Court Opinion

ID: 4451235
Source: CourtListenerOpinion
Date Created: 2019-10-29 21:00:12.087172+00
Date Added: 2024-06-11T13:33:35.354122
License: Public Domain

United States Court of Appeals
                       For the First Circuit

No. 18-2001

  IN RE: TELEXFREE, LLC; TELEXFREE, INC.; TELEXFREE FINANCIAL,
                              INC.,

                              Debtors.

   STEPHEN DARR, as Trustee of the Estates of TelexFree, LLC,
         TelexFree, Inc., and TelexFree Financial, Inc.,

                        Plaintiff, Appellee,

                                 v.

        RITA DOS SANTOS, individually and as putative class
   representative; MARIA MURDOCH, individually and as putative
 class representative; ANGELA BATISTA-JIMENEZ, individually and
      as putative class representative; ELISANGELA OLIVEIRA,
   individually and as putative class representative; DIOGO DE
    ARAUGO, individually and as putative class representative,

                            Defendants,

              PLAINTIFFS' INTERIM EXECUTIVE COMMITTEE,

                    Interested Party, Appellant.

          APPEAL FROM THE UNITED STATES DISTRICT COURT
                FOR THE DISTRICT OF MASSACHUSETTS

         [Hon. Timothy S. Hillman, U.S. District Judge]

                               Before

                     Lynch, Selya, and Barron,
                          Circuit Judges.
     Robert J. Bonsignore, with whom Lisa Sleboda, Bonsignore
Trial Lawyers, PLLC, William R. Baldiga, James W. Stoll, and Brown
Rudnick LLP were on brief, for Appellant.
     Harold B. Murphy, with whom Charles R. Bennett, Jr., Andrew
G. Lizotte, Shawn Lu, and Murphy & King, P.C. were on brief, for
Appellee.

                        October 29, 2019
             LYNCH, Circuit Judge.         This appeal is from bankruptcy

court orders adopted by the district court arising out of the

bankruptcies of TelexFree, LLC; TelexFree, Inc.; and TelexFree

Financial, Inc. (collectively, "TelexFree"), one of the largest

Ponzi/pyramid schemes in U.S. history.             The dispute in this case

is over who will be allowed to seek to recover payments made by

new participants in the scheme to the existing participants who

recruited them (the "Contested Funds").             Trustee Stephen Darr is

attempting    to   recoup    these     Contested   Funds    through   avoidance

actions, while victims represented by the Plaintiffs' Interim

Executive    Committee      ("PIEC")    are    asserting    unjust    enrichment

claims to recover the same sums.

             Adopting the bankruptcy court's analysis, the district

court   stayed     the   unjust   enrichment       claims   under     11   U.S.C.

§ 362(a)(3) based on the following findings:

(1) that the trustee has standing to bring the avoidance actions

because the Contested Funds were "interests of the debtor in

property" under 11 U.S.C. §§ 547 and 548;

(2) that these avoidance actions were themselves "property of the

estate" under 11 U.S.C. § 541; and

(3) that the unjust enrichment claims were acts to "obtain" or

"control" property of the estate (i.e., the avoidance actions) --

and thus barred by 11 U.S.C. § 362(a)(3) -- because they are

"derivative" of the avoidance actions under the analyses set forth

                                       - 3 -
in the Second Circuit's Madoff cases.             See Picard v. Fairfield

Greenwich Ltd. ("Madoff III"), 762 F.3d 199 (2d Cir. 2014);

Marshall v. Picard (In re Bernard L. Madoff Inv. Sec. LLC) ("Madoff

II"), 740 F.3d 81 (2d Cir. 2014).

The net effect of these rulings was to permit the trustee to pursue

the Contested Funds and to stop PIEC's efforts to pursue those

funds.

            We    assess    and   reject   the   only   arguments     that    the

appellant makes as to why the bankruptcy court erred in ruling

that    their    unjust    enrichment   claims   are    stayed     pursuant   to

§ 362(a)(3).      Those arguments, which we reject, are: (1) that the

avoidance action claims are not "property of the estate" within

the meaning of that stay provision because the bankruptcy court's

"standing" finding is flawed; and (2) that, in any event, the

unjust enrichment claims do not seek to "obtain" or "control" the

"property of the estate" within the meaning of that stay provision

because those claims are not "derivative" of the avoidance action

claims under the derivative analyses the Second Circuit employed

in the Madoff cases.

            We    affirm,   write   narrowly,    and    do   not   reach   other

arguments or potential arguments.            We describe below the facts

and, more explicitly, the nature of the dispute between Darr and

PIEC.

                                     - 4 -
                                I.

A.   The TelexFree Scheme

          TelexFree was a hybrid Ponzi and pyramid scheme that

operated in the United States from 2012 until 2014, when its

founders were criminally charged, its operations closed, and it

declared bankruptcy.   It is considered one of the largest such

schemes in U.S. history, with approximately $1.7 billion lost and

one million participants, many of them immigrants, defrauded.

