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Banco Popular North America v. Gandi

June 27, 2005

BANCO POPULAR NORTH AMERICA, PLAINTIFF-APPELLANT AND CROSS-RESPONDENT,
v.
SURESH GANDI A/K/A SURESH GANDHI, MADHU S. GANDI A/K/A MADHU S. GANDHI, DEFENDANTS, AND RICHARD P. FREEDMAN, ESQ., ANGELINI, VINIAR & FREEDMAN, A NEW JERSEY GENERAL PARTNERSHIP, MICHAEL A. ANGELINI, ESQ., A PARTNER, AND CARL B. VINIAR, ESQ., A PARTNER, DEFENDANTS-RESPONDENTS AND CROSS-APPELLANTS.



On certification to the Superior Court, Appellate Division, whose opinion is reported at 360 N.J. Super. 414 (2003).

SYLLABUS BY THE COURT

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

LONG, J., writing for a unanimous Court.

This matter involves claims by a bank, Banco Popular North America, against an attorney, Richard P. Freedman, for creditor fraud, common-law fraud, and negligence arising out of an asset transfer and the issuance of an opinion letter to the bank. The first of the two issues in this matter is whether a cause of action exists for creditor fraud that would encompass the attorney's conduct. The second is whether the attorney violated any duty to Banco Popular in connection with the fraudulent transfer or the opinion letter.

During the late 1990's, Suresh Gandhi operated a series of fast-food restaurants under Arby's and Burger King franchises. Separate corporations, of which Gandhi was the sole shareholder, ran each of three restaurants. One ran the Arby's. Priya Fast Foods, Inc. (Priya I) and Priya Fast Foods II, Inc. (Priya II) each operated a Burger King. In May of 1997, Banco Popular loaned Priya I $500,000. Gandhi executed a personal guaranty with regard to that loan. At that time, Gandhi jointly owned two homes with his wife along with securities in a mutual fund. At some point, Gandhi became enmeshed in a dispute with Arby's. He retained Freedman to represent him in connection with that dispute. According to Gandhi, Freedman advised him to transfer all of his assets into his wife's name in order to place them beyond Arby's reach. On April 20, 1998, Freedman prepared the deeds for both parcels and the documents that effectuated the transfer.

A few months later, the bank issued another loan to Priya I for $15,000. In connection with that loan, and despite the asset transfer two months earlier, Gandhi executed a guaranty in which he represented that he "has not and will not, without the prior written consent of Lender, sell, lease, assign, encumber, hypothecate, transfer, or otherwise dispose of all or substantially all of Guarantor's assets, or any interest therein . . . ." Gandhi also warranted that "no event has occurred which may materially adversely affect Guarantor's financial condition.."

On July 21, 1998, the bank issued a $750,000 loan to Priya II. That loan would not have been granted except for the fact that Gandhi executed a guarantee of payment, which represented among other things: that he had provided financial statements to the bank to obtain the loan and during the term of the loan, provided Guarantor shall maintain a minimum net worth of not less that $950,000. Guarantor shall have the right to transfer, sell or assign any real or personal property owned by him, without any requirement of obtaining Lender's consent.

Freedman negotiated Gandhi's guaranty with the bank as well as other terms and documents relating to the $750,000 loan. Freedman also issued an opinion letter in which he stated, "After due investigation, we are unaware of any material matters contrary to the representations and warranties of the Borrower or the Guarantor contained in the Loan Documents."

Gandhi defaulted on all of the loans. The bank obtained a judgment against Gandhi for $1,251,574.58 and instituted an action against Gandhi and his wife, claiming that the transfers of the houses and the mutual fund violated the Uniform Fraudulent Transfer Act (UFTA). The bank filed an amended complaint joining Freedman as a defendant after Gandhi testified at a deposition that Freedman had advised him to make the transfers. The bank alleged that Freedman breached the duty he owed to the bank by negligently advising Gandhi to transfer assets, making him unable to fulfill his financial obligations to the bank and that Freedman conspired with Gandhi to defraud his creditors. The bank filed another amended complaint in which it alleged that Freedman perpetrated common-law fraud, negligence, creditor fraud, and ethical violations in advising Gandhi to transfer his assets to defraud Arby's, in effectuating the transfer, and in issuing the misleading opinion letter on which he intended the bank to rely. Another count of the complaint alleged civil conspiracy.

