Johnson v. Neilson , 525 F.3d 805 ( 2008 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
In re: REED E. SLATKIN, 
Debtor.
GLENN JOHNSON; BARBARA No. 06-56334
JOHNSON; SANTA BARBARA CAPITAL
D.C. No.
MANAGEMENT, a limited liability
company,  CV-06-00512-
RSWL
Appellants,
OPINION
v.
R. TODD NEILSON, Trustee of the
Estate of Reed Slatkin,
Appellee.

Appeal from the United States District Court
for the Central District of California
Ronald S.W. Lew, District Judge, Presiding
Argued and Submitted
April 11, 2008—Pasadena, California
Filed May 6, 2008
Before: Robert R. Beezer, Thomas G. Nelson, and
Barry G. Silverman, Circuit Judges.
Opinion by Judge Thomas G. Nelson
4965
IN RE: SLATKIN 4969
COUNSEL
Richard M. Moneymaker, Los Angeles, California, for the
appellants.
John P. Reitman and Peter J. Mastan, Gumport Reitman, Los
Angeles, California, for the appellee.
OPINION
T.G. NELSON, Circuit Judge:
The bankruptcy court granted summary judgment in favor
of the Trustee of the bankruptcy estate of Reed E. Slatkin,
avoiding under 11 U.S.C. § 548(a) and California Civil Code
§ 3439.04(a) certain transfers made by Slatkin during his
operation of a Ponzi scheme.1 The district court affirmed the
grant of summary judgment. We have jurisdiction over this
appeal under 28 U.S.C. § 1291, and we affirm.
FACTS AND PROCEDURAL HISTORY
In May 2001, Slatkin filed for Chapter 11 bankruptcy pro-
tection. Shortly thereafter, he was charged in a federal crimi-
nal case with mail fraud, wire fraud, money laundering, and
1
“[A] Ponzi scheme is a phony investment plan in which monies paid
by later investors are used to pay artificially high returns to the initial
investors, with the goal of attracting more investors.” Alexander v. Comp-
ton (In re Bonham), 229 F.3d 750, 759 n.1 (9th Cir. 2000).
4970 IN RE: SLATKIN
conspiracy to obstruct justice in connection with his operation
of a Ponzi scheme. He pled guilty to the criminal charges pur-
suant to a plea agreement and currently is serving a fourteen-
year prison sentence. In his plea agreement, Slatkin admitted
that from 1986 to May 2001, he operated a Ponzi scheme in
which he paid investors purported profits primarily using
funds raised from other investors. Slatkin’s Ponzi scheme
involved over $593 million and approximately 800 investors,
and resulted in losses exceeding $240 million.
In August 2002, the Trustee initiated the first of hundreds
of adversary proceedings against Slatkin’s investors. In these
adversary proceedings, the Trustee sought avoidance and
recovery, under 11 U.S.C. § 548(a)(1) and California Civil
Code § 3439.04(a), of actual fraudulent transfers made by
Slatkin to investors. Specifically, the Trustee sought to avoid
as fraudulent any transfer made by Slatkin to an investor to
the extent that such transfer exceeded the amount the investor
had given Slatkin, i.e., the amount of the investor’s purported
profit on their investment.
The present case involves the adversary proceeding filed by
the Trustee against investors Glenn Johnson, Barbara John-
son, and Santa Barbara Capital Management (collectively, the
“Johnsons”). During the period of time that Slatkin was oper-
ating the Ponzi scheme, he transferred millions of dollars in
purported profits to the Johnsons. The Trustee seeks to avoid
and recover these purported profits.
The bankruptcy court granted the Trustee partial summary
judgment, finding that Slatkin’s guilty plea and plea agree-
ment conclusively established that Slatkin operated a Ponzi
scheme from 1986 to May 2001 with the actual intent to
defraud his creditors. Slatkin’s actual intent is important
because, to be avoidable and recoverable as a fraudulent
transfer under 11 U.S.C. § 548(a)(1)(A) and California Civil
Code § 3439.04(a)(1), the transfer must have been made with
IN RE: SLATKIN 4971
the actual intent to hinder, delay, or defraud creditors. See 11
U.S.C. § 548(a)(1)(A); Cal. Civ. Code § 3439.04(a)(1).
The bankruptcy court then granted the Trustee summary
judgment on the remaining issues, finding (1) that the Trustee
had the right to avoid and recover the transfers to the John-
sons, and (2) that the Trustee was entitled to prejudgment
interest.
The district court affirmed the bankruptcy court’s grants of
summary judgment. The Johnsons timely appeal to this court.
STANDARD OF REVIEW
We review de novo a district court’s decision on appeal
from a bankruptcy court. Ditto v. McCurdy, 510 F.3d 1070,
1075 (9th Cir. 2007). We review the bankruptcy court’s grant
of summary judgment de novo. Id. We may affirm the grant
of summary judgment on any basis supported by the record.
Ryman v. Sears, Roebuck & Co., 505 F.3d 993, 995 (9th Cir.
2007).