          The material facts are not disputed by the parties.

TelexFree held itself out as a multi-level marketing company that

sold international phone subscription packages.   Participants paid

membership fees to join the TelexFree scheme and have the right to

sell phone subscription packages to others.1      Each participant,

including new participants, was assigned an online user account by

the company.   Many participants had multiple accounts, as they

were encouraged to do by the economic incentives of the scheme.

The participants, for bankruptcy purposes, later were divided into

"Net Winners" and "Net Losers," important concepts which we explain

below.

          The actual phone subscriptions sold were tangential to

TelexFree's true purpose, like all pyramid schemes.     TelexFree's

     1    The phone subscription service offered by TelexFree
allowed customers to make inexpensive calls to other countries
using a technology called Voice over Internet Protocol ("VoIP")
instead of a traditional phone line.

                              - 5 -
operations,      rather,       were     geared     towards    recruiting     new

participants into the scheme.            New participants, on signing up,

owed a membership fee to TelexFree.              Instead of paying TelexFree,

new participants could pay the existing members directly, and the

existing members could redeem some accumulated "credits" to settle

the new members' obligations to TelexFree.               New participants then

themselves     often     recruited     additional      participants   into   the

scheme.      Participants who joined early in the scheme could make

significant money from all the "downstream" participants, while

many newer participants lost money, sometimes their entire life

savings.

             TelexFree combined these classic pyramid scheme features

with   the    features    of   a    classic    Ponzi   scheme.    The    company

advertised that participants could receive guaranteed returns on

the money they put into TelexFree, without ever having to sell a

VoIP subscription package or even to sign up a new participant.

To keep up the facade of a legitimate business, the company

required     participants      to     post    commercially-useless      internet

advertisements.

             For example, participants who joined the scheme through

the "AdCentral Plan" paid TelexFree $339 -- a $50 membership fee

and a $289 contract fee.           In return, they were allowed to sell ten

VoIP subscription packages (although they were not required to)

and were required to post one internet advertisement a day.                  If

                                       - 6 -
the participants met their advertising quota, they would earn the

right to sell another VoIP subscription package each week.     Or,

instead of selling it, they could turn the extra VoIP subscription

package back into TelexFree in exchange for twenty dollars' worth

of credits.   In that way, participants could reliably transform a

$339 investment into $1,040, or a 207% annual rate of return.

Other membership plans had even higher rates of return.   This was

not true compensation for labor but was instead an astronomical

guaranteed return on investment, paid for by newer recruits'

membership fees.

          Ostensibly, there were three main ways to make money

through the TelexFree scheme: selling phone subscription packages,

posting internet advertisements, and signing up new participants.

Often, TelexFree participants were not paid in cash directly but

through digital "credits" that they, under the terms of their

subscription contracts, could redeem for cash at a later point.2

          The Contested Funds at issue relate to the signing up of

new participants.   When an existing participant recruited someone

new into the scheme, TelexFree would send an invoice to the new

participant for the membership fee.    One way the new participant

     2    PIEC disputes whether participants regularly converted
credits into cash, but PIEC concedes that participants were
regularly paid commissions and bonuses in the form of credits and
"it's conceivable" that at least some participants received cash
payment from TelexFree.

                               - 7 -
could satisfy the invoice was by paying the company the membership

fee directly, although only about twelve percent of membership

fees were paid that way.

              The much more common method used was that the new

participant paid her membership fee directly to the participant

who recruited her. TelexFree then would remove from the recruiting

participant's account credits of equal value to the membership fee

that   this    recruiting        participant    retained.     TelexFree     then

considered     the   new    participant's      invoice   satisfied   and,   once

annually, issued an Internal Revenue Service Form 1099 to the

recruiting participant for the value of the credits he redeemed.

Existing TelexFree participants could monetize their accumulated

credits this fast and reliable way.

              The parties disagree about how to properly characterize

these transactions.          The bankruptcy and district courts adopted

the trustee's characterization.             The trustee characterizes this

series of transactions as a single "triangular transaction."                  He

argues that the payments made by the new participants to the

recruiting participants were integral to the economics of the

TelexFree scheme and are best understood as an indirect way for

the new participants to pay TelexFree membership fees and TelexFree

simultaneously       to    pay   the   recruiting   participants     for    their

accumulated credits.         The concept of one "triangular transaction"

was adopted by the bankruptcy court when it approved the net equity

                                       - 8 -
formula, discussed below.        It is that formula which the trustee

will use to distribute estate assets to the TelexFree victims.

