Undue Influence as a Challenge to Lifetime Gifts

An action setting forth a claim of undue influence is among the most common methods of contesting a will; however, an action for undue influence can also be effective in challenging lifetime gifts. As a general matter, undue influence is defined as mental, moral, or physical exertion which has destroyed the free agency of a party by preventing that party from following the dictates of his own mind and will and accepting instead the domination and influence of another. A plaintiff claiming undue influence has the burden of demonstrating a confidential relationship between the donor and the donee.

A confidential relationship encompasses all relationships whether legal, natural, or conventional in their origin, in which confidence is naturally inspired, or, in fact, reasonably exists. It exists where the relations between the parties appear to be of such a character as to render it certain that they do not deal on terms of equality, but that either on the one side from superior knowledge of the matter derived from a fiduciary relation, or from over-mastering influence; or on the other from weakness, dependence or trust justifiably reposed, unfair advantage is rendered probable. Family relations are among the most natural of confidential relationships.

In a will contest, a plaintiff additionally bears the burden of demonstrating suspicious circumstances. Though subjective and fact sensitive, such circumstances exist where a testator is isolated from others and dependent upon the beneficiary, where a beneficiary is involved in assisting the testator in the preparation of the will, or where there are questions as to the testators capacity, among other things.

Yet, in challenging a gift during the donor’s lifetime a plaintiff can present evidence of suspicious circumstances, but is not required. The reason for this is that a living donor is not likely to give to another something that he or she can still enjoy. The only requirement to create a presumption is the existence of a confidential relationship. Thereafter, the recipient of a challenged gift has the burden of showing by clear and convincing evidence not only that no deception or undue influence was used, and that all was fair, open and voluntary, but also that it was well understood.

Depending on the type of gift, rebutting a claim of undue influence for a lifetime gift may not be difficult. But where the gift is substantial, courts will generally view a challenged gift with greater scrutiny. An example of this is where a donor is dependent on and makes an improvident gift to a donee that strips the donor of all or virtually all his or her assets. In such circumstances, a presumption will arise that the donor did not understand the consequences of his act and the donee must show that the donor had the benefit of competent and disinterested counsel. Similarly, when a physically or mentally weakened donor, without receiving any advice, makes a gift to a donee on whom the donor depends. If that gift leaves the donor without adequate means of support, the presumption of undue influence can be conclusive.

As a practical matter, this raises concerns for parties who give and receive gifts of significance. While an attorney need not be involved for every act of giving, parties should be mindful of potential allegations of undue influence to ensure that gifts will survive any subsequent challenge. Certainly those who have concerns of undue influence—related either to a will or a lifetime gift—should consult with an attorney regarding any potential claim.

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PennEast Pipeline Update: FERC and the U.S. Supreme Court

The litigation surrounding the PennEast pipeline continues, with neither side backing down. Although the battle is being fought in multiple courts, two recent orders are worth highlighting.

On February 20, 2020, the Federal Energy Regulatory Commission (FERC) granted PennEast Pipeline Company, LLC’s (“PennEast”) request for an extension of time to complete its 166 mile natural gas pipeline project which originates in Pennsylvania and extends into Mercer County, New Jersey. The original deadline to complete construction was January 19, 2020, and the new deadline is January 19, 2022.

Although the extension is not a surprise, since FERC grants these extensions routinely, it is interesting to note that one FERC Commissioner (Commissioner Glick) wrote a short and concise dissent and expressly recommended that FERC “simultaneously stay the certificate” so “PennEast cannot further exercise eminent domain until at least some” of the issues that support the extension are resolved. A very good and fair suggestion since what we now have is a clear example of putting the cart before the horse – seeking to take property for a pipeline that may never be built.

PennEast used this artificial deadline in support of its original application for injunctive relief in the eminent domain cases filed in New Jersey arguing it would be irreparably harmed if it could not meet this deadline. Property owners pointed out the weakness of this claim by giving the court numerous examples of how easy it is to get extensions. The court was not persuaded by the property owner’s arguments and granted injunctive relief allowing PennEast to move forward with the project.

The United States Supreme Court granted PennEast’s extension of time for filing its petition for a writ of certiorari to March 4, 2020. In simpler terms, a petition for the issuance of a writ of certiorari is a written request to the United States Supreme Court to review a lower court decision; in this case, the decision of the Third Circuit Court of Appels ruling that PennEast cannot sue the State of New Jersey in Federal Court.

