Ivey v. Swofford (In Re Whitley)Ivey v. Swofford (In Re Whitley)
MEMORANDUM OPINION
This аdversary proceeding came before the court on Defendant’s motion pursuant to Rule 7012 of the Federal Rules of Bankruptcy Procedure and Rule 12(b)(6) of the Federal Rules of Civil Procedure to dismiss Plaintiffs complaint for failure to state a claim for relief, and for failure to plead claims with sufficient particularity as required by Rule 7008 of the Federal Rules of Bankruptcy Procedure and Rule 8 of the Federal Rules of Civil Procedure. Sarah F. Sparrow and Jeffery S. Southеr-land represent Defendant and Edwin R. Gatton represents Plaintiff.
FACTS
James Edward Whitley (the “Debtor”) was the sole shareholder and principal officer of South Wynd Financial, Inc., a corporation purportedly in the business of invoice funding and receivables financing (“factoring”). In reality, Debtor’s factoring business was non-existent and fictitious.
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On March 8, 2010, a group of unsecured creditors filed an involuntary
The first cause of action seeks to avoid the transfers pursuant to section 548(a)(1)(A). The second cause of action seeks to avoid the transfers pursuant to section 548(a)(1)(B). Plaintiff relies on the North Carolina Uniform Fraudulent Transfer Act as an alternative theory of recovery on both counts. Lastly, Plaintiff seeks to disallow or reduce Defendant’s Proof of Claim (hereinafter, the “Objection”). Defendant has moved under Federal Rules of Civil Procedure 8, 9(b), and 12(b)(6) to dismiss Plaintiffs complaint.
MATTER BEFORE THE COURT
Defendant’s motion seeks dismissal of Plaintiffs complaint under Federal Rules 8, 9(b), and 12(b)(6). For the reasons that follow, the court has сoncluded that Defendant’s motion should be denied.
STANDARD
Pursuant to Rule 7012(b) of the Federal Rules of Bankruptcy Procedure, Rule 12(b)-(h) of the Federal Rules of Civil Procedure applies in adversary proceedings in the Bankruptcy Court. In order to survive a Rule 12(b)(6) motion to dismiss, “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim for relief that is plausible on its face.’ ”
Ashcroft v. Iqbal,
Rule 9(b) requires that “[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity.” However, Rule 9 “does not contradict the theory of notice pleading embraced by the Fеderal Rules in general, and Rule 8, in particular.”
Gilbert v. Bagley,
DISCUSSION
1. Motion to dismiss Count I under Fed. R. Civ. Pro. 8 and 12(b)(6) is denied
Count I of the complaint seeks avoidance and recovery of prepetition transfers to Defendant under both 11 U.S.C. § 548(a)(1)(A) and § 39-23.4(a)(l) of the North Carolina Fraudulent Transfer Act, made applicable to this case by section 544 of the Bankruptcy Code. Under section 548(a)(1)(A), a trustee may avoid any transfer of an interest of the debtor in property made within two years of the filing of the petition if the debtor made such transfer with actual intent to hinder, delay, or defraud creditors. 11 U.S.C. § 548(a)(1)(A). This provision requires proof of actual intent to defraud. Similarly, the North Carolina Fraudulent Transfer Act, together with section 544(b) of the Bankruptcy Code, permits the trustee to avoid a transfer made “with the intent to hinder, delay, or defraud any creditor of the debtor” within the four-year period specified in N.C. Gen.Stat. § 39-23.9. Therefore, a trustee in bankruptcy, pursuant to section 544 of the Code, has the authority to attack fraudulent transfers under section 3923.4(a) that occurred up to four years prior to the commencement of the trustee’s action.
In order to state a claim for relief under section 548(a)(1)(A), Plaintiff must show that Defendant received a transfer of an interest of the Debtor. Defendant alleges that Count I fails to establish that Debtor “transferred an interest of the debtor in property” to Defendant. Defendant contends that because the complaint аlleges that the transfers were “funded through funds obtained from additional investors,” the funds necessarily were not an interest of Debtor in property. Mem. of Law in Supp. of Def.’s Mtn. to Dismiss, 10-11. Movant’s argument is without merit: transfers made by the operator of a Ponzi scheme may be recovered under section 548(a)(1), despite the fact that the funds, in reality, “belonged” to investors. In
Sender v. Buchanan (In re Hedged-Investments Assocs., Inc.),
Plaintiffs allegations also state a claim under both the Bankruptcy Code and North Carolina law that Debtor made the challenged transfers with actual intent to defraud. The complaint sets out facts intended to support the existence of a Pon-zi scheme. A majority of federal courts have held that proof of operation of a Ponzi scheme is sufficient to establish actual intent to hinder, delay, or defraud creditors so as to permit avoidance as a fraudulent transfer under section 548(a)(1)(A).
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Transfers in furtherance of a Ponzi scheme “have achieved a special status in fraudulent transfer law” from which intеnt of actual fraud may be inferred.
In re Cohen,
[a] fraudulent investment scheme in which money contributed by later investors generates artificially high dividends for the original investors, whose example attracts even larger investments. Money from the new investors is used directly to repay or pay interest to earlier investors, [usually] without any operation or revenue-producing activity other than the continual raising of new funds.
Blaok’s Law Dictionary (8th ed. 2004). By its very nature, a Ponzi scheme will eventually collapse. Perpetrators therefore know that the investors at the end of the line will lose their investment.
