New York Modernizes the Debtor and Creditor Law

On December 6, 2019, the Governor signed a bill repealing Article 10 of the Debtor and Creditor Law (“DCL”) and replacing it with provisions contained in the Uniform Voidable Transactions Act (known until recently as the Uniform Fraudulent Transfer Act).

Until now, New York State remained one of only two states that had not adopted the UVTA.  The existing DCL provisions derived from the UFCA adopted by New York State in 1925.

In this blog, I have made some preliminary observations about the new Article 10.

Many of the changes bring Article 10 into line with Section 548 of the Bankruptcy Code.

First, perhaps most significantly, the avoidance period has been reduced from six to four years.  Previously, the DCL operated under a CPLR 213 catch all provision where no express limitation was provided for elsewhere.  Four has been the norm in most other states for some time.

Second, no comparable provision to former DCL Section 273-a (the “special” provision for litigation defendants, which provides for a remedy where a transfer was made during a litigation in which judgment is entered against the transferor and not satisfied) is included in the new Article 10.

Third, the UVTA creates an insider preference claim in Section 274(b), which is subject to statutory defenses under Section 277(f) and a one-year look back period.

Fourth, good faith has been removed as an element of fair consideration.  Formerly, “fair consideration” required both “fair equivalent” and that the transfer have been made in “good faith”.  Instead, “reasonably equivalent value”, as understood in the bankruptcy context, will be the standard.

Fifth, the term “voidable” is used in lieu of “fraudulent” and the terms “voidable transactions” have replaced “fraudulent conveyances”.

Sixth, the choice of law question has been simplified as the principal location of the debtor-transferor at the time of transfer will govern.

Seventh, the new Article 10 will only be applicable to transfers made on and after April 4, 2020.

At my Dean’s Hour presentation at the Nassau County Bar Association on March 4, 2020 I will discuss the new Article 10, how it differs from its predecessor, how it differs from the avoidance claims under Chapter 5 of the Bankruptcy Code and the implications of the April 4, 2020 effective date.

I hope to see you there.

 

Bankruptcy Preference Amendment(s) Effective February 19, 2020

On August 23, 2019, the Small Business Reorganization Act (H.R. 3311; S. 1091) (the “SBRA”) was signed into law.  The law is effective 180-days following enactment, that is on February 19, 2020.

Congress incorporated two important changes into the SBRA that may have broader implications beyond small business reorganizations as applicable to the recovery of “preferential transfers” under Section 547 of the Bankruptcy Code.

  • First, a debtor or trustee is required to consider a party’s statutory defenses “based on reasonable due diligence in the circumstances of the case and taking into account a party’s known or reasonably knowable affirmative defenses” prior to commencing an action under Section 547.
  • Second, the small dollar limit contained in 28 U.S.C. § 1409(b) is increased to $25,000.

“Reasonable due diligence” is not defined in the SBRA and will not doubt be the subject of litigation in the future.

With respect to the venue limitation, presently claims under $13,650 must be brought in the district where the defendant resides,  rather than where the bankruptcy case is pending, so as to avoid inconveniencing defendants sued in so-called “small dollar” cases.   Given the impracticability of filing small claims in multiple jurisdictions, this change may effectively eliminate claims under an aggregate amount of $25,000.

These amendments were predicated primarily on  recommendations made in the report of the American Bankruptcy Institute Commission (the “ABI”) to Study the Reform of Chapter 11.

The ABI identified the following “recommended principles” in its report:

  1. The trustee’s ability to pursue preference claims under Section 547 of the Bankruptcy Code preserves value for the estate and tempers the “run on the debtor” that may occur immediately prior to a bankruptcy filing. The avoiding power in Section 547 may, however, be subject to abuse in certain cases. The Commission analyzed a variety of potential reforms to section 547, including refining elements of, or shifting the burden of proof for, certain defenses under Section 547(c). After much research and deliberation, the Commission determined that the potential abuses under Section 547 are addressed most effectively through the changes in small preference actions, pleading requirements, and demand requirements described in these principles, and continued judicial oversight in accordance with the Bankruptcy Code.
  2. The trustee should be precluded from issuing a demand letter to, or filing a complaint against, any party for an alleged claim under Section 547 unless, based on reasonable due diligence, the trustee believes in good faith that a plausible claim for relief exists against such party under Section 547, taking into account the party’s known or reasonably knowable affirmative defenses under Section 547(c).
  3. The trustee must plead with particularity factual allegations in the complaint that establish a plausible claim for relief under section 547. In accordance with the U.S. Supreme Court’s decisions in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009), legal conclusions or speculative allegations should not be sufficient to support a preference complaint.
  4.  The dollar amount of the defense against preference claims provided in Section 547(c)(9) should be increased to $25,000 in the aggregate. This dollar amount should continue to be increased based on the Consumer Price Index for All Urban Consumers under section 104(a).
  5. The small claims venue provision in 28 U.S.C. § 1409(b) should be amended to (i) clarify that the section applies to preference actions under Section 547 and (ii) increase the dollar limit for debts (excluding consumer debts) against noninsiders to $50,000 in the aggregate. This dollar amount should continue to be increased based on the Consumer Price Index for All Urban Consumers under section 104(a).

