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TELEFEST, INC. v. VU-TV

August 6, 1984

TELEFEST, INC., Plaintiff,
v.
VU-TV, INC., Defendant, MANUFACTURERS HANOVER TRUST COMPANY and BARTON PRESS, INC., Intervenors



The opinion of the court was delivered by: BARRY

 The question before the court is whether a security agreement executed on May 6, 1983 for the benefit of intervenor Manufacturers Hanover Trust ("MHT") by defendant VU-TV, Inc. ("VU-TV") and by the company of which VU-TV is a wholly-owned subsidiary, CATV Products, Inc. ("CATV"), constituted a fraudulent conveyance within the meaning of the Uniform Fraudulent Conveyance Act ("UFCA"), as adopted by New Jersey, 25 N.J.S.A. 2-7 through 2-19 ("NJFCA"). If that conveyance was fraudulent, MHT will be impaired to the extent of the fraud in asserting what is otherwise a priority security interest in funds being held by Graphic Scanning, Inc. ("Graphics") for the benefit of VU-TV.

 Plaintiff TeleFest, Inc. ("TeleFest") seeks to recover a portion of those funds to recompense the violations of a licensing agreement that it had with defendant VU-TV. Barton Press, Inc. ("Barton"), is a judgment lien creditor, seeking to recover on a contract breached by VU-TV. For the reasons set forth below, I conclude that TeleFest and Barton have failed to prove that the security agreement between MHT and VU-TV amounted to a fraudulent conveyance.

 TeleFest entered into a licensing agreement with VU-TV on March 22, 1982. TeleFest licensed to VU-TV the world-wide distribution rights of videotapes of musical performances given at the ChicagoFest Blues Series in 1981. VU-TV agreed to pay TeleFest seventy percent of the gross proceeds of world-wide sales, with a minimum payment of fifty thousand dollars. Simultaneously, the two parties agreed that, in consideration of $7500, VU-TV would distribute another videotape, "Cheap Trick Live at ChicagoFest".

 Alleging that VU-TV failed to pay the specified guaranteed amounts and to perform other contractual obligations, TeleFest brought this action on March 4, 1983. VU-TV failed to answer or otherwise appear and, on April 8, 1983, TeleFest was granted an Order of Final Judgment against VU-TV for $57,500, plus costs.

 Barton obtained a default judgment against VU-TV on April 19, 1984 in the Superior Court of New Jersey in the amount of $85,323.86. It attempted to levy on that judgment on June 11, 1984, but found that the VU-TV account receivable held by Graphics was affected by restraints imposed by this court on November 22, 1983. Barton sought permission to intervene under Fed. R. Civ. P. 24(b). *fn1" Notwithstanding the fact that Barton is not indispensable, the motion to intervene was granted because Barton's claim and the main action involve common questions of law and fact.

 MHT claims that its security agreement has priority over the judgments of both TeleFest and Barton. The basis for its claim is set forth in the affidavit of MHT Senior Vice-President Joseph Adamko, dated June 4, 1984. According to that affidavit, CATV's predecessor, Gamco Industries, Inc., opened an account and obtained a secured loan from MHT on May 15, 1980. In November, 1980, Gamco sold its assets and changed its name to CATV. The Gamco loan was repaid by January, 1981. In July, 1981, MHT, a New York banking association, agreed to extend a $100,000 unsecured line of credit to VU-TV at two percent over the prime rate of interest in exchange for the personal guarantees of VU-TV's Treasurer, Martin Horak, and its Secretary, Leon Poitrais, and the cross-corporate guarantee of CATV.

 An MHT "Credit Facility Review" was conducted in March and April, 1982 in connection with a plan of Horak and Poitrais and a VU-TV and CATV stockholder, Ted Leder, to obtain a $300,000 loan to purchase San Antonio Home Entertainment, Inc. ("San Antonio"). A statement entitled "Credit Department Review", dated March 12, 1982, was issued as part of that effort. The statement described VU-TV's business, its financial condition, and the results obtained through the end of September, 1981 by the company. It concluded that VU-TV was a "company which has recorded strong sales growth and sizeable profit margins, and earnings have been reinvested to increase its equity base." The reviewer also noted that the corporate officers were highly expert and experienced and that the company was positioning itself for expansion to European markets.

