Opinion ID: 690275
Heading Depth: 3
Heading Rank: 2

Heading: Payments to the Attorneys

Text: 40 Petitioners also contend that Enterprises fraudulently conveyed $775,722 in legal fees to the Attorneys, approximately $60,000 of which derived from the proceeds of Clemence's second mortgage. The contested fees represented payment for legal services that the Attorneys rendered as counsel for Enterprises' co-defendants in the RICO action. Petitioners argue that the Attorneys' legal services were not fair consideration within the meaning of DCL Sec. 272 because they were not provided directly to Enterprises itself. The Attorneys respond that their services were fair consideration for Enterprises' payments because Enterprises benefitted from the unified defense of which these services were a part. 41 The District Court agreed with the Attorneys. It found that it was to the advantage of each defendant in the RICO action to present a unified defense and to have all co-defendants adequately represented, because all the defendants were threatened with joint and several liability. The District Court reasoned: 42 One can question the wisdom of retaining some of the attorneys, a number of whom were prominent, expensive New York City criminal lawyers. However, the selection of the proper counsel is always a matter of individual choice. The plaintiffs have never disputed that bona fide legal services were rendered by the attorneys to one or more of the defendants or that their disbursements were not actually incurred. 43 Having presided at the very lengthy trial and considered the numerous motions, we conclude ... that in a conspiracy case such as this, Enterprises did receive a benefit from the funds it laid out on behalf of the other parties, albeit it paid far too high a price for that benefit. Nor do we believe that there was anything unethical in this approach in light of the common interest of all of the defendants and their right to have a joint defense if it was to their benefit. 44 HBE Leasing, 837 F.Supp. at 63 (footnotes omitted). The District Court therefore concluded that the benefit Enterprises received from the Attorneys' services represented fair consideration for Enterprises' payments, and it accordingly dismissed Petitioners' claim against the Attorneys. 45 In determining whether Enterprises received fair consideration, the District Court correctly disregarded the form of this transaction and looked instead to its substance. Under DCL Sec. 272, fair consideration means a fair equivalent that the debtor receives in exchange for its property or obligation. Thus, when a debtor transfers its property but the transferee gives the consideration to a third party, the debtor ordinarily will not have received fair consideration in exchange for its property. However, under the well established doctrine of Rubin v. Manufacturers Hanover Trust Co., 661 F.2d 979 (2d Cir.1981), the fact that the consideration initially goes to third parties may be disregarded to the extent that the debtor indirectly receives a benefit from the entire transaction. See id. at 991-92; see also In re Fairchild Aircraft Corp., 6 F.3d 1119, 1127 (5th Cir.1993); In re Jeffrey Bigelow Design Group, Inc., 956 F.2d 479, 485 (4th Cir.1992); Mellon Bank, N.A. v. Metro Communications, Inc., 945 F.2d 635, 646-47 (3d Cir.1991), cert. denied, 503 U.S. 937, 112 S.Ct. 1476, 117 L.Ed.2d 620 (1992); In re W.T. Grant Co., 699 F.2d 599, 609 (2d Cir.), cert. denied, 464 U.S. 822, 104 S.Ct. 89, 78 L.Ed.2d 97 (1983). While Rubin has most often been applied in cases decided under the fraudulent conveyance provisions of federal bankruptcy law, its approach to indirect benefits is equally applicable under the parallel provisions of the UFCA. See Telefast, Inc. v. VU-TV, Inc., 591 F.Supp. 1368, 1379-81 (D.N.J.1984) (New Jersey UFCA); In re Chomakos, 170 B.R. 585, 590 (Bankr.E.D.Mich.1993) (Michigan UFCA). 46 Petitioners contend that the District Court's finding that Enterprises indirectly received a benefit from the Attorneys' services does not satisfy Rubin 's test for fair consideration. Under the UFCA and the parallel provisions of federal bankruptcy law, fair consideration is defined quantitatively as a fair equivalent or an amount not disproportionately small as compared with the value of the property, or obligation obtained [from the debtor]. DCL Sec. 272; see also 11 U.S.C. Sec. 548(a)(2)(A) (1988). Thus, to determine whether a debtor indirectly received fair consideration under the Rubin doctrine, the fact-finder must first attempt to measure the economic benefit that the debtor indirectly received from the entire transaction, and then compare that benefit to the value of the property the debtor transferred. Rubin, 661 F.2d at 993. The mere fact that the debtor received a benefit is therefore insufficient to find fair consideration. Id. 47 Despite the considerable force of Petitioners' argument, we believe that the quantitative analysis normally required by Rubin is inappropriate in this case where multiple co-defendants were threatened with joint and several liability, they mounted a common defense, and one defendant paid the legal fees of the others. As the District Court correctly noted, individual defendants may choose to pay as much to their attorneys for their defense as they consider worthwhile, as long as the payments fall within a fair range of reasonable compensation for bona fide legal services or are reimbursement for legitimate expenses incurred during the defense. 