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Sasco 1997 NI, LLC v. Zudkewich


June 27, 2007


On appeal from the Superior Court of New Jersey, Law Division, Essex County, Indictment No. L-4392-98.

Per curiam.


Argued March 6, 2007

Before Judges Weissbard, Payne, and Graves.

Plaintiff, SASCO 1997 NI, LLC (SASCO), appeals from a verdict of no cause for action in favor of defendants. We affirm.

This appeal involves primarily the question of whether defendant Arik Zudkewich fraudulently transferred his fifty-percent interest in jointly-held marital real property in 1990 to his wife, defendant Rochelle Zudkewich, under New Jersey's Uniform Fraudulent Transfer Act (NJFTA or UFTA), N.J.S.A. 25:2-20 to -34. Plaintiff sought to set aside the transfer in an effort to collect on a default judgment it obtained against Arik relating to a guaranty he had given, in December 1989, on a loan to one of his partnerships. Also named as defendants were two partnerships controlled by Rochelle, Kira Development and Jaldars Development.

SASCO filed its complaint against defendants on April 23, 1998, alleging that Arik's transfer of the marital home to Rochelle constituted a violation of the NJFTA, and setting forth claims for fraud, conversion, and unjust enrichment. SASCO 1997 NI, LLC v. Zudkewich, 166 N.J. 579, 584 (2001). SASCO requested the imposition of a constructive trust. Ibid. Defendants moved to dismiss the complaint on the ground that the NJFTA's statute of limitations barred SASCO's claims. Ibid. The Law Division granted the motion, and we affirmed in an unpublished opinion. Ibid. However, in March 2001, the Supreme Court reversed because, while it agreed with defendants' argument regarding the statute of limitations, the Court applied its holding prospectively. Id. at 596. Thus, it remanded for trial on SASCO's NJFTA claim. Ibid.

SASCO filed a second amended complaint*fn1 on October 2, 2003, essentially restating the counts in the original complaint and adding counts related to the tracing of the proceeds from the alleged fraudulent transfer, as well as claims of common law fraud, creditor fraud,*fn2 and bad faith.

Trial was held before Judge Lombardi on fourteen dates in September and October 2005. Following summations, on October 25, 2005, the judge rendered a decision, covering seventy-six transcript pages, finding in favor of defendants. Final judgment was entered in favor of defendants on November 7, 2005.

Plaintiff's appeal presents the following arguments:













The following constitutes a summary of the evidence adduced at trial.


Arik began working in real estate in 1980 with Jack Burstyn, a prominent real estate developer in New Jersey. In the early 1980s, Arik was an assistant construction supervisor while working for Burstyn. He became construction supervisor on a project in Caldwell in the mid-1980s.

Starting in the mid-1980s, Arik became a partner in a number of partnerships in which Burstyn was the principal, including: Jaywood Associates, Woods Associates, East Crescent Associates, Tarnsfield Associates, Crescent Associates, Land Bank Associates, Laurel Manor Associates, Merit Associates, and Timber Associates. Woods Associates developed nine single-family homes. East Crescent built townhouses. Tarnsfield developed four real estate projects. Land Bank involved one project, a townhouse and condominium development. Laurel and Merit involved twelve real estate projects.

Arik met and married Rochelle in 1985. At the time, Rochelle was working in her father's knitting business. The couple moved into a condominium in Little Falls. Rochelle began selling real estate for Weichert Realty in 1987 and worked there until 1993.

In 1986, Harry Jacobs, Rochelle's father, financed the newlywed couple's purchase of vacant land in Livingston, known as 5 Canoe Brook Drive, for $125,000, as a gift to Arik and Rochelle; Arik and Rochelle intended to build a house on the site. However, there is no written documentation of Jacobs's gift. Arik and Rochelle were listed as the buyers on the June 24, 1986 deed.

The house was constructed in 1987 and 1988. Rochelle worked with an architect to design the house, and supervised the subcontractors on the project. However, the construction applications submitted to the municipal building department indicated that Arik was in charge of the work. Arik also hired the subcontractors on the project. Arik and Rochelle took out a construction loan of over $200,000 from First Fidelity Bank, and out of a credit line of up to $400,000 for the construction of the house. Apparently, the loan was subsequently converted to a mortgage. Jacobs contributed an additional $500,000 for the construction.

Arik was also one of nine partners in Gateway 195, in which he held a seven-percent interest. The partnership intended to develop an office complex in Hamilton Township off of Interstate 195. Midlantic Bank loaned Gateway 195 $2.9 million for land acquisition and construction in December 1989. Arik, along with nine others, gave his personal guaranty on the loan by way of two separate guaranties of $1.8 and $1.1 million to Midlantic on December 19, 1989. According to his June 15, 1989 financial statement, Arik's net worth was $6,395,250.

First Fidelity failed to provide funding in a timely manner to the Tarnsfield project in 1989, which resulted in the delay of construction and the sale of units, as well as the release of purchasers from contracts of sale. The delays were attributed to First Fidelity's seeking additional collateral and other favorable accommodations.

On May 1, 1990, Arik executed a deed transferring his fifty-percent interest in 5 Canoe Brook which, according to his 1989 financial statement, was worth a total of $900,000, to Rochelle for $1.00. The deed was recorded with the Essex County Register's Office on May 8, 1990. According to Arik and Rochelle, Arik transferred his interest because Jacobs wanted Rochelle to have the entire interest in the property on the ground that Jacobs had contributed most of the funding for the purchase and construction, and because the transfer would make Jacobs feel more "comfortable." Jacobs is now deceased. According to Arik, the couple's mortgagee approved the transfer.

According to a June 30, 1990 financial statement, prepared by the accounting firm of Dinnerstein & Kessler (D&K), Arik's net worth was $4,368,530. The statement was supported by a detailed schedule assessing Arik's equity interest in various real estate properties. Arik bought a Jaguar and seven race horses in November 1990; his tax return showed that he spent approximately $44,000 on the horses.

Arik contended that, as of the time of the 1990 financial statement, he was not having difficulties with any of the projects listed on the statement. There is conflicting evidence in the record as to whether Midlantic was concerned in 1990 about the progress of the Gateway 195 project. There was both evidence that it was concerned about the progress of the construction and leasing, and contrary indications that it believed the project was on schedule, as well as positive comments regarding the project. Apparently, the project eventually ran into problems when anticipated tenants failed to materialize.

As of 1990, Arik worked for Tarnsfield, Land Bank, Gateway 195, The Woods, and Timber. The majority of his time between 1990 and 1993 was spent on the Tarnsfield project. As of mid-1990, Arik's seven-percent interest in Gateway 195 was worth over $200,000, and his twenty-percent interest in Merit was worth approximately $900,000. Merit had a debt of $2.7 million at the time. Arik was one of the guarantors on an approximately $17 million mortgage loan to Land Bank. He was also one of six guarantors on a $1.3 million loan from First Fidelity to Tarnsfield, made in January 1990. In total, Arik was a guarantor on what he testified were over $24 million worth of loans as of mid-1990.*fn3 However, as of 1990, Burstyn's personal net worth was over $100 million.

