Tag: assets

Appellate Division Quotes Lucinda Williams, Orders Trial Court To Take Closer Look At Whether Debt Was Fully Satisfied

 by:  Peter J. Gallagher (@pjsgallagher) (LinkedIn)

Lucinda WilliamsAdd this to the list of things you never want to hear a court say about your performance during a case: "defendants' presentation of evidence certainly gave voice to the song lyric, 'when nothing makes any sense, you have a reason to cry.'" (It is a lyric from a Lucinda Williams song if you were curious.) But this was the Appellate Division's conclusion in Brunswick Bank & Trust v. Heln Management, LLC, a case that was making its second appearance before the Appellate Division (after an earlier remand) and was sent back to the trial court for a third round.

The issue in Brunswick Bank was relatively straightforward. Plaintiff and defendants entered into five loans. The loans were secured by mortgages on several properties owned by defendants. After defendants defaulted on the loans, plaintiff sued and obtained a judgment against defendants. Plaintiff then filed foreclosure actions against defendants, seeking to foreclose on the mortgages it held against defendants' properties. It received final judgments of foreclosure in these cases as well. Some of these properties were then sold, which "provided rolling compensation for [plaintiff] against all defendants' obligations."

At some point during this "rolling" sale of mortgaged properties, defendants moved to stay all pending foreclosure proceedings, arguing that plaintiff was "over-capitalized" – i.e., it was going to collect more than it was entitled to collect under its judgment. Defendants then moved to have the judgment deemed satisfied, arguing that plaintiff had already recovered — through its collection efforts — the full amount of the judgment. The trial court granted the motion but held that two pending foreclosures could proceed. The trial court further acknowledged that it had the power to "prevent a windfall" to plaintiff, but that the record was "too muddled" to decide whether this was the case. 

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File for bankrupcty when you have enough assets to pay your debts, then hide some assets . . . what could go wrong?

by:  Peter J. Gallagher (@pjsgallagher) (LinkedIn)

Law book (pd)I don't usually post about bankruptcy or criminal law issues, but the facts from a recent decision from the U.S. Court of Appeals for the Third Circuit, which involved both bankruptcy and criminal law issues, were too intriguing to ignore. 

In United States v. Free, defendant "made the bizarre decision to file for bankruptcy even though he had more than sufficient assets to pay his debts." Then, "having filed for bankruptcy unnecessarily, [he] hid assets worth hundred of thousands of dollars from the Bankruptcy Court." Not surprisingly, this led to criminal charges being brought against defendant and convictions for multiple counts of bankruptcy fraud. To make things even more odd, despite all of his "prevarications," defendant's creditors were paid in full from the bankruptcy estate. So, to summarize, defendant did not need to file bankruptcy but chose to do so, only to then defraud the Bankruptcy Court by hiding hundreds of thousands of dollars worth of assets, but eventually paid "100 cents on the dollar" to his creditors.

The legal issue in the case was how to properly calculate "loss" under the Sentencing Guidelines, which increase a "fraudster's" recommended sentence based on the loss he causes, or intends to cause, his or her victims. The curious part about Free was that the victims, defendant's creditors, were paid in full, therefore they had not suffered any loss in the usual sense of the word.

In Free, plaintiff filed for bankruptcy in his capacity as as the sole proprietor of an electric company he owned. He also owned a company that specialized in the sale of vintage firearms, which would become a central part of his bankruptcy case. Free claimed that he filed for bankruptcy to stay the sheriff's sale of property he was on the verge of losing through foreclosure. When he filed, he identified more than $1 million in assets — property and personal property, including firearms — and almost $700,000 in liabilities.  He originally filed under Chapter 13, but the court converted it to a Chapter 7 bankruptcy, which would liquidate his assets and distribute the proceeds to his creditors.

