In re Manshul Const. Corp

2000 WL 1228866

S.D.N.Y.,2000.

Aug. 30, 2000.

Only the Westlaw citation is currently available.

COUNSEL:  Chester B. Salomon, Alec P. Ostrow, Walter Benzija, Salomon Green & Ostrow, P.C., New York, for Plaintiff Yann Geron, Trustee of the Estates of Manshul Construction Corp. and Manshul Construction Company (Bronx), Inc., Debtors.

Neal Brickman, Law Offices of Neal Brickman, New York, James C. Smith, Travis W. Moon, Raybrun, Moon & Smith, P.A., Charlotte, North Carolina, for Plaintiff Travelers Casualty and Surety Company, formerly known as The Atena Casualty and Surety Company, Inc.

Steven J. Mandelsburg, Gilbert Backenroth, Zachary Newman, Hahn & Hessen LLP, New York, for Defendant Nancy Schulman.

Judd Burstein, Daniel Wallach, Burstein & McPherson LLP, New York, for all Defendants other than Nancy Schulman.

OPINION

Findings of Fact and Conclusions of Law

JUDGE:  KOELTL, District J.

[*1]  The plaintiffs, Travelers Casualty and Surety Company (“Travelers”) and Yann Geron, Trustee of the Estates of Manshul Construction Corp. (“Manshul”) and Manshul Construction Company (Bronx), Inc. (“the Debtors”) (collectively with Travelers “the plaintiffs”) brought these consolidated actions alleging that certain transfers of assets by Allan G. Schulman and Manshul were fraudulent under the New York Debtor and Creditor Law (“DCL”) and the United States Bankruptcy Code. Allan Schulman and the other defendants are alleged to have directly or indirectly received the disputed transfers.

INTRODUCTION

The Trustee’s action was initiated pursuant to Rule 7001 of the Federal Rules of Bankruptcy Procedure to recover money or property and to obtain injunctive and declaratory relief. This Court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334(b). This proceeding was referred to the bankruptcy court pursuant to 28 U.S.C. § 157(a). This Court withdrew the proceeding pursuant to Fed. R. Bankr.P.9015. Venue is proper in this district pursuant to 28 U.S.C. § 1409(a) because this proceeding arises in a case under the Bankruptcy Code pending in this district.

Travelers’ action was initiated as an amendment to an action pending in the New York State Supreme Court, New York County, by and between Travelers, as plaintiff, and Ascot Maintenance Corp. (“Ascot”) and Allan Schulman as defendants. The defendants removed Travelers’ amended claims, and only its amended claims, to this Court pursuant to 28 U.S.C. § 1452, asserting that those claims were “related” to the Trustee’s action. This Court has jurisdiction over Travelers’ action pursuant to 28 U.S.C. § 1334(b) in that it is related to the Trustee’s action, a civil action commenced under Chapter 11 of the Bankruptcy Code. Venue is proper in this district pursuant to 28 U.S.C. § 1409(a) because the amended claims are related to a bankruptcy proceeding pending in this district.

Pursuant to a Stipulation and Order dated April 30, 1999 the parties agreed and the Court determined that this Court has subject matter jurisdiction over this proceeding. Pursuant to that Stipulation and Order the parties further agreed and the Court determined that Travelers’ amended claims be consolidated, and tried together, with the Trustee’s action.

The Trustee alleges that beginning in January 1994, Manshul, through its president and sole shareholder defendant Allan Schulman, transferred in excess of $11 million with actual or constructive intent to hinder, delay or defraud Manshul’s then present and future creditors. The Trustee alleges that Allan Schulman caused those transfers to occur at a time when he knew or should have known that Manshul was or would be rendered insolvent by reason of the transfers. The Trustee seeks recovery of the transfers from the defendants based on the following statutory causes of action: (a) 11 U.S.C. §§ 544(b) and 550 and New York Debtor and Creditor Law (“the DCL”) § 276 (transfers made with actual intent to defraud a debtor’s present and future creditors); (b) 11 U.S.C. §§ 544(b) and 550 and DCL § 273 (constructively fraudulent conveyances made by a debtor when insolvent); (c) 11 U.S.C. §§ 544(b) and 550 and DCL § 274 (constructively fraudulent conveyances made by a debtor which left the debtor with unreasonably small capital); (d) 11 U.S.C. §§ 544(b) and 550 and DCL § 275 (constructively fraudulent conveyances made by a debtor at a time when the debtor intended or believed that it would incur debts beyond its ability to pay as such debts became due); (e) 11 U.S.C. §§ 548(a)(2)(A)—(B)(i), (ii) and (iii) and 550 (constructively fraudulent conveyances made by a debtor within one year prior to the petition date); (f) 11 U.S.C. §§ 548(a)(1) and 550 (transfers made by a debtor with actual intent to hinder, delay or defraud creditors within one year prior to the petition date); and (g) 11 U.S.C. § 544(b) and DCL § 276-a (recovery of attorneys’ fees incurred by the Trustee in brining this action. [FN1]

FN1. Claims against defendants Annette Fogelman and the Estate of Julius Schulman have previously been resolved.

[*2] The Trustee contends that the transfers were not made for any legitimate estate or tax planning purpose or for any lawful consideration. Rather, beginning in 1994, Allan Schulman and his company were faced with a desperate situation. The government had filed a criminal complaint against him, his father, Manshul, and the attorney for Manshul. Manshul was facing defaults and mounting claims from subcontractors and suppliers with respect to it major construction projects. In short, Manshul and Mr. Schulman were in dire straits. In response, Mr. Schulman caused Manshul to transfer millions of dollars in order to hinder, delay, and defraud Manshul’s creditors. Millions of dollars were transferred to Nancy Schulman, Allan Schulman’s wife, and she in turn placed millions of dollars in an offshore trust in the Cook Islands, all in an effort to hinder, delay, and defraud Manshul’s creditors. In addition, Nancy Schulman transferred other funds into four newly created corporations, also in an effort to defraud Manshul’s creditors.

Travelers’ claims are similar. From 1980 until 1994, Aetna Casualty and Surety Company (“Aetna”), the predecessor of Travelers, issued numerous performance bonds and payment bonds on certain construction projects as surety for Manshul. Aetna issued those bonds pursuant to indemnity agreements under which Manshul, Ascot and Allan Schulman jointly and severally agreed to indemnify Aetna against any loss, expense or liability that Aetna may incur as a result of its issuance of bonds on Manshul’s construction projects. As of December 31, 1993, Aetna had performance bonds issued and outstanding on Manshul projects in an aggregate penal amount of over $56,000,000.

Travelers, as successor to Aetna, claims that the transfers from Manshul and from Allan Schulman were made with actual and constructive intent to hinder, delay or defraud the creditors of Allan Schulman, including Travelers. Travelers seeks to recover all of the transfers from the defendants pursuant to the following sections of the DCL: (a) DCL § 276 (transfers made with actual intent to hinder, delay or defraud either present or future creditors); (b) DCL § 273 (transfers made when the transferor was insolvent or became insolvent by the making of the transfers); (c) DCL § 275 (transfers made when the transferor intended or believed at the time of the transfers that he would incur debts beyond his ability to pay them as they became due); (d) DCL § 276-a (providing for recovery of reasonable attorneys’ fees incurred in bringing the action).

The defendants contend that the intent necessary to maintain an actual fraudulent conveyance claim was absent because the transfers were made for a lawful purpose, namely to implement an estate and tax plan developed during the summer and latter part of 1993 and the early part of 1994 and to avoid the imposition of duplicate taxes by the State of New York and New York City on Manshul. The defendants also deny that Manshul and Allan Schulman were insolvent at the time of the transfers or otherwise are liable for constructive fraudulent conveyances. The defendants also contend that they are entitled to certain offsets.

[*3] All parties stipulated and agreed to waive their right to trial by jury. This case was tried to the Court without a jury beginning on May 2, 2000 and continuing through and including May 24, 2000.

Pursuant to Fed.R.Civ.P. 52(a), having assessed the credibility of the witnesses at trial and reviewed the extensive submissions by the parties, the Court now makes the following findings of fact and conclusions of law.

FINDINGS OF FACT

A. The parties

1. Plaintiff Yann Geron (the “Trustee”) was appointed by the United States Trustee on December 5, 1996 as the interim Chapter 7 trustee of Manshul Construction Corp. (“Manshul”) and Manshul Construction Company (Bronx), Inc. (“Manshul Bronx”). Mr. Geron is currently serving as permanent trustee of Manshul and Manshul Bronx. (Joint Exh. 1 ¶ 1; Tr. at 550-51 (Geron).)

2. Plaintiff Travelers, formerly known as The Aetna Casualty and Surety Company, Inc. (“Aetna”), is a corporation organized and existing under the laws of the State of Connecticut, is duly authorized to transact business in the State of New York, and maintains an office and place of business at One Whitehall Street, New York, New York. (Joint Exh. 1 ¶ 2.) Travelers is the successor-in-interest of Aetna for all purposes relating to this case. (Tr. at 1820 (statement by Mr. Burstein); Tr. at 1821 (statement by Mr. Mandelsburg).)

3. Defendant Ascot Maintenance Corp. (“Ascot”) is a corporation organized and existing under and by virtue of the laws of the State of New York, with its principal office and place of business located at 11-02 37th Avenue, Long Island City, New York. (Joint Exh. 1 ¶ 3.)

4. Defendant Allan Schulman is an individual residing at 60 East End Avenue, New York, New York 10028. (Joint Exh. 1 ¶ 4.)

5. Defendant Nancy Schulman is an individual residing at 60 East End Avenue, New York, New York 10028, and she is the wife of defendant Allan Schulman. (Joint Exh. 1 ¶ 5.)

6. Defendant The Ethan Michael Schulman Trust is an inter vivos trust settled by Allan Schulman under the laws of the State of New York. Allan Schulman is, and at all material times has been, a trustee of the Ethan Michael Schulman Trust. (Joint Exh. 1 ¶ 6.)

7. Defendant The Brett Adam Schulman Trust is an inter vivos trust settled by Allan Schulman under the laws of the State of New York. Allan Schulman is, and at all material times has been, a trustee of the Brett Adam Schulman Trust. (Joint Exh. 1 ¶ 7.)

8. Defendant Stanley Meyrowitz is a certified public accountant practicing with the firm of Meyrowitz, Langenthal & Company, L.L.P. with its principal place of business located at One Lindon Place, Great Neck, New York 10021. At all times material to this action, Mr. Meyrowitz has been and is a trustee of The Ethan Michael Schulman Trust and The Brett Adam Schulman Trust. Mr. Meyrowitz is named as a defendant in this action solely in his capacity as trustee of the aforementioned trusts. (Joint Exh. 1 ¶ 8.)

[*4] 9. Annette Fogelman, Allan Schulman’s sister, is an individual residing in New Rochelle, New York. (Joint Exh. 1 ¶ 9.)

10. Defendant Viscount Properties, Inc. (“Viscount”) is a corporation organized and existing under and by virtue of the laws of the State of New York with its principal place of business located at 11-02 37th Avenue, Long Island City, New York 11101. Viscount is in the business of owning and operating commercial real estate properties located in Long Island City, New York. (Joint Exh. 1 ¶¶ 10, 44; Tr. at 277, 283-84 (A.Schulman).)

11. Defendant Janal Properties Corp. (“Janal”) is a corporation organized and existing under and by virtue of the laws of the State of New York with its principal place of business located at 11-02 37th Avenue, Long Island City, New York 11101. Janal is in the business of owning and operating commercial real estate properties located in Long Island City, New York. (Joint Exh. 1 ¶¶ 11, 44; Tr. at 286-88 (A.Schulman).)

12. Before January 5, 1994, Allan Schulman owned 100% of the issued and outstanding stock of Viscount and Janal. (Joint Exh. 1 ¶ 44.) On his personal financial statement dated December 31, 1993, Allan Schulman stated that his ownership interests in Viscount and Janal had a fair market value of $2,500,000. (Id.) As of December 31, 1993, Viscount and Janal were indebted to Manshul in the aggregate amount of $1,293,354.88. (Id.)

13. Defendant NAS Family Partners, L.P. (“Family Partnership”) is a limited partnership established on or about July 19, 1995 under the Colorado Uniform Limited Partnership Act of 1981. (Joint Exh. 1 ¶ 12; Travelers Exh. 401.)

14. Defendant Schulman Family Trust (“Schulman Trust”) is an inter vivos trust settled by Nancy Schulman under the laws of the Cook Islands on or about August 21, 1995. (Joint Exh. 1 ¶ 13; Travelers Exh. 401; Tr. at 1964-65 (N. Schulman); Tr. at 909 (Rothschild).)

15. Nancy Schulman is the sole general partner of NAS Family Partners holding a 1% ownership interest. Schulman Family Trust is the sole limited partner of NAS Family Partners, holding a 99% ownership interest acquired by gift from Nancy Schulman on or about August 21, 1995. (Joint Exh. 1 ¶ 14; Travelers Exh. 401; Tr. at 1961-64 (N. Schulman); Tr. at 908 (Rothschild).)

16. Defendant Southpac Trust International, Inc. (“Southpac”) is a foreign corporation with its principal place of business located at Second Floor, Centrepoint, Rarotonga, Cook Islands, South Pacific. Southpac is and has been the trustee of the Schulman Trust. (Joint Exh. 1 ¶ 15; Travelers Exh. 401; Tr. at 909-10 (Rothschild) .)

17. Defendant Stuart Becker is an accountant practicing with the firm of Becker & Co. with its principal place of business located on Lexington Avenue, New York, New York 10007. Mr. Becker is named as a defendant solely in his capacity as a former trustee of the Schulman Family Trust. (Joint Exh. 1 ¶ 16.)

[*5] 18. Defendant Beam Industries, Inc. (“Beam”) is a corporation organized and existing under and by virtue of the laws of the State of New York with its principal office and place of business located at 11-02 37th Avenue, Long Island City, New York 11101. (Joint Exh. 1 ¶ 17.)

19. Defendant Marathon Construction, Inc. (“Marathon”) is a corporation organized and existing under and by virtue of the laws of the State of New York. (Joint Exh. 1 ¶ 18.)

20. Defendant B & E Builders, Inc. (“B & E”) is a corporation organized and existing under and by virtue of the laws of the State of New York. (Joint Exh. 1 ¶ 19.)

21. Defendant Eastland Construction, Inc. (“Eastland”) is a corporation organized and existing under and by virtue of the laws of the State of New York. (Joint Exh. 1 ¶ 20.)

B. The Schulmans

22. Allan Schulman and Nancy Schulman met in 1984 and they were married on April 16, 1989. It was the second marriage for both. (Joint Exh. 1 ¶ 21; Travelers Exh. 4; Tr. at 105-08, 2139 (A.Schulman); Tr. at 2576 (N. Schulman).)

23. At the time of their marriage, Nancy Schulman’s net worth was between approximately $10,000 and $12,000. (Tr. at 2579 (N. Schulman).) Allan Schulman’s net worth and assets at the time of their marriage were substantial, consisting of, among other things, his investment in Manshul.

24. On or about April 13, 1989, Allan Schulman and Nancy Benjamin (now Nancy Schulman) signed a written Prenuptial Agreement in which Nancy Schulman waived certain rights and claims to Allan Schulman’s property or assets by reason of the marriage, including equitable distribution rights in the event of divorce and the right of election of a surviving spouse in the event of Allan Schulman’s death. (Travelers Exh. 4.) The Prenuptial Agreement signed by the Schulmans provides that “Nancy agrees that Allan may dispose of any part or all of [his] property at any time or times and in any manner he may see fit and that Nancy expressly renounces, waives, relinquishes and releases any right to claim all such property, or any part thereof or any interest in such property of Allan.” (Travelers Exh. 4 ¶¶ 2.1(a), 3.1(a) & (b).)

25. According to the Prenuptial Agreement, Allan Schulman was to provide for Nancy Schulman in his will. If the two remained married for six to ten years, Allan Shulman was required by the terms of the Prenuptial Agreement to provide a bequest in his will to Nancy Schulman of 10% of his net estate. (Travelers Exh. 4 ¶ 6.1.)

26. When the Prenuptial Agreement was executed, Nancy Schulman had no assets in her name. Schedule B to the Prenuptial Agreement lists Nancy’s assets as “None.” (Travelers Exh. 4, Sch. B; Tr. at 107 (A.Schulman).)

27. Later in 1989, Nancy Schulman gave birth to twin boys, Ethan and Brett Schulman. (Tr. at 2577 (N. Schulman).) Nancy Schulman experienced a difficult pregnancy; in the first month of her pregnancy she was advised by her doctors to remain in bed until she delivered. (Id.) As a result, Nancy Schulman had to suspend her own career as a high school drug and alcoholism counselor. (Id.)

[*6] 28. On January 11, 1991, Allan Schulman signed and published his Last Will and Testament. The Will provided, among other things, that if Mr. and Mrs. Schulman were not separated or divorced, a testamentary trust would be established under which Nancy Schulman would draw an income for life, and thereafter the corpus of the trust would support Allan and Nancy Schulman’s children. The Will did not designate Nancy Schulman as executor or trustee, nor did it provide for any outright bequests to her. (Joint Exh. 1 ¶¶ 22, 23; Travelers Exh. 9; Tr. at 109, 112-13 (A.Schulman).)

29. Neither Allan Schulman’s January 11, 1991 Will nor the Prenuptial Agreement has ever been modified, revised or revoked. (Tr. at 108, 113 (A.Schulman); Tr. at 2597-99 (N. Schulman).) Nancy Schulman has never requested that the Prenuptial Agreement or the 1991 Will be revised or revoked. (Tr. at 2597-99 (N. Schulman).)

30. Since their marriage, Allan and Nancy Schulman have continuously lived together and have never separated or divorced. From the time of their marriage until July 1994, Allan Schulman fully supported his wife and children, providing them with a luxury home, a vacation home, food, clothing, medical care and private schooling for the children. (Tr. at 114, 382 (A.Schulman); Tr. at 2595-97 (N. Schulman).) At trial, Nancy Schulman testified that through the end of 1993 Allan Schulman provided her and her children with a “wonderful lifestyle.” (Tr. at 2581 (N. Schulman).)

31. Net worth statements prepared by Meyrowitz, Langenthal & Co., L.L.P. as of December 31, 1993 listed Allan Schulman’s total assets as $17,146,966, his total liabilities as $60,000, and his total net worth as $17,086,966. This financial statement also valued Allan Schulman’s interest in Manshul at $12,000,000, showed cash holdings of $10,000, and provided approximately the same values for marketable securities ($1,222,361) and for Viscount and Janal stock ($2,500,000) as did his net worth statement for the previous year. (Joint Exh. 1 ¶ 24; Travelers Exh. 102; Tr. at 173-74 (A.Schulman).)

32. As of December 31, 1993, Nancy Schulman’s total net worth was approximately $12,000. (Joint Exh. 1 ¶ 25.)

33. Prior to January 1, 1994, Allan Schulman had never given Nancy Schulman or either of their children any gift with a value in excess of $10,000. (Tr. at 114, 177 (A.Schulman).)

34. Prior to January 1, 1994, Manshul had never made a distribution to Nancy Schulman or the Schulman children, nor had it ever transferred any monies or assets to them for any other purpose. (Tr. at 2141 (A.Schulman); Tr. at 2579- 80 (N. Schulman).)

35. Prior to January 1, 1994, Allan Schulman had never taken distributions from Manshul. Rather, prior to this date Allan Schulman was compensated with wages. (Travelers Exhs. 99, 210.)

36. Nancy Schulman was not involved in the business operations of Manshul in any way, nor was she aware of the particulars of the company’s financial condition or the status of its construction jobs. (Tr. at 2023-2024 (N. Schulman).)

C. Manshul and its relationship with Aetna

[*7] 37. At all times material to this action, Allan Schulman has been the sole shareholder of Manshul. (Joint Exh. 1 ¶ 26.)

38. In 1957, Manshul was incorporated as a Subchapter S corporation in the State of New York by Julius Schulman, Allan Schulman’s father. At all relevant times, Manshul reported income under Subchapter S of the Internal Revenue Code, as amended. (Joint Exh. 1 ¶ 27.)

39. In or about 1962, Allan Schulman, a civil engineer, joined Manshul and was, from at least 1990 until the appointment of a trustee and the conversion of the Manshul bankruptcy cases to Chapter 7 proceedings, Manshul’s sole shareholder and president. (Tr. at 115 (A.Schulman).)

40. From its incorporation until its bankruptcy, Manshul specialized in providing general contracting services to bonded public works construction projects in New York City and the metropolitan area. (Joint Exh. 1 ¶ 28.)

41. From 1980 until 1994, Aetna, as surety, issued various construction surety bonds on behalf of Manshul, as principal, for each construction project on which Manshul was the general contractor. (Joint Exh. 1 ¶ 30.) These surety bonds included performance bonds that were issued to insure completion of Manshul’s construction contracts in the event of default or other non- performance by Manshul, and labor and material payment bonds issued to ensure payment of Manshul’s obligations to subcontractors and suppliers on its construction projects. (Joint Exh. 1 ¶ 30.) 42. Aetna issued the bonds in exchange for payment of premiums that it charged to Manshul. (Joint Exh. 1 ¶ 31.)

43. On or about April 12, 1980 Manshul and defendants Ascot and Allan Schulman, with others, executed a General Agreement of Indemnity (“GAI”) in favor of Aetna in which they agreed to “indemnify and exonerate Aetna from and against any and all loss and expense of whatever kind … which it may incur or sustain as a result of or in connection with (1) the furnishing of any Bond [or] (2) the enforcement of this agreement” (the “1980 Indemnity Agreement”). (Joint Exh. 1 ¶ 32; Travelers Exh. 1; Tr. at 121-22 (A.Schulman).) Julius Schulman, his wife, Edna, and Allan Schulman’s first wife, Patricia, were signatories to the 1980 Indemnity Agreement. (Travelers Exh. 1; Tr. at 122-24 (A.Schulman).)

44. On April 20, 1988, at a time when Allan was not married, Manshul and Allan Schulman executed and delivered to Aetna a second General Agreement of Indemnity (the “1988 Indemnity Agreement” or “GAI”) in which Manshul and Allan Schulman agreed “jointly and severally … to indemnify Surety from and against any and all Loss” (Joint Exh. 1 ¶ 34; Travelers Exh. 3; Tr. at 123-24 (A.Schulman).) The GAI defines “Loss” as “[a]ny and all loss, costs, charges and expenses of any kind, sustained or incurred by Surety in connection with or as a result of (1) the furnishing of any Bond [or] (2) the enforcement of this Agreement.” (Travelers Exh. 3 ¶ 1(h).)  

[*8] 45. It was Aetna’s practice to require the signature of a principal’s spouse on indemnity agreements to avoid having the principal frustrate Aetna’s indemnity claims by transferring assets to the spouse. (Tr. at 633 (LePostollec).) In the case of Manshul, however, Aetna never required that Nancy Schulman be added to any indemnity agreement after she married Allan Schulman because the Prenuptial Agreement between the Schulmans restricted Nancy Schulman’s right to receive funds from Allan Schulman. (Travelers Exh. 46, at 5; Tr. at 641 (LePostollec).) A memorandum between Aetna underwriters states: “When asked about his wife’s indemnity Mr. Schulman told us that his wife has signed a pre-nuptial agreement which lists in detail the assignment of personal assets. As per the prenuptial agreement, Manshul Construction Corp. is to remain solely the property of Alan Schulman. Nancy Schulman has absolutely no interest or involvement in Manshul Construction Corp.” (Travelers Exh. 14, at 2.)

