United States v. Risk

JAMES M. WICKS, United States Magistrate Judge

Bradley Sarnell, United States Department of Justice, Tax Division Attorney for Plaintiff

Drew W. Schirmer, Dennis M. Brown, Suffolk County Attorney, Attorney for Defendants Clerk of the Suffolk County Traffic and Parking Violations Agency, New York and Suffolk County, New York

No appearances for Defendants David Risk, individually and in his capacity as Trustee of The David Risk 2023 Revocable Trust, Ron Holland Advertising, Inc., HSBC Bank USA as successor by merger of The Manhattan Savings Bank, Sustainable Neighborhoods LLC, and Suffolk County Water Authority, New York

REPORT AND RECOMMENDATION

JAMES M. WICKS, United States Magistrate Judge

The United States of America (“Plaintiff”) commenced this action pursuant to 26 U.S.C. §§ 7401 and 7403, and N.Y. Debtor and Creditor Law §§ 273, 275, and 276, against various Defendants who have, or may claim, an interest in parcels of real property located in Suffolk County of which Plaintiff seeks to set aside as fraudulent conveyances. (See generally ECF No. 1.) Plaintiff now seeks a judgment determining that purported transfers of title to this property were fraudulent conveyances, that such transfers be set aside, and that the property shall be sold and proceeds applied to certain outstanding tax liabilities. (Id. at p. 9.)

The Defendants are comprised of David Risk, individually and in his capacity as Trustee of The David Risk 2023 Revocable Trust, Ron Holland Advertising, Inc., HSBC Bank USA as successor by merger of The Manhattan Savings Bank, Sustainable Neighborhoods LLC, Clerk of the Suffolk County Traffic and Parking Violations Agency New York, Suffolk County Water Authority New York, Suffolk County New York, and Town of Brookhaven (collectively, “Defendants”).

Before the Court on referral from the Hon. Diane Gujarati is Plaintiff's motion for default judgment against David Risk, individually and in his capacity as Trustee of The David Risk 2023 Revocable Trust, Ron Holland Advertising, Inc., HSBC Bank USA as successor by merger of The Manhattan Savings Bank, Sustainable Neighborhoods LLC, and Suffolk County Water Authority New York (collectively, “Defaulting Defendants”). (ECF No. 18.) For the reasons that follow, the undersigned respectfully recommends that Judge Gujarati GRANT Plaintiff's motion (ECF No. 18).

FACTUAL BACKGROUND

Plaintiff, operating with authorization of the Secretary of the Treasury and at the direction of the United States Attorney General, commenced this action against Defendants on April 3, 2024 to set aside fraudulent transfers of certain parcels of real property. (ECF No. 1 at p. 1.) This property consists of “the land, along with all improvements, buildings, and appurtenances” at 47 Old Neck Road South, Center Moriches, New York 11934 (“Property”) and was “known and designated as and by Plot D and Lots 49 and 50.” (Id. at ¶ 12.)

Pursuant to 26 U.S.C. § 7403(a), “the Attorney General or his delegate, at the request of the Secretary,” may bring an action in a United States District Court to enforce a lien of the United States where there has been “a refusal or neglect to pay any tax, or to discharge any liability in respect thereof ....”.

This Property was subject to multiple conveyances - the earliest being August 14, 1980 and the most recent being May 25, 2023. (Id. at ¶¶ 13, 18.) Specifically, on August 14, 1980, John James O'Malley and Virginia Rose O'Malley, through a Bargain and Sale Deed, conveyed the Lot 50 portion of the Property to J. Ronald Holland (“Holland”), with the deed being recorded on September 11, 1980. (Id. at ¶ 13.) Subsequently, Robert Henzler conveyed Lot 49 and Plot D to Holland on July 14, 1986, through a Bargain and Sale Deed which was recorded on October 7, 1986. (Id. at ¶ 14.) On June 7, 2007, Holland purported to convey, by Warranty Deed, title to the entire Property to himself and David Risk (“Risk”) as joint tenants with right of survivorship. (Id. at ¶ 15.) Such deed was recorded on August 7, 2007. (Id.) Then, by Warranty Deed dated September 3, 2014 and recorded on September 16, 2014, Holland and Risk purported to convey title to the entire Property to Risk with a life estate reserved for Holland. (Id. at ¶ 16.) Following Holland's death on May 27, 2022 (id. at ¶ 17), Risk purported to convey title to the Property to Risk in his capacity as Trustee of the David Risk 2023 Revocable Trust. (Id. at ¶ 18.) This deed was recorded on May 25, 2023. (Id.)

According to the Complaint, all deeds were recorded with the Suffolk County Clerk's Office. (See ECF No. 1 at ¶¶ 13-16.)

Plaintiff specifically opposes the conveyances made on June 7, 2007 as well as September 3, 2014. At the time of these two particular transfers, as alleged, Holland “had accrued substantial income tax liabilities to the Internal Revenue Service” (“IRS”) for the income tax years 1983 and 1984, along with “additional penalties and interest that accrued and continue to accrue on those liabilities.” (Id. at ¶¶ 26-27.) Such large sums owed was a result of Holland's participation in a partnership, McMahan, Brafman, Morgan & Co. and what the IRS deemed a “tax motivated transaction.” Indeed, in a decision entered January 10, 2007, the United States Tax Court in In re McMahon, determined that substantial adjustments needed to be made at the partner level and subsequently disallowed a number of reported losses pertaining to Holland. (See ECF No. 18 at p. 7 (referencing Holland I, at ECF No. 42-8.)) As alleged, Holland's share of losses owed amounted to $1.1 million. (Id.)

As Plaintiff accurately points out, the United States commenced a proceeding on April 26, 2019 to collect Holland's tax liabilities for the 1983 and 1984 tax years. See United States v. Holland, No. 2:19-cv-02456-DJ-JMW (E.D.N.Y.) (hereinafter “Holland I”). This action remains ongoing and most recently includes a motion by the United States to substitute Risk in for the deceased Holland. (See Holland, ECF Nos. 152, 153.)

The U.S. Tax Court entered a stipulated decision in In re McMahon, an action brought by the partnership against the Commissioner of the Internal Revenue Service, finding that Holland's underpayment of taxes while a partner was a “tax motivated transaction” and imposing subsequent penalties. In re McMahon, No. 21790-91.

On April 7, 2008, a delegate of the Secretary of the Treasury made assessments against Holland for federal incomes taxes and accuracy penalties for the 1983 and 1984 tax periods. (Id. at ¶ 19.) Holland's assessed amount for the 1983 tax period was $57,247.00, while his assessed amount for the 1984 period was $60,947.00. (See id.)

Furthermore, Alex Lau, a Revenue Officer Advisor at the IRS tasked with reviewing taxpayer records and preparing declarations of owed balances, concluded that Holland's outstanding income tax liabilities for the 1983 and 1984 tax years owed to Plaintiff as of July 17, 2024 was $2,802,889.85. (ECF No. 18-1 pp. 1-2.) Such a figure accounts for “all payments, credits, abatements, statutory accruals, and costs.” (Id. at p. 2.) Moreover, according to Lau, since July 17, 2024, statutory additions continue to accrue to date, including interest pursuant to 26 U.S.C. §§ 6601, 6621, 6622. (Id.) Despite repeated notices to pay these liabilities, Holland “failed, neglected, or refused to fully pay the liabilities”. (ECF No. 1 at ¶¶ 20-21.) As such, federal tax liens arose and attached to Holland's interest in the Property. (Id. at ¶ 22.)

Lau arrived at this figure after determining that because Holland's tax liabilities stemmed from what the IRS deems a “tax motivated transaction” under 26 U.S.C. § 6621(c)(3) in effect for 1983 and 1984, interest accrued on Holland's account at 120 percent of the annual interest rate. (ECF No. 18-1 at p. 2.)

As a result of these unpaid liabilities, Plaintiff avers that the June 7, 2007 and September 3, 2014 conveyances violated various provisions of the New York Debtor and Creditor Law. Namely, such conveyances were “made without fair consideration while [Holland] was insolvent” (id. at ¶ 28), “made without fair consideration and rendered [Holland] insolvent” (id. at ¶ 29), and were “made without fair consideration at a time when [Holland] intended to, or believed that he would, incur debts beyond his ability to pay.” (Id. at ¶ 30.) Moreover, these transfers were supposedly fraudulent as they were made by Holland “with actual intent to hinder, delay, or defraud his creditors” as evidenced by his transfer for insufficient consideration to Risk who had a close relationship with Holland, by Holland's continued use of the Property after he transferred his interest, and by his course of action to transfer his interest despite his awareness of the outstanding tax liabilities owed to the IRS. (Id. at ¶ 31.)

