Gregory M. Messer, as Chapter 7 Trustee of the Est v. Fyre Media Inc. et al

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
In re:
FYRE FESTIVAL LLC,
Debtor.
FOR PUBLICATION
Chapter 7
Case No. 17-11883 (MG)
GREGORY M. MESSER, as Chapter 7
Trustee of the Estate of Fyre Festival LLC,
Plaintiff,
v.
FYRE MEDIA INC., and WILLIAM Z.
McFARLAND, a/k/a Billy McFarland,
Defendants.
Adv. Pro. Case No. 19-01340 (MG)
MEMORANDUM OPINION GRANTING TRUSTEE’S MOTION FOR
ENTRY OF A DEFAULT JUDGMENT
A P P E A R A N C E S:
KLESTADT WINTERS JURELLER
SOUTHARD & STEVENS, LLP
Special Litigation Counsel to Gregory M.
Messer, Chapter 7 Trustee of the Estate of
Fyre Festival LLC
200 West 41st Street, 17th Floor
New York, NY 10036-7023
By: Fred Stevens, Esq.
Lauren C. Kiss, Esq.
Christopher J. Reilly, Esq.
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MARTIN GLENN
UNITED STATES BANKRUPTCY JUDGE
Pending before the Court is a motion by Gregory M. Messer (“Messer” or the
“Trustee”) as chapter 7 trustee of the estate of Fyre Festival LLC (“Fyre Festival” or the
“Debtor”), plaintiff in this adversary proceeding, seeking an order (a) declaring that (i)
the funds raised for and by Fyre Festival were property of Fyre Festival, and (ii) the
Trustee has the exclusive right to pursue the avoidance of any transfers of those funds by
Fyre Media Inc. (“Fyre Media”) or William Z. McFarland, a/k/a Billy McFarland
(“McFarland,” and together with Fyre Media, the “Defendants”) for the benefit of Fyre
Festival’s bankruptcy estate, and (b) directing the entry of a default judgment against
Defendants in the amounts discussed below. (“Motion,” ECF Doc. # 12; “Proposed
Order,” id., Ex. B; “Judgment,” id., Ex. C.) The Trustee submitted an affidavit of Fred
Stevens, Esq. (“Stevens Affidavit”), in support of the Motion. (Motion, Ex. A.)
For the reasons explained below, the Court grants the Motion. A separate Order
(in the form submitted by the Trustee’s counsel) will be entered granting the relief
requested by the Trustee and directing the entry of a default judgment for the amounts of
liquidated claims as set forth below, and without prejudice to additional judgments on
unliquidated claims. A separate judgment will be entered against Defendants Fyre Media
and McFarland, jointly and severally, in the amount of $10,993,267.51, and, additionally,
against Defendant Fyre Media in the amount of $3,422,079.12 (collectively, the
“Liquidated Claims”).1
1 	The Liquidated Claims include: Claim No. 1 (Declaratory Judgment – Property of the Estate – 11
U.S.C. § 541); Claim No. 2 (Fraudulent Conveyance – Actual Fraud – 11 U.S.C. §§ 544(b), 548(a)(1)(A)
and 550; and NYDCL (as defined below) § 276); and Claim No. 4 (Declaratory Judgment – Exclusive
Right to Pursue any Avoidance of Festival Funds Transfers). (Motion at 3 n. 3; “Complaint,” ECF Doc. #
1.)
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I. 	BACKGROUND
A. 	General Background
On July 7, 2017 (the “Petition Date”), an involuntary petition under chapter 7 of
the Bankruptcy Code was filed against the Debtor by John Nemeth, Raul Jimenez and
Andrew Newman. (Motion ¶ 1.) On August 29, 2017, the Court entered the order for
relief in the Debtor’s case. (Id. ¶ 2.) On or around August 31, 2017, Messer was
appointed interim trustee of the Debtor’s estate. On or about November 17, 2017,
Messer presided over the first meeting of creditors pursuant to section 341(a) of the
Bankruptcy Code and became the permanent trustee. (Id. ¶ 4.) On December 13, 2017,
the Court entered an order designating McFarland as the person responsible for
performing the Debtor’s duties under the Bankruptcy Code. (Id. ¶ 3.) To date,
McFarland has not filed the required bankruptcy schedules or statement of financial
affairs, or testified at a meeting of creditors. (Id.)
