author: SCHWARZER, District Judge.

text:
    CHUA HAN MOW, Petitioner, v. UNITED STATES of America, Respondent.
    No. C-85-2399-WWS.
    United States District Court, N.D. California.
    Oct. 15, 1985.

      Janet Sherman, Santa Monica, Cal., for petitioner.
    Charles B. Burch, Asst. U.S. Atty., San Francisco, Cal., for respondent.
   MEMORANDUM OF OPINION AND ORDER

SCHWARZER, District Judge.

Petitioner, Chua Han Mow, moves to correct his federal sentence to reflect time he served in Malaysian custody allegedly “in connection with” the same acts upon which his federal sentence is based. Petitioner was held in Malaysian custody for two different periods: August 4, 1975 to December 20, 1977; and December 21, 1977 to November 28, 1979. The Attorney General determined that the second period of incarceration was for the same offense as the federal conviction and awarded credit for time served during that period, in accordance with 18 U.S.C. § 3568. At issue in this motion is the first period of custody. Because petitioner has failed to demonstrate his first period of Malaysian detention was in connection with the same acts upon which his current federal sentence is based, his motion will be denied.

I. The Standard of Review for Sentence Correction by the District Court

This court has jurisdiction to correct a federal sentence pursuant to 28 U.S.C. § 2255, which states in pertinent part:

If the court finds that the judgment was rendered without jurisdiction, or that the sentence imposed was not authorized by law ... the court shall vacate and set the judgment aside and shall discharge the prisoner or resentence him or grant a new trial or correct the sentence as may appear appropriate.

Petitioner has moved to correct his federal sentence under section 2255, attacking the lawfulness of his prison term based on the statutory entitlement to credit created by 18 U.S.C. § 3568, which requires the Attorney General to give a federal prisoner “credit toward service of his sentence for any days spent in custody in connection with the offense or acts for which sentence was imposed.”

The Attorney General bears the initial responsibility for determining when credit is due under section 3568, United States v. Clayton, 588 F.2d 1288,1292 (9th Cir.1979), and it is only when a prisoner has exhausted his administrative remedies that he has recourse to the district court. Chua Han Mow v. United States, 730 F.2d 1308, 1313 (9th Cir.1984), cert. denied, — U.S. —, 105 S.Ct. 1403, 84 L.Ed.2d 790 (1985). Chua has met this burden; his application for credit for the period August 4, 1975 to December 20, 1977 has been denied by the Attorney General.

Once the executive branch has acted, the district court may review the administrative decision for compliance with section 3568 in order to protect the prisoner’s statutory right to credit. United States v. Morgan, 425 F.2d 1388,1390 (5th Cir.1970); see also United States v. Mathis, 689 F.2d 1364, 1365 (11th Cir.1982). In making its review, the court is not necessarily bound by the administrative findings of fact. See, e.g., Shaw v. Smith, 680 F.2d 1104, 1107 (5th Cir.1982) (whether state custody was due solely to federal action is question of fact for district court to determine); O’Connor v. Attorney General of U.S., 470 F.2d 732, 734 (5th Cir.1972) (same); Morgan, 425 F.2d at 1390 (whether state and federal charges were the “same” is for court to determine); Doyle v. Elsea, 658 F.2d 512, 514-15 (7th Cir.1981) (review of § 3568 administrative decision; no mention of deference to administrative record); Thompson v. Brooks, 510 F.Supp. 223 (S.D. N.Y.1981) (same). In any event, if the initial administrative proceeding does not resolve the prisoner’s claim of entitlement to credit, the district court is free to address the issue. See Shaw, 680 F.2d at 1107 (where connection between federal action and state custody unresolved, court could decide the issue); O’Connor, 470 F.2d at 734 (same); Morgan, 425 F.2d at 1390 (similarity between state and federal charges unclear). Here, the Chief of Administrative Systems of the Federal Bureau of Prisons declared that he was “unable to make a determination as to whether the offenses which led to [Chua’s] conviction in the United States are the same as those in Malaysia for which he was ordered detained ...,” (Defendant’s Opposition, filed March 31, 1985, Declaration of Don Anderson, at 114) and the government denied petitioner’s claim because it was unable to determine the issue from petitioner’s papers. Id. Thus the executive branch has not decided the issue. Accordingly, the court may proceed with de novo review of petitioner’s motion.

II. Factual Background

Chua Han Mow, a Malaysian citizen, was originally indicted by a federal grand jury on May 16, 1973. He was charged along with six others with conspiring to violate federal laws prohibiting the importation, possession and distribution of heroin. Specifically, the indictment alleged Chua participated in a scheme to smuggle heroin from Malaysia to San Francisco. The acts alleged occurred in 1972 and 1973 in Malaysia and the United States. A federal warrant for Chua’s arrest was issued on the same day as the indictment.

From May 1973, until his eventual arrest in August 1975, attempts were made to apprehend Chua in Malaysia, where warrants were also pending against him. (Petitioner’s Suppl. to § 2255 Motion, filed March 19, 1985, Ex. I at 84 (Dept, of Justice memo)). Declassified federal documents released to petitioner pursuant to the Freedom of Information Act indicate federal drug enforcement officers had a strong and continuing interest in capturing Chua during this period. On May 24, 1973, a joint Malaysian-American “round-up” operation in Penang, Malaysia, based upon Malaysian warrants (Id.), failed to net Chua, who had gone into hiding.

While Malaysian and American authorities were tracking down Chua, United States officials had also begun preliminary procedures to extradite him, in apparent anticipation of his eventual apprehension. (Id.) A Department of Justice memorandum, probably written in June 1973, described the situation: “It is uncertain at this time, exactly what legal measures the government of Malaysia can bring against the subjects of these investigations. If adequate legal actions cannot be brought attempts will be made to extradite.” (Id.) By January 1975, extradition efforts had officially started through the government of Thailand, since there was no Malaysian-American extradition treaty in effect at the time. (Id. at 72 (telex from American Embassy, Malaysia), 79 (Dept, of Justice investigation report), 81 (same), 96 (same)).

On August 4, 1975, Chua was arrested by Malaysian police, apparently without the assistance of federal agents. A month later, he was convicted of violating the Malaysian Emergency Ordinance of 1969 and was subsequently imprisoned in Malaysia for a period of two years, commencing October 2, 1975, and continuing until October 1,1977. His conviction was based upon his drug smuggling activities in Malaysia since 1960.

While Chua was in prison, United States officials continued their efforts to extradite him. (Id. at 75 (Dept, of Justice investigation report)). An amendment to Malaysia’s Extradition Ordinance of 1958, effective January 1977, permitted Malaysian officials to accept “[djirect requests from any foreign country for the extradition of a fugitive criminal.” (Id. at 96 (Dept, of Justice investigation report)). In September 1977, the United States formally requested the extradition of Chua. (Id. at 72 (telex from American Embassy, Malaysia), 95 (same)).

