Liberty Mutual Insurance Companyas Fiduciary for t v. State Of New York et al

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NEW YORK
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IN RE: 	CHAPTER 11
LYNN CITRON and 	CASE NO.: 08-71442-ast
JEFFREY CITRON,
Debtors.
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LIBERTY MUTUAL INSURANCE COMPANY,
as Fiduciary for the Bankruptcy Estate of
Lynn Citron and Jeffrey Citron, Plaintiff,
v. 	ADV. PROC. NO.: 09-08126-ast
THE STATE OF NEW YORK,
BING LI and THE LAW OFFICES
OF BING LI, LLC, and FRANK PAONE, Defendants.
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APPEARANCES:
William B. Pollard, III, Esq.
David T. McTaggart, Esq.
Kornstein Veisz Wexler & Pollard, LLP
757 Third Avenue
New York, New York 10017
Attorneys for Liberty Mutual Insurance Company
John W. Kolwe, Esq.
Jones, Walker, Waechter, Poitevent, Carr
600 Jefferson Street
Suite 1600
P. O. Drawer 3408
Lafayette, Louisiana 70502-3408
Attorneys for Liberty Mutual Insurance Company
Neal S. Mann, Esq.
Assistant Attorney General
120 Broadway
New York, New York 10271
Attorneys for State of New York
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MEMORANDUM OPINION ON CROSS-MOTIONS FOR SUMMARY JUDGMENT
Issues Before the Court
Pending before the Court are cross-motions for summary judgment filed by the Plaintiff,
Liberty Mutual Insurance Company as Fiduciary for the Bankruptcy Estate of Lynn Citron and
Jeffrey Citron (“Liberty Mutual” and “Plaintiff”), and by Defendant, the State of New York
(“NY”). Plaintiff seeks to avoid and recover a $75,000.00 criminal fine paid by Debtor Jeffrey
Citron to NY as part of a plea agreement related to several felony counts of insurance fraud, and
$14,000.00 of criminal fines paid by Debtor Lynn Citron as part of a plea agreement with NY
related to several misdemeanor charges of insurance fraud.
For the reasons herein, this Court grants in part and denies in part, each motion.
Jurisdiction
This Court has jurisdiction over this core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A),
(B), (F) and (H), and 1334(b), and the Standing Order of Reference in effect in the Eastern District
of New York.
Procedural History
On March 27, 2008, Debtors filed a voluntary petition for relief under Chapter 13 of the
United States Bankruptcy Code (the “Petition Date”). [dkt item 1]1 At the time this case was filed,
Debtor Jeffrey Citron was incarcerated, and Debtor Lynn Citron was serving out a three-year
probation term.
On June 2, 2008, Liberty Mutual Insurance Company filed a motion to dismiss the main
case and a brief in support thereof. [dkt items 30, 31] Liberty Mutual asserted, inter alia, that
Debtors had filed this bankruptcy in bad faith, had failed to disclose all assets, and were ineligible
1 Unless otherwise noted, all references to the docket are in the main case.
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for chapter 13 relief under Section 109(e) of the Bankruptcy Code,2 because their liquidated,
unsecured claims approximated $10 million, and their debts to Liberty Mutual, including treble
damages and prepetition interest, exceeded $26 million (the “Dismissal Motion”). Liberty Mutual
filed a proof of claim asserting unsecured debts in excess of $26 million. An evidentiary hearing on
the Dismissal Motion was scheduled for July 28, 2008. [dkt item 44] On June 27, 2008, this Court
issued an Order directing Debtors to show cause why this case should not be converted to a case
under chapter 7, and scheduled an evidentiary hearing thereon, also for July 28, 2008. [dkt item 43]
On July 23, 2008, following a substitution of counsel, Debtors filed a motion seeking to
convert the main case from a case under chapter 13 to one under chapter 11 of the Bankruptcy
Code. [dkt item 53] On August 29, 2008, this Court entered an Order converting the main case to a
case under chapter 11 of the Bankruptcy Code. [dkt item 65]
On December 15, 2008, Liberty Mutual filed a motion seeking authority to initiate lawsuits
on behalf of the bankrupt estate (the “Authorization Motion”). [dkt item 91] On December 18,
2008, the United States Trustee (the “UST”) filed a motion seeking dismissal of the main case (the
“UST Dismissal Motion”). [dkt item 92]
On February 11, 2009, following a contested hearing on the Authorization Motion, this
Court entered an Order authorizing Liberty Mutual to pursue recovery actions on behalf of the
bankruptcy estate (the “Authorization Order”). [dkt item 114] The UST’s Dismissal Motion has
been adjourned on several occasions, on consent of the UST, based on progress towards a plan of
reorganization in the main case.
