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McGlynn v. Schultz

Decided: March 21, 1966.


Mintz, J.s.c.


Plaintiff, receiver of Neptune Center Associates (N.C.A.), a limited partnership of New Jersey, seeks damages from the defendants for their alleged active participation or negligent acquiescence in the diversion by Office Buildings of America, Inc. (O.B.A.) of $414,900 asserted to be trust funds belonging to the partnership. These funds consist of the moneys originally invested in the partnership by the partners for the specific purpose of acquiring title to premises known as Neptune City Shopping Center.

At all times hereinafter mentioned the following defendants were either officers and/or directors of O.B.A.:

Mortimer L. Schultz -- President, chairman of the board, director, member of the executive committee.

Richard W. Siebert -- Vice-president, director, member of the executive committee.

David H. Jackson -- Director, member of the executive committee.

Gerald I. Lebau -- Director, member of the executive committee.

Jack E. Portis -- Second vice president, director.

Alexander C. Greyson -- Director, member of the executive committee.

Thomas H. Vaughn -- Director.

Otto Rubens -- Director.

Norman R. Berson -- Director, member of the executive committee.

Raymond F. White -- Secretary.

Sherman I. Hirschfeld -- Comptroller, treasurer, director.

Additionally, defendants Berson, Hirschfeld and White were president, treasurer and secretary, respectively, as well as directors of First Jersey Securities Corp. (First Jersey), a wholly owned subsidiary of O.B.A. Defendants Schultz, Siebert, Hirschfeld, Berson and White were part of the management team for O.B.A. and devoted their full time and efforts to the affairs of O.B.A. and First Jersey. The remaining defendants have outside interests and became board members of O.B.A. as a result of having invested in one or more of the O.B.A. syndicates, or through the purchase of O.B.A. stock. Defendant Schultz was the dominant personality in the conduct of the affairs of O.B.A. and First Jersey.

During trial, dismissals were entered as to defendants White and Portis. White was Schultz's personal secretary as well as secretary to O.B.A. He exercised no management functions, had no authority, and at all times was responsible to and followed the directions of defendant Schultz. Portis lives in Chicago and was not present at any of the important directors' meetings to be noted later. He did not exercise any of the functions normally reserved to directors nor was he in a position to know the details of the corporation's business. Cf. Ark-Tenn Distributing Corp. v. Breidt, 209 F.2d 359 (3 Cir. 1954). Prior to trial the attorney for the plaintiff-receiver accepted a settlement with Rubens for $500 on the grounds that Rubens as a director had done all that he could to see to it that the fund in question was preserved for the partnership, and a dismissal was entered. This amount was required to absorb the expenses to be incurred in connection with effecting the dismissal as against said defendant.

N.C.A. was organized by agreement dated March 20, 1963 and acknowledged on May 14, 1963 by defendant Schultz as general partner and defendants Berson and Siebert as original limited partners, and filed on May 21, 1963. O.B.A. was a New Jersey corporation engaged in the real estate syndication business. First Jersey was an underwriter for real estate syndications and was a wholly owned subsidiary of O.B.A.

O.B.A. would acquire an income-producing property which it would in turn convey, or assign its contract to purchase, at a profit to a limited partnership. O.B.A. would then take back a net lease from the partnership, the rental usually calculated to return 9% or 10% of the partner's investment. The N.C.A. arrangement was typical.

At the regular meeting of the O.B.A. executive committee on February 27, 1963, attended by Schultz, Lebau, Jackson, Siebert and Berson, as its members, Hirschfeld by invitation, and White as secretary, Siebert reported that negotiations were being conducted for the purchase of the Neptune City Shopping Center. The owners were asking $400,000 in cash over mortgages of approximately $1,850,000. It was unanimously agreed that the company look favorably toward the acquisition of this property.

The annual meeting of the board of directors was held on March 11, 1963. Schultz, Lebau, Vaughn, Greyson, Hirschfeld, Siebert and Rubens attended in their capacity as directors. White was present as secretary. The minutes of that meeting indicate that Siebert reported that the company had definitely decided to purchase the shopping center and would enter into a contract before the end of the week. They further indicate that the contract terms were explained and the attending members of the board were told that the property was to be syndicated for about $720,000. At this time the board approved the terms of the contract.

