Miami Police Relief & Pension Fund v. Tabas (In Re Florida Fund of Coral Gables, Ltd.)

[DO NOT PUBLISH]

IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

________________________

FILED

U.S. COURT OF APPEALS

ELEVENTH CIRCUIT

No. 05-11521

August 15, 2005

Non-Argument Calendar

THOMAS K. KAHN

________________________ CLERK

D. C. Docket Nos. 03-21609-CV-UUB

BKCY No. 99-40395

In Re: THE FLORIDA FUND OF CORAL GABLES, LTD.,

Debtor.

____________________________________________________

MIAMI POLICE RELIEF & PENSION FUND,

Plaintiff-Appellant,

versus

JOEL L. TABAS, as Trustee of the Bankruptcy Estate

of the Florida Fund of Coral Gables, Ltd, a.k.a.

The Florida Fund,

Defendant-Appellee.

________________________

Appeal from the United States District Court

for the Southern District of Florida

_________________________

(August 15, 2005)

Before TJOFLAT, DUBINA and PRYOR, Circuit Judges.

PER CURIAM:

The Miami Police Relief and Pension Fund (Police Fund) appeals the

decision of the district court that affirmed a judgment entered in favor of the

Trustee and against the Police Fund in an adversary proceeding in bankruptcy. The

Trustee sued the Police Fund to avoid several preferential transfers from the

debtor, the Florida Fund of Coral Gables, Ltd. (Florida Fund), a now-defunct Ponzi

scheme operated by a longtime associate of the Police Fund. Because the Police

Fund was not entitled to sovereign immunity, an insider relationship existed

between the Police Fund and the debtor, and the Police Fund was the proper

defendant in this adversary action, we affirm.

I. BACKGROUND

The Police Fund is a pension plan that is intended to benefit the police

officers of the City of Miami. The Police Fund was established under both state

law and local ordinance, and it is governed by a board of directors. During the

relevant period, Donald Warshaw served as Chief of Police, and in various

leadership roles in both city government and the board of the Police Fund.

Ronald Stern was the proprietor of the Florida Fund and a longtime associate

of the Police Fund and its directors. Stern and his accounting firm were employed

as the accountants for the Police Fund. Stern also served as an investment advisor

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to the Police Fund. Stern had personal relationships with several directors of the

Police Fund, and he served as the personal accountant to some of them.

Stern also had a personal and business relationship with the administrator of

the Police Fund, Ruth Miller. Stern and Miller had a personal friendship for three

decades. Miller was employed simultaneously by Stern and the Police Fund, and

although Stern paid the full salary for Miller, Stern was then reimbursed by the

Police Fund for its share. Miller’s office was located in the same office space that

housed both Stern’s personal office and that of the Florida Fund. Transactions

between Stern and the Police Fund were regularly handled inside those offices,

because Stern and Miller worked in such close proximity.

The Florida Fund was a limited partnership and Ponzi scheme operated by

Stern. The Florida Fund undertook no legitimate business or investment activity,

but continually bilked the Police Fund and others. Between January 1996 and May

1998, Stern and the Florida Fund defrauded the Police Fund of more than $1.3

million.

In November 1998, the Police Fund commissioned an investigation by

outside accountants that uncovered the fraud Stern had committed against the

Police Fund. In December 1998, the Florida Fund began to reimburse the Police

Fund for some of its losses. Between December 1998 and March 1999, the Florida

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Fund paid $771,757.19 to the Police Fund in a series of seven payments. Warshaw

testified that he considered Stern “a member of the Police family,” but Stern had

become the black sheep of that family by February 1999, when Warshaw

“squeez[ed]” Stern and told Stern that he was “messing with the Police.” In May

1999, the Police Fund sued the Florida Fund in state court to recover its remaining

losses, and the Police Fund filed a claim against the estate of Stern in a Florida

probate court.

In October 1999, an involuntary petition for bankruptcy relief was filed

against the Florida Fund. On December 8, 2000, the Police Fund filed a proof of

claim in the bankruptcy of the Florida Fund. Joel Tabas was appointed Trustee of

the Florida Fund, and he filed this adversary proceeding against the Police Fund to

avoid the seven transfers from the Florida Fund to the Police Fund between

December 1998 and March 1999.

The bankruptcy court awarded the Trustee $771,757.19 based on the

conclusion that the transfers from the Florida Fund to the Police Fund were

avoidable preferences, under section 547(b) of Chapter 11. The Police Fund

appealed to the district court, which affirmed the judgment of the bankruptcy court.

The Police Fund then filed this appeal.

II. STANDARD OF REVIEW

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“As the ‘second court of review of a bankruptcy court’s judgment,’ this

Court examines independently the factual and legal determinations of the

bankruptcy court and employs the same standards of review as the district court.”

In re Issac Leaseco, Inc., 389 F.3d 1205, 1209 (11th Cir. 2004) (quoting In re Club

Assocs., 951 F.2d 1223, 1228 (11th Cir. 1992)). “Factual findings by the

bankruptcy court are reviewed under the limited and deferential clearly erroneous

standard. . . . In contrast, legal conclusions by the bankruptcy court and the

district court are reviewed by this court de novo.” In re Club Assocs., 951 F.2d at

1228.

