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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." The Agreement called for monthly payments of $8333.33, constituting interest only, for sixty months, with a balloon payment of $500,000 on November 4, 2011.

Gallelli signed the Agreement "Individually, and as President and Chief Executive Officer of Custom Mortgage Solutions, Inc." Under the Agreement, Gallelli "as President and Chief Executive Officer" of CMS, also promised plaintiff an option to purchase a five percent interest in CMS for $100. The option could be exercised in sixty months or upon a subsequent sale of a majority interest of CMS. Plaintiff admitted he was aware that when he made the loan, Gallelli did not hold the listed titles at CMS. Rather, plaintiff anticipated that Gallelli would assume those positions upon his purchase, with Diana, of a controlling interest in the firm.

Gallelli paid the $500,000 to CMS before he entered a written agreement with Arena to transfer a controlling interest in CMS to him and Diana. At that point, Gallelli had not informed Arena of the terms of his Agreement with plaintiff. After CMS repaid Popular, Arena refused to transfer control of CMS to Gallelli and Diana. Arena rebuffed Gallelli's repeated requests that he sign a proposed agreement. However, the proposed agreement did not memorialize an outright sale of a majority interest. Rather, it consisted of a loan agreement, wherein CMS agreed to repay the $500,000 to Gallelli within thirty-six months. Under the proposed agreement, 520,000 shares (out of one million outstanding) would be pledged as collateral.*fn3

CMS directly paid plaintiff several monthly payments due under the Agreement, but ceased doing so in mid-2007. Gallelli ultimately defaulted.

Plaintiff filed his complaint against defendants and others in June 2009. Plaintiff named Diana, Arena and another individual allegedly associated with Arena. Plaintiff did not name Gallelli because plaintiff obtained judgment against him in a separate action. In his suit against defendants, plaintiff asserted claims of unjust enrichment; fraud and negligent misrepresentation; violation of the UFTA; tortious interference with contract; and civil conspiracy. Plaintiff argued Hedde wrongfully threatened criminal prosecution to coerce CMS to repay its debt to Popular. After a period of discovery, defendants moved for summary judgment on all counts against them.

Judge Louis R. Meloni granted the motion on September 1, 2010. In an oral opinion, the court dismissed plaintiff's fraud claim "because there's no fact asserted, no testimony where the Popular defendants made any representation to Sandone that would cause him to lend the money to Gallelli. In fact the testimony from Mr. Sandone is exactly the opposite that there was - he never spoke to anybody from Popular." The court dismissed the negligent misrepresentation claim for the same reason. As there was no evidence that defendants "even knew about the loan agreement between Sandone and Gallelli," the court also dismissed the claim of tortious interference with contract.

The court cited two grounds for dismissing the UFTA claim, which plaintiff's counsel described in argument as its "main claim." First, although plaintiff alleged Arena fraudulently transferred funds to defendants, the court held "it's questionable whether or not Sandone was even a creditor of C.M.S." Second, assuming for argument's sake plaintiff was a creditor, the court held "there's no evidence that Arena or the Popular defendants acted to hinder, delay or defraud Sandone in his capacity as a creditor." The court held that the record did not support a finding that CMS or Arena acted in bad faith. Also, "there are no real badges of fraud that are presented by the facts here related to the transfer of the money from Arena to Popular. It's not to an insider. It wasn't to get some advantage. He was paying off a debt." The court noted that Gallelli knew what Arena intended to do with the funds obtained from plaintiff. Finally, the court dismissed the civil conspiracy claim "because there is no independent cause of action against the Popular defendants."

In May 2011, plaintiff moved for reconsideration. Plaintiff argued that a new certification from Arena regarding his meeting with Hedde supported plaintiff's claim that Hedde wrongfully obtained payment of CMS's debt to Popular by threatening criminal prosecution. Plaintiff argued he was previously unable to secure a certification from Arena or to obtain his deposition because then he had a pending bankruptcy matter and he had asserted his right against self-incrimination in another case. Arena stated, "Without stating out loud any explicit accusation of wrongdoing, Popular nonetheless made it clear to me that it would pursue criminal charges against us unless we paid back the debt within a 2 to 3 day window of time." Then Arena claimed he did not "know what Popular [was] referring to when it accuse[d] CMS of 'double funding' in its written report of suspicious activity. I have no knowledge of any double funding or fraud on the line at CMS."

Judge Meloni denied the motion in an order entered June 10, 2011. In his oral opinion, the judge concluded that the new certification did not alter the material facts, including that "Popular had no idea . . . where Arena got the money, let alone that it came from the plaintiff."

Plaintiff appeals from both trial court orders. He argues Popular is liable for fraudulent conveyance, tortious interference with contract, fraud, and conspiracy to defraud. He asserts the record evidence creates a genuine issue of fact regarding whether Popular obtained payment from CMS by wrongfully invoking the possibility of criminal prosecution. He contends that a payment so obtained must be voided because it was an unfair preference, not made in good faith, and a fraudulent transfer under UFTA.

We are unpersuaded and affirm substantially for the reasons stated by Judge Meloni in his oral decisions. We add the following brief comments regarding plaintiff's fraudulent transfer claim.

