JARWICK DEVELOPMENTS, INC. et al. v. JOSEPH WILF, et al.

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-5027-03T35027-03T3

JARWICK DEVELOPMENTS, INC.

and ADA REICHMANN,

Plaintiffs-Appellants/

Cross-Respondents,

v.

JOSEPH WILF and THE ESTATE OF

HARRY WILF, deceased,

individually and as partners

in the partnership known as

J.H.W. ASSOCIATES, LEONARD A.

WILF, ZYGMUNT WILF, MARK WILF,

SIDNEY WILF, RACHEL AFFORDABLE

HOUSING, HALWIL ASSOCIATES, a

partnership, and PERNWIL

ASSOCIATES, a partnership,

Defendants-Respondents/

Cross-Appellants.

__________________________________________________________

 

Argued November 9, 2005 - Decided December 15, 2006

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

On appeal from the Superior Court of New Jersey, Chancery Division, Morris County, C-184-92.

Morrill J. Cole argued the cause for appellants/cross-respondents (Cole, Schotz, Meisel, Forman & Leonard, attorneys; Mr. Cole, on the brief).

Sheppard A. Guryan argued the cause for respondents/cross-appellants (Lasser Hochman, attorneys; Mr. Guryan, of counsel and on the brief; Bruce H. Snyder, on the brief).

PER CURIAM

In this matter, plaintiffs Jarwick Developments, Inc. and Ada Reichmann appeal (a) from a June 26, 2002, order entered by Judge Reginald Stanton, fixing January 8, 1992, as the valuation date for plaintiffs' interest in a seven hundred sixty-four (764) unit garden apartment project known as Rachel Gardens in Montville (the Project) and (b) from the subsequent final judgment dismissing plaintiffs' complaint, entered following a trial before Judge Kenneth C. MacKenzie, to whom the case had been reassigned after Judge Stanton retired.

Plaintiffs contend that the valuation date is irrelevant and that they are entitled to an accounting of profits they would and should have received had they not been excluded from the Project. Defendants cross-appeal, contending that Judge Stanton's order of March 11, 2000, which determined that plaintiffs were entitled to a twenty-five percent (25%) interest in the Project, was erroneous, as was the determination that defendants had breached their agreement by failing and refusing to recognize plaintiffs' interest in the Project. We reverse and remand the orders from which plaintiffs appeal. We affirm the order determining liability from which defendants cross-appeal.

We begin with a brief description of the parties involved in this litigation. Ada Reichmann, wife to Ralph Reichmann, is the sole stockholder in Jarwick Developments, Inc. Ada is also the sister to Abe and Josef (Joe) Halpern. Abe and Joe had frequent business dealings, including the one now at issue, with brothers Harry (now deceased) and Joseph Wilf. Together, Harry and Joseph comprised J.H.W. Associates (J.H.W.). Also involved in these dealings were Harry's son, Leonard, and Joseph's sons, Zygmunt, Mark and Sidney (now deceased).

In 1985, the Halperns and Wilfs formed Halwil Associates (Halwil) in order to purchase property and obtain approvals for the Project. The parties signed a partnership agreement dated March 1, 1985, granting J.H.W. a fifty percent (50%) interest; Abe a twenty-five percent (25%) interest; and Joe a twenty-five percent (25%) interest. Shortly thereafter, the partnership purchased a portion of the property for the Project and contracted to purchase an adjoining parcel of land. By the end of 1986, Leonard, Zygmunt, and Sidney were formally introduced into the partnership, thereby changing the percentage held by J.H.W. Then, J.H.W. held a twenty-five percent (25%) interest in Halwil, with Leonard taking a twelve point five percent (12.5%) share and Zygmunt and Sidney sharing equally in the remaining twelve point five percent (12.5%).

Near the beginning of 1988, the Wilfs discovered what they believed to be Abe's improper diversion of funds from certain other partnerships. Joseph testified that, as a result, they removed Abe from any role in the management of the partnership. Abe eventually was able to pay back the money that he had taken. Further, there was testimony that during this period Abe was in a state of financial distress.