On a motion for summary judgment, all reasonable infer-
ences are drawn in favor of the non-moving party. Anderson
v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). Summary
judgment must be granted “if the pleadings, the discovery and
disclosure materials on file, and any affidavits show that there
is no genuine issue as to any material fact and that the movant
is entitled to judgment as a matter of law.” Fed. R. Civ. P.
56(c).
4972 IN RE: SLATKIN
ANALYSIS
A. The bankruptcy court did not abuse its discretion in
denying the Johnsons’ motion for a continuance to
conduct further discovery.
The Johnsons argue that the bankruptcy court abused its
discretion in denying them additional discovery prior to grant-
ing summary judgment on the issue of Slatkin’s intent. In par-
ticular, they argue that they were not allowed to depose
Slatkin or review the transcript of Slatkin’s testimony in a
proceeding before the Trustee2 prior to the bankruptcy court’s
grant of summary judgment on the issue of Slatkin’s intent.
[1] We review the bankruptcy court’s refusal to grant a
continuance to permit additional discovery for an abuse of
discretion. See Matter of Bishop, Baldwin, Rewald, Dil-
lingham & Wong, Inc., 779 F.2d 471, 475-76 (9th Cir. 1985).
“[W]e will only find an abuse of discretion if the movant dili-
gently pursued its previous discovery opportunities, and can
demonstrate that allowing additional discovery would have
precluded summary judgment.” See Bank of Am., NT & SA v.
PENGWIN, 175 F.3d 1109, 1118 (9th Cir. 1999).
[2] The Johnsons have now had the opportunity to conduct
the requested discovery by deposing Slatkin and reviewing
the transcript of his previous testimony in the proceeding
before the Trustee. The Johnsons fail to point to anything that
contradicts the plea agreement or the bankruptcy court’s find-
ing, based on the plea agreement, that Slatkin operated a
Ponzi scheme over a fifteen year period with the actual intent
to defraud. The Johnsons also fail to demonstrate that addi-
tional discovery would have otherwise precluded the grant of
summary judgment on the issue of Slatkin’s intent. We there-
fore hold that the bankruptcy court did not abuse its discretion
2
The Johnsons were not a party to the proceeding before the Trustee.
IN RE: SLATKIN 4973
in denying the Johnsons further discovery prior to granting
partial summary judgment. See id.
B. The Johnsons’ right to a jury trial was not violated by
the grant of summary judgment.
The Johnsons argue that the grant of summary judgment
violates their right to a trial by jury guaranteed by the Seventh
Amendment to the United States Constitution. We reject this
claim as without merit. As the Supreme Court held, over one
hundred years ago, a summary judgment proceeding does not
deprive the losing party of its Seventh Amendment right to a
jury trial. See Fid. & Deposit Co. of Md. v. United States, 187
U.S. 315, 319-21 (1902); see also Anderson, 477 U.S. at 251-
52 (holding that there is no right to a jury trial where the evi-
dence is “so one-sided that one party must prevail as a matter
of law”).
C. The bankruptcy court properly determined that Slatkin
acted with the actual intent to “hinder, delay, or
defraud” his creditors.
The bankruptcy court granted summary judgment on the
issue of Slatkin’s actual intent based solely on Slatkin’s guilty
plea and plea agreement. The Johnsons argue that, in doing
so, the bankruptcy court erred. Specifically, the Johnsons
argue (1) that the plea agreement should not have been admit-
ted, and (2) that the plea agreement should not be given pre-
clusive effect as to Slatkin’s intent.
We review the bankruptcy court’s evidentiary rulings for an
abuse of discretion. Latman v. Burdette, 366 F.3d 774, 786
(9th Cir. 2004). To reverse on the basis of an erroneous evi-
dentiary ruling, we must conclude not only that the bank-
ruptcy court abused its discretion, but also that the error was
prejudicial. Id.
4974 IN RE: SLATKIN
1. The plea agreement is admissible to demonstrate that
Slatkin operated a Ponzi scheme with the intent to
defraud.
[3] The plea agreement is being offered to show the truth
of the information contained therein—that Slatkin ran a Ponzi
scheme and, in doing so, had the actual intent to defraud his
creditors. The plea agreement is therefore hearsay. See Fed.
R. Evid. 801(c). To be considered on a motion for summary
judgment, the plea agreement must accordingly fall within
one of the exceptions to the hearsay rule. See Fed. R. Civ. P.
56(e)(1) (requiring that only admissible evidence be consid-
ered for purposes of summary judgment); Fed. R. Evid. 802
(“Hearsay is not admissible except as provided by these rules
or by other [applicable] rules . . . .”).
The bankruptcy court did not make clear which hearsay
exception it relied upon in finding the plea agreement to be
admissible. We can, however, affirm the bankruptcy court’s
evidentiary ruling on any ground supported by the record,
even if it differs from the reasoning of the bankruptcy court.
See Atel Fin. Corp. v. Quaker Coal Co., 321 F.3d 924, 926
(9th Cir. 2003) (per curiam).
