Opinion
DOCKET NO. A-1433-11T4
09-05-2013
RHONDA DEL MASTRO, Plaintiff-Appellant, v. PHILIP B. GRIMADO; INDUSTRIAL CONCEPTS, INC., t/a ICI, INC.; DAVID McKEE; and PRECISIONS DEVICES ASSOCIATES, INC., Defendants-Respondents.
Peter L. MacIsaac argued the cause for appellant (Chasen Leyner & Lamparello, P.C., attorneys; Mr. MacIsaac and Joel A. Leyner, on the brief). Stuart J. Moskovitz argued the cause for respondents.
NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
Before Judges Lihotz, Ostrer and Kennedy.
On appeal from the Superior Court of New Jersey, Law Division, Bergen County, Docket No. L-2746-10.
Peter L. MacIsaac argued the cause for appellant (Chasen Leyner & Lamparello, P.C., attorneys; Mr. MacIsaac and Joel A. Leyner, on the brief).
Stuart J. Moskovitz argued the cause for respondents. PER CURIAM
In 2005, plaintiff Rhonda Del Mastro secured a judgment against defendant Philip B. Grimado. While attempting to obtain payment, plaintiff learned Grimado had closed his business, defendant Internal Concepts, Inc. (ICI). Thereafter, he began working as an employee of defendant Precisions Devices Associates, Inc. (PDA), which was owned by defendant David McKee. After Grimado closed ICI, PDA changed its business model and began servicing ICI's former customers. Plaintiff initiated this action under the Uniform Fraudulent Transfer Act (UFTA), N.J.S.A. 25:2-20 to -34, seeking to set aside and avoid what she maintained was a fraudulent transfer by Grimado of his business interest. Following a bench trial, the judge found plaintiff's complaint was barred by the statute of limitations and she otherwise failed to prove a fraudulent transfer. Plaintiff appealed from the October 13, 2011 judgment dismissing her complaint. We reverse and remand for a new trial.
I.
In an effort to provide context, we briefly discuss the court's entry of plaintiff's underlying judgment, followed by the facts surrounding defendants' business interests and the ICI's closing. Thereafter, we will review plaintiff's efforts to satisfy the underlying judgment and the events leading to the order dismissing her complaint.
On August 19, 2005, following a seven-day bench trial, Judge Peter E. Doyne issued a written opinion finding Grimado liable to plaintiff for intentional infliction of emotional distress and invasion of privacy (underlying tort action). The conduct forming the causes of action stemmed from Grimado's reaction to plaintiff's decision to end their intimate, nine-month relationship. Grimado hacked plaintiff's computer contacts to mail or deliver to her family, friends, and business clients "Christmas cards" filled with explicit photographs of plaintiff. An August 30, 2005 judgment awarded plaintiff $531,820.47 in compensatory and punitive damages. The judgment was affirmed on appeal. Del Mastro v. Grimado, No. A-0618-05 (App. Div. Mar. 20, 2007) (slip op. at 5).
It is undisputed that in July 2005, when fixing the amount of punitive damages in the underlying litigation, Judge Doyne considered extensive testimony regarding Grimado's assets. The evidence revealed the most significant asset Grimado held was an interest in ICI, a Sub-chapter S corporation. Although not disclosed at that time, in this matter Grimado maintained he began winding up ICI's affairs in April and May 2005, effectively closing ICI while the underlying tort litigation was concluding.
Aside from garnishing Grimado's wages, plaintiff has been unsuccessful in collecting her judgment. On July 31, 2009, she filed this complaint alleging defendants, through their respective companies, conspired to fraudulently transfer and conceal Grimado's assets to avoid paying plaintiff's judgment.
II.
During trial in this matter, the following evidence was presented. Grimado was ICI's sole owner. ICI serviced approximately fifty customers, focusing on the purchase and resale of electric motors, primarily used in medical equipment. The customers would place orders with Grimado on behalf of ICI, who in turn would purchase the product from a manufacturer; the predominant manufacturer was Moog Components Group (Moog). Generally, the manufacturer shipped the ordered items directly to the customer. Customers paid ICI when the order was placed, and ICI paid the manufacturer when the item was shipped, retaining as its fee the difference between what the manufacturer charged and what the customer paid. ICI's gross profit margin, based on its tax returns, was approximately 25%.
Grimado testified he had co-owned the business with his former wife and he claimed he obtained complete ownership upon their divorce in 2000. However, evidence introduced by plaintiff, including ICI's Federal and State reporting Sub-S returns show Christine Grimado was a shareholder of the corporation up until December 31, 2004.
Grimado ran the operation from his residence. ICI's telephone number was Grimado's cell phone number. As a service entity ICI maintained no inventory, facility, or physical assets. Grimado testified ICI had gross annual sales as high as $1 million to $1.5 million. In addition to his weekly salary, ICI paid Grimado's $800 monthly rent and his car lease.
ICI's 2003 and 2004 corporate income tax returns were at odds with Grimado's testimony. In calendar year 2003, ICI reported gross sales of $1,309,747, and total ordinary income of $200,903. ICI had a Fidelity investment account containing $224,905, accounts receivable of $162,979, and total retained earnings of $248,939. That year, Grimado was reported as a 50% shareholder, and his former wife, Christine Grimado, was the other 50% shareholder. In 2003, both shareholders received distributions of $99,332.
