PAUL SCHMECK v. THOMAS KRALL -

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-4710-07T34710-07T3

PAUL AND CAROL SCHMECK,

Plaintiffs-Appellants,

v.

THOMAS AND SHARON KRALL,

Defendants-Respondents.

_______________________________________________________

 

Argued January 29, 2009 - Decided

Before Judges Parrillo, Lihotz and Messano.

On appeal from the Superior Court of New Jersey, Law Division, Special Civil Part, Cape May County, Docket No. DC-003010-07.

Richard Kitrick argued the cause for appellants (McCrink, Kehler & McCrink, attorneys; Mr. Kitrick, on the brief).

Michael P. Stanton argued the cause for respondents (Taht, Stanton & McCrosson, P.C., attorneys; Mr. Stanton, on the brief).

PER CURIAM

Following a non-jury trial, judgment was entered dismissing plaintiffs Paul and Carol Schmeck's complaint against defendants, Thomas and Sharon Krall, and awarding defendants $14,722.31 on their counterclaim. In dismissing the complaint, the judge determined that an escrow agreement, signed by all parties on the day of closing, modified the existing real estate contract, entitling defendants to keep the escrow monies that were the subject of the complaint. As to the counterclaim, the judge determined that plaintiff had violated the implied covenant of good faith and fair dealing, and committed equitable fraud, entitling defendants to additional damages.

Plaintiffs contend that the "competent, relevant, and reasonably credible evidence" fails to demonstrate that the escrow agreement modified the terms of the existing contract. As to judgment on the counterclaim, plaintiffs argue that the judge mistakenly admitted hearsay testimony, without which the evidence was insufficient to support a finding of liability against them.

We have considered the arguments raised in light of the record and applicable legal standards. We affirm in part, and reverse in part.

I.

Plaintiffs entered into a written contract to sell their condominium unit, 900 Palen Avenue, Unit C6, Ocean City (the unit), to defendants for $650,000. The agreement contained the following paragraph that was added to the form contract:

Seller agrees to put into an escrow account $10,000 toward the bulkhead replacement. If, within six months of settlement date, the bulkhead is not scheduled to be replaced, the money shall revert back to the seller with no further commitment on the part of the seller.

Pursuant to the contract terms, an early closing was to occur on April 7, 2006, a concession defendants claimed to have made to plaintiffs.

On that day, the parties appeared at the closing without counsel. The title agent conducting the closing agreed to serve as escrow agent. She composed a written "Escrow Agreement" (the escrow agreement) on the letterhead of the title agency, acknowledging receipt of $10,000 from the settlement proceeds. The escrow agreement further provided in relevant part,

[These] [f]unds [are] to be held to pay the cost of replacement of the Bulkhead. Said replacement is to be scheduled within 180 days from the date of closing. Upon notification by the Buyer of scheduled repairs, funds will be released to the invoicing contractor. Balance of any monies remaining after said repairs are completed, shall be returned to the Seller. In the event that said replacement is not scheduled within the time permitted, all funds shall be released by the Company, with no further notice or approval required, to Buyer, to make the repairs.

The agreement was signed by plaintiffs, defendants, and the title agent. The closing was consummated without any apparent problem.

On November 7, 2007, plaintiffs filed a complaint in the Special Civil Part alleging that bulkhead repairs had not occurred, nor were they scheduled, and defendants failed to release the $10,000 placed in escrow at closing. Plaintiffs sought relief under theories of breach of contract, quasi-contract/unjust enrichment, and promissory estoppel.

Defendants subsequently filed an answer and counterclaim alleging breach of contract, violation of the covenant of good faith and fair dealing, and legal and equitable fraud. They alleged that sixteen days after closing, a series of special assessments totaling more than $20,000 were made by the condominium association (the association) for necessary repairs. Defendants further alleged that plaintiffs were aware of the need for these repairs having attended an association meeting approximately one year before closing, at which an engineering report from Czar Engineering (the Czar report) detailing necessary "extensive renovations, repairs or improvements" was discussed.

