August 28, 2012
ROBERT W. GILVEY, PLAINTIFF-RESPONDENT,
CREATIVE DIMENSIONS IN EDUCATION, INC., A NEW JERSEY CORPORATION, ANDREA BLUMENTHAL, INDIVIDUALLY AND IN HER CAPACITY AS OWNER AND DIRECTOR OF CREATIVE DIMENSIONS IN EDUCATION, INC., AND JAY BLUMENTHAL, INDIVIDUALLY AND IN HIS CAPACITY AS OWNER AND DIRECTOR OF CREATIVE DIMENSIONS IN EDUCATION, INC., DEFENDANTS-APPELLANTS.
On appeal from the Superior Court of New Jersey, Law Division, Essex County, Docket No. L-11-09.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued: October 5, 2011
Before Judges Cuff, Lihotz and St. John.
This is a wrongful termination action. We review an order permitting plaintiff to file an amended complaint asserting fraudulent transfer claims against defendants, his former employers. A second order requires defendants' accountant to disclose their personal financial information, and a third order permits discovery of advice provided to defendants by their former attorney. We affirm the order permitting the amended complaint but direct the trial judge to consider whether the fraudulent transfer claims should be severed from the wrongful termination claim, or bifurcated at trial, if introduction of evidence to support the fraudulent transfer claims would cause undue prejudice to defendants. We also affirm the order denying the motion to quash the subpoena directed to defendants' accountant but reverse the order denying the motion to quash the subpoena to defendants' attorney.
Defendant Creative Dimensions in Education, Inc. (Creative) provides tutoring for college entrance examinations. Defendants Andrea Blumenthal and Jay Blumenthal own and operate Creative. In June 2003, defendants hired plaintiff Robert W. Gilvey as a tutor, and promoted him to Assistant Director of Marketing and Development. Five months later, in November 2004, defendants demoted plaintiff to tutor and terminated him on February 1, 2008.
Plaintiff filed a five count complaint seeking compensatory and punitive damages. He alleged that his termination violated the Law Against Discrimination (LAD), N.J.S.A. 10:5-1 to -49, because he was terminated in early February 2008 while recovering from a fall (Counts One and Two). He also alleged his termination violated the Conscientious Employee Protection Act (CEPA), N.J.S.A. 34:19-1 to -14, because defendants terminated him in retaliation for his complaints that defendants had violated the Employment Retirement Income Security Act (ERISA), 29 U.S.C.A. §§ 1001-1461, by failing to inform him of his eligibility to participate in an individual retirement account, for his complaints that his compensation violated the state wage and hour laws, and his complaints about copyright infringement (Count Three). Plaintiff also alleged defendants' conduct violated the implied covenant of good faith and fair dealing (Count Four) and the wage and hour laws (Count Five).
Defendants filed an answer denying all claims and a three-count counterclaim asserting intentional infliction of emotional distress, unfair competition, and breach of contract claims. Defendants also filed an amended counterclaim asserting a Fair Trade Act claim, N.J.S.A. 56:4-1 to -2.
During the course of discovery, plaintiff served a subpoena duces tecum on defendants' accountant seeking financial documents and information concerning defendants. On September 10 and October 27, 2010, plaintiff deposed the Blumenthals in the course of which Jay Blumenthal stated he relied on advice received from their attorney regarding issues related to employee compensation.
In response to defendants' motion for a protective order to quash the subpoena duces tecum served on the accountant, the motion judge granted the motion in part and barred discovery of the Blumenthals' personal financial information. According to the order dated October 19, 2010, defendants' accountant was required to produce documents concerning the financial condition of the business, unless defendants waived their claim for economic damages with respect to the unfair competition claim against plaintiff. Defendants voluntarily dismissed their counterclaim on November 18, 2010.