Plaintiff appears to ground his claim in N.J.S.A. 25:2-25, which declares a transfer fraudulent "by a debtor . . . as to a creditor . . . if the debtor made the transfer . . . [w]ith actual intent to hinder, delay, or defraud any creditor of the debtor[.]" To demonstrate "actual intent," he claims he has established "badges of fraud" including some expressly set forth in the UFTA and those not. See N.J.S.A. 25:2-26. He asserts the "debtor . . . became insolvent shortly after the transfer was made" under N.J.S.A. 25:2-26(i). He also cites, as badges of fraud, the "secret meeting" where Hedde sought payment by allegedly threatening criminal charges, and the false pretenses by which Arena obtained the funds from Gallelli.

Fatal to plaintiff's claim is that he is not a creditor of CMS, nor is CMS a debtor as to plaintiff. The Act does not apply to plaintiff's cause of action, because the Act only addresses fraudulent transfers by a debtor as to its creditors. N.J.S.A. 25:2-25. Only a creditor is entitled to relief under the UFTA. See N.J.S.A. 25:2-29 (describing relief against a fraudulent transfer available to a "creditor"). "The purpose of the Fraudulent Transfer Act, 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) (emphasis added).

A "creditor" is defined as a person with a "claim." N.J.S.A. 25:2-21. A "claim" means "a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured." Ibid. The definition is derived from Section 101(4) of the Bankruptcy Code, 11 U.S.C.A. § 101(4). 7A Uniform Laws Annotated, Business and Financial Laws (Master ed. 2006) 16. "Since the purpose of the [Uniform Law] is primarily to protect unsecured creditors against transfers and obligations injurious to their rights, the words 'claim' and 'debt' . . . generally have reference to an unsecured claim and debt." Ibid. A "creditor" may include "the holder of an unliquidated tort claim or a contingent claim." Ibid. Notwithstanding that broad definition, we discern no basis upon which a jury could find the Agreement between plaintiff and Gallelli granted plaintiff "a right to payment" from CMS.

Other jurisdictions, interpreting the UFTA, have rejected similar claims based on a plaintiff's failure to establish a present or future "right to payment" from the allegedly fraudulent transferor. See, e.g., APS Sports Collectibles, Inc.

v. Sports Time, Inc., 299 F.3d 624, 629 (7th Cir. 2002) (denying UFTA claim because UFTA requires a "debtor/creditor relationship" and "since none of the individual defendants in this case was a party to the . . . loan transaction [with plaintiff], their status as debtors cannot be established"); A.P. Props. v. Goshinsky, 714 N.E.2d 519, 522 (Ill. 1999) ("Although . . . the definition of a claim is expansive, that does not mean that the definition is all encompassing. . . . Stated simply, the Act requires a debtor/creditor relationship. That relationship can be contingent or unmatured, but it must exist.").

Under the plain terms of the Agreement, plaintiff loaned $500,000 to Gallelli, not CMS; and Gallelli, not CMS, promised to repay it. There is no evidence that Arena even knew Gallelli's source of the $500,000, or the terms of the Agreement. It is of no moment that Gallelli signed the Agreement as an officer of CMS because plaintiff knew Gallelli held no such position, and only anticipated securing those positions upon acquiring a controlling interest. Moreover, Gallelli did not purport to extend a promise by CMS to repay the loan. His only promise in the Agreement, in his future role as an officer of CMS, was that he would cause the firm to issue stock options to plaintiff. Gallelli made the promise to repay the $500,000 without reference to his anticipated role.

Nor is it significant that CMS made some of the monthly payments to plaintiff. CMS's voluntary payments did not of themselves render CMS liable under Gallelli's contract with plaintiff. Nor were the payments compelling evidence of an agreement by CMS to assume Gallelli's debt. Neither Gallelli nor Arena testified that CMS agreed, after Gallelli provided the funds to Arena, to assume Gallelli's debt to plaintiff. Rather, Gallelli's draft agreement would have obliged CMS to repay Gallelli at the same interest rate as he was obliged to pay to plaintiff - but with a balloon payment two years sooner than Gallelli's payment to plaintiff.

Finally, Smith v. Whitman, 39 N.J. 397 (1963), upon which plaintiff relies, does not compel a different result. The Court applied the concept of "good faith" as an element of "fair consideration" under the Uniform Fraudulent Conveyance Act (UFCA), N.J.S.A. 25:2-9, repealed by L. 1988, c. 74, § 1. The Court concluded "a creditor should not be permitted to gain an advantage over other creditors" by illegally promising to protect the debtor from criminal liability. Id. at 408. A threat to report a crime, however, is not deemed the same as a promise to protect someone from prosecution. Id. at 408-09.

However, even absent such a promise, "[i]t may well be that . . . a creditor who deliberately sparks the hope of forbearance in order to induce a conveyance should not be permitted as against other creditors to retain what he thereby gained." Id. at 409. Smith, supra, does not govern this case because it addressed the rights of creditors of a threatened debtor. As we have discussed, plaintiff is not a creditor of CMS.


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