PER CURIAM.
This is a fraud action involving the control of a now-defunct coffee roaster, Hudson's Coffee, Inc. (Hudson's). Defendants Armenia Coffee Corp. (Armenia), Joseph Apuzzo, Jr. (Apuzzo, Jr.), Joseph Apuzzo, Sr. (Apuzzo, Sr.) (collectively the Apuzzos), and Regal Trading, Inc. (Regal) appeal from a final judgment following a bench trial adjudging them liable to plaintiffs Fourteen Florence Street Corporation (Fourteen Florence), Mecca & Son Trucking Company, Inc. (Mecca Trucking), and Helen Mecca (collectively plaintiffs, the Meccas, or the Mecca Entities) for damages of $685,216.20 and pre-judgment interest. Plaintiffs cross-appeal from the denial of their claims for punitive damages and attorneys' fees.
The trial court determined that the Apuzzos, through their control of both Hudson's and its green coffee supplier Armenia, created a fraudulent security interest in Hudson's assets. After Hudson's had become insolvent and owed hundreds of thousands of dollars in back rent to the Meccas, who had sued to evict Hudson's, the Apuzzos, acting through Armenia, repossessed virtually all of Hudson's machinery, equipment, inventory, and finished goods thus putting those assets beyond the Meccas' reach with the intent to defraud them. The court found that the Apuzzos thereafter transferred Hudson's assets to Regal, a corporation they owned, which continued the business of Hudson's pursuant to a de facto merger. The Apuzzos then liquidated Hudson's in a bankruptcy proceeding.
Because there are ample facts in the record to support the trial judge's conclusions, we affirm the judgment against the Apuzzos, Armenia, and Regal but reverse one aspect of the damage award and remand for reconsideration and any recalculation of pre-judgment interest. We affirm the court's denial of punitive damages but reverse the court's denial of attorneys' fees limited to one aspect of plaintiffs' claim.
A brief procedural history will be helpful to an understanding of the issues. Plaintiffs filed their fraud action in December 2004. In November 2005, Hudson's filed a Chapter 7 bankruptcy petition. In February 2006, the bankruptcy trustee removed the fraud action to bankruptcy court. Thereafter, the Mecca Entities, the Apuzzos, and Armenia all filed proofs of claim. In May 2007, the bankruptcy court entered an order permitting the Mecca Entities to intervene as co-plaintiffs with the trustee. The trustee then filed an amended complaint that included plaintiffs' claims as well as a cross-claim against plaintiffs for amounts Hudson's had paid them prior to Armenia's repossession and Hudson's petition.
In September 2008, the trustee settled its claims with plaintiffs. The settlement provided for a remand to State court of plaintiffs' "particularized" claims against defendants with plaintiffs being free to bring any other claims by amendment in the State court action. Plaintiffs settled the trustee's cross claims against them with a payment of $45,000, and received assignment of allowed claims against Hudson's estate under $20,000. The bankruptcy court approved the settlement by order of September 17, 2008.
Armenia appealed that order to the district court contending that remand to State court was improper. The district court affirmed the order, rejecting Armenia's claim. The court termed the situation
The district court also rejected Armenia's claim that the bankruptcy court failed to determine whether the remaining state claims were "`particularized'" to plaintiffs or "`core' claims" belonging in bankruptcy. It thus held that the bankruptcy court did not err in remanding plaintiffs' original complaint to State court.
Following reinstatement of the state action, the Assignment Judge entered an order for the voluntary dismissal without prejudice of plaintiffs' claims against Hudson's in accordance with the federal court order approving the bankruptcy settlement. The order also allowed defendants to file a motion for summary judgment if they contended plaintiffs' claims were barred by virtue of that bankruptcy settlement. Defendants thereafter made such a motion. The Assignment Judge found that issues of fact precluded summary judgment and so denied the motions, subject to defendants' right to renew them after plaintiffs had presented their proofs at trial.
We draw the following facts from the record. James Capozzi and Sidney Abramowitz were coffee traders employed by Armenia before leaving to start their own company, Coffee Trade Services (Coffee Trade). In 1997, Capozzi and Abramowitz began to organize a new roast coffee business, which they would eventually call Hudson's. Although still operating Coffee Trade, Capozzi and Abramowitz began to purchase equipment for Hudson's, which they stored in Jersey City in a building owned by Fourteen Florence, one of the Meccas Entities, pursuant to an oral understanding with plaintiffs.
The Meccas, friends of Capozzi's, eventually agreed to invest $300,000 in Hudson's in return for a one-third interest in the new company, the other two-thirds to be owned one-third each by Coffee Trade, and investors known as the San Francisco Group. The Meccas' investment was to be comprised of cash, trucking services and the forbearance of rent at the property where Hudson's had been storing its equipment and where it would eventually produce coffee.
