Darr v. Wanzeler

• Court: United States Bankruptcy Court, D. Massachusetts
• Decided: February 22, 2023
• Docket: 16-04032
• Status: Unknown

Opinion

DISTRICT OF MASSACHUSETTS

____________________________________ ) In re: ) Chapter11Cases ) TELEXFREE,LLC, ) 14-40987 TELEXFREE, INC., ) 14-40988 TELEXFREE FINANCIAL, INC., ) 14-40989 ) Debtors. ) JointlyAdministered ____________________________________) ) STEPHENDARR,CHAPTER 11 ) AdversaryProceeding TRUSTEE, ) No.16-04032 ) Plaintiff, ) ) v. ) ) CARLOS WANZELER, JAMES ) MERRILL,CARLOS COSTA,PRISCILA ) FREITAS COSTA,FABIOWANZELER, ) LYVIAMARACAMPISTAWANZELER, ) MARIAEDUARDA WANZELER DE ) ALMEIDAESOUZA, DRUCILA ) WANZELER, MARISA MACHADO ) WANZELER SALGADO,RENATO ) ALVES,ANACOSTA, NATHANA ) SANTOS REIS,FABIO FARIA, ) LELIOCELSO RAMIRES FARIAS, ) SANDERLYRODRIGUES,VAGNER ) ROZA,ROBERTBOURGUIGNON, ) REGINACELIA,MICHAEL ) CALAZANS,FABIO DEARRAZ ) CRISPIM, SHEFFAMONTOYA,LUIS ) FERREIRA,SANDRES LEVIS,FEBE ) WANZELER DEALMEIDAESOUZA, ) andBRUNORANGEL CARDOZO, ) ) Defendants. ) ____________________________________) MEMORANDUMOF DECISION Before the Court is a motion to dismiss the claims against Fabio Faria (“Faria”) set forth

in Counts Seven and Eleven (the “Motion”) in an adversary proceeding filed by Steven Darr, the Chapter11trustee(the“Trustee”)inthejointlyadministeredbankruptcycasesofTelexfree,LLC, Telexfree, Inc., and Telexfree Financial, Inc. (collectively, the “Debtors” or “Telexfree”). In the complaint,theTrusteeallegesthatFariawasamemberofacivilconspiracyandaidedandabetted thetortiousconductofdefendantsJamesMerrill,CarlosWanzeler,andCarlosCosta(collectively, the “Principals”), who operated a Ponzi and pyramid scheme1 that left the Debtors with close to $1 billion in liabilities. Because the Court concludes that the complaint alleges facts sufficient to establishplausibleclaims against Faria,theMotion will bedenied.

I. FACTS ANDTRAVEL OFTHECASE

The following recitation of facts is taken from the allegations in the complaint, matters of recordintheunderlyingbankruptcycase,documentsreferencedin(andattachedto)thecomplaint, andothermatters ofwhichtheCourt maytakejudicial notice.2

1 The Debtors have previously been foundto have operated a pyramid and Ponzi scheme, which ruling is the law of the case in each of the jointly administered cases. See Order of November 25, 2015, ECF No. 654 (Hoffman, J.), as amended on December 21, 2015, ECF No. 668 (Hoffman, J.), in lead case number 14-40987. 2 While a court generally may not consider documents that are extrinsic to the complaint in ruling on a motion to dismiss, there are exceptions “for documents the authenticity of which are not disputed by the parties;forofficialpublicrecords;fordocumentscentraltoplaintiffs'claim;orfordocumentssufficiently referredtointhecomplaint.” Alt.Energy,Inc.v.St.PaulFire&MarineIns.Co.,267F.3d30,33(1stCir. 2001)(quotingWattersonv.Page,987F.2d1,3(1stCir.1993));seealsoCurriev.WellsFargoBank,N.A. (InreCurrie),SlipCopy,Bankr.No.11-17349-JNF,Adv.No.12-1009,2013WL1305805,*1n.1(Bankr. D. Mass. March 28, 2013) (“The Court may take judicial notice of the documents in the debtor’s file and thoseintheCourt’sownrecords.”). moneyfromindividualswhopurchasedmembershipplansinTelexfree(the“Participants”). Each time a Participant purchased a membership plan, an account (“User Account”) was established to tracktheParticipant’sactivityintheScheme. ParticipantsreceivedcreditstotheirUserAccounts

for selling membership plans and voice over internet protocol (“VoIP”) packages and placing internet ads, which could be redeemed for cash, transferred to another User Account, applied to satisfy an invoice for another User Account, or monetized via a transaction wherein a Participant recruited another Participant to join the Scheme, collected the recruited Participant’s payment of the membership plan invoice issued by the Debtors to the recruited Participant, and redeemed accumulated credits in satisfaction ofthatinvoice. The Trustee alleges that the Principals were intimately involved in the perpetration of the Schemefortheirpersonalbenefitand,inanefforttofurtherprofitfromtheDebtors’creditsystem, engineered the issuance of additional credits that were unrelated to membership plan purchases,

ad placements, or any other compensation scheme and for which there was no consideration (the “Manual Credits”) to the User Accounts of a select group of Participants (“Manual Credit Recipients”), many of which were sold to other Participants and generated additional money for the Principals and Manual Credit Recipients while increasing the Debtors’ liability when the Manual Credits would eventually be redeemed. According to the Trustee, the Principals and/or theManualCreditRecipientsreceivedupto$98,611,860fromthesaleofManualCredits,leaving theDebtorswith massive liabilitiesto theirmembershipprogram. The Debtors filed voluntary petitions under Chapter 11 of the United States Bankruptcy

