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Conveyance to Extinguish an Antecedent Debt Held Not to Be Fraudulent Under (Old) DCL § 273-a

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  • Posted on: Jan 27 2021

DCL § 273-a (conveyances by defendants) provides that a conveyance made without fair consideration by a defendant in an action for money damages is fraudulent as to the plaintiff in that action, regardless of intent, if the defendant fails to satisfy a resulting judgment in the action. Fair consideration encompasses two components: “whether the amount given for the transferred property was a ‘fair equivalent’ or not ‘disproportionately small’” and “whether the transaction [was] made in good faith.” DCL § 272; Sardis v. Frankel, 113 A.D.3d 135, 141-142 (1st Dept. 2014). Good faith requires honest, fair and open dealings by the transferor and the transferee. Matter of CIT Group/Commercial Servs., Inc. v. 160-09 Jamaica Ave. Ltd. Partnership, 25 A.D.3d 301, 303 (1st Dept. 2006) (quoting Berner Trucking v. Brown, 281 A.D.2d 924, 925 (4th Dept. 2001)).

The foregoing principles were at issue in Eagle Eye Collection Corp. v. Shariff, 2021 N.Y. Slip Op. 00385 (1st Dept. Jan. 26, 2021) (here).

Eagle Eye was brought as a collection action against a nonparty. The debtor owned a condominium unit in which defendants were tenants. At some point in 2016, the debtor’s mortgage lender commenced a foreclosure proceeding against her. In October 2016, the debtor conveyed the unit to nonparty NYC REO LLC (“REO”), for nominal consideration, giving a deed in lieu of foreclosure. Plaintiff alleged that defendants were aware both of its collection action against the debtor and that the debtor was in foreclosure. Plaintiff asserted that defendants negotiated with the mortgage lender to engineer the conveyance to REO as a straw purchaser. In April 2017, REO conveyed the unit to defendants.

Plaintiff commenced the action, alleging violations of, inter alia, DCL §§ 273-a and 273. Defendants moved to dismiss. The motion court granted the motion. Plaintiff appealed.

The Appellate Division, First Department affirmed.

The Court held that plaintiff “failed to adequately plead a claim for fraudulent conveyance under Debtor and Creditor Law § 273-a.” “First”, noted the Court, the debtor’s conveyance of the deed in lieu of foreclosure was done to extinguish the mortgage – that is, it was a thing of value made “in payment of an antecedent debt.” Slip Op. at *1. As such, it could not constitute a fraudulent conveyance under DCL § 273-a. Id. (citing Ronga v. Chiusano, 97 A.D.2d 753, 753 (2d Dept. 1983)). 

Second, the Court found plaintiff’s allegation that “the deed in lieu of foreclosure was not a ‘fair equivalent’ of the mortgage debt being satisfied” to be speculative and conclusory. Id. (citing Jaliman v. D.H. Blair & Co. Inc., 105 A.D.3d 646, 647 (1st Dept. 2013)). Such allegations, held the Court “do not state a claim for constructive fraud under the Debtor and Creditor Law.” Id. (citing Riback v. Margulis, 43 A.D.3d 1023, 1023 (2d Dept. 2007)).

Accordingly, the Court concluded that the transfer of the unit to defendants from REO was not actionable: 

Because of these factors, the initial transfer from the debtor to REO is not actionable. Since the initial transfer is not actionable, the subsequent transfer to defendants, who “derived title immediately or mediately” from a good faith purchaser for value, is also not actionable (Debtor and Creditor Law § 278).

Id.

On the issue of good faith, the Court rejected plaintiff’s argument that defendants acted in bad faith by allegedly engineering the transaction with REO. In this regard, the Court noted that the timing of events undermined the underlying predicate of plaintiff’s argument:

Moreover, plaintiff claims that defendants first learned of its collection action against the debtor when plaintiff served her with process at the unit in December 2016. Plaintiff asserts that, once they learned of plaintiff’s collection action, defendants contacted the debtor’s mortgage lender to engineer a conveyance to REO as a straw purchaser, followed by the conveyance to defendants. By December 2016, however, it is undisputed that the debtor had already transferred the unit to REO. Thus, even under plaintiff’s version of the facts, defendants learned of the collection action after the mortgage lender had already taken the deed in lieu of foreclosure in satisfaction of the antecedent mortgage. Defendants cannot have acted in bad faith to engineer a transfer to a straw purchaser two months before they even learned of the transaction they were supposedly seeking to avoid.

Id. at *1-*2.

With regard to plaintiff’s claim under DCL § 273, the Court held that it “suffer[ed] from the same defects as its claim under section 273-a.” Id. at *2. First, said the Court, the allegation of insolvency was conclusory and, therefore, did “not suffice to support its claim under Debtor and Creditor Law § 273.” Id. (citing Riback, 43 A.D.3d at 1023). Second, as with the DCL § 273-a claim, because the conveyance “satisfie[d] an antecedent debt [that was] made while the debtor [was] insolvent” it could not be fraudulent or “otherwise improper.” Id. (quoting Ultramar Energy v. Chase Manhattan Bank, 191 A.D.2d 86, 90-91 (1st Dept. 1993)).

Takeaway

Eagle Eye illustrates the difficulties creditors have alleging violations of the old DCL. Even when alleging constructive fraud, in which intent is not required, creditors must allege facts to support their claims. A mere belief that a defendant transferred assets without fair consideration does not suffice to demonstrate a violation of DCL §§ 273 and 273-a. As noted by the Eagle Eye Court, “‘speculative and conclusory allegations’ do not state a claim for constructive fraud under the Debtor and Creditor Law.” Slip Op. at *1 (citation omitted).  

Eagle Eye also shows that a constructive fraud claim cannot survive a dismissal motion where the conveyance was made “in payment of an antecedent debt.” The reason: the antecedent debt, which is satisfied upon receipt of the property or obligation, represents a “fair equivalent” of what is conveyed. See DCL § 272.

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