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finding that a “transfer may indeed not be considered a conveyance . . . when the transfer is truly just a momentary stopping point for funds that are part of a larger ongoing transaction”
Summary of this case from Axginc Corp. v. Plaza Automall, Ltd.Opinion
No. 98 Civ. 5945 (NRB)
November 15, 2000
OPINION AND ORDER
This action for fraudulent conveyance is brought by plaintiff Cadle Company ("plaintiff" or "Cadle") against Miriam Newhouse ("Mrs. Newhouse" or "defendant"). Plaintiff alleges that certain transfers by Mrs. Newhouse's late husband, Shraga Newhouse, from his company to a bank account in her name were made fraudulently so as to avoid payment on debts owed to plaintiff. Both parties have entered cross-motions for summary judgment. For the following reasons, summary judgment is entered in favor of the plaintiff.
I. BACKGROUND
The essential facts of this case are undisputed. Shraga Newhouse was the Chief Executive Officer and majority shareholder of Mademoiselle Knitwear, Inc. until his death on May 31, 1998. See Parties' Joint Statement of Undisputed Facts ("JSOUF"), ¶ 1, 3. Mr. Newhouse incurred substantial debts in the early 1990s; by August, 1994 he owed creditors in excess of $13,000,000. See id., ¶ 9. Among these debts was a $2,000,000. loan Mr. Newhouse guaranteed in January, 1991 that was subsequently assigned to plaintiff in 1995. See id., ¶ 5, 6. Upon default in payment, Cadle brought suit in New York State court and obtained a judgment against Mr. Newhouse in the amount of $2,467,883.37. This judgment was entered in July, 1996. See id., ¶ 7-8.
In November, 1992 the Newhouses opened an account numbered 8027486 at the Israeli Discount Bank ("the IDB Account"). See Id., ¶ 10. The account was opened solely in Mrs. Newhouse's name, although Mr. Newhouse was given power of attorney over the account, as well as authority to sign checks. See id., ¶ 11-12. From the time of the account's opening in 1992 until his death in 1998, Mr. Newhouse caused a number of transfers totaling $2,720,745.58 to be made from Mademoiselle Knitwear to the IDB account bearing Mrs. Newhouse's name. See id. ¶ 17. Mademoiselle Knitwear filed petitions in bankruptcy in both 1991 and 1996, and is now defunct. See id. ¶ 21, Vlock Affidavit, ¶ 33.
From November, 1992 through July 1996, Mr. and Mrs. Newhouse wrote over 4,500 checks drawn on the IDB account in the aggregate amount of at least $1,639,712.27. See JSOUF, ¶ 18-19. These checks were primarily for family and household-related expenses including tuition, food, clothing, mortgage payments, charity, entertaining, flowers, furniture, jewelry and other such items. See id., ¶ 20; Rubin Affidavit, Exh. D.
Mr. Newhouse signed at least 573 checks drawn on the IDB account, totaling $544,854.55, while Mrs. Newhouse signed at least 4,109 checks totaling $1,094,857.72. See SOUF, ¶ 18-19.
Cadle, an Ohio corporation, filed the instant case in August, 1998, against Newhouse, a New York citizen, invoking this court's diversity jurisdiction. See 8 U.S.C. § 1332. Both parties have moved for summary judgment based on the above uncontested facts.
II. DISCUSSION
A. Summary Judgment Standard
Rule 56(c) of the Federal Rules of Civil Procedure provides that summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Celotex Corp. v. Catrett, 477 U.S. 317, 322. The party seeking summary judgment "bears the initial responsibility of informing the district court of the basis for its motion," and identifying which materials "it believes demonstrate the absence of a genuine issue of material fact." Celotex, 477 U.S. at 323. Once a motion for summary judgment is properly made, the burden shifts to the nonmoving party, which "'must set forth specific facts showing that there is a genuine issue for trial.'" Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (quoting Fed.R.Civ.P. 56(e)). Here, summary judgment is particularly appropriate because both parties have so moved, each noting that the central facts are largely undisputed. There is no alleged factual dispute between the parties that would defeat an otherwise properly supported motion for summary judgment. See Anderson, 477 U.S. at 247. Instead, the parties contest the legal significance of essentially uncontroverted facts.
