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Motorworld, Inc. v. William Benkendorf077009)

Supreme Court of New Jersey
156 A.3d 1061, 228 N.J. 311 (2017)
ELI5:

Rule of Law:

Under the Uniform Fraudulent Transfer Act (UFTA), a transfer made by a debtor corporation is constructively fraudulent if the corporation does not receive 'reasonably equivalent value' in return. Value provided to a separate, affiliated 'sister' corporation or to the common shareholder does not constitute value received by the debtor corporation itself.


Facts:

  • Carole Salkind was the sole shareholder of three corporations managed by her husband, Morton Salkind: Motorworld, Inc., Fox Development, Inc. (Fox), and Giant Associates, Inc. (Giant).
  • Benks Land Services, Inc. (Benks), owned by William Benkendorf, performed over $1,000,000 of landscaping and construction services for Fox and Giant, for which it was never paid. Benks performed no services for Motorworld.
  • In 2004, Motorworld loaned $500,000 to William and Gudrun Benkendorf, which was documented by a $600,000 promissory note in favor of Motorworld. This note became Motorworld's only asset.
  • The Benkendorfs defaulted on the note, and their debt to Motorworld, including interest and penalties, continued to grow over several years.
  • In August 2008, Morton Salkind, acting for Motorworld, agreed to a setoff arrangement with Benkendorf.
  • Motorworld executed a Release, canceling the Benkendorfs' entire debt owed to Motorworld under the promissory note.
  • In exchange for this Release, Benks and Benkendorf agreed to forgive the more than $1,000,000 debt owed to Benks by Fox and Giant.
  • The execution of the Release left Motorworld with no assets, rendering it insolvent.

Procedural Posture:

  • Catherine Youngman, the bankruptcy Trustee for Carole Salkind's estate, filed a complaint on behalf of Motorworld against the Benkendorfs and Benks in a New Jersey trial court to collect on the promissory note.
  • The Trustee filed a second, consolidated action against the same defendants, seeking to void the Release under the Uniform Fraudulent Transfer Act (UFTA).
  • After a bench trial, the trial court found that the Release constituted a constructively fraudulent transfer, voided it, and entered a judgment of over $1.4 million in favor of the plaintiffs.
  • The defendants (Benkendorfs and Benks), as appellants, appealed to the Appellate Division.
  • The Appellate Division panel reversed the trial court's judgment, holding that the transfer was made for 'reasonably equivalent value' because it benefited Motorworld's sole shareholder, Carole Salkind.
  • The plaintiffs (Trustee and Motorworld), as petitioners, were granted certification to appeal to the Supreme Court of New Jersey.

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Issue:

Does a debtor corporation's release of its sole asset, a promissory note, in exchange for the forgiveness of a debt owed by two separate 'sister' corporations, constitute a constructively fraudulent transfer under the Uniform Fraudulent Transfer Act on the grounds that the debtor corporation did not receive 'reasonably equivalent value'?


Opinions:

Majority - Justice Patterson

Yes, the release constitutes a constructively fraudulent transfer. Under the plain language of the Uniform Fraudulent Transfer Act (N.J.S.A. 25:2-27(a)), a transfer is fraudulent if the debtor does not receive 'reasonably equivalent value' in exchange. The statute requires that value must be received by and for the benefit of the debtor-transferor, which in this case is Motorworld. The forgiveness of debts owed by separate corporate entities (Fox and Giant), even those with a common shareholder, provides no value to Motorworld itself. The court must respect the legal distinction between separate corporate entities and cannot disregard the corporate form to find an indirect benefit to the shareholder. Because Motorworld relinquished its sole asset and received nothing of value in return, the transfer was constructively fraudulent as it rendered Motorworld insolvent.



Analysis:

This decision reaffirms the fundamental principle of separate corporate identity and clarifies the application of the 'reasonably equivalent value' standard under the UFTA. It establishes that courts must strictly analyze which entity receives the 'value' in a transaction, preventing shareholders of closely held corporations from shifting assets and liabilities between entities to the detriment of a specific corporation's creditors. The ruling provides a clear precedent that indirect benefits to shareholders or affiliated companies do not satisfy the UFTA's requirement that the debtor itself must receive value, thereby strengthening protections for creditors of individual corporate entities within a larger commonly-owned group.

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