McLean Boulevard Associates v. Atwood

98-2094 (U.S. Dist. Ct. D. N.J. 1998) (Unpublished)
  • Opinion Date: July 21, 1998

PARTNERSHIPS; FRAUDULENT TRANSFERS—Transfers that took place before enactment of the Uniform Fraudulent Transfer Act are governed by the Uniform Fraudulent Conveyance Act even if the cause of action accrues much later.

This federal court matter followed a series of state court actions beginning with a suit by a property seller alleging that its buyer had defaulted on a purchase money mortgage. In that suit, the buyer responded by maintaining that its seller had misrepresented the environmental condition of the property and, on that basis, sought recission of the sale. During the pendency of that state court action, the buyer petitioned the New Jersey Department of Environmental Protection (NJDEP) for recission of a letter of non-applicability and a negative declaration that NJDEP had issued to the seller. After NJDEP rejected the buyer’s assertions that the seller’s submissions had contained material representations and omissions of fact, the buyer appealed that denial to the court and the court remanded the matter to the NJDEP to conduct a dispute resolution proceeding. Following that proceeding, NJDEP rescinded the letter of non-applicability and negative declaration based upon the seller’s failure to disclose critical information in the affidavit it submitted in its application for the letter of non-applicability. The seller unsuccessfully appealed NJDEP’s ruling. Ultimately, a state court found that the seller had committed fraud in the course of its sale of the property and awarded a substantial judgment in favor of the buyer.

The matter moved to federal court when the buyer sought to enforce the state court judgment. In this action, it alleged that the seller’s partners were liable for the judgment against the seller and included claims of: (a) partnership by estoppel; (b) fraudulent misrepresentation concerning the identity of the seller’s partners; (c) negligent representation on the same basis; and (d) fraudulent conveyance of the partnership’s assets. The reason for the buyer taking this action is that following the initial sale, the seller funneled the net sale proceeds and subsequent purchase price payments to individuals through separate trusts which they had set up for their own benefit. This left the seller without any assets. The seller responded that the individual trusts were set up for estate planning purposes and that although bank accounts were initially established for each trust, they were subsequently closed and the income was being paid directly to the trust beneficiaries. Thus, although the trusts remained as the named partners of the seller, they no longer had any assets and for the ten prior years, the trusts existed in name only. With respect to the buyer’s claim that the seller misrepresented the trusts as being partners of the partnership whereas in practice, the individuals were effectively the true partners, the Court examined New Jersey Law regarding materiality of the alleged misrepresentation and the presence or absence of detrimental reliance. Even if the buyer was correct in its allegation that the seller misrepresented its true partners, the buyer could not prevail unless it showed that the misrepresentation was material and that it had detrimentally relied thereon. In the instant case, both of those issues required a factual record and the seller was denied a summary dismissal of the buyer’s claims so that the buyer could develop a record.

With respect to the fraudulent transfer claim, the Court first needed to determine its timeliness. Under the Uniform Fraudulent Transfer Act, an action must be brought within four years of the allegedly fraudulent transfer. In this case however, the questioned transfers took place before enactment of the Uniform Fraudulent Transfer Act. New Jersey’s predecessor Act, the Uniform Fraudulent Conveyance Act (UFCA) provided for a six year limitations period. The change of law in the beginning of 1989 did not reduce that six year period to a four year period. Moreover, under the UFCA, the six-year period begins to run from either the time of the fraudulent conveyance or the point of which the creditor’s claim matures. Therefore, in the instant matter, the cause of action occurred when the buyer obtained its judgment against the seller. In addition, the seller’s defense that the entire controversy doctrine barred the fraudulent transfer claim was unavailing because that doctrine does not bar claims that are unknown or unaccrued at the time of the earlier action.

Under the UFCA, a fraudulent transfer with an actual intent to defraud is fraudulent as to both present and future creditors. Here, however, the conveyance in question did not appear to be with actual intent and therefore would not be presumptiously fraudulent against the buyer because it was not a creditor at the time of the transfers. This is because the transfers of the partnership interest took place well before the sale of the property. This, however, did not bar the buyer’s claim. It merely altered the burden of proof. Subsequent creditors must show fraudulent intent.