A D&K financial statement dated July 31, 1991, reflected a net worth of $2,092,620 for Arik. Arik also submitted a net worth statement to Midlantic as of June 1991 in which he listed his net worth as $4,409,030, including $3,933.530 in real estate investments.*fn4

Thus, Arik's net worth between 1989 and 1990 declined from $6.4 million to $4.3 million, and between 1990 and 1991, from $4.3 million to $2.93 million. According to Arik, the decline was due to sales of houses in the developments, which reduced the partnerships' assets. Arik described 1990 as his most profitable year, where he earned well over $500,000 in distributions and profits.*fn5 With respect to Tarnsfield, Land Bank, and Timber, Arik stated that the best distribution years were in the late 1980s and early 1990s. Arik derived between $50,000 and $100,000 annually from his partnership in Jaywood. He earned approximately $150,000 on East Crescent in 1988, approximately $400,000 in 1989, and approximately $180,000 in 1990. Arik received between $300,000 and $400,000 in distributions from both Tarnsfield and Carmel between 1989 and 1991.

On September 16, 1992, Arik and Rochelle sold 5 Canoe Brook for $1.2 million. At the time of the sale, they had $171,000 left on the mortgage. The deed of sale listed both Arik and Rochelle as the sellers, despite the prior transfer. The balance of the proceeds check, approximately $968,000, went into a separate bank account controlled by Rochelle. Most of those proceeds were used by Rochelle to purchase another property at 95 Minnisink Road, Short Hills, in April 1993, for $821,000. Rochelle developed the property as an investment, and took out a $500,000 mortgage to cover the cost of demolishing the existing house and constructing a new house. According to Arik, Rochelle bought, designed, and sold 95 Minnisink Road. However, Arik hired most of the subcontractors. Rochelle also asked Arik to take care of the necessary permit applications. Construction began in mid-1994, and the property was sold in mid-1995 for $2,377,500.

According to Arik, his financial decline began in late 1993, when Burstyn filed for bankruptcy. He claimed that the earnings he made between 1986 and 1992 were dissipated by late 1993 when he had to start paying off loans affected by the bankruptcy. Rochelle did not learn of his financial reversals until 1995. Arik's 1995 financial statement showed that he had a negative net worth of $64,000.

In July 1995, Rochelle used some of the proceeds from the sale of 95 Minnisink, together with a mortgage taken out in her name, to purchase 54 Western Avenue Drive in Short Hills. After renovations, which took a year or so and were supervised by Rochelle, she and Arik moved into 54 Western Drive.

In late 1995, Rochelle formed two partnerships, known as Kira and Jaldars, to develop luxury homes in the Short Hills area. Rochelle made ninety-nine percent of the capital contribution with respect to Kira, while she and her brother, Robert Jacobs, each made fifty-percent contributions of $300,000 to start up Jaldars. Rochelle ultimately bought out her brother's interest in Jaldars. Rochelle made Arik a manager rather than a partner in Jaldars because he was not working at the time. However, Arik did not receive compensation for his role as manager. He did have authority to write checks on the Kira and Jaldars accounts, and both Arik and Rochelle did the bookkeeping. However, there were times when Rochelle moved one of their personal accounts to a different bank without renewing Arik's check-writing authority. Rochelle generally worked ten to twenty hours per week on Kira and Jaldars, while Arik did not work as many hours.

Kira, which is Arik spelled backwards, developed property at 7 Swale Lane in Millburn beginning in late 1995. Rochelle found the property, helped design the house, put it on the market, and negotiated the sale with the purchasers. The property was sold for approximately $2 million in December 1996. Kira also developed 8 Shore Edge Lane in Millburn, which was acquired for $945,000 and, after renovation, was sold for $2.8 million. Kira also developed 56 Lake Road in Short Hills. Arik signed the mortgage and the relevant documents with respect to these properties.

Jaldars developed 8 York Terrace in Millburn, which was sold for $1.65 million in March 1998. As with Kira, Arik signed the mortgage and contracts on 8 York Terrace on behalf of Jaldars. Another Jaldars project was 30 Montview Avenue in Short Hills, which was a vacant lot when purchased. The land purchase price and construction came to about $1.3 million, and the property was sold for $2.3 million. Jaldars also developed another property found by Rochelle at 38 Slope Drive in Short Hills. Arik did not receive any compensation from Kira or Jaldars with respect to these projects. Rochelle earned $1.4 million between 1996 and 2000.

First Fidelity filed three separate actions against Arik and his partners in late 1993, based on guarantees given by the partners, including the guaranty on the February 1990 Tarnsfield loan, two other loans to Tarnsfield totaling over $3 million, and nearly $3 million in a loan to Land Bank. These actions were resolved in June 1995, as part of a settlement in which Arik assigned his interests in the properties in question to First Fidelity.

In mid-1994, Midlantic assigned its Gateway 195 loan to ALI Inc. SASCO 1997 NI, LLC, supra, 166 N.J. at 583. In December 1994, ALI filed an action against Gateway 195 and its partners based on Gateway's default on the loan. Ibid. In March 1995, Gateway 195 declared bankruptcy. Ibid. Subsequently, Gateway 195 and five of the partners settled with ALI. Ibid. Because the settlement did not cover the full balance of the loan, ALI continued with the action against Arik and two other partners.

Ibid. In August 1997, ALI obtained a default judgment against Arik in the amount of $1,300,347.50. Id. at 583-84. At about the same time, ALI transferred its interests in the litigation to SASCO. Id. at 584. SASCO has not received any payments relating to the Gateway 195 loan since August 1997, and has not received any payments from Arik. According to SASCO, there is presently an outstanding balance of approximately $2 million on the default judgment.

Both sides offered witnesses regarding Rochelle's participation in Kira and Jaldars. Patina Weinstock, the purchaser of 30 Montview Avenue, testified that she understood Arik to be the builder. Weinstock visited the site almost every day during the nine-month construction but never saw Rochelle. Weinstock believed that Arik was supervising the construction. Gail Cohen, the purchaser of 8 Shore Edge Lane, testified that Arik was the only one involved in the negotiations, and that she saw Arik, and not Rochelle, supervising the construction when she visited two or three times a week during the seven-month construction period.

However, according to Marion Mannino, an excavation contractor who did work for Kira and Jaldars, it was Rochelle who gave him the site plan, told him what work needed to be performed, and paid him for the work performed. Mannino believed that Rochelle was the one in charge. Similarly, David Internofcia, an electrical contractor who worked for Kira and Jaldars, stated that he was contacted by Rochelle, met with her on the job site, and was paid by her. Christine Miseo, an architect who was hired by both Kira and Jaldars, also testified that Rochelle ran the construction and took the lead in the design work. Miseo described Rochelle as "competent" and "hands on."

SASCO hired an insurance fraud investigator, Ken Grayzel, to observe Arik and Rochelle in March 1999. Although Grayzel observed Arik at the construction site at 8 Shore Edge Lane for several days, he never saw Rochelle at the site.

Another private investigator hired by SASCO, William Dalton, placed Arik and Rochelle under surveillance at various times in 2001, 2002, and 2003, to determine whether they were in the construction business. Although Dalton saw Arik at the relevant constructions sites, he rarely saw Rochelle.

