jpm amicus (1)

505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

NO. 15-0489 IN THE SUPREME COURT OF TEXAS

RALPH S. JANVEY, in his Capacity as Court-Appointed Receiver

for the Stanford International Bank, Limited, et al.;

OFFICIAL STANFORD INVESTORS COMMITTEE;

Plaintiffs-Appellants,

vs.

THE GOLF CHANNEL, INCORPORATED;

TGC, L.L.C., doing business as Golf Channel,

Defendants-Appellees.

Certified Question from the United States Court of Appeals for the Fifth Circuit

Case No. 13-11305

BRIEF OF AMICUS CURIAE JPMORGAN CHASE BANK,

NATIONAL ASSOCIATION, IN SUPPORT OF APPELLEES

David J. Woll (pro hac vice pending)

Email: [email protected]

Isaac Rethy (pro hac vice pending)


SIMPSON THACHER & BARTLETT LLP

425 Lexington Avenue

New York, NY 10017-3954

(212) 455-2000

Fax: (212) 455-2502

James J. White (pro hac vice pending)


UNIVERSITY OF MICHIGAN LAW SCHOOL

625 South State Street

Ann Arbor, MI 48109-1215

(734) 764-9325

Mary Angela Jenkins

Texas Bar No. 24008612


Daren Wayne Perkins



JPMORGAN CHASE BANK, N.A.

700 North Pearl Street, 15th Floor

Dallas, TX 75265

(214) 965-3778

Fax: (214) 965-4024

Attorneys for Amicus Curiae

JPMorgan Chase Bank, N.A.

i

TABLE OF CONTENTS

TABLE OF AUTHORITIES .................................................................................... ii

STATEMENT OF INTEREST .................................................................................. 1

CERTIFIED QUESTION .......................................................................................... 2

SUMMARY OF THE ARGUMENT ........................................................................ 2

BACKGROUND ....................................................................................................... 7

ARGUMENT ............................................................................................................. 9

I. THE FIFTH CIRCUIT’S PONZI SCHEME JURISPRUDENCE IS

CONTRARY TO TUFTA ............................................................................... 9

A. Fraudulent Transfer Claims Are Not Fraud Claims ............................ 10

B. The Fifth Circuit’s Ponzi Scheme Jurisprudence Is Unsupported

By Persuasive Authority ...................................................................... 20

C. The Fifth Circuit’s Conclusive Presumption Of Fraudulent

Intent Is Inconsistent With TUFTA .................................................... 27

1. TUFTA Rejects Presumptions Of Intent .................................. 27

2. TUFTA Imposes Liability On A Transaction-By-

Transaction Basis ...................................................................... 29

3. The Presumption Of Fraudulent Intent Is Bad Public

Policy......................................................................................... 32

II. ARM’S LENGTH TRANSACTIONS AT MARKET RATES

PROVIDE VALUE UNDER SECTION 24.009(a) ...................................... 33

CONCLUSION ........................................................................................................ 42

CERTIFICATE OF SERVICE ................................................................................ 44

CERTIFICATE OF COMPLIANCE ....................................................................... 45

ii

TABLE OF AUTHORITIES

Cases

Allard v. Flamingo Hilton (In re Chomakos),

69 F.3d 769 (6th Cir. 1995) ...............................................................................41

Am. Cancer Soc’y v. Cook,

675 F.3d 524 (5th Cir. 2012) .............................................................................29

B.E.L.T., Inc. v. Wachovia Corp., 403 F.3d 474 (7th Cir. 2005) ...................................................................... 17, 31

Badger State Bank v. Taylor,

688 N.W.2d 439 (Wis. 2004) .............................................................................37

Balaber-Strauss v. Sixty Five Brokers (In re Churchill Mortg. Inv. Corp.), 256 B.R. 664 (Bankr. S.D.N.Y. 2000) ..............................................................24

Bank of Am., N.A. v. Kapila (In re Pearlman),

478 B.R. 448 (M.D. Fla. 2012) ............................................................................ 9

Bear, Stearns Sec. Corp. v. Gredd (In re Manhattan Inv. Fund, Ltd.),

397 B.R. 1 (S.D.N.Y. 2007) ................................................................... 9, 25, 30

BFP v. Resolution Trust Corp., 511 U.S. 531 (1994) ...........................................................................................35

Boston Trading Group v. Burnazos,

835 F.2d 1504 (1st Cir. 1987) ............................................................... 15, 16, 33

Bowman v. El Paso CGP Co., LLC,

431 S.W.3d 781 (Tex. App.—Houston [14th Dist.] 2014, pet. denied) ............27

Breeden v. Ne. Binding Sys. (In re Bennett Funding Grp., Inc.),

253 B.R. 316 (Bankr. N.D.N.Y. 2000) ..............................................................22

Brennan v. Slone (In re Fisher),

296 F. Appx. 494 (6th Cir. 2008) ......................................................................22

Carney v. Lopez,

933 F. Supp. 2d 365 (D. Conn. 2013) ................................................................31

iii

Christians v. Crystal Evangelical Free Church (In re Young),

152 B.R. 939 (D. Minn. 1993) ...........................................................................36

Cunningham v. Brown,

265 U.S. 1 (1924) ...............................................................................................26

Cuthill v. Greenmark, LLC (In re World Vision Entm’t, Inc.), 275 B.R. 641 (Bankr. M.D. Fla. 2002) ..............................................................24

Davis v. Schwartz,

155 U.S. 631 (1895) ...........................................................................................19

Englert v. Englert, 881 S.W.2d 517 (Tex. App.—Amarillo 1994, no writ) ....................... 12, 28, 41

Equip. Acquisition Res., Inc. v. PlainsCapital Leasing, LLC

(In re Equip. Acquisition Res., Inc.), 502 B.R. 784 (Bankr. N.D. Ill. 2013) ................................................................30

Finn v. Alliance Bank,

860 N.W.2d 638 (Minn. 2015) .................................................................. passim

Firmani v. Firmani,

752 A.2d 854 (N.J. Super. Ct. App. Div. 2000) ................................................39

G.M. Houser, Inc. v. Rodgers,

204 S.W.3d 836 (Tex. App.—Dallas 2006, no pet.) .........................................19

Given v. Taylor, Hart & Co., 6 Tex. 315 (1851) ...............................................................................................42

Hawes v. Cent. Tex. Prod. Credit Ass’n,

503 S.W.2d 234 (Tex. 1973) .............................................................................11

Hayes v. Palm Seedlings Partners-A

(In re Agric. Research & Tech. Grp., Inc.), 916 F.2d 528 (9th Cir. 1990) .............................................................................22

Henry v. Lehman Commercial Paper, Inc.

(In re First Alliance Mortgage Co.), 471 F.3d 977 (9th Cir. 2006) ...................................................................... 14, 15

iv

Higgs v. Amarillo Postal Emps. Credit Union,

358 S.W.2d 761 (Tex. App.—Amarillo 1962, no writ) ....................................28

Hinsley v. Boudloche (In re Hinsley),

201 F.3d 638 (5th Cir. 2000) ...................................................................... 35, 39

Image Masters, Inc. v. Chase Home Fin., 489 B.R. 375 (E.D. Pa. 2013) ............................................................................31

In re Gen. Agents Ins. Co. of Am., Inc., 224 S.W.3d 806 (Tex. App.—Houston [14th Dist.] 2007, no pet.) ..................12

In re Petters Co., Inc., 495 B.R. 887 (Bankr. D. Minn. 2013) ...............................................................24

In re Yotis,

518 B.R. 481 (Bankr. N.D. Ill. 2014) ................................................................38

Ingalls v. SMTC Corp. (In re SMTC Mfg. of Texas),

421 B.R. 251 (Bankr. W.D. Tex. 2009) .............................................................18

Janvey v. Alguire,

647 F.3d 585 (5th Cir. 2011) .............................................................................27

Janvey v. Brown,

767 F.3d 430 (5th Cir. 2014) .................................................................... 7, 8, 27

Janvey v. Democratic Senatorial Campaign Comm., Inc., 712 F.3d 185 (5th Cir. 2013) ............................................................................... 8

Janvey v. The Golf Channel, Inc., 780 F.3d 641 (5th Cir. 2015) ................................................................ 2, 5, 9, 34

Janvey v. The Golf Channel, Inc.,

792 F.3d 539 (5th Cir. 2015) ..................................................................... passim

Kapila v. TD Bank, N.A. (In re Pearlman),

460 B.R. 306 (Bankr. M.D. Fla. 2011) ..............................................................24

KCM Fin. LLC v. Bradshaw,

457 S.W.3d 70 (Tex. 2015) ...............................................................................10

v

Klein v. Cornelius,

786 F.3d 1310 (10th Cir. 2015) .................................................................. 36, 37

Klein v. Weidner,

729 F.3d 280 (3d Cir. 2013) ..............................................................................38

Lippe v. Bairnco Corp., 249 F. Supp. 2d 357 (S.D.N.Y. 2003) ...............................................................19

Martino v. Edison Worldwide Capital (In re Randy),

189 B.R. 425 (N.D. I11. 1995) ..........................................................................23

Maxwell v. KPMG LLP,

520 F.3d 713 (7th Cir. 2008) .............................................................................33

Merrill v. Abbott (In re Indep. Clearing House Co.), 77 B.R. 843 (D. Utah 1987) ...............................................................................21

Nobles v. Marcus,

533 S.W.2d 923 (Tex. 1976) .............................................................................12

Quilling v. Schonsky,

247 Fed. Appx. 583 (5th Cir. 2007)...................................................................26

Roland v. United States,

838 F.2d 1400 (5th Cir. 1988) ...........................................................................18

Samson v. U.S. W. Commc’ns, Inc. (In re Grigonis),

208 B.R. 950 (Bankr. D. Mont. 1997) ...............................................................40

Scholes v. Lehmann,

56 F.3d 750 (7th Cir. 1995) ...............................................................................25

SEC v. Mgmt. Solutions, Inc.,

No. 11 Civ. 1165, 2013 WL 4501088 (D. Utah Aug. 22, 2013) .......................30

SEC v. Res. Dev. Int’l, LLC,

487 F.3d 295 (5th Cir. 2007) ...................................................................... 26, 37

Sender v. Heggland Family Trust (In re Hedged-Inv. Assocs., Inc.), 48 F.3d 470 (10th Cir. 1995) .............................................................................22

vi

Sharp Int’l Corp. v. State St. Bank & Trust Co. (In re Sharp Int’l Corp.),

281 B.R. 506 (Bankr. E.D.N.Y. 2002) ..............................................................31

Sharp Int’l Corp. v. State St. Bank & Trust Co. (In re Sharp Int’l Corp.), 403 F.3d 43 (2d Cir. 2005) ......................................................................... 16, 31

