Despite an opinion by the Texas Supreme Court immunizing trade suppliers from fraudulent transfer claims for providing goods or services to a Ponzi scheme, the Fifth Circuit stood by its guns and continues to embrace a different theory of “value” to apply under Section 548 of the Bankruptcy Code.
The per curiam opinion on Aug. 22 arose from the $7 billion Ponzi scheme orchestrated by R. Allen Stanford, who is now serving a 110-year prison term. After the scheme fell apart, the receiver sued Golf Channel Inc. to recover $5.9 million that Sanford paid for advertising time targeting the channel’s high-income audience as potential new investors.
The federal district judge ruled without holding a trial that Golf Channel provided “reasonably equivalent value,” a valid defense to a fraudulent transfer claim. The district judge equated Golf Channel to an innocent trade creditor.
On appeal, the Fifth Circuit reversed in March 2015. While advertising “may have been quite valuable to the creditors of a legitimate business,” the panel opinion by Circuit Judge Jennifer Walker Elrod held that “services to encourage investment in such a scheme do not provide value to the creditors” because they only prolong the fraud and increase innocent investors’ losses.
The appeals court said the channel offered no evidence to show “how its services benefited Stanford’s creditors.” It only showed that its charges were at market rates, the circuit court said.
Having been ordered to repay the $5.9 million in advertising revenue, the channel filed a motion for rehearing en banc. In response, the panel withdrew its opinion and asked the Texas Supreme Court in June 2015 to advise whether the Texas Uniform Fraudulent Transfer Act requires proof of “reasonably equivalent value” from the perspective of creditors, or whether the defendant can defeat a fraudulent transfer claim by showing it provided goods or services at market value.
Texas’ highest court answered the certified question in April when it said that “reasonably equivalent value” is provided under TUFTA when (1) services were fully provided under an arms’-length contract for “fair market value,” (2) the consideration had “objective value” and (3) the exchange occurred in the ordinary course of the defendant’s business. In the context of a Ponzi scheme, the state court said that value is provided so long as the services would have been available to another buyer at market rates had they not been purchased by the Ponzi scheme.
From the perspective of a reasonable creditor, the Texas Supreme Court said the advertising services had value even if they depleted the Ponzi scheme’s estate.
Bound by the Texas court’s opinion on state law, the Fifth Circuit reversed its prior conclusion and upheld the district court’s grant of summary judgment absolving Golf Channel of fraudulent transfer liability.
Observing that “TUFTA is unique among fraudulent transfer laws because it provides a specific market-value definition of ‘reasonably equivalent value,’” the circuit’s opinion on Aug. 22 served notice that the appeals court’s prior decisions to the contrary under Section 548 of the Bankruptcy Code retain their “binding effect,” as do Fifth Circuit opinions interpreting other states’ fraudulent transfer laws.
The Fifth Circuit specifically reiterated its opinion from prior cases that the “primary consideration” is “the degree to which the transferor’s net worth is preserved.” The question is not whether the consideration had “objective value,” but whether the exchange “conferred a tangible economic benefit on the debtor.”