Marine Midland Bank v. Murkoff

Decision Date10 November 1986
Citation120 A.D.2d 122,508 N.Y.S.2d 17
PartiesMARINE MIDLAND BANK, Appellant, v. Norman B. MURKOFF, et al., Respondents.
CourtNew York Supreme Court — Appellate Division

McCabe & Mack, Poughkeepsie (David L. Posner, of counsel), for appellant.

Lloyd L. Rosenthal, Poughkeepsie, for respondents.

Before MOLLEN, P.J., and LAZER, WEINSTEIN and RUBIN, JJ.

LAZER, Justice.

In these two appeals the appellant is a judgment creditor who succeeded in setting aside the judgment debtor's conveyance of his interest in his jointly-owned home to his wife. Dissatisfied with constructive fraud as the sole ground for the relief granted and having failed in a subsequent effort to expand the ground to include actual intent to defraud, the judgment creditor seeks the additional relief from us. It also argues that its remedies against the property and the wife of the judgment debtor should be broadened. We conclude that the plaintiff did establish its claim of an actual intent to defraud and thus is entitled to counsel fees, but the remainder of the relief it seeks is inappropriate.

I

The action has its genesis in the financial troubles of Rocket Stores, Inc., in which the defendants, Norman and Abby Murkoff, who are husband and wife, and Richard Shafran, who is Abby's brother, held a controlling interest. During the period from 1974 to 1977, Norman Murkoff guaranteed three notes that Rocket Stores made to the plaintiff, but on July 7, 1977, Rocket Stores filed a petition in bankruptcy and subsequently defaulted on the notes. Within a few weeks, the plaintiff brought three separate actions against Norman Murkoff based on the guarantees and obtained three judgments totalling $78,921.97.

While these actions were pending, Norman Murkoff conveyed to Abby his interest in the home they owned as tenants by the entirety. The plaintiff then commenced this action to set aside the conveyance, alleging that it was fraudulent under Debtor and Creditor Law article 10. By the terms of Debtor and Creditor Law article 10, a conveyance is deemed fraudulent as to creditors not only where it is made with actual intent "to hinder, delay or defraud" creditors (Debtor and Creditor Law § 276), but also where the fraud is constructive, i.e., the conveyance is made without fair consideration by a person (1) who is insolvent or will thereby be rendered insolvent (Debtor and Creditor Law § 273), or (2) against whom an action is pending or a judgment has been docketed for money damages (Debtor and Creditor Law § 273-a), or (3) who is engaged in a business for which his capital is unreasonably small (Debtor and Creditor Law § 274), or (4) who believes he will incur debts beyond his ability to pay (Debtor and Creditor Law § 275).

The complaint contained four causes of action, each alleging that the conveyance was fraudulent under a different section of the Debtor and Creditor Law. The primary defense was that the conveyance had been made in good faith because of Norman Murkoff's ill health and his longstanding promise to Abby's father to convey his interest to her once the mortgage had been satisfied.

The plaintiff obtained summary judgment on its cause of action under Debtor and Creditor Law §§ 273 (conveyance by a person who is or will thereby be rendered insolvent) and 273-a (conveyance by person against whom an action is pending), neither of which requires proof of an actual intent to defraud. A judgment was entered on March 28, 1984, directing the clerk to record the money judgments the plaintiff had previously obtained as liens against the real property of Abby Murkoff "to the extent of Norman B. Murkoff's prior interest therein". The two remaining causes of action were severed and a second judgment was ultimately entered on September 17, 1984, after trial, dismissing the plaintiff's claim under Debtor and Creditor Law § 274 (conveyance by person with unreasonably small capital) for failure of proof. The claim under Debtor and Creditor Law § 276 was dismissed on the ground that the plaintiff had not met its burden of proving actual intent to hinder, delay or defraud creditors. The appeal from the summary judgment is on the ground that the relief afforded was too narrow; the appeal from the judgment after trial relates solely to the cause of action based on actual fraud (Debtor and Creditor Law § 276).

The significance of these appeals to the plaintiff is two-fold. To recover attorneys' fees under Debtor and Creditor Law § 276-a, actual intent to hinder, delay or defraud must be established (Debtor and Creditor Law § 276-a; see, Farm Stores v. School Feeding Corp., 102 A.D.2d 249, 256, 257, 477 N.Y.S.2d 374, affd. 64 N.Y.2d 1065, 489 N.Y.S.2d 877, 479 N.E.2d 222 on opn. at App.Div.; Schmitt v. Morgan, 98 A.D.2d 934, 936, 471 N.Y.S.2d 365, appeal dismissed 62 N.Y.2d 914, 479 N.Y.S.2d 9, 467 N.E.2d 893; Southern Inds. v. Jeremias, 66 A.D.2d 178, 185-186, 411 N.Y.S.2d 945). Therefore, unless the plaintiff can obtain a judgment based on actual intent to defraud, attorneys' fees are unavailable. Even more important is the fact that while the plaintiff has been awarded a lien against Norman's interest in the entirety despite the conveyance to Abby, that interest remains subject to Abby's right of survivorship (see, Hiles v. Fisher, 144 N.Y. 306, 39 N.E. 337) and is thus of limited value. According to the plaintiff, where a tenancy by the entirety is involved, the creditor's relief should exceed mere maintenance of a lien even if nothing more than constructive fraud has been established, but certainly if actual intent to defraud has been proved against both spouses. The remedies the plaintiff seeks are (1) termination of the tenancy by the entirety and its transformation into a tenancy in common, (2) a money judgment against Abby Murkoff in the amount of the judgment against Norman, up to one-half the value of the property, and (3) the imposition of a constructive trust on the interest Norman transferred, compelling Abby to hold that interest for the benefit of the plaintiff and pay to it one-half of the rental income from the property.