Plaintiff Paul Schmeck testified that defendant Thomas Krall visited the unit at least two times prior to the closing, and expressed concerns about "three things," "the view of the bridge, the bulkhead, and the mud in the boat slip." Plaintiff put defendant on the phone with the association's property manager in an attempt to have the questions answered. With respect to the bulkhead, which plaintiff acknowledged was old and in need of repair, the parties agreed to escrow $10,000. Plaintiff understood that if the bulkhead was to be replaced, defendants were entitled to keep the escrow; however, if the bulkhead was only to be repaired, the escrow would be returned to plaintiffs.

Plaintiff acknowledged signing the escrow agreement at closing after it was "briefly described" by the agent. He did not read it beforehand, and believed it did not alter the contractual language. He had no contact with defendants until a month later when defendants called, told him "they were assessed," and asked plaintiffs to pay a share of the assessment. Plaintiff explained that he "knew nothing about any assessments at the time of settlement and [he] didn't feel that [he] was responsible." When he subsequently tried to obtain the $10,000 escrow from the title agency, he found out that the monies had already been released to defendants.

On cross-examination, plaintiff admitted that he was aware of three engineering reports prepared on behalf of the condominium association. Although aware of their contents, he never disclosed the reports to defendants, admitting that he discussed with defendants only the "repair[] or replacement" of "[t]he bulkhead[] and the mud in the slips." Plaintiff acknowledged seeing the Czar report, dated April 9, 2005, which contained an opinion as to the "structural conditions" of the condominium. But plaintiff also contended that "[a]ll three engineers had different opinions," and that individual homeowners had different ideas as to what should be, or was required to be, repaired. Plaintiff acknowledged that his certified answers to interrogatories indicated the escrow was for the purpose of defraying the costs of either repair or replacement of the bulkhead.

Defendant, a mechanical engineer, testified that before purchasing the unit, he visited "two or three times." He did not hire a home inspector, because he "thought [he] could inspect the inside [himself]," having done construction work and home repairs. Based upon what he saw, the unit was "in pretty good shape inside." Defendant contended that at the closing, everyone signed the escrow agreement without "a whole lot" of discussion. He claimed the agreement was intended to cover both replacement and repairs of the bulkhead. On April 22, 2006, defendant attended a condominium association meeting and was handed a copy of the Czar report. A contractor was present and everyone was "discussing all these repairs." He and his wife were "floored," and claimed that they would not have closed on the unit if they were aware of the issues raised in the report. Defendants then received a series of three assessment notices from the association over the next four months containing amounts due based upon each unit's pro rata share. These were for various repairs to the common elements of the association, but not the bulkhead. Defendants paid all three assessments.

Defendant identified copies of the minutes from the association's May 21, 2005 meeting that included discussion of the Czar report. Plaintiffs were noted as being present during the meeting. Defendant ultimately became president of the condominium association. Rather than incurring the significant costs for total replacement of the bulkhead, he suggested and received the association's approval to repair the structure instead. Proposals to make the repairs were received in the summer of 2006. However, given the three special assessments already made, the association put off any further special assessment until April 2007 and work began in September. Defendants paid an additional amount as their share of the assessment for bulkhead repairs.

On cross-examination, defendant admitted that the two engineers called to examine the bulkhead since he owned the unit had a difference of opinion as to whether it should be repaired or replaced. He also acknowledged that some of the items contained in the association's assessment notices were not discussed in the Czar report at all, and he produced no documents indicating that the association had actually paid any contractors to perform the work contained in the assessment notices. Defendant admitted that before the closing, he spoke to the association's property manager who advised that no special assessments were planned.

