Pryor v. Morra

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NEW YORK
-------------------------------------------------------------x
In re
Chapter 7
SELENA J. MORRA,
Case No. 04-81042-CEC
Debtor.
------------------------------------------------------------x
ROBERT L. PRYOR, as Chapter 7 Trustee of
the Bankruptcy Estate of Selena J. Morra,
Plaintiff,
-against- Adv. Pro. No. 06-8099-CEC
FIDELITY INVESTMENTS INSTITUTIONAL
SERVICES CO., INC. and SELENA MORRA,
Defendants.
------------------------------------------------------------x
DECISION
APPEARANCES:
Robert L. Pryor, Esq.
Pryor & Mandelup, LLP
675 Old Country Road
Westbury, NY 11590
Attorneys for the Chapter 7 Trustee
Vincent Cuocci, Esq.
Feinsilver & Cuocci, LLC
One Old Country Road, Suite 125
Carle Place, NY 11514
Attorneys for Debtor
CARLA E. CRAIG
Chief United States Bankruptcy Judge
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This matter comes before the Court on the motion of Robert L. Pryor (the "Trustee"), the
chapter 7 trustee of the estate of Selena J. Morra (the "Debtor"), for summary judgment in this
adversary proceeding, seeking to avoid contributions made by the Debtor to a 401(k) plan during
the four years prior to the commencement of this bankruptcy case, based on the theory that these
contributions constituted constructive fraudulent conveyances pursuant to New York Debtor &
Creditor Law ("DCL") § 273. Also before the Court is the Debtor's cross-motion for summary
judgment. For the following reasons, both motions are denied.
Jurisdiction
This Court has jurisdiction of this core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A),
(E), and (H) and 1334, and the Eastern District of New York standing order of reference dated
August 28, 1986. This decision constitutes the Court's findings of fact and conclusion of law to
the extent required by Federal Rule of Bankruptcy Procedure 7052.
Background
The following facts are undisputed, or are matters of which judicial notice may be taken.
On February 23, 2004, the Debtor filed a voluntary petition under chapter 7 of the
Bankruptcy Code. On Schedule B, the Debtor listed an interest in a "pension" valued at $3,000
as an asset, and on Schedule C, claimed that asset as exempt pursuant to DCL § 282(iii)(2)(e).
On Schedule F, the Debtor listed unsecured debt totaling $33,196, consisting of student loans and
credit card debt.
At the first meeting of creditors pursuant to § 341 of the Bankruptcy Code, the Debtor
testified that the value of the "pension" was $23,000. From the Debtor's testimony, the Trustee
learned that, during the four years before filing for bankruptcy protection, the Debtor made 48
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monthly contributions of $446.00 each (the "Contributions") to a 401(k) plan established by
Verizon, the Debtor's employer. Other than her interest in the 401(k) plan, the Debtor did not
own any assets of value at the time each of the Contributions were made. At the time the
Contributions were made, the Debtor was liable for student loan debt, and was also indebted to
Citibank.
On March 8, 2005, pursuant to § 727 of the Bankruptcy Code, the Debtor was granted a
discharge of her debts.
On February 23, 2006, the Trustee commenced this adversary proceeding to avoid the
Contributions made by the Debtor to her 401(k) plan. Invoking his authority under § 544 of the
Bankruptcy Code to set aside certain transfers avoidable under state fraudulent conveyance law,
the Trustee seeks to avoid the Contributions under a theory of constructive fraud pursuant to
DCL §§ 273 and 275, and under a theory of actual fraud pursuant to DCL § 276.1
Legal Standard
Summary judgment is appropriate when "the pleadings, the discovery and disclosure
materials on file, and any affidavits show that there is no genuine issue as to any material fact and
that the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). "When cross-
motions for summary judgment are pending, '[e]ach individual summary judgment motion must
be evaluated independently.'" Healey v. Thompson, 186 F. Supp. 2d 105, 113 (D. Conn. 2001),
aff'd in part, vacated in part on other grounds, Lutwin v. Thompson, 361 F.3d 146 (2d Cir.
