Texas Judge Denies “Ponzi Presumption” for “Ponzi-Like” Scheme; AM Radio Station Dodges Fraudulent Conveyance Bullet
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July 13, 2022, US Bankruptcy Court for Northern Texas – The Northern Texas Bankruptcy Court granted a motion for judgment on partial findings filed by CBS Radio, Inc. et al. (“Defendants”) determining that Robert Yaquinto, Jr., the Chapter 7 trustee (“Trustee”) for Texas E&P Operating, Inc. (“Debtor”), failed to sustain his claims against the Defendants for alleged fraudulent transfers under both Texas Uniform Fraudulent Transfer Act (“TUFTA”) and the Bankruptcy Code.
Defendants are the current and former owners of KRLD 1080, an AM radio station serving the Dallas market. In the four years prior to the petition date, it is stipulated that the Debtor purchased radio airtime and associated advertising services from KRLD, paying a total of $529,587.86. Mark Plummer, sole owner of the Debtor company, used most of this paid airtime for an hour-long Saturday morning show called “Smart Oil & Gas,” in which he discussed market trends and the benefits of investing in oil and gas. During the show, Mr. Plummer would allegedly “invite” listeners interested in learning about potential investment opportunities in oil and gas to call an 800 phone number or visit a website.
The Trustee brought an adversary proceeding to avoid and recover the purchase price paid by the Debtor to the Defendants as alleged actual and constructive “fraudulent” transfers. The Defendants contended that the Trustee failed to prove the alleged fraudulent intent in order to avoid the transfers made to the Defendants. The Trustee pleaded for a ‘Ponzi-Scheme Like Presumption’ alleging that the Debtor was operating a “fraudulent business scheme”. The ‘Ponzi Scheme Presumption’ may, under certain circumstances, defeat an assertion of reasonably equivalent value.
The Court cited the decision in In re Reagor-Dykes Motors, LP holding that the Ponzi-scheme presumption does not apply beyond classic “Ponzi Schemes”. The Court treated the alleged existence of a “fraudulent business scheme” only as a badge of fraud to be considered among other badges of fraud. The Court, after due perusal of the evidence, determined that the Debtor had real revenue and assets that were part of a real oil and gas business. The Court found that Mr. Plummer committed numerous “improper” actions, through the Debtor, which could be considered as “fraudulent”. However, the Court refused to recognize the whole business of the Debtor as a “fraudulent scheme” solely based on these actions. The Court concluded that the Trustee failed to prove that the transfers to the Defendants were made with actual intent to defraud the creditors.
Additionally, the Trustee contended that “reasonably equivalent value” was not received by the Debtor because the advertising paid for by the Debtor was allegedly used to promote investments in non-Debtor entities. However, the Court found that the Debtor and Non-Debtor Affiliates worked in concert and each role served by one of the entities provided value to all of the entities involved in the oil and gas business of Mr. Plummer. The Court concluded that the Trustee has not provided evidence that the Debtor did not in some way benefit from the investments generated from the advertisements on KRLD.
The Court held that the Trustee failed to meet his burden in showing the transfers to the Debtor were made for less than “reasonably equivalent value,” as the contracts with KRLD were entered into at arm’s length, at market rates, and conferred at least some indirect benefit on the Debtor.
Yaquinto v. CBS Radio, Inc. (In re Tex. E&P Operating, Inc.), 2022 Bankr. LEXIS 1932
(28)