Irving H. Picard v. Saul B. Katz et al
Filing
28
NOTICE of RECENT AUTHORITY re: 20 MOTION to Dismiss THE AMENDED COMPLAINT OR, IN THE ALTERNATIVE, FOR SUMMARY JUDGMENT.. Document filed by Charles 15 Associates, Charles 15 LLC, Charles Sterling LLC, Charles Sterling Sub LLC, College Place Enterprises LLC, Coney Island Baseball Holding Company LLC, Estate of Leonard Schreier, FFB Aviation LLC, FS Company LLC, Fred Wilpon Family Trust, Arthur Friedman, Ruth Friedman, Iris J. Katz and Saul B. Katz Family Foundation, Inc., Judy and Fred Wilpon Family Foundation, Inc., Amy Beth Katz, David Katz, Dayle Katz, Gregory Katz, Howard Katz, Iris Katz, 157 J.E.S. LLC, Air Sterling LLC, BAS Aircraft LLC, Jason Bacher, Bon Mick Family Partners LP, Bon-Mick, Inc., Brooklyn Baseball Company LLC, C.D.S. Corp., Michael Katz, Saul B. Katz, Todd Katz, Katz 2002 Descendants' Trust, Heather Katz Knopf, Natalie Katz O'Brien, Mets II LLC, Mets Limited Partnership, Mets One LLC, Mets Partners, Inc., Minor 1 (REDACTED), Minor 2 (REDACTED), L. Thomas Osterman, Phyllis Rebell Osterman, Realty Associates Madoff II, Red Valley Partners, Robbinsville Park LLC, Ruskin Garden Apartments LLC, Saul B. Katz Family Trust, Michael Schreier, Deyva Schreier Arthur, See Holdco LLC, See Holdings I, See Holdings II, Sterling 10 LLC, Sterling 15C LLC, Sterling 20 LLC, Sterling Acquisitions LLC, Sterling American Advisors II LP, Sterling American Property III LP, Sterling American Property IV LP, Sterling American Property V LP, Sterling Brunswick Corporation, Sterling Brunswick Seven LLC, Sterling Dist Properties LLC, Sterling Equities, Sterling Equities Associates, Sterling Equities Investors, Sterling Heritage LLC, Sterling Internal V LLC, Sterling Jet II Ltd., Sterling Jet Ltd., Sterling Mets Associates, Sterling Mets Associates II, Sterling Mets LP, Sterling Pathogenesis Company, Sterling Third Associates, Sterling Thirty Venture LLC, Sterling Tracing LLC, Sterling Twenty Five LLC, Sterling VC IV LLC, Sterling VC V LLC, Edward M. Tepper, Elise C. Tepper, Jacqueline G. Tepper, Marvin B. Tepper, Valley Harbor Associates, Kimberly Wachtler, Philip Wachtler, Bruce N. Wilpon, Daniel Wilpon, Debra Wilpon, Fred Wilpon, Jeffrey Wilpon, Jessica Wilpon, Judith Wilpon, Richard Wilpon, Scott Wilpon, Valerie Wilpon, Wilpon 2002 Descendants' Trust, Robin Wilpon Wachtler. (Attachments: # 1 Exhibit A, # 2 Exhibit B)(Wagner, Karen)
EXHIBIT B
Page 1
[*1] Commodity Futures Trading Commission, Respondent, v Stephen Walsh, et
al., Defendants, Janet Walsh, Appellant. Securities and Exchange Commission,
Respondent, v WG Trading Investors, L.P., et al., Defendants, Robin Greenwood,
Relief Defendant, Janet Walsh, Appellant.
No. 91
COURT OF APPEALS OF NEW YORK
2011 NY Slip Op 5366; 2011 N.Y. LEXIS 1704
June 23, 2011, Decided
NOTICE:
Elliott Scheinberg et al., amici curiae.
THE LEXIS PAGINATION OF THIS DOCUMENT
IS SUBJECT TO CHANGE PENDING RELEASE OF
THE FINAL PUBLISHED VERSION.
THIS
OPINION IS UNCORRECTED AND SUBJECT TO
REVISION BEFORE PUBLICATION IN THE
OFFICIAL REPORTS.