We hold that the plea agreement is admissible under Fed-
eral Rule of Evidence 807, and that the bankruptcy court did
not, therefore, abuse its discretion when it considered the plea
agreement in granting summary judgment.
Under Rule 807,
A statement not specifically covered by Rule 803 or
804 but having equivalent circumstantial guarantees
of trustworthiness, is not excluded by the hearsay
rule, if the court determines that (A) the statement is
offered as evidence of a material fact; (B) the state-
ment is more probative on the point for which it is
offered than any other evidence which the proponent
IN RE: SLATKIN 4975
can procure through reasonable efforts; and (C) the
general purposes of these rules and the interests of
justice will best be served by admission of the state-
ment into evidence.
Fed. R. Evid. 807.
[4] Slatkin’s plea agreement meets the requirements for
admission under this rule. First, the plea agreement is offered
as evidence of a material fact—Slatkin’s operation of a Ponzi
scheme over a fifteen-year period and his actual fraudulent
intent in doing so.
[5] Second, Slatkin’s admissions in the plea agreement that
he operated a Ponzi scheme, and that he did so with the actual
intent to defraud, are more probative on these issues than any
other evidence the Trustee could procure. In fact, it is pre-
cisely because such direct proof of fraudulent intent is rarely
available that courts allow a finding of fraudulent intent based
on circumstantial evidence. See Consove v. Cohen (In re Roco
Corp.), 701 F.2d 978, 984 (1st Cir. 1983) (“A court may make
a finding of fraudulent intent under section 548(a)(1) on the
basis of circumstantial evidence; direct proof of the transfer-
or’s fraudulent intent will rarely be available.”); Am. Express
Travel Related Servs. Co. v. Golchin (In re Golchin), 175
B.R. 366, 367-68 (Bankr. S.D. Cal. 1993) (“Rarely will a per-
son who is guilty of fraudulent conduct admit his guilt. Thus,
direct proof of fraudulent intent is rarely available.”) (internal
quotations and alterations omitted).
[6] Third, admission of the plea agreement to prove Slat-
kin’s actual fraudulent intent and operation of the Ponzi
scheme furthers the general purposes of the Rules of Evidence
and “the interests of justice will best be served by admission
of the [plea agreement] into evidence.” Fed. R. Evid. 807.
[7] Finally, Slatkin’s plea agreement has equivalent circum-
stantial guarantees of trustworthiness. His guilty plea, based
4976 IN RE: SLATKIN
on the plea agreement, (1) was made under oath with the
advice of counsel, (2) subjected Slatkin to severe criminal
penalties, (3) was made after Slatkin was advised of his con-
stitutional rights, and (4) was accepted by the court in the
criminal matter only after the court determined that Slatkin’s
plea was knowing and voluntary.
The Johnsons take issue only with the “equivalent circum-
stantial guarantees of trustworthiness” requirement of Rule
807. The Johnsons argue that the plea agreement is unreliable
and untrustworthy because (1) Slatkin is a perpetrator of a
fraud to which he admits and he is thus not “reliable” or
“credible”; (2) Slatkin made statements in the plea agreement
solely for the purpose of demonstrating his extraordinary
cooperation, resulting in his sentence being reduced from 105
years to 14 years; and (3) the Trustee requested certain things
be included in the plea agreement solely to benefit the Trust-
ee’s litigation position. We reject these arguments and hold
that the plea agreement was admissible under Rule 807.
First, the criminal consequences to Slatkin of making the
admissions contained in the plea agreement provide a suffi-
cient circumstantial guarantee of trustworthiness to overcome
any concern regarding Slatkin’s unreliability or lack of credi-
bility. Cf. Fed. R. Evid. 804(b)(3) (deeming admissible state-
ments made by an unavailable declarant that tend to subject
the declarant to criminal liability such that a reasonable per-
son in the declarant’s position would not have made the state-
ments unless believing them to be true).3
Second, the plea agreement did not, as the Johnsons argue,
reduce Slatkin’s sentence from 105 years to 14 years. If Slat-
kin had been subjected to the maximum statutory sentence on
each of his counts of conviction, and if the sentences on each
3
We decline the Trustee’s invitation to find Slatkin unavailable as a
matter of law and therefore do not address the Trustee’s argument that
Slatkin’s plea agreement is admissible under Fed. R. Evid. 804(b)(3).
IN RE: SLATKIN 4977
of the counts of conviction had been imposed to run consecu-
tively, the total length of his combined sentence would have
been 105 years.4 There is, however, no indication that the dis-
trict court would have sentenced Slatkin to the statutory maxi-
mum on each count of conviction or imposed consecutive
sentences if Slatkin had not entered into the plea agreement.
Further, the district court was not bound by the plea agree-
ment. Thus, although Slatkin obviously benefitted from the
plea agreement through the government’s agreement to make
certain sentencing recommendations, the plea agreement did
not, as the Johnsons argue, result in a ninety-one year reduc-
tion in Slatkin’s sentence.
