Burkart v. Varma
12-02460
Bankr. E.D. Cal.Nov 4, 2013Background
- Chapter 7 trustee Michael Burkart sued Ashni Varma and Shiu Varma seeking recovery of ~ $63,664 as fraudulent transfers received from debtor Vincent Singh, who operated a Ponzi scheme.
- Summons and complaint were properly served; defendants did not answer and the clerk entered default.
- Trustee alleged two or more transfers totaling $63,664 (trial evidence showed $63,659) made within two years of the petition and constituting actual fraudulent transfers under 11 U.S.C. § 548(a)(1)(A).
- Trustee also sought recovery from defendants under 11 U.S.C. § 550 as initial transferees/beneficiaries of avoidable transfers.
- Bankruptcy court found it lacked constitutional authority to enter a final judgment on fraudulent-transfer claims against non-creditors (per Exec. Benefits/Arkison) because defendants had not waived Article III adjudication; thus the court submitted findings and a recommendation to the district court.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether default judgment is appropriate after defendants failed to answer | Default should be entered because clerk entered default and Eitel factors favor trustee: prejudice, merits, sufficiency, limited dispute, no excusable neglect | No response; no defenses asserted | Court found Eitel factors satisfied and recommended default judgment be entered by the district court on liability and damages (subject to Article III limitation) |
| Whether transfers are avoidable as actual fraudulent transfers under § 548(a)(1)(A) | Transfers to defendants were payments from a Ponzi scheme; existence of a Ponzi scheme establishes actual intent to defraud | No response; possible § 548(c) good-faith/new-value defense not pled | Court held well-pleaded facts establish actual intent via Ponzi-scheme inference; claim is meritorious |
| Whether trustee can recover the transferred amounts from defendants under § 550 | Trustee may recover from initial transferees or beneficiaries of an avoided transfer | No response | Court held trustee’s § 550 claim is meritorious and relief is appropriate |
| Whether bankruptcy court may enter final judgment on fraudulent-transfer claims against these non-creditor defendants | Trustee sought entry of default judgment in bankruptcy court | Defendants did not consent to Article III adjudication; they are non-creditors and not sufficiently active in the bankruptcy to be deemed to have waived Article III rights | Court concluded it lacks constitutional authority to enter final judgment and therefore submitted proposed findings and recommended entry of judgment by the district court |
Key Cases Cited
- Exec. Benefits Ins. Agency v. Arkison, 702 F.3d 553 (9th Cir. 2012) (bankruptcy courts may hear fraudulent-transfer core matters but may lack constitutional authority to enter final judgment against nonconsenting non-creditors)
- AFI Holding, Inc. v. Mackenzie, 525 F.3d 700 (9th Cir. 2008) (existence of a Ponzi scheme is sufficient to establish actual intent under § 548(a)(1))
- Eitel v. McCool, 782 F.2d 1470 (9th Cir. 1986) (factors for deciding whether to enter default judgment)
- Geddes v. United Fin. Group, 559 F.2d 557 (9th Cir. 1977) (no hearing on damages required where amount is liquidated or can be computed from record)