CHAPTER 7 ARTICLE
156 A.3d 1061 (2017)
228 N.J. 311 MOTORWORLD, INC., Plaintiff,
v.
William BENKENDORF, Gudrun Benkendorf, Benks Land Services,
Inc., Defendants.
Catherine E. Youngman, Chapter 7 Trustee for Carole Salkind,
Plaintiff-Appellant,
v.
William Benkendorf, Gudrun Benkendorf, Benks Land Services,
Inc., Defendants-Respondents.
No. A-64 September Term, 2015, No. 077009. Supreme Court of New Jersey.
Argued November 30, 2016.
Decided March 30, 2017.
On certification to the Superior Court, Appellate Division.
Andrew J. Karas argued the cause for appellant (Fox Rothschild and Forman Holt & Eliades attorneys); Mr. Karas and Joseph M. Cerra, on the briefs).
Diana C. Manning argued the cause for respondents (Bressler, Amery & Ross, attorneys; Ms. Manning and Benjamin J. DiLorenzo, on the brief).
JUSTICE PATTERSON delivered the opinion of the Court.
The Uniform Fraudulent Transfer Act (UFTA), N.J.S.A. 25:2-20 to -34, provides that a transfer made by a debtor is constructively fraudulent as to a creditor whose claim arose before the transfer was made, if the debtor made the transfer without receiving "reasonably equivalent value" in exchange for the transfer and the debtor was insolvent at that time or became insolvent as a result of the transfer. N.J.S.A. 25:2-27(a). In order to constitute "reasonably equivalent value" for purposes of the UFTA, the "value" must be received by and for the benefit of the debtor-transferor, not for the benefit of a different person or entity. Ibid.; Nat'l Westminster Bank NJ v. Anders Eng'g, Inc., 289 N.J.Super. 602, 605, 674 A.2d 638 (App. Div. 1996); Flood v. Caro Corp., 272 N.J.Super. 398, 406-07, 640 A.2d 306 (App. Div. 1994).
In this appeal, a bankruptcy trustee and a corporation owned by the bankrupt debtor challenge the corporation's release of a debt, on the ground that the release constituted a constructively fraudulent transfer under the UFTA. The debt that was released had previously been owed to the corporation by a landscaping business that was a creditor of two other corporations owned by the same shareholder. The other corporations' debts to the landscaping business were extinguished in exchange for the release.
The trial court concluded that the transfer was constructively fraudulent under N.J.S.A. 25:2-27(a) because the corporation relinquished its sole asset without receiving "reasonably equivalent value" in return. An Appellate Division panel reversed that determination. The panel held that the transfer benefited the debtor corporation's sole shareholder because it extinguished the debts of two other corporations that she owned. The Appellate Division determined that the transfer was therefore made for "reasonably equivalent value" and that it was not constructively fraudulent under N.J.S.A. 25:2-27(a).
We hold that the Appellate Division panel improperly ignored the distinction between the corporation that was the "debtor" for purposes of N.J.S.A. 25:2-27(a) and its shareholder, as well as the distinction between the debtor corporation and the other corporate entities that the shareholder owned. We conclude that the evidence fully supports the trial court's determination 1065*1065 that the corporation did not receive "reasonably equivalent value" in exchange for the disputed transfer. Accordingly, we reverse the Appellate Division's judgment and remand to the panel for its consideration of issues that it did not reach.
Andrew J. Karas argued the cause for appellant (Fox Rothschild and Forman Holt & Eliades attorneys); Mr. Karas and Joseph M. Cerra, on the briefs).
Diana C. Manning argued the cause for respondents (Bressler, Amery & Ross, attorneys; Ms. Manning and Benjamin J. DiLorenzo, on the brief).
JUSTICE PATTERSON delivered the opinion of the Court.
The Uniform Fraudulent Transfer Act (UFTA), N.J.S.A. 25:2-20 to -34, provides that a transfer made by a debtor is constructively fraudulent as to a creditor whose claim arose before the transfer was made, if the debtor made the transfer without receiving "reasonably equivalent value" in exchange for the transfer and the debtor was insolvent at that time or became insolvent as a result of the transfer. N.J.S.A. 25:2-27(a). In order to constitute "reasonably equivalent value" for purposes of the UFTA, the "value" must be received by and for the benefit of the debtor-transferor, not for the benefit of a different person or entity. Ibid.; Nat'l Westminster Bank NJ v. Anders Eng'g, Inc., 289 N.J.Super. 602, 605, 674 A.2d 638 (App. Div. 1996); Flood v. Caro Corp., 272 N.J.Super. 398, 406-07, 640 A.2d 306 (App. Div. 1994).
