5
Like the bankruptcy court and district court, we apply the version of section 547 in effect when
Forex filed its bankruptcy petition.
5
A creditor who asserts the ordinary-course-of-business defense has the
burden of showing each of the three elements of 11 U.S.C. § 547(c)(2). “Although
the first two elements of the defense pertain to the conduct of the parties toward
one another, the third element involves a broader inquiry.” Issac Leaseco, 389
F.3d at 1210. Therefore, about the third element, “[a] creditor must show that the
disputed transaction was made both in the course of regular dealings between the
parties and in accordance with the standards of the relevant industry.” Id.In this case, the Trustee argues that the Hardin defendants did not produce
evidence in support of the first two elements of the ordinary-course-of-business
defense because the defendants were investors with Forex instead of creditors who
received money from Forex in payment of a debt. But, as the district court
explained, the Trustee only can seek to avoid a preferential transfer made “to or
for the benefit of a creditor.” See 11 U.S.C. § 547(b)(1). And the Trustee does
not point us -- in our review of the bankruptcy’s court factual findings for clear
error -- to evidence that supports the claim that the payments made by Forex to the
Hardin defendants were not in regular dealings between the parties.
The Trustee also contends that the Hardin defendants failed to produce
evidence that Forex’s payments to them conformed with industry standards, which
is required to satisfy the third element of the ordinary-course-of-business defense.
6
The record contains deposition testimony of N.R. Karve, who gave $10,000 to
Forex to buy foreign currency. After conducting only a few trades, Karve
requested -- and received -- the balance of funds invested with Forex. Therefore,
the record contains evidence that returning invested funds to its customers was
part of the ordinary course of Forex’s business. The Trustee has not persuaded us
that the bankruptcy court’s finding -- that Forex’s transactions with the Hardin
defendants satisfied the requirements of the ordinary-course-of-business defense --
was clearly erroneous.6
The Trustee next contends that Forex operated a Ponzi or “Ponzi-type”
scheme and that, as a result, the transfers made from Forex to the Hardin
defendants could not have been made in the ordinary-course-of-business. We
review the bankruptcy court’s factual determination that Forex did not operate a
Ponzi scheme for clear error.7 See In re Club Associates, 951 F.2d 1223, 1228
(11th Cir. 1992) (“Factual findings by the bankruptcy court are reviewed under the
6
The Trustee asserts that the district court improperly relied on Roderick Hudnell’s affidavit,
which was submitted as part of the Gawlick case, in determining that Forex’s transactions with the
Hardin defendants occurred in the ordinary-course-of-business. Although the Trustee included
Hudnell’s affidavit and a transcript of his deposition testimony in the designation of items to be
included in the record on appeal in the case of Ronald George, one of the Hardin defendants, we
conclude that, even without consideration of the Hudnell affidavit, the bankruptcy court did not
clearly err in deciding that the ordinary-course-of-business defense applied.
7
We note that the Trustee does not argue that the district court applied the wrong standard in
reviewing for clear error the bankruptcy court’s determination that Forex did not operate a Ponzi
scheme.
7
limited and deferential clearly erroneous standard.”). “[A] Ponzi scheme is a
phony investment plan in which monies paid by later investors are used to pay
artificially high returns to the initial investors, with the goal of attracting more
investors.” United States v. Silvestri, 409 F.3d 1311, 1317 n.6 (11th Cir. 2005);
see also Cunningham v. Brown, 44 S.Ct. 424 (1924) (providing origin for “Ponzi
scheme”).
The Trustee cites the affidavit of Bruce Prestin, an accountant who reviewed
Forex’s books and records for the Trustee before the 2004 bankruptcy court trial.
In his affidavit, Prestin stated, among other things, that money received by Forex
from the Hardin defendants was co-mingled. The Trustee also relies on the trial
testimony of Mark Singer, who worked for Forex and testified that Forex was
underfunded. In addition, the Trustee cites Karve’s testimony that a Forex
representative told him that he would receive large profits on his investments with
the company. But, as the district court noted, it is not clear that these statements to
Karve were anything more than marketing puffery. Even though the record
indicates that Forex may not have operated a well-run business, the record
contains account statements showing that trades in foreign currency were made on
Karve’s account; and when Karve asked Forex for the balance of the funds in his
account, he received that payment. Based on the record before us, we cannot say
8
that the bankruptcy court clearly erred in determining that Forex did not operate a
Ponzi or Ponzi-type scheme.8
Therefore, we conclude that the bankruptcy court did not clearly err in
determining that the ordinary-course-of-business defense applied in this case; and
we affirm the denial of the Trustee’s complaints to avoid preferential transfers
made to the Hardin defendants.
AFFIRMED.
8
As a result, we need not decide whether a debtor who operates a Ponzi scheme can make
transfers in the ordinary-course-of-business under 11 U.S.C. § 547.
9