Accordingly, Plaintiff seeks to have these two transfers “set aside, and to have the Court order the transfers of the Property set aside for the benefit of the United States so that the United States can enforce its federal tax liens against the Property.” (Id. at ¶ 33.)

PROCEDURAL BACKGROUND

Plaintiff initially filed the Complaint on April 3, 2024 (ECF No. 1) and subsequently received no response from all Defaulting Defendants after the various summonses were returned executed (see ECF Nos. 7, 10, 11, 14, 15). Prior to serving Risk, Plaintiff filed a motion pursuant to N.Y. C.P.L.R. § 308(5) for alternative service (ECF No. 8), specifically requesting to serve Risk via his email address and by first-class mail to the address of the Property. Indeed, Plaintiff argued that service upon Risk was “impracticable” as Risk was not residing at the address listed in a public records search, Risk refused to comply with court order's in Holland I demanding he update his address, and his most recent filings in Holland I stated he lives in the “Caribbean Region.” (See Holland I at ECF Nos. 136, 138.) The undersigned issued a Memorandum Order granting the motion and permitting alternative service pursuant to the CPLR. (See ECF No. 13.)

Upon all Defaulting Defendants failure to respond to the Complaint, Plaintiff requested a certificate of default against them (ECF No. 16) and the Clerk of the Court entered default against the Defaulting Defendants shortly after on July 15, 2024. (ECF No. 17.) Following the undersigned's Electronic Order dated July 19, 2024 directing Plaintiff to move for default judgment in light of the Clerk's entry of default, Plaintiff filed the present motion. (See ECF No. 18.)

Upon the undersigned's preliminary review of Plaintiff's motion, however, the Court found that Plaintiff failed to submit “a certificate of service stating that all documents in support of the request for default judgment including the ‘Clerk's Certificate of Default' and any papers required by this rule, have been personally served on, or mailed to the last known residence (for an individual defendant) or business address (for other defendants) of, the party against whom default judgment is sought in accordance with E.D.N.Y. Local Civ. R. 55.2(a)(3).” (Electronic Order dated August 14, 2024.) Plaintiff has since filed the missing document. (ECF No. 19.) Furthermore, in its review of the submitted documents, the undersigned directed Plaintiff to supplement its motion by identifying how the agents who received service of process as indicated in the “Returns of Service” for Defaulting Defendants Sustainable Neighborhoods LLC, HSBC Bank USA, and Suffolk County Water Authority, New York, respectively, were agents statutorily authorized to accept service for those corporate entities. (Electronic Order dated December 17, 2024.) Plaintiff has since provided such supplemental proof. (ECF No. 20.)

In its motion, rather than seeking damages, Plaintiff seeks to set aside fraudulent transfers of the Property in order to satisfy Holland's unpaid tax liabilities. (ECF No. 18 at p. 11.) Particularly, Plaintiff requests a judgment: (i) determining that the June 7, 2007 and September 3, 2014 transfers were fraudulent conveyances, that such transfers be set aside, and that the Property shall be sold and the proceeds applied to satisfy Holland's tax liabilities (ECF No. 1 at p. 9); and (ii) a judgment against all Defaulting Defendants that “such parties have no right, title, claim, lien, or interest in the [Property] or the proceeds of the sale of the Property.” (ECF No. 18 at p. 2.)

THE LEGAL FRAMEWORK

Plaintiff's motion for default judgment was filed on April 3, 2024 and remained pending through July 1, 2024, which means that the newly imposed Local Rules of this District apply.There is a two-step process for the granting of default judgments under Fed.R.Civ.P. 55. First, as here, the Clerk of the Court enters default when a party fails to plead or otherwise defend the action. See Fed.R.Civ.P. 55(a); see also E.D.N.Y. Local R. 55.1(b) and 55.2. After the clerk's certificate of default is issued and posted on the docket, a party may apply for entry of a default judgment. Fed.R.Civ.P. 55(b); see also E.D.N.Y. Local R. 55.2. The decision to grant a motion for default is left to the discretion of the district court. United States v. Dougherty, No. 15-cv-554 (ADS) (AKT), 2016 WL 5112063, at *3 (E.D.N.Y. Aug. 1, 2016), report and recommendation adopted, 2016 WL 4705549 (E.D.N.Y. Sep. 7, 2016). Given that the Clerk has already entered default against the Defaulting Defendants (ECF No. 17), the Court is primarily concerned with Plaintiff's compliance with E.D.N.Y. Local R. 55.2.

See E.D.N.Y. Local R. 1.1 (“These Local Civil Rules take effect on July 1, 2024 (the “Effective Date”) and govern actions pending or filed on or after that date. For actions pending on the Effective Date, if fewer than 14 days remain to perform an action governed by these Rules, the provisions of the previous Local Rules effective on June 30, 2024 will govern.”).

A default constitutes an admission of all well-pleaded factual allegations in the complaint, except those relating to damages. See Greyhound Exhibitgroup, Inc. v. E.L.U.L. Realty Corp., 973 F.2d 155, 158 (2d Cir. 1992). However, a plaintiff must still demonstrate that the allegations set forth in the Complaint state valid claims. See City of N.Y. v. Mickalis Pawn Shop, LLC, 645 F.3d 114, 137 (2d Cir. 2011) (suggesting that “a district court is ‘required to determine whether the plaintiff's allegations establish the defendant's liability as a matter of law'” prior to entering default judgment (quoting Finkel v. Romanowicz, 577 F.3d 79, 84 (2d Cir. 2009) (alterations omitted)). The Court must therefore ensure: (i) Plaintiff satisfied all the required procedural steps in moving for default judgment, see Local Civ. R. 55.2; and (ii) Plaintiff's allegations, when accepted as true, establish liability as a matter of law. See Finkel, 577 F.3d at 84.

DISCUSSION

I. Procedural Compliance

Local Civil Rule 7.1 requires motions to include a notice of motion, a memorandum of law, and supporting affidavits or exhibits containing any necessary factual information for the decision of the motion. E.D.N.Y. Local R. 7.1(a)(1) - (3). Local Civil Rule 55.2 requires that a party moving for default judgment append to its application an affidavit or declaration demonstrating that (A) the Clerk has entered default against the Defendants, (B) the movant has complied with the SCRA, and (C) that the individual defaulting defendant is not a minor or incompetent person, as well as all papers required by E.D.N.Y. Local R. 7.1 (supra), and a proposed judgment and certificate of service that all documents in connection with the motion for default judgment has been personally served on or mailed to the defaulting defendants' residence or business address. E.D.N.Y. Local R. 55.2(a)(1)-(3).

Recently added under the Local Rules, is that the moving party “must file a statement of damages, sworn or affirmed to by one or more people with personal knowledge, in support of the request, showing the proposed damages and the basis for each element of damages, including interest, attorney's fees, and costs.” E.D.N.Y. Local R. 55.2(c). Here, Plaintiff is not seeking damages, “but instead is seeking to set aside fraudulent transfers of real property in order to satisfy [Holland's] unpaid tax liabilities.” (ECF No. 18 at p. 11.) To the extent such tax amounts must be proven, Alex Lau's affidavit establishes the amount of assessments and balance of Holland's tax liabilities. (See ECF No. 18-1 at pp. 1-3.)

With respect to the non-military affidavit, before a default judgment can be entered for the plaintiff, the SCRA commands that the Court “require the plaintiff to file with the court an affidavit . . . stating whether or not the defendant is in military service and showing necessary facts to support the affidavit.” 50 U.S.C. App. § 521; see also ADI Glob. Distribution v. Green, No. 20-CV-03869 (AMD) (JMW), 2023 WL 3355049, at *3 (E.D.N.Y. Apr. 24, 2023) (same), report and recommendation adopted, 2023 WL 3346499 (E.D.N.Y. May 10, 2023). “The nonmilitary affidavit must be based not only on an investigation conducted after the commencement of an action or proceeding but also after a default in appearance by the party against whom the default judgment is to be entered.” Apex Mar. Co. v. Furniture, Inc., No. 11-CV-5465 (ENV) (RER), 2012 WL 1901266, at *1 (E.D.N.Y. May 18, 2012).

Here, as to Risk, the sole individual Defaulting Defendant, Plaintiff submits the affidavit of Bradley A. Sarnell who conducted a search of the “Department of Defense Manpower Data Center” which revealed that Risk was not a member of the military. (ECF No. 18-2 at p. 1.) This complies with the SCRA. See McLaugulin v. Onanafe Management Solutions LLC, No, 22-CV-6792 (PKC) (MMH), 2024 WL 4184485, at *6 (E.D.N.Y. Sept. 14, 2024) (noting the SCRA requirement is complied with where plaintiff files a declaration stating that an individual defaulting defendant was not a member of the military after performing a search of the Department of Defense database). Furthermore, the SCRA requirement is inapplicable to the remaining Defaulting Defendants as they are corporations and thus cannot be members of the military. (See ECF No. 18-2 at p. 2); see also Guanglei Jiao v. Shang Shang Qian Inc., No. 18-CV-5624 (ARR) (VMS), 2020 WL 6370148, at *9 (E.D.N.Y. Aug. 11, 2020), report and recommendation adopted, 2020 WL 5105063 (E.D.N.Y. Aug. 31, 2020) (only applying service members civil relief act to the individual defendants).

