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Posted: January 17, 2016

Insider Payment Not In Good Faith Under Debtor and Creditor Law Sections 273 and 275

On January 12, 2016, the First Department issued a decision in American Media, Inc. v. Bainbridge & Knight Laboratories, LLC, 2016 NY Slip Op. 00096, holding that an insider payment is not a payment made in good faith for purposes of Debtor and Creditor Law Sections 273 and 275.

In American Media, the motion court dismissed the plaintiff’s claims “for fraud and violation of sections 273 and 275 of the Debtor and Creditor Law” against the individual defendant, Ruderman, who was “the owner and chairman of” the corporate defendant, Bainbridge. The First Department held that the Debtor and Creditor Law claim should not have been dismissed, explaining:

The complaint . . . adequately states a claim for violation of sections 273 and 275 of the Debtor and Creditor Law as against Ruderman. Ruderman is alleged to have repaid loans to himself at a time when Bainbridge was insolvent, or rendered insolvent thereby. An insider payment is not in good faith, regardless of whether or not it was paid on account of an antecedent debt. The requirement of good faith is not fulfilled through preferential transfers of corporate funds to directors, officers or shareholders of a corporation that is, or later becomes insolvent, in derogation of the rights of general creditors. The claim does not involve the failure to pay the amounts owed under the contract, but rather Ruderman’s inappropriately taking money out of Bainbridge that could have been used to repay plaintiffs.

(Internal quotations and citations omitted) (emphasis added).

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