On rebuttal, plaintiff identified the two other engineering reports that were commissioned by the association, one dated June 3, 2005 by the Hyland Design Group, the other, dated June 2, 2005, prepared by Walker, Previti, Holmes & Associates. He further testified that he served on the association board of directors for five years, from 2001 to 2006. Plaintiff explained the substance of the discussions within the association regarding the Czar report, noting that some conditions listed in the report were possible findings that required further investigation. He also noted that some unit owners wanted to use the report to justify additional work they wanted done. He explained:

It seemed every time we got a professional in or someone with credentials to examine or give us suggestions it was always second guessed, and it seemed like the owners tried to get other people in to tell them what they wanted to hear. It was very frustrating . . . . This was the typical attitude of the condo all five years that I was there.

Plaintiff examined the three special assessment letters defendants produced and denied knowing about many of the items of work contained therein. He claimed much of the work was "cosmetic [], nothing to do with the structure."

All three engineering reports were moved into evidence, the judge concluding without any significant discussion that he "w[ould] consider them all." However, during closings, plaintiffs renewed an objection they initially made during the testimony, claiming the reports were hearsay and the judge should not consider their contents. We discuss this particular aspect of plaintiffs' appeal in greater detail below.

In an oral opinion that immediately followed trial, the judge found that the escrow agreement was intended to cover the "replace[ment] or repair of the bulkhead" and amended the existing contract. In particular, the judge placed emphasis on the plaintiffs' admissions in their interrogatory answers to this effect. The judge found that any "ambiguity in the language was overcome by . . . the intent of the parties . . . which was to do repair and replace[ment]" of the bulkhead. He dismissed plaintiffs' claim for the return of the $10,000 escrow.

Turning to defendants' counterclaim, the judge found that "what should have been disclosed in this case is all of the engineering reports, especially from one professional, an architect, to another professional [ ] an engineer." Citing the "covenant of good faith and fair dealing [] implied in every agreement," the judge reasoned,

When you have material information that may affect the transaction and you don't disclose that information, and the testimony is here and I accept it that if, in fact, that information had been known with respect to the three engineering reports, that [defendants] may not have gone forward with the transaction. There may have been a different negotiation . . . . That may have happened but we'll never know . . . .

. . . .

And so the Court finds that there was a breach of the implied covenant of good faith and fair dealing here with respect to the entering into of the contract.

Citing the specifics of the Czar report, the judge noted defendants' "proofs [] do not need to be . . . that something was done or not done, the proofs here [] only need to be that there were assessments made by the condominium association based upon these documents and that those assessments that were made were near term, that is they were close at hand." The judge also concluded defendants had proven "equitable fraud." After calculating the amount of the assessments defendants paid, plus additional amounts for bulkhead repairs, the judge entered judgment for $14,722.31, giving plaintiffs credit for the $10,000 escrow already released to defendants. This appeal ensued.

II.

Our review of the factual findings made by the trial judge in a non-jury trial is quite limited. Estate of Ostlund v. Ostlund, 391 N.J. Super. 390, 400 (App. Div. 2007). "'[W]e do not weigh the evidence, assess the credibility of witnesses, or make conclusions about the evidence.'" Mountain Hill, L.L.C. v. Twp. of Middletown, 399 N.J. Super. 486, 498 (App. Div. 2008) (quoting State v. Barone, 147 N.J. 599, 615 (1997)). In general, the judge's factual "findings . . . should not be disturbed unless they are so wholly insupportable as to result in a denial of justice[.]" Rova Farms Resort, Inc. v. Investors Ins. Co., 65 N.J. 474, 483-84 (1974) (quotation omitted). However, "[a] trial court's interpretation of the law and the legal consequences that flow from established facts are not entitled to any special deference." Manalapan Realty, L.P. v. Twp. Comm., 140 N.J. 366, 378 (1995).

A.

Plaintiffs argue that the escrow agreement was not an enforceable modification of the contract of sale because it did not reflect "a meeting of the minds," and because no additional consideration was exchanged. Since the bulkhead was not replaced, they contend the escrow monies should have been released to them. We disagree.

