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The New Jersey Supreme Court declined on Monday to lower the threshold for fraud actions against lawyers whose clients are implicated in schemes against creditors. By a 7-0 vote in a case against a Cherry Hill attorney, the justices declared there is no cause of action against lawyers in New Jersey for the amorphous concept of “creditor fraud,” which prohibits acts intended to defraud a creditor even in the absence of common-law fraud elements. “Although the word ‘fraud’ is used in common parlance to connote any practice involving shady or underhanded dealing, in the law it is a term of art with a clear definition,” Justice Virginia Long wrote in ,A-5/6. “We hold that an amorphous creditor fraud claim that requires plaintiffs to prove neither reliance nor misrepresentation does not exist in New Jersey.” A lawyer can, however, be held liable for conspiracy to commit fraud or violation of the Uniform Fraudulent Transfer Act, the Court said. The decision is a relief to debtors’ lawyers because the Appellate Division endorsed the creditor fraud cause of action and the Third U.S. Circuit Court of Appeals had suggested two years ago that New Jersey’s high court would recognize it. Had the justices done so, lawyers could be sued for misconduct that, in effect, has no clear definition beyond the fact that creditors have been thwarted. The State Bar Association had argued as amicus that allowing such suits would open lawyers, indeed all professionals advising creditors, to claims just for representing clients suspected of fraud. The author of the Bar’s brief, Christopher Carey of Morristown’s Graham, Curtin & Sheridan, said the correct remedy for lawyer misconduct short of the traditional legal fraud is discipline. State Bar President Stuart Hoberman says, “We’re glad to see that to prove fraud against attorneys it requires the normal elements of fraud.” At issue was whether Banco Popular, in its pursuit of fast-food franchisee Suresh Gandi for $1.2 million in defaulted loans, could also seek recovery from Gandi’s lawyer, Richard Freedman of Cherry Hill’s Angelini, Viniar & Freedman, based on the latter’s advice. The bank sued Gandi for alleged fraudulent transfer of assets and when Gandi said in a deposition that Freedman told him to do it, the bank sued the lawyer for creditor fraud, common-law fraud, negligence and ethics violations. According to the complaint, Freedman gave advice that violated ethics rules and issued a misleading opinion on which he intended the bank to rely. The allegations, which Freedman says are untrue, have never been tested because Camden County Superior Court Judge William Cook granted a motion for dismissal, saying the bank failed to state a claim on which relief could be granted. The appeals court reinstated the creditor fraud and civil conspiracy claims but affirmed the dismissal of the common-law fraud and negligence claims. The Supreme Court threw out the creditor fraud claim but said Freedman could be liable for conspiracy to violate the UFTA. Stephen Falanga, a business litigation and bankruptcy lawyer at Roseland’s Connell Foley, says the decision is good news for the bar. “The chief problem with the lower court decision and the concept of ‘creditor fraud’ in general was the lowering of the legal standards for proving fraud,” he says. “With no clear guidance, an attorney could unintentionally be exposed to liability for ‘creditor fraud’ for merely counseling a client about their options or for assisting in common real estate transactions.” Freedman’s lawyer, Lance Kalik of Morristown’s Riker, Danzig, Scherer, Hyland & Perretti, says creditor fraud is so nebulous it can’t be proved or disproved. “Fraud is misrepresenting a fact upon which another relies,” he says. “Creditor fraud is not misrepresenting anything upon which no one relies, yet being tied up with a lawsuit because your client does something untoward and at some point you had some involvement with the client.” Even the bank’s lawyer likes the decision. “It puts attorneys on notice as to the kind of conduct that courts will not tolerate in the future when it comes to attempts to frustrate creditors,” says Samuel Feldman of Roseland’s Orloff, Lowenbach, Stifelman & Siegel. Feldman says the decision is not a blow to banks. The creditor fraud concept wasn’t well defined in the Appellate Division and “now the Supreme Court has incorporated the jurisprudence of civil conspiracy to make the rules clearer for attorneys and to banks as to what they need to prove,” he says. Not all observers see the decision as an unmitigated win for lawyers. Daniel Stoltz, a bankruptcy lawyer at Millburn’s Wasserman, Jurista & Stoltz, would have preferred a blanket rule that “you can’t have liability to somebody who is not your client.” This ruling, he says, “will allow creative plaintiffs’ lawyers who want to look for a deep pocket to . . . sue lawyers.”

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