PennEast requested the extension for several reasons, including the need to allow FERC time to decide PennEast’s request that FERC issue a declaratory order on FERC’s understanding of the scope of a certificate holder’s authority under the Natural Gas Act, that scope being whether a pipeline company can sue a state in federal court – the exact issue already decided by the United State Court of Appeals. Once again, to no surprise, FERC sided with the pipeline company in a decision that is a bit brazen, to say the least. Commissioner Glick, in another telling dissent, drives home the obvious problem with this superficial decision:

There is no need for the Commission to insert itself into what is primarily a constitutional question that is being litigated where those questions belong: The federal courts. Nor is this an area where the Commission has the particular expertise the majority is so quick to claim. The NGA requires the Commission to determine whether an interstate pipeline is required by the public convenience and necessity. If the Commission finds that a proposed pipeline is so required, section 7(h) of the NGA automatically provides the pipeline developer eminent domain authority without any action or further involvement by the Commission. The congressional intent behind a statutory provision that governs a judicial scheme, which the Commission has no role in administering, is not a subject on which we are especially well-qualified to opine.

Unfortunately, the dissent is just the opinion of one commissioner disagreeing with the majority. However, a dissent can sometimes lead to a change in the law if new commissioners are appointed who share the dissenter’s view, the majority reconsiders its past positions, or Congress decides to correct the problem with legislation.

Stay tuned for further updates.

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Appellate Division Gives Guidance Regarding Life Insurance to Secure Alimony

Yesterday, I blogged on the S.W. v. G.M. case in a post entitled More from the Appellate Division on Lifestyle, Foulas and the Concept of Income Equalization.  In that blog, I noted that the S.W. court also addressed the issue of life insurance to secure alimony.

It is not necessary to get into the facts of S.W. further to address this issue here, other than to point out that in an open durational alimony case, the trial  judge relied on N.J.S.A. 2A:34-23(j)(1), which states: “There shall be a rebuttable
presumption that alimony shall terminate upon the obligor spouse or partner
attaining full retirement age.” Accordingly, given the age of the husband/payor, the judge multiplied the alimony by five years, at which point husband
would reach the full social security age.  As the alimony was reversed again, so too was the life insurance obligation.

That said, Judge Mawla went further, reminding us of the purpose of life insurance to secure alimony, as follows:

A determination of the proper amount of life insurance coverage for a support obligation requires a consideration of many variables. Where a party is insurable and able to pay the necessary premiums, a life insurance death benefit should neither only meet a beneficiary’s bare needs, nor be a windfall. In the former case, unexpected changes in circumstances can leave a beneficiary with unmet needs, whereas the latter condition exposes a payor’s estate to obligations he or she never had during the marriage.

Judge Mawla then gave guidance as to how the amount should be calculated:

In the alimony context, “once the amount of the obligation is established, the present value (or more correctly, the continuing present value as the obligation decreases) should be determined.” (citation omitted)… The present-day value methodology is appropriate where there is a “known future quantity” of an obligation. Ibid. Where the alimony obligation is not readily  quantifiable because the duration of the obligation is unknown, a
trial judge may utilize an obligor’s life expectancy to determine the duration of the obligation if it is reasonable to do so.  (citation omitted)…

Additionally, a reduction in the amount of security as the obligation is satisfied is an appropriate means of assuring alimony is secured but not subject to a windfall. See Claffey v. Claffey, 360 N.J. Super. 240, 264-65 (App. Div. 2003) (stating “it is perfectly reasonable to provide for the periodic reduction or review of the amount of . . . required security to reflect the diminishing need for it as the parties age, or circumstances otherwise change.”); (citation omitted)… In some cases, where the obligation has the potential to extend beyond an assumed end date because of a change in circumstances, or where a presumption of termination has been rebutted, it may be appropriate to decrease the death benefit in smaller increments or not at all.

In alimony contexts, determining whether to use life expectancy or the presumptive retirement age, and a fixed or declining amount of security will depend on the circumstances of each case and is a matter of judicial discretion.

In S.W., the issue was reversed and remanded because there was no testimony, and only a disputed assertion regarding the husband’s potential retirement at the full  social security age. Moreover, the Appellate Division noted that because the alimony award is of an open duration and may not necessarily
terminate when plaintiff reaches the full social security age, the methodology
that the Appellate Division set forth, as noted above,  will provide the trial judge with enough flexibility to determine the extent and amount of life insurance needed.

While not much of this states anything new, what is of note is that in open durational alimony cases, calculation of the security should not necessarily end at retirement age, in recognition that alimony could continue thereafter.

