New York Law Review

Tag: Debtor and Creditor Law

  • Marine Midland Bank v. Murkoff, 504 N.E.2d 841 (N.Y. 1986): No Cause of Action for Assisting Debtor Absent Transfer or Benefit

    Marine Midland Bank v. Murkoff, 504 N.E.2d 841 (N.Y. 1986)

    Under New York law, a creditor has no cause of action against a party who merely assists a debtor in transferring assets if the assisting party did not receive the assets or benefit from the transfer, and the creditor lacked a lien or judgment on the debt at the time of the transfer.

    Summary

    Marine Midland Bank, as a creditor, sought damages from two bank officials (defendants) who allegedly assisted a debtor in transferring assets to Switzerland to avoid a judgment. The bank had previously obtained a $6 million judgment against the debtor in federal court. The bank did not claim that the defendants received any of the transferred funds or otherwise benefitted from the transfer. The New York Court of Appeals held that the bank had no cause of action against the defendants because they were mere participants in the transfer, and the bank had no lien or judgment on the assets when the transfer occurred. The court clarified that Sections 278 and 279 of the Debtor and Creditor Law did not create a new remedy against non-transferees.

    Facts

    Marine Midland Bank obtained a $6 million judgment in federal court against a director of a bank’s parent corporation for losses suffered by the bank due to the director’s financial dealings.

    During the pendency of the federal suit, two officials of the bank (defendants) allegedly assisted the director in transferring funds to an account in Switzerland.

    The bank did not allege that the defendants received any of the funds or benefitted in any way from the transfer.

    Procedural History

    The bank brought an action against the two officials, alleging they fraudulently deprived the bank of funds by assisting the director’s transfer.

    The Supreme Court initially denied the defendants’ motion to dismiss.

    The Appellate Division reversed, holding that no cause of action existed under New York law for merely assisting a debtor in transferring assets without a lien or judgment.

    The New York Court of Appeals affirmed the Appellate Division’s decision.

    Issue(s)

    Whether, under New York law and the Debtor and Creditor Law, a creditor has a cause of action against a party who merely assists a debtor in transferring assets, when the assisting party does not receive the assets or benefit from the transfer, and the creditor did not have a lien or judgment on the assets at the time of the transfer.

    Holding

    No, because under longstanding New York law, a creditor has no cause of action against a party who merely assists a debtor in transferring assets where there was neither a lien on those assets nor a judgment on the debt, and Sections 278 and 279 of the Debtor and Creditor Law did not explicitly or implicitly create such a remedy.

    Court’s Reasoning

    The court reaffirmed the traditional New York rule that a creditor cannot sue a party for merely participating in the transfer of a debtor’s property before obtaining a judgment or lien. The court cited Braem v. Merchants’ Natl. Bank, 127 N.Y. 508, 515, stating that plaintiff conceded to this traditional rule. The court rejected the argument that Sections 278 and 279 of the Debtor and Creditor Law changed this rule. These sections allow a creditor to seek nullification of the conveyance or secure the assets to satisfy the debt, but do not create a remedy for money damages against non-transferees who did not benefit from the transfer.

    Regarding Section 273-a of the Debtor and Creditor Law, the court clarified that it defines a fraudulent conveyance but does not create a cause of action for conspiracy against non-transferees who assist in the conveyance. The court emphasized that it is not within its power to create a new remedy through judicial construction where the statute does not provide one. The court stated, “It is not for us to write such a remedy into the statute by judicial construction.”

  • Planned Consumer Marketing, Inc. v. Coats and Clark, Inc., 71 N.Y.2d 442 (1988): ERISA Preemption and Fraudulent Conveyances

    Planned Consumer Marketing, Inc. v. Coats and Clark, Inc., 71 N.Y.2d 442 (1988)

    ERISA does not preempt state laws aimed at preventing fraudulent conveyances, even when the assets are deposited into an ERISA-qualified plan, if the plan itself is used as a vehicle for fraud.

