On Cloaking Devices And Usury: Lender Can Be Sued If It Uses Corporate Shell To Cloak A Personal Loan As A Business Loan

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.

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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)

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.

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Is A Locked, Fenced-In Parking Lot A “Structure”? It is in New Jersey.

by: Peter J. Gallagher (@pjsgallagher)

I was in law school during the Bill Clinton/Monica Lewinsky drama. When the pundits seized on Bill Clinton's grand jury testimony about what the "meaning of 'is' is," I recall one of my professors saying that lawyers make distinctions like that every day. In practice, I have learned that this is true. At depositions and in court, lawyers often argue over the meaning of certain words that most people would think are fairly uncontroversial. Sometimes these arguments are more for the sake of argument than anything else, but often they are crucial to the issues in the case, like in the recent New Jersey Supreme Court decision in State v. Olivero.

In Olivero, defendant was convicted of third-degree burglary for stealing metal printing rollers used in printing presses from a fenced-in lot that was adjacent to a warehouse. Defendant and his brother cut the chain and padlock that secured the fence around the lot before driving in and taking the rollers. Unfortunately for them, a security guard noticed that the chain and padlock had been cut and called the police, who arrested defendant and his brother as they attempted to drive out of the facility.

Under New Jersey law, "A person is guilty of burglary if, with purpose to commit an offense therein or thereon he . . . enters a structure." A "structure" is defined as "any building, room, ship, vessel, car, vehicle or airplane, and also means any place adapted . . . for carrying on business." At trial, defense counsel argued that defendant could not be found guilty of burglary because the lot was not a "structure." The trial court rejected this argument, holding that the fenced-in area was "a prohibited space not open to the public, as well as a place for carrying on . . business." The Appellate Division affirmed, noting that the lot was secured from the public.

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Indigent Corporations Are People Too! New Jersey Court Holds That Indigent Corporations Are Entitled To Appointed Counsel, Just Not Public Defenders

by: Peter J. Gallagher (@pjsgallagher)

Anyone who has watched Law & Order or any other police procedural probably knows the Miranda warnings by heart, including the part about the perpetrators having the right to an attorney and the right to have an attorney appointed to represent them if they cannot afford one. But, did you ever stop to consider whether an indigent corporation that is charged with a crime has the right to have counsel appointed to represent it? Probably not, right? (For me, it is hard to imagine Detective Lennie Briscoe (played by the great Jerry Orbach) slapping the cuffs on Enron and wise-cracking about their misuse of special purpose entities and mark-to-market accounting.) However, this question was recently addressed by the Appellate Division in an interesting opinion that offered a primer on both the history of the right to counsel under New Jersey Law and the public defender program before answering the question.

In State v. Western World, Inc., the defendant, Western World, Inc., was a corporation that operated “Wild West City,” which is, as the name suggests, a western heritage theme park. Western World was indicted in connection with a shooting that occurred during the reenactment of a gunfight. The indictment originally named Western World along with its president, one of its employees, and the entity that owned the land on which the theme park operated. In exchange for the dismissal of the indictment as to these other defendants, Western World agreed to plead guilty as an accomplice to one count of the indictment (third-degree unlawful possession of a handgun). As part of the plea agreement, Western World waived its right to appeal, except as to the “limited question of whether a carry permit was required by the actors under the facts of [the] case.” Western World was subsequently sentenced to one year of probation and required to pay a $7,500 fine. Western World was represented by private counsel throughout this process.

Approximately one month after Western World entered its guilty plea, its counsel wrote to the regional office of the Office of the Public Defender (“OPD”), indicating that Western World wanted to appeal the issue reserved for appeal as part of its plea agreement and also appeal the fine imposed upon it at sentencing. Counsel indicated that he would not be representing Western World because he had not been paid. He further indicated that the judge that accepted Western World’s plea indicated that it would be entitled to a public defender if it could not afford one, but that Western World had been “turned away by the Public Defender’s Office.”

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Today at SCOTUS – [Insert Bad Fish Pun Here]

by: Peter J. Gallagher (@pjsgallagher)

In an interesting case this morning at the US Supreme Court, the Justices will be asked to determine whether a fish is a “tangible object.” No. Really. That is the issue in Yates v. United States.

The Sarbanes-Oxley Act, which was passed in the wake of the Enron scandal, makes it a crime to “destroy, mutilate, conceal, or cover up any record, document, or tangible object” with the intent to obstruct a federal investigation. It is unlikely that Congress had fish in mind when it passed the Act, but this is nonetheless the federal law that was used to convict John Yates — captain of the Miss Katie, a commercial fishing boat out of Cortex, Florida — for throwing 72 red grouper that were allegedly below the legal limit back into the ocean.

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