DUTCH HILL REALTY CORP. v. MADELINE MINETTO

NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
 
 
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-2036-04T3

DUTCH HILL REALTY CORP.,
a New York Corporation,

Plaintiff-Appellant/
Cross-Respondent,

v.

MADELINE MINETTO, individually,
as executrix of the Estate of
Joseph Minetto and as Co-Trustee
of the Credit Shelter Trust
created pursuant to the Last
Will and Testament of Joseph
Minetto,

Defendants/Third Party
Plaintiffs-Respondents/
Cross-Appellants,

and

PATRICIA MINETTO CAFFREY, ALAN
MINETTO, ANTOINETTE MINETTO
COSCARELLO a/k/a Antoinette
Minetto, CAROL ANN FINNERAN,
RONALD MINETTO, SCOTT MINETTO,
individually and as Co-Trustee
of the Credit Shelter Trust
created pursuant to the Last
Will and Testament of Joseph
Minetto, MINDY ANN MINETTO
a/k/a Mindy Minetto Beason,
individually and as Co-Trustee
of the Credit Shelter Trust
created pursuant to the Last
Will and Testament of Joseph
Minetto, MITCHELL MINETTO,
individually and as Co-Trustee
of the Credit Shelter Trust
created pursuant to the Last
Will and Testament of Joseph
Minetto, and JOSEPH MINETTO,
his heirs, devisees and
personal representatives
and his, hers, theirs or any
of their, successors in right,
title and interest, STATE OF
NEW JERSEY, UNITED STATES OF
AMERICA, and ROBERT ADAMO,

Defendants,

v.

UNION STATE BANK,

Third-Party Defendant-
Appellant/Cross-Respondent.

________________________________________________

DUTCH HILL REALTY CORP.,
a New York Corporation,

Plaintiff-Appellant/
Cross-Respondent,

v.

MINETTO HOMES, INC., a
Corporation of the State of
New Jersey, and MADELINE MINETTO,
as Executrix of the Estate of
Joseph Minetto,

Defendants/Third-Party Plaintiffs-
Respondents/Cross-Appellants,

and

STATE OF NEW JERSEY and ROBERT ADAMO,

Defendants,

v.

UNION STATE BANK,

Third-Party Defendant-
Appellant/Cross-Respondent.

_______________________________________________________________

Text Box
 
December 8, 2006

Argued May 2, 2006 Decided

Before Judges Kestin, R. B. Coleman and Seltzer.

On appeal from the Superior Court of New Jersey, Chancery Division, General Equity Part, Bergen County, F-4795-01 and F-4800-01 (Consolidated).

Jan Alan Brody argued the cause for appellants/cross-respondents Dutch Hill Realty Corp. and Union State Bank (Carella, Byrne, Bain, Gilfillan, Cecchi, Stewart & Olstein, attorneys; Mr. Brody, of counsel and on the brief and G. Glennon Troublefield, of counsel and on the brief).

A. Dennis Terrell argued the cause for respondents/cross-appellants Madeline Minetto and Minetto Homes, Inc. (Drinker Biddle & Reath, attorneys; Mr. Terrell and Robert K. Malone, of counsel and on the brief; Richard E. Brennan and Frank F. Velocci, on the brief).

John D. Larimer (Nixon Peabody), of the New York bar, argued the cause for amici curiae New York Bankers Association, American Bankers Association, Independent Community Bankers of America and Independent Bankers Association of New York State (Mr. Larimer and Roberto C. Martens, Jr., on the brief).

