Hassett v. Goetzmann

Citations: 10 F. Supp. 2d 181; 1998 U.S. Dist. LEXIS 9039; 1998 WL 326758Docket: Misc. 3368(NPM)

Court: District Court, N.D. New York; June 19, 1998; Federal District Court

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In the case of Hassett v. Goetzmann, the U.S. District Court for the Northern District of New York examined whether Harry E. Goetzmann, Jr. (the Judgment Debtor) transferred property with the intent to hinder, delay, or defraud creditors. The court was also tasked with determining if his wife, Sylvia Goetzmann, and son, Eric Goetzmann (collectively, the Respondents), received these transfers with similar fraudulent intent. The Trustee, acting under New York's Uniform Fraudulent Conveyance Act, sought to invalidate over $5.5 million in alleged fraudulent transfers made by the Judgment Debtor.

The Trustee's action was based on three claims under New York Debtor and Creditor Law: 1) § 273, arguing the transfers made the Judgment Debtor insolvent and lacked fair consideration; 2) § 273-a, asserting the transfers were made while an action against the Judgment Debtor was pending; and 3) § 276, claiming the transfers were made with actual intent to defraud creditors. The Trustee also requested attorneys' fees based on § 276-a.

The court granted the Trustee's motion for summary judgment on the first two claims, declaring the transfers to Sylvia and Eric Goetzmann constructively fraudulent and awarding monetary judgments against them in case the set-aside assets were insufficient. However, the court denied the motion regarding the actual intent to defraud, citing a factual dispute. The request for attorneys' fees was also denied, as it hinged on a finding of actual intent to defraud.

After a stay on enforcement of judgments against the Respondents, a trial was held on the remaining claims from June 1 to June 3, 1998. Ultimately, the court found that both the Judgment Debtor and the Respondents acted with intent to hinder, delay, or defraud the Judgment Debtor's creditors in the fraudulent concealment of assets.

On January 13, 1989, Continental Information Systems Corporation (CIS) filed for Chapter 11 bankruptcy in the Southern District of New York. The Judgment Debtor, founder and former CEO of CIS, was subsequently sued by the Trustee for recovering $364,781 in bonuses paid to him shortly before the bankruptcy filing while CIS was insolvent. The Bankruptcy Court ruled in favor of the Trustee on April 15, 1996, allowing recovery of the full amount plus interest. Additionally, the Trustee sought recovery of $51,700 in improper fringe benefits, resulting in a favorable judgment for the Trustee on November 18, 1993. 

The Judgment Debtor claims to have no assets to satisfy these judgments, attributing this to transferring nearly all his valuable assets to family members during CIS's financial troubles. In March 1989, he made an oral agreement to convey these assets to S. Goetzmann and later executed a written Assignment Agreement, which he admits was prepared after the oral agreement date. The assets transferred were valued over $5 million against S. Goetzmann's pledged assets of approximately $800,000. The Judgment Debtor justified the transfer as a fair action and also transferred nearly $400,000 to E. Goetzmann during CIS’s financial distress.

Between November 22, 1988, and December 19, 1988, the Judgment Debtor transferred $261,000 to E. Goetzmann for deposit into a Citibank account, intending to prevent MNB from exercising its right of offset in case of loan default. E. Goetzmann, then 25, possessed a bachelor’s degree in business administration and was employed as a money manager at First Albany Corp. The Judgment Debtor did not inform his son of the transfer’s purpose, and E. Goetzmann was unaware of his father's financial difficulties, only assuming he had creditors. He opened the account and signed blank checks, which he later delivered to the Judgment Debtor. Although he was aware of his father’s CEO position at CIS and had seen newspaper articles about creditors, he dismissed them as inconsequential. The account statements were sent to a post office box from which the Judgment Debtor collected them. E. Goetzmann denied any intention to conceal assets from creditors.

The Judgment Debtor lacks assets to satisfy judgments due to transferring all assets and generating no income despite working extensive hours. He is currently the president of Schomann International Corp. (SIC), a closely-held corporation established by S. Goetzmann, who is its majority shareholder. SIC was funded by proceeds from the sale of Schomann Entertainment Corporation, amounting to over $5 million. The Judgment Debtor manages SIC's finances and has check-writing authority, although SIC only covers his expenses. He has no ownership interest or deferred compensation claims with SIC.

The court retains jurisdiction over the matter despite pending appeals, as the appeal from the January 26, 1998 decision was non-final and lacked certification for interlocutory appeal, allowing the district court to maintain its jurisdiction.

