HBE Leasing Corp. v. Frank

• Decision Date: 07 August 1995
• Docket Number: 1467,Nos. 873,1468,D,s. 873
• Citation: 61 F.3d 1054
• Parties: HBE LEASING CORPORATION, Signal Capital Corporation, and John Hancock Leasing Corporation, Plaintiffs-Appellees Cross-Appellants, v. Susan Murphy FRANK, Carl P. Goldstein, Richard A. Stoloff, Goldstein & Stoloff, a partnership, and Wallace Berkowitz, as trustee, Defendants-Appellants Cross-Appellees, Clemence Frank, Defendant-Cross-Appellee, Hiram J. Frank and Kevin Gleason, Defendants. ockets 94-7607, 94-7635 and 94-7657.
• Court: U.S. Court of Appeals — Second Circuit

Page 1054

61 F.3d 1054

HBE LEASING CORPORATION, Signal Capital Corporation, and John Hancock Leasing Corporation Plaintiffs-Appellees Cross-Appellants, v. Susan Murphy FRANK, Carl P. Goldstein, Richard A. Stoloff Goldstein & Stoloff, a partnership, and Wallace Berkowitz, as trustee Defendants-Appellants Cross-Appellees Clemence Frank, Defendant-Cross-Appellee, Hiram J. Frank and Kevin Gleason, Defendants.

Nos. 873, 1467, 1468, Dockets 94-7607, 94-7635 and 94-7657.

United States Court of Appeals, Second Circuit.

Argued March 29, 1995.

Decided Aug. 7, 1995.

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

Judd Burstein, New York City (Marc Fernich, Gregory Fleesler, New York City, of counsel and on the brief), for defendants-appellants Susan Murphy Frank and Wallace Berkowitz, as trustee.

Carl P. Goldstein, Monticello, NY (Richard A. Stoloff, Goldstein & Stoloff, Monticello, NY, of counsel), for defendants-appellants-cross-appellees Carl P. Goldstein, Richard A. Stoloff and Goldstein & Stoloff, a partnership.

Edward Rubin, New York City (Stewart A. Marin, New York City, of counsel), for defendant-cross-appellee.

Before MINER and PARKER, Circuit Judges, and SCHEINDLIN, District Judge. ^*

PARKER, Circuit Judge:

Facing a $21 million judgment, Hiram J. Frank ("Frank") conveyed the bulk of his considerable property to his lawyers, his fiancee, and his mother. Whether New York fraudulent conveyance law permits the judgment creditor to set aside these conveyances is the issue raised in these appeals from a final judgment of the United States District Court for the Southern District of New York (Brieant, Judge ).

In the course of defending a multi-million dollar civil RICO and common law fraud action brought against Frank and certain related people and entities, ¹ Frank conveyed away virtually all of the defendants' assets. Three of the five successful plaintiffs in the RICO action (collectively denominated "HBE"), now judgment creditors facing a recalcitrant Frank and having recovered only a tiny portion of the judgment, challenged these conveyances as fraudulent under the New York Uniform Fraudulent Conveyance Act, N.Y.Debt. & Cred.Law ("DCL") Secs. 270-281 (McKinney 1990), in three separate proceedings. First, HBE challenged one set of conveyances in proceedings supplementary to the RICO judgment. In that case, Judge Gerard L. Goettel, who had presided over the RICO trial, set aside certain transfers and upheld others, as explained below. HBE Leasing Corp. v. Frank, 837 F.Supp. 57 (S.D.N.Y.1993) ("HBE I "). On appeal, this Court affirmed in part and reversed in part. HBE Leasing Corp. v. Frank, 48 F.3d 623 (2d Cir.1995) ("HBE IV "). Second, in this independent action, HBE challenged another set of conveyances, to Frank's fiancee, mother, and lawyers. These conveyances are the subject of Judge Charles L. Brieant's summary judgment rulings in the decision now on appeal. HBE Leasing Corp. v. Frank, 851 F.Supp. 571 (S.D.N.Y.1994), modified, No. 93 Civ. 1597 (S.D.N.Y. May 24, 1994) ("HBE III "). Third, HBE challenged the transfer of a note in a separate action brought in the Southern District of Florida.

Frank's disposition of his assets during the RICO litigation may be summarized as follows:

1. Frank encumbered real estate owned by H.H. Frank Enterprises, Inc. ("Enterprises"), one of the RICO defendants controlled by Frank, by conveying two mortgages valued at $350,000 to his mother, Clemence Frank, who was not a defendant in the RICO action. In HBE I, Judge Goettel voided these transfers. This Court in HBE IV affirmed the avoidance of one of the mortgages and reversed and remanded as to the second mortgage. 48 F.3d at 629.

2. During the RICO litigation, Frank paid numerous defense attorneys from Enterprises's coffers. $775,000 of these payments were challenged as fraudulent in HBE I. Although Judge Goettel declined to set aside these payments, that ruling was reversed and remanded in HBE IV. Id.