46. Aetna requested, and Allan Schulman provided Aetna with, relevant portions of the Prenuptial Agreement executed by the Schulmans to justify Nancy Schulman’s exemption from signing the GAI. (Travelers Exhs. 14, 18, 30; Tr. at 132, 2203 (A.Schulman).)

47. Prior to 1994, Allan Schulman met with Aetna underwriters at least twice each year for the purpose of, among other things, discussing and reviewing the financial condition of Manshul and reviewing the status of its construction projects and the bonding relationship between Manshul and Aetna. Prior to or at these meetings, Allan Schulman would typically provide Aetna with financial information for both himself and Manshul. (Tr. at 125 (A.Schulman.) Allan Schulman testified that the financial information he provided to Aetna in connection with these meetings was prepared by Manshul’s accountant, Mr. Meyrowitz. (Tr. at 127-28 (A.Schulman) .) In addition to these meetings, Allan Schulman communicated with Aetna through his bond broker, the Carman Agency. (Tr. at 125 (A.Schulman).)

48. Although not provided for in any written agreement, the understanding and practice between Aetna and Allan Schulman was that Allan Schulman or Manshul would advise Aetna of any significant distributions, transfers or changes in Manshul’s financial condition. (Tr. at 1097 (Wright); Tr. at 2091 (Carson).) Pierre F. LePostollec, manager of Aetna’s New York bond office during the years 1982-1996, and current regional vice president of Travelers, testified that Aetna expected Allan Schulman to inform Manshul of any events or transfers from Manshul or from Allan Schulman that could affect Manshul’s financial condition, including distributions to shareholders, substantial gifts to Allan Schulman’s wife and children, and substantial transfers of personal assets to non- signatories to the indemnity agreement. (Tr. at 626, 636-38 (LePostollec).)

49. On a number of occasions Allan Schulman acted in accordance with this understanding with Aetna by informing Aetna of planned transfers and distributions, and Aetna did not object to these transfers. In 1992, Allan Schulman notified Aetna that he wanted to withdraw $1,500,000 of Manshul’s pretax profits to pay off the mortgage on his Muttontown, New York residence. (Travelers Exh. 46, at 5; Tr. at 134 (A.Schulman).) Allan Schulman notified Aetna of this planned withdrawal because he wanted Aetna’s “thoughts on this matter prior to year end to ensure it would not affect his bonding line.” (Travelers Exh. 46, at 5.) In addition, at a November 1993 meeting Allan Schulman advised Aetna of his intention to withdraw $800,000 to establish trust funds for his two children. (Travelers Exh. 90; Tr. at 652 (LePostollec).) Allan Schulman’s disclosure of this intended withdrawal was also consistent with Aetna’s expectation that it be informed of transfers that would impact Allan Schulman’s or Manshul’s financial condition. (Tr. at 179 (A.Schulman); Tr. at 652-53 (LePostollec); Tr. at 2083, 2090-91 (Carson).)

[*9] 50. In anticipation of the proposed distribution to the children’s trusts, Aetna established a $1,000,000 reserve against the amount used by Allan Schulman to fund the children’s trusts. (Tr. at 653 (LePostollec).) However, Allan Schulman never advised Aetna that he had actually created the trusts for his children or that he had transferred any monies from Manshul to fund those trusts. (Tr. at 667-68 (LePostollec).)

51. After the 1988 Indemnity Agreement was executed, from 1991 onward, Allan Schulman had numerous discussions with Aetna concerning his longstanding desire to revise the agreement to exclude his Muttontown residence. Aetna was receptive to Allan Schulman’s proposal to exclude the Muttowntown residence but required Allan Schulman to execute a revised general agreement of indemnity (the “GAI”) which would include several companies wholly-owned by Allan Schulman as additional signatories to the GAI. (Travelers Exh. 18, at 0636; Travelers Exh. 46, at 0482.) Among the companies Aetna sought to add as signatories were Janal and Viscount. (Travelers Exh. 46, at 0482.)

52. In September 1991 Allan Schulman formally requested that his Muttontown residence be excluded from the GAI. (Travelers Exh. 15; Tr. at 178 (A.Schulman).) Aetna at this point agreed to exclude the Muttontown residence in exchange for Allan Schulman’s agreement to add Janal and Viscount as additional indemnitors under the 1988 Indemnity Agreement. (Travelers Exh. 18; Tr. at 1106 (Wright).) Allan Schulman agreed to this condition. (Tr. at 1106- 07 (Wright).) A November 15, 1991 Aetna underwriting memorandum evidences Allan Schulman’s agreement. It states: “During our meeting, Mr. Schulman expressed a willingness to cooperate in providing whatever additional information we may request and has demonstrated this willingness through agreeing to add the Manshul affiliated companies onto the G.A.I.” (Travelers Exh. 18, at 5-6.) The memorandum further states that Aetna representatives had “successfully negotiated the exclusion of Mr. Schulman’s Muttontown residence in exchange for the addition of Viscount, and Janal Properties into the G.A.I.” (Travelers Exh. 18, at 2.) Aetna also sent a letter dated May 10, 1993 to Arnold Melman, Allan Schulman’s bonding agent, “confirm[ing] in writing our understanding of the following: Mr Schulman will be forwarding a perfected General Agreement of Indemnity (“GAI”) in the immediate future.” (Travelers Exh. 61.)

53. Thereafter, in the Spring of 1992, Aetna sent Allan Schulman a revised indemnity agreement adding Viscount and Janal. (Travelers Exh. 46; Tr. at 137 (A.Schulman).) Over the next three years, Aetna repeatedly requested that Allan Schulman execute the revised GAI and Aetna was repeatedly assured by Allan Schulman and Carman that Janal and Viscount would be added. However, the revised GAI was never executed. (Travelers Exhs. 18, 32, 61, 63, 66, 67, 79, 90; Tr. at 137 (A.Schulman); Tr. at 1110, 1112-18 (Wright).)

[*10] 54. On May 7, 1993, Allan Schulman, Arnold Melman, Manshul’s insurance broker, and Stanley Meyrowitz met with Aetna representatives James Carson and Alfred Wright. (Travelers Exh. 63.) At this meeting there was further discussion of the revised GAI. (Id.) According to a June 8, 1993 Aetna interoffice memorandum prepared by Mr. Wright, Aetna was “still awaiting perfection of the updated GAI adding Janal, Viscount, and Di-Cast onto the GAI in exchange for a homestead exclusion for the Schulman’s Muttontown residence. Alan assured [Aetna], once again, that the updated indemnity will be forthcoming shortly.” (Id. at 1388.)

55. On June 25, 1993, Mr. Wright wrote to Raymond Carman of the Carman Agency seeking an update on the status of the issue that Allan Schulman would “be forwarding to Aetna a copy of a perfected General Agreement of Indemnity (GAI) in the immediate future.” (Travelers Exh. 67.)

56. On September 15, 1993, Mr. Wright again wrote to Raymond Carman for the purpose of “request[ing] an update to the … issues discussed during the meeting of May 7th and to outline an agenda in anticipation of [Aetna’s] upcoming meeting tentatively scheduled for either September 29th, or October 1st.” (Travelers Exh. 79.) Mr. Wright sought once again to obtain written confirmation that Allan Schulman would be prepared to discuss that he “will be forwarding to Aetna a copy of a perfected General Agreement of Indemnity (GAI) in the immediate future[.]” (Id.)

57. Although at trial Allan Schulman testified that he had told his bonding agent that he did not want to add Viscount and Janal to the GAI (Tr. at 163 (A.Schulman)), the evidence is plain that he never told Aetna he was reluctant to add Janal and Viscount to the GAI. (Tr. at 1123-24 (Wright).) A June 1993 Aetna memorandum indicates that at a regular underwriting meeting, “Allan assured us, once again, that the updated indemnity will be forthcoming shortly.” (Travelers Exh. 63.)

58. On January 3, 1994, Allan Schulman transferred the capital stock of Viscount and Janal to Nancy Schulman. (Travelers Exhs. 106, 107, 442; Tr. at 1574-75 (Meyrowitz).) 59. In a January 18, 1994 letter, however, Mr. Scotto of the Carman Agency informed Aetna that Allan Schulman had given the agreement adding Janal and Viscount as collateral for the 1988 Indemnity Agreement to his attorneys for review and that he expected to have the “same in our hands, properly executed, very soon now.” (Travelers Exh. 112.)

60. Both Allan Schulman and Mr. Meyrowitz, who enacted the transfer of Janal and Viscount stock, received copies of this letter, but neither informed either the Carman Agency or Aetna that Janal and Viscount had already been transferred from Allan Schulman to Nancy Schulman or that the revised GAI adding Janal and Viscount would not be forthcoming. (Tr. at 292-95 (A.Schulman); Tr. at 1580-81 (Meyrowitz); Travelers Exh. 112.) In fact, even into February 1994, Manshul’s bonding agent continued to discuss with Allan Schulman the issue of a revised GAI adding Viscount and Janal. A letter from Mr. Scotto to Allan Schulman dated February 22, 1994 states that “[t]he only other outstanding issues relate to the executed General Agreement of Indemnity i.e. its return.” (Travelers Exh. 131.)

[*11] 61. Allan Schulman’s testimony that he never actually agreed with Aetna to add Janal and Viscount to the GAI, but was merely considering the proposal (Tr. at (163) (A.Schulman)), is not credible. It is clear from the testimony of Alfred Wright and Pierre LePostollec, and the documentary evidence, that Aetna justifiably believed it had an agreement with Allan Schulman to add Janal and Viscount to the GAI. It is also clear that Allan Schulman induced Aetna to believe that it had such an agreement by actively concealing from Aetna his alleged unwillingness to add Janal and Viscount to the GAI and then his actual transfer of the stock of those companies. (Travelers Exhs. 18, 32, 46, 61, 66, 67, 79, 90, 112, 131; Tr. at 1106-07 (Wright); Tr. at 641-47, 652 (LePostollec).)

62. As of June 30, 1993, Manshul reported total current assets worth $22,967,193, which included (a) cash and cash equivalents of $2,988,815; (b) United States’ Treasury Bills of $13,172,832; and (c) marketable securities of $2,223,595. Manshul’s current liabilities (i.e., accounts payable, billings in excess of costs and recognized earnings, accrued taxes and expenses) as of this date totaled $11,277,382. Stockholders’ equity as of June 30, 1993 was valued at $12,643,109. (Def.Exh. 231-I.)

63. On November 15, 1993, Aetna approved a $9,000,000 bid bond in Manshul’s favor to the New York City Transit Authority for the rehabilitation of the 34th Street Station. (Def.Exh. 299.)

64. On November 22, 1993, Allan Schulman and Stanley Meyrowitz met with Aetna representatives James Carson and Alfred Wright to discuss, among other things, Manshul’s financial statements and also to update Aetna on the status of Manshul’s outstanding jobs. Mr. Wright later prepared an internal summary of the November 22, 1993 meeting in which he acknowledged Manshul’s strong financial condition. The memo states that:

Our recent meeting with this account gave indications of Manshul having another successful year during 1993. The profit projections for all of their work in progress far exceeds the original estimates…. [I]t should be stressed that this company still enjoys excellent profits on its projects. In the 2 years in which I have been on this account, Manshul has not “brought a project home” with less than $1,000,000 in profit. Everyone involved in the meeting agreed that there currently does not appear to be an end to the depressed construction market.

….

Manshul continues to be a very profitable entity. Based upon their strong financial condition, and the business savvay [sic] of Alan Shulman [sic], we recommend continuing Manshul’s line at $65,000,000 aggregate with a maximum single job of $20,000,000. Associate Manager Jim Carson has read and agrees with the contents of this correspondence.

(Travelers Exh. 90, at 0510, 0514.)

65. As of December 31, 1993, Manshul had three active construction projects: the Nassau County Community College project, the New Bronx Housing Court project, and the ECC # 4 project. (Joint Exh. 1 ¶ 40; Tr. at 171 (A.Schulman).)

[*12] 66. As of December 31, 1993 Manshul had never been declared in default by an owner of a project in its 35-year history in the construction business. (Tr. at 117 (A.Schulman).) In addition, prior to December 31, 1993, no claims had ever been made against Aetna as a result of the performance bonds it issued Manshul on any of Manshul’s construction projects. (Tr. at 147 (A.Schulman).) Moreover, prior to December 31, 1993, Aetna had never suffered a loss in connection with any payment bond that it issued on behalf of Manshul. (Tr. at 1595 (Kiernan).) A declaration of default by the owner of a project for which Aetna had issued a performance bond would be an event of default under the GAI. (See Travelers Exh. 3, at ¶ 6.)

67. On or about March 8, 1994, Manshul, Ascot and Allan Schulman executed an agreement (the “March 1994 Agreement”) in which they, inter alia, ratified and affirmed their indemnification obligations under the 1988 Indemnity Agreement. (Travelers Exh. 135.) The March 1994 Agreement was in response to events that occurred in connection with the Nassau Community College project discussed more fully below. Nassau County had declared Manshul in default in January 1994, the first default in Manshul’s history, and Nassau County was only prepared to reinstate Manshul as contractor under a completion agreement to which Aetna was a party. Aetna was unwilling to execute the completion agreement without the March 1994 Agreement. The March 1994 Agreement provides, among other things, that “Manshul and each of the Indemnitors hereby ratify and affirm said Indemnity Agreement, and other agreements executed in favor of Aetna, and all of their obligations thereunder.” (Id.) The agreement did not add Janal or Viscount as indemnitors.

68. On or about May 20, 1994, after learning from a published newspaper account that Allan Schulman had been arrested on May 19, 1994, Aetna rescinded all future bonding authority for Manshul. (Tr. at 660 (LePostellec); Travelers Exh. 161.)

69. Allan Schulman testified at trial that in April of 1994 Manshul’s business was doing as well if not better than it had done as of December 31, 1993. (Tr. at 492-93, 533 (A.Schulman).) Stuart Becker also testified that Allan Schulman conveyed this to him at a meeting in early April, 1994. (Tr. at 824 (Becker).) As explained in greater detail below, this testimony was not credible.

70. Comparison of Manshul’s 1993 and 1994 tax returns indicates that, contrary to Mr. Schulman’s contention, Manshul’s business was not in fact doing as well or better in April of 1994 as compared to December 1993. Manshul’s 1993 tax return shows that Manshul’s gross receipts exceeded $20 million and its income was a profit of nearly $1 million. (Travelers Exh. 100.) Manshul’s 1994 tax return shows that its gross receipts for 1994 had declined to approximately $13 million and that it suffered a loss of nearly $2 million. (Travelers Exh. 210.) Additionally, Mr. Schulman himself testified that Manshul’s revenues during the first quarter of 1994 would not have been as good as 1993 because payments were delayed on the Nassau County Community College project. (Tr. at 533 (A.Schulman).) And in January 1994 Manshul had been declared in default on the Nassau Community College, the largest contract in its history and the first time it had been declared in default.

[*13] 71. On January 10, 1995, again in response to developments on the Nassau Community College project, Manshul, Ascot, and Allan Schulman executed an agreement (the “January 1995 Agreement”) in which they again ratified and affirmed their indemnification obligations under the 1988 Indemnity Agreement. (Def.Exh. 75, ¶ 16.) The January 1995 Agreement provides, in pertinent part, that “[t]he Indemnitors, and each of them, by their signatures below, …. consent to the terms and conditions of the instant Agreement and … ratify and reaffirm their obligations under the General Agreement of Indemnity and For Security dated April 20, 1988, under the Agreement dated March 8, 1994, and under any other agreements made by them, or any of them, in favor of Aetna.” (Id.)

D. Nassau Community College

72. On March 17, 1992, the County of Nassau awarded Manshul the prime contract for the general construction of a classroom building and student center at the Nassau Community College (the “Nassau project”) for a contract price of $22,000,264. (Joint Exh. 1 ¶ 41; Tr. at 154 (A.Schulman).) Aetna, as surety for Manshul, issued a performance bond to Nassau County and a payment bond for the benefit of Manshul’s subcontractors and suppliers on the Nassau project. (Joint Exh. 1 ¶ 41; Tr. at 153-54 (A.Schulman).)

73. The Nassau project was the largest project in Manshul’s history. (Tr. at 154-55 (A.Schulman).)

74. The Nassau project was scheduled to be completed by December 21, 1994. (Tr. at 235 (A.Schulman).)

75. Manshul experienced difficulties with the Nassau project from its inception. (Tr. at 155 (A.Schulman).)

76. During December 1992, Nassau County advised Allan Schulman that it was “in receipt of information which indicates the existence of a serious problem between [Manshul] and its steel fabricator [Waldorf Steel].” (Travelers Exh. 39; Tr. at 155 (A.Schulman).)

77. By letter dated November 30, 1993 Nassau County had cautioned Manshul about its concerns about the progress of the Nassau project:

You are already mindful of our deep concern with Manshul’s performance on this project; indeed, from its commencement, Manshul has not performed in accordance with contractual requrements and has caused the project to be behind schedule which has impacted the other Prime Contractors and caused the contract completion date, last month, to be in jeopardy by as much as 232 working days behind.

In view of this, Manshul appears unable to complete this project by the December 21, 1994 completion date which will seriously jeopardize the intended educational use of the new facility as scheduled.

(Travelers Exh. 88; Tr. at 217-18 (A.Schulman).) The letter also requested a meeting “to discuss how Manshul will complete its contract as scheduled and to consider other alternatives to default.” (Travelers Exh. 88.)

78. On December 8, 1993 Allan Schulman and other representatives of Manshul met with Nassau County officials to discuss the County’s allegations of delay on the project. (Tr. at 223-26 (A.Schulman).) By letter dated December 8, 1993, Nassau County Commissioner John Waltz advised Manshul that “The County of Nassau believes that grounds for default exist pursuant to the terms of the contract between the County and Manshul.” (Travelers Exh. 89; Tr. at 223, 226- 27 (A.Schulman).) Nassau County therefore “demand[ed] that by January 7, 1994, [Manshul] demonstrate that the project [could] be completed on time in accordance with the schedule updates.” (Travelers Exh. 89.)

[*14] 79. On January 11, 1994, Nassau County declared Manshul in default under its prime contract by letter stating, in part:

Be advised that in accordance with the terms of our Contract, Agreement, Article 37, pages 51-52 thereof, you are declared in default. The grounds for this determination are:

1. You have not fulfilled the rate of progress of your work.

2. You have unreasonably and unnecessarily delayed the completion of your work. 3. You have not been executing your Contract in good faith.

4. You have been violating provisions of your Contract which a review of the record will document.

(Travelers Exh. 109; Tr. at 229 (A.Schulman).) Later that same day, Manshul was ordered to leave the project, leaving equipment, tools and materials on- site. (Travelers Exh. 109; Tr. at 230 (A.Schulman).)

80. Manshul remained off the Nassau project from January 11, 1994 to March 8, 1994. (Tr. at 234 (A.Schulman).)

81. On January 25, 1994 Manshul commenced a proceeding under Article 78 of the New York Civil Practice Law and Rules seeking to obtain a temporary restraining order vacating and annulling Nassau County’s declaration of default. (Travelers Exh. 117; Tr. at 234 (A.Schulman).) The verified petition filed by Allan Schulman in the Article 78 proceeding sought both to reinstate Manshul and to restrain Nassau County and Aetna from obtaining replacement contractors. Manshul disputed that any basis for default existed and characterized the default as arbitrary and capricious. The petition states that equitable relief is critical because “the County’s precipitous default declaration will put [Manshul] out of business because all public agencies and municipalities, including Nassau County itself, require bidders on public contracts to submit pre-qualification statements which must list any prior default as a condition for qualification for any bid.” (Travelers Exh. 116 ¶ 13; Tr. at 239 (A.Schulman).) Allan Schulman also verified in the petition that “[t]his default will disqualify [Manshul] from public bidding.” (Travelers Exh. 116 ¶ 13; Tr. at 239 (A.Schulman).)

82. Aetna had also disputed Nassau County’s contention that the project was behind schedule. In an Aetna interoffice memorandum dated December 9, 1993, Alfred Wright advised Brien N. Bialaski that the Nassau Community College Project was then “51% complete and progressing nicely.” (Def. Exh. 300, at 0584.) Mr. Wright further advised Mr. Bialaski that “[t]he Estimated Gross Profit of $2,000,000 reflected in the June statements has increased to $3,000,000 (13%), and this project is still expected to be completed on time (December of 1994).” (Id.)

83. On March 8, 1994, Manshul entered into a settlement stipulation with Nassau County that rescinded the January 11, 1994 declaration of default (the “First Settlement Agreement”). (Travelers Exh. 426 (attachment); Tr. at 307-08 (A.Schulman).) The First Settlement Agreement provided for the withdrawal of Nassau County’s January 11, 1994 Notice of Default and an agreement by Aetna to retain the services of a reputable construction management company to serve as the primary contact and liaison between Nassau County and Manshul on the Nassau Community College Project. Aetna, Manshul, Allan Schulman and Ascot also entered into the March 1994 Agreement described above in which each of the Indemnitors under the GAI ratified and reaffirmed the “[GAI] and other agreements executed in favor of Aetna and all of their obligations thereunder.” (Travelers Exh. 135.)

[*15] 84. Shortly thereafter, on March 15, 1994, Manshul terminated Sawyer’s Glass as one of its key subcontractors. (Tr. at 309 (A.Schulman).)

85. By early April 1994, Nassau County again threatened to default Manshul. (Travelers Exh. 426; Tr. at 322, 329 (A.Schulman).) By letter dated April 6, 1994 the Nassau County Attorney informed Manshul that the County was “seriously concerned that this project is not progressing and that unless Manshul and Aetna resolve the disputes with all Manshul’s subcontractors and suppliers by April 15, 1994, the County will have no other recourse than to consider the remedies under the Contract, including a second default .” (Travelers Exh. 426; Tr. at 330 (A.Schulman).)

86. In late April 1994, Manshul commenced a second Article 78 proceeding to restrain Nassau County from declaring Manshul in default and to collect an overdue receivable from the County. (Travelers Exh. 426; Tr. at 325 (A.Schulman).)

87. On June 10, 1994, Manshul entered into a stipulation with Nassau County to settle Manshul’s second Article 78 proceeding. In this stipulation, Manshul agreed to accomplish certain tasks by certain milestone dates provided for in the agreement (the “Milestone Agreement” or the “Second Settlement Agreement”). (Travelers Exh. 168; Tr. at 368 (A.Schulman).) The Milestone Agreement provided, among other things, that the building closing facade would be completed by September 30, 1994. (Tr. at 368-69 (A.Schulman).) According to the agreement, if Manshul did not meet each of the milestone dates, it would step aside voluntarily as general contractor. In the event Manshul stepped aside, Aetna agreed to act as the completing surety with the option to use Manshul as its completing contractor. (Travelers Exh. 168; Tr. at 369 (A.Schulman) .)

88. Coppers was Manshul’s metal panel supplier responsible for completing an aspect of the building closing facade by the milestone date of September 30, 1994. (Tr. at 372 (A.Schulman).) By July 1994, Allan Schulman knew that all of Coppers’ aluminum metal panels would not be installed by September 30, 1994, and that, consequently, this milestone would not be met. (Tr. at 373 (A.Schulman).) Internal Aetna correspondence dated July 27, 1994 and authored by Sean Kiernan states: “The 1st and 3rd milestones can be met but the second milestone will be approximately 4 weeks late.” (Travelers Exh. 177.) Mr. Kiernan continued: “The problem here is the reaction of the county to this news. If they are truly interested in bringing this job in, they should give us some sort of waiver on this milestone # 2. If they are looking for an excuse to put Manshul off the job and have Aetna finish the job … here is the excuse.” (Id.)

