Opinion ID: 1189324
Heading Depth: 1
Heading Rank: 4

Heading: The Receiver's Fraudulent Conveyance Claim

Text: In support of his application to the district court, the Receiver presented two alternative theories: that the June 2002 conveyance of Borderline NS to Appellant never occurred, and that, even if it did, it should be set aside as fraudulent under N.Y. Debtor & Creditor Law § 276. The district court accepted the latter. Sandi contends that the Receiver cannot utilize the statute as he does not represent a creditor of Todd Eberhard. [3] We agree.
It is well settled that in order to set aside a fraudulent conveyance, one must be a creditor of the transferor; those who are not injured by the transfer lack standing to challenge it. N.Y. Debtor & Creditor Law § 276 makes this requirement explicit: Every 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, is fraudulent as to both present and future creditors.  N.Y. Debt. & Cred. Law § 276 (emphasis added). The conveyance is not void per se, but voidable by creditors of the transferor. This proposition is hardly novel  section 276 is a direct descendant of the Statute of Elizabeth, enacted by Parliament in 1570. [4] See Hearn 45 St. Corp. v. Jano, 283 N.Y. 139, 142, 27 N.E.2d 814 (1940). The Statute of Elizabeth was passed to aid the creditor in his pursuit of legal assets. Garrard Glenn, The Law of Fraudulent Conveyances § 5, at 8 (1996). Thus, only those who are, shall or might be in anywise disturbed, hindered, delayed or defrauded by the fraudulent conveyance were permitted to set it aside. Id. app. at 588 (quoting Statute of Fraudulent Conveyances, 1570, 13 Eliz., c. 5, § 2 (Eng.)). In contrast, non-creditors were not enabled by the statute of 13 Eliz. c. 5 ... for the statute makes the deed void as against the creditors, but not against the party himself, his executor or administrators; for against them it remains a good deed. Hawes v. Leader, (1608) 79 Eng. Rep. 232, 233 (K.B.). In 1829, New York enacted its own fraudulent conveyance law based on the principles embodied in the Statute of Elizabeth. [5] See Republic of Italy v. De Angelis, 206 F.2d 121, 127 (2d Cir.1953) (Clark, J., concurring). The statute retained the creditor standing requirement, providing that a fraudulent conveyance is void only as against the persons ... hindered, delayed or defrauded. 2 N.Y.Rev.Stat. 137 § 1 (1829). Early New York decisions made clear that [e]very sale or other transfer of goods made with intent to defraud creditors, though valid as between the parties to the transaction, is utterly void as to creditors. Babcock v. Booth, 2 Hill 181, 183 (N.Y.Sup.Ct.1842). Thus, grantors remained bound by their own fraudulent conveyances. See Ford v. Harrington, 16 N.Y. 285 (1857). As future United States Supreme Court Justice Samuel Nelson stated, the creditor standing requirement was the received construction of the Statute of Elizabeth since at least the early Seventeenth Century. Nellis v. Clark, 20 Wend. 24, 39 (N.Y.Sup. Ct.1838) (Nelson, C.J., dissenting). Such was the state of the law in New York into the 1900s. In 1925, the Legislature enacted the Uniform Fraudulent Conveyance Act, N.Y. Debtor & Creditor Law §§ 270-281, a codification of previous statutes ... which had their origin in the statute of 13 Eliz. ch. 5. Hearn 45 St. Corp., 283 N.Y. at 142, 27 N.E.2d 814. In drafting the Act, the National Conference of Commissioners on Uniform State Laws sought to eliminate the confusion caused by attempts to stretch the Statute of Elizabeth (and its state law progeny) to cover all conveyances which wrong creditors, including those made without an actual intent to defraud. Prefatory Note, Uniform Fraudulent Conveyance Act (1918); see Marine Midland Bank v. Murkoff, 120 A.D.2d 122, 127-28, 508 N.Y.S.2d 17 (2d Dep't 1986). However, because its express terms confine it to conveyances made with actual fraudulent intent, section 7 of the Act, codified at N.Y. Debtor & Creditor Law § 276, is practically identical with the 13th of Elizabeth. Lee v. State Bank & Trust Co., 54 F.2d 518, 520 (2d Cir.1931). In keeping with centuries of common law and statutory tradition, state and federal courts construing section 276 have continued to allow only creditors to set