United States v. Franklin National Bank

• Decision Date: 19 October 1973
• Docket Number: No. 72 C 859.,72 C 859.
• Citation: 376 F. Supp. 378
• Parties: UNITED STATES of America, Plaintiff, v. FRANKLIN NATIONAL BANK, Defendant.
• Court: U.S. District Court — Eastern District of New York

376 F. Supp. 378

UNITED STATES of America, Plaintiff, v. FRANKLIN NATIONAL BANK, Defendant.

No. 72 C 859.

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

October 19, 1973.

Henry Brachtl, Asst. U. S. Atty., E. D. N. Y., Brooklyn, N. Y., for plaintiff.

Kaye, Scholer, Fierman, Hays & Handler, New York City, for defendant.

MEMORANDUM OF DECISION AND ORDER

MISHLER, Chief Judge.

Defendant-third party plaintiff, Franklin National Bank (Franklin), moves for summary judgment on the grounds that the plaintiff's claim is "founded upon a tort" and is therefore barred by the three year statute of limitations contained in 28 U.S.C. § 2415(b).¹

Prior to June 27, 1966, Technical Capital Corporation (TCC), borrowed the sum of $300,000.00 from the Small Business Administration pursuant to 15 U. S.C. § 661 et seq. and issued a debenture in that amount. The United States then acquired title to the debenture. On June 27, 1966, third-party defendant, Benjamin Abramson (Abramson), borrowed $300,000.00 from Franklin and used the proceeds of the loan to purchase all the outstanding stock of TCC.

On June 28, 1966, the sum of $477,000.00 was deposited to the account of TCC at the Franklin. On the same date, a check in the amount of $300,000.00 was drawn against the funds deposited. The check was signed by Abramson as an officer of TCC and made to the order of Abramson. The endorsement on the back of the check contained the legend, "Re: Purchase of certificate of deposit #7821, $300,000.00 to mature December 7, 1966, C/D 23-7821."

The complaint alleges that Franklin wrongfully applied TCC funds in issuing a certificate of deposit to Abramson, that Abramson thereafter used the certificate of deposit to pay the personal indebtedness of $300,000.00, and that Franklin wrongfully accepted and applied the certificate of deposit in payment of Abramson's obligation. Franklin admits that the certificate of deposit was used to pay Abramson's personal indebtedness. It denies that TCC funds were wrongfully applied (Answer ¶ 7). For the purpose of this motion the court assumes the truth of plaintiff's allegations.

Plaintiff obtained judgment in the sum of $307,041.61 against TCC in the United States District Court for the Southern District of New York on July 17, 1967. The plaintiff then commenced this action against Franklin seeking a judgment "requiring defendant to pay to plaintiff the funds wrongfully received from Technical Capital Corporation or so much as is sufficient to satisfy the indebtedness of Technical Capital Corporation to the plaintiff. . . ." (Complaint ¶ 10).

The complaint in the instant action was filed on June 26, 1972. Both parties agree that, for statute of limitations purposes, the cause of action accrued on July 18, 1966, the effective date of 28 U.S.C. § 2415.² The defendant contends that the action is "founded upon a tort" and hence is barred by the three year limitation period imposed by § 2415(b). In response, the plaintiff urges that the action, if controlled by § 2415 at all, is founded upon an implied contract within the meaning of § 2415(a),³ and that the six year limitation period contained therein has not run.

The answer to the question posed by the defendant's motion for summary judgment lies in a determination of the nature of the claim. If the claim is tortious, the claim is barred; if founded upon implied contract, it is not. Plaintiff urges and defendant does not contest the applicability of New York law.⁴

The New York Debtor and Creditor Law, McKinney's Consol.Laws, c. 12, which adopts verbatim the Uniform Fraudulent Conveyance Act, does not confer upon the creditor a right of action in tort against the grantee. Section 278 of Article 10 provides that:

§ 278. Rights of creditors whose claims have matured

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.