3A “Ponzi scheme” is “[a] fraudulent investment scheme in which money contributed by later investors generatesartificiallyhighdividendsorreturnsfortheoriginalinvestors,whoseexampleattractsevenlarger investments....” PonziSchemeDefinition,Black’sLawDictionary(11thed.2019). A“pyramidscheme” is “[a]dishonest and oftenillegal way ofselling investments, wherebymoney from later investors is used to pay people in the system who have already invested . . . .” Pyramid Scheme Definition, Black’s Law Dictionary(11thed.2019). “PetitionDate”); theDebtors’caseswereconsolidatedforproceduralpurposesandthereafterhave been jointly administered. In May 2014, the Debtors’ cases were transferred to the District of Massachusetts,andtheTrusteewasappointedonJune6,2014. OnSeptember22,2015,theCourt

approved the employment of Huron Consulting Services, LLC (“Huron”) as the Trustee’s accounting and financial advisor to provide various services, including analysis of the Debtors’ data, forensic accounting, assistance to counsel in the development of litigation claims, and forensicandlitigationconsultingservices. OnApril1,2016,theTrusteefiledtheinstantadversary proceeding against the Principals, various individuals allegedly related to or affiliated with the Principals and deemed by the Trustee to have received more from the Scheme than they invested (the “Related Net Winners”), and certain Manual Credit Recipients, including Faria, alleged by theTrusteeto havefacilitatedthePrincipals’implementationoftheScheme. In the complaint, the Trustee alleges that Faria received and monetized “up to” $990,702

in Manual Credits for the benefit of himself and the Principals and alleges that by doing so, Faria participated in a civil conspiracy to implement and profit from the Scheme and aided and abetted thePrincipals’tortiousconduct. TheTrusteealsoallegesthatallManualCreditRecipients,which include Faria, sold Manual Credits to other Participants and distributed some or all of those sale proceeds to thePrincipals orfortheirbenefit. Faria responded by filing the Motion, disputing but refraining from refuting “nearly all” of the allegations as pertaining to Faria, Faria Memorandum, 3 n.2, May 16, 2016, ECF No. 14, andseekingdismissaloftheclaimsagainstFariaforfailuretostateaclaimforwhichreliefcanbe grantedunderFed.R.Civ.P.12(b)(6)(“Rule12(b)(6)”),madeapplicabletotheseproceedingsby

4See 11 U.S.C. §§ 101 et seq. All statutory references are to provisions of the Bankruptcy Code unless otherwisestated. request, due to a pending criminal action against defendant and Principal James Merrill. This CourtheldastatusconferenceonMay26,2022andprovidedFariaandtheTrusteetheopportunity to file supplemental briefs regarding the Motion, which both parties did. After a hearing on the

Motion, theCourt took thematterunderadvisement.

II. POSITIONS OFTHEPARTIES Faria argues that the Trustee relies entirely on conclusory statements and allegations lacking any particularity to support the Trustee’s claims that Faria was a member of a conspiracy to commit fraud and aided and abetted the Principals’ tortious conduct. Faria notes that his name appears only once in the body of the complaint as an individual who “monetized up to” the total amountofManualCreditsthatFariareceivedwithoutanyallegationthatFariaknewthePrincipals or their relatives alleged to have participated in the Scheme, that Faria had interactions or any

relationship with the Principals, or that Faria gave any form of kickback to the Principals. AccordingtoFaria,theTrusteehasdescribedtheManualCreditsas“worthless,”andtheTrustee’s failure to accuse Faria of receiving net winnings in the complaint (or in the Trustee’s separate adversary proceeding against domestic net winners) supports the conclusion that Faria did not actually monetize Manual Credits. Faria further notes in his supplemental brief that the Trustee has failed to amend the complaint to provide any further detailed factual allegations despite six years having passed since the complaint was filed and expenses having been incurred to analyze the Debtors’ data. Accordingly, Faria states that one can only reasonably conclude that no additional factual details exist. Furthermore, Faria argues, the Trustee’s allegation that Faria received worthless Manual Credits, standing alone, is insufficient to plausibly allege that Faria

agreed to participate in a conspiracy or that Faria knew of and participated in the Principals’ According to Faria, the Trustee fails to set forth sufficient facts to plausibly suggest or allow this Court to infer that Faria was aware of the alleged fraud or tortious conduct of the Principals,waspartofanyagreementorhadacommondesignwithanothertocommitfraud,acted

in furtherance of the alleged conspiracy, or actively participated in or substantially assisted the Principal’s tortious conduct. Faria says that the complaint fails to meet the plausibility standard set forth in Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556 (2007) and does not contain sufficientfactualallegationstosatisfyeachelementofeithertheconspiracyoraidingandabetting claims,requiringdismissalofthecomplaintastoFariaunderGagliardiv.Sullivan,513F.3d301 (1st Cir.2008). To the extent that the Trustee’s claims against Faria are predicated on fraud, Faria maintains that the heightened pleading standard of Fed. R. Civ. P. 9(b) (“Rule 9(b)”), made applicable to this adversary proceeding by Fed. R. Bankr. P. 7009, applies. Faria says that the