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Eric Solotoff is the editor of the New Jersey Family Legal Blog and the Co-Chair of the Family Law Practice Group of Fox Rothschild LLP. Certified by the Supreme Court of New Jersey as a Matrimonial Lawyer and a Fellow of the American Academy of Matrimonial Attorneys, Eric is resident in Fox Rothschild’s Morristown, New Jersey office though he practices throughout New Jersey. You can reach Eric at (973) 994-7501, or esolotoff@foxrothschild.com.

 

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More From the Appellate Division on Lifestyle, Formulas and the Concept of Income Equalization

A few weeks ago, I authored a post on this blog entitled Debunking the Myth That the Percentage Used in the So-Called “Alimony Rule of Thumb” Should Go Down as the Payer’s Income Goes Up.   That post reiterated that the Court’s cannot use formulas, but that they are often used and that people have posited a theory that when incomes go up, the percentages should go down. Therein, I showed the ramifications of that theory and juxtaposed it against the part of the alimony statute that says, “…the standard of living established in the marriage or civil union and the likelihood that each party can maintain a reasonably comparable standard of living, with neither party having a greater entitlement to that standard of living than the other.”

Yesterday, in a reported (precedent setting) opinion in the case of S.W. v. G.M., the Appellate Division weighed in on the use of formulas (there are none), the theory of income equalization (the aforementioned portion of the statute doesn’t mean that), and required that marital lifestyle be quantified.  It also gave guidance on what should not be included in a recipient needs.  There was also an interesting discussion regarding life insurance to secure alimony which will be part of a separate post on this blog.

In this case, the parties divorced after a long term marriage.  The matter was tried to conclusion, previously appealed, and remanded back to the trial court to address the issue of alimony.  At the original trial, the court found that the five year average of the husband’s net after tax income was $1,313,000 – a finding that the Appellate Division accepted in the original appeal.  The Appellate Division also accepted the prior finding that the parties lived a wealthy lifestyle but did not save.  The Appellate Division reversed the prior alimony award of $450,000 per year because the trial judge never quantified the parties lifestyle, and thus, could not determine how the figure was derived.

On the remand, the trial judge increased the alimony to $477,504 per year net, based largely on her pendente lite budget, but again never quantified lifestyle.  Accordingly, the wife appealed again and the court reversed again.

In addressing the issue of lifestyle, the Judge Mawla reiterated the importance of quantifying the marital lifestyle, stating:

The importance of finding the marital lifestyle cannot be overstated. It is at once the fixed foundation upon which alimony is first calculated and the fulcrum by which it may be adjusted when there are changed circumstances in the years following the initial award. …

In Hughes, the parties spent more than they earned and relied on borrowing and parental support to meet the marital lifestyle. 311 N.J. Super. at 34. The trial judge discounted these additional funds and determined the lifestyle using only the family’s earned income, which the judge termed the “real” standard of living. Ibid. We held “[t]he judge . . . confused two concepts. The standard of living during the marriage is the way the couple actually lived, whether they resorted to borrowing and parental support, or if they limited themselves to their earned income.” Ibid.

In many cases, parties live above their means or spend their earnings and assets to meet expenses. In such instances, a finding of the marital lifestyle must consider what the parties spent during the marriage and not merely offer a nod to a bygone, unattainable lifestyle. In this case, the trial judge overlooked the lessons from Crews and Hughes and our instruction to find, numerically, the marital lifestyle. To the extent Crews and Hughes implicitly required that marital lifestyle be determined numerically, we now explicitly state a finding of marital lifestyle must be made by explaining the characteristics of the lifestyle and quantifying it.

In determining the marital lifestyle, trial courts were directed to consider the following:

In a contested case, a trial judge may calculate the marital lifestyle utilizing the testimony, the CISs required by Rule 5:5-2, expert analysis, if it is available, and other evidence in the record. The judge is free to accept or reject any portion of the marital lifestyle presented by a party or an expert, or calculate the lifestyle utilizing any combination of the presentations.

In this case, the Appellate Division noted that the trial court disregarded the marital budget altogether and instead supplemented the wife’s current budget with some expenses she once enjoyed during the marriage.  The Appellate Division found this methodology to be:

…problematic because it ignored the judge’s own findings that the marital lifestyle “subsumed” the entirety of plaintiff’s earnings. By application of this logic, if the judge determined the net yearly income was $1,520,268 or $126,689 per month, the alimony award allotted defendant disposable income of $36,7925 and plaintiff $89,897 per month without explanation. This was a misapplication of law because it ignored Crews and N.J.S.A. 2A:34-23(b)(4), which requires a judge consider “[t]he standard of living established in the marriage . . . and the likelihood that each party can maintain a reasonably comparable standard of living, with neither party having a greater entitlement to that standard of living than the other.”