In calendar year 2004, ICI reported gross sales of $1,743,701, with ordinary business income of $211,675. ICI's tax return reported year-end accounts receivable totaling $285,296, retained earnings of $151,770, and cash of $55,605. As of the 2005 calendar year-end, the return reported all assets as zero.
We point out that although Grimado stated he owned ICI solely and was its sole employee, the 2004 return includes a K-1 distribution to Christine Grimado of $52,340 and states she owns 24.726776% of the stock.
On the 2005 return, Grimado was listed as the sole shareholder.
McKee was an engineer. He solely owned and operated PDA. He too worked from his home. McKee served as an authorized manufacturer's representative and an independent commissioned sales representative for Moog. PDA did not purchase and resell product, rather McKee designed motors in conformance with a client's needs and set up the client's account with Moog, which manufactured the motors in accordance with the specifications McKee had drawn.
McKee and Grimado met in the mid-1990s. McKee introduced Grimado to his customers, and Grimado became the customers' account salesman. The two men and their companies worked in tandem, performing different functions for many of the same customers which used Moog motors. When ICI's customer needed a Moog product, Grimado most often called McKee, Moog's manufacturer's representative, to place the order. Grimado profited from the mark-up on each motor he ordered on behalf of a client, and McKee received a commission on each item manufactured by Moog.
In late March 2004, Moog terminated McKee as its manufacturer's representative. At that point, McKee "probably" had "many conversations" with Grimado regarding changing the business model of PDA.
In April or May 2005, immediately before trial on plaintiff's underlying tort actions, Grimado spoke with McKee, and expressed his intention to close ICI. According to his most recent trial testimony, Grimado began cessation of business efforts in April 2005, by informing his customers he was closing his operation. Grimado asserted he could no longer handle the stress of owning and running his own company, could not focus, and was too overwhelmed by the day-to-day operations of running a business. He told the customers "they could contact Mo[og] or contact Dave McKee" or PDA. Grimado estimated he wrapped up all outstanding matters, collecting all accounts receivable, and satisfied all accounts payable no later than July 12, 2005. Sometime during this period, Grimado explained, all of ICI's business records were destroyed by a "computer virus."
Grimado acknowledged that in June 2005, during the underlying action, extensive expert testimony was presented by him and plaintiff on the value of ICI. Although this evidence was not included in the appellate record, the trial transcript does suggest Grimado's expert valued ICI at $250,000 and plaintiff's expert valued ICI at twice that sum. Further, during the underlying tort action, Grimado conceded he never mentioned he had closed ICI in April 2005.
Coincident with Grimado's efforts to close ICI, PDA began to provide similar services for customers. After the underlying judgment was entered in August 30, 2005, Grimado went to work for PDA. He stated his responsibilities included customer service, preparing customer invoices, which he in turn gave to McKee for billing and collection. Grimado testified he retained no computer records of customer transactions, but admitted he kept a hard copy of each invoices, which he discarded once McKee informed him payment was received.
As a PDA employee, Grimado performed his job from home, initially retaining the same cell phone number he had used at ICI. He called and serviced the same customers he had while running ICI, for which he was paid $66,000 annually, more than $80,000 less than he last earned at ICI. In addition to his annual salary, PDA reimbursed Grimado for expenses totaling $14,573.33 in fiscal year 2005; $17,660.90 in fiscal year 2006; and $18,372.21 in fiscal year 2007. It is unclear whether Grimado's telephone and health insurance costs were also reimbursed.
In referencing PDA's "fiscal year" we refers to the date of the fiscal year's commencement.
Both Grimado and McKee were opaque on the details of the events leading to Grimado's joining PDA. Grimado could not remember who broached the issue of him working for PDA or how his salary was set. McKee could not remember precisely which customers previously serviced by ICI were then serviced by PDA. On cross-examination, however, he identified a list of such customers supplied during discovery, eventually admitting he actually prepared the list.
McKee testified PDA had twenty-five or thirty customers when he began his new service business model, and at the time of trial, reported fifty customers, all of whom were serviced by Grimado. McKee admitted some former ICI customers had no prior association with PDA. After Moog terminated its relationship with him, McKee "worked with" Grimado "during that whole period of time." McKee accompanied Grimado on sales calls, "talked to customers, . . . [and] would get together and talk over customer situations, visit customers, things of th[at] nature." He expended these efforts because he "expected to do something later on with . . . Grimado[,]" such as "share ownership in another corporation or handle these customers, some[]way of working together because it was profitable." McKee asserted, "ICI as it was constituted then was a profitable way to do business." At the time he offered to hire Grimado, McKee knew ICI had grossed over $1 million per year.
McKee explained he considered the customers previously serviced by ICI to be his customers, even though he acknowledged PDA had not done business for most customers in many years and, for others, had never provided services. During his pre-trial deposition, when asked how much business PDA had in the year before Grimado joined, McKee admitted "very little to none." McKee also testified Grimado had referred business to PDA in the summer months before he joined PDA.
McKee also contradicted Grimado's testimony about the business operations and Grimado's responsibilities to maintain records. McKee stated when Grimado operated ICI, some product was delivered to Grimado's home "so [PDA] c[ould] bill him for it." If a product was sent directly to a customer, the bill went through Grimado. McKee testified this arrangement "had not changed" since Grimado began working for PDA. When Grimado called Moog to place an order, the paperwork generated by the manufacturer was sent to Grimado, who provided a copy of the invoice to McKee. All order confirmation forms were kept by Grimado.
