Opinion
DOCKET NO. A-4176-12T4
04-28-2014
GS PARTNERS, L.L.C., a limited liability company of New Jersey, Plaintiff-Appellant, v. CAROL VENUTO, individually and as executrix of the Estate of RALPH A. VENUTO, SR., deceased, RALPH A. VENUTO, JR., CAROL REBECCHI and RICHARD P. VENUTO, Defendants-Respondents.
Robert A. Vort argued the cause for appellant. Dimitri L. Karapelou argued the cause for respondents.
NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
Before Judges Ashrafi and Leone.
On appeal from Superior Court of New Jersey, Chancery Division, Somerset County, Docket No. C-12044-11.
Robert A. Vort argued the cause for appellant.
Dimitri L. Karapelou argued the cause for respondents. PER CURIAM
Plaintiff GS Partners, L.L.C., filed a complaint in the Chancery Division against the shareholders of a defunct corporation seeking to collect on a default judgment plaintiff had obtained against the corporation. The Chancery Division dismissed the three counts of plaintiff's amended complaint alleging fraudulent transfer of the corporation's cash to the shareholders on the ground that those counts were barred by a statute of repose, N.J.S.A. 25:2-31. Subsequently, the court granted summary judgment to defendants on the other two counts of plaintiff's amended complaint, which alleged violation of N.J.S.A. 14A:6-12(1)(c) during dissolution of the corporation and common law unjust enrichment. We reverse the dismissal of the three fraudulent transfer counts and affirm summary judgment on the other two counts.
I.
On a motion to dismiss on the pleadings pursuant to Rule 4:6-2(e), we adopt a "generous and hospitable" reading of plaintiff's complaint, Printing Mart-Morristown v. Sharp Elecs. Corp., 116 N.J. 739, 746 (1989), and on a motion for summary judgment pursuant to Rule 4:46-2, we view the evidence most favorably to the party opposing summary judgment, Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995). As viewed according to those standards most favorably to plaintiff, the relevant facts are as follows.
The five individuals named as defendants were the shareholders of Hollywood Tanning Systems, Inc., a corporation that sold tanning salon franchises, as well as tanning beds, equipment, lotions, and other supplies. Plaintiff acquired assignment of one such franchise in December 2006 from Carmine Gallichio, who had purchased the franchise through discussions with defendants Ralph Venuto, Sr., and Ralph Venuto, Jr. Plaintiff alleges that the Venutos made fraudulent representations in selling the franchise and subsequently in servicing it.
On April 18, 2007, Hollywood Tanning sold most of its assets, including the franchise business, to another company, Tan Holdings, LLC. In exchange, Hollywood Tanning received (1) $40 million in cash, (2) the assumption of some of its liabilities by Tan Holdings, (3) 25% of the issued and outstanding preferred units of Tan Holdings, and (4) contingent earnouts to be paid by Tan Holdings to Hollywood Tanning based on anticipated revenue.
Hollywood Tanning used some of the cash it received to pay creditors. Plaintiff was not a creditor at the time of the assets sale but alleges it had claims against Hollywood Tanning because of the misrepresentations and presumably because of contractual obligations of Hollywood Tanning to its franchisees.
On June 22, 2007, about two months after Hollywood Tanning sold its assets, the company distributed millions of dollars to the individual defendant-shareholders. After the distribution, Hollywood Tanning's assets consisted only of (1) the Tan Holdings preferred units, (2) the contingent Tan Holdings earnouts, and (3) "a few small receivables." These assets later became worthless. Hollywood Tanning became insolvent and stopped transacting business in August or September 2008, about fifteen months after the 2007 sale of assets and distribution to defendants.
The specific amount distributed was variously described as $16,000,000 in plaintiff's amended complaint, and as $25,284,948.53 or $23,434,194.68 during discovery.