The trial judge granted Freedman's motion to dismiss for failure to state a claim upon which relief could be granted. The Appellate Division, in a reported opinion, reinstated the bank's claims for creditor fraud and civil conspiracy but upheld the dismissal of the claims for common-law fraud and negligence.

This Court granted the Banco Popular's petition for certification with respect to the Appellate Division's resolution of the negligence claims and Freedman's cross-petition for certification in connection with creditor fraud.

HELD: There is no cause of action for creditor fraud in this jurisdiction but the attorney may be liable for conspiracy to violate the Uniform Fraudulent Transfer Act for his participation in the transfer. Such an action would require the creditor to prove that the conspirator agreed to perform the fraudulent transfer, which, absent the conspiracy, would give a right of action under the UFTA. The attorney also may be liable for misrepresentations he made in connection with the opinion letter he issued on the subsequent loan.

1. To establish common-law fraud, a plaintiff must prove: (a) a material misrepresentation of a presently existing or past fact; (b) knowledge or belief by the defendant of its falsity; (c) an intention that the other person rely on it; (d) reasonable reliance thereon by the other person; and (e) resulting damages. Two reported Appellate Division opinions conclude that it is not necessary for the plaintiff to establish legal fraud to have a viable cause of action when it is otherwise demonstrated that actions have been taken for the purpose of defrauding a creditor. We disagree. Misrepresentation and reliance are the hallmarks of any fraud claim, and a fraud cause of action fails without them. A creditor fraud claim that requires plaintiffs to prove neither reliance nor misrepresentation does not exist in New Jersey. Our conclusion dovetails with the state of the law in other jurisdictions. Creditor fraud is not recognized anywhere else in the country, and we see no warrant to acknowledge its existence here. (pp. 14-18)

2. The question then becomes what remedies are available to address Freedman's part in the asset transfer and in issuing the opinion letter. Banco Popular alleges that Freedman counseled Gandhi to violate and assisted him in violating the UFTA. In New Jersey, a civil conspiracy is a combination of two or more persons acting in concert to commit an unlawful act, or to commit a lawful act by unlawful means, the principal element of which is an agreement between the parties to inflict a wrong against or injury upon another, and an overt act that results in damage. The gist of the claim is not the unlawful agreement, but the underlying wrong which, absent the conspiracy, would give a right of action. Following this definition, a creditor in New Jersey may bring a claim against one who assists another in executing a fraudulent transfer. Such an action would require the creditor to prove that the conspirator agreed to perform the fraudulent transfer, which, absent the conspiracy, would give a right of action under the UFTA. (pp. 21-22)

3. The fact that Freedman was representing Gandhi during that transaction does not insulate him from liability. The allegations indicate that Freedman counseled Gandhi to transfer his assets to defraud a creditor, and, if proved, his assistance in facilitating the transfer reflects implicit, if not explicit, agreement to further that purpose. The Appellate Division properly declined to dismiss the conspiracy count of the complaint to the extent that it was based upon a UFTA violation. Thus if proved, the conspiracy count would subject Freedman to the remedies provided in the UFTA. (p. 23)

4. We have recognized that there are circumstances in which an attorney may owe a duty to a third party with whom the attorney does not have a contractual relationship. If the attorney's actions are intended to induce a specific non-client's reasonable reliance on his or her representations, then there is a relationship between the attorney and the third party. If the attorney does nothing to induce reasonable reliance by a third party, there is no relationship to substitute for the privity requirement. Put differently, the invitation to rely and reliance are the linchpins of attorney liability to third parties. (pp. 23-26)

5. Banco Popular's negligent misrepresentation claims regarding the asset transfer exceed the reach of a 1995 Supreme Court decision in which this Court recognized that there are circumstances in which an attorney may owe a duty to a third party. The duty recognized in the Court's opinion in 1995 arose because an attorney, engaged in dealings involving a non-client, made misrepresentations to the non-client knowing that they would induce her reliance. In aiding Gandhi in the asset transfer, not only did Freedman make no representations to the bank seeking to induce reliance, but the entire transaction was intended to be and was carried out without the bank's knowledge.

