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Sarner v. Sarner

Decided: June 6, 1960.

MAURICE SARNER AND LEONARD SARNER, AS STOCKHOLDERS OF LINWOOD PARK, INC., SECTIONS 1 TO 13, INCLUSIVE, EACH A CORPORATION OF THE STATE OF NEW JERSEY, ET AL., PLAINTIFFS-RESPONDENTS,
v.
SIDNEY SARNER, INDIVIDUALLY AND AS AN OFFICER AND DIRECTOR OF LINWOOD PARK, INC., SECTIONS 1 TO 13, INCLUSIVE, EACH A CORPORATION OF THE STATE OF NEW JERSEY, ET AL., DEFENDANTS-APPELLANTS



Goldmann, Conford and Freund. The opinion of the court was delivered by Conford, J.A.D.

Conford

[62 NJSuper Page 46] Sidney Sarner is sued in this action by his younger brothers, Maurice Sarner and Leonard Sarner, each of whom holds a 10% stock interest in some 18 real estate corporations in Bergen County, Sidney owning the remainder. They contend that Sidney has misused his position as majority stockholder and dominant officer of the corporations to his private advantage. In that aspect their action is brought in a capacity representative of all stockholders, seeking to make the corporations whole. The action also seeks the declaration of a partnership interest of plaintiffs, individually, to the extent of 10% each, in Sarner Management Co., an unincorporated company organized to act as rental and managing agent of the properties of the

real estate corporations referred to, and an accounting for unpaid profits of that enterprise assertedly due them.

By the pretrial order and plaintiffs' concessions during trial the subject matter of the derivative stockholders' action has become confined to three of the corporations, Linwood Park Business Center, Inc. ("Business Center" hereinafter), Linwood Park Business Center, Inc., Section 1 ("Section 1" hereinafter), and Teaneck Gardens, Inc. ("Teaneck Gardens" hereinafter). The first two mentioned corporations own a shopping or business center in Fort Lee. The pretrial order states that plaintiffs seek the appointment of a receiver to operate and manage the business center properties and to recover from Sidney Sarner any moneys found to be due the corporations.

After trial the Chancery Division entered judgment (1) for $186,588.62 in favor of Business Center against Sidney Sarner, individually and trading as Sarner Management Co.; (2) for $157,547 in favor of Section 1 against the same defendant; (3) for $139,603.15 in favor of Teaneck Gardens against the same defendant; (4) appointing a receiver "for the purpose of collecting this judgment" who was further authorized to take over and manage the properties of Business Center and Section 1, with full authority to rent, maintain and operate them, and to pay over the net income therefrom to the proper officers of the owning corporations; and (5) directing Sidney Sarner to pay to each of the plaintiffs 10% of the net profits of Sarner Management Co. "from the date of its beginning business until the date hereof" (September 28, 1959).

Defendant Sidney Sarner appeals from the judgment and from an order directing payment by the corporations mentioned of $3,000 for services of an accountant ordered by the court pendente lite to be rendered to plaintiffs for purposes of discovery in the action.

For better understanding of the said defendant's contentions certain additional circumstances are noted. One of the other corporations owned by the individual parties is Linwood

Park, Inc., which owns unimproved land. Thirteen of the corporations are named Linwood Park, Inc., Section 1 to Section 13, consecutively (the "Section corporations" hereinafter). These companies constructed and operate apartment houses in Fort Lee adjoining the shopping center. By virtue of proceedings instituted by the United States Federal Housing Administration, apparently arising out of claims by that agency that F.H.A.-approved mortgages were improperly procured by those corporations in amounts exceeding construction costs of the buildings encumbered thereby, two nominees of the F.H.A. sit with Sidney Sarner as directors of these corporations. While the complaint originally instituted herein complained of improper activities by Sidney Sarner in respect of the Section corporations, the pretrial order eliminated that area of dispute from the present litigation.

I.

We first address our attention to the appeal from the money judgment in favor of the three corporations against Sidney Sarner, individually and trading as Sarner Management Co. It is to be noted that there is no dispute concerning the amounts adjudicated. The testimony shows that corresponding debit-credit entries appear on the books of each of the corporations and of Sarner Management Co. reflecting the obligations of Sidney Sarner, trading under that name, to the several corporations for the respective amounts stated. It appears that these obligations accrued through the failure of Sarner Management Co., managing agent of the corporate realty holdings, to remit to the corporations the full amount of rents collected over varying periods of time between 1951, when the first of these properties was erected, and December 31, 1958, as of which date the books of the various entities reflect the obligations noted. These funds were apparently part of the source used by Sarner to acquire a home, a large farming enterprise in

Connecticut (Sidney Sarner Foundation), and a part interest in a Connecticut restaurant, these being reflected as assets on the books of Sarner Management Co. at acquisition costs, respectively, of $78,644.81, $419,687.57 and $38,125.

The evidence further makes it clear that the development of all the business enterprises owned by the brothers Sarner is attributable practically in entirety to the business acumen of Sidney. Prior to 1950 Sidney and Maurice had some joint realty interests in New York City. Thereafter Sidney developed the large Bergen County holdings, Maurice getting a 20% share in Sidney's interest in the first project (Teaneck) for an investment of $5,000, but being later required by Sidney to share his interest in the expanded corporate enterprises to the extent of half, or 10% of the total, with Leonard, who contributed no money. Sidney thus retained an 80% interest. These percentages of interest were uniformly maintained in all the later corporate projects.

The proofs justify the conclusions of the Chancery Division that:

"Sidney Sarner has a domineering personality. He ran the entire operation with a minimum of consultation with his brothers. He would brook no interference with his actions and his decisions were final"

and that the transfers of funds from the corporations to Sarner Management Co. in the amounts stated were effected by Sidney without consultation with the brothers or authorization from the corporations. While the trial court in a sense correctly describes these transactions as diversions of corporate funds for Sidney's personal use, it is at least to be said for him that he caused the obligations to be openly acknowledged as his debts on the books of the corporations and the management company, and that the transactions are therefore more appropriately to be characterized as unauthorized loans from the corporations to Sarner, individually, devoid of any aspect of fraud or peculation. Nevertheless, plaintiffs properly assert the right of the corporations

to have recovery of these amounts from Sidney Sarner, individually, and trading as Sarner Management Co., and it is elementary that ...


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