Opinion

Gowan v. Patriot Group, LLC (In Re Dreier LLP)

452 B.R. 391
2011 Bankr. LEXIS 2338
2011 WL 2412581

Court: United States Bankruptcy Court, S.D. New York
Filed: Jun 16, 2011
Status: Published
Author: Glenn
On the bench: Martin Glenn
Cited by: 79 cases
Authority: More cited than 82.5%

holding that “[f]or claims 5 brought by a bankruptcy trustee, courts take a more liberal view when examining allegations of 6 actual fraud ... in the context of a fraudulent conveyance, since a trustee is an outsider to the 7 transaction who must plead fraud from second-hand knowledge”

How later courts described this case

holding that “[f]or claims 5 brought by a bankruptcy trustee, courts take a more liberal view when examining allegations of 6 actual fraud ... in the context of a fraudulent conveyance, since a trustee is an outsider to the 7 transaction who must plead fraud from second-hand knowledge”
explaining that the trustee, as the party seeking to avoid the transaction, bears the burden of proof by a preponderance of the evidence on all elements of a claim for constructive fraudulent transfer under § 548(a)(1)(B)
holding “[f]or claims brought by a bankruptcy trustee,. courts take a more liberal view when examining allegations of actual fraud ... in the context of a fraudulent conveyance, since a trustee is an outsider to the transaction, who must plead fraud from second-hand knowledge”
concluding that only the intent of the transferor must be shown in an actual fraudulent transfer action under NYDCL § 276, and that caselaw to the contrary was either dicta or misguided

Written by the judges who cited it.

The opinion

MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS’ MOTIONS TO DISMISS

MARTIN GLENN, Bankruptcy Judge.

Before the Court is a motion to dismiss filed by The Patriot Group, LLC, The Washington Special Opportunity Fund, LLC and The Washington Special Opportunity Fund, Inc. (collectively, “Patriot” or “Defendants”) asserting that the complaint fails to state a claim upon which relief can be granted pursuant to Federal Rule of Civil Procedure (“Rule”) 12(b)(6), made applicable by Federal Rule of Bankruptcy Procedure (“Bankruptcy Rule”) 7012 (the “Motion to Dismiss”). Pursuant to the actual and constructive fraudulent conveyance provisions of §§ 544, 548(a), 550 of the Bankruptcy Code (the “Code”) and various sections of New York Debtor and Creditor Law

(the “NYDCL”), the chapter 11 trustee, Sheila Gowan (“Gowan” or the “Trustee”) seeks to avoid and recover prepetition transfers by Dreier LLP to the Defendants in the course of the Ponzi scheme perpetrated by Marc Dreier.

Among the recent spate of frauds and Ponzi schemes, the crimes of Marc Dreier (“Dreier”) stand out as among the most brazen. Dreier built a successful 200-plus lawyer firm based in New York — Dreier LLP (“Dreier LLP” or the “Debtor”)— unique in that he was the firm’s sole equity partner. Dreier’s fraud shared much in common with frauds of other corrupt lawyers who have stolen client funds deposited in their law firm’s bank accounts, although the amount of stolen client funds was very large.

But what sets Dreier apart, perhaps in a class of his own, is the Ponzi scheme he developed, as his thirst

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for cash and need to cover-up earlier thefts increased, by selling bogus forged promissory notes of one of his firm’s corporate clients, Solow Realty Development Corp. (“Solow”), to supposedly-sophisticated hedge funds (the “Solow Note” or “Notes” or “Solow Notes”). Solow is a privately-held real estate development and investment firm based in New York which had no knowledge of Dreier’s fraud.

Over the course of several years Dreier succeeded in selling over $700 million in bogus Solow Notes with maturities of approximately one year or less at allegedly above-market interest rates.

The new Solow Note investors wired funds to purchase the Notes to Dreier LLP, which deposited the funds in the firm’s account entitled “Dreier LLP Escrow Account” with the last four digits of “5966” (the “5966 Account”). It is undisputed that the 5966 Account contained commingled funds from firm clients, Note investors and law firm operating revenue. Marc Dreier controlled deposits and withdrawals from the 5966 Account, and used the funds in the account at will to pay for his lavish lifestyle, to fund the operations of his law firm, when necessary, and to make payments to earlier clients and Note investors whose funds he had earlier stolen from the 5966 Account. The scheme fell apart when Marc Dreier was arrested in Canada for impersonating another client in an effort to raise additional funds needed to prevent his scheme from unraveling when currently-due obligations could not be paid. Shortly after Dreier’s arrest, Dreier LLP was forced into bankruptcy, and a chapter 11 trustee, Sheila Gowan, was appointed. An involuntary chapter 7 bankruptcy was also commenced against Marc Dreier personally, and a chapter 7 trustee was appointed.

On May 11, 2009, Dreier was convicted upon his guilty plea to a multi-count federal indictment and sentenced to 20 years in prison. Additionally, upon his criminal conviction, a civil forfeiture order was entered, not only forfeiting Marc Dreier’s personal assets, but also assets of Dreier LLP, including any funds in the 5966 Account.

The Trustee has commenced numerous adversary proceedings, including the three cases that are pending before me.

The Dreier LLP chapter 11 case and the Marc Dreier chapter 7 case, as well as numerous other avoidance actions, are pending before my colleague Judge Stuart M. Bernstein. The defendants in the cases before me are hedge funds that purchased bogus Solow Notes.

The defendants in the

Patriot

and

Amaranth

cases are so-called “net winners,” having been repaid the full amount of principal and interest on the Notes before the scheme unraveled; the defendants in the

Novator

and

Xerion

cases are so-called “net losers,” having

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been repaid some but less than the full amount of the principal on the Notes. The Trustee sued the defendants in the

Patriot, Novator

and

Xerion

cases on actual and constructive fraudulent conveyance avoidance claims under both federal and New York law to recover the transfers from the 5966 Account repaying principal and interest; in the

Amaranth

case, because the challenged transfers occurred more than two years before the chapter 11 filing, the Trustee sued the defendants only under New York law because of the longer statute of limitations. The defendants in the four cases moved to dismiss the complaints, raising mostly the same arguments. The Court entered a common briefing and argument schedule, heard argument on the motions to dismiss on April 5, 2011 (the “Hearing”), and took the motions under submission.

Two potentially case-dispositive issues are raised in these cases: (1) whether the forfeiture order, entered by the district court in Marc Dreier’s criminal case upon his guilty plea, had the effect of forfeiting all funds in the 5966 Account, or traceable to the account, including the funds transferred to the defendants before the forfeiture order was entered, thereby precluding the Trustee from recovering the payments to defendants because, as a result of the forfeiture, the funds were not “property of the debtor,” an essential element under federal and state avoidance claims; and (2) whether the defendants’ deposits into the 5966 Account and the funds repaid to the defendants from the 5966 Account were held by Dreier LLP in an “express trust,” precluding the Trustee from recovering the payments because funds held in an express trust are not “property of the debtor”? Additionally, the defendants’ motions to dismiss raise other arguments, some common to all three cases and some specific to the individual cases.

This opinion addresses the two potentially case-dispositive issues and the additional common arguments, as well as the case-specific issues in this case. The motions to dismiss in the other two cases are resolved in separate opinions that incorporate this opinion, to the extent applicable, and address case-specific issues raised in each of those cases.

For the reasons explained below, the Court denies the motions to dismiss with respect to the two potentially case-disposi-tive issues, and grants the motions in part and denies the motions in part with respect to the common arguments and the case-specific issues in this case. As explained, the forfeiture order issue raises only an issue of law, resolved against the defendants in this opinion, and therefore foreclosing the issue to defendants as the cases proceed. The “express trust” issue, however, raises mixed questions of fact and law that cannot be resolved on the motions to dismiss, and must await further developments in these cases.

As to the common issues among the defendants, the Court reaches the following conclusions: First, the “Ponzi scheme presumption” applies to the transfers

*401

made to defendants during the course of Dreier’s fraud sufficient to state a claim for actual fraudulent conveyance under § 548(a)(1)(A) of the Bankruptcy Code. Second, to state a claim for actual fraudulent conveyance under NYDCL § 276, the Court concludes that the Trustee has adequately pled the fraudulent intent of the transferor and need not plead the fraudulent intent of the transferee — “mutual fraudulent intent” is not necessary. Third, as to the claims for constructive fraudulent conveyance under § 548(a)(1)(B) of the Bankruptcy Code, the Court concludes that the complaints are dismissed as to the repayment of principal because the Trustee concedes that such repayment extinguished a common law claim, such as restitution, that defendants may have had against the estate; however, the claims for constructive fraudulent conveyance under the Bankruptcy Code are permitted to go forward as to the repayments in excess of principal because the Debtor did not receive “reasonably equivalent value” for such transfers. Fourth, as to the claims for constructive fraudulent conveyance under the NYDCL, the Court concludes that the Trustee’s concession that the repayment of principal satisfied an antecedent debt precludes, as a matter of law, avoidance of such transfers; under controlling law, whether the defendants lacked “good faith,” an indisputably thorny inquiry, is not an issue under the NYDCL where the transfers satisfied a valid antecedent debt. Fifth, the Trustee may seek recovery of the repayments in excess of principal because the Debtor did not receive “fair equivalent” value for the transfers. Sixth, consideration of the defendants’ good faith sufficient to make out an affirmative defense under § 548(c) of the Bankruptcy Code or NYDCL § 278(1) is not appropriate at the motion to dismiss stage. Seventh, the claims for equitable subordination under § 510(c) of the Bankruptcy Code must be dismissed as premature unless the defendant has filed a claim in the bankruptcy case.

Specific to the

Patriot

case, the motion to dismiss Counts I and III, the actual fraudulent conveyance claims under Code § 548(a)(1)(A) and NYDCL §§ 276 and 276-a, is denied. With regard to Counts II, IV, V and VI, the constructive fraudulent conveyance claims under Code § 548(a)(1)(B) and NYDCL §§ 273, 274 and 275, the motion to dismiss is granted to the extent of the repayment of principal and denied to the extent the repayments exceeded the principal. With regard to Count VII, for equitable subordination, the motion to dismiss is granted without prejudice.

I. BACKGROUND

At bottom, the complaint alleges that the Defendants knew or should have known that they received the transfers as part of Dreier’s Ponzi scheme and should return funds received during the course of the fraud that were paid from property of Dreier LLP. The complaint alleges causes of action under the applicable provisions of the Code and the NYDCL for actual and constructive fraudulent conveyances seeking to avoid and recover transfers made by Dreier LLP to the Defendants before the bankruptcy filing. The Trustee also seeks preemptive equitable subordination of any claims filed by the Defendants against the Dreier LLP estate (no such claims having been filed so far), arguing that the Defendants unjustly benefited from the proceeds received during the course of the fraudulent scheme.

A. Elements of the Fraud

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Unlike the classic Ponzi

scheme where a fraudster promises exorbitantly high rates of return through its own investment activities, but in fact takes funds from one person to pay another, Dreier perpetuated a Ponzi scheme through the sale of bogus Solow Notes from 2004 to 2008 with allegedly above-market interest rates and on favorable terms to investors.

