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Polk v. Schwartz

Decided: February 23, 1979.

IRWIN POLK AND LEA POLK, PLAINTIFFS-APPELLANTS,
v.
DAVID SCHWARTZ AND IRENE SCHWARTZ, HIS WIFE; MILTON SCHWARTZ; SIDNEY SCHWARTZ; ELLIOT S. GROSS; S.S.R. REALTY ASSOCIATES, A NEW JERSEY PARTNERSHIP; EMEK REALTY ASSOCIATES, A NEW YORK PARTNERSHIP; CHAVARIM, INC., A NEW JERSEY CORPORATION; ISAAC BULKA; EDWARD EINHORN; CARMEL REALTY ASSOCIATES, A NEW YORK LIMITED PARTNERSHIP; 17 REALTY ASSOCIATES, A NEW JERSEY CORPORATION; HOWARD M. LAWN AND PEARL B. LAWN, HIS WIFE, INDIVIDUALLY, JOINTLY, SEVERALLY AND IN THE ALTERNATIVE, DEFENDANTS-RESPONDENTS



On appeal from Superior Court, Chancery Division, Atlantic County.

Allcorn, Seidman and Botter. The opinion of the court was delivered by Seidman, J.A.D.

Seidman

By leave granted, plaintiffs appeal from an order discharging of record a lis pendens filed in connection with a suit instituted by them against defendants in Chancery Division.

The complaint alleged that plaintiffs are the owners of a nursing home facility in Atlantic City which they acquired in 1974 from Senator Holding Corporation, and also the successors in interest of the former Senator Holding Corporation which leased the premises in 1971 to the Senator Convalescent Center Corporation, all the stock of which was owned by plaintiffs. In 1972 plaintiffs sold 90% of their stock to a group of investors "organized and directed" by defendants David Schwartz and Elliot S. Gross, for the sum of $900,000, of which one-half was paid in cash and the remainder was to be paid in monthly installments of $4,200 over a period of ten years, at the expiration of which the balance would be due and payable. According to the complaint, the sole asset acquired by the stockholders was the

lease to operate the nursing home. Plaintiffs alleged further that in 1975 the Senator Convalescent Center Corporation subleased the nursing home to Shore Manor, the principals of which were defendants David Schwartz, Elliot S. Gross, Milton Schwartz and Sidney Schwartz.

Plaintiffs contended in their complaint that the individual defendants David, Milton and Sidney Schwartz and Elliot Gross thereafter "conspired to deplete the corporation [SCCC] of its assets and working capital, and to defraud the plaintiffs of the sums due under the lease and of the balance due under the sale of the stock by performing" certain "overt acts." These acts included, allegedly, mismanaging the financial and nursing care operation of the home, resulting in a civil suit by the Public Advocate and the appointment of a state supervisor; drawing excessive salaries from the operating facility; charging personal expenditures, such as car rental, legal fees, travel and life insurance, to the operating facility; borrowing an interest-free total of $140,000 from the facility without a corporate resolution and failing to repay said loans; failing to pay federal withholding taxes and state unemployment disability insurance after deducting same from employees' wages, resulting in government levies against the corporation; withdrawing $60,581.75 from Shore Manor, Ltd. and advancing such sum to Atlantic Senator Associates without a corporate resolution, security or interest; converting $180,000 of patients' personal Medicaid funds to personal use; acquiring adjacent land in the name of David Schwartz' son-in-law for a parking lot with Shore Manor, Ltd. funds, which land was then leased to Shore Manor, Ltd. at an excessive monthly rate of $2,500.

Plaintiffs also alleged that an order was entered in Chancery Division appointing a medical receiver for the nursing home. They contended that this "deprived the plaintiffs of the sums due from the defendants" and was allegedly caused by "the conduct and financial mismanagement of the defendants resulting in depleting the corporation of sufficient

funds and assets to carry on the operation of the nursing home."

They further alleged that during this period of alleged financial mismanagement of the nursing home a total of $632,174.63 due them under the lease and the contract of sale was fraudulently retained by the individual defendants and used to purchase certain properties in Atlantic City. The breakdown of sums allegedly due plaintiffs is as follows: $184,066.60 for rent due under the lease; $65,000 for a percentage rent due under the lease; $28,108.03 for real estate taxes which defendants were obligated to pay under the lease, and $355,000 representing the balance remaining on the contract of sale. These amounts accrued during the period from September 1, 1977 to June 19, 1978. The first four counts of plaintiffs' complaint demanded judgment in these amounts.

In the fifth count plaintiffs sought to have a constructive trust imposed upon certain properties acquired by the individual defendants in Atlantic City either in their names, in the names of certain corporations or in other individual names. Plaintiffs alleged that defendants David, Milton and Sidney Schwartz and Elliot Gross conspired to deplete Shore Manor, Ltd., of its assets and working capital, thereby depriving plaintiffs of the sums due them, in order to use the funds to acquire the properties in Atlantic City. A constructive trust was sought on these properties "in order to satisfy the sums due and owing" plaintiffs. The properties listed by plaintiffs were all acquired between June 1, 1977 and July 27, 1978, and were purchased at prices ranging from $5,500 up to $1,500,000. Title was taken in the following names: four in the name of defendant 17 Realty Associates, Inc., a New Jersey corporation with its principal place of business located at 181 Beach, ...


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