MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS’ MOTION TO DISMISS
THIS MATTER comes before the Court on Defendants’ Motion to Dismiss, (Doc. No. 5)
Background
This case arises out of a Ponzi scheme perpetrated by Doug Vaughan. This adversary proceeding is one of many adversary proceedings initiated by the Chapter 11 Trustee seeking to recover payments made by Vaughan Company Realtors (“VCR”) to parties who invested in VCR’s promissory note program. Below is a summary of the claims brought against Galbreth Defendants.
Count 13 Turnover and Accounting under 11 U.S.C. § 542;
Counts 2-5 Actual and constructive fraud under New Mexico Fraudulent Transfer Act and/or 11 U.S.C. § 548(a)(1) based on alleged transfers to Galbreth Defendants made within two years of the date of the filing of the VCR bankruptcy case;
Counts 6-13 Actual and constructive fraud under state law, N.M.S.A. § 56-10-18(A)(1) and/or 11 U.S.C. § 544 based on alleged transfers to Galbreth Defendants made within four years of the date of the filing of the VCR bankruptcy case;
Count 14 Undiscovered fraudulent transfers pursuant to state and federal law; and
*46 Count 15 Disallowance of Defendants’ claims pursuant to 11 U.S.C. § 502.
Defendants make four (4) different arguments in support of their motion to dismiss. First, Defendants argue Plaintiffs attempt to avoid and recover transfers to Dr. Galbreth’s pension plan is impermissible under the Employee Retirement Income Security Act of 1974 (“ERISA”). Second, Defendants allege that the Complaint does not allege specific facts showing that the Galbreth 401(k) Plan itself was a transferee from whom VCR payments can now be recovered. Third, Defendants assert the Complaint does not allege specific facts which show that VCR’s transfers to Dr. Galbreth and/or the Galbreth Defined Benefit Plan were not for reasonably equivalent value. Finally, Defendants argue that the Complaint fails to meet the heightened standard set forth in Rule 9(b) which requires a showing of actual intent to hinder, delay, or defraud under federal or state actual fraudulent conveyance laws. The Court will address each argument in turn.
Discussion
I. Legal Standard
Fed.R.Civ.P. 12(b)(6) allows a defense for “failure to state a claim upon which relief can be granted.” In asserting a claim, the claimant must plead “only enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly,
A 12(b)(6) motion must be converted to a motion for summary judgment if “matters outside the pleading are presented to and not excluded by the court” and “all parties ... [are] given reasonable opportunity to present all material made pertinent to such a motion by Rule 56.” Fed.R.Civ.P. 12(b). The failure to convert a 12(b)(6) motion to one for summary judgment where a court does not exclude outside materials is reversible error unless the dismissal can be justified without considering the outside materials. See Brown v. Zavaras,
The Court will not convert the instant motion into a motion for summary judgment. Plaintiff asserts that Defendant’s
II. Plaintiffs Claims are not Barred by ERISA
Defendants contend that Section 206 of the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1056(d)(1) prohibits Plaintiff from recovering transfers to the Galbreth Defined Benefit Plan, the 401(k) Plan, and the pension plan (“collectively referred to as the ‘Galbreth Benefit Plans’ ”). In response, Plaintiff argues that whether ERISA applies is an affirmative defense and/or a question of fact that cannot be answered by the Complaint alone. In the alternative, Plaintiff argues ERISA does not protect fraudulently transferred funds in contravention of the Bankruptcy Code.
