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In A Case Handled by Samuel Feldman, NJ Supreme Court Establishes a Cause of Action Against Attorneys for Conspiracy to Violate the Uniform Fraudulent Transfer Act
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On June 27, 2005 the New Jersey Supreme Court issued its opinion in Banco Popular North America v. Suresh Gandi a/k/a Suresh Gandhi (A-5/6). The Court’s ruling is significant as it for the first time recognized a cause of action against an attorney for conspiring with a client to violate the Uniform Fraudulent Transfer Act (“UFTA”). The Court also held that financial institutions to which representations are made by borrower’s counsel have a cause of action for intentional or negligent misrepresentation if the opinion is misleading.
Banco Popular’s counsel at both the trial and appellate levels was Samuel Feldman, a partner in the litigation department of Orloff, Lowenbach, Stifelman & Siegel, P.A.
The claim brought by Banco Popular grew out of a loan it had made to Mr. Gandhi’s business in May 1997. Mr. Gandhi was the personal guarantor of the loan. In April 1998, Mr. Gandhi was involved in a litigated dispute with another creditor. In the context of that dispute, Banco Popular alleged that Mr. Gandhi’s attorney advised him to transfer certain real estate and securities to his spouse and prepared the transfer documents. Two months later, Mr. Gandhi signed another guaranty for a modest line of credit. In that guaranty Mr. Gandhi represented that he had not transferred substantially of his assets and that he would not do so without Banco Popular’s written consent.
In July 1998, Mr. Gandhi’s corporation closed on another loan from Banco Popular in which the attorney who is alleged to have counseled and facilitated the April 1998 asset transfer represented Mr. Gandhi and his corporation. In that connection, the attorney rendered a written opinion letter to Banco Popular in which he represented that he had undertaken an investigation and that he was unaware of any material matters contrary to the representations made by Mr. Gandhi or his corporation contained in the loan documents. Although Banco Popular alleged that there were representations made that the attorney knew to be false, it also argued that the attorney was negligent in his “investigation” and/or was negligent in making his representation.
Mr. Gandhi defaulted on his guarantees and Banco Popular ultimately obtained a judgment of more than $1,000,000 against him. During the course of asset discovery, Banco Popular discovered information concerning the attorney’s alleged involvement in facilitating the fraudulent transfers.
Banco Popular brought an action against the attorney, his law firm and its partners asserting several causes of action, including “creditor fraud”, common law fraud, civil conspiracy, professional negligence, and negligent misrepresentation, both in connection with the asset transfer and with the opinion letter. The trial court dismissed Banco Popular’s complaint.
Banco Popular appealed to the Appellate Division which reinstated the claim for “creditor fraud” based on prior Appellate Division case law and also reinstated the claim for civil conspiracy and the claim against the law firm. It affirmed the dismissal of the common law fraud claims as well as Banco Popular’s claims for negligence.
The Supreme Court granted both parties’ request for certification in view of the significance of the issues raised.
Although the Supreme Court declined to recognize a cause of action for “creditor fraud”, it accepted Banco Popular’s argument that a remedy existed against the attorney under the law of conspiracy. Specifically the Court held that a cause of action existed against the attorney for conspiracy to violate the UFTA. This ruling followed the law in several other jurisdictions. This ruling has significant implications for all professionals (not just attorneys) who assist clients in transferring assets. If, years later, a transfer is found to have been fraudulent within the meaning of the UFTA, the creditor might well have recourse against the professional who advised and/or assisted in the transfer. At a minimum, the professional may be liable to the creditor for the costs of reversing the transfer. If the asset has been sold to a third party for adequate consideration following the transfer, the professional might be liable for the value of the asset transferred.
The Supreme Court reversed the Appellate Division’s dismissal of Banco Popular’s negligence and fraud claims against the attorney and his law firm arising out of the “borrower’s” opinion given to Banco Popular in connection with the loan issued by Banco Popular to Mr. Gandhi’s business two and one half months after the alleged fraudulent transfers. It found that the opinion was intended to induce Banco Popular to issue the loan and accept Mr. Gandhi’s guaranty. Language in the attorney’s opinion suggested that the attorney had undertaken an investigation of certain representations made by Mr. Gandhi, including a representation regarding his assets.
In Banco Popular v. Gandhi, the Supreme Court significantly expanded a professional’s liability for assisting a client in making a fraudulent transfer as defined in the UFTA. Thus, attorneys and other professionals need to be particularly cognizant of the extensive provisions of the UFTA and exercise vigilance in assisting clients in effectuating asset transfers in circumstances that years later could result in a determination that the transfer was made in violation of the UFTA. |
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