DEBRA GLADSTONE, Individually et al. v. STEVEN LUDSIN

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-2432-04T22432-04T2

DEBRA GLADSTONE, Individually

and Derivatively on behalf of

LUDSIN ASSOCIATES,

Plaintiff-Respondent,

v.

STEVEN LUDSIN,

Defendant-Appellant.

__________________________________

 

Argued February 1, 2006 - Decided June 15, 2006

Before Judges Wefing, Fuentes and Graves.

On appeal from Superior Court of New

Jersey, Chancery Division, General Equity

Part, Bergen County, Docket No. C-171-03E.

Peter R. Bray argued the cause for appellant

(Bray, Chiocca & Miller, attorneys; Mr. Bray,

on the brief).

Steven R. Klein and Susan M. Usatine

argued the cause for respondent (Cole,

Schotz, Meisel, Forman & Leonard, attorneys;

Mr. Klein, of counsel and on the brief;

Ms. Usatine, on the brief).

PER CURIAM

Defendant Steven Ludsin appeals from the final judgment of the Chancery Division, General Equity Part, permanently removing him as general partner of Ludsin Associates; directing the sale of his ownership interest in the business to plaintiff Debra Gladstone, his partner and sister; and awarding plaintiff compensatory damages and counsel fees. The judgment of the court was entered after a four-day bench trial. Defendant now argues that the trial court erred by failing to apply the entire controversy and estoppel doctrines to bar plaintiff's claims. Defendant also argues that the remedies fashioned by the court are not supported by law, nor warranted by the facts.

After reviewing the record before us, we reject these arguments and affirm substantially based on Judge Escala's comprehensive and well-reasoned memorandum of opinion. We summarize the following facts from the evidence presented at trial.

I

The Creation of the Partnership

This case contains all of the elements of a quintessential intra-family conflict that often arises after the demise of the central figure that started and maintained a small, but successful family-owned business. Here, that central figure was the Ludsin family's patriarch, the parties' father.

In 1977, Samuel Ludsin established Ludsin Associates as a New Jersey limited partnership. Samuel and his son, defendant Steven Ludsin, were the original general partners. Samuel's daughter Debra (plaintiff Gladstone), and his wife Sonya (the parties' mother) were limited partners. Samuel's brother and his children (collectively the "Orlands") made up the remaining eleven limited partners. Plaintiff and defendant's initial ownership interests were 16.5 percent respectively

The partnership certificate conferred exclusive control over the management of the partnership to the general partners. They in turn owed a duty of loyalty to the business and were expected to act in the best interest of the partnership. The seventh article of the partnership certificate sets forth the manner in which profits and losses of the partnership shall be distributed:

The General and Limited Partners shall share in the net profits of the Partnership in the same proportion as the capital contribution of [sic] each bears to the total capital contribution of all of the General and Limited Partners.

The sixth article permits compensation of the general partners in the form of a management fee, but limited as follows:

The Partnership shall pay to the General Partners a management fee of 4% of the gross rentals received by the Partnership during the fiscal year as compensation for their services in supervising the business and properties of the Partnership. None of the Partners shall receive any other salary or drawings for services rendered on behalf of the Partnership in their capacity as Partners, nor shall any Partner receive any interest on his or her contribution to the capital of the Partnership.

On January 17, 1986, the partnership certificate was amended to prohibit defendant, upon Samuel's death or insanity, from selling, transferring, encumbering or in any manner disposing of the property without plaintiff's express written consent. Upon defendant's death or insanity, plaintiff would become a general partner. According to plaintiff, the purpose of this amendment was to protect plaintiff's interest in the partnership and ensure that plaintiff's children would be able to inherit the property, unless plaintiff agreed to sell the property.

Partnership Assets and Operations

The partnership owns approximately twenty-five acres of land in Fairfield, New Jersey. There are several buildings on the property that are rented to ten manufacturing and warehousing tenants. The property is zoned as an industrial area.