ERISA contains a number of provisions directed at safeguarding a stream of income for pensioners and their dependents. See generally Guidry v. Sheet Metal Workers Nat. Pension Fund,
In general, the anti-alienation provision prohibits creditors from reaching funds in an ERISA plan as a means of collecting a judgment against a beneficiary. Guidry,
Courts are highly skeptical of creating exceptions to ERISA’s anti-alienation provision. See Patterson,
Plaintiff argues that ERISA does not prevent the recovery of a fraudulent transfer into an otherwise qualified plan. The initial inquiry, however, is whether the recovery of a fraudulent transfer constitutes an alienation or assignment prohibited by Section 206 of ERISA and the relevant sections of the Internal Revenue Code (“IRC”). The IRC regulations promulgated by the Secretary of Treasury, who has the authority to implement ERISA, define the terms “assignment” and “alienation.” Those regulations, which are entitled to deference under Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc.,
For purposes of this section, the terms “assignment” and “alienation” include—
(i) Any arrangement providing for the payment to the employer of plan benefits which otherwise would be due the participant under the plan, and
(ii) Any direct or indirect arrangement (whether revocable or irrevocable) whereby a party acquires from a participant or beneficiary a right or interest enforceable against the plan in, or to, all or any part of a plan benefit payment which is, or may become, payable to the participant or beneficiary.
26 C.F.R. § 1.401(a) — 13(c)(1) (emphasis added).
On its face, Section 206 of ERISA only restricts alienation of “benefits provided under the plan.” 29 U.S.C. § 1056(d)(1). When read in conjunction with the coordinate IRC regulations, it is clear that recapturing a fraudulent transfer does not constitute an “assignment” or “alienation” prohibited by ERISA. Sub-part (i) requires that the payment be made to an employer. Plaintiff is not an employer, and subpart (i) is therefore inapplicable. Subpart (ii) requires that an enforceable right be obtained from a participant or beneficiary, not from the plan itself. Dr. Galbreth is sued in his capacity as the trustee of the Galbreth Benefit Plans. See (Doc. No. 1), Complaint, caption. There is no evidence that Dr. Gal-breth acted in his capacity as a beneficiary or participant; on the contrary, when addressing Dr. Galbreth’s relevant conduct Plaintiff specifically refers to Dr. Gal-breth’s actions as the trustee of the Gal-breth Benefit Plans. See id., at ¶¶ 4-8. Thus, subpart (ii) is also inapplicable.
Several courts have examined 29 U.S.C. § 1056(d)(1) and the accompanying IRC regulations to determine whether a particular transaction constituted an assignment or alienation within the meaning of ERISA. Consider In re Schantz,
*49 The prohibition [on alienation] is directed at ‘benefits provided,’ not the corpus of the fund; and the potential for assignment or alienation, which is limited by the prohibition, would seem to lie with the. beneficiary, not the depository.... We would be hard-pressed to find that § 1056(d) was intended to do more than address the individual beneficiary’s right of access to his share of the fund.
Id. at 96. (citations omitted).
Because the anti-alienation provision only prohibits alienation of benefits that become payable to a plan participant or beneficiary, those provisions do not limit the Trustee’s right to recover fraudulent transfers from the corpus of the Galbreth Benefit Plans.
Further, even if this Court were to find that the fraudulent transfers in this matter were alienations or assignments within the scope of ERISA, the anti-alienation provision, even if otherwise applicable, does not supersede the avoidance provisions of the Bankruptcy Code. ERISA must be read in harmony with 11 U.S.C. §§ 544 and 548. See U.S. v. Wampler,
Although only a handful of courts have examined this issue, the majority permitted bankruptcy trustees to use the avoiding powers of 11 U.S.C. §§ 547 and 548 to recover from ERISA plans. For example, the court in In re Goldschein,
This Court finds U.S. Bankruptcy Judge Robert Jacobvitz’s analysis in In re Vaughan Co., Realtors especially persuasive:
The Court concludes that the application of the Bankruptcy Code’s provisions voiding fraudulent transfers does not conflict with the identified purposes of ERISA’s anti-alienation provision. The Bankruptcy Code is directed at the prevention of debtor fraud, while ERISA is aimed at protecting employees “from ... [their] own financial improvidence in dealing with third parties.” American Telephone & Telegraph Co. v. Merry,592 F.2d 118 , 124 (2d Cir.1979). To hold*50 otherwise would subordinate the Bankruptcy Code to ERISA, which contravenes ERISA’s express directive that it not be construed to supersede any other federal law. See 29 U.S.C. § 1144(d).
