Cullin v. Silverman

Filing 8

MEMORANDUM AND ORDER. For the reasons stated in the attached opinion, the Bankruptcy Court's Order is AFFIRMED. The Clerk of the Court is respectfully directed to close this case. My chambers mailed a copy of this opinion and docket entry to pro se defendant. Ordered by Judge Joan M. Azrack on 3/31/2015. (Terranova, Robert)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
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KAREN CULLIN,
Appellant,

For Online Publication Only

MEMORANDUM &
ORDER
14-CV-4248 (JMA)

-againstKENNETH P. SILVERMAN,
Chapter 7 Trustee of Agape World, Inc.,
Appellee.
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A P P E A R A N C E S:
Karen Cullin
Pro se Appellant
David Joseph Mahoney
SilvermanAcampora LLP
100 Jericho Quadrangle, Suite 300
Jericho, New York 11753
Attorneys for Appellee
AZRACK, United States District Judge:

Appellant Karen Cullin appeals an order of the Bankruptcy Court (Grossman, J.) that
awarded Trustee Kenneth P. Silverman $11,744.76 on his constructive fraudulent conveyance
claim against Cullin.

For the reasons set forth below, the Bankruptcy Court’s order is

AFFIRMED.
I. BACKGROUND
Cullin made investments totaling $75,000 in a Ponzi scheme perpetrated by Nicholas
Cosmo and various companies he controlled, including Agape World, Inc. and other “Agape”
entities. Cullin’s investments were memorialized in contracts between her and Agape entities.

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Before the scheme collapsed, Cullin received $86,744.76, leaving her with a net gain of
$11,744.76 on her investments.
Beginning in 1999, Agape operated as a purported “bridge lender, whereby investors
were advised that Agape provided short-term bridge loans to commercial borrowers in order to
generate high rates of return.” (Order Following Trial (“Order”) ¶ 8, ECF No. 1-4.) Agape and
various brokers recruited third-party investors, such as Cullin, to invest money with Agape. (Id.
¶ 9.) Pursuant to the contracts between the third-party investors and Agape, the “investors were
permitted to receive payments from their purported investments in the form of ‘interest
payments’ or, alternatively, the purported investors were permitted to ‘roll-over’ their
investments to a future bridge loan offered.”1 (Id. ¶ 11.) However, “[t]he third-party funds
received by [Agape] were not used to invest in bridge loans.” (Id. ¶ 12.) Instead, funds from
investors were “used to pay prior investors their promised rate of interest or to provide a return
of their investment.”

(Id. ¶ 13.)

In addition, Agape used investor funds to engage in

“undisclosed and unauthorized commodity futures trading.” (Id. ¶ 15.)
After various Agape entities entered bankruptcy, Silverman, the Trustee for those entities,
filed an adversary proceeding against Cullin, alleging that some of the funds Cullin received
from Agape constituted a fraudulent conveyance. After a bench trial, the Bankruptcy Court
found that Cullin’s $11,744.76 net gain constituted a fraudulent conveyance under New York
law and awarded that amount to the Trustee. (Id. at 7.) This appeal followed.2

1

The details of Cullin’s contracts are discussed further infra.

2

In the Bankruptcy Court, Cullin appeared pro se and represented herself during the bench trial. Cullin, however,
admitted to the Bankruptcy Court that her attorney had prepared her pre-trial brief. (Trial Tr. (“Tr.) 4:14–18; 5:10–
12, ECF No. 1-9.) On appeal, Cullin is again proceeding pro se. It appears, however, that her appellate papers were
prepared by, or with the substantial assistance of, an attorney.

