Case Title: Commodity Futures Trading Commission v. Walsh, et al.

Citation: 

Docket Number: 

State: new-york

Court: New York Appellate Court

Date: 2011-06-23T00:00:00Z

Document:
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This opinion is uncorrected and subject to revision before
publication in the New York Reports.
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No. 91  
Commodity Futures Trading 
Commission,    
            Respondent,
        v.
Stephen Walsh, et al.,
            Defendants,
Janet Walsh,
            Appellant.
--------------------------------
Securities and Exchange 
Commission,
            Respondent,
        v.
WG Trading Investors, L.P., et 
al.,
            Defendants,
Robin Greenwood,
            Relief Defendant,
Janet Walsh,
            Appellant.
Steven L. Kessler, for appellant.
Allan A. Capute, for respondent Securities and Exchange
Commission.
Nancy R. Doyle, for respondent Commodity Futures
Trading Commission.
Elliott Scheinberg et al., amici curiae.
GRAFFEO, J.:
Stephen Walsh is a defendant in related actions brought
by plaintiffs Commodity Futures Trading Commission and Securities
and Exchange Commission (the Agencies) alleging violations of the
anti-fraud provisions of the Commodity Exchange Act and the
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No. 91
Securities Exchange Act.  The Agencies claim that between 1996
and 2009, Walsh and his codefendant, Paul Greenwood,
misappropriated more than $550 million from funds they managed
for various public and private institutional investors.1
The Agencies also pursued disgorgement efforts against
Janet Schaberg, the former spouse of Walsh, seeking to recover
any proceeds she held of the fraud perpetuated by Walsh. 
Although there is no indication that she was aware of or
participated in any wrongdoing related to her ex-husband's
fraudulent scheme, the Agencies allege that a sizable amount of
property derived from Walsh's illegal securities activities went
into Schaberg's possession under the parties' separation
agreement and divorce decree.
The United States Court of Appeals for the Second
Circuit asks us two questions to assist it in discerning whether
Schaberg has a legitimate claim to those funds, which would
prevent the Agencies from obtaining disgorgement from her.  These
questions involve the interplay of the Domestic Relations Law and
the Debtor and Creditor Law and implicate significant public
policy considerations.
Background
Walsh and Schaberg were married in 1982 and have two
children.  Over the course of their 25-year marriage, Walsh was a
1  Greenwood pleaded guilty to securities fraud charges in
2010.  Walsh's criminal prosecution remains pending.
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No. 91
substantial shareholder in or a management partner of a number of
successful business enterprises, such as Champion Sportswear and
Tanger Malls/Prime Outlets.  As a couple, they acquired a number
of homes, including condominiums in Florida and New York City,
and a house in Port Washington, New York.  Schaberg did not have
outside employment during the marriage, but she volunteered at a
number of charitable organizations.
In 2004, Schaberg and Walsh separated and divorce
proceedings were initiated in early 2005.  They entered into a
"Stipulation of Settlement and Agreement" in November 2006
pursuant to Domestic Relations Law § 236 (B) (3).  Under the
terms of the agreement, Schaberg conveyed her ownership interest
in the Port Washington marital residence (with an alleged value
of about $7.5 million) to Walsh and she received sole ownership
of the condominiums in New York City and Florida (with an alleged
value of approximately $6.7 million).  The agreement also
provided that Schaberg would retain nearly $5 million held in
several checking accounts and Walsh waived all claims to such
monies.  Walsh further agreed to pay Schaberg a distributive
award of $12.5 million, payable in biannual installment payments
through 2020.2  As part of the settlement, Schaberg further
waived any claim for maintenance based on the parties' lengthy
2  Schaberg had received $3 million in installment payments
when Walsh ceased making the payments in 2009 as a result of a
restraining order imposed on his assets.
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No. 91
marriage and, except as otherwise provided in the agreement,
relinquished her right "to a distributive award or an award of
equitable distribution with respect to any property acquired by
[Walsh] either before or during the marriage."  In April 2007,
the settlement agreement was incorporated, but not merged, into
the parties' final judgment of divorce.  Schaberg moved to
Florida in 2007 and remarried a year later.
