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Schenck v. HJI Associates

November 25, 1996


On appeal from the Superior Court of New Jersey, Chancery Division, Monmouth County.

As Corrected January 13, 1997.

Before Judges Shebell, Baime and Braithwaite. The opinion of the court was delivered by Shebell, P.j.a.d.

The opinion of the court was delivered by: Shebell

The opinion of the court was delivered by


Plaintiff, a real estate broker, is aggrieved by an adverse decision from an umpire appointed under the Alternative Dispute Resolution Act (ADRA), N.J.S.A. 2A:23A-1 to 19. Following the umpire's decision, plaintiff moved in the Chancery Division to vacate the dismissal of his Complaint. However, following argument, the Chancery Judge affirmed the umpire by order of November 9, 1995.

Plaintiff appeals and argues: "The trial court erred by upholding the umpire's failure to give effect to the contract's terms by adverting to parol evidence where such an analysis was unnecessary." Plaintiff urges that an appellate court has authority to correct an ADRA umpire's legal error, and that the umpire and Judge erred in finding that the provisions of the commission agreement were not triggered.

Plaintiff is licensed in New York and New Jersey. The individual defendants are partners at HJI Associates, a partnership whose sole asset was a 9.5 acre parcel of vacant land on the northeast corner of Route 35 and Industrial Way East, Eatontown. HJI purchased the property in 1986 with mortgage financing from Midlantic National Bank. By 1989, the mortgage had become seriously in default and its value had dropped to the point where the mortgage exceeded the fair market value of the property.

In 1992, the partnership listed the property for sale with Michael Gilman, a realtor. Shortly thereafter, Gilman notified the defendants that plaintiff, Stanley Schenck, said he had found possible tenants for the site, including a national entertainment company, AMC. AMC was interested in building a movie theater complex on the site. A Bally's Jack LaLanne health spa was also envisioned. At this time, the partnership was in default of the mortgage and foreclosure proceedings had been started.

Gilman and the defendants met several times with the plaintiff to discuss construction of a building on the site to house the prospective tenants. During these meetings, defendants informed the realtors that the mortgage was in default and being foreclosed, and that there was no equity left in the property. The value of the property in 1992 had dropped to between $600,000.00 and $800,000.00 and the mortgage balance had grown to about $1,800,000.00. Defendants also told the realtors that they could not pay any commission unless they obtained financing, with payments dependent upon construction draws and the paying of rent.

After much negotiating, a contingent lease was prepared and executed with AMC. It required certain municipal board approvals for the construction of the building which would house the movie theaters as well as contingencies for construction financing needed by defendants. AMC was also aware of defendant's financial situation and that they needed to obtain financing.

Plaintiff sought to insure that he would be able to collect a commission and, therefore, his counsel drafted a commission agreement. The agreement, signed by defendants and plaintiff, but not Gilman, provides for payment of 4% of the fixed annual rent as commission on the leases. A payment schedule was outlined, specifying the obligations of the parties during a six year payment schedule. The commission was $1,300,000 for two leases, the one to AMC was $972,600.00, and the other to The Fitness Center (TFC) was $404,464.00. The contingent lease with AMC did not go into effect. Apparently, defendants did not enter into a lease with TFC, as no evidence was produced to show that there was anything besides negotiations with TFC.

Although paragraph 2.3 of the commission agreement states that a commission is due and payable upon the signing of the agreement, paragraph 3 sets forth a payment schedule for the commission to be paid from money obtained from the construction draws and rent. Similarly, while paragraph 5.1 states that the owner will be in default upon insolvency and paragraph 5.3 accelerates "all payments not yet made" upon such default, the parties knew that the owner was indeed insolvent at the time of the signing of the agreement. Further, paragraph 8.5 conditions the owner's ability to pay the commission upon the owner obtaining financing:

Owner represents that it has the financial capability to complete the underlying lease transaction and make payments on this commission, said representation to be conditionally ...

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