On March 11, 2015, the US Court of Appeals for the Fifth Circuit, in Janvey v. Golf Channel, Inc. (No. 13-11305, (5th Cir. Mar. 11, 2015)), reversed a district court ruling, and held that a payment of $5.9 million to the operator of a cable network for advertising services provided to a failed Ponzi scheme was a fraudulent transfer because from the standpoint of the Ponzi scheme's creditors, no value could be received for advertising services intended to promote a Ponzi scheme.

Stanford International Bank, Limited (Stanford) operated a multi-billion dollar Ponzi scheme through more than 130 affiliated entities. To sustain the Ponzi scheme, Stanford targeted the typically high net-worth sports audiences. In 2005 Stanford became a title sponsor of the Stanford St. Jude's Championship, an annual PGA Tour event held in Memphis, Tennessee. In connection with this sponsorship, the Golf Channel, Inc. (Golf Channel), which broadcasted the tournament, offered Stanford an advertising package. In October 2006, Stanford entered into a two-year agreement with Golf Channel for a range of marketing services, which the parties agreed to renew for four years. Stanford paid at least $5.9 million to Golf Channel under this agreement.

In February 2009, the SEC uncovered Stanford's Ponzi scheme and filed a lawsuit in the Northern District of Texas against Stanford and related entities, requesting the appointment of a receiver over Stanford. The district court assumed exclusive jurisdiction, seized Stanford's assets and appointed Ralph S. Janvey (Janvey) to serve as receiver. Janvey discovered the payments to Golf Channel, and in 2011, filed suit under the Texas Uniform Fraudulent Transfer Act (TUFTA) to recover the full $5.9 million. The district court determined that although Stanford's payments to Golf Channel were fraudulent transfers under the TUFTA, Golf Channel was entitled to judgment as a matter of law on its affirmative defense that it received the payments in good faith and in exchange for reasonably equivalent value (the market value of advertising on The Golf Channel). The district court explained that "Golf Channel looks more like an innocent trade creditor than a salesman perpetrating and extending the Stanford Ponzi scheme."

Janvey appealed the decision to the Fifth Circuit. While Janvey did not dispute that Golf Channel acted in good faith, he questioned whether Golf Channel had given “reasonably equivalent value” in exchange for the $5.9 million it received when it provided advertising services to Stanford.

The Fifth Circuit reversed the district court's decision and held that the $5.9 million payment to Golf Channel was avoidable as a fraudulent transfer.

In evaluating “reasonably equivalent value,” the Fifth Circuit considered:

Under the UFTA, value "is to be determined in light of the purpose of the Act to protect a debtor's estate from being depleted to the prejudice of the debtor's unsecured creditors. Consideration having no utility from a creditor's viewpoint does not satisfy the statutory definition."

Golf Channel produced evidence of the market value of its services, but did not show that its services preserved the value of Stanford's estate or had any utility from the creditors' perspective. The Fifth Circuit explained that while 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. This is because each new investment in a Ponzi scheme decreases the value of the estate by adding a new liability that can never be legitimately repaid. Therefore, Golf Channel did not satisfy the burden under the TUFTA to prove value to the creditors.

The Fifth Circuit rejected Golf Channel's arguments that:

The Fifth Circuit explained that under the TUFTA, there is no distinction between different types of services or different types of transferees, and the objective market value of a service does not matter. The only factor that is important is the value of any services from the creditors' perspective. Further, the Fifth Circuit held that it had no authority to create an exception for trade creditors and that the advertising services did not provide even a speculative economic benefit to Stanford's creditors.

Finally, because Golf Channel did not prove that any value was given, it was not necessary for the Fifth Circuit to address the second prong of the inquiry concerning reasonable equivalence.

The ruling of the Fifth Circuit in this case is unprecedented and creates a great risk for any service business that deals with a debtor. The decision imposes an unrealistic expectation for suppliers and other trade creditors to investigate the affairs of their customers before transacting with them because even innocent parties could be subject to claw-back claims if they are dealing with the operator of a Ponzi scheme. As a result, the claims of creditors of a failed Ponzi scheme may be prioritized over the claims of innocent merchants, who are also victims of the Ponzi scheme.

If followed by other courts, this decision could have a broad impact, as the UFTA has been adopted in 43 states and shares the same definition of "value" as found in section 548 of the Bankruptcy Code.

For more information on fraudulent transfers, see the following Practice Notes: