Texas Bankruptcy Court Denies Ponzi Scheme Presumption When It Finds No True Ponzi
June 03, 2022, US Bankruptcy Court for the Northern District of Texas – The Bankruptcy Court for the Northern District of Texas rejects use of the Ponzi Scheme Presumption by Dennis Faulkner (Trustee of the Reagor-Dykes Auto Group Creditors Liquidating Trust) as improper, on the motion for summary judgment filed by Ford Motor Credit Company, LLC (“Ford Credit”), against whom the adversary proceedings were brought by Trustee Faulkner.
Prior to August 1, 2018, Ford Credit provided floorplan financing to Reagor-Dykes Motors, LP (“Reagor Dykes”) to finance the purchase of new and used vehicle inventory. After Reagor-Dykes “routinely failed” to make payoffs and due to Reagor-Dykes’ alleged engagement in “check-kiting” scheme, “fake flooring”, and “double flooring”, Ford Credit suspended floorplan financing and sued Reagor- Dykes and its principals, seeking to recover more than $116 million of alleged debt due under its financing.
After Reagor-Dykes filed bankruptcy, Ford Credit pursued Reagor Dykes and its guarantors in the Court to recover amounts allegedly owed to it and related damages. Ford Credit has made substantial recovery but remains Reagor-Dykes’ largest unsecured creditor with a claim in the bankruptcy case for $48 million.
Trustee seeks to recover through his “fraudulent-transfer” claim, $315,429,217.16, which accounts for all of Reagor-Dykes’ transfers arguably made to Ford Credit during the two years before Reagor-Dykes filed bankruptcy. For the preference claim, he aims to recover $44,509,155.22, which constitutes transfers Reagor-Dykes allegedly made to Ford Credit during the ninety days before Reagor-Dykes filed bankruptcy.
Trustee contends that he can avoid the burden to prove fraudulent intent for every transfer through the “Ponzi Scheme Presumption”. Trustee argues that the Ponzi-Scheme Presumption applies to his fraudulent-transfer claim because Reagor-Dykes operated as a “Ponzi-like fraudulent enterprise” and therefore, “fraudulent intent” can be presumed for each transfer.
The Court analyzed several Fifth Circuit case laws to conclude that the Circuit precedent does not extend the application of Ponzi Scheme Presumption beyond classic Ponzi Schemes. The Court found that Reagor-Dykes, despite its “many acts of fraud”, was not a wholly illegitimate business and cannot be categorized as a “Ponzi Scheme”.
The Court denied the Trustee from invoking the Ponzi-Scheme Presumption to satisfy the intent element of § 548(a)(1)(A).
Faulkner v. Ford Motor Credit Co., LLC (In re Reagor-Dykes Motors, LP), 2022 Bankr. LEXIS 1570