aside fraudulent transactions. Non-creditors can find no relief in a statute whose object ... is to enable a creditor to obtain his due despite efforts on the part of a debtor to elude payment. Hearn 45 St. Corp., 283 N.Y. at 142, 27 N.E.2d 814. [E]ven if a transfer is made with actual intent to defraud creditors, one must be a creditor in order to complain. [6] Martes v. USLIFE Corp., 927 F.Supp. 146, 148 (S.D.N.Y.1996); see also Lazar v. Libby, 28 Misc.2d 131, 132, 219 N.Y.S.2d 362 (N.Y. Sup.Ct. Nassau County 1960) (plaintiff whose debt was paid no longer had the status of a creditor [and][t]o maintain an action under section 276 of the Debtor and Creditor Law ..., the plaintiff must have such status). Fraudulent conveyances are binding on all non-creditors, including the transferor himself. As the Court of Appeals has noted, [t]he general rule, that courts will ... extend no remedy to a grantor or vendor of property to recover back from the grantee or vendee the property thus transferred ... is too well settled to be now called in question. Pattison v. Pattison, 301 N.Y. 65, 73, 92 N.E.2d 890 (1950). History and the plain language of the ancient statute's offspring leave no doubt that a transferor cannot set aside a disposition of assets on the ground that the disposition allegedly constituted a fraudulent transfer. This is so for good reason. Were transferors allowed to assert fraudulent conveyance claims against those to whom they transfer property, transferors would be empowered to rescind transactions by virtue of their own fraudulent or deceptive designs. Such empowerment would be perverse. Accordingly, Todd Eberhard could not rely on his fraudulent intent to rescind a transfer of property to his mother, but a creditor of Todd Eberhard could. The question then becomes whether the Receiver represented a creditor of Todd Eberhard, or merely Todd Eberhard himself.
District courts possess broad power to remedy violations of federal securities laws. See SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1103 (2d Cir. 1972). Thus, [a]lthough neither the Securities Act of 1933 nor the Securities Exchange Act of 1934 explicitly vests district courts with the power to appoint trustees or receivers, courts have consistently held that such power exists. SEC v. Am. Bd. of Trade, Inc., 830 F.2d 431, 436 (2d Cir. 1987). Receivers appointed at the SEC's request are equipped with a variety of tools to help preserve the status quo while the various transactions [are] unraveled... to obtain an accurate picture of what transpired. Manor Nursing Ctrs., 458 F.2d at 1105. We have observed that [a] primary purpose of appointing a receiver is to conserve the existing estate. Esbitt, 335 F.2d at 143. Receivers are directed to marshal the assets of the defendant, id., and prevent the dissipation of [the] defendant's assets pending further action by the court, Am. Bd. of Trade, 830 F.2d at 436. This authority necessarily includes the power to investigate the defendant's transactions. See SEC v. Koenig, 469 F.2d 198, 202 (2d Cir.1972). Moreover, where the entity in receivership is a corporation, the receiver may report to the SEC and convene shareholder meetings on its behalf. Id. Yet the power of a securities receiver is not without limits. For example, we have expressed strong reservations as to the propriety of allowing a receiver to liquidate [an estate]. Lankenau v. Coggeshall & Hicks, 350 F.2d 61, 63 (2d Cir.1965). In addition, because receivership should not be used as an alternative to bankruptcy, we have disapproved of district courts using receivership as a means to process claim forms and set priorities among various classes of creditors. Am. Bd. of Trade, 830 F.2d at 437-38. More fundamentally, the authority of a receiver is defined by the entity or entities in the receivership. [T]he plaintiff in his capacity of receiver has no greater rights or powers than the corporation itself would have. Fleming v. Lind-Waldock & Co., 922 F.2d 20, 25 (1st Cir.1990) (internal quotation marks omitted). A receiver may commence lawsuits, but stands in the shoes of the corporation and can assert only those claims which the corporation could have asserted. Lank v. N.Y. Stock Exch., 548 F.2d 61, 67 (2d Cir.1977).
