New York Supreme Court Addresses Pleading Requirements For Fraudulent Conveyance Actions

• Posted on: Jan 12 2018

In very general terms, fraudulent conveyance statutes are designed to protect creditors from situations where a debtor transfers its assets to a creditor’s detriment.  Sometimes such transfers are made with actual intent to defraud.  Other times, transfers may be deemed to be constructively fraudulent regardless of the actual intent of the debtor/transferor.

Presently, Article 10 of New York’s Debtor and Creditor Law (the “DCL”) governs fraudulent transfers.[1]  For example, section 273 (Conveyances by insolvent) provides that conveyances that render a debtor insolvent that are made without fair consideration, are fraudulent as to creditors regardless of intent;  section 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; and, section 276 (Conveyance made with intent to defraud) provides that conveyances made with actual intent (as opposed to presumed intent) to “hinder, delay, or defraud either present or future creditors, is fraudulent as to both present and future creditors.”

The Court, in Capital One Equipment Finance Corp. v. Patton R. Corrigan, et. al. (Sup. Ct. New York Co. December 14, 2017) (the “Action”), recently decided two motions to dismiss plaintiff’s fraudulent conveyance complaint.  The facts in Capital One are interesting.  Transit Funding Associates, LLC (“TFA”) was in the business of lending money to Chicago taxi owners and drivers to purchase taxi medallions.  Levine and Corrigan were principals of TFA.  In 2009, Capital One provided TFA with a $35 million revolving credit line to finance its business.  The credit line, which was guarantied by Levine and Corrigan, was increased to $80 million in 2012.  In 2014, due to its decision to stop lending in the Chicago medallion market, Capital One began denying TFA’s requests for funding.  As a result of Capital One’s decision, TFA was unable to extend new medallion loans or obtain replacement financing.  TFA’s business “was destroyed” and, when its loan obligations to Capital One matured in late 2014, it defaulted.

Thereafter, in a related action, TFA sued Capital One for, inter alia, breach of contract and fraud related to the decision to stop lending.  In another related action, Capital One moved for summary judgment in lieu of complaint against Corrigan and Levine on their respective guaranties.  Supreme Court denied the motion, but the Appellate Division reversed and Capital One entered a $57 million judgment against Corrigan and Levine.

Capital One commenced the Action in 2016 alleging, constructive and actual fraudulent conveyances under sections 273, 274, 275, 276, 276-a and 278 of the DCL.  To support its complaint, Capital One alleged numerous transfers by Levine and Corrigan during time periods when they should have known that they might have liability to Capital One under their guaranties.  Thus, Capital One alleged that over a two-year period, the value of Levine’s assets declined from $155 million to $29 million, with $45 million in assets being transferred to his wife for no consideration.  It was also alleged that, in a similar period of time, Corrigan’s assets decreased from $163 million to $12 million – with a total reduction in cash and marketable securities from $45 million to $1 million.  Finally, Capital One alleged that, while “entities controlled by Corrigan and Levine” sold medallions valued at between $150 and $175 million, only $11 million of the proceeds was used to pay down TFA’s loan, but at least $76 million was distributed to family members and related entities (the “$76 Million Family Distribution”).

In dismissing the twenty-first and twenty-second causes of action in the complaint related to the $76 Million Family Distribution, the Court recognized that “Capital One fail[ed] to specifically allege that Corrigan and Levine had an ownership or beneficial interest in the transferred property, such that Corrigan and Levine would have benefitted in any way from the transfers… [and that] they just allege that they ‘controlled’ the entities that sold the medallions and distributed the money.”

The twenty-third and twenty-fourth causes of action in the complaint were also dismissed.  Those causes of action allege that Corrigan and Levine transferred tens of millions of dollars: without consideration and were rendered insolvent; and, with the actual intent to hinder, delay or defraud Capital One.  In recognizing the insufficiency of the factual allegations supporting these causes of action, the Court recognized that “Capital One merely alleges a decline of Levine and Corrigan’s assets because of a transfer of cash and assets, however, [it] fails to allege how specific assets or money were fraudulently transferred or conveyed, and [it] fails to allege specific recipients of any such fraudulent conveyance during a specific time frame.”

The Court did, however, sustain the other twenty causes of action in the Complaint.  For example, causes of action pursuant to DCL 273, 274 and 275 were sustained. These causes of action are based on constructive fraud and, therefore, do not require the particularized pleading required with causes of action based on actual fraud (as with claims made pursuant to DCL 276 (see CPLR 3016(b) and Swartz v. Swartz, 145 A.D.2d 818 (2^nd Dep’t 2016)).  In this regard, the Court found that:

Capital One alleges conveyances of millions of dollars’ worth of assets and property from Levine to his wife for no consideration during the time that Uber was gaining control in the market and beginning to threaten the taxi medallion industry.  Capital One alleges that the conveyances rendered Levine insolvent or left with small capital such that he would be unable, if required, to pay his debt pursuant to the guaranty.  The allegations can support an inference that when making the conveyances, Levine believed that he would incur debts beyond his ability to pay.  Further discovery will yield more information as to these allegations, but the pleadings are sufficient to survive Levine’s motion to dismiss this claim.

The Court also sustained causes of action for conveyances made with actual intent fraud to defraud under DCL 276 and 276-a.  Because actual intent to hinder, delay or defraud creditors is difficult to prove, the Court recognized that “a pleader is allowed to rely on ‘badges of fraud’ to support its case, such as: 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.”  The Court found that Capital One’s allegations that “conveyances were made from Levine to his wife, with no consideration, not in the ordinary course of business, and with knowledge that he could be liable under the guaranty” were sufficient to sustain the applicable allegations for transfers made with actual intent to defraud.

TAKEAWAY

When pleading under the DCL, it is important to appreciate the applicable pleading standards based on the varying burdens and to satisfy the requisite burden with sufficient facts.  Ironically, the Capital One Court dismissed the causes of action with the more liberal pleading standard because insufficient facts were alleged by Capital One.

[1] The New York Legislature is presently considering repealing the existing fraudulent conveyance laws and adopting the “Uniform Voidable Transaction Act” in its place.  Developments in this area will be reported herein.

Tagged with: Banking Litigation, Business Disputes, Commercial Litigation, Fraudulent Conveyance