Finally, the fact that the Trustee may have requested that
certain information be included in the plea agreement does
not, under the circumstances, render the plea agreement unre-
liable. This is particularly true here because Slatkin has con-
sistently maintained, in both written testimony and during oral
testimony, that the factual statements in the plea agreement
are true and accurate.
2. The plea agreement preclusively establishes Slatkin’s
intent to defraud in relation to transfers to investors of
purported profits.
The Johnsons argue that the plea agreement cannot be used
to establish Slatkin’s intent regarding the transactions Slatkin
had with the Johnsons. The Johnsons further argue that evi-
dence they submitted—Slatkin’s 1999 tax return— raises an
issue of fact precluding summary judgment on the issue of
intent. We reject both of these arguments and hold that the
4
The statutory maximum sentence for each of the five counts of mail
fraud to which Slatkin pled guilty was five years; the statutory maximum
for each of the three counts of wire fraud to which Slatkin pled guilty was
three years; the statutory maximum for each of the six counts of money
laundering to which Slatkin pled guilty was ten years; and the statutory
maximum for the single count of conspiracy to obstruct justice to which
Slatkin pled guilty was five years.
4978 IN RE: SLATKIN
plea agreement preclusively establishes that Slatkin’s trans-
fers of purported profits to investors during his operation of
the Ponzi scheme were made with the actual intent to defraud.
a. Slatkin’s actual intent to defraud is established by his
admissions in his plea agreement.
Slatkin admitted in his plea agreement that from 1986 to
May 2001, he (1) used the “bulk of investor funds to operate
a massive ‘Ponzi’ scheme whereby he defrauded his investors
by paying them returns largely with funds raised from other
investors”; (2) “planned and executed a scheme to defraud
approximately 800 investors . . . of over $593 million”; (3)
did not invest the vast majority of investor funds he received
during this time but instead disbursed those funds “to other
investors as fraudulent returns, diverted funds for his own per-
sonal benefit, and dissipated funds on many speculative,
undisclosed, and ultimately unprofitable investments”; (4)
used newly invested funds from some investors to pay other
investors because his investments did not generate sufficient
income to meet investors’ periodic requests for payments; and
(5) sent false and fabricated account statements to investors.
[8] We previously have found the mere existence of a Ponzi
scheme sufficient to establish the actual intent to hinder,
delay, or defraud creditors under 11 U.S.C. § 548(a) and Cali-
fornia Civil Code § 3439.04(a), or another state’s equivalent
fraudulent transfer statute. See Barclay v. MacKenzie (In re
AFI Holding, Inc.), No. 06-55033, ___ F.3d ___, 2008 WL
1734583, at *3 (9th Cir. April 16, 2008) (examining 11
U.S.C. § 548(a) and Cal. Civ. Code § 3439.04(a)); Hayes v.
Palm Seedlings Partners-A (In re Agric. Research & Tech.
Group, Inc.), 916 F.2d 528, 534-35 (9th Cir. 1990) (examin-
ing 11 U.S.C. § 548(a) and Hawaii’s uniform fraudulent trans-
fer act); see also Plotkin v. Metro Honda (In re Cohen), 199
B.R. 709, 717 (9th Cir. B.A.P. 1996) (examining § 548(a) and
Calif. Civ. Code § 3439.04(a)). We now hold that a debtor’s
admission, through guilty pleas and a plea agreement admissi-
IN RE: SLATKIN 4979
ble under the Federal Rules of Evidence, that he operated a
Ponzi scheme with the actual intent to defraud his creditors
conclusively establishes the debtor’s fraudulent intent under
11 U.S.C. § 548(a)(1)(A) and California Civil Code
§ 3439.04(a)(1), and precludes relitigation of that issue. See
Floyd v. Dunson (In re Ramirez Rodriguez), 209 B.R. 424,
433 (Bankr. S.D. Tex. 1997) (“[T]he criminal conviction of
Ms. Rodriguez based on the debtors’ operation of a Ponzi
scheme conclusively establishes fraudulent intent, and pre-
cludes the defendant from relitigating this issue.”); Martino v.
Edison Worldwide Captial (In re Randy), 189 B.R. 425, 439
(Bankr. N.D. Ill. 1995) (holding that debtor’s actual intent to
defraud investors was preclusively established by the jury ver-
dict against him in a criminal proceeding); Emerson v. Maples
(In re Mark Benskin & Co.), 161 B.R. 644, 648 (Bankr. W.D.
Tenn. 1993) (“The debtors’ intent to defraud creditors was
established by the guilty pleas to the related criminal charges
and preclusive effect may be given to those guilty pleas as
factual findings to the extent that the debtors’ intent to
defraud creditors is required in this adversary proceeding.”).
b. The plea agreement provides a sufficient factual
basis to support the bankruptcy court’s finding that
the conveyances to the Johnsons were fraudulent.