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II. DISCUSSION
A. Standard of Review
Cullin challenges the Bankruptcy Court’s legal conclusions, which this Court reviews de
novo. In re Hyman, 502 F.3d 61, 65 (2d Cir. 2007). A bankruptcy court’s factual findings are
reviewed for clear error.3 Id.
The harmless error rule applies in bankruptcy appeals. In re Sanshoe Worldwide Corp.,
993 F.2d 300, 305 (2d Cir. 1993) (citing Federal Rule of Bankruptcy Procedure 9005).
B. New York’s Fraudulent Conveyance Statute
“The Bankruptcy Code provides two avenues for a trustee to recover fraudulent transfers
made by the debtor.” In re Carrozzella & Richardson, 286 B.R. 480, 483 n.3. (D. Conn. 2002).
A trustee may seek relief directly under 11 U.S.C. § 548, the Bankruptcy Code’s fraudulent
conveyance provision. Alternatively, a trustee may invoke 11 U.S.C. § 544(b), which “permits a
trustee to avoid any transfers that an unsecured creditor could avoid under applicable state law.”
In re Bernard L. Madoff Inv. Securities LLC, 773 F.3d 411, 41 (2d Cir. 2014), pet. for cert. filed
(Mar. 17, 2015). Here, the applicable state law is New York Debtor & Creditor Law (“DCL”) §§
270–281. “With few exceptions, the basic principles governing fraudulent transfer actions are
the same, regardless of [whether Section § 548 or state law is invoked.]” Carrozzella, 286 B.R.
at 483 n.3 (citation omitted).
DCL § 273 provides that: “[e]very conveyance made and every obligation incurred by a
person who is or will be thereby rendered insolvent is fraudulent as to creditors without regard to
his actual intent if the conveyance is made or the obligation is incurred without a fair
3

To the extent that the Supreme Court’s decision in Stern v. Marshall, 564 U.S. 2 (2011), could potentially impact
this appeal, the parties have waived any arguments under Stern by not raising them below or on appeal. See In re
FKF 3, LLC, 501 B.R. 491, 499 (S.D.N.Y. 2013) (noting that parties who fail to object before the bankruptcy court
or on appeal can be deemed “to have impliedly consented to final adjudication by the bankruptcy judge”), appeal
filed (2d Cir. Dec. 5, 2013).

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consideration.” “Fair consideration is given for property, or obligation . . . [w]hen in exchange
for such property, or obligation, as a fair equivalent therefor, and in good faith, property is
conveyed or an antecedent debt is satisfied . . . .” DCL § 272.
Similarly, Section 548 of the Bankruptcy Code requires, among other things, that the
debtor

“received less than a reasonably equivalent value” in the transfer.

11 U.S.C. §

548(a)(1)(B)(i). When analyzing claims under the DCL and the Bankruptcy Code, courts use the
“[Bankruptcy Code’s] ‘reasonably equivalent value’ [standard] interchangeably with the DCL’s
‘fair consideration’ [requirement].” In re Singh, 434 B.R. 298, 309 (Bankr. E.D.N.Y. 2010).
To establish fair consideration, “neither ‘mathematical precision’ nor a ‘penny-for-penny
exchange’ is required.” In re Churchill Mortg. Inv. Corp., 256 B.R. 664, 678 (Bankr. S.D.N.Y.
2000) (quoting Rubin v. Mfrs. Hanover Trust Co., 661 F.2d 979, 994 (2d Cir. 1981)), aff’d sub
nom. Balaber-Strauss v. Lawrence, 264 B.R. 303 (S.D.N.Y. 2001). “Rather, the assessment of
fair equivalent value requires a court to compare the rough values of what was given and what
was received in exchange.” Chen v. New Trend Apparel, Inc., 8 F. Supp. 3d 406, 448–49
(S.D.N.Y. 2014) (Daniels, J., adopting report and recommendation of Dolinger, M.J.).
C. Application of Fraudulent Conveyance Principles to Ponzi Schemes
Although the Second Circuit has not addressed how the DCL applies to Ponzi scheme
investors, many courts have concluded that such statutes allow those investors to retain their
principal, but not any profits or interest. See, e.g., Donell v. Kowell, 533 F.3d 762, 777–78 (9th
Cir. 2008); In re Bernard L. Madoff Inv. Sec. LLC, 454 B.R. 317, 333 (Bankr. S.D.N.Y. 2011),
leave to appeal denied, No. 11-MISC-337, 2012 WL 5511952, at *3 (S.D.N.Y. Nov. 14, 2012).
There is, however, a split of authority over the application of fraudulent conveyance principles to
at least one subset of Ponzi schemes—those in which investors are paid contractual interest on

