Tuesday, March 24, 2015

Shocking Fraudulent Transfer Ruling from the Fifth Circuit (Sim Israeloff)

By Sim Israeloff

The Fifth Circuit Court of Appeals has handed down a ruling that puts every service business at risk of having to refund fees that it honestly and innocently earned from a customer that is later found to be running a fraud scheme.
The Golf Channel sold commercial air time to the Stanford Financial Group.  Stanford was later convicted of running a giant Ponzi scheme.  The Receiver appointed over Stanford's empire sued the Golf Channel seeking the return of $5.9 million it had received from Stanford.  The Golf Channel did not know of Stanford's fraud and it provided services to Stanford in good faith and at the market price.  But the Court of Appeals held that all fees had to be refunded anyway.  Janvey v. Golf Channel, No. 13-11305 (5th Cir. March 11, 2015).  Why?
Under the Uniform Fraudulent Transfer Act, a transfer made with the intent to defraud creditors can be set aside.  But a recipient can keep money or property it took in good faith and for which it gave the debtor something of "reasonably equivalent value."   
The court held that where a payor like Stanford operates a Ponzi scheme, all transfers are made with fraudulent intent as a matter of law.  But Golf Channel's good faith was unquestioned, it charged regular market rates for its services, so it gave reasonably equivalent value, right?  Not according to the Court.
The Court held that value must be measured “from the standpoint of the creditors” rather than from market prices.  And that "[t]he primary consideration . . . is the degree to which the transferor’s net worth is preserved.”   It found that "Golf Channel’s (unknowing) efforts to extend Stanford’s scheme had no value to the creditors. 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."
The court's ruling may put every honest services business at risk, and unable to protect itself, if one of its customers is later found to be running a Ponzi scheme.  It remains to be seen if there will be a motion for rehearing or other efforts to change the panel’s decision.

Sim Israeloff is a senior shareholder with over 30 years of trial experience and is head of the Firm's Commercial Litigation Practice Group.  Sim's practice is devoted to commercial and complex business litigation in state and federal courts.

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