[9] The Johnsons argue that the plea agreement does not
provide a sufficient factual basis to support a determination
that Slatkin’s transfers to them were fraudulent. The Johnsons
claim that the Trustee must demonstrate the source of each of
the transfers to them and demonstrate that the source of those
transfers was not “legitimate.” We disagree. We hold that
once the existence of a Ponzi scheme is established, payments
received by investors as purported profits—i.e., funds trans-
ferred to the investor that exceed that investor’s initial
“investment”—are deemed to be fraudulent transfers as a mat-
ter of law.
4980 IN RE: SLATKIN
Although this circuit has not yet addressed this issue, the
Seventh Circuit has, in a well-reasoned decision authored by
Judge Posner. See Scholes, 56 F.3d 750.
In Scholes, as in the present case, the debtor masterminded
a Ponzi scheme. Id. at 752. The debtor in Scholes operated a
Ponzi scheme for a period of approximately two years and
defrauded investors of approximately $30 million. Id. He pled
guilty to fraud in a criminal proceeding and was sentenced to
a twelve-year term of imprisonment. See id.
A receiver was appointed to attempt to recover certain
funds transferred by the debtor to investors. Id. One of the
individuals from whom the receiver attempted to recover
funds was Phillips, who was in a position similar to the
Johnsons—he was “one of the investors in the Ponzi scheme
who was lucky enough to make money.” Id. at 753. The Sev-
enth Circuit held that the payments Phillips received from the
debtor representing “profits,” i.e., funds transferred to Phillips
by the debtor that exceeded Phillips’ initial investment, were
fraudulent conveyances that Phillips was not entitled to keep.
Id. at 757-58.
[10] As the court explained, the source of the “profits”
received by Phillips was “[a] theft by [the debtor] from other
investors.” Id. at 757.
It is no answer that some or for that matter all of
Phillips’s profit may have come from “legitimate”
trades made by the [debtor]. They were not legiti-
mate. The money used for the trades came from
investors gulled by fraudulent representations. Phil-
lips was one of those investors, and it may seem
“only fair” that he should be entitled to the profits on
trades made with his money. That would be true as
between him and [the debtor]. It is not true as
between him and either the creditors . . . or the other
investors . . . . [Phillips] should not be permitted to
IN RE: SLATKIN 4981
benefit from a fraud at their expense merely because
he was not himself to blame for the fraud. All he is
being asked to do is to return the net profits of his
investment — the difference between what he put in
at the beginning and what he had at the end.
Id. at 757-58; see Cunningham v. Brown, 265 U.S. 1, 12-13
(1924) (holding, in what has been referred to as the “original”
Ponzi scheme case, that under circumstances involving multi-
ple victims and commingled funds, tracing should not be uti-
lized and that, instead, equity demands that all victims of the
fraud be treated equally).
[11] In the present case, the source of any profits received
by the Johnsons was a theft from the other investors. See
Scholes, 56 F.3d at 757. Although the Johnsons argue that
there is a question of fact as to whether the purported profits
they received were from “legitimate” investments made by
Slatkin, in truth none of the trades made by Slatkin were “le-
gitimate” because the money used for the trades came from
investors gulled by Slatkin’s fraudulent representations. See
id.
All the Johnsons are being asked to do is return the pur-
ported profits on their investment. See id. at 757-78. This will
prevent the injustice that would result if the Johnsons were
allowed to retain their purported profit at the expense of other
defrauded investors. See id. at 757; see also Cunningham, 265
U.S. at 12-13.
c. The 1999 tax return does not raise a genuine issue
of material fact.
The Johnsons argue that Slatkin’s 1999 tax return—which
lists taxable income of $27,982,808; tax liability of
$7,160,676; payments made of $2,416,712; and capital gains
attributed to various investors, including the Johnsons—raises
a genuine issue of material fact on the issue of whether Slat-
4982 IN RE: SLATKIN
kin operated a Ponzi scheme from 1986 through 2001. We
disagree.
[12] As discussed above, Slatkin’s guilty plea and plea
agreement conclusively establish that he operated a Ponzi
scheme from 1986 through 2001 with the intent to defraud his
creditors; and the transfers to the Johnsons of purported prof-
its on their investment are therefore deemed fraudulent as a
matter of law.
[13] The mere fact that Slatkin reported income to the
Internal Revenue Service and delineated capital gains for cer-
tain investors is not inconsistent with his operation of a mas-
sive Ponzi scheme. Further, that Slatkin may have invested a
small percentage of the funds he received from investors, and
may have received a profit from such investments, does not
create a genuine issue of material fact as to the actual exis-
tence of the Ponzi scheme.
D. The bankruptcy court properly determined that Slatkin
was not a “stockbroker” under the Bankruptcy Code.
The Johnsons next argue that the bankruptcy court erred in
granting summary judgment on the issue of whether Slatkin
was a “stockbroker” under the Bankruptcy Code. The ques-
tion of whether Slatkin was a “stockbroker” is significant
because the Trustee is prohibited from avoiding settlement or
margin payments made by “stockbrokers.” See 11 U.S.C.
§ 546(e).
