by: Peter J. Gallagher (@pjsgallagher) (LinkedIn)
Cloaking devices are common in sci-fi movies like Star Trek and Star Wars. They are used to render an object, usually a spaceship, invisible to nearly all forms of detection. Although scientists are apparently working to make real-life cloaking devices, at this point they exist only in the movies and, apparently, in New Jersey courts, at least according to the Appellate Division in Amelio v. Gordon.
In Amelio, plaintiff owed an apartment building in Hoboken. He approached defendants about obtaining a loan to finish renovations on three units in the building, along with the common areas. Plaintiff claimed that defendants instructed him to create a corporate entity to obtain the loan. Plaintiff did as he was instructed, and formed a limited liability company, which obtained the loan from defendants. Plaintiff, who was identified as the managing member of the limited liability company, signed the loan documents on behalf of the company.
Plaintiff later sued, arguing that the fees and interest payments under the loan exceeded the amounts allowable under New Jersey's usury laws. He also claimed that defendants fraudulently convinced him to create a limited liability company and have that entity obtain the loan, just so they could charge him usurious fees and interest. Plaintiff sued in his individual capacity, not on behalf of the limited liability company. On the day of trial, defendants argued that the complaint had to be dismissed because plaintiff lacked standing to sue since the company was the borrower, not plaintiff. With little explanation, the trial court granted the motion and dismissed the complaint. Plaintiff appealed.
The Appellate Division reversed the trial court. It held that plaintiff had standing to sue defendants, and, in fact, was the only one with standing to do so.
Under New Jersey law, a limited liability company is not allowed to "plead or set up the defense of usury to any action brought against it to recover damages or enforce a remedy on any obligation [that it] executed." New Jersey courts have extended this prohibition to individual endorsers or guarantors of a corporate loan. This would appear to foreclose any claim by plaintiff in Amelio — whether brought by plaintiff, individually, or by the limited liability company — that the terms of the loan from defendants were usurious. This, however, is where the cloaking device comes in.
In Amelio, the Appellate Division noted that "an individual can recover usury payments on a loan made to a corporation if the individual can prove that the lender fraudulently caused the individual to create the corporation as a device to evade the usury laws." Stated differently, "a lender cannot evade the usury laws by using a corporate shell to cloak a loan that, in effect, is actually being made to an individual borrower." The Appellate Division held that an individual cannot take advantage of this exception if "the corporation is not a shell and was not formed solely to cloak the loan." In doing so, it cited to Selengut v. Ferrera, a case involving a "legitimate preexisting corporation," which "had a significant economic life of its own, predating the loan" and "owned property that was valuable and that was separate and apart from the loan," and which therefore was not created simply to cloak an individual loan as a corporate loan. But if the corporation was created just to cloak the loan, then the exception applies.
In Amelio, the Appellate Division concluded that defendants were correct that plaintiff could not assert individual claims based on alleges breaches of the loan documents. But, because the complaint could be read to allege a claim that he was fraudulently induced into creating a limited liability company as a way for defendants to subvert the usury laws, defendants' motion to dismiss should have been denied.
Pete's Take 