Second Department Affirms Denial of Summary Judgment Motion Finding Issues of Fact Surrounding Fraud and Fraudulent Conveyance Claims

• Posted on: Jun 6 2019

Sometimes a decision goes in a direction that the reader does not expect. Bashian & Farber, LLP v. Syms, 2019 N.Y. Slip Op. 04348 (2d Dept. June 5, 2019) (here), is such a case.

Bashian involved what appeared to be a straightforward case concerning an alleged fraud and fraudulent conveyance in the context of a fee dispute between a law firm and its former client. While the case involved the elements of those claims, its holding focused on the concept of scheme liability – that is, liability premised on the knowing participation in a scheme to defraud, even where the participation did not involve all of the elements of a fraud claim (such as the making of a statement). Since scheme liability is not typically alleged in a common law fraud and fraudulent conveyance action, this Blog will take a closer look at Bashian in today’s post.   

A Quick Primer on the Applicable Law

Common Law Fraud

To state a claim for fraud, a plaintiff must allege a material misrepresentation of fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages. Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 558 (2009). Notably, “[l]iability for fraud may be premised on knowing participation in a scheme to defraud, even if that participation does not by itself suffice to constitute the fraud.” Danna v. Malco Realty, Inc., 51 A.D.3d 621, 622 (2d Dept. 2008). See also see CPC Intl. v. McKesson Corp., 70 N.Y.2d 268, 286 (1987).

Fraud allegations must be stated with particularity to satisfy CPLR 3016(b). Id. Thus, the plaintiff must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Id. at 559-60. Conclusory allegations will not suffice. Id. Neither will allegations based on information and belief. See Facebook, Inc. v. DLA Piper LLP (US), 134 A.D.3d 610, 615 (1st Dept. 2015) (“Statements made in pleadings upon information and belief are not sufficient to establish the necessary quantum of proof to sustain allegations of fraud.”).

Although, CPLR § 3016 (b) provides that “the circumstances constituting the [fraud] shall be stated in detail,” the New York Court of Appeals has “cautioned that section 3016 (b) should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud.” Pludeman v. Northern Leasing, Sys., Inc., 10 N.Y.3d 486, 491 (2008) (internal quotation marks and citations omitted). Thus, where the facts “are peculiarly within the knowledge of the party charged with the fraud,” and “it would work a potentially unnecessary injustice to dismiss a case at an early stage where any pleading deficiency might be cured later in the proceedings,” dismissal should be denied. Id. at 491-92 (internal quotation marks and citations omitted). See also CPC Intl. v. McKesson Corp., 70 N.Y.2d 268, 285-286 (1987).

Fraudulent Conveyance: DCL § 276

Under Section 276 of the DCL, “[e]very conveyance made … with actual intent … to hinder, delay, or defraud either present or future creditors, is fraudulent.…” To plead a claim under DCL § 276, the plaintiff “must allege that (1) the thing transferred has value of which the creditor could have realized a portion of its claim; (2) that this thing was transferred or disposed of by the debtor and (3) that the transfer was done with actual intent to defraud.” Brunner v. Estate of Lax, 47 Misc. 3d 1206(A) (Sup. Ct., N.Y. County 2015), aff’d, 137 A.D.3d 553 (2d Dept. 2016). Like a common law fraud claim, a claim under DCL § 276 must be pleaded with particularity. Syllman v. Calleo Dev. Corp., 290 A.D.2d 209, 210 (1st Dept. 2002).

The burden of proving actual intent is on the party seeking to set aside the conveyance. Marine Midland Bank v. Murkoff, 120 A.D.2d 122, 126 (2d Dept. 1986); see also ACLI Gov’t Sec., Inc. v. Rhoades, 653 F. Supp. 1388, 1394 (S.D.N.Y. 1987).

