was not "disproportionately small as compared with the value of the [fee] obtained" but rather was its "fair equivalent." DCL § 272 (defining fair consideration).
Hewlett Packard also argues that, even assuming $ 500,000 was fair consideration for the services to be provided by the Firm, the services were primarily for the benefit of Solomon rather than Gala. It argues, therefore, that Gala itself did not receive $ 500,000 worth of services and that, from Gala's point of view, fair consideration was not received.
This argument is rejected. At the time the Firm was retained, representation was to be provided not only for Solomon and Mascolo, but also for Gala. Gala was at the center of the controversy and the Firm's services certainly were intended to benefit Gala as well as Solomon and Mascolo. Indeed, although Hewlett Packard argued in its post-hearing submission that "Gala was never indicted and never needed to prepare a criminal defense" (Letter to Court from Ronald G. Blum, Esq., dated August 4, 1997, at 9), Gala was eventually indicted and pled guilty on September 22, 1997. Gala was the subject of plea discussions between Ruvoldt and the Assistant United States Attorney even before it was indicted. Gala was very much in need of a criminal defense from the outset.
Moreover, Gala is a privately-held company, solely owned, controlled, and operated by Solomon and Mascolo. For all intents and purposes, Solomon and Mascolo were Gala. With Solomon and Mascolo facing criminal charges, Gala's very existence was at risk. Hence, it was not inappropriate for Gala to spend a substantial portion of its resources to defend Solomon and Mascolo (see Tr. 111-12, 118-19), as long as it was not engaging in a fraudulent conveyance. See HBE Leasing, 48 F.3d at 638 ("The fact that the consideration initially goes to third parties may be disregarded to the extent that the debtor indirectly receives a benefit from the entire transaction."). To the extent that the Firm conducted a joint defense of Gala, Solomon and Mascolo, it "effectively advanced the interests of all defendants simultaneously." Id. at 639.
Finally, the questions that led to my deciding to hold a hearing have been answered to my satisfaction. Although $ 500,000 is surely a substantial sum, retainers of this size or even larger are not unheard of, as Hafetz testified (see Tr. 67), and I am satisfied by the Firm's explanation as to why it requested such a fee here. Moreover, Gala, Solomon, and Mascolo turned to the Firm because of Solomon's 25-year relationship with Lederman. Solomon was willing to take on the extra expense of hiring a New York law firm to litigate a criminal matter in California because he trusted and had confidence in Lederman, and because New York counsel would be more accessible to him and Mascolo than California counsel as they both resided in the New York area. In addition, although the Firm did not have a reputation for doing criminal defense work, it had recently brought in Ruvoldt, who did have extensive experience in criminal law, to develop a white collar practice. And Gala was willing to spend virtually all of its remaining assets because the freedom of its sole shareholders and its continued existence were at stake.
For all these reasons, I conclude that the fixed fee of $ 500,000 paid to the Firm by Gala was reasonable and was conveyed in return for fair consideration. Accordingly, Hewlett Packard's claim under section 273 is rejected.
B. Section 276
I also hold that Hewlett Packard has not proven a fraudulent conveyance under section 276 because it has not shown that Gala paid the $ 500,000 to the Firm with the intent to hinder, delay, or defraud Hewlett Packard and because I find that, even assuming there was such a fraudulent scheme, the Firm did not have actual or constructive knowledge of it.
Under section 276, actual intent to defraud must be proven by clear and convincing evidence. See McCombs, 30 F.3d at 328. Here, Hewlett Packard did not prove, by clear and convincing evidence, that the $ 500,000 was conveyed as part of a scheme to defraud. While Gala, Solomon, and Mascolo have now pled guilty and agreed to make restitution to Hewlett Packard in the amount of $ 1,443,936 based on the underlying events, Gala did not pay $ 500,000 to the Firm for the purpose of preventing Hewlett Packard from getting the money. There was no evidence that Gala retained any control over the funds after they were paid to the Firm nor any evidence of any agreement on the part of the Firm to reconvey the funds to Gala at a later date. Indeed, as I have previously held, the fee became the Firm's property the moment it was paid, subject only to a partial refund in the event the Firm's services were prematurely terminated at a point when the circumstances would warrant a partial refund.
Although the effect of the payment was to deprive Hewlett Packard of the money, Gala paid the fee to the Firm not to intentionally deprive Hewlett Packard of the funds but to obtain legal representation. Accordingly, I conclude that the fee was a genuine one paid for bona fide legal services and that Gala was not seeking merely to "park" the money temporarily with the Firm to keep it out of Hewlett Packard's reach until it could later be retrieved.