[14] To be a “stockbroker” under the Bankruptcy Code, an
individual has to (1) have a “customer” as defined in 11
U.S.C. § 741, and (2) be “engaged in the business of effecting
transactions in securities—(i) for the account of others; or (ii)
with members of the general public, from or for such person’s
own account.” 11 U.S.C. § 101(53A). We hold that although
Slatkin had “customers,” he was not “engaged in the business
IN RE: SLATKIN 4983
of effecting transactions in securities,” and was not, therefore
a “stockbroker.”
1. Slatkin had “customers.”
[15] A “customer” includes an “entity that has a claim
against a person arising out of . . . a deposit of cash, a secur-
ity, or other property with such person for the purpose of pur-
chasing or selling a security.” 11 U.S.C. § 741(2)(B)(ii). The
Johnsons, like Slatkin’s other investors, deposited funds with
Slatkin for the purpose of having him purchase securities with
those funds. The Johnsons were therefore “customers” of
Slatkin. See 11 U.S.C. § 741(2)(B)(ii); Wesbanco Bank
Barnesville v. Rafoth (In re Baker & Getty Fin. Servs., Inc.),
106 F.3d 1255, 1260 (6th Cir. 1997) (“In re Baker & Getty”)
(holding that defrauded investors who deposited funds with
the debtor for the purpose of having the debtor purchase
securities were “customers” of the debtor); cf. Wider v. Woot-
ton, 907 F.2d 570, 573 (5th Cir. 1990) (holding that a debtor’s
clients were not “customers” where the clients did not provide
the debtor with a reservoir of cash from which to purchase
securities, but instead paid the debtor only after the debtor had
purchased the securities).
The Trustee does not contest that the Johnsons fall within
the plain language of “customer” under § 741(2)(B)(ii). The
Trustee argues, however, that an “ordinary-course-of-
business” requirement should be read into the definition of
“customer” under § 741(2)(B)(ii). The Trustee reasons that
because the definition of “customer” under § 741(2)(A)5
5
Section 741(2)(A) defines a “customer” as including an
entity with whom a person deals as principal or agent and that has
a claim against such person on account of a security received,
acquired, or held by such person in the ordinary course of such
person’s business as a stockbroker, from or for the securities
account or accounts of such entity —
4984 IN RE: SLATKIN
includes an “ordinary-course-of-business” requirement, Con-
gress clearly intended to include that same requirement in the
§ 741(2)(B)6 definition of “customer.” The Trustee further
argues that § 741(2)(B)’s definition of customer does not
make sense unless it includes an “ordinary-course-of-
business” requirement. We disagree.
The text of § 741(2)(B), combined with the legislative his-
tory, makes clear, that the definition of “customer” turns not
on the status or intent of the debtor, but instead on the purpose
of the investor. See In re Baker & Getty, 106 F.3d at 1260
(citing H.R. Rep. No. 95-595 (1977), reprinted in 1978
U.S.C.C.A.N. 6223-27). “An investor qualifies as a customer
[under § 741(2)(B)(ii)] when the investor deposits money or
securities with the debtor with the expectation that the debtor
purchase stock or trade securities.” Id. “It is the act of entrust-
ing the cash to the debtor for the purpose of effecting securi-
ties transactions that triggers the customer status provisions.
Whether the debtor plans to purchase securities with the funds
(i) for safekeeping;
(ii) with a view to sale;
(iii) to cover a consummated sale;
(iv) pursuant to a purchase;
(v) as collateral under a security agreement; or
(vi) for the purpose of effecting registration of transfer . . . .
11 U.S.C. § 741(2)(A).
6
Section 741(2)(B) defines “customer” as including an
entity that has a claim against a person arising out of —
(i) a sale or conversion of a security received, acquired, or
held as specified in subparagraph (A) of this paragraph; or
(ii) a deposit of cash, a security, or other property with such
person for the purpose of purchasing or selling a security.
11 U.S.C. § 741(2)(B).
IN RE: SLATKIN 4985
or defraud investors is irrelevant.” Id. (citations, quotations,
and alterations omitted).
2. Slatkin was not “engaged in the business of effecting
transactions in securities.”
[16] To be a “stockbroker,” Slatkin not only must have had
“customers,” he also must have “engaged in the business of
effecting transactions in securities.” 11 U.S.C. § 101(53A)(B).
To determine whether Slatkin was “engaged in the business
of effecting transactions in securities,” we begin by giving
this language its ordinary and plain meaning. See Salazar v.
McDonald (In re Frank Salazar), 430 F.3d 992, 995 (9th Cir.
2005). If the language is clear and unambiguous, “we look no
further when we seek to ascertain its meaning.” See id.
[17] The operative term of the language “engaged in the
business of effecting transactions in securities” is “effecting.”
See In re Baker & Getty, 106 F.3d at 1260. “Effect” is com-
monly understood to mean “[t]hat which is produced by an
agent or cause; a result, outcome, or consequence”; or “[t]o
bring about; to make happen.” Black’s Law Dictionary (8th
ed. 2004). Applying this common meaning of the term “ef-
fect,” the relevant question is whether Slatkin was in the busi-
ness of making securities transactions happen. See In re Baker
& Getty, 106 F.3d at 1260. We hold that he was not.