B. Fraudulent Conveyance Claims
Cadle asserts that Mr. Newhouse's transfers from Mademoiselle Knitwear to the IDB account were fraudulent conveyances perpetrated so as to render him and his corporation without assets and thus judgment-proof. Plaintiff alleges these transactions to be fraudulent pursuant to various sections of Article 10 of the New York Debtor and Creditor Law ("DCL"), §§ 270-81. Specifically, plaintiff argues that the conveyances were either actually fraudulent under § 276, or, in the alternative, were constructively fraudulent under §§ 273 and 273a. We address each claim in turn.
1. Actual Fraudulent Intent
New York DCL § 276 provides that conveyances are to be put aside if it can be demonstrated that they were motivated by an actual intent to defraud:
Every conveyance made and every obligation incurred with actual intent, as distinguished from intent proved in law, to hinder, delay, or defraud either present or future creditors, is fraudulent as to both present and future creditors.
N.Y. Debt. Cred. L. § 276 (McKinney 1990)
Courts assessing claims of actual fraud have observed that "[t]he determination of such intent is ordinarily a question of fact which cannot be resolved on a motion for summary judgment." Grumman Aerospace Corp. v. Rice, 199 A.D.2d 365, 366, 605 N.Y.S.2d 305 (2d Dep't. 1993).See also Furlong v. Storch, 132 A.D.2d 866, 867, 518 N.Y.S.2d 216 (3d Dep't. 1987); Farmer's Prod. Credit Ass'n. of Middletown v. Taub, 121 A.D.2d 681, 682, 504 N.Y.S.2d 448 (2d Dep't. 1986). The Uniform Fraudulent Conveyance Act (adopted in its entirety without change into the New York DCL) established a separate cause of action, constructive fraud, precisely because actual intent is so difficult to demonstrate.See Marine Midland Bank v. Murkoff, 120 A.D.2d 122, 127, 508 N.Y.S.2d 17 (2d Dep't. 1986) (citing Prefatory Note, Uniform Fraudulent Conveyance Act, 7A, ULA 427, 428)
However, although it may be difficult to establish actual intent in the summary judgment context, it is not impossible to do so. New York courts have recognized that "fraudulent intent, by its very nature is rarely susceptible to direct proof" and thus "must be established by inference from the circumstances surrounding the allegedly fraudulent act."Murkoff, 120 A.D.2d at 128. Thus, in cases with strong circumstantial evidence courts will find fraudulent intent under § 276 at the summary judgment stage. See United States v. Carlin, 948 F. Supp. 271, 277 (S.D.N.Y. 1996)
To prove a § 276 claim for actual fraud, the burden rests on the plaintiff to show (1) a conveyance; (2) that evinces actual intent to defraud. See N.Y. Debt. Cred. L. § 276; Carlin, 948 F. Supp. at 277. The plaintiff must prove these factors by clear and convincing evidence. See Lowendahl v. Baltimore Ohio Ry., 287 N.Y.S. 62, 76 (1st Dep't. 1936), aff'd. 272 N.Y. 360 (1936).
a. Conveyance
The New York DCL defines "conveyance" extremely broadly: "'Conveyance' includes every payment of money, assignment, release, transfer, lease, mortgage or pledge of tangible or intangible property, and also the creation of any lien or encumbrance." N.Y. Debt. Cred. L. § 270.
Here, there unquestionably was a conveyance from Mademoiselle Knitwear to Mrs. Newhouse. Although defendant makes much of the fact that Mr. Newhouse had power of attorney over the IDB account, this nonetheless was not a joint account. Whether or not the account was "in effect" a joint account, as defendants contend, is irrelevant. It remained solely in Mrs. Newhouse's name, a fact of considerable significance, as it put the funds out of the reach of Mr. Newhouse's numerous creditors.
