United States District Court, Southern District of New York
December 18, 2000
JEFFREY B. SKLAROFF, AS RECEIVER, PLAINTIFF,
ABRAHAM ROSENBERG, ISAAC ROSENBERG, ROSE CASTLE CORP. AND FRANKLIN REALTY CORP., DEFENDANTS.
The opinion of the court was delivered by: Parker, District Judge.
MEMORANDUM DECISION AND ORDER
Plaintift Jeffrey B. Sklaroff, acting as Receiver in Donna Lee H.
Williams, Insurance Commissioner of the State of Delaware v. LPDA
Acquisition Corp, et al., 96 Civ. 3079 (BDP), seeks to recover from
defendants monies due pursuant to a written guarantee of payment executed
by them as partial collateral security for the repayment of a loan.
Plaintiff moves for summary judgment. For the reasons stated herein, the
motion is granted.
In March 1991, National Heritage Life Insurance Company ("NHL") lent
$4.3 million to Franklin Realty Corp ("Franklin Realty"). The loan was
secured by a mortgage on property owned by Franklin Realty. The
defendants, Abraham and Isaac Rosenberg, were the sole shareholders and
officers of Franklin Realty. The Rosenbergs, along with another one of
their companies, Rose Castle Corp., executed a broad personal guarantee
in which they, among other things, "absolutely and unconditionally"
guaranteed the repayment of the loan to NHL. Specifically, in entering
the guarantee, the defendants further agreed that even if NHL released
the collateral securing Franklin Realty's debt, they would remain liable
under the guarantee to repay the money lent them by NHL. The guarantee
provides in part as follows:
[the guarantors] hereby consent that from time to
time, before or after any default by the borrower
. . . with or without further notice to or assent from
[the guarantors], any security at any time held by or
available to [NHL] for any obligation of the Borrower
. . . may be exchanged, surrendered or released and
any obligation of the Borrower . . . may be changed,
altered, renewed, extended, continued, surrendered,
compromised, waived or released in whole or in part
. . . and the [guarantors] shall remain bound under
this guaranty notwithstanding any such exchange,
surrender, release, change, alteration, renewal,
extension, continuance, compromise, waiver, inaction,
extension of further credit or other dealing.
Guarantee at 2.
In April 1992, NHL entered into a Participation Agreement with LPDA
Acquisition Corp., a New York corporation that was owned and controlled
by Lyle Pfeffer and Michael Blutrich. Under the Participation Agreement
NHL assigned to LPDA a 65% interest in seven mortgages including the
Franklin Realty mortgage and also authorized LPDA to administer the
Beginning in the spring of 1994 it started to become apparent that the
transaction involving Pfeffer and Blutrich, of which the Participation
Agreement was the centerpiece, was a massive fraud on NHL resulting in
tens of millions of dollars in losses. In April 1994, the Insurance
Commissioner entered an Order of Supervision over NHL under Delaware
law. Under the Order of Supervision, NHL was barred from transferring any
of its property and undertaking any action which could result in reducing
the net worth of NHL without the prior consent of the Commissioner.
The next month, on May 24, 1994, a Rehabilitation and Injunction Order
was entered by the Delaware Court of Chancery on the application of the
Insurance Commissioner. Under that order, the Commissioner was directed
to take possession and control of NHL's assets. In addition, that order
vested the Commissioner with title to all NHL property. In November
1995, the Delaware Chancery Court entered a Liquidation and Injunction
Order. Under the Liquidation Order, the Commissioner was directed to
maintain, and control the property and assets of NHL and succeed to its
title to and interest in all NHL's property. These various orders
furthered the broad remedial purpose of protecting and preserving the
assets of NHL for the benefit of its policy holders.
