Saturday, July 18, 2015

Fifth Circuit Takes a Mulligan on Golf Channel Fraudulent Transfer Decision

By Stephen W. Sather
Barron & Newburger, P.C.
Austin, TX

One of the biggest challenges in unwinding a Ponzi scheme is figuring out who has to give back money and who gets to keep what they have.    Since promoters don't advertise the fact they are engaging in a Ponzi scheme, some people who thought they were dealing with a legitimate business end up being sued to recover so-called "fraudulent transfers."  The Golf Channel case is a perfect illustration of this problem.   Although the Fifth Circuit initially decided that the Golf Channel was ineligible to assert a defense that they provided value in good faith, they have decided to take a mulligan.   The panel has withdrawn its initial opinion and has certified the question to the Texas Supreme Court.    Janvey v. The Golf Channel Incorporated, No. 13-11305 (5th Cir. 6/30/15)

What Happened
 According to the Court:
For nearly two decades, Allen Stanford operated a multi-billion dollar Ponzi scheme2 through more than 130 affiliated entities centered around Stanford International Bank Limited (Stanford).3 To sustain the scheme, Stanford promised investors exceptionally high rates of return on certificates of deposit (CD) and sold these investments through advisors employed at the affiliated entities. Some early investors received the promised returns, but, as was later discovered, these returns were merely other investors’ principal. Before collapsing, Stanford had raised over $7 billion selling these fraudulent CDs.
Opinion, p. 3.   In order to get its brand out in front of sports audiences, Stanford purchased $5.9 million of advertising from the Golf Channel.  



When the Ponzi scheme collapsed, Ralph Janvey was appointed as receiver and was charged with recovering funds for investors.    He sued the Golf Channel to recover the payments as fraudulent transfers.   The Golf Channel asserted a defense that the payments were made in good faith and for reasonably equivalent value.   The District Court agreed, stating, “Golf Channel looks more like an innocent trade creditor than a salesman perpetrating and extending the Stanford Ponzi scheme.”
  
The Fifth Circuit Rulings
 In its initial ruling, the Fifth Circuit held that whether value was provided must be viewed from the perspective of the debtor's creditors.   Thus, if the advertising helped perpetuate the Ponzi scheme by making it look respectable, it did not provide value. Janvey v. Golf Channel, 780 F.3d 641 (5th Cir. 2015).  The court rejected the Golf Channel's argument that value should be viewed from its perspective, namely that because advertising is a valuable commodity in the market, it must provide value.  

The Golf Channel and several amici facing similar claims moved for rehearing and rehearing en banc or in the alternative to certify the question to the Texas Supreme Court.   The panel accepted the latter suggestion.  On June 30, 2015, it withdrew its opinion.   Instead, it certified the following question to the Texas Supreme Court:
Considering the definition of “value” in section 24.004(a) of the Texas Business and Commerce Code, the definition of “reasonably equivalent value” in section 24.004(d) of the Texas Business and Commerce Code, and the comment in the Uniform Fraudulent Transfer Act stating that “value” is measured “from a creditor’s viewpoint,” what showing of “value” under TUFTA is sufficient for a transferee to prove the elements of the affirmative defense under section 24.009(a) of the Texas Business and Commerce Code?
Opinion, p. 13.  

While the Fifth Circuit could draw on a wide range of federal fraudulent transfer decisions, the statute at issue was a state one.   This allowed the Court to send the legal question over to their brethren on the Texas Supreme Court based on the following logic:
Given the possible tension within TUFTA with respect to the perspective from which to measure “reasonably equivalent value,” that this is a question of state law that no on-point precedent from the Supreme Court of Texas has resolved, that the Supreme Court of Texas is the final arbiter of Texas’s law, and that the meaning of “reasonably equivalent value” is central to this case as well as other pending cases filed by Stanford’s receiver, we believe it is best to certify the question at issue.
 Id.     Thus, the case of the Stanford Receiver and the Golf Channel is not ready to head into the clubhouse just yet.

What It Means

The Texas Supreme Court's ruling will have repercussions far beyond Texas.   Fraudulent transfer law is codified in two different but related systems.   Most fraudulent  transfer law is based on state versions of the Uniform Fraudulent Transfer Act.   Bankruptcy trustees can either rely on the UFTA under 11 U.S.C. Sec. 544 or the Bankruptcy Code's own statute found at 11 U.S.C. Sec. 548.  However, a receiver such as Mr. Janvey may only rely on the state act.  Both sets of laws revolve around the concepts of transfers made with intent to hinder, delay or defraud and transfers made for lack of reasonably equivalent value while insolvent.  However, there are differences.   The main one is that the Bankruptcy Code has a two year look back while UFTA allows creditors to unravel transfers made up to four years previously.    Because the underlying concept of value is the same under both the Bankruptcy Code and state UFTAs, the Texas high court will impact fraudulent transfer law on a national basis.

The question of value goes to the very heart of fraudulent conveyance law.  In its initial incarnation, the Statute of 13 Elizabeth, fraudulent transfer law distinguished between knowing and unknowing participants in schemes.    The original statute did 
not extend to any estate or interest in land, tenements, hereditaments, leases, rents, commons, profits, goods or chattels, had, made, conveyed or assured, or hereafter to be had, made, conveyed or assured, which estate or interest is or shall be, upon good consideration and bona fide, lawfully conveyed or assured to any person or persons, or bodies politic or corporate, not having at the time of such conveyance or assurance to them made any manner of notice or knowledge of such covin, fraud or collusion as is aforesaid.
The initial Golf Channel opinion made the knowledge and good faith of the recipient irrelevant.   If the payment did not enhance the receivership estate, it did not constitute value.    If this rationale is taken to its logical extent, then any payment to a trade creditor would constitute a fraudulent transfer.   For example, when the Ponzi promoter paid rent or utilities, these payments allowed the scheme to go on.  If the payments had not gone on, then the promoter would not have had a venue for the scheme and the scheme would not have taken place.   The company which sells a computer to the promoter is in a slightly different position.   A computer is a hard asset which can be liquidated by the receiver.   However, the value of used personal property is almost always just a fraction of its purchase price.   Would the value be the amount the computer company could have received from an alternative purchaser or is it merely its liquidation value?   

If the answer is that innocent vendors are at risk for giving back their payments, then it may be time to consider a legislative solution.

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