Case Update: Silverman v. Carob Bean Realty Corp. II, 24-cv-08062 (S.D.N.Y.)

In an important decision for bankruptcy practitioners, the U.S. District Court for the Southern District of New York partially reversed a Bankruptcy Court ruling that had dismissed a trustee’s fraudulent transfer claim, reinforcing key limits on the defensive use of the alter ego doctrine.

The dispute arose out of the bankruptcy of several litigation funding entities operated as a Ponzi scheme by Jaeson Birnbaum, including Cash4Cases, Inc. Prior to the bankruptcy filings, Cash4Cases transferred $280,000 to Carob Bean Realty Corp. II as a down payment for real estate being acquired by Liberty Bridge Properties (LBP)—a separate special purpose vehicle created by Birnbaum. Notably, LBP was not a debtor in the bankruptcy proceedings.

Rimon partner and bankruptcy trustee Kenneth P. Silverman initiated an adversary proceeding against Carob Bean, alleging the $280,000 payment constituted a fraudulent conveyance for which no fair consideration was received. The Bankruptcy Court granted summary judgment in favor of Carob Bean, holding that LBP was an alter ego of Cash4Cases, and therefore Carob Bean was a good faith transferee for value.

On appeal, Judge Lewis A. Kaplan vacated the dismissal of the Trustee’s complaint. He ruled that the Bankruptcy Court erred in applying the alter ego doctrine without requiring a showing that the party invoking it—Carob Bean—was harmed by the legal separateness of the entities involved. The Court made clear that the alter ego theory cannot be used defensively to defeat a trustee’s fraudulent transfer claim where the defendant has not suffered any injury due to the corporate form. Judge Kaplan also found unresolved factual issues as to whether Cash4Cases received fair consideration, specifically regarding any indirect benefit from the transaction.

Key Takeaway:
This decision is a significant win for bankruptcy trustees and creditors. It reaffirms that defendants cannot co-opt the alter ego doctrine to shield themselves from liability under the Bankruptcy Code. The ruling preserves the trustee’s ability to unwind fraudulent transfers and ensures that defendants bear the burden of demonstrating fair consideration and good faith. Importantly, it prevents the erosion of corporate separateness in a way that would undermine creditor protections and the statutory framework for avoiding fraudulent transfers.

Appellate briefing and argument were led by Rimôn partner, Anthony C. Acampora and Rimôn Counsel Meghan Lavine.

The case was printed in the NY Law Journal on May 1, 2025.

Read the decision here.

This summary is provided for informational purposes only and is not intended to constitute legal advice nor does it create an attorney-client relationship with Rimon, P.C. or its affiliates.