Nearly two years after entry of the judgment of
divorce, the Agencies filed separate complaints in the United
States District Court for the Southern District of New York
alleging large-scale fraud by Walsh, Greenwood and various
investment entities they controlled.  Both complaints sought
monetary penalties from the named defendants and disgorgement of
ill-gotten gains from the defendants and relief defendants alike. 
Schaberg was named as a relief defendant, along with other
parties believed to be in possession of proceeds from the
fraudulent securities scheme.
The District Court granted the Agencies' requests for
preliminary injunctions freezing six of Schaberg's brokerage and
bank accounts containing approximately $7.6 million.  The court
also prohibited Schaberg from transferring any real property,
jewelry or artwork without court approval, thereby effectively
freezing the bulk of her assets.  Schaberg appealed, arguing that
the District Court erred in issuing the injunctions because the
property targeted by the injunctions was not subject to
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No. 91
disgorgement.
The Second Circuit recognized that federal district
courts have the power to order disgorgement from a relief
defendant upon a finding that the party "(1) is in possession of
ill-gotten funds and (2) lacks a legitimate claim to those funds"
(618 F3d 218, 225 [2d Cir 2010]).  In this case, the Second
Circuit has determined that the question as to whether the
injunctions were properly issued turns on whether the District
Court correctly found, as a matter of law, that Schaberg lacked a
legitimate claim to the funds.3  Acknowledging Schaberg's
assertion that she has a valid claim to the funds because "she
acquired her assets pursuant to the separation agreement she
executed with Walsh in their divorce proceedings, and that by
executing this agreement she became a good faith purchaser for
value of the assets" (id. at 226), the Court held that resolution
of Schaberg's contention implicated open issues of New York law. 
The Second Circuit therefore certified the following two
questions to us:
"(1) Does 'marital property' within the
meaning of New York Domestic Relations Law  
§ 236 include the proceeds of fraud?
"(2) Does a spouse pay 'fair consideration'
according to the terms of New York Debtor and
3  The Second Circuit reserved judgment as to whether, under
the first prong of the test, "some of her assets were purchased
with funds that are not alleged to be the proceeds of fraud, and
thereby would not be subject to disgorgement" (618 F3d at 226   
n 4).
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Creditor Law § 272 when she relinquishes in
good faith a claim to the proceeds of fraud?"
(id. at 231-232).
The Second Circuit also invited this Court to "reformulate these
questions as it sees fit, or expand them to address any other
issues of New York law pertinent to these appeals" (id. at 232).
Marital Property
Schaberg asserts that she validly acquired certain
assets pursuant to the settlement agreement, and that by entering
into this agreement she became a good faith purchaser for value
of the distributed property.  The Agencies respond that monies
derived from the securities fraud were not part of the marital
estate in the first instance and, consequently, cannot be
retained or transferred through equitable distribution of marital
assets under Domestic Relations Law § 236.  The parties' legal
arguments raise difficult policy questions, requiring us to weigh
the competing interests of the original owners of funds stolen in
a fraudulent scheme against the innocent former spouse of the
defrauder.
We begin with the language and purpose of Domestic
Relations Law § 236, which codifies New York's Equitable
Distribution Law.  Under the terms of the statute, section 236
"contemplates only two classes of property: marital property and
separate property" (O'Brien v O'Brien, 66 NY2d 576, 583 [1985]). 
Marital property is defined as "all property acquired by either
or both spouses during the marriage and before the execution of a
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No. 91
separation agreement or the commencement of a matrimonial action,
regardless of the form in which title is held" (Domestic
Relations Law § 236 [B] [1] [c]]), and this broad definition
"includes a wide range of tangible and intangible interests"
(Fields v Fields, 15 NY3d 158, 162 [2010], rearg denied 15 NY3d
819 [2010] [internal quotation marks and citation omitted]). 
