November 5, 2007
JOHN W. FINK, PLAINTIFF-APPELLANT,
ADVANCED LOGIC SYSTEMS, INC., PROGRESSIVE DEVELOPMENT SYSTEMS, INC., ADVANCED FINANCIAL SOLUTIONS GROUP, INC., KAYDON STANZIONE, DEFENDANTS, AND AFFLINK, INC. DEFENDANT-RESPONDENT.
On appeal from the Superior Court of New Jersey, Law Division, Gloucester County, L-0494-03.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued October 15, 2007
Before Judges Weissbard, S.L. Reisner and Baxter.
Plaintiff John W. Fink appeals from a trial court order dated September 9, 2005, granting summary judgment dismissing his complaint against defendant AFFLINK, Inc. We affirm.
The dispute in this case revolves around computer software owned by Progressive Development Systems (PDS). PDS produced and owned two software packages called Level 5 and Level 5 Pro. The software programs allowed PDS customers to electronically track product orders, inventory, shipping, back orders, and other commercial transactions. In 2000, PDS was "running cash negative" at the time and was thus "looking for additional people to put money in [PDS] until they . . . would be self-sufficient."
Advanced Logic Systems, Inc. (ALSI) had acquired PDS as a wholly owned subsidiary. ALSI also had numerous outstanding debts, and sought transactions "to reduce some of these obligations." Accordingly, ALSI retained Fink as an "outside accountant/financial consultant" to investigate PDS's financial information and prepare the subsidiary for presentation to potential investors.*fn1
Fink never had an employment or consulting contract with ALSI, but he continued working there without a written contract until February 2001. He submitted invoices for his work and was paid on a per diem basis, though he was asked by his ALSI contact, Robert Brown, to "hold off on receiving payment in anticipation that a full-time job would materialize." Fink was told this delayed payment was caused by a shortage of cash, but that the company expected money to come in, with which they would pay him.
In March 2001, Fink invested in ALSI, loaning the company $20,000. On April 12, 2001, he loaned ALSI an additional $250,000, and a loan agreement, line of credit note and security agreement were signed. "Sometime in or around August 2001," Fink reached an agreement with Kaydon Stanzione, the CEO and Chairman of ALSI, PDS and AFSG, "to increase the April 12, 2001 loan amount to $500,000." According to Fink, he ultimately invested a net amount of $509,000 in ALSI as well $330,000 in unpaid time and expenses. UCC financing statements for Fink's loan were filed on or about December 26, 2001.
Five lienholders had secured interests in PDS. Although Fink's loan and security agreements called for his lien to have first priority, he conceded that this was not the case. In fact, PDS's lienholders were, in priority order, Commerce Bank ($70,000), Stevens & Lee ($600,000), Fink, Howard Rubin, and KSR Associates. Thus, while Fink had a UCC lien on PDS's assets, he did not have priority as a creditor.
Against this backdrop, we turn to the AFFLINK transaction. AFFLINK, a customer of PDS, based in Tuscaloosa, Alabama, expressed interest in having access to PDS's Level Five Pro software. At the time of PDS's negotiations with AFFLINK regarding the sale or license of the software, Level Five Pro was licensed to thirty to fifty clients in the paper industry. Fink, who had "over fifteen years [sic] experience dealing with acquisitions, mergers and buys and these kinds of assets," offered Stanzione his services to assist in the AFFLINK negotiations. "[F]rom about March of 2002 to about the beginning of July of 2002," Fink was the lead negotiator on behalf of ALSI and PDS and had been instructed by Stanzione "to try to push [a] licensing arrangement" over an outright sale to AFFLINK. Fink's impression was that Stanzione preferred a licensing arrangement because he "wanted to hold onto the software so he had the bragging rights."
