FRAUDULENT CONVEYANCES Nassau Academy of Law CLE Live ...

Nassau Academy of LawCLE Live Class & WEBCASTFRAUDULENT CONVEYANCESYou Can Run But YouCan’t Hide!Tuesday, October 27, 20095:30-7:30 p.m.Speakers:Jeffrey C. Daniels, Esq., Garden CityRonald M. Terenzi, Esq., Stagg TerenziConfusione & Wabnik, LLP, Garden CityNassau CountyBar Association15th and West StreetsMineola, NY 11501516-747-4464516-747-4147 faxwww.nassaubar.orgacademy@nassaubar.org

DefinitionsInsolvencyConsideration and ValueLiquidated and Unliquidated ClaimsBadges of FraudConstructive FraudActual FraudDivorce ContextRemediesConstructive TrustBankruptcy

McKinney's Debtor and Creditor Law § 270 Page 1Effective:[See Text Amendments]Mckinney's Consolidated Laws of New York Annotated CurrentnessDebtor and Creditor Law (Refs & Annos)Chapter 12. Of the Consolidated Laws (Refs & Annos)Article 10. Fraudulent Conveyances (Refs & Annos)§ 270. Definition of termsIn this article “assets” of a debtor means property not exempt from liability for his debts. To the extent that anyproperty is liable for any debts of the debtor, such property shall be included in his assets.“Conveyance” includes every payment of money, assignment, release, transfer, lease, mortgage or pledge of tangibleor intangible property, and also the creation of any lien or incumbrance.“Creditor” is a person having any claim, whether matured or unmatured, liquidated or unliquidated, absolute, fixedor contingent.“Debt” includes any legal liability, whether matured or unmatured, liquidated or unliquidated, absolute, fixed orcontingent.CREDIT(S)(Added L.1925, c. 254, § 1.)Current through L.2009, chapters 1 to 14 and 16 to 347.Copr © 2009 Thomson ReutersEND OF DOCUMENT© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

McKinney's Debtor and Creditor Law § 271 Page 1Effective:[See Text Amendments]Mckinney's Consolidated Laws of New York Annotated CurrentnessDebtor and Creditor Law (Refs & Annos)Chapter 12. Of the Consolidated Laws (Refs & Annos)Article 10. Fraudulent Conveyances (Refs & Annos)§ 271. Insolvency1. A person is insolvent when the present fair salable value of his assets is less than the amount that will be requiredto pay his probable liability on his existing debts as they become absolute and matured.2. In determining whether a partnership is insolvent there shall be added to the partnership property the present fairsalable value of the separate assets of each general partner in excess of the amount probably sufficient to meet theclaims of his separate creditors, and also the amount of any unpaid subscription to the partnership of each limitedpartner, provided the present fair salable value of the assets of such limited partner is probably sufficient to pay hisdebts, including such unpaid subscription.CREDIT(S)(Added L.1925, c. 254, § 1.)Current through L.2009, chapters 1 to 14 and 16 to 347.Copr © 2009 Thomson ReutersEND OF DOCUMENT© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

McKinney's Debtor and Creditor Law § 272 Page 1Effective:[See Text Amendments]Mckinney's Consolidated Laws of New York Annotated CurrentnessDebtor and Creditor Law (Refs & Annos)Chapter 12. Of the Consolidated Laws (Refs & Annos)Article 10. Fraudulent Conveyances (Refs & Annos)§ 272. Fair considerationFair consideration is given for property, or obligation,a. When in exchange for such property, or obligation, as a fair equivalent therefor, and in good faith, property isconveyed or an antecedent debt is satisfied, orb. When such property, or obligation is received in good faith to secure a present advance or antecedent debt inamount not disproportionately small as compared with the value of the property, or obligation obtained.CREDIT(S)(Added L.1925, c. 254, § 1.)Current through L.2009, chapters 1 to 14 and 16 to 347.Copr © 2009 Thomson ReutersEND OF DOCUMENT© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

McKinney's Debtor and Creditor Law § 273 Page 1Effective:[See Text Amendments]Mckinney's Consolidated Laws of New York Annotated CurrentnessDebtor and Creditor Law (Refs & Annos)Chapter 12. Of the Consolidated Laws (Refs & Annos)Article 10. Fraudulent Conveyances (Refs & Annos)§ 273. Conveyances by insolventEvery conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent isfraudulent as to creditors without regard to his actual intent if the conveyance is made or the obligation is incurredwithout a fair consideration.CREDIT(S)(Added L.1925, c. 254, § 1.)Current through L.2009, chapters 1 to 14 and 16 to 347.Copr © 2009 Thomson ReutersEND OF DOCUMENT© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

McKinney's Debtor and Creditor Law § 273-a Page 1Effective:[See Text Amendments]Mckinney's Consolidated Laws of New York Annotated CurrentnessDebtor and Creditor Law (Refs & Annos)Chapter 12. Of the Consolidated Laws (Refs & Annos)Article 10. Fraudulent Conveyances (Refs & Annos)§ 273-a. Conveyances by defendantsEvery conveyance made without fair consideration when the person making it is a defendant in an action for moneydamages or a judgment in such an action has been docketed against him, is fraudulent as to the plaintiff in that actionwithout regard to the actual intent of the defendant if, after final judgment for the plaintiff, the defendant fails tosatisfy the judgment.CREDIT(S)(Added L.1962, c. 310, § 103.)Current through L.2009, chapters 1 to 14 and 16 to 347.Copr © 2009 Thomson ReutersEND OF DOCUMENT© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

McKinney's Debtor and Creditor Law § 274 Page 1Effective:[See Text Amendments]Mckinney's Consolidated Laws of New York Annotated CurrentnessDebtor and Creditor Law (Refs & Annos)Chapter 12. Of the Consolidated Laws (Refs & Annos)Article 10. Fraudulent Conveyances (Refs & Annos)§ 274. Conveyances by persons in businessEvery conveyance made without fair consideration when the person making it is engaged or is about to engage in abusiness or transaction for which the property remaining in his hands after the conveyance is an unreasonably smallcapital, is fraudulent as to creditors and as to other persons who become creditors during the continuance of suchbusiness or transaction without regard to his actual intent.CREDIT(S)(Added L.1925, c. 254, § 1.)Current through L.2009, chapters 1 to 14 and 16 to 347.Copr © 2009 Thomson ReutersEND OF DOCUMENT© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

McKinney's Debtor and Creditor Law § 275 Page 1Effective:[See Text Amendments]Mckinney's Consolidated Laws of New York Annotated CurrentnessDebtor and Creditor Law (Refs & Annos)Chapter 12. Of the Consolidated Laws (Refs & Annos)Article 10. Fraudulent Conveyances (Refs & Annos)§ 275. Conveyances by a person about to incur debtsEvery conveyance made and every obligation incurred without fair consideration when the person making the conveyanceor entering into the obligation intends or believes that he will incur debts beyond his ability to pay as theymature, is fraudulent as to both present and future creditors.CREDIT(S)(Added L.1925, c. 254, § 1.)Current through L.2009, chapters 1 to 14 and 16 to 347.Copr © 2009 Thomson ReutersEND OF DOCUMENT© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

McKinney's Debtor and Creditor Law § 276 Page 1Effective:[See Text Amendments]Mckinney's Consolidated Laws of New York Annotated CurrentnessDebtor and Creditor Law (Refs & Annos)Chapter 12. Of the Consolidated Laws (Refs & Annos)Article 10. Fraudulent Conveyances (Refs & Annos)§ 276. Conveyance made with intent to defraudEvery conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed inlaw, to hinder, delay, or defraud either present or future creditors, is fraudulent as to both present and future creditors.CREDIT(S)(Added L.1925, c. 254, § 1.)Current through L.2009, chapters 1 to 14 and 16 to 347.Copr © 2009 Thomson ReutersEND OF DOCUMENT© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

McKinney's Debtor and Creditor Law § 276-a Page 1Effective:[See Text Amendments]Mckinney's Consolidated Laws of New York Annotated CurrentnessDebtor and Creditor Law (Refs & Annos)Chapter 12. Of the Consolidated Laws (Refs & Annos)Article 10. Fraudulent Conveyances (Refs & Annos)§ 276-a. Attorneys' fees in action or special proceeding to set aside a conveyance made with intentto defraudIn an action or special proceeding brought by a creditor, receiver, trustee in bankruptcy, or assignee for the benefitof creditors to set aside a conveyance by a debtor, where such conveyance is found to have been made by the debtorand received by the transferee with actual intent, as distinguished from intent presumed in law, to hinder, delay ordefraud either present or future creditors, in which action or special proceeding the creditor, receiver, trustee inbankruptcy, or assignee for the benefit of creditors shall recover judgment, the justice or surrogate presiding at thetrial shall fix the reasonable attorney's fees of the creditor, receiver, trustee in bankruptcy, or assignee for the benefitof creditors in such action or special proceeding, and the creditor, receiver, trustee in bankruptcy, or assignee for thebenefit of creditors shall have judgment therefor against the debtor and the transferee who are defendants in additionto the other relief granted by the judgment. The fee so fixed shall be without prejudice to any agreement, express orimplied, between the creditor, receiver, trustee in bankruptcy, or assignee for the benefit of creditors and his attorneywith respect to the compensation of such attorney.CREDIT(S)(Added L.1938, c. 479; amended L.1943, c. 172.)Current through L.2009, chapters 1 to 14 and 16 to 347.Copr © 2009 Thomson ReutersEND OF DOCUMENT© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

McKinney's Debtor and Creditor Law § 277 Page 1Effective:[See Text Amendments]Mckinney's Consolidated Laws of New York Annotated CurrentnessDebtor and Creditor Law (Refs & Annos)Chapter 12. Of the Consolidated Laws (Refs & Annos)Article 10. Fraudulent Conveyances (Refs & Annos)§ 277. Conveyance of partnership propertyEvery conveyance of partnership property and every partnership obligation incurred when the partnership is or willbe thereby rendered insolvent, is fraudulent as to partnership creditors, if the conveyance is made or obligation isincurred,a. To a partner, whether with or without a promise by him to pay partnership debts, orb. To a person not a partner without fair consideration to the partnership as distinguished from consideration to theindividual partners.CREDIT(S)(Added L.1925, c. 254, § 1; amended L.1938, c. 15, § 1.)Current through L.2009, chapters 1 to 14 and 16 to 347.Copr © 2009 Thomson ReutersEND OF DOCUMENT© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

McKinney's Debtor and Creditor Law § 278 Page 1Effective:[See Text Amendments]Mckinney's Consolidated Laws of New York Annotated CurrentnessDebtor and Creditor Law (Refs & Annos)Chapter 12. Of the Consolidated Laws (Refs & Annos)Article 10. Fraudulent Conveyances (Refs & Annos)§ 278. Rights of creditors whose claims have matured1. Where a conveyance or obligation is fraudulent as to a creditor, such creditor, when his claim has matured, may,as against any person except a purchaser for fair consideration without knowledge of the fraud at the time of thepurchase, or one who has derived title immediately or mediately from such a purchaser,a. Have the conveyance set aside or obligation annulled to the extent necessary to satisfy his claim, orb. Disregard the conveyance and attach or levy execution upon the property conveyed.2. A purchaser who without actual fraudulent intent has given less than a fair consideration for the conveyance orobligation, may retain the property or obligation as security for repayment.CREDIT(S)(Added L.1925, c. 254, § 1.)Current through L.2009, chapters 1 to 14 and 16 to 347.Copr © 2009 Thomson ReutersEND OF DOCUMENT© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

McKinney's Debtor and Creditor Law § 279 Page 1Effective:[See Text Amendments]Mckinney's Consolidated Laws of New York Annotated CurrentnessDebtor and Creditor Law (Refs & Annos)Chapter 12. Of the Consolidated Laws (Refs & Annos)Article 10. Fraudulent Conveyances (Refs & Annos)§ 279. Rights of creditors whose claims have not maturedWhere a conveyance made or obligation incurred is fraudulent as to a creditor whose claim has not matured he mayproceed in a court of competent jurisdiction against any person against whom he could have proceeded had his claimmatured, and the court may,a. Restrain the defendant from disposing of his property.b. Appoint a receiver to take charge of the property,c. Set aside the conveyance or annul the obligation, ord. Make any order which the circumstances of the case may require.CREDIT(S)(Added L.1925, c. 254, § 1.)Current through L.2009, chapters 1 to 14 and 16 to 347.Copr © 2009 Thomson ReutersEND OF DOCUMENT© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

McKinney's Debtor and Creditor Law § 282 Page 1Effective:[See Text Amendments]Mckinney's Consolidated Laws of New York Annotated CurrentnessDebtor and Creditor Law (Refs & Annos)Chapter 12. Of the Consolidated Laws (Refs & Annos)Article 10-A. Personal Bankruptcy Exemptions (Refs & Annos)§ 282. Permissible exemptions in bankruptcyUnder section five hundred twenty-two of title eleven of the United States Code, [FN1] entitled “Bankruptcy”, anindividual debtor domiciled in this state may exempt from the property of the estate, to the extent permitted by subsection(b) thereof, only (i) personal and real property exempt from application to the satisfaction of money judgmentsunder sections fifty-two hundred five and fifty-two hundred six of the civil practice law and rules, (ii) insurancepolicies and annuity contracts and the proceeds and avails thereof as provided in section three thousand twohundred twelve of the insurance law and (iii) the following property:1. Bankruptcy exemption of a motor vehicle. One motor vehicle not exceeding twenty-four hundred dollars in valueabove liens and encumbrances of the debtor.2. Bankruptcy exemption for right to receive benefits. The debtor's right to receive or the debtor's interest in: (a) asocial security benefit, unemployment compensation or a local public assistance benefit; (b) a veterans' benefit; (c) adisability, illness, or unemployment benefit; (d) alimony, support, or separate maintenance, to the extent reasonablynecessary for the support of the debtor and any dependent of the debtor; and (e) all payments under a stock bonus,pension, profit sharing, or similar plan or contract on account of illness, disability, death, age, or length of serviceunless (i) such plan or contract, except those qualified under section 401, 408 or 408A of the United States InternalRevenue Code of 1986, [FN2] as amended, was established by the debtor or under the auspices of an insider thatemployed the debtor at the time the debtor's rights under such plan or contract arose, (ii) such plan is on account ofage or length of service, and (iii) such plan or contract does not qualify under section four hundred one (a), fourhundred three (a), four hundred three (b), four hundred eight, four hundred eight A, four hundred nine or four hundredfifty-seven of the Internal Revenue Code of nineteen hundred eighty-six, [FN3] as amended.3. Bankruptcy exemption for right to receive certain property. The debtor's right to receive, or property that is traceableto: (i) an award under a crime victim's reparation law; (ii) a payment on account of the wrongful death of anindividual of whom the debtor was a dependent to the extent reasonably necessary for the support of the debtor andany dependent of the debtor; (iii) a payment, not to exceed seventy-five hundred dollars on account of personal bodilyinjury, not including pain and suffering or compensation for actual pecuniary loss, of the debtor or an individualof whom the debtor is a dependent; and (iv) a payment in compensation of loss of future earnings of the debtor or anindividual of whom the debtor is or was a dependent, to the extent reasonably necessary for the support of the debtorand any dependent of the debtor.CREDIT(S)(Added L.1982, c. 540, § 1, amended L.1984, c. 805, § 15; L.1989, c. 280, § 4; L.1995, c. 93, § 4; L.1998, c. 206, §3, eff. July 7, 1998, deemed eff. Jan. 1, 1998.)© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

McKinney's Debtor and Creditor Law § 282 Page 2[FN1] 11 USCA § 522.[FN2] 26 USCA §§ 401, 408, 408A.[FN3] 26 USCA §§ 401a, 403a, 403b, 408, 408A, 409, 457.Current through L.2009, chapters 1 to 14 and 16 to 347.Copr © 2009 Thomson ReutersEND OF DOCUMENT© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

McKinney's Debtor and Creditor Law § 283 Page 1Effective:[See Text Amendments]Mckinney's Consolidated Laws of New York Annotated CurrentnessDebtor and Creditor Law (Refs & Annos)Chapter 12. Of the Consolidated Laws (Refs & Annos)Article 10-A. Personal Bankruptcy Exemptions (Refs & Annos)§ 283. Aggregate individual bankruptcy exemption for certain annuities and personal property1. General application. The aggregate amount the debtor may exempt from the property of the estate for personalproperty exempt from application to the satisfaction of a money judgment under subdivision (a) of section fifty-twohundred five of the civil practice law and rules and for benefits, rights, privileges, and options of annuity contractsdescribed in the following sentence shall not exceed five thousand dollars. Annuity contracts subject to the foregoinglimitation are those that are: (a) initially purchased by the debtor within six months of the debtor's filing a petitionin bankruptcy, (b) not described in any paragraph of section eight hundred five (d) of the Internal Revenue Codeof nineteen hundred fifty-four [FN1], and (c) not purchased by application of proceeds under settlement options ofannuity contracts purchased more than six months before the debtor's filing a petition in bankruptcy or under settlementoptions of life insurance policies.2. Contingent alternative bankruptcy exemption. Notwithstanding section two hundred eighty-two of this article, adebtor, who (a) does not elect, claim, or otherwise avail himself of an exemption described in section fifty-two hundredsix of the civil practice law and rules; (b) utilizes to the fullest extent permitted by law as applied to saiddebtor's property, the exemptions referred to in subdivision one of this section which are subject to the five thousanddollar aggregate limit; and (c) does not reach such aggregate limit, may exempt cash in the amount by which fivethousand dollars exceeds the aggregate of his exemptions referred to in subdivision one of this section or in theamount of two thousand five hundred dollars, whichever amount is less. For purposes of this subdivision, cashmeans currency of the United States at face value, savings bonds of the United States at face value, the right to receivea refund of federal, state and local income taxes, and deposit accounts in any state or federally chartered depositoryinstitution.CREDIT(S)(Added L.1982, c. 540, § 1.)[FN1] 26 USCA § 805(d).Current through L.2009, chapters 1 to 14 and 16 to 347.Copr © 2009 Thomson ReutersEND OF DOCUMENT© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

McKinney's Debtor and Creditor Law § 284 Page 1Effective:[See Text Amendments]Mckinney's Consolidated Laws of New York Annotated CurrentnessDebtor and Creditor Law (Refs & Annos)Chapter 12. Of the Consolidated Laws (Refs & Annos)Article 10-A. Personal Bankruptcy Exemptions (Refs & Annos)§ 284. Exclusivity of exemptionsIn accordance with the provisions of section five hundred twenty-two (b) of title eleven of the United States Code[FN1], debtors domiciled in this state are not authorized to exempt from the estate property that is specified undersubsection (d) of such section.CREDIT(S)(Added L.1982, c. 540, § 1.)[FN1] 11 USCA § 522(b).Current through L.2009, chapters 1 to 14 and 16 to 347.Copr © 2009 Thomson ReutersEND OF DOCUMENT© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

BAKER & HOSTETLER LLP45 Rockefeller PlazaNew York, NY 10111Telephone: (212) 589-4200Facsimile: (212) 589-4201Attorneys for Irving H. Picard, Esq., Trustee for theSubstantively Consolidated SIPA Liquidation of Bernard L. MadoffInvestment Securities LLC and Bernard L. MadoffUNITED STATES BANKRUPTCY COURTSOUTHERN DISTRICT OF NEW YORKSECURITIES INVESTOR PROTECTIONCORPORATION,v.Plaintiff-Applicant,BERNARD L. MADOFF INVESTMENTSECURITIES LLC,Adv. Pro. No. 08-01789 (BRL)SIPA Liquidation(Substantively Consolidated)Defendant.In re:BERNARD L. MADOFF,Debtor.IRVING H. PICARD, Trustee for the Liquidationof Bernard L. Madoff Investment Securities LLC,Adv. Pro. No. __________ (BRL)Plaintiff,v.RUTH MADOFF,Defendant.COMPLAINT

Irving H. Picard, Esq. (the “Trustee”), as trustee for the consolidated liquidationproceedings of Bernard L. Madoff Investment Securities LLC (“BLMIS” or, alternatively, the“Company”), under the Securities Investor Protection Act, 15 U.S.C. §§ 78aaa, et seq. (“SIPA”),and Bernard L. Madoff (“Madoff”) individually, by and through his counsel, Baker & HostetlerLLP, for his Complaint against Ruth Madoff (“Mrs. Madoff”), based on actual knowledge andinformation and belief, states the following:NATURE OF PROCEEDING1. This adversary proceeding is part of the Trustee’s continuing duty to seek to recaptureand return the investment funds of the customers of BLMIS that were diverted by Bernard L.Madoff in the course of his massive Ponzi scheme.2. For decades, Mrs. Madoff lived a life of splendor using the money of BLMIS’scustomers. Regardless of whether or not Mrs. Madoff knew of the fraud her husband perpetratedat BLMIS, during the past two- and six-year statutory periods, she received tens of millions ofdollars from BLMIS for which BLMIS received no corresponding benefit or value and to whichMrs. Madoff had no good faith basis to believe she was entitled. The purpose of this action is torecover that money to the extent possible for the benefit of BLMIS and its defrauded customers.3. The Madoffs have forfeited their homes, financial holdings, and other property inconnection with Madoff’s criminal sentence. The United States government agreed not to contestMrs. Madoff’s claim to $2.5 million and to make a payment to her in that amount followingforfeiture of the Madoffs’ assets. The forfeiture Stipulation And Order, dated June 26, 2009 (the“Forfeiture”) (copy attached), expressly provides that the $2.5 million payment to Mrs. Madoff“does not in any way preclude . . . Irving H. Picard, Esq. as trustee for the liquidation of the-2-

usiness of defendant Bernard L. Madoff Investment Securities LLC . . . from seeking to recoverthe Funds from Ruth Madoff.” While Madoff’s crimes have left many investors impoverishedand some charities decimated, Mrs. Madoff remains a person of substantial means. The inequitybetween Mrs. Madoff’s continuing financial advantages and the economic distress of Madoff’scustomers compels the Trustee to bring this action.4. At this time, the Trustee has identified at least $44,822,355 that is subject to recapturefrom Mrs. Madoff. Of this amount, Mrs. Madoff received at least $23,765,534 directly orindirectly from BLMIS during the two-year period prior to BLMIS’s bankruptcy filing (the“Two-Year Transfers”). These payments constitute fraudulent transfers which must be returned.Beyond this, the Trustee has identified at least an additional $21,116,820 received by Mrs.Madoff during the six-year period prior to BLMIS’s bankruptcy filing. These payments may berecaptured as fraudulent conveyances under the Bankruptcy Code and applicable law (the “Six-Year Period Transfers” and, collectively with the Two-Year Transfers, the “Transfers”).Accordingly, judgment should be entered in no less than the total amount of $44,822,355(exclusive of any additional amounts the Trustee later discovers) that Ms. Madoff knew, orshould have known, belonged to BLMIS and to its customers so that, to the extent possible, thefunds can be returned to the Trustee for the benefit of all the victims of the Madoff Ponzi scheme.5. This adversary proceeding is brought pursuant to 15 U.S.C. §§ 78fff(b), 78fff-1(a),and 78fff-2(c)(3), 11 U.S.C. §§ 105(a), 502(d), 541, 542, 544, 548(a), 550(a), and 551 (11 U.S.C.§§ 101 et. seq. are referred to herein as the “Bankruptcy Code”), and the New York FraudulentConveyance Act (N.Y. Debt & Cred. § 270 et. seq.), to set aside fraudulent transfers andfraudulent conveyances, and pursuant to New York common law for a constructive trust, an-3-

accounting, and to recover the money improperly received by Mrs. Madoff from BLMIS due toconversion and unjust enrichment.THE PARTIES6. Defendant Ruth Madoff has been married to Bernard L. Madoff for 49 years. Mrs.Madoff was a Controller at Madoff Securities International Ltd. (“MSIL”)—a related Britishcompany in which she personally held an interest—and she had business responsibilities foraccount reconciliation within the Company’s Investment Advisory Business (the “IA Business”).Mrs. Madoff was a BLMIS insider as defined by Section 101(31) of the Bankruptcy Code.JURISDICTION AND VENUE7. This is an adversary proceeding brought in this Court, in which the main underlyingsubstantively consolidated SIPA case, No. 08-01789 (BRL) (the “SIPA Case”), is pending. TheSIPA Case was originally brought in the United States District Court for the Southern District ofNew York (the “District Court”) as Securities Exchange Commission vs. Bernard L. MadoffInvestment Securities LLC et al., No. 08 CV 10791 (the “District Court Proceeding”). This Courthas jurisdiction over this adversary proceeding under 28 U.S.C. § 1334(b), Federal Rules ofBankruptcy Procedure 7001(1), (2), (7), (8), and (9), and 15 U.S.C. §§78eee(b)(2)(A), (b)(4).(O).8. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B), (C), (E), (H), and9. Venue in this district is proper under 28 U.S.C. § 1409.-4-

BACKGROUND, THE TRUSTEE, AND STANDING10. On December 11, 2008 (the “Filing Date”), Bernard Madoff was arrested by federalagents for violation of the criminal securities laws, including, inter alia, securities fraud,investment adviser fraud, and mail and wire fraud. Contemporaneously, the Securities andExchange Commission (“SEC”) filed a complaint in the District Court which commenced theDistrict Court Proceeding against Madoff and BLMIS. The District Court Proceeding remainspending in the District Court. The SEC complaint alleged that Madoff and BLMIS engaged infraud through the investment advisor activities of BLMIS.11. On December 12, 2008, The Honorable Louis L. Stanton of the District Court enteredan order, which appointed Lee S. Richards, Esq. as receiver for the assets of BLMIS (the“Receiver”).12. On December 15, 2008, pursuant to 15 U.S.C. § 78eee(a)(4)(A), the Securities andExchange Commission consented to a combination of its own action with an application of theSecurities Investor Protection Corporation (“SIPC”). Thereafter, pursuant to 15 U.S.C. §78eee(a)(4)(B), SIPC filed an application in the District Court alleging, inter alia, that BLMISwas not able to meet its obligations to securities customers as they came due and, accordingly, itscustomers needed the protections afforded by SIPA.13. Also on December 15, 2008, Judge Stanton granted the SIPC application and enteredan order pursuant to SIPA (the “Protective Decree”), which, in pertinent part:(a)(b)appointed the Trustee for the liquidation of the business of BLMIS pursuant to15 U.S.C. § 78eee(b)(3);appointed Baker & Hostetler LLP as counsel to the Trustee pursuant to15 U.S.C. § 78eee(b)(3); and-5-

(c)removed the case to this Bankruptcy Court pursuant to 15 U.S.C. § 78eee(b)(4).By this Protective Decree, the Receiver was removed as Receiver for BLMIS.14. By orders dated December 23, 2008 and February 4, 2009, respectively, theBankruptcy Court approved the Trustee’s bond and found that the Trustee was a disinterestedperson. Accordingly, the Trustee is duly qualified to serve and act on behalf of the estate ofBLMIS. In addition, the bankruptcy estate of Bernard L. Madoff, individually, was substantivelyconsolidated into the estate of BLMIS by order of the Bankruptcy Court dated June 9, 2009.15. At a plea hearing (the “Plea Hearing”) on March 12, 2009, in the case captionedUnited States v. Madoff, Case No. 09-CR-213(DC), Madoff pled guilty to an 11-count criminalinformation filed against him by the United States Attorneys’ Office for the Southern District ofNew York. At the Plea Hearing, Madoff admitted that he “operated a Ponzi scheme through theinvestment advisory side of [BLMIS].” (Plea Hr’g Tr. at 23: 14-17). Additionally, Madoffasserted, “[a]s I engaged in my fraud, I knew what I was doing [was] wrong, indeed criminal.”(Id. at 23: 20-21). On June 29, 2009, Madoff was sentenced to a prison term of 150 years and heand Mrs. Madoff entered into the Forfeiture.16. As the Trustee appointed under SIPA, the Trustee has the job of recovering andpaying out customer property to BLMIS’ customers, assessing claims, and liquidating any otherassets of the firm for the benefit of the estate and its creditors. The Trustee is in the process ofmarshalling BLMIS’ assets, and the liquidation of BLMIS’ assets is well underway. The assetsrecovered, however, will not be sufficient to reimburse the customers of BLMIS for the billionsof dollars that they invested with BLMIS over the years. Consequently, the Trustee must use hisauthority under SIPA and the Bankruptcy Code to pursue recovery from, among others, Mrs.-6-

Madoff who received fraudulent transfers and fraudulent conveyances of money which belongedto BLMIS and its defrauded customers. Absent this or other recovery actions, the Trustee will beunable to satisfy the claims described in subparagraphs (A) through (D) of 15 U.S.C. § 78fff-2(c)(1).17. Pursuant to 15 U.S.C. § 78fff-1(a), the Trustee has the general powers of abankruptcy trustee in a case under the Bankruptcy Code (in addition to the powers granted bySIPA pursuant to 15 U.S.C. § 78fff(b)). Chapters 1, 3, 5, and Subchapters I and II of Chapter 7 ofthe Bankruptcy Code are applicable to this case.18. Pursuant to 15 U.S.C. § 78lll(7)(B), the Filing Date is deemed to be the date of thecommencement of the case and the filing of the petition within the meanings of sections 544 and548 of the Bankruptcy Code.19. The Trustee has standing to bring these claims pursuant to 15 U.S.C. § 78fff-1 and theBankruptcy Code, including sections 323(b) and 704(a)(1) because, among other reasons:(a)BLMIS incurred losses as a result of the claims set forth herein;(b)the Trustee is a bailee of customer funds entrusted to BLMIS for investmentpurposes;(c)the Defendant received “Customer Property” as defined in 15 U.S.C. § 78lll(4);(d)SIPC has not, and will not, fully reimburse the customers for their losses;(e)the Trustee is the assignee of claims paid, and to be paid, to customers of BLMISwho have filed claims in the liquidation proceeding (such claim-filing customers, collectively,-7-

“Accountholders”). As of this date, the Trustee has received multiple express unconditionalassignments of certain claims of the applicable Accountholders which they could have asserted.As assignee, the Trustee stands in the shoes of persons who have suffered injury-in-fact and adistinct and palpable loss for which the Trustee is entitled to reimbursement in the form ofmonetary damages;(f)SIPC has expressly conferred to the Trustee its rights of subrogation with respectto payments it has made and is making to customers of BLMIS from SIPC funds; and(g)the Trustee has the power and authority to avoid and recover transfers pursuant tosections 544, 548, 550(a), and 551 of the Bankruptcy Code and 15 U.S.C. § 78fff-2(c)(3).THE FRAUDULENT PONZI SCHEME20. BLMIS is a New York limited liability company that was wholly owned by BernardMadoff. It operated from its principal place of business in the “Lipstick Building” at 885 ThirdAvenue, in Manhattan. BLMIS was registered with the SEC as a securities broker-dealer under§15(b) of the Securities Exchange Act of 1934. (15 U.S.C. § 78o(b)). By virtue of thatregistration, BLMIS is a member of SIPC.21. For years, the IA Business purported to utilize a “split-strike conversion” strategy thatit claimed generated enormous and steady financial returns for its customers. In truth, though,BLMIS never implemented this strategy, or any other. At the Plea Hearing, Madoff admitted thathe never in fact purchased any of the securities he claimed to have purchased for customeraccounts. The Trustee’s investigation to date establishes that, to the extent that records areavailable, BLMIS never carried out an actual IA business; it simply deposited the customers’investment funds in a bank account and used the money to pay other customers’ redemptions-8-

ased on fictitious profits and for the personal enrichment of Madoff and his family. The entireIA Business was a fraudulent Ponzi scheme.THE PONZI SCHEME BENEFITED MRS. MADOFF22. The Madoff Ponzi scheme massively enriched Mrs. Madoff. She received substantialtransfers of money from BLMIS which belonged to the Company and, ultimately, its customers.Two-Year Period Fraudulent Transfers23. In the two-year period prior to the Filing Date of BLMIS, as detailed below (24-32), Mrs. Madoff received at least $23,765,534 from BLMIS in the form of direct paymentsto her as well as payments to entities she owned and/or controlled together with other familymembers or as an investor (collectively, the “Two-Year Period Fraudulent Transfers”).24. Mrs. Madoff was an investor in DWD Associates LLC (“DWD”), an entitycontrolled by the Blumenfeld Development Group. Mrs. Madoff’s ownership stake in thisbusiness was entirely financed by BLMIS. On December 8, 2008, BLMIS transferredapproximately $11 million from the IA Business operating account at JPMorgan Chase (the“703” account) to DWD in consideration for Mrs. Madoff’s ownership interest in DWD. BLMISdid not receive any corresponding benefit or value for this $11 million payment.25. On November 26, 2008, after receiving funds from BLMIS, MSIL directed a wiretransfer from its account at Anglo Irish Bank in London in the amount of $2,088,692.06 to Mrs.Madoff’s personal account at Wachovia Bank. BLMIS did not receive a corresponding benefitor value for this transfer of funds to Mrs. Madoff.-9-

26. On December 20, 2007, after receiving funds from BLMIS, MSIL wired$2,785,515.55 from an MSIL account at Barclay’s Bank to Mrs. Madoff’s personal account atthe Bank of New York (the “690” account). The MSIL system indicated that this amount was aninterest payment on a loan. Indeed, the Trustee has discovered that on December 27, 2001,BLMIS loaned $25 million to MSIL. The loan funds, however, originated from the 703 accountmaintained by the IA Business at JPMorgan Chase. Thus, BLMIS made the loan but Mrs.Madoff personally received the payments on the loan. BLMIS received no corresponding benefitor value for the funds paid by MSIL to Mrs. Madoff.27. Mrs. Madoff was also an investor in a series of private equity funds whichprimarily invested in real estate (the “Sterling Entities”). Mrs. Madoff’s capital contributions tothe Sterling Entities, however, were paid entirely by BLMIS. For example, on July 17, 2008,BLMIS transferred $720,000 from the 703 JPMorgan Chase account to Sterling AmericanProperty V for the benefit of Mrs. Madoff. Similarly, on October 2, 2008, Mrs. Madoff receiveda “Confidential Memo” from Arthur Friedman requesting a payment of $59,714.46 to SterlingAcquisitions LLC in order to finance the purchase of excess shares issued by Changing WorldTechnologies. Rather than paying the money herself, however, Mrs. Madoff’s capitalcontribution was paid by BLMIS on November 4, 2008 when $59,714.46 was wired from aBLMIS account (the “509” account) to Sterling Acquisitions LLC to satisfy Mrs. Madoff’sobligation. Finally, on May 3, 2007, BLMIS wired $1,030,000 from its 703 account atJPMorgan Chase to Sterling American Property V on Mrs. Madoff’s behalf. There is noevidence that BLMIS received investment income or any other benefit from Mrs. Madoff or theSterling entities for the use of these funds.-10-

28. BLMIS funds were also used to pay for personal expenses charged to Mrs.Madoff’s American Express card. During the two years prior to the Filing Date, BLMIS paid forapproximately $1.1 million in personal expenses charged to Mrs. Madoff’s American Expresscard, for which BLMIS did not receive a corresponding benefit or value.29. On December 27, 2006, after receiving funds from BLMIS, MSIL wired$1,905,693.37 from its account at Anglo Irish Bank to Mrs. Madoff’s personal account at theBank of New York. As with the 2007 payment to Mrs. Madoff (see 25), this payment waspurportedly made to service a 2001 loan made by BLMIS. Yet MSIL made its payment not toBLMIS but to Mrs. Madoff. BLMIS received no corresponding benefit or value for this paymentto Mrs. Madoff.30. Mrs. Madoff also received BLMIS funds through MSIL to pay for a yacht for herpersonal enjoyment. In 2007, MSIL transferred a total of $2,782,962 to Mrs. Madoff’s personalaccounts for, on information and belief, payments for Mrs. Madoff’s yacht, as follows: January11, 2007, $776,358; March 13, 2007, $789,420; April 24, 2007, $813,444; and June 4, 2007,$403,740. BLMIS received no corresponding benefit or value for these payments.31. Mrs. Madoff was also an investor in two other private investment funds—namely,Delta Fund I, L.P. and Delta Ventures (Cayman) Ltd (the “Delta Funds”). On March 26, 2007,BLMIS wired $175,000 from its 703 operating account to Delta Fund I, L.P., on behalf of Mrs.Madoff. BLMIS received no corresponding benefit or value for this payment.32. Between 1996 and 2008, BLMIS sent $6.4 million from the House 5 operatingaccount to an entity called LaGuardia Corp Center Associates, LLC (“LaGuardia”). Although-11-

BLMIS made the investments into LaGuardia, on January 17, 2007, Mrs. Madoff received adeposit of $117,957 from LaGuardia to her personal investment account at Cohmad Securities.Six-Year Fraudulent Transfer Period Payments33. During the six-year period prior to the Filing Date, exclusive of the fraudulenttransfers detailed above (i.e., December 11, 2002 - December 11, 2006), Mrs. Madoff receivedan additional $21,116,820 from BLMIS (collectively, the “Six-Year Period Transfers”), asdetailed below ( 34-41).34. During this period, using funds it received from BLMIS, MSIL wired fourpayments totaling $ 4,270,264.80 to Mrs. Madoff’s personal account at Bank of New York.Specifically, these transactions were: December 20, 2002, $1,201,513.41; December 24, 2003,$1,213,424.66; December 23, 2004, $869,178.10; and December 20, 2005, $986,148.63. MSILrecords purport to show that $3,068,751.39 of this amount was paid to service loans made byBLMIS (although the payments were made to Mrs. Madoff, personally). Regardless, BLMISreceived no corresponding benefit or value for the payment of any of these amounts.35. On October 2, 2003, from funds received from BLMIS, MSIL wired $2,337,400to Mrs. Madoff’s personal account for the purchase of a yacht for the personal enjoyment of Mrs.Madoff and her family. This yacht served no legitimate business purpose and BLMIS derived nocorresponding benefit or value for this money paid to Mrs. Madoff.36. Mrs. Madoff also received funds from BLMIS via an entity called MadoffTechnologies LLC (“Madoff Technologies”), an investment vehicle for Mrs. Madoff and certainof her family members—her children, Andrew and Mark Madoff, her brother-in-law, Peter-12-

Madoff, and her niece, Shana Madoff, among others. Mrs. Madoff, herself, owned 44.55% ofMadoff Technologies LLC. On February 21, 2003, $4.26 million was wired from BLMIS’s 703account to Madoff Technologies. Mrs. Madoff’s 44.55% ownership share of this moneyamounts to $1,897,830. BLMIS received no corresponding benefit or value from this payment.37. On January 7, 2004, $5,227,563.16 was wired from Madoff Technologies directlyto Mrs. Madoff’s personal account at the Bank of New York. This exact amount wassubsequently transferred to Mrs. Madoff’s personal investment account at Cohmad Securitiesone week later, on January 15, 2004. BLMIS received no corresponding benefit or value for thismoney which, through Madoff Technologies, was transferred to Mrs. Madoff.38. Between December 11, 2002 and December 11, 2006, in a total of nine payments,BLMIS funds were also used to invest an additional $2,344,672 in the Sterling Entities for Mrs.Madoff’s personal benefit, as follows:DateAmountJanuary 14, 2003 $130,129February 3, 2003 $140,000March 28, 2003 $200,000April 15, 2003 $139,640April 25, 2003 $226,789May 28, 2003 $111,712June 29, 2004 $279,281July 6, 2004 $279,281May 27, 2005 $837,843There is no evidence that BLMIS received investment income or any other benefit from Mrs.Madoff or the Sterling Entities for the use of these funds.-13-

39. In the six-year period prior to the Filing Date, excluding the payments previouslydescribed (see 31), BLMIS wired funds on Mrs. Madoff’s behalf to the Delta Funds on fiveseparate occasions. On January 31, 2003, BLMIS wired $250,000; on September 22, 2003,BLMIS sent two payments totaling $250,000 from the 703 operating account; on June 22, 2004,BLMIS sent another $250,000 from the House 5 operating account (the “621” account forBLMIS’s market-making and proprietary desk businesses); on September 12, 2005, another$75,000 was sent from the 621 account; and on April 5, 2006, another $125,000 was sent to theDelta Fund. All of these payments were made utilizing BLMIS funds for the benefit of Mrs.Madoff. BLMIS received no corresponding benefit or value for the payment of any of theseamounts.40. Mrs. Madoff was also an investor in a business called PetCare RX. To date,during the six-year period, the Trustee has discovered that a total of $2,000,000 was sent toPetCare RX from BLMIS’s operating accounts (the 621 and 703 accounts) to pay for Mrs.Madoff’s investment. These payments were as follows: March 21, 2003, $500,000; August 18,2003, $500,000; and November 17, 2005, $1,000,000. BLMIS received no correspondingbenefit or value for any of these amounts.41. During this period, too, BLMIS funds were used to pay for personal expensescharged to Mrs. Madoff’s American Express card. Between December 11, 2002, and December11, 2006, BLMIS paid for an additional $2,089,088 in personal expenses charged toMrs. Madoff’s American Express card, for which BLMIS did not receive a corresponding benefitor value.-14-

42. Ruth Madoff was never an employee of BLMIS yet millions of dollars belongingto BLMIS and its customers found their way into her personal accounts and investments withoutany legitimate business purpose or any value or benefit to BLMIS, simply because of herrelationship with Bernard Madoff. Mrs. Madoff knew, or should have known, that what shereceived was not hers, and that the vast sums of money she received from BLMIS belonged tothe Company and to BLMIS’s customers.NATURE OF THE CLAIMS AGAINST MRS. MADOFF43. At all times relevant hereto, BLMIS was insolvent in that (i) its assets were worthbillions of dollars less than the value of its liabilities; (ii) it could not meet its obligations as theycame due; or (iii) at the time of the transfers to Mrs. Madoff described herein, BLMIS was leftwith insufficient capital.44. This adversary proceeding is being brought to recapture monies paid to or for thebenefit of Mrs. Madoff so that this customer property can be equitably distributed among all ofthe victims of BLMIS in accordance with the provisions of SIPA.45. The Trustee also seeks an accounting for all monies received by Mrs. Madoff fromBLMIS and a constructive trust as a result of the past unjust enrichment of—and to prevent anyfurther unjust enrichment by—Mrs. Madoff on all assets she received or receives in connectionwith BLMIS. The accounting and constructive trust are necessary in this case in light of the sizeof the Ponzi scheme and the amount of money improperly transferred to Mrs. Madoff to financeher personal life and personal investments.46. The Transfers of money to Mrs. Madoff were, and continue to be, property of theconsolidated estate within the meaning of section 541 of the Bankruptcy Code as well as-15-

customer property within the meaning of 15 U.S.C. § 78lll(4), and are subject to turnoverpursuant to section 542 of the Bankruptcy Code.47. The Transfers are avoidable and recoverable under sections 544, 548(a), 550(a), and551 of the Bankruptcy Code, applicable provisions of SIPA, particularly 15 U.S.C. § 78fff-2(c)(3), and applicable provisions of N.Y. CPLR 203(g) and N.Y. Debt. & Cred. Law §§ 273-279.48. A total of 111 transfers in the collective amount of $44,882,355 (the “Six YearTransfers”) were made during the six years prior to the Filing Date and are avoidable andrecoverable under sections 544, 550(a), and 551 of the Bankruptcy Code, applicable provisions ofSIPA, particularly 15 U.S.C. § 78fff-2(c)(3), and applicable provisions of N.Y. Debt. & Cred.Law §§ 273-279.49. Of the Six Year Transfers, at least 38 in the collective amount of $21,116,820 (the“Two Year Transfers”) were made during the two years prior to the Filing Date, and areadditionally recoverable under sections 548(a)(1), 550(a), and 551 of the Bankruptcy Code andapplicable provisions of SIPA, particularly 15 U.S.C. 78fff-2(c)(3).50. To the extent that any of the recovery counts may be inconsistent with each other,they are to be treated as being pled in the alternative.51. The Trustee’s investigation is on-going and the Trustee reserves the right to (i)supplement the information on the Transfers and any additional transfers, and (ii) seek recoveryof such additional transfers.-16-

FIRST CAUSE OF ACTIONTURNOVER AND ACCOUNTING - 11 U.S.C. § 54252. The Trustee incorporates by reference the allegations contained in the previousparagraphs of this Complaint as if fully rewritten herein.53. The transfers constitute property of the estate to be recovered and administered by theTrustee pursuant to section 541 of the Bankruptcy Code and 15 U.S.C. §§ 78fff-2(c)(3)4 and78lll(4).54. As a result of the foregoing, pursuant to section 542 of the Bankruptcy Code and15 U.S.C. § 78fff-2(c)(3), the Trustee is entitled to the immediate payment and turnover from thedefendant of any and all transfers made by BLMIS, directly or indirectly, to the defendant.55. As a result of the foregoing, pursuant to section 542 of the Bankruptcy Code, theTrustee is also entitled to an accounting of all such transfers received by Mrs. Madoff fromBLMIS, directly or indirectly.SECOND CAUSE OF ACTIONFRAUDULENT TRANSFERS - 11 U.S.C. §§ 548(a)(1)(A), 550, AND 55156. The Trustee incorporates by reference the allegations contained in the previousparagraphs of this Complaint as if fully rewritten herein.57. The Two-Year Transfers were made on or within two years before the Filing Date.58. The Two-Year Transfers were made by BLMIS with the actual intent to hinder,delay, or defraud some or all of BLMIS’s then-existing or future creditors.-17-

59. The Two-Year Transfers constitute a fraudulent transfer avoidable by the Trusteepursuant to section 548(a)(1)(A) of the Bankruptcy Code and recoverable from Mrs. Madoffpursuant to section 550(a) of the Bankruptcy Code and 78 U.S.C. § 78fff-2(c)(3).60. As a result of the foregoing, pursuant to sections 548(a)(1)(A), 550(a), and 551 of theBankruptcy Code and 78 U.S.C. § 78fff-2(c)(3), the Trustee is entitled to a judgment: (a)avoiding and preserving the Two-Year Transfers; (b) directing that the Two-Year Transfers beset aside; and (c) recovering the Two-Year Transfers, or the value thereof, from Mrs. Madoff forthe benefit of the consolidated estate of BLMIS.THIRD CAUSE OF ACTIONFRAUDULENT TRANSFER - 11 U.S.C. §§ 548(a)(1)(B) , 550, AND 55161. The Trustee incorporates by reference the allegations contained in the previousparagraphs of this Complaint as if fully rewritten herein.62. The Two-Year Transfers were made on or within two years before the Filing Date.63. BLMIS received less than a reasonably equivalent value in exchange for each of theTwo-Year Transfers.64. At the time of each of the Two-Year Transfers, BLMIS was insolvent, or becameinsolvent, as a result of the Two-Year Transfer in question.65. At the time of each of the Two-Year Transfers, BLMIS was engaged in a business ora transaction, or was about to engage in business or a transaction, for which any propertyremaining with BLMIS was an unreasonably small capital.-18-

66. At the time of each of the Two-Year Transfers, BLMIS intended to incur, or believedthat it would incur, debts that would be beyond BLMIS’s ability to pay as such debts matured.67. The Two-Year Transfers constitute fraudulent transfers avoidable by the Trusteepursuant to section 548(a)(1)(B) of the Bankruptcy Code and recoverable from Mrs. Madoffpursuant to section 550(a) of the Bankruptcy Code and 15 U.S.C. § 78fff-2(c)(3).68. As a result of the foregoing, pursuant to sections 548(a)(1)(B), 550(a), and 551 of theBankruptcy Code and 15 U.S.C. § 78fff-2(c)(3), the Trustee is entitled to a judgment: (a)avoiding and preserving the Two-Year Transfers; (b) directing that the Two-Year Transfers beset aside; and (c) recovering the Two-Year Transfers, or the value thereof, from Mrs. Madoff forthe benefit of the consolidated estate of BLMIS.FOURTH CAUSE OF ACTIONFRAUDULENT TRANSFER - NEW YORK DEBTOR AND CREDITOR LAW§§ 276, 276-a, 278 AND/OR 279, AND 11 U.S.C. §§ 544, 550(a), AND 55169. The Trustee incorporates by reference the allegations contained in the previousparagraphs of this Complaint as if fully rewritten herein.70. At all times relevant to the Six-Year Transfers, there have been one or more creditorswho have held and still hold matured or unmatured unsecured claims against BLMIS that wereand are allowable under section 502 of the Bankruptcy Code or that were and are not allowableonly under section 502(e).71. The Six-Year Transfers were made by BLMIS with the actual intent to hinder, delay,or defraud the creditors of BLMIS. BLMIS made the Six-Year Transfers to, or for the benefit of,the defendant in furtherance of a fraudulent investment scheme.-19-

72. As a result of the foregoing, pursuant to sections 276, 276-a, 278 and/or 279 of theNew York Debtor and Creditor Law, sections 544, 550(a), and 551 of the Bankruptcy Code, and15 U.S.C. § 78fff-2(c)(3), the Trustee is entitled to a judgment: (a) avoiding and preserving theSix-Year Transfers; (b) directing that the Six-Year Transfers be set aside; (c) recovering the Six-Year Transfers, or the value thereof, from Mrs. Madoff for the benefit of the consolidated estateof BLMIS; and (d) recovering attorneys’ fees from Mrs. Madoff.FIFTH CAUSE OF ACTIONFRAUDULENT TRANSFER - NEW YORK DEBTOR AND CREDITOR LAW§§ 273 AND 278 AND/OR 279, AND 11 U.S.C. §§ 544, 550(a), AND 55173. The Trustee incorporates by reference the allegations contained in the previousparagraphs of the Complaint as if fully rewritten herein.74. At all relevant times there was and is at least one or more creditors who held and holdmatured or unmatured unsecured claims against BLMIS that were and are allowable undersection 502 of the Bankruptcy Code or that were and are not allowable only under section502(e).75. BLMIS did not receive fair consideration for the Six-Year Transfers.76. BLMIS was insolvent at the time it made each of the Six-Year Transfers or, in thealterative, BLMIS became insolvent as a result of each of the Six-Year Transfers.77. As a result of the foregoing, the Trustee is entitled to a judgment pursuant to sections273, 278, and 279 of the New York Debtor and Creditor Law, sections 544, 550(a), and 551 ofthe Bankruptcy Code, and 15 U.S.C. § 78fff-2(c)(3): (a) avoiding and preserving the Six-Year-20-

Transfers; (b) directing that the Six-Year Transfers be set aside; and (c) recovering the Six-YearTransfers, or the value thereof, for the benefit of the consolidated estate of BLMIS.SIXTH CAUSE OF ACTIONFRAUDULENT TRANSFERS - NEW YORK DEBTOR AND CREDITOR LAW§§274, 278 AND/OR 279, AND 11 U.S.C. §§ 544, 550(a), AND 55178. The Trustee incorporates by reference the allegations contained in the previousparagraphs of the Complaint as if fully rewritten herein.79. At all relevant times there was and is at least one or more creditors who held and holdmatured or unmatured unsecured claims against BLMIS that were and are allowable undersection 502 of the Bankruptcy Code or that were and are not allowable only under section502(e).80. BLMIS did not receive fair consideration for the Six-Year Transfers.81. At the time BLMIS made each of the Six-Year Transfers, BLMIS was engaged orwas about to engage in a business or transaction for which the property remaining in its handsafter each of the Six-Year Transfers was an unreasonably small capital.82. As a result of the foregoing, pursuant to sections 274, 278, and/or 279 of the NewYork Debtor and Creditor Law, sections 544, 550(a), and 551 of the Bankruptcy Code, and 15U.S.C. § 78fff-2(c)(3), the Trustee is entitled to a judgment: (a) avoiding and preserving the Six-Year Transfers; (b) directing that the Six-Year Transfers be set aside; and (c) recovering the Six-Year Transfers, or the value thereof, from Mrs. Madoff for the benefit of the consolidated estateof BLMIS.-21-

SEVENTH CAUSE OF ACTIONFRAUDULENT TRANSFERS - NEW YORK DEBTOR AND CREDITOR LAW§§ 275, 278, AND/OR 279, AND 11 U.S.C. §§ 544, 550(a), AND 55183. The Trustee incorporates by reference the allegations contained in the previousparagraphs of the Complaint as if fully rewritten herein.84. At all relevant times there was and is at least one or more creditors who held and holdmatured or unmatured unsecured claims against BLMIS that were and are allowable undersection 502 of the Bankruptcy Code or that were and are not allowable only under section502(e).85. BLMIS did not receive fair consideration for the Six-Year Transfers.86. At the time BLMIS made each of the Six-Year Transfers, BLMIS had incurred, wasintending to incur, or believed that it would incur debts beyond its ability to pay them as thedebts matured.87. As a result of the foregoing, pursuant to sections 275, 278, and/or 279 of the NewYork Debtor and Creditor Law, sections 544, 550(a), and 551 of the Bankruptcy Code, and 15U.S.C. § 78fff-2(c)(3), the Trustee is entitled to a judgment: (a) avoiding and preserving the Six-Year Transfers; (b) directing that the Six-Year Transfers be set aside; and (c) recovering the Six-Year Transfers, or the value thereof, from Mrs. Madoff for the benefit of the consolidated estateof BLMIS.-22-

EIGHTH CAUSE OF ACTIONUNDISCOVERED FRAUDULENT TRANSFERS - NEW YORK CIVIL PROCEDURELAW AND RULES 203(g) AND NEW YORK DEBTOR AND CREDITOR LAW§§ 276, 276-a, 278, AND/OR 279, AND 11 U.S.C. §§ 544, 550(a), AND 55188. The Trustee incorporates by reference the allegations contained in the previousparagraphs of this Complaint as if fully rewritten herein.89. At all times relevant to the Transfers, the fraudulent scheme perpetrated by BLMISwas not reasonably discoverable by at least one unsecured creditor of BLMIS.90. At all times relevant to the Transfers, there have been one or more creditors who haveheld and still hold matured or unmatured unsecured claims against BLMIS that were and areallowable under section 502 of the Bankruptcy Code or that were and are not allowable onlyunder section 502(e).91. The Transfers were made by BLMIS with the actual intent to hinder, delay, ordefraud the creditors of BLMIS. BLMIS made the Transfers to or for the benefit of Mrs. Madoffin furtherance of a fraudulent investment scheme.92. As a result of the foregoing, pursuant to NY CPLR 203(g) sections 276, 276-a, 278,and/or 279 of the and New York Debtor and Creditor Law sections 544, 550(a), and 551 of theBankruptcy Code, and 15 U.S.C. § 78fff-2(c)(3), the Trustee is entitled to a judgment: (a)avoiding and preserving the Transfers; (b) directing that the Transfers be set aside; (c) recoveringthe Transfers, or the value thereof, from Mrs. Madoff for the benefit of the consolidated estate ofBLMIS; and (d) recovering attorneys’ fees from Mrs. Madoff.-23-

NINTH CAUSE OF ACTIONRECOVERY OF SUBSEQUENT TRANSFERS - NEW YORK DEBTOR ANDCREDITOR LAW § 278 AND 11 U.S.C. §§ 544, 548, 550(a), AND 55193. The Trustee incorporates by reference the allegations contained in the previousparagraphs of this Complaint as if fully rewritten herein.94. Each of the Transfers are avoidable pursuant to sections 544 and/or 548 of theBankruptcy Code.95. On information and belief, some or all of the Transfers were subsequently transferredto family members or affiliated/other entities, either directly or indirectly (collectively, the“Subsequent Transfers”).96. Each of the Subsequent Transfers were made directly or indirectly to one or more ofMrs. Madoff’s family members or affiliated/other entities.97. Mrs. Madoff is an immediate or mediate transferee of the Subsequent Transfers.98. As a result of the foregoing, pursuant to section 278 of the New York Debtor andCreditor Law, sections 544, 548, 550(a) and 551 of the Bankruptcy Code, and 15 U.S.C. § 78fff-2(c)(3), the Trustee is entitled to a judgment against Mrs. Madoff: (a) avoiding and preservingthe Subsequent Transfers; and (b) recovering the Subsequent Transfers, or the value thereof,from Mrs. Madoff for the benefit of the estate of BLMIS.-24-

