Rudolph J. Di Massa, Jr.
Chad E. Odhner
Fraudulent transfer statutes like the Texas Uniform Fraudulent Transfer Act (TUFTA) generally provide an affirmative defense for transferees who can prove that they accepted a transfer in good faith and gave the debtor "reasonably equivalent value" in return. In the context of a failed Ponzi scheme, this defense may fall short if the goods or services provided by the transferee served to perpetuate the scheme in some way. In Janvey v. Golf Channel, 780 F.3d 641 (5th Cir. 2015), the U.S. Court of Appeals for the Fifth Circuit considered whether approximately $5.9 million in advertising fees accepted in good faith by the Golf Channel Inc. could be recovered as a fraudulent transfer by the court-appointed receiver of the failed Stanford International Bank Ponzi scheme. A three-judge panel of the court clarified that the threshold question of whether "value" was given under TUFTA must be answered from the standpoint of creditors, rather than from a market perspective, and held that "services furthering a debtor's Ponzi scheme provide no value to the debtor's creditors" as a matter of law. Accordingly, the court rejected Golf Channel's affirmative defense, reversed the district court's dismissal of the receiver's complaint, and rendered judgment in favor of the receiver.
For nearly 20 years, Stanford International Bank Ltd. and its affiliates operated a typical Ponzi scheme, targeting high-net-worth individual investors by promising astronomical returns on CDs. These high returns were paid with the fresh deposits of newly attracted investors. By the time the U.S. Securities and Exchange Commission uncovered the scheme in 2009, Stanford had pulled in more than $7 billion from its victims.
Stanford marketed its brand to sports audiences because of the high percentage of wealthy individuals represented by this demographic. As part of this strategy, Stanford sponsored the Stanford St. Jude Championship, an annual golf tournament broadcast by Golf Channel. In connection with the tournament, Golf Channel offered Stanford an advertising package that included: commercial airtime; mid-tournament messages touting Stanford's brand, products and charitable contributions; and displaying Stanford's logo throughout the tournament. All told, Stanford paid Golf Channel over $5.9 million during a four-year period pursuant to this advertising agreement.
In February 2009, the SEC brought an action against Stanford in the Northern District of Texas. Stanford's assets were seized and the court appointed Ralph Janvey as receiver for the Stanford entities. While investigating Stanford's accounts, Janvey discovered the advertising fees paid to Golf Channel and filed suit to recover the full $5.9 million as a fraudulent transfer.
As in 11 U.S.C. Section 548(a)(1) of the Bankruptcy Code, a fraudulent transfer under TUFTA is one made "with actual intent to hinder, delay or defraud any" creditor of the debtor. Because it was undisputed that Stanford was engaged in a Ponzi scheme, Golf Channel stipulated to the fact that the payments it had received from Stanford constituted a fraudulent transfer.
Golf Channel nonetheless raised the affirmative defense under TUFTA that it had taken the payments in good faith and for a reasonably equivalent value. Golf Channel presented evidence establishing that the market value of its services was equivalent to the $5.9 million it received in exchange for those services. The district court agreed, granting Golf Channel's motion for summary judgment on its statutory defense and reasoning that "Golf Channel looks more like an innocent trade creditor than a salesman perpetuating and extending the Stanford Ponzi scheme." On appeal, the receiver did not dispute that Golf Channel had acted in good faith, so the only issue before the Fifth Circuit was whether Golf Channel's advertising services provided "reasonably equivalent value" for the $5.9 million it received from Stanford. Golf Channel again relied on evidence that it had received fair market value for its services.
The test employed by courts within the Fifth Circuit is a two-step process geared toward determining whether a transferee gave "reasonably equivalent value." The first inquiry is whether the services exchanged had any value under TUFTA as a matter of law. Should the court determine that value was given, the second step would then be to review for clear error whether the actual value of the exchanged services was reasonably equivalent to the value of the transfer. Unfortunately for Golf Channel, the Janvey court did not reach the second step, because it held under the first step that Golf Channel's market value evidence failed as a matter of law to establish any value under TUFTA.