On March 19, 1963 O.B.A. executed two contracts to purchase the Neptune City Shopping Center. Two contracts were needed because the property was composed of two distinct parcels, each owned by separate entities. Altogether, $400,000 in cash was involved, the bulk of the purchase price being the assumption of existing mortgages. The contracts provided for September 25, 1963 as the closing date. A $100,000 deposit was paid by O.B.A. out of its general funds upon execution of the contract. This money had been borrowed by it from third persons for this specific purpose.

N.C.A. was organized under O.B.A. auspices for the express purpose of acquiring title to the shopping center. First Jersey prepared an offering of limited partnership units for sale to the public. Capitalization was to be in the sum of $720,000, the amount O.B.A. desired for the assignment of its interest in the shopping center over and above the assumption of all existing and new mortgages by N.C.A. Thus, the gross profit to O.B.A. in this transaction was to approximate $320,000. Immediately after the execution of the contracts to acquire the properties a prospectus was prepared and circularized among all O.B.A. shareholders and investors in earlier syndications.

Using this prospectus as part of its sales technique First Jersey sold limited partnership shares in N.C.A. to the general public. From March 29, 1963 through May 29, 1963 First Jersey collected from the limited partners $414,900, which was deposited in its own account and later remitted to O.B.A. at the direction of defendant Schultz. This fund was deposited in the general O.B.A. bank account and was used to meet other O.B.A. obligations as they accrued. The N.C.A. limited partnership agreement expressly provided for a separate bank account. Paragraph 15 states:

"All funds of the Partnership are to be deposited in the Partnership name, in such bank account or accounts as shall be designated by the General Partner. Withdrawals from any such bank account or accounts shall be made upon such signing or signatures as the General Partner may designate."

However, no such individual bank account was opened for N.C.A. At this juncture all that existed was a contract between O.B.A. and the sellers of Neptune City Shopping Center, with a closing date set for September 25, 1963. O.B.A. did not assign this purchase contract to N.C.A., nor did it contract in writing to turn the property over to N.C.A. upon closing with the sellers. No arrangement was made to protect the interests of the N.C.A. partners. The best that can be said is that the directors of O.B.A. orally

agreed that title was to be transferred to N.C.A. Significantly, the investors in N.C.A. were not apprised respecting the "informality" of these arrangements.

Before title to the shopping center could be closed, O.B.A. on June 25, 1963 petitioned for an arrangement under Chapter XI of the Bankruptcy Act, and on August 26, 1963 was declared bankrupt. During March, April and May 1963 over $1,200,000 passed through O.B.A.'s general account, of which $414,900 was collected from the N.C.A. partners. On June 25, 1963, when O.B.A. filed its petition in bankruptcy, it had only about $7,000 in its bank account. If it were not for the influx of funds collected from N.C.A., O.B.A. would have overdrawn its bank account during March, April, May and June 1963 by about $400,000.

This failure to take steps to protect the interests of N.C.A. in the funds collected is the basis of plaintiff's attempt to hold the defendants individually liable. It is argued that their failure to assume the duty of assuring that N.C.A.'s funds were maintained and protected for the purpose for which they had been collected is actionable. Plaintiff urges that the evidence establishes that defendants either diverted trust moneys to other corporate purposes, Hirsch v. Phily, 4 N.J. 408 (1950), negligently performed their fiduciary duty so as to be the cause of the partnership's loss, or knowingly aided a fiduciary in the breach of his duty or ratified his actions. Williams v. McKay, 40 N.J. Eq. 189 (E. & A. 1885); Judson v. Peoples Bank & Trust Co., 25 N.J. 17 (1957). It matters not that the individual defendants did not personally benefit from any alleged conversion of trust funds and acted merely as agents for a corporation. Hirsch v. Phily, supra.

During trial it became clear that there were two pivotal issues in this case: (1) were the funds collected from the N.C.A. partners trust funds, and (2) if so, is the alleged advice of counsel a good defense considering all the facts of this case? Other facts in evidence will be disclosed as they become necessary to the discussion at hand.


At the outset it should be noted that the New Jersey Legislature enacted a Real Estate Syndication Offerings Law, L. 1963, c. 192, ยง 2; N.J.S.A. 49:3-27 through 49:3-44, effective as of January 1, 1964, which makes the trust issue moot for new real estate syndicates. The act explicitly provides that all funds raised for real estate syndicates, like those in question here, are trust funds until actually employed in connection with the consummation of the transaction. N.J.S.A. 49:3-40. However, the statute and its legislative history do not indicate whether this statute was creating new law or codifying ...

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