Court Examines Scope of Claim for Fraudulent Conveyance

On July 7, 2014, Justice Ramos of the New York County Commercial Division issued a decision in 135 E. 57th St., LLC v. 57th St. Day Spa, LLC, 2014 NY Slip Op. 31802(U), examining multiple alleged fraudulent conveyances.

In 135 E. 57th St., LLC, the plaintiff building owner and landlord brought an action to collect a judgment "for rent" obtained "against its former tenant, defendant 57th Street Day Spa, LLC (the Tenant)," "from the owners of the Tenant on theories of piercing the corporate veil, successor liability, civil conspiracy, and pursuant to Debtor and Creditor Law (DCL) § 270, et seq." In deciding a motion for summary judgment brought by several defendants, the court analyzed the plaintiff's fraudulent conveyance claims as follows:

Constructive fraud occurs when a conveyance is made without fair consideration by one who: 1) is insolvent or who is rendered insolvent by the conveyance; 2) is engaged or is about to engage in a business or transaction for which the property remaining after the conveyance is unreasonably small; or 3) intends or believes that it will incur debts beyond its ability to pay as they mature.

A creditor attempting to set aside a fraudulent conveyance is limited to setting aside the conveyance of the property which would have been available to satisfy the debt had there been no conveyance. The creditor can recover from the party who made the transfer or the party who received the transfer. A claim of fraudulent conveyance cannot be sustained against a nontransferee on the ground that it assisted in the transfer.

(Internal quotations and citations omitted) (emphasis added). The court went on to examine the five fraudulent conveyances alleged by the plaintiff.

The first conveyance failed to support a claim because the transfer was not made by its debtor.

The court denied summary judgment with respect to second and fourth conveyances, which involved payments that were due to the debtor being made to one of the defendants instead. Because "the monies belonged to and should have been paid to the Tenant, if the Tenant was bypassed and the monies paid directly to transferees, the transferees could have received a fraudulent conveyance." Looking at the standard for whether a conveyance is fraudulent, the court explained:

In order for a conveyance not to be fraudulent, good faith is required of both the transferor and the transferee. A transfer without good faith is deemed to lack fair consideration. Transfers to controlling shareholders, officers, or directors of an insolvent corporation are deemed to be lacking in good faith and are presumptively fraudulent. Insolvency is presumed if fair consideration is lacking.

(Internal quotations and citations omitted) (emphasis added). The court found that there were questions of fact regarding whether the alleged transfer left the debtor insolvent.

The third conveyance failed to support a claim because the plaintiff failed to present evidence showing that the defendant did not receive fair consideration when it sold its 49% ownership interest in the Tenant.

The fifth conveyance

consists of the Tenant's failure to insist on payment of the rent starting in January 2009, thereby benefitting the Lather companies and leaving the Tenant without any money. The Tenant did not demand the rent or sue the Lather entities, according to plaintiff. A waiver or release of an obligation can be a conveyance under DCL.

(Internal quotations and citations omitted) (emphasis added).

This decision illustrates several of the many applications of a claim of fraudulent conveyance, along with some of the limitations of such a claim.