BLI Settles Fraudulent Transfer Suit on Behalf of Creditor

BLI Settles Fraudulent Transfer Suit on Behalf of Creditor

March 17, 2015
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On behalf of a leading global insurer, Bluestone Law International (“BLI”) is pleased to announce that it has secured a substantial litigation settlement in the United States District Court for the Southern District of New York.

The suit, first filed in late 2011, alleged that the Defendant, a former leading men’s clothing manufacturer, fraudulently conveyed nearly $1.9 million to its former CEO and President as the company unraveled and folded in the final months of 2012. The action was brought pursuant to New York Debtor and Creditor Law § 273-a, which provides, among other things, that the transfer of funds from a Defendant company in a pending lawsuit to an insider director or manager is per se fraudulent. The suit hinged on whether an insider’s status as a secured creditor was a defense to the statute. In ruling on BLI’s dispositive turnover motion, the Court opined that while Plaintiff had made a “compelling case that [Defendant’s] transfers qualify as fraudulent conveyances” – the Court ultimately could not rule on Plaintiff’s motion as a matter of law, and the matter was set for trial. The Court’s opinion provided a strong blueprint for Plaintiff and BLI at trial, and ultimately led to a favorable settlement for BLI’s Plaintiff creditor client just a few days before trial preparation was to begin.

In general, under the fraudulent conveyance laws, there is nothing improper about an insolvent company repaying obligations to secured creditors because the transfers are deemed to be for “fair consideration.” However, when the secured creditor is an insider, such as an owner, manager, or someone with an intimate knowledge of the insolvent company’s finances and operations, New York law is unsettled as to when those transfers will be void as fraudulent. In this case, the Court, relying on a bankruptcy court decision from the Western District of New York found that only if “special circumstances” indicating “bad faith” were present, could the Court deem the transfers fraudulent as a matter of law. See In re Northstar Dev. Corp., 465 B.R. 6 (Bankr. W.D.N.Y. 2012). While certain “bad faith” elements were present and identified by the Court, the Court determined it was prevented from ruling in Plaintiff’s favor because it was a factual matter to be submitted to a jury. Thus, while the law in New York remains somewhat murky in regard to repayments to secured insiders under N.Y. DCL § 273-a, this matter was successfully resolved through a settlement conference with the Court.

BLI continues to be at the forefront of asset/debt recovery and fraudulent transfer law in the US and abroad. The BLI litigation efforts were led by attorneys Zack Bluestone, Kyle Choi, and Gabe Bluestone.