Opinion
DOCKET NO. A-1653-13T4
10-28-2015
JACOB KLEIN, individually and on behalf of GEMSTONE MANAGEMENT, LLC, Plaintiffs-Appellants, v. GEMSTONE PROPERTY GROUP, LLC; MLM GEMSTONE LP, MITCHELL MORGAN; HARVEY ROSS; HR GEMSTONE LLC; DANIEL WINSCHUH and AL FRATONI, Defendants-Respondents.
Arthur D. Grossman argued the cause for appellants (Mandelbaum Salsburg, Lazris & Discenza, P.C., attorneys; Mr. Grossman and Lance N. Olitt, on the briefs). Daniel S. Bernheim, III (Wilentz Goldman & Spitzer, P.A.) of the Pennsylvania Bar, admitted pro hac vice, argued the cause for respondents Gemstone Property Group, LLC; MLM Gemstone LP; and Mitchell Morgan (Wilentz Goldman & Spitzer, P.A., attorneys; Mr. Bernheim and Rachel C. Heinrich, on the brief). Marc D. Haefner argued the cause for respondents Daniel Winschuh and Al Fratoni (Connell Foley LLP, attorneys; Mr. Haefner, of counsel and on the brief). Shapiro, Croland, Reiser, Apfel & DiIorio, LLP, attorneys for respondents Harvey Ross and HR Gemstone, LLC, join in the brief of respondents Gemstone Property Group, LLC, MLM Gemstone LP, and Mitchell Morgan.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION Before Judges Sabatino, Accurso, and O'Connor. On appeal from the Superior Court of New Jersey, Law Division, Morris County, Docket No. L-0827-11. Arthur D. Grossman argued the cause for appellants (Mandelbaum Salsburg, Lazris & Discenza, P.C., attorneys; Mr. Grossman and Lance N. Olitt, on the briefs). Daniel S. Bernheim, III (Wilentz Goldman & Spitzer, P.A.) of the Pennsylvania Bar, admitted pro hac vice, argued the cause for respondents Gemstone Property Group, LLC; MLM Gemstone LP; and Mitchell Morgan (Wilentz Goldman & Spitzer, P.A., attorneys; Mr. Bernheim and Rachel C. Heinrich, on the brief). Marc D. Haefner argued the cause for respondents Daniel Winschuh and Al Fratoni (Connell Foley LLP, attorneys; Mr. Haefner, of counsel and on the brief). Shapiro, Croland, Reiser, Apfel & DiIorio, LLP, attorneys for respondents Harvey Ross and HR Gemstone, LLC, join in the brief of respondents Gemstone Property Group, LLC, MLM Gemstone LP, and Mitchell Morgan. PER CURIAM
This appeal arises out of a failed real estate venture. The key three individuals involved in the litigation (plaintiff Jacob Klein and defendants Daniel Winschuh and Al Fratoni) joined forces in 2006 to invest in two residential real estate projects in New York City. Those three individuals, all of whom were highly educated and possessed many years of experience in business, formed an elaborate chain of partnerships, limited liability entities, and single-asset entities to own and operate the two projects. Both projects involved the construction and development of high-rise condominium buildings. Each entity had its own operating agreement which governed, among other things, how funds would be distributed to the constituent members.
We have been advised that Mr. Fratoni is now deceased. --------
The second project, located on 37th Street, was hit particularly hard by the economic downturn of 2008, resulting in the project's principal lender winning a $17,000,000 judgment against it. After certain issues were resolved with the lender, the second project began to wind down, after the last condominium unit sold in 2010. Despite that project's financial difficulties, a sum of monies became available for final distribution in 2011.
Meanwhile, however, Klein, an individual member of one of the constituent member entities, Gemstone Management, LLC ("Gemstone Management"), resigned as a managing director in 2008. Nearly three years later in 2011, however, Klein vigorously disputed the amount that he would receive under the final distribution plans and eventually withdrew funds himself, without consent from the entity's board. Although those withdrawn funds were eventually restored into an escrow account, Klein (and Gemstone Management as a co-plaintiff) sued his former partners, and related entities, seeking payment from those funds. Among other things, Klein claimed that he was entitled to priority treatment of a $250,000 capital contribution that he had personally made. He also sought to recoup preferential treatment on a $500,000 sum which he characterized as a finder's fee in connection with the second project.
