ZACHARY GLICKMAN et al. v. THEODORE H. SOLLOD, et al.

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-4526-05T14526-05T1

ZACHARY GLICKMAN and ALICE

GLICKMAN,

Plaintiffs-Appellants/

Cross-Respondents,

v.

THEODORE H. SOLLOD and

KYOUNGHEE SOLLOD,

Defendants-Respondents/

Cross-Appellants.

__________________________________________________________

 

Argued September 24, 2007 - Decided October 19, 2007

Before Judges A.A. Rodr guez, C.S. Fisher and C.L. Miniman.

On appeal from the Superior Court of New Jersey, Law Division, Bergen County, Docket No. L-1574-04.

Harvey R. Poe argued the cause for appellants/cross-respondents (Poe & Freireich, attorneys; Jeffrey J. Berezny, on the brief).

Bruce L. Atkins argued the cause for respondents/cross-appellants (Deutsch At-kins, attorneys; Mr. Atkins, of counsel; Christopher J. Carcich, on the brief).

PER CURIAM

After a non-jury trial, the judge dismissed all claims. Plaintiffs seek our review, among other things, of that part of the judgment that denied their claim to an interest in a limited liability company known as KO is OK, LLC. Defendants have cross-appealed, arguing that the trial judge erred in failing to enforce a contract stipulation, which authorized a fee award to the prevailing party in any litigation alleging a breach of contract. In light of his fact findings, to which we defer, we conclude that the judge correctly resolved the disputes about the parties' nascent business venture, but we conclude that the judge mistakenly rejected defendants' claim for counsel fees and remand for additional proceedings.

I

The record reveals that plaintiff Zachary Glickman (Zach) had been a manager of performers in the music business for many years; he and his wife, plaintiff Alice Glickman (Alice), lived in California. Defendant Theodore H. Sollod (Ted) was self-employed in the apparel business; he and his wife, defendant Kyounghee Sollod (Kay), lived in New Jersey. The parties had been friends since the 1960's.

In 2001, KO is OK opened what was described in testimony as a "snowball stand quasi gift shop" on the Trautwein Farm in Closter. KO is OK's operating agreement revealed that Kay was its sole member and manager. In 2002, due to ill health and advancing age, the operators of the farmstand indicated an intention to retire. Sensing a business opportunity, Ted approached his friend Zach.

Zach and Alice had owned and operated a chain of H agen Dazs ice cream stores for eight to ten years. Ted testified that he believed Zach's involvement in the farmstand would constitute a good fit because Zach "had experience and knowledge [about] running a food operation and running the inside of a food business and had the computer knowledge and infrastructure to help us get this thing off the ground." Indeed, the judge found as a fact that Zach was "a sophisticated entrepreneur, well versed in both the accounting and legal aspects of corporate management."

Ted advised Zach that the former operators earned approximately $300,000 per year from the farmstand business, and he provided Zach with copies of the operators' tax returns, which showed gross receipts of $779,280 in 1999, and $742,870 in 2000. As a result, Zach visited the farm in October 2002.

After various discussions and communications with Ted, and other visits by Zach to New Jersey, the details of which were thoroughly discussed in the trial judge's opinion and need not be repeated here, the parties moved forward. KO is OK paid $13,000 from its account to the former farmstand operators for their assets, and "The Farm in Closter, LLC" entered into a three-year lease of the premises. Ted and Kay also executed personal guarantees in favor of the lessor. Zach sent Ted $25,000 to be used for the security deposit and the first and last month's rent, but refused to provide a personal guarantee.

After further discussions, Zach wrote to Ted and Kay on February 18, 2003, indicating the need to provide structure to their undertaking and suggesting sixteen proposed items to be agreed upon. Zach followed this with a letter to Ted and Kay, dated February 19, 2003, which stated in full:

This letter when signed by you below shall serve as an agreement between us regarding our relationship in KO is OK LLC, 'The Farm in Closter' and 'The Trautwein Farm and Garden Store'. The principals of the agreement shall be Ted and Kyounghee Sollod . . . and Zach and Alice Glickman. . . .