Although Hudson's evidently did business from sometime in 1997, there was no certificate of incorporation filed until May 1999. In that certificate, Capozzi was listed as director and registered agent. Capozzi was also Hudson's president and treasurer, and had control over the corporate books and records. No stock was issued. Capozzi and the Meccas also eventually formalized a five-year lease between Hudson's and Fourteen Florence back-dated to January 1998, which memorialized the terms of the arrangement by which they had begun operating. Hudson's agreed to pay Fourteen Florence a yearly rental of $4.00 per square foot for 13,936 square feet, or $4,645.33 per month. The lease also recognized that an additional 4680 square feet was to be added to the size of the leasehold at the same charge per square foot. Beginning in January 2001, however, rent would increase by $.25 per square foot. Additionally, the tenant would be responsible for tax increases above the 1998 levels and could exercise a five-year extension at its option.
Hudson's expanded its space in the building and the rent increased several times accordingly. Beginning in March 1999, the actual rented space increased to 23,296 square feet, for a monthly rental of $7,765.33. Eleven months later, in February 2000, the rented space climbed to 34,612 square feet, for $11,537.33 per month.
In May 2000, the Meccas, having become increasingly concerned about their investment, were looking to be bought out. Capozzi approached Apuzzo, Jr., at Armenia, which had been providing Hudson's with its supply of coffee beans, to see if the Apuzzos were interested in taking the Meccas' place. Armenia was one of the largest coffee importers in the United States. Apuzzo, Jr. was president and his father, Apuzzo, Sr. was chairman, and, although they had no ownership in Armenia, they operated it for three Panamanian companies as a means of distributing Columbian coffee in the United States. The Apuzzos agreed to invest in Hudson's, but asked Capozzi not to tell plaintiffs of their involvement because some of Armenia's customers might see it as a conflict.
In June 2000, Capozzi informed Michael Mecca, Helen Mecca's son and vice-president of Mecca Trucking, that Hudson's had found a replacement for the Meccas. Hudson's agreed to repay them the balance of their capital contributions, which the Meccas valued at about $360,000, and to start paying monthly rent going forward. Capozzi understood that the Apuzzos were paying $600,000 into Hudson's for the Meccas' share. Although Apuzzo, Jr. testified that Armenia wired $150,000 into Hudson's account, Hudson's bank records listed the amount as only $124,990.
The parties still had no written agreements as to ownership in Hudson's prior to the Apuzzos' involvement. Rather, the first time the parties documented their relationship was in a shareholders' modification and consent agreement among Apuzzo, Jr., Capozzi, and Abramowitz (both individually and as a representative of Coffee Trade) dated February 8, 2001. According to that agreement, Apuzzo, Jr., made a $600,000 contribution in return for a one-third interest in Hudson's. He also became a director. The modification further provided that certain payments to Hudson's "had already been advanced toward this dollar amount and that the balance will be paid out based on cash flow demands." The February 2001 modification also indicated that two-thirds of Hudson's was then owned by Coffee Trade, although Capozzi testified that the San Francisco Group still owned one-third at that time, even though Hudson's had yet to formally issue any stock.
Prior to the February 2001 modification, Capozzi had maintained control over Hudson's bank account which was the only account used or applied to Hudson's debts. Shortly after the February 2001 modification, Apuzzo, Jr. began handling the books at Armenia's New York offices. A New York bank account for Hudson's was opened, with Apuzzo, Jr. having authority to sign checks. Shortly thereafter, Hudson's maintained only one account, the one Apuzzo, Jr. controlled.
According to the minutes from Hudson's March 2001 board of directors' meeting, the Apuzzos, Capozzi, and a representative of the San Francisco Group met to discuss various company matters. Apuzzo, Jr., Capozzi, and the representative of the San Francisco Group were confirmed as directors. The minutes then related that "the issuance of the shares were delivered and signed by all parties for Armenia Coffee, Coffee Trade Services and San Francisco and agreed to proportionately," and that Apuzzo, Jr. was "representing Armenia." Capozzi, describing the one-third ownership share of the "Apuzzo group," testified that he understood that at that point Armenia was represented on Hudson's board. In any event the "original share book" was to be kept at Armenia. The minutes further stated that the "execution of the Shareholders' Agreement of Hudson's Coffee was distributed and signed by all parties," and that future agenda items were to be submitted to Apuzzo, Jr. in advance. Among matters decided were that rent would be "delayed until more funds from [the] business became available," and that no more money would be put into Hudson's.
In December 2001, the parties entered into another shareholders' modification agreement. The parties' interests were stated as 41.5% for Apuzzo, Jr., 41.5% for Coffee Trade, and 17% for the San Francisco Group. According to the modification, Apuzzo, Jr., had advanced or contributed a total of $500,000 for his 41.5% interest, and "payments to Hudson[`s] have already been advanced toward this dollar total." The agreement was to be governed by New York law, and the integration clause included language to the effect that it "sets forth the entire agreement and understanding of the parties hereto and supersedes any and all written or oral agreements or representations between the parties hereto relating to the transactions contemplated by this agreement or related documents." No further explanation appears for the changes in the ownership proportions of Coffee Trade and the San Francisco Group other than that it was "for consideration received."