89. On October 4, 1994, Nassau County informed Manshul that it had not reached certain of the contract milestones. (Def. Exh. 168 ¶ 49.) Manshul contested Nassau County’s notification and the dispute was thereafter litigated in the Supreme Court, Nassau County. (Id.) Aetna and Manshul both participated in the hearing through counsel.

[*16] 90. In a decision dated November 15, 1994, Justice Joseph A. DeMaro of the New York State Supreme Court, Nassau County, determined that Manshul had failed to complete specified work by the September 30, 1994 milestone date set forth in the Second Settlement Agreement, and that under the terms thereof, Manshul and Aetna had not substantially completed the work required by the milestone date. (Travelers Exh. 197, at 6.)

91. By letter dated November 23, 1994, Aetna’s counsel, Henry Wallach, informed Nassau County that, pursuant to the terms of the Second Settlement Agreement, Aetna was prepared to assume the role of completing surety and it intended to engage Manshul as its completing contractor. (Def.Exh. 65.) Mr. Wallach advised Nassau County that “Aetna and Manshul are prepared to devote their good faith efforts to completing the contract work as soon as possible and … with the cooperation of the County and its representatives at the jobsite, the work remaining to be performed can be completed to the point where the County can take beneficial occupancy on or about August 1, 1995.” (Id.)

92. On January 10, 1995, Aetna and Manshul executed an agreement whereby Aetna retained Manshul to act as completing contractor on the Nassau project. (Def.Exh. 75.)

93. On January 13, 1995, Nassau County defaulted Aetna as completing surety for the Nassau project. (Tr. at 450 (A.Schulman).)

94. After January 13, 1995, Manshul performed no further work on the Nassau project. (Tr. at 450 (A.Schulman).)

E. The New Bronx Housing Court Project

95. On June 9, 1992, the City of New York awarded Manshul the prime contract for the general construction of the New Bronx Housing Court (“New Bronx”). Aetna, as surety for Manshul, issued a performance bond to the City of New York and a payment bond for the benefit of Manshul’s subcontractors and suppliers on the New Bronx project. (Joint Exh. 1 ¶ 42.)

96. By letter dated January 8, 1993, Allan Schulman advised the Department of General Services of the City of New York that the New Bronx project was “in jeopardy. Subcontractors are refusing to work; vendors are refusing to delivery [sic] all due to nonpayment by your office.” (Travelers Exh. 48; Tr. at 187 (A.Schulman).)

97. By February 1993 Manshul began to have disputes with the City regarding payment on the New Bronx project. (Tr. at 218 (A.Schulman).) At the same time, certain of Manshul’s subcontractors threatened to walk off the job because they were not being paid. (Tr. at 218 (A.Schulman).) Allan Schulman advised the City that it and its subcontractors were being prevented from performing on the project because they were not being paid, and that certain of the subcontractors were refusing to work because they were not being paid. (Travelers Exhs. 54, 56; Tr. at 219 (A.Schulman).)

98. On June 11, 1993, Manshul and LaQuila, Manshul’s foundation subcontractor, walked off the New Bronx project. (Def. Exh. 450; Tr. at 1917 (Kiernan).)

[*17] 99. In or about September 1993, the HVAC subcontractor, Wenco Mechanical Corp. (“Wenco”), left the New Bronx project. (Tr. at 220-21 (A.Schulman).) Wenco filed for bankruptcy protection on or about November 17, 1993. (Tr. at 221 (A.Schulman).)

100. By April 1994, the City was threatening to default Manshul on the New Bronx project for failure to perform its obligations under the contract. (Travelers Exh. 298 ¶ 29; Tr. at 185-87 (A.Schulman).)

101. On or about August 1, 1995, the City notified Manshul in writing of its decision to hold Manshul in default on the New Bronx project. (Travelers Exh. 240.) The City also notified Aetna of its decision and demanded that Aetna undertake completion of the project pursuant to Aetna’s performance bond obligations. Aetna refused to do so, claiming, in a letter dated August 16, 1995, that it had not had an opportunity to conduct an investigation to determine whether the default was proper. (Def.Exh. 119.)

102. On August 1, 1995, Manshul was declared in default on the New Bronx project and it was instructed to cease all work on the project. (Travelers Exhs. 240, 242; Tr. at 433 (A.Schulman).)

F. The ECC # 4 Project

103. On September 22, 1993 the City of New York awarded Manshul the prime contract for the general construction of the Early Childhood Center # 4 (“ECC # 4”). Aetna, as surety for Manshul, issued performance and payment bonds for the ECC # 4 project. (Joint Exh. 1 ¶ 43; Tr. at 171, 180 (A.Schulman).) The ECC # 4 project was the last project Manshul ever procured. (Tr. at 180 (A.Schulman).)

104. In or about May 1994, the City stopped paying for the ECC # 4 Project after arrest warrants were issued for Julius Schulman and Allan Schulman. (Tr. at 2172-75 (A.Schulman).)

105. In or about early August 1994, negotiations took place between the the City and Manshul with respect to a substitution of Manshul (Bronx) for Manshul on the ECC # 4 Project. (Tr. at 2175-2174 (A.Schulman).)

106. Work on the ECC # 4 Project resumed after August 31, 1994, upon the execution of an agreement providing for the removal of Manshul and Allan Schulman from the project. (Def.Exh. 156, ¶ 16.)

107. Pursuant to the August 31, 1994 agreement, Manshul (Bronx) was created for the sole purpose of assuming Manshul’s obligations under the ECC # 4 contract and completing the project without any involvement by Manshul or Allan Schulman. Allan Schulman and Manshul were prohibited from exercising any control over Manshul (Bronx) or the construction of the ECC # 4 building. Manshul (Bronx) was to be operated by Carol Sigmond and Stanley Meyrowitz. (Tr. at 2172 (A.Schulman).)

108. On September 22, 1995, the City declared Manshul in default on the ECC # 4 project. (Def. Exh. 129; Tr. at 434 (A.Schulman).)

G. Subcontracter claims

109. During the years 1991 through 1993 the number and amount of subcontractor claims asserted against Manshul steadily increased. In 1991, the aggregate face amount of subcontractor claims was slightly under $1,000,000. In 1992, this amount increased to approximately $1,500,000, and in 1993, the claims increased to approximately $2,000,000. In 1994, the face amount of subcontractor claims against Manshul increased dramatically. Approximately $12,000,000 in subcontractor claims were asserted in the first four months of 1994, and over $13,000,000 in subcontractor claims were asserted against Manshul by the end of 1994. (Tr. at 1597-98 (Kiernan).) Of this amount, over $8,000,000 was a claim by Waldorf Steel which Allan Schulman believed was exaggerated and unjustified. (Tr. at 2148-54 (A.Schulman).)

[*18] 110. In 1994 Allan Schulman began calling Aetna frequently in connection with the increase in subcontractor claims. (Tr. at 1599 (Kiernan).)

111. Manshul and Allan Schulman were aware of at least the following subcontractor claims in 1991 and 1992 (amounts shown in parenthesis): Pottstown Fabricators, Inc. ($430,020); C & D Fireproofing (over $57,000); Byram Concrete and Supply, Inc. ($104,258); Del Gesso, Inc. ($178,000); Ben Strauss, Inc. ($35,447.50); and Remark Electric ($795,446.71). These subcontractors made claims against Manshul through demand letters, notices of mechanic’s liens or notices of public improvement liens. (Travelers Exhs. 11, 12, 13, 17, 29, 31 and 33; Tr. at 149-53, 262-63 (A.Schulman).)

112. Manshul and Allan Schulman were aware of at least the following subcontractor claims through demand letters, lawsuits and lien claims filed in 1993 and 1994 in the amounts shown and on or about the dates identified: Byram Concrete ($72,961.67) (Aug. 5, 1993); Remark Electric (TEQ) ($686,911) (Sept. 29, 1993); Remark Electric ($108,680) (Oct. 25, 1993); Photo Lab Fabricators, Inc. ($414,000) (Nov. 15, 1993); Francis Brothers ($228,131.21) (Dec. 9, 1993); Anthracite ($140,000) (Jan.1994); Gem Steel Fabricators ($345,182) (Jan. 25, 1994); Williams Elevator ($313,555) (Jan. 28, 1994); Eastern Sheetmetal ($43,673.88) (Feb.1994); Sawyer’s Glass ($1,022,212.30) (Feb. 8, 1994); Perosi Electric ($130,270) (Feb. 18, 1994); Canron Construction ($747,617) (Feb. 22, 1994); Lacertosa J & C Mason Contractors Inc. ($163,928.33) (March 14, 1994); Waldorf Steel ($8,524,561) (March 17, 1994); Alumax ($406,745) (April 29, 1994); Peer Construction ($759,359) (1st quarter of 1994). (Travelers Exhs. 136, 138, 139, 140, 145; Tr. at 258-71, 310-12, 316-22 (A.Schulman).) 113. A number of these subcontractor claims resulted in lawsuits that were fully litigated, including claims asserted by Photo Lab Fabricators, Inc. (Travelers Exh. 196; Tr. at 418 (A.Schulman)), Perosi Electric (Travelers Exh. 275; Tr. at 424-25 (A.Schulman)), RSG Caulking (Travelers Exh. 301), Francis Brothers Sewer and Drainage, Inc. (Travelers Exhs. 302, 303), Serge Elevator Co., Inc. (Travelers Exh. 312), and F & G Mechanical Corp. (Travelers Exh. 318).

114. Manshul’s Chapter 11 bankruptcy petition and schedules, filed on July 31, 1996 and sworn to by Allan Schulman, indicate that the following subcontractors had claims pending against Manshul for work performed or events occurring prior to December 31, 1993: Waldorf Steel ($2,100,000); Remark Electric ($1,700,000); Francis Bros. Sewer and Drainage ($240,000); Sentrale Contracting Corp. ($750,000); Canron Construction Corp. ($748,000); Gem Steel Erectors ($250,000); G.R. Del Gesso ($169,000). (Travelers Exh. 274; Tr. at 248-54 (A.Schulman).)

115. In Manshul’s chapter 11 petition and schedules sworn to by Allan Schulman, Manshul specifically identified Remark Electric Corp. as having a disputed unsecured claim of $850,000 arising as of January 15, 1993 stemming from Remark’s work on the FBI project, and a disputed unsecured claim of $50,000 arising as of January 1, 1994 stemming from Remark’s work on the New York City Transit Authority project. (Travelers Exh. 274, at SB 0000125). Manshul’s chapter 11 schedules also identify Francis Brothers Sewage and Drainage as having a disputed unsecured claim of $136,000 arising as of January 1, 1994 stemming from work performed on the Navy project. (Travelers Exh. 274 at SB 0000216.) In addition, Manshul’s chapter 11 schedules identify Yasulka, Inc. as having a disputed unsecured claim of $88,291.40 stemming from work performed on the 41st Precinct, Yonkers, and FBI projects. (Travelers Exh. 274.)

[*19] 116. The Francis Brothers, Remark and Yasulka claims plainly arose prior to the time of the transfers at issue in this case. (Def. Exh. 194, App. 2, at 2-4.) The Trustee also identifies Remark, Francis Brothers, Yasulka and numerous other subcontractors as possessing claims arising prior to December 31, 1993, for which Manshul remained liable at the commencement of the bankruptcy proceeding. (Trustee Exh. 3 at § 2, Exh. A.)

117. Attached to the affidavit of Allan G. Schulman is a schedule in which Allan Schulman identifies over one-hundred and thirty lawsuits pending against Manshul at the time of the bankruptcy filing, many of which, including the lawsuit filed by Francis Brothers, were commenced prior to the time of the transfers at issue in this case. (Travelers Exh. 274.)

118. The Trustee also testified that a total of approximately $30,000,000 in subcontractor claims have been filed in the Chapter 7 bankruptcy case. (Tr. at 564-65 (Geron).) 119. Manshul’s affidavit, sworn to by Allan Schulman and submitted with Manshul’s chapter 11 petition pursuant to Local Bankruptcy rule 1007-2, included a version of a chart prepared by Manshul’s in-house counsel, Carol Sigmond, outlining various subcontractor claims against Manshul. (Travelers Exh. 274; Tr. at 255 (A.Schulman).) In the affidavit, Allan Schulman swore to the accuracy of Carol Sigmond’s list of subcontractor claims, the date of service of the claim and the face amount of the claims. (Travelers Exh. 274; Tr. at 255-56 (A.Schulman).) Accordingly, the Court accepts these schedules as evidence of the existence of these claims as of the dates of service and in the face amounts indicated in the schedules.

H. Criminal investigation

120. On May 2, 1994, Allan Schulman met with Sheldon Rosenblum, a Board of Education official, and delivered to him an envelope containing $4,500 in cash. (Travelers Exh. 159 ¶ 3; Tr. at 335 (A.Schulman).)

121. On or about May 7, 1994, agents of the Federal Bureau of Investigation (the “FBI”) executed a search warrant at the offices of Louis Cantor, one of Manshul’s attorneys, in connection with a criminal investigation of Mr. Cantor, Allan Schulman, Julius Schulman, and Manshul. (JX 1 ¶ 50.)

122. Prior to execution of the search warrant, none of the subjects of the investigation had knowledge of the impending criminal investigation. On or about May 7, 1994, after execution of the search warrants, Allan Schulman and Nancy Schulman learned of the criminal investigation. (JX 1 ¶ 51.)

123. As of May 7, 1994, Allan Schulman was aware that he could be arrested in connection with bribery charges. (Tr. at 336 (A.Schulman).) After learning of the FBI raid on Louis Cantor’s office, Allan Schulman was afraid that he would be arrested and that the government could seize or restrain his assets. (Tr. at 387-88, 494-95 (A.Schulman).)

124. Thereafter, Allan Schulman met with Stuart Becker, who told him: “[Y]ou don’t know what the government can do…. Get the money out immediately, protect the family, start moving the monies out…. However you want to take the money, you take the money, by check, take it out.” Allan Schulman agreed with Becker’s advice to remove funds from Manshul. (Joint Exh. 1 ¶ 49; Tr. at 499-501 (A.Schulman).)

[*20] 125. In a sworn affidavit dated October 9, 1997, Mr. Schulman stated with respect to the pending criminal investigation:

I was threatened with an arrest and ultimately arrested and charged with a crime in May 1994.

When this devastating event occurred, I immediately visited Stuart Becker again and told him that I was going to be arrested and while I had complete faith in my innocence, I was terribly afraid that I could be convicted of a crime and go to jail. I did not know what would happen to my assets, I was afraid that the government could do something with my assets and my family would be penniless.

(Travelers Exh. 308 at ¶¶ 5-6.)

126. Mr. Schulman’s October 9, 1997 affidavit also states that Mr. Becker advised him to withdraw Manshul’s accumulated earnings and distribute them to his wife, in order “to get them out of my name.” (Travelers Exh. 308, at ¶ 6.) While Mr. Schulman alleged in his affidavit that this had been “planned” as early as January 1994, as explained below, this allegation of a pre-existing plan is not credible.

127. On or about May 19, 1994, a criminal complaint was filed in the Southern District of New York against Allan Schulman, Julius Schulman, Louis Cantor, and Manshul. On May 20, 1994, Allan Schulman and Julius Schulman were arrested in connection with the criminal complaint on charges of bribery of a public official and conspiracy. (Joint Exh. 1 ¶ 57; Travelers Exh. 159; Tr. at 337-38 (A.Schulman).)

128. Within days of the May 7, 1994 search of Louis Cantor’s office, Allan Schulman retained Andrew Maloney as his criminal attorney in connection with the bribery investigation. (Tr. at 1824, 1838 (Maloney).)

129. Mr. Maloney testified that in his opinion the maximum fine facing Manshul at the time was between $56,000 and $120,000, with a possible downward departure. (Tr. at 1836 (Maloney).) Mr. Maloney also testified, however, that a conviction of Manshul on charges of conspiracy and bribery would have put Manshul out of business. (Tr. at 1841 (Maloney).)

130. Mr. Meyrowitz similarly testified that he was unable to give an opinion as to Manshul’s financial condition following the criminal charges because the charges put the company’s very existence at issue:

A. At the particular time at the end of June 30 there was a criminal action going on. I had no idea how the outcome would show up. There could have been a potential tremendous liability to the company. It was more than just footnoting it. It could have possibly destroyed the entire company at that particular time. So in no way were we in a position to issue a financial statement

Q. In connection with the criminal matter, what relationship, if any, did you make between the pendency of the criminal matter and the ability to get bonding?

A. The bonding companies were not—wouldn’t give bonds at that particular time because things were up in the air.

Q. What effect if any did you regard the ability to get new bonding to have on Manshul’s ability to get new construction projects?

[*21] A. Without that, the type of work that Manshul Construction was doing, they just couldn’t. They wouldn’t get any work at all.

Q. In effect, the inability to get new jobs virtually put Manshul out of business, is that correct?

A. It didn’t put Manshul out of business. It just stopped them from doing any new work

(Tr. at 2654-55 (Meyrowitz).)

131. In addition to the possible fine against Manshul, Allan Schulman also faced an individual fine of $40,000 and a prison sentence if convicted on the charges against him. (Travelers. Exh. 519.; Tr. at 1826, 1835-38 (Maloney).)

132. After he retained Mr. Maloney, Allan Schulman and Carol Sigmond spent three to four months in Mr. Maloney’s offices working virtually full-time on the criminal defense. (Tr. at 393 (A.Schulman); Tr. at 1005-06 (Sigmond); Tr. at 1843 (Maloney).)

133. The period May to August 1994 was a desperate time for the Schulmans. Nancy and Allan Schulman were “scared to death” of the criminal charges facing Allan Schulman and Manshul. (Tr. at 1999-2000 (N. Schulman).) Meanwhile, Manshul had been defaulted on the Nassau project, and it entered into the Milestone Agreement on which it would shortly default. Manshul’s only other ongoing projects—the New Bronx project and ECC # 4—were also in trouble.

134. Allan Schulman testified that when he transferred funds in May 1994 out of Manshul, he “wasn’t thinking.” (Tr. at 523 (A.Schulman).) He further testified: “I was in a panic state, that was one thing, as I look now, and I was depressed. I guess when something like this happens, you get depressed. I started to follow Mr. Becker’s advice.” (Tr. at 523-24 (A.Schulman).)

135. On or about December 30, 1994, the criminal complaint against Manshul, Julius Schulman and Allan Schulman was withdrawn without prejudice, but future prosecution remained a possibility. (Joint Exh. 1 ¶ 74; Trustee Exh. 94; Tr. at 1846-48 (Maloney).)

136. In November 1996 Mr. Maloney attempted to negotiate a plea agreement with the United States Attorney’s Office. (Tr. at 1845-48 (Maloney); Tr. at 294, 393-94 (A.Schulman).) The plea agreement involved Manshul pleading guilty to the bribery charges and facing a potential criminal fine of $500,000 in exchange for the government not prosecuting Allan Schulman. (Trustee Exh. 94; Tr. at 394 (A.Schulman); Tr. at 557-59 (Geron); Tr. at 1847 (Maloney).)

137. On December 12, 1996 the Trustee met with Andrew Maloney regarding this proposed plea agreement. (Tr. at 556 (Geron).) Mr. Maloney encouraged the Trustee to accept the plea on behalf on Manshul in order to protect Allan Schulman, even though the plea agreement would have a substantial negative impact on Manshul’s ability to collect outstanding receivables. (Tr. at 1847 (Maloney).)

138. The Trustee refused to enter into the proposed plea agreement because, he concluded, Manshul’s guilty plea would give a legal basis to the state and municipal owners of certain projects not to pay Manshul’s outstanding invoices, and it could also expose Manshul to possible disgorgement of amounts previously paid to it on those projects. (Tr. at 559-60 (Geron).)

[*22] 139. Mr. Maloney very credibly denied ever advising Allan Schulman to transfer money out of Manshul so that the government could not reach it. He stated: “[I]f you’re telling somebody to hide monies from bona fide creditors and/or the government, that would be unethical; I think perhaps unlawful.” (Tr. at 1849 (Maloney).)

140. In May or June of 1997 the United States Government discontinued its investigation of Manshul. (Tr. at 560-61 (Geron).)

141. Allan Schulman did not advise Aetna of either the Criminal Complaint or of his arrest. (Tr. at 338 (A.Schulman).) Aetna only learned of the criminal arrest through a New York Times article. (Joint Exh. 1 ¶ 59; Tr. at 656 (LePostollec).)

142. On June 9, 1994, Allan Schulman met with Aetna representatives at their request to discuss, among other things, the impact of the Criminal Complaint on the bonding relationship between Manshul and Aetna. (Joint Exh. 1 ¶ 59; Tr. at 356-57 (A.Schulman) .) Notes from the June 9, 1994 meeting prepared by Aetna personnel state that “[t]he extent of the downside risk in this circumstance was not known” at the time of the meeting. (Travelers Exh. 166 ¶ 5.) The Memo did indicate: “There is no evidence that any of the company’s contracts are being terminated …. [The Nassau project] is apparently going to proceed after some delay.” (Travelers Exh. 166 ¶ 5.) After the meeting, Aetna personnel concluded that “the direction of things is uncertain at this time and will probably not be determined clearly before the end of 1994.” (Travelers Exh. 166 ¶ 9.)

143. In internal Aetna correspondence dated August 4, 1994 from James Carson to Sean Kiernan, Mr. Carson states: “Let me just clarify … we would not issue any more bonds until a significant number of pending items in regard to Manshul are cleared up. Pending those resolutions, we would only issue a bond if it involved a claim situation and the claims department requested us to do so.” (Travelers Exh. 183.)

144. After his arrest, Allan Schulman did not attempt to procure further bonding from Aetna or from other sources until 1995. (Tr. at 383 (A.Schulman).)

I. Change in Allan Schulman’s and Manshul’s financial condition.

145. For the years immediately prior to 1994, Manshul had a history of high profits and high liquidity. In 1991, Manshul reported $21,871,381 in gross sales, $2,079,218 in compensation to officers (i.e, Allan Schulman), and $3,085,836 in income. (Travelers Exh. 24; Tr. 136-37 (A.Schulman).)

146. In 1991, Allan Schulman’s net worth statement indicated holdings of $10,000 in cash, approximately $1,200,000 in marketable securities and an estimated equity of approximately $900,000 in his Muttontown residence. (Travelers Exh. 25; Tr. at 139 (A.Schulman).) In his December 31, 1991 personal net worth statement, Allan Schulman valued Manshul at $10,000,000 and he valued his Viscount and Janal stock at $2,500,000. (Travelers Exh. 25; Tr. at 140 (A.Schulman).) His total net worth was $14,050,075. (Travelers Exh. 25.)

[*23] 147. In 1992, Manshul reported $20,614,382 in gross sales, $3,034,687 in compensation to officers and $2,353,461 in income. (Travelers Exh. 42; Tr. at 142-43 (A.Schulman).)

148. Allan Schulman’s 1992 personal net worth statement shows holdings of $10,000 in cash, approximately $1,200,000 in marketable securities, and approximately the same values as in 1991 for his ownership interests in the Muttontown residence and Viscount and Janal. (Tr. at 143 (A.Schulman); Travelers Exh. 43.) Allan Schulman’s December 31, 1992 personal net worth statement valued his interest in Manshul at approximately $12,000,000. (Travelers Exh. 43 .) His total net worth was $16,803,596. (Id.)

149. Manshul’s June 30, 1993 financial statement indicates that Manshul was holding cash, cash equivalents, U.S. Treasury bills, and marketable securities of approximately $18 million and total stockholder equity of $12,643,109. (Travelers Exh. 70; Tr. at 165 (A.Schulman).)

