Commercial Division Declines to Use New York Debtor and Creditor Law to Enjoin a Defendant’s Asset Sale Without Evidence of Inadequate Consideration

by Patterson Belknap Webb & Tyler LLP
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In Del Forte USA, Inc. v. Blue Beverage Group, Inc. et al., No. 518454/2016, 2017 BL 253248 (Sup. Ct. Jul. 17, 2017), New York Commercial Division Justice Sylvia G. Ash denied plaintiff Del Forte’s preliminary injunction motion that sought, pursuant to N.Y. Debtor and Creditor Law (“DCL”) § 279, to enjoin defendant Blue Beverage from selling 60% of Blue Beverage’s shares to co-defendant Kuzari Group for $5 million unless $500,000 is placed in escrow and a receiver is appointed.  As an alternative form of relief, Del Forte sought, pursuant to CPLR § 6201, to attach at least $500,000 from the asset sale to satisfy a judgment that might be rendered in Del Forte’s favor.

The case involves claims by Del Forte, a seller of cold coffee beverages, for breach of contract and fraudulent inducement against Blue Beverage for allegedly failing to carry out a retort process to sterilize Del Forte’s beverages for sale on retail shelves.  Del Forte alleged that Blue Beverage is insolvent, favoring insiders, and seeking to frustrate a future judgment in Del Forte’s favor.

DCL § 279 governs the rights of creditors whose claims have not matured against debtors engaged in fraudulent conveyances.  The statute provides that “where a conveyance made or obligation incurred is fraudulent as to a creditor whose claim has not matured he may proceed in a court of competent jurisdiction against any person against whom he could have proceeded had his claim matured,” seeking a court order “(a) restrain[ing] the defendant from disposing of his property, (b) appoint[ing] a receiver to take charge of the property, (c) set[ting] aside the conveyance or annulling the obligation, or (d) mak[ing] any order which the circumstances of the case may require.”

As Justice Ash explains, “because direct evidence of fraudulent intent is often elusive,” in applying fraudulent conveyance law, courts consider various “badges of fraud,” including:  “(1) a close relationship between the parties to the transfer; (2) the inadequacy of consideration; (3) the transferor's knowledge of the creditor's claims and the transferor's inability to pay them; (4) the retention of control of the property by the transferor after the conveyance; (5) the fact that the transferred property was the only asset sufficient to pay the transferor's obligations; (6) the fact that the same attorney represented the transferee and transferor; and (7) a pattern or course of conduct by the transferor after it incurred its obligation to the creditor.”[1]

Similarly, to obtain a pre-judgment order of attachment under CPLR § 6201(3), a plaintiff must demonstrate “intent to defraud creditors, or to frustrate the enforcement of a judgment that might be rendered in favor of the plaintiff.”[2]

In Del Forte, the court found that plaintiff failed to satisfy its burden of showing that Blue Beverage is “entering into the subject transaction with the intent to defraud creditors.”[3]  In particular, Justice Ash noted that Del Forte “fail[ed] to establish that $5 million constitutes inadequate consideration” for 60% of Blue Beverage’s shares.[4]

According to the decision, “[a]lthough Plaintiff provides plenty of evidence of potential judgment creditors of Blue Beverage, there is no evidence that the proposed transaction between the Kuzari Group and Blue Beverage is one that aims to defraud or frustrate potential creditors, nor is there any indication that the proposed sale will render Blue Beverage an ‘empty shell’ of a corporation.”[5]

 

 

Endnotes


[1] Del Forte USA, Inc. v. Blue Beverage Group, Inc. et al., No. 518454/2016, 2017 BL 253248, at *3 (Sup. Ct. Jul. 17, 2017) (citing Cadle Co. v. Organes Enters., Inc., 29 A.D.3d 927, 928 (2d Dep’t 2006)).

[2] Id. (quoting Benedict v. Browne, 289 A.D.2d 433, 433 (2d Dep’t 2001)).

[3] Id.

[4] Id.

[5] Id.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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