Plaintiff, the receiver of Mar Building Co., Inc. (improperly referred to in the title as Mar Building, Inc.; referred to herein as Mar), an insolvent construction corporation, seeks to recover monies diverted from the corporation by Markus Weiner (Weiner) and Martin Blashinsky (Blashinsky), its former officers, and to pierce the corporate veil of Mar so as to hold Middlesex Apts., Inc. (Middlesex), the owner of the realty, responsible for obligations due from Mar to certain creditors. The matter is before the court on final hearing.
Middlesex was formed January 26, 1965. The incorporators were Weiner, Blashinsky and Sarah Bernstein, each of whom subscribed to 60 shares of stock, and Julius and Estelle Greenman who together subscribed to 30 shares. Mar was incorporated January 28, 1965. The incorporators, with equal shares of stock, were Blashinsky, Weiner and Bernstein. The same attorney incorporated both corporations.
Middlesex acquired title to land in Matawan, New Jersey, upon which Mar was to construct an apartment project. A contract was entered into between Mar and Middlesex on March 3, 1965 under which Mar was to do the construction for $680,000. Middlesex obtained from The Dime Savings Bank of Brooklyn a construction and permanent loan in the amount of $825,000. It was the intention of Blashinsky and Weiner to mortgage out the entire job, including the cost of the land, using none of their own money.
The amount paid by Middlesex for the land and other items exclusive of construction was $148,571.20. The total cost of the land and buildings to date was $968,939.42.
As of 1968 the cost of the building had been $806,000. There were, however, $141,153.01 of claims asserted by contractors against Mar for work done in the construction. With the exception of three creditors, these claims have been settled by Middlesex on the basis of 25 cents on the dollar. The three creditors who refused to settle are the receiver of Charles J. Rooney Plumbing & Heating, Inc., Ace-Manzo, Inc. and Manzo Contracting Co., Inc. At the trial of this
case defendants not only denied liability but also vigorously contested the validity and amount of the claims of the three creditors.
The theory upon which plaintiff proceeds against Middlesex is that a fraud was committed at the time the contract was signed with Mar for the construction of the building. It is contended that Blashinsky and Weiner, the active principals of Middlesex, must have known that the buildings could not possibly have been built for $680,000. Testimony was given by a well-qualified builder that anyone computing the probable cost for the construction of the buildings in 1965 would have arrived at a figure in the neighborhood of $900,000. Defendants sought to counteract that testimony by offering testimony of their own building expert. He testified that $703,000 ($23,000 over the contract price) would have been a valid estimate of costs. That figure, however, did not include anything for organization expenses, legal fees, temporary heat, electricity, salaries, or profit to the corporation. Testimony was also offered by defendants from an accountant who represented one of the investors in Middlesex and Mar and also Middlesex itself. He testified that from his examination of the contracts entered into and estimates that he saw for certain supplies such as lumber, masonry and hardware, the total cost was to have been $680,170. However, in such computation one of the contracts (Weiner Electric Co.) was taken at $10,000 less than its actual figure, and the amounts estimated for some of the suppliers were unreasonably low. Again no consideration was given to organization expenses, legal fees, temporary heat, electricity, salaries, or profit to the corporation. It is perfectly clear to the court that the contract price of $680,000 had no relationship to what the actual cost of construction was going to be. The court discounts the effect of the accountant's testimony because most of the contracts were entered into well after the contract between Middlesex and Mar and therefore they could not have been in Blashinsky's and Weiner's contemplation when the $680,000 contract price was arrived at.
The case presents a situation that all too often is seen. One or more persons organize a corporation to buy land and another corporation to enter into a construction contract which has little or no relationship to estimated costs of the work to be performed. That contract provides that no stop notices will be filed. The construction company, completely controlled by the people who own the real estate holding company, then enters into subcontracts for a major portion of the work. If the construction company can get away with it, its subcontracts prohibit any recourse to the Mechanics Lien Law. The amount of the general contract is grossly inadequate, the incorporators of the two corporations keeping from the mortgage funds the costs of the land, interest to be paid on the mortgage, organization costs of the landowning corporation and a profit to the incorporators. Inevitably, the construction company becomes insolvent, the subcontractors are not paid, and the incorporators grow fat on the work, labor and materials put in the project by the subcontractors who end with a claim against the insolvent construction corporation.
It is fundamental that a corporation is an entity wholly separate and distinct from the individuals who compose and control it, but the corporate cloak may not be utilized as a subterfuge to justify wrong or perpetuate fraud. Frank v. Franks Inc. , 9 N.J. 218, 223-224 (1952); Cohen v. Dwyer , 133 N.J. Eq. 226 (Ch. 1943), aff'd 134 N.J. Eq. 350 (E. & A. 1944); Miller & Dobrin, etc., Co. v. Camden Fire, etc., Assn. , 55 N.J. Super. 205, 217 (Law Div. 1959); Schmid v. First Camden National Bank & Trust Co. , 130 N.J. Eq. 254 (Ch. 1941).
In Macfadden v. Macfadden , 49 N.J. Super. 356 (App. Div. 1958), certif. den. 27 N.J. 155 (1958), the ...