- Case Type:
- Business
- Case Status:
- Affirmed
- Citation:
- 22-10429 & 22-10235 (5th Circuit, Mar 20,2024) Published
- Tag(s):
-
- Ruling:
- In this non-bankruptcy opinion, the U.S. Court of Appeals for the Fifth Circuit (Circuit) affirmed the decision of the U.S. District Court for the Northern District of Texas (DC) not to award a setoff on one of several bases - inequity's vivid taint - that would have otherwise reduced the judgment won by the receiver (Receiver) for the estate of Stanford International Bank and related entities (SIB) in the former's lawsuit to recover estate assets from Gary Magness (GM) and certain affiliates, began after the launch of related receivership proceedings against SIB in the same tribunal.
- Procedural context:
- It wasn't always so complicated. This appeal grew out of two actions, closely linked, pending before the same Texas judge in the very same court. First, a receivership action commenced by the Securities and Exchange Commission (SEC) against SIB (Receivership Action), which led to the appointment of Ralph S. Janvey as the Receiver. Second, a standalone lawsuit (Magness-Receiver Action) by the latter against GM, along with GMAG, L.L.C., and several other affiliates (Magness). SIB's ponzi scheme engendered the Receivership Action, while Magness' conversion of $79-million in SIB-issued certificates of deposit (CDs) into SIB loans worth $88.2 million, a sum representing the value of the original CDs plus accumulated interest, SIB's counteroffer to Magness' demand for full redemption as rumors of SIB's fraud swirled, thereafter made the Magness-Receiver Action inevitable. It, moreover, represented the culmination of a lengthy appellate and trial process: a prior Circuit appeal, from which a certified question to the Supreme Court of Texas (SJT) emerged that compelled the Circuit to reverse and render judgment against Magness, followed by the entry of that ordered final judgment (with fees and interest added) by the DC, subsequently stayed at Magness' request (and upon the posting of a suitable bond), so as to allow Magness to make two moves: that judgment's fruitless appeal to the Circuit and equally unsuccessful petition for a writ of certiorari for review of the Circuit's first liability ruling.
These failures prompted the issuance of two twined trial court decisions. One came in the Magness-Receiver Action. There, after the Circuit had affirmed the DC's final judgment, plus its calculation of prejudgment interest and costs, the Receiver petitioned the DC for the release of the $79 million put up by Magness as a "cash supersedeas bond," also (and perhaps more commonly) known as an appeal bond, so as to secure his bid for a stay of final judgment. Though they had previously represented that they would not oppose the release of funds, Magness then moved for leave to file a complaint; the DC denied this motion and granted the Receiver's motion to release the bonded funds. The other came in the Receivership Action. There, Magness filed a "nearly identical" motion for leave to file his proposed complaint, again seeking a declaratory judgment pertaining to setoff. As it had in the Magness-Receiver Action, the DC again denied Magness' motion. By denying leave in both cases, the DC effectively denied Magness' setoff plea. Considering an overwhelming overlap in theme and logic, Magness naturally proceeded to appeal both denials, contending his setoff rights fall into two categories: a "20% CD Principal Setoff Amount plus accrued interest on that amount" and the "amount of distributions to which [Magness is] entitled as [a] victim[] of SIB."
A few more twists and turns remained, for this opinion would not be the first but rather the second one to be released and published after the consolidation of these separate appeals at the circuit-level. In 2023, the Circuit issued an opinion issued on May 30, 2023, and published at 69 F.4th 259 (2023 Opinion). But after Magness filed a petition for rehearing en banc, this petition was denied in light of the failure of any appellate judge in regular active service to request such a colloquy. The petition, however, was not quite dead; instead, the Circuit opted to treat it as one for panel rehearing. So reconfigured, the petition was granted. Upon its substantive consideration, the Circuit withdrew the 2023 Opinion and replaced it with the one summed here and issued nearly ten months later.
- Facts:
- Between December 2004 and October 2006, Magness purchased $79 million in CDs that paid above-market rates issued by SIB. After reports that the SEC was investigating SIB for the issuance of fraudulent CDs over nearly two decades, Magness sought to redeem their investments. While SIB rejected the possibility of redemption, they did agree to loan the value of the CDs, plus an additional sum as a result of accumulated interest. As a result, in October 2008, Magness received $88.2 million from SIB through a series of loans.
In 2009, SIB was exposed as a Ponzi scheme, leading the SEC to commence the formal Receivership Action in the DC. A 2010 order issued by the DC in the Receivership Action barred "[t]he set off of any debt issued by the Receivership Estate or secured by the Receivership Estate assets based on any claim against the Receiver or the Receivership Estate" absent prior judicial approval and forbad all persons from filing suit against the Receiver on claims "arising from the subject matter of this civil action." Later, in 2012, the DC established a process for creditors to file specifically defined claims against the Receivership and to participate in distributions. Magness participated in this process, filing three proofs of claim alleging outstanding balances in their SIB CD account that constitute the basis for their setoff demand.
In the Magness-Receiver Action, the Receiver sued Magness, alleging that the loans received from SIB were fraudulent transfers. While Magness agreed the payments were fraudulent, they insisted that they had been taken in good faith under Texas law. Eventually, in this second action, the jury determined that, though Magness had inquiry notice of the possibility of a Ponzi scheme, such an investigation would have been futile. Accordingly, the DC entered a judgment denying the Receiver any recovery. Since Magness did not have to disgorge any funds, then, setoff was not an issue. However, on appeal, the Circuit certified to the Supreme Court of Texas (SCT) the question of whether good faith was, in fact and under Texas law, a defense under these circumstances. The SCT answered no. Accordingly, the Circuit reversed and rendered judgment for the Receiver as to Magness' liability. Procedural convolutions ensued, as detailed above.
- Judge(s):
- Leslie H. Southwick; James L. Dennis; and Carl E. Stewart
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