The element of fair consideration exists when, in exchange for property or an obligation, "as a fair equivalent therefor, and in good faith, property is conveyed or an antecedent debt is satisfied" (Debtor and Creditor Law § 272 [a]). The good faith of both the transferor and transferee is an indispensable element of fair consideration ( see Matter of Mega Personal Lines, Inc. v Halton, 9 AD3d 553; Berner Trucking v Brown, 281 AD2d 924), and preferential transfers of corporate funds to directors, officers, and shareholders of insolvent corporations in derogation of the rights of general creditors do not fulfill the requirement of good faith ( see Matter of PA. Bldg. Co. v Silverman, 298 AD2d 327; Berner Trucking v Brown, supra; Sullivan Sons v Superior Dry Wall Sys. Corp., 109 AD2d 836; Farm Stores v School Feeding Corp., 102 AD2d 249, affd 64 NY2d 1065; Loco X-Ray Sys. v Fingerhut, 88 AD2d 425). The plaintiff made a prima facie showing that it was entitled to summary judgment on its fraudulent conveyance cause of action pursuant to Debtor and Creditor Law § 273 by submitting evidence that the transfers made between late January and early May 2003 rendered Hyrise insolvent and were made without fair consideration.

New York courts have carved out one exception to the rule that preferential payments of pre-existing obligations are not fraudulent conveyances: preferences to a debtor corporation's shareholders, officers, or directors are deemed not to be transfers for fair consideration. See Farm Stores, Inc. v. School Feeding Corp., 102 A.D.2d 249, 477 N.Y.S.2d 374, 378 (1984), aff'd, 64 N.Y.2d 1065, 489 N.Y.S.2d 877, 479 N.E.2d 222 (1985); Southern Industries, Inc. v. Jeremias, 66 A.D.2d 178, 411 N.Y.S.2d 945, 949 (1978).

New York courts have identified an important exception to this general rule: the repayment of an antecedent debt does not constitute fair consideration when the recipient of the payment is a corporate insider, i.e. an officer, director, or major shareholder of the transferor corporation. See Atlanta Shipping Corp. v. Chem. Bank, 818 F.2d 240, 249 (2d Cir. 1987); Farm Stores, Inc. v. School Feeding Corp., 477 N.Y.S.2d 374, 378 (App. Div. 1984), aff'd, 64 N.Y.2d 1065 (1985). Even when such transfers involve an exchange of equivalent value, courts have held that they presumptively lack good faith and are therefore fraudulent.

It therefore lacks good faith. Farm Stores, Inc. v. School Feeding Corp., 102 A.D.2d 249, 477 N.Y.S.2d 374, 378 (2nd Dep't 1984), aff'd, 64 N.Y.2d 1065, 489 N.Y.S.2d 877, 479 N.E.2d 222 (1985) (“[P]referential transfers to directors, officers and shareholders of insolvent corporations in derogation of the rights of general creditors do not fulfill the good faith requirement of the Debtor and Creditor Law.”); Indus., Inc. v. Jeremias, 66 A.D.2d 178, 411 N.Y.S.2d 945, 949 (2nd Dep't 1978)

However, "[o]ne exception has been recognized by the New York courts to the rule that the repayment of an antecedent debt constitutes fair consideration: where 'the transferee is an officer, director, or major shareholder of the transferor.'" In re: Sharp International Corp., 403 F.3d 43, 54 (2d Cir. 2005); see also HBE Leasing Corp. v. Frank, 48 F.3d 623, 634-635 (2d Cir. 1995) (payments of pre-existing obligations to corporation's shareholders, officers, or directors are deemed not to be transfers for fair consideration) (citing Farm Stores, Inc. v. School Feeding Corp., 102 A.D.2d 249 (2d Dep't 1984), aff'd, 64 N.Y.2d 1065 (1985); Southern Industries, Inc. v. Jeremias, 66 A.D.2d 178 (2d Dep't 1978)). Here, Dente is both an officer and major shareholder of Private Label who caused the insolvent Private Label to convey to Second Skin the right to receive commission payments that totaled $306,085.

