HBE Leasing Corp. v. Frank

• Decision Date: 13 March 1995
• Docket Number: 564,D,Nos. 184,s. 184
• Citation: 48 F.3d 623
• Parties: HBE LEASING CORPORATION, Signal Capital Corporation, John Hancock Corporation, Petitioners-Appellees-Cross-Appellants, v. Clemence FRANK, Respondent-Appellant, and Gerald Lefcourt, Jay Goldberg, Michael Berger, Judd Burstein, Goldstein & Stoloff, Richard Ware Levitt and Cliff Gordon, Respondents-Cross-Appellees. ockets 93-9263L, 94-7185XAP.
• Court: U.S. Court of Appeals — Second Circuit

Page 623

48 F.3d 623

31 Fed.R.Serv.3d 1422

HBE LEASING CORPORATION, Signal Capital Corporation, John Hancock Corporation, Petitioners-Appellees-Cross-Appellants, v. Clemence FRANK, Respondent-Appellant and Gerald Lefcourt, Jay Goldberg, Michael Berger, Judd Burstein, Goldstein & Stoloff, Richard Ware Levitt and Cliff Gordon, Respondents-Cross-Appellees.

Nos. 184, 564, Dockets 93-9263L, 94-7185XAP.

United States Court of Appeals Second Circuit.

Argued Oct. 13, 1994.

Decided Jan. 18, 1995.

As Amended on Denial of Rehearing March 13, 1995.

Edward Rubin, New York City, for respondent-appellant.

S. Pitkin Marshall, New York City, for petitioners-appellees-cross-appellants.

Sheryl E. Reich, New York City (Gerald B. Lefcourt, Lefcourt & Dratel, on the brief), for respondents-cross-appellees Gerald Lefcourt, Jay Goldberg, Judd Burstein, Richard Ware Levitt, and Cliff Gordon.

Michael G. Berger, pro se.

Before: NEWMAN, Chief Judge, WALKER and CALABRESI, Circuit Judges.

JON O. NEWMAN, Chief Judge:

This appeal concerns the application of fraudulent conveyance law to multi-party transactions involving an insolvent judgment debtor. In one set of transactions, the debtor exchanged mortgages for funds and immediately transferred the funds to a third party. In another set of transactions, the debtor paid the attorney's fees of its co-defendants in a civil action. The primary question in both circumstances is whether the debtor received fair consideration for its property.

Clemence Frank ("Clemence") appeals from an order of the District Court for the Southern District of New York (Gerard L. Goettel, Judge) voiding two mortgages that she held in real property owned by judgment debtor H.H. Frank Enterprises, Inc. ("Enterprises"). The appellees, judgment creditors of Enterprises who were petitioners in the District Court ("Petitioners"), cross-appeal from the District Court's order insofar as it dismissed their claims against a group of attorneys who allegedly received fraudulent conveyances from Enterprises ("the Attorneys"). We affirm the avoidance of one of Clemence's mortgages on the ground that she knew or should have known that it was part of a single transaction from which Enterprises received no benefit. However, we reverse the avoidance of her other mortgage and remand for further proceedings, because Enterprises may have used the proceeds from that mortgage for legitimate corporate purposes. On the cross-appeal, we reverse and remand the dismissal of Petitioners' claims against the Attorneys, because although the District Court properly found that Enterprises received fair consideration for these payments, it failed to consider Petitioners' alternative theory that the payments were made with actual fraudulent intent.

Background

Petitioners in this proceeding to set aside fraudulent conveyances represent a group of leasing companies and their assigns who were prevailing plaintiffs in a civil RICO fraud action tried before Judge Goettel and a jury. The defendants in the RICO action were: eight individuals, including Hiram H. Frank and Hiram J. Frank, who are the husband and son, respectively, of appellant Clemence Frank; three corporations, including Enterprises, in which Hiram J. Frank owns a majority interest; and H.H. Frank Enterprises, Inc. Pension Plan ("the Pension Plan"). After a jury trial, the District Court entered judgment for the plaintiffs for trebled RICO damages of $19,670,142 plus interest, for which the defendants are jointly and severally liable; for common law fraud damages against various defendants totaling $6,556,714; and for punitive damages totaling $5,000,000. That judgment was affirmed on a prior appeal. HBE Leasing Corp. v. Frank, 22 F.3d 41 (2d Cir.1994).