Solow v. Reinhardt (In re First Commercial Mgmt. Group),

279 B.R. 230 (Bankr. N.D. Ill. 2002) ................................................................23

Stanley v. U.S. Bank Nat’l Ass’n (In re TransTexas Gas Corp.),

597 F.3d 298 (5th Cir. 2010) ...................................................................... 35, 39

United States v. Dyer,

216 F.3d 568 (7th Cir. 2000) .............................................................................25

United States v. Fernon,

640 F.2d 609 (5th Cir. 1981) .............................................................................18

United States v. Stanford,

--- F.3d ----, 2015 WL 6742682 (5th Cir. Oct. 29, 2015) .................................... 7

United States. v. Hartstein,

500 F.3d 790 (8th Cir. 2007) .............................................................................30

Walker v. Anderson,

232 S.W.3d 899 (Tex. App.—Dallas 2007, no pet.) .........................................19

Walker v. Treadwell (In re Treadwell), 699 F.2d 1050 (11th Cir. 1983) .........................................................................36

Warfield v. Byron,

436 F.3d 551 (5th Cir. 2006) .................................................................. 9, 25, 39

Wiand v. Lee,

753 F.3d 1194 (11th Cir. 2014) .........................................................................26

Wider v. Wootton,

907 F.2d 570 (5th Cir. 1990) .............................................................................22

Zahra Spiritual Trust v. United States,

910 F.2d 240 (5th Cir. 1990) .............................................................................36

vii

Statutes and Rules

11 U.S.C. § 547(c)(2) ...............................................................................................22

11 U.S.C. § 548 ........................................................................................................41

11 U.S.C. § 548(c) ...................................................................................................37

TEX. BUS & COMM. CODE ANN. § 24.005(b)(1) .......................................................19

TEX. BUS & COMM. CODE ANN. § 24.005(b)(11) .....................................................19

TEX. BUS & COMM. CODE ANN. 24.006 ...................................................... 10, 20, 34

TEX. BUS & COMM. CODE ANN.§ 24.005(a)(1) ........................................... 10, 20, 34

TEX. BUS & COMM. CODE ANN.§ 24.005(b) ............................................................10

TEX. BUS & COMM. CODE ANN.§§ 24.005(a)(2) ......................................... 10, 20, 34

UNIF. FRAUDULENT CONVEYANCE ACT ....................................................................28

UNIF. FRAUDULENT TRANSFER ACT ................................................................. passim

UNIF. VOIDABLE TRANSACTIONS ACT ......................................................... 12, 13, 28

Other Authorities

Bruce J. Borrus,

Recent Developments in Fraudulent Transfer Cases Arising out of Ponzi Schemes (2015) ........................................................................................... 20, 26

Jared Wilkerson,

Investors and Employees as Relief Defendants in Investment Fraud

Receiverships: Promoting Efficiency By Following the Plain Meaning of

“Legitimate Claim or Ownership Interest”,

3 Fin. Fraud L. Rep. 243, (Mar. 2011) ................................................................. 8

Jason B. Hirsh,

Golf is a Crazy Game, Comm. Bankr. Litig. (Mar. 13, 2015) ............................ 5

viii

Kenneth C. Kettering,

The Uniform Voidable Transactions Act; or, the 2014 Amendments to

the Uniform Fraudulent Transfer Act, 70 Bus. Law. 777 (2015) ........................................................................... passim

Orlando F. Bump,

FRAUDULENT CONVEYANCES § 20 (4th ed. 1896) .............................................17

Richard F. Doyle, Jr. & Vernon Teofan,

The Nonuniform Texas “Uniform” Fraudulent Transfer Act,

42 Sw. L.J. 1029 (1989) .....................................................................................11

U.S.A. TODAY,

Lawyer wants 34% of money recovered in Stanford case (Aug. 14, 2009) ........ 8

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STATEMENT OF INTEREST

JPMorgan Chase Bank, N.A. (“JPMorgan Chase Bank”) is a national bank

chartered under the National Bank Act and a subsidiary of JPMorgan Chase & Co.

(“JPMorgan Chase”), a leading global financial services firm and one of the largest

banking institutions in the United States.1 JPMorgan Chase is one of the nation’s

leading providers of commercial and consumer credit and banking services. The

ability of JPMorgan Chase and other lenders to extend business credit at

reasonable terms depends in large part on the stability and predictability of the

application of state and federal laws governing the creditor/debtor relationship.

As such, JPMorgan Chase has a compelling interest in the resolution of the

important issues of fraudulent transfer law that will be impacted by this Court’s

determination of the question of Texas law certified by the United States Court of

Appeals for the Fifth Circuit. Fraudulent transfer laws are valuable creditor-

protection tools when they are properly applied so as to prevent debtors from

improperly sheltering their assets or otherwise placing their assets beyond the

reach of creditors. However, the Fifth Circuit panel’s application of the Texas

Uniform Fraudulent Transfer Act (“TUFTA”) in this case turns fraudulent transfer

law on its head. If allowed to stand, the panel’s interpretation of TUFTA will

1 Pursuant to Rule 11(c) of the Texas Rules of Appellate Procedure, JPMorgan Chase Bank

certifies that no other person or entity contributed monetarily towards the preparation or

submission of this brief.

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result in significant commercial uncertainty and manifestly unfair outcomes by

transforming many ordinary-course, arms-length, market-price transactions into

voidable transfers.

CERTIFIED QUESTION

Considering the definition of “value” in section 24.004(a)

of the Texas Business and Commerce Code, the

definition of “reasonably equivalent value” in section

24.004(d) of the Texas Business and Commerce Code,

and the comment in the Uniform Fraudulent Transfer Act

stating that “value” is measured “from a creditor’s

viewpoint,” what showing of “value” under TUFTA is

sufficient for a transferee to prove the elements of the

affirmative defense under section 24.009(a) of the Texas

Business and Commerce Code?

SUMMARY OF THE ARGUMENT

In rendering summary judgment against Golf Channel, the Fifth Circuit held

that (1) Stanford’s purchase of TV advertising services at a market rate constituted

an intentional fraudulent transfer under TUFTA because Stanford was engaged in a

Ponzi scheme, and (2) the advertising services Golf Channel provided had no value

under TUFTA because they did not generate an asset that Stanford’s creditors

could use to satisfy their claims. See Janvey v. The Golf Channel, Inc., 780 F.3d

641 (5th Cir. 2015) (“Golf Channel I”). On rehearing, the Fifth Circuit vacated

Golf Channel I and sought this Court’s input on the second holding via certified

question. See Janvey v. The Golf Channel, Inc., 792 F.3d 539 (5th Cir. 2015)

(“Golf Channel II”). The Fifth Circuit did not expressly certify a question as to its

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first holding, which, broadly applied, would make every transfer of any kind by an

entity that operates a Ponzi scheme an intentional fraudulent transfer under

TUFTA as a matter of law. Nonetheless, the Fifth Circuit “disclaim[ed] any

intention or desire that the Supreme Court of Texas confine its reply to the precise

form or scope of the question certified.” Golf Channel II, 792 F.3d at 547.

Accordingly, although the Fifth Circuit did not specifically certify a question

with respect to the Golf Channel I panel’s conclusion that all transfers of any kind

made by a Ponzi scheme perpetrator are intentional fraudulent transfers, the

certified question concerning the establishment of “value” under TUFTA would

not even arise absent the conclusive Ponzi scheme presumptions applied in Golf

Channel I. The history and purpose of TUFTA does not permit the conclusion that

receiving payment for TV advertising in an arms-length transaction at market rates

could be a fraudulent transfer. Only through adoption of a judicially-created

presumption—that all transfers by a debtor deemed to be engaged in Ponzi scheme

activities are intentional fraudulent transfers—could the Golf Channel I panel even

begin to question whether the market-value advertising payments received by

defendant were “for value.” Thus, an understanding of the Fifth Circuit’s Ponzi

scheme jurisprudence provides crucial context for this Court’s review of the instant

certified question.

4 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

The conclusive presumption applied by the Golf Channel I panel that all

transfers by an entity operating a Ponzi scheme are by definition intentional

fraudulent transfers is not a correct statement of Texas law. It has no basis in

TUFTA’s statutory text, misapprehends the purposes of fraudulent transfer law,

and has never been endorsed by a Texas court. Without this presumption, the

Receiver’s case would have been dismissed on the pleadings, because under

longstanding principles of fraudulent transfer law, a debtor’s purchase of goods or

services in an arms-length transaction and at a reasonable market rate is not an

intentional fraudulent transfer—regardless of whether the debtor is generally

engaged in fraud or uses the fruits of the transaction in a manner that somehow

deepens its insolvency. Application of this presumption eliminated the Receiver’s

burden of actually pleading and proving its prima facie case, and immediately

shifted the burden to Golf Channel to satisfy TUFTA’s statutory affirmative

defense for transferees who take in good faith and for value. Nothing in TUFTA

suggests that this wholesale elimination of the plaintiff’s burden of proof is

appropriate.

The Fifth Circuit’s TUFTA jurisprudence has “stomach-curdling”

implications.2 In Golf Channel I, the Fifth Circuit expressed the view that

2 See Jason B. Hirsh, Golf is a Crazy Game, Comm. Bankr. Litig. (Mar. 13, 2015), available at

http://commercialbankruptcylitigation.com/articles/ralph-janvey-as-receiver-for-stanford-

5 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

payments to the “electricity provider” of “a debtor engaged in a Ponzi scheme”

would constitute intentional fraudulent transfers, and that the electricity provider

would have to “put[ ] on evidence that its services helped preserve the building in

which the debtor operated, preventing the building’s deterioration to the benefit of

the debtors’ creditors” in order to retain the debtor’s payments on its electric bills.

780 F.3d at 646 n.7. This Court’s resolution of the Fifth Circuit’s certified

question will determine whether Texas utility providers will actually, as Golf

Channel I held and as the Receiver contends, have to retain electrical engineers as

expert witnesses to avoid having their customers’ bill payments clawed back, or

whether they will merely be required to demonstrate that they charged market rates

for their services. The latter answer is obviously correct. More basically, this

hypothetical suit against an electric company (and the real suit against the Golf

Channel) should have been dismissed on the pleadings as a matter of law, and

should not have reached the summary judgment stage based on a set of judge-made

conclusive presumptions with no basis in TUFTA.

The Ponzi scheme jurisprudence that has been developed by the federal

courts in recent decades, and that was adopted and applied by the Golf Channel I

panel, is mistaken. It misapprehends the purpose and history of fraudulent transfer

international-bank-v-the-golf-channel (describing Golf Channel I as a “stomach curdling

decision”).