As a result, in a partnership agreement dated June 20, 1988, Joe, J.H.W., and the Wilf sons formed Pernwil Associates (Pernwil) to take title to the project property. In this new partnership, J.H.W. had a fifty percent (50%) interest, Joe had a twenty-five percent (25%) interest, Leonard had a twelve point five percent (12.5%) interest, and Zygmunt, Mark and Sidney took equal shares of the remainder. On June 29, 1988, Halwil assigned the contract for purchase of the project property to Pernwil, in addition to transferring title to the previously purchased property. These transfers represented the sole assets of the Halwil partnership.

Abe testified that he did not learn about the formation of Pernwil and the assignment until August 1988, when his brother told him, and that he was never told that he had the option of buying into Pernwil. Abe also testified that he would have made a capital contribution to Halwil and Pernwil in 1988 had he been asked. By the end of 1988, Abe had contributed nearly $220,000 in capital contributions to Halwil.

During this time, from 1988 to 1989, Abe sought financial aid from his sister, Ada, and her husband, Ralph. The Reichmanns made numerous loans to Abe and in amounts such that Ralph sought to secure the loans, thereby reducing his potential exposure. To that end, Ralph formed Jarwick Developments, Inc. (Jarwick), with Ada as the sole shareholder, to receive Abe's June 20, 1989 assignment of his twenty-five percent (25%) interest in Halwil. Abe did not formally assign his interest until March 6, 1990. Both Ada and Ralph were aware when they agreed to take the assignment of Abe's interest in Halwil that Abe had been excluded from Pernwil.

On August 3, 1989, intermediaries for the Reichmanns, Joseph Schochet and Michael Rottenberg, met with Harry, Joseph and Zygmunt in New York. As a result of this meeting, Harry, the patriarch of the Wilf family, wrote a letter to Ralph, dated August 3, 1989, recognizing Abe's twenty-five percent (25%) interest in "the Halwil and Pernwil project" and welcoming Ralph's involvement. Further, Harry asked that Ralph agree to fund, should the need arise, any shortages necessary for the Project, plus Harry and Ralph would fund Joe's share - Ralph would fund thirty-three and one-third percent (33 1/3%) and Harry would fund sixty-six and two-thirds percent (66 2/3%) of Joe's share. Thereafter, in a letter to Harry dated August 4, 1989, Ralph agreed to the proposed terms. This was the extent of the discussion between Ralph and the Wilfs.

Schochet remained in touch with Harry, who eventually informed him that Reichmanns' funding would not be necessary because the partnership had obtained mortgage financing. Schochet remained in periodic contact with Harry until Harry's death in mid-1991. In early 1992, Schochet, seeking Pernwil's financial information, contacted Joseph, who directed him to Zygmunt. During Zygmunt and Schochet's meeting, Zygmunt informed Schochet "the train had left the station." This meant that the partnership had obtained outside financing and that Ralph would no longer be involved. Ralph testified that at no time did the partnership ever ask him to guarantee or sign a mortgage for financing, nor would he have refused had they so asked. In fact, neither he nor Jarwick was even asked to make capital contributions to either Halwil or Pernwil and none were made.

On September 11, 1992, plaintiffs filed a complaint against defendants seeking: (1) damages for diversion of a valuable business opportunity and fraud, (2) judgment declaring that plaintiffs had a twenty-five percent (25%) interest in Pernwil, (3) specific performance to treat plaintiffs as partners in the Project, (4) an accounting and (5) the appointment of a receiver to manage Pernwil's affairs. After delays for numerous reasons, a trial was held as to the liability issue in October 1999. The court found in favor of plaintiffs. In his January 11, 2000 oral opinion, the judge, relying on the former Uniform Partnership Act (UPA), N.J.S.A. 42:1-1 to 49, repealed, effective December 8, 2001, by the current Uniform Partnership Act, N.J.S.A. 42:1A-1 to 56, found that the correspondence between Harry and Ralph gave rise to a new and separate partnership and that Zygmunt had improperly excluded Jarwick from the project. The court further determined that the remedy necessitated a trial on damages. On June 14, 2002, on motion of the parties, the court set as the valuation date January 8, 1992, the date of the breach of the August 1989 agreement. Thereafter, following a damages trial, the court issued a written opinion on March 22, 2004, in which it found that, as of the date of valuation, plaintiff's twenty-five percent (25%) interest had a negative value and that, therefore, plaintiffs were not entitled to damages.

