MAIN LAND SUSSEX COMPANY, LLC VS. PRITI SHETTY (L-0480-14, MORRIS COUNTY AND STATEWIDE)

NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
This opinion shall not "constitute precedent or be binding upon any court." Although it is posted on the
internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R. 1:36-3.
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-5450-15T4
MAIN LAND SUSSEX
COMPANY, LLC,
Plaintiff-Respondent/
Cross-Appellant,
v.
PRITI SHETTY and
SANDESH SHETTY,
Defendants-Appellants/
Cross-Respondents,
and
JITENDRAKUMA PATEL, a/k/a
JEETENDRA PATEL, JIGNA
PATEL, RAHUL GAJIPARA,
and JAYSHREE R. GAJIPARA,
Defendants.
Argued November 28, 2018 – Decided March 8, 2019
Before Judges Koblitz, Currier, and Mayer.
On appeal from Superior Court of New Jersey, Law
Division, Morris County, Docket No. L-0480-14.
Evan M. Goldman argued the cause for
appellants/cross-respondents (Hill Wallack, LLP,
attorneys; Evan M. Goldman, of counsel and on the
briefs; Scott D. Salmon, on the briefs).
Caterina DeVerna argued the cause for
respondent/cross-appellant (Mainardi & Mainardi, PC,
attorneys; Caterina DeVerna and Edward Mainardi, Jr.,
on the briefs).
PER CURIAM
In this matter arising out of a commercial lease, we affirm the judgment,
following a bench trial, entered against all defendants.1 Defendants Priti and
Sandesh Shetty (Shetty) appeal from the judgment. Plaintiff, Main Land Sussex
Company, LLC, cross-appeals the denial of its attorney's fee application as well
as the denial of certain discovery motions.
Priti,2 Jitendrakuma Patel, and Rahul Gajipara formed ARCP, LLC, which
leased space from plaintiff, the owner and landlord of a commercial shopping
center. ARCP operated a Dunkin' Donuts franchise (franchise) in the shopping
center. Priti, Jitendrakuma, and Rahul were guarantors on the commercial lease.
1
Plaintiff has subsequently settled with the Patel and Gajipara defendants.
2
We use the defendants' first names for clarity and ease of the reader as the
defendants share surnames.
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2
Their spouses, Sandesh Shetty, Jigna Patel, and Jayshree Gajipara, were not
guarantors on the lease, but all of the defendants were guarantors on certain
ARCP loan obligations. Those obligations resulted in liens and mortgages on
all of defendants' residences.
Several years into the lease term, the franchise began to experience
financial difficulties. As a result, in 2010, plaintiff consented to the sale of the
business to Preston Lewis Corporation (Preston). The lease, which had three
years remaining on its term, was assigned to Preston as part of the sale.
However, ARCP, Priti, Jitendrakuma, and Rahul remained liable as guarantors
under the lease. The assignment required ARCP to satisfy any unpaid amounts
due to plaintiff; that condition was satisfied at the closing.
Prior to the sale of the franchise and lease assignment to Preston,
plaintiff's representative advised the lease guarantors they would not be released
from the guarantee. Plaintiff's offer to buy out the guaranties for certain
payment terms was declined by the guarantors.
In March 2011, within a year of the closing, Preston defaulted on the lease.
After plaintiff obtained a judgment of possession, Preston filed for bankruptcy.
When ARCP and the guarantors did not pay the rent or sewer bill, plaintiff
instituted suit against the guarantors and ARCP. At the close of trial, an order
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of judgment was entered against ARCP for $299,439.55 (inclusive of counsel
fees), and judgment was entered against each of the three guarantors for
$66,494.04. None of the judgment debtors made any payments towards the
judgments.
As a result of its unsuccessful attempts to collect on the judgments,
plaintiff filed the suit which underlies this appeal. Plaintiff alleged defendants
committed a fraudulent transfer when they distributed all of ARCP's assets,
following the sale of the franchise to Preston, without satisfying the payments
owed under the lease.
At the second trial, Priti testified she was the managing member of ARCP,
and Rahul and Jitendrakuma were the other members; all three had equal shares
in the business. To finance the purchase and operation of the franchise, ARCP
took out three loans: $50,000 from PNC Bank; $80,132.47 from Lakeland Bank;
and $191,074.40 from GE Capital Solutions. The members personally
guaranteed those loans. In addition, the members used their personal residences
as collateral for the PNC Bank and Lakeland Bank loans, and mortgages were
placed on their residences to secure those loans.
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Even after Preston's purchase of the franchise, Priti testified she knew
ARCP and the individual guarantors remained obligated under the lease for rent
for the remaining term of the lease.