On November 19, 2010, plaintiff served a subpoena duces tecum on Linda Niedweske, an attorney retained by defendants to provide legal services on general employment matters. Defendants moved to quash this subpoena and this motion was denied by order dated January 25, 2011. An order dated January 21, 2011, also permitted plaintiff to file an amended complaint to assert a claim for fraudulent transfer, a claim for aiding and abetting fraudulent transfer, and a demand to pierce the corporate veil of Creative. This same order required defendants to produce the previously requested personal financial information requested in the July 2010 subpoena that had been barred by a prior order. The motion judge denied a stay of the January 21 and 25, 2011 orders pending appeal; this court granted leave to appeal.
We commence our discussion with the order granting plaintiff leave to file an amended complaint that alleges defendants Blumenthal have engaged in fraudulent transfers and also that each has aided and abetted such transfers. Defendants' argument implies a fraudulent transfer action is not ripe until entry of judgment on the underlying wrongful termination claim. We disagree.
"The purpose of the Fraudulent Transfer Act [(FTA)], N.J.S.A. 25:2-20 to -34, is to prevent a debtor from placing his or her property beyond a creditor's reach." Gilchinsky v. Nat'l Westminster Bank N.J., 159 N.J. 463, 475 (1999) (footnote omitted). The fundamental premise of the FTA is to prevent a person exposed to a claim of another from defeating the claimant's ability to be made whole. Ibid. Most cases discussing fraudulent transfers arise in the context of a subsequent action to set aside transfers and recover transferred assets filed following entry of judgment. See, e.g., Banco Popular No. Am. v. Gandhi, 184 N.J. 161, 168-69 (2005) (complaint seeking to set aside asset transfers filed following entry of judgment in favor of mortgagee); Gilchinsky, supra, 159 N.J. at 470-71 (same); Johnson v. Lentini, 66 N.J. Super. 398, 402-03 (Ch. Div. 1961) (same). Nevertheless, as demonstrated by the definition of claim, creditor, debt and debtor,*fn1 N.J.S.A. 25:2-21, the remedy provided by the FTA applies to present and future creditors. See also Senate Labor, Industry and Professions Committee Statement, Assembly No. 1265 -- L. 1988, c. 74 (referring to present and future creditors).
By its terms, the FTA does not bar a fraudulent transfer claim prior to entry of judgment. Moreover, there is authority permitting amendment of a pending complaint to assert a fraudulent transfer claim. See Barsotti v. Merced, 346 N.J. Super. 504, 508-09 (App. Div. 2001) (complaint seeking compensatory damages for injuries sustained in automobile accident amended to permit a fraudulent transfer claim against personal attorney for defendant driver). Further, there is authority permitting filing of a separate fraudulent transfer action prior to reduction of a claim to judgment. See Ford Motor Credit Co. v. Chiorazzo, 529 F. Supp. 2d 535, 540 (D.N.J. 2008) (applying New Jersey law, court observes FTA does not require reduction of claim to judgment prior to initiation of action invoking FTA remedies).
Defendants also assert the motion judge should not have granted the motion to file the amended complaint because the amendment is legally insufficient. The standard for granting leave to amend is well known. Rule 4:9-1 provides that leave to amend a pleading should be "freely given in the interest of justice." The Supreme Court has held that "achievement of substantial justice is the fundamental consideration" for such motions. City of Jersey City v. Hague, 18 N.J. 584, 602 (1955). The motion judge must decide the motion "pursuant to the same standard as a motion to dismiss for failure to state a claim." Webb v. Witt, 379 N.J. Super. 18, 28 (App. Div. 2005). All of the allegations of the complaint must be accepted as true. Ibid.
A motion to amend a pleading may be denied only if the nonmoving party would suffer undue prejudice or the proposed amendment is not sustainable as a matter of law. Interchange State Bank v. Rinaldi, 303 N.J. Super. 239, 257 (App. Div. 1997). Generally, the judge should not assess the merits of the amendment. Hansen v. Hansen, 339 N.J. Super. 128, 140 (App. Div. 2001).
Pursuant to N.J.S.A. 25:2-25:
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; or
b. Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:
(1) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
(2) Intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor's ability to pay as they become due.
