Opinion
DOCKET NO. A-4015-14T2
02-02-2017
VENDORPASS, INC., Plaintiff-Appellant, v. TEXO SOLUTIONS, L.L.C., TEXO ENTERPRISE SOLUTIONS, L.L.C., Defendants, and COLUMBIA BANK, Defendant-Respondent.
John G. McCarthy argued the cause for appellant (Smith, Gambrell & Russell, LLP, attorneys; Christopher G. FitzPatrick, on the brief). David M. Repetto argued the cause for respondent (Harwood Lloyd, LLC, attorneys; Mr. Repetto, of counsel and on the brief; Thomas Loikith, on the brief).
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
This opinion shall not "constitute precedent or be binding upon any court." Although it is posted on the internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R.1:36-3. Before Judges Yannotti, Fasciale, and Gilson. On appeal from the Superior Court of New Jersey, Chancery Division, Morris County, Docket No. C-0013-14. John G. McCarthy argued the cause for appellant (Smith, Gambrell & Russell, LLP, attorneys; Christopher G. FitzPatrick, on the brief). David M. Repetto argued the cause for respondent (Harwood Lloyd, LLC, attorneys; Mr. Repetto, of counsel and on the brief; Thomas Loikith, on the brief). PER CURIAM
Plaintiff VendorPass, Inc. (VendorPass) appeals a March 30, 2015 order granting summary judgment to defendant Columbia Bank (Columbia) and denying summary judgment to VendorPass. We affirm because the undisputed material facts establish that VendorPass had no viable claim against Columbia.
I.
We derive the facts from the summary judgment record, viewing them in a light most favorable to VendorPass. The claims in this matter involve several companies and four individuals who owned, operated, or guaranteed the loans of two of the companies.
Texo Enterprise Solutions, LLC (Texo 1) and Texo Solutions, LLC (Texo 2) are affiliated companies owned by Carol Daily and her mother, Lisa Andreotti. Carol's husband, Peter Daily, helped to operate Texo 1 and Texo 2. Mario Andreotti, the husband of Lisa, allowed a home he owned with his wife to be used as security for a loan made to Texo 2.
In 2009, Texo 2 gave Columbia a promissory note so that it could borrow up to $350,000 from the bank under a line of credit. To secure that loan, Carol and Peter Daily and Lisa Andreotti guaranteed repayment of the loan. Approximately two years later, in March 2011, Texo 2 gave a second promissory note to Columbia so that it could borrow up to an additional $100,000 from the bank. Again, the Dailys and Lisa Andreotti guaranteed that second loan. The Dailys and the Andreottis also gave Columbia mortgages on properties they owned in Randolph and Morris Plains.
By 2013, Texo 2 had borrowed the full $450,000 from Columbia. Repayment of the loans was due in June 2013, but Texo 2 could not make repayment at that time.
Meanwhile, Texo 1 had entered into an agreement to partner with VendorPass. VendorPass provides "payrolling and independent contracting validation, billing and agency of record services." In 2011, VendorPass entered into an agreement with Texo 1 to jointly provide payroll and billing services to customers. In the spring of 2013, Texo 1 and VendorPass partnered to provide services to a particular customer (the Customer).
Apparently, for reasons of confidentiality, VendorPass only identified the Customer as End Customer 2.
The payroll and billing services also involved a managed service provider (MSP), which was an affiliate of VendorPass. The MSP would submit invoices to the Customer and the Customer would then pay MSP. MSP would deposit the payments it received, less its fee, into Texo 1's account at JP Morgan Chase Bank (the Chase Account). Texo 1 would then turn over the monies to VendorPass and VendorPass would use those monies to reimburse itself or its subcontractors for monies previously paid to consultants who worked at the Customer. Texo 1 would separately invoice VendorPass for its fee, which was one percent of the amount paid by the Customer.
In December 2003, VendorPass informed Texo 1 that the Customer no longer required its services and the relationship would be terminated. By the end of December 2013, Texo 1 owed VendorPass just over $1,500,000 for monies Texo 1 had received from the MSP. VendorPass demanded payment in early January 2014, but Texo 1 did not make payment to VendorPass.
Instead, on January 17, 2014, Texo 1 transferred $550,000 from its Chase Account to Texo 2's account at Columbia. On January 22, 2014, Texo 2 authorized Columbia to withdraw just over $450,000 of those monies to pay its outstanding loans to Columbia.
