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New Tool for New Buildings with Construction Defects

As COVID-19 ripped through our city, our state legislature amended the New York Debtor Creditor Law to broaden protections against fraudulent conveyances. Among the first to benefit are buyers of new condominium units. 

The Uniform Voidable Transaction Act became effective on April 4, 2020. The provisions of Debtor and Creditor Law §273 and §274, defining voidable transactions, have been aligned with those of other states and updated. Section 273 defines voidable transfers as to both present and future creditors; its essence is the intent behind the transfer. If the transfer is made with the intent to hinder creditors and results in either an unequal exchange or a loss in value, then the transfer is voidable. 

Intent under the applicability of §273 to any given transfer is determined by factors such as whether the transfer is made to an insider, any de facto control over the asset is maintained by the debtor, the value received for the transfer, the assets remaining in the debtor after the transfer, the debtor was on notice of claims or law suits, the debtor was insolvent at the time of the transfer or soon thereafter or the debtor concealed assets or absconded. Another major change is that the burden of proof is set as preponderance of the evidence, not clear and convincing evidence, as was the case before the Act. 

In some respects, the language prohibiting the hindering, delaying or defrauding a creditor dates from the 1571 Fraudulent Conveyances Act in England, commonly termed “13 Elizabeth.” However, there is a subtle but significant shift in the law, set forth in the Uniform Fraudulent Conveyances Act, that is whether “fraud” is required. Actual fraud may be used to void a transfer, but it is not required. Instead, the tests above provide more objective measures of when a transfer is voidable for what amounts to intend to delay or obstruct a creditor as opposed to fraud against the creditor. 

Under §274, a transfer is voidable as to a present creditor if the transfer is made without receiving equal value, and the debtor was or became insolvent at that time. The transfer is voidable whether it rendered the debtor insolvent or the insolvency was close in time. Also under §274, a transfer made to retire an old debt to an “insider,” where there is reason to believe the debtor is or may become insolvent and that renders the debtor insolvent, may also be voidable. The term “insider” is defined in Debtor and Creditor Law §270 in a common-sense manner. It includes relatives or general partners of an individual debtor, any partnership or corporation in which debtor is a controlling party, an officer, director, controlling party of a debtor entity or a relative or partner of the debtor of any party in control of the debtor. 

The basic change in §274 replaces the old case law as to “constructive intent” to defraud or the requirement of “good faith” in the transfer, which were more subjective, with the more objective standards of financial insolvency as tested by accounting standards. 

These objective standards in the Uniform Act are the subject of a decision in Board of Managers of 11 Beach St. Condominium v. HFZ 11 Beach St. LLC, et al. 11 Beach arose out of construction defect litigation by the plain-tiff board of managers against the sponsor, certain related parties and unsold units. At the commencement of the action, 11 Beach sought to force the defendants to hold certain sale proceeds in the sponsor to cover the damages in the action. 

In granting 11 Beach an attachment before judgment of up to $1.1 million from the sale proceeds of Unit 3B, the trial court analyzed §273. The court found the transfer was void based on the insolvent status of the debtor after the transfer and the effort by the sponsor to waive claims for defective work in connection with the transfer. These persuaded the trial judge that the transfer of the final unit was intended to “hinder or delay” 11 Beach in collecting on a judgment in the defect litigation. 

Under the circumstances presented, for the Board of 11 Beach, this result appears fair and reasonable, suggesting that the transition to a more objective, accounting-based analytic model for voidable transfers will lead to fairer results in this type of case. Sponsors will have to compensate buyers for significant construction defects in new buildings. 

This column presents a general discussion. This column does not provide legal advice. Consult your attorney for specific legal advice. 

Carol A. Sigmond
Greenspoon Marder LLP
590 Madison Ave., Suite 1800
New York, NY 10022