Insolvent Party's Transfer of Property to Insider Not Improper Where Insider is Secured Creditor

On June 19, 2018, Justice Schecter of the New York County Commercial Division issued a decision in Englander Capital Corp. v. Zises, 2018 NY Slip Op. 28185, holding that an insolvent party's transfer of property to an insider was not a fraudulent conveyance because the insider was a secured party, explaining,

New York's Debtor and Creditor Law deems certain conveyances made without fair consideration to be fraudulent irrespective of moral guilt and intent because of the tendency of these transactions to deceive, violate a confidence or injure interests that the law deems worthy of special protection.

Fair consideration is provided when property is given in good faith to satisfy a pre-existing debt as a fair equivalent therefor. Whether fair consideration has been exchanged must be determined based on the particular facts of each case. Good faith is always essential.

Generally, an insolvent's transfer of property to an insider to satisfy an antecedent debt is presumed to lack good faith because it allows those aware of the insolvency to prefer themselves over others by devoting the property of the corporation to the payment of their own debts leaving nothing for other creditors. The exception to that rule is when the transfer is to an insider who is legitimately a secured creditor. Under those circumstances, no preference occurs because the satisfaction of a secured debt causes no improvement of position. Indeed, plaintiff has not cited any precedent holding that a conveyance to repay a legitimately secured creditor, who happened to be an insider, was deemed fraudulent.

Here, there is no evidence that the Zises' security interest for their loan to LawCash, which partially funded the purchase of Structured Settlements, was a sham or was otherwise invalid. There is no indication that in making the secured loan and later in partially satisfying it, Defendants and LawCash did not act honestly, fairly and openly. In fact, plaintiff was on notice of the Secured Note by virtue of the UCC Financing Statement filed on September 8, 2006 and it could have secured itself but did not do so. As holders of a legitimate secured obligation, Defendants were entitled to the assets that they received to satisfy their outstanding secured debt. Because plaintiff failed to show that LawCash's bona fide transfers—many of which were made before Englander even commenced the LawCash Action—were anything other than value being exchanged for the discharge of a secured debt, the conveyances were made in good faith and for fair consideration.

(Internal quotations and citations omitted).

We have substantial experience in helping judgment creditors collect on judgments and search for and attach assets worldwide. A big part of that effort is using the legal tools--such as claims for fraudulent conveyance discussed in this opinion--for recovering property that has been transferred to a third party to avoid its being seized to satisfy a judgment. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client need help collecting on a judgment.