Conveyances Fraudulent Under Debtor Creditor Law

On December 22, 2016, Justice Kornreich of the New York County Commercial Division issued a decision in Wimbledon Financing Master Fund, Ltd. v. Wimbledon Fund, SPC, 2016 NY Slip Op. 32556(U), granting summary judgment on fraudulent conveyance claims, explaining:

In applying this summary judgment burden shifting standard to proceedings under the DCL, New York courts have long held that once the petitioner establishes that a transfer has been made without consideration, the initial burden to establish solvency is on the transferor. To be sure, whether the subject conveyance has rendered the debtor insolvent, and whether fair consideration was paid, are generally questions of fact which must be determined under the circumstances of the particular case and, generally, the burden of proving these elements is upon the party challenging the conveyance. However, when a transfer has been made for no consideration, the courts recognize a rebuttable presumption of insolvency and fraudulent transfer, and the burden then shifts to the transferee to overcome that presumption.

DCL § 273 provides that every conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regard to his actual intent if the conveyance is made or the obligation is incurred without a fair consideration. DCL §§ 274 and 275, respectively, further provide:

[§ 274] Every conveyance made without fair consideration when the person making it is engaged or is about to engage in a business or transaction for which the property remaining in his hands after the conveyance is an unreasonably small capital, is fraudulent as to creditors and as to other persons who become creditors during the continuance of such business or transaction without regard to his actual intent.
[§ 275] Every conveyance made and every obligation incurred without fair consideration when the person making the conveyance or entering into the obligation intends or believes that he will incur debts beyond his ability to pay as they mature, is fraudulent as to both present and future creditors.

Simply put, a conveyance that renders the conveyor insolvent is fraudulent as to creditors without regard to actual intent, if the conveyance was made without fair consideration. Moreover, even if there is fair consideration, a transfer is still constructively fraudulent in the absence of good faith on the part of both the transferor and the transferee. Importantly, as pertinent here, an insider payment is not in good faith, regardless of whether or not it was paid on account of an antecedent debt.

In this case, Wimbledon alleges and submits evidence that neither of the Transfers were made for any consideration. This allegation shifts the burden onto WCM and Class C to raise a question of fact about fair consideration or Arius Libra's solvency. With respect to the $250,000 Transfer, the only consideration claimed by WCM is repayment of management fees and expenses allegedly owed by Arius Libra to WCAM. This is insufficient. Since both Arius Libra and WCAM were controlled by Albert Hallac, Jeffrey Hallac, and Keith Wellner (and, apparently, non-party David Bergstein), any payment made by Arius Libra to WCAM would be a payment to an insider and, therefore, cannot be considered to be in good faith. This is true regardless of whether Arius Libra actually owed fees and expenses to WCAM, and whether the payment, which was made to WCM (not to WCAM), was indeed repayment of these alleged fees and expenses.

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