FT - Flood v. Caro Corp. (4/18/1994)

[Riser Adkisson LLP]

Flood v. Caro Corporation
640 A.2d 306 (N.J.Super.App.Div. 04/18/1994)\
New Jersey Superior Court, Appellate Division

Nos. A-3116-92T5, A-5578-92T5

272 N.J.Super. 398, 640 A.2d 306, 1994.NJ.41224

Decided: April 18, 1994.

JOSEPH FLOOD, T/A JOSEPH E. FLOOD REALTORS, PLAINTIFF-RESPONDENT,

v.

CARO CORPORATION, A N.J. CORPORATION, DEFENDANT-APPELLANT. JOSEPH FLOOD,
T/A JOSEPH E. FLOOD REALTORS, PLAINTIFF-APPELLANT, V. CARO CORPORATION, A
NEW JERSEY CORPORATION, DEFENDANT-RESPONDENT.

On appeal from the Superior Court, Law Division. Essex County.

Alfonse J. Cifelli argued the cause for appellant in A-3116-92T5 and respondent in A-5578-92T5
(Fiorello & Cifelli, attorneys; Mr. Cifelli of counsel and on the brief).

Eric A. Summerville argued the cause for respondent in A-3116-92T5 and appellant in A-5578-92T5
(Summerville, Radding & Campbell, attorneys; Mr. Summerville on the brief).

Before Judges R.s. Cohen, D'Annunzio and Wallace.

Cohen

COHEN, R.S., J.A.D.

Two appeals arise out of plaintiff's action for a broker's commission on the sale of twenty-five
condominium apartments from defendant Caro Corporation ("Caro") to Seton Hall University. After a
bench trial, judgment was entered for plaintiff against Caro for $126,250 plus interest of
$24,229.35, for a total of $150,479.35. Caro appealed; we affirm. The second appeal was taken by
plaintiff from the denial of his application for an order to levy execution on an asset which Caro
had transferred in a transaction which plaintiff alleged was fraudulent and thus voidable. On that
appeal, we reverse and remand.

First, as to the commission dispute. Caro's principal argument is that the evidence did not
support the judgment in plaintiff's favor. Not so. There was ample credible evidence in the record
demonstrating that Caro agreed to pay plaintiff a five percent commission if he produced a buyer,
and that plaintiff pursued and ultimately procured Seton Hall, a party not only ready, willing and
able to buy, but which ultimately bought the property. See Ellsworth Dobbs, Inc. v. Johnson, 50
N.J. 528, 551, 236 A.2d 843 (1967); Kuhn v. Spatial Design, Inc., 245 N.J. Super. 378, 388-89, 585
A.2d 967 (App. Div. 1991). It is of no consequence that plaintiff produced a sale of the twenty-
five apartments in bulk instead of one at a time. There was nothing in Caro's engagement to pay a
commission which excluded such a sale. It is similarly of no consequence whether plaintiff's
commission was earned during an exclusive or an open listing of the property. It had to be one or
the other, and in either event, the commission was earned.

It is true, as Caro points out, that the trial Judge's letter opinion contains errors of fact. Our
own review of the record satisfies us, however, that the errors were peripheral, and not involved
in the Judge's findings of consequential facts, and thus do not affect the soundness of the
judgment.

Caro also argues that the court erred by including the cost of modifying the apartments in the
purchase price when calculating plaintiff's five percent commission. We disagree. The Caro-Seton
Hall contract called for a "purchase price" of $2,525,000. Of that amount, $2,300,000 was
attributed to "real estate" and $225,000 to "construction." Several witnesses testified that the
apartments were not finished when they were shown to Seton Hall officials and when the contract
was signed. Seton Hall's Plant and Project Manager testified that $80,000 to $90,000 of the
$225,000 was the cost for modification the units for student use, and that the rest was for
completion of the units, which would have been required for any buyer. The fact that Seton Hall
could have engaged another contractor to finish the job is immaterial. Plaintiff was not retained
to sell an unfinished building, and surely could not have sold unfinished units to individual unit
buyers. The Judge correctly included the construction cost as part of the purchase price in
calculating plaintiff's commission.

