Disbursement of Proceeds from Sale of Dunkin' Donuts Location Found to be a Fraudulent Transfer

In New Jersey, the Uniform Fraudulent Transfer Act ("UFTA") is codified at N.J.S.A. 25:2-20 to -33 and provides protection to creditors of companies that sell off their assets without providing adequate security for the company's creditors.  In a March 8th unpublished opinion of the Appellate Division, the court agreed with the trial judge that a fraudulent transfer occurred when the proceeds of the sale of a Dunkin' Donuts were distributed to the owners of the company without providing adequate security to satisfy a lease guaranty that the company remained obligated on.

The company that owned the Dunkin' Donuts location was called ARCP, LLC and they sold the location to a new entity in 2010.  As part of the sale, the commercial lease was assigned to the buyer but ARCP remained as a guarantor on the lease.  Despite the fact that ARCP remained as a guarantor on a lease that had multiple years remaining, ARCP disbursed all of the proceeds from the sale by paying off any debts due at the time and then disbursing the remaining $326,793.19 to the members of ARCP, leaving ARCP insolvent.  Eventually, the buyer defaulted on the lease and declared bankruptcy, resulting in the landlord enforcing the lease guaranty of ARCP as there were significant monies owed.  The Appellate Division agreed with the trial court that the transaction demonstrated the "badges of fraud" that a court uses to determine whether or not a fraudulent transfer had occurred.  Although there was no lease default at the time of the sale of the location, the lease guaranty was a contingent liability that should have been accounted for prior to the disbursements to the members.  Accordingly the individual members were found liable for the $291,464.94 judgment obtained by the landlord.  (Main Land Sussex Company, LLC v. Priti Shetty, et. al.)