TENTH CAUSE OF ACTIONDISALLOWANCE OF MRS. MADOFF’S CLAIMS - 11 U.S.C. § 502(b) and (d)99. The Trustee incorporates by reference the allegations contained in the previousparagraphs of this Complaint as if fully rewritten herein.100. By Proof Of Claim, dated June 30, 2009 and received July 2, 2009, Mrs. Madofffiled a claim in this proceeding (the “Claim”). Mrs. Madoff’s claim was filed as “a contingentand unliquidated claim” in connection with four pending actions “seeking contribution,indemnification and/or reimbursement” for any damages awarded against her in those actions.101. Mrs. Madoff’s Claim is not supported by the books and records of BLMIS nor theclaim materials submitted by Mrs. Madoff, and, therefore, should be disallowed pursuant tosection 502(b) of the Bankruptcy Code.102. The Claim also should not be allowed as a customer claim or as a generalunsecured claim. Mrs. Madoff is the recipient of transfers of BLMIS’ property which arerecoverable under sections 544, 548, and 550 of the Bankruptcy Code and 15 U.S.C. § 78fff-2(c)(3), and Mrs. Madoff has not returned the Transfers to the Trustee. As a result, pursuant tosection 502(d) of the Bankruptcy Code, the Claim must be disallowed unless and until Mrs.Madoff return the Transfers to the Trustee.Claim.103. As a result of the foregoing, the Trustee is entitled to an order disallowing the-25-

ELEVENTH CAUSE OF ACTIONCONVERSION104. The Trustee incorporates by reference the allegations contained in the previousparagraphs of this Complaint as if fully rewritten herein.105. BLMIS had a possessory right and interest to its assets, including its customers’investment funds.106. Mrs. Madoff converted the investment funds of BLMIS customers when shereceived money originating from other BLMIS customer accounts in the form of payments andother transfers. These actions deprived BLMIS and its creditors of the use of this money.107. As a direct and proximate result of this conduct, BLMIS and its creditors have nothad the use of the money converted by Mrs. Madoff.108. By reason of the above, the Trustee, on behalf of BLMIS and its creditors, isentitled to an award of compensatory damages, in an amount to be determined at trial.109. Mrs. Madoff’s conscious, willful, wanton, and malicious conduct entitles theTrustee, on behalf of BLMIS and its creditors, to an award of punitive damages, in an amount tobe determined at trial.TWELFTH CAUSE OF ACTIONUNJUST ENRICHMENT110. The Trustee incorporates by reference the allegations contained in the previousparagraphs of this Complaint as if fully rewritten herein.-26-

111. Mrs. Madoff benefited from the receipt of money from BLMIS in the form ofpayments and other transfers which were the property of BLMIS and its customers, and forwhich Mrs. Madoff did not adequately compensate BLMIS or provide value.112. This enrichment was at the expense of BLMIS and, ultimately, at the expense ofBLMIS’s other customers.113. Equity and good conscience require full restitution of the monies received by Mrs.Madoff from BLMIS.114. Mrs. Madoff’s conscious, intentional and willful tortious conduct entitles BLMISto recapture profits derived by Mrs. Madoff utilizing monies they received from BLMISincluding, by way of example and without limitation, profits earned from real estate intereststhey purchased with BLMIS’s customer funds.115. By reason of the above, the Trustee, pursuant to section 544 of the BankruptcyCode and other applicable law, on behalf of BLMIS and its creditors, is entitled to an award ofcompensatory damages, in an amount to be determined at trial.THIRTEENTH CAUSE OF ACTIONCONSTRUCTIVE TRUST116. The Trustee incorporates by reference the allegations contained in the previousparagraphs of this Complaint as if fully rewritten herein.117. As set forth above, the assets of BLMIS have been wrongfully diverted as a resultof fraudulent conveyances, conversions, and other wrongdoing of Mrs. Madoff for her own, andher family’s, individual interests and enrichment.-27-

118. The Trustee has no adequate remedy at law.119. Because of the past unjust enrichment of Mrs. Madoff, the Trustee is entitled tothe imposition of a constructive trust with respect to any transfer of funds, assets, or propertyfrom BLMIS as well as to any profits received by Mrs. Madoff in the past or on a going forwardbasis in connection with BLMIS.FOURTEENTH CAUSE OF ACTIONACCOUNTING120. The Trustee incorporates by reference the allegations contained in the previousparagraphs of this Complaint as if fully rewritten herein.121. As set forth above, the assets of BLMIS have been wrongfully diverted as a resultof fraudulent conveyances, breaches of fiduciary duties, conversions, and other wrongdoing ofMrs. Madoff for her own, and her family’s, individual interests and enrichment.122. The Trustee has no adequate remedy at law.123. To compensate BLMIS for the amount of monies Mrs. Madoff diverted fromBLMIS for her own benefit, it is necessary for Mrs. Madoff to provide an accounting of anytransfer of funds, assets, or property received from BLMIS, as well as to any profits in the pastand on a going forward basis in connection with BLMIS. Complete information regarding theamount of such transfers misused by Mrs. Madoff for her own benefit is within her possession,custody, and control.-28-

WHEREFORE, the Trustee respectfully requests that this Court enter judgment in favorof the Trustee and against Mrs. Madoff as follows:(a)on the First Cause of Action, pursuant to section 542 of the Bankruptcy Code and15 U.S.C. § 78fff-2(c)(3): (a) that the property that was the subject of the Transfers beimmediately delivered and turned over to the Trustee; and (b) for an accounting by Mrs. Madoffof the property that was the subject of the Transfers or the value of such property;(b)on the Second Cause of Action, pursuant to sections 548(a)(1)(A), 550(a), and551 of the Bankruptcy Code and 15 U.S.C. § 78fff-2(c)(3): (a) avoiding and preserving the Two-Year Transfers; (b) directing that the Two-Year Transfers be set aside; and (c) recovering theTwo-Year Transfers, or the value thereof, from Mrs. Madoff for the benefit of the consolidatedestate of BLMIS;(c) on the Third Cause of Action, pursuant to sections 548(a)(1)(B), 550(a), and 551of the Bankruptcy Code and 15 U.S.C. § 78fff-2(c)(3): (a) avoiding and preserving the Two-YearTransfers; (b) directing that the Two-Year Transfers be set aside; and (c) recovering the Two-Year Transfers, or the value thereof, from Mrs. Madoff for the benefit of the consolidated estateof BLMIS;(d)on the Fourth Cause of Action, pursuant to sections 276, 276-a, 278, and/or 279 ofthe New York Debtor & Creditor Law, sections 544, 550(a), and 551 of the Bankruptcy Code,and 15 U.S.C. § 78fff-2(c)(3): (a) avoiding and preserving the Six-Year Transfers; (b) directingthat the Six-Year Transfers be set aside; (c) recovering the Six-Year Transfers, or the valuethereof, from Mrs. Madoff for the benefit of the consolidated estate of BLMIS; and (d)recovering attorneys’ fees from Mrs. Madoff;-29-

(e)on the Fifth Cause of Action, pursuant to sections 273, 278, and/or 279 of theNew York Debtor and Creditor Law, sections 544, 550, and 551 of the Bankruptcy Code, and 15U.S.C. § 78fff-2(c)(3): (a) avoiding and preserving the Six-Year Transfers; (b) directing that theSix-Year Transfers be set aside; and (c) recovering the Six-Year Transfers, or the value thereof,from Mrs. Madoff for the benefit of the consolidated estate of BLMIS;(f)on the Sixth Cause of Action, pursuant to sections 274, 278, and/or 279 of theNew York Debtor and Creditor Law, sections 544, 550, 551, and 1107 of the Bankruptcy Code,and 15 U.S.C. § 78fff-2(c)(3): (a) avoiding and preserving the Six-Year Fraudulent Transfers; (b)directing the Six-Year Transfers be set aside; and (c) recovering the Six-Year Transfers, or thevalue thereof, from Mrs. Madoff for the benefit of the consolidated estate of BLMIS;(g)on the Seventh Cause of Action, pursuant to sections 275, 278, and/or 279 of theNew York Debtor and Creditor Law, sections 544, 550, 551, and 1107 of the Bankruptcy Code,and 15 U.S.C. § 78fff-2(c)(3): (a) avoiding and preserving the Six-Year Transfers; (b) directingthat the Six-Year Transfers be set aside; and (c) recovering the Six-Year Transfers, or the valuethereof, from Mrs. Madoff for the benefit of the consolidated estate of BLMIS;(h)on the Eighth Cause of Action, pursuant to NY CPLR 203(g), sections 276, 276-a,278, and/or 279 of the New York Debtor & Creditor Law, and sections 544, 550(a), and 551 ofthe Bankruptcy Code: (a) avoiding and preserving the Transfers; (b) directing that the Transfersbe set aside; (c) recovering the Transfers, or the value thereof, from Mrs. Madoff for the benefitof the consolidated estate of BLMIS; and (d) recovering attorneys’ fees from Mrs. Madoff;(i)on the Ninth Cause of Action, pursuant to section 278 of the New York Debtorand Creditor Law, sections 550(a) and 551 of the Bankruptcy Code, and 15 U.S.C. § 78fff--30-

2(c)(3): (a) preserving the Subsequent Transfers; (b) directing that the Subsequent Transfers beset aside; (c) recovering the Subsequent Transfers, or the value thereof, from Mrs. Madoff for thebenefit of the consolidated estate of BLMIS; and (d) recovering attorneys’ fees from Mrs.Madoff;(j)on the Tenth Cause of Action, that the claim or claims of Mrs. Madoff bedisallowed;(k)on the Eleventh Cause of Action against Mrs. Madoff for the wanton, willful, andmalicious conversion of BLMIS assets, for compensatory and punitive damages in amounts to bedetermined at trial;(l)on the Twelfth Cause of Action against Mrs. Madoff for unjust enrichment, forcompensatory damages in an amount to be determined at trial;(m)on the Thirteenth Cause of Action against Mrs. Madoff for the imposition of aconstructive trust upon any transfer of funds, assets, or property received from BLMIS as well asto any profits in the past and on a going forward basis received by Mrs. Madoff in connectionwith BLMIS, in favor of the Trustee for the benefit of BLMIS’s estate;(n)on the Fourteenth Cause of Action against Mrs. Madoff for an accounting of anytransfer of funds, assets, or property received from BLMIS as well as to any profits in the pastand on a going forward basis received by Mrs. Madoff in connection with BLMIS;(o) on all Claims for Relief, pursuant to common law and N.Y. C.P.L.R. 5001, 5004awarding the Trustee prejudgment interest from the date on which any transfer of BLMIS funds,assets, or property were received by each Family Defendants;-31-

(p)awarding the Trustee all applicable attorneys’ fees, interest, costs, anddisbursements of this action;(q)granting the Trustee such other, further, and different relief as the Court deemsjust, proper, and equitable.Date: New York, New YorkJuly 29, 2009BAKER & HOSTETLER LLPBY: s/David J. SheehanDavid J. SheehanEmail: dsheehan@bakerlaw.comMarc E. HirschfieldEmail: mhirschfield@bakerlaw.comKeith R. MurphyEmail: kmurphy@bakerlaw.com45 Rockefeller PlazaNew York, New York 10111Telephone: (212) 589-4200Facsimile: (212) 589-4201Of Counsel:Attorneys for Irving H. Picard, Esq.,Trustee for the SIPA Liquidation of Bernard L.Madoff Investment Securities LLCJohn SiegalEmail: jsiegal@bakerlaw.comAdam B. OppenheimEmail: aoppenheim@bakerlaw.com-32-

302 B.R. 760 Page 1302 B.R. 760(Cite as: 302 B.R. 760)United States District Court,E.D. New York.In re SHARP INTERNATIONAL CORP., and SharpSales Corp., Debtors.Sharp International Corp., Plaintiff,v.State Street Bank and Trust Company, Defendant.Bankruptcy Nos. 99-21317-608, 99-23347-608.Adversary No. 01-1439 (CEC).No. 02-CV-5306 (DGT).Dec. 5, 2003.Background: Chapter 11 debtor brought adversaryproceeding against lender that had provided financingfor debtor's business for allegedly aiding and abettingfiduciary breaches of debtor's principals, in divertingassets from debtor, and to set aside payment thatlender had received from debtor in repayment of preexistingloan as actually or constructively fraudulentas to creditors. On motion to dismiss for failure tostate claim, the Bankruptcy Court, Carla E. Craig, J.,281 B.R. 506, granted motion granted and dismissedcomplaint, and debtor appealed.Holdings: The District Court, Trager, J., held that:(1) allegations in debtor's complaint, that lender thatprovided financing for debtor's business, upon learningthat debtor's principals had overstated debtor'ssales by fabricating false accounts receivable, had notgone public with this information, but had requireddebtor to promptly repay its debt to lender with proceedsfrom sale of subordinated notes, thereby enablingdebtor's principals to continue looting millionsof dollars from debtor, sufficiently alleged lender'sknowledge of looting;(2) complaint failed to sufficiently identify any affirmativeact of participation by lender in principals'fraud, as required to support claim against lender onaiding and abetting theory; and(3) lender's acceptance of funds from debtor, in dollar-for-dollarrepayment of valid, preexisting loan,did not give rise to fraudulent transfer claim underNew York law.Affirmed.West Headnotes[1] Bankruptcy 378251k3782 Most Cited CasesBankruptcy court's dismissal of complaint for failureto state claim is reviewed de novo.[2] Fraud 30184k30 Most Cited CasesUnder New York law, cause of action for aiding andabetting breach of fiduciary duty is based on wellestablishedprinciple that anyone who knowinglyparticipates with fiduciary in breach of trust is liablefor full amount of damage caused thereby to cestuisque trust.[3] Fraud 30184k30 Most Cited CasesTo state claim for aiding and abetting breach of fiduciaryduty under New York law, plaintiff must allege:(1) breach by fiduciary of obligations to another; (2)that defendant knowingly induced or participated inthat breach; and (3) that plaintiff suffered damages asresult of breach.[4] Fraud 30184k30 Most Cited CasesUnder New York law, defendant need not have anyintent to harm in order to be liable for aiding andabetting breach of fiduciary duty; however, defendantmust have actual knowledge of primary violator'sunderlying breach.[5] Fraud 30184k30 Most Cited CasesUnder New York law, constructive knowledge ofanother's breach of fiduciary duty is legally insufficientbasis to impose aiding and abetting liability.[6] Federal Civil Procedure 636170Ak636 Most Cited CasesTo extent that underlying fiduciary breaches allegedin support of aiding and abetting claim are based onfraudulent conduct, complaint must meet heightenedpleading requirement of Federal Rule of Civil Procedurewhich governs allegations of fraud. Fed.RulesCiv.Proc.Rule 9(b), 28 U.S.C.A.© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

302 B.R. 760 Page 2302 B.R. 760(Cite as: 302 B.R. 760)[7] Banks and Banking 10052k100 Most Cited CasesComplaint's extensive recitation of circumstances thatallegedly caused lender to suspect that borrower'sprincipals were fraudulently overstating its sales,including borrower's failure to comply with reportingrequirements set forth in loan agreement, was insufficient,standing alone, to satisfy "actual knowledge"standard for aiding and abetting claim under NewYork law.[8] Fraud 30184k30 Most Cited CasesAssertions that defendant who allegedly aided andabetted primary violator's breach of fiduciary dutyharbored well-founded but unconfirmed suspicions ofprimary violator's wrongdoing are insufficient to satisfy"actual knowledge" standard for aiding and abettingclaim under New York law, simply because,with benefit of hindsight, those suspicions turned outto be correct.[9] Banks and Banking 10052k100 Most Cited CasesAllegations in borrower's complaint, that lender thatprovided financing for borrower's business, uponlearning that debtor's principals had overstated borrower'ssales by fabricating false accounts receivable,had not gone public with this information, but hadrequired borrower to promptly repay its debt tolender with proceeds from sale of subordinated notes,thereby enabling borrower's principals to continuelooting millions of dollars from borrower, sufficientlyalleged lender's knowledge of this looting, as requiredunder New York law to state claim for aidingand abetting alleged looting; lender's knowledge thatborrower, a private company, was inflating its revenuesby reporting sales to defunct companies or companiesin wholly unrelated fields supported inferenceof lender's actual knowledge of this looting, especiallyin light of other allegations in complaint, suchas those regarding lender's investigation of borrower'spayments to its principals.[10] Fraud 30184k30 Most Cited CasesUnder New York law, "knowing participation" elementof aiding and abetting claim requires more thandefendant's knowledge of primary violation; to stateclaim, plaintiff must allege some form of participationby alleged aider and abetter in primary wrongdoing.[11] Fraud 30184k30 Most Cited CasesUnder New York law, defendant may be held liablefor participating in another's breach of fiduciary dutyif defendant provided substantial assistance to primarywrongdoer.[12] Fraud 30184k30 Most Cited CasesUnder New York law, "substantial assistance" offiduciary breach may be found, of kind sufficient tohold defendant liable for aiding and abetting thatbreach, where defendant affirmatively assists, helpsconceal or, by virtue of failing to act when requiredto do so, enables breach of fiduciary duty to proceed.[13] Fraud 30184k30 Most Cited CasesInaction by alleged aider and abetter in failing to investigateor to alert third parties of another's breachof fiduciary duty will not constitute "substantial assistance,"of kind sufficient under New York law toimpose aiding and abetting liability, unless allegedaider and abettor owes some fiduciary duty directlyto plaintiff; existence of primary violator's duty,without more, will not suffice.[14] Fraud 30184k30 Most Cited CasesUnder New York law, defendant may be liable asaider and abetter for inducing or encouraging fiduciaryto breach his duties to another, even though defendantdoes not directly assist in commission of underlyingwrong. Restatement (Second) of Torts §876.[15] Banks and Banking 10052k100 Most Cited CasesWhile allegations in borrower's complaint were sufficientto support inference of lender's actual knowledgeof alleged fiduciary breaches by borrower'sprincipals, in fraudulently overstating borrower'ssales in order to secure financing while they continuedto loot borrower of its assets, allegations in complaint,that lender had not gone public with this information,but had required borrower to promptlyrepay its debt to lender with proceeds from sale of© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

302 B.R. 760 Page 3302 B.R. 760(Cite as: 302 B.R. 760)subordinated notes, failed to sufficiently identify anyaffirmative act of participation by lender in principals'fraud, as required to support claim againstlender on aiding and abetting theory; allegation thatlender had allowed sale of notes to proceed by notexercising its contractual right to block borrowerfrom further borrowing alleged act that was in natureof one of omission rather than of commission, anddid not suffice.[16] Banks and Banking 10052k100 Most Cited CasesUnder New York law, bank's contractually bargained-forright to prevent borrower from engagingin any further borrowing by selling its subordinatednotes did not confer on bank any affirmative duty toprotect noteholders from actions of borrower's management,in engaging in such borrowing to obtainfunds to repay bank loan at time when bank allegedlyknew of massive fraud by debtor's management inoverstating its sales.[17] Fraudulent Conveyances 159(1)186k159(1) Most Cited Cases[17] Fraudulent Conveyances 162.1186k162.1 Most Cited CasesLender's acceptance of funds from borrower, in dollar-for-dollarrepayment of valid, preexisting loan,did not give rise to constructive fraudulent transferclaim under New York law, though lender allegedlyknew that borrower's management had raised fundsfrom sale of subordinated notes that operated as fraudon noteholders; lender's knowledge of fraudulent actsof borrower's management in connection with sale ofnotes did not affect its "good faith," for purpose ofconstructive fraudulent transfer claim, absent anyallegation of lender's participation in this fraud.N.Y.McKinney's Debtor and Creditor Law § 272.[18] Fraudulent Conveyances 77186k77 Most Cited Cases[18] Fraudulent Conveyances 86186k86 Most Cited CasesThere are three elements to "fair consideration,"within meaning of New York constructive fraudulentconveyance law: (1) recipient of alleged fraudulenttransfer must either convey property or discharge anantecedent debt in exchange; (2) exchange must befor a fair equivalent; and (3) exchange must be ingood faith. N.Y.McKinney's Debtor and CreditorLaw § 272.[19] Fraudulent Conveyances 159(2)186k159(2) Most Cited Cases"Good faith" is not lacking, within meaning of NewYork constructive fraudulent conveyance law, simplybecause transferee knows of transferor's unfavorablefinancial condition at time of transfer.N.Y.McKinney's Debtor and Creditor Law § 272.[20] Fraudulent Conveyances 114186k114 Most Cited CasesMere fact that payment is preferential, in sense that itis made by insolvent debtor to satisfy debt to onecreditor at the expense of others, does not make itconstructively fraudulent conveyance under NewYork law; correction of such preferential treatment isnot aim of fraudulent conveyance law.N.Y.McKinney's Debtor and Creditor Law § 272.[21] Fraudulent Conveyances 159(1)186k159(1) Most Cited CasesLender's acceptance of funds from borrower, in dollar-for-dollarrepayment of valid, preexisting loan,did not give rise to actual fraudulent transfer claimunder New York law, though lender allegedly knewthat borrower's management had raised funds fromsale of subordinated notes that operated as fraud onnoteholders; alleged fraud concerned manner inwhich debt to noteholders arose, and not the subsequentconveyance of those funds to lender, whichwas legitimate creditor of borrower. N.Y.McKinney'sDebtor and Creditor Law § 276.[22] Fraudulent Conveyances 9186k9 Most Cited CasesUnder New York law, if there is actual intent to hinder,delay, or defraud creditors by means of conveyance,then conveyance can be set aside even if debtorremains otherwise solvent, and even if fair considerationis given in exchange for transfer.N.Y.McKinney's Debtor and Creditor Law § 276.[23] Bankruptcy 272451k2724 Most Cited CasesCause of action to avoid transfer as actually fraudulentas to creditors must be plead with particularity asrequired by Federal Rule of Civil Procedure.© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

302 B.R. 760 Page 4302 B.R. 760(Cite as: 302 B.R. 760)Fed.Rules Civ.Proc.Rule 9(b), 28 U.S.C.A.[24] Fraudulent Conveyances 14186k14 Most Cited CasesBadges of fraud, such as court may consider underNew York law in deciding whether transfer wasmade with actual intent to defraud creditors, include:(1) lack or inadequacy of consideration; (2) family,friendship or close associate relationship betweenparties; (3) retention of possession, benefit or use ofproperty in question by debtor; (4) financial conditionof the party sought to be charged both before andafter transfer; (5) existence or cumulative effect ofpattern or series of transactions, or course of conduct,after debt was incurred, financial difficulties began,or creditor suits were initiated or threatened; and (6)general chronology of events and transactions underinquiry. N.Y.McKinney's Debtor and Creditor Law §276.[25] Fraudulent Conveyances 16186k16 Most Cited CasesUnder New York law, while presence of any particularbadge of fraud is by no means prerequisite to findingthat transfer was made with actual intent to defraudcreditors, badges of fraud appropriately focuscourt's inquiry on circumstances that suggest thatconveyance was made with fraudulent intent, i.e.,with purpose of placing debtor's assets out of reach ofcreditors.N.Y.McKinney's Debtor and Creditor Law § 276.*764 Kramer Levin Naftalis Frankel LLP, New YorkCity, for Debtors.James C. McCarroll, Kramer, Levin, Naftalis &Frankel, LLP, New York City, for Trustee.Bingham McCutchen, New York City, Jonathan B.Alter, Bingham, McCutchen LLP, Hartford, CT, forCreditor Committee.Scott D. Corrigan, Peter Neil Wang, Freidman,Wang & Bleiberg, PC, New York City, for Plaintiff/Appellant.Michael R. Young, Willkie, Farr & Gallagher, LLP,New York City, for Defendant.Kelley Drye, Neil Matthew Merkl, Kelley, Drye &Warren, LLP, New York City, for Appellee.TRAGER, District Judge.Memorandum and OrderPlaintiff-Appellant Sharp International Corp.("Sharp") appeals an order of the Bankruptcy Courtfor the Eastern District of New York (Craig, J.), dismissingin its entirety an adversary complaint filed bySharp against its former secured lender, State StreetBank and Trust Company ("State Street"). The complaintasserts a claim against State Street under NewYork common law for aiding and abetting Sharp'sthree officers in breaching their fiduciary duties tothe company. Sharp further claims that a $12 millionpayment Sharp made to State Street in April 1999 insatisfaction of a valid antecedent debt is avoidable asa constructive and/or intentional fraudulent conveyancepursuant to New York Debtor & Creditor Law(the "D.C.L.") §§ 273-276. Lastly, Sharp asserts thatany claim State Street may subsequently raise byvirtue of its return of the $12 million payment--ifsuch relief were to be ordered-- should be equitablysubordinated to the claims of Sharp's other unsecuredcreditors.Background(1)Sharp is a closely-held New York corporation,which, at all times relevant to this case, was engagedprimarily in the business of importing, assemblingand distributing wrist watches, clocks, pens and mechanicalpencils. See Compl. 5, 9. This adversaryproceeding arises out of a massive fraud againstSharp and its creditors perpetuated by Sharp's formerofficers, Herbert, Lawrence, and Bernard Spitz (the"Spitzes").In 1993, the Spitzes purchased 100 percent ofSharp's common stock. From then until October1999, the Spitzes served as Sharp's sole officers, withresponsibility *765 over Sharp's day-to-day affairs.[FN1] See id. 10. In January 1995, the Spitzes solda 13 percent ownership interest in Sharp to an outsideinvestor, Bohoradzaner, Inc. Pursuant to agreementsexecuted in connection with this sale, Bohoradzaner,Inc. had "the right to a seat on Sharp's Board of Directors,the right to inspect Sharp's books and records,the right to veto certain corporate transactions,and a variety of other corporate governance rights."Id. 11. Jaime Bohoradzaner, the principal of Bo-© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

302 B.R. 760 Page 5302 B.R. 760(Cite as: 302 B.R. 760)horadzaner, Inc., served as a member of Sharp'sBoard of Directors from January 1995 until October1999. See id. Sharp alleges that "[n]either Bohoradzaner,Inc. nor Mr. Bohoradzaner played anyrole in, or had any knowledge of, the fraud and embezzlementcommitted by the Spitzes." Id.FN1. Specifically, Bernard Spitz served asSharp's Chief Executive Officer, HerbertSpitz served as President, and LawrenceSpitz was Chief Financial Officer. See id. 10.The Spitzes' fraud had two basic components. First,beginning some time prior to 1997 and continuinguntil October 1999, the Spitzes fraudulently inflatedSharp's reported sales and revenues and used thesefalsified financial statements "to raise increasinglylarge sums of money from a succession of banks andother lenders." [FN2] Id. 15. At the same time, theSpitzes looted Sharp of the funds they caused it tofraudulently raise, as well as other corporate funds.See id. 16. In 1998 and 1999 alone, the Spitzes stolemore than $44 million from Sharp, diverting thefunds to a variety of companies, most of which wereowned by or otherwise affiliated with the Spitzes, andwhich provided no consideration to Sharp in exchangefor the transfers. See id.FN2. So great was the scope of the fraudthat "[t]he great majority of Sharp's reportedaccounts receivable balances during fiscal1997, 1998, and 1999 was comprised of fictitioussales," including reported sales to fictitiouscustomers and fictitious sales to actualcustomers. Id. 13. The Spitzes reportedSharp's net sales to be $52.1 millionin 1997 (when its actual sales for that yearwere approximately $24 million), $80.2 millionin 1998 (when actual sales were approximately$21 million), and $118.1 millionin 1999 (when actual sales were approximately$19 million). See id. 14.State Street's relationship with Sharp (and theSpitzes) commenced in November 1996, when StateStreet approved a $20 million demand line of creditto Sharp--secured by Sharp's assets--to refinanceSharp's then-current debt with LaSalle Bank and tosupport Sharp's operations. See id. 17. The terms ofState Street's loan to Sharp were formalized in aCredit Agreement and a Security Agreement, both ofwhich were dated December 12, 1996. See id. 18.The $20 million credit limit notwithstanding, StateStreet permitted Sharp's indebtedness to rise to approximately$26 million in 1997. See id. 19. In July1998, the Spitzes raised $17.5 million through theissuance of subordinated notes to a group of investors(the "Noteholders"). See id. 15. Sharp subsequentlyused a portion of the July 1998 proceeds to pay downthe debt to State Street. Thus, by the fall of 1998, theState Street debt had been reduced to $15 million.See id. 19.Sharp alleges that State Street began to suspect thepossibility of the Spitzes' fraud some time during thesummer of 1998, when Sharp breached its loanagreement in numerous respects. In particular,Sharp failed and refused to provide State Streetwith borrowing base reports, detailed accounts receivableaged trial balances, and other documentation,as required by the Credit and Security Agreements,despite State Street's constant *766 requestsfor such information; Sharp failed and refused toimplement an accounting system that would generatemonthly financial statements, despite Sharp'sprior agreement to do so; and Sharp refused to utilizethe State Street lockbox account, throughwhich, pursuant to the parties' Agreements, Sharp'saccount receivables were required to flow.Id. 31. Moreover, based on the documentation thatSharp did furnish, State Street grew concerned thatSharp was growing at an "alarmingly rapid pace" andwas consuming a large amount of cash. Id. 32.Sharp contends that State Street's sensitivity to thiskind of behavior was "heightened" as a result of afraud it had discovered at another of its borrowers,PT Imports, with whom State Street developed alending relationship in 1993. See id. 21, 28. Duringthe summer of 1998, State Street determined thatPT Imports had "created fictitious accounts receivableand customers, had created fictitious purchaserecords, and had falsely identified vendors who didnot exist." Id. 25. State Street concluded this fraud"had directly caused it to lend large amounts ofmoney to PT Imports." Id. Accordingly, in June1998, State Street commenced an action against PTImports in New York State court, seeking damages inexcess of $19 million. See id. 26. Like the loan toSharp, the PT Imports loan was made for the purposeof refinancing a debt to LaSalle Bank. See id. 17,© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

302 B.R. 760 Page 6302 B.R. 760(Cite as: 302 B.R. 760)21. Furthermore, both Sharp and PT Imports haddealings with another Brooklyn-based entity, namedKent International, whose "principals had fraudulentlyinflated the company's net sales figures by creatingfalse sales with related real customers and fictitiouscustomers." Id. 27.In the fall of 1998, despite the fact that the Sharploan was current, well within line limits, and--basedon Sharp's reported financial condition, appeared tobe oversecured--State Street took various actions thatdemonstrated its mounting concerns regarding theSharp loan. That September, Nancy Loucks("Loucks"), a Senior Vice President and Credit RiskOfficer at State Street, who had also had oversightresponsibility for State Street's lending relationshipwith PT Imports, assigned James Benninger ("Benninger")from State Street's loan workout departmentto assist with the Sharp credit. See id. 33. CharlesGlerum ("Glerum"), outside counsel specializing introubled loans, was also put on the case. See id.Loucks has admitted that she "devoted more time tothe Sharp credit than to any other credit on which sheworked throughout the summer and fall of 1998, eventhough Sharp was not in monetary default during thistime period." Id. 37. Loucks further alerted a numberof high-level State Street officials of her concerns.See id.On two separate occasions, State Street took the"unusual step" of contacting several of Sharp's largestcustomers to confirm that they were, in fact, purchasingproducts from Sharp. See id. 38. In early October,State Street sent letters to Sharp seeking informationfrom Sharp regarding its largest customers andrequesting access to Sharp's facilities to conduct aphysical inventory count. See id. 39. State Streetalso requested the work papers of Sharp's outsideauditor, KPMG Peat Marwick ("KPMG"), in connectionwith the audit it had done for the fiscal year endingMarch 31, 1998. See id. 40.On October 22, 1998, State Street's outside counselretained First Security Services Corporation ("FirstSecurity"), a firm specializing in investigating financialfraud, to conduct a formal investigation of Sharp.See id. 41. Sharp alleges on information *767 andbelief that the purpose of the investigation was todetermine whether fraud was being committed bySharp and whether State Street had any legal claimsagainst Sharp as a result. See id. On November 3,1998, First Security produced a 60-page report relayingthe results of its investigation, which was reviewedby State Street's outside counsel, Loucks, andother high-level officials at State Street. "Loucks hasadmitted that this report further heightened her concernsof fraud at Sharp." Id. 42.On November 4, 1998, State Street representativesmet with the Spitzes at Sharp's facilities. State Streetindicated its intent to conduct formal confirmationsof Sharp's receivables with the aid of Sharp's auditor,KPMG. Sharp refused to consent to these confirmationsand further instructed State Street not to involveKPMG, fearing that its auditor might be "spooked"by such an inquiry. See id. 43.On November 6, 1998, Benninger, the loan workoutspecialist assigned to the Sharp credit, requested thathe be provided copies of Sharp checks that hadpassed through State Street's demand deposit account.Benninger reviewed the checks in order to identifythe parties with whom Sharp was doing business andto determine whether Sharp had made any substantialpayments to the Spitzes. See id. 45. Two weekslater, on or about November 20, 1998, Benninger hadadditional checks pulled and reviewed them for thesame purpose. See id. The complaint does not indicatewhat, if anything, was revealed by these inquiries.Several days later, a team of State Street field auditorsmade a scheduled visit to the Sharp facility inorder to review Sharp's detailed accounts receivablestatement and cash receipts. However, despite itsprior agreement to do so, Sharp refused to make thisinformation available to the State Street personnel.See id. 46. Eventually, in response to another letterfrom State Street demanding access to this information,Sharp provided State Street "gross numbers,without any backup." Id.Sharp alleges that State Street's investigative effortsculminated on November 18, 1998, when Loucksobtained Dun & Bradstreet reports (the "D & B Reports")on 18 of Sharp's reported customers. Accordingto Sharp, the D & B Reports "contained sufficientdisclosures to afford [Loucks] the knowledge thatSharp had fraudulently created fictitious customersand accounts receivable." Id. 47. More specifically,the D & B Reports showed that "one supposed Sharpcustomer had no known address, another had gone© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

302 B.R. 760 Page 7302 B.R. 760(Cite as: 302 B.R. 760)out of business in 1991, and a number of others--towhich Sharp reported selling millions of dollarsworth of watches--were engaged in businesses havingnothing to do with the sale a watches (e.g., plasticsmanufacturer, food wholesaler, fabric laminator, andphoto equipment retailer)." Id.At this point, State Street "halted its investigation ofSharp," deciding "not to confront the Spitzes withwhat it knew or to alert anyone else to the clear evidenceof fraud in its possession." Id. 48. Sharp allegesthat State Street wanted to avoid a potentiallyembarrassing loss such as the one it had recently sufferedfrom the PT Imports fraud. See id. 49. StateStreet recognized that "without a substantial infusionof new funds, Sharp in all likelihood would be unableto repay the almost $15 million it owed State Street."Id. Thus, at a meeting held on November 30, 1998,State Street demanded and obtained Sharp's agreementto secure new financing--presumably from investorsunaware of the fraud--and to use that financingto pay off the debt to State Street. See id. 50.State Street agreed to give Sharp until the end ofMarch 1999 to retire *768 the debt. See id. To securethe new financing necessary to pay off State Street'sline of credit by the March deadline, the Spitzescaused Sharp to raise an additional $25 million fromthe Noteholders, who had loaned Sharp $17.5 millionthe previous July. See id. 51.Sharp claims that, upon learning that the Noteholderswere planning to provide Sharp with additional debtfinancing, State Street deliberately concealed itsknowledge of the Spitzes' fraud. Specifically, prior tothe closing of the second Note offering, Dan Lobdell,the account officer assigned to the Sharp account, atthe advice of State Street's counsel, repeatedly"avoided" phone calls from the Noteholders' representatives,who he knew would be inquiring aboutSharp's credit. See id. 52. Furthermore, on or aboutMarch 22, 1999, State Street consented in writing tothe additional $25 million in financing. Under theterms of State Street's loan agreement with Sharp,such consent was a prerequisite to Sharp's taking onany additional debt. See id. 53.On March 23, 1999, without any knowledge of theSpitzes' fraud, the Noteholders purchased an additional$25 million in subordinated notes from Sharp.[FN3] See id. 54. A month later, Sharp paid StateStreet $12,250,024, using a portion of the March1999 funds, thus reducing Sharp's debt from approximately$15 million to $2.7 million. See id. 55.State Street then accepted personal promissory notesfrom the Spitzes in exchange for releasing Sharpfrom the balance of the debt, although "State Streethad little confidence that the Spitzes would repaythese notes." Id. Sharp alleges that between November1998, when State Street discovered the fraud, andOctober 1999, the Spitzes looted Sharp of more than$19 million. See id. 58.FN3. On May 30, 2001, the Noteholderscommenced a separate action against StateStreet in New York State court, allegingfacts virtually identical to those alleged inthe present adversary proceeding. The Noteholdersasserted claims for fraud, negligentconcealment, and aiding and abetting fraud.In an unpublished opinion, dated April 14,2003, which quoted extensively from theBankruptcy Court's decision dismissingSharp's adversary complaint, the courtgranted State Street's motion for summaryjudgment as to all of the Noteholders'claims. See Albion v. State Street, Index No.602711/01 (Sup.Ct.N.Y.Co. Apr. 14, 2003)(Cahn, J.). Counsel for the Noteholders, whowas present at oral argument in this appeal,represents that the Noteholders have appealedthe state court's order granting summaryjudgment. See Tr. of Aug. 13, 2003Oral Arg. at 2.On July 1, 1999, KPMG withdrew its prior, unqualifiedaudit opinions with respect to Sharp's financialstatements for fiscal years 1997 and 1998, and terminatedits engagement on behalf of Sharp, refusing toissue its audit opinion with respect to Sharp's financialstatements for fiscal 1999. See id. 56.(2)On September 7, 1999, the Noteholders commencedan involuntary chapter 11 bankruptcy proceedingagainst Sharp. See id. 57. The bankruptcy courtgranted an order of relief, and appointed FTI/KahnConsulting, Inc. as "responsible officer" of Sharp,removing the Spitzes from the operation of the business.See id. In November 2000, bankruptcy courtentered a judgment of $44,378,650.30 against theSpitzes and three of their companies, jointly and severally.That judgment remains unsatisfied. See id. © 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

302 B.R. 760 Page 8302 B.R. 760(Cite as: 302 B.R. 760)16.On May 30, 2001, Sharp commenced this adversaryproceeding against State Street, alleging: 1) that StateStreet aided and abetted the Spitzes in breaching theirfiduciary duties to the company; 2) that the $12 milliondollar payment State Street received from Sharpin April 1999 constitutes a constructive and/or intentional*769 fraudulent conveyance under the D.C.L.;and 3) that in the event the $12 million dollar paymentis ordered to be returned, State Street's claimsshould be equitably subordinated to the claims ofSharp's unsecured creditors. State Street moved todismiss the complaint, relying principally on the followingarguments: 1) that the complaint did not adequatelyplead an aiding and abetting claim underRules 12(b)(6) and 9(b); 2) that the complaint did notstate a claim for intentional or constructive fraudulentconveyance under the D.C.L.; and 3) that becauseSharp's sole officers--the Spitzes--were the primarywrongdoers in the fraudulent scheme State Street wasaccused of aiding and abetting, the doctrine of in paridelicto barred the company from obtaining relieffrom third-parties for participating in the scheme.In a Memorandum Decision dated July 30, 2002, theBankruptcy Court granted State Street's motion anddismissed the common law aiding and abetting claimas well as the fraudulent conveyance claims for failureto state a claim. See Sharp Int'l Corp. v. StateStreet Bank & Trust Co. (In re Sharp Int'l Corp. &Sharp Sales Corp.), 281 B.R. 506(Bankr.E.D.N.Y.2002) ( "Bankr.Dec."). These findingsmade it unnecessary for the Bankruptcy Court toreach State Street's in pari delicto defense, or to considerSharp's equitable subordination claim. See id. at524.Standard of Review[1] This court has appellate jurisdiction over Sharp'sappeal pursuant to 28 U.S.C. § 158(a). The BankruptcyCourt's dismissal of Sharp's complaint forfailure to state a claim is reviewed de novo. See In reMaxwell Communication plc, 186 B.R. 807(S.D.N.Y.1995); see also Americare Health Group,Inc. v. Melillo, 223 B.R. 70, 75 n. 2 (E.D.N.Y.1998)("In reviewing a decision of the bankruptcy court, adistrict court applies a de novo standing of review toconclusions of law ....") (citing In re IonosphereClubs, Inc., 922 F.2d 984, 988 (2d Cir.1990)).Because the motion granted by the Bankruptcy Courtwas a motion to dismiss pursuant to Rule 12(b)(6),the veracity of all well-pleaded allegations in Sharp'sadversary complaint must be assumed, and all reasonableinferences must be drawn in the light mostfavorable to Sharp. See Mills v. Polar MolecularCorp., 12 F.3d 1170, 1174 (2d Cir.1993). In reviewinga Rule 12(b)(6) motion, the court's function is to"assess the legal feasibility of the complaint, not toassay the weight of evidence which might be offeredin support thereof." See Geisler v. Petrocelli, 616F.2d 636, 639 (2d Cir.1980). The inquiry focuses noton "whether a plaintiff will ultimately prevail but onwhether the claimant is entitled to offer evidence tosupport the claims." Scheuer v. Rhodes, 416 U.S.232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974). Accordingly,a motion to dismiss a complaint can onlybe granted if "it appears beyond doubt that the plaintiffcan prove no set of facts in support of [its] claimwhich would entitle [it] to relief." Conley v. Gibson,355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80(1957).Discussion(1)Aiding and Abetting a Breach of Fiduciary Duty[2][3] The bankruptcy court dismissed Sharp's claimagainst State Street for aiding and abetting theSpitzes' breaches of their fiduciary duties for failureto state a claim under Rule 12(b)(6), finding thatSharp had not adequately pled State Street's knowledgeof or participation in the Spitzes' wrongdoing.The cause of action for aiding and abetting a breachof fiduciary duty under New York common law isbased on the well-established principle that "[a]nyonewho knowingly participates *770 with a fiduciary ina breach of trust is liable for the full amount of thedamage caused thereby to the cestuis que trust."Wechsler v. Bowman, 285 N.Y. 284, 291, 34 N.E.2d322, 326 (1941) (emphasis added). To state a claimfor aiding and abetting a breach of fiduciary duty aplaintiff must plead: 1) a breach of fiduciary obligationsto another; 2) that the defendant knowingly inducedor participated in the breach; and 3) that theplaintiff suffered damages as a result of the breach.See Kaufman v. Cohen, 760 N.Y.S.2d 157, 169, 307A.D.2d 113, 125 (1st Dep't 2003) (citing S & K SalesCo. v. Nike, Inc., 816 F.2d 843, 847-48 (2d Cir.1987)and Whitney v. Citibank, N.A., 782 F.2d 1106, 1115(2d Cir.1986)).© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

302 B.R. 760 Page 9302 B.R. 760(Cite as: 302 B.R. 760)[4][5] There is no requirement that the alleged aiderand abetter have an intent to harm. However, to satisfythe knowledge prong, the defendant must haveactual knowledge of the primary violator's underlyingbreach of fiduciary duty. See Kaufman, 760N.Y.S.2d at 169, 307 A.D.2d at 125. "Constructiveknowledge of the breach of fiduciary duty by anotheris legally insufficient to impose aiding and abettingliability." Id.[6] Furthermore, to the extent the underlyingbreaches of fiduciary duty are based on fraudulentconduct, the complaint must meet the heightenedpleading requirement of Rule 9(b) of the FederalRules of Civil Procedure, which mandates that allallegations of fraud be pled with particularity. However,Rule 9(b)'s particularity requirement does notapply to "conditions of the mind"--including knowledge--whichmay be averred generally.In this case, the first and third elements of the aidingand abetting claim-- an underlying breach of a fiduciaryduty and resulting damages--are adequately pledin Sharp's complaint. As officers of Sharp, theSpitzes owed fiduciary duties to the corporation,which they breached by causing Sharp to raise millionsof dollars through fraudulently inflated financialstatements, and by converting the fraudulently acquiredproceeds as well as other corporate funds totalingin excess of $44 million. Further, Sharp wasclearly damaged by the Spitzes' large-scale looting ofthe company--indeed, the Bankruptcy Court has entereda judgment against the Spitzes (and several oftheir companies) jointly and severally in the amountof $44,378,650.30.The focus of the Bankruptcy Court's opinion--and ofthe parties' arguments in this appeal--concerns StateStreet's "knowing participation" in the Spitzes' conduct.The Bankruptcy Court began its analysis of thiselement of the aiding and abetting claim by endeavoringto "identify precisely the breach of fiduciaryduty for which Sharp seeks to hold State Street liable."Bankr.Dec. at 513. In this connection, theBankruptcy Court concluded that it was necessary todivide the Spitzes' fraud "into two conceptually distinctcategories: (1) causing Sharp to raise millions ofdollars through fraudulent representations; and (2)unlawfully diverting more than $44 million in Sharpfunds to companies that provided no consideration toSharp." Id. The court further contended that"[a]lthough these two types of wrongful conduct mayhave been combined by the Spitzes to form an overallfraudulent scheme, the wrongs are logically separableand give rise to two distinct causes of action and todifferent types of damages." Id. Moreover, the BankruptcyCourt noted, Sharp's claim against StateStreet--as evidenced by the damages sought in thecomplaint--was based on the Spitzes' looting ofSharp, rather than the accounting fraud that facilitatedthe looting. See id.; Compl. 58, "wherefore"clause "a" (seeking damages in excess of $19 millionfor the aiding and abetting claim, representing thesums misappropriated by the Spitzes *771 after StateStreet allegedly discovered the scheme).The Bankruptcy Court's analysis of Sharp's aidingand abetting claim is, in large part, driven by thisanalytical framework. See id. at 515 ("[The] facts[alleged in Sharp's complaint] at most support aninference that State Street had actual knowledge thatthe Spitzes were fraudulently inflating Sharp's receivables,"not that they were misappropriating corporateassets); id. at 517 ("[E]ven if accepted as adequateto plead that State Street assisted the Spitzes indefrauding the Noteholders, [Sharp's allegations] do [] not support a claim that State Street induced, participatedin, or substantially assisted the Spitzes indiverting monies from Sharp.").Sharp challenges the bankruptcy court's "bifurcation"of the Spitzes' fraud, arguing that "the Complaint... sets forth a unified integrated fraud in whichthe Spitzes raised money on behalf of Sharp throughfalse pretenses, and then stole that money for theirown purposes." Sharp Mem. in Supp. of Appeal("Sharp Mem.") at 17. At least at the pleading stage,plaintiff is correct that the rigid separation of thecomponents of the Spitzes' scheme for purposes ofevaluating the adequacy of the allegations of StateStreet's "knowing participation" is artificial and unwarranted.The fraudulent financial reporting throughwhich the Spitzes induced creditors to loan money toSharp and the Spitzes' embezzlement of those andother corporate funds were two steps in a singlescheme. See id. ("[T]he fraud in the falsification ofSharp's sales and revenues in order to raise moneywas inextricably linked to the theft of monies fromSharp."). Indeed, as discussed infra, in a case such asthis involving a closely-held corporation, the firststep would have been all but pointless without thesecond. Thus, on a motion to dismiss, State Street's© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

302 B.R. 760 Page 10302 B.R. 760(Cite as: 302 B.R. 760)knowledge of the Spitzes' looting is not profitablyanalyzed in isolation from State Street's awareness ofthe Spitzes' accounting fraud.Actual Knowledge[7][8] At the outset, the Bankruptcy Court correctlyobserved that the complaint's extensive recitation ofthe circumstances that allegedly caused State Streetto suspect fraud at Sharp--including, inter alia,Sharp's failure to comply with the reporting requirementsset forth in its loan agreement, and the unmistakableparallels between Sharp's behavior and that ofPT Imports--are not, standing alone, sufficient tomeet the actual knowledge standard of an aiding andabetting claim under New York law. See Bankr.Dec.at 514. Indeed, the case law suggests that assertionsthat an alleged aider and abettor harbored wellfounded--butunconfirmed--suspicions of the primaryviolator's wrongdoing are not sufficient to plead actualknowledge simply because, with the benefit ofhindsight, those suspicions turned out to be correct.[9] In Ryan v. Hunton & Williams, 2000 WL1375265 (E.D.N.Y. Sept.20, 2000), for example, defraudedinvestors alleged that Chemical Bank aidedand abetted a "Ponzi" scheme carried out throughaccounts at the bank. The bank was "on notice ofvarious 'red flags' that indicated fraudulent conduct."Id. at *1. Indeed, as soon as the accounts wereopened, the bank's branch officer "suspected that theywere a vehicle for fraudulent activity and immediatelyreferred them to Chemical's in-house fraud investigativeunit." Id. The fraud unit recommendedthat the accounts be closed immediately, and the accountswere shut down approximately a month later.See id. Prior to the closing of the accounts, however,bank officials "approved multiple wire transfers thatresulted in the theft of investor funds." Id. at *2. Thecourt dismissed the aiding and abetting claim, concluding,inter alia, that the plaintiffs failed to adequatelyplead *772 Chemical Bank's actual knowledgeof the fraud. In this connection, the court notedthat "[a]llegations that [a defendant] suspectedfraudulent activity ... do not raise an inference of actualknowledge of [the] fraud." Id. at *9. See alsoRenner v. Chase Manhattan Bank, 2000 WL 781081,at *12 (S.D.N.Y. June 16, 2000) (granting 12(b)(6)motion to dismiss claim against a bank for aiding andabetting customer's prime bank guarantee scam, despitebank officials' suspicions of fraud--which ledthem to reject one of customer's proposed transactions--because the complaint alleged "no factual basisfor the assertion that Chase officials actually knewthe fraud [they suspected] was, in fact, occurring");Kolbeck v. LIT America, Inc., 939 F.Supp. 240(S.D.N.Y.1996) (finding that brokerage firm and associatedindividual defendants could not be "chargedwith knowledge" of the looting of investors' fundsdespite defendants' awareness of plaintiffs' accusations;"knowledge of accusations without more" didnot give rise to a duty to investigate, and did not supportan inference of actual knowledge of the fraud),In a case such as this, where an alleged aider andabetter in fact undertakes an investigation of the primarywrongdoer's conduct, determining the precisepoint at which evidence giving rise to suspicions offraud reaches a cumulative critical mass sufficient tosupport an inference of actual knowledge is a factintensive inquiry not easily resolved on the face ofthe pleadings. Sharp's complaint identifies StateStreet's review of the D & B Reports on November18, 1998 as the moment when the bank's mountingsuspicions concerning accounting irregularities atSharp became actual knowledge of the Spitzes' fraud.See Compl. 47-48. As noted supra, these reportson 18 of Sharp's reported customers revealed that: 1)one of these customer had no known address; 2) anotherhad actually gone out of business in 1991; and3) "a number of others" did not appear to be in thewatch business at all--despite Sharp's reported salesto these entities of millions of dollars in watches.State Street argues that the information allegedlybefore it would have permitted inferences other thanthe presence of fraud at Sharp--e.g., that Sharp was afailing business, or had management that was incompetentor negligent--and therefore "cannot compel aninference that State Street knew of Sharp's fraud."State Street Mem. in Opp'n to Appeal ("State StreetMem.") at 10-11. Aside from the fact that what StateStreet is alleged to have known makes these alternativehypotheses highly unlikely, even assuming thatState Street could plausibly have reached such conclusions,the court is required, for purposes of thismotion to dismiss, to draw all reasonable inferencesin Sharp's favor. See Moy v. Adelphi Institute, Inc.,866 F.Supp. 696 (E.D.N.Y.1994) (citing Conley, 355U.S. at 45-46, 78 S.Ct. 99) ("Any uncertainty regardinginferences that may be drawn from a complaint'scontentions must be determined in the light most fa-© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

302 B.R. 760 Page 11302 B.R. 760(Cite as: 302 B.R. 760)vorable to the plaintiff."). The test, therefore, is notwhether the facts alleged compel an inference favorableto Sharp, but rather whether they permit such aninference.Viewed in this light, Sharp's allegations are sufficientto plead State Street's actual knowledge of boththe false sales invoicing and probable looting by theSpitzes. State Street contends that the "limited information"revealed by the D & B Reports, concerning asubset of Sharp's customers, would not have led StateStreet to conclude that "the Spitzes were engaged infraudulent conduct on a major scale," as the complaintalleges, Compl. 48-- especially in light ofSharp's allegation that State Street confirmed thatseveral of Sharp's largest reported customers were infact purchasing Sharp products. *773 See State StreetMem. at 11; Compl. 38. However, State Street didnot review the D & B Reports in a vacuum. Indeed,the bank had for months been troubled by Sharp'sfailure to comply with the reporting requirements,and its persistent refusals to provide State Street withaccess to its books or to permit physical inventorycounts. The gravity of State Street's concerns is amplydemonstrated by the serious investigative effortsit allegedly initiated, notwithstanding the fact that onpaper "Sharp appeared to be oversecured and was notin monetary default." Compl. 35. In this context,the eventual discovery by State Street that Sharp wasreporting sales to a supposed customer who had, infact, gone out of business years earlier, or to otherswho by all appearances were not even in the watchbusiness, provides a sufficient factual predicate tosupport Sharp's allegation--at the pleading stage--thatState Street confirmed its suspicions, effectivelycrossing the line from constructive to actual knowledgeof the Spitzes' fraud.Despite State Street's discovery of evidence indicatingthat Sharp was not reporting its sales honestly,the Bankruptcy Court, relying on its bifurcation ofthe fraud, concluded that Sharp had not adequatelypled State Street's actual knowledge of the "wrong forwhich Sharp seeks recovery against State Street,"viz., the Spitzes' conversion of Sharp's funds.Bankr.Dec. at 515. As the Bankruptcy Court wouldhave it, the facts pleaded concerning the D & B Reports"at most support an inference that State Streethad actual knowledge that the Spitzes were fraudulentlyinflating Sharp's receivables," but "[t]he factthat a company is inflating its receivables does notnecessarily mean that the company's principals arelooting it." Bankr.Dec. at 515. In the particular circumstancesof this case, however, it is difficult toimagine another possible reason for the Spitzes toreport fictitious sales. [FN4] Sharp was not a publicly-heldcorporation, which could stand to benefit--at the expense of future shareholders--from inflatingthe apparent value of the company and thus drivingup stock prices. In this respect, Cenco, Inc. v. Seidman& Seidman, 686 F.2d 449 (7th Cir.1982)--citedby the Bankruptcy Court as an example of a corporatefraud involving fraudulent overstatement of inventory,but no subsequent looting--is inapposite. Asthe Bankruptcy Court explained, the Cenco case involveda publicly-traded corporation whose managers"inflated the company's apparent net worth and thusthe market value of its stock[,]" using the "inflatedstock to buy up other companies on the cheap." Id. at451. No such motive could plausibly account for thereporting of fraudulent sales by Sharp's management.Indeed, inasmuch as there was no public market forSharp's stock the nexus between the overvaluation ofthe company and looting by management is inescapable.[FN5]FN4. When asked at oral argument to provideanother plausible reason that mighthave motivated the Spitzes to report fraudulentsales, counsel for State Street respondedthat State Street might have supposed thatthe Spitzes "want[ed] to make the companylook good until they sell it to a third party."Tr. of Aug. 13, 2003 Oral Arg. at 12. Such ahypothesis would have been highly speculativeat best, however, since State Streetwould have had to assume that a prospectivebuyer would do very little due diligence and,therefore, not discover that the sales volumewas not as reported.FN5. For these reasons, State Street's relianceon In re Investors Funding Corp. ofN.Y. Sec. Litig., 523 F.Supp. 533(S.D.N.Y.1980) (quoted in State StreetMem. at 17) is similarly unpersuasive. Inthat case, a Chapter X trustee sued a bankruptcorporation's former auditors who hadcertified financial statements that "materiallyoverstated the income and assets of the[corporation] while materially understatingits losses and liabilities." Id. at 536-37. The© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