Not surprisingly, the relatively few cases dealing with the issue have held that receivers have standing to pursue fraudulently conveyed assets only when one of the entities in receivership is a creditor of the transferor. This distinction is nicely explained in a pair of Seventh Circuit decisions authored by Judge Posner. See Troelstrup v. Index Futures Group, Inc., 130 F.3d 1274 (7th Cir.1997); Scholes v. Lehmann, 56 F.3d 750 (7th Cir.1995). In Scholes, Michael Douglas created three corporations and caused them, in turn, to create limited partnerships. Scholes, 56 F.3d at 752. The corporations were the general partners and sold limited partner interests to investors in a Ponzi scheme. [7] Id. In the civil enforcement action, the district court appointed one receiver to represent both Douglas and the corporations, who then sought to recover assets conveyed to third parties. Id. at 752-53. Those third parties argued that the receiver was suing on behalf of the investors, not Douglas or the corporations, and lacked standing to do so. Id. The Seventh Circuit disagreed, noting that the corporations  Douglas's robotic tools  were still distinct legal entities with separate rights and duties. Id. at 754. The appointment of the receiver removed the wrongdoer from the scene. The corporations were no more Douglas's evil zombies. Freed from his spell they became entitled to the return of the moneys ... that Douglas had made the corporations divert to unauthorized purposes. Id. Once the zombie corporations were under the control of the receiver, the receiver's only object was to maximize the value of the corporations for the benefit of their investors and any creditors. Id. at 755. The receiver pressed a claim that the corporations had a right to a return of their assets that had been distributed by Douglas in his scheme. Because Douglas controlled the corporations completely, the transfers were, in essence, coerced. Id. The court cautioned that if the receiver had been appointed to guard only Douglas's individual assets, the question of standing might have a different answer. Id. Two and a half years later, the Seventh Circuit was presented with that exact situation in Troelstrup  the receiver was appointed only for the assets of the Douglas figure, John Tobin. Troelstrup, 130 F.3d at 1275-76. The court held that the receiver lacked standing to assert his claim. Looking back, the court said of Scholes: We held that [Douglas's] receiver, who had also been appointed the corporations' receiver, had standing to sue on behalf of the corporations, because they were entitled to the return of the money that the defrauder had improperly diverted from them.... Troelstrup ... was just Tobin's receiver, and so he could not sue ... on behalf of [the investment entity], not having been appointed its receiver. Id. at 1277 (emphasis in original). Tobin's receiver lacked standing because he was suing a third party on behalf of Tobin's creditors to enforce a personal right of theirs, not a right of Tobin's in which they have an interest by virtue of being his creditors. Id. We agree with the Seventh Circuit's analysis and hold that a receiver's standing to bring a fraudulent conveyance claim will turn on whether he represents the transferor only or also represents a creditor of the transferor.
