Opinion
13906/11
02-27-2012
RDLF Financial Services, LLC and RD Legal Funding, LLC, Plaintiffs, v. Esquire Capital Corp., Defendant.
Attorney for Plaintiff:Jerome Reisman Attorney for Defendant: Anthony J. Auciello
Attorney for Plaintiff:Jerome Reisman
Attorney for Defendant: Anthony J. Auciello
Carolyn E. Demarest, J.
In this action by plaintiffs RDLF Financial Services, LLC (RDLF) and RD Legal Funding, LLC (RD) alleging a fraudulent transfer of funds and impairment of its security interest and seeking to recover $325,507 plus interest and attorneys' fees, defendant Esquire Capital Corp. (Esquire) moves for an order, pursuant to CPLR 3211 (a) (1), (3), (5), and (7) and Limited Liability Company Law § 802, dismissing RDLF and RD's (plaintiffs) action as against it. RDLF and RD cross-move, pursuant to CPLR 3212 (b), for summary judgment in their favor on all causes of action in their complaint.
BACKGROUND
Marc A. Bernstein, Esq. (Bernstein) is a disbarred attorney who is currently incarcerated for the theft of client funds. Bernstein & Bernstein LLP (B & B) is the law firm through which Bernstein had practiced law prior to his disbarment and incarceration. Both plaintiffs and defendant Esquire, a New York corporation, are in the business of providing funding to attorneys by purchasing through assignment the attorneys' right to legal fees in lawsuits.
On April 21, 2005, Esquire entered into a Funding Agreement (the Funding Agreement), which provided that Bernstein, on behalf of B & B, accepted the sum of $200,000 from Esquire, in consideration of the assignment to Esquire of an interest equal to the sum of $200,000, together with an accrued monthly usage fee, a $250 application fee, a $75 disbursement fee, and other fees or costs, in legal fees to be paid to Bernstein or B & B in five listed lawsuits, including the case of Albury v Maimonides Med. Ctr. (Sup Ct, Kings County, index No. 24976/99) (the Albury action), which had been filed on July 19, 1999 and was then pending in the Supreme Court, Kings County. The Funding Agreement contained the representation that the assigned rights had not previously been encumbered and stated that Bernstein would not "in any manner assign, transfer, pledge, or sell [his] right(s) or interest(s) to the fees or/and expenses due to [him] in this Lawsuit to any other individual(s) or entity(ies) before making a full repayment to Esquire." The Funding Agreement further stated:
"I hereby grant Esquire . . . a Lien and Security Interest in the Proceeds of the Lawsuits as regards to the disbursements and attorney fees. If [Bernstein or B & B] should receive all or any portion of the Proceeds of the Lawsuits, I shall notify Esquire . . . within 72 hours of the settlement and deliver at least 40% of the Proceeds to Esquire . . . within 7 days after the settlement check has been deposited into my trust account until all outstanding amounts are paid in full . . . There are no other liens on my interest in the Proceeds of the Lawsuits, nor will I knowingly allow any to be created."The Funding Agreement also stated:
"I hereby accept Esquire['s] funding as per the terms of this agreement, grant Esquire . . . a Security Interest and Lien as per the terms hereof, and assign the Proceeds of the Lawsuit to the extent specified in this agreement."Defendant Esquire did not record or perfect its security interest.
A check dated April 21, 2005, payable to B & B, reflects a payment by Esquire in the amount of $200,000 in accordance with the terms of the Funding Agreement. On June 29, 2006, a compromise order was signed authorizing settlement of the Albury action for $5,000,000 and B & B purportedly became entitled to legal fees earned and disbursements made as a result of its legal representation of the plaintiffs in that case in the amount of $590,659.90.
These facts, as recited, are taken from the papers submitted by the parties, however, the actual Infant's Compromise Order dated June 29, 2006, as recorded in the County Clerk's office, indicated a "total settlement sum" of $3,500,000, with $506,659.90 to be paid to B & B in attorney's fees, inclusive of disbursements.
However, subsequent to the assignment to defendant, on November 2, 2005, B & B, as the assignor, and RD, a Delaware limited liability company with its principal place of business in New Jersey, as the assignee, entered into an Assignment and Sale Agreement (the Assignment Agreement) whereby, in consideration of the receipt by B & B from RD of a cash payment of $500,000, B & B sold and assigned to RD its legal fees in the prospective sum of $607,500, which B & B represented it had earned in the Albury action. Paragraph 1 (a) of the Assignment Agreement provided that B & B sold to RD its "interest in and to the Legal Fee [in the Albury action] free and clear of all claims, liens, interests and encumbrances." Paragraph 1 (c) of the Assignment Agreement further provided:
The Assignment Agreement indicates that only $299,922.97 of the $500,000 "Purchase Price" was attributable to the Albury case and the balance was to be "applied" to "balances" due on two other cases. Plaintiffs indicate that they have had a long standing arrangement with B & B and that legal fees have been assigned to them in numerous cases over the years.
The court in the Albury case apparently approved less than what Bernstein and B & B anticipated based upon their retainer agreement. Thus, the "Legal Fee" recited in the Assignment Agreement was $607,500 and that is the amount to which plaintiffs claim to be entitled.
