In Re: Liberty Bridge Capital Management GP, LLC

Background

Eight entities associated with Birnbaum’s litigation-funding business filed Chapter 7 bankruptcy petitions in January 2020. The bankruptcy estates were combined for purposes of the proceedings. In March 2019, C4C wired $280,000 to Carob Bean’s attorneys as a down payment on a contract under which Liberty Bridge Properties Capital Management GP, LLC (LBP), a special-purpose entity, would purchase a Manhattan property from Carob Bean for $2.8 million. C4C was not a party to the purchase contract. The sale never closed, and Carob Bean kept the down payment.

The Chapter 7 trustee sued Carob Bean to recover the payment as a fraudulent transfer under sections 273 through 276 of New York’s Debtor and Creditor Law and sections 548(a)(1)(A) and (B) of the Bankruptcy Code. A fraudulent-transfer claim generally seeks to undo a transfer that improperly reduced a debtor’s estate, including a transfer made without fair value or with actual intent to defraud creditors. The parties filed competing motions for summary judgment, which asks whether the undisputed facts require judgment without a trial.

The Bankruptcy Court denied the trustee’s motion and granted Carob Bean’s cross-motion for summary judgment dismissing the complaint. It reasoned that LBP and C4C were alter egos—legally, entities whose separate identities could be disregarded—because LBP lacked a separate business existence and was created to hold property for the affiliated business. It therefore treated LBP’s contractual right to purchase the property as a benefit to C4C. The Bankruptcy Court also found that Carob Bean had provided fair consideration and could use statutory defenses available to a good-faith transferee that gave value.

District Court’s Analysis

The District Court held that the Bankruptcy Court applied New York’s alter-ego and corporate-veil principles incorrectly. Under New York law, domination and control alone are not enough. The control must also have been used to commit a fraud or other wrong that injured the party seeking to disregard the corporate form. Even assuming that defensive use of the alter-ego doctrine could be appropriate in some circumstances, the record here did not show that C4C’s and LBP’s separate legal identities were used to defraud or injure Carob Bean. Carob Bean received a payment from C4C, an entity that was not a party to the purchase contract, but the court found nothing fraudulent or abusive about that payment itself.

The court separately addressed whether C4C received fair consideration for its payment. LBP received contractual rights under the purchase agreement, but C4C did not receive those rights directly. The possible benefit to C4C—potentially using the property as office space if LBP completed the purchase—was contingent and was not itself a contractual right. Under the principles governing indirect benefits, the fact-finder generally must compare the economic benefit received by the debtor with the value of what the debtor transferred. The District Court held that a genuine dispute of material fact existed over whether C4C received an indirect benefit approximately equal to the $280,000 payment.

The District Court also held that Carob Bean was not entitled to summary judgment on its statutory defenses. The New York defense required fair consideration, which remained disputed. The Bankruptcy Code’s separate defense protects a good-faith transferee only to the extent of the value the transferee gave in exchange. Although the court found no error in the Bankruptcy Court’s conclusion that Carob Bean acted in good faith, it held that the value Carob Bean provided—and the amount, if any, that Carob Bean could retain—also presented a genuine factual dispute.

Ruling and Disposition

Judge Lewis A. Kaplan vacated the Bankruptcy Court’s order to the extent it granted Carob Bean’s cross-motion for summary judgment dismissing the complaint. He affirmed the order to the extent it denied the trustee’s motion for summary judgment. The case was remanded for further proceedings consistent with the District Court’s decision. The ruling did not finally determine the amount, if any, that the trustee may recover; it held that Carob Bean was not entitled to judgment as a matter of law on the existing record.