Fifth Circuit Defends Prior Rulings that Ponzi Scheme Trade Creditors Do Not Provide Value Under Bankruptcy Code and Fraudulent Transfer Law Beyond Texas, After Texas Supreme Court Says They Do Under Texas UFTA if They Fully Perform in the Ordinary Course at Market Rates
For nearly twenty years, R. Allen Stanford operated Stanford International Bank, Limited (“Stanford”), through more than 130 affiliates, as a multi-billion dollar Ponzi scheme. In 2005, Stanford became the title sponsor of an annual PGA Tour event to bring in high-net-worth investors and the Golf Channel, Inc. (“Golf Channel”), which broadcasted the tournament, offered Stanford an advertising package. Although Golf Channel did not develop the media strategy or content, Golf Channel’s final approval was required under the advertising agreement it entered into with Stanford. Under that agreement, Stanford paid nearly $6 million to Golf Channel, satisfying most of its monthly payment obligations and, before the agreement expired, entered into a four-year renewal.
In February 2009, the Securities and Exchange Commission commenced an enforcement action against Stanford in the Northern District of Texas, stating claims for securities fraud and seeking the appointment a receiver over Stanford. The district court assumed exclusive jurisdiction, seized Stanford’s assets, and appointed Ralph S. Janvey to serve as receiver. The receiver discovered Stanford’s payments of nearly $6 million to Golf Channel prior to the commencement of the receivership and filed an action under the actual fraud section of Texas Uniform Fraudulent Transfer Act (“TUFTA”) to recover those payments. After discovery, the parties filed cross-motions for summary judgment. The District Court granted Golf Channel’s motion and denied the receiver’s motion, determining that although Stanford’s payments to Golf Channel were fraudulent transfers under TUFTA, Golf Channel, which the Court equated to a trade creditor, was entitled to judgment as a matter of law on its affirmative defense that it received the payments in good faith and in exchange for reasonably equivalent value (the market value of advertising on The Golf Channel). See Janvey v. Golf Channel, 2013 WL 11309343 (N.D. Tex. Nov. 5, 2013). The receiver appealed to the Fifth Circuit Court of Appeals. The issue on appeal was whether Golf Channel proved the second element of its affirmative defense – that its advertising services provided “reasonably equivalent value” as defined under TUFTA.
In March 2015, the Fifth Circuit reversed the District Court, concluding that Golf Channel failed to prove that it had provided to Stanford reasonably equivalent value, i.e., that “its services benefited Stanford’s creditors” and thus preserved the value of Stanford’s Estate or had any utility from Stanford’s creditors’ perspective. The Fifth Circuit determined that the evidence showing its services were at market rates – the only evidence of value presented by Golf Channel – was insufficient to satisfy Golf Channel’s burden under TUFTA of proving value to Stanford’s creditors. The Court reasoned that while advertising “may have been quite valuable to the creditors of a legitimate business,” Golf Channel’s services actually attracted new investors to the Ponzi scheme, which prolonged the fraud, increased investor losses, and decreased the Estate’s value by increasing its liabilities. See Janvey v. Golf Channel, Inc., 780 F.3d 641, 646 (5th Cir. 2015), vacated and superseded on reh’g sub nom.
On rehearing in June 2015, the Fifth Circuit vacated its decision and certified to the Supreme Court of Texas the question of whether a transferee can establish the “reasonably equivalent value” defense under TUFTA by proving it provided goods or services at market value or whether the transferee must prove value from the perspective of creditors. See Janvey v. Golf Channel, Inc., 792 F.3d 539, 547 (5th Cir. 2015), certified question accepted (July 17, 2015), certified question answered sub nom., Janvey v. Golf Channel, Inc., No. 15-0489, 2016 WL 1268188 (Tex. April 1, 2016).
In April 2016, the Supreme Court of Texas answered the certified question by first determining that under TUFTA, “value exists when the debtor took consideration that had objective value at the time of the transfer, even if the consideration neither preserved the debtor’s estate nor generated an asset or benefit that could be levied to satisfy unsecured creditors.” Janvey v. Golf Channel, Inc., No. 15-0489, 2016 WL 1268188 at *12, 487 S.W. 3d 560 (Tex. April 1, 2016). The Court found that from the perspective of a reasonable creditor, the advertising services Golf Channel provided to Stanford had value even if they depleted its Estate. See id. The Court then determined that TUFTA does not provide for a different standard in the context of a Ponzi scheme and that value is provided if the services would have been available to another buyer at market rates had they not been purchased by the debtor. See id. at *16. Ultimately, the Court concluded that a transferee establishes a reasonably equivalent value affirmative defense under TUFTA when the transferee “fully performed in an arm’s-length transaction in the ordinary course of its business at market rates.” Id. at *17.
Bound by the Texas Supreme Court’s answer to the certified question on TUFTA’s “reasonably equivalent value” defense, the Fifth Circuit, per curium, reversed its 2015 decision and upheld the District Court’s order granting summary judgment in favor of Golf Channel. See Janvey v. Golf Channel, Inc., No. 13-11305 (5th Cir. Aug. 22, 2016). The Fifth Circuit determined that under Texas law the advertising Golf Channel had provided to Stanford constituted reasonably equivalent value and thus the payments Golf Channel had received from Stanford for the advertising were not fraudulent transfers. Id. The Court, however, observed that “TUFTA is unique among fraudulent transfer laws because it provides a specific market-value definition of ‘reasonably equivalent value’” and reiterated its opinion in a case under Washington’s UFTA that “services that furthered a Ponzi scheme were not for ‘value’ as a matter of law because ‘[t]he primary consideration in analyzing the exchange of value for any transfer is the degree to which the transferor’s net worth is preserved.’” Id. Similarly, the Court noted that the inquiry under Section 548(c) of the Bankruptcy Code is “whether the consideration provided in exchange for a transfer conferred a tangible economic benefit on the debtor, not whether the consideration . . . had objective value in the abstract.” Id. The Fifth Circuit concluded by making it clear that the “binding effect” of its prior decisions applying other states’ fraudulent transfer laws and Section 548 “remains unaffected” by this decision under TUFTA. See id. at 5.