Barkany Asset Recovery and Management LLC v. Marina District Development Co, LLC

Filing 51

MEMORANDUM & ORDER For the reasons discussed: (i) the Court grants the Trustee's cross-motion for leave the file the Third Amended Complaint as the pleading subject to Rule 12(b)(6) analysis; (ii) the Court denies Borgata's motion to dismis s with respect to the third and fourth causes of action (i.e., those pleading actual fraud under NY DCL §276 and Code § 548(a)(1)(A)); and (iii) theCourt grants Borgata's motion to dismiss the first, second and fifth causes of action ( i/e., the claims for constructive fraud under NY DCL §§ 273-a and 275 and for unjust enrichment). It is the Court's hope that the zealously requested discovery will give this proceeding the focus it has been lacking. SO Ordered by Judge Raymond J. Dearie on 10/11/2018. (Ramesar, Thameera)

FfLED

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK

IN CLERK'S OFFICE

US DISTRICT COURT E.D.N.Y

*

MARC A.PERGAMENT,as CHAPTER 7

OCT 1 5 2018

TRUSTEE OF THE ESTATE OF

BROOKLYN OFFICE

GERSHON BARKANY,

Plaintiff,
MEMORANDUM & ORDER

-against14 CV 2602(RJD)
MARINA DISTRICT DEVELOPMENT CO.,
LLC d/b/a BORGATA HOTEL CASINO & SPA,
Defendant.
X

DEARIE, District Judge.

It is a matter of public record and a central allegation in this case that in a June 2013

guilty plea to wire fraud, debtor Gershon Barkany admitted to operating a series of Ponzi-Iike

schemes from approximately December 2009 to March 2013 (the "Ponzi period").^ A second
key allegation, not seriously disputed, is that throughout the Ponzi period, Barkany regularly
gambled at the casino operated by defendant Marina District Development dT)/a Borgata Hotel

Casino and Spa("Borgata"). Together, these allegations fuel the fraudulent conveyanc^e claims
brought by the plaintiff, the Trustee of Barkany's bankruptcy estate, who seeks to recoup the
I

more than four million dollars that Barkany lost gambling at Borgata during the Ponzi ]5eriod.

The Trustee advances separate claims for constructive fraudulent conveyance under Sections
273-a and 275 of New York Debtor and Creditor Law("NYDCL"),actual fraudulent

'See generallv United States v. Barkany, 13 CR 362(JLB)
(ARL)ECF Docs. 1,2, 35, 52
(Criminal Complaint, March 27, 2013; Arrest Warrant; Waiver of Indictment and Information,
June 25, 2013; and Transcript of Plea Allocution, June 26, 2013. Sentencing is schedu ed for
October 19, 2018.

conveyance under Section 276 ofthe NYDCL,fraudulent transfer under Bankruptcy Code(the
"Code")§548(a)(l)(A), and unjust enrichment under state law.

Borgata moves under Fed. R. Civ. P. 12(b)(6)to dismiss the action for failure to state a
claim. The Trustee cross-moves under Fed. R. Civ. P. 15 for leave to file a Third Amended

Complaint("TAC").

For the reasons detailed below,the Court:(i) grants the Trustee's cross-motion for leave

to file the TAC as the pleading subject to 12(b)(6) analysis;(ii) denies Borgata's motion with

respect to the Trustee's claims for actual fraudulent conveyance under the DCL and fraudulent
transfer under the Code (the third and fourth claims for relief in the TAC); and (iii) grants
I

Borgata's motion with respect to the claims for constructive fraudulent conveyance unc^er the
DCL and unjust enrichment(the TAC's first, second and fifth claims for relief).
FACTUAL BACKGROUND
1.

Procedural Context

Although the Trustee's cross-motion presents to the Court thefourth iteration o:

his

claims, the underlying allegations and legal theories have not changed materially since this
action was first commenced,on or about April 24, 2014, by Barkany Asset Recovery and

Management, LLC.("BARM").^Complaint, ECF Doc. 1.^ The parties' shifting positions
with respect to important jurisdictional and related procedural matters, however, have reflected a
troubling lack offocus and direction.

^ BARM was organized to assist in the recovery, collection and administration of assets stolen by
Barkany. See ECF Doc. 17. According to the initial complaint, BARM asserted its claims here
as assignee of some of Barkany's victims. ECF Doc 1, H 9.

Within two weeks offiling the initial pleading, BARM filed a first amended complaint,

see ECF Doc 5, and Borgata requested a pre-motion conference to address its intent to|seek
dismissal on the grounds of lack of personal jurisdictional, improper venue, and failure to state a
claim.

Def. Letter dated May 30, 2014,ECF Doc. 8. Less than a month later, on June 24,

2014, Borgata filed an Involuntary Chapter 7 Petition against Barkany in the United States

Bankruptcy Court for the Eastern District of New York, Case No. 14-72941-845 (the "Chapter 7
Proceeding"). Shortly thereafter, at Borgata's urging, Magistrate Judge Orenstein ruled that the
automatic stay provision of the Bankruptcy Code, 11 U.S.C. §362(a)(2), applied to this action.
See Electronic Order dated July 16,2014, referencing motion, ECF Doc. 13, 16. Almost four
years later, however, in a joint letter dated April 11,2018(ECF Doc. 48), submitted in response
to this Court's order to show cause, the parties acknowledged that the automatic stay is not

applicable to this action. By electronic order dated April 13, 2018,this Court vacated the July
2014 order staying the case.

On or about January 14,2015,just under seven months after the commencement ofthe

Chapter 7 Proceeding, an order of relief was entered in the Bankruptcy Court with Barlcany's

consent; the appointment of Marc Pergament as Interim Trustee soon followed.^ Approximately
six months later, on or about June 23,2015, the Interim Trustee notified the Court of its intention
to move under Fed. R. Civ. P. 24 to intervene as co-plaintiff, and upon intervention, to remove
this action to the bankruptcy court. ECF Doc. 17. Then-plaintiff BARM consented to the

proposed intervention while Borgata opposed; by Memorandum and Order dated August 3, 2015,

^ These events, summarized as background in the Interim Trustee's motion to intervene, ECF
Doc. 17, are not disputed.
3

Magistrate Judge Orenstein rejected Borgata's objections, granted the Interim Trusteefs request
to file the proposed motion to intervene, and directed the parties to confer on the matter. ECF

Doc. 20. Briefing on the motion to intervene ensued. ECF Docs. 21 through 27. While the
motion was subjudice, however,the parties advised the Court that the Bankruptcy Court had
certified the election of Mark A. Frankel as permanent Chapter 7 Trustee of Barkany's estate,
I

and by joint stipulation moved under Fed. R. Civ. P. 25(c)for the substitution of Frankel in place
of BARM as plaintiff.

Stipulation filed September 1, 2016,ECF Doc. 29. Magistrate Judge

Orenstein so ordered the substitution.

Mark A. Pergament, however, soon succeeded Mark Frankel as permanent chapter 7

trustee, and by stipulation and proposed order filed January 11,2017,the parties askei that
Pergament be included in the caption as an additional plaintiff."^ ECF Doc. 30. The submission
was electronically so ordered the same day. Notably, the stipulation provides that the ITrustee

"shall promptly file a Notice of Removal with the Clerk's Office to effectuate the removal of this
action" to the Bankruptcy Court, while preserving defendant's right to object to the removal.
ECF Doc. 30-1.

