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Grow Farms Corp. v. National State Bank

Decided: February 5, 1979.

GROW FARMS CORPORATION, PLAINTIFF,
v.
THE NATIONAL STATE BANK, ELIZABETH, NEW JERSEY, DEFENDANT



Coleman, J.s.c.

Coleman

[167 NJSuper Page 105] The motion filed in this case raises some novel questions: (1) can a national banking corporation*fn1

be held liable for the tort of fraud and deceit; and (2) can a creditor proceed in a state court to avoid a preferential transfer by a debtor in violation of the Bankruptcy Act, 11 U.S.C.A. 701 et seq. ?

Plaintiff Grow Farms Corporation (Grow Farms), a New York Corporation, filed a class action complaint against defendant The National State Bank (bank), alleging Uniform Commercial Code (U.C.C.) violations, preferential transfer of assets of a debtor, and fraud and deceit of vendor-creditors of Valley Fair Corporation (Valley Fair). Defendant seeks dismissal of the complaint for several reasons.

The second count of the complaint alleges that defendant conspired to defraud plaintiff's class of creditors by giving Valley Fair the appearance of solvency between November 18 and December 23, 1977, allowing it to benefit from Christmas sales of merchandise which plaintiff's class of creditors delivered to Valley Fair. This count alleges that the fraud and deceit commenced November 18, 1977 when defendant bank entered into a loan agreement with Valley Fair in order to change the bank's position from an unsecured creditor to that of a secured creditor. It is alleged that the purpose of this loan agreement was to enable Valley Fair to raise additional cash during the Christmas season by reselling the merchandise delivered by plaintiff's class of creditors and then depositing the sales proceeds in the bank.

On December 23, 1977 Valley Fair filed a petition under Chapter XI of the Bankruptcy Act, 11 U.S.C.A. § 701 et seq. This petition was filed in the United States District Court, Southern District of New York. Plaintiff alleges that it has suffered a detriment by relying upon the appearance of solvency created by defendant. After the Chapter XI proceeding was filed, the bank, under a program of set-offs against the account of Valley Fair that had been enlarged by virtue of the Christmas sales, satisfied Valley Fair's entire indebtedness to it.

The bank seeks a dismissal of the second count of the complaint by contending that (1) plaintiff has failed to state

a cause of action for fraud and deceit; (2) plaintiff has failed to comply with the requirements of R. 4:5-8(a), and (3) only the debtor-in-possession can bring an action for fraudulent or preferential transfers.

I. Fraud and Deceit

Legal fraud or misrepresentation consists of a material representation of a presently existing or past fact made with knowledge of its falsity, with the intention that the other party rely thereon and with the result that the other person does so rely to his pecuniary detriment. Foont-Freedenfeld v. Electro-Protective , 126 N.J. Super. 254 (App. Div. 1973); Lopez v. Swyer , 115 N.J. Super. 237 (App. Div. 1971), aff'd 62 N.J. 267 (1973). Harper and James, in their treatise on the Law of Torts , vol. 1, § 7.1 state:

The modern law of misrepresentation evolved from the action on the case of deceit. Closely allied to the action for breach of warranty, it was not until 1789 that the action was available to one other than a party to a business transaction. But in Pasley v. Freedman , 3 Term Rep. 51 100 Eng. Rep. 450 (1789) it was held by a divided Court that one who fraudulently induced another to extend credit to a person known to be untrustworthy, could be held liable to the person thereby defrauded. After this case, deceit, as a distinct tort, was definitely disassociated from actions for breach of warranty and the basis for the legal duty was perceived to be independent of the contractual relationship between the parties. The source of the duty is the law and the basis is the relationship of the parties which usually, but not necessarily, involves a business transaction between them.

Since 1789, when Pasley was decided, it has been recognized that an action for fraud and deceit will lie against a defendant where it is shown that plaintiff was induced by defendant's misrepresentation to deal with a third party. This is true even though plaintiff had no dealings with defendant. See Prosser on Torts (4 ed. 1971), § 105 at 685. In the instant case it has been ...


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