The Supreme Court has applied a two-part test to assess fraudulent transfer claims: (1) "'whether the debtor [or person making the conveyance] 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 (2) "whether the debtor transferred property with an intent to defraud, delay, or hinder the creditor." Gilchinsky, supra, 159 N.J. at 475-76 (quoting In re Wolensky's Ltd. P'ship, 163 B.R. 615, 626-27 (Bankr. D.C. 1993)).
Fraud allegations must be pled with specificity, "insofar as practicable," and may include dates, if needed. R. 4:5-8(a); see also Grow Farms Corp. v. Nat'l State Bank, 167 N.J. Super. 102, 110 (Law Div. 1979). However, "[m]alice, intent, knowledge, and other condition[s] of mind of a person may be alleged generally." R. 4:5-8(a). "When a motion challenging the legal sufficiency of a complaint is filed, [the] plaintiff is entitled to a liberal interpretation and given the benefit of all favorable inferences that reasonably may be drawn." State, Dep't of Treasury, Div. of Inv. ex rel. McCormac v. Qwest Commc'ns Int'l, Inc., 387 N.J. Super. 469, 478 (App. Div. 2006). If the trial court determines the plaintiff has failed to plead with sufficient specificity, it should permit the "plaintiff the opportunity to comply with the dictates of the rule," rather than deny the amendment. Rebish v. Great Gorge, 224 N.J. Super. 619, 627 (App. Div. 1988).
Plaintiff asserts in his amended complaint that in or about November 13, 2007, Andrea and Jay Blumenthal secretly drained substantial funds from a Creative Dimension business account. They transferred these assets with the intent of (a) shielding the assets from potential liability to [plaintiff] and/or other employees with claims against defendants; (b) placing the assets beyond the reach of [plaintiff] and other potential creditors of defendants; (c) defrauding, delaying and/or or [sic] hindering [plaintiff] and other creditors from enforcing prospective judgments against defendants and/or (d) undercapitalizing Creative Dimensions in order to frustrate any prospective judgment against the corporation.
Plaintiff also alleges that Jay and Andrea Blumenthal "commingled their assets with the assets of Creative Dimensions" by linking their personal bank account with that of their corporation and "withdrew funds at their sole discretion . . . thereby frustrating any potential judgment against the corporation."
Measured against the statute and the need to plead allegations of fraud with specificity, plaintiff has pled with sufficient particularity that defendants have placed their assets beyond the reach of creditors to frustrate their ability to satisfy a debt owed by defendants to him. Gilchinsky, supra, 159 N.J. at 475-76. To be sure, there is no direct allegation that any alleged transfer rendered the corporate or individual defendants insolvent; however, the allegation that the individual defendants "drained substantial funds" from the corporate defendant can be readily interpreted as an allegation that the corporate defendant was left with insufficient assets to meet its ongoing obligations. N.J.S.A. 25:2-25b(1).
Moreover, this state recognizes a cause of action for aiding and abetting fraud, Qwest Communications International, supra, 387 N.J. Super. at 480. Plaintiff need only produce circumstantial evidence of actions that facilitated illegal transfers to withstand a motion to dismiss, and, therefore, a motion to amend. See Morgan v. Union Cnty. Bd. Of Chosen Freeholders, 268 N.J. Super. 337, 365 (App. Div. 1993) (holding the court should permit a jury to determine whether an agreement exists in a conspiracy claim "so long as there is a possibility that the jury can infer from the circumstances [the defendants] had a meeting of the minds and thus reached an understanding to achieve the conspiracy's objectives."), certif. denied, 135 N.J. 468 (1994). The allegations of the amended complaint are sufficient to permit the proposed amendment. We, therefore, have no quarrel with the order permitting the amended complaint. Under these circumstances, plaintiff is also entitled to conduct reasonable discovery from defendants and their agents to obtain relevant evidence of their financial condition at the time of the alleged transfers.
