NIKOLAOS PSAROS Cross- v. CHRISTOS SAROPOULOS Cross- and DOROTHY SAROPOULOS, ELEFTERIOS SAROPOULOS, 547 NORTH MAIN STREET, LLC
(NOTE: The status of this decision is .)
NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
SUPERIOR COURT OF NEW JERSEY
DOCKET NO. A-4293-07T34293-07T3
DOROTHY SAROPOULOS, ELEFTERIOS
SAROPOULOS, 547 NORTH MAIN
Argued April 28, 2009 - Decided
Before Judges Winkelstein, Gilroy and Chambers.
On appeal from the Superior Court of New Jersey, Chancery Division, Ocean County, C-95-05.
Frederick E. Popovitch argued the cause for appellant/cross-respondent (Popovitch & Popovitch, attorneys; Mr. Popovitch, on the brief).
Alan C. Milstein argued the cause for respondent/cross-appellant (Sherman, Silverstein, Kohl, Rose & Podolsky, attorneys; Mr. Milstein, Jeffrey P. Resnick and Leily Schoenhaus, on the brief).
Plaintiff, Nikolaos Psaros, appeals from two orders of the Chancery Division which, while awarding him compensatory damages for defendant Christos Saropoulos's breach of an asset purchase agreement, nevertheless denied his claim for $100,000 in liquidated damages and for counsel fees. We affirm the order denying plaintiff liquidated damages, but reverse the order denying counsel fees and remand for further proceedings.
The litigation arose out of an asset purchase agreement (the agreement) in which defendant, as the sole member of New Horizon, LLC, sold plaintiff a restaurant business, the Horizon Diner (the Horizon), located on East Bay Avenue in Manahawkin. Plaintiff claimed that defendant violated a restrictive covenant in the agreement, and filed this lawsuit to enforce that covenant and for damages. After denying plaintiff's request for a preliminary restraining order, the trial court conducted a bench trial on January 8, 2008, which disclosed the following facts.
Plaintiff and defendant have each been in the diner business approximately twenty to twenty-five years. On June 18, 2001, they entered into the agreement for the sale of the Horizon. Both were represented by counsel during negotiations and execution of the agreement. For $650,000, plaintiff acquired the following: equipment, furniture and fixtures for $38,334; good will for $606,666; and a restrictive covenant for $5,000. The restrictive covenant states:
In consideration for payment of the sum of Five Thousand ($5,000.00) Dollars, Seller [defendant] hereby covenants and agrees that neither he, his wife, Dorothy Saropoulos nor his son, Elefterios Saropoulos, shall open another diner or restaurant, or engage in any way in the diner, restaurant and/or bar business within a radius of ten (10) miles from the Premises (the "Restricted Area"), for a period beginning from the Closing Date and continuing for a period of twenty (20) years (the "Restrictive Covenant"). Specifically excluded from the Restrictive Covenant is Fred's Beach Haven Diner, 4th & Bay Avenue and Beach Haven, Long Beach Island, New Jersey [of] which the Seller, or its members, may regain ownership interest. This covenant shall lapse in the event Purchaser [plaintiff] defaults under any obligation created under this Agreement and the Exhibits hereto.
In the event of a violation of this provision, Purchaser shall be entitled to recover One Hundred Thousand ($100,000) Dollars as liquidated damages from the Seller and to pursue any remedy at law or at equity in a court of competent jurisdiction.
The agreement also contains a fee-shifting provision, entitling a party who substantially prevails in litigation arising out of the agreement to counsel fees and investigative costs.
Plaintiff expanded the size and seating capacity of the diner and renamed it "Nick's Horizon Diner." In January 2005, four years after the sale of the Horizon, defendant, his wife and two other individuals, formed a company known as 547 L.L.C. The company purchased real property in Barnegat, located four to seven miles from the Horizon. Subsequently, that company leased a portion of the property, consisting of a restaurant formerly known as Boone's Tavern, to Leftor, L.L.C., a company formed by defendant's son and others. The restaurant was renamed Monte's Caf and Lounge (Monte's).