6 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

law by focusing not on the specific challenged transactions but on the debtor-

transferor’s general business practices, thereby blurring the important distinctions

between the law of “fraudulent transfers” and the law of “fraud.” This

jurisprudence also leads to dramatically different outcomes based on arbitrary

judicial determinations of whether a particular debtor’s operations constituted a

“Ponzi scheme,” a phrase that has no clear definition and is nowhere mentioned in

TUFTA.

The validity of this jurisprudence as a matter of state law had never been

presented to a state supreme court until this past year. In that case, the Minnesota

Supreme Court resoundingly rejected each aspect of the doctrines espoused in Golf

Channel I and II as inconsistent with the Uniform Fraudulent Transfer Act, the

same uniform law enacted by the Texas legislature as TUFTA. See Finn v.

Alliance Bank, 860 N.W.2d 638, 642 (Minn. 2015) (rejecting each “component of

the Ponzi-scheme presumption” as inconsistent with the Minnesota Uniform

Fraudulent Transfer Act). This Court should do so as well.

Finally, the Receiver’s claim that the Golf Channel’s provision of TV

advertising had no value because it did not increase the value of Stanford’s estate

is meritless. This argument suffers from the same misplaced focus on the overall

character of Stanford’s business, rather than on the specific transactions at issue.

Like the doctrines above, such a conception of value has no basis in the statutory

7 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

text or in case law. There is no statutory “Ponzi scheme exception” to the ordinary

rules for assessing the provision of value, and this Court should not create one in

this case.

BACKGROUND

Golf Channel sold advertising time in what was undisputedly an arms-

length, market rate transaction. The parties who purchased the advertising were

companies controlled by R. Allen Stanford, which “sold certificates of deposit

(‘CDs’) to investors” that “promised investors extraordinarily high rates of return.”

Janvey v. Brown, 767 F.3d 430, 433 (5th Cir. 2014). Stanford claimed that

investors’ funds would be invested in high-quality securities, but “instead of

actually investing the money raised by selling these CDs, Stanford used the money

to pay prior investors their promised returns.” Id. In other words, Stanford was

running what is commonly understood to be a “Ponzi scheme,” which collapsed in

early 2009. Id. Stanford was tried and convicted of mail and wire fraud, money

laundering, and related conspiracy charges and sentenced to 110 years in prison.

See United States v. Stanford, --- F.3d ----, 2015 WL 6742682, at *1 (5th Cir. Oct.

29, 2015). The Fifth Circuit recently affirmed Stanford’s conviction. See id.

When Stanford’s scheme collapsed, the Stanford entities were put into

receivership, and plaintiff Ralph Janvey (the “Receiver”) was appointed as receiver

by the Securities and Exchange Commission (“SEC”). The Receiver filed

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numerous fraudulent transfer suits against parties who dealt with Stanford. Many

of these were CD investors “who received back their principal, as well as supposed

interest on this principal.” Brown, 767 F.3d at 434.3 The Receiver also sued

creditors such as Golf Channel which did not invest in Stanford’s fraudulent CDs,

but rather provided commercial services to Stanford. The Receiver’s suits

principally asserted state-law fraudulent transfer claims, but were brought in

federal court; federal jurisdiction arose from the federal receivership statutes and

the federal courts’ supplemental jurisdiction. See Janvey v. Democratic Senatorial

Campaign Comm., Inc., 712 F.3d 185, 202 n.3 (5th Cir. 2013).

The Receiver argued, and the Fifth Circuit agreed, that the Texas Uniform

Fraudulent Transfer Act (“TUFTA”) governs the Receiver’s fraudulent transfer

claims because “the Ponzi scheme was operated out of Texas, the Receiver is in

Texas, many of the Stanford entities are in Texas, and some of the defrauded

creditors and [defendants] are Texan,” and therefore Texas has the greatest interest

in the disputes. Brown, 767 F.3d at 436; see also Golf Channel I, 780 F.3d at 643

3 The receiver—against the wishes of the SEC—first attempted to recover investor funds by

naming investors as “relief defendants” and seeking disgorgement of all CD proceeds. The Fifth

Circuit rejected this theory of recovery in Janvey v. Adams, leading the receiver to commence

suits against investors under fraudulent transfer statutes. See generally Brief of Sec. & Exch.

Comm’n as Amicus Curiae in support of Appellees, Janvey v. Adams, Nos. 09-10761, 09-10765

(5th Cir. 2009), available at 2009 WL 6338943; Jared Wilkerson, Investors and Employees as

Relief Defendants in Investment Fraud Receiverships: Promoting Efficiency By Following the

Plain Meaning of “Legitimate Claim or Ownership Interest” 3 Fin. Fraud L. Rep. 243 (Mar.

2011); U.S.A. TODAY, Lawyer wants 34% of money recovered in Stanford case (Aug. 14, 2009),

available at http://usatoday.com/money/industries/brokerage/2009-08-14-stanford-

attorney_N.htm.

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n.3 (finding Texas law applicable in the instant case). Prior to certification of the

instant question of Texas law to this Court, however, this litigation has proceeded

with only minimal reference to Texas law, and has instead been resolved based on

federal cases applying judge-made rules arising out of Ponzi schemes; these rules

which are often referred to collectively as the “Ponzi scheme presumption.”4

ARGUMENT

I. THE FIFTH CIRCUIT’S PONZI SCHEME JURISPRUDENCE IS

CONTRARY TO TUFTA

The Fifth Circuit first adopted the rule that every transfer made by a person

engaged in a Ponzi scheme is an intentional fraudulent transfer in 2006, see

Warfield v. Byron, 436 F.3d 551 (5th Cir. 2006), and has since applied it a number

of times, including in the instant action. See Golf Channel II, 792 F.3d at 543 (“In

this circuit, proving that a transferor operated as a Ponzi scheme establishes the

fraudulent intent behind the transfers it made.”) (collecting cases).

This rule misinterprets TUFTA. First, it ignores the important distinction

between a cause of action for fraud and a cause of action for fraudulent transfer.

Second, it is unsupported by persuasive authority. Third, it arbitrarily alters the

4 See, e.g., Finn v. Alliance Bank, 860 N.W.2d 638, 642 (Minn. 2015) (addressing “the so-called

‘Ponzi-scheme presumption’ adopted by a number of federal courts”); Bank of Am., N.A. v.

Kapila (In re Pearlman), 478 B.R. 448, 451 (M.D. Fla. 2012) (discussing “the judicially-created

‘Ponzi scheme presumption’”); Bear, Stearns Sec. Corp. v. Gredd (In re Manhattan Inv. Fund,

Ltd.), 397 B.R. 1, 8 (S.D.N.Y. 2007) (describing the “general rule—known as the ‘Ponzi scheme

presumption’”).

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nature of liability under TUFTA by imposing such liability based on the

designation of a transferor’s business as a Ponzi scheme, rather than on a case-by-

case inquiry into the transaction at issue.

A. Fraudulent Transfer Claims Are Not Fraud Claims

Fraudulent transfer statutes empower courts to prevent debtors from injuring

their creditors “by placing assets beyond their reach.” KCM Fin. LLC v.

Bradshaw, 457 S.W.3d 70, 89 (Tex. 2015). The general purpose of fraudulent

transfer law is “policing conduct to the prejudice of creditors—in other words,

debtor behavior that contravenes acceptable norms of creditors’ rights.”5 There are

two basic types of fraudulent transfer claims: “actual” or “intentional” fraudulent

transfer claims, which void transactions intended to “hinder, delay, or defraud” the

transferor’s creditors (see TEX. BUS & COMM. CODE ANN. § 24.005(a)(1)) (West

2015), and “constructive” fraudulent transfers, which are transactions by an

insolvent debtor for less than reasonably equivalent value (see id. §§ 24.005(a)(2),

24.006). Intentional fraudulent transfer claims under § 24.005(a)(1) are proven by

showing a confluence of factors known as “badges of fraud,” which are listed in §

24.005(b). This case involves an “actual intent” claim under § 24.005(a)(1), but

5 Kenneth C. Kettering, The Uniform Voidable Transactions Act; or, the 2014 Amendments to

the Uniform Fraudulent Transfer Act, 70 Bus. Law. 777, 807 (2015).

11 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

rather than establishing his prima facie case through the badges of fraud analysis,

the Receiver relied on a conclusive presumption of intent in Ponzi scheme cases.

Texas’s fraudulent transfer statute, enacted in 1987, is based on the Uniform

Fraudulent Transfer Act (“UFTA”).6 The National Conference of Commissioners

on Uniform State Laws (the “Uniform Law Commission”) adopted UFTA in 1984

to supersede the Uniform Fraudulent Conveyance Act (“UFCA”), which the

Uniform Law Commission had promulgated in 1918 as a “codification of the

‘better’ decisions applying the Statute of 13 Elizabeth.”7 The Statute of 13

Elizabeth, an English statute enacted in 1571, “is traditionally referred to as the

fountainhead of American law on the subject.”8 Texas never adopted the UFCA;

its pre-TUFTA fraudulent transfer statute was “derived from an 1840 Act of the

Republic of Texas”9 which itself “closely resemble[d] the … statute of 13

Elizabeth.” Hawes v. Cent. Tex. Prod. Credit Ass’n, 503 S.W.2d 234, 236 (Tex.

1973). In its consistent fealty to the Statute of 13 Elizabeth, “fraudulent

conveyance law may be unique in its statutory continuity.”10

Indeed, the

6 See generally Richard F. Doyle, Jr. & Vernon Teofan, The Nonuniform Texas “Uniform”

Fraudulent Transfer Act, 42 Sw. L.J. 1029 (1989).

7 UNIF. FRAUDULENT TRANSFER ACT, Prefatory Note, at 1 (1984).

8 Kettering, supra note 5, at 778.

9 Doyle & Teofan, supra note 6, at 1030.

10 Kettering, supra note 5, at 777 (2015).

12 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

“primordial rule” of the modern statute “renders voidable any transfer of property

by a debtor made with ‘intent to hinder, delay, or defraud’ creditors”—a phrase

composed of “the very same words, inconsequentially reordered, that were used to

express the rule in 1571.”11

Texas courts have repeatedly pointed out that “fraudulent transfer” is a term

of art, and does not simply describe any transaction with some connection to some

sort of fraud. See, e.g., In re Gen. Agents Ins. Co. of Am., Inc., 224 S.W.3d 806,

819 (Tex. App.—Houston [14th Dist.] 2007, no pet.) (“‘Fraudulent transfer’. . . is a

statutory term of art that does not necessarily equate to the term ‘fraud.’”); Englert

v. Englert, 881 S.W.2d 517, 519 (Tex. App.—Amarillo 1994, no writ) (“Matters

involved in a cause of action for fraud are separate and distinct from those in an

action for fraudulent transfer.”); Nobles v. Marcus, 533 S.W.2d 923, 925 (Tex.