JUDGES: Opinion by Judge Graffeo. Chief Judge
Lippman and Judges Ciparick, Read and Jones concur.
Judge Pigott dissents in part in an opinion in which Judge
Smith concurs.
PRIOR HISTORY: CFTC v. Walsh, 618 F.3d 218,
2010 U.S. App. LEXIS 16909 (2d Cir. N.Y., 2010)
OPINION
OPINION BY: GRAFFEO
GRAFFEO, J.:
DISPOSITION: [**1]
Following certification of
questions by the United States Court of Appeals for the
Second Circuit and acceptance of the questions by this
Court pursuant to section 500.27 of the Rules of Practice
of the New York State Court of Appeals, and after
hearing argument by counsel for the parties and
consideration of the briefs and the record submitted,
certified questions answered in accordance with the
opinion herein.
COUNSEL: Steven L. Kessler, for appellant.
Stephen Walsh is a defendant in related actions
brought by plaintiffs Commodity Futures Trading
Commission and Securities and Exchange Commission
(the Agencies) alleging violations of the anti-fraud
provisions of the Commodity Exchange Act and the
Securities [*2] Exchange Act. The Agencies claim that
between 1996 and 2009, Walsh and his codefendant, Paul
Greenwood, misappropriated more than $550 [**2]
million from funds they managed for various public and
private institutional investors.1
Allan A. Capute, for respondent Securities and Exchange
Commission.
1 Greenwood pleaded guilty to securities fraud
charges in 2010. Walsh's criminal prosecution
remains pending.
Nancy R. Doyle, for respondent Commodity Futures
Trading Commission.
The Agencies also pursued disgorgement efforts
against Janet Schaberg, the former spouse of Walsh,
Page 2
2011 NY Slip Op 5366, *2; 2011 N.Y. LEXIS 1704, **2
seeking to recover any proceeds she held of the fraud
perpetuated by Walsh. Although there is no indication
that she was aware of or participated in any wrongdoing
related to her ex-husband's fraudulent scheme, the
Agencies allege that a sizable amount of property derived
from Walsh's illegal securities activities went into
Schaberg's possession under the parties' separation
agreement and divorce decree.
The United States Court of Appeals for the Second
Circuit asks us two questions to assist it in discerning
whether Schaberg has a legitimate claim to those funds,
which would prevent the Agencies from obtaining
disgorgement from her. These questions involve the
interplay of the Domestic Relations Law and the Debtor
and Creditor Law and implicate significant public policy
considerations.
Background
Walsh and Schaberg were married in 1982 and have
two children. Over the course of their 25-year marriage,
[**3] Walsh was a substantial shareholder in or a
management partner of a number of successful business
enterprises, such as Champion Sportswear and Tanger
Malls/Prime Outlets. As a couple, they acquired a number
of homes, including condominiums in Florida and New
York City, and a house in Port Washington, New York.
Schaberg did not have outside employment during the
marriage, but she volunteered at a number of charitable
organizations.
In 2004, Schaberg and Walsh separated and divorce
proceedings were initiated in early 2005. They entered
into a "Stipulation of Settlement and Agreement" in
November 2006 pursuant to Domestic Relations Law §
236 (B) (3). Under the terms of the agreement, Schaberg
conveyed her ownership interest in the Port Washington
marital residence (with an alleged value of about $7.5
million) to Walsh and she received sole ownership of the
condominiums in New York City and Florida (with an
alleged value of approximately $6.7 million). The
agreement also provided that Schaberg would retain
nearly $5 million held in several checking accounts and
Walsh waived all claims to such monies. Walsh further
agreed to pay Schaberg a distributive [*3] award of
$12.5 million, payable in [**4] biannual installment
payments through 20202. As part of the settlement,
Schaberg further waived any claim for maintenance
based on the parties' lengthy marriage and, except as
otherwise provided in the agreement, relinquished her
right "to a distributive award or an award of equitable
distribution with respect to any property acquired by
[Walsh] either before or during the marriage." In April
2007, the settlement agreement was incorporated, but not
merged, into the parties' final judgment of divorce.
Schaberg moved to Florida in 2007 and remarried a year
later.
2
Schaberg had received $3 million in
installment payments when Walsh ceased making
the payments in 2009 as a result of a restraining
order imposed on his assets.
