Friday, July 03, 2015

Fifth Circuit Seeks Mulligan on Texas Law Question in Golf Channel case

By R. Jason Howard, J.D.

On appeal from the District Court for the Northern District of Texas, the Fifth Circuit Court of Appeals has granted a petition for panel rehearing, vacated its original opinion, and substituted an opinion certifying a question raised on the interpretation of the Texas Uniform Fraudulent Transfer Act’s (TUFTA) definition of “value” in the context of a good faith transferee of a Ponzi scheme. The certified question concerns an issue of state law that no on-point precedent from the Supreme Court of Texas has resolved (Janvey v. The Golf Channel, Inc., June 30, 2015, per curiam).

Background. Allen Stanford operated a multi-billion dollar Ponzi-scheme for nearly two decades before it was discovered. By 2005, Stanford had devised a plan to increase awareness of the brand, Stanford International Bank Limited (Stanford) and its affiliate entities, by marketing to sports audiences. Thereafter, Stanford became a title sponsor of the Stanford St. Jude’s Championship, an annual PGA Tour event held in Memphis, Tennessee.

Upon discovering this, the Golf Channel offered Stanford an advertising package to augment its advertising efforts and in the ensuing years, Stanford paid at least $5.9 million to the Golf Channel pursuant to the advertising agreement.

In 2009, the SEC uncovered the Ponzi scheme and filed suit in the Northern District of Texas against Stanford and related entities. Ralph S. Janvey was appointed as receiver and, pursuant to his powers, he filed suit under TUFTA to recover the full $5.9 million.

District Court finding. The District Court sided with the Golf Channel, and although the court determined that the payments to the Golf Channel were fraudulent transfers under TUFTA, Golf Channel was entitled to judgment as a matter of law as it met the two elements of TUFTA’s affirmative defense that: (1) it took the transfer in good faith; and (2) in return for the transfer, it gave the debtor something of “reasonably equivalent value” (the market value of advertising on The Golf Channel).

There the court explained that “Golf Channel looks more like an innocent trade creditor than a salesman perpetrating and extending the Stanford Ponzi scheme.” In granting Golf Channel’s motion for summary judgment, the court compared Golf Channel’s services to consumables and speculative investments, which have been held to have value under the Uniform Fraudulent Transfer Act (UFTA) and section 548 of the Bankruptcy Code.

Fifth Circuit. In order to determine if Janvey, as receiver, is entitled to disgorge the $5.9 million that Golf Channel received, the Fifth Circuit turned to Texas law, specifically looking to interpret the meanings of “value” and “reasonably equivalent value” in TUFTA.

Noting that there was no on-point precedent from the Supreme Court of Texas interpreting the meanings of “value” and/or “reasonably equivalent value,” the Fifth Circuit certified a question to the Texas Supreme Court because it was unable to reconcile whether, under TUFTA, proof of the market value is sufficient to establish “reasonably equivalent value” for purposes of the affirmative defense or whether the transferee must produce specific evidence to show value of the transfer to the debtor’s creditors.

Question certified. The Fifth Circuit certified the following question while also disclaiming “any intention or desire that the Supreme Court of Texas confine its reply to the precise form or scope of the question certified”:

  • “Considering the definition of “value” in section 24.004(a) of the Texas Business and Commerce Code, the definition of “reasonably equivalent value” in section 24.004(d) of the Texas Business and Commerce Code, and the comment in the Uniform Fraudulent Transfer Act stating that “value” is measured “from a creditor’s viewpoint,” what showing of “value” under TUFTA is sufficient for a transferee to prove the elements of the affirmative defense under section 24.009(a) of the Texas Business and Commerce Code?”

The case is No. 13-11305.

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