NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued January 23, 2013
On appeal from the Superior Court of New Jersey, Law Division, Bergen County, Docket No. L-2746-10.
Peter L. MacIsaac argued the cause for appellant (Chasen Leyner & Lamparello, P.C., attorneys; Mr. MacIsaac and Joel A. Leyner, on the brief).
Stuart J. Moskovitz argued the cause for respondents.
Before Judges Lihotz, Ostrer and Kennedy.
In 2005, plaintiff Rhonda Del Mastro secured a judgment against defendant Philip B. Grimado. While attempting to obtain payment, plaintiff learned Grimado had closed his business, defendant Internal Concepts, Inc. (ICI). Thereafter, he began working as an employee of defendant Precisions Devices Associates, Inc. (PDA), which was owned by defendant David McKee. After Grimado closed ICI, PDA changed its business model and began servicing ICI's former customers. Plaintiff initiated this action under the Uniform Fraudulent Transfer Act (UFTA), N.J.S.A. 25:2-20 to -34, seeking to set aside and avoid what she maintained was a fraudulent transfer by Grimado of his business interest. Following a bench trial, the judge found plaintiff's complaint was barred by the statute of limitations and she otherwise failed to prove a fraudulent transfer. Plaintiff appealed from the October 13, 2011 judgment dismissing her complaint. We reverse and remand for a new trial.
In an effort to provide context, we briefly discuss the court's entry of plaintiff's underlying judgment, followed by the facts surrounding defendants' business interests and the ICI's closing. Thereafter, we will review plaintiff's efforts to satisfy the underlying judgment and the events leading to the order dismissing her complaint.
On August 19, 2005, following a seven-day bench trial, Judge Peter E. Doyne issued a written opinion finding Grimado liable to plaintiff for intentional infliction of emotional distress and invasion of privacy (underlying tort action). The conduct forming the causes of action stemmed from Grimado's reaction to plaintiff's decision to end their intimate, nine-month relationship. Grimado hacked plaintiff's computer contacts to mail or deliver to her family, friends, and business clients "Christmas cards" filled with explicit photographs of plaintiff. An August 30, 2005 judgment awarded plaintiff $531, 820.47 in compensatory and punitive damages. The judgment was affirmed on appeal. Del Mastro v. Grimado, No. A-0618-05 (App. Div. Mar. 20, 2007) (slip op. at 5).
It is undisputed that in July 2005, when fixing the amount of punitive damages in the underlying litigation, Judge Doyne considered extensive testimony regarding Grimado's assets. The evidence revealed the most significant asset Grimado held was an interest in ICI, a Sub-chapter S corporation. Although not disclosed at that time, in this matter Grimado maintained he began winding up ICI's affairs in April and May 2005, effectively closing ICI while the underlying tort litigation was concluding.
Aside from garnishing Grimado's wages, plaintiff has been unsuccessful in collecting her judgment. On July 31, 2009, she filed this complaint alleging defendants, through their respective companies, conspired to fraudulently transfer and conceal Grimado's assets to avoid paying plaintiff's judgment.
During trial in this matter, the following evidence was presented. Grimado was ICI's sole owner. ICI serviced approximately fifty customers, focusing on the purchase and resale of electric motors, primarily used in medical equipment. The customers would place orders with Grimado on behalf of ICI, who in turn would purchase the product from a manufacturer; the predominant manufacturer was Moog Components Group (Moog). Generally, the manufacturer shipped the ordered items directly to the customer. Customers paid ICI when the order was placed, and ICI paid the manufacturer when the item was shipped, retaining as its fee the difference between what the manufacturer charged and what the customer paid. ICI's gross profit margin, based on its tax returns, was approximately 25%.
Grimado ran the operation from his residence. ICI's telephone number was Grimado's cell phone number. As a service entity ICI maintained no inventory, facility, or physical assets. Grimado testified ICI had gross annual sales as high as $1 million to $1.5 million. In addition to his weekly salary, ICI paid Grimado's $800 monthly rent and his car lease.
ICI's 2003 and 2004 corporate income tax returns were at odds with Grimado's testimony. In calendar year 2003, ICI reported gross sales of $1, 309, 747, and total ordinary income of $200, 903. ICI had a Fidelity investment account containing $224, 905, accounts receivable of $162, 979, and total retained earnings of $248, 939. That year, Grimado was reported as a 50% shareholder, and his former wife, Christine Grimado, was the other 50% shareholder. In 2003, both shareholders received distributions of $99, 332.
