AUSIMONT USA, INC. v. ENVIRONMENTAL MATERIALS CORPORATION, et al.

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-0376-04T10376-04T1

AUSIMONT USA, INC.,

Plaintiff-Appellant,

v.

ENVIRONMENTAL MATERIALS

CORPORATION and EVTC, INC.,

Defendants,

and

THE CIT GROUP/BUSINESS CREDIT, INC.,

Defendant/Intervenor-Respondent.

________________________________________________________

 

Argued May 1, 2006 - Decided May 31, 2006

Before Judges Fall, C.S. Fisher and Yannotti.

On appeal from the Superior Court of New Jersey, Chancery Division, Ocean County,

Docket No. OCN-C-210-02.

Joseph J. Fleischman argued the cause for appellant (Norris, McLaughlin & Marcus, attorneys; Mr. Fleishman and Margaret Raymond-Flood, on the brief).

Samara L. Kline, of the Texas bar, admitted pro hac vice, argued the cause for respondent (D'Allesandro, Jacovino & Gerson, attorneys; Edward G. D'Allesandro, Jr., Frederick E. Gerson, C. Luckey McDowell and Ms. Kline, on the brief).

PER CURIAM

Plaintiff Ausimont USA, Inc. (plaintiff) filed this action in the Chancery Division in Ocean County, claiming that a loan made to defendant Environmental Materials Corporation (EMC) and others, by intervenor The CIT Group (CIT), constituted a transfer prohibited by the New Jersey Fraudulent Transfer Act, N.J.S.A. 25:2-20 to -34. Following a bench trial, Chancery Judge James D. Clyne rejected plaintiff's contentions for the reasons thoroughly described in his written decision.

The facts, as stipulated by the parties or as found by Judge Clyne, may be briefly summarized as follows.

In February 1997, plaintiff began selling gas-related goods to EMC, which used those goods in refrigerant products that it sold and distributed. EMC was expected to pay for these goods within sixty days of invoicing. This sales relationship continued without incident until the invoice on an order placed by EMC in May 2001 became overdue in July 2001.

EMC was founded in 1974 by its president, George Cannon; in 1992, EMC was acquired by the predecessor corporation of defendant EVTC, Inc. In reliance on Cannon's reassurances, plaintiff continued to supply products to EMC. By the time plaintiff stopped shipping goods in November 2001, it was owed $1,360,355.24.

Relevant to plaintiff's attempts to obtain payment from EMC, or to obtain a remedy elsewhere, were the events regarding financing received by EMC's parent (EVTC), EMC itself, and other affiliates. These circumstances commenced in August 1998, when EVTC became indebted to Chase Manhattan Bank in the principal amount of $12,000,000. EMC was a guarantor of that loan, and pledged all its assets as security. Other EVTC subsidiaries also pledged their assets as security.

The Chase note matured on January 15, 1999, and, in September 1999, Chase threatened foreclosure.

In December 1999, EVTC entered into a secured loan agreement with CIT. EMC and two other subsidiaries of EVTC (i.e., RRFI and FRI) were co-borrowers on this transaction, which provided the borrowers with a revolving credit line of $12,000,000 and a term credit line of $300,000. The obligation to Chase was substantially paid down through the use of $5,287,914.49 from the CIT credit line, $3,570,802.18 from EVTC's cash on hand, and $241,881.90 from lockbox receipts held by CIT.

At the time of the transaction with CIT, EMC had sufficient assets to continue its ordinary business and sufficient cash flow to pay its debts. Specifically, EMC's balance sheet then revealed a net worth of $12,106,578, although $13,521,863 of its $19,854,086 in assets consisted of loans to affiliates. It was then the only profitable company in the EVTC corporate family.

By November 2001, when EMC's obligation to plaintiff had risen significantly and had gone unpaid for a few months, the CIT loan indebtedness also increased to approximately $7,500,000. As a result, on December 14, 2001, EVTC acknowledged its default and entered into a forbearance agreement with CIT. The CIT loan was thereafter reduced to approximately $5,100,000 by the last quarter of 2002, a circumstance attributable to CIT's retention of receivables of the consolidated company through a lockbox arrangement.

