A.C. & R., Inc. v. Wharton Liquors, Inc.

A-4374-98T5 (N.J. Super. App. Div. 2000) (Unpublished)
  • Opinion Date: February 28, 2000

CORPORATIONS; SHAREHOLDERS; FIDUCIARY DUTY—A sole shareholder owes a quasi-trust duty to creditors when the business is sold and can not prefer himself over those creditors.

A liquor store’s creditor obtained a judgment against a corporate owner. After commencement of the original suit, but approximately one year prior to trial, the debtor transferred its assets, including its liquor license, to a third party. In return, it received a promissory note, payable in monthly installments. The liquor store immediately assigned the payments to its sole stockholder, who allegedly had loaned the store a substantial amount of money during the course of the business. The lower court ordered that the monthly payments on the note be made to the creditor and not to the debtor’s president. Its authority for such an order was N.J.S. 2A:17-63, which states that after a levy upon the debts due or accruing to the judgment creditor from a third person, the court, upon notice may direct that the debt be paid to the officer holding the execution, either in one payment or in installments as the court may deem just. Initially, the lower court found that transfer of the note to the corporation’s president was a fraudulent conveyance because: “(1) the transfer was to an insider; (2) there was concealment, in that the transfer was not disclosed to plaintiff, a potential creditor; (3) the transfer occurred during the pendency of suit, and defendant was well aware of the nature of the claim and liability; and (4) there was no opportunity to challenge the value of the sale or the insolvency of defendant thereafter.” Additionally, the lower court found that there was no documented evidence of a debt incurred by the liquor store in favor of its president and sole shareholder. It held that because the president was the defendant’s sole shareholder and owner, he would not be permitted to recoup his own contributions to the business to the detriment of other creditors. On reconsideration, although the Court accepted the liquor store’s argument that the creditor had advance knowledge of the transfer of assets, the Court did not change its ruling. The Appellate Division reviewed the arguments made on appeal by the liquor store but was persuaded that they were without merit. The shareholder clearly was an “insider” under the Uniform Fraudulent Transfer Act, which provides that an “insider” includes an “affiliate.” An “affiliate” is “a person who directly or indirectly owns, controls, or holds with power to vote, 20% or more” of the stock of the subject entity. The sole stockholder, in that capacity, owed a quasi-trust duty to the creditor when the business was sold. “In that relationship, an owner cannot prefer himself over other creditors.” Further, the sole shareholder lacked the status of a creditor and had no right, title or claim of debt as to the corporation. The Appellate Division agreed that the shareholder was merely trying to salvage what he could of his investment at the expense of the judgment creditor.