Interpool Ltd. v. Patterson, 89 Civ. 8501 (LAK)

• Decision Date: 16 June 1995
• Docket Number: No. 89 Civ. 8501 (LAK),95 Civ. 2868 (LAK).,89 Civ. 8501 (LAK)
• Citation: 890 F. Supp. 259
• Parties: INTERPOOL LIMITED, Plaintiff, v. Barry PATTERSON, et al., Defendants. INTERPOOL LIMITED, Petitioner, v. RMC HOLDINGS LIMITED PARTNERSHIP, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

890 F. Supp. 259

INTERPOOL LIMITED, Plaintiff, v. Barry PATTERSON, et al., Defendants.

INTERPOOL LIMITED, Petitioner, v. RMC HOLDINGS LIMITED PARTNERSHIP, et al., Defendants.

Nos. 89 Civ. 8501 (LAK), 95 Civ. 2868 (LAK).

United States District Court, S.D. New York.

June 15, 1995.

As Amended June 16, 1995.

COPYRIGHT MATERIAL OMITTED

Lloyd Clareman, New York City, for plaintiff.

Keith L. Flicker, Kenneth M. Simon, Flicker, Garelick & Associates, New York City, for defendants Richard Cuneo, Monique Cuneo, Genco Associates, Inc., Container Options, Inc., RMC Holdings Ltd. Partnership, and RAC Family Trust.

OPINION

KAPLAN, District Judge.

Shortly before this case was scheduled to go to trial, and unbeknownst to plaintiff or the Court, defendant Richard Cuneo conveyed substantially all of his non-exempt assets to a limited partnership of which he and his wife are the sole partners. He then transferred his partnership interests to a family trust of which he and his wife are the sole trustees and beneficiaries. The net result of the transfers was that Cuneo and his wife retained exclusive control over and beneficial use of Cuneo's assets, but the partnership agreement and trust instrument purported to place those assets substantially beyond the reach of creditors. Plaintiff subsequently recovered a substantial judgment against Cuneo which has not been satisfied and now seeks to set them aside on the ground that the transfers were both actually and constructively fraudulent as to plaintiff.

The Context of This Dispute

Plaintiff Interpool Limited ("Interpool") commenced the first of these two actions (No. 89-8501) against Cuneo and others in 1989 alleging claims under the Racketeer Influenced and Corrupt Organizations Act ("RICO") and for common law fraud and breach of fiduciary duty. Cuneo, who had been Interpool's agent for the sale of used shipping containers, allegedly sold Interpool equipment to himself and his co-conspirators at sweetheart prices without Interpool's knowledge, thus diverting substantial profits and business opportunities from Interpool to himself.

By March 1994, No. 89-8501 was virtually ready for trial. The joint pretrial order was due on March 17, 1994 and was filed, after signature by Judge Kram, on March 31, 1994. No motion for summary judgment had been made. The case awaited only a firm trial date.

The Challenged Transfers

RMC Holdings Limited Partnership

On March 24, 1994, Cuneo and his wife, with the assistance of a Florida attorney named Howard Rosen, entered into an agreement of limited partnership of RMC Holdings Limited Partnership ("RMC"). Cuneo and his wife transferred property valued at $1,357,600 and $47,600, respectively, to RMC as the initial capital contributions.¹ Each of them is both a general and a limited partner. The property thus transferred was all or substantially all of Cuneo's property that is not exempt from execution under the law of Florida, the State in which he resides.

The partnership engages in no business other than the ownership of the cash, cash equivalents and securities transferred to it by the Cuneos, who are its only partners. Distributions of net cash flow and capital may be made only in amounts and at times deemed appropriate in the sole discretion of "the General Partner." (Clareman Aff.Ex. A, §§ 4.3, 4.5, 6.2(c); see also FLA. STAT.ANN. §§ 620.138, 620.139, 620.145, 620.146 (West 1993))². As there are two general partners, each with equal general partnership interests, the joint action of both Cuneos is required in order for RMC to make any payment of any kind in respect of the partnership interests. See FLA.STAT.ANN. §§ 620.186 (Uniform Partnership Act governs in cases not provided for in limited partnership statute), 620.645 (all partners have equal rights in management) (West 1993); II ALAN R. BROMBERG & LARRY E. RIBSTEIN, BROMBERG AND RIBSTEIN ON PARTNERSHIP §§ 6.03(b), 6.03(c) (1991). The Cuneos, however, in their capacities as general partners, retain the power to use all of the partnership assets for their own benefit. (See Clareman Aff.Ex. A, Art. 8)

Even more interesting is a provision of the RMC partnership agreement that purports to prohibit, or at least discourage, execution on the interest of a partner in the partnership. Article 12 provides in substance that the taking or encumbering of a partnership interest by levy, foreclosure, charging order, execution or other similar involuntary proceeding is deemed a Prohibited Transfer. A creditor who brings an action resulting in such a taking or encumbrance is treated as an assignee of the partnership interest and may receive only such distributions of net cash flow attributable to that interest as are properly disbursed. (Id. §§ 12.2(a), 12.3(a)) The creditor, however, is prohibited from taking any role in the management of RMC and from "acting in any manner as a Partner." (Id.) Thus, a judgment creditor who successfully charges or levies upon Cuneo's partnership interests, or the purchaser of those interests at a judicial sale, would be entitled to receive such cash flow, and only such cash flow, if any, as Cuneo and his wife decide to distribute.

