Opinion
DOCKET NO. A-2291-14T3
04-01-2016
ZENSHIN, LLC and DAMIAN ROSS, Plaintiffs-Appellants, v. NEW MONMOUTH BAPTIST CHURCH, INC., FOCUS ON THE FAMILY, PRISON FELLOWSHIP MINISTRIES, FIRST CONGREGATIONAL CHURCH OF CHESTER, NEW JERSEY, Defendants-Respondents, and THE BIBLE LEAGUE, BRETHREN IN CHRIST FOUNDATION, INC. d/b/a BIC WORLD MISSIONS, ST. MARY'S CHURCH, THE DIOCESE OF TRENTON d/b/a ST. JOHN VIANNEY HIGH SCHOOL, Defendants.
Dughi, Hewit & Domalewski, attorneys for appellants (Charles M. Radler, Jr., Gary L. Riveles, and Jacqueline E. Shulman, on the briefs). Messina Law Firm, P.C., attorneys for respondents (Michael P. Laffey, on the brief).
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION Before Judges Alvarez, Ostrer, and Haas. On appeal from the Superior Court of New Jersey, Law Division, Bergen County, Docket No. L-7919-14. Dughi, Hewit & Domalewski, attorneys for appellants (Charles M. Radler, Jr., Gary L. Riveles, and Jacqueline E. Shulman, on the briefs). Messina Law Firm, P.C., attorneys for respondents (Michael P. Laffey, on the brief). PER CURIAM
Plaintiffs Damian Ross and Zenshin, LLC, sued defendants New Monmouth Baptist Church, Inc., Focus on the Family, Prison Fellowship Ministries, The Bible League, Brethren in Christ Foundation, Inc. doing business as BIC World Missions, First Congregational Church of Chester, New Jersey, St. Mary's Church, and the Diocese of Trenton, doing business as St. John Vianney High School, alleging violations of the Uniform Fraudulent Transfer Act (UFTA), N.J.S.A. 25:2-20 to -34. The trial judge dismissed the complaint with prejudice on defendants' motion pursuant to Rule 4:6-2(e). We affirm the dismissal, but remand to modify the judgment to a dismissal without prejudice.
Brethren in Christ Foundation, Inc. settled with plaintiffs. Plaintiffs voluntarily dismissed The Bible League without prejudice contingent on its right to reinstate were the trial court's dismissal to be reversed.
The essential facts are not in dispute. Christopher Pizzo was the president of Noble Learning Systems, Inc. (Noble) and Gary Reinert the part-time chief financial officer. Reinert later acquired a thirty percent interest in Close Combat, LLC, and served as its chief executive officer and chief financial officer. Close Combat was the successor to Noble.
Over several years, ending in approximately 2008, Reinert and Pizzo distributed, without plaintiffs' authorization or a compensation agreement, martial arts visual instructional recordings. Eventually, after litigation and arbitration, Close Combat, Noble, and Pizzo were found to owe plaintiffs $2,438,046.16. See Zenshin, LLC v. Close Combat Co., LLC, No. A-0313-12 (App. Div. Aug. 21, 2013). Final judgment, together with prejudgment interest, came to $2,851,221.88.
Reinert and Pizzo created various shell companies in order to avoid paying distribution fees on account of their unauthorized, continuing sales of plaintiffs' martial arts materials. Plaintiffs filed a UFTA action against Reinert, Pizzo, and some of the companies. Eventually, in October 2013, the parties entered into a settlement compelling disgorgement of assets.
When deposed in that proceeding, Pizzo testified that Reinert had been compensated over $3,000,000 from 2008 through 2013 for his services to Close Combat, despite the actual value of his services totaling only $750,000. Plaintiffs' economic expert believed the value of Reinert's services from 2008 through 2013 ranged from between $113,750 to $171,650 per year.
Between 2008 and 2012, Reinert, individually and through one of his fictitious companies, Keystone Lighthouse, LLC, (Keystone) donated approximately $320,000 to defendants. It is also undisputed that defendants were good faith bona fide recipients of Reinert and Keystone's donations.
When plaintiffs sought to amend their UFTA complaint against Pizzo and Reinert to name the defendants in this case, the application was denied without prejudice to their right to file a separate, second UFTA action against the charities. The within proceedings are plaintiffs' second UFTA case.
Reinert and/or Keystone eventually settled with plaintiffs, paying them "over 95% of [Reinert's] liquid assets[.]" The confidential settlement agreement preserved plaintiffs' ability to assert new claims.
Accordingly, plaintiffs filed this suit seeking to recover approximately $320,000 in charitable donations made by Reinert and/or Keystone. Plaintiffs allege that the confidential settlement agreement, and other judgment collection efforts, recovered "hundreds of thousands of dollars less than the $1,084,001.55 plus interest" due from Reinert as his share of the judgment.