302 B.R. 760 Page 12302 B.R. 760(Cite as: 302 B.R. 760)district court concluded that the management'sembezzlement of surplus funds raisedthrough artificially inflated stock sales wasnot a "reasonably foreseeable" result of theoverstated financial statements:It is arguably foreseeable, as a result of financialstatements overstating the financialcondition of a corporation, that securities issuedand sold by that corporation will commanda price higher than their true value,that purchasers will be injured as a resultand that the corporation will receive excessivefunds in consideration for the securities.However, it is certainly not a direct or reasonablyforeseeable result of such financialstatements that inside management will embezzlesuch surplus funds for their personaluse.Id. at 540. Whatever the merits of that conclusionin the context of publicly-tradedcorporation, it is of limited relevance in thiscase.*774 That State Street actually suspected the Spitzes'embezzlement--even before the D & B Reports confirmedthat Sharp was overstating its accounts receivable--isnot a matter a speculation. The complaintspecifically alleges that on November 6, 1998, Benninger,the loan workout specialist assisting in theinvestigation of Sharp pulled copies of Sharp checksthat had passed through State Street's demand depositaccount for the purpose of determining, inter alia,whether Sharp had made substantial payments to theSpitzes. See Compl. 45. Benninger made anothersuch inquiry, approximately two weeks later. See id.These allegations undercut the notion that State Streetmight only have suspected that Sharp was a failingbusiness. Of course, as discussed above, suspicionsof the Spitzes' fraud, without more, would at bestsupport an inference of constructive knowledge.However, State Street is alleged to have acquiredsufficient evidence of the Spitzes' fraud to bring itbeyond the realm of mere suspicion and surmise.In sum, contrary to the Bankruptcy Court's conclusion,Sharp has plead sufficient facts which if provencould lead a reasonable jury to infer that State Street,a sophisticated commercial bank, actually knew--atleast as of mid-November 1998--of a unitary fraud atSharp, consisting of the fraudulent reporting of thecompany's accounts receivable in order to raisemoney to fund the looting of the corporation by corruptmanagement.Participation[10][11][12][13] The "knowing participation" elementof the aiding and abetting claim requires morethan a defendant's knowledge of the primary violation.To state a claim, a plaintiff must allege someform of participation by the alleged aider and abetterin the primary wrongdoing. Broadly speaking, thecase law identifies two forms of actionable "participation."First, aiding and abetting liability can attachwhere a defendant provides substantial assistance tothe primary wrongdoer. "One provides substantialassistance if he affirmatively assists, helps conceal, orby virtue of failing to act when required to do so enablesa [breach of fiduciary duty] to proceed."Kolbeck, 939 F.Supp. at 247. In general, inaction--e.g., a failure to investigate or to alert third partiesabout another's misconduct--does not constitute substantialassistance, unless the defendant owes a specialduty directly to the plaintiff. "It is well settledthat without an independent duty to disclose, mereinaction does not amount to substantial assistance forpurposes of determining aider and abettor liability."Calcutti v. SBU, Inc., 273 F.Supp.2d 488, 494(S.D.N.Y.2003) (citing National Westminster BankUSA v. Weksel, 124 A.D.2d 144, 511 N.Y.S.2d 626(1st Dep't 1987)). The existence of the primary violator'sduty is not sufficient to hold a non-fiduciarysecondary actor liable for inaction on an aiding andabetting theory.[14] Second, even without directly assisting in thecommission of the underlying *775 wrong, a defendantmay still be liable as an aider and abetter for"inducing" or "encouraging" a fiduciary to breach hisduties to another. See Kaufman, 760 N.Y.S.2d at 169(holding that a claim for aiding and abetting a breachof fiduciary duty requires, inter alia, allegations thatthe defendant knowingly induced or participated inthe breach) (emphasis added); Wight v. BankamericaCorp., 219 F.3d 79, 91 (2d Cir.2000) (same); S & KSales Co. v. Nike, 816 F.2d 843, 849 (2d Cir.1987).The Restatement (Second) of Torts explains that"[a]dvice or encouragement to act," in instanceswhere "the act encouraged is known to be tortious[,]... has the same effect upon the liability of the advisoras participation or physical assistance." Restatement(Second) of Torts § 876, comment "d"; see also© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

302 B.R. 760 Page 13302 B.R. 760(Cite as: 302 B.R. 760)Lindsay v. Lockwood, 163 Misc.2d 228, 233, 625N.Y.S.2d 393, 397 (Sup.Ct. Monroe Co.1994) ("Thearchetypical aiding and abetting defendant is one whoencourages another to commit a tortious act.").[15] In this case, Sharp contends that upon discoveringthe scheme in November 1998, State Street demandedthat Sharp obtain new financing to retire itsdebt to State Street--financing which could only beobtained by expanding the scope of the fraud on theNoteholders, and which led to an infusion of freshmoney to fund the Sptizes' continued looting. Sharpfurther asserts that State Street affirmatively assistedthe expanded fraud in three respects: first, instead ofimmediately foreclosing, [FN6] State Street providedSharp with continued access to the line of credit toenable the Spitzes to find new innocent investors;second, one of State Street's employees deliberatelyavoided phone calls from the Noteholders' representative,who he knew would be calling to inquire aboutthe Sharp credit; and third, State Street provided writtenconsent to Sharp's sale of $25 million in subordinatednotes to the Noteholders, without which thedeal could not have gone forward, since, under theterms of Sharp's agreements with State Street, Sharpcould not take on additional debt without StateStreet's consent.FN6. The complaint alleges that Sharp'sCredit Agreement with State Street providedfor a demand line of credit, see Compl. 16,and, therefore, State Street had an absoluteright to repayment upon demand at any time.State Street counters that Sharp's allegations are ultimatelybased on "inaction," viz. that State Street didnot demand immediate repayment, did not respond toinquiries from the Noteholders or otherwise revealthe evidence of fraud it discovered, and did not interferewith Sharp's raising of new funds. Such inaction,State Street reasons, cannot constitute substantialassistance because State Street was not a fiduciary of(and, therefore, owed no special duty to) Sharp or itsother creditors. [FN7] See *776Manufacturers HanoverTrust Co. v. Yanakas, 7 F.3d 310, 318 (2dCir.1993) ("[T]he mere fact that a corporation hasborrowed money from the same bank for severalyears is insufficient to transform the relationship intoone in which the bank is a fiduciary.") (cited in ADTOperations, Inc. v. Chase Manhattan Bank, N.A., 173Misc.2d 959, 662 N.Y.S.2d 190, 193(Sup.Ct.N.Y.Co.1997)); Bank Leumi Trust Co. ofN.Y. v. Block 3102 Corp., 180 A.D.2d 588, 580N.Y.S.2d 299, 301 (1st Dep't 1992) ("The legal relationshipbetween a borrower and a bank is a contractualone of debtor and creditor and does not create afiduciary relationship between the bank and its borrower....").FN7. State Street is correct that the law imposesno affirmative duty on a bank to actwhen it learns that its borrower is committinga fraud since one does not wish to discouragelenders from conducting investigationsof their borrowers. On the other hand,as a matter of public policy such a dutymight be desirable to prevent the compoundingof losses at least in those situationswhere the lender knows that by its consentto the refinancing, a looting scheme will befurthered. If State Street's discovery of thelooting did give rise to a duty to act-eitherby somehow reporting the fraud, or at thevery least demanding immediate repaymentthescope of the looting would have been farsmaller than it ultimately became. Indeed, asa result of the Spitzes' expanded fraud, theNoteholders negligent as they undoubtedlywere in carrying out their due diligence werecheated out of an additional $25 million,while Sharp (and by extension its creditors)suffered a further loss of $19 million in divertedfunds. However, despite these considerations,the law is clear that a lender isnot a fiduciary of a borrower, and has noduty to act simply because it suspects oreven knows of a fraud perpetuated by theborrower's management.The conflicting policy considerations discussedabove are also reflected in the criminallaw, but the result may well be the opposite.Assuming that the bank officials hadactual knowledge that the Spitzes were intendingto loot the Noteholders' monies thatwere not being used to satisfy Sharp's debtto State Street and that they were told thiswas the only way the bank would ever getits money back, they might well be criminallyliable as aiders and abettors under 18U.S.C. § 2(a). See Sand et al., Modern JuryFederal Jury Instructions [Criminal] Vol. 1,Chapter 11, Aiding and Abetting Instruction11-2, pp. 11-3-4© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

302 B.R. 760 Page 14302 B.R. 760(Cite as: 302 B.R. 760)In the end, despite Sharp's efforts to cast State Streetas an instigator and active participant in the Spitzes'scheme, the complaint cannot overcome the absenceof any duty on State Street's part to protect Sharp'sinterests. Indeed, each of the alleged affirmative actsthat Sharp identifies as comprising State Street's"substantial assistance" are at root omissions-- failuresto act. By allowing Sharp continued access tothe line of credit, for instance, State Street in essencepreserved the status quo. Although it would havebeen in the long-term best interests of Sharp (and itsother creditors) for State Street to have immediatelycut off the Spitzes' access to the revolving loan facilityand loan proceeds, State Street owed Sharp noduty of loyalty, and had no obligation to put Sharp'sinterests ahead of its own. Similarly, State Streetcould possibly have thwarted the fraud by disclosingwhat it knew to the Noteholders prior to the closingof the second financing. However, in the absence of aduty to disclose its knowledge of the Spitzes' fraud,State Street cannot be held liable for its failure torespond to inquiries from the Noteholders' representative.[FN8] See Renner, 2000 WL 781081, at *9(concluding that a bank official did not aid and abet acustomer's fraud by "fail[ing] to respond" to inquiriesconcerning the customer). Indeed, the failure to answeror respond to phones calls (even if motivated bya conscious desire not to disclose information) canhardly be characterized as more than inaction.FN8. Had State Street made any false ormisleading statements to the Noteholders, itmight have had a duty to correct any resultingmisimpressions. Surely, however, theNoteholders could not have viewed StateStreet's failure to respond to their inquiriesas any kind of endorsement of the proposedtransaction. If anything, under the circumstances,State Street's evasiveness mighthave aroused a prudent investor's suspicions.[16] The closest Sharp comes to identifying any actof participation by State Street is the written consentState Street gave in March 1999 to the Noteholders'purchase of $25 million in subordinated notes fromSharp. Sharp argues that State Street's act of consentingto the transaction was a sine qua non of theSpitzes' expanded fraud, since without the consent,Sharp would not have been able to borrow any additionalmoney, and the Spitzes' continued looting wasfunded in part by the additional funds advanced bythe Noteholders. However, State Street's contractuallybargained-for authority to block Sharp from furtherborrowing, did *777 not confer on the bank anaffirmative duty to protect Sharp--and still less toprotect other third-parties, such as the Noteholders--from the actions of Sharp's management. Significantly,although the consent made it possible for theSpitzes to seek additional financing through fraud,there is no allegation that State Street did anything toinduce the Noteholders to lend to Sharp. Sharp hasnot alleged, for example, that the consent was intendedas--or could have been reasonably interpretedby the Noteholders to be--a representation by StateStreet as to Sharp's creditworthiness. More importantly,although State Street may have anticipatedthat the Spitzes would continue to loot the company,they had no duty to intervene to prevent breaches offiduciary duty by Sharp's management.Equally unavailing are Sharp's efforts to hold StateStreet accountable for encouraging or inducing theSpitzes to expand the scope of their fraud. Althoughthe case law and the Restatement identify "inducement"as an independent form of participation, thereis scant authority setting forth exactly what conductwould qualify as inducement in this context. SeeSharp Mem. at 13 ("[W]e are not aware of any mentionof inducement of this sort in the case law...."). Inits complaint, Sharp asserts thaton November 30, 1998, State Street demanded andobtained Sharp's agreement to secure new financingfrom investors unaware of the fraud, and to usethat financing to pay off State Street's line of credit.In exchange, State Street agreed to give Sharp untilMarch 31, 1999 to obtain this new financing and toretire the debt to State Street.Compl. 50. The Bankruptcy Court concluded thatthis pleading violated Rule 9(b), "by failing to allegewho made the demand, who else was present, exactlywhat was said, and where this occurred." Bankr.Dec.at 517.Assuming that Rule 9(b) applies to these allegations,and that the pleading falls short of the rule's particularitythreshold, this would not, of course, be groundsfor dismissal with prejudice, since Sharp could begranted leave to replead to provide more detail. SeeLuce v. Edelstein, 802 F.2d 49, 56 (2d Cir.1986)("Complaints dismissed under Rule 9(b) are almostalways dismissed with leave to amend."); accord© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

302 B.R. 760 Page 15302 B.R. 760(Cite as: 302 B.R. 760)United Feature Syndicate, Inc. v. Miller FeaturesSyndicate, Inc., 216 F.Supp.2d 198, 225(S.D.N.Y.2002). However, even accepting the adequacyof Sharp's pleading under Rule 9(b), it is difficultto see how State Street could be held accountablefor inducing a fraudulent scheme that was well underwaybefore State Street is alleged to have evenhad any knowledge of it. The allegations of the complaintamply demonstrate that the Spitzes required noencouragement or inducement to defraud creditors orto breach the duties of loyalty that they owed Sharp.Indeed, more than half of the $44 million stolen bythe Spitzes had already been diverted by the timeState Street allegedly discovered the fraud.Although Sharp has adequately pled State Street'sknowledge of the Spitzes' scheme, the failure of thecomplaint to identify any affirmative act of participationin the Spitzes' breach of their fiduciary duties toSharp necessitates the dismissal of the complaint forfailure to state a claim.(2)Fraudulent Conveyance ClaimsConstructive Fraudulent Conveyance[17] The D.C.L., under which Sharp brings the second,third, fourth and fifth counts of its complaint, isNew York's version of the Uniform Fraudulent ConveyancesAct (the "U.F.C.A."). The statute *778codifies a set of legal principles that are intended to"protect creditors by invalidating certain transactionsthat render debtors' assets unreachable." Note, GoodFaith & Fraudulent Conveyances, 97 Harv. L.Rev.495, 495 (1983).In the second, third, and fourth counts of the complaint,Sharp alleges that the $12 million paymentthat State Street received from Sharp in April 1999,in satisfaction of Sharp's valid pre-existing debt toState Street, constitutes a constructive fraudulentconveyance under the D.C.L.Pursuant to the D.C.L. a conveyance by a debtor isdeemed constructively fraudulent if it is made without"fair consideration," as defined in the statute, andany of the following conditions is met: 1) the transferoris insolvent or will be rendered insolvent by thetransfer in question [FN9]; 2) the transferor makingthe conveyance is a defendant in an action for moneydamages who fails to satisfy a judgment enteredagainst him [FN10]; 3) the transferor is engaged or isabout to engage in a business transaction for whichits remaining property constitutes unreasonably smallcapital [FN11]; or 4) the transferor believes that itwill incur debts beyond its ability to pay. [FN12]FN9. See D.C.L. § 273 ("Every conveyancemade ... by a person who is or will bethereby rendered insolvent is fraudulent asto creditors without regard to his actual intentif the conveyance is made ... without afair consideration.").FN10. See D.C.L. § 273a ("Every conveyancemade without fair consideration whenthe person making it is a defendant in an actionfor money damages or a judgment insuch an action has been docketed againsthim, is fraudulent as to the plaintiff in thataction without regard to the actual intent ofthe defendant if, after final judgment for theplaintiff, the defendant fails to satisfy thejudgment.").FN11. See D.C.L. § 274 ("Every conveyancemade without fair consideration whenthe person making it is engaged or is aboutto engage in a business or transaction forwhich the property remaining in his handsafter the conveyance is an unreasonablysmall capital, is fraudulent as to creditorsand as to other persons who become creditorsduring the continuance of such businessor transaction without regard to his actualintent.").FN12. See D.C.L. § 275 ("Every conveyancemade ... without fair considerationwhen the person making the conveyance ...intends or believes that he will incur debtsbeyond his ability to pay as they mature, isfraudulent as to both present and futurecreditors.").Sharp alleges that the challenged payment to StateStreet was made while Sharp was insolvent; that atthe time of the payment Sharp was engaged or wasabout to engage, in a transaction for which the propertyremaining in its possession constituted unreasonablysmall capital; and that Sharp believed itwould incur debts beyond its ability to pay. See© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

302 B.R. 760 Page 16302 B.R. 760(Cite as: 302 B.R. 760)Compl. 70, 76, 81. Accepting these allegations astrue, Sharp must still adequately plead the absence offair consideration to state a claim for constructivefraudulent conveyance under the D.C.L. See AtlantaShipping Corp., Inc. v. Chemical Bank, 818 F.2d 240,248 (2d Cir.1987) ("An essential element of a claimpursuant to DCL §§ [273-275] is lack of fair consideration.").[18] The statute defines "fair consideration" in thefollowing manner:Fair consideration is given for property ...a. When, in exchange for such property ... as a fairequivalent therefor, and in good faith, property isconveyed or an antecedent debt is satisfied, orb. When such property ... is received in good faithto secure a present advance or antecedent debt inamount not disproportionately small as comparedwith the value of the property ... obtained.*779 See D.C.L. § 272. Thus, there are three elementsto "fair consideration" under the D.C.L.: first,the recipient of the debtor's property must either conveyproperty or discharge an antecedent debt in exchange;second, the exchange must be for a fairequivalent; and third, the exchange must be "in goodfaith." See HBE Leasing Corp. v. Frank, 61 F.3d1054, 1058-59 (2d Cir.1995).Sharp acknowledges that the $12 million payment toState Street satisfied an antecedent debt, and that theexchange was for fair equivalent value. Thegravamen of Sharp's constructive fraudulent conveyanceclaim is that State Street did not receive thepayment in good faith because at the time of thepayment, it was aware of the Spitzes' fraud (and thusknew or had reason to know of Sharp's insolvency),and because the payment was intended as a quid proquo for Sharp's assistance in the fraud on the Noteholders."The precise meaning of 'good faith' in the context ofthe law of fraudulent conveyances has been the boneof jurisprudential contention among the states thathave adopted the UFCA." See Ostashko v. Ostashko,2002 WL 32068357, at *22 (E.D.N.Y. Dec. 12,2002); see also Boston Trading Group, Inc. v. Burnazos,835 F.2d 1504 (1st Cir.1987) (Breyer, J.) (recognizingthat "courts and commentators have had difficultydetermining the meaning of 'good faith' in [the]definition of 'fair consideration.' "). For one thing,state and federal courts in New York have differed asto whose good faith matters, with some suggestingthat both parties' good faith must be established, andothers contending that the good faith requirementapplies to the transferee alone. Compare, e.g., JulienJ. Studley, Inc. v. Lefrak, 66 A.D.2d 208, 412N.Y.S.2d 901 (2d Dep't 1979) ("[T]he good faith ofboth transferor and transferee is stressed as an indispensiblecondition in the definition of fair consideration."),aff'd, 48 N.Y.2d 954, 425 N.Y.S.2d 65, 401N.E.2d 187 (1979); with HBE Leasing Corp., 61 F.3dat 1058 ("The 'good faith' in § 272 is the good faith ofthe transferee[.]").More fundamentally, courts have struggled to determinethe role of a subjective "good faith" requirementin the context of constructive fraudulent conveyancelaw, which is designed to "reduc[e] the role of thedebtor's subjective intent and expand[ ] the role ofobjective factors." Note, supra at 497; Nisselson v.Drew Indus., Inc. (In re White Metal Rolling &Stamping Corp.), 222 B.R. 417, 428-29(Bankr.S.D.N.Y.1998) ("Although tagged with thetitle 'fraudulent,' fraud has nothing to do with theconstructive fraudulent conveyance claim. The transactionis based on the transferor's financial conditionand the sufficiency of the consideration provided bythe transferee."); see also United States v. McCombs,30 F.3d 310, 326 n. 1 (2d Cir.1994) ("We are notentirely clear from the case law, however, just howthe 'good faith' requirement under section 272 operatesin the context of a fraudulent conveyance claimunder section 273, a constructive fraud statute wherethe issue of intent is irrelevant."). Indeed, D.C.L. §§273, 273a and 275 expressly indicate that the intentof the transferor is irrelevant. On the other hand,some inquiry into the "mental states of the parties tothe transaction" would appear to be necessary "inorder to preserve the distinction between 'good faith'and 'fair equivalent,' " Ostashko, 2002 WL 32068357,at *22, which both the text of the D.C.L. and the caselaw clearly indicate are two distinct requirements.See D.C.L. § 272 (defining fair consideration as entailingthe conveyance of property or satisfaction ofan antecedent debt "as a fair equivalent ... and ingood faith.") (emphasis added); In re Manshul ConstructionCorp., 2000 WL 1228866, at *52(S.D.N.Y.2000) ("Even if a transaction involves anexchange of fair *780 equivalents, a transaction alsolacks fair consideration if it was not made in goodfaith."); Ede v. Ede, 193 A.D.2d 940, 598 N.Y.S.2d90, 92 (3d Dep't 1993) ("[F]air consideration requiresthat the exchange not only be for equivalent value,© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

302 B.R. 760 Page 17302 B.R. 760(Cite as: 302 B.R. 760)but also that the conveyance be made in goodfaith[.]") (citations omitted); see also Note, supra at505 (noting that an assessment of good faith that focusessolely on the values exchanged "effectivelyeliminates the good-faith requirement and thus disregardsthe statutory language specifying two distinctelements of 'fair consideration.' "). [FN13]FN13. Given the confused state of the caselaw, these questions concerning the contentof the good faith requirement would be appropriatefor certification to the New YorkCourt of Appeals. Unfortunately, "[n]eitherthe New York Court of Appeals rule implementingthe relevant state constitutionalprovision nor the federal provisions providingfor certification to New York's highestcourt allows for a decision to certify by thedistrict courts in the Second Circuit."Hamilton v. Accu-Tek, 62 F.Supp.2d 802,847 (E.D.N.Y.1999) (citing 22 NYCRR §500.17, Second Circuit Local Rule 0.27).State Street argues categorically, that the repaymentof a valid antecedent debt--at least where a fairequivalent is exchanged--cannot be a constructivefraudulent conveyance, unless the transfer is made toan insider, such as an officer, director, or majorstockholder of the transferor. See Atlanta Shipping,818 F.2d at 249 ("In general, repayment of an antecedentdebt constitutes fair consideration unless thetransferee is an officer, director, or major shareholderof the transferor."). In response, Sharp devotes muchof its argument to the proposition that "good faith" isan independent element of "fair consideration." However,this does not do much to illuminate the precisecontent of the requirement.[19][20] Taken by themselves, Sharp's allegationsconcerning State Street's knowledge of the Spitzes'scheme and the bank's resulting awareness thatSharp's reported financial condition did not reflect thecompany's actual financial condition--i.e., that thecompany was insolvent--are not enough to support alack of "good faith" under the D.C.L.'s definition offair consideration. Some courts have suggested that"good faith may be lacking because of a transferee'sknowledge of a transferor's unfavorable financialcondition at the time of the transfer." In re CheckmateStereo & Electronics, Ltd., 9 B.R. 585, 617(Bankr.E.D.N.Y.1981), aff'd, 21 B.R. 402(E.D.N.Y.1982); accord Ostashko, 2002 WL32068357, at *23; In re Centennial Textiles, Inc., 220B.R. 165, (Bankr.S.D.N.Y.1998). However, a findingthat good faith is lacking based solely on the transferee'sawareness that the transferor (for one reasonor another) lacks the resources to satisfy all his debtswould run afoul of the fundamental principle that apreference--a payment by an insolvent debtor satisfyingdebts to one creditor at the expense of others--isnot a fraudulent conveyance. See G. Glenn, FraudulentConveyances and Preferences § 289 (1940) ("Ifthere is one point more ungrudgingly accepted thanothers, it is that a preferential transfer does not constitutea fraudulent conveyance.").In a sense, all preferences prejudice the unfavoredcreditors, inasmuch as the debtor's remaining assetsare by definition insufficient to fully cover the debtsowed to them. However, the correction of this unfairnessis not the aim of fraudulent conveyance law. SeeBoston Trading, 835 F.2d at 1510 ("The basic objectof fraudulent conveyance law is to see that the debtoruses his limited assets to satisfy some of his creditors;it does not normally try to choose among them."). AsJustice *781 Sullivan of the First Department of theAppellate Division has explained:[A] conveyance which satisfies an antecedent debtmade while the debtor is insolvent is neitherfraudulent nor otherwise improper, even if its effectis to prefer one creditor over another.... It is ofno significance that the transferee has knowledgeof such insolvency. Nor is the transfer subject to attackby reason of knowledge on the part of thetransferee that the transferor is preferring him toother creditors, even by virtue of a secret agreementto that effect.Ultramar Energy Limited v. Chase Manhattan Bank,N.A., 191 A.D.2d 86, 90-91 599 N.Y.S.2d 816, 819(1st Dep't 1993) (internal citations and quotationmarks omitted).Concededly, what is alleged here is different than thetypical preference, since State Street is alleged tohave known not just of Sharp's insolvency but alsothat the particular funds used to repay it were acquiredby dishonest means. However, absent anyallegations of State Street's participation in the fraudon the Noteholders, this knowledge alone is not sufficientto establish a lack of good faith, and thus theabsence of fair consideration, under the D.C.L. §272. This issue was extensively analyzed in Boston© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

302 B.R. 760 Page 18302 B.R. 760(Cite as: 302 B.R. 760)Trading Group, Inc., 835 F.2d 1504 (1st Cir.1987), aFirst Circuit opinion authored by then Circuit JudgeStephen Breyer. Boston Trading involved a transfereewho received payments for the sale of a businessknowing that the transferors had obtain the transferredfunds through fraud. See id. at 1506. The courtconcluded that the despite the transferee's knowledgeof the illegitimate source of the funds, his receipt didnot amount to a lack of good faith under Massachusetts'fraudulent conveyance statute--identical in allrelevant respects to the D.C.L. See HBE LeasingCorp. v. Frank, 48 F.3d 623, 634 n. 5 (2d Cir.1995)(noting that both the Second Circuit and New Yorkcourts have "encouraged recourse to case law of otherjurisdictions[,]" "[i]n order to promote a uniform nationalinterpretation of the UFCA."). Judge Breyerexplained that, at least where the transferee did notparticipate in--but only knew about--the originalfraud, the transferee had at most obtained a preference.See id. at 1512. Fraudulent conveyance law wasnot implicated because the fraud did not concern theconveyance itself, but only the "manner in which the... debt" to the defrauded party arose. Id. at 1510.Sharp argues on this appeal, as it did before theBankruptcy Court, that a different result is compelledby the Second Circuit's holding in HBE Leasing, 48F.3d 623. Specifically, Sharp relies on an excerptfrom that decision in which the court concluded thatwhere ... a transferee has given equivalent value inexchange for the debtor's property, the statutory requirementof "good faith" is satisfied if the transfereeacted without either actual or constructiveknowledge of any fraudulent scheme.Id. at 636. Sharp contends that at the time of thetransfer, State Street had actual--or at the very leastconstructive--knowledge of the fraudulent schemethrough which Sharp acquired the funds used to retirethe debt to State Street. Indeed, it is alleged to haveknown at the time it gave its consent to the $25 millionnote purchase that the funds were being raisedfraudulently and would be used, in part, to refinanceSharp's debt to State Street, and that any surplusfunds raised would quite likely be looted by theSpitzes. As the Bankruptcy Court properly concluded,however, an examination of the facts of HBELeasing reveals the inapplicability of that case here.*782 In HBE Leasing, judgment creditors sought toset aside mortgages given by the judgment debtor tothe mother of the debtor's principal. The mortgageswere given in exchange for a contemporaneous advanceof cash that constituted equivalent value. However,shortly after the funds advanced in exchange forone of the mortgages was received by the debtor, thefunds were disbursed to the debtor's principal, purportedlyin satisfaction of loans he had previouslymade to the debtor. When examined in isolation, thatmortgage could not be avoided as constructivelyfraudulent. Even if the mother were regarded as aninsider, the rule that preferential payments to insidersare per se lacking in good faith, see, e.g., FarmStores, Inc. v. School Feeding Corp., 102 A.D.2d249, 477 N.Y.S.2d 374, 378 (1984), aff'd, 64 N.Y.2d1065, 489 N.Y.S.2d 877, 479 N.E.2d 222 (1985), didnot apply, since the mortgages secured a contemporaneousadvance of funds--not a pre-existing debt--and thus had no net effect on the debtor's balancesheet. See HBE Leasing, 48 F.3d at 635. Instead, theSecond Circuit applied the good faith element of theD.C.L's definition of fair consideration to collapse thetwo transactions by which the money given to thedebtor in exchange for the mortgage was immediatelyreconvened for a purpose deemed fraudulent underthe D.C.L., viz. to bestow a preference on an insider.Applying this framework, "the net result was that [themother] received a mortgage from the judgmentdebtor, while [the son] received money from [themother]. Thus at the end of the day [the judgmentdebtor] received nothing in exchange for the firstmortgage." Id. at 637. The Second Circuit held thatthe mother's actual or constructive knowledge at thetime she received the mortgages that the considerationshe advanced in exchange would be used for afraudulent purpose was sufficient to show a lack ofgood faith. See id.Furthermore, the Second Circuit explicitly considered(and rejected) an alternative ground advanced bythe parties seeking to avoid the transaction-- namely,that a lack of good faith on the part of the transferee(i.e., the mother) was grounds for avoiding the mortgage"independent of the role that mental states playin the analysis whereby transactions are collapsed."Id. at 636. Based both on the factual scenario involvedin the case and on the Second Circuit's holdingthat a lack of good faith was not an independentground for avoiding the mortgage, the BankruptcyCourt reached the following conclusion: the relevanceof the Second Circuit's assertion that actual orconstructive notice of "any fraudulent scheme" isenough to establish the transferee's lack of good faithis limited to cases involving "a fraudulent scheme© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

302 B.R. 760 Page 19302 B.R. 760(Cite as: 302 B.R. 760)that has the effect of depriving the debtor of the benefitof the consideration given in exchange for thetransfer that is sought to be avoided-- for exampleknowledge that would provide a basis for collapsingtwo transactions under the analysis set forth in HBELeasing." Bankr.Dec. at 520. Further undercuttingSharp's assertion that HBE Leasing renders a transferconstructively fraudulent when the transferee knowsthat the funds transferred were fraudulently acquiredis the fact that the Second Circuit cited with approvalJudge Breyer's decision in Boston Trading--a decisionthat, as discussed above, reached precisely theopposite result. See HBE Leasing, 48 F.3d at 636.The transaction at issue in HBE Leasing involved acontemporaneous exchange between a transferor andtransferee--not the repayment of a pre-existing debt.The knowledge to which the Second Circuit referredwas the transferee's actual or constructive awarenessat the time it advanced the consideration that thetransferor would not, in fact, either retain those fundsor expend them for some legitimate *783 corporatepurpose. The intent of the holding was to avoid afacially legitimate transfer that was, in fact, designedto disguise a scheme that would effectively deny thedebtor the use of the consideration, thus unfairly frustratingthe claims of other creditors. Although themortgage was not suspect when viewed in isolation,in context it operated as a means of turning the corporation'sreal property into cash that could be divertedto an insider, thus depriving outside creditorsnot only of the property subject to the mortgage, butalso, ultimately, of the consideration initially advancedto secure it. In this case, the considerationadvanced by State Street was the loan proceeds thatgave rise to the antecedent debt. There is no allegationthat State Street knew when it advanced thosefunds that they would be used for any improper purpose.Thus, there was nothing suspect about the legitimacyof Sharp's pre-existing debt to State Street.A different result might be warranted if there weresome reason to doubt State Street's status as a legitimatecreditor of Sharp--if there were any allegation,for example, that Sharp's debt to State Street hadsomehow been manufactured with the intent of ultimatelyfrustrating the rights of legitimate creditorsthrough a collusive preferential "repayment." There isno question that a fraud occurred in this case. However,the fraud was not in the transfer to State Street--which was a bona fide creditor that advanced funds toSharp in good faith--but rather the manner in whichthe funds transferred to repay the debt were raised. Itis not the purpose of the fraudulent conveyance law,however, to remedy this wrong. The defrauded Noteholdersmay well be able to seek relief under otherlegal theories, such as restitution. See Restatement(First) of Restitution § 202. It is understandable thatthe bankruptcy trustee representing Sharp would seekto frame his claim in terms of the fraudulent conveyancelaw, since a trustee in bankruptcy is not generallyempowered to pursue the claims of the debtor'screditors, but is specifically authorized under thebankruptcy code to pursue fraudulent conveyanceclaims on behalf of the debtor's unsecured creditors.See 11 U.S.C. § 544(b). Nevertheless, the limitationson the claims available to the bankruptcy trustee donot justify expanding the proper bounds of fraudulenttransfer law in this case.Actual Fraudulent Conveyance[21] Alternatively, Sharp asserts that the $12 millionpayment to State Street is avoidable as an intentionalfraudulent conveyance under D.C.L. § 276. The statuteprovides thatEvery conveyance made ... with actual intent, asdistinguished from intent presumed in law, to hinder,delay, or defraud either present or future creditors,is fraudulent as to both present and futurecreditors.[22][23] An intentional fraudulent conveyance claimfocuses on the intent of the transferor. If there was anactual intent to "hinder, delay, or defraud" creditors,the conveyance can be set aside even if the debtorremains otherwise solvent and even if fair considerationis given in exchange for the transfer. SeeMcCombs, 30 F.3d at 328; Le Café Crème, Ltd. v.Roux (In re Le Café Crème, Ltd.), 244 B.R. 221, 239(Bankr.S.D.N.Y.2000). Because it is based onfraudulent intent, a claim under § 276 must be pleadwith particularity in accordance with Rule 9(b) of theFederal Rules of Civil Procedure. See Atlanta Shipping,818 F.2d at 251.[24] Recognizing that it is typically difficult to demonstrateintent by direct evidence, the courts haveidentified various "badges of fraud" that serve as circumstantialevidence of actual intent. The *784badges of fraud identified by the Second Circuit include:© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

302 B.R. 760 Page 20302 B.R. 760(Cite as: 302 B.R. 760)1. lack or inadequacy of consideration;2. family, friendship or close associate relationshipbetween the parties;3. retention of possession, benefit or use of theproperty in question by the debtor;4. the financial condition of the party sought to becharged both before and after the transaction inquestion5. the existence or cumulative effect of a pattern orseries of transactions or course of conduct after theincurring of debt, onset of financial difficulties, orpendency of threat of suits by creditors; and6. the general chronology of the events and transactionsunder inquiry.See Salomon v. Kaiser (In re Kaiser), 722 F.2d 1574,1582-83 (2d Cir.1983). The Bankruptcy Courtpointed out that Sharp had not alleged any of thebadges of fraud in this case. See Bankr.Dec. at 522.Sharp protests that the badges of fraud are irrelevanthere because of the clear showing of the Spitzes' actualfraudulent intent, as demonstrated by the allegationsthat Sharp was grossly inflating its reportedsales and revenues, and using these inflated financialstatements to induce the Noteholders to advancesums far in excess of what they would have beenwilling to provide had they known Sharp's true financialpicture. See Sharp Mem. at 23-24.For the reasons state above, the judgment of theBankruptcy Court is affirmed. The clerk of the courtis directed to close this case.302 B.R. 760END OF DOCUMENT[25] Although the presence of any particular badgeof fraud is by no means a prerequisite to a finding ofactual intent to defraud, the badges of fraud appropriatelyfocus the inquiry on the circumstances that suggesta conveyance was made with fraudulent intent,viz. with the purpose of placing a debtor's assets outof the reach of creditors. As in Boston Trading, thefraud detailed in Sharp's complaint concerns themanner in which the debt to the Noteholders arose,not the subsequent conveyance of those funds toState Street, which was a legitimate creditor of Sharp.Finally, Sharp asserts that payment to State Streetwas made with the actual intent to defraud creditorsbecause it was made for the purpose of "buying"State Street's continued silence, and thus its assistancein the fraud. As noted supra, State Street owedno duty to Sharp or its creditors, and its silence didnot constitute an act of participation in the Spitzes'fraud. For these reasons, Sharp's intentional fraudulentconveyance claim fails.Conclusion© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

394 B.R. 721 Page 1394 B.R. 721, 50 Bankr.Ct.Dec. 192(Cite as: 394 B.R. 721)Westlaw Delivery Summary Report for DANIELS,JEFFREYDate/Time of Request:Wednesday, October 21, 2009 18:38 EasternClient Identifier:NALDatabase:FBKR-CSCitation Text: 394 B.R. 721Lines: 1560Documents: 1Images: 0The material accompanying this summary is subject to copyright. Usage is governed by contract with Thomson Reuters,West and their affiliates.United States Bankruptcy Court,S.D. New York.In re M. FABRIKANT & SONS, INC., et al., ReorganizedDebtors.The Official Committee of Unsecured, Creditors of M.Fabrikant & Sons, Inc.;and Fabrikant-Leer, International, Ltd., Plaintiff,v.JP Morgan Chase Bank, N.A.; ABN Amro Bank N.V.;Bank of America, N.A.; HSBCBank USA, National Association; Bank Leumi USA; IsraelDiscount Bank of NewYork; Antwerpse Diamantbank, N.V.; Sovereign PreciousMetals, Llc; andSovereign Bank, Defendants.Bankruptcy Nos. 06-12737 (SMB), 06-12739(SMB).Adversary No. 07-02780.Oct. 10, 2008.Background: Chapter 11 debtors' unsecured creditors'committee brought adversary proceeding against lendersand company from which one of the debtors had purchasedgold that was subsequently transferred to affiliatedentities, seeking to recover from defendants on fraudulenttransfer theory by collapsing transactions between debtorsand defendants on the one hand and debtors and affiliateson the other. Defendants moved to dismiss.Holdings: The Bankruptcy Court, Stuart M. Bernstein,Chief Judge, held that:(1) fraudulent transfer avoidance counts in complaint filedby unsecured creditors' committee, to extent grounded onactual, and not just a constructive, fraud theory, lackedparticularity required to satisfy heightened federal pleadingstandard;(2) committee's failure to allege facts supporting inferencethat lenders knew, or had reason to suspect, that loan proceedswould subsequently be transferred for less thanreasonably equivalent value to affiliates, or thatdebtors were insolvent at time, prevented committee fromstating avoidance claim against lenders on collapsedtransaction theory;(3) initial transferees that no longer retained any interestin the transferred property were not "necessary party" incause of action to recover from immediate or mediatetransferees; and(4) committee would be granted leave to amend.Motion granted in part; claims dismissed with leave toamend pleading.West Headnotes[1] Bankruptcy 2645.151k2645.1 Most Cited CasesUnder appropriate circumstances, multiple transactionswill be collapsed and treated as steps in a single transactionfor fraudulent transfer avoidance purposes. 11U.S.C.A. §§ 544, 548.[2] Bankruptcy 2645.151k2645.1 Most Cited CasesParty seeking to collapse a series of transactions forfraudulent transfer avoidance purposes must satisfy twoelements or prongs by demonstrating, first, that considerationreceived from initial transferee was reconveyed bydebtor for less than fair consideration or with actual intentto defraud creditors, and secondly, that initial transfereehad actual or constructive knowledge of entire scheme© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

394 B.R. 721 Page 2394 B.R. 721, 50 Bankr.Ct.Dec. 192(Cite as: 394 B.R. 721)that renders the exchange with debtor fraudulent. 11U.S.C.A. §§ 544, 548.[3] Bankruptcy 2645.151k2645.1 Most Cited CasesFor initial transferor to have "actual knowledge" ofscheme that allegedly renders its transaction with thedebtor fraudulent on a collapsed transaction theory, initialtransferor must have been intimately involved in formulationor implementation of plan by which proceeds werechanneled to third party. 11 U.S.C.A. §§ 544, 548.[4] Bankruptcy 2645.151k2645.1 Most Cited CasesFor initial transferor to have "constructive knowledge" ofscheme that allegedly renders its transaction with thedebtor fraudulent on a collapsed transaction theory, initialtransferor must have become aware of circumstances thatshould have led it to inquire further into circumstances oftransaction, but failed to make that inquiry. 11 U.S.C.A.§§ 544, 548.[5] Bankruptcy 2650(3)51k2650(3) Most Cited CasesValid antecedent debt provides adequate consideration tosupport the grant of security interest, for fraudulent transferavoidance purposes. 11 U.S.C.A. §§ 544, 548.[6] Bankruptcy 272451k2724 Most Cited CasesComplaint to avoid transfer as intentionally fraudulent tocreditors mustsatisfy heightened pleading requirements of Federal Rulesof Civil Procedure. 11 U.S.C.A. § 548(a)(1)(A);Fed.Rules Civ.Proc.Rule 9(b), 28 U.S.C.A.[7] Bankruptcy 272451k2724 Most Cited CasesParty asserting intentional fraudulent transfer claim mustspecify the property that was allegedly conveyed, the timingand frequency of those allegedly fraudulent conveyances,and the consideration paid. 11 U.S.C.A. §548(a)(1)(A); Fed.Rules Civ.Proc.Rule 9(b), 28 U.S.C.A.[8] Bankruptcy 272451k2724 Most Cited CasesAllegations that debtor made an aggregate amount or seriesof cash or other transfers over period of time, withoutfurther particularization, are insufficient to state intentionalfraudulent transfer claim. 11 U.S.C.A. §548(a)(1)(A); Fed.Rules Civ.Proc.Rule 9(b), 28 U.S.C.A.[9] Bankruptcy 272451k2724 Most Cited CasesFraudulent transfer avoidance counts in complaint filedby unsecured creditors' committee, to extent grounded onactual, and not just a constructive, fraud theory, lackedparticularity required to satisfy heightened federal pleadingstandard, where committee complained only of "net"loss to Chapter 11 estate as result of transactions, and didnot identify specific affiliates to which transfers weremade or specific dates of those transfers. 11 U.S.C.A. §548(a)(1)(A); Fed.Rules Civ.Proc.Rule 9(b), 28 U.S.C.A.[10] Bankruptcy 272451k2724 Most Cited CasesConstructive fraud counts of fraudulent transfer avoidancecomplaint that unsecured creditors' committee had filedagainst Chapter 11 debtors' prepetition lenders on a collapsedtransaction theory, based on debtors' subsequenttransfer of loan proceeds to affiliated companies ownedby debtors' principals, sufficiently alleged that loan proceedswere transferred to these affiliates under circumstancesthat constituted a constructive fraud on debtors'creditors, by alleging generally that subsequent transferswere made at time when debtors were insolvent for lessthan reasonably equivalent value; however, committee'sfailure to allege facts supporting inference that lendersknew, or had reason to suspect, that loan proceeds wouldsubsequently be transferred for less than reasonablyequivalent value to affiliates, or that debtors were insolventat time, prevented committee from stating avoidanceclaim against lenders on collapsed transaction theory. 11U.S.C.A. § 548(a)(1)(B).[11] Fraudulent Conveyances 57(3)186k57(3) Most Cited CasesBy its terms, constructive fraudulent transfer provision ofNew York law dealing with transactions that leave debtorwith unreasonably small capital applies only to conveyances,not to obligations. N.Y.McKinney's Debtor andCreditor Law § 274.[12] Fraudulent Conveyances 77186k77 Most Cited CasesDelivery of collateral to secure a non-avoidable debt orobligation constitutes a transfer supported by "fair consideration,"within meaning of constructive fraud provisionof New York fraudulent transfer law. N.Y.McKinney'sDebtor and Creditor Law §§ 272-274.© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

394 B.R. 721 Page 3394 B.R. 721, 50 Bankr.Ct.Dec. 192(Cite as: 394 B.R. 721)[13] Fraudulent Conveyances 9186k9 Most Cited Cases[13] Fraudulent Conveyances 101186k101 Most Cited CasesInsider preferences by insolvent transferor, even whenmade to satisfy valid debts, lack "good faith," for purposeof constructive fraud provision of New York fraudulenttransfer law. N.Y.McKinney's Debtor and Creditor Law§§ 272-274.[14] Bankruptcy 272451k2724 Most Cited CasesHeightened federal pleading standards do not apply toconstructive fraudulent transfer claims, which are subjectto less rigorous pleading requirements. 11 U.S.C.A. §548(a)(1)(B); Fed.Rules Civ.Proc.Rule 9(b), 28 U.S.C.A.[15] Bankruptcy 272451k2724 Most Cited CasesPlaintiff need not provide specific facts to support allegationsthat transfer is constructively fraudulent to creditors;all that is required is that plaintiff's allegations give defendantfair notice of what plaintiff's claim is and thegrounds upon which it rests. 11 U.S.C.A. § 548(a)(1)(B);Fed.Rules Civ.Proc.Rules 8(a), 9(b), 28 U.S.C.A.[16] Bankruptcy 216251k2162 Most Cited CasesUnder federal pleading standards, while allegations ofdefendant's knowledge may be made generally, conclusorystatements will not suffice; rather, complaint mustallege some specific facts which support inference ofknowledge. Fed.Rules Civ.Proc.Rule 9(b), 28 U.S.C.A.[17] Bankruptcy 2650(5)51k2650(5) Most Cited CasesIndirect benefits, such as synergies or increased access tocapital, that debtor receives as result of considerationpassing to third parties, particularly affiliates, may constitutefair consideration to debtor, for constructive fraudulenttransfer avoidance purposes. 11 U.S.C.A. §548(a)(1)(B).[18] Bankruptcy 270151k2701 Most Cited CasesAvoidance and recovery of property that was subject ofavoided transfer are separate concepts under the BankruptcyCode. 11 U.S.C.A. §§ 544-549, 550.[19] Bankruptcy 270151k2701 Most Cited CasesIt is only to extent that transfer is actually avoided thattrustee may recover from transferees on avoided transferunder the plain terms of Code provision governing liabilityof initial, immediate and mediate transferees. 11U.S.C.A. § 550.[20] Statutes 188361k188 Most Cited CasesStarting point for construction of any statute is plain languageof statute itself.[21] Bankruptcy 270151k2701 Most Cited Cases[21] Bankruptcy 272351k2723 Most Cited CasesWhile it was only to extent that transfers were actuallyavoided that unsecured creditors' committee could recoverfrom transferees on avoided transfers, initial transfereesthat no longer retained any interest in the transferredproperty were not "necessary parties" in cause of action torecover from immediate or mediate transferees, and unsecuredcreditors' committee could pursue avoidance claimsdirectly against immediate or mediate transferees fromwhich it was seeking to recover without having first successfullyprosecuted avoidance claim against initial transferees,and without joining initial transferees as parties tosuit; indeed, even if committee had previously avoidedtransfers in cause of action against initial transferees, itwould still have to avoid transfers as against immediate ormediate transferees as prerequisite to recovering therefrom,unless issue or claim preclusion principles applied.11 U.S.C.A. § 550.[22] Bankruptcy 2159.151k2159.1 Most Cited CasesCourts apply three-part test to determine whether joinderof party is required, under which they inquire (1) whetherabsent party is "necessary" party; (2) whether joinder ofabsent party is feasible; and, if joinder is not feasible, (3)whether court, in equity and good conscience, shoulddismiss lawsuit because nonparty is "indispensable."Fed.Rules Bankr.Proc.Rule 7019, 11 U.S.C.A.; Fed.RulesCiv.Proc.Rule 19, 28 U.S.C.A.[23] Bankruptcy 2159.151k2159.1 Most Cited CasesEffect that decision may have on absent third party is not© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

394 B.R. 721 Page 4394 B.R. 721, 50 Bankr.Ct.Dec. 192(Cite as: 394 B.R. 721)material consideration in deciding whether this third partyis "necessary party" on theory that court cannot accordcomplete relief among existing parties in hisabsence. Fed.Rules Bankr.Proc.Rule 7019, 11 U.S.C.A.;Fed.Rules Civ.Proc.Rule 19(a)(1)(A), 28 U.S.C.A.[24] Bankruptcy 2159.151k2159.1 Most Cited CasesFor joinder of absent third party to be required on theorythat adjudication in his absence may, as practical matter,impair or impede his ability to protect some interest thathe has in subject of litigation, the impact of any adjudicationon his interest must be direct and immediate; merepossibility of collateral estoppel is not enough, if it cannotbe shown that some outcome of federal litigation which isreasonably likely can preclude absent party with respectto some issue material to absent party's rights or dutiesunder standard principles governing effect of prior judgments.Fed.Rules Bankr.Proc.Rule 7019, 11 U.S.C.A.;Fed.Rules Civ.Proc.Rule 19(a)(1)(B)(i), 28 U.S.C.A.[25] Bankruptcy 272351k2723 Most Cited CasesTransferee that retains title to or an interest in the propertyconveyed is "necessary party" to fraudulent transfer actionagainst subsequent transferee. 11 U.S.C.A. §§ 548, 550;Fed.Rules Bankr.Proc.Rule 7019, 11 U.S.C.A.; Fed.RulesCiv.Proc.Rule 19, 28 U.S.C.A.[26] Bankruptcy 272351k2723 Most Cited CasesEarlier transferee who has parted with all interest in thetransferred property is not "necessary party" in suitagainst subsequent transferee. 11 U.S.C.A. §§ 548, 550;Fed.Rules Bankr.Proc.Rule 7019, 11 U.S.C.A.; Fed.RulesCiv.Proc.Rule 19, 28 U.S.C.A.[27] Bankruptcy 2159.151k2159.1 Most Cited Cases"Multiple liability" clause of Federal Rule of Civil Proceduredescribing circumstances under which joinder ofabsent third party is required is intended to protect thedefendant against inconsistent obligations, not inconsistentadjudications. Fed.Rules Bankr.Proc.Rule 7019, 11U.S.C.A.; Fed.RulesCiv.Proc.Rule 19(a)(1)(B)(ii), 28 U.S.C.A.[28] Bankruptcy 216251k2162 Most Cited CasesGenerally, leave to amend should be freely granted whenjustice so requires, unless it would be futile. Fed.RulesBankr.Proc.Rule 7015, 11 U.S.C.A.; Fed.RulesCiv.Proc.Rule 15(a), 28 U.S.C.A.[29] Bankruptcy 216251k2162 Most Cited CasesDecision whether to grant leave to amend pleading iscommitted to trial court's discretion. Fed.RulesBankr.Proc.Rule 7015, 11 U.S.C.A.; Fed.RulesCiv.Proc.Rule 15(a), 28 U.S.C.A.[30] Bankruptcy 272451k2724 Most Cited CasesDeficiencies in fraudulent transfer avoidance complaintfiled by unsecured creditors' committee, consisting ofcommittee's failure to particularize the transfers that itcontended were made with actual fraudulent intent and itsfailure to plead facts necessary to support inference thatinitial transferors had actual or constructive knowledge ofscheme by debtors' principals to immediately transfermuch of what they received for less than reasonablyequivalent value to affiliates, as required to permit collapsingof transactions, were type of deficiencies thatcommittee might be able to cure, such that committeewould be granted leave to amend. Fed.RulesBankr.Proc.Rule 7015, 11 U.S.C.A.; Fed.RulesCiv.Proc.Rule 15(a), 28 U.S.C.A.*725 Susman Godfrey LLP, Stephen D. Susman, Esq.,Jacob W. Buchdahl, Esq., Jonathan J. Ross, Esq., ofCounsel, New York, NY, Attorneys for the OfficialCommittee of Unsecured Creditors.Hahn & Hessen LLP, Steven J. Mandelsberg, Esq.,Joshua I. Divack, Esq., Charles Loesner, Esq., of counsel,New York, NY, Attorneys for JPMorgan Chase Bank,N.A.Cadwalader, Wickersham & Taft LLP, Evan R. Fleck,Esq., Gregory M. Petrick, Esq., Ingrid Bagby, Esq., PeterM. Friedman, Esq., of counsel, New York, NY, Attorneysfor ABN Amro Bank N.V.Reimer & Braunstein LLP, Paul S. Samson, Esq.,Meegan B. Casey, Esq., Jeffrey D. Ganz, Esq., of counsel,Boston, MA, Attorneys for Bank of America, N.A.Phillips Lytle LLP, William J. Brown, Esq., Paul K.Stecker, Esq., Allan L. Hill, Esq., of counsel, New York,NY, Attorneys for HSBC Bank USA.© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

394 B.R. 721 Page 5394 B.R. 721, 50 Bankr.Ct.Dec. 192(Cite as: 394 B.R. 721)Herrick, Feinstein LLP, Andrew C. Gold, Esq., FrederickE. Schmidt, Esq., of counsel, New York, NY, Attorneysfor Bank Leumi USA.Heller Ehrman LLP, Timothy Mehok, Esq., ErinMcMurray-Killelea, Esq., Andrew Levine, Esq., of counsel,New York, NY, Attorneys for Israel Discount Bank ofNew York.Cullen And Dykman LLP, Matthew G. Roseman, Esq.,Matthew D. Brown, Esq., of counsel, Garden City, NY,Attorneys for Antwerpse Diamantbank, N.V.Milbank, Tweed, Hadley & McCloy LLP, Douglaw W.Henkin, Esq., Wilbur F. Foster, Jr., Esq., Robert R. Miller,Esq., Alan J. Stone, Esq., of counsel, New York, NY,Attorneys for Sovereign Precious Metals, LLC and Sov-ereign Bank.MEMORANDUM DECISION AND ORDERGRANTING IN PART AND DENYING IN PARTMOTIONS TODISMISS COMPLAINTS TUART M. BERNSTEIN, Chief Judge:This lawsuit arose out of the bankruptcy of M. Fabrikant& Sons, Inc. ("MFS") and Fabrikant-Leer International,Ltd. ("FLI," and collectively with MFS, the debtors or"Fabrikant"). In the main, the *726 Amended Complaint,dated March 27, 2008 (ECF Doc. # 54), seeks to avoid thepre-petition obligations owed by the debtors to the defendantbanks (other than Sovereign Bank), and to avoid andrecover the value of the liens granted to secure those obligations.The Official Committee of Unsecured Creditorsof MFS and FLI (the plaintiff or the "Committee") alsoseeks to recover the value of gold that MFS purchasedfrom Sovereign Precious Metals, LLC ("SPM") and transferredto another company operated by its principals.Lastly, the Amended Complaint asserts claims againstfour of the defendant banks as subsequent transferees offraudulent transfers.Each defendant moved to dismiss the Complaint. [FN1]For the reasons that follow, Counts I through IV are dismissed.In addition, those portions of Counts V throughVII that allege actual fraudulent transfers are dismissed.Finally, the plaintiff is granted leave to replead.FN1. The Committee filed its initial Complainton October 1, 2007. (ECF Doc. # 1.) After thedefendants moved to dismiss, the Committeefiled its Amended Complaint to add defendantSovereign Bank. The Amended Complaint otherwisemirrored the Complaint. The Court hastreated the motions as if they were directed at theAmended Complaint.BACKGROUNDThe background information is derived from the allegationsof the Amended Complaint. MFS is a New Yorkcorporation, ( 5), [FN2] that had engaged in the diamondand jewelry business since 1895, and for many years, wasone of the largest and most prominent diamond and jewelrywholesalers in the world. ( 17.) In 2005, MFS establishedFLI, also a New York corporation, ( 6), to act as adistributor and wholesaler of "low end" finished jewelry.MFS owns 82% of the FLI stock. ( 18.)FN2. The parenthetical notation "( --)" refers tothe paragraphs in the Amended Complaint.Charles Fortgang and his son, Matthew Fortgang, ownapproximately 32% of the stock of MFS. ( 18.) The remainderof stock is owned, through a trust, by MarjorieFortgang and Susan Fortgang and by employees or formeremployees of MFS. ( 18.) At all relevant times, Charles,as chairman, and Matthew, as President, controlled MFSand FLI. ( 18.)In addition, Charles and Matthew Fortgang, and trusts ofwhich Charles, Matthew, and Susan Fortgang were beneficiaries,owned a group of 47 companies (the "FortgangAffiliates") engaged in the diamond and jewelry business.( 20; see Amended Complaint at Ex. A.) With few exceptions,neither of the debtors had an ownership interest inany of the Fortgang Affiliates. ( 20.)MFS became insolvent no later than January 2003, (21), and FLI became insolvent no later than January 13,2006. ( 22.) They filed their voluntary chapter 11 petitionsin this Court on November 17, 2006 (the "PetitionDate").A. The "Scheme" Transactions (Counts I through IV)1. The Debtors and the Pre-Petition BanksThe thrust of Counts I through IV involves a scheme engineeredby Charles and Matthew Fortgang through© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

