Opinion
No. 27708–08.
2009-05-26
The TOWN OF SOUTHAMPTON, Petitioner, v. Anthony CHIODI and ADC Contracting And Construction, Inc., Respondents.
Devitt Spellman Barrett, LLP, Smithtown, Attorneys for Petitioner. Kushnick & Associates, P.C., Attorneys for Respondents.
Devitt Spellman Barrett, LLP, Smithtown, Attorneys for Petitioner. Kushnick & Associates, P.C., Attorneys for Respondents.
ELIZABETH H. EMERSON, J.
Upon the following papers numbered 1 24 read on this petition for turn-over and motion to amend petition; Notice of Petition and supporting papers 1–7; Notice of Motion and supporting papers 14–23; Answering Affidavits and supporting papers 8–12, 24; Replying Affidavits and supporting papers 13; it is,
ORDERED that the petition pursuant to CPLR 5225, inter alia, for an order directing the respondents to turn over sums received in settlement from the City of New York is denied, and the proceeding is dismissed; and it is further
ORDERED that the motion by the petitioner for leave to amend the petition is denied.
By a judgment dated February 27, 2006, the petitioner was awarded $220,607 against the respondent ADC Contracting and Construction, Inc. (hereinafter “ADC”). The judgment, which was affirmed on appeal, remains unsatisfied. In January 2007, the petitioner served a restraining notice on the City of New York to prevent the payment of so much of a settlement between the City of New York and ADC as would satisfy the judgment. By an order of this court dated June 12, 2007, the restraining notice was vacated. The restrained sums were subsequently released and, according to the petitioner, wrongfully transferred to the respondent Anthony Chiodi, ADC's president and sole shareholder. The petitioner commenced this proceeding pursuant to CPLR 5225 for an order directing Chiodi and ADC to turn over the settlement funds up to the amount of the judgment. The petitioner also seeks a judgment against Chiodi personally in the amount of $220,607 and moves to amend the petition to add Roseanne Chiodi, Anthony Chiodi's wife, as a respondent.
It is undisputed that the funds in question were paid to ADC's sureties to settle lawsuits brought by the sureties to recover sums paid by them on performance and payment bonds issued to ADC. The petitioner contends that ADC was insolvent when the settlement funds were paid out in 2007 and that it remains insolvent. The petitioner further contends that Chiodi and his wife were personally liable to ADC's sureties as guarantors. Thus, the petitioner contends that the transfer of funds to ADC's sureties was a fraudulent transfer because the Chiodis benefitted personally therefrom.
CPLR 5225 contains the device used by a judgment creditor or garnishee when it can be established that a judgment debtor is in possession of money or property subject to application to the judgment. The primary burden on the judgment creditor is one of proof. The court will not direct the judgment debtor to pay over money unless it has been clearly established that the judgment debtor has money to pay over ( see, Siegel, Practice Commentaries, McKinney's Cons Laws of NY, Book 7B, CPLR C5225:1). In view of the fact that the petitioner contends that ADC is insolvent, the court finds that the petitioner has failed to establish that ADC has money to pay over to the petitioner.
A judgment creditor can make use of the special proceeding offered by CPLR 5225(b), not only against a garnishee, but against a transferee as well. This express authorization to use CPLR 5225(b) against transferees means that it may be the means to set aside fraudulent transfers made by the judgment debtor to defraud creditors ( see, Siegel, Practice Commentaries, McKinney's Cons Laws of NY, Book 7B, CPLR C5225:7).
New York's fraudulent transfer law permits the recovery of transfers that unfairly diminish a debtor's estate (In re Trace International Holdings, Inc. v. Dow Chemical Co., 301 BR 801, 805). To set aside a transfer as fraudulent under Debtor and Creditor Law § 273 or 273—a no proof of an intent to defraud is required. Constructive fraud may be shown when the debtor transfers assets without fair consideration and the debtor is or becomes insolvent (Debtor and Creditor Law § 273; Matter of ECAC of NY, Inc. v. Capri 400, Inc., 49 AD3d 1006, 1007) or the debtor has a judgment docketed against him that he has failed to satisfy (Debtor and Creditor Law § 273–a; Dempster v. Overview Equities, 4 AD3d 495, 497). Transfers to controlling shareholders, officers, or directors of an insolvent corporation are deemed to be lacking in good faith and are presumptively fraudulent (Matter of CIT Group/Commercial Servs. Inc. v. 160–09 Jamaica Ave. Ltd. Partnership, 25 AD3d 301, 303;see also, American Panel Tec v. Hyrise, Inc., 31 A.D.2d 586, 587). However, putting aside transfers to insiders, the payment of an existing liability is not fraudulent. Past consideration is good consideration, and an antecedent debt satisfies the requirement of fair consideration. ( In re Trace International Holdings, Inc. v. Dow Chemical Co., supra at 805; see also,Debtor and Creditor Law § 272; Ultramar Energy Ltd. v. Chase Manhattan Bank, N.A., 191 A.D.2d 86, 91).