11 The same should be true of the defendants in this case who were threatened with joint and several liability and conducted a common defense to protect their common interests. The existence of some adverse interests among the co-defendants might reasonably have required each defendant to have individual counsel, but to the extent that the several defense attorneys conducted a joint defense, they effectively advanced the interests of all defendants simultaneously. See United States v. Schwimmer, 892 F.2d 237, 243-44 (2d Cir.1989) (recognizing joint defense privilege), cert. denied, 502 U.S. 810, 112 S.Ct. 55, 116 L.Ed.2d 31 (1991). Thus, the services that each defense attorney performed in the course of conducting a joint defense provided a benefit to each defendant. Rubin 's quantitative approach, requiring some measurement of the value of the benefit to each defendant, is not applicable under these circumstances because the full value of the joint defense inured to the benefit of all defendants, and there is no point in trying to quantify the incremental value added by the joint defense beyond the value of individual representation. These joint services represented fair consideration for the payment of reasonable compensation, regardless of which defendant paid the bill. We need not decide whether some inquiry concerning apportionment would be warranted in a case where the defenses of all the defendants did not overlap to the extent that occurred in this case. 48 Because Petitioners do not dispute that Enterprises' payment of the Attorneys' fees represented a reasonable rate of compensation for bona fide legal services rendered to defendants with substantially overlapping defenses, the District Court correctly concluded that Enterprises received fair consideration in exchange for its payments. However, the District Court failed to consider an alternative theory of liability offered by Petitioners: that Enterprises paid the Attorneys' fees with actual intent to defraud its creditors. Under DCL Sec. 276, a transfer made with actual intent to hinder, delay, or defraud present or future creditors is fraudulent as to such creditors, regardless of whether the debtor receives fair consideration for its property. See United States v. McCombs, 30 F.3d 310, 327-28 (2d Cir.1994); ACLI Government Securities, Inc. v. Rhoades, 653 F.Supp. 1388, 1395 n. 32 (S.D.N.Y.1987), aff'd, 842 F.2d 1287 (2d Cir.1988). Actual fraudulent intent must be proven by clear and convincing evidence, but it may be inferred from the circumstances surrounding the transaction, including the relationship among the parties and the secrecy, haste, or unusualness of the transaction. See McCombs, 30 F.3d at 328. However, a transfer motivated by actual fraudulent intent may not be voided if a transferee who paid fair consideration did not have actual or constructive knowledge of such intent. Dunham v. Tabb, 27 Wash.App. 862, 621 P.2d 179, 182 (1980); DCL Sec. 278. 49 The record establishes the existence of genuine factual disputes pertaining both to Enterprises' intent in paying the Attorneys' fees and the Attorneys' knowledge of that intent. Enterprises paid the legal fees of its co-defendants at the direction of its controlling shareholder, Hiram J. Frank, who was thereby relieved of the burden of paying for his own defense. Even though Enterprises received fair consideration in exchange for its payments, this arrangement effectively transferred substantial assets from the corporation to Hiram J. Frank and the other co-defendants. Because a fact-finder might reasonably conclude that the purpose behind this arrangement was to hinder, delay, or defraud Enterprises' future judgment creditors, the District Court should not have dismissed Petitioners' claims against the Attorneys at this stage in the proceedings. We therefore reverse and remand for further proceedings on this issue. 12 50 The result of this inquiry will also determine Clemence Frank's liability on her second mortgage. As discussed above, this mortgage represented a voidable fraudulent transfer of Enterprises' property only to the extent that the subsequent transfer of $60,000 of the mortgage proceeds to the Attorneys was itself a fraudulent conveyance. 13 At most, however, these interlocking transactions resulted in a single fraudulent transfer of Enterprises' property. If the Petitioners establish on remand that the transfer to the Attorneys was fraudulent, they may recover this property from Clemence or (if it is shown that the Attorneys had actual or constructive knowledge of the fraudulent scheme) from the Attorneys. See United States v. Red Stripe, Inc., 792 F.Supp. 1338, 1344 (E.D.N.Y.1992); DCL Sec. 278(1)(a). But an unjustified double recovery would result if Petitioners could void both the relevant portion of Clemence's second mortgage and the transfer of the proceeds to the Attorneys. Cf. In re Checkmate Stereo & Electronics, Ltd., 9 B.R. 585, 622 (Bankr.E.D.N.Y.1981) (allowing only single recovery by imposing joint and several liability on multiple transferees under New York UFCA and Bankruptcy Code), aff'd, 21 B.R. 402 (E.D.N.Y.1982); Robert J. White, Leveraged Buyouts & Fraudulent Conveyance Law Under the Bankruptcy Code, 1991 Ann.Surv.Am.L. 357, 410-11 (1992) (bankruptcy trustee may recover only once from multiple transferees in multilateral fraudulent conveyance). Thus, if Petitioners elect to void the relevant portion of the mortgage, any judgment against the Attorneys must be reduced by an equivalent amount. This election of remedies does not affect Petitioners' rights vis-a-vis Clemence's other mortgage or the other payments to the Attorneys.