On the other hand, the decision to permit the amendment does not account for the prejudice that may accrue to defendants, if the fraudulent transfer claims are tried at the same time as the wrongful termination claims. Assuming this matter is tried to a jury, to succeed on the fraudulent transfer claims asserted in Counts Six and Seven of the amended complaint, plaintiff must adduce evidence that defendants transferred assets or incurred an obligation with the actual intent to hinder, delay or defraud plaintiff, or without receiving adequate consideration, engaged in a transaction that would leave the corporate defendant or the individual defendants with insufficient assets. N.J.S.A. 25:2-25a, b(1). N.J.S.A. 25:2-26 identifies some but not all factors a fact-finder, such as a jury, may consider to determine actual intent. Those factors include, the individual defendants' retained possession or control of corporate assets after the transfer, N.J.S.A. 25:2-26a; the defendants had been sued before the transfer, N.J.S.A. 25:2-26d; the defendants transferred substantially all of their assets, N.J.S.A. 25:2-26e; the defendants were insolvent or became insolvent shortly after the transfer, N.J.S.A. 25:2-26i; or the transfer occurred shortly before or after a substantial debt was incurred, N.J.S.A. 25:2-26j. The production of this evidence may have the clear capacity to cause undue prejudice to the defense of the wrongful termination claims asserted by plaintiff. The trial judge must take care to avoid this situation and must consider whether the fraudulent transfer claims must be severed or bifurcated at trial.
We have identified no authority addressing whether fraudulent transfer claims asserted in the same complaint should be bifurcated for trial. In Barsotti, the personal injury claims settled prior to trial of the fraudulent transfer claims. 346 N.J. Super. at 509. In Ford Motor Credit, the court was not required to address whether the prosecution of a fraudulent transfer claim would prejudice the defendant because the other pending matters, a civil action in federal district court on a guaranty and a bankruptcy proceeding, would proceed separately. 529 F.Supp. 2d at 542. We are not, however, without guidance.
In any action in which a party seeks punitive damages, the party against whom such damages are sought may request a bifurcated trial and, if requested, the trial shall be bifurcated. N.J.S.A. 2A:15-5.13a. A jury may not consider the issue of punitive damages until it has first decided that the defendant is liable and has awarded compensatory damages. N.J.S.A. 2A:15-5.13b, c; Baglini v. Lauletta, 338 N.J. Super. 282, 305 (App. Div.), certif. denied, 169 N.J. 607 (2001). Evidence relevant to the issue of punitive damages may not be introduced in the first stage of the bifurcated trial. N.J.S.A. 2A:15-5.13b. Bifurcation is permitted on request of the party against whom such damages are sought due to the prejudice that may redound to that party, if the issue of punitive damages is before the jury at the same time it considers whether that party is liable and, if so, the appropriate measure of compensatory damages. Baglini, supra, 338 N.J. Super. at 305.
Trial of fraudulent transfer claims at the same time as the other claims asserted in the complaint may have the same effect as trial of a punitive damage claim before a verdict on the underlying claims as it may suggest an awareness of liability and a desire to thwart recompense to plaintiff. Failure to sever the fraudulent transfer claims may interfere with a dispassionate evaluation of plaintiff's evidence in support of his various wrongful termination claims. Therefore, the trial judge must consider severance or bifurcation of the fraudulent transfer claims, if requested by defendants, particularly because the fraudulent transfer claim should be dismissed if plaintiff is unsuccessful on his underlying claims.
The final issue we address is the order denying defendants' motion to quash the subpoena issued to their former attorney. The motion judge held reliance on the advice of counsel is relevant to a defense asserted by defendants and plaintiff is entitled to depose defendants' attorney. We disagree.
The subpoena duces tecum directed to Niedweske requested her testimony at a deposition and the production of documents "related to legal advice or opinions" given by her to the corporate defendant or to the individual defendants regarding wage and hour compensation policies, resolution of wage and hour compensation disputes, and employee eligibility to participate in the corporate defendant individual retirement account. Defendants asserted their attorney-client privilege; plaintiff responded they had waived the privilege by asserting they relied on advice of counsel to fashion their compensation policies.
New Jersey courts "vigorously" protect the attorney-client privilege. Weingarten v. Weingarten, 234 N.J. Super. 318, 324 (App. Div. 1989). A party may move to quash a subpoena issued to its attorney, "if compliance would be unreasonable or oppressive[,]" Rule 1:9-2, or violate a privilege, Pressler & Verniero, Current N.J. Court Rules, comment 4 on R. 1:9-2 (2012).
