Opinion
NOT FOR PUBLICATION
Argued and Submitted at Phoenix, Arizona: July 26, 2007
Appeal from the United States Bankruptcy Court for the District of Arizona. Bk. No. 99-06935, Adv. No. 01-01021. Honorable Redfield T. Baum, Sr., Chief Bankruptcy Judge, Presiding.
Before: KLEIN, PAPPAS and AHART, [ Bankruptcy Judges.
Hon. Alan M. Ahart, U.S. Bankruptcy Judge for the Central District of California, sitting by designation.
MEMORANDUM
The confirmed plan of the appellee provided for the remediation of Ponzi scheme activities by authorizing the revested debtor to sue under Arizona's Uniform Fraudulent Transfer Act (" UFTA") to recover excess returns from " net winners" in the Ponzi scheme who had received more than their investments. The appellants, who received interest at rates of up to 25 percent per week during the period the debtor was operated as a Ponzi scheme, appeal the summary judgment avoiding $397,313 in transfers to them. We AFFIRM.
FACTS
United Development, Inc. (" appellee" or " UDI"), an Arizona corporation in the business of land development, is a revested debtor whose plan of reorganization was confirmed on January 9, 2001. UDI financed its operations and activities primarily through syndication fees from limited partnerships that were established when real estate was purchased in Mesa, Arizona. Due to a downturn in the real estate market in the late 1980s, the limited partnerships were not able to adequately fund their operations.
In its effort to continue its operations, help the limited partnerships, and maintain the real property assets, UDI borrowed funds from numerous private investors and institutions at interest rates so high that it became a Ponzi scheme.
By mid-1998, UDI had loaned over $4,000,000 to the limited partnerships collectively. And, UDI was unable to collect on these debts because the limited partners themselves were then about $7,000,000 delinquent in their capital contributions to the limited partnerships.
Joe Auza (" appellant" or " Auza") was one such investor who loaned money to UDI. Between September 1997 and December 1998, Auza loaned UDI $1,225,000 at interest rates of up to 25 percent per week and received $1,622,313 in repayments.
Auza testified:
UDI could not keep up with its loan payments to Auza and others like him, which resulted in borrowing additional funds from existing and new investors to repay previous loans. As a result of UDI's insufficient assets or profits generated from its business activities from which to repay its lenders, UDI used the funds obtained from later lenders to repay the principal and above-market rates of return to earlier investors.
The cycle of borrowing from one set of investors to pay previous investors caused UDI's liabilities to mount to unsustainable levels. In October 1998, a Reorganization Team (" RT"), appointed by UDI, took over UDI's operations, and ceased the borrowing and paying pattern.
UDI claims to have been insolvent since at least 1995 with large losses aggregating each year. Over 90 percent of the 1995-1997 losses were attributable to interest expense. According to UDI's September 30, 1997, Balance Sheet, UDI had assets of $9,987,000 and liabilities of $30,000,000. UDI's primary source of capital at this time were funds loaned or " invested" by other third parties, not from its business operations.
In June 1999, petitioning creditors filed an involuntary bankruptcy against UDI, which UDI converted to a case under chapter 11 on September 7, 1999.
The RT conducted an investigation into UDI's past financial affairs and discovered that UDI had been run in the manner of a Ponzi scheme, with subsequent investors' funds being used to pay off earlier investors. Recognizing the inequity of UDI's preference of earlier investors over later investors, the RT developed a plan of reorganization that permitted the estate to recover from those UDI creditors who received amounts in excess of the principal amount invested. Those individuals who received more than the principal amount loaned to UDI (i.e., received their entire investment plus interest) were referred to as " negative cash-at-risk" or " net winners."
Creditors that received payment of less than the principal amount loaned were referred to as " positive cash-at-risk" or " net losers."
To ensure that collective losses of the business were evenly distributed among all of its investors, UDI brought adversary proceedings against individual investors that were net winners so that the proceeds from these actions could be returned to all similarly situated unsecured creditors.
