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Motorworld, Inc. v. Benkendorf

Supreme Court of New Jersey

March 30, 2017

MOTORWORLD, INC., Plaintiff,
v.
WILLIAM BENKENDORF, GUDRUN BENKENDORF, BENKS LAND SERVICES, INC., Defendants. CATHERINE E. YOUNGMAN, Chapter 7 Trustee for Carole Salkind, Plaintiff-Appellant,
v.
WILLIAM BENKENDORF, GUDRUN BENKENDORF, BENKS LAND SERVICES, INC., Defendants-Respondents.

          Argued November 30, 2016

         On certification to the Superior Court, Appellate Division.

          Andrew J. Karas argued the cause for appellant (Fox Rothschild and Forman Holt & Eliades attorneys); Mr. Karas and Joseph M. Cerra, on the briefs).

          Diana C. Manning argued the cause for respondents (Bressler, Amery & Ross, attorneys; Ms. Manning and Benjamin J. DiLorenzo, on the brief).

         PATTERSON, J., writing for a unanimous Court.

         In this appeal, the Court considers whether a corporation's release of a debt constituted a constructively fraudulent transfer under the Uniform Fraudulent Transfer Act (UFTA), N.J.S.A. 25:2-20 to -34.

         In 1988, Morton Salkind arranged for his wife, Carole Salkind, to become the sole shareholder of nineteen closely held corporations, three of which-Fox Development, Inc. (Fox), Giant Associates, Inc. (Giant), and plaintiff Motorworld, Inc. (Motorworld)-are involved in this appeal. Defendant William Benkendorf was the principal owner of defendant Benks Land Services, Inc. (Benks). In 2004, Morton Salkind retained Benks to provide landscaping services to some of the companies owned by Carole Salkind, including Fox and Giant, but not Motorworld. Over time Fox and Giant accumulated a debt to Benks of more than $1, 000, 000 in unpaid bills.

         In 2004, Benkendorf approached Morton Salkind for a loan. Salkind agreed and designated Motorworld as the lender because it had no liabilities. Carole Salkind transferred $499, 000 from her personal checking account into Motorworld's account. Benkendorf and his wife, defendant Gudrun Benkendorf, executed a note (Note), stating that they would pay the principal amount of $600, 000 by September 16, 2005, and would be assessed a ten percent penalty and twenty-four percent interest in the event of a default. The Benkendorfs agreed not to "seek a set off, reduction or use of this Note to offset any money" owed to them or their companies by Fox, any other company in which Carole Salkind was a principal stockholder, "or any family members of Carole Salkind." Benks guaranteed the Note, and Motorworld issued a check for $500, 000-$100, 000 less than the principal amount stated in the Note.

         Despite several amendments to the Note, the Benkendorfs repeatedly failed to pay the principal amount and thus faced substantial interest and late charges. Benkendorf requested that Morton Salkind treat the amount due as a setoff of the more than $1, 000, 000 owed to Benks by Fox and Giant. Salkind agreed and executed a Release on Motorworld's behalf, pursuant to which Motorworld would cancel the Note-eliminating Benkendorfs obligation to pay the $600, 000 in principal, as well as interest and penalties-and Benks and Benkendorf would forgo their right to collect from Fox and Giant more than $1, 000, 000 in unpaid bills for landscaping and related services.

         In March 2009, Morton Salkind filed a Chapter 7 petition for bankruptcy, and, in June 2009, Carole Salkind also filed a Chapter 7 petition, listing Fox, Giant, and Motorworld among her corporate assets. The Trustee of both bankruptcy estates discovered that Motorworld's $500, 000 debt to Carole Salkind was its sole liability and that its sole asset was the Benkendorfs' $600, 000 debt. On Motorworld's behalf, the Trustee filed a complaint against the Benkendorfs and Benks, seeking to collect on the Note. When defendants contended that the Release extinguished their debt, the Trustee filed a second action seeking to void the Release on the basis of two provisions of the UFTA.

         The trial court found that the Release was a constructively fraudulent transfer under N.J.S.A. 25:2-27(a) because Motorworld received no "reasonably equivalent value" in return for releasing the debt and became insolvent by virtue of the transfer. The trial court voided the Release and entered judgment in plaintiffs' favor.