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loans to the Ponzi scheme operator. Courts disagree whether such contractual interest can ever
constitute reasonably equivalent value. See In re Carrozzella & Richardson, 286 B.R. 480, 487–
90 (D. Conn. 2002) (surveying decisions).
One line of precedent—illustrated by cases such as In re Indep. Clearing House Co., 77
B.R. 843 (D. Utah 1987) and In re Taubman, 160 B.R. 964 (Bankr. S.D. Ohio 1993)—deny
investors any recovery of interest. These cases reason that: (1) investors’ contracts in Ponzi
schemes are not enforceable as applied to interest and profits because such contracts contravene
public policy; and (2) funds from Ponzi scheme investors do not provide “value” to the debtor
and its creditors because such funds merely allow the debtor “to defraud more people of more
money.” In re Indep. Clearing House Co., 77 B.R. at 857–860; Taubman, 160 B.R. at 986–87;
see also Janvey v. Golf Channel, Inc., No. 13-11305, 2015 WL 1058022 (5th Cir. Mar. 11, 2015)
(adopting similar view of value and holding that, in context of Ponzi scheme, payment to trade
creditor constituted a fraudulent transfer under Texas law)
In contrast, cases such as Carrozzella and In re Unified Commercial Capital, Inc. hold
that payments to Ponzi scheme investors of reasonable contractual interest do not constitute
fraudulent transfers because such payments satisfy antecedent debts and result in the debtor
receiving reasonably equivalent value in exchange for the payments. See Carrozzella, 286 B.R.
at 490–91 (applying Connecticut’s Uniform Fraudulent Transfer Act and stressing that the
annual interest rates paid to investors, which ranged from 8%–15%, were reasonable and that
[t]his was not the typical ‘too-good-to-be-true’ investment scheme”); In re Unified Commercial
Capital, Inc., 260 B.R. 343, 353 (Bankr. W.D.N.Y. 2001) aff’d No. 01-CV-6004, 2002 WL
32500567 (W.D.N.Y. June 21, 2002).

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D. The Arguments and Decision Below
Below, Cullin argued that, under the Carrozzella line of precedent, she was entitled to
keep the $11,744.76 in profits. The Bankruptcy Court disagreed and found those transfers to be
constructively fraudulent under the DCL. (Order at 6.) The Bankruptcy Court did not explicitly
address the split of authority concerning Ponzi schemes, but appeared to follow the Indep.
Clearing House Co. line of cases, stating that: “[N]one of the arguments raised by [Cullin] are
valid in the case of a Ponzi scheme such as we have here. Because none of the authorities cited
by [Cullin] are applicable to the facts of this case, [her] defenses raised are overruled.” (Id. at 7;
see also Tr. 49:14–15 (“In a ponzi scheme, what the law says is, once you get more than [the
principal you invested], everything else comes back.”).
E. The Parties’ Arguments on Appeal
On appeal, Cullin again relies on the Carrozzella line of precedent, arguing that the
$11,744.76 was interest paid in the satisfaction of a legally enforceable antecedent debt, and thus
constituted fair consideration. The Trustee urges the Court to follow the opposing line of
precedent, which forecloses Cullin’s claim to the $11,744.76. In the alternative, the Trustee
argues that Cullin cannot recover under Carrozzella because the record on appeal does not
contain Cullin’s contracts with Agape. The Trustee also implies that those contracts were never
made part of the record below. The Trustee does not address the substance of Cullin’s contracts.
Instead, the Trustee attempts to “reserve[] all of his rights, claims, remedies, defenses, and
rebuttals in the event that [Cullin], or any other defendant in connection with the Agape
bankruptcy case, introduces executed contracts for the purpose of proving a contractual right to

