New York Law Review

Tag: fraudulent conveyance

  • 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”.

  • Koffman v. A. O. Brokaw Co., 40 N.Y.2d 880 (1976): Availability of Turnover Order Without Prior Execution

    Koffman v. A. O. Brokaw Co., 40 N.Y.2d 880 (1976)

    A judgment creditor is not required to obtain priority by execution before using other enforcement devices under CPLR Article 52, including seeking a turnover order, and may challenge fraudulent conveyances in such proceedings.

    Summary

    This case addresses whether a judgment creditor must levy execution on a judgment debtor’s assets before seeking a turnover order against a third party allegedly holding property belonging to the debtor. The Court of Appeals held that no such requirement exists. A judgment creditor can pursue remedies like turnover orders and actions to set aside fraudulent conveyances without first obtaining priority through execution. The Appellate Division erred in requiring prior execution. The case was remitted to the Appellate Division to consider the fraudulent conveyance claim, including the relevance of Section 273-a of the Debtor and Creditor Law.

    Facts

    The petitioner, Koffman, obtained a judgment against P.D.C. Koffman then sought a turnover order against the Hoffman Group, alleging that the Hoffman Group held property belonging to P.D.C. or that P.D.C. fraudulently conveyed property to the Hoffman Group or Bella Vista Apartments, Inc. The petitioner sought to satisfy its judgment against P.D.C. by obtaining assets held by the Hoffman Group.

    Procedural History

    The trial court ruled against Koffman. The Appellate Division affirmed, based on the premise that Koffman could not secure a turnover order because there had not been a levy of execution on the Koffman Group under petitioner’s judgment against P.D.C. The Court of Appeals reversed the Appellate Division’s order and remitted the matter for further consideration.

    Issue(s)

    Whether a judgment creditor must levy execution on a judgment debtor’s assets before seeking a turnover order against a third party alleged to be holding property belonging to the judgment debtor under CPLR 5225(b) and 5227?

    Holding

    No, because there is no requirement that a judgment creditor obtain priority by way of execution before resorting to one of the other enforcement devices provided by CPLR article 52.

    Court’s Reasoning

    The Court of Appeals found that the Appellate Division’s requirement of prior execution was erroneous. The court emphasized that CPLR Article 52 provides various enforcement devices, and a judgment creditor is not obligated to pursue execution before utilizing other remedies like turnover orders or actions to set aside fraudulent conveyances. The Court cited Weinstein-Korn-Miller, Manual CPLR 30-17, 30-18, stating that a judgment creditor need not obtain priority by execution before using other enforcement devices. Specifically, the court noted: “plaintiffs right to set aside as fraudulent a conveyance of property by P. D. C. to the Hoffman Group or to Bella Vista Apartments, Inc., may be determined in the present proceeding (6 Weinstein-KornMiller, NY Civ Prac, pars 5225.16, 5225.17, pp 52-375, 52-376).” The court directed the Appellate Division to consider Section 273-a of the Debtor and Creditor Law, which addresses conveyances made without fair consideration that leave the grantor with unreasonably small capital.

  • James v. Powell, 19 N.Y.2d 249 (1967): Choice of Law in Fraudulent Conveyance of Real Property

    19 N.Y.2d 249 (1967)

    The validity of a conveyance of a property interest is governed by the law of the place where the property is located, and this includes determining whether the conveyance was made in fraud of creditors.

    Summary

    This case addresses the issue of which jurisdiction’s law applies in a fraudulent conveyance action when real property is transferred to avoid a New York judgment. The plaintiff sued Adam Clayton Powell and his wife, alleging they fraudulently transferred Puerto Rican property to avoid a libel judgment in New York. The Court of Appeals held that the law of Puerto Rico, where the property is located, governs the validity of the conveyance. While New York law governs punitive damages, the court found that the defendant’s conduct did not warrant such damages. The case was remitted to determine Puerto Rican law.

    Facts

    The plaintiff obtained a libel judgment against Adam Clayton Powell in New York. Subsequently, Yvette Powell, acting for herself and as attorney for her husband, transferred real property they owned in Puerto Rico to her uncle and aunt, the Diagos. The stated consideration included cash, a purchase-money mortgage, and cancellation of a debt. The Diagos also placed additional mortgages on the property. The plaintiff, unable to locate property in Powell’s name in Puerto Rico, sued in New York, alleging fraudulent conveyance to prevent collection of her judgment.

