On November 10, 2021, Justice Reed of the New York County Commercial Division issued a decision in Airball Capital LLC v. Rosenthal & Rosenthal Inc., 2021 NY Slip Op. 51082(U), holding that a creditor of the parent company of a debtor did not have standing to assert fraudulent conveyance claims against the debtor, explaining:
On a defendant’s motion to dismiss the complaint based upon the plaintiff’s alleged lack of standing, the burden is on the moving defendant to establish, prima facie, the plaintiff’s lack of standing as a matter of law. To defeat the motion, a plaintiff must submit evidence which raises a question of fact as to its standing.
In order for a party to challenge a conveyance as fraudulent pursuant to the NYDCL, the party must be a creditor within the meaning of that statute. A creditor is defined as a person having a claim, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured.
In Martes v USLife Corp. (927 F Supp 146, 148 [SD NY 1996]), defendant USLIFE, the parent company of judgment debtor Title-Dallas, sold all of its stock in judgment debtor Title-Dallas to a third party, Title-USA. Thereafter, Martes filed a lawsuit against Title-Dallas and received a judgment against that company, which shortly thereafter was in liquidation. Martes then filed an action against USLIFE for fraudulent conveyance, attempting to collect the debt owed to him by judgment debtor Title-Dallas. The court in Martes granted summary judgment to defendant USLIFE, holding that there could be no fraudulent conveyance of which the plaintiff could complain when the “only entity that transferred anything was USLIFE. Plaintiff was not a creditor of USLIFE; he was a creditor only of Title-Dallas. Hence, he lacks standing to complain of any fraud in the sale of USLIFE of its shares in Title-Dallas.
Likewise here, Airball is not a creditor of the subsidiary entities. Its complaint admits as much. While Airball cites toStillwater Liquidating LLC v CL Recovery Trading Fund III, L.P. (2019 NY Slip Op 33108[U], *1 [Sup Ct, NY County 2019]), and In re Platinum-Beechwood Litig. (427 F Supp 3d 395, 454-455 [SD NY 2019]) for the proposition that a creditor of a parent company can sue for fraudulent conveyances by its subsidiaries, the role of the plaintiffs in both cases was that of a court-appointed receiver, one whose sole responsibility it was to ensure that assets rightfully belonging to the creditors were recovered. To reject standing in those cases would undermine plaintiff’s very purpose. That is not the case here where Airball is neither a court-appointed receiver nor trustee, but simply a creditor of the holding company attempting to claw back funds it believes it has a stake in.
Nor can Airball claim that the Loan Agreement bound the subsidiary entities when the contract was only between itself and H33.
DCL §§ 273, 274, and 276 protects only creditors, or future creditors, of persons making certain conveyances, and plaintiff is not a creditor of the subsidiary entities. Therefore, moving defendants’ motion to dismiss the first and second causes of action sounding in actual and constructive fraudulent conveyance is granted.
For the reasons discussed above, the third and fourth causes of action must also be dismissed against Rosenthal and Sunrise. Moving defendants have established that plaintiff is neither a debtor, obligor nor one holding a security interest or lien in the subsidiary entities that would entitle it to the remedies offered under UCC § 9-625 or a declaration pursuant to UCC § 9-617. In opposition, plaintiff fails to raise any question of fact as to its standing by adopting or ratifying any obligations in the loan agreement, nor does it attempt to pierce the corporate veil.
Plaintiff’s complaint alleges that Airball and H33 were parties to the Loan Agreement, that Rosenthal was aware of the Loan Agreement and Rosenthal interfered with the Loan Agreement by inducing H33 and Hanna to breach the Loan Agreement by executing the PPA, which purportedly conveyed all of the material assets of H33 and collateral in which Plaintiff held a security interest in violation of certain negative covenants in the contract. Plaintiff alleges that Rosenthal induced H33 and Hanna to execute the PPA by misrepresenting that board approval was not necessary and plaintiff was damaged as a result. However, as plaintiff states in its complaint, the contract had already been breached by H33’s failure to comply with schedule 2.02 of the loan agreement, for repayment of the loan and identification of a suitable merger target and therefore it cannot show that but for Rosenthal’s alleged interference a breach would not have occurred.
Accordingly, the fifth cause of action is dismissed.
(Internal quotations and citations omitted).