    Summary

    Coats and Clark (C&C) obtained a judgment against Planned Consumer Marketing (PCM). Suspecting PCM was shielding assets, C&C discovered PCM deposited funds into an ERISA-qualified profit-sharing plan. C&C sued, alleging PCM fraudulently conveyed assets into the plan to avoid paying the judgment, violating state debtor-creditor laws, business corporation laws, and EPTL. The New York Court of Appeals held that ERISA does not preempt state laws that seek to prevent fraudulent conveyances, even when the assets are in an ERISA plan, if the plan itself is the tool of fraud. The court reasoned that Congress did not intend ERISA to shield fraudulent activity.

    Facts

    PCM contracted with C&C to promote products but C&C refused full payment, leading PCM to sue for breach of contract.
    C&C counterclaimed, alleging inadequate performance and seeking recovery of prior payments; C&C won a judgment of $72,838.75 in 1981.
    PCM claimed it had no employees and was inactive since 1977/1978, unable to satisfy the judgment.
    C&C discovered PCM, through its president Edwin Lee, deposited over $200,000 into accounts in the name of the Planned Consumer Marketing Profit Sharing Plan (the Plan).
    The Plan, established in 1974, was ERISA-qualified, with beneficiaries being Edwin Lee, his brother, and his secretary; Edwin Lee and his brother were trustees.

    Procedural History

    C&C initiated a special proceeding under CPLR Article 52 to compel the banks to turn over the funds in the Plan to satisfy the judgment.
    PCM and Lee moved to dismiss, asserting lack of subject matter jurisdiction due to ERISA preemption and the anti-alienation provisions of ERISA.
    The Supreme Court denied the motion.
    The Appellate Division modified, dismissing some causes of action as ERISA-related but upholding others based on state fraud laws.
    The Court of Appeals granted leave to appeal, certifying the question of whether the Appellate Division’s order was properly made.

    Issue(s)

    Whether ERISA preempts state laws, such as the Debtor and Creditor Law, Business Corporation Law, and EPTL, when those laws are applied to funds deposited in an ERISA-regulated trust where the cause of action alleges fraudulent conveyance into the plan to avoid creditors.
    Whether the application of state fraudulent conveyance laws conflicts with ERISA’s anti-alienation clause.

    Holding

    No, because ERISA does not preempt state laws aimed at preventing fraudulent conveyances when the ERISA plan is used as a tool of fraud, as these laws do not directly or indirectly regulate the terms and conditions of employee benefit plans.
    No, because the application of state laws voiding conveyances made in defraud of creditors does not impermissibly conflict with the purposes of ERISA’s anti-alienation provision.

    Court’s Reasoning

    The court distinguished this case from Retail Shoe Health Commn. v Reminick, where the claims directly related to fiduciary duties established by ERISA. Here, the causes of action allege the Plan was used to shield assets from creditors, not to challenge the administration or terms of the Plan.
    State laws like the Debtor and Creditor Law aim to prevent fraudulent conveyances and protect creditors. They do not regulate ERISA plans nor do they prohibit or permit any method of administering an ERISA plan or calculating benefits. C&C is not seeking to enforce rights under the Plan.
    Regarding the Business Corporation Law claim, the court noted corporations are creatures of state law, and the law at issue here furnishes a means of redressing wrongful disposition of corporate assets.
    Regarding the EPTL claim, the court found that Lee’s interest in the ERISA account may be reached if he created the trust for his own benefit to defraud creditors, as EPTL 7-3.1(a) provides that a disposition in trust for the use of the creator is void against creditors.
    The court noted a later amendment to EPTL 7-3.1 specifically stated that conveyances to retirement plans are not exempt from judgment satisfaction if deemed fraudulent conveyances under the Debtor and Creditor Law.
    Addressing the anti-alienation clause, the court distinguished Helmsley-Spear, Inc. v Winter and Ellis Natl. Bank v Irving Trust Co., because in those cases, the fraud was independent of the ERISA plan, while here, the creation and enhancement of the trust were alleged to be in defraud of creditors.
    The court stated that purposes of the antialienation clause include protecting spendthrift employees and preventing involuntary levies. These purposes do not conflict with the prevention of debtor fraud, a field traditionally within the power of the states to police. The court emphasized that C&C only seeks to reach Lee’s interest in the plan, and those funds may not be shielded simply because they are in an ERISA trust.
    The court quoted Shaw v. Delta Air Lines noting that some state actions “may affect employee benefit plans in too tenuous, remote, or peripheral a manner to warrant a finding that the law ‘relates to’ the plan”.