Chua completed his Malaysian prison term on October 1, 1977. Upon his release, Malaysian officials ordered him restricted to the Province of Bundi for another two years, which was apparently customary procedure. (Petitioner’s Suppl. to § 2255 Motion, filed November 22,1982, Exhibit B, Transcript of Extradition Proceedings, at 4 (Cross-Examination of Tan Khik Seng)). A month after his release, on November 2, 1977, a federal grand jury returned a superseding indictment against him and others. The new indictment charged Chua with participating in the same 1972-73 heroin smuggling operation that formed the basis of the 1973 indictment. A day after the indictment, a new arrest warrant was also issued for Chua.

On December 21, 1977, Chua was again arrested by Malaysian authorities, this time based solely upon a request from the United States. (Id. at 10 (Direct-Examination of Tan Khik Seng); see also Petitioner’s Suppl. to § 2255 Motion, filed March 19, 1985, Ex. I at 72 (telex from American Embassy), 95 (same)). He remained incarcerated in Malaysia until he was extradited to the United States on November 28, 1979. Chua pled guilty on April 20,1979 to two of three counts pending against him in the superseding indictment. This Court sentenced him to thirty years in prison — 15 years on each count, to run consecutively.

Petitioner now moves this Court, pursuant to 18 U.S.C. § 3568, for an order requiring the Attorney General to credit his federal sentence with the time he spent in Malaysian detention from August 4, 1975 to December 20, 1977. Petitioner has already received credit for his second period of incarceration in Malaysia, from December 21, 1977 to November 28, 1979. Since Petitioner has exhausted his administrative remedies in seeking credit for his first period of detention, his present motion is properly before the court.

III. The Statutory Criteria for Determining Whether Credit is Due

Under 18 U.S.C. § 3568, the Attorney General must give a federal prisoner “credit toward service of his sentence for any days spent in custody in connection with the offense or acts for which sentence was imposed.” Petitioner claims his Malaysian detention from August 4, 1975 to Decern-ber 20, 1977 was “in connection with” his later federal conviction and therefore he is entitled to credit for this time. Petitioner has the burden to prove this connection. United States v. Dovalina, 711 F.2d 737, 740 (5th Cir.1983); Shaw v. Smith, 680 F.2d 1104, 1106 (5th Cir.1982).

Chua’s Malaysian custody is composed of three distinct periods: 1) presentence custody, from August 4, 1975 to October 2, 1975; 2) postconviction imprisonment for violating Malaysian law, extending from October 2, 1975 to October 1, 1977; and 3) postimprisonment restriction to Bundi Province from October 1,1977 to December 21, 1977. Two of these periods may be quickly dismissed.

A. Postconviction Imprisonment

Two years of petitioner’s Malaysian detention (October 2, 1975 to October 1, 1977) were served pursuant to a Malaysian prison sentence imposed as a result of Chua’s conviction under the Malaysian Emergency Ordinance of 1969. Petitioner’s claim of entitlement to credit for this period of incarceration is without merit because it involves postconviction custody.

It is a threshold requirement for section 3568 credit that the custody for which credit is sought is presentence custody; time served pursuant to a valid conviction, either federal or nonfederal, may not be credited against a federal prisoner’s sentence under section 3568. See Shelvy v. Whitfield, 718 F.2d 441, 444 (D.C.Cir.1983); United States v. Haney, 711 F.2d 113, 115 (8th Cir.1983); United States v. Shillingford, 586 F.2d 372, 374 (5th Cir.1978); Goode v. McCune, 543 F.2d 751, 753 (10th Cir.1976); Howard v. United States, 420 F.2d 478, 480 (5th Cir.1970); Kimberlin v. Attorney General, No. 84-C-5924 (N.D.Ill. July 9, 1985) (available October 1, 1985, on Westlaw, Allfeds file). Cf. United States v. Love, 555 F.Supp. 1041, 1043 (N.D.Cal. 1983).

The legislative history of section 3568 clearly indicates that Congress intended the statute only to provide credit for presentence custody. See S.Rep. No. 750, 89th Cong., 1st Sess. 21, 111 Cong. Rec. 24523 (1965) (amendments to § 3568, which established the section in its present form, were designed to “assure that persons convicted of crimes will receive credit for time spent in custody prior to trial ” (emphasis added)). Moreover, this intent is evident in the caption to 18 U.S.C. § 3568, which reads in pertinent part, “credit for time in custody prior to the imposition of sentence.” (emphasis added). Finally, the Federal Prison System (FPS), the administrative arm of the Department of Justice and Attorney General responsible for allocation of prison credit, has incorporated the rule into its regulations. The FPS determines eligibility for section 3568 credit according to guidelines contained in Program Statement No. 5880.24, Sentence Computation, Jail Time Credit Under 18 U.S.C. 3568, dated September 5, 1979 [hereinafter “FPS Statement 5880.24”], which state at section 5.b.(2) (applying to sentences imposed on or after September 20, 1966): “Jail time credit will not be given for any portion of time spent serving another sentence, either federal or non-federal [except where the non-federal sentence is later vacated].” This FPS interpretation of section 3568 is entitled to great deference. See N.Y. State Dept. of Social Services v. Du- blino, 413 U.S. 405, 421, 93 S.Ct. 2507, 2516-17, 37 L.Ed.2d 688 (1973) (construction of statute by those charged with its execution should be followed unless there are compelling indications the construction is wrong).

Accordingly, petitioner’s claim for credit for the prison time he served from October 2, 1975 to October 1, 1977, pursuant to his conviction under the Malaysian Emergency Ordinance of 1969, must be denied.

B. Postimprisonment Restriction

Petitioner further claims he is entitled to credit for the time he was restricted to Bundi Province after his release from Malaysian prison on October 1, 1977, and up until the date of his second arrest, on December 21,1977. This claim is also without merit.

Chua was restricted to Bundi Province by an order dated September 28, 1977, effective October 1, 1977. The order stated that restriction “is required ... [for] the purpose of preventing the person [Chua] from committing any activities in whatever form to jeopordize [sic] public order.” Under its terms, Chua was required: 1) to reside in “Bundi Province, Kemaman District, Trengganu;” 2) to maintain his residence there, unless permitted to move by the police; 3) to restrict his travel only to that region, unless permitted to travel outside the restricted area; 4) to inform the police of his address; 5) to present himself to the nearest police station every Monday; 6) to remain in his home between 8:00 p.m. and 6:00 a.m.; and 7) to “keep the peace and be in good behavior.” Chua was not confined in a jail or prison while in Bundi Province.