Whereas it is agreed as follows:

1. The parties will jointly own the corporation KO is OK LLC (or any successor corporation) in equal amounts for the purpose of operating the retail establish-ment currently known as The Trautwein Farm and Garden Store.

2. Zach Glickman will work at the farm for two (2) weeks a month. Ted Sollod will work at the farm full time.

3. There will be two (2) principal salaries - Sollod 100% and Glickman 66 2/3% with any other working party being paid an hourly wage comparable to Lucy.[]

4. All Financial remunerations except salaries shall be equal for both parties.

5. Should Zach Glickman come in for all but one week a month, then his salary will be made equal with Ted Sollod's.

6. Any personal expenses paid for by the company shall be charged against that partner's draw unless previously agreed to by parties.

7. The corporation will pay for up to twelve (12) roundtrip airline tickets annually for Zach to fly from Los Angeles to New Jersey.

8. Each party will have specific duties relegated to them after it is agreed by all parties.

9. Zach will be the CFO and will be in charge of all financial and business matters including but not limited to corporate books, checks, invoices, banking, payroll, budgeting, etc.

10. Each responsible party has final determination of their responsible area except when it has a substantial financial affect on the corporation. Then the parties must agree.

11. No major expenses (over $500.00) except the purchase of inventory will be incurred without the approval of all parties.

12. No agreements or contracts will be entered into without the prior approval of the parties.

13. The Sollod and Glickman parties will each have one vote.

14. The Sollod and Glickman parties will each put up equal amounts of capital to start the company unless the corporation is granted a SBA loan to finance everything needed. If not, most of the capital investment will be treated as a loan with some going to the capitalization of the corporation. This is to be determined by the parties.

15. Glickman has already advanced the corporation a total of $25,495.85. Should the SBA loan be secured then that money will be paid back to Glickman along with any interest and loan fees paid. Otherwise, it will go towards Glickman's investment in the corporation.

16. If litigation should commence between the parties due to a breach of the agree-ment, the prevailing party shall be entitled to all reasonable legal fees. Additionally, if either party cannot collect all funds due them by the other, then the prevailing party shall be entitled to costs incurred with the collection of said funds and interest from the date of the judgment at the then prevailing prime interest rates.

17. Upon agreement of these terms, a formal stockholder's agreement will be drafted and executed by all parties.

Your signatures below shall constitute a binding agreement between the parties.

The bottom of the letter contained lines for the signatures of Ted, Kay and Alice, preceded by the statement: "ACCEPTED AND AGREED TO." Ted, Kay and Alice signed the letter in the designated locations, but Zach's signature only appears above "ACCEPTED AND AGREED TO," following his valediction of "Warmest regards," suggesting he only signed the letter as its author and not as a participant.

We discern from the trial judge's findings that the omission of a line for Zach's signature after the "ACCEPTED AND AGREED TO" language was no oversight. Indeed, the judge found from the evidence that Zach later declined to become a member of the entities that were formed to hold the lease of the farmstand and to operate the business. This finding was based upon: Zach's refusal to personally guarantee the small business loan referred to in the February 19, 2003 agreement; the stockholders' agreement referred to by Zach in the February 19, 2003 agreement was never prepared, let alone executed; the operating agreements of the limited liability companies were never amended to add Zach or Alice, or both, as members; and other words and conduct that revealed Zach and Alice's intention to abandon the venture.

This course of conduct, leading to Zach and Alice's abandonment of the venture, commenced about the time KO is OK applied for a small business loan. The record reveals that Ted learned in February 2003 from a representative of the Small Business Administration (SBA) "that there was money available in northern New Jersey for businesses with women of minority, Korean, for women in general and for farms in particular." Because Kay fit the profile of eligible borrowers, Ted and Zach agreed, after consulting with an attorney, that KO is OK ought to apply for an SBA loan.

