KENNETH GRUBER v. XACTIS CORPORATION

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-3800-10T1

KENNETH GRUBER

and MURRAY GRUBER,

Plaintiffs-Respondents,

v.

XACTIS CORPORATION,

Defendant,

and

ALAN S. KAPLAN,

Defendant-Appellant.

_________________________________________________________

September 5, 2013

Argued March 12, 2013 - Decided

Before Judges Messano and Lihotz.

On appeal from the Superior Court of New Jersey, Law Division, Essex County, Docket No. L-8044-07.

Alan S. Kaplan, appellant, argued the cause pro se.

David J. Gruber argued the cause for respondents (Gruber, Schwartz & Posnock, LLP, attorneys; Mr. Gruber, of counsel and on the brief).

PER CURIAM

Following a non-jury trial, judgment was entered in favor of plaintiffs Kenneth and Murray Gruber against defendants Alan Kaplan (defendant) and Xactis Corporation (Xactis) in the amount of $300,000, together with prejudgment interest in the amount of $209,582.29, for a total judgment of $509,582.29. Defendants' subsequent motion for reconsideration was denied.

The testimony at trial revealed that, in June 2005, defendant approached plaintiffs and solicited their investment in Xactis, a company providing computer programming services to other corporations. At a meeting defendant arranged at the home of Arthur Lester, he made a detailed presentation and provided plaintiffs with a private placement offering memorandum and disclosure statement (offering statement). Defendant represented that Lester was someone who had already invested $100,000 in Xactis. The offering statement asserted that "[m]anagement's initial valuation for [Xactis] is [$]20,000,000 and [it] is issuing a total of 5,000,000 shares [of stock]." The offering statement also explained the speculative and potentially risky nature of any investment in Xactis.

Defendant also represented orally and in the offering statement that Xactis had a direct and on-going relationship with Sun Microsystems (Sun) and Electronic Data Systems. Defendant also stated that Xactis was selling its proprietary software to Sun and other large companies and the company had contracted, or was about to contract with, Nextel, the Department of Homeland Security, the Internal Revenue Service, the United States Department of Agriculture, Hewlett-Packard, and Banco Popular, among others. Defendant projected revenues of $6 million for 2005, $36 million for 2006, $72 million in 2007, and $130 million in 2008.

Defendant stated that Xactis would be purchasing the intellectual property rights held by another corporation, Internet Now Technologies (INow), portrayed as a predecessor to Xactis. However, defendant never disclosed that INow was involved in significant litigation involving claims by Sun seeking more than $1 million, or that INow was bankrupt. Defendant failed to disclose that Xactis did not have any cash on hand, or that he had several judgments and tax liens against him personally, including an IRS lien of approximately $400,000, no assets and was nearly $1 million in debt. Defendant asked plaintiffs to invest $300,000, which would fund the existing and imminent contracts with Sun and other entities.

On June 10, 2005, plaintiffs each executed convertible promissory notes with Xactis for $50,000. Under the terms of the notes, an "[e]vent of [d]efault" included: a failure by Xactis to pay principal, interest, or other amounts due; a failure to perform its obligations; and the making of any false representations, warranties, or certifications. Upon an "event of default, plaintiffs were entitled "at [their] option . . . [to] declare the entire unpaid principal balance of th[e] Note, together with all accrued but unpaid interest, due and payable . . . . " Payment of interest was to commence on the one-year anniversary of the notes. On October 18, 2005, defendant requested and received an additional $100,000 from each plaintiff. Additional promissory notes were executed that included similar provisions.

Plaintiffs claimed that thereafter defendant would routinely deny their requests for financial documents relating to Xactis. Defendant's claims of promising prospects bore no fruit.

Plaintiffs also established that defendant and his wife, Rebecca, used the investments for personal expenses. Rebecca used the initial $100,000 to write checks from Xactis to herself, defendant, and another defunct corporation, RBI, Inc. (RBI).1 The additional $200,000 was used to pay for household expenses, food, alcohol, clothing, and a car. On August 29, 2007, due to the failure of Xactis to make interest payments under the notes, plaintiffs declared Xactis in default.