Here, the allegedly fraudulent transfer consisted of the transfer of corporate funds to third-party sureties of the corporation to satisfy antecedent corporate obligations. Contrary to the petitioner's contentions, Anthony Chiodi did not transfer the funds in question to himself or to his wife. Although Chiodi and his wife were secondarily liable to ADC's sureties as guarantors, ADC was primarily liable. The court finds that, under these circumstances, the petitioner has failed to establish constructive fraud.
To set aside a transfer as fraudulent under Debtor Creditor Law § 276 a creditor needs to show actual intent to defraud on the part of the transferor. When actual intent to hinder, delay, or defraud creditors is proven, proof of unfair consideration or insolvency is not required (Wall Street Assocs. v. Grodsky, 257 A.D.2d 526, 529;Miller v. Miller 276 A.D.2d 758;In re Sharp Intl. Corp. v. State Street Bank & Trust Co., 403 F3d 43, 56 (2nd Cir] ). Due to the difficulty of proving actual intent, the pleader is allowed to rely on so-called badges of fraud to support his case, i.e. circumstances so commonly associated with fraudulent transfers that their presence give rise to an inference of intent. Among such circumstances are: a close relationship between the parties to the alleged fraudulent transaction, a questionable transfer not in the usual course of business, inadequacy of the consideration, the transferor's knowledge of the creditor's claim and the inability to pay it, and the retention of control of the property by the transferor after the conveyance ( Wall Street Assocs. v. Grodsky, supra at 529; see also, Dempster v. Overview Equities, supra at 498). Other factors include secrecy, haste, or unusualness of the transaction ( In re Sharp Intl. Corp. v. State Street Bank & Trust Co., supra at 56, citing HBE Leasing Corp. v. Frank, 48 F3d 623, 639) and the timing of the transfer ( Matter of CIT Group/Commercial Servs. Inc. v. 160–09 Jamaica Ave. Ltd. Partnership, supra at 303). Of course, the flip side of these badges of fraud is that their absence constitutes evidence that there was no intent to defraud (Lippe v. Bairnco Corp., 249 F Supp 2d 357, 375 [SDNY], affd99 Fed Appx 274).
Here, the allegedly fraudulent transfer was to third-parties, unrelated to ADC or the Chiodis, to satisfy antecedent corporate obligations. An antecedent debt is considered valuable consideration under contract law ( In re Trace International Holdings, Inc. v. Dow Chemical Co., supra at 806, n 6). There is no evidence in the record that the transfer was other than in the ordinary course of ADC's business or that the Chiodis retained control over the funds after their conveyance. Moreover, the transfer is not subject to attack even if the third-party sureties knew that the transfer would result in the petitioner not getting paid. A debtor may properly assign assets to a creditor as security for an antecedent debt although the effect of the transfer will be to prefer that creditor ( Ultramar Energy Ltd. v. Chase Manhattan Bank, N.A., supra at 91). It is not unfair, and therefore not a fraudulent conveyance, for the debtor to select arbitrarily the creditors whom it chooses to pay ( Id. at 91). To be sure, the payment of an antecedent debt, or a preference, reduces the assets available to other creditors. Nevertheless, a I preferential transfer does not constitute a fraudulent conveyance. To hold otherwise would allow a single creditor, acting in his own interest, to set aside a preferential transfer and substitute himself as the party preferred ( In re Trace International Holdings, Inc. v. Dow Chemical Co., supra at 805–806). The court finds that the payments in question were, at most, a preference between creditors and that they did not hinder, delay, or defraud either present or future creditors of ADC ( see, In re Sharp Intl. Corp. v. State Street Bank & Trust Co., supra at 56). The fact that the Chiodis were secondarily liable for the same debt does not, without more, transform the conveyance from a preferential to a fraudulent transfer. Accordingly, both the petition and the motion are denied.