New Fraudulent Transfer case says you better research your clients


Lets say your business lands a client who pays you 6 million a year.  You do your best, provide great service, and of course spend the 6 million.

A few years later you get a letter in the mail saying your client was running a ponzi scheme and you have to pay all 6 million back.  Sound far fetched?  Yeah, I thought so too, until I just read an appellate court case on fraudulent conveyances that came out yesterday.

In that case, Stanford Bank, which ran a 9 billion dollar ponzi scheme, paid the golf channel 6 million dollars for advertising.  In return the golf channel ran ads worth 6 million.  Seems simple enough doesn’t it?

Unfortunately for the golf channel, anytime a ponzi scheme promoter makes a payment to someone else, there is a presumption that the payment was a fraudulent transfer.  One way to overcome that presumption is to show that you took the money in good faith and provided value in return for the money.

In the golf channel case it is undisputed the golf channel had no clue that Stanford was running a ponzi operation.  Also undisputed is the fact that the golf channel gave 6 million dollars worth of ads.  However lawyers and judges are weird people.  They see all sorts of nuances where others see just either/or.

In this particular case the appellate court said the golf channel didn’t have to just show it provided 6 million of ads to Stanford, rather the golf channel had to show its services did not diminish the value of Stanford.  Since the golf channel didn’t point out how its ads increased or preserved the value of Stanford, the appellate court said the golf channel had to pay the 6 million back.

Think through the consequences of this decision.  Lets say you have a restaurant and a ponzi scheme promoter throws one hell of a party.  The bill is 100K.  A few years later a receiver could come after you for the 100K.

If you have an office building and provide office space to a ponzi person.  When it blows up you might have to forfeit all the rent payments.

You’re a web developer and create a web page and do marketing for a company.  Better not spend a dime as a receiver might knock on your door 2 or 3 years down the road.

I think you get the picture.

A lot of small business owners seem to believe the myth that if they do everything by the book they never have to worry about a financially crippling lawsuit.  I think to say that with this case that myth is now busted.  If you don’t have a valid plan in place to protect your assets, your really doing a disservice to your family.