"Assignor and Assignee intend that the transaction contemplated hereunder shall constitute a true sale and transfer of the Legal Fee to Assignee, thereby providing Assignee with the full risks and benefits of ownership. Assignee may at its option and in addition to all other notices provided for herein, file a financing statement under the Uniform Commercial Code (UCC') giving notice of this Assignment without Assignor's signature or further authorization. In the event this transaction is re-characterized as a loan, then the parties agree that this Assignment shall be deemed to be a security agreement within the meaning of Article 9 of the UCC and Assignor hereby grants to Assignee a first priority security interest within the meaning of Article 9 of the UCC in all of the Assignor's right, title and interest in and to the Legal Fee to secure a loan in an amount equal to (a) the Legal Fee, or (b) the Purchase Price, plus interest calculated thereon at a rate of interest equal to the lesser of (i) twenty four (24%) percent per annum, or (ii) the maximum rate permitted by law in the jurisdiction in which the Assignor conducts the practice of law . . ."
Paragraph 2 of the Assignment Agreement set forth that B & B represented and warranted that it "own[ed] good title to the Legal Fee, free and clear of all Adverse Interests and ha[d] the unrestricted right to assign the Legal Fee to Assignee."
Paragraph 4 of the Assignment Agreement provided:
"Security Interest. Assignor expressly acknowledges and agrees that the representations, warranties, covenants, and indemnification and repurchase obligations of Assignor under this Agreement . . . are secured by a Pledge and Security Agreement of all of Assignor's present and future accounts, chattel paper, equipment, instruments, investment property, documents, letter of credit rights, personal property and general intangibles (collectively, the Collateral'). This Agreement shall constitute a security agreement in the Collateral and shall serve as authorization to Assignee to file an initial UCC financing statement to perfect the pledge and any and all amendments thereto without Assignor's signature or further authorizations. If any of the representations, warranties and/or covenants of Assignor set forth herein . . . is either breached or untrue . . . then Assignee shall have the rights and remedies of a secured party under the UCC . . ."
Bernstein executed a Guaranty of Performance, also dated November 2, 2005, whereby he unconditionally guaranteed the performance, obligations, representations, warranties, covenants, indemnities and agreements of B & B under the Assignment Agreement. Upon execution of the Assignment Agreement on November 2, 2005, RD and B & B jointly notified the Federation of Jewish Philanthropies, as representative of defendants in the Albury action, that the legal fees due to B & B had been assigned to RD and were to be paid and delivered to RD.
Prior to the execution of the Assignment Agreement, RD, as the secured party, had filed a UCC-1 financing statement on December 20, 2001, naming B & B as the debtor, covering "all assets." Annexed to this UCC-1 financing statement were four "Assignment and Sale" agreements, executed by B & B on August 8, 2001, August 10, 2001, October 25, 2001, and November 21, 2001 (2001 Assignments). These four Assignment Agreements, like the November 2, 2005 Assignment Agreement, similarly named B & B, as the assignor, and RD, as the assignee, pertained to the assignment of B & B's legal fees in specifically identified lawsuits then pending, and contained a security agreement clause. Paragraph 1 (c) of these four 2001 Assignment Agreements contained similar language to that of paragraph 1 (c) of the November 2, 2005 Assignment Agreement in providing that "this Assignment shall be deemed to be a security agreement within the meaning of Article 9 of the Uniform Commercial Code and Assignor hereby grants to Assignee a first priority security interest within the meaning of Article 9 of the UCC of all of the Assignor's right, title and interest in and to the Property to secure a loan in an amount equal to the Purchase Price and each of Assignors' other obligations under this Agreement," but contained no reference to the filing of a UCC-1 financing statement. Nor did these four 2001 Assignment Agreements contain the same terms as paragraph 4 of the November 2, 2005 Assignment Agreement acknowledging the pledge of all of assignors "present and further accounts, chattel paper, equipment, instruments, investment property, documents, letters of credit rights, personal property and general intangibles (collectively, the "Collateral")" or the authorization to file "a UCC filing statement to perfect the pledge." The 2001 UCC-1 financing statement was effective for a five-year period and did not lapse until December 20, 2006 (see UCC 9-515 ).
RDLF is also a Delaware limited liability company which is affiliated with RD. RD asserts that it assigned the Assignment Agreement, its right to receive payment of the legal fees in the Albury action, and all related documentation to RDLF. An undated Allonge provided that "[t]he Assignment . . . Agreement to which this Allonge is attached . . . has been sold and assigned by RD . . . to RDLF . . . and [RDLF] has granted a security interest in the [Assignment] Agreement to DZ Bank AG, as Agent." No issue has been raised regarding the validity or effectiveness of this assignment. DZ Bank is not a party to this action.
On June 29, 2006, Justice Gerard Rosenberg, in the Albury action, signed an Infant's Compromise Order, directing that the sum of $506,659.90 (inclusive of disbursements) be paid to B & B as its legal fees and the insurance company for the defendants in the Albury action issued a three-party settlement check dated October 25, 2006 payable to B & B, RD and Esquire, as payment for such legal fees.