On May 30, 1996, the LPDA action was filed in this Court. See Donna Lee
H. Williams, et al. v. LPDA Acquisition Corp., et al., 96 Civ. 3079
(BDP). In that action, the Insurance Commissioner sought rescission, the
setting aside of fraudulent conveyances, money damages, as well as
equitable relief, including an order setting aside the Participation
Agreement as fraudulent.*fn1
Many months after the Insurance Commissioner took control of NHL, the
defendants, Abraham and Isaac Rosenberg, paid
$855,000 in July 1996 to an entity owned and controlled by Pfeffer and
Blutrich called NuLenda Inc. In return, the Rosenbergs received from LPDA
a Satisfaction of Mortgage, a transaction defendants claim extinguished
the $4,300,000 mortgage since the $885,000 was, they claim, fair
consideration. The Satisfaction was dated July 26, 1996.
Once it became apparent that the Participation Agreement was the
principal vehicle by which NHL was being looted, the Insurance
Commissioner moved on June 21, 1996, on notice to LPDA, Pfeffer and
Blutrich, for the appointment of a Temporary Receiver. In November 1996,
Sklaroff was appointed Temporary Receiver by order of this Court. The
order directs the Receiver to take possession of numerous mortgages,
including the Franklin Realty Mortgage at issue in this action, and
institute and carry on all legal proceedings for the protection of the
mortgages, including legal proceedings, such legal proceedings as might
be necessary to recover possession of the mortgages or property.
At the same time, the activities of Pfeffer, Blutrich, Isaac and
Abraham Rosenberg, Franklin Realty, NuLenda Corporation and other
individuals and entities were the subject of a large scale criminal
investigation by the Federal Bureau of Investigation and the United
States Attorney's Office for the Middle District of Florida. Blutrich,
Pfeffer, Isaac Rosenberg and others were indicted. See United States v.
Lyle Pfeffer, Case No. 97-71-Cr.-Ov, (22 C S2); See United States v.
Michael Blutrich, Case No. 97-71-Cr.-Ov-22 (S2).
In April 1998, Pfeffer and Blutrich executed plea agreements with the
United States Attorney's Office for the Middle District of Florida. They
plead guilty to approximately 18 felony counts, including RICO, and RICO
conspiracy charges arising from the massive fraud they perpetuated on
NHL, including criminal charges relating to the negotiation and
performance of the Participation Agreement and involving their dealings
with Abraham and Isaac Rosenberg. Two months later in June 1998,
Pfeffer, Blutrich and LPDA executed a Consent Order and Judgment in which
they consented to the entry of judgment in the LPDA's actions in amounts
ranging from $660,000 to $100,000,000. Under the terms of the consent
judgment, the Participation Agreement was rescinded and rendered void, ab
initio, and Pfeffer, Blutrich and LPDA consented to and accepted as
findings of fact the allegations made by the Insurance Commissioner in
the LPDA action. Pfeffer and Blutrich became cooperating government
witnesses in United States v. John Gotti, Jr., 99 Cr. 42 (BDP).
Isaac Rosenberg was also indicted in the Middle District of Florida for
bankruptcy fraud arising from his dealings with NHL. There, in return for
the government's agreement to dismiss more serious charges against him,
including a pending RICO conspiracy charge, Isaac Rosenberg plead guilty
to committing bankruptcy fraud in violation of Title 18, United States
Code, § 152 by filing false proofs of claim in a bankruptcy
proceeding pending in the United States Bankruptcy Court for the Eastern
District of New York. In the criminal proceeding against him, Rosenberg
allocuted that he had falsely sworn in court filings that NHL was a
creditor in the bankruptcy case and the filing was a means of permitting
the Rosenbergs to use NHL money to acquire collateral from a secured
creditor. Specifically, Isaac Rosenberg allocuted as follows:
a. At all times material herein, ISACK ROSENBERG and
his brother Abraham (collectively the
"Rosenbergs"), New York businessmen, owned a number
of corporations, including Certified Lumber, Inc.,
Boro Park, Inc., Franklin Realty Inc., and Rose
b. On or about March 5, 1991, National Heritage Life
Insurance Company (NULIC), Orlando, Florida, issued
a $4,300,000 loan to Franklin Realty, Inc., secured
by real property of Franklin Realty, Inc., and by a
guarantee from rose Castle Corp., and personal
guarantees of the Rosenbergs.
