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Schlussel v. Emmanuel Roth Co.

Decided: February 7, 1994.


On appeal from the Superior Court of New Jersey, Law Division, Bergen County.

Petrella, Conley and Villanueva. The opinion of the court was delivered by Conley, J.A.D.


Plaintiff landlord appeals the dismissal of his claim under the Uniform Commercial Code Bulk Transfer Act, N.J.S.A. 12A:6-101 to 6-111, for rental payments not due and owing at the time of transfer of the assets of his tenant, defendant Emmanuel Roth Co. (Roth), to defendant Novtex Corporation (Novtex). The claim was rejected by the trial Judge on the basis that plaintiff was not a creditor within the meaning of the act as to future rents at the time of transfer. Plaintiff also appeals a judgment entered in his favor for a rentor's lien pursuant to N.J.S.A. 2A:44-165 to -- 167 in the amount of rent that was due as of the date of transfer reduced by the amount of Roth's security deposit. Finally, plaintiff appeals a no cause jury verdict on his claims against defendant Daniel Bird, president of Novtex, and defendants John Carpenter and Carl Funke, shareholders of Roth, for their alleged fraudulent misrepresentations that Novtex would assume the lease and alleged concealment of the removal of Roth's assets and business from the premises. Novtex cross-appeals from the rentor's lien judgment. We affirm the dismissal of the bulk transfer act and fraud claims and modify the rentor's lien judgment to remove the security deposit reduction.

In October 1980, plaintiff and Roth executed a five-year lease for a portion of plaintiff's industrial building in Carlstadt. In October 1985, the lease was modified and extended to October 1995. As modified, the lease provided for an annual lease rent of $76,483.00 payable in monthly installments of $6,373.58, with a rent adjustment every two and one-half years. In addition, the lease provided for payments of a percentage of certain expenses, including taxes, insurance and maintenance of common areas.

The monthly rent was due the first of the month, but if not paid by the fifteenth of each month, a late charge would be assessed.

Pursuant to Article 15 of the lease, a default in payment of its rental obligations under the lease would occur if Roth failed to make such payments upon ten days written notice by plaintiff. Upon such default, plaintiff could terminate the lease upon five days notice, enter and repossess the premises. If so terminated, the lease established damages as either "[a] sum which represents any excess of (i) the aggregate of the rent, impositions and additional rent for the balance of the term if the Lease was not so terminated, over (ii) the net rental value of the demised premises at the effective date of such termination, both discounted at the rate of four percent (4%) per annum" or, at plaintiff's option, "[s]ums equal to the rent, impositions and additional rent, when the same would have been payable if not for such termination, less any net rents received by Landlord, from any reletting, after deducting all costs incurred in connection with such termination and reletting . . . ."

Roth produced and distributed narrow fabric and trimmings at the premises. In December 1986, Carpenter and Funke purchased all of Roth's stock, and continued to operate the business. They received loans from Chemical Bank to finance this acquisition and Chemical Bank obtained a security interest in Roth's assets, which was perfected in 1987. By September 1988, the company was in financial trouble. One of the rent checks to plaintiff had bounced and, in Carpenter's words, the business was borrowing from Peter to pay Paul. Carpenter and Funke did not want to file for bankruptcy, and their alternatives were either finding a partner to allow them to continue to run the business or identifying a purchaser for the business.

In October 1988, Carpenter and Funke advised plaintiff by letter that they were seeking his help in marketing their premises. Plaintiff promoted the availability of the space to the brokerage community and Roth advertised it in the newspaper. Roth also showed the space to potential lessees.

During that time, Novtex emerged as a potential buyer for Roth. On November 9, 1988, Carpenter, Funke and Novtex entered into an agreement for purchase of assets. Pursuant to that agreement, Novtex assumed responsibility for all of Roth's orders, including back orders and future orders, and for its inventory. It also assumed leases for five automobiles, for Xerox, telex and postage equipment, and for the telephone system. Novtex did not assume the lease with plaintiff.

Also during this November 1988 time period, Bird, Funke and Carpenter met with plaintiff's son, Marc Schlussel. Most of the evidence presented to the jury on the fraud counts*fn1 focused on whether Bird did or did not state at this meeting that, if and when the Novtex purchase was consummated, Novtex would assume Roth's lease and operate the business from Carlstadt.