394 B.R. 721 Page 6394 B.R. 721, 50 Bankr.Ct.Dec. 192(Cite as: 394 B.R. 721)which MFS and FLI borrowed money from the defendant Bank Leumi USA ("BL"), Israel Discount Bank of Newbanks (other than Sovereign Bank) and then reconveyed York ("IDB"), Antwerpse Diamantbank, N.V. ("ADB,"the loan proceeds to the Fortgang Affiliates for inadequate and collectively, the "Pre-Petition Banks"). According toor no consideration. For many years prior to the Petition the Amended Complaint, the Pre-Petition Banks made theDate, the debtors engaged in independent lending relationships*727 with a number of financial institutions. 2003 and the Petition Date:following aggregate loans to Fabrikant between JanuaryThey included the defendants, J.P. Morgan Chase Bank,N.A. ("JPMC"), ABN AMRO Bank N.V. ("ABN"), Bankof America ("BOA"), HSBC Bank USA, N.A. ("HSBC"),------------------------------------------------------------------Amount ofPre-Petition BankObligation Incurred------------------------------------------------------------------JPMC $ 35,838,000------------------------------------------------------------------ABN $ 44,290,000------------------------------------------------------------------BOA $ 10,475,000------------------------------------------------------------------HSBC $ 12,075,000------------------------------------------------------------------BL $ 11,592,000------------------------------------------------------------------IDB $ 9,660,000------------------------------------------------------------------ADB $ 5,454,000------------------------------------------------------------------$129,384,000.00------------------------------------------------------------------( 32-33, 54, 61.)The loans were initially made on an unsecured basis. InOctober 2004, the Pre-Petition Banks took security interestsin all of the debtors' assets to protect themselves, andshift the detrimental effects of the fraudulent transfers tothe unsecured creditors. ( 47.) On January 13, 2006,MFS guaranteed the $8.5 million debt FLI owed to defendantsABN and BL. ( 34.) On that same day, FLI guaranteed$92 million of then existing obligations owed byMFS to the Pre-Petition Banks. This amount comprisedall of MFS' pre-existing obligations to the Pre-PetitionBanks during the two-year period preceding the PetitionDate. (Id. at 35.)During this same period--January 2003 to the PetitionDate--MFS advanced the net amount of $175.3 million tothe Fortgang Affiliates (the "Affiliate Transfers"). ( 27,40.) Fabrikant funded the transfers to the Fortgang Affiliates,at least in part, with the money borrowed from thePre-Petition Banks. ( 32.) MFS made many of the transfersprior to the date the Fortgang Affiliates repaid thePre-Petition Banks on account of their own loan obligations.( 23.) Similarly, the Fortgang Affiliates transferredsignificant sums back to MFS in advance of MFS' loanpay-down obligations to the Pre-Petition Banks. [FN3] (24.) However, MFS never came close to fully repaying itsdebts owed to the Pre-Petition Banks after January 2003.( 31.)FN3. The plaintiff alleges that MFS and theFortgang Affiliates transferred money back andforth on an "as needed" basis to clear up theirbalance sheets and fund their respective loan repayments.(See 23-24.)2. The Debtors and SPMIn a separate transaction on July 7, 2006, MFS and FLIbecame jointly and severally obligated to SPM in theamount of $32 million on account of MFS' purchase ofgold from SPM. [FN4] ( 32, 37.) At least $22 million© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

394 B.R. 721 Page 7394 B.R. 721, 50 Bankr.Ct.Dec. 192(Cite as: 394 B.R. 721)had already been delivered to Fortgang Affiliates, and thepurchase was made for their benefit. ( 38.) The AmendedComplaint also indicates that as *728 of the Petition Date,the SPM claim was secured. (See 51.)FN4. The SPM transaction is spelled out indocuments attached to the Declaration of RobertR. Miller in Support of Defendant SovereignPrecious Metals, LLC's Motion to Dismiss theComplaint, dated December 10, 2007, ("MillerDecl.") (ECF Doc. # 34). On July 7, 2006, MFSpurchased gold from SPM pursuant to the EighthAmendment to Amended and Restated ConsignmentAgreement dated as of December 31,1998. (See Miller Decl. at Ex. E.) In substance,Sovereign Bank loaned MFS up to $33 million topurchase 50,760 fine troy ounces of gold thatSPM had consigned to MFS under an earlierconsignment agreement. (Id. at 4.) The EighthAmendment to Amended and Restated ConsignmentAgreement also "grant[ed] and reconfirm[ed]"the security interest that had beengranted on January 13, 2006. (Id. at 6.)3. The Fraudulent Nature of the SchemeThe plaintiff alleges that the Affiliate Transfers weremade with actual fraudulent intent. ( 41.) In the alternative,the Affiliate Transfers were made with constructivefraudulent intent because the debtors did not receive fairconsideration or reasonably equivalent value in exchangefor the obligations they incurred to the Pre-Petition Banksand SPM. (See 57.)disregard of their actual or constructive knowledge of thefacts that rendered those transfers fraudulent transfers. (45.) From at least January 2003, the Pre-Petition Banksand SPM knew that MFS did not own the Fortgang Affiliates,that a substantial portion, if not virtually all, of thefunding provided by the Pre-Petition Banks would betransferred to the Fortgang Affiliates, ( 42), and that thereceivables generated by the Affiliate Transfers were virtuallyworthless. ( 43.) The Pre-Petition Banks and SPMnevertheless made the transfers to maintain their reputations"as the premier lenders to the international jewelryand diamond industry," and to placate Charles and MatthewFortgang, who "would not allow MFS to do businesswith them if they attempted to restrict transfers to FortgangAffiliates." ( 45.) The Pre-Petition Banks and SPMalso believed that they could protect themselves by obtainingthe personal guaranties of Matthew and CharlesFortgang, and thereafter, liens on all of the debtors' assets.( 45.)B. The Subsequent Transfers (Counts V through VII)As noted earlier, the Fortgang Affiliates also borroweddirectly from five of the seven Pre-Petition Banks. ( 29.)From January 2006 until the Petition Date, Fabrikantmade actual or constructive fraudulent transfers in theaggregate amount of $38,890,000 to the following FortgangAffiliates: Alpha Diamond Co., Inc. ("Alpha Diamond"),Diamfab PVBA ("Diamfab"), Fabrikant TradingIndia, and Fabrikant HK Trading Ltd. ("Fabrikant HK").( 76, 84.) These Fortgang Affiliates used these transfersto pay the Pre-Petition Banks the following amounts[F N5] :The plaintiff further alleges that the Pre-Petition BanksFN5. See 77, 85.and SPM made the loans or extended the credit thatfunded the improper transfers to the Fortgang Affiliates in------------------------------------------------------------------Pre-Petition BankAggregate Transfers------------------------------------------------------------------ABN $ 8,364,265------------------------------------------------------------------HSBC $14,025,784------------------------------------------------------------------IDB $ 5,946,592------------------------------------------------------------------$28,336,641.00------------------------------------------------------------------In addition, between January 2005 and the Petition Date,Fabrikant made actual or constructive fraudulent transfersin the aggregate amount of $10,535,000 to VSI, LLC("VSI"), another Fortgang Affiliate. ( 78, 86.) VSI used© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

394 B.R. 721 Page 8394 B.R. 721, 50 Bankr.Ct.Dec. 192(Cite as: 394 B.R. 721)these transfers to pay $9,882,351 to defendant SovereignBank in satisfaction of its own debts. ( 79, 87.)C. The Post-Petition Bankruptcy SaleAs of the Petition Date, the Pre-Petition Banks and SPMheld secured claims against the debtors in the sum of$161.3 million. ( 51.) The debtors acknowledged theseclaims in the Final Order Authorizing Debtors' Use ofCash Collateral and Granting Adequate Protection Claimsand Liens, dated December 18, 2006 (the "FCCO")(filedin Case No. 06-12737 ECF *729 Doc. # 93) subject to theComm ittee's right to object. [FN6] (Id.) After the PetitionDate, each of the defendants sold their secured claims.(Id.)FN6. The defendants appear to argue that thedebtors' admissions in the FCCO restrict theplaintiff, or at a minimum, impose a higherpleading standard. (Joint Reply Memorandum ofLaw in Further Support of Defendants' Motionsto Dismiss Complaint, dated Mar. 4, 2008, at 19-20)(ECF Doc. # 48.) The FCCO allowed theCommittee to commence this avoidance and recoveryaction notwithstanding the debtors' releaseof the defendants. (FCCO at 22.) Suchclauses are commonly included in cash collateralorders to balance the lender's desire for a release,as the quid pro quo for its consent to the use ofits cash collateral, against the need to protect theinterests of the unsecured creditors, particularlyat an early stage of the case before there is anopportunity to confirm the validity and extent ofthe liens. Here, the Committee's right to challengethe pre-petition transactions between thedebtors and the defendants would be a hollowone if the Committee was hamstrung by the admissionsmade by the debtors in the FCCO. Instead,this adversary proceeding necessarily proceedsas if the debtors never made the admissionsand concessions in the FCCO.On May 21, 2007, all of MFS' remaining assets were soldat an auction. ( 52.) Wilmington Trust Company, theagent for the purchasers of the secured debt, purchasedthe majority of the assets for $38.5 million. (Id.) SuryaCapital purchased the remaining assets for $10.4 million.(Id.)D. This Adversary ProceedingThe Amended Complaint seeks to avoid the fraudulenttransfers and obligations made or incurred by the debtors,and recover their value for the benefit of the unsecuredcreditors. The Amended Complaint is divided into twoparts, and contains the following seven claims for relief:-------------------------------------------------------------------------------Count Defendant(s)Description of Claim(s)-------------------------------------------------------------------------------1 Pre-Petition Banks and Avoiding, under 11 U.S.C. § 544, theSPMobligations incurred by the debtors in theamounts of $44,290,000 to ABN; $12,075,000to HSBC, $9,660,000 to IDB; $5,454,000 toADB; $11,592,000 to BL; $10,475,000 to BOA;$35,838,000 to JPMC; and $32,000,000 to SPM.( 54-60.)-------------------------------------------------------------------------------2 Pre-Petition Banks and Avoiding, under 11 U.S.C. § 548, theSPMobligations incurred by FLI in the amountsof $44,290,000 to ABN; $12,075,000 to HSBC,$9,660,000 to IDB; $5,454,000 to ADB;$11,592,000 to BL; $10,475,000 to BOA;$35,838,000 to JPMC; and $32,000,000 to SPM.( 61-65.)-------------------------------------------------------------------------------3 Pre-Petition Banks and Avoiding, under 11 U.S.C. § 548, theSPMobligations incurred by MFS in the amountsof $16,790,000 to ABN; $2,075,000 to HSBC,$9,660,000 to IDB; $1,521,628 to ADB;© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

394 B.R. 721 Page 9394 B.R. 721, 50 Bankr.Ct.Dec. 192(Cite as: 394 B.R. 721)$4,592,000 to BL; $5,075,000 to BOA;$22,338,000 to JPMC; and $32,000,000 to SPM.( 66-70.)-------------------------------------------------------------------------------4 Pre-Petition Banks and Avoiding the liens securing the fraudulentSPMobligations alleged in Counts I through III,and recovering the value of the collateralreceived by the defendants from the debtorsunder 11 U.S.C. § 550. ( 71-75.)-------------------------------------------------------------------------------5 ABN, IDB, HSBC and Avoiding, under 11 U.S.C. § 544, the transfersSovereign Bankin the amounts of $14,025,784 to HSBC,$8,364,265 to ABN, $5,946,592 to IDB and$9,882,351 to Sovereign Bank. ( 76-83.)-------------------------------------------------------------------------------6 ABN, IDB, HSBC and Avoiding, under 11 U.S.C. § 548, the transfersSovereign Bankin the amounts of $14,025,784 to HSBC,$8,364,265 to ABN, $5,946,592 to IDB and$9,882,351 to Sovereign Bank. ( 84-92.)-------------------------------------------------------------------------------7 ABN, IDB, HSBC and Recovering, under 11 U.S.C. § 550(a), theSovereign Bankvalue of the payments made by the FortgangAffiliates to defendants ABN, IDB, HSBC andSovereign Bank, in amounts to be determinedat trial. ( 93-98.)-------------------------------------------------------------------------------*730 E. The Motions to DismissEach defendant moved separately to dismiss the Complaint.[FN7] The plaintiff concedes that the first fourclaims for relief depend upon a "collapsing" theory underwhich the Pre-Petition Banks and SPM should be heldliable for the reconveyance of the loan proceeds or gold tothe Fortgang Affiliates. (See Memorandum of Law in Oppositionto Defendants Motions to Dismiss the Complaintin its Entirety and with Prejudice, dated Feb. 4, 2008("Opposition Memo "), at 39-40)(ECF Doc. # 47.) Thedefendants (other than Sovereign Bank) argue that theplaintiffs have failed to plead the necessary elements tocollapse the transactions. The defendants implicated in thelast three claims point to several pleading deficiencies,and also contend that the plaintiff cannot avoid and recoverthe subsequent transferors unless it avoids the initialtransfer to the Fortgang Affiliates.FN7. See note 1 supra.DISCUSSIONOn a motion to dismiss a complaint under Fed.R.Civ.P.12(b)(6), a court must "accept all factual allegations in thecomplaint as true," Tellabs, Inc. v. Makor Issues &Rights, Ltd., --- U.S. ----, 127 S.Ct. 2499, 2509, 168L.Ed.2d 179 (2007); accord Leatherman v. TarrantCounty Narcotics Intelligence & Coordination Unit, 507U.S. 163, 164, 113 S.Ct. 1160, 122 L.Ed.2d 517 (1993),even if the allegations are doubtful in fact. Bell Atl. Corp.v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1965, 167L.Ed.2d 929 (2007). The factual allegations must neverthelessbe plausible, In re Elevator Antitrust Litig., 502F.3d 47, 50 (2d Cir.2007); Iqbal v. Hasty, 490 F.3d 143,157-58 (2d Cir.2007), cert. granted sub nom. Ashcroft v.Iqbal, --- U.S. ----, 128 S.Ct. 2931, 171 L.Ed.2d 863(2008), and "raise a right to relief above the speculativelevel." Bell Atl. Corp., 127 S.Ct. at 1965; accord ATSICommcns., Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2dCir.2007). "[L]abels and conclusions, and a formulaicrecitation of the elements of a cause of action will notdo." Bell Atl. Corp., 127 S.Ct. at 1965; accord PaycomBilling Servs. v. Mastercard Intl., Inc., 467 F.3d 283, 289(2d Cir.2006)("we do not 'permit conclusory statements tosubstitute for minimally sufficient factual allegations.'")(quoting Furlong, M.D. v. Long Island Coll. Hosp., 710F.2d 922, 927 (2d Cir.1983)); Amron v. Morgan StanleyInv. Advisors Inc., 464 F.3d 338, 344 (2d Cir.2006)("baldassertions and conclusions of law will not suffice" to de-© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

394 B.R. 721 Page 10394 B.R. 721, 50 Bankr.Ct.Dec. 192(Cite as: 394 B.R. 721)feat a motion to dismiss (internal quotation marks omitted)).Instead, the plaintiff must "amplify a claim withsome factual allegations in those contexts where suchamplification is needed to render the claim plausible."Iqbal, 490 F.3d at 157-58 (emphasis in original). "[O]ncea claim has been stated adequately, it may be supportedby showing any set of facts consistent with the allegationsin the complaint." Bell Atl. Corp., 127 S.Ct. at 1969; accordRoth v. Jennings, 489 F.3d 499, 510 (2d Cir.2007)."[C]ourts must consider the complaint in its entirety, aswell as other sources courts ordinarily examine when rulingon *731Rule 12(b)(6) motions to dismiss, in particular,documents incorporated into the complaint by reference,and matters of which a court may take judicial notice."Tellabs, 127 S.Ct. at 2509. Courts may also consider"any written instrument attached to the complaint,statements or documents incorporated into the complaintby reference, legally required public disclosure documentsfiled with the SEC, and documents possessed by orknown to the plaintiff and upon which it relied in bringingthe suit." ATSI Commcns, 493 F.3d at 98; accord Roth,489 F.3d at 509; Chambers v. Time Warner, Inc., 282F.3d 147, 152-53 (2d Cir.2002); Rothman v. Gregor, 220F.3d 81, 88-89 (2d Cir.2000). "Where a plaintiff's conclusoryallegations are clearly contradicted by documentaryevidence incorporated into the pleadings by reference,however, the court is not required to accept them." Labajov. Best Buy Stores, L.P., 478 F.Supp.2d 523, 528(S.D.N.Y.2007); accord Kuhne v. Midland Credit Mgmt.,Inc., No. 06 Civ. 5888(DC), 2007 WL 2274873, at *1(S.D.N.Y. Aug. 9, 2007); Matusovsky v. Merrill Lynch,186 F.Supp.2d 397, 400 (S.D.N.Y.2002).A. Counts I through IV[1] As noted, Counts I through IV hinge on the applicabilityof the doctrine of collapsing. Under appropriatecircumstances, multiple transactions will be collapsed andtreated as steps in a single transaction for analysis underthe fraudulent conveyance laws. HBE Leasing Corp. v.Frank, 48 F.3d 623, 635 (2d Cir.1995); Orr v. KinderhillCorp., 991 F.2d 31, 35 (2d Cir.1993)("[A]n allegedlyfraudulent conveyance must be evaluated in context;[w]here a transfer is only a step in a general plan, the planmust be viewed as a whole with all its composite implications.")(internalquotation marks and citations omitted).Although collapsing is usually applied to leveraged buyouts,the doctrine applies more generally to the following"paradigmatic scheme":one transferee gives fair value to the debtor in exchangefor the debtors property, and the debtor then gratuitouslytransfers the proceeds of the first exchange to asecond transferee. The first transferee thereby receivesthe debtors property, and the second transferee receivesthe consideration, while the debtor retains nothing.HBE Leasing, 48 F.3d at 635.[2] A party seeking to collapse a series of transactionsmust satisfy two elements, or prongs. First, "the considerationreceived from the first transferee must be reconveyedby the debtor for less than fair consideration orwith an actual intent to defraud creditors." Id. If the debtorretains the consideration, or transfers it for valuable consideration,its estate is not unfairly diminished and theinitial transfer is not fraudulent. Id.[3][4] Second, the initial transferee must have actual orconstructive knowledge of the entire scheme that rendersthe exchange with the debtor fraudulent. Id.; accord In reBest Prods. Co., Inc., 168 B.R. 35, 56- 57(Bankr.S.D.N.Y.1994)(courts frequently examine the defendant'sknowledge "of the structure of the entire transactionand ... whether its components were part of a singlescheme")(internal quotation marks and citation omitted);Official Comm. of Unsecured Creditors of Sunbeam Corp.v. Morgan Stanley Co. (In re Sunbeam Corp.), 284 B.R.355, 370 (Bankr.S.D.N.Y.2002)("Courts have collapsed aseries of transactions into one transaction when it appearsthat despite the formal structure erected and the labelsattached, the segments, in reality, comprise a single integratedscheme when evaluated focusing on the knowledgeand intent of the parties *732 involved in the transaction.").Actual knowledge exists where the "initial transferorwas intimately involved in the formulation or implementationof the plan by which the proceeds of theloan were channeled to the third-party." Sunbeam, 284B.R. at 370. Constructive knowledge, on the other hand,will be found where the initial transferee became aware ofcircumstances that should have led it to inquire furtherinto the circumstances of the transaction, but failed tomake the inquiry. HBE Leasing, 48 F.3d at 636.Counts I through III seek to invalidate the loan and purchaseobligations under the fraudulent transfer provisionsof New York and federal bankruptcy law. The Pre-Petition Banks and SPM have, however, assigned theirclaims and related security interests, and no longer assertthem against the debtors or their estates. Furthermore, thedebtors settled with the assignees under the confirmedchapter 11 plan, and are not challenging the debts or liensin their hands. Thus, the mere avoidance of the obliga-© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

394 B.R. 721 Page 11394 B.R. 721, 50 Bankr.Ct.Dec. 192(Cite as: 394 B.R. 721)tions would not provide any meaningful relief.[5] The validity of the loan obligations is neverthelesscrucial to Count IV. Asserted solely as a constructivefraudulent transfer claim, Count IV seeks to avoid andrecover the value of the liens conveyed to the Pre-PetitionBanks and SPM to secure the repayment of the obligations.A valid antecedent debt provides adequate considerationto support the grant of a security interest.Ultramar Energy Ltd. v. Chase Manhattan Bank, N.A.,191 A.D.2d 86, 599 N.Y.S.2d 816, 819(N.Y.App.Div.1993)("Even though insolvent, a debtormay properly assign assets to a creditor as security for anantecedent debt although the effect of the transfer will beto prefer that creditor."); see Geron v. Palladin OverseasFund, Ltd. (In re AppliedTheory Corp.), 330 B.R. 362,363 (S.D.N.Y.2005)("In its appeal, the appellant urges usto reject the per se rule consistently applied in this District,which provides that a debtors grant of a securityinterest in its assets to a lender who has previously giventhe debtor a cash loan may not be considered a fraudulentconveyance."). The plaintiff must, therefore, invalidatethe obligations to avoid and recover the value of the cor-responding liens.With this in mind, we turn to the elements of the debtors'collapsing claim.1. The First ProngThe parties debate the degree of specificity that theseallegations must meet. In particular, they argue over theTo satisfy the first prong of the collapsing doctrine, theplaintiff must plead and ultimately prove that (1) the Pre-Petition Banks and SPM transferred consideration to thedebtors; (2) the debtors reconveyed the consideration tothe Fortgang Affiliates; and (3) the reconveyance of theloan proceeds and gold was made with actual or constructivefraudulent intent within the meaning of the fraudulenttransfer laws. The Amended Complaint alleges that thedebtors received at least $129.4 million in loan proceedsfrom the Pre-Petition Banks and another $32 millionworth of gold from SPM, and incurred correspondingobligations. In addition, the Amended Complaint allegesthat the debtors retransferred the $129.4 million, as part oftheir net transfer of over $175 million, to the FortgangAffiliates. Finally the Amended Complaint alleges thatMFS reconveyed $22 million worth of the SPM gold,which was already in the possession of the Fortgang Af-filiates at the time of the sale.need to particularize each transfer. The sufficiency of thetransfer allegations in the Amended Complaint dependson whether the plaintiff is relying on theories of actual* 733 or constructive fraud, and is discussed immediatelybelow.a. Actual Fraud[6] The plaintiff contends that the Affiliate Transferswere made with actual fraudulent intent under both NewYork and bankruptcy law, and hence, may be set asidewithout regard to the adequacy of any consideration receivedby the debtors. A claim to avoid an intentionalfraudulent conveyance or transfer must satisfy the pleadingrequirements of Rule 9(b) of the Federal Rules ofCivil Procedure. [FN8] Sharp Int'l Corp. v. State StreetBank & Trust Co. (In re Sharp Int'l Corp.), 403 F.3d 43,56 (2d Cir.2005); Atlanta Shipping Corp., Inc. v. Chem.Bank, 818 F.2d 240, 251 (2d Cir.1987); Nisselson v. DrewIndus., Inc. (In re White Metal Rolling & StampingCorp.), 222 B.R. 417, 428 (Bankr.S.D.N.Y.1998). Rule9(b) requires the plaintiff to plead claims of actual or intentionalfraud with particularity.FN8. Rule 9(b) states:(b) FRAUD OR MISTAKE; CONDITIONS OFMIND. In alleging fraud or mistake, a party muststate with particularity the circumstances constitutingfraud or mistake. Malice, intent, knowledge,and other conditions of a person's mindmay be alleged generally.[7][8] The party asserting an intentional fraudulent transferclaim must "specify the property that was allegedlyconveyed, the timing and frequency of those allegedlyfraudulent conveyances, [and] the consideration paid."United Feature Syndicate, Inc. v. Miller Features Syndicate,Inc., 216 F.Supp.2d 198, 221 (S.D.N.Y.2002); accordAlnwick v. European Micro Holdings, Inc., 281F.Supp.2d 629, 646 (E.D.N.Y.2003) (dismissing intentionalfraudulent transfer claim that failed to identify theassets that were transferred and identified the date of thetransfer as "on or about 2001"); Wujin Nanxiashu SecantFactory v. Ti-Well Int'l Corp., No. 01 Civ. 8871(JCF),2002 WL 1144903, at *4 (S.D.N.Y. May 29,2002)(dismissing intentional fraudulent transfer claim thatfailed to identify the property that was transferred, whenthe transfers occurred and to whom the transfers weremade); see also Fed.R.Civ.P. App. of Forms, Form 21 at 4. Consequently, allegations that a debtor made an aggregateamount or series of cash or other transfers over aperiod of time, without further particularization, are insuf-© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

394 B.R. 721 Page 12394 B.R. 721, 50 Bankr.Ct.Dec. 192(Cite as: 394 B.R. 721)ficient to state an intentional fraudulent transfer claim.E.g., Fed. Nat'l Mortgage Ass'n v. Olympia MortgageCorp., No. 04 CV 4971(NG)(MDG), 2006 WL 2802092,at *9 (E.D.N.Y. Sept. 28, 2006)(dismissing intentionalfraudulent transfer claims that aggregated and lumped aseries of cash transfers made over a three to five year periodand failed to identify how many transfers were beingchallenged or the specific dates or amounts of those transfers);Gindi v. Silvershein, No. 93 Civ. 8679(LLS), 1995WL 347397, at *6 (S.D.N.Y. June 8, 1995)(dismissingintentional fraudulent transfer claim that alleged a seriesof non-specific transfers and obligations); Silverman v.K.E.R.U. Realty Corp. (In re Allou Distribs., Inc.), 379B.R. 5, 31-32 (Bankr.E.D.N.Y.2007)(dismissing claim ofintentional fraudulent transfer of "millions of dollars"without specifying the source, dates or the amounts of thetransfers that the trustee was seeking to recover); Thalerv. Adler (In re Adler), 372 B.R. 572, 581(Bankr.E.D.N.Y.2007)(dismissing intentional fraudulenttransfer claim that did not "allege any specifics as to theamounts or dates" of cash deposits made by a debtor husbandinto his wifes bank account); cf. Sullivan v. Kodsi,373 F.Supp.2d 302, 306 (S.D.N.Y.2005)(denying motionto dismiss intentional fraudulent transfer claims challengingnon-specific transfers made to *734 a family trustbetween late 1997 and June 2000 on the ground that thefacts were "peculiarly within the opposing party's knowledge,"and several "badges of fraud" were present).[9] The allegations of actual fraudulent transfer directedagainst the Pre-Petition Banks fail to satisfy these requirements.The Amended Complaint does not identifyany specific transfer, transferor, [FN9] transferee, [FN10]or date of transfer. Instead, it challenges the "net" transfersin the amount of $175.3 million to the Fortgang Affiliatesbetween January 2003 and the Petition Date.Moreover, the focus on the aggregate "net" amount oftransfers implies that some were repaid, undercutting theplaintiff's apparent theory that all of the Pre-Petition Bankloans were fraudulently reconveyed to the Fortgang Affiliates.(See 32)("Fabrikant funded the transfers to theFortgang Affiliates through these obligations that it in-from the Pre-Petition curred Banks.")FN9. There are two debtors in the case, but theAmended Complaint frequently lumps them together.FN10. The Fortgang Affiliates include 47 separateentities. The Amended Complaint lumpsthem together, without distinction, in Counts Ithrough IV.The allegations regarding the single SPM transfer arefree of most of these pleading deficiencies, but not all ofthem. MFS purchased $32 million of gold from SPM onJuly 7, 2006, and both debtors were liable for the purchaseprice. ( 37.) Some $22 million worth of the goldpurchased had already been delivered to the FortgangAffiliates. ( 38.) The Amended Complaint neverthelessfails to identify which Fortgang Affiliates were the transfereesor the dates of the transfers. [FN11] Hence, theclaim against SPM also fails to satisfy Rule 9(b). In lightof this conclusion, it is unnecessary to reach the otherarguments raised by the defendants in support of theirmotions to dismiss this element of the plaintiff's collapsingclaim. [FN12]FN11. According to the Amended Complaint,the SPM merchandise was delivered to the FortgangAffiliates prior to the actual sale, and presumablyon consignment.FN12. The Court nevertheless rejects the argument,made at some length by certain defendants,that the plaintiff's claim is really one for aidingand abetting a breach of fiduciary duty which theplaintiff has failed to plead adequately, and inany event, lacks standing to assert. The plaintiffis not asserting any such claim.b. Constructive Fraud[10][11][12][13] The plaintiff may also satisfy its pleadingburden by alleging that the reconveyance of the loanproceeds and gold was constructively fraudulent understate or federal bankruptcy law. Under the New YorkDebtor & Creditor Law ("NYDCL"), which the partiescite, a person challenging a transfer of the debtor's propertyas constructively fraudulent must show that it wasmade without fair consideration and (1) the debtor wasinsolvent or was rendered insolvent by the transfer,NYDCL § 273, (2) the debtor was left with unreasonablysmall capital, id., § 274, [FN13] or (3) the debtor intendedor believed that it would incur debts beyond itsability to pay when the debts matured. Id., § 275. SharpInt'l, 403 F.3d at 53. Under NYDCL § 272,FN13. By its terms, § 274 ("unreasonably smallcapital") applies to conveyances but not obligations,and cannot be relied on to invalidate thedebtors' loan debt or guaranties to the Pre-Petition Banks. See Silverman v. Paul's Land-© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

394 B.R. 721 Page 13394 B.R. 721, 50 Bankr.Ct.Dec. 192(Cite as: 394 B.R. 721)mark, Inc. (In re Nirvana Rest. Inc.), 337 B.R.495, 508 (Bankr.S.D.N.Y.2006). Furthermore,the delivery of collateral to secure a nonavoidabledebt or obligation constitutes a transfersupported by "fair consideration" that cannot beset aside under the NYDCL. See id. at 502.*735 Fair consideration is given for property, or obligation,a. When in exchange for such property, or obligation, asa fair equivalent therefor, and in good faith, property isconveyed or an antecedent debt is satisfied, [FN14] orFN14. The "good faith" aspect of "fair consideration"is an "elusive concept" that "is hard to locate... in a statute in which the issue of intent isirrelevant." Sharp Int'l, 403 F.3d at 54 (internalquotation marks and citation omitted). Here, theAmended Complaint essentially alleges thatCharles and Matthew Fortgang siphoned moneyand property from the debtors, who they controlled,and transferred the siphoned assets to theFortgang Affiliates, who they also controlled.Lack of good faith would presumably existwhere the transferors and transferees are affiliatesengaged in the sort of scheme alleged in theAmended Complaint. The Amended Complaintalso alleges that MFS was using some of the Pre-Petition Bank debt to repay debts owed to theFortgang Affiliates while its own financial conditionwas deteriorating. ( 41.) Insider preferencesby an insolvent transferor, even whenmade to satisfy valid debts, lack good faith. SeeSharp Int'l, 403 F.3d at 54.b. When such property, or obligation is received ingood faith to secure a present advance or antecedentdebt in amount not disproportionately small as comparedwith the value of the property, or obligation obtained.The bankruptcy law contains similar provisions. Under §548(a)(1)(B), the trustee must demonstrate that within twoyears of the petition date, (1) the debtor transferred aninterest in property; (2) the debtor was (a) insolvent at thetime of the transfer or became insolvent as a result of thetransfer, (b) was engaged in business or was about to engagein business for which the debtor's remaining propertywas an unreasonably small capital, or (c) intended toincur or believed that it would incur debts beyond its abilityto pay as they matured, and (3) the debtor received lessthan a reasonably equivalent value in exchange for suchtransfer. "Good faith" is not an element of the plaintiff'sproof of "reasonably equivalent value" under the BankruptcyCode and the Uniform Fraudulent Transfer Act,see Unif. Fraudulent Transfer Act, § 4 cmt. 2 (2006); instead,good faith is an affirmative defense that the transfereemay raise but the plaintiff need not plead. Silvermanv. Actrade Capital, Inc. (In re Actrade Fin. Techs. Ltd.),337 B.R. 791, 802 (Bankr.S.D.N.Y.2005).[14][15] Rule 9(b) does not apply to claims sounding inconstructive fraudulent transfer, Id. at 801 (collectingcases), and allegations of a constructive fraudulent transferare subject to less rigorous pleading requirements. Theplaintiff need not provide specific facts to support its allegations,see Erickson v. Pardus, --- U.S. ----, 127 S.Ct.2197, 2200, 167 L.Ed.2d 1081 (2007), and Rule 8(a) onlyrequires that the allegations "give the defendant fair noticeof what the plaintiff's claim is and the grounds uponwhich it rests." Swierkiewicz v. Sorema N.A., 534 U.S.506, 512, 122 S.Ct. 992, 152 L.Ed.2d 1 (2002)(quotingConley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 2 L.Ed.2d80 (1957)). As a result, some of the same courts that rejectedthe non-particularized allegations of intentionalfraudulent transfers upheld the sufficiency of the constructivefraudulent transfer claims based on the sameallegations. E.g., Fed. Nat'l Mortgage Ass'n, 2006 WL2802092, at *9 (allegations that aggregated and lumped aseries of transfers made over a three to five year periodand failed to identify the number of transfers, the specificdates of the transfers or the amounts of the transfers "aresufficient to satisfy the notice pleading standard of Rule 8,but, [with one exception], not the heightened pleadingstandard of Rule 9(b)."); *736Gindi, 1995 WL 347397, at*5-6 (allegations that the debtor made or incurred a nonparticularizedseries of transfers and obligations weresufficient to survive a motion to dismiss under Rule12(b)(6) but insufficient under Rule 9(b)); see Court-Appointed Receiver for Lancer Mgmt. Group LLC v.169838 Canada, Inc., No. 05-60235-CIV. (KAM), 2008WL 2262063, at *3 (S.D.Fla. May 30, 2008)(Rule 8(a)does not require the pleader to "allege the particular transferswhich each of the [defendants] received," or the capacityin which the defendants received them); Sullivan,373 F.Supp.2d at 307-08 (denying motion to dismiss constructivefraudulent transfer claims challenging nonparticularizedtransfers made to a family trust betweenlate 1997 and June 2000).Here, the Amended Complaint alleges that the debtorstransferred over $175 million to the Fortgang Affiliates© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

394 B.R. 721 Page 14394 B.R. 721, 50 Bankr.Ct.Dec. 192(Cite as: 394 B.R. 721)during a period lasting nearly four years. The AmendedComplaint also includes the general allegations of insolvency(as well as the other financial tests), which are sufficientunder Federal Civil Rule 8. See Danning v. Lavine,572 F.2d 1386, 1388-89 (9th Cir.1978) (Kennedy, J.);Pereira v. Cogan, No. 00 Civ. 619(RWS), 2001 WL243537, at *8 (S.D.N.Y. Mar.8, 2001). Finally, theAmended Complaint alleges that debtors did not receivereasonably equivalent value or fair consideration from theFortgang Affiliates. The allegation is based on the contentionthat loan receivables generated by certain of the AffiliateTransfers, exceeding $50 million, could not havebeen repaid, and degraded over time. ( 25.) In addition,the JPMC Report, [FN15] discussed in more detail below,excluded all affiliate receivables in calculating MFS' bor-base. According to the plaintiff, this implied thatrowingthey "could not be valued at face." ( 43.)FN15. The JPMC Report is attached as ExhibitA to the Reply Declaration of Steven J. Mandelsbergin Further Support of Defendants' Motionsto Dismiss Complaint, dated March 4,2008, ("JPMC Report ") (ECF Doc. # 49).The factual allegations in the Amended Complaint providethe Pre-Petition Banks and SPM with clear notice ofwhat the plaintiff intends to prove on the first prong; thedebtors reconveyed the Pre-Petition Bank loans and SPMgold to the Fortgang Affiliates in exchange for worthlessor near-worthless receivables at a time when they were orbecame insolvent or unable to continue their businesses. Icannot conclude that the constructive fraudulent transferclaims are implausible, as pleaded, or that the plaintiffshould be foreclosed from offering evidence that thedebtors failed to receive reasonably equivalent value orfair consideration. Accordingly, the Amended Complaintsufficiently alleges that the debtors received transfersfrom the Pre-Petition Banks and SPM, or incurred obligationsbased on those transfers, and reconveyed the transferredproperty to the Fortgang Affiliates at a time whenthe debtors were or became insolvent (or met one of theother financial tests) for less than reasonably equivalentvalue or fair consideration.2. The Second Prong[16] The plaintiff must also plead that the defendants(other than Sovereign Bank) had actual or constructiveknowledge of the debtors' scheme to make the constructivefraudulent transfers to the Fortgang Affiliates. AlthoughRule 9(b) allows the pleader to allege knowledgegenerally, conclusory statements are insufficient. Instead,the complaint must allege some specific facts that supportan inference of knowledge. Devaney v. Chester, 813 F.2d566, 568-69 (2d Cir.1987); *737Elemary v. Holzmann,A.G., 533 F.Supp.2d 116, 132 (D.D.C.2008); seeSunbeam, 284 B.R. at 372-73. Thus, while conclusoryallegations of insolvency or inadequate consideration maysuffice for the purpose of alleging the elements of a constructivefraudulent transfer claim (under the first prong),they are not sufficient to support an allegation that thePre-Petition Banks and SPM knew that the transfers werefraudulent. Instead, the plaintiff must plead the minimalfacts necessary to present a plausible claim that the Pre-Banks and SPM knew or should have known ofPetitionthe Fortgangs' scheme.According to the plaintiff, the defendants (other thanSovereign Bank) had knowledge as early as January 2003,of "the existence of the Fortgang Affiliates, of the factthat the Fortgang Affiliates were not owned by MFS, ofMFS's practice of funding those Fortgang Affiliates, ofthe fact that a substantial portion, if not virtually all, ofthe funding the Pre-Petition Banks would advance to MFSin the future would be transferred to Fortgang Affiliatesand of MFS's deteriorating financial condition from January2001 to the Petition Date." ( 42; see also OppositionMemo at 42.) The defendants (other than Sovereign Bank)also "had knowledge that any consideration MFS wouldreceive from the Fortgang Affiliates would be of little orno value to MFS." ( 43.)The principal factual support for the allegations regardingknowledge comes from the JPMC Report. In 2002, JPMCcommissioned the report to assist it in deciding whether toextend an unsecured credit facility to MFS in the sum of$51,500,000. (JPMC Report at 1577.) [FN16] The JPMCReport indicated that MFS conducted an ongoing jewelrybusiness, at least prior to October 2002, which includedsignificant business transactions with the Fortgang Affiliates.MFS primarily purchased its inventory overseas,typically from affiliates, [FN17] (Id. at 1579, 1592), butsubstantial credits traveled in both directions. As of October31, 2002, MFS owed accounts payable in the sum of$130,383,947 to the affiliates, and the affiliates owedMFS accounts receivable of $67,971,893, i.e., MFS owedthe affiliates the net amount of $62,412,054. (Id. at 1669.)In addition, the affiliates owed MFS $50,059,335 on accountof intercompany loans, and MFS owed its affiliates$ 18,868,370, also on account of intercompany loans. (Id.at 1672.)© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

394 B.R. 721 Page 15394 B.R. 721, 50 Bankr.Ct.Dec. 192(Cite as: 394 B.R. 721)FN16. The citation to page numbers in the JPMCReport refers to the Bates-stamped page numbers.Each page is stamped with a consecutive,five digit number that begins with "0." The initial"0" has been omitted from the citation.FN17. There is a near complete overlap betweenthe MFS affiliates referred to in the JPMC Report,(see JPMC Report at 1644, 1669), and theFortgang Affiliates listed on Exhibit A to theAmended Complaint.As noted, the affiliate receivables were ignored for thepurpose of computing the borrowing base. The JPMCReport showed that MFS still had $159,320,457 in eligiblereceivables, $152 million in bank debt, and over$7,320,457 in excess availability. (Id. at 1628.) Furthermore,this did not take into account MFS' total inventoryof $203,483,000. (Id.) In short, the JPMC Report revealedan entity with plenty of unencumbered liquid assets.Consequently, the JPMC Report did not provide theminimal factual basis to support a plausible argument thatthe Pre-Petition Banks and SPM knew or should haveknown of the Fortgangs' alleged scheme to make constructivefraudulent transfers to the Fortgang Affiliates.First, the Amended Complaint alleges, partly on informationand belief, that the Pre-Petition *738 Banks receivedthe report, ( 43), but does not allege that SPM ever sawit.[17] Second, it does not support the conclusory statementthat the Pre-Petition Banks knew that MFS did not "own"the Fortgang Affiliates. To the contrary, the JPMC Reportreferred to them as "affiliates," suggesting the oppositeconclusion. Furthermore, transfers to third parties, particularlyaffiliates, are supported by fair considerationwhen the debtor benefits indirectly. Indirect benefits mayinclude synergy, increased access to capital, safeguardinga source of supply and protecting customer relationships.Leibowitz v. Parkway Bank Trust Co. (In re ImageWorldwide, Ltd.), 139 F.3d 574, 578-79 (7th Cir.1998);Nirvana Rest., 337 B.R. at 502.The JPMC Report indicated, in this regard, that MFS andthe affiliates made intercompany transfers in furtheranceof their respective businesses, and depended on each otherto conduct their respective businesses. MFS depended onthe Fortgang Affiliates to provide most of its inventory,and relied on their credit to obtain it--MFS owed far moreto the Fortgang Affiliates than they owed to MFS. If anything,the JPMC Report implied that MFS used the Pre-Petition Bank loans to fund legitimate business transactionswith the Fortgang Affiliates. Although the JPMCReport also showed net loans to affiliates aggregatingover $30 million, the purchase and sale transactions, andthe corresponding accounts payable and receivable,dwarfed the amount of the loans. Under the circumstances,knowledge that affiliated entities engaged in thesame business and bought and sold each other's productsundercuts an inference of knowledge, actual or constructive,that the transfers between them were part of afraudulent scheme.Third, the JPMC Report does not support the allegationthat the Pre-Petition Banks knew or should have knownthat MFS' financial condition was deteriorating, or moreto the point, that the transfers to the Fortgang Affiliatesrendered MFS insolvent or unable to continue in business.MFS had substantial liquid assets, in the form of receivablesand inventory, which exceeded its bank debt by asignificant margin. MFS continued to operate for anotherfour years before filing a chapter 11 petition. Most significantly,the Pre-Petition Banks continued to make unsecuredloans to MFS for approximately two years afterthey allegedly saw the JPMC Report. [FN18] Their lendingactivities were inconsistent with the actual or constructiveknowledge that the Fortgangs were siphoningMFS' assets and transferring them to the Fortgang Affili-for no consideration, and rendering the debtors insol-atesvent or unable to continue in business in the process.FN18. The Amended Complaint alleges that thePre-Petition Banks secured their loans in October2004. While this may support an inference thatthey perceived an increased risk of collection, itdoes not support an inference that they knew orshould have known that MFS was insolvent oron the verge of becoming insolvent--the Pre-Petition Banks continued to make loans. Furthermore,the Amended Complaint does not provideany facts relating to MFS' financial conditionin October 2004, or the Pre-Petition Banks'knowledge of that condition.Apparently sensing some skepticism on the reader's partthat the Pre-Petition Banks would knowingly making uncollectibleloans, the Amended Complaint offered a varietyof reasons why the Pre-Petition Banks made the loansanyway. According to 45, they did so out of a "desire tobe recognized as the premier lenders to the internationaljewelry and diamond industry," "*739 their belief that it© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

394 B.R. 721 Page 16394 B.R. 721, 50 Bankr.Ct.Dec. 192(Cite as: 394 B.R. 721)was not possible to maintain their reputation as leadinglenders to that industry unless they were lenders to MFS"and because "Charles and Matthew Fortgang would notallow MFS to do business with them if they attempted torestrict transfers to Fortgang Affiliates." Furthermore,they believed that they were protected from the adverseconsequences of the risky loans through "the personalguaranties of Matthew and Charles Fortgang and, subsequently,by obtaining liens on all of the assets of MFS andFLI." Five of the Pre-Petition Banks were also creditorsof the Fortgang Affiliates, and, benefited directly from theAffiliate Transfers.These allegations amount to no more than an effort tobolster an implausible theory with rank speculation. Nofacts are offered to support the inference that any particularPre-Petition Bank was so concerned about its lenderreputation in the jewelry business, or what the Fortgangsthought about it, that it would make the types of loansnecessary to fund the scheme alleged in the AmendedComplaint. Furthermore, the Amended Complaint doesnot plead any facts to support the contention that the Pre-Petition Banks were willing to make risky loans based onthe Fortgangs' guarantees or liens on unidentified assets.Indeed, if the Fortgang Affiliate receivables were trulyworthless, this would imply that the Fortgang Affiliateswere insolvent, and could not pay their debts. In thatevent, the Fortgangs' equity in the insolvent Fortgang Affiliateswould be worthless, and their ability to honor theirguarantees would be more doubtful. Finally, the fact thatfive unidentified Pre-Petition Banks were also creditors ofthe Fortgang Affiliates and benefited from the AffiliateTransfers implies that these banks made new loans simplyto repay the old loans.In conclusion, the Amended Complaint does not set fortha plausible claim that the Pre-Petition Banks or SPMknew or should have known that the debtors were engagedin a multi-year scheme to make constructivefraudulent transfers of the Pre-Petition Bank loans and theSPM gold to the Fortgang Affiliates. Accordingly, thecorresponding obligations to the Pre-Petition Banks arenot avoidable, FLI's guarantee of those obligations is notvoidable, and Counts I through III must be dismissed.[FN19] In addition, since the obligations are not avoidable,the liens given to secure the obligations are sup-by antecedent debts, and cannot be avoided. Con-portedsequently, Count IV must also be dismissed.FN19. The Amended Complaint does not supplyany information about the FLI obligations thatMFS guaranteed. Hence, it does not state a claimthat the FLI independent obligations werefraudulent, or that MFS' guarantee of those obli-gations was fraudulent.B. Counts V through VII1. The Sufficiency of the AllegationsThe last three Counts do not depend on the collapsingdoctrine, or, at least in the first instance, the defendantbanks' knowledge. Counts V and VI allege that betweenJanuary 2006 and the Petition Date, the debtors transferredthe aggregate amount of $38,890,000 to four specificFortgang Affiliates: Alpha Diamond, Diamfab,Fabrikant Trading India and Fabrikant HK. During thesame period, the four Fortgang Affiliates transferred$14,025,784 to HSBC, $8,364,295 to ABN and$5,946,592 to IDB. In addition, between January 2005and the Petition Date, the debtors transferred $10,535,000to VSI, another Fortgang Affiliate, and during the sametime span, VSI transferred $9,882,351 to Sovereign Bankin satisfaction *740 of its own debt. The Fortgang Affiliatesmade the second set of transfers to pay down theirown obligations to the transferee defendant banks. Theplaintiff contends that the first set of transfers, from thedebtors to the Fortgang Affiliates, were actually or constructivelyfraudulent. It seeks to avoid these first transfers,and in Count VII, recover the value of the transfersfrom the subsequent transferees, HSBC, ABN, IDB andSovereign Bank (collectively, the "Defendant Banks").[FN 20]FN20. Under 11 U.S.C. § 550(b)(1), the trusteecannot recover from a subsequent transferee whotook the transfer for value, in good faith andwithout knowledge of the avoidability of the initialtransfer. These are affirmative defenses thatthe transferee defendant must plead and prove.Cassirer v. Sterling Nat'l Bank & Trust Co. ofN.Y. (In re Schick), 223 B.R. 661, 664-65(Bankr.S.D.N.Y.1998).The initial transfers appear to be a subset of the transfersthat were indirectly challenged in Counts I through III. Inany case, the allegations relating to the intentional fraudulenttransfer claims are insufficient for the reasons stated,plus a few more. The Amended Complaint fails to identifythe date or amount of each transfer. Instead, it aggregatesan indefinite number of transfers made during a 2-3year period. Furthermore, except in the case of VSI, the© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

394 B.R. 721 Page 17394 B.R. 721, 50 Bankr.Ct.Dec. 192(Cite as: 394 B.R. 721)Amended Complaint does not identify which FortgangAffiliate received a particular transfer. Instead, it lumpsthe transfers and the transferees together.The pleading is similarly vague in alleging the second setof transfers to the Defendant Banks. The Amended Complaintdoes not specify the dates or amounts of the transfers.Except for VSI, it also fails to identify which of theother four Fortgang Affiliates made a particular transfer,and who among the Defendant Banks received that transfer.Instead, it lumps the transfers, the transferors andtransferees together. Accordingly, claims that the initialtransfers were made with actual fraudulent intent fail, andthe plaintiff cannot recover those transfers from a subse-quent transferee.Conversely, the allegations regarding constructivefraudulent transfers are sufficient, again for the reasonsstated. The Court has already addressed the allegations ofconstructive fraudulent transfers from the debtors to theFortgang Affiliates. These are sufficient to state a claimfor avoidance. The Amended Complaint also alleges thatthe four Fortgang Affiliates retransferred the initial transfersto the four Defendant Banks. The allegations providethe Defendant Banks with notice of the plaintiff's claims,and permit them to defend the action. Accordingly, theclaims to recover the constructive fraudulent transfersfrom the Defendant Banks, as subsequent transferees, arelegally sufficient.2. The Failure to Join The Fortgang AffiliatesAlthough Counts V through VII seek to avoid the transfersby the debtors to the five Fortgang Affiliates, theplaintiff did not join these or any Fortgang Affiliates asdefendants. The Court raised the question and invitedbriefing on whether the § 550(a) action could proceed intheir absence. This is a variation of a frequently asked andoften debated point: can a trustee recover under § 550(a)from a subsequent transferee without first avoiding thetransfer in a suit against the initial transferee. I concludethat under the circumstances alleged in the AmendedComplaint, the plaintiff can bypass the Fortgang Affiliatesand proceed directly against the Defendant Banks.*741 a. The Bankruptcy Code[18][19] The Bankruptcy Code separates the concepts ofavoidance and recovery. Levit v. Ingersoll Rand Fin.Corp. (In re VN Deprizio Constr. Co.), 874 F.2d 1186,1196 (7th Cir.1989); Savage & Assocs., P.C. v. BLRServs. SAS (In re Teligent, Inc.), 307 B.R. 744, 749(Bankr.S.D.N.Y.2004); HR Rep No. 95-595 at 375(1977), U.S.Code Cong. & Admin.News, 1977 pp. 5963,6331 ("[S]ection 550 prescribes the liability of a transfereeof an avoided transfer, and enunciates the separationbetween the concepts of avoiding a transfer and recoveringfrom the transferee."); S Rep No. 95-989 at 90(1978)(same). Several sections permit a trustee to avoid atransfer on the ground that it is fraudulent. See, e.g., 11U.S.C. §§ 544(b), 548. Sometimes, this is all the relief thetrustee needs. For example, if a trustee challenges thegranting of a mortgage, and the court avoids the mortgageas a fraudulent transfer, the declaration of voidness endsthe litigation--the trustee does not need to "recover" themortgage.More often, however, the trustee will seek affirmativerecovery beyond a judicial declaration of voidness. Forexample, if the debtor fraudulently transferred a piece ofpersonal property, the trustee will seek to avoid the transferand recover the personal property or its value. Similarly,if the debtor fraudulently transferred cash and thetrustee avoids the transfer, he will want to recover thesame amount of cash.Section 550 deals with the situations involving affirma-recovery. Section 550(a) states:tiveExcept as otherwise provided in this section, to the extentthat a transfer is avoided under section 544, 545,547, 548, 549, 553(b), or 724(a) of this title, the trusteemay recover, for the benefit of the estate, the propertytransferred, or, if the court so orders, the value of suchproperty, from ... the initial transferee of such transferor the entity for whose benefit such transfer was made;or any immediate or mediate transferee of such initialtransferee.(emphasis added). As noted, the debate generated by theemphasized language is whether the trustee must firstavoid a transfer as between the initial transferor and trans-before he can recover from the subsequent trans-feree,feree.[20] The starting point for the construction of any statuteis the plain language of the statute itself. United States v.Ron Pair Enters., 489 U.S. 235, 242, 109 S.Ct. 1026, 103L.Ed.2d 290 (1989)("The plain meaning of legislationshould be conclusive, except in the 'rare cases [in which]the literal application of a statute will produce a resultdemonstrably at odds with the intentions of its drafters.'")(internal citation omitted). The meaning of "to the extentavoided" is apparent. "Avoid" is a verb that means"[t]o render void, BLACK'S LAW DICTIONARY 146© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

394 B.R. 721 Page 18394 B.R. 721, 50 Bankr.Ct.Dec. 192(Cite as: 394 B.R. 721)(8th ed. 2004)("BLACK"), or "to annul, vacate, defeat,evade, invalidate." WEBSTER'S THIRD NEW INTER-NATIONAL DICTIONARY (UNABRIDGED) 151(1981). It is not synonymous with "avoidable." Avoidable,or "voidable," is an adjective. It describes a transactionthat can be voided, id. at 2562, but that is "[v]aliduntil annulled." BLACK 1605. In other words, a transfermust be avoidable in order to be avoided, but until it isavoided, it is as valid as an unavoidable transfer.A significant number of cases have read § 550 to requirethat the plaintiff must first (or simultaneously) bring asuccessful suit against the initial transferee before he canrecover the transfer or its value from *742 the subsequenttransferee. [FN21] E.g., Weinman v. Simons (In re Slack-Horner Foundries Co.), 971 F.2d 577, 580 (10thCir.1992)("[I]n order to recover from a subsequent transfereethe trustee must first have the transfer of the debtor'sinterest to the initial transferee avoided under § 548");Allou Distribs., 379 B.R. at 19 ("Thus, before the Trusteemay obtain an actual recovery from the Movants under §550(a), he must first avoid the underlying initial transfers.");Geltzer v. Fur Warehouse, Ltd. (In re Furs by Albert& Marc Kaufman, Inc.), Adv. Proc. No. 05-1838,2006 WL 3735621, at * 8 (Bankr.S.D.N.Y. Dec.14,2006)(noting that an "essential element" of a trustee'srecovery under § 550(a) was his avoidance of the initialtransfer); Williams v. Mortillaro (In re Res., RecyclingRemediation, Inc.), 314 B.R. 62, 69(Bankr.W.D.Pa.2004)("Section 550(a) is a recovery provisionand gives rise to a secondary cause of action whichapplies after the trustee has prevailed under one (or more)of the avoidance provisions found in the BankruptcyCode."); Yoppolo v. Liberty Mortgage (In re Morgan),276 B.R. 785, 789 (Bankr.N.D.Ohio 2001)(the statutorylanguage of § 550 and its legislative history leads to theconclusion that a trustee must first avoid an underlyingtransfer before recovery); Greenwald v. Latham Watkins(In re Trans-End Tech., Inc.), 230 B.R. 101, 104-05(Bankr.N.D.Ohio 1998)(under the plain and unambiguouslanguage of § 550(a), a prerequisite to recovery from anytransferee is that the initial transfer first be avoided ratherthan merely proven to be avoidable); Brandt v. Hicks,Muse Co., Inc. (In re Healthco Intl., Inc.), 195 B.R. 971,981-82 (Bankr.D.Mass.1996)("If the initial transfereemakes a second transfer, the property may be recoveredfrom the later transferee only if the transfer is avoidedwith respect to the initial transferee."); Santee v. Nw. NatlBank (In re Mako, Inc.), 127 B.R. 471, 473(Bankr.E.D.Okla.1991)(a cause of action under § 550(a)may be brought only after a trustee prevails pursuant tothe transfer avoidance sections of the Code).FN21. Enron Corp. v. Intl Fin. Corp. (In re EnronCorp.), 343 B.R. 75 (Bankr.S.D.N.Y.2006),which is frequently cited in support of thisproposition, has been reversed. See Order Reversingand Remanding Judgment of the BankruptcyCourt, dated Apr. 16, 2008, Adv. Proc.No. 03-93370 (ECF Doc. # 167).An equally significant number of cases have reached theopposite result, concluding that the trustee can sue thesubsequent transferee in the first instance, and need proveonly that the initial transfer was avoidable. E.g., IBT Int'l,Inc. v. Northern (In re Int'l Admin. Servs., Inc.), 408 F.3d689, 706 (11th Cir.2005)("[O]nce the plaintiff proves thatan avoidable transfer exists he can then skip over the initialtransferee and recover from those next in line.");Kendall v. Sorani (In re Richmond Produce Co., Inc.),195 B.R. 455, 463 (N.D.Cal.1996)("[O]nce the trusteeproves that a transfer is avoidable under section 548, hemay seek to recover against any transferee, initial or immediate,or an entity for whose benefit the transfer ismade."); Brown v. Phillips (In re Phillips), 379 B.R. 765,780 (Bankr.N.D.Ill.2007)("A court must first make a determinationwhether the transfer was fraudulent underapplicable state law and, therefore, avoidable under §544(b) before that transfer can be recovered pursuant to §550(a)."); Official Comm. of Unsecured Creditors v. Foss(In re Felt Mfg. Co., Inc.), 371 B.R. 589, 638(Bankr.D.N.H.2007)(In a recovery action under § 550, itis "sufficient if the complaint asserts that there are avoidabletransfers under state or federal law....");*743Leonard v. Optimal Payments Ltd. (In re Nat'l AuditDef. Network), 332 B.R. 896, 915(Bankr.D.Nev.2005)(adopting the holding ofInternational Administrative Services ); Crafts Plus+, Inc.v. Foothill Capital Corp. (In re Crafts Plus+, Inc.), 220B.R. 331, 338 (Bankr.W.D.Tex.1998)("Once it has beenestablished that a qualified transfer has been made, § 550provides for recovery against either the initial transferee... or 'the entity for whose benefit such transfer was made.'"); see Woods & Erickson, LLP v. Leonard (In re AVI,Inc.), 389 B.R. 721, 735 (9th Cir. BAP 2008)("[W]e holdthat a trustee is not required to avoid the initial transferfrom the initial transferee before seeking recovery fromsubsequent transferees under § 550(a)(2)."). In RichmondProduce, District Judge Schwarzer explained that § 550does not contain language suggesting that recovery from asubsequent transferee is dependent on a prior action orrecovery against the initial transferee. The introductory"to the extent that" language in § 550(a) recognizes that© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