Plaintiff's appeal challenges the denial of his post-judgment application to set aside Caro's
assignment of a mortgage which apparently was Caro's only asset after the closing with Seton Hall.
The goal of the application was to direct the mortgage proceeds toward execution of plaintiff's
judgment, which had been partially satisfied out of escrowed closing proceeds. Supplementary
proceedings pursuant to R. 4:59-1(e) had revealed that, at the closing of the sale to Seton Hall,
part of the purchase price was satisfied by the execution of a mortgage to Caro for $500,000,
payable $100,000 per year for five years, and that the mortgage had been assigned and was at least
ostensibly out of the reach of an executing judgment creditor.

Plaintiff moved to declare the assignment of the mortgage a fraudulent transfer, and to order
Seton Hall to satisfy plaintiff's judgment out of the next annual payment. The Judge denied the
motion with the following terse explanation:

The opinion did not deal with any of the significant and controlling provisions of the Uniform
Fraudulent Transfer Act. N.J.S.A. 25:2-20 to -34.

The factual record before us is sparse. It appears that the property on which the apartments were
built was owned by Mr. and Mrs. Farro. They transferred it in 1987 to Caro, a corporation which
they apparently formed to develop the property, and they accepted in payment a note and mortgage
for $500,000. The mortgage was recorded in February 1987. Caro agreed to sell the apartments to
Seton Hall on July 11, 1990. The contract provided that $500,000 of the $2,525,000 purchase price
was to be paid in five equal yearly installments on a note secured by a mortgage. On July 16,
1990, plaintiff started suit for his commission, in part to tie up the proceeds of the sale to
Seton Hall.

By an unrecorded assignment dated August 28, 1990, the day of the closing of the sale to Seton
Hall, Caro transferred to the Farros its interest in the debt due from Seton Hall. On October 28,
1991, despite the prior transfer to the Farros, Caro assigned the mortgage to Brounell-Kramer-
Waldor-Kane Agency ("BKWK") supposedly to satisfy obligations for insurance premiums due from Caro
and also from Onorato Construction, Inc., and Ora Realty, Inc, both of which were also Farro
family entities.

The insufficiency of this scenario to decide the case becomes apparent from a review of the
applicable statutory law.

In 1988, New Jersey adopted the Uniform Fraudulent Transfer Act ("the Act"), N.J.S.A. 25:2-20 to -
34, to replace the Uniform Fraudulent Conveyance Law, which had been in effect since 1919.*fn1 New
Jersey's version of the Act is substantially the same as the uniform statute. In the years since
it was promulgated by the Commissioners on Uniform State Laws in 1984, the Act has been adopted in
at least twenty-nine states.

The Act modernizes the law respecting the rights and remedies of creditors in cases of transfers
of assets by debtors the design or effect of which is to prevent or impede satisfaction of claims
out of the debtor's assets, or to prefer favored claimants.*fn2 A prime purpose of the Act is to
align state law on fraudulent transfers with the federal Bankruptcy Act, see 11 U.S.C. §§ 547 and
548, and the Uniform Commercial Code-Secured Transactions. N.J.S.A. 12A:9-101 et seq.*fn3 Another
goal is to make uniform the law among the states that adopt the Act. See N.J.S.A. 25:2-33.

N.J.S.A. 25:2-25 is not grossly different from repealed predecessor provisions. See N.J.S.A. 25:
2-11 to -13. It declares fraudulent both as to present and future creditors any transfer by a
debtor (a) made with actual intent to defraud, or (b) made without receiving reasonably equivalent
value in exchange (1) if the debtor was engaged or was about to engage in a business or
transaction for which its remaining assets were unreasonably small in relation to the business or
transaction, or (2) if the debtor intended to incur or believed, or reasonably should have
believed, that it would incur debts beyond its ability to pay as they became due.

