A New Jersey chancery court, in The CIT Group/Equipment Financing, Inc. v. Zavidow (Ch. Div., Aug. 23, 2007), recently allowed a creditor to reach the proceeds of a debtor’s interest in his marital home, fi nding that the debtor’s conveyance to his wife was a fraudulent transfer.

In Zavidow, CIT issued a commitment in October 2000 to loan $1.4 million to Zavidow’s business in return for Steven Zavidow’s personal guarantee. In December 2000 and February 2001, Zavidow and his wife entered into handwritten agreements through which Zavidow transferred his one-half interest in the marital property to his wife, allegedly in return for her permitting him to use the proceeds of a $400,000 home equity loan for his business. In April 2001, the home equity loan was obtained and, in May 2001, Zavidow executed the personal guarantee to CIT. The actual deed transferring his interest was not executed, however, until December 2001 and it was not recorded until May 2002. After Zavidow’s business defaulted on the loan, CIT sought to enforce the personal guarantee. When CIT discovered the transfer of Zavidow’s interest, and learned that the marital home had been sold to a third party in 2004 for $1.7 million, CIT then sued Zavidow and his wife claiming the transfer violated the New Jersey Uniform Fraudulent Transfer Act, N.J.S.A. 25:2-20, et seq. (the UFTA), by placing an asset (the jointly owned marital home) beyond the reach of creditors.

The court rejected Zavidow and his wife’s defenses to CIT’s fraudulent transfer claim. The court found Zavidow’s claim that he could not recall executing the guarantee incredible. The court also found that Zavidow’s claim that the transfer was valid because it was in consideration for his wife’s allowing the home equity loan proceeds to be used in his business was not supported by the evidence (since there was no proof that the proceeds went into the business). Finally, Mrs. Zavidow admitted in her testimony that the purpose of the agreements was to shield the marital home for herself and her children.

The court similarly rejected the Zavidows’ claim that CIT should have done a title search to learn about the conveyance. The court noted that Zavidow had represented he owned the home with his wife and continued to submit annual personal fi nancial statements affi rmatively misrepresenting that he still owned an interest in his home. Also telling was the timing of the alleged agreements and the fact that the deed “conveniently managed to be unrecordable” until a year after CIT had made the loan. The fact that Mrs. Zavidow was an attorney made the claims about “secret, undisclosed, unwitnessed agreements” especially unworthy of belief.

Under the UFTA, a transaction is fraudulent if (1) it puts an asset beyond the reach of creditors that would have been available to them if not for the conveyance and (2) the conveyance was done with an intent to defraud, hinder or delay creditors. Based on the proofs, the court found the evidence plain as to the Zavidows’ intent to defeat CIT’s rights as a creditor. Many of the so-called “badges of fraud” under N.J.S.A. 25:2-25(a) were present, including the fact that the transfer was to an insider, the debtor retained possession of the property, the transfer was concealed, and the transfer occurred shortly before a substantial debt was incurred.

While the court ruled in favor of CIT on its fraudulent transfer claim, it found that CIT had not met its burden with respect to constructive fraud under N.J.S.A. 25:2- 25(b). Under this theory, the creditor needs to show that the debtor engaged in a transaction for which the remaining assets were unreasonably small in relation to the transaction, or that the debtor incurred debts beyond his ability to pay as they became due. CIT had not proved that Zavidow was unable to satisfy all of the debts he incurred at the time of the credit transaction. The Zavidow case shows that inter-spousal property transfers of interests in the marital home can pose signifi cant risks under the UFTA.