Fink's loan to ALSI was due on April 12, 2002. At the end of April 2002, Fink gave ALSI notice of its default on his loan. Fink testified at his deposition that Stanzione had "already agreed to pay" him "$150,000 in cash, plus a percentage of any accounts receivable that were also [sold], plus some other assets" and Fink "felt if I did not get what [he and Stanzione] had agreed to, that I had a right to say I'm not giving my release" on his lien and the transaction with AFFLINK would be blocked.
On May 8, 2002, AFFLINK emailed its purchase offer to Fink. Three days later, on May 11, 2002, Fink forwarded the email to Stanzione and other ALSI executives, stating that "[t]he offer is woefully inadequate in my opinion. . . . It is my recommendation that we turn down this offer and suspend further talks."
On June 28, 2002, Fink wrote to Stanzione and other ALSI executives with an update on AFFLINK's due diligence review. He stated that Chip Shields, AFFLINK's vice president of finance, told him that AFFLINK wanted the software and not the perpetual license. [Shields] argued that Afflink needs to protect its investment in the business that they plan to build, which will rest squarely on the software. In particular he expressed concern that a third party could some how [sic] obtain the software from [ALSI/PDS] and, in some way, cause Afflink a problem over the issue of rights . . . I responded that this requirement could make the deal problematic and we discussed alternatives. . . . I believe, if they are serious about doing the deal, this issue can easily be addressed by . . . the contract specifying the rights guaranteed under the perpetual license arrangement as well as Afflink's right to modify, augment and delete code without infringing/abrogating their rights under the contract to the code and use of the software.
A non-binding letter of intent was signed by the parties on July 9, 2002. That letter provided that the software would be sold to AFFLINK for a fee of $500,000, that an additional fee would be paid to purchase the accounts receivable, and that an earn-out would exist based upon the revenue from the software. After the letter of intent was completed, Fink claimed he no longer acted as lead negotiator for ALSI in its dealings with AFFLINK, yet documents in the record suggest he continued in this role.
In preparation for the sale to be closed, AFFLINK performed due diligence and raised several concerns. First, AFFLINK was concerned about inheriting PDS's maintenance contracts with third parties, and the licensing fee agreements. Second, there was concern about the collectability of PDS's accounts receivable. Finally, AFFLINK learned that some PDS customers were in the pornography business, and AFFLINK did not want to service those customers.
On July 16, 2002, Shields emailed a summary of the due diligence review to others at AFFLINK. In this email he stated that PDS's "Accounts Receivable was not in good order when we arrived, is still being worked [sic]. The aging has not been kept current, requiring PDS'[s] manual work in getting it clean. We have requested additional detail to support what is there, write off what is uncollectible."
Fink believed that he told AFFLINK that he was a creditor of ALSI while AFFLINK was doing its due diligence after signing the letter of intent and requested a list of ALSI and PDS's lien holders. On July 18, 2002, he sent Shields an email to which a "list of PD[S's] secured creditors" was attached. There is no dispute that at some point during the negotiation process, Fink became concerned that his claim would not be paid as part of the deal, and he sent notice to the parties that he would not release his UCC lien on the debtors' assets.
Eventually, either because Fink refused to release his UCC lien on the assets, or because AFFLINK did not want to take over all of PDS' assets and obligations including some of its customers who were in the pornography business, the sale deal fell apart. However, AFFLINK and PDS were later able to agree on a non-exclusive license arrangement.
Under the license agreement, AFFLINK did not assume responsibility for the maintenance contracts and PDS retained its accounts receivable. Ownership of the software remained with PDS which continued to have the rights to use that software in any industry not covered by the three-year non-competition clause of the agreement. AFFLINK agreed to pay approximately $430,000 for the license and $25,000 for the lease of equipment, for a total cost of $455,000. This money was sent to ALSI/PDS via wire transfer.
When ALSI/PDS did not repay his loan, Fink sued them. He also sued AFFLINK, on the theory that the non-exclusive lease really amounted to a sale of all of PDS' assets and was a fraudulent transfer of those assets, and that AFFLINK had conspired with ALSI/PDS to place their corporate assets beyond Fink's reach and to leave the debtors without sufficient assets to pay Fink's claim.