Id., at 607.
Accordingly, the Court finds that ERISA does not prevent Plaintiffs recovery of fraudulent transfers made to the Galbreth Benefit Plans.
III.The Complaint Sufficiently Alleges Claims Against the Galbreth 401(k) Plan
Defendants request the dismissal of the claims against the Galbreth 401 (k) Plan because Defendants allege that Plaintiff has not pled the claims against the 401(k) Plan with the specificity required by Fed.R.Civ.P. 12(b)(6). In her Response, Plaintiff does not specifically address Defendants’ argument regarding the 401 (k) Plan, but instead argues generally that she pled sufficient facts to survive a motion to dismiss. In Plaintiffs Complaint, the only reference specifically to the 401(k) Plan itself (not to Dr. Galbreth as the trustee of the 401(k) plan) is, “[u]pon information and belief, the Galbreth Benefit Plan may have been converted, or its asserts may have been transferred to the] [401(k) Plan. To the extent the Galbreth Benefit Plan transferred any of its assets to the Gal-breth 401 (k) Plan, the Galbreth 401 (k) Plan is a subsequent or mediate transferee of any transfers from VCR” See Complaint, ¶ 4.
To survive a motion to dismiss, a complaint must merely contain sufficient facts that, if assumed to be true, state a claim to relief that is facially plausible. See Twombly,
IV. The Complaint Sufficiently Alleges That the Transfers Were Not Made for Reasonably Equivalent Value
Defendants move to dismiss Plaintiffs constructive fraud claims (Counts IV, V, VIII, IX, X, XI, and XII) because Plaintiffs Complaint allegedly does not provide specific factual assertions showing that VCR did not receive a reasonably equivalent value for the transfers. Defendants further argue that a showing of a Ponzi scheme, in and of itself, does not support a finding that the transfers were not for reasonably equivalent value. Plaintiffs response does not specifically address whether the Complaint sufficiently pled that the transfers were not for reasonably equivalent value. Instead Plaintiff simply attempts to discredit Defendants’ argument that the transfers were for reasonably equivalent value. This Court agrees with Defendant that Plaintiffs factual allegations with regard to each specific constructive fraud claim are “formulaic recita
Constructive fraud under 11 U.S.C. § 548(a)(1)(B) requires the plaintiff to establish that the debtor “received less than a reasonably equivalent value in exchange for the transfer.” 11 U.S.C. § 548(a)(l)(B)(i). Similarly, the constructive fraud provisions under the New Mexico Fraudulent Transfer Act contain a requirement that the debtor made the transfer “without receiving a reasonably equivalent value in exchange for the transfer.” N.M.S.A.1978 § 56-10-18(A)(2). The plaintiff bears the burden of demonstrating that the transferor received less than a reasonably equivalent value in exchange for the transfer. See Parks v. Persels and Associates, LLC (In re Kinderknecht),
In this instance, Defendants invested money with VCR. The transfers at issue here are those transfers that VCR made back to Defendants. Because of the fact that Defendants had already given VCR money, the “value” that VCR received from its transfers to Defendants was a reduction in the potential restitution claim Defendants had based upon their original investment. This is similar to the analysis conducted in In re Indep. Clearing House Co.,
[f]rom the time a defendant entrusted his money to the debtors, he had a claim against the debtors for the return of his money. We believe that the Code’s definition of “debt” and its related terms is broad enough to cover the debtors’ obligation to return a defendant’s principal undertaking, whether that obligation was based on the contract between the debtors and the defendant or was based on the defendant’s right to restitution.
Independent Clearing House,
The court reasoned further that “to the extent a transfer merely repaid a defendant’s undertaking, the debtor received not only a ‘reasonably equivalent value’ but the exact same value — dollar for dollar.” Id.
