Daily Development for
Wednesday, September 6, 1995

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

FRAUDULENT CONVEYANCES; MORTGAGES: A mortgage securing initial loan and future advances by a landowner who is the defendant in an action for money damages constitutes a fraudulent conveyance as to the plaintiff in that action because the initial loan is not equal to fair value for property. BSL Development Corp. v. Aquabogue Cove Partners, Inc., 623 N.Y.S.2d 253 (App. Div. 1995).

Landowner gave mortgagee a note for $9.6 million, securing an initial $1 million obligation and future advances. At the time a lawsuit was pending against landowner. Later, landowner defaulted on the mortgage note and mortgagee initiated a foreclosure action. During the pendency of the foreclosure action, the damages lawsuit was resolved and plaintiff won a$980,000 judgment against landowner. Plaintiff intervened in the foreclosure action to have the mortgage set aside as against plaintiff:

Held: Conveyance in mortgage is void as against the judgment, and conveyance abated until judgment is paid. (Presumably this means that the foreclosure can proceed with lienholder in first position as to proceeds - assuming that proceeds equal at least the lienholder's claim.)

Reporter's Comment: This case, applying New York debtor/creditor law, illustrates the importance of fulfilling all three requirements for a nonfraudulent transaction. Here, the mortgage for $8 million secured advances of only $1 million. New York requires fair consideration for a transaction by a defendant in an action for a money judgment who transfers property that could be used to satisfy the judgment.

Editor's Comment: As usual, it is difficult to be certain of all that went on from the sketchy report of this New York intermediate appeals decision. It appears that the mortgage lien was "primed" as to the $1 million originally advanced as well as to future advances. It also appears that the court would have ruled that the mortgage would not have been so primed if the money advanced under the mortgage loan had been "fair value." But these concepts are inconsistent. Why isn't the $1 million advanced "fair value" for a mortgage lien equal to $1 million? Why can't the court "split the mortgage" and award first priority for the $1 million and then second priority to the judgment lien?

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