Appeals from district court decisions are typically only permissible from final judgments under 28 U.S.C. § 1291, and the court retains jurisdiction in this case due to the improper appeal. Frivolous appeals do not affect the district court's ability to proceed to trial, nor do they impede its jurisdiction to issue a permanent injunction after a preliminary injunction is granted. 

Under New York's Debtor and Creditor Law (DCL) § 276, any conveyance made with actual intent to hinder, delay, or defraud present or future creditors is considered fraudulent. Unlike DCL § 273, which allows for constructive fraud based on circumstantial evidence, § 276 requires a demonstration of actual intent to defraud. The burden of proof lies with the party seeking to invalidate the conveyance, requiring clear and convincing evidence, which is usually inferred from circumstantial evidence rather than direct proof. 

Indicators of fraudulent intent, known as "badges of fraud," include transfers to relatives or friends, suspicious timing, lack of fair consideration, insolvency following transfers, and retention of benefits from the transferred property. In this case, the Trustee successfully established that the Judgment Debtor transferred assets to S. Goetzmann and E. Goetzmann with the intent to hinder, delay, and defraud creditors. The court also found that S. Goetzmann and E. Goetzmann were aware of this intent when receiving the transfers. The Judgment Debtor's rationale for the transfers was deemed implausible, especially when considering the disproportionate value of the assets conveyed in relation to the assets pledged by S. Goetzmann.

The Judgment Debtor’s transfers of assets to S. Goetzmann demonstrate clear intent to defraud creditors, as indicated by several factors. First, the Judgment Debtor rendered himself insolvent through these transfers, which occurred shortly after CIS filed for bankruptcy and when he faced known creditor issues. The intrafamily nature of the transactions, particularly with his wife, raises further suspicion. The grossly inadequate consideration received for the transfers undermines any claims of legitimate intent. Moreover, the Judgment Debtor retained possession and benefit of many assets, continuing to reside in the marital home and use vehicles transferred to Goetzmann, which reinforces the fraudulent intent.

The Judgment Debtor's extensive unpaid work (35-125 hours weekly) further suggests he is attempting to evade creditor claims by generating no income that could be seized. Despite not having a formal claim or ownership in SIC, he acknowledges the expectation of future benefits from his work, indicating he maintains control over the company through Goetzmann. The totality of circumstances indicates a deliberate effort to hinder, delay, and defraud creditors, supporting the conclusion that the transfers to S. Goetzmann should be set aside as fraudulent under DCL 276. 

Additionally, the Judgment Debtor's actions regarding E. Goetzmann illustrate an intent to obstruct MNB’s right of offset, as he could not provide a legitimate rationale for these arrangements. His admission that the banking setup would likely affect other creditors strengthens the case against him. Ultimately, the evidence compellingly shows the Judgment Debtor’s fraudulent intent in the asset transfers.

The Judgment Debtor attempted to shield assets from creditors by transferring $393,500 to E. Goetzmann, demonstrating intent to defraud, as supported by both admissions and independent evidence. The transfers occurred during CIS's financial distress and after seeking bankruptcy counsel, with the Judgment Debtor willfully omitting the existence of the Citibank account from sworn financial statements. The court finds these actions fraudulent under DCL § 276, setting aside the entire amount transferred. Additionally, a previous $126,500 transfer is deemed constructively fraudulent, allowing it to be set aside under DCL § 273. The Trustee is entitled to attorneys' fees under DCL § 276-a, as the evidence shows both the Judgment Debtor and E. Goetzmann acted with intent to hinder creditors. S. Goetzmann's lack of recollection regarding her intentions does not negate her involvement, as the record confirms her knowledge of the fraudulent transfers. Specifically, S. Goetzmann sold Schomann Entertainment Corporation, with proceeds placed in an account under her brother's name to evade creditors, indicating her intent to defraud.

S. Goetzmann's deposition from 1995 indicated her potential intent to maintain a checking account in E. Goetzmann's name to delay or hinder the creditors of the Judgment Debtor, despite her inability to recall details during the trial. Significant inconsistencies arose in her testimony, particularly concerning the Assignment Agreement, where she stated she required security for her pledge but later submitted an affidavit during a foreclosure action asserting ignorance of the documents she signed and claiming no consideration for pledging her interest in the marital estate to MNB. These contradictions suggest a manipulation of sworn statements to obstruct foreclosure proceedings. 

