Alleging that a debtor was a net winner in a Ponzi scheme doesn’t state a claim for nondischargeability, even when the debtor has realized an “impossibly high” profit of $93,000 on an investment of $2,500, for reasons explained by Bankruptcy Judge Joseph N. Callaway of Greenville, N.C.
The debtor was among the investors in a Ponzi scheme where 700,000 participants lost $700 million. The debtor was a lucky investor, because he took out much more cash than he invested.
The trustee for the Ponzi scheme won a fraudulent transfer judgment for about $93,000 against the debtor, representing the debtor’s net winnings in excess of the cash he invested. When the debtor filed his own chapter 13 petition, the Ponzi scheme trustee responded with a complaint seeking a declaration that the $93,000 judgment was nondischargeable as a debt obtained by “actual fraud” under Section 523(a)(2)(A).
In an opinion on March 6, Judge Callaway granted the debtor’s motion to dismiss the complaint for failure to state a claim under Rule 12(b)(6).
The Requirements for Alleging Fraud
Even though the complaint expressed “facial plausibility” to meet Iqbal/Twombly standards, Judge Callaway said that the complaint must also demonstrate fraud with “particularity” to satisfy Rule 9(b). He said that alleging the “mere receipt of funds or value via fraudulent transfers does not equate with ‘actual fraud;’ the additional element of requisite intent or scienter must also be alleged and shown.”
The complaint alleged that the debtor was a “willing and profitable participant” in the fraud, represented by net winnings of $93,000 realized by having invested only $2,500. Judge Callaway examined the judgment against the debtor but found “no factual findings regarding [the debtor’s] intent or level of involvement in the Ponzi scheme beyond being a ‘net winner’ for the sum asserted plus interest.”
The complaint also alleged that the debtor had “actively promoted” the scheme by posting advertisements and recruiting two other individuals who invested in the Ponzi scheme and also ended up being net winners.
However, Judge Callaway said that the additional allegations did “not allege [that the debtor] helped create the Ponzi scheme or materially furthered and aided its advancement,” because advertising and recruiting new investors “were requirements to continue as an investor and participant.” He said, “Those allegations, without more, do not allow an inference of fraudulent intent.”
Judge Callaway said that realizing an “impossibly high” rate of return represented one badge of fraud, but he cited a prior decision of his own for holding that “[t]he presence of a single badge of fraud is not sufficient to establish actual fraudulent intent.” In re Coley, 608 B.R. 625, 636 (Bankr. E.D.N.C. 2019).
Judge Callaway dismissed the complaint for failure to state a claim, because “[a]llegations of actual fraud based solely on the presence of one badge of fraud plus the recruitment of two individuals, without more to buttress a reasonable inference of deceitful intent, are insufficient under the guidelines from [Husky Int’l Elecs., Inc. v. Ritz, 136 S. Ct. 1581 (2016)].”
Alleging that a debtor was a net winner in a Ponzi scheme doesn’t state a claim for nondischargeability, even when the debtor has realized an “impossibly high” profit of $93,000 on an investment of $2,500, for reasons explained by Bankruptcy Judge Joseph N. Callaway of Greenville, N.C.
The debtor was among the investors in a Ponzi scheme where 700,000 participants lost $700 million. The debtor was a lucky investor, because he took out much more cash than he invested.
The trustee for the Ponzi scheme won a fraudulent transfer judgment for about $93,000 against the debtor, representing the debtor’s net winnings in excess of the cash he invested. When the debtor filed his own chapter 13 petition, the Ponzi scheme trustee responded with a complaint seeking a declaration that the $93,000 judgment was nondischargeable as a debt obtained by “actual fraud” under Section 523(a)(2)(A).
In an opinion on March 6, Judge Callaway granted the debtor’s motion to dismiss the complaint for failure to state a claim under Rule 12(b)(6).