MARINER'S BANK v. 4921 BERGENLINE CORP

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-0

MARINER'S BANK,

Plaintiff-Respondent,

v.

4921 BERGENLINE CORP. and

MEDARDO PEREZ,

Defendants/Third-Party

Plaintiffs-Appellants,

v.

ROLANDO CRIBEIRO, C&P BUILDERS,

INC., JOSEPH A. DOMINGUEZ and

STEVEN P. ORIA,

Third-Party Defendants,

and

FRED DAIBES,

Third-Party Defendant-

Respondent.

_________________________________

January 23, 2014

Argued September 24, 2013 Decided

Before Judges Reisner and Ostrer.

On appeal from the Superior Court of New Jersey, Chancery Division, Hudson County, Docket No. F-055838-10.

Mateo Perez argued the cause for appellants.

Douglas A. Stevinson argued the cause for respondent Mariner's Bank (Windels Marx Lane & Mittendorf, LLP, attorneys; Mr. Stevinson, on the brief).

Robert P. Travers, P.C., attorneys for respondent Fred Daibes, joins in the brief of respondent Mariner's Bank.

PER CURIAM

Defendants Medardo Perez and 4921 Bergenline Corp. (Bergenline) appeal from the trial court's order denying their motion to vacate an earlier order dismissing their counterclaim and third-party complaint filed in response to a foreclosure action in Hudson County. The court held defendants' claims were barred by the doctrine of res judicata, as they were essentially the same claims that the Chancery Division in Bergen County dismissed in a final, unappealed order. The court also held that defendants lacked standing to assert their claims, which belonged to a separate business entity, RC Associates, a limited liability company. We agree and affirm.

I.

We discern the following facts from the record.1 Perez is the sole shareholder of Bergenline. He also is one of two members of RC Associates, each holding a fifty-percent ownership interest. The other member is Edward Dolan. Both Bergenline and RC Associates borrowed funds from plaintiff, Mariner's Bank (Mariner's).

In 2009, RC Associates constructed residential condominiums on land in Weehawken it acquired from Perez and third-party defendant Rolando Cribeiro. RC Associates utilized a construction company that Cribeiro controlled, C & P Builders, Inc. (C&P). In 2007, Mariner's, with whom Cribeiro had a prior relationship, provided a construction loan of over $2 million to RC Associates. The loan was secured by a mortgage on the Weehawken property.

Also in 2007, Bergenline borrowed $1.5 million from Mariner's to refinance the mortgage on the property it owned at 4919-4921 Bergenline Avenue in West New York. Perez utilized some of the net proceeds of Bergenline's West New York loan to purchase some of the parcels in the Weehawken project. He provided a personal guaranty of the West New York mortgage loan. He also executed an assignment of rent from Bergenline's tenant, a commercial bank.

Perez alleged that unbeknownst to him or Dolan, Cribeiro obtained a modification of the Weehawken loan to RC Associates, securing $250,000 in additional credit. Perez alleged that Cribeiro, also without Perez's knowledge, obtained a separate $300,000 mortgage loan encumbering other property that RC Associates owned. Perez alleged Cribeiro forged his and Dolan's signatures in order to obtain these additional loans, and then utilized the loan proceeds for purposes that did not serve the interests of RC Associates. Perez asserted that third-party defendants Fred Daibes, Joseph A. Dominguez and Steven P. Oria all Mariner's officers were aware of the forgery and permitted the additional, unauthorized borrowing.

Perez alleged that he discovered the additional borrowing when the condominium units were sold. At the closing of each unit, the gross proceeds of sale were paid to Mariner's, which then deducted pro-rated amounts due on the loans. Perez also alleged that Mariner's wrongfully paid to Cribeiro, instead of RC Associates, receipts from the closings that exceeded the amounts due on the loans. Perez claimed between $1.3 and $1.6 million in such "profits" were diverted from RC Associates.