Thereafter, by letter dated February 27,2017,the Trustee advised the Court that

^ The record does not connect the dots on this point. Apparently, after Magistrate Judge

Orenstein so ordered the stipulation providing that Mr. Frankel be substituted for BAI^ as

plaintiff, the caption was not changed. The paperwork seeking to include Pergament in the
caption specifically asks that he be "added" as an "additional" plaintiff along with BARM. Fast
forwarding to a conference held on April 21, 2017, counsel for the Trustee fleshed the matter out
further: noting that this "has been a difficult case," he reported that Mr. Pergament"was the
original interim trustee" but that "[h]e got voted out, which is very unusual," and that Mr.
Pergament was appointed successor permanent trustee only after Mr. Frankel, the first permanent
trustee,"ended up resigning."(The Court is referencing page 7 of an unfiled draft transcript of
the proceedings).

"Mpon further investigation" the Trustee "ha[d] determined" that the proper means to effectuate

the transfer ofan action to the bankruptcy court was not, as it had originally believed, the filing

ofa Notice ofRemoval, but instead should be a motion to "refer" the action under 28 y.S.C. §
157(a)and this Court's Standing Order ofReference. EOF Doc. 31 at 1 When the pdrties

appeared for a pre-motion conference on April 21,2017, however,the Trustee reportecj that he
had again reconsidered where this action should be.« Without formal legal argument tl^t parties
reported their shared view that, under controlling law,the bankruptcy court could do n<j mom

than enter proposed findings offact and conclusions oflaw on the Trustee's claims,anJ that,
because the case would likely end up back in this Court, they no longer believed refeJ to the

bankruptcy court appropriate or desirable.' Further, the Trustee reported that, with Borgata's

Ilfcie^'Llr till?

"nay provide that any or

Supreme Court decisions have held that even though 28 U.S.C § 157(b) authi)rized
siiiea as core, /^icle III ofthe Constitution prohibits bankruptcy courts from finallv

56^746^120^°^^'' that although Bankruptcy Court had statutory authoritvMarshall
Stem v. to eriter
fin,i •
^(holding
cnnJt t®""? °u

r7?i7T

15Wht as" "h° i!"® '

a core proceeding under 28 U.S.C. §157(b)(2)(C) it lacked

Exec. Benefits Tn.

fraudulent transfer actions are listed in 28 U S C §

fact and conck^ions ofTHuTnotSuS"

°"''

^ Referenced here is an unfiled draft transcript ofthe April 21,2017 proceedings.
'Assuming without deciding that, like the fraudulent transfer claims in Exec Benefits the
ally adjudicate, the
SllTadiSte r material point here is that Ms Court'slacks the constitutional authority to
bankmptcy court jurisdiction is clear. See 28 US C

consent, he intended to file a second amended complaint("SAC")incorporating additional
transfers that had come to his attention.

The Trustee filed his SAC on May 1, 2017, ECF Doc. 35; simultaneously, Borgata filed a

letter outlining its intended motion to dismiss on the grounds of lack of personal jurisdiction,
improper venue, and failure to state a claim. Def. Ltr., May 1, 2107, ECF Doc. 36. Tie
Trustee's response, by letter dated May 5, 2017,ECF Doc. 38, included a then-recent discovery:
a Borgata casino credit application form that Barkany completed in March 2012. ECIf Doc. 38 at
pg. 4. As will be discussed, because the form contains false or incomplete information, the
Trustee relies on the document in arguing that Borgata knew or should have known of Barkany's
questionable financial and legal status at the time he gambled at its casino. The parties appeared
at a pre-motion conference on May 31, 2017, where the 2012 credit application received
I

considerable attention.®
2.

I

Threshold Matter:

The Trustee's Cross-Motion for Leave to File the TAG

The TAC is not offered as a purported cure ofthe alleged 12(b)(6) deficiencies. Instead,
the TAC reflects the Trustee's effort to bring before the Court for purposes of the 12(b)(6)

analysis the additional matters that came to light at the time ofthe pre-motion conference and
were discussed in open court at that time (principally, the 2012 credit application and some
additional transfers). Borgata argues only that repleading would be futile because the TAC

§ 1334(b)("...the district courts shall have original but not exclusive jurisdiction of all civil
proceedings arising under title 11, or arising in or related to cases under title 11").

® At the conference, it was agreed that the challenge to personal jurisdiction would be deferred
pending limited discovery on the subject. The challenge to venue, not addressed in the briefs,
appears to have been abandoned.

advances the same legal theories as its predecessor (the SAC), but Borgata does not specifically
object to Trustee's objective of bringing into the 12(b)(6) analysis allegations relating to the
matters already discussed at the pre-motion conference. Finally, the allegations in the TAG that

are new do not alter the Court's analysis ofthe legal issues that Borgata's motion presents for
adjudication.

For these reasons, the Court grants the Trustee's cross-motion and accepts the TAG as the

pleading now subject to 12(b)(6) scrutiny.

Fed. R. Civ. P. 15(a)("a party may amend its

pleading only with the opposing party's written consent or the court's leave" and "[t]he court
should freely give leave when justice so requires"); Rivera v. Harvest Bakerv Inc., 13-CV-

00691(ADS),2015 WL 5542386,at *3(E.D.N.Y. Sept. 18,2015)("[the Rule 15(a)] ^andard is
permissive" and "justice does so require unless the plaintiff is guilty of undue delay or bad faith

or unless permission to amend would unduly prejudice the opposing party")(internal (Quotations
and citations omitted).

3.

The Pertinent Factual Allegations

For purposes of Borgata's 12(b)(6) motion, the TAG is liberally construed, all honconclusory factual allegations are assumed to be true, and all reasonable inferences are: drawn in
the Trustee's favor. Ashcroft v. Iqbal. 556 U.S. 662,678(2009); Countv of Erie. NY v. Colgan

Air. Inc.. 711 F.3d 147, 149(2d Cir. 2013). On the other hand,"labels and conclusioijs,""naked
assertions devoid offurther factual enhancement" and "legal conclusion[s] couched as factual

allegation[s]" are irrelevant for 12(b)(6) purposes. Iqbal. 556 U.S. at 678 (internal quotations
and citations omitted). The Trustee's reliance on certain documents referenced in the TAG does
not convert the motion to one for summary judgment. See, e.g.. Bachaveva v. Americare
Certified Special Services. Inc.. 2013 WL 1171741, *5(E.D.N.Y. Mar. 20, 2013)("on a Rule
7

12(b)(6) motion to dismiss a district court must limit itself to facts stated in the complaint or in
documents attached to the complaint as exhibits or incorporated in the complaint by reference")
(internal quotation and citation omitted).
A.