Priti confirmed that the closing statement from the sale of the franchise to
Preston showed three checks payable to ARCP: $20,021.57 for the payoff of the
ARCP loan from PNC Bank; $80,368.97 as the payoff of ARCP's loan from
Lakeland Bank, and $191,074.40 for the payoff of ARCP's loan from GE Capital
Solutions. The payments to Lakeland and PNC Banks released the
corresponding mortgages on the members' residences. The payoff to GE Capital
Solutions released the guarantors of the GE loan.
Three additional checks payable to ARCP totaling $326,793.19 went into
ARCP's account. Those monies were distributed to the members in the spring
of 2010. ARCP was no longer in business at the time.
Plaintiff presented Timothy King, who was qualified as an expert in
accounting, fraudulent transfers, and dissolutions. In response to a hypothetical
question at trial, King explained that if the sales proceeds from the closing of
the franchise were used to pay personal mortgages of the members and their
spouses, that would constitute the payment of a personal obligation made before
the priority of any payment owed to actual and contingent creditors of the
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company. In winding down a company, payments should be made to the
creditors of the entity before paying mortgages of the principals and their
spouses. Without consideration for such transactions, they would be considered
fraudulent conveyances.
King concluded:
As a landlord in this matter Main Land Sussex was a
present and future creditor of ARCP [until] the end of
the lease term. After the sale of ARCP's assets, ARCP
did not reserve funds for its contingent liability to Main
Land relative to the remaining term of the lease. Rather
ARCP paid hundreds of thousands of dollars from the
sale of the business to or for the benefit of the
individuals as insiders and to the detriment of the
creditor, Main Land Sussex.
In an oral decision on July 6, 2016, the trial judge determined plaintiff had
demonstrated a fraudulent transfer under N.J.S.A. 25:2-25(a) by clear and
convincing evidence. He analyzed the badges of fraud listed under N.J.S.A.
25:2-26 and found the evidence supported multiple factors establishing a
fraudulent transfer. The judge entered a $291,464.94 judgment for plaintiff.
Plaintiff's subsequent application for attorney's fees was denied.
On appeal, defendants raise a myriad of issues, asserting the court erred:
1) in permitting plaintiff's expert testimony; 2) in denying defendants' in limine
motions; 3) in permitting improper comments of plaintiff's counsel during
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summation; 4) in its ruling that defendants fraudulently transferred assets; and
5) in ignoring prior judgments entered against defendants. Although not raised
to the trial court, defendants contend on appeal that the matter should be
remanded for a new trial and heard by a different judge. Plaintiff asserts in its
cross-appeal that the court erred in denying its application for counsel fees and
denying various discovery motions.
We first address defendants' contention that the court erred in permitting
plaintiff's expert to testify at trial. We review evidentiary rulings for an abuse
of discretion, including the admissibility of expert testimony. Pomerantz Paper
Corp. v. New Cmty. Corp., 207 N.J. 344, 371-72 (2011); Hisenaj v. Kuehner,
194 N.J. 6, 16 (2008).
Plaintiff first served an expert report from King in September 2015. It
referred to a tax return of ARCP. The report did not discuss any implications of
the tax return in its conclusion. The report contained the same concluding
paragraph King testified to at trial.
Around this same time, plaintiff continued to seek all federal and state tax
returns for ARCP. Defendants objected to this expansive demand and sought a
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protective order. In September 2015, the court3 agreed and found plaintiff had
not "demonstrated that disclosure [would] serve a substantial purpose or that the
information sought is not readily obtainable through other means. Further,
[p]laintiff seeks the entire returns without limitation. Accordingly, good cause
is not shown, and a [p]rotective [o]rder is entered" as to the tax returns.
In January 2016, defendants moved for an order barring plaintiff from
producing any expert testimony at the time of trial because plaintiff had not
served an expert report prior to the discovery end date of September 21, 2015.
Citing plaintiff's failure to file an expert report in accordance with the deadlines,
the trial judge granted defendants' motion on January 13, 2016.
Despite the prior deadlines, the record reflects a discovery deadline of
February 29, 2016, and a trial date of March 21, 2016. When plaintiff's counsel
was injured, requiring surgery and a recuperation period, he requested an
adjournment of the trial date and sought to reschedule depositions of defendants.
Following a conference with the presiding judge, a March 21, 2016 order set a
peremptory trial for May 25, 2016. Dates were also delineated for the filing of
in limine motions, responses, and pre-trial information statements.
3
This is a different judge than the one who entered subsequent orders and
conducted the bench trial in May and June 2016.
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Defendants filed several in limine motions. In response, plaintiff opposed
the motions and filed a cross-motion seeking to vacate the January 13, 2016
order and to permit King to testify as an expert at trial. The judge assigned to
preside over the trial advised he would hear the motions on the first day of trial.
The parties continued to engage in discovery. Depositions of defendants
were taken on March 30 and April 20, 2016. A representative of plaintiff was
deposed on April 22, 2016.
