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In Cooling Guard Mechanical Corp. v. Frankl, No. BER-C-119-17 (N.J. Super. Ct. Ch. Div. Aug. 21, 2017), the New Jersey Superior Court decided an issue of first impression under New Jersey law: whether a creditor must have been a creditor at the time of an alleged transfer in order to subsequently avoid the transfer as an actual fraudulent conveyance. The court held in the affirmative. Because the plaintiffs were not creditors at the time of the alleged transfer, the court dismissed the complaint.

The defendants, a husband (Andy) and wife (Dawn), conveyed their residence in Franklin Lakes, which they owned as tenants by the entirety, to Dawn alone in 2004 for the sum of $1.00. For unexplained reasons, and notwithstanding the 2004 conveyance, the defendants repeated this transaction in 2009.

In 2016, one plaintiff (Cooling Guard) settled litigation against Andy and Ibex (Andy’s company) through a settlement requiring them to pay Cooling Guard a total of $54,500 in 10 monthly payments, of which only six were made. The other plaintiff, Peeples Mechanical, entered into two subcontract agreements with Ibex in 2016 and asserted that Ibex failed to make payment thereunder.

In 2017, Cooling Guard and Peeples Mechanical commenced a lawsuit asserting that the 2004 and 2009 conveyances of the defendants’ residence to Dawn were “made with actual intent to hinder, delay, or defraud [Andy's] then current creditors and/or future creditors.” The plaintiffs also alleged that the defendants conspired to fraudulently transfer their residence and that both conveyances should be avoided as actual and constructive fraudulent conveyances under the New Jersey Uniform Fraudulent Transfer Act (UFTA), N.J.S.A. 25:2-20, et seq.

The defendants moved to dismiss the complaint, arguing that the count alleging actual and constructive fraudulent conveyances should be dismissed because the plaintiffs were neither present nor future creditors of the defendants at the time of the conveyances and that the plaintiffs’ claims were barred by the statute of limitations.

The court first addressed the statute of limitations issue, noting that UFTA was enacted “to prevent the debtor from placing his or her property beyond a creditor’s reach.” Slip op. at 12. An action under UFTA to avoid an actual fraudulent transfer must be commenced within four years after the transfer or, if later, within one year after the plaintiff discovered the transfer. For constructive fraudulent transfers, UFTA provides only a four-year limitations period with no discovery exception. N.J.S.A. 25:2-31. The court held that plaintiffs’ actual fraud claims were timely filed based on their certification that they filed their complaint within one year after discovering the challenged transfers. Slip op. at 14. However, the court held that plaintiffs’ constructive fraud claims were time-barred because UFTA does not provide a discovery rule for those claims. Slip op. at 14-16.

The court next addressed the merits of plaintiffs’ actual fraud claims, in which the plaintiffs argued that the conveyances were fraudulent as to “Andy’s then current creditors and/or future creditors.” Id. at 3. The court noted that UFTA itself does not use the phrase “future creditors,” which is found only in the title of the statute and is not defined in UFTA. Citing prior case law, the court held that titles are not considered part of statutes and do not assist in statutory interpretation. Slip op. at 17.

UFTA provides in pertinent part that “[a] transfer made … by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made ….” N.J.S.A. 25:2-25(a). The court noted that UFTA defines a “creditor” as “a person who has a claim[,]“; a “claim” as “a right to payment”; and a “debtor” as “a person who is liable on a claim.” N.J.S.A. 25:2-21.

Neither plaintiff had any right to payment from Andy in 2004 or 2009, and thus neither plaintiff was a creditor when the challenged transfers of the defendants’ residence took place. For actual fraudulent transfers, the court held that the “actual intent” language of UFTA “requires that the requisite mental state—actual intent to hinder, etc.—be [in] existence at the time of the transfer” and that it “can not be viably contended” that the defendants intended, at the time of challenged transfer of the defendants’ residence, to hinder collection efforts arising under contracts that entered into in 2013 and 2015. Slip op. at 18. Thus, the court held that neither plaintiff could assert a claim for avoidance of the transfers as actual fraudulent conveyances and granted defendants’ motion to dismiss the actual fraud claims.

The court discussed in dicta several older Pennsylvania decisions arising under the predecessor to UFTA. Under that statute, one court noted that a claim to avoid an actual fraudulent conveyance could “be brought where ‘the conveying party can reasonably foresee incurring the costs of a claim or judgment at the time of the conveyance.’” Id. at 19. However, the court did not apply this analysis because it determined that it “can not be viably contended” that Andy could have reasonably foreseen in 2004 or 2009 that he would incur costs of a claim or judgment in 2016 or 2017 based on contracts entered into in 2013 and 2016. Nevertheless, future plaintiffs that wish to assert claims for actual fraudulent transfers, but were not creditors of the transferor at the time the challenged transfers were made, should analyze whether the transferor nevertheless could have reasonably foreseen owing them money in the future.

After dismissing plaintiffs’ claims for actual fraud, the court noted (although it did not rule on the issue, having already determined plaintiffs’ constructive fraud claims were time-barred) that constructive fraud “by contrast, can accommodate unknown, future ‘victims.’” Id. In other words, a plaintiff asserting a constructive fraud claim need not have been a creditor of the defendant at the time of the challenged transfer.

The Cooling Guard decision draws an important distinction between actual and constructive fraudulent transfers: while an actual fraudulent transfer claim generally cannot be sustained if the plaintiff was not a creditor of the transferor at the time the challenged transfer occurred, a constructive fraudulent transfer claim made under the same circumstances may nevertheless be viable—so long as the claim is brought within the strict four-year limitations period.•

Next Week…

The Settlement Series