Separate property, in contrast, is narrowly limited to four
discrete categories, none of which are applicable to this case.4
Domestic Relations Law § 236 requires that a trial
court equitably distribute marital property between the parties
upon the dissolution of the marriage, while separate property
remains with the original spousal owner (see Domestic Relations
Law § 236 [B] [5]).  In making its distributive determination,
the court is to consider a variety of statutory factors,
including the duration of the marriage, the age and health of the
4  Specifically, separate property means:
"(1) property acquired before marriage or
property acquired by bequest, devise, or
descent, or gift from a party other than the
spouse;
"(2) compensation for personal injuries;
"(3) property acquired in exchange for or the
increase in value of separate property,
except to the extent that such appreciation
is due in part to the contributions or
efforts of the other spouse;
"(4) property described as separate property
by written agreement of the parties pursuant
to subdivision three of this part" (Domestic
Relations Law § 236 [B] [1] [d]).
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No. 91
parties, the income of each party, the extent of any maintenance
award, the probable future financial circumstances of each party,
and the nontitled spouse's direct or indirect contributions to
the marriage, including "services as a spouse, parent, wage
earner and homemaker" (Domestic Relations Law § 236 [B] [5] [d]). 
New York's Equitable Distribution Law also permits the parties --
as happened here -- to contract out of the elaborate statutory
scheme and instead agree to a division or distribution of
property, provided financial disclosure and the statutory
requirements for a valid separation agreement are satisfied
(see Domestic Relations Law § 236 [B] [3]).
The Legislature adopted the Equitable Distribution Law
in 1980 to replace the existing system of distribution, which had
depended, in large measure, on the traditional common-law title
theory of property.  In recognition that marriage represents "an
economic partnership to which both parties contribute as spouse,
parent, wage earner or homemaker," the Equitable Distribution Law
was designed on "an entirely new theory which considered all the
circumstances of the case and of the respective parties to the
marriage" (O'Brien, 66 NY2d at 585).  The comprehensive regime
"reflects an awareness that the economic
success of the partnership depends not only
upon the respective financial contributions
of the partners, but also on a wide range of
nonremunerated services to the joint
enterprise, such as homemaking, raising
children and providing the emotional and
moral support necessary to sustain the other
spouse in coping with the vicissitudes of
life outside the home" (Price v Price, 69
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No. 91
NY2d 8, 14 [1986] [internal quotation marks
and citation omitted]).
Consistent with this purpose, and implicit in the statutory
framework as a whole, is the concept that "upon dissolution of
the marriage there should be a winding up of the parties'
economic affairs and a severance of their economic ties by an
equitable distribution of the marital assets" (O'Brien, 66 NY2d
at 585).
Against this legislative backdrop, we must decide
whether the dictates of Domestic Relations Law § 236 and the
purposes of equitable distribution permit the transfer of marital
assets to a recipient spouse who is unaware that some or all of
those assets were illegally acquired by the other spouse.  The
statute expansively defines marital property to encompass "all
property acquired" by either spouse during the course of the
marriage and there is a presumption that "all property, unless
clearly separate, is deemed marital property" (Fields, 15 NY3d at
163 [internal quotation marks and citation omitted]). 
Furthermore, the term "acquired" does not require that property
be segregated by its methods of acquisition; it merely means that
a person gains possession (see Black's Law Dictionary 26 [9th ed
2009]).  Given that we have repeatedly held that the scope of
marital property is to be "construed broadly" (see e.g. Mesholam
v Mesholam, 11 NY3d 24, 28 [2008] [internal quotation marks and
citation omitted]), we conclude that the proceeds of fraud can
constitute marital property as defined in Domestic Relations Law
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No. 91
§ 236 and answer the first certified question in the affirmative. 
It is therefore possible under the Domestic Relations Law to
transfer assets derived from fraud to an innocent and unknowing
spouse in a divorce proceeding.