UDI based its authority to bring such actions on well-settled case law holding that, because the " profits" or interest payments of the scheme are illusory, the only appropriate course of action is to permit the trustee (or debtor-in-possession) to maintain actions against the earlier investors (the " net winners") on behalf of the more recent investors (the " net losers"). See In re Taubman, 160 B.R. 964, 978 (Bankr. S.D. Ohio 1993); Dicello v. Jenkins (In re Int'l Loan Network, Inc.), 160 B.R. 1, 7 (Bankr. D.D.C. 1993); see also Official Cattle Contract Holders Comm. v. Commons (In re Tedlock Cattle Co.), 552 F.2d 1351, 1353-54 (9th Cir. 1977) (approving equitable distribution to creditors involved in Ponzi scheme).
On September 7, 2001, UDI filed an adversary proceeding against Auza and his wife (the " Auzas") seeking recovery of $497,313 allegedly fraudulently transferred to the Auzas by UDI while UDI was insolvent, pursuant to Arizona's UFTA, Ariz. Rev. Stat. § 44-1001 et seq. as applied through 11 U.S.C. § 544(b). The Auzas denied they received $497,313 more than they had loaned and generally denied all other material allegations of the complaint.
UDI filed a motion for summary judgment against the Auzas on February 8, 2005, re-alleging that the Auzas received $497,313 in excess of the complete return of principal invested. An account analysis and copies of other financial records attached as exhibits to the motion indicated that, by loaning UDI $1,225,000 and receiving back at least $1,722,313 between September 1997 and December 1998, Auza was negative cash-at-risk (" net winner") in the amount of $497,313 (" UDI Account Analysis"). See UDI's Statement of Facts in Support of UDI's Mot. for Summ. J., Ex. B, 52, Feb. 8, 2005.
In their response to the motion, the Auzas raised three main arguments. First, they asserted that inaccurate accounting analysis by the RT confused Joe Auza's records by including receipts and payments of his son, Joseph Auza, Jr., who had his same name, and who had also invested and received transfers from UDI. The Auzas corroborated their position by noting that a previous, undated account analysis provided by UDI showed separate accounts of " Joe Auza" and " Joseph Auza" (" Segregated Account Analysis"). The analysis listed total investments of " Joe Auza" from September 1997 to January 1998 of $1,125,000 and repayments of $1,143,125, a difference of only $18,125. A separate accounting on the Segregated Account Analysis identified total investments of " Joseph Auza" from September 1997 to November 1997 of $100,000 and four repayments totaling $149,188. The Auzas contended that the repayments to " Joseph Auza" refer to the son, not the father.
Joe Auza and his son have identical names in that they are both " Joseph Anthony Auza." To avoid confusion, it appears the parties have adopted the convention of referring to the appellant/father as Joe and his son (who was not sued) as Joseph. UDI's complaint against the Auzas did not name their son, Joseph Auza, Jr. as a party to the action.
Second, the Auzas contended that UDI did not present sufficient evidence to show that Auza had received all of the funds alleged in UDI's Account Analysis, specifically a $355,000 payment on December 31, 1998.
The Auzas also disputed a $600,000 payment allegedly made to the Auzas on January 5, 1998, as shown on UDI's Account Analysis. However, this dispute was subsequently resolved when UDI affirmatively established that Auza received the $600,000 payment on January 5, 1998, through his admission in his deposition that the payment was part of ending a contract between UDI and a person named Hoover.
Furthermore, the Auzas argued that UDI was a legitimate business that simply made poor business decisions and pursued fiscal strategies totally unrealistic in hindsight, and thus, UDI could not be a Ponzi scheme.
Several continuances of the matter ensued to allow time to conduct additional discovery on UDI's books and Auza's bank records, to depose Auza to resolve the newly asserted Joe/Joseph argument, and to permit the parties to file supplemental briefs on the remaining issues.