Perez asserted that as a result of these various misdeeds, he was deprived of his anticipated share of RC Associates' profits from the Weehawken project. He asserted that he intended to transfer those funds to Bergenline, to pay the mortgage loan on the West New York property. As he was unable to do so, Bergenline defaulted on the West New York mortgage loan.

On November 6, 2010, Mariner's filed its foreclosure action in connection with the Bergenline mortgage loan in Hudson County. Mariner's also sued Perez on the personal guaranty, and began collecting rent from Bergenline's tenant, pursuant to the assignment of rent.

Nine days later, Perez filed a separate nine-count complaint in the Chancery Division in Bergen County against Mariner's, Cribeiro, C&P, the three officers, and Dolan. He set forth the alleged misdeeds in connection with the Weehawken project loans, which we have already described. Perez asserted that the defendants converted monies that belonged to Perez and RC Associates. However, it was evident from the pleadings that Perez's asserted property interests were secondary to those of the limited liability company.

Perez sought relief based on claims of legal fraud by the bank officers (count one) and negligent hiring by Mariner's (count two). He asserted against the officers and Mariner's claims of negligence (count three), and breach of good faith and the implied covenant of good faith and fair dealing (counts four and five); fraudulent scheme to convert RC Associates' and Perez's assets (count six); civil conspiracy (count seven); and violation of the New Jersey Racketeer Influenced and Corrupt Organizations Act, N.J.S.A. 2C:41-1 to -6.2 (count eight). He sought an accounting from Mariner's, the officers, and Cribeiro (count nine). Perez sought no relief from Dolan and C&P, although he named them as defendants.

In lieu of an answer, Mariner's moved to dismiss on behalf of all the defendants. Among other arguments, movants argued that the complaint set forth claims that belonged solely to RC Associates, and Perez lacked standing to assert them. Perez cross-moved to restrain Mariner's' collection of rent from Bergenline's tenant pending adjudication of the Bergen County case.

The trial court granted Mariner's' motion. In a written opinion filed April 1, 2011, the court interpreted the complaint to allege, essentially, that the defendants "fraudulently diverted profits rightfully earned by R.C. Associates." The court concluded, "While Plaintiff claims a direct cause of action, if profits were diverted from R.C. Associates, the cause of action resides with [R.C. Associates]." Citing Strasenburgh v. Straubmuller, 146 N.J. 527, 550 (1996), the court found that Perez had not alleged a "special injury" that would entitle him to sue personally, instead of derivatively, for the benefit of the business entity. The court dismissed the complaint without prejudice, presumably to permit the re-filing of the complaint by RC Associates.

The court also held that dismissal of the action precluded the cross-motion to restrain Mariner's' rent collection. "Additionally, in any event the Court finds that any application to restrain the bank from exercising its rights under the Assignment of Rents should be properly filed within the context of the previously filed Hudson County mortgage foreclosure action."

Perez did not appeal from the dismissal, nor did RC Associates file a complaint on its own behalf. Instead, Perez and Bergenline renewed the Bergen County allegations in their counterclaim and third-party complaint in the Hudson County foreclosure action. They again sought relief based on claims of legal fraud by the bank officers and, this time, added claims against Mariner's for fraud (count one). In all other respects, they asserted against the officers and Mariner's the identical claims raised in the Bergen County action, using virtually identical language. They alleged negligent hiring, negligence, breach of good faith and the implied covenant of good faith and fair dealing, fraudulent scheme to convert RC Associates' and Perez's assets, civil conspiracy, and violation of the New Jersey Racketeer Influenced and Corrupt Organizations Act. They likewise also sought an accounting from Mariner's, the officers, and Cribeiro.

Mariner's' foreclosure complaint was ultimately dismissed after Bergenline satisfied the loan by refinancing. Mariner's then filed a motion in June 2012 to dismiss the counterclaim and third-party complaint, arguing that it was barred by res judicata based on the Bergen County dismissal, and that Perez and Bergenline lacked standing to assert claims that belonged to RC Associates. Judge Hector R. Velazquez granted the motion as unopposed by order entered July 13, 2012.

