In a March 16, 2016, opinion, the U.S. Court of Appeals for the Fifth Circuit held that a claimant’s delay in initiating his investigation of potentially fraudulent transfers while triaging numerous other responsibilities could toll the applicable statute of repose under the Texas Uniform Fraudulent Transfer Act (TUFTA)[1] until the claimant was able to begin investigating the particular transfers at issue, even if that investigation began more than one year after it otherwise could have.
In Janvey v. Romero (Romero), one of the most recent rounds of the ongoing Stanford Ponzi saga, the Fifth Circuit held that Ralph Janvey, the court-appointed receiver for R. Allen Stanford and numerous Stanford entities (the “receiver”), was not barred from bringing fraudulent transfer claims against a former Stanford entity employee simply because he began investigating the transfers more than one year after his appointment.[2] Rather, the Fifth Circuit focused on the volume of responsibilities placed upon the receiver in unwinding Stanford, investigating its prior actions and recovering its assets across multiple countries.[3] It held that the trial court jury was justified in finding that the receiver could not have reasonably discovered the transfers at issue until he actually started investigating them, even though that investigation did not start until 20 months after he was appointed.[4]
The Transfers at Issue
Peter Romero was a part-time member of the Stanford International Advisory Board (IAB) beginning in 2001.[5] Over the next eight years, Romero earned approximately $700,000 in advisory fees, in addition to travel expense reimbursements and additional compensation.[6] He resigned in January 2009, shortly before the Securities and Exchange Commission (SEC) brought charges against Stanford.[7]
The TUFTA Suit
The receiver was appointed on Feb. 15, 2009, the same day the SEC brought charges, but he did not begin investigating any payments made to IAB members until October 2010, 20 months after his appointment.[8] Four and a half months after that, the receiver brought suit against Romero under TUFTA, seeking recovery of all money paid to him from 2001-09.[9]
At trial, the jury found in favor of the receiver.[10] Post-trial, Romero argued that the portion of his salary received more than four years before the receiver filed suit was protected by TUFTA’s four-year statute of repose because the receiver did not timely begin his investigation of the IAB when he otherwise could have, which precluded his ability to rely on the one-year-from-discovery statute of repose to seek return of the earlier transfers.[11] The district court denied Romero’s motion for judgment as a matter of law, and Romero appealed.[12]
On Appeal
On appeal, Romero reiterated his argument that the receiver could not avail himself of the one-year statute of repose because he did not investigate the IAB until more than 20 months after his appointment. In conjunction, he argued that the discoverability of the older transfers was subject to an “inherently undiscoverable” analysis,[13] under which the fraudulent transfer must be “unlikely to be discovered within the prescribed limitations period despite due diligence” in order to toll the one-year statute of repose.[14] Romero further argued that, at the latest, the receiver could have discovered the IAB transactions four and a half months after his appointment, since it took the receiver that long to discover them once he started his investigation.[15]
Consistent with the model Uniform Fraudulent Transfer Act, TUFTA § 24.010(a)(1) provides that a cause of action to recover fraudulent transfers that are based on a claim of actual intent to defraud “is extinguished unless action is brought ... within four years after the transfer was made or the obligation was incurred or, if later, within one year after the transfer or obligation was or could reasonably have been discovered by the claimant.”[16] The Fifth Circuit previously held that both knowledge of the transfer and knowledge of the fraudulent nature of the transfer are required in order for a cause of action to accrue under TUFTA.[17] At issue in Romero was only the “knowledge-of-transfer” requirement, as there was no dispute that the receiver had knowledge of the fraudulent nature of substantially all of the transactions for more than one year prior to filing suit.[18]
The Fifth Circuit rejected Romero’s arguments wholesale. In doing so, it went to considerable length to detail the massive responsibilities placed on the receiver upon his appointment. It gave substantial weight to the receiver’s trial testimony, in which he stated that his investigation of the IAB could not have begun at any earlier date because of the “six major categories of work he had to do involving hundreds of issues.”[19] These included reviewing approximately 15,000 boxes of physical files and 60 terabytes of electronic data), litigating 60 lawsuits against 1,300 defendants, engaging in foreign litigation to recover the almost 85 percent of Stanford’s remaining assets that were located overseas, and expending over 46,000 person-hours over two years.[20] Altogether, the Fifth Circuit found that this extraordinary factual scenario was legally sufficient to support the jury’s finding that the receiver could not have reasonably discovered any of the IAB transfers to Romero until well after his appointment, and certainly less than one year before he brought suit against Romero.[21]
The Takeaway
While this case arose outside of bankruptcy, its implications for fraudulent transfer actions in bankruptcy are evident. Nationwide, all but a handful of jurisdictions have enacted some version of the Uniform Fraudulent Transfer Act, and two of the three states in the Fifth Circuit have presently enacted some version.[22] While the burden placed on the receiver that warranted tolling of the TUFTA statute of repose in Romero was unusually heavy, the case may nevertheless invite tolling claims in less complex fraudulent transfer litigation.
[1] See Tex. Bus. & Com. Code §§ 24.001 et. seq.
[2] Janvey v. Romero, 817 F.3d 184 (5th Cir. 2016).
[3] Id. at 190-92.
[4] Id. at 191-92.
[5] Id. at 187.
[6] Id.
[7] Id.
[8] Id.
[9] Id.
[10] Id.
[11] Id.
[12] Id.
[13] Id. at 189, n.4.
[14] Caddle Co. v. Wilson, 136 S.W.3d 345, 351 (Tex. App.—Austin, no pet.).
[15] Romero, 817 F.3d at 189.
[16] Tex. Bus. & Com. Code § 24.010(a)(1).
[17] See Janvey v. Democratic Senatorial Campaign Comm. Inc., 712 F.3d 185, 193 (5th Cir. 2013).
[18] Romero, 817 F.3d at 188, 188 n.3.
[19] Id. at 190 (internal quotation marks omitted).
[20] Id. at 190-91.
[21] Id. at 191-92.
[22] See Tex. Bus. & Com. Code §§ 24.0001 et. seq.; Miss. Code Ann. §§ 15-3-101 et seq.; La. Acts 2004, No. 447, § 2 (repealing Louisiana’s enactment of the Uniform Fraudulent Transfer Act).