Indeed, a transferor's ability to maintain dominion over an asset after the transfer of its title is considered a "badge of fraud" and is generally presumed to support a finding of intent to defraud. The fact that Mr. Newhouse effected a nominal transfer to Mrs. Newhouse while retaining actual control of the funds does not demonstrate that no conveyance occurred, but rather that the conveyance was artfully constructed.
The purpose of the fraudulent conveyance statute is to prevent assets from being put beyond the reach of creditors through a change in title. Because that was precisely the effect of Mr. Newhouse's transfers of funds into the IDB account bearing Mrs. Newhouse's name, considering these transfers to be"conveyances" is consistent with the policy of the DCL, contrary to defendant's contentions otherwise.
Defendant also asserts that the transfers should not be considered "conveyances" for the purpose of the DCL because she merely acted as a conduit between her husband and the various recipients of the funds. Defendant offers a strained reading of the precedent in this regard, however. A transfer may indeed not be considered a conveyance under § 276 when the transfer is truly just a momentary stopping point for funds that are part of a larger ongoing transaction. See In Re Finley, Kumble, Wagner et al v. Alexander Alexander, 130 F.3d 52 (2d Cir. 1997).
The hallmark of a conduit, however, is that the recipient does not exercise dominion and control over the transferred funds. See Bonded Financial Services, Inc. v. European American Bank, 838 F.3d 890, 893 (7th Cir. 1988). Here, Mrs. Newhouse unquestionably had control over the funds. Moreover, the transfers at issue here were not earmarked with the kind of specificity required to sustain the argument that their transfer into the IDB account was merely a waystation en route to their final destination. The transfers were not identifiably headed to some other beneficiary, nor was it clear that their presence in the IDB account was as fleeting as would be required to consider that account a mere conduit.
b. Intent to Defraud
In ascertaining whether intent to defraud exists, New York courts have long recognized that "direct proof" of actual intent "can rarely be obtained," Stewart v. Lyman, 62 A.D. 182, 70 N.Y.S. 936, 940 (1st Dep't. 1901), and thus the courts have identified a number of "badges of fraud" that are probative of the existence of fraudulent intent. See United States v. McCombs, 30 F.3d 310, 328 (2d Cir. 1994) (applying New York law). These factors are "so frequently attending fraudulent transfers that an inference of fraud arises from them." Gafco v. H.D.S. Mercantile Corp., 47 Misc.2d 661, 664, 263 N.Y.S.2d at 109, 114 (1965)
The five principal badges of fraud include: (1) a close (often familial) relationship between the parties, see Apple Bank for Savings v. Contaratos, 204 A.D.2d 375, 376, 612 N.Y.S.2d 51, (2d Dep't. 1994); (2) a lack of consideration in the transaction, see Gafco, 263 N.Y.S.2d at 114; (3) the transferor's indebtedness and knowledge of the creditor's claim, see United Parcel Service v. Jay Norris Co., 102 Misc.2d 231, 233, 423 N.Y.S.2d 125, 127 (1979); (4) the secret, hasty, or otherwise irregular nature of the transfer, see In re Grand Jury Subpoena Duces Tecum Dated Sept. 15, 1983, 731 F.2d 1032, 1041 (2d Cir. 1984); and (5) the transferor's retention of possession, benefit or use of the property after the transfer, see Apple Bank, 204 A.D.2d at 376, 612 N.Y.S.2d at 52.
Based on completely undisputed facts, and on the presence of at least four out of the five factors here, there is support for a summary judgment finding of actual fraud. First, there is no question that the two parties to the transfer here were husband and wife. A conveyance between two married parties prompts significantly heightened scrutiny by courts due to the increased opportunity for fraud because the parties are not operating not at arm's length. See, e.g., Murkoff, 120 A.D.2d at 128 ("A transfer from husband to wife is ordinarily scrutinized carefully" due to the possibilty of a "joint purpose" to perpetrate fraud.); see also Nonas v. Romantini, 706 N.Y.S.2d 109, 110 (1st Dep't. 2000).
