Opinion
ORDER
RONALD S.W. LEW, Senior District Judge.
This is an appeal from the Bankruptcy Court's denial of Appellants Robert Rakow, Karen Rakow, and the Highlands Group, Inc.'s Motion for Partial Summary Judgment and granting of Appellee Trustee of the Chapter 11 Bankruptcy Estate of Reed E. Slatkin, R. Todd Neilson's Motion for Summary Judgment [1].
On January 22, 2007, the United States Bankruptcy Court denied Appellants' Motion for Partial Summary Judgment on the issue of whether Appellants' transfer of 250, 000 shares of BID.COM stock offset supposed profits.
On April 25, 2008, the United States Bankruptcy Court granted Summary Judgment for Appellee in the amount of $3,350,000 plus pre- and post- judgment interest. The Bankruptcy Court again rejected the argument that the BID.COM Stock Transfer offset these supposed gains.
Having reviewed all papers submitted pertaining to this Appeal the Court, NOW FINDS AND RULES AS FOLLOWS:
I. BACKGROUND
This case arises out of the bankruptcy proceedings of Reed E. Slatkin, the perpetrator of a large-scale Ponzi scheme. Trustee of the Chapter 11 Bankruptcy Estate of Reed E. Slatkin, R. Todd Neilson, ("Appellee") sued Appellants Robert and Karen Rakow and their company, Highlands Group, Inc., (collectively, "Appellants") to avoid and recover fraudulent and/or preferential transfers made to Appellants by Slatkin.
Sometime around February 1991, Appellants opened a purported investment account with Slatkin called the "Highlands Account." The account was named for a corporation jointly owned by Robert and Karen Rakow.
According to Appellants, when the Highlands Account was first opened, Appellant Robert Rakow was president of Calvin Klein Jeans and drew a salary, thus, he deposited mostly cash into the account. However, he later left Calvin Klein Jeans and began consulting for other companies. Instead of cash, he earned stock options. In 1999, Appellant Robert Rakow transferred 250, 000 shares of stock in BID.COM to Slatkin. Therefore, Appellants contend that they used those stock options to invest in what Appellants later learned was a Ponzi scheme.
During the seven years before his bankruptcy, Slatkin transferred $3,350,000 to the Highlands Account in furtherance of his Ponzi scheme ("Net Highlands Account Transfers"). The Bankruptcy Court awarded Appellee this amount, plus pre-judgment and post-judgment interest, on Summary Judgment of Appellee's First Claim For Relief.
Appellants main issue raised on appeal is whether Appellants can evoke an affirmative defense of "setoff" under 11 U.S.C. § 548 and CAL CIV. CODE § 3439.08(a). Thus, Appellants claim that the 250, 000 of transferred BID.COM stock would setoff the $3,350,000 in the Highlands Account.
II. LEGAL STANDARDS
A. Standard of Review
District courts have jurisdiction to hear appeals from final judgments, orders, and decrees entered by the Bankruptcy Court. See 28 U.S.C. § 158(a). District courts review the lower courts' conclusions of law de novo and findings of fact for clear error. See Nielson v. Chang , 253 F.3d 520, 526 (9th Cir. 2001).
B. Summary Judgment
Summary judgment is appropriate when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). "Bankruptcy Rule 7056 applies Rule 56 of the Federal Rules of Civil Procedure to adversary proceedings." In re Aubrey , 111 B.R. 268, 272 (9th Cir. BAP 1990).
III. DISCUSSION
Appellants raise 5 issues on appeal: (1) the Bankruptcy Court erred when it found that the purchase of 250, 000 shares of BID.COM was a so-called special investment; (2) the Bankruptcy Court erred when it held that special investments were separate transactions unrelated to Slatkin's Ponzi scheme; (3) if the special investments are separate transactions, which must be treated as separate from Slatkin's Ponzi scheme, then Appellee did not establish that any particular transfer from Slatkin was part of the Ponzi scheme as opposed to the special investments; (4) the Bankruptcy Court erred in not granting Appellants' Motion for Partial Summary Judgment regarding the BID.COM transaction; and, (5) Appellee has produced no evidence to support a finding of bad faith within the meaning of the fraudulent transfer laws.
