“Broadcasting Lies”: Broadcaster Liability in Consumer Fraud, Part 2

Editor's Note: Part I of this article can be found on the Commercial Fraud Committee Website.

Recent cases suggest that broadcasters who advertise a debtor’s fraudulent business may face exposure to § 548 claims, as was addressed in Part 1 of this article. In Part 2, we address the second element of a broadcaster’s defense: the exchange of reasonably equivalent value in exchange for payments received by the broadcaster. The Fifth Circuit’s recent decision in Janvey v. The Golf Channel Inc.,[1] a UFTA case, suggests that in the Ponzi-scheme context, even if broadcasters receive funds in good faith, they may never be able to demonstrate the exchange of reasonably equivalent value.

In Janvey, Golf Channel demonstrated that in exchange for $5.9 million, it provided advertising and sponsorship services at market rates to the Stanford Ponzi web of entities.[2] Golf Channel provided the services in good faith pursuant to a written contract and was paid for advertising the Stanford Financial investment fund. At the time it aired the commercials, Golf Channel had no idea Stanford Financial was a Ponzi scheme. The district court rejected the Stanford receiver’s arguments that the advertising services provided no value to the Stanford creditors, since they only grew the Ponzi scheme. Instead, the district court focused on the market value of Golf Channel’s services at the time they were provided.

The Fifth Circuit rejected the market value approach and evaluated value from the perspective of the Stanford receivership creditors. In reversing summary judgment in favor of Golf Channel, the Court found that “[w]hile Golf Channel’s services may have been quite valuable to the creditors of a legitimate business, they have no value to the creditors of a Ponzi scheme.”[3]

The court noted that TUFTA’s[4] definition of “value” is adapted from Bankruptcy Code § 548 and focuses on the degree to which the transferor’s net worth is preserved.[5] The Fifth Circuit accordingly measured value from the creditor’s perspective, rather than from the perspective of a buyer in the marketplace or the transferee.[6] The Court’s analysis thus necessarily adopted a hindsight approach. Because Golf Channel’s services only encouraged new investments, and new investments in a Ponzi scheme only deepen insolvency, services that encourage investment in a Ponzi scheme do not provide value to creditors, regardless of the market value of the services at the time they were provided.

Upon request for rehearing, the court granted Golf Channel’s alternative request to certify TUFTA’s meaning of value to the Texas Supreme Court.[7] In its decision, the Fifth Circuit observed:

• No Texas Supreme Court decision establishes TUFTA’S meaning of “reasonably equivalent value.”
• “Possible tension” exists between TUFTA’S official comments, which measure “value” from a creditor’s standpoint,[9] affirmative defense, which suggests that value is measured from the perspective of a buyer in the general marketplace.
• TUFTA was “designed to strike a balance between protecting the creditors of an insolvent business while at the same time ensuring that third-party merchants and transferees … would have an affirmative defense to protect their earnings.”

The Fifth Circuit essentially asks the Texas Supreme Court to determine whether reasonably equivalent value means the market value of services at the time they are provided, or if value to the transferor’s creditors is required. The Fifth Circuit acknowledged that it has been measuring “value” under TUFTA based on the creditors’ standpoint, instead of from the perspective of a buyer in the marketplace. The distinction is really one of time as well as perspective. Is value determined from a market perspective at the time the services are provided (when the provider has no reason to believe the recipient is a Ponzi scheme), or is it measured in hindsight from the value remaining to satisfy Ponzi scheme creditors?

As the Fifth Circuit noted, very few instances are imaginable that might survive the second perspective. For instance, the electric company providing electricity at market value whose “services helped preserve the building in which the debtor operated, preventing the building’s deterioration to the benefit of the debtor’s creditors”[10] might qualify. But, in withdrawing its original opinion and certifying the question of value, the Fifth Circuit recognized that “value in the market and value to the creditors may not be the same in the context of a debtor engaged in a Ponzi scheme,”[11] and that the “value to creditors” perspective “may render valueless many goods and services, which were provided in good faith, that are unrelated to real property or consumables.”[12]

The Fifth Circuit found that while Golf Channel had produced “market value” evidence, it had provided no “value to the receivership creditors” evidence.[13] The court rejected Golf Channel’s untimely argument that payments were in satisfaction of the antecedent debt created by its contract, but expressly did not restrict the Texas Supreme Court from considering “the meaning and applicability of the antecedent debt clause in TUFTA’s definition of “value.”[14]

The Fifth Circuit’s certification of the “reasonably equivalent value” question likely represents an acknowledgement by the Court that its original opinion would broadly impose on nearly every trade merchant whose services are “consumables” the burden of due diligence to ensure that each customer is not insolvent or operating a Ponzi scheme. The economic realities inherent in such an approach would greatly slow the wheels of commerce.

Unless and until the Texas Supreme Court uses a market value approach to determine “reasonably equivalent value,” broadcasters operating in Texas should carefully scrutinize each of their customers to ensure that those customers are not insolvent or operating a Ponzi scheme. Otherwise, they face the prospect of turning market rate payments if their customer turns out to have been insolvent or a Ponzi scheme.