    Procedural History

    The Powells moved to dismiss the complaint, arguing lack of subject matter jurisdiction and failure to state a cause of action. Special Term denied the motion, and the Appellate Division affirmed. While the appeal was pending, the defendants failed to appear for depositions, leading to an order striking their answers and directing an inquest on damages. The trial court awarded compensatory and punitive damages, which the Appellate Division modified by reducing the compensatory damages and punitive damages against Powell, and eliminating punitive damages against Mrs. Powell. The defendants appealed to the Court of Appeals.

    Issue(s)

    1. Whether the substantive law of New York or Puerto Rico governs the validity of a conveyance of real property located in Puerto Rico, alleged to be a fraudulent conveyance to avoid a New York judgment.

    2. Whether New York law or Puerto Rican law governs the award of compensatory damages in this case.

    3. Whether New York law or Puerto Rican law governs the availability of punitive damages.

    4. Whether the defendant’s conduct warrants an award of punitive damages under the applicable law.

    Holding

    1. No, because the validity of a conveyance of a property interest is governed by the law of the place where the property is located.

    2. Puerto Rican law governs the award of compensatory damages because the cause of action arises under the law of the situs of the property.

    3. Yes, because the issue of punitive damages depends on the object or purpose of the wrongdoing, and New York has the strongest interest in protecting its judgment creditors.

    4. No, because the defendant’s conduct was not so “gross and wanton” as to bring it within the class of malfeasances for which punitive damages may be awarded.

    Court’s Reasoning

    The court reasoned that the validity of a real property conveyance is governed by the law of the jurisdiction where the property is located, citing Wyatt v. Fulrath, 16 N.Y.2d 169. The court stated, “Whatever right the plaintiff had to levy execution on the land in question necessarily arose solely under the law of Puerto Rico, the jurisdiction empowered to deal with the res.” The court emphasized that New York law cannot determine the extent to which property outside the state is subject to execution. The court quoted the Restatement Second of Conflict of Laws, stating, “The law of the state where the land is determines whether the conveyance was made in fraud of third persons.”

    Regarding punitive damages, the court applied the “interest analysis” approach from Babcock v. Jackson, 12 N.Y.2d 473, concluding that New York has the strongest interest in protecting its judgment creditors from attempts to frustrate satisfaction of judgments. However, the court held that punitive damages were not warranted in this case because the defendant’s conduct, while possibly wrongful, was not sufficiently egregious. The court stated, “The fraud here asserted — aimed at removing a judgment debtor’s property from the reach of an execution — does not fall within that category.” The court also expressed concern that the lower courts may have been improperly influenced by Powell’s prior contempt citations.

  • White Plains Savings Bank v. Sam and Al Realty Co., Inc., 26 N.Y.2d 20 (1970): Intervention by Creditors in Foreclosure

    White Plains Savings Bank v. Sam and Al Realty Co., Inc., 26 N.Y.2d 20 (1970)

    A judgment creditor of a grantor who allegedly fraudulently conveyed property to the holder of the equity of redemption has a sufficient interest to intervene in a mortgage foreclosure action involving that property, especially when the referee makes unauthorized payments affecting potential surplus funds.

    Summary

    Nesmith, a judgment creditor of Sam and A1 Realty Co., Inc., and Vucker, a holder of a promissory note from the same company, sought to intervene in a mortgage foreclosure action. They alleged that Sam and A1 Realty fraudulently conveyed the property to White Plains Realty Co., Inc., rendering Sam and A1 Realty judgment proof. The referee in the foreclosure action paid taxes from the sale proceeds, contrary to the foreclosure judgment stating the sale would be “subject to unpaid taxes.” Nesmith and Vucker argued this payment reduced surplus funds they could potentially claim. The lower courts denied their motion to intervene, deeming their interest too remote. The Court of Appeals reversed, holding that the creditors had a sufficient interest to intervene, especially given the referee’s unauthorized payment.

