Kriegman v. Mirrow

Filing 83

FINDINGS OF FACT AND CONCLUSIONS OF LAW. Signed by Chief Judge Rosanna Malouf Peterson. (SK, Case Administrator)

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UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WASHINGTON

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In Re:
NO: 2:14-CV-268-RMP

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LLS AMERICA, LLC,
Bankr. Case No. 09-06194-FPC11
Debtor,

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BRUCE P. KRIEGMAN, solely in his
capacity as court-appointed Chapter 11
Trustee for LLS America, LLC,

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FINDINGS OF FACT AND
CONCLUSIONS OF LAW

Plaintiff,

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v.

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ANGELA MIRROW, et al.,

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Defendants.

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This action was tried before the Court on May 11, 2015. Plaintiff, Bruce P.

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Kriegman, the court-appointed Chapter 11 Trustee for LLS America, LLC

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(“Trustee”), was represented by Shelley N. Ripley of Witherspoon Kelley.

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FINDINGS OF FACT AND CONCLUSIONS OF LAW ~ 1

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All Defendants are pro se litigants. In accordance with the Pretrial Order,

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the Court permitted the Trustee to file witness affidavits in lieu of testimony. See

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ECF No. 69 at 2. Defendants did not appear for trial, either telephonically or in

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person.

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Ms. Ripley stated that Defendant Richard B. Jordan appeared on the

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Court’s docket as a defendant at the time of trial, although the Trustee would not

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proceed against Mr. Jordan at trial because he had settled with the Trustee.

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Defendants Connie Konsulis, Shanna Bowolin, and Matthew Bowolin were the

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only remaining defendants.

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Having reviewed the witness affidavits and admitted exhibits, the Court
makes the following findings of fact and conclusions of law:

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PREVIOUS RULINGS

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1.

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On July 1, 2013, the Bankruptcy Court issued its Report and

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Recommendation Re Plaintiff’s Motion for Partial Summary Judgment on

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Common Issues (“Report and Recommendation”) recommending that the District

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Court grant the Trustee’s Amended Motion for Partial Summary Judgment on two

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“Common Issues”: (1) Debtor operated a Ponzi scheme; and (2) Debtor was

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insolvent at the time of its transfers to Defendants. On August 19, 2013, this

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Court adopted the Bankruptcy Court’s Report and Recommendation and entered

Ponzi Scheme and Insolvency

FINDINGS OF FACT AND CONCLUSIONS OF LAW ~ 2

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an order granting the Trustee’s Amended Motion for Partial Summary Judgment

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on the Common Issues (“Order Adopting Report and Recommendation”). See

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2:11-cv-00357-RMP, ECF No. 92. Therefore, this Court has determined that

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Debtor operated a Ponzi scheme and was insolvent at the time of each of the

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transfers to Defendants.

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All of the findings and conclusions set forth in the Report and

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Recommendation and the Order Adopting Report and Recommendation are

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incorporated by this reference and are the law of this case.

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2.

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Omnibus Hearing for the Testimony of Charles B. Hall

The court-appointed examiner, Charles B. Hall, testified at an Omnibus

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Hearing in open court commencing on February 25, 2014. See 2:13-cv-00417-

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RMP, ECF Nos. 39, 40.1 His testimony consists of written direct examination

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testimony that was filed on or about February 17, 2014, and the oral testimony

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that he gave at the Omnibus Hearing. Mr. Hall was cross examined by several

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defense attorneys and by some pro se defendants. Mr. Hall’s testimony at the

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Omnibus Hearing is part of the record in this adversary action.

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Defendants were transferred from cause number 2:13-cv-00417-RMP to their current cause
number on November 11, 2014. 2:13-cv-00417-RMP, ECF No. 84.

FINDINGS OF FACT AND CONCLUSIONS OF LAW ~ 3

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FINDINGS OF FACT
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formed originally in 1997. PO-1 at 11.
2.

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Debtor is the Little Loan Shoppe group of companies, which was

Debtor operated a Ponzi scheme, whereby investors’ loans sometimes

were used to pay other investors’ promised returns on investments. PO-1 at 16.

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3.

Over the course of its existence, Debtor acquired approximately

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$135.4 million from investments made by individual lenders, usually documented

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by promissory notes offering interest returns in the range of 40% to 60% per

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annum. PO-1 at 7 n.2, 15.

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4.

Debtor accumulated payday loan bad debts of approximately $29

million, which were written off in 2009. PO-1 at 41.

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5.

Debtor was never profitable at any time during its existence and at no

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time did it generate sufficient profits to pay the amounts due the lenders. PO-1 at

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16, 53.

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6.

Defendants are lenders who received payments from Debtor.

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7.

Defendants filed proofs of claim, P-11 (Bowolins’ proof of claim); P-

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41 (Konsulis’s proof of claim), and the relevant conduct largely occurred in

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Spokane, Washington.

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The Bowolins’ promissory notes were executed in Spokane. P-11 at

3, 5.

