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Fifth Circuit Blocks Fraudulent Transferee's Good Faith Defense
"A … transferee [who] received fraudulent transfers with actual knowledge or inquiry notice of fraud or insolvency" loses any "good faith" defense available under the Texas version of the Uniform Fraudulent Transfer Act (TUFTA), held the U.S. Court of Appeals for the Fifth Circuit on Jan. 9, 2019. Janvey v. GMAG, LLC, 2019 WL 141107, 3 (5th Cir. Jan. 9, 2019) (emphasis added).
Although the "TUFTA good faith affirmative defense is an exception to the rule that fraudulent transfers must be returned," the Fifth Circuit reasoned that "no court has considered extending TUFTA good faith to a transferee on inquiry notice who later shows an investigation would have been futile." Id. at 4, 5. Significantly, in reversing the district court's dismissal of an SEC receiver's fraudulent transfer complaint in a Ponzi scheme case, the court "declined to rely on [Bankruptcy Code] §548(c) [case law] to interpret TUFTA good faith." Id., citing G.E. Capital Commercial, Inc. v. Worthington Nat'l Bank, 754 F.3d 297, 312 n.21 (5th Cir. 2014) (Code "§548(c) is not necessarily substantively congruent with state-law counterparts, despite a common ancestry.)".
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GMAG shows the different judicial approaches to applying fraudulent transfer law under the widely adopted state law Uniform Fraudulent Transfer Act (UFTA) and under the federal Bankruptcy Code (Code). In fact, the Fifth Circuit struggled with differences between the two seemingly identical statutes in 2015 and 2016 after asking for and receiving guidance from the Texas Supreme Court on the meaning of "value" in TUFTA's good faith defense provision.
In Janvey v. Golf Channel Inc., 834 F.3d 570, 572 (5th Cir. 2016), the court reluctantly affirmed the dismissal of an SEC receiver's fraudulent transfer suit against an advertising firm for $5.9 million it had received in good faith from a Ponzi scheme debtor. In response to the Fifth Circuit's certified question, the Texas Supreme Court ruled that the defendant's "media-advertising services had objective value and utility from a reasonable creditor's perspective at the time of the transaction, regardless of [the debtor's] financial insolvency at the time." Janvey v. Golf Channel Inc., 487 S.W. 560, 570 (2016). The Fifth Circuit could therefore not apply TUFTA "in a way that would nullify a statutory affirmative defense [good faith receipt of funds in exchange for reasonably equivalent value] whenever [the] debtor was operating a Ponzi scheme."
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