"A written contract is formed when there is a 'meeting of the minds' between the parties, evidenced by a written offer and an unconditional, written acceptance." Morton v. 4 Orchard Land Trust, 180 N.J. 118, 129-30 (2004) (quoting Johnson & Johnson v. Charmley Drug Co., 11 N.J. 526, 538-39 (1953)). After forming the contract, the parties "may, by mutual assent, modify it." County of Morris v. Fauver, 153 N.J. 80, 99 (1998). "A proposed modification by one party to a contract must be accepted by the other to constitute mutual assent to modify." Id. at 100. "Unilateral statements or actions made after an agreement has been reached or added to a completed agreement clearly do not serve to modify the original terms of a contract, especially where the other party does not have knowledge of the changes, because knowledge and assent are essential to an effective modification." Ibid. An agreement to modify an existing contract "must be based upon new or additional consideration." Ibid.

The changes to the original contract made by the escrow agreement were not imposed unilaterally upon plaintiffs without their knowledge. They executed the document at closing after it was briefly discussed with them by the title agent. Compare Bonnco Petrol, Inc. v. Epstein, 115 N.J. 599, 604-05 (1989) (finding unilateral alteration of contract as basis of equitable fraud and not modification of the parties' oral agreement). There was no evidence regarding the execution of the escrow agreement that would support a finding that plaintiffs were in any way misled about its contents.

Although plaintiffs contend they did not read the escrow agreement, the judge was free to disregard that evidence. Moreover, "in the absence of fraud, one who does not choose to read a contract before signing it cannot later relieve himself of its burdens." Moreira Constr. Co. v. Moretrench Corp., 97 N.J. Super. 391, 394 (App. Div. 1967), aff'd 51 N.J. 405 (1968). In concluding plaintiffs understood the escrow agreement now contemplated repairs to the bulkhead, as well as replacement, the judge relied upon plaintiffs' own interrogatory answers in which they acknowledged such an understanding. Plaintiffs also testified that the bulkhead was in need of repairs, and that defendants were concerned about its condition prior to executing the original contract. Therefore, there were sufficient facts upon which the trial judge could conclude that the parties intended the escrow agreement to modify the existing contract. Furthermore, we do not think the terms of the escrow agreement, while significantly different from the term of the original agreement, are ambiguous.

With respect to plaintiffs' argument that the modification lacked any additional consideration and is therefore unenforceable, we note the trial judge did not address the issue because it was not raised before him. "It is a well-settled principle that our appellate courts will decline to consider questions or issues not properly presented to the trial court when an opportunity for such a presentation is available 'unless the questions so raised on appeal go to the jurisdiction of the trial court or concern matters of great public interest.'" Nieder v. Royal Indemn. Ins. Co., 62 N.J. 229, 234 (1973) (quoting Reynolds Offset Co., Inc. v. Summer, 58 N.J. Super. 542, 548 (App. Div. 1959), certif. denied, 31 N.J. 554 (1960)). We therefore do not consider the argument that the modification lacked consideration because it was not raised below.

B.

Turning to the issues relating to the counterclaim, plaintiffs argue that the judge erred by admitting into evidence various defense exhibits and the testimony that accompanied them. In particular, plaintiffs argue the Czar report was hearsay and its admission highly prejudicial because by relying upon the content of the Czar report, and linking it to specific items contained on the three special assessment notices, the judge determined plaintiffs had breached the implied covenant of good faith and fair dealing and committed equitable fraud.

The Czar report first arose during cross-examination of plaintiff. Plaintiffs' counsel objected to its admission, arguing the document was hearsay. Defense counsel explained he wished to establish "that [plaintiffs] w[ere] in possession of [it]." The judge ruled that the report could be used for credibility purposes only and could not be utilized to "substantiate [defendants] damages claim" or for the "substantive issues of any repairs."

During direct examination, defendant was asked to identify the three assessment letters, each of which delineated the items for which the special assessments were earmarked. The first, dated April 22, 2006, assessed the unit owners "$75,000 for building/siding restoration," of which defendants' share was $11,070. The second, dated June 27, 2006, listed seven work items totaling $52,730, of which defendants' share was $7,782.95. The third, dated August 30, 2006, assessed the unit owners $12,000 "for [] restoration of the rear, first floor decks[,]" of which defendants' share was $1771.20.

