In Re Foster

275 F.3d 924 (10th Cir. 2001)

Purchase the Printed Copy at bsmsphd.com

Nature of the Case

To access this section all you need to do is click here and register.

Facts

The Debtor, Foster, operated several 'Ponzi' investment schemes whereby returns to investors were paid not from profits derived from an underlying business venture, but with funds received from new investors. The business venture in which investors believed they were investing did not exist. Foster commingled in general bank accounts the funds from his fraudulent activities. On August 15, 1996, several investors filed an involuntary petition against Foster under Chapter 7 of the Bankruptcy Code in the District of Colorado. Between the filing of the petition and the entry of the order for relief, Foster initiated a series of transfers to D, a former investor in the schemes. P sought to avoid these transfers pursuant to § 549 of the Bankruptcy Code. There is no dispute that the transfers occurred without court approval and after commencement of the case. D argued that the funds were subject to a constructive trust and thus not property of the estate. The bankruptcy court agreed and dismissed P's complaint. The district court affirmed the bankruptcy court order. The court used the lowest intermediate balance rule, which permits a claimant to trace trust funds deposited into a general account. Under this rule, any funds removed from the account are presumed to be the debtor's personal funds to the extent these funds exceed the beneficiary's equitable interest. Although new deposits are not subject to the equitable claim of the trust beneficiary, subsequent withdrawals are presumed to draw first upon the new funds. Applying the rule, the constructive trust beneficiary may retrieve the lowest balance recorded after the funds were commingled. P contends that the bankruptcy court should not have applied an equitable tracing fiction to elevate the claim of one defrauded creditor over the claims of other similarly situated creditors. The matter was before the bankruptcy court on cross-motions for summary judgment.