The Former DCL Remains On The Docket

• Posted on: May 15 2024

By: Jeffrey M. Haber

As readers of this Blog know, on December 6, 2019, the State of New York joined the vast majority of jurisdictions to adopt the Uniform Voidable Transaction Act (“UVTA”) in whole or in part. The New York version of the UVTA became effective on April 4, 2020. The UVTA governs fraudulent transfers.

Although it has been four years since the effective date of the UVTA, there remain scores of cases in the court system that were filed under the former Debtor Creditor Law (“DCL”). Today we examine one of them: Patterson Belknap Webb & Tyler LLP v. Marcus & Cinelli LLP, 2024 N.Y. Slip Op. 02670 (1st Dept. May 14, 2024) (here).

The Former DCL

The former DCL set forth a comprehensive regime that governed fraudulent conveyances. For example, DCL § 273 (conveyances by insolvent) provided that conveyances that render a debtor insolvent and that were made without fair consideration, were fraudulent as to creditors regardless of intent;  DCL § 273-a (conveyances by defendants) provided that a conveyance made without fair consideration by a defendant in an action for money damages was fraudulent as to the plaintiff in that action, regardless of intent, if the defendant failed to satisfy a resulting judgment in the action; DCL § 274 (conveyance to defendants in a business or transaction) provided that conveyances made without fair consideration in a business or transaction for which the capital remaining after the conveyance was unreasonably small, were fraudulent as to creditors regardless of intent; DCL § 275 (conveyance by defendants to the detriment of current and future creditors) provided that conveyances and obligations incurred without fair consideration when the debtor intended or believed that he/she would incur debts beyond his/her ability to pay as they matured, were fraudulent as to both present and future creditors; and DCL § 276 (conveyance made with intent) provided that conveyances made with actual intent to “hinder, delay, or defraud either present or future creditors, [were] fraudulent as to both present and future creditors.”

To set aside a conveyance or obligation incurred under former DCL §§ 273, 273-a, 274 and 275, the plaintiff had to establish that the conveyance or obligation incurred was made without “fair consideration”. Under DCL § 272, “[f]air consideration … [was] not only a matter of whether the amount given for the transferred property was a ‘fair equivalent’ or not ‘disproportionately small’ … but whether the transaction [was] made in good faith.”¹ “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.”² 

A claim under former DCL § 275 required, in addition to the conveyance and unfair consideration elements discussed above, an element of intent or belief that insolvency would result.³ 

Former DCL § 276, unlike Sections 273 and 275, concerned actual fraud, as opposed to constructive fraud, and did not require proof of unfair consideration or insolvency. Because intent to defraud is difficult to prove, the plaintiff could rely on “badges of fraud” 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.”⁴ 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.⁵ “Depending on the context, badges of fraud will vary in significance, though the presence of multiple indicia will increase the strength of the inference.”⁶ A conveyance made with actual intent to defraud is fraudulent regardless of whether the debtor receives fair consideration.⁷ 

The former DCL also provided that a creditor could obtain damages against persons who participated in a fraudulent transfer as “transferees” or as beneficiaries of the conveyances – i.e., one who otherwise benefits from the conveyance.⁸ A person’s status as a transferee could be established by the exercise of “dominion or control” over the property in question.⁹ 

Patterson Belknap Webb & Tyler LLP v. Marcus & Cinelli LLP

Patterson Belknap involved the enforcement of a judgment against non-party Barbara Stewart (“Stewart”), a former client of the plaintiff. 

In 2013, plaintiff obtained a judgment against Stewart for more than $2 million arising from legal services rendered. That same year, plaintiff served Stewart with a restraining notice prohibiting her from selling or transferring any property until the judgment was satisfied. According to the allegations in the complaint, defendants, attorneys who later represented Stewart, knew about the restraining notice, yet in 2016 facilitated a sale of her personal property, a diamond ring, at a private auction that yielded nearly $3 million. Plaintiff alleged that defendants paid some of Stewart’s debts with the proceeds of the sale and deposited the rest of the funds into an IOLA and escrow account, later using the funds to make various payments on Stewart’s behalf, including some payments to themselves. Plaintiff’s judgment against Stewart has never been paid. 

