DOCKET NO. A-4846-12T1
Louis Giansante argued the cause for appellants/cross-respondents (Giansante & Associates, LLC, attorneys; Mr. Giansante, of counsel and on the brief). Betsy G. Ramos argued the cause for respondents/cross-appellants Shanna Lynn Corporation, Louis W. Garman, Sr., Theresa Maderich, Joseph Maderich, Agnes Maderich, Virgil Ann Maderich, Henry Maderich (Capehart & Scatchard, P.A., attorneys; Ms. Ramos, on the brief).
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION Before Judges Waugh, Maven, and Carroll. On appeal from the Superior Court of New Jersey, Law Division, Gloucester County, Docket No. L-1046-99. Louis Giansante argued the cause for appellants/cross-respondents (Giansante & Associates, LLC, attorneys; Mr. Giansante, of counsel and on the brief). Betsy G. Ramos argued the cause for respondents/cross-appellants Shanna Lynn Corporation, Louis W. Garman, Sr., Theresa Maderich, Joseph Maderich, Agnes Maderich, Virgil Ann Maderich, Henry Maderich (Capehart & Scatchard, P.A., attorneys; Ms. Ramos, on the brief). PER CURIAM
Plaintiffs Lawrence J. Dalton and Christine J. Dalton appeal the judgment entered by the Law Division on April 30, 2013, as well as the supplemental judgment entered on July 12. They argue that the remedy ordered by the trial judge was insufficient. Defendants Shanna Lynn Corporation (Shanna Lynn) and its owners, defendants Louis W. Garman, Sr., Theresa Maderich, Joseph Maderich, Agnes Maderich, Virgil Ann Maderich, and Henry Maderich, cross-appeal from the same judgments, arguing that the trial judge should have dismissed plaintiffs' claim and awarded no remedy. We affirm.
We refer to the defendants collectively as the Shanna Lynn defendants. We note that the trial judge found in favor of defendants Joseph Maderich and Agnes Maderich and dismissed all individual claims against them.
We briefly outline the facts and procedural history discerned from the record on appeal. They are set forth in more detail in our earlier opinion in this matter. Dalton v. Shanna Lynn Corp. (Dalton I), No. A-0048-10, A-1944-10 (App. Div. Apr. 19, 2012), certif. denied, 213 N.J. 44 (2013).
In 1988, Shanna Lynn owned the Rainbow Inn, a property including a liquor store and bar on North Delsea Drive in Clayton. The Daltons entered into a contract with Shanna Lynn and certain of the individual defendants to purchase the business.
There was a 550-gallon underground fuel oil tank on the property. On August 10, which was before the closing, defendant Lerco Fuel Oil Company (Lerco) delivered fuel oil and filled the tank to capacity. In order to receive credit for a full tank at closing, the Shanna Lynn defendants had Lerco return on August 29, the day of the closing, to top off the tank so it would be completely full.
Lerco is not a party to this appeal because the claims against it were dismissed.
Shortly after the closing, the Shanna Lynn defendants received a receipt for the oil. It showed that Lerco had delivered 530 gallons of oil that day, even though the tank was full less than three weeks earlier. Because such a large use of fuel oil in a short period of time was atypical, defendant Theresa Maderich (Maderich) sought an explanation. According to Maderich, when she expressed concern about the delivery, the night watchman told her that he had seen someone siphoning oil out of the tank the night before.
The next day, Carl Kirstein, the president of Lerco, contacted Maderich and told her the volume of oil was too large, based on the short period of time that had passed since the most recent oil delivery. After Maderich told him that she did not suspect theft, Kirstein told her there must be a leak. He recommended emptying the underground tank and installing aboveground storage tanks in the basement. Kirstein further testified that he sent Maderich a letter explaining that the tank was leaking into the surrounding ground. Maderich, however, maintained that neither she nor Lerco suspected or knew whether oil had been stolen or if there was a problem. She also denied receiving Kirstein's letter.
However, the Shanna Lynn defendants directed Lerco to pump out the underground tank, which only had 238 gallons of oil at that time. They also arranged for the installation of aboveground tanks in the basement. Both actions were done at the expense of the Shanna Lynn defendants. None of the defendants disclosed to the Daltons their reasons for doing so.