Plaintiff subsequently hired Glen Blue, a private investigator, to investigate defendant's involvement in Monte's. Blue obtained Health Department reports identifying defendant as the owner of Monte's; he saw defendant accept a bread delivery at the restaurant; and he saw him open Monte's kitchen. Blue determined that defendant opened Monte's each morning, cooked and accepted deliveries, while defendant's wife operated the restaurant during the afternoon and evening.
Defendant testified that he went to Monte's about three times a week to give his son advice regarding the restaurant. He admitted that he occasionally cooked at Monte's. He acknowledged that Monte's was within the ten-mile restricted area under the terms of the agreement.
Plaintiff testified that if not for the restrictive covenant, he would not have purchased the Horizon. He asserted that at least three employees left Horizon to work at Monte's. He admitted, however, that the Horizon did not lose business after Monte's opened, and since Monte's had closed, prior to the trial date, he did not experience an increase in business. Plaintiff was unable to name any customers who stopped patronizing his restaurant to go to Monte's.
The court upheld the validity of the restrictive covenant and found that defendant violated it. In addressing plaintiff's damages, specifically whether the court should enforce the liquidated damages provision of the agreement, the court found:
[P]laintiff candidly testified that during the course of the time that Monte's was opened that he did not see an appreciable difference in the gross income to his business and could not substantiate . . . that he, in fact, suffered any loss whatsoever that he could justify before the Court. As a result of his inability to do so the plaintiff's attorney argues that that's exactly why you have a liquidated damages clause, because you can't quantify it. But that's different than arguing that there is, in fact, no loss.
Thus, while concluding that defendant had violated the restrictive covenant, the court found that plaintiff did not suffer any damages as a result of that violation. Consequently, the court declined to enforce the liquidated damages clause. Relying on Metlife Capital Finance Corp. v. Washington Avenue Associates L.P., 159 N.J. 484, 504 (1999), the court stated:
So having said all of that, to impose $100,000 liquidated damages clause here, to impose that or enforce it would be nothing more than a penalty against the defendant, and that would be fundamentally unfair and that flies in the face of New Jersey law.
The court held that awarding plaintiff $100,000 in damages for the defendant's breach of the restrictive covenant would be punitive, not compensatory.
The court did award plaintiff $10,000 in compensatory losses, and $11,255 for plaintiff's investigatory costs necessary to enforce the restrictive covenant. Nevertheless, the court declined to award plaintiff attorneys' fees. Rather, because the court had not entered a preliminary injunction, had not enforced the agreement's liquidated damages provision, and had dismissed plaintiff's complaint as to three of the four defendants, the court found that plaintiff had not obtained a judgment "substantially in his favor so as to be entitled to expenses under the terms of the agreement."
On appeal, the issues are whether the court erred by failing to enforce the liquidated damages clause of the agreement and by failing to award plaintiff counsel fees. We turn first to whether the trial court abused its discretion in determining that the liquidated damages clause was in effect a penalty, and consequently unenforceable.
The "touchtone" as to whether a liquidated damages clause is enforceable is reasonableness. Metlife, supra, 159 N.J. at 495. Factors to be considered in assessing reasonableness include the intention of the parties, actual damages sustained, and the parties' bargaining power. Ibid. In a commercial contract, liquidated damages provisions are presumptively reasonable, with the burden falling upon the party challenging the clause to prove its unreasonableness. Id. at 496. The test of reasonableness is applied "either at the time the contract is made or when it is breached." Id. at 502. Here, the trial judge did not abuse his discretion in concluding that defendant met his burden of establishing the unreasonableness of the $100,000 liquidated damage clause.
Though there may have been reason to foresee the need for a liquidated damages clause at the time the parties made the agreement, such a consideration would have anticipated an unquantifiable loss to the buyer's business as a result of the seller's breach of the covenant not to compete. Under the facts here, however, plaintiff sustained no actual damages. While Monte's was open, plaintiff's restaurant did not suffer a decrease in business, and after Monte's closed, his business did not increase. Put simply, plaintiff was unable to establish any monetary loss as a result of defendant's violation of the restrictive covenant.