Nevertheless, the Agencies argue that, putting aside
the language of Domestic Relations Law § 236 and focusing on
public policy considerations favoring the return of stolen
property to its rightful owner, we should carve out an exception
to the broad definition of marital property for the proceeds of
fraud.  They suggest that where, as here, it is alleged that the
property transferred in a divorce proceeding was itself derived
from stolen funds, a court should not reach the issue of fair
consideration (the topic of the Second Circuit's second certified
question) because it is simply irrelevant whether fair
consideration was given.  In their view, the original owner -- a
victim of embezzlement and not a mere creditor -- should have an
absolute right to seek disgorgement of the previously distributed
property from the transferee-spouse.  Although these contentions
have appeal, we are unable to agree.
It has long been the law of this State that "money
obtained by fraud or felony cannot be followed by the true owner
into the hands of one who has received it bona fide and for a
valuable consideration in due course of business" (Stephens v
Board of Educ. of Brooklyn, 79 NY 183, 186 [1879]).  This
principle is premised on the recognition that, in contrast to
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No. 91
chattels, "money has no earmark" and "cannot be identified"
(Hatch v Fourth Natl. Bank of City of N.Y., 147 NY 184, 192
[1895]).5  At its core, our rule favoring innocent transferees of
stolen funds over defrauded owners is rooted in New York's
"concern for finality in business transactions" (Banque Worms v
BankAmerica Intl., 77 NY2d 362, 372 [1991]).  We have explained
that "to permit in every case of the payment of a debt an inquiry
as to the source from which the debtor derived the money, and a
recovery if shown to have been dishonestly acquired, would
disorganize all business operations and entail an amount of risk
and uncertainty which no enterprise could bear" (id. [internal
quotation marks and citation omitted]).
Similar concerns are relevant in the matrimonial realm. 
Ex-spouses have a reasonable expectation that, once their
marriage has been dissolved and their property divided, they will
be free to move on with their lives.  To hold that the proceeds
of fraud acquired by one spouse unbeknownst to the other cannot
be subject to equitable distribution or conveyed through a
settlement agreement as marital property would undermine one of
the fundamental policies underlying the equitable distribution
process, namely finality.  The exception proposed by the Agencies
would effectively undo court orders and settlement agreements for
5  By comparison, an owner may seek recovery of identifiable
stolen property, such as a piece of artwork, from an innocent
good faith purchaser for value (see Solomon R. Guggenheim Found.
v Lubell, 77 NY2d 311, 317 [1991]).
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No. 91
an indeterminate time after the "winding up of the parties'
economic affairs" (O'Brien, 66 NY2d at 585), and "subvert the
policy of upholding settled domestic relations . . . in divorce
cases" (Rainbow v Swisher, 72 NY2d 106, 111 [1988]; see
also Boronow v Boronow, 71 NY2d 284, 290-291 [1988]).
Moreover, as a practical matter, where the innocent
spouse and matrimonial court are unaware of the tainted nature of
particular assets, distribution of marital assets under Domestic
Relations Law § 236 (or pursuant to an opt-out settlement
agreement) would become unworkable, particularly where the
illegal activity of one spouse is not revealed for a number years
subsequent to the divorce, as occurred in this case.6 
Analogizing to the rule articulated in Stephens and Hatch in the
business setting, we conclude that monies obtained by fraud
cannot be followed by the original owner into the hands of an
innocent former spouse who now holds them (or assets derived from
them) as a result of a divorce proceeding where that spouse in
good faith and without knowledge of the fraud gave fair
consideration for the transferred property.  That being said,
whether Schaberg acted in good faith and paid fair consideration
6  Of course, an entirely different situation is presented
if it is known that both spouses participated in or were aware of
the fraud or illegal conduct.  In such cases, courts have held
that it would be contrary to public policy to encourage "illegal
activity by making an equitable distribution of the fruits of a
criminal enterprise" (LaPaglia v LaPaglia, 134 Misc 2d 1030, 1032
[Sup Ct, Kings County 1987]).
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No. 91
for the tainted property that came into her possession pursuant
to the settlement agreement is another matter and is at the heart
of the Second Circuit's second question, to which we now turn.
