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Lyn-Anna Properties, Ltd. v. Harborview Development Corp.

July 16, 1996

LYN-ANNA PROPERTIES, LTD., ALAN HUSAK AND ALAN KIPNIS, PLAINTIFFS-RESPONDENTS,
v.
HARBORVIEW DEVELOPMENT CORP., DEFENDANT AND THIRD-PARTY PLAINTIFF, AND KURENS SOUTH INC., PHILIP KURENS AND CLAIRE KURENS, DEFENDANTS AND THIRD-PARTY PLAINTIFFS-APPELLANTS, V. ROBERT NOTTE, THIRD-PARTY DEFENDANT.



On certification to the Superior Court, Appellate Division.

The opinion of the Court was delivered by O'hern, J. Justices Handler, Pollock, Garibaldi, Stein and Coleman join in Justice O'HERN's opinion. Chief Justice Wilentz did not participate.

The opinion of the court was delivered by: O'hern

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

Lyn-Anna Properties, Ltd., et al. v. Harborview Development Corp., et al. (A-65-95)

(NOTE: This is a companion case to Brennan v. Orban also decided today.)

Argued January 3, 1996 -- Decided July 16, 1996

O'HERN, J., writing for a unanimous Court.

The issue on appeal is whether, in a pending equitable action between business partners, the Chancery Division may retain jurisdiction over a compulsory counterclaim asserted by one group of partners against another group of partners for legal malpractice related to the partnership affairs.

This action arose out of a failed real estate development project known as "Marina Cove," a 96-unit condominium to be built in three phases in North Miami Beach, Florida. Initially, the project was formed as a joint venture between Harborview Development Corp. (Harborview), a real estate development corporation owned by Robert Notte, and Lyn-Anna Properties, Ltd. (Lyn-Anna), a limited partnership owned by Alan Husak and Alan Kipnis. In December 1987, Philip Kurens, an acquaintance of Notte, agreed to invest in Marina Cove in return for a share of profits. He incorporated Kurens South, Inc. and became a partner in Harborview. Kurens alleges that Alan Kipnis acted as attorney for Harborview in that matter, and served as escrow agent for the receipt of Kurens' money.

The project continued to lose money. By the end of 1989, Marina Cove required additional capital. Kurens agreed to invest additional funds in return for receiving all of the stock in Harborview. On December 12, 1989, Kurens and Harborview entered into an agreement that provided that in exchange for his investment, Kurens would assume managerial control of Marina Cove and receive all of Notte's interest in Harborview. This resulted in Lyn-Anna becoming a partner with Kurens. Unfortunately, after Kurens assumed control of Harborview, the project continued to lose money and started to fail.

On December 12, 1990, Husak, Kipnis and their partnership, Lyn-Anna (all referred to as Lyn-Anna) brought suit in Chancery Court, seeking to restrain the disbursement of funds and to obtain an accounting of monies disbursed. Lyn-Anna alleges that Kurens' conduct after obtaining control of Harborview was in breach of the December 12, 1989 management agreement and that that breach led to the failure of the project. Harborview, Kurens South, Philip Kurens and Claire Kurens (all referred to as Kurens) filed a counterclaim against Lyn-Anna, alleging that Kipnis' conduct between the fall of 1987 and December 12, 1989 constituted legal malpractice and fraud. Kurens moved for a jury trial on the counterclaim. The Chancery Division denied that motion on February 17, 1993. Following a bench trial, the Chancery Division dismissed both Lyn-Anna's complaint and Kurens' counterclaim with prejudice.

Kurens appealed, arguing that the trial court erred in denying the request for a jury trial on the counterclaim. The Appellate Division affirmed for substantially the same reasons expressed by the Chancery Court. The Appellate Division noted that the claims arose out of and stemmed from the same transaction. Each of the claims relied in part on the December 1987 agreement, and the disputed events all took place while that agreement was in effect. As a result, the court concluded that Kurens' counterclaim was ancillary to the equitable claims raised in Lyn-Anna's complaint. Thus, according to the Appellate Division, the lower court properly applied the doctrine of ancillary jurisdiction that enables a court in equity to try without a jury those legal counterclaims that are ancillary or incidental to the equitable claims raised in the initial complaint.

The Supreme Court granted certification limited to the issue of whether Kurens is entitled to a jury trial on the counterclaim for malpractice and fraud.

HELD:

In the circumstances of this case, the fiduciary relationship between the attorney-partner and the counterclaiming partner was sufficiently related to the equitable oversight of the partnership affairs to warrant the retention of jurisdiction of the counterclaim in the Chancery Division.