McKee stated Grimado was responsible for entering invoices, accounts payable, and accounts receivable records on his computer at the time he received an order. He also was to bill the customer for the product. Grimado was the one who "maintain[ed]" these records "on his computer," and McKee "review[ed] them" by meeting with Grimado. McKee stated at some point after his review, Grimado would destroy the records, and no other record of the costs paid per the invoice was maintained by PDA.
When Grimado worked for ICI, he and McKee met "once every couple of weeks." This practice continued after Grimado commenced employment with PDA. The one change identified by McKee with respect to his relationship with Grimado after ICI closed and Grimado began working as PDA'S employee was McKee handled all the money and considered himself in "a supervisory role." McKee was asked specific questions regarding PDA's sales profits and general ledger, but he was unable to provide responsive answers. He also could not explain his supervisory responsibilities.
Plaintiff's forensic accounting expert, Thomas J. Reck, examined ICI's and PDA's tax returns, the personal income tax returns of Grimado and McKee, PDA's general ledgers, checks payable to Moog, and other pertinent materials. He assumed everything in PDA's business operations was a mere continuation of ICI's practices, with "[t]he only thing that changed [being] the entity through which goods were being sold," i.e., ICI's customers were now serviced by PDA and the customers were accordingly billed by PDA, not ICI.
In his analysis, Reck discerned unexplained percentages when he compared ICI's and PDA's sales. For example, during PDA's 2004 fiscal year, it had no cost of goods sold, as at that time, McKee received commissions as Moog's manufacturer's representative. ICI's 2004 tax return reflected it spent 78% of its gross receipts to buy the goods sold. In fiscal year 2005, a period PDA picked up the sales efforts previously performed by the then defunct ICI, PDA spent 92% of its gross receipts to buy the products it sold. Similarly, in 2006, PDA's spent 92.6% of its gross receipts to buy products for resale. Reck testified In his experience as a forensic accountant, he had never seen such a decline in gross profit percentages. He explained typically cost increases are gradual over time, in contrast to the dramatic 13% increase in cost of goods sold essentially reported from 2004 to 2005. However, he admitted it was impossible to verify whether there was an increase in product cost or a siphoning of profits because Grimado destroyed PDA's customer invoices.
In 2004, as we noted earlier, McKee and PDA acted as a manufacturer's representative for Moog, and did not purchase the goods for resale, but only received a commission on the Moog products. Accordingly, PDA had no purchase costs.
Plaintiff also introduced PDA's general ledgers for the fiscal years ending June 30, 2005 and June 30, 2006. PDA's business had significantly decreased as of June 30, 2005, and the ledgers predominately recorded expenditures for office equipment, McKee's car, health insurance, and AARP expenses. However, from July 1, 2005, to June 30, 2006, the year ICI's customers began being serviced by Grimado at PDA, deposits exceeded $1 million, a trend that continued thereafter.
The judge issued a written decision on October 13, 2011, entering judgment for defendants and dismissing plaintiff's complaint. He found any transfer of ICI's assets was completed by early July 2005; therefore, plaintiff's complaint, filed more than four years later, was untimely, and barred by the statute of limitations. The judge also examined the proofs and found plaintiff had not shown by clear and convincing evidence that Grimado fraudulently transferred ICI's assets. Finally, the judge rejected plaintiff's request for an award of sanctions for the spoliation of evidence in connection with the destruction of order records. Plaintiff appealed, challenging these three conclusions.
III.
In our review of the decision of a trial judge sitting without a jury, "'we do not disturb the factual findings and legal conclusions of the trial judge unless we are convinced that they are so manifestly unsupported by or inconsistent with the competent, relevant and reasonably credible evidence as to offend the interests of justice[.]" Seidman v. Clifton Sav. Bank, S.L.A., 205 N.J. 150, 169 (2011) (quoting In re Trust Created By Agreement Dated December 20, 1961, ex. rel. Johnson, 194 N.J. 276, 284 (2008) (internal quotation marks omitted)). "[T]he scope of appellate review is expanded when the alleged error on appeal focuses on the trial judge's evaluations of fact, rather than his or her findings of credibility." Walid v. Yolanda for Irene Couture, Inc., 425 N.J. Super. 171, 179 (App. Div. 2012) (citation omitted). Finally, the judge's "interpretation of the law and the legal consequences that flow from established facts are not entitled to any special deference." Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995) (citations omitted). As a result, we review the judge's legal conclusions de novo. Little v. KIA Motors America, Inc., 425 N.J. Super. 82, 90 (App. Div. 2012) (citing Manalapan Realty, supra, 140 N.J. at 378).
Before we examine the issues on appeal, we need to review the relevant provisions of the UFTA, upon which plaintiff's claims are based.
The purpose of the UFTA "is to prevent a debtor from placing his or her property beyond a creditor's reach." Gilchinsky v. Nat'l Westminster Bank N.J., 159 N.J. 463, 475 (1999) (citations omitted). The underlying policy is to prevent debtors from deliberately cheating creditors by removing their property from "the jaws of execution." Ibid.