Second, it is undisputed that Mr. Newhouse retained unfettered control over the IDB account after he made the transfers into it from Mademoiselle Knitwear. Indeed, he signed over five hundred checks drawn on the account, for a total of more than $550,000. See SOUF, ¶ 19. The transferor's conduct after a conveyance is an important indicator of the conveyance's validity; the transfer is treated as a sham if the transferor retains control of the allegedly transferred goods. Marine Midland, 120 A.D.2d at 129.
Third, it is undisputed that Mr. Newhouse was in fact indebted at the time he made the transfers, and was aware of those debts. Mr. Newhouse made the loan guarantee at issue on January 23, 1991, and a judgment was entered against him for the sum of $2,467,883.37 in July, 1996. See JSOUF ¶ 5, 8. Moreover, in 1992, when the transfers began, Mr. Newhouse was indebted in excess of $2,000,000.00. See id., ¶ 9. Additionally, the Mademoiselle Knitwear Corporation, from which Mr. Newhouse caused the transfers to be made, was in bankruptcy at two different times during the time of the transfers. See id., ¶ 21. It is thus clear that this third badge of fraud was present: conveyances made when a transferor is both indebted and aware of those debts creates an inference that he acts with fraudulent intent. See Carlin, 948 F. Supp. at 277.
Fourth, there was no consideration in return for the transfer from Mademoiselle Knitwear to Miriam Newhouse. At no time did Mrs. Newhouse work for Mademoiselle Knitwear or provide any goods or services that might be viewed as consideration for the transfers into the IDB account. Indeed, defendant establishes no connection whatsoever between Mrs. Newhouse and Mademoiselle Knitwear other than her receipt of the transfers at issue here.
In contrast to a claim of constructive fraudulent conveyance, discussed infra, the absence of consideration is not necessary to stating a claim of actual fraudulent conveyance. See See Apple Bank, 612 N.Y.S.2d at 52. The lack of consideration is merely one of several "badges of fraud," albeit possibly the most important one. In the summary judgment context, it has been held that "lack of fair consideration gives rise to a rebuttable presumption of fraudulent intent." Carlin, 948 F. Supp. at 277. But see Marine Midland, 120 A.D.2d at 127-28 (finding actual fraudulent intent under § 276 based on badges of fraud, but rejecting rebuttable presumption).
Defendant does not dispute these facts, but nonetheless argues that consideration was indeed present for these transfers. She asserts that Mr. Newhouse's standing statutory obligations to support his wife and family are sufficient consideration. Newhouse cites the New York State Family Court Act §§ 412-13 as providing statutory consideration for these conveyances. We find this argument, although not without initial surface appeal, ultimately unpersuasive for several reasons.
Family Court Act § 412 states, "A married person is chargeable with the support of his or her spouse and, if possessed of sufficient means or able to earn such means, may be required to pay for his or her support a fair and reasonable sum, as the court may determine, having due regard to the circumstances of the respective parties."
As a general proposition, the New York courts have long held otherwise-fraudulent intra-family transfers to be invalid when justified solely by familial obligations or relationships. There is clear body of case law holding that "[l]ove and affection," particularly hypothetical devotion contemplated in the future, does not constitute fair consideration. Rush v. Rush, 244 N.Y.S.2d 673 (2d Dep't. 1963); see also Farino v. Farino, 449 N.Y.S.2d 379, 385 (1982); Marine Midland Bank v. Stein, 433 N.Y.S.2d 325, 327 (1st Dep't. 1980).
Defendant contends, however, that such precedent is distinguishable because in the instant case the consideration in question is not future consideration, but payment for an "antecedent debt". It is true that under § 272 of the DCL, an antecedent debt may satisfy the requirement of consideration and thus successfully serve as a defense against allegations of fraudulent conveyance. The question remains, however, whether a spouse's statutory duty of support qualifies as such an antecedent debt, such that the spouse owed the duty might be considered a creditor under the terms of the DCL.