On March 24, 2009, Liberty Mutual, with the power vested in it pursuant to the
Authorization Order, filed this adversary proceeding as Plaintiff. NY filed a Rule 12(b)(6) motion
2 Unless otherwise noted, all references to statutory provisions are to the Bankruptcy Code, found under Title 11 of
the United States Code.
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to dismiss this adversary proceeding on May 18, 2009, to which Plaintiff responded on June 1,
2009. [adv. dkt items 8, 9] Supplemental briefs were filed on August 11 and 12, 2009. [adv. dkt
items 11, 12] This Court denied the NY motion to dismiss on August 31, 2009. [adv. dkt item 14]
On July 28, 2009, Debtors and Liberty Mutual filed a motion in the main case seeking to
have the Court approve a global settlement between them. [dkt item 133] On August 26, 2009, this
Court entered an Order approving the settlement between Liberty Mutual and Debtors. [dkt item
137] This settlement was represented as clearing a few of the potential roadblocks between Liberty
Mutual and Debtors so that Debtors could confirm a plan of reorganization.
In this adversary proceeding, Liberty Mutual and NY now have each filed motions seeking
summary judgment under Rule 7056 of the Bankruptcy Code. Each has also filed a statement of
material facts upon which there is no dispute, in accordance with Local Bankruptcy Rule 7056-1 in
the Eastern District of New York. [adv. dkt items 16, 18, 20, 26] These motions are fully briefed
and were taken under submission by the Court. 3
Uncontroverted Facts
The following materials facts are not controverted:
1. 	On or about June 5, 2007, Debtors were both indicted, along with several others, for
alleged involvement in an alleged fraudulent insurance scheme against Liberty
Mutual and others. The indictment, styled as People of the State of New York
against Jeffrey Citron, et al., was assigned indictment number 2373/2007 (the
“Indictment”).
2. 	The Indictment accused Jeffrey Citron of 85 felonies, which carried maximum fines
3 For clarification regarding the other three defendants listed in this adversary proceeding: On December 18, 2009,
the Court approved a settlement agreement between Liberty Mutual and Defendant Frank Paone [dkt item 28]; on
March 5, 2010, Liberty Mutual filed a status letter with the Court indicating it was in settlement discussions with the
remaining defendants, Bing Li and the Law Offices of Bing Li [dkt item 31].
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of double the amount of any gains from the commissions of the alleged crimes.4
3. 	The Indictment accused Lynn Citron of 7 felonies, which carried maximum fines of
double the amount of any gains from the commissions of the alleged crimes.5
4. 	Debtors both pleaded guilty to certain counts. On September 10, 2007, Debtors each
allocuted as part of their respective plea agreements. Jeffrey Citron allocuted to five
felony counts, and received an indeterminate sentence of one and two-thirds to five
years, along with having to pay a $75,000.00 fine by the sentencing date. This plea
agreement was conditioned upon Jeffrey Citron surrendering his notary license,
staying out of trouble between his allocution date and his sentencing date,
cooperating with the department of probation so his presentence report could be
prepared, and his not engaging in any insurance business prior to his sentencing date.
As part of his plea agreement, Jeffrey Citron also agreed to waive his right to trial on
the charges and waived his right to appellate review. Lynn Citron allocuted to a
misdemeanor charge in exchange for which she was to be sentenced to three years’
probation, and “in lieu of forfeiture or fines in the total amount of $175,000,” agreed
to pay $5,000.00 by her sentencing date, and an additional $4,722.00 per month over
the duration of her probation, with an agreement to provide the State of New York
with a judgment, which could be secured by Debtors’ residence in Woodbury, New
York. Lynn Citron also agreed to surrender any insurance licenses held by her or her
agency, waived her right to a trial, and waived her right to appellate review. Lynn
Citron also agreed not to travel, other than for work, to New York City, or to visit
4 The pleadings do not reveal what the maximum incarceration term might have been.
5 As with Jeffrey Citron’s Indictment, the pleadings do not reveal what the maximum incarceration term might have
been for Lynn Citron.
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her husband in prison.
5. 	After several delays in their sentencing date, Debtors were finally sentenced on
December 19, 2007.
6. 	Also on December 19, 2007, NY and Lynn Citron entered into a Consent Order,
which memorialized her forfeiture of $175,000.00, and provided for her first
payment to be due on the sentencing date of December 19, 2007, with monthly
payments thereafter of $4,722.22 over the term of her thirty-six months of probation.
Lynn Citron further agreed to a confession of judgment, and the indexing of that
confession of judgment as a lien against Debtors’ residence “should she miss two
monthly payments.”
7. 	Lynn Citron signed an affidavit of confession of December 19, 2007, and paid her
initial $5,000.00.