The standard of review for whether a party is an insider, within the meaning

of the relevant portions of the Bankruptcy Code “has been the subject of some

debate.” In re Krehl, 86 F.3d 737, 742 (7th Cir. 1996). We agree with the Seventh

and Fifth Circuits that “[t]he question under section 101(31) is whether the

historical facts found by the bankruptcy court meet the [Bankruptcy] Code’s

open-ended definition of an insider. We think that question is properly

characterized as a mixed question of law and fact.” Id.; see also In re Holloway,

955 F.2d 1008, 1014 (5th Cir. 1992).

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III. DISCUSSION

The Police Fund makes three arguments on appeal. First, it contends that the

Trustee could not sue the Police Fund in an adversary proceeding in federal

bankruptcy court based on the sovereign immunity of the Police Fund. Second, the

Police Fund argues that the bankruptcy court erred when it concluded that the

Police Fund was an insider of the Florida Fund. Third, the Police Fund argues that

its members, rather than the directors or the Police Fund itself, were the proper

defendants in the adversary action. We address each of these arguments in turn.

A. The Police Fund Does Not Have Sovereign Immunity

Under the Tenth Amendment and State Law.

Florida law purports to make immune from divestment by judicial decree the

money contributed to the Police Fund:

For any municipality, chapter plan, local law municipality, or local

law plan under this chapter, the pensions, annuities, or any other

benefits accrued or accruing to any person under any municipality,

chapter plan, local law municipality, or local law plan under the

provisions of this chapter and the accumulated contributions and the

cash securities in the funds created under this chapter are exempted

from any state, county, or municipal tax of the state and shall not be

subject to execution or attachment or to any legal process whatsoever

and shall be unassignable.

Fla. Stat. § 185.25. The Florida Supreme Court has held that the money

contributed to the Police Fund cannot be reached in an equity suit, under state law,

by a private party who sues to recover the police officer’s pension in state court.

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Baron v. Bailey, 275 So. 2d 519, 520 (Fla. 1973). The Police Fund argues that this

grant of immunity is “reserved to” the State of Florida by the Tenth Amendment to

the United States Constitution. U.S. Const. Amend. X. The Police Fund concedes

that it is not entitled to sovereign immunity under the Eleventh Amendment.

The argument of the Police Fund runs squarely against the operative section

of the Bankruptcy Code that provides for a waiver of sovereign immunity when the

sovereign files a proof of claim: “A governmental unit that has filed a proof of

claim in the case is deemed to have waived sovereign immunity with respect to a

claim against such governmental unit that is property of the estate and that arose

out of the same transaction or occurrence out of which the claim of such

governmental unit arose.” 11 U.S.C. § 106(b). The Police filed a proof of claim in

the bankruptcy of the Florida Fund. That proof of claim “arose out of the same

transaction or occurrence” as the complaint that the Trustee filed against the Police

Fund. We conclude, therefore, that the Police Fund waived any alleged right to

invoke sovereign immunity.

B. The Police Fund was an Insider of the Florida Fund.

We now turn to the argument of the Police Fund that the bankruptcy court

erred when it concluded that the Police Fund was an insider of the Florida Fund.

“[I]f the debtor is a partnership,” an “‘insider’ includes” the following entities: “(i)

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general partner in the debtor; (ii) relative of a general partner in, general partner of,

or person in control of the debtor; (iii) partnership in which the debtor is a general

partner; (iv) general partner of the debtor; or (v) person in control of the debtor.”

11 U.S.C. § 101(31)(C). “By virtue of the nonlimiting term ‘includes,’ the”

definition of “insider” in section 101(31) “is intended to be illustrative rather than

exhaustive.” In re Krehl, 86 F.3d at 741; see also 11 U.S.C. § 102(3) (“‘includes’

and ‘including’ are not limiting”). “An ‘insider’ generally is an entity whose close

relationship with the debtor subjects any transaction made between the debtor and

such entity to heavy scrutiny.” 2 Lawrence P. King, et al. Collier on Bankruptcy ¶

101.31 at 101-99 (Revised 15th ed. 1996). As the Fifth Circuit concluded, “The

cases which have considered whether insider status exists generally have focused

on two factors in making that determination: (1) the closeness of the relationship

between the transferee and the debtor; and (2) whether the transactions between the

transferee and the debtor were conducted at arm’s length.” In re Holloway, 955

F.2d at 1011.

Both the district court and the bankruptcy court correctly found that the

Police Fund was an insider of the Florida Fund. First, no one can seriously dispute

the closeness of the relationships between Stern, the principal of the Florida Fund,

and the Police Fund and its directors. Second, neither the district court nor the

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bankruptcy court clearly erred in finding that the transactions between the Florida

Fund and the Police Fund were not at arm’s length. Third, the record shows that

the Police Fund discovered the fraud of the Florida Fund before any other creditor,

and based on its longstanding relationship with Stern, the Police Fund was able to

obtain the preferential transfers the Trustee sought to avoid.

C. The Police Fund Is the Proper Defendant.

The final argument of the Police Fund is that the Trustee erroneously sued

the Police Fund as an entity and the chairman and secretary of the board of the

Police Fund in their capacities as officers of the Police Fund. The Police Fund

asserts that the proper defendants are the individual police officers of the City of

Miami who are beneficiaries of the Police Fund. This argument is absurd. The

Police Fund has offered no authority to support its assertion that the Police Fund

cannot pay a judgment entered against it in an adversary proceeding. The Police

Fund filed, in its own name, a proof of claim in the bankruptcy of the Florida Fund,

and we reject the proposition that the Police Fund may sue, but not be sued, in its

own name.

IV. CONCLUSION

The judgment of the district court is

AFFIRMED.

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