    Facts

    Sam and A1 Realty Co., Inc. conveyed real property to White Plains Realty Co., Inc., a newly formed corporation. Nesmith was a judgment creditor of Sam and A1 Realty, and Vucker held a promissory note from them. Nesmith and Vucker claimed the conveyance was fraudulent, rendering Sam and A1 Realty judgment proof. White Plains Savings Bank initiated a mortgage foreclosure action on the property now held by White Plains Realty. The foreclosure judgment ordered the referee to sell the property “subject to unpaid taxes.” After the sale, the referee paid the mortgage claim and other costs, then used the remaining funds to pay taxes and tax liens against the property.

    Procedural History

    The plaintiff moved to confirm the referee’s report of sale. Nesmith and Vucker moved to intervene, opposing the motion on the grounds that the referee wrongfully paid taxes contrary to the foreclosure judgment. Special Term denied the motion to intervene, stating it lacked the power to permit intervention because the applicants were not direct creditors of the record holder of the equity of redemption, and the holder did not object. The Appellate Division affirmed, holding the appellants’ interest was too remote. The Court of Appeals granted leave to appeal and certified the question of whether the Appellate Division’s order was correctly made.

    Issue(s)

    Whether the interest of judgment creditors of a grantor who allegedly fraudulently conveyed property to the holder of the equity of redemption is too remote to allow them to intervene in a mortgage foreclosure action involving that property.

    Holding

    No, because the judgment creditors have a sufficient interest in potential surplus funds resulting from the sale, especially when the referee makes unauthorized payments that could affect the amount of those funds.

    Court’s Reasoning

    The Court of Appeals relied on Goodell v. Harrington, 76 N.Y. 547 (1879), which held that a judgment creditor of the equity holder’s grantor could intervene in a similar situation. The Court reasoned that because the property constituted a fund from which the intervenor might satisfy his judgment if he prevailed on the fraudulent conveyance claim, the interest was sufficient. The Court found the present case analogous to Goodell, stating, “The intervenor in both cases is a creditor of the person who has conveyed the subject property, allegedly by a fraudulent conveyance, to the holder of the equity of redemption.” The Court emphasized that the referee’s payment of taxes, contrary to the foreclosure judgment, was an act beyond his power. This unauthorized payment directly affected the potential surplus money to which the creditors might have a claim. The Court concluded that the lower courts erred in holding they lacked the power to allow intervention, and reversed the order confirming the referee’s report. The court emphasized that the property represented a potential fund for satisfying the creditors’ claims, making their interest direct and substantial enough to warrant intervention.

  • Landau v. Chazanof, 12 N.Y.2d 244 (1963): Unclean Hands Defense in Property Reconveyance

    Landau v. Chazanof, 12 N.Y.2d 244 (1963)

    The doctrine of unclean hands does not bar equitable relief to protect legal ownership of property when the requested relief is not to enforce an executory obligation arising from an illegal transaction, even if the party seeking relief engaged in prior misconduct related to the property.

    Summary

    Landau sued Chazanof to compel the execution of a replacement deed for property that Chazanof had previously conveyed to Landau, but the deed was lost and unrecorded. The defendant argued that Landau should be denied relief due to unclean hands because Landau had previously transferred the property to his son to conceal it from creditors. The New York Court of Appeals held that the unclean hands doctrine did not apply because Landau was not seeking to enforce an illegal agreement, but rather to protect his current legal ownership of the property after a voluntary reconveyance. Therefore, the court reinstated the trial court’s judgment in favor of Landau.

    Facts

    In 1934, Jacob Landau, the sole stockholder of the plaintiff corporation, conveyed the subject property to his son, Alfred Landau, without consideration, intending to conceal it from his creditors. Alfred agreed to hold the property for his father’s benefit. Jacob Landau filed a bankruptcy petition in 1945, falsely stating he had no interest in real property. In 1950, Alfred conveyed the property, at his father’s request, to the defendant, Chazanof, Jacob Landau’s son-in-law, also without consideration. Simultaneously, Chazanof orally promised to convey the property to the plaintiff corporation, and he did execute and deliver a deed to the plaintiff.

    Procedural History

    The trial court ruled in favor of the plaintiff, ordering the defendant to execute a replacement deed. The Appellate Division reversed the trial court’s decision and dismissed the complaint, citing the doctrine of unclean hands. The New York Court of Appeals granted leave to appeal.