8. 	Jeffrey Citron paid his entire $75,000.00 fine on March 25, 2008. Lynn Citron paid
an additional $9,000.00 on March 25, 2008.
9. 	The March 25, 2008, payments made by each of Debtors had been due earlier, but
the payment date had been extended with the approval of the state criminal court
until March 20, 2008.
10. 	Debtors filed a Chapter 13 bankruptcy case on March 27, 2008.
11. 	Lynn Citron defaulted on her monthly payment obligations, having made only the
initial $5,000.00 payment on December 19, 2007, and a $9,000.00 payment on
March 25, 2008, representing the payment due for January and February 2008.
12. 	On May 16, 2008, the Supreme Court of Nassau County entered a Judgment by
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Confession against Lynn Citron, in the amount of $161,015.00, plus postjudgment
interest of nine percent per annum.
13. 	NY filed a secured proof of claim in the main bankruptcy case on June 27, 2008,
claiming a secured debt of $161,015.00.
14. 	It is unknown whether or when NY docketed the confession of judgment with the
Clerk of either Nassau or Suffolk County.
Summary of Arguments
Liberty Mutual asserts that the Jeffrey Citron’s $75,000.00 March 2008 payment and Lynn
Citron’s March 2008 $9,000.00 payment (collectively, the “March 2008 Payments”) were both
preferential payments and therefore avoidable under Bankruptcy Code Section 547(b). Liberty
Mutual further argues that Lynn Citron’s December 19, 2007, $5,000.00 payment, along with the
Debtors’ March 2008 Payments (collectively, the “Transfers”), all constitute fraudulent transfers
and, therefore, are subject to avoidance under Bankruptcy Code Section 548(a).
NY, in its cross-motion for summary judgment, asserts that the Debtors received reasonably
equivalent value for the Transfers because they avoided long jail sentences, substantial fines, and
the significant costs of a criminal trial, and, thus, the Transfers were not fraudulent transfers. NY
concedes that the March 2008 Payments are preferences, but argues that the affirmative defense
provided under Section 547(c)(1) precludes recovery by Liberty Mutual. [adv. dkt item 20]
Legal Analysis
The Standard for Summary Judgment
Pursuant to Rule 56© of the Federal Rules of Civil Procedure, incorporated by Bankruptcy
Rule 7056©, summary judgment should be granted to the moving party if the Court determines that
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“the pleadings, depositions, answers to interrogatories, and admissions on file, together with
affidavits, if any, show that there is no genuine issue as to any material fact and that the moving
party is entitled to judgment as a matter of law.” Celotex Corp. v. Catrett, 477 U.S. 317, 322
(quoting FED . R. CIV . P. 56©).
In considering cross-motions for summary judgment, the court must evaluate the merits of
each motion independently of the other. See Heublein, Inc. v. United States, 996 F.2d 1455, 1461
(2d Cir.1993); In re Rodriguez, 50 B.R. 576 (Bankr. E.D.N.Y. 1985) (“[C]ross-motions for
summary judgment do not warrant the court in granting summary judgment unless one of the
moving parties is entitled to judgment as a matter of law upon facts that are not genuinely
disputed.”)
A movant has the initial burden of establishing the absence of any genuine issue of material
fact. Celotex, 477 U.S. at 322-23. A fact is “material” if it “might affect the outcome of the suit
under the governing law.” Anderson, 477 U.S. at 248. An issue of fact is genuine “if the evidence
is such that a reasonable jury could return a verdict for the nonmoving party.” Id. “When summary
judgment is sought, the moving party bears an initial burden of demonstrating that there is no
genuine dispute of material fact to be decided with respect to any essential element of the claim in
issue; the failure to meet this burden warrants denial of the motion.” Anderson, 477 U.S. at 250
n.4).
If the movant meets his initial burden, the nonmoving party “must do more than simply
show that there is some metaphysical doubt as to the material facts.” Matsushita Elec. Indus. Co.,
Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). Rather, it must present “significant probative
evidence” that a genuine issue of fact exists. Anderson, 477 U.S. at 249 (quotation omitted). “There
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is no issue for trial unless there exists sufficient evidence in the record favoring the party opposing
summary judgment to support a jury verdict in that party’s favor.” Cadle Co. v. Newhouse, No. 01
Civ. 1777(DC), 2002 WL 1888716 *4 (S.D.N.Y. Aug. 16, 2002) (citing Anderson, 477 U.S. at
249); see also Anderson, 477 U.S. at 250 (finding that summary judgment is appropriate only when
“there can be but one reasonable conclusion as to the verdict”).