In addition, late in 2001, CIT told EVTC that a consultant was needed if CIT were to continue to work with the company. By February 2002, through a consultant, CIT exerted significant control over the consolidated company and determined which creditors to pay. This consultant also formulated a workout plan, but CIT failed to fund it, resulting in the virtual shut-down of these companies.

As a result, on April 25, 2002, CIT commenced an action in a Texas state court seeking to foreclose on its loan. At that time, CIT was owed approximately $5,100,000. On May 13, 2002, the Texas court entered an injunction that prohibited, among other things, the transfer or hypothecation of the assets of EVTC and its subsidiaries. The Texas court also ordered the liquidation of the assets of EVTC, EMC and the other subsidiaries.

On February 27, 2002, plaintiff filed a complaint in the Law Division in Gloucester County against EMC, alleging a breach of their contract and seeking damages in the principal amount of $1,360,355.24. EMC defaulted and, on August 7, 2002, default judgment was entered in favor of plaintiff and against EMC in the amount of $1,395,016.34.

On August 6, 2002 -- the day before the entry of judgment in the Gloucester action -- plaintiff filed a verified complaint in the Chancery Division in Ocean County against EMC and EVTC, seeking the appointment of a statutory receiver. Soon thereafter, a consent order was entered that permitted plaintiff to amend its complaint to include claims against CIT. Plaintiff filed an amended complaint which contained fraudulent transfer and equitable fraud claims.

Judge Clyne conducted a bench trial over the course of six days and made findings regarding plaintiff's claim that EMC's obligation for the CIT loan represented a fraudulent transfer, as well as plaintiff's alternative claim that CIT engaged in a fraud by controlling EVTC and EMC, and by having EMC continue to order and receive goods from plaintiff while preventing the payment to plaintiff of those goods.

Judge Clyne rendered a written opinion, which contains his thorough findings of fact and conclusions of law on these issues. Those findings can be synopsized in the following way. As for the fraudulent transfer claim, Judge Clyne found that the evidence either did not exist or did not persuade him to agree with plaintiff that CIT was an insider during the relevant time period; that EMC obtained reasonably equivalent value for becoming obligated on the CIT loan agreement because EMC was a guarantor of the Chase loan, which, in essence, was replaced by CIT's loan; and that the Chase obligation represented a real liability for EMC because Chase had threatened foreclosure and EMC appeared to be the only guarantor with assets that could satisfy Chase's claim. The judge also rejected plaintiff's equitable fraud claim, chiefly because he found "as a fact that CIT did not exert such control" over EMC "until months after [plaintiff had] ceased sending product and months after EMC had incurred" the approximate $1,360,000 obligation to plaintiff. The judge explained how he reached these essential findings and their significance to the legal conclusions he drew from those facts in his thoughtful written opinion. Judgment was entered in favor of CIT on August 24, 2004.

Plaintiff appealed, arguing that (1) N.J.S.A. 25:2-25 requires that, in exchange for its guarantee, a guarantor must receive "reasonably equivalent value" and that the judge failed to make appropriate findings in this regard; (2) that the judge drew an erroneous legal conclusion when he held that CIT's funding of the reduction of the Chase debt provided EMC with value; (3) that the judge's "one ball of wax" theory -- i.e., that EMC received value from the fact that the CIT loan "kept alive" the other EVTC companies -- is erroneous; (4) that the judge failed to quantify the extent to which EMC, as a guarantor, received value in these circumstances; (5) that the judge failed to make adequate findings of fact regarding whether EMC's assets were unreasonably small at the time it guaranteed the Chase loan; (6) that the judge erred in concluding that plaintiff did not have standing to assert a claim based upon N.J.S.A. 25:2-27; and (7) that the judge mistakenly failed to conclude that CIT's interests should have been equitably subordinated to the interests of plaintiff.

We reject these contentions substantially for the reasons set forth in Judge Clyne's written opinion.

Affirmed.

 

Namely: Refrigerant Reclaim Services, Inc. (RRSI), Fulcircle
Recyclers, Inc. (FRI), Environmental Technologies Inc., EMC Export, and Refrigerant Management Services, Inc.

Following those payments, Chase was left with a retained note in the amount of $750,000.

EMS also accessed the CIT credit line for its own purposes.

The claim based on N.J.S.A. 25:2-27 was disposed of by way of summary judgment.

(continued)

(continued)

8

A-0376-04T1

May 31, 2006