In determining whether a transfer is fraudulent, a court must make two inquiries:
The first is whether the debtor or person making the conveyance has put some asset beyond the reach of creditors which would have been available to them at some point in time but for the conveyance. . . . The second is whether the debtor transferred property with an intent to defraud, delay, or hinder the creditor. Transfers calculated to hinder, delay, or defeat collection of a known debt are deemed fraudulent because of the debtor's intent to withdraw the assets from the reach of process. Both inquiries involve fact-specific determinations that must be resolved on a case-by-case basis.
[Gilchinsky, supra, 159 N.J. at 465-66 (internal quotation marks and citations omitted).]
The UFTA defines "transfer" as "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, and creation of a lien or other encumbrance." N.J.S.A. 25:2-22. Further, the statute defines fraudulent transfer as:
A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:
a. With actual intent to hinder, delay, or defraud any creditor of the debtor; or
b. Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:
(1) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
(2) Intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor's ability to pay as they become due.
[N.J.S.A. 25:2-25.]
In determining whether the debtor acted with "actual intent" to defraud creditors, the court must consider several statutory factors, or "badges of fraud," including whether:
a. The transfer or obligation was to an insider;
b. The debtor retained possession or control of the property transferred after the transfer;
c. The transfer or obligation was disclosed or concealed;
d. Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;
e. The transfer was of substantially all the debtor's assets;
f. The debtor absconded;
g. The debtor removed or concealed assets;
h. The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
i. The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
j. The transfer occurred shortly before or shortly after a substantial debt was incurred; and
k. The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.
[N.J.S.A. 25:2-26.]
In an action alleging a fraudulent transfer occurred, the court must consider "whether the badges of fraud are present, not whether some factors are absent." Gilchinsky, supra, 159 N.J. at 477. The "confluence of several [badges of fraud] in one transaction generally provides conclusive evidence of an actual intent to defraud." Ibid. (citing Max Sugarman Funeral Home, Inc. v. A.D.B. Investors, 926 F.2d 1248, 1254-55 (1st Cir. 1991)). A plaintiff bears the burden of proving the statutory elements by clear and convincing evidence. Jecker v. Hidden Valley, Inc., 422 N.J. Super. 155, 164 (App. Div. 2011) (citation omitted), certif. denied, 210 N.J. 28 (2012).
On appeal, plaintiff first maintains defendants waived their right to assert a statute of limitations defense and the judge erred in holding plaintiff's complaint was time-barred. We agree.
A statute of limitations is not "self-executing," and generally must be raised as an affirmative defense. Zaccardi v. Becker, 88 N.J. 245, 256 (1982). Pursuant to Rule 4:5-4, "an affirmative defense that is not pleaded or otherwise timely raised is deemed to have been waived." Pressler & Verniero, Current N.J. Court Rules, comment 1.2.1 on R. 4:5-4 (2013) (citations omitted). If the defense is not properly raised and adjudicated, "a stale claim filed after the expiration of the applicable statute of limitations is nonetheless valid." Notte v. Merchants Mut. Ins. Co., 185 N.J. 490, 500 (2006).
Here, defendants' answer did not assert as an affirmative defense that plaintiff's action was barred by the statute of limitations. The judge incorrectly determined the defense was nonetheless timely raised in defendants' motion for summary judgment. However, this error alone does not require reversal of the judgment. The UFTA itself prescribes requirements for the timely assertion of a claim and thus we turn to those requirements.
N.J.S.A. 25:2-31, titled "Extinguishment of cause of action," provides in relevant part:
A cause of action with respect to a fraudulent transfer or obligation under this article is extinguished unless action is brought:
a. Under subsection a. of [N.J.S.A.] 25:2-25, within four years after the transfer was made or the obligation was incurred or, if later, within one year after the transfer or obligation was discovered by the claimant[.]
The statute was amended in 2002 to delete the phrase, "or could reasonably have been," preceding the word "discovered." L. 2002, c. 100, § 1.
Contrary to the judge's characterization, this provision is a statute of repose, not a statute of limitations.
A statute of limitations is a procedural device operating as a defense to limit the remedy available upon proof of an existing cause of action. . . . Such statutes are designed to protect defendants from unexpected enforcement of stale claims by plaintiffs who fail to use reasonable diligence in prosecuting their claims.Thus, "[e]xpiration of a statute of limitations operates to bar the filing and prosecution of what is deemed a stale suit." Id. at __ (slip op. at 10) (citations omitted).
[Cumberland County Board of Chosen Freeholders v. Vitetta Group, P.C., __ N.J. Super. __, __ (App. Div. 2013) (slip op. at 9-10) (internal quotation marks and citations omitted).]
A statute of repose likewise addresses the timeliness of initiating actions, but also defines substantive rights. See Daidone v. Buterick Bulkheading, 191 N.J. 557, 564-65 (2007) (explaining a statute of repose may preclude an otherwise valid cause of action from ever arising) (citations omitted)). "The basic feature of a statute of repose is the fixed beginning and end to the time period a party has to file a complaint." R.A.C. v. P.J.S., Jr., 192 N.J. 81, 96 (2007) (citations omitted). "Unlike a conventional statute of limitations, the statute of repose does not bar a remedy but rather prevents the cause of action from ever arising." Port Imperial Condo. Ass'n v. K. Hovnanian Port Imperial Urban Renewal, Inc., 419 N.J. Super. 459, 469 (App. Div. 2011) (citing Rosenberg v. Town of N. Bergen, 61 N.J. 190, 199 (1972)). Unlike statutes of limitations, statutes of repose are self-executing. Notte, supra, 185 N.J. at 500.
