UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF FLORIDA
BROWARD DIVISION
| IN RE:
FINANCIAL FEDERATED TITLE & TRUST, INC. a/ka ASSET SECURITY CORP. a/k/a VIATICAL ASSET RECOVERY CORP., a/k/a QUAD-B-LTD., Debtor. |
CASE NO. 99-26616-BKC-RBR
|
|
IN RE:
AMERICAN BENEFIT SERVICES, INC. Debtor. |
Case No. 99-26543-BKC-RBR
|
ORDER GRANTING SUBSTANTIVE CONSOLIDATION OF DEBTOR,
WITH AMERICAN BENEFITS SERVICES, INC.
THIS CAUSE came before the Court on April 25, 2000 at 1:30 p.m. in Fort Lauderdale, Florida on the Trustee's Motion For Substantive Consolidation of Debtor With American Benefits Services, Inc., filed by John W. Kozyak, Chapter 11 Trustee for Financial Federated Title & Trust, Inc. ("FinFed"). By way of his Motion, the Trustee seeks the entry of an Order substantively consolidating the FinFed estate with the estate of American Benefits Services, Inc. ("ABS"), Case No. 99-26543-BKC-RBR (United States Bankruptcy Court, Southern District of Florida). The Court having heard argument of counsel, having reviewed the file, and being fully advised in the premises, makes the following findings of fact and conclusions of law:
I.
FINDINGS OF FACT
The Trustee submitted and the Court admitted into evidence without opposition or objection Trustee's Exhibit Numbers 1-13, including the deposition of Reginald Darbonne taken February 21, 2000 by Trustee's counsel. The Trustee also proffered the testimony of John Standart who acted as an in-house accountant for the Debtor, Robert Katz, an investor, and the Trustee who were present in Court. The proferred testimony was accepted without objection and no one sought to examine the witnesses.
The only papers received by the Court in opposition to the motion were allegedly filed on behalf of American Benefits Services, Inc. ("ABS").
It is argued in the ABS memorandum that the characterization of ABS as a participant in a Ponzi scheme is based only on comments of Trustee's counsel and not evidence. ABS Memorandum, paragraph 1. The Trustee's Exhibit No. 1, titled Participation Disclosure, was described by the witnesses in the proffer as the basic document utilized by ABS to solicit all of the investors who are currently creditors of both ABS and FinFed. It contains at the back certain tear-out forms, including, on page 17, a Participation Agreement that is a contract between the investor and ABS. The contract expressly incorporates by reference pages 10 and 11 of the Participation Disclosure. The first statement in the description of the participation section states that the funds invested by the participant are to be deposited with a financial escrow agent. That agent is identified in the Disbursement Letter of Instruction as a licensed attorney named Jeffrey Paine. Trustee's Exhibit No. 4 is a letter from Jeffrey Paine to the investors which appears to have been written on behalf of ABS. The first sentence states that "...the purpose of this letter is to respond to misinformation that has been disseminated regarding American Benefit Services and Financial Federated Title & Trust." Paragraph 4 of Exhibit No. 4 specifically states that investors can be offered the so-called "5% guaranteed return option," only because ABS has the ability to pay them with other investors' funds (emphasis supplied).
The ABS memorandum also argues that there was no partnership of any sort between FinFed and ABS and no "affiliation" of interests as defined in Section 101 of the Bankruptcy Code. The Participation Disclosure describes on page 5 the relationship between what are labeled by ABS as its "strategic partners". The so-called "Financial Escrow Agent" is later identified as Jeffrey Paine, and the other strategic partner is identified as the VIB Trust Company on page 7 and 19.
John Standart is a licensed Florida CPA employed by Asset Security Corporation ("ASC"), an alter ego of FinFed. Standart testified during his 2004 examination, excerpts of which were admitted into evidence as Trustee's Exhibit No. 12, that Ray Levy, president of ABS, and Fred Brandau, the principal of FinFed, split the amounts of the gross investment dollars received through the investment scheme (depo.pg.33); that Levy was introduced to him as the person who sells the policy and finds the investors (depo.pg.46); and that it was his understanding that Levy and Brandau were basically partners with each receiving an 18% split.
Q. And then he and Ray are pretty much equals in terms of their economic interests?
A. Yeah, they split the money and they had different responsibilities of paying people. Fred was the administrative side. Ray's was the sales side was the function.
Depo. at pg.33.
Trustee's Exhibit No. 2, a form letter on the letterhead of ABS and signed by Ray Levy's daughter, Ronalee Levy, welcomes all new participants to "our program". Trustee's Exhibit No. 6 is an example of how ABS handled essentially 100% of the interface between the investors and FinFed.
Trustee's Exhibit No. 8 is the evolution through documents filed with the Secretary of State of ABS's predecessor in interest, Asset Base Management, Inc. ("ABM"). ABM commenced its corporate existence under the name of Viatical Asset Management, Inc. ("VAM"), with Frederick Brandau as the president, secretary, treasurer and sole director. On December 31, 1997, VAM which by then had changed its name to ABM, amended its Articles, removing Frederick Brandau as an officer and a director and installing Ray Levy as the sole officer and director. ABM was thus the predecessor in interest to ABS, utilizing the same logo as its successor ABS (Trustee's Exhibit No. 6).