Nearly two years after entry of the judgment of
divorce, the Agencies filed separate complaints in the
United States District Court for the Southern District of
New York alleging large-scale fraud by Walsh,
Greenwood and various investment entities they
controlled. Both complaints sought monetary penalties
from the named defendants and disgorgement of
ill-gotten gains from the defendants and relief defendants
alike. Schaberg was named as a relief defendant, along
with [**5] other parties believed to be in possession of
proceeds from the fraudulent securities scheme.
The District Court granted the Agencies' requests for
preliminary injunctions freezing six of Schaberg's
brokerage and bank accounts containing approximately
$7.6 million. The court also prohibited Schaberg from
transferring any real property, jewelry or artwork without
court approval, thereby effectively freezing the bulk of
her assets. Schaberg appealed, arguing that the District
Court erred in issuing the injunctions because the
property targeted by the injunctions was not subject to
disgorgement.
The Second Circuit recognized that federal district
courts have the power to order disgorgement from a relief
defendant upon a finding that the party "(1) is in
possession of ill-gotten funds and (2) lacks a legitimate
claim to those funds" (618 F3d 218, 225 [2d Cir 2010]).
In this case, the Second Circuit has determined that the
question as to whether the injunctions were properly
issued turns on whether the District Court correctly
found, as a matter of law, that Schaberg lacked a
legitimate claim to the funds3. Acknowledging
Schaberg's assertion that she has a valid claim to the
funds because [**6] "she acquired her assets pursuant to
the separation agreement she executed with Walsh in
their divorce proceedings, and that by executing this
agreement she became a good faith purchaser for value of
Page 3
2011 NY Slip Op 5366, *3; 2011 N.Y. LEXIS 1704, **6
the assets" (id. at 226), the Court held [*4] that
resolution of Schaberg's contention implicated open
issues of New York law. The Second Circuit therefore
certified the following two questions to us:
"(1) Does 'marital property' within the meaning of New
York Domestic Relations Law § 236 include the proceeds
of fraud?
"(2) Does a spouse pay 'fair consideration' according to
the terms of New York Debtor and Creditor Law § 272
when she relinquishes in good faith a claim to the
proceeds of fraud?" (id. at 231-232).
The Second Circuit also invited this Court to
"reformulate these questions as it sees fit, or expand them
to address any other issues of New York law pertinent to
these appeals" (id. at 232).
3 The Second Circuit reserved judgment as to
whether, under the first prong of the test, "some of
her assets were purchased with funds that are not
alleged to be the proceeds of fraud, and thereby
would not be subject to disgorgement" (618 F3d
at 226 n 4).
Marital Property
Schaberg asserts that she [**7] validly acquired
certain assets pursuant to the settlement agreement, and
that by entering into this agreement she became a good
faith purchaser for value of the distributed property. The
Agencies respond that monies derived from the securities
fraud were not part of the marital estate in the first
instance and, consequently, cannot be retained or
transferred through equitable distribution of marital assets
under Domestic Relations Law § 236. The parties' legal
arguments raise difficult policy questions, requiring us to
weigh the competing interests of the original owners of
funds stolen in a fraudulent scheme against the innocent
former spouse of the defrauder.
We begin with the language and purpose of
Domestic Relations Law § 236, which codifies New
York's Equitable Distribution Law. Under the terms of
the statute, section 236 "contemplates only two classes of
property: marital property and separate property"
(O'Brien v O'Brien, 66 NY2d 576, 583, 489 N.E.2d 712,
498 N.Y.S.2d 743 [1985]). Marital property is defined as
"all property acquired by either or both spouses during
the marriage and before the execution of a separation
agreement or the commencement of a matrimonial action,
regardless of the form in which title [**8] is held"
(Domestic Relations Law § 236 [B] [1] [c]]), and this
broad definition "includes a wide range of tangible and
intangible interests" (Fields v Fields, 15 NY3d 158, 162,
931 N.E.2d 1039, 905 N.Y.S.2d 783 [2010], rearg denied
15 N.Y.3d 819, 934 N.E.2d 885, 908 N.Y.S.2d 152 [2010]
[internal quotation marks and citation omitted]). Separate
property, in contrast, is narrowly limited to four discrete
categories, none of which are applicable to this case.4
[*5]
4
Specifically, separate property means: "(1)
property acquired before marriage or property
acquired by bequest, devise, or descent, or gift
from a party other than the spouse; "(2)
compensation for personal injuries; "(3) property
acquired in exchange for or the increase in value
of separate property, except to the extent that such
appreciation is due in part to the contributions or
efforts of the other spouse; "(4) property
described as separate property by written
agreement of the parties pursuant to subdivision
three of this part" (Domestic Relations Law § 236
[B] [1] [d]).