Under section 3568, “custody” refers to days actually spent in prison. Polakoff v. United States, 489 F.2d 727, 730 (5th Cir.1974); Ortega v. United States, 510 F.2d 412, 413 (10th Cir.1975); United States v. Peterson, 507 F.2d 1191, 1192-93 (D.C.Cir.1974); Thompson v. Brooks, 510 F.Supp. 223, 225 (S.D.N.Y.1981); Hogan v. United States, 383 F.Supp. 850, 852 (D.S.C. 1974). See also FPS Statement 5880.24 §§ 5 & 5.b.(4)(c) (“custody” means “physical incarceration in jail-type institution or facility” (emphasis in original)). It does not refer to time out on bail, United States v. Robles, 563 F.2d 1308, 1309 (9th Cir. 1977), cert. denied, 435 U.S. 925, 98 S.Ct. 1491, 55 L.Ed.2d 519 (1978); Sica v. United States, 454 F.2d 281, 282 (9th Cir.1971); Cochran v. United States, 489 F.2d 691, 693 (5th Cir.1974); Ortega, 510 F.2d at 413, nor does it refer to time out on parole, United States v. Hawkins, 492 F.2d 771, 772 (5th Cir.), cert. denied, 419 U.S. 1052, 95 S.Ct. 629, 42 L.Ed.2d 647 (1974); Thompson v. Brooks, 510 F.Supp. at 225. “Custody” refers only to time spent in “detention or imprisonment in a place of confinement.” Peterson, 507 F.2d at 1192-1193 (reviewing legislative history). Numerous courts have refused to grant credit for bail time or parole with restrictions similar to those imposed upon Chua. See, e.g., Robles, 563 F.2d at 1309 (restrictive bond not considered custody, though it limited travel, required defendant obey all laws and court orders, and keep his attorney posted with his address); Polakoff, 489 F.2d at 730 (bond restricted social life and travel); Thompson, 510 F.Supp. at 225 (parole required weekly, bi-weekly and monthly reports to state parole officers). Thus Chua is not entitled to credit for the time he spent restricted to Bundi Province.

C. Presentence Custody

The only period of Malaysian detention for which petitioner might be entitled to credit under section 3568 is the time he served in presentence custody, from the date of his arrest (August 4, 1975) to the date he began to serve his Malaysian prison sentence (October 2, 1975). But this claim also fails.

Petitioner bases his claim to credit on the theory that his Malaysian custody and federal sentence were based on the same acts or offense. This argument is derived from the Federal Prison System’s regulations, which state: “If the federal inmate has been in presentence state custody on essentially the same charge, credit will also be given even though a federal detainer may not have been on file during that time.” FPS Statement 5880.24, § 5.c.(l)(b).

The standard used by both the FPS and the courts to determine whether charges supporting the state custody are the “same” as those supporting a federal sentence is a strict one. The FPS guidelines state:

Credit will be given for time spent in non-federal presentence custody when the non-federal and federal charges are similar enough to be considered the same criminal charges or offense. This is applicable when the factors of time, location, and the criminal acts are identical in both charges.

FPS Statement 5880.24, § 5.c.(1)(b). In Gilbert v. United. States, 299 F.Supp. 689 (S.D.N.Y.1969), the court held that “[o]ffenses are the ‘same’ only when the evidence required to support a conviction upon a Federal indictment would have been sufficient to warrant a conviction upon the State indictment.” Id. at 692. There, state charges of check theft were held not the “same” as federal charges of stock fraud perpetrated with the very checks,which were stolen. Id. at 693. A similar standard has been used by virtually all other courts addressing the issue. See, e.g., Shillingford, 586 F.2d 372 (state and federal assault charges arising from one shootout with both state and federal officers not the “same”); Goode v. McCune, 543 F.2d 751 (10th Cir.1976) (federal and state charges of bank robbery arising from one robbery not the “same”); Fontaine v. United States, 434 F.2d 1310 (5th Cir.1970) (state charge of wrongful appropriation of a car and federal charge of transporting the same car across state lines); Dillinger v. Blackwell, 277 F.Supp. 389 (N.D.Ga. 1967) (same); United States v. Seeker, 275 F.Supp. 608 (D.Md.1967) (federal charge of transporting stolen vehicle and state charge of stealing tags for use in the same crime). See also 47 A.L.R.Fed. at 767-70 (collecting cases).

The Malaysian and federal charges brought against Chua do not satisfy this strict standard. Chua was convicted in Malaysia for violating the Malaysian Emergency Ordinance of 1969. Presumably, Chua’s arrest on August 4 and his presen-tence custody were based upon the same grounds for which he was convicted by Malaysian authorities; petitioner has offered no persuasive evidence to the contrary.

Chua’s Malaysian conviction listed as its “grounds” the following government finding:

That you since 1960 being an active member of an illegal syndicate in the trafficking of drugs in and out of the country. Your activities not only tarnish the international image of Malaysia but also cause the increase of crimes involving violence in respect of drugs and thus you have acted in such a manner contrary to public order.

In addition, the Order specified three “allegations of fact:” 1) that since 1960, Chua was “an active member of an illegal syndicate extensively involved in the smuggling of dutiable goods into Malaysia;” 2) that since 1960, he was “an active member of an illegal syndicate involved in the trafficking of opium from Thailand into Malaysia and having connections with drug traffickers in Singapore, Hong Kong and other SouthEast Asian countries;” and 3) that since 1971, he was “an active member of various syndicates involved actively in the trafficking of drugs in and out of the country.”

In contrast to the Malaysian Order, the November 2, 1977 federal indictment to which petitioner pleaded guilty charged Chua with involvement in a single 1972-73 scheme to smuggle heroin into San Francisco. Specifically, Count I of the indictment charged Chua with conspiring to import heroin into the U.S. in violation of 21 U.S. §§ 846 and 963, based upon his alleged participation in a series of meetings and drug deals with federal undercover agents in Malaysia, beginning March 25, 1973, and continuing through May 17, 1973. Count III (Count II was dropped when Chua pleaded guilty to Counts I and III) charged Chua with distribution of heroin with the intent to smuggle it into the U.S. in violation of 21 U.S.C. § 959; it was based upon his distribution of the drug in Penang, Malaysia in May, 1973.

A facial comparison of both the Malaysian and federal charges shows that the bases for petitioner’s Malaysian custody and his federal conviction are clearly different; the former is based on acts extending back to 1960, the latter on acts occurring in 1972 and 1973. But even assuming, ar-guendo, that the sole factual basis for the Malaysian charge of drug smuggling was the same 1972-73 series of acts which supported Chua’s federal conviction, petitioner’s argument still fails because the elements of the Malaysian and federal charges differ in at least one key respect; the federal charge of drug smuggling requires the intent to smuggle the drug into the United States; this element is not a necessary component of the Malaysian charge. For these reasons, the charges supporting Chua’s Malaysian custody are not sufficiently similar to those supporting his federal conviction so as to entitle petitioner to section 3568 credit.

Accordingly, petitioner’s § 2255 motion is denied.

IT IS SO ORDERED.

      . But Cf. United States v. Haney, 711 F.2d 113, 114 (8th Cir.1983) (where federal detainer has been filed against defendant, government has burden to rebut presumption that detainer was sole cause of state custody). Here, petitioner has not shown that a federal detainer was ever issued, nor does it seem likely one ever was, or would have been effective even if issued, since no Malaysian-American extradition treaty was in effect at the time of Chua’s presentence custody.

      . An exception to this rule exists for a prisoner whose state or federal sentence is later vacated. la that case postconviction imprisonment will be credited if it is based on the same charges as the later federal sentence. See Federal Prison System Program Statement No. 5880.24, Sentence Computation, Jail Time Credit Under 18 U.S.C. 3568, dated September 5, 1979, § 5.b.(2). E. g., United States v. Floyd, 519 F.2d 1031, 1035 (5th Cir.1975); Emig v. Bell, 456 F.Supp. 24, 26 (D.Conn.1978); Mize v. United States, 323 F. Supp. 792, 794 (N.D.Miss.1971); Hill v. Holman, 255 F.Supp. 924, 925 (M.D.Ala.1966).

