Joe Wielebinski and Matthias Kleinsasser for Law360: Ponzi Ruling Complicates Texas Fraudulent Transfer Litigation


Winstead PC attorneys Joe Wielebinski and Matthias Kleinsasser wrote an article published by Law360 about the recent opinion issued by the Fifth Circuit in Janvey v. GMAG LLC, the latest of several opinions addressing Texas Unifor​m Fraudulent Transfer Act issues arising out of the Stanford International Bank Ponzi scheme. An excerpt is below:

“The U.S. Court of Appeals for the Fifth Circuit and the Texas Supreme Court have issued several recent opinions addressing Texas Uniform Fraudulent Transfer Act issues arising out of the Stanford International Bank Inc. Ponzi scheme.

On Oct. 8, the Fifth Circuit issued its latest opinion in Janvey v. GMAG LLC, reaffirming and clarifying that a transferee on inquiry notice of fraudulent conduct must conduct a diligent investigation to be able to rely on TUFTA's good faith affirmative defense, rather than arguing that such an investigation would have been futile.

What is the gist of the latest Janvey opinion?

Ralph S. Janvey, the Stanford International Bank receiver, sued Gary D. Magness and various affiliated entities to recover $79 million under an actual fraudulent transfer theory. A jury found that the Magness parties had inquiry notice as of October 2008 that Stanford International Bank was engaged in a Ponzi scheme.

The jury also found, however, that further investigation by the Magness parties into this scheme would have been futile. Based on the jury's findings, the district court held that the Magness parties had met their burden to rely on TUFTA's Section 24.009(a) affirmative defense, which allows a transferee to defeat liability by showing it received an actual fraudulent transfer in good faith and in exchange for reasonably equivalent value.

Actual or inquiry notice is generally sufficient to negate good faith, but inquiry notice will not negate good faith if the transferee conducts a diligent investigation that fails to uncover fraudulent conduct. Inquiry notice is defined 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."

Until recently, whether a transferee who did not conduct a diligent investigation could retain its good faith defense by demonstrating that an investigation would have been futile was an open question. Initially, the Fifth Circuit concluded that the Texas Supreme Court would not hold that a futility exception exists under Texas law.

The Fifth Circuit subsequently vacated that opinion upon Magness' request that the futility exception question be certified to the Texas Supreme Court. In December 2019, the Texas Supreme Court held futility does not excuse a transferee on inquiry notice from conducting a diligent investigation.

Applying the Texas Supreme Court's decision to the facts, the Fifth Circuit held that the Magness parties did not conduct a diligent investigation into fraudulent conduct and were not entitled to TUFTA's affirmative defense. Because the Fifth Circuit provided no guidance on this issue, the main question left unanswered is what, precisely, does a diligent investigation require?

Read the full article.

About Winstead

Winstead is a national business law firm with nearly 300 attorneys who serve as trusted advisors to emerging, mid-market and large companies, both public and private. The Winstead team provides a range of core legal services that are critical to our clients achieving their business goals. Winstead’s business transactions and litigation practices serve key industries including airlines, financial services, healthcare, higher education, investment management/private equity, life sciences, real estate, and sports business.   

Search Tips:

You may use the wildcard symbol (*) as a root expander.  A search for "anti*" will find not only "anti", but also "anti-trust", "antique", etc.

Entering two terms together in a search field will behave as though an "OR" is being used.  For example, entering "Antique Motorcars" as a Client Name search will find results with either word in the Client Name.


AND and OR may be used in a search.  Note: they must be capitalized, e.g., "Project AND Finance." 

The + and - sign operators may be used.  The + sign indicates that the term immediately following is required, while the - sign indicates to omit results that contain that term. E.g., "+real -estate" says results must have "real" but not "estate".

To perform an exact phrase search, surround your search phrase with quotation marks.  For example, "Project Finance".

Searches are not case sensitive.

back to top