Martino v. Edison Worldwide Capital (In re Randy),
This court finds that the “Ponzi scheme presumption” similarly arises in fraudulent transfer actions brought under section 39-23.4(a)(l) of the North Carolina Fraudulent Transfer Act. This issue is a matter of first impression in North Carolina. The Court will look to the interpretation of the Uniform Fraudulent Transfer Act in other jurisdictions, since the North Carolina statute is to be “applied and construed to effectuate its general purpose to
The Court’s decision to apply a presumption of actual fraud under the North Carolina Fraudulent Transfer act is further supported by federal case law. The Ninth Circuit has reasoned that where a state statute is similar to the Bankruptcy Code, cases analyzing the Bankruptcy Code provisions are persuasive authority.
AFI Holding, 525
F.3d at 703.. Indeed, several courts have looked to cаses interpreting section 548 in order to give meaning to their state statutes.
See, e.g., PHP Liquidating, LLC v. Robbins (In re PHP Healthcare Corp.),
Plaintiffs allegations are sufficient to plausibly establish the existence of a Ponzi scheme and thereby trigger a presumption of actual fraud. As defined by the Fourth Circuit, 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.”
U.S. v. Godwin,
Defendant further argues that Plaintiffs actual fraud claim should be dismissed because the complaint fails to identify any
specific creditor
to whom Debtor was indebted or intended to defraud. This level of specificity is not required in order for Plaintiff to withstand a 12(b)(6) аction. The defendants in
In re James River Coal Co.,
The amended complaint alleges that at all relevant times, the Debtors had creditors with claims that arose before or within a reasonable time after the challenged transactions. That alone should be sufficient.... [I]t would be promoting form over substance to dismiss any claim based upon the Trustee’s failure to name one specific creditor that was harmed by the actions of the defendants. Considering the low threshold to be applied to motions to dismiss, dismissal is not appropriate to the case at this stage of the proceedings.
James River Coal,
2. Motion to dismiss Count I under Fed. R. Civ. Pro. 9 is denied
A claim for actual fraudulent transfer under the Bankruptcy Code must satisfy Rule 9(b), which requires that aver-ments of fraud be pleaded with particularity.
Westinghouse Savannah River Co.,
The Complaint adequately alleges Debtor-transferor’s fraudulent intent for purposes of section 548(a)(1)(A) and N.C. GemStat. § 39-23.4(a)(l). The Complaint includes particulars as to the identity of the transfers sought to be avoided, including the date, transferor, transferee, method of transfer, and amount of each alleged transfer.
See Klein v. Capital One Fin. Corp.,
3. Motion to dismiss Count II under Fed. R. Civ. Pro. 12(b)(6) is denied
Plaintiffs second cause of action seeks avoidance of the transfers made by Debtor to Defendant pursuant to 11 U.S.C. § 548(a)(1)(B) and under N.C. GemStat. § 39-23.4(a)(2). In order to avoid a transfer under these sections, a trustee must establish that (1) the debtor had an interest in the property transferred; (2) the interest was transferred within two years of the filing of the bankruptcy petition (or within four years under North Carolina law); (3) the debtor was insolvent at the time of the transfer or became insolvent as a result thereof; and (4) the debtor received less than a reasonably equivalent value in exchange for suсh transfer.
See In re Gutpelet,
The Complaint satisfies the first, second, and third elements of a constructive fraud claim. The Complaint describes transfers that took place either within two years, as required by the federal statute, or within four years, as required by North Carolina law. Plaintiffs allegations reflect that the assets transferred were an interest of Debtor. In order to prove the third element, insolvency, the complaint recites that Debtor was insolvent on the dates of the transfers. Plaintiffs allegation, although technically “a formulaic recitation of the elements of a cause of action,”
Twombly,
[Charles Ponzi] was always insolvent, and became daily more so, the more his business succeeded. He made no investments of any kind, so that all the money he had at any time was solely the result of loans by his dupes.
Cunningham v. Brown,
The fourth element of a claim under section 548(a)(1)(B) requires that Plaintiff show that the transferor received “less than reasonably equivalent value” in exchange for the transfer. “Reasonably equivalent value” is a question of fact as to which the court is to be given considerable latitude to make a determination by considering all the facts and circumstances surrounding the transaction in question.
In re Summit Place, LLC,
Courts have recognized that defrauded investors have a claim fоr fraud against the debtor arising as of the time of the initial investment. Thus, any transfer up to the amount of the principal investment satisfies the investors’ fraud claim (an antecedent debt) and is made for “value” in the form of the investor’s surrender of his or her tort claim. Such payments are not subject to recovery by the debtor’s trustee. Any transfers over and above the amount of the principal&emdash; i.e., for fictitious profits&emdash;are not made for “value” because they exceed the scope оf the investors’ fraud claim and may be subject to recovery by a plan trustee.
Perkins,
The Court declines to distinguish between payments to Defendant designated by Debtor as “interest” or “income” from a repayment of principal. This approach is consistent with that taken by other courts who have considered the issue. In
Perkins,
the Eleventh Circuit rejected the Trustee’s argument that equity should be distinguished from debt, reasoning that focusing solely on the form of the investment would “ignore the realities of how Ponzi schemes operate.”
4. Motion to dismiss the Objection is denied
An objection to proof of claim which contains no facts to support disal-lowance may be dismissed under Rule 12(b)(6).
In re Barnhart,
CONCLUSION
Defendant’s Motion to Dismiss is denied. An order so providing is being entered contemporaneously with the filing of this memorandum opinion.
Notes
. In May 2011, Whitley pled guilty to wire fraud and money laundering charges.
.
See, e.g., In re Grafton Partners,
. Some courts have held that the requirement is relaxed even more when the plaintiff is a third party, such as a trustee, because a third party generally has less information on which to base its allegation.
See Rosener v. Majestic Mgmt., Inc. (In re OODC, LLC),