As an interesting aside, it appears as though the Court is espousing the theory that the parties’ net income equaled their marital lifestyle.  I suspect that this will be  fertile ground for future litigation regarding the issue of lifestyle.

In rejecting the notion of either income equalization or the use of formulas to calculate alimony, Judge Mawla held:

To be clear, N.J.S.A. 2A:34-23(b)(4) does not signal the Legislature intended income equalization or a formulaic application in alimony cases, even where the parties spent the entirety of their income. Had the Legislature intended alimony be calculated through use of a formula, there would be no need for the statutory requirement that the trial court address all the statutory factors. The Legislature declined to adopt a formulaic approach to the calculation of alimony. See Assemb. 845, 216th Leg., 2014 Sess. (N.J. 2014) (declining to enact legislation computing the duration of alimony based upon a set percentage).

The Court then gave instruction regarding what should be considered, and more importantly, not considered, regarding the recipient’s need.  The court made clear that it should be the expenses related to that party, as opposed to expenses solely related to the other spouse of the children.  Specifically, the Court held:

The portion of the marital budget attributable to a party is likewise not subject to a formula. Contained in most marital budgets are expenses, which may not be associated with either the alimony payor or payee, including those associated with children who have since emancipated or whose expenses are met by an asset or a third-party source having no bearing on alimony. There are also circumstances where an expense is unrelated to either the payor or the payee but is met by that party on behalf of a child. And, as is the case here with defendant’s photography hobby, there are expenses which only one party incurred during the marriage. Therefore, after finding the marital lifestyle, a judge must attribute the expenses that pertain to the supported spouse. Only then may the judge consider the supported spouse’s ability to contribute to his or her own expenses and the amount of alimony necessary to meet the uncovered sum. Crews, 164 N.J. at 32-33.

This is interesting as it makes clear that you cannot bootstrap the expenses of the other party or the children to come to need.  On the other hand, there was no guidance as to how to deal with this added cash flow, at least with regard to child expenses that are no longer in existence.  I recently had a case where the parties while living in the same household, lived two completely difference lifestyles – one extravagant (the payer) and the other ultra conservative in terms of spending.  Had this case been decided at the time of the trial in that matter, my guess is that it would not have settled because the court may have had to fix the alimony based upon the wife’s actual expenses, as opposed to the husband’s spending- whether or not it seemed fair or squared with the part of the statute that said that neither party is entitled to a greater lifestyle than the other.

In any event, the S.W. case gives trial judges and practitioners more guidance as to how to deal with marital lifestyle.  It may also require more work of the forensic accountants who prepare lifestyle analyses as they try to parse out expenses of the payer and the children.

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Eric Solotoff is the editor of the New Jersey Family Legal Blog and the Co-Chair of the Family Law Practice Group of Fox Rothschild LLP. Certified by the Supreme Court of New Jersey as a Matrimonial Lawyer and a Fellow of the American Academy of Matrimonial Attorneys, Eric is resident in Fox Rothschild’s Morristown, New Jersey office though he practices throughout New Jersey. You can reach Eric at (973) 994-7501, or esolotoff@foxrothschild.com.

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Proposed New Jersey Legislation Aimed at Combating Workplace Bias and Sexual Harassment

On February 18, 2020, New Jersey Governor Phil Murphy unveiled a sweeping proposal that significantly strengthens the New Jersey Law Against Discrimination. The proposed legislation was the result of a two year study of workplace employment discrimination and sexual harassment conducted by the New Jersey Division on Civil Rights. It also mirrors the current societal shift in attitudes about workplace discrimination and sexual harassment. Employers need to be cognizant of these proposed changes and the current climate.

If enacted, New Jersey would require all employers to provide anti-discrimination and anti-harassment training. The New Jersey Supreme Court held that trial court should consider whether or not an employer made training available to supervisors and all employees when deciding whether or not an employer has been negligent in preventing sexual harassment. This proposed change would require training.

If enacted, New Jersey would be following in the footsteps of a handful of states, like California, Connecticut, Delaware, Maine, and New York in requiring that employers provide anti-discrimination and anti-harassment training. Even if this legislation is not enacted, I recommend based upon the current case law in New Jersey that employers provide yearly anti-discrimination and anti-harassment training. It’s relatively inexpensive and not overly burdensome to do so.

The proposed legislation would also extend the statute of limitations. The current statute of limitations under the New Jersey Law Against Discrimination is two years. The proposed legislation, if enacted, would extend the period in which workers can assert a Law Against Discrimination Claim to three years and give workers an extra six months to file a complaint with the New Jersey Division on Civil Rights.