            In   contrast,      PIEC    characterizes       the        triangular

transaction as three separate transactions.             In its view, since

the credits assigned to participants were fictitious and the entire

scheme criminal, the bankruptcy court was required to look to only

the so-called "participant-to-participant payments" between the

new   and   recruiting    participants     when    analyzing      what    was   an

"interest in property" of the debtor for purposes of both Darr's

avoidance action claims and whether Darr has standing to recover

the Contested Funds. In PIEC's view, the "victims" PIEC represents

who want to exercise their "personal rights" against recruiters

who "pocketed their hard-earned savings" were the persons harmed,

not TelexFree.    PIEC wants to recover the Contested Funds through

its unjust enrichment claims, but it does not say it will prove

its claims on an individual-by-individual basis.            Rather, it seeks

to prove its claims by reference to the fraudulent scheme.

B.    Procedural History

            When the scheme collapsed in 2014, TelexFree filed a

voluntary    petition    for   relief   under     chapter   11    of    the   U.S.

Bankruptcy Code.    Stephen Darr was appointed the trustee of the

jointly administered estates on June 6, 2014.

            Darr sought and received two initial rulings from the

bankruptcy court: (1) that TelexFree was a Ponzi and pyramid

                                   - 9 -
scheme, and (2) that a "net equity formula" should be used to

calculate TelexFree victims' potential claims.     The net equity

formula, which the bankruptcy court approved on January 26, 2016,

divides TelexFree participants into groups of "Net Winners" and

"Net Losers."   Only Net Losers will be creditors in the TelexFree

bankruptcy cases.

            Under the net equity formula adopted, the unredeemed

credits assigned to participants' user accounts are disregarded,

and all of a participant's user accounts are aggregated.     Then,

"the total amount a participant paid, whether to Telex[F]ree or to

a recruiting participant, minus the amount of money that the

participant received, whether from Telex[F]ree or a recruiting

participant, results in the amount of the participant's claim."

"Net Winners," then, are participants who paid less into the scheme

than they got out, including through participant-to-participant

payments.    "Net Losers" are those who paid more into the scheme

than they got out.   Similar net equity formulas based on the same

"net investment method" have been adopted in other Ponzi scheme

cases. See Donell v. Kowell, 533 F.3d 762, 771-72 (9th Cir. 2008);

Sec. Inv'r Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC (In re

Bernard L. Madoff Inv. Sec. LLC), 424 B.R. 122, 125 (Bankr.

S.D.N.Y. 2010), aff'd sub nom. In re Bernard L. Madoff Inv. Sec.

LLC, 654 F.3d 229 (2d Cir. 2011).

                              - 10 -
           In 2016, Darr filed two avoidance class actions in the

bankruptcy proceedings against groups of foreign and domestic Net

Winners, respectively, seeking to use preferential or fraudulent

transfer theories under 11 U.S.C. §§ 547 and 548 (collectively,

"Avoidance Actions").    Any recovery from these class actions will

be ratably distributed to all Net Losers.

           Separately,   in   2014,   putative   classes   of   TelexFree

victims,   coordinated   by   PIEC,   had   initiated   lawsuits   against

financial institutions, lawyers, leaders of the TelexFree scheme,

and others.   Many of these lawsuits have been consolidated into

multidistrict litigation ("MDL") pending in the U.S. District

Court for the District of Massachusetts.         Darr did not initially

object to these PIEC lawsuits, but did when two putative classes

of Net Losers, led by Rita Dos Santos, Maria Murdoch, Elisangela

Oliveira, and others (collectively, the "Defendants"), brought

claims for unjust enrichment against the Net Winners of the scheme,

also seeking to recover the Contested Funds.3

           In an adversary proceeding in the U.S. Bankruptcy Court

for the District of Massachusetts, Darr sought to enjoin the PIEC

     3    The first action was originally filed in district court
and was later consolidated into the MDL. Plaintiffs in that action
tried to amend the MDL's consolidated complaint to add a claim for
unjust enrichment against the Net Winners. The motion to amend
was denied. PIEC plaintiffs then filed a second action containing
an unjust enrichment claims in district court, separate from the
MDL. The court overseeing the MDL stayed the second action as an
attempt to circumvent his ruling denying the motion to amend.

                                 - 11 -
Defendants, individually and as putative class representatives,

from pursuing their unjust enrichment claims against the Net

Winners.    Darr argued that such a claim is an improper attempt to

"control" property of the TelexFree estates in violation of the

automatic stay imposed in bankruptcy proceedings by § 362(a) of

the Bankruptcy Code.         The U.S. District Court for the District of

Massachusetts withdrew the reference of the adversary proceeding

to   the   bankruptcy    court    but    returned   the   proceeding   to   the

bankruptcy     court    to    draft     "proposed   findings   of   fact    and

conclusions of law."

             PIEC moved for summary judgment against Darr, contending

that it was not violating the automatic stay because Darr lacked

standing to bring his Avoidance Actions since TelexFree, as a

criminal enterprise, never had a property interest in the Contested

Funds, in contrast to the Net Loser Defendants PIEC represents,

who had suffered direct, particularized harm at the hands of Net

Winners.