Domestic Relations Law § 236 requires that a trial
court equitably distribute marital property between the
parties upon the dissolution of the marriage, while
separate property remains with the original spousal owner
(see Domestic Relations Law § 236 [B] [5]). [**9] In
making its distributive determination, the court is to
consider a variety of statutory factors, including the
duration of the marriage, the age and health of the parties,
the income of each party, the extent of any maintenance
award, the probable future financial circumstances of
each party, and the nontitled spouse's direct or indirect
contributions to the marriage, including "services as a
spouse, parent, wage earner and homemaker" (Domestic
Relations Law § 236 [B] [5] [d]). New York's Equitable
Distribution Law also permits the parties -- as happened
here -- to contract out of the elaborate statutory scheme
and instead agree to a division or distribution of property,
provided financial disclosure and the statutory
requirements for a valid separation agreement are
satisfied (see Domestic Relations Law § 236 [B] [3]).
The Legislature adopted the Equitable Distribution
Law in 1980 to replace the existing system of
distribution, which had depended, in large measure, on
the traditional common-law title theory of property. In
recognition that marriage represents "an economic
partnership to which both parties contribute as spouse,
Page 4
2011 NY Slip Op 5366, *5; 2011 N.Y. LEXIS 1704, **9
parent, wage earner or homemaker," the Equitable
Distribution [**10] Law was designed on "an entirely
new theory which considered all the circumstances of the
case and of the respective parties to the marriage"
(O'Brien, 66 NY2d at 585). The comprehensive regime
"reflects an awareness that the economic success of the
partnership depends not only upon the respective
financial contributions of the partners, but also on a wide
range of nonremunerated services to the joint enterprise,
such as homemaking, raising children and providing the
emotional and moral support necessary to sustain the
other spouse in coping with the vicissitudes of life
outside the home" (Price v Price, 69 NY2d 8, 14, 503
N.E.2d 684, 511 N.Y.S.2d 219 [1986] [internal quotation
marks and citation omitted]). [*6]
Consistent with this purpose, and implicit in the
statutory framework as a whole, is the concept that "upon
dissolution of the marriage there should be a winding up
of the parties' economic affairs and a severance of their
economic ties by an equitable distribution of the marital
assets" (O'Brien, 66 NY2d at 585).
Against this legislative backdrop, we must decide
whether the dictates of Domestic Relations Law § 236
and the purposes of equitable distribution permit the
transfer of marital assets to a recipient spouse [**11]
who is unaware that some or all of those assets were
illegally acquired by the other spouse. The statute
expansively defines marital property to encompass "all
property acquired" by either spouse during the course of
the marriage and there is a presumption that "all property,
unless clearly separate, is deemed marital property"
(Fields, 15 NY3d at 163 [internal quotation marks and
citation omitted]). Furthermore, the term "acquired" does
not require that property be segregated by its methods of
acquisition; it merely means that a person gains
possession (see Black's Law Dictionary 26 [9th ed
2009]). Given that we have repeatedly held that the scope
of marital property is to be "construed broadly" (see e.g.
Mesholam v Mesholam, 11 NY3d 24, 28, 892 N.E.2d 846,
862 N.Y.S.2d 453 [2008] [internal quotation marks and
citation omitted]), we conclude that the proceeds of fraud
can constitute marital property as defined in Domestic
Relations Law § 236 and answer the first certified
question in the affirmative. It is therefore possible under
the Domestic Relations Law to transfer assets derived
from fraud to an innocent and unknowing spouse in a
divorce proceeding.