No copy of this check has been supplied to the Court although both plaintiffs and defendant acknowledge that they consented to such procedure. Both sides indicate that they communicated with B & B and the maker of the check, but there is no indication that plaintiffs and defendant communicated directly with each other prior to issuance of the check, which was delivered to B & B, nor is there any writing evidencing the "agreement" between plaintiffs and B & B that the check would be "held" pending resolution of conflicting claims. Of course, it is reasonable to infer that both plaintiffs and defendant were made aware of the other's claims to the funds through their communications with the maker insurance company.
Plaintiffs contend that upon learning of B & B's previous assignment of its legal fees in the Albury action to Esquire, although they believed this assignment to Esquire directly violated the terms of their Assignment Agreement, RDLF agreed that the insurance company could issue the settlement check in the Albury action as a three-party check made payable to Esquire, B & B, and RD on the express condition that B & B hold the settlement check until the issue of who was entitled to the proceeds of this check was resolved. The settlement check, payable to B & B, Esquire, and RD, was delivered directly to B & B and Bernstein. RD and RDLF claim that on October 31, 2006, without their authorization, consent, or knowledge, Bernstein forged the endorsement of RD on the settlement check, deposited it into B & B's operating account with North Fork Bank (now Capital One N.A.), and thereby obtained control of all of the funds. Esquire denies any knowledge of this alleged forgery by B & B. Two days later, B & B issued a check, dated November 2, 2006, payable to Esquire, in the amount of $325,507, which was deposited on the same day and debited from B & B's account. On November 22, 2006, B & B issued a check payable to RD in the amount of $500,000, as partial payment of plaintiff's claim, which was returned for insufficient funds.In response to the "bounced" check, RDLF filed an action against B & B, Bernstein, and North Fork Bank in the Supreme Court, New York County (RDLF Financial Servs, LLC v Bernstein, Sup Ct, NY County, index No. 119185/06) (the New York County action) based upon Bernstein's breach of the Assignment Agreement and alleged fraud in forging RD's endorsement on the settlement check, converting funds owned by RDLF by depositing them into B & B's operating account at North Fork Bank, fraudulently inducing RD to enter into the Assignment Agreement, and failing and refusing to pay any portion of the funds due to RDLF under the Assignment Agreement. Roni Dersovitz (Dersovitz), a principal of RDLF and the managing manager of RD and RDLF, was later added as a plaintiff in the New York County action. Defendant Esquire was not joined in that action. On June 10, 2009, the New York County Supreme Court entered judgments in the New York County action, in favor of RDLF against B & B and Bernstein in the amount of $891,885.41, and in favor of Dersovitz against Bernstein in the amount of $2,921,349.81, pursuant to the terms of a Stipulation of Settlement between Bernstein, B & B, and RDLF reached on June 27, 2008. Bernstein made two payments of $50,000 each to RDLF pursuant to the Stipulation of Settlement, and thereafter moved to vacate the Stipulation of Settlement, which motion was denied by decision and order dated May 10, 2010 in the New York County action. Plaintiffs contend that the settlement in the 2006 New York County action was based upon numerous assignments from B & B and the payments totaling $100,000 are unrelated to the assignment at issue here. This contention is believed by the recitation in the May 10, 2010 decision of Justice Bransten, of the specific facts of the instant case and the terms of the Albury Assignment Agreement as the basis for the New York County action and the settlement reached therein. RD and RDLF claim not to have received any portion of the legal fees due under the Assignment Agreement, however, apart from the $500,000 check that bounced, plaintiffs have clearly received $100,000 of the funds due them in this case.
The date of RD's assignment to RDLF has not been revealed, but, since there appears to be no dispute relevant to this issue, the court treats the two plaintiffs as joined in interest for the purposes of this decision.
Pursuant to the Stipulation of Settlement, RDLF discontinued the New York County action as against North Fork Bank.
On June 17, 2011, RD and RDLF filed this action against Esquire, alleging a first cause of action that the transfer of the check from B & B to Esquire in the amount of $325,507 was a fraudulent transfer avoidable under Debtor and Creditor Law § 273, § 274, and § 275 because it was made without fair consideration by B & B to Esquire in order to render B & B insolvent and prevent it from paying its debts, a second cause of action alleging that the transfer to Esquire was an intentional fraudulent conveyance pursuant to Debtor and Creditor Law § 276, a third cause of action for an award of attorneys' fees, costs, and disbursements pursuant to Debtor and Creditor Law § 276-a, an apparently redundant fourth cause of action seeking to recover the transferred funds from Esquire or any transferee of Esquire based upon the claims set forth in the first and second causes of action, a fifth cause of action alleging that Esquire impaired plaintiffs' security interest in the funds, and a sixth cause of action seeking a constructive trust. Esquire interposed an answer dated July 22, 2011, denying sufficient information as to each and every allegation except admitting its own corporate identity and that it "received a check", and alleging 15 affirmative defenses.