In March 2003, while the SBA loan was being pursued, the parties began renovations on the farmstand buildings with money advanced by Zach. Zach also provided funds on a "need basis," which ultimately totaled $175,000. During this month, Zach came to New Jersey twice for week long stays, while Ted continued to "manage the farm on a day-to-day basis."

On April 10, 2003, the SBA loan of $320,000 was approved, and collateralized by a third mortgage on Ted and Kay's home. The SBA also required a personal guarantee from any individual owning twenty percent or more of the borrowing entity. Zach, however, refused to provide a personal guarantee. During the course of his visits and telephone calls to the farm, Anthony Villanueva, who processed the loan for Sovereign Bank, became "very curious" about Zach's "participation in the whole project." He advised the parties that if Zach was a partner, then that had to be disclosed, and if he was "a substantial partner," then Zach would be required to provide his tax returns and guarantee the loan. Villanueva spoke to both Zach and Ted, both of whom insisted that Zach "was a just a friend helping . . . out." Although Villanueva pressed the issue with Ted, and advised that if Zach held an interest it "had to be disclosed" and that Zach would, in that case, have "to step up to the plate and sign," the parties maintained that Zach was simply a friend "helping out." On July 30, 2003, the SBA loan of $320,000 was funded; only Ted and Kay signed as guarantors of the loan.

The business venture proposed by the February 19, 2003 agreement continued to unravel in other ways. As KO is OK began operations, Zach wrote checks based on vendor invoices and payroll records. However, he had no authority to sign checks -- only Kay did. Zach testified that, on May 27, 2003, he was at the farm and told Ted and Kay that he "need[ed] to be put on [KO is OK's bank] account." Kay refused, and Zach left for Los Angeles the next morning "fuming."

In July, Zach went to Europe on tour with one of the music groups he managed. On July 13, 2003, he emailed to Ted his "hope [that] we can get back on track and get this thing moving." On July 21, 2003, however, Zach broke his kneecap when he tripped at an airport in Sicily. He was placed in a full leg cast and returned to Los Angeles on August 4, 2003. The cast was removed on August 6, 2003, but that night Zach was taken to the emergency room with pulmonary embolisms and a blood clot in his leg, and remained hospitalized from August 7 to 16, 2003. Doctors advised Zach not to fly for six or seven months. Notwithstanding these difficulties, according to his testimony, Zach "actually did payroll and paid invoices from [his] hospital bed."

At the end of August 2003, the password for the bank account was changed, and Zach found he was unable to access the account. Although this circumstance occurred toward the end of the relationship, Ted testified that the relationship had turned tenuous as early as April when, according to Ted, Zach used "vulgar" language in front of the young employees and the elderly, which "creat[ed] a major problem" and prompted complaints. In addition, Ted testified that in May or June 2003 Zach said: "I'm leaving, I'm going, I'm not coming back, I got to go in the entertainment business, I got to go make money" to pay the family expenses. Although Ted acknowledged that he "never heard the word resign used," Ted's acrimonious email of June 11, 2003, accused Zach of "walk[ing] out" and complained that Ted needed a working partner to help with the farmstand's day-to-day operation. As Ted explained:

[W]hen [Zach] was going back to California in June, he was going to go back and earn some money because he wasn't going to make any money here at the farm and that there wasn't enough money for two families to earn a living much less one and, you know, give me back my money and I'm out of here and this way, you know, but you're on the hook for the personal guarantee on the lease and then the personal guarantee on the SBA loan and I'm out of here.

Ted said at that point that he agreed to repay all the money Zach had advanced once the SBA loan closed.

On August 28, 2003, Ted emailed Zach, seeking execution of a general release because he did not want Zach or Alice to claim in the future that they were partners. He also requested that Zach bring the books and records current so that their maintenance could be transitioned to another bookkeeper.

