Two Recent Decisions Potentially Expand Fraudulent Transfer Exposure In Ponzi Schemes

Two recent decisions from the Fifth Circuit and Eighth Circuit could expand the fraudulent transfer exposure of unknowing third parties that provide goods, services, or funding to companies operating Ponzi schemes.

Janvey v. The Golf Channel

The Fifth Circuit's recent decision in Janvey v. The Golf Channel, Inc., if followed by courts in other circuits, could leave many unknowing vendors and service providers in Ponzi scheme cases without a defense to fraudulent transfer claims by a trustee or receiver.

The decision arises from the highly-publicized, multi-billion dollar Ponzi scheme perpetrated by Allen Stanford. In 2009, the Securities and Exchange Commission filed a civil enforcement action in the Northern District of Texas, obtained a freeze of all assets of Stanford International Bank, Ltd. ("Stanford") and its affiliates, and requested the appointment of Ralph S. Janvey as receiver ("Receiver"), which the district court granted.

Advertising provided no value to creditors, transfers recoverable by receiver

Stanford had paid The Golf Channel, Inc. ("Golf Channel") a total of $5.9 million for advertising and other promotional services related to Stanford's sponsorship of a PGA Tour event held in Memphis, Tennessee. The Receiver sued Golf Channel to recover the $5.9 million under the Texas Uniform Fraudulent Transfer Act ("TUFTA"). TUFTA, which mirrors uniform fraudulent transfer statutes in other states, allows creditors (or receivers) to avoid transfers made with actual intent to defraud creditors or by an insolvent entity that does not receive reasonably equivalent value in return. TUFTA, like other uniform fraudulent transfer statutes, provides a defense for transferees who receive funds in good faith and provide reasonably equivalent value in return.

Golf Channel argued it received the $5.9 million in good faith and provided reasonably equivalent value in the form of advertising and promotional services. The district court agreed and granted summary judgment in Golf Channel's favor. On appeal, the Fifth Circuit reversed, finding no evidence the advertising and promotional services provided value to Stanford's creditors and served only to "encourage investment" in the Ponzi scheme. The court reasoned that, under TUFTA, value is measured from the standpoint of creditors rather than that of an ordinary buyer in the marketplace and the primary consideration is the degree to which the transferor's net worth is preserved. Even though the...