The Tenth Circuit took a similar approach to analyzing reasonably equivalent value in the context of a Ponzi scheme in Jobin v. McKay (In re M & L Business Machine Co.),
New Mexico courts recognize that restitution is an equitable remedy, and often look to the Restatements for guidance in considering restitution claims. See e.g., Eker Bros., Inc. v. Rehders,
However, because a claim for restitution is equitable in nature, “investors who have knowledge of, and help perpetuate, a fraud should not be permitted to benefit in the form of restitution.” Picard v. Merkin (In re Bernard L. Madoff Inv. Securities, LLC),
[In] recognizing these claims for rescission and restitution, we assume that the investors had no knowledge of the fraud the debtors were perpetrating. If investments were made with culpable knowledge, all subsequent payments made to such investors ... would be avoidable under section 548(a)(2), regardless of the amount invested, because the debtors would not have exchanged a reasonably equivalent value for the payments.
Id. (citation omitted).
Similarly, in evaluating “reasonably equivalent value” under 11 U.S.C. § 548(a)(2) in light of a defendant’s potential claim for restitution, the Tenth Circuit, applying Colorado law, determined that a transferee without actual knowledge of the Ponzi scheme had a restitution claim at the time of transfer even if the transferee was negligent and unreasonable in relying upon the misrepresentation. McKay,
Here, Plaintiff has alleged that Defendants knew or should have known that the VCR promissory note program was a fraudulent scheme and that the Defendants willingly turned a blind eye to several red flags that would indicate that VCR was perpetrating fraud. Plaintiffs further allege that such red flags became commonly known by the public at large following the arrest of Bernard Madoff in 2008 and that Defendants nevertheless continued to invest in VCR’s note program despite the fact that the interest rates the Defendants received were “unreasonably high.” These allegations are sufficient to state a plausible claim that Defendants had actual knowledge of the fraud and subjectively knew that they were participating in a fraudulent scheme. Defendants may, in fact, have a claim for restitution that was partially satisfied when they received distributions. But if the Defendants had subjective knowledge that they were participating in the fraudulent scheme, they would be precluded from asserting a claim for restitution. Because the Court cannot determine Defendants’ subjective knowledge at this stage in the proceeding, it is premature for the Court to dismiss the Plaintiffs claims for constructive fraud. The Court cannot find that Plaintiff failed to sufficiently plead that the transfers made in this case were for less than reasonably equivalent value. The Court will, therefore, deny the Defendants’ request to dismiss Plaintiffs constructive fraud claims.
V. The Complaint meets the Fed. R.Civ.P. 9(b)(6) Standard for Fraud
Pursuant to Rule 9(b), Fed.R.Civ. P., a party alleging fraud “must state with particularity the circumstances constituting fraud[,]” though “[m]alice, intent, knowledge and other conditions of a person’s mind may be alleged generally.” A party asserting a claim for actual fraud under either 11 U.S.C. § 548(a)(1) or applicable state law is subject to the heightened pleading requirements of Rule 9(b). See In re Tronox Inc.,
The trustee may avoid any transfer ... that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily — (a) made such transfer ... with actual intent to hinder, delay, or defraud any entity to which the debt- or was or became, on or after the date that such transfer was made ... indebted.
11 U.S.C. § 548(a)(1).
Similarly, N.M.S.A.1978 § 56-10-18(A)(1) includes the requirement that the debtor made the transfer “with actual intent to hinder, delay or defraud any creditor of the debtor.” Defendants assert that Plaintiffs Complaint falls short of Rule
To satisfy the heightened pleading requirement under Fed.R.Civ.P. 9, a plaintiff must sufficiently plead the factual grounds upon which the fraud is based in order to afford the defendant fair notice of the fraud claim, including: the time, place, and contents of the alleged fraudulent representation, the identity of the party who made the misrepresentation, and the consequences of the false representation. Koch v. Koch Indus., Inc.,
When there is sufficient evidence of a Ponzi scheme, the “actual intent to defraud” element necessary to recover a transfer as actually fraudulent under either § 548(a)(1)(A) or applicable state law can be established based on a “Ponzi scheme presumption.” See e.g., Perkins v. Haines,
The allegations in the Complaint describing the promissory note program and VCR’s method of conducting business and securing new investors plausibly describe a Ponzi scheme.