1976) (“Fraudulent conveyance requires a technical pleading that relies on specific

allegations, including one that alleges the transfer to have been a fraud against the

rights of the creditors; it is in addition to, and separate from, an action for fraud.”).

The fact that Texas courts have had to repeatedly make this point, however, is

indicative of the “confusion” that can arise from the “misleading intimation” that

“[f]raud is … a necessary element of a claim for relief under the Act.”12

It is not.

11

Id.

12 UNIF. VOIDABLE TRANSACTIONS ACT § 15 cmt. 1 (2014).

13 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

Rather, as the drafters of the recent 2014 amendments to the UFTA explain, a

fraudulent transfer claim seeks to undo “a transaction that unacceptably

contravenes norms of creditors’ rights”; such a transaction “need not bear any

resemblance to common-law fraud.”13

The risk of confusion of fraud and

fraudulent transfer concepts is most acute when courts consider fraudulent transfer

claims involving, as here, transactions by debtors whose business practices involve

civil or criminal fraud. Such debtors may well act with “intent to defraud” in the

modern sense of the term, but a transaction in which one party intends to defraud

another is not, as such, a “fraudulent transfer” under TUFTA.

Recognizing that use of the term “fraud,” while “sanctioned by historical

usage,” is “a misleading description of the [UFTA],” the Uniform Law

Commission approved revisions to the Uniform Act in 2014 which, among other

things, changed its title to the “Uniform Voidable Transactions Act.”14

In a recent

article, Kenneth C. Kettering, the Reporter for the 2014 amendments’ drafting

committee, identifies two sources of the confusion which the renaming of the law

was meant to redress. First, the identification of the transactions subject to the law

as “fraudulent” derives from Latin legal sources, in which “the root word fraus did

13

Id. § 4 cmt. 8; see also Kettering, supra note 5, at 807 (explaining that a “more correct

shorthand” for the objectives of fraudulent transfer law is prevention of “conduct to the prejudice

of creditors”). Professor James J. White, counsel to amicus curiae, served on the drafting

committee for these 2014 amendments.

14 UNIF. VOIDABLE TRANSACTIONS ACT § 15 cmt. 1.

14 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

not really mean ‘fraud,’” but rather “ ‘prejudice’ or ‘disadvantage,’” something

better understood in 1571 than today.15

Second, “[t]he nickname of the primordial

rule, ‘actual fraud,’ invites the misconception that the rule’s intent requirement

should be interpreted in a way similar to the intent requirement for a claim of

common-law fraud,” which “makes little sense as an interpretation of that language

in modern codifications of voidable transfer law.”16

Thus, “for centuries courts

applying the modern statutes or similar laws have interpreted the reference to

‘intent’ to minimize or eliminate the significance of the debtor’s mental state,”

through use of the “badges of fraud” and the “standard evidentiary presumption

that a person is presumed to intend the natural consequences of his acts.”17

In keeping with these principles, those courts that have thoroughly analyzed

the issue have recognized that a nexus to a fraudulent scheme, or the use of funds

obtained by fraud, does not render a transaction voidable under fraudulent transfer

law. For example, in Henry v. Lehman Commercial Paper, Inc. (In re First

Alliance Mortgage Co.), 471 F.3d 977 (9th Cir. 2006), the Ninth Circuit addressed

aiding and abetting fraud claims and fraudulent transfer claims brought against a

15

Kettering, supra note 5, at 807 (2015).

16 It was, however, a “sensible interpretation of the primordial rule as originally written in the

Statute of 13 Elizabeth,” because rather than creating a private right in favor of creditors, “[t]he

Statute of 13 Elizabeth was a penal statute” which “targeted the debtor who made the improper

transfer as much as the transferee who received it,” and therefore required mens rea. Id. at 809.

17 Id. at 809-10.

15 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

Lehman Brothers affiliate, which had provided financing to an insolvent mortgage

lender that had been found liable for defrauding its borrowers. The court affirmed

Lehman’s aiding and abetting liability, finding that Lehman “kn[ew] that First

Alliance loans were originated through deceptive sales procedures,” and that

“without Lehman’s financing, First Alliance would not have been able to continue

to fund its fraudulently obtained loans.” Id. at 987. The court, however, rejected

claims that loan repayments to Lehman constituted fraudulent transfers. Id. at

1009. The court reasoned that because fraudulent transfer law attempts to prevent

“scheme[s] to hide assets from creditors,” but is not generally aimed at preventing

or redressing fraud, the fact that “Lehman substantially assisted First Alliance in

fraud” did not mean that loan repayments from First Alliance to Lehman

constituted “a scheme to fraudulently transfer First Alliance assets.” Id.

Similarly, in Boston Trading Group v. Burnazos, now-Justice Breyer,

writing for the First Circuit, found that repayment of a loan using funds

fraudulently acquired from a third party did not constitute a voidable transfer. 835

F.2d 1504, 1510 (1st Cir. 1987). In so holding, the court noted “the potentially

confusing coincidence that we are dealing with a form of initial dishonesty [by the

transferor] that itself happens to be called fraud,” but recognized that no fraudulent

transfer existed because “the fraud or dishonesty in this example concerns not [the

transferor’s] transfer to the [repaid creditor] but the manner in which the original

16 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

debt [to the defrauded third party] arose.” Id. at 1510 (emphasis in original). In

so holding, the court noted that it had found “no modern case (nor any reference in

any modern case, treatise, or article to any case in the past 400 years) that has

found a fraudulent conveyance in such circumstances,” which was “not

surprising,” since “[f]raudulent conveyance law is basically concerned with

transfers that ‘hinder, delay or defraud’ creditors; it is not ordinarily concerned

with how such debts were created.” Id.

Along the same lines, Sharp Int’l Corp. v. State St. Bank & Trust Co. (In re

Sharp Int’l Corp.), involved a loan repayment by an entity engaged in widespread

fraud to a lender that “knew that the funds used to repay the [preexisting debt]

were fraudulently obtained.” 403 F.3d 43, 55 (2d Cir. 2005). The plaintiff-

appellant complained that the lower court, in dismissing its fraudulent transfer

claims, had “inappropriately focused on ‘badges of fraud’ even though the Spitzes’

fraud was so clearly established that it need not be detected by indicia.” Id. at 56.

The Second Circuit rejected the argument, finding that the fraudulent transfer

claim failed because the plaintiff “inadequately allege[d] fraud with respect to the

transaction that [plaintiff] seeks to void”—the alleged fraud related to “the manner

in which Sharp obtained new funding from the Noteholders, not Sharp’s

subsequent payment of part of the proceeds to State Street.” Id. (emphasis added).

And, rejecting a similar claim, the Seventh Circuit explained that “[b]eing paid for

17 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

services rendered” to the perpetrator of a fraud does not constitute a fraudulent

transfer. B.E.L.T., Inc. v. Wachovia Corp., 403 F.3d 474, 477 (7th Cir. 2005).

“Someone who sells a car at the market price to Charles Ponzi is entitled to keep

the money without becoming liable to Ponzi's victims for the loss created by his

scheme.” Id.

The UFTA’s drafters “include[d] most of the badges of fraud that have been

recognized by the courts in construing and applying the Statute of 13 Elizabeth and

§ 7 of the Uniform Fraudulent Conveyance Act.”18

Notably, these badges of fraud

do not include the general character of the debtor’s business, or the fact that the

debtor was engaged in a fraudulent or criminal enterprise. While the statutory list

of badges of fraud is not exclusive, debtors who engage in fraud or misconduct are

hardly uncommon; if such a badge of fraud had existed at common law, it would

either have been included as one of the UFTA’s enumerated badges of fraud, or the

drafters would have explained its exclusion.19

As the Minnesota Supreme Court

explained in Finn,

Even if there is evidence to support the inference that

Ponzi-scheme operators generally intend to defraud

investors, MUFTA does not contain a provision allowing

18

UNIF. FRAUDULENT TRANSFER ACT § 4 cmt. 5.

19 Consistent with this, an early leading commentator observed that “[a]n intent to deceive and

defraud the public” does not in and of itself demonstrate the requisite fraudulent intent for

purposes of fraudulent transfer law. Orlando F. Bump, FRAUDULENT CONVEYANCES § 20 (4th

ed. 1896).

18 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

a court to presume fraudulent intent. Instead, MUFTA

contains a list of factors, commonly referred to as

“badges of fraud,” that a court may consider to determine

whether a debtor made a transfer with an actual intent to

defraud creditors. See Minn. Stat. § 513.44(b). That “the

debtor was involved in a Ponzi scheme” is not among

them. To be sure, the list of badges of fraud is not

exclusive, see id. (stating that “consideration may be

given, among other factors, to” the badges of fraud), so a

court could consider a debtor’s operation of a Ponzi

scheme if such a fact is properly alleged and supported.

But the Legislature’s enumeration of a specific list of

badges of fraud, none of which are conclusive, precludes

an interpretation that it intended a non-enumerated badge

of fraud to be conclusive.

860 N.W.2d at 647 (emphasis in original).

When analyzed under the badges of fraud—as TUFTA instructs courts to

do—Golf Channel’s provision of TV advertising to Stanford does not constitute a

fraudulent transfer. Of the 11 statutory factors, the only one satisfied is

insolvency, and under TUFTA, “[a]s a matter of law, a finding of fraudulent intent

cannot properly be inferred from the existence of just one ‘badge of fraud.’”

Ingalls v. SMTC Corp. (In re SMTC Mfg. of Texas), 421 B.R. 251, 300 (Bankr.

W.D. Tex. 2009); see also Roland v. United States, 838 F.2d 1400, 1403 (5th Cir.

1988) (an inference of fraud is proper only when several badges are found); United

States v. Fernon, 640 F.2d 609, 613 (5th Cir. 1981) (“[O]ne badge of fraud

standing alone may amount to little more than a suspicious circumstance,

insufficient in itself to constitute fraud per se”); Walker v. Anderson, 232 S.W.3d

19 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

899, 914 (Tex. App.—Dallas 2007, no pet.) (“An individual badge of fraud is not

conclusive.”); G.M. Houser, Inc. v. Rodgers, 204 S.W.3d 836, 843 (Tex. App.—

Dallas 2006, no pet.) (same). Moreover, where the debtor’s transfer consists of a

payment in satisfaction of a valid debt, such transfer—although potentially a

preference—has never been considered a fraudulent transfer, notwithstanding the

debtor’s insolvency. See, e.g., Davis v. Schwartz, 155 U.S. 631, 640 (1895) (“We

do not understand it to have ever been doubted that a debtor may openly prefer one

creditor to the rest, and may transfer property to him, or give him security, even

after others have begun their actions.”).