c. On or about March 6, 1991, Howard Savings Bank
("HSB") issued a $4,000,000 loan to Certified
Lumber, and $2,500,000 loans to ISACK ROSENBERG and
his brother Abraham (collectively the
"Rosenbergs"). To secure these loans, Certified
Lumber and the Rosenbergs gave guarantees, pledged
the inventory and assets of Certified Lumber and of
Boro Park, gave a $2,500,000 mortgage on the real
property on which Certified Lumber was located, and
gave a $500,000 mortgage on the real property on
which Boro Park was located. The assets of HSB,
including these debts and mortgages were ultimately
acquired by First Fidelity Bank ("FFB") (HSB and
FFB as successor to HSB hereinafter collectively
referred to as "HSB/FFB"). Franklin Realty, Inc.
did not provide a guarantee of any of the HSB loans
to Certified Lumber.
d. On or about June 3, 1992, Certified Lumber and Boro
Park filed Petitions under Chapter 11 of the
Bankruptcy Code with the United States Bankruptcy
Court for the Eastern District of New York,
Brooklyn, New York, which were procedurally
consolidated (the "CL/BP Bankruptcy").
FALSE DECLARATIONS IN BANKRUPTCY
e. On or about June 17, 1992, and again on or about
July 31, 1992,
The defendant herein, caused a false and fraudulent document, that is,
an unsworn statement made under penalty of perjury to be filed in the
CL/BP Bankruptcy, Eastern District of New York, a case under Chapter 11
of the Bankruptcy Code.
f. Specifically, on or about June 17, 1992, and again
on or about July 31, 1992, ISACK ROSENBERG, in
relation to a case under Chapter 11 of the
Bankruptcy Code, made false and fraudulent unsworn
declarations under penalty of perjury which listed
NHLIC as an unsecured creditor in documents filed
in the CL/BP Bankruptcy. Specifically, ISACK
ROSENBERG falsely stated that NHLIC was a creditor
holding a $4,300,000 unsecured claim pursuant to an
unspecified "Guarantee," whereas Certified Lumber
never gave such a guarantee to NHLIC, and no such
guarantee had ever been recorded.
g. On or about September 25, 1992, HSB settled the
$4,000,000 loan to Certified Lumber for
$1,200,000. On or about November 2, 1993, FFB
settled the remaining claims for $1,150,000. The
settlements were for the fair market value of the
collateral securing said loans. Accordingly,
HSB/FFB did not suffer any loss as a result of the
above-described attempted bankruptcy fraud.
In October 1999, the Receiver commenced this action seeking judgment
based on the personal guarantees and seeking to set aside the July 1996
Satisfaction on the ground that it constituted a fraudulent conveyance.
Summary judgment is granted only if "there is no genuine issue as to
any material fact and . . . the moving party is entitled to judgment as a
matter of law."
Fed.R.Civ.P. 56(c). On a motion for summary judgment, "all ambiguities
and inferences to be drawn from the underlying facts should be resolved
in favor of the party opposing the motion, and all doubts as to the
existence of a genuine issue for trial should be resolved against the
moving party." Brady v. Town of Colehester, 863 F.2d 205, 210 (2d Cir.
1988) (citing Celotex Corp. v. Catrett, 477, U.S. 317, 330 n. 2,
477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)).
The mere existence of an alleged factual dispute between the parties
will not defeat a motion for summary judgment. Terry v. United States,
No. 98 Civ. 8249 (NRB), 2000 WL 204522, at *3 (S.D.N.Y. Feb. 18, 2000).
Rather, the non-moving party must affirmatively set forth facts showing
that there is a genuine issue for trial. See Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 246, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A dispute
about a material fact is "genuine . . . if the evidence is such that a
reasonable jury could return a verdict for the nonmoving party." Id. at
248, 106 S.Ct. 2505.
In order to recover on its guarantee, the Receiver must establish the
following elements: "(1) the plaintiff is owed a debt from a third
party; (2) the defendant made a guarantee of the payment of the debt; (3)
the debt has not been paid by either third party or the defendant."
Chemical Bank v. Haseotes, 13 F.3d 569, 573, (2d Cir. 1994).