Arnold Mytelka testified that in December 2004, he was appointed as fiscal agent to oversee litigation surrounding INow. His March 2005 report to the court revealed that INow was insolvent, had no assets and was not conducting business. INow owed Sun $1.2 million, and Sun had terminated their relationship. Mytelka recommended INow file for bankruptcy.

By early May 2005, Mytelka had been discharged from his duties. Yet, the offering statement shown to plaintiffs in June 2005 claimed that Mytelka was overseeing INow's litigation and was supportive of transferring INow's contracts to Xactis. Mytelka was not aware of defendant's efforts to raise money for Xactis, was unaware of any effort by Xactis to buy INow and knew of no contractual relationships between Xactis and Sun in 2005.

Defendant testified. He claimed that Xactis was a successor to INow and he was transitioning INow's intellectual property and other resources to Xactis. However, he admitted there was no formal assignment of INow's contract with Sun to Xactis, and his statement to plaintiffs that he had the support of the special fiscal agent was "slight[ly] incorrect." Defendant conceded that Mytelka's report regarding Sun's termination of its agreement with INow was accurate.

Defendant admitted that Xactis did not have a bank account when he started to solicit investors, and he deposited plaintiffs' money into RBI's account. Defendant explained that he used RBI's account as his and Rebecca's personal bank account, and that he did not document any loans between RBI and Xactis. Defendant knew that the RBI account was not subject to the liens against him.

Defendant testified that Xactis never issued stock, but he, nonetheless, considered himself the sole shareholder. In addition, he conceded that he never signed leases for Xactis to have offices in Canada, Singapore, and South Africa, or a research and development facility in Chile, as he had claimed when initially speaking with plaintiffs. He never held any formal shareholder or board of directors meetings for Xactis.

Defendant admitted that Lester had never invested in Xactis, but had made a personal loan to defendant in the amount of $100,000. Lester did not receive a promissory note or an offering statement in exchange for his money, and defendant used Lester's funds for personal expenses. Defendant claimed any representation to plaintiffs that Lester was an investor was merely "ambiguous."

In an extensive oral opinion placed on the record December 15, 2010, the judge issued his findings of fact and conclusions of law. The judge made "all of [his] factual findings . . . by clear and convincing evidence." The judge considered plaintiffs' request that Xactis' corporate veil be pierced, and defendant be held personally liable. He concluded the "interest[s] of fairness and justice clearly support a disregarding of the corporate form in this case in order to impose personal liability on [defendant] for his wrongdoings . . . ." The judge further concluded that because he found plaintiffs were entitled to the "enforcement of a contractual right[,] . . . the unjust enrichment count" of the complaint should be dismissed.

The judge then considered the remaining substantive counts of plaintiffs' complaint. He found that defendants were liable to plaintiffs under the terms of the notes. Exhaustively referencing specific provisions of the offering statement, the judge concluded, "those false representations of fact were [also] made to each [plaintiff] verbally, at the meeting at . . . Lester's house." He further determined defendant knew the representations were false, and he "intended to deceive both [plaintiffs] . . . ." The judge found each plaintiff "believed and justifiably relied upon the statements that I just put on the record and they were induced by those statements to make the investment[s] in [Xactis]." Plaintiff suffered damages, i.e., the monies loaned to defendant but not repaid. The judge determined that most of the remaining counts of plaintiffs' complaint were "subsumed" by his conclusion that plaintiffs had proven legal fraud.

Lastly, the judge determined that plaintiffs had established a "civil conspiracy" between defendant and Rebecca. The judge noted that the clear and convincing evidence established the "co[-]mingling of the Xactis money [and] Ms. Kaplan's money[,]" and "that this money was used for personal . . . expenses . . . not business expenses . . . ."

Before us, defendant asserts a variety of challenges to the judge's factual findings and legal conclusions, as well as arguments regarding the conduct of the trial itself. We have considered those contentions in light of the record and applicable legal standards. We affirm.

We initially note:

Final determinations made by the trial court sitting in a non-jury case are subject to a limited and well-established scope of review: 'we do not disturb the factual findings and legal conclusions of the trial judge unless we are convinced that they are so manifestly unsupported by or inconsistent with the competent, relevant and reasonably credible evidence as to offend the interests of justice[.]

[Seidman v. Clifton Sav. Bank, S.L.A., 205 N.J. 150, 169 (2011) (quoting In re Trust Created By Agreement Dated December 20, 1961, ex. rel. Johnson, 194 N.J. 276, 284 (2008) (internal quotation marks omitted)).]