150. Manshul’s December 31, 1993 audited financial statement indicates cash and cash equivalents, U.S. Treasury bills and marketable securities of approximately $17 million and total stockholder equity of $12,940,638. Manshul’s 1993 federal tax return reports over $20 million in gross sales, $1,800,000 in compensation to officers and $934,000 in income. (Travelers Exhs. 99, 100; Tr. at 170, 172-73 (A.Schulman).) [FN2]

FN2. This financial statement does not contain any footnote or adjustment for the write off of the Janal and Viscount debt to Manshul or for the $1,200,000 that was transferred into trusts for the Schulman children in January 1994. (Travelers Exh. 99.)

151. A net worth statement prepared by Meyrowitz, Langenthal & Co., L.L.P. as of December 31, 1993 lists Allan Schulman’s total assets as $17,146,966, his total liabilities as $60,000, and his total net worth as $17,086,966. This statement also values Allan Schulman’s interest in Manshul at $12,000,000, shows cash holdings of $10,000, and provides approximately the same values for marketable securities and for Viscount and Janal stock as did his net worth statement for the years 1991 and 1992. (Joint Exh. 1 ¶ 24; Travelers Exh. 102; Tr. at 173-74 (A.Schulman).) [FN3]

FN3. This statement also includes Viscount and Janal with a value of $2,500,000. (Travelers Exh. 102.)

152. On June 15, 1993, in a meeting with his attorney Ronald Stein, Allan Schulman projected that Manshul would probably have losses in the coming year or two. (Trustee Exh. 96; Tr. at 961 (Stein).)

153. Manshul’s gross sales declined from over $20 million in 1993 to just over $13 million in 1994, and total officer compensation declined during the same period from $1,800,000 to $106,000. (Travelers Exhs. 210, 338; Tr. at 404 (A.Schulman).) In 1994, Manshul recorded a loss of $1,989,620. (Travelers Exh. 210; Tr. at 406 (A.Schulman).)

154. In 1995, Manshul had $780,000 in gross sales, it paid compensation to officers of $90,000, and it suffered losses in excess of $2,100,000. (Travelers Exh. 266; Tr. at 446 (A.Schulman).)

155. Manshul’s chapter 11 bankruptcy petition indicates that at the time of its filing on July 31, 1996, Manshul had $9 million in assets and approximately $25 million in liabilities. (Travelers Exh. 274.)

156. At the time of Mr. Geron’s appointment as Trustee of Manshul, there was only about $300 in the operating account of the estate. (Tr. at 550 (Geron).)

[*24] 157. Allan Schulman presently has no assets, except his interest in Manshul. From 1995 to the present, Nancy Schulman has provided the sole support of Allan Schulman using assets and moneys that had been given to her by Allan Schulman in 1994. (Travelers Exh. 308; Tr. at 450-51 (A.Schulman).)

J. Transfers [FN4]

FN4. At trial, the Court reserved on the admissibility of Trustee’s Exhibit 42, a schedule of payments to Manshul’s principals prepared by Stuart Fleischer Associates. (See Tr. at 731.) The parties have not briefed the admissibility of that document. In any event, the Court has not relied on it in view of the abundant evidence of the transfers discussed in the text, including the Stipulation of Facts among the parties. (See Joint. Exh. 1.)

i. Viscount and Janal stock

158. Prior to January 3, 1994 Allan Schulman owned 100% of the issued and outstanding stock of Viscount and Janal. On his personal financial statement dated December 31, 1993, Allan Schulman’s ownership interests in Viscount and Janal had a fair market value of $2,500,000. (Tr. at 140-41 (A.Schulman).)

159. As of December 31, 1993, Viscount and Janal were indebted to Manshul in the aggregate amount of $1,293,354.88. (Joint Exh. 1 ¶ 44; Def. Exh. 194 at 34; Tr. at 170, 275 (A.Schulman); Tr. at 2500 (Etlin).) [FN5]

FN5. The Court has accepted the amount stipulated to by the parties and reflected in Joint Exhibit 1, although there was testimony at trial that the amount of indebtedness should be about $20,000 higher.

160. On January 3, 1994, Allan Schulman directed Manshul’s accountant, Stanley Meyrowitz, to fill out a stock certificate to transfer Allan Schulman’s stock in Viscount and Janal to Nancy Schulman. Also on January 3, 1994, Allan Schulman directed Mr. Meyrowitz to cause Manshul to forgive, without any consideration, the $1,331,045 in debt owed to Manshul by Viscount and Janal because Allan Schulman wanted to give the Viscount and Janal stock to Nancy Schulman free of any indebtedness. (Travelers Exh. 442; Def. Exh. 194, at 34; Tr. at 278, 293 (A.Schulman); Tr. at 1572-78 (Meyrowitz).

161. Allan Schulman made these transfers to Nancy Schulman before receiving any estate planning advice regarding transfers. (Tr. at 300-01, 489, 491, 2165 (A.Schulman); Tr. at 820-21 (Becker); Tr. at 964 (Stein).)

162. Although the corporate share certificate of Viscount indicates that the shares were transferred on January 3, 1994, on or about January 5, 1994 Allan Schulman also drafted and signed documents gifting the shares of Viscount and Janal to his wife. (Travelers Exhs. 106, 107, 442; Tr. at 278-79, 285-86, 291 (A.Schulman); Tr. at 1573 (Meyrowitz); Tr. at 858-59 (Becker).)

163. Nancy Schulman provided nothing of value in exchange for Allan Schulman’s transfer of the Janal and Viscount shares. (Tr. at 285-86, 291 (A.Schulman).)

164. As of January 1994, Viscount owned, and it still owns, commercial buildings located at 11-16 37th Avenue and 11-02 37th Avenue in Long Island City, New York. (Tr. at 283-84 (A.Schulman).) Each of the tenants of these commercial properties pays rent, which is regularly collected by Viscount. (Tr. at 284 (A.Schulman).) 165. As of January 1994, Janal owned, and it still owns, commercial buildings at 11-20 37th Avenue, 12-20 37th Avenue and 36-25 12th Street, Long Island City, New York. (Tr. at 286 (A.Schulman).) As of January 1994, Janal also owned a small house located at No. 3 Gunpowder Lane in East Hampton, used by the Schulmans for personal use, which house has since been sold. (Tr. at 286 (A.Schulman).) Janal rents each of its commercial properties for which it collects rent regularly. (Tr. at 288 (A.Schulman); Tr. at 1991 (N. Schulman).)

[*25] 166. Nancy Schulman is currently the sole officer and shareholder of Viscount and Janal. (Tr. at 289 (A.Schulman).)

167. Since the transfer of the stock in these corporations, Allan Schulman has retained benefits from the corporations and he has assisted Nancy Schulman in negotiating certain of the commercial leases owned by Viscount and Janal. (Tr. at 290 (A.Schulman); Tr. at 1991 (N. Schulman).) In addition, since transferring the stock of Viscount to his wife, Allan Schulman has used offices owned by Viscount without paying any rent. (Tr. at 288 (A.Schulman).)

ii. Transfers to trusts for Schulman children

168. The inter vivos trust agreements for the Schulmans’ twin boys, Brett and Ethan, were executed by Allan Schulman as settlor on January 20, 1994, after the first default on the Nassau project. (Travelers Exh. 113; Tr. at 302-03 (A.Schulman).)

169. On or about January 28, 1994 Manshul issued a check, signed by Allan Schulman, in the amount of $600,000 payable to The Ethan Schulman Trust, and a second check, signed by Allan Schulman, in the amount of $600,000 payable to The Brett Schulman Trust. No consideration was given for these transfers. (Joint Exh. 1 ¶ 46; Travelers Exhs. 119, 120.)

170. On March 17, 1994, Manshul issued two checks, each signed by Allan Schulman, in the amounts of $20,000 each to The Ethan Schulman Trust and The Brett Schulman Trust. No consideration was given for these transfers. (Joint Exh. 1 ¶ 47; Trustee Exhs. 24, 25.)

iii. Transfers to Allan Schulman, Nancy Schulman, and Annette Fogelman

171. On May 9, 1994, just two days after Allan Schulman learned of the criminal investigation, Manshul issued a check, signed by Allan Schulman, payable to Allan Schulman in the amount of $110,000. (Joint Exh. 1 ¶ 52.) This did not constitute salary or wages due from Manshul. (Travelers Exhs. 210, 305.) Allan Schulman testified that the consideration that he gave for the $110,000 check he had Manshul issue to him was the work he provided to Manshul for more than 35 years. (Tr. at 358-59 (A.Schulman).)

172. On May 13, 1994, Manshul issued a check, signed by Allan Schulman, payable to Allan Schulman in the amount of $500,000. (Travelers Exh. 154; Joint Exh. 1 ¶ 53; Tr. at 342-43 (A.Schulman).) This payment did not constitute salary or wages due from Manshul. (Tr. at 343 (A.Schulman).) Manshul received no consideration in exchange for the payment of the $500,000. (Tr. at 343, 351- 52, 401-02 (A.Schulman).)

173. On May 14, 1994, Manshul issued a check, signed by Allan Schulman, payable to Nancy Schulman in the amount of $1,500,000. (Joint Exh. 1 ¶ 54; Travelers Exh. 155.) This was the first cash gift that Allan Schulman had ever given Nancy Schulman in excess of $10,000. (Tr. 345 (A.Schulman).) Allan Schulman directed Nancy Schulman to put these funds in a conservative investment. According to Allan Schulman, on receiving the check for $1,500,000 and being told to invest it conservatively, Nancy Schulman responded to the effect “OK” or “Fine.” (Tr. at 347 (A.Schulman).) Nancy Schulman gave no consideration for this transfer. (Joint Exh. 1 ¶ 54; Tr. at 343-46 (A.Schulman).)

[*26] 174. On May 14, 1994, Manshul issued a check, signed by Allan Schulman, payable to his sister, Annette Fogelman, in the amount of $1,000,000. (Joint Exh. 1 ¶ 55; Joint Exh. 2; Travelers Exh. 156.) When Allan Schulman delivered this check to Annette Fogelman he was upset and crying. (Joint Exh. 2; Tr. at 349 (A.Schulman).) Allan Schulman testified that he gave the money to his sister “because I was in panic and shock over the criminal—I was not thinking rationally. I was emotionally upset. Maybe it was the wrong thing to do. I don’t know, but I was not a—I don’t think I was in a rational state.” (Tr. at 353 (A.Schulman).)

175. When Allan Schulman gave his sister the check, he simply asked her “to hold it for him.” (Joint Exh. 2; Tr. at 349 (A.Schulman).) At the time of the transfer, Allan Schulman did not know what might happen to him, including whether he might be imprisoned as a result of the criminal investigation. (Tr. at 353-54 (A.Schulman); Tr. at 2007 (N. Schulman).) Ms. Fogelman gave nothing of value to Manshul in return for the transfer. Prior to this transfer, Allan Schulman had never given money to Ms. Fogelman to hold for him. (Travelers Exh. 156; Joint Exh. 2; Tr. at 346-47, 349-51, 353, 382 (A.Schulman); Tr. at 2006 (N. Schulman).)

176. Also on May 14, 1994, Allan Schulman gave Nancy Schulman a check in the amount of $500,000 drawn on his personal account. (Joint Exh. 1 ¶ 56; Travelers Exh. 157.) Allan Schulman testified that he instructed Nancy Schulman to invest this money conservatively, and that she promised that she would. (Tr. at 350- 52 (A.Schulman).) Nancy Schulman gave nothing of value to Allan Schulman in exchange for these funds. (Tr. at 351-52 (A.Schulman).)

177. On May 31, 1994, Manshul issued a check, signed by Allan Schulman, payable to Allan Schulman in the amount of $500,000. (Joint Exh. 1 ¶ 58; Travelers Exh. 164.) This payment did not constitute salary or wages due from Manshul. (Travelers Exhs. 210, 305; Tr. at 355 (A.Schulman).) Allan Schulman testified that the consideration he gave for this check was his “life.” (Tr. at 355-56 (A.Schulman).)

178. On June 13, 1994, Manshul issued a check, signed by Allan Schulman, payable to Allan Schulman in the amount of $1,000,000. (Joint Exh. 1 ¶ 60). This payment did not constitute salary or wages due from Manshul. (Travelers Exhs. 210, 305.) Allan Schulman testified that the consideration he gave for this check was his 35 years of work. (Tr. at 371 (A.Schulman).)

179. On May 2, 1994, Allan Schulman signed a contract to sell his Muttontown residence, which he owned in his name alone, for $1,875,000. (Travelers Exh. 152; Tr. at 334 (A.Schulman).) On June 15, 1994, Allan Schulman used the $1,200,000 in equity he retained after the sale of the Muttontown residence to purchase a cooperative apartment at 60 East End Avenue (the “60 East End Avenue apartment”). (Joint Exh. 1 ¶ 63; Travelers Exh. 172; Tr. at 139, 334, 369-70 (A.Schulman).)

[*27] 180. In April 1994, Allan Schulman entered into a contract to purchase the 60 East End Avenue apartment in his name alone for $1,125,000. (Travelers Exh. 427.) When the sale closed on June 15, 1994, however, the apartment was titled in the names of Allan and Nancy Schulman as joint tenants. (Travelers Exh. 428; Joint Exh. 1 ¶ 61; Tr. at 323-24, 359-62 (A.Schulman).) The value of the one-half interest in the 60 East End Avenue apartment was $562,500. (Travelers Exh. 427.) Nancy Schulman gave Allan Schulman nothing of value in exchange for her one-half interest in the 60 East End Avenue apartment. (Tr. at 360 (A.Schulman).)

181. On August 3, 1994, Allan Schulman issued a check made payable to Nancy Schulman in the amount of $1,600,000. Mr. Schulman testified that when he gave Nancy Schulman the check he again instructed her to invest the money conservatively, and her response to this gift of $1,600,000 was “Thank you.” (Joint Exh. 1 ¶ 64; Travelers Exh. 179; Tr. at 396-97, 400-01 (A.Schulman).)

182. On August 9, 1994, Allan Schulman issued a check made payable to Nancy Schulman in the amount of $1,250,000. Mr. Schulman testified that when he gave Nancy Schulman this money he said about the same things he had said previously. (Joint Exh. 1 ¶ 65; Travelers Exh. 184; Tr. at 397, 400-01 (A.Schulman).)

183. Also on August 9, 1994, Allan Schulman transferred his entire brokerage account at Smith Barney, worth approximately $1,666,800, to Nancy Schulman. (Joint Exh. 1 ¶ 66; Travelers Exh. 185; Tr. at 397-98 (A.Schulman); Tr. at 1994 (N. Schulman).)

184. On August 9, 1994, Manshul issued a check, signed by Allan Schulman, payable to Allan Schulman in the amount of $1,000,000. (Joint Exh. 1 ¶ 67.) This payment did not constitute salary or wages due from Manshul. (Travelers Exhs. 210, 305.) Allan Schulman testified that he was entitled to this transfer because he had earned the money and regarded it as his own and he regarded Manshul as similar to a bank. (Tr. at 356, 401-02 (A.Schulman).)

185. On August 12, 1994, Manshul issued a check, signed by Allan Schulman, payable to Allan Schulman in the amount of $700,000. (Joint Exh. 1 ¶ 68.) This payment did not constitute salary or wages due from Manshul. (Travelers Exhs. 210, 305.)

186. On August 16, 1994, Manshul issued a check, signed by Allan Schulman, payable to Allan Schulman in the amount of $500,000. (Joint Exh. 1 ¶ 69.) This payment did not constitute salary or wages due from Manshul. (Travelers Exhs. 210, 305.) Allan Schulman gave Manshul nothing of value in exchange for this transfer. (Tr. at 401-02 (A.Schulman).)

187. On August 16, 1994, Allan Schulman issued a check made payable to Nancy Schulman in the amount of $500,000. Mr. Schulman testified that when he gave Nancy Schulman these funds he again told her to invest the money conservatively. (Joint Exh. 1 ¶ 70; Travelers Exh. 189; Tr. at 399 (A.Schulman).)

[*28] 188. On August 25, 1994, Allan Schulman issued a check made payable to Nancy Schulman in the amount of $500,000. Mr. Schulman testified that when he gave this check to Nancy Schulman he also told her to invest it conservatively. (Joint Exh. 1 ¶ 71; Tr. at 399 (A.Schulman).) Nancy Schulman gave nothing of value to Allan Schulman in exchange for the money or the brokerage account that he transferred to her in August 1994. (Tr. at 400-01 (A.Schulman); Tr. at 1994 (N. Schulman).)

189. By the end of August 1994 Allan Schulman had transferred substantially all of his liquid assets to Nancy Schulman. He retained his one-half interest in the 60 East End Avenue apartment and his interest in Manshul. (Tr. at 400 (A.Schulman).) He had also transferred millions of dollars of liquid assets out of Manshul to himself, Nancy Schulman, and his sister Annette Fogelman.

190. On December 22, 1994, Allan Schulman gifted his one-half ownership interest in the 60 East End Avenue apartment to Nancy Schulman. (Tr. at 410 (A.Schulman); Travelers Exhs. 429, 434, 435.)

191. Allan Schulman did not, however, advise the managing agent of the property about the transfer at that time. (Tr. at 410-11 (A.Schulman).) It was not until June 1997, after Manshul’s bankruptcy case had been converted from Chapter 11 to Chapter 7, that Allan Schulman actually transferred the stock certificate evidencing one-half ownership in the 60 East End Avenue apartment to Nancy Schulman. (Travelers’ Exhs. 429, 445, 446; Tr. at 411 (A.Schulman).)

192. Since the transfer of his interest in the apartment, Allan Schulman has continued to enjoy the benefit and use of the apartment without payment. (Tr. at 115, 408 (A.Schulman).)

193. Between June 15 and December 31, 1994, Manshul furnished labor and materials worth $504,797.97 in connection with renovation work it performed on the Schulmans’ 60 East End Avenue apartment. (Joint Exh. 1 ¶ 73; Tr. at 407-08 (A.Schulman).) The Schulmans gave Manshul nothing of value in exchange for this labor and materials. (Tr. at 408 (A.Schulman).)

194. On December 30, 1994, Manshul issued a check, signed by Allan Schulman, payable to Nancy Schulman in the amount of $500,000. (Joint Exh. 1 ¶ 75; Tr. at 403-05 (A.Schulman); Travelers Exh. 208.) Nancy Schulman gave Manshul nothing of value in exchange for these funds. (Tr. at 405 (A.Schulman).)

195. On January 10, 1995, Manshul issued two checks, each signed by Allan Schulman, in the amount of $20,000 each to the custodial accounts of Ethan Schulman and Brett Schulman. (Joint Exh. 1 ¶ 76.)

196. On March 1, 1995, at Allan Schulman’s direction, Annette Fogelman transferred to Nancy Schulman the $1,000,000 previously given to Ms. Fogelman by Allan Schulman. (Tr. at 350 (A.Schulman).) When Ms. Fogelman transferred $1,000,000 to Nancy Schulman, Mrs. Schulman gave nothing of value in exchange for these funds. (Tr. at 350 (A.Schulman); Tr. at 2012 (N. Schulman).)

[*29] 197. On December 13, 1995, Manshul issued a check, signed by Allan Schulman, payable to Nancy Schulman, in the amount of $100,000. (Joint Exh. 1 ¶ 83; Tr. at 443 (A.Schulman).)

198. On March 11, 1996, Manshul issued a check, signed by Allan Schulman, payable to Nancy Schulman in the amount of $250,000. (Joint Exh. 1 ¶ 84; Tr. at 443 (A.Schulman).)

199. There was no consideration for any of the transfers from Manshul to Allan and Nancy Schulman. Mr. Schulman agreed that “Manshul’s money was [his] money” and he testified that he had paid taxes on the money in Manshul and that, in his view, Manshul “was like a bank. It was sitting there and I gave my life for it.” (Tr. at 356, 401-02 (A.Schulman).) Nancy Schulman testified that she viewed her receipt of funds from Allan Schulman as holding them for him in the same way that Annette Fogelman had held the $1,000,000 transferred to her. (Tr. at 2007 (N. Schulman).)

200. Mr. Meyrowitz testified that Allan Schulman related the withdrawals to the pending criminal action. (Tr. at 2652 (Meyrowitz) .) Mr. Meyrowitz testified that the criminal action made Allan Schulman “realize that he had too much money in the company.” (Tr. at 2650 (Meyrowitz).) Allan Schulman told Mr. Meyrowitz that “there was a criminal action pending and he wanted to take the money out.” (Tr. at 2652 (Meyrowitz).)

201. Mr. Richard Weiss, an accountant employed by Stuart Fleischer and Associates, was responsible for drafting a solvency analysis for Manshul and Allan Schulman. (Tr. at 773 (Weiss).) Mr. Weiss met extensively with Allan Schulman and other Manshul employees in the course of drafting the solvency analysis in July 1996. (Tr. at 774 (Weiss).) Mr. Weiss testified credibly that Allan Schulman said that he had caused the transfers to be made beginning in 1994 because

[h]e was having problems with the owners of the projects and that had resulted in defaults on several of the jobs. He was having problems with the subcontractors and trades on many of the jobs, which resulted in an enormous number of lawsuits and claims being filed against Manshul. There were problems with collecting receivable balances and retainage balances, which was causing problems with the company’s cash flow. And there were also the matters of criminal charges which had been placed against Mr. Schulman.

(Tr. at 778 (Weiss).)

202. Aetna reasonably expected that Allan Schulman would have informed Aetna of the transfer of millions of dollars in personal and corporate assets to his wife “[b]ecause it was so material to the success and the obligations that Aetna and Manshul had as co-obligators [sic] on its bonds and the significant construction projects. If the company’s capital would be depleted, that would have a negative impact upon the company’s ability to perform its obligations and Aetna, we are guaranteeing them.” (Tr. at 2090 (Carson).) Mr. Meyrowitz, Manshul’s accountant, understood that the financial statements were to be provided to Aetna. (Tr. at 2632-33 (Meyrowitz).) And Aetna justifiably relied on Manshul’s “stong liquidity” and “strong capital position.” (Travelers Exh. 46.) Nevertheless, Allan Schulman never advised Aetna of any of the transfers which undermined Manshul’s liquidity and capital position. (Tr. at 2089-90 (Carson); Tr. at 661 (LePostellec).)

iv. Transfers from Nancy Schulman


[*30] 203. Sometime in mid-1995, Nancy Schulman became concerned that creditors of Allan Schulman and Manshul “might go after me to recover my money which had been transferred to me one (1) year earlier.” (Travelers Exh. 308 (N. Schulman Affidavit at ¶ 18); Tr. at 1957-58 (N. Schulman).)

204. Around that time, Stuart Becker, who was a family friend, approached Nancy Schulman and expressed his concerns about the ongoing criminal investigation, cash flow problems at Manshul, Manshul’s inability to collect its receivables, and defaults on the construction projects. Mr. Becker recommended that Nancy Schulman consult Gideon Rothschild (Tr. at 1959 (N. Schulman)), a New York attorney specializing in estate planning and foreign asset protection trusts. (Tr. at 880-81 (Rothschild).)

205. Thereafter, on July 19, 1995, Nancy Schulman, with the assistance of Mr. Rothschild, established defendant Family Partnership. Nancy Schulman is the sole general partner of Family Partnership, holding a 1% ownership interest, and defendant Schulman Trust is the sole limited partner in Family Partnership, holding a 99% ownership interest acquired by transfer from Nancy Schulman. (Joint Exh. 1 ¶¶ 12, 79; Travelers Exh. 401; Tr. at 1961-65 (N. Schulman); Tr. at 881-82 (Rothschild).)

