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Federal Deposit Insurance Co. v. Malin

decided: September 23, 1986.

FEDERAL DEPOSIT INSURANCE CO., PLAINTIFF-APPELLEE, CROSS-APPELLANT,
v.
LEONARD MALIN, AND PHYLLIS MALIN, DEFENDANTS-APPELLANTS, CROSS-APPELLEES



Appeal from an amended judgment and order entered in the United States District Court for the Eastern District of New York, Altimari, J., on September 30, 1985, declaring a deed void and in fraud of the creditor and ordering a partition sale of the real property. Cross-appeal on denial of sanctions.

Meskill, Newman and Kearse, Circuit Judges.

Author: Meskill

MESKILL, Circuit Judge:

This is an appeal from an amended judgment entered September 30, 1985, in the United States District Court for the Eastern District of New York, Altimari, J., after a bench trial. The court declared a deed executed between Phyllis and Leonard Malin pursuant to their separation agreement void and in fraud of the creditor, the Federal Deposit Insurance Company (FDIC), under the actual and presumptive fraud provisions of sections 276, 273 and 273-a of the New York Debtor and Creditor Law. N.Y. Debt. & Cred. Law §§ 276, 273, 273-a (McKinney 1945 & Supp. 1986). The court issued an order directing a partition sale of the real property. The Malins appeal from the amended judgment and the FDIC cross-appeals from that part of the judgment denying sanctions. We vacate the judgment and remand to the district court.

BACKGROUND

This case involves the commercial relationship between Leonard Malin and the FDIC and the personal relationship between Leonard Malin and his former wife, Phyllis Malin. At issue is certain real property, a home in North Woodmere, New York, which was deeded to Phyllis Malin as sole grantee in the course of divorce proceedings. Mindful of competing social considerations, the protection of creditors on the one hand and the encouragement of "orderly and amicable settlement of financial affairs between husband and wife" on the other hand, Marine Midland Bank-New York v. Batson, 70 Misc. 2d 8, 332 N.Y.S.2d 714, 718 (Sup. Ct. 1972), and upon review of the record, we conclude that the setting aside of the conveyance by the district court should be reversed on the ground that New York Debtor and Creditor Law § 278 bars a suit to set aside a fraudulent conveyance against "a purchaser for fair consideration without knowledge of the fraud at the time of the purchase."

In 1977 Leonard Malin left his wife to live with another woman whom he eventually married. In 1980, while still separated, the Malins sold the condominium residence they owned jointly. On September 2, 1980, they purchased a single family house in North Woodmere, New York. Phyllis Malin testified at trial that she and Leonard took title to the house as tenants by the entirety because she had insufficient credit to obtain a mortgage and that when they purchased the house, "we knew that eventually at the time of the divorce, the house would be mine." App. at 123. Although the real property was characterized in the separation agreement as "the marital home," Leonard never lived in the house and Phyllis paid the mortgage installments and other carrying charges.

There was further testimony at trial that subsequent to Leonard's departure and prior to the divorce, he and Phyllis discussed a divorce settlement but did not reach any agreement until about September 1981. Phyllis Malin testified that the original separation agreement was not signed in September 1981 because her mother was ill. The agreement was signed a year later on September 15, 1982, after her mother died.

Under the separation agreement, Leonard Malin agreed to provide support and maintenance of $2,500 per month after taxes, college education expenses for the three children (only one of whom was a minor), a car for Phyllis, plus other benefits. Most pertinent to this case is the statement in the agreement that "it is the intent of the parties that upon the signing of this agreement, [the] Wife shall have sole and exclusive beneficial and actual ownership of the marital home," with the wife to assume all obligations relating to the home. App. at 209.

Meanwhile, on December 15, 1981, the First National Bank of South Charleston (Bank) obtained a default judgment in the United States District Court for the Southern District of West Virginia in the amount of $101,844.98, against Leonard Malin and others. FDIC v. Spartan Mining Co., 96 F.R.D. 677, 679 (S.D. W.Va. 1983), aff'd sub nom. FDIC v. Schaffer, 731 F.2d 1134 (4th Cir. 1984). That judgment was filed and docketed in the United States District Court for the Eastern District of New York on September 29, 1982, and then docketed in the Office of the Clerk of Nassau County on October 27, 1982. Woodmere, New York is located in Nassau County.

That same month, Leonard Malin moved the West Virginia district court to vacate the judgment against him. Id. at 679. That court denied his motion after a hearing, finding that he had actual knowledge of the lawsuit in June 1981. Id. at 679, 682-83.

On September 15, 1982, the day the separation agreement was signed, Phyllis Malin filed a divorce action against Leonard Malin in Nassau County Supreme Court claiming abandonment for more than one year. A judgment of divorce was granted on November 12, 1982. The state court ordered that the separation agreement survive and not be merged in the judgment.

Thereafter, on or about December 9, 1982, Leonard Malin and Phyllis Malin transferred title to the real property by deed to Phyllis Malin in accordance with the separation agreement and judgment of divorce. The deed was recorded on January 4, 1983. No tax stamps were affixed to the deed and handwritten on the margin of the deed was the notation "No Consideration." The boiler-plate language, however, recited "consideration of ten dollars and other valuable consideration." App. at 188.

Seventeen months later, in June 1984, the FDIC, as assignee of the Bank's judgment, filed a complaint in the Supreme Court of the State of New York, County of Nassau, to set aside as fraudulent the conveyance of the North Woodmere residence to Phyllis Malin. The Malins removed the action to the United States District Court for the Eastern District of New York. See 28 U.S.C. §§ 1441(b), 1446(d) (1982). During the pendency of the action in the district court, the FDIC commenced state execution procedures against the property, directing the sheriff of Nassau County to sell at public auction Leonard Malin's interest in the property. The Malins sought a protective order of the district court enjoining the execution sale. Their application was denied and the execution sale took place on January 28, 1985. The FDIC was the high bidder at $24,000 for Leonard Malin's interest in the property.

A. Proceedings Below

In the FDIC action to set aside the conveyance to Phyllis Malin, the district court concluded that the conveyance violated the presumptive fraud provisions of sections 273 and 273-a of New York's Debtor and Creditor Law and the actual fraud provision, section 276 N.Y. Debt. & Cred. Law §§ 273, 273-a, 276 (McKinney 1945 & Supp. 1986). In granting judgment to the FDIC, the court also voided the sheriff's deed. Both parties moved to amend the judgment. On September 30, 1985, the district court amended its judgment by deleting the part that vacated the sheriff's deed to the FDIC. The court declared that Leonard and Phyllis Malin were divisible one-half owners of the property when the West Virginia judgment was filed in Nassau County, and that the FDIC and Phyllis Malin were now the divisible one-half owners by virtue of the filed judgment, the writ of execution of October 1984 and the sheriff's deed of February 1985 between the sheriff of Nassau County and the FDIC.

In reaching its conclusions that the aforementioned New York state law fraud provisions had been violated, the court reasoned that the property was transferred "well after" Malin knew the debt remained unpaid because the default judgment was filed in Nassau County on October 27, 1982, and the deed between Phyllis and Leonard Malin was dated December 9, 1982. App. at 303. The court noted that the filing of the default judgment established not only "knowledge" of indebtedness but also public notice of the debt. Without further elucidation, the court found that Leonard Malin had transferred his interest in the property with knowledge of his indebtedness and "did so in order to delay and hinder and defraud the ...


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