Additionally, Plaintiff's motion against the Defaulting Defendants complies with Local Rule 7.1 and Local Rule 55.2(a)(2) because it includes (1) a notice of motion (ECF No. 18 at p. 1); (2) a memorandum of law (ECF No. 18 at p. 3); (3) affidavits and exhibits to support Plaintiff's contentions (see ECF Nos. 18-1; 18-2); and (4) a proposed order detailing the proposed judgment. (ECF No. 18-9.) The motion further complies with Local Rule 55, as Plaintiff properly attached and submitted a declaration affirming that the Certificate of Default was entered by the Court on July 15, 2024 (ECF No. 18-4) and a declaration that Risk was not a minor or incompetent person. (ECF No. 18-2 at p. 1.) Plaintiff also filed an affidavit of service of the requisite documents as to the Defaulting Defendants via first class mail. (ECF No. 19.)

Like under the SCRA, because the remaining Defaulting Defendants are not individuals, they cannot be a “minor or incompetent person”. (ECF No. 18-2 at p. 2)

Accordingly, the undersigned finds that Plaintiff's Motion for Default Judgment is procedurally proper and now turns to the merits of the Motion.

II. Applying the Default Factors

In evaluating whether to grant a default judgment, courts consider: (i) whether the defendant's default is willful; (ii) whether the defendant has a meritorious defense to plaintiff's claims; and (iii) the level of prejudice the non-defaulting party would suffer if the motion for default judgment is denied. See Trustees of Empire State Carpenters Annuity, Apprenticeship, Lab. Mgmt. Co-op., Pension & Welfare Funds v. Flooring Experts, Inc., No. 12-CV-6317 (ADS)(AKT), 2013 WL 4042357, at *2 (E.D.N.Y. Aug. 8, 2013), report and recommendation adopted, 2013 WL 4761151 (E.D.N.Y. Sept. 3, 2013).

Consideration of these three factors leads to a recommendation that an entry of default judgment is appropriate where, as here, Defendants have wholly failed to appear and present any defense, and Plaintiff is left with no further steps to take to secure relief. ADI Glob. Distribution, 2023 WL 3355049, at *4.

III. Jurisdiction

A. Personal Jurisdiction

“[B]efore a court grants a motion for default judgment, it may first assure itself that it has personal jurisdiction over the defendant.” Sinoying Logistics Pte Ltd. v. Yi Da Xin Trading Corp., 619 F.3d 207, 213 (2d Cir. 2010). Since a judgment rendered against a defendant over whom the Court does not have personal jurisdiction can be vacated pursuant to Rule 60(b)(4), it “‘preserves judicial economy for the court to assess personal jurisdiction from the outset and thereby avoid rendering a void judgment.'” ADI Glob. Distribution, 2023 WL 3355049, at *3 (citation omitted). Here, a sua sponte assessment of personal jurisdiction is appropriate because the Defaulting Defendants have failed to appear in this action. Id.

For a court to exercise personal jurisdiction: (i) a plaintiff must complete proper service of process, (ii) there must be a statutory basis for personal jurisdiction that renders such service of process effective, and (iii) the exercise of personal jurisdiction must comport with constitutional due process principles. See Licci ex rel. Licci v. Lebanese Canadian Bank, SAL, 673. F.3d 50, 60-61 (2d Cir. 2012).

Rule 4(c) requires that a summons must be served with a copy of the Complaint and by a person who is at least 18 years old and not a party to the case. See Fed.R.Civ.P. 4(c). Additionally, Rule 4(e)(1) permits service on individuals to be made “pursuant to the law of the state in which the district court is located. Under New York law, personal service may be effected on an individual by ‘delivering the summons within the state to a person of suitable age and discretion at the [person's] actual place of business . . . and by mailing the summons to the person to be served at his or her last known residence or . . . actual place of business.'”. Upon a showing of impracticability to serve under these prescribed methods, New York law permits alternative service upon an individual. See N.Y. C.P.L.R. § 308(5). Here, as noted supra, the undersigned permitted Plaintiff to serve Risk via alternate means (see ECF No. 13), namely by emailing Risk on his email address used in Holland I, and by first-class mail to the Property's address. Considering Plaintiff served Risk through both of these alternate methods, service was proper as to the individual Defaulting Defendant. (ECF No. 14); see Zavala v. Top Shelf Elec. Corp., No. 20 Civ. 947 (PAE) (KNF), 2021 WL 3159849), at *1, *3 (S.D.N.Y. June 14, 2021) (finding service by the “combination” of certified mail and email comported with due process).

Further, Rule 4(h) provides that a domestic or foreign corporation may be served by “delivering a copy of the summons and of the complaint to an officer, a managing or general agent, or any other agent authorized by appointment or by law to receive service of process ....” See Fed.R.Civ.P. 4(h)(1)(B); Hartford Fire Ins. Co. v. Queens Cnty. Carting, Inc., No. 20-CV-01844 (NSR), 2022 WL 254367, at *2 (S.D.N.Y. Jan. 27, 2022) (quoting Fed.R.Civ.P. 4(h)(1)(A); (e)(1)) (“Under Rule 4(h)(1)(A), a corporation may be served ‘in the manner prescribed by Rule 4(e)(1) for serving an individual,' which includes ‘following state law for serving a summons in an action brought in courts of general jurisdiction in the state where the district court is located or where service is made[.]'”). Under New York law, service on a corporation may be made by “personally delivering to and leaving with the secretary of state or a deputy, or with any person authorized by the secretary of state to receive such service, at the office of the department of state in the city of Albany, duplicate copies of such process together with the statutory fee” and “shall be complete when the secretary of state is so served.” N.Y. Bus. Corp. Law § 306(b)(1).

Here, Ron Holland Advertising was properly served through the New York Secretary of State as two copies of the summons and Complaint were delivered to Authorized Agent Nancy Dougherty (ECF No. 7). Furthermore, as originally submitted, “Gillian Butler Customer Service as Clerk” received service for HSBC Bank USA (ECF No. 10), “Nesh Nurse as Administration” received service for Sustainable Neighborhoods LLC (ECF No. 11), and “Bilal Malik as Attorney” received process for Suffolk County Water Authority New York (ECF No. 15). As indicated supra, Plaintiff failed to offer proof that such agents were registered agents or agents authorized by law to receive such process, thereby prompting the undersigned to direct Plaintiff to file supplemental proof that such agents were authorized to accept service. (Electronic Order dated December 17, 2024.)

Plaintiff subsequently submitted three separate declarations, each establishing that proof upon these individuals was procedurally and statutorily proper. Particularly, Bilal Malik, as attorney, declared that he was “an agent authorized by appointment” under the CPLR to accept service. (ECF No. 20-1 at ¶ 2.) Moreover, the Managing Associate General Counsel for HSBC Bank, Meredith Friedman, declared that Gillian Butler, as a representative, was statutorily authorized to accept service. (ECF No. 20-2 at ¶ 2.) Lastly, Scott Kohanowski, counsel for Sustainable Neighborhoods LLC, stated that Moneshia Nurse, as Operation Associate, accepts service for this corporate entity as “she staffs the reception desk in [their] office”. (ECF No. 20-3 at ¶ 2.) Accordingly, service was properly effectuated to all corporate Defaulting Defendants.

Here, because the United States is Plaintiff, and because this action involves enforcement of the United States' internal revenue and tax laws, this Court has subject matter jurisdiction under federal question jurisdiction. See 28 U.S.C. §§ 1331, 1340, 1345; see also 26 U.S.C. §§ 7402, 7403. In cases arising under federal question jurisdiction, where, like here, the statutes conferring jurisdiction do not contemplate nationwide service of process, personal jurisdiction is determined by the law of the state in which the district court sits. See Pettenato v. Beacon Health Options, Inc., 425 F.Supp.3d 264, 277 (S.D.N.Y. 2019). Thus, the Court first looks to New York law for the purpose of determining personal jurisdiction over the Defaulting Defendants in New York. Then, the Court evaluates whether the “exercise of jurisdiction under state law satisfies federal due process requirements of ‘fair play and substantial justice.'” Mortg. Funding Corp. v. Boyer Lake Pointe, LLC, 379 F.Supp.2d 282, 286 (E.D.N.Y. 2005) (quoting Burger King Corp. v. Rudzewicz, 471 U.S. 462, 477 (1985)). Under New York law there are two routes for a court to exercise personal jurisdiction. The Court considers each in turn below.

i. General Jurisdiction

Ordinarily, the Court considers this issue in light of the Supreme Court's pronouncements in Daimler and Goodyear, where the Court stated that other than in the “exceptional case,” the exercise of general jurisdiction is confined to a corporation's “place of incorporation and principal place of business.” See Aybar v. Aybar, 177 N.E.3d 1257, 1265 (2021) (citing Daimler AG v. Bauman, 571 U.S. 117 (2014)); Goodyear Dunlop Tires Operations, S.A. v. Brown, 564 U.S. 915 (2011)). Here, the Complaint does not indicate where any of the corporate Defaulting Defendants are incorporated or where they maintain their principal places of business. The undersigned, therefore, recommends a finding that this Court lacks general jurisdiction over the corporate Defaulting Defendants.