Dreier received approximately $700 million in fraud proceeds over the course of the scheme (the “Note Fraud”) to fund his lavish lifestyle and fund the operations of his law firm, Dreier LLP, in which he was the sole equity partner.

See In re Dreier LLP,

429 B.R. 112, 118 (Bankr.S.D.N.Y.2010). To fund the fraud, Dreier told most potential investors that a long-standing Dreier LLP client, Solow Realty and Development Corp., was interested in borrowing from investment firms to fund Solow’s purchase of unspecified real estate investments. (Compl. ¶ 16.) Dreier primarily used the principal obtained from later purchasers of Notes to pay off the principal and interest due to earlier purchasers.

Dreier,

429 B.R. at 118 .

In furtherance of his scheme, Dreier delivered “information packages” to potential investors containing fabricated Solow financial statements and other information about the “investment.” (Compl. ¶ 17.) Dreier also crafted fake audit opinion letters on the letterhead of Berdon LLP, an established accounting and auditing firm that did not know Dreier was using its name as part of the fraud.

(Id.)

According to the Trustee, the financial statements contained glaring irregularities that would cause a “reasonable” investor to inquire further.

(Id.)

In addition to defrauding investors into buying fake Notes, Dreier required investors to execute “Term Loan Agreements” that contained the following language:

The Borrower hereby authorizes the Lender to rely upon the telephone or written instructions of any person identifying himself or herself as an authorized officer of the Borrower and upon any signature which Lender believes to be genuine, and the Borrower shall be bound thereby in the same manner as if the officer were authorized or such signature were genuine.

(Compl. ¶ 21.) In essence, this provision purported to bind Solow to the actions of any person who claimed to be an authorized officer of Solow, in this case, Dreier himself. The Trustee characterizes this

*403

provision as “highly unusual.”

(Id.)

The Term Loan Agreements also directed investors to deal only with Dreier because all legal notices, billing statements, payments, or communications of any kind were to be sent to “Solow Management c/o Dreier LLP” at the Dreier LLP address. (Compl. ¶ 20.)

Investors were directed to wire their investments directly to the 5966 Account. (Compl. ¶ 23.) Although titled an “escrow” or “trust” account, the 5966 Account was used for purposes other than holding Dreier LLP client escrow funds.

(Id.)

Funds from the fraud deposited in the 5966 Account were commingled with legitimate client funds, Dreier LLP operating funds, and funds from other Dreier LLP accounts.

(Id.)

Funds held in the 5966 Account were transferred for different purposes, including return of funds to actual Dreier LLP clients, payments of principal and interest to investors in the Note Fraud, and distribution to other Dreier-owned accounts.

(Id.)

The Trustee avers that because of these facts, along with others that are specific to the defendants in each of the cases, the Defendants knew or should have known that the transfers they received were in furtherance of the Ponzi scheme.

B. Collapse of the Fraudulent Scheme and Forfeiture

Dreier’s scheme collapsed after he was arrested in Toronto and charged with criminal impersonation. He was arrested in New York upon his return from Toronto and charged with conspiracy, securities fraud, and money laundering. Dreier pleaded guilty to all counts. Following Dreier’s guilty plea, Judge Rakoff signed an Order of Forfeiture/Preliminary Order of Forfeiture as to Specific Properties,

see

ECF Doc. # 85 in

United States v. Dreier,

No. 09-cr-85 (JSR) (S.D.N.Y. July 17, 2009) (the “Preliminary Forfeiture Order”), that ordered Dreier to forfeit:

the properties listed in

Schedule A

attached hereto (the “Specific Properties”), as property constituting or derived from proceeds obtained as a result of the fraud offenses alleged in Counts One through Seven, as well as property involved in the money laundering offense alleged in Count Eight and property traceable to such property;

Id.

at 3. “Specific Properties” included “[a]ny and all funds in [the 5966 Account] held at JP Morgan Chase in the name of Dreier LLP.”

Id.,

Schedule A, Item 13. The Preliminary Forfeiture Order also ordered Dreier to forfeit:

any and all property, real and personal, that constitutes or is derived from proceeds traceable to the commission of the fraud offenses alleged in Counts One through Seven, and any and all property, real and personal, involved in the money laundering offense alleged in Count Eight, and all property traceable to such property.

Id.

¶ 2.

Because the defendants raised the issue of the effect of the Preliminary Forfeiture Order on the Trustee’s ability to bring avoidance actions, the Court entered an order requesting the Office of the United States Attorney for the Southern District of New York (the “U.S. Attorney”) to file a statement of its position regarding whether the Preliminary Forfeiture Order deprived Dreier LLP of an interest in funds that were transferred to the defendants. (ECF Doc. #27.) In addition, the Court directed the Trustee to file the transcripts of the hearings in the district court and bankruptcy court with respect to the Preliminary Forfeiture Order, the Coordination Agreement (as defined below), and the settlement between the government, the Trustee and GSO Capital Partners LP and

*404

its affiliates (collectively, “GSO”)- (M); see

Dreier,

429 B.R. at 138 (denying motion to approve settlement without prejudice);

In re Dreier LLP,

ECF Doc. # 610, No. 08-15051 (order approving settlement as revised),

aff'd,

No. 10 Civ. 4758(DAB), 2010 WL 3835179 , at *5 (S.D.N.Y. Sept. 10, 2010). The U.S. Attorney submitted a statement in response to the Court’s request, setting out the U.S. Attorney’s position that the Preliminary Forfeiture Order did not forfeit the funds transferred to these defendants before the forfeiture order was entered (the “Government Letter”).

(ECF Doc. # 42.)

C. Allegations Against Patriot

The Trustee filed an initial complaint against Patriot on August 24, 2010 and Defendants filed an initial motion to dismiss on November 5, 2010. (ECF Doc. # s 7-8.) Thereafter, on November 24, 2010, the Trustee filed the active Complaint, to which the Defendants filed a motion to dismiss for failure to state a claim and a supporting declaration on January 11, 2010. (ECF Doc. # s 13-15.) On February 1, 2011, the Trustee filed the Trustee’s Memorandum of Law in Opposition to Defendants Motion to Dismiss the Amended Complaint (the “Trustee Mem.”). (ECF Doc. #23.) And on February 18, 2011, the Defendants filed the Reply Memorandum in Support of Defendants’ Motion to Dismiss the Amended Complaint (the “Reply Mem.”). (ECF Doc. # 31.)

1. First Amended Complaint

The Trustee seeks to avoid and recover from Defendants prepetition transfers totaling $16,650,000 representing the repayment of principal and the payment of interest received from Dreier LLP within two years of the petition date under both the Code and the NYDCL. (Compl. ¶ 1.) The Complaint asserts the following claims against the Defendants

Count No._Allegation_

I_Actual Fraudulent Conveyance — 11 U.S.C. §§ 548 (a)(1)(A) and 550

II Constructive Fraudulent Conveyance — 11 U.S.C. §§ 548 (a)(1)(B) and _550_

III New York Law Fraudulent Conveyance — 11 U.S.C. §§ 544 and 550 _and NYDCL §§ 276, 276-a, 278 and 279_

IV New York Law Fraudulent Conveyance — 11 U.S.C. §§ 544 and 550 _and NYDCL §§ 273, 278 and 279_

V New York Law Fraudulent Conveyance — 11 U.S.C. §§ 544 and 550 and NYDCL §§ 274, 278 and 279

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VI New York Law Fraudulent Conveyance — 11 U.S.C. §§ 544 and 550 _and NYDCL §§ 275, 278 and 279_

VII Equitable Subordination — 11 U.S.C. § 510 (c)

2. Patriot’s Involvement in the Note Fraud

Jonathan Kane (“Kane”), president of Patriot Group and an officer of Washington Special Opportunity Fund LLC and Washington Special Opportunity Fund, Inc., was introduced to the Note program by Adrian Kingshott (“Kingshott”), who arranged for Kane and others to meet with Marc Dreier and another Patriot employee on June 18, 2007 in exchange for a fee constituting a percentage of the purported principal on each Note. (Compl. ¶ 24-25, 28.)

Patriot agreed to participate in the purported Solow Note program and purchase Notes. Thereafter, on June 25, 2007, Dreier and Patriot executed a nondisclosure agreement that contained a provision prohibiting any Patriot employee from contacting “any officer, director, employee or agent of [Solow] regarding the Transaction, or [Solow’s] business as it relates to the Transaction, except with the express written permission of [Dreier].”

(Id.

¶29.) The nondisclosure agreement also required Patriot to communicate with Dreier himself, rather than with Solow, regarding the transaction or requests for information.

(Id.)

Prior to the closing of the transaction, Kane asked Dreier to provide him with the contact information for Steven Cherniak (“Cherniak”), Solow’s actual CEO, to ask him questions about Solow’s performance and “whether and how the recent turmoil in the credit markets could affect [Solow].”

(Id.

¶ 33-34.) Dreier replied by email, providing Kane with a “dummy” email address that directed emails to Dreier himself rather than to Cherniak.

(Id.)

Kane emailed who he believed was Cherniak at the fake email address regarding the financial performance of Solow, but heard back from Dreier himself, purporting to be Cherniak.

(Id.

¶ 36.) The email that Kane received from Dreier stated that “Cherniak” hoped the emails had been helpful and that Cherniak “[a]ppreciate[d] [his] interest in this program.”

(Id.)

The following day, Kane took affirmative steps to reach Cherniak at his real email address and eventually spoke to Cherniak on the telephone.

(Id.

¶ 38.) Cherniak was apparently confused about the transaction as confirmed by a later email from Cherniak’s real email account to Kane that read: “I apologize for appearing confused when we spoke. I was not aware of the details. I’ve since spoken with Marc Dreier and he said everything is fine. If you need anything further, please call Marc.”

(Id.)

According to the Trustee, “Cherniak’s ‘confusion’ should have alerted Kane that the transaction Patriot was about ‘to enter into was not legitimate.’ “

(Id.)

In addition, different signature blocks on the emails should have been a “red flag” for Kane.

(Id.

¶ 39.)

Nevertheless, on August 14, 2007, Patriot agreed to purchase $15 million of Notes with a one-year maturity and an interest rate of 11%.

(Id.

¶ 42.) On the same date, Patriot wired $15 million to the 5966 Account.

(Id.)

On the closing date, Patriot’s attorney, Stephen Geissler, emailed Catherine Borrico, Dreier’s secretary: “Just curious, why [is Patriot] wiring to your account vs [Solow’s] account?”

(Id.

¶ 41.) Dreier never responded to Geis-sler’s email.

(Id.)

After closing, Patriot’s

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attorney emailed Kane congratulating him for being a lender “to a something or other, weighing in at an 11.0% interest rate.”

(Id.

¶ 43.) Kane responded: “Just hope I don’t see Marc Dreier on a flight to Columbia any time soon.”

(Id.)

According to the Trustee, these emails “demonstrate that the Patriot Group had deep suspicions about the legitimacy of the transaction” and “[a]t the least, the Patriot Group was on inquiry notice that the transaction was illegitimate.”

(Id.

¶ 44.)

The transfers from the 5966 Account

to Patriot occurred as follows: on November 14, 2007, Patriot received an interest payment of $412,500 from the 5966 Account.

