FRAUDULENT CONVEYANCES Nassau Academy of Law CLE Live ...

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.