Curtis, et al. v. Perkins (In re International Management Associates, LLC)

Citation:
Curtis v. Perkins (In re International Management Associates, LLC), No. 14-13423 (11th Cir. Mar. 19, 2015)
Tag(s):
Ruling:
The Eleventh Circuit affirmed the Georgia District Court’s affirmance of the Bankruptcy Court’s admission of critical business summaries and its Ponzi scheme finding. With respect to the evidentiary issues, the Court clarified that the summaries were admissible under F.R.E. 1006 as long as the underlying records were made available for inspection and were otherwise admissible themselves. The Court then assumed, for the sake of argument, that the Bankruptcy Court erred in admitting the summaries under F.R.E. 1006 based on the residual hearsay exception of F.R.E. 807. However, it still had to disregard the error if it didn’t have a substantial prejudicial effect. It held that there was no such effect, as the summaries could come in under the business records exception instead. The Court held that the trustee satisfied his slight burden on authenticity when he testified that he located the documents at IMA’s turned-over offices and the documents matched related third party documents. The Court held that the trustee also satisfied F.R.E. 803(6)’s record requirements: (i) made at or near the time by someone with knowledge; (ii) kept in the ordinary course; and (iii) made as a regular practice. Specifically, the trustee was the custodian; he investigated the documents’ reliability and trustworthiness; and he learned that they were regularly kept in the ordinary course. [Note: The Court overruled Defendants’ objection that the trustee’s testimony regarding the 803(6) requirements was, itself, based on hearsay, for 2 reasons: (i) the Court can rely on unprivileged hearsay when resolving preliminary questions of fact regarding admissibility and (ii) the business records exception only requires that the witness be knowledgeable about the document creation procedures, not that the witness have firsthand knowledge of contents, authors, or preparation.] Therefore, the trustee satisfied the business records exception and, thus, the Bankruptcy Court did not abuse its discretion in admitting the summaries (even if the original basis—the residual hearsay exception—might not have been applicable). With respect to the Ponzi scheme finding, the Court first reminds us that the key feature of a Ponzi scheme is that entities perpetuating the scheme usually conduct little to no legitimate business. The Court affirmed the Ponzi finding because, under the clear error standard, it was not enough for Defendants to submit that the Bankruptcy Court could have found a legitimate business. Rather, they had to establish that the Bankruptcy Court could not have reasonably made the determination. They didn’t establish that and the Court affirmed the determination.
Procedural context:
The Chapter 11 trustee for International Management Associates, LLC (“IMA”) filed a series of Ponzi-related avoidance actions against certain of IMA’s investors (“Defendants”), including an action to avoid a $200,000 transfer made to Defendants shortly before the bankruptcy. Relying on certain business records and stipulated facts, the Bankruptcy Court ruled that IMA was a Ponzi scheme. With that ruling, the trustee avoided the $200,000 transfer. Defendants appealed the evidentiary findings and the Ponzi scheme finding. The District Court affirmed. Defendants appealed to the Eleventh Circuit. The recited standard of review is worth noting: (i) Circuit reviews of District Court reviews of Bankruptcy Court decisions are made independently of the District Court; (ii) evidentiary rulings are reviewed for an abuse of discretion (with such abuses reviewed for their substantial prejudicial effect, if any); and (iii) an appellee may seek to affirm on any basis that’s supported by the record.
Facts:
Kirk Wright ran an entity called International Management Associates, LLC (“IMA”). He claimed that it was a hedge fund, but it looked like a Ponzi scheme. Certain investors in IMA (the “Defendants”) had invested $500,000 and received back $621,000, including $200,000 that provided the basis for a subsequent (the subject) avoidance action. A Georgia state court appointed William Perkins as IMA’s receiver. Perkins did what a receiver usually does: he locked down the business, locked-out Wright and other principals, and investigated the business internally and externally with the help of the FBI and the SEC. Based on his investigation, Perkins put IMA in a Chapter 11 and became IMA’s Chapter 11 trustee. As trustee, he filed various Ponzi-based avoidance actions, including an action against Defendants on the $200,000. At trial, the parties stipulated that the above investments, returns, and transfers occurred. The issue at trial was whether IMA was, in fact, a Ponzi scheme. The trustee sought to introduce summaries of the business records establishing the Ponzi scheme. Evidentiary issues arose.
Judge(s):
Carnes; Hull; and Rosenbaum

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