Furthermore, “[f]or general jurisdiction over an individual to comport with due process, Defendants must be domiciled in New York, served in New York, or have otherwise consented to the court's jurisdiction.” Reich v. Lopez, 38 F.Supp.3d 436, 455 (S.D.N.Y. 2014). Here, Risk is not domiciled in New York, but rather has an unknown whereabouts, currently asserting he resides in “the Caribbean Region”. (See ECF No. 13 at p. 3.) Moreover, as noted supra, Risk was not served while he was in New York, but rather was served through alternate means-his email address and at the Property. Lastly, there is no indication that Risk consented to this Court's jurisdiction. Accordingly, the undersigned recommends a finding that the Court does not have general jurisdiction over Risk. Notwithstanding, the Court turns to an analysis of whether the court may exercise jurisdiction under New York's long-arm statute.

ii. Specific Jurisdiction

Pursuant to New York's long-arm statute, CPLR 302(a), a court “may exercise personal jurisdiction over any non-domiciliary . . . who in person or through an agent . . . transacts any business within the state,” as long as the Plaintiff's “cause of action aris[es] from” that “transact[ion].” CPLR 302(a). This is known as specific jurisdiction and sometimes referred to as long-arm jurisdiction. To exercise specific jurisdiction through New York's long-arm statute, “two requirements must be met: (1) The defendant must have transacted business within the state; and (2) the claim asserted must arise from that business activity.” Sole Resort, S.A. de C.V. v. Allure Resorts Mgmt., LLC, 450 F.3d 100, 103 (2d Cir. 2006) (citation omitted).

“To determine whether a party has ‘transacted business' in New York, courts must look at the totality of circumstances concerning the party's interactions with, and activities within, the state.” D.H. Blair & Co. v. Gottdiener, 462 F.3d 95, 105 (2d Cir. 2006). Courts consider the following factors:

(i) whether the defendant has an on-going contractual relationship with a New York corporation; (ii) whether the contract was negotiated or executed in New York and whether, after executing a contract with a New York business, the defendant has visited New York for the purpose of meeting with parties to the contract regarding the relationship; (iii) what the choice-of-law clause is in any such contract; and (iv) whether the contract requires franchisees to send notices and payments into the forum state or subjects them to supervision by the corporation in the forum state.

Sunward, Inc., 362 F.3d 17 at 22 (quotations omitted) (internal citations omitted).

“Section 302(a) also requires that the claims asserted ‘aris[e] from any of the acts' that provide the basis for exercising jurisdiction.” Sea Tow Servs. Int'l, Inc v. Pontin., 472 F.Supp.2d 349, 360 (E.D.N.Y. 2007) (quoting CPLR 302(a)). “[A] claim ‘aris[es] from' a particular transaction when there is ‘some articulable nexus between the business transacted and the cause of action sued upon.'” Id. (quoting Sole Resort, 450 F.3d at 103).

Here, as it relates to Risk, Plaintiff alleges that property located in New York was fraudulently conveyed between Holland and Risk. Notably, Risk was a joint transferee in the first challenged conveyance-June 7, 2007-and was the sole transferee of the entire Property in the next challenged conveyance-September 3, 2014. As such, both transactions pertaining to this cause of action involved Risk, and thus there exists a nexus between the transfers and the cause of action sued upon. See Licci, 673 F.3d 50 (noting there must be a direct relation between the cause of action and the in-state conduct). Moreover, pursuant to N.Y. C.P.L.R. § 302(a)(2), a court may exercise personal jurisdiction over any non-domiciliary who “commits a tortious act within the state.” Here, fraudulent conveyance is a tort, and such a tort occurred within New York as evidenced by the Property fraudulently conveyed being located in Suffolk County and the deeds documenting these transactions being recorded in Suffolk County. See State Farm Mut. Auto. Ins. Co. v. Grafman, No. 04-CV-2609 (NG) (SMG), 2017 WL 9482093, at *8 (E.D.N.Y. June 12, 2017) (noting fraudulent conveyance is a “species of tort” under Section 302(a)(2), thereby conferring personal jurisdiction under New York's long-arm statute for those subject to fraudulent transfer transactions), report and recommendation adopted, 2017 WL 4217122 (E.D.N.Y. Sept. 21, 2017).

As to the corporate Defaulting Defendants, Plaintiff notes that, in strict adherence with 26 U.S.C. § 7403(b), these entities “ha[ve], or may claim, an interest in the real property of which the United States seeks to set aside fraudulent conveyances.” (ECF No. 1 at ¶¶ 5-7, 9). Likewise, in its Memorandum of Law, Plaintiff states that it named the corporate Defaulting Defendants because “they may have liens against [Holland] and/or [Risk] that could encumber the Property.” (ECF No. 18 at p. 10.) Courts in this District routinely find that defendants are properly named in an action under § 7403 where they have or may have claims of interest in the subject property. See, e.g., United States v. Palapoli, No. CV 09-3482 (ADS) (WDW), 2011 WL 6961604, at *1 (E.D.N.Y. Nov. 4, 2011), report and recommendation adopted, 2011 WL 6961663 (E.D.N.Y. Dec. 8, 2011) (noting four defendants were “named as parties to this action because of their potential claim to an interest in the Property upon which the United States seeks to foreclosure its liens.”); Dougherty, 2016 WL 5112063, at *5-6. Despite being properly named parties to the suit, this Court must still analyze whether it possesses in personam jurisdiction over these corporate Defaulting Defendants.

26 U.S.C. § 7403(b) provides that in actions to enforce tax liabilities, “[a]ll persons having liens upon or claiming any interest in the property involved in such action shall be made parties thereto.” (emphasis added).

Here, there exists a clear nexus between the cause of action-recovery of tax liabilities from the Property-and the business transacted by the corporate Defaulting Defendants in obtaining an interest in the Property. As such, because Plaintiff seeks to enforce tax liabilities against the Property to which the corporate Defaulting Defendants have or may claim an interest, Plaintiff's claim relates to the corporate Defaulting Defendant's forum-related activity. See In re Kuwait Ports Authority, No. 1:20-MC-00046-ALC, 2021 WL 5909999, at *7 (S.D.N.Y. Dec. 13, 2021) (“A single transaction would be sufficient to fulfill [the minimum contacts] requirement . . . so long as the relevant cause of action also arises from that transaction.”) (citation omitted); see also Elsevier, Inc. v. Grossman, 77 F.Supp.3d 331, 346 (S.D.N.Y. 2015).

“The exercise of long arm jurisdiction over Defendants by a New York court must also satisfy constitutional due process standards.” Sunward Elecs., Inc. v. McDonald, 362 F.3d 17, 24 (2d Cir. 2004). To satisfy the requirements of due process, the Defendant's activities in New York must constitute “some act by which the defendant purposefully avails itself of the privilege of conducting activities within the forum States, thus invoking the benefits and the protection of its laws.” Burger King, 471 U.S. at 475. This involves a two-fold inquiry: (1) “minimum contacts,” and (2) “reasonableness.” Sea Tow Servs. Int'l, 472 F.Supp.2d at 360.

First, as to Risk, the Court is satisfied that Plaintiff's claims arise out of Risk's contacts with New York and support specific jurisdiction because this lawsuit stems from those very conveyances involving the Property that Risk was a direct party to-conveyances which are at the forefront of this lawsuit. Second, the exercise of specific jurisdiction over Risk is reasonable. The factors supporting this conclusion include:

(1) the burden that the exercise of jurisdiction will impose on the defendant; (2) the interests of the forum state in adjudicating the case; (3) the plaintiff's interest in obtaining convenient and effective relief; (4) the interstate judicial system's interest in obtaining the most efficient resolution of the controversy; and (5) the

shared interest of the states in furthering substantive social policies.

Id. (quoting Asahi Metal Indus. Co. v. Sup. Ct. of Cali., Solano Cty., 480 U.S. 102, 113 (1987)).