Prior to the filing of summary judgment motions in this lawsuit, the trial judge had set deadlines for the filing of expert reports. Fink did not file an expert report, nor did he request additional time to file an expert report in the course of responding to defendants' summary judgment motions. Judge McDonnell initially granted AFFLINK summary judgment on August 27, 2004. She later vacated that order and adjourned the motion until October 8, 2004, at which time she again granted the motion in an oral opinion placed on the record. After filing and then failing to prosecute an interlocutory appeal, Fink moved before the trial court for reconsideration of the order dismissing his claim against AFFLINK. The motion was granted on June 17, 2005, thus giving Fink additional time to develop his claim against AFFLINK. AFFLINK re-filed its summary judgment motion on July 21, 2005. Again, at the argument of this motion, Fink's counsel did not indicate that he needed more time to file an expert report. On September 9, 2005, Judge McDonnell granted the motion.
In an oral opinion, Judge McDonnell concluded that Fink had not proven his claims against AFFLINK. Because there was no expert or other testimony regarding the valuation of PDS's software, Judge McDonnell stated she could not make the leap that plaintiff wants to make from the documents . . . . There is no expert to explain it to a jury, there is nothing inherently illegal or per se illegal in doing a due diligence after the letter of intent and determining that perhaps PDS was . . . just too much to take over and that the transaction should be limited to a licensing agreement rather than an outright asset sale.
I'm satisfied that . . . despite that [Fink] has the right to assert the lien . . . that the monies that were generated from the transaction with AFFLINK were subject to his lien when they came into the possession of ALSI/PDS and he had rights to pursue that against those entities and that these are not placed beyond his reach and nor by any action of AFFLINK.
There's no evidence by way of expert report that the transaction was other than reasonable value . . . . There's no evidence that AFFLINK received a benefit beyond that for which it paid or that it actually had been a willful or wanton disregard for Fink's right.
In addition, she granted summary judgment to AFFLINK with respect to the conspiracy claim. She found "that the purpose of AFFLINK was to acquire the rights either through ownership or through licensing of the software and the source code for their own proper business use and not for the purpose of defrauding or avoiding [Fink's lien]."
In granting summary judgment to AFFLINK, Judge McDonnell relied both on her conclusions at this hearing and those from her earlier grant of summary judgment on October 8, 2004. At the October hearing, she had recounted the history of the parties' dealings and reviewed at length the email correspondence between them. She ruled that under the facts presented that the licensing of the software to Afflink was not a fraudulent transfer and that the counts of fraudulent transfer should be dismissed . . . because . . . the software was not placed out of the reach of the PDS creditors and that the non-exclusive license agreement was exactly that; that PDS still had the ability to go on with its work, to market, to conduct this transaction and take the money and to build up again. They retained the right to collect the receivables and certainly as a creditor, . . . Fink had a right to monitor and obtain from PDS or ALSI whatever funds were appropriate directly to him.
But his failure to do that or his failure to protect himself with respect to PDS and ALSI under the facts and circumstances presented, do not make the transaction a fraudulent one as to Afflink, which appears, frankly, to have been a bonafide third-party who paid a reasonable consideration for the assets that were licensed; that there is no prohibition against a licensing agreement even when the property that's licensed is subject to a security interest. That does not make it a per se fraudulent transfer.
I'm satisfied that there's no evidence of an intent to defraud, hinder, or delay on the part of Afflink. . . .
And again, there's no evidence to suggest that Afflink provided less than fair value or engaged in bad faith during the transaction. The plaintiff has failed to demonstrate a material representation by Afflink of a present existing or past fact; knowledge or belief of the defendant by its falsity, or an intent that the plaintiff rely upon this false information or information resulting to damage to plaintiff. . . . With respect to [Fink's claim of civil conspiracy], . . .