The proposed legislation would revise the legal framework for courts to assess whether or not conduct is “severe or pervasive” enough to constitute a violation of the Law Against Discrimination. Under this new proposed framework, one violation of the Law Against Discrimination (if it is severe enough) could result in liability.

Employers need to think about these proposed changes. If enacted, the legislation will give additional protections to employees. Hence, it is important for employers to be cognizant of these changes and the current climate. Failure to do so will likely expose the employer to liability.

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Welcome Allison Madden, Esq. Family Law Attorney

Employers Must Be Extremely Wary of Retaliation Claims

Over the past decade, the Equal Employment Opportunity Commission (“EEOC”) has reported that retaliation is the most common issue alleged by federal employees and the most common discrimination finding in federal sector cases. Nearly half of all claims made to the EEOC are retaliation claims.

Employers must be aware of the fact that the EEOC found that other employers retaliated in violation of the law in greater than 40% of the reported claims. The same is likely true under the anti-retaliation provisions as set forth in the New Jersey Law Against Discrimination. Hence, it is essential that employers take affirmative remedial steps to prevent retaliation. Moreover, employers must immediately and effectively address retaliation if it is reported.

Both federal and New Jersey state law prohibits retaliating against anyone who files an complaint of discrimination, participates in a discrimination proceeding, or otherwise opposes discrimination. Retaliation is a separate and distinct cause of action under both the New Jersey Law Against Discrimination and federal anti-employment discrimination statues.

In other words, even if the employee’s underlying sexual harassment claim is not sustainable or proven to be false, retaliating against the complainant or anyone who supported her/him/them is unlawful. Retaliation exposes the employer to compensatory damages and statutory legal fees and costs. Retaliating against a complainant will also extend the statute of limitations for the underlying claims of employment discrimination.

A manager, co-worker, or the alleged violator of the anti-discrimination laws and policies may not fire, demote, harass, or otherwise retaliate against an individual who files a complaint of discrimination, participates in a discrimination proceeding, or otherwise opposes discrimination in the workplace. The law recognizes that retaliation is often subtle. Examples of retaliation include, but are not limited to:

1. Bad mouthing the complainant or witnesses who supported the complainant;
2. Telling others that the complainant or witnesses is/are liars;
3. Giving them unfair, negative performance reviews;
4. Not promoting them;
5. Reducing their authority within the company;
6. Making negative compensation decisions (i.e., reduction in salary, not giving standard raises, or reducing or not giving bonuses);
7. Unfairly criticizing the complainant’s or witnesses’ performance; and
8. Firing the complainant or witnesses.

Employers need to take affirmative steps to prohibit, and when it occurs, remediate overt and subtle forms of retaliation.

I recommend the following:

1. The employer must have a handbook which contains the company’s anti-discrimination and anti-retaliation policies set forth in writing;
2. The employer should go over those policies and procedures at least once per year;
3. If an employee files a complaint of discrimination, the complainant must be reminded that the company has anti-retaliation policies in place and to encourage the complainant to immediately report any perceived or actual violations if they feel anyone has retaliated against them;
4. The employer must communicate, both to the complainant and all other witnesses who know of the existence of the claim, that reporting the claim was the correct thing to do and is appreciated by the employer;
5. The employer must instruct the witnesses not to make negative comments about the complainant or the witnesses who supported her/him/them;
6. The employer must tell (both orally and in written notice to follow) the individual or individuals who were accused of violating the company’s discrimination policies and reminded that they must not retaliate;
7. The employer must communicate (both orally and in writing) to all witnesses of the anti-retaliation policies. They must be made aware that they are prohibited from retaliating against anyone and they should immediately report any retaliation to management;
8. The employer must immediately deal with any allegations of retaliation. If retaliation is found to have occurred, the company must take affirmative, immediate steps to ensure that it not happen again. That, of course could include terminating the retaliator’s employment;
9. The employer should follow up with the complainant after the underlying discrimination allegations are addressed to ensure that they are not being retaliated against; and
10. If the employer is going to give the complainant a negative review, terminate their employment, reduce their salary, or not give a bonus, make sure that the file is well-documented and provable. If an employee feels that these decisions were retaliatory, the employer will need to demonstrate to a jury that they were not.

Taking these steps, making the complainant feel “welcome and wanted,” and immediately and effetely addressing discrimination and/or retaliation claims may help the employer avoid the dreaded, embarrassing, expensive employment discrimination lawsuit.

