Ralph Janvey v. GMAG, L.L.C. , 925 F.3d 229 ( 2019 )

Case: 17-11526 Document: 00514971687 Page: 1 Date Filed: 05/24/2019
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
May 24, 2019
No. 17-11526
Lyle W. Cayce
Clerk
RALPH S. JANVEY, in his Capacity as Court-Appointed Receiver for the
Stanford International Bank Limited et al,
Plaintiff - Appellant
v.
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,
Defendants - Appellees
Appeal from the United States District Court
for the Northern District of Texas
ON PETITION FOR PANEL REHEARING
Before STEWART, Chief Judge, and DENNIS and WILLETT, Circuit Judges.
PER CURIAM:
The original opinion in this case was filed on January 9, 2019. Janvey v.
GMAG, LLC, 913 F.3d 452 (5th Cir. 2019). There, we held that a transferee on
inquiry notice of a transfer’s fraudulent nature is not entitled to the Texas
Uniform Fraudulent Transfer Act’s (“TUFTA”) good faith affirmative defense.
Because the jury determined that the Defendants-Appellees were on inquiry
notice of the fraudulent nature of transfers received from a Ponzi scheme, we
reversed the district court’s judgment and rendered judgment in favor of the
Case: 17-11526 Document: 00514971687 Page: 2 Date Filed: 05/24/2019
No. 17-11526
Plaintiff-Appellant. Defendants-Appellees submitted a petition for panel
rehearing and a petition for rehearing en banc, which are now pending before
the court. In these petitions, Defendants-Appellees requested, in the
alternative, that we certify a question to the Supreme Court of Texas on
grounds that interpreting TUFTA’s good faith defense is a significant issue of
first impression, and the panel’s interpretation differs from that of other
jurisdictions to analyze their own Uniform Fraudulent Transfer Act (“UFTA”)
good faith defenses.
The petition for panel rehearing is GRANTED, the original opinion is
VACATED, and the panel substitutes the following opinion certifying a
question to the Supreme Court of Texas.
CERTIFICATION FROM THE UNITED STATES COURT OF
APPEALS FOR THE FIFTH CIRCUIT TO THE SUPREME COURT OF
TEXAS, PURSUANT TO THE TEXAS CONSTITUTION ART. 5 § 3–C AND
TEXAS RULE OF APPELLATE PROCEDURE 58.1.
I. BACKGROUND
The SEC uncovered the Stanford International Bank (“SIB”) Ponzi
scheme in 2009. For close to two decades, SIB issued fraudulent certificates of
deposit (“CDs”) that purported to pay fixed interest rates higher than those
offered by U.S. commercial banks as a result of assets invested in a well-
diversified portfolio of marketable securities. In fact, the “returns” to investors
were derived from new investors’ funds. The Ponzi scheme left over 18,000
investors with $7 billion in losses. The district court appointed Plaintiff-
Appellant Ralph S. Janvey (“the receiver”) to recover SIB’s assets and
distribute them to the scheme’s victims.
Defendants-Appellees are Gary D. Magness and several entities in which
he maintains his wealth (collectively, “Magness”). Magness was among the
largest U.S. investors in SIB. Between December 2004 and October 2006,
2
Case: 17-11526 Document: 00514971687 Page: 3 Date Filed: 05/24/2019
No. 17-11526
Magness purchased $79 million in SIB CDs. As of November 2006, Magness’s
family trust’s investment committee monitored his investments, including the
SIB CDs.
Bloomberg reported in July 2008 that the SEC was investigating SIB. At
an October 2008 meeting, the investment committee persuaded Magness to
take back, at minimum, his accumulated interest from SIB. The receiver
asserts this decision was the result of mounting skepticism about SIB.
Magness asserts it was because he was experiencing significant liquidity
problems given the tumbling stock market.
