The recent Fifth Circuit decision in Janvey v. The Golf Channel, Inc. ("Golf Channel") reminds us again that sometimes, despite our best efforts, bad things happen to good people. In that case, the Golf Channel learned a painful lesson arising out of its innocent involvement with Stanford International Bank, Ltd.
For nearly two decades, Stanford had operated a multi-billion dollar Ponzi scheme. To sustain the scheme, Stanford promised investors exceptionally high rates of return on certificates of deposit, and sold these investments through advisors employed at its affiliated entities. Some early investors received the promised return 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 therefore became a title sponsor of the Stanford St. Jude's Championship, an annual PGA golf tournament held in Memphis, Tennessee.
Golf Channel's Relationship with Stanford. After hearing of Stanford's sponsorship, The Golf Channel, Inc., which broadcast the tournament, offered Stanford an advertising package to augment Stanford's marketing efforts. To that end, Stanford entered into a two-year agreement with Golf Channel for a range of marketing services, including commercial airtime, live coverage of the Stanford St. Jude's Championship, display of the Stanford logo throughout the event, promotion of Stanford as the sponsor of the tournament, various updates, and identification of Stanford as a sponsor of Golf Channel's coverage of the U.S. Open.
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. A receiver (Ralph S. Janvey) was subsequently appointed. In the process of investigating Stanford's accounts, the receiver discovered the payments to Golf Channel.
Golf Channel Sued for Fraudulent Conveyance. In 2011, the receiver sued Golf Channel under the Texas Uniform Fraudulent Transfer Act (TUFTA) to recover approximately $5.9 million in payments. Golf Channel subsequently filed a motion for summary judgment, arguing that it received the payments in good faith and in exchange for "reasonably equivalent value," in the form of the market value of advertising on the Golf Channel. The District Court agreed with Golf Channel and granted summary judgment, explaining, "Golf Channel looks more like an innocent trade creditor than a salesman for perpetrating and extending the Stanford Ponzi scheme."
Unfortunately for Golf Channel, on appeal the Court of Appeals for the Fifth Circuit reversed the District Court's judgment and rendered judgment in favor of the receiver, Janvey. "Unfair," one might say. Perhaps. But as we shall see, the Fifth Circuit's decision supports one of the fundamental purposes of fraudulent transfer law – that being the assurance of fair and equal treatment of all creditors of an insolvent company.
What Happened to "Reasonably Equivalent Value"? Fraudulent transfer laws such as TUFTA, and its Bankruptcy Code equivalent found in Section 548 of the Bankruptcy Code, were enacted to protect creditors against depletion of a debtor's estate. To that end, fraudulent transfer statutes allow creditors to void fraudulent transfers made by a debtor, and force the recipient of those transfers to return the transfer to the debtor's estate. A transfer is generally thought to be actually fraudulent if made "with actual intent to hinder, delay or defraud any creditor of the debtor."
Still, TUFTA provides an affirmative defense that a transferee may use to prevent avoidance of a transfer. Thus, even if a transfer is actually fraudulent, a transfer cannot be voided if the transferee proves two conjunctive elements -- first, that it took the transfer in good faith, and second, that in return for the transfer the transferee gave the debtor some form of "reasonably equivalent value." Some form of the "reasonably equivalent value" defense is found in most, if not all, fraudulent transfer statutes, including under the Bankruptcy Code.
In Golf Channel, there was no dispute that the Golf Channel took Stanford's money in good faith, as there was simply no evidence the Golf Channel was aware that