The United States Court of Appeals for the Fifth Circuit recently asked for guidance from the Supreme Court of Texas on whether a transferee on inquiry notice of fraudulent intent can achieve good faith without investigating its suspicions. Without providing an exhaustive review of the Texas Uniform Fraudulent Transfer Act’s good faith affirmative defense, the Supreme Court of Texas answered the question no. Janvey v. GMAG, L.L.C. et al, Case No. 19-0452, ___ S.W.3d ____ (Tex. December 20, 2019).
The Supreme Court restated that the purpose of the Texas Uniform Fraudulent Transfer Act (“TUFTA”) is to “protect creditors from being defrauded or left without recourse due to the actions of unscrupulous debtors.” Janvey v. GMAG, L.L.C. et al, Case No. 19-0452, ___ S.W.3d ____ (Tex. December 20, 2019), citing, KCM Fin. LLC v. Bradshaw, 457 S.W.3d 70, 89 (Tex. 2015). Creditors are allowed to invoke TUFTA to “claw back” fraudulent transfers from their debtors to third-party transferees. The ability to claw back can be defeated if the transferee can show that it acted in good faith and the transfer involved reasonably equivalent value.
In responding to the certified question, the Supreme Court held that when a transferee is on inquiry notice and attempts to invoke TUTFA’s affirmative defense of good faith, it must show that it investigated its suspicions diligently. Janvey v. GMAG, L.L.C. et al, Case No. 19-0452, ___ S.W.3d ____ (Tex. December 20, 2019). Recognizing that the investigation may not uncover additional evidence to impute to the transferee, it is still required once the transferee is on inquiry notice. Further, the investigation is a chance to demonstrate good faith and requiring proof of an investigation negates the incentive to remain willfully ignorant of fraud. Janvey v. GMAG, L.L.C. et al, Case No. 19-0452, ___ S.W.3d ____ (Tex. December 20, 2019).
This opinion by Justice Busby and the Supreme Court of Texas helps clarify the duties of transferees. Parties to a transaction have closed their eyes to examples of possible fraudulent intent to defraud a creditor for much too long. This opinion significantly strengthens the TUFTA which already provides its own eleven, nonexclusive indicia of fraudulent intent. See Tex. Bus. & Com. Code ch. 24. Also, this opinion along with the Supreme Court of Texas’ previous opinion on what constitutes “reasonably equivalent value” in Janvey v. Golf Channel, Inc., 487 S.W.3d 560, 566 (Tex. 2016) provides a comprehensive look at what is needed to raise or defeat the affirmative defense to TUFTA.
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