After a three-day nonjury trial and a general finding that Klein's testimony and legal arguments were unpersuasive, the court concluded that Klein was entitled only to $155,474 as his final distribution. Thereafter, the court amended the final judgment at the request of defense counsel to eliminate even that sum because of asserted wind-down costs and indemnification liabilities.
Klein and Gemstone Management now appeal, asserting that the trial court erred on numerous substantive and procedural grounds. On appeal, plaintiffs advance four arguments.
First, they assert that the trial court abused its discretion in striking their amended interrogatory answers and denying reconsideration of that order. At the heart of these amendments was the treatment of the $500,000 acquisition fee to which Klein claimed he was entitled in connection with the 37th Street project — namely, that it should have been included in calculating plaintiffs' percentage of the capital base and further that plaintiffs were entitled to payment of that fee. Plaintiffs argue that "defendants themselves overlooked the correct treatment of the 37th Street [Project] contributions," and that plaintiffs did not raise the claim earlier because defendants had not "timely disclosed" the revised distribution calculations during discovery. In opposition, defendants argue that the basis for plaintiffs' "incredulous assertion" was "reasonably available or discoverable by due diligence" as required by the court rule, particularly because that finders' fee was discussed in a June 2007 board meeting.
Plaintiffs' second argument is that the trial court erred in dismissing their claims for fraud, fraudulent inducement, and breach of fiduciary duty at the conclusion of their case. Defendants contend that plaintiffs failed to establish the elements of either fraud or fraudulent inducement. Defendants further contend that plaintiffs' fraud claims should be barred by the "economic loss" doctrine. Defendants assert that no fiduciary relationship existed, as the interactions in this case were among partners in a business deal rather than among fiduciaries.
Third, plaintiffs argue that there was insufficient evidence in the record to support the trial court's initial judgment that plaintiffs were entitled to a distribution of only $155,474. Specifically, plaintiffs maintain that, although they were precluded from arguing that Klein was entitled to recover a $500,000 acquisition fee in connection with the 37th Street project, he should not have been precluded from asserting that the fee should have been treated as a capital contribution and thus Klein was entitled to preferred return on that amount and its inclusion in the capital base. In opposition, defendants underscore the portion of Winschuh's trial testimony in which he explained that the $500,000 was not booked as capital because the property was required to meet certain other conditions before that amount could be booked as capital. Because those conditions were never met, defendants point out, the trial record provides sufficient evidence to support the exclusion of that requested sum.
As a related point, plaintiffs argue that there was insufficient evidence in the trial court record to support the court's adoption of Gemstone Property's revised distribution calculations in full. Those revised calculations, plaintiffs argue, treated Klein's $250,000 contribution only as ordinary capital and not as special capital contribution. Plaintiffs argue that the evidence at trial demonstrated that Klein's contribution indeed was a special capital contribution and that the trial court essentially ignored that fact. In opposition, defendants contend that the trial record provided more than sufficient evidence to support the court's judgment, primarily on the grounds that the trial court found: (1) that the written unanimous consent was unambiguous and (2) Winschuh was a more credible witness than Klein in their respective testimony regarding whether they had an oral conversation about the alleged priority repayment of Klein's $250,000 contribution.
Fourth and finally, plaintiffs argue that the trial court abused its discretion by amending the final judgment based in part on a certification by Winschuh that addressed certain dissolution and legal fees for which defendants argued plaintiffs should be held responsible. Plaintiffs specifically contend that there was no argument or testimony regarding these claimed fees presented at trial, and that such post-trial claims should not have been entertained by the court.
In opposition, defendants assert that Winschuh's testimony did establish that certain expenses had been incurred. They further assert that the property operating agreement entitled its members to indemnification from claims asserted against them. Additionally, they contend that the indemnification claim could not have been raised earlier because the indemnification provision was triggered only when defendants ultimately prevailed on most of the issues at trial.
Defendants have not cross-appealed any of the trial court's rulings.
I.