Samuel Ludsin was the partnership's founder and operated its day-to-day activities. He also founded and operated Garfield Industries, Inc. ("Garfield"), a manufacturing enterprise that operates a factory on the partnership's property. Garfield is the partnership's second largest tenant, a co-guarantor of the partnership's mortgage, and also allows the partnership to use its employees, space, office equipment and supplies without charge.

As noted by Judge Escala, from the formation of the partnership and Garfield, Samuel Ludsin operated these businesses "as he saw fit for the financial benefit of himself and his children, although he consistently treated Steven and Debra essentially equally." Shortly after receiving the shares in Garfield, defendant voluntarily sold his shares in Garfield to plaintiff, giving her an 80% interest in Garfield.

Plaintiff and the parties' cousin, Steven Gelvan, presently own and operate Garfield. With the exception of its finances, Gelvan also manages the day-to-day operations of the partnership. Only plaintiff, her late father Samuel and Gelvan were authorized to sign documents for the partnership. According to Gelvan, defendant was not involved with the family businesses during Samuel Ludsin's lifetime.

It was Samuel Ludsin's practice not to take the 4% management fee authorized by the partnership certificate, but to share the fee (approximately $30,000 annually) equally with his two children. He also never took management fees in excess of $30,000.

Samuel did not pay anyone a regular salary to manage the partnership until shortly before his death, when he was no longer able to be involved in the day-to-day management of the partnership. He also did not reimburse himself for personal expenses from the partnership's assets. Although defendant alleged that his father paid him additional management fees, no records documenting these payments were produced at trial.

C

Management of the Partnership

After Samuel Ludsin's Death

Samuel Ludsin died on May 26, 1997. Soon after his father's death, defendant, acting in his capacity as sole general partner, removed his sister's name from the list of authorized signators for the partnership's account.

Under the terms of the partnership certificate, upon Samuel Ludsin's death, the partnership would be automatically dissolved unless the surviving general partner provided written notice of his intention to continue the partnership. Thus, according to plaintiff, because defendant failed to provide the limited partners with the required written notice of his intention to continue the partnership, the partnership terminated on July 26, 1997, sixty days after their father's death. Thereafter, plaintiff further contends, a de facto limited partnership was formed subject to dissolution. On November 6, 1997, defendant attempted to continue the partnership by filing an amendment to the certificate. The purported amendment, however, bore only Samuel Ludsin's signature, and was filed more than five months after his death.

Defendant chose not to manage the partnership as Samuel Ludsin had done during his lifetime. Instead, defendant hired his cousin Gelvan (Garfield's manager) as the on-site manager for the property owned by the partnership. Gelvan's responsibilities included collecting the rents, interacting with all the realtors, preparing the leases, and performing or arranging to be performed building maintenance and repairs. Thus, Gelvan essentially took over everything that the late Samuel Ludsin had done, while defendant assumed exclusive control over the checkbook and finances. Defendant also relocated the partnership's home office to his East Hampton home. Defendant authorized payments on behalf of the partnership and dealt with the partnership's accountant. However, defendant kept the partnership's books, records, and checkbook at Garfield's office, as had his father.

Although defendant regularly communicated with Gelvan, he only occasionally visited the property. He also made minimal efforts to develop the property. Despite his significantly diminished involvement with the operations of the partnership property, (as compared with his late father), defendant began to take management fees in excess of the 4% permitted under the partnership certificate. Commencing in June of 2001, defendant also began reimbursing himself for so-called personal expenses.

D

The Orlands' Law Suit and Settlement

On March 28, 2001, the Orlands, who were limited partners, filed an amended complaint suing defendant for mismanagement and misappropriation of partnership funds. The Orlands also sued plaintiff Gladstone in connection with a $10,000 contribution she allegedly had the partnership make to the school her autistic son attended. Plaintiff argued that this expenditure had been authorized by her father before his death.