Perez then moved to vacate the July 13 dismissal order. He argued that his non-opposition resulted from the misdirection of the motion papers. He contended he had standing, and res judicata did not bar his claims.

Judge Velazquez then heard the matter on the merits, and denied the motion. He reasoned, in a written opinion:

The term "res judicata" refers broadly to the common-law doctrine barring relitigation of claims or issues that have already been adjudicated. Cf. In re Coruzzi, 95 N.J. 557, 568, appeal dismissed, 469 U.S. 802, 105 S. Ct. 56, 83 L. Ed. 2d 8 (1984) (doctrine of collateral estoppel not mandated by constitution or statute). In essence, the doctrine of res judicata provides that a cause of action between parties that has been finally determined on the merits by a tribunal having jurisdiction cannot be relitigated by those parties or their privies in a new proceeding. Roberts v. Goldner, 79 N.J. 82, 85 (1979). For a judicial decision to be accorded res judicata effect, it must be a valid and final adjudication on the merits of the claim. Restatement (Second) of Judgments, supra, 27. A dismissal for failure to state a claim constitutes an adjudication on the merits. See Velasquez v. Franz, 123 N.J. 498, 507 (1991).

After a review of the papers filed herein, including the pleadings filed in the Bergen County action as well as the Court's written opinion dismissing the action, I must concur with Mariner's['] argument that even if persuaded by Perez's procedural arguments, the July 13[,] 2012 order should not be vacated. Perez's attempt to distinguish the claims in this case from those dismissed in Bergen County falls short and has no support under established New Jersey jurisprudence. Without citing any legal authority or case law Perez argues that he should be able to prosecute the dismissed claims because the Hudson County matter involves a foreclosure action. However, the doctrine of res judicata bars relitigation of claims or issues that have already been adjudicated and is not depend[e]nt on the type of case that is filed. The counterclaims and third party claims in this case are identical to those claims that were dismissed in the Bergen County action. The result can be no different here in Hudson County simply because the claims are raised as counterclaims and third party claims in a foreclosure action.

A review of the counterclaim and third party complaint reveal[s] that Perez has simply resurrected the same claims that were dismissed in Bergen County. He has named the same parties and alleged the same facts and causes of action asserted in the Bergen County matter, in most instances using identical language and terms. In the Bergen County case, [the court] ruled that Perez, as a shareholder had no standing to prosecute claims that were based on wrongs allegedly done to the corporate entity RC Associates. The result can be no different in this case. The claims alleged in the counterclaims and the third party complaint are the same [i.e.], conspiracy to commit fraud in obtaining additional funding for a purpose other than the construction project and misappropriation of corporate profits. Under the circumstances, Perez has no standing to assert these claims as counterclaims or in a third party complaint filed in the Hudson County matter. Again these issues have been fully litigated in the Bergen County matter and cannot be litigated again notwithstanding the fact that this matter commenced as a foreclosure action.

This appeal followed.

II.

We review de novo a trial court's order dismissing an action on res judicata grounds. See Walker v. Choudhary, 425 N.J. Super. 135, 151 (App. Div.), certif. denied, 211 N.J. 274 (2012) ("The application of res judicata is a question of law" that is reviewed de novo (internal quotation marks and citation omitted)). We apply the same standard of review to a trial court's determination that a party lacks standing to assert a claim. People for Open Gov't v. Roberts, 397 N.J. Super. 502, 508 (App. Div. 2008) ("The issue of standing is a matter of law as to which we exercise de novo review."). Having carefully reviewed defendants' arguments in light of the record and applicable legal principles, we affirm substantially for the reasons set forth in Judge Velazquez's cogent opinion.

