The Fifth Circuit Shifts the Risk of Doing Business with Fraudulent Enterprises to Trade Creditors

April 07, 2015

When a debtor pays the market cost for goods and services provided to it by third-party vendors, these payments normally cannot be recovered as fraudulent transfers in the U.S. That is because the debtor receives reasonably equivalent value for the payments to its vendors and because the unsuspecting vendors can assert a good faith defense based on the value provided. As courts recognize, third party vendors “have no reason and, more importantly, no duty to inquire into the nature of the debtor’s business.” But when the debtor is a fraudulent enterprise, a Ponzi scheme for example, is value defined as the objective market value of the goods and services provided by the vendors, i.e. an objective standard, or is it value subjective to the debtor -- i.e. since the goods and services do nothing but prolong the fraud with no benefit to the debtor and its eventual creditors, do they constitute value at all?

A recent Fifth Circuit decision, Janvey v. Golf Channel, Inc., adopted a subjective approach to the question and held that the Golf Channel did not provide “value” in selling advertising time to a business later revealed to be a Ponzi scheme.

Read "The Fifth Circuit Shifts the Risk of Doing Business with Fraudulent Enterprises to Trade Creditors."