When examined in isolation, that mortgage could not be avoided as constructively fraudulent. Even if the mother were regarded as an insider, the rule that preferential payments to insiders are per se lacking in good faith, see, e.g., Farm Stores, Inc. v. School Feeding Corp., 102 A.D.2d 249, 477 N.Y.S.2d 374, 378 (1984), aff'd, 64 N.Y.2d 1065, 489 N.Y.S.2d 877, 479 N.E.2d 222 (1985), did not apply, since the mortgages secured a contemporaneous advance of funds--not a pre-existing debt--and thus had no net effect on the debtor's balance sheet. See HBE Leasing, 48 F.3d at 635.

When examined in isolation, that mortgage could not be avoided as constructively fraudulent. Even if the mother were regarded as an insider, the rule that preferential payments to insiders are per se lacking in good faith, see, e.g., Farm Stores, Inc. v. School Feeding Corp., 102 A.D.2d 249, 477 N.Y.S.2d 374, 378 (1984), aff'd, 64 N.Y.2d 1065, 489 N.Y.S.2d 877, 479 N.E.2d 222 (1985), did not apply, since the mortgages secured a contemporaneous advance of funds — not a pre-existing debt — and thus had no net effect on the debtor's balance sheet. See HBE Leasing, 48 F.3d at 635.

The Trustee asserts that the Judgment Debtor's own financial statements establish that the Judgment Debtor transferred to S. Goetzmann assets in excess of his net worth and thus the conveyances rendered him insolvent. See McFadden Aff., Exhibit "3" (financial statement); Farm Stores, Inc. v. School Feeding Corp., 102 A.D.2d 249, 252-253, 477 N.Y.S.2d 374, 377 (2d Dep't 1984), aff'd, 64 N.Y.2d 1065, 489 N.Y.S.2d 877, 479 N.E.2d 222 (1985) (defendant corporation was rendered insolvent "inasmuch as the fair salable value of its assets after the transfers was less than the amount that would be required to pay the probable liability on its existing debts as they became absolute and matured"). Defendants simply counter that questions of a transferor's solvency are questions of fact not capable of being determined as a matter of law.

Absent an allegation that Chemical assumed a status more substantial than that of a creditor, we refuse to impose upon it any special fiduciary duty. Cf. Farm Stores, Inc. v. School Feeding Corp., 102 A.D.2d 249, 477 N.Y.S.2d 374, 378 (2d Dep't 1984), aff'd, 64 N.Y.2d 1065, 479 N.E.2d 222, 489 N.Y.S.2d 877 (1985) (Creditor who exercised his influence as a shareholder in decisions that directly affected his investments, consented to challenged fraudulent distributions had a fiduciary duty to the rights of general creditors). Atlanta already has ample recourse, of which it is taking full advantage, against IMH's other creditors.

As a general rule in New York for purposes of fraudulent conveyance law, the payment of an unsecured debt to an insider is deemed to be without good faith, and therefore lacking in fair consideration. In Farm Stores, Inc. v. School Feeding Corp., 64 N.Y.2d 1065, 1066–67, 489 N.Y.S.2d 877, 479 N.E.2d 222 (1985), the Court of Appeals affirmed a judgment avoiding this kind of fraudulent conveyance, “for the reasons stated in the opinion by Justice Moses M. Weinstein.” Writing for a unanimous panel of the Appellate Division, Justice Weinstein held “that preferential transfers to directors, officers and shareholders of insolvent corporations in derogation of the rights of general creditors do not fulfill the good-faith requirement of the Debtor and Creditor Law.” 102 A.D.2d 249, 254, 477 N.Y.S.2d 374 (1984). Consequently, “[t]he shareholders cannot be considered bona fide purchasers for fair consideration who are immune from liability as transferees of fraudulently conveyed property, as the record reveals that they were aware that they were receiving money from [the debtor] when the claims of the general creditors had not been completely paid and, in fact, they consented to such a distribution of the corporate funds.”