Now, the plaintiff must show that there is one plan of which all participants are aware. In this case, the plaintiff has not produced such evidence. . . . The fact that [the licensing agreement] results in a substantial payment of money by Afflink to either PDS or ALSI or Stanzione, and that none of the money gets to Fink is not . . . any of Afflink's responsibility or a fault or evidence of any kind of an agreement to subvert or avoid the security interest of Fink.
While the trial judge dismissed Fink's claims against AFFLINK, she granted Fink summary judgment against ALSI and the other debtors, and he subsequently settled with them for one million dollars. Nonetheless, he continues to contend that he should also be able to collect the debt from the debtors' customer, AFFLINK.
Our review of the trial court's grant of summary judgment is de novo, using the same Brill standard that the trial court is mandated to use. See Prudential Prop. & Cas. Ins. Co. v. Boylan, 307 N.J. Super. 162, 167 (App. Div.), certif. denied, 154 N.J. 608 (1998); Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995). Employing that standard, we agree with the trial judge that there were no material facts in dispute and she properly granted AFFLINK's motion.
We begin by reviewing the law concerning fraudulent transfers. The Uniform Fraudulent Transfer Act, codified in New Jersey at N.J.S.A. 25:2-20 to -34, provides that
[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:
a. With actual intent to hinder, delay, or defraud any creditor of the debtor[.] [N.J.S.A. 25:2-25a.]
Determination of whether a conveyance is fraudulent is fact-specific and must be resolved on a case-by-case basis. Gilchinsky v. Nat'l Westminster Bank N.J., 159 N.J. 463, 476 (1999). The party seeking to prove that the transaction was accomplished to defraud a creditor bears the burden of proving actual intent to defraud, delay or hinder the creditor. Ibid.
Two inquiries must be made to determine whether a transfer was fraudulent. Id. at 475-76. The first inquiry "is whether the debtor [or person making the conveyance] had put some asset beyond the reach of creditors which would have been available to them at some point in time but for the conveyance." Id. at 475 (quotations and citations omitted). There are two parts to this inquiry: first, whether the asset was put beyond the creditor's reach and second, whether the creditor would have received the asset but for the conveyance. We begin by addressing the second inquiry, because it is abundantly clear that Fink's evidentiary submissions to the trial court did not satisfy this standard.
Fink failed to establish that but for the conveyance to AFFLINK, he would have received PDS's assets. There is no dispute that by the time the transaction occurred, Fink knew he would be in third position among PDS's lienholders, that he understood that the two entities superior to him were to be fully reimbursed before he was paid, and that the combined debt owed to those lienholders was approximately $649,253.81. Thus, Fink would not have received any of the $500,000 payment preliminarily agreed to in the parties' letter of intent, as the funds would have been exhausted by the two superior lienholders.
Fink contends, however, that "Stevens & Lee had waived its legal right to be paid in full and agreed to a lesser amount . . . for a total payment from the Afflink proceeds of only $99,962.50." He thus contends that he would indeed have received some of the $500,000 sale proceeds. The short answer is that Fink does not cite to any legally competent evidence to support that claim. "Bare conclusions in the pleadings, without factual support in tendered affidavits, will not defeat a meritorious application for summary judgment." U.S. Pipe & Foundry Co., 67 N.J. Super. 384, 399-400 (App. Div. 1961). The only support Fink offers for his claim is a statement in a deposition that ALSI/PDS had authorized a payment of $99,962.50 to Stevens & Lee. The witness does not state, however, that Stevens & Lee had agreed that this would satisfy its lien or had waived its right to pursue the full lien amount. Fink's unsupported contentions did not create a material fact dispute so as to defeat AFFLINK's motion for summary judgment.
Fink likewise failed to submit evidence demonstrating that PDS's assets were placed out of his reach. Though Fink claims that the license agreement left PDS as no more than a shell, it received a cash infusion of $455,000 from its deal with AFFLINK, and thus had cash assets which were within the reach of its creditors. See Barsotti v Merced, 346 N.J. Super. 504, 516-17 (App. Div. 2002). Judge McDonnell awarded Fink summary judgment of $484,000 against ALSI, PDS, ASFG and Stanzione at the same hearing at which she granted summary judgment to AFFLINK. Moreover, Fink ultimately settled with the ALSI defendants for $1,000,000. As discussed earlier, to the extent he was unable to collect the debt, it was because his claim was inferior to those of other creditors.