Later that month, Magness’s financial advisor approached SIB for a
redemption. On October 9, 2008, SIB instead agreed to loan Magness $25
million on his accumulated interest. SIB applied Magness’s outstanding
“accrued CD interest” to repay most of this loan. In other words, Magness
repaid $24.3 million of the $25 million loan with “paper interest” and $700,000
with cash. Between October 24 and 28, 2008, Magness borrowed an additional
$63.2 million from SIB. In total, Magness received $88.2 million in cash from
SIB in October 2008.
The receiver sued Magness to recover funds under theories of (1) TUFTA
fraudulent transfer and (2) unjust enrichment. The receiver obtained partial
summary judgment as to funds in excess of Magness’s original investment, and
Magness returned this $8.5 million in fraudulent transfers to the receiver.
The receiver moved for partial summary judgment, seeking a ruling that
the remaining amounts at issue were also fraudulent transfers. Magness
moved for summary judgment on his TUFTA good faith defense and the
receiver’s unjust enrichment claim. The district court granted the receiver’s
motion and denied Magness’s motion.
Just before trial, the district court sua sponte reconsidered its denial of
Magness’s motion for summary judgment and rejected the receiver’s unjust
3
Case: 17-11526 Document: 00514971687 Page: 4 Date Filed: 05/24/2019
No. 17-11526
enrichment claim. Thus, the only issue presented to the jury was whether
Magness received $79 million, 1 already determined to be fraudulent transfers,
in good faith. After Magness’s case-in-chief, the receiver moved for judgment
on grounds that (1) Magness was estopped from claiming he took the transfers
in good faith and (2) no reasonable jury could conclude that Magness
established TUFTA’s good faith defense. The district court did not rule on the
motion.
The jury determined that Magness had inquiry notice that SIB was
engaged in a Ponzi scheme, but not actual knowledge. Inquiry notice was
defined in the jury instructions as “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.” The jury also determined that an
investigation would have been futile. A futile investigation was defined in the
jury instructions as one where “a diligent inquiry would not have revealed to a
reasonable person that Stanford was running a Ponzi scheme.”
The receiver moved for entry of judgment on the verdict, arguing that
the jury’s finding of inquiry notice defeated Magness’s TUFTA good faith
defense as a matter of law. The receiver also renewed his motion for judgment
as a matter of law. The district court denied the receiver’s motions and held
that Magness satisfied his good faith defense. The receiver renewed his post-
trial motions and moved for a new trial. The court denied these motions and
issued its final judgment that the receiver take nothing aside from his prior
receipt of $8.5 million.
On appeal, the receiver argued that (1) Magness was estopped from
contesting his actual knowledge of SIB’s fraud or insolvency; (2) the jury’s
1 Magness originally invested $79 million in SIB. He borrowed $88.2 million in cash
from SIB, but he paid $700,000 back to SIB in cash and has already ceded $8.5 million to the
receiver. The $79 million “loaned” to Magness from SIB remains in dispute.
4
Case: 17-11526 Document: 00514971687 Page: 5 Date Filed: 05/24/2019
No. 17-11526
finding of inquiry notice defeated Magness’s TUFTA good faith defense as a
matter of law; (3) the district court’s jury instructions were erroneous and
reduced Magness’s burden to establish good faith; and (4) the district court
erred by granting Magness’s motion for summary judgment on the receiver’s
unjust enrichment claim.
We initially decided this case on the second issue. Relying on the text of
TUFTA and interpretations by the Texas lower courts, our court, and our
circuit’s district courts, we reversed the district court’s judgment and rendered
judgment in favor of the receiver. Magness filed petitions for panel rehearing
and rehearing en banc, in which he raised the argument that we should certify
the question of TUFTA good faith to the Supreme Court of Texas. Because the
Texas courts to consider TUFTA good faith have not considered whether it
includes a diligent investigation requirement or a futility exception, we certify
the question––whether TUFTA good faith requires a transferee on inquiry
notice to conduct an investigation or show such an investigation would have
been futile––to the Supreme Court of Texas. See In re Katrina Canal Breaches
Litig., 613 F.3d 504, 509 (5th Cir. 2010) (quoting Free v. Abbott Labs., 164 F.3d
270, 274 (5th Cir. 1999)) (“[C]ertification may be advisable where important
state interests are at stake and the state courts have not provided clear
guidance on how to proceed.”).
