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Texas Supreme Court: Arm’s Length Transactions Made in Ordinary Course is Reasonably Equivalent Irrespective of a Ponzi Scheme

Janvey v. Golf Channel, Inc., No. 15-0489, 2016 Tex. LEXIS 241 (Apr. 1, 2016)

April 1, 2016, Texas – R. Allen Stanford perpetrated a multi-billion dollar Ponzi scheme through Debtor Stanford International Bank Limited (Stanford), which sold fraudulent high yield certificates of deposit to innocent investors. Defendant Golf Channel entered into a two-year agreement with Stanford to provide media-advertising services. In exchange for its services, Golf Channel received $5.9 million. Three years after the services contract expired, the Court-appointed a Receiver, who sued Golf Channel to recover all the money Stanford paid under the media-advertising agreement, alleging the payments were made with intent to defraud Stanford’s creditors. Golf Channel argued the transfer was not voidable because it took Stanford’s contract payments in good faith and in exchange for reasonably equivalent value. The Receiver alleged that Golf Channel’s affirmative defense failed as a matter of law because advertising services that further a Ponzi scheme and produce no tangible estate asset have zero value.

The District Court agreed that fraudulent intent was conclusively established because Stanford operated a Ponzi scheme, but still granted summary judgment for the Defendant on its affirmative defense. Citing TUFTA’s definition of reasonably equivalent value, the Court opined that, if Golf Channel’s services provided any value, the exchange of value was reasonably equivalent even when a Ponzi scheme was involved because the transaction was at arm’s length, in good faith, at fair market value, and in the ordinary course of business.

On appeal, the Fifth Circuit initially reversed and rendered judgment in the Receiver’s favor. The Court declared that that the Defendant’s services provided zero value to the creditors as Stanford operated a Ponzi scheme and the expenditures for Golf Channel’s media services further depleted the assets an insolvent Debtor without conferring any reciprocal benefit for its creditors. Thus, the alleged payments were voidable.

On rehearing, the panel vacated its opinion and opined that considering TUFTA’s definitions of value and reasonably equivalent value as applied to the circumstances of the case at bar, the reasonably equivalent value requirement in section 24.009(a) of TUFTA was satisfied when the transferee fully performed an arm’s-length transaction in the ordinary course of its business at market rates. The Court concluded that the Defendant’s services were sold at fair market value in an arm’s-length transaction; had an objective value and utility from a reasonable creditor’s perspective at the time of the transaction; were carried out in the ordinary course of business and a later discovery that the Debtor was operating a Ponzi scheme did not render the exchange valueless. Hence, the alleged transfers were not voidable.