Plaintiff served King's expert report for a second time on April 27, 2016.
Other than the redaction of any reference to tax returns, in compliance with the
September 2015 order, the report was identical to that previously served in
September 2015. Plaintiff's counsel advised King was available for deposition.
Defense counsel declined to depose King.
On the first day of trial, the judge considered the parties' in limine
applications. Pertinent to this appeal is the discussion of King's expert report.
The trial judge informed counsel that he was mistaken in barring King's report
on January 13, 2016, because he believed a prior judge had adjudicated the issue.
The judge also noted discovery was reopened twice since September 2015, and
the parties had continued to conduct discovery up until the date of trial. The
judge, therefore, vacated his prior order conditioned on the production of King
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for deposition. Plaintiff renewed his offer to produce King for deposition.
Defense counsel responded that he did not intend to depose King as long as the
expert was limited to the contents of his report.
Up until a final disposition, a "trial court has the inherent power, to be
exercised in its sound discretion, to review, revise, reconsider and modify its
interlocutory orders at any time prior to the entry of final judgment ." Johnson
v. Cyklop Strapping Corp., 220 N.J. Super. 250, 257 (App. Div. 1987); see also
Pressler & Verniero, Current N.J. Court Rules, cmt. 2 on R. 4:50-1 (2018)
("Interlocutory orders are reviewable at any time in the interest of justice and in
the court's discretion.").
Here, the trial judge conceded he entered the January 13, 2016 order under
the mistaken belief there had been "an adjudication of the case." Furthermore,
the judge noted the rationale for barring the expert report, as beyond the
discovery end date was not viable, because discovery had been extended twice
since the original end date. King's report was served again in April 2016, with
no changes other than the redaction of any reference to tax returns in accordance
with the September 2015 order. King was available for deposition and was
specifically limited to the contents of his report.
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Under the circumstances presented here, the trial judge was authorized to
reconsider his January 13, 2016 order to correct his mistake, and we are satisfied
there was no abuse of discretion in doing so. Johnson, 220 N.J. Super. at 257;
Pressler & Verniero, cmt. 2 on R. 4:50-1.
Defendants also objected on the first day of trial to the testimony of King
as impermissible net opinion. Counsel added: "Not to suggest we believe Mr.
King should testify at all. But if he is permitted to testify I would ask Your
Honor to enter an order that limits him to the scope of his report." The judge
replied that he intended to reserve on the net opinion issue but added King would
be limited to "the four corners of his report." Neither counsel mentioned King
in opening statements.
During King's direct testimony, defense counsel posited multiple
objections. The court sustained the objections, limiting the expert only to any
factual information presented in his report. King was not permitted to reference
the badges of fraud under N.J.S.A. 25:2-26. King did proffer the sole opinion
set forth in his initial September 2015 report and reiterated in his April 2016
report. He found plaintiff remained a creditor of ARCP until the end of the lease
term. He noted ARCP did not reserve any funds for its contingent liability to
plaintiff after the sale of ARCP's assets. He concluded "ARCP paid hundreds
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of thousands of dollars from the sale of the business to or for the benefit of the
individuals as insiders and to the detriment of [plaintiff]."
At the end of King's direct testimony, defense counsel renewed his
objection to the expert testimony as net opinion. In his consideration, the judge
stated: "I think it might be a close question, but I think based on his experience
I will allow his opinion testimony to at least be considered by the [c]ourt.
Weight is obviously something which we have to redetermine what weight I give
to it." The report was not admitted into evidence.
The judge permitted written submissions following the close of evidence
and counsel presented oral closing arguments. Neither counsel mentioned
King's testimony in their oral arguments. In his oral decision, the judge similarly
made no reference to King's testimony.
We cannot discern a clear abuse of discretion in permitting King's
testimony. Particularly in light of the lack of any reliance by the trial judge
upon any aspect of King's testimony in his decision. In ruling, the court found
plaintiff met its burden in proving there was a fraudulent transfer under N.J.S.A.
25:2-26. As King was not permitted to discuss the statute, there was no
demonstration the court relied on King's testimony. Even if there was any error
by permitting King to testify at trial, any such error was harmless error. R. 2:10-
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2 ("harmless error" is one that was not by nature "clearly capable of producing
an unjust result").
We turn to defendants' contention that the trial court erred in finding a
fraudulent transfer of assets. In our review of a non-jury case, we will not
disturb "the factual findings and legal conclusions of the trial judge unless . . .
they are so manifestly unsupported by or inconsistent with the competent,
relevant and reasonably credible evidence as to offend the interests of justice."
Rova Farms Resort, Inc. v. Inv'rs Ins. Co. of Am., 65 N.J. 474, 484 (1974).