Here, Plaintiff brought this case in New York and Risk's supposed fraudulent transfers took place in New York, the deeds were recorded in New York, and the property subject of this entire lawsuit is situated in New York. The Court finds the remaining factors to be neutral, and given the Risk's default, it has not been provided, nor does it find, any reason why exercise of specific jurisdiction over Risk would be unreasonable. Similarly, as to the corporate Defaulting Defendants, their interest and claims in property located in New York evidence that they have availed themselves of conducting business with New York, to the extent that is it not unreasonable for them to anticipate being haled into court here to adjudicate those very rights to a claim in this Property. See In re Kuwait, 2021 WL 5909999, at *7; see also 56 Willoughby A LLC v. Zhang, No. 20-CV-3973-CBA-SJB, 2021 WL 3622084, at *6 (E.D.N.Y. July 27, 2021). Accordingly, the undersigned recommends a finding that the Court has specific personal jurisdiction over the corporate Defaulting Defendants too.

In the event the District Judge concludes that the Court does not have personal jurisdiction over the corporate Defaulting Defendants, the undersigned nonetheless recommends a finding that this Court exercise in rem jurisdiction.

In rem jurisdiction concerns the court's ability to determine title to, or the status of, property physically located within the court's jurisdiction. See Bloom v. Emden, No. 19-CV-10155 (RA), 2022 WL 799096, at *5 (S.D.N.Y. Mar. 16, 2022). As such, a court's authority pursuant to In rem jurisdiction stems directly from adjudicating the ownership or other rights with respect to the property and the judgment is effective against all persons with an interest in the property. In re Globo Comunicacoes e Participacoes S.A., 317 B.R. 235, 251 (S.D.N.Y. 2004) (“A court, in exercising its in rem jurisdiction alone, is constitutionally empowered to adjudicate rights to property only when such property is legally or physically located within its own jurisdiction.”) (citation omitted). Ordinarily, this form of jurisdiction is invoked where one or more defendants with potential claims to property are nonresidents or jurisdiction over them cannot be secured in the forum state. See Bloom, 2022 WL 799096, at *6 (noting in rem jurisdiction “represents an alternative to in personam jurisdiction”). In order for a court to exercise In rem jurisdiction, it is still necessary that certain minimum contacts with the property exist in order to satisfy constitutional due process requirements. Libutti v. United States, 179 F.3d 114, 123 (2d Cir. 1999) (indicating the standards set forth International Shoe extend to In rem jurisdiction cases).

The Supreme Court has stated, in the context of minimum contacts for in rem jurisdiction, the “presence of property in a State may bear on the existence of jurisdiction by providing contacts among the forum State, the defendant, and the litigation.” Shaffer v. Heitner, 433 U.S. 186, 208 (1977). Moreover, as here, “when claims to the property itself are the source of the underlying controversy between plaintiff and the defendant, it would be unusual for the State where the property is located to not have jurisdiction” as such claim to property within the State “would normally indicate that [defendants] expected to benefit from the State's protection of his interest.” Id.

Here, the Property, which is located in New York, is at the forefront of the “underlying controversy.” Furthermore, this matter pertains to alleged fraud committed upon property located within New York's borders. New York, thus, has a strong interest in adjudicating this matter as it pertains to the rights and interests associated with, or claimed in, this Property. See Bloom, 2022 WL 799096, at *6 (“The fact that defendants assert claims to property within the forum indicates that they expect to benefit from the protection of the forum's laws.”). Accordingly, the corporate Defaulting Defendants interest in the Property located in New York “may bear on the existence of jurisdiction by providing contacts” to New York, themselves, and the action which stems directly from the Property itself.

Therefore, in the event the District Judge finds that personal jurisdiction does not exist over the corporate Defaulting Defendants, the undersigned recommends a finding that this matter may proceed forward as to the corporate Defaulting Defendants as there exists In rem jurisdiction over them.

IV. Liability

When a defendant defaults, the court “is required to accept all of the [plaintiff's] factual allegations as true and draw all reasonable inferences in its favor[.]” Finkel, 577 F.3d at 84. A defendant's default is considered an admission of all of well-pleaded allegations of liability. See Greyhound Exhibitgroup, Inc., 973 F.2d at 158.

A. Statute of Limitations

Before addressing the merits of Plaintiff's claims, the Court must determine if Plaintiff brought its claims in a timely manner. 26 U.S.C. § 6502 states that an assessed tax may be collected by “levy or by a proceeding in court, but only if the levy is made or the proceeding begun . . . within 10 years after the assessment of the tax ....”. Plaintiff argues that although the statutory period is ten years following tax assessment, the present action is timely pursuant to 26 U.S.C. § 6502 because the statute of limitations for both tax years (1983 and 1984) were tolled in three separate instances. (ECF No. 1 at ¶ 34.)

First, Plaintiff alleges the statute of limitations was tolled “during collection due process proceedings pursuant to 26 U.S.C. § 6330(e)(1).” (Id. at ¶ 34.) Indeed, 26 U.S.C. § 6330(e)(1) states in relevant part that if a hearing is requested, “the levy actions which are the subject of the requested hearing and the running of any period of limitations under section 6502 . . . shall be suspended for the period during which such hearing, and appeals therein, are pending.” Plaintiff avers that because Holland submitted a “Collection Due Process hearing request” on October 30, 2008 that was resolved on June 3, 2009, the statutory period of limitations for both tax years was extended at least 216 days. (Id. at ¶ 35.)

Second, Plaintiff contends that the statute of limitations was tolled “while any installment agreement request was pending and for 30 days after a rejection or after termination following acceptance pursuant to 26 U.S.C. § 6331(k)(2) and (3) (but not while an installment agreement is active and in effect).” (ECF No. 1 at ¶ 34.) Plaintiff specifically avers that Holland entered into an installment agreement with the IRS on August 12, 2011 which was terminated on February 11, 2013-thereby extending the statute of limitations period for thirty days. (Id. at ¶ 36.) Moreover, Plaintiff maintains that Holland again proposed an installment agreement to the IRS on August 14, 2014, which was accepted on December 5, 2014, and was subsequently terminated on March 4, 2017. (Id. at ¶ 37.) Therefore, as argued, the limitations period for both tax years was extended for 113 days-the time in which the agreement was in effect-plus an additional 30 days following termination under 26 U.S.C. § 6331(k)(2)(A) and (D). (Id. at ¶ 38.)

Third, Plaintiff maintains that the statute of limitations was tolled “during the pendency of a proceeding in court to collect the tax pursuant to 26 U.S.C. § 6502(a).” (ECF No. 1 at ¶ 34.) Specifically, Plaintiff cites the United States' ongoing lawsuit in Holland I, which was initiated on April 26, 2019, to collect Holland's tax liabilities for both 1983 and 1984. (Id. at ¶ 38.)

Here, the assessments against Holland for federal income taxes and accuracy penalties were made on April 7, 2008. (See id. at ¶ 19.) The applicable statute of limitations, therefore, would conclude ten years following the assessment date, April 7, 2018. Notably, the tax collection proceeding was commenced on April 26, 2019 in Holland I. Though untimely on its face, this Court finds that Plaintiff's claims are timely as the statute of limitations period was adequately tolled.

First, Holland's filing of a hearing request tolled the statute of limitations for 216 days. See United States v. Rabkin, No. 18-CV-00690 (MKB), 2018 WL 5777031, at *4 (E.D.N.Y. Nov. 2, 2018) (noting that where a collection due process hearing is requested in relation to assessed tax liabilities, the statute of limitations is tolled during the pendency of the hearing and any subsequent appeal). Furthermore, pursuant to 26 U.S.C. § 6330(e)(1), “[i]n no such event shall any such [statute of limitations] period expire before the 90th day after the day on which there is a final determination in such hearing.” This provision effectively extends the tolling period ninety days after there is a final determination in a hearing. Rabkin, 2018 WL 5777031, at *4. Accordingly, because the tolling period was additionally extended 90 days following the conclusion of the hearing, the statute of limitations was tolled a combined 306 days because of the due process hearing.

Second, the statutory period was further tolled by Holland's then-pending request for the installment agreement and subsequent extensions of time following termination of Holland's two installment agreements. Specifically, the time in which an installment agreement is pending through the time in which the installment agreement is rejected or terminated serves to toll the limitations period. See United States v. Schiller, 81 F.4th 64, 69 (2d Cir. 2023) (concluding a levy was prohibited during the 327-day period where “defendants' installment agreement was pending from December 7, 2017, when it was processed by the IRS, until October 30, 2018, when they received notice that their proposal was rejected.”). Here, Holland's request was pending for 113 days-between August 14, 2014 and December 5, 2014. Furthermore, Plaintiff's period to collect was tolled an additional 30 days following termination of both of Holland's installment agreements. See United States v. Chelsea Brewing Co., LLC, No. 12 Civ. 1544 (ER), 2014 WL 4801330, at *4 (S.D.N.Y. Sept. 26, 2014). The statute of limitation period, therefore, was tolled for an additional 173 days because of these installment agreements.