While Esquire contends that RD and RDLF's cross motion for summary judgment is premature because issue has not been joined, this contention is patently devoid of merit due to the answer filed by Esquire prior to the filing of RD and RDLF's cross motion.
DISCUSSION
As a threshold matter, the court must address Esquire's argument that since both RD and RDLF are limited liability companies formed in Delaware, they were required to comply with Limited Liability Company Law § 802 in order to bring an action in this state. Limited Liability Company Law § 802 provides that a foreign limited liability company doing business within New York State must obtain a certificate of authority from the New York Department of State in order to maintain a civil action in New York, by submitting to the Secretary of State a certificate of existence and an application for authority to do business in this state as a foreign company (see Limited Liability Company Law § 802 [a]) and complying with certain publication requirements (see Limited Liability Company Law § 802 [b]).
Limited Liability Company Law § 808 (a) provides:
"(a) A foreign limited liability company doing business in this state without having received a certificate of authority to do business in this state may not maintain any action, suit or special proceeding in any court of this state unless and until such limited liability company shall have received a certificate of authority in this state."
Esquire concedes that RD filed for a certificate of authority, but claims that it did not comply with the publication requirements of Limited Liability Company Law § 802. Esquire also asserts that RDLF has not filed for a certificate of authority, nor has it complied with the publication requirements of Limited Liability Company Law § 802. Esquire contends that RD and RDLF, therefore, cannot maintain this action based upon their lack of authority to do so because of their failure to comply with Limited Liability Company Law § 802, and that this action must be dismissed pursuant to CPLR 3211 (a) (3) for lack of legal capacity to sue.
Although plaintiffs claim not to be "doing business" in New York and therefore claim not to be subject to the requirements of section 808(a), this issue need not be addressed because RD has submitted the entity information from the New York State Department of State, which shows that it filed with the Department of State on July 27, 1999, and has an active status as being authorized to conduct business in New York State. Although RDLF admits that it has not yet received its certificate of authority from New York State, it has annexed a copy of its application for a certificate of authority dated August 30, 2011.
It has been held that a foreign limited liability company's "failure to obtain a certificate of authority to do business in New York before initiating the action is not a fatal jurisdictional defect" (Basile v Mulholland, 73 AD3d 597, 597 [2010]). Rather, the appropriate remedy is to stay the action for a period of time in order to afford the foreign limited liability company an opportunity to comply with Limited Liability Company Law § 808 (a), instead of dismissing the action (see Matter of Mobilevision Med. Imaging Servs., LLC v Sinai Diagnostic & Interventional Radiology, P.C., 66 AD3d 685, 685-685 [2009]). Here, RD has already complied with this section and, since RDLF has already made such application and expects to have such a certificate shortly, such a stay is not necessary, particularly in light of the ultimate disposition herein.
With respect to the merits of RD and RDLF's claims, Esquire argues that these claims must be dismissed pursuant to CPLR 3211 (a) (1) based upon the documentary evidence and pursuant to CPLR 3211 (a) (7) for failure to state a viable cause of action. Plaintiffs have cross-moved for summary judgment on all their claims. The parties have submitted affidavits of their principals attesting to the facts, which are substantially undisputed. Thus, the court will treat both motions as seeking summary judgment pursuant to CPLR 3212.
Esquire asserts that since B & B and Bernstein entered into the Funding Agreement with it on April 21, 2005, prior to its entry into the Assignment Agreement with RD on November 2, 2005, with respect to the same legal fees, defendant Empire is entitled to priority over B & B and Bernstein's assignment to RD and that it, therefore, was entitled to the $325,507 which it received from B & B. Empire asserts that RD and RDLF can only claim an interest in the remaining balance of the $506,659.90 in legal fees from the Albury action, i.e., $181,152.90, which remained in the account of B & B, and can assert their claim only as against Bernstein and B & B. Esquire contends that RD and RDLF's causes of action for violations of the Debtor and Creditor Law, based upon a violation of RD's purported security interest, must be dismissed because they seek to set aside a payment which was made pursuant to a valid assignment created prior to plaintiffs' Assignment Agreement.
RD and RDLF's first cause of action for avoidance of a constructive fraudulent transfer alleges that the transfer of the $325,507 check to Esquire was a fraudulent transfer avoidable under Debtor and Creditor Law § 273, § 274, and § 275. Debtor and Creditor Law § 273 provides:
"Every conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regard to his actual intent if the conveyance is made or the obligation is incurred without a fairDebtor and Creditor Law § 274 provides:
consideration."
"Every conveyance made without fair consideration when the person making it is engaged or is about to engage in a business or transaction for which the property remaining in his hands after the conveyance is an unreasonably small capital, is fraudulent as to creditors and as to other persons who become creditors during the continuance of such business or transaction without regard to his actual intent."Debtor and Creditor Law § 275 provides:
"Every conveyance made and every obligation incurred without fair consideration when the person making the conveyance or entering into the obligation intends or believes that he will incur debts beyond his ability to pay as they mature, is fraudulent as to both present and future creditors."