Barkany's Criminal Conduct

The TAG'S narrative incorporates the pivotal events from the Barkany crimina

prosecution and related civil and bankruptcy matters. Barkany's criminal activities became the
subject of an FBI investigation in or about June 2011; two months later, on or about Apgust 11,

2011—and almost two years before his guilty plea in this Court—^Barkany executed ah Affidavit
of Confession of Judgment(the "Affidavit") in favor of his victims in which he admitted to
having defrauded them out of millions of dollars. TAG

27-29. He admitted that he

"repeatedly engaged in fraudulent and unauthorized practices" and "employed a variety of means
in this fraud, including the solicitation offunds for real estate and loan transactions which,
unbeknownst to [the creditors], were not as represented or altogether non-existent." TAG H 30(a).
The "loans and real estate transactions were generally shams." TAG 1|30(b). Some of i:he early

transactions did produce returns; when the later transactions did not, Barkany "would I'esort to
reporting fictitious or falsely inflated returns, making some payments and, on certain occasions,
trying to get the creditors to roll over payments into new transactions." TAG ^ 30(d). In reality,
however, the investors' money had been used to pay off other creditors "or was otherwise
misappropriated" by Barkany.

^ On March 25,2013, ajudgment based on the Affidavit was entered against Barkany ^d several
Barkany-controlled entities referenced in the Affidavit, including Morgan 86, Inc., in the
Supreme Court of the State of New York, Queens County. Barkany, the Trustee specifically
alleges, is the alter ego of Morgan 86 and other entities. TAG UK 31-33. On August H,2013,
thatjudgment was assigned to BARM,the initial plaintiff in this action; and on April 17, 2017,
8

According to the Affidavit, Barkany's criminal conduct began in approximately January

2009 and concluded by the end of 2010. The TAC alleges(and the referenced public records
confirm), however,that Barkany resumed his criminal activity sometime after his 2011
admissions and continued to engage in fraudulent conduct through approximately Mai'ch 2013,
when he was arrested by federal authorities in this district on charges of wire fraud in violation
oflSU.S.C. §1343. TAC nil 34-37.

The Trustee alleges that, "[ajfter the original Ponzi scheme concluded," Barkany

"devised and implemented additional Ponzi schemes using the same fraudulent metho'^s and
devices he had used to defraud his original victims." TAC 1134. Although the Criminal
Complaint and Information contain the same general charge, neither document demarcates, as
the TAC does, the conclusion of an original scheme and the resumption of criminal activity

through the devising of subsequent schemes. Rather, the Complaint and Information both charge
a continuous time period—and, of note, only in the later-filed Information does the time period
continue through March 2013. Compare Complaint H 4(Barkany engaged in criminal conduct
"[b]etween January 2009 and December 2010) with Information H 11 (Barkany engaged in
criminal conduct "[i]n or about and between December 2009 and March 2013").
The Criminal Complaint specifically charges that Barkany "operated a business in a

manner consistent with what is commonly referred to as a 'Ponzi' scheme," which tha|t document
defines as follows:

as part ofthe settlement of an adversary proceeding commenced by the Trustee agains BARM,
the Bankruptcy Court approved BARM's assignment to the Trustee ofthe Judgment ir sofar as it
is against Morgan 86. TAC HH 45-48

a fraudulent scheme in which investors are lured to invest money in a business
venture with promises of unusually high retums and/or profits from the
investment. The high retums and/or profits are represented to investors to be
generated by the business ventures themselves. However, in a Ponzi scheme, tne
vast majority of the money retumed to investors is actually money that was
obtained directly from successive investors, rather than from the business venture

itself. The Ponzi scheme ultimately becomes unsustainable ...[ejarly investors .
.. often receive the promised profits ...[while][n]ew investors typically make no
profits and, in fact, lose their entire original investment when the scheme
ultimately collapses."
Complaint ^ 2.

The Information, by contrast, does not label Barkany's conduct a Ponzi scheme.
Both instruments, however, charge the same essential criminal conduct, namely, that

Barkany induced investors to give him money by representing to them that he would invest their
money in real estate that he would later sell for a profit. Complaint ^ 2, Information ^ /. These

investment opportunities, however,"did not exist"(Information, K 7)and were entirely
"fabricated" by Barkany. Complaint H 2.

j.

Additionally, both instruments incorporate Barkany's gambling activities into the alleged
criminal conduct, charging that,"instead" ofinvesting in real estate, he used his investors'

money "to pay other investors, donated it to charity, lost it gambling at Atlantic City and
i

otherwise used it for his own profit." Information,^ 8. also Complaint at14(almcjst
verbatim charge). TAC H 38.

When pleading guilty to the single count of wire fraud charged in the Information,

Barkany specifically admitted that his criminal conduct spanned the period December ^009
through March 2013. TAC H 40.

Transcript ofPlea Allocution, June 26, 3013, 13 CR 362,

10

ECF Doc 52

Consistent with the charging instruments, Barkany's allocution does not draw a

line demarcating the "ending" of an early Ponzi scheme and the commencing of later schemes.
The theme of relapse, however, appears elsewhere. For example, in Barkany's
sentencing submission, which this Court can judicially notice, his attorney comments that even
after his plea, Barkany resorted to falsifying a signature on a real estate document, an act that
counsel describes as an unfortunate "relapse into the impulsive [conduct] and poor judgment that

marked his gambling addiction and ... the scheme that led to his prosecution." Sentencing
Memorandum, 13-CR-362, ECF Doc. 103, at 3-4.

B.

The Transfers Alleged to Be Fraudulent Conveyances

The TAC alleges that at Barkany's direction,"[pjroceeds from the Ponzi schemes were

transferred" to Borgata throughout the period of Barkany's criminal conduct, i.e.,"from no later

than December 2009 to March 2013"(defined supra as "the Ponzi period"). TAC ^ 4^. The
TAC includes a table listing 47 such transfers, by date and amount,totaling $4,669,003.50(the
"Transfers"). TAC ^ 54. (As a point of reference, bearing on the limitations issue to be

discussed infra at note 14, approximately Va ofthe Transfers(35 ofthe 47)occurred more than
two years before the June 2014 filing ofthe Chapter 7 petition date).

The Trustee further alleges, upon information and belief, that "all of the Transfers...

were made with Ponzi Proceeds," TAC K 51, and "in furtherance of[the] Ponzi schem^." TAC U
9. Specifically,"Barkany made the [t]ransfers in order to seek to continue his gambling

10 Barkany allocuted before Magistrate Judge Arlene R. Lindsay on June 26, 2013. The late

Judge Leonard Wexler accepted and approved the plea by Order dated August 7, 20131 13 CR
362,ECF Doc. 46. As part of his plea, Barkany consented to forfeiture in the amount of$62
million.

11

activities at [Borgata's] facility, providing him with the chance to win and use his gambling

winnings to sustain and continue the Ponzi schemes." TAG ^ 104. Finally, the Trustee alleges

that Borgata "did not provide reasonably equivalent value or fair consideration in retijm for the
Transfers" and that "the Transfers constitute property of[Barkany's] bankruptcy estate." TAG
nil 52-53.

C.

Borgata's Handling of Barkany's Credit Line

The Trustee alleges, upon information and belief, that Barkany began gambling at

Borgata in November 2008, when he was 24, and a high school graduate with no record of
business activity. TAG ^ 55. At that time, Barkany completed a credit application, which
Borgata approved in the initial amount of$100,000. From December 2009 through February 3,
2011, Barkany transferred $2,140,503.50 "in Ponzi Scheme proceeds"(TAG H 64)to Borgata in
order "to cover his gambling losses."(TAG H 64). During this same period, Borgata resorted to
collection actions to obtain Barkany's payment of his credit line debt. TAG HH 55-65.

