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Morganroth & Morganroth v. Norris, McLaughlin & Marcus, P.C.

331 F.3d 406 (3rd Cir. 2003)

DEBTOR-CREDITOR; FRAUD—Although the tort of “creditor fraud” is not yet recognized in New Jersey, it is not necessary to show a classic case of legal fraud when it is otherwise demonstrated that actions have been taken for the purpose of defrauding a creditor.

A law firm obtained a judgment against a former client and a company owned by that client. It then filed suit against a subsequent attorney for its former client, alleging that the other attorney had gone “beyond the bounds of permissible advocacy” when acting as an active participant and planner in a scheme to obstruct their efforts to execute on their judgment. Specifically, they alleged that the subsequent attorney prepared a confirmatory deed purporting to transfer a large farm and personal residence from the client to a company owned by the client. Along those lines, the creditor-attorney asserted that the subsequent attorney knew the deed to be false when prepared and did so, “with the intent of unlawfully aiding [the client] in an attempt to defraud [them] and to hinder and delay enforcement of the [judgment].” Further, they alleged that the subsequent attorney “knowingly and falsely prepared a sham Memorandum of Life Lease” which purported to acknowledge the existence of a fictional pre-existing lessor-lessee relationship between the client, as owner, and the client, as guardian of his children, as lessee. It also alleged additional intentional acts in furtherance of a scam to hinder collection including the making of misrepresentations to the recording clerk’s office. Further, they alleged that the attorney assisted in forming the client’s company for the sole purpose of obstructing their efforts to enforce their judgment against the client.

The subsequent attorney responded that all of its actions were properly done and that recording the various documents did not have any effect on the creditor-attorney because they merely asserted the client’s legal position.

The issue before the Court was whether, if the creditor-attorney’s allegations were true, a cause of action existed under New Jersey law. The creditor-attorney did not state a claim for common law fraud, but argued that it had a claim for “creditor fraud” under New Jersey law. It further asserted that it was “not required to allege reliance upon statements made by [the subsequent law firm] to make out a cause of action for creditor fraud because New Jersey case law provides a cause of action against a judgment debtor who fraudulently obstructs enforcement of a judgment.” The “tort of ‘creditor fraud’ [] does not require that the plaintiff plead all of the elements of common law fraud,” but the tort of “creditor fraud” is not recognized, as such, by the New Jersey Supreme Court. “Nevertheless, the New Jersey Superior Court has explained that ‘[i]t is not necessary for [a] plaintiff to show a classic case of legal fraud in order to have a viable cause of action when it is has otherwise demonstrated that actions have been taken for the purpose of defrauding a creditor.’” Here, the Court held that, if proven, the creditor-attorney’s allegations could support a cause of action for fraud in the subsequent attorney, even though its complaint did “not allege any misrepresentation by the [subsequent] attorney to [it] and [did] not allege that the [creditor-attorney] detrimentally relied on such misrepresentation.”

In addition, the Court held that, if proven, the subsequent attorney could also be liable under the theory of “civil conspiracy.” Such a tort requires: (1) a combination of two or more persons; (2) a real agreement or confederation with a common design; (3) the existence of an unlawful purpose, or of a lawful purpose to be achieved by unlawful means; and (4) proof of special damages.” The tort of “civil conspiracy” need not be “adjunct” to a fraud claim. Likewise, the Court held that, if proven, the subsequent attorney could be liable to the creditor-attorney under the theory of “aiding and abetting,” the elements of which are: “(1) the commission of a wrongful act; (2) knowledge of the act by the alleged aider-abettor; and (3) the aider-abettor knowingly and substantially participat[ing] in the wrongdoing.”

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