LEONARD H. FRANCO, SR. v. 1138 SUMMIT AVENUE, LLC, et al.

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-5184-04T15184-04T1

LEONARD H. FRANCO, SR.,

Plaintiff-Appellant,

v.

1138 SUMMIT AVENUE, LLC, a New

Jersey Limited Liability Company,

and CHRISTIAN ARAUJO, individually,

Defendants-Respondents.

___________________________________

 

Submitted March 20, 2006 - Decided April 7, 2006

Before Judges Lintner and Parrillo.

On appeal from the Superior Court of

New Jersey, Law Division, Hudson County,

L-2724-04.

Miller, Meyerson, Schwartz & Corbo, attorneys for appellant (Gerald D. Miller, of counsel).

No brief was filed on behalf of respondents.

PER CURIAM

Plaintiff, Leonard Franco Sr., appeals from an order of the Law Division granting summary judgment in favor of Franco's son-in-law, Christian Araujo, and 1138 Summit Avenue, LLC (the LLC), a New Jersey Limited Liability Company. On April 6, 2004, plaintiff filed a complaint seeking to impose a constructive trust on six residential apartments located at 48-50 Irving Avenue in Jersey City, alleging that he was a fifty percent partner in the LLC, the owner of the property. In the second count of the complaint, plaintiff sought to impose a constructive trust on a one-family residence located at 953 Summit Ave in Jersey City. Although the deed to 953 was in Araujo's name, plaintiff alleged that he and Araujo had entered into an oral partnership agreement for the purpose of purchasing the single-family home in order to convert it to a two-family home. He also alleged that 953 was placed in Araujo's name for the purpose of convenience and based upon assurances that Araujo would obtain private financing from the seller to finance the purchase after which they would borrow additional funds to convert the property into a two-family home.

In addition to the complaint, plaintiff filed a lis pendens on both properties. Prior to the Law Division judge's entry of the order granting summary judgment, a Chancery Division judge entered an order permitting the sale of 953, which was under contract, with the proceeds to be held in trust pending the outcome of the underlying litigation. After plaintiff filed his notice of appeal, we stayed the order granting summary judgment to the extent that the proceeds from the sale of the property located at 953 shall be held in escrow by defense counsel pending disposition of this appeal. We now reverse and remand for a plenary hearing.

In support of their motion for summary judgment, defendants submitted: (1) the Deed to 953, showing the property was conveyed to Araujo for $110,000; (2) the Deed to 48-50 Irving Avenue in the name of the LLC; (3) the Certificate of Formation of the LLC dated May 29, 2002, establishing Araujo and Victor Franco as fifty percent partners, each with cash contributions of $5000; (4) an assignment dated May 19, 2003, by which Victor assigned his fifty percent interest in the LLC to Araujo; and (5) affidavits from both Araujo, plaintiff's former wife, Miriam Franco, Jose Ruiz, an electrician who performed work at both properties, and Michele Henry and John Loughner, both residential tenants at 48-50 Irving Avenue.

In two affidavits, Araujo indicated that he was the sole owner of 953, purchased it with a mortgage taken in his name and entirely at his risk. He asserted that plaintiff had not contributed anything of value to the purchase, maintenance, operation, or improvement of the property, and that the property was under contract to be sold for $211,000 to Wardell Mahone, which sale was being improperly delayed by plaintiff's lis pendens.

Regarding the LLC, Araujo admitted that plaintiff, formerly an attorney, helped him in forming the company and on some occasions wrote leases and landlord tenant notices, but did not contribute to the purchase, operation, improvement, or management of the property. He averred that the only other partner in the LLC was plaintiff's brother, Victor Franco, who assigned his rights to him because Victor lives in upstate New York and did not actively participate in the operation of the property. Additionally, the LLC could not qualify for a mortgage from Bayonne Community Bank so long as Victor remained part of the company. Araujo conceded that he gave plaintiff the use of one of the apartments at 48-50 Irving Avenue rent-free but did not provide any reason for doing so.

Miriam Franco's supporting affidavit indicated that plaintiff was a disbarred attorney and never to her knowledge had any type of financial relationship with Araujo. Ruiz stated that he was hired by Araujo to upgrade the electrical service at both properties and had no dealings with plaintiff. His only contact with plaintiff was when plaintiff opened a door at 48-50 Irving Avenue so he could access the electrical panel. Henry and Loughner asserted that they paid rent to Araujo and that he was the person they contacted when repairs were needed, and although plaintiff lived for a time at in an apartment at 48-50 Irving Avenue, plaintiff did nothing by way of repairs, improvements, or maintenance of which they were aware. Loughner, however, later provided plaintiff with an affidavit indicating that he did not know that his earlier affidavit was an affidavit and that he signed it without reading it because Araujo told him it was needed for business matters involving plaintiff.