II. DISCUSSION
Texas, like most states, has adopted a version of UFTA, which was
designed “to prevent debtors from transferring their property in bad faith
before creditors can reach it.” BMG Music v. Martinez, 74 F.3d 87, 89 (5th Cir.
1996). Like UFTA, TUFTA allows the recovery of property transfers made
“with actual intent to hinder, delay, or defraud any creditor of the debtor.” Tex.
Bus. & Com. Code § 24.005(a)(1). Recipients of fraudulent transfers can
prevent clawback actions by proving they received property “in good faith and
5
Case: 17-11526 Document: 00514971687 Page: 6 Date Filed: 05/24/2019
No. 17-11526
for a reasonably equivalent value.” Id. § 24.009(a). Such recipients bear the
burden of proving TUFTA’s good faith defense. Flores v. Robinson Roofing &
Constr. Co., Inc., 161 S.W.3d 750, 756 (Tex. App.––Fort Worth 2005, pet.
denied).
The term good faith is not defined by TUFTA or UFTA and has not been
interpreted by the Supreme Court of Texas. The most prominent definition of
TUFTA good faith requires that to retain good faith, a transferee cannot
possess either actual or inquiry notice of a transfer’s fraudulent nature. Hahn
v. Love, 321 S.W.3d 517, 527 (Tex. App.––Houston [1st Dist.] 2009, pet. denied)
(“A transferee who takes property with knowledge of such facts as would excite
the suspicions of a person of ordinary prudence and put him on inquiry of the
fraudulent nature of an alleged transfer does not take the property in good
faith and is not a bona fide purchaser.”); see also GE Capital Commercial, Inc.
v. Worthington Nat’l Bank, 754 F.3d 297, 313 (5th Cir. 2014) (describing Hahn
as “the most thorough and well-reasoned Texas case applying TUFTA’s ‘good
faith’ defense”); Tex. Pattern Jury Charges––Bus., Consumer, Ins. & Emp’t
§ 105.29 (2016 ed.) (“A party takes an asset . . . in good faith if the party (1)
had no actual notice of the fraudulent intent of the debtor and (2) lacked
knowledge of such facts as would cause a person of ordinary prudence to
question whether the debtor had fraudulent intent.”).
There is no dispute that Magness was on inquiry notice of the fraudulent
nature of SIB’s transfers. The jury made this finding. We also know that
Magness did not undertake an investigation prior to accepting the transfers.
As the court below explained in a pre-judgment order, “[t]he parties agree that
the Defendants [Magness] did not perform any inquiry before redeeming their
CDs. However, the Defendants argue that they are excused from this
requirement because any investigation would have been futile and would not
have led to discovery of Stanford’s fraudulent purpose.” This brings us to the
6
Case: 17-11526 Document: 00514971687 Page: 7 Date Filed: 05/24/2019
No. 17-11526
crux of this case: does TUFTA good faith require a transferee on inquiry notice
to conduct an investigation, and if so, can that transferee retain the good faith
defense if he does not conduct an investigation but later convinces the
factfinder that such an investigation would not have turned up the fraudulent
purpose?
The lower court answered yes to both questions. It acknowledged that
“[n]either TUFTA nor Texas courts explicitly describe a duty to investigate as
a required part of TUFTA’s good faith defense. See, e.g., Hahn, 321 S.W.3d at
526–27.” However, the court, “in making an Erie guess as to how Texas law
would apply,” found it reasonable to adopt the approach taken by the Fifth
Circuit in interpreting the Bankruptcy Code’s mirror image good faith defense
to fraudulent transfer. See 11 U.S.C. § 548(c) (A transferee “that takes for value
and in good faith . . . may retain any interest transferred . . . to the extent that
such transferee . . . gave value to the debtor in exchange for such transfer.”).
