All County Paving Corp. v Darren Constr., Inc., Index No. 34005/2012, 08/04/2015 (Emerson, J.)

Fraudulent conveyance law; DCL §273; DCL §276; Good will

By Michael Farinacci | Managing Editor

Plaintiff-creditor was unable to collect on a judgment entered years ago against the defendant’s former company. In the former company, defendant was the sole officer and shareholder. Defendant formed the new company because his prior company’s debt exceeded its income and was unable to continue business. Defendant started his new company with substantially the same name, changing it from Darren Construction Services to Darren Construction. Moreover, the company maintained the same location and phone number as the prior company.

Plaintiff sought to collect the judgment against defendant’s new company alleging that defendant fraudulently created the new company to avoid liability on the debt

The court found that although the defendant did not transfer any “hard” assets between the two companies, defendant did transfer the good will of his insolvent company to his new company. The principle elements of good will are the continuity of place, continuity of name, and reputation. Here, defendant maintained the same location and phone number, and defendant continued to be the sole shareholder.

Next, the court found that defendant violated New York’s fraudulent conveyance law (Debtor and Creditor Law §273 and §273–a) when he transferred the good will of his insolvent company to the new company without fair consideration. Under both §273 and §273-a, proof of intent to defraud is not required. “Constructive fraud may be shown when the debtor transfers assets without fair consideration and the debtor is or becomes insolvent or the debtor has a judgment docketed against him that he has failed to satisfy.” Moreover, transfers of an insolvent company are presumptively fraudulent.

The court, further, found that defendant made the transfer with actual intent to defraud in violation of DCL §276. Under §276, a creditor needs to show actual intent to defraud. However, due to the difficulty in proving actual intent, courts allow the creditor 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.” Examples of such circumstances are inadequacy of consideration, close relationship between transferor and transferee, and transferor’s knowledge of the creditor’s claim and inability to pay it. Here, defendant transferred the good will of his insolvent company to himself, doing so for the purpose of starting over to avoid paying the outstanding judgment.

Accordingly, the court granted summary judgment to the Plaintiff allowing him to collect the prior judgment against the defendant’s new company.

All County Paving Corp. v Darren Constr., Inc., Index No. 34005/2012, 08/04/2015 (Emerson, J.).




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