Even assuming that Gala was seeking to prevent Hewlett Packard from getting the money back, however, I accept the testimony of Ruvoldt and Lederman that, from their point of view, the fee was a genuine one. Ruvoldt and Lederman believed that the Firm would be providing at least $ 500,000 worth of services. They certainly did not believe that Gala was paying the $ 500,000 to the Firm for the purpose of hiding it from Hewlett Packard. See HBE Leasing, 48 F.3d 623 at 639 (holding that even "a transfer motivated by actual fraudulent intent may not be voided if a transferee who paid fair consideration did not have actual or constructive knowledge of such intent.").
Hewlett Packard argues that, even assuming the Firm did not have actual knowledge of Gala's intent to hinder, delay, or defraud Hewlett Packard, it had constructive knowledge of such intent because it should have but did not inquire into the source of the funds. The argument is rejected. First, again, as I have held, Gala paid the $ 500,000 to the Firm for legal services, not to prevent Hewlett Packard from reaching the money. Hence, Gala's intent in paying the fee was not to hinder, delay, or defraud Hewlett Packard. Second, even assuming that Gala's intent in paying the fee was fraudulent, in the circumstances of this case the Firm was not obliged to inquire any further than it did, for Ruvoldt and Lederman had no reason to believe that Gala conveyed the funds for any reason other than to obtain legal services.
The law provides little guidance on a lawyer's obligation to inquire as to the source of a client's fee. In the district court proceedings in the HBE Leasing case, Judge Goettel observed that:
We know of no authority which requires attorneys to question the financial resources of their clients in paying their legal fees . . . . Nor do we believe it is required that attorneys defending civil claims evaluate the financial status of their clients before accepting payment of their fees. To place such a burden on attorneys would add intolerably to their problems.
HBE Leasing Corp. v. Frank, 837 F. Supp. 57, 63-64 (S.D.N.Y. 1993). On the basis of this reasoning, Judge Goettel dismissed, without a hearing or trial, claims seeking to set aside as fraudulent conveyances the payment of certain fees to attorneys for representation in a civil case. The Second Circuit reversed the dismissal of the claims and remanded for further proceedings, holding that factual issues existed as to the debtor's intent in paying the attorneys' fees and the attorneys' knowledge of that intent. HBE Leasing, 48 F.3d at 639.
The Second Circuit's decision in HBE Leasing makes it clear that, in certain circumstances, lawyers do have a duty to inquire as to circumstances surrounding the payment of fees. Lawyers are not exempt from the provisions prohibiting fraudulent transfers. "Constructive knowledge of fraudulent schemes will be attributed to transferees who were aware of circumstances that should have led them to inquire further into the circumstances of the transaction, but who failed to make such an inquiry." HBE Leasing, 48 F.3d at 636. Hence, lawyers who receive a conveyance under circumstances that should cause them to inquire into the reasons behind the conveyance must diligently do so, lest they be charged with knowledge of any intent on the part of the transferor to hinder, delay, or defraud. A lawyer who blindly accepts fees from a client under circumstances that would cause a reasonable lawyer to question the client's intent in paying the fees accepts the fees at his peril.
Here, the circumstances did not require Ruvoldt and Lederman to inquire any further than they did. Solomon and Mascolo professed their innocence. Whether they were actually innocent or not, they were entitled to legal representation in any criminal proceedings brought against them. And whether Ruvoldt and Lederman believed Solomon and Mascolo to be guilty or not, they were willing to provide that representation and the Firm committed to provide services that it believed in good faith would be worth at least $ 500,000.
I assume that Lederman and Ruvoldt, as experienced lawyers, entertained at least some doubt with respect to their clients' protestations of innocence. After all, Ruvoldt believed that in excess of $ 600,000 worth of time would be required to defend against any charges, and in estimating the time that would be required, he factored in time for sentencing and appeal. Lederman acknowledged as well that, based on the discussions with the clients, he believed there was "substantial exposure." Even assuming, however, that Ruvoldt and Lederman entertained the possibility that Solomon, Mascolo, and/or Gala had engaged in wrongdoing, Ruvoldt and Lederman had no reason to believe that Gala was paying the $ 500,000 not for legal representation but to prevent Hewlett Packard from obtaining the funds.
Because Hewlett Packard has not met its burden of proving fraudulent intent and the Firm did not have either actual or constructive knowledge of any intent to defraud on the part of Gala, the section 276 claim fails as well.
Hewlett Packard's application for an order holding that the $ 500,000 fee paid to the Firm is subject to attachment in this case as a fraudulent conveyance is denied.
Dated: New York, New York
January 8, 1998
United States District Judge