In January 1995, there was a fire at the Rainbow Inn. In June 1997, during reconstruction, a contractor informed the Daltons that he had discovered black sludge that smelled like oil. Although they agreed that the sludge smelled like oil, the Daltons decided to continue reconstruction because the contractor told them the oil would not interfere with the work. The Daltons did not take any samples or report the presence of the oil in the ground to anyone or any governmental agency. Reconstruction was completed and the Rainbow Inn reopened in March 1998.
On January 4, 1999, the Daltons served a notice of suit on the defendants, the Attorney General, and the Commissioner of Environmental Protection, claiming that the defendants had violated the New Jersey Environmental Rights Act (ERA), N.J.S.A. 2A:35A-1 to -14, and the Spill Compensation and Control Act (Spill Act), N.J.S.A. 58:10-23.11 to -23.24, based on the leak that occurred on the property when the Shanna Lynn defendants were the owners.
On June 8, the Daltons filed a ten-count complaint in the Law Division, alleging a variety of statutory and common law claims against Shanna Lynn, the individual defendants, and Lerco. The Daltons also hired Marks Environmental, Inc. (Marks Environmental), to perform a site investigation. In November 2000, Marks Environmental reported that the abandoned underground fuel oil tank was the source of the black sludge uncovered by the excavation during the reconstruction. The report recommended a full site characterization study to be followed by any required remediation. The study was needed to determine the vertical and lateral extent of soil contamination and the existence of any groundwater contamination. The Daltons did not conduct the recommended study.
In December 2002, the Law Division dismissed the consumer fraud, negligence, and statutory claims against the Shanna Lynn defendants, as well as all claims against Lerco. The matter went to trial in March 2006. At the close of the Daltons' case, the judge dismissed all breach of contract and fraud claims against the Shanna Lynn defendants, except the claim for equitable fraud.
The judge found that the Daltons had established a prima facie case of equitable fraud. He requested further legal arguments concerning the remedy, taking into consideration the lapse of time since the sale, the failure to act when the ground oil was discovered, and the absence of a definitive investigation to delineate the scope of the damage and any efforts to remediate the property. The judge struck the jury demand because the case now involved only an equitable claim.
Without resuming the trial, the judge dismissed the equitable fraud claim on October 15, 2010. He held that the classic equitable remedies of rescission and reformation of the sales agreement were not available because of the passage of time. The judge also cited plaintiffs' decision to proceed with reconstruction of the damaged building in 1997 without remediation of the condition resulting from the 1988 spill and dismissal of the Spill Act and ERA claims because "plaintiff[s] had not complied with the statutory obligations." The trial judge entered an order dismissing the equitable fraud claim. The Daltons appealed.
In Dalton I, supra, slip op. at 23-24, we affirmed as to all issues except the dismissal of the equitable fraud claim. We concluded that the trial judge's holding "that plaintiffs had adduced sufficient evidence to require denial of the Shanna Lynn defendants' motion for judgment at the close of plaintiffs' case [was] well-founded" based on the evidence presented. Id. at 15.
We addressed the remedy issue in the event the trial judge were to find in favor of the Daltons.
The trial judge could have issued a mandatory injunction requiring the Shanna Lynn defendants to conduct an investigation of the contamination, to undertake remediation of the site, or to contribute a share of the costs to remediate the site. It does not appear from this record that he gave such injunctive relief any consideration. Although we hold that plaintiffs have no bases as yet to recover under the Spill Act, we note that injunctive relief is one of the remedies available under this statute to obtain remediation of contaminated sites, N.J.S.A. 58:10-23.11u, and the nature of the equitable fraud in this case suggests such relief may be a suitable remedy to plaintiffs.
Delays of cleanup efforts in contamination cases are particularly costly
due to the potential damages suffered by the environment. New Jersey courts have recognized that "the determination of responsibility between or among successive owners possibly liable for the contamination may impede the swift implementation of cleanup efforts . . . ." [Superior Air Prods. Co. v. NL Indus., Inc.], 216 N.J. Super. [46, 61-62 (App. Div. 1987), appeal dismissed by 126 N.J. 308 (1991)]. In light of this concern, courts have imposed remedies to ameliorate the damage caused by environmental hazards as liability litigation drags along:
Injunctions are generally used in pollution-related actions brought on the theory of nuisance, although in proper circumstances they may be issued in actions brought for negligence and trespass, and if there is no other adequate remedy, an injunction is available to abate continuous and permanent pollution that causes irreparable injury, or to prevent a multiplicity of suits.
