Eberhard v. Marcu (Standing/In Pari Delicto)

530 F.3d 122 (2d Cir. 2008)

In Eberhard v. Marcu, 530 F.3d 122 (2d Cir. 2008), a Receiver appointed in an SEC enforcement action brought suit against a third party, the mother of the Defendant in the SEC action, to set aside the transfer of the Defendant’s interest in a Canadian company as a fraudulent conveyance under section 276 of New York’s Debtor & Creditor Law. The District Court determined that a bench trial would comply with due process and, upon the completion of the bench trial, ruled that the transfer of the property in question shall be set aside as a fraudulent conveyance under New York law. The Petitioner appealed, and the Second Circuit vacated and remanded the District Court’s ruling finding that a receiver cannot utilize section 276 of New York’s Debtor & Creditor Law to set aside a fraudulent conveyance, where he does not represent a creditor. Eberhard, 530 F.3d at 129-31. The Court noted that the New York statute states that “[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, is fraudulent as to both present and future creditors.” N.Y. Debt. & Cred. Law § 276. Furthermore, a “creditor” is defined as “a person having any claim, whether matured or unmatured, liquidated or unliquidated, absolute, fixed or contingent.” N.Y. Debt. & Cred. Law § 270. While the Court recognized the Seventh Circuit decision in Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995), it found it to be distinguishable on the basis that the receiver in Scholes was appointed for the corporations in receivership who had claims against the individual wrongdoer, whereas the receiver in this matter had been appointed only for the assets of the SEC defendant, and not for any of the corporations in which he had an interest. Eberhard, supra at 132-3. The Court held that “[w]e agree with the Seventh Circuit’s analysis and hold that a receiver’s standing to bring a fraudulent conveyance claim will turn on whether he represents the transferor only or also represents a creditor of the transferor.” Id. at 133.* Additionally, since the Court found that the Receiver lacked standing to bring a fraudulent conveyance action, the case was essentially that of the Petitioner’s intervention in the District Court proceedings to recover the property she argued had been transferred to her. Id. at 135-6. The Court then ruled that the Petitioner had a Seventh Amendment right to a trial by jury, not simply a bench trial, where a claim for the right to possession is involved. Id. at 136.

Notably, the Second Circuit also found that the District Court had subject matter jurisdiction over the Receiver’s claim, as ancillary to the SEC action as long as “the receiver’s suit is to aid in the accomplishment of the ends sought and directed in the SEC action.” Id. at 129, quoting Esbitt v. Dutch-Am. Mercantile Corp., 335 F.2d 141, 142-43 (2d Cir. 1964).

* The Court also notes that some state statutes may impose looser standards for fraudulent conveyance, noting that Stenger v. World Harvest Church, Inc., 2006 WL 870310 (N.D.Ga. 2006) presented one factual scenario in which the receiver was permitted to pursue a fraudulent conveyance claim under the Georgia Statute which stated that fraudulent conveyances were void as to “creditors and others,” thereby not limiting a receiver’s claims to only that of a creditor. Eberhard, supra at 135.

– Phillip S. Stenger