Plaintiff offered Lawrence Frankel as an expert in accounting, specifically in financial statements and tax returns. Frankel examined Arik's earnings from 1983 to 1995, although Arik's tax returns from the 1980s were not available. Frankel determined that Arik earned a little over $2 million between 1983 and 1989, and that his earnings were highest in 1989. Based on a review of Arik's financial statements, Frankel determined that Arik's net worth was approximately $6.4 million in 1989, a significant amount of which consisted of real estate holdings. Frankel cited Arik's 1990 tax return showing negative adjusted gross income of $4387 and real estate losses of $67,409, which he described as real and not "paper" losses. Most of the losses came from the partnerships Arik was involved with.

Frankel juxtaposed 1990 with 1989, where Arik had an adjusted gross income of $686,000. Frankel described 1990 as "a year of substantial real estate losses" for Arik. In 1990, Arik's net worth dropped to $4.3 million; $3.9 million of that amount was in real estate holdings. Frankel attributed the decline to the transfer of the marital residence and the decline in value of the other real estate holdings, the latter due in part to the sale of some of the real estate. Frankel cited the delay in the Tarnsfield project as indicative of a problem with the lender that should have been apparent to Arik.

Frankel concluded that as of 1990, problems were foreseeable, citing the releases to buyers on projects that year. The expert described the $30 million in personal guarantees*fn6 given by Arik as "substantial and significant exposure" and claimed that as of 1990 Arik had "limited liquidity." Frankel also noted the tighter banking regulatory environment in 1990 because of failing real estate loans. Consequently, Frankel concluded that a financial "calamity" should have been apparent to Arik in 1990.

Frankel concluded that between 1990 and 1991, Arik's financial condition "deteriorated substantially." He described the real estate loss of $313,000, as reflected on the 1992 tax return, as indicating that Arik's real estate ventures had a "[v]ery bad year." While we have set out Frankel's testimony in some detail, the judge ultimately found him to be not credible.

Lewis Dinnerstein, a partner in D&K and a certified public accountant, testified on behalf of defendants. Dinnerstein prepared Arik's net worth statements and tax returns, and also was an accountant for the various partnerships in which Arik was involved. He attested to the accuracy of Arik's financial statements, which were unaudited and based on information given to him by Arik as to the value of various real estate investments. Dinnerstein also rebutted Frankel's conclusion, drawn from Arik's 1992 tax return, concerning Arik's financial condition in the 1990-1991 time period.


In points I and II, SASCO argues that the trial court erred as a matter of law by holding that the transfer was not fraudulent under the NJFTA because Arik was not insolvent at the time of the transfer and did not become insolvent as a result of the transfer. SASCO claims that the trial court erred in limiting its consideration of fraudulent intent to whether Arik was insolvent in mid-1990 rather than examining all eleven of what are referred to as "badges of fraud" contained in the NJFTA, which are:

a. The transfer or obligation was to an insider;

b. The debtor retained possession or control of the property transferred after the transfer;

c. The transfer or obligation was disclosed or concealed;

d. Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;

e. The transfer was of substantially all the debtor's assets;

f. The debtor absconded;

g. The debtor removed or concealed assets;

h. The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;

i. The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;

j. The transfer occurred shortly before or shortly after a substantial debt was incurred; and

k. The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor. [N.J.S.A. 25:2-26.]

Badges of fraud represent circumstances that so frequently accompany fraudulent transfers that their presence gives rise to an inference of intent. Gilchinsky v. Nat'l Westminster Bank N.J., 159 N.J. 463, 475 (1999). SASCO maintains that it proved at least five badges of fraud at trial.

Defendants contend that the trial court did not rely solely on the question of whether Arik was insolvent. In any event, according to defendants, it was natural for the court to focus on the issue of insolvency because the bulk of the evidence offered by SASCO was directed to that question. Defendants argue that the court's ultimate findings were supported by substantial, credible evidence.

In a lengthy oral decision, the trial judge found a failure of proof on the part of plaintiff to demonstrate Arik's fraudulent intent at the time of the transfer to his wife on May 8, 1990. Succinctly put, the judge stated that he found "just a lot of holes here and I don't find there's sufficient proofs."

Noting that the transfer of the marital property had been made without consideration, the trial court described the transfer as a gift and held that there was no presumption that it was fraudulent absent evidence that Arik was insolvent at the time. The court found that Arik was not insolvent in 1990, but rather had a net worth of $4.3 million, a fact not rebutted by SASCO. Moreover, it found that Arik experienced little in the way of business reversals prior to mid-1990, and that the three contract deposits that had to be returned in the year prior to May 1990 were not significant evidence of economic distress. The court noted that Burstyn obtained a $5 million loan after Arik transferred the house to Rochelle, and that Burstyn did not file for bankruptcy until December 1993, more than three years later. In addition, the court found no evidence, but rather only speculation and conjecture, that Arik was aware in mid-1990 that either he or Burstyn was headed for insolvency. The court added:

[M]y conclusion is that the plaintiff has not shown by clear and convincing evidence . . . that at the time this transfer was made it was made with actual intent to hinder, delay or defraud any creditor or debtor.

At the time, he [Arik] had over $4 million in assets. . . . .

Now, what happened subsequent I don't think is relevant. I don't think it's relevant in that if the market got bad the next year or the year after that, that you can go back and simply infer actual intent to defraud at the time of the transfer when bad results happen a good time into the future. And that's what happened in this matter.

The trial court addressed some of the other badges of fraud. It noted that it had "listened carefully to . . . what badges of fraud are evident or have been proved." The court found that it was not in dispute "that this was a transfer to an insider without consideration," but that Arik had not concealed his assets, particularly from Midlantic. The court proceeded to conclude that an examination of the badges of fraud did not reveal that Arik had made the transfer with fraudulent intent.

As noted, the court found Frankel's testimony lacking in specificity, and lacking credibility in light of the evidence presented at trial. It cited Midlantic's reliance on Burstyn, and not Arik, as undercutting Frankel's testimony. That the real estate market may have been "soft" at the time was not sufficient, according to the court. Moreover, it noted that the house was the only asset Arik transferred.

The court determined that the intent to defraud must be shown at the time of the transfer and cannot be based on events that occurred several years later. It therefore concluded that SASCO failed to establish the requisite badges of fraud. "[I]n light of . . . a gift being transferred to a wife while the debtor remained solvent and remained solvent for a short time thereafter, I don't find based on the expert testimony of Mr. Frankel that they've proven an actual intent to defraud on May 8, 1990."

The court discounted the tax returns showing Arik suffering real estate losses:

[A]gain, Mr. Frankel didn't offer any particular explanation. . . . There was testimony by . . . Mr. Zudkewich that he was still drawing money. He had sufficient monies. Nobody explained and nobody asked what happened to the income. If you look on those Schedule E's there was income distribution.

I'm not sure what the passive income loss was for. One thing is nobody presented the tax returns for the partnership or any of the partnership records.

Finally, the court further noted that Arik never made an effort to conceal his assets.


The scope of review of a judgment entered in a non-jury case is limited: the findings on which the judgment is based should not be disturbed unless they are not supported by adequate, substantial, and credible evidence in the record. Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474, 483-84 (1974). Thus, the fact findings and legal conclusions of the trial judge should not be disturbed unless the court is clearly convinced that they are so manifestly unsupported by or inconsistent with the competent, relevant, and reasonably credible evidence as to offend the interests of justice. Id. at 484. "That the finding reviewed is based on factual determinations in which matters of credibility are involved is not without significance." Ibid.

