Opinion
DOCKET NO. A-5497-13T1
07-20-2016
STEPHEN CARUCCI, Plaintiff-Appellant, v. REGENCY FINANCIAL GROUP, LLC, JUSTIN PISANO, MARION FUNDING GROUP, CORP., a/k/a MARION FUNDING GROUP, INC., and REBECCA PISANO, Defendants-Respondents.
Joseph A. Deer argued the cause for appellant (Bashwiner and Deer, LLC, attorneys; Mr. Deer, of counsel and on the briefs). Robert J. Pompliano argued the cause for respondents Regency Financial Group, LLC and Justin Pisano. Thomas J. Wall argued the cause for respondents Marion Funding Group, Corp. and Rebecca Pisano.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION Before Judges Espinosa, Rothstadt, and Currier. On appeal from Superior Court of New Jersey, Law Division, Bergen County, Docket No. L-0169-13. Joseph A. Deer argued the cause for appellant (Bashwiner and Deer, LLC, attorneys; Mr. Deer, of counsel and on the briefs). Robert J. Pompliano argued the cause for respondents Regency Financial Group, LLC and Justin Pisano. Thomas J. Wall argued the cause for respondents Marion Funding Group, Corp. and Rebecca Pisano. PER CURIAM
Plaintiff Stephen Carucci filed a complaint against defendants Justin Pisano and his wife, Rebecca Pisano, as well as the couple's separately owned businesses, defendants Regency Financial Group, LLC (Regency) and Marion Funding Group, Corp. a/k/a Marion Funding Group, Inc. (Marion), alleging they violated the New Jersey Uniform Fraudulent Transfer Act (UFTA), N.J.S.A. 25:2-20 to -34, by fraudulently transferring Regency's assets to Marion. He appeals from the Law Division's final order dismissing his complaint with prejudice and from an earlier order regarding discovery. Following a bench trial, the Law Division dismissed the complaint based upon its finding that plaintiff's evidence was insufficient to sustain his claim. On appeal, plaintiff argues the trial court committed reversible error by erroneously interpreting the plain meaning of "asset" under the UFTA, holding that plaintiff failed to provide sufficient evidence to prove damages, failing to enforce a prior discovery order, and holding that all defendants were shielded from liability as a result of Justin's Chapter 7 bankruptcy discharge. We affirm.
We refer to the Pisanos by their first names to avoid any confusion resulting from the use of their common last name. No disrespect is intended.
The court conducted the bench trial over two days in 2014. At trial, the parties stipulated to certain facts and the Pisanos were the only witnesses called by plaintiff. Defendants did not call any witnesses. After the parties completed their closing arguments and made additional written submissions, the court entered a final order on June 11, 2014, dismissing plaintiff's complaint with prejudice, and issued a written decision with the court's reasons.
Plaintiff later filed a timely notice of appeal. After the appeal was filed, Judge Harz issued an amended written decision on August 4, 2014, to correct a clerical error in the docket number.
In its decision, the court made specific findings of fact based upon the evidence presented at trial. Those facts, which were mostly undisputed by the parties, can be summarized as follows.
Plaintiff was a client of Regency, a limited liability company and accounting firm owned solely by Justin. During 2005 and 2006, plaintiff made loans to Regency totaling $52,000 that were never repaid, although the parties acknowledged that some interest payments were made by Regency. In October 2009 plaintiff filed suit against Justin, Regency, and another entity Justin owned. Those defendants filed an answer, but did not otherwise participate in the litigation. As a result, the court struck their answer and entered a default and, eventually, a judgment in the amount of $54,782.35 against all three defendants. That judgment, however, was later vacated as to Justin because he filed for relief in the United States Bankruptcy Court on April 7, 2011. Plaintiff never pursued his claims against Justin in that court, so Justin's debt to plaintiff was discharged in that action.
At the time plaintiff filed the 2009 action, Regency's checking account contained approximately $10,000. However, by February 2010, no additional deposits were being made and Regency's bank accounts were empty. According to the stipulation between the parties in this action, plaintiff never served a writ of execution or attempted to levy on Regency's bank accounts or other assets in an effort to collect on the judgment entered in the 2009 action.
The parties also stipulated in this action that Justin's "office furniture was listed as exempt in th[e] Bankruptcy Order."
While plaintiff's 2009 action was pending, and before Justin filed for bankruptcy relief, Rebecca formed Marion and opened for business in the same location from which Regency operated, assuming Regency's obligations under its lease and using the same telephone number. In addition to operating the business, Marion hired Justin to perform accounting services and used Regency's computers to provide those services to Regency's former clients, whose identities were stored on a client list on those computers. The parties agreed that three hundred clients that appeared on Marion's client list were previously Regency's clients. Marion did not pay any consideration to Regency or Justin and, from July 2010 through June 2011, generated $160,037.31 in gross income, over a quarter of which was received from Regency's former clients. The income generated by these clients were for services performed by Marion and not from any monies owed by them to Regency for services performed at an earlier time.
