New Jersey Appellate Court Rules That Client List Is an Asset in Suit Alleging Fraudulent Transfer

file2581243266765.jpgA business owner may have violated the Uniform Fraudulent Transfer Act (UFTA), N.J.S.A. 25:2-20 et seq., when he closed his wholly-owned corporation and began working for another company in the same field, according to a New Jersey appellate court. Del Mastro v. Grimado, et al, No. A-1433-11T4, per curiam (Sup. Ct. N.J. App. Div., Sep. 5, 2013). The plaintiff, who had obtained a judgment against the defendant in a separate matter, claimed that the defendant fraudulently transferred business assets in order to prevent her from collecting the judgment. The appellate court ruled that the client list of the defendant’s corporation was an asset for the purposes of the UFTA. The ruling could be important for any New Jersey small business that seeks to reorganize, dissolve, or merge with another company while certain debts remain outstanding.

The defendant was the sole shareholder of Internal Concepts, Inc. (ICI), an S-corporation that brokered electric motors used in medical equipment for about fifty clients. According to the court, the business had gross sales of $1.3 million in 2003 and $1.7 million in 2004. In August 2005, the plaintiff obtained a judgment against the defendant in a separate suit for invasion of privacy and intentional infliction of emotional distress. The court awarded her $531,000 in compensatory and punitive damages, based on an evaluation of the defendant’s assets, including ICI. The defendant closed ICI shortly before the 2005 trial began. He testified that the closure of the business was completed in July 2005. The defendant went to work for Precisions Devices Associates, Inc. (PDA), a company that had worked alongside ICI, and which began to perform many of the services ICI had performed once he joined as an employee.

The plaintiff filed suit against the defendant, as well as ICI, PDA, and PDA’s owner in July 2009, claiming that the closure of ICI and transfer of the client list to PDA hindered her efforts to collect on her judgment, and therefore violated the UFTA. The trial court dismissed the complaint in October 2011, finding in part that the plaintiff had not provided clear and convincing evidence of fraud.

The appellate court reversed the trial court’s rulings. On the fraud issue, the court examined the defendant’s testimony during the trial of the invasion of privacy claim. He claimed in the present case that he closed ICI months before entry of the judgment, but he offered testimony as to the business’ value during the 2005 trial. He did not tell the court in 2005 that he had closed the business. The defendant’s testimony regarding how he came to work for PDA differed from the testimony offered by PDA’s owner, the court noted. Finally, the court concluded that ICI’s client list was a valuable asset, and that the defendant’s transfer of it to PDA could constitute a UFTA violation. It remanded the case for a new trial.

At Samuel C. Berger, PC, our small business attorneys represent New York and New Jersey entrepreneurs and businesses. We offer fixed-fee packages of legal services covering a variety of legal matters. Our goal is to enable our clients to understand their legal rights and obligations as businesses and business owners, and to ensure that their operations run smoothly. Contact us today online or at (212) 380-8117 to schedule a confidential consultation with a member of our legal team.

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Photo credit: jdurham from morguefile.com.