The Chapter 7 Trustee appointed in the TransVantage Solutions, Inc. bankruptcy case ground the gears of the nation’s trucking industry this past April when he filed over 500 adversary complaints against common carriers, shippers and customers of the bankrupt company.
In one of the more unusual bankruptcy cases to come down the pike in quite a while, TransVantage was a New Jersey-based company, founded in 1964, that provided freight audit and payment services on behalf of its manufacturing customers to ensure that the auditing and payment of freight invoices were both accurate and timely. TransVantage would receive and review invoices from the freight carriers of its customers and, if the invoices were accurate, instruct its customers to forward funds to pay the approved invoices. The customers would send the requested funds, in trust, to TransVantage for payment to the approved carrier.
That is how the business was supposed to work. However, the Trustee, as well as the Federal government, have alleged that for a number of years customers’ funds earmarked for payment to specific carriers became commingled with the advances made by other customers. Further, trust funds were alleged to have been misappropriated by TransVantage to pay its payroll and operating expenses and sizeable sums were embezzled by its principal, Shirley Sooy, for personal gain. The Trustee asserts that, over the course of time, new funds remitted by customers became insufficient to pay the outstanding freight bills of other customers. TransVantage filed for bankruptcy in 2013 following an audit conducted by a customer who had advanced funds without its carriers receiving payment. At the time of the bankruptcy filing, there was an approximate shortfall of $40 million in funds required to pay customer freight bills. Sooy is currently under Federal indictment for conspiracy to commit wire fraud for the alleged diversion of customer funds for the payment of mortgages on personal properties owned by Sooy in New Jersey and Florida, to acquire a 48-foot yacht and a $135,000 Maserati, to pay personal credit card charges incurred by Sooy and family members, as well as to pay for the remodeling of her home.
In recent years, the use of freight auditing and payment companies has proliferated as manufacturers have outsourced such functions seeking expertise and convenience. The breakdown in the internal controls of TransVantage has sent a chill throughout this burgeoning industry which is dependent on the confidence and trust of its customer base that the huge sums of advanced money will be appropriately handled.
The Trustee has filed avoidance actions against approximately 500 carriers — ranging from “mom and pop” trucking outfits to multi-national transportation concerns — as well as 15 of its customers. The amounts sought to be avoided by the Trustee and recovered for the estate approach $500 million dollars. As to the customers, the Trustee alleges that the payments made to the carriers constitute preferences for the customers because they were made in satisfaction of obligations arising from agreements with TransVantage.
The Trustee alleges that TransVantage was operated as a Ponzi scheme and seeks the avoidance of payments received by carriers as fraudulent transfers. In the context of a Ponzi Scheme, the debtor’s intent under 11 U.S.C. § 548(a)(1)(A) is presumed from the nature of the scheme itself. As a matter of law, the “Ponzi scheme presumption” establishes the debtor’s fraudulent intent, because transfers made in the course of a Ponzi scheme could have been made for no purpose other than to hinder, delay or defraud creditors.
However, the Trustee’s allegation that TransVantage operated as a Ponzi scheme has been met with wide-spread skepticism. A Ponzi scheme is generally defined as a fraudulent investment scheme in which money contributed by later investors generates artificially high dividends or returns for the original investors, whose example attracts even larger investments and where money from the new investors is used directly to repay or pay interest to earlier investors, usually without any operation or revenue-producing activity other than the continual raising of new funds. To prove that a debtor engaged in a Ponzi scheme, a trustee must establish that: (1) deposits were made by investors; (2) the debtor conducted little or no legitimate business operations as represented to investors; (3) the purported business operation of the Debtor produced little or no profits or earnings; and (4) the source of payments to investors was from cash infused by new investors.
The Trustee alleged none of these elements in the Adversary Complaints. To the contrary, there were no payments to or from investors. The money received by TransVantage were advances made by its customers for the legitimate freight charges of its carriers. By all appearances, TransVantage was a legitimate business that suffered a breakdown of internal controls and misappropriation by its principal. Quite simply, TransVantage has none of the hallmarks of the typical Ponzi scheme.
In late May, several of the customers filed a Joint Motion to Partially Consolidate the Adversary Proceedings, Temporarily Stay Adversary Proceedings and Obtain relief from the Procedures Order. More than 200 hundred of the Adversary defendants have filed formal Joinders to the Consolidation Motion. The Consolidation Motion contends that there are numerous common threshold issues implicated in these Adversary Proceedings and that to address them piecemeal would not only be highly inefficient but might result in decisions being made before all parties might be heard. These common issues include whether:
the alleged embezzlement gives rise to the Ponzi scheme presumption;
the Debtor has an interest in the advanced trust funds;
the Trustee’s efforts to recover the $40 million shortfall benefits the estate;
the Debtor was insolvent at the time of the transfers; and
the Debtor received reasonably equivalent value in exchange for the carrier payments.
The Consolidation Motion requested the stay and consolidation of all of the Adversary Proceedings for the purpose of the briefing and determination of these common threshold issues.
Not surprisingly, the Trustee vigorously opposed the Consolidation Motion, claiming that a blanket stay on all of the Adversary Proceeding would disrupt his efforts to settle with the defendants and fund the estate. A hearing on the Consolidation Motion was held in early June of 2015, and Judge Ferguson entered a ruling that appears, on its face, designed to address the concerns of all parties.
For the defendants who either filed or joined in the Consolidation Motion, the Adversary Proceedings are stayed pending the filing and determination of an Omnibus Motion to Dismiss addressing these threshold issues. Parties who have individualized defenses will be permitted to file supplemental briefing. However, Judge Ferguson’s ruling will leave undisturbed the Adversary Proceedings of defendants who neither moved for nor joined in the Consolidation Motion, and such proceedings will advance in accordance with the original Procedures Order entered at the inception of these cases.
The next several months should prove to be interesting as the Trustee’s attempts to expand Ponzi scheme definitions beyond the traditional model of investment-related scams get put to the test.
 See gen. Black’s Law Dictionary (9th ed. 2009); Cunningham v. Brown, 265 U.S. 1, 44 S. Ct. 424, 68 L. Ed. 873 (1924) (seminal case involving Charles Ponzi, creator of the Ponzi scheme, from which the definition stems).
 In re NorVergence, Inc., 405 B.R. 709, 730 (Bankr. D.N.J. 2009) (quoting Rieser v. Hayslip (In re Canyon Sys.Corp.), 343 B.R. 615, 629-30 (Bankr. S.D. Ohio 2006)(internal citations omitted).
 The Procedures Order was entered in mid-April of 2015, before all of the Adversary Proceedings had been filed, and has the effect of channeling the Adversaries to mediation and precluding the ability of defendants to challenge the sufficiency of the Trustee’s allegations through motions to dismiss.