 MHT agreed to provide the requested loan, but cross-corporate guarantees were to be executed by VU-TV, CATV and San Antonio with each company cross-collateralizing with all assets, including receivables, the loans of the other companies. The collateralization was to cover all outstanding loans, including those that had previously been unsecured. A general security agreement was to be executed and filings on the companies' assets made. In May, 1982, the cross-guarantees of the companies and related documents, prepared by MHT's legal department, were supposedly sent to Horak. Loans were also extended in April and May, 1982 to CATV, which received $300,000, and to San Antonio, which received $20,000.

 VU-TV and CATV's cross-guarantees and the UCC filing statements were not executed with the other documents in May and June, 1982. MHT is unable to account for this lapse, but believes that it either failed to prepare those documents, did not receive them back from Horak, or received the documents executed, but "misplaced" them. MHT discovered "sometime in early 1983" that it did not have the desired guarantees. An MHT "Interoffice Letter", dated January 20, 1983, requested the MHT Legal Department to prepare guarantees and UCC filings for VU-TV, CATV and San Antonio.

 The loans that had been made to the related companies were renewed by MHT at each maturity date and further loans extended. As of January, 1983, CATV owed MHT $450,000, VU-TV owed $50,000 and San Antonio owed $17,000. By June, 1983, the loan balances had been reduced, and CATV owed $385,000, VU-TV owed $50,000, and San Antonio owed $15,000. Although MHT filed financing statements for VU-TV accounts receivable on April 15, 1983 with the Clerk of Middlesex County, New Jersey, and on April 18, 1983 with the Secretary of State of New Jersey, it was not until May 6, 1983 that CATV executed a "Guarantee of all Liability and Security Agreement" ("Guarantee"). VU-TV executed a similar agreement, thereby cross-collateralizing the loans extended to the related entities.

 A second affidavit of Mr. Adamko, dated October 19, 1983, avers that all of the notes executed by VU-TV and the related entities in favor of MHT are in default. Adamko asserts that because MHT filed its financing statements before TeleFest had the United States Marshal serve a writ of execution upon Graphics -- a corporation holding certain monies for the benefit of VU-TV -- on June 22, 1983, MHT has a priority of security interest and is entitled to collect any monies held by Graphics for the benefit of VU-TV, up to a total of $450,000.

 TeleFest contests the priority of security interest on a number of grounds, one of which is TeleFest's assertion that because MHT obtained the security agreement from VU-TV after the entry of TeleFest's default judgment against VU-TV without fair consideration and at a time when the latter was already insolvent, MHT was the grantee of a fraudulent conveyance within the meaning of the UFCA, as adopted in New Jersey.

 TeleFest argues and MHT does not dispute that the security agreement of May 6, 1983 constituted a "conveyance" under ยง 2-7 of the NJFCA. There is no doubt that, at the very least, the security agreement involved the pledge of "intangible property" pursuant to that section.

 The NJFCA contains a provision covering conveyances made where an actual intent to hinder creditors exists, N.J.S.A. 25: 2-13, and provisions covering conveyances that are deemed fraudulent without reference to intent. N.J.S.A. 25: 2-10 through 12. TeleFest abjures any attempt to prove that there was an intent to defraud creditors when the security agreement was executed, but relies on the three provisions of the NJFCA which read as follows:

 
25: 2-10. What constitutes insolvency fraudulent
 
Every conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regard to his actual intent if the conveyance is made or the obligation is incurred without a fair consideration.
 
25: 2-11. Conveyances by persons in business without fair consideration
 
Every conveyance made without fair consideration when the person making it is engaged or is about to engage in a business or transaction for which the property remaining in his hands after the conveyance is an unreasonably small capital is fraudulent as to creditors and as to other persons who become creditors during the continuance of such business or transaction without regard to his actual intent.
 