RD and RDLF, in their first cause of action, allege that the transfer of the $325,507 check from B & B to Esquire was made: (a) for less than reasonably equivalent value to B & B, or for any value, (b) while B & B was engaged or was about to be engaged in either a business or a transaction for which the remaining assets of B & B were unreasonably small in relation to that business or transaction, (c) while B & B intended to incur, or believed or reasonably should have believed that it would incur, debts beyond its ability to pay as they became due, and/or (d) at a time B & B was insolvent and/or was rendered insolvent by virtue of the transfer. They further allege that the transfer of the check was made by B & B to Esquire so as to render B & B insolvent and to prevent B & B from paying the debt it owed to RDLF. No specific fraudulent acts by Empire, other than receipt and acceptance of the $325,207 transfer, are alleged.
As is evident from Debtor and Creditor Law § 273, " [b]oth insolvency and inadequacy of consideration are prerequisites to a finding of constructive fraud'" (Matter of American Inv. Bank v Marine Midland Bank,191 AD2d 690, 691 [1993], quoting Huit Corp. v Siskind, 30 Misc 2d 598, 599 [1961]; see also Schmitt v Morgan, 98 AD2d 934, 935 [1983]). Debtor and Creditor Law § 274 and § 275 similarly require a lack of fair consideration for a conveyance which leaves the debtor with unreasonably small capital or debts beyond its ability to pay. "The burden of proving both insolvency and the lack of fair consideration is upon the party challenging the conveyance" (Matter of American Inv. Bank,191 AD2d at 692).
Here, RD and RDLF's complaint merely tracks the language of Debtor and Creditor Law § 273, § 274, and § 275 in an attempt to allege a cause of action. On a motion to dismiss pursuant to CPLR 3211 (a), a court must ordinarily presume the factual allegations of the complaint, as pleaded, to be true and accord the plaintiff the benefit of every possible favorable inference (see 511 W. 232nd Owners Corp. v Jennifer Realty Co., 98 NY2d 144, 152 [2002]; Sokoloff v Harriman Estates Dev. Corp., 96 NY2d 409, 414 [2001]; Leon v Martinez, 84 NY2d 83, 87-88 [1994]). However, factual allegations consisting of bare legal conclusions or that are inherently incredible or flatly contradicted by the documentary evidence are not entitled to such consideration (see Pincus v Wells, 35 AD3d 569, 570 [2006]; Syracuse Orthopedic Specialists, P.C. v Hootnick, 16 AD3d 1019, 1020 [2005]; Tectrade Intl. v Fertilizer Dev. & Inv., 258 AD2d 349, 349 [1999]; Biondi v Beekman Hill House Apt. Corp., 257 AD2d 76, 81 [1999]; Wilson v Hochberg, 245 AD2d 116, 116 [1997]; Kliebert v McKoan, 228 AD2d 232, 232 [1996]; SRW Assoc. v Bellport Beach Prop. Owners, 129 AD2d 328, 331 [1987]). Moreover, since RD and RDLF have cross-moved for summary judgment and the court may search the record and grant Esquire summary judgment (see CPLR 3212 [b]), plaintiffs have a burden to submit evidentiary facts to raise a triable issue of fact rather than merely rely upon bare conclusory allegations which are unsubstantiated (see generally Zuckerman v City of New York, 49 NY2d 557, 562 [1980]; Blair v O'Donnell, 85 AD3d 954, 956-957 [2011]). Notably, RD and RDLF, in opposition to Esquire's motion and in support of their cross motion for summary judgment, do not allege that questions of fact exist or that further discovery is needed, nor do they challenge the assignment to Empire in return for funds advanced to B & B.
Neither party has attempted to document or compute the precise amount due to Empire under the Funding Agreement at the time the $325,207 check was issued. In the absence of a specific challenge to the amount paid, the court deems such sum accepted as accurately reflecting B & B's debt to Empire.
Esquire asserts there was fair and valuable consideration paid by it to Bernstein and B & B in the amount of $200,000 for its assignment, which predated the assignment to RD by at least six months. Esquire also asserts that Bernstein and B & B were not rendered insolvent as claimed by RD and RDLF since after it received $325,507, Bernstein and B & B still retained $181,152.90 of the subject $506,659.90 legal fee, and may well have had other assets.
Esquire also points out that, subsequent to its receipt of the $325,507 check, RDLF (as discussed above) entered into a Stipulation of Settlement with Bernstein and B & B in the New York County action, whereby they paid RDLF two payments totaling $100,000.
