It’s (Former) DCL Day In The Second Department (DCL §§ 273, 275 and 276 To Be Exact)

• Posted on: Nov 16 2020

On April 4, 2020, the New York Uniform Voidable Transactions Act (“NYUVTA”) became effective, replacing Article 10, Sections 270-281 of the Debtor and Creditor Law (“DCL”), the State’s almost century-old fraudulent conveyance law. 

In February of this year, this Blog examined the NYUVTA, the DCL and the changes the NYUVTA made to the DCL (here). 

Since the NYUVTA applies to cases filed on or after April 4, 2020, there remain many cases under the former DCL that are being litigated in the courts of New York. Today, we examine two such cases: Cheek v. Brooks, 2020 N.Y. Slip Op. 06485 (2d Dept. Nov. 12, 2020) (here), and JDI Display Am., Inc. v. Jaco Electronics, Inc., 2020 N.Y. Slip Op. 06507 (2d Dept. Nov. 12, 2020) (here). Cheek involved DCL former § 273, and JDI involved DCL former §§ 273, 275 and 276.

[Ed. Note: to avoid confusion, all references to and discussions of the DCL shall be to the former version of the law.] 

Cheek v. Brooks

Cheek involved an action pursuant to DCL § 273, in which Cheek sought to set aside the conveyance of the certain properties. The conveyances occurred in 2002, when Harold Deveaux, Jr. transferred two properties to his nephew, defendant Khareem Brooks. At the time of the transfer, plaintiff, who lived at one of the properties from her birth in 1994 through at least 1995, possessed a cause of action against Deveaux for lead poisoning. In 2008, plaintiff, by her mother, commenced an action against Deveaux and, in 2009, obtained a judgment against him. Deveaux died in 2015.

In 2015, plaintiff commenced the action. Plaintiff moved for summary judgment on the cause of action seeking relief pursuant to DCL § 273. In an order dated October 4, 2018, the motion court, among other things, granted that branch of plaintiff’s motion. Brooks appealed.

The Second Department affirmed.

Pursuant to DCL § 273, “a conveyance that renders the conveyor insolvent is fraudulent as to creditors without regard to actual intent, if the conveyance was made without fair consideration.” Stout St. Fund I, L.P. v. Halifax Grp., LLC, 148 A.D.3d 744, 747 (2d Dept. 2017); Grace Plaza of Great Neck v. Heitzler, 2 A.D.3d 780, 781 (2d Dept. 2003). To constitute fair consideration, the value given in exchange must be fairly equivalent and proportionate to the value of the property conveyed. DCL § 272; Stout, 148 A.D.3d at 748; Sardis v Frankel, 113 A.D.3d 135, 141 (1st Dept. 2014). “Good faith is required of both the transferor and the transferee, and it is lacking when there is a failure to deal honestly, fairly, and openly.” 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)).

“An individual is ‘insolvent’ within the meaning of the Debtor and Creditor Law when ‘the present fair salable value of his [or her] assets is less than the amount that will be required to pay his [or her] probable liability on … existing debts as they become absolute and matured.’” Grace Plaza, 2 A.D.3d at 781 (quoting DCL § 271(1)); see also Matter of City of Syracuse Indus. Dev. Agency [Amadeus Dev., Inc. – Financitech, Ltd.], 156 A.D.3d 1329, 1332 (4th Dept. 2017). Insolvency is a “‘prerequisite[ ] to a finding of constructive fraud under section 273.’” Syracuse Indus. Dev. Agency, 156 A.D.3d at 1332 (quoting Joslin v Lopez, 309 A.D.2d 837, 838 (2d Dept. 2003)).

Against the foregoing, the Second Department held that the motion court correctly found that the “alleged purchase prices were not fairly equivalent and proportionate to the value of the subject properties.” Slip Op. at *1. The Court noted that the “deeds for both properties recite[d] consideration in the sum of only $10 and neither indicate[d] that any transfer tax was paid.” Id. The Court noted that Brooks “purchased the Greene Avenue property for $200,000 and the Adelphi Street property for $170,000, and … tendered a contract for the purchase and sale of the Greene Avenue property which stated a purchase price of $200,000.” Id. “Although ‘[i]t is always open to a party, where a nominal consideration is expressed, to show what the real consideration was,’” said the Court, “Brooks failed to do so.” Id. (internal citation omitted).

The Court also found that Brooks failed to rebut the presumption that the transfers were made without fair consideration. Under New York law, “the burden of proving insolvency is on the party challenging the conveyance.” Id. (quoting Battlefield Freedom Wash, LLC v. Song Yan Zhuo, 148 A.D.3d 969, 971 (2d Dept. 2017)) (citation omitted) “However,” noted the Court, as in Cheek, “when a transfer is made without fair consideration, a presumption of insolvency and fraudulent transfer arises, and the burden shifts to the transferee to rebut that presumption.” Id. (quoting Battlefield, 148 A.D.3d at 971). The Court found that “Brooks’s conclusory assertions and those of his aunt that Deveaux was not rendered insolvent were insufficient to rebut that presumption.” Id.

JDI Display Am., Inc. v. Jaco Electronics, Inc.