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‘interest’ payments over and above their principal investments.”4 (Appellee Br. at 7, ECF No.
5.) In response, Cullin appended the contracts to her reply brief and argues that, even if the
Court declines to consider the actual contracts, various admissions by the Trustee below are
sufficient to allow Cullin to prevail under Carrozzella.
F. Analysis
It is unnecessary to decide which competing line of precedent is more persuasive
because, even under Carrozzella and related cases, the $11,744.76 still constitutes a fraudulent
conveyance and, therefore, Cullin is not entitled to those funds.5 Accordingly, the Bankruptcy
Court’s decision is affirmed.
1. Cullin’s Contracts Are Not Part of the Record
Cullin did not designate her contracts as part of the record on appeal. More importantly,
as far as the Court can determine, Cullin’s contracts were never formally introduced into the
record before the Bankruptcy Court.6 In any event, as explained below, irrespective of whether
or not her contracts are part of the record, Cullin cannot prevail.

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Below, the Trustee argued, inter alia, that “Agape was a classic ‘too-good-to-be-true’ scheme since many [of
Agape’s contracts] offered . . . at least a 48% return on [Cullin’s] ‘investment’ on an annualized basis.” (Trustee’s
Pre-Trial Mem. at 8 n.5, ECF No. 1-2.)
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The question of which competing strand of precedent this Court should follow is a question of law. If this Court
were to follow the Carrozzella line of the precedent, certain subsidiary questions of fact under that precedent would
arise, including whether the interest rates under Cullin’s contracts were reasonable. The Bankruptcy Court did not
make explicit findings on these questions. However, any error in this regard would be harmless. As explained infra,
even when the record below is viewed in the light most favorable to Cullin and all reasonable inferences are drawn
in her favor, no reasonable factfinder could find for Cullin on the relevant factual questions. Accordingly, even
under Carrozzella, the Bankruptcy Court’s decision may be affirmed without the necessity for a remand and further
fact-finding. See In re Sanshoe Worldwide Corp., 993 F.2d 300, 305 (2d Cir. 1993) (holding that although
bankruptcy court failed to make necessary findings, record established that this failure was harmless error); Stevens
v. Baas, 197 B.R. 57, 59 (N.D. Ohio 1995) (holding that bankruptcy court’s failure to address appellant’s defense
was harmless because it was “evident from the record” that defense failed).
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Cullin’s initial disclosures, which contained two of her contracts, were filed on the docket below. The Court,
however, fails to see how such a filing is sufficient to make them part of the record for purposes of this appeal. The
Court also notes that Cullin—who appeared pro se at the bench trial—appears to have introduced certain exhibits
that the Bankruptcy Court accepted into evidence. (Tr. 46:17–21.) However, the content of Cullin’s exhibits is not
identified in the trial transcript or anywhere else in the record.

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2. The Trustee’s Admissions Below
Cullin suggests that even if her contracts are not formally part of the record, various
concessions by the Trustee below are sufficient to allow her recover under Carrozzella. Cullin is
mistaken.
Below, the Trustee represented that the contracts Agape offered to investors “permitted
[them] to receive payments from their purported investments in the form of ‘interest payments.’”
(Trustee’s Pre-Trial Mem. at 3.) The Trustee also stated that Cullin “purportedly received
‘interest’ payments allegedly arising out of her ‘investment.’” (Id. at 4.) The mere fact that
unspecified contracts existed and that certain payments were in the form of quote-unquote
“interest payments” does not establish that these payments were made pursuant to a valid
antecedent debt or constituted fair consideration. Moreover, Cullin ignores the fact that the
Trustee also represented below that Agape’s contracts involved annual interest rates of 48%. (Id.
at 8 n.5.) As explained infra, such interest rates are unreasonable under Carrozzella.
3. Cullin’s Contracts
Cullin also urges the Court to consider the contracts themselves, which she attached to
her reply brief. Even if those contracts could be considered, Cullin still cannot prevail under
Carrozzella.
Cullin submitted four contracts. The first two are largely identical. They refer to
Cullin’s investment as a “loan,” but also contain the following critical provisions:


“Dividends And/Or Interest Payments Are ‘Not Guaranteed’ by [Agape].”