From that point forward, Borgata "knew or should have known that Barkany hLd

gambling and financial problems." TAG ^ 68. On March 1, 2011, Barkany executed ^d filed
j

with the New Jersey Gasino Gontrol Gommission a Request for Voluntary Exclusion from

Gasino Gambling(the "Voluntary Exclusion Form" or "Form"). TAG H 66. On the F|)rm,

Barkany acknowledged:"I am voluntarily requesting exclusion from all gaming activities at all
New Jersey licensed gaming casinos and simulcasting facilities because I am a problem
gambler."

The Form offers the option ofself-excluding for one year,five years, or life; B^kany

chose a year. TAG ^ 77. When that period ended,in March 2012,Barkany advised Bcjrgata that
he wished to resume gambling. TAG f 77. Barkany then completed the casino credit application
12

referenced earlier bearing the signature of a credit representative dated March 22, 2012. The

2012 application contained pre-printed, outdated information from 2008. TAC K 82, 83.
Barkany left the lines for "total gross income" and "total gross assets" blank and entered, falsely,
a zero on the line for "indebtedness." TAC ^ 87, 88; EOF Doc. 38, at 4. The lines for Danking

information contain the names oftwo accounts—a joint account with Barkany's wife at HSBC
i

and a business account at Wells Fargo in the name of Morgan 86, the primary entity B^kany
used to conduct the original Ponzi scheme—^that were closed and inactive. TAC ^ 86.

Aware that Barkany was a self-identified problem-gambler, Borgata did not seek to

verify the information on the 2012 credit application; did not require Barkany to supplement the
incomplete application with current financial information; did not conduct a NYSECF search to

determine whether Barkany was a defendant in any lawsuits;'' and did not perform a credit
check or other independent creditworthiness investigation. TAC

79-95. Nevertheless,

Borgata extended Barkany a credit line of$200,000, twice the size of his pre-exclusion line.
TAC nil 79-95.

According to the TAC,in the next year,(from March 2012 until from Barkany'is arrest in

early 2013), Borgata increased Barkany's credit line several times without investigating his
finances. TAC H 96. Some of Barkany's wire-transfers to Borgata came from bank accounts
other than the two listed on the 2012 credit application; one was sent from his attorney's account
to create the impression that Barkany was a successful businessman. TAC flj 97-100.

"In this respect, the TAC alleges that on September 14, 2011, BARM commenced a lawsuit
against Barkany's former attorneys in the New York state courts in which the pleadings aver that
the case "arises from a massive Ponzi scheme perpetrated by Gershon Barkany," and that in
January 2012, Barkany was named as a third-party defendant in another New York action in
which the papers refer to the "fraudulent scheme perpetrated solely by Barkany." TAC 111169-72.
13

In sum,the TAG concludes, at the time of the Transfers, Barkany was insolvent, or was

rendered insolvent as a result of the Transfers; his gambling losses at Borgata during the Ponzi
period far exceeded his winnings; Barkany did not received bona fide consideration in exchange

for the Transfers; and Borgata did not receive the Transfers in good faith. TAG in| lOsjlOS.
DISCUSSION

RULE 12(b)(6)STANDARDS

"To survive a motion to dismiss, a complaint must contain sufficient factual matter,

accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft. 556 U.S. at
678(quoting Bell Atl. v. Twomblv.550 U.S. 544, 570(2007)). "A claim has facial plausibility

when the plaintiff pleads factual content that allows the court to draw the reasonable inference
that the defendant is liable for the misconduct alleged." Iqbal. 556 U.S. at 678. There is no

litmus test: "[d]etermining whether a complaint states a plausible claim" is "context-specific"
and "requires the reviewing court to draw on its judicial experience and common sense." Id In
general, plausibility is understood as lying between probability and mere possibility. Id. at 678
("The plausibility standard is not akin to a probability requirement, but it asks for more than a
sheer possibility that a defendant has acted unlawfully. Where a complaint pleads factsi that are

merely consistent with a defendant's liability, it stops short of the line between possibility and

plausibility of entitlement to relief."). To survive at 12(b)(6), the Trustee must "nudge|j][his]
claims across the line from conceivable to plausible." Twomblv. 550 U.S. at 570. The

dispositive question is whether,"constru[ed] liberally" with "all reasonable inferences[drawn] in
the plaintiffs favor," Gountv ofErie. 711 F.3d at 149(internal quotation and citation omitted),
the TAG pleads enough factual content "to allow the court to draw the reasonable inference that
the defendant is liable for the misconduct alleged." Iqbal. 556 U.S. at 678.
14

EVALUATION OF THE TRUSTEE'S CLAIMS
I.

The Actual Fraud Claims

As noted, the Trustee brings claims for actual fraudulent conveyance under DCL § 276

and fraudulent transfer under Code § 548(a)(1)(A). The central element ofthese claiijis, as now
discussed, is the debtor's actual intent to hinder, delay or defraud creditors.
A. Governing Statutory Provisions

Section 548(a)(1)(A) ofthe Code provides, in relevant part:
The trustee may avoid any transfer ... of an interest of the debtor in
property, or any obligation incurred by the debtor that was made or
incurred on or with in 2 years before the date of the filing of the petition, if

the debtor voluntarily or involuntarily—
(A)made such transfer or incurred such obligation with actual intent to
hinder, delay, or defraud any entity to which the debtor was or became, on
or after the date that such transfer was made or obligation was incurred,
indebted[.]

11 U.S.C. § 548(a)(1)(A)(emphasis added).

Section 550 of the Code provides,in relevant part:
to the extent that a transfer is avoided under [section 548], the trustee may
recover for the benefit of the estate, the property transferred, or, ofthe
court so orders, the value of the property, from—

(1)the initial transferee ofsuch transfer or the entity for whose benefit
such transfer was made; or

(2)any immediate or mediate transferee ofsuch initial transferee.
11 U.S.C. § 550(a).

NY DCL §§ 276 and 278 authorize similar relief. Section 276 provides:
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.
15

i

|

Section 278 authorizes defrauded creditors to seek to "set aside" conveyances jhat section
276 declares fraudulent. Unlike the Code, however,the DCL allows the setting aside of transfers

made up to six years (rather than only two years) before the bankruptcy petition was f^led. See

Schneider v. Barnard. 508 B.R. 533,541 (E.D.N.Y. 2014)(Bianco, J.)(collecting autllorities).'^
Finally, under both the DCL and the Code,the nature ofthe transferee's state of mind
can be a bar to avoidance of an otherwise fraudulent conveyance; the DCL refers to a

transferee's "knowledge ofthe fraud" whereas the Code speaks more generally of"good faith.
See NY DCL § 278(1)(creditor as to whom a conveyance is fraudulent may have the

conveyance set aside "as against any person except a purchaserforfair consideration without
knowledge ofthefraud at the time of the purchase")(emphasis added); 11 U.S.C. § 548(c)(even

if a transfer is voidable,"a transferee that takesfor value and in goodfaith may retain ^y
interest transferred to the extent that such transferee gave value to the debtor in exchange for
such transfer or obligation")(emphasis added).