PER CURIAM
Plaintiff, Dutch Hill Realty Corp. (DHR), a wholly owned subsidiary of third-party defendant Union State Bank (USB), appeals from a November 30, 2004 order of judgment that discharged certain mortgages, declared null and void several related guarantees, and denied and dismissed its complaint for foreclosure filed against numerous defendants, including Madeline Minetto (Madeline), individually and as the executrix of the estate of Joseph Minetto (Minetto) (jointly referred to as defendants). At the beginning of the trial, the parties agreed that New York law would govern the proceedings.
Minetto and Robert Adamo (Adamo) entered into a partnership and created 28 Associates, L.L.C. (28 Associates), a limited liability company, for the purpose of acquiring and rehabilitating 100 Garr Street in Piermont, New York, into a condominium building (the project). For purposes of financing the project, 28 Associates obtained loans from USB, with James Martin (Martin), a deputy to the chief credit officer, acting as the loan officer on the transactions. For a period spanning from March 5, 1997 until June 8, 1999, USB loaned Minetto and Adamo approximately $26,000,000 secured by a mortgage note and a mortgage encumbering the site of the project.
In connection with these loans, Minetto and Adamo executed and delivered unconditional and continuing guarantees of payment of all existing and future obligations owed by 28 Associates to USB. These guarantees, significantly, gave USB the right "to release such collateral or any part thereof," and to "dispose of any and all collateral securing this indebtedness in any manner as [USB], in its sole discretion, may deem appropriate." Pursuant to the guarantees, no notice prior to release was required to be given to the guarantors.
Further, the guarantees provided that the guarantors agreed that their obligations "could not be affected by . . . any defense arising by reason of any . . . negligence or omission by [USB] in enforcing its claims." Finally, the guarantees provided that the written agreements constituted the final and complete agreement between the parties, that the guarantors did not rely on any course of dealing or oral representation in executing them, and that the guarantees could only be altered in writing.
During this same period, between March 1997 and June 1999, Minetto executed, on two separate occasions, two $3,000,000 mortgages encumbering both his Paris Avenue property and Industrial Parkway property, both located in New Jersey, for a total of $12,000,000.
The terms of the loans provided that sixty-one percent of the gross sales price of each condominium unit would be paid to USB to pay down the loan, three percent would be released to 28 Associates as working capital, and the remaining thirty-six percent would be placed into a "blocked" account that would be controlled by USB to ensure that sufficient funds were available to complete construction. USB would release the funds in the "blocked" account once there was sufficient money to complete the project or the project was complete.
Minetto died in September of 1999, leaving Adamo and Madeline with control of 28 Associates. During this period, condominium closings were not occurring at the rate previously anticipated and Adamo communicated with Martin about the possibility of free releases. See footnote 1 When Madeline learned of this, she expressed her disapproval of this practice to Martin and USB by letter and she made known her desire that USB not make any further loans to 28 Associates without her knowledge. Despite this, Madeline learned that between December 1999 and March 15, 2000, Martin granted free releases as condominium closings took place, with no money going into a "blocked" account or towards paying down the loan. Ultimately, at least twenty free releases occurred.
Subsequently, Adamo and Madeline brokered a buyout deal, whereby Adamo would purchase Madeline's share of Minetto and Adamo's joint businesses. The agreement, in part, provided that the Minetto guarantees would be reduced by the amount of free releases already granted and that Minetto's estate would be released from the guarantees in the amount of two dollars for every one dollar from future condominium closings applied to pay down the notes, and that no more free releases would be granted. While neither USB nor Martin was a signatory to this agreement, Martin gave assurances that USB approved of the agreement and that he had the authority to broker such an agreement. Despite his assurances, Martin continued to grant free releases.
Martin agreed with Adamo to allow unit closings with no proceeds going to USB or to the "blocked" account. Martin informed no one at USB of this practice. He directed local bank managers to deposit closing checks made out to USB into 28 Associates' accounts. Further, Martin falsified reports in connection with the loan to prevent USB from discovering any problems associated with the loan. On October 31, 2000, USB learned of Martin's practice of granting free releases, and because of that practice and the falsified reports, USB fired Martin.
On November 1, 2000, USB filed a proof of claim in the Surrogate's Court in Rockland County, New York, against the Minetto estate for the entire $19.6 million outstanding loan balance. Further, USB filed a proof of loss claim with its insurance carrier claiming that Martin had knowingly and recklessly filed false sales reports to hide the free release program and that these representations were made in order to deceive the bank and to induce USB to rely on them. On November 9, 2000, USB declared the loans to 28 Associates to be in default because "the maturity dates had expired without full payment and 28 Associates has failed to repay its loans from condominium unit closing proceeds as required by the loan documents." USB then assigned the mortgage, together with all the note and loan documents, to DHR, its wholly owned subsidiary that was responsible for resolving problem loans.
After the trial judge requested and received proposed findings of fact and conclusions of law from both sides, the court issued a lengthy written opinion addressing the issues in the case and reaching the results summarized above. Plaintiffs first allege that the judge seemingly adopted defendant's post-trial submission and that such wholesale adoption of a litigant's submissions constitutes reversible error, warranting remand of the matter on that ground. We disagree.
