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Bilotti v. Accurate Forming Corp.

Decided: January 21, 1963.


For reversal -- Chief Justice Weintraub and Justices Jacobs, Francis, Proctor, Hall, Schettino and Haneman. For affirmance -- None. The opinion of the court was delivered by Hall, J.


This case is here on plaintiff's appeal from summary judgment granted defendants in the Law Division. We certified the matter on our own motion before argument in the Appellate Division. R.R. 1:10-1(a).

The essence of the cause of action is a claim of fraud in connection with the sale of plaintiff's stock in the three corporate defendants resulting in the receipt of an inadequate price. Of principal concern is the effect of a general release given by plaintiff when the sale was consummated.

The summary judgment application was heard before pretrial conference and before discovery had been completed. In fact, the motion was made while plaintiff's deposition was still being taken by defendants and before he had had any opportunity for discovery on his part. We can, therefore, consider the case only as it had been unfolded to that point, and, as in all summary judgment matters, we must regard the situation most strongly against defendants in the light of their burden to "show palpably that there is no genuine issue as to any material fact challenged" and that they are entitled to judgment "as a matter of law." R.R. 4:58-3. Judson v. Peoples Bank & Trust Company of Westfield, 17 N.J. 67, 73-77 (1954) (Judson I). So viewed, the following appears.

Plaintiff and the individual defendants were the sole stockholders of these three small corporations, each holding four shares. The five constituted the board of directors and were

the officers of each company. Two of the corporations were engaged in manufacturing and the third was a realty holding company. Their affairs seem to have been managed as a unit and they may be treated as one for present purposes.

In November 1958, after two or three years operation of the businesses, during which plaintiff had been engaged in production work rather than financial management, he was discharged from employment by his four colleagues and was thereafter excluded from participation in the enterprise as an employee, officer and director. He retained counsel and there were negotiations for the sale of his stock interest. It does not appear whether he or his former associates first proposed the idea of a sale.*fn1 He and his then attorney were furnished some figures, said to have come from the corporations' books, which indicated a total net worth of $125,000, thereby giving his one-fifth interest a book value of $25,000. The negotiations did not result in a sale. It is inferable that plaintiff was insisting on a book value price which defendants were unwilling to meet. In November 1959 he received notice of stockholders' meetings of the manufacturing companies which were called to act on proposals to issue additional stock and to authorize the granting of stock options to the other four shareholders. The meetings resulted, over plaintiff's protest, in authorization for such options to the extent of 250 shares to each of the four, to be exercised within a five-year period at a price of $2 per share.

About December 1, 1959, plaintiff instituted a suit in the Chancery Division against the present defendants. The complaint was not before the trial court but has been furnished us pursuant to request at oral argument. The first count sought to set aside the stock option action as illegal and to enjoin its consummation. Cf. Eliasberg v. Standard Oil Company, 23 N.J. Super. 431 (Ch. Div. 1952), affirmed o.b. 12 N.J. 467 (1953). The second count claimed for some $6500 said to be

owed plaintiff by the manufacturing companies. The third simply alleged his naked belief that the affairs of the corporations were being mismanaged and corporate property diverted for the benefit of the other stockholders to his detriment. The relief sought was examination of the corporate books, records and other financial information. The count partook of a stockholder's bill for discovery or action in mandamus under the old practice, see Fuller v. Alexander Hollander & Company, 61 N.J. Eq. 648 (E. & A. 1900), and Lippmann v. Hydro-Space Technology, Inc., 77 N.J. Super. 497 (App. Div. 1962), seeking information upon which to base a derivative suit against corporate officers and directors.

The suit apparently reactivated negotiations for the purchase of his stock interest. There is nothing in the present record to indicate that the discussion revolved around mere settlement of the claims asserted in the complaint. A few months later, according to plaintiff's deposition testimony, his attorney reported inability to obtain satisfactory current financial information about the corporations, and an offer to purchase his stock for $25,000. The plaintiff thereupon, so he says, telephoned the defendant Busacco, who was his brother-in-law as well as the directing head of the businesses and who acted for the other defendants, and inquired whether the $25,000 offer represented one-fifth of the then corporate net worth. Busacco told him, he asserts, that it did and that there had been no substantial changes in the figures which had been furnished several months previously. He relied upon these representations and agreed to accept $25,000 for his stock plus $3500 to be paid to his counsel for fees.

