Court: No Fraud By Owners In Financing Of Settlement Factoring Company Sale

Court: No Fraud By Owners In Financing Of Settlement Factoring Company Sale

A New York court last month issued an opinion in a long-running dispute over the financing of a sale of a structured settlement factoring company, dismissing the claims that the owners of the factoring company engaged in fraud to shield assets from the prospective purchaser.

In describing the decision, one news report put it this way: “A New York state judge . . . threw out an investment company’s lawsuit accusing the majority owners of a structured-settlement buyout company of bilking it out of more than $1 million it was owed from the sale of a subsidiary, finding they had rights to the funds that the investment company says should have gone to pay it off.”  (Law360’s article, headlined “Structured Settlement Co. Owners Didn’t Scam Seller: Judge“, is available here.)

The court described the facts as follows:

  • “Englander wanted to sell Structured Settlements LP (Structured Settlements) to LawCash for $1.8 million . . . .
  • “Jay and Selig Zises . . . were two of the six owners of LawCash . . . .
  • “In September 2006, the Zises loaned LawCash $1.5 million to facilitate the transaction with Englander . . . .
  • “On September 6, 2006, LawCash and the Zises executed a promissory note memorializing the loan (Secured Note), which was secured by a Pledge and Security Agreement dated the same day (Security Agreement) . . . .
  • “Pursuant to the Security Agreement, LawCash granted the Zises ‘a security interest and continuing lien on all of its right, title and interest’ in certain collateral, including all of LawCash’s interests in Structured Settlements . . . .
  • “LawCash proceeded with the purchase of Structured Settlements on September 6, 2006, paying Englander $800,000 in cash and executing a $1.0 million note (Unsecured Englander Note) for the balance of the purchase price.
  • “Significantly, Englander did not take any security interest on its note . . .
  • “LawCash made two payments on the Unsecured Englander Note but by late 2007 or early 2008, it defaulted on its obligations to Englander. . . .
  • “Although LawCash made regular monthly payments to the Zises beginning in early 2007, by September 2009, when the Zises’ loan matured, LawCash defaulted on the Secured Note as well . . . .
  • “On October 20, 2009, Englander commenced an action against LawCash and moved for summary judgment pursuant . . . based on LawCash’s default on the Unsecured Englander Note . . . .
  • “On November 2, 2009, the Zises sent a notice of default to LawCash demanding payment on the Secured Note . . . .
  • “LawCash did not cure and the Zises’ debt remained. . . .
  • “On December 4, 2009, a few months after the Secured Note matured, the Zises informed LawCash that ‘the Event of Default was continuing’ and advised that the amount that was outstanding was $495,333.26 . . . .
  • “The Zises proposed ‘to accept the Collateral, including [LawCash’s interest in Structured Settlements in full satisfaction of LawCash’s] obligations under the Secured Note, as permitted by the terms of the [Security Agreement]’ . . . .
  • “LawCash accepted the proposal and the Zises informed Englander on December 8, 2009 . . . .
  • “Once the Zises foreclosed on their security interest in December 2009, LawCash became, for all intents and purposes, insolvent . . . .
  • “‘By that point in time, [LawCash] had lost its line of credit, the CEO had been let go, and [LawCash] had lost its business to other structured settlement buy-out companies’ . . . .
  • “Ten months later, in October 2010, Englander was awarded a $1,030,502.85 judgment against LawCash . . . .
  • “The LawCash Judgment went unpaid. . . .
  • “In 2012, Englander commenced this action against Defendants seeking to collect the amount of the LawCash Judgment and alleging that conveyances between LawCash and Defendants were fraudulent and violated the New York Debtor and Creditor Law. . . .
  • “Englander points out that from the very outset — even before the LawCash Action was commenced — LawCash insisted that it should not be required to satisfy its obligations under the Unsecured Englander Note because it believed that Structured Settlements was not worth the $1.8 million purchase price . . . .
  • “Englander alleges that to avoid payment, the Zises, who together had a controlling interest in LawCash, purposefully foreclosed on their security interest before Englander could obtain a judgment, leaving Englander ultimately unable to collect from LawCash . . . .
  • “Englander maintains that the Zises used the Secured Note and alleged default as part of a deliberate sham ‘as a pretext for intentionally stripping LawCash of its assets and making sure that Englander never got paid’ . . . .
  • “Given the interconnecting relationships between LawCash and the Zises and the Zises’ insider status, Englander asserts that it is entitled to summary judgment and a damages award sufficient to satisfy the LawCash Judgment as well as attorneys’ fees.
  • “Defendants, in contrast, contend that the Zises secured their loan in 2006 and were entitled to priority in being repaid . . . .
  • “They explain that Englander, as an unsecured second-line creditor, could not avail itself of any right to pursue LawCash assets prior to obtaining a judgment against LawCash and, by then, LawCash had no assets . . . .
  • “Defendants urge that they are entitled to a judgment because (1) a conveyance that satisfies a secured antecedent debt is not fraudulent, (2) there was no prejudice to Englander because, as secured parties, the Zises were entitled to be repaid first though they were insiders, (3) the consideration for the transfers was fair and (4) there was no actual intent to defraud Englander because the transfers satisfied a legitimate preexisting secured debt . . . .”

The court sided with the defendants, concluding that there is “no evidence that the Zises’ security interest for their loan to LawCash, which partially funded the purchase of Structured Settlements, was a sham or was otherwise invalid” and “no indication that in making the secured loan and later in partially satisfying it, Defendants and LawCash did not act honestly, fairly and openly.”

Further, the court found no actual fraud because, “[t]hough there was a close relationship between LawCash and Defendants and other ‘badges’ may be present, under the circumstances, plaintiff failed to meet its burden of establishing that Defendants engaged in ‘deception intentionally practiced to frustrate [Englander’s] legal rights'” and, in fact, “[t]o the contrary, Defendants proved that (1) the Zises loaned money to LawCash for the purchase of Structured Settlements from Englander, (2) the Zises contemporaneously took a valid security interest in LawCash’s property, (3) LawCash made payments to the Zises consistently even before the LawCash Action was commenced, (4) the Zises notified LawCash of its default (and even informed plaintiff) soon after the Secured Note matured and (5) the consideration was adequate.”

The full opinion is available here.

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