Defendant was then asked whether the Czar report specifically spoke to the need for some of these repairs. Over the objection of plaintiffs' counsel, he was repeatedly permitted to read from the report to support his claim that the assessments were specifically for repairs mentioned in the report. Ultimately, the following exchange took place between plaintiffs' counsel and the judge:

Palintiffs' counsel: Judge, again, I'm going to object to that testimony. He's reading it from the report, and they're offering that testimony to show that the building was in poor condition, and that was the opinion of just this expert.

Judge: Actually, if it was just an assessment that was made, and they were paid, and the court will take it in the context of, as part of the counterclaim to consider it in that. If the Court needs to, if the court feels that it needs to, the court can adjourn this matter. I'm sitting without a jury. I can adjourn the matter if we need to, to come back another day if we don't have the engineer available, if the Court feels it's necessary. At the present time the Court doesn't feel it's necessary.

(Emphasis added.)

Plaintiffs contend that the Czar report, the assessment letters, the reports of the other two engineering firms, and the proposal furnished by the company, Blue Water Piling, that ultimately performed the bulkhead repairs, were all inadmissible hearsay, introduced to prove the truth of the documents' contents. Hearsay is defined as "a statement, other than one made by the declarant while testifying at the trial or hearing, offered in evidence to prove the truth of the matter asserted." N.J.R.E. 801(c). Though not specifically addressed by the trial judge, we concede that some of the documents may have been admissible under various exceptions to the hearsay rules. However, the Czar report was inadmissible to prove the truth of its contents, something that defendant repeatedly was questioned about during his testimony.

The prejudice resulting was obvious. Plaintiffs could not cross-examine the author of the report and thus were unable to impeach defendants' "proofs" on a critical issue, i.e., whether the contents of the Czar report denote serious structural and other deficiencies in the common elements of the condominium association. The only proof that such conditions existed was the report itself. Plaintiffs testified that but for the condition of the bulkhead, which was fully disclosed to defendants, the repairs were cosmetic and the subject of conflicting views by the unit owners regarding necessity. Defendants offered no independent proof of the materiality or necessity of the repairs contained in any of the assessments, other than their own testimony that the exterior stucco on the buildings, the subject of the first and largest assessment, was in "bad shape."

The judge, it seems, believed that the only relevance to the report was that plaintiffs knew of its existence and failed to disclose it to defendants prior to the purchase. However, as we subsequently explain, failing to advise defendants before closing of the existence of a report cannot be the critical omission upon which plaintiffs' liability rests.

(i)

In every contract, there is an implied covenant that neither party shall commit any act which destroys or injures the right of the other party to enjoy the fruits of the contract. R.J. Gaydos Ins. Agency, Inc. v. Nat'l Consumer Ins. Co., 168 N.J. 255, 277 (2001). "The party claiming a breach of the covenant of good faith and fair dealing 'must provide evidence sufficient to support a conclusion that the party alleged to have acted in bad faith has engaged in some conduct that denied the benefit of the bargain originally intended by the parties.'" Brunswick Hills Racquet Club, Inc. v. Route 18 Shopping Ctr. Assocs., 182 N.J. 210, 225 (2005) (quoting 23 Williston on Contracts 63:22, at 513-14 (Lord ed. 2002) (footnotes omitted)). "Bad motive or intention is [an] essential" part of the plaintiff's claim. Wilson v. Amerada Hess Corp., 168 N.J. 236, 251 (2001). "[A] party can violate the implied covenant of good faith and fair dealing without violating an express term of a contract." Sons of Thunder, Inc. v. Borden, Inc. 148 N.J. 396, 422-23 (1997). A party's failure to disclose its true intentions or the state of its knowledge may be sufficient to prove a breach of the covenant if it is accompanied by the requisite malicious motive. See Brunswick Hills, supra, 182 N.J. at 229 (finding breach of the covenant where defendant "engaged in a pattern of evasion" to detriment of plaintiff that was attempting to exercise its option to purchase); Bak-A-Lum Corp. v. Alcoa Bldg. Prods., 69 N.J. 123, 126-30 (1976) (applying covenant to termination of at-will exclusive distributorship in which defendant intentionally misled and caused harm to plaintiff).