         Defendants appealed, contending that the Release did not effect a constructively fraudulent transfer, that the doctrine of estoppel and the statute of limitations barred plaintiffs' claims, and that the trial court erred by awarding interest and penalties. The Appellate Division reversed the trial court, finding that the transfer benefited Motorworld's creditor, Carole Salkind, by absolving her other companies of their debt to Benks. The panel did not reach defendants' defenses and other arguments and dismissed plaintiffs' cross-appeal challenging Morton Salkind's authority to execute the Release. The Court granted plaintiffs' petition for certification. 224 N.J. 526 (2016).

         HELD: The record reveals no reason to abandon the corporate form. By virtue of the Release, Motorworld received no value at all, let alone value commensurate with the loss of its sole asset: a debt in the amount of $600, 000 plus accumulating interest and penalties. The disputed transfer was not made for "reasonably equivalent value" under N.J.S.A. 25:2-27(a), and plaintiffs established all elements of a constructively fraudulent transfer.

          1. A trustee in bankruptcy has the right to sue parties for recovery of all property available under state law. The UFTA was enacted to prevent a debtor from placing his or her property beyond a creditor's reach and allows the creditor to undo the wrongful transaction so as to bring the property within the ambit of collection. The UFTA section at issue here provides that "[a] transfer made ... by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made ... if the debtor made the transfer without receiving a reasonably equivalent value in exchange .. . and ... the debtor became insolvent as a result of the transfer." N.J.S.A. 25:2-27(a). (pp. 14-15)

         2. A court applying N.J.S.A. 25:2-27(a) must undertake a fact-sensitive inquiry, and that statute requires a party challenging a transfer to prove several elements. First, the party must establish the existence of a "transfer" or "obligation." Second, the party challenging the transfer must demonstrate that the claim of the creditor arose before the transfer was made or the obligation was incurred. Third, the party must prove that the debtor "was insolvent at [the] time" of the transfer, or that "the debtor became insolvent as a result of the transfer." The fourth element that a party challenging a transfer must prove is at the heart of this appeal: for a transfer to be constructively fraudulent, the debtor must not receive a "reasonably equivalent value" in exchange for the transfer, (pp. 16-18)

         3. The determination of "reasonably equivalent value" is a two -step process. A court must first determine whether the debtor received value, and then examine whether the value is reasonably equivalent to what the debtor gave up. The UFTA defines "value" for purposes of fraudulent transfer law to include the satisfaction of a debtor's antecedent debt. The UFTA, however, specifically requires that the "reasonably equivalent value" be received by the debtor, not another person or entity. A party receives reasonably equivalent value for what it gives up if it gets roughly the value it gave under the totality of the circumstances surrounding the disputed transfer, (pp. 18-20)

         4. It is undisputed that the Release effected a "transfer" within the meaning of N.J.S.A. 25:2-27(a), that the "creditor" with an antecedent claim was Carole Salkind, and that by virtue of that transfer, the debtor, Motorworld, lost its sole asset and became insolvent. Those determinations leave only one statutory element to be resolved in this appeal: whether the transfer was made for "reasonably equivalent value." Ibid, (p. 21)

         5. The trial court acknowledged that when Morton Salkind executed the Release, he intended that Motorworld would relinquish its right to be repaid by the Benkendorfs in accordance with the Note, as amended. Consistent with the UFTA, however, the trial court looked beyond the intent of Morton Salkind and defendants when they agreed to the transfer. It considered the impact of the Release on Motorworld, Carole Salkind, and, most importantly, her creditors, as is appropriate under settled law. The trial court found no evidence that in the operation of the nineteen companies owned by Carole Salkind, the corporate identities of the companies had been disregarded or the funds of those entities had been commingled. The trial court concluded that Motorworld was not Carole Salkind's alter ego and that the record revealed no reason to disregard the corporate form. Accordingly, the trial court determined that although the transfer may have been advantageous to Fox and Giant, it failed to benefit Motorworld. (pp. 21-23)

         6. The trial court's findings were thoroughly grounded in the record and amply supported the conclusion that the disputed transfer was constructively fraudulent for purposes of N.J.S.A. 25:2-27(a). The potential value of the transfer to Fox and Giant is irrelevant to the inquiry. Neither Motorworld nor Carole Salkind had the slightest obligation to pay Benks' bills to Fox and Giant for work that Benks performed on those entities' behalf. Motorworld received no "value" when the Release extinguished those entities' liability to Benks. (pp. 23-25)