The only real dispute over the existence of these three elements is
defendants' contention that the Guarantee was extinguished as a
consequence of the Satisfaction of Mortgage delivered by LPDA in July
1996 to NuLenda.*fn2
This contention does not establish a defense to the Guarantee for two
reasons. First, the text of the Guarantee bars the contention. Secondly,
assuming the transaction occurred, it was a fraudulent conveyance under
New York law. See New York Debtor and Creditor's Law §§ 273, 273-a.
The parties to the Guarantee in their writing, contemplated that the
collateral, i.e., the mortgages, might be, for whatever reason,
exchanged, surrendered or released. Nevertheless, the Guarantee provided
that, in the event such things happen, the guarantors would still be
bound to repay NHL the outstanding loan amount evidenced by the Note. In
other words, in entering the guarantee, the defendants agreed that they
would "absolutely and unconditionally" guarantee payment of Franklin's
obligations to NHL on the Note. They further agreed that the Guarantee
would continue to obligate them, even if NHL released the collateral
securing Franklin's debt.
Nothing in the Satisfaction of Mortgage suggests that it had the effect
of terminating the obligations created by the broad personal guarantees.
Since the parties to the transaction were all highly sophisticated
business men, had such an effect been their intention, there undoubtedly
would have been a written cancellation of the underlying Note, as well as
a written release of the defendants' obligations under the terms of the
Guarantee. The absence of such documents is a telling indication that the
Satisfaction of Mortgage means only what it says — that it was
intended to release the collateral, but not to extinguish the underlying
debt or to release the Rosenbergs from their obligations under the
Next, the Receiver contends that the delivery of Satisfaction of
Mortgage in July 1996 to Franklin Realty by Pfeffer and Blutrich was a
under DCL § 273 since it was made for less than fair consideration in
the time when Pfeffer, Blutrich and LPDA were insolvent. The Receiver
also contends that the conveyance was fraudulent under § 273-a of the
DCL because it was made without fair consideration at a time when
Pfeffer, Blutrich and LPDA were defendants in an action for money
Section 273-a provides: 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 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 a final judgment for the
plaintiff, the defendant fails to satisfy the judgment.
Therefore, three elements need to be satisfied under § 273-a: (1)
the conveyance was made without fair consideration; (2) at the time of
the transfer, the transferor was a defendant in an action for money
damages or a judgment in such action has been docketed against him; and
(3) a final judgment has been rendered against the transferor that
remains unsatisfied. Lippe v. Bairnco Corporation, 229 B.R. 598, 603
(S.D.N.Y. 1999) (citations omitted); Dixie Yarns, Inc. v. Forman,
906 F. Supp. 929, 935 (S.D.N.Y. 1995).
Here, there is no dispute as to the second and third elements. The
Satisfaction was delivered by Pfeffer purportedly acting on behalf of
LPDA, at the time when Blutrich and Pfeffer were defendants in the LPDA
action, a lawsuit in which the Insurance Commissioner sought, inter
alia, to set aside the Participation Agreement and to recover millions in
damages. Moreover, in view of the relationship between Pfeffer,
Blutrich, the Rosenbergs and Franklin Realty as is apparent from the plea
agreements, the Rosenbergs undoubtedly knew well before July 1996 that
the Delaware Insurance Commissioner was attempting to recover funds
stolen from NHL such as the Franklin Realty mortgage which was part of
the fraudulent Participation Agreement. In addition, the judgment which
has been entered in the LPDA action against LPDA, Pfeffer and Blutrich
— in amounts exceeding $100,000,000 — has yet to be paid.
As to the first element — fair consideration — the $855,000
was not paid to NHL, to whom the debt was owed, but to an entity called
NuLenda, a separate company owned and controlled by Pfeffer and Blutrich
and consequently NHL received no consideration from this transfer.