Trustee possesses the Debtors’ data, which was analyzed by Huron, while Faria is unable to even access his User Account. Therefore, Faria argues, the Trustee should be held to this heightened standard without exception. Faria disputes the Trustee’s assertion that the details of the Manual Credit monetization transactions are only required to determine damages. According to Faria, Rule9(b)requirestheTrusteetodetailthecreditmonetizationtransactionsbyassertingtheparties to the transactions, the dates, and the amounts. And, because the complaint fails to adequately allege either Faria’s affirmative assistance or enabling of the Principals’ tortious conduct or the specifics of Faria’s alleged participation in the fraud – namely, when Faria joined the conspiracy, who Faria reached an agreement or common design with, and what acts he agreed to do and actuallyperformedinfurtheranceofandtoactivelyparticipateinthefraud–Fariaargues thatthe

factual allegations are objectively inadequate as a matter of law and all claims against him must InopposingtheMotion, theTrustee clarifies that theterm “upto”is synonymous with “at least some” as relates to the factual allegation that Faria monetized his Manual Credits totaling $990,702. While conceding that the credits inherently had no value, the Trustee explains that the

creditscouldbemonetizedforvalueduringtheoperationoftheScheme. TheTrusteeassertsthat, as a Participant in the Debtors’ membership program, Faria would have understood that Faria receivedtheManualCreditsfornoconsiderationandunrelatedtoincentiveactivitiesandtherefore wasawareofboththeconspiracyandthePrincipals’tortiousconduct. AndtheTrusteestatesthat by knowingly monetizing Manual Credits, Faria intentionally furthered the Scheme and substantially assistedthePrincipals’tortious conduct. In his original brief, the Trustee acknowledged that the heightened pleading standard of Rule 9(b) applies both to actual fraud claims and “associated claims where the core allegations effectively charge fraud.” N. Am. Catholic Educ. Programming Found., Inc. v. Cardinale, 567

F.3d 8, 15 (1st Cir. 2009).5 According to the Trustee, Rule 9(b) requires the Trustee to state the circumstances constituting fraud with particularity, but the complaint need only allege Faria’s intentand/orknowledgegenerally. TheTrusteesaysthat,totheextentRule9(b)applies,theCourt should relax the heightened pleading standard as some bankruptcy courts have done for trustees bringing fraud claims, since a trustee “must rely on secondhand knowledge for the benefit of the estateandallofitscreditors.” Trustee’sOpposition,4,June10,2016,ECFNo.24(quotingBarry v.SantanderBank,N.A.(InreLibertyStateBenefitsofDelaware,Inc.),541B.R.219,233(Bankr. D.Del. 2015)). Inhissupplementalbrief,theTrusteeerroneouslystatesthattheonlyclaimassertedagainst

5 However,intheTrustee’ssupplementalbrief,theTrusteecitesCardinale, 567 F.3d at 15,tosupporthis positionthatRule9(b)onlyrequiresapartytopleadaclaimallegingactualfraud,andnotassociatedclaims, withparticularity. potentially applies to that claim to the extent that it alleges that Faria aided and abetted the Principals’actual fraudulent transfers set forth in Count Two. And theTrusteeargues that, to the limitedextentRule9(b)mayapplytoCountEleven,ithasbeensatisfiedsincethelawofthecase

is that the Debtors engaged in a Ponzi scheme, which carries a presumption that payments in furtherance of the scheme are made with actual intent to defraud, citing Sec. Inv’r Prot. Corp. v. BernardL.MadoffInv.Sec.LLC,531B.R.439,471(Bankr.S.D.N.Y.2015). AstotheTrustee’s allegations that Faria aided and abetted the Principals’ breaches of fiduciary duties, the Trustee argues that Rule9(b)does not apply. The complaint details the manner in which the Scheme operated and alleges that the Principals caused the Debtors to issue Manual Credits to only a select group of Participants, including Faria. The Trustee argues that those factual allegations are sufficient for the Court to infer that Faria and at least one other person acted pursuant to an agreement to further and profit

from the Scheme and that Faria sold Manual Credits for that purpose. The Trustee also says that the factual allegations support the reasonable inference that Faria had actual knowledge of the Principals’tortiousconductarisingfromtheSchemeandthatFariaintentionallyandsubstantially assisted and/or encouraged the Principals by his sale of Manual Credits and disbursement of at least some of the sale proceeds to the Principals or for their benefit, which furthered the Scheme. In addressing Faria’s protest that the complaint fails to identify each transaction by which Faria aided and abetted the Principals in the Scheme or to specify the exact amount of Manual Credits thatFariamonetized,the Trusteeassertsthat nosuchpleadingrequirement applies. TheTrusteepointstoFaria’sfailuretochallengethesufficiencyoftheotherCountsofthe

6ThecomplaintalsoallegescivilconspiracyagainstFariainCountSeven. and for the recovery of payments received as mediate transferees from the Manual Credit Recipients, as well as the substance of Faria’s memorandum, as evidence that the complaint’s factual allegations provide sufficient notice of the Trustee’s claims against Faria and to rebut