In 1988, New Jersey adopted the UFTA to replace the Uniform Fraudulent Conveyance Law, N.J.S.A. 25:2-7 to -19, which had been in effect since 1915. New Jersey's version of the UFTA is substantially the same as the uniform statute. Flood v. Caro Corp., 272 N.J. Super. 398, 403 (App. Div. 1994). A prime purpose of the UFTA is to align state law on fraudulent transfers with the federal bankruptcy law and the Uniform Commercial Code, as well as to make uniform the law among the states that adopt the UFTA. Id. at 403-04.

The purpose of the UFTA is to prevent a debtor from placing his or her property beyond a creditor's reach. Gilchinsky, supra, 159 N.J. at 475. Fraudulent conveyance claims allow a creditor to undo the wrongful transaction so as to bring the property within the ambit of collection. Ibid. Specifically, N.J.S.A. 25:2-25(a)*fn7 provides:

A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation

[w]ith actual intent to hinder, delay, or defraud any creditor of the debtor[.]

In determining whether a transfer constitutes a fraudulent conveyance, the Court has set forth two relevant inquiries: whether the debtor has put some asset beyond the reach of creditors which would have been available to them at some point in time but for the conveyance, and whether the debtor transferred the property with an intent to defraud, delay or hinder the creditor. Gilchinsky, supra, 159 N.J. at 475-76 (1999). Each inquiry is fact specific and must be resolved on a case-by-case basis. Id. at 476. The person or entity seeking to set aside the conveyance bears the burden of proving actual intent. Ibid. The UFTA does not require that the plaintiff prove that the debtor sought to defraud a particular creditor; hence, the reference to "any creditor." N.J.S.A. 25:2-25(a); In re Blatstein, 192 F.3d 88, 97 (3d Cir. 1999).

There is no dispute that SASCO satisfied the first inquiry, namely, that the house, or the proceeds therefrom, would have been available to SASCO but for the conveyance. In the second inquiry, determining whether the circumstances of the conveyance give rise to the conclusion that Arik intended to thwart or evade his responsibilities for the guarantees, courts generally look to the "badges of fraud," quoted above.

In determining actual intent to defraud, courts should balance the factors set forth in N.J.S.A. 25:2-26, as well as any other factors relevant to the transaction. Gilchinsky, supra, 159 N.J. at 477. "Although the presence of a single factor, i.e., badge of fraud, may cast suspicion on the transferor's intent, the confluence of several in one transaction generally provides conclusive evidence of an actual intent to defraud." Ibid. Nonetheless, there is no specific number of badges that must be found before a transfer is characterized as fraudulent; in some cases, the presence of a single factor may suffice. Id. at 483. "Actual intent often must be established through inferential reasoning, deduced from the circumstances surrounding the allegedly fraudulent act."

Id. at 477. The UFTA does not require the fact finder to draw inferences of bad intent from the badges of fraud; any badge of fraud is potentially relevant to proving fraudulent intent, but no single badge alone creates a presumption of bad intent. In re Jackson, 318 B.R. 5, 14 (Bankr. D.N.H. 2004), aff'd, 459 F.3d 117 (1st Cir. 2006). See also In re Hill, 342 B.R. 183, 198 (Bankr. D.N.J. 2006).

Preliminarily, we note that SASCO places unwarranted reliance on the following statement of the Court in its opinion in SASCO 1997 NI, LLC, supra, 166 N.J. at 595:

Without deciding the issue . . . we can fairly infer, on the facts elucidated to date, that Zudkewich fraudulently transferred his interest in the home to avoid paying on the guarantee. Assuming that to be the case, Zudkewich played a suburban shell game to hide homes and avoid creditors.

However, these observations are clearly dicta. The Court explicitly stated that it was not deciding the issue, and that it was merely making an inference based on the record as it stood at the time. Therefore, we do not give any controlling effect to the Supreme Court's observations.

Further, in Gilchinsky, supra, 159 N.J. at 477, the Court held that giving controlling weight to the fact that two of the eleven badges of fraud were absent was improper. Rather, the Court stated: "The proper inquiry is whether the badges of fraud are present, not whether some factors are absent." Ibid. However, given other case law on the subject, we question whether the Court intended this analysis to be an either/or proposition. It has been held that a fact finder may consider any evidence negating fraudulent intent, as well as any evidence suggestive of it. In re Jackson, supra, 318 B.R. at 14. "Just as 'badges of fraud' may be used to raise the inference of actual intent, some of the factors . . . along with other evidence, may also be used to infer lack of actual intent." Morris v. Nance, 888 P.2d 571, 576 (Or. App. 1994), review denied, 898 P.2d 192 (Or. 1995). See also Lippe v. Bairnco Corp., 249 F. Supp. 2d 357, 375 (S.D.N.Y. 2003) (noting that the "flip side of these badges of fraud is that their absence . . . would constitute evidence that there was no intent to defraud"), aff'd, 99 Fed. Appx. 274 (2d. Cir. 2004). Indeed, we consider the proposition to be self-evident. As a result, we conclude that the absence of such badges of fraud is relevant to a fraudulent transfer inquiry under the UFTA.

Turning to the merits of the analysis of the badges of fraud, there appears to be little dispute that by transferring his share of the marital property to Rochelle, the transfer was made to an insider. N.J.S.A. 25:2-26(a). Under the NJFTA, a relative of the debtor is considered an insider. N.J.S.A. 25:2-22(a)(1). Moreover, for purposes of alleged fraudulent conveyances, dealings between close relatives are scrutinized closely. Levy v. D'Alesandro, 14 N.J. Misc. 449, 456 (Ch. 1936). See also In re Harper, 132 B.R. 349, 354 (Bankr. S.D. Ohio 1991) ("Transfers between spouses . . . are suspect and subject to the strictest scrutiny, particularly when the consideration exchanged appears to be inadequate").

Another badge of fraud is that Arik remained in partial possession of the property after the transfer, since he continued to live in the marital home. N.J.S.A. 25:2-26(b). See In re Harper, supra, 132 B.R. at 354 (debtor never relinquished possession of property after transferring his fifty-percent interest in marital home to his wife where he continued to live in marital home following transfer).

The record indicates that the transfer was disclosed, N.J.S.A. 25:2-26(c), when Arik spoke to a Midlantic loan officer, Bill Collver. In addition, the deed was recorded at the relevant county office. See In re Earle, 307 B.R. 276, 292 (Bankr. S.D. Ala. 2002) (recording of deed of transfer found to be evidence of absence of fraudulent intent).

There was no proof that Arik was sued or was threatened with suit before the transfer. N.J.S.A. 25:2-26(d). The only evidence in the record is that Arik was not sued until 1992. By 1998, Arik had become a defendant in some two dozen suits brought by such entities as First Fidelity, Midlantic, and ALI.

Thus, we reject SASCO's claim that there is substantial credible evidence in the record to support the conclusion that Arik made the transfer because of disputes between the partnerships he was involved with and First Fidelity.

