7 May 2014

Court Suspends TelexFree Bankruptcy Motion, Transfers Venue To Massachusetts


In a ruling that concluded the 8 hour hearing conducted last Friday in Nevada’s bankruptcy court, where TelexFree lawyers put up a real good fight, the presiding Judge August Landis used a series of arguments to decide the suitability or not of TelexFree’s bankruptcy case being transferred to Massachusetts.

In summary, the judge granted the Securities and Exchange Commissions's request for abstention and suspended the bankruptcy proceedings of TelexFree LLC, TelexFree, Inc., and TelexFree Financial Inc. (collectively, "TelexFree") adding that, if the company plans to continue with its bankruptcy, proceedings would have to be transferred to the District of Massachusetts.

Arguments to Transfer Venue

In evaluating the Motion to Transfer venue, the Court considered two factors: the "convenience of parties" AND the "interest of justice".
Making conclusions of law re motion for change of venue. Court must first ask whether original venue is proper. Starting with LLC's case. No party has challenged that LLC's venue in Nevada is proper. Court concludes that venue is originally proper for LLC. Because LLC owns more than 20% of Financial's shares, Financial is an affiliate, and thus venue of Financial is proper. Inc. is Massachusetts corporation, and is not domiciled or resident in Nevada. Court concludes that venue of Inc. is not proper in Nevada.

Question becomes what to do with cases: do they stay or are they transferred. Reviewing grounds for transferring venue. Analyzing "convenience of parties" ground, which includes six factors. Also analyzing "interest of justice" ground. Movant seeking transfer carries burden by preponderance of evidence.

Convenience of parties:

In deciding whether the transfer was in the "convenience of parties" involved, the court weighed on six factors: 1). proximity of creditors, 2). proximity of debtors, 3). proximity of witnesses, 4). proximity (i.e. location) of assets, 5). economic administration of the estate, and 6). necessary for ancillary administration if liquidation should result.
Application of "convenience of parties" factor to LLC and Financial. Neither schedules nor statements of affairs have been filed. Evidence developed at hearing that there are no known secured creditors of debtor, bulk of creditors are promoters owed money due to original failed comp plan, approximately 90% of debtor's creditors reside outside of Nevada and Massachusetts, approx. 75% of customers and promoters reside outside U.S. While less than 5% live in MA, there are fewer customers and promoters in Nevada and Massachusetts, and 10 of largest unsecured creditors reside in MA. Court concludes proximity of creditors weighs in favor of transfer.

Next, proximity of debtors. LLC shares headquarters with Inc. in MA. Chief restructuring officer stated he would have performed restructuring duties in MA headquarters before search warrant execution; thereafter, he would perform his duties from Georgia. Neither Financial nor LLC has office presence or employees in Nevada. Proximity of debtors weighs in favor of transfer to Massachusetts.

While credentials of MacMillan and Runge not subject to question, court finds they have little knowledge related to business administration of LLC and Financial - couldn't identify competitors. Proximity of witnesses weighs in favor of transfer.

Proximity of assets. Substantially all of IT and office equipment located in MA. Weigh in favor of transfer to MA.

Access to books and records most readily available in Massachusetts. Judicial economy weighs in favor of conducting both proceedings in Massachusetts. Economical administration weighs in favor of transfer to Massachusetts.

Necessity of ancillary administration in case of liquidation. Typically not given much weight, favors transfer to Massachusetts.

Venue must be transferred to Massachusetts for LLC and Financial. If Inc. case is to continue, must be transferred to district or division where it could have been brought.
Noting that the fifth factor was the most important while the sixth factor was the least important, the Court found that all six factors weighed in favor of a transfer to Massachusetts. Based on these findings, the Court concluded that the transfer of TelexFree, LLC and TelexFree Financial, Inc. bankruptcy proceedings to Massachusetts was warranted.

Interests of justice:

In deciding whether a transfer of the TelexFree bankruptcy case was warranted on grounds of "interests of justice", the court looked at the following six factors: 1). the promotion of economic and efficient administration of the estate; 2). the interests of judicial economy would be served; 3). the parties would receive a fair hearing in each venue; 4). either forum has an interest in having the controversy decided within its borders; 5). the enforcement of any judgment would be affected; and 6). whether the plaintiff's original choice of forum should be disturbed.
Court considering whether transfer is in interest of justice.

Access to books and records in MA, no business presence or employees in Nevada. Judicial economy would also be better served. Debtors have national law firm. Nothing in record to suggest that any party would be divided fair trial in either Nevada or Massachusetts - neutral factor. Fewer customers and promoters in Nevada than Massachusetts.

Transfer to Massachusetts would also aid in enforcement of judgments. Enforceability of judgment in SEC's enforcement action would be aided by transfer. As to original choice of forum, court exercises its discretion to conclude venue is properly in Massachusetts.
While noting that the third factor was a "push," the Court concluded the remaining factors warranted transfer of venue to Massachusetts.
In summary, careful review and analysis of applicable factors demonstrates that venue for all cases must be transferred to Massachusetts.


Following its ruling on the Motion to Transfer Venue, the Court also pondered whether abstention was appropriate. Noting that abstention is used sparingly and in unusual circumstances, the court concluded such a situation was present.
Next is the question of abstention. Court asked parties to weigh in on propriety of abstention given proceedings and TRO already transpiring in Massachusetts.

Court may dismiss or suspend proceedings based upon satisfaction of factors. Court is mindful that abstention is used sparingly and in unusual circumstances. Court thinks that is the case here.

First, suspension would avoid potential for confusion and delay. Second, another forum is available to protect interests of parties. Third, federal proceedings are necessary. Next, there is no equitable procedure available. Next, debtors and creditors will not be able to reach out-of-court agreement. No non-federal bankruptcy proceeding pending. Bankruptcy filed commensurate with SEC's commencement of civil action in Massachusetts.

Debtors made point that their intent was to reorganize sale of VoIP packages to customers and to develop app and technology.
After weighing several factors, the Court concluded that abstention in the form of suspending all proceedings was warranted until and when venue could be transferred to Massachusetts.
On balance, Court finds that abstention in form of suspension of all proceedings is warranted until such time as transfer to District of Massachusetts is completed. Court will enter order of absention suspending all proceedings, including motion to determine portions of SEC's TRO are invalid and U.S. Trustee's motion for appointment of trustee.

Conclusion and implications

TelexFree bankruptcy case is now totally put on hold until it is completely moved over to Massachusetts, where incidentally the company is currently being sued by the SEC and the Massachusetts Securities Division.

The implication of the abstention of proceedings is that the DoJ’s Chapter 11 Trustee nomination will also be put on hold until proceedings are completely transferred, after which, presumably the motion will be given a new hearing date.

The date for the transfer to District of Massachusetts is yet to be set.


  1. Thanks. we are following closely. keep us posted

    1. Hi Jackson, you're welcome. I'll try my best