Though the trial court indicated Marion had a gross income of $60,837.31, we cannot find this figure in the record provided. The figure we provide is the amount deposited into Marion's bank account during this time period. The difference is immaterial to our determination.
Plaintiff filed this action alleging fraudulent conveyance and civil conspiracy, and seeking payment of the $54,782.35 awarded in the prior judgment. Rebecca and Marion filed an answer, and Regency and Justin filed a separate answer. In the ensuing months, defendants filed motions for summary judgment and plaintiff filed a cross-motion to compel discovery. On July 12, 2013, the court granted plaintiff's motion, "compell[ing] defendants to produce full and complete responses to Plaintiff's written discovery" demands, and granted summary judgment to Justin only. Subsequently, plaintiff filed a motion to strike defendants' answers for failure to comply with the court's July 12, 2013 discovery order. The court entered an order on October 8, 2013, adjourning plaintiff's motion to strike to December 20, 2013, but compelling defendants to comply with plaintiff's demand for production of certain documents.
Regency and Justin's motion for summary judgment alleged that Justin discharged the prior judgment in his Chapter 7 bankruptcy discharge. The basis for Rebecca's and Marion's motions for summary judgment is unclear from the record.
According to Marion and Rebecca, plaintiff withdrew a second motion to strike their pleadings, and a subsequent order striking Regency's pleading was vacated by consent. There is nothing in the record to support these contentions or that discloses what, if anything, transpired on December 13, 2013.
The court presided over the two-day bench trial in 2014 before issuing its final order and written decision. In the decision, it set forth its findings and analyzed them under the UFTA before concluding that plaintiff failed to meet his burden of proof. In its analysis, the court rejected each of the factual contentions plaintiff believed established his entitlement to relief. The court found that Justin's employment by Marion was "not itself unlawful." It then found that, although Regency and Marion were in the same type of business and plaintiff claimed money received by Marion was intended for Regency, there was "no evidence, either testimonial or documentary . . . presented to show that money belonging to Regency or Justin Pisano was ever directly transferred to Marion," because the "testimony showed" that Marion's deposits were income derived from services it performed, which was corroborated by the checks themselves, and "[n]o testimony or documentary evidence was introduced to contradict those statements." As to deposits made into Marion's accounts, the court concluded that "[w]ithout expert testimony or a more detailed analysis of the trail of monies paid for services rendered, [it could not] assess which money, if any, was fraudulently transferred from Regency to Marion."
Turning to plaintiff's reliance on Marion's use of Regency's customer list, the court rejected plaintiff's contention that the list was an asset under the UFTA because there were no agreements binding Regency's customers to continue using its services. Relying upon the Court's opinion in Lamorte Burns & Co. v. Walters, 167 N.J. 285 (2001), and our opinion in Raven v. A. Klein & Co., 195 N.J. Super. 209 (App. Div. 1984), the court further concluded that the customer list was not a "restricted asset[]" because it contained only the customers' names and not any "trade secrets," and was not "protected by a restrictive covenant." The court then found that, even if there was some evidence that the list itself was an asset as defined by the UFTA, there was no expert testimony or other evidence establishing "what the value of [the] customer lists may have been" so it had "no basis from which to award damages."
The court entered its final order and this appeal followed.
The scope of our review of a judgment entered in a non-jury case is limited. "[W]hen supported by adequate, substantial and credible evidence," a trial court's findings "are considered binding on appeal" and "should not be disturbed unless . . . they are so wholly insupportable as to result in a denial of justice." Rova Farms Resort, Inc. v. Inv'rs Ins. Co., 65 N.J. 474, 483-84 (1974) (citation omitted); see also Griepenburg v. Twp. of Ocean, 220 N.J. 239, 254 (2015). Deference to the trial court's findings is particularly appropriate when "the evidence is largely testimonial and involves questions of credibility" because the trial court "has a better perspective than a reviewing court in evaluating the veracity of witnesses." Seidman v. Clifton Sav. Bank, S.L.A., 205 N.J. 150, 169 (2011) (quoting Cesare v. Cesare, 154 N.J. 394, 412 (1998)). We will "'not disturb the factual findings and legal conclusions of the trial judge' unless convinced that those findings and conclusions were 'so manifestly unsupported by or inconsistent with the competent, relevant and reasonably credible evidence as to offend the interest of justice.'" Griepenburg, supra, 220 N.J. at 254 (quoting Rova Farms Resort, supra, 65 N.J. at 484).
Issues of law, however, are reviewed de novo. Zabilowicz v. Kelsey, 200 N.J. 507, 513 (2009). "A trial court's interpretation of the law and the legal consequences that flow from established facts are not entitled to any special deference." Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995).