Rule 1:7-4 mandates that in non-jury cases, the court "shall by opinion or memorandum decision, either written or oral, find the facts and state its conclusions of law thereon." Courts are expected to "comply with their responsibility to address the issues and provide findings of fact and conclusions of law" under this rule. Berger v. First Trenton Indem. Co., 339 N.J. Super. 402, 405 (App. Div. 2001). However, even if a trial judge adopts proposed findings verbatim, "the findings are those of the court and may be reversed only if clearly erroneous." Anderson v. City of Bessemer City, North Carolina, 470 U.S. 564, 572, 105 S. Ct. 1504, 1511, 84 L. Ed. 2d 527 (1985). See Delesky v. Tasty Baking Co., 175 N.J. Super. 513, 518 (App. Div. 1980) (finding it is not improper for a court to adopt proposed findings of fact if the court's "independent review of the evidence demonstrates its accuracy").
Here, it is evident that the court adopted much of defendant's submission. While there is a preference for independent fact finding by a judge, a court can adopt proposed findings of fact so long as there is "some indication of a discriminating judicial review." Massachusetts Mut. Life Ins. Co. v. Manzo, 234 N.J. Super. 266, 270 n. 1 (App. Div.), rev d on other grounds, 122 N.J. 104 (1991). We find evidence of such a review here. An assessment of the distinctions between the defendant's submission and the judge's opinion discloses that the judge conducted the requisite independent review. Further, the record sufficiently supports the judge's findings so as to withstand appellate review.
Plaintiffs next allege that the court improperly vitiated the guarantees on the basis of fraud. The judge found that Martin's fraud, attributable to USB, by itself negated the Minetto estate's obligations under the Minetto guarantees. The judge further found that, under New York law, fraud vitiates all contracts. We disagree with the court's conclusion, based on New York's fraud jurisprudence.
The judge, in vitiating the Minetto guarantees, relied upon case law stating that "fraud vitiates all contracts," of which guarantees are a species. Specifically, the court found that Martin committed fraud by granting free releases, by converting closing checks made out to USB and depositing them into accounts controlled by 28 Associates, and by brokering the buyout agreement between Madeline and Adamo when Martin lacked the authority to do so. Our review of New York law discloses that, absent fraud in the inducement, fraud by itself will not vitiate these absolute and unconditional loan guarantees.
New York courts have consistently held that "the defense of fraud in the inducement . . . if proven, renders [a] contract voidable." Mix v. Neff, Jr., 473 N.Y.S.2d 31, 33 (App. Div. 1984). Nonetheless, one cannot fraudulently induce another to sign a contract by making misrepresentations after execution of the contract. O'Dell v. Ginsburg, 677 N.Y.S.2d 583, 584 (App. Div. 1998). Accordingly, misrepresentations made after execution of a contract cannot constitute fraud in the inducement. Thus, even if the defendants proved fraud, attributable to plaintiff, such fraud would not necessarily vitiate the guarantees.
Additionally, if the parties, as here, set down their agreement "in a clear, complete document," that writing should be enforced, and evidence "outside the four corners of the document . . . is generally inadmissible to add to or vary the writing." W.W.W. Assocs., Inc. v. Giancontieri, 565 N.Y.S.2d 440, 443 (1990). While "a general merger clause cannot serve to exclude parol evidence of fraud in the inducement . . . a specific disclaimer is sufficient to destroy a plaintiff's allegation that the agreement at issue was executed in reliance upon contrary oral representations." Marine Midland Bank, N.A. v. Walsh, 689 N.Y.S.2d 288, 289 (App. Div. 1999).
Here, the alleged fraud occurred after Minetto executed the guarantees. Additionally, the language of the guarantees is unequivocal in specifying the waiver of defenses and in specifying that the commitments undertaken represented the integrated agreements of the parties, not subject to parol evidence or to modification, except in writing. Therefore, any oral promises made by Martin would have no effect on the terms of the guarantees. Under such circumstances, the court improperly invalidated the guarantees.
Plaintiff also asserts that the court erred in discharging the foreclosures on the Paris Avenue and Industrial Parkway properties. See footnote 2 The trial court concluded that USB could not "cause the project to fail through free releases, thereby eliminating the intended source for the debt service and construction funding, and then take advantage of the predicament by declaring a default and acceleration of the [Paris Avenue and Industrial Parkway mortgages]."
Plaintiff correctly argues that the guarantees expressly provided for the free release of collateral, however, the Paris Avenue and Industrial Parkway mortgages contain no such provisions. Therefore, plaintiff, through Martin's actions, allowed the collateral to become impaired. A release of collateral is "considered to interfere with the surety's rights by removing assets to which otherwise he would have had access by subrogation[.]" Executive Bank of Fort Lauderdale, Fla. v. Tighe, 411 N.Y.S.2d 939, 944 (App. Div.), aff d as modified on other grounds, 445 N.Y.S.2d 425 (1981). See Katsoufris v. Adamo, 216 N.J. Super. 84, 89 (App. Div. 1987) (recognizing the principle that "a release of collateral held by a creditor, or its impairment by improper action or inaction on his part, will extinguish the obligation of the surety, at least to the extent of the value of the security released or impaired"). We are satisfied the court correctly applied this general principle relating to the impairment of collateral in discharging the mortgages. Because we find the mortgages were thus properly discharged, we need not reach plaintiff's other arguments.
Finally, we turn to defendants' cross-appeal. They contend the court erred in failing to award them damages. Defendants, in their counterclaim, sought damages for fraud, constructive fraud, breach of contract, breach of fiduciary duty, and breach of the implied covenant of good faith. While the judge agreed that Martin's actions constituted fraud, he found that defendants had:
not demonstrated that Martin's fraudulent conduct resulted in the project not being completed or [that the project] would not have required additional funding by USB. The project was at a close to break even point when Adamo[] was accused of stealing from his partner Minetto. With the death of Mr. Minetto it is highly speculative as to what the financial outcome of the project would have been.