S^ Schneider. 508 B.R. at 542("Although the New York statute of limitations for ^audulent
conveyance actions allows a creditor to recover transfers made six years before the filing ofthe

complaint, it is well established that once a bankruptcy petition is filed, section 546(a) pfthe
Code is triggered, allowing a trustee to recover transfers made six years before the petition date."
(internal quotation and citation omitted).

The parties did not address the limitations issue. Nevertheless, it is clear that the 35 trajnsfers

that occurred between and including January 7,2010 and June 4,2012(see TAC K 54)jwould not
be actionable under Bankruptcy Code § 548(a)(1)(A) because they were made more th^ two
years before the petition date (June 14, 2014). All 47 Transfers, however, occurred with the sixyear limitations period applicable to the DCL § 276 claim.
16

B. The "Ponzi Scheme Presumption"

In Borgata's view, to characterize the Transfers as fraudulent conveyances is simply
I

misguided as a matter oflaw and common sense. The credit relationship between a >jfew Jersey
casino and its patrons, as Borgata explains, is entirely a creature of state law,s^ generallv
N.J.A.C. §19.45 et seq(New Jersey Division of Gaming("DOE")regulations), and there is no

allegation that the Transfers contravene that law.^^ By repaying the credit Borgata extended to

him, Borgata urges, Barkany was not defrauding creditors, but simply paying one oftl^em. Put
differently: for purposes offraudulent conveyance analysis, Borgata urges, it should tje treated as
the equivalent of Barkany's grocery store, utility provider or any other legitimate business that in

exchange for fair consideration—i.e., goods or services provided—^was paid by Barkaky with

Ponzi proceeds. The consideration here, which the Trustee does not dispute, is the unLisputed

entertainment value ofgambling.'"*

|

The Trustee, in defense of his claims, relies on settled Second Circuitjurisprudence (to be

discussed)in asserting that the Transfers are presumptively fraudulent because they w^re made
during the operation ofthe Ponzi schemes and "in furtherance of those schemes. He ^rther

While not within the four comers ofthe complaint, the nature of the credit relationship and the
goveming regulations can be judicially noticed for purposes ofthe 12(b)(6) motion. In general,
in order to draw on a casino line of credit, a patron requests a "marker" for a specified amount.
This "marker" is a counter check, generated by the casino, with the patron's banking
information, including ABA routing number, and made payable to the casino; upon issuance (at
either the gaming table or the casino cashier), the patron signs the check, which is held as
security against the repayment of the credit. The regulations require that all markers in excess of
$5,000 be repaid within 45 days; if the payment is not made,the casino is required to d eposit the
marker in satisfaction of the liability.

Barkany also invokes the statutory bars to recovery in arguing that, regardless of Bajkany's
fraud, Borgata was an innocent party who received without knowledge of the fraud (under DCL

§ 276)and in good faith (under Code § 548(c). This branch ofthe motion is issue is discussed
separately in Part l.C, infra.
17

asserts that this presumption is enough to get him past 12(b)(6). Borgata"concedes l^that] there
is a general rule that a Ponzi scheme demonstrates actual intent to hinder, delay, or defraud

j

creditors as a matter of law." Def. Mem.,ECF Doc. 42-1 at 7, but argues that the rule is

inapplicable to the Transfers because Borgata is not an alleged victim of Barkany's scjhemes.

The settled law plainly supports the Trustee's position.

(

The debtor's operation of a Ponzi scheme is strong circumstantial

|

evidence ofthe debtor's actual intent to hinder, delay, or defraud creditors.

!

Indeed, transfers made by a Ponzi entity are presumed to have been made

I

with actual intent to hinder, delay or defraud creditors under the relevant

j

Bankruptcy Code provisions and applicable New York Debtor and
Creditor law. This Ponzi scheme presumption, according to which the
existence of a Ponzi scheme establishes that transfers were made with the

intent to hinder, delay and defraud creditors, is well recognized by courts

in this Circuit and elsewhere.

|

j

Schneider. 508 B.R. at 542(reviewing the jurisprudence)(intemal quotations and citations

omitted).

|

Notably, this presumption (at least as this Court understands the jurisprudence^ is far
from a strained legal construct; rather, as Schneider explains, the presumption appropriately
reflects the inevitable unsustainability ofPonzi schemes:

[t]The rationale for the Ponzi scheme presumption derives from the nature

I

of a Ponzi scheme itself, A Ponzi scheme is any sort offraudulent

|

arrangement that uses later acquired fimds or products to pay off previous
investors...Because the investor pool is a limited resource and will

eventually run dry, the Ponzi scheme operator must know all along,from

j

the very nature of his activities, that investors at the end ofthe line will

|

lose their money. Accordingly, when a Ponzi scheme transfers funds out

,

ofthe Ponzi scheme, only one inference is possible, namely,that the

1

debtors had the intent to hinder, delay or defraud creditors.

j

Id.(intemal citations, quotations,and alterations omitted).

j

With respect to the presumption, the only question Borgata's motion presents i^ whether

to declare the principle mapplicable to the Transfers solely because Borgata was not oiJe of the
18

investors in the stream feeding the Ponzi cycle. In Borgata's view, logic and caselaw dictate that
the presumption apply only to "transfers that make the investment look profitable in order to
attract future investors and thereby 'further the Ponzi scheme." Def. Mem.,ECF Doc 42-1, at 8.

Id. Since Borgata was not an investor, the Transfers did not contribute to the signatuije Ponzi
falsity, z.e., the fraudulent appearance of profitability needed to attract new investors.

Borgata's position, however,rests on an on unduly narrow construction ofthe lerm
"Ponzi scheme" and the eponymous presumption, as the controlling caselaw shows. F|irst, as
explained by Bankruptcy Judge Burton R. Lifland, writing in one ofthe many decisions in the

Manhattan Investment Fund litigation in the Southern District(cited heavily yet selectively by
both parties here):

When a debtor operating a Ponzi scheme makes a payment with the
knowledge that foture creditors will not be paid, that payment is presumed
to have been made with actual intent to hinder, delay or defraud other
creditors—regardless ofwhether the payments were made to early
investors, or whether the debtor was engaged in a strictly classic Ponzi
scheme.

In re Manhattan Inv. Fund Ltd.. 310 B.R. 500,509(Bankr. S.D.N.Y. Oct. 7, 2002)(eniphasis
added). A subsequent district court opinion in the same litigation held similarly. S^ In re

Manhattan Inv. Fund Ltd.. 397 B.R. 1,12(S.D.N.Y. 2007)(explaining that "there is ncj precise
definition of a Ponzi scheme and [that] courts look for a general pattern, rather than specific
requirements," and that the label Ponzi "applie[s] to any sort of inherently fraudulent

arrangement under which the debtor-transferor must utilize after-acquired investment fjmds to
pay off previous investors in order to forestall disclosure ofthe fraud")(internal quotation and
citation omitted).