In addition, under the badges of fraud analysis, the absence of the badges of

fraud negates any inference of fraudulent intent. See, e.g., Lippe v. Bairnco Corp.,

249 F. Supp. 2d 357, 375 (S.D.N.Y. 2003) (“Of course, the flip side of these

badges of fraud is that their absence . . . would constitute evidence that there was

no intent to defraud.”); UNIF. FRAUDULENT TRANSFER ACT § 4 cmt. 6, 7A U.L.A.

pt. II, at 60 (Master ed. 2006) (“In considering the [badges of fraud] … the court

may appropriately take into account all indicia negativing as well as those

suggesting fraud”). Here, Stanford’s payment to the Golf Channel for TV

advertising time was not a transfer to an insider (TEX. BUS & COMM. CODE ANN. §

24.005(b)(1), (11) ) or a sham transaction in which Stanford retained control of

ostensibly transferred property (id. § 2); it was not concealed (id. §§ 3, 7) or timed

20 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

so as to suggest that Stanford was attempting to shelter its assets from a pending

judgment or recently-incurred debt (id. §§ 4, 10); it was not a transfer of

substantially all of Stanford’s assets (id. § 5); and the payment had no relationship

to Stanford absconding or concealing assets (id. §§ 6, 7). In other words, it was an

ordinary, arm’s-length market transaction.20

B. The Fifth Circuit’s Ponzi Scheme Jurisprudence Is Unsupported

By Persuasive Authority

Entities involved in fraudulent investment schemes are often placed into

federal receivership or bankruptcy proceedings after the schemes are uncovered.

Consequently, fraudulent transfer cases arising in this context are often brought in

federal court. While the federal courts in such contexts often apply state fraudulent

transfer statutes, they generally focus primarily, if not exclusively, on other federal

decisions, rather than on state law. As one commentator recently noted, this case

“is the first federal case to seek an authoritative interpretation of UFTA, a state

statute, from the highest court of the state.”21

In the course of addressing fraudulent transfer claims in such cases, the

20

Of course, if a transaction both involves an insolvent debtor and is made for less than

reasonably equivalent value, it is voidable under the “constructive fraud” provisions of §

24.005(a)(2) and § 24.006 regardless of the transferor’s intent. Critically, however, it is the

Receiver’s burden—not Golf Channel’s—to establish lack of reasonably equivalent value under

either the intentional fraudulent transfer provisions of § 24.005(a)(1) or the constructive

fraudulent transfer provisions of § 24.005(a)(2) and § 24.006.

21 Bruce J. Borrus, Recent Developments in Fraudulent Transfer Cases Arising out of Ponzi

Schemes, at 2 (2015), available at http://www.americanbar.org/content/dam/aba/events/

business_law/2015/09/bankruptcy/materials/erosion-of-defenses-201509.authcheckdam.pdf.

21 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

federal courts have recently developed a set of rules of decision, often referred to,

as noted above, as “Ponzi scheme presumptions.” These rules are of recent

vintage, and courts that have adopted them have done so without meaningful

analysis, but have relied on tautological proclamations about the fraudulent nature

of Ponzi schemes and citations to other cases that either adopt the doctrines in

similarly conclusory fashion, or do not support the sort of categorical propositions

for which they are cited.

Modern federal Ponzi scheme fraudulent transfer jurisprudence can be traced

back to Merrill v. Abbott (In re Indep. Clearing House Co.), 77 B.R. 843, 860 (D.

Utah 1987). Independent Clearing House held that a Ponzi scheme operator,

aware that it was insolvent and that payouts to investors of “profits” at per annum

rates in excess of 95% deepened its insolvency, could be charged with “knowledge

to a substantial certainty” that such transfers would ultimately injure its investor-

creditors, and that this certain knowledge “constitutes intent in the eyes of the

law.” Id. at 860. This ruling was tethered to the facts of the particular case and the

nature of the specific challenged transactions, and did not purport to announce a

general rule about “Ponzi schemes.” It merely held that intent was established

because transfers of fictitious profits had the necessary effect of prejudicing

creditors, a result that is consistent with the focus of modern fraudulent transfer

law on creditor protection rather than the debtor’s mental state, and that is not

22 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

specific to Ponzi schemes; intent can be inferred whenever a debtor, aware of its

insolvency, knowingly makes unequal transfers that deepen its insolvency, no

matter the nature of such debtor’s business.22

Other early federal cases, relying on

Independent Clearing House, similarly allowed recovery of fictitious profits to

Ponzi scheme investors, reasoning that “knowledge that a transaction will operate

to the detriment of creditors” justifies an inference of actual intent on the part of

the transferor. E.g., Hayes v. Palm Seedlings Partners-A (In re Agric. Research &

Tech. Grp., Inc.), 916 F.2d 528, 535 (9th Cir. 1990).23

By the mid-1990s, as Ponzi scheme precedents began to accumulate, some

courts lost focus on the specific transactions before them, and instead simply

presumed the existence of intentional fraudulent transfers based on the fraudulent

nature of Ponzi schemes. This approach is often traced back to an Illinois

22

See, e.g., Brennan v. Slone (In re Fisher), 296 F. Appx. 494, 508 (6th Cir. 2008) (affirming

finding of actual fraud where debtor transferred assets for less than reasonably equivalent value

when planning for bankruptcy).

23 Another early line of cases arising out of Ponzi schemes involved claims for recovery of

preferential transfers, rather than fraudulent transfers. These cases typically construed

exceptions for transfers made in the “ordinary course of business or financial affairs of the debtor

and the transferee,” 11 U.S.C. § 547(c)(2), with some courts—including the Fifth Circuit—

holding that this exception was intended only for “legitimate” businesses and therefore

inapplicable to transfers made by Ponzi schemes. See, e.g., Wider v. Wootton, 907 F.2d 570, 572

(5th Cir. 1990) (“Transfers made in a ‘Ponzi’ scheme are not made in the ordinary course of

business.”). In reviewing these preference cases, the Tenth Circuit noted—like the Finn court

would two decades later in the fraudulent transfer context—that it was “[s]triking” that “none of

those cases cite any language or legislative history in support of” a Ponzi-scheme exception, and

that “[r]ather, it appears to us that this bright line rule has developed solely from precedent that

does not support it.” Sender v. Heggland Family Trust (In re Hedged-Inv. Assocs., Inc.), 48 F.3d

470, 475 (10th Cir. 1995); accord Breeden v. Ne. Binding Sys. (In re Bennett Funding Grp.,

Inc.), 253 B.R. 316, 322-23 (Bankr. N.D.N.Y. 2000) (same).

23 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

bankruptcy court ruling, Martino v. Edison Worldwide Capital (In re Randy),

which derived “actual intent” as a matter of law by finding “[t]hat the Debtor

Randy intended to defraud his investors was established by the jury verdict against

him in the criminal proceeding.” 189 B.R. 425, 439 (N.D. Ill. 1995). Randy had

been convicted of “mail fraud, money laundering, and racketeering.” Id. at 435.

The conceptual slippage here is clear: the purveyor of a fraudulent investment

scheme is guilty of “defrauding his investors,” and his investors, if they lost money

in the scheme, are also his creditors (by virtue, if nothing else, of the fraud claims

they hold against him). Therefore, the purveyor “intended to defraud his

creditors”—a phrase that sounds very much like the conduct proscribed by

fraudulent transfer law. See id. at 439 (“The Superseding Indictment under which

Randy was convicted clearly established that he intended to defraud his

creditors.”). As discussed above, however, a fraudulent transfer is not just a

transfer with a nexus to some form of fraud or a transaction with a transferor who

harbors an evil intent; it is a specific sort of transaction in which a debtor hides

assets or places them beyond the reach of creditors. Thus, to the extent In re

Randy imposed fraudulent transfer liability just because the transferor had been

convicted for mail and wire fraud, it committed legal error.24

24

Cf., e.g., Solow v. Reinhardt (In re First Commercial Mgmt. Group), 279 B.R. 230, 238

(Bankr. N.D. Ill. 2002) (rejecting In re Randy and holding that “the statutes and case law do not

call for the court to assess the impact of an alleged fraudulent transfer in a debtor’s overall

24 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

Federal case law subsequently coalesced around a standard announced in a

2002 Florida bankruptcy court ruling, Cuthill v. Greenmark, LLC (In re World

Vision Entm’t, Inc.), 275 B.R. 641 (Bankr. M.D. Fla. 2002). The World Vision

court held, without citing any supporting authorities, that because “[a] Ponzi

scheme is by definition fraudulent,” “[b]y extension, any acts taken in furtherance

of the Ponzi scheme ... are also fraudulent.” Id. at 656. While cases such as

Independent Clearing House had inferred intent from the nature of the particular

challenged transfers, World Vision simply derived intent from the generally

fraudulent nature Ponzi schemes, without reference to the transaction at issue, and

then looked for some sort of connection between the transaction and the fraudulent

scheme. This protean standard has since empowered receivers and trustees to

bring suit against ever-expanding categories of defendants who (like Golf Channel)

did not invest in the Ponzi scheme itself. See, e.g., In re Petters Co., Inc., 495 B.R.

887, 910 (Bankr. D. Minn. 2013) (commercial loan repayments “furthered” a Ponzi

scheme because they were “a means to avoid default and to sustain the façade

against collapse”); Kapila v. TD Bank, N.A. (In re Pearlman), 460 B.R. 306, 319

(Bankr. M.D. Fla. 2011) (repayments to revolving lender furthered Ponzi scheme if

they “prolonged and supported” it); Bear, Stearns Sec. Corp. v. Gredd (In re

business. The statutes require an evaluation of the specific consideration exchanged by the

debtor and the transferee in the specific transaction which the trustee seeks to avoid, made by the

individual Debtors.”) (quoting Balaber-Strauss v. Sixty Five Brokers (In re Churchill Mortg. Inv.

Corp.), 256 B.R. 664, 680 (Bankr. S.D.N.Y. 2000)).

25 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

Manhattan Inv. Fund), 397 B.R. 1, 13 (S.D.N.Y. 2007) (“Because the Fund’s only

strategy was to short-sell technology stocks, it had to keep its account at Bear

Stearns operational in order to survive. If it had not made the transfers into the

margin account, the Fund could have collapsed almost immediately”).25

The Fifth Circuit, however, does not even recognize the minimal limitation

imposed by World Vision’s “in furtherance” standard. Instead, every transfer made

by an entity operating a Ponzi scheme—including bill payments to the electric

company, is by definition avoidable as an intentional fraudulent transfer, unless the

transferee can establish an affirmative defense. See Warfield, 436 F.3d at 558

(“The Receiver’s proof that RDI operated as a Ponzi scheme established the

fraudulent intent behind transfers made by RDI.”)). As support for the sweeping

rule it announced, Warfield cited only the Seventh Circuit’s ruling in Scholes v.

Lehmann, 56 F.3d 750 (7th Cir. 1995) (applying the pre-UFTA Illinois law).

