ANTHONY CANGER et al. v. EAST HANOVER, INC.

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-6484-04T26484-04T2

ANTHONY CANGER and A.C.

CANGER ENTERPRISES OF

EAST HANOVER, INC.,

Plaintiffs-Respondents,

v.

DORINE INDUSTRIAL PARK

PARTNERSHIP and GILBERT

R. JACOBS,

Defendants-Appellants.

_______________________________________

 

Argued May 16, 2006 - Decided July 24, 2006

Before Judges Payne and Sabatino.

On appeal from the Superior Court of New Jersey, Chancery Division, Morris County, C-190-00.

Gregory J. Coffey argued the cause for appellants (Coffey & Associates, attorneys; Mr. Coffey, of counsel and on the brief; Richard J. Dewland, on the brief).

Steven A. Lang argued the cause for respondents.

PER CURIAM

This business litigation returns to us on narrow valuation issues decided after a two-day trial in the Chancery Division in July 2005. The bench trial followed our limited remand of this matter. See Canger v. Dorine Industrial Park Partnership, et al., No. A-4743-02T2 (App. Div. Jan. 14, 2005).

We incorporate by reference the detailed transactional and procedural history recited in our January 2005 opinion. In that opinion, we remanded the matter to determine (1) the value of Albert Froysland's twenty-five percent (25%) equity interest as of the date of his death on July 21, 1993, in defendant Dorine Industrial Park Partnership ("DIP"); and (2) the compensatory damages owed to Froysland's successor in interest, plaintiff Anthony C. Canger, by DIP and codefendant Gilbert R. Jacobs arising out of the conversion of certain management fees.

Following a bench trial that largely involved competing testimony of two expert accountants, the judge issued a letter opinion on July 22, 2005 adopting the valuations of plaintiff's expert, Gino P. Carrozza, C.P.A., and rejecting those of the defense expert, Ronald Rowe, C.P.A. Specifically, the trial judge valued Froysland's 25% interest in DIP as of July 21, 1993 at $211,445, a sum which he awarded to Canger, as Froysland's assignee, in a judgment bearing 7% annual interest computed from February 23, 2000, the date that defendants presented their initial accounting to plaintiff. Additionally, the judge awarded plaintiff $29,966 in converted management fees, with prejudgment interest at the same 7% rate, but calculated from September 12, 2000.

Defendants DIP and Jacobs appeal the remand judgment. They argue that (1) Froysland's equity interest in DIP as of his 1993 death had a negative value, essentially because of certain then-contingent environmental liabilities; (2) the trial judge should have adopted the valuation of defendants' expert Rowe and rejected that of plaintiff's expert Carrozza; and (3) the trial court erred in failing to deduct certain expenses in connection with Froysland's so-called maintenance agreement with the DIP partnership. We reject these arguments, and affirm.

Froysland had an undisputed 25% percent equity interest in DIP, a partnership formed in 1977 to own and manage two commercial buildings in East Hanover. The two other partners in DIP were defendant Jacobs, who had a 50% interest, and Henry Kochan, who had a 25% interest. The DIP partnership agreement specified that a partner's interest would be liquidated upon his death, but prescribed no standard for valuing that interest.

After Froysland died in 1993, DIP failed to conduct a prompt valuation of his one-quarter share of DIP's equity. However, DIP continued to pay the two surviving partners, Jacobs and Kochan, periodic "management fees," even though such payments were not authorized by the partnership agreement. In July 1995 Canger, who had other unrelated business dealings with Froysland, purchased the latter's interest in DIP from his estate at a sheriff's sale.

In September 2000 Canger, as Froysland's successor, settled his claims against Kochan for certain monetary installments, but preserved his claims against the partnership and Jacobs. Canger then sued DIP and Jacobs in September 2000 for an accounting and various damages. After an initial trial in 2002 and a subsequent motion for reconsideration, Canger was awarded $212,007.88 on a variety of legal theories, but recovered no damages for the accounting of Froysland's one-quarter interest in DIP.

We modified that initial judgment in various respects, reducing plaintiff's recovery by $18,244.34. We also concluded that the initial judgment should have included a component for the value of Froysland's equity in DIP upon his death, consistent with the partnership agreement and also with case law holding that surviving partners are liable to account to a deceased partner's representatives for the decedent's interest in the partnership. See Blut v. Katz, 13 N.J. 374, 380 (1953). Because the trial judge had failed to assess the competing valuation proofs of the parties, we remanded for such an assessment of Froysland's interest. We also remanded the matter for a re-determination of the amount plaintiff is entitled to recover for defendants' conversion of management fees, as we were uncertain of the methodology used by the trial court to calculate its $29,966 award on that claim after the first trial. The remand proceedings, and this appeal by defendants, ensued.

