Like many other Ponzi schemes, R. Allen Stanford’s operated by selling Certificates of Deposit and paying an initial group of victims a high return using subsequent investors’ money, all the while taking large portions of the investment funds for himself and his various entities (the “Stanford Entities”). While the Ponzi scheme’s perpetrator and many of his associates were sentenced to prison, hundreds of civil suits were filed in various courts that related to and stemmed from the Stanford Ponzi scheme.
More than seven years ago, Ralph Janvey (“Janvey”) was appointed Receiver for the Stanford Entities and tasked with recovering as much money as possible from the $7.2 billion Ponzi scheme that defrauded over 18,000 people and returning that money to the investors. To achieve this aim, one tool Javney uses is the filing of clawback suits against those companies who were paid by the Stanford Entities but provided no real value in return.
The Golf Channel Case
The Stanford Entities heavily invested in and marketed through various sporting channels and events. The Stanford International Bank became the chief sponsor of the Stanford St. Jude’s Championship, a PGA Tour event that was held annually in Memphis, Tennessee and broadcast by The Golf Channel, Inc. (“The Golf Channel”).
Beginning in 2006, The Golf Channel and the Stanford Entities entered into a two-year agreement pursuant to which The Golf Channel aired more than 682 Stanford commercials annually for the Stanford Entities. In exchange for airing the commercials, The Golf Channel received over $5.9 million in compensation from the Stanford Entities.
In 2011 the Receiver filed a clawback lawsuit against the Golf Channel in federal district court in which the Receiver alleged that the $5.9 million in payments to the Golf Channel constituted a fraudulent transfer and that The Golf Channel should be required to return the money.
Under the Texas Uniform Fraudulent Transfer Act (“TUFTA”), when dealing with a transfer made in alleged furtherance of a Ponzi scheme, fraudulent intent is presumed and the burden is on defendants to prove that they received payment for services provided in good faith and forreasonably equivalent value. The trial judge ruled that The Golf Channel met its burden and granted summary judgment in its favor. The trial court reasoned that the “Golf Channel look[ed] more like an innocent trade creditor than a salesman perpetrating and extending the Stanford Ponzi scheme.”
Appeal to the Fifth Circuit
The Receiver appealed the trial court’s ruling to the Fifth Circuit Court of Appeals arguing that The Golf Channel did not provide “reasonably equivalent value” to the Stanford creditors (the victims of the Ponzi scheme) for the $5.9 million when it aired the Stanford commercials. The Receiver argued that the commercials effectively enlarged the Ponzi scheme by recruiting more investors, thereby perpetuating the fraud and providing no positive value. While The Golf Channel argued that $5.9 million was the reasonable market value for the airing of the commercials, the Fifth Circuit focused instead on the value of the advertising services through the eyes of the creditors. The three judge panel ruled that The Golf Channel’s airing of the commercials in question provided no value to Stanford creditors and did not have "any utility from the creditors' perspective.” Accordingly, the Fifth Circuit ordered The Golf Channel to return the $5.9 million.
Nonetheless, on rehearing, the Fifth Circuit vacated its previous ruling requiring The Golf Channel to return the money, and instead sent a “certified question” to the Texas Supreme Court, asking the court to define the term "reasonably equivalent value" under TUFTA.
The Texas Supreme Court Decision
On Friday April 1, 2016, The Texas Supreme Court issued its opinion on the matter. The Texas Supreme Court held that The Golf Channel did in fact provide reasonably equivalent value for the money it received. The Court ruled that "reasonable equivalent value" was provided because "the transferee (1) fully performed under a lawful, arm's-length contract for fair market value, (2) provided 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."
Under the Supreme Court’s interpretation, the value of services is not based on retroactive knowledge of fraud or existence of a Ponzi scheme. Rather, the focus is on the objective value at the time of the transaction. Such an interpretation is business-friendly and will prevent businesses from having to perform unreasonably extensive due diligence and background checks to determine if potential clients have ulterior motives and/or incentives.
The recent Supreme Court ruling will likely have a stifling effect on receivers who file clawback suits against businesses who were providing good faith services pursuant to a contract. More to the point, this new decision will likely serve to keep money in the pockets of businesses that provide services to clients whom they do not know are defrauding others.