Fair Consideration
Schaberg contends that the District Court erred in
holding, as a matter of law, that she lacked a legitimate claim
to the frozen funds.  She argues that she provided fair
consideration in exchange for the allegedly fraudulent proceeds
and thereby became a good faith purchaser for value through her
execution of an arms-length separation agreement.  She also
claims that there is no evidence that she had knowledge of her
ex-husband's illegal conduct, particularly since he had a history
of being a successful entrepreneur and securities trader, nor did
she engage in collusion in the divorce proceeding to deprive the
defrauded parties recovery of their investments.  The Agencies
counter that, as a matter of law, Schaberg could not have given
fair consideration because, in exchange for acquiring assets that
were later determined to be derived from fraud, she only gave up
a claim to a larger portion of the marital estate, which also
consisted of Walsh's proceeds of fraud and, as such, her
consideration was illusory.  Again, both parties raise compelling
arguments.
Debtor and Creditor Law § 278 provides that a creditor
whose claim has matured may have a fraudulent conveyance set
aside "against any person" other than a good faith purchaser for
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No. 91
value, defined as "a purchaser for fair consideration without
knowledge of the fraud" (Debtor and Creditor Law § 278 [1]). 
Fair consideration is given for property "[w]hen in exchange for
such property . . . as a fair equivalent therefor, and in good
faith, property is conveyed or an antecedent debt is satisfied"
(Debtor and Creditor Law § 272 [a]).  It is well settled that an
evaluation of whether fair consideration is given for property
under Debtor and Creditor Law § 272 must "be determined upon the
facts and circumstances of each particular case" (Halsey v
Winant, 258 NY 512, 523 [1932]).7
In assessing whether a spouse pays fair consideration
within the meaning of Debtor and Creditor Law § 272 in connection
with a property distribution made pursuant to a separation
agreement incorporated into a judgment of divorce, a court must
examine a number of factors.  Since consideration cannot be
predicated on a spouse's relinquishment of a claim to a greater
share of the proceeds of fraud, the first step is to determine
whether the spouse relinquished rights to other untainted assets
in the marital estate.  Clearly, this would constitute fair
7  Here, as the Second Circuit noted, "it is essentially
undisputed that Schaberg had no notice that the money she
received in her divorce was derived from fraud" (618 F3d at 229 n
8), and "there is no reason to question Schaberg's good faith"
(id. at 230) in her execution of the settlement agreement. 
Hence, the only relevant element of Debtor and Creditor Law § 272
is whether she gave "fair consideration" for the allegedly
tainted assets she received through the parties' property
settlement.
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No. 91
consideration.
Second, a court needs to look beyond the tangible
marital property at issue because New York recognizes other forms
of legitimate consideration, including nonmonetary consideration. 
For example, New York courts have found fair consideration where
a spouse releases a claim for maintenance (see Federal Deposit
Ins. Co. v Malin, 802 F2d 12, 20 [2d Cir 1986]; In re Fair, 142
BR 628, 631 [Bankr ED NY 1992]; Darling v Darling, 22 Misc 3d
343, 358 [Sup Ct, Kings County 2008]) or where consideration is
predicated on "legally cognizable aspects of [the transferor's]
child support obligation" (see First Fed. Sav. & Loan Assn. of
Rochester v Kasmer, 140 AD2d 826, 828 [3d Dept 1988]). 
Similarly, the waiver of inheritance rights and the
relinquishment of other "rights and remedies otherwise conferred
by law" are also relevant to the determination of fair
consideration (Marine Midland Bank-N.Y. v Batson, 70 Misc 2d 8,
10 [Sup Ct, Nassau County 1972]).  It is also possible that child
custody or visitation concessions could be viewed as a valuable
form of consideration.  Indeed, based on the myriad types of
consideration that arise in the unique context of marital
dissolution, courts have repeatedly stated that "transfers made
pursuant to a valid separation agreement incorporated into a
divorce decree are presumed to have been made for fair
consideration" (In re Durand, 2010 WL 3834587, *7, 2010 US Dist
LEXIS 101755, *21 [ED NY 2010]; see also In re Cersosimo, 2009 WL
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No. 91
3182989, *4, 2009 Bankr LEXIS 2009, *13-14 [Bankr ED NY 2009];
Darling, 22 Misc 3d at 358-359).