[61C Am. Jur. 2d Pollution Control § 1932 (2010) (emphasis added) (footnotes omitted).]
Of course, final injunctive relief will be imposed only when the party seeking such relief demonstrates that it has established the liability of the other party, the need for injunctive relief, "and the appropriateness of such relief on a balancing of equities." Rinaldo v. RLR Inv., LLC, 387 N.J. Super. 387, 397 (App. Div. 2006); Samaritan v. Borough of Englishtown, 294 N.J. Super. 437, 442-44 (Law Div. 1996). In Sheppart v. Township of Frankford, 261 N.J. Super. 5 (App. Div. 1992), this court identified other factors that may inform the decision to grant final
injunctive relief. These non-exclusive factors include:
(1) the character of the interest to be protected; (2) the relative adequacy of the injunction to the plaintiff as compared with other remedies; (3) the unreasonable delay in bringing suit; (4) any related misconduct by plaintiff; (5) the comparison of hardship to plaintiff if relief is denied, and hardship to defendant if relief is granted; (6) the interests of others, including the public; and (7) the practicality o[f] framing the order or judgment. Restatement (Second) of Torts § 936 (1977).
[Id. at 10.]
Consequently, we reversed in part and remanded the equitable fraud claim "to permit the trial to proceed to conclusion." Id. at 23-24.
Here, the trial judge terminated the trial at the close of plaintiffs' case. He had an incomplete record to determine whether plaintiffs would be entitled to relief in the nature of a mandatory injunction which would require the Shanna Lynn defendants to participate in a preliminary assessment of the site that would identify the site of the spill, any migration of the spill, and the existence and extent of ground and water contamination.
To be sure, plaintiffs have not demonstrated that they face immediate and irreparable harm. On the other hand, the trial judge found plaintiffs' claim of equitable fraud well-founded in the facts, and the ramifications of a discharge of approximately 1000 gallons of fuel oil into the ground will not vanish. To remediate the discharge, plaintiffs face the prospect of conducting a comprehensive study to ascertain the extent of soil and groundwater
contamination due to the 1988 oil spill. The cost of such a study may be expensive, and any remediation will consume time, energy and financial resources. Admittedly, their actions in 1997 may have made remediation of the site more difficult and more costly but the truncated record due to the trial judge's failure to consider any equitable remedy other than rescission or reformation of the 1988 contract does not permit a definitive resolution of plaintiffs' right to this relief.
[Id. at 20-23.]
Following the remand, the parties recreated the trial record and supplemented it with deposition transcripts. The judge then heard argument on whether plaintiffs had demonstrated equitable fraud and, if so, what the remedy would be. On April 25, 2013, he placed an oral decision on the record, finding Shanna Lynn and the individual defendants, except for Joseph Maderich and Agnes Maderich, liable for equitable fraud. The judge explained his reasons as follows:
Joseph and Agnes Maderich had not signed the contract of sale for the property, and consequently had made no representations with respect to the oil tank and property.
The fact that the knowledge came after is not an impediment to the finding of equitable fraud as a result. Because arguably, under equitable fraud, knowledge
is not proof to be shown. If the fact is known after and not before closing[, that] makes the claim by [p]laintiff[s] stronger . . . .
The fact that they did become knowledgeable of the concern makes [p]laintiff[s'] claim stronger. Because at that point, citing to [Hernig v. Harris, 117 N.J. Eq. 146 (Ch. 1934)], it's knowledge that what they had said before was not true, and that the problem is continuing damage.
So you know that you had a problem that is just not a problem that caused damage when I had it, it's causing damage now. Because we just put the oil in and it's continuing even to this point. And it's not a one-time concern.
It is the continuing nature of the problem of the oil in the ground that creates the problem for [d]efendants having knowledge now of the issue and not bringing it to light and rectifying that circumstance at that point in time.