Actual intent to defraud must be proven by clear and convincing evidence. Marine Midland Bank, 120 A.D.2d at 128; ACLI Gov’t Sec., 653 F. Supp. at 1394. Since it is rarely susceptible to direct proof, actual intent is typically established through circumstantial evidence surrounding the allegedly fraudulent act. Id. Consequently, courts allow creditors “to rely on badges of fraud to support his case, i.e., circumstances so commonly associated with fraudulent transfers that their presence gives rise to an inference of intent.” Wall St. Assoc. v. Brodsky, 257 A.D.2d 526, 529 (1st Dept. 1999) (internal quotation marks and citations omitted). Among the circumstances considered are: secrecy and haste in making the transfers; “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. See also Dempster v. Overview Equities, Inc., 4 A.D.3d 495, 498 (2d Dept. 2004); United Parcel Service v. Jay Norris Corp., 102 Misc. 2d 231, 233 (Sup. Ct., Nassau County 1979) (inference raised from the relationship of the parties to the transaction and the secrecy of the sale); Gafco, Inc. v. H.D.S. Mercantile Corp., 47 Misc. 2d 661, 664 (Sup. Ct., N.Y. County 1965) (“Inadequacy of consideration, secret or hurried transactions not in the usual mode of doing business, and the use of dummies or fictitious parties are common examples of ‘badges of fraud.’”). A conclusory allegation that the plaintiff has been defrauded is not sufficient. Syllman, 290 A.D.2d at 210.

Bashian & Farber, LLP v. Syms

Background

Plaintiffs are the former attorneys of the defendant Richard Syms (“Richard”). Beginning in 2010, plaintiffs represented Richard in a sharply contested probate proceeding. Plaintiffs alleged that in mid-2012, Richard stopped paying plaintiffs’ legal fees. Richard allegedly told plaintiffs that he would sell certain real property owned by him to pay the outstanding legal fees.

According to plaintiffs, instead of selling the property and paying his legal fees as promised, in August and December 2011, Richard and his wife, defendant Ineva Syms (“Ineva”), transferred to Ineva solely, for nominal or no consideration, three jointly owned unimproved properties located at 113 Depot Hill Road, Amenia, N.Y. (the “113 Depot Hill Property”); 108 Depot Hill Road, Amenia, N.Y. (the, “108 Depot Hill Property”); and 221 North Salem Road, Lewisboro, N.Y. (the “221 North Salem Property”). Plaintiffs further alleged that on July 22, 2013, Richard and Ineva sold the 221 North Salem Property to a third party for more than $1.2 million. At the time, Richard allegedly had outstanding legal fees of approximately $239,142.25, but failed to make any payments.

In October 2013, Richard and Ineva listed for sale a property known as 3313 Route 343, Amenia, N.Y. In March 2014, Ineva transferred, allegedly for no valuable consideration, the 108 Depot Hill Property, a property known as 199 North Salem Road, Lewisboro, N.Y. (the “199 North Salem Property”), and the 113 Depot Hill Property from her name into the Syms Family Revocable Trust dated March 11, 2014 (the “Trust”), for which she and Richard served as trustees. At the time of the second transfer, Richard allegedly owed plaintiffs $329,068.90 in legal fees. The 199 North Salem Property was later transferred from the Trust to Ruth Merns, Richard’s mother, for $1.00.

In July 2014, plaintiffs commenced the action to recover, inter alia, on an account stated for legal fees and pursuant to Debtor and Creditor Law article 10 against Richard and Ineva, both individually and as trustees of the Trust, and the Trust. According to plaintiffs, Richard and Ineva transferred the various properties with the intent and purpose to hinder, delay, and defraud plaintiffs from collecting the indebtedness owed by Richard, and were part of a common plan, scheme, or conspiracy to defraud plaintiffs. Plaintiffs later amended the complaint to include other defendants alleged to have been involved in the alleged scheme to defraud.

Defendants moved for summary judgment to dismiss the third and fourth causes of action of the amended complaint, which alleged fraud and fraudulent conveyance, respectively, against Ineva, both individually and as trustee, the fifth cause of action, which alleged unjust enrichment, against Ineva individually, and the third and fourth causes of action against the Trust and Richard, as trustee.