On August 28, 2019, the Trustee filed the Complaint against the Defendants
seeking, inter alia, declaratory relief, the avoidance and recovery of certain fraudulent
transfers and related relief, including payment of attorneys’ fees and costs, and damages
for breach of fiduciary duties. (Motion ¶ 9; Complaint.) On August 30, 2019, the Clerk
of the Court issued a summons requiring the Defendants to appear in this action.
(“Summons,” ECF Doc. # 3.) On September 5, 2019, the Summons and Complaint were
personally served upon Fyre Media by first class mail at the address designated by Fyre
Media with the New York State Department of State for the service of legal process.
(Motion ¶ 11 (citing Stevens Affidavit ¶ 5).) The Affidavit of Service attesting to the
proper service of the Summons and Complaint upon Fyre Media was filed. (ECF Doc. #
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4.) In addition, on September 10, 2019, the Summons and Complaint were served upon
Fyre Media by first class mail by serving McFarland at his address at FCI Otisville,
Federal Correctional Institution, where he was incarcerated at the time of service.
(Motion ¶¶ 11–12.) A Certificate of Service attesting to the additional service of the
Summons and Complaint was filed. (ECF Doc. # 5.) An Affidavit of Service attesting to
the proper service of the Summons and Complaint against McFarland was filed. (ECF
Doc. # 4.)
The Defendants did not timely respond to the Complaint. (Motion ¶ 17.) In a
September 14, 2019 letter to the Trustee’s counsel, McFarland acknowledged receipt of
the Summons and Complaint, accepted responsibility for repaying “every dollar owed to
investors and ticket holders,” and expressed his willingness to “do whatever [he] can to
help and/or provide the least amount of friction for [the Trustee], creditors, and the
[C]ourt.” (Id. (citing Stevens Affidavit ¶ 13).) Accordingly, the Trustee argues that
Defendants have defaulted on their obligation to respond to the Summons and Complaint,
and consented to the entry of judgments. (Id.) On October 16, 2019, the Clerk of the
Court entered certificates of default against the Defendants. (ECF Doc. ## 8, 9.)
The Trustee seeks entry of a default judgment pursuant to Federal Rule of
Bankruptcy Procedure 7055(b)(2).
B. 	The Trustee’s Motion for Entry of the Proposed Order and Judgment
First, the Trustee seeks entry of an order declaring that the funds raised for and by
Fyre Festival were property of Fyre Festival. (Motion ¶ 28; Proposed Order.) The
Motion states that Fyre Festival maintained only two financial accounts, which were
escrow accounts maintained at First Western Trust Bank for the benefit of an air travel
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vendor (the “Air Travel Accounts”). (Id. ¶ 23.) The Air Travel Accounts were
established and used exclusively in connection with the booking of and payment for
flights, a requirement of the Federal Aviation Administration. (Id.) The Air Travel
Accounts were funded with at least $1.8 million in Festival Funds (defined below),
including three transfers identified by the Trustee in the Motion—$1.22 million from
McFarland that he received from Fyre Media; $313,000 from Fyre Media; and $240,000
from an alleged defrauded investor, Carola Jain. (Id. ¶ 24.)
All other funds raised and expended by Fyre Festival were deposited into and
disbursed directly from accounts maintained by Fyre Media and McFarland. (Id. ¶ 25.)
Not less than $14,415,346 of Fyre Festival’s funds (together with any funds borrowed by,
invested in, received for the account of, or otherwise belonging to Fyre Festival, the
“Festival Funds”) were transferred to, deposited into and disbursed from Fyre Media’s
bank accounts. (Id. ¶ 26 (citing “Festival to Media Transfers,” Complaint, Ex. A).) The
Festival to Media Transfers include $10,471,000 in transfers by investors in and lenders
to Fyre Festival, $1,404,531.86 in revenues from ticket purchasers, $1,500,000 from a
company that paid for advance ticket sales, and $1,039,814.77 from ticket purchasers for
amounts put on their prepaid wristbands (the “Fyre Bands”). (Id. (citing Complaint ¶
61).) Fyre Media then made transfers of Festival Funds to McFarland (“Festival to
McFarland Transfers,” and together with the Festival to Media Transfers, the “Insider
Fraudulent Transfers”). (Complaint, Ex. B.) The Festival to McFarland Transfers from
January 1, 2017 to April 30, 2017 were not less than $10,993,267.51. (Motion ¶ 27
(citing Complaint ¶ 62).)