II

The burden of proof to establish actual fraud under Debtor and Creditor Law § 276 is upon the creditor who seeks to have the conveyance set aside (Brody v. Pecoraro, 250 N.Y. 56, 164 N.E. 741), and the standard for such proof is clear and convincing evidence (Lowendahl v. Baltimore & Ohio R.R. Co., 247 App.Div. 144, 287 N.Y.S. 62, affd. 272 N.Y. 360, 6 N.E. 56, rearg. denied 273 N.Y. 584, 7 N.E.2d 704; Cooper v. Maurer, 37 N.Y.S.2d 992; see also, 24 NY Jur, Fraudulent Conveyances § 12, at p. 207).

Debtor and Creditor Law § 276 clearly distinguishes constructive fraud from actual intent to defraud, for it states:

"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."

Despite the statutory distinction, the plaintiff asserts that facts constituting proof sufficient to establish intent presumed in law, such as the mere conveyance of property at less than full consideration by a debtor in peril, establish as well a rebuttable presumption of actual intent to defraud. By this theory, proof of constructive fraud constitutes clear and convincing evidence of intentional fraud sufficient to thrust upon the defendant the obligation to come forward with evidence that will defeat the plaintiff's case. Although our ultimate finding sustains the plaintiff's claim of actual intent to defraud, it is important for us to dispose of the presumption contention which continues to becloud Debtor and Creditor jurisprudence (see, Scola v. Morgan, 66 A.D.2d 228, 412 N.Y.S.2d 893; Torr v. Torr, 18 A.D.2d 722, 236 N.Y.S.2d 252; Burch v. Jeruss, 281 App.Div. 991, 120 N.Y.S.2d 893; Campbell v. Brown, 268 App.Div. 324, 51 N.Y.S.2d 310, appeal dismissed 294 N.Y. 702, 60 N.E.2d 849; Cody v. Hovey, 256 App.Div. 1038, 10 N.Y.S.2d 739; Sabatino v. Cannizzaro, 243 App.Div. 20, 275 N.Y.S. 677; Gates & Co. v. B.N. Builders, Inc., 238 App.Div. 163, 263 N.Y.S. 613). The authorities the plaintiff cites in support of the presumption theory (see, Ga Nun v. Palmer, 216 N.Y. 603, 111 N.E. 223; Smith v. Reid, 134 N.Y. 568, 31 N.E. 1082) are no longer controlling under the scheme effectuated by the State's fraudulent conveyance act, and we therefore reject the notion that such a presumption of intentional fraud exists.

When the Uniform Fraudulent Conveyance Act was drafted, the rebuttable presumption of fraud concept had a widespread following in the states (see, e.g., Miles v. Monroe, 96 Ark. 531, 132 S.W. 643; Kennard v. Curran, 239 Ill. 122, 87 N.E. 913; Flood v. Bollmeier, 165 Iowa 88, 144 N.W. 579; Underleak v. Scott, 117 Minn. 136, 134 N.W. 731; Parker v. Fenwick, 147 N.C. 525, 61 S.E. 378). In drafting the Uniform Fraudulent Conveyance Act which later became article 10 of New York's Debtor and Creditor Law, the National Conference of Commissioners on Uniform State Laws sought to eliminate the confusion in existing laws which stemmed, in part, from judicial attempts to stretch the original English fraudulent conveyance statute, the Statute of Elizabeth (13 Eliz. ch. 5) and its offspring (see, e.g., New York's 1829 statute ), which permitted relief only on a showing of actual intent to defraud, to apply to situations where no such actual intent could be proven (see, Prefatory Note, Uniform Fraudulent Conveyance Act, 7A Uniform Laws Annotated 427, 428).

To eliminate the undesirable reasoning underlying the judicially-created presumptions while at the same time recognizing that a remedy was often required when the creditor was wronged without judicially proveable intent to defraud, the draftsmen of the uniform act eliminated the presumption as a basis for finding a conveyance fraudulent (see, Prefatory Note, op. cit., 1918 Proceedings of the 28th Annual...

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