In some good news for commercial vendors, the Supreme Court of Texas recently ruled that payments for ordinary services provided to an insolvent customer are not recoverable as fraudulent transfers, even if the customer turns out to be a “Ponzi scheme” instead of a legitimate business.
In Janvey v. Golf Channel, Inc.,[1] the Court considered whether, under the Texas Uniform Fraudulent Transfer Act (“TUFTA”), a vendor should be required to return payments it received in good faith for services rendered simply because its customer turned out to be a Ponzi scheme and not a lawful business.[2] Ultimately, the Court determined that the objective market value of services provided in the ordinary course of business serves as a defense to a fraudulent transfer claim, despite the illegitimate nature of the Ponzi scheme. In reaching that conclusion, the Court rejected the contention that the value provided must flow directly to the Ponzi scheme’s creditors.
A quick refresher on fraudulent transfers: The Uniform Fraudulent Transfer Act (and its bankruptcy counterpart, Section 548 of the Bankruptcy Code) prevents a debtor from improperly moving assets beyond the reach of creditors. As one example relevant to the Janvey case, an asset may be recovered for the benefit of creditors if the debtor transferred it “with actual intent to hinder, delay, or defraud” creditors, unless the transferee took the asset in good faith and for reasonably equivalent value. Factors indicating fraudulent intent include transfers to insiders, concealment of the transfer, or debtor-retained control of an asset after the transfer, all of which are questions of fact.
When a Ponzi scheme is involved, courts generally bypass analyzing such “badges of fraud” and conclusively presume that all transfers in furtherance of the scheme—even to legitimate creditors with no role in the fraud—are made with actual intent to defraud because the underlying business is inherently illegal and insolvent. In addition, the nature of the Ponzi scheme raises doubts about a vendor’s normal defense that it provided value, because the “value” the vendor provided does not necessarily improve the position of the scheme’s creditors – it actually unwittingly allows the illusion of the Ponzi scheme continue, keeping the scheme afloat to defraud other investors. Indeed, this was the position the United States Court of Appeals for the Fifth Circuit took in Janvey before vacating its initial opinion and...