UDI refuted the Joe/Joseph argument through Auza's admissions during his deposition that all of the transfers originally shown on the UDI Account Analysis, regardless of whether they were deposited to " Joe Auza" or " Joseph Auza, " were made into one of two bank accounts held by Auza, the father. See UDI's Demonstrative Ex. used at Summ. J. Hr'g (Aug. 1, 2006) (" Joe Auza Investment Summary"). Even in regard to four checks payable to " Joseph Auza, " which the appellants had argued were paid to the son as shown on the Segregated Account Analysis they rely on, Auza admitted in his deposition that these were all transactions to himself and his signature is on the backs of these checks which were deposited into his bank account. The bank records and testimony established the amount in excess of principal that Auza received from UDI by showing that Auza received and deposited $1,622,313 into either of his two bank accounts (and not an account belonging to his son). Auza's investments totaling $1,225,000 meant he was a " net winner" by $397,313.
Auza's deposition established that he had at least two bank accounts (a Bank of America account and a Bank One account), in which payments from UDI were deposited.
The total of all repayments to Auza is actually $1,722,312.50. However, UDI noted that, because it did not have sufficient documentation to support the first entry on the Auza account analysis, which listed a $75,000 payment made on October 10, 1997 to an " unknown" payee in an " unknown" account, UDI did not seek to include the $75,000 payment as part of its negative cash-at-risk number for purposes of the motion for summary judgment. UDI also did not include $25,000 as part of its negative cash-at-risk number because of the lack of accurate records to show that $355,000 was deposited on December 31, 1998. Instead, UDI had evidence of $330,000 deposited into a Bank One Account on January 15, 1998, corroborated by Auza's Bank records. Thus, $1,722,312 - $75,000 - $25,000 = $1,622,312 in repayments to Auza.
In response to Auza's argument that $100,000 was invested by Auza's son, through Auza's admission in his deposition that the $100,000 for " Joseph's" investment came from Auza's bank account and that his son only received $100,000 back into the same account, UDI argued that (even accepting Auza's version of the Joe/Joseph story in which Auza only invested $1,125,000) Auza still received $1,522,313 in repayment from UDI. Thus, even after adjusting for the $100,000, he was still a $397,313 negative cash-at-risk net winner.
Furthermore, in response to Auza's contention that UDI did not present sufficient evidence to demonstrate that Auza received a $355,000 payment from UDI on December 31, 1998, UDI established Auza had received $330,000 on January 15, 1998, through bank records produced by the Auzas during discovery. For the reason that UDI was unable to establish what happened as to the remaining $25,000 of the $355,000 entry on UDI's account analysis, this amount was not sought in connection with UDI's summary judgment motion.
At the hearing on UDI's motion for summary judgment on August 1, 2006, UDI's counsel argued that the reason UDI's Account Analysis showed the $355,000 amount received on December 31, 1998, after UDI had ceased operations, was because the transaction was linked to an agreement with Auza to reduce his Form 1099 tax document interest amount. See UDI's Statement of Facts in Support of UDI's Mot. for Summ. J., Ex. B, 52, Feb. 8, 2005 (UDI Account Analysis showing the $250,000 principal adjustment). UDI's counsel also noted that Auza's deposit slip was corroborated by a corresponding accounting entry in UDI's books and records.
On September 26, 2006, the bankruptcy court entered its memorandum decision on UDI's motion for summary judgment, which avoided as fraudulent transfers the $397,313 the Auzas received in excess of their principal amount invested. Although the Auzas had argued that UDI was not a Ponzi scheme, the court reiterated its previous determination that UDI was both insolvent and a Ponzi scheme at all times material to this dispute. The court also concluded that UDI " properly supported its factual claims based upon both the business records of UDI, the admissions by the defendants regarding their transactions with UDI, and the relevant banking records (bank statements, checks and deposit records etc.)." Moreover, the court found that the Auzas' assertion that their son received certain transfers " as not supported by the record as the transfers were to the defendants [or] their bank accounts, and not to their son."
