Tuesday, April 12, 2016

The Supreme Court Clarifies the Meaning of "Value" in Ponzi Scheme Case

By Todd Harlow, Steve Stapleton

The Texas Uniform Fraudulent Transfer Act (“TUFTA”) has long been a powerful tool for creditors seeking to recover seemingly uncollectible debts.  A TUFTA plaintiff’s prima facie case is fairly straightforward  First, the plaintiff must prove it is a creditor who has a claim against the debtor.  From there, the plaintiff has two avenues for recovery: either prove that the debtor intentionally transferred assets to delay, hinder or defraud the creditor, or prove that the (insolvent) debtor transferred assets without receiving reasonably equivalent value in return.

The defendant may assert certain affirmative defense that it took in “good faith” and paid “reasonably equivalent value.”  In a case certified to the Court by the Fifth Circuit Court of Appeals, the Texas Supreme Court on April 1, 2016 held that under TUFTA, “value” is measured objectively, such that a transferee is protected from a fraudulent transfer action when the transferee (1) fully performs under a lawful, arm’s length contract for fair market value, (2) provides consideration that had objective value at the time of the transaction and (3) made the exchange in the ordinary course of the transferee’s business. *1

The background of the case is taken directly from the opinion.  

R. Allen Stanford perpetuated a $7 billion Ponzi scheme.  After Stanford’s assets were seized, the court-appointed receiver began legal proceedings to avoid prior asset transfers made by Stanford, among which was $5.9 million paid to The Golf Channel for media-advertising services.  The receiver alleged that the payments were made with the intent to defraud Stanford’s creditors.  The district court granted summary judgment for the Golf Channel stating fundamentally that the exchange of value was reasonably equivalent because the transaction was arm’s length, in good faith, at fair market value and in the ordinary course of business.  The Fifth Circuit Court of Appeals reversed and rendered judgment for the receiver, holding that the services provided no value to a Ponzi scheme creditor and thus were avoidable.  On rehearing, the Court, however, vacated its opinion and certified the question to the Texas Supreme Court, asking “what showing of ‘value’ under TUFTA is sufficient for a transferee to prove the elements of the [good faith] affirmative defense?”  Because both the Fifth Circuit and other courts have typically utilized a “conclusive presumption that transfers in furtherance of the [Ponzi] scheme were made with actual intent to defraud,” any such transfer was fraudulent as a matter of law.  

Under TUFTA, any person who takes a transfer in good faith and for a reasonably equivalent value is protected.  The certified question thus pertained only to the “reasonably equivalent value” requirement of the affirmative defense; in other words, how is value defined under TUFTA.  The Fifth Circuit had concluded that because value must be assessed from the point of view of Stanford’s creditors and must act to preserve the transferor’s net worth, the Golf Channel’s (unknowing) efforts to extend the Ponzi scheme had no value to Stanford’s creditors.  The Texas Supreme Court noted that “[t]his conclusion presumably derives from the [Fifth Circuit’s] view that generating business for a Ponzi scheme necessarily decreases the value of the estate, which would not be the case for legitimate businesses procuring similar media-advertising services.”  The Golf Channel charged the receiver with improperly applying not only a retrospective value inquiry, but a value inquiry that had to have been imbued with the “clarity of hindsight or imputed with the debtor’s knowledge” of the Ponzi scheme – in other words, a subjective evaluation which “would wreak economic havoc if good-faith merchants are required to forfeit their earnings unless they prove that  … the transaction … did not further the debtor’s insolvency.”

The Supreme Court, noting that TUFTA provides a specific market-value definition of “reasonably equivalent value” which must be “evaluated objectively at the time of the transfer, not in retrospect,” held that TUFTA “does not impose a subjective value inquiry nor countenance a retrospective one.”  The Court further held that “[e]valuating value subjectively from a creditor’s vantage point would effectively negate a transferee’s good faith defense….”

Significantly, the Supreme Court concluded that “value exists when the debtor took consideration that had objective value at the time of the transfer, even if the consideration neither preserved the debtor’s estate nor generated an asset or benefit that could be levied to satisfy unsecured creditors.”  In conclusion, the Supreme Court said that “we discern nothing in  TUFTA’s text suggesting the [Texas] Legislature intended a different value standard to apply in the Ponzi-scheme context.”  

The Supreme Court got it right.

*1  Janvey v. The Golf Channel, No. 15-0489 (Tex., April 1, 2016).

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