394 B.R. 721 Page 19394 B.R. 721, 50 Bankr.Ct.Dec. 192(Cite as: 394 B.R. 721)transfers are sometimes avoided only in part, and only theavoidable part is recoverable. 195 B.R. at 463; accordInt'l Admin. Servs., Inc., 408 F.3d at 706. InternationalAdministrative Services also expressed the concern that aninitial transferee could escape liability by retransferringthe property. 408 F.3d at 704.Although § 550 plainly limits recovery to the extent thatthe transfer is actually avoided, it does not follow that the"avoidable" courts reached the wrong result. The casesthat read "to the extent avoided" literally assume that theinitial transferee must be a party to the avoidance action.See Shapiro v. Art Leather, Inc. (In re Connolly N. Am.,LLC), 340 B.R. 829, 839 (Bankr.E.D.Mich.2006). Thedecisions on both sides of the issue have focused on thelanguage of the Bankruptcy Code because the parties directedtheir attention to that provision. However, theBankruptcy Code, and specifically §§ 544(b) and 548,does not identify the proper, necessary or indispensableparties to a fraudulent transfer action, and does not statethat the initial transferee is necessary. Instead, we mustlook to the Federal Rules of Civil Procedure.3. Fed.R.Civ.P. 19[21][22] Federal Civil Rule 19, made applicable to thisadversary proceeding by Federal Bankruptcy Rule 7019,governs the required joinder of parties. [FN22] The *744Rule establishes a three-part test to determine whetherjoinder of a party is required: (1) is the absent party a"necessary" party, 4 JAMES WM. MOORE, MOORE'SFEDERAL PRACTICE § 19.02[3][a], at 19-17 (3d ed.2008)("MOORE"); (2) is the absent party's joinder "feasible,"id. § 19.02 [3][b], at 19-17 to -18, and (3) if joinderis not feasible, should the court, in "equity and good conscience,"dismiss the action because the nonparty is "indispensable"under Rule 19(b)? Id. § 19.02[3][c], at 19-19; see Provident Tradesmens Bank & Trust Co. v. Patterson,390 U.S. 102, 124, 88 S.Ct. 733, 19 L.Ed.2d 936(1968); Viacom Int'l, Inc. v. Kearney, 212 F.3d 721, 725(2d Cir.2000); Associated Dry Goods Corp. v. TowersFin. Corp., 920 F.2d 1121, 1123 (2d Cir.1990).(B) that person claims an interest relating to thesubject of the action and is so situated that disposingof the action in the person's absence may:(i) as a practical matter impair or impede the person'sability to protect the interest; or(ii) leave an existing party subject to a substantialrisk of incurring double, multiple, or otherinconsistentobligations because of the in-wiseterest.....(b) WHEN JOINDER IS NOT FEASIBLE. Ifa person who is required to be joined if feasiblecannot be joined, the court must determinewhether, in equity and good conscience, the actionshould proceed among the existing parties orshould be dismissed. The factors for the court toconsider include:(1) the extent to which a judgment rendered inthe person's absence might prejudice that personor the existing parties;(2) the extent to which any prejudice could belessened or avoided by: (A) protective provisionsin the judgment;(B) shaping the relief; or(C) other measures;(3) whether a judgment rendered in the person'sabsence would be adequate; and(4) whether the plaintiff would have an adequateremedy if the action were dismissed for nonjoin-der.FN22. Rule 19 provides:(a) PERSONS REQUIRED TO BE JOINEDIF FEASIBLE. (1) Required Party. A personwho is subject to service of process and whosejoinder will not deprive the court of subject matterjurisdiction must be joined as a party if:(A) in that person's absence, the court cannot accordcomplete relief among existing parties; or[23] The Fortgang Affiliates are not necessary partiesunder Rule 19(a)(1)(A). "A Rule 19(a)(1) inquiry is limitedto whether the district court can grant complete reliefto the persons already parties to the action. The effect adecision may have on the absent party is not material."Janney Montgomery Scott, Inc. v. Shepard Niles, Inc., 11F.3d 399, 405 (3d Cir.1993); accord Arkwright-BostonMfrs. Mut. Ins. Co. v. City of New York, 762 F.2d 205,209 (2d Cir.1985); Drankwater v. Miller, 830 F.Supp.188, 192 (S.D.N.Y.1993). Here, the plaintiff can obtaincomplete relief by recovering a money judgment againstthe Defendant Banks without regard to the Fortgang Affiliates.[24] In addition, Rule 19(a)(1)(B) does not require theFortgang Affiliates' joinder. Rule 19(a)(1)(B)(i) focuseson the prejudice to the absent party if the litigation proceedsin its absence. The absentee must "claim a legallyprotected interest relating to the subject matter of the action,"Northrop Corp. v. McDonnell Douglas Corp., 705© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

394 B.R. 721 Page 20394 B.R. 721, 50 Bankr.Ct.Dec. 192(Cite as: 394 B.R. 721)F.2d 1030, 1043 (9th Cir.1983), and the impact of anyadjudication must be "direct and immediate." JanneyMontgomery Scott, 11 F.3d at 407. "[I]f the outcome ofthe litigation will have no practical effect on the absentee'sinterest, the absentee is not a necessary party." 4MOORE § 19.03[3][b], at 19-49. The mere possibility ofcollateral estoppel is not enough; "[r]ather, it must beshown that some outcome of the federal case that is reasonablylikely can preclude the absent party with respectto an issue material to the absent party's rights or dutiesunder standard principles governing the effect of priorjudgments." Janney Montgomery Scott, 11 F.3d at 409.[25][26] A transferee that retains title to or an interest inthe property conveyed is a necessary party to the fraudulenttransfer action, Valvanis v. Milgroom, 529 F.Supp.2d1190, 1199-1200 (D.Haw.2007); Nastro v. D'Onofrio,263 F.Supp.2d 446, 450 (D.Conn.2003); Tanaka v. Nagata,76 Hawai'i 32, 868 P.2d 450, 454 (1994), becausethe fraudulent transfer action will affect the transferee'stitle or interest. See Tanaka, 868 P.2d at 455 ("Fundamentalprinciples of due process require that transferees whoclaim an interest in real property or its proceeds have afull and fair opportunity to contest claims of fraudulenttransfer."). Conversely, an earlier transferee who hasparted with all interest in the transferred property is notnecessary in a suit against a subsequent transferee.Tsiatsios v. Tsiatsios, 144 N.H. 438, 744 A.2d 75, 80(1999)("[W]e agree with the majority of jurisdictions thathave held that a transferor who has parted with all interestin the property can no longer *745 be affected by anydecree pertaining to the property, and that therefore thetransferor is not a necessary party to a fraudulent transferaction."); 37 AM.JUR. 2d, Fraudulent Conveyances andTransfers § 188 (Westlaw Database updated Sept.2008)("A grantee who has parted with possession of theproperty is a necessary party in some jurisdictions, but itis more frequently the case that he no longer has any interestin the subject matter and therefore is not a necessaryparty.")(footnotes omitted); 37 C.J.S., Fraudulent Conveyances§ 254 (Westlaw Database updated June2008)("As a general rule, an intermediate grantee throughwhom the title to the property passes from the debtor tothe ultimate grantee, and whose title and interest in theproperty has been divested, is not a necessary, althoughhe or she may be a proper, party ...."); see generally W.J.Dunn, Necessary Parties Defendant To Action To SetAside Conveyance In Fraud Of Creditors, 24 A.L.R.2d395, 1952 WL 7788 (1952).The Defendant Banks do not contend that Alpha Diamond,Diamfab, Fabrikant Trading India, Fabrikant HKor VSI retained an interest in the funds they transferred tothe Defendant Banks. Instead, they contend that certainFortgang Affiliates, who they do not identify, filed claimsin these cases. The Defendant Banks then state, withoutcitation to legal authority, that "[i]f the transfers in ClaimsFive through Seven are avoided, any claims against thedebtor-transferors held by Fortgang Affiliates that aretransferees of those transfers would be subject to disallowanceunder Bankruptcy Code § 502(d)." (MemorandumOf Law Of HSBC Bank USA, National Association,ABN Amro Bank N.V., Israel Discount Bank Of New York,And Sovereign Precious Metals, LLC In Further SupportOf Motion To Dismiss Complaint, dated Mar. 21, 2008, at6) (ECF Doc. # 50).The Defendant Banks failed to show that the FortgangAffiliates implicated in the last three claims filed claimsin this case. The Defendant Banks also failed to explainwhy they would be bound by a determination avoiding theinitial transfers, and could not litigate that issue in a claimobjection proceeding. Hence, there is no basis to concludethat the five Fortgang Affiliates will be prejudiced if thisaction proceeds in their absence.[27] Finally, the Fortgang Affiliates are not necessaryunder Rule 19(1)(B)(ii), which focuses on whether anexisting party--here, the four Defendant Banks--will besubjected "to a substantial risk of incurring double, multiple,or otherwise inconsistent obligations because of theinterest." The "multiple liability" clause is intended toprotect the defendant against inconsistent obligations, notinconsistent adjudications. See 4 MOORE § 19.03[4][b],[4][d] at 19-59 to -60. Thus, for example, where the plaintiffsues one of two tortfeasors, the defendant does notface "multiple liability" because it may lose in the originalaction and then lose the subsequent action for contributionagainst the other joint tortfeasor. See Janney MontgomeryScott, 11 F.3d at 411; 4 MOORE § 19.03[4][e], at 19- 63to 64. The Defendant Banks have not highlighted anyinconsistent liability that they might have to face if theylose to the plaintiff.Accordingly, the Court concludes that the Fortgang Affiliatesare not necessary or "required" parties, and it isunnecessary to consider the feasibility of their joinder, ortheir indispensability. [FN23] The plaintiff can *746 proceeddirectly against the Defendant Banks, and "avoid"the initial transfer as to them. In fact, even if the plaintiffhad successfully avoided the transfer by the debtors to theFortgang Affiliates in an earlier action, the Defendant© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

394 B.R. 721 Page 21394 B.R. 721, 50 Bankr.Ct.Dec. 192(Cite as: 394 B.R. 721)Banks could still defend against Counts V through VII onthe basis that the initial transfers were not fraudulent. SeeLeshin v. Welt (In re Warmus), 276 B.R. 688, 694-95(S.D.Fla.2002)(subsequent transferee not collaterally estoppedfrom contesting avoidability following settlementbetween trustee and initial transferee); Thompson v. Jonovich(In re Food & Fibre Prot., Ltd.), 168 B.R. 408, 416(Bankr.D.Ariz.1994)(trustee who obtained a defaultjudgment against the initial transferee was required toprove every element of preference or fraudulent transferagainst the subsequent transferee); see VFB L.L.C. v.Money's Trust (In re VF Brands, Inc.), 282 B.R. 134, 139(Bankr.D.Del.2002)(denying motion for stay pendingappeal on the ground, inter alia, that the movant, a subsequenttransferee, would not be collaterally estopped fromcontesting any issue decided in the action between thetrustee and the initial transferee). In other words, the trusteemust always "avoid" the transfer as against the subsequenttransferee unless collateral estoppel or res judicataapplies. Moreover, this conclusion allows a trustee to settlewith the initial transferee and pursue the subsequenttransferees, or pursue a subsequent transferee when he isu nable to sue the initial transferee.FN23. Although not argued by the DefendantBanks, some courts have expressed a concernthat if the trustee did not have to avoid the initialtransfer, § 550(f)(1) would become meaningless.With certain exceptions, a trustee must bring anaction to avoid a fraudulent transfer within twoyears of the order for relief. 11 U.S.C. §546(a)(1). Section 550(f) provides that a recoveryaction must be brought no later than one yearafter the avoidance of the transfer or the closingor dismissal, whichever occurs first. This suggeststhat without the judgment of avoidance, theperiod of limitations under § 550(f) would neverstart to run. E.g., Trans-End Tech., 230 B.R. at104 ("If the Court were to adopt the Trustee's argumentof avoidability, the limitation periods ofboth § 546 and § 550(f) would be renderedmeaningless.").No such danger exists. Section 546(a) imposes astatute of limitations that applies to all avoidancelawsuits. If the trustee sues a subsequent transfereeto avoid a transfer, as the plaintiff did here,he must do so within the period of limitationsprescribed in § 546(a). If the trustee seeks to recoverthe transfer or its value under § 550 in thesame suit, he necessarily satisfies § 550. AVI,Inc., 389 B.R. at 734. If, for some reason, heseeks only to avoid the transfer, and is successful,he must then bring the § 550(a) actionagainst that same defendant within the time pein§ 550(f) . riod prescribedId.C. Leave To Amend[28][29] If the Amended Complaint must be dismissed,the plaintiff asks for leave to amend. Generally, leave toamend should be freely granted when justice so requiresunless it would be futile. Acito v. IMCERA Group, Inc.,47 F.3d 47, 55 (2d Cir.1995); see Lucente v. Intl Bus.Machs. Corp., 310 F.3d 243, 258 (2d Cir.2002)("Where itappears that granting leave to amend is unlikely to beproductive, however, it is not an abuse of discretion todeny leave to amend.")(quoting Ruffolo v. OppenheimerC o., 987 F.2d 129, 131 (2d Cir.1993)). The decision iscommitted to the trial court's discretion. Id.[30] Two pleading deficiencies led to the dismissal ofvarious parts of the Amended Complaint. First, the plaintifffailed to particularize the transfers that it contendswere made with actual fraudulent intent. Second, it failedto plead the facts necessary to support the inference thatthe Pre-Petition Banks or SPM had actual or constructiveknowledge of the Fortgangs' fraudulent scheme. Theplaintiff may be able to cure these pleading deficiencies,and accordingly, its motion for leave to *747 amend theAmended Complaint will be granted.In conclusion, Counts I through IV are dismissed in theirentirety, and the portions of Counts V through VII thatassert intentional fraudulent transfer claims are also dis-The plaintiff is granted leave to replead withinmissed.thirty days of this decision and order.So ordered.394 B.R. 721, 50 Bankr. Ct.Dec. 192ENDOF DOCUMENT© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

397 B.R. 642 Page 1397 B.R. 642(Cite as: 397 B.R. 642)Westlaw Delivery Summary Report for DANIELS,JEFFREYDate/Time of Request:Wednesday, October 21, 2009 18:22 EasternClient Identifier:NALDatabase:FBKR-CSCitation Text: 397 B.R. 642Lines: 1015Documents: 1Images: 0The material accompanying this summary is subject to copyright. Usage is governed by contract with Thomson Reuters,West and their affiliates.United States Bankruptcy Court,E.D. New York.In re Michael ZERBO, Debtor.Robert L. Pryor, as Chapter 7 Trustee of the BankruptcyEstate of MichaelZerbo, Plaintiff,v.Debra Zerbo, Defendant.Bankruptcy No. 804-81573-ast.Adversary No. 06-08124-ast.Nov. 26, 2008.Background: Trustee of debtor-husband's Chapter 7 estatebrought adversary proceeding to avoid, on fraudulenttransfer and preference theories, certain transfers made bydebtor as part of division of marital assets in state courtdivorce action that shortly preceded petition date. Bothparties moved for summary judgment.Holdings: The Bankruptcy Court, Alan S. Trust, J., heldthat:(1) prior determination by state divorce court to incorporateprovision of marital settlement agreement awardingresidence to wife did not prevent trustee, in subsequentChapter 7 case filed by debtor-husband, from seeking toset aside transfer of residence to wife as fraudulent conveyanceon theory that any such cause of action threatenedto overturn results of state court's judgment in violationof Rooker-Feldman doctrine;(2) state divorce court's approval of this division of maritalassets as part of regularly conducted divorce proceedingsconclusively established "reasonably equivalentvalue"; and(3) trustee failed to establish that debtor was insolvent attime of alleged insider preference.Ex-wife's motion granted in part and denied in part; trustee'smotion denied.West Headnotes[1] Fraudulent Conveyances 54(1)186k54(1) Most Cited Cases[1] Fraudulent Conveyances 64(1)186k64(1) Most Cited Cases[1] Fraudulent Conveyances 77186k77 Most Cited CasesUnder New York fraudulent conveyance law, transfer canbe fraudulent either as result of actual intent by transferorto hinder, delay or defraud, or as the result of financialstatus of transferor and economic equivalence of transaction.N.Y.McKinney's Debtor and Creditor Law §§ 272-276.[2] Fraudulent Conveyances 277(1)186k277(1) Most Cited CasesIn general, party seeking to avoid transfer as constructivelyfraudulent to creditors under New York law bearsburden of proving lack of fair consideration.N.Y.McKinney's Debtor and Creditor Law § 272.[3] Fraudulent Conveyances 77186k77 Most Cited CasesDetermination as to whether fair consideration has beengiven, within meaning of constructive fraud provisions ofNew York fraudulent conveyance law, turns on facts ofeach specific case. N.Y.McKinney's Debtor and Creditor© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

397 B.R. 642 Page 2397 B.R. 642(Cite as: 397 B.R. 642)Law §§ 272-275.[4] Fraudulent Conveyances 273186k273 Most Cited CasesBurden of proving actual intent of transferor is on partyseeking to set aside conveyance as actually fraudulent tocreditors under New York law. N.Y.McKinney's Debtorand Creditor Law § 276.[5] Fraudulent Conveyances 15186k15 Most Cited Cases[5] Fraudulent Conveyances 16186k16 Most Cited CasesParty seeking to set aside conveyance as actually fraudulentto creditors under New York law can establish requisiteintent on part of transferor to hinder, delay or defraudby demonstrating existence of certain "badges of fraud,"badges that include: (1) lack or inadequacy of consideration;(2) family, friendship or close associate relationshipbetween parties; (3) retention by transferor of possession,benefit or use of property in question; (4) financial conditionof transferor before and after transfer; (5) existenceor cumulative effect of pattern or series of transactions orcourse of conduct after debt was incurred, after the onsetof financial difficulties, or during pendency of threat ofsuit by creditors; and (6) chronology of events and transactionsunder inquiry. N.Y.McKinney's Debtor and CreditorLaw § 276.[6] Courts 509106k509 Most Cited CasesPrior determination by state divorce court to incorporateprovision of marital settlement agreement awarding residenceto wife did not prevent trustee, in subsequent Chapter7 case filed by debtor-husband, from seeking to setaside transfer of residence to wife as fraudulent conveyanceon theory that any such cause of action threatened tooverturn results of state court's judgment in violation ofRooker-Feldman doctrine; doctrine did not bind trustee,as nonparty to prior divorce action.[7] Courts 509106k509 Most Cited CasesRooker-Feldman doctrine applies only to individuals thatwere parties to state court proceeding; nonparties to statecourt proceeding cannot be bound by doctrine.[8] Bankruptcy 2650(2)51k2650(2) Most Cited Cases[8] Bankruptcy 270451k2704 Most Cited Cases[8] Fraudulent Conveyances 95(11)186k95(11) Most Cited CasesTransfer of debtor's interest in former marital home to hisestranged wife as part of distribution of marital assets instate court divorce action, just 125 days prior to debtor'sfiling for Chapter 7 relief, was not subject to avoidance bytrustee in exercise of strong-arm powers, as constructivelyfraudulent under New York law, nor could it be avoidedunder bankruptcy fraudulent transfer statute, though transferwas effected as part of marital settlement agreementbetween parties, which was only later approved by statecourt and incorporated into judgment of divorce; no evidencewas presented of any fraud or collusion betweenparties, so that state divorce court's subsequent approvalof that division as part of regularly conducted divorceproceedings conclusively established "reasonably equivalentvalue." 11 U.S.C.A. §§ 544, 548(a)(1)(B);N.Y.McKinney's Debtor and Creditor Law §§ 272, 273,275.[9] Bankruptcy 2650(2)51k2650(2) Most Cited Cases[9] Fraudulent Conveyances 95(11)186k95(11) Most Cited CasesAbsent extrinsic fraud or collusion among divorcing parties,the division of marital assets which is agreed to byparties and which is contemporaneously or subsequentlyapproved by matrimonial court, and incorporated intodivorce decree, conclusively establishes "reasonablyequivalent value," so as to prevent subsequent attempt toset that division aside on constructive fraudulent transfertheory.[10] Bankruptcy 2650(1)51k2650(1) Most Cited Cases[10] Bankruptcy 270451k2704 Most Cited Cases[10] Fraudulent Conveyances 95(11)186k95(11) Most Cited CasesBankruptcy court should not interfere with outcome ofstate court divorce action, by setting aside its distributionof marital assets on constructive fraudulent transfer theory,if this distribution was result of regularly conducted© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

397 B.R. 642 Page 3397 B.R. 642(Cite as: 397 B.R. 642)proceeding under state law, and if there is no proof ofcollusion or other extrinsic fraud.[11] Bankruptcy 2650(2)51k2650(2) Most Cited Cases[11] Bankruptcy 270451k2704 Most Cited Cases[11] Fraudulent Conveyances 95(11)186k95(11) Most Cited CasesEven assuming that division of marital assets as part ofregularly-conducted, noncollusive division of marital assetsin state divorce action was potentially avoidable bytrustee of debtor-husband's Chapter 7 estate on constructivefraudulent transfer theory, trustee failed to establishlack of reasonably equivalent value to debtor in form,inter alia, of a release of liability on loan from formerwife's parents. 11 U.S.C.A. §§ 544, 548(a)(1)(B);N.Y.McKinney's Debtor and Creditor Law §§ 272, 273,275.[12] Bankruptcy 2650(2)51k2650(2) Most Cited Cases[12] Bankruptcy 270451k2704 Most Cited Cases[12] Fraudulent Conveyances 95(11)186k95(11) Most Cited CasesIn establishing, for constructive fraudulent transfer avoidancepurposes, that Chapter 7 debtor-husband had in factreceived "reasonably equivalent value" for transferring hissubstantial equity in former marital residence to his estrangedwife as part of division of marital assets in divorceaction, wife was not limited to claiming only theconsideration stated in marital settlement agreement, butcould show that debtor received additional considerationby presenting competent evidence of other concessions onher part. 11 U.S.C.A. §§ 544, 548(a)(1)(B);N.Y.McKinney's Debtor and Creditor Law §§ 272, 273,275.[13] Bankruptcy 2726.1(2)51k2726.1(2) Most Cited CasesTrustee bears burden of proof on all elements of preferenceavoidance claim, including debtor's insolvency attime of transfer. 11 U.S.C.A. § 547(b)(1- 5).[14] Bankruptcy 2726(2)51k2726(2) Most Cited Cases[14] Bankruptcy 2727(2)51k2727(2) Most Cited CasesBald assertion by Chapter 7 trustee, that debtor was insolventat time of alleged insider preference more than 90days prior to petition date, was insufficient to satisfy hisburden of proof on this issue, given that there was no presumptionof insolvency outside general 90-day preferenceperiod. 11 U.S.C.A. § 547(b)(3), (f).[15] Bankruptcy 2613(3)51k2613(3) Most Cited CasesObligation which Chapter 7 debtor incurred to his exwife'sparents in connection with loan that parents madeduring their marriage was not part of contemporaneousexchange with subsequent transfer made as part of divisionof marital assets in connection with his divorce, norwas it intended to be, and would not support "contemporaneousexchange for new value" defense by ex-wife totrustee's preference avoidance claim. 11 U.S.C.A. §547(c)(1).[16] Bankruptcy 2602.151k2602.1 Most Cited CasesAny "repayment" of loan that Chapter 7 debtor had receivedfrom his ex-wife's parents was not in nature ofalimony, maintenance or support to spouse, former spouseor child of debtor, within meaning of statutory exceptionto trustee's preference-avoidance power. 11 U.S.C.A. §547(c)(7).*645 Justin Logan Rappaport, Esq., Pryor & Mandelup,Westbury, NY.Kenneth Halpern, Esq., Sawyer Halpern & Demetri, GardenCity, NY.MEMORANDUM OPINION GRANTING DEFEN-DANT SUMMARY JUDGMENT IN PART, DENYINGDEFENDANT SUMMARY JUDGMENT IN PART,AND DENYING PLAINTIFF SUMMARY JUDG-MENTALAN S. TRUST, Bankruptcy Judge.Pending before the Court are the following:Defendant's Motion For Summary Judgment DismissingComplaint [dkt item 15]; andTrustee's Affirmation in Opposition to Defendant's MotionFor Summary Judgment and in Support of Trus-© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

397 B.R. 642 Page 4397 B.R. 642(Cite as: 397 B.R. 642)tee's Application For Summary Judgment [dkt item 17]Issues Before the Court and Summary of RulingThe Plaintiff in this adversary proceeding is Robert L.Pryor, as the Chapter 7 Trustee for the estate of MichaelZerbo ("Debtor"). The Defendant is Debtor's formerspouse, Debra Zerbo ("Defendant"). All of the Trustee'sclaims arise out of the pre-petition divorce between theDebtor and Defendant. These claims all center around thepre-petition transfer of Debtor's interest in their maritalresidence [FN1] (the "Marital Residence") to Defendantas part and parcel of their divorce proceeding and the equitabledivision of their former marital property (the"Transfer"). The parties agreed to the Transfer in a settlementagreement. This settlement was later incorporatedinto a Decree of Divorce which, inter alia, directed theparties to comply with the settlement.FN1. The Marital Residence is located at 11Ethan Allen Court, South Setauket, New York.Each party seeks summary judgment on all claims assertedby the Trustee. In his Complaint, the Trustee assertsthe following claims: (I) pursuant to 11 U.S.C. §§544 and 548(a), and New York Debtor and CreditorLaw ("DCL") §§ 273, 275, 276, 276-a, 278 and 279, forjudgment against the Defendant avoiding the Transfer as afraudulent conveyance; (ii) pursuant to 11 U.S.C. §550(a)(1) against the Defendant, as the initial transferee,for recovery of the Marital Residence transferred byDebtor to Defendant, or in the alternative, for judgmentfor the value of the Marital Residence, plus interestthereon from the date of the Transfer; (iii) pursuant to 11U.S.C. § 542(a), for judgment directing the Defendant toturnover and deliver to the Trustee, and account for, allproperty of Debtor's bankruptcy estate received by Defendant,(iv) pursuant to 11 U.S.C. § 105(a), for judgmentfor the value of the Marital Residence transferred by theDebtor to the Defendant, and for imposition of a constructivetrust over the Marital Residence and all proceedsthereof; (v) pursuant to 11 U.S.C. § 547, declaring theTransfer avoided; and *646 (vi) pursuant to 11 U.S.C. §550(a), directing Defendant to deliver to the Trustee dulyexecuted documents transferring Debtor's interest in theMarital Residence to the Trustee, or in the alternative,judgment for the value thereof.For the reasons set out herein, this Court grants partialsummary judgment in favor of Defendant, denies portionsof Defendant's motion, and denies the entirety of the Trustee'smotion.JurisdictionThis Court has jurisdiction over this core proceeding pursuantto 28 U.S.C. § 157(b)(2)(A), (E) and (H), and1334(b), and the Standing Order of Reference in effect inthe Eastern District of New York.Procedural HistoryOn March 15, 2004, Debtor filed a voluntary petition forrelief under Chapter 7 of the United States BankruptcyCode. This adversary proceeding was commenced onMarch 15, 2006. On July 11, 2008, Defendant moved forsummary judgment. [dkt item 15] On August 8, 2008, theTrustee opposed the Defendant's motion and cross movedfor summary judgment [dkt item 17]. Each side filed aStatement of Material Facts Upon Which There Is NoDispute, in accordance with Local Bankruptcy Rule 7056-1. [dkt items 15 and 17] These motions are fully briefedand were taken under submission by the Court.Undisputed FactsAs set forth by the parties in their respective Statementsof Material Facts, the parties agree to the following facts:1. The Debtor and the Defendant were married on July18, 1987.2. There were two infant children of this marriage,Nicole Zerbo born April 16, 1990, and Michael Zerbo,born February 11, 1995.3. On January 8, 2002, Debtor commenced an action fordivorce against Defendant in the Supreme Court of theState of New York, County of Suffolk (the "DivorceAction").4. Debtor and Defendant were both represented bycounsel in the Divorce Action.5. During the Divorce Action, the state court entered apendente lite order, pursuant to which the Debtor wasordered to pay temporary child support along with otherexpenses during the pendency of the divorce.6. Debtor and Defendant entered into a settlementagreement in the Divorce Action dated September 19,2003 (the "Settlement Agreement").7. This Settlement Agreement was the result of a contentiouslitigation between the parties with competentlegal counsel on both sides, and was the result of a considerableamount of negotiation and compromise.8. Pursuant to the Settlement Agreement, on or aboutNovember 11, 2003, Debtor transferred all of his right,title and interest in the Marital Residence to Defendant.This transfer was the result of an exchange of considerationbetween Debtor and Defendant.9. The Settlement Agreement was incorporated by ref-© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

397 B.R. 642 Page 5397 B.R. 642(Cite as: 397 B.R. 642)erence into a Judgment of Divorce, which specificallyprovided as follows:Ordered and Adjudged that the settlement agreementdated September 19, 2003, a copy of which is on filewith the Court, shall be incorporated by reference intothis judgment, shall survive and not merge in thisjudgment, and the parties hereby are directed to complywith every legally enforceable term and provision ofsuch settlement agreement.The Judgment of Divorce was entered on December 10,2003.10. The state court issued its Findings of Fact and Conclusionsof Law in the *647 Divorce Action. [FN2] TheFindings of Fact and Conclusions of Law, along withthe Judgment of Divorce, specifically refer to the SettlementAgreement and incorporate the specific termsof the Settlement Agreement into the Judgment of Divorce.FN2. Based upon the incomplete copy of theState Court's Findings and Conclusions the Defendantprovided the Court, this Court cannot ascertainthe entry date of the Findings and Conclusions.11. At the time the Judgment of Divorce was entered,and as of the time Debtor transferred his interest in theMarital Residence to Defendant, the Marital Residencehad a value of $532,000 and was subject to a mortgagelien in favor of Wells Fargo in the amount of $140,000.Thus, prior to the division of marital property, and absentother adjustments, the Debtor was entitled to 50%of the net equity value of $392,000, being an amountequal to $196,000.12. On March 15, 2004, Debtor filed a voluntary petitionfor relief under Chapter 7 of the United StatesBankruptcy Code. Thus, this bankruptcy case was filedninety-five (95) days after the Judgment of Divorce wasentered, and one hundred and twenty-five (125) daysafter Debtor transferred his interest in the Marital Residenceto Defendant.Legal AnalysisThe Standard for Summary JudgmentPursuant to Rule 56(c) of the Federal Rules of Civil Procedure,incorporated by Bankruptcy Rule 7056(c), summaryjudgment should be granted to the moving party ifthe Court determines that "the pleadings, depositions,answers to interrogatories, and admissions on file, togetherwith affidavits, if any, show that there is no genuineissue as to any material fact and that the moving partyis entitled to judgment as a matter of law." Celotex Corp.v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d265 (quoting Fed.R.Civ.P. 56(c)); Anderson v. LibertyLobby, Inc., 477 U.S. 242, 247- 48, 106 S.Ct. 2505, 91L.Ed.2d 202 (1986); Matsushita Elec. Indus. Co. v. ZenithRadio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 89L.Ed.2d 538 (1986).In considering cross-motions for summary judgment, theCourt must evaluate the merits of each motion independentlyof the other. Heublein, Inc. v. United States, 996F.2d 1455, 1461 (2d Cir.1993); In re Rodriguez, 50 B.R.576 (Bankr.E.D.N.Y.1985) ("[C]ross-motions for summaryjudgment do not warrant the court in granting summaryjudgment unless one of the moving parties is entitledto judgment as a matter of law upon facts that are notgenuinely disputed.")A movant has the initial burden of establishing the absenceof any genuine issue of material fact. Celotex, 477U.S. at 322-23, 106 S.Ct. 2548. A fact is "material" if it"might affect the Page 6 of 29 outcome of the suit underthe governing law." Anderson, 477 U.S. at 248, 106 S.Ct.2505. An issue of fact is genuine "if the evidence is suchthat a reasonable jury could return a verdict for the nonmovingparty." Id. "When summary judgment is sought,the moving party bears an initial burden of demonstratingthat there is no genuine dispute of material fact to be decidedwith respect to any essential element of the claim inissue; the failure to meet this burden warrants denial ofthe motion." Smith v. Goord, No. 9:06-CV-401(FJS/DEP), 2008 WL 902184 *4 (N.D.N.Y. Mar.31,2008) (citing Anderson, 477 U.S. at 250 n. 4, 106 S.Ct.2505).If the movant meets his initial burden, the nonmovingparty "must do more than simply show that there is somemetaphysical *648 doubt as to the material facts."Matsushita, 475 U.S. at 586, 106 S.Ct. 1348. Rather, itmust present "significant probative evidence" that a genuineissue of fact exists. Anderson, 477 U.S. at 249, 106S.Ct. 2505 (quotation omitted). "There is no issue for trialunless there exists sufficient evidence in the record favoringthe party opposing summary judgment to support ajury verdict in that party's favor." Cadle Co. v. Newhouse,No. 01 Civ. 1777(DC), 2002 WL 1888716 *4(S.D.N.Y.2002) (citing Anderson, 477 U.S. at 249, 106S.Ct. 2505); see also Anderson, 477 U.S. at 250, 106 S.Ct.2505 (finding that summary judgment is appropriate onlywhen "there can be but one reasonable conclusion as tothe verdict").© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

397 B.R. 642 Page 6397 B.R. 642(Cite as: 397 B.R. 642)As part of the independent evaluation of cross-motionsfor summary judgment, the court must draw all reasonableinferences against the party whose motion is underconsideration. Coach, Inc. v. Peters, 386 F.Supp.2d 495,497 (S.D.N.Y.2005); see also Considine v. Schachter(Inre Schachter), No. 05- 9404, 2007 WL 2238293(Bankr.S.D.N.Y. Aug.1, 2007).Standards for Avoidance under Bankruptcy Code Sections544(b), 547 and548Bankruptcy Code Section 544(b) authorizes the Trusteeto avoid "any transfer of an interest of the debtor in propertyor any obligation incurred by the debtor that is voidableunder applicable law by a creditor holding an unsecuredclaim...." 11 U.S.C. § 544(b)(1). The "applicablelaw" upon which the Trustee relies is set forth in Sections273, 275, 276, 276-a, 278 and 279 of New York Debtorand Creditor Law ("DCL") and is discussed below.Section 547 of the Bankruptcy Code, authorizes the Trusteeto avoid a transfer which prefers one creditor oversimilarly situated creditors, and allows the transferee toreceive more than it would have received in a Chapter 7case had the transfer not been made. 11 U.S.C. § 547.Bankruptcy Code Section 548(a), in effect when theDebtor filed this case, authorized the Trustee to avoid atransfer made for less than reasonably equivalent valuewithin one (1) year prior to the petition date. [FN3]FN3. Prior to the October 17, 2005, amendmentsto the Bankruptcy Code provided under theBankruptcy Abuse Prevention and ConsumerProtection Act ("BAPCPA"), the applicablelook-back period under § 548(a) was one (1)year. Section 548(a) was amended to provide atwo (2)-year lookback. This bankruptcy case wasfiled prior to the effective date of the relevantBAPCPA amendments, and this Court appliesthe Bankruptcy Code and Rules as they existedprior to the enactment of BAPCPA.Standards for Avoidance of Fraudulent Conveyancesunder New York Law[1][2] Under New York law, a transfer can be a fraudulentconveyance either as the result of actual intent by thetransferor to hinder, delay or defraud, or as the result ofthe financial status of the transferor and the economicequivalence of the transaction. A constructively fraudulenttransfer will occur where the transfer is made withoutfair consideration as defined by DCL Section 272 and (1)the transferor will be rendered insolvent (DCL § 273), or(2) the transferor intends or believes that he or she willincur debts beyond his or her ability to pay them as theymature (DCL § 275). [FN4] See In re Manshul Constr.Corp., No. 96B44080(JHG),2000 WL 1228866 *48-49(S.D.N.Y. Aug.30, 2000)(citing *649MFS/Sun LifeTrust-High Yield Series v. Van Dusen Airport Servs. Co.,910 F.Supp. 913, 936 (S.D.N.Y.1995)). In general, theplaintiff bears the burden of proving the lack of fair consideration.United States v. McCombs, 30 F.3d 310, 324(2d Cir.1994).FN4. N.Y. Debt. & Cred. Law § 274, which isnot implicated by the Amended Complaint, alsodeals with constructive intent fraudulent conveyanceswhere the transferor is engaged in businessand will be left with unreasonably small capital.DCL § 272 defines "fair consideration" as follows:Fair consideration is given for property or obligation,a. When in exchange for such property, or obligation, asa fair equivalent therefor, and in good faith, property isconveyed or an antecedent debt is satisfied, orb. When such property, or obligation is received ingood faith to secure a present advance or antecedentdebt in amount not disproportionately small as comparedwith the value of the property, or obligation obtained.DCL § 272 (McKinney's 2008).[3] Courts generally agree that the concept of fair consideration"can be an elusive one that defies any one preciseformula," and that a determination as to whether fair considerationhas been made turns on the facts of each specificcase. See McCombs, 30 F.3d at 326.[4] DCL § 276 governs a fraudulent conveyance madewith actual intent and provides: [FN5]FN5. The Trustee also seeks to recover attorneys'fees and expenses pursuant to DCL § 276-a. Underthis Section of New York law, the Trusteemay recover his fees and expenses only if he isable to prove that a fraudulent conveyance madewith actual intent occurred.Every conveyance made and every obligation incurredwith actual intent, as distinguished from intent presumedin law, to hinder, delay, or defraud either present© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

397 B.R. 642 Page 7397 B.R. 642(Cite as: 397 B.R. 642)or future creditors, is fraudulent as to both present andfuture creditors.DCL § 276 (McKinney's 2008). The burden of provingthe "actual intent" of the transferor is on the party seekingto set aside the conveyance. This intent must be establishedby clear and convincing evidence. "[A]ctual intentto defraud must be proven by the party seeking to setaside the conveyance by clear and convincing evidence."McCombs, 30 F.3d at 328 (citing Marine Midland Bank v.Murkoff, 120 A.D.2d 122, 126, 508 N.Y.S.2d 17, 20 (2dDep't 1986) and ACLI Gov't Sec. v. Rhoades, 653 F.Supp.1388, 1394 (S.D.N.Y.1987)).[5] Actual intent to defraud is rarely susceptible to directproof. Therefore, the Second Circuit Court of Appeals hasenumerated certain "badges of fraud" which can establishactual intent. The nonexclusive list of badges of fraudincludes:1. lack or inadequacy of consideration;2. family, friendship or close associate relationship betweenthe parties;3. retention of possession, benefit or use of the propertyin question by the debtor;4. the financial condition of the transferor before andafter the transfer in question;5. the existence or cumulative effect of a pattern or seriesof transactions or course of conduct after the debt isincurred, the onset of financial difficulties, or pendencyof threat of suits by creditors; and6. the chronology of the events and transactions underinquiry.See Salomon v. Kaiser (In re Kaiser), 722 F.2d 1574,1582-83 (2d Cir.1983).In his Complaint, the Trustee seeks recovery under DCLSections 278 and 279. Section 278 sets forth the rights ofcreditors whose claims have matured, and provides:1. Where a conveyance or obligation is fraudulent as toa creditor, such creditor, when his claim has matured,may, as against any person except a purchaser for fairconsideration without knowledge *650 of the fraud atthe time of the purchase, or one who has derived titleimmediately or mediately from such a purchaser,a. Have the conveyance set aside or obligation annulledto the extent necessary to satisfy his claim, orb. Disregard the conveyance and attach or levy executionupon the property conveyed.2. A purchaser who without actual fraudulent intent hasgiven less than a fair consideration for the conveyanceor obligation, may retain the property or obligation assecurity for repayment.DCL § 278 (McKinney's 2008).DCL Section 279 articulates the relief available to creditorswhose claims have not matured, and provides:Where a conveyance made or obligation incurred isfraudulent as to a creditor whose claim has not maturedhe may proceed in a court of competent jurisdictionagainst any person against whom he could have proceededhad his claim matured, and the court may,a. Restrain the defendant from disposing of his property.b. Appoint a receiver to take charge of the property,c. Set aside the conveyance or annul the obligation, ord. Make any order which the circumstances of the casemay require.DCL § 279 (McKinney's 2008).The Transfer of the Marital Residence and the Exchangeof ConsiderationThe Trustee's PositionThe Trustee first asserts that this Court can, and should,independently review the Settlement Agreement and theJudgment of Divorce to determine if the Debtor made afraudulent transfer, or if the Defendant received a preference.Defendant argues by analogy to BFP v. ResolutionTrust Corp., 511 U.S. 531, 114 S.Ct. 1757, 128 L.Ed.2d556 (1994), that a state court divorce settlement andjudgment are not subject to review by a bankruptcy courtunder Section 548 without proof of collusion or extrinsicfraud. The Trustee rejects this position, and relies upon,inter alia, In re Stinson, 364 B.R. 278(Bankr.W.D.Ky.2007) and In re Hill, 342 B.R. 183(Bankr.N.J.2006).The Trustee also alleges that the Debtor did not receivereasonably equivalent value under Bankruptcy Code §548 for his interest in the Marital Residence, that theDebtor did not receive fair consideration under DCL §§273, 278 and 279, that Defendant received a preferenceunder Bankruptcy Code § 547, and that Defendant's parentsreceived an insider preference under § 547.The Trustee also alleges the Transfer was made by theDebtor with actual intent to hinder, delay or defraud underDCL §§ 276, 278 and 279. However, the Trustee has notprovided any evidence that the Transfer was made by theDebtor with actual intent to hinder, delay or defraud, norhas the Trustee provided any evidence that the Debtor andDefendant entered into a conspiracy or colluded to defraudcreditors of Debtor.© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

397 B.R. 642 Page 8397 B.R. 642(Cite as: 397 B.R. 642)Defendant's PositionAs noted above, Defendant asserts that this Court cannot,or, in the alternative, should not upset the SettlementAgreement and the state court's Judgment of Divorce. Inthe alternative, Defendant argues she did not receive anavoidable transfer as a matter of law based upon the considerationexchanged, and that neither she nor her parentsreceived a preference. Finally, Defendant argues thisCourt is precluded under the Rooker-Feldman doctrinefrom reviewing the Decree of Divorce.AnalysisAlthough this Court disagrees with Defendant's analysisof Rooker-Feldman, it *651 does agree with the Defendant'sinvocation of BFP, and, for the reasons statedherein, will grant partial summary judgment in favor ofDefendant.Inapplicability of Rooker-Feldman[6] This Court rejects Defendant's assertion that Rooker-Feldman applies. This Court instead agrees with andadopts the Fifth Circuit's analysis in Erlewine and JudgeAlley's analysis in Bledsoe as to why the Trustee's lawsuitis not prohibited by the Rooker-Feldman doctrine.[7] The Fifth Circuit in In re Erlewine, 349 F.3d 205,210-11 (5th Cir.2003) stated: "[T]he divorce decree is notentitled to preclusive effect because the Trustee was not aparty to the state court divorce proceedings, nor was he inprivity with any party." The Court in In re Bledsoe, 350B.R. 513, 516 (Bankr.D.Or.2006) stated:The Rooker-Feldman doctrine is a recognition of theprinciple that federal courts, other than the U.S. SupremeCourt, lack authority to exercise appellate reviewover a state court's judicial decision. The doctrine appliesonly to individuals that were parties to the statecourtproceeding; nonparties to the state-court proceedingcannot be bound. While this fraudulent transfer actiondoes not literally seek appellate review of the dissolutionjudgment, the doctrine may be applicable if thefederal proceeding is a "de facto" appeal of the stateproceeding or involves an issue "inextricably intertwined"with a forbidden de facto appeal. agree with thecourt in In re: Erlewine, 349 F.3d 205, 210-11 (5thCir.2003), however, that the Trustee is not precluded byRooker-Feldman from bringing an action in bankruptcycourt alleging a fraudulent transfer.Bledsoe, 350 B.R. at 516 (internal citations omitted).Similarly here, the Trustee can sue to set aside the DivorceDecree and the underlying Settlement Agreement,as he was not a party to either.BFP Case[8][9] In BFP v. Resolution Trust Corp., 511 U.S. 531,114 S.Ct. 1757, 128 L.Ed.2d 556 (1994), the SupremeCourt considered the following facts. In October 1989,BFP, a partnership formed for the purpose of purchasing ahome, filed for Chapter 11 bankruptcy relief. Prior to thepetition date, BFP had taken title to a home subject to afirst lien deed of trust in favor of Imperial Savings Association("Imperial") to secure payment of a loan of$356,250 made to the Pedersens in connection with BFP'sacquisition of the home. [FN6] Following defaults and adelay occasioned by an involuntary bankruptcy filingagainst BFP, Imperial foreclosed its lien against the homein accordance with California law. The home was purchasedat the foreclosure sale by Paul Osborne for$433,000. BFP, 511 U.S at 533-34, 114 S.Ct. 1757.FN6. BFP then granted a second lien deed oftrust as security for a $200,000 promissory note.After filing bankruptcy, BFP commenced an adversaryproceeding seeking to set aside the conveyance of thehome to Osborne, asserting that the foreclosure sale constituteda fraudulent transfer under § 548 of the BankruptcyCode. BFP alleged that the home was actuallyworth over $725,000 at the time of the sale to Osborne for$433,000.Acting on separate motions, the Bankruptcy Courtgranted summary judgment in favor of Imperial. [FN7]The Bankruptcy *652 Court found, inter alia, that theforeclosure sale had been conducted in compliance withapplicable California laws and was neither collusive norfraudulent. The Ninth Circuit Bankruptcy Appellate Panelaffirmed in a divided opinion. In re BFP, 132 B.R. 748(9th Cir.BAP (Cal.)1991).FN7. During the course of the proceedings, theResolution Trust Corporation ("RTC") was appointedas receiver of Imperial and appeared inthe litigation on behalf of Imperial. This appearancedid not, however, impact the outcome of thecase.The Supreme Court identified the issue as follows:This case presents the question whether the considerationreceived from a noncollusive, real estate mortgage© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

397 B.R. 642 Page 9397 B.R. 642(Cite as: 397 B.R. 642)foreclosure sale conducted in conformance with applicablestate law conclusively satisfies the BankruptcyCode's requirement that transfers of property by insolventdebtors within one year prior to the filing of abankruptcy petition be in exchange for "a reasonablyequivalent value." 11 U.S.C. § 548(a)(2).BFP, 511 U.S. at 533, 114 S.Ct. 1757.In beginning its analysis, the Supreme Court noted thatthe constructive fraudulent transfer provisions of § 548permits avoidance if the trustee can establish (1) thatthe debtor had an interest in property; (2) that a transferof that interest occurred within one year of the filing ofthe bankruptcy petition; (3) that the debtor was insolventat the time of the transfer or became insolvent as aresult thereof; and (4) that the debtor received "less thana reasonably equivalent value in exchange for suchtransfer." 11 U.S.C. § 548(a)(2)(A). It is the last ofthese four elements that presents the issue in the casebefore us.Id. at 535, 114 S.Ct. 1757.The Supreme Court then stated that "reasonably equivalentvalue" under § 548(a)(2)(A) is not a defined termunder the Bankruptcy Code, but that "value" is defined.For purposes of § 548, value means "property, or satisfactionor securing of a ... debt of the debtor." The Courtwent on to discuss the development of the line of caseswhich applied a mathematical formula to determine whatwas "reasonably equivalent value," as well as those caseswhich disagreed with this mathematical approach.In Durrett v. Washington Nat'l Ins. Co., 621 F.2d 201,203-04 (5th Cir.1980), the Fifth Circuit Court of Appealsinterpreted a provision of the predecessor Bankruptcy Actanalogous to § 548(a)(2). Durrett held that a foreclosuresale which resulted in the owner receiving 57% of theproperty's fair market value could be set aside as a fraudulenttransfer. In doing so, the Fifth Circuit indicated indicta that any foreclosure sale which results in the ownerreceiving less than 70% of fair market value should beinvalidated. Some subsequent decisions followed thisapproach, but others did not. Compare In re Littleton, 888F.2d 90, 92, n. 5 (11th Cir.1989) (following Durrett), withIn re Bundles, 856 F.2d 815, 820 (7th Cir.1988) (rejectingDurrett ).The Supreme Court in BFP then noted, however, thatDurrett is not applicable because § 548 is not driven by afair market value determination, but is driven by a reasonablyequivalent value determination:[Congress used the] entirely novel phrase "reasonablyequivalent value." "[I]t is generally presumed that Congressacts intentionally and purposely when it includesparticular language in one section of a statute but omitsit in another," and that presumption is even strongerwhen the omission entails the replacement of standardlegal terminology with a neologism. One must suspectthe language means that fair market value cannot--or atleast cannot always--be the benchmark.BFP, 511 U.S. at 537, 114 S.Ct. 1757 (internal citationsomitted).*653 Thus, under BFP, the price received at a regularlyconducted, non-collusive foreclosure sale, which is properlyconducted under applicable state law, conclusivelyestablishes reasonably equivalent value for purposes of §548(a).BFP Provides an Analytic Framework for Analysis ofthis CaseThis Court has determined that BFP provides an analyticframework for analysis of whether a non-collusive divisionof marital property, embraced by a state court judgment,should be reviewable for possible avoidance as afraudulent transfer. In this context, this Court's analysisfinds the following excerpt from BFP particularly relevant:Market value cannot be the criterion of equivalence inthe foreclosure-sale context. The language of §548(a)(2)(A) ("received less than a reasonably equivalentvalue in exchange") requires judicial inquiry intowhether the foreclosed property was sold for a pricethat approximated its worth at the time of sale ... Noone would pay as much to own [foreclosed] property ashe would pay to own real estate that could be sold atleisure and pursuant to normal marketing techniques.And it is no more realistic to ignore that characteristicof the property (the fact that state foreclosure law permitsthe mortgagee to sell it at forced sale) than it is toignore other price-affecting characteristics (such as thefact that state zoning law permits the owner of theneighboring lot to open a gas station). Absent a clearstatutory requirement to the contrary, we must assumethe validity of this state-law regulatory background andtake due account of its effect.BFP, 511 U.S. at 538-39, 114 S.Ct. 1757 (internal citationsomitted).Notably, the Supreme Court went on to state: "The existenceand force and function of established institutions oflocal government are always in the consciousness of© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

397 B.R. 642 Page 10397 B.R. 642(Cite as: 397 B.R. 642)lawmakers and, while their weight may vary, they maynever be completely overlooked in the task of interpretation."511 U.S. at 539-40, 114 S.Ct. 1757, citing DaviesWarehouse Co. v. Bowles, 321 U.S. 144, 64 S.Ct. 474, 88L.Ed. 635 (1944).Also noteworthy is that the Supreme Court in BFP didnot differentiate between foreclosure sales conducted undercourt supervision (judicial foreclosures) and foreclosuresales conducted without court supervision (nonjudicialforeclosures). Rather, the Supreme Court only refersto a "properly noticed foreclosure sale." BFP, 511 U.S. at533, 114 S.Ct. 1757. Under California law, the applicablelaw at issue in BFP, a foreclosure sale may be conductedeither judicially (See Cal.Civ.Code § 2931 (West 2008))or non-judicially (See Cal.Civ.Proc.Code § 725a (West2008)).In New York, as presumably in every state of the UnitedStates, divorces and the division of assets incident thereto,occur solely under the auspices of an institution of localgovernment--namely, a state court. Further, as in a foreclosuresale, parties to a divorce proceeding are not requiredto market their marital residence for sale the way ahome being sold by a willing seller would be sold. Divorcingparties do not always sell their marital residenceon the open market through a multiple listing service orvia some other recognized real estate sales device. In addition,various assets owned by a divorcing couple thatare subject to being divided as marital property, such asrights in pension plans, IRAs, stock in closely held companies,life insurance policies, and similar assets, have norecognized mechanism for public sale, or even a readymarket for public sale. Other assets constituting maritalproperty, such as refrigerators, couches, golf clubs, andtelevisions, could *654 today be sold through publicmeans not readily in use in 1984, such as on internetbasedauction sites, but such sales would not necessarilygenerate fair market value. Divorcing parties are not necessarilywilling sellers.Further, divorcing parties divide assets for many reasonsother than achieving economic equivalency. Among theseare the need to adjust assets based upon ongoing custodyand support of children, sentimental attachment to familyheirlooms, ending the incurrence of the economic costs ofthe divorce proceeding itself, and, often, the necessity ofbringing closure to what can be a difficult, expensive,emotional and energy consuming process.Absent Extrinsic Fraud or Collusion, a Divorce DecreeThat Incorporates aSettlement Conclusively Establishes Reasonably EquivalentValueHere, this Court has determined that, absent extrinsicfraud or collusion among the divorcing parties, the divisionof marital assets which is agreed to by the parties,and is contemporaneously or subsequently approved by amatrimonial court, and incorporated into a divorce decree,conclusively establishes reasonably equivalent value.[10] This Court follows in part the decision in Bledsoe,which holds that a bankruptcy court should not interferewith the outcome of a state court divorce action, whichwas the result of a regularly conducted proceeding understate law, absent proof of collusion or other extrinsicfraud. 350 B.R. at 520. However, Bledsoe differs significantlyfrom this case in one significant respect. InBledsoe, the parties did not enter into a divorce settlement--thedivision of marital assets was determined by thematrimonial court without the agreement of the parties.In Bledsoe, the debtor's petition for relief was filed onMay 10, 2004. Prior thereto, on November 26, 2003, ajudgment was entered dissolving debtor's marriage. TheBledsoe court described the divorce judgment as follows:The matter had been hotly contested, and Debtor wasfound by the Circuit Court to have unlawfully dissipatedmarital assets, and to have unlawfully failed toprovide required discovery. The Court set out extensivefindings regarding the Debtor's misconduct and concludedthat a default judgment should be entered. Thejudgment, entered on or about November 26, 2003,awarded a substantial majority of the parties' assets tothe Defendant.Bledsoe, 350 B.R. at 515.Based upon this Court's reading of BFP, this Court declinesto differentiate between a division of assets adjudicatedby the matrimonial court after trial, and a consensualsettlement entered into by the parties which is subsequentlyapproved by the matrimonial court. In either scenario,the trial court approves a division of assets that mayor may not have economic equivalence but, for the reasonsstated above, provide each side with reasonablyequivalent value.In light of this Court's determination that, absent collusionor extrinsic fraud, the division of marital propertymade a part of a divorce decree is conclusively determinedto be for reasonably equivalent value under Section548, that portion of the Debtor's motion seeking summary© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

