Summary:
National Judgment Recovery ("NJR") brought an action to determine that the $93,159.71 fraudulent conveyance judgment against Tyndall, as a "net winner" in the ZeekRewards pyramid scheme case, was nondischargeable under 11 U.S.C. § 523(a)(2)(A) as actual fraud.
After permitting NJR to amend its original complaint to avoid a motion to dismiss, the bankruptcy court found that the amended complaint finding did adequately allege "actual fraud." Following NJR v. Sheppard, the bankruptcy court held that was not, however, sufficient as NJR failed to :allergy facts that would show [Tyndall] fraud with the requisite fraudulent intent." Neither the amended complaint nor the underlying judgment (attached) sufficiently alleged that Tyndall "helped create the Ponzi scheme or materially furthered and aided its advancement." Nor was the "impossibly high" rate of return alone a sufficient badge of fraud. This contrasts with NJR v. Reefe, where the defendant was shown to have clearly "built the base for her part of the pyramid... using knowingly fraudulent means."
Commentary:
This case is certainly useful for people that end up filing their own bankruptcies in the wake of fraudulent conveyance actions against them by Trustees in other cases, since here Tyndall had at least one badge of fraud with the related stink of a Ponzi scheme. Most other cases are far more innocently cases where someone accepted funds from a soon-to-be debtor. Chapter 7 Trustees might be mindful of this in negotiating settlements of these potential actions and Chapter 13 Trustees, when making demands that Debtors fund plans to compensate creditors for transfers should also factor this into any Best Interest of the Creditors analysis.
It would also be interesting to hear from any of the dozens of North Carolina attorneys involved in the underlying Zeekerewards case, why it was handled as a federal receivership rather than as an involuntary bankruptcy case. Whether there remains any real discussion in the NCBA Bankruptcy Section community is perhaps the real impediment to such conversion.
To read a copy of the transcript, please see:
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