Applying these guiding principles, we turn first to plaintiff's arguments that the court misapplied the UFTA by failing to realize that "under the [UFTA] an entire business can[] be fraudulently transferred as an 'asset,'" and erred in concluding "that it had no basis to award damages[,] as the value of Regency's business transferred to Marion exceeded the 2009 judgment." We disagree.
The UFTA "prevents[] a debtor from placing his or her property beyond a creditor's reach" and from "deliberately cheat[ing] a creditor by removing his property from the 'jaws of execution.'" Gilchinsky v. Nat'l Westminster Bank N.J., 159 N.J. 463, 475 (1999); see also Rosario v. Marco Constr. & Mgmt. Inc., 443 N.J. Super. 345, 355 (App. Div. 2016). As the Supreme Court has explained:
Under the UFTA, a transfer made or obligation incurred by a debtor is fraudulent if done:
a. With actual intent to hinder, delay, or defraud any creditor of the debtor; or
b. Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:
(1) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
(2) Intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor's ability to pay as they become due.
[N.J.S.A. 25:2-25(a), (b).]
Those standards apply whether the creditor's claim arose before or after the transfer was made or the obligation was incurred. N.J.S.A. 25:2-25. The [UFTA] sets forth the indicia of "actual intent" for use in interpreting subsection a. of N.J.S.A. 25:2-25(a):
In determining actual intent under subsection a. of [N.J.S.A.] 25:2-25 consideration may be given, among other factors, to whether:
a. The transfer or obligation was to an insider;
b. The debtor retained possession or control of the
property transferred after the transfer;
c. The transfer or obligation was disclosed or concealed;
d. Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;
e. The transfer was of substantially all the debtor's assets;
f. The debtor absconded;
g. The debtor removed or concealed assets;
h. The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
i. The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
j. The transfer occurred shortly before or shortly after a substantial debt was incurred; and
k. The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.
[N.J.S.A. 25:2-26.]
[Banco Popular N. Am. v. Gandi, 184 N.J. 161, 175-76 (2005) (second alteration in original).]
In order to succeed on a UFTA claim, a plaintiff bears "the burden of proof to demonstrate both defendant['s] liability and the amount of damages chargeable to defendant[s]." AYR Composition, Inc. v. Rosenberg, 261 N.J. Super. 495, 507 (App. Div. 1993). Those elements must be proven by clear and convincing evidence, Barsotti v. Merced, 346 N.J. Super. 504, 520 (App. Div. 2002), which requires proof that creates "a firm belief or conviction that the allegations sought to be proved by the evidence are true. It is evidence so clear, direct, weighty in terms of quality, and convincing as to cause [the factfinder] to come to a clear conviction of the truth of the precise facts in issue." Model Jury Charge (Civil), 1.19, "Burden of Proof - Clear and Convincing Evidence" (2011). A mere balancing of the probabilities is insufficient. Ibid.
To establish a cause of action for fraudulent transfer, the plaintiff must first show that the defendant "has put some asset beyond the reach of creditors which would have been available to them at some point in time but for the conveyance." Gilchinsky, supra, 159 N.J. at 475 (citation omitted); see also Jecker v. Hidden Valley, Inc., 422 N.J. Super. 155, 163-64 (App. Div. 2011), certif. denied, 210 N.J. 28 (2012). Under the UFTA, an asset is defined broadly as "property of a debtor." N.J.S.A. 25:2-21. Property is "anything that may be the subject of ownership." N.J.S.A. 25:2-22.
Plaintiff must also prove that the transferred assets had value. See Karo Mktg. Corp. v. Playdrome Am., 331 N.J. Super. 430, 444 (App. Div.), certif. denied, 165 N.J. 603 (2000). Thus, an action for fraudulent transfer under the UFTA will not stand "where a purported asset has no monetary worth . . . 'because technically no asset of value [has been] transferred.'" Jecker, supra, 422 N.J. Super. at 166 (quoting Karo Mktg., supra, 331 N.J. Super. at 444).
If a plaintiff establishes that an asset of value has been transferred, the plaintiff must then prove the transfer was fraudulent, in that it occurred under the circumstances set forth in N.J.S.A. 25:2-25(a) or (b). If a plaintiff satisfies its burden as to these factors, it will be entitled to recover from the transferee only "the fair market value of the assets . . . transferred . . . , valued as of the date of transfer[, which] may or may not be equal to the full amount originally claimed." AYR Composition, supra, 261 N.J. Super. at 506-07.
