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Janvey v. Gmag, L.L.C.

Supreme Court of Texas

December 20, 2019

Ralph S. Janvey, in his Capacity as Court-Appointed Receiver for the Stanford International Bank Limited, et al., Appellants,
GMAG, L.L.C.; Magness Securities, L.L.C.; Gary D. Magness; Mango Five Family Incorporated, in its Capacity as Trustee for the Gary D. Magness Irrevocable Trust, Appellees

          Argued October 8, 2019

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


         The Texas Uniform Fraudulent Transfer Act (TUFTA) is "designed to protect creditors from being defrauded or left without recourse due to the actions of unscrupulous debtors." KCM Fin. LLC v. Bradshaw, 457 S.W.3d 70, 89 (Tex. 2015). Creditors may invoke TUFTA to "claw back" fraudulent transfers from their debtors to third-party transferees. Yet even if a transfer is fraudulent, the statute does not always require the transferee to relinquish the transferred asset. If the transferee proves as an affirmative defense that it acted in good faith and the transfer was for a reasonably equivalent value, it may keep the transferred asset.

         The U.S. Court of Appeals for the Fifth Circuit has requested our guidance on what constitutes good faith under TUFTA. Specifically, the Fifth Circuit asks whether a transferee on inquiry notice of fraudulent intent can achieve good faith without investigating its suspicions. Without comprehensively defining the contours of TUFTA's good-faith defense, we answer the question no. When a transferee on inquiry notice attempts to use TUFTA's affirmative defense to shield the transfer from the statute's clawback provision, it must show at minimum that it investigated its suspicions diligently. The investigation may not turn up additional evidence of fraud that should be imputed to the transferee, but that result does not negate the suspicions that a transferee on inquiry notice has at the time of the transfer. An investigation is an opportunity for the transferee to demonstrate its good faith, and requiring proof of an investigation negates any incentive transferees may have to remain willfully ignorant of fraud.


         Stanford International Bank, Ltd. (the Bank) ran a highly complex Ponzi scheme for almost two decades that attracted over $7 billion in investments. The Bank sold fraudulent certificates of deposit and issued "returns" to its old investors with money procured from new investors. The Bank deceived over 18, 000 investors before the Securities and Exchange Commission (SEC) uncovered the scheme in 2009.

         Appellee Gary D. Magness and several entities through which Magness invested his funds (collectively, Magness) were among the investors deceived by the Bank. Magness was one of the largest investors, purchasing $79 million of the fraudulent certificates of deposit. Magness withdrew his investments from the Bank sometime after news of the SEC's investigation became public. In 2008, Magness recovered $88.2 million through loans from the Bank: his original investment of $79 million and $9.2 million of "accrued interest" credited to his account with the Bank. He later repaid $700, 000 to the Bank, so his net return was $8.5 million.

         Once the SEC discovered the Bank's Ponzi scheme, a federal district court appointed appellant Ralph S. Janvey (the Receiver) to recover the Bank's assets and distribute them among the investors equitably. The Receiver sought return of Magness's net payout from the Bank.

         The Receiver sued Magness in federal district court to recover these funds, alleging (1) Magness's withdrawal from the Bank should be avoided because it constituted a fraudulent transfer under TUFTA, and (2) Magness was unjustly enriched. Janvey v. GMAG, L.L.C., 913 F.3d 452, 454 (5th Cir. 2019), vacated and superseded on reh'g, 925 F.3d 229 (5th Cir. 2019). Magness responded that he satisfied TUFTA's good-faith defense, thus preventing the Receiver from avoiding the Bank's transfer to Magness. The district court granted the Receiver's motion for partial summary judgment for the net amount Magness received from the Bank in excess of his investment; Magness subsequently paid the Receiver this $8.5 million. Id. The district court left to the jury, however, whether the Receiver was entitled to claw back Magness's original $79 million investment. Id. The district court also denied Magness's motions for partial summary judgment regarding his defense of good faith and the Receiver's claim of unjust enrichment. Id.

         Following trial, the jury found Magness had inquiry notice of the Ponzi scheme. Id. at 454-55. The jury charge provided: "Inquiry notice is knowledge of facts relating to the transaction at issue that would have excited the suspicions of a reasonable person and led that person to investigate." Id. at 454. The next question in the charge asked whether "a diligent inquiry would . . . have revealed to a reasonable person that Stanford was running a Ponzi scheme." Id. at 455. The jury found that "an investigation [would] have been futile." Id. The district court denied the Receiver's motion for entry of judgment on the verdict and renewed motion for judgment as a matter of law, holding that Magness satisfied his good-faith affirmative defense. Id.

         The Receiver appealed to the Fifth Circuit, raising several issues. Id. As relevant here, the Receiver contended "the jury's finding of inquiry notice defeated Magness's TUFTA good faith defense as a matter of law." Id. The Fifth Circuit agreed and reversed the district court's judgment, rendering judgment for the Receiver. Id. at 458. Specifically, the Fifth Circuit determined that Magness failed to satisfy TUFTA's good-faith affirmative defense and that there is no "futility exception" to that defense. Id.

         Following the Fifth Circuit's decision, Magness sought rehearing. He urged the Fifth Circuit to certify the good-faith question instead of relying on its Erie guess. The Fifth Circuit vacated its prior opinion and certified the following question, which we accepted:

Is the Texas Uniform Fraudulent Transfer Act's "good faith" defense against fraudulent transfer clawbacks, as codified at Tex. Bus. & Com. Code § 24.009(a), available to a transferee who had inquiry notice of the fraudulent behavior, did not conduct a diligent inquiry, but who would not have been reasonably able to discover that fraudulent activity through diligent inquiry?

Janvey v. GMAG, L.L.C., 925 F.3d 229, 235 (5th Cir. 2019).


         May a transferee on inquiry notice of a fraudulent transfer satisfy TUFTA's good-faith defense without conducting a diligent investigation? We conclude that the answer is no. If a transferee has actual knowledge of facts that would lead a reasonable person to suspect the transfer is voidable under TUFTA but does not investigate, the transferee may not achieve good- faith status to avoid TUFTA's clawback provision-regardless of whether the transferee reasonably could have discovered the fraudulent activity through diligent inquiry.

         I. Standard and ...

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