The Fifth Circuit, like many other courts interpreting § 548(c) good faith,
permits transferees to “rebut” a finding of inquiry notice by demonstrating that
they conducted a “diligent investigation” into their suspicions. In re Am. Hous.
Found., 785 F.3d 143, 164 (5th Cir. 2015). Neither Magness nor the receiver
disputed this case’s application. Thus, the lower court decided that a transferee
on inquiry notice must conduct a diligent investigation to retain the TUFTA
good faith defense.
The lower court next determined that the diligent inquiry requirement
obligated a futility exception. While the court found no controlling Texas or
Fifth Circuit law on point, it was persuaded that a transferee meets the
diligent inquiry requirement if he shows that an investigation would have been
futile. Because the district court denied Magness’s motion for summary
judgment on TUFTA good faith, the questions of inquiry notice and futility
were presented to the jury. While the jury determined Magness was on inquiry
7
Case: 17-11526 Document: 00514971687 Page: 8 Date Filed: 05/24/2019
No. 17-11526
notice of SIB’s Ponzi scheme, it also determined that an investigation into the
scheme would have been futile. The district court thus determined that
Magness retained good faith. On appeal, the receiver asked this court to reject
the district court’s application of the futility exception to TUFTA good faith
and find that, under Hahn, the jury’s finding of inquiry notice defeats
Magness’s TUFTA good faith defense as a matter of law.
In our prior opinion, we agreed with the receiver and held that
“[r]egardless of the intricate nature of a fraud or scheme, failing to inquire
when on inquiry notice does not indicate good faith.” GMAG, 913 F.3d at 458.
Our holding aligns with other decisions interpreting TUFTA good faith. See
Citizens Nat’l Bank of Tex. v. NXS Constr., Inc., 387 S.W.3d 74, 84–86 (Tex.
App.––Houston [14th Dist.] 2012, no pet.) (upholding jury’s finding that
transferee had either actual or inquiry notice, which defeated the TUFTA good
faith defense); Vasquez v. Old Austin Rd. Land Tr., No. 04-16-00025-CV, 2017
WL 3159466, at *3 (Tex. App.––San Antonio 2017) (concluding that the trial
court erred by granting the transferee TUFTA good faith on summary
judgment because of evidence that the transferees were on inquiry notice); SEC
v. Helms, No. A-13-CV-1036 ML, 2015 WL 1040443, at *14 (W.D. Tex. Mar. 10,
2015) (denying TUFTA good faith in the absence of actual knowledge of fraud
because of evidence that “would have led a reasonable investor to believe the
transfer was fraudulent”); Hahn, 321 S.W.3d at 531 (denying motion for
summary judgment on TUFTA good faith because of evidence supporting a
finding of actual knowledge or inquiry notice).
In Citizens National, a Texas court of appeals evaluated a jury’s
rejection of a TUFTA good faith defense. 387 S.W.3d at 85–86. The jury
instructions were pulled directly from Hahn’s definition of good faith: they
instructed that good faith was defeated on grounds of actual or inquiry notice.
Id. The court upheld the jury’s finding that one transferee had either actual or
8
Case: 17-11526 Document: 00514971687 Page: 9 Date Filed: 05/24/2019
No. 17-11526
inquiry notice and thus did not prove the TUFTA good faith defense. Id.
Magness argues this case is not on point because the court found the transferee
“knew the transfer was fraudulent as to some creditors,” and thus had actual
notice––not inquiry notice. Id. at 86. However, another Texas case relied on
the same principle to find inquiry notice sufficient to defeat the TUFTA good
faith defense. See Vasquez, 2017 WL 3159466, at *3 (holding that the trial court
erred in granting transferee TUFTA good faith on summary judgment because
of evidence “sufficient to raise a genuine issue of material fact as to whether
the appellees had [inquiry] notice that the appellants had a claim or interest
in the property”).