             Darr   filed     a   cross-motion      for   summary   judgment,

requesting a declaratory judgment that the Contested Funds are

property of the estate and that PIEC's unjust enrichment claims

violate the automatic stay, and, in addition or in the alternative,

an injunction under § 105(a) of the Bankruptcy Code preventing

PIEC from further prosecuting unjust enrichment claims against the

Net Winners.

                                      - 12 -
            The bankruptcy court, on December 18, 2017, found that

Darr, in his capacity as trustee of the TelexFree estates, has the

requisite    property     interest      under    11    U.S.C.    §§ 547       and    548,

rejecting PIEC's argument that the criminal nature of TelexFree's

"business" and TelexFree's lack of actual possession of the funds

meant Darr lacked standing to bring the Avoidance Actions.                            The

court also found the Defendants' unjust enrichment claims are

derivative of Darr's Avoidance Actions and barred by the automatic

stay provision of the Bankruptcy Code.                See 11 U.S.C. § 362(a)(3).

The bankruptcy court recommended granting summary judgment for

Darr, including permanently enjoining the Defendants from further

prosecuting     their    claims.         The     district      court    adopted       the

bankruptcy court's proposed findings and entered summary judgment

for Darr, including as to the injunctive relief.

            PIEC appeals, arguing that the district court erred in

adopting the bankruptcy court's proposed findings.                     PIEC makes the

following      three    arguments,       each    of    which    it     maintains       is

independently sufficient to require a reversal: (1) TelexFree

cannot have had a property interest in the Contested Funds under

§§ 547   and    548    because    any     such    interest      would       arise    from

"unenforceable, illegal contract[s]" with participants; (2) even

if a property interest theoretically could arise from illegal

contracts,     TelexFree    did    not    have    one    because       it    never    had

"physical possession or valid legal control of [the] funds"; and

                                     - 13 -
(3) the harm suffered by the Defendants was particularized to them

and not derivative of Darr's Avoidance Actions, so the Defendants'

claims against the Net Winners should not be enjoined or considered

stayed.

                                     II.

           The district court, as said, adopted the bankruptcy

court's findings and conclusions and entered summary judgment.           We

review a district court's ruling on cross-motions for summary

judgment de novo.    Sch. Union No. 37 v. United Nat'l Ins. Co., 617

F.3d 554, 558-59 (1st Cir. 2010).

           Because   we   reject     PIEC's   arguments,   we   affirm   the

district court's order.        We hold that TelexFree had a property

interest in the Contested Funds for purposes of 11 U.S.C. §§ 547

and 548, such that the trustee had standing to bring his Avoidance

Actions.   Darr's Avoidance Actions themselves are property of the

estate for purposes of § 362(a)(3), the unjust enrichment claims

are derivative of the Avoidance Actions, and the Defendants are

impermissibly     attempting    to    "obtain   possession      of"   and/or

"exercise control over property of the estate" in violation of the

automatic stay.     11 U.S.C. § 362(a)(3).

A.   TelexFree Had an Interest in Property in the Contested Funds
     Sufficient To Give Darr Standing to Bring His Avoidance
     Actions

           Sections 547 and 548 of the Bankruptcy Code allow Darr

to recover certain "transfer[s] of an interest of the debtor in

                                   - 14 -
property."   11     U.S.C.   § 547(b);   id.   § 548(a)(1)    (similar).4

"[I]nterest of the debtor in property" is not defined in either

     4    Section    547(b),    governing      preferential   transfers,
states:
          (b) Except as provided in subsections (c) and
          (i) of this section, the trustee may . . .
          avoid any transfer of an interest of the
          debtor in property --
               (1) to or for the benefit of a creditor;
               (2) for or on account of an antecedent
               debt owed by the debtor before such
               transfer was made;
               (3) made while the debtor was insolvent;
               (4) made --
                      (A) on or within 90 days before the
                      date of the filing of the petition;
                      or
                      (B) between ninety days and one year
                      before the date of the filing of the
                      petition, if such creditor at the
                      time of such transfer was an
                      insider; and
               (5) that enables such creditor to receive
               more than such creditor would receive
               if --
                      (A) the case were a case          under
                      chapter 7 of this title;
                      (B) the transfer had not been made;
                      and
                      (C) such creditor received payment
                      of such debt to the extent provided
                      by the provisions of this title.
11 U.S.C. § 547(b) (emphasis added).
          Section 548(a)(1),      governing      fraudulent   transfers,
states, in relevant part:
          (a)(1) The trustee may avoid any transfer

                                - 15 -
section.   In Begier v. IRS, 496 U.S. 53, 58 (1990), the Supreme

Court explained that "property," for purposes of avoidance actions

such as Darr's, is "best understood as that property that would

have been part of the estate had it not been transferred before

the commencement of bankruptcy proceedings." The Court then looked

to § 541(a)(1) of the Bankruptcy Code for the definition of

"property of the estate."      Id. at 59.

