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When a Transfer Is Not a Transfer

May unit-owners transfer their condominium unit when to do so avoids foreclosure of that unit to pay a debt? That was the question in Jeffrey Sardis, Lauren Sardis and JAS Holding Corp. v. Sofia Frankel and Michael Frankel.

The Action

Sofia Frankel owned a condominium apartment at 160 West 66th Street in Manhattan. Ms. Frankel had been a broker at Goldman Sachs when the Sardises entrusted her with some $19 million to invest on their behalf. They remained clients when Ms. Frankel left to join Lehman Brothers but, by 2004, complained that she had fraudulently churned their accounts, causing them more than $9.5 million in losses. The Sardises began an arbitration against Frankel and Lehman and, about two weeks before Lehman filed for bankruptcy, the court awarded the Sardises $2.5 million, holding both Frankel and Lehman responsible.

Shortly after the award was issued, Ms. Frankel met with a partner at the law firm of Proskauer Rose. The firm’s time records reflect a discussion with Ms. Frankel and her son, Michael, regarding an “asset protection plan.” Records also reflected discussions concerning “sale/transfer of NY condos” and “option of filing claim in bankruptcy...”

The Transfer

In early 2009, Ms. Frankel began depleting and relinquishing assets, some of which were the subject of other litigations. She transferred ownership of the condo apartment, previously appraised at $1.175 million, to Michael, for one dollar and “other valuable consideration.”

The Sardises sought to set aside the transfer, claiming that it was a “fraudulent conveyance” prohibited by the New York State Debtor and Creditor Law. If the conveyance were set aside, the Sardises could force a sale of the apartment in order to pay a portion of the arbitration award. The Frankels challenged the suit, claiming that Ms. Frankel and her son entered into an oral agreement in late 1999, wherein Michael was to purchase the apartment when he turned 30. They claimed the conveyance of the apartment in 2009 was merely the culmination of their existing obligations.

The Sardises moved for summary judgment. The Frankels opposed, setting forth the terms of the 1999 agreement – Michael was to take immediate possession of the apartment and assume the expenses for monthly mortgage payments, property taxes, water and sewer charges, the common charges of the condominium, and any renovations and improvements; and a reasonable market value of the apartment was to be ascertained in 2009, when Michael attained 30 years of age, at which time the transfer of title to him would be effected in exchange for his promise to pay the remainder of the purchase (presumably, appraisal) price.

The court found that Michael did, in fact, pay the carrying charges on the apartment since 1999. The Frankels asserted that those payments constituted past consideration for their agreement to transfer the apartment. The court noted that, other than the Frankels’ “self-serving” affidavits, the only evidence of the purported 1999 agreement was in late 2008 and 2009 when an appraisal was obtained, a deed was recorded, and a promissory note was executed by Michael in connection with the transfer.

The Ruling

This court explained that the record failed to support the Frankels’ claim that Ms. Frankel sold the apartment to Michael based on a 1999 agreement rather than as part of an “asset protection plan” to insulate the property from the claims of the Sardises and other creditors.

Under the debtor and creditor law, property must be transferred for “fair consideration.” The law identifies two indications of fair consideration – the adequacy of what is given in exchange and “good faith.” The law also states: “Every conveyance made without fair consideration when the person making it is a defendant in an action for money damages or a judgment in such an action has been docketed against him, is fraudulent as to the plaintiff in that action without regard to the actual intent of the defendant if, after final judgment for the plaintiff, the defendant fails to satisfy the judgment.”

There was no question that the arbitration had concluded and an award had been rendered against Ms. Frankel before the transfer of the condominium apartment to Michael. There was also no question that the judgment against Ms. Frankel had not been satisfied. As all of the other elements were met, the court determined that whether the transfer of the apartment should have been set aside turned on whether the transfer was made for fair consideration.

The court explained that “fair consideration” under the law was not only a matter of whether the amount given for the transferred property was a “fair equivalent” or “not disproportionately small,” which the parties vigorously disputed, but whether the transaction was made “in good faith.”

The good-faith obligation was imposed on both the one transferring the apartment and the one taking title. A determination of good faith, the court noted, was made on a case-by-case basis. However, the court clarified that it was the burden of the Frankels to establish good faith – they had to demonstrate that Ms. Frankel was a good-faith seller and that Michael was a good-faith purchaser for fair consideration, and that neither had any knowledge of any fraud. The court explained that when the person who received the property was aware that there was a judgment against the one transferring the property, the conveyance will not meet the good-faith requirement and will be set aside as constructively fraudulent.

According to the court, it was apparent that Ms. Frankel’s conveyance of the condominium apartment to her son was but one of a series of transactions undertaken as part of an “asset protection plan” devised with the assistance of counsel immediately after the arbitration award. Indeed, the Frankels did not even contend that Ms. Frankel acted in good faith, and the court could make no such finding. Further, it was apparent that Michael was a participant in the asset protection plan.

The Takeaway

Why are we using this “Case Notes” column to discuss fraudulent transactions under the debtor and creditor law? Unfortunately, we have lately seen several cases where condominium unit-owners attempted to transfer their units to avoid paying creditors. In this instance, the creditor was a third party. In many instances, however, the creditor is the condominium’s board of managers.

Based on anecdotal evidence only, it appears that the number of unit-owner defaults has increased substantially since 2008. Boards – the liens of which are third in priority to taxes and valid first mortgages – are finding themselves embroiled in foreclosures and, often as a sale is imminent, unit-owner bankruptcies. Some unit-owners, however, try to avoid those litigations and instead – owing money (whether before or after judgment) – transfer their apartment to a relative or friend, typically without the “purchaser” paying the monies owed to the condominium. Because the transfer of a condo (unlike a co-op) can, and occasionally does, take place without the knowledge of the condominium, a board should determine whether to try to void the transfer, as the plaintiffs did.

One interesting aspect of this case concerns the mortgage secured by the condominium unit. It appears from the decision that Ms. Frankel had a mortgage. There is no indication that the mortgagee was paid, or that it had agreed to allow title to pass to the son (or, for that matter, that it was ever advised of the transfer). Based on most every mortgage document we have seen, such a transfer typically would constitute a default under the mortgage documents, which would have allowed the mortgagee to foreclose.

This case is important because the appellate court covering Manhattan and the Bronx gives guidance as to what is required under the debtor and creditor law to sustain a conveyance. It informs us how courts will interpret and apply the “good faith” requirement and circumstances under which one who conveys the property simply can’t meet the burden.


For Plaintiffs:
Wollmuth Maher & Deutsch
For Defendant Sofia Frankel: Michael L. Paikin
For Defendant Michael Frankel:
Law Offices of Gabriel Del Virginia


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