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BAKER v. POWER SECS. CORP.

December 11, 1996

BARNEY M. BAKER, et al., Plaintiffs,
v.
POWER SECURITIES CORPORATION, et al., Defendants. BARNEY M. BAKER, et al., Petitioners, v. RAF FINANCIAL CORPORATION, Respondent.



The opinion of the court was delivered by: LARIMER

 BACKGROUND

 This class action was originally commenced by petitioners against Power Securities Corporation ("Power") and other defendants to recover monetary losses sustained by petitioners as a result of alleged securities fraud. On March 20, 1992, a $ 25 million judgment was entered in favor of petitioners against Power, which had ceased operations in 1989. Plaintiffs thereafter commenced this "turnover" proceeding against RAF Financial Corporation ("RAF" or "respondent") pursuant to Fed. R. Civ. P. 69(a) and N.Y. C.P.L.R. §§ 5225(b) and 5227, which together allow a judgment creditor to satisfy its judgment from money or property held by a third party on behalf of the judgment debtor or out of money or property owed by a third party to the judgment debtor. Petitioners allege that RAF holds money and securities on behalf of Power, and in this proceeding they seek an order compelling RAF to turn over those funds to petitioners to satisfy partially the outstanding judgment.

 Pursuant to Fed. R. Civ. P. 69(a), this action is governed by C.P.L.R. § 5225(b), which provides a procedure for a judgment creditor to obtain property of the debtor which is in the possession of a third party. The statute provides in part:

 
(b) Upon a special proceeding commenced by the judgment creditor, against a person in possession or custody of money or other personal property in which the judgment debtor has an interest, . . . where it is shown that the judgment debtor is entitled to the possession of such property or that the judgment creditor's rights to the property are superior to those of the transferee, the court shall require such person to pay the money . . . to a designated sheriff.

 This rule, then, "provides for a two-step analysis in determining whether property belonging to a judgment debtor--but in the possession of a third party--should be turned over to a judgment creditor." Beauvais v. Allegiance Securities, Inc., 942 F.2d 838, 840 (2d Cir. 1991).

 
First, it must be shown that the judgment debtor 'has an interest' in the property the creditor seeks to reach. Where this first step is satisfied, the trial court must, second, then make one of two findings: it must find either that the judgment debtor is 'entitled to the possession of such property' or it must find that 'the judgment creditor's rights to the property are superior' to those of the party in whose possession it is. Only after both steps of the analysis are demonstrated may the trial court order the transferee to turn over the property to the judgment creditor . . . .

 Id. at 840-41.

 CONTENTIONS OF THE PARTIES

 According to petitioners, at the time Power went out of business, RAF had in its possession approximately $ 1.1 million belonging to Power. Petitioners allege that RAF is still in possession of money and proceeds of Power which should be turned over to petitioners as a judgment creditor. RAF vigorously denies petitioners' allegations and contends that it no longer possesses any money or securities belonging to Power and that Power, in fact, owes it substantial sums for services rendered.

 This dispute centers around the reasonableness of certain fees that RAF charged against Power's account. RAF contends that it charged those fees pursuant to a written agreement with Power. Petitioners maintain that even if Power agreed to the fees, the charges are excessive, and that any such agreement was not supported by sufficient consideration. Petitioners also allege that the conveyance by Power of stock to RAF in April, 1989 amounted to a fraudulent conveyance. This transfer was effected to provide RAF with some collateral for debts and obligations it assumed in liquidating Power's accounts.

 At issue here is whether the April 11 conveyance by Power to RAF is legally enforceable. Plaintiffs contend that it constituted a fraudulent transfer that may be set aside by the court. In support of this contention, plaintiffs rely on the New York Uniform Fraudulent Conveyance Act ("UFCA"), N.Y. Debt. & Cred. L. ("DCL") §§ 270-281, which "identifies several situations involving 'constructive fraud,' in which a transfer made without fair consideration constitutes a fraudulent conveyance, regardless of the intent of the transferor." HBE Leasing Corp. v. Frank, 48 F.3d 623, 633 (2d Cir. 1995).

 Under DCL § 273-a,

 
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.

 "An essential element of a claim pursuant to DCL [§ 273] is lack of fair consideration." Atlanta Shipping Corp. v. Chemical Bank, 818 F.2d 240, 248 (2d Cir. 1987). What constitutes fair consideration is set out in § 272, which provides that

 
Fair consideration is given for property, or obligation,
 
a. When 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, or
 
b. When such property, or obligation is received in good faith to secure a present advance or antecedent debt in amount not disproportionately small as compared with the ...

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