On July 26, 2006, the Trustee dismissed the action against defendant Fidelity Investments Institutional
1
Services Co., Inc.
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2004). A court is not required to grant one party's motion because the other party's motion was
denied. Otis Elevator Co. v. Factory Mut. Ins. Co., 353 F. Supp. 2d 274, 279 (D. Conn. 2005).
When deciding a motion for summary judgment, the court's function is not to resolve
disputed issues of fact, but only to determine whether there is a genuine issue of material fact to
be tried. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986). A fact is considered
material if it "might affect the outcome of the suit under the governing law." Id. at 248. No
genuine issue exists "unless there is sufficient evidence favoring the nonmoving party for a jury
to return a verdict for that party. If the evidence is merely colorable, or is not significantly
probative, summary judgment may be granted." Id. at 249-50 (citations omitted). On the other
hand, if "there is any evidence in the record from any source from which a reasonable inference
could be drawn in favor of the nonmoving party, summary judgment is improper." Chambers v.
TRM Copy Ctrs. Corp., 43 F.3d 29, 37 (2d Cir. 1994). "The nonmoving party must show that
there is more than a metaphysical doubt regarding a material fact and may not rely solely on self-
serving conclusory statements." Rosenman & Colin LLP v. Jarrell (In re Jarrell), 251 B.R. 448,
450-51 (Bankr. S.D.N.Y. 2000) (citations omitted).
Here, both motions for summary judgment must be denied for the reasons set forth below.
Discussion
A. Trustee's Motion
The Trustee argues that he is entitled to summary judgment on the basis that the
Contributions were constructively fraudulent pursuant to DCL § 273. The Trustee also seeks to
recover the Contributions for the estate based on the argument that they are non-exempt under
New York Civil Practice Law and Rules ("CPLR") § 5205(c)(5).
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At the outset, the Trustee's arguments that the Contributions are non-exempt under CPLR
§ 5205(c)(5) must be rejected. This argument was addressed at length in this Court's decision in
the Debtor's bankruptcy case denying the Trustee's motion to disallow the Debtor's exemption in
the 401(k) plan. (Decision dated Sept. 5, 2008, Case No. 04-81042, Docket #55.) That ruling,
which applies to the instant motion, will not be repeated here at length, but may be summarized
as follows: CPLR § 5205(c)(5) limits the exemption of property pursuant to CPLR § 5205(c)(1)
and (2). Because the Debtor claimed her exemption in the 401(k) plan pursuant to DCL §
282(iii)(2)(e), which is an entirely separate statutory basis for exemption, CPLR § 5205(c)(5) has
no application to the instant avoidance action.
Notwithstanding the inapplicability of CPLR § 5205(c)(5), by virtue of § 544, which
permits the Trustee to seek avoidance of certain transfers recoverable under state law, the Trustee
may seek to set aside the Contributions pursuant to the DCL. Section 273 of the DCL provides
that "[e]very 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 fair consideration." N.Y. Debt. &
Cred. Law § 273. Section 270 of the DCL provides that the term '"[c]onveyance' includes every
payment of money, assignment, release, transfer, lease, mortgage or pledge of tangible or
intangible property, and also the creation of any lien or incumbrance." N.Y. Debt. & Cred. Law
§ 270.