206. On August 21, 1995, Nancy Schulman settled defendant Schulman Trust. At all times since August 21, 1995, Nancy Schulman has been the settlor and the protector of the Schulman Trust. (Joint Exh. 1 ¶ 80.) The Schulman Trust was settled under the laws of the Cook Islands which, as explained below, are highly protective of such trusts and very restrictive with respect to the rights of creditors. 207. On August 21, 1995, Nancy Schulman made an initial capital contribution of $8,203,000 to defendant Family Partnership, and immediately transferred her 99% interest in Family Partnership to the Schulman Trust. (Joint Exh. 1 ¶ 81.)

208. All of the capital contributed to the Family Partnership and the Schulman Trust was comprised of the monies transferred to Nancy Schulman from Manshul and Allan Schulman in 1994. (Tr. at 1969-70 (N. Schulman).)

209. The Schulman Trust was formed in approximately the same month as Manshul was defaulted on the New Bronx project and approximately one month before Manshul was defaulted in connection with the ECC # 4 project. (Tr. at 449 (A.Schulman).) By August 1995 Manshul had already been defaulted on the Nassau project and indeed Aetna, as the completing surety, had also been declared to be in default.

210. Of the $8,120,970 that Nancy Schulman used to fund the Schulman Trust, approximately $1,800,000 was used to capitalize East End Ltd., a Hong Kong corporation established by defendant Southpac and wholly-owned by the Schulman Trust. (Tr. at 853-56 (Becker); Tr. at 924 (Rothschild); Tr. at 1972 (N. Schulman).) These funds are managed by Sarasohn Bank in Switzerland. (Tr. at 853 (Becker).) As such, this $1,800,000 in funds is located outside the United States.

[*31] 211. The remainder of the monies used to fund the Schulman Trust and the Family Partnership were placed in a securities account with Smith Barney and an account with Citicorp, both located in New York City. Those accounts originally totaled over $6,000,000. (Tr. at 1969-70 (N. Schulman).)

212. At all times since August 1995, Nancy Schulman has had full and unfettered access to those funds in the Schulman Trust and the Family Partnership that are maintained in New York accounts, and she has retained the use and benefit of these funds without obtaining permission from the trustees of the Schulman Trust to pay the Schulmans’ legal fees and their living expenses. (Tr. at 1970-71, 2012 (N. Schulman).) Nancy Schulman simply contacts the bank or the securities brokerage house to obtain a distribution of funds from the Schulman Trust. (Tr. at 1971 (N. Schulman).)

213. Allan Schulman encouraged Nancy Schulman to place more funds off shore in the Schulman Trust. (Tr. at 449 (A.Schulman).)

214. At the present time, Nancy Schulman has already used between $5,000,000 and $6,000,000 of the assets of the Schulman Family Trust. (Tr. at 1971 (N. Schulman).)

215. The Schulman Family Trust continues to own East End Limited, which has assets of approximately $2 million. (Tr. at 1972 (N. Schulman).)

216. Explaining her reason for the transfer of over $8,000,000 to the Family Partnership and eventually to the Schulman Trust, Nancy Schulman swore in her October 9, 1997 affidavit that the transfers were done at a time when “Manshul had met financial difficulties and both Manshul and my husband were being sued by Aetna and others. I transferred $2,000,000 offshore because I was afraid that even though the money was transferred to me when Manshul was solvent and strong … Manshul’s creditors might go after me to recover my money which had been transferred to me one year earlier.” (Travelers Exh. 308 (N. Schulman Affidavit at ¶ 18); Tr. at 1951-58 (N. Schulman).)

217. Nancy Schulman testified that the primary reason for the formation of the Schulman Trust in the Cook Islands was the threat that Manshul’s and Allan Schulman’s creditors would go after her for the debts owed by Manshul and her husband. (Tr. at 1953-54 (N. Schulman).)

218. At all times material to this action Nancy Schulman has been and is the sole shareholder and 100% owner of defendants Beam, Marathon, B & E, and Eastland. Of the funds transferred to her from Allan Schulman and Manshul, Nancy Schulman conveyed $250,000 to Beam (Tr. at 1973 (N. Schulman)), $750,000 to Marathon (Tr. at 1985 (N. Schulman)), $500,000 to B & E (Tr. at 1976 (N. Schulman)), and $525,000 to Eastland (Tr. at 1980 (N. Schulman)). Nancy Schulman received nothing of value in exchange for the money she transferred to these corporations. (Tr. at 1973, 1977, 1981, 1987 (N. Schulman).) Nancy Schulman subsequently returned to herself the money she had transferred to Marathon. (Tr. at 1986 (N. Schulman).)

[*32] 219. All of the assets owned by Beam, B & E and Eastland were purchased using funds transferred from Allan Schulman or Annette Fogelman. (Tr. at 1984 (N. Schulman).) Beam and Marathon were started in the Spring of 1995. Beam was to do renovation work on apartments and small businesses. Marathon was to do city construction work—”sort of pick up where Manshul left off.” (Tr. at 1973-74, 1986 (N. Schulman).) B & E and Eastland were started in the Fall of 1996. B & E was to purchase land and Eastland was to build homes. (Tr. at 1977-84 (N. Schulman).)

220. To date, Nancy Schulman has not returned to Allan Schulman any of the funds or assets transferred to her by Manshul and Allan Schulman during 1994, 1995 and 1996, although she has paid for his counsel fees. (Tr. at 444 (A.Schulman).)

221. During 1994, Nancy Schulman’s personal net worth increased from $12,000 in the beginning of the year to over $10,000,000 by the end of the year. (Tr. at 2599-600 (N. Schulman).)

222. From 1995 to the present, Nancy Schulman has provided the sole support of Allan Schulman using assets and moneys that had been given to her by Allan Schulman in 1994. (Travelers Exh. 308. Tr. at 450-51 (A.Schulman).)

223. Nancy Schulman has used some of the money transferred to her by Manshul and Allan Schulman to pay for Allan Schulman’s lawyers in connection with both the criminal investigation and the present case. (Tr. at 444-45 (A.Schulman).)

K. Estate and tax planning

224. At trial, the defendants sought to establish that the transfers at issue in this case were made in furtherance of a valid estate and tax plan followed by the Schulmans on the advice of numerous professionals. In particular, the defendants alleged that there was an estate plan by which Allan Schulman attempted to equalize his assets and those of his wife and a tax plan to remove certain accumulated earnings from Manshul to avoid certain taxes. The plaintiffs presented a number of witnesses who had provided professional advice to Allan Schulman, Nancy Schulman, or both. Having observed all of the witnesses and assessed their demeanor and credibility, the Court finds that the transfers to the trusts of the Schulman children were made pursuant to a valid estate plan, but that the evidence is clear and convincing that none of the other transfers were made pursuant to such a plan but rather were made pursuant to a not very subtle plan to attempt to put money out of the reach of creditors of Allan Schulman and Manshul.

i. Ronald Stein

225. On June 15, 1993, Allan Schulman met with Ronald Stein, a member of the New York firm of Stroock, Stroock & Lavan and a specialist in tax and estate planning. (Trustee Exh. 96.) Allan Schulman had another meeting with Ronald Stein in January 1994.

226. Among other things, Allan Schulman and Mr. Stein discussed the formation of trusts for the Schulman children and the possibility of executing another will under which a trust would be established for Nancy Schulman consisting of 90% of Allan Schulman’s assets at the time of his death. (Tr. at 969 (Stein).) According to Mr. Stein, “[they] discussed the fact that the trust [for Nancy Schulman] would provide a larger base for income than required by the [existing] prenuptial agreement. [Nancy Schulman] would be entitled, after a certain number of years of marriage, to a portion outright.” (Tr. at 970 (Stein).) Mr. Stein and Allan Schulman also discussed “a possible provision in the will which would require her to take one or the other, that is, either her rights under the agreement, or, instead to take the larger trust under the will.” (Id.)

[*33] 227. Mr. Stein prepared a trust for the Schulman children, a will for Allan Schulman and a trust agreement for the benefit of Nancy Schulman. Of these, only the trust agreement for the Schulman children was executed. (Tr. at 958 (Stein).)

228. In November 1993, Allan Schulman advised Aetna of his intention to withdraw $800,000 to establish the trusts for his two children (Travelers Exh. 90; Tr. at 652 (LePostollec)) and Aetna established a $1,000,000 reserve in anticipation of the trusts (Tr. at 653 (LePostollec)).

229. The trusts were funded by checks issued by Manshul to each trust in the amount of $600,000 on January 28, 1994, $20,000 on March 17, 1994, and $20,000 on January 10, 1995. The $1,200,000 which funded the original trusts was the amount selected because that was the amount Allan and Nancy Schulman could give without being liable for estate or gift tax. (Tr. at 963 (Stein).) The $20,000 to each child’s trust in January 1994 and January 1995 was the amount that Allan and Nancy Schulman could give their children each year without being liable for federal gift tax. (Tr. at 964 (Stein).)

230. Mr. Stein did not advise Mr. Schulman to transfer all or any part of Manshul’s liquid assets to himself or his family members. (Tr. at 963 (Stein).) Nor did Mr. Stein discuss with Mr. Schulman the subject of off shore asset protection trusts. (Tr. at 964-65 (Stein).) Mr. Stein also did not advise Allan Schulman to transfer his stock in Janal and Viscount to his wife, nor did he discuss with Allan Schulman the debt owed to Manshul by Janal and Viscount. (Tr. at 965 (Stein).)

231. On or about August 21, 1997, Mr. Stein received a telephone call from an attorney who was then representing Allan Schulman. (Tr. at 976 (Stein).) Mr. Stein testified that the attorney said that Allan Schulman had asked the attorney to speak to Mr. Stein. The attorney told Mr. Stein that, according to Allan Schulman, Mr. Stein had reviewed Manshul’s financial statements and then advised Allan Schulman to make certain transfers and suggested the use of offshore trusts for protection of the Schulmans’ assets. Mr. Stein advised the attorney that he had not given Mr. Schulman any such advice; indeed, that these topics were never discussed. (Tr. at 977 (Stein).)

232. There were numerous conflicts between Allan Schulman’s trial testimony and that of Ronald Stein. Mr. Stein testified that at his initial meeting with Allan Schulman on June 15, 1993 Mr. Schulman told him that Manshul probably would have losses in the next year or two, and Mr. Stein recorded that prediction in his notes of that initial meeting. (Tr. at 961 (Stein).) At trial, Mr. Schulman denied that he told Mr. Stein in June 1993 that there would be losses in Manshul for the next year or two. (Tr. at 203, 479 (A.Schulman).) Allan Schulman also testified that at their June 15, 1993 meeting he and Mr. Stein discussed offshore asset protection trusts. (Tr. at 437 (A.Schulman).) Mr. Stein testified that he never discussed offshore asset protection trusts with Allan Schulman; Mr. Stein further testified that he never advised or suggested to Mr. Schulman that he or any member of his family should set up an offshore asset protection trust. (Tr. at 964-65 (Stein).)

[*34] 233. Mr. Stein’s testimony is entirely credible. Mr. Stein has no stake in this litigation. Moreover, his testimony is supported by the facts of the creation of the children’s trusts in the exact amount discussed and the failure to make the numerous asset withdrawals and to set up the asset protection trusts until substantially later. Mr. Schulman’s testimony that he was advised by Mr. Stein to withdraw funds from Manshul and to create an offshore trust is not credible.

234. Accordingly, Mr. Stein’s testimony makes clear that the trusts created for the Schulman children were set up and funded pursuant to a genuine estate plan, following consultation with Mr. Stein. The trusts for the children are plainly of a different pedigree than the other transfers of funds, such as the transfers to an offshore trust in the Cook Islands, with which Mr. Stein was not involved and as to which he plainly gave no advice. Indeed, the contrast between the careful legal preparation for the children’s trusts that began in mid-1993 which is documented and supported by the credible testimony of Mr. Stein, compared to the other transfers, highlights the fraudulent nature of the other transfers.

ii. Stuart Becker

235. In January 1994, Allan Schulman met with Stuart Becker, a certified public accountant and a specialist in estate and tax planning for the principals of family-owned businesses. (Tr. at 808 (Becker).) Mr. Becker was a longtime acquaintance and family friend of the Schulmans. (Tr. at 809 (Becker).)

236. At their January 1994 meeting, Allan Schulman told Mr. Becker that he was interested in doing estate planning in order to better protect his family in the event of his demise and to mitigate taxes. (Tr. at 810-811 (Becker).) Allan Schulman told Mr. Becker that he was the stockholder of a very successful construction business, Manshul, and that, although he had some personal assets and other holdings outside of Manshul, most of his net worth was tied up in Manshul. (Tr. at 811 (Becker).) Allan Schulman also advised Mr. Becker that had already set up a trust for the benefit of his children in the amount of $620,000 per child, based upon advice which had been given to him by other professionals. (Tr. at 812 (Becker).)

237. During this January 1994 meeting, Allan Schulman did not discuss with Mr. Becker Manshul’s pending litigation, its contractual relationship with Aetna, or the existence of creditors. (Tr. at 489-91 (A.Schulman); Tr. at 812 (Becker).) Allan Schulman also did not tell Mr. Becker about the Prenuptial Agreement or his 1991 will. (Tr. at 813-14 (Becker).) He also did not tell Becker that he had already transferred Viscount and Janal to Nancy Schulman. (Tr. at 300-01, 491 (A.Schulman).)

238. At the conclusion of their January 1994 meeting, Mr. Becker asked Allan Schulman to provide him with Manshul’s current financial statements and recent tax returns, as well as Mr. Schulman’s most recent personal financial statement and individual tax returns. (Tr. at 813 (Becker).) Mr. Becker testified that he told Allan Schulman that he would need such information to analyze the situation and come up with specific recommendations. (Tr. at 815 (Becker).)

[*35] 239. In early April 1994, Allan Schulman had a second meeting with Stuart Becker. (Joint Exh. 1 ¶ 48; Tr. at 491 (A.Schulman).) During this meeting, Allan Schulman also did not tell Mr. Becker that he had gifted the stock of Janal and Viscount to his wife and that he had caused Manshul to write off debts that Janal and Viscount owed to Manshul. (Tr. at 820-21 (Becker).) 240. On April 5, 1994, Mr. Becker sent a letter to Allan Schulman in which he advised Allan Schulman that for various tax reasons, “Manshul’s cash and investments in various securities should be distributed to you, as sole shareholder, in an amount not to exceed $11,592,826.” (Travelers Exh. 147.) This “tax-efficient strategy” would avoid certain New York State and New York City tax liabilities. (Id.) There is no mention in this letter of any estate plan, nor does Mr. Becker’s letter advise Allan Schulman to share any of his or Manshul’s assets with Nancy Schulman. (Id.) Indeed, the letter specifically advises Allan Schulman that the “above-described assets should be held by you personally rather than by the corporation.” (Id.) Nor is there any discussion of how, if liquid assets were to be transferred from Manshul and Allan Schulman to Nancy Schulman, that would affect Manshul’s liquidity or Manshul’s relationship with Aetna or Allan Schulman’s refusal to have Nancy Schulman as a signatory on the GAI because she allegedly had no interest in Manshul.

241. Allan Schulman met with Mr. Becker for a third time in May 1994, immediately after learning that he was about to be arrested. (Joint Exh. 1, ¶ 49; Travelers Exh. 308; Tr. at 387 (A.Schulman).) Mr. Becker advised Allan Schulman at this time to remove funds from Manshul and transfer them to Nancy Schulman because the government might have a financial claim against Allan Schulman, and it was important to get the funds out of the company to protect the family. (Tr. at 835 (Becker).)

242. Mr. Becker testified that as of May 1994 the criminal investigation had diverted Allan Schulman’s and Mr. Becker’s attention from any estate planning. (Tr. at 860-61 (Becker).) Allan Schulman told Mr. Becker that they had to “put everything we were planning on hold until [Allan Schulman] got into the criminal matter and it was satisfactorily resolved.” (Tr. at 860-61 (Becker).)

243. Consistent with his concern at the time of the criminal investigation about getting funds out of the company to avoid “the long arm of the government,” rather than pursuing an estate and tax plan, Mr. Becker eventually sent Nancy Schulman to consult with Gideon Rothschild, a lawyer specializing in asset protection trusts. (Tr. at 835, 841-42 (Becker).)

244. Mr. Becker was initially the United States trustee of the Schulman Trust (Tr. at 843 (Becker)) but, pursuant to the Trust provisions, he was removed from that position in September 1997 when the Trustee began this action asserting claims against Nancy Schulman. (Travelers Exh. 307; (Tr. at 849-50) (Becker).) Mr. Becker also advised Nancy Schulman that creating East End Limited, a Hong Kong limited partnership, would set up an additional layer of protection for her with respect to the assets. (Tr. at 856 (Becker).)

[*36] 245. It is plain from this testimony that the transfers at issue in this case were not made pursuant to a tax and estate plan advised by Mr. Becker. The transfers of the Viscount and Janal stock and the write-off of their indebtedness to Manshul were made before Mr. Becker had formulated any recommendations and he was not told about them at the time. The only written advice by Mr. Becker in April 1994 relates to the tax advantages of transferring assets from Manshul to Allan Schulman, not to Nancy Schulman. By May 1994, any estate and tax plans were on hold because of the criminal investigation and charges. In any event, to the extent that there were any thoughts of an estate and tax plan that went beyond the January 1994 transfers to the children’s trusts, which were recommended by Mr. Stein and not by Mr. Becker, it was never implemented. In fact, Mr. Becker testified quite clearly that any estate plan he was advising Allan Schulman to implement was “preempted” by Mr. Schulman’s criminal arrest. (Tr. at 860 (Becker).) In addition, it is plain that Mr. Becker’s advice to Nancy Schulman was not for the purpose of any estate or tax plan. Moreover, no alleged estate plan explains the $1,000,000 transfer to Annette Fogelman or the elaborate plan to create the Cook Islands trust.

iii. Gideon Rothschild

246. Upon the advice of Mr. Becker, Allan Schulman, and then later Nancy Schulman, met with Gideon Rothschild (Joint Exh. 1 ¶ 78; Tr. at 435 (A.Schulman); Tr. at 888 (Rothschild)) for the purpose of seeking advice on asset protection trusts. (Tr. at 1960 (N. Schulman).)

247. Mr. Rothschild testified at trial that an asset protection trust is a trust established under the law of a jurisdiction that has active legislation intended to protect trust assets from the settlor’s future creditors. (Tr. at 881 (Rothschild).) The protective effect of a foreign situs trust is to place assets out of the reach of the settlor’s future creditors. (Tr. at 886 (Rothschild).)

248. Following the consultation with Mr. Rothschild, on August 21, 1995 Nancy Schulman established defendant Schulman Trust. The Schulman Trust contains various mechanisms to protect its funds. The trust requires that fraudulent conveyance actions seeking funds from the trust be litigated in the Cook Islands. Mr. Rothschild testified that that jurisdiction does not recognize constructive fraudulent conveyance as a cause of action, and requires proof beyond reasonable doubt of actual fraud. (Tr. at 886-88 (Rothschild).)

249. Mr. Rothschild testified that in setting up such an offshore trust, which he emphasized is to protect funds from future creditors, he conducts due diligence to ensure that the trust is not being used to defraud existing creditors. With respect to the Schulman Trust, however, Mr. Rothschild’s due diligence amounted to reliance on representations by Mr. Becker and Nancy Schulman as to when transfers were made from Manshul and Allan Schulman and as to their financial condition. (Tr. at 896 (Rothschild).) Mr. Rothschild did no searches for any existing lawsuits, judgments or liens against Nancy Schulman; rather, he relied exclusively on representations made by Nancy Schulman and her professional advisors. (Tr. at 901-02 (Rothschild).) He did not perform the searches even though it was Allan Schulman who had initially consulted him and it was plain that Allan Schulman could not create an offshore trust because of Allan Schulman’s contingent liabilities. (Tr. at 901 (Rothschild).)

[*37] 250. It is plain that the purpose of the Schulman Trust was to remove funds from the reach of Manshul’s and Allan Schulman’s creditors and from the government in the event of criminal liability. The trust was not created pursuant to any valid estate or tax plan.

iv. Stuart Fleischer

251. Allan Schulman testified that he met with Stuart Fleischer, a Certified Public Accountant, in late 1995 or early 1996 and again in mid-1996. (Tr. at 205-06 (A.Schulman).) Stuart Fleischer’s firm, Stuart Fleischer and Associates, was formally engaged by Richard Kraver, one of Manshul’s attorneys, on July 1, 1996 to perform a solvency analysis of Manshul as of 1994, to investigate the financial circumstances of the company at the time the transfers were made, and to advise Allan Schulman whether these transfers were fraudulent conveyances. (Tr. at 708 (Fleischer).) Specifically, Mr. Fleischer was asked to give advice as to the potential personal exposure of Allan Schulman with respect to these transfers. (Tr. at 708 (Fleischer).)

252. Mr. Fleischer obtained the information necessary for his analysis from Allan Schulman, Carol Sigmond, employees of Manshul, and the company’s books and records. (Tr. at 710 (Fleischer).) Mr. Fleischer was provided with a report of subcontractor claims and trigger dates for each claim that had been prepared by Ms. Sigmond. (Travelers Exh. 316; Tr. at 208 (A.Schulman).)

253. In preparing his analysis and assessing contingent liabilities, Mr. Fleischer relied on information provided by Ms. Sigmond. (Tr. at 736-37 (Fleischer).)

254. Based on the information provided by Manshul and its representatives, including Allan Schulman, Mr. Fleischer concluded that beginning in May 1994 and continuing for the remainder of 1994, Manshul had a deficit equity position, and therefore Manshul was insolvent during that time. (Tr. at 737-38 (Fleischer).)

255. Mr. Fleischer’s solvency report was delivered to Allan Schulman and Manshul’s counsel on July 16, 1996. (Tr. at 738 (Fleischer); Travelers Exh. 272.) Mr. Fleischer’s report expressly assumed no negative impact on Manshul of lawsuits related to the three major projects (Nassau County, New Bronx, and ECC # 4) still in existence as of December 31, 1993. (Tr. at 741 (Fleischer).)

256. When Mr. Fleischer prepared his solvency report, nobody at his firm was told of the criminal investigation of Manshul that had commenced in May 1994 although he was aware of criminal difficulties of Julius Schulman and may have been aware of criminal difficulties of Allan Schulman. Mr. Fleischer testified that had he known of the investigation of Manshul he would have reflected increased exposures in his report. He also testified that this information would also have called into question the recording of the realization of assets and the extent of contingencies. (Tr. at 741-42 (Fleischer).) [FN6]

FN6. At trial, it was disputed whether the Fleischer solvency analysis, Travelers Exh. 272, should be admitted for its truth or excluded because it was hearsay. Allan Schulman conceded that the analysis would be admissible against him because it was prepared by someone acting as his agent. See Fed.R.Evid. 802(d)(2)(D); Tr. at 2783 (statement by Mr. Burstein). While an argument could be made that the analysis falls within the business records exception to the hearsay rule, see Fed.R.Evid. 803(6), it appears that the analysis was prepared for possible litigation and thus the business records exception may not apply. See Potamkin Cadillac Corp. v. B.R.I. Coverage Corp., 38 F.3d 627, 632 (2d Cir.1994). In any event, the analysis is concededly admissible against Mr. Schulman. It is also admissible for its non-hearsay value to show Mr. Schulman’s concern over these transfers as early as mid-1996. Finally, however, the Court has found the expert analysis provided by Mr. Lenhart to be the most persuasive solvency analysis and, therefore, does not rely on Mr. Fleischer’s analysis.