In February 2002, Capozzi (on behalf of Hudson's), a representative of the San Francisco Group, Abramowitz (on behalf of Coffee Trade), and Apuzzo, Jr. signed another shareholders' modification. It recited that Apuzzo, Jr., had advanced to, or on behalf of, Hudson's, a total of $560,000, and owned 51.5% of the company. As in the prior modifications, it represented that "payments to Hudson[`s] have already been advanced toward this dollar total." Distributions were to be made only by majority vote of the shareholders and agreement by the board, and while Apuzzo, Jr., continued to have a seat on the board, other members were to be elected by majority vote of the shareholders.
According to Capozzi's testimony, the $560,000 sum reflected in that modification was once again to be in addition to the earlier amounts Apuzzo, Jr. had previously contributed, thereby bringing Apuzzo, Jr.'s putative investment to $1.66 million, for a 51.55% ownership in Hudson's. Apuzzo, Jr. testified that he had made contributions to Hudson's in February 2001 of $600,000 and in February 2002 of an additional $560,000, for a total of $1.16 million, in return for 51.5% of Hudson's stock, but he insisted that the change anticipated by the December 2001 modification agreement for his payment of $500,000 in exchange for a 41.5% interest was never consummated. That testimony was at odds with his deposition in which he had acknowledged the December 2001 modification agreement. Apuzzo, Jr. had also testified at deposition that both he and Apuzzo, Sr. contributed sums to Hudson's in exchange for later acquiring shares. He subsequently maintained at trial that all sums advanced by Apuzzo, Sr. were loans and were not in exchange for any interest in Hudson's. He also pegged the amount that he and Apuzzo, Sr. "invested, loaned and have now lost" at $1.180 million.
Although Capozzi remained Hudson's president after the Apuzzos became involved in Hudson's, he testified that Apuzzo, Jr. handled all matters of income and expense, that Apuzzo, Jr. never provided him an accounting, and that he did not know what the company was doing in sales or how it was spending its funds. Neither did he know how much money Apuzzo, Jr. had actually contributed to Hudson's. Capozzi testified that he was not denied access to the books, he simply relied on Apuzzo, Jr. to keep him informed.
As of May 2002, Hudson's balance sheet reflected total assets of $1,424,485, of which $234,679 represented cash, accounts receivable and inventory. Its then current liabilities (accounts payable, expenses and loans) totaled $1,332,365. Hudson's "paid-in capital" statement as of May 31, 2002, listed "Apuzzo's" contribution as $560,000, while Coffee Trade and San Francisco Group's combined contribution totaled $627,450.63.
On May 31, 2002, Capozzi wrote to Michael Mecca to confirm that Hudson's owed approximately $252,095 in back rent and that the current monthly rent was $16,429, with the lease due to expire on January 3, 2003. Hudson's did not renew its lease at the end of 2002. Nevertheless, it remained in the property and, according to Michael Mecca, continued in a month-to-month tenancy pending negotiations. The Meccas proposed a new lease by which rent would increase to $4.75 per square foot per year for the 46,388 square feet leased, plus taxes and insurance. Although the parties never signed the proposed lease, beginning in January 2003, the Meccas began billing Hudson's monthly rent of $18,361.91, plus an increased share of taxes, in accordance with the terms they had proposed. According to the proposed lease, effective January 2005, rent would increase again to $5.50 per square foot, or $21,261.16 monthly.
As with the allegations that his father had invested in Hudson's, Apuzzo, Jr. also denied that Armenia had ever acquired an ownership interest in the company, notwithstanding the reference in the March 2001 Hudson's minutes to "issuance of shares" to the Armenia representative, or Capozzi's contrary understanding. Instead, he maintained that along with having sold Hudson's coffee, Armenia, like Apuzzo, Jr. and his father, had loaned Hudson's money and purchased equipment for it beginning in April 2000.
On February 15, 2003, Capozzi, on behalf of Hudson's, signed a note to Armenia to repay with interest the principal amount of $560,000. Interest installments of $28,000 were due each year on the anniversary of the note, with the first payment due in February 2004. That same date Capozzi also signed an agreement giving Armenia a security interest in Hudson's property as described in an attached schedule. The security interest covered past credit and extended to future advances and loans, and covered collateral that essentially represented all of Hudson's assets. Armenia never recorded a UCC filing statement of its security interest. Capozzi also personally guaranteed the note and security agreement. He testified that he gave the personal guarantees as a favor to Apuzzo, Jr., who had asked him to do so because Apuzzo, Jr. "was under a lot of pressure at Armenia," and both Apuzzos were Capozzi's friends.