On October 5, 2006, the bankruptcy court entered its judgment in favor of UDI, and against the Auzas, for $397,313.
The Auzas timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction via 28 U.S.C. § 1334. We have jurisdiction under 28 U.S.C. § 158(a)(1).
ISSUES
(1) Whether the bankruptcy court erred in finding that the funds returned to Auza in excess of the amount loaned to UDI was a fraudulent conveyance under Arizona's UFTA because UDI was operating a Ponzi scheme.
(2) Whether the bankruptcy court erred in determining that Auza received $397,313 in " profit" or " interest, " from UDI that was voidable as an actually fraudulent transfer.
STANDARD OF REVIEW
We review summary judgment de novo to assess whether there is a genuine issue of material fact and whether the moving party is entitled to judgment as a matter of law. Khaligh v. Hadaegh (In re Khaligh), 338 B.R. 817, 823 (9th Cir. BAP 2006).
A summary judgment shall be rendered forthwith if the movant can show that there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c), incorporated by Fed.R.Bankr.P. 7056.
The mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) (emphasis in original). The movant seeking summary judgment bears the initial burden of establishing, in light of the pleadings, depositions, answers to interrogatories, admissions, and affidavits, the absence of a genuine issue of material fact. However, the ultimate burden of demonstrating the existence of a genuine issue of material fact lies with the non-moving party. Horphag Research Ltd. v. Garcia, 475 F.3d 1029, 1035 (9th Cir. 2007). When the movant has carried its burden under Rule 56(c), the non-moving party must come forward with " specific facts showing that there is a genuine issue for trial ." Id . (quoting Fed.R.Civ.P. 56(e) (emphasis added)); see also Hayes v. Palm Seedlings Partners (In re Agric. Research), 916 F.2d 528, 533 (9th Cir. 1990).
DISCUSSION
I
In conjunction with their argument that the funds returned to Auza in excess of his principal investment were not a fraudulent transfer under Arizona's UFTA, the Auzas contend that UDI was not conducting a Ponzi scheme in the first place. Since this matter is critical to the rest of the analysis, we discuss it first.
A
The Ninth Circuit describes a Ponzi scheme as:
an arrangement whereby an enterprise makes payments to investors from the proceeds of a later investment rather than from profits of the underlying business venture, as the investors expected. The fraud consists of transferring proceeds received from the new investors to previous investors, thereby giving other investors the impression that a legitimate profit making business opportunity exists, where in fact no such opportunity exists.
Hayes, 916 F.2d at 531; Wyle v. C.H. Rider & Family (In re United Energy Corp.), 944 F.2d 589, 590 n.1 (9th Cir. 1991); see also Cunningham, Tr. of Ponzi v. Brown, 265 U.S. 1, 13, 44 S.Ct. 424, 68 L.Ed. 873 (1924) (" when the fund with which the wrongdoer is dealing is wholly made up of the fruits of the frauds perpetrated against a myriad of victims, . . . [i]t is a case the circumstances of which call strongly for the principle that equality is equity.").
The Auzas contend UDI was not a Ponzi scheme because it was not insolvent from its inception. Rather, they say UDI claims it was a legitimate business that simply made poor business decisions. In addition, the Auzas contend that UDI did not provide sufficient evidence to prove UDI was conducting a Ponzi scheme because it did not present even one name of a later investor, who did not receive a return of his investment from UDI and who invested money at the time the Auzas were paid a portion of their loans.