         7. The UFTA does not charge a court to consider whether a creditor of a debtor-or, for that matter, the debtor's individual shareholder-received the "value" at issue. By the statute's unequivocal terms, the value must be received by the debtor itself. Moreover, the UFTA should be construed consistently with the basic tenet of American corporate law that the corporation and its shareholders are distinct entities, (pp. 25-27)

         8. The Court concurs with the trial court's conclusion that the disputed transfer was not made for "reasonably equivalent value" under N.J.S.A. 25:2-27(a) and that plaintiffs established all of the elements of a constructively fraudulent transfer claim under that provision of the UFTA. (p. 27)

         The judgment of the Appellate Division is REVERSED and the matter is REMANDED to the Appellate Division for consideration of the defenses and arguments asserted by defendants that it did not reach.

          CHIEF JUSTICE RABNER and JUSTICES LaVECCHIA, ALBIN, FERNANDEZ-VINA, SOLOMON, and TIMPONE join in JUSTICE PATTERSON's opinion.

          OPINION

          PATTERSON, JUSTICE

         The Uniform Fraudulent Transfer Act (UFTA), N.J.S.A. 25:2-20 to -34, provides that a transfer made by a debtor is constructively fraudulent as to a creditor whose claim arose before the transfer was made, if the debtor made the transfer without receiving "reasonably equivalent value" in exchange for the transfer and the debtor was insolvent at that time or became insolvent as a result of the transfer. N.J.S.A. 25:2-27(a). In order to constitute "reasonably equivalent value" for purposes of the UFTA, the "value" must be received by and for the benefit of the debtor-transferor, not for the benefit of a different person or entity. Ibid.; Nat'l Westminster Bank N.J. v. Anders Eng'g, Inc., 289 N.J.Super. 602, 605 (App. Div. 1996); Flood v. Caro Corp., 272 N.J.Super. 398, 406-07 (App. Div. 1994).

         In this appeal, a bankruptcy trustee and a corporation owned by the bankrupt debtor challenge the corporation's release of a debt, on the ground that the release constituted a constructively fraudulent transfer under the UFTA. The debt that was released had previously been owed to the corporation by a landscaping business that was a creditor of two other corporations owned by the same shareholder. The other corporations' debts to the landscaping business were extinguished in exchange for the release.

         The trial court concluded that the transfer was constructively fraudulent under N.J.S.A. 25:2-27(a) because the corporation relinquished its sole asset without receiving "reasonably equivalent value" in return. An Appellate Division panel reversed that determination. The panel held that the transfer benefited the debtor corporation's sole shareholder because it extinguished the debts of two other corporations that she owned. The Appellate Division determined that the transfer was therefore made for "reasonably equivalent value" and that it was not constructively fraudulent under N.J.S.A. 25:2-27(a).

         We hold that the Appellate Division panel improperly ignored the distinction between the corporation that was the "debtor" for purposes of N.J.S.A. 25:2-27(a) and its shareholder, as well as the distinction between the debtor corporation and the other corporate entities that the shareholder owned. We conclude that the evidence fully supports the trial court's determination that the corporation did not receive "reasonably equivalent value" in exchange for the disputed transfer. Accordingly, we reverse the Appellate Division's judgment and remand to the panel for its consideration of issues that it did not reach.

         I.

         We summarize the facts based upon the trial record.

          For several decades, Morton Salkind operated a range of businesses, primarily focused on real estate development. In 1988, he arranged for his wife, Carole Salkind, to become the sole shareholder of nineteen closely held corporations. Despite the change of ownership, Morton Salkind continued to manage the companies. This appeal involves three of those entities: plaintiff Motorworld, Inc. (Motorworld), established to explore the prospect of stock car racing at the Meadowlands Sports Complex; Fox Development, Inc. (Fox), a development company that built condominiums in Rockaway Township; and Giant Associates, Inc. (Giant), a development company engaged in a construction project at the Rockaway Town Hall.

         Defendant William Benkendorf (Benkendorf) was the principal owner of defendant Benks Land Services, Inc. (Benks), which provided commercial landscaping, excavation, and snow removal services. In 2004, Morton Salkind contacted Benkendorf, whom he had known for many years, and retained Benks to provide landscaping services to some of the companies owned by Carole Salkind. Over a period of several years, Benks provided landscaping services to Fox in connection with its residential development project in Rockaway and to Giant ...


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