*

 The Honorable Terry C. Kern, United States District Judge for the Northern District of Oklahoma,

sitting by designation.

PUBLISH

UNITED STATES COURT OF APPEALS

Filed 5/23/96

TENTH CIRCUIT

________________________

In re: HEDGED-INVESTMENTS ASSOCIATES, INC., )

)

Debtor. )

)

--------------------------- )

)

HARVEY SENDER, Trustee, )

)

Plaintiff-Appellee, )

)

v. ) No. 95-1059

)

ESTILL H. BUCHANAN, a/k/a Mary Estill Buchanan, )

individually, and as Trustee of the Estill H. Buchanan Trust )

and as Custodian for Catharine Buchanan and Helen )

Buchanan under the Uniform Gifts to Minors Act, )

)

Defendant-Appellant. )

__________________________

ON APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLORADO

(D.C. No. 94-F-859)

_________________________

Melody Dawson of Katch, Sender & Wasserman, P.C., Denver, Colorado, for Plaintiff-Appellee.

Bruce E. Rohde of Davis & Ceriani, P.C., Denver, Colorado, for Defendant-Appellant.

_________________________

Before BRORBY and McWILLIAMS, Circuit Judges, and KERN,

*

 District Judge.
2

 Pursuant to his powers under 11 U.S.C. § 541, Mr. Sender also brought claims against Ms.

Buchanan under the Colorado Uniform Limited Partnership Act, Colo. Rev. Stat. § 7-62-101 et seq. The

appeal sub judice does not implicate these claims.

2

BRORBY, Circuit Judge.

_________________________

Harvey Sender, as trustee in bankruptcy, brought claims in the bankruptcy court against Estill

Buchanan under, inter alia,

2

 11 U.S.C. § 547(b) & (b)(4)(B) (insider preferences) and 11 U.S.C.

§ 548(a)(2) (constructive fraudulent transfers). The bankruptcy court found in favor of Mr. Sender

on both claims. The district court affirmed the bankruptcy court, and Ms. Buchanan now appeals.

We exercise jurisdiction pursuant to 28 U.S.C. § 158(d) and affirm the district court's decision

affirming the bankruptcy court.

This case arises out of a fraudulent investment scheme perpetrated by James Donahue and

his solely-owned corporation, Hedged Investments Associates, Inc. ("HIA Inc."). The parties do not

dispute the basic operation of the scheme. In the late 1970s, Mr. Donahue and HIA Inc. began an

investment fund known as Hedged Investments. Mr. Donahue attracted investors to the fund by

claiming he had developed a sophisticated method of trading in stock options that resulted in

substantial returns. Upon enticing someone to invest in the Hedged Investments fund, Mr. Donahue

sold the investor limited partnership units in one of three limited partnerships he established as

investment vehicles for the fund. Mr. Donahue named these partnerships Hedged-Investments

Associates, L.P., ("HIA L.P."), Hedged-Investments Associates II, L.P., ("HIA II L.P."), and HedgedSecurities Associates, L.P. ("HSA L.P.") (collectively the "Debtor Partnerships"). HIA Inc. served
3

as managing general partner for each of the Debtor Partnerships. Acting through HIA Inc., Mr.

Donahue told investors he would invest partnership capital in the Hedged Investments fund and that

the fund's assets would in turn be invested according to his trading strategy. Though Mr. Donahue

actually used investors' contributions to trade in stock options, the Hedged Investments fund amassed

enormous trading losses. To hide these losses, Mr. Donahue reported false earnings and allocated

false profits to investors' accounts. He then allowed investors to withdraw cash from their accounts

on the basis of these falsely attributed profits. In effect, Mr. Donahue ran a Ponzi scheme -- he paid

these so-called profits to investors who chose to make cash withdrawals with the contributions of

other investors.

In 1978, Ms. Buchanan, acting for herself and as trustee for her own trust and custodian for

her children, began investing in the Hedged Investments fund. Over the course of her participation

in the Hedged Investments scheme, Ms. Buchanan invested about $750,000 in the fund and received

transfers from HIA Inc. totaling a little over $2 million. Apparently, Ms. Buchanan was among the

few investors who received more money from the Hedged Investments fund than they invested.

According to Mr. Sender, "hundreds of people together lost hundreds of millions of dollars in [the

Hedged Investments] scheme."

Mr. Donahue's Hedged Investments scheme collapsed in August 1990. On August 30, 1990,

HIA Inc. filed for bankruptcy protection under Chapter 11 of Title 11 of the United States Code. In

September 1990, the bankruptcy court converted the proceeding to Chapter 7 and appointed Mr.

Sender as trustee.
4

During the one-year period extending backward from the original bankruptcy filing, Ms.