25: 2-12. Incurring debts beyond ability to pay
 
Every conveyance made and every obligation incurred without fair consideration when the person making the conveyance or entering into the obligation intends to or believes that he will incur debts beyond his ability to pay as they mature, is fraudulent as to both present and future creditors.

 TeleFest argues that to the extent that VU-TV's security agreement guaranteed debts incurred by CATV and San Antonio, the agreement was a conveyance or obligation incurred without fair consideration. *fn2" However, separate and apart from the issue of fair consideration, TeleFest is obliged to show that VU-TV was insolvent at the time of the conveyance to MHT because, in actions to set aside a conveyance as fraudulent to the creditors of the grantor, the burden of proving fraud rests upon the plaintiff. Palestroni v. Jacobs, 18 N.J. Super. 438, 87 A.2d 356 (App. Div. 1952). See also Epstein v. Bendersky, 132 N.J.E. 30, 26 A.2d 247 (1942).

 TeleFest claims that affidavits which it has submitted, when considered together, show that VU-TV was insolvent on May 6, 1983. In an affidavit of December 15, 1983, Gregory Roselli, TeleFest's president, states that TeleFest was aware of VU-TV's "serious financial problems" as early as November, 1982. Roselli relates that on November 13, 1982, Robert Sewak, VU-TV's acting president, asked Roselli to cancel the TeleFest/VU-TV contracts because of these problems. The following month, Sewak resigned and, according to Roselli, in January, 1983, Leon Poitrais, VU-TV's new president, informed Roselli that VU-TV had insufficient funds to pay TeleFest. During the same month, Cynthia Friedland, a television industry official, allegedly told Roselli that VU-TV was in "grave financial difficulty."

 Roselli states that in February, 1983, he spoke with Sewak, who told him that VU-TV was "broke" as of December, 1982 and was still "broke." Roselli further relates that, in March, 1983, he met with one Walter Baxter, who had been VU-TV's president in early 1982. Baxter told him that VU-TV had the industry reputation of "being 'dead'". Roselli spoke with Sewak again in April and May, 1983 and Sewak told him that VU-TV's only asset was money owed it by Graphics. These conversations convince TeleFest that VU-TV was, at the very least, in serious financial straits at the time that it signed the security agreement.

 TeleFest also submits the affidavit of Robert Sewak, dated January 19, 1984. Sewak states that during the period April 1, 1982 to December 31, 1982, he was a paid consultant to VU-TV with complete access to that company's accounts, contracts and operating statements and that in November, 1982 he met Roselli and told him that VU-TV did not have the funds to pay its obligations to TeleFest under the contract. He further states that, at that time and, to his knowledge, thereafter, VU-TV did not have sufficient funds to pay all of its creditors and that in December, 1982, VU-TV had "debt . . . in excess of foreseeable income." Sewak adds that the debt to at least seven studios and some duplicating houses caused those businesses to refuse to work for VU-TV without pre-payment. Sewak also claims that Poitrais told him in 1983 that the company lacked sufficient funds to pay Poitrais' regular salary.

 The April 26, 1984 affidavit of Leonard Cohen, Director of Engineering for VU-TV from January through August, 1983, confirms that VU-TV had problems meeting its payroll during 1983. Cohen states that many of his payroll checks were returned for insufficient funds and that he was told by VU-TV's landlord and by "various officers of VU-TV" that, beginning in April, 1983, the company stopped paying rent that it owed for its office space. Additionally, Cohen asserts that in April, 1983 and throughout the rest of his tenure at VU-TV, studios, duplicating houses and other trade creditors were also not paid sums owed them. A Notice of Levy, dated January 11, 1984 and filed by the Internal Revenue Service, indicates that VU-TV was unable to pay its employment taxes for the tax periods ending in March, September, and December, 1982 and March, June, and September, 1983.


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