In calendar year 2004, ICI reported gross sales of $1, 743, 701, with ordinary business income of $211, 675. ICI's tax return reported year-end accounts receivable totaling $285, 296, retained earnings of $151, 770, and cash of $55, 605.As of the 2005 calendar year-end, the return reported all assets as zero.
McKee was an engineer. He solely owned and operated PDA. He too worked from his home. McKee served as an authorized manufacturer's representative and an independent commissioned sales representative for Moog. PDA did not purchase and resell product, rather McKee designed motors in conformance with a client's needs and set up the client's account with Moog, which manufactured the motors in accordance with the specifications McKee had drawn.
McKee and Grimado met in the mid-1990s. McKee introduced Grimado to his customers, and Grimado became the customers' account salesman. The two men and their companies worked in tandem, performing different functions for many of the same customers which used Moog motors. When ICI's customer needed a Moog product, Grimado most often called McKee, Moog's manufacturer's representative, to place the order. Grimado profited from the mark-up on each motor he ordered on behalf of a client, and McKee received a commission on each item manufactured by Moog.
In late March 2004, Moog terminated McKee as its manufacturer's representative. At that point, McKee "probably" had "many conversations" with Grimado regarding changing the business model of PDA.
In April or May 2005, immediately before trial on plaintiff's underlying tort actions, Grimado spoke with McKee, and expressed his intention to close ICI. According to his most recent trial testimony, Grimado began cessation of business efforts in April 2005, by informing his customers he was closing his operation. Grimado asserted he could no longer handle the stress of owning and running his own company, could not focus, and was too overwhelmed by the day-to-day operations of running a business. He told the customers "they could contact Mo[og] or contact Dave McKee" or PDA. Grimado estimated he wrapped up all outstanding matters, collecting all accounts receivable, and satisfied all accounts payable no later than July 12, 2005. Sometime during this period, Grimado explained, all of ICI's business records were destroyed by a "computer virus."
Grimado acknowledged that in June 2005, during the underlying action, extensive expert testimony was presented by him and plaintiff on the value of ICI. Although this evidence was not included in the appellate record, the trial transcript does suggest Grimado's expert valued ICI at $250, 000 and plaintiff's expert valued ICI at twice that sum. Further, during the underlying tort action, Grimado conceded he never mentioned he had closed ICI in April 2005.
Coincident with Grimado's efforts to close ICI, PDA began to provide similar services for customers. After the underlying judgment was entered in August 30, 2005, Grimado went to work for PDA. He stated his responsibilities included customer service, preparing customer invoices, which he in turn gave to McKee for billing and collection. Grimado testified he retained no computer records of customer transactions, but admitted he kept a hard copy of each invoices, which he discarded once McKee informed him payment was received.
As a PDA employee, Grimado performed his job from home, initially retaining the same cell phone number he had used at ICI. He called and serviced the same customers he had while running ICI, for which he was paid $66, 000 annually, more than $80, 000 less than he last earned at ICI. In addition to his annual salary, PDA reimbursed Grimado for expenses totaling $14, 573.33 in fiscal year 2005; $17, 660.90 in fiscal year 2006; and $18, 372.21 in fiscal year 2007. It is unclear whether Grimado's telephone and health insurance costs were also reimbursed.
Both Grimado and McKee were opaque on the details of the events leading to Grimado's joining PDA. Grimado could not remember who broached the issue of him working for PDA or how his salary was set. McKee could not remember precisely which customers previously serviced by ICI were then serviced by PDA. On cross-examination, however, he identified a list of such customers supplied during discovery, eventually admitting he actually prepared the list.
McKee testified PDA had twenty-five or thirty customers when he began his new service business model, and at the time of trial, reported fifty customers, all of whom were serviced by Grimado. McKee admitted some former ICI customers had no prior association with PDA. After Moog terminated its relationship with him, McKee "worked with" Grimado "during that whole period of time." McKee accompanied Grimado on sales calls, "talked to customers, . . . [and] would get together and talk over customer situations, visit customers, things of th[at] nature." He expended these efforts because he "expected to do something later on with . . . Grimado[, ]" such as "share ownership in another corporation or handle these customers, someway of working together because it was profitable." McKee asserted, "ICI as it was constituted then was a profitable way to do business." At the time he offered to hire Grimado, McKee knew ICI had grossed over $1 million per year.