UDI contends that the Auzas' argument that a Ponzi scheme must be insolvent from its inception misstates and oversimplifies the case law regarding Ponzi schemes. UDI cites a Colorado bankruptcy court decision which, notwithstanding its determination that the debtor's prior business affairs were legitimate, had granted summary judgment in favor of the trustee and avoided transfers to the investor-defendant under 11 U.S.C. § 548(a)(1) (actual intent) because the debtor was operating a Ponzi scheme (and insolvent) at the time of the transfers. See Jobin v. McKay (In re M& L Bus. Machs. Co.), 155 B.R. 531, 535 n.7 and 540 (Bankr. D. Colo. 1993). Thus, applying M& L Bus. Machines and Ninth Circuit case law, UDI argues that even though UDI initially had some legitimate business, it was, at all times relevant to the Auzas' case, operating as a Ponzi scheme by using money from later investors to pay earlier investors.
UDI further maintains that UDI was conducting a Ponzi scheme by referring to the evidence presented to the bankruptcy court indicating that UDI was insolvent from 1996 forward and that 90 percent of its losses between 1995 and 1997 arose from interest expense. UDI contends that the Auzas did not present any evidence to challenge UDI's facts, its assertions that UDI was conducting a Ponzi scheme, or that it was insolvent.
After noting that it had previously made this determination on multiple occasions, the bankruptcy court determined that UDI was both a Ponzi scheme and insolvent at all times material to this dispute. We agree. In seeking to avoid summary judgment, the nonmoving party must come forward with " specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). Simply challenging UDI by relying upon unsupported allegations does not create a genuine issue of material fact. Thus, the Auzas did not meet their burden of producing specific controverting evidence. The bankruptcy court did not err in finding that UDI was operating as a Ponzi scheme.
B
UDI seeks avoidance of the alleged fraudulent transfer of funds that the Auzas received in excess of the amount they loaned to UDI, pursuant to 11 U.S.C. § 544(b) which incorporates Arizona's UFTA, Ariz. Rev. Stat. § 44-1004.
In footnote 6 of appellee's brief, UDI notes that Auza inexplicably asserts that UDI also sought relief under 11 U.S.C. § 548; however, the one-count complaint plainly shows this is incorrect. UDI further explains:
" The trustee [or debtor-in-possession] may avoid any transfer of an interest of the debtor in property . . . that is voidable under applicable law by a creditor holding an unsecured claim. . . ." 11 U.S.C. § 544(b). The applicable law in this instance, Arizona's UFTA, provides that a transfer is fraudulent if the debtor made the transfer with the " actual intent to hinder, delay or defraud any creditor of the debtor." Ariz. Rev. Stat. § 44-1004(A)(1).
Alternatively, a transfer is constructively fraudulent if the debtor made the transfer without receiving a reasonably equivalent value in exchange for the transfer, and the debtor either: (a) was insolvent, or (b) intended to incur, or should have believed he would incur, debts beyond his ability to pay as they became due. Ariz. Rev. Stat. § 44-1004(A)(2). This case, however, is an actual fraudulent intent case and is not a constructive fraud case.
In evaluating a fraudulent transfer claim under Arizona law, a court can infer intent to defraud, hinder, or delay from the mere fact that the individual was running a Ponzi scheme, because no other reasonable inference is possible. Warfield v. Alaniz, 453 F.Supp.2d 1118, 1137 (D. Ariz. 2006) (Arizona's UFTA); Plotkin v. Pomona Valley Imports (In re Cohen), 199 B.R. 709, 717 (9th Cir. BAP 1996) (proof of a Ponzi scheme is sufficient to establish the operator's actual intent to hinder, delay, or defraud creditors for purposes of actually fraudulent transfers under both the Bankruptcy Code and UFTA); accord, Gredd v. Bear Stearns Sec. Corp. (In re Manhattan Inv. Fund Ltd.), 359 B.R. 510, 517-18 (Bankr. S.D.N.Y. 2007). Actual intent to defraud, hinder, or delay may be shown by direct proof or circumstantial evidence from which actual intent may be reasonably inferred. Id . at 1136; Gerow v. Covill, 192 Ariz. 9, 960 P.2d 55, 63 (Ariz. App.Div. 1998).