  • Marine Midland Bank v. Samuel Lefrak, 48 N.Y.2d 954 (1979): Res Judicata and Separate Causes of Action

    Marine Midland Bank v. Samuel Lefrak, 48 N.Y.2d 954 (1979)

    A subsequent legal action is not barred by res judicata if the requisite elements of proof and the evidence necessary to sustain recovery vary materially from a prior action, even if both actions arise from the same course of dealing.

    Summary

    Marine Midland Bank sought to enforce a judgment against corporate defendants by claiming Samuel Lefrak had transferred corporate assets without fair consideration, making him a constructive trustee. The Lefraks argued res judicata barred the action due to a prior breach of contract suit where the bank tried to pierce the corporate veil. The Court of Appeals held that res judicata did not apply because the present action required different elements of proof under the Debtor and Creditor Law than the previous action, even though both stemmed from the same dealings. The key distinction was that the first action focused on domination and control, whereas the second focused on fraudulent asset transfers.

    Facts

    Marine Midland Bank obtained a judgment against certain corporate defendants. The bank then initiated proceedings against Samuel Lefrak, alleging he had transferred assets from the corporations without fair consideration. The bank sought to hold Lefrak liable as a constructive trustee of the assets, which would then be reachable by the corporation’s creditors.

    Procedural History

    The lower court ruled in favor of Marine Midland Bank. The Appellate Division affirmed the lower court’s decision. The Lefraks appealed to the New York Court of Appeals, arguing that the doctrine of res judicata barred the present proceeding because of a prior breach of contract action. The Court of Appeals affirmed the Appellate Division’s order, finding that res judicata did not apply.

    Issue(s)

    1. Whether a proceeding to enforce a judgment by proving fraudulent transfer of assets is barred by res judicata due to a prior breach of contract action seeking to pierce the corporate veil, when both actions arise from the same course of dealing.

    Holding

    1. No, because the requisite elements of proof and the evidence necessary to sustain recovery vary materially between an action to pierce the corporate veil and an action to prove fraudulent transfer of assets under the Debtor and Creditor Law.

    Court’s Reasoning

    The Court of Appeals reasoned that the prior breach of contract action sought to “pierce the corporate veil” based on the theory that Samuel Lefrak dominated and controlled the corporate nominees. While proof of fraud might be relevant in such a suit, it was not essential, and was neither alleged nor proven. The present proceeding, brought under CPLR 5225(b), focused on enforcing the judgment by proving transfers of corporate assets without fair consideration. This required demonstrating a violation of sections 272-274 of the Debtor and Creditor Law, which was not relevant in the first action. The court emphasized that even though the actions arose from the same course of dealing, the differing elements of proof meant res judicata did not apply. The court quoted Matter of Reilly v Reid, 45 NY2d 24, 30 stating ” ‘[t]he requisite elements of proof and hence the evidence necessary to sustain recovery vary materially’ ”. The court further stated that the present proceeding contemplated a pre-existing judgment, and the judgment in favor of the petitioner did not destroy or impair the rights established by the first action, citing Schuylkill Fuel Corp. v Nieberg Realty Corp., 250 NY 304, 306-307. Thus, the Court of Appeals found no basis to apply the doctrine of res judicata.