Continue reading “File for bankrupcty when you have enough assets to pay your debts, then hide some assets . . . what could go wrong?” →

For Richer And For (Perhaps Very Shortly) Poorer: Wife Must Testify About Husband’s Allegedly Hidden Assets

by:  Peter J. Gallagher (@pjsgallagher)

For husbands, the lesson from a recent Appellate Division opinion is that you cannot assert the marital privilege in an attempt to keep their wives from being deposed by a judgment creditor about assets that you might be trying to conceal from that judgment creditor. In U.S. Electrical Services, Inc. v. Electrical Solutions Group, Inc., plaintiff obtained a judgment for approximately $165,000 against defendants (a corporation and an individual who was alleged to be the sole shareholder of the corporation). In post-judgment proceedings, plaintiff applied for, and obtained, an order of discovery permitting the deposition of the individual defendant's wife based upon plaintiff's assertion that she had knowledge of certain assets that the individual defendant had failed to disclose.

The individual defendant moved to vacate the order, arguing that any testimony from his wife would be subject to the marital privilege — codified at N.J.SA 2A:84A-22 — and that he did not consent to the disclosure of the information. The trial court denied the motion, holding that the individual defendant's wife could be deposed about her "first-hand knowledge and observations of facts and occurrences." The individual defendant appealed.

The Appellate Division affirmed the trial court's order. It started with the general proposition that privileges must be narrowly construed. With this in mind, it turned to the specific elements of the marital privilege: (1) a communication; (2) made in confidence; (3) between spouses. The Appellate Division further noted that the purpose of the privilege is to "encourage[] free and uninhibited communication between spouses, and, consequently, [to] protect[] the sanctity and tranquility of marriage." But, because the "only effect" of the privilege is to "suppress[] [] relevant evidence," it must be "confined as narrowly as is consistent with the reasonable protection of marital communications."

In U.S. Electrical Services, the individual defendant argued that any "personal and business financial records" that he "brought into the martial home where [his wife] may have seen them [were] necessarily [ ] confidential communication[s] between spouses." The Appellate Division disagreed for a number of reasons.

First, it held that documents that were stored in the marital home and were observed by a spouse do not a "confidential communication" make. The privilege protects communications, not conduct or occurrences. Thus, a wife's observations of what her husband did, including bringing documents into the marital home, are not covered by the privilege. The court did hold, however, that communications about the documents could potentially be protected under the marital privilege "provided the right proofs" (which were not present in the instant case).

Second, the Appellate Division held that the contents of the documents were not automatically privileged "just because both parties have seen them." In this regard, the court held that many business and financial records are generated by, or submitted to, third parties outside of the marital home. As a result, they may not be confidential at all. Moreover, the Appellate Division observed that, even if documents were initially confidential, "placement in the home where another member of the household or a guest could discover them does not guarantee continued confidentiality." At a minimum, a party seeking to assert the privilege would have to demonstrate that the underlying documents remained confidential while in the marital home.

Third, the Appellate Division held that the act of leaving document in the marital home does not encourage communications between spouses or protect marriages, the very purpose behind the privilege. Absent convincing evidence that applying the privilege would protect and further the interests it was designed to advance, the Appellate Division saw no reason to recognize the privilege.

Ultimately, the take home message from U.S. Electrical Services is that simply bringing documents into the marital home, and even sharing them (or making them visible or available to  your spouse) does not bring the existence or content of those documents within the marital privilege. But, both the trial court and Appellate Division left open the possibility that communications about such documents, in the right situation, might be privileged.

Extra! Extra!

by: Peter J. Gallagher (@pjsgallagher)

The latest edition of  "Commercial Litigation Briefs" is out. The newsletter is published by my firm and contains short articles on topics and cases of interest to commercial litigators. This month there are two articles — one by me and one by my colleague, John DeSimone. My article discusses a recent decision from the Delaware Supreme Court that required Wal-Mart to produce attorney-client communications to shareholders as they investigated whether to bring a derivative lawsuit against the company. John's article reports on a recent New Jersey Appellate Division decision about debt buyers trying to collect on charged-off credit card accounts they purchased from other debt buyers, which also provides helpful guidance for litigators on the hearsay exception for business records.

Enjoy!