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ed. 1940)). Fraudulent transfer law is instead “a set of legal (not equitable) doctrines
designed for very different purposes.” Id. at 1508. The Supreme Court has thus observed
that fraudulent transfer actions “more nearly resemble state-law contract claims brought
by a bankrupt corporation to augment the bankruptcy estate than they do creditors’
hierarchically ordered claims to a pro rata share of the bankruptcy res.” Granfinanciera,
S.A. v. Nordberg, 492 U.S. 33, 56 (1989). 20
The Second Circuit has expressly held that a transfer on account of antecedent
debt is not a fraudulent transfer, regardless of the mental state or intent of the transferor.
In In re Sharp International Corp., 403 F.3d 43 (2d Cir. 2005), a lender began to suspect
Sharp of fraud, and demanded that Sharp repay its loan. Sharp fraudulently induced
investments from unsuspecting investors, some of which were then used to repay the debt
to Sharp. Id. at 47-48. The Second Circuit ruled that Sharp’s payment to State Street
constituted a preference, but not a fraudulent conveyance. A “‘conveyance which
satisfies an antecedent debt made while the debtor is insolvent is neither fraudulent nor
otherwise improper, even if its effect is to prefer one creditor over another.’” Id. at 54
(quoting Ultramar Energy, Ltd. v. Chase Manhattan Bank, N.A., 191 A.D.2d 86, 90-91,
599 N.Y.S.2d 816 (1st Dep’t 1993)).
That Sharp defrauded new investors to raise money to pay State Street – even if
State Street knew about that fraud – did not change the fact that the transfer to State
20 Fraudulent transfer laws have specific statutes of limitation – two years under federal law, and
six years under New York law – that restrict the period during which transfers may be avoided. Even if any
avoidance provision were applicable to the Transfers, it would permit avoidance only within the relevant
period. The customer’s account statement immediately preceding that period would reflect the customer’s
equity at the start of the period. The Trustee’s “cash-in/cash-out” approach ignores these temporal
limitations on his avoidance power.
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