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Unintended Consequences of a Do-It-Yourself Estate Plan

A do-it-yourself estate plan can lead to a number of unintended consequences as demonstrated by a Florida Supreme Court case, Aldrich v. Basile. In this case, Ms. Ann Aldrich wrote her own Will on a pre-printed legal form. Ms. Aldrich specifically listed each item of her property in her Will, including the account numbers for her financial accounts. The Will left each item of property to Ms. Aldrich’s sister, Mary Jane Eaton; and, if Ms. Eaton did not survive, then Mr. James Aldrich (her brother) was designated as the alternate beneficiary.

In general, wills and trusts should contain a residuary and other clauses to properly distribute all assets. Ms. Aldrich did not include a residuary clause in her Will because, most likely, it was omitted from the pre-printed form. Ms. Aldrich’s Will only contained specific devises that were limited to the property specifically described by her Will. Failing to include a residuary clause had costly consequences for Ms. Aldrich’s estate.

Mary Jane Eaton predeceased Ms. Aldrich and named Ms. Aldrich as her beneficiary. Ms. Aldrich created a new account to receive her inheritance from Ms. Eaton and took title to Ms. Eaton’s real estate. Ms. Aldrich failed to revise her Will to address the new account or the new real estate inherited from Ms. Eaton.

Following Ms. Aldrich’s death, James Aldrich had to litigate with two of Ms. Aldrich’s nieces over the assets not listed in Ms. Aldrich’s Will. The Florida Supreme Court held that Ms. Aldrich’s Will only addressed the property specifically devised to Mr. James Aldrich. Since the Will provided no instruction as to the assets inherited from Ms. Eaton, these assets passed, in part, to Ms. Aldrich’s nieces.

One Justice from the Florida Supreme Court commented that the expensive litigation far outweighed any savings resulting from the pre-printed form. Perhaps even worse, Ms. Aldrich’s two nieces inherited part of her estate. These nieces were not named anywhere in the Will and Ms. Aldrich probably did not intend that nieces inherit part of her estate. However, this intent could not be inferred by the Court, and the nieces took part of Ms. Aldrich’s estate.

Aldrich v. Basile provides a real life example of two basic problems that can result from do-it-yourself estate planning:

1. Unintended heirs; and,
2. Costly

More complex problems can arise from incomplete tax planning or family structure issues, such as divorce, addiction, creditors, and others. These issues often affect even “simple” estate plans and can have profound consequences for an estate. If you have any questions concerning your estate plan, please call Robert Morris, Esquire (609) 945- 7617.

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Earth Fare Files for Liquidating Chapter 11 Bankruptcy

Earth Fare, Inc., the 45-year old natural and organic grocery chain, filed for Chapter 11 bankruptcy on Tuesday in Delaware under docket number 20-10256. The Debtor operates more than 53 grocery stores throughout the Southeast, mid-Atlantic and Midwest.

The company is privately held and backed by private equity firms Oak Hill Capital Partners and Green Capital Partners. The Wall Street Journal and the Motley Fool report that the Debtor plans to close all stores.

In the company’s bankruptcy pleadings, the Debtor owes more than 10,000 creditors between $100 million and $500 million and its assets are likewise between $100 million and $500 million.

If you have an Earth Fare lease in your portfolio or if you are a trade creditor owed money, Stark & Stark’s Shopping Center & Retail Development Group can help.

Our bankruptcy attorneys regularly represent landlords throughout the country, including recently in the Eastern District of Missouri, District of New Jersey, Southern District of New York, District of Delaware, District of Minnesota and the Western and Eastern Districts of Pennsylvania regarding a variety of issues.

Our Group has been counsel to landlords and trade creditors in the Houlihan’s, Fairway Market, Mattress Firm, Toys “R” Us, Payless, Eastern Outfitters (EMS Part 2), EMS, Golfsmith, RadioShack, General Wireless (RadioShack 2), Gander Mountain, A&P, Joyce Leslie, rue21, Central Grocers, and Sports Authority chapter 11 bankruptcy cases.

For more information on how Stark & Stark can assist you, please contact Thomas Onder, Shareholder, at (609) 219-7458 or tonder@stark-stark.com or Joseph Lemkin at (609) 791-7022 or jlemkin@stark-stark.com.

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Sears Continues to File Hundreds of Preference Suits Against Trade Creditors

The lawsuits just keep coming… last week, Chapter 11 Debtor, Sears Holdings Corporation (“Sears”) continued to file hundreds of preference complaints to recover money from paid pre-petition creditors. The Debtor filed a mass of suits back in November 2019.