The Auzas have raised no genuine issue of material fact questioning the conclusion that UDI was engaged in a Ponzi scheme. Proof of a Ponzi scheme is sufficient to establish the Ponzi scheme operator's actual intent to hinder, delay or defraud its creditors with fraudulent transfers. See Cohen, 199 B.R. at 717. Thus, we agree with the bankruptcy court that any amount that Auza received in excess of his principal investment was a voidable transfer because UDI's operation of a Ponzi scheme established its actual intent to hinder, delay, or defraud its creditors.
C
Under Arizona's UFTA, a transfer is not voidable under Ariz. Rev. Stat. § 44-1004(A)(1) against a person who took in good faith and for a reasonably equivalent value. Ariz. Rev. Stat. § 44-1008(A). This is an affirmative defense.
The Auzas argue that UDI received " reasonably equivalent value" for its transfers, and thus, the funds received in excess of their principal investment are not voidable. However, this argument is inadequate because there is a missing link: the Auzas are unable to establish that the transactions were made in good faith. The interest rate of 25 percent per week is fatal to the existence of a genuine issue of material fact suggesting good faith.
In his deposition, Auza admitted he knew that interest rates of up to 25 percent per week were, in effect, too good to be true. He testified:
Q Was that a common rate, 25 percent per week or per two weeks?
A Yeah. The risk factor - they didn't have nothing to back it up.
Q So you knew that these were risky transactions?
A Right.
....
Q Would you say that 25 percent per week is higher than or lower than interest rates that you are ordinarily used to seeing?
A Higher.
(Auza Dep. 16:23-25, 17:1-3, 17:23-25, 18:1, July 26, 2005)
It has already been determined that the payments to Auza in excess of his principal invested were voidable as actually fraudulent transfers because UDI was conducting a Ponzi scheme. Because the Auzas' position that the transfer was for reasonably equivalent value is irrelevant to actually fraudulent transfers, their argument to that effect does not raise a genuine issue of material fact.
Furthermore, regardless of the Auzas' argument that there was reasonably equivalent value for the transfer, this issue is not material because of Auza's fatal inability to demonstrate the good faith that is essential to the affirmative defense. Thus, the bankruptcy court was correct in determining that the return to Auza in excess of his principal investment was avoidable as an actually fraudulent transfer.
In fact, other bankruptcy courts have concluded that a debtor in a Ponzi scheme does not receive reasonably equivalent value to the extent it pays amounts which exceed the creditor's original investment. See Noland v. Morefield (In re Nat'l Liquidators, Inc.), 232 B.R. 915, 919 (Bankr. S.D. Ohio 1998); In re Taubman, 160 B.R. 964, 985 (Bankr. S.D. Ohio 1993); see also United Energy, 944 F.2d at 595 n.6 (noting in dicta that amounts received by the investor in excess of the investments would be avoidable). The debtor receives less than a reasonably equivalent value because all that the debtor receives in return for the transfers is the use of the defendants' money to continue the Ponzi scheme. See Nat'l Liquidators, 232 B.R. at 919.
II
The Auzas next argue on appeal that the bankruptcy court erred in determining that Auza received $397,313 in " profit" or " interest, " in excess of the amount loaned to UDI. The Auzas raise two arguments. First, they contend that the checks UDI paid to " Joe" and " Joseph" are separate transactions to the father and son, even though all the funds were deposited into the father's account. Second, they dispute the $355,000 amount allegedly paid to Auza on December 31, 1998. We take each argument in turn.
A
Alleging that the four checks totaling $149,188 paid to " Joseph" meant the payments were to the son, the Auzas question how Joe and Joseph in essence became the same person by the bankruptcy court's apparent determination that it was immaterial that the son (not a party to the action) was a separate person merely because the son's $100,000 investment came from the same account as investments by the father and payments went back to the same account. The Auzas contend that, at the very least, a genuine, material issue of fact is raised as to whether Joe and Joseph made separate transactions and essentially became the same person on the UDI accounts.