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The Debtor argues that the Contributions do not constitute "conveyances" within the
meaning of DCL § 270 because they were not made to a third party. On its face, DCL § 2702
does not include a requirement that a transfer be made for the benefit of a third party in order to
constitute a conveyance. Furthermore, a number of courts have held that the conversion of
nonexempt assets to exempt assets, if made with intent to hinder, delay or defraud creditors, may
be avoided. See e.g., In re Orr, No. 07-81177, 2008 WL 244168, at *3 (Bankr. C.D. Ill. Jan. 28,
2008) ("A debtor's conversion of nonexempt assets to exempt assets may constitute a 'transfer'
under the Bankruptcy Code . . . [which] may be subject to avoidance and recovery on a
fraudulent transfer theory." (citations omitted)); Barber v. Dunbar (In re Dunbar), 313 B.R. 430,
438 (Bankr. C.D. Ill. 2004) (transfer of funds from debtors' savings account to 401(k) account is
a "transfer" within the meaning of § 548(a)(1) of the Bankruptcy Code). To conclude that
contributions by a debtor to a 401(k) plan are not "conveyances" within the meaning of DCL §
270, would shield such transfers from avoidance under all circumstances, even where actual
fraud is shown. Such an interpretation of "conveyance" is not supported by the terms of DCL §
270 and would be inconsistent with case law permitting avoidance of conversion of assets from
nonexempt form where actual fraudulent intent is shown. See Geron v. Schulman (In re Manshul
Const. Corp.), No. 96B44080, 2000 WL 1228866, at *43 n.7 (S.D.N.Y. August 30, 2000) ("[I]f a
transfer is fraudulent under the DCL, it is also fraudulent under Section 548 of the [Bankruptcy]
In fact, the Debtor's Contributions to the 401(k) plan do constitute a transfer to an entity separate from the
2
Debtor. In arguing that the Contributions do not constitute a transfer to a third party, the Debtor seems to be making
the point that, in exchange for the Contributions, she received an interest in the 401(k) plan, just as she would have if
she had transferred funds to a seller in exchange for an ownership interest in any other asset. This argument
therefore goes rather to the issue of fair consideration.
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Code."); In re Schwartz, 58 B.R. 923, 926 n.2 (Bankr. S.D.N.Y. 1986) (DCL §§ 273, 276 and
278 and § 548 are substantially similar).
The Trustee argues that he is entitled to summary judgment pursuant to DCL § 273
because the Contributions were not made in exchange for fair consideration. DCL § 272
provides in relevant part that fair consideration is given for property "[w]hen in exchange for
such property, or obligation, as a fair equivalent therefor, and in good faith, property is conveyed
or an antecedent debt is satisfied." N.Y. Debt. & Cred. Law § 272(a).
To succeed on his motion for summary judgment, therefore, the Trustee must show that
the Contributions were made for less than fair equivalent value or that they were not made in
good faith. See United States v. McCombs, 30 F.3d 310, 324 (2d Cir. 1994) (burden rests on
party challenging the conveyance); Lippe v. Bairnco Corp., 249 F. Supp. 2d 357, 376 (S.D.N.Y.
2003) (constructive fraud must be shown by a preponderance of the evidence); Gray v. Fill (In re
Fill), 82 B.R. 200, 216 (Bankr. S.D.N.Y. 1987) (fair consideration requires "an equivalent
exchange of value and good faith").
The Trustee relies on United States v. Evseroff, No. CV-00-6029, 2006 WL 2792750
(E.D.N.Y. Sept. 27, 2006), vacated and remanded, 270 Fed. Appx. 75 (2d Cir. 2008), in support
of his argument that the Contributions were not made in exchange for fair consideration. In that
case, to satisfy tax liability, the government sought to seize property held in a trust established by
the taxpayer for the benefit of his sons. Evseroff, 2006 WL 2792750, at * 1. Without an analysis
of DCL § 272, the Evseroff court stated that "there was no consideration for the transfer to the
[t]rust." Id. at *5. The court then went on to consider whether the taxpayer was insolvent at the
time the property was transferred to the trust.
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The facts in this case differ significantly from those presented in Evseroff. There, the
taxpayer transferred property to an irrevocable trust for the benefit of his children, and did not
retain a beneficial interest in the assets, or receive anything in return. Here, in return for the
Contributions, the Debtor received an interest in the 401(k) plan at least equal in value to the
Contributions.
