611 B.R. 735
Bankr. S.D.N.Y.2020Background
- Involuntary Chapter 7 petition filed July 7, 2017; Gregory M. Messer appointed Chapter 7 trustee for Fyre Festival LLC.
- Trustee filed an adversary complaint (Aug. 28, 2019) against Fyre Media, Inc. and William Z. McFarland seeking declaratory relief, avoidance/recovery of fraudulent and preferential transfers, and damages for breach of fiduciary duty.
- Trustee alleges at least $14.4 million of festival-related funds were routed through Fyre Media accounts (including $10,471,000 from investors and $1.4M in ticket revenues); at least $10,993,267.51 was transferred from Fyre Media to McFarland, and an additional $3,422,079.12 remained in Fyre Media accounts.
- Summons and complaint were served on defendants; neither timely answered. Certificates of default were entered; McFarland acknowledged receipt but did not defend.
- Trustee sought (a) declaration that festival funds are property of the estate, (b) a declaration that the Trustee has the exclusive right to pursue avoidance/recovery of transfers, (c) default judgment for liquidated fraudulent-transfer amounts ($10,993,267.51 jointly and severally against both defendants; plus $3,422,079.12 against Fyre Media), and (d) reserved requests for judgments on unliquidated claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are the funds raised for and by Fyre Festival property of the bankruptcy estate? | Funds raised from investors, lenders, ticket buyers, and prepaid wristbands were Festival Funds and thus estate property. | No timely opposition (default). | Yes; funds that were not transferred are estate property; transfers may be avoided. |
| Does the Trustee have exclusive right to pursue avoidance/recovery of transfers of Festival Funds? | McFarland controlled finances, commingled funds through Fyre Media, and used those accounts for Festival activity, so Trustee has exclusive avoidance rights. | No timely opposition (default). | Yes; Trustee has exclusive right to pursue avoidance of insider fraudulent and preferential transfers. |
| Are the defendants liable for actual/constructive fraudulent transfers and in what amounts? | Under 11 U.S.C. §§ 544(b), 548 and NYDCL § 276, defendants received wrongful transfers: $10,993,267.51 to McFarland (and jointly liable), plus $3,422,079.12 retained by Fyre Media. Trustee supported amounts with bank records. | No timely opposition (default). | Liability established on admitted, well-pleaded allegations; Court awarded default judgments for the liquidated amounts. |
| Was a default judgment appropriate despite Wellness and related authorities? | Service was proper; defendants’ failure to respond constitutes implied consent; Court should apply the two-step default-judgment framework and assess damages using bank records. | No timely opposition (default). | Yes; Court applied the two-step rule, treated well-pleaded allegations as admitted, assessed damages from financial records, and granted default judgment. |
Key Cases Cited
- City of New York v. Mickalis Pawn Shop, LLC, 645 F.3d 114 (2d Cir. 2011) (two-step default-judgment process; admission of well-pleaded allegations)
- Credit Lyonnais Sec. (USA), Inc. v. Alcantara, 183 F.3d 151 (2d Cir. 1999) (damages on default require court inquiry to ascertain amount with reasonable certainty)
- Transatlantic Marine Claims Agency, Inc. v. Ace Shipping Corp., 109 F.3d 105 (2d Cir. 1997) (standard for determining damages after default)
- D.H. Blair & Co. v. Gottdiener, 462 F.3d 95 (2d Cir. 2006) (default admits well-pleaded allegations)
- Wellness Int’l Network, Ltd. v. Sharif, 575 U.S. 665 (2015) (limits on entry of default judgment without service or implied consent)
- In re Sharp Int’l Corp., 403 F.3d 43 (2d Cir.) (fraudulent-transfer principles and New York law)
- Exec. Sounding Bd. Assoc. v. Advanced Mach. & Eng’g Co. (In re Oldco M. Corp.), 484 B.R. 598 (Bankr. S.D.N.Y. 2012) (bankruptcy courts may enter default judgments on implied consent where service and notice are proper)
- Feltman v. Tri-State Emp. Serv., Inc. (In re TS Emp., Inc.), 602 B.R. 840 (Bankr. S.D.N.Y. 2019) (applying the Credit Lyonnais framework to avoidance-claim damages)