Armenia's records for the period beginning April 2000, indicated regular amounts extended to Hudson's for coffee sales, but also referenced such things as "customer advance," "purchase of equipment," "advance (loan)" and "advance/loan (Mecca)." They also recorded various payments by Hudson's. In August 2003 alone, Hudson's made payments to Armenia totaling approximately $350,000, but, according to Apuzzo, Jr., those payments were not payment on the note. Further, although it had made a $107,731.50 back payment to the Meccas in January, Hudson's had continued to be behind in its rent throughout 2003. According to Hudson's own records, as of April 30, 2003, it owed $283,530.87 for "rent and contributions," and owed Mecca Trucking an additional $6150. On November 24, 2003, counsel for the Meccas wrote to Hudson's that it owed $390,000 in back rent and that if Hudson's failed to vacate by December 31, 2003, it would be deemed a willful holdover tenant and liable for double rent.
According to Capozzi, by February 2004, Hudson's was not selling sufficient coffee and was "losing money every day," although he admitted that the influx of Apuzzo, Jr.'s money and his having not declared a default when Hudson's missed the February 2004 $28,000 interest payment on the note were helping Hudson's to stay in business. Negotiations with the Meccas for a new lease had been continuing, however, and during the negotiations Hudson's had made some good faith back rent payments. Nevertheless, on June 30, 2004, counsel for the Meccas wrote to Hudson's to advise that the landlord was terminating the tenancy, and gave it until July 31 to vacate. Capozzi testified that when he approached Apuzzo, Jr. about the rent owed to the Meccas, Apuzzo, Jr. told him that he should "stay out of it, [and] that it was being resolved."
The parties did not resolve the tenancy matter, however, and on July 21, 2004, Fourteen Florence filed an eviction action. Michael Mecca testified that although they had filed for eviction, plaintiffs still hoped to get Hudson's to agree to a new lease.
At about that same time, Apuzzo, Jr. authorized repossession of the collateral under the security agreement to Armenia. Apuzzo, Jr. testified that Armenia determined to exercise its rights because Hudson's had not made the $28,000 payment under the note and could no longer pay for the coffee it needed. Although he later maintained that Armenia was only protecting itself, Apuzzo, Jr. acknowledged that given the ongoing disputes over the tenancy, he was concerned that if Hudson's were evicted the equipment would have been in the hands of the landlord.
Armenia gave Hudson's no written notice prior to repossessing the equipment. Instead, on August 24, 2004, a Saturday, Capozzi received a call from one of Hudson's employees about the property. When he went to the building, people were "dissembling the plant" by removing Hudson's equipment and Capozzi called the police. Apuzzo, Jr., Abramowitz, and a representative of the San Francisco Group, along with other Hudson's employees, were present. Cappozi testified that he had assumed that when Apuzzo, Jr. had told him he would take care of the rent dispute, he meant that they would come to an agreement, and not that Apuzzo, Jr. intended to take the equipment out of the leasehold.
Apuzzo, Jr. acknowledged that Armenia repossessed most of Hudson's assets, including the operating equipment, inventory and the finished goods on hand. The only items left behind were certain packing machines, bins, conveyors, and an afterburner, which Apuzzo, Jr. testified were too big and "cumbersome" to remove. A crane would have been necessary to remove the afterburner, which was on the roof.
Apuzzo, Jr. testified that he had not given Capozzi advance notice of the repossession because Capozzi would not have been in favor of that course. Apuzzo, Jr. also testified, however, that he had spoken to Abramowitz and the representative of the San Francisco Group, both of whom were Hudson's employees, in advance. Moreover, he told the representative of the San Francisco Group, a fellow director of Hudson's, that Armenia was going to "perfect its security agreement against Hudson's for non-performance." Apuzzo, Jr. admitted they did not discuss the possibility of Hudson's instead obtaining a loan to pay the $28,000 interest installment due.
Prior to the repossession, the value of Hudson's equipment and machinery, according to its records, was $1,283,238. On October 18, 2004, Armenia sold the repossessed equipment to Regal for $599,500 pursuant to a written agreement. The agreement recited that the machinery component had been appraised at $576,000 in July 2004.
The Apuzzos owned Regal, which had been an investment company not in the business of roasting coffee. After the repossession, Hudson's employees, Abramowitz and the representative of the San Francisco Group went to work for Regal. By the time of trial, Regal was a successful coffee roaster with sales in excess of $5 million using the equipment repossessed from Hudson's. Regal also was making timely payments to Armenia in accord with their sales agreement.
After Armenia had repossessed the equipment and Hudson's had effectively abandoned the leasehold, Fourteen Florence and Hudson's settled. The Meccas dismissed the tenancy action, although preserving other claims. Plaintiffs subsequently received a quote of $90,800 to remove the machinery Hudson's and Armenia abandoned and to repair the damage done to the premises by Armenia's repossession. According to the estimate, there was no market for the remaining machinery, all of which would likely have to be scrapped.
Following the repossession, Hudson's immediately ceased operations and its remaining employees were let go. Nevertheless, Apuzzo, Jr. testified that he did not know the particular date on which Hudson's had become insolvent, and could not recall why he had waited almost a year after the repossession before filing the bankruptcy petition.