The respective versions of events are as follows. Marc Schlussel contended that Bird never informed him during the meeting that the acquisition was an asset purchase only; Schlussel believed that the business would continue just as it had when Carpenter and Funke had taken over. However, Schlussel never asserted that Bird made an express representation that Novtex would assume the lease. Schlussel stated only that Bird had assured him that rent arrearages would be paid.

In contrast, Bird was emphatic that he explained to Schlussel that Novtex was completing an asset purchase of Roth, would move Roth's equipment to Massachusetts, and had no interest in plaintiff's lease. Carpenter similarly recalled that Bird had always referred to the Roth acquisition as an asset purchase. He elaborated that the purpose of the November meeting was to assure Schlussel that, despite the bounced checks, the rent would be brought up to date.

Indeed plaintiff acknowledged that he knew that Novtex would move the company to Massachusetts at some point, but denied

that Bird told him the move would occur before February 1989. A December 30, 1988 letter from plaintiff, however, to Carpenter and Funke reiterated the parties' arrangement for advertising the space and plainly reflected plaintiff's awareness of Roth's desire to terminate the lease "as quickly as possible." In that letter, plaintiff asked only that "should your plans change and you no longer desire to terminate the existing lease as quickly as possible please contact landlord immediately."

As of November, Roth was behind on the October and November rents and taxes. On November 18, 1988, plaintiff sent Roth a notice advising that it was "in default in payment" for a total of $15,289.00 -- including the October and November rent payments, fourth quarter real estate taxes and late fees. The notice concluded that if the default was not cured in full within ten days plaintiff would exercise all rights legally available. With monies advanced by Novtex, these arrearages were paid, in addition to the December rent. As of the end of December, plaintiff had received from Roth, advanced by Novtex, $22,133.00, representing rental payments for October and November, late fees and fourth quarter real estate taxes, in addition to December's rent.

The closing between Roth and Novtex occurred on January 13, 1989. As of that date, the January rent had not been paid and late fees for December's rent as well as maintenance fees had also not been paid. On January 11, 1989, plaintiff sent Roth notice of the total amount owed ($10,622.00). This notice was not received by Roth, however, until January 17 and pursuant to the lease, a default by Roth would not have occurred until January 22, 1989.

The total consideration paid by Novtex for the assets of Roth purchased by Novtex was $401,840.00. That amount consisted of (1) $170,000.00 paid to Chemical Bank on its secured loan (2) $151,775.00 in accounts payable of Roth which were expressly assumed and paid by Novtex, and (3) $80,065.00 in loan advances by Novtex to Roth between November 1988 and January 13, 1989, including the $22,133.00 paid to plaintiff. Additionally, at the closing of the transaction between Roth and Novtex it was determined

that the total indebtedness of Roth to Chemical was $206,657.00. In order to pay Chemical's secured loan, Carpenter and Funke personally borrowed from Novtex $36,657.00 which was paid by Novtex to Chemical Bank to make up the deficiency. After the closing and prior to payment of Roth's accounts payable, Novtex sent a letter to each creditor to verify the accuracy of the information as to the amounts owed by Roth. It has never been disputed that all of the proceeds of the sale were paid by Novtex entirely to Roth's various creditors.

By the end of January 1989, Novtex moved all of Roth's equipment to its facility in Massachusetts. Roth paid no other rent to plaintiff. By written notice dated January 22, 1989 and effective January 26, 1989, plaintiff terminated the lease for nonpayment of the January rent, December late charges and maintenance expenses. The premises were rented to a new tenant in January 1990, but for less rent.

Pursuant to the liquidated damages provision of the lease, plaintiff calculated his damages as (1) $85,556.00 unpaid base rent for 1989 plus interest of $83,422.00, (2) expenses as a result of the termination and reletting in the amount of $50,636.00 plus interest of $36,655.00, and (3) rental shortfall (the difference in the Roth rent and the new lease) of $137,285.00. No party has ever disputed these amounts and a judgment for $393,554.00 was entered against Roth.


Contending that he was a creditor of Roth at the time of the transfer of its assets, plaintiff claims he was entitled to notice of the transfer and to share in the proceeds that were distributed by Novtex to Roth's other creditors. He argues that Novtex, as a transferee of all of Roth's assets, is responsible for what would have been his share of the proceeds which he contends is ...

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