With the judgment largely unsatisfied, Petitioners commenced this supplementary proceeding in aid of judgment, pursuant to Fed.R.Civ.P. 69(a) and N.Y.C.P.L.R. Sec. 5225(b) (McKinney 1978), to void certain transfers from Enterprises to Clemence and to the Attorneys as fraudulent conveyances under New York law. Neither Clemence nor the Attorneys were defendants in the underlying RICO action. ¹

The contested transfers to Clemence consist of two mortgages on real property owned by Enterprises. These mortgages secured notes for $250,000 and $100,000, respectively, which Clemence received from Enterprises when she advanced those same amounts to the corporation. At the time of these mortgage transactions in 1992, Enterprises was a defendant in the RICO action, but no judgment had yet been entered. Clemence was not at that time an officer, director, or shareholder of Enterprises, although she had been a director until at least mid-1990. Petitioners do not deny that Clemence advanced a total of $350,000 at the time the mortgages were created, nor do they dispute in this action that the money she advanced derived from her own separate funds. Rather, their claim that the mortgages represented fraudulent conveyances stems from the fact that shortly after Enterprises received the $250,000 loan from Clemence, Enterprises disbursed these funds to her son, Hiram J. Frank, purportedly as repayment for loans he had earlier made to Enterprises. Similarly, shortly after Enterprises received the $100,000 loan from Clemence, the corporation disbursed approximately $60,000 of these monies to the Attorneys.

The total of the contested conveyances to the Attorneys comprised Enterprises' payment of $775,722 in fees for legal services allegedly rendered not to Enterprises itself, but to its co-defendants for what Enterprises contends was part of a unified legal defense in the RICO action. This sum does not include an additional $344,000 in fees that Enterprises paid to its own attorneys or $741,000 that the Pension Plan paid to various attorneys.

In an opinion, the District Court accepted three separate grounds for voiding Clemence Frank's mortgages. HBE Leasing Corp. v. Frank, 837 F.Supp. 57 (S.D.N.Y.1993). First, relying on the "Deep Rock" doctrine of equitable subordination, see Taylor v. Standard Gas & Electric Co., 306 U.S. 307, 59 S.Ct. 543, 83 L.Ed. 669 (1939) ("Deep Rock "), it found that Clemence was an "insider" whose loans represented capital contributions to Enterprises, regardless of whether the proceeds were used for legitimate corporate purposes, and that the mortgages should therefore be equitably subordinated to the claims of Petitioners. HBE Leasing, 837 F.Supp. at 60-61. Second, the Court found that Clemence had received the mortgages as part of a single transaction in which the mortgage proceeds were improperly transferred to her son, Hiram J. Frank. Because Enterprises itself received no benefit from the completed transaction, the District Court found the transfer of the mortgages to Clemence to be fraudulent, regardless of whether she knew of the entire transaction. Id. at 61. Third, the Court found that Clemence had not taken the mortgages in good faith. Id. at 62.

The District Court also found that Enterprises' payments to the Attorneys were not fraudulent transfers, because Enterprises realized a benefit from the Attorneys' representation of its co-defendants as part of a joint defense in the RICO action. Id. at 63. The Court also reasoned that it would place too great a burden on trial lawyers if they had to inquire into the financial resources of their clients before they accepted payment of legal fees. Id. at 63-64.

Finally, in an unpublished order the District Court determined that further discovery and a hearing would be necessary to resolve a separate claim against Clemence relating to a transfer from her husband, Hiram H. Frank. Accordingly, the District Court severed this claim for further proceedings.

Discussion

A. Appellate Jurisdiction

We must initially consider the question of our appellate jurisdiction, which arises because this supplementary proceeding involves multiple claims, not all of which have been adjudicated. ² On November 2, 1993, the District Court entered its order and opinion adjudicating Petitioners' claims pertaining to Clemence's mortgages and Enterprises' payments to the Attorneys. Subsequently, on December 17, 1993, the District Judge denied a motion by Clemence to stay the November 2 order as it related to her mortgages. The Judge reasoned that a stay would needlessly delay the sale of valuable properties, and that if Clemence succeeded in having the order overturned on appeal, any deficiency in the sale proceeds could be satisfied by the Petitioners, who were all solvent. Finally, on January 13, 1994, the District Court entered a document called a "judgment" (signed on December 15, 1993), which purported to dispose of the two previously decided claims, and which severed for further proceedings a third claim relating to a transfer to Clemence from her husband, Hiram H. Frank. Neither this "judgment" nor any order contained an express determination that there was no just reason for delay. The judgment, however, ordered Clemence "to execute and file all documents necessary and appropriate to vacate and remove any mortgage lien she may have asserted against the property of HH Frank Enterprises, Inc. as to the aforesaid mortgages."

The parties contend that we have jurisdiction over this appeal pursuant to 28 U.S.C. Sec. 1291 (1988), which grants us jurisdiction when the District Court has entered a final judgment. Rule 54(b) of the Federal Rules of Civil Procedure sets out the requirements for the entry of a partial final judgment in multi-claim or multi-party actions. A final judgment may be entered as to some--but fewer than all--claims or parties "only upon an express determination that there is no just reason for delay and upon an express direction for the entry of judgment." Fed.R.Civ.P. 54(b). The Rule makes clear that if the District Court does not both direct entry of judgment and expressly determine that there is no just reason for delay, then its order or decision is not final,...