Buchanan received transfers from HIA Inc. totaling $248,896.88. Mr. Sender, as bankruptcy trustee

for the estate of HIA Inc., sued Ms. Buchanan to recover these transfers pursuant to two alternative

avoidance theories. First, he claimed under 11 U.S.C. § 547(b) that Ms. Buchanan received the

$248,896.88 as preferences to or for the benefit of an inside creditor. Second, Mr. Sender claimed

the transfers were avoidable under 11 U.S.C. § 548(a) as transfers made while HIA Inc. was

insolvent and for which it did not receive reasonably equivalent value. The bankruptcy court found

for Mr. Sender on both theories and entered alternative judgments against Ms. Buchanan under §

547(b) and § 548(a) in the amount of $248,896.88, plus costs. The district court affirmed the

bankruptcy court's decision. In this appeal, Ms. Buchanan contends the transfers from HIA Inc. to

her are avoidable under neither § 547(b) nor § 548(a). Because we find the bankruptcy court

properly concluded Mr. Sender can avoid the transfers pursuant to 11 U.S.C. § 548(a), we do not

address the issues raised by Mr. Sender's claim under § 547(b).

In reviewing the decision of a bankruptcy court pursuant to 28 U.S.C. § 158, the district court

and the court of appeals apply the same standards of review that govern appellate review in other

cases. Therefore, we review the bankruptcy court's legal conclusions de novo and its factual findings

for clear error. Phillips v. White (In re White), 25 F.3d 931, 933 (10th Cir. 1994).

According to 11 U.S.C. § 548:

(a) The trustee may avoid any transfer of an interest of the debtor in property,

or any obligation incurred by the debtor, that was made or incurred on or within one

year before the date of the filing of the petition, if the debtor voluntarily or
5

involuntarily--

....

(2)(A) received less than a reasonably equivalent value in

exchange for such transfer or obligation; and

(B)(i) was insolvent on the date that such transfer was made

or such obligation was incurred, or became insolvent as a result of

such transfer or obligation; ....

The bankruptcy court found the payments made to Ms. Buchanan within one year of the

bankruptcy filing for HIA Inc. satisfied these requirements. Accordingly, the bankruptcy court ruled

Mr. Sender could avoid the payments. Ms. Buchanan challenges this ruling on the basis of a single

issue. She claims HIA Inc. received "reasonably equivalent value in exchange" for the money it

transferred to her, which, if true, would mean the transfers are not avoidable. The bankruptcy court

disagreed, declaring:

Here, the evidence established that during the relevant one year preceding the

Debtor's bankruptcy, the Defendant received $248,896.88, and she invested not one

red cent during that time period. Up to the beginning of the one-year period, she had

invested a total of $750,911.00 in cash and had already received $1,761,143 in cash

-- over $1 million more than she invested. It is ludicrous for her to now argue that

she gave the reasonably equivalent value for the sums received during the one-year

period.

Ms. Buchanan does not dispute the bankruptcy court's observation that "she invested not one

red cent" during the time she received the transfers at issue. Instead, she contends HIA Inc. received

reasonably equivalent value for its transfers to her because the transfers partially satisfied her

legitimate fraud claim against HIA Inc. According to Ms. Buchanan:

everyone agrees that HIA, Inc. fraudulently induced Mrs. Buchanan to invest and

then misappropriated her investment.... Obviously, then, Mrs. Buchanan had a 'claim'
6

against HIA, Inc. and HIA, Inc. had a 'debt' to her (a liability on that claim).... Mrs.

Buchanan's claims were satisfied, in part, by the payments she received. Therefore,

HIA, Inc. received value for its transfers to her.

The bankruptcy court did not address this theory. The district court addressed it only cursorily,

asserting:

[Ms. Buchanan's] reasoning is specious. Although the Hedged scheme was a fraud,

because the amounts Buchanan received were well in excess of her investment, rather

than a victim of the Ponzi scheme, she was a beneficiary who suffered no damages.

Given these excess payments, the Court finds that there was no reasonably equivalent

value.

Though the district court reached the correct conclusion, the issue is not as elementary as the

court's treatment suggests. For Ms. Buchanan to succeed on her argument, HIA Inc. must have (1)

received value and (2) that value must have been reasonably equivalent to the $248,896.88 in

transfers to Ms. Buchanan. See Gray v. Snyder, 704 F.2d 709, 711-12 (4th Cir. 1983).

According to 11 U.S.C. § 548, "'value' means property, or satisfaction or securing of a present

or antecedent debt of the debtor." 11 U.S.C. § 548(d)(2)(A). Ms. Buchanan contends the transfers

at issue satisfied an "antecedent debt" created by her fraud claim against HIA Inc. The Bankruptcy

Code defines "debt" as "liability on a claim." 11 U.S.C. § 101(12). According to the legislative

history from both Houses of Congress, the terms "are coextensive: a creditor has a 'claim' against

the debtor; the debtor owes a 'debt' to the creditor." H.R. Rep. No. 595, 95th Cong., 1st Sess. 310,

reprinted in 1978 U.S.C.C.A.N. 5963, 6267 and App. 2 Collier on Bankruptcy; S. Rep. No. 989,

95th Cong., 2d Sess. 23, reprinted in 1978 U.S.C.C.A.N. 5787, 5809 and App. 3 Collier on

Bankruptcy; see also Pennsylvania Dept. of Public Welfare v. Davenport, 495 U.S. 552, 558 (1990)
7

(recognizing Congress' intent to make the terms "debt" and "claim" coextensive). Thus, a debtor

receives "value" for a transfer if the transfer satisfies a "claim" the transferee-creditor has against the

debtor.