As part of the independent evaluation of cross-motions for summary judgment, the court
must draw all reasonable inferences against the party whose motion is under consideration. Coach,
Inc. v. Peters, 386 F.Supp.2d 495, 497 (S.D.N.Y. 2005).
The parties do not dispute the material facts that each has asserted. Thus, this Court must
determine whether all material facts have been presented to this Court and, if so, whether: (1) the
March 2008 Payments are avoidable as fraudulent transfers under Section 548; and (2) NY has
demonstrated that the March 2008 Payments are excepted from preference avoidance in accordance
with Section 547(c)(1).
Standards for Avoidance Under Bankruptcy Code Sections 547 and 548
Bankruptcy Code Sections 547 and 548 provide the circumstances under which a preference
and a fraudulent transfer can be found to exist and be avoided. 11 U.S.C. §§ 547, 548. Section 547
of the Bankruptcy Code authorizes either the debtor or the trustee to avoid a transfer which prefers
one creditor over similarly situated creditors, and allows the transferee to receive more than it
would have received in a Chapter 7 case had the transfer not been made. 11 U.S.C. § 547. NY has
conceded that the elements of a preference under Section 547(b) have been demonstrated by the
summary judgment evidence submitted by Liberty Mutual regarding the March 2008 Payments.
[adv. dkt item 20, p.5] Instead, NY focuses its argument on the assertion that the March 2008
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Payments to NY should be excepted from avoidability under Section 547(c)(1), which provides a
complete defense based on a contemporaneous exchange for new value.
Bankruptcy Code Section 548(a) authorizes either the debtor or trustee to avoid a transfer
made for less than reasonably equivalent value within two years prior to the petition date.6 11
U.S.C. § 548(a). The Bankruptcy Code provides that the trustee may avoid transfers or obligations
for which the debtor received less than a reasonably equivalent value if the debtor was insolvent or
was rendered insolvent by the transfer, and/or intended to incur, or believed that the debtor would
incur, debts that would be beyond the debtor’s ability to pay as such debts matured. Id.
Section 548 Analysis: Whether a Plea Bargain Resulting in a Reduction in
Jail Time, Fines, and Legal Costs Constitutes Reasonably Equivalent Value
In BFP v. Resolution Trust Corp., 511 U.S. 531 (1994), the United States Supreme Court
stated that the phrase “reasonably equivalent value” contained within Section 548 does not
necessarily connote a strictly economic or dollar for dollar analysis. “One must suspect the
language means that fair market value cannot—or at least cannot always—be the benchmark” for
determining reasonably equivalent value. BFP, 511 U.S. at 537 (internal citations omitted). In
BFP, the Supreme Court held that the price received at a regularly conducted, noncollusive
foreclosure sale, which is properly conducted under applicable state law, conclusively establishes
reasonably equivalent value for purposes of Section 548(a). See BFP, 511 U.S. at 537.
In In re Zerbo, 397 B.R. 642 (Bankr. E.D.N.Y. 2008), this Court addressed a Section 548
attack by a trustee against a prepetition divorce property settlement. In Zerbo, by extension of the
6 Prior to the October 17, 2005, amendments to the Bankruptcy Code provided under the Bankruptcy Abuse
Prevention and Consumer Protection Act (“BAPCPA”), the applicable look-back period under § 548(a) was one
year. Section 548(a) was amended to provide a two -year look back. This bankruptcy case was filed after the
effective date of the relevant BAPCPA amendments.
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BFP analysis, this Court concluded that reasonably equivalent value for purposes of Section 548(a)
could be conclusively established by a divorce decree which divided marital assets, if the division
of assets was approved by a matrimonial court and if there is no evidence of extrinsic fraud or
collusion among the divorcing parties. Zerbo, 397 B.R. at 654.
Very little case law has been found on the precise question posed here: whether the
settlement of criminal litigation constitutes reasonably equivalent value for Section 548 purposes.
This Court believes that BFP establishes a framework for analysis of this case as it did for Zerbo.
The only two cases cited by NY, both decided well before BFP, help illuminate this
analysis. 	These cases are 	In re Tower Environmental, Inc., 260 B.R. 213 (M.D. Fla. 1998), which
is similar to this case in many material respects, and in In re CareerCom Corp., 215 B.R. 674 (M.D.
Pa. 1997). CareerCom is not quite as similar to this case as Tower.
In Tower, the debtor, an environmental remediation firm, entered into a plea agreement
(“Plea Agreement”) with the State of Florida (the “State”), to settle a 45-count indictment against
the debtor’s predecessor corporation, Consolidated Credit Group, Inc. (“CCG”). In re Tower Envtl.,
Inc., 260 B.R. at 218-19. Under the Plea Agreement, CCG agreed to enter pleas of no contest to all
of the counts of grand theft in the indictment, and the State agreed to nolle prosequi the
racketeering and conspiracy charges. The Plea Agreement included both monetary and
nonmonetary conditions. CCG agreed to pay restitution, a sum comprising the State’s cost of the
investigation, and a fine, each payable in installments. Two major stockholders of debtor
guaranteed the payments under the Plea Agreement. Id. at 219.