Plaintiff has demonstrated that the time of this transaction, the
property was valued in excess of $4,665,000 as evidenced by the appraisal
of BCS Valuations Inc. Consequently, there is no genuine issue of
material fact as to whether fair consideration was supplied for the
satisfaction. § 272 of the Debtor Creditor Law requires, for "fair
consideration" to exist, an exchange of property or the satisfaction of
antecedent debt for reasonably equivalent value and good faith. A payment
of $855,000 to release a $4,300,000 loan is not, by any calculus, fair
In response, the Rosenbergs contend that fair consideration was given
when the mortgage was released in July 1996. They contend that because
Franklin Realty and LPDA entered into an earlier Modification Agreement
dated July 9, 1992 reducing the principal amount of the Franklin Realty
obligation from $4,300,000 to $2,800,000, the subsequent payment of
$855,000 was fair because it constituted a reasonable equivalent exchange
in view of the reduced principal outstanding.
Assuming the July 1992 document to be authentic (a highly dubious
assumption but one which is mandatory under Rule 56 Fed.R.Civ.P.)
defendants' argument still has no merit since the Modification
Agreement, on its face, does not trigger a reduction on the principal
amount of the loan. The Agreement provides that the contemplated
reduction in principal is contingent, that a balloon payment is due on
1996 of $2,813,387 and that, in the event of default, the modification
"shall be deemed null and void ab initio, for all purposes for all
purposes." It is not undisputed that the March 1996 payment was never made
therefore no reduction could have occurred.
Moreover, even if the reduction had occurred, the $855,000 purported
payment still would have been for less than fair consideration. Under the
Debtor and Creditor Law, an $855,000 payment to liquidate a $2.8 million
obligation is still not "fair consideration."
The Rosenberg's next claim is because they were not defendants in the
LPDA action, they have no exposure as the recipients of a fraudulent
conveyance. Contrary to this contention, § 273-a contains no language
which requires that the transferee be a named defendant in the antecedent
action for money damages that triggered the fraudulent conveyance.
The purpose of § 273-a is to provide a remedy for a creditor who
has brought an action for money damages against a party who, after being
named a defendant in that action, conveys assets to a third party for
less than fair consideration leaving the ultimate judgment unpaid. See
Lippe v. Bainco Corp., 229 B.R. 598, 601 (S.D.N.Y. 1999) citing,
Stochastic Decisions, Inc. v. DiDomenico, 995 F.2d 1158, 1172 (2d Cir.
1993). That is precisely what occurred here.
Plaintiff is entitled to recover on his claim pursuant to Debtor and
Creditor Law § 273 as well. According to that provision,
Every conveyance made and every obligation incurred by
a person who is or will be thereby rendered insolvent
is fraudulent as to creditors without regard to his
actual intent if the conveyance is made or the
obligation is incurred without fair consideration.
Accordingly, only two elements need to be satisfied under § 273:(1)
the conveyance was made without fair consideration; and (2) that the
transferor was or was rendered insolvent. See Wechsler v. Hunt Health
Systems, Ltd., 1999 WL 397751, at *20 (S.D.N.Y. 1999).
Both elements are satisfied here. There is no question that Pfeffer and
Blutrich and LPDA were all insolvent in July 1996 as the consent judgment
and their plea allocutions made clear and, as previously noted, the
purported Satisfaction of the Franklin Mortgage was not supported by fair
consideration. Moreover, while there is ample reason to suspect that the
purported Satisfaction was executed with intent to defraud, the existence
of such intent is not necessary under § 273. See New York Debtor and
Creditor's Law § 273; see also Pashaian v. Eccelston Properties,
Ltd., 88 F.3d 77, 82 (2d Cir. 1996). Accordingly, § 273 is also
For the foregoing reasons, plaintiff's motion for summary judgment is
granted. Plaintiff is entitled to judgment:
1. On his Guarantee claims against Abraham Rosenberg, Isaac Rosenberg
and Rose Castle (Claims one, two and three of the Amended Complaint) in
the amount of $9,982,487,*fn3 plus attorney's fees to be determined, as
well as additional interest, late charges and penalties accrued from the
date of that calculation to the date the judgment entered; and
2. Relief on the Receiver's fraudulent conveyance claims against
Abraham Rosenberg, Isaac Rosenberg and Franklin Realty (Claims four and
five of the Amended Complaint) for a money judgement, as specified
above, and for an order striking and setting aside the Satisfaction of
Mortgage and reinstating the Franklin Realty