In this appeal, a bankruptcy trustee and a corporation owned by the bankrupt debtor challenge the corporation's release of a debt, on the ground that the release constituted a constructively fraudulent transfer under the UFTA. The debt that was released had previously been owed to the corporation by a landscaping business that was a creditor of two other corporations owned by the same shareholder. The other corporations' debts to the landscaping business were extinguished in exchange for the release.
The trial court concluded that the transfer was constructively fraudulent under N.J.S.A. 25:2-27(a) because the corporation relinquished its sole asset without receiving "reasonably equivalent value" in return. An Appellate Division panel reversed that determination. The panel held that the transfer benefited the debtor corporation's sole shareholder because it extinguished the debts of two other corporations that she owned. The Appellate Division determined that the transfer was therefore made for "reasonably equivalent value" and that it was not constructively fraudulent under N.J.S.A. 25:2-27(a).
We hold that the Appellate Division panel improperly ignored the distinction between the corporation that was the "debtor" for purposes of N.J.S.A. 25:2-27(a) and its shareholder, as well as the distinction between the debtor corporation and the other corporate entities that the shareholder owned. We conclude that the evidence fully supports the trial court's determination 1065*1065 that the corporation did not receive "reasonably equivalent value" in exchange for the disputed transfer. Accordingly, we reverse the Appellate Division's judgment and remand to the panel for its consideration of issues that it did not reach.
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We summarize the facts based upon the trial record.
For several decades, Morton Salkind operated a range of businesses, primarily focused on real estate development. In 1988, he arranged for his wife, Carole Salkind, to become the sole shareholder of nineteen closely held corporations. Despite the change of ownership, Morton Salkind continued to manage the companies. This appeal involves three of those entities: plaintiff Motorworld, Inc. (Motorworld), established to explore the prospect of stock car racing at the Meadowlands Sports Complex; Fox Development, Inc. (Fox), a development company that built condominiums in Rockaway Township; and Giant Associates, Inc. (Giant), a development company engaged in a construction project at the Rockaway Town Hall.
Defendant William Benkendorf (Benkendorf) was the principal owner of defendant Benks Land Services, Inc. (Benks), which provided commercial landscaping, excavation, and snow removal services. In 2004, Morton Salkind contacted Benkendorf, whom he had known for many years, and retained Benks to provide landscaping services to some of the companies owned by Carole Salkind. Over a period of several years, Benks provided landscaping services to Fox in connection with its residential development project in Rockaway and to Giant as part of its Rockaway Town Hall project. It is undisputed that neither Benks nor Benkendorf provided landscaping services to Motorworld.
Benkendorf testified, and Morton Salkind agreed, that Benks was paid $5,000,000 for work performed on the Fox development project alone, and that Fox and Giant accumulated a debt to Benks in the amount of more than $1,000,000 in unpaid bills for landscaping and construction services.
In 2004, Benkendorf needed money immediately to resolve a federal payroll tax issue. Citing Fox's outstanding bills, Benkendorf approached Morton Salkind and asked for a loan. Salkind agreed to arrange a loan. According to Salkind, he decided to designate Motorworld as the lender in the transaction because the company was "clean" and had no liabilities.
Following Morton's instructions, Carole Salkind transferred $499,000 from her personal checking account into Motorworld's bank account. Although the record contains no note or other document memorializing the transaction between Carole Salkind and Motorworld, Motorworld's tax return characterized that transaction as a "loan" from Carole Salkind to Motorworld.
Benkendorf and his wife, defendant Gudrun Benkendorf, executed a note dated December 17, 2004 (Note). The Note, prepared by Morton Salkind's counsel at his direction, stated that the Benkendorfs would pay the principal amount of $600,000 by September 16, 2005, and would be assessed a ten percent penalty and twenty-four percent interest in the event of a default. The Note recited that the money was being loaned as an "accommodation" to the Benkendorfs so that they could "satisfy an IRS obligation [that was] imminently due." The Benkendorfs agreed not to "seek a set off, reduction or use of this Note to offset any money" owed to them or their companies by Fox, any other company in which Carole Salkind was a principal stockholder, "or any family members of Carole Salkind."