The statutory language, providing a cause of action is extinguished, rather than barred, if not filed within the designated period of time, suggests this is a period of repose. Also, the legislative history provides: "The bill . . . bars the right rather than the remedy on expiration of the statutory periods prescribed." Senate Labor, Industry and Professions Committee, Statement to A. 1265 (enacted as L. 1988, c. 74). See also Unif. Fraudulent Transfer Act § 9, 7A U.L.A. 194, 195 cmt. 1 (2006) (noting drafters of the UFTA stated the purpose of this section "is to make clear that lapse of the statutory periods prescribed by the section bars the right and not merely the remedy"); Intili v. DiGiorgio, 300 N.J. Super. 652, 660 (Ch. Div. 1997) (relying on this legislative history and noting the UFTA "expressly limits a creditor's right to set aside a transfer to the time period in the statute"); In re Princeton-New York Investors, Inc., 199 B.R. 285, 293 n.4 (Bankr. D.N.J. 1996) (finding N.J.S.A. 25:2-21 is a statute of repose because it bars the right to bring the action, rather than the remedy proscribed).
We note the legislative history mistakenly refers to N.J.S.A. 25:2-31 as a "statute of limitations." It is not unusual to see the terms statute of limitations and statute of repose used interchangeably; however, that is an inaccuracy, as they are different. We conclude use of the statute of limitations label here was a mere misnomer, in light of the actual description of intent that follows, stating the provision is designed to bar a right, not a remedy, as is characteristic of a statute of repose.
Here, plaintiff's complaint was required to be filed within four years of the allegedly fraudulent transfer or, if later, within one year of her discovery thereof. N.J.S.A. 25:2-31a. Plaintiff discovered the termination of ICI and the alleged subsequent transfer during Grimado's deposition on October 17, 2005, making the one-year period inapplicable. We examine whether plaintiff's UFTA action was timely under the four-year period of repose.
We reject as lacking merit, plaintiff's contention the trial judge erroneously interpreted N.J.S.A. 25:2-31 to provide "a claimant who becomes aware of a fraudulent conveyance has merely one year time period for filing a complaint." R. 2:11-3(e)(1)(E). The judge correctly stated N.J.S.A. 25:2-31 does not bar a claimant's action so long as it is brought "within four years after the transfer or within one year of actual discovery of the transfer."
Plaintiff's complaint asserted the fraudulent transfer occurred when Grimado went to work for PDA. However, the judge concluded ICI had ceased operation at or around the date Grimado identified, July 12, 2005, and, therefore, by the date Grimado commenced employment with PDA, there were no assets to transfer. Consequently, he found plaintiff's complaint had not been timely filed.
Although we generally defer to a trial court's findings, particularly those regarding credibility, we do not blindly accept trial findings that fail to properly evaluate all evidence presented. We reverse when convinced the findings made are "so manifestly unsupported by or inconsistent with the competent, relevant and reasonably credible evidence as to offend the interests of justice[.]" Rova Farms, supra, 65 N.J. at 484.
We are aware the trial judge included a general finding that the two fact witnesses who testified, Grimado and McKee, were credible, as "[t]hey made good eye contact, answered questions forthrightly and calmly, and presented candid demeanors." Nevertheless, in evaluating the sufficiency of the evidence, we find the judge failed to consider Grimado's evasive and reticent responses; his deliberate concealment of the shut-down of ICI while, during the underlying trial, introducing evidence about its ongoing value; inconsistencies in Grimado's and McKee's responses on important issues pertaining to records and business operations at PDA; and Grimado's destruction of evidence with McKee's knowledge and apparent assent.
During the underlying tort action, Grimado conceded he "felt no obligation to disclose to the court, which was making a valuation of the ICI business, that he was actually closing it." Here, too, Grimado teeters on the edge of dissembling, given that, by his own testimony, ICI had been closed for months at the time he testified in the underlying tort action and presented expert valuation of ICI. Further, when asked why he never mentioned he had, in fact, closed ICI, Grimado blithely responded, "no one asked." In our view, these facts display neither candor nor forthrightness. Rather, these facts suggest an attitude which impugns the integrity of the court. See Ali v. Rutgers, 166 N.J. 280, 288 (2000). Grimado's assertions in each of these two court proceedings are more than inconsistent; the two positions are so unreconcilable that we are compelled to invoke the doctrine of judicial estoppel.
"Judicial estoppel is an extraordinary remedy that should be invoked only when a party's inconsistent behavior will otherwise result in a miscarriage of justice." Commercial Ins. Co. of Newark v. Steiger, 395 N.J. Super. 109, 114 (App. Div. 2007) (internal quotation marks and citations omitted). In Ali, supra, the Court emphasized:
"The purpose of the judicial estoppel doctrine is to protect 'the integrity of the judicial process.' Cummings v. Bahr, 295 N.J. Super. 374, 387 (App. Div. 1996). A threat to the integrity of the judicial system sufficient to invoke the judicial estoppel doctrine only arises when a party advocates a position contrary to a position it successfully asserted in the same or a prior proceeding. Chattin v. Cape May
Greene, Inc., 243 N.J. Super. 590, 620 (App. Div. 1990), aff'd o.b., 124 N.J. 520 (1991)."
[166 N.J. at 287-88 (quoting Kimball Int'l, Inc. v. Northfield Metal Prod., 334 N.J. Super. 596, 608 (App. Div. 2000)).]