Faria’s alleged incognizance of the underlying torts at issue. Consequently, the Trustee argues that the complaint contains sufficient factual allegations to provide fair notice to Faria of the conspiracyandaidingandabettingclaimsandcontainsenoughinformationforFariatoadequately answerthecomplaint. Assertingthat thecomplaint satisfies thepleading requirements of Fed.R. Civ. P. 8 (“Rule 8”), made applicable by Fed. R. Bankr. P. 7008, and Rule 9(b) (to the limited extent thatit applies),the Trusteerequests thatthe Court denytheMotion. InadditiontoFaria’srequestthattheCourtdismisstheclaimsagainsthiminthisadversary proceeding, Faria also requests in his supplemental brief that the Court bar the Trustee from pursuing monetization-based claims against Faria in a separate, pending adversary proceeding

(Darr v. Argueta, Adversary Proceeding No. 14-4006) or in any other matter. The Trustee commenced the Argueta case on January 15, 2016 against 23 named defendants and a defendant class of “net winners” to recover fraudulent and preferential transfers. On April 14, 2016, the CourtgrantedtheTrusteeleavetoamendtheArguetacomplainttoadd82newdefendants. Faria is not anameddefendant in theArgueta proceeding. According to Faria, both this adversary proceeding and the pending Argueta proceeding involve identical subject matter and parties and thus Faria says the Court should prevent the TrusteefromaddingFariaasadefendantintheArguetacase,becausetodosowouldsubjectFaria to duplicative claims in multiple proceedings. Faria asserts that dismissal of the claims in this adversary proceeding would be a judgment on the merits for purposes of res judicata, thus

precluding the Trustee from bringing identical claims against Faria in the context of the Argueta TheTrusteesays that Argueta was commencedas aclass actionagainst aputativeclassof defendantscomprisedofdomesticnetwinnersintheSchemetopursuefraudulentandpreferential transfer claims against the class members. According to the Trustee, the Argueta class action

claimsinvolveaseparatesetoffactsandlegalstandardsfromtheclaimsraisedinthisproceeding. The Trustee would not be able to maintain the claims raised in this proceeding against all class defendants in Argueta. Therefore, the Trustee argues, neither res judicata nor the bar against duplicativelitigation are applicable.

III. DISCUSSION A. Pleadingand DismissalStandards To decide a motion to dismiss for failure to state a claim for relief under Rule 12(b)(6), “the Court must sift through the averments in the complaint, separating conclusory legal

allegations (which may be disregarded) from allegations of fact (which must be credited).” Rodriguez-Reyes vs. Molina-Rodriguez, 711 F.3d 49, 53 (1st Cir. 2013) (citing Morales-Cruz v. Univ.of P.R.,676F.3d220,224(1st Cir.2012)). Acourt looks at alltheallegations containedin the “four corners of the complaint” when deciding a motion to dismiss pursuant to Rule 12(b)(6). U.S.exrel. Rost v.Pfizer,Inc.,253F.R.D.11,15 (D.Mass. 2008)(citing Watterson v.Page,987 F.2d1,3(1stCir.1993)). Acceptingthefactualallegationsinthecomplaintastrue,thecourtmust then draw all reasonable inferences in the plaintiff’s favor and determine whether those alleged facts are sufficient to “state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007); see also Langadinos v. Am. Airlines, Inc., 199 F.3d 68, 69 (1stCir.2000). “Aclaimhasfacialplausibilitywhentheplaintiffpleadsfactualcontentthatallows

thecourttodrawthereasonableinferencethatthedefendantisliableforthemisconductalleged.” requirement,’ but it asks for more than a sheer possibility that a defendant has acted unlawfully.” Id. “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements,donotsuffice.” Id. Assessing“apleadedsituation’splausibilityisa‘context-specific’

job that compels us ‘to draw on’ our ‘judicial experience and common sense.’” Schatz v. Republican State Leadership Comm., 669 F.3d 50, 55 (1st Cir. 2012) (quoting Iqbal, 556 U.S. at 679). This Court must consider whether “the complaint warrant[s] dismissal because it failed in tototorenderplaintiff’sentitlementtoreliefplausible.” Rodriguez-Reyes,711F.3dat55(quoting Twombly,550U.S. at 569n.14). FederalRuleofCivilProcedure8(a)(2)requiresonlythatacomplaintcontain“ashortand plain statement of the claim showing that the pleader is entitled to relief.” However, claims of fraud are subject to an exception to Rule 8(a)’s simplified pleading standard. Rule 9(b) requires that “[i]n alleging fraud or mistake, a party must state with particularity the circumstances

constituting fraud or mistake.” Fed. R. Civ. P. 9(b). The purpose of this heightened pleading standard is to “give notice to defendants of the plaintiffs’ claim, to protect defendants whose reputationmaybeharmedbymeritlessclaimsoffraud,todiscourage‘strikesuits,’andtoprevent the filing of suits that simply hope to uncover relevant information during discovery.” Doyle v. Hasbro,Inc.,103F.3d186,194(1st Cir.1996). The Trustee alleges that all of the defendants conspired to engage in and implement the Scheme, which by definition is a form of fraud. Cuthill v. Greenmark, LLC (In re World Vision Entm’t, Inc.), 275 B.R. 641, 656, 658 (Bankr. M.D. Fla. 2002) (“A Ponzi scheme is by definition fraudulent...andanyactstakeninfurtheranceof[a]Ponzischemearealsofraudulent.”). Count Seven therefore asserts a claim for civil conspiracy to commit fraud, rendering Rule 9(b)’s

