Ralph S. JANVEY, In His Capacity as Court Appointed Receiver for the Stanford International Bank Limited, et al; Official Stanford Investors Committee, Plaintiffs-Appellants, v. The GOLF CHANNEL, Incorporated; Golf Channel, L.L.C., doing business as Golf Channel, Defendants-Appellees.
No. 13-11305.
United States Court of Appeals, Fifth Circuit.
March 11, 2015.
REVERSED AND REMANDED WITH INSTRUCTIONS.
Theodore W. Daniel, Esq., Kyle Morris Schindler, Norton Rose Fulbright U.S. LLP, Dallas, TX, for Defendants-Appellees.
Before REAVLEY, ELROD, and SOUTHWICK, Circuit Judges.
JENNIFER WALKER ELROD, Circuit Judge:
This case requires us to interpret and apply the Texas Uniform Fraudulent Transfer Act (TUFTA) to determine whether the court-appointed receiver of a failed Ponzi scheme can recover nearly six million dollars that the scheme spent advertising on a major cable network. Because Golf Channel failed to proffer any evidence showing that its advertising services provided reasonably equivalent value from the standpoint of Stanford‘s creditors, and we have previously held that services furthering a debtor‘s Ponzi scheme provide no value to the debtor‘s creditors, we REVERSE the district court‘s judgment and RENDER judgment in favor of the receiver.
I.
The facts are undisputed. For nearly two decades, Stanford International Bank, Limited (Stanford) operated a multi-billion dollar Ponzi scheme1 through more than 130 affiliated entities.2 To sustain the scheme, Stanford promised investors exceptionally high rates of return on certificates of deposit (CD), and sold these investments through advisors employed at the affiliated entities. Some early investors received the promised returns, 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 became a title sponsor of the Stanford St. Jude‘s Championship, an annual PGA Tour event held in Memphis, Tennessee. Upon hearing of Stanford‘s sponsorship,
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. The district court assumed exclusive jurisdiction, seized Stanford‘s assets, and appointed Ralph S. Janvey to serve as receiver. Pursuant to his powers, the receiver took custody of any and all assets owned by or traceable to the receivership estate, which included recovering any voidable transfers made by Stanford before going into receivership.
In the process of investigating Stanford‘s accounts, the receiver discovered the payments to Golf Channel, and in 2011, filed suit under TUFTA to recover the full $5.9 million. After initial discovery, the parties filed cross-motions for summary judgment. Despite the fact that Golf Channel offered no evidence to show how its services benefitted Stanford‘s creditors, the district court granted Golf Channel‘s motion and denied the receiver‘s motion. The district court determined that although Stanford‘s payments to Golf Channel were fraudulent transfers under 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). As the district court explained, “Golf Channel looks more like an innocent trade creditor than a salesman perpetrating and extending the Stanford Ponzi scheme.”
II.
We review a grant of summary judgment de novo, “applying the same standard on appeal that is applied by the district court.” Tiblier v. Dlabal, 743 F.3d 1004, 1007 (5th Cir.2014) (internal quotation marks omitted). Summary judgment is proper “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”
III.
Fraudulent transfer laws like TUF
However, TUFTA provides an affirmative defense that transferees may use to prevent creditors from voiding transfers. Even where a transfer is fraudulent under TUFTA, a creditor cannot void the transfer if the transferee proves two elements: (1) that it took the transfer in good faith; and (2) that, in return for the transfer, it gave the debtor something of “reasonably equivalent value.”
Given the undisputed fact that Stanford was engaged in a Ponzi scheme, the parties stipulated that the $5.9 million dollar transfer to Golf Channel was fraudulent. See Brown, 767 F.3d at 439. In addition, the district court held, and the receiver did not challenge on appeal, that Golf Channel took the transfer in good faith. Therefore, at issue here is whether Golf Channel has proven the second element of its affirmative defense—that its advertising services provided “reasonably equivalent value” as defined under TUFTA.
We analyze reasonably equivalent value under a two-step framework. First, we review de novo whether the property or service exchanged categorically had any value under TUFTA, as this is a question of law. See, e.g., Warfield, 436 F.3d at 558 (holding that broker services furthering a Ponzi scheme have no value as a matter of law) accord In re Fruehauf Trailer Corp., 444 F.3d 203, 212-13 (3d Cir.2006) (“[A] court should not consider the ‘totality of the circumstances’ in evaluating the threshold question of whether any value was received at all.“) (emphasis in original). Because we hold that Golf Channel failed to prove that it exchanged something of value, we need not address the second step.4
“Value” is defined in TUFTA as “property []transferred or an antecedent debt []secured or satisfied, but value does not include an unperformed promise made otherwise than in the ordinary course of the promisor‘s business to furnish support to the debtor or another person.”