      . Although petitioner claims the "United States authorities had advised the local Customs Department to arrest Chua and others and punish them,” (Petitioner’s Suppl. to § 2255 Motion, filed March 19, 1985 at 3), he has not supported this contention with any convincing evidence; petitioner cites only the hearsay declaration of his Malaysian attorney, which tentatively states: "When I talked to Mr. Boon [a Malaysian Customs Officer] and as far as I can now remember, he mentioned to me that the United States ... advised the Local Customs Department to arrest and punish [Chua and others].’’ (Id., Ex. A, Declaration of Triptipal Singh). Mr. Singh’s declaration is contradicted by the federal documents petitioner submitted in support of his motion and which indicate Chua was arrested August 4, 1975, based on Malaysian warrants, as detailed earlier.

      . These allegations of fact were, in turn, based upon a lengthy statement made by Chua between August 20, 1975 and August 28, 1975 while held in police custody. Although petitioner originally challenged the use of this statement at his sentencing, he used a portion of it in support of the motion now before the court (See Petitioner’s Suppl. to § 2255 Motion, filed March 19, 1985, Ex. G). In fairness, the court considers the remainder of the statement, pursuant to Fed.R.Evid. 106. The government submitted the complete statement during Chua’s sentencing in 1980. (See Government’s Memo Re Admissibility of Confession, filed April 1, 1980, Ex. A).
      The seventeen page, single-spaced statement amply supports the Malaysian government’s grounds for detention. In it, Chua admits to participating in the smuggling of textile into Malaysia from 1960 (Id. at ffl 5, 7); to assisting people he knew were smuggling opium into Malaysia from Thailand (Id. at ff 58, 78, 79, 84); and to participating in at least four heroin deals, one in 1971, destined for New York (Id. at ff 11-18, 22), another two in 1974, possibly destined for Amsterdam or the United States (Id. at ff 65-71, 72-75), and the 1972-73 smuggling operation aimed at San Francisco and for which Chua was indicted by the federal grand jury. (Id. at ff 24-33). In addition, the statement also details Chua’s active participation in illegal gambling operations throughout Southeast Asia, as well as his close association with numerous drug traffickers.

      . Additionally, petitioner argues that the August 4, 1985-December 20, 1977 period of Malaysian detention "was based on a plea bargain arrangement whereby Chua was advised by Malaysian authorities ... that if he would admit to having participated in the charged offenses, the Minister of Home Affairs would agree to confine him in Malaysia for two years in lieu of being extradited to the United States.” (Petitioner’s Suppl. to § 2255 Motion, filed March 19, 1985, at 2). Thus petitioner apparently contends this plea bargain arrangement shows that the Malaysian detention was due to the federal charges. But this proposition is not convincing.
      First, the only evidence submitted by petitioner in support of the alleged plea bargain is a hearsay declaration by Chua’s Malaysian attorney. (See Id., Ex. A). Second, the thrust of petitioner’s argument is belied by the very face of the Malaysian detention order, which is clearly based on charges different from the federal indictment, as already explained. Finally, petitioner admitted his guilt in his presentence statement to many more crimes than simply the 1972-73 San Francisco smuggling scheme. See footnote 4 supra.

        . Because petitioner’s claim fails based on the face of the Malaysian and federal charges, his request for an evidentiary hearing is also denied.


source: Caselaw Access Project

author: DAVID L. RUSSELL, District Judge.

license: Public Domain

text:
    The NORTHERN TRUST COMPANY, an Illinois state banking corporation, Plaintiff, v. The FEDERAL DEPOSIT INSURANCE CORPORATION, in its capacity as Receiver for Penn Square Bank, N.A., Defendant.
    No. Civ 83-506-R.
    United States District Court, W.D. Oklahoma.
    Oct. 15, 1985.

      Patrick M. Ryan and Charles E. Geister, III, Ryan, Holloman & Geister, Oklahoma City, Okl., for plaintiff.
    Charles C. Baker and Oliver S. Howard, Gable & Gotwals, Tulsa, Okl., for defendant.
   ORDER

DAVID L. RUSSELL, District Judge.

Background

Plaintiff Northern Trust Company is an Illinois state banking corporation. Defendant Federal Deposit Insurance Company (“FDIC”) is the Receiver of Penn Square Bank, an Oklahoma national banking corporation that was declared insolvent by the Comptroller of the Currency in July, 1982. Prior to its insolvency, Penn Square originated and participated loans to “upstream” banks such as Northern Trust. Subsequently, in the course of the receivership, the FDIC offset the borrowers’ Penn Square deposit accounts against the balance due on their loans. Receiver’s certificates were issued to Northern in proportion to its stake in the offsets. Northern will take its share of the remaining loan payments in “new money” as it is collected from the borrowers.

In Northern Trust’s view, “it appears certain” that the actual value of the Receiver’s certificates will be less than their face value. Unhappy with this prospect of diminished returns on its participations, Northern Trust filed the instant suit, alleging that through the participations it acquired legal ownership of the loans and collateral; that the Receiver’s setoffs impaired Northern’s property interests in the loans and collateral; that the borrowers’ knowledge of the participations eviscerated the equities of setoff; and that the setoffs were effected by the Receiver in an inconsistent and arbitrary manner. As an alternative theory, Plaintiff claims that the parties intended to create a fiduciary relationship through the participations. According to this view, Penn Square (and, by extension, the Receiver) were responsible to Northern Trust for segregating and safeguarding Northern’s share of the loan proceeds on a dollar-for-dollar basis.

The case is pending before the Court on the Receiver’s motion to dismiss Plaintiffs First Amended Complaint.

Discussion

Ownership and Property Rights

A participation relationship is governed by the terms of the participation agreement. Franklin v. Commissioner of Internal Revenue, 683 F.2d 125 (5th Cir. 1982). In Hibernia National Bank v. FDIC, et al, 733 F.2d 1403 (10th Cir.1984) the Tenth Circuit construed participation certificates identical to those at bar. The Court concluded that the certificates created an assignment coupled with an agency and expressly found that the certificate “cannot be read to transfer the ownership of the loans.” 733 F.2d 1407-1408. (As Plaintiff emphasizes, Hibernia was an injunction suit entailing unique standards of proof; however, that distinction does not undercut the circuit’s substantive interpretation of the certificate’s terms.)

The certificates evidencing Northern’s participations (which are set forth in the appendix to this Order) state, inter alia, that Penn Square would “hold for Northern’s account” its pro rata share of loan payments; that Penn Square retained sole discretion to modify or compromise the loans; and that Penn Square’s responsibility to Northern was limited to the “same care” that Penn exercised toward non-participated loans. The terms of Northern’s certificates gave it less input into Penn Square’s management of the participated loans and their collateral than the agreement construed by this Court in Seattle-First Nat’l Bk v. FDIC, 619 F.Supp. 1351 (W.D.Okl.1985), which arguably created property and trust interests. Even that possibility did not preclude offset, however, and the weaker terms of Northern’s certificates do not preclude offset here. The Court concludes that Northern Trust’s certificate did not create or transfer any ownership or property rights in the participated loan or the supporting collateral. Hibernia National Bank v. FDIC.