In August of 2001, the Orlands settled their claims against plaintiff. After the case against her was dismissed, plaintiff agreed to purchase the Orlands' approximately one-third interest in the partnership. The sale was structured as follows: (1) plaintiff agreed to pay $250,000; (2) the partnership agreed to pay the Orlands an additional $50,000; and (3) in addition, the Orlands' loans obtained from the partnership, approximately $50,000, would be forgiven. Acquisition of the Orlands' ownership interest gave plaintiff a 55.7028% controlling interest in the partnership.

At the time of the settlement, plaintiff was aware that the Orlands were claiming that defendant was taking excessive management fees. In fact, the partnership's loan forgiveness to the Orlands was in part in recognition that they had not received a partnership distribution since defendant became the general partner. The Orlands subsequently also dismissed the claims against defendant.

Plaintiff testified that during the Orlands' negotiations, she informed her brother that the partnership was to be operated lawfully and fairly in the future, including regular payments of partnership distributions. Gelvan gave similar testimony at trial. Although at his deposition defendant indicated that he recalled talking with his sister about the future operations of the partnership, he could not recall any such conversation at trial.

The Orlands' settlement agreement contained a general release between defendant and plaintiff. Plaintiff objected to the general release, because she wanted to preserve her right to hold defendant accountable for future breaches of his fiduciary duty. Thus, plaintiff agreed only to sign the release if it exempted future acts. The final agreement, entitled "Transfer, Settlement and Release Agreement" was executed in March of 2002, and provided that the partnership, and all limited partners, including plaintiff, "release any and all claims each may have against the other, whether known or unknown, which accrued prior to the date of this agreement, including, but not limited to, any and all claims asserted in the within litigation."

Pursuant to the settlement agreement, all partners "retain the right to pursue claims that were either unknown, un-arisen, or un-accrued" as of the date of the settlement agreement. It bears noting, that when the negotiations with the Orlands were taking place, plaintiff had not been afforded an opportunity to review the partnership's books, records or tax returns.

E

Management of the Partnership

After the Orlands Buyout

By the summer of 2002, plaintiff and her mother had not received a partnership distribution since defendant had become sole general partner. Plaintiff requested a distribution or loan to reduce her personal indebtedness that resulted from the acquisition of the Orlands' interest. Defendant denied his sister's request. Shortly thereafter, defendant gave plaintiff $5,000, which he told her was a distribution, but which was recorded in the partnership's records as a loan to plaintiff.

In the years leading up to this lawsuit, the partnership's average annual gross income was $600,000. Under Samuel Ludsin's management, distributions ranged from $60,000 to $250,000 annually. In response to defendant's denial of her request for a loan, plaintiff directed her accountants to review the partnership's financial records. In December 2002, while in the process of reviewing the records, plaintiff saw a fax from defendant to Gelvan that requested reimbursement of one month of expenses amounting to $1,515.80.

Plaintiff gave the following testimony at trial as to the significance of this discovery:

This is when I did realize he was doing this 'cause -- it just wasn't something -- I was in Garfield and this came through the FAX machine. I saw all these numbers and I asked Steve Gelvan what it was about and he said these are expenses that he, my brother writes checks for to himself.

And since it was a small property and that we never needed these kind[s] of expenses, everything was done in Garfield, a couple of papers, pencils, four or five checks a month, and I couldn't imagine how there could possibly be all these expenses, what they were for. They had to be all personal and just looking for a way to get more money out of the property to himself.

After reviewing the fax, plaintiff responded to defendant's request for reimbursement as follows:

Steven, I happen [sic] to see this statement. I feel these expenses seem extremely high for 1 month. Please supply a receipt to at least show what you are spending these expenses on [and] if they apply to Ludsin Associates [sic] Business. We never had bills like this in the past 40 years! Please advise ASAP. Debby (your partner.)

