When a debtor pays the market cost for goods and services provided to it by third-party vendors, these payments normally cannot be recovered as fraudulent transfers in the U.S. That is because the debtor receives reasonably equivalent value for the payments to its vendors and because the unsuspecting vendors can assert a good faith defense based on the value provided. As courts recognize, third party vendors “have no reason and, more importantly, no duty to inquire into the nature of the debtor’s business.”1 But when the debtor is a fraudulent enterprise, a Ponzi scheme for example, is value defined as the objective market value of the goods and services provided by the vendors, i.e. an objective standard, or is it value subjective to the debtor -- i.e. since the goods and services do nothing but prolong the fraud with no benefit to the debtor and its eventual creditors, do they constitute value at all?

A recent Fifth Circuit decision, Janvey v. Golf Channel, Inc.,2 adopted a subjective approach to the question and held that the Golf Channel did not provide “value” in selling advertising time to a business later revealed to be a Ponzi scheme.

Prior Caselaw Defining “Value”: Emphasizing Objective Market Value

In analyzing transfers for “value,” courts have distinguished between different categories of funds at stake in a Ponzi scheme: investment principal, investment profit, and salary/commissions. A return of the principal invested constitutes “reasonably equivalent value” exchange, since the transferor is returning the amount originally invested.3 In contrast, payouts of “profits” by Ponzi schemes are not made in exchange for reasonably equivalent value.4    

Courts are divided, however as to whether a transfer to a salesperson or broker in the Ponzi scheme context can ever be an exchange for reasonably equivalent value. In Warfield v. Byron,5 the Fifth Circuit held that a broker who unknowingly solicited investments for a Ponzi scheme did not give value to the debtor in exchange for commission fees.

The Southern District of New York6 disagreed, holding that brokers’ services may have provided value. “Not every transaction which has the effect of ‘exacerbating the harm to creditors by increasing the amount of claims while diminishing the debtors’ estate’ is a fraudulent conveyance.”7 The fact that the debtor’s enterprise is fraudulent, does not render each transfer made by that business avoidable as a fraudulent transfer.8

Similarly, the Eleventh Circuit held the daughter of a Ponzi scheme propagator, who received as commission a percentage of total revenue, was entitled to present a good faith affirmative defense to the trustee’s avoidance action.9 And a recent district court decision held that a Ponzi scheme broker could provide “value,” reasoning, “analyses of value should be ‘purely objective.’”10

Outside of the Ponzi scheme context, courts agree an objective approach to value should be taken, measuring the value of the property transferred and the consideration received at the time of the transfer.11 Subsequent events, are disregarded.12 By focusing on whether the debtor received reasonably equivalent value at the time of the transfer, courts avoid valuing an asset “through the 20/20 vision of hindsight.”13 Rather, courts look to market prices as measures of “value.” 14

Janvey v. Golf Channel, Inc.

Stanford International Bank, Limited operated a multi-billion dollar Ponzi scheme through more than 130 affiliated entities. In February 2009, the SEC uncovered Stanford’s Ponzi scheme and filed a lawsuit in the Northern District of Texas against Stanford. The District Court assumed exclusive jurisdiction, seized Stanford’s assets, and appointed a receiver who subsequently took custody of any and all assets owned by or traceable to the receivership estate. This included recovery of any voidable transfers made by Stanford before going into receivership.

The receiver filed suit under the Texas Uniform Fraudulent Transfer Act (“TUFTA”) to recover $5.9 million of payments made to the Golf Channel. During 2007-08, Golf Channel sold media sponsorships to Stanford under which Stanford purchased the right to run its pre-designed commercials and the right to sponsor various events on Golf Channel’s network. Golf Channel did not control the content of the advertisements. The District Court granted summary judgment to Golf Channel, determining that although Stanford’s payments were fraudulent transfers, the Golf Channel was entitled to the affirmative defense of value given in good faith.

In concluding that Golf Channel’s services conferred value, the District Court analogized them to consumables and speculative investments. That a debtor immediately used up and depleted a good or service from a transferee, or that a debtor made an investment that did not ultimately add to the estate, did not render such transfers valueless. The court rejected the receiver’s argument that the services provided by the Golf Channel were of no value since they merely prolonged the fraud and thus worsened the financial condition of the debtors to the detriment of the unsecured creditors. As the District Court noted, “if the Receiver were correct, he would have a fraudulent transfer claim against the power company for the electricity Stanford used and against the water company for the water used.”15

On appeal, the Fifth Circuit reversed and rendered judgment in favor of the receiver. The court emphasized a comment on “value” in the Uniform Fraudulent Transfer Act: “[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.”16

The Court of Appeals noted that “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,”17 and “Golf Channel’s services did not, as a matter of law, provide any value to Stanford's 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.”18

Implications

By placing arm’s length vendors and other unsecured trade creditors in the same category as active participants in Ponzi schemes, the Fifth Circuit, in contrast to the objective approach followed by other courts, treated “value to the creditors” as a separate requirement distinct from “market value.” In effect, the Fifth Circuit adopted a subjective approach, measuring not the objective value provided by the Golf Channel, but whether or not the services provided enhanced the subjective debtor (and its creditors) before the Court. Thus, in the Fifth Circuit, trade creditors share more exposure to fraud associated with fraudulent investment schemes, than investors do; after all, return of investors’ principal is deemed for value, but payment for goods and services provided, at least under Janvey v. Golf Channel, does not.