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Ghaleb v. King Motors, Inc.

A-2948-07T3 (N.J. Super. App. Div. 2008) (Unpublished)

CORPORATIONS; SHAREHOLDER LIABILITY — If a corporation’s shareholder, while making a monetary settlement on behalf of the corporation, negotiates his or her own release from personal liability but fails to disclose that the corporation, though promising to pay the settlement amount, is insolvent, he or she will be held personally liable for the agreed-upon amount.

An SUV buyer was arrested and charged with a number of criminal offenses because the vehicle he was driving had been reported stolen. As a result, he incurred attorney’s fees of $7,000. The buyer sued the dealership that sold him the SUV. He alleged negligence and violation of consumer fraud statutes. The parties entered into a consent judgment under which the dealership was to furnish a new vehicle of roughly the same value and to pay $14,000 for the buyer’s legal fees. Under the consent judgment, all charges against the sole owner of the dealership were dismissed.

The dealership gave the buyer a replacement vehicle but did not pay the $14,000 owed to the buyer. The buyer was unaware that, prior to the entry of the consent agreement, the dealership went out of business. After the owner of the dealership failed to respond to an information subpoena or a subsequent motion to respond, an arrest warrant was issued for him. The owner responded, disclosing how much credit was available on the dealership’s credit card and how much money was in the dealership’s checking account. The lower court denied the buyer’s motion to enforce the settlement and to require the dealership to draw the $14,000 available on its credit card and pay that money to the buyer.

When the buyer demanded to be paid the $3,000 available in the dealership’s checking account, he was soon after informed by the attorney for the dealership’s owner that only $75 remained there. The buyer then moved to vacate the consent judgment, to have the owner re-named as a direct defendant, and for judgment to be entered against the owner individually. Alternatively, the buyer requested a hearing as to whether the dealership’s owner committed fraud by entering into the agreement when he knew that the dealership was out of business and could not satisfy the consent judgment. The lower court found that the buyer did not prove fraud by clear and convincing evidence and denied the motion.

On appeal, the Appellate Division found that the lower court incorrectly denied the buyer’s motion because the evidence on the record indicated that the dealership owner knew that the dealership could not satisfy the consent judgment at the same time as he was negotiating his release from any personal liability. It concluded that the dealership owner’s failure to disclose such crucial information amounted to fraudulent concealment. Therefore, it reversed the lower court’s finding, and remanded the matter for a judgment against the dealership’s owner, personally, for $14,000.

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