According to a summary of transactions between Armenia and Hudson's from 2000 thru 2004, when Hudson's executed the $560,000 security agreement and balloon note to Armenia in February 2003, it owed Armenia $552,537.66. As of April 3, 2003, the amount owed had risen to $572,049.74, and by the end of Hudson's fiscal year on May 31, 2004, Hudson's owed Armenia $596,548.20. Armenia's ledgers indicated additional 2003 and 2004 advances or payments on behalf of Hudson's, bringing Hudson's total debt to Armenia to $1,071,171.59. Apuzzo, Jr. testified at deposition that all of the sums Hudson's owed to Armenia were for product, but at trial corrected his testimony by adding that the amounts also reflected sums owed on loans he and his father had advanced to the company. In reviewing the Armenia records, Apuzzo, Jr. could not say why none of the money Hudson's paid was ever classified as payment toward the $28,000 annual interest payment, which payment might have avoided repossession.
Apuzzo, Jr. acknowledged that he was Hudson's board chairman, and that Hudson's corporate documents were kept in the same New York location that served as the offices for Armenia and Regal. He also acknowledged that Hudson's net sales went from about $30,000 in 2000 to $400,000 by the end of 2001, before eventually rising to over $1 million prior to repossession of the equipment in 2004. Between March 2001 and August 2004, Hudson's sales increased but its overall financial picture did not improve. Apuzzo, Jr. maintained throughout his testimony that the fact that $560,000 was the amount in both the February 2002 modification agreement and the February 2003 security agreement was merely coincidence.
Apuzzo, Jr. also acknowledged having used Hudson's funds in connection with one of his private race cars, but maintained that the money was spent to advertise Hudson's on the body of the car. Capozzi, however, testified that he never authorized the purchase of racing equipment with Hudson's funds, and, according to him, race car driving was one of Apuzzo, Jr.'s hobbies. Although the Hudson's checks at issue were written for items such as "shop rental," Apuzzo, Jr. maintained that those personal expenses were paid by Hudson's in lieu of Hudson's paying him for advertising space. Apuzzo, Jr. estimated such advertising charges at $25,000, but had no photos of the car to illustrate the advertising.
After Hudson's filed for bankruptcy in November 2005, plaintiffs filed three separate proofs of claim: one for $13,593 on behalf of Mecca Trucking; one for $77,770 on behalf of Helen Mecca; and one for $552,232 on behalf of Fourteen Florence, for a total of $643,595 on behalf of the Meccas. Armenia's proof of claim against Hudson's was calculated by adding cash advances, accounts payable from coffee sales, "purchase accruals," and a $350,000 loan to Hudson's (for a total of $1,071,171.59), and then subtracting all credits, including the money received from the sale to Regal of the repossessed assets, for a balance of $351,671.59. The Apuzzos filed a joint claim for $1,085,000.
In May 2006, the bankruptcy court issued a notice of abandonment of the property left in the leasehold. Plaintiffs maintained that was the point when Hudson's stopped accruing rent. Michael Mecca testified that Hudson's had accrued rent prior to January 2003 of $433,351.53, and between January 2003 and May 2006 of $801,418, for a total of approximately $1,234,769, of which it had paid $404,000, leaving a balance due for unpaid rent of $830,769. Michael Mecca testified that the Meccas' contribution for their original one-third share of the coffee venture consisted of approximately $187,311.97 in rent forbearance, $29,700 in trucking services, and $170,000 in cash, for a total of about $386,000 between 1997 and May 2000. He conceded that rent accruing until the date Hudson's was incorporated was the obligation of the joint venture that became Hudson's. Hudson's had made payments to the Meccas on account of the Meccas' capital contributions, however, eventually paying a total of $210,000. The Meccas maintained that they were still owed $177,178. Accordingly, the Meccas claimed a total due of approximately $1,007,947, which they supported with the testimony of an accounting expert, Leonardo Scheinder.
The judge concluded on the basis of the facts adduced at trial that defendants Apuzzo, Sr., Apuzzo, Jr., Armenia, and Regal committed a fraudulent transfer of assets from Hudson's through Armenia to Regal, and that Regal continues the business of Hudson's pursuant to a de facto merger with that entity. Specifically, the trial court agreed with plaintiffs that Armenia's security agreement was a fraudulent attempt by the Apuzzos to secure their own investments in Hudson's. The judge found that the shareholders' agreements "were nothing more than a sham," and that the Apuzzos controlled and manipulated Hudson's books to reflect contributions to the company never made. Thus although Hudson's books reflect contributions by the Apuzzos of $1,660,000, the court found proof of only $624,821. The judge found that plaintiffs proved that Armenia's records "do not accurately reflect the amount loaned to Hudson's and deposited in his account," and that "advances" and "loans" to Hudson's on Armenia's books, were either never deposited into Hudson's account or not in the amounts claimed. The judge found that Apuzzo, Jr., used $25,178.28 of Hudson's assets to fund his racing hobby, and rejected Apuzzo, Jr.'s claim that the race car was used for advertising as "totally preposterous." The court also rejected Apuzzo, Jr.'s contention that it was only coincidence that the value of Hudson's assets, claimed to be $560,000, matched his claimed capital contributions.