In a response affidavit, plaintiff contended that Araujo came to him seeking his expertise and inquiring about a real estate investment. Plaintiff averred that he and Araujo purchased the property at 48-50 Irving Avenue for $207,500 through his contacts with James Monaco, a long-time associate, from whom plaintiff secured initial financing. He claimed that through his efforts the purchase was a "no money down deal." At closing, he signed the purchase money note with Araujo. He further claimed to have structured the construction financing to improve the six apartments, personally signing several notes. They renovated the property while he lived rent-free in one of the units and actively supervised the rehabilitation. Araujo controlled all the funds of the partnership. In May 2003, the rehabilitation was substantially completed and he and Araujo began to look for a permanent mortgage. According to plaintiff, because his brother Victor could not qualify for the $300,000 mortgage from Bayonne Community Bank, Araujo "assured and induced" him that he, Araujo, would obtain the financing for "our benefit" in return for transferring Victor's fifty percent interest to Araujo.

Plaintiff claimed that he and Araujo entered into an oral agreement to purchase 953. "For the purpose of convenience and based upon defendant Araujo's assurances that he, Araujo, could obtain private purchase money financing from the seller," they agreed that Araujo would hold legal title for both Araujo and plaintiff's benefit. They purchased the property for $110,000 with the seller taking back a $100,000 purchase money mortgage. The additional $10,000 came from Monaco as did additional private financing for construction to convert the property to a two-family house for which plaintiff asserted that both he and Araujo signed promissory notes. Following completion of the project, the property was listed with a real estate broker for sale. Araujo unilaterally, without plaintiff's consent, took possession of the property, causing plaintiff to file his complaint and lis pendens for fear that Araujo would divert the proceeds from the sale of the property for his own use.

Plaintiff also submitted an affidavit from his brother Victor, asserting that he signed the partnership agreement for plaintiff's benefit at plaintiff's request because plaintiff's credit was weak. Victor also claimed that plaintiff, defendant Aruajo, and he signed a purchase money mortgage note to Monaco for $225,000 to purchase and provide working capital for the LLC.

Attached as exhibits by plaintiff were five promissory notes for money received from James Monaco and his wife, signed by both plaintiff and Araujo: the first, dated May 2, 2002, for $15,000; the second, dated August 5, 2002, for $5000; the third, dated October 21, 2002, for $19,782; the fourth, dated March 26, 2003, for $5000; and the fifth, dated August 20, 2003, for $47,500. The October 21, 2002, note specifically stated that it was secured by a second mortgage on the property at 48-50 Irving Avenue. The August 20, 2003, note, which was signed by plaintiff as guarantor, stated that the loan was secured by a mortgage in favor of the lender on the property at 953.

In a responding affidavit, Araujo denied the assertions made by plaintiff, including plaintiff's living arrangements and partnership interest in the LLC, the intention that they split the proceeds from the sale of 953, and that plaintiff secured the financing. Araujo claimed the August 5 note was for plaintiff's living expenses and the October 21 note included the $5000 loaned on August 5, that plaintiff had no money or credit, and that Araujo and the LLC paid off the loans from Monaco. Araujo did not explain, however, why plaintiff was an obligor on either of the loans that specifically referenced the two properties.

Granting the defendants' summary judgment motion, the judge first concluded that there was no evidence that plaintiff had an ownership interest in either property. He observed that there was no agreement establishing a partnership between plaintiff and Araujo respecting the LLC, no agreement indicating that they would split the profits on the sale of 953, and plaintiff's name was not on the deeds to either property.

Rejecting plaintiff's argument that there were sufficient facts to withstand defendant's motion for summary judgment, the judge found that there was no evidence that Araujo defaulted on any of the promissory notes thereby jeopardizing plaintiff's liability under the note. He concluded that breach of a contract alone is insufficient to qualify as a wrongful act for warranting imposition of a constructive trust and there was no evidence to indicate that Araujo was unjustly enriched.

Disregarding plaintiff's assertion that the promissory notes executed by plaintiff and Araujo evidenced the alleged oral partnership agreements respecting both properties, the judge stated:

In the present case, evidence shows that the plaintiff Franco cosigned a couple of promissory notes and a mortgage note. However, not only is there no evidence of the purpose for which the finances were obtained but, in addition, there's no evidence that the defendant [Araujo], defaulted on the note. So the plaintiff Franco can be restored to his original position.

The judge also concluded that there was no harm warranting imposition of a constructive trust, because Araujo did not default on the notes, thus plaintiff never became liable on the notes and his credit was not jeopardized,.

On appeal, plaintiff asserts that he presented sufficient facts to establish that there was a business relationship between himself and Aruajo sufficient to withstand defendants' motion for summary judgment. He argues that the various affidavits presented questions of fact that plaintiff provided (1) advice and information, (2) acquisition costs, and (3) help in refinancing the LLC by finding a mortgage broker, contrary to the judge findings. He also contends that the supporting papers established that there was a factual question as to whether he and Araujo agreed to split the profits for the sale of the properties and the proofs were sufficient to establish a prima facie case to warrant imposition of a constructive trust.