The transfer of Arik's share of the property was not a transfer of "substantially all" his assets, N.J.S.A. 25:2-26(e), although most of his assets were tied up in the partnerships. Nevertheless, his net worth as of mid-1990, in excess of $4 million, was substantially more than the value of his fifty-percent interest in 5 Canoe Brook, which apparently was around $450,000.

Arik did not "abscond[]," and there is no evidence that he removed or concealed assets. N.J.S.A. 25:2-26(f) and (g). The one dollar received in return for the transfer was not reasonably equivalent to the value of the asset transferred.

N.J.S.A. 25:2-26(h).

As noted, Arik was not insolvent at the time of the transfer, nor did he become insolvent "shortly after" the transfer.*fn8 N.J.S.A. 25:2-26(i). Under the NJFTA, a debtor is insolvent if the sum of the debtor's debts is greater than all of the debtor's assets. N.J.S.A. 25:2-23(a). The record indicates that Arik had a net worth of over $4 million as of mid-1990. Although he had a negative net taxable income in 1990, as of June 30, 1990, he had a net worth of $4,368,530. As Frankel conceded, adjusted gross income reflects taxable income, not net worth. Therefore, the trial court was correct that Arik was not insolvent at the time he transferred his interest in 5 Canoe Brook to Rochelle.

SASCO contends that the trial court focused too heavily on this one badge of fraud, often to the exclusion of the other badges. However, given that the thrust of SASCO's case related to establishing that Arik was in financial jeopardy at the time of the transfer, the trial court's focus on this question was understandable. Moreover, the court was really focusing on the fact that not only was Arik solvent, but he and his businesses were flourishing at the time, which was highly relevant to the court's conclusion that the transfer was not made with intent to defraud.

Whether the transfer occurred "shortly after a substantial debt was incurred," N.J.S.A. 25:2-26(j), is debatable. The transfer occurred some five months after the debt in question was incurred. That is, the guaranty on the Gateway 195 loan was made in December 1989, while the transfer occurred in May 1990. It is unclear whether five months constitutes "shortly after" for purposes of the statute. No definition of "shortly after" is contained in the NJFTA and the phrase is not specifically addressed by the case law. In Firmani v. Firmani, 332 N.J. Super. 118, 120, 123 (App. Div. 2000), the panel concluded that the transfer in question occurred shortly after the relevant debt had been incurred, even though the transfer took place nearly three years later. However, the court appeared to view the date the debt came due, and not the date when the debt obligation was taken on, as the relevant measuring point. Nonetheless, it is reasonable to assume that five months is not so long an amount of time as to be beyond the contemplation of the drafters when they crafted the "shortly after" language. Thus, this badge of fraud can be said to be applicable to this case.

Finally, Arik did not transfer the essential assets of a business to a lienor. N.J.S.A. 25:2-26(k).

In sum, there were, at best, four badges of fraud present in this case out of a possible eleven. As a result, SASCO contends, and we agree, that the Court's concluding language in Gilchinsky, is pertinent:

Where several badges of fraud accompany one transaction . . . a strong inference of fraud arises. . . . Unless a sufficient explanation is supplied, clearly rebutting the inference of actual fraudulent intent, the conclusion that the debtor possessed the requisite intent is inescapable. [159 N.J. at 484.]*fn9

We do not read the above-quoted statement from Gilchinsky as altering the fundamental proposition, stated at the outset of the opinion, that "[t]he person seeking to set aside the conveyance bears the burden of proving actual intent." Id. at 476 (citations omitted). Here, defendants did proffer an "explanation" for their actions, which the trial judge found "sufficient" to tip the weight of the proofs in defendants' favor. While he did not speak in terms of burden-shifting, if such is the import of Gilchinsky, the judge clearly found that plaintiff had failed to establish "actual fraudulent intent." Id. at 484.

Defendants claim that Arik's interest in 5 Canoe Brook was transferred because his father-in-law, in light of his financial contribution to the purchase, felt more comfortable if Rochelle had the entire interest in the property. Defendants suggest that this evidence was not contradicted by the proofs, thus rebutting the inference of actual fraud. Compare Jenney v. Vining, 415 A.2d 681, 683 (N.H. 1980) (record supported finding that husband transferred his interest in marital home to his wife to accommodate wife's demands that her interest in the property be protected in light of couple's marital problems), with In re Silverstein, 151 B.R. 657, 661-62 (Bankr. E.D.N.Y. 1993) (debtor's explanation that he transferred his fifty-percent interest in marital home for no consideration to his wife in anticipation of divorce was not credible where only evidence in support came from debtor and his wife and where company in which husband was co-owner was in financial distress at the time).

Also rebutting the inference is the fact that the transfer took place three to four years prior to Burstyn's bankruptcy and Arik's ensuing financial collapse. While no time limitation as to when the financial distress must follow the transfer is set forth in the statute or the case law, federal bankruptcy law is instructive. Under that law, a debtor may be granted a discharge unless the debtor, with intent to hinder, delay, or defraud a creditor, has transferred or concealed property of the debtor within one year of the filing of the petition for bankruptcy. 11 U.S.C.A. § 727(a)(2). Some flexibility in the one-year requirement has been allowed in cases involving concealment of a transfer that originally took place more than one year prior to the bankruptcy, but which extended into the one-year time period. See In re Olivier, 819 F.2d 550, 553-55 (5th Cir. 1987) (seven years); Silverstein, supra, 151 B.R. at 661 (fourteen months).

In Carluccio v. Winter, 108 N.J. Eq. 174, 175 (E. & A. 1931), a judgment creditor sought to set aside the conveyance of real estate by the judgment debtor to his wife. Although the plaintiff was a creditor of the debtor at the time of the conveyance, the judgment was not obtained until some seven years after the conveyance. Id. at 175-76. The Court held that there was no evidence of fraud in the making of the conveyance. Id. at 176. The court noted that the judgment debtor's company had a profitable year prior to the year the real estate had been conveyed, and that while financial trouble began the month the conveyance took place, the company did not become insolvent for another three years. Id. at 178.

By contrast, in Dammers v. Croft, 111 N.J. Eq. 462, 463 (E. & A. 1932), the judgment creditor sought to set aside a conveyance of real estate by the judgment debtor to his wife by way of gift. The Court upheld the setting aside of the conveyance because at the time of the conveyance the judgment debtor had his money "practically tied up in encumbered, unproductive and unsalable Florida real estate," and was "undergoing a struggle to keep [his] head[] above water." Id. at 465.

This case is more like Carluccio than Dammers. It cannot be said that Arik was struggling to keep his head above water in mid-1990. Rather, as in Carluccio, Arik had a profitable year the year prior to the transfer and did not become insolvent for another three to four years.