The judge's December 11, 2014 written decision dismissing the complaint in the within matter held as a matter of law that "a past fraudulent transfer from a judgment debtor to an individual and eventual donor [did not] render[] any charitable donation made by that donor suspect, or open to litigation under the UFTA." He opined that the UFTA did not include charitable donations because although plaintiffs established that they were "creditors," and that the donations were "transfers," they failed to establish that no "value" was extended by the donees as required by the law in order for a creditor to be able to "claw back" funds. See N.J.S.A. 25:2-24(a) and -30(a). The judge further opined that it would be against public policy for UFTA to apply to charitable donations, and, therefore, relief should be denied on that separate basis. He also concluded that plaintiffs did not allege sufficient facts establishing that the donated funds were "the proceeds of a fraudulent transfer" or came from "an illegitimate source."
Observing that the unjust enrichment theory of recovery was based on balancing the equities when one party was enriched at the expense of another, the judge decided that the doctrine was inapplicable. Since the charities had not engaged in any wrongdoing, he saw no "equitable basis" for the creditor to be preferred over the transferee. Plaintiffs do not appeal that basis for dismissal.
Plaintiffs now raise the following issues for our consideration:
POINT I
THE UNIFORM FRAUDULENT TRANSFER ACT BARS CHARITABLE DONATIONS BY INSOLVENT DEBTORS, AND THE TRIAL COURT'S RULING TO THE CONTRARY WAS ERRONEOUS.
A. The Case Law Barring Charitable Donations By Insolvent Debtors Has Been Uniformly Settled For 20 Years.
B. In Minnesota and Florida, The Two States In Which Legislatures Modified the UFTA To Afford Charities Broader Defenses, The Legislative History Acknowledged That Ordinary UFTA Statutes Permit Clawback Actions Against Charities.
C. A Plain Reading Of The UFTA, Interwoven With The Facts Alleged In Plaintiffs' Complaint, Establishes That Plaintiffs' Complaint States A Cause Of Action Under The Statute.
POINT II
CHARITABLE INSTITUTIONS DO NOT PROVIDE "REASONABLY EQUIVALENT VALUE" PURSUANT TO THE UNIFORM FRAUDULENT TRANSFER ACT FOR CHARITABLE DONATIONS RECEIVED FROM AN INSOLVENT DONOR, AND THE TRIAL COURT'S RULING TO THE CONTRARY WAS ERRONEOUS.
POINT III
AN INSOLVENT DONOR'S USE OF SOME LEGITIMATE INCOME COMBINED WITH SUBSTANTIALLY GREATER AMOUNTS OF FRAUDULENTLY TRANSFERRED FUNDS DOES NOT BAR PLAINTIFFS FROM ANY RECOVERY PURSUANT TO THE UNIFORM FRAUDULENT TRANSFER ACT, AND THE TRIAL COURT'S RULING TO THE CONTRARY WAS ERRONEOUS.
POINT IV
"A MAN MUST BE JUST BEFORE HE IS GENEROUS." THE PUBLIC POLICY OF THE STATE OF NEW JERSEY, AS IN [FORTY] OF THE [FORTY-TWO] JURISDICTIONS WHICH HAVE ENACTED THE UNIFORM FRAUDULENT TRANSFER ACT, CONSIDERS THE INTERESTS OF VICTIMS OF FRAUDULENT TRANSFERS TO BE SUPERIOR TO THE INTERESTS OF CHARITIES WHICH RECEIVED DONATIONS MADE WITH FRAUDULENTLY TRANSFERRED FUNDS.
We review de novo a trial court's decision to dismiss a complaint for failure to state a claim under Rule 4:6-2(e). Teamsters Local 97 v. State, 434 N.J. Super. 393, 413 (App. Div. 2014). We owe no deference to the trial court's conclusions of law. Rezem Family Assocs. L.P. v. Borough of Millstone, 423 N.J. Super. 103, 114 (App. Div.), certif. denied and appeal dismissed, 208 N.J. 366 (2011). Our decision is governed by the same standards as applied by the trial court. Donato v. Moldow, 374 N.J. Super. 475, 483 (App. Div. 2005).
"The standard traditionally utilized by courts to determine whether to dismiss a pleading for failure to state a claim on which relief may be granted is a generous one." Green v. Morgan Props., 215 N.J. 431, 451 (2013). The inquiry is limited to whether the facts alleged on the face of the complaint are legally sufficient. Ibid. (citing to Printing Mart-Morristown v. Sharp Elecs. Corp., 116 N.J. 739, 746 (1989)). Courts are bound to search "the complaint in depth and with liberality to ascertain whether the fundament of a cause of action may be gleaned even from an obscure statement of claim, opportunity being given to amend if necessary." Printing Mart-Morristown, supra, 116 N.J. at 746 (quoting Di Cristofaro v. Laurel Grove Mem'l Park, 43 N.J. Super. 244, 252 (App. Div. 1957).