In exchange, the State agreed not to pursue the criminal prosecution of CCG, debtor, three
entities associated with CCG, and “any officers, directors, shareholders, employees, and agents” of
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the named entities. This agreement not to prosecute extended to “matters relating to the factual
basis detailed in the [i]ndictment and any matters presently under investigation.” The Plea
Agreement included several nonmonetary provisions and provided for withdrawal from the
agreement in the event of breach by either party, which included the failure to make the required
payments. Under the Plea Agreement, the State was not precluded from pursuing penalties,
restitution, costs, and other relief pertaining to events other than the specific incidents identified in
the indictment. Id. at 218-19.
Debtor made all of the required payments. The restitution was paid according to the
schedule established in the Plea Agreement and the fine and the costs of investigation were paid in
advance of the due dates. Id. at 220.
An involuntary case under Chapter 7 was filed against debtor on July 20, 1995, after which
debtor consented to an order for relief under Chapter 11, entered on August 24, 1995. Debtor
proposed to liquidate all of its assets in its Chapter 11 case, and the Creditors’ Committee filed the
adversary proceeding at issue in the opinion against State of Florida. Id. at 221.
The parties agreed that Tower made certain transfers of its property to the State or for the
benefit of the State within one year prior to bankruptcy, and made other transfers more than one
year but less than two years prior to bankruptcy. 7 These transfers were made in satisfaction of
Debtor’s obligations under the Plea Agreement. Tower, 260 B.R. at 220. The court stated that other
tests of the statutes must be examined to determine reasonably equivalent value if Debtor did not
receive reasonably equivalent value in exchange for incurring the obligation; however, “[if] the
Debtor received reasonably equivalent value in exchange for incurring [and paying] the
7 Tower was decided under the pre-BAPCPA § 548 which provided for a one year ‘look back’ period. The
otherwise applicable substantive provisions of § 548 did not change.
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obligation[s], then the obligation[s] were not fraudulent [transfers] under any of the tests, and the
transfers in satisfaction of the obligation[s], while they may have been preferential, were not
fraudulent. In re Tower Envtl., Inc., 260 B.R. at 222-23.8
The court also noted that “neither party cited any case authority dealing squarely with the
issue of whether obligations incurred or payments made in connection with the settlement of
criminal charges are constructively fraudulent within the meaning of § 548(a)(2) of the Bankruptcy
Code, and it appears that this issue may not have been addressed in any prior decisions.” Id. at 223-
24. 9
The Tower court applied what it considered the then existing, most analogous cases, and, on
the issue of value, stated as follows:
The value received when the obligations were incurred is found in the
resolution of the charges in the indictment. This resolution entailed at least
(1) resolving the risk of incurring the substantial liabilities associated with
the indictment, (2) avoiding the substantial costs associated with litigation of
45 felony charges, and (3) the possibility that 	the 	terms of the Plea
Agreement, viewed at the time that the Agreement was entered, could have
enabled the Debtor to receive an economic benefit in the future. Value was
received for the payments pursuant to the Plea Agreement because they were
in satisfaction of the obligations which had been incurred, which is defined as
value by § 548(d)(2)(a).
Id. at 226.
Having found that value had been received, the inquiry turned to reasonable equivalence.
For this, the Tower court turned to an economic equivalence model to determine how the amount of
the payments compared to the liability facing Tower absent the Plea Agreement. Id. at 227-28. The
court noted that the Debtor faced a realistic possibility of conviction, and concluded as follows:
8 Tower did not involve any preference claims.
9 This Court notes that Tower has not been cited by any other court to date.
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There may be instances in the context of criminal litigation where fines,
penalties, or forfeitures are imposed with respect to which a debtor does not
receive reasonably equivalent value. However, in this case, considering the
factors discussed above, the Court concludes that the Debtor received
reasonably equivalent value in exchange for entering the Plea Agreement and
incurring the obligations.
Id.
Under Florida law, the state trial court had a responsibility to consider whether to accept the
Plea Agreement.10 The Tower court also noted that the Plea Agreement was an arms-length,
noncollusive agreement. Id. at 228-29.
The court concluded that Tower received reasonably equivalent value in exchange for
incurring the obligations of the Plea Agreement, and for making the transfers in payment of the
amounts required by the Plea Agreement, including the payments made prior to their due dates,
noting all payments were “made in satisfaction of an antecedent debt of equal value.” Id. at 229-30.