For most creditors, it makes no sense that they receive a complaint to return money for goods or services sold prior to October 15, 2018, when the company filed for bankruptcy protection. However, the Federal Bankruptcy Code allows a debtor to recover “preferences” in bankruptcy – 11 U.S.C. 547.

If you are a trade creditor who received a complaint, before you open the check book to Sears, know what defenses there are to this statutory claim.

What is Preference?

A preference is a payment received from a debtor, made within 90 days of the bankruptcy filing. Bankruptcy Code section 547(b) allows a bankruptcy trustee or debtor-in-possession to avoid these payments if the transfers were to or for the benefit of a creditor on account of an antecedent debt while the debtor was insolvent. When Congress enacted the Bankruptcy Code, the policy behind preferences was to level the playing field for all creditors by not allowing a creditor to receive more than it would have within the debtor’s bankruptcy case.

The Bankruptcy Code provides the trustee or debtor-in-possession power to recover these transfers. However, you may have certain defenses, including:

• Payments made within the ordinary course of business;
• New value provided for the debt;
• Payments made outside of the 90-day preference period;
• Settlements during the bankruptcy case; and/or
• Payments made via C.O.D.

Gather Information

To determine if you have any defenses, it is critical to analyze the full payment history at least a year before the bankruptcy filing. This information includes:

1. All correspondence, contracts, emails and the like with the debtor;
2. A copy of all invoices, showing invoice date, terms, and amount of each invoice;
3. A copy of the payments received (i.e. checks, wires, cash deposit slip) and date posted to your client’s bank account;
4. Number of days elapsed between date of invoice and date payment was received; and
5. Personnel involved with the debtor’s account so they can advise how payments were made, applied and any unique issues with the debtor.

It is critical to properly analyze this information and formulate a corresponding response to reduce or even eliminate preference exposure.

If you received a preference complaint and or demand, Stark & Stark’s Shopping Center & Retail Development Group can help.

Our bankruptcy attorneys regularly represent landlords throughout the country, including recently in the Eastern District of Missouri, District of New Jersey, Southern District of New York, District of Delaware, District of Minnesota and the Western and Eastern Districts of Pennsylvania regarding a variety of issues.

Our Group has been counsel to landlords and trade creditors in the Houlihan’s, Fairway Market, Mattress Firm, Toys “R” Us, Payless, Eastern Outfitters (EMS Part 2), EMS, Golfsmith, RadioShack, General Wireless (RadioShack 2), Gander Mountain, A&P, Joyce Leslie, rue21, Central Grocers and Sports Authority chapter 11 bankruptcy cases.

For more information on how Stark & Stark can assist you, please contact Thomas Onder, Shareholder, at (609) 219-7458 or tonder@stark-stark.com or Joseph Lemkin at (609) 791-7022 or jlemkin@stark-stark.com.

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The Duty to Account of a Power of Attorney

While most people who are appointed Powers of Attorney understand their general duty to act only within the best interests of the person for whom they are serving as a Power of Attorney, and to not undertake transactions which solely benefit themselves, most of them do not understand their duty to account which is required by statute. It is important that a Power of Attorney carefully account when utilizing a Power of Attorney to undertake financial transactions, as this issue could come back to bite them if they do not properly account.

In general, the law provides that a Power of Attorney owes a fiduciary duty to the principal to act solely within their best interests. In addition, the statute provides that the Power of Attorney shall maintain “accurate books and records” of all financial transactions. The use of the word “shall” in the statute indicates that this is not an option, but instead, a mandatory requirement which must be undertaken by an individual when utilizing a Power of Attorney. The phrase accurate books and records indicates that not only should relevant receipts be maintained, but in addition, a detailed transactional history of all transactions undertaken by the Power of Attorney must also be maintained. Such records should include copies of checks, receipts, and other documents which evidence the transactions undertaken by the Power of Attorney. Further, there must be an accounting as to all transactions pursuant to which the dollar value of the transactions can be reconciled.

Should a Power of Attorney fail to maintain accurate books and records of all financial transactions, this could be used against them in a subsequent proceeding should an abuse of the Power of Attorney be alleged. In such a subsequent proceeding, if the Power of Attorney is unable to account in light of the statutory duty which requires them to do so, a Court may find that the Power of Attorney has breached his/her fiduciary duty. As a result, he/she could be found liable to the principal or other parties for the full value of the unsubstantiated transactions. This could be disastrous to a person who acted as a Power of Attorney, however, failed to maintain accurate books and records. This may result in substantial liability to either the Estate of the principal who may have passed away, the principal himself, or other interested parties.