The bankruptcy code defines "claim" as: "right to payment, whether or not such right is

reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed,

undisputed, legal, equitable, secured, or unsecured." 11 U.S.C. § 101(5). Congress intended that

this be the "broadest possible definition." H.R. Rep. No. 595, at 309; S. Rep. No. 989, at 21; see also

Ohio v. Kovacs, 469 U.S. 274, 279 (1985) (recognizing "that Congress desired a broad definition of

a 'claim'"). Ms. Buchanan contends she had a claim against HIA Inc. on a theory of fraud because

she was fraudulently induced to participate and continue participating in the Hedged Investments

scheme.

There is no dispute that Ms. Buchanan was fraudulently induced to participate in a Ponzi

scheme. The question is whether she had a viable claim against HIA Inc. based on this fraud. Ms.

Buchanan received the transfers at issue after already receiving approximately $1 million more than

her original $750,000 investment. The district court found that since Ms. Buchanan received more

than she invested she did not have a viable claim for fraud. In effect, the district court determined

Ms. Buchanan had already received restitution and therefore was entitled to no remedy. The district

court's observations are correct insofar as restitution is the remedy to which Ms. Buchanan would

be entitled; however, restitution is not the only remedy available to a defrauded party under Colorado

law.
8

Under Colorado law, a fraud plaintiff

must elect either to rescind the entire contract to restore the conditions existing

before the agreement was made or to affirm the entire contract and recover the

difference between the actual value of the benefits received and the value of those

benefits if they had been as represented, plus any other damages naturally and

proximately caused.

Colorado Interstate Gas Co. v. Chemco, Inc., 833 P.2d 786, 793 (Colo. Ct. App. 1991) (citing

Trimble v. City & County of Denver, 697 P.2d 716, 724 (Colo. 1985)) (emphasis added), aff'd, 854

P.2d 1232 (Colo. 1993); see also 37 Am.Jur.2d Fraud & Deceit § 327. The election of remedies

belongs to the defrauded party. Trimble, 697 P.2d at 723 (citing Altergott v. Yeager, 543 P.2d 1293

(Colo. Ct. App. 1975)).

Ms. Buchanan contends the district court overlooked the second alternative remedy for fraud.

She claims she could have affirmed the investment contract and recovered the difference between

the value of what she received and the value of Mr. Donahue's representations to her, plus

consequential damages. In support of this argument, Ms. Buchanan points to evidence in the record

indicating that even though she received about $1.25 million more than she invested, she still did

not receive the full value of Mr. Donahue's representations. She also highlights certain consequential

damages she suffered, including unrecoverable tax payments on undistributed earnings and interest

payments on money she borrowed to pay the taxes.

We are not persuaded. Ms. Buchanan correctly observes Colorado law ordinarily permits a

fraud plaintiff to affirm the contract and receive expectation and consequential damages. This case,

however, is not ordinary; it arises out of a Ponzi scheme in which Ms. Buchanan was only one of
9

many innocent investors. As the district court in Merrill v. Abbott (In re Independent Clearing

House Inc.), 77 B.R. 843 (D. Utah 1987) (en banc), observed:

To allow an [investor] to enforce his contract to recover promised returns in excess

if his [investment] would be to further the debtors' fraudulent scheme at the expense

of other [investors].

... Any recovery would not come from the debtors' own assets because they

had no assets they could legitimately call their own. Rather, any award of damages

would have to be paid out of money rightfully belonging to other victims of the Ponzi

scheme.

Id. at 858.

We find the district court's reasoning in Merrill persuasive and reach the same conclusion.

"[A]s a matter of public policy, the contract[] involved in this case w[as] unenforceable to the extent

[it] purported to give [Ms. Buchanan] a right to payments in excess of [her] undertaking." Id. In

other words, Ms. Buchanan did not have the enforceable option of affirming her contract with HIA

Inc. and recovering expectation and consequential damages. Because she had no claim against HIA

Inc. for damages in excess of her original investment, HIA Inc. had no debt to her for those amounts.

Therefore, the transfers could not have satisfied an antecedent debt of HIA Inc., which means HIA

Inc. received no value in exchange for the transfers. Since HIA Inc. received no value for the

transfers, a fortiori, it did not receive reasonably equivalent value, which brings the transfers within

the requirements of 11 U.S.C. § 548(a)(2). Merrill, 77 B.R. at 858-59; see also In re Taubman, 160

B.R. 964, 985-86 (Bankr. S.D. Ohio 1993) (adopting the rule announced in Merrill); Jobin v. Lalan

(In re M & L Business Mach. Co.), 160 B.R. 851, 858 (Bankr. D. Colo. 1993) (same), aff'd, 167 B.R.

219 (D. Colo. 1994).
10

Ms. Buchanan has not challenged the bankruptcy court's application of § 548(a) on any other

grounds. For the reasons given herein, we AFFIRM the district court's decision affirming the

decision of the bankruptcy court.