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The Trustee therefore seeks a declaration that the Festival Funds were and, to the
extent that they have not been transferred by Fyre Media or McFarland, are the property
of Fyre Festival. The Trustee argues that this relief should be granted because the
Festival Funds—which were transferred to the Defendants via the Insider Fraudulent
Transfers—were raised by investors in the Fyre Festival, lenders to the Fyre Festival,
purchasers of tickets to the Festival, and purchasers of prepaid Fyre Bands. Therefore,
the Trustee submits that Festival Funds were or are the property of Fyre Festival.
(Motion ¶ 28.)
Second, the Motion seeks entry of an order declaring that the Trustee should have
the exclusive right to pursue the avoidance of any transfers of funds by the Defendants
for the benefit of Fyre Festival’s bankruptcy estate. (Id. ¶ 33.) Some of the Festival
Funds were used to pay vendors and service providers which provided legitimate and
necessary services to the Fyre Festival. (Id. ¶ 29.) The Motion lists, however, many
services that were paid for but never materialized––musical acts, food, and flights;
models and influencers who promoted the Festival at significant cost without disclosing
to the public that they were paid for promoting the Festival; and a production company
that ultimately used the footage to produce a Netflix documentary. (Id. ¶ 30.) The
Motion argues that these parties received Festival Funds at the unfair expense of Fyre
Festival’s defrauded investors, creditors and ticketholders (the expenditures collectively,
the “Festival Fraudulent Transfers”). (Id.) Further, McFarland commingled in his
personal account his assets and the assets of Fyre Festival, Fyre Media and possibly other
entities under his control. (Id. ¶ 31.) During the period where the Festival to McFarland
Transfers were made, McFarland spent not less than $315,645.87 on personal expenses.
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(Id.) Other Festival Funds were used to make “preferential transfers” to certain of Fyre
Festival’s creditors, which the Trustee argues should be recovered for the benefit of all of
the creditors of Fyre Festival (the “Festival Preferential Transfers”). (Id. ¶ 32.)
The Trustee’s Proposed Order seeks a declaration that the Trustee has the
exclusive right to pursue the recovery of Insider Fraudulent Transfers and Festival
Preferential Transfers of the Festival Funds. (Id. ¶ 33.) The Trustee submits that such
relief should be granted based upon, inter alia, the following:
 	The Festival Funds are or were the property of Fyre Festival;
 	McFarland controlled the financial affairs of both Fyre Festival and Fyre Media;
 	McFarland never established separate financial accounts for Fyre Festival and
used the financial accounts of Fyre Media for conducting the business of both
Fyre Media and Fyre Festival (the “Fyre Entities”);
 	McFarland deposited a majority of the Festival Funds into the financial accounts
of Fyre Media;
 	McFarland transferred at least $10,993,267.51 of the Festival Funds in the
account of Fyre Media to his personal financial accounts;
 	McFarland commingled the funds of the Fyre Entities and never maintained a
separate accounting for each of the Fyre Entities;
 	Certain of the Festival Funds disbursed from the accounts of Fyre Media and
McFarland were used to make the Insider Fraudulent Transfers and Festival
Preferential Transfers that the Trustee intends to pursue recovery of from the
ultimate recipients for the benefit of creditors of Fyre Festival; and
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 	Had McFarland deposited and disbursed Festival Funds to and from financial
accounts owned by Fyre Festival, then the Trustee would have the exclusive right
to pursue the avoidance of the Insider Fraudulent Transfers and the Festival
Preferential Transfers.
(Motion ¶ 33 (citing Complaint ¶¶ 84–92).)
Third, the Trustee seeks a judgment against both Defendants, jointly and
severally, in the amount of $10,993,267.51, representing the Festival to McFarland
Transfers, and against Fyre Media in the additional amount of $3,422,079.12,
representing the difference between the total Insider Fraudulent Transfers and the
Festival to McFarland Transfers, pursuant to sections 544(b), 548(a)(1)(A) and 550 of the
Bankruptcy Code and section 276 of the New York Debtor and Creditor Law
(“NYDCL”). (Motion ¶ 35.)
Further, the Trustee also seeks an order entitling him to additional default
judgments against Defendants on all claims in the Complaint that require additional
evidentiary submissions to determine the amount of damages (the “Unliquidated
Claims”).2 The Trustee states that he may seek a determination of the amount of the
Unliquidated Claims upon a motion on notice to Defendants in the future to the extent
that the judgment on the Liquidated Claims would be satisfied. (Motion at 3.)
