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SKS Property Management, L.P. v. Abramovitz

97-4929 (U.S. Dist. Ct. D. N.J. 1998) (Unpublished)

FRAUDULENT TRANSFERS; STATUTE OF LIMITATIONS—The one-year safety period for filing an action to set aside a fraudulent transfer begins when the creditor discovers or could reasonably have discovered the occurrence of the transfer itself, not the fraudulent nature of the transfer.

A wholesale jewelry manufacturing company was indebted to a lender and as collateral for that debt, a party related to the debtor pledged its interest in a real estate partnership as security for repayment of the loan. Under the security agreement associated with the partnership interest, the guarantor represented and warranted that its partnership interest was unencumbered by debt, that it could be assigned as collateral, and that it would maintain and preserve the lien against outside claims. Unbeknownst to the lender, the guarantor had previously granted mortgages secured by the partnership’s real estate properties to the principal of the debtor. During the course of subsequent litigation in New York, the lender endeavored to obtain a charging order on the partnership interest that had been pledged to it, but lost in a priority battle because it had not properly perfected its security interest.

In the current action, the lender alleged that a series of transactions involving transfer of the partnership interest and related properties was part of a fraudulent scheme to hide assets and that as a result it could not collect its debt from the guarantor. In connection with the dealings between the guarantor and the principal of the debtor, other properties were conveyed among numerous parties and various mortgages were created as part of the overall set of transactions.

At issue in this case was whether the fraudulent conveyance claim was time barred. Under New Jersey’s version of the Uniform Fraudulent Transfer Act, a cause of action with respect to a fraudulent transfer or obligation is extinguished if the claim is not brought “within four years after the transfer was made or the obligation was incurred or, if later, within one year after the transfer obligation was or could reasonably have been discovered by the claimant[.]” Creditors bear the burden of proof to establish the expiration of the period. In this case, there was no issue that the four year period had expired. The only question was whether the one-year safety provision applied. Testimony taken during depositions in the New York matter alerted or should have alerted the creditor about the various property purchases. That testimony was taken more than one year before the instant suit was brought. The creditor claimed, however, that although it may have known of the conveyance more than one year before it filed suit, it could not have reasonably discovered the fraudulent nature of the transfers until later, when, through its discovery in a different case, it became aware of its fraudulent nature. Furthermore, the unusual arrangements that were revealed in the later discovery proceedings sparked its suspicion and prompted it to research further the previous transactions involving the property. Consequently, the issue before the Court was whether the one-year safety period should run from the date the creditor first became aware of the transactions or the date it knew (or should have reasonably have known) of the fraudulent nature of the conveyance. To the U.S. District Court, this was an issue of first impression in New Jersey. According to the Court’s analysis, the answer rested on whether the New Jersey Fraudulent Transfer Act’s time restriction was a statute of repose or a statute of limitations. Federal case law and the rulings of other courts have held that this particular provision “embodies the most distinctive characteristics of a statute of repose, the barring of the right to bring an action rather than the remedy period prescribed.” According to the Court, by the statute’s plain language, it “extinguishes” the creditor’s cause of action; it does not just block the remedy after a certain period of time. Under the law as it has evolved, a statute of repose is not subject to equitable tolling principles because this approach would disrupt the statutory intention to place an absolute time limit on the bringing of a cause of action to set aside a fraudulent transfer. Therefore, the creditor’s attempt in this case to toll the period until the date it knew or should have reasonably known the fraudulent nature of the transfer failed. In the Court’s view, if the New Jersey legislature had intended to toll the one-year safety period under certain circumstances, it could have explicitly stated so. As a result, the creditor’s claim was held to be time barred.


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