VendorPass continued to demand payment from Texo 1, but Texo 1 did not make full payment to VendorPass. Thus, on February 6, 2014, VendorPass filed a verified complaint in the Chancery Division against the Dailys, the Andreottis, Texo 1, and Texo 2. VendorPass sought payment of the monies owed to it and also sought and was granted a temporary injunction restraining Texo 1 and Texo 2 from distributing any funds in their bank accounts.
On February 28, 2014, the Dailys and the Andreottis filed bankruptcy petitions under Chapter 7. Thereafter, the case was stayed against those individuals. The Chancery Division also ordered Texo 1 and Texo 2 to deposit any monies in their bank accounts into court. In accordance with that order, $545,100.98 was deposited with the court.
On April 17, 2014, VendorPass filed an amended complaint naming as defendants Texo 1, Texo 2, and Columbia. Through the amended complaint, VendorPass sought to compel Columbia to turn over to it the $450,000 Columbia had been paid by Texo 2. VendorPass claimed rights to that $450,000 under theories of constructive trust and fraudulent transfers under N.J.S.A. 25:2-25(a) and 25:2-27(b).
Texo 1 and Texo 2 failed to file an answer or response to the amended complaint. Accordingly, in August 2014, the Chancery court entered a final judgment by default against Texo 1 and Texo 2. The default judgment against Texo 1 was for breach of contract in the amount of just over $1,500,000. The default judgment against Texo 2 was for just over $1,000,000 for actual and constructive fraudulent transfers. In partial satisfaction of those judgments, the Chancery court dispersed to VendorPass the $545,100.98 from the funds that had been paid into court from Texo 1's and Texo 2's bank accounts.
VendorPass and Columbia then engaged in discovery. Thereafter, VendorPass moved for summary judgment for the imposition of a constructive trust on the $450,000 that Texo 2 had paid to Columbia. Columbia filed a cross-motion for summary judgment on all claims against it.
The Chancery court heard oral argument and, on March 30, 2015, entered an order denying VendorPass' motion and granting Columbia's cross-motion. Thus, the court dismissed with prejudice all claims against Columbia. The Chancery court also denied Columbia's application for sanctions against VendorPass.
The court explained the reasons for its rulings in a written statement of reasons issued with its order. The Chancery court held that VendorPass had failed to establish a claim for a constructive trust because Columbia was not unjustly enriched by the repayment of its loan. The court also held that VendorPass failed to adequately plead claims for fraudulent transfers because Columbia did not fraudulently receive the funds nor was there any evidence that Columbia knew of any scheme by Texo 1, Texo 2, or the individuals who controlled those companies.
II.
On appeal, VendorPass makes five arguments: (1) Columbia was unjustly enriched by the receipt of funds that did not properly belong to Texo 2; (2) Columbia failed to assert N.J.S.A. 12A:9-332 as an affirmative defense and, therefore, it should have been precluded from relying on that defense; and even if the defense applied, there were material factual disputes precluding summary judgment in favor of Columbia; (3) the Chancery court erred in holding that VendorPass failed to adequately plead its claim for actual fraudulent transfer under N.J.S.A. 25:2-25(a); (4) the Chancery court erred in holding that VendorPass cannot establish a claim for actual fraudulent transfer as a matter of law; and (5) the Chancery court erred in holding that Columbia's knowledge of the principals' scheme was a necessary element to a claim for constructive fraudulent transfer under N.J.S.A. 25:2-27(a).
We review a grant of summary judgment de novo, applying the same standard as the trial court. Davis v. Brickman Landscaping, Ltd., 219 N.J. 395, 405 (2014). Summary judgment is appropriate if "the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact challenged and that the moving party is entitled to a judgment or order as a matter of law." R. 4:46-2; see also Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995).
VendorPass' arguments can be analyzed as four issues. First, did VendorPass establish a claim for a constructive trust? Second, did VendorPass establish a claim for actual fraudulent transfer? Third, did VendorPass establish a claim for a constructive fraudulent transfer? Finally, whether the pertinent section of the Uniform Commercial Code (UCC), N.J.S.A. 12A:9-332(b), bars VendorPass' claims. We address the fourth question last because the trial court did not rely on that defense.