“Upon Closing Client Will Receive ‘Up To’ (14.0%) Percent Interest Check Based on
Principal.”7

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This contract, and two others, state that they apply to short-time investments spanning approximately 60 to 70
days. The fourth contract does not state the length of the investment, but makes clear that the return was up to 4%
per month.

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The third contract is slightly different, but also includes the following relevant provisions:


“Interest payments are ‘not guaranteed’ by [Agape].”



“Upon closing client will earn ‘up to’ twelve percent (12%) interest based on principal.”

The fourth contract, between Cullin and a different Agape entity, is more detailed and contains
the following provisions:


“Lender hereby sells to the Participant and the Participant hereby purchases from the
Lender a participation in the advance. [Agape] sells participation up to a 48% or 4% per
month discount per annum for 24 month term”



“No advances or repayments of advances are guaranteed by [Agape] or any of its
affiliates or business partners.”



“Lender agrees to keep accurate records of all participants [sic] advances, collateral
material, and collections.”



“Advance payments are ‘Not Guaranteed’ by [Agape].”

The fourth contract also includes the following question: “Do you wish to receive your potential
monthly return of up to 4%[?]”
The details of Cullin’s contracts doom her arguments under Carrozzella for two reasons.
First, the contractual rate of return on Cullin’s contracts—approximately 48% or more
annually—is not reasonable under Carrozzella. See In re Canyon Sys. Corp., 343 B.R. 615, 643–
46 (Bankr. S.D. Ohio 2006) (granting summary judgment to trustee and distinguishing
Carrozzella where Ponzi scheme provided returns of 35% or more, which resulted in debtor not
receiving reasonably equivalent value in exchange for transfers). Cullin’s rates of return are
prima facie evidence of unreasonableness and Cullin did not offer any evidence to the contrary.8
Cf. Carrozzella, 286 B.R. at 484 n.3 (explaining that, although “many Ponzi schemes
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Below, Cullin sought to introduce evidence concerning the one-day return generated by Twitter’s initial public
offering (“IPO”). (Tr. 47:16–48:1.) The Bankruptcy Court refused to accept this evidence as an exhibit. (Tr.
47:16–48:1.) Cullin does not challenge that decision and, in any event, evidence regarding investors’ return on an
IPO is not relevant to the question of what constitutes a reasonable rate of return on a loan.

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characteristically use exorbitantly high rates of return to entice new investors,” annual interest
rate of 15% was not unreasonably high given that when scheme began, the prime rate of interest
was over 15%).
Second, unlike the contracts in Carrozzella and Unified Commercial Capital, Cullin’s
contracts make clear that Agape did not guarantee a specific rate of interest, or, in fact, any
interest at all. Compare Contracts, Exs. to Appellant’s Reply Br., ECF No. 7 with Carrozzella,
286 B.R. at 484 & nn.9–14 (stating that that each investor was promised a specific rate of
return); Unified Commercial Capital, 2002 WL 32500567, at *8 (“[Debtor] represented that it
was selling ‘debentures’ and ‘certificates of deposit’ to investors with ‘guaranteed’ returns of
twelve percent or more annually. Thus, the payments to [the investor] were not simply payments
of nonexistent profits, but of a contractually provided-for, commercially reasonable rate of
interest on what amounted to a loan by [the investor] to [debtor].”)9; see also In re Bayou Grp.,
LLC, 439 B.R. 284, 337 (S.D.N.Y. 2010) (distinguishing Carrozzella and Unified Commercial
Capital because “they involved commercially reasonable, contractually guaranteed rates of
return” and “explicit promise[s] of a repayment greater than principal”). At best, Cullin’s
contracts could be considered contingent obligations that required Agape to pay Cullin some (or
all) of the interest that Agape received from the entities that entered into bridge loans with
Agape.10 The problem for Cullin is that, because Agape never made these bridge loans, it never

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In Unified Commercial Capital, the investor’s account agreement guaranteed a 12% return, but certain other
documents provided to the investors indicated that investors were not entitled to any return unless the debtor was, in
fact, profitable. 2002 WL 32500567, at *8 n.4. The district court dismissed the relevance of this point, which was
apparently raised for the first time in a reply brief, noting that “[t]he fact remains, however, that [the debtor]
receive[d] value from [the investor] in the form of a $100,000 loan, and that [the investor] was entitled to reasonable
interest on that loan.” Id. at *8 n.4. Even assuming that the court in Unified Commercial Capital was correct on this
point, as noted above, the amount of interest Cullin received was clearly unreasonable.
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Even this interpretation is questionable given that Cullin’s contracts merely state that she will receive “up to” a
certain return without specifying how that return would be calculated or the circumstances under which Agape
would be required to remit any interest to Cullin.

