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4th Cir.: CCWB Asset Investments v. EBC Asset Investment- Distribution Methods in Federal Receivership

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By Ed Boltz, 1 October, 2024

Summary:

The case involves a court-appointed receiver tasked with distributing assets recovered from a Ponzi scheme involving over 230 investors who were defrauded by Kevin Merrill, Jay Ledford, and Cameron Jezierski. The appellants, two groups of investors (the Dean Investors and the Connaughton Investors), challenged the district court's approval of the receiver's plan to distribute the recovered assets.

The receiver proposed to use the "Rising Tide" method to distribute funds.  The Rising Tide method:

The Rising Tide method deducts from that recovery pre-Receivership withdrawals and distributions—unless they are rolled over. For instance, suppose A invests $100 in a Ponzi scheme but withdraws $50 before the scheme crumbles. Under the Rising Tide method, the receiver counts that $50-withdrawal as partial compensation for A’s loss, meaning A will receive less from the receiver’s distribution of the assets. Because the Rising Tide method requires subtracting previous withdrawals from an investor’s receivership recovery, investors who make withdrawals fare worse under that method than those who withdraw nothing.

The Dean Investors, however, advocated for the "Maximum Balance" approach, which would not count reinvested withdrawals against their recovery. The court rejected this approach, stating that it had no precedent, was administratively difficult, and that the investors had benefited from the withdrawals, however small.

The Connaughton Investors objected to the "Collateral Offset Provision," which reduced their distribution by amounts they had already recovered from third-party settlements. They argued this discouraged settlements, but the court upheld the provision, ensuring equitable recovery for all investors.

Commentary:

I would be interested in hearing from others about if and how both these concepts from federal receivership of Rising Tide and Collateral Offset  might apply in a bankruptcy case.  For example,  would either of these impact the distribution allowed to a unsecured creditor that received preferential payments prior to the bankruptcy?

With proper attribution,  please share this post. 

To read a copy of the transcript, please see:

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4th Circuit Court of Appeals

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