§ 27 of the Act has two provisions, both designed to protect creditors whose claims arose before
the time of a transfer by a debtor ("present creditors"). Neither requires showing an intent on
the part of the debtor to hinder, delay or defraud creditors. The first provision, § 27a, which
does not substantially differ from the 1919 Fraudulent Conveyance Law, declares fraudulent as to
present creditors a transfer made by a debtor without receiving a reasonably equivalent value in
exchange if the debtor was insolvent or became insolvent as a result of the transfer.

The second provision, § 27b, is a new one designed to deal with preferences. Consistent with the
Bankruptcy Act, 11 U.S.C. § 547(b)(4)(B), it declares fraudulent as to present creditors a
transfer made by a debtor to an "insider" for an antecedent debt if the debtor was insolvent and
the insider had reasonable cause to believe the debtor was insolvent.*fn4 The premise of § 27b is
that an insolvent debtor should pay debts owed to unrelated creditors before paying debts owed to
corporate insiders. See Unif. Fraudulent Transfer Act, prefatory note, 7A U.L.A. 641 (1984);
Senate Committee Statement, supra, n. 3.

A creditor who is entitled to a remedy under the Act has a range of protective possibilities. If
the creditor has a judgment against the debtor, application may be made in the action for a court
order permitting execution on the asset transferred or its proceeds. § 29b. Such an application
necessitates proceedings suitable to determine the rights of the parties, including possibly
innocent transferees for value, perhaps requiring a plenary trial to determine disputed material
facts.

Any creditor, with or without a judgment, may prosecute a suit (1) to avoid the transfer to the
extent necessary to satisfy the claim, (2) to attach or otherwise provisionally secure the asset
transferred, (3)(a) to enjoin further Disposition of the asset transferred or other property, or
(3)(b) to appoint a receiver. § 29a. Direct and subsequent transferees from the debtor have
appropriate defenses. See § 30. We may take it that none of the defenses apply here, since the
transferee, BKWK, has chosen not to participate in the litigation to raise them.

It is impossible to say on this record whether the transfer by Caro challenged by plaintiff is
fraudulent under the provisions of either § 27a or 27b. The facial ambiguity of the transaction is
the principal problem. The Farros sold Caro the property in 1987 for $500,000. In payment, they
accepted a note and mortgage in that amount, and they recorded the mortgage at the time of the
sale. The closing of the Caro-to-Seton Hall contract took place on August 28, 1990. In order to
convey good title, Caro had to produce a release of the 1987 mortgage. It apparently did so. It
also took back a $500,000 mortgage from Seton Hall. On the same day, it seems to have assigned the
Seton Hall mortgage debt to the Farros. Despite that, it seems to have assigned the same mortgage
debt a year later to BKWK. Purposely or not, the participants confused the transaction with
purported assignments of the debt to the Farros and also to BKWK. Further proceedings, possibly
including a plenary hearing, will be required to permit informed fact-finding on the subject.

If the transfer is determined to have been from Caro directly to BKWK, then § 27a applies. Under
that provision, a transfer is fraudulent as to present creditors if the debtor did not receive a
reasonably equivalent value in exchange and was insolvent or became insolvent as a result of the
transfer. Plaintiff is clearly a present creditor. A person need not have a judgment to be a
creditor under the Act. A creditor need only have a claim, which is a right to payment, whether or
not reduced to judgment and whether or not disputed. § 21. Plaintiff's claim existed when the
transfer was made, that is, his right to a commission arose on the date of the Caro-Seton Hall
closing, which was before the assignment of the mortgage debt to BKWK.

It is impossible to tell from this record whether Caro received a reasonably equivalent value from
BKWK. We are told only that BKWK is an insurance agency which was owed some $400,000 in premiums
by Caro and also by Onorato Construction, Inc., and Ora Realty, Inc., two other business entities
owned by the Farro family. However, we are not told how much was owed to BKWK by each of the
three. Plaintiff may well be correct that most of the $400,000 was owed by Onorato and Ora, since
Caro was created only to build the one project involved in this case, and owned the project for a
limited period of time.

