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Goldstein v. Deichl

A-4530-04T1 (N.J. Super. App. Div. 2006) (Unpublished)

AGREEMENTS; INJUNCTIVE RELIEF — Although it is generally the rule that a temporary injunction cannot be issued without a showing of irreparable harm, protecting an asset against dissipation by a judgment debtor, when the judgment may otherwise be uncollectible, is an appropriate basis for issuing injunctive relief so long as the other elements needed for a temporary injunction are established.

In 1992, certain investors put over $3,000,000 into partnerships managed by a group of promoters. The partnerships suffered considerable losses, and the investors brought suit against the promoters, claiming that the promoters’ wrongful conduct caused the investors’ losses. The investors obtained a default judgment against the promoters in July of 1998.

A written settlement agreement between the parties provided for a two million dollar judgment in favor of the investors. The sum was to be paid over time in cash payments, shares in other entities, and portions of the compensation the promoters might receive from prospective transactions. The agreement stated that the promoters would not dispose of any assets in order to avoid their obligations. The investors agreed to defer execution on the judgment for three years, provided the investors fulfilled their obligations as set forth in the agreement. If the promoters breached the agreement, the investors could seek legal remedies including execution and enforcement of the judgment. The promoters failed to make a partial payment due in June of 2000, triggering the investors’ right to enforce the judgment.

Meanwhile, in November of 1998, the promoters had an active role in the formation of a new corporation, placing all of the new corporation’s issued shares in the ownership of the wife of one of the promoters. The investors sued, alleging that the promoters formed the new corporation and agreed that their wives should be the sole shareholders, in order to protect the business’ income and assets from execution by the investors. They sought relief under the Uniform Fraudulent Transfer Act (UFTA), and damages for breach of contract and common law fraud.

The lower court denied the investors’ claims for temporary injunctive relief and for appointment of a receiver for the new corporation, and dismissed the complaint in its entirety. The Appellate Division affirmed the denial of temporary injunctive relief, but reversed the order dismissing the complaint and remanded for entry of an order transferring the investors’ complaint to the Law Division.

The Court agreed that there were sufficient questions regarding the investors’ claims as to warrant a denial of the temporary injunction, but rejected the lower court’s reasoning that a temporary injunction could not be issued without a showing of irreparable harm. The Court stated that “protecting an asset against dissipation by a judgment debtor, when the judgment otherwise may be uncollectible, is an appropriate basis for issuing injunctive relief, so long as the other Crowe v. De Gioia elements are established.” The other elements are: (1) that the applicable underlying law is well settled; (2) the material facts are not substantially disputed and there is a probability of ultimate success on the merits; and (3) how balancing the hardships to the respective parties favors the issuance of the requested relief.

The Court also determined that the lower court erred in dismissing the investors’ complaint without any discovery having taken place, since there were substantial factual disputes between the parties. One of these factual disputes concerned the statute of limitations on claims brought under the UFTA. The current version of that Act requires that claims be brought within four years of the fraudulent transfer, or within one year following the claimant’s discovery of the transfer. The lower court concluded that the UFTA provision that applied to this case was that which was in place at the time of the settlement. At that time, the UFTA provided that the one-year period began when the claimant could reasonably have discovered the transfer. The Appellate Division, without deciding which version of the Act applied to the instant case, found that there were factual disputes as to what an asset search would have revealed had one been conducted. Therefore, conducting discovery would be necessary to resolve the issue of the timeliness of the UFTA claim.

Another reason the lower court concluded that the UFTA claim should be dismissed was because there was no transfer under the UFTA. The definition of “transfer” under the UFTA includes “every mode ... of disposing or parting with an asset.” The lower court agreed with the promoters who claimed that since the new corporation issued its shares directly to one of their wives and that they, the promoters, never held any shares, there was no transfer, and the UFTA therefore did not apply. However, the Appellate Division found that papers filed in a separate lawsuit among the promoters, stated that the interest in the new corporation actually belonged to the promoters implying a transfer under the UFTA.

The Court found that the investors’ allegations also made a case for breach of contract and common law fraud by the promoters, when they entered the settlement agreement with the knowledge that they had formed a business from which the investors could not collect the judgment. There were questions of timing for both the breach of contract and common law fraud claims, and the Court stated that further investigation would be required to resolve them. Therefore, the Court remanded the case to be transferred to the Law Division.

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