In support of its conclusion that Apuzzo, Sr., Apuzzo, Jr., Armenia, and Regal were liable for fraudulently transferring the insolvent Hudson's assets to Regal, the court found that the Apuzzos were insiders of Hudson's and Armenia and owned Regal, which at the time of the transfer was an investment company but which after the transfer entered the coffee business using Hudson's equipment, inventory and key employees; that Apuzzo, Jr., Hudson's chairman, retained control of the property after the transfers to Armenia and Regal; that the transfer was concealed, accomplished when Hudson's was closed and without informing Capozzi, Hudson's president, in advance; that prior to the transfer, Hudson's was sued by plaintiffs for back rent; that the transfer included all of Hudson's assets with any real value; that Hudson's, through Apuzzo, Jr., removed the assets; that the value of the consideration received by Hudson's as evidenced by the $560,000 security agreement was reasonably equivalent to the $576,000 at which the equipment had been recently appraised; that Hudson's was insolvent at the time of the transfer, and filed for bankruptcy thereafter; that the transfer occurred shortly after a substantial debt was incurred in the form of the back rent that as of July 2004 had resulted in a complaint for eviction; and that Hudson's transferred its essential assets to a lienor, Armenia, who then transferred the assets to Regal, an entity wholly owned by insiders of Hudson's.
There was no dispute that Hudson's assets would have been available to the Meccas but for the conveyance. The court concluded that the clear intent of that transfer was to keep Hudson's assets out of the hands of its landlord, the Meccas. The court found that the Apuzzos "blatantly breached" their duties to Hudson's.
Finding that the Apuzzos controlled Hudson's, Armenia, and Regal, all of which they used for their own purposes in furthering their fraudulent scheme, the court determined to pierce the corporate veil.
Following several post-trial motions, the court entered an amended final judgment in favor of plaintiffs against defendants, jointly and severally, for $685,216.20, consisting of $177,178 remaining due on their capital contribution, $417,238.20 in back rent, $90,800 for property damage to the premises, and prejudgment interest of $204,720.06, for a total judgment of $889,936.26. The court denied plaintiffs' request for punitive damages and attorneys' fees and defendants' request for new trial. This appeal followed.
Preliminarily, defendants assert that plaintiffs lacked standing to pursue the claims they prevailed on at trial as a result of the bankruptcy proceedings and their settlement with the bankruptcy trustee. No extended discussion on this point is necessary. As have the other three courts that considered this argument, we reject it.
Defendants contend that the claims on which plaintiffs prevailed were general claims belonging to the bankruptcy trustee. The settlement agreement between plaintiffs and the trustee remanding those claims to State court, however, specifically noted that they "are not core claims, but are instead particularized claims of the Mecca Entities over which this Court does not have subject matter jurisdiction." The bankruptcy judge approved that settlement over Armenia's objection after two hearings. Differentiating between general and particularized claims of creditors is an everyday issue in bankruptcy court and we defer to that court's significant expertise in the area.
The trial court's factual findings underscore the soundness of those rulings. As the court found, this was not a case in which a struggling Hudson's withdrew its own property to avoid it falling into the landlord's hands. The judge found that the Apuzzos wrongfully employed Armenia's fraudulent security interest to surreptitiously remove all of Hudson's property having any value before plaintiffs could lock them out. Accordingly, the trial court was correct in concluding that plaintiffs had standing because their injuries were personal to them and not general claims belonging to all creditors.
Defendants next claim the court erred in finding that Armenia's repossession of Hudson's assets and transfer to Regal amounted to a fraudulent conveyance under New Jersey's Uniform Fraudulent Transfer Act (UFTA),
The purpose of the UFTA is to stop a debtor from deliberately cheating a creditor by placing property beyond his or her reach.
Thus, transfers are fraudulent as to a present or future creditor if either the debtor made the transfer with intent to defraud, or the transfer was made without receiving a reasonably equivalent value in exchange for the transfer, and the debtor intended to incur, or believed, or reasonably should have believed, that it would incur debts beyond its ability to pay as they became due. These inquiries are fact sensitive, and the burden of proving intent is on the party seeking to set aside the conveyance.
Because intent is generally not susceptible to direct proof, courts look to factors commonly referred to as "badges of fraud," or circumstances that "so frequently accompany fraudulent transfers that their presence gives rise to an inference of intent."
Courts attempting to determine actual intent to defraud must balance the factors listed in
The trial court made extensive findings detailing the many badges of fraud present in this transaction. First, Apuzzo, Jr., who engineered Armenia's security interest in Hudson's essential assets and then surreptitiously orchestrated the execution on those assets, was unquestionably an insider.
According to our Court, while the presence of a single badge of fraud "may cast suspicion on the transferor's intent, the confluence of several in one transaction generally provides conclusive evidence of an actual intent to defraud."
Defendants also claim the court erred in finding Armenia and Regal liable to plaintiffs under a successor liability theory. Although the general rule is that an acquiring corporation does not become responsible for the debts and liabilities of the seller in an asset acquisition, there is a well-recognized exception for transactions entered into fraudulently in order to escape responsibility for such debts and liabilities.
The evidence fully supports the court's conclusion that Armenia, at the direction of Apuzzo, Jr. with the assistance of Apuzzo, Sr. and having the intent to defraud the Meccas, acquired the equipment through a fraudulent security agreement obtained by Apuzzo, Jr. and then funneled that equipment to Regal, a corporation wholly owned by father and son. Following the repossession of its machinery, equipment, inventory, and finished goods, Hudson's no longer had the ability to remain in business. As owners of Regal, the Apuzzos got the benefit of essentially all of Hudson's remaining assets that, up until that time, had been used by the company that Apuzzo, Jr. had been effectively controlling. Regal also acquired Hudson's key personnel.
The Apuzzos similarly argue that the trial court erred in finding them personally liable to plaintiffs. Specifically, they contend there was no evidence that they had breached any fiduciary duties to Hudson's.
A corporation is a separate entity from its stockholders, and "in the absence of fraud or injustice," courts do not typically impose liability on the principals.
Here, as already noted, Apuzzo, Jr. was Hudson's controlling director long before the repossession by Armenia, having possession of Hudson's corporate books and checking account. The court found that he used Hudson's funds to pay for his personal car racing hobby. As Armenia's president, Apuzzo, Jr., directed the repossession of Hudson's assets without informing Hudson's president. Given the court's findings on fraudulent intent, the evidence also supported the judge's decision to hold Apuzzo, Jr. personally liable. Not only did he effectively control Hudson's prior to the repossession and conceive and orchestrate it, but as an officer in Armenia he funneled the proceeds to Regal and ultimately presumably profited as half-owner of that corporation.
The trial court termed Apuzzo, Sr. as an officer and director of Hudson's; that was not correct. Nevertheless, Apuzzo, Sr. certified that he was a Hudson's shareholder, although his son testified that he had been mistaken in his belief. Hudson's president, Capozzi, also believed that Apuzzo, Sr. had received Hudson's stock, although there was apparently no evidence of Apuzzo, Sr. actually having been issued shares. Notwithstanding, Apuzzo, Jr. certified that he and his father had contributed over $1 million to "capitalize the struggling operations" of Hudson's, and he testified at deposition that his father had contributed to the Apuzzos's purchase of additional Hudson's shares. Capozzi testified that Apuzzo, Sr. had attended most of Hudson's meetings and had told Capozzi that he contributed money to the company. Minutes of a March 2001 board meeting listed Apuzzo, Sr. as present, which Apuzzo, Jr. corroborated. Further, Apuzzo, Sr. testified at deposition that "we owed rent to Mecca," evidently addressing Hudson's unpaid rent, and said that the Meccas convinced Capozzi to "take on additional space when
We are satisfied that the evidence established Apuzzo, Sr. not only as an authority figure in Armenia, but also as one very involved with the decision-making at Hudson's, who was aware of the debt to plaintiffs and who performed as though he had a substantial stake in the outcome, all indicia of more than just an ordinary ownership interest in Hudson's.
The settlement with the bankruptcy trustee preserved plaintiffs' conspiracy claims for reinstatement here, and plaintiffs' amended complaint alleged a civil conspiracy including Apuzzo, Sr. We conclude that there is sufficient support in the record for the court's conclusion that Apuzzo, Sr. was aware of, furthered, and willingly participated in Apuzzo, Jr.'s plan, and thus is personally liable for assisting him in hindering plaintiffs' collection efforts, albeit for reasons slightly different than those expressed by the trial court.
Defendants challenge the damage award contending that any recovery was limited to the amount of the appraisal of the equipment repossessed, or $599,500, minus any setoffs, pursuant to the statutory limitations of
Under
Here, the court credited plaintiffs' testimony that they had obtained an estimate of $90,800 for the costs of removing the equipment that Hudson's had abandoned in the leasehold, including erecting a crane to remove the afterburner from the roof, and making necessary repairs. Adding the $90,800 to the amount realized on the sale of the repossessed equipment, $599,500, equals $690,300, or approximately $5000 more than the court awarded ($690,300-$685,216.20). Thus, the court's award was not invalid for exceeding the amount permitted under
Further, the security agreement blanketed all Hudson's assets, including inventory, which Apuzzo, Jr. acknowledged Armenia repossessed as well. Although the record does not include a specific value for the inventory Armenia seized, it is undisputed that Armenia took Hudson's green coffee inventory and finished goods. Apuzzo, Jr. already had possession of Hudson's books and contracts, which presumably included Hudson's customer lists. Although it is impossible to know with certainty the value of the additional inventory and account assets Armenia repossessed, it seems clear that they represented at least some credible value, if only because in a short time Regal, theretofore an investment company, was transformed into a successful coffee concern. Whatever the value of those additional assets, it could be properly added to the amount of any judgment for purposes of
We reject defendants' argument that they were entitled to off-sets under
We likewise reject defendants' argument that there was no support for the award of $177,178 regarding plaintiffs' alleged capital contribution. Michael Mecca testified that the Meccas' contribution for their original one-third share of the coffee venture consisted of approximately $187,311.97 in rent forbearance, $29,700 in trucking services, and $170,000 in cash, for a total of about $386,000. Hudson's repaid about $210,000, leaving a balance of approximately $177,178, or the amount the court awarded.
The award for back rent, however, cannot stand for two reasons. First, the court erred in using the terms of the unsigned January 2003 lease as a basis to calculate plaintiffs' rental damages beyond the expiration of the written lease. When the parties' original lease expired in January 2003, Hudson's became a holdover tenant:
Accordingly, it was error to calculate plaintiffs' rental damages using the terms of the unsigned January 2003 lease.
Second, the court failed to award any amount of back rent for the period of June 2000 through December 2002. Michael Mecca and plaintiffs' expert testified that the rent forbearance component of plaintiffs' capital contribution was calculated through May 2000. Michael Mecca testified that the rent due for the period from June 2000 through December 2002 was $433,351.53, plus approximately $33 per month in taxes. The court expressed no reason why plaintiffs were to be denied back rent for the June 2000-December 2002 period, or explained how the record indicated plaintiffs had been otherwise paid that rent.
Because we cannot calculate the rent and taxes due from the materials in the record, and any recalculation must take into account the capping provisions of
We reject defendants' argument that the court erred in awarding damages jointly and severally against defendants. The facts established that in their personal capacities the Apuzzos acted jointly and with a common purpose and intent to defraud plaintiffs. As the controlling and representative powers in Armenia and alter egos and owners of Regal, the Apuzzos's fraud would similarly make the corporate defendants jointly liable here.
On their cross-appeal, plaintiffs contend that the court erred in denying punitive damages. We disagree. Pursuant to the Punitive Damages Act,
Plaintiffs also challenge the court's denial of counsel fees. They contend that they were entitled to recover their counsel fees against the Apuzzos for having to protect their interests against third parties in this action, the tenancy action, and the bankruptcy court.
As the trial court correctly noted, New Jersey abides by the American rule that each side bears its own litigation expenses.
Plaintiffs' claims against the Apuzzos, Armenia and Regal in this action were intertwined with their claims against Hudson's. Plaintiffs' success on the merits of their UFTA claims depended on their success in proving fraud among all defendants, in piercing the corporate forms, and in showing that the Apuzzos were the alter egos of the corporate defendants. Accordingly, we agree with the trial court that having successfully made that showing, plaintiffs may not now contend that the Apuzzos, Armenia and Regal were not the actual tortfeasors but third parties.
Similarly, in the tenancy matter, Hudson's was the tenant and the only defendant, as well as the party in this action through which plaintiffs accused defendants of perpetrating their fraud. Hudson's was not a "third-party" to either action.
We do not, however, reach the same conclusion with regard to the proceedings in the bankruptcy court. Once the automatic stay was entered and the state action dismissed, plaintiffs filed a declaratory judgment complaint in the bankruptcy court in order to dispose of the property Hudson's abandoned, and separate proofs of claim. The trustee filed an amended bankruptcy complaint in which plaintiffs were permitted to join in certain of the trustee's claims against Regal and Armenia, but by which the trustee also asserted claims against plaintiffs for preference payments.
Ultimately, plaintiffs were successful in settling the trustee's claims and in getting the bankruptcy court to approve the reinstatement of this action. But Hudson's bankruptcy filing was what necessitated plaintiffs having to assert their damage claim in that proceeding and then defend it against the trustee, and those actions are hallmarks of the third-party exception:
Because we conclude that plaintiffs' attorneys' fees incurred in litigation with the bankruptcy trustee were proximately caused by defendants' torts, we find the court erred in denying plaintiffs damages measured by the expense of that litigation with the third-party bankruptcy trustee. Accordingly, we reverse the denial of attorneys' fees to plaintiffs limited to fees incurred in the bankruptcy proceeding.
Having considered the parties' remaining arguments in light of the record, we have concluded that plaintiffs are without sufficient merit to warrant discussion in a written opinion.
We affirm the judgment against the Apuzzos, Armenia, and Regal but reverse the back-rent component of the damage award and remand for reconsideration and any recalculation of pre-judgment interest. We affirm the court's denial of punitive damages but reverse the court's denial of attorneys' fees limited to fees plaintiffs incurred in the bankruptcy court.
Affirmed in part; reversed in part; and remanded.