The Trustee argues that the Debtor's interest in the 401(k) plan does not constitute fair
consideration because the Contributions were transfers made to a "separate juridical entity" (i.e.,
the 401(k) plan), and resulted in the removal of these assets from creditors' reach because the
Debtor's interest in the 401(k) plan is an exempt asset. However, the fact that assets have been
converted to exempt form, and thereby placed beyond the reach of creditors, does not
automatically result in the conclusion that a transfer was fraudulent. See Gill v. Stern (In re
Stern), 345 F.3d 1036, 1044 (9th Cir. 2003) (in the context of an avoidance action under
California law, stating that the conversion of non-exempt assets into exempt assets, without
more, is insufficient to establish fraud); Jensen v. Dietz (In re Sholdan), 217 F.3d 1006, 1010
(8th Cir. 2000) (in the context of an objection to a debtor's homestead exemption, stating that
"[i]t is well settled that the mere conversion of non-exempt assets to exempt assets is not in itself
fraudulent"); Bank of Pa. v. Adlman (In re Adlman), 541 F.2d 999, 1004 (2d Cir. 1976) (in the
context of an objection to discharge, stating that "the exchange by the bankrupt, on the eve of
bankruptcy, of non-exempt property for exempt property, is not itself a fraud on his creditors"
(citing Forsberg v. Sec. State Bank, 15 F.2d 499, 502 (8th Cir. 1926))); Gugino v. Orlando (In re
Ganier), 403 B.R. 79, 85 (Bankr. D. Idaho 2009) (in the context of an avoidance action, stating
that "[t]he prebankruptcy conversion of non-exempt assets to exempt assets is not per se
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fraudulent, but neither is it per se proper and insulated from scrutiny and possible avoidance"); In
re Keating, No. 05-CV-5921, 2006 WL 2690239 at *5 (E.D.N.Y. 2006) (denying the trustee's
objection to the exemption of an annuity contract, noting that "[u]tilizing available exemptions
and engaging in pre-bankruptcy planning, without more, is not indicative of actual intent to
defraud creditors"); In re Miller, 113 B.R. 98, 104-105 (Bankr. D. Mass. 1990) (in the context of
an objection to a homestead exemption, holding that "[t]he [d]ebtor's availing himself of an
exemption that state law makes available to him is not a fraudulent transfer [under Massachusetts
law]," and stating that "[a] debtor's conversion of non-exempt assets into exempt assets on the
eve of bankruptcy in order to shield the assets from creditors is not in itself fraudulent" under the
Bankruptcy Code).
Nor does the fact that a debtor has exchanged non-exempt for exempt assets lead to the
conclusion that the transfer was for less than fair consideration. This is so because "fair
consideration" is analyzed by scrutinizing what the debtor receives in exchange for the transfer.
As one court explained, analyzing "reasonably equivalent value" under § 548 of the Bankruptcy
Code:
It is from the DEBTORS' perspective, however, that the value
received must be viewed. The language of the statute is plain–the
transfer is not avoidable if the debtor received reasonably equivalent
value. The statute does not require that the net value of the debtor's
estate available for distribution to creditors remain the same. Under
a balance sheet analysis, the DEBTORS' net worth is the same post-
transfer as pre-transfer. The reasonable equivalence standard is
satisfied, notwithstanding the shift to an exempt asset.
Dunbar, 313 B.R. at 437 (footnote omitted). Accord, Butler v. Loomer (In re Loomer), 222 B.R.
618, 622-623 (Bankr. D. Neb. 1998) (finding that debtor received reasonably equivalent value in
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exchange for transfers to exempt retirement plan, by virtue of the resulting increase in the value
of his retirement account).
The facts and legal issues before the court in Dunbar parallel those presented here. There,
the chapter 7 trustee sought to recover as a constructively fraudulent conveyance the debtors'
transfer of funds from a non-exempt savings account to an exempt 401(k) plan approximately six
months before filing their bankruptcy case. The court rejected the argument that no transfer
occurred when the funds were paid from the savings account to the 401(k) plan, but found that
reasonably equivalent value had been given, noting that "the amount of the debit to the savings
account is equal to the amount of the credit to the 401(k) account." Dunbar, 313 B.R. at 437.
Although the Dunbar court analyzed § 548 of the Bankruptcy Code, the same analysis can
properly be applied to the meaning of "fair consideration" under DCL § 272. "Under DCL § 272,
'fair consideration' means a fair equivalent that the debtor receives in exchange for its property or
obligation." HBE Leasing Corp. v. Frank, 48 F.3d 623, 638 (2d Cir. 1995). Nothing in the
language of DCL § 272 requires the court to find that the value of the debtor's non-exempt assets
remains the same in order to conclude that the debtor has received a "fair equivalent" for the
transfer. As the Dunbar court noted:
To hold under the facts here, that constructive fraud has been proved,
would permit the trustee to recover every exempt asset converted
from a nonexempt asset by an insolvent debtor. That result would run
contrary to the firmly embedded and longstanding bankruptcy policy
that permits debtors to convert nonexempt property into exempt
property in order to maximize the exemptions to which they are
entitled.
