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Investors were told that the funds were used to purchase business
equipment for resale. No equipment was purchased. Instead,
funds obtained from later investors were used to pay early
investors their promised interest rates. Later investors often
received no payments.
All of M&L's equipment, inventory, accounts, chattel paper,
and general intangibles were subject to a security agreement,
dated September 11, 1989, in favor of Capitol Federal Savings and
Loan (Capitol Federal). Subsequently, when the Resolution Trust
Corporation (RTC) was appointed Capitol Federal's receiver, RTC
succeeded to Capitol Federal's security interest.
On October 1, 1990, M&L filed a petition with the United
States Bankruptcy Court for the District of Colorado under
Chapter 7 of the Bankruptcy Code. 11 U.S.C sec. 701 (1994). The
Chapter 7 filing was due to a clerical error, and the case was
converted to a Chapter 11 proceeding on October 9, 1990. 11
U.S.C. sec. 1101 (1994).
M&L notified private investors by letter dated October 4,
1990, that it had filed the bankruptcy petition ostensibly to
prevent RTC from seizing the assets covered by the September 1989
security interest. M&L sent private investors a second letter
dated October 30, 1990, purporting to inform them as to M&L's
status and indicating that M&L would shortly obtain a loan from a
European lender, Manns Haggerskjold, which would enable M&L to
remove itself from the Chapter 11 bankruptcy proceeding. In
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