Our scope of review in evaluating the trial court's determinations is circumscribed. An appellate court shall "not disturb the factual findings and legal conclusions of the trial [court] unless [it is] convinced that they are so manifestly unsupported by or inconsistent with the competent, relevant and reasonably credible evidence as to offend the interests of justice[.]" Seidman v. Clifton Sav. Bank, 205 N.J. 150, 169 (2011) (third alteration in original) (quoting In re Trust Created by Agreement Dated December 20, 1961, 194 N.J. 276, 284 (2008)); see also Anderson v. City of Bessemer City, 470 U.S. 564, 574, 105 S. Ct. 1504, 1512, 84 L. Ed. 2d 518, 529 (1985) (noting the trial court's "major role is the determination of fact"); Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474, 484 (1974). We only review de novo the trial court's legal determinations. 30 River Court E. Urban Renewal Co. v. Capograsso, 383 N.J. Super. 470, 476 (App. Div. 2006) (citing Rova Farms, supra, 65 N.J. at 483-84). Fact-finders, in this instance the trial court, have the best "opportunity to hear and see the witnesses and to get a 'feel' for the case that the reviewing court [cannot] enjoy." Twp. of W. Windsor v. Nierenberg, 150 N.J. 111, 132 (1997), certif. denied, 171 N.J. 443 (2002).
We also accord deference to the trial court's discovery rulings, generally leaving those rulings intact unless the appellant demonstrates that the court abused its discretion. Bender v. Adelson, 187 N.J. 411, 428 (2006) (regarding rulings applying Rule 4:14-7); Huszar v. Greate Bay Hotel & Casino, Inc., 375 N.J. Super. 463, 471-72 (App. Div.), certif. granted and remanded, 185 N.J. 290 (2005) (regarding discovery extension issues under Rule 4:24-1).
Applying these well-settled review standards here in light of the record as a whole, we affirm the trial court's determinations that preceded and resulted in the original final judgment. The court did not abuse its discretion in disallowing plaintiffs' late request to amend discovery and belatedly inject new legal theories into the case. Moreover, there is substantial credible evidence in the record to support the trial court's findings of fact. The trial court had ample grounds to disbelieve Klein on critical aspects of his testimony.
We also are not convinced that the court undervalued plaintiffs' proportionate interest in the modest residual value of net revenues that were ultimately generated by this business venture. The sum of $155,474 that the court calculated as Klein's share of the distribution is reasonably supported by the trial proofs, despite plaintiffs' advocacy for a higher sum. The original award is therefore affirmed.
II.
That said, we are persuaded that the trial court erred in subsequently revising the judgment at defendants' request and eliminating the $155,474 payout to plaintiffs. Neither the claimed wind-down (or "dissolution") costs, nor the indemnification amounts, which the court found to have totally offset plaintiffs' distribution, were ever quantified with any testimony or other competent proofs. Instead, these claimed sums were, in essence, taken into account in the modified judgment as an afterthought. The trial court also did not adequately explain why those deductions were not "taken off the top" of the venture's remaining assets, rather than applying them solely to plaintiffs' share.
We reject plaintiffs' argument that defendants' claims for an offset of Klein's payout due to indemnification obligations for defendants' counsel fees and related costs are barred by the entire controversy doctrine. The entire controversy doctrine "does not apply to bar component claims [either] unknown, unarisen, or unaccrued at the time of the original action." Harley Davidson Motor Co., Inc. v. Advance Die Casting, Inc., 150 N.J. 489, 494 (1997) (quoting Mystic Isle Dev. Corp. v. Perskie & Nehmad, 142 N.J. 310, 323 (1995)). Here, the venture's obligation to reimburse directors for their legal costs in defending this lawsuit, as contemplated by paragraph 3 of the operating agreement, did not accrue until the case was concluded and the billings were quantified.
The appropriate treatment of the wind-down costs is a somewhat different question. Plaintiffs argue that defendants should have pled and identified these costs long before the case was tried and the initial final judgment was entered. Plaintiffs also contend that the venture already had set aside a reserve in its account that should have sufficed to cover the wind-down costs. These contentions are best sorted out in an expanded record attained with appropriate testimony and cross-examination. Once the record is better developed, the trial court may revisit its prior rulings and decide if defendants' assertion of these claims of offset were raised too late.
We therefore vacate the amended judgment and reinstate the original judgment, without prejudice to defendants' right to pursue modifications supported by appropriate proofs. Such proofs bearing on modification shall be tested at an evidentiary hearing if one is requested by plaintiffs.
Affirmed in part, vacated in part, and remanded. We do not retain jurisdiction. I hereby certify that the foregoing is a true copy of the original on file in my office.
CLERK OF THE APPELLATE DIVISION