L. Solvency

257. At trial, the Trustee offered the testimony of William K. Lenhart, a certified public accountant, certified fraud examiner and partner with the accounting and consulting firm of BDO Seidman LLP. (Tr. at 1186 (Lenhart).) Mr. Lenhart is a specialist in the field of construction accounting. (Tr. at 1188- 89 (Lenhart).) Mr. Lenhart is also an expert in solvency accounting and construction accounting. (Tr. at 1190 (Lenhart).)

[*38] 258. Upon review of Mr. Lenhart’s report and the testimony given at trial, the Court finds Mr. Lenhart’s conclusions credible and reliable.

259. Based on his analysis, Mr. Lenhart concluded that “on or about May 7, 1994, Manshul was insolvent. The fair value of its debts were in excess of the fair value of its assets at that point in time.” (Tr. at 1191 (Lenhart); see also Trustee Exh. 3.) Indeed, Mr. Lenhart credibly concluded that the fair value of Manshul’s debts exceeded the fair value of its assets by May, 1994 by in excess of $4,500,000. (Trustee Exh. 3, at p. 27.) Because Mr. Lenhart’s report and testimony offer ample support for the conclusion he draws regarding Manshul’s insolvency, the Court accepts his calculation that Manshul was insolvent as of May 7, 1994.

260. Because Allan Schulman’s solvency was tied to Manshul’s solvency, he was also insolvent by May 7, 1994. (See Travelers Exh. 102 (Allan Schulman’s net worth statement at December 31, 1993) .) By May 7, 1994, his $12,000,000 investment in Manshul no longer had any fair value. Moreover, he had transferred the $2,500,000 investment that he had in Janal and Viscount. Thus, his $17,000,000 in net worth was reduced by at least $14,500,000. In addition, Allan Schulman was liable under the GAI to Aetna for any loss Aetna incurred under any of its bonds. Given Manshul’s inability to pay its obligations, and the liabilities credibly calculated by Mr. Lenhart, Allan Schulman’s derivative liabilities for the fair value of the losses to Aetna rendered him insolvent by May 7, 1994. There were contingent liabilities of Manshul for contract claims and lawsuits fairly valued at the end of 1993 at $2,300,000. (Tr. at 1227-36 (Lenhart).) And there were losses on the Nassau County project and the New Bronx Housing project reasonably valued by May 1994 in excess of $1,800,000. (Tr. at 1251-58 (Lenhart).) Thus, by May 7, 1994, the fair value of Allan Schulman’s debts substantially exceeded the fair value of his assets. During the remainder of 1994, Allan Schulman transferred his only remaining significant assets. The only remaining significant assets of Allan Schulman were the Muttontown residence, the proceeds of which were transferred into the purchase of the 60 East End Avenue apartment (worth $1,125,000), and his securities brokerage account (worth $1,666,800). The securities account was transferred to Nancy Schulman in August 1994, and the apartment was transferred in equal shares to Nancy Schulman in June 1994 and December 1994.

261. The methodology followed by Mr. Lenhart was to begin with the audited financial statements of Manshul for the year ended December 31, 1993 which showed total stockholder equity of $12,940,638 and to make adjustments to that equity to reflect decreases in assets or increases in liabilities that should have been reflected. As a result, Mr. Lenhart concluded that adjusted stockholder equity at December 31, 1993 should have been $4,805,005. The report then takes the monthly financial statements for 1994 and makes similar adjustments. Having carefully reviewed the individual adjustments and the methodology, the Court finds them credible and reliable.

[*39] 262. Some of the major adjustments should be noted to explain further Mr. Lenhart’s expert opinions and methodology. Mr. Lenhart wrote off $1,316,492 due from affiliated companies at December 31, 1993 because these were the amounts payable by Janal and Viscount which were in fact written off by Manshul in January 1994. While these were written off at December 31, 1993, because Mr. Lenhart concluded there was no intention to pay these amounts at that time, there is no question that they should at least be written off by January 1994 when the indebtedness was forgiven. Thus, the timing of this write-off does not change Manshul’s insolvency at May 7, 1994.

263. Mr. Lenhart also reasonably subtracted the amount of profit that Manshul had recognized on the Nassau project ($981,500) and the New Bronx Housing project ($346,558) because it was no longer practical to estimate a profit on these jobs. (Trustee Exh. 3, at 18-20.) Manshul recognized revenues from fixed- price, long-term construction contracts on a percentage of completion basis. However, profit should not be included where it is no longer practical to estimate the financial outcome of the project. (Id.) Mr. Lenhart testified credibly that it was no longer possible to estimate profit on these jobs because of the excessive delays caused by the problems on the jobs. (Tr. at 1219-24 (Lenhart).) There is no question in the Court’s view that the profit on these jobs was so uncertain prior to May 7, 1994 that Mr. Lenhart was correct that the profit should be written off and that consequently, liabilities should be increased by $1,328,058. The history of these projects, as discussed above, and indeed the unprecedented developments that had occurred on these projects prior to May 7, 1994, demonstrate the reasonableness of Mr. Lenhart’s conclusion.

264. Mr. Lenhart included an increase in liabilities of $2,300,000 to reflect contingent liabilities. The estimate was a reasonable estimate based on claims that had already been made relating to work that had been completed prior to December 31, 1993. It did not even include claims on the Nassau project, New Bronx project or ECC # 4. While it was based on input from the analysis of Carol Sigmond, in-house counsel for Manshul, who analyzed pending claims, it was compared on a test basis to actual pleadings. (Tr. at 1227-36 (Lenhart).) Mr. Lenhart testified credibly that based on his analysis, the amounts included in his analysis reflected contingent liabilities that were probable and estimable as of December 31, 1993. (Tr. at 1231 (Lenhart).) Given the huge increase in claims in the first quarter of 1994, Mr. Lenhart’s analysis was a reasonable analysis which did not overstate the contingent liabilities.

265. In view of the substantial litigation faced by Manshul, it was also reasonable to include an estimate of $1,500,000 in legal fees. (Tr. at 1238-40 (Lenhart).)

266. The subsequent monthly financial statements were reasonably reduced to reflect losses on the Nassau project, the New Bronx project, and increased legal fees. (Trustee Exh. 3, at 24-27; Tr. at 1251-58 (Lenhart).)

[*40] 267. Mr. Lenhart’s expert opinion that Manshul was insolvent as of May 7, 1994 was amply supported by the evidence.

268. The defendants offered the testimony of Ms. Holly Etlin, the head of the restructuring and reorganization practice at Deloitte & Touche, as an expert in construction accounting and solvency accounting. (Tr. at 2382 (Etlin).)

269. Ms. Etlin’s analysis determined, in contrast to that of Mr. Lenhart, that Manshul was solvent as of December 31, 1993, remained solvent as of December 31, 1994, and that it was also solvent throughout 1994 at the time of the transfers at issue in this case. (Tr. at 2427-30) (Etlin).)

270. The Court finds, however, that Ms. Etlin’s analysis and conclusions are not supported by the credible evidence and that they are unreliable, and ultimately lack credibility. First, in reaching her conclusions Ms. Etlin relied extensively on conversations she had with Mr. Meyrowitz and an analysis of his work papers, and on conversations with Allan Schulman. (Tr. at 2386-90 (Etlin).) While it was certainly reasonable to speak with Mr. Schulman and Mr. Meyrowitz, it was apparent that Ms. Etlin relied upon them for factual matters in which they were directly interested even when other reliable evidence supported contrary conclusions. For example, in considering whether to write off profit and recognize losses on projects in 1994, Ms. Etlin relied on Mr. Schulman and Mr. Meyrowitz: “I had extensive discussions with regard to the defaults with Mr. Schulman, with Mr. Meyrowitz, with other people who were connected with the company at the time, and really asked them on many occasions, and many different ways whether at that point in time what subsequently happened really would have been probable in trying to form my judgment as to whether or not it was probable.” (Tr. at 2526 (Etlin).) Ms. Etlin never gave a reasonable, credible explanation as to how she was able to ignore the impact of the first default in Manshul’s history, and that on its largest project ever, which was then followed by another default, and a judicial finding that Manshul had failed to live up to the settlement agreement—all in 1994. She failed to explain adequately how these events would not have increased the costs of the project and required writing off the profit on the Nassau project in 1994.

271. Second, Ms. Etlin testified that a key issue in determining Manshul’s solvency at the time of the transfers in this case is the pendency of claims against the company. (Tr. at 2391 (Etlin).) Accordingly, Ms. Etlin hired a lawyer, Suzanne Charles, to assess the litigation claims against Manshul at the time of the transfers and the probability of a negative outcome with respect to those claims. (Tr. at 2391-92 (Etlin).) However, for the reasons explained below, Ms. Charles’ analysis was unreliable.

272. Third, Ms. Etlin testified that no adjustment based on the January 1994 default on the Nassau County project was necessary to the balance sheet as of 1993 because that default was set aside and Manshul was back on the job. (Tr. at 2552 (Etlin).) This analysis plainly ignores the costs associated with the delay as well as the subsequent events that occurred on the Nassau project throughout 1994. Indeed, in preparing Manshul’s 1995 tax return, Mr. Meyrowitz wrote off the profit for the Nassau project for the 1994 year but Ms. Etlin added that profit back for her solvency analysis for Manshul for 1994. (Tr. at 2433, 2454-61 (Etlin).) In view of the problems and resulting increased costs discussed by Mr. Lenhart, Ms. Etlin’s analysis was not reasonable.

[*41] 273. Ms. Etlin also understated the problems Manshul experienced with respect to the New Bronx project. (Tr. at 2416-17 (Etlin).) In view of the demonstrated history of the Nassau project and the New Bronx project prior to and during 1994, it was incredible for Ms. Etlin to testify: “So those kinds of disputes are relatively common, not unheard of, you know. Were Nassau and New Bronx proving to be more difficult jobs than maybe his average job in the past? Maybe a little more difficult, but nothing rising to the level of necessitating writing off profits.” (Tr. at 2416-17 (Etlin).) The default on the Nassau County project was the first default in Manshul’s history and occurred on its largest project ever. It was not credible to describe such an incident as “relatively common.”

274. Ms. Etlin testified regarding certain accounts receivable that Mr. Meyrowitz had determined should be written off in 1994. Ms. Etlin reinstated these receivables relating to school construction projects because of an agreement that they allegedly would be paid, even though Manshul was charged in a criminal complaint for bribing a Board of Education official. However, in conducting her analysis, Ms. Etlin made no effort to determine if, in fact, these receivables were ever collected. (Tr. at 2446 (Etlin).) In view of the substantial contractual and legal difficulties faced by Manshul in 1994, it was unreasonable to reinstate these receivables, particularly when Mr. Meyrowitz had concluded soon thereafter that they should be written off. Moreover, Ms. Etlin restored a considerable number of other receivables that Mr. Meyrowitz concluded should be written off. Part of Ms. Etlin’s analysis was based on historic collection rates. But given the substantial difficulties faced by Manshul in 1994, it was unreasonable to believe that historic collection rates would prevail. (Tr. at 2447-52 (Etlin).) 275. The conclusions reached by Suzanne Charles, relied upon by Ms. Etlin, are also unreliable. First, Ms. Charles did not analyze all of the claims asserted against Manshul, but only 32 such claims. (Tr. at 2304, 2334-38 (Charles); Travelers Exhs. 344, 345.) Moreover, she had no experience with recording reserves for claims. (Tr. at 2287 (Charles).)

276. Second, with respect to the claims she did review, Ms. Charles’ testimony was exceedingly vague. With respect to the Pottstown claim, for example, Ms. Charles estimated that “there would probably be a liability in the neighborhood of about $200,000, assuming that everybody else was put to bed.” (Tr. at 2314 (Charles).) Concerning the majority of claims reviewed by Ms. Charles, she concluded generally that “they were all lower than the face amount of the claim,” without offering any specific information regarding these claims, or any reliable basis for her conclusion. (Tr. at 2323 (Charles).)

277. Third, Ms. Charles was unable, from an accounting standpoint, to provide any guidance as to the correct amount Manshul should have put on its books for any of the claims she reviewed. (Tr. at 2332 (Charles).)

M. Manshul’s capital and the ability of Manshul and Allan Schulman to pay debts as they became due.

[*42] 278. The Court also finds credible Mr. Lenhart’s testimony that by May 7, 1994, Manshul also had unreasonably small capital to continue as a going concern and that Manshul knew or should have known by that date that it was incurring debts without the ability to pay those debts when they matured.

279. With respect to capital in Manshul, Mr. Lenhart opined that on or about May 7, 1994, Manshul had unreasonably small capital to continue as a going concern. In addition, he concluded that as of about May 7, 1994, Manshul either knew or should have known that it was incurring debts without the ability to pay those debts when they matured. (Tr. at 1191 (Lenhart).) It is also clear that, given his liability to Aetna, Allan Schulman knew or should have known that he was incurring debts without the ability to pay them when they became due.

280. In reaching his conclusions, Mr. Lenhart considered that as of about May 7, 1994, Manshul was unable to obtain new work because of the pending criminal investigation. (Tr. at 1276 (Lenhart).)

281. Allan Schulman also testified that Manshul had a cash-to-cash loss of $1,500,000 in 1994. (Tr. at 2270 (A.Schulman).)

282. A comparison of Manshul’s actual cash expenditures for 1994 with its liquid assets available as of January 1, 1994, shows clearly that Manshul experienced a significant negative cash flow during 1994. (Tr. at 1278-88 (Lenhart).)

283. In light of the negative cash flow on the existing jobs, and because Manshul could not obtain new jobs, the only available capital was the cash in the company. If all the cash and cash equivalents were withdrawn, the result was unreasonably small capital. Accordingly, Manshul was plainly left without adequate capital to continue as a going concern as of May 7, 1994. (Tr. at 1277-78 (Lenhart).)

284. The financial picture for Manshul for 1995 was equally bleak. A comparison of projected operating costs, litigation expenses for both civil and criminal matters, and projected claims settlements with projected income for 1995 leads to the conclusion that a continued shortfall in cash flow was likely. (Tr. at 1289-97 (Lenhart).)

285. Ms. Etlin’s conclusion that Manshul had sufficient capital to meet its ongoing expenses in 1994 is not supported by reliable evidence. (Tr. at 2437 (Etlin).) Ms. Etlin provided no support for this conclusion. In fact, Ms. Etlin admitted that “there are no specific schedules detailing that analysis in our report.” (Tr. at 2489 (Etlin).) Ms. Etlin’s report also shows no calculations of the costs to complete Manshul’s existing jobs as of December 31, 1994. (Tr. at 2493 (Etlin).) Therefore, particularly when compared to Mr. Lenhart’s reasoned analysis, the Court does not credit Ms. Etlin’s conclusion that Manshul had sufficient capital in 1994.

CONCLUSIONS OF LAW

A. Basis of federal jurisdiction

286. This Court has jurisdiction over the Trustee’s action pursuant to 28 U.S.C. § 1334(b). The Court also has jurisdiction over Travelers’ action pursuant to 28 U.S.C. § 1334(b) because the action is related to the Trustee’s action.

[*43] 287. Venue is proper in this District pursuant to 28 U.S.C. § 1409(a).

B. Nature of claims

288. The Trustee seeks recovery of all of the above transfers to and from the defendants except the transfers from Allan Schulman of Janal and Viscount, the 60 East End Avenue cooperative apartment, and Allan Schulman’s brokerage account which cannot be traced to transfers from Manshul to Allan Schulman. The Trustee asserts the following statutory causes of action: (a) 11 U.S.C. §§ 554(b) and 550 and DCL § 276 (transfers made with actual intent to defraud a debtor’s present and future creditors); (b) 11 U.S.C. §§ 544(b) and 550 and DCL § 273 (constructively fraudulent conveyances made by a debtor when insolvent); (c) 11 U.S.C. §§ 544(b) and 550 and DCL § 274 (constructively fraudulent conveyance made by a debtor which left the debtor with unreasonably small capital); (d) 11 U.S.C. §§ 544(b) and 550 and DCL § 275 (constructively fraudulent conveyances made by a debtor when the debtor intended or believed that it would incur debts beyond its ability to pay as such debts became due); (e) 11 U.S.C. §§ 548(a)(2)(A)-(B)(i), (ii), and (iii) and 550 (constructively fraudulent conveyances made by the debtor within one year prior to the petition date); and (f) 11 U.S.C. §§ 548(a)(1) and 550 (transfers made by the debtor with actual intent to hinder, delay or defraud creditors within one year prior to the petition date).

289. Travelers seeks recovery of the transfers from the defendants based on the following statutory causes of action: (a) DCL § 276; (b) DCL § 273; and (c) DCL § 275. Travelers agrees that the Trustee should recover the transfers in the first instance except for Janal and Viscount, the 60 East End Avenue cooperative apartment, and Allan Schulman’s brokerage account which are transfers from Allan Schulman rather than transfers from Manshul. (See Tr. at 2930-35 (statement of Mr. Brickman).)

290. The Trustee also seeks attorneys’ fees pursuant to 11 U.S.C. § 544(b) and DCL § 276-a and Travelers seeks attorneys’ fees pursuant to DCL § 276-a.

C. The Trustee’s standing and motion to amend complaint

291. Section 544(b) of the Bankruptcy Code allows a trustee, as the representative of creditors, to avoid “any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of [the Bankruptcy Code] or that is not allowable only under section 502(e) of [the Bankruptcy Code].” 11 U.S.C. § 544(b). The “applicable law” upon which the Trustee in this case relies is contained in DCL §§ 273, 274, 275, and 276. In addition, Section 548 of the Bankruptcy Code gives a trustee standing to recover transfers made one year prior to the petition date which were actually or constructively fraudulent to creditors. See 11 U.S.C. § 548(a)(1). [FN7] Manshul filed a voluntary petition under Chapter 11 of the Bankruptcy Code on July 31, 1996, so most of the transfers at issue in this case, which occurred prior to July 31, 1995, would not be covered by § 548(a)(1). (Joint Exh. 1 ¶ 85.)

FN7. There is no dispute that if a transfer is fraudulent under the DCL, it is also fraudulent under Section 548 of the Bankrupty Code. See, e.g., In re Schwartz, 58 B.R. 923, 926 n.2 (Bankr.S.D.N.Y.1986).

[*44] 292. At the conclusion of the trial, the Trustee moved pursuant to Fed.R.Civ.P. 15(a) to amend its Amended Complaint to assert, in addition to 11 U.S.C. § 544(b), standing under 11 U.S.C. § 544(a) to avoid the transfers under DCL §§ 274, 275, and 276. Section 554(a) of the Bankruptcy Code allows a trustee to avoid transfers possessed by a judicial lien creditor or an unsatisfied execution creditor as of the commencement of the bankruptcy case “whether or not such creditor exists.” 11 U.S.C. § 544(a)(1)-(2). The Trustee asserts standing under Section 554(a) as an additional basis to avoid the transfers, except under DCL § 273, [FN8] without the need for it to establish the existence of creditors at the time of the transfers.

FN8. The Trustee does not assert standing under Section 544(a) to pursue claims under DCL § 273 because DCL § 273 refers only to “creditors” rather than to both creditors and future creditors. (See Trustee’s Post-Trial Mem., at 10 n.6.)

293. The defendants agree that the Trustee has automatic standing under Section 544(a) to pursue claims under DCL §§ 274, 275, and 276 and the defendants do not oppose the amendment of the Trustee’s complaint to add Section 544(a) as a basis for the Trustee’s standing. (See Letter of Mr. Burstein dated June 13, 2000.) [FN9]

FN9. While the letter mistakenly refers to the motion to amend to add standing under Section 548(a), it is plain that the motion to amend was to add standing under Section 544(a) and that motion was unopposed. (Tr. at 2821 (statement of Mr. Burstein).)

294. “In the absence of any apparent or declared reason—such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, [or] futility of amendment … [leave to amend] should … be ‘freely given.’ ” Foman v. Davis, 371 U.S. 178, 182 (1962) (quoting Fed.R.Civ.P. 15(a)). See also Hemphill v. Schott, 141 F.3d 412, 420 (2d Cir.1998). There is no evidence here of any undue delay or bad faith or dilatory motive on the part of the Trustee. Nor can it be said that the amendments the Trustee seeks to make are futile or that the defendants will be prejudiced by the amendment. The defendants agree that the Trustee has standing under Section 544(a) to pursue claims under DCL §§ 274, 275, and 276, and the defendants do not oppose the amendment of the Trustee’s complaint. The Trustee’s motion to amend is therefore granted.

295. The defendants contend, nonetheless, that the Trustee lacks standing under Section 544(b) of the Bankruptcy Code and therefore the Trustee’s claims under DCL § 273 must be dismissed. The argument is without merit. The defendants contend that the Trustee is required, in order to assert standing under Section 554(b), to demonstrate that there was an actual unsecured creditor at the time of the transfer which could have avoided the transfer under the DCL. Courts disagree as to whether a trustee is required to establish the existence of a specific creditor in order to have standing under Section 554(b). Compare In re Wingspread Corp., 178 B.R. 938, 945 (Bankr.S.D.N.Y.1995) (holding that the trustee must name an actual unsecured creditor who would have standing to challenge the transfer) with In re Leonard, 125 F.3d 543, 544 (7th Cir.1997) (holding that trustee need not identify specific creditor who could set aside transfer). However, it is not necessary to resolve this issue in this case. The evidence at trial makes clear that at the time of all of the transfers at issue in this case there existed unsecured creditors of Manshul, who held allowable claims, and those creditors could have avoided the transfers under the DCL. These creditors included Remark Electric Corp., Francis Brothers’ Sewer & Drainage, Inc., Yasulka, and Aetna.

[*45] 296. The defendants’ own evidence established the existence of allowable claims of Remark, Francis Bothers and Yasulka. Their expert at trial prepared a report admitted as Defendants’ Exhibit 194 which included estimates of probable liability on each of these claims. With respect to Remark, the report concluded that “Independent counsel estimates that Manshul would probable [sic] be liable for an amount between $500,000 and $600,000.” (Def.Exh. 194, App.2, p. 3.) With respect to the Francis Brothers claim, the report pointed out that “the courts determined in April 97 that Francis was owed $80,000 (incl.interest) …. We recorded an additional reserve to reflect the face amount of the claim.” (Def.Exh. 194, App.2, p. 4.) With respect to Yasulka, the report concluded, “[Deloitte & Touche, the defendants’ expert] after confirming with independent counsel reflected an additional reserve to result in an aggregate reserve of $35,000.” (Def.Exh. 194, App.2, p. 2.) Thus, with respect to these creditors the claims arose prior to the transfers at issue in this case, the claims were recognized by Manshul as unsecured claims when it commenced the bankruptcy case, and the defendants’ own evidence establishes Manshul’s liability for at least part of these claims.

297. The defendants have presented no evidence to dispute that these were allowable claims. The defendants responded that the Trustee has only shown that there were creditors in existence at the time of the transfers: “Whether the Trustee has succeeded in that endeavor is irrelevant because the Trustee has failed to point to any proof which would allow the Court to conclude that any of these creditor claims are still extant.” (Def. Post-Trial Reply Br., at 21.) This argument has no merit. The evidence establishes that the claims existed and there is no evidence that they ceased to exist. Moreover, Travelers Exhibit 419 contains proofs of claim filed in Manshul’s bankruptcy. The Court allowed briefing on the admissibility of this exhibit and will now admit it for the limited purpose of showing the claims that were filed in the bankruptcy. There is no dispute that the exhibit contains authentic claims filed in the bankruptcy and the defendants’ argument has now made that fact relevant. Travelers Exhibit 419 contains proofs of claim filed by Remark Electric Corp. (claim no. 118) and Francis Brothers (claim no. 143). [FN10] Finally, the Trustee testified that there have been a total of approximately $30 million dollars in subcontractor claims filed and that he has not proceeded beyond a preliminary review of claims because he wanted to determine what money was in the estate for distribution. (Tr. at 564, 607-08 (Geron).)