Initially, we note that the judge correctly found that there were no written partnership agreements respecting either parcel of property and plaintiff's name does not appear on any deed. Until 1996, New Jersey followed the historical common-law rule that oral agreements to transfer an interest in real property were unenforceable under the Statute of Frauds. In 1996, the Legislature amended the statute to provide that oral agreements to transfer real estate could be enforceable if proven by clear and convincing evidence. N.J.S.A. 25:1-13(b); Prant v. Sterling, 332 N.J. Super. 369, 378, (Ch. Div. 1999), aff'd, 332 N.J. Super 292 (App. Div.), certif. denied, 166 N.J. 606 (2000). Partnership agreements are not governed by either the former or the present version of the Statue of Frauds and may be oral. See Stark v. Reingold, 18 N.J. 251, 267-68 (1955).

The mere breach of an oral promise, whether giving rise to a claim based upon breach of contractual or promissory estoppel, is not a sufficient basis for impressing a constructive trust. Pesten v. Sailer, 225 N.J. Super. 178, 195 (App. Div. 1988). A constructive trust is a remedial device by which the "conscience of equity finds expression," thereby preventing the retention of property where, under the circumstances, it would be against good conscience to do so. Stewart v. Harris Structural Steel Co., 198 N.J. Super. 255, 266 (App. Div. 1984) (quoting Beatty v. Guggenheim Exploration Co., 225 N.Y. 380, 122 N.E. 378, 380 (1914)).

Thus, a constructive trust has been imposed where there is wrongful conduct on the part of the party acquiring or retaining the property. D'Ippolito v. Castoro, 51 N.J. 584, 589 (1968); see also Hirsch v. Travelers Ins. Co., 134 N.J. Super. 466, 471 (App. Div. 1975); Hyland v. Simmons, 152 N.J. Super. 569, 575 (Ch. Div. 1977), aff'd, 163 N.J. Super. 137 (App. Div. 1978), certif. denied, 79 N.J. 479 (1979). Constructive trust has also been impressed to avoid unjust enrichment even though the property was not retained as the result of wrongful or illegal conduct. Stewart, supra, 198 N.J. Super. at 266; see also Trs. of Clients' Sec. Fund v. Yucht, 243 N.J. Super. 97, 131 (Ch. Div. 1989) (imposing a constructive trust based upon unjust enrichment where the property was legally acquired but not used for the purposes intended by the beneficiary). The burden of proof imposed upon a party seeking to impress a constructive trust is by clear and convincing evidence. Dessel v. Dessel, 122 N.J. Super. 119, 121 (App. Div. 1972), aff'd, 62 N.J. 141 (1973).

In D'Ippolito, supra, 51 N.J. at 589, the Court imposed a constructive trust for the benefit of the guarantor where a co-guarantor, in disregard of the guarantee, refused to pay one-half of a debt owed to the principal creditor, concluding that failure to pay the guarantee was a "wrongful act." Where "title to property is acquired by fraud, duress or undue influence, or is acquired or retained in violation of a fiduciary duty, a constructive trust may be impressed in appropriate circumstances." Hyland, supra, 152 N.J. Super. at 575.

In this case, a binding oral agreement of some kind is suggested by the promissory notes and circumstances asserted by plaintiff, specifically: (1) the evidence that plaintiff lived in one of the units at 48-50 Irving Avenue for a substantial time without paying rent; (2) the multitude of contradictory facts set forth in the many affidavits submitted by the litigants; (3) the recital in the October 21, 2002, note that "THIS NOTE IS SECURED BY A SECOND MORTGAGE, SUBJECT ONLY TO A FIRST MORTGAGE ALSO HELD BY JAMES MONACO, ON PREMISES KNOWN AS 1138 SUMMIT AVENUE . . . ."; (4) plaintiff's co-signature as guarantor on the August 20, 2003, note expressing that the loan was secured by a mortgage in favor of the lender on the property at 953 Summit; and (5) Victor's supporting affidavit that he signed the partnership agreement for the benefit of plaintiff.

The principles and purposes governing summary judgment are well settled. The most significant aspect of these principles is that all reasonable doubts as to the presence of genuine issues of fact are to be resolved against the movant. Ruvolo v. American Casualty Co., 39 N.J. 490, 499 (1963). After carefully considering the entire record and plaintiff's arguments, in the light of the applicable law, we reverse and remand the matter for trial because we do not have sufficient confidence in the state of the record to endorse the motion judge's grant of summary judgment in favor of defendants and because factual issues exist preventing entry of judgment as a matter of law. Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995). The stay on the proceeds from the sale of 953 is to remain in effect pending the completion of trial.

Reversed and remanded.

 

The Chancery Order is not included in the appendix on appeal.

Defendants did not participate in this appeal.

(continued)

(continued)

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A-5184-04T1

April 7, 2006