On appeal from the Superior Court of New Jersey, Chancery Division, Sussex County, Docket No. P-298-06.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Before Judges Carchman, Lihotz and Ashrafi.
Following a six-day bench trial, the trial judge dismissed plaintiff John Simon's complaint alleging, among other claims, that decedent, David B. Madden, made a series of fraudulent transactions to his wife, defendant Constance Kneule-Madden, resulting in an insolvent estate and depriving plaintiff of the ability to collect on an extant judgment. The judge concluded that plaintiff failed to sustain his burden of proof. We agree and affirm.
These are the facts adduced at trial. Plaintiff and decedent were close friends for many years. Throughout the course of their friendship, plaintiff entered into numerous business transactions with decedent. At one point, decedent borrowed large amounts of money from plaintiff to develop insurance programs associated with Pemaquid Underwriting Brokerage, Inc. (Pemaquid), an entity in which decedent was President and sole shareholder. Pemaquid was a broker, underwriter and managing agent for various insurance policies.
To memorialize the loan transactions and establish evidence of the debt, decedent executed an April 14, 2003 promissory note. Under the terms of the note, decedent agreed to pay $639,088 plus three-percent interest to plaintiff. The first payment under the promissory note was due on January 15, 2004, and payments were to be made on the fifteenth day of each month, for sixty months thereafter.
In February 2000, three years prior to the execution of the note, decedent was diagnosed with prostate cancer, and he underwent numerous medical treatments for his illness, including chemotherapy and different drug therapies. Decedent and his attorney, Robert Gaynor, began to develop an estate plan.
Decedent met with Gaynor for the first time on November 9, 2000, and Gaynor advised decedent that "for purposes of maximizing the estate planning, [they] needed to take assets out of [decedent's] name, out of joint name and put assets into [defendant]'s name, so that the two of them would be equal in terms of the bottom line to their estates." Gaynor recommended that the "assets that are jointly held or the assets that are in [decedent]'s name should be transferred, by reason of the unlimited marital deduction there would be no gift tax, . . . into [defendant]'s name." One of Gaynor's "main goals" in planning decedent's estate was to avoid a situation where one spouse dies with insufficient assets in the spouse's name to fund a credit shelter trust.
As of November 9, 2000, decedent valued the Pemaquid stock at $10 million. On March 10, 2003, in another meeting with Gaynor, decedent valued the Pemaquid stock at $2-3 million. However, Gaynor stated that, at that meeting, decedent noted that "Pemaquid has no value right now, but it will be worth somewhere between two and three million." Decedent also acknowledged, at that meeting, that he owed approximately $600,000 to plaintiff, but stated that the debt would be paid in full when Pemaquid was sold. In fact, at a May 15, 2003 meeting with Gaynor, decedent represented that Pemaquid was worth $3 million. According to Gaynor, he was retained specifically "to protect [decedent and defendant's] kids from having to pay excess unnecessary federal estate tax."
Decedent executed his Last Will and Testament (the Will) on March 13, 2003. The Will directed that all debts "shall be paid or satisfied by my Executrix from my estate . . . ." Decedent also devised to defendant all tangible personal property, interests in real property and the "rest residue and remainder" of decedent's estate. Plaintiff died on October 29, 2003, and his estate was admitted to probate on November 12, 2003. Defendant was appointed executrix of decedent's estate.
At the time decedent was diagnosed with cancer, decedent's assets included, among other things: a commercial office building in Randolph, New Jersey (the Randolph property), acquired on December 22, 1992; residential property in Hopatcong, New Jersey (the Hopatcong property), which was acquired on November 30, 1999, and used as a marital residence; residential property in Naples, Florida; Pemaquid stock that decedent valued in an estate planning session as worth $3 million; and various bank accounts, including a Valley National Bank (Valley) savings account (the savings account), which, as of May 30, 2003, had a balance of $110,495.13*fn1 . All of the real property was held by the parties as tenants by the entirety.
On June 11, 2003, decedent withdrew $102,500 from the savings account and deposited it into a joint checking account at Valley (the checking account). This money was apparently used to pay household bills and decedent's medical bills.
Decedent also transferred his interest as a tenant by the entirety in the Randolph property and the Hopatcong property to defendant on March 18, 2003.
In addition to these assets, decedent had an interest in two leases. Two pre-death transfers of these leases form the focal point of this appeal. These are the relevant facts. On December 15, 1992, decedent, as a tenant, entered into a commercial lease with Anthony and Angelina Maskello (the Roxbury lease or 1992 lease) for commercial property located at 247 Route 10, Roxbury, New Jersey. The lease was for a term of twenty-one years, and a total rental of $857,692. Paragraph five of the lease provides that "The Tenant shall not, without the written consent of the Landlord, assign or mortgage this Lease, but shall have the right to sublease." Paragraph 20 of the lease stated, however, that "if this lease or the estate of the Tenant hereunder shall pass to another . . . the Landlord may, if the Landlord so elects, at any time thereafter, terminate the lease . . . ." Paragraph 25 of the lease also stated that "[n]o additions, changes or modifications, renewals or extensions hereof, shall be binding unless reduced to writing and signed by the Landlord and the Tenant."
One day after executing the Roxbury lease, decedent entered into a sublease agreement with Boston Chicken, Inc. for the Roxbury property (Boston Chicken sublease). The sublease, as the Roxbury lease, was in decedent's name only. As of 2007, Boston Chicken was paying approximately $85,000 a year to decedent, of which $44,704 was paid to the Maskellos; the remaining approximate $40,000 was retained by the decedent.
