Perkins v. Crown Fin., LLC (In re Int'l Mgmt. Assocs., LLC)

IN RE: INTERNATIONAL MANAGEMENT ASSOCIATES, LLC, Debtor.

WILLIAM F. PERKINS, PLAN TRUSTEE, Plaintiff, v. CROWN FINANCIAL, LLC, Defendant.

CASE NO. 06-62966-PWB

ADVERSARY PROCEEDING NO. 06-6421-PWB

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF GEORGIA ATLANTA DIVISION

Filed: February 10, 2016

February 9, 2016

CHAPTER 11

ORDER

William F. Perkins, Trustee for the Debtor, International Management Associates, LLC, seeks summary judgment on his claims that a transfer of money from the Debtor to Crown Financial, LLC ("Crown"), is avoidable and recoverable as a fraudulent transfer pursuant to 11 U.S.C. §§ 544(b), 548(a)(1), and 550, and O.C.G.A. §§ 18-2-74(a) and 18-2-77(a). Crown contends that the money was not property of IMA's estate because it was subject to a constructive trust. Crown also asserts that the Trustee cannot avoid the transfer because it received the transfer in good faith and for value.

For the reasons stated herein, the Trustee's motion is granted in part and denied in part. In summary, the Court concludes the following with respect to the specific issues the parties address:

1. The Trustee has established the elements of a prima facie claim for actual fraud against Crown pursuant to 11 U.S.C. § 548(a)(1)(A) and O.C.G.A. § 18-2-74(a)(1). (Section IV).

2. IMA had an interest in the funds transferred to Crown and such funds are not subject to a constructive trust in favor of Crown. (Section IV(A)).

3. The transfer was made with an intent to hinder, delay or defraud creditors because it was made in furtherance of a Ponzi scheme. (Section IV(B)).

4. For purposes of summary judgment, the Trustee has not established that the transfer of funds to Crown was constructively fraudulent pursuant to 11 U.S.C. § 548(a)(1)(B) and O.C.G.A. § 18-2-75(a) because a factual dispute exists as to whether IMA received less than reasonably equivalent value when it transferred monies to Crown in exchange for a release in the Settlement Agreement. (Section V).

5. Because factual disputes exist as to whether Crown took the Transfer in good faith, the Trustee has not, as a matter of fact and law, negated Crown's affirmative defenses under 11 U.S.C. § 548(c) and Georgia law. (Section VI).

6. The Trustee is entitled to summary judgment that the affirmative defense of O.C.G.A. § 18-2-78(e) is inapplicable to the transfer. (Section VII(A)).

7. The trustee is entitled to summary judgment that the defense of in pari delicto is not applicable to the Trustee's claims in this proceeding. (Section VII(B)).

8. The Trustee is entitled to prejudgment interest in an amount to be determined after trial. (Section VIII).

I. Procedural Background

On February 17, 2006, a group of investors sued International Management Associates, LLC, (IMA), represented to be a hedge fund operated by Kirk Wright, in the Superior Court of Fulton County, Georgia. The Superior Court appointed William F. Perkins as the receiver for IMA and its related affiliates. On February 27, 2006, the United States District Court for the Northern District of Georgia appointed Mr. Perkins as the federal receiver in a civil action brought by the Securities and Exchange Commission.

On March 16, 2006, IMA and its affiliates (the "IMA Debtors"), through Mr. Perkins, filed for relief under chapter 11 of the Bankruptcy Code. The Court ordered joint administration of these cases under Case No. 06-62966, and, later, the appointment of a chapter 11 trustee. The Office of the United States Trustee appointed Mr. Perkins as the Chapter 11 trustee on April 20, 2006.

After substantive consolidation of the cases, the Court entered an order confirming the Third Amended Trustee's Plan of Liquidation on August 27, 2008. [Case No. 06-62966,Doc. 669]. The plan provides for Mr. Perkins to serve as the Plan Trustee and to liquidate assets of the consolidated estates, including the prosecution of avoidance actions, for distribution to creditors.

On October 10, 2006, the Plan Trustee filed a Complaint to Avoid and Recover Transfers against Crown Financial, LLC ("Crown"). The complaint relies in part on the contention that the IMA Debtors operated as a Ponzi scheme. On January 24, 2013, pursuant to the Order Consolidating Proceedings, Establishing Scheduling Deadlines, and Setting Trial Dates [Misc. Proceeding 12-506, Doc. No. 1], the Court conducted a trial, for purposes of this and other adversary proceedings, on the issue of whether Kirk Wright operated the IMA Debtors as a Ponzi scheme. On February 6, 2013, the Court entered an Order finding that, for purposes of this and other adversary proceedings, Kirk Wright operated the IMA Debtors as a Ponzi scheme during the period of October 1, 1997 through February 17, 2006. [Misc. Proceeding 12-506, Doc. No. 23]. The Eleventh Circuit affirmed this ruling.¹

II. Undisputed Facts

The following facts are undisputed, except where noted.²

Dr. Lloyd Geddes, Jr., ("Geddes") is a principal of Oncology & Hematology Center of Atlanta, P.C. ("Oncology"). In 2005, Geddes sought a loan from the Defendant, Crown, to complete construction of Verve nightclub.