A “Ponzi” scheme, as that term is generally used, refers to an investment scheme in which returns to investors are*55 not financed through the success of the underlying business venture, but are taken from principal sums of newly attracted investments. Typically, investors are promised large returns for their investments. Initial investors are actually paid the promised returns, which attract additional investors.
In re Vaughan Co., Realtors,
In a typical Ponzi scheme, (1) the debtor receives funds from investors (which can include parties loaning money to generate a return); (2) investors are promised large returns for their investments; (3) initial investors are actually paid the promised returns, which attracts additional investors; (4) returns to investors are not financed through the success of the underlying business venture, if any, but are taken from principal sums received from newly attracted investments; and (5) the debtor induces investments through an illusion of paying returns to investors from legitimate business activities. Id. (citations omitted).
The Complaint generally describes the alleged Ponzi scheme perpetrated by Doug Vaughan through VCR and other entities in which Mr. Vaughan held an interest. For example, Plaintiff alleges that VCR issued promissory notes to investors with high, fixed rates of return that were allegedly secured by a deed of trust on real property, other investments, and Mr. Vaughan’s personal wealth. Plaintiff argues that, in fact, the money received from investors “was not utilized to buy real estate or to further real estate projects as purported, but instead was primarily used to make principal and/or interest payments to other investors and to fund VCR’s operating expenses ... and to enrich [Mr.] Vaughan.” See Complaint, at ¶ 23. Finally, the Complaint recites that in Mr. Vaughan’s individual bankruptcy case, the bankruptcy court found that the only way Mr. Vaughan was able to continue his business operations was to obtain additional “ ‘funds from investors who were promised high rates of return on their investments. The funds invested were not utilized as represented; rather they went to pay the high rates of returns to the prior investors. This is a textbook example of a Ponzi scheme.’ ”
These allegations are sufficient to set forth a plausible claim that VCR operated its business as a Ponzi scheme. Thus, the Complaint contains factual allegations sufficient to allege “actual intent to defraud” under the Ponzi scheme presumption. The allegations in the complaint also sufficiently connect the Defendants to the alleged Ponzi scheme. The Complaint identifies each of the alleged investments the Defendants made, and the alleged rate of return for each investment. As for the transfers Plaintiff seeks to recover, the Complaint identifies the total amounts that Plaintiff alleges were transferred to Defendants during each look-back period. The allegations in the Complaint sufficiently connect Defendants to the Ponzi scheme by specifically identifying the investments they made which were a part of the “promissory note program” and the payments made to Defendants. The Court, therefore, concludes that the Complaint satisfies Rule 9, Fed.R.Civ.P. because the allegations sufficiently provided defendants with ‘“fair notice of plaintiffs claims and the factual background upon which [they] are based ... ’ ” Koch v. Koch Indus.,
THEREFORE, IT IS ORDERED that Defendants’ Motion to Dismiss (Doc. No. 5) is GRANTED in part and DENIED in part. Count 1 of Plaintiffs Complaint is dismissed; however, Defendants’ Motion is denied in regards to the other Counts.
Notes
. This document number refers to the original case (USDC No. 12CV728). All of the adversary proceedings regarding Doug Vaughan have now been consolidated under the Master Case No. 12CV817.
. The background facts underlying this matter have been extensively discussed by this Court in numerous opinions entered in the Master Case No. 12CV817. This opinion will refer to the Galbreth Defendants collectively and will only refer to specific defendants where a distinction is necessary.
.Plaintiff consents to the dismissal of Count 1.
. Because this Court finds that even if the Galbreth Benefit Plans were qualified plans under ERISA, ERISA would not prevent Trustee’s recovery, this Court will not conduct an analysis of whether the Galbreth Benefit Plans are in fact qualified plans.
. The actual knowledge standard for constructive fraud claims differs from the objective standard by which the good faith defense to actual fraud claims is measured. See McKay,