In CareerCom, the debtor was the parent corporation of numerous for-profit post-secondary
learning institutions and trade schools, during which time the federal Department of Education
(“DOE”) managed the Department of Education Payment Management System (“DEPMS”), the
central repository for payments of federal grants to post-secondary institutions and trade schools.
Prior to filing bankruptcy for itself and several subsidiaries, CareerCom received funding from the
DEPMS, which funding was paid into a consolidated account managed by CareerCom and from
10 Rule 3.172, Florida Rules of Criminal Procedure, in effect at the time Tower was decided, provides that a State
trial judge must have certain assurances before accepting a plea of nolo contendere. Before accepting such a plea, the
state trial judge must be satisfied that the plea is voluntary and that there is a factual basis for it. Additionally, the
trial judge should determine that the defendant understands the complete terms of any plea agreement, including
specifically all obligations the defendant will incur as a result. Further, before the trial judge accepts a nolo
contendere plea, the judge must determine that the defendant either acknowledges his or her guilt or acknowledges
that he or she feels the plea to be in his or her best interest, while maintaining his or her innocence. No plea
negotiation is binding until it is accepted by the trial judge formally after making all the inquiries, advisements, and
determinations required by Rule 3.172[.]
FLA. R. C RIM. P. 3.172.
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which all subsidiaries’ payables were paid. Prior to filing, CareerCom paid fines to the DOE for
various record-keeping irregularities. These payments were made from its commingled bank
account in order to remain on DOE’s advance payment roster. Over the same period, however,
DOE paid CareerCom $3.3 million in advance funding for its schools.
The court determined that this advance funding constituted new value and, thus, excluded
the fines from being recoverable as preferences. Part of the court’s analysis noted that by paying
the fines, CareerCom and its subsidiaries could continue to receive advance DEPMS funding, rather
than being switched to reimbursement funding, under which the CareerCom entities would have to
advance the grants to students and then seek reimbursement from DEPMS. Reimbursement
funding would have also increased CareerCom’s administrative costs. In re CareerCom Corp., 215
B.R. at 676-77.
The CareerCom court also rejected the Section 548 claims, noting these claims “must fail
because all subsidiaries, directly or indirectly, received new value in exchange for the transfers in
question.” Id. at 678.
The BFP and Zerbo Analysis Do Not Require That
Reasonable Equivalence Be Measured Only By Money
As this court noted in Zerbo, the Supreme Court in BFP either directed or, at a minimum,
gives an imprimatur to courts to consider the “force and function of established institutions of local
government” in analysing reasonably equivalent value under Section 548(a). BFP, 511 U.S. at 538-
40 (internal citations omitted); Zerbo, 397 B.R. at 653.
The record before this Court indicates that New York imposes similar requirements to
considering and approving plea agreements as Florida did at the time Tower was decided. As such,
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the plea bargain process in the criminal context in New York is entitled to the same deference as
this Court gave civil divorce proceedings in Zerbo. See Zerbo, 397 B.R. 642; see also In re Bledsoe,
563 F.3d 1106 (9th Cir. 2009)(holding marital dissolution judgment that results from contested
divorce proceeding conclusively establishes reasonably equivalent value for § 548 purposes, absent
collusion or extrinsic fraud). Said otherwise, when the State of New York compromises the
possible term of incarceration and amount of monetary sanctions for alleged wrongdoing in order to
resolve a criminal proceeding, under the watchful eye of a court of competent jurisdiction, the
resolution of that proceeding should, too, be treated presumptively as being for reasonably
equivalent value. Here, each plea agreement of Debtors was presided over and accepted by the
state court. Each extension of the time for sentencing and for making any payment was also
approved by the state court.
Thus, akin to Zerbo, absent extrinsic fraud or collusion among the sovereign and the
accused, a plea agreement which is approved by a court of competent jurisdiction, and the
performance thereof, conclusively establishes reasonably equivalent value for purposes of Section
548(a). Here, as there is no evidence or even an allegation of any such fraud or collusion, NY is
entitled to summary judgment in its favor on Liberty Mutual’s fraudulent transfer claims.
Section 547 Analysis: Whether a Plea Bargain Resulting in a Reduction in
Jail Time, Fines and Legal Costs Constitutes a Contemporaneous Exchange for New Value
The preference analysis requires a different path than the fraudulent transfer analysis. This
case presents the possibly anomalous result that a debtor could plead guilty, avoid jail, pay his or
her monetary penalties, then file bankruptcy and have the federal, state or local sovereign stripped
of the benefit of its bargain, with no ability to restore the criminal proceeding. However, the issue
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before this Court is not whether that possible result should flow from the Bankruptcy Code; the
question for this Court is what result does derive from the Bankruptcy Code.