Plaintiff began pursuing its claims before Hollywood Tanning became insolvent. After a failed attempt at arbitration, plaintiff filed suit against Hollywood Tanning, other corporate parties, and the two Ralph Venutos in the Law Division, Somerset County. On defendants' motion, the court dismissed the claims against the Venutos without prejudice on the ground that the allegations of plaintiff's complaint pertained to the Venutos' actions on behalf of the corporation, and so, the Venutos could not be sued individually. Subsequently, on January 7, 2011, the court entered a default judgment against Hollywood Tanning only, awarding plaintiff damages of $959,359.
A few months later, plaintiff's counsel obtained post-judgment discovery in another plaintiff's lawsuit against Hollywood Tanning by which counsel learned relevant information about the June 22, 2007 distribution of cash to the shareholders. Plaintiff filed the present action on June 20, 2011, this time alleging that the individual defendants violated the New Jersey Uniform Fraudulent Transfer Act (UFTA), engaged in improper distribution of corporate assets under N.J.S.A. 14A:6-12(1)(c), and were unjustly enriched when they received the distributions without preserving cash to pay legitimate future claims against Hollywood Tanning.
Defendants moved to dismiss the June 2011 complaint on several grounds. Plaintiff cross-moved for leave to amend its complaint. On January 9, 2012, the court granted plaintiff's motion to amend and denied defendants' motion to dismiss. On February 2, 2012, plaintiff filed its amended complaint. The amended pleading changed the structure of the initial complaint and added factual support for its allegations, but it did not change the basic nature of plaintiff's claims or the parties against whom plaintiff made those claims.
Defendants moved to dismiss the amended complaint pursuant to Rule 4:6-2(e). On November 8, 2012, the court granted defendants' motion to dismiss as to the three UFTA counts on the ground that they were time-barred by N.J.S.A. 25:2-31. The court declined to dismiss the other two counts of the amended complaint at that time.
The various motions described in this opinion were heard and decided by three different judges.
Plaintiff moved for reconsideration, and defendants moved for summary judgment on the remaining two counts. On March 27, 2013, the court denied plaintiff's motion for reconsideration and simultaneously granted summary judgment on the remaining counts, thus dismissing plaintiff's amended complaint in its entirety. This appeal is from the court's orders of November 8, 2012, and March 27, 2013.
II.
Plaintiff argues the Chancery Division incorrectly dismissed the three UFTA counts. N.J.S.A. 25:2-31 provides in pertinent part that "[a] cause of action . . . under [the UFTA] is extinguished unless action is brought" no more than "four years after the transfer was made or the obligation was incurred." The alleged fraudulent transfer of cash to defendants occurred on June 22, 2007. Plaintiff filed its initial complaint on June 20, 2011, within four years. Plaintiff's amended complaint, however, was filed on February 2, 2012, about four years and seven months after the transfers.
Plaintiff has not claimed that another provision of N.J.S.A. 23:2-31 that sets a one-year period from the claimant's discovery of a fraudulent transfer is applicable in this case.
The trial court agreed with plaintiff that the UFTA counts satisfied the requirements of Rule 4:9-3 for relation back to the date the initial complaint was filed. Nevertheless, the court held that relation back under the rule did not apply because a statute of repose barred plaintiff's claims.
Rule 4:9-3 provides:
Whenever the claim or defense asserted in the amended pleading arose out of the conduct, transaction or occurrence set forth or attempted to be set forth in the original pleading, the amendment relates back to the date of the original pleading; but the court, in addition to its power to allow amendments may, upon terms, permit the statement of a new or different claim or defense in the pleading. An amendment changing the party against whom a claim is asserted relates back if the foregoing provision is satisfied and, within the period provided by law for commencing the action against the party to be brought in by amendment, that party (1) has received such notice of the institution of the action that the party will not be prejudiced in maintaining a defense on the merits, and (2) knew or should have known that, but for a mistake concerning the identity of the proper party, the action would have been brought against the party to be brought in by amendment.
[(Emphasis added).]
As a conclusion of law, the Chancery Division's holding is subject to plenary appellate review. Estate of Hanges v. Metro. Prop. & Cas. Ins. Co., 202 N.J. 369, 382-83 (2010); Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995).