"[T]he scope of appellate review is expanded when the alleged error on appeal focuses on the trial judge's evaluations of fact, rather than his or her findings of credibility." Walid v. Yolanda for Irene Couture, Inc., 425 N.J. Super. 171, 179 (App. Div. 2012) (citation omitted).

The judge'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. of Manalapan, 140 N.J. 366, 378 (1995) (citations omitted). As a result, we review the judge's legal conclusions de novo. Little v. KIA Motors America, Inc., 425 N.J. Super. 82, 90 (App. Div. 2012) (citing Manalapan Realty, supra, 140 N.J. at 378).

Defendant claims that the judge failed to comply with Rule 1:7-4(a), thereby requiring us "to speculate about the reasons for [his] sua sponte findings and decisions . . . ." The argument lacks sufficient merit to warrant discussion in a written opinion. R. 2:11-3(e)(1)(E). It is abundantly clear that the judge fully explained his findings which underpinned the legal conclusions he reached. Those factual findings were adequately supported by sufficient credible evidence in the record and we find no basis to disturb them.

Defendant contends that the judge erred in finding he committed fraud since there was no evidence that he acted with "willful and malicious intent." However,

proof of common law fraud requires the satisfaction of five elements: a material misrepresentation by the defendant of a presently existing fact or past fact; knowledge or belief by the defendant of its falsity; an intent that the plaintiff rely on the statement; reasonable reliance by the plaintiff; and resulting damages to the plaintiff.

[Liberty Mut. Ins. Co. v. Land, 186 N.J. 163, 175 (2006) (citing Gennari v. Weichert Co. Realtors, 148 N.J. 582, 610 (1997)).]

There was ample support for the judge's conclusion that plaintiffs' had established these elements by clear and convincing evidence.

Defendant may confuse the necessary elements of fraud with those additional elements that support an award of punitive damages in such circumstances. "To be subject to liability for punitive damages, a defendant's conduct must be willfully and wantonly reckless or malicious." Gennari, supra, 148 N.J. at 610-11 (citing Nappe v. Anschelewitz, Barr, Ansell & Bonello, 97 N.J. 37, 49 (1984)). "[L]iability under common-law fraud may be established, but the question of whether this conduct rises to a level justifying the imposition of punitive damages is quite different." Gennari v. Weichert Co. Realtors, 288 N.J. Super. 504, 551 (App. Div. 1996). There was no award of punitive damages in this case.

We also reject defendant's arguments that the judge applied "inappropriate definitions, standards and criteria," to the evidence, or based his finding of fraud upon a "legally and financially inappropriate timeline-to-success . . . ." The judge's findings were solidly tethered to the evidence in the record; the finding of fraud was based on the misrepresentations that induced plaintiffs to invest their money, not when, or if, Xactis was likely to be profitable. Whether defendant was provided with enough time to make Xactis profitable is irrelevant, because the gravamen of plaintiffs' claims was that defendant made false representations to obtain their investment in the first instance.

Defendant also argues that the judge erred by not allowing him to call Donald L. Estes, Jr., as a witness. The judge decided to conduct a hearing pursuant to N.J.R.E. 104(a), since Estes was not identified as a witness until a week or two before trial.

However, when the judge requested a proffer, defendant claimed that Estes would testify that he knew defendant for approximately four years, ran his own company and had partnered with Xactis to develop business. But, defendant conceded that Estes had no ownership interest in Xactis, was unfamiliar with its corporate affairs and executed no agreements with the company. The judge concluded, without hearing Estes's testimony, that the subject of the proffer was irrelevant to the case. We agree.

Relevant evidence is defined as "having a tendency in reason to prove or disprove any fact of consequence to the determination of the action." N.J.R.E. 401. Whether Xactis was an ongoing concern when the case was tried in November and December 2010 was inconsequential to the litigation. The judge did not mistakenly exercise his discretion in denying the testimony of Estes.

Defendant also contends that the judge, "with no forewarning," made "sua sponte decisions at the end of . . . trial" regarding "securities fraud issues not raised in the complaint." The argument does not fairly present the full record.

