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Bell v. Disner

United States District Court, W.D. North Carolina, Charlotte Division

February 10, 2015

KENNETH D. BELL, in his capacity as a court-appointed Receiver for Rex Venture Group, LLC d/b/a ZeekRewards.com, Plaintiff,
v.
TODD DISNER, in his individual capacity and in his Capacity as trustee for Kestrel Spendthrift Trust; TRUDY GILMOND; TRUDY GILMOND, LLC; JERRY NAPIER; DARREN MILLER; RHONDA GATES; DAVID SORRELLS; INNOVATION MARKETING, LLC; AARON ANDREWS; SHARA ANDREWS; GLOBAL INTERNET FORMULA, INC; T. LEMONT SILVER; KAREN SILVER; MICHAEL VAN LEEUWEN; DURANT BROCKETT; DAVID KETTNER; MARY KETTNER; P.A.W.S. CAPITAL MANAGEMENT LLC; LORI JEAN WEBBER; and a Defendant Class of Net Winners in ZEEKREWARDS.COM, Defendants.

ORDER

GRAHAM C. MULLEN, District Judge.

This matter is before the Court upon the Receiver's Motion for Class Certification. (Doc. No. 68). The Receiver is moving to certify a Defendant class in this case pursuant to Federal Rule of Civil Procedure 23(a) and (b)(1)(A) and (B) comprised of all persons or entities who were Net Winners of more than one thousand dollars in ZeekRewards.

I. FACTUAL BACKGROUND

This "clawback" litigation was initiated by the Receiver of Rex Venture Group, LLC ("RVG"). The Complaint alleges as follows: Paul Burks, the owner and former top executive of RVG, and other management insiders used RVG in their operation of a massive Ponzi and pyramid scheme through ZeekRewards from at least January 2011 until August 2012. Compl. at ¶¶ 1, 6-9. Over 700, 000 participants lost over $700 million dollars in the scheme. Id. at ¶ 1. Burks and the management insiders used ZeekRewards to promise substantial payouts and outsize returns to all participants, but few actually benefitted. Id. at ¶ 2. Those who did benefit were paid not with profits from a legitimate retail operation, but rather from money paid in by later investors in the scheme. Id. at ¶ 3. The largest "net winners" (those who received more money from ZeekRewards than they paid in) each received well over a million dollars, and many others received hundreds of thousands of dollars. Id. at ¶¶ 2, 12-25.

On August 17, 2012, the Securities and Exchange Commission filed an action in this Court, Securities and Exchange Commission v. Rex Venture Group, LLC d/b/a ZeekRewards.com and Paul Burks, Civil Action No. 3:12cv519, to obtain injunctive and monetary relief against Paul Burks, shut down the ZeekRewards Ponzi and pyramid scheme, freeze RVG's assets, and seek appointment of a receiver for RVG. That same date, in the Agreed Order Appointing Temporary Receiver and Freezing Assets of Defendant Rex Venture Group, LLC, this Court appointed Kenneth D. Bell as the Receiver over the assets, rights, and all other interests of the estate of Rex Venture Group, LLC, d/b/a www.ZeekRewards.com and its subsidiaries and any businesses or business names under which it does business. The Order further directed Mr. Bell as RVG's Receiver to institute actions and legal proceedings seeking the avoidance of fraudulent transfers, disgorgement of profits, imposition of constructive trusts, and any other legal and equitable relief that the Receiver deems necessary and appropriate to preserve and recover RVG's assets for the benefit of the Receivership Estate.

The Complaint alleges that the vast majority of the ZeekRewards winners' money came from ZeekRewards losers rather than legitimate business profits. Compl. at ¶ 3. At least $845 million was paid in to ZeekRewards, of which no more than $6.3 million (less than 1%) came from retail bid purchases by non-participants. Id. In total, the ZeekRewards database records show that over 92% of the money paid in to ZeekRewards came from Net Losers rather than Net Winners, and ZeekRewards' Net Winners received over $283 million in net winnings. Id.

The Receiver alleges that because ZeekRewards' Net Winners "won" (the victims') money in an unlawful combined Ponzi and pyramid scheme, the Net Winners are not permitted to keep their winnings and must return the fraudulently transferred winnings to the Receiver for distribution to ZeekRewards' victims. The Receiver filed this "clawback" action on February 28, 2014, asserting claims of relief against approximately 9, 400 Net Winners for: (1) Fraudulent Transfer of RVG Funds in Violation of the North Carolina Uniform Fraudulent Transfer Act; (2) Common Law Fraudulent Transfer; and (3) Constructive Trust.

II. DISCUSSION

The Federal Rules of Civil Procedure do allow for a defendant class. Rule 23(a) states that "[o]ne or more members of a class may sue or be sued ...." Fed.R.Civ.P. 23(a) (emphasis added); see also Henson v. E. Lincoln Twp., 814 F.2d 410, 412 (7th Cir. 1987) ("It is apparent from the words of Rule 23(a) (sue or be sued as representative parties') that suits against a defendant class are permitted."). Defendant class actions have been certified when, as here, there is a need for a "procedural device that allows one who has a common grievance against a multitude of persons to resolve... the dispute by using only a few members of the class." Broadhollow Funding Corp. v. Fitzmaurice (In re Broadhollow Funding Corp.), 66 B.R. 1005, 1007 (Bankr. E.D.N.Y. 1986). "The use of a defendant class avoids costly multiple litigation and the danger of inconsistent adjudication of the same issue." Id.

A defendant class may be certified if it meets four prerequisites: (1) numerosity; (2) commonality; (3) typicality; and (4) fair and adequate representation. Fed.R.Civ.P. 23(a). In addition to meeting the four prerequisites of Rule 23(a), certification of the proposed class requires satisfaction of one of the class requirements set forth in Rule 23(b). The Court will first discuss each of the Rule 23(a) prerequisites.

A. Rule 23(a) Analysis

It is undisputed that the proposed class meets the numerosity requirement, as it consists of approximately 9400 Net Winner Defendants. Defendants contend, however, that differences in questions of law and fact as well as differences in claims and defenses among the Defendants preclude a finding of commonality and typicality.

The "commonality" factor examines whether there are "questions of law or fact common to the class." Fed.R.Civ.P. 23(a)(2). Here, the common questions are whether ZeekRewards operated as a Ponzi and/or pyramid scheme and whether net winnings received by the Defendants should be returned to the Receiver. "It is not required that all factual or legal questions raised in the lawsuit be common so long as a single issue is common to all class members." Weinman v. Fid. Capital Appreciation Fund (In re Integra Realty Res., Inc.), 179 B.R. 264, 270 (Bankr. D. Colo. 1995); see also In re Cardinal Indus., 105 B.R. 834, 844 (Bankr. S.D. Ohio 1989) ("There need only exist one significant issue or fact common to all members of the putative class.") (citing Newburg on Class Actions § 3.10).

In Weinman, the court certified a defendant class action involving approximately 6, 300 defendant shareholders after the bankruptcy of the Integra hotel company. Weinman, 179 B.R. at 270.[1] The court found that the commonality requirement was met based on whether a spinoff of stock to the shareholders constituted a ...


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