Scholes, however, concerned appeals from judgments entered on constructive

fraudulent transfer claims, and Scholes necessarily rejected the rule Warfield

derived from it, holding that the judgments at issue could not (as the plaintiff had

argued in the alternative) be affirmed under an actual fraud theory. See Scholes, 56

25

As these examples demonstrate, the “in furtherance” inquiry tends to collapse into a spurious

sort of speculation whereby a transfer not part of a Ponzi scheme “furthers” the scheme if, had

the debtor not made the transfer, the scheme would (hypothetically) have collapsed. Cf. United

States v. Dyer, 216 F.3d 568, 570 (7th Cir. 2000) (“But for Dyer’s having been born, he wouldn’t

have operated a Ponzi scheme; but it would be odd, in fact incorrect, to say that his birth (or the

birth of his parents or grandparents) caused his crime.”).

26 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

F.3d at 759 (concluding, despite the submission into evidence of, among other

things, the Ponzi scheme operator’s guilty plea, that “the evidence … is [not] so

strong that we can say as a matter of law that there was fraud in fact.”).

Neither Warfield nor any of the Fifth Circuit’s later rulings applying its rule

provide any further precedential or analytical justification for this rule, much less

any support for this rule in TUFTA’s text or history. Quilling v. Schonsky, 247

Fed. Appx. 583, 586 (5th Cir. 2007), citing only Warfield, restated this rule as

“[u]nder the UFTA, transfers made from a Ponzi scheme are presumptively made

with intent to defraud, because a Ponzi scheme is, as a matter of law, insolvent

from inception” (a formulation that confusingly seems to justify a presumption of

intent entirely on the basis of the debtor’s insolvency26

). Similarly, SEC v. Res.

Dev. Int’l, LLC, 487 F.3d 295, 301 (5th Cir. 2007), cited on Warfield in holding

that “[i]n this circuit, proving that [a transferor] operated as a Ponzi scheme

establishes the fraudulent intent behind the transfers it made.” Subsequent Fifth

26

Warfield also announced the rule that a Ponzi scheme “is, as a matter of law, insolvent from its

inception,” 436 F.3d at 558, relying on Cunningham v. Brown, a preference action arising from

the scheme perpetrated by Charles Ponzi. 265 U.S. 1 (1924). In Cunningham, the Supreme

Court noted in dicta that Ponzi “was always insolvent, and became daily more so, the more his

business succeeded.” 265 U.S. at 8. As the Minnesota Supreme Court explained, however, this

“reflects only the Court’s observation that the particular swindle operated by Charles Ponzi …

was insolvent when it began. It does not stand for the broader proposition that every Ponzi

scheme, even those businesses that once operated legitimately or had legitimate operations apart

from the Ponzi scheme, is necessarily insolvent from its inception.” Finn, 860 N.W.2d at 649;

see also Borrus, supra note 21, at 2 (“Cunningham did not hold that all Ponzi schemes are

presumed to be insolvent. Wiand [v. Lee, 753 F.3d 1194, 1201 (11th Cir. 2014)] and Warfield go

too far when they cite Cunningham for the proposition that a debtor who is operating a Ponzi

scheme is, as a matter of law, insolvent from its inception.”).

27 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

Circuit cases simply cite back to some combination of these three cases without

further analysis.27

C. The Fifth Circuit’s Conclusive Presumption Of Fraudulent Intent

Is Inconsistent With TUFTA

The Fifth Circuit’s conclusive presumption of fraudulent intent cannot be

reconciled with TUFTA. First, TUFTA does not permit presumptions of intent.

Second, liability under TUFTA should not attach based on characterizations of the

transferor’s general business practices, rather than the characteristics of the specific

challenged transaction. Third, the Fifth Circuit’s rule improperly redraws the

balance struck between creditors’ rights and protection of transferees. It does not

properly state Texas law and should therefore be rejected.

1. TUFTA Rejects Presumptions Of Intent

Under TUFTA, it is the plaintiff’s burden to prove the elements of its prima

facie case, and Texas courts reject attempts to shift aspects of that burden to the

transferee. See, e.g., Bowman v. El Paso CGP Co., LLC, 431 S.W.3d 781, 789 n.8

(Tex. App.—Houston [14th Dist.] 2014, pet. denied) (rejecting creditor’s attempt

to “shift the burden to [the transferee] to prove an element of [the creditor’s]

claim” because “it is [the creditor’s] burden to prove that [the debtor] did not

receive reasonably equivalent value”). Texas courts have also consistently held

27

For instance, Golf Channel II recited the rule by quoting Janvey v. Brown, 767 F.3d 430 (5th

Cir. 2014), which in turn relied on Janvey v. Alguire, 647 F.3d 585 (5th Cir. 2011), which relied

on Warfield. See Golf Channel II, 792 F.3d at 543.

28 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

that “fraudulent intent must be affirmatively shown and will not be presumed.”

Englert, 881 S.W.2d at 518 (citing Higgs v. Amarillo Postal Emps. Credit Union,

358 S.W.2d 761, 763 (Tex. App.—Amarillo 1962, no writ)).

Similarly, a principal and articulated goal of the Uniform Law

Commissioners in drafting the original UFCA was to redress confusion in the

common law caused by application of unwarranted presumptions of fraud. To

remedy this confusion, the UFCA created “constructive fraud” as a separate cause

of action, and otherwise rejected all prospect of the continued use of presumptions.

As expressly stated in the Prefatory Note to the UFCA:

In the Act as drafted all possibility of a presumption of

law as to intent is avoided. Certain conveyances which

the courts have in practice condemned, such as a gift by

an insolvent, are declared fraudulent irrespective of

intent. On the other hand, while all conveyances with

intent to defraud creditors (see Section 7) are declared

fraudulent, it is expressly stated that the intent must be

“actual intent, as distinguished from intent presumed as a

matter of law.”

UNIF. FRAUDULENT CONVEYANCE ACT, 7A U.L.A. pt. II at 247, 378 (Master ed.

2006). This hostility carried through to the UFTA, and is reinforced by its 2014

amendments, which expressly provide that a fraudulent transfer plaintiff “has the

burden of proving the elements of the claim for relief by a preponderance of the

evidence,”28

and explain that “courts should not apply nonstatutory presumptions

28

UNIF. VOIDABLE TRANSACTIONS ACT § 4(c).

29 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

that reverse that allocation, and should be wary of nonstatutory presumptions

that would dilute it.”29

By creating a nonstatutory presumption of intent to deal

with a particular set of facts, the Fifth Circuit contravened the intent of the drafters

of the UFTA and the Texas legislature in adopting it. As the Minnesota Supreme

Court held in Finn, since “MUFTA does not contain a provision allowing a court

to presume fraudulent intent …, there is no statutory justification for relieving the

Receiver of its burden of proving—or for preventing the transferee from

attempting to disprove—fraudulent intent.” See Finn, 860 N.W.2d at 647.

2. TUFTA Imposes Liability On A Transaction-By-

Transaction Basis

TUFTA also does not authorize the creation of special rules based on “the

form or structure of the entity making the transfer.” Finn, 860 N.W.2d at 647.

However, the numerous advantages that inure to fraudulent transfer plaintiffs once

the existence of a “Ponzi scheme” is established incentivizes fraudulent transfer

plaintiffs to fit the facts of any fraud to this procrustean bed. See, e.g., Am. Cancer

Soc’y v. Cook, 675 F.3d 524, 526 (5th Cir. 2012) (“The Receiver’s attempt to liken

the scheme in question to a ‘Ponzi-like fraud,’ and therefore reduce her burden to

proving ‘presumed intent to defraud,’ fails for lack of evidence. Not all securities

frauds are Ponzi schemes.”); SEC v. Mgmt. Solutions, Inc., No. 11 Civ. 1165, 2013

29

Id. § 4 cmt. 11 (emphasis added).

30 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

WL 4501088, at *20 (D. Utah Aug. 22, 2013) (denying motion “to gain an early

overall characterization of a Ponzi scheme in order to take future advantage of the

‘Ponzi presumption’”); Equip. Acquisition Res., Inc. v. PlainsCapital Leasing, LLC

(In re Equip. Acquisition Res., Inc.), 502 B.R. 784, 795 (Bankr. N.D. Ill. 2013)

(denying similar motion because fraud alleged was “too different from the

traditional Ponzi scheme”). This inquiry into whether a debtor’s general course of

conduct can be characterized as a Ponzi scheme is incompatible with the proper

focus of fraudulent transfer law—whether specific challenged transfers

unacceptably interfere with creditors’ rights—and is rendered all the more arbitrary

by the absence of any precision in judicial definitions of “Ponzi schemes,”30

as

well as the complete absence of any statutory guidance on the subject. See Finn,

860 N.W.2d at 647 (“The word ‘Ponzi’ does not appear in the Minnesota Statutes,

and MUFTA does not address ‘schemes.’”).

Just as this doctrine forces courts to choose whether a particular fraudulent

scheme should be characterized as a Ponzi scheme, it also forces courts to rely

30

See, e.g., Finn, 860 N.W.2d at 646 (“[E]ven those courts that have recognized a Ponzi-scheme

presumption have struggled to define its scope, in no small part due to the multitude of different

forms that a fraudulent-investment scheme can take.”); United States. v. Hartstein, 500 F.3d 790,

798 (8th Cir. 2007) (“While the general term ‘Ponzi scheme’ refers to various configurations of

investment schemes in which one victim’s funds are used to pay, appease, or further entice the

same victim or additional victims, the term is in such wide use in such diverse settings as to be of

little practical assistance.”); In re Manhattan Inv. Fund Ltd., 397 B.R. at 12 (Bankr. S.D.N.Y.

2007) (“There is no precise definition of a Ponzi scheme and courts look for a general pattern,

rather than specific requirements.”).

31 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

wholly on other Ponzi scheme cases to the exclusion of other authorities. For

example, multiple courts have distinguished the Second Circuit’s ruling in Sharp,

403 F.3d 43 and the Seventh Circuit’s ruling in B.E.L.T., 403 F.3d 474—both of

which hold that an arm’s-length market transaction does not become a fraudulent

transfer simply because the debtor has engaged in widespread fraud—on the basis

that they did not involve Ponzi schemes.31

The allegations in B.E.L.T. and Sharp,

however, reveal frauds materially indistinguishable from Ponzi schemes. The

lower court in Sharp summarized that “[Sharp’s principals] reported fictitious sales

and revenues and falsely inflated Sharp’s accounts receivable to the extent that

fraudulent or nonexistent transactions comprised three quarters of the accounts

receivable balance included in Sharp’s financial statements.” Sharp Int’l Corp. v.

State St. Bank & Trust Co. (In re Sharp Int’l Corp.), 281 B.R. 506, 510 (Bankr.