3. Frank cashed over $200,000 in bonds from which he purchased an exempt Florida residence. This transfer of assets has not been challenged.

4. Frank made several transfers in October 1990 to his then-fiancee, Susan Murphy Frank ("Murphy"): a $383,000 Liberty, New York, residence, $864,000 in bonds (to be held in trust by Wallace Berkowitz), a $56,000 yacht, and an $11,000 engagement ring. ² In the present action, HBE moved for summary judgment to void these transfers as fraudulent. Judge Brieant granted the motion, voiding all the transfers to Murphy and awarding judgment to HBE in the amount of the assets' combined value. Murphy and Berkowitz appeal.

5. In July 1991 Frank transferred $1,010,200 in bonds to attorneys Carl P. Goldstein and Richard A. Stoloff and their firm, Goldstein & Stoloff, Esqs. (hereafter collectively "Goldstein"). That transfer has not been challenged.

6. On November 5, 1992 (immediately after the jury verdict in the RICO case), Frank transferred to Goldstein a $227,000 bond (North Broward Bond), a $144,000 mortgage (Chern Mortgage) and a $278,000 note (Fox Run Note). ³ HBE moved for summary judgment to void the three conveyances as fraudulent. In HBE III, Judge Brieant granted the motion in part, voiding the transfer of the North Broward Bond and entering judgment against Goldstein for the value of the bond plus interest, for a total of $258,000. The district court's order does not address the Chern Mortgage and Fox Run Note; however, because the court entered final judgment, HBE's claims as to the mortgage and note were effectively dismissed. Goldstein appeals with respect to the bond; HBE cross-appeals with respect to the mortgage and note.

7. Frank transferred a note valued at $201,000 to his Florida attorneys in November 1992. That conveyance was challenged in the Southern District of Florida and voided by Judge Kenneth Ryskamp on June 16, 1994.

8. In August 1991 and October 1992, Frank transferred bonds worth $482,000 to Clemence Frank. In HBE III, Judge Brieant granted Clemence Frank's motion for summary judgment and dismissed HBE's claims against her. HBE cross-appeals as to that ruling.

For the reasons set forth below, we hold that (1) the transfers to Murphy are voidable and we therefore affirm that portion of the district court's judgment; (2) the transfers of the North Broward Bond and Fox Run Note are voidable and we therefore affirm as to the bond and reverse and remand as to the note; (3) there exist genuine issues of material fact as to the transfer of the Chern Mortgage and we therefore reverse and remand on that issue; and (4) there exist genuine issues of material fact as to the transfer of the bonds to Clemence Frank and we therefore reverse that portion of the court's judgment and remand for further proceedings.

THE STATUTES

This diversity case arises under the New York Uniform Fraudulent Conveyance Act. Several provisions of that act are at issue. First, DCL Sec. 276 forbids a transfer made with actual intent to defraud creditors:

Every conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud either present or future creditors, is fraudulent as to both present and future creditors.

The district court voided the North Broward Bond and the Murphy transfers not under DCL Sec. 276, however, but under DCL Sec. 273-a, which permits a creditor to attack certain transfers regardless of the transferor's state of mind:

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.

DCL Sec. 273-a "fleshed out the [common law] meaning of a fraudulent conveyance by stigmatizing certain conveyances made during litigation." Orr v. Kinderhill Corp., 991 F.2d 31, 35 (2d Cir.1993).

No one disputes that Frank was a defendant in an action for money damages who did not satisfy the judgment and who made certain conveyances while the action was in progress. The dispute is whether the conveyances were made with, or without, "fair consideration." The term "fair consideration" is defined in DCL Sec. 272:

Fair consideration is given for property, or obligation,

a. When in exchange for such property, or obligation, as a fair equivalent therefor, and in good faith, property is conveyed or an antecedent debt is satisfied, or

b. When such property, or obligation is received in good faith to secure a present advance or antecedent debt in amount not disproportionately small as compared with the value of the property, or obligation obtained.

The meaning of DCL Sec. 272 is primarily at issue in these appeals.

Finally, DCL Secs. 278 and 279 set out remedies for creditors challenging fraudulent conveyances. Section 279 pertains to creditors whose claims have not matured. Section 278 pertains to creditors, like HBE, whose claims have matured, and provides:

1. Where a conveyance or obligation is fraudulent as to a creditor, such creditor, when his claim has matured, may, as against any person except a purchaser for fair consideration without knowledge of the fraud at the time of the purchase, or one who has derived title immediately or mediately from such a purchaser

a. Have the conveyance set aside or obligation annulled to the extent necessary to satisfy his claim, or

b. Disregard the conveyance and attach or levy execution upon the property conveyed.

2. A purchaser who without actual fraudulent intent has given less than a fair consideration for the conveyance or obligation, may retain the property or obligation as security for repayment.

With that framework in mind, we turn to the issues raised on appeal.

THE CONVEYANCES TO MURPHY

Frank conveyed the bond and...