Debtor D (we’ll call him “D,” for short) owes you tens of thousands of dollars for product that you delivered months ago. When you inquire as to what the delay is in receiving payment, you get a run-around, and ultimately find out that D’s company was taken over by a small, closely held company whose priorities clearly do not include paying your bills.  By now, you’ve put them on formal notice that unless D pays the bills in full, a breach of contract suit will be brought.

Recognizing that he will have no viable defense to your claim, the principal of D does what many short-sighted executives do: he divests the company of as many assets as possible, as quickly as possible, transferring properties into the name of his wife and other family members for little or no consideration. While many people in your situation would throw up their hands at this point, that may prove to be a terrible mistake. And that is because they are likely unaware of the doctrine of constructive fraud – the cousin of the alter ego/piercing the corporate veil doctrine.

Unlike common law fraud principles, which require a showing of intent to defraud (which is difficult to prove), New York’s Uniform Fraudulent Conveyance Act (‘UFCA’), as codified in Article 10 of the Debtor and Creditor Law at §§ 270-281, has several provisions that do not require a claimant to prove that the defendant had actual intent to commit a fraud, and some of these provisions, such as section 273-a (entitled “Conveyances by
defendants”), was specifically drafted to prevent debtors from escaping their obligations in a lawsuit. This doctrine is commonly referred to as “constructive fraud.”

There is one important catch, however: in New York, as in other jurisdictions, “[A] transfer may not be challenged as fraudulent unless it prejudices the complaining creditor.” In other words, in determining whether a creditor has been prejudiced, courts consider what rights, if any, the creditor would have had to levy on the property had the challenged conveyance not occurred. And if the creditor (i.e., you) would never have been able to recover any of that money because your claim was so far back in line of the creditors, you will still be out of luck.

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And the plaintiff considered himself lucky when all this transpired, because, after all, he had purchased Allstate’s Deluxe Plus Homeowner’s policy, and figured that his losses would be covered. How wrong he was.

Allstate didn’t even have the decency to formally deny his claim; and, since his insurance policy (like all other Deluxe Plus policy holders) required him to protect Allstate’s interests in recovering compensation for the property damage that may have been caused through the fault of a third party (in this case the Village), he independently hired an attorney, and paid him out of his own pocket, to prosecute the claim in order to assure that the statute of limitations against the Village did not expire.

Reading between the lines of this decision, it is fairly clear to me that the Appellate court, like the trial court before it, found Allstate’s conduct rather troubling, as they both ruled that a jury should be free to consider whether Allstate deliberately withheld its determination on this claim so that the plaintiff (rather than Allstate) would have to bear the cost of hiring an attorney (which otherwise would and/or should have been Allstate’s obligation). If a jury sides with plaintiff on this issue, and finds that Allstate engaged in deceptive business practices (this law is codified at sections 349 and 350 of the General Business Law), Allstate faces the specter of not only compensatory damages for their alleged breach of contract, but also treble and punitive damages as well.

This should prove interesting.

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