And finally, the current ongoing lawsuit to collect tax liabilities against Holland serves to toll the statute of limitations period at the time the tax collection action is filed. See United States v. Rowe, 19-CV-5770, 2020 WL 5549085, at *3-4 (E.D.N.Y. Sept. 16, 2020) (rejecting defendant's argument that the statute of limitations period expired where the tax assessment occurred on October 19, 2009, and a tax collection action was filed on October 11, 2019 “eight days short of the ten-year statute of limitations.”).

Accordingly, the statute of limitations was tolled a combined 479 days and currently remains tolled. 479 days added to April 7, 2018-the original ten-year statute of limitations deadline-is later than April 26, 2019-the commencement of the tax collection action. The undersigned, therefore, recommends that, in light of these multiple occurrences serving to toll the statute of limitations pursuant to 26 U.S.C. § 6502, the District Judge conclude that Plaintiff's claims are timely interposed.

B. New York Debtor and Creditor Law Violations

Plaintiff asserts that it has stated valid causes of action under New York Debtor and Creditor Law §§ 273, 275, and 276 in force at the time of the transfers. (ECF No. 18 at 6.) At the outset, New York's fraudulent transfer statutes were revised in 2020 through the passage of the Uniform Fraudulent Transactions Act. As such, all references to fraudulent transfer statutes made herein, unless specified otherwise, are to the pre-2020 statute as the allegedly fraudulent transfers here occurred pre-2020. See Emerson Elec. Co. v. Holmes, No. 16-CV-1390 (PKC) (SIL), 2020 WL 4592808, at *1 n.2 (E.D.N.Y. Aug. 11, 2020) (“Despite an effective date of April 4, 2020, the amendment does not apply to a transfer made or obligation incurred before such effective date, nor [does] it apply to a right of action that has accrued before such effective date.”) (internal quotations and citations omitted).

a. N.Y. Debtor and Creditor Law § 273

Pursuant to § 273 of the New York Debtor and Creditor Law, “[e]very conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regard to his actual intent if the conveyance is made or the obligation is incurred without fair consideration.” A violation of this section is a fraudulent conveyance as a matter of law. See Deflora Lake Dev. Assocs. v. Hyde Park, No. 13-CV-4811, 2016 WL 7839191, at *3 (S.D.N.Y. June 9, 2016) (“A fraudulent conveyance is a transfer made without fair consideration by a debtor when he or she is insolvent or which renders him or her insolvent.”). Moreover, this section treats the offense as constructive fraud, which, unlike standard fraud, eliminates the intent prerequisite that is typical of most fraud statutes. See In re Khan, No. 10-46901, 2014 WL 10474969, at *21 (E.D.N.Y. Dec. 24, 2014) (highlighting that claims under § 273 are “grounded in constructive fraud”).

In order to establish constructive fraud under this section, the party challenging the conveyance bears the burden and must prove the transferor was insolvent prior to the transfer or rendered insolvent by the transfer, and the transfer was made without fair consideration. See Ray v. Ray, 799 Fed.Appx. 29, 30 (2d Cir. 2020); see also Deflora Lake Dev. Assocs., 2016 WL 7839191, at *3. A person is insolvent when, at the time the conveyance was made, “the present fair salable value of his assets is less than the amount that will be required to pay his probable liability on his existing debts as they become absolute and matured.” N.Y. Debt. & Cred. L. § 271(1). Furthermore, “fair consideration” is given for property when “in exchange for such property . . . as a fair equivalent therefor, and in good faith,” property is conveyed “or an antecedent debt is satisfied or when such property . . . is received in good faith to secure a present advance or antecedent debt in amount not disproportionately small as compared with the value of the property, or obligation obtained.” N.Y. Debt. & Cred. L. § 272. Pragmatically speaking, this means that the “(1) the recipient of the debtor's property . . . must either (a) convey property in exchange or (b) discharge an antecedent debt in exchange; and (2) such exchange must be a ‘fair equivalent' of the property received; and (3) such exchange must be ‘in good faith.'” HBE Leasing Corp. v. Frank, 61 F.3d 1054, 1058-59 (2d Cir. 1995).

Notably, “a conveyance made by a grantor without consideration at a time when debts are outstanding raises a presumption of insolvency.” Deflora Lake Dev. Assocs., 2016 WL 7839191, at *3 (citations omitted). In those circumstances, the burden shifts to the transferee to rebut that presumption. See Cadle Co v. Newhouse, 74 Fed.Appx. 152, 153 (2d Cir. 2003) (affirming the district court's determination that where there appears to be “no consideration” under § 273, the burden shifts to the transferor to prove “the legitimacy of the transaction.”).

Here, Plaintiff contends that the transfers on June 7, 2007 and September 3, 2014 were made without fair consideration while Holland was insolvent and rendered Holland insolvent. (ECF No. 1 at ¶¶ 28-29.) Specifically, both documents detailing the recording of the two deeds by Clerk of Court (ECF No. 18-5 Ex. C (the 2007 transfer); ECF No. 18-6 Ex. D (the 2014 transfer)) indicate there is “0” for “Consideration Amount.” Moreover, the presumption of insolvency is raised here because Holland had debts outstanding at the time of these transfers.

Specifically, at the time of both conveyances, Holland was aware that he owed tax liabilities to the IRS from the 1983 and 1984 tax years as a result of his former partnership- McMahan, Brafman, Morgan & Co. (ECF No. 18 at p. 7.) The decision imposing these tax liabilities, which accrued to $1.1 million including interest, was entered on January 10, 2007- several months before the first objected-to conveyance in June 2007. (Id.) Notably, the undersigned finds no evidence indicating that Holland possessed or retained over $1.1 million at the time of the initial transfer. Also, the record is silent as to anything that would “prove the legitimacy” of these transactions.

Accordingly, because no consideration was offered, and Holland had outstanding debts at the time of these transfers, the undersigned recommends a finding that the June 7, 2007 conveyance and September 3, 2014 conveyance were fraudulent under N.Y. Debtor and Creditor Law § 273. In the event the District Judge does not find that Holland had outstanding debts at the time of the June 2007 conveyance, the undersigned nonetheless recommends a finding that the September 2014 conveyance still be deemed a fraudulent conveyance under § 273.

b. N.Y. Debtor and Creditor Law § 275

Under § 275 of the New York Debtor and Creditor Law (2019), “[e]very conveyance made and every obligation incurred without fair consideration when the person making the conveyance or entering into the obligation intends or believes that he will incur debts beyond his ability to pay as they mature, is fraudulent as to both present and future creditors.”

“Courts have interpreted ‘intends or believes' as ‘awareness by the transferor that, as result of the conveyance, he will not be able to pay present and future debts.'” Ostashko v. Ostashko, No. 00-CV-7162 (ARR), 2002 WL 32068357, at *19 (E.D.N.Y. Dec. 12, 2002) (citation omitted). Like § 273, Section 275 provides another means for a creditor to avoid a transfer via constructive fraud. See In re Khan, 2014 WL 10474969, at *21. It follows, therefore, that in order to sustain a claim under § 275, a creditor must allege (1) a lack of fair consideration; and (2) the debtor intended or believed that it would incur debts beyond its ability to pay. Kim v. Ji Sung Yoo, 311 F.Supp.3d 598, 611 (S.D.N.Y. 2018).

Here, Plaintiff contends that the transfers on June 7, 2007 and September 3, 2014 were fraudulent as they were made without fair consideration while Holland “intended to, or believed that he would” incur debts beyond his ability to pay. (ECF No. 1 at ¶ 30.) At the outset, as detailed supra, the transfers were made without any consideration-let alone fair consideration. Additionally, at the time of both conveyances, Holland likely knew he would incur debts beyond his ability to pay, largely because the U.S. Tax Court already rendered a decision in In re McMahan & Co. Therefore, Holland was aware of impending debt for the June 2007 conveyance, and had been assessed and notified about his large tax liabilities amount before making the September 2014 conveyance. Accordingly, the undersigned recommends a finding that both conveyances were fraudulent under § 275 as they were made without consideration while Holland believed he would incur debts beyond his ability pay. In the event the District Judge does not find that Holland “intended or believed” that he would incur debts beyond its ability to pay as it relates to the June 2007 conveyance, the undersigned nonetheless recommends a finding that the September 2014 conveyance deemed a fraudulent conveyance under § 275.

c. N.Y. Debtor and Creditor Law § 276

Section 276 of the New York Debtor and Creditor Law states that “[e]very conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud either present or future creditors, is fraudulent as to both present and future creditors.” In contrast to §§ 273 and 275, this section is concerned with “actual fraud” and thus focuses on the transferor's intent. See Geo-Group Comms., Inc. v. Chopra, No. 15 Civ. 1756 (KPF), 2016 WL 4098552, at *7 (S.D.N.Y. July 27, 2016). Indeed, to prove actual fraud, the creditor must show an intent to defraud on the part of the transferor by clear and convincing evidence. Fannie Mae v. Olympia Mortg. Corp., No. 04-CV-4971 (NG) (MDG), 2011 WL 9933496, at *12 (E.D.N.Y. Aug. 5, 2011). Such proof must also satisfy the Federal Rule of Civil Procedure 9(b) heightened pleading standard. Id.; In re Sharp Int'l Corp., 403 F.3d 43, 56 (2d Cir. 2005) (“As actual intent to hinder, delay, or defraud constitutes fraud, it must be pled with specificity, as required by Fed.R.Civ.P. 9(b).”). Meaning, the complaint must state with particularity the circumstances constituting fraud. Nantong Sanhai Garment Co. v. Fab Mill Inc., No. 21 CIV. 859 (NRB), 2022 WL 540756, at *3 (S.D.N.Y. Feb. 23, 2022).