And so I'm satisfied the first element of equitable fraud is made out.
The second element is made knowing that it was false. Now, that element in equitable fraud is not required. The second element knowledge, is not necessary. And I read the different cases that direct that.
But in this case we do have knowledge. It's post closing, but I've already found that the fact that it's post closing does not negate the fact of the equitable fraud.
Three, detrimental reliance incurred upon the representation. Well, the detrimental reliance is the fact that [p]laintiff[s] trusted — going back to that Hernig case — trusted the representations
that were given to them by [defendants]. And that the property was in good stead. That it didn't have a problem with the oil.
And we're willing to accept that based on those representations. And the detriment was that the information once known, not having been revealed, took from [plaintiffs] the ability to take more contemporary action, more immediate action.
. . . .
It took from [plaintiffs] themselves the ability to exercise more immediate action, to investigate and clean up, which would have been more concentrated oil that had not had a chance to migrate.
And all those things are to the detriment of the [p]laintiff[s], and it's based on the reliance of the representations made by the [d]efendant[s] that they were delivering a clean site.
And based on that, I'm satisfied that all of the elements of equitable fraud have been shown, that they've been shown by the clear and convincing weight of the evidence in the record. And that as a result, the liability claim of equitable fraud by [p]laintiff[s] against [d]efendants has been made out.
The judge ordered the Shanna Lynn defendants to take the steps required to investigate the oil contamination and complete the necessary clean up and remediation. However, taking into account the Daltons' delay in taking action once the leak was discovered, he ordered that the costs associated with the investigation and remediation, including funds already expended by the Daltons for those purposes, be allocated between the parties as follows: sixty-five percent to be borne by the liable defendants and thirty-five percent by the Daltons. The judge denied plaintiffs' request for rescission, recoupment, disgorgement, and counsel fees. He further ordered a constructive trust to preserve existing assets and an accounting to determine available assets. The judge entered the judgment on April 30, and the supplemental judgment on July 12. This appeal followed.
On appeal, the Daltons contend that the relief awarded was inadequate, did not fully enforce their equitable rights, and allowed the Shanna Lynn defendants to retain profits attributable to their fraud while forcing them to bear the cost of thirteen years of litigation. The Shanna Lynn defendants cross-appeal, arguing that there was no equitable fraud and that the trial judge erred in requiring a constructive trust and an accounting.
When reviewing a decision resulting from a bench trial, "[t]he general rule is that [factual] findings by the trial court are binding on appeal when supported by adequate, substantial, credible evidence." Cesare v. Cesare, 154 N.J. 394, 411-12 (1998) (citing Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474, 484 (1974)). We do not disturb the factual findings of the trial judge unless we are "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." Id. at 412 (quoting Rova Farms, supra, 65 N.J. at 484) (internal quotation marks omitted); see also Beck v. Beck, 86 N.J. 480, 496 (1981).
Because the fashioning of equitable remedies is generally left to the discretion of the trial judge, who must balance the facts he or she has found with the equities established by those findings to fashion a remedy, the resulting decision may only be reversed if there has been an abuse of that discretion. Sears Mortgage Corp. v. Rose, 134 N.J. 326, 354 (1993). It is implicit in the exercise of equitable discretion that "'conscientious judgment [must be] directed by law and reason and [be] looking to a just result.'" State v. Madan, 366 N.J. Super. 98, 109-10 (App. Div. 2004) (quoting Wasserstein v. Swern & Co., 84 N.J. Super. 1, 6 (App. Div.), certif. denied, 43 N.J. 125 (1964)).
Our role is not to determine "whether the trial [judge] took the wisest course, or even the better course, since to do so would merely be to substitute our judgment for that of the [trial judge]. The question is only whether the trial judge pursue[d] a manifestly unjust course." Gillman v. Bally Mfg. Corp., 286 N.J. Super. 523, 528 (App. Div.) (citation and internal quotation marks omitted), certif. denied, 144 N.J. 174 (1996). In making such a determination, we employ an abuse of discretion standard, meaning that "[a] trial [judge]'s rulings on discretionary decisions are entitled to deference and will not be reversed on appeal absent a showing of an abuse of discretion involving a clear error in judgment." In re Estate of Hope, 390 N.J. Super. 533, 541 (App. Div.), certif. denied, 191 N.J. 316 (2007).
