FRAUDULENT CONVEYANCES Nassau Academy of Law CLE Live ...

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.