(Id.

¶ 47.) On February 14, 2008, Patriot received a second interest payment of $412,500 from the 5966 Account.

(Id.

¶ 48.) On May 14, 2008, Patriot received a third interest payment of $412,500 from the 5966 Account.

(Id.

¶ 49.) On August 14, 2008, Patriot received a fourth interest payment of $412,500 from the 5966 Account, along with the repayment of $15 million in principal.

(Id.

¶ 51.) In total, the Trustee seeks disgorgement of $16,650,000 transferred from the 5966 Account to Patriot Group during the course of Dreier’s fraudulent scheme. Patriot was a “net winner” because it received repayment of principal plus a profit in the form of interest.

II. DISCUSSION

A. Standard on a Motion to Dismiss

To survive a motion to dismiss pursuant to Rule 12(b)(6), “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ”

Vaughn v. Air Line Pilots Ass’n, Int’l,

604 F.3d 703 , 709 (2d Cir.2010) (quoting

Ashcroft v. Iqbal,

— U.S. —, 129 S.Ct. 1937, 1949 , 173 L.Ed.2d 868 (2009)). “Where a complaint pleads facts that are merely consistent with a defendant’s liability, it stops short of the line between possibility and plausibility of entitlement to relief.”

Iqbal,

129 S.Ct. at 1949 (citations and internal quotation marks omitted). Plausibility “is not akin to a probability requirement,” rather plausibility requires “more than a sheer possibility that a defendant has acted unlawfully.”

Id.

(citation omitted). Furthermore, a complaint that does not “plausibly suggest an illicit accord because it was not only compatible with, but indeed was more likely explained by, lawful, unchoreographed free-market behavior” that does not “suggest an unlawful agreement” must be dismissed.

Id.

at 1950 (citation omitted).

Following the Supreme Court’s decision in

Iqbal ,

courts use a two-prong approach when considering a motion to dismiss.

See, e.g., McHale v. Citibank,

N.A

(In re The 1031 Tax

Group), 420 B.R. 178, 189-90 (Bankr.S.D.N.Y.2009);

Weston v. Optima Commc’ns Sys., Inc.,

No. 09 Civ. 3732(DC), 2009 WL 3200653 , at *2 (S.D.N.Y. Oct.7, 2009) (Chin, J.) (acknowledging a “two-pronged” approach to deciding motions to dismiss);

S. Ill. Laborers’ and Employers Health and Welfare Fund v. Pfizer, Inc.,

No. 08 CV 5175(KMW), 2009 WL 3151807 , at *3 (S.D.N.Y. Sept.30, 2009) (Wood, J.) (same);

Inst. for Dev. of Earth Awareness v. People for the Ethical Treatment of Animals,

No. 08 Civ. 6195(PKC), 2009 WL 2850230 , at *3 (S.D.N.Y. Aug.28, 2009) (Castel, J.) (same). First, the court must accept all factual allegations in the complaint as true, discounting legal conclusions clothed in the factual garb.

Kiobel v. Royal Dutch Petroleum Co.,

621 F.3d 111, 124 (2d Cir.2010) (stating that a court must “assum[e] all well-pleaded, nonconclusory factual alle

*407

gations in the complaint to be true”) (citing

Iqbal,

129 S.Ct. at 1949-50 );

Rescuecom Corp. v. Google Inc.,

562 F.3d 123, 127 (2d Cir.2009) (stating that the court must “accept as true all of the factual allegations set out in the plaintiffs complaint, draw inferences from those allegations in the light most favorable to the plaintiff, and construe the complaint liberally”) (quoting

Gregory v. Daly,

243 F.3d 687 , 691 (2d Cir.2001));

Boykin v. KeyCorp,

521 F.3d 202, 204 (2d Cir.2008) (“In reviewing a motion to dismiss, we accept the allegations in the complaint as true.”) (citation omitted);

Spool v. World Child Int’l Adoption Agency,

520 F.3d 178, 183 (2d Cir. 2008) (“Although we construe the pleadings liberally, bald assertions and conclusions of law will not suffice.”) (internal quotation marks omitted). Second, the court must determine if these well-pleaded factual allegations state a “plausible claim for relief.”

Iqbal,

129 S.Ct. at 1951 (citation omitted).

Courts do not make plausibility determinations in a vacuum; it is a “context-specific task that requires the reviewing court to draw on its judicial experience and common sense.”

Id.

at 1950 (citation omitted). A claim is plausible when the factual allegations permit “the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”

Id.

at 1949 (citation omitted). Meeting the plausibility standard requires a complaint to plead facts that show “more than a sheer possibility that a defendant has acted unlawfully.”

Id.

(citation omitted). A complaint that only pleads facts that are “merely consistent with a defendant’s liability” does not meet the plausibility requirement.

Id.

(quoting

Bell Atl. Corp. v. Twombly,

550 U.S. 544, 557 , 127 S.Ct. 1955 , 167 L.Ed.2d 929 (2007) (internal quotation marks omitted)). “A pleading that offers labels and conclusions or a formulaic recitation of the elements of a cause of action will not do.”

Id.

(quoting

Twombly,

550 U.S. at 555 , 127 S.Ct. 1955 (internal quotation marks omitted)). “Threadbare recitals of the elements of a cause of action, supported by mere conclu-sory statements, do not suffice.”

Id.

(citation omitted). “The pleadings must create the possibility of a right to relief that is more than speculative.”

Spool,

520 F.3d at 183 (citation omitted).

Courts deciding motions to dismiss must draw all reasonable inferences in favor of the nonmoving party and must limit their review to facts and allegations contained in (1) the complaint, (2) documents either incorporated into the complaint by reference or attached as exhibits, and (3) matters of which the court may take judicial notice.

Blue Tree Hotels Inv. (Canada), Ltd. v. Starwood Hotels & Resorts Worldwide, Inc.,

369 F.3d 212 , 217 (2d Cir.2004) (citation omitted);

Chambers v. Time Warner, Inc.,

282 F.3d 147 , 152-53 (2d Cir.2002);

DDR Const. Servs., Inc. v. Siemens Indus., Inc.,

No. 09 CIV. 09605 RJH, 2011 WL 982049, at *1 (S.D.N.Y. Mar. 22, 2011). Courts also consider documents not attached to the complaint or incorporated by reference, but “upon which the complaint

solely

relies and which

[are] integral to the complaint.” Roth v. Jennings,

489 F.3d 499 , 509 (2d Cir.2007) (internal quotation marks omitted) (quoting

Cortec Indus. Inc. v. Sum Holding L.P.,

949 F.2d 42 , 47 (2d Cir.1991));

see also

21 U.S.C. § 853 (n)(7); Fed. R. CRim. P. 32.2(c)(2). However, the Government may move to amend the forfeiture order to include either subsequently located forfeitable property or substitute property. Fed. R. CRim. P. 32.2(e)(1).

[12] Pursuant to the “relation-back” doctrine, “[a]ll right, title, and interest in [property subject to criminal forfeiture] vests in the United States upon the commission of the act giving rise to forfeiture under this section.” 21 U.S.C. § 853 (c). Under the “relation-back” doctrine, the Government’s interest in forfeitable property vests as of the moment when the criminal conduct occurred.

See United States v. Parcel of Land, Bldgs., Appurtenances and Improvements, known as 92 Buena Vista Ave., Rumson, N.J.,

507 U.S. 111, 125 , 113 S.Ct. 1126 , 122 L.Ed.2d 469 (1993) (“Under the relation back doctrine, a decree of forfeiture had the effect of vesting title to the offending res in the Government as of the date of its offending conduct.”);

United States v. Timley,

507 F.3d 1125, 1130 (8th Cir.2007) (“[T]he proceeds of an offense do not exist before the offense is committed, and when they come into existence, the government’s interest under the relation-back doctrine immediately vests.”) (citation omitted);

United States v. Nava,

404 F.3d 1119, 1124 (9th Cir.2005) (“The title to the forfeited property vests in the United States at the time the defendant commits the unlawful acts, ... although it attaches only upon the defendant’s conviction.”) (citations omitted).

The relation-back doctrine can divest a bankruptcy estate of its property even though the estate was created

before

the forfeiture order was entered. In

United States v. Zaccagnino III,

No. 03-10095, 2006 WL 1005042 (C.D.Ill. Apr.18, 2006), the court found that since the date of the crime occurred prior to the creation of the bankruptcy estate, the defendant’s property that was obtained as a result of the illegality belonged to the Government.

Id.

at *4. Therefore, to the extent that title to any forfeited asset vested in the Government prepetition by virtue of the relation-back doctrine, that forfeited property was not property of the estate.

Id.

However, the relation-back doctrine does not necessarily forfeit a defendant’s property interest merely because such property is

subject

to forfeiture.

See 92 Buena Vista Avenue,

507 U.S. at 127 , 113 S.Ct. 1126 (“[I]t is clear that the fictional and retroactive vesting of title there

*412

under is not self-executing, but occurs only when the Government wins a judgment of forfeiture.”);

see also

5B Wright & Welling, Fed. Practice & Procedure § 1357 (“As a practical matter, a dismissal under Rule 12(b)(6) is likely to be granted by the district court only in the relatively unusual case in which the plaintiff includes allegations that show on the face of the complaint that there is some insuperable bar to securing relief.”). Whether the Defendants took the transfers in good faith is a factual question that may not be determined on the face of the Complaint.

See Bernard L. Madoff Inv. Secs. LLC, 440

B.R. at 256;

LaVigna v. Lipshie (In re Wise),

173 B.R. 75, 78-79 (Bankr.E.D.N.Y.1994) (“[L]ack of good faith at the time of the transfer ... may not be determined on the face of the Plaintiffs complaint.”). The dispute here centers on the Trustee’s argument that the Defendants knew or should have known that the transfers were made with tainted funds; on the other hand, the Defendants assert that they had no knowledge of Dreier’s fraud and took the transfers in good faith at all times. Determining the Defendants’ good faith is an indisputably factual inquiry to be undertaken by the Court after the close of discovery and need not be resolved at the motion to dismiss stage. It is simply not the Trustee’s burden at this stage of the case to counter the Defendants’ declaration of good faith.

*427

The Defendants argue that the bankruptcy court decision in

Feldman v. Chase Home Finance (In re Image Masters, Inc.),

421 B.R. 164 (Bankr.E.D.Pa.2009) supports their position that a court may consider the § 548(c) good faith defense on a motion to dismiss. In

Image Masters,

the court dismissed actual fraudulent conveyance claims against certain banks that collected mortgage payments from the debtor, and received the transfers for value and in good faith under section 548 of the Bankruptcy Code and applicable Pennsylvania law.

Id.

at 180-88. The court in

Image Masters

stated that “[d]efendants have the burden, of course, of proving that they received the transfers for value and in good faith as an affirmative defense to the Trustee’s causes of action. Nevertheless, a complaint may be subject to dismissal under Rule 12(b)(6) when an affirmative defense ... appears on its face.”

Id.

at 181 (citations and internal quotation marks omitted). There is nothing exceptionable in that legal proposition. But without necessarily subscribing to the application of that legal principle in the

Image Masters

case, it is clear that the proposition is of no help to the Defendants here. In

Image Masters,

the court read the complaint as conceding that the defendants were not aware of the fraud the debtor was perpetrating; nor were the defendants a party to any of the documents executed in connection with the fraudulent scheme.