We add the following brief additional remarks. We recognize that limited liability companies and corporations, although they share the attribute of limited liability, are distinct legal entities, invested with different characteristics to satisfy different policy goals. Consequently, we should not mechanistically import principles of law governing corporations to the law governing limited liability companies. See Steven C. Bahls, Application of Corporate Common Law Doctrines to Limited Liability Companies, 55 Mont. L. Rev. 43, 90-91 (1994) (stating that the LLCs' "combination of . . . corporate and partnership attributes creates difficulties for courts when deciding whether to apply . . . corporate and partnership doctrines to limited liability companies[]" and arguing that courts should develop new doctrines where needed instead of adopting all corporate or all partnership common law rules).2 On the other hand, in numerous contexts relevant to limited liability companies, the law of corporations is instructive. See, e.g., Elf Atochem N. Am., Inc. v. Jaffari, 727 A.2d 286, 293-94 (Del. 1999) (applying corporate law to determination of whether a lawsuit against an LLC was derivative or direct because the "derivative suit is a corporate concept grafted onto the limited liability company form").

On the issue of standing, the New Jersey Limited Liability Company Act (LLC Act), N.J.S.A. 42:2B-1 to -70, which governed Perez's claims, restricts the ability of an LLC member to assert claims that belong to the LLC.3 In that respect, it is similar to corporation law, which restricts a corporation's shareholder from asserting claims of the corporation. See Pepe v. Gen. Motors Acceptance Corp., 254 N.J. Super. 662, 666 (App. Div.) ("The law is clear and uniform: shareholders cannot sue for injuries arising from the diminution in value of their shareholdings resulting from wrongs allegedly done to their corporations. Nor can stockholders assert individual claims for . . . other income lost because of injuries assertedly done to their corporations." (citations omitted)), certif. denied, 130 N.J. 11 (1992); see also Brown v. Brown, 323 N.J. Super. 30, 36 (App. Div.) (distinguishing between derivative actions which are conditioned on injury or breach of duty to the corporation, and direct actions, involving injury sustained by, or violating a duty owed to a shareholder), certif. denied, 162 N.J. 199 (1999). To maintain a direct action, a shareholder must suffer special injury. Strasenburgh, supra, 146 N.J. at 550 ("A special injury exists 'where there is a wrong suffered by [a] plaintiff that was not suffered by all stockholders generally or where the wrong involves a contractual right of the stockholders, such as the right to vote.'" (quoting In re Tri-Star Pictures, Inc., 634 A.2d 319, 330 (Del. 1993))).

The LLC Act provides that a member may sue "in the right of a limited liability company to recover a judgment in its favor" that is, in the company's favor only if the "managers or members with authority to do so have refused to bring the action" or asking them to do so would "not likely . . . succeed."4 N.J.S.A. 42:2B-60. Only then may a current member bring a derivative action. N.J.S.A. 42:2B-61. Implicit in these provisions of the LLC Act is that a member of a limited liability company may not bring an action in his or her own name, to redress wrongs to the company, even if the member indirectly suffers harm as a result. To assert a claim in his or her own name, the member must suffer a special injury not shared generally by other members.

We have held that a court, in its discretion, may dispense with adherence to the requirements of a derivative action in cases involving closely-held corporations. Brown, supra, 323 N.J. Super. at 36-37. The court may do so "'if it finds that [it] will not (i) unfairly expose the corporation or the defendants to a multiplicity of actions, (ii) materially prejudice the interests of creditors of the corporation, or (iii) interfere with a fair distribution of the recovery among all interested persons.'" Id. at 36 (quoting American Law Institute, Principles of Corporate Governance: Analysis and Recommendations 7.01(d) (1992)). However, the record does not demonstrate that a direct action would have been appropriate here, inasmuch as Dolan, the other fifty-percent member of RC Associates, was not a party to the Hudson County case, nor were his interests necessarily represented.

We conclude that Judge Velazquez correctly determined that Perez asserted various wrongs to RC Associates that resulted in the diversion of profits owed to RC Associates, as the owner of the Weehawken condominium project. Although Perez claims he suffered injury based on his interest in his share of those profits the claims belonged to RC Associates. He lacked standing to assert those claims directly.

