Motorworld, Inc. v. William Benkendorf077009)
156 A.3d 1061
| N.J. | 2017Background
- In 2004 Motorworld (a dormant corporation wholly owned by Carole Salkind) loaned $500,000 (documented by a $600,000 Note) to William and Gudrun Benkendorf, guaranteed by Benks Land Services; Motorworld was otherwise asset-light and later had only that Note as its sole asset.
- Benks had provided landscaping services to two other corporations owned by Carole (Fox and Giant), which owed Benks over $1,000,000; Motorworld did not receive services from Benks.
- After repeated defaults and amendments to the Note, Morton Salkind (Motorworld officer) executed a Release in August 2008 extinguishing the Benkendorfs’ $600,000 obligation to Motorworld in exchange for Benks forgoing collection of the $1,000,000 owed by Fox and Giant.
- Trustees for Morton and Carole’s bankruptcy estates discovered Motorworld’s sole asset had been the Note; Trustee sued to collect on the Note and separately sought to void the Release under the UFTA as an actual and constructive fraudulent transfer.
- The trial court found the Release constructively fraudulent under N.J.S.A. 25:2-27(a) because Motorworld received no reasonably equivalent value and became insolvent; the Appellate Division reversed, reasoning the Release benefitted the shareholder and her other companies; the Supreme Court reversed the Appellate Division and remanded for unresolved defenses.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Motorworld’s Release of the Note was a "transfer" avoidable under N.J.S.A. 25:2-27(a) (constructive fraud) | Release voided a $600,000 asset; Motorworld received no value and became insolvent, so the transfer was constructively fraudulent | The Release conferred value because it relieved Carole’s other companies of >$1,000,000 debt, so it was for reasonably equivalent value | Held: Transfer was constructively fraudulent; Motorworld received no reasonably equivalent value and became insolvent |
| Whether “reasonably equivalent value” may be satisfied by benefit to the debtor’s shareholder or sister corporations | Value must be received by the debtor; benefit to shareholder or other corporations is not value to Motorworld | Benefit to Carole and her other companies indirectly benefitted Motorworld (Trustee steps into debtor’s shoes with no greater rights) | Held: Value must accrue to the debtor-transferor itself; benefits to shareholder/other entities do not satisfy the statute |
| Whether corporate separateness should be disregarded (alter ego/veil piercing) | Corporate form respected; no commingling or alter-ego evidence | Appellate Division treated entities as effectively interchangeable because same owner | Held: Corporate distinctions must be respected absent evidence to disregard them; trial court correctly found no basis to pierce veil |
| Remedies / next steps: whether Release should be voided and judgment entered; whether defenses (estoppel, statute of limitations) apply | Trustee sought avoidance and recovery (judgment entered at trial) | Defendants raised estoppel, statute of limitations, and challenged interest/penalties | Held: Supreme Court affirmed constructive-fraud finding, reversed Appellate Division and remanded for consideration of defenses and penalty/interest arguments |
Key Cases Cited
- Nat’l Westminster Bank NJ v. Anders Eng’g, Inc., 289 N.J. Super. 602 (App. Div. 1996) (transfer that satisfies debt of a different entity is not value to the debtor)
- Flood v. Caro Corp., 272 N.J. Super. 398 (App. Div. 1994) (same principle: satisfaction of another entity’s debt does not provide reasonably equivalent value to debtor)
- Mellon Bank, N.A. v. Metro Commc’ns, Inc., 945 F.2d 635 (3d Cir. 1991) (fraudulent-conveyance analysis must consider value from creditors’ perspective)
- VFB LLC v. Campbell Soup Co., 482 F.3d 624 (3d Cir. 2007) (a party receives reasonably equivalent value if it gets roughly the value it gave)
- In re Fruehauf Trailer Corp., 444 F.3d 203 (3d Cir. 2006) (totality-of-the-circumstances test for reasonably equivalent value)
- Dole Food Co. v. Patrickson, 538 U.S. 468 (U.S. 2003) (reaffirming corporate separateness principle)