Fifth Circuit Blocks Fraudulent Transferee's Good Faith Defense

Although the "TUFTA good faith affirmative defense is an exception to the rule that fraudulent transfers must be returned," the Fifth Circuit reasoned that "no court has considered extending TUFTA good faith to a transferee on inquiry notice who later shows an investigation would have been futile." Id. at 4, 5. Significantly, in reversing the district court's dismissal of an SEC receiver's fraudulent transfer complaint in a Ponzi scheme case, the court "declined to rely on [Bankruptcy Code] §548(c) [case law] to interpret TUFTA good faith." Id., citing G.E. Capital Commercial, Inc. v. Worthington Nat'l Bank, 754 F.3d 297, 312 n.21 (5th Cir. 2014) (Code "§548(c) is not necessarily substantively congruent with state-law counterparts, despite a common ancestry.)".

Relevance

GMAG shows the different judicial approaches to applying fraudulent transfer law under the widely adopted state law Uniform Fraudulent Transfer Act (UFTA) and under the federal Bankruptcy Code (Code). In fact, the Fifth Circuit struggled with differences between the two seemingly identical statutes in 2015 and 2016 after asking for and receiving guidance from the Texas Supreme Court on the meaning of "value" in TUFTA's good faith defense provision.