A. The Bankruptcy Court did not err in granting Appellee's Motion for Summary Judgment.
The Court finds that the Bankruptcy Court did not err in granting Appellee's Motion for Summary Judgment because the Bankruptcy Court properly applied the "no setoff" rule to this case. The "no setoff" rule states that a fraudulent conveyance cannot be offset against or exchanged for a general unsecured claim. See In re Acequia, Inc. , 34 F.3d 800, 817 (9th Cir. 1994). The Bankruptcy Court properly evaluated the applicable case law and correctly determined that the "no setoff rule" applies to the case at bar. Accordingly, the Bankruptcy Court correctly held that, as a matter of law, the 250, 000 of BID.COM stock could not setoff the $3,350,000 in the Highlands Account and, thus, Appellee's Motion for Summary Judgment should be granted.
As the affirmative defense of "setoff" under 11 U.S.C. § 548 and CAL CIV. CODE § 3439.08(a) was not available to Defendants, issues (1), (2), (3), and (5) were properly decided.
B. The Bankruptcy Court did not err in denying Appellants' Motion for Partial Summary Judgment regarding the BID.COM transaction.
Appellants were not entitled to Partial Summary Judgment of the Third and Fifth claims for relief because there are issues of material fact as to the value of stock Appellants transferred to Slatkin.
Looking at the facts in a light most favorable to Appellee, the 250, 000 shares of BID.COM stock may not have been worth $5,120,760. This figure was based on the closing sale price of BID.COM stock on April 8, 1999, when the stock certificate was allegedly sent to Slatkin's broker. However, Appellee shows that Slatkin did not receive the stock on April 8, 1999. The stock was sent on April 8th via overnight delivery, thus, it could not have been in the hands of the broker on April 8th. Furthermore, Appellee introduced evidence that on May 6, 1999 "Highlands" deposited the 250, 000 shares of BID.COM stock into a securities brokerage account in Slatkin's name. Thus, there is an issue of material fact as to the exact monetary value of the BID.COM stock.
Moreover, there is evidence that Appellants may have only owned a portion of the 250, 000 share value. Slatkin testified that Appellants would split some of the stock proceeds with Slatkin and Ronald Rakow. Furthermore, Appellant Robert Rakow sent a fax to Slatkin stating that the $4.2 million in BID.COM proceeds should be divided amongst Appellants, Slatkin, and "other valuable associates."
Thus, evidence that the proceeds of the BID.COM investment may not have been intended to be distributed in whole to Appellants, plus evidence regarding the exact date of transfer, raise enough of a question of material fact to defeat a Partial Summary Judgment Motion on the issue. Accordingly, the Bankruptcy Court did not err in denying the Partial Summary Judgment Motion and issue (4) was properly decided.
IV. CONCLUSION
The Bankruptcy Court properly found that the affirmative defense of "setoff" under 11 U.S.C. § 548 and CAL CIV. CODE § 3439.08(a) was not available to Defendants. Accordingly, the United States Bankruptcy Court's April 25, 2008 granting of Summary Judgment for Appellee in the amount of $3,350,000 plus pre- and post- judgment interest is AFFIRMED.
Appellee raised a question of material fact to defeat Appellants' Partial Summary Judgment Motion. There are issues of material fact as to the value of the BID.COM stock in question, given conflicting evidence of the exact date of transfer and questions as to whether proceeds were intended to be distributed in whole to Appellants. Thus, the Bankruptcy Court did not err in denying the Partial Summary Judgment Motion. Accordingly, the United States Bankruptcy Court's January 22, 2007, denial of Appellants' Motion for Partial Summary Judgment is AFFIRMED.
IT IS SO ORDERED.