Plaintiff commenced the action against defendants, interposing causes of action for violations of former DCL §§ 273, 273-a, 274, 275, and 276 (first, second, and third causes of action). Plaintiffs also interposed a cause of action against defendants David P. Marcus (“Marcus”) and the law firm of Marcus and Cinelli LLP (the “Firm”) for civil contempt (fifth cause of action).

Defendants moved to dismiss the former DCL causes of action, claiming, among other things, that they were not transferees or beneficiaries of the sale proceeds. In doing so, defendants argued that they never exercised dominion or control over the funds they held in trust for Stewart. Defendants insisted that the funds, which were solely controlled by Stewart, were used to satisfy debts owed to defendants for their legal work.

The motion court denied the branches of the motion that sought to dismiss the former DCL causes of action. The Appellate Division, First Department modified the order with respect to the first cause of action in so far as it relied on former DCL §§ 273 and 274, and otherwise affirmed the motion court’s order.

As an initial matter, the Court held that there were issues of facts as to whether defendants were beneficiaries of the alleged transfer of property to their IOLA account: “At this stage of the litigation, it has not been established that defendants did not benefit from the alleged transfer.”¹⁰ 

The Court held that “defendants failed to establish that they were entitled to dismissal of the constructive fraud claims under Debtor and Creditor Law §§ 273-a and 275, as defendants cannot establish at this stage that the allegedly fraudulent transfers to them were made in good faith, either by the transferor (Stewart) or the transferees (defendants).”¹¹

However, the Court found that plaintiff’s allegations of insolvency and inadequate capitalization were too conclusory to support its fraudulent conveyance claims under former DCL §§ 273 and 274.¹² “Among other deficiencies,” explained the Court, “the complaint contain[ed] no allegations about the ‘present fair salable value’ (Debtor and Creditor Law § 271[1]) of the Bermuda estate or about Stewart’s financial condition in December 2017, the date of the second transfer.”¹³ Accordingly, the Court “dismiss[ed] so much of the first cause of action as relie[d] on [former] Debtor and Creditor Law §§ 273 and 274.”¹⁴

Moreover, the Court held that plaintiff pleaded its actual fraud claim “with sufficient particularity to survive a motion to dismiss, as the complaint sufficiently allege[d] ‘badges of fraud’ with respect to Stewart’s intent to defraud plaintiff.”¹⁵ 

Finally, the Court rejected defendants’ argument that the former DCL claims should be dismissed because the complaint failed to allege their intent to defraud. “That the complaint does not set forth allegations regarding the transferee’s intent,” said the Court, “does not compel dismissal, because at the pleading stage, only the intent of the transferor is relevant; the intent of the transferee is not.”¹⁶ 

Footnotes

1. Sardis v. Frankel, 113 A.D.3d 135, 141-142 (1st Dept. 2014).
2. 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)).
3. Wall Street Assocs. v. Brodsky, 257 A.D.2d 526, 529 (1st Dept. 1999) (citation omitted).
4. Id. (internal quotation marks and citations omitted).
5. Id.
6. 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).
7. MFS/Sun Life Trust, 910 F. Supp. at 934 (citation omitted).
8. See FDIC v. Porco, 75 N.Y.2d 840, 842 (1990) (per curiam).
9. Id.
10. Slip Op. at *1.
11. Id. at *1-*2 (citing former DCL § 272(a); and Sardis, 113 A.D.3d at 142-143).
12. Id. at *2 (citing Eagle Eye Collection Corp. v. Shariff, 190 A.D.3d 600, 602 (1st Dept. 2021); Wildman & Bernhardt Constr. v. BPM Assoc., 273 A.D.2d 38, 38-39 (1st Dept. 2000)).
13. Id. at *2-*3.
14. Id. at *3.
15. Id. (citing Wall St. Assoc., 257 A.D.2d at 529). The Court did not identify the badges of fraud on which it relied.
16. Id. (citing McCormack Family Charitable Found. v. Fidelity Brokerage Servs., LLC, Index No. 655270/2018, 2020 WL 2542089, *5 (Sup. Ct., N.Y. County, May 19, 2020), aff’d in part, appeal dismissed in part, 195 A.D.3d 420 (1st Dept. 2021), lv. denied, 31 N.Y.3d 912 (2021)).

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.