The United States Court of Appeals for the Fifth Circuit, in Ralph S. Janvey, In His Capacity as Court Appointed Receiver for the Stanford International Bank, et al. v. The Golf Channel, Incorporated, Case No. 13-11305, recently reversed a lower court’s ruling and ordered The Golf Channel, Incorporated (Golf Channel) to repay approximately $6,000,000 to the receivership estate for the multi-billion dollar Ponzi scheme operator, Stanford International Bank (Stanford). Based on the facts of the case, this is a very harsh result for Golf Channel, and could have far-reaching implications for ordinary trade creditors doing business with investment or financial firms.
The facts of the case are straightforward: Golf Channel and Stanford put together an advertising and marketing package associated with Golf Channel’s coverage of the Stanford St. Jude’s Championship, a PGA golf tournament sponsored by Stanford. They struck a two-year deal in 2006, with a subsequent four-year renewal thereafter. By the time the Securities and Exchange Commission (SEC) discovered Stanford’s Ponzi scheme in early 2009, Stanford paid approximately $5.9 million to Golf Channel for services rendered under the advertising and marketing agreements. The SEC appointed a receiver to take custody of Stanford’s assets and investigate potential avoidance actions.
In 2011, the receiver filed a lawsuit against Golf Channel seeking the avoidance and recovery of the $5.9 million under the Texas Uniform Fraudulent Transfers Act (TUFTA). TUFTA, which is similar to the many other states’ fraudulent transfer laws, allows creditors to void fraudulent transfers made by a debtor and force the return of such transfers to the debtor’s estate. Under TUFTA, a transfer is deemed fraudulent if it is made “with actual intent to hinder, delay, or defraud any creditor of the debtor.” The fact that a debtor operated a Ponzi scheme is enough to establish the fraudulent intent behind a transfer. There are, however, substantive defenses even where a transfer is deemed fraudulent under TUFTA. Specifically, a creditor cannot void the transfer if the transferee can prove two elements:
- That it took the transfer in good faith; and
- That, in return for the transfer, it gave the debtor something of “reasonably equivalent value.”
Golf Channel asserted this affirmative defense at the district court and won. The district court held that, while the $5.9 million transfer was fraudulent because Stanford was engaged in a Ponzi scheme, Golf Channel was entitled to a judgment as a matter of law because it received the payments in good faith and in exchange for reasonably equivalent value, which the district court determined as the market value of advertising on the Golf Channel network. The receiver appealed on the grounds that Golf Channel failed to provide reasonably equivalent value.
In analyzing whether reasonably equivalent value had been provided, the Fifth Circuit found that Golf Channel failed to put forward evidence that its services preserved the value of Stanford’s estate or had any utility from Stanford’s creditors’ perspective. Because Golf Channel only put forward evidence showing the market value of its services, it failed, as a matter of law, to satisfy its burden under TUFTA of providing value to Stanford’s creditors. In other words, Golf Channels’ provision of services to Stanford unknowingly extended the Ponzi scheme, which the Fifth Circuit determined to be of no value to Stanford’s creditors.
The Fifth Circuit’s decision is amazingly broad and creates material risk to ordinary trade creditors. Unfortunately, the Fifth Circuit refused to make any distinction between services to secure new investment in a Ponzi scheme versus those that simply promote a company’s brand in the ordinary course of business. The Fifth Circuit also ignored the fact that such services would have been valuable to a legitimate business enterprise, which Golf Channel had good reason to believe Stanford was truly legitimate. Indeed, based on the scope of Stanford’s multi-billion dollar Ponzi scheme, there were many other businesses that also thought it to be legitimate.
By ignoring the market value of the advertising services provided by Golf Channel, it appears the Fifth Circuit’s ruling creates a new burden on parties doing business with investment or financial firms. Do ordinary vendors now need to undertake material due diligence when seeking to transact business with a financial institution or investment advisor? It is unreasonable to require an ordinary trade creditor to have a complete view of the financial condition of an investment or financial firm with which it seeks to conduct business. Ponzi schemes are dependent upon deception and proceed to dupe participating parties for many years. The fate of Golf Channel in this case puts parties on notice that providing legitimate business services may actually be aiding a Ponzi scheme, at least in the eyes of one court.