           Section 541(a)(1) defines "property of the estate" as

including "all legal or equitable interests of the debtor in

property   as   of   the   commencement   of   the   case."   11   U.S.C.

§ 541(a)(1).     This includes property "wherever located and by

whomever held," id. § 541(a), and both "tangible or intangible

property," S. Rep. No. 95-989, at 82 (1978), as reprinted in 1978

U.S.C.C.A.N. 5787, 5868.       The section incorporates interests in

property "made available to the estate by other provisions of the

Bankruptcy Code," including in some instances "property in which

           . . . of an interest of the debtor in property
           . . . that was made or incurred on or within
           2 years before the date of the filing of the
           petition, if the debtor voluntarily or
           involuntarily --
           (A) made such transfer or incurred such
           obligation with actual intent to hinder,
           delay, or defraud any entity to which the
           debtor was or became, on or after the date
           that such transfer was made or such obligation
           was incurred, indebted . . . .
11 U.S.C. § 548(a)(1) (emphasis added).

                                 - 16 -
the debtor did not have a possessory interest."                   United States v.

Whiting Pools, Inc., 462 U.S. 198, 205 (1983).                   The definition of

"transfer" is also broad and includes "each mode, direct or

indirect, absolute or conditional, voluntary or involuntary."                       11

U.S.C. § 101(54)(D).

             Ordinarily, state law creates and defines the underlying

property interests, see Butner v. United States, 440 U.S. 48, 55

(1979),   but    federal        bankruptcy      law   determines      whether    those

interests     are      "property      of     the    estate,"    see   Rine   &   Rine

Auctioneers, Inc. v. Douglas Cty. Bank & Tr. Co. (In re Rine &

Rine Auctioneers, Inc.), 74 F.3d 854, 857-58 (8th Cir. 1996).

             We affirm the district court's finding that TelexFree

had a property interest in the Contested Funds for the purposes of

Darr's Avoidance Actions under both §§ 547 and 548, and therefore

that Darr has standing to bring his claims.                    The bankruptcy court

carefully evaluated the substance of the TelexFree scheme when it

approved the trustee's net equity formula.                 The formula recognizes

that membership fees paid directly to TelexFree -- in which

TelexFree indisputably would have had a property interest -- are

functionally     the     same    as    membership      fees    that   were   paid   to

recruiting participants as part of a triangular transaction. Where

membership      fees    were    paid       directly   to   TelexFree,    recruiting

participants were compensated with credits which, according to the

terms of the contract, they could redeem for cash at a later point

                                           - 17 -
using money generated largely from membership fees.                     In the

triangular model, new participants gave their membership fees in

cash directly to already-recruited participants.

             In both situations, participants engaged in a system

designed and implemented by TelexFree.           New participants knew, or

should have known, that the recruiting participant was acting at

TelexFree's behest and that the recruiting participant had no

authority to let a new participant into the TelexFree scheme

unilaterally.    On joining the scheme, the new participant received

an invoice and user account from TelexFree.                 Membership in the

scheme was governed by a contract that TelexFree wrote.                The new

participants would have never paid the recruiting participants but

for TelexFree's promise that they could join the scheme.

             PIEC argues that such a property interest cannot exist

in a Ponzi scheme like TelexFree because the entire scheme, and

any contracts made pursuant to it, are fraudulent and therefore

void ab initio.        The court, it argues, should not enforce an

illegal   contract     or   treat   any   part   of   the    Ponzi   scheme    as

legitimate.

             This argument fails here.       The individual transactions

that make up the triangular transaction at the heart of this case

under the relevant state law are at most voidable, not void.                  The

bankruptcy     court    correctly     recognized      that     under   Nevada,

Massachusetts, and many other states' laws, fraud in the inducement

                                    - 18 -
merely renders a contract voidable.5             Proposed Findings of Fact

and Conclusions of Law, Darr v. Dos Santos, No. 15-04055 (Bankr.

D. Mass. Dec. 18, 2017), ECF No. 98 at 18-19 (citing Bishop v.

Stewart, 13 Nev. 25, 42 (1878); Shaw's Supermarkets, Inc. v.

Delgiacco,     575   N.E.2d   1115,    1117    (Mass.    1991)).   And   it   is

undisputed that none of the participants attempted to void their

membership with TelexFree pre-petition.