The question of whose debts were satisfied by the transfer of the mortgage obligation to BKWK is
of significance. Under § 27a the reasonably equivalent value taken in exchange for a transfer must
be received by and for the benefit of the debtor-transferror and not some other person or entity.
The reason is that an exchange of value legitimizes a transaction because it provides the debtor a
new asset or reduction of debt to replace the transferred asset on the debtor's balance sheet.
Thus a transfer made in satisfaction of the debt of another is not made for reasonably equivalent
value. Application of these principles requires that the court ascertain on remand what if any
obligation of the debtor-transferror was involved in the exchange.

Application of § 27a also requires that a determination be made whether Caro was insolvent or was
rendered insolvent by the transfer. That does not seem to be a very difficult matter to resolve in
this case.

If it is ultimately determined that the transfer was not from Caro to BKWK, but from Caro to the
Farros, then § 27b comes into play. The Farros are both "insiders." The term includes directors
and officers of debtor corporations, §§ 22b(1) and (2), and "relatives" of directors and officers,
§ 22(b)(G). Spouses are relatives, § 22. In addition, the transfer, if made to the Farros, was
made for an antecedent debt, the 1987 Caro purchase money mortgage, and the debtor, Caro, appears
likely from the fragmentary record before us to have been insolvent at the time of the assignment
to the Farros.

The application of § 27b to this case seems at first glance to be complicated by the Act's § 31c,
which extinguishes a creditor's cause of action for a fraudulent transfer to an insider one year
after the transfer was made. Clearly, plaintiff's application to satisfy its judgment out of the
Seton Hall mortgage proceeds was initiated more than one year after Caro executed the unrecorded
transfer to the Farros.

The apparent problem is resolved by § 28 of the Act, which contains provisions governing when a
transfer is considered to be made for the purpose of the Act. A thorough Discussion of the complex
provisions is not necessary. It suffices for this case to say that the transfer of an asset
consisting of a debt secured by a mortgage on real estate is a transfer permitted by law to be
perfected by recording, to the end that a good faith purchaser of the asset could not acquire an
interest in the asset superior to the interest of the transferee. When no steps are taken to
perfect by recording a transfer that applicable law permits to be so perfected, § 28(2) deems the
transfer to have been made immediately before the filing of the application to avoid it. See Unif.
Fraudulent Transfer Act, comment 1 on § 6, 7A U.L.A. 659 (1984).

Thus, if the operative transfer in this case is the unrecorded assignment from Caro to the Farros,
the transfer is deemed to have taken place just before plaintiff moved against it in 1993, and the
one-year limitation is not an impediment to the application.

Affirmed on A-3116-92T5. Reversed and remanded on A-5578-92T5

Disposition

Affirmed on A-3116-92T5. Reversed and remanded on A-5578-92T5

Opinion Footnotes

*fn1 N.J.S.A. 25:2-7 to -19, repealed by L. 1988, c. 74, para. 1, N.J.S.A. 25:2-34.

*fn2 For a good brief overview of the Act, its parallels with and its departures from its
predecessor, see Richard E. Cherin, Fraudulent Transfers Redefined Under New Act, 122 N.J.L.J.
Index Page 1362 (1988).

*fn3 The Act also repeals inconsistent provisions of Title 14A, N.J.S.A. 14A:14-10 to -12,
applicable to corporate debtors. See Senate Labor, Industry and Professions Committee Statement,
Assembly No. 1265-L. 1988, c. 74, appended to N.J.S.A. 25:2-20.

*fn4 Section 27a applies if "the debtor was insolvent at that time or the debtor became insolvent
as a result. . . ." Section 27b applies if "the debtor was insolvent at that time. . . ."
Insolvency in the Act is a balance sheet concept. See § 23a. It is unnecessary for this case to
determine if there is an operative difference in the application of §§ 27a and 27b that is
produced by the omission from 27b of the words, "became insolvent as a result."