The relevant comment in UFTA states that the definition of “value” is:
[A]dapted from § 548(d)(2)(A) of the Bankruptcy Code.... The definition []is not exclusive [and] 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.
Unif. Fraudulent Transfer Act § 3 cmt. 2 (emphasis added). UFTA offers only one specific example of an exchanged benefit that fails the value test—love and affection. See id. (citing United States v. West, 299 F.Supp. 661, 666 (D.Del.1969)). Therefore, courts are left to define the contours of “value” and “[t]he primary consideration is the degree to which the transferor‘s net worth is preserved.” Warfield, 436 F.3d at 558 (citing Butler Aviation Int‘l, Inc. v. Whyte (Matter of Fairchild Aircraft Corp.), 6 F.3d 1119, 1127 (5th Cir. 1993)).5 Importantly, we measure value “from the standpoint of the creditors,” not from that of a buyer in the marketplace. Stanley v. U.S. Bank Nat‘l Assoc. (In re TransTexas Gas Corp.), 597 F.3d 298, 306 (5th Cir.2010) (citing In re Hinsley, 201 F.3d 638, 644 (5th Cir.2000)).
In Warfield, we held that commissions paid to a broker in exchange for securing new investments into a Ponzi scheme are voidable, even assuming the broker was unaware of the fraud. 436 F.3d at 560. Because the debtor‘s business was inherently illegitimate (a Ponzi scheme), the broker‘s services, which furthered the scheme, had no value as a matter of law.6
On summary judgment in the instant case, Golf Channel put forward no evidence that its services preserved the value of Stanford‘s estate or had any utility from the creditors’ perspective.7 Golf Channel only brought forth evidence showing the market value of its services. This was insufficient to satisfy its burden under TUFTA of proving value to the creditors. See Unif. Fraudulent Transfer Act § 8 cmt. 1 (“The person who invokes this defense carries the burden of establishing good faith and the reasonable equivalence of the consideration exchanged.“).
Moreover, Golf Channel‘s services did not, as a matter of law, provide any value to Stanford‘s creditors. Just like the broker‘s (unknowing) efforts to extend the Ponzi scheme in Warfield, 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.8 Ponzi schemes by definition create greater liabilities than assets with each subsequent transaction. Each new investment in the Stanford Ponzi scheme decreased the value of the estate by creating a new liability that the insolvent business could never legitimately repay. See Brown, 767 F.3d at 439 (describing the insolvency of Stanford‘s Ponzi scheme); Janvey v. Democratic Senatorial Campaign Comm., Inc., 712 F.3d 185, 196 (5th Cir.2013) (“[A] Ponzi scheme is, as a matter of law, insolvent from its inception.” (internal quotation marks omitted)); see also Hirsch v. Arthur Andersen & Co., 72 F.3d 1085, 1088 n. 3 (2d Cir.1995) (“The effect of such a scheme is to put the corporation farther and farther into debt....“). Services rendered to encourage investment in such a scheme do not provide value to the creditors.
Golf Channel argues that its advertising services did not further the Stanford Ponzi scheme and that the $5.9 million reasonably represents the market value of those services. It tries to distinguish its services from the broker services in Warfield on the ground that a broker directly secures new investment in to a Ponzi
We note that our conclusion here does not rest upon a conclusion that the advertising services themselves lacked value in the abstract. In granting Golf Channel‘s motion for summary judgment, the district court compared Golf Channel‘s services to consumables and speculative investments which have been held to have value under UFTA. The district court stated that “[i]t seems wrong ... to hold that every transaction in which a debtor acquires consumables is a fraudulent transfer.” We agree. As the district court explained, we have held that a debtor purchasing jet fuel to keep an affiliated airline in business is an exchange for reasonably equivalent value even though the value to the debtor is merely the potential proceeds of a possible sale of that affiliated airline.9 Matter of Fairchild, 6 F.3d at 1123-27 (interpreting “value” in section 548 of the Bankruptcy Code). In fact, the investment in Fairchild was ultimately unsuccessful, yet, when measured at the time of the investment, we held that the increased possibility of selling the business had value. Id. at 1126-27. We explicitly rejected a definition of value that would exclude speculative or potential gains. Id. Here, however, the advertising services did not provide even a speculative economic benefit to Stanford‘s creditors.
IV.
Accordingly, we REVERSE the district court‘s judgment and RENDER judgment in favor of the receiver.
UNITED STATES of America, Plaintiff-Appellant v. Robert KALUZA; Donald Vidrine, Defendants-Appellees.
No. 14-30122.
United States Court of Appeals, Fifth Circuit.
March 11, 2015.