E.D.N.Y. 2002). The complaint in B.E.L.T. alleged that the debtor was “engaged

in a massive creditor fraud, using false financial statements, non-existent

equipment vendors and a phony telefax ruse to defraud creditors, including the

plaintiffs, out of millions of dollars in loans and equipment financing.” 4th Am.

Compl. at 4, B.E.L.T., Inc. v. Lacrad Int’l Corp., Nos. 01 C 4296, 01 C 7539 (N.D.

31

See, e.g., Carney v. Lopez, 933 F. Supp. 2d 365, 381 (D. Conn. 2013) (“Defendants’ reliance

on Sharp Int’l is misplaced if the Ponzi presumption applies. In that case, all the Receiver must

show is that the transfers at issue were related to a Ponzi scheme.”); Image Masters, Inc. v.

Chase Home Fin., 489 B.R. 375, 394 (E.D. Pa. 2013) (distinguishing Sharp because “it did not

involve a Ponzi scheme, but a different fraudulent scheme”).

32 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

Ill. Mar. 7, 2002)), available at 2002 WL 32742361. Imposing liability based

entirely on judicial determinations as to whether a debtor’s general business

practices amounted to a “Ponzi scheme,” as opposed to some other sort of

fraudulent scheme is fundamentally inconsistent with the case-specific, transfer-

by-transfer inquiry mandated by TUFTA, and should be rejected.

3. The Presumption Of Fraudulent Intent Is Bad Public Policy

The Fifth Circuit’s rule that “proving that [a transferor] operated as a Ponzi

scheme establishes the fraudulent intent behind the transfers it made” (e.g., Golf

Channel II, 792 F.3d at 543) lacks any limiting principle whatsoever, and

improperly dispenses with the core inquiry of fraudulent transfer law—i.e.,

whether a particular transfer improperly hid or placed assets beyond the reach of

creditors. This lack of a limiting principle makes the Ponzi scheme presumption

extremely attractive to trustees and receivers, but creates a nightmare for ordinary

market participants, such as commercial lenders who have done nothing more than

receive loan repayments at market rates of interest (i.e., transfers for reasonably

equivalent value), and trade creditors, who have merely exchanged goods or

services for the promise of payment.

The risk of overreaching by plaintiffs attempting to expand the presumption

is compounded by the particular incentives of trustees and receivers, the plaintiffs

who typically seek to use the presumption. As Judge Posner has explained:

33 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

The filing of lawsuits by a going concern is properly

inhibited by concern for future relations with suppliers,

customers, creditors, and other persons with whom the

firm deals (including government) and by the cost of

litigation. The trustee of a defunct enterprise does not

have the same inhibitions. A related point is that while

the management of a going concern has many other

duties besides bringing lawsuits, the trustee of a defunct

business has little to do besides filing claims that if

resisted he may decide to sue to enforce.

Maxwell v. KPMG LLP, 520 F.3d 713, 718 (7th Cir. 2008). With no clear

standards in place, and with plaintiffs continuously pushing for recoveries against

new classes of transferees, it has been left to the discretion of individual courts to

make equitable judgments that are nowhere contemplated by TUFTA and that have

more in common with the law of restitution than with fraudulent conveyance law.

See, e.g., Boston Trading Grp., 835 F.2d at 1508 (“In this case, however, we are

concerned not with these well-established principles of restitution, but with

Fraudulent Conveyance Law, a set of legal (not equitable) doctrines designed for

very different purposes.”); Finn, 860 N.W.2d at 652 (“[E]quality among a debtor’s

creditors, even if they are victims of a Ponzi scheme, is not the purpose of

MUFTA.”) (emphasis in original).

II. ARM’S LENGTH TRANSACTIONS AT MARKET RATES PROVIDE

VALUE UNDER SECTION 24.009(a)

TUFTA, properly understood, simply does not contemplate that arm’s length

market transactions will be potentially voidable as fraudulent transfers merely

34 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

because one party to such a transaction is dishonest. Thus, it should not be Golf

Channel’s burden to establish, as an affirmative defense, that it furnished

reasonably equivalent value. Instead, as discussed above, the Receiver should be

required to plead and prove the lack of reasonably equivalent value, either as part

of an intentional fraudulent transfer claim under § 24.005(a)(1) or a constructive

fraudulent transfer claim under § 24.005(a)(2) or § 24.006. In any event,

regardless of where the burden of proof lies, Golf Channel’s provision of TV

advertising on its face conferred reasonably equivalent value on Stanford.

In Golf Channel I, the Fifth Circuit relied on comment 2 to section 3 of the

UFTA, which provides in relevant part:

“Value” is to be determined in light of the purpose of the

Act to protect a debtor’s estate from being depleted to the

prejudice of the debtor’s unsecured creditors.

Consideration having no utility from a creditor’s

viewpoint does not satisfy the statutory definition. The

definition does not specify all the kinds of consideration

that do not constitute value for the purposes of this Act—

e.g., love and affection. See, e.g., United States v. West, 299 F. Supp. 661, 666 (D. Del. 1969).

UNIF. FRAUDULENT TRANSFER ACT § 3 cmt. 2. Based on this comment, the Fifth

Circuit concluded that value should be measured “‘from the standpoint of the

creditors,’ not from that of a buyer in the marketplace.” Golf Channel I, 780 F.3d

at 645. None of the authorities cited by Golf Channel I supported its statement that

value should not be measured from the standpoint of a “buyer in the marketplace”;

35 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

to the contrary, it has long been understood that “reasonably equivalent value”

means “similar to fair market value.” BFP v. Resolution Trust Corp.,

511 U.S. 531, 545 (1994). Instead, Golf Channel I, like the Receiver, attempts to

derive from three lines of inapposite cases the overarching and unsupported

proposition that fraudulent transfer statutes contemplate a post-hoc judicial inquiry

into whether a particular transfer—regardless of whether it was an arm’s-length

transaction at market rates—preserves “the transferor’s net worth” and thus

provides “value to the creditors.” Id. at 645-46.32

The first line of cases—with which the UFTA comment is concerned—

rejects claims that intangible or subjective consideration, such as “love and

affection,” constitutes reasonably equivalent value for a transfer. E.g., Christians

v. Crystal Evangelical Free Church (In re Young), 152 B.R. 939, 948 (D. Minn.

32

The Receiver also cites certain entirely inapposite cases which simply involve transfers for

objectively deficient value. In Hinsley v. Boudloche (In re Hinsley), 201 F.3d 638, 644 (5th Cir.

2000) the debtor claimed that she was mistaken about the value of the assets she received in the

challenged transaction, and so believed that she was getting much more value than she actually

did. Id. at 643. For example, debtor undervalued one asset by nearly $1 million, an error

corroborated by her own balance sheet. Id. at 644. The court pointed out that under such

circumstances, the debtor’s subjective belief as to the asset’s value is not dispositive in the

“reasonably equivalent value” inquiry. Similarly, in Stanley v. U.S. Bank Nat’l Ass’n (In re

TransTexas Gas Corp.), 597 F.3d 298 (5th Cir. 2010), the debtor corporation’s CEO received

over $2 million in severance payments, which he claimed were in satisfaction of a $3 million

claim under his employment agreement. However, after a bench trial, the district court found as

a matter of fact that the CEO was owed $1.5 million at most. Id. at 307-8. Neither of these cases

establish any special rule stemming from a difference between the viewpoint of the debtor and a

creditor. Rather, they simply stand for the uncontroversial proposition that a debtor’s subjective

belief as to the value of property transferred will not trump objective evidence contradicting that

belief.

36 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

1993) (moral obligations not reasonably equivalent value), rev’d on other grounds,

82 F.3d 1407 (8th Cir. 1996); Zahra Spiritual Trust v. United States, 910 F.2d 240,

249 (5th Cir. 1990) (spiritual fulfillment not reasonably equivalent value); Walker

v. Treadwell (In re Treadwell), 699 F.2d 1050, 1051 (11th Cir. 1983) (love and

affection not reasonably equivalent value). Notably, Golf Channel I’s quotation of

the UFTA comment omits its final sentence, which explains that the comment is

directed at “the kinds of consideration that do not constitute value for purposes of

this Act.”33

This reference is significant: it makes clear that the focus of the

comment is on forms or types of (nonmonetary) consideration (e.g., “love and

affection”) that lack objective value whether viewed from the specific perspective

of the debtor’s creditors, or from the perspective of a buyer in the marketplace—

not on establishing a requirement that, assessed in hindsight, the transaction must

have yielded a net benefit to the debtor’s estate.

The second line of cases on which the Receiver relies concern transactions

in which value is conferred on a third party, not on the debtor. In Klein v.

Cornelius, the principal of the debtor corporation paid a law firm $90,000 of the

corporation’s funds to represent the principal’s friend in a criminal proceeding,

33

Golf Channel II quoted the comment in its entirety, including this final sentence, but did not

consider the significance of this sentence to a proper understanding of the comment. 792 F.3d at

544-45.

37 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

even though the friend had no connection to the debtor corporation.34

786 F.3d

1310, 1314 (10th Cir. 2015). The court held that the payment was made “solely for

the benefit of a third party” and therefore did not “furnish reasonably-equivalent

value to the debtor.” Id. at 1321. Similarly, in Badger State Bank v. Taylor, the

transferees agreed to cancel a debt owed to them by the debtor corporation in

exchange for the cancellation of a roughly equivalent debt that they owed a third

company.35

688 N.W.2d 439, 446 (Wis. 2004) . While the third party received

value in the form of a cancellation of its debts, the debtor received nothing. Id.

The focus in these cases is on reasonably equivalent value being given “to the

debtor,” rather than a third party—an express element of the good faith and value

defense under § 548(c) of the Bankruptcy Code, and implicit in the UFTA’s

articulation of the defense.36

The third line of cases, to which the Receiver only alludes, involves the

distinct situation in which a debtor changes the legal form of its property interest in

an asset to prevent creditors from executing on the property, a fact pattern similar

34

SEC v. Res. Dev. Int’l, LLC, 487 F.3d 295 (5th Cir. 2007) also involved a case where the

debtor corporation paid a third party’s legal fees.

35 Both the debtor and third party in Badger State were owned by the same individual, who

through this transaction essentially siphoned money from a failing company into a healthy one.

36 11 U.S.C. § 548(c) provides in relevant part that “transferee or obligee of such a transfer or

obligation that takes for value and in good faith has a lien on or may retain any interest

transferred or may enforce any obligation incurred, as the case may be, to the extent that such

transferee or obligee gave value to the debtor in exchange for such transfer or obligation.”

38 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

to that involving debtors who engage in sham transactions in which they retain

control of purportedly transferred assets in order to retain the benefit of those

assets while hiding them from their creditors. In such cases, the focus is not on the

diminution in the debtor’s assets as such, but rather on the debtor’s intentional

conversion of its assets into a harder-to-reach form, thus “hindering” and

“delaying” (as opposed to “defrauding”) its creditors. For example, in Klein v.