The Chancery Division relied on Greczyn v. Colgate-Palmolive, 183 N.J. 5 (2005), as the controlling precedent with respect to the relation back of pleadings beyond a limitation period contained in a statute of repose. It viewed Greczyn as holding that the only circumstance where relation back is allowed when the claim would otherwise be barred is in the context of fictitious party pleadings. We disagree that Greczyn so holds. Greczyn did not involve relation back of the same claims against the same parties under Rule 4:9-3. That case addressed whether a statute of repose allows relation back when a party was first identified and named beyond the statute's time bar but the plaintiff had utilized Rule 4:26-4, the rule governing fictitious-party practice, to allege claims against unidentified parties. Greczyn, supra, 183 N.J. at 7.
The facts of Greczyn are as follows. The plaintiff tripped and fell on a stairway at her place of employment. Ibid. Her initial complaint did not identify the designer of the stairway by name, but it did describe several fictitiously-named defendants as the designers. Id. at 7-8. The plaintiff later learned the designer's identity and amended her complaint. Ibid. The architectural firm that was identified moved for summary judgment based on the ten-year statute of repose established by N.J.S.A. 2A:14-1.1. The firm had substantially completed its work on the stairway more than ten years before the date of the plaintiff's amended complaint. Greczyn, supra, 183 N.J. at 7-8. The plaintiff argued the amended complaint should relate back to the filing of her initial complaint, which was within the ten-year period. Ibid. The Supreme Court agreed, and held that permitting amendment of the plaintiff's complaint under the fictitious-party rule would not be contrary to the legislative intent in enacting the statute of repose. Id. at 17-19.
A similar result was reached by the United District Court in In re Sharps Run Associates, L.P., 157 B.R. 766 (D.N.J. 1993). In that case, the court reviewed the application of N.J.S.A. 42:2A-46(a), which contains a time bar pertaining to the liability of a partner who receives a return of his contribution to the partnership. The court was asked to determine whether that statute prohibits relation back under Federal Rule of Civil Procedure 15(c). Sharps Run, supra, 157 B.R. at 782-83. The court allowed relation back, indicating that while the statutory time bar appeared to be a statute of limitations, the court would have reached the same decision if it had been a statute of repose. Id. at 784-85.
Contrary to defendants' arguments and the Chancery Division's conclusions in this case, Greczyn did not hold that the only time relation back can be used to save an otherwise time-barred cause of action is in the context of fictitious party pleadings. Rather, that case is better understood as consistent with permitting relation back under Rule 4:9-3, provided that the claims asserted in the amended pleading arose out of the same "conduct, transaction or occurrence" as alleged in the timely-filed pleading and are against the same parties. As in Greczyn, allowing relation back in such circumstances does not violate the legislative intent of N.J.S.A. 25:2-31.
Our understanding of the law in this regard is also consistent with "[t]he doctrine of substantial compliance [which] allows for the flexible application of a statute in appropriate circumstances." Negron v. Llarena, 156 N.J. 296, 304 (1998). In Negron, the Court declined to dismiss an action filed in New Jersey after the applicable limitations period had run because the plaintiff had previously filed a timely suit in federal court against the same defendants but the case had been dismissed for lack of diversity jurisdiction. Id. at 305-06. There is as much reason in this case to permit relation back of the February 2012 filing of an amended complaint in the same court as there was to permit an otherwise time-barred filing in Negron in a different court.
Having concluded that the Chancery Division erred as a matter of law in dismissing the first three counts of plaintiff's amended complaint, we reverse the court's order of November 8, 2012, and remand for further proceedings on those counts.
III.
Plaintiff argues the Chancery Division incorrectly granted summary judgment to defendants on the fourth and fifth counts of its amended complaint. The fourth count alleged that defendants were liable for the debt owed to plaintiff under N.J.S.A. 14A:6-12(1)(c), a statute specifically applicable to the liability of directors of a corporation. The fifth count alleged unjust enrichment.
The trial court's granting of summary judgment should be affirmed when the evidence, construed in the light most favorable to the non-prevailing party, does not give rise to a genuine issue of material fact and the prevailing party is entitled to judgment as a matter of law. Brill, supra, 142 N.J. at 540.