    Issue(s)

    Whether the doctrine of unclean hands bars a plaintiff from obtaining equitable relief to protect their legal ownership of property, when the plaintiff had previously engaged in fraudulent conduct concerning the property, but is not seeking to enforce an illegal agreement.

    Holding

    No, because the plaintiff is not seeking to enforce an executory obligation arising out of an illegal transaction, but rather to protect a status of legal ownership achieved through a voluntary reconveyance.

    Court’s Reasoning

    The Court of Appeals reasoned that the unclean hands doctrine only applies when the cause of action is directly founded in illegality or immorality. In this case, Landau was not seeking to enforce the original fraudulent conveyance to his son or Chazanof’s promise to reconvey. Instead, he was seeking to protect his current ownership of the property, which was based on a completed, voluntary reconveyance. The court emphasized that a voluntary reconveyance to a fraudulent grantor is effective between the parties and entitled to court protection. Citing Professor Chafee, the court noted the importance of accurate land records, arguing that penalizing Landau for past misdeeds by perpetuating an erroneous land record was not justified. The court distinguished this case from those where the plaintiff seeks to enforce an “inequitable” interest in real property, noting that Chazanof had no remaining interest in the property. The court emphasized that equity is not an “avenger at large” and the maxim of unclean hands applies only where the plaintiff has acted unjustly in the very transaction of which he complains. The court reasoned that wrongs done by Jacob Landau to creditors prior to the acquisition of the current title cannot be raised by Chazanof to defeat otherwise available relief.

  • Hangen v. Hachemeister, 114 N.Y. 566 (1889): Validity of Chattel Mortgages When Mortgagor Retains Control

    Hangen v. Hachemeister, 114 N.Y. 566 (1889)

    A chattel mortgage is void as to creditors if the mortgagor retains possession of the mortgaged property with the power to sell it and use the proceeds, unless the creditor assents to the arrangement with valid consideration or equitable estoppel.

    Summary

    This case addresses the validity of chattel mortgages when the mortgagor retains control over the property. The Court of Appeals held that a chattel mortgage is void as to creditors if the mortgagor retains possession of the property with the power to sell it and use the proceeds, undermining the security interest. The court found that the bank’s mortgage was void because the mortgagor was allowed to continue selling the mortgaged goods as if no mortgage existed. The creditor’s alleged assent to this arrangement was deemed ineffective due to lack of consideration and failure to establish equitable estoppel. The receiver of the debtor *could* bring the action.

    Facts

    Beck obtained a loan from the National Bank of Auburn (Avery, president), secured by a chattel mortgage on his inventory. Beck also obtained a second mortgage from Avery individually. Beck remained in possession of the mortgaged property, selling it at retail as before the mortgage, using the proceeds. Ross sold goods to Beck on credit. Ross knew of Avery’s unsecured loan of $1000 to Beck. After the bank’s mortgage was executed, Ross learned of it and sent an agent (Gordon) to inquire. Avery told Gordon that Beck offered the mortgage. Avery took possession of the stock in the store and proceeded to sell it out under both mortgages.

    Procedural History

    Hangen, as receiver for judgment creditor Ross, sued Hachemeister, who obtained the chattel mortgage via assignment, alleging the mortgage was fraudulent. The trial court found the Avery mortgage valid but the bank mortgage not fraudulent, concluding Ross had assented to the bank’s arrangement. The General Term affirmed, holding that another creditor could not compel the mortgagee to refund the money on the ground that as against creditors generally the mortgage given to secure the paid debt would have been adjudged void. The Court of Appeals reversed, holding the bank’s mortgage void and Ross’s assent ineffective.

    Issue(s)

    1. Whether a chattel mortgage is void as to creditors if the mortgagor retains possession of the mortgaged property with the power to sell it and use the proceeds.
    2. Whether a creditor’s assent to such an arrangement between the mortgagor and mortgagee precludes the creditor from asserting their rights against the mortgaged property.
    3. Whether the plaintiff, as receiver, can maintain this action.

    Holding

    1. Yes, because such an arrangement is deemed fraudulent as to creditors as the debtor retains dominion and control over the assets ostensibly secured by the mortgage.
    2. No, because such assent must create an equitable estoppel or exist in agreement and be supported by valid consideration.
    3. Yes, because a receiver appointed in supplementary proceedings is vested with the legal title to all the personal property of the judgment debtor and has the further right to prosecute actions to set aside all transfers of property made by the debtor to defraud his creditors.