Dunbar, 313 B.R. at 438.
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One fact emphasized by the Trustee, that in making the Contributions to her 401(k) plan,
the Debtor was transferring funds to a "separate juridical entity," is not relevant to this analysis.
A transfer of funds to a non-exempt money market or brokerage account, rather than to an
exempt 401(k) plan, also constitutes a transfer to a separate juridical (legal) entity – i.e., the
financial institution in which the account is held. The transferor receives in exchange an interest
in the account (or an obligation of the financial institution to pay), just as the Debtor received an
interest in the 401(k) plan in exchange for the Contributions. A transfer to a "separate juridical
entity" is not automatically a transfer for less than fair value; fair value depends on what is
received by the transferor in return.
In this case, the Debtor received, at a minimum, an interest in the 401(k) plan equal to the
amount of the Contributions. Thus, the Debtor received fair equivalent value in exchange for the
Contributions.
DCL § 272 defines "fair consideration" as an exchange of fair equivalent value given "in
good faith." N.Y. Debt. & Cred. Law § 272. Many courts have noted the difficulty of
determining the meaning of "good faith" for the purpose of New York's constructive fraudulent
conveyance law. "Good faith is an elusive concept in New York's constructive fraud statute. It is
hard to locate that concept in a statute in which 'the issue of intent is irrelevant.'" Sharp Int'l
Corp. v. State St. Bank & Trust Co. (In re Sharp Int'l Corp.), 403 F.3d 43, 54 (2d Cir. 2005)
(quoting United States v. McCombs, 30 F.3d 310, 326 n. 1 (2d Cir. 1994); see also McCombs, 30
F.3d at 326 n. 1("We are not entirely clear from the case law, however, just how the 'good faith'
requirement under section 272 operates in the context of a fraudulent conveyance claim under
section 273, a constructive fraud statute where the issue of intent is irrelevant."). One
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formulation of this standard is set forth in HBE Leasing: when "a transferee has given equivalent
value in exchange for the debtor's property, the statutory requirement of 'good faith' is satisfied if
the transferee acted without either actual or constructive knowledge of any fraudulent scheme."
HBE Leasing, 48 F.3d at 636.
It is unnecessary to consider at this juncture how good faith for the purposes of DCL §
272 would be analyzed in the context of this case, where the Debtor is both the maker and the
beneficial recipient (through her interest in the 401(k) plan) of the transfers at issue. The Trustee
has provided no evidence that the Contributions were either made or received in anything other
than good faith. Given that the Contributions were made for fair equivalent value, and that there
is no evidence of bad faith, it is not possible to conclude that the Contributions were not made for
fair consideration. The Trustee's motion for summary judgment must therefore be denied.
B. Debtor's Motion
The Debtor argues that she is entitled to summary judgment because she was solvent at
the time the Contributions were made, and because she received fair consideration in exchange
for the Contributions. The Debtor seeks summary judgment on all the claims asserted in the
complaint, including DCL §§ 273, 275, and 276.3
The Debtor asserts that she was solvent because "she was in fact paying her monthly
obligations as they came due with a fair degree of regularity," and that "[w]hile [she] may have
fallen behind on the monthly payments from time to time, overall she was properly servicing her
Section 275 of the DCL provides that "[e]very conveyance made and every obligation incurred without
3
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." N.Y.
Debt. & Cred. Law § 275. Section 276 of the DCL provides for the avoidance of "[e]very 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." N.Y. Debt. & Cred. Law § 276.
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debts and had a positive net worth." (Debtor's Opp'n ¶ 15.) The only evidence submitted in
support of this assertion is the Debtor's deposition testimony, which does not support the
conclusion that she "was in fact paying her monthly obligations as they became due with a fair
degree of regularity" or that "overall she was properly servicing her debts": she testified that she
was current on "maybe three or four" of her six debts that required monthly payments, and that
she fell behind on her payments within the year prior to filing for bankruptcy. (Trustee's Ex. D,
Debtor's Dep. Test. at 18-19, 21, 23.)