Id.

at 172-73 (“The Defendants were not part of or aware of the artifice and scheme concocted by Snyder and the Debtors.”). In fact, counsel to the trustee in

Image Masters

conceded during oral argument that “there [was] no relationship between the debtor and these lenders.”

Id.

at 181.

The Defendants in this case were not strangers to the fraudulent transaction. Indeed, Defendants contend that they were the innocent victims. The Trustee, on the other hand, argues that the Defendants were on inquiry notice of the alleged fraud. The Court concludes, based on the allegations in the Complaint, that there are legitimate issues of fact regarding the Defendants’ good faith that should be considered on a full evidentiary record after the close of discovery.

See Kapila v. Integra Bank, N.A. (In re Pearlman),

440 B.R. 569, 577-78 (Bankr.M.D.Fla.2010) (distinguishing

Image Masters

on similar grounds);

see also Notinger v. Costa (In re Robotic Vision Sys., Inc.),

374 B.R. 36, 59 (Bankr.D.N.H.2007) (“[Determining whether adequate consideration was received and whether good faith existed is a factual inquiry that is inappropriate at the motion to dismiss stage.”) (citing

Miller v. McCown De Leew & Co., Inc. (In re The Brown Schools),

368 B.R. 394, 408 (Bankr.D.Del.2007)).

Accordingly, the Debtor’s actual intent to defraud creditors is presumed by operation of the Ponzi scheme presumption and the Court will not consider the § 548(c) good faith defense at this stage. The motion to dismiss Count I — avoidance of the transfers as actually fraudulent under § 548(a)(1)(A) — is denied.

2. Actual Fraudulent Conveyance Under New York Law

Count III of the Complaint seeks avoidance and recovery of prepetition transfers to the Defendants under NYDCL § 276, made applicable to this case by § 544 of the Bankruptcy Code.

*428

Section 276 of the NYDCL allows the Trastee to avoid any “conveyance made ... with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud either present or future creditors.” NYDCL § 276. To adequately plead a claim to recover actual fraudulent transfers under the NYDCL, the complaint must state with particularity the factual circumstances constituting fraud under Rule 9(b).

Am. Tissue, Inc. v. Donaldson, Lufkin & Jenrette Secs. Corp.,

351 F.Supp.2d 79, 106-07 (S.D.N.Y.2004) (applying the pleading requirements of Rule 9(b) to actual fraud claims under both the Bankruptcy Code and the NYDCL). “Actual fraudulent intent must be proven by clear and convincing evidence, but it may be inferred from the circumstances surrounding the transaction, including the relationship among the parties and the secrecy, haste, or unusualness of the transaction.”

HBE Leasing Corp. v. Frank,

48 F.3d 623, 639 (2d Cir.1995) (citation omitted).

The question of law raised by the parties is whether the Trustee must plead fraudulent intent of

both

the trans-feror and transferee to state a claim under NYDCL § 276. (Patriot Mem. at 24 n. 4; Trustee Mem. at 25-26.) Stated differently, is fraudulent intent of the transferor

and

the transferee an element of an actual fraudulent conveyance claim brought under NYDCL § 276? The question is important here because the Complaint (and the complaints in the other adversary proceedings) does not plead fraudulent intent by the transferees. Case law in this Circuit is divided on this question. Indeed, I previously concluded in

Andrew Velez Constr.,

373 B.R. at 276 , that “[u]nder [NYDCL § 276], unlike a claim under Bankruptcy Code § 548(a)(1),” the plaintiff “must plead fraudulent intent of both the transferor and the transferee under § 276.” (citation omitted). Many of the opinions (including my own in

Andrew Velez Constr.)

that concluded that fraudulent intent of both transferor and transferee is required have reached that result simply by citing prior decisions without further analysis of the issue. Further analysis now persuades the Court that to state a claim under NYDCL § 276 the Complaint need only sufficiently allege fraudulent intent by the transferor. This aligns the fraudulent intent pleading requirement under Bankruptcy Code § 548(a)(1)(A) and NYDCL § 276. The Ponzi scheme presumption in cases such as these satisfies the Trustee’s pleading requirement.

The Second Circuit has stated that “[t]o prove actual fraud under § 276, a creditor must show intent to defraud on the part of the transferor. Where actual intent to defraud is proven, the conveyance will be set aside regardless of the adequacy of the consideration given.”

Sharp,

403 F.3d at 56 (quoting

HBE Leasing Corp. v. Frank,

61 F.3d 1054 , 1059 n. 5 (2d Cir.1995)). The Second Circuit in

Sharp

affirmed the dismissal of the avoidance complaint on other grounds so whether intent by the transferee is also required was arguably unnecessary to the decision.

Id.

The quote from

HBE Leasing

comes from a footnote which reads, in full: “The ‘good faith’ in § 272 [of NYDCL] is the good faith of the transferee-in this case, Murphy (and Goldstein and Clemence Frank). By contrast, to prove actual fraud under § 276, a creditor must show intent to defraud on the part of the transferor.”

HBE Leasing,

61 F.3d at 1059 n. 5. The footnote primarily dealt with the “good faith” requirement in the definition of “fair consideration” in NYDCL § 272, rather than pleading requirements for actual fraudu

*429

lent intent.

Id.

No authority is cited for this statement of the law. Many lower court decisions in this Circuit after

Sharp

and

HBE Leasing

did not simply follow their lead on the issue of intent.

Some lower court opinions require only pleading fraudulent intent by the transfer- or.

See Geron v. Schulman (In re Manshut Constr. Corp.),

No. 96B44080(JHG), 96B44079(JHG), 97 CIV. 8851(JGK), 99 CIV. 2825(JGK), 2000 WL 1228866 , *46 (S.D.N.Y. Aug. 30, 2000) (Koeltl, J.) (“It is not necessary under DCL § 276 to show fraudulent intent on the part of the transferee. However, a transfer motivated by actual fraudulent intent may not be voided if a transferee who paid fair consideration did not have actual or constructive knowledge of such intent.”) (citation and internal quotation marks omitted);

Crowthers McCall Pattern, Inc. v. Lewis,

129 B.R. 992, 999 (S.D.N.Y.1991) (Lasker, J.) (“The plaintiff counters that it need only plead and prove the fraudulent intent of the transferor; good faith and fair consideration on the part of each of the transferees is an affirmative defense which [defendant] entities must plead and prove. Case law supports [plaintiffs] position that it is the intent of the transferor and not the intent of the transferee that is relevant to liability under § 276. As Justice Cardozo observed, ‘If the grantor made the conveyance with fraudulent intent, the burden was on the grantee to show that he had accepted it for value, in which event the [creditors] mights [sic] have to prove that he had notice of the fraud.’ Thus, the intent of the [defendants] is relevant only as an affirmative defense and the allegations of the complaint are sufficient as they stand.”) (quoting

Brody v. Pecoraro,

250 N.Y. 56 , 164 N.E. 741, 742 (1928)) (citation omitted);

Le Café Creme, Ltd. v. Le Roux (In re Le Café Creme, Ltd.),

244 B.R. 221, 239 (Bankr.S.D.N.Y.2000) (Brozman, J.) (“It is the intent of the transferor and not that of the transferee that is dispositive.”) (quoting

Stratton Oakmont,

234 B.R. at 318 (Brozman, J.) (“It is the intent of the transferor and not that of the transferee that is dispositive. The intent of the transferee only becomes relevant as an affirmative defense if the defendant is not the initial transferee.”) (citations omitted));

Bruno Mach. Corp. v. Troy Die Cutting Co., LLC (In re Bruno Mach. Corp.),

435 B.R. 819, 853-54 (Bankr.N.D.N.Y.2010) (Littlefield, J.) (“[I]t is the intent of the transferor and not that of the transferee that is dispositive.... The intent of the transferee only becomes relevant as an affirmative defense if the defendant is not the initial transferee.”) (citation and internal quotation marks omitted);

Mendelsohn v. Jacobowitz (In re Jacobs),

394 B.R. 646, 658-59 (Bankr.E.D.N.Y.2008) (Stong, J.) (“[I]t is the intent of the transferor and not that of the transferee that is disposi-tive.”) (citations and internal quotation marks omitted).

Other lower court opinions require pleading of fraudulent intent by the trans-feror and transferee.

See, e.g., Andrew Velez Constr.,

373 B.R. at 276 (Glenn, J.);

MarketXT,

361 B.R. at 395 (Gropper, J.) (“Under the Bankruptcy Code, the plaintiff must establish the actual fraudulent intent of the transferor/debtor; under the NYDCL the plaintiff must establish the actual fraudulent intent of both the trans-feror and the transferee.”) (citations omitted);

Park S. Secs.,

326 B.R. at 517 (Drain, J.) (“Section 548(a)(1)(A) of the Bankruptcy Code and section 276 of the New York Debtor-Creditor Law, incorporated by Bankruptcy Code section 544(b), provide that a trustee may avoid transfers of an interest of the debtor in property made with actual intent to hinder, delay, or defraud creditors. The ‘intent’ that must be established under section 548(a) is the

debtor’s

actual fraudulent intent; under

*430

section 276 of the N.Y.D.C.L., however, the Trustee must establish both the debt- or’s

and

the transferee’s actual fraudulent intent.”) (citation omitted);

Gredd v. Bear Stearns Secs. Corp. (In re Manhattan Inv. Fund, Ltd.),

310 B.R. 500, 508 (Bankr.S.D.N.Y.2002) (Lifland, J.) (“Under N.Y.D

CL section 276, a cause of action must allege fraudulent intent on the part of the transferor as well as the

transferee.

Fraudulent intent on the part of one of the parties is insufficient.”) (citations and internal quotation marks omitted);

Gentry v. Kovler (In re Kovler),

249 B.R. 238, 243 (Bankr.S.D.N.Y.2000) (Hardin, J.) (the

“Kovler

2000 Opinion”) (“Mutual fraudulent intention on the part of both parties to the transaction is required in order to invoke the protection of the law prohibiting fraudulent conveyances; fraudulent intent on the part of one of the parties is insufficient.”).

The

Kovler

2000 Opinion appears to be the original basis for the decisions in this district holding that intent of the transfer- or and transferee is required. The court’s statement that “[mjutual fraudulent intention on the part of both parties to the transaction is required,” 249 B.R. at 243 , appears to be based upon a quote from a New York state case,

Anderson v. Blood,

152 N.Y. 285 , 46 N.E. 493 (1897), that “[t]he transferee must have participated or acquiesced in the transferor’s fraudulent act.”

Kovler,

249 B.R. at 243 . As an initial matter, the quoted statement does not appear in the

Anderson

case, which dealt primarily with whether a purchaser of certain real estate was entitled to a bona fide purchaser defense after being conveyed certain property.

Anderson,

46 N.E. at 494-96 . The court in

Kovler

also relied on the decision in

Key Bank of N.Y. v. Diamond,

203 A.D.2d 896 , 611 N.Y.S.2d 382, 384 (4th Dep’t 1994). However, the

Key Bank

decision involved the recovery of attorneys’ fees under NYDCL § 276-a which, as discussed more fully below, requires that the plaintiff prove the intent of both the transferor and the transferee.

