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Sebring associates v. Coyle

February 06, 2002

SEBRING ASSOCIATES, A NEW JERSEY PARTNERSHIP; JAMES N. CANINO; AND ANTHONY R. PALMERI, PLAINTIFFS-RESPONDENTS
v.
EUGENE J. COYLE, DEFENDANT-APPELLANT



Before Judges Baime, Fall and Axelrad. On appeal from Superior Court of New Jersey, Chancery Division, Bergen County, BER-C-24-93.

The opinion of the court was delivered by: Baime, P.J.A.D.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued January 9, 2002

The principal question presented by this appeal is whether a partner's refusal to contribute necessary capital to the partnership constitutes misconduct sufficient to warrant judicial dissolution. Following a twenty-eight day trial, the Chancery Division judge issued an extensive written opinion in which she found that defendant Eugene Coyle's failure to contribute funds necessary to the survival of Sebring Associates constituted a breach of the partnership agreement and grounds for dissolution of the partnership. The judge entered an order excluding defendant from the partnership, permitting the remaining partners, James Canino and Anthony Palmeri, to continue operation of the business, and awarding plaintiffs various items of damage. Defendant appeals. We affirm that portion of the Chancery Division's judgment excluding defendant from membership in the partnership, but remand the matter to the Chancery Division for further proceedings respecting damages.

I.

The protracted trial produced a record exceeding 7,000 pages. Much of the evidence pertained to complex business transactions and arcane accounting principles that are not directly in issue. Our recitation focuses only upon those facts critical to our disposition of the issues presented.

In November 1984, Canino, Palmeri and Coyle formed 170 Prospect Associates for the purpose of acquiring land and erecting high rise apartments. As a preliminary step, the three created Brewring Associates, which purchased two sites, 170 Prospect Avenue and 300 Prospect Avenue, in the City of Hackensack. After Sebring was formed, the latter property, 300 Prospect Avenue, was sold at a profit of millions of dollars in excess of the combined purchase price of both sites. The sale price was sufficient to satisfy the short-term mortgage and provide the three partners with a distribution of over $3.5 million which was shared equally.

The partners' attention then focused upon the construction of luxury apartments at the 170 Prospect Avenue site. Canino and Palmeri were experienced in high rise residential development – Canino as a builder and Palmeri as a manager. Coyle was a highly successful orthopedic surgeon, but, as the owner of two large apartment complexes, was not a neophyte in the field of residential management. Although the point was hotly contested at trial, the general understanding of the partners was that Canino would serve as the general contractor, Palmeri would manage development of the property, and Coyle, through his accumulated assets and financial statement, would provide the financial strength necessary to obtain the requisite financing.

The development plan envisioned several phases. First, Excelsior I, a luxury apartment building, was to be constructed. Thereafter, a second tower and a "core" amenities building were to be erected.

Friction between Coyle and the other two partners developed almost immediately. In 1986, the partnership obtained a $35 million building loan from Howard Savings for the construction of Excelsior I. The loan increased in increments for further construction and acquisition through 1991 to a face value of approximately $45 million. To secure the performance and completion bond, it was necessary to post a $2 million working capital fund and a $2 million letter of credit. According to Canino and Palmeri, Coyle reneged on his promise to pledge $2 million to secure the requisite letter of credit. Ultimately, the crisis was narrowly averted when Canino and Palmeri provided the requisite collateral through some innovative financing.

Construction of Excelsior I was completed in June 1988. Because construction costs had been kept in tight control, interim surplus funds were available. In October 1988, each partner received a distribution of $600,000. This distribution was in addition to a $432,000 payment that had been made earlier, and to monthly payments of $10,000 that had commenced the previous year.

A downturn in the real estate market impacted on the financial integrity of the partnership by late 1989. The interest reserve maintained by Howard was inadequate because rentals were slow. To make matters worse, Howard's financial problems precluded it from providing funding for completion of the second tower and the amenities building, thus diminishing rental rates at Excelsior I.

Sebring approached Powder Mill Bank to obtain additional funding. Powder Mill's lending limit per transaction was $900,000. Because approximately $3 million were needed, the partners and the bank developed a plan in which separate $900,000 loans would be issued to each partner individually. Each partner thus signed a separate note and pledged individual collateral, but the amounts obtained were immediately transferred to Sebring. The transaction was shown in Sebring's financial statements as loans from the partners. Conversely, Coyle, and presumably Canino and Palmeri, did not list the Powder Mill loans as liabilities on their personal financial statements.

