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SASCO 1997 NI, LLC v. Zudkewich

A-2083-05T2 (N.J. Super. App. Div. 2007) (Unpublished)

FRAUDULENT TRANSFERS — Using a “badges of fraud” analysis, the court analyzes the actions taken by a debtor.

A real estate developer had acquired numerous properties as a partner of several development entities. During the course of the numerous acquisitions and developments of the properties, the developer transferred, to his wife, his fifty-percent interest in the home he had jointly acquired with his wife. The wife’s father purportedly had purchased the land and gave it to his daughter and her developer husband, both of whom later had the house built on it but there was never any documentation of the father’s gift. Approximately one year following the transfer of his share of the marital property to his wife, the developer, who was a guarantor for many development projects, began to experience a decline in his net worth. Two years following the transfer of the marital property, it was sold. Over the following eight years, the proceeds from the sale had been used by the wife and two partnerships formed by her to purchase, develop, and resell a number of properties. Proceeds of more than one million dollars were acquired and held in the wife’s name.

A lender, who had financed many of the developer’s project, brought three actions against the developer and his partners. These were later settled. A bank which had also financed some of the partnerships’ development projects had assigned one of the partnership’s loans when that partnership was experiencing financial difficulties. The assignee sued the partnership and its partners, including the developer, for the partnership’s default on a loan. The partnership declared bankruptcy a few months later. Subsequently, the parties partially settled the matter. The assignee continued the action against the developer and two other partners for the recovery of the full balance of the loan and obtained a default judgment against the developer for more than one million dollars.
A transferee, who had assumed the assignee’s interest in the loan, continued the action against the developer and contended at trial that the developer was actively involved with the development of the properties owned by his wife and her partnerships following the transfer of his interest in the couple’s former home to his wife. An accountant for the transferee, who had examined the developer’s tax returns as well as financial documents, testified that by the time the developer transferred his interest in the family home to his wife, he should have been aware of the financial problems that his partnerships were facing. The transferee claimed that the developer’s transfer of his interest in the house to his wife was fraudulent because the developer had knowledge of his partnership’s impending financial difficulties. Nonetheless, the lower court found that the developer’s transfer of his share of the marital property to his wife was not fraudulent.

On appeal, the Appellate Division upheld the lower court’s finding. The Court noted that an inquiry into a fraudulent transfer claim requires a finding as to whether an asset has been placed beyond the reach of a creditor that would have otherwise been available. A finding of a fraudulent transfer also requires a determination as to whether a debtor had transferred the property with the intent to defraud, delay or hinder a creditor. Such a determination is often established by offering convincing proof that any number eleven “badges of fraud,” standard inferences that fraud, were intended.

The Court found that the transferee had proven that a transfer occurred which placed the developer’s home out of reach of its predecessors in interest in the loan. On the other hand, the Court also noted that to establish an intent to defraud a creditor, while any number of the badges of fraud could be proven, that the absence of any of the badges could be relevant to a finding that a transfer was not fraudulent. Here, the Court found that the transfer by the developer to his wife satisfied the badge of fraud of a transfer to an insider, but that such a finding alone did not establish fraudulent intent on the developer’s part. It pointed out, however, that questionable transfers from one spouse to another are automatically considered transfers to insiders and are strictly scrutinized. The Court also found that the developer continued to reside in the marital home. This established the badge of fraud of maintaining possession, or partial possession of the transferred asset. The Court found that the transfer was not concealed, which was counterindicitive of a different badge of fraud, and also that there was no indication that the developer was facing an imminent lawsuit until three years following the transfer, another badge of fraud. The badges of fraud that a transfer was concealed and consisted of all, or nearly all, of the debtor’s assets were found not to have occurred because the deed was recorded and because at the time of the transfer, the developer was worth more than four million dollars.

The developer was also found not to have met the badges of fraud of having received an equivalent value of the interest that he transferred, or to have been insolvent, or to have been facing insolvency, at the time of the transfer. The Court found that the transfer could have been considered to have occurred shortly after a substantial debt was incurred, another badge of fraud, even though it was five months later. The Court, however, noted that there was no standard amount of time for discerning exactly how long after a transfer was considered to have been shortly after the transfer. Another finding by the Court was that the developer had not transferred the essential assets of a business to a lienor, which would have been another badge of fraud. So, the Court noted that although some badges of fraud were present, the burden of proving fraudulent intent still rested with the party that sought to have a conveyance reversed. It found that the lower court did not err in finding that while certain badges of fraud were present, the transferee had not proven that they constituted fraudulent intent.

The transferee’s request for the establishment of a constructive trust on fifty percent of the proceeds from the sale of the marital home, and fifty percent of the subsequent proceeds from the properties bought and sold by the wife’s partnerships, was denied. The Court found that the transferee had not established an equitable basis, beyond its claim of a fraudulent transfer, to justify a constructive trust on the proceeds of the marital home. It also found that any value in the work done by the developer on behalf of his wife’s development partnerships was beyond the reach of the transferee and that since the developer did not receive a salary, there was no fraudulent intent. To the Court, there was no evidence that the proceeds from his wife’s partnerships were funneled back to him. It pointed out that personal services do not constitute tangible property that could be the subject of ownership, or transferable assets, sufficient to support a fraudulent transfer claim.

The Court also rejected the transferee’s request to attach the proceeds of the developer’s wife’s partnerships on a “reverse piercing of the corporate veil” theory. In doing so, it noted that such a theory was intended to make corporate assets available to satisfy the debts of a corporate insider. Here, it found that the wife’s partnerships did not succeed any businesses previously run by the developer and the developer did not control, manipulate or in any way manage her partnerships. The Court additionally noted that it found no New Jersey court decisions granting relief on the basis of reverse piercing the corporate veil. It also rejected the transferee’s claims of common law fraud for perjured statements made by the developer during depositions and noted that there was no New Jersey case construing discovery violations as common law fraud. The Court additionally found that the transferee never established that it, or any of its predecessors in interest, relied on the perjured statements or that any damages were suffered as a result. The Court noted that the transferee could have sought sanctions through the lower court or have brought the matter to the attention of the prosecutor’s office.

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