Nevertheless, the Agencies argue that, putting aside
the language [**12] of Domestic Relations Law § 236
and focusing on public policy considerations favoring the
return of stolen property to its rightful owner, we should
carve out an exception to the broad definition of marital
property for the proceeds of fraud. They suggest that
where, as here, it is alleged that the property transferred
in a divorce proceeding was itself derived from stolen
funds, a court should not reach the issue of fair
consideration (the topic of the Second Circuit's second
certified question) because it is simply irrelevant whether
fair consideration was given. In their view, the original
owner -- a victim of embezzlement and not a mere
creditor -- should have an absolute right to seek
disgorgement of the previously distributed property from
the transferee-spouse. Although these contentions have
appeal, we are unable to agree.
It has long been the law of this State that "money
obtained by fraud or felony cannot be followed by the
true owner into the hands of one who has received it bona
fide and for a valuable consideration in due course of
business" (Stephens v Board of Educ. of Brooklyn, 79 NY
183, 186 [1879]). This principle is premised on the
recognition that, in contrast to chattels, [**13] "money
has no earmark" and "cannot be identified" (Hatch v
Fourth Natl. Bank of City of N.Y., 147 N.Y. 184, 192, 41
N.E. 403, 2 N.Y. Ann. Cas. 288 [1895]) [*7] 5. At its
core, our rule favoring innocent transferees of stolen
funds over defrauded owners is rooted in New York's
"concern for finality in business transactions" (Banque
Worms v BankAmerica Intl., 77 N.Y.2d 362, 372, 570
N.E.2d 189, 568 N.Y.S.2d 541 [1991]). We have
explained that "to permit in every case of the payment of
a debt an inquiry as to the source from which the debtor
derived the money, and a recovery if shown to have been
dishonestly acquired, would disorganize all business
operations and entail an amount of risk and uncertainty
which no enterprise could bear" (id. [internal quotation
marks and citation omitted]).
5 By comparison, an owner may seek recovery
of identifiable stolen property, such as a piece of
artwork, from an innocent good faith purchaser
for value (see Solomon R. Guggenheim Found. v
Lubell, 77 NY2d 311, 317, 569 N.E.2d 426, 567
N.Y.S.2d 623 [1991]).
Similar concerns are relevant in the matrimonial
realm. Ex-spouses have a reasonable expectation that,
once their marriage has been dissolved and their property
Page 5
2011 NY Slip Op 5366, *7; 2011 N.Y. LEXIS 1704, **13
divided, they will be free to move on with their lives. To
hold that the proceeds of fraud acquired [**14] by one
spouse unbeknownst to the other cannot be subject to
equitable distribution or conveyed through a settlement
agreement as marital property would undermine one of
the fundamental policies underlying the equitable
distribution process, namely finality. The exception
proposed by the Agencies would effectively undo court
orders and settlement agreements for an indeterminate
time after the "winding up of the parties' economic
affairs" (O'Brien, 66 NY2d at 585), and "subvert the
policy of upholding settled domestic relations . . . in
divorce cases" (Rainbow v Swisher, 72 NY2d 106, 111,
527 N.E.2d 258, 531 N.Y.S.2d 775 [1988]; see also
Boronow v Boronow, 71 NY2d 284, 290-291, 519 N.E.2d
1375, 525 N.Y.S.2d 179 [1988]).
Moreover, as a practical matter, where the innocent
spouse and matrimonial court are unaware of the tainted
nature of particular assets, distribution of marital assets
under Domestic Relations Law § 236 (or pursuant to an
opt-out
settlement
agreement)
would
become
unworkable, particularly where the illegal activity of one
spouse is not revealed for a number years subsequent to
the divorce, as occurred in this case6. Analogizing to the
rule articulated in Stephens and Hatch in the business
setting, we conclude that monies obtained by fraud
[**15] cannot be followed by the original owner into the
hands of an innocent former spouse who now holds them
(or assets derived from them) as a result of a divorce
proceeding where that spouse in good faith [*8] and
without knowledge of the fraud gave fair consideration
for the transferred property. That being said, whether
Schaberg acted in good faith and paid fair consideration
for the tainted property that came into her possession
pursuant to the settlement agreement is another matter
and is at the heart of the Second Circuit's second
question, to which we now turn.