Nor does the record support the conclusion that the Debtor had a positive net worth. The
Debtor argues that her entire debt of $33,196 should not be taken into account when determining
liability, but only the amounts of her required monthly payments. This argument reflects a
misunderstanding of the applicable legal standard. Section 270 of the DCL provides that "'[d]ebt'
includes any legal liability, whether matured or unmatured, liquidated or unliquidated, absolute,
fixed or contingent." N.Y. Debt. & Cred. Law § 270. In determining whether a party is insolvent
under the DCL, the court must consider a debtor's probable liability on debts that have not yet
become due. Hirsch v. Gersten (In re Centennial Textiles, Inc.), 220 B.R. 165, 174 (Bankr.
S.D.N.Y. 1998) (long term debt is considered in evaluating insolvency under DCL § 271);
compare Allen Morris Commercial Real Estate Servs. Co. v. Numistatic Collectors Guild, Inc.,
No. 90 CIV. 264, 1993 WL 183771, at *8 (S.D.N.Y. May 27, 1993) ("The statute's reference to
'probable liability' includes contractual contingent liabilities such as guaranties and lease
obligations.").
The Debtor's argument that her assets, for these purposes, includes her "interest in
anticipated future income from a regular source," must also be rejected. (Debtor's Opp'n at ¶ 13.)
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Section 271 of the DCL provides that "[a] person is insolvent when the present fair salable value
of his assets is less than the amount that will be required to pay his probable liability on his
existing debts as they become absolute and matured." N.Y. Debt. & Cred. Law § 271(1). The
prospect of earning future income cannot be considered an asset having "salable value," at least
where the debtor is an employee at will, subject to termination or layoff with or without cause.
In short, the Debtor has submitted no evidence that, at the time any of the Contributions
were made, she was solvent within the meaning of DCL § 270. Having failed to show that there
is no genuine issue of material fact on this issue, the Debtor is not entitled to summary judgment
on the Trustee's constructive fraud claim under DCL § 273.
However, the principal issue in this adversary proceeding is not the Debtor's solvency at
the time she made the Contributions, but whether the Debtor made the Contributions in good
faith. Given that the Debtor received fair equivalent value in exchange for the Contributions, if
the Contributions were made in good faith, the Trustee's claims under DCL §§ 273 and 275 fail,4
regardless of the Debtor's solvency, because fair consideration was received in exchange for the
Contributions.
Moreover, any determination that the Debtor made the Contributions in good faith would
also defeat the Trustee's claim of actual fraud pursuant to DCL § 276, which provides for the
avoidance of "[e]very conveyance made and every obligation incurred with actual intent, as
Although courts generally examine the good faith of the transferee when deciding constructive fraud
4
claims, HBE Leasing, 48 F.3d at 636, since the Debtor in this case is both the transferor and the beneficial owner of
the transferee, (i.e., her interest in the 401(k) plan), a determination that the Contributions were made in good faith
would also constitute a determination that they were received in good faith.
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distinguished from intent presumed in law, to hinder, delay, or defraud either present or future
creditors." N.Y. Debt. & Cred. Law § 276.
By the same token, if the Trustee establishes that the Debtor made the Contributions with
actual intent to hinder, delay or defraud creditors, the Debtor's solvency is irrelevant, and the
Contributions are avoidable pursuant to DCL § 276.
As the record is silent with respect to the Debtor's good faith, or lack thereof, in making
the Contributions, the Debtor's motion for summary judgment must be denied.
Conclusion
For the foregoing reasons, the Trustee's motion for summary judgment and the Debtor's
motion for summary judgment are denied, and the issue of the Debtor's good faith in making the
Contributions will be set down for a hearing. A separate order will issue.
Dated: Brooklyn, New York
July 21, 2009
/s/Carla E. Craig
CARLA E. CRAIG
Chief United States Bankruptcy Judge
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