FN10. The defendants objected to the admissibility of Travelers Exhibit 419 in post-trial briefs on the grounds that certain claims, including claims 118 and 143 were not included in the copies of Travelers Exhibit 419 provided to the parties and to the Court. This argument has no merit. The Trustee identified Travelers Exhibit 419 as a copy of the proofs of claim filed with the Bankruptcy Court. (Tr. at 567 (Geron).) The fact that the courtesy copies of the exhibit provided to the parties did not include all of the items does not undercut their authenticity. Indeed, on their face, the copies are marked received and appropriately numbered.

298. Therefore, even if the Trustee is required to establish the existence of a specific creditor with an allowable claim, the Trustee has satisfied this requirement. Accordingly, the Trustee has standing under Section 554(b). [FN11]

FN11. The issue of the Trustee’s standing under Section 544(b) is in any event moot in view of the Court’s findings below that none of the fraudulent transfers were fraudulent only under DCL § 273, and in view of the Trustee’s uncontested standing to challenge the transfers under DCL §§ 274, 275, and 276.

299. There is no dispute, and it is plain, that the trustee has standing under Section 548(a) to avoid fraudulent transfers made one year prior to the petition date, in this case one year prior to July 31, 1996.

D. Fraudulent conveyance pursuant to DCL § 276

[*46] 300. Section 276 of the DCL provides:

Every 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.

Thus, in contrast to the constructive fraud provisions of the Debtor and Creditor Law, DCL § 276 requires a showing of a debtor’s “actual intent” to hinder, delay, or defraud its creditors. See generally United States v. McCombs, 30 F.3d 310, 327 (2d Cir.1994).

301. Under DCL § 276, a conveyance will be set aside as fraudulent regardless of the adequacy of consideration given for the transfer where the actual intent to defraud creditors is proven. See McCombs, 30 F.3d at 328. Pursuant to this section, “[o]nly an actual intent to hinder and delay need be established, not an actual intent to defraud.” United States v. Carlin, 948 F.Supp. 271, 277 (S.D.N.Y.1996). The burden of proving “actual intent” is on the party seeking to set aside the conveyance. See McCombs, 30 F.3d at 328; Marine Midland Bank v. Murkoff, 120 A .D.2d 122, 126, 508 N.Y.S.2d 17, 20 (2d Dep’t 1986), appeal dismissed, 69 N.Y.2d 875, 507 N.E.2d 322 (1987). Actual intent to defraud must be proven by clear and convincing evidence. See McCombs, 30 F.3d at 328; Murkoff, 120 A.D.2d at 126, 508 N.Y.S .2d at 20. It is not necessary under DCL § 276 to show fraudulent intent on the part of the transferee. See Securities Investor Protection Corp. v. Stratton Oakmont, Inc., 234 B.R. 293, 318 (Bankr.S.D.N.Y.1999). However, “a transfer motivated by actual fraudulent intent may not be voided if a transferee who paid fair consideration did not have actual or constructive knowledge of such intent.” HBE Leasing Corp. v. Frank, 48 F.3d 623, 639 (2d Cir.1995). See DCL § 278.

302. As an initial matter, it is plain that Manshul and Allan Schulman had creditors at the time of all of the transfers at issue in this case. A creditor, for purposes of the DCL, is “a person having any claim, whether matured or unmatured, liquidated or unliquidated, absolute, fixed or contingent.” DCL § 270. In 1988, Manshul and Allan Schulman and others jointly and severally agreed to indemnify Aetna from and against any loss, cost, expense, or liability that Aetna may incur as a consequence of having issued surety bonds on Manshul’s construction projects. (Joint Exh. 1 ¶ 34; Tr. at 123-24 (A. Schulman; Travelers Exh. 3.) Manshul and Allan Schulman thereafter reaffirmed their obligations under the 1998 Indemnity Agreement. (Travelers Exh. 135; Def. Exh. 75 ¶ 16.) As a result, at all times since 1988, including at the time of the transfers at issue in this case, Aetna (and now Travelers) has been a creditor of Manshul and Allan Schulman pursuant to DCL § 270. In addition to Aetna (Travelers), the evidence presented at trial clearly shows that Manshul and Allan Schulman had additional creditors at the time of the transfers because by the end of 1993 various subcontractors, laborers, and suppliers had asserted claims against Manshul. (Travelers Exh. 274.) Moreover, at the time of the transfers, the Government was a creditor of Allan Schulman and Manshul, and Allan Schulman was concerned about the Government’s ability to take away assets from Manshul and himself as a result of the criminal case.

i. Fraudulent intent

[*47] 303. The plaintiffs have established by clear and convincing evidence that the defendants acted with fraudulent intent under DCL § 276 in making all of the transfers at issue in this case, except for the transfers to the trusts of the Schulman children made in January 1994, March 1994, and January 1995.

304. With respect to the transfers of the stock of Viscount and Janal to Nancy Schulman and the forgiveness of their debt to Manshul in January 1884, it is plain that Allan Schulman made these transfers in order to defraud his and Manshul’s creditors, particularly Aetna. The evidence establishes that at the time that Allan Schulman made these transfers, he had already agreed to add Janal and Viscount to the indemnity agreement with Aetna in exchange for the release of his Muttontown residence. After the transfers were made, Mr. Schulman actively misled Aetna into believing that he would be executing a revised indemnity agreement adding Janal and Viscount. In particular, Mr. Schulman, as well as Mr. Meyrowitz, failed to inform Aetna that the January 18, 1994 letter from the Carman Agency advising Aetna that the revised indemnity agreement would be forthcoming was incorrect. Both Mr. Schulman and Mr. Meyrowitz received copies of the letter. It is clear from the evidence at trial that Mr. Schulman’s purpose in transferring the shares in these corporations to Nancy Schulman and in causing Manshul to forgive debts owed by Janal and Viscount was to defraud Aetna and hinder and delay its claims against Manshul and himself.

305. The evidence at trial also clearly established that Allan Schulman acted with an intent to hinder, delay and defraud his creditors, including Travelers, and with an intent to hinder, delay and defraud the creditors of Manshul, when, beginning in May 1994, he made transfers to Nancy Schulman, and caused Manshul to make transfers to himself, to Nancy Schulman, and to Annette Fogelman. This evidence of actual fraudulent intent includes Richard Weiss’ testimony that Allan Schulman told him he transferred funds because of the pending claims against Manshul and the criminal charges and Stuart Becker’s testimony that he had advised Mr. Schulman to transfer funds out of Manshul because of the possible claims against it in the wake of Mr. Schulman’s arrest. Allan Schulman’s testimony that he made the transfers, not in order to defraud, hinder or delay his creditors and Manshul’s creditors, but as part of an overall estate and tax plan, to equalize his assets with those of his wife, was not credible and was not supported by the documentary evidence.

306. It is also clear from the evidence at trial that Nancy Schulman acted with an intent to hinder, delay and defraud the creditors of Allan Schulman and Manshul when she in turn transferred the funds she had received to the Schulman Family Trust. It is plain from the testimony of Nancy Schulman, Stuart Becker, and Gideon Rothschild that the entire purpose of establishing the overseas trust was to move funds out of the reach of Manshul’s and Alan Schulman’s creditors. Nancy Schulman’s testimony about her conversations—or lack of conversations—with Allan Schulman on her receipt of millions of dollars of transfers and her testimony that this was pursuant to estate planning was not credible.

[*48] 307. With respect to the transfers to the trusts of the Schulman children made in January and March 1994 and January 1995, the plaintiffs have not established by clear and convincing evidence Allan Schulman’s actual intent to defraud creditors. The evidence is clear that Allan Schulman informed Aetna in November 1993 that he intended to set up trusts for his children and, in response, Atena established a reserve in anticipation of the initial transfers to the trusts. The trust instruments were prepared by Ronald Stein, who was consulted by Allan Schulman in June 1993 for purposes of estate planning. It is clear that, in contrast to the other transfers at issue in this case, the trusts for the children were set up pursuant to an estate plan Allan Schulman discussed with Mr. Stein. There is no credible evidence to support a conclusion that Allan Schulman acted with intent to defraud or to delay or hinder his creditors or Manshul’s creditors in transferring any funds to the children’s trusts. The initial transfers in January 1994 were in accordance with Mr. Schulman’s representations to Aetna, and there is no evidence of Mr. Schulman’s fraudulent intent in making smaller additional transfers to the trusts in March 1994 and January 1995. Indeed, the contrast between these transfers and the other transfers highlights the fraudulent nature of the other transfers.

308. In determining whether a transfer is fraudulent, it is appropriate to consider the entire context in which a transfer occurs, rather than merely the isolated transfer itself. See, e.g., MSF/Sun Life Trust-High Yield Series v. Van Dusen Airport Services Co., 910 F.Supp. 913, 934 (S.D.N.Y.1995); Dixie Yarns, Inc. v. Forman, 906 F.Supp. 929, 937-38 (S.D.N.Y.1995). However, even taking into account the pattern of fraudulent transfers including the transactions relating to Viscount and Janal in January 1994 and the subsequent transfers which occurred beginning in May 1994, it can not be said that the transfers to the children’s trusts were made with fraudulent intent. These transfers were made pursuant to a valid estate plan. They were documented and made on the advice of credible counsel. They were different in kind from the other transfers and were substantially separated in time from most of the other transfers.

ii. Badges of fraud

309. Actual intent need not be established by direct evidence for purposes of Section 276. Rather, the fraudulent nature of a conveyance may also be inferred from the circumstances surrounding the transaction. See In re Grand Jury Subpoena Duces Tecum Dated Sept. 15, 1983, 731 F.2d 1032, 1041 (2d Cir.1984). The relevant circumstances, which are referred to as the “badges of fraud,” include: transfers to relatives or close friends of the transferor; suspicious timing of the transfers or transfers that are unusual or hasty; lack of fair consideration for the transfers; whether the transfers rendered the transferor insolvent; and the transferor’s retention of possession, benefit, or use of the property transferred. See McCombs, 30 F.3d at 328; Murkoff, 120 A.D.2d at 129, 508 N.Y.S.2d 17; Citibank, N.A. v. Benedict, No. 97 Civ. 9541, 2000 WL 322785, at *11 (S.D.N.Y. March 28, 2000).

[*49] 310. The plaintiffs have also established the presence of sufficient badges of fraud to support an inference of fraudulent intent with respect to all of the transfers except those to the trusts of the Schulman children made in January and March 1994 and January 1995.

311. For all of the transfers at issue in this case it is plain that there was no fair consideration. The term “fair consideration” is defined in DCL § 272:

Fair consideration is given for property, or obligation,

a. When in exchange for such property, or obligation, as a fair equivalent therefor, and in good faith, property is conveyed or an antecedent debt is satisfied, or

b. When such property, or obligation 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.

See also HBE Leasing Corp. v. Frank, 61 F.3d 1054, 1058-59 (2d Cir.1995). The evidence at trial established that millions of dollars were transferred from Manshul and Alan Schulman without any fair consideration at all. As Alan Schulman himself testified at trial, neither he nor Nancy Schulman nor Annette Fogelman gave anything as a fair equivalent exchange for any of the transfers made to them. It is clear that these transfers were not in consideration for uncompensated services, or for property, or to satisfy an outstanding debt. While Mr. Schulman testified that he received transfers from Manshul as a result of his lifetime of work for the company, the evidence is clear that these transfers were not in fact wages paid to Mr. Schulman for his past work. The Manshul tax returns show that Allan Schulman had in fact been receiving substantial compensation from Manshul. The transfers did not discharge an antecedent debt that Manshul owed to Allan Schulman. And Allan Schulman was not acting in good faith when he caused the transfers. See HBE Leasing Corp., 61 F.3d at 1058-59.

312. The defendants contend that the transfers from Alan Schulman to Nancy Schulman were supported by fair consideration because Alan Schulman has a “long-standing antecedent debt, arising from his obligation to support his wife and children in a manner commensurate with his financial capacity.” (Defendants’ Post-Trial Br., at 13.) The claim is without merit and it plainly does not support a finding that there was consideration for transfers made to Nancy Schulman. There is no basis under New York law to conclude that Alan Schulman owed, for purposes of DCL § 272, an “antecedent debt” to Nancy Schulman solely by virtue of the Schulman’s marital relationship. The cases and statutory provisions cited by the defendants do not support such a proposition. Allan Schulman had already been supporting Nancy Schulman in a wonderful lifestyle before he made any transfers to her. She had specifically agreed to limit her rights to his property pursuant to the Pre-Nuptial Agreement which was never changed. When Allan Schulman made the transfers to Nancy Schulman he did not cancel any pre-existing debt that he owed to Nancy Schulman and neither he nor Manshul received anything from Nancy Schulman for the transfers. “Love and affection are inadequate consideration under the DCL.” Hickland v. Hickland, 100 A.D.2d 643, 645, 472 N.Y.S.2d 951, 954 (3d Dep’t), appeal dismissed, 63 N.Y.2d 951, 473 N.E.2d 44 (1984); see also Apple Bank for Savings v. Contaratos, 204 A.D.2d 375, 376, 612 N.Y.S.2d 51, 52 (2d Dep’t 1994); Duckstein v. Rosa, 118 A.D.2d 951, 952 499 N.Y.S.2d 515, 516 (3d Dep’t 1986); Rush v. Rush, 19 A.D.2d 846, 244 N.Y.S.2d 673 (2d Dept.1963). If the defendants were correct, any spouse could transfer substantial assets to the other spouse and simply call it a transfer in return for consideration and shelter the assets from creditors. There is no such loophole. As the Court of Appeals for the Second Circuit explained in a related context, if the defendants were correct, a potential spouse “could empty his estate with impunity when sued by victims, transfer his property to his fiancee and receive nothing but inchoate interests in return—nothing from which [a creditor] could recover its judgment—and yet enjoy the benefits of the property now nominally owned by his wife. That is the sort of injustice fraudulent conveyance law is designed to prevent.” HBE Leasing Corp., 61 F.3d at 1059. See also In re Rosenfield’s Will, 213 N.Y.S.2d 1009, 1014 (Surr.Ct.1961), aff’d without opinion, 18 A.D.2d 718, 236 N.Y.S.2d 941 (2d Dep’t 1962).

[*50] 313. Transfers made to family members are an additional badge of fraud. See, e.g., ACLI Government Securities, Inc. v. Rhoades, 653 F.Supp. 1388, 1395 (S.D.N.Y.1987), aff’d, 842 F.2d 1287 (2d Cir.1988). This badge of fraud is present in this case because all of the transfers were made exclusively to Allan Schulman, the sole shareholder of Manshul, and to Allan Schulman’s wife and sister, some of which were then transferred to other controlled entities.

314. A further badge of fraud in this case is that Allan Schulman retained control over and has continued to enjoy the benefit of the transfers made to Nancy Schulman and Annette Fogelman. Allan Schulman plainly enjoyed control over funds transferred to Annette Fogelman because she was merely holding the funds until Mr. Schulman directed their transfer to Mrs. Schulman. The evidence is also clear that the transfers have been used to pay Mr. Schulman’s living expenses and legal fees, he continues to live in the cooperative apartment, he continues to make decisions with respect to the operation of Viscount and Janal, and he uses office space owned by Viscount without paying rent.

315. A further badge of fraud in this case is the dramatic change in the respective financial condition of Allan and Nancy Schulman as a result of the transfers. Allan Schulman’s financial statements showed that as of December 31, 1993 his net worth, including his interest in Manshul, was $17,146,966. (Travelers’ Exh. 102.) Manshul’s December 31, 1993 financial statement showed that its net worth was $12,940,638. (Travelers’ Exh. 99.) During 1994 Allan Schulman transferred millions of dollars from Manshul and millions of dollars of his personal assets to his wife. After the transfers were effected, Mr. Schulman was left with no assets, aside from his interest in Manshul, and Mrs. Schulman’s assets were considerable.

316. The timing of the transfers made during and after May 1994 is also a badge of fraud with respect to those transfers. The evidence clearly shows that millions of dollars were transferred over a short period of time coinciding with an increased risk of liability to Allan Schulman and Manshul. As of May 1994 Nassau County had threatened a second default on the Nassau County project, the City was threatening to default Manshul on the New Bronx Housing project, Allan Schulman had been arrested, the future of Manshul was in serious question, and there had been a dramatic increase in subcontracter claims against Manshul. In addition, by the end of July 1994 Allan Schulman knew that another default on the Nassau County project was imminent. In the wake of these events, between the months of May and August 1994, millions of dollars were transferred, including transfers of $1 million from Manshul to Allan Schulman, $1.5 million from Manshul to Nancy Schulman, $1 million from Manshul to Annette Fogelman, and $500,000 from Allan Schulman to Nancy Schulman—all within weeks after Nassau County had threatened a second default. Transfers in excess of $7 million were made in August 1994 once another default on the Nassau County project was imminent. By September 30, 1994, Manshul had failed to meet the required milestone for the Nassau County project and, in November 1994, the New York State Supreme Court found that Manshul had not complied with the Milestone Agreement. Shortly thereafter, additional transfers were made. Transfers made in 1995, including the initial capitalization of the Cook Islands Trust in the amount of $8.1 million, came in close proximity to declarations of default on the New Bronx Housing Court project and the ECC # 4 project in August and September of 1995. The evidence clearly shows that when Allan Schulman and Manshul faced increased exposure from their creditors and from the government, funds were transferred first out of Manshul and from Allan Schulman, and then by Mrs. Schulman to an offshore account.

[*51] 317. That transfers in this case were made in secret is also a badge of fraud. The evidence is plain that Allan Schulman did not inform Aetna of the transfers of millions of dollars to himself, to his sister, and to his wife, despite the plain understanding between Allan Schulman and Manshul and Aetna that Aetna would be advised of any significant change in Allan Schulman’s or Manshul’s financial condition. In addition the evidence is clear that Allan Schulman actively concealed from Aetna that he had transferred the stock of Janal and Viscount to Nancy Schulman and forgiven debts owed by Janal and Viscount to Manshul. It is also clear that the transfers made by Mrs. Schulman were made in secret.

318. These numerous badges of fraud are sufficient to establish fraudulent intent as to all of the transfers at issue in this case except for the transfers made to the trusts of the Schulman children.

319. With respect to the transfers to the children’s trusts, there are not sufficient badges of fraud to support an inference of fraudulent intent. These transfers were made without fair consideration and they, like all of the transfers in this case, were made to family members. However, Aetna was plainly aware of Allan Schulman’s intention to set up trusts for his children and the initial transfers to the trusts in January 1994 were in accordance with what Allan Schulman had advised Aetna. There is nothing about the timing of the initial transfer, which was made pursuant to a consultation with Mr. Stein, which suggests fraud. There is also nothing about the timing of the transfers of $20,000 to each trust in March 1994 which is indicative of fraud. While the January 1995 transfers to the trusts were made at the same time as other transfers that were plainly fraudulent, only $20,000 was transferred to each trust at that time, a very small amount in comparison to the fraudulent transfers, and amounts that were consistent with what the Schulmans could transfer without being subject to federal gift taxes. Moreover, there is no evidence that Allan Schulman has retained control of or any benefit from any of the funds in the children’s trusts. Considering all of the circumstances of the transfers to the children’s trusts, the plaintiffs have not established by clear and convincing evidence sufficient badges of fraud to establish any fraudulent intent in making these transfers.

E. Constructive fraud pursuant to DCL §§ 273, 274, and 275.

320. Under New York law, a transfer is a constructive fraudulent conveyance if it is made without fair consideration, see DCL § 272, and (1) the transferor will be rendered insolvent, see DCL § 273, or (2) the transferor is engaged in business and will be left with unreasonably small capital, see DCL § 274, or (3) the transferor intends or believes that it will incur debts beyond its ability to pay them as they mature, see DCL § 275. See generally MFS/Sun Life Trust-High Yield, 910 F.Supp. at 936.

[*52] 321. For purposes of constructive fraud, the burden to establish a lack of fair consideration for a transfer is generally on the party challenging the conveyance. See McCombs, 30 F.3d at 324. However, when the nature and value of consideration for a transfer are within the transferee’s control, the transferee has the burden of establishing the fairness of the consideration. See id. Moreover, “where the transaction involves family members, and the transaction was made without any tangible consideration, ‘a heavier burden is placed upon the grantee to demonstrate fair consideration for the transfer.’ ” Id. at 324 (quoting Liggio v. Liggio, 53 A.D.2d 543, 549, 385 N.Y.S.2d 33, 39 (1st Dep’t 1976)). See also Domino Media, Inc. v. Kranis, 9 F.Supp.2d 374, 387 (S.D.N.Y.1998), aff’d, 173 F.3d 843 (2d Cir.1999). In this case because any evidence bearing on the nature or value of any alleged consideration was wholly within the defendants’ control, the defendants bear the burden of proving that fair consideration was given in exchange for the transfers at issue.

322. Even if a transaction involves an exchange of fair equivalents, a transaction also lacks fair consideration if it was not made in good faith. See HBE Leasing Corp., 61 F.3d at 1058-59. “[A] transaction is void for lack of good faith when one or more of the following factors is lacking: (1) an honest belief in the propriety of the activities in question; (2) no intent to take unconscionable advantage of others; and (3) no intent to, or knowledge of the fact that the activities in question will hinder, delay, or defraud others. The term ‘good faith’ does not merely mean the opposite of the phrase ‘actual intent to defraud.’ ” Computerland Corp. v. Batac, Inc., 750 F.Supp. 97, 98 (S.D.N.Y.1990) (quotations and citation omitted). Good faith is required of both the transferor and the transferee. See In re Checkmate Stereo & Electronics, Ltd., 9 B.R. 585, 617 (Bankr.E.D.N.Y.1981), aff’d, 21 B.R. 402 (E.D.N.Y.1982).

323. It is plain that the transfers in this action were made without consideration because nothing at all was given in exchange for any of the transfers. The testimony of Alan Schulman and Nancy Schulman at trial clearly demonstrates that there was no fair consideration for any of the transfers.

324. In addition, it is plain that all of the transfers made to Nancy Schulman, Allan Schulman, and Annette Fogelman lacked fair consideration for the additional reason that they were not made in good faith. The transfers Allan Schulman caused Manshul to make to himself were plainly not in good faith because, for the reasons stated above, Mr. Schulman acted with fraudulent intent. The transfers to Nancy Schulman and Annette Fogelman were also plainly not made in good faith. These transfers were made at a time when Manshul and Allan Schulman were under criminal investigation and Manshul faced substantial claims by subcontractors, defaults and threats of default on its projects. The transfers were made in haste and in secret. It is not credible that the transferees believed the transfers were for any proper purpose. Mrs. Schulman’s testimony that she believed that these transfers were simply part of an estate and tax plan is not credible. Mr. Schulman testified that when he presented Mrs. Schulman with numerous checks the only conversation he had with her was to invest the funds conservatively. Mrs. Schulman testified that her only conversation with Mr. Schulman when she received the checks was to thank him for giving her assets in her own name. This testimony defies belief. It is not credible that when Mrs. Schulman suddenly received, in a short period of time, numerous large checks, that she believed there was nothing improper about these transfers. It is also plain that the transfers Mrs. Schulman subsequently made were not made in good faith because they were made for the specific purpose to remove funds from creditors. Mrs. Schulman’s transfers of over $8 million to an “asset protection” trust in the Cook Islands serve to underscore her awareness of her participation in a scheme to attempt to put assets out of the reach of creditors.

i. DCL § 273 (insolvency)

[*53] 325. Section 273 of the DCL states:

Every conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regards to his actual intent if the conveyance is made or the obligation is incurred without a fair consideration.

