Debtor's Transfer of Good Will To Newly-Formed Entity is Fraudulent Conveyance

On August 4, 2015, Justice Emerson of the Suffolk County Commercial Division issued a decision in All County Paving Corp. v. Darren Constr., Inc., 2015 NY Slip Op. 51144(U), granting summary judgment to the plaintiff on a fraudulent conveyance claim based on a judgment debtor's transfer of the good will of its business to a newly-formed entity.

The plaintiff in All County Paving had been unable to collect on a judgment entered in 2011 against Darren Construction Services, Ltd. Two months before the entry of the judgment, Michael Fusco, the sole officer, director and shareholder of Darren Construction Services, caused the entity to cease doing business and formed a new company, Darren Construction, Inc., of which Fusco was the sole officer, director and shareholder. The new entity conducted the same business, from the same location, and had the same telephone number as the defunct Darren Construction Services. Moreover, Fusco testified at his deposition that "he formed Darren Construction[, Inc.] because Darren Construction Services' debts exceeded its income and, due to the poor economy, it was not feasible for Darren Construction Services to continue doing business." The plaintiff brought suit seeking to hold Darren Construction, Inc. liable for the judgment on a fraudulent conveyance theory. The Court granted summary judgment to the plaintiff on the fraudulent conveyance claim.

Justice Emerson's decision provides an overview of the New York fraudulent conveyance law, explaining the difference between constructive and actual fraudulent conveyances:

New York's fraudulent conveyance law permits the recovery of transfers that unfairly diminish a debtor's estate. To set aside a transfer as fraudulent under Debtor and Creditor Law § 273 or §273-a, no proof of an intent to defraud is required. Constructive fraud may be shown when the debtor transfers assets without fair consideration and the debtor is or becomes insolvent or the debtor has a judgment docketed against him that he has failed to satisfy. Transfers to controlling shareholders, officers, or directors of an insolvent corporation are deemed to be lacking in good faith and are presumptively fraudulent.

To set aside a transfer as fraudulent under Debtor and Creditor Law § 276, a creditor needs to show actual intent to defraud on the part of the transferor. When actual intent to hinder, delay, or defraud creditors is proven, proof of unfair consideration or insolvency is not required. Due to the difficulty of proving actual intent, the pleader is allowed to rely on so-called badges of fraud to support his case, i.e. circumstances so commonly associated with fraudulent transfers that their presence give rise to an inference of intent. Among such circumstances are: a close relationship between the parties to the alleged fraudulent transaction, a questionable transfer not in the usual course of business, inadequacy of the consideration, the transferor's knowledge of the creditor's claim and the inability to pay it, and the retention of control of the property by the transferor after the conveyance. Other factors include secrecy, haste, or unusualness of the transaction and the timing of the transfer.

(Citations omitted) (emphasis added).

In All County Paving, there was no evidence that Darren Construction Services transferred any of its hard assets to Darren Construction, Inc. Nevertheless, Justice Emerson found that because Fusco's new company carried on the same business of his old company, there was a fraudulent conveyance of the company's good will:

"Good will" has been defined as the advantage or benefit which is acquired by an establishment, beyond the mere value of the capital, stocks, funds, or property employed therein, in consequence of the general public patronage and encouragement, which it receives from constant or habitual customers, on account of its local position, or common celebrity, or reputation for skill or affluence, or punctuality, or from other accidental circumstances or necessities, or even from ancient partialities or prejudices. . . . The chief elements of good will are continuity of place, continuity of name, and reputation.

The court finds that, while Fusco may not have transferred any "hard" assets from Darren Construction Services to Darren Construction, he transferred the good will of the business, which is a saleable asset. The record reflects that Darren Construction took over the business of Darren Construction Services at the same location, with the same telephone number, and with the same proprietor as before and that Darren Construction Services did not receive any consideration therefor. The record also reflects that, at the time of the transfer, Darren Construction Services was insolvent and a defendant in the underlying action. Moreover, the judgment in that action remains unsatisfied. Accordingly, the court finds that the transfer was made without fair consideration in violation of both § 273 and § 273-a of the Debtor and Creditor Law.

The court also finds that the transfer was made with actual intent to defraud in violation of Debtor and Creditor Law § 276. The timing of the transfer, which was not in the ordinary course of Darren Construction Services' business; the inadequacy of the consideration; and the retention of control over both business by Michael Fusco all give rise to an inference of intent to defraud, which the defendants have failed to rebut. Fusco's deposition testimony reveals that, contrary to his contentions, the transfer was made to avoid paying the plaintiff and Darren Construction Services' other creditors.

(Citations omitted).

Justice Emerson's decision conflicts with the First Department's decision in P.A. Bldg. Co. v. Elwyn D. Lieberman, Inc., 227 A.D.2d 277, 279, 642 N.Y.S.2d 300, 301 (1st Dep't 1996), where the court held that summary judgment should have been granted dismissing a fraudulent conveyance claim against the defendant transferee, holding as a matter of law that the good will of the transferor's business belonged not to the transferor but to the transferor's sole shareholder and president, who "accounted for the vast majority of the Corporation's business." According to the court, "[i]t has long been recognized that good will may sometimes attach to an employee who maintains distinctly personal or professional relationships with customers, so that the business entity possesses little of it." Id.