SASCO questions the trial court's reliance on two other old New Jersey cases that it claims are no longer good law, Fed. Reserve Bank of Philadelphia v. Godfrey, 120 N.J. Eq. 203 (E. & A. 1936), and Kearny Plumbing Supply Co. v. Gland, 105 N.J. Eq. 723 (Ch. 1930). In Fed. Reserve Bank of Philadelphia, supra, parents conveyed real estate to their daughter for nominal consideration. Over three years later, a judgment was obtained against the defendants on debt, the greater part of which had been incurred prior to the conveyance. 120 N.J. Eq. at 203. The conveyance did not render the defendants insolvent, but it was argued that because the defendants' assets had decreased the year prior to the conveyance, the defendants' intent was to hinder and delay creditors. Id. at 204. The defendants testified that their motivation in making the conveyance was concern over their failing health. Id. at 205. In addition, at the time of the conveyance the defendants had a positive net worth and testified that no creditors were "pushing" them. Ibid. The Court held that an unfavorable inference could not be drawn from the defendants' subsequent inability to pay their debts. Id. at 206. "What the debtor's financial condition was at the time of the conveyance is not to be judged by his inability to pay his debts two years later. No unfavorable inference . . . is to be drawn after such an elapse of time." Ibid. The Court noted that there was nothing to suggest that the defendants were aware at the time of the conveyance of the subsequent bank failure that led to them becoming judgment debtors. Ibid.

In Kearney Plumbing Supply Co., supra, 105 N.J. Eq. at 725-26, the court stated: "What the debtor's financial condition was at the time of the conveyance is not to be judged by his inability to pay his debts two years later."

We see no error in the trial court's reliance on these older cases for the correct proposition that fraudulent intent must exist at the time of the conveyance or transfer. See Turk v. Internal Revenue Serv., 127 F. Supp. 2d 1165, 1169 (D. Mont. 2000) ("A conveyance cannot become fraudulent at some point after its occurrence. It must be either fraudulent or non-fraudulent when executed."), aff'd, 69 Fed. Appx. 364 (9th Cir. 2003). While somewhat distinguishable, the holding in Fed. Reserve Bank lends support for the trial court's holding. As in that case, a decrease in Arik's net worth was not as significant as the fact that he had a positive net worth and was not being pursued by creditors. Moreover, based on the evidence adduced, there was no reason why Arik should have suspected that Burstyn was facing financial difficulty in mid-1990. In addition, Arik's purchase of the luxury automobile and the race horses in late 1990 was indicative that he did not feel financially strapped.

The record does not contain compelling, credible evidence to warrant the conclusion that Arik was aware of Gateway 195's declining prospects as of June 1990. While Midlantic may have expressed concern regarding the progress of the construction and leasing, Arik testified that as of June 1990 he was not having any difficulties with any other projects that he was involved with. In addition, it is undisputed that there were no problems with the Gateway 195 loan until 1993 or 1994, when anticipated tenants failed to materialize.

SASCO points to about fifty releases, or canceled sales contracts, between early 1988 through June 1990. These were primarily attributed to problems in obtaining financing from First Fidelity on the Tarnsfield project, as noted earlier. Aside from the fact that none of the releases appear to relate to the Gateway 195 project, there is nothing in the record to support the conclusion that Arik believed that these canceled contracts were indicative that Burstyn, and thus Arik, was facing financial difficulties. Inasmuch as none of the other projects Arik was involved in suffered similar cancellations, the problems appeared to be isolated to one project.

SASCO points to Firmani, supra, 332 N.J. Super. at 119-20, where a husband who owed $25,000 pursuant to a judgment of divorce, as a result of which he obtained sole ownership of the marital home, established a partnership and transferred the marital home to the partnership shortly before payment on the judgment came due. Under the partnership agreement, the husband held a one-percent interest as general partner, and a ninety-four-percent interest as a limited partner. Id. at 120. In consideration for the conveyance, the husband received one dollar from the partnership. Ibid.

We held that the conveyance of the marital home satisfied at least five of the badges of fraud set forth in N.J.S.A. 25:2-26, and vacated the conveyance. Id. at 122. We noted that since the husband was the sole general partner and the primary limited partner, the conveyance was made to an insider. Ibid. By continuing to use the marital home as a residence and a place of business, he retained possession and control after the conveyance. Ibid. Moreover, the husband knew that the $25,000 payment was coming due; therefore, he knew, or should have known, that absent voluntary payment, an enforcement action probably would be brought. Id. at 122-23. Finally, we found that the conveyance occurred shortly after a substantial debt had been incurred. Id. at 123.

While there are some similarities between Firmani and this case, in our view there are two important differences. The first is that, unlike Firmani where the husband, in effect, conveyed the marital residence to himself, Arik conveyed his interest to another person, albeit his wife, and retained no interest in the property. More importantly, unlike the husband in Firmani, Arik did not know in June 1990 that a specific debt was "coming due," particularly given that he was not the primary debtor on any of the loans, or even whether he would have to ever make good on the personal guaranties.

Thus, we conclude that the trial judge did not err in his analysis, based on comprehensive findings of fact, leading to a conclusion that Arik's transfer of his interest in the marital home did not constitute a fraudulent transfer under the NJFTA.


SASCO contends that it should have been permitted to attach the proceeds of the sale of 5 Canoe Brook to satisfy the default judgment by way of the imposition of a constructive trust. Defendants argue that resolution in their favor of the issues discussed above, forecloses any equitable claim for the imposition of a constructive trust. Because the trial court found no fraud under the UFTA, it saw no need to apply the remedy of tracing the assets of the sale of 5 Canoe Brook.

Under N.J.S.A. 25:2-29(b), "[i]f a creditor has obtained a judgment against the debtor, . . . the creditor, if the court so orders, may levy execution on the asset transferred or its proceeds." Since SASCO obtained a default judgment against Arik, it was permitted to seek such an order. Therefore, the failure to find that the transfer was fraudulent under the NJFTA did not necessarily foreclose SASCO from seeking to attach the proceeds. Even where the transfer is not declared fraudulent, there may be an equitable reason to attach the assets, for example unjust enrichment. "[A] constructive trust will be impressed in any case where to fail to do so will result in an unjust enrichment." D'Ippolito v. Castoro, 51 N.J. 584, 588 (1968).

Nevertheless, we affirm the trial court's decision on this point because SASCO failed to establish any other equitable basis for attaching the proceeds, beyond alleging a fraudulent transfer. SASCO argues that 5 Canoe Brook's 1992 deed of sale reflected that Arik and Rochelle were joint owners and that, as a result, it should be able to trace fifty-percent of the net proceeds of the sale, amounting to nearly $500,000 that was used to purchase 95 Minnisink Road and, in turn, 54 Western Drive. While it is true that the deed of sale listed both Arik and Rochelle as the sellers, evidence introduced at trial indicated that the net proceeds went into a separate account controlled solely by Rochelle. Since SASCO offers no evidence to dispute these proofs, its argument must be rejected. In addition, a spouse is permitted to transfer his or her interest in real estate as tenants by the entirety. N.J.S.A. 37:2-18. Consequently, SASCO's claim that Arik and Rochelle remained tenants by the entirety after Arik transferred his fifty-percent interest in 5 Canoe Brook is likewise rejected.


SASCO argues that the trial court erred in failing to find that Arik's labor, management services, and the good will he brought to Kira and Jaldars constituted a fraudulent transfer. Defendants assert that Arik's services were not an asset subject to transfer under the NJFTA, and that even if they were, Arik did not render valuable services to Kira and Jalders.

With respect to the services Arik provided to Kira and Jaldars, the trial court concluded that a creditor cannot attach the value of labor and services that a husband provides to his wife's business. In any event, the court found that little expertise or experience was required for the work Arik did for the two companies. Therefore, based on the proofs adduced at trial, the court found that good will, as a separate asset, could not be valued. Because the court found that the services Arik provided to Kira and Jaldars were not subject to creditors' attachment, it held that no constructive trust should be imposed.