In assessing this question, it is important to note a critical distinction — the difference between a debt owed a spouse as the result of a separation or divorce agreement, and the ongoing duty of support in an intact marriage. Much of the authority cited by the defendant for the proposition that a spouse should be considered a creditor for the standing obligation of support in fact arises in contexts related to the dissolution of the marriage. See, e.g., Kvassay v. Kvassay, 127 A.D.2d 903, 904 (3d Dep't. 1987) (spouse sought and was granted support after separation). In such cases, support agreements are obviously enforceable and it is apparent that conveyances made in order to comply with judicially-created agreements are made with fair consideration.
Similarly, the support obligation is recognized in the context of an anticipated separation. Thus, conveyances made in anticipation of divorce might colorably be considered fraudulent under the DCL. See Soldano v. Soldano, 411 N.Y.S.2d 395 (2d Dep't. 1978). Where one spouse effects a conveyance so as to render assets out of the reach of the other spouse's potential claims where such claims are foreseeable, the claimant spouse is properly considered a creditor under the DCL. See Kasinski v. Questel, 472 N.Y.S.2d 807, 808 (4th Dep't. 1984)
However, defendant asks this court to go two significant steps further and hold: (1) that one spouse is at all times a creditor of the other spouse during the entire course of the marriage, and (2) that this debt is enforceable against third parties. There is scant support for such an extreme position in New York case law. Indeed, we find it particularly telling that despite the frequency with which interspousal conveyances must undoubtedly occur, that defendant has no clear precedent to support her view. In fact, the principal authority defendant cites for this proposition is a two justices' dissent from a an affirmance without opinion. See Safie v. Safie, 24 A.D.2d 502, 261 N.Y.S.2d 993 (2d Dep't. 1965).
Besides the fact that the Safie case has no majority opinion and is of questionable precedential value, it is additionally distinguishable. There, as in much of the authority defendant cites, the spouses were living separately and no longer maintaining the joint marital household. Thus, the obligation of support must be considered differently than in the context of an ongoing marital relationship in which assets, incomes and property are co-mingled for any number of purposes.
Defendant further asks us to take a second, unprecedented step by urging the Court to uphold a conveyance that otherwise defrauds a third party because of the marital support obligation. Enforcing the support obligation as between two spouses is not at all the same as excusing a fraudulent conveyance affecting third party creditors when that conveyance is sought to be justified solely by the support obligation.
Not only is the idea that one spouse is the other's creditor — such that conveyances between spouses would be difficult to challenge — an unprecedented proposition, but the it is also an unenforceable one. Defendant offers no guidance as to how a court might quantify — retrospectively — what portions of the more-than $2.7 million in transfers here might legitimately have been made in consideration of the support obligation.
We reject defendant's argument despite our recognition that had Shraga Newhouse openly taken a salary from Mademoiselle Knitwear, that under New York law a very large percentage of that salary would have been exempt from execution by his creditors. See N.Y. C.P.L.R. § 5231. Consequently, his failure to conduct himself in a more forthright manner will result in the entry of a judgment against his wife for the full amount of the debt owed plaintiff, with the attendant consequences for her and their children. Although this result is not an entirely comfortable one, there is simply no way for this Court to quantify retrospectively the amounts that the Bankruptcy Court would have permitted Shraga Newhouse to withdraw in salary or the percentage of his income his creditors would have been allowed to garnish. Finally, adopting defendant's suggestion would leave a gaping hole in the law of fraudulent conveyance in an area that has traditionally been subject to additional scrutiny in recognition of the potential for abuse at the expense of legitimate creditors.
c. Conclusion
Plaintiff has demonstrated that nearly all the "badges of fraud" relevant to a fraudulent intent inquiry are present here. The undisputed presence of these facts, taken in toto, mandates a summary judgment of actual fraudulent intent. Although defendant contests the legal significance of some of these facts, such as the question of whether the statutory spousal obligation creates consideration for the transaction, the facts themselves remain uncontroverted.