II. 	LEGAL STANDARD
This Court recently set forth the legal standard for an entry of a default judgment:
Rule 55 of the Federal Rules of Civil Procedure, made applicable to
this adversary proceeding by Bankruptcy Rule 7055, “provides a
‘two-step process’ for the entry of a judgment against a party
2 	The Unliquidated Claims include: Claim No. 3 (Attorneys’ Fees for Avoidance of Conveyance
Made with Intent to Defraud – 11 U.S.C. § 544(b), and NYDCL § 276-a); and Claim No. 5 (Breach of
Fiduciary Duties). (Motion at 3 n.4; Complaint.)
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that fails to defend: first, the entry of a default, and second, the entry
of a default judgment.” City of New York v. Mickalis Pawn Shop,
LLC, 645 F.3d 114, 128 (2d Cir. 2011) (quoting New York v. Green,
420 F.3d 99, 104 (2d Cir. 2005)). “The first step, entry of a default,
formalizes a judicial recognition that a defendant has, through its
failure 	to 	defend 	the 	action, 	admitted 	liability 	to 	the
plaintiff.” 	Id. 	“The second step, entry of a default judgment,
converts 	the 	defendant’s 	admission 	of 	liability 	into 	a 	final
judgment.” Id.
A default generally is “an admission of all well-pleaded allegations
against the defaulting party.” D.H. Blair & Co. v. Gottdiener, 462
F.3d 95, 107 (2d Cir. 2006). However, “allegations in the complaint
with respect to the amount of the damages are not deemed
true.” Credit Lyonnais Sec. (USA), Inc. v. Alcantara, 183 F.3d 151,
155 (2d Cir. 1999). Accordingly, the trial court “must . . . conduct
an inquiry in order to ascertain the amount of damages with
reasonable certainty.” 	Id. 	(citing Transatlantic Marine Claims
Agency, Inc. v. Ace Shipping Corp., 109 F.3d 105, 111 (2d Cir.
1997)). Ascertaining damages involves two steps: (1) “determining
the proper rule for calculating damages on such a claim,” and (2)
“assessing 	plaintiff’s 	evidence 	supporting 	the 	damages 	to 	be
determined under this rule.” Credit Lyonnais, 183 F.3d at 155.
Feltman v. Tri-State Emp. Serv., Inc. (In re TS Emp., Inc.), 602 B.R. 840, 844–45 (Bankr.
S.D.N.Y. 2019).
In Exec. Sounding Bd. Assoc. v. Advanced Mach. & Engineering Co. (In re Oldco
M. Corp.), 484 B.R. 598, 600 (Bankr. S.D.N.Y. 2012), this Court entered a default
judgment against a properly served defendant who failed to respond to the complaint,
where the plaintiff filed (i) a proof of service of the summons and complaint on the
defendant; (ii) a proof of service of a second summons and complaint on the defendant;
(iii) a proof of service of the certificate of default on the defendant; and (iv) a proof of
service of the motion for the entry of a default judgment and supporting declaration on
the defendant.
Although the Court’s opinion in Oldco M. Corp. predated the Supreme Court’s
decision in Wellness Int’l Network, Ltd. v. Sharif, 575 U.S. 665 (2015), the Court’s
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reasoning underlying the opinion in Oldco M. Corp. remains sound in that bankruptcy
judges may enter default judgments based on implied consent resulting from a
defendant’s failure to respond to a summons and complaint. Other bankruptcy court
decisions after Wellness have applied Oldco M. Corp. and concluded that bankruptcy
judges may enter default judgments based on implied consent resulting from a
defendant’s failure to respond to a summons and complaint. See, e.g., Reid v. Wolf (In re
Wolf), 595 B.R. 735, 753 (Bankr. N.D. Ill. 2018); Campbell v. Carruthers (In re
Campbell), 553 B.R. 448, 45253 (Bankr. M.D. Ala. 2016); Hopkins v. M & A Ventures,
dba Hiwide Transp. Ltd. (In re Hoku Corp.), AP No. 15-08043-JDP, 2015 WL 8488949,
at *12 (Bankr. D. Idaho Dec. 10, 2015).