1066*1066 Benkendorf's company, Benks, guaranteed the Note. The obligation was secured by construction equipment and vehicles owned by Benks and other companies owned by the Benkendorfs. The same day, Motorworld issued a check to the Benkendorfs for $500,000 — $100,000 less than the principal amount set forth in the Note.
After he and his wife failed to pay the principal amount by the date set forth in the Note, Benkendorf asked Morton Salkind to "offset" the "late fees" owed to Motorworld "by monies owed to Benks by Giant Corp." Salkind declined Benkendorf's request for a setoff. Instead, the parties executed a First Amendment to the Note on September 29, 2005, providing for a payment schedule and additional penalties and interest in the event of a further default.
Although the record suggests that the Benkendorfs made some payments toward their loan obligation, it is undisputed that they failed to repay the principal by the extended date. On October 11, 2006, the parties executed a Second Amendment to the Note, extending the deadline for repayment to January 1, 2007, and setting a payment schedule for the interest due on the loan. The Benkendorfs again failed to repay the loan by the extended date and entered into a Third Amendment to the Note on April 23, 2008. The Third Amendment extended the due date until March 1, 2009, and imposed substantial interest and late charges on the Benkendorfs.
In light of his escalating obligations, Benkendorf renewed his urgent request that Morton Salkind "clean this up" by treating the amount due on the Note as a setoff of the more than $1,000,000 owed to Benks by Carole Salkind's companies, Fox and Giant, for landscaping work. Benkendorf testified that by August 2008, he was angry at Morton Salkind for declining to enter into a setoff arrangement. Salkind, then awaiting sentencing on a federal tax evasion charge, wished to preserve a business relationship that he "cherished" and agreed to a setoff arrangement. He insisted, however, on what Benkendorf characterized as an agreement to "split it down the middle": Motorworld, no longer an active company, would cancel the Note — eliminating Benkendorf's obligation to pay the $600,000 in principal, as well as interest and penalties — and Benks and Benkendorf would forgo their right to collect from Fox and Giant more than $1,000,000 in unpaid bills for landscaping and related services. To Salkind, the agreement constituted "a two for one deal ... two to one in my favor," that he did not consider "a big deal." To Benkendorf, the terms of the arrangement were acceptable, notwithstanding his agreement to forgo repayment of the $1,000,000 owed, because he "never had much luck pursuing any debts. It was just a waste of time."
In accordance with that agreement, Motorworld and defendants effected the transfer at the center of this case. On August 8, 2008, Motorworld executed a Release that provided:
This shall serve to confirm that the $600,000.00 Promissory Note executed on December 17, 2004 in favor of Motorworld, Inc.; which Promissory Note was amended three times, is due March 1, 2009.
This shall further serve to confirm that in payment of the Promissory Note, Benks Land Services, owned by William C. Benkendorf, has performed site work services which were provided with regard to the Rockaway Town Hall project, and has provided various construction and maintenance services, on Buildings 15 & 16.
Based upon all of the above services, the Note has been satisfied and is at this point Paid in Full.
1067*1067 The Release was signed by Morton Salkind as Motorworld's Vice President. As confirmed by the attorney who prepared the Release at Salkind's direction, Motorworld had never been involved in the construction projects referenced in the Release.[1]
In March 2009, Morton Salkind filed a Chapter 7 petition for bankruptcy in the United States Bankruptcy Court for the District of New Jersey. In his petition, he listed no corporate entities as assets. In June 2009, Carole Salkind filed a Chapter 7 bankruptcy petition, listing Fox, Giant, and Motorworld among her corporate assets. In her petition, she stated that the value of her interest in Motorworld was "unknown." Consistent with the terms of the Release, Carole Salkind did not list the Benkendorfs' debt to Motorworld as an asset of that company.
The United States Bankruptcy Court appointed Catherine E. Youngman (Trustee) to serve as the trustee of both bankruptcy estates. The Trustee's investigation of Carole Salkind's assets revealed that Motorworld conducted no business, that its $500,000 debt to Carole Salkind was its sole liability, and that it had a single asset: the Benkendorfs' $600,000 debt to Motorworld, guaranteed by Benks, as memorialized in the December 17, 2004 Note. The Trustee's determination gave rise to this litigation.