NY rests its entire preference defense on Section 547(c)(1), which provides as follows:
(c) The trustee may not avoid under this section a transfer--
(1) to the extent that such transfer was--
(A) intended by the debtor and the creditor to or for whose benefit such
transfer was made to be a contemporaneous exchange for new value given to
the debtor; and
(B) in fact a substantially contemporaneous exchange.
11 U.S.C. § 547(c)(1). New value is defined under section 547(a)(2) as follows:
(2) “new value” means money or money's worth in goods, services, or new
credit, or release by a transferee of property previously transferred to such
transferee in a transaction that is neither void nor voidable by the debtor or
the trustee under any applicable law, including proceeds of such property, but
does not include an obligation substituted for an existing obligation.
11 U.S.C. § 547(a)(2). As the Tower court noted, criminal restitution payments which are not
fraudulent transfers may be preferences. Tower, 260 B.R. at 223. As noted above, NY has
conceded that the March 2008 Payments satisfy each of the preference elements.
The analysis of the new value defense is different for Lynn Citron than for Jeffrey Citron.
Jeffrey Citron made one payment contemporaneous with his sentencing on March 25, 2008, which
was his only transfer. Lynn Citron, however, made one $5,000.00 payment contemporaneous with
her sentencing on December 19, 2007, which was outside the preference window, and one payment
of $9,000.00 on March 25, 2008. To the extent Lynn Citron received new value in exchange for
agreeing to plead guilty, she received that value on December 19, 2007, when her plea was accepted
and her sentence imposed. NY conceded that Lynn Citron’s sentencing date had to be adjourned on
several occasions because she claimed she did not have the funds available to pay the initial
Memorandum Opinion - p. 17
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$5,000.00 installment, which she ultimately paid on December 19, 2007, when she was sentenced.
[adv. dkt item 20, pp. 3-4] However, the new value defense requires not only new value be
received, but that the exchange of the new value for the transfer be intended to be and be in fact a
substantially contemporaneous exchange. See 11 U.S.C. § 547(c)(1).
NY argues that the sentencing of Lynn Citron resulted in a credit transaction, and that the
new value defense still shelters the payments she was to make subsequent to sentencing, as these
were due on a regular schedule. [adv. dkt item 20, pp. 8-10] Even if this Court were to accept that
argument, however, the undisputed facts here are that Lynn Citron did not pay according to the
agreed schedule. The $9,000.00 payment she made on March 25, 2008, represented past due
payments for the payments due for January and February 2008, which were supposed to be monthly
payments of $4,722.22 over the term of her thirty-six months of probation.
Thus, NY cannot prevail on its claim as a matter of law that Lynn Citron’s $9,000.00
payment on March 25, 2008, four (4) months after she was sentenced and received the benefit of
her plea agreement, and well after the dates she agreed to make payments, was in fact a
substantially contemporaneous exchange for new value for the December 19, 2007, plea agreement
for purposes of Section 547(c)(1)(B). Therefore, Liberty Mutual is entitled to recovery of the
$9,000.00 paid by Lynn Citron on March 25, 2008.
The question as to Jeffrey Citron is more difficult. Neither side has provided briefing on
whether agreeing to a prison sentence shorter than what the charged offenses could provide and/or
reduced fines of less than what the charged offenses could provide constitutes money or money’s
worth transferred by NY for purposes of Section 547(c)(2). Further, no summary judgment
evidence is before this Court as to the quantitative value of the reduced prison term and/or reduced
Memorandum Opinion - p. 18
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fines from which this Court could determine the extent to which NY provided new value, if any.
This Court does conclude, however, that if new value was provided under Section 547(a)(2)
incident to Jeffrey Citron’s plea agreement, the $75,000.00 he paid was intended to be a
contemporaneous exchange and was in fact a contemporaneous exchange for purposes of Section
547(c)(1).
Further, neither side has cited the line of cases addressing whether restitution payments are
subject to preference recovery. Several courts have held that payments made pursuant to criminal
restitution obligations are subject to recovery through chapter 5 avoidance actions. See, e.g., Smith
v. Rogers (In re Castelhano), No. 07-1049, 2009 WL 1870956 (Bankr. D.N.H June 24,
2009)(denying motion for summary judgment because “[p]laintiff must prove that the transfers
occurred pre-petition under § 547(b) or post-petition under § 549, and that the transfers were of ‘an
interest of the debtor’ or ‘property of the estate[.]’”); Richardson v. The R.B.K. Corp. (In re Tyler),
379 B.R. 707, 710-11 (Bankr.W.D. Mich. 2007)(finding trustee proved all elements to establish
avoidable preferential transfer under § 547(b) for civil restitution); Bova v. St. Vincent De Paul
Corp. (In re Bova), 272 B.R. 49, 53 (Bankr. D.N.H. 2002)(finding no criminal restitution exception
to an avoidance action); Movitz v. Maricopa County (In re Ball), 257 B.R. 309, 314 (Bankr. D.