Here, the judge neither assessed nor commented on the contrary testimony offered by Grimado. Further, the July and August 2005 testimony regarding ICI's value belies Grimado's new contention that business operations ceased in April or May 2005, and were completed by July 12, 2005. As we will discuss in more detail below, these contradictions also must be evaluated in light of Grimado's claims he has no records from this period, records which, if available, would either support or refute plaintiff's contention.
A close examination of the financial documents that were produced reflects a very healthy, viable business. Grimado offers his feelings of malaise and being overwhelmed, yet in 2004, ICI reported its highest ever gross receipts of $1,743,701, resulting in distributions of $211,675 to Grimado and his former wife. If Grimado is to be believed that he just stopped working in April 2005, ICI's gross receipts of $606,360 for the first four months suggests it would have been on track to reach $1,819,080 for the year, a figure belying Grimado's claims of an inability to focus on his business.
Further, we note, as of January 1, 2005, ICI reported $55,605 in cash and $285,296 in accounts receivable. Also, retained earnings, part of stockholders' equity, are reported as $151,770. While Grimado likely dissipated the cash and dissolved the retained earnings, because of his assertion regarding the unavailability of records precluded verification of Grimado's claimed disposition of accounts receivable.
We conclude the judge failed to consider evidence offered by Grimado in the underlying tort action, which critically bears on whether judicial estoppel precludes Grimado's new assertion that ICI was closed as of July 12, 2005. On this record, we conclude it does, and the finding by the judge that Grimado had no business by July 12, 2005, cannot stand. Therefore, plaintiff's complaint would have been filed within the statutory period of repose.
We find the judge erred in finding ICI had no assets, a finding obviating the possibility of a fraudulent transfer, see Karo Mktg. Corp. v. Playdrome Am., 331 N.J. Super. 430, 444 (App. Div.) (holding no cause of action arises if no asset of value was transferred), certif. denied, 165 N.J. 603 (2000), because he erroneously limited ICI's assets to tangible property.
We also note the trial judge erred in determining ICI's assets were not transferred to McKee and PDA. The finding ignored the transfer of ICI's client list, which was not, as the trial court found, simply a matter of "Grimado's personal knowledge and skills."
Under the UFTA, the term "asset" is defined as "property of a debtor" (with a few exclusions not applicable here), N.J.S.A. 25:2-21, and "property" is defined as "anything that may be the subject of ownership," N.J.S.A. 25:2-22. In a service business like ICI, this would include intangibles such as a list of customers. "Where a company's business is to provide services, information about customers is a property right of the company." AYR Composition, Inc. v. Rosenberg, 261 N.J. Super. 495, 504 (App. Div. 1993) (citation omitted). "This is proper because a service company must obtain its customers 'at the cost of time, trouble and expense in soliciting and obtaining them as customers.'" Ibid. (quoting Abalene Extermination Co. v. Oser, 125 N.J. Eq. 329, 331 (Ch. 1939)). See also Karlin v. Weinberg, 77 N.J. 408, 417 (1978) (explaining an employer has a legitimate business interest in client relationships, which may be protected); Whitmyer Bros., Inc. v. Doyle, 58 N.J. 25, 33 (1971) (holding an employer has "a patently legitimate interest in protecting . . . his customer relationships"); Hollister v. Fiedler, 22 N.J. Super. 439, 445 (App. Div. 1952) (noting customer lists were a valuable asset of an insurance company).
This court reviewed this issue and quoted Hollister, stating:
"In the conduct of an insurance business, aside from the ability of the salesman to obtain customers to purchase insurance contracts, perhaps the most valuable asset is information as to who may be in the market for insurance protection and when the most likely time would be to solicit them. That pertinent information is obtained from the list of expirations or records or renewal dates for existing insurance contracts. . . . In fact, the accountant testified[:] "If you took the expirations away from the business, you would have no business."
[AYR Composition, supra, 261 N.J. Super. at 503 (quoting Hollister, supra, 22 N.J. Super. at 445).]
A review of AYR is also instructive. In AYR, supra, the defendants were the directors, and one the sole owner with his wife, of the company. 261 N.J. Super. at 500. The directors decided to cease business operations and join a different firm. Ibid. The defendants brought with them ten to twenty of the prior corporation's accounts, some of which had outstanding receivables, as well as the defunct corporation's client list and telephone number. Ibid. We affirmed the trial judge's findings and conclusion that the prior corporation's customer lists were a corporate asset, and the defendants had breached their fiduciary duty to the former corporation by transferring its sole lucrative asset. Id. at 500-01, 504-05. In our review, we agreed with the trial court that the "defendants' transfer of assets to [the new corporation] was a fraudulent conveyance as a matter of law" under the UFTA. Id. at 503 (citing United States v. Mazzara, 530 F. Supp. 1380, 1383 (D.N.J. 1982), aff'd 722 F.2d 733 (3d Cir. 1983)).
In this matter, the heart of ICI's sales success was its customer lists. Grimado asserted: "Well[,] without me[,] ICI had no need to exist." From this the judge concluded the business as actually Grimado's individual efforts. Additionally, based on a finding that ICI's customers were formerly actually PDA's long-time customers, the judge concluded no asset was transferred. Our review shows these findings are belied by the totality of the trial evidence.
