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.
ATTORNEY NO. 019931992
Supreme Court of New Jersey
March 30, 2017
156 A.3d 1061
JUSTICE PATTERSON
Argued November 30, 2016
156 A.3d 1061
IN THE MATTER OF VICTOR G. SISON, AN ATTORNEY AT LAW (ATTORNEY NO. 019931992)
March 30, 2017
ORDER
This matter having been duly presented, it is ORDERED that VICTOR G. SISON, formerly of JERSEY CITY, who was admitted to the bar of this State in 1992, and who was suspended from the practice of law for a period of three months, effective December 16, 2016, by Order of this Court filed November 17, 2016, be restored to the practice of law, effective immediately.
156 A.3d 1061
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-Decided March 30, 2017
Diana C. Manning argued the cause for respondents (Bressler, Amery & Ross, attorneys; Ms. Manning and Benjamin J. DiLorenzo, on the brief).
JUSTICE PATTERSON delivered the opinion of the Court.
The Uniform Fraudulent Transfer Act (UFTA),
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
We hold that the Appellate Division panel improperly ignored the distinction between the corporation that was the “debtor” for purposes of
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 as part of its Rockaway Town Hall project. It is undisputed that neither Benks nor Benkendorf provided landscaping services to Motorworld.
Benkendorf testified, and Morton Salkind agreed, that Benks was paid $5,000,000 for work performed on the Fox development project alone, and that Fox and Giant accumulated a debt to Benks in the amount of more than $1,000,000 in unpaid bills for landscaping and construction services.
In 2004, Benkendorf needed money immediately to resolve a federal payroll tax issue. Citing Fox‘s outstanding bills, Benkendorf approached Morton Salkind and asked for a loan. Salkind agreed to arrange a loan. According to Salkind, he decided to designate Motorworld as the lender in the transaction because the company was “clean” and had no liabilities.
Following Morton‘s instructions, Carole Salkind transferred $499,000 from her personal checking account into Motorworld‘s bank account. Although the record contains no note or other document memorializing the transaction between Carole Salkind and Motorworld, Motorworld‘s tax return characterized that transaction as a “loan” from Carole Salkind to Motorworld.
Benkendorf and his wife, defendant Gudrun Benkendorf, executed a note dated December 17, 2004 (Note). The Note, prepared by Morton Salkind‘s counsel at his direction, stated that the Benkendorfs 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 Note recited that the money was being loaned as an “accommodation” to the Benkendorfs so that they could “satisfy an IRS obligation [that was] imminently due.” 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.”
After he and his wife failed to pay the principal amount by the date set forth in the Note, Benkendorf asked Morton Salkind to “offset” the “late fees” owed to Motorworld “by monies owed to Benks by Giant Corp.” Salkind declined Benkendorf‘s request for a setoff. Instead, the parties executed a First Amendment to the Note on September 29, 2005, providing for a payment schedule and additional penalties and interest in the event of a further default.
Although the record suggests that the Benkendorfs made some payments toward their loan obligation, it is undisputed that they failed to repay the principal by the extended date. On October 11, 2006, the parties executed a Second Amendment to the Note, extending the deadline for repayment to January 1, 2007, and setting a payment schedule for the interest due on the loan. The Benkendorfs again failed to repay the loan by the extended date and entered into a Third Amendment to the Note on April 23, 2008. The Third Amendment extended the due date until March 1, 2009, and imposed substantial interest and late charges on the Benkendorfs.
In light of his escalating obligations, Benkendorf renewed his urgent request that Morton Salkind “clean this up” by treating the amount due on the Note as a setoff of the more than $1,000,000 owed to Benks by Carole Salkind‘s companies, Fox and Giant, for landscaping work. Benkendorf testified that by August 2008, he was angry at Morton Salkind for declining to enter into a setoff arrangement. Salkind, then awaiting sentencing on a federal tax evasion charge, wished to preserve a business relationship that he “cherished” and agreed to a setoff arrangement. He insisted, however, on what Benkendorf characterized as an agreement to “split it down the middle“: Motorworld, no longer an active company, would cancel the Note-eliminating Benkendorf‘s 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. To Salkind, the agreement constituted “a two for one deal ... two to one in my favor,” that he did not consider “a big deal.” To Benkendorf, the terms of the arrangement were acceptable, notwithstanding his agreement to forgo repayment of the $1,000,000 owed, because he “never had much luck pursuing any debts. It was just a waste of time.”
