This case, which arises out of the attempts of two federal agencies to disgorge funds from Janet Schaberg,
Janet Schaberg was married to Stephen Walsh for more than two decades. By the time of their separation in 2004, Walsh had amassed a substantial fortune and the two negotiated a settlement that gave Schaberg a not-insubstantial fortune of her own. Under that settlement, finalized in 2006, Walsh agreed to pay Schaberg 12.5 million dollars in biannual installments through 2020 and to allow Schaberg to keep nearly 5 million dollars held in several checking accounts during the marriage. Schaberg conveyed to Walsh her interest in a house in Port Washington, New York, while Schaberg assumed sole ownership of condominiums in New York City and in Florida. Both parties waived their rights to any further equitable distribution, maintenance, or inheritance. In 2008, Schaberg remarried and adopted her current name.
In 2009, the CFTC and the SEC accused Walsh of operating a Ponzi scheme through which he and a partner fleeced
The agencies sued not only Walsh but Schaberg. They did not allege that she herself committed or even had knowledge of any wrongdoing, only that she nevertheless possessed the proceeds of that wrongdoing—transferred directly to her from the investment entity in question—and should have to disgorge those proceeds to pay the defrauded investors. Pending resolution of the matter, the agencies sought and received a series of orders restraining Schaberg's funds, including the preliminary injunctions at issue here, which leave Schaberg "without access to the vast majority of her assets." Walsh I, 618 F.3d at 222-23.
On Schaberg's interlocutory appeal from the preliminary-injunction orders, we recognized that the agencies may obtain disgorgement of ill-gotten funds only to the extent that a relief defendant like Schaberg lacks a legitimate claim to them. See id. at 225, citing SEC v. Cavanagh, 155 F.3d 129, 136 (2d Cir.1998). We held that if Schaberg "received her assets only when they were transferred to her pursuant to the separation agreement and if she is a good faith purchaser for value, then her assets are immune from disgorgement." Walsh I, 618 F.3d at 226. Looking to New York state law, we found a dearth of precedent on these matters and therefore certified two questions to the New York Court of Appeals:
Id. at 231-32.
On the first question, the Court of Appeals ruled unambiguously and unanimously for Schaberg, holding that "proceeds of fraud can constitute marital property" and that "monies obtained by fraud cannot be followed by the original owner into the hands of an innocent former spouse who now holds them (or assets derived from them) as a result of a divorce proceeding where that spouse in good faith and without knowledge of the fraud gave fair consideration for the transferred property." Walsh II, 17 N.Y.3d at 172, 174, 927 N.Y.S.2d 821, 951 N.E.2d 369. It follows that the putative fraud proceeds that came into Schaberg's possession during the marriage were part of the marital estate subject to division upon divorce, and that Schaberg's ability to retain the funds, and the fraud victims' ability to retrieve them, turn on whether Schaberg qualifies as a bona fide purchaser for value given the terms of the separation agreement and divorce decree.
On the second question, the Court of Appeals reached a more complicated conclusion. On the one hand, it held that "consideration cannot be predicated on a spouse's relinquishment of a claim to a greater share of the proceeds of fraud." Id. at 175, 927 N.Y.S.2d 821, 951 N.E.2d 369. Thus, as the agencies contend, if the marital estate consisted entirely or almost entirely of the proceeds of fraud, Schaberg cannot be regarded as a bona fide purchaser for value simply because the share of the proceeds she received in the divorce represented a compromise in which she agreed in exchange to abandon claims to
Id. at 176, 927 N.Y.S.2d 821, 951 N.E.2d 369. The Court answered the reformulated question in the negative. Two judges dissented in part, arguing that Schaberg could not have rendered fair consideration "by giving up future claims to the equitable distribution of [fraudulent] proceeds in which she has no legitimate interest." Id. at 179, 927 N.Y.S.2d 821, 951 N.E.2d 369 (Pigott, J., dissenting in part).