              In In re Ogden, the Tenth Circuit concluded, as we do

here, that a debtor operating a Ponzi scheme has a property

interest in the form of defeasible, or voidable, title in funds

that were obtained fraudulently from an investor, notwithstanding

the underlying fraud.         Bailey v. Big Sky Motors, Ltd. (In re

Ogden), 314 F.3d 1190, 1197-98 (10th Cir. 2002) (applying Utah

law).       Other cases conclude the same.6             TelexFree's particular

hybrid business model was unusual, but as the Second Circuit

recognized in In re Bernard L. Madoff Investment Securities LLC

        5  "[W]hen the result in a case will not be affected by
the choice of law, an inquiring court, in its discretion, may
simply bypass the choice." Lexington Ins. Co. v. Gen. Accident
Ins. Co. of Am., 338 F.3d 42, 46 (1st Cir. 2003).          That is
appropriate here, where the parties have not objected to the choice
of law.
        6 See Merrill v. Allen (In re Universal Clearing House
Co.), 60 B.R. 985, 994-97 (D. Utah 1986); Guttman v. Fabian (In re
Fabian), 458 B.R. 235, 259-60 (Bankr. D. Md. 2011), aff'd, 475
B.R. 463 (D. Md. 2012), aff'd sub nom. Fabian v. Guttman ex rel.
Strategic Partners Int'l, Inc., 491 F. App'x 420 (4th Cir. 2012)
(per curiam); Dicello v. Jenkins (In re Int'l Loan Network, Inc.),
160 B.R. 1, 11 (Bankr. D.D.C. 1993).

                                      - 19 -
("Madoff I"), 654 F.3d 229, 238 n.7 (2d Cir. 2011), fraud comes in

many forms.

             The district court also correctly rejected the argument

that the doctrine of in pari delicto supports PIEC's position that

the   scheme    precluded   TelexFree       obtaining   a   valid     property

interest.      In pari delicto is "[t]he principle that a plaintiff

who   has   participated    in   wrongdoing    may   not    recover    damages

resulting from the wrongdoing."      In pari delicto doctrine, Black's

Law Dictionary (11th ed. 2019).       PIEC urges us not to "lend [our]

good offices to mediating disputes among wrongdoers."               Nisselson

v. Lernout, 469 F.3d 143, 151 (1st Cir. 2006) (quoting Bateman

Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 306 (1985)).

             Certainly, in pari delicto may sometimes be asserted as

an affirmative defense against a bankruptcy trustee. See id. at

153; see also Official Comm. of Unsecured Creditors of PSA, Inc.

v. Edwards, 437 F.3d 1145, 1151 (11th Cir. 2006) (collecting

cases).     But we hold that in pari delicto doctrine does not defeat

Darr's standing to bring avoidance actions.

             PIEC advances a distorted definition of Net Winners to

argue that in pari delicto bars TelexFree and its participant

victims from engaging as "co-conspirators to a massive fraud."

They define "Net Winners" as any participant who got more in

participant-to-participant payments than that person gave out.

That definition was properly rejected by the bankruptcy court.             It

                                   - 20 -
is also inconsistent with the net equity formula that the court

did approve, which includes payments from TelexFree as well as

other participants when calculating who is a Net Winner.            Many of

the recruiting participants are themselves victims of the scheme.

            Further, PIEC mistakenly relies on the principle that "a

trustee in bankruptcy cannot and does not acquire rights or

interests superior to, or greater than, those possessed by the

debtor."    Nisselson, 469 F.3d at 153.          For the reasons already

explained, TelexFree had an interest in the Contested Funds.

            PIEC   separately   argues    that   a   defeasible    property

interest cannot be created in a Ponzi scheme without the debtor

having physical possession of the funds.7        As described above, the

definition of interest in property for purposes of §§ 547 and 548

was intended by Congress to be broad.        The text of §§ 547 or 548

does not say that physical possession is required.                11 U.S.C.

§§ 547-548.   To the contrary, it is clear the interest in property

may include property "wherever located and by whomever held."           Id.

§ 541(a).    And that it includes intangible property.       S. Rep. 95-

989, at 82.    This argument fails as well.8

     7    The bankruptcy court acknowledged that the debtor
physically possessed the funds at issue in the cases cited by PIEC
in which a court allowed a bankruptcy trustee to bring avoidance
actions to recover transferred funds in a Ponzi scheme. None of
those cases say that physical possession is a requirement; indeed,
none of them involved facts raising the issue.
     8    Our understanding of the phrase "interest of the debtor
in property" in §§ 547 and 548 accords with the purpose of

                                 - 21 -
              A contrary holding denying Darr the ability to recover

the   funds    on   the   estates'   behalf   would   ignore   the   economic

substance of the TelexFree scheme.        See Pepper v. Litton, 308 U.S.