In a service business, a company's accounts and intangibles, such as a list of customers, are assets as contemplated by the UFTA. See id. at 504-05. Customer lists are deemed such assets "because a service company must obtain its customers 'at the cost of time, trouble and expense in soliciting and obtaining them as customers.'" Id. at 504 (quoting Abalene Exterminating Co. v. Oser, 125 N.J. Eq. 329, 331 (Ch. 1939)); see also Karlin v. Weinberg, 77 N.J. 408, 417 (1978) (explaining an employer has a "legitimate [business] interest in the protection of [client] relationships"); Whitmyer Bros. v. Doyle, 58 N.J. 25, 33 (1971) (holding an "employer has a patently legitimate interest in protecting . . . his customer relationships"); Hollister v. Fiedler, 22 N.J. Super. 439, 445 (App. Div. 1952) (noting that customer lists were a "valuable asset" of an insurance company).
However, more than identification of a customer list is required to prove the value of the asset. AYR Composition, supra, 261 N.J. Super. at 507. As we observed in AYR Composition, the list is to be considered a component of the business alleged to have been fraudulently transferred:
The value of a particular account when transferred may be unrelated to the income later received. The income received may be a factor in this proof, but it is not the sole measure of damages. Post-transfer income may be generated solely because the account was developed or materially changed through [the transferee]'s efforts. On the other hand it may be nothing more than a continuation of the income previously earned on the account less the expenses necessary to develop the account and discounted to the
date of transfer. It also may be true that a particular account had substantial value, but for some extraneous reason was abandoned or lost by [the transferee]. A conflict of interest, a clash of personalities or other bases could have caused a valuable account to have generated no income to the transferee. Plaintiff may be able to show through expert testimony how accounts transferred in the [particular] industry are valued. Furthermore, the good will of the [transferring business], including its telephone number, general customer lists, employee base and the like may likewise have a value ascribed by suitable expert testimony. We reiterate, however, that the measure of damages is not the gross or net income from any particular account or accounts, but rather the sum of their fair market values as of the date of transfer.
[Id. at 507-08 (emphasis added).]
In order to establish the "fair market value" of a service business's asset, including its client list, expert testimony is often required, as it is generally a matter outside the ken of lay people. See Hopkins v. Fox & Lazo Realtors, 132 N.J. 426, 450 (1993) (quoting Wyatt v. Wyatt, 217 N.J. Super. 580, 591 (App. Div. 1987) ("In general, expert testimony is required when 'a subject is so esoteric that jurors of common judgment and experience cannot form a valid conclusion.'")); see also Balsamides v. Protameen Chems., Inc., 160 N.J. 352, 368 (1999) ("[V]aluation disputes . . . frequently become battles between experts."); Lawson Mardon Wheaton, Inc. v. Smith, 160 N.J. 383, 397 (1999) ("There is no inflexible test for determining fair value, as '[v]aluation is an art rather than a science.'" (alteration in original) (citation omitted)).
Applying these requirements to plaintiff's proofs at trial, we disagree with the trial court's conclusion that the customer list was not an asset. We find that the cases upon which the court relied were inapposite, as they were unrelated to the UFTA and dealt instead with violations of restrictive covenants in employment contracts. See Lamorte Burns & Co., supra, 167 N.J. at 301; Raven, supra, 195 N.J. Super. at 213.
However, we agree with the trial judge that plaintiff failed to establish the value of any assets or, as plaintiff argues for the first time on appeal, the value of Regency, to the extent he proved a transfer under the UFTA at all. Plaintiff offered no expert testimony as to the values, if any, of the customer list or Regency's on-going business. His reliance on the two companies' gross incomes alone, without expert testimony or other competent proof, did not establish any asset's fair market value. As to the funds he alleged were transferred from Regency to Marion, directly or indirectly, there was no evidence in the record identifying the specific funds he claimed were improperly transferred or their amounts. By relying solely on the Pisanos' testimony at trial, plaintiff failed to prove his entitlement to any relief under the UFTA.
We find plaintiff's remaining arguments to be without sufficient merit to warrant discussion in a written opinion. R. 2:11-3(e)(1)(E). Suffice it to say, as to plaintiff's contention regarding discovery, the record supplied to us is devoid of any indication of what action the court took, if any, on the adjourned date for plaintiff's motion to strike. In their briefs to us, the parties dispute events they each allege occurred without providing any support for their arguments. Moreover, it is apparent there was a substantial amount of discovery supplied by defendants, and there has been no showing by plaintiff that any further discovery would have changed the outcome of this case. Finally, plaintiff's contention that the trial court applied the protection of the bankruptcy court's automatic stay or its discharge of Justin's debt to plaintiff's claim against any other party is simply unsupported by the record.
Defendants contend an order to strike was entered but vacated by consent and that plaintiff waived any further discovery demands. Plaintiff responds that there was no waiver but does not refute defendants' allegations about an order being entered and vacated. --------
Affirmed.
I hereby certify that the foregoing is a true copy of the original on file in my office.
CLERK OF THE APPELLATE DIVISION