In certifying the second question to us, the Second
Circuit implicitly presumed that the only consideration Schaberg
could have given in exchange for the tainted property she
received was her release of a claim to other proceeds of the
fraud -- if that is the case, her claim would be illusory. 
Despite Schaberg's claim to the contrary, we must accept for
purposes of answering this question the Second Circuit's
assumption that the marital estate here "consisted almost
entirely of the proceeds of fraud" (618 F3d at 230).  Yet, as
we've discussed, there are other valid forms of consideration
that are relevant to the determination of fair consideration,
even where the bulk of a marital estate consists of ill-gotten
gains.  We therefore reformulate the second question to read as
follows:
"Is a determination that a spouse paid 'fair
consideration' according to the terms of New
York Debtor and Creditor Law § 272 precluded,
as a matter of law, where part or all of the
marital estate consists of the proceeds of
fraud?"
As reformulated, and under our analysis, we answer this question
in the negative.
Of course, the ultimate determination as to whether
Schaberg gave fair consideration pursuant Debtor and Creditor Law
§ 272 under the facts and circumstances of this case is a matter
for the federal courts to resolve.  But we note, on this limited
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No. 91
record, that Schaberg contends that she surrendered more than her
right to claim through equitable distribution a greater portion
of fraudulently obtained funds constituting the marital estate. 
She alleges that she waived a claim for maintenance under
Domestic Relations Law § 236 (B) (6), the calculation of which is
based on a variety of considerations, including the length of the
marriage; she released her right to inherit from Walsh's estate;
and she dispensed with her interest in the multi-million dollar
marital residence located in Port Washington, which she claims
was not acquired with moneys derived from Walsh's fraudulent
activities.8  Furthermore, even where a spouse does not
relinquish a "fair equivalent" for the aggregate of assets, it is
possible that fair consideration may be exchanged for at least
some of the assets (cf. Corporation of Lloyd's v Funk, 246 AD2d
570, 572 [2d Dept 1998], lv dismissed 91 NY2d 1002 [1998]).
In sum, we are not unsympathetic to the interests of
parties who were fraudulently deprived of their investments and
who, understandably, seek the return of a portion of their stolen
8  In particular, Schaberg asserts that the Port Washington
property was purchased in 1999 with funds derived from the sale
of their previous marital residence, which in turn had been
bought with legitimate funds in the early 1980's, long before
Walsh's allegedly fraudulent conduct took place.  Notably, Walsh
was apparently permitted to sell the Port Washington home and use
a portion of the untainted proceeds from that sale to pay legal
fees incurred in connection with his criminal prosecution (see
Commodity Futures Trading Commn. v Walsh, 2010 WL 882875, *3,
2010 US Dist LEXIS 21992, *9 [SD NY 2010]).
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No. 91
monies.  Most definitely, the victims of fraud are entitled to
pursue disgorgement where it is demonstrated that the transferee-
spouse was aware of or participated in the fraud or otherwise
failed to act in good faith.  One example of bad faith would be
where the parties entered into a collusive divorce arrangement
designed to conceal stolen money from its rightful owner.  And
even where the recipient executed a settlement agreement in good
faith and without knowledge of the source of the ill-gotten
gains, the defrauded parties may still recover if the spouse did
not give fair consideration for the property under Debtor and
Creditor Law § 272.  But we believe that an innocent spouse who
received possession of tainted property in good faith and gave
fair consideration for it should prevail over the claims of the
original owner or owners consistent with this State's strong
public policy of ensuring finality in divorce proceedings.9
Accordingly, the first certified question and, as
reformulated, the second certified question should be answered in
accordance with this opinion.