To make out a prima facie case of equitable fraud, there must be "(1) a material misrepresentation of a presently existing or past fact; (2) the maker's intent that the other party rely on it; and (3) detrimental reliance by the other party." Liebling v. Garden State Indem., 337 N.J. Super. 447, 453 (App. Div.) (citing Jewish Ctr. of Sussex Cnty. v. Whale, 86 N.J. 619, 624 (1981)), certif. denied, 169 N.J. 606 (2001). However, in contrast to legal fraud, "there need not be proof that the statement was made with knowledge that it was false," ibid., and thus, there is no need to prove "knowledge of the falsity and an intention to obtain an undue advantage therefrom," Jewish Ctr., supra, 86 N.J. at 624-25. Further, "[t]he elements of scienter, that is, knowledge of the falsity and an intention to obtain an undue advantage therefrom, are not essential if plaintiff seeks to prove that a misrepresentation constituted only equitable fraud." Id. at 625 (citations omitted). In fact, "[e]ven an innocent misrepresentation can constitute equitable fraud justifying rescission." Ledley v. William Penn Life Ins. Co., 138 N.J. 627, 635 (1995). The elements of equitable fraud must be proven by clear and convincing evidence. Stochastic Decisions, Inc. v. DiDomenico, 236 N.J. Super. 388, 395 (App. Div. 1989), certif. denied, 121 N.J. 607 (1990).
In Dalton I, supra, slip op. at 23-24, we held that plaintiffs had demonstrated a prime facie case of equitable fraud. We have not changed our view on that issue. In his oral decision, the trial judge concluded that Maderich knew, after the closing, that there was reason to believe there was a leak in the tank. She had been so advised by Kirstein, who recommended emptying the tank and replacing it with aboveground tanks in the basement. Rather than disclose the information to the Daltons, which could have jeopardized the sale, the Shanna Lynn defendants chose to assume the expense of emptying the tank and replacing it, as recommended by Kirstein. But, they also chose not to inform the Daltons that oil might have leaked from the tank into the ground. We find no error in the judge's conclusion that their course of conduct, specifically the failure to disclose the fact that there was reason to believe there had been an oil leak, constituted equitable fraud.
Given our standard of review, we reject the Daltons' argument that the judge erred in finding that there was no knowledge of the leak prior to the closing, as well as the assertion of the Shanna Lynn defendants that there was no factual basis for a finding of equitable fraud at all. The judge's factual findings were firmly based in the record and his legal conclusion was consistent with applicable law as outlined above. We also note the judge's reliance on Hernig, which supports his decision.
In addition, we reject the Shanna Lynn defendants' argument that there was no proof of reasonable reliance, which is required for a finding of equitable fraud. Daibo v. Kirsch, 316 N.J. Super. 580, 588 (App. Div. 1998) (citing Jewish Ctr., supra, 86 N.J. at 625); DSK Enter., Inc. v. United Jersey Bank, 189 N.J. Super. 242, 251 (App. Div.), certif. denied, 94 N.J. 598 (1983). That the Daltons chose not to exercise their right to perform an environmental inspection of the property and the oil tank does not negate their reliance on the contractual representations made with respect to the property. They had every right to rely on those representations. While it is true that the Daltons could have asked why the Shanna Lynn defendants replaced the oil tank, it is equally true that those defendants could have voluntarily explained their reasons. A defendant cannot claim that a plaintiff should have been more astute in discovering the fraud. Pioneer Nat'l Title Ins. Co. v. Lucas, 155 N.J. Super. 332, 342 (App. Div.), aff'd, 78 N.J. 320 (1978).
As we held in Dalton I, supra, slip op. at 19, "[a] court may decline to impose an equitable remedy if such relief is neither realistic nor fair." We added that, in this case, "rescission was neither realistic nor fair," explaining that the
[t]ransfer of ownership of the real property and the business known as the Rainbow Inn occurred in 1988. Eighteen years had elapsed between the closing and conclusion of trial. There had been substantial performance of the agreement of sale. Moreover, when plaintiffs elected in 1997 to proceed with construction rather than to investigate the extent of the spill, they took action that rendered remediation of the site more difficult and perhaps more extensive and expensive. Neither party could be restored to the positions they occupied in 1988.As the judge observed, the oil leak did not prevent the Daltons from running their business.
