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
October 8, 2019
Certified Question from the United States Court of Appeals
for the Fifth Circuit
BRETT BUSBY JUSTICE.
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.
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.
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.
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
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.
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.
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.
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.
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.
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
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