McKee explained he considered the customers previously serviced by ICI to be his customers, even though he acknowledged PDA had not done business for most customers in many years and, for others, had never provided services. During his pre-trial deposition, when asked how much business PDA had in the year before Grimado joined, McKee admitted "very little to none." McKee also testified Grimado had referred business to PDA in the summer months before he joined PDA.
McKee also contradicted Grimado's testimony about the business operations and Grimado's responsibilities to maintain records. McKee stated when Grimado operated ICI, some product was delivered to Grimado's home "so [PDA] c[ould] bill him for it." If a product was sent directly to a customer, the bill went through Grimado. McKee testified this arrangement "had not changed" since Grimado began working for PDA. When Grimado called Moog to place an order, the paperwork generated by the manufacturer was sent to Grimado, who provided a copy of the invoice to McKee. All order confirmation forms were kept by Grimado.
McKee stated Grimado was responsible for entering invoices, accounts payable, and accounts receivable records on his computer at the time he received an order. He also was to bill the customer for the product. Grimado was the one who "maintain[ed]" these records "on his computer, " and McKee "review[ed] them" by meeting with Grimado. McKee stated at some point after his review, Grimado would destroy the records, and no other record of the costs paid per the invoice was maintained by PDA.
When Grimado worked for ICI, he and McKee met "once every couple of weeks." This practice continued after Grimado commenced employment with PDA. The one change identified by McKee with respect to his relationship with Grimado after ICI closed and Grimado began working as PDA'S employee was McKee handled all the money and considered himself in "a supervisory role." McKee was asked specific questions regarding PDA's sales profits and general ledger, but he was unable to provide responsive answers. He also could not explain his supervisory responsibilities.
Plaintiff's forensic accounting expert, Thomas J. Reck, examined ICI's and PDA's tax returns, the personal income tax returns of Grimado and McKee, PDA's general ledgers, checks payable to Moog, and other pertinent materials. He assumed everything in PDA's business operations was a mere continuation of ICI's practices, with "[t]he only thing that changed [being] the entity through which goods were being sold, " i.e., ICI's customers were now serviced by PDA and the customers were accordingly billed by PDA, not ICI.
In his analysis, Reck discerned unexplained percentages when he compared ICI's and PDA's sales. For example, during PDA's 2004 fiscal year, it had no cost of goods sold, as at that time, McKee received commissions as Moog's manufacturer's representative. ICI's 2004 tax return reflected it spent 78% of its gross receipts to buy the goods sold. In fiscal year 2005, a period PDA picked up the sales efforts previously performed by the then defunct ICI, PDA spent 92% of its gross receipts to buy the products it sold. Similarly, in 2006, PDA's spent 92.6% of its gross receipts to buy products for resale. Reck testified In his experience as a forensic accountant, he had never seen such a decline in gross profit percentages. He explained typically cost increases are gradual over time, in contrast to the dramatic 13% increase in cost of goods sold essentially reported from 2004 to 2005. However, he admitted it was impossible to verify whether there was an increase in product cost or a siphoning of profits because Grimado destroyed PDA's customer invoices.
Plaintiff also introduced PDA's general ledgers for the fiscal years ending June 30, 2005 and June 30, 2006. PDA's business had significantly decreased as of June 30, 2005, and the ledgers predominately recorded expenditures for office equipment, McKee's car, health insurance, and AARP expenses. However, from July 1, 2005, to June 30, 2006, the year ICI's customers began being serviced by Grimado at PDA, deposits exceeded $1 million, a trend that continued thereafter.
The judge issued a written decision on October 13, 2011, entering judgment for defendants and dismissing plaintiff's complaint. He found any transfer of ICI's assets was completed by early July 2005; therefore, plaintiff's complaint, filed more than four years later, was untimely, and barred by the statute of limitations. The judge also examined the proofs and found plaintiff had not shown by clear and convincing evidence that Grimado fraudulently transferred ICI's assets. Finally, the judge rejected plaintiff's request for an award of sanctions ...