Because he does not represent any creditor of Todd Eberhard, we conclude that the Receiver lacks standing to set aside the purported conveyance of Borderline NS under N.Y. Debtor & Creditor Law § 276. As in Troelstrup, the Receiver here stands only in the shoes of Todd Eberhard. He can press only those claims that Eberhard himself could assert, see Lank, 548 F.2d at 67, and Eberhard, as transferor, may not bring an action to set aside his own fraudulent conveyance, see Pattison, 301 N.Y. at 73, 92 N.E.2d 890. A receiver acquires no right ... to the property fraudulently transferred for the reason that the transfer is valid against the debtor and cannot be set aside by the receiver as the debtor's successor. The transfer is good against every one except the creditors of the [transferor]. 2 Clark on Receivers § 364 (3d ed.1959). Indeed, the Receiver cites no authority to support his contention that he has standing to bring a claim under section 276. [8] Instead, he relies in large part on one line in SEC v. Shiv, 379 F.Supp.2d 609, 618 (S.D.N.Y.2005), where the district court stated that receivers ha[ve] standing, for the benefit of those defrauded to recover fraudulently obtained funds that ha[ve] come to rest with a non-wrongdoing party. However, the receivership in Shiv  unlike the one at issue here  specifically included the corporations manipulated by the individual defendant. The receiver in Shiv had standing for the benefit of those defrauded because he was their receiver. Id. The Receiver here is not. Like his counterpart in Troelstrup, the Receiver in fact asserted a claim on behalf of Eberhard's creditors without representing any of them. He lacks standing to do so. The Receiver argues that he, and not the SIPA trustee, is the only person who could bring a claim to set aside the transfer of Borderline NS, since the corporation was an asset of Todd Eberhard individually, not of EIA or Park South. This argument is utterly without merit. Under section 276, the conveyance may be set aside by any creditor of the transferor. [9] If EIA and Park South (entities under the control of the SIPA trustee) are creditors of Todd Eberhard, then, in Judge Posner's colorful words, [f]reed from [Eberhard's] spell, and no longer his evil zombies, the corporations would be entitled to the return of the assets that Eberhard unlawfully diverted from them. [10] See Scholes, 56 F.3d at 754. For that reason, the fact that Borderline NS is not, at present, an asset of EIA or Park South is not relevant for standing purposes. Any creditor of Todd Eberhard has standing to bring a claim under section 276 to reach fraudulently transferred assets. [11] Finally, the Receiver contends that the power and authority of a federal securities receiver are matters of federal law. As a general proposition, we agree. Federal law supplies district courts appointing receivers with broad equitable powers. Am. Bd. of Trade, 830 F.2d at 438. We have entrusted receivers with the responsibility to conserve the existing estate by unraveling and investigating the defendant's transactions. See id. at 436. Under this authority, the Receiver is free to claim (as he did before the district court) that the conveyance of Borderline NS did not occur. But that was not the ground chosen by the district court to set aside the conveyance, and federal law does not give a receiver, or a district court, the authority to re-write or ignore state law. The district court's judgment was premised on a state fraudulent conveyance statute, governed by state law. The fact that the person asserting the claim is a federally appointed receiver does not federalize the law employed to attack the transaction. See, e.g., Freeman v. First Union Nat'l, 329 F.3d 1231, 1233-34 (11th Cir.2003) (certifying to Supreme Court of Florida the question of whether Florida law supports a claim by plaintiffs, including a federal receiver, for aiding and abetting a fraudulent transfer); Scholes, 56 F.3d at 753 (The law under which the receiver proceeded is the Illinois law of fraudulent conveyances as it stood in 1989.). In fact, some federal receivers have enjoyed the benefit of state statutes imposing looser standing requirements. See, e.g., Stenger v. World Harvest Church, Inc., No. 1:04-CV-00151, 2006 WL 870310, at  n. 6 (N.D.Ga. Mar. 31, 2006) (allowing receiver to pursue fraudulent conveyance claim under former Ga.Code. Ann. § 18-2-22 which provided that fraudulent conveyances were null and void as to creditors and others  (emphasis added)). N.Y. Debtor & Creditor Law § 276 is clear  a conveyance made with an intent to defraud is only fraudulent as to ... creditors. N.Y. Debt. & Cred. Law § 276. Since he represented only Todd Eberhard and none of his creditors, the Receiver lacked standing to utilize section 276 to set aside the conveyance of Borderline NS. [12] The district court's decision to the contrary was in error and, for that reason, we vacate the judgment of the district court.