Decisions on a Rule 4:6-2(e) motion are left to the court's sound discretion. See Johnson v. Glassman, 401 N.J. Super. 222, 246-47 (App. Div. 2008). Ordinarily, such motions are granted without prejudice. Smith v. SBC Commc'ns Inc., 178 N.J. 265, 282 (2004).
N.J.S.A. 25:2-25(b) provides:
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 . . ., if the debtor made the transfer . . .:
. . . .
b. Without receiving a reasonably equivalent value in exchange for the transfer . . ., 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.
Plaintiffs alleged only some elements of N.J.S.A. 25:2-25(b). They did not allege that the remaining assets of either Reinert or Keystone "were unreasonably small in relation to the business or transaction[,]" N.J.S.A. 25:2-25(b)(1), or that Reinert or Keystone "[i]ntended to incur, or believed or reasonably should have believed that [they] would incur, debts beyond [their] ability to pay as they become due." N.J.S.A. 25:2-25(b)(2). Pleading that Close Combat was insolvent between 2008 and 2013, and that Reinert received $3,000,000 in compensation from Close Combat during that time, at least $2,250,000 of which exceeded the fair market value of his services, did not suffice.
Although plaintiffs satisfied N.J.S.A. 25:2-27(a) in that they averred that the donations were not reasonably equivalent to value received, they did not allege, as required by that section of the statute, that Reinert or Keystone were insolvent or became insolvent as a result at the time of the transfers. Plaintiffs should have alleged that the debtor's debts were greater than all of his assets, and that the debtor was not paying his debts as they became due. N.J.S.A. 25:2-23(a), (b).
Plaintiffs also failed to allege that Noble, Pizzo, and Close Combat had not satisfied the $2,851,221.88 judgment against them, or that Reinert and/or Keystone had not satisfied the portion for which they were liable under the settlement agreement. They did not disclose whether Reinert or Keystone had paid any of the amounts agreed to pursuant to the confidential settlement agreement.
Plaintiffs' certification in opposition to the motions to dismiss, however, suggested all the information missing from the complaint. An amended complaint could satisfy UFTA's baseline statutory requirements. After all, fraud must be pled with specificity as to the "particulars of the wrong, with dates and items if necessary . . . insofar as practicable." R. 4:5-8(a). These plaintiffs should be afforded the opportunity to comply with the rule and track UFTA. Although we agree that the pleadings lacked some necessary elements thereby making dismissal proper, we do not agree with the judge that the record was sufficiently developed that conclusions of law could be reached.
The judge based his decision to dismiss with prejudice on the premise that so long as defendants complied with their beneficial purposes of caring for third parties, they provided value in exchange for the donations. By concluding that fulfillment of charitable purposes was the equivalent of value, the judge ended the inquiry. See N.J.S.A. 25:2-30(a). That section of the statute, however, is an affirmative defense that must be proven by the charities. Ibid. Yet defendants have neither alleged nor proved anything, having merely filed the motion. It was premature to formulate legal conclusions on this record. For that reason, the motion should not have been dismissed with prejudice.
A transfer passes muster if value is exchanged:
Value is given for a transfer . . . if, in exchange for the transfer . . ., property is transferred or an antecedent debt is secured or satisfied, but value does not include an unperformed promise made otherwise than in the ordinary course of the promisor's business to furnish support to the debtor or another person.
[N. J.S.A. 25:2-24(a).]
Furthermore, the judge was concerned that the relief plaintiffs sought violated New Jersey's public policy, which supports charitable organizations. It is well-established, however, that such significant policy decisions must be left to the Legislature or our Supreme Court. See In re Plan for the Abolition of the Council on Affordable Hous., 214 N.J. 444, 449 (2013); Robinson v. Zorn, 430 N.J. Super. 312, 324 (App. Div.), certif. denied, 216 N.J. 8 (2013); Grubbs v. Knoll, 376 N.J. Super. 420, 450 (App. Div. 2005).
Therefore, considering the matter de novo, the dismissal should not have been with prejudice. Plaintiffs may well be able to file amended pleadings that sufficiently allege a UFTA basis for a "claw back" of donated funds. On a Rule 4:6-2(e) motion, the question of whether defendants provided value as defined in UFTA cannot be decided on this record. The issue of whether public policy bars plaintiffs from UFTA relief is best left for another day.
Affirmed, except that the matter shall be remanded and the dismissal modified to "without prejudice." I hereby certify that the foregoing is a true copy of the original on file in my office.
CLERK OF THE APPELLATE DIVISION