Moreover, as the trial court found, the Bergen County court definitively addressed the issue of standing. Perez was collaterally estopped from raising the issue anew in the Hudson County matter. See, e.g., State v. Gonzalez, 75 N.J. 181, 186 (1977) ("Collateral estoppel is that branch of the broader law of res judicata which bars relitigation of any issue which was actually determined in a prior action, generally between the same parties, involving a different claim or cause of action."). The doctrine applies because the issue decided in the prior action is identical to the one presented in the subsequent action; the issue was actually litigated; there was a final judgment on the merits; the prior determination was essential to the judgment; and the party against whom preclusion is asserted was a party to the proceeding. SeePerez v. Rent-A-Center, Inc., 186 N.J.188, 199 (2006), cert. denied, 549 U.S. 1115, 127 S. Ct. 984, 166 L. Ed. 2d 710 (2007).

While the court dismissed the Bergen County complaint without prejudice, it did so apparently only to preserve RC Associates' ability to assert the claims. The court adjudicated the merits of Perez's claims. SeeVelasquez, supra, 123 N.J.at 507 (stating that a dismissal with prejudice for lack of defendant's capacity to be sued was an adjudication on the merits sufficient to implicate res judicata, but a dismissal without prejudice generally indicates no adjudication on the merits).

Perez argues that even if he did not have standing in the Bergen County case, he had standing to assert the counterclaim and third-party complaint in the Hudson County case because he was challenging the validity of the mortgage at issue. We disagree. The counterclaim and third-party complaint address the alleged forgery, and other alleged misdeeds pertaining to the lending on the Weehawken project. The allegations simply do not address the validity of the West New York mortgage.

Perez also asserts a variety of procedural arguments in support of his appeal. In particular, Perez misreads the Bergen County decision in asserting that the court in that case authorized Perez to file his claims in the foreclosure action. The court simply opined that relief regarding the assignment of rents should be sought in the context of the foreclosure action.

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

1 We rely primarily on certifications submitted by Perez, and extend to him all favorable inferences of fact. Printing-Mart Morristown v. Sharp Elecs. Corp., 116 N.J. 739, 746 (1989).

2 For example, in adopting the LLC Act, the Legislature deleted a provision in the original legislation that would have compelled courts to apply corporate veil piercing law to LLCs. Compare Senate Bill 890, 205th Leg. 7 (June 1, 1992) (original bill), with Senate Bill 890, 205th Leg. (June 14, 1993) (enacted as L. 1993, c. 210) (Senate Committee Substitute). The Revised Uniform Limited Liability Company Act (RULLCA), N.J.S.A. 42:2C-1 to -94, effective March 18, 2013, L. 2012, c. 50, 96, recognizes a different standard for piercing the veil of a limited liability company than that applicable to corporations. Specifically, the RULLCA states that the "failure of a limited liability company to observe any particular formalities relating to the exercise of its powers or management of its activities is not a ground for imposing liability on the members . . . ." N.J.S.A. 42:2C-30(b). See also Kaycee Land & Livestock v. Flahive, 46 P.3d 323, 327-28 (Wyo. 2002) (noting that LLC veil piercing should be treated differently from corporate veil piercing given the organizational flexibility inherent in LLCs). By contrast, failure to observe formalities is a significant factor in determining whether to pierce a corporation's veil. See, e.g., Richard A. Pulaski Constr. Co. v. Air Frame Hangars, Inc., 195 N.J. 457, 472 (2008); Canter v. Lakewood of Voorhees, 420 N.J. Super. 508, 519 (App. Div. 2011) (discussing failure to observe corporate formalities).

3 The LLC Act was repealed effective March 1, 2014. L. 2012, c. 50, 95.

4 The RULLCA includes more extensive provisions than the LLC Act on derivative actions by a member of an LLC. See N.J.S.A. 42:2C-67 to -72. In particular, the new law provides that a member may not bring a direct action against the LLC itself, or another member or manager, unless that member has suffered an injury "not solely the result of an injury suffered or threatened to be suffered by the limited liability company." N.J.S.A. 42:2C-67(b).