Court Rejects Claim for Aiding and Abetting Fraudulent Conveyance

On October 17, 2019, Justice Schecter of the New York County Commercial Division issued a decision in Stillwater Liquidating LLC v. CL Recovery Trading Fund III, L.P., 2019 NY Slip Op. 33108(U), rejecting a claim for aiding and abetting a fraudulent conveyance, explaining:

DCL claims are only properly asserted against the transferor and transferee. Based on the allegations in the complaint, Recovery is the only proper defendant on the DCL claims because the other defendants are not alleged to possess the Notes and are not parties to the PSA. Liability cannot be extended to other parties simply because they participated in the fraudulent transfer.

Priestley v Panmedix Inc. (134 AD3d. 642 [1st Dept 2015]) is not to the contrary. In Priestley, while the motion court had granted plaintiff leave to amend the complaint to assert a claim for aiding and abetting a fraudulent conveyance, the Appellate Division never expressly held that such a cause of action is viable. The Appellate Division further held that, under New York law, there exists a common law cause of action for tortious interference with enforcement of a judgment based on plaintiff possessing a valid judgment at the time of the fraudulent conveyance. Here, plaintiff is not seeking to enforce a judgment.

The court is unconvinced that Priestley intended to deviate from the federal courts' understanding that the Court of Appeals, in Federal Deposit, rejected the notion that an aiding and abetting fraudulent conveyance claim is viable. Geo-Group, decided three years after Priestley, held that such a claim was not viable. This court concurs that no such claim exists under New York law and. that if Priestley meant to hold to the contrary, it would have expressly done so. Clear Court of Appeals precedent controls.

That said, as Amusement Industries makes clear, the beneficiaries of fraudulent conveyances can be held directly liable' under a DCL claim. It is plausible, based on the allegations in the complaint, that Recovery's general partner (Investors), manager (Management), and the individual who actually caused Recovery to enter into the PSA (Futch) directly benefited from the sale of the Notes. While plaintiff does not explicitly plead that they did, the court will allow them to amend to directly assert DCL claims against these defendants under the beneficiary theory set forth in Amusement Industries. As pleaded, the DCL claims against the defendants other than Recovery are conclusory and appear to be based on a theory of vicarious liability, aiding and abetting and conspiracy, none of which are tenable. If plaintiff really intends to base its claims on a beneficiary theory, its complaint should do so clearly and plead facts supporting this theory.

(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.