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Fink v. Advanced Logic Systems, Inc.

A-5939-05T1 (N.J. Super. App. Div. 2007) (Unpublished)

FRAUDULENT TRANSFERS —In determining whether a conveyance is fraudulent as to a particular creditor, a court must determine whether the asset was put beyond that creditor’s reach and, if the creditor would have received that asset, but for the conveyance.

A computer software company retained a consultant who performed services without a contract, and on a per diem basis. The consultant also invested in the company and the company executed promissory notes evidencing the debt. The consultant was one of five creditors who held secured liens on the company’s assets, but he did not have priority among them. One of the company’s customers became interested in acquiring its software and the consultant was the lead negotiator on the company’s behalf. The buyer eventually decided not to acquire the software either because the consultant would not release his lien or because the buyer did not want to assume all of the company’s obligations to existing customers of the software. However, the company and the buyer eventually negotiated a non-exclusive license agreement. When the consultant was not paid back with the proceeds of the transaction, he sued the company and the buyer claiming that the transaction was a fraudulent conveyance. He claimed that the non-exclusive license amounted to the sale of substantially all of the company’s assets and was designed to place the funds beyond his reach and to leave the company without sufficient funds to pay his claim. He also claimed that the price was insufficient consideration.

The lower court granted the buyer’s motion for summary judgment, finding that there was nothing inherently illegal in the buyer’s decision to pursue a license arrangement rather than an outright purchase. There was testimony that the buyer did not want to assume the obligations to service some of the existing customers utilizing the software, particularly when one of the customers was involved in the pornography industry. The lower court also found that the company’s decision to license the software, rather than sell it, did not preclude the consultant from pursuing its claim once the company received the licensing fee. In addition, the lower court noted that even if there were an outright sale of the software to the buyer, the consultant was still unlikely to have his lien paid off with the proceeds since there were superior lien holders.

The Appellate Division affirmed, noting that in determining whether a conveyance is fraudulent, one must determine: (a) whether the asset was put beyond the creditor’s reach; and (b) if the creditor would have received that asset, but for the conveyance. The Court agreed with the lower court’s finding that the consultant did not meet that burden since he would not have received the sale proceeds anyway, as there were superior lien holders to be paid off first, and the sale proceeds would have been exhausted before his lien could be satisfied. The Court also rejected the consultant’s argument of fraudulent transfer because the buyer did not acquire the assets. Rather, it acquired a non-exclusive licensing agreement. The license agreement provided the buyer with exclusive use, in certain industries, and for a limited time period. The software could still be licensed to others and could generate revenue thereby. Therefore, the license did not amount to a sale. Further, the Court rejected the consultant’s argument that the asset was sold for insufficient consideration since expert testimony would have been needed to determine the software’s value and the consultant did not provide such testimony.

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