heightened pleading standard applicable because “fraud is specifically alleged as an ingredient of With regard to Count Eleven, the complaint alleges that Faria aided and abetted the Principals’tortiousconduct,describedasthecommissionof“theprimarycausesofactionalleged therein,” consisting of Counts One, Two, Four, Five, and Six.7 Rule 9(b)’s heightened pleading

standard applies to Count Eleven to the extent that fraud is a component of a cause of action underpinningtheaidingandabetting claim. Id. Count One sets forth claims for constructive fraudulent transfers pursuant to §548(a)(1)(B). Rule 9(b) is not applicable to claims for constructive fraudulent transfers since theydonotinvolveallegationsofactualintenttodefraud. SeePicardv.CohmadSecuritiesCorp. (InreBernard L.MadoffInv.Secs.LLC),454B.R.317,332(Bankr.S.D.N.Y.2011). Therefore, Rule 9(b) does not apply to the claim that Faria aided and abetted the Principals’ constructive fraudulent transfers set forth in Count One. However, Rule 9(b)’s heightened pleading standard clearly applies to Count Two, as that count alleges actual fraudulent transfers under §548(a)(1)(A).8

7 See Complaint, 30 ¶ 142. The complaint sets forth Counts One through Six specifically against the Principals. Count Three, for recovery of preferential transfers, is based on §§ 547, 550 and 551 of the BankruptcyCode,andtheTrusteehasnotcitedanylaworarguedthatthisclaimisbasedintort. Sincethe Trustee indicated in his supplemental brief that he does not intend to pursue Count Three, the Court will notconsiderCountThreeinitsanalysisoftheaidingandabettingclaim. 811U.S.C.§548(a)(1)provides: (a) (1) The Trustee may avoidany transfer (including anyinterestto orforthebenefitof an insider under an employment contract) of an interest of the debtor in property, or any obligation(includinganyobligationtoorforthebenefitofaninsiderunderanemployment contract)incurredbythedebtor,thatwasmadeorincurredonorwithin2yearsbeforethe dateofthefilingofthepetition,ifthedebtorvoluntarilyorinvoluntarily- (A)madesuchtransferorincurredsuchobligationwithactualintenttohinder,delay, ordefraudanyentitytowhichthedebtorwasorbecameonorafterthedatethatsuch transferwasmadeorsuchobligationwasincurred,indebted;or (B) (i) received less than a reasonably equivalent value in exchange for such transfer orobligation;and faith, respectively, based on allegations that the Principals caused the Debtor to engage in the Schemethat thePrincipals thencarriedout forthe benefit ofthePrincipals, RelatedNet Winners, and Manual Credit Recipients while causing the Debtors to incur unsatisfiable debt to the

Scheme’s net losers. Count Six sets forth a claim for “looting” based on allegations that the Principals committed corporate waste by drawing excessive distributions, colluded with the Related Net Winners to extract fictitious profits from the Scheme and share in net winning payments, and colluded with Manual Credit Recipients for the financial benefit of the Principals and the Manual Credit Recipients. Although the Trustee failed to cite any statutory or common law claim for “looting,” Count Six sounds in a claim based on breach of fiduciary duty and the Court will treat it as such. WhiletheclaimsforbreachoffiduciarydutiesmaynotappearsubjecttoRule9(b)ontheir face, Rule 9(b) is read “expansively to cover associated claims where the core allegations

effectively charge fraud.” Cardinale, 567 F.3d at 15 (citing Hayduk v. Lanna, 775 F.2d 441, 443 (1st Cir. 1985)). Counts Four, Five, and Six, to some degree, each involve the Principals’ use of the Debtors to orchestrate the Scheme to the detriment of the Debtors and in violation of their fiduciary duties. The Trustee’s overall legal theory is that the Principals violated their duties by

(ii) (I)wasinsolventonthedatethatsuchtransferwasmadeorsuchobligation wasincurred,orbecameinsolventasaresultofsuchtransferorobligation; (II) was engaged in business or a transaction, or was about to engage in businessoratransaction,forwhichanypropertyremainingwiththedebtor wasanunreasonablysmallcapital; (III) intended to incur, or believed that the debtor would incur debts that wouldbebeyondthedebtor’sabilitytopayassuchdebtsmatured;or (IV)madesuchtransfertoorforthebenefitofaninsider,orincurredsuch obligationtoorforthebenefitofaninsider,underanemploymentcontract andnotintheordinarycourseofbusiness. TrusteeallegesinCountSixthatthePrincipalsdrewexcessivedistributions,thenucleusofCounts Four, Five, and Six is that the Principals violated their duties by engaging in fraudulent activity, theScheme. AlthoughthesecountsseekreliefforbreachesoffiduciarydutiestotheDebtors,they

are based on allegedly fraudulent and improper conduct by the Principals as officers, principals, and/or directors. Consequently, the Rule 9(b) heightened pleading requirement applies to the Count Eleven claim that Faria aided and abetted the Principals’ violation of fiduciary duties set forthinClaimsFour,Five,andSixtotheextentthatthoseclaimsallegethatthePrincipalsengaged in fraudulent activity. See In re Felt Mfg. Co., Inc., 371 B.R. 589, 608 (Bankr. D.N.H. 2007) (citing Lalonde v. Textron, Inc., 369 F.3d 1, 6 (1st Cir. 2004)). In summary, the heightened pleading standard of Rule 9(b) applies to the Count Eleven claim that Faria aided and abetted the Principals’ actual fraudulent transfers set forth in Count Two and to the breach of fiduciary duty claims set forth in Counts Four, Five, and Six to the extent of the Principals’ alleged fraudulent