397 B.R. 642 Page 11397 B.R. 642(Cite as: 397 B.R. 642)judgment on Count 1 of the Amended Complaint shouldbe granted, and that portion of the Trustee's Cross-Motionon Count 1 of the Amended Complaint should be denied.based upon the consideration *655 exchanged as set forthin the Settlement Agreement, the Transfer was not afraudulent transfer under Section 548 as a matter of law.In the Alternative, the Transfer Was Not a FraudulentTransfer Under Section548 Based Upon the Consideration Exchanged[11] In the alternative, this Court has determined that,Defendant asserts the Transfer was not a fraudulent transfer,by using the following calculations:Agreed value of marital residence: $532,000Less:Wells Fargo Mortgage balance: ($140,000)Projected real estate commission, transfer tax and closing ($ 20,960)costs if property were sold:Total $160,960Net Equity: $371,040Debtor's Net Equity transferred to Defendant: $185,520--------Defendant then asserts that she was entitled to the followingcredits against Debtor's Net Equity:Child support arrears, pursuant to pendente lite order: $ 45,532Parents loan to parties to build and maintain the marital $ 61,000residence (total $122,000) l/2 due from Debtor:Repairs and maintenance of $8,300 to house during divorce; $ 4,150one half charged to Debtor per pendente lite order):Outstanding bills for life insurance, automobile insurance, $ 1,800water and miscellaneous, which was Debtor's obligationduring the divorce, per pendente lite order but whichDebtor did not pay:Defendant's attorney's legal fee, which Debtor did not pay: $ 29,500One half of marital assets improperly taken by Debtor: $ 15,213Value of waiver of interest in Debtor's $92,000 annuity: $ 32,200Waiver of maintenance (alimony) of $1,000 per month for 48 $ 48,000months:Total value to Debtor from settlement: $237,395--------Thus, even if this Court did examine the considerationexchanged under the Settlement Agreement and theJudgment of Divorce, the Defendant argues she did notreceive a fraudulent transfer as a matter of law, and that,in fact, Debtor received more value than he relinquished.Agreed value of the Marital Residence: 532,000Less: Wells Fargo Mortgage balance $140,000Net Equity: $392,000The Debtor's interest in the Marital Residence: $196,000The Trustee asserts that the proper calculation regardingthe Transfer is as follows:Then, according to the precise terms of the SettlementAgreement, the Trustee asserts Defendant was entitled toonly the following credits:Support arrears under the pendente lite Order: $ 45,532© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

397 B.R. 642 Page 12397 B.R. 642(Cite as: 397 B.R. 642)Her right to receive child support and maintenance through $ 30,000September 16, 2004:Her interest in Debtor's annuity: $ 32,200Debtor's total remaining equity interest (if "loan" from $ 88,268 ORDefendant's parents is properly characterized as a gift):--------Debtor's total remaining equity interest (if "loan" is $ 27,268incorrectly deemed a loan):-------------------------------------------------------------------------------Thus, argues the Trustee, the Transfer was without fairconsideration as Debtor was still owed, at a minimum,$27,268 and, as such, the Transfer amounted to a fraudulentconveyance. The Trustee further asserts that the parents'"loan" should be properly characterized as a gift underNew York law, because no documents substantiatedthe parents' loan, there was no interest to be charged, andthere were no agreed payment terms.[12] The Court will separately address each of the Trustee'sclaims. First, the Trustee cannot assert that the Defendantcan only claim the consideration stated in the SettlementAgreement as what she surrendered in order toreceive the Transfer, when the Trustee is also seeking tounwind that very agreement. If this Court considered theTrustee's claims at trial, the Court would compare all ofthe consideration given up by the Defendant in order toreceive the Transfer, not just those set out in the preciseterms of the Settlement Agreement. Defendant has establishedby competent summary judgment evidence that shemade concessions, and therefore provided value, in excessof those detailed in the precise terms of the SettlementAgreement.However, even if the Court were to limit Defendant tothe precise terms of the Settlement Agreement as the consideration*656 she provided, she still did not receive afraudulent transfer. For fraudulent transfer purposes, if theDefendant's parents made a loan for improvements to theMarital Residence for which the Debtor was liable orwhich encumbered the Marital Residence, the Debtorreceived value under Section 548(a)(2) by the extinguishmentof that obligation. As noted above, "value" asdefined under Section 548(d)(2), includes satisfaction orsecuring of an antecedent debt.The Defendant's Parents Made a Loan to Debtor andDefendantThe only evidence before the Court on whether or not aloan was made by Defendant's parents are the Affidavit ofDefendant [dkt item 15] and her deposition testimony [dktitem 17]. In her Affidavit, Defendant stated:22. Forgiveness of Parental Loan-During our marriage,my parents lent us $122,000 to help us build our maritalresidence and make improvements to it. As part of thedivorce settlement, I waived any repayment of thesemonies by the debtor on my parents' behalf. The Judgmentof Divorce states "The plaintiff's waiver of his interestin the marital residence is also the result of theseparate property claim, which the defendant had as aresult of the monies contributed to the purchase of thehome and improvements by the defendant's parents."(Exhibit C--Judgment of Divorce, page 7, paragraph b)The Judgment of Divorce therefore treated this moneyas part of the property settlement to which I was entitled,but which I waived.[dkt item 15].In her deposition, Defendant specifically denied that "anyof this money was meant to be a gift," and she testifiedregarding deposits her parents made to her account andthe use of the funds for the home [dkt item 17, Exs. E, F& G].In the Settlement Agreement, Debtor agreed, inter alia,as follows:The Husband's waiver of his interest in the marital residenceis also the result of the separate property claimswhich the wife had as a result of monies contributed tothe purchase of the home and its improvements by thewife's parents.[dkt item 15, Ex. A, p. 22].Thus, based on the evidence before the Court, and drawingall proper inferences, the Trustee has failed to create agenuine issue of material fact as to whether the parents'loan was a loan or a gift. Therefore, this Court treats thefunds advanced by Defendant's parents as a loan.Even if the parents had not made an enforceable loan,however, Debtor ratified his obligation for these advancesin the Settlement Agreement by acknowledging that De-© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

397 B.R. 642 Page 13397 B.R. 642(Cite as: 397 B.R. 642)fendant had separate property claims for the loan. Thisratification occurred more than ninety (90) days beforeDebtor filed for bankruptcy protection. As such, theDebtor did receive value for the release of his obligationsfor the loan. Had the loan not been released, the parentsmight have asserted an equitable lien against the MaritalResidence.Based upon the foregoing analysis, this Court holds thatthe Transfer was not a fraudulent transfer, and therefore,the Trustee's Claim under Section 548 must fail. Accordingly,for the reasons stated above, the Court finds thatthat portion of the Debtor's motion seeking summaryjudgment on Count 1 of the Amended Complaint shouldbe granted, and that portion of the Trustee's Cross-Motionon Count 1 of the Amended Complaint should be denied.The Transfer Was Not a Constructive Intent FraudulentConveyanceIn Count 2 of the Amended Complaint, the Trustee allegesthat the Transfer can *657 be avoided under DCL §273 as a constructively fraudulent conveyance. An essentialelement to proving a constructively fraudulent conveyanceis that the transfer lacks fair consideration. Asnoted above, DCL § 272 defines fair consideration. ThisCourt adopts the above analysis of the exchange of considerationas it relates to Count 1 of the Amended Complaint,and hereby incorporates by reference that analysiswith respect to Count 2 of the Complaint. As a result,Debtor received fair consideration as a matter of law.Therefore, that portion of Defendant's motion seekingsummary judgment as to Count 2 of the Amended Complaintshould be granted, and that portion of the Trustee'sCross-Motion as to Count 2 of the Amended Complaintshould be denied.The Transfer Was Not a Conveyance by a Person Aboutto Incur DebtsThe Trustee in Count 3 of the Amended Complaint seeksto avoid the Transfer under DCL § 275 as a conveyancemade by a person about to incur debts. As with DCL §273, an essential element to the DCL § 275 claim is thatthe transfer was made or incurred without fair consideration.The Court adopts its analysis and conclusion above,that Debtor received fair consideration as a matter of law.Therefore, that portion of Defendant's motion seekingsummary judgment as to Count 3 of the Amended Complaintshould be granted, and that portion of the Trustee'sCross-Motion as to Count 3 of the Amended Complaintshould be denied.The Transfer Was Not a PreferenceCount 5 of the Amended Complaint seeks to avoid theTransfer as a preference under Section 547. First, as to theparents of the Defendant, repayment of their loan was notan insider preference. In addition, Defendant did not receivea preference.[13][14] The Trustee bears the burden of proof on allelements of a preference claim under Section 547. Includedwithin those elements are insolvency of the debtorat the time of the Transfer, under Section 547(b)(3), andthat the transferee received more than it would have receivedunder Chapter 7 had the transfer at issue not beenmade, under Section 547(b)(5). The Trustee has failed toraise a genuine issue of material fact on either of theseelements.Section 547(f) creates a presumption that the Debtor wasinsolvent, but that presumption applies only to the ninety(90) days preceding the petition date. Here, the Transferoccurred ninety-four (94) days preceding the petition dateif measured from the Decree of Divorce, or one hundredand twenty-five (125) days prior to the petition date ifmeasured from the date of the Transfer itself. As such,there is no presumption of insolvency.The only evidence of solvency of the Debtor before thisCourt is Debtor's retention of his $92,000 annuity andDebtor's retention of certain personal property. As Debtorclearly had equity in the Marital Residence, and was relievedof all other marital liabilities, the Court cannotconclude that a genuine issue exists as to Debtor's insolvencyat the time of Transfer.Moreover, the Trustee did not provide evidence of insolvency.He simply stated in his Affirmation that "Debtorwas insolvent at the time the parties entered into the SettlementAgreement." [dkt item 17, Ex. 2, 3] This unsupportedconclusion is not adequate under Anderson andMatsushita to raise a genuine issue of material fact. SeeAnderson, 477 U.S. at 249, 106 S.Ct. 2505, andMatsushita, 475 U.S. at 586, 106 S.Ct. 1348. Moreover,the Trustee's assertion does not address November 11,2003, when the Transfer occurred, or December 10, 2003,when the Judgment of Divorce was entered. As such, theTrustee *658 did not raise a genuine issue of material facton Debtor's insolvency.Therefore, that portion of Defendant's Motion seekingsummary judgment as to Count 5 of the Amended Complaintshould be granted, and that portion of the Trustee's© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

397 B.R. 642 Page 14397 B.R. 642(Cite as: 397 B.R. 642)Cross-Motion as to Count 5 of the Amended Complaintshould be denied.This Court Does Not Reach the Issue of Application ofBFP to a Preference ClaimIn light of this Court's disposition of the Trustee's preferenceclaim, this Court need not and therefore does notreach the issue of the application of BFP v. ResolutionTrust Corp. to a preference claim under Bankruptcy Code§ 547.The "Repayment" of the Parents' Loan was Not a PreferenceThe Trustee argues that, even if the money provided tothe Debtor and Defendant by Defendant's parents is considereda loan, the "repayment" of the $61,000 Debtorallegedly owed the parents should still be set aside as animpermissible preference to an insider pursuant to Section547. As noted above, the repayment of the parents' loanoccurred more than ninety days prior to the Petition Date.As there is no genuine issue of material fact as to Debtor'ssolvency during that period, Defendant's parents did notreceive an insider preference.This Court Rejects Defendant's Affirmative Defenses tothe Preference ClaimThis Court rejects Defendant's affirmative defenses to theTrustee's preference claim. Defendant asserts that the repaymentof the parents loan was not a preference based onthe defense of "contemporaneous exchange" underBankruptcy Code Section 547(c)(1), and as a support obligationunder Section 547(c)(7). Defendant asserts asfollows:The defendant in return for obtaining the debtor's halfinterest in the marital residence, gave up a basket ofitems as outlined in her Affidavit. This is clearly the"contemporaneous exchange" referred to in BankruptcyCode § 547(c)(1), as a defense to a preferential transferclaim. In fact, the Judgment of Divorce treats the maritalresidence transfer and the settlement agreement as"contemporaneous." (Exhibit C, page 7, paragraph b)16. As a further defense to this preferential claim underBankruptcy Code § 547, the defendant in her answer tothe amended complaint refers to Bankruptcy Code §547(c)(7) which provides that a bona fide payment of adebt to a spouse, former spouse or child of the debtorfor alimony, maintenance or support for such spouse orchild in connection with a separation agreement, divorcedecree or other order of a court of record made inaccordance with a state law or property settlementagreement is a defense to a preferential transfer claim.Clearly § 547(c)(7) was intended to protect spouses orformer spouses against the preferential payment claimsby trustees.[dkt items 15].[15] Defendant's affirmative defense of contemporaneousexchange under Section 547(c)(1) is rejected. The obligationsto Defendant's parents that arose prior to or evenduring the course of the divorce proceedings were notcontemporaneous exchanges with the Transfer, nor werethose exchanges intended to be contemporaneous. Thoseobligations preceded the Transfer and were released as aresult of the Transfer.[16] Moreover, the parents' loan does not qualify for theaffirmative defense under Section 547(c)(7). As Section547(c)(7) stood prior to the enactment of BAPCPA, thisdefense was for payments made on a *659 bona fide debtto the extent made for alimony, maintenance or support ofthe spouse or former spouse of the debtor or a child of thedebtor. Here, the parents' loan does not qualify for thisdefense.ConclusionSummary judgment will be granted in favor of Defendantand denied as to the Trustee on Counts 1, 2, 3, and 5 ofthe Trustee's Amended Complaint. Summary judgment isdenied as to both parties on Counts 4, 6, 7, and 8. A trialdate will be scheduled by the Court on these remainingclaims. A separate judgment hereon will be entered.397 B.R. 642END OF DOCUMENT© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

443 F.3d 180 Page 1443 F.3d 180(Cite as: 443 F.3d 180)Westlaw Delivery Summary Report for DANIELS,JEFFREYDate/Time of Request:Wednesday, October 21, 2009 18:26 EasternClient Identifier:NALDatabase:CTACitation Text: 443 F.3d 180Lines: 825Documents: 1Images: 0The material accompanying this summary is subject to copyright. Usage is governed by contract with ThomsonReuters, West and their affiliates.United States Court of Appeals,Second Circuit.Lorraine G. GRACE, Individually and as Executrixof the Estate of Oliver R.Grace, Gerald I. White, Trustee U/W Morgan H.Grace, for the Marital DeductionTrust, Gerald I. White, Trustee U/W Morgan H.Grace for the Non-MaritalDeduction Trust and Gerald I. White, Trustee U/WMorgan H. Grace for theGeneration Skipping Trust and Gerald I. White, Trusteeof the John E. GraceTrust, individually and as stockholders of BriggsLeasing Corp., suing onbehalf of themselves and for the benefit of said corporationand for the classof all other stockholders of said corporation similarlysituated, Plaintiffs-Appellants,v.BANK LEUMI TRUST COMPANY OF NEWYORK, David Mack, the Estate of Leo V. Berger,Apex Marine Corp., Harvey Schwartz, Phyllis Sepeand Sigmund Kassap, Trustee ofthe Leo V. Berger Grantor Trust No. 1 as PersonalRepresentative of the Estateof Leo V. Berger, Non-Party Movants-Defendants-Appellees,Robert Rosenstock, Robert Genser, Edward Rosenstock,Briggs Leasing Corporationand Briggs Acquisition Corporation, Defendants.Docket Nos. 04-5824-CV(L), 04-5840(C0N), 04-5842-CV(CON).Argued: Sept. 12, 2005.Decided: April 4, 2006.Background: Former minority shareholders of corporation,as purported judgment creditors of corporationand its majority shareholder, brought fraudulentconveyance action against corporation's transferees.Transferees moved to vacate predicate judgmentagainst corporation and majority shareholder. TheUnited States District Court for the Eastern Districtof New York, Trager, J., granted motion, and subsequentlydismissed fraudulent conveyance claims.Former shareholders appealed.Holdings: The Court of Appeals, Pooler, CircuitJudge, held that:(1) transferees had standing to move to vacate predicatejudgment even though they had not been party toit;(2) motion to vacate was timely; and(3) predicate judgment was void, based on, inter alia,majority shareholder's having acted for corporationdespite conflict of interest.Affirmed.West Headnotes[1] Federal Courts 829170Bk829 Most Cited CasesDistrict court's decision on motion for relief fromjudgment is reviewed for abuse of discretion.Fed.Rules Civ.Proc.Rule 60(b), 28 U.S.C.A.[2] Federal Civil Procedure 2650170Ak2650 Most Cited CasesIn former minority shareholders' fraudulent conveyanceaction against corporation's transferees, brought© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

443 F.3d 180 Page 2443 F.3d 180(Cite as: 443 F.3d 180)in shareholders' capacity as purported judgmentcreditors of corporation and its majority shareholder,transferees had standing to move to vacate predicateunsatisfied judgment, even though they had not beenparty to it; purpose of stipulation upon which judgmenthad been based was to collect money fromtransferees, and corporation was judgment-proof andnot represented by counsel at time of judgment.Fed.Rules Civ.Proc.Rule 60(b), 28 U.S.C.A.;N.Y.McKinney's Debtor and Creditor Law § 273-a.[3] Federal Civil Procedure 2650170Ak2650 Most Cited CasesWhere plaintiff enters into settlement agreement withjudgment-proof, pro se defendant with intent at timeof settlement to collect from third party that allegedlyreceived fraudulent conveyances, and further, plaintiffattempts to use judgment as predicate for fraudulentconveyance action against third party, third partyis strongly affected by judgment and entitled tostanding to bring motion for relief from it. Fed.RulesCiv.Proc.Rule 60(b), 28 U.S.C.A.[4] Fraudulent Conveyances 8186k8 Most Cited CasesTo prevail on claim under New York fraudulent conveyancestatute, plaintiff must establish that: (1) conveyancewas made without fair consideration; (2)conveyor is defendant in action for money damages,or judgment in such action has been docketed againsthim; and (3) defendant has failed to satisfy judgment.N.Y.McKinney's Debtor and Creditor Law § 273-a.[5] Federal Civil Procedure 2658170Ak2658 Most Cited CasesIn former minority shareholders' fraudulent conveyanceaction against corporation's transferees, broughtin shareholders' capacity as purported judgmentcreditors of corporation and its majority shareholder,transferees' motion to vacate predicate judgment asvoid was timely, even though filed more than fiveyears after that judgment; shareholders themselveshad created significant delay by bringing fraudulentconveyance claim more than 15 years after subjectconveyances, and five years after unsatisfied judgment,and motion to vacate was reasonably filed inresponse to fraudulent conveyance claim. Fed.RulesCiv.Proc.Rule 60(b)(4), 28 U.S.C.A.;N.Y.McKinney's Debtor and Creditor Law § 273-a.[6] Constitutional Law 401292k4012 Most Cited Cases(Formerly 92k315)[6] Corporations 522101k522 Most Cited Cases[6] Corporations 542(1)101k542(1) Most Cited Cases[6] Federal Civil Procedure 2392170Ak2392 Most Cited CasesJudgment against corporation and corporation's nonattorneymajority shareholder, which was based onstipulation of settlement signed by majority shareholderon his own and corporation's behalf, was void,precluding its use as predicate for plaintiffs' fraudulentconveyance action against corporation's transferees;no evidentiary hearing had been held and no detailedaffidavits received, corporation's pro se statusprecluded its execution of stipulation, and corporationand majority shareholder had conflicting interestsand thus court's basing judgment on stipulationviolated corporation's due processrights. U.S.C.A. Const.Amend. 5; Fed.RulesCiv.Proc.Rules 55(b)(2), 60(b)(4).[7] Corporations 508101k508 Most Cited Cases[7] Federal Civil Procedure 2415170Ak2415 Most Cited CasesCorporation may not appear in federal lawsuit againstit except through attorney, and where corporationrepeatedly fails to appear by counsel, default judgmentmay be entered against it. Fed.RulesCiv.Proc.Rule 55, 28 U.S.C.A.*182 Sidney Bender and Risa Bender, LeventrittLewittes & Bender, New York, NY, for Plaintiffs-Appellants.Robert Fryd and Donna Levinsohn, WarshawBurstein Cohen Schlesinger & Kuh, LLP, New York,NY, for Non-Party Movant-Defendant-AppelleeBank Leumi Trust Company of New York.David T. Azrin and Harvey Schwartz, Gallet Dreyer& Berkey, LLP, New York, NY, for Non-Party© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

443 F.3d 180 Page 3443 F.3d 180(Cite as: 443 F.3d 180)Movants-Defendants-Appellees David Mack, theEstate of Leo V. Berger, Apex Marine Corp., HarveySchwartz, Phyllis Sepe and Sigmund Kassap, Trusteeof the Leo V. Berger Grantor Trust No. 1 as PersonalRepresentative of the Estate of Leo V. Berger.CARDAMONE, CABRANES, and POOLER, CircuitJudges.POOLER, Circuit Judge.Three appeals have been consolidated in this case.On July 3, 1985, plaintiffs-appellants ("plaintiffs")commenced a federal *183 action, against BriggsLeasing Corporation ("Briggs"), Briggs AcquisitionCorporation ("BAC"), and individual defendants, inwhich plaintiffs asserted individual, class, and derivativeclaims for "equitable and other relief." On March17, 1994, the United States District Court for theEastern District of New York (Johnson, J.), entered adefault judgment against Briggs. A trial against defendantRobert Rosenstock and an inquest to fixdamages against Briggs were scheduled to begin inAugust 1997. On July 31, 1997, plaintiffs and RobertRosenstock entered into a stipulation of settlementagainst Briggs and Robert Rosenstock. On August 5,1997, the United States District Court for the EasternDistrict of New York (Trager, J.) approved the stipulationby order and directed the clerk to enter a finaljudgment, which the clerk did against Briggs on August15, 1997.In 2002, plaintiffs brought fraudulent conveyanceactions in the United States District Court for theSouthern District of New York, against non-partymovants-defendants-appellees ("movants"), underNew York Debtor and Creditor Laws ("DCL"),predicated upon the August 15, 1997, judgmentagainst Briggs. In late 2002, movants initiated proceedingsto vacate plaintiffs' judgment against Briggsunder Rules 60(b)(4) and 60(b)(6) of the FederalRules of Civil Procedure.The district court (Trager, J.) granted movants' motionto vacate. Grace v. Rosenstock, No. 85-cv-2039(E.D.N.Y. Oct. 4, 2004). The district court also dismissedthe fraudulent conveyance actions, becausewithout an uncollected judgment as a predicate, therecould be no cause of action for fraudulent conveyances.Grace v. Bank Leumi, No. 04-cv-0708(E.D.N.Y. Oct. 6, 2004); Grace v. Schwartz, No. 04-cv-1622 (E.D.N.Y. Oct. 14, 2004).We affirm.BackgroundPrior to 1985, Briggs was a publicly-held autoleasingcompany incorporated in New York. RobertRosenstock, his father Edward Rosenstock, andRobert Genser ("Genser") were officers and directorsof Briggs and owned, respectively, approximately 64percent, 3 percent, and 5 percent of its outstandingstock. In January 1985, Robert Rosenstock and Genserdecided to take Briggs private in a freeze-outmerger. [FN1] They incorporated BAC and plannedto merge BAC and Briggs, buy out Briggs's minorityshareholders, and make Briggs the surviving corporation.Rosenstock and Genser contributed all of theirBriggs shares to BAC. Rosenstock purchased hisfather's shares of Briggs stock and contributed themto BAC. As a result, BAC owned 72 percent of thestock of Briggs, with Rosenstock and Genser owningall of the stock of BAC.FN1. Under New York's Business CorporationLaw ("BCL"), a merger may be authorizedby the affirmative vote of two-thirds ofthe corporation's shares. See N.Y. BCL §903(a)(2) (McKinney 2006).Briggs outlined a plan for a merger with BAC in aJanuary 1985 proxy statement to its shareholders. Allshareholders would be bought out at $1.50 per share.Eighty-six percent of the minority shareholders, includingnamed plaintiffs, filed notices of election todissent. A February 1985 special meeting approvedthe merger based solely on BAC's vote. At the meeting,plaintiffs voted their shares against the merger.The merger was nevertheless consummated on February26, 1985, when Rosenstock and Genser becamethe sole holders of Briggs shares, owning approximately93 percent and 7 percent, respectively.*184 On May 20, 1985, plaintiffs brought an appraisalaction against Briggs in the Supreme Court ofthe State of New York, Nassau County, to fix the fairvalue of their shares as dissenting shareholders.[FN2] Briggs answered this action through counselon July 23, 1985. Plaintiffs also notified the statecourt of their intention to file a federal action andrequested that their appraisal action be held in abeyancepending the final determination of their case in© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

443 F.3d 180 Page 4443 F.3d 180(Cite as: 443 F.3d 180)federal court. The state court did so on October 7,1985. Plaintiffs then commenced a federal action,asserting individual, class, and derivative claims for"equitable and other relief," in an amended complaintdated July 1, 1985. They named Robert Rosenstock,Genser, Edward Rosenstock, Briggs, and BAC asdefendants. They alleged, inter alia, violations of theSecurities Exchange Act of 1934, the New YorkBusiness Corporation Law ("BCL"), and fiduciaryduties. They also brought derivative actions on behalfof Briggs against Robert Rosenstock, Genser, andEdward Rosenstock, for allegedly using corporatefunds for personal expenses and diverting corporateopportunities to competing companies they owned.They requested that the class action be certified, themerger be set aside, the terms of the merger be reformed,the defendants "account for the damagessuffered by Briggs and the profits and benefits enjoyedby the individual defendants by reason of [theirwrongful conduct]," and the court give "such other,further, and different relief as may be just, includingdamages, together with costs, disbursements and areasonable fee for plaintiffs' attorneys." DefendantsRobert Rosenstock, Genser, and Edward Rosenstockanswered this complaint on July 22, 1985, and Briggsanswered separately, also on July 22, 1985. Briggsand the individual defendants were represented bydifferent attorneys.FN2. This action was brought under NewYork's BCL. See N.Y. BCL § 623(h)(1)(McKinney 2006). The named plaintiffsowned approximately 1.25 percent of Briggsstock prior to the merger, and the classowned about 14 percent, roughly equivalentto 83,402 shares.In an August 14, 1986, memorandum and order, thedistrict court (Costantino, J.) granted plaintiffs' motionfor class certification. Grace v. Rosenstock, No.cv-85-2039 (E.D.N.Y. Aug. 14, 1986) ("Grace I").[FN3] In January 1988, Finley, Kumble, Wagner,Heine, Underberg, Manley & Casey ("Finley Kumble"),the law firm that represented Briggs, declaredbankruptcy, leaving Briggs without legal representation.Michael Rosen, the attorney for the individualdefendants, determined that Briggs and his clientshad a conflict of interest, and he could therefore notrepresent Briggs. Briggs did not appear by counselfor the next five years. Meanwhile, on January 19,1989, an order of discontinuance was entered by theUnited States District Court for the Eastern Districtof New York (Costantino, J.), because the court receiveda report stating that the action had been settled.Grace v. Rosenstock, No. 85-cv-2039 (E.D.N.Y.Jan. 19, 1989) ("Grace II"). In fact, Halperin v.Rosenstock, No. 85-cv-1258, an action brought byRobert Rosenstock's sister and brother-in-law (alsoBriggs minority shareholders), had settled. This settlementinadvertently led Judge Costantino to closeGrace I.FN3. Because of the long and complex proceduralhistory in this case, each of the federalcourt decisions has been assigned, inchronological order, a roman numeral forthe purposes of this opinion. For ease of referencewe attach an appendix identifyingGrace I through XIII.Four years later, on March 1, 1993, plaintiffs movedto set aside the order of discontinuance and reopenGrace I. On *185 March 24, 1993, an order from theUnited States District Court for the Eastern Districtof New York (Raggi, J.) held that Grace I had beenclosed in error and reopened it. Grace v. Rosenstock,No. cv-85-2354 (E.D.N.Y. Mar. 29, 1993) ("GraceIII"). Plaintiffs then moved for a default judgmentagainst Briggs and BAC on the issue of liability, andfor an inquest after discovery to determine theamount of damages to be included in the judgment.Michael Rosen filed a motion to withdraw as counselfor defendants in June 1993. Genser obtained newcounsel. Briggs and Rosenstock did not obtain newcounsel. In 1993, pursuant to Rule 55 of the FederalRules of Civil Procedure, default judgments wereentered against Briggs and BAC, as neither corporationwas represented by counsel. Grace v. Rosenstock,No. 85-cv-2039 (E.D.N.Y. June 8, 1993)("Grace IV").Almost two-and-one-half years later, in January1996, plaintiffs moved for leave to amend the complaint,which had been filed nearly nine years earlier,to assert additional claims against the defendants andadd additional defendants, including non-partymovants. Plaintiffs wanted to set aside as void theallegedly fraudulent transfers to Bank Leumi, DavidMack, Leo V. Berger, and Apex Marine Corporation.Plaintiffs alleged that Briggs executed promissorynotes and mortgages on real property in favor of Bergerand Mack, in exchange for loans. Neither party© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

443 F.3d 180 Page 5443 F.3d 180(Cite as: 443 F.3d 180)disputed that Berger and Mack paid out and loanedthe full amount, but plaintiffs alleged that pursuant toRobert Rosenstock's and Genser's instructions, Bergerand Mack disbursed some of the money in theloans to Rosenstock and Genser individually. Thedistrict court (Levy, M.J.) issued a memorandum andorder on September 30, 1996, which denied permissionto add new defendants and assert new claims.See Grace v. Rosenstock, 169 F.R.D. 473, 480-86(E.D.N.Y.1996) ("Grace V"). Judge Levy reasonedthat the new claims did not relate back to the originalcomplaint, in part because they set forth "a completelynew set of operational facts." Id. at 481. JudgeLevy also denied plaintiffs' arguments on equitabletolling and equitable estoppel, explaining, "althoughplaintiffs complain that they did not learn of the allegedfraudulent conveyances until late 1995, theyclearly could have learned of the note and mortgagetransactions earlier had they been more diligent innoticing depositions or seeking court interventionregarding discovery." Id. at 484.Judge Trager affirmed Judge Levy's order in its entirety,Grace v. Rosenstock, No. 85-cv-2039(E.D.N.Y. Nov. 7, 1996) ("Grace VI"), and on February28, 1997, plaintiffs were denied leave to take aninterlocutory appeal. On July 28, 1997, the partiesattended a status conference before the district court(Wolle, J.). According to plaintiffs, "the only partiesthat were then appearing before Judge Wolle werethe party of plaintiffs, plaintiff [sic ] Rosenstock, prose and Briggs Leasing by Mr. Rosenstock." Plaintiffsentered into a stipulation of settlement dated July 31,1997, as to their claims against defendants RobertRosenstock and Briggs. Rosenstock, who accordingto plaintiffs was judgment-proof, executed the stipulationon behalf of himself for $6,912,288, and onbehalf of Briggs for $4,028,000. Neither Rosenstocknor Briggs had legal representation. Judge Tragerentered a judgment for these amounts against bothRosenstock and Briggs. Grace v. Rosenstock, No. 85-cv-2039 (E.D.N.Y. Aug. 15, 1997) ("Grace VII").The judgment declared as moot the state court proceedingsagainst both Rosenstock and Briggs. Id.After entry of the 1997 judgment, plaintiffs andGenser consented to have all further proceedings,including entry of any *186 judgment, conducted bya magistrate judge. The matter was referred to MagistrateJudge Levy. Following a bench trial, JudgeLevy dismissed the claims against Genser in theirentirety. See Grace v. Rosenstock, 23 F.Supp.2d 326,337 (E.D.N.Y. Oct.29, 1998) ("Grace VIII"). Plaintiffsappealed from the dismissal of their claims andwe affirmed the judgment on August 25, 2000. SeeGrace v. Rosenstock, 228 F.3d 40 (2d Cir.2000)("Grace IX"). In that case, we affirmed, inter alia, theorder denying leave to add claims and parties, issuedby Judge Levy in Grace V; the order dismissingplaintiffs' claims against Genser, issued by JudgeLevy in Grace VIII; and Judge Levy's denial of otherarguments advanced by plaintiffs, including equitableestoppel and equitable tolling. Id. at 52-55. [FN4]FN4. Although we did concede that the limitationsperiod had not yet begun to run as tothe DCL § 273-a claims, we nonetheless didnot reverse because the plaintiffs were foundto have waived their nonaccrual objection tothe magistrate judge's ruling. Grace IX, 228F.3d at 54.According to plaintiffs, writs of execution againstBriggs and Rosenstock were returned unsatisfied. InAugust 2002, plaintiffs commenced separate actionsin the Southern District of New York against Briggsand movants, using the unsatisfied 1997 judgment asa predicate to bringing fraudulent conveyance claimsagainst movants, under Section 273-a of DCL. SeeN.Y. CLS Dr & Cr § 273 (2006). Plaintiffs allegedthat notes, guarantees, and mortgages on real propertyof Briggs, given to movants between 1986 and1989, were made without fair consideration. [FN5]Plaintiffs argued that movants helped Robert Rosenstockloot the corporation by giving the loans directlyto Robert Rosenstock and other companies he owned.FN5. Although movants did receive proceedsof real estate sales made by Briggs,these payments were allegedly millions ofdollars less than the amounts they hadloaned.On February 13, 2004, the first fraudulent conveyanceaction was transferred from the United StatedDistrict Court for the Southern District of New York(Berman, J.), to the United Stated District Court forthe Eastern District of New York. Grace v. BankLeumi Trust Co., No. 02-cv-6612(S.D.N.Y. Mar. 30,2004), 2004 U.S. Dist. LEXIS 5294 at *6 ("GraceX"). This had the effect of transferring the secondaction for fraudulent conveyance. Id. at *17. Judge© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

443 F.3d 180 Page 6443 F.3d 180(Cite as: 443 F.3d 180)Berman reasoned that the proper venue was the EasternDistrict, the alleged fraudulent conveyances involvedreal property located in the Eastern District,the transfer promoted efficiency, and plaintiffs'choice of forum was entitled to little weight. He alsocalled the plaintiffs' choice of forum an attempt at"judge shopping." Id. at *13.In October 2002, movants had written to JudgeTrager to request a pre-motion conference, explainingthat they intended to file a motion to vacate the 1997judgment. In 2003, movants filed motions to vacate.The district court then issued a memorandum andorder, which addressed movants' arguments for vacatingthe judgment. Grace v. Rosenstock, No. 85-cv-2039 (E.D.N.Y. Oct. 4, 2004) ("Grace XI"). Thesereasons included the following: (1) Briggs was notrepresented by counsel when the settlement was entered;(2) Robert Rosenstock lacked power to confessjudgment against Briggs; (3) the amount of the defaultjudgment against Briggs exceeded the reliefsought against Briggs in the original complaint; and(4) the class was not notified of the settlement and afairness hearing was not held. See id. at 9.*187 Judge Trager vacated the 1997 judgment asvoid under Rule 60(b) of the Federal Rules of CivilProcedure. He explained that it is well-settled lawthat a corporation may appear in the federal courtsonly through licensed counsel; damages for a defaultjudgment should not be awarded without a hearing ora demonstration by affidavits establishing the facts;no inquest was held because the stipulation was thebasis for entry of judgment against Briggs; rescissorydamages are not available for freeze-out mergers; theamount was both excessive and different in kind fromthat sought in the complaint; and there was evidenceof collusion between Rosenstock and plaintiffs to thedetriment of movants. Grace XI, at 9-20. JudgeTrager concluded, "[i]n any event, movants shouldnot be required to suffer further legal costs to bring asummary judgment motion, while plaintiffs pressforward with a 19-year-old litigation fraught withprocedural errors and excessive, if not completelymeritless, claims." [FN6] Id. at 20. He then dismissedthe two fraudulent conveyance actions, because therewas no longer a judgment on which to collect. Gracev. Bank Leumi, No. 04-cv-0708 (E.D.N.Y. Oct. 6,2004) ("Grace XII"); Grace v. Schwartz, No. 04-cv-1622 (E.D.N.Y. Oct. 14, 2004) ("Grace XIII").FN6. Although the merits of this case werenot an issue, Judge Trager neverthelessnoted that "even if the Judgment were upheld,plaintiffs would probably not survive amotion for summary judgment," Grace XI,at 19. He explained that he was skepticalthat Bank Leumi did not give fair considerationfor the mortgages. Id. at 20. He wrotethat if Briggs was not a defendant in an actionfor money damages when the conveyanceswere made, DCL § 273-a did not applyand therefore the judgment could not affectmovants. And he found that the transfersto Mack, Berger, and Apex occurredwhile this action was administrativelyclosed. Id. Therefore, if they had checkedthe court documents (which movants saidthey did), they would have found that thecase was administratively closed because ofa pending settlement. Id.Plaintiffs filed an appeal to this Court on November1, 2004.DiscussionI. JurisdictionWe have jurisdiction over the appeals of Grace XI,Grace XII, and Grace XIII based on 28 U.S.C. §1291, the notices of appeal having been filed on November1, 2004. The district court had jurisdictionover Grace XI under 28 U.S.C. § 1331, as it was anaction arising under federal law. Jurisdiction inGrace XII and Grace XIII was based on Rule 69 ofthe Federal Rules of Civil Procedure, because theyconcerned the collection of a federal judgment. SeeEpperson v. Entm't Express, Inc., 242 F.3d 100, 107(2d Cir.2001); Fed.R.Civ.P. 69.II. Standard of Review[1] Federal Rule of Civil Procedure 60(b) decisionsby district courts are accorded deference. We reverseonly where there has been an abuse of discretion. SeeLawrence v. Wink (In re Lawrence), 293 F.3d 615,623 (2d Cir.2002); Nemaizer v. Baker, 793 F.2d 58,61-62 (2d Cir.1986). [FN7]FN7. When we recognized in Central VermontPublic Service Corp. v. Herbert, 341F.3d 186 (2d Cir.2003), that "[a]lmost everyCircuit has adopted de novo review of Rule60(b)(4) motions, and we know of no Circuit© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

443 F.3d 180 Page 7443 F.3d 180(Cite as: 443 F.3d 180)that defers to the district court on a Rule60(b)(4) ruling," we were referring to a districtcourt judgment refusing to find a judgmentvoid. The language that de novo reviewis appropriate for Rule 60(b) motionshas not been adopted in this Circuit. As weexplained in Lawrence, "deferential abuse ofdiscretion review of a district court's Rule60(b) decisions reflects both the proximityof a district court to the facts of a case andthe fact that a district court typically is beingasked under Rule 60(b) to revisit its own finalorder or decision." 293 F.3d at 623.*188 III. StandingRule 60(b) states, in part, that a "court may relieve aparty or a party's legal representative from a finaljudgment, order, or proceeding ...." Fed.R.Civ.P.60(b). Here, movants are neither parties nor a party'slegal representatives. However, we observed inLawrence, 293 F.3d at 627 n. 11:several circuit courts have permitted a non-party tobring a Rule 60(b) motion or a direct appeal whenits interests are strongly affected, and we havepermitted such a motion on at least one occasion.See Dunlop v. Pan Am. World Airways, Inc., 672F.2d 1044, 1052 (2d Cir.1982) (non-party plaintiffshad standing to invoke Rule 60(b)(6) to amend afederal judgment, where they were "sufficientlyconnected and identified with the ... suit").(alternation in original). In Dunlop, movants wereprecluded from bringing an age discrimination actionbecause of a prior judgment to which they were not aparty, but which nonetheless restricted their litigationoptions. We held that "on the facts of this case appellantswere sufficiently connected and identified withthe Secretary's suit to entitle them to standing to invokeRule 60(b)(6)." 672 F.2d at 1052. While welimited our holding in Dunlop to the facts of thatcase, which are clearly distinguishable from the factshere, we rested our decision on "the principles governingstanding," which, given the facts of Dunlop,were "sufficiently flexible to permit a finding ofstanding." Id. at 1051.[2] Finding that movants here were "sufficientlyconnected and identified with" the 1997 settlement isalso in keeping with the principles governing standing.See Dunlop, 672 F.2d at 1052. Both plaintiffsand movants concur that the purpose of the 1997stipulation was to collect money from movants.Plaintiffs argue that they laid out their strategy toobtain a judgment against Briggs in order to pursuecollection of that judgment by recapturing the fraudulentconveyances from movants. This is evidencednot only by their own admissions, but also by the factthat Briggs was judgment-proof and not representedby counsel at the time of the 1993 default judgmenton liability.[3] Today, as in Dunlop, we limit our decision to thefacts of this case, and hold that where plaintiffs enterinto a settlement agreement with a judgment-proof,pro se defendant with the intent at the time of thesettlement to collect from a third party that allegedlyreceived fraudulent conveyances, and further, theyattempt to use the judgment as a predicate for afraudulent conveyance action against the third party,the third party is "strongly affected" by the judgmentand entitled to standing to bring a Rule 60(b) motion.See Lawrence, 293 F.3d at 627 n. 11. This decisiondoes not mean that similarly situated plaintiffs mustautomatically defend their judgments from thirdpartytransferees. Rather, if a plaintiff holds a judgmenton liability against a judgment-proof pro sedefendant and hopes to use the judgment as a predicatefor a fraudulent conveyance claim, she need onlycarry out a judicially supervised inquest to protect herjudgment.[4] To prevail on a claim under DCL § 273-a, aplaintiff must establish (1) that the conveyance wasmade without fair consideration; (2) that the conveyoris a defendant in an action for money damagesor that a judgment in such action has been docketedagainst him; and (3) that the defendant has failed tosatisfy the judgment. See N.Y. CLS Dr & Cr § 273a.It is not the judgment itself that plaintiffs collect fromtransferees. Therefore, the unsatisfied judgment,while a necessary predicate to bringing a DCL § 273-a case, *189 is not a sword that can be directly turnedupon third-party transferees. The proper remedy in afraudulent conveyance claim is to rescind, or setaside, the allegedly fraudulent transfer, and cause thetransferee to return the transferred property to thetransferor. Geren v. Quantum Chem. Corp., 832F.Supp. 728, 736-37 (S.D.N.Y.1993). The "purposeof such an action is to force the debtor to recoverproperty transferred for inadequate consideration sothat the property can be used to satisfy the debt owedto the creditor." Id. at 736. The creditor's remedy is"limited to reaching the property which would have© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

443 F.3d 180 Page 8443 F.3d 180(Cite as: 443 F.3d 180)been available to satisfy the judgment had there beenno conveyance, and requiring that it be restored to thedebtor's possession." Id. (internal quotations and citationsomitted).One underlying purpose of DCL § 273-a --- to preventdefendants from liquidating their assets in contemplationof an adverse judgment --- would be underminedif third parties could routinely attack judgmentsto which they were not a party. It could addadditional and potentially onerous steps to plaintiffs'litigation before they could collect on a judgment.For instance, in a hypothetical multi-plaintiff lawsuitin which defendants are judgment-proof, some plaintiffsmight pursue DCL § 273-a claims against athird-party transferee. If the hypothetical plaintiffs'judgment were vacated under Rule 60(b), a possibledue process violation could be visited upon the absentplaintiffs. Here, as Judge Trager correctly acknowledged,the judgment has no res judicata or collateralestoppel effect on movants. It does, however,have res judicata effects on any plaintiffs or classmembers who are not a party to the fraudulent conveyancelawsuit.In this case, however, there is a strong possibilitythat the predicate judgment that forms the basis ofthis fraudulent conveyance action is the result of asettlement process devoid of due process protectionsand marred by serious procedural shortcomings.There is the appearance that plaintiffs and defendantsentered settlement negotiations with the mutual intentof laying the burden of compensating plaintiffssquarely on non-party movants. Should the fraudulentconveyance claims be heard on the merits, the trialcourt could choose not to look behind the judgmentfor any improprieties. We thus carve out an exceedinglynarrow exception to the well-established rulethat litigants, who were neither a party, nor a party'slegal representative to a judgment, lack standing toquestion a judgment under Rule 60(b).IV. TimelinessThis Circuit will not examine the merits of a judgmentif the motion to set it aside was untimely. SeeState St. Bank & Trust Co. v. Inversiones ErrazurizLimitada, 374 F.3d 158, 179 (2d Cir.2004). As JudgeTrager explained, Rule 60(b) motions brought pursuantto (b)(1), (b)(2), or (b)(3) must be made not morethan one year after the entry of judgment. Grace XI,at 10; accord Fed.R.Civ.P. 60(b). Movants could notseek to vacate it under these first three clauses andtherefore do not allege or argue mistake, newly discoveredevidence, fraud, or misrepresentation. Theyinstead rely on Rule 60(b)(4), "the judgment is void,"and Rule 60(b)(6), "any other reason justifying relieffrom the operation of the judgment," which do nothave a one-year time limit. See Fed.R.Civ.P. 60(b).[5] Plaintiffs argue that movants' Rule 60(b) motionis approximately nine years too late, because their1997 collateral attack on the appeal to the SecondCircuit demonstrates they could have made this motionthen. Plaintiffs' Br. at 49. Putting *190 aside fora moment the fact that this subverts plaintiffs' oppositionto movants' standing, plaintiffs also contend thatmovants resisted being made parties to this suit, deliberatelydecided not to cross-appeal from the 1998final order, and deliberately chose to wait for overfive years before bringing a Rule 60(b) motion. Plaintiffs'Br. at 40. Plaintiffs argue that movants shouldhave paid greater attention to a January 30, 1997,letter, from plaintiffs to Judge Trager, which argued,inter alia, that under controlling Second Circuit authorities,the statute of limitations for DCL § 273-atransfers in fraud of creditors does not begin to rununtil the defendants fail to satisfy the judgment; thatplaintiffs would go to trial to obtain a judgment thatwas allegedly worthless because Briggs was only anempty shell; and that the mortgages were not issuedfor fair consideration and were therefore fraudulent.See Plaintiffs' Br. at 41-42. Therefore, plaintiffs arguethat they "clearly laid out their strategy to obtain ajudgment against Briggs in order to pursue collectionof that judgment by recapturing the fraudulent conveyancesfrom the transferees--here, Bank Leumi,Mack, Berger and Apex Marine Corp." Plaintiffs' Br.at 43.Movants collaterally attacked the 1997 judgmentduring plaintiffs' appeal. They did so to avoid beingjoined as defendants in this litigation. They were notparties to this case, money was not being collectedfrom them, and they chose this strategy among theseveral legal options available to them. And, theywere successful. The district court agreed with theircollateral attack, and they successfully avoided beingjoined as defendants. See Grace V. Further, the courtsbelow, and this Court on appeal, uniformly deniedplaintiffs' attempts to bring fraudulent conveyanceactions against movants. See Grace V; Grace VI;Grace IX. Therefore, it would have been a self-© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

443 F.3d 180 Page 9443 F.3d 180(Cite as: 443 F.3d 180)defeating act if movants (having been kept out oflitigation) had injected themselves in the case in orderto attack a judgment that did not then affect them.A Rule 60(b)(4) motion must be made "within a reasonabletime" after entry of the judgment.Fed.R.Civ.P. 60(b). "Courts have been exceedinglylenient in defining the term 'reasonable time,' withregard to voidness challenges. In fact, it has been oftstatedthat, for all intents and purposes, a motion tovacate a default judgment as void 'may be made atany time.' " State St. Bank, 374 F.3d at 179 (quotingBeller & Keller v. Tyler, 120 F.3d 21, 24 (2dCir.1997)). In our decision in Central Vermont PublicService Corp., the Rule 60(b) motion was not untimelyalthough the movant had waited more thanfour years to bring its motion, and did so when"prompted by a suit ...." 341 F.3d at 188, 189. Weheld in State Street Bank, "where a party has previouslyfiled a motion to vacate a default judgment thatfailed to raise a voidness argument and subsequentlyadvances such an argument in a Rule 60(b)(4) motionmore than a year after the entry of the default judgment,the Rule 60(b)(4) motion should be denied asuntimely." 374 F.3d at 179. [FN8]FN8. Rule 60(b)(6) does not have a one yearlimit, but instead requires that the motionmust be made within a "reasonable time."Fed.R.Civ.P. 60(b)(6). To determine thetimeliness of a motion brought pursuant toRule 60(b)(6), we look at the particular circumstanceof each case and "balance the interestin finality with the reasons for delay."Kotlicky v. United States Fidelity & Guar.Co., 817 F.2d 6, 9 (2d Cir.1987). Notably, aRule 60(b)(6) motion requires "extraordinarycircumstances," which "typically do notexist where the applicant fails to move forrelief promptly." 12 MOORE'S FEDERALPRACTICE § 60.48[3][c]; Transaero, Inc.v. La Fuerza Area Boliviana, 24 F.3d 457,462 (2d Cir.1994). Moore's Federal Practicedoes not define "promptly," instead it citesTransaero, which holds, "[n]or, in the circumstancesof this case, does the fact thatBAF did not learn of the entry of the defaultjudgment for several years constitute 'extraordinarycircumstances' justifying Rule60(b)(6) relief." Id. at 462. Because we laterdecline to rule on the district court's grantingof the Rule 60(b)(6) motion, we do not decidewhether the Rule 60(b)(6) motion wastimely.*191 Judge Trager distinguished the movants herefrom those in Beller & Keller, as the movants herehad not filed any previous appeal or motion to vacate.He reasoned:Regardless of whether or not they theoretically hadthe option of doing so, they have provided a simpleexplanation for their actions: they waited untilplaintiffs had actually sued them under DCL §273-a. Taking into account this lenient standard,the motion was filed within a reasonable time,namely, shortly after the commencement of [the2004 actions for fraudulent conveyances].Grace XI, at 10. Judge Trager's observation was especiallyappropriate considering that the allegedlyfraudulent transactions occurred nearly fifteen yearsearlier.In a typical case, five years from the judgment to aRule 60(b) motion would be considered too long bymany courts. This case, however, is anything buttypical. Plaintiffs created significant delay by bringinga fraudulent conveyance claim more than fifteenyears after the conveyances were alleged to havebeen made, and five years after the judgment thatthey could not satisfy. Plaintiffs' argument thatmovants have waited too long, when movantsbrought this motion only weeks after plaintiffs filedthis lawsuit, is unpersuasive. In this case, we are interestedless in the number of years from the time ofjudgment, than we are in what has happened in between.It was well within Judge Trager's discretion todetermine that the Rule 60(b) motion was timely,because being directly sued provides "good cause."V. The Judgment is void under Rule 60(b)(4)[6] Movants contend that the judgment here is voidfor several reasons: (a) the default judgment was enteredwithout any evidentiary hearings, detailed affidavits,or documentary evidence having been presentedto the district court; (b) a corporation cannotappear pro se in federal court; (c) there were materialconflicts of interest between the corporate officersnegotiating the settlement agreement and the corporationitself; and (d) the judgment was in violation ofRule 54(c) of the Federal Rules of Civil Procedurebecause plaintiffs obtained relief in excess and differentin kind from that sought in their complaint.© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

443 F.3d 180 Page 10443 F.3d 180(Cite as: 443 F.3d 180)Plaintiffs cite Cablevision Systems New York CityCorp. v. Lokshin, 980 F.Supp. 107, 112(E.D.N.Y.1997), for the proposition that a districtcourt has the discretion to determine the amount ofdamages to be included in a default judgment by anevidentiary hearing, detailed affidavits, or documentaryevidence. This is true, yet here, there were noneof the above: no evidentiary hearings, no detailedaffidavits, and no documentary evidence. This wasbecause the parties settled. Plaintiffs enumerate manyitems that would have been included in these hearingshad they taken place. In fact, plaintiffs assert thatthe reason that Rosenstock settled on behalf of Briggswas because plaintiffs previewed for Rosenstock theoverwhelming evidence that would be used in theinquest. However, the record indicates that JudgeWolle never held an evidentiary hearing, receiveddetailed affidavits, or considered documentary evidence.Judge Wolle held a status conference on July28, *192 1997, in which plaintiffs' counsel appearedin person and Rosenstock appeared by telephonefrom Florida. On July 31, 1997, an order from JudgeWolle urged the parties to continue settlement negotiationsand imposed a deadline of August 4, 1997.Plaintiffs and Rosenstock then signed the stipulationof settlement, with Rosenstock acting on behalf ofBriggs and himself.Judge Trager wrote that it is "well-settled" that a "'corporation may appear in the federal courts onlythrough licensed counsel.' " Grace XI, at 12 (quotingRowland v. California Men's Colony, 506 U.S. 194,201-02, 113 S.Ct. 716, 121 L.Ed.2d 656 (1993)).Judge Trager, citing Mullin-Johnson Co. v. Penn MutualLife Insurance Co., 9 F.Supp. 175(N.D.Cal.1934), explained that this rule "has beenapplied to dismiss any action or motion filed by acorporation purporting to act pro se." Grace XI, at 12.He also found that "[a] corporation cannot execute astipulation of settlement while appearing pro se in afederal court." Id. at 13.[7] Judge Trager is correct. This Court held in SECv. Research Automation Corp., 521 F.2d 585 (2dCir.1975), that "[i]t is settled law that a corporationmay not appear in a lawsuit against it except throughan attorney, and that, where a corporation repeatedlyfails to appear by counsel, a default judgment may beentered against it pursuant to Rule 55, F[ed]. R. Civ.P." Id. at 589 (internal citation omitted); accordJacobs v. Patent Enforcement Fund, Inc., 230 F.3d565, 568 (2d Cir.2000). Further, this Court held inEagle Associates v. Bank of Montreal, 926 F.2d 1305(2d Cir.1991), that "we long have required corporationsto appear through a special agent, the licensedattorney." Id. at 1308.Plaintiffs attempt to invoke Schifrin v. ChenilleManufacturing Co., 117 F.2d 92 (2d Cir.1941), arguingthat even if Briggs retained an attorney, this attorneywould have "merely carried out an agreement"made by defendant Rosenstock. In distinguishing thiscase, Judge Trager explained one of the justificationsfor requiring that corporations be represented bycounsel: "the 'lay litigant' lacks many of the attorney'sethical responsibilities." Grace XI, at 13 (quotingJones v. Niagara Frontier Transp. Auth., 722 F.2d20, 22 (2d Cir.1983)). Attorneys do not exist merelyto act as information conduits or to communicatewith opposing counsel. Rather, they inform, advise,counsel, explain matters of law, and do much more. Itis impossible to know what role an attorney forBriggs would have played, but it is likely that shewould have played some role in the negotiation beyondsimply passing along information to plaintiffs,especially considering that Rosenstock and Briggshad conflicting interests. Plaintiffs argue that it is"fundamentally unfair" to leave them without a remedy,but plaintiffs brought this situation upon themselvesby negotiating an extraordinarily high settlementby telephone with a bankrupt pro se defendantwho spoke for a bankrupt corporate shell that lackedlegal counsel. Even the sole shareholder of a corporationis differently situated legally from the corporation,whose interests " 'frequently overlap but are notidentical in all respects.' " Grace XI, at 13 (quotingBatac Dev. Corp. v. B & R Consultants, Inc., 2000WL 307400, at *2 (S.D.N.Y. March 23, 2000)).Plaintiffs do not cite any case law supporting theproposition that corporations may negotiate settlementspro se. They merely revert to their previousargument that Judge Trager had discretion under Rule55(b)(2) to approve the settlement. However, theplain language of Rule 55(b)(2) does not support thiscontention. See Fed.R.Civ.P. 55(b)(2). The propercourse of action for plaintiffs was to ask *193 thecourt to "conduct such hearings or order such referencesas it deem[ed] necessary and proper," as Rule55(b)(2) provides.© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