The Court has rejected the speculation of USB's experts that Minetto had used proceeds of the loans for personal unauthorized profits or that additional capital would be required regardless of the free releases. The Court also does not find credible evidence that the project would have broken even or shown a profit, but for the actions of Martin.

 
Under applicable New York law, damages are meant to compensate a plaintiff for what was lost due to the fraud. Damages in a fraud case are not recoverable if "they did not result directly from the fraudulent misrepresentation or if they are speculative." Taschman v. Univ. of Rochester, 606 N.Y.S.2d 106, 107 (App. Div. 1993). The goal in a breach of contract case is to place the nonbreaching party "in the position he would have been in the absence of the breach, no worse but no better." Kenford Co., Inc. v. County of Erie, 489 N.Y.S.2d 939, 942 (App. Div. 1985), rev d on other grounds, 570 N.Y.S.2d 1 (1989). A party cannot recover damages in a breach of contract action for lost profits "unless they were within the contemplation of the parties at the time the contract was entered into and are capable of measurement with reasonable certainty." Heary Bros. Lightning Prot. Co., Inc. v. Intertek Testing Servs., N.A., Inc., 780 N.Y.S.2d 691, 693 (App. Div.) (citations omitted), aff d, 797 N.Y.S.2d 400 (2005).
Defendants propose that the releases Martin granted were the sole contributing factors that caused the project to flounder. Specifically, they contend almost $6,000,000 was released in free releases, and another $7,000,000 should have been, but was not, deposited into a blocked account. The court found that "the project was at a close to break even point when Adamo was accused of stealing" from Minetto and that after the death of Minetto the project became "highly speculative." The court further discounted, as not credible, evidence that posited that, but for Martin's actions, "the project would have broken even or shown a profit." A trial court's factual findings should not be disturbed unless "they are so wholly unsupportable as to result in a denial of justice." Rova Farms Resort, Inc. v. Investors Ins. Co. of America, 65 N.J. 474, 483-84 (1974).
At trial, defendants failed to adduce evidence that showed a loss attributable to the estate that was distinguishable from the loss to 28 Associates. They additionally failed to produce evidence as to the potential cost of the project had Minetto not died. The court's determination that damages are speculative finds ample support in the record, and we will not disturb it.
Affirmed as to the foreclosure and damages; reversed as to the guarantees relating to the Paris Avenue property and the Industrial Parkway property which guarantees are validated.
Affirmed in part, reversed in part.
 

 
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Footnote: 1 A "free release" is the release of collateral under a mortgage without consideration, and without any pay down of the loan.
Footnote: 2 While the parties stipulated that New York law would govern the proceedings, we believe that New Jersey law should govern the determination to foreclose or not to foreclose interests in real property located in this state; however, under either state's law, the results on this issue are the same.

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