"The general rule is that in the absence of any actual fraudulent intent, services rendered . . . for the benefit or improvement of [a] spouse's . . . business are not to be deemed fraudulent as to creditors." 37 Am. Jur. 2d, Fraudulent Conveyances and Transfers § 43 (2001) (footnote omitted). Thus, a husband may work for a bona fide business owned by his wife, and the assets of the business will remain beyond the reach of the husband's creditors. Benson v. Richardson, 537 N.W.2d 748, 761 (Iowa 1995).

The NJFTA defines asset as the "property of a debtor."

N.J.S.A. 25:2-21. Property, in turn, is defined as "anything that may be the subject of ownership." N.J.S.A. 25:2-22. Personal services cannot be included within the ambit of those definitions.

The trial court relied on Bressner v. Ambroziak, 379 F.3d 478, 483 (7th Cir. 2004). There, the debtor's wife started up a business, which the creditor alleged was a successor to one of her husband's businesses, given the fact that the wife had no experience in managing or operating a business. Id. at 480. The creditor maintained that the success of the successor company was due to the husband's involvement as the de facto manager of the business, in which, while not receiving a salary, he had access to the company's expense account. Id. at 481. The court rejected the creditor's argument, finding that the value of the performance of services to the company was not an asset transferable to the company under the UFTA. Id. at 483.

SASCO claims that Bressner is distinguishable because, unlike here, the business the wife started in that case was in a different line than the former business. We agree with SASCO that although there were some differences between the activities engaged in by the Burstyn partnerships and those engaged in by Kira and Jaldars, namely multi-housing or office developments versus custom-made single-family homes, those differences were not as clear-cut as in Bressner. However, we conclude that any such distinction is not as important as the fact that Arik never had control over the Burstyn partnerships, but merely had a minority position in an enterprise controlled by Burstyn. As such, Arik did not have a business to which Kira or Jaldars could be said to have been the alter ego. Therefore, if anything, the facts in this appeal provide stronger support for defendants' position that a spouse's services are not an asset transferable under the UFTA than the facts in Bressner.

Further support for the trial court's conclusion on this point may be found in other out-of-state case law. In Overocker v. Solie, 597 N.W.2d 579, 580-81 (Minn. Ct. App. 1999), the debtor and his wife started three restaurants with knowledge of the creditor's claim. The husband was active in the start-up and played a vital role in the day-to-day operations of the restaurants. Id. at 581. However, he was not paid for his services. Ibid. The court held that labor and services were not assets that could be transferred under the UFTA. Ibid. It stated: "It is not . . . a fraudulent transfer -- to donate services. And a judgment creditor does not acquire a property interest in the proceeds of a wife's business merely because the debtor husband worked for the business and as her agent." Id. at 582. See also Studds v. Fid. & Deposit Co. of Md., 267 F.2d 875, 876 (4th Cir.) ("[A] debtor, even though insolvent, has committed no fraud in law or in fact by giving his labor away . . . although the relationship of the debtor and his employer is that of husband and wife"), cert. denied, 361 U.S. 876, 80 S.Ct. 140, 4 L.Ed. 2d 114 (1959).

SASCO cites Benson, supra, 537 N.W.2d at 761, where the evidence demonstrated that a company set up by the husband and wife shortly after judgment was entered, which provided the husband with a monthly salary, was an effort to fraudulently allow the debtor husband to accumulate assets beyond the reach of the judgment-creditors. However, in this instance, Kira and Jaldars were set up before the default judgment was entered, and Arik was not paid a salary.

Similarly distinguishable is Fischer v. Brancato, 147 S.W.3d 794, 798 (Mo. Ct. App. 2004), another case relied on by SASCO, where the debtor and his wife set up two management companies under the dominion and control of the husband, which were used to convey to his wife all the income he received from his services as an orthopedic surgeon. After the creditor obtained judgment, the husband received no salary for his professional services, but rather the wages earned were paid to his wife, and then ultimately to him. Id. at 799-800. The court held that this was a fraudulent conveyance in an effort to render the husband judgment proof. Id. at 801. Here, however, there was no evidence that Arik used Kira and Jaldars as conduits to divert and funnel income to him so as to place such income beyond the reach of creditors.

SASCO also cites In re Blatstein, supra, 192 F.3d at 92, where the husband-debtor transferred all of his income in a corporation to his wife. However, income is clearly encompassed by the NJFTA's definition of asset and property. Here, there was no transfer of income by Arik, merely the provision of services.

However, "good will" would appear to come under the definitions of "asset" and "property" in the NJFTA, as noted above. Good will is a legally protectable interest that is an asset and an element of determining value. Dugan v. Dugan, 92 N.J. 423, 429-31 (1983). In addition, such items as customer lists and customer accounts are assets, the transfer of which are subject to the NJFTA. AYR Composition, Inc. v. Rosenberg, 261 N.J. Super. 495, 502-03 (App. Div. 1993). However, SASCO has failed to demonstrate in this instance the existence of good will as that term is legally defined. As the trial court concluded, the operation of Kira and Jaldars did not require any particular specialization or experience. Nor did SASCO identify what particular form of good will was transferred by Arik. Good will is essentially reputation that will probably generate future business. Dugan, supra, 92 N.J. at 429. SASCO did not introduce evidence of Arik's reputation in the real estate development field beyond his experience, or evidence that his presence, in particular, would generate future business.

Accordingly, we conclude that the trial court did not err in finding that Arik's provisions of personal services to Kira and Jaldars did not constitute a fraudulent transfer of an asset under the NJFTA.


SASCO maintains that it should be permitted to attach the assets of Kira and Jaldars because they are Arik's alter egos. This may be accomplished, according to SASCO, by a "reverse piercing" of the corporate veil to permit it to attach Kira's and Jaldars' assets, as well as any distributions from these entities to Rochelle or their children, to satisfy the default judgment. Defendants contend that SASCO's failure to succeed on the UFTA claim forecloses any reverse veil-piercing in this matter.

The trial court rejected the pierce-the-corporate-veil doctrine because Arik did not provide the funding for the businesses in question. In other words, Kira and Jaldars were not the continuation of a prior business under a new name. The court concluded that Rochelle put time into the projects and had sufficient expertise, despite Arik's involvement.

In the classic application of piercing the corporate veil, "a court disregards the existence of a corporation to make the corporation's individual principals and their personal assets liable for the debts of the corporation." In re Blatstein, supra, 192 F.3d at 100 (quoting In re Schuster, 132 B.R. 604, 607 (Bankr. D. Minn. 1991)). In a reverse piercing-the-corporate-veil context, "'assets of the corporate entity are used to satisfy the debts of a corporate insider so that the corporate entity and the individual will be considered one and the same.'" Ibid. (quoting In re Mass, 178 B.R. 626, 627 (M.D.Pa. 1995)). Only exceptional circumstances warrant the granting of this "unusual" remedy, such as preventing fraud and illegality. Ibid.