6 Of course, an entirely different situation is
presented if it is known that both spouses
participated in or were aware of the fraud or
illegal conduct. In such cases, courts have held
that it would be contrary to public policy to
encourage "illegal activity by making an equitable
distribution of the fruits of a criminal enterprise"
(La Paglia v La Paglia, 134 Misc 2d 1030, 1032,
514 N.Y.S.2d 317 [Sup Ct, Kings County 1987]).
Fair Consideration
Schaberg contends that the District Court erred in
holding, as a matter of law, that she lacked a legitimate
claim to the frozen funds. She argues that she provided
fair consideration in exchange for the allegedly [**16]
fraudulent proceeds and thereby became a good faith
purchaser for value through her execution of an
arms-length separation agreement. She also claims that
there is no evidence that she had knowledge of her
ex-husband's illegal conduct, particularly since he had a
history of being a successful entrepreneur and securities
trader, nor did she engage in collusion in the divorce
proceeding to deprive the defrauded parties recovery of
their investments. The Agencies counter that, as a matter
of law, Schaberg could not have given fair consideration
because, in exchange for acquiring assets that were later
determined to be derived from fraud, she only gave up a
claim to a larger portion of the marital estate, which also
consisted of Walsh's proceeds of fraud and, as such, her
consideration was illusory. Again, both parties raise
compelling arguments.
Debtor and Creditor Law § 278 provides that a
creditor whose claim has matured may have a fraudulent
conveyance set aside "against any person" other than a
good faith purchaser for value, defined as "a purchaser
for fair consideration without knowledge of the fraud"
(Debtor and Creditor Law § 278 [1]). Fair consideration
is given for property "[w]hen [**17] in exchange for
such property . . . as a fair equivalent therefor, and in
good faith, property is conveyed or an antecedent debt is
satisfied" (Debtor and Creditor Law § 272 [a]). It is well
settled that an evaluation of whether fair consideration is
given for property under Debtor and Creditor Law § 272
must "be determined upon the facts and circumstances of
each particular case" (Halsey v Winant, 258 NY 512, 523,
180 N.E. 253 [1932]).7
7
Here, as the Second Circuit noted, "it is
essentially undisputed that Schaberg had no notice
that the money she received in her divorce was
derived from fraud" (618 F3d at 229 n 8), and
"there is no reason to question Schaberg's good
faith" (id. at 230) in her execution of the
settlement agreement. Hence, the only relevant
element of Debtor and Creditor Law § 272 is
whether she gave "fair consideration" for the
allegedly tainted assets she received through the
parties' property settlement.
In assessing whether a spouse pays fair consideration
Page 6
2011 NY Slip Op 5366, *8; 2011 N.Y. LEXIS 1704, **17
within the meaning of Debtor and Creditor Law § 272 in
connection with a property distribution made pursuant to
a separation agreement incorporated into a judgment of
divorce, a court must examine a number of [*9] factors.
Since [**18] consideration cannot be predicated on a
spouse's relinquishment of a claim to a greater share of
the proceeds of fraud, the first step is to determine
whether the spouse relinquished rights to other untainted
assets in the marital estate. Clearly, this would constitute
fair consideration.
Second, a court needs to look beyond the tangible
marital property at issue because New York recognizes
other forms of legitimate consideration, including
nonmonetary consideration. For example, New York
courts have found fair consideration where a spouse
releases a claim for maintenance (see Federal Deposit
Ins. Co. v Malin, 802 F2d 12, 20 [2d Cir 1986]; In re
Fair, 142 BR 628, 631 [Bankr ED NY 1992]; Darling v
Darling, 22 Misc 3d 343, 358, 869 N.Y.S.2d 307 [Sup Ct,
Kings County 2008]) or where consideration is predicated
on "legally cognizable aspects of [the transferor's] child
support obligation" (see First Fed. Sav. & Loan Assn. of
Rochester v Kasmer, 140 AD2d 826, 828, 528 N.Y.S.2d
216 [3d Dept 1988]). Similarly, the waiver of inheritance
rights and the relinquishment of other "rights and
remedies otherwise conferred by law" are also relevant to
the determination of fair consideration (Marine Midland
Bank-N.Y. v Batson, 70 Misc 2d 8, 10, 332 N.Y.S.2d 714
[Sup Ct, Nassau County 1972]). [**19] It is also
possible that child custody or visitation concessions could
be viewed as a valuable form of consideration. Indeed,
based on the myriad types of consideration that arise in
the unique context of marital dissolution, courts have
repeatedly stated that "transfers made pursuant to a valid
separation agreement incorporated into a divorce decree
are presumed to have been made for fair consideration"
(In re Durand, 2010 WL 3834587, *7, 2010 U.S. Dist
LEXIS 101755, *21 [ED NY 2010]; see also In re
Cersosimo, 2009 WL 3182989, *4, 2009 Bankr LEXIS
2009, *13-14 [Bankr ED NY 2009]; Darling, 22 Misc 3d
at 358-359).