As discussed in the motion court’s decision, defendants argued that the fraud and fraudulent conveyance claims against Ineva and the Trust should be dismissed because there were assets sufficient to satisfy a judgment if plaintiffs were to prevail. Defendants claimed that the transfers did not involve any element of fraud; that Richard was current in his payment of the legal fees not only at the time of the transfers but for a significant period thereafter; that Richard did not make himself insolvent or judgment proof with the transfers; and that plaintiffs knew that Richard had assets to satisfy any judgment entered against him. Thus, defendants contended that the fraud and fraudulent conveyance claims were without merit and should be dismissed.

As to Ineva, defendants maintained, among other things, that the fraud claim against her did not identify a single representation that she made and otherwise was not pleaded with the requisite particularity.

Plaintiffs opposed the motion. Plaintiffs argued that Ineva essentially admitted at her deposition that she and Richard created the Trust in order to avoid creditors such as plaintiffs, thereby admitting that they were participants in the effort to defraud plaintiffs. Plaintiffs relied on Richard’s representation that he had sufficient assets in the form of real property, that once liquidated he would use to satisfy his current, as well as anticipated future debts to plaintiffs. Based on that representation, plaintiffs continued to provide legal services to Richard.

The motion court denied the motion determining, inter alia, that triable issues of fact existed as to whether defendants engaged in a fraudulent scheme to defraud creditors, including plaintiffs. Defendants appealed.

The Second Department’s Decision

The Second Department affirmed the motion court’s decision and order. The Court held that “defendants failed to establish their prima facie entitlement to judgment as a matter of law dismissing the third and fourth causes of action, which alleged fraud and fraudulent conveyance, respectively, insofar as asserted against Ineva, both individually and as trustee, Richard as trustee, and the Trust.” Slip Op. at *2.

The Court found that although there were badges of fraud indicating that defendants had engaged in fraud and fraudulent transfers, there were nevertheless questions of fact concerning whether Ineva and Richard participated in a scheme to defraud Richard’s creditors:

Here, Ineva’s deposition testimony confirmed that the various properties were transferred out of her and Richard’s joint names into her name solely, and later into the Trust, in an effort to shield those properties from potential creditors. Furthermore, by transferring the properties into Ineva’s name solely and then into the Trust, for which Richard and Ineva were the trustees, Richard and Ineva retained control over those properties. Retention of control of properties after a conveyance is regarded as an indication that the conveyance was fraudulent. In addition, Richard and Ineva sold the 221 North Salem property in July 2013 for $1,232,000, but failed to pay the outstanding debt owed to the plaintiffs. Thus, a triable issue of fact exists as to whether Ineva, both individually and as trustee, Richard as trustee, and the Trust, acting in concert, participated in a scheme to defraud Richard’s creditors.

Id.

Takeaway

Bashian is notable for its reliance on scheme liability to affirm the motion court’s decision and order – that is, liability premised on the knowing participation in a scheme to defraud, even when that participation does not by itself suffice to constitute the fraud. CPC Intl. v. McKesson Corp., 70 N.Y.2d 268, 286 (1987); Danna, 51 A.D.3d at 622; Kuo Feng Corp. v. Ma, 248 A.D.2d 168, 168-69 (1st Dept. 1998). While there are many issues of fact involved in the case, such as those identified by the motion court (e.g., the nature of the transfers of the properties, whether there was fair consideration for the transfers, whether Richard was solvent or made insolvent by the transfers; whether Richard and Ineva had the ability to satisfy a judgment, and whether there was intent to defraud), the focus of the case is on the participation of Ineva and the Trust in the alleged fraud and fraudulent conveyance. Thus, the lesson of Bashian is clear: when a complaint “describes a scheme — involving all the defendants — devised and executed for the specific purpose of defrauding” the plaintiff, then all the “parties to the underlying fraudulent conspiracy, [can], nonetheless, be liable for [the] independent actions done in furtherance of it.” CPC Intl., 70 N.Y.2d at 286, citing Dewey v. Moyer, 72 N.Y. 70, 80 (1878).