Congress rejected the ABI’s recommendation that a trustee be required to perform “reasonable due diligence” before issuing a demand letter, but adopted the recommendation  that such diligence be completed ahead of the filing a complaint.

Congress declined to increase the aggregate amount of the transfers that could not be subject to avoidance as preferential in a non-consumer debtor case from $6,825 to $25,000 under Section 547(c)(9).

However, Congress appears to have seized upon that $25,000 amount for purposes of increasing the “small dollar” venue limitation under 11 U.S.C. § 1409(b).

Congress did not adopt language clarifying that 28 U.S.C. § 1409(b) applies to preference actions commenced under Section 547.

Courts had reached different conclusions over whether 28 U.S.C. § 1409(b) applied to preference claims by comparing the language in 28 U.S.C. § 1409(a) to 28 U.S.C. § 1409(b).  

28 U.S.C. § 1409(a) provides:

Except as otherwise provided in subsections (b) and (c), a proceeding arising under title 11 or arising in or related to a case under title 11 may be commenced in the district court in which such case is pending. (emphasis added)

Accordingly, Section 1409(a) identifies three categories of bankruptcy proceedings.

In contrast, 28 U.S.C. § 1409(b) states:

Except as provided in subsection (d) of this section, a trustee in a case under title 11 may commence a proceeding arising in or related to such case to recover a money judgment of or property worth less than $1,375 or a consumer debt of less than $20,450, or a debt (excluding a consumer debt) against a noninsider of less than $13,650, only in the district court for the district in which the defendant resides. (emphasis added)

A Section 547 preference claim arises under title 11.  It does not arise in and is not related to a case under title 11.

As Section 1409(b) identifies only those cases “arising in” and “related to” a bankruptcy case, many Courts have concluded that preference claims are not subject to the “small dollar” venue limitation of 28 U.S.C. § 1409(b).

Congress missed the opportunity to correct this oversight in the SBRA.

Reportedly a bill providing for a technical correction to Section 1409(b) is going to be introduced to Congress.

 

Distinctions in Federal and NYS Deposition Practice – Part One

The rules and law governing the review and execution of errata sheets and the scope of permissible corrections differs between Federal and New York State practice (and as between our own Departments).  These distinctions will be discussed in a short series of blog articles.

In this post, I am going to discuss the distinctions applicable to the review of a transcript by a witness.

Are You Obligated To Allow The Witness To Review The Transcript?

As a preliminary matter, under CPLR 3116 it is mandatory that the transcript be provided to the witness for review and correction.  Should the witness fail to sign the transcript before a notary and return the deposition transcript within sixty days, it may be used as though signed[1].  The witness may not make changes more the sixty days after submission of the transcript to the witness for examination.

The witness need not demand to inspect the transcript.  Should the deposing party fail to comply with CPLR 3116(a), it may be precluded from using the transcript pursuant to CPLR 3117See, e.g., Ramirez v. Willow Ridge Country Club, Inc., 84 A.D.3d 452 (1st Dept. 2011); Santos v. Intown Assoc., 17 A.D.3d 564 (2d Dept. 2005); Lalle v. Abe, 234 A.D.2d 346 (2d Dept. 1996).

The depositing party has the burden of establishing compliance with CPLR 3116(a) if they intend to offer the transcript.  See, e.g., Pina v. Flik Intl. Corp., 25 A.D.3d 772, 772 (2d Dept. 2006).