1. The court of equity was developed to grant special remedies that common-law courts could not give. Article 1, paragraph 9 of the New Jersey Constitution of 1947 guarantees the right of trial by jury. At common law it was understood that equitable actions were not within the constitutional provisions that provide for a right of trial by jury. A court of equity may properly adjudicate an ancillary claim without providing the complainant with a jury trial. Thus, prior to the 1947 Constitution, if the primary relief sought by the complainant was equitable in nature, equity had jurisdiction to settle all issues, even though purely legal in nature, where subsequent events made it impractical or unnecessary to award equitable relief. (pp. 5-15)

2. Kurens urges the Court to follow federal precedent that has required trial by jury in the context of compulsory counterclaims. Under federal precedent, it would make no difference if the equitable cause clearly outweighs the legal cause so that the basic issue of the case taken as a whole is equitable. As long as any legal cause is involved, the jury right it creates controls. While other jurisdictions follow federal precedent, New Jersey's legal history and traditions have placed a greater emphasis on the distinct roles of its law and chancery courts. (pp. 15-17)

3. A dominant theme of the Constitution of 1947 was the development of a court system that would meet the needs of New Jersey's rapidly changing society after World War II. Just as equity courts originally evolved to meet the changing needs of society, so their current mode conforms to the changing needs of society. The jurisdiction of a chancery court is to be exercised with a sensitive regard for the right to trial by jury. It is not an "inflexible rule" that chancery, having once acquired jurisdiction, should retain the case to settle all of the rights of all the parties. Each case requires an assessment of the nature and relationship of the issues and claims and the extent to which decision of the legal issues is incidental or essential to the determination of the equitable matters. (pp. 17-22)

4. In assessing whether jury trial rights are infringed, courts should consider the nature of the underlying controversy, as well as the remedial relief sought. Although, in this case, the claims for relief were ultimately limited to money damages, entitlement to relief arose from the fiduciary relationship between and among the parties. Kipnis' duty as an attorney cannot be fully divorced from his duty as a prospective partner. And Kurens' duties under the contract grew out of his partnership relationship with Kipnis and Husak. Thus, there is no clear-cut line of demarcation between the attorney malpractice issues and the partnership management issues. Those issues are part of the board of fiduciary relationship among the joint venturers in the Harborview project. As such, the Chancery Division correctly held that the claims made by Kurens in respect of the actions of Kipnis are so interrelated with the equitable issues in this matter that they are properly deemed ancillary. The Chancery Division appropriately exercised its jurisdiction to settle are of the rights of all of the parties. That Kurens' counterclaim was compulsory does not alter the original jurisdiction of the chancery court. (pp. 23-27)

Judgment of the Appellate Division is AFFIRMED.

JUSTICES HANDLER, POLLOCK, GARIBALDI, STEIN and COLEMAN join in JUSTICE O'HERN's opinion. CHIEF JUSTICE WILENTZ did not participate.

The opinion of the Court was delivered by

O'HERN, J.

This appeal concerns the ancillary jurisdiction of the Chancery Division of Superior Court. The question is whether in a pending equitable action between business partners, the Chancery Division may retain jurisdiction over a compulsory counterclaim asserted by one group of partners against another group of partners for legal malpractice related to the partnership affairs. We hold, in the circumstances of this case, that the fiduciary relationship between the attorney-partner and the counterclaiming partner was sufficiently related to the equitable oversight of the partnership affairs to warrant the retention of jurisdiction of the counterclaim in the Chancery Division.

I

This action arose out of a failed real estate development project. We draw the facts primarily from the briefs of the defendants. The project, known as "Marina Cove," called for 96 condominium units to be built in three phases in North Miami Beach, Florida. Initially, the project was formed as a joint venture between Harborview Development Corporation (Harborview), a real estate development corporation owned by third-party defendant Robert Notte, and Lyn-Anna Properties (Lyn-Anna), a limited partnership owned by plaintiffs Alan Husak and Alan Kipnis. The original financing for Marina Cove was obtained through Sunrise Savings & Loan, which became insolvent in 1986.

After Sunrise Savings failed, the venture was able to secure replacement financing from First American Savings. However, additional funds were needed to close the loan. For those funds, Notte turned to an acquaintance, defendant Philip Kurens. In December 1987, Kurens agreed to invest in Marina Cove in return for a share of its profits. He incorporated defendant Kurens South, Inc., and became a partner in Harborview. Kurens alleges that plaintiff Alan ...


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