FINDINGS OF FACT AND CONCLUSIONS OF LAW ~ 4

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Debtor gave lenders, including Defendants, post-dated checks to

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cover interest payments, but some checks had insufficient funds to cover payment

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of the checks or no longer had an active account with the drawee bank when the

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date for payment arrived. See, e.g., P-15; P-46 at 14.

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10.

Debtor voided approximately 29,000 of the post-dated checks that it

had issued to lenders. PO-1 at 26.
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The Bowolins received a promissory note that was rolled into or

renewed in another promissory note. P-11 at 3.
12.

All of the transfers that the Trustee seeks to avoid were made within

the period of September 1997 to July 21, 2009. P-13; P-43.
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Indicia and characteristics of the Ponzi scheme present in this case

include:
a.

Proceeds received from new investors masked as profits from

running a payday loan business; PO-1 at 16, 22;
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Promise of a high rate of return, usually between 40% to as

much as 60%, on the invested funds; PO-1 at 19;
c.

Debtor paid commissions to third parties who solicited new

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lenders, typically 10% of the amount received from the new lender; PO-1 at

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20-21;

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FINDINGS OF FACT AND CONCLUSIONS OF LAW ~ 5

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d.

Debtor solicited funds as loans evidenced by a promissory

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note but demonstrated a pattern of “rolling over” the promissory notes

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when due into new notes instead of paying off the obligation; PO-1 at 26;

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e.

Debtor, throughout its history, made false and misleading

statements to current and potential lenders; PO-1 at 53-54; and,

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f.

Debtor was insolvent from its inception to the filing of its

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bankruptcy; PO-1 at 67.

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14.

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The court-appointed examiner, Charles B. Hall, by way of education,

experience, and vocation, is qualified to analyze and review the legitimacy of an
enterprise’s operation and to detect a fraud based on Ponzi scheme operations.

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Mr. Hall’s testimony is credible.

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16.

Curtis Frye’s written testimony, which pertained to Debtor’s record

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keeping and the accounting of investment, payments, and consulting

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fees/commissions to Defendants, is credible.

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Defendants are “net winners.”

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Defendants were promised high rates of return from Debtor.

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19.

Defendants offered no evidence or argument in support of the

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defense of good faith.

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against Defendants does not support by a preponderance of the evidence that these

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Defendants met the objective standard of good faith.

Moreover, the Court’s review of Plaintiff’s evidence

FINDINGS OF FACT AND CONCLUSIONS OF LAW ~ 6

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The following summarizes the evidence of investments made by

Matthew and Shanna Bowolin and the payments that they received:

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Total Payments (Money Out):
Total Investments (Money In):
MIMO (Difference between
Money In and Money Out):

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$34,601.37 CAD
$25,000.00 CAD
$9,601.37 CAD

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The following summarizes the evidence of investments made by

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Connie Konsulis and the payments that she received:
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Total Payments (Money Out):
Total Investments (Money In):
MIMO (Difference between
Money In and Money Out):

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$25,003.57 USD
$10,000.00 USD
$15,003.57 USD

Total transfers to Defendants are as follows:

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• Matthew and Shanna Bowolin for $34,601.37 CAD;

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• Connie Konsulis for $25,003.57 USD;

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23.

All transfers to Defendants were made with actual fraudulent intent

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and in furtherance of a Ponzi scheme.
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24.

Defendants filed proofs of claim as follows:

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• Matthew and Shanna Bowolin – Claim No. 417
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• Connie Konsulis – Claim No. 84

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FINDINGS OF FACT AND CONCLUSIONS OF LAW ~ 7

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CONCLUSIONS OF LAW
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This Court has jurisdiction of this proceeding pursuant to 28 U.S.C. §

1334 and 28 U.S.C. § 157(d).

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2.

This Court has jurisdiction over Defendants.

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3.

This action was timely commenced.

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4.

Washington state law governing fraudulent transfers applies.

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5.

Transfers made in furtherance of a Ponzi scheme constitute actual

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fraud under the Bankruptcy Code and Washington’s version of the Uniform

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Fraudulent Transfer Act (UFTA). See Bankr. Adv. Doc. 11-80299, ECF No. 378

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at 21-25. “Where causes of action are brought under the UFTA against Ponzi

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scheme investors, the general rule is that to the extent innocent investors have

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received payments in excess of the amounts of principal that they originally

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invested, those payments are avoidable as fraudulent transfers . . . .” Donell v.

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Kowell, 533 F.3d 762, 770 (9th Cir. 2008).

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6.

A transferee of a fraudulent transfer may keep funds that it took for

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reasonably equivalent value and in good faith. See 11 U.S.C. § 548(c); RCW

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19.40.081(a). As recipients of transfers that constitute actual fraud, the burden of

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proof in establishing the affirmative defense of good faith is on Defendants. In re

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Agric. Research and Tech. Grp., Inc., 916 F.2d 528, 535 (9th Cir. 1990); 5 Collier

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on Bankruptcy ¶ 548.09[2][c] at 548-98.2 (16th ed. 2011).

FINDINGS OF FACT AND CONCLUSIONS OF LAW ~ 8

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7.