activity, but Rule 9(b) does not apply to the claim that Faria aided and abetted the Principals’ constructivefraudulenttransfers set forth in Count One. While Rule 9(b) is applicable to Count Seven and to some extent Count Eleven, strict application of the heightened pleading standard may be relaxed pending discovery in some circumstances,suchas“whentheunderlyingfactsare‘peculiarlywithinthedefendants’control.’” United Air Lines, Inc. v. Gregory, 716 F. Supp. 2d 79, 86 (D. Mass. 2010) (quoting U.S. ex rel. Franklin v. Parke-Davis, Div. of Warner-Lambert Co., 147 F. Supp. 2d 39, 47 (D. Mass. 2001)). Becauseabankruptcytrusteeisa“thirdpartyoutsider”and“must relyonsecondhandknowledge forthebenefitoftheestateandallofitscreditors,”somebankruptcycourtshaveappliedarelaxed Rule9(b)standardtotrusteesbringingclaimsoffraud. Liberty,541B.R.at233(internalcitations

and quotations omitted). While the Trustee has had access to the Debtors’ data and the extensive opportunitytoconductdiscoveryregardingFaria’sdispositionofproceedsfromthesaleofManual Credits or Faria’s transactions with or for the benefit of the Principals. In addition, the Court is notawarethattheTrusteehashadaccesstothepersonalfinancialrecordsofthePrincipals,Related

Net Winners, or the other Manual Credit Recipients. Consequently, the Court will slightly relax theRule9(b)standard as it appliesto Counts SevenandEleven. B. CountSeven:Civil Conspiracy In Count Seven, the Trustee alleges that Faria and the other defendants, for an unlawful purpose and using unlawful means, agreed or commonly designed to engage in, implement, further, and profit from the Scheme and engaged in a tortious act in furtherance of the agreement orcommondesign,leavingtheDebtorsliabletoParticipantsforapproximately$1billioninlosses resulting from the Scheme. In their respective briefs regarding the Motion, the parties cite Massachusetts law as the applicable law under Count Seven. While the First Circuit, applying

Massachusetts law, has identified two types of civil conspiracy, the Trustee and Faria concur that theTrusteeallegesthat Fariaengagedin thetypeofcivil conspiracy“akin to atheoryofcommon lawjointliabilityintort.” AetnaCas.Sur.Co.v.P&BAutobody,43F.3d1546,1563-64(1stCir. 1994). Toestablishliability forthistypeofconspiracy,theplaintiffmust allege“first, acommon design or an agreement, although not necessarily express, between two or more persons to do a wrongfulactand,second,proofofsometortiousactinfurtheranceoftheagreement.” Id.at1564 (citing Restatement (Second) of Torts § 876 cmt. B (Am. Law Inst. 1979)). Of these elements, Faria arguesthat thefactual allegations areinsufficientto eitherproveorinferthe existence ofan agreement involving Faria. BasedonthefactualallegationthatFariawasaParticipantwhohadManualCreditsissued

to his User Account, the Court may draw an inference in the Trustee’s favor that, due to Faria’s issuedto himfornoconsiderationandtheissuanceoftheManual Credits was not consistent with the terms of the Debtors’ membership incentive plan. The allegation that Faria proceeded to sell at least some of those Manual Credits to other Participants supports a claim that Faria acted with

an unlawful purpose and in furtherance of the Scheme. Due to the Court’s prior finding that the Scheme was a Ponzi and pyramid scheme, and by nature was fraudulent, the Trustee’s allegation that Faria sold some of those Manual Credits and thereby furthered the Scheme allows the Court to readthecomplaint as allegingthatFariacommitteda“wrongful act.” The requisite conspiratorial agreement need not be express “so long as its existence can plausibly be inferred from words, actions, and the interdependence of activities and persons involved.” Aetna, 43 F.3d at 1562. The Trustee has alleged that the Principals orchestrated the issuance of Manual Credits totaling $990,702 for no consideration to Faria and that Faria monetized up to the total amount of Manual Credits for the benefit of himself and the Principals.

While the Trustee has not alleged that Faria was a relative of any of the Principals, the Trustee alleges generally that the Principals used both relatives and “surrogates” (an undefined term) to profitfromtheScheme. TheTrusteeallegesthatFariadistributedsomeoralloftheproceedsfrom Faria’ssaleofManualCreditstothePrincipalsorfortheirbenefit,allowingtheCourttoplausibly infer that Faria had an agreement with at least one other person, a Principal, to engage in and implementtheScheme. BecausethetortunderpinningCountSevenforconspiracyisfraud,theCourtmustconsider the relaxed applicability of Rule 9(b)’s heightened pleading standard, which usually requires averment of the “who, what, where, and when” of the alleged fraud. Alternative Sys. Concepts, Inc.v.Synopsys,Inc.,374F.3d23,29(1stCir.2004). TheCourtfindsthatthecomplaintcontains

sufficient factual allegations to establish the “who” and what” of Faria’s fraudulent activity as the Court can infer that Faria was aware that the Manual Credits were issued to him for no consideration and inconsistent with themembership program terms and proceeded to sell Manual Credits and distribute at least some of the sale proceeds for the benefit of himself and the