In his summation, defense counsel, among other arguments, contended that many of the representations in the offering statement were aspirational, what "hopefully . . . Xactis can provide for [the] market." Thereafter, plaintiffs' counsel addressed that argument by citing specifically to federal precedent regarding "forward looking statements" in securities offerings.

In rendering his decision, the judge repeatedly explained that the case was "not a securities act case." The judge distinguished such cases from the present case by providing a brief background of federal law and expressly stating several times that they did not apply. He expressly stated: "[A]gain, this is not a securities law case, but I thought it's appropriate to give context to this litigation that I put on the record what the securities law provides and what the cases that are decided under the Securities Act apply."

Despite claiming that the trial judge erred by applying federal securities law, in his brief, defendant urges that the "bespeaks caution doctrine" and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the PSLRA), 15 U.S.C.A. 78u-5, relieved him of liability based upon the offering statement. It is quite clear that plaintiffs did not assert a claim for securities fraud and the trial judge did not rely upon securities law in reaching his decision.

Nevertheless, the argument is unavailing on its merits.

The PSLRA requires forward-looking statements to be accompanied by meaningful cautionary statements in order for safe harbor protection to apply. The cautionary language should be directly related to the alleged misrepresentations, but it does not have to actually accompany the alleged misrepresentation. . . . Cautionary language must be extensive and specific . . . . This Court . . . [has] explained: [A] vague or blanket (boilerplate) disclaimer which merely warns the reader that the investment has risks will ordinarily be inadequate to prevent misinformation. To suffice, the cautionary statements must be substantive and tailored to the specific future projections, estimates or opinions in the prospectus which the plaintiffs challenge.

[GSC Partners CDO Fund v. Washington, 368 F.3d 228, 243 n.3 (3d Cir. 2004) (citations and quotation marks omitted) (second alteration in original).]

"[T]he 'bespeaks caution' doctrine . . . like the safe harbor provision, protects forward-looking statements that are accompanied by meaningful cautionary statements from liability." Ibid. (citation omitted).

Here, the trial judge found that many of the statements in the offering statement were not forward looking, but, rather, were misrepresentations of current situations. Moreover, any cautionary language in the offering statement was "boilerplate" and inadequate.

Defendant next contends that the judge erred in finding he and Rebecca engaged in a civil conspiracy. Defendant's first argument -- the judge failed to consider the necessary components of a claim under the Uniform Fraudulent Transfer Act (UFTA), N.J.S.A. 25:2-20 to -34 -- lacks sufficient merit to warrant discussion. R. 2:11-3(e)(1)(E). Plaintiffs made no claim under the UFTA.

We discern from defendant's brief that he alternatively argues the evidence was insufficient to prove he and his wife engaged in a civil conspiracy. We disagree.

"In New Jersey, a civil conspiracy is a combination of two or more persons acting in concert to commit an unlawful act, or to commit a lawful act by unlawful means, the principal element of which is an agreement between the parties to inflict a wrong against or injury upon another, and an overt act that results in damage." Banco Popular N. Am. v. Gandi, 184 N.J. 161, 177 (2004) (citation omitted). "[T]he gist of the claim is not the unlawful agreement, but the underlying wrong which, absent the conspiracy, would give a right of action." Id. at 177-78 (citation omitted).

We note that the judgment, contrary to defendant's assertion, was not entered against Rebecca, but only against defendant and Xactis. The judge found that plaintiffs' monies were essentially diverted from Xactis to pay for defendant's and his wife's personal expenses. There was ample proof that defendant conspired with another person, his wife, to commit fraud.

To the extent we have not specifically addressed defendant's remaining arguments, they lack sufficient merit to warrant discussion in a written opinion. R. 2:11-3(e)(1)(E).

1 We use Rebecca's first name to avoid confusion; we intend no disrespect by this informality. Rebecca filed a voluntary Chapter 7 bankruptcy petition in 2008, requiring plaintiffs to pursue their fraud claims against her in bankruptcy court. On February 11, 2011, the bankruptcy court held that Rebecca engaged in actual fraud and that her obligations to plaintiffs were non-dischargeable. On March 17, 2011, the bankruptcy court entered an order in favor of plaintiffs against Rebecca in the amount of $509,582.29. The District Court upheld that decision on appeal, and on May 24, 2012, the United States Court of Appeals for the Third Circuit affirmed.