19

Indeed, in that case, the district court affirmed the bankruptcy court's application ofthe

Ponzi presumption to transfers that a hedge fund made to its broker-maintained margii
account—which included funds used to open new trading positions, to support open positions,

and to keep the account operational; none were payments to investors. 397 B.R. at 13.'^
The point is further illustrated by In re C.F. Foods. 280 B.R. 103(Bankr. E.D. Pa. 2002),

where the bankruptcy court applied the presumption to transfers made by a Ponzi schelne
operator to a charity. See id., 280 B.R. at 111-112. The court reasoned that,"[i]n perpetrating

the Ponzi scheme,[the debtor] had to know that the monies from investors would even|tually run
out and that the payments to charities would contribute to the eventual collapse ofthe

stratagem," and that "[kjknowledge that future investors will not be paid is sufficient to establish

actual intent to defraud them." Id at 111 (internal citation omitted). Cf In re ArmstroLg,285
F.3d 1092(8th Cir. 2002)(trustee successfully avoided, on an actual fraud theory under section
548(a)(1) ofthe Code,transfers made by a Ponzi scheme operator to Harrah's casino to cover his
gambling expenses and debts).

The entity at issue in Manhattan Fund Investment's was a hedge fund, engaged in the
ultimately unprofitable short selling oftechnology stocks in the late 1990's. Fund manager
Michael Berger hid the fund's growing losses by fraudulently misrepresenting to new investors
that the fund was profitable by concealing its financial status from brokers, auditors and other

service providers. The Court held that the fund was a Ponzi scheme because, despite the many
directions in which funds flowed, Berger ultimately "sought to cover losses from ill-advised
short sales ...with deposits made by new investors." 397 B.R. at 12.
Of note, the Ponzi scheme presumption was not invoked in Armstrong. Instead, the
bankruptcy court made findings of actual fraud after a hearing at which the debtor, attorney
Murray Armstrong, testified. The testimony revealed that Armstrong obtained funds "through
numerous fraudulent methods, including his Ponzi schemes, check kiting, and embezzlement
from his clients." In re Armstrong. 231 B.R. 739, 742(Bankr. E.D. Ark. 1999). The relationship

between his gambling and his Ponzi schemes was not clearly demarcated: the court observed that
"[ajlthough [Armstrong] may have been 'driven' to gamble and to obtain funds to cover his
20

These cases also illustrate that one component of Borgata's position is correct: namely,

that the presumption of intent to defraud creditors is triggered only when the transfers sustain or

advance the Ponzi scheme in some way.'^ The rub for Borgata, however, is that the allegations

here, appropriately tracking the theory charged in the criminal complaint to which B^kany pled
guilty, cast the Transfers in precisely this way, i.e., as having been made in furtherance of

Barkany's ongoing Ponzi activity.

TAC H 51,9("all of the Transfers... were m'^de with

Ponzi Proceeds...in furtherance of[the] Ponzi scheme").

I

Importantly, the TAC does more than merely recite the Barkany prosecutors'|heory—a
gesture that might be susceptible to attack as a "mere conclusion" not entitled to weight in the
12(b)(6) analysis—^but also spells out concretely just how the Transfers did (or could);further the

Ponzi scheme:"Barkany made the Transfers in order to seek to continue his gambling activities
at [Borgata's] facility, providing him with the chance to win and use his gambling winnings to
sustain and continue the Ponzi schemes." TAC H 104. In short, the TAC alleges that Barkany

resorted to a potential source other than later investors to seek to raise the money necessary to
keep his scheme going. This is neither conclusory nor fanciful but plainly plausible within the

meaning of lobal. It is therefore also sufficient under the cited authorities to trigger apjplication

illegal schemes, in fact he knew at the time he placed the bets that he could not win sufficient

funds to cover his gambling losses and Ponzi schemes." Id at 743.

j

To be sure, the required nexus between the scheme,and the transactions to which thi
presumption offraudulent intent applies, has not been articulated consistently.

Schneider,

508 B.R. at 543 (collecting cases). The presumption has been applied to "almost all tr^sfers
made by a Ponzi entity;" to transfers that "bear some connection to" the scheme, are "inade in
connection with" the scheme, or are "in furtherance ofthe scheme;" but not to transfers that "are

unrelated to" the scheme. Id (internal citations and quotations omitted).

21

!

of the presumption that, in so doing, Barkany intended to hinder the ability ofsome of his
investor-victim-creditors to collect what he owed them.

To be sure, the allegations also give rise to a range of other inferences. It may be,for

example,that Barkany gambled not specifically to cover Ponzi scheme obligations but with a
reckless disregard for the fact that he was putting funds owed to his victims at risk—a set offacts

that would also justify, post hoc, application ofthe Ponzi presumption at this stage. Tljie truth
may also turn out to be, as Borgata asks the court now to infer, the opposite; i.e., that ^arkany
resorted to criminal activity in order to fund a gambling addiction. These, however, arp
considerations for another day: at this stage, the Court draws all reasonable inferences in the
Trustee's favor. IqbaL 556 U.S. at 678; Countv of Erie. 711 F.3d at 149.

C.

The Bars to Recovery:"Knowledge of the Fraud"(DCL § 278(1)) and
"Good Faith"(Code § 548(c)).

Borgata argues that, even ifthe presumption establishes fraudulent intent on B^kany's
part for 12(b)(6) purposes, the Trustee's claims must nevertheless be dismissed because Borgata

is an innocent recipient; the argument takes a slightly different tack under the DCL (wnich, as

noted, refers to "knowledge ofthe fraud") and the Code(which uses the term "good faith").

In the DCL § 276 context, Borgota argues that the transferee's knowledge ofthl
transferor's fraud is an essential element that it is the Trustee's burden to adequately plead and

prove. Borgata says that the TAC's conclusory recitation that it(Borgata)knew or should have
known of Barkany's criminal conduct is not enough to survive 12(b)(6) because several

allegations preclude any bona fide, plausible inference to that effect. For example, although
Barkany initially admitted to operating a Ponzi scheme in the August 2011 Affidavit of
Confession of Judgment in favor of BARM(TAC ^ 28-30), BARM did not make that d.ocument

22

public, by filing it in court, until March 25, 2013(TAG ^31)—^which is after the last

Transfers occurred.

the

TAG H 54(the Transfers occurred between January 7, 2010 dnd March

13, 2013). Similarly, it was not until the end of March 2013—again,after the last of|the

Transfers—that the federal criminal charges against Barkany were filed.(TAG 1135). jsince it is
not alleged that Borgata was an actual co-conspirator of Barkany's, Borgata emphasizes, there is
simply no basis for inferring the requisite actual or constructive knowledge.
The same theme fuels Borgata's argument that it received "in good faith" within the

meaning of Gode § 548(a), except that Borgata appears to concede that good faith under the

Gode is an affirmative defense on which it, rather than the Trustee, bears the burden, porgata
appears to argue, however,that the absence good faith can nevertheless be the basis for dismissal

here because the Trustee has elected to address the subject and because the pleading filly

presents the facts essential to the defense. See, e.g.. Bachaveva. 2013 WL 1171741, a|; *5

("dismissal under Rule 12(b)(6)on the basis ofan affirmative defense is appropriate .j..ifthe
defense appears on the face ofthe complaint")(internal quotation and citation omitted|).