Id.; see

NYDCL § 276-a. Thus, neither

Anderson

nor

Key Bank

stand for the proposition that “mutual fraudulent intention of both parties” is necessary to avoid a transfer as a fraudulent conveyance under NYDCL § 276.

Perhaps in recognition of the fact that its statement of the law was without support, the

Kovler

court issued an “Order Correcting Decision After Trial” in 2005 (the “Correcting Opinion”), five years after

*431

the initial decision, replacing the statement that “mutual fraudulent intention” must be proved under NYDCL § 276.

Gentry v. Kovler (In re Kovler),

329 B.R. 17, 18-19 (Bankr.S.D.N.Y.2005). The court replaced the paragraph regarding mutual fraudulent intention with the following paragraph:

Where the plaintiff establishes actual and mutual fraudulent intent by both parties, the transaction is a fraudulent conveyance regardless of consideration or the solvency of the transferor.

Golden Budha Corp. v. Canadian Land Co. of America,

931 F.2d 196 , 201 (2d Cir. 1991) (“If ‘the transferee participated or acquiesced in the transferor’s fraudulent design ... the transaction falls within the condemnation of the fraudulent conveyance statutes, without regard to the adequacy or nature of the consideration, the solvency of the transferor, or the primary purpose of the transferee to secure a profitable purchase.’ ” (quoting 30 N.Y. Jur. 2d

Creditor’s Rights

§ 243 (1983)));

U.S. v. McCombs,

30 F.3d 310 , 327-28 (2d Cir.1994) (“[Section 276 focuses on the ‘actual intent’ of the transacting parties ... [and] ... where actual intent to defraud creditors is proven, the conveyance will be set aside regardless of the adequacy of consideration given.”).

Id.

The Correcting Opinion attempts to rectify the misstatement of the requirements for a claim under § 276 made in the Kovler 2000 Opinion, but by that time, the proverbial horse had already left the barn.

Between the

Kovler

2000 Opinion and the issuance of the Correcting Opin

*432

ion, the court in

Manhattan Inv. Fund

had picked up the

Kovler

decision, stating:

Under N.Y.D & CL section 276, a cause of action must allege fraudulent intent on the part of the transferor as well as the

transferee. See Sullivan v. Messer (In re Corcoran),

246 B.R. 152, 161 (E.D.N.Y.2000)

(emphasis added); Gentry v. Kovler (In re Kovler),

249 B.R. 238, 243 (Bankr.S.D.N.Y.2000) (holding that N.Y.D

CL requires “mutual fraudulent intention on the part of

both parties to the transaction”) (emphasis added).

“Fraudulent intent on the part of one of the parties is insufficient.”

In re Kovler,

249 B.R. at 243 . Accordingly, although N.Y.D & CL section 276 requires a showing that “the transferee must have participated or acquiesced in the transferor’s fraudulent act.” .

Manhattan Inv. Fund,

310 B.R. at 508 (citation omitted).

Other later decisions in this district picked up the

Manhattan Inv. Fund

decision and held that the plaintiff must establish both the debtor’s and the transferee’s actual fraudulent intent.

See Park S. Secs.,

326 B.R. at 517-18 (dismissing claims under § 276 on a motion to dismiss because trustee had not plead with particularity the fraudulent intent of the transferee);

MarketXT,

361 B.R. at 395-97 (same).

The text of NYDCL § 276 juxtaposed against other sections of the

*433

NYDCL compel the conclusion that it is the transferor’s intent alone, and not the intent of the transferee, that is relevant under NYDCL § 276. Section 276 allows a trustee to avoid: “[e]very 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....” NYDCL § 276. On the other hand, NYDCL § 276-a, allows a plaintiff to recover attorneys’ fees “where such conveyance is found to have been made by the debtor and received by the transferee with actual intent.” NYDCL § 276-a.

A claim under section 276-a requires a finding of fraudulent intent by both the trans-feror and the transferee.

See Carey v. Crescenzi

923 F.2d 18, 21 (2d Cir.1991) (stating that recovery of attorneys’ fees under § 276-a requires an “explicit finding of actual intent to defraud” on the part of both the transferor and the transferee);

Key Bank,

611 N.Y.S.2d at 384 . In contrast, NYDCL § 276 makes no reference to the actual fraudulent intent of the transferee and the difference between the provisions cannot be ignored.

See Bayou Grp., LLC,

396 B.R. at 826 n. 5 (“The statute itself makes this clear. Section 276 is concerned only with a ‘conveyance made ... with intent,’ and only a transferor can be said to have ‘made’ a conveyance. There is no reference in this provision to the transferee or the transferee’s intent.”).

Further support that the transferee’s intent is irrelevant at the motion to dismiss stage is evident from the structure of Article 10 of the NYDCL. Similar to the affirmative defense available to a defendant under § 548(c),-the transferee’s intent is considered in connection with the affirmative defense under NYDCL § 278(1).

Article 10 of the New York Debtor & Creditor Law is based on the Uniform Fraudulent Conveyance Act (“UFCA”), promulgated in 1918.

See Le Café Creme,

244 B.R. at 238 n. 13 (“New York’s DCL Article 10 enacts the Uniform Fraudulent Conveyance Act rather than the more modern Uniform Fraudulent Transfer Act.”). NYDCL § 278 provides an affirmative defense that allows a 'bona fide purchaser for value who took without knowledge of the fraud to retain the transfer.

See

NYDCL § 278(1).

*434

Case law and the statutory framework confirm that NYDCL § 278(1) is an affirmative defense and the burden of proof under the section 278(1) affirmative defense is on the defendant, not on the plaintiff.

See FDIC v. Malin,

802 F.2d 12, 18 (2d Cir.1986) (“Phyllis Malin [transferee] must also satisfy the remaining elements of section 278 to claim its benefits. Specifically, it must be determine whether Phyllis was a ‘purchaser for fair consideration without knowledge of the fraud at the time of the purchase.’ ”) (citation omitted);

United States v. Orozco-Prada,

686 F.Supp. 1537, 1542 (S.D.N.Y.1986) (discussing lack of case law regarding whose burden it is to prove that transferees were bona fide purchasers and concluding that “the burden of proof rests with [the transferees] to establish that, indeed, they were

bona fide

purchasers for valuable consideration and had neither actual nor constructive knowledge that the conveyance from [the transferors] was fraudulent”);

Jacobs,

394 B.R. at 659 (placing the burden on “innocent purchaser” to “affirmatively show good faith in order to take advantage of’ the NYDCL § 278 defense);

see also Balaber-Strauss v. Sixty-Five Brokers (In re Churchill Mortg. Inv. Corp.),

256 B.R. 664, 676 (Bankr.S.D.N.Y.2000) (characterizing NYDCL § 278 as a “parallel” to the 548(c) good faith affirmative defense where burden is on transferee to establish defense).

The language of NYDCL § 276 tracks the language of § 9 of the UFCA, titled “Rights of Creditors Whose Claims Have Matured,” which provides as follows:

(1) Where a conveyance or obligation is fraudulent as to a creditor, such creditor, when his claim has matured, may, as against any person except a purchaser for fair consideration without knowledge of the fraud at the time of the purchase, or one who has derived title immediately or immediately from such a purchaser[.]

Unif. FRAUDULENT Conveyanoe Act § 9, 7A U.L.A. 482 (1918). Though there is no commentary to this section of the UFCA because it was superseded by the Uniform Fraudulent Transfer Act (“UFTA”) in 1984, Unif. Fraudulent TeansfeR Act § 8, 7A U.L.A. 178-79 (1984), titled “Defenses, Liability, and Protection of Transferee,” confirms that the UFCA § 9 (upon which NYDCL § 278 is based) is intended to be an affirmative defense with the ultimate burden of proof placed on the transferee.

Because § 278 is an affirmative defense, the transferee’s actual fraudulent intent is considered at the summary judgment phase or at trial on a full evidentiary record.

*435

On a motion to dismiss, the trustee only needs to allege a prima facie case of actual fraud. If the trustee meets the evidentiary burden of proving a prima fa-cie case of actual fraud at trial, in order to retain the transfer the burden shifts to the transferee to establish the affirmative defense under § 278 by establishing that the transferee received the transfer for “fair consideration” and “without knowledge of the fraud.”

See Orozco-Prada,

636 F.Supp. at 1541 (“Proof of actual fraudulent intent makes a

prima facie

case and shifts to the grantee the burden of establishing his good faith in the transfer.”) (citation omitted). Whether the Defendants in this case took the transfers in good faith and for value are issues to be raised as affirmative defenses and “need not be negated by the Trustee in the Complaint.”

Stratton Oakmont,

234 B.R. at 318 (citation omitted).

After a full analysis of the case law and statutory construction of Article 10 of the NYDCL, the Court concludes that the Trustee need not plead the transferee’s fraudulent intent under NYDCL § 276 — all that is relevant at the motion to dismiss stage is that the Trustee has adequately plead the transferor’s actual fraudulent intent. Applying the Ponzi scheme presumption, the Complaint here sufficiently pleads the transferor’s actual fraudulent intent. Therefore, the motion to dismiss Count III — actual fraudulent conveyance under NYDCL § 276 — is denied.

The Defendants also seek dismissal of the request for attorneys’ fees included in Count III pursuant to NYDCL § 276-a. Section 276-a allows the Trustee to recover attorneys’ fees in an action seeking to set aside an actual fraudulent conveyance, “where such conveyance is found to have been made by the debtor and received by the transferee with actual intent, as distinguished from intent presumed in law, to hinder, delay or defraud either present or future creditors.... ” NYDCL § 276-a. The Complaint does not separately state causes of action under NYDCL §§ 276 and 276-a. Rather, the request for attorneys’ fees is an additional remedy sought by the Trustee. But attorneys’ fees will only be recoverable if the Trustee establishes at trial actual fraudulent intent by Defen

*436

dants. While the Complaint does not plead actual fraudulent intent by Defendants, the request for attorneys’ fees need not be stricken at his time. Unless the Trustee establishes actual fraud by the Defendants, the Trustee will not be able to recover attorneys’ fees, even if the Trustee recovers damages on the actual fraudulent transfer claim. If the Trustee is unable to develop through discovery evidence of actual fraud by Defendants, the portion of Count III requesting attorneys’ fees can be dismissed before trial or following trial.

E. Constructive Fraudulent Conveyance Claims

Counts II, IV, V and VI seek to avoid the transfers to Patriot as constructively fraudulent transfers under § 548(a)(1)(B) of the Bankruptcy Code and NYDCL §§ 273, 274, 275, respectively. With regard to these claims, the Motion to Dismiss is granted to the extent of the principal and denied as to the amounts received in excess of principal under both the Bankruptcy Code and the NYDCL.

1. Section 548(a)(1)(B) of the Bankruptcy Code

To prevail on a constructive fraud claim under the Bankruptcy Code, the Trustee must show,

inter alia,

that the debtor received “less than a reasonably equivalent value in exchange for such transfer.” 11 U.S.C. § 548 (a)(l)(B)(i).