Although “good faith” is not defined precisely in case law, at least one

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court has noted that the absence of good faith is shown by a transferee who knows

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that a debtor is operating a Ponzi scheme. See In re Agric. Research, 916 F.2d at

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535 (citing In re Indep. Clearing House, 77 B.R. 843, 861 (D. Utah 1987)). The

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Ninth Circuit has quoted favorably an explanation in an early case that a

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transferee’s “knowledge or actual notice of circumstances sufficient to put him, as

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a prudent man, upon inquiry as to whether his brother intended to delay or defraud

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his creditors . . . should be deemed to have notice . . . as would invalidate the sale

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as to him.” Id. (quoting Shauer v. Alterton, 151 U.S. 607, 621 (1894)).

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Thus, courts measure good faith by an objective standard, looking to

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what a transferee “‘knew or should have known’ in questions of good faith, rather

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than examining what the transferee actually knew from a subjective standpoint.”

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Id. at 536.

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9.

The goal of avoiding a debtor’s fraudulent transactions is not to

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punish those who received funds from the debtor. Instead, fraudulent transfers are

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avoided to benefit a debtor’s creditors by bringing property back into the debtor’s

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estate for distribution to creditors. See 5 Collier on Bankruptcy ¶ 548.01[1][a] at

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548-11.

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10.

Under the Bankruptcy Code, Washington’s UFTA, as well as

relevant case law, the Court does not contemplate a recipient’s intent when

FINDINGS OF FACT AND CONCLUSIONS OF LAW ~ 9

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deciding whether to avoid fraudulent transfers.

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Thompson v. Hanson, 168 Wn.2d 738, 749 (2010). Accordingly, a transfer that

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constitutes actual fraud is avoided in its entirety unless the transferee establishes

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that a reasonable person in the transferee’s position would not and should not

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have known of the fraud, not simply whether he or she actually acted in good

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faith.

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Id. ¶ 548.04[2] at 548-63;

At least one unsecured creditor existed who triggered the strong arm

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power of 11 U.S.C. § 544(b)(1) because the creditor did not and should not

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reasonably have discovered the fraudulent nature of Debtor’s Ponzi scheme

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transfers less than one year before the bankruptcy petition was filed.
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Under the statutes relating to fraudulent transfers, 11 U.S.C. § 548

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and RCW 19.40, et seq., payments received from Debtor are recoverable from

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each Defendant by the Trustee, subject to the defense of good faith pursuant to 11

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U.S.C. § 548(c) and RCW 19.40.081(a).

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Transfers made by Debtor in furtherance of its Ponzi scheme are

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transfers made with intent to hinder, delay and/or defraud creditors under both

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state law, RCW Ch. 19.40, and federal law, 11 U.S.C. § 548(a)(1).

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14.

All transfers to Defendants were made with actual fraudulent intent

and in furtherance of a Ponzi scheme.

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FINDINGS OF FACT AND CONCLUSIONS OF LAW ~ 10

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As discussed above, Defendants failed to meet their burden to

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establish good faith and, thus, Defendants are required to return the entire amount

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of the transfers that they received, including principal and interest.

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The Trustee is entitled to pre-judgment interest at the applicable

federal rate from July 21, 2009, when the bankruptcy case commenced.
17.

Pursuant to 11 U.S.C. § 548(a), 544, 550 and 551 and RCW

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19.40.041(1) and 19.40.071, the Trustee is entitled to and is granted a judgment

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for the benefit of the Liquidating Trust of Debtor against Matthew and Shanna

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Bowolin for $34,601.37 CAD, plus pre-judgment interest from July 21, 2009, at

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the applicable federal judgment rate and post-judgment interest at the federal

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judgment rate from the date of judgment to the date the judgment is paid in full,

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see 28 U.S.C. § 1961.

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Pursuant to 11 U.S.C. § 548(a), 544, 550 and 551 and RCW

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19.40.041(1) and 19.40.071, the Trustee is entitled to and is granted a judgment

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for the benefit of the Liquidating Trust of Debtor against Connie Konsulis for

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$25,003.57 USD, plus pre-judgment interest from July 21, 2009, at the applicable

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federal judgment rate and post-judgment interest at the federal judgment rate from

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the date of judgment to the date the judgment is paid in full, see 28 U.S.C. § 1961.
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The Trustee is entitled to reimbursement of his costs for pursuing this

action.

FINDINGS OF FACT AND CONCLUSIONS OF LAW ~ 11

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20.

All proofs of claim filed by any of Defendants in Debtor’s

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Bankruptcy proceedings or any claims that may hereafter arise are hereby

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disallowed pursuant to 11 U.S.C. § 502(d) unless and until the avoided transfers

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are returned to the Trustee.

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Trustee is awarded all applicable interest, costs and disbursements of

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this action against each Defendant.

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IT IS SO ORDERED.

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The District Court Executive is directed to enter this Order and provide

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copies to counsel and to Defendants, who are pro se.
DATED this 17th day of July 2015.

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s/ Rosanna Malouf Peterson
ROSANNA MALOUF PETERSON
Chief United States District Court Judge

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FINDINGS OF FACT AND CONCLUSIONS OF LAW ~ 12