United States: Two Recent Decisions Potentially Expand Fraudulent Transfer Exposure In Ponzi Schemes

Two recent decisions from the Fifth Circuit and Eighth Circuit could expand the fraudulent transfer exposure of unknowing third parties that provide goods, services, or funding to companies operating Ponzi schemes.

Janvey v. The Golf Channel

The Fifth Circuit's recent decision in Janvey v. The Golf Channel, Inc., if followed by courts in other circuits, could leave many unknowing vendors and service providers in Ponzi scheme cases without a defense to fraudulent transfer claims by a trustee or receiver.

The decision arises from the highly-publicized, multi-billion dollar Ponzi scheme perpetrated by Allen Stanford. In 2009, the Securities and Exchange Commission filed a civil enforcement action in the Northern District of Texas, obtained a freeze of all assets of Stanford International Bank, Ltd. ("Stanford") and its affiliates, and requested the appointment of Ralph S. Janvey as receiver ("Receiver"), which the district court granted.

Advertising provided no value to creditors, transfers recoverable by receiver

Stanford had paid The Golf Channel, Inc. ("Golf Channel") a total of $5.9 million for advertising and other promotional services related to Stanford's sponsorship of a PGA Tour event held in Memphis, Tennessee. The Receiver sued Golf Channel to recover the $5.9 million under the Texas Uniform Fraudulent Transfer Act ("TUFTA"). TUFTA, which mirrors uniform fraudulent transfer statutes in other states, allows creditors (or receivers) to avoid transfers made with actual intent to defraud creditors or by an insolvent entity that does not receive reasonably equivalent value in return. TUFTA, like other uniform fraudulent transfer statutes, provides a defense for transferees who receive funds in good faith and provide reasonably equivalent value in return.

Golf Channel argued it received the $5.9 million in good faith and provided reasonably equivalent value in the form of advertising and promotional services. The district court agreed and granted summary judgment in Golf Channel's favor. On appeal, the Fifth Circuit reversed, finding no evidence the advertising and promotional services provided value to Stanford's creditors and served only to "encourage investment" in the Ponzi scheme. The court reasoned that, under TUFTA, value is measured from the standpoint of creditors rather than that of an ordinary buyer in the marketplace and the primary consideration is the degree to which the transferor's net worth is preserved. Even though the services "may have been quite valuable to the creditors of a legitimate business, they have no value to the creditors of a Ponzi scheme." The court drew an analogy to the services of a broker who sold securities in a Ponzi scheme, citing Brown v. Warfield, 436 F.3d 551 (5th Cir. 2006). Accordingly, the Fifth Circuit rendered judgment in the Receiver's favor.

Courts split on definition of value for good faith defense

Although the Golf Channel decision is not alone in focusing on the transferor's net worth, there are other cases in which transferees have successfully defended fraudulent transfer claims in Ponzi schemes by showing they provided value from the perspective of the market for their goods or services. See Orlick v. Kozyak (In re Fin. Federated Title & Trust, Inc.), 309 F.3d 1325, 1332 (11th Cir. 2002); Balaber-Strauss v. Sixty-Five Brokers (In re Churchill Mortg. Investment Corp.), 256 B.R. 664, 679-80 (Bankr. S.D.N.Y. 2000). In fact, the Golf Channel decision runs contrary to a prior Fifth Circuit decision holding that Section 548(c) of the Bankruptcy Code (which mirrors the language of TUFTA) "looks at value from the perspective of the transferee: How much did the transferee "give"? The concern here, quite properly, is for the transferee's side of the exchange, not the transferor's gain." Jimmy Swaggart Ministries v. Hays (In re Hannover Corp.), 310 F.3d 796, 802 (5th Cir. 2002) (holding that call options purchased from the transferee had value even though the transferor, a fraudulent scheme, was unable to exercise them). In these decisions, the transferee's good faith as an unknowing provider of goods or services seems to outweigh the interest of preserving the net worth of the fraudulent scheme.