Principals. TheTrustee’sfailuretoallegethe“where”and“when”ortoprovidedetailsofFaria’s transactions involving the sale of Manual Credits to other Participants and the disbursements of those sale proceeds is logical considering the pre-discovery stage of this proceeding. While the TrusteemayhaveaccesstotheDebtors’data,FariahasnotassertedthattheTrusteehashadaccess to Faria’s data. Having found that the Trustee’s position and circumstances justify applying a relaxed Rule 9(b) pleading standard, the Court finds that the Trustee has sufficiently pled factual allegations to support the plausible inference that Faria had an agreement with another person to engage in, implement. and further the Scheme and sold Manual Credits received for no considerationforprofitinfurtheranceoftheScheme. WhileFariaarguesthathewas“unwittingly

ensnared in the Scheme,” the allegation that Faria disbursed at least some of his Manual Credit sale proceeds to the Principals or for their benefit supports an inference that Faria was an active participant,ratherthanmerelyengagedin “parallelconductthatcouldjust aswellbeindependent action.” See Twombly, 550 U.S. at 557. Accordingly, the Court finds that the complaint has sufficiently stated a claim against Faria for civil conspiracy and the Motion will be denied as to Count Seven. C. CountEleven:Aidingand AbettingtheCommission ofTortious Conduct In Count Eleven, the Trustee alleges that Faria aided and abetted the Principals’ commissionofthetortious conduct allegedinCounts One,Two,Four, Five,andSix byreceiving andsellingManual Credits anddistributing at least someofthesaleproceeds to orfor thebenefit

ofthePrincipalswithunlawfulintentandwithknowledgethatthePrincipalswereperpetratingthe claim. “[U]nder Massachusetts law liability for aidingand abetting a tort attaches where: (1) the defendant provides substantial assistance or encouragement to the other party; and (2) the

defendanthasunlawfulintent,i.e.,knowledgethattheotherpartyisbreachingadutyandtheintent to assist that party’sactions.” Mansor v.JPMorganChaseBank,N.A., 183F.Supp.3d250,264 (D.Mass. 2016)(citations omitted). Asto Count One(recoveryofconstructivefraudulent transfers)andCount Two(recovery of actual fraudulent transfers), the Trustee has alleged that the Principals controlled the Debtors, who paid specified sums in the millions directly to or for the benefit of each of the Principals, including some payments received as mediate transferees from Manual Credit Recipients, within two years of the Petition Date. In Exhibits A-E to the complaint, the Trustee identifies the date, account number, transferee, method of transfer, and amount of payments made by the Debtors to

orforthebenefitofthePrincipalswithintwoyearsofthePetitionDate. InCountOnetheTrustee hasallegedthatthesetransfersweremadeforlessthanreasonably equivalentvalue,which,based on the nature of the Scheme and the alleged amounts involved, is plausible. In light of the allegations detailing the operation of the Scheme and the allegation that the Principals caused the Debtorsto incurobligations to Participants that theDebtors were wholly unableto pay,the Court finds it plausible that the Debtors owed substantial debt and were insolvent at the time of the transfers or were rendered insolvent as a result thereof. Regarding the claim that Faria aided and abetted the Principals’ constructive fraudulent transfers, which is not subject to a heightened pleading standard, the Trustee has sufficiently pled the underlying tort of constructive fraudulent transfer.

TheCourthaspreviouslyfoundthattheDebtorsoperatedaPonzischeme,and“[i]tisnow intent to hinder, delay and defraud creditors.” Picard 445 B.R. at 220. And, applying a relaxed Rule9(b)standardastothe“who,what,how,andwhen”oftheallegedactualfraudulenttransfers forthe reasons discussed above,theCourt finds that theTrusteehas sufficientlypledfacts for the

Court to find that the Principals were the recipients of actual fraudulent transfers as set forth in Count Two. The question remains whether the Trustee has sufficiently pled that Faria had knowledge of the constructive and actual fraudulent transfers to the Principals and intentionally provided assistance that was substantial. “[P]leading knowledge for purposes of an aiding and abetting claim requires allegations of facts that give rise to a strong inference of actual knowledge.” Mansor, 183 F. Supp. 3d at 264 (quoting In re Agape Litig., 773 F. Supp. 2d 298, 308 (E.D.N.Y. 2011)). The Trustee has alleged that Faria was part of a select group of individuals who received Manual Credits,at least someofwhichhe thensoldto otherParticipants anddistributedat least a

portionofthosesaleproceedstothePrincipalsorfortheirbenefit. TheCourthasfoundthatbased on the allegations of Faria’s experience as a Participant in the Debtors’ membership program, it could be plausibly inferred that Faria was aware that he received the Manual Credits for no consideration and in a manner inconsistent with the terms of the Debtors’ membership incentive plan, which in turn raises a strong inference that Faria had actual knowledge of the Scheme. The Trustee also alleges that Faria sold Manual Credits to other Participants and distributed at least someofthosesaleproceedstothePrincipalsorfortheirbenefit.Fromthoseallegations,theCourt mayinferthatFariasubstantiallyassistedthePrincipalsintheirreceiptoffraudulentlytransferred funds. Consequently, the Court finds that the Trustee’s factual allegations provide a strong inferencethatFariahadactualknowledgeofthePrincipals’receiptofconstructiveandfraudulent