Pursuant to Debtor and Creditor Law § 272 (a), "[g]ood faith satisfaction of an antecedent debt constitutes fair consideration" (Northpark Assoc., L.P. v S.H.C. Mergers, Inc., 8 AD3d 642, 644 [2004]). It is well established that "a conveyance which satisfies an antecedent debt [even when] made while the debtor is insolvent is neither fraudulent nor otherwise improper, even if its effect is to prefer one creditor over another" (Ultramar Energy v Chase Manhattan Bank, 191 AD2d 86, 90-91 [1993]; see also Debtor and Creditor Law §§ 272, 273; In re Sharp Intl. Corp. v State St. Bank & Trust Co., 403 F3d 43, 54 [2d Cir 2005]; Matter of Town of Southampton v Chiodi, 75 AD3d 604, 606 [2010]; Matter of CIT Group/Commercial Servs., Inc. v 160-09 Jamaica Ave. Ltd. Partnership, 25 AD3d 301, 302 [2006]; Northpark Assoc., L.P. v S.H.C. Mergers, Inc., 8 AD3d 642, 644 [2004]; Ronga v Chiusano, 97 AD2d 753, 753 [1983]; AIU Ins. Co. v Robert Plan Corp., 17 Misc 3d 1104 [A], 2007 NY Slip Op 51828[U], *12 [Sup Ct, NY County 2007]). "It is of no significance that the transferee has knowledge of such insolvency" (Ultramar Energy, 191 AD2d at 91 [internal quotation marks and citation omitted]). "Nor is the transfer subject to attack by reason of knowledge on the part of the transferee that the transferor is preferring [it] to other creditors, even by virtue of a secret agreement to that effect" (id.; see also In re Sharp Intl. Corp., 403 F2d at 54-55).
Thus, even if insolvent, a debtor may properly transfer assets to a creditor in payment of an antecedent debt "although the effect of the transfer will be to prefer that creditor" (Ultramar Energy, 191 AD2d at 91). " It is not unfair, and therefore it is not a fraudulent conveyance, for the debtor arbitrarily to select the creditors whom [it] chooses to pay, although these favourites know that there will not be enough left to pay the others'" (id., quoting 1 Garrard Glenn, Fraudulent Conveyances and Preferences § 289a, at 494 [1940 rev ed]).
Here, B & B and Bernstein's issuance of the $325,507 check to Esquire was made in satisfaction of their antecedent debt created under the Funding Agreement, was for fair consideration and was not fraudulent under Debtor and Creditor Law §§ 273, 274 and 275, although its effect was to reduce the assets available to RDLF and frustrate satisfaction of the debt owed to plaintiffs under the Assignment Agreement (see Matter of Town of Southampton, 75 AD3d at 606). Thus, dismissal of RD and RDLF's first cause of action is mandated (see CPLR 3211 [a] [1], [7]; 3212 [b]).
RD and RDLF's second cause of action for intentional fraudulent conveyance under section 276 of the Debtor and Creditor Law is premised upon plaintiffs' claim that they have a first priority ownership interest in the $506,659.90 settlement check and that Esquire knowingly permitted Bernstein and B & B to disburse the $325,507 check to it, and accepted and deposited this check without plaintiff's knowledge or consent, in violation of plaintiffs' perfected first priority security interest in the settlement check. RD and RDLF, in this cause of action, further allege that Esquire accepted and deposited the check into its account without fair consideration and with the actual intent to hinder, delay, and defraud them.
Jason Younger, Empire's executive vice president, "adamantly denies" that Empire had any role in any alleged forgery of RD's endorsement upon the check deposited into B & B's account and plaintiffs have provided no evidentiary support for their claim that defendant intentionally defrauded them. While plaintiffs contend that Empire's mere acceptance of B & B's payment rendered such transfer fraudulent under Debtor and Creditor Law § 276, entitling them to a judgment against Esquire in the sum of $325,507, plus interest from November 2, 2006 plus punitive damages and attorneys' fees, costs, and disbursements, the above analysis of the law regarding the acceptance of payment of a valid antecedent debt, even knowing of the conflicting claims of other creditors, reveals the implausibility of plaintiffs' second cause of action.
Debtor and Creditor Law § 276 provides:
"Every conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud either present or future creditors, is fraudulent as to both present and future creditors."
Debtor and Creditor Law § 276 "addresses actual fraud, as opposed to constructive fraud, and does not require proof of unfair consideration or insolvency" (Wall St. Assoc. v Brodsky, 257 AD2d 526, 529 [1999]; see also Atsco Ltd. v Swanson, 29 AD3d 465, 465 [2006]). RD and RDLF, however, fail to sufficiently allege any actual fraud or even any "badges of fraud" on the part of Esquire to support a claim under Debtor and Creditor Law § 276 (see In re Sharp Intl. Corp., 403 F3d at 56; Zanani v Meisels, 78 AD3d 823, 825 [2010]; Phillip v Zanani, 67 AD3d 877, 878-879 [2009]).
RD and RDLF have failed to submit any evidentiary proof of any participation by Esquire in any fraud committed by Bernstein and B & B. While plaintiffs argue that they have priority over Esquire and a superior right to the proceeds of the Albury action based upon RD's perfected security interest in such proceeds by virtue of its filing of a 2001 UCC-1 financing statement, such claim does not per se render the payment to Esquire of monies owed to it under the prior Funding Agreement fraudulent or subject to being set aside under the Debtor and Creditor Law. Although the undisputed facts establish that, at the time B & B transferred funds to defendant, Empire knew of plaintiffs' competing claim to the payout of the legal fees in the Albury action, within a few days of Empire's receiving payment, plaintiffs were also sent a $500,000 check. Defendant was never made aware that this check had been returned for insufficient funds prior to commencement of this action. Plaintiffs' assumption that the funds paid to Empire from B & B's operating account were necessarily the proceeds of the insurance payment of legal fees has not been established and cannot be binding upon Empire. Moreover, since it appears that both plaintiffs and defendant were involved in the arrangement by which debtor B & B obtained control of these funds, plaintiffs could not have been defrauded by defendant, nor have plaintiffs articulated any basis for their conclusory speculative allegations against Empire.