Here, the judge did not find that plaintiffs acted with the requisite "bad motive or intention" in failing to disclose the existence of the Czar report to defendants. In fact, he reiterated the opposite sentiment several times, noting that he "d[id] not find anybody to be liars, thieves or scoundrels[,]" and that plaintiff and defendant had conducted themselves in "a professional and ethical way[,]" including "through this transaction," which he characterized as a "misunderstanding [reached] without advice." He noted that if plaintiffs "had sought the advice of a competent attorney" they would have disclosed "everything [they] kn[e]w about the property."

Secondly, we fail to see how defendants were denied the opportunity to fully enjoy the fruits of the contract. The agreement provided for the property to be sold "as is." It further provided defendants with the contingency to conduct a home inspection, something they specifically eschewed. To succeed on this score, defendants needed to prove that plaintiffs withheld material information from them regarding the condition of the property. Evidence as to the need for repairs, and their material nature, was necessary. Defendant presented no expert evidence on this issue, relying instead upon the inadmissible hearsay contained in the Czar report.

We conclude, therefore, that there was insufficient proof to establish that plaintiffs violated the implied covenant of good faith and fair dealing.

(ii)

The other theory of liability upon which the judge based his verdict was equitable fraud. Common law fraud requires proof of five elements: "(1) a material misrepresentation of a presently existing or past fact; (2) knowledge or belief by the defendant of its falsity; (3) an intention that the other person rely on it; (4) reasonable reliance thereon by the other person; and (5) resulting damages." Gennari v. Weichert Co. Realtors, 148 N.J. 582, 610 (1997). "The 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." Jewish Ctr. of Sussex County v. Whale, 86 N.J. 619, 625 (1981) (internal citation omitted). In the context of a real estate sale, a sufficient misrepresentation occurs if the seller fails to disclose "on-site defective conditions if those conditions were known to them and unknown and not readily observable by the buyer." Strawn v. Canuso, 140 N.J. 43, 59 (1995). "[T]he defective condition must be latent and not reasonably observable to the purchaser[] . . . [and] the nondisclosure must be significant." Correa v. Maggiore, 196 N.J. Super. 273, 281 (App. Div. 1984) (internal citation omitted).

As noted above, defendants' only proof as to the existence of defects at the property was the Czar report, the substance of which was hearsay. Moreover, defendant testified that he actually observed the condition of the exterior of the buildings and therefore plaintiffs did not conceal any "latent defect" from defendants. There was no proof to indicate that plaintiffs were aware that the association was going to declare a special assessment to make any repairs contained in the three assessment letters upon which defendants relied. In fact, defendant testified that the association's property manager told him no special assessments were planned. We conclude that defendants failed to prove the essential elements of equitable fraud. As a result, we reverse the judgment entered in their favor on the counterclaim.

The dismissal of plaintiff's complaint is affirmed. The judgment entered in favor of defendants is reversed and vacated.

Affirmed in part; reversed in part.

 

Because the pivotal testimony in the case was provided by these two witnesses, in reciting the evidence adduced at trial we use the singular, "plaintiff" and "defendant."

Carol Schmeck's testimony corroborated much of her husband's. She, too, acknowledged her earlier interrogatory answers.

Although the issue was not addressed by the trial judge, and has not been specifically raised by the parties, only equitable relief is available in a successful claim for equitable fraud. NCP Litigation Trust v. KPMG LLP. 187 N.J. 353, 395 n.8 (2006). In this case defendants sought only money damages, relief that is unavailable on such a claim, and could not have been awarded by the judge. Ibid. Nevertheless, we continue our analysis because it is applicable to both legal and equitable fraud claims and compels the same result.

(continued)

(continued)

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A-4710-07T3

June 25, 2009