Liberty Mutual Insurance v. New York (In Re Citron)
428 B.R. 562, 64 Collier Bankr. Cas. 2d 314, 2010 Bankr. LEXIS 1511 (2010)
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Rule of Law:
A criminal plea agreement approved by a court of competent jurisdiction conclusively establishes 'reasonably equivalent value' under Bankruptcy Code § 548, immunizing payments from avoidance as fraudulent transfers. However, such payments may still be avoided as preferential transfers under § 547 if they do not satisfy the contemporaneous exchange for new value defense, which requires a strict analysis of timing and whether the value received was 'money or money’s worth.'
Facts:
- Jeffrey Citron and Lynn Citron were indicted for their involvement in a fraudulent insurance scheme against Liberty Mutual Insurance Company and others.
- Jeffrey Citron faced 85 felony counts, and Lynn Citron faced 7 felony counts, both carrying potential fines of double the gains from the crimes.
- On September 10, 2007, both entered into plea agreements with the State of New York (NY).
- Jeffrey Citron pleaded guilty to five felonies in exchange for a prison sentence of one and two-thirds to five years and a $75,000 fine.
- Lynn Citron pleaded guilty to a misdemeanor in exchange for three years’ probation and a payment of $175,000 'in lieu of forfeiture or fines,' payable in installments.
- On December 19, 2007, Lynn Citron was sentenced and made her initial payment of $5,000.
- On March 25, 2008, Jeffrey Citron paid his entire $75,000 fine, and Lynn Citron made an additional $9,000 payment for installments that were past due.
- On March 27, 2008, two days after these payments, the Citrons filed for Chapter 13 bankruptcy.
Procedural Posture:
- Debtors Jeffrey and Lynn Citron filed a voluntary petition for Chapter 13 bankruptcy relief in the United States Bankruptcy Court for the Eastern District of New York.
- Liberty Mutual, a creditor, filed a motion to dismiss the bankruptcy case.
- The Debtors' case was converted from Chapter 13 to Chapter 11.
- The bankruptcy court entered an order authorizing Liberty Mutual to pursue recovery actions on behalf of the bankruptcy estate.
- Liberty Mutual, as Plaintiff, filed an adversary proceeding against the State of New York (NY) to avoid and recover the fine payments.
- NY's motion to dismiss the adversary proceeding was denied by the bankruptcy court.
- Liberty Mutual and NY filed cross-motions for summary judgment in the adversary proceeding, which are the subject of this opinion.
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Issue:
Does a debtor's payment of a criminal fine pursuant to a court-approved plea agreement constitute an avoidable fraudulent transfer under Bankruptcy Code § 548 for lack of 'reasonably equivalent value', or an avoidable preferential transfer under § 547 that is not protected by the 'contemporaneous exchange for new value' defense?
Opinions:
Majority - Alan S. Trust
No, as to the fraudulent transfer claim; Yes, in part, as to the preferential transfer claim. A transfer made pursuant to a court-approved criminal plea agreement is not an avoidable fraudulent transfer because it conclusively establishes reasonably equivalent value, but it may be an avoidable preferential transfer if it does not meet the strict requirements of the 'new value' defense. For the fraudulent transfer claim under § 548, the court extended the reasoning of BFP v. Resolution Trust Corp., which gives deference to state-law processes like foreclosure sales. The court held that a plea agreement approved by a court of competent jurisdiction, absent extrinsic fraud or collusion, is presumptively for reasonably equivalent value. The benefits received by the Debtors—reduced jail time, lower fines, and avoidance of litigation costs—constituted value. Therefore, the payments were not fraudulent transfers. For the preferential transfer claim under § 547, the analysis is different. NY conceded the payments were preferences and relied on the 'contemporaneous exchange for new value' defense. The court found that Lynn Citron’s $9,000 payment, made four months after her sentencing and for past-due amounts, was not 'in fact a substantially contemporaneous exchange' for the value she received from the plea deal. Therefore, this payment was avoidable. For Jeffrey Citron’s $75,000 payment, the court found that a genuine issue of material fact exists as to whether the reduced sentence and fines constitute 'new value' under § 547(a)(2)'s definition of 'money or money’s worth,' requiring a trial to determine its quantitative value.
Analysis:
This decision solidifies and extends the BFP doctrine, giving significant deference to state court criminal proceedings against challenges under § 548 of the Bankruptcy Code. It establishes that court-approved plea bargains are presumptively valid exchanges of value, protecting them from fraudulent transfer avoidance. However, the opinion starkly contrasts this with the stricter, more technical analysis required for preferential transfers under § 547, demonstrating that the same transaction can survive one avoidance action but fail another based on timing and the narrow statutory definition of 'new value.' This creates a critical distinction for practitioners: while the fairness of a plea deal is respected, the timing and nature of payments made under it are subject to intense scrutiny in bankruptcy.
