On appeal from the Superior Court of New Jersey, Law Division, Essex County, Indictment No. L-4392-98.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
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 The Law Division granted the motion, and we affirmed in an unpublished opinion.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 COURT ERRED AS A MATTER OF LAW BY HOLDING THAT THE DEBTOR DID NOT AND COULD NOT ACT WITH FRAUDULENT INTENT UNDER N.J.S.A. 25:2-25a AND 25:2-26 UNLESS THE APPLICABLE 1990 TRANSFER FOR $1.00 OCCURRED AT A TIME WHEN THE DEBTOR WAS INSOLVENT OR THE TRANSFER RENDERED HIM INSOLVENT.
THE COURT ERRED AS A MATTER OF LAW BY FAILING TO FIND FRAUDULENT INTENT BASED UPON THE PRESENCE OF SEVERAL BADGES OF FRAUD UNDER N.J.S.A. 25:2-26.
AFTER FAILING TO FIND THAT THE 1990 TRANSFER OF THE LIVINGSTON PROPERTY WAS FRAUDULENT, THE COURT ERRED AS A MATTER OF LAW BY FAILING TO ATTACH PROCEEDS FROM THE 1992 SALE OF THE PROPERTY AS NEEDED TO COLLECT PAYMENT UNDER SASCO'S JUDGMENT.
THE COURT ERRED AS A MATTER OF LAW BY FAILING TO FIND THAT THE DEBTOR'S DONATION OF VALUABLE MANAGEMENT SERVICES, LABOR, AND GOOD WILL CONSTITUTED FRAUDULENT TRANSFERS AND RELATED ACTIONABLE CONDUCT.
THE COURT ERRED AS A MATTER OF LAW BY FAILING TO FIND THAT THE DEFENDANTS WERE GUILTY OF INDISPUTABLE FRAUDULENT MISREPRESENTATIONS AND OTHER FRAUDULENT CONDUCT, CIVIL CONSPIRACY, FRAUD IN THE LITIGATION, AND BAD FAITH ACTIONABLE CONDUCT.
THE COURT ERRED AS A MATTER OF LAW AND FACT BY FAILING TO FIND THAT THE BUSINESSES OF KIRA, JALDARS AND ROCHELLE ZUDKEWICH SINCE 1993 HAVE SERVED AS THE ALTER EGO OF ARIK ZUDKEWICH AND ENTITLE PLAINTIFF TO PIERCE AND/OR REVERSE PIERCE THE CORPORATE VEIL AND TO ATTACH THEIR EARNINGS, ASSETS, AND PROFITS TO SATISFY THE 1997 JUDGMENT.
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 ...