Putting the Poof! to Judgment-Proof

Judgment-proof. Just saying it leaves a bad taste in my mouth. Why litigate if you cannot collect the money you are owed?

It happens to every litigator – you win but feel somehow you lost because the Judgment looks like it may be uncollectable. But appearances can be deceptive and there is more than one way to skin a cat. Many debtors are hoping you will just keep that Judgment in your file, move on, and leave them alone. Don’t do it!

When a Judgment debtor appears to be Judgment-proof, all is not necessarily lost. Our focus in such cases shifts to evaluating potential post-Judgment litigation against other parties; in particular, parties who may have received fraudulent conveyances/transfers of property.

A key issue under the New York Debtor and Creditor Law is whether the Judgment debtor transferred assets without “fair consideration” (reasonably equivalent value). This happens more often than many would think. But the lack of fair consideration can be hard to see, especially when it involves family members, corporate insiders, or affiliated parties. There even are sham private mortgages, recorded to make real property appear to have no equity. Debtors can be ingeniously devious! That’s why it is critical for creditor’s counsel to dig into the facts to evaluate possible fraudulent activity by debtors.

Fraudulent transfers can be challenged under New York statutory law, known as Article 10 of the Debtor and Creditor Law. It has a long antecedent, a British law from 1571 known as the Statute of Elizabeth. In fact, the well-known phrase in fraudulent conveyance law – transfers made “with actual intent to hinder, delay and defraud creditors” – is taken verbatim from this ancient statute. Fortunately, fraudulent transfer law has been broadened and strengthened in modern times. We now have the Uniform Fraudulent Conveyance Act, in force in New York since 1925, and the Uniform Fraudulent Transfer Act, which has been enacted in nearly all other states.

Judgment creditors need to know about fraudulent transfer law. It can turn a loser into a winner. We recently won a victory in an important fraudulent conveyance case in the Appellate Division, Second Department, Battlefield Freedom v. Song Yan Zhuo, 2017 NY Slip Op 02011, __ AD3d ___, (March 22, 2017). We represented a Judgment creditor from Virginia whose Judgment debtor co-owned a valuable apartment building in Flushing. When his Virginia business went bad, the debtor conveyed his interest to his co-owners, relatives by marriage. He received nothing of value in return. We domesticated the Judgment and then filed a fraudulent conveyance action. Initially, the results were not good. Summary judgment was denied and, after a trial before a Special Referee, our claims were dismissed. But we were persistent and pressed on. Our motion to disaffirm the Referee’s report was granted by Justice Leonard Livote, Supreme Court, Queens County, and our Judgment setting aside the deed was unanimously affirmed by the Appellate Division.

And we accomplished more than just winning a case for our client. The Appellate Division’s ruling clarified an important principle that has been rarely discussed in state court decisions. The burden of proof normally is on a plaintiff to prove each element of his fraudulent conveyance claim. However, when a claim is filed under Debtor and Creditor Law 273 (Conveyances By An Insolvent), once it is proved the debtor transferred property without fair consideration, the burden shifts to the transferee to prove the transferor was solvent when the transfer occurred. Since hard evidence about a debtor’s financial condition can be hard to come by – debtors (like ours in this case) can be like ghosts! – this makes success in fraudulent transfer litigation much more likely.

We offer lawyers a unique service – a no-risk, confidential, and free evaluation of any open money Judgment you feel may be collectible. You may submit Judgments for review by simply clicking the link in this newsletter. Or you may send it to us by email (judgments@dorazio-law.com), FAX (212-608-5398), or USPS mail to Bernard D’Orazio & Associates, P.C., 238 W 139th St New York, NY 10030. We usually will have a response to you within one week.