Fyre Festival Attendees Will Receive Nothing from Bankruptcy

In 2017, one of the most notorious social media promotional campaigns and musical festivals came crashing down, leaving vendors, investors, and ticket holders to pay for the disaster. Billy McFarland was accused and sentenced for defrauding hundreds of people out of millions of dollars. In an attempt to recoup some of the money they were owed, three creditors force McFarland’s company into bankruptcy.

After years of litigation, documents have finally been filed to start distributing funds to the creditors, including ticketholders, who were owed money by McFarland, Fyre Media, and Fyre Festival LLC. Unfortunately, those creditors will not see the amount of money they hoped for.

Below, we take a closer look at the festive, the issues it had, and the bankruptcy the followed. If you have any questions about the bankruptcy process, call Young, Marr, Mallis & Associates at (215) 701-6519.

The Festival

Fyre Festival has become a legendary and cautionary tale of fraudulent marking in the world of social media and influencers. It was a music festival founded by Billy McFarland, who is currently serving a six-year prison sentence for fraud, and rapper Ja Rule. The idea was to host an exotic musical festival on the Bahamian island of Great Exuma to cross-promote the booking app, Fyre.

Social media influencers promoted the musical festival on Instagram. While not initially disclosing they were paid from promoting the event, various social media “stars” such as Kendall Jenner, Hailey Baldwin, and Bella Hadid used their status to endorse the event.

The Problems

Issues arose during the Frye Festival’s inaugural weekend. The festival experienced severe problems involving event security, accommodations, medical services, food, and artist relations. These issues proved insurmountable, resulting in the festival being postponed and eventually canceled. Guests, who paid up to $100,000 for a festival package, were promised luxury villas and gourmet dining. Unfortunately, these festival attendees found themselves sleeping in FEMA tents and being served cheese sandwiches.

The Aftermath

In 2018, McFarland pleaded guilty to wire fraud to defraud ticket holders and investors and a second count of defrauding a ticket vendor. He was convicted and sentenced to six years in prison. Additionally, the court ordered that he forfeit $26 million. At least eight lawsuits arose out of the fraudulent festival, some seeking class-action status.

The Bankruptcy

In July of 2017, three lenders who McFarland defrauded filed a suit with the U.S. Bankruptcy Court to force Fyre Media/Fyre Festival LLC into Chapter 7 bankruptcy. U.S. Bankruptcy Judge Martin Glenn entered an order requiring the promotional company to prepare documents listing its creditors and those to whom it owed money. Gregory Messer was appointed as Bankruptcy Trustee.

Messer had to determine what damages ticketholders were entitled to. Because many took time off and incurred other expenses and costs, the amount lost was often more than the ticket price. Messer looked at what was promised and delivered, including the hardships many festival-goers had to endure. Considering these factors, the Trustee concluded that a claim of approximately $7,220 in damages for each ticketholder was appropriate.

The Trustee sought to recover fraudulent transfers under sections 544(b), 548(a)(1)(A) and 550 of the Bankruptcy Code. All creditors should be treated equally when an entity files for Chapter 7 bankruptcy. No particular vendor or creditor should be paid while others are left without any funds. A Chapter 7 Trustee has the right to reclaim payments that were made to musical acts, influencers, and other parties. However, Fyre Media and McFarland failed to keep accurate records of the transactions made in conjunction with the festival. This made it increasingly difficult for Messer to track where all the funds went. Additionally, several parties were uncooperative, relying on their contractual agreements with Fyre Media, Fyre Festival LLC, and McFarland.

Messer sought an order declaring that the Trustee should have the right to pursue the avoidance of any transfers of funds made for the benefit of the bankruptcy estate. Some of these funds were used to pay vendors for services that were provided. However, many of the services paid for were never provided, including musical acts, flights, and food. This also included funds that were paid for promoting the festival. Under applicable bankruptcy law, the Chapter 7 Trustee has a right to these funds.

In addition to fraudulent transfers to other entities, McFarland’s bank records and other statements also indicated that he transferred at least $10,993,267.51 of festival funds to his personal accounts, comingling these funds with his fiances. Separate accounts were not maintained for the various Frye enterprises. These issues made it difficult for Messer to verify what entities were paid and the total funds transferred.

Now, years after the disastrous and notorious festival never happened, Messer has filed documents with the Bankruptcy Court asking permission to begin disturbing the money that has been recovered. Unfortunately, the bankruptcy incurred costs of approximately $1.1 million, including the attorney fees for Messer and his team of legal and forensic experts. According to court documents, only $300,000 remains for creditors, including ticketholders who paid anywhere from $1,200 to $100,000 for the pleasure of attending the most infamous festival in history.

What does that mean for creditors? Basically, they will see very little in terms of repayment. In a Chapter 7 bankruptcy, creditors are paid on a pro-rata basis. Under this formula, a creditor would receive an amount based on the percentage of their original claim versus the total amount of available funds. Because Messer was only able to recover a small portion of the allegedly transferred funds, creditors, in this case, are out of luck. Even though the settlement order granted each ticketholder approximately $7,200, there are very few funds available to pay the judgment, meaning the actual payout to attendees could be closer to $288.

What Does the Fyre Festival Say About Bankruptcy?

McFarland’s actions were criminal. They left many people unpaid for their services or unreimbursed for money tickets and event packages they purchased. Rightfully, McFarland was sentenced for his criminal conduct. However, the Chapter 7 bankruptcy functioned as it was designed – to allow a debtor to eliminate debt. While, ideally, a court-appointed trustee should be able to recover funds that were paid to entities to allow for an equitable distribution, at Young, Marr, Mallis & Associates, our attorneys work to protect the debtor – not the creditors.

The reason someone files for bankruptcy, whether it is a Chapter 7 or Chapter 13, is to eliminate their debt or restructure their financial obligations into a more manageable plan. The ultimate goal is to discharge the debt or only pay cents on the dollar. Unlike negotiating with a creditor, what is paid or distributed is determined by the provisions of the Bankruptcy Code. If you owe American Express $45,000, they might only settle for $35,000 or $40,000. However, if you file for bankruptcy, you might be able to discharge the balance or pay substantially less than what AMEX would agree to outside the bankruptcy.

While you might look at the above story and feel some sympathy for the ticketholders who are left with virtually no reimbursements, you can be assured that if you need to file for bankruptcy, our experienced Pennsylvania bankruptcy lawyers will be aggressively advocating for your interests – not those of your creditors. If you are overwhelmed with debt or are only making the minimum payments each month, call our Philadelphia bankruptcy lawyers at Young, Marr, Mallis & Associates at (215) 701-6519 to discuss your options.