The transaction was consummated near the end of April 1960. Plaintiff resigned as an officer and director of the corporations. He delivered his stock and received a check of one of the corporations for the sale price. The record does not disclose the transferees but presumably they were the respective corporations or some or all of the individuals. At least, all received the benefit of the removal from the scene of

this one minority stockholder. The back of the check contained the notation that it was for "purchase and satisfaction of stock * * * including satisfaction in full of all claims for bonuses, salaries, loans, and any claim or demand of any kind or character." Plaintiff also delivered a general release under seal running to the corporations and the individuals. It was in the customary printed form, discharging all claims against defendants which plaintiff "ever had, now has or which he * * * hereafter, can, shall, or may have, for, upon or by reason of any matter, cause or thing whatsoever, from the beginning of the world to the day of the date of these Presents." The only added special language has no pertinency. (The purpose of a second release to the same effect, dated May 27, 1960, is not apparent.) In addition, the then pending suit was dismissed with prejudice by stipulation of counsel. See R.R. 4:42-1(a).

Several months later plaintiff learned from the defendant Serin, who in the meantime had sold his identical interest for a much larger sum than plaintiff received, that Busacco had misrepresented the corporate worth and had withheld the true situation in the telephone conversation. The information was that the corporate assets were actually far greater because cash and property had been secreted or diverted and did not appear on the corporate books. It may also be inferred that plaintiff was told that the books themselves would have disclosed a greater worth than Busacco had represented.

The present suit followed. The complaint in its omnibus general charges and inconsistent demands for relief is perhaps indicative of doubt as to the precise theory of the cause of action sought to be asserted, in view of the delivery of the release, and the exact mechanics necessary or available to bring success. In many respects it bears but little resemblance to the factual picture painted by the motion proofs and lacks that particularity of the wrong required by R.R. 4:9-1. There is no specific mention of the sale of the stock until the prayers are reached, although that transaction is the fulcrum of the case. The rambling document is instead keyed

to the "settlement" of the undescribed prior litigation for $28,500, alleging that, by reason of knowingly fraudulent misrepresentations of the financial status of the corporations and concealment of the true situation when there was an affirmative duty to disclose, plaintiff, relying thereon, was induced to enter into the settlement and deliver the release, although his share of the corporate net worth was actually at least $20,000 more. All defendants are sought to be charged on the theory of agency except Serin, who is specifically absolved though named as a party.

The initial demand of the complaint is for money damages in the amount of $50,000. Cf. R.R. 4:8-1. The prayers go on in effect to request rescission -- the setting aside of the release and settlement and the return of plaintiff's stock, without any tender on his part of the moneys previously received -- and an accounting and judgment for his actual one-fifth interest in the corporate worth. There is no demand to be relieved from the dismissal of the prior litigation, see R.R. 4:62-2, or to pursue that cause further.

After the filing of answers denying all elements of plaintiff's cause of action and pleading the release as a bar,*fn2 plaintiff served interrogatories on all defendants except Serin, which were never answered. Shortly thereafter both sides served notices to take the depositions of the opposing parties and for the production of books and records. The date and place specified were identical and the trial court ordered that plaintiff's deposition be completed first. His examination consumed two days and went far afield. It was finally suspended by defendants' counsel after plaintiff, on the advice of his attorney, refused to produce some personal notes and to answer two questions. Defense counsel stated that the

suspension was for the purpose of permitting an application for an order compelling production and answer.

Instead of applying for such an order, defendants moved for summary judgment, relying upon the deposition of plaintiff together with affidavits of Busacco which set up the release and denied misrepresentations and fraud of any kind. A notice of motion to compel production and answer by plaintiff was later served. This apparently was a defensive measure, to be pursued only if summary judgment was denied.

Plaintiff countered with a motion to stay the application for summary judgment until the depositions of defendants were taken, the corporate books and records examined and the testimony of the corporations' accountant obtained, orders for which were sought. A direction to answer plaintiff's interrogatories was also requested. It was asserted that his cause of action would thereby be factually established.

The application for summary judgment was heard first. The trial court held that the release barred the suit since plaintiff concededly claimed fraud in its inducement rather than in its execution. Reliance was placed on Kearney v. National Grain Yeast Corporation, 126 N.J.L. 307 (E. & A. 1941), in which it was held, under the pre-1948 practice, that only fraud in the execution of a release could avoid its effect in an ...

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