Fink likewise failed to produce evidence that "the debtor transferred property with an intent to defraud, delay or hinder the creditor." Gilchinsky, supra, 159 N.J. at 476. The eleven statutory factors used to determine fraudulent intent 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. 25:2-26a to -26k.]
Fink relies principally on factors e and h, but his evidentiary support for his claims is inadequate. Fink contends that the transfer consisted of substantially all of PDS's assets. N.J.S.A. 25:2-26e. However, PDS assets were not sold to AFFLINK; rather a non-exclusive license was purchased and an industry-specific and customer-specific non-compete agreement was executed for a definite period of time. Fink's contention that the non-exclusive license amounted to a transfer of ownership is inconsistent with Federal copyright law. Such "a nonexclusive license does not amount to a 'transfer' of ownership." MacLean Assocs., Inc. v. Wm. M. Mercer-Meidinger-Hansen, Inc., 952 F.2d 769, 778 (3d Cir. 1991) (citing The Copyright Act of 1976, 17 U.S.C.A. § 101). "Since a nonexclusive license does not transfer ownership of the copyright from the licensor to the licensee, the licensor can still bring suit for copyright infringement if the licensee's use goes beyond the scope of the nonexclusive license." Id. at 779. Further, there is no dispute that the license only gave AFFLINK exclusive use of the software in serving certain specified industries and for a limited time period.
Moreover, if Fink intended to rely on the license agreement to prove a fraudulent transfer, he needed to present expert testimony on the issue. Without expert testimony, lay persons unfamiliar with the software industry could not intelligently judge a dispute over the financial significance of a non-exclusive software license, that is, whether PDS could make additional commercial use of the software after granting AFFLINK a non-exclusive license. See Hopkins v. Fox & Lazo Realtors, 132 N.J. 426, 450 (1993). Further, as noted earlier, Fink also failed to address the fact that, as a result of the license, PDS gained $455,000 in cash assets.
On a related point, Fink contends that ASLI/PDS did not receive reasonably equivalent compensation for the software under the licensing agreement, as compared to that which they would have received under the asset sale. N.J.S.A. 25:2-26h. "In general, expert testimony is required when 'a subject is so esoteric that jurors of common judgment and experience cannot form a valid conclusion'." Hopkins, supra, 132 N.J. at 450 (quoting Wyatt by Caldwell v. Wyatt, 217 N.J. Super. 580 (App. Div. 1987)). We agree with Judge McDonnell that the lack of expert testimony on this issue was fatal to Fink's claim. Absent proof that AFFLINK failed to pay reasonable consideration in the transaction, Fink could not prove a claim based on subsection h. We agree that the valuation of PDS' business and the valuation of the software license involved complex financial and technical issues that lay jurors could not decide without expert testimony. See ibid.; Torres v. Schripps, Inc., 342 N.J. Super. 419, 430 (App. Div. 2001). None was offered, and Fink did not ask the trial judge for more time to file a report. Moreover, Fink could not act as his own expert without giving defendant notice that he intended to do so and providing an expert report as required by the trial court's management orders.
Fink's remaining appellate contentions do not warrant discussion in a written opinion, R. 2:11-3(e)(1)(E), beyond noting that absent proof that the underlying transfer to AFFLINK was fraudulent, Fink also could not prove that AFFLINK conspired to engage in a fraudulent transfer. See Bd. of Educ. of Asbury Park v. Hoek, 66 N.J. Super. 231, 241 (App. Div. 1961)("A conspiracy cannot be the subject of a civil action unless something is done which, without the conspiracy, would give a right of action."), rev'd on other grounds, 38 N.J. 213 (1962).