1. Constructive Trust
A constructive trust is an equitable remedy designed to "prevent unjust enrichment and force a restitution to the plaintiff of something that in equity and good conscience [does] not belong to the defendant." Flanigan v. Munson, 175 N.J. 597, 608 (2003) (alteration in original) (quoting Dan B. Dobbs, Remedies §4.3, at 241 (1973)). To establish a constructive trust, two conditions must be met. First, "a court must find that a party has committed 'a wrongful act.'" Ibid. (quoting D'Ippolito v. Castoro, 51 N.J. 584, 589 (1968)). "Second, the wrongful act must result in a transfer or diversion of property that unjustly enriches the recipient." Ibid. (citation omitted). "To prove a claim for unjust enrichment, a party must demonstrate that the opposing party 'received a benefit and that retention of that benefit without payment would be unjust.'" Thieme v. Aucoin-Thieme, ___ N.J. ___, ___ (2016) (slip op. at 24) (quoting Iliadis v. Wal-Mart Stores, Inc., 191 N.J. 88, 110 (2007)).
Here, VendorPass' claim for constructive trust fails on the second prong; VendorPass cannot show that Columbia was unjustly enriched. There is no dispute that Texo 2 had borrowed $450,000 from Columbia. Thus, when Texo 2 repaid $450,000 to Columbia, Columbia was not being unjustly enriched. Instead, Columbia was being repaid monies it had loaned to Texo 2.
2. Actual Fraudulent Transfer
VendorPass next asserts an actual fraudulent transfer under N.J.S.A. 25:2-25(a). The relevant portion of that statute provides:
A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:
a. With actual intent to hinder, delay, or defraud any creditor of the debtor[.]
Claims under subsection 2-25(a) are subject to the following defense:
[N. J.S.A. 25:2-25(a).]
A transfer or obligation is not voidable under subsection a. of [N. J.S.A.] 25:2-25 against a person who took in good faith and for a reasonably equivalent value or against any subsequent transferee or obligee.
[N. J.S.A. 25:2-30(a).]
Here, the defense in N.J.S.A. 25:2-30(a) applies to and protects Columbia. The undisputed material facts established that there were two transfers. First, Texo 1 transferred money to Texo 2. Texo 2 then transferred money to Columbia as repayment for a valid pre-existing debt. Under N.J.S.A. 25:2-30(a), a transfer under N.J.S.A. 25:2-25(a) is not voidable against a person who took in good faith for equivalent value or against any subsequent transferee. In this case, Columbia took the money in good faith for the equivalent value of the outstanding loan.
VendorPass argues that Columbia did not receive equivalent value in good faith because Texo 1 owed no debt to Columbia. The undisputed facts, however, establish that Texo 1 did not make the payment directly to Columbia. Instead, Texo 1 transferred money to Texo 2 and it was Texo 2 which owed the debt to Columbia and which paid that debt.
Even if the corporate distinction between Texo 1 and Texo 2 were not considered, Columbia would still be protected. If Texo 1 and Texo 2 were considered one entity, then there was an existing debt to Columbia and the payment to Columbia was for an equivalent value as a payment for outstanding loans.
Consequently, Columbia was entitled to summary judgment because VendorPass could not establish an actual fraudulent transfer.
3. Constructive Fraudulent Transfer
VendorPass also argues that it should have survived summary judgment for its claim of constructive fraudulent transfer under N.J.S.A. 25:2-27(a). N.J.S.A. 25:2-27(a) 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.
There are several reasons why VendorPass' claim of a constructive fraudulent transfer does not hold up under the undisputed facts of this case. First, under the plain language of subsection 2-27(a), the obligation, which here is the loan, must have been incurred after the debt to VendorPass arose. The facts establish that Texo 2 entered into the loan agreements with Columbia in 2009 and 2011. By June of 2013, Texo 2 had borrowed the full $450,000. VendorPass alleges that the monies owed to it by Texo 1 were transferred to Texo 2 in November 2013. Thus, when Texo 2 repaid the outstanding loan in January 2014, it was paying an obligation that had arisen before VendorPass became a "creditor" with a claim against Texo 1.
VendorPass argues that the fraudulent transfer was the transfer from Texo 1 to Texo 2. We accept that argument for purposes of our analysis. The transfer that VendorPass seeks to undo, however, is the transfer from Texo 2 to Columbia. When focusing on that second transfer, Texo 2's obligation to Columbia already existed before it received the transfer from Texo 1. Moreover, the transfer from Texo 2 to Columbia was in exchange for "a reasonably equivalent value." N.J.S.A. 25:2-27(a). Again, this was the payment of outstanding loans.