Under DCL § 273, there is a long-recognized presumption of insolvency where the debtor makes a conveyance without fair consideration. See Feist v. Druckerman, 70 F.2d 333, 334-35 (2d Cir.1934) (A.Hand, J.); In re O.P.M. Leasing Services, Inc., 40 B.R. 380, 393 (Bankr.S.D.N.Y.), aff’d, 44 B.R. 1023 (S.D.N.Y.1984), aff’d, 769 F.2d 911 (1985); Elliott v. Elliott, 365 F.Supp. 450, 453 (S.D.N.Y.1973); Miner v. Edwards, 221 A.D.2d 934, 935, 634 N.Y.S.2d 306, 307-08 (4th Dep’t 1995); Hickland, 100 A.D.2d at 645, 472 N.Y.S.2d at 954. The effect of this presumption is to impose the burden of coming forward with proof of solvency on those defending the transfers. See MFS/Sun Life Trust High Yield Series, 910 F.Supp. at 937-38; ACLI, 653 F.Supp. at 1393; Hassett, 40 B.R. at 393. However, if those defending the conveyance come forward with some evidence of solvency, the burden of persuasion remains with the plaintiffs who seek to set aside the conveyance. See MFS/Sun Life Trust High Yield Series, 910 F.Supp. at 938. In this case, the defendants did present evidence of solvency through the testimony of their expert, Ms. Etlin. Therefore, the plaintiffs still bear the burden of proving the insolvency of Manshul and Allan Schulman at the times of the transfers in question. [FN12]

FN12. In this case, based upon the findings of fact, the plaintiffs have proved by a preponderance of the evidence, without resort to any presumption, that Manshul and Allan Schulman were insolvent at the time of the transfers in question.

326. The DCL defines insolvency as follows: “A person is insolvent when the present fair saleable 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.” DCL § 271. A debt, for purposes of this section, “includes any legal liability, whether matured or unmatured, liquidated or unliquidated, absolute, fixed or contingent.” DCL § 270. See generally Allen Morris Commercial Real Estate Services Co. v. Numismatic Collectors Guild, Inc., No. 90 Civ. 264, 1993 WL 183771, *7-8 (S.D.N.Y. May 27, 1993).

327. In this case, the clear preponderance of the credible evidence demonstrates that Manshul and Allan Schulman were insolvent at the time the transfers were made by them beginning at least by May 7, 1994, the date of the search executed by government agents on the office of Manshul’s lawyer and the date by which Allan Schulman learned of the criminal investigation. The Court accepts as credible on this issue the testimony of Mr. Lenhart that Manshul was insolvent as of May 7, 1994. As of this date, the fair value of Manshul’s debts exceeded the fair value of its assets. (Tr. at 1191 (Lenhart); see also Trustee Exh. 3.) Allan Schulman’s solvency was dependent on Manshul’s solvency. And when Manshul was insolvent, and he had gifted his Viscount and Janal stock to Nancy Schulman, and was liable for Aetna’s losses under its bonds, Allan Schulman was also insolvent by May 7, 1994. The evidence proffered by the defendants, principally the testimony of Ms. Etlin, that Manshul remained solvent throughout 1994 is, for the reasons explained above, not credible. The plaintiffs have therefore established that Manshul and Allan Schulman were insolvent at the time of the transfers made after May 7, 1994.

[*54] 328. Accordingly, because they were made without consideration, and they were made at a time when Manshul and Allan Schulman were insolvent, all of the transfers made after May 7, 1994 were constructively fraudulent under DCL § 273.

329. The evidence, however, shows that Manshul and Allan Schulman were solvent at the time of the transfers made prior to May 7 1994, that is the transfer of Janal and Viscount and forgiveness of their debt on January 5, 1994, the initial funding of the children’s trusts on January 28, 1994, and the transfers of $20,000 to those trusts on March 17, 1994. Mr. Lenhart testified credibly that at the time these transfers were made, Manshul remained solvent, and there is also no evidence that Allan Schulman was insolvent at that time. (Tr. at 1330-31 (Lenhart).) Accordingly, those transfers were not constructively fraudulent pursuant to DCL § 273.

ii. Section 274 (unreasonably small capital)

330. DCL § 274 provides:

Every conveyance made without fair consideration when the person making it is engaged or is about to engage in a business or transaction for which the property remaining in his hands after the conveyance is an unreasonably small capital, is fraudulent as to creditors and as to other persons who become creditors during the continuance of such business or transaction without regard to his actual intent.

“[U]nreasonably small capital denotes a financial condition short of equitable insolvency.” Moody v. Security Pacific Bus. Credit, Inc., 971 F.2d 1056, 1070 (3d Cir.1992). The test is aimed at transfers that leave the transferor technically solvent but doomed to fail. See Moody, 971 at 1070 & n.22. In order to determine the adequacy of capital, a court will look to such factors as the company’s debt to equity ratio, its historical capital cushion, and the need for working capital in the specific industry at issue. See MFS/Sun Life Trust-High Yield Series, 910 F.Supp. at 944. However, while a company must be adequately capitalized, it does not need resources sufficient to withstand any and all setbacks. See id.

331. The evidence at trial, in particular the testimony of Mr. Lenhart, which the Court finds credible, establishes that Manshul had unreasonably small capital as of May 7, 1994. A comparison of Manshul’s cash expenditures for 1994 with its liquid assets as of January 1, 1994, shows that Manshul experienced a negative cash flow during 1994. (Tr. at 1278-88 (Lenhart).) As of May 7, 1994, Manshul was unable to obtain new work because of the pending criminal investigation. (Tr. at 1276-77 (Lenhart).) It was also unable to obtain any financing and thus would be required to finance its operations internally. (Tr. at 1278 (Lenhart).) Accordingly, Manshul was left, as of May 7, 1994, without adequate capital to continue as a going concern. (Tr. at 1275-78 (Lenhart).) Moreover, a comparison of projected operating costs, litigation expenses for civil and criminal matters, and projected claims settlements with projected income for 1995 indicates that a continued shortfall in cash flow was likely. (Tr. at 1289-97 (Lenhart).) Manshul therefore had unreasonably small capital as of May 7, 1994.

[*55] 332. Ms. Etlin’s conclusion that Manshul continued to have sufficient capital throughout 1994 and 1995 is not supported by any reliable evidence. 333. Accordingly, all of the transfers at issue by Manshul made after May 7, 1994 were constructively fraudulent under DCL § 274 because they left Manshul with unreasonably small capital.

334. The evidence is also clear, however, that as of the dates of the transfers in January and March 1994, Manshul was left with sufficient capital. Mr. Lenhart testified credibly that these transfers did not leave Manshul with unreasonably small capital and the Court finds his conclusion credible. (Tr. at 1330-31 (Lenhart).)

iii. Section 275

335. DCL § 275 provides:

Every 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.

“Section 275 is a constructive fraud provision which comes into play when a person making a conveyance without fair consideration intends or believes that he or she will incur debts beyond his or her ability to pay them as they mature, and thus said conveyance becomes fraudulent as to both present and future creditors.” Shelly v. Doe, 249 A.D.2d 756, 671 N.Y.S.2d 803, 806 (3d Dep’t 1998).

336. The evidence at trial clearly established that as of May 7, 1994, Allan Schulman knew that Manshul was incurring debts beyond its ability to pay as those debts matured and thus he also knew that he was incurring debts under his obligation under the GAI that were beyond his ability to pay. As of this date, Manshul was engaged in only three projects, which required substantial additional expenses to complete. Allan Schulman was also aware by this date of a dramatic rise in subcontracter claims against Manshul. In addition, Mr. Schulman knew by this date of the pending criminal investigation and the possibility of his imprisonment and a fine against himself and Manshul, as well as Manshul’s inability to obtain future work. It is clear from this evidence that when Allan Schulman made transfers and caused Manshul to make transfers after May 7, 1994 he intended or believed that he and Manshul were incurring debts they could not meet as the debts matured.

337. Accordingly, all of the transfers made after May 7, 1994 were constructively fraudulent under DCL § 275.

338. However, there is no evidence to support a conclusion that the transfers made prior to May 7, 1994 were constructively fraudulent pursuant to DCL § 275. Mr. Lenhart testified credibly that prior to that date Manshul would not have believed it was incurring debts it would be unable to pay as those debts matured (Tr. at 1330-31 (Lenhart)), and there is no evidence Allan Schulman believed he was incurring such debts. Accordingly, the transfers prior to May 7, 1994 were not constructively fraudulent under DCL § 275.

F. Affirmative defenses

[*56] 339. The defendants have asserted, as affirmative defenses, that even if they are found liable for actual or constructive fraud they are entitled to certain setoffs against the transfers and a recoupment of certain funds they paid to or on behalf of Manshul.

340. The defendants seek setoffs and recoupments in the following amounts: personal income taxes of $5.4 million paid by Alan Schulman on Manshul’s accumulated earnings; pre-petition advances to Manshul by Nancy Schulman in the amount of approximately $1.9 million; and $275,000 for the claims the Trustee settled with Annette Fogelman and the Estate of Julius Schulman. [FN13]

FN13. The defendants have abandoned as an affirmative defense a set- off and recoupment for rent and certain administrative expenses. (See Defendants Proposed Conclusions of Law ¶ 488.)

341. Section 553 of the Bankruptcy Code preserves the right of a creditor to offset a mutual debt owing by such creditor to the debtor if such a right otherwise exists under applicable non-bankruptcy law. See 11 U.S.C. § 553(a); Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 (1995); In re Chateaugay Corp., 94 F.3d 772, 777 n.5 (2d Cir.1996). In this case, the applicable New York State law recognizes both a common law and statutory right of setoff. See In re Westchester Structures, Inc., 181 B.R. 730, 740 (Bankr.S.D.N.Y.1995).

342. A creditor bears the burden of proving its right of setoff and must establish the following three criteria: (1) the debtor must owe a debt to the creditor which arose pre-petition; (2) the debtor must have a claim against the creditor which arose pre-petition; and (3) the debt and claim must be mutual. See In re Ionosphere Clubs, Inc., 164 B.R. 839, 841 (Bankr.S.D.N.Y.1994) (citing Braniff Airways, Inc. v. Exxon Co., U.S.A., 814 F.2d 1030 (5th Cir.1987)). Once the technical requirements of setoff are satisfied, a court “must scrutinize the right of setoff in light of the Bankruptcy Code’s goals and objectives. These goals include … equitable treatment of all creditors.” Ionosphere Clubs, 164 B.R. at 841 (quotation omitted). Although set-off is favored, see Pereira v. United Jersey Bank, N.A., 201 B.R. 644, 679 (S.D.N.Y.1996), a court may invoke equitable considerations and deny set-offs in the interests of justice, see In re Westchester Structures, Inc., 181 B.R. at 740.

343. In this case, there is no basis on which the defendants are entitled to any setoff. Personal income taxes paid by Allan Schulman plainly do not constitute a debt owed to him as a creditor. There is therefore no basis for a setoff. As to funds Nancy Schulman may have returned to Manshul, there is no basis on which to conclude that these funds are a debt to which Mrs. Schulman is now entitled as a creditor. There is also no basis to conclude that the settlement with Annette Fogelman and the Estate of Julius Schulman is a claim which may be offset. Finally, when a party is being sued for fraudulent transfers there is no mutuality of obligations and thus no right to any set- off. See In re O.P.M. Leasing Services, Inc., 40 B.R. at 402.

[*57] 344. Moreover, even if the technical requirements for a setoff had been met in this case, this is plainly a case in which a setoff is unwarranted. The defendants in this case transferred millions of dollars out of Manshul and to an offshore account in order to defraud the creditors of Manshul and Allan Schulman. Allowing the setoffs sought in this case would have the inequitable result of permitting the defendants to retain funds which they fraudulently conveyed at the expense of the creditors of Manshul and Allan Schulman. See In re Candor Diamond Corp., 76 B.R. 342, 352 n.12 (Bankr.S.D.N.Y.1987); In re O.P.M. Leasing Services, Inc., 40 B.R. at 402.

345. Recoupment is an equitable remedy. See In re McMahon, 129 F.3d 93, 96 (2d Cir.1997). For similar reasons, it is also unavailable to these defendants. Under no circumstances could the defendants be found to have come to court with clean hands. See Candor Diamond Corp., 76 B.R. at 352 n.12.

G. Summary of findings

346. The January 3, 1994 transfer of stock in Viscount and Janal ($2,500,000) from Allan Schulman to Nancy Schulman was made with actual fraudulent intent to defraud the creditors of Allan Schulman. Because this stock did not come from Manshul, only Travelers may recover it.

347. Manshul’s forgiveness of the $1,293,355 receivable from Viscount and Janal on January 3, 1994 was done with actual fraudulent intent to defraud the creditors of Manshul.

348. The January 28, 1994 transfer of $600,000 from Manshul to the Brett Schulman Trust was not made with actual fraudulent intent.

349. The January 28, 1994 transfer of $600,000 from Manshul to the Ethan Schulman Trust was not made with actual fraudulent intent.

350. The March 17, 1994 transfer of $20,000 from Manshul to the Brett Schulman Trust was not made with actual fraudulent intent.

351. The March 17, 1994 transfer of $20,000 from Manshul to the Ethan Schulman Trust was not made with actual fraudulent intent.

352. The May 9, 1994 transfer of $110,000 from Manshul to Allan Schulman was made with actual fraudulent intent.

353. The May 13, 1994 transfer of $500,000 from Manshul to Allan Schulman was made with actual fraudulent intent.

354. The May 14, 1994 transfer of $500,000 from Allan Schulman to Nancy Schulman was made with actual fraudulent intent.

355. The May 14, 1994 transfer of $1,500,000 from Manshul to Nancy Schulman was made with actual fraudulent intent. 356. The May 14, 1994 transfer of $1,000,000 from Manshul to Annette Fogelman was made with actual fraudulent intent.

357. The transfer from Annette Fogelman of this $1,000,000 to Nancy Schulman on March 1, 1995 was made with actual fraudulent intent.

358. The May 31, 1994 transfer of $500,000 from Manshul to Allan Schulman was made with actual fraudulent intent.

359. The June 13, 1994 transfer of $1,000,000 from Manshul to Allan Schulman was made with actual fraudulent intent.

[*58] 360. The June 15, 1994 transfer by Allan Schulman to Nancy Schulman of one-half interest in the 60 East End Avenue apartment ($562,500) was made with actual fraudulent intent to defraud Allan Schulman’s creditors. Because this was not a transfer from Manshul, only Travelers may recover it.

361. The August 3, 1994 transfer of $1,600,000 from Allan Schulman to Nancy Schulman was made with actual fraudulent intent.

362. The August 9, 1994 transfer of $1,000,000 from Manshul to Allan Schulman was made with actual fraudulent intent.

363. The August 9, 1994 transfer of $1,250,000 from Allan Schulman to Nancy Schulman was made with actual fraudulent intent.

364. The August 9, 1994 transfer of $1,666,800 (Smith Barney Account) from Allan Schulman to Nancy Schulman was made with actual fraudulent intent to defraud Allan Schulman’s creditors. Because this was not a transfer from Manshul, only Travelers may recover it.

365. The August 12, 1994 transfer of $700,000 from Manshul to Allan Schulman was made with actual fraudulent intent.

366. The August 16, 1994 transfer of $500,000 from Allan Schulman to Nancy Schulman was made with actual fraudulent intent.

367. The August 25, 1994 transfer of $500,000 from Allan Schulman to Nancy Schulman was made with actual fraudulent intent.

368. The December 1994 transfer from Allan Schulman of his remaining one-half interest in the 60 East End Avenue apartment to Nancy Schulman ($562,500) was made with actual fraudulent intent to defraud Allan Schulman’s creditors. Because this was not a transfer from Manshul, only Travelers may recover it.

369. Manshul’s furnishing of $504,797.97 worth of labor and materials to renovate the 60 East End Avenue apartment between June, 1994 and December, 1994 was done with actual fraudulent intent.

370. The December 30, 1994 transfer of $500,000 from Manshul to Nancy Schulman was made with actual fraudulent intent.

371. The January 10, 1995 transfer of $20,000 from Manshul to the Brett Schulman Trust was not made with actual fraudulent intent.

372. The January 10, 1995 transfer of $20,000 from Manshul to the Ethan Schulman Trust was not made with actual fraudulent intent.

373. The December 13, 1995 transfer of $100,000 from Manshul to Nancy Schulman was made with actual fraudulent intent.

374. The March 11, 1996 transfer of $250,000 from Manshul to Nancy Schulman was made with actual fraudulent intent.

375. All transfers described above from Manshul or Allan Schulman were not made for fair consideration or reasonably equivalent value. Indeed, all transfers from Manshul and Allan Schulman described above were made for no consideration at all.

376. All transfers from Manshul and Allan Schulman after May 7, 1994 were made while Manshul and Allan Schulman were insolvent.

377. All transfers from Manshul and Allan Schulman after May 7, 1994 were made while Manshul was engaged in business for which it had unreasonably small capital.

[*59] 378. All transfers from Manshul and Allan Schulman after May 7, 1994 were made while Manshul and Allan Schulman knew they would incur debts beyond their ability to pay as such debts matured.

379. The Trustee has standing to avoid all of the transfers discussed above except, for the reasons explained, the Trustee has proven no right to recover the transfers made on January 28, 1994 and March 17, 1994 to the Brett Schulman Trust and the Ethan Schulman Trust, and the Trustee has no right to recover the transfers from Allan Schulman that were not transfers from Manshul, namely the transfers of Allan Schulman’s stock in Viscount and Janal, Allan Schulman’s interest in the 60 East End Avenue apartment, and Allan Schulman’s brokerage account ($1,666,800).

380. Allan Schulman is the initial transferee or the party for whose benefit the transfer was made with respect to all of these transfers except for the transfers to the children’s trusts.

381. Nancy Schulman is the initial transferee for the following transfers:

(a) Stock of Janal and Viscount;

(b) Forgiveness of the $1,293,355 indebtedness by Manshul to Janal and Viscount.

(c) May 14, 1994 transfer of $500,000 from Allan Schulman to Nancy Schulman;

(d) May 14, 1994 transfer of $1,500,000 from Manshul to Nancy Schulman;

(e) June 15, 1994 transfer of one-half interest in the 60 East End Avenue apartment from Allan Schulman to Nancy Schulman;

(f) August 3, 1994 transfer of $1,600,000 from Allan Schulman to Nancy Schulman;

(g) August 9, 1994 transfer of $1,250,000 from Allan Schulman to Nancy Schulman;

(h) August 9, 1994 transfer of $1,666,880 (Smith Barney account) from Allan Schulman to Nancy Schulman;

(i) August 16, 1994 transfer of $500,000 from Allan Schulman to Nancy Schulman;

(j) August 25, 1994 transfer of $500,000 from Allan Schulman to Nancy Schulman;

(k) December 1994 transfer of the remaining one-half interest in the 60 East End Avenue apartment from Allan Schulman to Nancy Schulman;

(l) 1994 renovations by Manshul to the 60 East End Avenue apartment worth $504,797.97;

(m) December 30, 1994 transfer of $500,000 from Manshul to Nancy Schulman;

(n) December 13, 1995 transfer of $100,000 from Manshul to Nancy Schulman;

(o) March 11, 1996 transfer of $250,000 from Manshul to Nancy Schulman.

382. Nancy Schulman is an immediate transferee of the initial transferee from Manshul for all transfers made to her by Allan Schulman and Annette Fogelman, except for the transfers of Allan Schulman’s stock in Janal and Viscount, Allan Schulman’s interest in the 60 East End Avenue apartment, and Allan Schulman’s brokerage account ($1,666,800).

383. Nancy Schulman gave no consideration or anything of value for any of the transfers to her.

384. The Family Partnership is an immediate or mediate transferee of Nancy Schulman of $8,203,000 of the transfers received by Nancy Schulman.

385. The Family Partnership gave no consideration or anything of value for the transfers made to it.

[*60] 386. The Schulman Trust is an immediate or mediate subsequent transferee of the Family Partnership of $8,120,970, that is the transfers received by the Family Partnership.

387. The Schulman Trust gave no consideration or anything of value for any of the transfers made to it.

388. Beam is an immediate or mediate transferee of Nancy Schulman of $250,000 of the transfers received by Nancy Schulman.

389. Beam gave no consideration or anything of value for the transfers made to it.

390. Marathon is an immediate or mediate transferee of Nancy Schulman of $750,000 of the transfers received by Nancy Schulman.

391. Marathon gave no consideration or anything of value for the transfers made to it.

392. B & E is an immediate or mediate transferee of Nancy Schulman of $500,000 of the transfers received by Nancy Schulman.

393. B & E gave no consideration or anything of value for the transfers made to it.

394. Eastland is an immediate or mediate transferee of Nancy Schulman of $525,000 of the transfers received by Nancy Schulman.

395. Eastland gave no consideration or anything of value for the transfers made to it.

H. Remedy

396. The transfers to Nancy Schulman from Manshul made within one year prior to the filing of Manshul’s bankruptcy petition on July 31, 1996, namely $350,000, are avoidable by the Trustee, pursuant to section 548(a) of the Bankruptcy Code.

397. Pursuant to section 550(a) of the Bankruptcy Code, the Trustee may recover the transfers from the initial transferees from Manshul, the party for whose benefit the transfers were made, any immediate or mediate transferee of the initial transferee who gave no consideration or reasonably equivalent value for such transfers.

398. Travelers may recover the transfers from Allan Schulman that were not transfers recoverable by the Trustee as transfers from Manshul, namely the stock of Viscount and Janal, the 60 East End Avenue apartment, and the Smith Barney brokerage account stocks ($1,666,800). [FN14]

FN14. Travelers agrees that the Trustee should be the party to recover any transfers from Manshul. (Tr. at 2930-35 (statement by Mr. Brickman).)

399. Pursuant to Section 279 of the DCL, the transfers except for the transfers in January 1994 and March 1994 to the Schulman children’s trusts are set aside. 400. Because the defendants in this action have fraudulently transferred funds, there is a plain risk that the defendants will seek to frustrate the judgment in this case by making further transfers of funds. Injunctive relief is therefore also appropriate. See Pashaian v. Eccelston Properties, Ltd., 88 F.3d 77, 86-87 (2d Cir.1996); Mishkin v. Kenney & Brainsel, Inc., 609 F.Supp. 1254 (S.D.N.Y.) (Weinfeld, J.), aff’d, 779 F.2d 35 (2d Cir.1985). The defendants are therefore enjoined from making any further transfer of the contested assets pending resolution of the current action in New York State Court.

401. The plaintiffs are entitled to attorney’s fees pursuant to DCL § 276-a.

CONCLUSION

For the reasons explained above, the plaintiffs have established the defendants’ liability with respect to all of the transfers at issue in this case except for the transfers made to the trusts for the Schulman children in January and March 1994. The plaintiffs are directed to provide a proposed Judgment within seven days of the date of this Opinion together with any memorandum of law supporting any requested forms of relief and detailed calculations for any requested prejudgment interest. The defendants may submit any counter proposal and supporting materials five days thereafter. The plaintiffs may submit a separate application for attorneys’ fees. [FN15]

FN15. The Court has considered all of the arguments raised by the parties. To the extent not expressly addressed, the arguments are moot or without merit.

[*61] SO ORDERED.