Borrowers’ and Banks’ Right of Offset

In FDIC v. Mademoiselle of California, 379 F.2d 660 (9th Cir.1967), Hibernia, and Chase Manhattan Bank v. FDIC, 554 F.Supp. 251 (W.D.Okla.1983), the Receiver’s offsets against participated loans found support in the borrowers’ equitable right to offset, Scott v. Armstrong, 146 U.S. 499, 13 S.Ct. 148, 36 L.Ed. 1059 (1892). Plaintiff posits that the purpose of the offsets allowed in those cases was preservation of the borrowers’ rights, whereas in the present case it is the Bank’s estate which benefits from the offset because the Bank retains the “real dollars” of the borrower's deposits and passes upstream the (allegedly discounted) receiver’s certificates. In Northern’s view, this is a usurpation of equities.

Plaintiff is correct that a bank’s “lien”, or right to setoff, is conceptually distinct from the borrower’s right to setoff. Okl. Stat.Ann. tit. 42 § 32 (West, 1979) provides that: “A banker has a general lien, dependent on possession, upon all property in his hands belonging to a customer, for the balance due to him from such customer in the course of the business.” Although the statute uses the term “lien”, Oklahoma courts have pointed out that the bank’s right “is more accurately a right of setoff for it rests upon, and is coextensive with, the right to setoff as to mutual demands, (citation)” Ingram, v. Liberty National Bank and Tr. Co. of Okla. City, 533 P.2d 975, 977 (1975). Ingram held that a bank’s statutory setoff rights presupposes:

a) that the fund deposited in the bank by the debtor was the property of the latter; (b) that the fund was deposited without restrictions and was not a special fund, and (c) (there was) an existing indebtedness then due and owing by the depositor to the bank.

(citing Zollinger v. First National Bank of Okla. City, 259 P. 141.) [5A A. Michie on Banks and Banking, § 115c (1983).]

Setoffs by the FDIC as Receiver are specifically authorized by the Federal Reserve Act, 12 U.S.C. § 1822(d). The FDIC as Receiver may “withhold payment of such portion of an insured deposit of any depositor in a closed bank as may be required to provide for ... any liability of such depositor to the closed bank or its Receiver, which is not offset against a claim due from such bank, pending the determination and payment of such liability by such depositor ...” We take this statute to recognize the Receiver’s authority, on behalf of an insolvent bank, to effect an offset against a depositor for the “claim due from” the bank, and to create a bank’s federal statutory right to offset.

A bank’s claim to setoff has also been recognized as having a basis in equity. Messick v. Rardin, 6 F.Supp. 200, 202 (E.D.Ill.1934); 5A Michie § 1156.

The predicate for setoff is mutuality between the creditor bank and the borrower (Navajo Tribe v. Bank of New Mexico, 700 F.2d 1285 (10th Cir.1983)) and so long as mutuality continues, insolvency does not preclude a bank from effecting setoffs. 5A Michie on Banks and Banking, §§ 115(b)(c) (1983).

In like manner, as long as the lead bank maintains creditor status and responsibilities in a participated loan, mutuality survives between the lead bank and the borrower and setoff is not precluded. The Court finds that according to the terms of Northern Trust’s participation certificates, Penn Square as lead bank retained sufficient mutuality to warrant the Receiver’s exercise of its statutory right to offset. The Court further finds that the bank’s right to offset survives its insolvency and is incorporated into the Receiver’s duty to marshal the bank’s assets 12 U.S.C. 1821(d). See Seattle First Nat’l Bank v. FDIC, 619 F.Supp. 1351, 1357-1358 (W.D. Okl.1985).

From an equitable standpoint, enforcing an offset against a participated loan entails balancing benefits and hardships among at least three parties: the borrower, the lead bank, and the participants). These permutations are compounded when insolvency is an added factor and the Court readily admits to frustration, and perhaps impossibility, in striking a balance satisfactory to all parties. The Court concludes that it is sufficient to resolve the claims in favor of the borrowers and the lead bank (so long as a sufficient basis for mutuality exists), leaving participant banks to bear the market risk of their participation venture. To charge participants with responsibility for investigating the creditworthiness and solvency of both the lead banks and their borrowers is consistent with banking policies announced by the Comptroller of the Currency in its guidelines for loan partic-ipations, infra.

In summary, the Bank, and derivatively the Receiver, had an independent basis in statute and perhaps in equity to effect the offsets here. No term in the participation certification precluded passing on an offset to the upstream bank. The language chosen by the parties in their agreements and certificates may have had commercially perilous consequences, and indeed these may be perilous times for banks generally, but the solution lies in better draftsmanship of participation certificates. See, “Protecting Loan Participations from Set-offs,” 18 Tulsa L.J. 261 (1982).

Borrowers’ Knowledge of Participations

Plaintiff alleges that many of the borrowers knew or should have known that their loans were in fact being funded by banks other than Penn Square. This knowledge, in Plaintiff’s view, belies the borrowers’ expectation of offset. In support of this theory, Plaintiff emphasizes the language in Mademoiselle suggesting that the borrower there was ignorant of the participation. However,

this court is convinced that the fact that some of the borrowers from Penn Square bank had noticed that a loan participation had been sold to another bank ... does not shift the equities from the borrowers to the participating bank.

Chase Manhattan Bank v. FDIC, 554 F.Supp. at 255. The borrowers’ knowledge is similarly immaterial to the lead bank’s surviving right to offset, supra.

That Northern Trust and other upstream banks were disappointed in their commercial expectations of Penn Square is not disputed, but Northern’s disappointment can be termed “inequitable” only if it had an equitable claim, interest, or fund at stake. Such is not the case. As explained above, the participation certificates created no property interest or ownership right. Whatever factual disparity exists between the face amount and the actual value of Receiver’s certificates, this discrepancy does not overcome the borrowers’ and bank’s right to effect the offset. Furthermore, as explained below, no “augmentation” to the Receiver’s estate resulted from the offset and no fiduciary relation was created by the participation.

Augmentation and Preference

In Hoffman v. Rauch, 300 U.S. 255, 57 S.Ct. 446, 81 L.Ed. 629 (1937), a depositor whose bonds had been sold by the bank prior to its insolvency and without the depositor’s authorization sought to establish a preferred claim for the amount of the bonds’ sale price, which the bank had credited to her account. The depositor’s argument in support of her claim was strikingly similar to Northern’s position regarding its setoff:

(Depositor) submits that since the bank used the bonds in discharge of a liability it was thereby saved the use of its own funds for that purpose and the assets of the bank at the time of closing were therefore larger in amount than they otherwise would have been. 300 U.S. at 256, 57 S.Ct. at 446.