The remaining indicator of fraud — that a conveyance is secretive or irregular — is also arguably present. This factor is less thoroughly explained in the case law, but its presence or absence is not dispositive to the finding of fraudulent intent at the summary judgment stage. See e.g., Carlin, 948 F. Supp at 277-78. Although apparently not a secretive transaction, Mr. Newhouse' extraction of his earnings from his corporation via lump-sum transfers to a bank account in his wife's name is indeed irregular. In a recent case with facts nearly identical to those here, Judge Raggi noted that "the court finds that it was highly unusual for Mr. Lieberman [the defendant's late husband] to transfer virtually all of his assets to his wife, particularly since he knew that he had numerous creditors whom he would thereafter be unable to pay." Cadle Company v. Lieberman, 1998 WL 1674549, at *13 (Sept. 11, 1998 E.D.N.Y).
Based on these facts, summary judgment is appropriate on the § 276 claim. Our conclusion is additionally supported by precedent. For example, in the Apple Bank case the court found clear and convincing evidence of fraudulent intent when the defendant transferred title in her house to her daughter for a mere $10 after learning of the plaintiff's claim against her. That the defendant in that case continued to reside in the home rent-free after the conveyance was completed further bolstered the plaintiff's case. See Apple Bank, 612 N.Y.S.2d at 52. Similarly, inCarlin, Judge Parker found that "all the indicia of fraudulent intent" leads to "sufficient facts to a presumption of fraudulent intent."Carlin, 948 F. Supp. at 278. There, as here, defendant did not rebut those facts and there, as here, the court found summary judgment for plaintiff appropriate.
Although the result, as noted earlier, is a harsh one for the Newhouse family, it is an inescapable fact that Mr. Newhouse effected these conveyances in a manner replete with all the recognized indicia of fraud, thus making a finding of actual fraudulent intent ineluctable. We remain less troubled by Mrs. Newhouse's contention that by not recognizing a support obligation exception to fraudulent conveyance doctrine that the institutions of marriage and the family are somehow threatened. Other doctrines — such as bankruptcy, income execution, and family law rules — ensure that in the case of insolvency, funds legitimately required for support of a family's basic needs are in fact protected.
2. Constructive Fraudulent Conveyance
Plaintiff further argues that the conveyances to the IDB account were constructive fraudulent conveyances under § 273 of the DCL. That section states:
Every conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regard to his actual intent if the conveyance is made or the obligation is incurred without a fair consideration.
N.Y. Debt. Cred. L. § 273 (McKinney 1990). An inquiry into intent is obviated, then, when the transferor makes (1) a conveyance, (2) without consideration when he (3) is insolvent or will be rendered so by the conveyance. See McCombs, 30 F.3d at 323 (2d Cir. 1994).
The discussion of actual intent, supra, reflects our find finding that a conveyance between Mademoiselle and Mrs. Newhouse indeed occurred, and that no consideration supported it.
Furthermore, in determining insolvency in a section § 273 claim, once it is established that a conveyance is made by a debtor, and that it is unsupported by fair consideration, that transferor is presumed to have been rendered insolvent by it. See United States v. Red Stripe, Inc., 792 F. Supp. 1338, 1342 (E.D.N.Y. 1992) ("When a transfer is made without consideration, the defendants have the burden of proving solvency.")
Here, then, Mrs. Newhouse has the burden of proving that Mademoiselle Knitwear was solvent during the period 1992-1998. However, the parties have jointly stipulated that the corporation filed bankruptcy petitions in both 1991 and 1996, thereby establishing its insolvency. We find, therefore, as a matter of law that the conveyances were constructively fraudulent under DCL § 273.
III. CONCLUSION
For the foregoing reasons, plaintiff's summary judgment motion is granted. Plaintiff is directed to submit a proposed judgment within ten days, on notice to the defendant. Because § 276-a of the DCL provides for the awarding of attorneys' fees to prevailing plaintiffs in cases of actual fraud, the proposed judgment should include reasonable attorneys' fees. IT IS SO ORDERED.
The parties are directed to confer in a good faith effort to arrive at a stipulated amount for plaintiff's attorney's fees.