Plaintiff did not receive a response to this letter. Plaintiff's accountant's analysis of the books and records of the partnership revealed that:

1) In 2001, the defendant caused the partnership to improperly accrue "repair and maintenance" expenses of $230,137. Defendant authorized the partnership to issue fraudulent invoices for maintenance and construction work that was never done. This phantom accrual of expenses resulted in the partnership underreporting its income by thirty-five percent.

2) The 2001 over-accrual of expenses resulted in $230,137 of overstated income in 2002. Since plaintiff acquired Orlands' 33% interest in 2002, plaintiff incurred taxes on $76,712 (one third of the total income) that would not have been allocated to her if properly reported in 2001.

3) Defendant authorized $80,833 of rent monies owed to be forgiven in 2002 without proper documentation and without requiring that the partnership's accountants report the forgiven rent as income. This would have resulted in a corresponding charge to capital improvements or repairs and maintenance.

4) In 2002, defendant's management fee should not have exceeded 4% or $25,064, pursuant to the partnership certificate. During this period of time defendant paid himself $43,400 or $18,336 more than the maximum amount permitted. In fact, because defendant had delegated the on-site management responsibilities to Gelvan, he should have received less than the maximum 4%.

5) Defendant reimbursed himself for so-called business expenses totaling $28,525 in 2002 and $28,334 from January 1, 2003 through July 8, 2003. On the books, defendant classified the payment of his "business" expenses as building and maintenance expenses. These "business" expenses were in fact personal expenses that included home computers, paper goods, his pool, landscaping for his home in the Hamptons, his electricity, cost of fuel and maintenance for cars as well as health insurance.

6) Defendant waived interest on the outstanding partnership loans for 2002. The waiver of interest disproportionately benefited defendant, who owed the partnership twice as much as plaintiff.

Discussions between the parties and their respective financial advisors to reach an agreement as to how to improve the partnership's management practices proved fruitless. Litigation soon followed. At the commencement of this cause of action, defendant had a 22% interest in the partnership and plaintiff had a 55% interest.

Plaintiff's verified complaint alleged that defendant had breached his fiduciary duty. As an interim measure, the court appointed a special fiscal agent to monitor the business. The agent refused authorization for defendant's expenses, and directed the repayment of all the partnership loans. Plaintiff and her mother agreed to repay their loans. Defendant refused to repay his loans.

II

Legal Analysis

Defendant argues on appeal that the release executed by plaintiff in connection with the Orlands' litigation barred her claims here, because they: (1) were all known to exist prior to the delivery of the release; (2) were waived; (3) are barred by the entire controversy doctrine; or (4) are barred by the doctrine of estoppel. We disagree.

Although our review of the trial court's conclusions with respect to the scope and coverage of a contract is de novo, Fastenberg v. Prudential Ins. Co. of Am., 309 N.J. Super. 415, 420 (App. Div. 1998), we are in complete agreement with Judge Escala's legal analysis. Under the express language of the settlement agreement, plaintiff reserved her rights to proceed against defendant for any improper future acts. The allegations in the verified complaint and the evidence relied upon by the trial court are all within this timeframe.

Estoppel protects a party who has relied in good faith upon another's conduct and changed his position in reliance on the other person's conduct or position. Carlsen v. Masters, Mates & Pilots Pension Plan Trust, 80 N.J. 334, 339 (1979); Royal Assocs. v. Concannon, 200 N.J. Super. 84, 91-92 (App. Div. 1985). We have defined the doctrine of equitable estoppel as follows:

The essential principle of the policy of estoppel here invoked is that one may, by voluntary conduct, be precluded from taking a course of action that would work injustice and wrong to one who with good reason and in good faith has relied upon such conduct. An estoppel . . . may arise by silence or omission where one is under a duty to speak or act. It has to do with the inducement of conduct to action or nonaction. One's act or acceptance may close his mouth to allege or prove the truth. The doing or forbearing to do an act induced by the conduct of another may work an estoppel to avoid wrong or injury ensuing from reasonable reliance upon such conduct. The repudiation of one's act done or position assumed is not permissible where that course would work injustice to another who, having the right to do so, has relied thereon.