"Deference is especially appropriate 'when the evidence is largely testimonial
and involves questions of credibility.'" Cesare v. Cesare, 154 N.J. 394, 412
(1998) (quoting In re Return of Weapons to J.W.D., 149 N.J. 108, 117 (1997)).
However, "[a] trial court's interpretation of the law and the legal consequences
that flow from established facts are not entitled to any special deference."
Manalapan Realty, LP v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995).
Plaintiff alleged defendants violated the Uniform Fraudulent Transfer Act
(UFTA), N.J.S.A. 25:2-20 to -33, when it transferred monies received at the
closing of the sale of the franchise to pay off debts and mortgages securing
defendants' personal properties and distributed the remainder of the sales
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proceeds to ARCP's members. The transfers rendered ARCP insolvent without
paying the monies owed to plaintiff, the prior obligor.
The UFTA defines fraudulent transfer as follows:
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.]
The purpose of the UFTA "is to prevent a debtor from placing his or her
property beyond a creditor's reach" and from "deliberately cheat[ing] a creditor
by removing his property from 'the jaws of execution.'" Gilchinsky v. Nat'l
Westminster Bank N.J., 159 N.J. 463, 475 (1999) (citation omitted). If a
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fraudulent transfer is proven, a creditor may obtain "[a]voidance of the transfer
or obligation to the extent necessary to satisfy the creditor's claim." N.J.S.A.
25:2-29(a)(1). Where the transfer cannot be undone, a creditor may obtain a
judgment for the value of the asset fraudulently transferred against "[t]he first
transferee of the asset or the person for whose benefit the transfer was made."
N.J.S.A. 25:2-30(b)(1). The UFTA also contains a catch-all provision, affording
a creditor "[a]ny other relief the circumstances may require." N.J.S.A. 25:2 -
29(a)(3)(c).
In Gilchinsky, our Supreme Court explained:
In determining whether a transfer constitutes a
fraudulent conveyance, there are two relevant 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. The person seeking to set aside the
conveyance bears the burden of proving actual intent.
In determining whether the circumstances of a
particular transaction give rise to the conclusion that
the transferor intended to thwart or evade creditors,
courts generally look to factors commonly referred to
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as "badges of fraud." "Badges of fraud" represent
circumstances that so frequently accompany fraudulent
transfers that their presence gives rise to an inference
of intent.
[159 N.J. at 475-76 (alteration in the original) (citations
omitted)]
The plaintiff bears the burden of establishing a claim under the UFTA by
clear and convincing evidence. Jecker v. Hidden Valley, Inc., 422 N.J. Super.
155, 164 (App. Div. 2011); Barsotti v. Merced, 346 N.J. Super. 504, 520 (App.
Div. 2002).
The trial court analyzed the badges of fraud listed in N.J.S.A. 25:2-26 and
determined plaintiff proved a fraudulent transfer under N.J.S.A. 25:2-25(a) by
clear and convincing evidence. We are satisfied the court supported its
determination with the credible evidence in the record.
ARCP transferred property to insiders - the three individual members and
their spouses - all relatives, by paying off debts they personally guaranteed and
mortgages secured by their personal residences. ARCP distributed the remainder
of the sale proceeds to the members, which also benefited their spouses. See
N.J.S.A. 25:2-26(a).
The members and their spouses retained possession and control of the
property transferred after the transfer because their guaranties and mortgages
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were released, and they also retained and used the sale proceeds that were
distributed directly to the members. See N.J.S.A. 25:2-26(b).
The transfers consisted of all of ARCP's assets. See N.J.S.A. 25:2-26(e).
The members removed assets by paying off the loans that they and their spouses
had personally guaranteed, removing that money beyond the reach of plaintiff .
See N.J.S.A. 25:2-26(g).
The transfers rendered ARCP insolvent under N.J.S.A. 25:2-23(a) ("A
debtor is insolvent if the sum of the debtor's debts is greater than all of the
debtor's assets, at a fair valuation."), and (b) ("A debtor who is generally not
paying his debts as they become due is presumed to be insolvent."). Plaintiff's
contingent claim exceeded the value of ARCP's assets because ARCP did not
have any remaining assets after the transfers, leaving ARCP unable to pay the
rent obligation incurred prior to the transfers. Therefore, ample evidence
supported the trial court's finding of a fraudulent transfer.
Defendants' remaining arguments lack sufficient merit to warrant
discussion in a written opinion. R. 2:11-3(e)(1)(E).
We briefly address plaintiff's cross-appeal and its contention that the trial
court erred in denying its application for attorney's fees. In denying the
application, the trial judge stated:
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I think [R]ule 4:42-9 . . . recognizes that the American
rule is what we follow in litigation. And basically
speaking, I don't find that anything under [UFTA] . . .
which creates a right to counsel fees.
We are satisfied the trial judge acted within his discretion in following the
general rule and denying plaintiff's fee application.
Affirmed.
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