As such, the duty of account of a Power of Attorney is essential and cannot be taken lightly. If any questions arise as to the necessary duties, the attorneys at Stark & Stark can assist you in this regard.

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Child Support and College Contributions: How Are These Obligations Affected by a Strained Parent-Child Relationship?

In a recent decision, the appellate division has addressed the proper procedure for adjudicating a parent’s request to eliminate his obligation to pay child support and for college, when there is a question of whether the relationship with his child has been compromised.

In Zapata, v. Zapata, a father appealed the trial court orders denying his request to terminate his child support and his obligation to contribute to the college expenses of his daughter. The litigants had divorced in 2011 and had two children together. Their son became emancipated in 2014, at which time their daughter became a full-time college student at a private university.

When the parties divorced, they executed a property settlement agreement (PSA) which provided that their children’s college educations would first be funded by scholarships, available loans and savings allocated for college during the marriage. Thereafter, the parties agreed to contribute to college expenses in accordance with their ability to pay. Their PSA further addressed child support, which required the father to pay $246 per week for both children based upon the parents’ then-incomes.

The father filed a motion to terminate child support and his obligation to contribute to college in 2014. At that time, the parties’ son was deemed emancipated and the father and daughter were required to attend counseling. The trial court’s order further provided that the daughter’s failure to attend counseling would be deemed a waiver of her receipt of any continued college payments/support from her father. A total of five sessions were conducted and then counseling was terminated. The father claimed that the daughter terminated the sessions, whereas the daughter alleged that the sessions were jointly terminated by herself, her father and the counselor, who jointly felt they were no longer necessary.

Between 2014 and 2016, father and daughter had sporadic contact. In addition to the counseling sessions, the father had Christmas dinner with the daughter in 2015 and they exchanged text messages in 2016. He saw the daughter for her twentieth birthday but asked not to be invited to her birthday dinners again if he would be expected to pay. On her twenty-first birthday, the father emailed the daughter and signed it “your forgotten dad”. While the father characterized his relationship with his daughter as “strained” and accused her of refusing to communicate with him, the daughter characterized their relationship as “broken but not destroyed”.

Against this backdrop, the father filed a second motion to terminate his financial obligations in 2016. The mother cross-moved to enforce the child support obligation and compel the father to pay two-thirds of the daughter’s college costs, based upon her representation that the father earned double her income. In upholding the father’s support obligations, the trial court found that the father did not show a basis for altering the agreement reached in the PSA, or show that the daughter failed to comply with the 2014 order regarding counseling. The court further found that there was no change in circumstance warranting a modification of the support obligation. In doing so, the court only addressed the parent-child relationship factor of the test for determining college contributions set forth in Newburgh v. Arrigo. The father filed a motion for reconsideration of this decision, which was denied.

On appeal, the Appellate Division reversed the trial court’s ruling based upon several legal errors. First, the trial court erred by not conducting a plenary hearing regarding the material dispute of fact as to the parent-child relationship. While the father claimed no relationship existed, the daughter claimed a relationship was existent but broken. While the father claimed he was excluded from the college selection process, the daughter contended he paid the application fee and is a graduate of the very same college.

Second, the appellate court found no basis for allocating two-thirds of the college expenses to the father without further fact finding. The PSA requires the parties to contribute according to their ability to pay, but a review of updated financial information was not conducted by the trial court. The appellate court found that the trial court failed to review the statutory criteria of N.J.S.A. 2A:34-23(a) as well as the Newburgh factors to reach a decision regarding allocation of the college costs.

Finally, the trial court erroneously found there was no change in circumstances with regard to the father’s child support obligation. The trial court ignored the fact that (1) the original child support obligation was based upon 2 children, though the parties’ son had since been emancipated and (2) the daughter’s residence at college required a modification of the child support obligation. While the appellate division noted that child support and contribution to college are two discrete obligations, one cannot be ignored in determining the other when establishing a parent’s appropriate financial obligation.

This decision reminds practitioners and litigants that college contribution cases are fact-sensitive inquires that will more often than not require a plenary hearing in order to be resolved. Further, it serves as a reminder that while child support will be affected by an obligation to contribute to college expenses, the mere fact that a child enters college does not extinguish a traditional child support payment. However, these two distinct obligations remain symbiotically intertwined, and must be looked at together in addressing a parent’s responsibility to contribute to the ongoing support and education of their children.

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Katherine A. Nunziata is an associate in the firm’s Family Law practice, based in the Morristown, NJ office. You can reach Katherine at (973-548-3324) or at knunziata@foxrothschild.com.

 

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