In accordance with that agreement, Motorworld and defendants effected the transfer at the center of this case. On August 8, 2008, Motorworld executed a Release that provided:
This shall serve to confirm that the $600,000.00 Promissory Note executed on December 17, 2004 in favor of Motorworld, Inc.; which Promissory Note was amended three times, is due March 1, 2009.
This shall further serve to confirm that in payment of the Promissory Note, Benks Land Services, owned by William C. Benkendorf, has performed site work services which were provided with regard to the Rockaway Town Hall project, and has provided various construction and maintenance services, on Buildings 15 & 16.
Based upon all of the above services, the Note has been satisfied and is at this point Paid in Full.
In March 2009, Morton Salkind filed a Chapter 7 petition for bankruptcy in the United States Bankruptcy Court for the District of New Jersey. In his petition, he listed no corporate entities as assets. In June 2009, Carole Salkind filed a Chapter 7 bankruptcy petition, listing Fox, Giant, and Motorworld among her corporate assets. In her petition, she stated that the value of her interest in Motorworld was “unknown.” Consistent with the terms of the Release, Carole Salkind did not list the Benkendorfs’ debt to Motorworld as an asset of that company.
The United States Bankruptcy Court appointed Catherine E. Youngman (Trustee) to serve as the trustee of both bankruptcy estates. The Trustee‘s investigation of Carole Salkind‘s assets revealed that Motorworld conducted no business, that its $500,000 debt to Carole Salkind was its sole liability, and that it had a single asset: the Benkendorfs’ $600,000 debt to Motorworld, guaranteed by Benks, as memorialized in the December 17, 2004 Note. The Trustee‘s determination gave rise to this litigation.
II.
The Trustee filed a complaint, designating Motorworld as the plaintiff, against the Benkendorfs and Benks. In that action, Motorworld sought to collect on the Note and enforce its lien on the collateral that secured the loan. Defendants contended that the Release extinguished their debt to Motorworld.
The Trustee then filed a second action against the Benkendorfs and Benks, seeking to void the Release on the basis of two provisions of the UFTA. She alleged that Motorworld‘s execution of the Release was an actual fraudulent transfer under
The trial court consolidated the actions and conducted a two-day bench trial. In an oral opinion, the trial court determined that the evidence did not warrant a finding that the Release constituted an actual fraudulent conveyance under
Defendants appealed the trial court‘s judgment on the grounds that the Release did not effect a constructively fraudulent transfer under the UFTA, that the doctrine of estoppel and the statute of limitations barred plaintiffs’ claims, and that the trial court should not have awarded interest or penalties in its judgment. Plaintiffs cross-appealed, challenging Morton Salkind‘s authority to execute the Release on Motorworld‘s behalf.
An Appellate Division panel reversed the trial court‘s determination. The panel acknowledged that the debtor, Motorworld, received no “benefit of reasonably equivalent value” under
We granted plaintiffs’ petition for certification. 224 N.J. 526, 135 A.3d 146 (2016).
III.
Plaintiffs argue that the Appellate Division panel improperly viewed Motorworld to be indistinguishable from its shareholder, Carole Salkind, in the panel‘s application of the “reasonably equivalent value” standard of
Defendants argue that in a claim under
IV.
A.
The United States Bankruptcy Code “explicitly grants broad responsibilities to the trustee in collecting the debtor‘s assets and dealing with the bankruptcy estate.” Koch Ref. v. Farmers Union Cent. Exch., Inc., 831 F.2d 1339, 1342 (7th Cir. 1987) (citing
A trustee in bankruptcy represents every creditor of the bankrupt debtor. In re Ateco Equip., Inc., 17 B.R. 230, 235 (Bankr. W.D. Pa. 1982). He or she is the only party who can sue to represent the interests of the creditors as a class. Fisher v. Apostolou, 155 F.3d 876, 879 (7th Cir. 1998); Stein, supra, 314 B.R. at 311. In accordance with
In this appeal, the state law invoked by the Trustee is the UFTA, enacted “to prevent a debtor from placing his or her property beyond a creditor‘s reach.” Gilchinsky v. Nat‘l Westminster Bank NJ, 159 N.J. 463, 475, 732 A.2d 482 (1999); In re Bernstein, 259 B.R. 555, 557 (Bankr. D.N.J. 2001).4 The statute “allow[s] the creditor to undo the wrongful transaction so as to bring the property within the ambit of collection.” Gilchinsky, supra, 159 N.J. at 475, 732 A.2d 482.
The UFTA section at issue in this appeal provides:
A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.
[
N.J.S.A. 25:2-27(a) .]