The decision of the Court of Appeals, although not resolving every potential future question in this case, requires that we vacate the orders of the district court. We review the district court's preliminary injunctions for abuse of discretion, which may be found when that court "proceeds on the basis of an erroneous view of the applicable law." Walsh I, 618 F.3d at 225 (internal quotation marks omitted). Here, the district court rested its grant of relief to the agencies on an erroneous view of the first of two issues we identified in Walsh I. Specifically, the district court rejected Schaberg's argument that a divorce decree could "cleanse the taint of fraudulent proceeds previously transferred to a spouse prior to" dissolution of the marriage.
The agencies, seeking to avoid vacation of the preliminary-injunction orders, turn their sights to the second issue we discussed in Walsh I, the issue of fair consideration, arguing in effect that we should affirm the preliminary injunctions on an alternative ground. Cf. NXIVM Corp. v. Ross Inst., 364 F.3d 471, 476 (2d Cir.2004) (when reviewing a preliminary injunction, we may "affirm on any ground supported by the record"). They emphasize Walsh II's conclusion that "consideration cannot be predicated on a spouse's relinquishment of a claim to a greater share of the proceeds of fraud," 17 N.Y.3d at 175, 927 N.Y.S.2d 821, 951 N.E.2d 369, and argue that the entire marital estate consisted of ill-gotten gains. Schaberg, however, points to the court's further gloss that there is a presumption in favor of fair consideration in this context. See id. at 176, 927 N.Y.S.2d 821, 951 N.E.2d 369. She also notes that the agencies' position comes close to that of the Walsh II dissenters, while the Court of Appeals majority
Whatever the eventual resolution of this dispute, it is clear that we cannot affirm for lack of fair consideration based on the present record. First, the Court of Appeals answered squarely in the negative the very question the agencies would have us answer affirmatively: whether a finding that a divorced spouse paid "fair consideration," and is therefore a bona fide purchaser for value, is "precluded, as a matter of law, where part or all of the marital estate consists of the proceeds of fraud." Id. at 176, 927 N.Y.S.2d 821, 951 N.E.2d 369. It held that a presumption of fair consideration applies in assessing divorce settlements, emphasized the potential importance of intangible forms of consideration, and concluded that the mere fact that the vast bulk of the assets possessed by the couple were the proceeds of fraud did not necessarily undermine the presumption in this case. See id. at 175-76, 927 N.Y.S.2d 821, 951 N.E.2d 369. These aspects of the court's opinion militate strongly against affirming the district court—an outcome that clearly would have followed had the dissenters prevailed.
Second, it appears that at least some portion of the funds spent on the Port Washington property may have been untainted, so that Schaberg's relinquishment of her interest in that property could constitute substantial (if not necessarily sufficient) consideration.
Third, while rights to maintenance and inheritance from Walsh might not have been worth much at the time of the divorce, given that Walsh's (legitimate) net worth appears to have been negative, they may well, like out-of-the-money options, have had some value. There is some possibility, however remote, that Walsh might someday rebuild a legitimate fortune, to a portion of which Schaberg would have been entitled had she not divorced him. Whatever the value of that right, it is not zero, and Schaberg provided some consideration (though perhaps not much) when she relinquished that right.
Fourth, the Court of Appeals made clear that "even where a spouse does not relinquish a `fair equivalent' for the aggregate of assets, it is possible that fair consideration may be exchanged for at least some of the assets." Id. at 177, 927 N.Y.S.2d 821, 951 N.E.2d 369. The consideration Schaberg gave might have been a fair equivalent to a portion of the assets she received under the separation agreement, even if not to the entire amount. Thus, even if the various forms of consideration to which Schaberg points would be insufficient to render her a bona fide purchaser with respect to all of what she received in the divorce, it may be sufficient to qualify her as a bona fide purchaser with respect to some portion of those assets.
We therefore cannot affirm the district court's orders on the grounds suggested by the agencies.
We express no view on how the district court should resolve the matter of "fair
For these reasons, we VACATE the district court's orders converting its temporary restraining order into a preliminary injunction and its order elaborating the preliminary injunction, without prejudice to any renewed application by the agencies to restrain some or all of the assets in question, and we REMAND to that court for further proceedings consistent with this opinion.