In connection with the loan, Geddes provided Crown with Oncology's balance sheet showing that Oncology owned an IMA account worth $500,000. On September 7, 2005, Kirk Wright provided Crown with an investor account statement that showed Oncology as an investor in the IMA Platinum Group, LLC ("Platinum") and that the value of Oncology's account had grown from $1,050,101.72 on April 1, 2005, to $1,123,438.04 on June 30, 2005.

Crown asserts that it did due diligence on IMA and found that its professional accountants, brokers, and plan administrator were reputable and that IMA appeared to be in good standing.

On September 12, 2005, Crown made a $550,000 loan to Geddes and Oncology. Geddes and Oncology executed a promissory note in favor of Crown (the "Geddes Note") and Oncology pledged its interest in the IMA Platinum account to Crown. The loan had a due date for repayment on or before December 5, 2005.

Notwithstanding the account statements provided by Kirk Wright regarding the value of Oncology's account, the Trustee asserts that IMA's books and records do not reflect that Oncology ever executed an IMA Platinum Group limited liability company agreement. Healso asserts that the books and records reflect that Oncology never transferred any funds to any of the IMA Debtors before the loan to Geddes and Oncology. On September 13, 2005, the day after the $550,000 loan to Geddes, Oncology transferred $500,000 to one of IMA's checking accounts.

In October 2005, Geddes asked Crown to satisfy the loan from Oncology's IMA account. At this time, Crown asserts, it learned that Geddes and Wright were in business together in the development of Verve nightclub, but that they had had a falling out.

On October 5, 2005, Crown requested a November 5, 2005 payoff of $561,979.23 from IMA from Oncology's IMA account. Kirk Wright wrote to Chad Tribe, a Crown employee, that the request was not timely and would not be processed on November 5, 2005.

On November 4, 2005, Crown made a second request for a payoff from Oncology's IMA account, for $569,250.00 to be made on December 5, 2005. IMA did not comply with this second request, despite inquiries from Crown.

When payment from IMA was not forthcoming for the second time, Crown developed concerns about not receiving its money and about Wright's avoidance of telephone calls.

On December 8, 2005, Crown was informed that Oncology's interest in the Platinum account was only worth $100,000. Geddes and his attorney claimed to be unaware of the reduction in value. Crown's manager believed the decline in value was "an absolute lie."

On December 9, 2005, Crown filed a complaint and emergency petition for a temporary restraining order against IMA, Platinum, Kirk Wright, Oncology, and Geddes in the Superior Court of Fulton County, Georgia. (Doc. 65, Exh. 38). Crown's claims included breach of contract, tortious interference with contract, and fraud. Crown alleged that IMAwas a mere instrumentality of Wright being used to advance his personal interests. It also alleged that Wright made misrepresentations about the value of the IMA accounts.

Four days later, Kirk Wright and Crown exchanged offers regarding a payoff to Crown and an assignment of the Geddes Note from Crown to Kirk Wright. IMA's counsel, Smith Gambrell & Russell, at Wright's instruction, wired $590,000 to Crown's lawyers, Powell Goldstein Frazer & Murphy, LLP, on December 15, 2015.

After some back and forth, on January 5, 2006, Kirk Wright, IMA, Platinum, and Crown executed a Settlement Agreement. The Settlement Agreement provided for Crown to receive the previously wired $590,000, and for Crown to assign the Geddes Note to Kirk Wright.

The transfer at issue here (the "Transfer") occurred on January 6, 2006, when Powell Goldstein wired the $590,000 in its account to Crown. This was about six weeks before a number of investors sued IMA in Fulton County Superior Court as noted above.

At the time of the Transfer, IMA was insolvent and had creditors. As noted above, this Court on February 6, 2013, entered an Order finding that Kirk Wright operated the IMA Debtors as a Ponzi scheme during the period of October 1, 1997 through February 17, 2006.

The import of the foregoing can be summarized as follows. Geddes and Oncology borrowed $550,000 from Crown, secured by a nonexistent investment account with entities being operated by Kirk Wright as a Ponzi scheme. The scheme's operator represented to Crown that Oncology had an account worth more than twice the amount of the loan, but neither Geddes nor Oncology had ever transferred any money to the entities until after Crown made the loan.

After Crown sued IMA and others for, among other things, fraud, Crown eventually received payment of $590,000 from IMA and assigned the note evidencing the loan to Wright instead of the Debtor.

III. Overview of the Positions of the Parties

The Trustee contends that...