In its analysis of "value," the court considered: TUFTA's language; authority interpreting other states' Uniform Fraudulent Transfer Act (UFTA) statutes; comments to the Uniform Fraudulent Transfer Act; and interpretations of 11 U.S.C. Section 548 (upon which UFTA's definition of value is based). The court focused on Comment 2 to UFTA Section 3, which states, "Consideration having no utility from a creditor's viewpoint does not satisfy the statutory definition [of 'value']." Applying the principles of Comment 2 to the facts at hand, the court determined that value was to be measured from the standpoint of Stanford's creditors rather than from that of a buyer in the marketplace, with the primary consideration being the degree to which the estate's net worth was preserved as a result of the transfer. The court also referred to its opinion in Warfield v. Byron, 436 F.3d 551 (5th Cir. 2006), where it held that commissions paid to a broker by a Ponzi scheme were voidable—even where the broker was unaware of the fraud—because the broker's services furthered the scheme and consequently provided no value to creditors. The court analogized Golf Channel's advertising services to the broker's services in Warfield, in that both served to extend the Ponzi scheme. As the court explained, each transaction in a Ponzi scheme exposes the estate to increasing liabilities, so any service that encourages new investments not only fails to provide value to creditors but actually decreases the value of the estate.
Golf Channel argued that its advertising services were different from the broker's services in Warfield because the broker directly secured new investments into the scheme, "whereas an advertiser is an innocent 'trade creditor' generally promoting the business's brand." Declining to create such an exception for trade creditors, the court explained that TUFTA requires a determination of "value" from the creditors' standpoint, with the identity of the transferee and the nature of the services exchanged being of no significance. Thus, because the court found that Golf Channel had "put forward no evidence that its services preserved the value of Stanford's estate or had any utility from the creditors' perspective," Golf Channel's statutory defense failed as a matter of law. Accordingly, the appellate court reversed the district court and held in favor of the receiver.
Under normal circumstances, businesses can take solace in knowing they will have a good-faith defense against fraudulent transfer clawbacks if an account debtor goes belly-up. Indeed, the Janvey court acknowledged that Golf Channel's advertising services might have provided significant value to the creditors of a legitimate business. However, in light of the Janvey decision, even the most innocent trade creditor will be hard-pressed to prove such value when the debtor is a defunct Ponzi scheme.
Notwithstanding the wide impact of Janvey, trade creditors should not lose all hope: For example, the Janvey court hypothesized that a utilities provider might be able to prove that its services helped preserve the value of a Ponzi scheme's buildings for the benefit of its creditors. Therefore, Janvey should not be read as holding that all trade creditors are automatically subject to clawbacks in the wake of a Ponzi scheme's collapse. Nonetheless, the question of exactly which creditors can be said to be unwittingly helping extend a Ponzi scheme remains unsettled following Janvey. For example, does the local pizzeria extend the Ponzi scheme by delivering pizza to the scheme's employees who, in turn, work longer hours and find more investors? The Janvey decision offers little in the way of guidance or reassurance in this regard, but sends one very clear message: When it comes to Ponzi schemes, there are likely to be no winners. Innocent trade creditors are often no different than any other creditors in this context, and may face draconian clawbacks unless they can show how their goods or services helped preserve the estate's value for the benefit of the scheme's other creditors.
Rudolph J. Di Massa, Jr., a partner at Duane Morris, is a member of the business reorganization and financial restructuring practice group. He concentrates his practice in the areas of commercial litigation and creditors' rights. Chad E. Odhner is an associate in the Philadelphia office of the firm, where he practices in the areas of commercial finance and restructuring.
Reprinted with permission from The Legal Intelligencer, © ALM Media Properties LLC. All rights reserved.