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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When, If Ever, Is A Residential Mortgage Not “Residential” For The Purpose of Foreclosure?

     by:  Peter J. Gallagher (@pjsgallagher)

Believe it or not, this question comes up from time to time in my practice (exciting life, I know). In recent years I have prosecuted many foreclosure actions, but only commercial foreclosures. So the first question I usually ask a colleague who comes to me with a foreclosure  question is: "Is it a commercial or residential property?" When the answer starts with something like, "Well, that is actually an interesting question . . . " then I can almost guess what is coming next. Usually it is some variation of: "It is a home, but they mortgaged it to get money to start a commercial enterprise, so I want to argue that its commercial property." Unfortunately, you usually can't make that argument (at least not successfully), and the Appellate Division's recent decision in City National Bank of New Jersey v. Hodge reminded us all of that fact again.

To begin with, the differences between commercial and residential foreclosures in New Jersey are significant. Most importantly, commercial foreclosures are not subject to the Fair Foreclosure Act, including the various notice requirements that are required for residential foreclosures under the Act. Simply put, New Jersey law provides greater protections for residential owners who are about to lose their homes than they do for commercial owners who are about to lose their place of business. This means that the burdens on lenders seeking to foreclose on a residential mortgage are more demanding, if not entirely onerous.

 

Continue reading “When, If Ever, Is A Residential Mortgage Not “Residential” For The Purpose of Foreclosure?”

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.

Fair Foreclosure Act Does Not Apply When Borrowers No Longer Reside at Secured Premises At the Time of Default

by:  Matthew J. Schiller

New Jersey’s legislature enacted the Fair Foreclosure Act in order to afford homeowners “every opportunity to pay their home mortgages, and thus keep their homes.”  Amongst its safeguards, the Fair Foreclosure Act gives residential mortgagors statutory rights to cure defaults and requires mortgagees to notify mortgagors of their rights before filing a foreclosure action and another detailed notice before seeking entry of judgment. 

In Aurora Loan Services, LLC v. Einhorn, the Appellate Division concluded that the protections and requirements of the Fair Foreclosure Act do not apply if the mortgagors do not reside at the mortgaged property at the time of default – even if they did at the time of origination of the loan.    The Appellate Division interpreted the statutory definition of “residential mortgage” to have two requirements in order for the Fair Foreclosure Act to apply: (1) the mortgage must secure residential property that is occupied, or is to be occupied, at the time the Fair Foreclosure Act is to be applied; and (2) when the mortgage loan originated, the secured property must have consisted of four or fewer units, and one of those units must have been, or planned to have been, occupied by the debtor or a member of his or her immediate family. 

Accordingly, the Appellate Division concluded that if the debtor or its family do not occupy, or plan to occupy, the property when the loan originated, the Fair Foreclosure Act does not apply – even if the debtor resides at the property at the time of default.  Likewise, even if the debtor and/or its family occupied or planned to occupy the property when the loan originated, the Act will cease to apply if the debtor and its family vacate the property and convert it into a rental or investment property.    Therefore, if a debtor resides in another location at the time of default and provides no evidence of its intent to return to the mortgaged premises, the Fair Foreclosure Act, and the obligations imposed thereby on a mortgagee do not apply.