443 F.3d 180 Page 11443 F.3d 180(Cite as: 443 F.3d 180)Plaintiffs' original application for a default judgmentagainst Briggs was premised on the explicit groundthat the corporation was not represented by counsel.Therefore, it is difficult to comprehend their currentargument that Rosenstock was able to act for Briggs,when Briggs was found in 1993 to be without counsel,despite Rosenstock's presence.This brings us to the third major infirmity with the1997 judgment. The 1993 default judgment was procuredby plaintiffs in part based on their argumentthat counsel could not represent both defendantsRosenstock and Genser, and Briggs, as there was aconflict of interest between the corporate officers andthe corporation. Judge Trager explained that Rosenstock'sinterests were "completely adverse to that ofBriggs, which had claims against him .... Rosenstockstood only to gain by confessing judgment on behalfof Briggs." Grace XI, at 14. Rosenstock was a shareholderand an officer, which further supports the notionthat he should have been prohibited from alsoacting as a representative of Briggs. He had authorityto make some decisions for Briggs, but not this one.A judgment is void under Rule 60(b)(4) of the FederalRules of Civil Procedure "only if the court thatrendered it lacked jurisdiction of the subject matter,or of the parties, or if it acted in a manner inconsistentwith due process of law." Texlon Corp. v. Mfrs.Hanover Commercial Corp., 596 F.2d 1092, 1099(2d Cir.1979) (quoting 11 WRIGHT & MILLER,FEDERAL PRACTICE AND PROCEDURE, § 2862at 198 (1973)); see also Fustok v. ContiCommodityServs., Inc., 873 F.2d 38, 39 (2d Cir.1989). In orderingthe judgment following the stipulation, the districtcourt acted in a manner inconsistent with dueprocess of law. The court wrongly allowed Briggs, acorporation acting through Rosenstock, who was nota lawyer, to execute a stipulation of settlement whileappearing pro se. Rosenstock was not acting in theinterest of the corporation, but in his own when heagreed to the excessive judgment. Thus, Briggs wasdenied due process of law. The 1997 judgment istherefore void under Rule 60(b)(4) and is vacated.The fourth basis comes under Rule 55(d) of the FederalRules of Civil Procedure, which provides that in"all cases a judgment by default is subject to the limitationsof Rule 54(c)." Rule 54(c) requires that a"judgment by default shall not be different in kindfrom or exceed in amount that prayed for in the demandfor judgment." Fed.R.Civ.P. 54(c). JudgeTrager explained that the complaint here sought onlyequitable relief against Briggs-- specifically that themerger be set aside or its terms reformed. We made asimilar finding with regard to the same amendedcomplaint:aside from a typical catchall paragraph that mentioneddamages, the only relief requested by theamended complaint was equitable. On the claimsagainst Briggs, it requested rescission of themerger or reformation of its terms; on the derivativeclaim on behalf of Briggs, it sought from theindividual defendants an accounting and disgorgementof profits.Grace IX, 228 F.3d at 51. Judge Trager concludedthat New York BCL Section 623 requires an action toprincipally seek equitable relief, and Judge Levy alsofollowed this logic in his dismissal of the claimsagainst Genser. See Grace XI, at 17; Grace VIII, at336. According to Judge Trager, awarding damagesas part of the default judgment violates Rule 54(c) as*194 "different in kind" from "that prayed for in thedemand for judgment." Id. at 16 (internal quotationmarks omitted). However, because we have alreadyfound that the judgment is void, for the reasons discussedabove, we need not reach this issue.VI. We decline to reach the Rule 60(b)(6) argumentJudge Trager found that the excessiveness of thejudgment, "combined with its close resemblance tothe sale price of the Briggs real property in 1990,"demonstrated "collusion between Rosenstock andplaintiffs to the detriment of movants." Grace XI, at18. This collusion, Judge Trager explained, was anextraordinary circumstance and an undue hardshipunder Rule 60(b)(6), and therefore, he argued, thejudgment should be voided on that basis. Havingaffirmed the district court's decision on the Rule60(b)(4) motion, we decline to address this issue.ConclusionFor the foregoing reasons, we affirm the order andmemorandum of the district court in Grace XI, whichgranted non-party movants' motion to vacate thejudgment. As there is no judgment on which to collect,we must also affirm the two orders, Grace XIIand Grace XIII, which dismissed plaintiffs' fraudulentconveyance actions.Grace IAppendix© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

443 F.3d 180 Page 12443 F.3d 180(Cite as: 443 F.3d 180)Grace v. Rosenstock, No. cv-85-2039 (E.D.N.Y.Aug. 14, 1986) (order granting plaintiffs' motion forclass certification).Grace IIGrace v. Rosenstock, No. 85-cv-2039 (E.D.N.Y. Jan.19, 1989) (order of discontinuance entered for GraceI ).Grace IIIGrace v. Rosenstock, No. cv-85-2354 (E.D.N.Y.Mar. 29, 1993) (order holding that Grace I was discontinuedin error and reopening the case).Grace IVGrace v. Rosenstock, No. 85-cv-2039 (E.D.N.Y.June 8, 1993) (default judgments entered againstBriggs and BAC; neither corporation was representedby counsel).Grace VGrace v. Rosenstock, 169 F.R.D. 473, 480-86(E.D.N.Y.1996) (order denying plaintiffs permissionto add new defendants and assert new claims).Grace IXGrace v. Rosenstock, 228 F.3d 40 (2d Cir.2000)(opinion affirming Grace V and Grace VIII ).Grace XGrace v. Bank Leumi Trust Co. (S.D.N.Y. Mar. 30,2004), 2004 U.S. Dist. LEXIS 5294 (fraudulent conveyanceaction transferred from the Southern Districtto the Eastern District of New York).*195 Grace XIGrace v. Rosenstock, No. 85-cv-2039 (E.D.N.Y. Oct.4, 2004) (order vacating the default judgment againstnon-party movants).Grace XII and Grace XIIIGrace v. Bank Leumi, No. 04-cv-0708 (E.D.N.Y.Oct. 6, 2004); Grace v. Schwartz, No. 04-cv-1622(E.D.N.Y. Oct. 14, 2004) (orders dismissing the twofraudulent conveyance actions brought by plaintiffsagainst non-party movants).443 F.3d 180END OF DOCUMENTGrace VIGrace v. Rosenstock, No. 85-cv-2039 (E.D.N.Y.Nov. 7, 1996) (order affirming Grace V in its entiretyand denying plaintiffs leave to take an interlocutoryappeal).Grace VIIGrace v. Rosenstock, No. 85-cv-2039 (E.D.N.Y.Aug. 15, 1997) (judgment entered against Rosenstockand Briggs).Grace VIIIGrace v. Rosenstock, 23 F.Supp.2d 326 (E.D.N.Y.Oct.29, 1998) (order dismissing the claims againstGenser in their entirety).© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

Page 1257 A.D.2d 526, 684 N.Y.S.2d 244, 1999 N.Y. Slip Op. 00749(Cite as: 257 A.D.2d 526, 684 N.Y.S.2d 244)Westlaw Delivery Summary Report for DANIELS,JEFFREYYour Search:Wall Street Associates v BrodskyDate/Time of Request:Friday, October 23, 2009 08:46 EasternClient Identifier:ACADEMY OF LAWDatabase:NY-CSCitation Text: 257 A.D.2d 526Lines: 323Documents: 1Images: 0The material accompanying this summary is subject to copyright. Usage is governed by contract with ThomsonReuters, West and their affiliates.Supreme Court, Appellate Division, First Department,New York.WALL STREET ASSOCIATES, Plaintiff-Appellant,v.Edward BRODSKY, et al., Defendants-Respondents.Jan. 28, 1999.Judgment creditor sued law firm for legal malpracticeand breach of contract to perform legal services. TheSupreme Court, New York County, Edward Lehner,J., dismissed creditor's action, and creditor appealed.The Supreme Court, Appellate Division, held thatcreditor stated cognizable claim based on law firm'sfailure to bring fraudulent conveyance action againstjudgment debtors.Reversed.West Headnotes[1] Attorney and Client 45 129(2)45 Attorney and Client45III Duties and Liabilities of Attorney to Client45k129 Actions for Negligence or WrongfulActs45k129(2) k. Pleading and Evidence. MostCited CasesJudgment creditor stated cognizable claims againstlaw firm for legal malpractice and breach of contractto perform legal services in failing to bring an actionagainst judgment debtors for constructive and actualfraud under fraudulent conveyance provisions ofDebtor and Creditor Law, based on judgment debtors'admissions that stock in company they organized andcontrolled was placed in their respective wifes' namesto insulate it from anticipated judgment creditors,favorable price paid by spouses for debtors' shares,allegation that judgment debtors were judgment proofwhen creditor attempted to enforce its judgment, andallegation that time limitation on creditor's claim hadexpired by time law firm's representation of creditorceased. McKinney's Debtor and Creditor Law §§ 270,273, 275, 276; McKinney's CPLR 213, subd. 1,3211(a), par. 7.[2] Pretrial Procedure 307A 679307A Pretrial Procedure307AIII Dismissal307AIII(B) Involuntary Dismissal307AIII(B)6 Proceedings and Effect307Ak679 k. Construction of Pleadings.Most Cited CasesPretrial Procedure 307A 685307A Pretrial Procedure307AIII Dismissal307AIII(B) Involuntary Dismissal307AIII(B)6 Proceedings and Effect307Ak685 k. Affidavits or Other Showingof Merit. Most Cited CasesIn the context of a motion to dismiss, reviewing courtmust take the factual allegations of the complaint as© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

Page 2257 A.D.2d 526, 684 N.Y.S.2d 244, 1999 N.Y. Slip Op. 00749(Cite as: 257 A.D.2d 526, 684 N.Y.S.2d 244)true, consider the affidavits submitted on the motiononly for the limited purpose of determining whetherthe plaintiff has stated a claim, not whether he hasone and, in the absence of proof that an alleged materialfact is untrue or beyond significant dispute, mustnot dismiss the complaint. McKinney's CPLR3211(a), par. 7.[3] Attorney and Client 45 105.545 Attorney and Client45III Duties and Liabilities of Attorney to Client45k105.5 k. Elements of Malpractice or NegligenceAction in General. Most Cited Cases(Formerly 45k105)Attorney and Client 45 11245 Attorney and Client45III Duties and Liabilities of Attorney to Client45k112 k. Conduct of Litigation. Most CitedCasesThe plaintiff in a legal malpractice action must establishthat the attorney in question was negligent, thatthe attorney's negligence was the proximate cause ofthe loss sustained, and that actual damages were sustained;it must be established that “but for” the attorney'snegligence, the underlying action would havesucceeded.[4] Attorney and Client 45 11245 Attorney and Client45III Duties and Liabilities of Attorney to Client45k112 k. Conduct of Litigation. Most CitedCasesIn order to establish the proximate cause and actualdamages elements in legal malpractice case, plaintiffmust show that the statute of limitations on the underlyingclaim had run by the time that it dischargeddefendants as its attorneys.[5] Fraudulent Conveyances 186 277(2)186 Fraudulent Conveyances186III Remedies of Creditors and Purchasers186III(I) Evidence186k270 Presumptions and Burden ofProof186k277 Consideration186k277(2) k. Transactions BetweenRelatives. Most Cited CasesFraudulent Conveyances 186 308(4)186 Fraudulent Conveyances186III Remedies of Creditors and Purchasers186III(M) Trial186k308 Questions for Jury; Questions ofLaw and Fact186k308(4) k. Consideration. MostCited CasesIn claim for constructive fraud under fraudulent conveyanceprovisions of the Debtor and Creditor Law,fairness of the consideration given for conveyance isa question of fact and an intra-family transactionplaces a heavier burden on defendant to demonstratefairness. McKinney's Debtor and Creditor Law §§270, 273.[6] Fraudulent Conveyances 186 61186 Fraudulent Conveyances186I Transfers and Transactions Invalid186I(E) Insolvency of Grantor186k61 k. Insolvency Element of Fraud.Most Cited CasesFraudulent Conveyances 186 73.1186 Fraudulent Conveyances186I Transfers and Transactions Invalid186I(G) Consideration186k73 Want or Insufficiency Element ofFraud186k73.1 k. In General. Most CitedCasesClaim under Debtor and Creditor Law for actualfraud, as opposed to constructive fraud, in makingconveyance does not require proof of unfair considerationor insolvency. McKinney's Debtor and CreditorLaw §§ 270, 273, 275, 276.[7] Fraudulent Conveyances 186 14186 Fraudulent Conveyances186I Transfers and Transactions Invalid186I(A) Grounds of Invalidity in General186k13 Badges of Fraud186k14 k. In General. Most Cited Cases© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

Page 3257 A.D.2d 526, 684 N.Y.S.2d 244, 1999 N.Y. Slip Op. 00749(Cite as: 257 A.D.2d 526, 684 N.Y.S.2d 244)Due to the difficulty of proving actual intent to hinder,delay, or defraud creditors, the creditor in afraudulent conveyance action under Debtor andCreditor Law is allowed to rely on “badges of fraud”to support his claim for actual fraud, i.e., circumstancesso commonly associated with fraudulenttransfers that their presence gives rise to an inferenceof intent. McKinney's Debtor and Creditor Law §276.[8] Fraudulent Conveyances 186 14186 Fraudulent Conveyances186I Transfers and Transactions Invalid186I(A) Grounds of Invalidity in General186k13 Badges of Fraud186k14 k. In General. Most Cited CasesFactors that are considered “badges of fraud” forpurposes of claim for actual fraud under fraudulentconveyance provisions of Debtor and Creditor Laware: (1) a close relationship between parties to allegedfraudulent transaction; (2) a questionable transfer notin the usual course of business; (3) inadequacy ofconsideration; (4) transferor‘s knowledge of creditor'sclaim and the inability to pay it; and (5) retention ofcontrol of property by transferor after conveyance.McKinney's Debtor and Creditor Law § 276.[9] Limitation of Actions 241 99(2)241 Limitation of Actions241II Computation of Period of Limitation241II(F) Ignorance, Mistake, Trust, Fraud,and Concealment or Discovery of Cause of Action241k98 Fraud as Ground for Relief241k99 In General241k99(2) k. Fraud in the Purchase,Sale, or Acquisition of Property. Most Cited CasesA claim for constructive fraud under fraudulent conveyanceprovisions of Debtor and Creditor Law accruesat the time the fraud or conveyance occurs.McKinney's Debtor and Creditor Law §§ 270, 273;McKinney's CPLR 213, subd. 1.[10] Fraudulent Conveyances 186 248186 Fraudulent Conveyances186III Remedies of Creditors and Purchasers186III(F) Time to Sue186k248 k. Time to Sue and Limitations.Most Cited CasesLimitation of Actions 241 99(2)241 Limitation of Actions241II Computation of Period of Limitation241II(F) Ignorance, Mistake, Trust, Fraud,and Concealment or Discovery of Cause of Action241k98 Fraud as Ground for Relief241k99 In General241k99(2) k. Fraud in the Purchase,Sale, or Acquisition of Property. Most Cited CasesLimitation of Actions 241 100(3)241 Limitation of Actions241II Computation of Period of Limitation241II(F) Ignorance, Mistake, Trust, Fraud,and Concealment or Discovery of Cause of Action241k98 Fraud as Ground for Relief241k100 Discovery of Fraud241k100(3) k. Fraud in ObtainingPossession of or Title to Property. Most Cited CasesClaim for actual fraud under fraudulent conveyanceprovisions of the Debtor and Creditor Law is timelyif brought either within six years of the date that thefraud or conveyance occurs or within two years of thedate that the fraud or conveyance is discovered orshould have been discovered, whichever is longer.McKinney's Debtor and Creditor Law § 276;McKinney's CPLR 203(g).**246 Joseph S. Rosenthal, for Plaintiff-Appellant.Richard L. Spinogatti, for Defendants-Respondents.ROSENBERGER, J.P., WILLIAMS, ANDRIAS andSAXE, JJ.MEMORANDUM DECISION.*526 Judgment, Supreme Court, New York County(Edward Lehner, J.), entered May 12, 1997, which,upon defendants' CPLR 3211(a)(7) motion, dismissedplaintiff's second amended legal malpractice complaint,unanimously reversed, on the law, with costs,and plaintiff granted leave to file and serve the thirdamended complaint. Appeal from order, same courtand Justice entered May 6, 1997, unanimously dismissedas subsumed within the appeal from thejudgment. Appeal from order, same court and Justice,© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

Page 4257 A.D.2d 526, 684 N.Y.S.2d 244, 1999 N.Y. Slip Op. 00749(Cite as: 257 A.D.2d 526, 684 N.Y.S.2d 244)entered November 17, 1997, which denied plaintiff'smotion deemed to be one for reargument, unanimouslydismissed, without costs, as taken from anon-appealable order.[1][2] In the context of a CPLR 3211 motion to dismiss,where we must take the factual allegations ofthe complaint as true, consider the affidavits submittedon the motion only for the limited purpose of determiningwhether the plaintiff has stated a claim, notwhether he has one and, in the absence of proof *527that an alleged material fact is untrue or beyond significantdispute, must not dismiss the complaint(Guggenheimer v. Ginzburg, 43 N.Y.2d 268, 275,401 N.Y.S.2d 182, 372 N.E.2d 17; Rovello v. OrofinoRealty Co., 40 N.Y.2d 633, 634-36, 389 N.Y.S.2d314, 357 N.E.2d 970), we find that plaintiff's allegationsare sufficient to support its contentions that itsfraudulent conveyance claims were viable and potentiallysuccessful when brought to defendants' attentionin 1986, that as a consequence, its claims forlegal malpractice and breach of contract to performlegal services were sufficiently alleged, and that themotion court erred in granting dismissal of the complaint.We also grant leave to amend the complaint,notwithstanding the motion court's denial of plaintiff'smotion for reargument, where plaintiff had previouslysought, and the court failed to address, suchrelief in its opposition to defendants' motion to dismiss,and where the proposed third amended complaintclearly sets forth an adequate basis for plaintiff'sclaims. It is well-settled that leave to amendshould be freely granted (Dittmar Explosives v. A.E.Ottaviano, 20 N.Y.2d 498, 502, 285 N.Y.S.2d 55,231 N.E.2d 756; Lambert v. Williams, 218 A.D.2d618, 621, 631 N.Y.S.2d 31), and that strong publicpolicy favors resolving cases on the merits (see,Amer. Continental Properties v. Natl. Union Fire Ins.Co., 200 A.D.2d 443, 446, 608 N.Y.S.2d 807; Segallv. Heyer, 161 A.D.2d 471, 473, 555 N.Y.S.2d 738).Plaintiff alleged in its legal malpractice action thatdefendants successfully obtained for it a $6.1 millionjudgment in the underlying arbitration proceedingagainst, inter alia, its former general managing partners,Michael Wise and Monroe Friedman, for fraud,conversion, breach of fiduciary duty and negligence,but failed to bring an action against them, pursuant tothe Debtor and Creditor Law, to set aside allegedfraudulent conveyances to their spouses of their respective25% ownership interests in Enseco, Inc..Plaintiff further alleged that these conveyances renderedWise and Friedman judgment-proof, **247 andresulted in plaintiff's recovery of only $500,000.[3][4] The plaintiff in a legal malpractice action mustestablish that the attorney in question was negligent,that the attorney's negligence was the proximatecause of the loss sustained, and that actual damageswere sustained. It must be established that “but for”the attorney's negligence, the underlying actionwould have succeeded (Greenwich v. Markhoff, 234A.D.2d 112, 114, 650 N.Y.S.2d 704; Lauer v. Rapp,190 A.D.2d 778, 593 N.Y.S.2d 843). In addition, inorder to establish the proximate cause and actualdamages elements, plaintiff must show that the Statuteof Limitations on the underlying claim had run bythe time that it discharged defendants as its attorneys(see, C & F Pollution Control v. Fidelity and CasualtyCo. of New York, 222 A.D.2d 828, 829, 653N.Y.S.2d 704).[5] *528 With regard to plaintiff's DCL § 273 claim,for example, it had to establish that the debtors madea conveyance, that they were insolvent prior to theconveyance or rendered insolvent thereby, and thatthe conveyance was made without fair consideration(United States v. McCombs, 30 F.3d 310, 323; UnitedStates v. Carlin, 948 F.Supp. 271, 277). The motioncourt, in dismissing the second amended complaint,found that plaintiff failed to plead the existence of aconveyance and did not allege the insolvency element.However, DCL § 270 defines “conveyance”broadly and it has been held that the term includes aprospective debtor's arrangement to have stock issuedin the name of his wife (see, Levy v. Braverman, 24A.D.2d 430, 260 N.Y.S.2d 681). Applying this definitionto the instant matter, where the complaint citesFriedman's arbitration testimony that his Ensecostock was placed in his wife's name to insulate itfrom anticipated judgment creditors, it is clear thatthe complaint adequately alleges that a conveyanceoccurred. The insolvency element can be sufficientlymade out from the complaint in that it alleges thatWise and Friedman were judgment-proof when plaintiffattempted to enforce its judgment (see, UnionNatl. Bank v. Russo, 64 A.D.2d 759, 760, 406N.Y.S.2d 930). Finally, triable issues of fact wereraised as to the fairness of the consideration paid forthe conveyance, since the spouses' purchase of theshares at such a favorable price here appears to bedubious. Fairness of the consideration is a question of© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

Page 5257 A.D.2d 526, 684 N.Y.S.2d 244, 1999 N.Y. Slip Op. 00749(Cite as: 257 A.D.2d 526, 684 N.Y.S.2d 244)fact and an intra-family transaction places a heavierburden on defendant to demonstrate fairness (Liggiov. Liggio, 53 A.D.2d 543, 549, 385 N.Y.S.2d 33).Similarly, we find that plaintiff sufficiently assertedclaims under DCL §§ 275 and 276. DCL § 275 providesthat:Every conveyance made and every obligation incurredwithout fair consideration when the personmaking the conveyance or entering into the obligationintends or believes that he will incur debts beyondhis ability to pay as they mature, is fraudulentas to both present and future creditorsA claim under this provision requires, in addition tothe conveyance and unfair consideration elementsestablished supra, an element of intent or belief thatinsolvency will result (see, Shelly v. Doe, 249 A.D.2d756, 671 N.Y.S.2d 803). That requirement is satisfiedhere, at the least as to Friedman, by his aforementionedarbitration testimony that it was his intent thatissuance of his shares to his spouse would insulatehim from anticipated legal liability.[6][7][8] DCL § 276 provides that:Every conveyance made and every obligation incurredwith actual intent, as *529 distinguishedfrom intent presumed in law, to hinder, delay, ordefraud either present or future creditors, is fraudulentas to both present and future creditors.DCL § 276, unlike sections 273 and 275, addressesactual fraud, as opposed to constructive fraud, anddoes not require proof of unfair consideration or insolvency(see, United States v. Carlin, supra). Due tothe difficulty of proving actual intent to hinder, delay,or defraud creditors, the pleader is allowed to rely on“badges of fraud” to support his case, i.e., circumstancesso commonly associated with fraudulenttransfers “that their presence gives rise to an inferenceof intent”, (Pen Pak Corp. v. LaSalle NationalBank of Chicago, 240 A.D.2d 384, 386, 658N.Y.S.2d 407, quoting **248MFS/Sun Life Trust-High Yield Series v. Van Dusen Airport Servs. Co.,910 F.Supp. 913, 935; Shelly v. Doe, 249 A.D.2d756, 671 N.Y.S.2d 803 supra). Among such circumstancesare: a close relationship between the partiesto the alleged fraudulent transaction; a questionabletransfer not in the usual course of business; inadequacyof the consideration; the transferor's knowledgeof the creditor's claim and the inability to pay it;and retention of control of the property by the transferorafter the conveyance.Here, the second amended complaint clearly allegessufficient badges of fraud to support a DCL § 276cause of action: that Wise and Friedman caused acompany they organized and controlled, Enseco, toissue their respective 25 HARES OF ITS STOCK TOTHEIR SPOUSES FOR A CONSIDERATION OFQUESTIONABLE FAIRNESS; THAT FRIEDMANCAUSED HIS STOCK TO BE TRANSFERRED TOHIS SPOUSE WITH THE EXPRESS INTENT TOREMOVE THOSE ASSETS FROM THE REACHOF ANTICIPATED JUDGMENT CREDITORS;AND THAT THESE TRANSFERS RENDEREDWISE AND FRIEDMAN JUDGMENT PROOF.It should be noted that the third amended complaintand its accompanying submissions are unquestionablysufficient to establish the existence of any and allof the aforementioned DCL-based claims. In additionto establishing the elements noted above, it refers toan affidavit by defendant Wise wherein he admitsthat both his and Friedman's stock transfers tospouses were intended to defeat anticipated creditors,including plaintiff, that the stock transfers were unsupportedby consideration, and that the stock, in hiscase, was purchased with joint marital assets. It alsocites to two 1985 Enseco prospectuses which moreclearly depict Wise's and Friedman's roles and ownershipinterests in the company and the nature of thestock transfers. Indeed, the Wise and Friedman admissionsalone sufficiently support the pleading requirementfor the DCL § 276 claim *530(UnitedStates v. Orozco-Prada, 636 F.Supp. 1537, 1541(S.D.N.Y. 1986), affd. 847 F.2d 836).[9][10] Finally, plaintiffs sufficiently allege that theStatute of Limitations had run on its DCL claims bythe time they discharged defendants as its attorneys,regardless of whether they proceeded under a constructivefraud theory or an actual fraud theory. NewYork law provides that a claim for constructive fraudis governed by the six-year limitation set out inCPLR 213(1), and that such a claim arises at the timethe fraud or conveyance occurs (FDIC v. Pappadio,606 F.Supp. 631, 632 (E.D.N.Y. 1985)). In cases ofactual fraud, however, the claim is timely if broughteither within six years of the date that the fraud or© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

Page 6257 A.D.2d 526, 684 N.Y.S.2d 244, 1999 N.Y. Slip Op. 00749(Cite as: 257 A.D.2d 526, 684 N.Y.S.2d 244)conveyance occurs or within two years of the datethat the fraud or conveyance is discovered or shouldhave been discovered, whichever is longer (CPLR203[g]; Leone v. Sabbatino, 235 A.D.2d 460, 461,652 N.Y.S.2d 628; Ghandour v. Shearson LehmanBros., 213 A.D.2d 304, 305, 624 N.Y.S.2d 390 lv.denied 86 N.Y.2d 710, 635 N.Y.S.2d 947, 659N.E.2d 770; Bernstein v. La Rue, 120 A.D.2d 476,478, 501 N.Y.S.2d 896 appeal dismissed 70 N.Y.2d746, 519 N.Y.S.2d 1032, 514 N.E.2d 390). Here, thealleged fraudulent transfer of Enseco shares tookplace in 1984 and the plaintiff discovered it in 1986.Thus, the time limitation on plaintiff's claim hadclearly expired by 1994, which was the approximatetime defendants' representation of plaintiff ceased.Defendants' reliance on DCL §§ 273-a and 278, inasserting that the claim accrued at the time the judgmentwas obtained and thus had not expired when theattorney-client relationship ended, is misplaced herewhere it is not alleged that the arbitration of thefraudulent conveyance claims herein was pendingagainst Wise and Friedman at the time of the conveyances(see, Leone v. Sabbatino, supra).N.Y.A.D. 1 Dept.,1999.Wall Street Associates v. Brodsky257 A.D.2d 526, 684 N.Y.S.2d 244, 1999 N.Y. SlipOp. 00749END OF DOCUMENT© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

770 N.Y.S.2d 421 Page 12 A.D.3d 780, 770 N.Y.S.2d 421, 2003 N.Y. Slip Op. 19961(Cite as: 2 A.D.3d 780, 770 N.Y.S.2d 421)Westlaw Delivery Summary Report for DANIELS,JEFFREYDate/Time of Request:Wednesday, October 21, 2009 17:33 EasternClient Identifier:NALDatabase:NY-CSCitation Text: 770 N.Y.S.2d 421Lines: 170Documents: 1Images: 0The material accompanying this summary is subject to copyright. Usage is governed by contract with ThomsonReuters, West and their affiliates.Supreme Court, Appellate Division, Second Department,New York.GRACE PLAZA OF GREAT NECK, INC., respondent,v.Maxine HEITZLER, appellant.Dec. 29, 2003.Background: Nursing home brought action againstfamily member of resident, seeking to recover balanceallegedly due to it for resident's care based onclaim that resident's transfer of personal injury litigationproceeds to family members were fraudulentconveyances to avoid payment of debt under Debtorand Creditor Law. The Supreme Court, QueensCounty, Dye, J., denied family member's motion forsummary judgment dismissing the complaint, and sheappealed.Holdings: The Supreme Court, Appellate Division,held that:(1) resident was not insolvent within meaning ofDebtor and Creditor law, so as to support that herconveyances of portion of personal injury settlementproceeds to family members were fraudulent conveyancesmade with intent to defraud nursing home;(2) resident's transfers could not be deemed fraudulentas to creditors by having been made without consideration,so as to support nursing home's claim thatresident intended to incur debts beyond her ability topay as they matured; and(3) there was no basis to set aside resident's transfers,in absence of evidence that they were made with actualintent to hinder, delay, or defraud nursing homeas present or future creditor.Order reversed; motion granted.West Headnotes[1] Fraudulent Conveyances 57(1)186k57(1) Most Cited CasesNursing home resident was not insolvent withinmeaning of Debtor and Creditor law, so as to supportthat her conveyances of portion of personal injurysettlement proceeds to family members were fraudulentconveyances made with intent to defraud nursinghome; resident retained cash assets of over $342,700after intra-family transfers of settlement proceeds andcontinued to receive pension and social securitybenefits, and there was no evidence that resident hadoutstanding debts owed to nursing home or any othercreditor when transfers to family members weremade. McKinney's Debtor and Creditor Law §§271, subd. 1, 273.[2] Fraudulent Conveyances 58186k58 Most Cited CasesTransfers of personal injury settlement proceeds thatnursing home resident made to family members couldnot be deemed fraudulent as to creditors by havingbeen made without consideration, so as to supportnursing home's claim that resident intended to incurdebts beyond her ability to pay as they matured; therewas no evidence that resident had good indicationthat funds she retained from settlement proceedswould be insufficient to pay for nursing home careduring three-year period she would be required to© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

770 N.Y.S.2d 421 Page 22 A.D.3d 780, 770 N.Y.S.2d 421, 2003 N.Y. Slip Op. 19961(Cite as: 2 A.D.3d 780, 770 N.Y.S.2d 421)wait in order to be eligible for Medicaid assistancebased on rates charged by nursing home at time thattransfers were made. McKinney's Debtor and CreditorLaw § 275.[3] Fraudulent Conveyances 64(2)186k64(2) Most Cited CasesThere was no basis to set aside transfers that nursinghome resident made to family members following herreceipt of personal injury settlement proceeds, in absenceof evidence that nursing home resident madetransfers with actual intent to hinder, delay, or defraudnursing home that subsequently sought to recoversum owed to it for resident's care as present orfuture creditor; resident retained assets reasonablycalculated to cover cost of her care for three-yearwaiting period until she became eligible for Medicaidbenefits. McKinney's Debtor and Creditor Law § 276.**422 Joan M. Secofsky, New York, N.Y., for appellant.Abrams, Fensterman, Fensterman, Flowers & Eisman,LLP, Lake Success, N.Y. (Nancy J. Klein andAngela C. Bellizzi of counsel), for respondent.GABRIEL M. KRAUSMAN, J.P., LEO F. McGIN-ITY, ROBERT W. SCHMIDT and REINALDO E.RIVERA, JJ.*780 In an action, inter alia, to set aside a conveyancepursuant to Debtor and Creditor Law article 10,the defendant appeals from an order of the SupremeCourt, Queens County (Dye, J.), dated January 8,2003, which denied her motion for summary judgmentdismissing the complaint.ORDERED that the order is reversed, on the law,with costs, the motion is granted, and the complaint isdismissed.On January 8, 1996, the defendant's 81-year-oldmother, Estelle Witt, entered a nursing home ownedand operated by the plaintiff. Approximately ninemonths later, in September 1996, Mrs. Witt receivedthe sum of $659,532 in settlement of a medical malpracticeaction. It is undisputed that Mrs. Witt gaveover $350,000 of the settlement funds to the defendantand other family members. However, even aftertransferring these funds, Mrs. Witt retained over$342,700 in various bank and brokerage accounts.Mrs. Witt left the plaintiff's facility in November1999, and moved to a nursing home in Texas. Approximatelythree months later, the plaintiff commencedthis action, inter alia, to recover a balance of$26,610.73 allegedly due for Mrs. Witt's care, uponthe theory that the September 1996 fund transfers tothe defendant and other family members constitutedfraudulent conveyances pursuant to Debtor andCreditor Law §§ 273, 275, and 276. After discoverywas conducted, the defendant moved for summaryjudgment, contending that the September 1996 fundtransfers were not fraudulent conveyances becausethey did not render her mother insolvent, and werenot made with the intent to defraud creditors. *781The Supreme Court denied the motion, concluding,inter alia, that there were issues of fact as to whetherMrs. Witt had a **423 "good indication" of futureinsolvency when she transferred funds to her familyin September 1996, and whether she made the transferswith intent to defraud. We now reverse.[1] Pursuant to Debtor and Creditor Law § 273, aconveyance made by a person who will be renderedinsolvent thereby is fraudulent as to creditors, withoutregard to his or her actual intent, if the conveyanceis made without fair consideration. An individualis "insolvent" within the meaning of the Debtorand Creditor Law when "the present fair saleablevalue of his [or her] assets is less than the amountthat will be required to pay his [or her] probable liabilityon * * * existing debts as they become absoluteand matured" (Debtor and Creditor Law §271[1] ). Here, in support of her motion for summaryjudgment, the defendant submitted uncontrovertedevidence that her mother, now deceased, retainedcash assets of over $342,700 after the subject intrafamilytransfers, and that she continued to receive apension and social security benefits. Furthermore,there is no evidence that Mrs. Witt had outstandingdebts to the plaintiff nursing home, or any othercreditor, when the transfers were made in September1996. Under these circumstances, the transfers didnot render Mrs. Witt insolvent (see St. Teresa's NursingHome v. Vuksanovich, 268 A.D.2d 421, 702N.Y.S.2d 92), and thus were not fraudulent conveyanceswithin the meaning of Debtor and CreditorLaw § 273.[2] Furthermore, the September 1996 transfers cannotbe deemed fraudulent as to creditors pursuant toDebtor and Creditor Law § 275. Debtor and CreditorLaw § 275 provides that a conveyance made without© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

770 N.Y.S.2d 421 Page 32 A.D.3d 780, 770 N.Y.S.2d 421, 2003 N.Y. Slip Op. 19961(Cite as: 2 A.D.3d 780, 770 N.Y.S.2d 421)fair consideration at a time when the person makingthe conveyance "intends or believes that he [or she]will incur debts beyond his [or her] ability to pay asthey mature, is fraudulent as to both present and futurecreditors." Pursuant to this constructive fraudprovision, a conveyance made by a person who has a"good indication of oncoming insolvency" is deemedto be fraudulent (Matter of Shelly v. Doe, 249 A.D.2d756, 758, 671 N.Y.S.2d 803). Here, however, takinginto account the rates charged by the facility at thetime the transfers were made, it cannot be said thatMrs. Witt had a "good indication" that the funds sheretained would be insufficient to pay for her nursinghome care during the three-year period she would berequired to wait in order to become eligible for Medicaidassistance (Matter of Shelly v Doe, supra; seeCase v. Fargnoli, 182 Misc.2d 996, 1001, 702N.Y.S.2d 764; see also Matter of John XX., 226A.D.2d 79, 652 N.Y.S.2d 329).2 A.D.3d 780, 770 N.Y.S.2d 421, 2003 N.Y. SlipOp. 19961END OF DOCUMENT[3] *782 Finally, we find no basis to set aside thetransfers pursuant to Debtor and Creditor Law § 276,which provides that "[e]very conveyance made * * *with actual intent * * * to hinder, delay, or defraudeither present or future creditors" is fraudulent. Whilecreditors may rely upon circumstantial factorsdeemed "badges of fraud" to establish an inference offraudulent intent (White Rose Food v. Mustafa, 251A.D.2d 653, 654, 674 N.Y.S.2d 438; see Matter ofShelly v. Doe, supra; Pen Pak Corp. v. LaSalle Natl.Bank of Chicago, 240 A.D.2d 384, 658 N.Y.S.2d407), here the evidence submitted in support of themotion demonstrated that Mrs. Witt retained assetsreasonably calculated to cover the cost of her care forthe three-year period she would be required to waituntil she became eligible for Medicaid benefits. Althoughthe plaintiff contends that this conduct wasfraudulent, at the time the transfers were made, nopenalty could be imposed upon an individual fortransferring assets more than three years before**424 his or her application for Medicaid (see Matterof John XX., supra ). Under these circumstances,Mrs. Witt's decision to make gifts to her family whileretaining assets reasonably calculated to cover thecost of her care until she became eligible to receiveMedicaid assistance cannot be considered acts ofintentional fraud against future creditors (see Matterof John XX., supra; see also Matter of Shah, 257A.D.2d 275, 283, 694 N.Y.S.2d 82, affd. 95 N.Y.2d148, 711 N.Y.S.2d 824, 733 N.E.2d 1093).© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

Page 14 A.D.3d 495, 773 N.Y.S.2d 71, 2004 N.Y. Slip Op. 01149(Cite as: 4 A.D.3d 495, 773 N.Y.S.2d 71)Westlaw Delivery Summary Report for DANIELS,JEFFREYYour Search:Dempster v Overview EquitiesDate/Time of Request:Friday, October 23, 2009 08:49 EasternClient Identifier:ACADEMY OF LAWDatabase:NY-CSCitation Text: 4 A.D.3d 495Lines: 217Documents: 1Images: 0The material accompanying this summary is subject to copyright. Usage is governed by contract with ThomsonReuters, West and their affiliates.[1] Judgment 228 185(2)Supreme Court, Appellate Division, Second Department,New York.Madeline DEMPSTER, respondent,v.OVERVIEW EQUITIES, INC., et al., defendants,Island Helicopter Leasing Corp., et al., appellants.Feb. 23, 2004.Background: Former wife brought fraudulent actionagainst former husband's businesses to enforceamended judgment of divorce, granting her additionalequitable distribution amounts, based upon value offormer husband's businesses. The Supreme Court,Nassau County, Skelos, J., granted summary judgmentin favor of former wife.Holdings: The Supreme Court, Appellate Division,held that:(1) former wife established that conveyance of formerhusband's residence to his closely held businesswas fraudulent, supporting award of additional equitabledistribution amounts, and(2) doctrines of collateral estoppel and res judicatadid not bar litigation of issue of whether promissorynotes in favor of businesses constituted fair considerationto support former husband's confession ofjudgement in favor of businesses.Affirmed.West Headnotes228 Judgment228V On Motion or Summary Proceeding228k182 Motion or Other Application228k185 Evidence in General228k185(2) k. Presumptions and Burdenof Proof. Most Cited CasesA party moving for summary judgment must make aprima facie showing of entitlement to judgment as amatter of law, offering sufficient evidence to demonstratethe absence of any triable issue of fact.[2] Divorce 134 275(2)134 Divorce134V Alimony, Allowances, and Disposition ofProperty134k260 Enforcement of Order, Judgment, orDecree134k275 Conveyance in Fraud of Spouse'sRights134k275(2) k. Transfers and TransactionsInvalid. Most Cited CasesFormer wife established that conveyance of formerhusband's residence to his closely held business wasfraudulent, supporting award of additional equitabledistribution amounts based upon valuation of business;business to which residence was transferred wascreated just two days before transfer, transfer wasmade just before valuation trial to value former husband'sbusiness interests for equitable distributionpurposes, valuation trial could have rendered residenceas valid target of equitable distribution, and© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

Page 24 A.D.3d 495, 773 N.Y.S.2d 71, 2004 N.Y. Slip Op. 01149(Cite as: 4 A.D.3d 495, 773 N.Y.S.2d 71)business operated out of same address as former husband'sother business concerns. McKinney's Debtorand Creditor Law §§ 273-a, 276.[3] Fraudulent Conveyances 186 14186 Fraudulent Conveyances186I Transfers and Transactions Invalid186I(A) Grounds of Invalidity in General186k13 Badges of Fraud186k14 k. In General. Most Cited CasesIn action for fraudulent conveyance, direct evidenceof fraudulent intent is often elusive, and therefore,courts will consider “badges of fraud,” which arecircumstances that accompany fraudulent transfers socommonly that their presence gives rise to an inferenceof intent. McKinney's Debtor and Creditor Law§ 276.[4] Fraudulent Conveyances 186 14186 Fraudulent Conveyances186I Transfers and Transactions Invalid186I(A) Grounds of Invalidity in General186k13 Badges of Fraud186k14 k. In General. Most Cited CasesBadges of fraud, which may be considered as evidencein a fraudulent conveyance action, include (1)the close relationship among the parties to the transaction,(2) the inadequacy of the consideration, (3)the transferor's knowledge of the creditor's claims, orclaims so likely to arise as to be certain, and thetransferor's inability to pay them, and (4) the retentionof control of property by the transferor after theconveyance. McKinney's Debtor and Creditor Law §276.[5] Divorce 134 255134 Divorce134V Alimony, Allowances, and Disposition ofProperty134k255 k. Conclusiveness of Adjudication.Most Cited CasesRelitigation of issue of whether promissory notesissued by husband's businesses constituted fair considerationto support former husband's confession ofjudgment in favor of businesses was not barred, informer wife's fraudulent conveyance action againstbusinesses to recover equitable distribution awardbased upon valuation of businesses, under doctrinesof either res judicata or collateral estoppel, by priormatrimonial action, where promissory notes wereexamined in that action in context of valuation trialfor purpose of equitable distribution.**73 Dollinger Gonski & Grossman, Carle Place,N.Y. (Matthew Dollinger, Floyd G. Grossman, andMindy Wallach of counsel), for appellants.Nixon Peabody, LLP, New York, N.Y. (Frank H.Penski and Michael E. Kraver of counsel), for respondent.NANCY E. SMITH, J.P., DANIEL F. LUCIANO,HOWARD MILLER, and SANDRA L. TOWNES,JJ.*496 In an action, inter alia, to recover damages forfraudulent conveyance of real property, the defendantsIsland Helicopter Leasing Corp. and Rio Manufacturingof Delaware, Inc., appeal from an order ofthe Supreme Court, Nassau County (Skelos, J.), enteredAugust 15, 2002, which granted the plaintiff'smotion for summary judgment on the first, third, andsixth causes of action.ORDERED that the order is affirmed, with costs.The plaintiff, Madeline Dempster, was divorcedfrom the defendant George Dempster (hereinafterthe defendant) by judgment dated May 22, 1992. Onappeal, the judgment of divorce was modified and thematter was remitted to the trial court for valuation ofcertain of the defendant's closely-held businesses forpurposes of equitable distribution. As a result of thevaluation trial, the plaintiff was awarded additionalamounts based on the value of the defendant's businesses,which were included in an amended judgmentof divorce. Thereafter, the plaintiff sought to enforcethe amended judgment of divorce, resulting in twojudgments in her favor in the sums of $3,194,484 and$283,383.57, respectively.The transactions which give rise to the present lawsuitoccurred in the summer of 1995. On June 29,1995, just weeks before the valuation trial, the defendanttransferred title of his residence to the defendantOverview Equities, Inc. (hereinafter Overview).Two days earlier, on June 27, 1995, Overview wascreated by the filing of a Certificate of Incorporationwith the Secretary of the State of Delaware. Thereaf-© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

Page 34 A.D.3d 495, 773 N.Y.S.2d 71, 2004 N.Y. Slip Op. 01149(Cite as: 4 A.D.3d 495, 773 N.Y.S.2d 71)ter, on August 4, 1995, the defendant confessedjudgments in favor of the defendant Island HelicopterLeasing Corp. (hereinafter Island) for $1,181,364.50and in favor of the defendant Rio Manufacturing ofDelaware, Inc. (hereinafter Rio), for $291,998.24.The Island confession was purportedly in exchangefor a promissory note executed by the defendant onAugust 1, 1983, in exchange for an $800,000 constructionloan from Island. The Rio confession waspurportedly in exchange for a promissory note executedby the defendant on January 2, 1984, in exchangefor a $200,000 construction loan from Rio.On the same day that the defendant confessed judgmentin favor of Island and Rio, Overview separatelyconfessed judgment in favor of Island for$1,181,364.50 and in favor of Rio for $291,998.24.On April 14, 1999, Overview filed a Chapter 11bankruptcy *497 petition in the United States DistrictCourt for the Eastern District of New York. The defendant'sresidence was listed as an asset of the corporationand was approved for sale. All net proceedsfrom the sale of this property, which totaled over $1million, were placed in an escrow account. The netproceeds are the subject of this action.The complaint in this action seeks, inter alia, to recoverdamages for fraudulent conveyance of realproperty. The first cause of action seeks recoverybased on the alleged fraudulent conveyance of thedefendant's residence to Overview in violation ofDebtor and Creditor Law § 273-a. The third cause ofaction alleges the fraudulent conveyance of the defendant'sresidence**74 to Overview in violation ofDebtor and Creditor Law § 276. The sixth cause ofaction alleges that the confessions of judgment providedto Island and Rio from the defendant were enteredinto with the intent to defraud the plaintiff andhinder the collection of her judgments against thedefendant in violation of Debtor and Creditor Law §276. The Supreme Court granted the plaintiff's motionfor summary judgment. We affirm.[1] A party moving for summary judgment mustmake a prima facie showing of entitlement to judgmentas a matter of law offering sufficient evidenceto demonstrate the absence of any triable issue of fact(see Alvarez v. Prospect Hosp., 68 N.Y.2d 320, 508N.Y.S.2d 923, 501 N.E.2d 572; Zuckerman v. City ofNew York, 49 N.Y.2d 557, 427 N.Y.S.2d 595, 404N.E.2d 718). The plaintiff demonstrated the absenceof any triable issue of fact with respect to her claimspursuant to Debtor and Creditor Law § 273-a and §276. Therefore, the motion was sufficient to make outa prima facie case for summary judgment (seeWinegrad v. New York Univ. Med. Ctr., 64 N.Y.2d851, 487 N.Y.S.2d 316, 476 N.E.2d 642; Zuckermanv. City of New York, supra ). In opposition, the defendantfailed to raise a triable issue of fact.[2] The plaintiff established her cause of action pursuantto Debtor and Creditor Law § 273-a by provingthat the conveyance of the defendant's residence wasmade without fair consideration, a judgment wasdocketed against the defendant, and the defendantfailed to satisfy the judgment (see Taylor-Outten v.Taylor, 248 A.D.2d 934, 670 N.Y.S.2d 295). Withrespect to the element of fair consideration, the deeditself reflects that no money was paid for the defendant'sresidence. Notwithstanding this fact, the appellantscontend that extinguishing an antecedent debtconstituted fair consideration for the transfer. TheSupreme Court properly determined that, even assumingthat the Island and Rio notes were valid, atthe time of the transfer, they had expired and thereforewere unenforceable (see Matter of Friedgood,137 A.D.2d 688, 524 N.Y.S.2d 777). Consequently,the notes *498 could not serve as fair considerationand summary judgment was properly granted on theplaintiff's first cause of action (see Interpool Ltd. v.Patterson, 890 F.Supp. 259).[3][4] The plaintiff also established a prima faciecase of entitlement to summary judgment on her thirdand sixth causes of action pursuant to Debtor andCreditor Law § 276. Debtor and Creditor Law § 276provides that “[e]very conveyance made and everyobligation incurred with actual intent, as distinguishedfrom intent presumed in law, to hinder, delay,or defraud either present or future creditors, isfraudulent as to both present and future creditors.”Moreover, “[d]irect evidence of fraudulent intent isoften elusive. Therefore, courts will consider ‘badgesof fraud’ which are circumstances that accompanyfraudulent transfers so commonly that their presencegives rise to an inference of intent” (Pen Pak Corp. v.LaSalle Nat. Bank of Chicago, 240 A.D.2d 384, 658N.Y.S.2d 407 quoting MFS/Sun Life Trust-High YieldSeries v. Van Dusen Airport Servs., Co., 910 F.Supp.913, 935). Badges of fraud include (1) the close relationshipamong the parties to the transaction, (2) theinadequacy of the consideration, (3) the transferor's© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

780 N.Y.S.2d 409 Page 19 A.D.3d 553, 780 N.Y.S.2d 409, 2004 N.Y. Slip Op. 05710(Cite as: 9 A.D.3d 553, 780 N.Y.S.2d 409)Westlaw Delivery Summary Report for DANIELS,JEFFREYDate/Time of Request:Wednesday, October 21, 2009 18:28 EasternClient Identifier:NALDatabase:NY-CSCitation Text: 780 N.Y.S.2d 409Lines: 170Documents: 1Images: 0The material accompanying this summary is subject to copyright. Usage is governed by contract with ThomsonReuters, West and their affiliates.Supreme Court, Appellate Division, Third Department,New York.In the Matter of MEGA PERSONAL LINES, INC.,et al., Appellants,v.Dianne HALTON, Individually and as Executor ofthe Estate of Robert L. Halton,Deceased, et al., Respondents.July 1, 2004.Background: Transferee brought action seeking determinationthat funds it received from judgmentdebtor were not subject to restraint by judgmentcreditors. The Supreme Court, Saratoga County,Nolan Jr., J., entered summary judgment in favor ofjudgment creditors, and transferee appealed.Holding: The Supreme Court, Appellate Division,Rose, J., held that fact issues remained as to whethermajority shareholder of judgment debtor had controllinginterest in transferee.Reversed.West Headnotes[1] Judgment 183228k183 Most Cited CasesTrial court did not abuse its discretion in entertainingsecond summary judgment motion, where secondmotion was made after completion of discovery andturned upon issue not previously decided.[2] Fraudulent Conveyances 8186k8 Most Cited CasesIn order to establish fraudulent transfer by defendantin action for money damages, plaintiffs must provethat transferor was defendant in action for moneydamages at time of transfer, that transferor has notsatisfied resulting judgment, and transfer was madewithout fair consideration. McKinney's Debtor andCreditor Law § 273-a.[3] Fraudulent Conveyances 66186k66 Most Cited Cases[3] Fraudulent Conveyances 155186k155 Most Cited CasesGood faith of both transferor and transferee is indispensablecomponent of fair consideration in determiningwhether transfer during pendency of actionfor money damages is fraudulent conveyance.McKinney's Debtor and Creditor Law §§ 272, 273-a.[4] Corporations 548(9)101k548(9) Most Cited CasesAlthough transfer of corporate assets to insider establisheslack of good faith as matter of law, transfer ofassets must be either directly to insider or to entitycontrolled by insider. McKinney's Debtor and CreditorLaw § 272.[5] Judgment 181(31)228k181(31) Most Cited CasesGenuine issue of material fact as to whether majorityshareholder of judgment debtor had controlling interestin transferee corporation precluded summary© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

780 N.Y.S.2d 409 Page 29 A.D.3d 553, 780 N.Y.S.2d 409, 2004 N.Y. Slip Op. 05710(Cite as: 9 A.D.3d 553, 780 N.Y.S.2d 409)judgment in transferee's action seeking determinationthat funds it received from judgment debtor were notsubject to restraint by judgment creditors.**410 Tabner, Ryan & Keniry, Albany (Eric N.Dratler of counsel), for Mega Personal Lines, Inc.,appellant.McNamee, Lochner, Titus & Williams P.C., Albany(Scott C. Paton of counsel), for Mega Group, Inc.,appellant.Ianniello, Anderson & Reilly P.C., Clifton Park(Matthew I. Mazur of counsel), for Dianne Halton,respondent.Before: SPAIN, J.P., CARPINELLO, MUGGLIN,ROSE and LAHTINEN, JJ.*554 ROSE, J.Appeal from an order and judgment of the SupremeCourt (Nolan Jr., J.), entered June 26, 2003 in SaratogaCounty, which, in a proceeding pursuant toCPLR 5239, inter alia, granted a motion by respondentDianne Halton and Robert L. Halton for partialsummary judgment.Petitioner Mega Group, Inc. commenced an actionagainst Robert L. Halton [FN1] and respondent DianneHalton (hereinafter collectively referred to asrespondents) and respondents then interposed a counterclaimfor money damages. During the pendency oftheir counterclaim, Mega Group transferred substantiallyall of its assets to petitioner Mega PersonalLines, Inc. (hereinafter MPL). Respondents later obtaineda judgment against Mega Group and sought toenforce it by restraining certain funds held by thirdparties. MPL then commenced this proceeding seekinga determination that the restrained funds are, infact, the property of MPL and not Mega Group. Respondentsmoved to dismiss the petition on theground, among others, that the transfer of substantiallyall of Mega Group's assets to MPL, after respondentshad interposed their counterclaim againstMega Group, was fraudulent within the meaning ofDebtor and Creditor Law § 273-a. Treating themotion as one for summary judgment and findingthat questions of fact existed as to whether there wasequivalent value given for the transfer of MegaGroup's assets, Supreme Court denied the motion andwe affirmed (297 A.D.2d 428, 746 N.Y.S.2d 204[2002] ).FN1. Robert L. Halton, a named respondentin this proceeding, died while this appealwas pending and his wife, respondent DianneHalton, has been substituted for him.Following discovery, respondents moved for partialsummary judgment, this time arguing Mega Group'slack of good faith. Finding the good faith componentof fair consideration as defined by Debtor and CreditorLaw § 272 to be lacking as a matter of law--regardless of whether Mega Group received equivalentvalue for its assets--because Steven Gregory,Mega Group's president and majority shareholder,also held an ownership interest in MPL at the time ofthe transfer, Supreme Court granted respondents'motion. Petitioners now appeal.[1] Initially, we reject petitioners' procedural contentionthat Supreme Court erred by entertaining a secondsummary judgment *555 motion. Because respondents'second motion was made after the completionof discovery and, significantly, it turns upon anissue not previously decided, Supreme Court actedwell within its broad discretion (see Baker v. VanderbiltCo., 260 A.D.2d 750, 751-752, 688 N.Y.S.2d 726[1999]; Robbins v. K-Mart Corp., 248 A.D.2d 867,868, 669 N.Y.S.2d 774 [1998] ).[2][3][4] We reach a different conclusion, however,as to Supreme Court's determination that summaryjudgment should be granted here. In order to prevailunder Debtor and Creditor Law § 273-a, respondentswere required to prove that the **411 transferorwas a defendant in an action for money damages atthe time of the transfer, the transferor has not satisfiedthe resulting judgment and the transfer was madewithout fair consideration (see Berner Trucking v.Brown, 281 A.D.2d 924, 925, 722 N.Y.S.2d 656[2001] ). There is no real dispute here as to the firsttwo elements. The third element, fair consideration,exists when, in exchange for property or an obligation,"as a fair equivalent therefor, and in good faith,property is conveyed or an antecedent debt is satisfied"(Debtor and Creditor Law § 272[a] [emphasisadded] ). The good faith of both the transferor andtransferee is an indispensable component of fair consideration(see Matter of Superior Leather Co. v.Lipman Split Co., 116 A.D.2d 796, 797, 496N.Y.S.2d 845 [1986]; Studley, Inc. v. Lefrak, 66© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

780 N.Y.S.2d 409 Page 39 A.D.3d 553, 780 N.Y.S.2d 409, 2004 N.Y. Slip Op. 05710(Cite as: 9 A.D.3d 553, 780 N.Y.S.2d 409)A.D.2d 208, 213, 412 N.Y.S.2d 901 [1979], affd. 48N.Y.2d 954, 425 N.Y.S.2d 65, 401 N.E.2d 187[1979] ). Supreme Court resolved this disputed componentby first finding that Gregory was a MegaGroup insider with an ownership interest in MPL atthe time of the transfer, and then inferring a lack ofgood faith as a matter of law. While we agree withSupreme Court's premise that the transfer of corporateassets to an insider establishes a lack of goodfaith as a matter of law, we note that the principlerequires the transfer of assets either directly to theinsider or to an entity controlled by the insider (seeMatter of P.A. Bldg. Co. v. Silverman, 298 A.D.2d327, 328, 750 N.Y.S.2d 13 [2002]; Berner Truckingv. Brown, supra; Manufacturers & Traders Trust Co.v. Lauer's Furniture Acquisition, 226 A.D.2d 1056,1057, 641 N.Y.S.2d 947 [1996], lv. dismissed 88N.Y.2d 962, 647 N.Y.S.2d 715, 670 N.E.2d 1347[1996]; Farm Stores v. School Feeding Corp., 102A.D.2d 249, 254, 477 N.Y.S.2d 374 [1984], affd. inpart 64 N.Y.2d 1065, 489 N.Y.S.2d 877, 479 N.E.2d222 [1985] ). Thus, a corporate insider's participationin both the transferor and the transferee is not sufficientto resolve the issue as a matter of law unless theinsider controls the transferee. When the insider is thetransferee or controls the transferee, there can be nofactual dispute that the purpose of the transfer was toconfer on the insider a preference over other creditors(see Matter of Superior Leather Co. v. Lipman SplitCo., supra at 797, 496 N.Y.S.2d 845).thereof as granted the motion of respondent DianneHalton and Robert L. Halton for partial summaryjudgment; motion denied; and, as so modified, affirmed.SPAIN, J.P., CARPINELLO, MUGGLIN andLAHTINEN, JJ., concur.9 A.D.3d 553, 780 N.Y.S.2d 409, 2004 N.Y. SlipOp. 05710END OF DOCUMENT[5] While we agree with Supreme Court that Gregory'saffidavit *556 raises only feigned factual issuesdesigned to avoid the consequences of his earlierdeposition testimony admitting his interest in MPL atthe time of transfer (see Richter v. Collier, 5 A.D.3d1003, 1004, 773 N.Y.S.2d 645 [2004]; Martin v.Savage, 299 A.D.2d 903, 904, 750 N.Y.S.2d 684[2002] ), there is no evidence that his 40% interestwas a controlling one or that MPL was merely analter ego of either Gregory or Mega Group. Also,MPL offered evidence that Gregory did not effectivelycontrol MPL. This question of control is sufficientto raise a triable issue of fact as to whether therewas a shuffling of corporate assets that gave a preferenceto Gregory's interests over respondents' claim(see Rebh v. Rotterdam Ventures, 252 A.D.2d 609,611, 675 N.Y.S.2d 234 [1998] ).ORDERED that the order and judgment is modified,on the law, without costs, by reversing so much© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