In certifying the second question to us, the Second
Circuit implicitly presumed that the only consideration
Schaberg could have given in exchange for the tainted
property she received was her release of a claim to other
proceeds of the fraud -- if that is the case, her claim
would be illusory. Despite Schaberg's claim to the
contrary, we must accept for purposes of answering this
question the Second Circuit's assumption that the marital
estate here "consisted almost entirely of the proceeds of
fraud" (618 F3d at 230). Yet, as we've discussed, there
are other valid forms of consideration [**20] that are
relevant to the determination of fair consideration, even
where the bulk of a marital estate consists of ill-gotten
gains. We therefore reformulate the second question to
read as follows:
"Is a determination that a spouse paid 'fair
consideration' according to the terms of New York Debtor
and Creditor Law § 272 precluded, as a matter of law,
where part or all of the marital estate consists of the
proceeds of fraud?"
As reformulated, and under our analysis, we answer
this question in the negative. [*10]
Of course, the ultimate determination as to whether
Schaberg gave fair consideration pursuant Debtor and
Creditor Law § 272 under the facts and circumstances of
this case is a matter for the federal courts to resolve. But
we note, on this limited record, that Schaberg contends
that she surrendered more than her right to claim through
equitable distribution a greater portion of fraudulently
obtained funds constituting the marital estate. She alleges
that she waived a claim for maintenance under Domestic
Relations Law § 236 (B) (6), the calculation of which is
based on a variety of considerations, including the length
of the marriage; she released her right to inherit from
Walsh's estate; [**21] and she dispensed with her
interest in the multi-million dollar marital residence
located in Port Washington, which she claims was not
acquired with moneys derived from Walsh's fraudulent
activities8. Furthermore, even where a spouse does not
relinquish a "fair equivalent" for the aggregate of assets,
it is possible that fair consideration may be exchanged for
at least some of the assets (cf. Corporation of Lloyd's v
Funk, 246 AD2d 570, 572, 668 N.Y.S.2d 211 [2d Dept
1998], lv dismissed 91 NY2d 1002, 698 N.E.2d 958, 676
N.Y.S.2d 129 [1998]).
8 In particular, Schaberg asserts that the Port
Washington property was purchased in 1999 with
funds derived from the sale of their previous
marital residence, which in turn had been bought
with legitimate funds in the early 1980's, long
before Walsh's allegedly fraudulent conduct took
place. Notably, Walsh was apparently permitted
to sell the Port Washington home and use a
portion of the untainted proceeds from that sale to
pay legal fees incurred in connection with his
Page 7
2011 NY Slip Op 5366, *10; 2011 N.Y. LEXIS 1704, **21
criminal prosecution (see Commodity Futures
Trading Commn. v Walsh, 2010 WL 882875, *3,
2010 U.S. Dist LEXIS 21992, *9 [SD NY 2010]).
In sum, we are not unsympathetic to the interests of
parties who were fraudulently deprived of their [**22]
investments and who, understandably, seek the return of a
portion of their stolen monies. Most definitely, the
victims of fraud are entitled to pursue disgorgement
where it is demonstrated that the transferee-spouse was
aware of or participated in the fraud or otherwise failed to
act in good faith. One example of bad faith would be
where the parties entered into a collusive divorce
arrangement designed to conceal stolen money from its
rightful owner. And even where the recipient executed a
settlement agreement in good faith and without
knowledge of the source of the ill-gotten gains, the
defrauded parties may still recover if the spouse did not
give fair consideration for the property under Debtor and
Creditor Law § 272. But we believe that an innocent
spouse who received possession of tainted property in
good faith and gave fair consideration for it should
prevail over the claims of the original owner or owners
consistent with this State's strong public policy of
ensuring finality in divorce proceedings.9 [*11]
9
The Agencies suggest that disgorgement
should be allowed because, upon turning the
funds over to them, Schaberg could move to
vacate the settlement agreement in state court on
fraud [**23] grounds and seek a redistribution of
any untainted assets Walsh may have received.