The scope of appellate review of a judgment entered in a non-jury trial is limited: the findings on which the judgment is based should not be disturbed unless they are not supported by adequate, substantial and credible evidence in the record. Rova Farms Resort, Inc. v. Investors Ins. Co., 65 N.J. 474, 483-84 (1974). Nevertheless, "[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. Manalapan Twp. Comm., 140 N.J. 366, 378 (1995).

In finding for plaintiffs on the issue of liability, the court determined that the correspondence between Harry and Ralph in August 1989 created a new and separate partnership agreement between Jarwick and the Wilfs. We find no such creation of a separate partnership because Jarwick was already a partner in the project by virtue of Abe's assignment. The letters merely served to acknowledge the assignment of Abe's interest, to confirm Jarwick's participation and to secure a personal commitment from Ralph to fund twenty-five percent (25%) of the Project, in addition to partial funding of Joe Halpern.

The other partners in Halwil took Halwil's only assets and transferred them to Pernwil, a partnership consisting of essentially the same parties as Halwil, with the exception of Abe. J.H.W.'s twenty-five percent (25%) share in Halwil increased to a fifty percent (50%) interest in Pernwil, while Joe's share (twenty-five percent) (25%) and the share divided among Harry and Joseph's children (twenty-five percent) (25%) remained unchanged as a result of the formation of Pernwil.

The trial court found that the parties involved were all sophisticated businesspersons who would often use multiple partnerships during the course of one project in order to limit their financial exposure at various stages. Halwil and Pernwil were instrumentalities or vehicles utilized for the development of the Project, Rachel Gardens. The use of those partnerships did not alter the fact that essentially the same people were involved throughout. Equity will look to the substance of an agreement rather than the form. Assocs. Home Equity Servs. v. Troup, 343 N.J. Super. 254, 276 (App. Div. 2001) (citing Kleinberg v. Schwartz, 87 N.J. Super. 216, 222 (App. Div.), aff'd, 46 N.J. 2 (1965)).

The record indicates that Halwil's land and land purchase contract were transferred to Pernwil for a nominal fee. Halwil has been inactive since the assignment. By excluding Abe from Pernwil, the other partners were seeking to exclude Abe from the Project. Whether this was punishment for his allegedly wrongful use of partnership assets or because of his perceived weakened financial status, this attempt to exclude Abe comported neither with the partnership agreement nor with the applicable law.

The Halwil and Pernwil partnership agreements both provide that when one partner defaults, the other partners have the option of purchasing, pro rata, the defaulting partner's interest. Here, however, there was no allegation of default. While there may have been speculation as to Abe's ability to contribute, there was testimony that Abe contributed whenever asked, that he had contributed approximately $220,000, and that he was willing and able, certainly with the backing of the Reichmanns, to contribute further. There is no indication that Abe received any compensation for his interest in the Project that seemingly went to J.H.W. after the formation of Pernwil. Furthermore, even if Abe had defaulted on his capital contribution obligations, forfeiture of a partner's interest is not a permissible sanction for that breach. Sebring Assocs. v. Coyle, 375 N.J. Super. 315, 322 n.8 (App. Div. 2005).

Under the former UPA, Abe also kept his interest in the Project because there was not an effective termination of the partnership. The dissolution of a partnership "is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business." N.J.S.A. 42:1-29 (repealed 2001). Pursuant to the terms of the statute then effective, dissolution is caused:

(a) By the termination of the definite term or particular undertaking specified in the agreement;

(b) By the express will of any partner when no definite term or particular undertaking is specified;

. . . .

(d) By the expulsion of any partner from the business . . . in accordance with such a power conferred by the agreement between the partners;

(2) In contravention of the agreement between the partners, where the circumstances do not permit a dissolution under any other provision of this section, by the express will of any partner at any time[.]

[N.J.S.A. 42:1-31 (repealed 2001).]