Weidner, which the Receiver cites in a footnote, a debtor transferred a house to

himself and his wife as a tenancy by the entirety. 729 F.3d 280, 282 (3d Cir.

2013). The court rejected the argument that subsequent renovations by the wife

could constitute reasonably equivalent value for the transfer (which itself was

made for $1.00); the transfer of the house to the tenancy by the entirety “removed

the Property from [the creditor’s] reach” so the subsequent renovations added no

value to the debtor’s estate. Id. at 285; cf. In re Yotis, 518 B.R. 481, 488 (Bankr.

N.D. Ill. 2014) (“the only practical reason to hold a homestead in tenancy by the

entirety is to shelter that property from the creditors of one spouse.”). This, again,

does not stand for the broader principle that every transaction must be assessed to

determine whether it benefitted creditors. It merely means that where a debtor

engaged in a specific kind of fraudulent transfer—i.e., one in which the debtor

retains control over its property while changing its legal form to prevent creditors

from accessing it—the transferee, typically an insider of the debtor, will not be

39 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

able to establish the good faith and value defense. Cf. Firmani v. Firmani, 752

A.2d 854, 857 (N.J. Super. Ct. App. Div. 2000) (transfer of property to limited

partnership so that creditors could only recover “through the Limited Partnership

charging process” was intended to “hinder” or “delay” creditor).

Thus, the “tension” identified by the Fifth Circuit in Golf Channel II is

ultimately illusory. The Fifth Circuit sets up an opposition between a “creditor’s

perspective” and the perspective of “a buyer in the marketplace” which is found

nowhere in the UFTA comment itself. As noted above, the comment is focused on

“kinds of consideration,” such as “love and affection,” that have “no utility from a

creditor’s viewpoint.” UNIF. FRAUDULENT TRANSFER ACT § 3 cmt. 2. But “kinds

of consideration” such as “love and affection” equally lack utility from the

perspective of a “buyer in the marketplace.” Nor is any support found in the cases

the Fifth Circuit cites for the proposition that “[p]ursuant to UFTA, we have

measured value ‘from the standpoint of creditors,’ not from that of a buyer in the

marketplace,” none of which juxtapose creditors’ and market participants’

perspectives. Golf Channel II, 792 F.3d at 545.37

37

Stanley v. U.S. Bank Nat’l Assoc. (In re TransTexas Gas Corp.), 597 F.3d 298, 306 (5th Cir.

2010) involved severance payments to an executive in excess of what was required under his

employment contract. In re Hinsley, 201 F.3d 638 (5th Cir. 2000) merely holds that (1)

“[i]ntangible, non-economic benefits, such as preservation of marriage, do not constitute

reasonably equivalent value” and (2) a debtor’s incorrect subjective “belief” as to the value of

transferred assets does not create a disputed issue of material fact for summary judgment

purposes. Warfield, 436 F.3d at 560, involved contracts which were deemed to be illegal as a

matter of public policy. Setting aside whether this was the correct result (see Finn, 860 N.W.2d

40 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

Golf Channel II recognized that “consumables and speculative investments

… have value under UFTA,” but noted that speculative investments “at least had

the potential to benefit the debtor’s creditors,” whereas the “case before us may be

different because Stanford was engaged in a Ponzi scheme,” which foreclosed any

potential benefit to creditors because “each new transaction [with a Ponzi scheme]

create[s] greater liabilities.” Golf Channel II, 792 F.3d at 546. There are at least

two basic flaws in the Fifth Circuit’s logic. First, the Fifth Circuit’s hypothesized

“potential benefit” requirement does nothing to explain cases involving

consumables, which have no chance of yielding such benefits. As the court

reasoned in Samson v. U.S. W. Commc’ns, Inc. (In re Grigonis),

[C]onsumer purchases for solely personal gratification

furnish only ‘psychic and intangible’ benefits or

‘entertainment value’ to the debtor personally, and by

definition, always results in asset depletion. … [T]he

Court can with little effort imagine an array of consumer

transactions that result in absolutely no benefit to the

purchasers’ creditors—from tickets to Broadway shows

and exclusive sporting events, to hourly charges for

music, sports or language lessons, to any and all forms of

recreational travel, to name a few. While Congress may

at some point decide to include payments for such

extravagances in the list of transfers avoidable by a

trustee … the current statutory structure does not allow

for such extraordinary powers.

at 651-53 (criticizing rulings voiding contracts with Ponzi scheme operators)), the Fifth Circuit

did not suggest—and the Receiver does not seriously contend—that payment by Stanford for

advertising services would somehow be void as against public policy.

41 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

208 B.R. 950, 955-56 (Bankr. D. Mont. 1997) (construing 11 U.S.C. § 548). See

also Allard v. Flamingo Hilton (In re Chomakos), 69 F.3d 769, 771, 772 (6th Cir.

1995) (payments for “casino gambling” and “expensive dinners” could not be

avoided as fraudulent transfers).

Second, and perhaps more importantly, nothing in TUFTA, Texas case law,

or the drafter’s comments in any way suggests that transactions with an inherently

money-losing business should be considered, for that reason, to lack reasonably

equivalent value. There is no logically consistent way to limit such a rule to

“Ponzi schemes”; it would apply equally, for instance, to a debtor who

manufactures a product with a substantial, unknown health and safety risk, such

that each additional sale of the product deepens the debtor’s insolvency by

increasing its tort liability. Nothing in TUFTA suggests that such a debtor’s

payments to its suppliers or vendors should be avoidable as fraudulent transfers.

Such a rule, in effect, finds lack of reasonably equivalent value by virtue of finding

insolvency, thus making all transfers with hopelessly insolvent debtors avoidable

and transforming TUFTA into a supercharged preference statute (and one without

an ordinary course of business exception). Texas law does not countenance such a

result. See, e.g., Englert, 881 S.W.2d at 518 (“[F]rom the earliest days of our

jurisprudence, it has been recognized that a debtor has the right to prefer his

obligation to one creditor over an obligation to another creditor.”) (citing Given v.

42 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

Taylor, Hart & Co., 6 Tex. 315, 321 (1851)).

Fraudulent transfer law is aimed at avoiding certain types of inherently

unfair transactions in which debtors shelter or place their assets beyond the reach

of creditors. An arm’s-length, market rate transaction is not such a transaction.

Fraudulent transfer law does not require merchants to inquire into their

counterparties’ finances or perform due diligence on their general business

practices before entering into ordinary market transactions, nor does it give

creditors the right, outside of bankruptcy or receivership, to prevent debtors from

entering into such transactions simply because they may not ultimately inure to the

benefit of creditors. A debtor’s payment of a valid debt does not violate creditor

norms; creditors expect a debtor to pay its debts regardless of solvency. This Court

should affirm these longstanding principles and hold that Golf Channel’s provision

of television advertising services at market rates conferred reasonably equivalent

value, and therefore cannot be avoided under TUFTA.

CONCLUSION

The certified question should be answered by holding that an arm’s-length

market rate transaction confers reasonably equivalent value under TUFTA and is

not avoidable as a fraudulent transfer.

43 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

Respectfully submitted,

/s/ Mary Angela Jenkins

Mary Angela Jenkins


Email:

[email protected]

Daren Wayne Perkins



JPMORGAN CHASE BANK, N.A.

700 North Pearl Street, 15th Floor

Dallas, TX 75265

(214) 965-3778

Fax: (214) 965-4024

David J. Woll (pro hac vice pending)


Isaac Rethy (pro hac vice pending)


SIMPSON THACHER & BARTLETT LLP

425 Lexington Avenue

New York, NY 10017-3954

(212) 455-2000

Fax: (212) 455-2502

James J. White (pro hac vice pending)

UNIVERSITY OF MICHIGAN LAW

SCHOOL

625 South State Street

Ann Arbor, MI 48109-1215

(734) 764-9325

Fax: (734) 936-0579


Attorneys for Amicus Curiae

JPMorgan Chase Bank, N.A.

44 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

CERTIFICATE OF SERVICE

I hereby certify that on November 16, 2015, a true and correct copy of this

Brief was served via e-filing to all counsel of record:

Scott D. Powers

Stephanie F. Cagniart

David Arlington

Baker Botts LLP

98 San Jacinto Blvd., Suite 1500

Austin, Texas 78701

(512) 322-2500 (Telephone)

(512) 322-2501 (Facsimile)

[email protected]

[email protected]

Kevin M. Sadler Baker Botts LLP

1001 Page Mill Road

Building One, Suite 200

Palo Alto, California 94304

(650) 739-7500 (Telephone)

(650) 739-7699 (Facsimile)

[email protected]

Katherine D. Mackillop Norton Rose

Fulbright US LLP

Fulbright Tower

1301 McKinney

Suite 5100

Houston, Texas 77010

katherine.mackillop@nortonrosefulbrigh

t.com

Theodore W. Daniel Kyle Schindler

Tricia W. Macaluso Norton Rose

Fulbright US LLP 2200 Ross Avenue,

Suite 3600 Dallas, TX 75201-7932

(214) 855-8000 (Telephone) (214) 855-

8200 (Facsimile)

[email protected]

[email protected]

m

Jonathan Franklin

Norton Rose Fulbright US LLP

799 9th Street NW Suite 1000

Washington, DC 20001

202-552-0466 (Telephone)

(202) 662-4643 (Facsimile)

[email protected]

om

Douglas J. Buncher

NELIGAN FOLEY, L.L.P.

325 N. St. Paul, Suite 3600

Dallas, Texas 75201

(214) 840-5320

(214) 840-5301 (Facsimile)

[email protected]

45 505680-0299-13477-Active.18203941.4 11/16/2015 2:20 PM

Peter D. Morgenstern

BUTZEL LONG PC

380 Madison Avenue

22nd Floor

New York, NY 10017

[email protected]

Edward C. Snyder

CASTILLO SNYDER, P.C.

300 Convent St.

Suite 1020

San Antonio, Texas 78205

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Edward F. Valdespino

STRASBURGER & PRICE L.L.P.

300 Convent St.

Suite 1020

San Antonio, Texas 78205

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Mary Angela Jenkins

CERTIFICATE OF COMPLIANCE

1. This brief complies with the type-volume limitations of Tex. R. App. P. 9.4,

as it contains 11,205 words, excluding the parts of the brief exempted by Rule

9.4(i)(1).

2. This brief complies with the typeface requirements of Tex. R. App. P. 9.4(e)

because this brief has been prepared in a proportionally spaced typeface using

Microsoft Word 2010 in Times New Roman 14-point font for text and 12-point

font for footnotes.


Mary Angela Jenkins

jpm amicus (1)

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