But such an exercise would likely be fruitless,
particularly where it appears that, years after the
property division, Walsh liquidated the only
purportedly "clean" asset he owned -- the Port
Washington house.
Accordingly, the first certified question and, as
reformulated, the second certified question should be
answered in accordance with this opinion.
second question, but find its reformulation of that
question unnecessary. The Second Circuit posed a
narrowly tailored question that is relatively simple to
answer, namely, "Does a spouse pay 'fair consideration'
according to the terms of the New York Debtor and
Creditor Law § 272 when she relinquishes in good faith a
claim to the proceeds of fraud." I would answer that
question in the negative.
Debtor and Creditor Law § 278 states that a creditor
with a matured claim may have a conveyance set aside
against anyone "except a purchaser for fair [**24]
consideration without knowledge of the fraud at the time
of the purchase" (Debtor and Creditor Law § 278 [1]
[a]). "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"
(Debtor and Creditor Law § 272 [a]).
The second certified question posed by the Second
Circuit assumes that almost all of the proceeds in the
marital estate consisted of the proceeds of fraud, the
position taken by the CFTC and SEC (see Commodity
Futures Trading Comm. v Walsh, 618 F3d 218, 230 [2d
Cir.2010] [noting that "in her separation from Walsh,
Schaberg relinquished future claims to an equitable
distribution of marital property that - it is alleged consisted almost entirely of the proceeds of fraud"]). The
Second Circuit also notes that "there is no reason to
question Schaberg's good faith in relinquishing her claim
to what she believed was a legitimate interest in a
substantial fortune" (id. at 230). Taking these facts into
account, the question is, assuming that the marital estate
consists almost entirely of the proceeds of fraud, does an
"innocent [**25] spouse" like [*12] Schaberg, by virtue
of relinquishing future claims to those proceeds, pay fair
consideration? The answer is, of course, "no", as the
majority essentially acknowledges: "consideration cannot
be predicated on a spouse's relinquishment of a claim to a
greater share of the proceeds of fraud" (majority op. at
14).
DISSENT BY: PIGOTT (In Part)
DISSENT
PIGOTT, J.(dissenting, in part):
I agree with the majority's analysis and conclusion
relative to the first certified question. I also agree with
much of what the majority says in its discussion of the
Schaberg's forbearance from "'seek[ing] through
court proceedings or otherwise a distributive award or an
award of equitable distribution with respect to' any other
property acquired by [Walsh] over the course of their
marriage" (Walsh, 618 F3d at 229) does not constitute
"fair consideration" where, as the Second Circuit has
asked us to assume here, the Walsh proceeds were
Page 8
2011 NY Slip Op 5366, *12; 2011 N.Y. LEXIS 1704, **25
obtained as the result of fraud. One cannot reasonably
argue that a spouse -- even an innocent one with no
knowledge of her husband's fraud - could be said to have
given "fair equivalent value" by giving up future claims
to the equitable distribution of proceeds in which she has
no legitimate interest. In such a case, the innocent spouse
"has not [**26] given value for the misappropriated
property, but rather has gained an interest in the property
simply by virtue of being married to the person who
misappropriated" it (see generally In re Marriage of
Allen, 724 P2d 651, 659 [Colo.1986] [citing cases]).
Accordingly, I would answer the second certified
question in the negative.
****
Following certification of questions by the United
States Court of Appeals for the Second Circuit and
acceptance of the questions by this Court pursuant to
section 500.27 of the Rules of Practice of the New York
State Court of Appeals, and after hearing argument by
counsel for the parties and consideration of the briefs and
the record submitted, certified questions answered in
accordance with the opinion herein. Opinion by Judge
Graffeo.
Chief Judge Lippman and Judges Ciparick, Read and
Jones concur.
Judge Pigott dissents in part in an opinion in which
Judge Smith concurs.
Decided June 23, 2011