The Court expressly rejected this argument, holding that the bank had not realized an increase in its own assets; it had merely substituted its obligation to pay the deposited sale revenues for its obligation to pay the amount of the bonds. Although the depositor in Hoffman did not recover the sale proceeds, dollar-for-dollar, in the face amount of the bonds, that discrepancy was not considered an augmentation. In the present case, Receiver’s certificates (for the amount of the offset) were substituted for loan payments (in the same amount) by the borrower. Assuming, arguendo, that Northern’s projections are correct and there is a discrepancy between the face amount of the certificates and their actual value, that difference is still not an augmentation to the bank, according to Hoffman.

Fiduciary Relations

Ordinarily, banks involved in commercial arm’s-length transactions do not stand in a fiduciary relation to each other (Aaron Ferer and Sons, Ltd. v. Chase Manhattan Bank, 731 F.2d 112, 122 (2nd Cir.1984)); Barclay’s Bank D.C.O. v. Mercantile Nat’l Bank, 481 F.2d 1224, 1235 (5th Cir.1973), cert. dism'd 414 U.S. 1139, 94 S.Ct. 888, 39 L.Ed.2d 96 (1974). This general principle holds true for loan participation agreements. In Re Colocotronis Tankers Securities Litigation, 449 F.Supp. 828, 833 (S.D.N.Y.1978). In participations, as in other commercial transactions, the participants are held to marketplace standards of vigilance and independent inspections. Guidelines for loan participations issued by the Office of the Comptroller of the Currency indicate that purchasing (upstream) banks should conduct independent and prudent evaluations of loans offered for participation: “The acceptance by a purchaser of a favorable analysis of a loan issued by the seller, a credit rating institution, or another entity does not satisfy the need to conduct an independent credit analysis.” Comptroller of the Currency, Banking Circular 181 (rev. Aug. 2, 1984), Federal Banking Law Reports 11 60,799 (Commerce Clearing House.)

The fact that the lead bank holds title while acting as an agent for the participant does not render the agent a trustee for the participant. Restatement Second of Trusts, § 8, comment (h) (1959). The Restatement suggests that if interest or fees are charged between parties for the acquisition or use of money, that factor indicates a commercial rather than a fiduciary relationship. This observation is not crucial to our decision, however.

Notwithstanding the foregoing general principles, Plaintiffs insist that Penn Square and Northern Trust intended to create a fiduciary relationship. The intention of the parties must be ascertained from the terms of the contract itself, if the terms are clear (Harrison Western Corp. v. Gulf Oil Co., 662 F.2d 690 (10th Cir. 1981)), and extrinsic evidence is considered only in the absence of clarity. Premier Resources Ltd. v. Northern Natural Gas Co., 616 F.2d 1171 (10th Cir.1980), cert, den. 449 U.S. 827, 101 S.Ct. 92, 66 L.Ed.2d 31 (1980) (decision based on Oklahoma contract law); Humphreys v. Amerada-Hess Corp., 487 F.2d 800 (10th Cir.1973); Ollie v. Rainbolt, 669 P.2d 275 (Okla.1983). Construction of an unambiguous contract is a matter of law, and the Court will interpret the terms, absent significant ambiguity. CMI Corp. v. Gurries, 674 F.2d 821 (10th Cir.1982); Corbett v. Combined Communications Corp. of Okla., 654 P.2d 616 (Okla.1982).

The Court finds that the terms of Northern Trust’s participation certificates clearly and unambiguously establish an assignment and agency. Hibernia National Bank v. FDIC. According to the certificates, the parties agreed that Penn Square would act as the holding and collecting agent for Northern Trust’s pro rata interest in the note. Penn Square reserved to itself all rights concerning the release and substitution of collateral, the authority to consent to assignment and transfer of the participation, and the discretion to enforce or exercise the terms of the note. Accordingly, the Court determines as a matter of law that the participation certification clearly and unambiguously indicate that no fiduciary duties were established in the participation relationship between Penn Square and Northern Trust. The parol evidence rule would therefore bar consideration of additional evidence concerning the parties’ intentions. Okl.Stat.Ann. tit. 15 § 137 (West, 1983).

Receiver’s Administration of Offsets

Northern claims that the Receiver has been inconsistent in designating and effecting offsets when a borrower had both participated and non-partieipated loans. The FDIC concedes that it “may have been inconsistent” in effecting offsets and “may not have always consistently followed its intended policies because of (the) initial mass confusion following the closing of (Penn Square).” (FDIC Brief in Support of Motion to Dismiss at 6 (July 22, 1983)). However, Plaintiff suggests no documentary, statutory, or regulatory authority which governs the Receiver’s discretion in applying offsets. This Court has held that the Receiver’s Manual does not establish enforceable rights in favor of third parties {Chase Manhattan v. FDIC; Seattle-First v. FDIC; accord, 1st State Bk. of Hudson Co. v. U.S., 599 F.2d 558, 564 (3rd Cir. 1979), cert. den. 444 U.S. 1013, 100 S.Ct. 662, 62 L.Ed.2d 642 (1980). As a matter of general banking practices, where a borrower/depositor has executed more than one note to a bank the bank may apply the depositor’s balance to set off whichever debt the bank chooses (5A Michie on Banks and Banking, § 119a at 374 (1983)). The Court sees no reason why this same discretion should not be allowed under present circumstances to the Receiver.

Conclusion

The terms of the participation certificate do not create or transfer “property interests” or “ownership” of the loan from Penn Square to Northern Trust, nor do the terms establish a fiduciary relation between the banks. Instead, the terms of the certificates clearly and unambiguously indicate the parties’ intent to create an assignment coupled with an agency. There are no equities in favor of Northern Trust which outweigh the borrowers’ and the bank’s respective equitable and statutory rights to the disputed offsets. The borrowers’ alleged knowledge of the participations does not negate their equitable interests. The offsets do not create a “special fund” or “augmentation” in support of a preference in favor of Northern Trust. The Court reaches these conclusions as matters of law, based on the undisputed facts before the Court.

It appears beyond doubt that Plaintiff can prove no set of facts under the present allegations that would entitle it to the relief sought. Swanson v. Bixler, 750 F.2d 810 (10th Cir.1984). Even assuming as true all well pleaded facts concerning the partic-ipations and offsets, Plaintiffs claims for relief find no support in the law and accordingly are dismissed under Rule 12(b)6, Federal Rules of Civil Procedure.

