Couple Files Bankruptcy To Avoid Ponzi "Clawback" Lawsuit

A New Mexico couple facing the possible "clawback" of nearly $1 million from the largest Ponzi scheme in New Mexico history has filed for bankruptcy in a bid to avoid dodge the lawsuit.  Mark and Maura Dahrling, of Albuquerque, New Mexico, were among hundreds of investors that lost approximately $75 million to now-convicted Ponzi schemer Doug Vaughn and his real estate company. After being sued in a "clawback" suit by a court-appointed bankruptcy trustee seeking hundreds of thousands of dollars in transfers from Vaughn, the Dahrlings filed a bankruptcy petition seeking to put an end to the "sinister clawback litigation" - listing the only substantial liability as their possible exposure to the clawback lawsuit.

Doug Vaughn operated Vaughn Company Realtors ("VCR"), which was once the largest independent residential brokerage firm in New Mexico. Started in 1983, Vaughn and VCR pitched investments in the form of promissory notes, promising potential investors annual returns averaging 17.5%.  In return, Vaughn represented that investor funds would be used for real estate investments.  In total, VCR collected more than $86 million from investors in eight states.  

However, rather than use the funds for real estate investments, Vaughn ran an elaborate Ponzi scheme that used investor funds for a variety of unauthorized purposes, including the payment of Ponzi-style payments to investors, massive bonuses, and the payment of corporate expenses for VCR, which was hemorrhaging money having lost $54 million from 2004 to 2009 and nearly $14 million in 2009 alone.  The scheme began to collapse in late 2009, as payment obligations surpassed incoming fund inflows, and Vaughn soon began making preferential payments to investors and insiders.  Vaughn filed for personal and corporate bankruptcy protection in February 2010, indicating that nearly 600 investors were owed approximately $75 million. 

Soon after Vaughn declared bankruptcy, Judith Wagner was appointed as bankruptcy trustee and tasked with recovering funds for victims.  After identifying a number of investors that had been fortunate enough to receive returns of principal or profits from their investment with Vaughn and VCR, Wagner filed a wave of "clawback" lawsuits seeking not only the payment of profits from the scheme, but also the return of preferential payments made just before Vaughn filed for bankruptcy protection.  Wagner filed a total of 153 clawback lawsuits - flooding the U.S. Bankruptcy Court in Albuquerque and single-handedly representing approximately 70% of the total adversary lawsuits filed the previous year.  

The Dahrlings were among Wagner's clawback targets, facing lawsuits not only for their personal investment with Vaughn but also that of their business, Dahrling Enterprises.  Notably, Maura Dahrling had previously been an employee of VCR, pitting her as an insider of Vaughn and thus subject to higher scrutiny than a typical investor.  Under federal bankruptcy laws, even if the Dahrlings had not profited from the scheme, they still could be pursued for receiving preferential payments made by Vaughn just before the scheme collapsed. Federal bankruptcy laws identify different time period just preceding a bankruptcy petition in which transfers may be subject to clawback. Indeed, because a debtor is presumed to be insolvent 90 days before filing for bankruptcy, all payments made during that time period are subject to attack.  Earlier this year, a federal judge ruled in favor of Wagner in her suit against Dahrling Enterprises and entered a judgment in the amount of $338,056.  However, the litigation against the Dahrlings in their individual capacity remained ongoing, with Wagner seeking the return of over $600,000.  

After the judgment was entered against Dahrling Enterprises, Maura Dahrling indicated in a court filing opposing her upcoming deposition that she had decided to file bankruptcy to avoid continuing legal fees. In July, the Dahrlings filed a petition for chapter 7 liquidation, listing among their assets a $735,000 house and eight vehicles.  Under Chapter 7, assets that do not qualify for exemptions are sold and distributed to creditors - in this case, Wagner.  In a statement emailed to the Albuquerque Business Journal, Mark Dahrling indicated that

“We are good people and have done nothing wrong.  We have been forced into bankruptcy in order to stop this sinister clawback litigation against us and hopefully put an end to this unbelievable nightmare.”

While the filing of bankruptcy will halt any ongoing litigation against the Dahrlings, they must still satisfy the means test to qualify for Chapter 7 protection, which involves a series of eligibility requirements.  If they satisfy the means test, obtaining a subsequent discharge would forever bar Wagner from pursuing the clawback lawsuit.  

A copy of Vaughn's indictment is here.