    Court’s Reasoning

    The court reasoned that the agreement allowing the mortgagor to retain possession and sell the goods invalidated the mortgage as to creditors. The court cited a number of precedents establishing the principle that a chattel mortgage is fraudulent if the mortgagor retains dominion over the property. The court found that Ross’s assent was not supported by consideration, as the promise of Beck to return goods or make payments was never fulfilled. The court stated, “The conclusion that this mortgage was not void as against the judgment of Ross or the plaintiff was based upon a finding that Ross, the judgment creditor, with full knowledge that the agreement in reference to the possession of the mortgaged property had been entered into, assented to such arrangement.” The court rejected the argument that paying off the debt secured by the fraudulent mortgage before a lien was obtained validated the transaction, stating that all proceedings under a void mortgage are void. The court emphasized that the receiver stands in the shoes of the creditor and can pursue actions to set aside fraudulent conveyances. The court stated, “A receiver appointed in supplementary proceedings under the Code is vested with the legal title to all the personal property of the judgment debtor, and has the further right to prosecute actions to set aside all transfers of property made by the debtor to defraud his creditors.” The court also found that a prior pending action was not a bar to this suit, as it did not necessarily involve the same issues.

  • Adams v. Davidson, 10 N.Y. 309 (1851): Establishing Fraudulent Conveyance Through Lack of Possession

    Adams v. Davidson, 10 N.Y. 309 (1851)

    A transfer of property is deemed fraudulent against creditors when the assignor fails to relinquish actual possession and control of the property to the assignee, and the assignor continues to operate the business as before the assignment for their own benefit.

    Summary

    This case addresses the validity of a property assignment challenged as fraudulent by creditors. Brown assigned his assets to Davidson. Adams, acting on behalf of creditor Rathbone, levied on the assigned goods, arguing the assignment was fraudulent. The court held the assignment fraudulent because Brown retained control over the property, continuing to operate his business as usual even after the assignment to Davidson, indicating an intent to defraud creditors. This retention of control invalidated the assignment, allowing the creditor’s levy to stand.

    Facts

    Brown made an assignment to Davidson. Davidson told a clerk to observe the transaction. Brown told his clerk, Griffin, about the assignment. Brown retained the store keys and allowed Brown and Griffin to continue selling goods as usual. Brown told his brother-in-law the assignment was to induce Townsend & Wendell to provide bail and would be voided if successful. When the sheriff arrived to levy, Griffin did not disclose the assignment and promised the sheriff the proceeds of sales. Davidson did not make an inventory until after the levy.

    Procedural History

    Adams (representing Rathbone, a creditor) brought suit against Davidson, challenging the assignment. The lower court found in favor of Adams, deeming the assignment fraudulent. Davidson appealed to the Supreme Court, which affirmed the lower court’s decision in part and reversed in part. The case then went to the Court of Appeals.

    Issue(s)

    Whether the assignment from Brown to Davidson was fraudulent against creditors, specifically, whether Brown retained sufficient control over the property after the assignment to render it invalid.

    Holding

    Yes, because Brown did not relinquish control of the assigned property, continuing to operate his business and sell goods as before, indicating an intent to defraud creditors.

    Court’s Reasoning

    The court focused on the lack of actual and continued change of possession. The court emphasized that simply taking the keys symbolically was insufficient when Brown continued to operate the business as usual. The court highlighted the failure of Griffin to disclose the assignment to the sheriff as evidence of Brown’s continued control. The court noted that if Davidson was acting in good faith, he would have ensured a clear change in possession and control. The court also noted the significance of Davidson not calling Griffin as a witness to rebut the inference of fraud. The court stated the evidence showed that “there was not an actual, and much less a continued, change of possession of the assigned property.” The Court also notes, “The case, therefore, stands burdened, not only with the legal fraud resulting from the omission to take and continue the assigned property in the actual possession of the assignee, but with positive fraud in permitting Brown to sell for his own use and benefit as before.” Finally, the court states the assignment was at least in part created to coerce a third party to provide security for Brown, with the intention to void the assignment if successful.