In re Kozlov sets forth three factors the party seeking to pierce the attorney-client privilege must establish. 79 N.J. 232 (1979). First, "[t]here must be a legitimate need of the party to reach the evidence sought to be shielded." Id. at 243.
Second, "there must be a showing of relevance and materiality of that evidence to the issue before the court." Id. at 243-44. Third, the motion court must determine, "'by a fair preponderance of the evidence including all reasonable inferences, . . . that the information . . . could not be secured from any less intrusive source.'" Id. at 244 (quoting In re Farber, 78 N.J. 259, 276-77 (1978)). The second factor is generally satisfied "where the party claiming the privilege has implicitly waived it by putting the confidential communications 'in issue' in the litigation." Kinsella v. Kinsella, 150 N.J. 276, 300 (1997). In other words, "'where the plaintiff has placed in issue a communication which goes to the heart of the claim in controversy[,]'" the privilege is waived. Ibid. (quoting Developments in the Law, Privileged Commc'ns, 98 Harv.
L. Rev. 1450, 1637-38 (1985)).
When a party cites reliance on the advice of counsel as a defense, the threshold issue is whether such a defense is available to defeat a particular claim. In re PSE&G Shareholder Litigation addresses the "advice-of-counsel" defense in the context of a shareholder derivative action. 320 N.J. Super. 112 (Ch. Div. 1998). During a deposition, counsel for the defendants asserted the attorney-client and work product privileges permitted defendants to decline to answer questions regarding a shareholder demand because the directors had relied on the opinion of counsel in making that decision. Id. at 114. The motion court held the directors were required to answer the questions, stating, if "the opinion of counsel or advice of counsel is injected into the case, the attorney-client and work product privilege[s] have been deemed waived." Id. at 115. Notably, whether the directors acted on the advice of counsel was a material issued in the case, because a critical question in the litigation was whether the board acted in bad faith or unreasonably. In re PSE&G S'holder Litig., 173 N.J. 258, 292-93 (2002). Reliance on the advice of counsel may help establish good faith and absolve the board from liability. Ibid.
Although plaintiff's subpoena is narrowly tailored and limited to Niedweske's legal opinions or advice regarding compliance with the wage and hour law and plaintiff's eligibility to participate in an individual retirement account, he has failed to establish that reliance on the advice of counsel is relevant to a contested issue in the case. We acknowledge that plaintiff must establish that defendants acted in bad faith or for an improper motive to establish his breach of the covenant of good faith and fair dealing claim, Brunswick Hills Racquet Club, Inc. v. Route 18 Shopping Center Assocs., 182 N.J. 210, 225 (2005), but reliance on the advice of counsel is not an absolute defense to this claim. Moreover, reliance on the advice of counsel is not a defense to a wage and hour claim. N.J.S.A. 34:11-56a25.2. The reliance on advice defense provided by section 56a25.2 is limited to "reliance on any written administrative regulation, order, ruling, approval or interpretation by the Commissioner of the Department of Labor and Industry or the Director of the Wage and Hour Bureau[.]" Ibid.; see Keeley v. Loomis Fargo & Co., 183 F.3d 257, 271 (3d Cir. 1999) (good faith defense to a wage and hour claim not established by reliance on industry standards), cert. denied, 528 U.S. 1138, 120 S. Ct. 983, 145 L. Ed. 2d 933 (2000). Having failed to demonstrate that reliance on the advice of counsel is relevant to an issue in controversy, plaintiff is not entitled to breach the attorney-client privilege, and the subpoena duces tecum to defendants' attorney must be quashed.
In summary, we affirm the order permitting plaintiff to amend his complaint to assert claims arising under the FTA, but counsel the trial judge to consider severance or bifurcation of the fraudulent transfer claims at trial. We also affirm the order permitting discovery of defendants' financial condition at the time of the alleged fraudulent transfers, but reverse the order denying the motion to quash the subpoena to defendants' former attorney.
Affirmed in part; reversed in part.