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K. Woodmere Associates v. Menk Corp.

November 12, 1998

K. WOODMERE ASSOCIATES, L.P. AND KAPLAN AT TOMS RIVER, INC., PLAINTIFFS-APPELLANTS,
v.
MENK CORPORATION, DEFENDANT-RESPONDENT.



Before Judges King, Newman and Fall.

The opinion of the court was delivered by: Fall, J.s.c. (temporarily assigned)

[9]    Argued: October 28, 1998

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

In this declaratory judgment appeal, we consider the novel issue of competing claims by present and prior property owners to cash performance bonds posted by the prior owner pursuant to municipal approvals for development of that property. After a non-jury trial, the Judge ruled in favor of the current property owner, determining the "as is" quitclaim deeding of title to the property transferred the prior owner's interest in the cash performance bonds to the current property owner. The trial Judge ruled that absent agreement and consideration to the contrary, the cash performance bonds "run with the land" and become the property of the grantee. We disagree and reverse.

I.

An understanding of the issues and our ruling requires considerable Discussion of the complex factual and procedural history of this matter. Plaintiff, K. Woodmere Associates, L.P. (Woodmere), owner of real property located in Lakewood Township, Ocean County, obtained municipal approvals for construction of a 375-unit senior citizen life-care community with a 60-bed nursing home, known as Woodmere. Plaintiff, Kaplan at Toms River, Inc. (Kaplan), owner of real property located in Dover Township, Ocean County, obtained municipal approvals for construction of a 399-unit senior citizen townhouse community known as Le Resort. Woodmere and Kaplan have the same principal owners, Michael Kaplan and Morris Kaplan, and are collectively referred to as the "Kaplan Entities."

Incident to these development approvals, the Kaplan Entities posted performance guarantees for both projects, to insure satisfactory installation of various required offsite and onsite improvements. See N.J.S.A. 40:55D-53a(1). Performance guarantees were posted both with Lakewood Township and the Lakewood Municipal Utilities Authority (MUA) for the Woodmere development in 1987. The performance guarantees with Lakewood Township were in the form of performance bonds only. The performance guarantees posted with Lakewood MUA were in the form of performance bonds for 90%, and cash bonds for 10% of the estimated cost to install the required offsite sewer and onsite sewer and water utility improvements. The cash bonds posted on the Woodmere project with Lakewood MUA totaled approximately $37,000.

With respect to the Le Resort development, the performance guarantees were posted with Dover Township in the form of performance bonds for 90%, and cash bonds for 10% of the estimated cost of improvements installation. The total cash bonds posted with Dover Township by the Kaplan Entities for this project totaled approximately $70,000. Michael and Morris Kaplan personally indemnified the sureties posting the performance bonds on both projects.

At the time the Kaplan Entities were developing these properties, they had two outstanding loans from Midlantic National Bank (Midlantic). One was a construction loan to Kaplan at Toms River, Inc., and the second was a line of credit to K. Woodmere Associates, L.P. The outstanding principal loans totaled approximately $8 million, and both were personally guaranteed by Michael and Morris Kaplan. These loans were also guaranteed and secured as part of a cross-collateralization by two other properties owned by affiliates of the Kaplan Entities, one in Lakewood Township and the other in Jackson Township.

The developments proceeded, and many of the required improvements were installed on both projects. However, being over-extended, and unable to meet their obligations, Michael and Morris Kaplan filed for protection under Chapter 11 of the Bankruptcy Code, individually and on behalf of the various Kaplan Entities, on February 11, 1991. In a Chapter 11 proceeding, the debtor remains in possession of its assets and continues to operate its business, rather than undergoing a distribution of assets through liquidation, as in a Chapter 7 proceeding. See 11 U.S.C.A §1107(a). The debtor files a plan of reorganization, a committee of unsecured creditors is appointed by the court, and the reorganization plan is subject to approval of the Bankruptcy Court. A trustee is not routinely appointed. Once approved, the debtor continues in possession and continues to operate its business in accordance with the plan, periodically reporting to the United State Trustee. See 11 U.S.C.A. §1102(a)(1), §1102(b)(1), §1107(a), §1106(a)(1), and §1125(b). Here, the committee of unsecured creditors was appointed on March 1, 1991. The creditors committee approved, and the Bankruptcy Court confirmed, the five-year plan of reorganization in January 1993. The reorganization plan was implemented and is now complete. The uncontroverted evidence before the trial court established the cash performance bonds were part of the cash assets listed on the required Debtors' Disclosure Statement. See 11 U.S.C.A. §1125(b).

In June 1991, the Kaplans and Midlantic entered into settlement negotiations in an attempt to resolve the outstanding $8 million obligation. They reached an agreement in August 1991, having two principal components. First, the Kaplan Entities agreed to transfer ownership of the Woodmere and Le Resort properties to Midlantic by quitclaim deed in "as-is" condition. In return, Midlantic would deem $7.5 million of the debt satisfied and discharged. Second, $500,000 would remain as a non-recourse obligation of the Kaplan Entities, secured by the same Lakewood Township and Jackson Township properties that secured and cross-collateralized the original loans. The agreement was memorialized by correspondence.

In October 1991, the Kaplans filed a verified application with the United State Bankruptcy Court for the District of New Jersey seeking approval of the Midlantic agreement. The unsecured creditors committee and the Bankruptcy Court approved the agreement on February 24, 1992. According to the testimony of Michael Kaplan, a critical part of the consideration for the Kaplans and the creditors committee was conveyance of the Woodmere and Le Resort properties to Midlantic be "as is", without any requirement the Kaplan Entities continue or complete any construction at either site. A formal contract between the Kaplan Entities and Midlantic for transfer of the properties was never prepared. The Kaplan Entities executed quitclaim deeds to Midlantic for the Woodmere and Le Resort properties on June 26, 1992.

There is no reference to the cash performance bonds in any of the deeds, documents, or correspondence between the Kaplan Entities and Midlantic. There is no evidence the cash originally posted by the Kaplan Entities with Lakewood MUA or Dover Township to secure performance of the project improvements formed any part of the consideration for the agreement with Midlantic transferring ownership of the Woodmere and Le Resort properties.

On January 5, 1994 Midlantic entered into a written agreement to sell the Le Resort and Woodmere to Hovsons, Inc. Under the agreement, Hovsons, Inc. acknowledges it is purchasing the properties in "as-is" condition. Correspondence from Hovsons, Inc. to Midlantic, Inc. dated December 6, 1993 states Hovsons, Inc. sought the right to receive all cash performance bonds posted on the Le Resort project, when released. Apparently, neither Midlantic nor Hovsons, Inc. were aware until later that there were ...


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