Auza's counsel's accounting of the funds that he received from UDI is at direct odds with his own client's testimony. Through bank records and Auza's testimony, UDI established that the four checks Auza identified as paid to Joseph were all deposited into the father's (Joe's) bank account. Furthermore, Auza himself admitted at his deposition that the disputed checks paid to Joseph were transactions with himself and acknowledged his signature on the backs of the checks.
Regardless of whether the checks were paid to " Joseph" the father or son, because $100,000 was paid from and deposited back into the same account, it is essentially a wash.
Through the business records of UDI, the admissions by Auza regarding his transactions with UDI, and the relevant banking records, the bankruptcy court found that UDI had properly supported its factual claims. The bankruptcy court also found that the Auzas' assertion that their son received certain transfers was not supported by the record as the transfers were to the Auzas in their bank accounts, and not to their son. We believe the bankruptcy court was not in error. By not presenting controverting evidence or submitting any affidavits opposing summary judgment, the Auzas did not satisfy their burden of setting forth specific facts to establish a genuine, material issue of fact.
B
The Auzas next dispute the $355,000 payment shown on UDI's account analysis as received on December 31, 1998, because this was approximately one year after the transactions were completed. The Auzas argue that UDI's attorney employed " innovative devices" to support the claim by making inconsistent arguments. The Auzas contend that UDI's first proposition, that the $355,000 payment was evidenced by a $330,000 deposit into Auzas' Bank One account on January 15, 1998, is illogical because this transaction was made nearly a year earlier than the alleged $355,000 payment. The Auzas argue that UDI's next allegation, that the transaction may have been a cash transaction with no proof of actual payment to the Auzas, still does not explain why the entry was made months after all transactions had ceased. In response to UDI's explanation that the time discrepancy was due in part to an agreement with Auza to reduce his 1099 interest amount, Auza denied in his deposition that he ever received a 1099 from UDI.
UDI refutes the Auzas' arguments by contending that, even though the $355,000 amount was not adequately documented, other uncontradicted evidence proves that $330,000 was received by Auza, plus Auza never created an issue of fact by submitting an affidavit stating he had never received these funds.
For the reason that UDI was unable to establish what happened as to the remaining $25,000 of the $355,000 entry on the UDI Account Analysis, this amount was not sought in connection with UDI's summary judgment motion.
During discovery, the Auzas provided UDI with bank records which showed that Auza deposited $330,000 into his Bank One account on January 15, 1998, which was corroborated by a corresponding accounting entry in UDI's books and records. UDI contends that, during the entire year and a half before hearing on the summary judgment motion after UDI first included the $330,000 deposit slip in its original motion, the Auzas did not meet their burden to produce any evidence to contradict UDI's claim or supply an affidavit denying that Auza received the funds. UDI notes that even when the bankruptcy court twice specifically asked Auzas' counsel about affidavits, Auzas' counsel could not give a straight answer. During the hearing, Auzas' counsel stated he did not know where the $330,000 came from when the court directly asked him about the money.
UDI argues that the difference between the accounting entry of $355,000 and the actual deposit of only $330,000 was because it was not uncommon for UDI's transactions to be in cash. As UDI's counsel indicated to the bankruptcy court,
MR. STAPLETON: [What they have is] an accounting record. That's right, Your Honor. And - and - that's not, you know, it's not uncommon. There was, you know, fortunately or unfortunately, there was a lot of cash in this business. I mean, you know, the frank fact is, and if the Court is familiar with this from Hobbs, these were the people, you know, at the end of the day that were loaning money, that were getting 20 percent per week. These were the people who dealt in cash.
UDI's counsel referred to Hobbs, another adversary defendant receiving interest at rates of up to 25 percent per week that was sued by UDI, and one that had several large cash transactions. UDI points out that Auza knew of Hobbs' case in that his account is referred to in Auza's summary judgment response.
Summ. J. Hr'g Tr. 36:16-23 (Aug. 1, 2006).