[18] It is undisputed that Slatkin was not a licensed stock-
broker. It also is undisputed that, to the extent he did buy
securities with investor funds, he did so by contacting a stock-
broker who, in turn, would effect or make the requested trade
in securities happen. Further, Slatkin purchased and held the
securities that he did purchase in his own name, and not in the
name of his investors. Finally, there is no evidence that Slat-
kin had the ability to effect or make a trade in securities hap-
pen, or that he held himself out as having such an ability.
Under these circumstances, Slatkin was not “engaged in the
business of effecting transactions in securities.”
4986 IN RE: SLATKIN
The Johnsons rely heavily on In re Baker & Getty in argu-
ing that Slatkin was a “stockbroker.” In that case, the Sixth
Circuit held that the debtors were “stockbrokers” under
§ 101(53A). 106 F.3d at 1256. The debtors included three
entities and individual debtor, Cordek, and his wife. Cordek,
along with another individual, formed the three debtor enti-
ties, referred to collectively as “B&G.” Id. B&G solicited cus-
tomers to purchase securities, advertised itself as a licensed
broker-dealer, and encouraged its stockbrokers to tell prospec-
tive customers that B&G was a full-service brokerage firm
capable of conducting transactions in-house. Id.
In reality, B&G was not a licensed broker-dealer and could
not conduct transactions in-house. See id. at 1257. Instead,
B&G employed Mutual Services, a licensed broker-dealer, to
conduct trades through a clearing house. Id. Typically, B&G
stockbrokers, who were also registered representatives of
Mutual Services, placed orders with Mutual Services and
Mutual Services would clear the trades through a clearing
house. Id. After a trade was executed, Mutual Services would
provide a confirmation slip to both the investor and the B&G
stockbroker, and commission checks to B&G stockbrokers.
Id. Thus, although investors who purchased stock from B&G
licensed stockbrokers received valid securities, they received
the securities without knowledge of B&G’s actual status. Id.
At the same time that the B&G licensed stockbrokers were
conducting legitimate business, Cordek was operating a clas-
sic Ponzi scheme, pocketing money he received from inves-
tors and paying investors using funds received from new
investors. Id. at 1256-57.
The court held that B&G was “engaged in the business of
effecting transactions in securities.” See id. at 1260, 1262.
The facts in the record indicate that B&G effected
securities transactions, albeit with the aid of Mutual
Services. In particular, B&G enticed customers to
IN RE: SLATKIN 4987
invest their money through B&G. Investors, lured in
by B&G’s corporate offices and advertisements rep-
resenting B&G as a licensed broker-dealer, placed
money in the hands of B&G stockbrokers for the
purpose of purchasing stock. B&G stockbrokers told
investors that B&G was a full-service brokerage
firm, capable of conducting securities transactions
in-house. B&G stockbrokers, who were also regis-
tered representatives of Mutual Services, placed
orders for trades through Mutual Services. All the
while, B&G had taken steps to substitute itself in the
position of Mutual Services by applying for licens-
ing as a broker-dealer with the Securities and
Exchange Commission. Because B&G’s stockbro-
kers were registered representatives of Mutual Ser-
vices, they could use Mutual Services to execute
trades, yet maintain the strong client base should
B&G become a licensed broker-dealer. First, B&G
was responsible for soliciting investors, without
which there would have been no securities transac-
tions. Second, B&G’s stockbrokers, as registered
representatives of Mutual Services, executed transac-
tions in securities. Finally, from the beginning, B&G
operated with the intention that it replace Mutual
Services upon licensing. We conclude, therefore,
that B&G’s activities effected transactions in securi-
ties.
Id. at 1262 (citation omitted).
The court rejected the defrauded investors’ argument that
B&G was not a stockbroker as to their transactions because
no transaction in securities had been “effected.” See id. “Sec-
tion 101(53A) defines a stockbroker not on a customer-by-
customer basis, but as one ‘engaged in the business . . . .’ ”
Id. “In other words, we look not to a single maverick transac-
tion when determining whether a person is a stockbroker but,
instead, to the underlying business at issue.” Id. Except for
4988 IN RE: SLATKIN
Cordek’s dealings with the defrauded investors, “B&G con-
ducted legitimate business with all its customers. B&G, hav-
ing achieved ‘stockbroker’ status by virtue of its lawful
business, has such status as to [the defrauded investors] as
well.” Id.
The analysis in In re Baker & Getty confirms our conclu-
sion that Slatkin was not “engaged in the business of effecting
transactions in securities.” In the present case, we do not have
a situation where all but a very few, select transactions con-
ducted by the debtor were legitimate. Here, all but a very few
of the transactions conducted by Slatkin were illegitimate. See
id. at 1262 (noting that, except for the business conducted by
Cordek with the defrauded investors, B&G conducted legiti-
mate business with all its customers). We also do not have,
in the present case, a debtor who held himself out as being a
licensed, “full-service brokerage firm, capable of conducting
securities transactions in-house”; who was capable of execut-
ing trades through a clearing house; who was in the process
of seeking to be licensed as a broker-dealer; or who purchased
and sold securities in the names of the investors. See id. at
1256, 1262.
