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Gualario v. Gualario

A-1930-96T1 (N.J. Super. App. Div. 1997) (Unpublished)

MORTGAGES; FRAUDULENT TRANSFERS—A spouse that did not receive financial support during a marriage qualifies as a “creditor” under the Fraudulent Transfer Act. Therefore, when a court finds that when a mortgage was given with an actual intention to defraud the spouse, the Court may set aside the mortgage and award the property to the defrauded spouse, free and clear of the mortgage. The debt, however, remains an obligation of the mortgagor.

After a Township approved subdivision of a property into two tracts, a husband and wife built a larger house on the newly created tract and rented out their former residence on the other tract. Title to both tracts was in the husband’s name only. A few years later, the husband was in debt and, without the wife’s knowledge or consent, borrowed money from four family members, giving each a promissory note secured by a mortgage on both tracts. At the time of the execution of the loan documents, the husband and wife were not living together and the husband was not supporting the wife. A few months later, the husband conveyed the original tract to his son (one of the note holders), reserving a life estate for himself. The other family members released this tract from their respective mortgages, but these releases did not modify the terms of their notes or release the newer tract. The husband and wife were later divorced, and the Family Court awarded the newer tract to the wife in fee simple without the encumbrance of the mortgages since they were placed on the property without the wife’s knowledge or consent. The husband retained his life estate in the other tract.

Despite the mortgagee’s protest, the Appellate Division affirmed the Family Court judgment giving the wife a fee simple interest in the newer tract and no interest in the older tract, and extinguishing the husband’s interest in the newer tract, permitting him to retain only his life estate in the older tract. The central issue for the Court was whether the notes and mortgages were valid encumbrances on the wife’s tract such that her fee simple interest was subject to them. The wife alleged fraud against the husband and the note holders, claiming the original notes and mortgages were unsupported by consideration and were made with the intent of defrauding her so that her tract would be encumbered for the husband’s debt. The Appellate Court stated that a fraudulent transfer may be set aside where the intent of the transfer was to defraud a “creditor.” Although the wife failed to explain how she was a “creditor”, the Court relied on the broad definition of “creditor” found in the Uniform Fraudulent Transfers Act. That Act defines a creditor as any person with a right to payment, even an unmatured or future right to payment. The husband and wife were not living together and the husband was not supporting the wife at the time the mortgages and notes were executed. Therefore, at the time of the transfer, the wife was a creditor since she had the right to bring an action for separate maintenance based on the husband’s lack of support. In other words, even though the divorce and subsequent distribution by the Family Court did not take place until a few years later, at the time of the transfer of the mortgages, the husband was a debtor of the wife and she was his creditor. Thus, the Appellate Court had to determine whether the transfers were made with the intent to deceive the wife. The relevant statute lists 11 factors used to determine intent to defraud a creditor. The Court found at least 8 of the 11 factors present in this case, and opined that these factors demonstrated an intent to deceive the wife. Additionally, although the notes were to become payable when either tract was conveyed, the mortgagees did not demand payment or otherwise attempt to enforce the notes when the husband conveyed the older tract to his son. This also led the Court to believe that the loan transaction was merely a formality and without true economic substance. Accordingly, the Appellate Court concluded that the release and conveyance of the loan documents was fraudulent, and therefore unenforceable against the wife or her tract of land. However, since the mortgagees gave value, the Court concluded that the notes remained in effect until satisfied, and the husband remains liable for such debt.


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