The primary difference between the respective valuations of plaintiff's accountant Carrozza and defendants' accountant Rowe stems from their disparate treatment of certain contingent environmental liabilities connected with DIP's industrial property. It is undisputed that in 1984 environmental contaminants were discovered in the soil and groundwater on DIP's industrial premises. This discovery was promptly reported to the Department of Environmental Protection, which began taking regulatory action concerning the site. In October 1987 the DEP approved a clean-up plan for the property. The plan involved the placement of nine groundwater monitoring wells, which DIP thereafter installed on the site and periodically used for testing. The plan also required the design of a "pump-and-treat" system, which potentially might be necessary to channel and remediate the on-site groundwater.

In addition to these measures, in 1989 the DEP issued a directive under the Spill Act, N.J.S.A. 58:10-23.11, et seq., to DIP and to thirty-one other industrial entities in East Hanover, based upon concerns of widespread contamination of private wells in the municipality. Eventually, however, these groundwater claims were resolved. Specifically, DIP was obligated to contribute $226,675 in 2002 as its share towards the settlement of the multi-party Spill Act matter, and also was required to complete, at its own expense, all necessary groundwater remediation on its property. To secure the financing of such future on-site remediation, the DEP required the partnership to post $416,000, a sum which DIP duly advanced but which the record suggests has yet to be expended. Additionally, the DEP to date has not required DIP to install a pump-and-treat system. Indeed, ongoing soil and groundwater testing by DIP's environmental contractors suggests that such a system is unnecessary, and that natural attenuation of the tainted groundwater should suffice, although the DEP has made no final determination on that item.

While negotiating with the DEP over these matters, the partnership also pursued environmental cost recoveries against various third parties. These efforts resulted in DIP recovering approximately $1.8 million in settlement, minus its legal, expert and other transactional costs expended in pursuing those recoveries.

Based upon this chronology, defendants' accounting expert Rowe opined that DIP's past and future anticipated environmental costs, in combination, exceeded the $1.8 million that the partnership had collected from third parties. Accordingly, Rowe determined that Froysland's 25% interest in DIP, which no longer has any active operations, had a negative value. Moreover, Rowe concluded that Froysland's partnership equity likewise was worthless at the time of his death in 1993, given the prospective environmental liabilities which DIP's consultants had previously estimated could run as high as $3 million.

Plaintiff's accounting expert Carrozza disagreed with Rowe's analysis of the partnership's environmental liabilities and expenditures in several respects. Most importantly, Carrozza opined that it was unreasonable, under applicable principles of accounting, to include the $416,000 in subsequently-posted contingency funds in a valuation of Froysland's interest in DIP as of his death in 1993. Additionally, Carrozza reduced by $249,362 DIP's actual clean-up costs identified by Rowe, finding $43,446 of those costs to be duplicative and another $206,000 portion of that sum inappropriate to charge back to Froysland's interest as of 1993. Instead, Carrozza opined that a fair estimate of future clean-up costs in 1993 would have been only $160,572 (the discounted present value in 1993 of $366,488 in actual post-1993 environmental costs accepted by Carrozza), not the vastly greater sum noted by Rowe. Carrozza also reduced DIP's environmental counsel fees by $14,034, and made other adjustments.

As a result of these adjustments and differences in opinion, Carrozza determined that Froysland's equity in DIP as of July 21, 1993 amounted to $211,445, giving due recognition to the sums separately awarded to plaintiff on the conversion claim.

Having heard and considered the analyses of the respective accounting experts, the trial judge determined that plaintiff's proofs were "credible," and, in particular, "recognized the testimony of Mr. Carrozza as more compelling than that of Mr. Rowe." The judge observed that the "[d]ocumentary evidence supports this determination." While the judge acknowledged that Carrozza's forensic experience was not as extensive as Rowe's, the judge found that Carrozza's "knowledge of and facility in applying accounting principles were superior." In particular, the judge found that Carrozza's "explanations of the application of FASB 5 [Financial Accounting Standards Board Statement No. 5] and SOP 96-1 [FASB Statement of Position 96-1] were clear and made sense," whereas Rowe "misapplied" those guidelines "in reaching his conclusion that plaintiff was entitled to receive nothing for his interest in DIP." Further, the judge found that Carrozza's opinions had not been successfully impeached on cross examination. Accordingly, the judge adopted Carrozza's expert opinions on valuation in their entirety.

On appeal, defendant fundamentally argues that Carrozza's analyses, particularly as to DIP's environmental liabilities, were flawed and should not have been accepted by the trial judge. In considering those arguments, we stress that our scope of review is narrow. As a general proposition, the findings of a trial judge must be accorded considerable deference, and should be sustained if there is substantial credible evidence in the record to support them. Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474, 484 (1974). With respect to the opinions of qualified experts, a trial court is free to accept or reject the testimony of either side's expert, in full or in part. See Carey v. Lovett, 132 N.J. 44, 64 (1993); see also Brown v. Brown, 348 N.J. Super. 466, 478 (App. Div.), certif. denied, 174 N.J. 193 (2002) (applying that principle to expert testimony on valuation issues). Hence, there is nothing inherently amiss in the trial judge adopting plaintiff's expert's valuation in its entirety and rejecting the views advanced by the defense expert.