On May 26, 2000, the sublease was amended due to a change in ownership at Boston Chicken, Inc.; Golden Restaurant Operations, Inc. (Golden) became the sublessee, and the restaurant name was changed to "Boston Market." The term of this sublease was five years. Prior to the execution of the amendment of the sublease, decedent wrote to the Maskellos and advised that he had successfully obtained a two-percent increase in rent from Boston Market's new owners. Upon decedent's request, the Maskellos signed the letter as a memorialization that the rent for the Roxbury lease would also increase by two-percent.
On July 16, 2003, decedent executed a document assigning his interest and rights in the Boston Chicken sublease to defendant for one dollar. On September 22, 2003, decedent's attorney, William Fisher, wrote to Golden seeking its consent to such a transfer. At this time, Golden had become Boston Market Corp., an entity owned by McDonald's Corp. McDonald's consented to decedent's transfer in a November 11, 2003 letter.
Defendant and Angelina Maskello were close, personal friends. Angelina represented to defendant that, following decedent's death, the Roxbury lease could be terminated. Although the terms of the lease did not provide for a termination on decedent's death, defendant understood that to be the case, so she and Angelina entered into a month-to-month tenancy, which was not memorialized in a written agreement.
Angelina Maskello died in January 2006, and her son, Anthony Maskello, Jr., assumed responsibility for handling the month-to-month lease with defendant. Anthony believed, after discussing with his attorney, that because decedent had died, he was free to terminate the lease and enter into a new lease with another party. However, Anthony also iterated at trial that defendant attempted to have him sign a document stating that Angelina had terminated the lease; Anthony did not sign the document because he had no knowledge of those particular facts. He stated that he had "no reason to know one way or the other because I had never been involved in it until after my mom died[.]"
Ultimately, Anthony and defendant entered into a new lease, dated June 1, 2007 (the June 2007 lease). The June 2007 lease contained new and materially different terms than the original lease. For example, the term of the June 2007 lease was for seven years, ending in May 2014, while the original lease ended in December 2013*fn2 . Furthermore, the rent increases in the June 2007 lease were greater than the rent increases under the 1993 lease. Paragraph 30 of the June 2007 lease also stated that the document "represents the only lease in effect."
When asked at trial whether he considered the Roxbury lease to be in-effect during the period between decedent's death and the June 2007 lease, Anthony stated that "[a]s far I knew, I kept getting checks." During this time, defendant used the money received from the Boston Chicken sublease to pay the rent on the June 2007 lease and "used the other rent for [her] own use and purposes[,]" including $170,000 to litigate a claim against a tenant in the Randolph building. She did not pay anything on account of the outstanding debt owed to plaintiff.
At the time of trial, defendant managed the Randolph property, was responsible for its approximately $1 million mortgage and "incurr[ed] a lot of debt on the building over the past five years . . . ." Defendant sold the Naples property for a loss to pay off its mortgage.
Also following decedent's death, defendant attempted to manage Pemaquid, but she acknowledged that she "didn't have an understanding of how to run the company." The departure of two key managers -- Jeffrey Packard, President of Pemaquid, and Sharon Carlson, the sales director -- also resulted in a loss of Pemaquid's business. As a result, on March 22, 2004, Pemaquid filed for bankruptcy. At various times Pemaquid's assets were valued between $1 million and $10 million, and Pemaquid had earned approximately $6.2 million in gross income in 2002, approximately $1.2 million in 2003 and, as of the time of filing for bankruptcy in 2004, had earned $29,347. Pemaquid's debts were valued at approximately $20 million, $18 million of which related to a claim by Legion Insurance Company (Legion), which the bankruptcy petition described as "contingent," "unliquidated" and "disputed." Pemaquid also collected $1.1 million in a separate lawsuit against Cunningham Lindsey, U.S., Inc. (C-L), of which decedent's Estate collected $275,000, and Pemaquid had the right to seek to collect over $11 million from the excess carriers of C-L. There were insufficient assets to fund the credit shelter trust established for decedent's children. Critically important, at the time of decedent's death in October 2003, Pemaquid was still an operating entity transacting business in the insurance industry.
On January 16, 2004, plaintiff filed a complaint against decedent's estate, defendant, individually and as executrix of the estate, Pemaquid, Madden Insurance Agency, Inc. and D&H Alternative Risk Solutions, seeking, among other things, recovery on the promissory note between decedent and plaintiff. The case was referred to arbitration, and nearly two years later, the arbitrator awarded plaintiff $690,302.60, including interest; this award was confirmed in a December 19, 2005 judgment in the Law Division.
On April 25, 2006, plaintiff filed the present complaint against the estate, defendant, individually and as executrix, and decedent's minor children. Plaintiff alleged, among other things, that certain transfers of decedent's assets prior to his death were fraudulent transactions made for the purpose of defrauding plaintiff; that defendants conspired to place decedent's assets outside the reach of plaintiff; that defendant breached a fiduciary duty to plaintiff; and that defendant misappropriated the assets of the estate.
Plaintiff asserted that several of decedent's pre-death transactions were fraudulent, including: (1) the purchase of real property in Naples by decedent and defendant as tenants by the entirety; (2) the use of funds in decedent's name to pay down the mortgage on decedent's and defendant's marital home; (3) the alleged use of funds to reduce a mortgage on real property in Randolph; (4) the transfer of funds held in decedent's name; (5) an alleged transfer of life insurance policies into trust for ...