It is noted that plaintiffs litigated their fraud claims against Bernstein in the New York County action without joining defendants in that action.
Thus, RD and RDLF have failed to adequately allege or raise any genuine issue of fact as to any knowing inducement or participation in fraud on the part of Esquire (see In re Sharp Intl. Corp., 403 F3d at 56; Zanani, 78 AD3d at 825; Phillip, 67 AD3d at 878-879). Dismissal of RD and RDLF's second cause of action must, therefore, be granted (see CPLR 3016 [b], 3211 [a] [7]; 3212 [b]).
RD and RDLF's third cause of action seeks an award of their attorneys' fees, costs, and disbursements, pursuant to Debtor and Creditor Law § 276-a. This section permits attorneys' fees to be awarded to a creditor who has brought a successful action to set aside a fraudulent conveyance where the subject conveyance was made with actual intent to hinder, delay, or defraud either present or future creditors, as opposed to merely intent presumed in law or constructive fraud (see Hassett v Goetzmann, 10 F Supp 2d 181, 189-190 [ND NY 1998]; Farm Stores, Inc. v School Feeding Corp., 102 AD2d 249, 256-257 [1984], affd 64 NY2d 1065 [1985]). Since the court has determined that there is no evidence that the transfer of the $325,507 to Esquire was made with actual intent to hinder, delay, or defraud RD or RDLF, dismissal of this cause of action is warranted (see CPLR 3211 [a] [7]; 3212 [b]).
RD and RDLF's fourth cause of action seeks to recover the value of the transfer from B & B to Esquire. This cause of action, as pled, is redundant of the first and second causes of action for fraudulent conveyance. Since RD and RDLF have failed to allege any viable basis for such recovery from Esquire, this cause of action must be dismissed (see CPLR 3211 [a] [7]; 3212 [b]).
RD and RDLF's fifth cause of action, reminiscent of plaintiff's second cause of action in alleging that Esquire, by permitting and acquiescing in the transfer and accepting and depositing the $325,507 check into its account, impaired their security interest in B & B's assets, is premised upon plaintiffs' claim to a priority security interest in the funds paid to Empire. Relying upon RDLF's UCC-1 Statement filed on December 20, 2001, covering "ALL ASSETS" of Bernstein & Bernstein, LLP, to which was allegedly attached the four 2001 security agreements relating to the four specific lawsuits then pending , and which remained effective to December 20, 2006 (UCC §9-515), and the undisputed fact that Empire has never recorded or perfected its own security interest, plaintiffs contend they are entitled to recoup from Empire the moneys paid to it by B & B from the settlement of the Albury case.
Plaintiffs have not provided a complete copy of the filed UCC-1.
Assuming that the legal fees to be paid to B & B from the Albury settlement were covered by the 2001 UCC filing ( but see, Feinberg v Shaw, 2006 NY Slip Op 30335[U] [Sup Ct, New York County 2006]), and plaintiffs' security interest in such payment intangible was perfected by such filing (see UCC §§ 9-309, 310), the nature of the collateral changed to cash upon issuance of the three-party check by the insurer and deposit of that check into the debtor's operating account. Upon such transfer , plaintiffs lost control of the collateral, the proceeds became co-mingled with Bernstein's money and thus unidentifiable and plaintiffs' perfection of their security interest lapsed (see UCC § 9-315(d)(2)).
See UCC § 9-309(3), affording automatic perfection to sales of payment intangibles (Official Comment 4). Plaintiffs' Assignment Agreement characterizes the assignment as a sale and only alternatively as security for a loan.
Plaintiffs acknowledge their consent to the issuance of the three-party check and their awareness of defendant's conflicting claims to this money and agreed that the check should be delivered to Bernstein, albeit with the alleged understanding that he would not deposit it.
As plaintiffs argue, pursuant to Uniform Commercial Code § 9-322(a)(2), "[a] perfected security interest . . . has priority over a conflicting unperfected security interest". A straight-forward application of this rule to the undisputed facts would give plaintiffs a priority to the Albury legal fees which were paid to Bernstein (see Official Comment 4 to UCC § 9-322, Example 1 ("It makes no difference whether [an earlier filing party which makes a loan subsequent to the later-filing party] knew of [the earlier advance at the time the later advance is made]." The filing may occur prior to attachment of the security interest. )) However, once the funds became co-mingled in Bernstein's operating account (not an escrow account), the money was no longer identifiable as cash proceeds attaching to plaintiffs' security interest in the original collateral, the right to payment.
Under Uniform Commercial Code § 9-308, perfection of a security interest in a right to payment cannot occur until the collateral itself comes into existence and the debtor has rights in it. See Comment 6 to UCC § 9-322. Thus, plaintiffs' security interest in the Albury legal fees was not perfected until the Infant Compromise Order was signed in that action on June 29, 2006.
