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Janvey v. Gmag, L.L.C.

United States Court of Appeals, Fifth Circuit

January 9, 2019

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

          Before STEWART, Chief Judge, and DENNIS and WILLETT, Circuit Judges.

          CARL E. STEWART, CHIEF JUDGE

         This case, arising out of the Stanford International Bank Ponzi scheme, requires us to determine whether the Texas Uniform Fraudulent Transfer Act's good faith affirmative defense allows Defendants-Appellees to retain fraudulent transfers received while on inquiry notice of the Ponzi scheme. We hold it does not. We REVERSE the district court's judgment and RENDER judgment in favor of the Plaintiff-Appellant.

         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, 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) fraudulent transfer pursuant to the Texas Uniform Fraudulent Transfer Act ("TUFTA") 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 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 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 ...


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