UDI contends that Auza's deposit of $330,000 does not mean that Auza did not receive the $355,000 listed on UDI's records, but only meant that he deposited $330,000 of that money into his bank account. UDI claims Auza's deposit was likely in cash, which was common to many of UDI's later, very high interest, transactions, and a fact that the bankruptcy court was already familiar with from prior proceedings like Hobbs.
Furthermore, with respect to the time discrepancy between the dates, UDI points out that Auza's denial of ever receiving UDI's 1099 interest statement is misleading because Auza also admits that his accountant did all of his tax preparation. UDI maintains that the time discrepancy was due to an agreement with Auza to reduce his 1099 interest amount by referring to the UDI Account Analysis showing a $250,000 principal reduction on December 31, 1998. See UDI's Statement of Facts in Support of UDI's Mot. for Summ. J., Ex. B, 52, Feb. 8, 2005 (UDI Account Analysis showing the $250,000 principal adjustment). At the hearing, UDI's counsel explained that the 1099 showing a gain of $598,125 was not sent to Auza precisely because of UDI's agreement with Auza regarding the payment and the principal reduction.
A mere alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact. Anderson, 477 U.S. at 247 (emphasis in original). While the Auzas allege that there is some factual dispute with regards to the $355,000 payment to Auza shown on UDI's account analysis, UDI refutes their argument with evidence of a $330,000 deposit slip propounded by Auza himself (and corroborated by UDI's books and records), and explanations as to the time and amount discrepancies. Auza did not present contrary evidence and never submitted an affidavit denying receipt of the funds during the entire year and a half before the summary judgment hearing occurred. With nothing more, Auza is left to rely on his counsel's uncorroborated assertion during the hearing that he did not know where the money came from. This is simply not enough to defeat UDI's motion for summary judgment. At most, the Auzas may have raised some conflict in the evidence. However, these alleged inconsistencies are insufficient to create a genuine issue of material fact.
Thus, we agree with the bankruptcy court that there are no questions of material fact that Auza received $1,622,313 into his bank account. After subtracting the $1,225,000 the Auzas initially invested, the bankruptcy court correctly determined that Auza received $397,313 in excess of the principal amount loaned to UDI.
CONCLUSION
The bankruptcy court did not err in granting UDI's motion for summary judgment seeking avoidance of fraudulent transfers to Auza in the amount of $397,313, pursuant to Ariz. Rev. Stat. § 44-1004 as applied through 11 U.S.C. § 544.
UDI was engaged in a Ponzi scheme which allowed earlier investors to gain false profits or interest above their principal investment through money from later investors. Proof of a Ponzi scheme is sufficient to establish UDI's actual intent to defraud its creditors with fraudulent transfers. The Auzas did not establish the good faith that is essential to the affirmative defense they attempted to raise when they argued the return of reasonably equivalent value. Thus, the bankruptcy court was correct in determining that the funds returned to Auza in excess of the amount loaned to UDI were actually fraudulent transfers because UDI was operating a Ponzi scheme.
Furthermore, the bankruptcy court was correct in its determination that Auza received $397,313 in excess of the principal amount loaned to UDI. Based upon UDI's business records, Auza's admissions, and Auza's relevant banking records, UDI properly supported its factual claims and no genuine issue of material fact has been raised to the contrary.
We agree with the bankruptcy court's conclusions that there are no questions of material fact, and UDI is entitled to judgment as a matter of law. AFFIRMED.
Q And you agreed to loan [UDI] money, and you took an interest rate of approximately 25 percent per week for those loans. Is that correct? A Most of them, yeah.
(Auza Dep. 34:20-23, July 26, 2005)
With regard to the statute of limitations, an argument that Auza did not raise in the Bankruptcy Court, A.R.S. § 44-1009(1) specifically provides a four year limitation period for bringing avoidance actions under Arizona's fraudulent transfer statute. All of the transactions complained of occurred after September 15, 1997, within four years of the September 7, 2001 complaint.
(Appellee's Br. 19 n.6)