The lack of a misrepresentation by Freedman and reliance by the bank fatally undermines the existence of any duty between them. We affirm the Appellate Division's conclusion to that effect. (pp. 28-29)

6. Banco Popular's intentional and negligent misrepresentation claim against Freedman in respect of his role in negotiating the terms of the July loan and guaranty and in issuing an opinion letter stands on different footing from the asset transfer. Representations in negotiations are made to induce reliance. The purpose of a legal opinion letter is to induce reliance by others. To the extent that the loan negotiations or the opinion letter contained misstatements of material facts on which Freedman knew or should have known the bank would rely, they will support a negligence cause of action. The question is whether the complaint pleaded that cause of action. It is the existence of the fundament of a cause of action in those documents that is pivotal; the truth of plaintiff's allegations and the ability of the plaintiff to prove its allegations not at issue. Here, the Appellate Division erred. The appellate panel limited its consideration to two examples of misstatements by Gandhi advanced by the bank (paragraph 2(j) and the June guaranty) and ruled on the merits of those allegations. The panel concluded that the former was not a representation of net worth and also held that the guaranty was not incorporated into the July loan and that Freedman was not involved in that guaranty. The issue was not whether the bank's allegations were true or whether they could be proved, but only whether they were made. The court noted that under relevant standards, the Appellate Division's conclusions regarding paragraph 2(j) were incorrect; the bank was entitled on a Rule 4:6-2 motion to the inference that the $950,000 trigger in paragraph 2(j) was related to Gandi's representations. (pp. 29-31)

7. That Freedman intended the bank to rely on his misrepresentation that "we are unaware of any material matters contrary to the representations and warranties of the Borrower or the Guarantor contained in the Loan Documents" cannot be disputed. In the face of Gandi's financial representations to obtain the loans (any representation was false because of his divestiture of assets. The assertion that Freedman was unaware of any material matters contrary to the representations and warranties of the borrower or the guarantor provided the basis for a direct misrepresentation claim against Freedman, which may be characterized as negligent or intentional. Moreover, the bank asserted a breach of duty by Freedman that was not limited to outright misrepresentations in the opinion letter. If the facts alleged are proved, he had a duty either to counsel Gandhi to tell the bank the truth and see to it that he did so or to discontinue his representation. Freedman may have some explanation for what he did. We rule only that the bank's claims, with all inferences accorded to them, were sufficient to pass the pleadings stage of the litigation. The bank's claim for conspiracy in connection with the asset transfer may proceed, as may the bank's claims of negligent and intentional misrepresentation and negligent investigation. The bank's claims for creditor fraud were properly dismissed. (pp. 32-34)

Judgment of the Appellate Division is AFFIRMED in part and REVERSED in part.

CHIEF JUSTICE PORITZ and JUSTICES LaVECCHIA, ZAZZALI, ALBIN, WALLACE and RIVERA-SOTO join in JUSTICE LONG'S opinion.

The opinion of the court was delivered by: Justice Long

Argued January 20, 2004

Reargued November 8, 2004

This matter involves claims by a bank against an attorney for creditor fraud, common-law fraud, and negligence. Banco Popular North America (the Bank) avers that the attorney assisted his client in transferring assets to defraud a creditor. The Bank's interests are implicated because it issued the client loans before and after the fraudulent transfer, in reliance on the client's representations and on an opinion letter issued by the attorney. Ultimately, the client-debtor was unable to make payment on his debts to the Bank.

The first issue is whether a cause of action exists in this jurisdiction for creditor fraud that would encompass the attorney's conduct. The second is whether the attorney violated any duty to the Bank, a non-client, in connection with the fraudulent transfer or a subsequent loan. We hold that there is no cause of action for creditor fraud in this jurisdiction but that the attorney may be liable for conspiracy to violate the Uniform Fraudulent Transfer Act (UFTA), N.J.S.A. 25:2-20 to -34, for his participation in the transfer. We also hold that the attorney may be liable for misrepresentations he made in connection with the opinion letter he issued on the subsequent loan.

I.