Although stipulated damages among commercial entities may provide useful remedies in many instances, they are applicable only when there will be difficulty in assessing damages, not in a situation where the party seeking to enforce the liquidated damages provision has sustained no damage, like here. This is not a case where the damages are difficult to quantify; in such a case, a liquidated damages clause may be enforceable. Where the buyer has not suffered any damages, the liquidated damages clause simply constitutes a penalty for the violation of the restrictive covenant.
We turn next to plaintiff's argument that he is entitled to counsel fees as the prevailing party under the terms of the agreement. We find merit to that argument.
The agreement states that if
a party hereto seeks to enforce any of its rights hereunder in a court of competent jurisdiction, and if such action results in a judgment substantially in favor of either party (a dismissal, with prejudice, by the party commencing such action, shall be deemed to be a judgment in favor of the other party for the purposes of this section), then and in such event the prevailing party shall be entitled to recover from the other party, in addition to the relief awarded the prevailing party in or by judgment, all court costs, reasonable investigation expenses, and reasonable attorneys' fees . . . incurred by the prevailing party in such action.
Here, the trial court found that neither party was substantially the prevailing party, in that both prevailed in part. The court stated:
The Court although enforcing the restrictive covenant found that the damages themselves were negligible. I did find in favor of the defendant that the $100,000 provision was, in fact punitive in nature. So the Court has to look at what is fair and equitable under all the circumstances. . . .
. . . .
I think on balance when you look at the totality of the circumstances, the defendant exercised appropriate judgment in defending three of the four [original defendants]. He did prevail on throwing out the liquidated damages; the damages themselves were negligible under these circumstances.
The court consequently determined that "both parties should bear their own legal expenses as a result of the outcome of this particular case and the legal issues advanced by the plaintiff and by the defendant."
"A plaintiff is considered 'prevailing' if he is successful on any significant issue which benefits the party bringing the suit." Frank's Chicken House, Inc. v. Mayor and Council of Manville, 208 N.J. Super. 542, 546 (App. Div. 1986). Here, plaintiff received a judgment substantially in his favor. Although plaintiff initially failed in his attempts to obtain a temporary restraining order, following a trial, the judge found that defendant violated the restrictive covenant; and awarded plaintiff compensatory damages for the breach and reasonable investigative costs incurred by plaintiff's investigator. In that sense, plaintiff was a prevailing party, having substantially prevailed on a number of his claims.
Our decision is informed by the language of the agreement, which provides not only for attorney's fees, but also for reasonable investigation expenses when a party obtains a judgment substantially in that party's favor. Here, the court in fact awarded plaintiff reasonable investigation expenses. The court could only do so under the terms of the agreement if it found that plaintiff obtained a judgment substantially in his favor. In other words, the agreement establishes the same standard to award reasonable investigation expenses as it does to award counsel fees. Having inferentially found that plaintiff met that standard so as to be awarded investigation costs, it was inconsistent for the court to conclude that plaintiff did not meet that standard so as to be entitled to counsel fees. Plaintiff's limited success may be taken into account in establishing the quantum of counsel fees to which he is entitled, but did not justify the court's conclusion that counsel fees should not be awarded at all.
Consequently, we affirm the order declining to enforce the liquidated damages clause; we reverse the order denying plaintiff counsel fees, and remand for the court to determine the amount of fees. Because the fee-shifting provision of the agreement provides for counsel fees not only for the trial court proceedings, but also for "appellate proceedings," on remand, the court should also consider what we expect to be plaintiff's claim for counsel fees based on his limited success in this appeal. R. 2:11-4.
Affirmed in part, reversed in part, and remanded.
At oral argument before this court, defendant withdrew his cross-appeal.
Prior to trial, the court dismissed plaintiff's complaint against all defendants except Christos Saropoulas.
Elefterios Saropoulos is also referred to as Lefteddy Saropoulos.
The $10,000 compensatory damage award was related to the time plaintiff lost in seeking to enforce the restrictive covenant, not to any loss caused by the violation of the restrictive covenant. Defendant has not appealed from that damage award.
May 20, 2009