III. 	DISCUSSION
The Trustee is entitled to entry of a Default Judgment. The Complaint was
properly served on Defendants and they failed to timely respond to the Complaint. All
well-pleaded allegations in the Complaint are admitted and deemed to be true.
With respect to the request for declaratory relief, the moving papers clearly
establish that the Festival Funds, to the extent they were not transferred, were and are
property of the Debtor’s estate. And, to the extent that they were transferred, the Trustee
has the exclusive right to seek to recover Festival Funds that were transferred that may be
recoverable as preferential or fraudulent transfers.
The Trustee seeks to recover fraudulent transfers under sections 544(b),
548(a)(1)(A) and 550 of the Bankruptcy Code and section 276 of the NYDCL. Section
544(b)(1) of the Bankruptcy Code incorporates “applicable law,” and NYDCL applies in
this adversary proceeding. 11 U.S.C. § 544(b)(1). The Complaint alleges that transfers
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were made with the actual intent to hinder or delay present or future creditors of the
Debtor within the meaning of section 276 of NYDCL. (See Complaint ¶¶ 51–57, 70–80.)
“Liability for an actual fraudulent transfer under section 276 of the NYDCL is
established if a transfer is made with intent to defraud on the part of the transferor. A
default generally is an admission of all well-pleaded allegations against the defaulting
party.” In re TS Emp., Inc., 602 B.R. at 845 (citing In re Sharp Int’l Corp., 403 F.3d 43,
56 (2d Cir. 2005)) (some internal citations omitted). Here, the Defendants failed to
respond to the well-pleaded allegations of actual fraudulent transfer under section 276 of
the NYDCL. (See Motion ¶ 17.) This establishes the Defendants’ liability for actual
fraudulent transfers under section 276 of NYDCL.
The Motion also sets forth the proper damages rule. “To ascertain damages, the
Court carries out the first step—‘determining the proper rule for calculating damages . . .
.’ Credit Lyonnais, 183 F.3d at 155. After establishing the Defendants’ liability for an
actual or constructive fraudulent transfer under sections 273 or 276 of NYDCL, the Court
calculates the amount of damages by determining ‘the amount of monies wrongfully
received by the various transferees.’” In re TS Emp., Inc., 602 B.R. at 846 (quoting Fed.
Nat’l Mortg. Ass’n v. Olympia Mortg. Corp., No. 04-CV-4971 NG MDG, 2014 WL
2594340, at *5 (E.D.N.Y. June 10, 2014)) (some internal citations omitted).
“[T]he Court carries out the second step in ascertaining the damages by ‘assessing
plaintiff’s evidence supporting the damages to be determined under this rule.’” In re TS
Emp., Inc., 602 B.R. at 847 (quoting Credit Lyonnais, 183 F.3d at 155). “To determine
the amount of damages recoverable from a transferee, courts may rely on financial
records reflecting the amount of the transfers made to the transferee.” Id. at 846.
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Here, the Trustee’s professionals reviewed the Defendants’ financial records,
including bank statements and any other available information to determine the dates and
amounts of fraudulent transfers the Defendants received. The Motion attests to the
accuracy of the bank account information, and the transaction dates and amounts of funds
transferred to Defendants as reflected in Exhibits A and B attached to the Complaint.
(Motion ¶ 37 (citing Stevens Affidavit ¶ 19).) The Trustee has established by a
preponderance of the evidence that Defendants Fyre Media and McFarland wrongly
received transfers of $10,993,267.51, and that Defendant Fyre Media wrongfully received
transfers of an additional amount of $3,422,079.12, the difference between the total
Insider Fraudulent Transfers and the Festival to McFarland Transfers. (Motion ¶ 35.)
IV. 	CONCLUSION
For the foregoing reasons, the Court grants the Trustee’s Motion. A separate
Order Directing the Entry of a Default Judgment (in the form submitted by the Trustee’s
counsel) shall be entered. Additionally, a separate Judgment By Default Against
Defendants Fyre Media Inc. and William Z. McFarland shall be entered (again in the
form submitted by the Trustee’s counsel), providing for joint and several liability of
Defendants Fyre Media Inc. and William Z. McFarland in the amount of $10,993,267.51;
and, additionally, for liability of Defendant Fyre Media Inc. in the amount of
$3,422,079.12.
Dated: 	February 11, 2020
New York, New York
_____Martin Glenn____________
MARTIN GLENN
United States Bankruptcy Judge
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