FRAUDULENT CONVEYANCES Nassau Academy of Law CLE Live ...

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.