This issue was adroitly addressed in Square Mile Structured Debt (One) LLC v Swig, 2010 NY Slip Op 32937[U] [Sup Ct, New York County 2010]. Noting the dirth of authority as to what constitutes "identifiable cash proceeds", Judge Fried drew upon authority from the Michigan Court of Appeals (Conagra, Inc. v Farmers State Bank, 237 Mich App 109, 127, 602 NW2d 390 [1999]) to conclude "proceeds are identifiable so long as there is a reasonable connection between the proceeds and the collateral secured by the security interest." Square Mile, 2010 NY Slip Op 32937[U] at *8. Drawing a distinction between cash held in escrow and similarly segregated funds held by a Marshall pursuant to a writ of execution against the debtor, in which no commingling occurred, and money that had been paid over to one of the competing secured creditors, the Court relied upon Uniform Commercial Code §9-332(a) to conclude that the transferee of the commingled funds had obtained a right superior to the earlier perfected secured interest holder. See also, Gladstein v Martorella, 75 AD3d 465, 467 [1st Dept 2010]. Section 9-332(a) provides: "A transferee of money takes the money free of a security interest unless the transferee acts in collusion with the debtor in violating the rights of the secured party." As discussed above, notwithstanding plaintiffs' conclusory allegations, there is no evidence that Empire colluded with Bernstein to violate plaintiffs' rights. Although plaintiffs were clearly deprived of their rights by Bernstein's actions, their only recourse, of which they have already availed themselves in the New York County action, is against Bernstein and B & B. Plaintiffs' fifth cause of action must, therefore, be dismissed.
Dersovitz's affidavit does not assert that there was any fraudulent conduct by Esquire with respect to the $325,507 check.
RD and RDLF's sixth cause of action for a constructive trust merely conclusorily alleges, without any supporting allegations, that they are entitled to a constructive trust over Esquire's property and assets. "The necessary elements for the imposition of a constructive trust are: (1) a confidential or fiduciary relationship; (2) a promise; (3) a transfer in reliance on that promise; and (4) unjust enrichment" (Maiorino v Galindo, 65 AD3d 525, 526 [2009]; see also Sharp v Kosmalski, 40 NY2d 119, 121 [1976]; Pereira v Glicker, 61 AD3d 948, 949 [2009]; Nastasi v Nastasi, 26 AD3d 32, 37 [2005]). Here, the complaint does not allege any confidential or fiduciary relationship, there was no unjust enrichment as Esquire only received the monies owed to it by B & B, and RD and RDLF have not alleged that any promise was made by Esquire. Thus, RD and RDLF have failed to adequately plead a cause of action to impose a constructive trust. Consequently, dismissal of this cause of action is warranted (see CPLR 3211 [a] [7], 3212 [b]).
Esquire has also sought to dismiss RD and RDLF's complaint, pursuant to CPLR 3211 (a) (5), alleging that their claim is, in essence, for conversion, and is, therefore, time-barred by the three-year Statute of Limitations of CPLR 214 since such claim accrued in 2006. RD and RDLF assert that they have not alleged a cause of action for conversion. However, as defendant argues, the gravamen of the complaint, which is based upon defendant's alleged wrongful withholding of the secured collateral in violation of plaintiff's priority secured interest, is conversion. See Provident Bank v Community Home Mortgage Corp., 498 F Supp 2d 558, 571 [EDNY 2007]; see also Bank of India v Weg & Meyers, 257 AD2d 183, 189 [1st Dept 1999] (diversion of collateral secured by UCC-1 filing in violation of secured party's superior rights is conversion); Sterling National Bank v Goldberg, 277 AD2d 45, 46 [1st Dept 2000]; Bankers Trust Co. v Cerrato, Sweeney, Cohn, Stahl & Vaccaro, 187 AD2d 384, 385 [1st Dept 1992]. An action for conversion is subject to a three-year limitation period pursuant to CPLR 214(3), running from the date of the conversion (Vigilant Ins. Co of America v Housing Authority of City of El Paso, 87 NY2d 36, 44-45 [1995]).
It is undisputed that the conversion or conveyance of money to defendant, for which plaintiffs now make claim, occurred on October 31, 2006. The plaintiffs fully acknowledge that they were aware of this transfer of funds to defendant very soon thereafter. The instant action was commenced on June 17, 2011, well over four years after accrual of their claim under UCC article nine. Thus, the fourth and fifth causes of action must be alternatively dismissed as barred by the statute of limitations. In light of the preceding analysis, it is unnecessary to address defendant's defense of laches.
CONCLUSION
Accordingly, Esquire's motion is granted insofar as it seeks dismissal of RD and RDLF's complaint pursuant to CPLR 3211 (a) (1) and (7), and RD and RDLF's cross motion for summary judgment in their favor is denied.
Upon a search of the record, Esquire is also entitled to summary judgment dismissing RD and RDLF's complaint pursuant to CPLR 3212 (b).
This constitutes the decision, order, and judgment of the court.
ENTER,
J. S. C.