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Michael Sandone v. John Diana

November 21, 2012


On appeal from the Superior Court of New Jersey, Law Division, Camden County, Docket No. L-2928-09.

Per curiam.


Submitted May 31, 2012

Before Judges Sapp-Peterson and Ostrer.

Plaintiff appeals from the trial court's grant of summary judgment to defendants*fn1 , Popular Warehouse Lending LLC (Popular) and Popular Financial Services, Inc. (Popular Financial), and the court's subsequent denial of plaintiff's motion for reconsideration. Plaintiff asserted various claims against defendants arising out of the repayment of loans that Popular made to Custom Mortgage Solutions, Inc. (CMS). Plaintiff claimed to be a creditor of CMS and alleged CMS's payment to Popular rendered CMS insolvent, and was a fraudulent transfer under the Uniform Fraudulent Transfer Act (UFTA), N.J.S.A. 25:2-10 to -34. Plaintiff also claimed defendants tortiously interfered with his alleged contractual relations with CMS; and conspired to commit, and did commit a fraud against him. We affirm.

We discern the following facts from the record, viewed in a light most favorable to plaintiff as the non-moving party. Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995).

Popular was a wholly-owned subsidiary of Popular Financial, and engaged in "warehouse lending," that is, providing short term loans and financing to mortgage bankers, which in turn used the financing to sell loans in the secondary market. Popular had provided loans to CMS, which was owned by Charles Arena, Jr. By mid-2006, Popular's manager, Glenn Hedde, began winding down its relationship with CMS, because CMS often violated or defaulted under terms of its loan agreements with Popular.

In late September 2006, Hedde wrote to Arena, asserting that CMS was in default and demanded immediate payment of $940,293, the principal balance due Popular. The letter asserted that Arena was also personally liable as a guarantor of CMS's obligation. On October 2 or 3, 2006,*fn2 Hedde was told by another warehouse lender that it had made loans to CMS for some of the same properties that secured Popular loans to CMS. Hedde immediately drove to CMS's office and told Arena that he suspected CMS had committed a fraud, and demanded CMS repay the balance of its credit line within two days. On October 6, 2006 CMS wired $633,500 to Popular. The next day, it wired $21,500. Popular reported its suspicion of fraud to the IRS, in a Suspicious Activity Report, dated October 31, 2006.

Plaintiff was the indirect source of $500,000 of the funds CMS paid to Popular. On October 4, 2006, plaintiff wired $450,000 into the personal bank account of Rocco Gallelli, a CMS sales manager, who was also plaintiff's friend and business associate since the late 1990's. Plaintiff gave the remaining $50,000 to Gallelli in cash. Gallelli in turn provided the funds to Arena for CMS.

Plaintiff's involvement resulted from conversations with Gallelli that began weeks before Hedde's confrontation with Arena. Gallelli and plaintiff had discussed Gallelli's interest in obtaining, along with another CMS employee, John Diana, a controlling interest in CMS. Gallelli later solicited $500,000 for that purpose. Gallelli told plaintiff at a dinner meeting in late September that if Gallelli and Diana could gain control of CMS, they would be able to repay plaintiff within a year. Gallelli told plaintiff he believed CMS was mismanaged and, if he and Diana gained control, they could improve the firm's profitability.

Gallelli did not disclose to plaintiff negative information that he possessed about CMS. This included Gallelli's discovery that certain loans were retained on CMS's books because it had not yet received money back from investors, which Gallelli understood was a sign of potential financial weakness. Nor did Gallelli inform plaintiff that Arena had recently taken, without permission, a $210,000 check off Gallelli's desk, deposited it into CMS's account, and admitted he took the check because CMS needed the cash infusion.

Almost immediately after Hedde left his brief face-to-face meeting with Arena, Arena called Gallelli into his office and told him he needed $500,000 to pay off CMS's line of credit with Popular, or else Popular would place CMS in default. Arena knew Gallelli had access to funds in that amount, but did not know the source of those funds. Gallelli offered to obtain the money in return for a controlling interest in CMS. According to Gallelli, Arena agreed, and told Gallelli to contact his lawyers to draw up the papers.

Gallelli then called plaintiff and informed him that he now had the opportunity to purchase a majority interest in CMS, but needed to act within two days. Gallelli asked plaintiff if he would loan $500,000 for the purpose of acquiring that interest in CMS. Gallelli told plaintiff that Arena needed some of the funds to pay IRS tax liens. He did not tell Gallelli that the funds would be used to pay Popular. At no point did anyone from Popular communicate or make any direct representations to Gallelli.

On October 4, 2006, plaintiff and Gallelli entered into a Loan Agreement (Agreement), which plaintiff prepared. It denominated Gallelli as the borrower, and plaintiff as the lender. The principal amount was $500,000, bearing an interest rate of twenty percent. The agreement stated, "Rocco Gallelli ("Borrower") promises to pay Michael Sandone ("Lender"), to order, in lawful money of the United States of America, the principal amount of Five Hundred Thousand ($500,000.00) Dollars, together with interest at the rate of 20.00% per annum on the unpaid principal balance from October 4, 2006 until paid in full." ...

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