APPENDIX

CERTIFICATE OF PARTICIPATION PENN SQUARE BANK na Oklahoma City

Date_

TO:

WE ACKNOWLEDGE RECEIPT of $_in payment of your participation in that amount in a loan of $_made to _, evidenced by a note dated_due_with interest at_ per cent per annum, payable_

So that you will have a complete description of the subject loan, we are attaching hereto a true copy of the note and a true copy or a description of all security taken by us.
We hereby confirm that in consideration of your payment to us, we are holding for your account a pro rata interest in the unpaid principal of the subject note, together with the same proportionate interest in any and all interest to accrue on the note from and after date, and in any and all collateral securing the same, together with any guaranties thereof.
It is expressly understood that we do not make any representations or assume any responsibility with respect to the validity, genuineness or collectibility of said note, or the collateral securing the same, or guaranties thereof, and that we are entitled to use our discretion with respect to exercising or refraining from exercising any rights, or taking or refraining from taking any actions which may be vested in us, or which we may be entitled to take or assert under the terms of our note and that, although we will exercise the same care to protect your interest as we do to protect our own, we shall not, so long as we exercise such care, be under any liability to you with respect to anything which we may do or refrain from doing in the exercise of our judgment or which may seem to us to be necessary or desirable in the premises. We reserve the right to release collateral and to permit substitutions of new collateral.
This participation may not be assigned or transferred in whole or in part without our prior written consent. Also it is the understanding that we shall have the exclusive option and privilege of repurchasing this entire participation at any time by paying to you your pro rate share of the unpaid principal and accrued interest or less unearned discount, as the case may be.
We further understand that you will reimburse us in proportion to your participation in this loan for all expenses, attorneys fees, and other liabilities incurred by us in connection with this loan.
Kindly indicate your acceptance of this participation upon the conditions outlined above on the enclosed copy of this participation and return it to us.
Sincerely,
PENN SQUARE BANK na
Oklahoma City
By -

      . In Seafirst v. FDIC, this Court held that wired funds dispatched by an upstream bank to fund its share of a participated loan could constitute a "special deposit" and serve as the basis for a preferred claim so long as the funds were wired to a separate account and the Bank’s remaining general assets were not depleted below the amount of the special deposit, and so long as the amount of the wired funds remained intact. The crucial distinction between the instant case and Seafirst lies in the absence at bar of cognizable augmentation. In Seafirst there was an actual infusion of wired funds from the upstream bank. Here, in contrast, there was neither an intended nor an actual loan payment by the borrower but merely an offset between borrower and bank which cancelled part of the borrower's obligation. As explained by the Supreme Court in Scott v. Armstrong, 146 U.S. 499, 13 S.Ct. 148, 36 L.Ed. 1059 (1892) and Hoffman v. Rauch, 300 U.S. 255, 57 S.Ct. 446, 81 L.Ed. 629 (1936), and as recognized in this Circuit by Hibernia National Bank v. FDIC, 733 F.2d 1403 (10th Cir.1984), an offset is not a transfer of funds; it is a cancellation of debt. There being no augmentation of receivership assets effected through the instant offsets, equitable and agency principles do not suffice to create a preference.


author: MATSCH, District Judge.

text:
    James P. JOHNSON, as Equity Receiver to Collect Assets, on behalf of the Claimants of Chilcott Commodities Corporation, Chilcott Portfolio Management, Inc., Thomas D. Chilcott, d/b/a Chilcott Futures Fund, Thomas D. Chilcott, and Chilcott Futures Fund, Plaintiff, v. Joseph STUDHOLME and Renabelle B. Studholme, Defendants.
    Civ. A. No. 85-M-794.
    United States District Court, D. Colorado.
    Oct. 15, 1985.
    Gerald L. Bader, Jr., Pamela Nagle Hui-tín, Ann L. Duckett, Bader & Cox, Denver, Colo., for plaintiff.
    John A. Studholme, Fred Clifford, Boulder, Colo., for defendants.
   MEMORANDUM OPINION AND ORDER

MATSCH, District Judge.

In Civil Action No. 81-F-999, an action brought by the Commodity Futures Trading Commission, James Johnson was appointed Equity Receiver for Chilcott Commodities Corporation, Chilcott Portfolio Management, Inc., Thomas D. Chilcott, d/b/a Chilcott Futures Fund, and Thomas D. Chilcott, to take control of all of the properties and interests and exercise all the rights and powers of those defendants in that ease. The reasons for that action have been explained fully in other opinions by other judges in this district. See the orders in CFTC v. Chilcott Commodities Corp., et al., No. 81-F-999 (D.Colo. August 30, 1982) (Finesilver, J.) aff'd in part and rev’d in part, 713 F.2d 1477 (10th Cir. 1983); Johnson v. Chilcott, 590 F.Supp. 204 (D.Colo.1984) (Carrigan, J.); Johnson v. Chilcott, 599 F.Supp. 224 (D.Colo.1984) (Carrigan, J.); Niagra Fire Insurance v. Johnson, No. 84-A-746 (D.Colo. August 2, 1984) (Arraj. J.); Johnson v. Miller, 596 F.Supp. 768 (D.Colo.1984) (Kane, J.). In summary, Thomas Chilcott, president of Chilcott Portfolio Management, Inc., operated a classic “Ponzi” scheme and obtained millions of dollars from hundreds of investors by representing that their money would be pooled in a highly profitable investment fund. He induced a constant stream of new investments by misrepresenting the Fund’s performance and gave the appearance of success by using the funds from new investments to pay fictitious profits to earlier investors. When the scheme lost momentum, most investors lost their money. The operations ended in June, 1981.

The receiver brought this and other actions against all those investors who received payments from Chilcott. He seeks to recover as “fictitious profits” (the amounts paid to the investors in excess of their contributions) for distribution to the receivership estate’s creditors and claimants. The receiver does not purport to assert any claims on behalf of defrauded investors. Recovery is sought under claims for relief based on theories of (1) recovery of receivership assets, (2) unjust enrichment, (3) conversion, and (4) money had and received. Jurisdiction is ancillary to the main receivership action in this district. The defendants have moved to dismiss these claims under F.R.Civ.P. 12(b)(6).

In considering this motion, the court must assume that the plaintiff can prove all of the facts alleged in the complaint. What is most significant, however, is what the plaintiff has not alleged. There is no allegation that any defendant committed fraud or participated in the scheme. Indeed, there is no allegation that any of the defendants knew that the Fund was a Pon-zi scheme, and no allegation that the defendants received these payments with anything less than a good faith belief that it was a legitimate return on their investment as part of a contractual relationship with the Fund. In short, the defendants simply received payments which appeared to be the very performance which was promised to them when they made their investments in the Fund. The basic premise of the plaintiff’s claims is that fairness requires a redistribution of the effects of Thomas Chilcott’s fraud by collecting from those who received more than their investments and paying those who participate in the receivership estate. It should be emphasized that the receiver is not asserting the rights or claims of any investors, and that distribution is not to be made to a class of investors. What may be collected from these early investor defendants would become a part of the general receivership estate.

The eases upon which the receiver places principal reliance are not applicable because they are dependent upon substantive provisions of the bankruptcy code. The Utah bankruptcy court applied the recovery from voidable transfer provisions of 11 U.S.C. § 550, and the avoidance of transfers within one year before bankruptcy provision of 11 U.S.C. § 548(b) to recover Ponzi scheme payments in In re Independent Clearing House Co., 41 B.R. 985 (D.Utah Bkrtcy 1984). The recovery was, of course, limited to the payments made in the one year period before the filing of the bankruptcy petition.

The decision rests solely upon the application of federal bankruptcy law and does not purport to .create any equitable right of action. The plaintiff argues that an equity receiver has the powers of a bankruptcy trustee. That adage has some utility, but it does not mean that the substantive provisions of the bankruptcy code are available for use in a non-bankruptcy receivership. The Bankruptcy Code is sui generis. Its specific provisions function within the context of an intricate legislative system of laws designed carefully to meet the policy objectives of the Congress. For example, § 548 of the Bankruptcy Code is a strict liability provision that permits a trustee to avoid transfers made for less than equivalent value within one year preceding the filing of bankruptcy. That power is exercised for the benefit of the creditors of the bankruptcy estate whose claims are filed and allowed according to other statutory requirements. To extract this authority from the Bankruptcy Act, and apply it to recover payments made from three to twelve years earlier for the benefit of any persons to whom distribution may ultimately be ordered in the receivership, would be such an expansion of the law as to be judicial legislation beyond the authority of this court.

