A recent decision, In re: Grandparents.com, Inc.., et al., Debtors. Joshua Rizack, as Liquidating Tr., Plaintiff, v. Starr Indemnity & Liability Company, Defendant, Additional Party Names: Grand Card LLC, provides insight on the intersection between and among contract, tort, and fraudulent transfer theories of recovery.

In that case, the bankruptcy Trustee’s Complaint asserted that Starr and the debtor entered into a Strategic Alliance Agreement (“SAA”) requiring Starr to provide consulting services to the debtor.[1] Count I of the Complaint alleged a fraudulent transfer under 11 U.S.C. § 548(a)(1)(B), which allows for the avoidance of a payment or obligation if the debtor, inter alia, “received less than a reasonably equivalent value in exchange for such transfer or obligation; and was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation; was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital; intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts matured....”

The Complaint alleged further that, in exchange for the services provided under the SAA, the debtor would pay Starr $80,000 a month, a consulting fee upon attaining certain performance-related benchmarks, and a stock warrant to purchase common shares of stock in Grandparents.com equal to 25% of that company’s outstanding equity. In total, notwithstanding the stock warrant, Starr allegedly received $2,160,000.00 under the SAA within four years of the debtor’s bankruptcy filing.[2]

As support for the fraudulent transfer allegation, the Complaint asserted that the debtor was insolvent or inadequately capitalized when the transfers occurred, and that the debtor’s liabilities exceeded its assets each year during the four-year period. In addition, the Trustee argued that: (1) the debtor did not receive reasonably equivalent value for payments made under the SAA because staffing on the debtor’s account was reduced from four to one, (2) the remaining staffer was not part of Starr’s senior management, (3) Starr did not provide the degree of service required under the SAA, and (4) the value of Starr’s services was less than contemplated under the SAA and below the reasonably equivalent value paid by the debtor.[3]

Starr responded by filing a motion to dismiss, averring that the Complaint failed to adequately plead the relief sought in the Complaint. Starr argued that “a breach of contract claim can never give rise to a fraudulent conveyance claim because all of the money paid by the debtor was paid pursuant to a valid contract and payment under a contract always constitutes reasonably equivalent value - the payment is made pursuant to a bargained for exchange.”[4] Bankruptcy Judge Laurel Isicoff rejected that argument: “The existence of a binding contract does not foreclose a fraudulent conveyance claim if the elements of the cause of action for constructive fraud are met. ‘A transfer may be fraudulent even if it is made in accordance with the terms of a contract.’”[5] This is so because a transfer made under a contract may still be fraudulent if the exchange is not for reasonably equivalent value; whether the transfer is “made pursuant to the terms of a contract is not necessarily dispositive of the issue. If that were the case then any payment that is otherwise constructively or actually fraudulent would be insulated by the existence of a contract.”[6]

Starr also argued that constructive fraud is essentially a tort, and under common law tort principles such as the independent tort doctrine or the economic loss rule, the debtor should be barred from seeking redress outside of a breach of contract claim.[7] The court rejected this argument as well. Judge Isicoff noted both that statutory claims (like those based on the Bankruptcy Code), are not tort claims, and even if statutory fraud claims are tort claims, the statutory elements of those claims are distinct from the elements necessary to prove a breach of contract. Accordingly, “[T]hat the same operative facts may give rise to more than one cause of action does not preclude a plaintiff seeking relief under more than one theory.”[8]  Therefore, the court denied the motion to dismiss as to Count I[9] and allowed the Trustee to pursue a constructive fraudulent transfer claim against Starr.