The RAC Family Trust

A week after creating RMC, Cuneo, as settlor, transferred his 95.613% limited partnership interest in RMC to himself and his wife, as trustees, again with the aid of Attorney Rosen. The transfer expressly was made "for no consideration." (Clareman Aff.Ex. C, next to last page) The RAC Family Trust agreement, which is revocable by Cuneo, provides that the trustee shall pay to or apply for the benefit of Cuneo so much of the net income and/or principal of the trust as the trustee deems advisable. (Id. Art. I) Subject to Cuneo's power of appointment by will, the proceeds of the trust would pass to Mrs. Cuneo and the couple's daughters following Cuneo's death.

The trust instrument also contains a so-called "Protective Provision," the burden of which is that no creditor may reach Cuneo's interest in the trust except to the extent that income or principal is actually paid over to Cuneo by the trustee. (Id. Art. III) In the event that two trustees are serving, which is now the case, any action by the trustees must be unanimous. (Id. Art. VIII(F)) Thus, any creditor levying upon or charging Cuneo's beneficial interest in the trust would be entitled to receive only such amounts as Cuneo and his wife jointly decide to pay.

Prior Proceedings

The civil RICO case went to trial in November 1994 and resulted in a jury verdict against Cuneo in the amount of $4,520,000 plus attorneys fees of $299,805.18 and prejudgment interest. See Interpool Ltd. v. Patterson, No. 89 Civ. 8501, 1994 WL 665850 (S.D.N.Y. Nov. 28, 1994). Cuneo's motion for a new trial was denied in January 1995. Interpool Ltd. v. Patterson, 874 F.Supp. 616 (S.D.N.Y.1995). No stay of execution was sought and Cuneo's appeal was dismissed by the Court of Appeals on March 14, 1995.

Plaintiff appears to have commenced enforcement proceedings in early 1995 and to have learned of the challenged transfers during the early part of the year. On February 23, 1995, the Court granted Interpool's motion for a restraining order barring Cuneo from taking certain actions that threatened to frustrate enforcement of the judgment. On March 13, 1995, it extended the restraining order and directed Cuneo and certain of his co-defendants to comply with discovery requests in aid of execution. Interpool Ltd. v. Patterson, No. 89 Civ. 8501, 1995 WL 105284 (S.D.N.Y. Mar. 13, 1995).

Cuneo was deposed in March 1995 in connection with the proceedings to enforce the judgment. His explanation for the challenged transfers was unilluminating. He was unable, or chose not, to explain how he and his wife determined what property to transfer into RMC and RAC or why the transfers were made other than to say that he "picked stuff that he thought had a worth to it" and that he did so on the advice of counsel for "estate planning" reasons. He testified that he did what Attorney Rosen suggested and that he "assumed that it had to do with tax purposes if he died." But he did not articulate any specific reasons why he believed the transfers to be advantageous.

On March 30, 1995, Interpool moved to void the challenged transfers as fraudulent conveyances, for an order directing Cuneo to turn over all of the assets so transferred to the Marshal in partial satisfaction of the judgment, and for other relief. Cuneo responded, in part, that the transfers could not be set aside because, inter alia, RMC, RAC, and Mrs. Cuneo were not before the Court. Plaintiff thereupon commenced the second of the actions captioned above against RMC, RAC, and Cuneo and his wife in their capacities as partners and trustees of each, respectively, No. 95-2868. The second action seeks substantially the same relief as the motion in No. 89-8501. The defendants in No. 95-2868 have been served or waived service. No answers have been interposed, and the time within which to answer has expired.

The Court heard argument on Interpool's motion on April 24, 1995. Cuneo's counsel then argued that Cuneo was entitled to an evidentiary hearing, albeit only on the issue of whether Cuneo made the transfers with actual intent to defraud. (Tr. 32-34; see id. 28) Believing that the matter might be expedited by determining that issue first, but without determining that a hearing, even on that issue, was necessary, the Court scheduled an evidentiary hearing for May 11, 1995.

Shortly before the May 11 hearing, counsel for Cuneo advised the Court that Cuneo had been hospitalized with chest pains and sought an adjournment pending diagnosis and possible treatment. The Court rescheduled the hearing for May 23. On May 18, Cuneo's counsel requested another adjournment and submitted an affidavit from a doctor whom Cuneo consulted, which stated that Cuneo should refrain from participating in legal proceedings for "at least 3 to 4 weeks."³ The Court denied...