Fraud and the Fyre Festival Part 2: A legal analysis of the world’s worst music festival


This blog post is the second part of a two-part series looking at the Fyre Festival. The first post can be found here.

The infamous Fyre Festival dominated the news when the plans for a lavish music festival on a desert island in the Bahamas ended in disaster. The fallout spurned a host of legal activity, as the victims of McFarland’s scam operation also have filed civil lawsuits seeking compensation from the fraudsters. One of the first lawsuits filed was here in North Carolina, Crossno v. McFarland, No. 17-CVS-5724 (Wake County, North Carolina). The case was brought by two Fyre Festival concertgoers who paid thousands of dollars to McFarland’s company only to be stranded at the festival site, a “disastrous and barren area” lacking adequate food, lodging, security—not to mention any bands or music.

The lawsuit illustrates the various claims that can be brought on behalf of victims in consumer protection cases:

Fraud

Fraud is the most obvious cause of action against McFadden and the other planners of the Fyre Festival. To state a case for fraud under North Carolina law, a plaintiff must show that the defendant intentionally deceived them through “material malpresentations” of fact and that that plaintiff suffered harm having reasonably relied on those misrepresentations. (Civil fraud was discussed at length in Part 1 of this series.) Somewhat counterintuitively, persons who are particularly vulnerable to fraud, such as the elderly, can find it difficult to prove their case in court if they unreasonably relied on lies made by the fraudster. In other words, those who are gullible and easily deceived—the people who the law arguably should protect most—often have a tough time in court with fraud claims. A successful claim for fraud can result in an award of attorney’s fees and punitive damages to the plaintiff, up to the greater of $250,000 or three times the amount of compensatory damages (such as lost income, pain and suffering, etc.).

Negligent Misrepresentation

Similar to fraud, this cause of action is based again on a misrepresentation of material fact relied on by the plaintiff to their detriment. The key difference is the intent of the wrongdoer. Fraud requires a showing that the defendant purposely lied, or at least acted with “reckless disregard” for the truth. A successful claim for negligent misrepresentation, by comparison, requires only that the defendant was careless with respect to the truth of the matter. While easier to prove a claim for negligent misrepresentation, a successful plaintiff under this cause of action can recover only compensatory damages, and not punitive damages or attorney’s fees—which can significantly decrease the value of the case. Negligent misrepresentation is best viewed as a “fallback” cause of action if a claim for fraud is unsuccessful. (Claims for negligent misrepresentation sometimes get tripped up because the plaintiff must prove an additional element not found in a fraud claim: that the defendant owed the plaintiff a “duty of care.” A clear example of a duty of care is when a special relationship exists between the parties, such as that found between a doctor and her patient.)

Unfair and Deceptive Trade Practices

Under North Carolina law, it is illegal to engage in unfair and deceptive trade practices. The statute is sparse on details. Stated simply, “Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are declared unlawful.” North Carolina’s law was passed in the late 1960s when many states enacted legislation modeled off the Federal Trade Commission. The courts have interpreted the UDTPA to allow claims only brought by consumers against businesses, or else by one business against another business. A claim for unfair and deceptive trade practices will fail if brought by an employee against an employer, or between business partners—because those claims are not deemed to be based on an act “in or affecting commerce.” A successful plaintiff in a claim under the UDTPA can be awarded treble (=triple) damages and attorney’s fees. A lawsuit that alleges fraud almost always brings a claim for deceptive and unfair trade practices. (However, a plaintiff cannot receive both punitive damages for fraud and treble damages for UDTPA.) One key advantage to a claim for unfair and deceptive trade practices, as compared to fraud, is that a claim under the UDTPA does not require that the plaintiff reasonably relied on a misrepresentation by the defendant. The law requires only that the act “in or affecting commerce” be “unfair or deceptive”—nothing more.

Breach of Contract

The plaintiffs in the Fyre Festival litigation also sued for breach of contract. A claim for breach of contract requires “mutual consideration,” that is promises made by both parties to each other. All contracts include an implied covenant of good faith and fair dealing, and the plaintiffs alleged that the defendants breached that covenant, as well as the express terms of the contract. Damages for breach of contract are similar to those for negligent misrepresentation—and again, do not include punitive damages or attorney’s fees.

Civil Conspiracy

Lastly, the plaintiffs brought a separate cause of action for “civil conspiracy,” alleging that the defendants acted together (“in concert”) to defraud them. The courts typically do not view civil conspiracy as a separate cause of action, standing alone, but as a basis for holding several wrongdoers liable for the same bad acts.

The Fyre Festival litigation did not bring causes of action for two separate grounds that can be raised in consumer protection cases:

Fraudulent Transfer

North Carolina has adopted the Uniform Fraudulent Transfer Act. This law is a special tool that allows victims of fraud to recover money from third parties who received that money from the fraudster. The third party could be unaware of the underlying fraud, but the law still requires them to return the money to the victim. Recovery under this statute requires a showing the fraudster made the transfer with the intent to hide the money from the fraud victim, or without receiving value from the third party in exchange for the transfer. This tool was recently used to recover money for victims of the ZeekRewards Ponzi scheme based out of Lexington, North Carolina. (The largest Ponzi scheme at that time, in terms of number of victims, some 700,000 participants lost over $700 million dollars.)

Arrest and Bail

Lastly, North Carolina law includes an archaic statute called “Arrest and Bail.” This statute is rarely used and, as a result, largely unknown. This law offers the most powerful of tools—the power to arrest a defendant in a civil lawsuit and throw them in jail. The law applies only in certain egregious situations; breach of contract claims do not qualify. But a plaintiff can move to arrest a defendant in a case for civil fraud under certain circumstances, including when the defendant has concealed property gained through fraud so that the property cannot be found or taken by the sheriff. Somewhat surprisingly, this statute has survived challenges that it violates the due process clause of the Constitution or serves as an impermissible “debtor’s prison.” Plaintiffs should proceed with caution under this statute, given the risk of a counterclaim from a defendant who was wrongfully detained. Any order to arrest and detain the defendant requires the plaintiff to post a bond of no less than $100. (The statute was enacted when $100 meant a lot more than it does now.) The leverage of having a defendant sit in jail cell can be priceless.

In the Fyre Festival case, they did not need to consider bringing a cause of action for Arrest and Bail because McFadden was soon to be arrested for criminal fraud charges. McFadden pled guilty last year and was sentenced to 6 years in jail. The civil lawsuits will continue to work their way through the courts for years as well.

If you have been a victim of deceptive or unfair business practices, contact the consumer protection lawyers at Spengler & Agans .

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