In an email to Ted the next day, Zach said, "[a]s far as the [books and records] and release agreement [are concerned], when I have everything ready I will deal with them," but that they would not be available by the time Ted had requested. Zach described the situation in this manner:

By the end of August . . . I had no access to the bank accounts. I couldn't function as a CFO. . . . I couldn't go on line, I couldn't do anything. They stopped sending me any materials, any invoices, any payroll. They basically said you're not writing checks anymore, so, you know there was nothing I could do in terms of that. I wasn't making any money, so, you know, for me to go back and look at the farm and say, gee, look I own half that farm but I can't do anything with it . . . .

Ted again requested, on September 4, 2003, that Zach and Alice sign a release. Around the same time, Ted and Kay sent Zach and Alice the last portion of the $175,000 previously advanced to KO is OK, and reimbursed Zach's travel expenses. However, no formal document memorializing the end of the parties' relationship was ever prepared or signed, and neither Zach nor Alice ever signed the release requested by Ted. This suit, which followed, eventually went to trial before a judge, who heard evidence that revealed the circumstances we have only briefly outlined.

II

In his thorough findings, the trial judge concluded that neither side was entitled to relief. He held that Zach and Alice never became members of KO is OK and, therefore, were not entitled to distributions. Indeed, KO is OK's operating agreement unambiguously required the express consent of Kay, who was its only member, for the joinder of additional members, and further required an amendment to the operating agreement to effect such a change. Even if Kay's execution of the February 19, 2003 agreement could be interpreted as consent, no amended operating agreement was ever prepared or executed.

The judge also heavily -- and correctly -- relied upon the fact that the seventeenth paragraph of the February 19, 2003 agreement, which stated that "[u]pon agreement of these terms, a formal stockholder's agreement will be drafted and executed by all parties," was never fulfilled, and that the parties never intended to add Zach and Alice as members absent an executed and mutually agreeable stockholder's agreement. See, e.g., Prant v. Sterling, 332 N.J. Super. 369, 378 (Ch. Div. 1999), aff'd o.b., 332 N.J. Super. 292 (App. Div.), certif. denied, 166 N.J. 606 (2000). That the parties -- and particularly Zach -- understood this was demonstrated by Zach's steadfast refusal to sign any personal guarantees and, as well, the statements he made to the SBA loan officer denying an ownership interest in KO is OK -- a position diametrically opposed to the finding Zach and Alice sought from the trial judge. Accordingly, the judge correctly concluded that Zach and Alice had no further right to any relief beyond the return of the funds they advanced during the venture's aborted formation period. Since Ted and Kay repaid those funds prior to the commencement of this action, any claim Zach and Alice may have had that Ted and Kay were unjustly enriched by the advanced funds was without substance.

In addition, the trial judge's conclusion that the February 19, 2003 letter was not intended by any of the parties to constitute an amendment to KO is OK's operating agreement is supported not only by credible testimony, but also, as we have observed, by the letter agreement itself, which expressly anticipated that a formal stockholder's agreement would be drafted and executed -- circumstances that were never fulfilled. We conclude that the judge's findings were more than amply supported by the evidence he found credible and, therefore, are deserving of our deference. Bonnco Petrol, Inc. v. Epstein, 115 N.J. 599, 607 (1989); Rova Farms Resort, Inc. v. Investors Ins. Co. of America, 65 N.J. 474, 484 (1974).

Zach and Alice have also argued that, even if the February 19, 2003 agreement did not constitute a new operating agreement, or an amendment to KO is OK's existing operating agreement, "it nevertheless was at least a valid enforceable contract," which created a vested right for them to become members of KO is OK. We find insufficient merit in this argument to warrant discussion in a written opinion, R. 2:11-3(e)(1)(E), and conclude that the judge correctly viewed the seventeenth paragraph of the February 19, 2003 agreement as creating a condition that had to be met before Zach and Alice could become members of KO is OK -- i.e., the execution of a formal stockholder's agreement -- and that the judge properly concluded this condition was never fulfilled.

We also find insufficient merit in Zach and Alice's remaining arguments to warrant discussion in a written opinion. R. 2:11-3(e)(1)(E).