Implications of Golf Channel

The Golf Channel decision could affect many types of vendors and service providers who unknowingly provide services to companies operating Ponzi schemes. Because Ponzi schemes rarely have any legitimate revenue-producing operations, only those who provide tangible assets, goods, or benefits which can subsequently be liquidated and distributed to creditors would be protected from fraudulent transfer liability. Landlords, professionals, vendors, utility companies, and other service providers who lease space or provide other valuable services in the marketplace would have a difficult time showing they provided value to creditors of a Ponzi scheme. It will be interesting to see whether other circuits accept or reject this narrower view of value now adopted by the Fifth Circuit.

Ritchie Capital Management, LLC v. Stoebner

A recent Eighth Circuit decision, Ritchie Capital Management, LLC v. Stoebner, is likewise instructive for receivers. The decision arises from a multi-billion dollar Ponzi and fraud case, in which Tom Petters, through a number of companies he controlled, purported to run a so-called diverting business, where electronics were to be purchased in bulk and re-sold to major retailers at a substantial profit. In truth, the business was a sham, and the funds received originated exclusively from loans made to or investments in the Petters entities.

Court applies "badges of fraud" analysis to invalidate Trademark Security Agreement

In early 2008, the Petters companies, including the historic Polaroid Corporation ("Polaroid"), began experiencing substantial financial distress. In response, a Petters entity, Petters Group Worldwide ("PGW"), obtained a $31 million loan from Ritchie Capital Management, LLC ("Ritchie"), ostensibly to pay off PGW and Polaroid debts. Petters personally guaranteed the loan, and represented to Ritchie that it was to be "backed by the entire Polaroid corporation[.]" Ritchie ultimately extended nearly $130 million in loans to Petters entities. Polaroid was not a signatory to any of the Ritchie loans and, while the initial loan to PGW was used to pay the debts of Polaroid, the proceeds of the loans were not directed to Polaroid.

As Ritchie began demanding collateral for its loans, and on the eve of the FBI raid that would halt the fraudulent scheme, Petters executed a Trademark Security Agreement ("TSA") granting Ritchie liens on critical Polaroid trademarks. Polaroid was later placed into bankruptcy.

Polaroid, through its bankruptcy trustee, sued Ritchie to invalidate the TSA on the grounds that it constituted a fraudulent transfer. The trustee submitted a motion for summary judgment on the fraudulent transfer claim based on the so-called Ponzi scheme presumption, which holds that transfers made in furtherance of a Ponzi scheme are presumed to have been made with intent to defraud creditors. The application of the Ponzi scheme presumption enables a creditor to bypass a more detailed "badges of fraud" analysis, where an affirmative showing of actual intent to defraud must be made. The bankruptcy court applied both the Ponzi scheme presumption and the traditional badges of fraud analysis, and determined that Petters executed the TSA with fraudulent intent. Ritchie appealed.

On appeal, while the Eighth Circuit acknowledged the Ponzi scheme presumption, it determined that it "need not ... [apply the Ponzi scheme presumption] ... because [it could] affirm the bankruptcy court's finding of actual fraudulent intent under the badges of fraud approach." It thus drew "no conclusions as to the validity or future applicability of the Ponzi scheme presumption in the Eighth Circuit." Notably, in applying its badges of fraud analysis, the Eighth Circuit looked at the actual intent of the debtor – Polaroid – not PGW, because it was Polaroid (through Petters) which granted the liens which the trustee sought to avoid as fraudulent transfers. In other words, the fact that Polaroid was not a signatory to the Ritchie liens was irrelevant. What mattered was that "[b]ecause Petters unilaterally granted the[] liens on Polaroid's behalf, his intent was that of Polaroid." (emphasis original.) As such, and while the Ritchie loans may have benefitted PGW, "the viability of a parent company is not the type of value contemplated by the fraudulent transfer laws."

Implications of Ritchie Capital Management, LLC

The Ritchie Capital Management, LLC decision does not resolve the issue of whether the Ponzi scheme presumption will be formally recognized in the Eighth Circuit, which remains unclear. However, it does serve as a reminder to trustees, receivers, and creditors pursuing fraudulent transfer claims that: (a) even where a Ponzi scheme exists that might enable the application of the presumption, a more traditional badges of fraud approach should be considered, as it may be more palatable to a court; and (b) the intent of the transferor must be the focus of the inquiry, even where the transferor is a subsidiary of another entity, or an affiliate receives a benefit from the overall transaction.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions