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)

Star Trek (pd)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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NJ Supreme Court: LLP Cannot Be Converted To General Partnership For Failing To Maintain Liability Insurance

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

NJ Supreme Court (pd)On June 23, 2016, the New Jersey Supreme Court released its decision in Mortgage Grader, Inc. v. Ward & Olivo, LLP, a case in which I had the privilege of representing the New Jersey State Bar Association as amicus curiae. (I previously wrote about the case here.) As discussed below, the Supreme Court agreed with our arguments. 

In Mortgage Grader, a former client sued the defendant law firm and each of its partners after the firm dissolved. While the firm had maintained professional liability insurance while it was actively practicing, it did not purchase a "tail" policy to cover claims that arose after it dissolved. The trial court held that this violated Rule 1:21-1C(a)(3), which requires attorneys practicing as an LLP to "obtain and maintain in good standing one or more policies of lawyers' professional liability insurance which shall insure the [LLP] against liability imposed upon it by law for damages resulting from any claim made against the [LLP] by its clients." Accordingly, the trial court held that the individual partners were not shielded from liability as they would normally be as members of an LLP and were instead vicariously liable for their partners' negligence. In other words, the trial court effectively converted the LLP to a general partnership because it failed to maintain liability insurance. The Appellate Division reversed, holding that the trial court did not have the authority to strip the individual partners of their liability protections under either Rule 1:21-1C(a)(3) or the Uniform Partnership Act.

The NJSBA asked the New Jersey Supreme Court to affirm the Appellate Division's decision. The Supreme Court agreed, holding that: (1) the insurance requirements for LLPs did not extend to the period when a firm is "winding up" its business — i.e., when it is collecting receivables but no longer providing legal services; and (2) even if they did, an LLP could not be converted to a general partnership as a "sanction" for failing to maintain liability insurance. Justice Albin wrote a separate opinion, concurring with the judgment of the majority, but suggesting that the Court Rules be amended to provide that an LLP would lose its liability protection if it failed to meet the insurance requirements, and to require LLPs to purchase tail insurance for six years following their dissolution. 

The Supreme Court's opinion can be found here.

Entrepreneurial Inmate Loses Lawsuit

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

Jail (pd)While pro se lawsuits by prisoners are not unusual, you don't see ones like Tormasi v. Hayman every day.

In Tormasi, plaintiff sued several officials from the prison in which he was serving a life sentence. In the lawsuit, he claimed that they improperly seized his intellectual property assets and corporate records. As the Appellate Division explained: "During his incarceration, plaintiff acquired various intellectual property assets, which he assigned to Advanced Data Solutions Corporation (ADS) in exchange for sole ownership of the corporation." At some point during his incarceration, prison officials seized plaintiff's personal property, including: "1) miscellaneous corporate paperwork related to ADS . . 2) patent-prosecution documents; 3) an unfiled provisional patent application; 4) several floppy diskettes; and 5) various legal correspondence." Plaintiff sued in federal court, asserting a claim under the Takings Clause of the Fifth Amendment to the U.S. Constitution, various federal civil rights claims, and a state law claim for inverse condemnation.

 

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When is an LLP not an LLP? NJ Supreme Court to Consider Whether an LLP Converts to a GP if it Fails to Maintain Malpractice Insurance

Scales (pd)
On Monday, the New Jersey Supreme Court will hear oral argument in a case – Mortgage Grader, Inc. v. Ward & Olivo, LLP — that involves insurance, court rules, and statutory interpretation, but still manages to be interesting. I have the privilege of representing the New Jersey State Bar Association as amicus curiae in the case and will be part of the oral argument. (Unlike the U.S. Supreme Court, the New Jersey Supreme Court live streams all of its oral arguments. Click here on Monday at 1 pm to watch.) 

In Mortgage Grader, a former client sued the defendant law firm and each of its partners after the firm dissolved. While the firm had maintained professional liability insurance while it was actively practicing, it did not purchase a "tail" policy to cover claims that arose after it dissolved. The trial court held that this violated Rule 1:21-1C(a)(3), which requires attorneys practicing as an LLP to "obtain and maintain in good standing one or more policies of lawyers' professional liability insurance which shall insure the [LLP] against liability imposed upon it by law for damages resulting from any claim made against the [LLP] by its clients." Accordingly, the trial court held that the individual partners were not shielded from liability as they would normally be as members of an LLP and were instead vicariously liable for their partners' negligence. The Appellate Division reversed, holding that the trial court did not have the authority to strip the individual partners of their liability protections under either Rule 1:21-1C(a)(3) or the Uniform Partnership Act.

The NJSBA has asked the New Jersey Supreme Court to affirm the Appellate Division's decision. It has further suggested that if the Supreme Court is inclined to change Rule 1:21-1C(a)(3) to require that attorneys practicing as an LLP obtain a "tail" insurance policy to cover claims that arise after they dissolve, that this change be made through the normal rule making process and not as part of a decision in Mortgage Grader.

[BONUS COVERAGE: I plan to stick around after the oral argument in Mortgage Grader to hear oral argument in Robertelli v. The New Jersey Office of Attorney Ethics, a case I blogged about here and here. Robertelli involved an ethics  grievance filed against a defense lawyer who "friended" a plaintiff on Facebook.]

Transfer Can Be Fraudulent Even If It Occurs Before Loan, Default, And Lawsuit Over Default On Loan

Fraud (PD)A recent Appellate Division decision should serve as a warning to anyone thinking about transferring assets and rendering themselves judgment proof before entering into a business deal. If the deal goes bad, the transfer might be deemed fraudulent and creditors might be able to look to the fraudulently transferred assets to satisfy their judgments. 

In Anastasi v. Barmbatsis, defendants, husband and wife, held all of the shares in a single-purpose entity that owned and operated a Stewart's Root Beer in Franklin Park, New Jersey. Shortly before procuring a loan to open a new Stewart's location with a partner, husband transferred his interest in the entity to wife, along with nearly all of his interest in another entity that the two owned. Husband then entered into a deal with plaintiff — verbal, but "apparently sealed with a handshake" — to borrow $50,000 to use to open the new restaurant. Defendants used this money, along with other funds, to open the restaurant.

Husband agreed to repay the loan in five to seven months. This was subsequently extended but husband failed to repay the loan even with the extension. Plaintiff sued and obtained a default judgment against husband for $50,000. In post-judgment discovery, plaintiff learned about the pre-loan transfers from husband to wife. Thereafter, he sued both husband and wife alleging, among other things, that the transfers violated New Jersey's Uniform Fraudulent Transfers Act (the "UFTA"). The trial court ruled in plaintiff's favor. It held that wife was not personally responsible for paying back the loan, but plaintiff could satisfy his judgment with the interests in the two entities that husband had transferred to wife.

 

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Separate And Distinct Signature Required To Enforce Personal Guaranty From Corporate Officer or Director

by:  Peter J. Gallagher (@pjsgallagher)

In a recent unpublished decision, the Appellate Division again reminded us that a personal guaranty cannot be enforced unless the person against whom it is being enforced signed the guaranty. This may sound like an obvious reminder, but the issue comes up from time to time, particularly where a contract is entered into with a corporation and purports to contain a personal guaranty on behalf of an individual officer of the corporation. Unless the officer signs the contract in his or her personal capacity — i.e., not just on behalf of the corporation as an officer of the corporation — the guaranty will not be enforceable. I have blogged about this before.

In Herz v. 141 Bloomfield Avenue Corporation, plaintiffs leased property to the corporate defendant. The lease contained a provision whereby the individual defendant, the corporate defendant's president, agreed to be personally liable for all "obligations, rents (past and future), and damages" due under the lease. The individual defendant signed the lease, but did so only on behalf of the corporate defendant — the lease contained a signature block for the corporate defendant, but did not contain a separate signature block for the individual defendant.

After default, plaintiffs sued both the corporate defendant and the individual defendant. The individual defendant moved for summary judgment, arguing that he only signed the lease on behalf of the corporation and therefore could not be held liable under the personal guaranty. The trial court agreed and plaintiffs appealed. The Appellate Division affirmed.

 

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Thank You, Captain Obvious — It Is Improper To Throw Your Records In A Dumpster In Advance Of A Lawsuit

 by:  Peter J. Gallagher (@pjsgallagher)

When most litigators hear the term “spoliation” nowadays, they probably think of emails, servers, document retention policies, and back-up tapes. But the Appellate Division recently reminded us that old-fashioned spoliation is still alive and well (and improper).

In Hess Corporation v. American Gardens Management Company, plaintiff sued various single-purpose entities with which plaintiff had contracted to sell oil and gas. Plaintiff also sued the individual owner of all of these entities, which were essentially judgment proof, arguing that it was entitled to pierce the corporate veil and hold him liable because he had co-mingled funds and fraudulently conveyed and diverted assets from the various corporate entities for his personal use.

During discovery, plaintiff served the individual defendant with a document request. The individual defendant failed to respond and his answer was stricken. He later moved to reinstate his answer, first arguing that he could not answer the discovery request without implicating his Fifth Amendment right against self incrimination (which the court rejected) and then claiming that he did not have many of the documents requested. Based on the latter, the court vacated its prior order and reinstated his answer.

 

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