The assertion that ICI just ceased doing business and PDA filled the void left by its closure is contradicted by deposition testimony, and McKee's trial testimony, which were not considered by the judge. McKee may have had an association with many of ICI's customers at some time in the past, yet he candidly admitted in his deposition that PDA was not providing services to ICI's customers prior to August 2005. In fact, McKee admitted PDA performed almost no sales and its gross receipts resulted solely from Moog commissions. When Moog terminated McKee's manufacturer's representative relationship, PDA's work volume diminished and he began to accompany Grimado because he held an expectation of forming an association with him. PDA had not been providing sales services to its customers, and once it began servicing former ICI customers, its sales volume exploded. This fact is reflected by the dramatic increase in PDA's gross receipts and accompanying cost of goods sold shown on its tax returns for its 2005 and 2006 fiscal years.
At trial, McKee explained when Grimado suggested he would close ICI, he "probably" had "many conversations" with Grimado regarding changing the business model of PDA. He acknowledged that after Moog terminated his relationship, he accompanied Grimado on sales calls and "talked to customers, . . . would get together and talk over customer situations, visit customers, things of th[at] nature[,]" because he "expected to do something with Grimado" to capitalize on ICI's "profitable" business model, which "gross[ed] over one million dollars" per year in sales. Although McKee expressed he had some prior relationship with most of ICI's customers, this was at odds with his deposition testimony, in which he asserted ICI's customers became PDA's customers when Grimado became his employee, a fact similarly echoed by Grimado's deposition testimony.
The change in McKee's and Grimado's testimony from the time of their respective depositions to the time of trial also was not considered by the trial judge. However, this evidence strongly shows a purposeful transition of customers over several months in 2005, not a coincidental closure of ICI and PDA's provision of full services to existing customers. More important, the judge overlooked McKee's trial admission that he had not previously done business with some ICI customers, along with his specific testimony that PDA had twenty-five or thirty customers before ICI ceased, and fifty customers after Grimado joined PDA.
Finally, defendants' suggestion that there was no transfer of customer accounts because ICI ceased its operations then PDA began conducting sales is rejected as it is premised on an assertion for which the record provides inadequate support. To the contrary, the record shows conversations between McKee and Grimado during this transition period regarding the change in PDA's business model coincident with Grimado's claim of ICI's closure.
We also reject Grimado's legal assertion his actions were not fraudulently motivated to avoid payment to plaintiff because he ICI closed prior to the conclusion of the underlying tort litigation. A transfer of customer lists may be fraudulent even though it occurred prior to the entry of final judgment as the UFTA does not bar an action based on a transfer occurring before the creditor's claim arises. N.J.S.A. 25:2-25.
Following our review, we conclude the necessary, fact-specific analysis of the totality of all evidence would yield a determination Grimado transferred ICI's assets to PDA and McKee. We conclude the judge erred in his evaluation of the facts presented by plaintiff, requiring his findings to be set aside. Walid, supra, 425 N.J. Super. at 179.
This transfer of ICI's assets next must be examined for identifiable badges of fraud, as enumerated in N.J.S.A. 25:2-26. Although the judge considered and found certain badges of fraud, we agree with plaintiff that the court's analysis omitted others that appear applicable.
The trial judge identified some badges of fraud, stating: "Here, the most important factors are whether Grimado retained possession or control of the transferred property after the transfer[, N.J.S.A. 25:2-26b]; whether Grimado had been sued or threatened with suit before the transfer was made[, N.J.S.A. 25:2-26d]; and whether Grimado removed or concealed assets[, N.J.S.A. 25:2-26g]." We agree with plaintiff the court's analysis omitted adequate consideration of other applicable badges of fraud, including whether ICI, through Grimado, transferred all of its assets without receiving consideration, N.J.S.A. 25:2-26e, -26h; whether the transfer occurred shortly after judgment was entered against Grimado in favor of plaintiff, N.J.S.A. 25:2-26j; and whether Grimado and/or ICI was insolvent or became insolvent shortly after the alleged transfer was made, N.J.S.A. 25:2-26i.
Plaintiff also argues Grimado retained control of the asset after the transfer, N.J.S.A. 25:2-26b, and the transfer was to an insider, N.J.S.A. 25:2-26a. Although Grimado's business activities appear exactly the same before and after the transfer — he worked from his home, continued using his cell number when customers called, kept all sales records as he had in the past, and interfaced with the sale customers — without the sales orders, we cannot determine the extent to which Grimado retained control of the operation allegedly transferred. As to McKee, he does not fall within any of the definitions of an insider found in N.J.S.A. 25:2-22. Nonetheless, he and Grimado were more than business colleagues, and the connection between ICI's closure and PDA's revitalization was not an arm's-length business transaction, facts which are certainly evidential. McKee knew Grimado was involved in litigation with plaintiff; knew the nature and gross income of ICI; was privy to ICI's business model; and learned of ICI's sales techniques, a service PDA had not provided to customers, by accompanying Grimado for several months in 2005.
We conclude that in dismissing plaintiff's complaint for failure to prove a fraudulent transfer of assets by clear and convincing evidence, the trial judge failed to consider plaintiff's evidence of the transfer of ICI's client list, which was a corporate asset as a matter of law. See Barsotti v. Merced, 346 N.J. Super. 504, 520 (App. Div. 2002) (noting fraud must be proved by clear and convincing evidence). See also Gilchinsky, supra, 159 N.J. at 476 (expressly noting the burden plainly falls on the plaintiff in UFTA actions). We must remember,
[f]raudulent intent, by its very nature, is rarely susceptible to direct proof . . . . A defendant rarely will acknowledge that [he or] she transferred funds to place them beyond the reach of creditors. Actual intent often must be established through inferential reasoning, deduced from the circumstances surrounding the allegedly fraudulent act.