Additionally, E. Goetzmann's testimony regarding his lack of knowledge about the Judgment Debtor's intent when setting up his accounts was deemed implausible, given his educational background and profession as a money manager. His claims of ignorance regarding the significance of his father's transfer of nearly $400,000 were also unconvincing, as were his explanations for the accounts' purpose. Both S. Goetzmann and E. Goetzmann's actions were interpreted as knowingly participating in a scheme to defraud the Judgment Debtor's creditors. Consequently, the court concluded that the Trustee demonstrated that the assets were transferred with fraudulent intent, entitling the Trustee to recover attorneys' fees from both S. Goetzmann and E. Goetzmann, as well as the Judgment Debtor. The Trustee also sought to modify the judgment against S. Goetzmann to include pre- and post-judgment interest awarded against the Judgment Debtor.

A judgment of $364,791 was awarded by the Bankruptcy Court on April 15, 1996, with pre-judgment and post-judgment interest accruing at the statutory rate under 28 U.S.C. 1961 from March 22, 1990. A separate judgment of $51,700 was awarded on November 18, 1993, with similar interest provisions from April 27, 1989. The court has established that in cases of fraudulent conveyance, creditors can obtain judgments against transferees up to the value of the fraudulently conveyed property. The Trustee is entitled to judgments against S. Goetzmann and E. Goetzmann corresponding to the amounts owed but limited to the value of the transferred assets. For S. Goetzmann, this is approximately $5.5 million, while for E. Goetzmann, it is capped at $393,500, exclusive of interest, due to the value of the assets transferred. 

The Trustee seeks to enforce these judgments without first satisfying them from the transferred property, arguing that the remaining assets are of little value. However, the court denied this request, asserting that the judgments against the transferees are enforceable only to the extent that the Trustee cannot satisfy the judgments from the assets identified as fraudulent transfers. This limitation is in line with New York law regarding fraudulent transfers, which emphasizes the creditor's right to be compensated from the actual assets they are entitled to.

An action under New York's Debtor and Creditor Law (DCL) aims to compel a debtor to recover fraudulently transferred property to satisfy debts owed to creditors. The law permits the nullification of the transfer, allowing creditors to collect by reverting the title of assets to facilitate execution against those assets. A creditor may obtain judgment against any transferee for the value of the fraudulently transferred property, but this must align with the broader statutory interpretation. Actions to set aside transfers and trace debtor assets are typically treated as equitable rescission actions.

Judgments against transferees are limited to scenarios where the transferees were aware of the fraudulent transfer and where the assets have been diminished. In the current case, the Trustee argues that the fraudulent transfers have rendered the debtor's interest insufficient in value for levy; however, past case law indicates that such interests, specifically a tenancy by the entirety, cannot be unilaterally converted to a tenancy in common due to legislative intent. The court has previously upheld the Trustee's right to relief concerning the transferor's interest without disrupting the nature of the tenancy.

Furthermore, the court emphasizes that fraudulent conveyance actions do not provide a separate remedy for monetary damages against third parties who assist the debtor. The creditor's remedy is confined to the recovery of property that would have been available for judgment satisfaction prior to the fraudulent transfer. Allowing the Trustee to pursue personal assets of the respondents without first attempting to reclaim the fraudulently transferred assets would grant a remedy not supported by New York law. Thus, the Trustee cannot pursue judgments against the Goetzmanns independently. The defrauded creditor is entitled only to the original position held prior to the fraudulent act.

The Trustee must first attempt to satisfy his judgments against the Judgment Debtor by assessing the extent to which those judgments can be fulfilled through the transferred assets before pursuing those judgments against the Respondents. This restriction only applies to the Trustee's enforcement of judgments related to the Judgment Debtor, not to the judgments for attorneys' fees. The court finds no limitations on the Trustee's ability to enforce judgments for attorneys' fees.

The court concludes that the Judgment Debtor fraudulently transferred assets to S. Goetzmann and E. Goetzmann with the intent to defraud creditors, and that both Goetzmanns were aware of this fraudulent intent. The court awards the Trustee his attorneys' fees against the Judgment Debtor and the Goetzmanns, with the exact amount to be determined later. The Trustee is instructed to submit his fee request and supporting affidavits by June 29, 1998, while the Judgment Debtor and the Goetzmanns may object to the request's reasonableness by July 10, 1998.

The court notes several asset valuations involved in the fraudulent transfers, including real estate, business interests, and personal property. Furthermore, it highlights the arrangements between E. Goetzmann and his parents, which mirrored the setup with the Judgment Debtor, indicating a lack of inquiry or understanding regarding these arrangements. Lastly, the court references ongoing appeals related to prior decisions and emphasizes the need to maintain jurisdiction.