This appeal ensues from a dismissal of counts of the Bank's complaint. We thus proceed gingerly because Rule 4:6-2(e) motions to dismiss should be granted in "only the rarest [of] instances." Lieberman v. Port Auth. of N.Y. & N.J., 132 N.J. 76, 79 (1993)(quoting Printing Mart--Morristown v. Sharp Elecs. Corp., 116 N.J. 739, 772 (1989)). Trial courts are cautioned to search the complaint in depth and with liberality to ascertain whether the fundament of a cause of action may be gleaned even from an obscure statement of claim, opportunity being given to amend if necessary. At this preliminary stage of the litigation [a] [c]court [should not be] concerned with the ability of plaintiffs to prove the allegation contained in the complaint. . . . [P]laintiffs are entitled to every reasonable inference of fact. The examination of a complaint's allegations of fact required by the aforestated principles should be one that is at once painstaking and undertaken with a generous and hospitable approach. [Printing Mart, supra, 116 N.J. at 746 (internal quotations and citations omitted).]

See also Glass, Molders, Pottery, Plastics, & Allied Workers Int'l Union v. Wickes Cos., 243 N.J. Super. 44, 46 (Law Div. 1990) ("The test for determining the adequacy of a pleading is whether a cause of action is suggested by the facts.").

Obviously, if the complaint states no basis for relief and discovery would not provide one, dismissal is the appropriate remedy. Pressler, Current N.J. Court Rules, comment 4.1 on R. 4:6-2 (2005) (citing Camden County Energy Recovery Assocs. v. N.J. Dep't of Envtl. Prot., 320 N.J. Super. 59, 64 (App. Div. 1999), aff'd o.b., 170 N.J. 246 (2001)). In ruling, courts must "assume the facts as asserted by plaintiff are true and give her the benefit of all inferences that may be drawn in her favor." Velantzas v. Colgate-Palmolive Co., 109 N.J. 189, 192 (1988). We therefore treat the Bank's version of the facts as uncontradicted and accord it all legitimate inferences. We pass no judgment on the truth of the facts alleged; we accept them as fact only for the purpose of reviewing the motion to dismiss.

R. 4:6-2(e).

A.

During the late 1990's, defendant, Suresh Gandhi,*fn1 operated a series of fast-food restaurants under Arby's and Burger King franchises. Separate corporations, of which Gandhi was the sole shareholder, ran each of three restaurants. Echelon Fast Food, Inc. (Echelon) ran the Arby's, and Priya Fast Foods, Inc. (Priya I) and Priya Fast Foods II, Inc. (Priya II) each operated a Burger King. In May of 1997, the Bank loaned Priya I $550,000. What financial representations Gandhi made to secure that loan are not revealed in this record; however, Gandhi executed a personal guaranty with regard to that loan. What is known is that in 1997, Gandhi jointly owned two homes with his wife, Madhu, along with securities in a mutual fund. At some point, Gandhi became enmeshed in a dispute with Arby's.*fn2 He retained attorney Richard P. Freedman to represent him in connection with that dispute. According to Gandhi, Freedman advised him to transfer all of his assets into his wife's name in order to place them beyond Arby's reach ("the asset transfer" or "the fraudulent transfer").*fn3 On April 20, 1998, Freedman prepared the deeds for both parcels and the documents that effectuated the transfer.

A few months later, on June 16, 1998, the Bank issued another loan to Priya I for $15,000. What financial information Gandhi supplied the Bank to secure that loan is also unclear from this record. In connection with that loan, and despite the asset transfer two months earlier, Gandhi executed a Commercial Guaranty, on June 17, 1998, in which he represented and warranted that he "has not and will not, without the prior written consent of Lender, sell, lease, assign, encumber, hypothecate, transfer, or otherwise dispose of all or substantially all of Guarantor's assets, or any interest therein . . . ." (Emphasis added). Gandhi also warranted that "no event has occurred which may materially adversely affect Guarantor's financial condition . . . ."

On July 21, 1998, the Bank issued a $750,000 loan to Priya

II. According to the loan documents, that loan would not have been granted except for the fact that Gandhi executed a Guarantee of Payment, which represented among other things:

1. Guarantee

Guarantor unconditionally and irrevocably guarantees to Lender the prompt, absolute and unconditional payment of (i) the principal sum evidenced by the Note, (ii) interest on the ...


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