585 B.R. 306
Bankr. E.D.N.Y.2018Background
- Trustee Allan Mendelsohn sued Olga Kovalchuk to avoid and recover thirteen prepetition transfers totaling $41,544.63 from APCO Merchant Services under 11 U.S.C. § 544(b) and New York Debtor & Creditor Law (NYDCL), and asserted unjust enrichment. Parties stipulated APCO was insolvent when transfers occurred.
- The transfers (checks issued July–Dec 2012) were undisputed; defendant testified they were payments for sales/customer-service work and a $1,000 bonus.
- Defendant operated Merchant Marketing Group (MMG) as a sole proprietorship (reported on her Schedule C); debtor issued checks and 1099s to her and MMG; defendant claimed she generated ~1,200 merchant accounts in 2012 producing substantial revenue for APCO and was still owed commissions.
- Trustee did not identify at trial any specific "triggering" unsecured creditor whose rights he was asserting under § 544(b).
- At trial trustee emphasized a constructive-fraud theory under NYDCL § 273 (no fair consideration) rather than actual intent under § 276; he presented no evidence supporting actual fraud or entitlement to NYDCL § 276-a attorneys’ fees.
- The court found MMG was not a separate legal entity from defendant, credited defendant’s testimony, and concluded trustee failed to prove standing, lack of fair consideration, actual intent, or unjust enrichment; judgment for defendant.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing under § 544(b) (need "triggering" creditor) | Trustee may use § 544(b) to avoid transfers; did not identify a specific creditor in complaint or at trial | No specific creditor identified; trustee must show an existing unsecured creditor whose rights are being asserted | Trustee failed to prove existence of an actual qualifying unsecured creditor; standing not established |
| Constructive fraudulent conveyance (NYDCL § 273: fair consideration) | Payments to Kovalchuk lacked fair consideration because services were performed by MMG, not her personally, so APCO received no value from defendant | MMG is a sole proprietorship owned by Kovalchuk; payments to her were for services that generated significant revenue to APCO—thus reasonably equivalent value was received in good faith | Transfers provided fair consideration (services/merchant accounts); trustee failed to show diminution of estate; constructive fraud claim denied |
| Actual fraudulent conveyance (NYDCL § 276: intent) | Transfers were part of scheme to hinder/delay creditors (alleged) | No evidence of transferor's actual intent to defraud; trustee presented no badges of fraud or clear/convincing proof | Trustee presented no clear and convincing evidence of actual intent; actual fraud claim denied |
| Unjust enrichment and attorneys’ fees (NYDCL § 276-a) | Defendant retained transfers to APCO's detriment; attorneys’ fees under § 276-a if actual intent shown | Payments were for fair value; no evidence defendant received transfers with actual intent to defraud; no entitlement to fees | Unjust enrichment fails (consideration received); no evidence of transferee actual intent—attorneys’ fees denied |
Key Cases Cited
- Sharp Int'l Corp. v. State St. Bank & Trust Co., 403 F.3d 43 (2d Cir. 2005) (defines constructive fraudulent conveyance framework and fair-consideration analysis)
- HBE Leasing Corp. v. Frank, 48 F.3d 623 (2d Cir. 1995) (fair consideration and good-faith standards; transferee knowledge for good faith)
- Picard v. Cohmad Sec. Corp. (In re Bernard L. Madoff Inv. Sec. LLC), 454 B.R. 317 (Bankr. S.D.N.Y.) (trustee § 544(b) lookback and timely-commencement principles)
- Rubin v. Manufacturers Hanover Trust Co., 661 F.2d 979 (2d Cir. 1981) (transactions leaving debtor with equivalent value do not diminish estate)
- Lattanzio v. COMTA, 481 F.3d 137 (2d Cir. 2007) (sole proprietorship has no legal existence apart from its owner)