Although Borgata's cry of"innocent transferee" has some equitable appeal unjjer the

circumstances alleged, once again the controlling law supports the Trustee: at the 12(b|)(6) stage,
a transferee's good faith (under Gode §548(c)) and lack of knowledge of the fraud (uncier NY
DGL §278) are fact-intensive, affirmative defenses that need not and should not be reabhed at the

12(b)(6) stage. See, e.g.. Gowan v. The Patriot Group. LLG fin re Dreier LLP\ 452 B^R. 391,
401 et s^.(Bankr. S.D.N.Y. 2011)(aware that"some defenses may be appropriately considered
at the motion to dismiss stage," nevertheless holds that, in fraudulent conveyance actions,
"consideration of defendants' good faith sufficient to make out an affirmative defense under §

548(c)ofthe[]Gode or NYDGL § 278(1)is not appropriate at the motion to dismiss sjage")
23

(emphasis added)(collecting cases); Schneider. 508 B.R. at 545-547(holds that "the.Bankruptcy
Court correctly decided that DCL § 276 requires only proof of the transferor's fraudulent intent;

the transferee's intent is relevant only to a good faith defense [and] finds the Dreier (decision

particularly persuasive on this issue"). Accord Picard v. Madoff(In re Bernard L.fUadoff Inv.
Sec. LLC). 458 B.R. 87, 105 (Bankr. S.D.N.Y. 2011)("because section 278 is an affirmative

defense, the transferee's intent should be considered on a full evidentiary record...consequently,

for the purposes ofa motion to dismiss,the trustee need state with particularity only tjie
circumstances constituting the fraud and allege the requisite actual intent by the transferor to

hinder, delay, or defraud"). In asserting that a transferee's knowledge ofthe transferor's fraud is
an essential element that it is the Trustee's burden to plead, Borgata neither addresses[these cases

nor offers any authority in support.

i

Further, as a practical matter, the Court finds Dreier instructive because there, ps here,

"the dispute ... centers on the Trustee's argument that the Defendants knew or shoulc^ have
known that the transfers were made with tainted funds." 452 B.R. at 426. The bankruptcy court

concluded that "[djetermining the Defendants' good faith is an indisputably factual incjuiry to be

undertaken by the Court after the close of discovery and need not be resolved at the motion to

dismiss stage" and,therefore,"[i]t is simply not the Trustee's burden at this stage ofth|e case to
counter the Defendants' declaration of good faith." Id Borgata's claim here is likewise
intensely factual—and, at this stage, speculative absent a factual record. For example, by

Schneider recognizes that courts have not ruled consistently on this question,s^ 508 B.R. at
546, but relies heavily on the reasoning of Dreier for several reasons detailed at length in the

opinion. See id at 546-547. This Court is similarly persuaded for similar reasons.

24

]

Borgata's own account, the markers it issued Barkany included his bank routing nun^ber, which

is information presumably fumished on his credit application. Arguably,it should h|ve come to
Borgata's attention, when it deposited Barkany's markers, that Barkany's credit application

contained false information. Borgata, however, says that it, too, is a victim, defraudell by

Barkany, and that nearly $250,000 in credit extended to him remains unpaid. The pojnt is that
these issues must await factual discovery.'^

D. Particularity Under Fed. R.Civ.P.9(b).
j
Allegations offraud ofcourse must satisfy a heightened pleading standard. S|e Fed. R.
Civ. P. 9(b)("In alleging fraud or mistake, a party must state with particularity the |

circumstances constituting fraud or mistake"). Rule 9(b)is "designed to provide a defendant
with fair notice of a plaintiffs claim, to safeguard a defendant's reputation from improvident
i

charges of wrongdoing, and to protect a defendant against the institution of a strike suit." U.S.

ex rel. Ladas v. Exelis. Inc.. 824 F.3d 16,26(2d Cir. 2016). Rule 9(b)typically requijes a
plaintiff alleging fraud to identify the specific statements alleged to be fraudulent as wpll as who
made them, when, where, and why. Ladas. 824 F.3d at 25.

Further still, neither "knowledge" under the DCL or "good faith" under the Code is dearly

defined and may require further clarification post-discovery. See, e.g. Dreier. 452 B.Rj at 445-

447(noting that "[t]he Second Circuit has recognized that the question of'good faith' ijinder the
NYDCL is 'an elusive concept,"' that "the[]Code does not defines 'good faith' as us^d in §
548," and that the question "under both the NYDCL and the[]Code ha[s] been the subject of
wide-ranging debate among courts and commentators")(internal citations and quotations
omitted)(collecting authorities).

25

Here, because the Ponzi scheme presumption satisfies the Trustee's pleading burden with

respect to intent, all that 9(b) requires is that he specify the date and amount ofthe transactions
alleged to be fraudulent conveyances, and this he has done.

TAG H 54.

11. Constructive Fraudulent Conveyance

j

Under DCL § 273 and 275
A.

I

Governing Statutory Provisions

j

Section 273-a ofthe DCL provides:

Every conveyance made and every obligation incurred by a person who is or wjill
be thereby rendered insolvent is fraudulent as to creditors without regard to his^

actual intent ifthe conveyance is made or the obligation is incurred without fair

consideration. (DCL § 273-a).

j

See generallv HBE Leasing Corp. v. Frank. 48 F.3d 623,633(2d Cir. 1995)
("HBE Leasing I")

(labelling the fraud "identified by DCL § 273-a" as a type of"constructive fraud," because,ifthe
statutory conditions are met, a transfer can be deemed a fraudulent conveyance ''''regardless of
the intent ofthe transferor''')(emphasis added).

Section 275 of the DCL,while taking some account of the transferor's intent, a^so turns
on fair consideration; it provides:

Every conveyance made and every obligation incurred without fair consideratiop
when the person making the conveyance or entering into the obligation intends pr
believes that he will incur debts beyond his ability to pay them as mature, is |
fraudulent as to both present and future creditors. (DCL § 275)

"Fair consideration," in turn, is defined by DCL § 272:

j

Fair consideration is given for property, or obligation,

|

a. When in exchange for such property,or obligation, as a fair

[

equivalent therefor, and in goodfaith, property is conveyed or an
antecedent debt is satisfied, or

b. When such property, or obligation is received in goodfaith to
secure a present advance or antecedent debt in amount not
26

disproportionately small as compared with the value of the
property, or obligation obtained. (DCL § 272, emphasis added).
See generally Sham Int'l Corp. v. State Street Bank & Trust Co.,403 F.3d 43,53(2d Cir. 2005)

(summarizing these and related New York provisions).

B. Controllmg Jurisprudence

|

Constructive fraud,for fraudulent conveyance purposes, is a horse of a differeijit color.

With the focus shifting from the intent ofthe transferor to the question offair consideijation
(which, by statute, includes the transferee's good faith), the law supports Borgata's position here.