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received any interest from such loans. Thus, the contingencies in Cullin’s contracts never
occurred and Agape was never obligated to pay Cullin any interest. Accordingly, the Court fails
to see how Cullin’s contracts gave rise to a valid antecedent debt. Cf. In re Cassandra Grp., 338
B.R. 583, 595–596 (Bankr. S.D.N.Y. 2006) (finding, after bench trial, that payment of $300,000
for release of purported claims constituted fraudulent conveyance because defendants, whose
contract with debtor imposed liability on debtor in only limited circumstances that were not
triggered, did not have a valid claim against debtor and, thus, the release obtained by debtor did
not constitute fair consideration). Moreover, even assuming that Cullin’s contracts constitute
antecedent debts under the DCL,11 Agape still did not receive reasonably equivalent value for the
48% annualized interest paid to Cullin given that none of the contract’s contingencies ever
occurred.
The bankruptcy court’s decision in Unified Commercial Capital raises two additional
issues, in dicta, with potential relevance to this appeal. Neither of these issues, however, allow
Cullin to prevail. In Unified Commercial Capital, the bankruptcy court noted that if “an innocent
investor victim receives interest in excess of what a Court determines to be reasonable,” the
investor would have to return the unreasonable excess, but would still be entitled to retain
reasonable interest. 260 B.R. at 351 n.8. Here, however, Cullin has never argued, in the
alternative, that she is still entitled to a portion of the $11,744.76 even if her contractual rate of
return is found to be unreasonable. Moreover, even if she had raised that argument, she never
offered any evidence to establish a reasonable interest rate under the circumstances. In Unified
Commercial Capital, the bankruptcy court also stated that even if the contracts at issue were not

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Under the DCL, “‘[d]ebt’ includes any legal liability, whether matured or unmatured, liquidated or unliquidated,
absolute, fixed or contingent.” DCL § 270. However, this definition of “debt” does not answer the question of what
constitutes a “fair equivalent” for a contingent liability that was never triggered.

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enforceable, the investors still provided value because they loaned money to the debtor for a
period of time. Unified Commercial Capital, 260 B.R. at 353. Again, Cullin did not raise any
arguments on this point. Additionally, even if Cullin’s provision of funds to Agape provided
some value, the rate of return that Cullin received was unreasonable and, as explained above,
Cullin has never offered any evidence regarding a reasonable interest rate.
Finally, contrary to Cullin’s assertion, the Second Circuit’s decision in In re Sharp Int’l
Corp., 403 F.3d 43 (2d Cir. 2005) does not warrant reversal. In Sharp, the Second Circuit stated
that “[a] conveyance which satisfies an antecedent debt made while the debtor is insolvent is
neither fraudulent nor otherwise improper, even if its effect is to prefer one creditor over
another.” Id. at 54 (quoting Ultramar Energy Ltd. v. Chase Manhattan Bank, N.A., 191 A.D.2d
86, 90–91, 599 N.Y.S.2d 816 (1st Dep’t 1993)). In Sharp, however, the only question before the
court was whether the defendant received the transfer at issue in good faith—it was undisputed
that the transfer discharged a valid antecedent debt and was made for a fair equivalent. Id. at 54.
Here, for the reasons explained above, Agape did not receive a fair equivalent in exchange for
the “interest payments” to Cullin.
III. CONCLUSION
For the foregoing reasons, the Bankruptcy Court’s Order is AFFIRMED.
Dated: March 31, 2015
Central Islip, New York
/s/ (JMA)
JOAN M. AZRACK
UNITED STATES DISTRICT JUDGE

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