As the financial condition of the partnership became increasingly problematic, Palmeri apprised the parties in a series of letters that additional cash contributions were necessary. For example, in a June 26, 1991 letter to Canino and Coyle, Palmeri directed each partner to contribute $18,000 monthly toward Sebring's expenses, including payments on the three Powder Mill notes. While Canino and Palmeri infused the partnership with additional funds, Coyle generally ignored these letters and made no payment after 1991. Because of Coyle's recalcitrance, Sebring made payments on the Powder Mill loans to Canino and Palmeri, but stopped making payments on Coyle's loan. After Powder Mill was taken over by the FDIC, Canino's and Palmeri's loans were paid off, the amounts credited to the two partners' capital accounts. Coyle made several payments on his loan, but ultimately stopped. Paradoxically, no attempt to collect was made by the FDIC, and it now appears that Coyle's loan is uncollectible by virtue of expiration of the statute of limitations.

Plaintiffs presented additional evidence at trial tending to establish Coyle's lack of fidelity to the partnership. In June 1988, Coyle sold his luxury house to two doctors, Paul Rodigas and Susan Fox Rodigas, for $2.2 million. The buyers obtained a $1.5 million bank mortgage, and Coyle took back a $500,000 second mortgage. The same month, Coyle moved into a penthouse apartment at Excelsior I. Although Coyle initially paid rent for the apartment, he ultimately stopped making these payments. While Coyle claimed at trial that he resided at the penthouse as an "accommodation" to the partnership to provide a "showplace" to prospective tenants and to "impress the bank," the evidence abounds the other way, as subsequently noted in the judge's opinion.

More importantly, plaintiffs asserted that Coyle improperly used the partnership to bolster Paul Rodigas' financial strength after the physician fell ill with a malignant brain tumor. Plaintiffs claimed that Coyle enlisted the partnership and the individual partners in a business venture with the Rodigases without apprising them of Paul Rodigas's declining health. Although the parties devoted substantial attention to the issue, we describe only the bare outlines of the transaction.

Paul Rodigas was a cardiac surgeon. Approximately eighteen months after buying Coyle's house, Rodigas and Fox informed Coyle that Rodigas was diagnosed with a brain tumor. Although the original diagnosis was uncertain, Rodigas feared that he would be required to terminate his medical practice and would be unable to meet his mortgage obligation to Coyle. The tumor was later found to be malignant. Rodigas and Fox, along with Coyle, hatched a plan to establish a cardiac rehabilitation facility. Coyle arranged a presentation of the idea for Canino and Palmeri, proposing to establish a large office on the "professional floor" of Excelsior I. Coyle recommended the plan to Canino and Palmeri, concealing the fact that Rodigas suffered from a malignant brain tumor. As Coyle admitted at trial, had he told Canino and Palmeri that Rodigas had a malignant brain tumor, "[t]he meeting [with Canino and Palmeri would have been] over."

The management company established by Coyle was called Total Care Health Systems, Inc. The project eventually included not only cardiac rehabilitation services, but also a diet center and woman's care unit. The business occupied 5,100 square feet of office space at Excelsior I. Sebring was required to provide the "fit-up" expenses demanded by Rodigas and Fox for the office, costing approximately $400,000. The three partners and Rodigas and Fox borrowed $1,400,000 from Midlantic Bank, with all five signing personal guarantees.

The venture proved to be a fiasco. Rodigas abandoned the business and returned to his medical practice before dying. Midlantic filed suit on the personal guarantees. Canino, Palmeri and Coyle settled Midlantic's claim for $300,000 each. Although Canino and Palmeri paid their obligations in a timely manner, Coyle subsequently defaulted. Sebring itself suffered a major loss.

Plaintiffs claimed that Coyle also showed his disloyalty to the partnership by initially refusing to sign loan refinance documents necessary to a restructuring of Sebring's debt. Sebring needed an extension of the terms of the Howard construction loan due in 1993, and a decrease in the interest rate. The cash flow of Sebring was insufficient to support repayment of principal because the borrowing had been in anticipation of a long-term permanent financing and additional construction financing for the second tower and core amenities building. The interest rate on the entire debt was scheduled to rise, and only a shell and foundation for the tower and the amenities building had been constructed.

Howard's perilous financial condition precluded it from financing the completion of the remaining buildings. However, it agreed to extend the loan for twenty-eight years and reduce the interest rate significantly for a period of time. The interest rate was then to be increased at various intervals. Without these modifications, the partnership could not survive. Coyle nevertheless refused to sign the loan documents. In a written statement dated January 27, 1992, Coyle demanded a guarantee that his partnership interest would not be decreased beyond twenty percent as the price for his agreement to sign the refinancing documents. Coyle also demanded the payment of substantial monies to him by Sebring as a condition for his consent to the restructuring agreement. Time was of the essence in accomplishing the ...


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