A court applying
The statute requires a party challenging a transfer to prove several elements. See SEC v. Antar, 120 F. Supp. 2d 431, 443 (D.N.J. 2000). 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 obligation, or that “the debtor became insolvent as a result of the transfer or obligation.”
The fourth element that a party challenging a transfer must prove is at the heart of the dispute in this appeal. The UFTA requires that in order for a transfer to be constructively fraudulent, the debtor must not receive a “reasonably equivalent value”
in exchange for the transfer.
because the fraudulent conveyance laws are intended to protect the debtor‘s creditors, a lender cannot hide behind the position, although sympathetic, that it has parted with reasonable value. The purpose of the laws is estate preservation; thus, the question whether the debtor received reasonable value must be determined from the standpoint of the creditors.
[Mellon Bank, N.A. v. Metro Commc‘ns, Inc., 945 F.2d 635, 646 (3d Cir. 1991), cert. denied, 503 U.S. 937 (1992).]
The “determination of ‘reasonably equivalent value’ ... is a two-step process.” In re Eckert, 388 B.R. 813, 835 (Bankr. N.D. Ill. 2008). “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.” Ibid. Value and reasonably equivalent value are measured at the time of the transaction. See ibid. (measuring equivalent value under federal fraudulent conveyance act); Janvey v. Golf Channel, Inc., 487 S.W.3d 560, 569-70 (Tex. 2016) (measuring value and reasonably equivalent value according to Texas fraudulent transfer law).
The UFTA defines “value” for purposes of fraudulent transfer law as follows:
Value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied, but value does not include an unperformed
promise made otherwise than in the ordinary course of the promisor‘s business to furnish support to the debtor or another person. [
N.J.S.A. 25:2-24(a) .]
Accordingly, the satisfaction of the debtor‘s antecedent debt, as well as the transfer of property to the debtor, may constitute “value” that is given in exchange for the challenged transfer.
balance sheet.” Flood, supra, 272 N.J. Super. at 406-07, 640 A.2d 306.
The UFTA, however, specifically requires that the “reasonably equivalent value” be received by the debtor, not another person or entity.
“The second inquiry-whether what the debtor gave up was reasonably equivalent to what he received-is more difficult.” Eckert, supra, 388 B.R. at 835. As one court observed,
[t]he factors utilized to determine reasonably equivalent value are: (1) whether the value of what was transferred is equal to the value of what was received; (2) the fair market value of what was transferred and received; (3) whether the transaction took place at arm‘s length; and (4) the good faith of the transferee.
[Ibid.]
As the Third Circuit has noted, “a party receives reasonably equivalent value for what it gives up if it gets ‘roughly the value it gave,‘” considering the totality of the circumstances surrounding the disputed transfer. VFB LLC v. Campbell Soup Co., 482 F.3d 624, 631 (3d Cir. 2007) (quoting In re Fruehauf Trailer Corp., 444 F.3d 203, 213 (3d Cir. 2006)).
If a plaintiff proves all of the elements of
B.
In that setting, we consider the trial court‘s determination that Motorworld‘s Release was not given for “reasonably equivalent value” under
We review the trial court‘s factual findings under a deferential standard: those findings must be upheld if they are based on credible evidence in the record. D‘Agostino v. Maldonado, 216 N.J. 168, 182, 78 A.3d 527 (2013); Seidman v. Clifton Sav. Bank, S.L.A., 205 N.J. 150, 169, 14 A.3d 36 (2011). To the extent that the trial court interprets the law and the legal consequences that flow from established facts, we review its conclusions de novo. D‘Agostino, supra, 216 N.J. at 182, 78 A.3d 527; Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378, 658 A.2d 1230 (1995).
In rulings that are not disputed in this appeal, the trial court determined that the Release effected a “transfer” within the meaning of
The trial court made several critical findings regarding the reasons for and terms of the transfer. It determined that Benks provided approximately $5,000,000 in landscaping and related services to Fox and Giant and that, in August 2008, when the Release was executed, Fox and Giant owed approximately $1,000,000 to Benks.5 The court also found that Benkendorf did not consider the collection of the $1,000,000 owed to Benks by Fox and Giant to be
a worthwhile pursuit. That determination was supported by Benkendorf‘s testimony that he was willing to forgo the potential collection of the companies’ debts to Benks, in exchange for the Release, because he had found such collection efforts to be “a waste of time.”
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. The court found that Benkendorf similarly expected his personal debt to Motorworld, and that of his wife, to be eliminated in exchange for Benks’ relinquishment of its claim for approximately $1,000,000.
