Before Judges Pressler, Ciancia and Arnold.
The opinion of the court was delivered by: Ciancia, J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
On appeal from the Superior Court of New Jersey, Law Division, Ocean County.
Plaintiff Karo Marketing Corporation, Inc., appeals the dismissal of its suit to collect on a prior judgment. We now reverse that dismissal and reinstate plaintiff's complaint.
This appeal presents questions of when the actions of judgment debtors and those who control them, cross the line from legitimate business tactics into the area of creditor fraud. The genesis of the litigation was a contract entered into between plaintiff, a marketing and advertising company and "Playdrome," a name apparently designating several interlocking companies, as described more fully below. Plaintiff provided services that were billed in excess of $134,000 but received payment of only approximately $82,000. In March 1994, it brought an action for money owed against several defendants (Karo I). It was successful against two of those defendants, Playdrome Recreation Centers, Inc. (PRC) and Playdrex, Inc., in the amount of $82,631.81 including interest. Plaintiff has been unable to collect on that judgment because PRC was defunct for some time before the litigation began and its successor, Playdrex, became judgment proof in the course of the litigation when its sole source of income, one or more management contracts, was terminated. It is plaintiff's contention that defendants in the present action intentionally and fraudulently drained Playdrex of its income stream for the explicit purpose of thwarting the judgment anticipated against Playdrex. Indeed, plaintiff claims that once the present defendants decided to render Playdrex judgment proof, the Karo I litigation defense strategy was to direct liability onto Playdrex and away from the other defendants.
Plaintiff's inability to collect on its judgment was the basis for the present litigation. Plaintiff's complaint alleged fraudulent conveyance and fraud, civil conspiracy, New Jersey RICO violations (N.J.S.A. 2C:41-1 to -6.2) and the breach of the duty of good faith and fair dealing. In essence, plaintiff contended that the defendants deliberately abandoned a company they knew would be a judgment-debtor, Playdrex, and created a new company, River Avenue Management (RAM), to perform essentially the same management functions Playdrex had performed, for the primary purpose, indeed perhaps the exclusive purpose, of avoiding the judgment entered against Playdrex.
The defendants in this litigation and their relationships to each other may be explained as follows. Playdrome was formed as a partnership around 1986 by three men who are not defendants in the present litigation. The purpose of the undertaking was to refurbish or build and operate bowling centers, some of which included restaurants in their design. After some initial success the business expanded and in 1988 a group of investors (hereafter "Investor Group") joined the business apparently as limited partners and formed Playdrome New Jersey Limited Partnership (PNJLP). Those investors were defendants Dave Wallach, Eleanor Izdebski, Judith Carluccio, Dave Wintrode and Byron Kotzas. Apparently PNJLP then formed Playdrome America, Inc., which became the parent and holding company for the bowling centers and for the initial management company, PRC. Each bowling center/restaurant was a separately incorporated "operating company." The following defendants were operating companies: Playsuper, Inc., Playbrad, Inc., Playbird, Inc., Playdrome Woodbury, Inc., Playdrome Hightstown, Inc., Playdrome Burlington, Inc. and Playdrome Deptford, Inc. The stock of these operating companies was, in turn, held entirely by Playdrome America, Inc. Each of these operating companies had an oral management agreement with PRC. In addition there were four bowling centers owned by the original founders of Playdrome which were not owned by Playdrome America, Inc. Those bowling centers also had oral management agreements with PRC but are not defendants in the present litigation.
A series of separate limited partnerships owned the real estate upon which each bowling center and restaurant was situated. Those entities are also defendants. The Investor Group held a seventy-five percent limited partnership interest in the real estate partnerships and the three original founders owned a twenty-five percent share collectively.
PRC was formed to manage the bowling centers. It determined the marketing strategy and overall policy on behalf of the various operating companies. For these services it received a six percent management fee. In 1991 PRC was abandoned as the management company for Playdrome, although it may not have been formally dissolved. A new management company, Playdrex, Inc., was created, which assumed the same role and functions as PRC. Playdrome America, Inc., apparently owned the entire stock of PRC and its successor Playdrex. The original three founders initially owned seventy-five percent of Playdrome America, Inc., and the Investor Group owned a collective twenty-five percent share. In February 1994 the founders agreed to relinquish their ownership of Playdrome in exchange for indemnification from the corporation. The Investor Group took effective control of Playdrome, although it is not entirely clear whether ownership was completely transferred, since it seems the Investor Group, two and one-half years after the agreement, had not yet completed all of its obligations to the founders. It is not entirely clear if there was a formal board of directors, but the people making the decisions for Playdrome were the Investor Group, at least after the change of control.
Two of the named defendants, John Izdebski and Daniel Carluccio, Esq., apparently do not hold stock in Playdrome but have acted as representatives of their wives who are stockholders and members of the Investor Group.
Plaintiff has also named as defendants the newest management company doing business with Playdrome, River Avenue Management, Inc., its shareholders Mark Kotzas and John A. Izdebski, and at least some of its officers, including Mike Little, Donna Rein and Gary Weiner.
The attorney who represented Playdrome in Karo I, Valter Must and his law firm, Rothstein, Mandell, Strohm and Must, are also named as defendants.
With the exception of defendant Must and his firm, we refer to the defendants collectively as the "Playdrome defendants." Plaintiff's complaint in Karo II was filed in May 1998. In October 1998 defendant Must filed a series of motions including one to dismiss for failure to state a cause of action. The Playdrome defendants filed summary judgment motions in December 1998. All the dispositive motions ...