JDI involved an action under DCL §§ 273, 275 and 276, in which JDI sought to set aside the transfer of corporate funds to a director and shareholder of one of the corporate defendants.

Plaintiff is the developer, manufacturer, and seller of display devices and related products. From September 2014 through October 2017, defendant Jaco Electronics, Inc. was a licensed distributor of plaintiff’s products. As of July 2017, Jaco Electronics owed plaintiff approximately $550,000 for products plaintiff shipped to it. 

In August 2017, defendant Jaco Display Solutions, LLC purchased Jaco Electronics’ assets. According to the complaint, as part of the deal, Jaco Electronics received an investment of more than $1 million, which it transferred to defendant Joel Girsky, one of its directors and shareholders, leaving it insolvent. 

In an effort to recover damages for the outstanding amount owed to it by Jaco Electronics, plaintiff commenced the action against, among others, Jaco Electronics’ directors and shareholders, Girsky, Robert Savacchio, and Jeffrey Gash. 

The first cause of action sought to set aside the alleged fraudulent conveyances between Jaco Electronics and Girsky pursuant to DCL §§ 273, 275 and 276. Defendants moved to dismiss the complaint as asserted against them. By order dated July 9, 2018, the motion court, inter alia, denied the motion to dismiss the first cause of action. Defendants appealed.

The Second Department affirmed.

The Court held that “the first cause of action state[d] cognizable claims alleging a fraudulent conveyance pursuant to Debtor and Creditor Law former §§ 273, 275 and 276.” Slip Op. at *2. The Court found that “plaintiff sufficiently alleged that Jaco Electronics transferred corporate funds it had received from the sale of its assets to Girsky, one of its directors and shareholders, and that said transfer left it insolvent.” Id. 

Like DCL § 273, a claim under DCL § 275 must establish that the conveyance or obligation incurred was made without “fair consideration”. However, unlike DCL § 273, a claim under DCL § 275 requires an element of intent or belief that insolvency will result. Wall Street Assocs. v. Brodsky, 257 AD 2d 526, 529 (1st Dept. 1999) (citation omitted).

The Court also held that “[t]he complaint … contained sufficient factual assertions and badges of fraud, … , to support the allegation that Jaco Electronics believed that it would not be able to pay its debts after it transferred funds to Girsky, which give rise to an inference that Jaco Electronics intended to hinder, delay, or defraud the plaintiff.” Id. at *2 (citations omitted).

DCL § 276, unlike Sections 273 and 275, concerns actual fraud, as opposed to constructive fraud, and does not require proof of unfair consideration or insolvency. Because it is difficult to prove actual intent, the plaintiff may rely on “badges of fraud” (as noted by the JDI Court) to raise and inference of fraud, i.e., circumstances so commonly associated with fraudulent transfers “that their presence gives rise to an inference of intent.” Wall Street Assocs., 257 A.D.2d 526, 529 (internal quotation marks and citations omitted). Among such circumstances are: a close relationship between the parties to the alleged fraudulent transaction; a questionable transfer not in the usual course of business; inadequacy of the consideration; the transferor’s knowledge of the creditor’s claim and the inability to pay it; and retention of control of the property by the transferor after the conveyance. Id. “Depending on the context, badges of fraud will vary in significance, though the presence of multiple indicia will increase the strength of the inference.” MFS/Sun Life Trust v. Van Dusen Airport Servs., 910 F. Supp. 913, 935 (S.D.N.Y. 1995); see also Gafco, Inc. v. H.D.S. Mercantile Corp., 47 Misc.2d 661, 664 (Sup. Ct., N.Y. County 1965) (noting, “[a]lthough ‘badges of fraud’ are not conclusive and are more or less strong or weak according to their nature and the number occurring in the same case, a concurrence of several badges will always make out a strong case”) (internal quotation marks and citations omitted). A conveyance made with actual intent to defraud is fraudulent regardless of whether the debtor receives fair consideration. MFS/Sun Life Trust, 910 F. Supp. at 934 (citation omitted).

Since DCL § 276 concerns actual fraud, the plaintiff must plead it with particularity. Thus, the plaintiff must allege specific facts, including, among other things, the identity of the specific transactions or conveyances that the plaintiff claims were fraudulent. Syllman v. Calleo Dev. Corp., 290 A.D.2d 209, 210 (1st Dept. 2002); see CPLR 3016 (b). In JDI, the Court held that plaintiff satisfied this requirement. Slip Op. at *2.

Takeaway

Prior to the enactment of the NYUVT, creditors looked to Article 10 of the Debtor and Creditor Law to recover assets that had been (or may be) transferred by debtors to another party. Whether the debtor transferred assets with intent to defraud or without fair consideration, the former DCL (and now the NYUVT) provides creditors with a number of remedies.

There are significant differences between the DCL and the NYUVT (here). Whether the plaintiffs in Cheek and JDI would have prevailed under the NYUVT is unknown. What is certain, however, is creditors must satisfy the applicable pleading and evidentiary standards to secure the protections under both the former DCL and the NYUVT. In Cheek and JDI, the plaintiffs met their respective pleading and evidentiary requirements.