“The heightened federal pleading standard for allegations of fraud does not apply to a complaint to avoid transfers as constructively fraudulent.”

Bernard L. Madoff Inv. Secs. LLC,

445 B.R. 206 , 2010 WL 5841402, at *9 (citing

Actrade,

337 B.R. at 801-02 ). “As the party seeking to avoid the transaction, the Trustee bears the burden of proof by a preponderance of the evidence” on all elements of a claim for constructive fraudulent transfer under § 548(a)(1)(B).

Bennett Funding Grp., Inc.,

232 B.R. at 570 (citation omitted).

As to the repayment of principal, the Trustee concedes that the Defendants provided, and the Debtor received, “reasonably equivalent value” under the Bankruptcy Code and “fair equivalent” under the NYDCL “because the repayment of principal extinguished a common law claim, such as restitution, that Patriot may have had against DLLP.” Trustee Mem. at 11;

see also

H’rg Tr. 214:20-25 (“Q: So I don’t have to — for purposes here you have admitted that they have a restitution claim

*437

to the amount of the principal and I don’t have to examine whether there are circumstances whether — as to whether a restitution claim could or couldn’t be asserted? A: Correct.”). This concession precludes avoidance and recovery of the transfers to Defendants for the repayment of principal under § 548(a)(1)(B) of the Bankruptcy Code.

See, e.g., Levit v. R.T Milford Co. (In re Thunderdome Houston Ltd.

P’ship), No. 98 C 4615, 2000 WL 889846 , at *8 (Bankr.N.D.Ill. June 28, 2000) (“[Cjourts have reasoned that because a Ponzi investor immediately obtains a claim for restitution against the debtor upon making the investment by virtue of the debtor’s fraud, the claim constitutes a debt owed to the investor.”) (citation omitted);

see also Geron v. Palladin Overseas Fund, Ltd. (In re AppliedTheory Corp.),

330 B.R. 362, 364 (S.D.N.Y.2005) (concluding that satisfaction or securing of antecedent debt is fair consideration as a matter of law);

Pereira v. Dow Chem. Co. (In re Trace Int’l Holdings, Inc.),

301 B.R. 801, 805-06 (Bankr.S.D.N.Y.2003) (Bernstein, C.J.) (“Past consideration is good consideration. An ‘antecedent debt’ satisfies the requirement of fair consideration and reasonably equivalent value, and putting aside transfers to insiders, the payment of an existing liability is not fraudulent.”) (citations and internal quotation marks omitted),

vacated Pereira v. Dow Chem. Co. (In re Trace Int’l Holdings, Inc.),

No. 04 Civ. 1295(KMW), 2009 WL 1810112 , at *5 (S.D.N.Y. June 25, 2009). However, the Trustee maintains that she may still recover the interest payments made to Defendants under the Bankruptcy Code because the Defendants did not provide “reasonably equivalent value” for the payment of interest. Trustee Mem. at 13-16.

The Defendants disagree.

Patriot makes several arguments that it provided reasonably equivalent value in exchange for the amounts in excess of principal received on the purported loan made to Solow. First, Patriot argues that it provided “value” to Dreier LLP in exchange for the 11% interest it was paid on its loan over a one-year period because Dreier LLP was able to use the funds for a period of time and the use of funds had value that inured to Dreier LLP’s benefit. Patriot Mem. 18-21. Patriot principally relies on two cases,

Lustig v. Weisz & Assoc. Inc. (In re Unified Commercial Capital Inc.),

260 B.R. 343 (Bankr.W.D.N.Y.2001) and

Daly v. Deptula (In re Carrozzella & Richardson),

286 B.R. 480 (D.Conn.2002).

*438

Both cases are inapplicable here. Dreier LLP, from whose account the payments in excess of principal were paid, was not a signatory or obligor on the Notes; the payments in excess of principal did not extinguish a

contractual

debt owed by Dreier LLP to Patriot. In both

Unified Commercial Capital

and

Carrozzella & Richardson,

a trustee asserted fraudulent conveyance actions under the Bankruptcy Code and relevant state law against recipients of interest payments from a debtor that engaged in a Ponzi scheme.

Unified Commercial Capital,

260 B.R. at 345-46 ;

Carrozzella & Richardson,

286 B.R. at 481 . In

Unified Commerical Capital,

investors purchased “debentures” and “certificates of deposits” promising “guaranteed” returns of twelve percent (12%) per annum or more and “safety of principal.” 260 B.R. at 345-46 . Unified Commercial Capital, the debtor, “had a contractual obligation to pay the Interest” to the investors.

Id.

at 346 . Likewise, in

Carrozzella & Richardson,

the investors deposited funds directly with the debtor and were promised an annual rate of return between 8% and 15%. 286 B.R. at 483-84 . The debtor paid investors reasonable amounts of agreed upon interest for use of the defendant’s money over time.

Id.

The court concluded that the debtor received a dollar-for-dollar forgiveness of contractual debt by making the agreed-upon interest payments.

Id.

at 491 .

Dreier LLP’s payment in excess of principal to Defendants did not reduce a valid contractual debt because there was no valid contract. The essence of the Note Fraud was Dreier’s forgery of Solow Notes. Dreier LLP was not a contract party to the Term Loan Agreements executed by investors. In

Unified Commercial Capital

and

Carrozzella & Richardson,

the debtors took the investments from investors pursuant to contracts between the debtors and investors and, according to those courts, the debtors benefítted from the use of funds over time. Though Dreier LLP may have benefited from the use of the money to fund normal operating expenses and meet payroll obligations, there was no contractual debt owed by Dreier LLP to Defendants that was satisfied through the payments in excess of principal to bring it within

Unified Commercial Capital

and

Carrozzella & Richardson.

Patriot also argues that the payments in excess of principal extinguished a debt that Dreier LLP owed to Patriot for breach of an implied warranty of authority because Patriot could have recovered “benefit of the bargain” damages for such a breach. Patriot Mem. 17-18. The RestatemeNt (ThiRd) of Agency § 6.10 provides that:

A person who purports to make a contract, representation, or conveyance to or with a third party on behalf of another person, lacking power to bind that person, gives an implied warranty of authority to the third party and is subject to liability to the third party for

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damages for loss caused by breach of that warranty, including loss of the benefit expected from performance by the principal, unless

(1) the principal or purported principal ratifies the act as stated in § 4.01; or

(2) the person who purports to make the contract, representation, or conveyance gives notice to the third party that no warranty of authority is given; or

(3) the third party knows that the person who purports to make the contract, representation, or conveyance acts without actual authority.

Id.

“An agent’s implied warranty of authority is a solution to a problem otherwise confronted by third parties who deal with persons whom they believe to act as agents with power to bind a principal.”

Id.,

cmt. b. A cause of action for breach of implied warranty of authority may lie against the “person who purports to make a contract, representation, or conveyance to or with a third party on behalf of another person.”

Id.

§ 6.10. In this case, an action for breach of implied warranty may lie against Dreier himself, but not against Dreier LLP.

See DePetris & Bachrach, LLP v. Stout,

71 A.D.3d 460 , 898 N.Y.S.2d 4, 5-6 (1st Dep’t 2010) (reversing dismissal of cause of action for implied warranty of authority against defendants for their own conduct in misrepresenting that they had authority to enter into a contract with plaintiff).

Patriot asserts that “DLLP had a clear obligation to pay interest to Patriot under the doctrine of implied warranty of authority” because “under the doctrine of authority,

a person pretending to be an agent for another

is liable for the debts that

incurs on behalf of the supposed principal.” Reply Mem. at 9 (emphasis added). However, contrary to the Defendants’ assertion, the Court cannot conclude as a matter of law that an action for breach of implied warranty of authority would lie against Dreier LLP such that payments in excess of principal would satisfy an antecedent debt that Dreier LLP owed to Patriot. Defendants miss a step in the analysis. Although the Complaint alleges that “MSD told interested investors that Solow agreed to pay above-market interest on those loans as a favor to assist MSD in developing the investors as DLLP clients” and that Dreier “told potential investors that a long-standing DLLP client, [Solow], was interested in borrowing millions of dollars from investment firms at above-market interest rates to fund Solow’s purchase of unspecified real estate investments,” these statements do not establish Dreier LLP’s liability based on Marc Dreier’s breach of an implied warranty of authority. (Compl. ¶ 16.) Whether Dreier’s conduct can be imputed to Dreier LLP is not at issue before the Court, and certainly not addressed in connection with a potential cause of action for breach of implied warranty of authority.

In any event, even if Patriot could assert a claim for payments in excess of principal for breach of implied warranty of authority against Dreier LLP, Patriot should not be permitted to recover ahead of unsecured creditors of the Dreier LLP estate. The Restatement (Third) of Restitution And Unjust Enriohment recognizes that:

When restitution is based on a wrongful interference with the claimant’s legally protected interests, the claimant may be entitled (as against a recipient at fault or a successor in interest) to a recovery exceeding the amount of the claimant’s loss. In any such case, however,

(a) the portion of the restitution claim exceeding the claimant’s loss is subordi

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nated to the claims of the recipient’s creditors, and

(b) restitution to the claimant from assets that would otherwise go to innocent dependents of a deceased recipient is limited to the amount of the claimant’s loss.

Id.

§ 61 (Tentative Draft No. 7, 2010). Based on a theory of equity, “if a supra-compensatory award to the restitution claimant would come at the expense of a third party who is innocent of the underlying wrong: typically, an unpaid creditor or a surviving dependent of the wrongdoing recipient,” a court may exercise its discretion in declining to award a recovery to the restitution claimant.

Id.,

cmt. a. It follows that any claim for breach of implied warranty against Dreier LLP (assuming that Dreier’s conduct is imputed to Dreier LLP) that allowed Patriot to recover in excess of the amount of Patriot’s loss of principal may be “subordinated to the claims of the” Dreier LLP bankruptcy estate.

Id. §

61(a).

For the forgoing reasons, the Court concludes that the Defendants have not provided reasonably equivalent value for payments in excess of principal received from Dreier LLP under the Bankruptcy Code.

In light of the Trustee’s concession that the Defendants provided reasonably equivalent value for the repayment of

principal,

Count II, constructive fraudulent conveyance under the Bankruptcy Code, is dismissed to the extent of the repayment of principal and denied as to the payments in excess of principal.

2. Constructive Fraudulent Conveyance Under New York Law

Counts IV, V and VI seek avoidance and recovery of the prepetition transfers to Defendants as constructive fraudulent conveyances under NYDCL §§ 273,

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274

and 275,

respectively. A transfer is deemed a constructively fraudulent conveyance under NYDCL §§ 273, 274 and 275, if it is made without “fair consideration,” and one of the following conditions is met:

(i) the transferor is insolvent or will be rendered insolvent by the transfer in question, DCL § 273; (ii) the transferor is engaged in or is about to engage in a business transaction for which its remaining property constitutes unreasonably small capital, DCL § 274; or (iii) the transferor believes that it will incur debt beyond its ability to pay, DCL § 275.