The plaintiffs’ contention that the defendants were not purchasers for value is both irrelevant and wrong. It is irrelevant to the extent it purports to extend bankruptcy law to this situation. The point is wrong because the value given by the investors was, of course, their contributions and the risk that they may lose all or part of their investment. In retrospect it is obvious that both the risks and the possible returns were high. While the scheme may have been illegal, from an economic perspective there is no doubt that the innocent investors gave value. They did all that was asked of them in the representations which induced their investment.

In In re Young, 294 Fed. 1, (4th Cir. 1923), an investor put $4,000 into a Ponzi scheme. Before the debtor declared bankruptcy the investor received $4,796.90. After bankruptcy the investor filed a claim with the court to recover another $2,000 against the bankrupt estate as part of the contractual obligation owed by the debtor. He asserted it was his right to share equally in the distribution of the estate along with other victims who may have received back only a part or none of their investment. The court rejected his claim, holding that under equitable principles the investor who had already received “profits” would not be allowed to share in the distribution of the bankruptcy estate where after its division other investors could only recover a small part of their capital investment. In re Young did not allow a receiver for a Ponzi scheme to recover fictitious profits.

In re Tedlock Cattle Co., Inc., 552 F.2d 1351 (9th Cir.1977), did no more than follow Young and apply this “equity” theory as a measure for recovery by defrauded “Pon-zi” scheme investors. The dispute in Ted-lock was the method to use in distributing remaining assets of a Ponzi scheme to investors who had suffered losses. In re Tedlock did not create a right to recover from “overpaid” investors and, in fact, explicitly stated: “Those who took their ‘profits’ and got out are not before us.” Id. at 1352.

The plaintiff seeks to escape the general rule that he stands in the shoes of Chilcott and is subject to all defenses that could have been asserted against the Fund, by stating that a receiver of an insolvent corporation, in the interest of creditors, may disaffirm dealings of the debtor in fraud of their rights. Yet, the plaintiff insists that he is not attempting to assert any claims on behalf of individual investors. Accordingly, the argument must be that the trade creditors were defrauded by making payments to investors according to the representations made to them. But the Fund did not overpay investors to defraud creditors; the payments were made to maintain and perpetuate the Fund.

In short, research has uncovered no case in which a receiver of the defrauding entity has recovered payments to Ponzi scheme investors who received more than their contribution. It must be remembered that the receiver stands in the shoes of Thomas Chilcott and the various Chilcott Funds. To the extent that the Fund seeks recovery on equitable principles, it is difficult to imagine a less deserving entity. There is no equity in permitting an unincorporated association that perpetrated a massive fraud upon investors to recover money it had paid pursuant to contractual promises. Because the plaintiff is not asserting the claims of individual investors, he cannot raise those investors’ equitable considerations.

It is not clear that the Fund was injured by the payments to investors in excess of their capital contributions. The very existence of the Fund depended upon the payment to early investors of amounts that were in reality the contributions of later investors. Without such payments, the Fund could not have continued. The Fund was a fraud, and the existence and continuance of that fraud depended upon the payments the receiver now seeks to recover. It cannot logically be stated that the fund was “injured” by payments that were essential to its existence.

The claims for money had and received and injust enrichment fail for similar reasons. To recover for unjust enrichment in Colorado a plaintiff must show “(1) that a benefit was conferred on the defendant by the plaintiff, (2) that the benefit was appreciated by the defendant, and (3) that the benefit was accepted by the defendant under such circumstances that it would be inequitable for it to be retained without payment of its value.” Cablevision of Breckenridge, Inc. v. Tannhauser Condominium Ass ’n, 649 P.2d 1093, 1097 (Colo. 1982). For the reasons already given, these are not circumstances in which it would be inequitable for the defendants to retain the payments to them. The defendants accepted the money from the Fund in a good faith belief that the Fund was performing its contractual obligations. The Fund as an entity has no justifiable claim on the money it paid investors. Similarly, an action for money had and received, a common law claim based on the principle of unjust enrichment, can be maintained only so long as the money in good conscience belongs to the plaintiff.

Whether investors who lost money have a claim against those who received fictitious profits need not be decided here because those investors are not before the court. In any event, it is not clear that restitution is appropriate between the innocent investors who lost money and innocent investors who obtained fictitious profits. Here, the mistake of all investors was to trust Chilcott. Whether general principles of equity require that completely innocent investors in a Ponzi scheme should be required to share in the losses with, or be divested of “profits” for the benefit of persons whom they have never met or dealt with is not an easy question.

Some investors who received “fictitious profits” may have spent the money on education or other necessities many years ago. What else in equity and good conscience should plaintiffs who received money in good faith pursuant to an “investment contract” have done? In contrast, some investors who lost money may have been speculators who were prepared to lose their investments. There is simply no neat answer to the various equities involved here where the investors never knew each other and were equally at fault for trusting Chilcott. “Unexpected gains or losses by equally innocent parties may present similar problems, not capable of resolution by unjust enrichment principles.” Dobbs, Remedies, § 4.1 (1973). There is no precedent in law or equity for applying unjust enrichment principles in these circumstances. In such circumstances the courts may simply leave the parties where they were found.

As to the claim for conversion, the black letter law is that there can be no action for the conversion of money. 89 C.J.S. Trover & Conversion, § 23 (1955), 18 Am.Jur.2d Conversion § 10 (1965) (“Hence, where there is no obligation to return identical money, but only a relationship of debtor and creditor, an action for conversion of funds representing the indebtedness will not lie against the debtor”). In the old common law claims, such factual allegations would state an action in assumpsit for money had and received. But even if Cornelius v. Gerwin and Co., 642 P.2d 54 (Colo.App.1982) can be read to create new law, it is inapplicable. Unlike the plaintiffs in Cornelius, once the Fund sent the money to a defendant pursuant to a contract for investment it had no further possessory interest in the money.

The plaintiff has failed to state a claim upon which relief can be granted. Accordingly, it is

ORDERED, that the motion to dismiss under F.R.Civ.P. 12(b)(6) is granted as to all defendants. This civil action is dismissed.

      . The investment agreement provided, in part, as follows:
      "THIS AGREEMENT, made and entered into this_day of_, among THOMAS D. CHILCOTT, hereinafter called ‘Managing Agent,' (and _), hereinafter called 'Investor'.
      WHEREAS, the investor has agreed to make contributions to a common investment fund, hereinafter called the 'investment fund', and
      WHEREAS, said investment fund is established for the purpose of trading in the commodities and stock market exclusively, and
      WHEREAS, the Investor is desirous of obtaining management services and investment advice from the Managing Agent and said Agent has agreed to render said services and manage the investment fund.”