[Id. at 20.]
The fact that the oil hasn't negated the ability of the [p]laintiff[s] to operate the premises, they have been able to exercise the ability to run the bar, and they've got the liquor license, and there's nothing toWe agree, and find no abuse of the judge's discretion in reaching the decision not to undo the sale of the property.
say that there was an impediment on that, or to be able to use the property at this point in time, there's really no evidence upon which I can find that the case supports the theory of recoupment.
Instead, the judge concluded that requiring the Shanna Lynn defendants to "pick up [part of] the bill" for costs of the investigation and clean-up was the more appropriate remedy because the Daltons were "entitled to get the property into a position that was equal to what they had expected at the time of settlement." We are satisfied that this was a "conscientious judgment" based on law and reason that is entitled to deference. See Madan, supra, 366 N.J. Super. at 109-10 (quoting Wasserstein, supra, 84 N.J. Super. at 6). We also consider the judge's decision to require both sides to share the financial burden to be factually supported in the record, appropriate, and certainly not an abuse of discretion.
The Shanna Lynn defendants correctly argue that we determined in Dalton I, supra, slip op. at 20, that a constructive trust and an accounting were not appropriate in the context of this case. The trial judge took a different approach to those remedies. In effect, rather than invalidating the sale, he gave the Daltons a lien on the assets of the Shanna Lynn defendants to ensure that there will be sufficient assets to fund his equitable remedy. We had not considered such an approach and, consequently, our holding did not, in itself, bar it.
"A constructive trust is an appropriate remedy to redress a 'wrongful act' that results in 'unjust enrichment.'" Thompson v. City of Atl. City, 190 N.J. 359, 371 (2007) (citation omitted). "[I]t will be imposed when a person has acquired possession of or title to property under circumstances which, in good conscience, will not allow the property's retention." Thompson v. City of Atl. City, 386 N.J. Super. 359, 375-76 (App. Div. 2006), aff'd as modified, Thompson, supra, 190 N.J. at 386. The remedy would convert the recipient into a trustee and require that he account for the property in whatever manner the court deems fair and just. Id. at 376.
Accounting is an equitable remedy normally used in situations involving commercial properties whereby a possessing tenant accounts to a non-possessing co-tenant for any rents the tenant received for use of the property. Newman v. Chase, 70 N.J. 254, 266-67 (1976). The remedy can also be used in the context of "wrongful acts." In Wear-Ever Aluminum, Inc. v. Townecraft Industries, Inc., 75 N.J. Super. 135, 150-51 (Ch. Div. 1962), the defendant was ordered to account to the plaintiff for its deliberate pirating of the plaintiff's employees. The defendant was required to pay the plaintiff for the training costs of the pirated employees as well as replacement employees. Id. at 150. --------
Had the issue of the leak been raised at or shortly after the closing, one possible remedy would have been to escrow some or all of the proceeds of the sale pending resolution of the problem. Such a repair or remediation escrow is common in real estate transactions. We view the remedy imposed by the judge to be the functional equivalent of such an escrow. It would be inequitable, however, to tie up more of the Shanna Lynn defendants' assets than are needed to fund the remedy. Consequently, the trial judge should entertain any application by the Shanna Lynn defendants to quantify, as best as possible, the reasonably anticipated expenses so that the constructive trust serves its appropriate purpose, without causing unwarranted harm to the Shanna Lynn defendants.
We have reviewed the parties' remaining arguments in light of the record and applicable law, and find them to be without sufficient merit to warrant discussion in a written opinion. R. 2:11-3(e)(1)(E). We add only that, with respect to counsel fees, we conclude that this case is covered by the American Rule, under which all litigants bear their own attorney's fees. Gerhardt v. Continental Ins. Cos., 48 N.J. 291, 301 (1966). We find no merit in the Daltons' arguments to the contrary.
Affirmed. I hereby certify that the foregoing is a true copy of the original on file in my office.
CLERK OF THE APPELLATE DIVISION