The trial court was correct in its belief that, under the former UPA, partners may terminate the partnership whenever they wish, subject to certain penalties in certain situations. However, the statute speaks in terms of one partner walking away, seeking to distance himself from the endeavor, and thereby dissolving the partnership. No such act occurred here. As discussed previously, there was not a proper expulsion of Abe under the terms of the partnership agreement. Nor did Abe ever walk away from the Project. Rather, the Wilfs and Joe walked away with the partnership's assets, leaving Abe behind. Such a scenario does not fit within a permissible dissolution of the partnership.

It is of no operative consequence that the Pernwil partnership agreement provided a way for Abe to buy into that partnership if he complied with the terms within the specified sixty-day window. The partners excluded Abe from the partnership. The partners attempted to take Abe's interest for themselves without compensating Abe in contravention of both the partnership agreement and the law. As a result, Abe's partnership interest in the Project remained viable.

Having determined that Abe had a continuing interest in the Project, we need now determine whether the assignment of that interest was valid. The court, in resting its decision on the partnership created by the correspondence in August 1989, did not reach the issue of the validity of the assignment from Abe to Jarwick (the Reichmanns). However, based on the record, we find that the assignment was valid.

Under the terms of the Halwil and Pernwil partnership agreements, the partners may, without consent of the other partners, "transfer all or part of their interest in the Partnership to their respective husbands or wives; mothers or fathers; children or grandchildren . . .; brothers or sisters; or to a trust established solely for the benefit of a minor child or grandchild of a Partner."

Here, there was testimony that Abe sought to use his interest in Rachel Gardens as collateral for loans made by his sister, Ada, and brother-in-law, Ralph. Ada, with the aid of Ralph, incorporated Jarwick for the purposes of receiving the assignment. As the court correctly noted in its decision as to liability, while on the surface the parties in this matter are corporations and partnerships, at the core these are dealings among the individuals involved, and equity will look beyond the surface and to the substance of the dealings. This was an assignment from Abe to his sister Ada, therefore, no notice was required to be given to the other partners under either the Halwil or Pernwil agreement. However, even if notice had been required, it was given, acknowledged and ratified in the communications between Ralph and Harry.

Arguments that this was an empty assignment must also surely fail. As outlined above, Abe had a continuing and viable interest in the Project despite the efforts of the other partners. Additionally, in the August 3, 1989, letter to Ralph, Harry acknowledged Abe's twenty-five percent (25%) interest in the Project. Abe also made capital contributions to the Project of approximately $220,000. Therefore, Abe had an interest to assign and the assignment was valid.

By virtue of the assignment, Jarwick holds a twenty-five percent (25%) interest in the Project. That Project was not a static asset. It was an evolving dynamic venture, the development of Rachel Gardens. Consequently, the valuation of one's interest at a fixed moment in time is inadequate as an appropriate remedy. Instead, Jarwick was and is entitled to an accounting. The relevant statute, N.J.S.A. 42:1-22 (repealed 2001), provided:

Any partner shall have the right to a formal account as to partnership affairs:

(a) If he is wrongfully excluded from the partnership business or possession of its property by his copartners;

(b) If the right exists under the terms of any agreement;

. . . .

(d) Whenever other circumstances render it just and reasonable.

Here, Jarwick is entitled to a formal accounting of its twenty-five percent (25%) interest in the partnership. Therefore, we remand this matter for an accounting of Jarwick's twenty-five percent (25%) interest in the partnership.

In closing, we note briefly that an accounting is an equitable remedy. Savage v. Dowrie, 111 N.J. Eq. 108, 109-10 (Ch. Div. 1932), aff'd, 114 N.J. Eq. 342 (E. & A. 1933). Therefore, we are confident that the court on remand will take into consideration the many delays between bringing this claim to court and final judgment and, as a result, the disproportionate amount of capital and man-hours put into this Project by defendants. Similarly, we believe the court will not overlook the fact that Ralph committed himself, on behalf of his wife and Jarwick, to make capital contributions or to sign loan agreements as necessary to fund the Project. The fact that the other partners never called upon him to fulfill that promise makes this promise no less valuable. His exposure was no more or less significant than that of defendants in obtaining outside financing for the Project. The adjustments of debits and credits may be made accordingly.

Affirmed in part. Reversed and remanded in part.

 

(continued)

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A-5027-03T3

December 15, 2006