transfers and that Faria provided substantial assistance to the Principals. The Court finds that the Principals’ receipt of constructive fraudulent transfers as set forth in Count One and actual fraudulent transfers as set forth in Count Two. In Counts Four and Five, the Trustee alleges that Faria aided and abetted the Principals’

breaches of their fiduciary duties of care and good faith, respectively. In Count Six, the Trustee allegesthatthePrincipalslootedtheDebtorsandcommittedcorporatewastebydrawingexcessive distributions and colluding with Related Net Winners to extract and share in fictitious profits and with Manual Credit Recipients to financially benefit from monetized Manual Credits. As discussed above, the Court will treat the Count Six looting claim as a breach of fiduciary duty claim. “The elements of the tort of aiding and abetting a breach of fiduciary duty are: (1) there must be a breach of fiduciary duty; (2) the defendants must know of the breach; and (3) the defendantsmusthaveactivelyparticipatedorsubstantiallyassistedinorencouragedthebreachto

such a degree that they could not reasonably have been acting in good faith.” Baker v. Wilmer Cutler PickeringHale andDorrLLP,81N.E.3d 782,793(Mass. App.Ct. 2017)(citingArcidi v. Nat’l Assn. of Govt. Employees, 447 Mass. 616, 623-624 (2006)). As to the element of breach of fiduciary duty, the Trustee alleges breach by way of the Principals’ fraudulent activity, which is subjecttotherelaxedRule9(b)standard. ThelawofthecaseisthattheSchemeitselfisfraudulent. Accordingly, the complaint sufficiently details the Principals’ engagement in fraudulent activity, viaorchestrationandimplementationoftheScheme,tosatisfytherelaxedRule9(b)standard. The allegations in the complaint provide fair notice of the nature of the claimed breaches of fiduciary duty andFariahas not challengedthesufficiency ofthoseallegations. Fariadoes not disputethat thecomplaint states a claim thatthePrincipals, throughtheirorchestration oftheScheme, caused

theDebtorstoincurunsatisfiabledebt,breachedfiduciarydutiesofcareandgoodfaith,andlooted However,FariaurgestheCourttofindthatthecomplaintdoesnotsufficientlypleadeither Faria’s knowledge or the level of substantial assistance required for an aiding and abetting claim. “To establish a common law cause of action for aiding and abetting, plaintiffs must at least

demonstrate some measure of ‘active participation’ and the knowing provision of substantial assistance.” Schultz v. Rhode Island Hosp. Trust Nat’l Bank, 94 F.3d 721, 730 (1st Cir. 1996) (citingSpinnerv.Nutt,417Mass. 549,556(1994)). As discussed above, the factual allegations in the complaint allow the inference that Faria wouldhaverealizedthathereceivedtheManual Creditsfornoconsideration. And,inadditionto the factual allegations that the Principals used relatives and surrogates to profit from the Scheme and Faria was issued $990,702 in Manual Credits, which were issued to only a select group of individuals, the Court may reasonably infer that Faria was aware that some fraudulent activity by or on behalf of the Debtors was occurring. The Trustee’s allegation that Faria, a Manual Credit

Recipient, sold Manual Credits to other Participants and distributed at least some of those sale proceeds to the Principals or for their benefit allows the Court to reasonably infer that Faria knowingly provided substantial assistance to the Principals in their breaches of fiduciary duty. Therefore, the allegations in the complaint set forth plausible claims that Faria aided and abetted the Principals’ tortious conduct set forth in Counts Four, Five, and Six. Accordingly, the Court finds that the complaint has sufficiently stated a claim against Faria for aiding and abetting the commissionoftortious conduct andtheMotion will bedeniedas to Count Eleven. D. Faria’sRequesttoPrecludeTrusteefromPursuingClaimsinAnotherProceeding TheCourtwillnotissueanorderinthecontextofthecurrentMotionthatbarstheTrustee from naming Faria as defendant in the Argueta adversary proceeding or any other proceeding, as

to doso wouldrequiretheCourt to issueanadvisoryopinion onanunrelatedmatter. SeeFlast v. Cohen, 392 U.S. 83, 96 (1968) (It is clear that “the oldest and most consistent thread in the federal law of justiciability is that the federal courts will not give advisory opinions.”) (quoting Charles Alan Wright, Federal Courts 34 (1963)). To the extent Faria is either named as, or considered to be, a defendant in the Argueta proceeding or any other matter, Faria is free to file a motion to dismiss in the relevant proceeding.

IV. CONCLUSION For all the foregoing reasons, the Court rules that the Trustee, in the complaint, has stated plausible claims that Faria engaged in conspiracy to commit fraud and aided and abetted the Principals regarding constructive and actual fraudulent transfers, breaches of fiduciary duties of care and good faith, and looting/corporate waste. The Court will not issue an advisory opinion as to whether Faria may be named as a defendant in any other proceeding. Accordingly, the Court will DENY the Motion. A separate order in conformity with this Memorandum will issue forthwith.

By the Court Dated: February 22, 2023 Llhkett b Ly Elizabeth D. Katz United States Bankruptcy Judge