Finally, we have previously held that a subsequent good faith transferee enjoys the same rights under a constructive fraud transfer claim as it would otherwise enjoy in an actual fraud transfer case. See Nat'l Westminster Bank NJ v. Anders Eng'g, Inc., 289 N.J. Super. 602, 607-09 (App. Div. 1996). In National Westminster Bank, we held that the Uniform Fraudulent Transfer Act (UFTA) affords protection to a subsequent good faith transferee of property that initially had been fraudulently conveyed. Thus, both an actual and constructive fraudulent transfer are subject to the defense that a good faith transferee is protected if it took the transfer for a reasonably equivalent value. Ibid.
Here, VendorPass has no evidence that Columbia acted to conspire with Texo 1 and Texo 2 to defraud VendorPass. Instead, VendorPass relies on its proof that the transfer from Texo 1 to Texo 2 was a fraudulent transfer. The critical point, however, is that there is no evidence that the transfer from Texo 2 to Columbia is voidable because Columbia took that transfer in good faith as payment of outstanding loans.
Columbia also relies on the defense afforded in N.J.S.A. 25:2-30(e)(2). That defense provides that "[a] transfer is not voidable under subsection b. of [N. J.S.A.] 25:2-25 or [N. J.S.A.] 25:2-27 if the transfer results from . . . [e]nforcement of a security interest in compliance with Article 9 of the Uniform Commercial Code, N.J.S.[A.] 12A:9-101 [to -809]." The problem with applying that defense in this case is that Columbia was not enforcing its security interest. Rather, Texo 2 repaid the loans without the need for Columbia to enforce its security interest. --------
4. The defense under N.J.S.A. 12A:9-332
Columbia also relied on a defense afforded to it under the UCC, the relevant portion of which has been codified in N.J.S.A. 12A:9-332. That provision provides:
(a) Transferee of money. A transferee of money takes the money free of a security interest unless the transferee acts in collusion with the debtor in violating the rights of the secured party.
(b) Transferee of funds from deposit account. A transferee of funds from a deposit account takes the funds free of a security interest in the deposit account unless the transferee acts in collusion with the debtor in violating the rights of the secured party.
Columbia argues that this statute acts as a complete defense to the claims by VendorPass. In response, VendorPass initially contends that Columbia waived the defense by not expressly asserting it as an affirmative defense in its answer. We reject that argument. While Columbia did not expressly cite to N.J.S.A. 12A:9-332 in its answer, its answer and the affirmative defenses asserted made clear that Columbia was disputing VendorPass' right to void the transfer of the monies from Texo 2 to it. This is not a case where VendorPass did not understand that Columbia was asserting such a defense. Moreover, Columbia raised the defense as part of its motion for summary judgment and VendorPass had an adequate opportunity to respond. Thus, the affirmative defense was not waived because there was "no unfair surprise, substantial prejudice, or undue interference with the administration of justice." Hardwicke v. Am. Boychoir Sch., 368 N.J. Super. 71, 98 (App. Div. 2004) (citing Rivera v. Gerner, 89 N.J. 526, 536 (1982)), aff'd in part and modified in part, 188 N.J. 69 (2006).
VendorPass also argues that N.J.S.A. 12A:9-332 does not apply because it was not a "secured party." That argument, however, only highlights why VendorPass has no right to recover the money. If VendorPass was not a secured party to the money in the Texo bank accounts, then when the monies were transferred, they were transferred free and clear as fungible money. Since VendorPass has failed to establish that the transfer was a fraudulent conveyance or that a constructive trust should be imposed, the absence of a security interest leaves VendorPass with no recourse to reclaim those monies. See Rosario v. Marco Constr. & Mgmt., Inc., 443 N.J. Super. 345, 356 (App. Div. 2016) (explaining that the purpose of the UFTA "'is primarily to protect unsecured creditors against transfers and obligations injurious to their rights'" (quoting 7A Uniform Laws Annotated, Business and Financial Laws (Master ed. 2006) 16)).
Affirmed. I hereby certify that the foregoing is a true copy of the original on file in my office.
CLERK OF THE APPELLATE DIVISION