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UNITED STATES v. OROZCO-PRADA

June 16, 1986

UNITED STATES OF AMERICA, Petitioner, against EDUARDO OROZCO-PRADA; MRS. EDUARDO OROZCO-PRADA; VICTOR BALLESTAS; VICTOR BALLESTAS, INC., PAMILAR HOMES, INC.; SCHULTZ MANAGEMENT; SAMUEL G. COOPER; EUROPEAN AMERICAN BANK AND TRUST COMPANY; NASSAU TRUST COMPANY; HERBERT GALLAGHER, ESQ.; MORRISON, PAUL & BEILEY, P.C.; JEROME KRINSKY, Respondents


The opinion of the court was delivered by: GOETTEL

GOETTEL, D. J.:

Before this Court are applications by several parties claiming an interest in property once owned by defendant Eduardo Orozco-Prada ("Orozco"). The Government asserts a lien on the property to satisfy the substantial criminal fine levied against Orozco. The other claimants allege interests in the property based upon either an antecedent debt or a subsequent purchase for value. As discussed below, we find that the initial conveyance of the property by Orozco was fraudulent and that the subsequent claimants should have been on notice of that fraud. Accordingly, the United States is entitled to a priority interest in the property.

 I. Background

 In November 1982, Orozco was arrested and charged with seven counts of, inter alia, drug conspiracy and money laundering. After a lengthy trial in spring 1983, Orozco was convicted on six of the seven counts against him. Three of his four co-defendants were also convicted, albeit each on only one count. On June 30, 1983, two co-defendants were sentenced to periods of imprisonment, and one was fined $5,000. On July 6, 1983, the third convicted co-defendant was sentenced to a period of imprisonment and fined $25,000. On July 13, 1983, prior to Orozco's sentencing, but after his co-defendants had been sentenced and fined, Orozco assigned his right to purchase a piece of property at 11 Trusdale Drive, Old Westbury, New York (the "Westbury property") to Victor Ballestas. Orozco was sentenced on September 7, 1983, to a period of eight years imprisonment, and fined $1,035,000. *fn1"

 In 1981, Orozco had contracted with Pamilar Homes, Inc. ("Pamilar") to build a house on the Westbury property. Orozco and his family began residing at the Westbury property some time in 1982. Between March 1981 and November 16, 1982, the date of his arrest, Orozco paid Pamilar $532,000 towards the price of the house. In conveying his rights to purchase the property to Ballestas in July 1983, Orozco received no consideration, even though he had already paid over a half million dollars to the builder. On August 25, 1983, Ballestas closed title on the Westbury property and executed a $137,300 first mortgage to Pamilar. That mortgage was recorded on October 31, 1983. Orozco and his family remained in possession of the Westbury property until summer 1984.

 Meanwhile, on September 15, and October 7, 1983, this Court held hearings regarding Orozco's ability to pay the fine assessed against him. At those hearings, the issue of the ownership of the Westbury property was extensively discussed, since it was the major asset with which Orozco could pay his fine. Orozco attended several days of those hearings, but never disclosed to the Court that he had assigned his rights in the property to Ballestas. The assignment left him without sufficient assets to pay his criminal fine. On October 7, this Court directed Orozco to assign his interest in the property to the United States as security for his fine. This Court issued a written order on November 16, 1983, stating that Orozco had a "substantial equitable interest" in the Westbury property to which the fine could attach. That order was filed in Nassau County on November 23, 1983.

 On November 10, 1983, before the above-noted order was issued and filed, Ballestas executed two notes and second mortgages on the Westbury property. One Was for $250,000 to Schultz Management ("Schultz") and the other for $20,000 to Samuel Cooper ("Cooper"). Both loans were at a purported interest rate of twenty-four percent per annum. These mortgages were recorded on November 21, 1983, two days before the November 16th order was recorded in Nassau County.

 On July 12, 1984, Schultz commenced foreclosure proceedings on the Westbury property because the second mortgage was in default. In October 1984, the Government moved to stay the foreclosure proceedings in state court, and to set aside Orozco's assignment of his property rights to Ballestas as a fraudulent conveyance. Ballestas moved for an order approving his sale of the property to a third party. In November 1984, this Court issued an order enjoining the state court foreclosure actions. In December 1984, we issued a supplemental order allowing Ballestas to sell the property to a third party for $820,000. From these proceeds, various property taxes, mechanics' liens, broker and legal fees, and the first mortgage were to be paid. The remaining balance, about $551,771, was to be put in an interest-bearing account. The order further directed discovery and an evidentiary hearing on the issue of priority of interests in the property and the alleged fraudulent conveyance.

 This Court held extensive evidentiary hearings in February and March 1986 on the various claims to the Westbury property. *fn2" Mrs. Orozco testified that, although she and her husband had jointly contracted for the house and had lived there with their family, her relatives in Columbia and their business interests had actually purchased the house on speculation. Mrs. Orozco noted that most of the payments to the builder came from an account maintained in her name, which had been opened for the primary purpose of paying for the house. She acknowledged, however, that most of the deposits to that account came from her husband. Still, she claimed that her family had sent the money through her husband as a matter of convenience.

 Ballestas testified that he had been owed money for years by Mrs. Orozco's family in Columbia and their business interests, and that he accepted the house in payment of that antecedent debt. We must first determine whether the conveyance to Ballestas was valid or fraudulent, and, if fraudulent, whether it tainted the second mortgages on the property held by Schultz and Cooper.

 II. Discussion

 A. Ballestas's Claim

 It is undisputed that New York law governs this case. The United States, as the defrauded creditor, has the initial burden of establishing that the conveyance of the Westbury property from Orozco to Ballestas was fraudulent within the meaning of sections 273, 275, or 276 of the New York Debtor and Creditor Law. *fn3" Flierl v. Hickey, 24 N.Y.S.2d 573, 575 (Erie Co. Sup. Ct. 1941). The Government need not show actual intent to defraud creditors. If, regardless of intent to defraud, the transferor failed to receive fair consideration for the conveyance and was, thereby, rendered insolvent, section 273 raises a presumption that the conveyance was fraudulent. Feist v. Druckerman, 70 F.2d 333, 334 (2d Cir. 1934). "Fair consideration" may consist of an exchange for fairly equivalent property, "or an antecedent debt in amount not disproportionately small as compared with the value of the property." N.Y. Debt. & Cred. Law 272 (McKinney 1945).

 Ballestas asserts that the antecedent debt owed him by Mrs. Orozco's family was "fair consideration" for the transfer. We cannot agree. Although Ballestas may have had some business dealings with Mrs. Orozco's family in Columbia, the evidence adduced regarding the purchase of the house by Orozco, the bank accounts, and the payments, convince us that Ballestas's claim of an antecedent debt is a sham, and that no consideration was given for the transfer to Ballestas of Orozco's rights in the Westbury property. Since the conveyance apparently rendered Orozco insolvent, *fn4" the presumption arises under section 273 that the conveyance was fraudulent, and imposes on the voluntary transferee the duty of going forward with proof of the transferor's solvency to prevent the ...


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