295, 305 (1939) ("[F]raud will not prevail, . . . substance will

not give way to form, [and] technical considerations will not

prevent substantial justice from being done.").           Unless forbidden

by text, we interpret statutes on the assumption that Congress

would not have wanted the form of a transaction to overwhelm its

substance, particularly in the context of criminal, fraudulent, or

sham transactions.        See Santander Holdings USA, Inc. v. United

States, 844 F.3d 15, 21-23 (1st Cir. 2016).9

bankruptcy law more generally. See Cunningham v. Brown, 265 U.S.
1, 13 (1924) ("[E]quality is equity, and this is the spirit of the
bankrupt law."). Allowing one group of victims to bring its claims
first "thwarts the policy of ratable distribution" at the heart of
bankruptcy law. XL/Datacomp, Inc. v. Wilson (In re Omegas Grp.,
Inc.), 16 F.3d 1443, 1451 (6th Cir. 1994) (quotation omitted).
      9   We do not address arguments, not made in this case, as
to other possible limitations (including timing limitations) on
the trustee's avoidance power. We do take note of a comment by
Judge Easterbrook:
              [I]n 1972 the Supreme Court used the phrase
              "lacks standing" to describe its conclusion
              that a bankruptcy trustee may not sue on
              behalf of investors who thought that a third
              party's acts had injured them and the debtor
              jointly. Caplin v. Marine Midland Grace Trust
              Co., 406 U.S. 416 (1972). The Court used the
              language of "standing" to refer, not to
              injury, causation, and redressability, the
              three ingredients of standing, see Steel Co.
              v. Citizens for a Better Environment, 523 U.S.
              83, 102-04 (1998), but to whether Congress had
              authorized a trustee to pursue a given kind of

                                     - 22 -
B.   The Defendants' Unjust Enrichment Claims Are Derivative

            At summary judgment, the district court granted Darr's

request to enjoin the Defendants from further prosecuting their

unjust enrichment claims based on the finding that such claims

were derivative of Darr's Avoidance Actions and in violation of

the Bankruptcy Code's automatic stay provision.   We understand the

bankruptcy court, in performing this derivative analysis, to have

been addressing PIEC's contention that PIEC's unjust enrichment

claims are not an effort to exercise control over or obtain

possession of even the Avoidance Actions within the meaning of

§ 362(a)(3), as Darr had contended before that court.       We affirm.

            PIEC focuses most of its appeal on undermining Darr's

standing to bring his Avoidance Actions, and then argues as to

this second issue that the Defendants' unjust enrichment claims

cannot be stayed or enjoined as derivative of Darr's claims if

Darr's claims cannot be brought in the first place for lack of

standing.   Since we hold TelexFree had a property interest in the

Contested Funds, we affirm the bankruptcy court's finding that

Darr has standing to bring his Avoidance Actions.    This resolves

most of PIEC's arguments.

            action. Whether a given action is within the
            scope of the Code is a question on the merits
            rather than one of justiciability.
Grede v. Bank of N.Y. Mellon, 598 F.3d 899, 900 (7th Cir. 2010).

                               - 23 -
            Nonetheless,    we   briefly   analyze    the   meaning     of   a

derivative claim under § 362.        Besides arguing that the unjust

enrichment claims are not derivative, PIEC does not make any

arguments independently challenging the issuance of the injunctive

relief under § 105(a), so we do not engage that issue.

            Section 362(a)(3) automatically stays any act to "obtain

possession of property of the estate or of property from the estate

or to exercise control over property of the estate."              11 U.S.C.

§ 362(a)(3).      Darr argues that the avoidance causes of action

themselves constitute the "property of the estate" as defined in

11 U.S.C. § 541.      PIEC does not argue that such actions cannot

constitute property of the estate.         We accept Darr's contention

and   do   not   address   alternative   theories    of   what   else   could

constitute such property.        We hold that at least actions under

§§ 547 and 548 can constitute property of the estate.               Because

PIEC's arguments for why the trustee lacks standing to pursue the

Avoidance Actions fail, we treat the Avoidance Actions at issue as

property of the estate.10

      10    Collier on Bankruptcy explains:
            There is a conflict regarding whether a
            trustee's avoiding powers are property of the
            estate, an issue that arises when a trustee
            attempts to sell them to a third party. Two
            courts of appeals have held that avoiding
            power causes of action (at least those
            asserted under the strong-arm powers of
            section 544) are assets of the estate, while
            Official Committee of Unsecured Creditors of

                                  - 24 -
          This circuit has long recognized that causes of action

can be property of the estate even though they are not specifically

enumerated in the statute.    See Regan v. Vinick & Young (In re

Rare Coin Galleries of Am., Inc.), 862 F.2d 896, 900 (1st Cir.

1988) ("Causes of action belonging to the debtor are included as

property of the estate . . . .").

          More recently, we found that this general rule applies

to fraudulent conveyance claims specifically. See Morley v. Ontos,

Inc. (In re Ontos, Inc.), 478 F.3d 427, 431 (1st Cir. 2007) ("It

is well established that a claim for fraudulent conveyance [brought

pursuant to § 544] is included within [§ 541(a)(1)] property.");

see also Cadle Co. v. Mims (In re Moore), 608 F.3d 253, 259-62

(5th Cir. 2010) (recognizing that avoidance claims under § 544 are

property under § 541 and can be sold by the trustee); Briggs v.