The leading New York case dealing with the extent of a defrauded creditor's rights is Hearn 45 St. Corp. v. Jano, 283 N.Y. 139, 27 N.E.2d 814 (1940), cited and relied upon by the government. There, the New York Court of Appeals, when faced with a complaint very similar to that before us in the instant case, held that the gravamen of the complaint was an action in equity to set aside the fraudulent conveyance.⁵ The fact that the complaint alleged actual intent on the part of the debtor to evade the creditor did not transform the complaint into an action to recover on the ground of actual fraud. Surely, the court stated

the action is not one for actual fraud where a complete cause of action may be stated by a showing of the bare facts of a voluntary conveyance resulting in insolvency. Such a conveyance is but one of the two kinds which are deemed fraudulent by the operation of the statute. Both kinds are simply acts which are voidable at the behest of the creditor as a result of the statutory declaration. Whichever pattern the debtor may choose, the relief sought by the creditor is the same; to undo the transfer of title so as to bring within the ambit of execution those assets upon which the creditor is rightly entitled to levy. The fraud, such as it is, is only incidental to the right of the creditor to follow the assets of the debtor and obtain satisfaction of the debt. The gravamen of the cause of action in the case at bar is the ordinary right of a creditor to receive payment; this right has been implemented by the protection of legislation concerning the circumstances under which the creditor may avail himself of assets which the debtor has transferred to others. No deceptive or fraudulent act of the individual defendants, no wrongful co-operation of theirs in the acts by which the judgment debtor's property was transferred, lends weight to the plaintiff's cause of action. The plaintiff's right is complete without reference to the quality or character of the acts of the individual defendants. The gravamen of the action is the right of the creditor to be paid out of assets to which he is actually entitled and to set aside the indicia of ownership which apparently contradict that right.

See also Duell v. Brewer, 92 F.2d 59 (2d Cir. 1937) (Dictum from Learned Hand: "courts have generally held as to fraudulent conveyances that a person who assists another to procure one, is not liable in tort to the insolvent's creditors. . . . The reasons ordinarily given are the impossibility of proving any damages, which scarcely seems sufficient; but the result is settled, at least for us.")

Applying the reasoning of Hearn to the case before us, it would appear that the mere existence in the complaint of allegations of "wrongful conduct" by the grantee does not convert the action from one based upon the right of a creditor to set aside a fraudulent conveyance to one based upon a tort.

The Government's complaint alleges that TCC was indebted to the Government and that the application of TCC's funds to satisfy Abramson's personal indebtedness was "in fraud of TCC's creditor, the United States of America." (Complaint ¶ 8). The prayer for relief demands "an order requiring defendant to pay to plaintiff the funds wrongfully received from Technical Capital Corp., or so much as is sufficient to satisfy the indebtedness of Technical Capital Corp. to plaintiff." Although, as the defendant's memorandum points out, these allegations do not strictly follow the suggested form (Form 13) for a fraudulent conveyance complaint appended to the Federal Rules of Civil Procedure, they nevertheless clearly indicate that the action is one to set aside the fraudulent conveyance as provided in New York Creditor and Debtor Law, Article 10, § 278(1)(a). The allegations of wrongful conduct by the grantee (Franklin), do not transform the action into a tort claim, but rather are necessary to establish that the grantee is not "a purchaser for fair consideration without knowledge of the fraud at the time of the purchase" within the meaning of § 278.⁶

The second line of authority suggesting that there is no cause of action in tort against the grantee of a fraudulent conveyance is simply the general law of fraud and deceit.⁷ The so-called "textbook elements" of a fraud action include (1) the false representation of a material fact; (2) knowledge or belief of its falsity; (3) belief in the truth of the representation by the person to whom it is made; (4) intent that the person to whom the false representation is made rely on such representation; and (5) actual reliance. See, e. g., 5 Wright and Miller, Federal Practice and Procedure, Civil § 1297 (1969). To warrant relief against a person on the basis of fraud, it must appear that the fraud was committed "either by the person sought to be charged, or by his procurement, or with his authority." 24 N.Y.Jur., Fraud and Deceit, § 208 (1962). In the instant case, the complained of fraud apparently consisted of Abramson's use of TCC's assets to repay a personal debt owed to Franklin. While it may be that Franklin engaged in a scheme to defraud the Government by inducing Abramson to repay its outstanding loan with TCC funds, there is no suggestion or allegation in the complaint that Franklin engaged in such a course of conduct.⁸ It is certain that the Government's case does not depend on proving the elements of common law fraud. In view of F.R.Civ.P. 9(b) requiring particularity in pleading the circumstances of fraud, see 5 Wright and Miller, Federal Practice and Procedure, Civil § 1297 (1969), I conclude that the complaint cannot be construed as stating a tort claim in fraud, but rather must...