Page 134 A.D.3d 231, 824 N.Y.S.2d 37, 2006 N.Y. Slip Op. 07985(Cite as: 34 A.D.3d 231, 824 N.Y.S.2d 37)Westlaw Delivery Summary Report for DANIELS,JEFFREYYour Search:AMP Servs. LTD v Walanpatrias FoundDate/Time of Request:Friday, October 23, 2009 08:48 EasternClient Identifier:ACADEMY OF LAWDatabase:NY-CSCitation Text: 34 A.D.3d 231Lines: 116Documents: 1Images: 0The material accompanying this summary is subject to copyright. Usage is governed by contract with ThomsonReuters, West and their affiliates.Supreme Court, Appellate Division, First Department,New York.AMP SERVICES LIMITED as Trustee of The Walterand Anna Bronner Trust, as assignee of the Estateof Harry Joseph, Deceased, etc., Plaintiff-Respondent-Appellant,v.WALANPATRIAS FOUNDATION, also known asDORAW, etc., Defendant-Appellant-Respondent.AMP Services Limited as Trustee of the Walter andAnna Bronner Trust, as assignee of the Estate ofHarry Joseph, Deceased, etc., Plaintiff-Respondent,v.Walanpatrias Foundation, also known as DORAW,etc., Defendant-Appellant.Nov. 2, 2006.Background: Judgment creditor brought action allegingthat judgment debtors fraudulently transferredstock portfolio. The Supreme Court, New YorkCounty, Barbara R. Kapnick, J., dismissed claims,but denied judgment debtors' motion to vacate preliminaryinjunction. Parties filed cross-appeals.Holdings: The Supreme Court, Appellate Division,held that:(1) judgment creditor stated claim for fraudulenttransfer;(2) judgment debtors were subject to personal jurisdictionin New York; and(3) securities held by depository were not properpredicates for exercise of in rem jurisdiction.Affirmed.West Headnotes[1] Fraudulent Conveyances 186 261186 Fraudulent Conveyances186III Remedies of Creditors and Purchasers186III(H) Pleading186k258 Bill, Complaint, or Petition186k261 k. Insolvency. Most CitedCasesJudgment creditor's allegation that judgment debtorsdirected transfer of assets in disputed stock portfolioaccount after learning that judgment creditor had secureddefault judgment against them considerably inexcess of account's assets was sufficient to pleadfraudulent transfer claim, even though judgmentcreditor did not claim that transfer had rendered assetstotally and permanently unavailable or diminished.McKinney's Debtor and Creditor Law § 276.[2] Courts 106 12(2.25)106 Courts106I Nature, Extent, and Exercise of Jurisdictionin General106k10 Jurisdiction of the Person106k12 Domicile or Residence of Party106k12(2) Actions by or Against Nonresidents;“Long-Arm” Jurisdiction in General106k12(2.25) k. Tort Cases. MostCited Cases© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

Page 234 A.D.3d 231, 824 N.Y.S.2d 37, 2006 N.Y. Slip Op. 07985(Cite as: 34 A.D.3d 231, 824 N.Y.S.2d 37)Judgment debtors' actions through their agent in NewYork to move stock portfolio from state, if proved,would be sufficient to subject them to personal jurisdictionin New York in action alleging that transferwas fraudulent. McKinney's CPLR 302(a)(2);McKinney's Debtor and Creditor Law § 276.[3] Courts 106 19106 Courts106I Nature, Extent, and Exercise of Jurisdictionin General106k16 Jurisdiction of Property or Other Subject-MatterInvolved106k19 k. Situation of Personal Property.Most Cited CasesSecurities held by depository were not proper predicatesfor exercise of in rem jurisdiction in judgmentcreditor's action alleging that judgment debtors' transferof stock portfolio was fraudulent, where securitieswere held in fungible bulk and were not traceable toany particular individual.**38 Chadbourne & Parke LLP, New York (ThomasE. Butler of counsel), for appellantrespondent/appellant.Pillsbury Winthrop Shaw Pittman LLP, New York(David G. Keyko of counsel), for respondentappellant/respondent.FRIEDMAN, J.P., MARLOW, SULLIVAN,NARDELLI, GONZALEZ, JJ.*232 Order, Supreme Court, New York County (BarbaraR. Kapnick, J.), entered March 3, 2006, whichdenied defendants' CPLR 3211 motion insofar as itsought dismissal of the first cause of action in thesecond amended complaint and denied that branch ofdefendants' motion seeking vacatur of the previouslyissued order restraining disposition of certain disputedassets, but granted defendants' motion insofaras it sought dismissal of the second, third, fourth, andfifth causes of action in the second amended complaint,and order, same court and Justice, enteredMarch 20, 2006, which denied defendant's motion tovacate the preliminary injunction, unanimously affirmed,with one bill of costs in favor of plaintiff.Appeal from order, same court and Justice, enteredFebruary 8, 2005, unanimously dismissed, withoutcosts, as academic in light of the appeal from the subsequentorder.[1] In this action alleging the fraudulent transfer of astock portfolio, the motion court properly found thatplaintiff adequately pleaded a cause of action underDebtor and Creditor Law § 276 based upon “badgesof fraud” including, inter alia, the alleged transferpursuant to defendants' direction of the assets in thedisputed DORAW account from Lehman Brothers,Inc. in New York to Lehman Brothers Internationalin Europe while defendants were aware that plaintiffhad secured a default judgment against them in a relatedFlorida action considerably in excess of theDORAW account assets (see Wall St. Assocs. v.Brodsky, 257 A.D.2d 526, 529, 684 N.Y.S.2d 244[1999] ). Contrary to defendants' contention, plaintiff'sDebtor and Creditor Law § 276 claim did notrequire allegations that the transfer at issue had renderedthe subject assets totally and permanently unavailableor diminished. Plaintiff's allegations of a“deliberate attempt to stave off creditors by **39putting property in such a form and place that creditorscannot reach it” sufficed in support of their claim(Flushing Sav. Bank v. Parr, 81 A.D.2d 655, 656,438 N.Y.S.2d 374, appeal dismissed 54 N.Y.2d 770,443 N.Y.S.2d 61, 426 N.E.2d 752 [1981] ).[2] The actions of defendants through their agent inNew York to move the subject property from thisstate, if proved, would be sufficient to subject them topersonal jurisdiction pursuant to CPLR 302(a)(2) (seeBanco Nacional Ultramarino, S.A. v. Chan, 169Misc.2d 182, 188, 641 N.Y.S.2d 1006 [1996], affd.sub nom. Banco Nacional Ultramarino, S.A. v. MoneycenterTrust Co., 240 A.D.2d 253, 659 N.Y.S.2d734 [1997] ).Plaintiff satisfied the criteria for preliminary injunctiverelief (see City of New York v. Love Shack, 286A.D.2d 240, 242, 729 N.Y.S.2d 37 [2001] ).[3] Because the securities held by the depository areheld in *233 fungible bulk and are not traceable toany particular individual, they are not proper predicatesfor an exercise of in rem jurisdiction, and thesecond, third and fourth causes of action, premisedon an assertion of in rem jurisdiction over the depository-heldsecurities, were properly dismissed (seeMajique Fashions, Ltd. v. Warwick & Co. Ltd., 67A.D.2d 321, 326, 414 N.Y.S.2d 916 [1979] ).Finally, the fifth cause of action, seeking an account-© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

Page 334 A.D.3d 231, 824 N.Y.S.2d 37, 2006 N.Y. Slip Op. 07985(Cite as: 34 A.D.3d 231, 824 N.Y.S.2d 37)ing, was properly dismissed since there are no allegationsfrom which a fiduciary relationship betweenplaintiff and defendants with respect to the securitiesat issue might be inferred (cf. Chalasani v. State Bankof India, 235 A.D.2d 449, 450, 653 N.Y.S.2d 28, lv.dismissed 90 N.Y.2d 936, 664 N.Y.S.2d 273, 686N.E.2d 1368 [1997] ).We have considered the parties' remaining argumentsfor affirmative relief and find them unavailing.N.Y.A.D. 1 Dept.,2006.AMP Services Ltd. v. Walanpatrias Foundation34 A.D.3d 231, 824 N.Y.S.2d 37, 2006 N.Y. Slip Op.07985END OF DOCUMENT© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

Page 1991 F.2d 31(Cite as: 991 F.2d 31)Westlaw Delivery Summary Report for DANIELS,JEFFREYDate/Time of Request:Wednesday, October 21, 2009 18:32 EasternClient Identifier:NALDatabase:FEDFINDCitation Text: 991 F.2d 31Lines: 398Documents: 1Images: 0The material accompanying this summary is subject to copyright. Usage is governed by contract with ThomsonReuters, West and their affiliates.United States Court of Appeals,Second Circuit.Ashley S. ORR, Receiver of American Partners, Inc.,Plaintiff-Appellee-Cross-Appellant,v.KINDERHILL CORPORATION; Thomas A. Martin;Kinderhill Investment Company; Virginia S.Martin and Vincent Teahan, as Trustee of a ThomasA. Martin Trust, Defendants,Key Bank of Eastern New York, Defendant-Appellant-Cross-Appellee.Nos. 864, 1015, Dockets 92-9108, 92-9164.Argued Jan. 28, 1993.Decided March 16, 1993.Corporation's judgment creditor brought action to setaside fraudulent conveyance against corporation, itssubsidiary, and related parties, and bank which heldmortgage on property conveyed to subsidiary by corporation.The United States District Court for theNorthern District of New York, Con. G. Cholakis, J.,entered partial summary judgments for bank andcreditor, and both appealed. The Court of Appeals,McLaughlin, Circuit Judge, held that, under NewYork law: (1) three-year statute of limitations foractions on liabilities created by statute did not applyto action to set aside fraudulent conveyance; (2) sixyearcatch-all statute of limitations applied; and (3)transfer of property to subsidiary as part of restructuringplan was not supported by fair consideration.Affirmed.West Headnotes[1] Fraudulent Conveyances 186 248186 Fraudulent Conveyances186III Remedies of Creditors and Purchasers186III(F) Time to Sue186k248 k. Time to Sue and Limitations.Most Cited CasesUnder New York law, three-year limitations periodgoverning actions on liability created by statute doesnot apply to action by judgment creditor to set asidefraudulent conveyance, even though statute governssuch actions; statute governing fraudulent conveyancedid not create new liability not available undercommon law, but, rather, simply fleshed out meaningof fraudulent conveyance by stigmatizing certainconveyances made during litigation. N.Y.McKinney'sCPLR 214, subd. 2; N.Y.McKinney's Debtor andCreditor Law § 273-a.[2] Limitation of Actions 241 34(1)241 Limitation of Actions241I Statutes of Limitation241I(B) Limitations Applicable to ParticularActions241k34 Liabilities Created by Statute241k34(1) k. In General. Most CitedCasesUnder New York law, three-year statute of limitationsfor actions on liability created by statute appliesonly when statute creates new liability that did notexist at common law and would not exist but for stat-© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

Page 2991 F.2d 31(Cite as: 991 F.2d 31)ute. N.Y.McKinney's CPLR 214, subd. 2.[3] Limitation of Actions 241 34(1)241 Limitation of Actions241I Statutes of Limitation241I(B) Limitations Applicable to ParticularActions241k34 Liabilities Created by Statute241k34(1) k. In General. Most CitedCasesUnder New York law, that a statute merely enlargescommon-law scheme of liability or grants additionalremedies is insufficient to bring it within statute oflimitations for actions on liabilities created by statute.N.Y.McKinney's CPLR 214, subd. 2.[4] Fraudulent Conveyances 186 248186 Fraudulent Conveyances186III Remedies of Creditors and Purchasers186III(F) Time to Sue186k248 k. Time to Sue and Limitations.Most Cited CasesUnder New York law, actions by judgment creditoragainst debtor to set aside fraudulent conveyance aregoverned by six-year catch-all statute of limitations;action to set aside fraudulent conveyance is action forconstructive fraud, and actions for constructive fraudare subject to catch-all limitations period.N.Y.McKinney's CPLR 213, subd. 1;N.Y.McKinney's Debtor and Creditor Law § 273-a.[5] Fraudulent Conveyances 186 237(1)186 Fraudulent Conveyances186III Remedies of Creditors and Purchasers186III(C) Right of Action to Set Aside Transfer,and Defenses186k237 Nature and Form of Remedy186k237(1) k. In General. Most CitedCasesUnder New York law, action by judgment creditoragainst debtor to set aside fraudulent conveyance isaction for constructive fraud. N.Y.McKinney'sDebtor and Creditor Law § 273-a.[6] Fraud 184 38184 Fraud184II Actions184II(A) Rights of Action and Defenses184k38 k. Time to Sue and Limitations.Most Cited CasesUnder New York law, actions for constructive, ratherthan actual, fraud are subject to six-year catch-allstatute of limitations. N.Y.McKinney's CPLR 213,subd. 1.[7] Fraudulent Conveyances 186 1186 Fraudulent Conveyances186I Transfers and Transactions Invalid186I(A) Grounds of Invalidity in General186k1 k. Nature of Fraud in Transfers ofProperty. Most Cited CasesUnder New York law, allegedly fraudulent conveyancesmust be evaluated in context. N.Y.McKinney'sDebtor and Creditor Law § 273-a.[8] Corporations 101 542(1)101 Corporations101XII Insolvency and Receivers101k541 Conveyances When Insolvent or inContemplation of Insolvency101k542 In General101k542(1) k. In General. Most CitedCasesUnder New York law, corporation's conveyance ofreal property to subsidiary was not supported by fairconsideration, so that judgment creditor of corporationwas entitled to have it set aside as fraudulentconveyance, even though corporation subsequentlydistributed shares in subsidiary to corporation'sshareholders; transfer and distribution were elementsof single corporate restructuring plan, subsidiary providedonly nominal consideration, apart from itsshares, for property, and net effect of restructuringwas transfer of property without any correspondingbenefit to corporation. N.Y.McKinney's Debtor andCreditor Law § 273-a.*32 Anthony J. Carpinello, Albany, NY (T. PaulKane, Theresa Atkins, Hiscock & Barclay, Albany,NY, of counsel), for defendant-appellant-crossappellee.Robert L. Weigel, New York City (Robin L. Baker,Gibson, Dunn & Crutcher, of counsel), for plaintiffappellee-cross-appellant.© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

Page 3991 F.2d 31(Cite as: 991 F.2d 31)Before: NEWMAN, WINTER, and McLAUGHLIN,Circuit Judges.McLAUGHLIN, Circuit Judge:Plaintiff Ashley S. Orr, the receiver of AmericanPartners, Inc., is a judgment creditor of defendantKinderhill Corporation. While Orr's damage actionagainst Kinderhill was pending, Kinderhill deededcertain real property to its wholly-owned subsidiary,defendant Kinderhill Investment Company (“KIC”),for nominal consideration. After the transfer, but beforethe deeds were recorded, Kinderhill distributedthe stock in KIC to Kinderhill stockholders. KeyBank of Eastern New York, with knowledge of thesetransactions, later lent money to KIC and took backmortgages on the real property as security.After he obtained a judgment against Kinderhill, Orrsued in the District Court for the Northern District ofNew York (Con. G. Cholakis, Judge ) to set aside asa fraudulent conveyance Kinderhill's transfer of theproperty to KIC and KIC's subsequent transfer to KeyBank of a security interest in the real property. Thedistrict court granted partial summary judgment toOrr and set aside the transfer of real property, holding:(1) that a six-year limitations period applies toactions under New York Debtor & Creditor Law §273-a; and (2) that the transfer was not supported byfair consideration and was therefore fraudulent. Thedistrict court also granted partial summary judgmentto Key Bank on Orr's claim under Debtor & CreditorLaw § 273, holding that it was time-barred. Becausethe transfer of real property and the distribution ofstock were an integrated transaction not supported byfair consideration, we now affirm.BACKGROUNDTwenty years ago when limited partnerships werepopular as tax shelters, Thomas A. Martin foundedKinderhill. It was to serve as managing general partnerin various limited partnerships engaged in thoroughbredbreeding and racing. Martin has been thecompany's president and principal shareholder. Since1979, Key Bank has been Kinderhill's primary lender.American Partners, a California corporation, hadbeen a co-general partner with Kinderhill in severallimited partnerships. In August 1984, American Partnerswent into receivership and Orr, as its receiver,sued Kinderhill and Martin in the United States DistrictCourt for the Southern District of California (the“California Action”) for over one million dollars inmanagement fees that American Partners claimed itwas owed.In December 1985, while the California Action waspending against it, Kinderhill decided to restructure,apparently for tax reasons. Its Board of Directorsapproved a plan to create a wholly-owned subsidiary(KIC) to which Kinderhill would then transfer the tentracts of land (totalling 700 *33 acres) it owned inColumbia County, New York (the “New York Property”).To complete the deal, Kinderhill would distributeall its shares in KIC to its own shareholders.On New Years Eve, 1985, Kinderhill deeded nine ofthe ten New York tracts to KIC for nominal consideration(one to ten dollars). Nine months later, Kinderhillconveyed the tenth tract to KIC, also fornominal consideration. KIC assumed several outstandingmortgages on the New York Property totalling$780,000, although the land was worth between$3.45 and $4.4 million. KIC did not record the deedsuntil November 6, 1986 (seven tracts), November 11,1986 (two tracts), and January 20, 1987 (one tract).In September 1986, after Kinderhill had deeded theNew York Property to KIC, but before the deedswere recorded, Kinderhill approved a plan, effectiveOctober 1, 1986, for the distribution of all KIC sharesto Kinderhill shareholders. Upon the distribution,KIC and Kinderhill no longer had a formal corporaterelationship, although Martin continued to controland operate both companies.By 1986, Kinderhill had begun to experience financialdifficulty as a result of a recession in the thoroughbredindustry that was exacerbated by adversechanges in the tax laws. Key Bank watched all thisfrom afar. It had identified the company's cash flowproblems as early as 1985, and, indeed, had placed itsKinderhill loans on watch status in March 1986. Forthe fiscal year ended September 30, 1986, Kinderhilllost $612,825, and had a negative cash flow overtwice that amount.In early 1987, Martin came back to Key Bank forfinancing, requesting that it provide a $2.5 million© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

Page 4991 F.2d 31(Cite as: 991 F.2d 31)revolving line of credit to KIC, secured by the NewYork Property. Key Bank ordered a title report whichdisclosed the transfers of the property from Kinderhillto KIC and the nominal consideration paid byKIC. Key Bank also received Kinderhill's auditedfinancial statements for fiscal year 1986, which disclosedthat “[t]he Court [adjudicating the CaliforniaAction] has indicated that it has decided to grantjudgement [sic] to the plaintiff in an amount approximating$1,250,000....” Key Bank approved theloan and, on March 13, 1987, KIC gave Key Bank a$2.5 million mortgage on the New York Property tosecure advances under the line of credit.On June 17, 1987, Orr obtained a judgment in theCalifornia Action against Kinderhill individually for$159,338, and against Kinderhill and Martin, jointlyand severally, for $1,071,489, plus prejudgment interest.The Ninth Circuit subsequently affirmed thatjudgment, but Orr has been able to collect only$42,000 from Kinderhill and Martin.In March 1991, Orr brought the present action againstKinderhill, KIC, Key Bank, Martin, his wife, and thetrustee of a trust established by Martin, seeking to setaside several transfers of property (including Kinderhill'stransfers of the New York Property to KIC) asfraudulent under Debtor & Creditor Law §§ 273 and273-a. After some discovery, both Orr and Key Bankmoved for summary judgment on the claims relatingto the validity of Key Bank's mortgages. Key Bankasserted several affirmative defenses, including aclaim that Orr's action was barred by the applicablestatutes of limitations.In an opinion and order dated August 26, 1991, JudgeCholakis denied the summary judgment motions. Heheld that the six-year limitations period ofN.Y.Civ.Prac.L. & R. (“CPLR”) § 213(1) applied tofraudulent conveyance actions under both sections273 and 273-a. First, there being no evidence thatKey Bank was amenable to suit in California, he rejectedKey Bank's claim that California's four-yearlimitations period applied to the section 273 claimunder New York's borrowing statute, CPLR § 202.See Stafford v. International Harvester Co., 668 F.2d142, 152 (2d Cir.1981) ( “New York's borrowingstatute does not require the application of the statuteof limitations of a jurisdiction if the cause of actioncould never have been brought in that jurisdiction.”).Second, he held that Orr's section 273-a claim wascontrolled by CPLR § 213(1)'s six-year limitationsperiod, not CPLR § 214(2)'s three-year period governing*34causes of action created by statute. On theother hand, he denied plaintiff Orr's motion for summaryjudgment because there were questions of factregarding whether KIC gave fair consideration for theNew York Property.After further discovery and additional submissions tothe court, both parties renewed their motions forsummary judgment. In an opinion and order datedMarch 30, 1992, Judge Cholakis granted summaryjudgment to plaintiff Orr on his 273-a claim, concludingthat KIC had not given “fair consideration” forthe New York Property. The district court granteddefendant Key Bank summary judgment on Orr'ssection 273 claim, thereby reversing itself on thestatute-of-limitations issue. Judge Cholakis held that,because Key Bank had now demonstrated that it wasamenable to jurisdiction in California, the actioncould have been brought there and, therefore, NewYork's borrowing statute did apply. Because Orr'ssection 273 claim was untimely under the Californialimitations period of four years, the court concludedthat Key Bank was entitled to summary judgment.Judge Cholakis entered a partial summary judgmentreflecting his opinion and he certified an interlocutoryappeal under Fed.R.Civ.P. 54(b). On appeal, KeyBank challenges Judge Cholakis's award of summaryjudgment to Orr on his section 273-a claim; and Orrcross-appeals Judge Cholakis's award of summaryjudgment to Key Bank on the section 273 claim.Statute of LimitationsDISCUSSION[1] Key Bank argues that Orr's claim under Debtor &Creditor Law § 273-a was barred by CPLR § 214(2),which imposes a three-year statute of limitations on“an action to recover upon a liability, penalty or forfeiturecreated or imposed by statute.” We agree withthe district court, however, that the three-year periodgoverning liability created by a statute does not applyto an action by a judgment creditor to set aside afraudulent conveyance.[2][3] CPLR § 214(2) “does not apply to liabilitiesexisting at common law which have been recognizedor implemented by statute.” State v. Danny's Fran-© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

Page 5991 F.2d 31(Cite as: 991 F.2d 31)chise Sys., Inc., 131 A.D.2d 746, 746, 517 N.Y.S.2d157, 158 (2d Dept.1987), appeal dismissed, 70N.Y.2d 940, 524 N.Y.S.2d 672, 519 N.E.2d 618(1988). Rather, section 214(2) applies only when astatute creates a new liability that did not exist atcommon law and would not exist but for the statute.See Aetna Life & Casualty Co. v. Nelson, 67 N.Y.2d169, 174, 501 N.Y.S.2d 313, 315, 492 N.E.2d 386,388 (1986); Danny's Franchise Sys., 131 A.D.2d at746, 517 N.Y.S.2d at 158. Moreover, “ ‘the statutemust be essential to the cause of action’ [and].... thestatutory liability must truly be new.” Practice Commentaries,CPLR § 214:2, at 521 (quoting Bryden v.Wilson Memorial Hosp., 136 A.D.2d 843, 523N.Y.S.2d 686 (3d Dept.1988)). That the statutemerely enlarges the common-law scheme of liabilityor grants additional remedies is insufficient to bring itwithin CPLR § 214(2). State v. Cortelle Corp., 38N.Y.2d 83, 86-87, 378 N.Y.S.2d 654, 656-57, 341N.E.2d 223, 224-25 (1975); Danny's Franchise Sys.,131 A.D.2d at 747, 517 N.Y.S.2d at 159; State v.Bronxville Glen I Assocs., 181 A.D.2d 516, 581N.Y.S.2d 189, 190 (1st Dept.1992).Section 273-a provides:Every conveyance made without fair considerationwhen the person making it is a defendant in an actionfor money damages or a judgment in such anaction has been docketed against him, is fraudulentas to the plaintiff in that action without regard tothe actual intent of the defendant if, after finaljudgment for the plaintiff, the defendant fails tosatisfy the judgment.N.Y.Debtor & Creditor Law § 273-a.When Debtor & Creditor Law § 273-a was enacted in1961, the liability it imposed was not novel. Fraudulentconveyance actions were common in New Yorklong before 1961. See, e.g., Buttles v. Smith, 281N.Y. 226, 22 N.E.2d 350 (1939); Farmers' Loan &Trust Co. v. Meyer, 222 A.D. 123, 225 N.Y.S. 561(1st Dept.1927); *35West Shore Furniture Co. v.Murphy, 141 N.Y.S. 835 (Sup.Ct.Ulster County1913). Indeed, nearly four hundred years ago, theinfamous Star Chamber declared fraudulent a conveyanceby a debtor of all his goods and chattels toone creditor during the pendency of another creditor'saction. Twyne's Case, 76 Eng.Rep. 809 (Star Chamber1601); see also Hadlock v. Eric, 23 F.Supp. 692,693 (S.D.N.Y.1938) (“section 273 of the Debtor andCreditor Law does not itself create new liabilities butwas a codification of and the embodiment of existingpresumptions established by a long line of decisionsof the courts of the State of New York”). Section273-a simply fleshed out the meaning of a fraudulentconveyance by stigmatizing certain conveyancesmade during litigation. Thus, CPLR § 214(2) doesnot apply to actions under Debtor & Creditor Law §273-a.[4][5][6] We agree with the district court that actionsunder section 273-a are governed by the six-yearlimitations period of CPLR § 213(1). See Martin v.Martin, 29 A.D.2d 864, 865, 288 N.Y.S.2d 374, 376(2d Dept.1968), aff'd in relevant part, modified onother grounds, 23 N.Y.2d 858, 298 N.Y.S.2d 68, 245N.E.2d 801 (1969); RCA Corp. v. Tucker, 696F.Supp. 845, 857 n. 9 (E.D.N.Y.1988). An action toset aside a fraudulent conveyance under section 273-ais an action for constructive fraud. See Republic Ins.Co. v. Levy, 69 Misc.2d 453, 454, 329 N.Y.S.2d 918,922 (Sup.Ct.Rockland Cty.1972). Compare Debtor &Creditor Law §§ 276 (governing actual fraud) & 276-a (authorizing award of attorneys' fees for proof ofactual fraud under § 276). And actions for constructive-ratherthan actual-fraud have long been subjectto the catch-all limitations period of CPLR § 213(1),see Dolmetta v. Uintah Nat'l Corp., 712 F.2d 15, 18(2d Cir.1983); Dybowski v. Dybowska, 146 A.D.2d604, 605, 536 N.Y.S.2d 838, 839 (2d Dept.1989), andits predecessor, Civ.Prac.Act § 53. See Hearn 45 St.Corp. v. Jano, 283 N.Y. 139, 144, 27 N.E.2d 814,817 (1940); Buttles, 281 N.Y. at 236, 22 N.E.2d at353; McCabe v. Gelfand, 58 Misc.2d 497, 499, 295N.Y.S.2d 583, 585 (Sup.Ct.Kings County 1968). Seegenerally Samuel M. Hesson, The Statute of Limitationsin Actions to Set Aside Fraudulent Conveyancesand in Actions Against Directors by Creditors ofCorporations, 32 Cornell L.Q. 222, 224-27 (1946);Note, Statutory Limitation for Fraud Actions, 13St.John's L.Rev. 114, 115-19 (1938).Fair ConsiderationKey Bank also argues that the district court erred byholding that Kinderhill's conveyance of the NewYork Property to KIC was not supported by fair consideration.In the eyes of Key Bank, the transfer toKIC instantly inflated the value of KIC shares heldby Kinderhill, thereby providing the requisite fair© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

Page 6991 F.2d 31(Cite as: 991 F.2d 31)consideration. We need not address this argument,however, because we will not turn a blind eye to thereality that the transfer of the New York Property andthe spin-off of KIC shares constituted a single, integratedtransaction. This transaction, viewed in itsentirety, was not supported by fair consideration.[7] In equity, “substance will not give way to form,[and] technical considerations will not prevent substantialjustice from being done.” Pepper v. Litton,308 U.S. 295, 305, 60 S.Ct. 238, 244, 84 L.Ed. 281(1939); see also Dean v. Davis, 242 U.S. 438, 443,37 S.Ct. 130, 131, 61 L.Ed. 419 (1917); Warren v.Union Bank of Rochester, 157 N.Y. 259, 270-71, 51N.E. 1036, 1039 (1898). Thus, an allegedly fraudulentconveyance must be evaluated in context;“[w]here a transfer is only a step in a general plan,the plan ‘must be viewed as a whole with all its compositeimplications.’ ” Pereira v. Checkmate CommunicationsCo. (In re Checkmate Stereo & Elec.,Ltd.), 9 B.R. 585, 612 (Bankr.E.D.N.Y.1981) (quotingBuffum v. Peter Barceloux Co., 289 U.S. 227,232, 53 S.Ct. 539, 541, 77 L.Ed. 1140 (1933)), aff'd,21 B.R. 402 (E.D.N.Y.1982); accord Yoder v. T.E.L.Leasing, Inc. ( In re Suburban Motor Freight, Inc.),124 B.R. 984, 998 (Bankr.S.D.Ohio 1990); Gafco,Inc. v. H.D.S. Mercantile Corp., 47 Misc.2d 661,664-65, 263 N.Y.S.2d 109, 114 (N.Y.Civ.Ct.1965);Gruenebaum v. Lissauer, 185 Misc. 718, 728, 57N.Y.S.2d 137, 145 (Sup.Ct.N.Y.County 1945), aff'd,270 A.D. 836, 61 N.Y.S.2d 372 (1st Dept.1946).[8] The record is clear that Kinderhill's conveyanceof the New York Property to *36 KIC and Kinderhill'ssubsequent distribution of KIC shares wereelements of a single restructuring plan adopted byKinderhill's board of directors in December 1985.Key Bank acknowledged as much, both in contemporaneousinternal lending documents and at oral argument.So viewed, the restructuring was not supportedby fair consideration for, in effect, it was a gratuitoustransfer of the New York Property by Kinderhill.We recently analyzed a similar transaction in the taxcontext. See Salomon Inc. v. United States, 976 F.2d837 (2d Cir.1992). As part of a corporate restructuring,Salomon transferred certain assets to a newlyformed subsidiary and then spun-off the subsidiary toits shareholders. We rejected Salomon's invitation toanalyze the two steps of the transaction separately fortax purposes: “[i]n substance, if not in form, the directand the circuitous transaction are the same. Eachachieves a rapid transfer of ... property outside the[corporate] group. To distinguish between themwould deny economic reality.” Id. at 842 (citationsomitted) (taxpayer required to pay back tax benefitsassociated with assets transferred out of corporategroup); see also Shapiro v. Wilgus, 287 U.S. 348,353-54, 53 S.Ct. 142, 143-44, 77 L.Ed. 355 (1932);Gruenebaum, 185 Misc. at 728, 57 N.Y.S.2d at 145.We reach the same conclusion here. The net effect ofKinderhill's restructuring was the transfer of the NewYork Property without any corresponding benefit toKinderhill. Thus, as the bank knew prior to the mortgages,see Debtor & Creditor Law § 278(1), thetransaction was not supported by fair consideration,and, accordingly, the district court properly set itaside as a fraudulent conveyance under Debtor &Creditor Law § 273-a. See 1 Garrant Glenn, FraudulentConveyances and Preferences § 195, at 348 (rev.ed. 1940) (“real test of a fraudulent conveyance ... isthe unjust diminution of the debtor's estate”); see,e.g., United Towing Co. v. Phillips, 242 F.2d 627,631-32 (5th Cir.), cert. denied, 355 U.S. 861, 78 S.Ct.93, 2 L.Ed.2d 68 (1957); Republic Ins. Co. v. Levy,69 Misc.2d at 450-51, 329 N.Y.S.2d at 918-20; In reCampbell's Estate, 164 Misc. 632, 299 N.Y.S. 442(Sur.Ct.N.Y.County 1937); cf. Salomon v. Kaiser (Inre Kaiser), 722 F.2d 1574, 1582-83 (2d Cir.1983)(transferring assets beyond creditors' reach withoutconsideration received in exchange is fraudulent).CONCLUSIONIn sum, we hold that the district court correctly applieda six-year limitations period to Orr's claim underDebtor & Creditor Law § 273-a. Because Kinderhill'stransfer of the New York Property and subsequentdistribution of KIC shares were an integratedtransaction, not supported by fair consideration, weaffirm the district court's award of summary judgmentto Orr on his claim under Debtor & CreditorLaw § 273-a. In view of our affirmance on the appeal,the cross-appeal, which seeks no additional relief,is moot.C.A.2 (N.Y.),1993.Orr v. Kinderhill Corp.991 F.2d 31END OF DOCUMENT© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

Page 7991 F.2d 31(Cite as: 991 F.2d 31)© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.

FRAUDULENT TRANFERENCESRonald M. Terenzi, Esq.Stagg, Terenzi, Confusione & Wabnik, LLP401 Franklin Avenue, Suite 300Garden City, NY 11530Telephone (516) 812-4502Facsimile (516) 812-4600

Fraudulent TranferencesThe term “fraudulent transfer”, when used in debtor/creditor law, does notnecessarily implicate common law fraud. A fraudulent transfer is one in which the debtortransfers property fair less than reasonably equivalent value at the time they are insolventor are left insolvent by the transfer or have transferred the property to hinder delay ordefraud creditors. It is a tool used to protect creditors form the efforts of debtors to hideassets from the reach of their creditors. No intent of wrongdoing is required althoughthere are consequences if intent is shown.States have adopted either the Uniform Fraudulent Transference Act (“UFTA”,adopted by most states) or the Uniform Fraudulent Conveyance Act (“UFCA”)NY has adopted the UFCA6 year statute of LimitationsActual Fraud / Constructive fraudAlthough fraudulent transfers also include transfers made by a debtor with intentto delay, hinder, or defraud creditors, i.e., actual fraud, the most common use of thefraudulent transfer statutes is the constructive fraud provision promulgated in order toprotect creditors form the disposition of property by the debtor without fair return to thedebtor with the effect of putting those assets out of the reach of the creditor. An action torecover a fraudulent transfer can be brought under State Law or under the BankruptcyCode.Actual Fraud FTA gives badges of Fraud, FCA does notBadges of fraud include:• Lack or inadequacy of consideration• Family, friendship or close relationship with transferee• Retention of control, possession, benefit or use of property• Financial condition of party beg=fore and after the transaction• Existence or cumulative effect of pattern or series of transactions or course of conduct afterincurring debt, onset of financial difficulties, or pendency or threat of suits by creditors• General chronology of events and transactions under inquiryo In re Borriello, 2005, 329B.R. 367Attorneys fees awarded Under UFCA if actual intent to defraud shownFraudulent intent may be indicated by the lack or inadequacy of value given for property.In Re Borriello, 2005 329 B.R. 367

Nursing home case_ Transfer of personal injury claim to family members deemed notfraudulent in suit brought by nursing home because court found transferor had notintended to incur debts beyond her ability to pay based on 3 years cost of nursing homeuntil she was eligible for Medicaid. Grace Plaza Of Great Neck v. Heitzler (2 nd Dept.2003) 2A.D.3d 780.Hold Over Law Practice – Sub lessee law firm held over utilizing corporate shield againstlandlord for rent where assets, including cases of firm were transfered withoutconsideration with intent to defraud. Parsons & Witmore v. Abady Luttati KaiserSaurborn & Mair, P.C. (1 st Dept 2003) 309 A.D. 2d 765In LBO situation despite the fact that corporation defaulted on Bonds in little more than ayear, there was no evidence that former partners believed the company would b e unableto pay debts . Projections, which seemed reasonable at the time, proved to be incorrect.MFS/Sun Life Trust-High Yield series v. Van Dusen Airport Services Co. (1995), 910 F.Supp. 913.Constructive fraud.Lack of fair consideration essential in case of constructive fraud.Fair consideration determination is fact specific to each case. Fact finder measureseconomic benefit of whole transaction to Debtor and then compares to value of propertyconveyed.FCA uses term without fair considerationFTA uses less that reasonable equivalent value (similar to Bankruptcy Code)• Was insolvent or Rendered insolvent• Retains unreasonably small capital for business Debtor is engaged or is about to engage in• Debtor intended or believed that it would incur debts that would be beyond ability to paywhen maturedFraudulent Transfer Issues In BankruptcyFraudulent transfers can be set aside under two different bankruptcystatutes. Section 548 of the Bankruptcy Code permits a fraudulent transfer madewithin two years of the commencement of the bankruptcy case to be recoveredunder the Bankruptcy Code. Section 544 permits the use of state law to set asidefraudulent transfers made within the applicable state statute of limitations; in NewYork, six years.

The terms of Section 548 are virtually identical with the provisionsof the Uniform Fraudulent Conveyance Act, adopted by most states, includingNew York 1 . A transfer is “fraudulent,” and thus may be voided, if (a) it was madewith actual intent to hinder, defraud or delay creditors, or (b) the transfer wasmade while the debtor was insolvent or left insolvent by the transfer and the debtorreceived less than a reasonably equivalent value in return for the transfer.The main differences between bringing an action under the Code, asopposed to State Law, is that under the Code: a) there is a 2 year reach backperiod, as opposed to the 6 yr State provision; b) State law generally requires thatthere be an actual creditor identified that existed at time of Transfer and createsdefenses that might have existed against that creditor whereas in Bankruptcy thetrustee sues in his own right; c) the State law generally has more stringent standardof proof and d) Section 548(a)(1)(b)(ii)(IV) allows the avoidance of a transfer toor for benefit of Insider under an employment contract and not in the ordinarycourse of business(i.e., offensive bonuses and golden parachutes.Assumed Agreement: In re Network Access Solutions Corp. 330 B.R. 67(Bankr. Del. 2005). Creditor’s Committee sought to avoid and recover largepayments made to 2 officers prior to Chapter 11 under their employmentagreement. However, earlier in the case the Debtor had successfully moved toassume the officers employment agreements. The Court found it would beantithetical for the court to have ruled the assumption was in the best interest ofthe debtor and then rule that the agreement presented a bad faith arrangement thatdid not give reasonably equivalent value. Moreover the Court held the Committeewas judicially esptopped from asserting the avoidance action since it supported theassumption and was assumed to have reaped the benefits of same.In bankruptcy the trustee has two years to bring action even if 6 yr statute expires as longas 6 yr statute did not run before date of petition.Statute of Limitations ran on property transfer from date of recording of new deed.Ehrler v. Cataffo (2 dept 2007) 42 A.D. 3d 424Section 548(a)(2) also excepts charitable contributions from avoidance ifnot more that 15% of gross annual income, or if it exceeds that amount wasconsistent with the Debtor’s past practices. (Religious or charitable entity ororganization is defined by reference to the Internal Revenue Code)1 Article 10 of the New York Debtor and Creditor Law.

Sections 548 and 544 work in concert with Section 550, which is theeffectuating statute. Thus, a transfer is voided under Section 544 or Section 548,but judgment is obtained through Section 550. Under Section 550, the defendantmay be required to return the property or the value of the property.TransfereeOnce a transfer is avoided, Section 550 provides for judgment to be enteredagainst both the immediate recipient of the fraudulent transfer and a subsequenttransferee who takes with knowledge of the fraud. Thus, for example, if Afraudulently transfers his interest in his house to his wife, B, by deed which showsthat there was no consideration for the transfer, and then B sells the house to C,judgment can be obtained against A, B and C, all of whom are held to haveknowledge of the fraud. However, the trustee may not recover from C if they tookfor value and in good faith without knowledge of the voidability of the transfer.A good faith transferee who must return the property fraudulentlytransferred has a lien on that property for the value actually given for the transfer{548(c)} and for the cost of any improvements which increased the value of theproperty {550(e)}. The Uniform Fraudulent Conveyance Act does not provide expressdefenses and protections for a good faith transferee.In a case were actual fraud by the debtor is established a trustee mayrecover from a bona fide purchaser the increase in value of the propertytransferred to the extent the increase in due to market conditions as opposed tovalue added by transferee. This is a result of the fat that the transferee has a lien tothe extent of the value exchanged at the time of the transfer. However if thetransferee did not give value in good faith, they receive merely an unsecuredclaim.If the transferee sold the property the trustee may recover the value of theproperty including any profits derived from the property form the date of transferto the time of recovery based on the theory that had the transfer not taken place thedebtor would have had the value of those profits.The Bankruptcy Code § 548(b), provides for the avoidance of a transfer to a generalpartner of the debtor, if the debtor was insolvent or became insolvent as a result of thetransfer. UFCA has similar provision while the UFTA does not.Section 548(e) provides for the avoidance of a self settled trust, or a similar device with aTEN YEAR reach back period which left the debtor insolvent or was done with actual intentto hinder, delay or defraud creditor.

Ponzi Schemes. If investor received back funds that exceed the principal investment,then e these amounts are avoidable transfers by the debtor to the investors. Funds receivednot in excess of original contribution are generally safe assuming the investor acted in goodfaith without knowledge of the Ponzi scheme or any financial trouble of the debtor.Since the trustee need only show intent to hinder, delay or defraud, a Ponzi scheme, bydefinition meets the standard. Usually trustee can only recover “fictitious profits” underconstructive fraud theory but may be able to recover returned principal as well if shown thatinvestor did not act in good faith based on investor’s knowledge of the fraud.Marital Distributions. State divorce court approval (even subsequent) as part of regularlyconducted divorce proceeding, absent evidence of collusion , conclusively establishedreasonably equivalent value. In re Zerbo (2008, 397 B.R. 642Burden of proof on party asserting fraudulent transfer by preponderance of the evidenceTerms:Transfer: Defined under Section 101(54) as (a) creation of a lien; (b) retention of title assecurity; (c)foreclosure of right of redemption;(d) each mode, direct or indirect, absolute orconditional, voluntary or involuntary, of disposing or parting with (i) property; or (ii) aninterest in property. In other widest it is interpreted broadly to include ever grant of propertyor an interest therein.Insolvency: balance sheet analysis. Liabilities are greater than assets. Under 548 exemptassets are not included in the analysis, neither are contingent liabilities carried at full valuebut are discounted by the probability of the contingency. UFCA defines as “present fairsalable value of his assets is less than the amount that will be required to pay his probableliability on his existing debts as they become absolute and matured.Solvency is balance sheet analysis• Court did not include in balance sheet analysis a tort victims as yet unliquidated, not‐sued‐upon,and unmatured claim for abuse as it was not yet a debt. Shelly v. Doe 1997, 173 Misc.2d 200,660 N.Y.S.2d 937, Affirmed as modified 249 A.D. 756, 671 N.Y.S. 2d 803Reasonably Equivalent Value: Not defined under the Code. UFCA uses the term “”fairconsideration”. Always determined on a case by case basis and is generally a matter ofequity.Payment under a guarantee giving by debtor not fair consideration if underlyingGuarantee can be avoided as fraudulent obligation. Nirvana restaurant, Inc., 2006, 337 B.R.495

U.S. Supreme CourtBFP v. Resolution Trust Corp., 511 U.S. 531, 114 S. Ct. 1757, 128 L. Ed. 2d 556, 25 Bankr.Ct. Dec. (CRR) 1051, 30 Collier Bankr. Cas. 2d (MB) 345, Bankr. L. Rep. (CCH) 75885(1994) (The price obtained at a foreclosure sale of real property under state law is reasonableequivalent value.)Preference Actions1. DefinitionSection 547 of the Bankruptcy Code permits a trustee to avoid any transferof an interest of the Debtor in property, made to a creditor on account if anantecedent debt within 90 days prior to the filing of the bankruptcy petition (oneyear if the transferee is an insider) while the Debtor is insolvent, which enables tocreditor to receive more than the creditor would have received in a Chapter 7 casehad the payment not been made. The rationale for this provision is to prevent therush to the courthouse by the creditors and to create a level playing feel amongcreditors.2. DefensesThere are three primary defenses to a preference action: contemporaneousexchange, new value and ordinary course.(a) Contemporaneous exchangeIf the transfer of property or payment is made simultaneously with thegiving of new value, then the transfer is protected. 2 For example, if goods areshipped and paid COD, then there is no preference. This holds even if thepayment is made by check, as long as the check is cashed within a reasonabletime.(b) New valueTo the extent that a creditor extends new value after a preference, then theamount of the new value is protected. 3 For example, on Monday, the debtor pays2 11 U.S.C. § 547(c)(1).3 11 U.S.C. § 547(c)(4).

$10,000 in what is clearly a preference. On Tuesday, the creditor ships $8,000 innew merchandise, which is not paid for. On Wednesday, the debtor filesbankruptcy. The $10,000 preference is reduced by the $8,000 in new value, sothat only $2,000 is recoverable from the creditor. Moreover, the creditor has theright to file a proof of claim for the $8,000 which was not paid, and the $2,000which is returned to the bankruptcy Estate.Issues arise over the timing of the new value. If the debtor calls on Mondayand says that payment is in the mail, and the creditor ships on Tuesday, but doesnot receive the check until Friday, was that a transfer of new value made after thepreferential transfer? Courts are split on this question.(c) Ordinary courseProbably the most commonly asserted defense to a preference action iscontained in Section 547(c)(2) of the Bankruptcy Code: that the payments weremade in the ordinary course of business. That Subsection provides that:(c) The trustee may not avoid under this Section a transfer-(2) to the extent that such transfer was-(A) in payment of a debt incurred by the debtor in the ordinary course ofbusiness or financial affairs of the debtor and the transferee;(B) made in the ordinary course of business or financial affairs of thedebtor and the transferee; and(C) made according to ordinary business terms.The ordinary course defense is intended to strike a balance betweenpreventing preferential treatment and minimizing disruption of the orderly flow ofcommerce. As stated by Congress, "the purpose of this exception is to leaveundisturbed normal financial relations because it does not detract from the generalpolicy of the preference Section to discourage unusual action by either the debtoror his creditor during the debtor's slide into bankruptcy." 4The first two parts of the test are fairly straight forward. The courts look tosuch indicators as whether there were any unusual activities leading up to thepayment. For example, were there telephone demands, written demands, lawsuitsor dishonored checks. Changes in the terms may also take a payment out of theordinary, such as a reduction in the credit limit; reduction in the time to pay, for4 H.R. Rep. No. 595, 95th Cong., 1st Sess., at 373 (1977); S. Rep. No. 989, 95th Cong.,2d Sess. 88 (1978).

example, from net 15 to COD; or change in the type of payment, for example fromregular business check to certified check.The most common proof of ordinary course is in counting the days betweeninvoice and payment, and comparing the length of time for payment during theperiod prior to the 90 days preference period to the length of time for paymentduring the preference period.Case law is uniform in using the actual payment period to define theordinary course, rather than the invoice terms. Thus, if the terms are net 30, butthe payments were usually between 45 - 60 days, then ordinary course will bedefined by the 45 - 60 period, not 30. From there, however, methods of countingdiffer wholly from judge to judge. It is not an exaggeration to say that there is apublished decision to support or oppose any position on counting ordinary coursewhich a party wishes to propound.For example, if payment during the pre-preference period was between 45 -60 days after invoice, with an average of 50 days, and a mean of 49, should thecourt analyze the preference period payments by comparing the range of days, theaverage or the mean? If the court chooses the average, how many days off of theaverage must a payment be before it out of the ordinary - 3, 7, 14?It is at this point that the third part of the test comes into play. ViewingSubsection 547(c)(2)(B) as a subjective test, and Subsection 547(c)(2)(C) as anobjective test, the Sixth Circuit Court of Appeals has held that the creditor mustpresent evidence under the subjective test that the payment in question wasordinary in relation to prior conduct between that debtor and that creditor, andunder the objective test showing that the payment is ordinary in relation to thestandards prevailing in the relevant industry.3. SettlementsBecause of the uncertainties surrounding the various defenses to apreference action, preference suits are usually settled, not litigated through to trial.If the court does not give some indication of its view on the issues raised by thedefendant, either through a published decision or comments at a pre-trialconference, it is often helpful to make a motion for summary judgment. Often thefacts are not in dispute. Rather it is the application of the law that is uncertain.That is why summary judgment is often used. Even if facts are in dispute so thatthe motion can not be granted in full, the court will usually take the opportunity toprovide guidance in the parties in future settlement discussions, and may grantpartial summary judgment to help clarify and simplify the issues.

Among the issues to consider in any settlement discussion are the cost oflitigation to the parties, as well as the costs and delays attendant in theenforcement of a judgment and the possibility of an appeal. Included in thesecosts are the right of the plaintiff to recover interest from at least the date of thedemand for the return of the preference, and in some courts, from the date of thetransfer itself.In negotiating a settlement, the defendant should calculate the amount ofany unpaid debt (which might also be used for the new value defense) and theamount of the preference to be repaid, and then calculate how much of a dividendis expected to be repaid to creditors. Not only will the possibility of a dividendlimit damages (one of the elements of the preference is that it permitted thecreditor to receive more than would have been paid in a liquidation), but it may bepossible to settle a case by waiving a claim, rather than by repaying thepreferential transfer.Once a preferential payment is recovered, the creditor who returned thepayment is entitled to file a proof of claim for the amount of the returned payment,under Section 502(h). Settlement proposals should be reviewed carefully to insurethat this right is not being waived as part of the settlement.

Bankruptcy Code Section§ 548. Fraudulent transfers and obligations(a)(1) The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under anemployment contract) of an interest of the debtor in property, or any obligation (including any obligation to orfor the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred onor within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily—(A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity towhich the debtor was or became, on or after the date that such transfer was made or such obligation wasincurred, indebted; or(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and(ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or becameinsolvent as a result of such transfer or obligation;(II) was engaged in business or a transaction, or was about to engage in business or a transaction, forwhich any property remaining with the debtor was an unreasonably small capital;(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor'sability to pay as such debts matured; or(IV) made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefitof an insider, under an employment contract and not in the ordinary course of business.(2) A transfer of a charitable contribution to a qualified religious or charitable entity or organization shall not beconsidered to be a transfer covered under paragraph (1)(B) in any case in which.—(A) the amount of that contribution does not exceed 15 percent of the gross annual income of the debtor forthe year in which the transfer of the contribution is made; or(B) the contribution made by a debtor exceeded the percentage amount of gross annual income specified insubparagraph (A), if the transfer was consistent with the practices of the debtor in making charitablecontributions.(b) The trustee of a partnership debtor may avoid any transfer of an interest of the debtor in property, or anyobligation incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of thepetition, to a general partner in the debtor, if the debtor was insolvent on the date such transfer was made or suchobligation was incurred, or became insolvent as a result of such transfer or obligation.(c) Except to the extent that a transfer or obligation voidable under this section is voidable under section 544, 545, or547 of this title, a transferee or obligee of such a transfer or obligation that takes for value and in good faith has alien on or may retain any interest transferred or may enforce any obligation incurred, as the case may be, to theextent that such transferee or obligee gave value to the debtor in exchange for such transfer or obligation.(d)(1) For the purposes of this section, a transfer is made when such transfer is so perfected that a bona fidepurchaser from the debtor against whom applicable law permits such transfer to be perfected cannot acquire aninterest in the property transferred that is superior to the interest in such property of the transferee, but if suchtransfer is not so perfected before the commencement of the case, such transfer is made immediately before thedate of the filing of the petition.(2) In this section—(A) “value” means property, or satisfaction or securing of a present or antecedent debt of the debtor, but doesnot include an unperformed promise to furnish support to the debtor or to a relative of the debtor;(B) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant,

or securities clearing agency that receives a margin payment, as defined in section 101, 741, or 761 of thistitle, or settlement payment, as defined in section 101 or 741 of this title, takes for value to the extent of suchpayment;(C) a repo participant or financial participant that receives a margin payment, as defined in section 741 or 761of this title, or settlement payment, as defined in section 741 of this title, in connection with a repurchaseagreement, takes for value to the extent of such payment;(D) a swap participant or financial participant that receives a transfer in connection with a swap agreementtakes for value to the extent of such transfer; and(E) a master netting agreement participant that receives a transfer in connection with a master nettingagreement or any individual contract covered thereby takes for value to the extent of such transfer, exceptthat, with respect to a transfer under any individual contract covered thereby, to the extent that such masternetting agreement participant otherwise did not take (or is otherwise not deemed to have taken) such transferfor value.(3) In this section, the term “charitable contribution” means a charitable contribution, as that term is defined insection 170(c) of the Internal Revenue Code of 1986, if that contribution—(A) is made by a natural person; and(B) consists of.—(i) a financial instrument (as that term is defined in section 731(c)(2)(C) of the Internal Revenue Code of1986); or(ii) cash.(4) In this section, the term “qualified religious or charitable entity or organization” means—(A) an entity described in section 170(c)(1) of the Internal Revenue Code of 1986; or(B) an entity or organization described in section 170(c)(2) of the Internal Revenue Code of 1986.(e)(1) In addition to any transfer that the trustee may otherwise avoid, the trustee may avoid any transfer of aninterest of the debtor in property that was made on or within 10 years before the date of the filing of the petition,if—(A) such transfer was made to a self-settled trust or similar device;(B) such transfer was by the debtor;(C) the debtor is a beneficiary of such trust or similar device; and(D) the debtor made such transfer with actual intent to hinder, delay, or defraud any entity to which the debtorwas or became, on or after the date that such transfer was made, indebted.(2) For the purposes of this subsection, a transfer includes a transfer made in anticipation of any moneyjudgment, settlement, civil penalty, equitable order, or criminal fine incurred by, or which the debtor believedwould be incurred by—(A) any violation of the securities laws (as defined in section 3(a)(47) of the Securities Exchange Act of 1934(15 U.S.C. 78c(a)(47))), any State securities laws, or any regulation or order issued under Federal securitieslaws or State securities laws; or(B) fraud, deceit, or manipulation in a fiduciary capacity or in connection with the purchase or sale of anysecurity registered under section 12 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78l and78o(d)) or under section 6 of the Securities Act of 1933 (15 U.S.C. 77f).

Ron Terenzi is a founding partner at the law firm of STAG, TERENZI, CONFUSIONE& WABNIK, LLP which employs over 35 people at its Garden City offices. Ron heads thebankruptcy/business reorganization practice group, practicing in the areas of bankruptcy law andcommercial litigation. Mr. Terenzi has been practicing law on long Island for over 20 yearsserving the legal needs of commercial clients. He has written articles, appeared on various newsprograms and given talks to professional organizations and chaired continuing educationseminars in the field of bankruptcy law and business law topics. Mr. Terenzi also serves as amediator and arbitrator in connection with the mediation program the United States BankruptcyCourt and the Commercial Division of the State Supreme Court, Nassau County.Ron is active in various organizations on Long Island including:• Past President and, then, Chairman of the Board for the organization Advancement forCommerce, Industry, and Technology, “ACIT”;• the co-chair of the International Partnership Award Luncheon for the State University atOld Westbury;• Serves on the Board of Directors of the Nassau County Bar Association were hefrequently lectures and formerly chaired the Community Relations Public EducationCommittee and participated in monitoring program; and• Serves on the SUNY, Old Westbury, School of Business Advisory Board.