Ordinarily, demonstrating actual intent with direct proof is a rare occurrence and oftentimes elusive, so a creditor may rely on circumstantial evidence to establish an inference of fraudulent intent. Id. Indeed, case law under section 276 identifies “circumstantial indicators of ‘actual intent' to defraud, termed ‘badges of fraud.'” Cadle Co., 74 Fed.Appx. at 153. These badges include: (1) the inadequacy of consideration received, (2) the close relationship between the parties to the transfer, (3) the transferor's knowledge of the creditor's claim and the transferor's inability to pay it, (4) suspicious timing of transactions not in the usual course of business, (5) retention of control by the transferor, or (6) the use of fictitious parties. Adelphia Recoverty Trust v. Bank of America, N.A., 624 F.Supp.2d 292, 335 (S.D.N.Y. 2009). Notably, though “not all of the badges must be alleged” the presence of multiple badges will “increase the strength of the inference.” MFS/Sun Life Trust-High Yield Series v. Van Dusen Airport Servs. Co., 910 F.Supp. 913, 935 (S.D.N.Y. 1995).

Here, Plaintiff argues that the transfers at issue were fraudulent as certain badges of fraud were present, thereby demonstrating an actual intent to hinder, delay, or defraud the creditors on the part of Holland. (ECF No. 1 at ¶ 31.)

First, Plaintiff maintains that “the purported transfers were made to [Risk] for insufficient consideration.” (Id.) Second, Plaintiff avers that Risk and Holland had a close relationship (id.) as evidenced through Risk's status as Holland's long-term partner, Risk holding himself out as Holland's spouse, and Risk having held Holland's power of attorney. (ECF No. 18 at pp. 7-8) (referencing Holland I, ECF No. 37 (noting Risk's power of attorney); ECF No. 82 (Risk referring to Holland as “my dearly departed spouse”)). Third, as posited, Holland knew of his tax liabilities at the time of the transfers and was equally aware of his inability to pay them. (ECF No. 1 at ¶¶ 20, 21, 31.) Namely, and as detailed supra, Holland owed substantial income taxes to the IRS for the 1983 and 1984 tax years from his participation in his partnership of McMahan, Brafman, Morgan & Co. The decision in In re McMahon was rendered in January of 2007, months before the first allegedly fraudulent conveyance occurred. (See ECF No. 18 at p. 7.)

But that's not all.

Fourth, Plaintiff asserts that such conveyances were part of a pattern of transactions intended to transfer property from Holland's name and were not in the usual course of business, largely as evidenced by Holland's attempt to backdate the 2007 transfer to Risk “to be effective as of May 1990”. (ECF No. 1 at ¶ 31.) Moreover, Plaintiff notes that these transfers of title were from Holland as sole owner to Risk as joint tenant, and then to Risk entirely, without any consideration. (ECF No. 1 at ¶ 15.) Fifth, despite these transfers, Plaintiff argues that Holland “continued until his death to possess, use, and enjoy the Property, including by living there, after the transfers as he did prior to the purported transfers.” (ECF No. 1 at ¶ 31.) In fact, Holland retained a life estate in the Property after the 2014 transfer. (ECF No. 18-6, Ex. D; ECF No. 187, Ex. E.)

Here, as established above, the transfers were made with no consideration (See ECF No. 18-5, Ex. C; ECF No. 18-6, Ex. D) which ordinarily justifies an inference of actual intent. See Perrone v. Amato, No. 09-CV-316, 2017 WL 2881136, at *29 (E.D.N.Y. July 5, 2017) (noting the transaction had a “number of the badges of fraud,” including that Defendant “provided no consideration for the alleged fraudulent transfer.”). Moreover, the relationship between Holland and Risk is generally one that suffices for proving an additional “badge of fraud.” See Long Oil Heat, Inc. v. Spencer, 375 F.Supp.3d 175, 195 (N.D.N.Y. 2019) (finding the friendship between the parties to the conveyance sufficed for a “close relationship”); SEC v. McGinn, Smith & Co., 98 F.Supp.3d 506, 527 (N.D.N.Y. 2015) (“The transfer of property by the debtor to his spouse . . . while retaining the use and enjoyment of the property, is a classic badge of fraud.”) (citation omitted) (internal quotations omitted).

Furthermore, Holland, as transferor, knew that he had outstanding tax liabilities in existence at the time of the conveyances and, similarly, Holland was aware of his future inability to pay them as they became due. These facts combined ordinarily suffice for a showing of actual intent. See Ostashko, 2002 WL 32068357, at *19 (holding that several badges of fraud were present, including that defendant was aware of his debts owed in two separate forms). Additionally, the conveyances here are “secret and hasty” and not in the “usual course of business”, given the lack of consideration, Holland's attempt to backdate the transfer date, and Holland's continued residency at the Property despite Risk's possession of the Property in its entirety. See Fed. Nat. Mortg. Ass'n v. Olympia Mortg. Corp., 792 F.Supp.2d 645, 653 (E.D.N.Y. 2011) (finding, where no consideration was provided, the transfer was not made in the usual course of business as a transferor “does not usually transfer money to, or for the benefit of, people who provide no consideration.”); see also Belesis v. Lowery, No. 15-cv-2633 (JSR), 2017 WL 3641709, at *3 (S.D.N.Y. July 31, 2017) (concluding a transfer of one's interest to another for no apparent consideration, coupled with the transferor living in the property thereafter, satisfied the fraudulent transfer requirement). Similarly, a transferor's continued use following a conveyance of title, as is the case here, generally supports a finding of actual intent under § 276. See United States v. Evseroff, No. 00-CV-06029 (KAM), 2012 WL 1514860, at *11 (E.D.N.Y. Apr. 30, 2012) (determining actual intent was shown where evidence demonstrated that defendant retained and enjoyed possession of the property after title was transferred).

Accordingly, the undersigned recommends a finding that Plaintiff has met the 9(b) pleading requirement in light of the allegations contained in the Complaint, allegations that are deemed true by virtue of the defendants' default. Moreover, the undersigned recommends a finding that Plaintiff has shown that the transfers were made with an intent to hinder, delay, or defraud creditors, and thus fraudulent conveyances, pursuant to New York Debtor and Creditor Law § 276 (2019). In the event the District Judge believes that such a pleading requirement was not met, and thus Plaintiff's § 276 claim fails, the undersigned recommends that Plaintiff's motion for default judgment be denied without prejudice and with leave to renew to supplement the actual fraud elements in an amended complaint.

V. Relief

Plaintiff does not seek damages in this action. Rather, Plaintiff requests a judgment: (i) determining that the June 7, 2007 and September 3, 2014 transfers were fraudulent conveyances, that such transfers be set aside, and that the Property shall be sold and the proceeds applied to satisfy Holland's tax liabilities (ECF No. 1 at p. 9); and (ii) a judgment against all Defaulting Defendants that “such parties have no right, title, claim, lien, or interest in the [Property] or the proceeds of the sale of the Property.” (ECF No. 18 at p. 2.)

If the District Judge concludes that the conveyances here were fraudulent as recommended above, the undersigned recommends that those conveyances be set aside to the extent necessary to satisfy its federal tax liens. Pursuant to N.Y. Debt. & Cred. L. § 278(1)(a), the applicable provision at the time of the transfers, where a conveyance is fraudulent as to a creditor, such creditor “may, as against any person except a purchaser for fair consideration without knowledge of the fraud at the time of the purchase, or one who has derived title immediately or mediately from such a purchaser, have the conveyance set aside or obligation annulled to the extend necessary to satisfy his claim ....” N.Y. Debt. & Cred. L. § 278(1)(a) (2019).