[Gilchinsky, supra, 159 N.J. at 477 (internal quotation marks and citations omitted).]
Following our review, we are convinced the judge's limited findings were "inconsistent with the competent, relevant and reasonably credible evidence" offered. Seidman, supra, 205 N.J. at 169. The judge's failure to consider all evidence of fraudulent intent and all circumstances surrounding the transfer of ICI's customer list requires reversal and vacation of the entered judgment.
We also determine the judge erred in concluding there was no spoliation of evidence. Plaintiff sought relief, requesting sanctions be imposed for Grimado's destruction of PDA's sales invoices which would have reflected the cost of goods sold. Further, Grimado maintained his computer suffered a virus, so that he had no records from ICI.
The concern raised when one party destroys evidence integral to the other's proofs is the need to "'level the playing field.'" Robertet Flavors, Inc. v. Tri-Form Constr., Inc., 203 N.J. 252, 276 (2010) (quoting ManorCare Health Servs., Inc. v. Osmose Wood Preserving, Inc., 336 N.J. Super. 218, 236 (App. Div. 2001)).
Although the Court in Robertet Flavors addressed spoliation in the context of construction, its determination offers a helpful guide in this case. The Court required certain factors to be weighed and balanced:
[C]ourts confronted with spoliation . . . should consider all of the following: the identity of the spoliator; the manner in which the spoliation occurred, including the
reason for and timing of its occurrence; the prejudice to the non-spoliating party, including whether the non-spoliating party bears any responsibility for the loss of the spoliated evidence; and the alternate sources of information that are, or are likely to be, available to the non-spoliator from its own records and personnel, from contemporaneous documentation or recordings made by or on behalf of the spoliator, and from others as a result of the usual and customary business practices in the construction industry. Courts should then balance all of those considerations in crafting the appropriate remedy with an appreciation for the ways in which the construction industry itself provides them with unique tools with which to "level the playing field" and achieve an appropriate remedy for spoliation.
[Id. at 282.]
The Court further explained that trial judges
faced with spoliation claims should strive to impose a remedy that will serve the ends of justice by creating a level playing field, by ensuring that the consequence of the lost evidence falls on the spoliator rather than on an innocent party, and by using their considerable powers to deter future acts of spoliation.Possible remedies include drawing an adverse inference, limiting the person committing spoliation from presenting evidence shown by the destroyed evidence, and sanctions.
[Id. at 284.]
Here, Grimado baldly asserted he suffered a computer virus, but could not answer when this occurred. The judge considered the fact that the financial records of ICI were missing, but suggested plaintiff could glean any necessary information from the corporate tax returns. This conclusion is mistaken, as the destruction of ICI's records prevented an analysis of when its more than $250,000 in accounts receivable were collected and whether new business was generated beyond April 2005.
Furthermore, Grimado's assertion of record loss is suspect. The information used to prepare ICI's 2005 tax return was presumably provided by Grimado to his accountant, Horowitz. Interestingly, during the underlying tort action it was Horowitz, who testified for Grimado regarding ICI's ongoing business value. Presumably, Horowitz had some records that were the basis for his opinion regarding the business value. Grimado could have accessed these records. Also, we note, during his testimony in the underlying tort action, Horowitz did not mention ICI had closed.
Horowitz is also PDA's and McKee's accountant.
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A more important spoliation issue concerns Grimado's destruction of PDA's sales records, a matter not addressed by the trial court. Even though McKee professed responsibility for preparing and handling PDA's financial information, he had no knowledge of the general ledger, PDA's profit margin, or the cost of goods. McKee stated he allowed Grimado to keep the sales information and records on his computer, a fact incidentally denied by Grimado, and the two reviewed Grimado's records once a week. Both McKee and Grimado asserted neither kept track of the cost of goods or the profit margin, which calls into question how these items were calculated by the company accountant for income tax purposes. Again, Grimado deferred to McKee, but McKee could not answer this question.
Contrary to the trial judge's conclusion, this information was essential to prove plaintiff's case regarding the fraud. The failure to consider the effect of PDA's records destruction, rather than merely ICI's alleged record loss, was prejudicial error.
In summary, reversal is required by the accumulation of trial errors resulting from the judge's failure to review all evidence and consider all legal issues presented. The judgment is vacated, plaintiff's complaint is reinstated, and the matter is remanded for a new trial to consider whether the transfer of ICI's customer list was accompanied by badges of fraud such that the facts clearly and convincingly show the transfer was a fraudulent one under the UFTA. Further, plaintiff's motion for sanctions because of the spoliation of evidence must be considered anew. On remand, the case must reassigned. R. 1:12-1(d); Pressler & Verniero, Current N.J. Court Rules, comment 4 on R. 1:12-1 (2013) ("[A] matter remanded after appeal for a new trial should be assigned to a different trial judge if the first judge had, during the original trial, expressed conclusions regarding witness credibility.").
Reversed and remanded for a new trial consistent with our opinion.
I hereby certify that the foregoing is a true copy of the original on file in my office.
CLERK OF THE APPELLATE DIVISION