N.J.S.A. 14A:6-12(1)(c) provides for liability of "directors who vote for, or concur in" certain corporate actions, including "the distribution of assets to shareholders during or after dissolution of the corporation without paying, or adequately providing for, all known debts, obligations and liabilities of the corporation" (emphasis added). The Chancery Division granted summary judgment because plaintiff's evidence did not prove the distribution to the shareholders occurred "during or after dissolution." There was never a formal dissolution of Hollywood Tanning. Nominally, the corporation continues to exist.
Plaintiff argues that Hollywood Tanning effectively dissolved when the shareholder distribution rendered it insolvent. Not only does plaintiff provide no legal support for equating insolvency with dissolution of the corporation, but the evidence plaintiff relies upon in making this argument is not as plaintiff represents. Ralph Venuto, Jr., did not admit in deposition that the shareholder distribution rendered Hollywood Tanning insolvent. Venuto testified that Hollywood Tanning's assets after the distribution consisted of (1) a 25% ownership interest in Tan Holdings, (2) contingent earnouts to be paid by Tan Holdings, and (3) a variety of receivables. According to Venuto, these assets had "substantial value," and Hollywood Tanning continued to collect receivables until August 2008.
Even if insolvency were to be viewed as tantamount to dissolution, plaintiff's evidence does not show that Hollywood Tanning was insolvent immediately after the cash was distributed to the shareholders. The distribution of cash did not occur "during or after" any "constructive" dissolution, as alleged by plaintiff. The distribution occurred more than a year before Hollywood Tanning stopped transacting business and became insolvent in August or September 2008. We find no error in the Chancery Division's granting of summary judgment on count four of plaintiff's amended complaint.
With respect to count five, plaintiff's claims against the individual defendants are not based in contract or quasi-contractual rights or remedies since plaintiff's franchise agreement was with Hollywood Tanning, not the individual members of the corporation. New Jersey does not recognize unjust enrichment as an independent cause of action in tort. We stated in Castro v. NYT Television, 370 N.J. Super. 282, 299 (App. Div. 2004):
Unjust enrichment is of course a familiar basis for imposition of liability in the law of contracts. See Restatement (Second) of Contracts § 345(d) (1981). However, the
role of unjust enrichment in the law of torts is limited for the most part to its use as a justification for other torts such as fraud or conversion. See Restatement of Restitution Ch. 7 (Introductory Note) (1937) . . . .
In pursuing unjust enrichment, plaintiff must prove that it is entitled to pierce the corporate veil. Although shareholders are generally insulated from the tort liabilities of the corporation, courts have the power to pierce the corporate veil in cases of fraud, injustice, or the like. See State, Dept. of Envtl. Prot. v. Ventron Corp., 94 N.J. 473, 500-01 (1983); accord Richard A. Pulaski Constr. Co. v. Air Frame Hangars, Inc., 195 N.J. 457, 472 (2008). The doctrine is intended to prevent corporations from being used to commit crimes, frauds, "or otherwise to evade the law." State, Dept. of Envtl. Prot., supra, 94 N.J. at 500. The party seeking to pierce the corporate veil must convince the court to disregard the corporate form because of some abuse by the individual defendants of that form of transacting business. Cf. Richard A. Pulaski Constr. Co., supra, 195 N.J. at 473 (declining to pierce the corporate veil because the plaintiff had not alleged that the corporation "was either a fraud or a sham, or that it had failed to observe the requisite corporate formalities").
Although plaintiff alleged that some of the individual defendants were involved in making fraudulent misrepre- sentations, it lacked evidence that Hollywood Tanning was a sham corporation and therefore its veil should be pierced. Plaintiff's only argument was that defendants abused the corporate form by rendering it insolvent when they authorized the shareholder distribution to themselves without providing for creditors. That is the same claim as the UFTA claims. Unjust enrichment does not provide a separate common law cause of action outside the UFTA.
Affirmed in part, reversed in part and remanded. We do not retain jurisdiction.
I hereby certify that the foregoing is a true copy of the original on file in my office.
CLERK OF THE APPELLATE DIVISION