Federal courts have adhered to the Hahn standard as well. The Fifth
Circuit, evaluating whether the TUFTA good faith defense required an
objective or subjective analysis, upheld a district court’s Hahn-based jury
instructions. GE Capital, 754 F.3d at 313. The jury instructions stated in
relevant part: “To establish that it acted in good faith, [transferee] must prove
by a preponderance of the evidence that it lacked actual and [inquiry]
knowledge of the debtor’s fraud.” Id. at 301. The instructions did not consider
whether the transferee investigated his suspicions or whether such an
investigation would have been futile. Id. A federal district court, relying on
Hahn, similarly held that though it believed two transferees received transfers
without actual knowledge of fraud, their TUFTA good faith defense was
defeated because “there was significant evidence that should have led
[transferee] to investigate [transferor] and the purported security interest it
sought to acquire, and would have led a reasonable investor to believe the
transfer was fraudulent.” Helms, 2015 WL 1040443, at *14. In other words,
inquiry notice defeated the TUFTA good faith defense.
Magness does not offer cases interpreting TUFTA good faith differently.
Instead, he argues that the Supreme Court of Texas has interpreted inquiry
9
Case: 17-11526 Document: 00514971687 Page: 10 Date Filed: 05/24/2019
No. 17-11526
notice differently in the real property context. The Supreme Court of Texas
previously held that a party who purchases land while on inquiry notice “is
charged with notice of all the occupant’s claims the purchaser might have
reasonably discovered on proper inquiry.” Madison v. Gordon, 39 S.W.3d 604,
606 (Tex. 2001). But under Texas law, purchasers are subject to a preceding
duty to “search the records, for they are the primary source of information as
to title.” Strong v. Strong, 98 S.W.2d 346, 348 (Tex. 1936). This duty does not
arise from the definition of inquiry notice––it informs it. And while there is a
diligent investigation requirement, there is no futility exception: “[t]he
purchaser cannot say, and cannot be allowed to say, that he made a proper
inquiry, and failed to ascertain the truth.” Id. (citation omitted).
Magness also relies on the fact that other state courts have interpreted
their UFTA provisions to include a diligent inquiry requirement for transferees
on inquiry notice. See, e.g., Carey v. Soucy, No. 1 CA-CV 17-0533, 2018 WL
5556454, at *5 (Ariz. Ct. App. Oct. 30, 2018). However, we found no example of
a court applying the diligent inquiry requirement to hold that a transferee
retains good faith when he was on inquiry notice and did not investigate prior
to accepting a transfer. In fact, three courts applying this requirement held
that transferees in this position did not act in good faith. In re Christou, Nos.
06-68251-MHM, 06-68376-MHM, 06-68251-MHM, 2010 WL 4008191, at *3–4
(Bankr. N.D. Ga. Sept. 24, 2010); Walro v. Hatfield, No. 1:16-cv-3053-RLY-
DML, 2017 WL 2772335, at *7 (S.D. Ind. June 27, 2017); Klein v. McGraw, No.
2:12-cv-00102-BSJ, 2014 WL 1492970, at *2, *8 (D. Utah Apr. 15, 2014). 2 But,
notwithstanding these congruent outcomes, we recognize that other states
have adopted a standard that the Texas courts have yet to consider. While the
2 Reviewing these decisions, it appears that the jury’s findings that Magness was on
inquiry notice but would not have uncovered the Ponzi scheme had he investigated may sit
in tension.
10
Case: 17-11526 Document: 00514971687 Page: 11 Date Filed: 05/24/2019
No. 17-11526
Texas courts have interpreted TUFTA good faith, they have not discussed the
applicability of either the diligent inquiry requirement or the futility exception.
Given that other states’ UFTA good faith defenses have taken on a standard
not considered by the Texas courts, we CERTIFY the following question to the
Supreme Court of Texas:
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?
“We disclaim any intention or desire that the Supreme Court of Texas
confine its reply to the precise form or scope of the question certified.” Janvey
v. Golf Channel, Inc., 792 F.3d 539, 547 (5th Cir. 2015).
A True Copy
Certified May 24, 2019
Clerk, U.S. Court of Appeals, Fifth Circuit
11