Kent (In re Prof'l Inv. Props. of Am.), 955 F.2d 623, 626 (9th

Cir. 1992) (same).   Although Ontos dealt with fraudulent transfers

          Cybernetics   Corp.   v.   Chinery   (In   re
          Cybernetics Corp.)[, 226 F.3d 237, 244-47 (3d
          Cir. 2000),] is to the contrary. The problem
          is created because section 541(a)(3) provides
          that proceeds of the avoiding power causes of
          action are property of the estate, but there
          is no corresponding provision with respect to
          the causes of action themselves.
5 Collier on Bankruptcy ¶ 541.12[4] (Richard Levin & Henry J.
Sommer eds., 16th ed. 2018) (footnotes omitted).

                               - 25 -
claims brought under § 544, we think its reasoning extends as well

to other avoidance actions under §§ 547 and 548.

             This brings us to the issue of whether PIEC's unjust

enrichment claims are derivative of Darr's Avoidance Actions and

thus an impermissible attempt to obtain possession of or exercise

control over Darr's Avoidance Actions in violation of 11 U.S.C.

§ 362(a)(3).     The bankruptcy court ruled the unjust enrichment

claims brought by PIEC are derivative of the trustee's Avoidance

Actions because they seek to accomplish the same thing as the

trustee's actions and to go about it in the same way.      That is,

PIEC has admitted that the proposed classes' efforts to prove

unjust enrichment will not focus on any supposed wrongdoing by

individual Net Winners.     Rather, PIEC seeks to prove its unjust

enrichment case through the overall fraudulent scheme created by

TelexFree.    That is what the trustee seeks to do.

             PIEC seeks to undermine this analysis by pointing us to

Caplin and other cases dealing with whether particular causes of

action are best understood as belonging to the estate or individual

creditors in terms of who is injured. See Caplin v. Marine Midland

Grace Tr. Co. of N.Y., 406 U.S. 416, 434 (1972) (finding that a

trustee did not have standing to assert creditors' claims); see

also Steinberg v. Buczynski, 40 F.3d 890, 892 (7th Cir. 1994)

(asking whether the debtor or creditor owned the claim by asking

who was injured).     But for the reasons just discussed, under the

                                - 26 -
framework adopted by the bankruptcy court, the unjust enrichment

claims are best understood as avoidance actions in disguise.                     The

bankruptcy estate as a whole was harmed, not any individual Net

Loser.       See Madoff II, 740 F.3d at 91 ("We are . . . wary of

placing too much significance on the labels appellants attach to

their complaints . . . .").

               PIEC relies on its understanding of Madoff III, where

the Second Circuit allowed investors in Madoff feeder funds to

settle their lawsuits with these funds over objections by the

Madoff       trustee   that     these    suits    were   derivative   of   his   own

fraudulent transfer actions.              762 F.3d at 209-11.      But Madoff III

is easily distinguishable.              The claims here, in contrast, do not

attempt to target individual Net Winners because of their own

particular actions but seek to prove the claims through the Net

Winners' membership in the TelexFree scheme.                  The court in Madoff

III    found    that    "none    of     [the   defendants']    liability    to   the

plaintiffs depends on the wrongfulness of Madoff's conduct."                     Id.

at 210.       In Madoff III, the court held that a claim alleging that

a third party violated an independent duty owed to the plaintiff

was not derivative of a trustee's claim seeking to avoid a transfer

to    that    third    party.      Id.    at   209-10.     Here,   PIEC's   claims

                                         - 27 -
necessarily compete with Darr's claims; they are not at all

independent.11

                  Thus, PIEC has failed to show that the district court

erred        in    concluding,    in     adopting    the   bankruptcy     court's

recommendations,          that     the    unjust     enrichment    claims     are

"indistinguishable" from Darr's Avoidance Actions.                The putative

PIEC classes were harmed in the same way the rest of the TelexFree

Net     Loser       creditors    were    harmed:    they   purchased    worthless

membership plans in a fraudulent Ponzi/pyramid scheme.

                  Because we reject the PIEC Defendants' argument that the

unjust enrichment claims are not derivative of Darr's Avoidance

Actions, we reject their challenge to the bankruptcy court's

conclusion that their attempt to assert unjust enrichment claims

is an attempt to exercise "control" over the Avoidance Actions,

and thus property of the estate, in violation of the automatic

stay.        11 U.S.C. § 362(a)(3).        We have dealt with the arguments

PIEC has raised and are not persuaded.

                                          III.

                  Affirmed.   Costs are awarded to Darr.

        11We note, also, that the court in Madoff III analyzed the
fraudulent transfer claims under § 362(a)(1), not § 362(a)(3) as
we do here. In fact, the court cast doubt on whether a derivative
analysis would be appropriate under § 362(a)(3). See Madoff III,
762 F.3d at 208. We need not resolve that issue to reject PIEC's
argument as meritless.

                                         - 28 -