The First Department in Zamir v. Hilton Hotels, Inc., 304 A.D.2d 493, 758 N.Y.S.2d 645 (1st Dept. 2003), discussed the reason for the sixty-day requirement:

As further noted in the Practice Commentary, “[a]ccording to the Advisory Committee, the statutory purpose of imposing the 60-day restriction in the first place is to enable other parties, including the party who took the deposition, ‘to rely upon the deposition as final,’ an aim that would be frustrated by ‘[l]ast-minute changes.'” (citation omitted) We agree that courts should be circumspect about extending the 60-day period inasmuch as “[a]n indication from the courts that an extension will be allowed without a strong showing of justification will quickly evolve a dilatory attitude that can undermine the purpose of CPLR 3116(a)’s time limit altogether” (citations omitted).

The Zamir Court noted that an extension of the sixty-day period would require a showing of good cause, which plaintiff failed to provide:

the 60-day period, not being a rigid statute of limitations, is presumably extendable pursuant to CPLR 2004 (citations omitted). Nevertheless, CPLR 2004, while giving courts discretion to extend nearly all time limits in the CPLR for doing “any act,” nevertheless premises such relief upon a showing of good cause.

In contrast to CPLR 3116(a), under Rule 30(e) of the Federal Rules of Civil Procedure, only upon request of the witness or a party before the deposition is completed must the witness be allowed 30 days in which to review the transcript and sign a statement reflecting changes the witness wishes to make[2].

“As a threshold, Rule 30(e)(1) requires the party or deponent to request review of the deposition before the deposition itself is completed.” EBC, Inc. v. Clark Bldg. Systems, Inc., 618 F.3d 253, 265 (3d Cir. 2010). If the deponent does not timely request the opportunity to “read and sign” then the opportunity to make changes is waived. see Judge v. New York City Police Department, No. 10 Civ. 4236, 2012 WL 98509, at *4 (S.D.N.Y. Jan. 12, 2012) (plaintiff precluded from making changes to deposition transcript because he failed to request review of transcript).

“Numerous courts have rejected changes to depositions when the procedural requirements of Rule 30(e) were not met.” Winston v. Marriott International, Inc., No. 03 CV 6321, 2006 WL 1229111, at *6 (E.D.N.Y. May 8, 2006) (excluding disputed errata sheet as untimely); see EBC, Inc., 618 F.3d at 265 (“The procedural requirements of Rule 30(e) are clear and mandatory.”); Agrizap, Inc. v. Woodstream Corp., 232 F.R.D. 491, 493 (E.D.PA. 2006) (“[T]here is no debate that the procedural requirements of Rule 30(e) must be adhered to.” (internal footnote omitted)).

In short, while it is common practice to send a transcript for review in cases pending in federal court, there is no obligation to do so.  A calculating adversary may take advantage of a failure to demand to review the transcript on behalf of the witness and withhold the transcript.  Many practitioners are unaware of the obligation imposed under Rule 30(e)(1) or the consequences of the failure to request a review.

The mindful practitioner should exercise caution in this regard.

Next month I will address the scope of permissible changes that a witness may make to a transcript in the errata sheet.

– David Blansky

[1] The failure to sign within the required period means that the deposition “may be used as fully as though signed.” See, e.g., Thompson v. Hamptons Express, 208 A.D.2d 824 (2d Dept. 1994).

[2] In re Weatherford Int’l Sec. Litig., 2013 U.S. Dist. LEXIS 120321 (S.D.N.Y. Aug. 23, 2013) addressed the question of what happens when multiple witnesses or designated by a 30(b)(6) witness and only some of the deponents request the opportunity to review the transcript.  The court concluded a 30(b)(6) deposition, even of multiple designees, is one deposition and only one designee need invoke Rule 30(e)(1) for it to apply to all designees. “[R]egardless of the number of witnesses that Weatherford designated, the deponent remains Weatherford, and the depositions of the four Rule 30(b)(6) designees should be treated as that of a single deponent for purposes of Rule 30(e).”

 

Wells Fargo Bank Made a MISTAKE and They Have Admitted It

FOR IMMEDIATE RELEASE

Wantagh, New York

Wells Fargo disclosed that it illegally foreclosed on 400 families after denying modifications to qualified homeowners.

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Recent Amendments to the Federal Rules of Bankruptcy Procedure, Effective December 1, 2016

Recent bankruptcy rule amendments, effective December 1, 2016, address the continuing impact of the Stern v. Marshall case on bankruptcy proceedings.

In Stern v. Marshall, 564 U.S. 462 (2011), the United States Supreme Court held that a bankruptcy court, as a non-Article III court (i.e. courts without full judicial independence) lacked constitutional authority under Article III of the United States Constitution to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor’s proof of claim, even though Congress purported to grant such statutory authority under 28 U.S.C. § 157(b)2(C).

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