A federal appeals court has ordered The Golf Channel to repay nearly $6 million it received as payment for TV advertisement services from convicted Ponzi schemer Allen Stanford, finding that the advertisement services provided no value to Stanford's victims and thus could not defeat a court-appointed receiver's fraudulent transfer claim. While the lower court had likened The Golf Channel ("TGC") to an "innocent trade creditor" and dismissed claims bought by the court-appointed receiver, the U.S. Court of Appeals for the Fifth Circuit ("5th Circuit") found that TGC had failed to demonstrate that the TV ad package provided value to Stanford's victims and thus was subject to recovery. The decision is likely to affect several other similar suits brought by the receiver seeking an additional $36 million in sports marketing payments.
Stanford operated Stanford International Bank, Limited ("SIB") and numerous other related entities, which pitched certificates of deposits carrying above-average rates of return to investors around the globe. Stanford employed brokers to solicit investors for the CDs, ultimately raising more than $7 billion before the scheme collapsed in 2009. Stanford was arrested and charged with operating a massive Ponzi scheme. A federal jury later convicted Stanford of multiple fraud charges, and he is currently serving a 110-year prison sentence (currently under appeal).
One of the ways Stanford sought to expand his scheme was through soliciting affluent investors through advertisements in prominent sporting events. One of these events was an annual PGA Tour event held in Memphis, Tennessee which, after Stanford's title sponsorship, would become known as the Stanford St. Jude's Championship (the "Tournament"). TGC, which had broadcast rights to the Tournament, contacted Stanford in 2006 to discuss whether he would be interested in purchasing an advertising package to enhance his advertising efforts. Later in 2006, Stanford entered into a two-year agreement with TGC that included a panoply of advertising services including commercial airtime, live coverage of the Tournament featuring messages touting Stanford's charitable contributions and products, display of the Stanford logo, and promotion of Stanford throughout the network. Over the course of this relationship with TGC, Stanford paid approximately $5.9 million for these advertising services.
The court-appointed receiver for SIB, Ralph Janvey, sued TGC in 2011, alleging that the $5.9 million paid for the advertising services was a fraudulent transfer recoverable for the benefit of Stanford's victims. Under the Texas Uniform Fraudulent Transfer Act ("TUFTA"), a transfer is recoverable if made with the actual intent to hinder, delay, or defraud any creditor of the debtor. TUFTA allows a complete defense to any claims if the transferee can demonstrate both that (a) it took the transfer in good faith, and (b) in return for the transfer, it provided reasonably equivalent value to the debtor.
Under well-established caselaw, courts have found that the fraudulent intent required by TUFTA can be satisfied upon the showing that the debtor was operating a Ponzi scheme. This principle, known as the "Ponzi scheme presumption," obviates the need for any future analysis as to the transferor's intent, and shifts the focus to the transferee's ability to satisfy the affirmative defenses provided under TUFTA.
While it was uncontested that TGC received the transfers from Stanford in good faith, the parties disagreed as to whether TGC provided reasonably equivalent value in exchange that would satisfy TUFTA. TUFTA defines value as:
property transferred or an antecedent debt secured or satisfied, but value does not include an unperformed promise made otherwise than in the ordinary course of the promisor’s business to furnish support to the debtor or another person.
A crucial distinction rests in recognizing the correct viewpoint from which to measure value. While a transferee unsurprisingly argues that value should be analyzed from the vantage point of a buyer in the marketplace, courts instead recognize that the correct analysis focuses on whether the debtor's creditors - Stanford's victims - received value for the transfer. As the court remarked, the primary consideration was the "degree to which the transferor's net worth was preserved."
Notably, the Fifth Circuit insinuated that the outcome of the case might have been different had TGC put forth any evidence showing that its services "preserved the value of Stanford's estate or had any utility from the creditors' perspective." Rather, TGC only attempted to demonstrate the market value of its services - a strategy that wholly ignores the focal thrust of a TUFTA analysis. Given that the burden shifts from the transferor to the transferee once intent is established, TGC's failure to present evidence to carry this burden was fatal to its case. Concluding that TGC's services had no value to creditors of a Ponzi scheme and declining the invitation to carve out an exception to trade creditors, the Fifth Circuit reversed the lower court's decision and directed that judgment be entered in favor of the Receiver.
The outcome is noteworthy for several reasons. First, it reinforces the principle that a transferee's status as a trade creditor does not simply absolve it from future liability under a fraudulent transfer claim. Like any creditor, a trade creditor whose services either furthered the scheme or which provided no value to scheme victims cannot demonstrate reasonably equivalent value. Second, the outcome bodes well for the Stanford receiver's similar suits seeking $36 million from multiple sports marketing firms that were on hold pending the outcome of the TGC suit. Third, the holding should also encourage receivers to take a hard look at trade creditors that provided services to a Ponzi scheme, especially services intended to promote or tout the scheme such as advertising, sponsorships, and even charitable contributions.
A copy of the Opinion is below: