Defense Digest

The New Jersey Supreme Court Finds No Cause Of Action For Creditor Fraud Action Against Attorneys

On June 27, 2005, the Supreme Court of New Jersey held that there is no cause of action for creditor fraud against attorneys in this state. Banco Popular North America v. Gandi, A-5/6-03 (June 27, 2005). This long-awaited opinion helped clarify the law in New Jersey in connection with claims against attorneys by lenders and creditors who claim that attorneys have assisted their clients in transferring assets in order to defraud creditors. Recently, creditors have been alleging claims against attorneys for "creditor fraud." The Supreme Court held in Banco Popular that there is no cause of action for creditor fraud in New Jersey; however, the attorney may be liable to a creditor for conspiracy to violate the Uniform Fraudulent Transfer Act, N.J.S.A. 25:2-20 to 34, for participation in the transfer. Also, attorneys may be liable for misrepresentations made in connection with opinion letters issued to lenders in connection with loan transactions.

Interestingly, in Morganroth & Morganroth v. Norris, McLaughlin & Marcus, P.C., 331 F. 3d 406 (3rd Cir. 2003), the Third Circuit suggested that New Jersey would recognize an action for creditor fraud. As it turned out, the Third Circuit was wrong. The Supreme Court made the point that plaintiffs can no longer allege "creditor fraud" in an effort to avoid proving the five elements required to establish legal fraud.

However, remedies are available to creditors under the Uniform Fraudulent Transfer Act, i.e. breach of contract, negligence or common-law fraud. Those claims can be pursued pursuant to the Supreme Court's opinion in Banco Popular. For example, if a creditor alleges that the attorney assisted the client in violating the UFTA under a civil conspiracy, the creditor can bring a claim against one who assists another in executing a fraudulent transfer. However, the creditor must prove that the conspirator agreed to perform the fraudulent transfer which, absent the conspiracy, would give a right of action under the UFTA. See Morgan v. Union County Bd. of Freeholders, 268 N.J. Super. 337 (App. Div. 1993) certif. den., 135 N.J. 468 (1994). However, when asserting a claim for civil conspiracy, the creditor must satisfy all aspects of the civil conspiracy claim and all components of a UFTA claim. Therefore, if a creditor alleges that the attorney engaged in a conspiracy with the debtor to violate the UFTA and assisted the debtor in transferring assets, the creditor may state a claim.

It should also be noted that in Banco Popular, the bank asserted negligence claims against the attorney alleging negligent misrepresentation regarding the asset transfer. New Jersey does recognize, in some circumstances, that attorneys can be liable to non-clients. Petrillo v. Bachenberg, 139 N.J. 472 (1995). However, in such circumstances the attorney must intend to induce a non-client's reasonable reliance on his or her representations. In Banco Popular, the attorney aided the debtor in the asset transfer. However, he made no representations to the bank seeking to induce reliance. In fact, the entire transaction was intended to be carried out without the bank's knowledge. Therefore, the attorney did not expect third-party reliance, and no reliance ensued. Accordingly, the Supreme Court also affirmed dismissal of the bank's claim of negligence against the attorney.

However, the bank also asserted a claim of negligent misrepresentation against the attorney based upon an opinion letter that allegedly contained misstatements of material facts, which the attorney knew or should have known the bank would rely in connection with the loan transaction. Therefore, in situations where attorneys issue opinion letters to lenders and the lender relies upon the same in making the loan, attorneys are at risk for suit if there are misrepresentations contained in the opinions.

The Supreme Court's opinion in Banco Popular does clarify the law in New Jersey regarding these issues. Plaintiffs can no longer bring a claim of "creditor fraud." They will be limited to the remedies outlined in the opinion and under the Uniform Fraudulent Transfer Act if the lender can prove civil conspiracy or common-law fraud. Claims of negligent misrepresentation based upon an opinion letter can survive if there are misstatements which the lender relied upon in making the loan.

Should you have any questions in connection with this recent opinion, please do not hesitate to contact Jack Slimm of our Cherry Hill office.

*Jack, a shareholder in our Cherry Hill, NJ office, can be reached at (856) 414-6021 or jslimm@mdwcg.com.