Our research has not disclosed a New Jersey case permitting the reverse piercing of the corporate veil. Regardless of whether our courts would, for the benefit of a creditor's remedy, extend the alter ego concept beyond its traditional context of holding the individual liable for the corporation, we do not believe this is an appropriate case for such an application. Kira and Jaldars were not formed out of the ashes of a company owned and controlled by Arik. Generally, the factors to be considered in piercing the corporate veil under the alter ego theory include: failure to observe corporate formalities; non-payment of dividends; insolvency; siphoning of corporate funds by the dominant shareholder; non-functioning of other officers or directors; absence of corporate records; and gross undercapitalization. In re Mass, supra, 178 B.R. at 629-30. None of these factors were present in this matter. Rather, SASCO's reverse piercing argument appears to be merely another method by which it seeks to attach Arik's assets, an issue we have already addressed.

SASCO contends that the "clear and convincing evidence at trial reveals that Kira and Jaldars have been controlled, led, manipulated, and managed by Arik since they were formed in 1995." We do not find such clear and convincing evidence, but rather find that the trial court's determination to the contrary is supported by substantial credible evidence.


SASCO contends that the trial court erred in failing to find defendants liable for fraud, independent of the NJFTA.

SASCO points to what it alleges is Arik's false testimony during his 1998 deposition in which he concealed his role in Kira and Jaldars, as well as his withholding of information regarding the amount of money held in Arik's and Rochelle's children's names, information about management contracts and expense accounts, and information regarding whether the couple had a will. SASCO claims that such fraudulent misrepresentation cost it significant additional legal and investigative fees over the course of several years.

Defendants argue that SASCO failed to establish a common law fraud claim based on Arik's alleged perjury at his 1998 deposition because the questions asked of him were vague and imprecise. In any event, they contend that SASCO did not rely on the testimony and suffered no damage as a result.

At trial, SASCO told the court that the common law fraud claim it was pursuing related to Arik's testifying falsely during the course of the litigation. SASCO alleges that the following testimony during Arik's 1998 deposition was false: that Arik had not worked since 1994; that at the time of the deposition he was not managing any real estate; that Arik's name was not listed on any bank accounts for his children's benefit; that he had no joint bank accounts with his wife; that Arik failed to remember the name of one of his wife's companies, Kira; that he had no access or authority with respect to any credit cards; that there was no agreement between him and any family member for him to receive reimbursements; that neither he nor Rochelle owned any life insurance; that he was not a beneficiary under Rochelle's will; and the extent of Rochelle's work activities. SASCO claims that Arik contradicted this deposition testimony at trial.

With respect to the common law fraud claim, the trial court stated:

I really find that your not having prevailed that does not afford you the cause of action in that if it was proven that what they told you was false[,] the fact that he misled you as to there being attachable assets . . . you can get your attorneys' fees.

But I don't see a basis that you're not being a successful plaintiff that . . . your discovery that . . . I could have spent less on discovery. And I've never seen a cause of action for that . . . . . . . .

So, yes, . . . I have read his responses, his curt responses, or his unwillingness . . . to admit something and maybe not in admitting it in . . . as expansive terms as you may argue somebody should[. But] I don't think it gives you any separate cause of action unless you prevailed that there were assets that were attachable.

To establish a claim of common law fraud or fraudulent misrepresentation, a plaintiff must prove a material misrepresentation of a presently existing or past fact, with knowledge of its falsity and with the intention that the other person rely on it, and that there was in fact both reasonable reliance and resulting damages. Banco Popular N. Am. v. Gandi, 184 N.J. 161, 172-73 (2005); Schillaci v. First Fid. Bank, 311 N.J. Super. 396, 403 (App. Div. 1998). Fraud must be proven by clear and convincing evidence. Barsotti v. Merced, 346 N.J. Super. 504, 520 (App. Div. 2002).

We have found no case in New Jersey holding that a discovery violation constitutes common law fraud. Cf. Baxt v. Liloia, 155 N.J. 190, 210 (1998) (attorney fees and costs may be awarded where attorney fails to respond candidly to discovery requests). Moreover, even assuming the viability of such a cause of action in this context, SASCO failed to demonstrate that it reasonably relied on the alleged misrepresentations or suffered damages as a result. SASCO failed to show by clear and convincing evidence how it relied on Arik's deposition testimony to its detriment. If such testimony can be considered fraud, then conceivably any inconsistency between a witness's trial and deposition testimony could be subject to a claim of fraud. The evidentiary rules envision such inconsistencies and leave the effect of same to the trier of fact. Any inconsistency between deposition and trial testimony is a matter of credibility that can be brought out on cross-examination. Cf. Kimmel v. Dayrit, 301 N.J. Super. 334, 357-58 (App. Div. 1997) (in rejecting motion for new trial on ground that experts' trial testimony contradicted their deposition testimony, court noted that opposing counsel took every opportunity to cross-examine and argue in summation with respect to such inconsistencies), modified on other grounds, 154 N.J. 337 (1998). SASCO offers no reason why such a procedure was not sufficient in this case. In addition, SASCO fails to offer specific support for its claim that it suffered "significant additional expense on legal and investigative fees" as a result of the alleged misrepresentations. To the extent that SASCO argues that the trial court should have invoked the "false in one, false in all" maxim, utilization of that rule is a matter of the discretion of the trier of fact in evaluating the credibility of a witness, Capell v. Capell, 358 N.J. Super. 107, 111 n.1 (App. Div.), certif. denied, 177 N.J. 220 (2003), not part of a fraudulent misrepresentation claim.

Finally, SASCO failed to avail itself of the option of moving to sanction defendants for these alleged discovery violations. A trial court may impose sanctions for discovery violations, such as withholding relevant documents, by way of an award of counsel fees and costs. See Abtrax Pharm., Inc. v. Elkins-Sinn, Inc., 139 N.J. 499, 522 (1995). Alternatively, SASCO could have contacted the Prosecutor's Office to advance a prosecution of false swearing based on the inconsistencies. See In re Krieger, 48 N.J. 186 (1966).

SASCO further contends that to the extent that Rochelle also testified untruthfully at her deposition, it has made out claims of civil conspiracy and bad faith defense of litigation. The trial court appeared to reject at least the latter claim by denying SASCO attorney's fees. "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.'" Banco Popular N. Am., supra, 184 N.J. at 177 (citations omitted). However, SASCO offers no evidence of an agreement between Arik and Rochelle to testify falsely at their depositions.

SASCO's bad-faith-defense-of-litigation claim appears to be an allegation that defendants violated the Frivolous Claims Act, N.J.S.A. 2A:15-59.1, by reason of their deposition testimony. However, recovery of attorney's fees under that statute is made by application to the trial court, N.J.S.A. 2A:15-59.1(c), not by the pleadings. In addition, the terms of the statute apply only to complaints, defenses, counterclaims, and cross-claims, not to pre-trial discovery. McKeown-Brand v. Trump Castle Hotel & Casino, 132 N.J. 546, 562 (1993). Finally, and most importantly, in order to recover under the statute, the applicant must be the prevailing party, N.J.S.A. 2A:15-59.1(a)(1), which SASCO clearly was not in this matter.

The trial court did not err in holding that the answers given by Arik in his 1998 deposition did not constitute common law fraud, civil conspiracy or bad faith defense of litigation.


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