Like 43 other jurisdictions, New Jersey has attempted to combat debtor-creditor fraud by adopting the Uniform Fraudulent Transfer Act (the “UFTA”) as a method by which creditors may recover from debtors and others who hinder their collection efforts. Although it is considered a “uniform” act, the UFTA is routinely interpreted to supplement, rather than replacing other state laws, thereby increasing its impact. For instance, in adopting the UFTA, the New Jersey Legislature specifically opted not to preclude a creditor from asserting other causes of action, such as negligence or common-law fraud, in addition to those set forth in the UFTA.
Recently, the New Jersey Supreme Court decided Banco Popular v. Suresh Gandhi et al., which involved an appeal by Banco Popular (the “Bank”) from a dismissal of certain counts of its UFTA complaint seeking damages against an attorney who allegedly assisted his client in transferring assets to defraud the Bank.
In the late 1990s, Suresh Gandhi owned several fast food restaurants and obtained a series of business loans from the Bank. Sometime after entering into the first loan transaction, Gandhi became involved in a dispute with one of the fast food franchises. At the suggestion of his attorney, and without the knowledge or consent of the Bank, he transferred all of his assets into his wife’s name to place them beyond the reach of the fast food franchise. These transfers were subsequently found to be in violation of the UFTA and ultimately set aside.
In connection with one of the subsequent loans, Gandhi executed a Guaranty in which he represented and warranted that he “has not….dispose[d] of all or substantially all of [his] assets,” and that “no event has occurred which may materially adversely affect [his] financial condition.” Gandhi’s attorney, who was fully aware of the previous asset transfer, issued an opinion letter in which he stated that, “after due investigation we are unaware of any material matters contrary to the representations and warranties of the Borrower or the Guarantor.” Gandhi’s restaurants were eventually unsuccessful, and he defaulted on the Bank loans in 1999.
In its decision, the New Jersey Supreme Court held that a creditor may bring a claim against a person who assists another in executing a fraudulent transfer if “the creditor [can] prove that the conspirator agreed to perform the fraudulent transfer, ‘which, absent the conspiracy, would give a right of action’ under the UFTA.” Here, the Bank’s claim of conspiracy in connection with the attorney’s role in assisting the transfer of Gandhi’s assets was supported by facts sufficient to give rise to a direct cause of action under the UFTA against the attorney.
Moreover, Gandhi’s attorney owed a duty to the Bank if the loan documents or the opinion letter contained misstatements of material fact upon which he knew, or should have known, that the Bank would rely. Knowing that the guaranty that the Bank was relying upon was worthless, Gandhi’s attorney had a duty to either advise Gandhi to disclose his true financial status to the Bank, or discontinue his representation.
The Court’s holding in this case should reaffirm the notion that determining whether a particular transfer might be considered a fraudulent transfer in violation of the UFTA is a critical issue in asset protection planning, not only from a client’s perspective but from the attorney’s as well.
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