In short, it may be true that the parties initially expected that Zach and Alice would become members in the limited liability companies which leased part of the farm and owned and operated a business thereon. It may also be true that the parties jointly purchased equipment, infused the nascent venture with money, and invested time and effort. But, the evidence more than amply demonstrated, as the judge held, that when the time came, as one witness said in another context, for Zach and Alice to "step up to the plate" and become fully vested in both the benefits and the liabilities of the venture, Zach and Alice opted out. Accordingly, by revealing through words and conduct an intention to abandon the venture prior to its complete formation, Zach and Alice were left only with an equitable claim to the funds they advanced to the venture. Since the judge found that Zach and Alice had been fully reimbursed, he correctly refused to award them any additional relief.

III

We lastly turn to Ted and Kay's cross-appeal. They argue in their first point that the February 19, 2003 agreement expressly authorized the shifting of legal fees, and that, because they prevailed in this suit, they were entitled to such an award. In their second point, Ted and Kay claim an entitlement to fees or sanctions, pursuant to R. 2:6-9, because in their view Zach and Alice's brief failed to conform to the rules of appellate procedure. We find insufficient merit in the second point of the cross-appeal to warrant discussion in a written opinion. R. 2:11-3(e)(1)(E).

However, we find merit in the first point. An award of fees may be granted when authorized by contract. "[B]ecause such contractual provisions conflict with the common-law preference for avoiding awards of fees, they are strictly construed by our courts." McGuire v. City of Jersey City, 125 N.J. 310, 326-327 (1991); see also Satellite Gateway Comm., Inc. v. Musi Dining Car Co., Inc., 110 N.J. 280 (1988); Verna v. Links at Valleybrook, 371 N.J. Super. 77, 100-01 (App. Div. 2004). However, even in strictly construing this agreement, we must conclude that it authorized an award since it clearly and unambiguously stipulated that "[i]f litigation should commence between the parties due to a breach of the agreement, the prevailing party shall be entitled to all reasonable legal fees." Certainly, Ted and Kay prevailed in the action. Moreover, Zach and Alice have acknowledged in their brief, and in the complaint they filed in commencing this action, that their "lawsuit was based upon [Ted and Kay's] breach of a written operating agreement executed . . . on February 19, 2003." Although some of their claims do not fit the contours of the contractual stipulation, there is no doubt that Zach and Alice did allege a breach of the contract. Accordingly, we are satisfied that, as prevailing parties, Ted and Kay are entitled to an award of those fees which are reasonable in amount and which were incurred in defense of any claim that alleged or pivoted upon an allegation that they breached the February 19, 2003 agreement. We remand to the trial court for consideration of such an award.

 
Accordingly, we affirm the judgment under review in all respects, except that we reverse that part of the judgment which denied defendants' claim for counsel fees based upon the February 19, 2003 agreement, and remand for further proceedings on that claim in conformity with this opinion. We do not retain jurisdiction.

On February 4, 2003, a limited liability company entitled "The Farm in Closter, LLC" was formed, with Kay as its sole member. This company was created on the advice of counsel, who felt that, for liability purposes, the lease should be held by an entity other than KO is OK.

Lucy cooked homebaked goods sold at the farm.

KO is OK's operating agreement contained the following provisions regarding the admission of additional members:

4.3.1 One or more additional members of the Company may be admitted to the Company with the consent of the Member. Prior to the admission of any such additional member of the Company, the Member shall amend this Agreement to make such changes as the Member shall determine to reflect the fact that the Company shall have more than one member.

4.3.2 No person may be admitted as a Member to the Company through the payment of a Capital Contribution, assumption of one or more Company liabilities, or in any other manner, without the consent of the Member.

These portions of the operating agreement are consistent with the requirements of the New Jersey Limited Liability Company Act, N.J.S.A. 42:2B-1 to -70. See N.J.S.A. 42:2B-21(b)(1)(d)(1).

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A-4526-05T1

October 19, 2007