We have fully considered the specific criticisms raised on appeal of C.P.A. Carrozza's valuation of Froysland's equity interest, and conclude that none of them are sufficiently persuasive to disturb the remand judgment incorporating that valuation. Bearing in mind our deferential standard of review, we are satisfied that the proofs underlying that valuation are substantial and credible. Indeed, in our own review of the transcribed testimony of the two experts, we also are more favorably impressed with the logical force of Carrozza's opinions than those offered by Rowe in this case.

The major point of departure of Carrozza's valuation from Rowe's approach is Carrozza's exclusion of several environmental expense items post-dating Froysland's death in 1993. Those exclusions are quite reasonable in light of the inchoate nature of DIP's environmental exposure in 1993 and the fact that the $416,000 in security the partnership subsequently posted, in compliance with the DEP's mandate, has yet to be drawn down.

We agree with the trial judge that Carrozza's reduction of DIP's environmental liabilities from the higher sums reflected in Rowe's valuation comports with Financial Accounting Standards Board Statement No. 5 (March 1975), entitled "Accounting for Contingencies." That accounting guideline instructs, in pertinent part:

8. An estimated loss from a loss contingency . . . shall be accrued by a charge to income if both of the following conditions are met:

a. Information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements. It is implicit in this condition that it must be probable that one or more future events will occur confirming the fact of the loss.

b. The amount of loss can be reasonably estimated.

Applying these principles, Carrozza opined that in June 1993, the month of Froysland's death and thus the critical date of valuation, the partnership lacked sufficient information to make a "reasonable estimate" of its future environmental exposures. As of 1993, DIP's negotiations with the DEP were still ongoing, and the DEP's broader Spill Act case against DIP and the other thirty-one industrial property owners in East Hanover was years away from its resolution. The actual groundwater remedy needed for the site was still unknown. In this context of uncertainty tied to the dynamics of DIP negotiating with a governmental regulator, plaintiff's expert and the trial judge reasonably declined to include, dollar for dollar, all of the post-June 1993 environmental expense items identified by Rowe. Such an approach may not have been inexorably required, but it surely was reasonable and one which we shall affirm. We also sustain the trial court's sensible determination to accept Carrozza's decision to discount the post-1993 environmental expenses that were included in his calculations back to present value.

Apart from these accounting principles and other arithmetic considerations, we also find it eminently reasonable for the trial judge to have awarded plaintiff a positive sum for Froysland's one-quarter interest in DIP, given that the other two partners, Jacobs and Kochan, continued to pay themselves distributions out of the partnership for several years after Froysland's death. If the partnership's anticipated environmental liabilities in or about 1993 were, as defendants portray them, enormous, and the true net value of the company at that time was zero, it would have been imprudent for the surviving partners to continue to drain its assets. The actions of Froysland's partners after his death speak volumes.

We also have considered defendants' argument, implicitly rejected by the trial judge, that certain expenses for units 9 and 32 on the property should have been charged back, some of them posthumously, to Froysland's equity interest, as the result of an earlier "personal services agreement" covering the management of the premises, either by Froysland or a related entity known as "Al Froysland Associates," and as the result of the delay of Froysland's family members in vacating unit 9 after he died. We note that these matters are complicated by the partnership's suboptimal bookkeeping practices. Despite the deficiencies of the record, we are satisfied that the trial judge's valuation ruling was fundamentally sound and that no offsets for any of these cited items are warranted.

We have considered the remaining subsidiary arguments expressed in defendants' briefs, and they lack sufficient merit to require further discussion. See R. 2:11-3(e)(1)(E).

Affirmed.

 

A.C. Canger Enterprises of East Hanover, Inc., a corporation wholly owned by Anthony C. Canger, is listed with its owner in the complaint as a co-plaintiff. For sake of simplicity, we shall refer to the entity and the individual in this opinion as "plaintiff" or "Canger."

The units in the buildings were eventually divided into condominiums. At the times relevant to this litigation all units had been sold except units 9 and 32.

Defendants do not challenge in this appeal the $29,966 conversion award reinstated by the trial judge on remand, or the imposition of prejudgment interest.

Defense counsel solely attacks on appeal the substance of Carrozza's opinions, and does not renew his unsuccessful objection at trial that Carrozza, a licensed CPA, was not qualified under N.J.R.E. 702 to offer expert opinions on the environmentally-oriented valuation issues in this case.

We deem it unnecessary to rely in our analysis upon SOP 96-01, which FASB adopted three years after Froysland died in 1993.

We find inapposite defendant's citation to an out-of-state case, MT Properties, Inc. v. CMC Real Estate Corp., 481 N.W.2d 383, 389-90 (Minn. Ct. App. 1992), in which Minnesota's intermediate appellate court ruled that the contingent environmental liabilities in question there were "supported by the evidence" and thus properly had been factored into the valuation of shares of a closely-held corporation. The circumstances here are murkier and do not, as in MT Properties, involve a continuing business with a more predictable stream of future revenues and expenses, including outlays for environmental remediation. As of 1993, DIP had nearly completed the process of selling off its condominium units, a process that bogged down once the environmental problems were discovered on the property.

(continued)

(continued)

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A-6484-04T2

July 24, 2006