Section 278(1)(a) mirrors the current applicable provision of the New York Debtor and Creditor Law- § 276(a)(1)-which states “[i]n an action for relief against a transfer or obligation,” a creditor, like plaintiff, may obtain “avoidance of the transfer or obligation to the extent necessary to satisfy the creditor's claim ....”

Au fond this section states that where a fraudulent transfer exists, property can be attached in the hands of a third party other than a bona fide purchaser. “In general, the creditor's remedy in a fraudulent conveyance action is limited to reaching the property which would have been available to satisfy the judgment had there been no conveyance.” TLC Merchant Bankers, Inc. v. Brauser, No. 01 Civ. 3044 GEL, 2003 WL 1090280, at *3 (S.D.N.Y. Mar. 11, 2003) (internal quotations and citations omitted). Indeed, “[t]he purpose of the remedy fashioned by § 278 is to grant the creditor the right ‘to be paid out of assets to which he is actually entitled and to set aside the indicia of ownership which apparently contradict that right.'” Techno-Comp., Inc. v. Arcabascio, 130 F.Supp.3d 734, 746 (E.D.N.Y. 2015) (citation omitted).

Here, Risk does not qualify under New York Debtor and Creditor Law § 278 as a “bona fide purchaser” because he did not purchase the Property for fair consideration. As such, the undersigned recommends that both conveyances be set aside and avoided.

Plaintiff submits that it is permitted to “avoid the 2007 and 2014 transfers of the Property . . . to the extent necessary to satisfy [Holland's] tax liabilities, enforce its federal tax liens against the Property by selling it free and clear of the rights, titles, claims, liens, and interests of all parties ....” (ECF No. 18-9.) Plaintiff maintains that it should then “apply the proceeds of such sale to [Holland's] tax liabilities.” (Id.) Notably, where “a claim or interest of the United States is [] established” in the property, then a court may “after the parties have been duly notified of the action . . . decree a sale of such property by the proper officer of the court, and a distribution of the proceeds of such sale according to the findings of the court in respect to the interests of the parties and of the United States.” 26 U.S.C. § 7403(c).

At the outset, the Defaulting Defendants were “duly notified of the action” because they were properly served with the Complaint. See United States v. John, No. 18 Civ. 5045 (ENV) (VMS), 2020 WL 5536830, at *4 (E.D.N.Y. Mar. 2, 2020) (“Although the phrase ‘duly notified' is not defined in the statute, this Court is persuaded by the cases finding that parties have been ‘duly notified' when they have been effectively served with process in the action.”).

Furthermore, “the policy behind § 7403 favors the prompt and certain collection of delinquent taxes.” United States v. Anderson, No. 08-CV-6426-MAT, 2010 WL 5072958, at *2 (W.D.N.Y. Dec. 10, 2010). Notably, a district court is given limited discretion to not order a sale under § 7403 and such discretion should be exercised “rigorously and sparingly, keeping in mind the Government's paramount interest in prompt and certain collection of delinquent taxes.” United States v. Rogers, 461 U.S. 677, 711 (1983); see United States v. Eversoff, No. 00-CV-06029 (KAM), 2014 WL 202563, at *6 (E.D.N.Y. Jan. 16, 2014). It follows, therefore, that a sale is to be authorized where the government's interest in collecting delinquent taxes promptly outweighs any interest in retaining the property. See United States v. Martynuk, No. 13 Civ. 4110 (KPF), 2015 WL 328100, at *8 (S.D.N.Y. Jan. 26, 2015).

Here, such governmental interests outweigh any interest in the Property, namely because the United States seeks to collect on millions of dollars in taxes from 1983 and 1984, meanwhile those with interests in the Property have not established any prejudice or hardship faced if the sale is authorized. See Eversoff, 2014 WL 202563, at *6 (determining that under § 7403, defendants concerns did not outweigh the government's paramount interest in prompt debt collection as defendant's “tax obligations have been outstanding for over a decade” primarily because of a fraudulent transfer of the property, noting “it is unjust to allow the collection of the long-standing judgment against defendant to be delayed any longer.”). Moreover, there is little to no interest in retaining the Property not only as evidenced by the default, but also some of the Defaulting Defendants, like HSBC Bank USA and Sustainable Neighborhoods LLC, have explicitly stated that they “do not oppose the sale of the [Property]” and “disclaim[] any interest in the proceeds of any sale of that [Property].” (ECF No. 20-2 at ¶ 3; ECF No. 20-3 at ¶ 3.)

As such, the undersigned recommends that Plaintiff be permitted enforce its federal tax liens against the Property by selling it free and clear of rights and title and interests of all parties and apply the proceeds of such sale to Holland's tax liabilities. See United States v. Alfano, 34 F.Supp.2d 827, 849 (E.D.N.Y. 1999) (“Clearly, pursuant to 26 U.S.C. § 7403, the Court may decree a sale of such property and distribute the proceeds in respect to the interests of the parties and the United States” where the property at issue was fraudulently conveyed).

Lastly, Plaintiff seeks a declaratory judgment against all Defaulting Defendants that “such parties have no right, title, claim, lien, or interest in the [Property] or the proceeds of the sale of the Property.” (ECF No. 18 at p. 2.)

Pursuant to 26 U.S.C. § 7403(b), “[a]ll persons having liens upon or claiming any interest in the property involved in such action shall be made parties” in an action to enforce a lien or subject property to the payment of tax.” As such, “[i]n an action brought by the United States to enforce federal tax liens against real property, the Court is empowered to adjudge that defendants joined pursuant to IRC § 7403(b) who have defaulted ‘have no right, title, claim, lien, or other interest in the real property.'” United States v. Calaman, No, 15-cv-180 (NGG) (PK), 2016 WL 8213831, at *7 (E.D.N.Y. Nov. 16, 2016).

Here, as set forth above, this is an action to set aside fraudulent transfers of property so that Plaintiff-the United States-can enforce its tax liens against the Property. Moreover, all Defaulting Defendants “ha[ve], or may claim, an interest in the real property of which the United States seeks to set aside [as] fraudulent conveyances.” (ECF No. 1 at ¶¶ 4-7, 9.) As such, they were named because they may have an interest in the Property which Plaintiff seeks to enforce the lien. Importantly, as here, the Court “may reasonably interpret [the defendants] defaults as evidence that they claim no such interest.” United States v. Palapoli, No. CV 09-3482 (ADS) (WDW), 2011 WL 6961604, at *1 (E.D.N.Y. Nov. 4, 2011), report and recommendation adopted, 2011 WL 6961663 (E.D.N.Y. Dec. 8, 2011). Accordingly, the undersigned recommends that such declaratory relief sought is warranted under these circumstances and therefore recommends finding that the Defaulting Defendants be deemed to have no right, title, claim, lien, or interest in the Property or the proceeds of the sale of the Property.

CONCLUSION

In light of the foregoing, the undersigned recommends that the District Judge GRANT Plaintiff's motion for default judgment and find that the June 7, 2007 and September 3, 2014 conveyances are fraudulent as under the New York Debtor and Creditor Law §§ 273, 275 and 276, conclude that such conveyances be set aside and avoided to the extent necessary to satisfy Holland's outstanding tax liabilities, and permit Plaintiff to enforce the tax liens against the Property be selling it free and clear of rights and title and interests of all parties and apply the proceeds of such sale to Holland tax liabilities. Moreover, the undersigned recommends that David Risk, in his capacity as the Trustee of The David Risk 2023 Revocable Trust, Ron Holland Advertising, Inc., HSBC Bank USA, Sustainable Neighborhoods LLC, and Suffolk County Water Authority be declared to have no right, title, claim, lien, or interest in the Property or the proceeds of the sale of the Property.

OBJECTIONS

A copy of this Report and Recommendation is being electronically served on counsel for Plaintiff. Plaintiff is directed to serve a copy of this Report and Recommendation on Defendants via first-class mail and via email and promptly file proof of service on ECF. Any written objections to this Report and Recommendation must be filed with the Clerk of the Court within fourteen (14) days of service of this Report. 28 U.S.C. § 636(b)(1) (2006 & Supp. V 2011); Fed.R.Civ.P. 6(a), 72(b). Any requests for an extension of time for filing objections must be directed to the district judge assigned to this action prior to the expiration of the fourteen (14) day period for filing objections. Failure to file objections within fourteen (14) days will preclude further review of this Report and Recommendation either by the District Court or the Court of Appeals. Thomas v. Arn, 474 U.S. 140, 145 (1985) (“a party shall file objections with the district court or else waive right to appeal”); Caidor v. Onondaga Cnty., 517 F.3d 601, 604 (2d Cir. 2008) (“failure to object timely to a magistrate's report operates as a waiver of any further judicial review of the magistrate's decision”); see Monroe v. Hyundai of Manhattan & Westchester, 372 Fed.Appx. 147, 147-48 (2d Cir. 2010) (same).