9  The Agencies suggest that disgorgement should be allowed
because, upon turning the funds over to them, Schaberg could move
to vacate the settlement agreement in state court on fraud
grounds and seek a redistribution of any untainted assets Walsh
may have received.  But such an exercise would likely be
fruitless, particularly where it appears that, years after the
property division, Walsh liquidated the only purportedly "clean"
asset he owned -- the Port Washington house.
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Commodity Futures Trading Commission v Walsh, et al. (and another
action)
No. 91
PIGOTT, J.(dissenting, in part):
I agree with the majority's analysis and conclusion
relative to the first certified question.  I also agree with much
of what the majority says in its discussion of the second
question, but find its reformulation of that question
unnecessary.  The Second Circuit posed a narrowly tailored
question that is relatively simple to answer, namely, "Does a
spouse pay 'fair consideration' according to the terms of the New
York Debtor and Creditor Law § 272 when she relinquishes in good
faith a claim to the proceeds of fraud."  I would answer that
question in the negative.  
Debtor and Creditor Law § 278 states that a creditor
with a matured claim may have a conveyance set aside against
anyone "except a purchaser for fair consideration without
knowledge of the fraud at the time of the purchase" (Debtor and
Creditor Law § 278 [a] [1]).  "Fair consideration is given for
property, or obligation . . . [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" (Debtor and Creditor Law § 272 [a]).  
The second certified question posed by the Second
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No. 91
Circuit assumes that almost all of the proceeds in the marital
estate consisted of the proceeds of fraud, the position taken by
the CFTC and SEC (see Commodity Futures Trading Comm. v Walsh,
618 F3d 218, 230 [2d Cir.2010] [noting that "in her separation
from Walsh, Schaberg relinquished future claims to an equitable
distribution of marital property that - it is alleged - consisted
almost entirely of the proceeds of fraud"]).  The Second Circuit
also notes that "there is no reason to question Schaberg's good
faith in relinquishing her claim to what she believed was a
legitimate interest in a substantial fortune" (id. at 230). 
Taking these facts into account, the question is, assuming that
the marital estate consists almost entirely of the proceeds of
fraud, does an "innocent spouse" like Schaberg, by virtue of
relinquishing future claims to those proceeds, pay fair
consideration?  The answer is, of course, "no", as the majority
essentially acknowledges: "consideration cannot be predicated on
a spouse's relinquishment of a claim to a greater share of the
proceeds of fraud" (majority op. at 14).
Schaberg's forbearance from "'seek[ing] through court
proceedings or otherwise a distributive award or an award of
equitable distribution with respect to' any other property
acquired by [Walsh] over the course of their marriage" (Walsh,
618 F3d at 229) does not constitute "fair consideration" where,
as the Second Circuit has asked us to assume here, the Walsh
proceeds were obtained as the result of fraud.  One cannot
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No. 91
reasonably argue that a spouse – even an innocent one with no
knowledge of her husband's fraud - could be said to have given
"fair equivalent value" by giving up future claims to the
equitable distribution of proceeds in which she has no legitimate
interest.  In such a case, the innocent spouse "has not given
value for the misappropriated property, but rather has gained an
interest in the property simply by virtue of being married to the
person who misappropriated" it (see generally In re Marriage of
Allen, 724 P2d 651, 659 [Colo.1986] [citing cases]). 
Accordingly, I would answer the second certified question in the
negative. 
*   *   *   *   *   *   *   *   *   *   *   *   *   *   *   *   *
Following certification of questions by the United States Court
of Appeals for the Second Circuit and acceptance of the questions
by this Court pursuant to section 500.27 of the Rules of Practice
of the New York State Court of Appeals, and after hearing
argument by counsel for the parties and consideration of the
briefs and the record submitted, certified questions answered in
accordance with the opinion herein.  Opinion by Judge Graffeo.
Chief Judge Lippman and Judges Ciparick, Read and Jones concur. 
Judge Pigott dissents in part in an opinion in which Judge Smith
concurs.
Decided June 23, 2011
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