Although Ray Levy did not appear as a witness, the Trustee did move into evidence as Trustee's Exhibit No. 9 excerpts from a 2004 examination taken by the Trustee of Ray Levy on April 12, 2000. Originally, Levy invoked his Fifth Amendment right against self incrimination in response to almost all questions that were propounded to him at an examination taken over a two-day period at the end of 1999. However, On April 12, 2000, Levy testified that ABS's sole source of funds until FinFed went out of business sometime in 1999 was FinFed. (depo.pg.31). Levy further testified that ABS received approximately $13,436,000.00 from FinFed in commissions, substantiating the proffered testimony of both the Trustee and John Standart that ABS was paid in direct proportion to its financial success.
In addition to the $13,436,000.00 paid to ABS, Trustee's Exhibit No. 11 reflected disbursements made to other constituents of the Levy group including U.S. Benefits Trust; Levy Insurance; Asset Base Management; First R&R Trust; and, Ray Levy individually of almost $24,000,000.00.
No evidence was offered in opposition to the Motion for Substantive Consolidation with Debtor American Benefits Services, Inc., and no one appeared objecting to substantive consolidation, although thousands of investors and other parties in interest received notice of the hearing.
II.
CONCLUSIONS OF LAW
The controlling authority in this circuit on substantive consolidation are the cases of Eastgroup Properties, 935 F2 245(11th Cir.1991), and In Re: Reider, 31 F3 1102(11th Cir. 1994). Eastgroup Properties and Reider hold that a party moving for substantive consolidation must show two elements: (1) substantial identity between the two estates to be consolidated ; and, (2) that consolidation is necessary to avoid some harm or realize some benefit.
"The purpose of substantive consolidation is 'to insure the equitable treatment of all creditors.'" Eastgroup Properties, 935 F.2d at 248.
The Trustee has made a prima facie case for substantive consolidation based on the evidence that he has offered in this case.
A. SUBSTANTIAL IDENTITY
The only evidence presented to the Court is that ABS and FinFed were substantially the same entity. ABS conducted the marketing and sales side of the business and handled all of the investor interface. FinFed remained in the background, allegedly carrying on the administrative functions and providing the sourcing for the policies. The Court takes judicial notice of the fact that the Petitioning Creditors filed an involuntary petition against ABS first because ABS was known to them.
B. AVOIDANCE OF HARM AND REALIZATION OF BENEFIT
As the Court in Eastgroup Properties stated, the second prong of a prima facie case to be made by the movant for substantive consolidation is a showing that consolidation is necessary to avoid some harm or to realize some benefit.
One of the obvious benefits in this case that is readily apparent to the Court is the ease, cost and efficiency of administration that is achieved with a single estate. This would seem to be especially appropriate in this case, because every single creditor of FinFed appears to be a creditor of ABS. The Trustee proffered testimony establishing this fact and there is nothing in the record, not even in the ABS written objection, that would counter this finding.
The Trustee also pointed out a more fundamental benefit of substantive consolidation than mere cost saving or efficiency of administration. Substantive consolidation would also ensure the equitable treatment of all creditors. Based on the Schedules that have been filed, it appears at this time that ABS has a greater ratio of assets to debt. Accordingly, the goal of consolidation is not that FinFed creditors should be permitted to share in the assets of ABS, but rather that the creditors of FinFed and ABS should be treated equally. This principle, the equality of treatment, is what will ensure that the underlying purpose of substantive consolidation in this case will be fulfilled and that all creditors will receive equitable treatment.
Because the Trustee has presented a prima facie case in favor of substantive consolidation, the burden of persuasion and going forward with the evidence shifts to the creditor objecting to substantive consolidation. The objecting creditor must show that it has relied on the separate credit of one of the entities to be consolidated and that it will be prejudiced by substantive consolidation. Eastgroup Properties, 935 F.2d at 249; Reider, 31 F2 at 708.
1. The Standing Order
As noted above, an objection to substantive consolidation was purportedly filed on behalf of ABS. The ABS objection states that it is being filed by "...its attorney in the adversary action within the Financial Federated Title and Trust Company bankruptcy....". East Brook Properties and Reider both contemplate that an objection to substantive consolidation will be made by a creditor. The Trustee has sent out various status reports to all investors. The Motion for Substantive Consolidation of Debtor with American Benefits Services, Inc., was noticed to all parties in interest in both FinFed and ABS, as well as a third group of investors who may make some claim to some policies held by ABS. No creditor or investor opposed the consolidation.
2. Lack of Any Evidence
The record before this court is devoid of any evidence to support the position of ABS in opposition to substantive consolidation.
III.
CONCLUSION
Based upon the Findings of Fact and Conclusions of Law as set forth above, the Trustee's Motion For Substantive Consolidation of Debtor With American Benefits Services, Inc. is GRANTED.
The bankruptcy estates of American Benefits Services, Inc. and Financial Federated Title & Trust, Inc. are substantively consolidated into the Financial Federated Title & Trust, Inc. estate. Although pursuant to Local Rule 9004-1(F) the bankruptcy estates would normally be substantively consolidated into American Benefits Service, Inc. (the lower case number), because of the administrative problems that would arise if the ABS bankruptcy number were utilized, the Court Orders that the case be substantively consolidated into the Financial Federated Title & Trust, Inc. bankruptcy estate pursuant to the requirements of Local Rule 9004-1(F), all court papers filed hereafter shall be styled with Financial Federated Title & Trust, Inc. Case Number 99-26616-BKC-RBR
DONE AND ORDERED in the Southern District of Florida on May 17, 2000.
Copies furnished to:
Attorney Rice is directed to serve a conformed copy of this Order upon all interested parties not listed above.