As an initial matter, it is clear that DCL § 272 means what it says: in contrast tj) its status

in actual fraudulent conveyance jurispmdence,"good faith" on the part ofthe transferee is an
element of a constructive fraudulent conveyance claim. See Sham.403 F.3d at 53,54jn.4 ("[t]he

fair consideration test is profitably analyzed as follows:(1)... the recipient ofthe debtjor's
property must either(a)convey property in exchange or(b)discharge an antecedent dejbt in

exchange; and(2)such exchange must be a fair equivalent ofthe property received; aJd(3)such
exchange must be in good faith," noting that "'[g]ood faith' in a constmctive fraudulent

conveyance claim is the good faith of the transferee."). Accord Dreier. 452 B.R. at 442("Under

New York law, the party seeking to have the transfer set aside [as constmctively fraudiilent]

bears the burden of proof on the element offair consideration and, since it is essential tp a
finding offair consideration, good faith")(internal quotation and citation omitted).^®

Dreier. taking the analysis a step further, observes that in seeking to establish a lack (if"fair
consideration," a tmstee may seek to establish either the lack of"fair equivalent value"jfor the
transfer or the lack of good faith on the part of the transferee. 452 B.R. at 442-443. As noted, the
Tmstee is not disputing that the gambling entertainment experience Borgata provided Barkany
was "fair equivalent value." The only issue presented, therefore, is Borgata's good faitn.
27

Without reaching the question of whether "good faith" as an element of"fair

consideration" for constructive fraud might differ in scope from "good faith" in the alctual fraud

context,the Court concludes that the constructive fraudulent conveyance claims herejmust be
dismissed because binding Second Circuit precedent forecloses the precise theory of jack of
good faith on which the Trustee relies.

[

First, as a general matter, the Circuit reminds us that,"[u]nlike the[]Code,tl|e[NYC
DCL]is a set of legal rather than equitable doctrines, whose purpose is not to provide]equal

distribution of a debtor's estate among creditors, but to aid specific creditors who havb been

defrauded by the transfer ofa debtor's property [and] does not bestow a broad power jo reorder
creditor claims or to invalidate transfers that were made for fair consideration ... whe^e no
actual intent to hinder, delay, or defraud creditors has been shown." HBE Leasing I, ^8 F.3d at
634. Further,"even the preferential repayment of pre-existing debts to some creditors does not

constitute a fraudulent conveyance, whether or not it prejudices other creditors, because the basic
object offraudulent conveyance law is to see that the debtor uses his limited assets to iatisfy
some of his creditors; it normally does not try to choose among them." Id.(internal quotation

and alteration omitted).

|

Second, aware that"some New York cases have broadly construed the referen(pe to
"good faith" in DCL § 272's definition of'fair consideration,"' while "other authorities have
cautioned against an expansive reading of the [DCLJ's reference to good faith," the Circuit
discouraged efforts "to assert lack of good faith" as an "independent ground" for voiding
transactions. HBE Leasing 1.48 F.3d at 636. A decade later, in Sharp, the Circuit re-affirmed

that good faith is a distinct element ofthe definition offair consideration while acknowledging

28

that "[g]ood faith is an elusive concept in New York's constructive fraud statute." Sham 403
F.3d at 54.

Relevant here, however, the Circuit in Sharp squarely rejected the approach to good

faith/lack of knowledge on which the Trustee's constructive fraudulent conveyance claims rest.
Reviving the teaching of HBE Leasing I that the '*[t]he basic object offraudulent conveyance

law is to see that the debtor uses his limited assets to satisfy some of his creditors" ank that "it
normally does not try to choose among them," 403 F.3d at 54, Sham further explained: "[n]or it
does it matter that the preferred creditor knows that the debtor is insolvent." Id.

In that case. Sharp argued that certain transfers to State Street Bank were constructively

fraudulent because "State Street knew that the funds used to repay the State Street del^t were

fraudulently obtained." Id. at 55. The Circuit found Sharp's theory "unpersuasive," ii,and

adopted the following as Circuit law:

j

a lack of good faith does not ordinarily refer to the transferee's knowledge ofthe

source ofthe debtor's monies which the debtor obtained at the expense of othey
creditors... to find a lack of"good faith" where the transferee does not particij^ate
in, but only knows that the debtor created the other debt through some form of|
dishonesty is to void the transaction because it amounts to a kind of

|

"preference"—concededly a most undesirable kind of preference, one in whichj
the claims of altemative creditors differ considerably in their moral worth, but a

kind of preference nonetheless.

!

Id at 55(intemal quotations and citations omitted).^'
The panel in Sham was emphatic: it reiterated that:

|
,

Sham also explained that the mle it adopted was not inconsistent with its "observatiop in HBE
Leasing I\hdX 'the statutory requirement of"good faith" is satisfied if the transferee act^d

without either actual or constmctive knowledge of any fraudulent scheme"—language c^n which
the Tmstee relies here. Sharp explains that HBE Leasing Ts.discussion was limited to ijts unique
facts, which involved the "collapsing of multiple transactions" that were treated as "phaises of a
single transaction." Id at 55 (intemal quotations omitted).
i

29

i

Sharp has alleged State Street's knowledge that the funds used to repay the j
preexisting debt were fraudulently obtained. New York fraudulent

conveyance law, however, is primarily concerned with transactions that

j

shield company assets from creditors, not the manner in which specific
debts were created... State Street's knowledge of the [transferors'] fraud,
without more, does not allow an inference that State Street received the

$12.25 million payment in bad faith.

i

Id. at 55-56(internal citation and quotation omitted).

j

The Trustee's position here is materially indistinguishable from the theory rejected, as a

matter of law, in Sharp.^^ As a result, the TAC cannot be reasonably be construed to ^llege lack
offair consideration, an essential element of constructive fraudulent conveyance. Accordingly,

the Trustee's claims for constructive fraudulent conveyance are dismissed.^^
3.

j

Unjust Enrichment

To prevail on a claim of unjust enrichment, a party must show that(1)the othej* party was
enriched,(2)at that party's expense and(3)that it is against equity and good conscien(pe to

permit the other party to retain what is sought to be recovered. Paramount Film Distrili). Corp. v.
State of New York. 30 N.Y.2d 415,421 (1972), cert, denied,414 U.S. 829(1973). The

allegations preclude recovery under this theory because, as noted, there is no allegatiorj that the
credit relationship between Barkany and Borgata was itself unlawful, or that Borgata did not

have a prima facie entitlement to be paid for the credit it lawfully extended. The separate issue

As noted previously, there has been no allegation or suggestion that Borgata participated in
Barkany's criminal activity. See Sharp,403 F.3d at 55 (lack of good faith under DCL 272 not
shown "where the transferee does not participate in, but only knows that the debtor created the

other debt through some form ofdishonesty...")(emphasis added).

j

As a final word: it is not clear that there is any reason the Trustee needs to proceed(m parallel

theories ofconstructive and actual fraud. Notably, between the SAC and the TAG the T^pastee
elected to withdraw his claim for constructive fraudulent transfer under the Bankruptcy pode.
30

of whether the Transfers are voidable after the fact under fraudulent conveyance lawjdoes not
trigger the concerns of conscience that trigger a bona fide claim for unjust enrichmer^t.

CONCLUSION

For the reasons discussed:(i) the Court grants the Trustee's cross-motion for leave the
file the Third Amended Complaint as the pleading subject to Rule 12(b)(6) analysis;(ii) the

Court denies Borgata's motion to dismiss with respect to the third and fourth causes of action

(i.e., those pleading actual fraud under NY DCL §276 and Code § 548(a)(1)(A)); andj(iii) the
Court grants Borgata's motion to dismiss the first, second and fifth causes of action (/jC., the
claims for constructive fraud under NY DCL §§ 273-a and 275 and for unjust enrichnient). It is

the Court's hope that the zealously requested discovery will give this proceeding the focus it has
been lacking.
SO ORDERED.

Dated: Brooklyn, New York
October //, 2018

s/ RJD
United States District Judge

31