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, represented by the Trustee, as is appropriate under settled law. See Mellon Bank, supra, 945 F.2d at 646; see also In re Bernard L. Madoff Inv. Secs. LLC, 740 F.3d 81, 91 (2d Cir. 2014) (“[I]n bankruptcy [a fraudulent transfer] claim is usually brought by the trustee, for the benefit of all creditors. This is because the claim is really seeking to recover property of the estate.” (quoting In re Seven Seas Petroleum, Inc., 522 F.3d 575, 589 n.9 (5th Cir. 2008))).
Significantly, the trial court rejected defendants’ contention that the corporate distinctions between Motorworld and Fox and Giant, and between Motorworld and its shareholder Carole Salkind, should be ignored. It 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, respecting the legal distinctions among the Salkind companies, the trial court concluded that Motorworld owed nothing to Benks or its owners, the Benkendorfs, when it executed the
Release. It noted that Benks provided landscaping and related services to Fox and Giant, not to Motorworld. The court determined that although the transfer may have been advantageous to Fox and Giant, it failed to provide the slightest benefit to Motorworld, much less “reasonably equivalent value” for Motorworld‘s release of a $600,000 debt.
The record also supports the trial court‘s pivotal conclusion: that Motorworld made the transfer that rendered it insolvent “without receiving a reasonably equivalent value in exchange for the transfer or obligation.”
received by and for the benefit of the debtor-transfer[ ]or and not some other person or entity.” Anders, supra, 289 N.J. Super. at 605, 674 A.2d 638 (quoting Flood, supra, 272 N.J. Super. at 406, 640 A.2d 306). It is clear that Motorworld received no “value” when the Release extinguished those entities’ liability to Benks.
The Appellate Division panel acknowledged that Motorworld did not receive a benefit of “reasonably equivalent value” in exchange for releasing the Note. The panel, however, rejected what it viewed to be the trial court‘s formulaic application of the UFTA. It noted that the transfer benefited Carole Salkind by relieving two other companies owned by her of a significant debt and concluded that because Salkind was Motorworld‘s only creditor, that benefit constituted “reasonably equivalent value” for Motorworld‘s Release. The Appellate Division panel elected to treat Motorworld and its sole shareholder as interchangeable for purposes of
Giant, and the proceeds of that loan might have been used to pay Benks for its landscaping services had the Release not been signed, she indirectly benefited from the Release. That argument was not presented to the trial court; with the exception of a passing reference to a construction loan in a certification signed by Carole Salkind, the record is devoid of evidence regarding any such loan. See Selective Ins. Co. of Am. v. Rothman, 208 N.J. 580, 586, 34 A.3d 769 (2012) (holding that court need not consider issue raised for the first time in appellate argument). Even if defendants had presented evidence supporting their contention regarding the construction loan, that evidence would not have altered the analysis. Benkendorf‘s testimony establishes that he had no intention to seek payment of Benks’ bills from any source, let alone from a construction loan. Moreover, defendants do not suggest that the use of the proceeds of a construction loan to pay Benks’ bills would have any impact on Motorworld, the “debtor” for purposes of
N.J.S.A. 25:2-27(a) .
holder-received the “value” at issue.
Moreover, the UFTA should be construed consistently with the “basic tenet of American corporate law ... that the corporation and its shareholders are distinct entities.” Dole Food Co. v. Patrickson, 538 U.S. 468, 474, 123 S.Ct. 1655, 1660, 155 L.Ed. 2d 643, 652 (2003); see also Fletcher Cyclopedia of the Law of Private Corporations § 31, at 107 (rev. ed. 2015) (“The properties of two corporations are distinct, though the same shareholders own or control both.“). As the trial court recognized, Motorworld, Fox, and Giant were incorporated and managed as separate corporate entities, distinct from their common shareholder and from one another. The record reveals no reason to abandon the corporate form.
Accordingly, we find that, 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. We concur with the trial court‘s conclusion that the disputed transfer was not made for “reasonably equivalent value” under
V.
The judgment of the Appellate Division is reversed, and the matter is remanded to the Appellate Division so that it may consider the estoppel and statute of limitations defenses asserted by defendants and defendants’ challenge to the trial court‘s assessment of interest and penalties.
CHIEF JUSTICE RABNER and JUSTICES LaVECCHIA, ALBIN, FERNANDEZ-VINA, SOLOMON, and TIMPONE join in JUSTICE PATTERSON‘s opinion.