 
[Middletown Twp. Policemen's Benevolent Ass'n Local No. 124 v. Twp. of Middletown, 162 N.J. 361, 367 (2000) (quoting Summer Cottagers' Ass'n of Cape May v. City of Cape May, 19 N.J. 493, 503-04 (1955) (citations omitted).]

Applying these legal principles to the facts here, we reject defendant's argument that plaintiff's conduct during the negotiations leading to the settlement of the Orlands' litigation, and/or her conduct thereafter, constitute a sufficient basis to estop her from pursuing her claims here.

Defendant's waiver argument is equally without merit. Waiver is the intentional relinquishment of a known right. Shebar v. Sanyo Bus. Sys. Corp., 111 N.J. 276, 291 (1988); Geo. F. Malcolm, Inc. v. Burlington City Loan and Trust Co., 115 N.J. Eq. 227, 232 (N.J. Ch. 1934). Waiver requires that the parties know of their legal rights and remedies and have decided not to enforce their rights or pursue a remedy. Ibid. The Malcolm court found that unless a party intentionally relinquishes a right with full knowledge of the facts, the right persists. Ibid. Nothing in this record supports the notion that plaintiff waived her right to proceed against defendant based on the allegations disclosed in the complaint.

Finally, we reject defendant's entire controversy argument. Rule 4:30A provides:

Non-joinder of claims required to be joined by the entire controversy doctrine shall result in the preclusion of the omitted claims to the extent required by the entire controversy doctrine . . . .

The entire controversy doctrine does not preclude a successive action if the claim was "unknown, unarisen or unaccrued at the time of the original action." K-Land Corp. No. 28 v. Landis Sewerage Auth., 173 N.J. 59, 72 (2002) (quoting Hillsborough Twp. Bd. of Educ. v. Faridy Thorne Frayta, P.C., 321 N.J. Super. 275, 283 (App. Div. 1999)); Harley Davidson Motor Co. v. Advance Die Casting, Inc., 150 N.J. 489, 494 (1997). As we have noted, plaintiff's cause of action here is based on defendant's conduct following the execution of the settlement agreement ending the Orlands' litigation. As such, the entire controversy doctrine is simply not applicable.

We are also satisfied that the trial court had the equitable power to compel defendant's ouster and provide for the buyout of his interest in the partnership at a reasonable rate, in lieu of the statutory remedy of dissolution. We also affirm Judge Escala's method of calculation and ultimate valuation of defendant's ownership interest.

Finally, we come to the question of the court's award of counsel fees to plaintiff. Plaintiff sought a counsel fee award of $236,016. In support of her application, she submitted a certification of legal services and a letter-brief in support thereof. Defendant opposed the application. Judge Escala determined that the plaintiff's efforts were approximately 50% greater than that of defendant. The defendant's attorneys' fees were $96,322. The court awarded plaintiff only two-thirds of her fees or approximately $160,000, which, as the court noted, was comparable to the 50% greater effort, but simply rounded up. Judge Escala's findings are sufficiently clear and complete to permit review. In re Vey, 124 N.J. 534, 544 (1991). His determination of attorneys' fees in the amount of $160,000 was not unreasonable, and not a clear abuse of discretion warranting reversal.

The balance of defendant's arguments lack sufficient merit to warrant discussion in a written opinion. R. 2:11-3(e)(1)(E).

 
Affirmed.

Although defendant could have purchased the Orlands' interest under similar terms, he declined to do so.

Although the partnership certificate technically terminated upon Samuel Ludsin's death, the parties' conduct corresponded to the guidelines and limitations contained in the certificate, with the exception of the management fees defendant took.

(continued)

(continued)

18

A-2432-04T2

June 15, 2006