[19] We hold that Slatkin was not “engaged in the business
of effecting transactions in securities” and therefore was not
a “stockbroker.”
3. Mr. Johnson’s declaration does not raise a genuine
issue of material fact as to whether Slatkin was a
“stockbroker.”
The Johnsons argue that Mr. Johnson’s declaration raises a
genuine issue of material fact as to whether Slatkin was a
“stockbroker.” We disagree.
Mr. Johnson’s declaration simply indicates that Slatkin
made large trades of shares; that these trades were made by
Slatkin through Slatkin’s stockbrokers; that Slatkin made
IN RE: SLATKIN 4989
these trades in his own name; that Slatkin would sometimes
share or pass on to the Johnsons what was purported to be
“profits” resulting from Slatkin’s trades; and that Mr. Johnson
believed that Slatkin was acting as his stockbroker. These
facts, taken as true, do not demonstrate that Slatkin was acting
as a stockbroker.
First, that Slatkin made trades through stockbrokers rather
than effecting trades himself, and made trades in his own
name rather than in his investors’ names, demonstrates that
Slatkin’s stockbrokers were engaged in the business of effect-
ing transactions in securities.
Second, that Slatkin would share or pass on to the Johnsons
purported profits from investments does not create an issue of
fact in light of Slatkin’s admission that he paid purported
profits to investors using funds received from other investors.
Third, Mr. Johnson’s subjective belief that Slatkin was act-
ing as his stockbroker is relevant only to the question of
whether the Johnsons were a “customer” of Slatkin. It is not
relevant to the “engaged in the business of effecting transac-
tions in securities” inquiry. See In re Baker & Getty, 106 F.3d
at 1262. Mr. Johnson’s belief does not, therefore, create a
genuine issue of material fact. See id.
E. The bankruptcy court properly awarded prejudgment
interest.
We review for abuse of discretion the bankruptcy court’s
award of prejudgment interest, but review de novo whether an
award of prejudgment interest is authorized under state or fed-
eral law. See Oak Harbor Freight Lines, Inc. v. Sears Roe-
buck & Co., 513 F.3d 949, 954 (9th Cir. 2008).
1. Prejudgment Interest under State Law.
[20] Section 3288 of the California Civil Code provides:
“In an action for the breach of an obligation not arising from
4990 IN RE: SLATKIN
contract, and in every case of oppression, fraud, or malice,
interest may be given, in the discretion of the jury.” Cal. Civ.
Code § 3288 (emphasis added). The Johnsons argue that only
a jury can award prejudgment interest under § 3288, and that
the bankruptcy court did not have the authority to award pre-
judgment interest. We disagree and hold that when a court has
granted judgment as a matter of law on all substantive issues,
the court has authority to award prejudgment interest under
§ 3288. Cf. L.A. Nat’l Bank v. Bank of Canton, 37 Cal. Rptr.
2d 389, 400-01 (Cal. Ct. App. 1995) (finding award of pre-
judgment interest by trial court after summary judgment to be
under section 3288 as opposed to another section of the civil
code); Bass v. Youngblood, 34 Cal. Rptr. 326, 333 (Cal. Ct.
App. 1963) (upholding a trial court’s award of prejudgment
interest under section 3288 following a court trial).
Barry v. Raskov, 283 Cal. Rptr. 463 (Cal. Ct. App. 1991),
relied on by the Johnsons, is not contrary to our holding. In
that case, a jury trial was held and the jury returned a verdict
in favor of the plaintiff. Id. at 465. The trial court, on its own,
awarded prejudgment interest. Id. The California Court of
Appeals held that the trial court “had no authority to usurp the
discretion conferred on the jury” by § 3288, and that the
court’s award of prejudgment interest was therefore error. Id.
at 468-69.
Unlike Barry, in the present case there has not been, and
will not be, a jury trial. There is nothing in Barry that indi-
cates that, in a situation involving a grant of judgment as a
matter of law, only a jury, and not a court, can award prejudg-
ment interest under § 3288.
2. Prejudgment Interest under Federal Law.
[21] Finally, the Johnsons argue that because they have
demanded a jury trial, they are entitled to have a jury decide
the issue of prejudgment interest under federal law. We dis-
IN RE: SLATKIN 4991
agree, and hold that the bankruptcy court had the authority to
award prejudgment interest under federal law.
Osterneck v. Ernst & Whinney, 489 U.S. 169 (1989), relied
on by the Johnsons, does not support their argument. Oster-
neck indicates that, even after a jury trial, the court, rather
than the jury, will decide the issue of prejudgment interest
under federal law. See id. at 176 (“In deciding if and how
much prejudgment interest should be granted, a district court
must examine — or in the case of a postjudgment motion,
reexamine — matters encompassed within the merits of the
underlying action.”).
AFFIRMED.