Sharp,

403 F.3d at 53 ; NYDCL §§ 273, 274, 275.

Under NYDCL § 272(a), “fair consideration” is given for property or an 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.” NYDCL § 272(a). The Trustee concedes that the repayment of principal was for a “fair equivalent” under the NYDCL because such payments extinguished a common law claim, such as restitution, that Patriot may have had against DLLP. Trustee Mem. at 11.

Still, the Trustee asserts that she may avoid and recover the transfer of

both

principal and payments in excess of principal made to Defendants during the course of Dreier’s Ponzi scheme under the NYDCL because the Defendants took the transfers with a lack of good faith, an element of “fair consideration” in NYDCL § 272 and incorporated into NYDCL §§ 273, 274 and 275. Trustee Mem. at 11-12, 13-16 (“[T]he Trustee may still recover the principal repayments under the DCL’s constructively fraudulent transfer statute if the Trustee can establish that Patriot lacked good faith.”). In response, the Defendants argue that the Trustee cannot recover the repayment of principal based on the Second Circuit’s statement in

Sharp,

403 F.3d at 54 , that “bad faith does not appear to be an articulable exception to the broad principal that ‘the satisfaction of a preexisting debt qualifies as fair consideration for a transfer of property.’ ”

Id.

(quoting

Pashaian v. Eccelston Props.,

88 F.3d 77 , 85 (2d Cir.1996)). According to the Defendants, the concession that repayment of principal extinguished an antecedent debt, combined with the absence of any allegation that Patriot participated in the

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fraud, precludes the Trustee from recovering the repayment of principal from the Defendants as a constructive fraudulent conveyance under the NYDCL.

See

Reply Mem. at 3. For the reasons discussed below, the Court concludes that the Trustee cannot recover repayment of principal based on the NYDCL constructive fraudulent conveyance provisions. With regard to the payments in excess of principal, the Court concludes, as it did above in connection with the claims for constructive fraud under the Bankruptcy Code, that the payment of interest was not for “fair equivalent” value and may be recovered by the Trustee.

The Second Circuit has stated that “fair consideration” under the NYDCL has three elements:

(1) the transferee must convey property in exchange for the transfer, or the transfer must discharge an antecedent debt;

(2) what the transferee exchanges for the transfer must be of “fair equivalent” value to the property transferred by the debtor;

and

(3) the transferee must make the exchange in “good faith.”

See Sharp,

403 F.3d at 53-54 (emphasis added) (citing

HBE Leasing,

61 F.3d at 1058-59 ) (“fair consideration” requires not only that the exchange be for equivalent value, but also that the conveyance be made in good faith). “Under New York law, the party seeking to have the transfer set aside bears the burden of proof on the element of fair consideration and, since it is essential to a finding of fair consideration, good faith.”

Actrade,

337 B.R. at 802 (citing

McCombs,

30 F.3d at 326). The Trustee must prove the elements of a claim for constructive fraudulent conveyance under the NYDCL by a preponderance of the evidence standard.

See Lippe v. Bairnco Corp.,

249 F.Supp.2d 357 , 376 n. 6 (S.D.N.Y.2003) (Chin, J.) (concluding that the appropriate standard of proof for claim brought under NYDCL § 273 is a preponderance of the evidence standard).

While courts uniformly recognize that “fair consideration” contains two elements — the transfer must be made for “fair equivalent” value

and

received in good faith — whether a complaint should survive a motion to dismiss if the Trustee alleges lack of “fair consideration” by pleading either a lack of “fair equivalent” value

a lack of good faith is less than clear.

See, e.g., HBE Leasing,

61 F.3d at 1058-59 (explaining that the test for “fair consideration” is in the disjunctive and all three elements must be met to establish that the transfer was for “fair consideration”);

SEC v. Universal Express, Inc.,

No. 04 Civ. 3233(GEL), 2008 WL 1944803 , at *5 (S.D.N.Y. Apr.30, 2008) (“In New York, the concept of fair consideration has two components — the exchange of fair value and good faith — and both are required.”) (citation and internal quotation marks omitted);

Silverman v. United Talmudical Academy Torah Vyirah, Inc. (In re Allou Distribs., Inc.),

446 B.R. 32 (Bankr.E.D.N.Y.2011) (Stong, J.) (analyzing “fair equivalent” value in the context of constructive fraudulent transfer claims brought by trustee and determining that factual issues existed in denying summary judgment and not analyzing “good faith” element);

but see Actrade,

337 B.R. at 802-08 (analyzing both “fair equivalent” value and “good faith” on a motion to dismiss notwithstanding determination that questions of fact existed regarding “fair equivalence” of transfers). When explaining the burden of proof necessary to establish “fair consideration,” however, the Second Circuit has made clear that the test under NYDCL § 272 is in the disjunctive. Accordingly, the Court concludes that the Trustee need not allege the ab

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sence of each element of “fair consideration” to state a claim for constructive fraudulent conveyance at the motion to dismiss stage.

See Sharp,

403 F.3d at 53-54 . To defeat a motion to dismiss, the Trustee need only allege a lack of “fair consideration” by pleading a lack of “fair equivalent” value

a lack of good faith on the part of the transferee.

The Court begins its analysis by addressing whether the Trustee’s concession that the repayment of principal extinguished an antecedent debt that the Defendants may have had against Dreier LLP negates the state law constructive fraudulent transfer claims. The Trustee concedes that the Defendants provided “fair equivalent” value under the NYDCL in exchange for the repayment of its principal because the repayment of principal extinguished a common law claim, such as restitution, that the Defendants may have had against Dreier LLP. Trustee Mem. at 11. Notwithstanding this concession, the Trustee argues that the she is entitled to avoid and recover the repayment of principal to Defendants, even if Defendants provided fair equivalent value because the Trustee can show lack of “fair consideration” by demonstrating a lack of good faith on the part of the Defendants in receiving the transfers.

Id.

at 11-12 (“[T]he Trustee may still recover the principal repayments under the DCL’s constructively fraudulent transfer statute if the Trustee can establish that Patriot lacked good faith.”).

On a number of occasions, the Second Circuit has steadfastly held that “in general, a transfer for antecedent debt is deemed a good faith transfer,” and bad faith will only nullify such a transfer if “the transferee is an officer, director, or major stockholder of the transferor.”

Atlanta Shipping Corp.,

818 F.2d at 248-49 (affirming dismissal of claims brought under the constructive fraud provisions of the NYDCL because payments to lender “satisfied an antecedent debt” and lender was not an officer, director or shareholder of transferee);

Pashaian,

88 F.3d at 85 (“New York courts have carved out one exception to the rule that preferential payments of pre-existing obligations are not fraudulent conveyances: preferences to a debtor corporation’s shareholders, officers, or directors are deemed not to be transfers for fair consideration.”) (quoting

HBE Leasing,

48 F.3d at 634-35 ) (citations omitted);

Sharp,

403 F.3d at 54 (“[B]ad faith does not appear to be an articulable exception to the broad principle that the satisfaction of a preexisting debt qualifies as fair consideration for a transfer of property.”) (citation and internal quotation marks omitted).

The rationale for the conclusion that payment of a valid antecedent debt does not qualify as a fraudulent conveyance under the NYDCL is based on the objective of the UFCA, which “[ujnlike the Bankruptcy Code ... is a set of legal rather than equitable doctrines, whose purpose is not to provide equal distribution of a debt- or’s estate among creditors, but to aid specific creditors who have been defrauded by the transfer of a debtor’s property.”

HBE Leasing,

48 F.3d at 634 (citing

Boston Trading Grp., Inc. v. Burnazos,

835 F.2d 1504, 1508 (1st Cir.1987)).

Thus, the UFCA does not bestow a broad power to reorder creditor claims or to invalidate transfers that were made for fair consideration, at least where no actual intent to hinder, delay, or defraud creditors has been shown. As the definition of “fair consideration” in DCL § 272 makes clear, even the preferential repayment of pre-existing debts to some creditors does not constitute a fraudulent conveyance, whether or not it prejudices other creditors, be

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cause “[t]he basic object of fraudulent conveyance law is to see that the debtor uses his limited assets to satisfy

some

of his creditors; it normally does not try to choose among them.”

Boston Trading,

835 F.2d at 1509 ;

see also Atlanta Shipping Corp. v. Chemical Bank,

818 F.2d 240, 249 (2d Cir.1987);

Ronga v. Chiusano,

97 A.D.2d 753 , 468 N.Y.S.2d 174, 175 (1983); 1 Garrard Glenn,

Fraudulent Conveyances and Preferences

§ 289, at 488-90 (1940).

Id.

Accordingly, in the absence of an actual intent to hinder, delay or defraud creditors or a transfer made to an officer, director, or major shareholder of the transferor, the NYDCL does not give a court authority to invalidate a transfer that satisfied a valid antecedent debt.

See also The Liquidation Trust v. Daimler AG (In re Old CarCo LLC),

435 B.R. 169, 190 (Bankr.S.D.N.Y.2010) (Gonzalez, C.J.) (“It is only when the transferee is an insider that New York courts recognize an exception to the rule the repayment of an antecedent debt constitutes fair consideration.”) (citation and internal quotation marks omitted).

Based on this analysis, the Court concludes that the Trustee’s claims to recover principal for constructive fraudulent conveyance under NYDCL §§ 273, 274 and 275 must fail. In her papers and at the Hearing, the Trustee has made clear that she does not dispute that the Defendants provided “fair equivalent” value under the NYDCL in exchange for the repayment of principal because such repayment extinguished a common law claim, such as restitution, that the Defendants may have had against Dreier LLP. Courts have recognized that reduction of a restitution claim satisfies an antecedent debt in the context of a fraudulent scheme.

See Jobin v. McKay (In re M & L Bus. Mach. Co., Inc.),

84 F.3d 1330, 1342 (10th Cir.1996) (holding that debtor’s payments to investors were for reasonably equivalent value because such payments reduced the amount of the investors’ claims for rescission);

Wyle v. C.H. Rider & Family (In re United Energy Corp.),

944 F.2d 589, 595-96 (9th Cir.1991) (repayment of principal was reasonably equivalent value for reduction of restitution claim in satisfaction of an antecedent “debt” within the Bankruptcy Code definition);

Mark A. McDermott, Ponzi Schemes and the Law of Fraudulent and Preferential Transfers,

72 Am. Bankr. L.J. 157 , 165-66 (1998) (“[E]ach dollar which an investor receives as a return of his principal investment constitutes a reduction of his claim for restitution against the debtor, which, as the satisfaction of an antecedent debt of the debtor, constitutes value (or consideration) to the debtor.”) (footnote omitted). In this case, the Trustee concedes that the repayment of principal reduced a restitution claim that the Defendants may have had against the Debtor which satisfied a valid antecedent debt that Dreier LLP owed to the Defendants. Accordingly, the repayment of principal was on account of an antecedent debt, sufficient to bring it within

Atlanta Shipping, HBE Leasing

and

Sharp,

and not avoidable under the constructive fraud provisions of the NYDCL.

See Sharp Int’l Corp v. State St. Bank & Trust Co. (In re Sharp Int’l Corp.),

302 B.R. 760, 782 (E.D.N.Y.2003) (rejecting “alternative ground” that “a lack of good faith on the part of the transferee ... was grounds for avoiding the [transaction]” where transaction constituted repayment of a valid antecedent debt).

