The recent Fifth Circuit decision in Janvey v. The Golf Channel, Inc. (“Golf Channel“) reminds us again that sometimes, despite our best efforts, bad things happen to good people. In that case, the Golf Channel learned a painful lesson arising out of its innocent involvement with Stanford International Bank, Ltd.
For nearly two decades, Stanford had operated a multi-billion dollar Ponzi scheme. To sustain the scheme, Stanford promised investors exceptionally high rates of return on certificates of deposit, and sold these investments through advisors employed at its affiliated entities. Some early investors received the promised return but, as was later discovered, these returns were merely other investors’ principal. Before collapsing, Stanford had raised over $7 billion selling these fraudulent CDs.
Beginning in 2005, Stanford developed a plan to increase awareness of its brand among sports audiences. It targeted this group because of its large proportion of high-net-worth individuals, the people most likely to invest with Stanford. Stanford therefore became a title sponsor of the Stanford St. Jude’s Championship, an annual PGA golf tournament held in Memphis, Tennessee.
Golf Channel’s Relationship with Stanford. After hearing of Stanford’s sponsorship, The Golf Channel, Inc., which broadcast the tournament, offered Stanford an advertising package to augment Stanford’s marketing efforts. To that end, Stanford entered into a two-year agreement with Golf Channel for a range of marketing services, including commercial airtime, live coverage of the Stanford St. Jude’s Championship, display of the Stanford logo throughout the event, promotion of Stanford as the sponsor of the tournament, various updates, and identification of Stanford as a sponsor of Golf Channel’s coverage of the U.S. Open.
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 District Court to appoint a receiver over Stanford. A receiver (Ralph S. Janvey) was subsequently appointed. In the process of investigating Stanford’s accounts, the receiver discovered the payments to Golf Channel.
Golf Channel Sued for Fraudulent Conveyance. In 2011, the receiver sued Golf Channel under the Texas Uniform Fraudulent Transfer Act (TUFTA) to recover approximately $5.9 million in payments. Golf Channel subsequently filed a motion for summary judgment, arguing that it received the payments in good faith and in exchange for “reasonably equivalent value,” in the form of the market value of advertising on the Golf Channel. The District Court agreed with Golf Channel and granted summary judgment, explaining, “Golf Channel looks more like an innocent trade creditor than a salesman for perpetrating and extending the Stanford Ponzi scheme.”
Unfortunately for Golf Channel, on appeal the Court of Appeals for the Fifth Circuit reversed the District Court’s judgment and rendered judgment in favor of the receiver, Janvey. “Unfair,” one might say. Perhaps. But as we shall see, the Fifth Circuit’s decision supports one of the fundamental purposes of fraudulent transfer law – that being the assurance of fair and equal treatment of all creditors of an insolvent company.
What Happened to “Reasonably Equivalent Value”? Fraudulent transfer laws such as TUFTA, and its Bankruptcy Code equivalent found in Section 548 of the Bankruptcy Code, were enacted to protect creditors against depletion of a debtor’s estate. To that end, fraudulent transfer statutes allow creditors to void fraudulent transfers made by a debtor, and force the recipient of those transfers to return the transfer to the debtor’s estate. A transfer is generally thought to be actually fraudulent if made “with actual intent to hinder, delay or defraud any creditor of the debtor.”
Still, TUFTA provides an affirmative defense that a transferee may use to prevent avoidance of a transfer. Thus, even if a transfer is actually fraudulent, a transfer cannot be voided if the transferee proves two conjunctive elements — first, that it took the transfer in good faith, and second, that in return for the transfer the transferee gave the debtor some form of “reasonably equivalent value.” Some form of the “reasonably equivalent value” defense is found in most, if not all, fraudulent transfer statutes, including under the Bankruptcy Code.
In Golf Channel, there was no dispute that the Golf Channel took Stanford’s money in good faith, as there was simply no evidence the Golf Channel was aware that Stanford was running a Ponzi scheme. Golf Channel was essentially an “innocent bystander.” Key then to the Court’s decision was whether in return for the transfers, Golf Channel gave Stanford “reasonably equivalent value.”
At the core of the Fifth Circuit’s reasoning was its finding that “reasonably equivalent value” is to be determined in light of the statute’s purpose to protect the debtor’s estate from being depleted, to the prejudice of the debtor’s unsecured creditors. In that regard, the Court determined that value received by a debtor, but which has no utility from a creditor’s viewpoint, does not satisfy the statutory definition of “reasonably equivalent value.” The question then was, “Did the Golf Channel’s advertising services benefit Stanford’s other creditors?” Unfortunately for the Golf Channel, the Fifth Circuit’s answer was “no.”
While the Golf Channel’s services might have been quite valuable to the creditors of a legitimate business, the Court concluded they had no value to creditors of a Ponzi scheme. That is because each new investment in the Stanford Ponzi scheme actually decreased the value of the Stanford estate by creating a new liability that Stanford’s insolvent business could never legitimately repay. As a result, services (such as Golf Channel’s advertising services) that are rendered to encourage investment in a fraudulent scheme, do not provide “reasonably equivalent value” to creditors.
While the Fifth Circuit’s decision might seem subjectively unfair to Golf Channel, from the more objective point of view of other creditors of the Stanford estate, the $5.9 million paid to Golf Channel was essentially money poured down the drain, and provided no benefit whatsoever to Stanford’s creditors.
“Know Thy Customer.” So, how can one avoid Golf Channel’s predicament? First, the Fifth Circuit’s “reasonably equivalent value” standard relates to actual fraudulent transfer actions under TUFTA, and in the context of a Ponzi scheme. Courts outside the Fifth Circuit not faced with the same or similar circumstances might apply the test differently. Nevertheless, to the extent “reasonably equivalent value” is at issue in a Ponzi scheme situation, the result in Golf Channel is certainly worrisome. Second, the “value” (marketing services) provided by Golf Channel served primarily to expand Stanford’s fraudulent scheme, and was of no benefit to Stanford’s creditors. There may be circumstances in which a creditor’s goods or services do benefit other creditors of a Ponzi scheme, and creativity in that regard would be recommended. Finally, it’s always good advice to “know thy customer.” If a business model looks too good to be true, it probably is.