Ariz. 2001)(finding that “[u]nlike the discharge exceptions, the preference statute does not treat
criminal fines, penalties, forfeitures or restitution any differently than other debts, except as
specifically set forth in § 547(c).”); Zimmerman v. Itano Farms, Inc. (In re Currey), 144 B.R. 490
(Bankr. D. Idaho 1992)(finding that the beneficiary of a restitution payment was a creditor and
therefore the payment could be recovered as a preference); Bakst v. Atlantic National Bank (In re
Memorandum Opinion - p. 19
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Kayajanian), 27 B.R. 711 (Bankr. S.D. Fla. 1983)(finding that trustee established an avoidable
preference action when debtor executed a promissory note to a bank to comply with a criminal
restitution order).
In Castelhano, a chapter 7 trustee sought to recover certain pre- and post-petition restitution
payments made by the debtor to the victim of his criminal conduct. In support of the victim’s
motion for summary judgment, the debtor asserted that avoidance of the restitution payments would
lead to an inequitable and unfair result for the debtor. The court took a contrary view, and stated
that “excepting restitution obligations from avoidance actions takes money away from the estate
and other unsecured creditors. The consequence would leave the unsecured creditors paying for the
Debtor's criminal actions.” Castelhano, 2009 WL 1870956 at *3.
Again, the issue here is not whether to except criminal fines, penalties and forfeitures from
the strictures of the preference provisions of the Bankruptcy Code. 	That is a legislative function
for Congress to undertake in the crafting of the Bankruptcy Code. For example, Congress made a
policy determination to except certain domestic support obligation payments from avoidance
recovery by enacting Section 547(c)(7), which provides an affirmative defense for preferential
payments made to the extent such payments were bona fide payments for a domestic support
obligation. No similar exception has been made for criminal fines or restitution.
Similarly, the issue is not whether allowing NY to keep a preferential payment would upset
the bargain the State of New York made with Debtors. That, too, is a legislative function for
Congress.
This Court’s analysis should not, however, be read as being without regard for Judge
Memorandum Opinion - p. 20
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Vaughan’s comments in Castelhano—that excluding restitution payments from avoidance recovery
“would leave the unsecured creditors paying for the Debtor’s criminal actions.” Castelhano, 2009
WL 1870956 at *3. As noted, this is not an action to avoid restitution payments.
Similarly, the issue before this Court is not whether avoiding any of the Transfers would
have the effect of rewriting the plea agreements, and converting fines and forfeiture paid to NY
into restitution paid to Liberty Mutual. As the parties here have agreed, Liberty Mutual was one of
the parties defrauded, resulting in the indictment being brought in the first place. The plea
agreements were, in part, to vindicate the wrong done to Liberty Mutual.11 Liberty Mutual has
adduced evidence that it holds in excess of 95% of the filed unsecured claims in this case. 12 Had
the plea agreements been structured to provide direct restitution to Liberty Mutual rather than fines
or forfeitures paid to NY, and this litigation commenced against Liberty Mutual, a similar
avoidance analysis would have to have been conducted.
Thus, a trial is required to determine what the potential maximum prison sentences and
monetary fines would have likely been had Jeffrey Citron not pleaded guilty, and the quantitative
value of avoiding these potential terms of incarceration and fines, in order to determine what money
or money’s worth in goods, services, or new credit Jeffrey Citron received in exchange for his plea
agreement for Section 547(c)(1) and 547(c)(2) purposes.
11 Of the 92 total charged felonies, 10 related to Liberty Mutual.
12 This calculation factors in NY as a secured creditor, as it filed a secured claim, presumably based on Lynn
Citron’s agreement to provide a lien against Debtors residence following a default in payments. Liberty Mutual
asserts actual losses at the hands of the Citrons approaching $10 million.
Memorandum Opinion - p. 21
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Conclusion
Summary judgment should be granted in favor of NY on Liberty Mutual’s fraudulent
transfer claims. Summary judgment should be granted in favor of Liberty Mutual on its claim to
recover the $9,000.00 paid by Lynn Citron on March 25, 2008, as a preference. Summary judgment
should be denied to both parties on the preference claim as to the $75,000.00 paid by Jeffrey Citron.
An Order consistent herewith shall be issued.
Memorandum Opinion - p. 22
____________________________
Alan S. Trust
United States Bankruptcy Judge
Dated: May 6, 2010
Central Islip, New York
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