As to the payments in excess of principal, the Court concludes, as it did above in the context of “reasonably equivalent value” under the Bankruptcy Code, that the Defendants have not provided “fair equivalent” value for payments in excess of principal.

See supra,

section

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II.E.l. According to applicable Second Circuit law, a creditor seeking to invalidate the transfers bears the burden of proving that the transfer was made without “a fair consideration.” NYDCL §§ 272, 273, 274, 275. For a transfer to be made for “a fair consideration” three elements must be satisfied, including that the transfer be for “fair equivalent” value

and

the transfer be taken in good faith. NYDCL § 272;

Sharp,

403 F.3d at 53-54 . It follows that to disprove that a transfer was made for “a fair consideration,” the Trustee must establish the absence of one of the elements of “fair consideration.”

Id.

This can be accomplished, alternatively, by establishing that the Defendants failed to provide “fair equivalent” value for the transfer or that the Defendants took the transfer with a lack of good faith.

Id.

By alleging that the transfers in excess of principal were not for “fair equivalent” value, the Trustee has properly plead a claim for constructive fraudulent conveyance under the NYDCL. The Trustee’s claims for constructive fraudulent conveyance under the NYDCL are permitted to go forward to recover amounts in excess of principal.

3. Good Faith Affirmative Defenses Under Bankruptcy Code § 548(c) and NYDCL § 278

The Defendants will no doubt plead good faith affirmative defenses to the state law claims and Bankruptcy Code claims.

See

NYDCL § 278(1); 11 U.S.C. § 548 (c). While the Court need not address the merits of these defenses now, the Court will briefly discuss issues arising from these defenses that may shape further proceedings in this and the other similar adversary proceedings.

Issues of “good faith” under both the NYDCL and the Bankruptcy Code have been subject of wide-ranging debate among courts and commentators. The parties addressed the good faith defense in their briefs, but further briefing and analysis will likely be necessary after the close of discovery either on a motion for summary judgment or at trial.

a. NYDCL § 278(1)

As noted above in section II.D.2, NYDCL § 278(1) provides an affirmative defense to a transferee of an otherwise avoidable transfer that permits the transferee to retain the transfer. NYDCL § 278(1) (“Where a conveyance or obligation is fraudulent as to a creditor, such creditor, when his claim has matured, may, as against any person except a purchaser for

fair consideration without knowledge of the fraud

at the time of the purchase, or one who has derived title immediately or mediately from such a purchaser....”) (emphasis added). To establish this defense, a defendant must prove that it took the transfer for “fair consideration,” which requires three elements:

(1) the transferee must convey property in exchange for the transfer, or the transfer must discharge an antecedent debt;

(2) what the transferee exchanges for the transfer must be of “fair equivalent” value to the property transferred by the debtor;

and

(3) the transferee must make the exchange in “good faith.”

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See Sharp,

403 F.3d at 53-54 (emphasis added) (citation omitted). Accordingly, the Defendants would have to establish their “good faith” to benefit from the NYDCL § 278(1) affirmative defense.

The Second Circuit recognized that the question of “good faith” under the NYDCL is “an elusive concept.”

Sharp,

403 F.3d at 53 (“Good faith is an elusive concept in New York’s constructive fraud statute. It is hard to locate that concept in a statute in which ‘the issue of intent is irrelevant.’ ”) (citation omitted). Collier has recognized that “[t]he unpredictable circumstances in which courts may find its presence or absence render any definition of ‘good faith’ inadequate, if not unwise.” 5 COLLIER ON BANKRUPTCY ¶ 548.09[2][b] at 548-96 (16th ed. rev. 2011);

see also

Black’s Law Dictionary (9th ed. 2009) (defining “good faith” as “honesty in belief,” “faithfulness to one’s duty or obligation,” and “observance of reasonable commercial standards of fair dealing in a given trade or business”).

Id.

The court concluded that good faith “contains both subjective (‘honesty in fact’) and objective (‘observance of reasonable commercial standards’) components.”

Id.

Under the subjective prong, a court looks to “the honesty” and “state of mind” of the party acquiring the property.

See, e.g. Triffin v. Pomerantz Staffing Servs., LLC,

370 N.J.Super. 301 , 851 A.2d 100, 104 (N.J.Super.Ct.App.Div.). Under the objective prong, a party acts without good faith by failing to abide by routine business practices.

See Rudiger Charolais Ranches v. Van De Graaf Ranches,

994 F.2d 670, 672-73 (9th Cir.1993) (reasonable commercial practice includes a “custom or practice” unless in conflict with a statute);

see also

Grant Gilmore,

The Commercial Doctrine of Good Faith Purchase,

63 Yale L.J. 1057 , 1122 n.22 (1954) (good faith standard captures routine business practices of industry). We therefore arrive at the conclusion that the objective good-faith standard probes what the transferee knew or should have known,

see Laines,

352 B.R. at 406, taking into consideration the customary practices of the industry in which the transferee operates.

Id.

(footnotes omitted).

At least one recent court has jettisoned the objective approach in favor of a subjective approach that considers the actual knowledge of the transferee at the time of the transfer.

See Meoli v. The Huntington Nat’l Bank (In re Teleservices Grp., Inc.),

444 B.R. 767, 815 (Bankr.W.D.Mich. 2011) (“The test is not, as Trustee would have it, how well Huntington measured up against what others in the community might have done in its stead. Rather, Huntington’s conduct is to be tested based upon its own honesty and integrity — i.e., its good faith — as it became aware of more and more indicators of Teleservices’ fraud upon its creditors.”).

The Second Circuit does not appear to have resolved the issue in this Circuit. Lower courts in this Circuit that have considered the § 548(c) good faith issue in Ponzi scheme cases have applied a two-part test to determine if the transferee took the transfers in good faith.

See Bayou Grp., LLC,

439 B.R. at 312 (“Once a transferee has been put on inquiry notice of either the transferor’s possible insolvency or of the possibly fraudulent purpose of the transfer, the transferee must satisfy a ‘diligent investigation’ requirement.”);

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Manhattan Inv. Fund,

397 B.R. at 22-23 (“The Bankruptcy Court correctly noted that the good faith question can be broken down into two parts: (1) whether Bear Stearns was on inquiry notice of the Fund’s fraud and (2) whether Bear Stearns was diligent in its investigation of the Fund.”).

With regard to the “inquiry notice” prong of the good faith analysis, Judge Buchwald in

Manhattan Inv. Fund

considered “whether what [the transferee] knew or should have known

triggered a duty to investigate

further....”

Id.

at 23 (emphasis added). There, Bear Stearns served as the bankrupt hedge fund’s prime broker and “facilitated the Fund’s short selling activities by borrowing stocks from third parties, selling them for the Fund, and placing the proceeds in a ‘short account’ which credited the proceeds to the Fund.”

Id.

at 4-5 . Bear Stearns, as the fund’s prime broker, had a duty to inquire further based on certain “red flags” that were apparent to Bear Stearns suggesting that the hedge fund was perpetrating a fraud.

The test announced in

Manhattan Inv. Fund

may not be applicable to these Defendants. Bear Stearns’ duty to inquire further, recognized in

Manhattan Inv. Fund,

does not appear to exist here. The Restatement (Second) of ToRts § 12(2) (1965), titled “Reason To Know; Should Know,” recognizes that

[t]he words “should know” ... denote the fact that a person of reasonable prudence and intelligence or of the superior intelligence of the actor would ascertain the fact in question

in the performance of his duty to another,

or would govern his conduct upon the assumption that such fact exists.

Id.

(emphasis added). Comment a to this section provides that the expression “ ‘should know’ indicates that the actor is under a duty to another to use reasonable diligence to ascertain the existence or nonexistence of the fact in question and that he would ascertain the existence thereof in the proper performance of that duty.”

Id.,

cmt. a. Unlike Bear Stearns in

Manhattan Inv. Fund,

Defendants do not appear to have owed a duty to anyone (other than perhaps their own investors) to investigate Dreier’s fraud. On the record before the Court it is not clear that the Defendants ever had a duty to investigate further. But, as explained below, even without a duty, the Defendants cannot ignore facts of which they are aware.

To be eligible

for

the good faith defense under § 548(c) (whether or not the transferee has a duty to inquire further), a transferee should not be able to “consciously avoid” facts within its knowledge

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that would suggest that the transfers were not made in good faith. The Restatement (Second) of Torts, addresses the issue of recklessness in section 500, titled “Reckless Disregard of Safety Defined”:

[t]he actor’s conduct is in reckless disregard of the safety of another if he does an act or intentionally fails to do an act which it is his duty to the other to do, knowing or having reason to know of facts which would lead a reasonable man to realize, not only that his conduct creates an unreasonable risk of physical harm to another, but also that such risk is substantially greater than that which is necessary to make his conduct negligent.

Id.

§ 500. This Restatement section deals with liability for physical harm, rather than economic injury, but a recklessness standard applies to many economic torts as well.

See Int’l Minerals & Res.,

S.A.

v. Bomar Res., Inc.,

5 Fed.Appx. 5, 9 (2d Cir.2001) (“[I]n the context of an action under New York law for tortious interference with contract, ‘an injured party can recover punitive damages when the tor-tious act complained of involved a wanton or reckless disregard of the plaintiffs rights.’ ” (quoting

Universal City Studios, Inc. v. Nintendo Co.,

797 F.2d 70, 77 (2d Cir.1986))).

A standard of “conscious turning away” was referenced by Judge Newman in

HBE Leasing,

48 F.3d at 637 . It appears akin to “conscious avoidance,” “conscious ignorance,” or an “ostrich defense,” most often applied in criminal cases,

see, e.g., United States v. Feroz,

848 F.2d 359, 360 (2d Cir.1988) (per curiam) (“This court has repeatedly emphasized that, in giving the conscious avoidance charge, the district judge should instruct the jury that knowledge of the existence of a particular fact is established (1) if a person is aware of a high probability of its existence, (2) unless he actually believes that it does not exist.”) (citations omitted), but also approved by the Second Circuit in civil cases.

See Woodman v. WWOR-TV, Inc.,

411 F.3d 69 , 84-85 n. 14 (“[A] party’s knowledge of a disputed fact may also be proved through evidence that he consciously avoided knowledge of what would otherwise have been obvious to him. As we have explained in the criminal context, [t]he rationale for the conscious avoidance doctrine is that a defendant’s affirmative efforts to ‘see no evil’ and ‘hear no evil’ no not somehow magically invest him with the ability to ‘do no evil.’ ... [The law] does not tolerate a person shutting his eyes to a fact ...

after

realizing its high probability with requisite knowledge and intent to discriminate.”) (citations and internal quotation marks omitted);

see also

3B Fed. JüRY PRAC.

InstR. 161.58 (5th ed. 2011) (“To be held responsible for conscious avoidance or failure to investigate, defendant_, must either be under a duty to investigate

have consciously avoided knowledge knowing the consequences of such avoidance.”) (emphasis added). Based on these principles, if it is proved that the Defendants “consciously avoided” facts that would suggest that the transfers were made with a lack of good faith, the Defendants may not retain the otherwise avoidable transfers based on the § 548(c) defense.