Court's Analysis of Debtor and Creditor Law Claims Illustrates Differences Between Various DCL Claims

On February 25, 2021, Justice Sherwood of the New York County Commercial Division issued a decision in Singind Life Sciences (HK) Ltd. v. Versailles Indus. LLC, 2021 NY Slip Op. 30584(U), analyzing various Debtor and Creditor Law claims:

First, plaintiffs' constructive fraud claim under NYDCL § 273 cannot be dismissed. To allege a constructive fraud claim under NYDCL 273, a plaintiff must allege: (i) the conveyance was made while the transferor was insolvent or was rendered insolvent by the conveyance, (ii) the conveyance was made without fair consideration, and (iii) the plaintiff was a creditor at the time of transfer. The complaint successfully alleges each element of this claim. It alleges that judgment-debtor defendants Versailles and Simon were insolvent when the alleged cash transfers were made. The complaint also alleges that the transfers were made without fair consideration and that Singind became a creditor to Versailles as of October 20, 2016 and Rekhatek became a creditor to Simon as of April 5, 2017.

Contrary to defendants' assertion that plaintiffs failed to adequately plead insolvency, based on the allegation that judgment-debtors' dissolved in 2019, plaintiffs correctly note that their complaint never alleges that the judgment-debtor defendants rendered themselves insolvent only in or after January 2019. Further, plaintiffs have sufficiently alleged badges of fraud which could give rise to an inference of intent including a close relationship between the parties to the alleged fraudulent transaction, transferor's knowledge of the creditor's claim, and inadequacy of consideration. Finally, although defendants correctly note that some of the alleged transfers occurred prior to the date in which they became creditors (October 20, 2016 and April 5, 2017), the complaint alleges transfers were made by both judgment-debtor defendants after each of these dates. Thus, defendants cannot argue that plaintiffs were not creditors at the time of some of the alleged transfers. Consequently, the motion to dismiss plaintiffs' first claim is denied.

Plaintiffs' NYDCL § 273-a claim must be dismissed. NYDCL 273-a provides that every conveyance made without fair consideration when the person making it is a defendant in an action for money damages or a judgment in such an action has been docketed against him, is fraudulent as to the plaintiff in that action without regard to the actual intent of the defendant if, after final judgment for the plaintiff, the defendant fails to satisfy the judgment. Here, defendants correctly note that the latest transfer alleged is November 7, 2017, whereas the Prior Actions were not commenced until September 12, 2018. Accordingly, the judgment-debtor defendants were not defendants in an action for money damages at any time that the transfers were alleged to have been made. The motion to dismiss plaintiffs' second claim shall be granted.

Next, plaintiffs' NYDCL § 274 and NYDCL § 275 claims will not be dismissed. NYDCL § 274 provides that every conveyance made without fair consideration, at a time 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 actual intent. NYDCL 275 states that 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. Here, the complaint alleges that judgment-debtor defendants made the alleged transfers without fair consideration, while engaged in a business transaction and entering a debt obligation, and both were left with an unreasonably small capital. Again, defendants confuse the allegation that the judgment-debtors wire left with unreasonably small capital with the allegation that both were dissolved in 2019. Defendants' reference to their previous arguments as to the lack of fair consideration allegations and plaintiffs' status as creditors also fail for the reasons addressed above. Defendants' requests to dismiss the third and fourth claims are denied. Plaintiffs' NYDCL § 276 claim should not be dismissed. To plead a constructive fraudulent conveyance claim under NYDCL 276, the claimant must allege that (i) the thing transferred has value of which the creditor could have realized a portion of its claim; (ii) that this thing was transferred or disposed of by the debtor; and (iii) that the transfer was done with actual intent to defraud. Defendants' argument as to this claim primarily revolves around the heightened pleading standards for fraud under CPLR 3016(b). However, as stated above, a plaintiff may rely on badges of fraud to support its case due to the difficulty of proving actual intent to hinder, delay, or defraud creditors. As enumerated earlier, plaintiffs have sufficiently alleged such badges of fraud which might give rise to an inference of intent. The request to dismiss the fifth claim is denied.

(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.