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Park Union Building Supplies, Inc. v. Miller

A-3999-98T3 (N.J. Super. App. Div. 2000) (Unpublished)

CORPORATIONS; SHAREHOLDERS; PERSONAL LIABILITY—Shareholders are personally liable for a corporation’s debt where they fraudulently transfer corporate property in the face of a known legal action.

An individual was the president, sole shareholder, director, and only officer of a corporation that served as the general partner of a limited partnership formed for the purpose of developing a subdivision of luxury homes. The same individual also held the same positions in a second limited partnership organized for the same purpose for a different piece of property. The partnerships borrowed money from a bank in connection with the two developments and the individual was personally obligated on the loan, which was cross-collateralized. One of the developer entities purchased building supplies and materials from a vendor but failed to pay for them. After a number of unsuccessful efforts to collect the debt, the vendor contacted the developer’s attorney to negotiate an arrangement to use the debt toward the purchase price of one of the luxury lots. Negotiations broke down. The vendor then filed suit against the limited partnership that had purchased the supplies, its corporate general partner, and the individual officer and shareholder. Meanwhile, the attorney went into the real estate development business and purchased the developer’s remaining lots, arranging for a loan and mortgage from the same bank that held the developer’s mortgage. Even though the purchase price did not cover the original developer’s mortgage, the bank released the lots and part of the purchase proceeds were set aside to satisfy various liens and claims against the property. Even though the attorney was aware of the unpaid debt to the vendor, neither the attorney nor the developer told the vendor of the sale. The developer and the attorney-buyer executed affidavits essentially saying that no money was owed to the vendor. Each affidavit read, “[n]o one has notified us that the money is due and owing for construction, alteration or repair work on this property.” Eventually, the vendor filed an amended complaint alleging violation of the Uniform Fraudulent Transfer Act (UFTA). The lower court found “by clear and convincing evidence” that the individual officer and shareholder, the corporate general partner, and the limited partnership intended to defraud the vendor by transferring assets in violation of the UFTA. The lower court found that the individual officer and shareholder “violated a ‘quasi-trust’ duty” to the vendor and therefore was personally liable. The individual appealed the imposition of personal liability. Specifically, his contention was that he was not a “debtor” as defined by the UFTA and that the vendor “failed to allege that it intended to seek to pierce the corporate veil as a judicial remedy.” The Appellate Division upheld the lower court and validated its finding of fraudulent intent. The lower court looked at the following six factors from the twelve factor test found within the UFTA: (a) the transfer obligation was concealed; (b) before the transfer was made, the debtor had been sued or threatened with suit; (c) the transfer was of substantially all of the debtor’s assets; (d) the debtor absconded (as it no longer existed); (e) the value of consideration received by the debtor was reasonably equivalent to the value of the assets transferred; and (f) the debtor was insolvent or became insolvent shortly after the transfer was made. Even though the lower court may have misunderstood the relevance of the consideration paid being substantially equal to the value of the assets transferred, the individual did not challenge that conclusion. Rather, the individual urged that it was an error to impose personal liability upon him since he was not the “debtor.” The Court recognized that a corporation is a separate entity from its shareholders, but pointed out that “the corporate veil may be pierced to impose personal liability on the shareholders upon a showing of fraud or injustice.” Here, because the lower court found a fraudulent transfer under UFTA, the court felt that the imposition of personal liability was an acceptable additional remedy to those already provided by the UFTA. It explained that it would ignore a corporate identity, pierce a corporate veil, and hold corporate principals personally liable where they fraudulently transfer corporate property in the face of known legal action. In further support of this, the lower court concluded that the effect of the individual shareholder’s and officer’s conduct in “filing a false affidavit and further promising to indemnify [its buyer] was to preclude payment of the pending complaint [of the vendor] whether through additional funding by the Bank or by [the buyer], or by [the individual officer and shareholder] himself.” The Court found that this justified the imposition of personal liability.


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