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Froom v. Perel

April 27, 2005

RONALD J. FROOM AND FROOM DEVELOPMENT CORP., PLAINTIFFS-RESPONDENTS/ CROSS-APPELLANTS,
v.
MARC A. PEREL; ROBERT J. AMBROSI; EDWARD JATEN; JOHN C. WALSEY; RONALD SAVERIN; J.W. TRUST; EDISON I HD, LLC; EDISON I NORTH, LLC; EDISON PRINCE, LLC; EDISON I SOUTH 34A, LLC; EDISON I SOUTH 34B, LLC; EIDSON I NORTH 35A, LLC; EDISON I NORTH 35B, LLC; EDISON I NORTH 35C, LLC; EDISON I NORTH 35D, LLC; JOHN DOE, INC. 1-5, JOHN DOE(S) 1-5, DEFENDANTS, AND VINCENT P. MALTESE, ESQ. AND WILENTZ, GOLDMAN & SPITZER, P.C., DEFENDANTS-APPELLANTS/CROSS-RESPONDENTS.



On appeal from the Superior Court of New Jersey, Law Division, Essex County, Docket No. L-1504-99.

Before Judges Petrella, Parker and Yannotti.

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

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued March 7, 2005

Defendants Wilentz, Goldman & Spitzer, P.C. and Vincent P. Maltese, a member of the firm, (the Wilentz defendants) appeal from a final judgment entered in favor of plaintiff Froom Development Corp. (FDC) on a legal malpractice claim. FDC cross-appeals from the judgment. We reverse the judgment and dismiss the cross-appeal as moot.

I.

Plaintiff Ronald J. Froom is a commercial real estate broker. Sometime in 1991, Froom learned about a 27-acre tract of property owned by Berger Industries, Inc. (Berger) and located in Edison, New Jersey. Although the property consisted of an "old mostly abandoned manufacturing facility" and was "in horrible disrepair," Froom considered the property a "diamond in the rough" because of its "great" location. He envisioned the property as the site of "a large shopping center." Froom informed defendant John C. Walsey, an experienced investor and developer, about the property. Walsey also saw its potential and agreed to proceed with the acquisition and development of the property.

According to Froom, in the summer of 1992, he and Walsey had a telephone conversation during which they discussed their respective interests in the venture. Froom asserted that Walsey agreed he would provide all of the money to acquire and develop the property but Froom would receive a 50% non-dilutable ownership interest in the project. To Froom, non-dilutable meant that his 50% interest would remain unchanged even if other investors subsequently were brought into the deal. Froom described himself as a "sweat equity" developer who locates the property, performs preliminary research and investigations, prepares a demographic profile report and retains an architect to prepare a preliminary rendering.

Walsey's version of his deal with Froom was different. He testified he told Froom that, although he lacked money at the time, he could arrange financing from third-party investors and Froom would receive 50% of any return that Walsey received from the property. Walsey also said that Froom's interest would be converted to an equity position only after these conditions were met: Walsey must recover all of his investment in the project, Froom could not interfere with the financing of the venture by having an equity position and Froom had to perform as a day-today developer of the project.

Froom was advised to consult Maltese at the Wilentz firm to discuss the firm's qualifications to handle the transaction. Froom met Maltese in September 1993 and Maltese introduced Froom to Steven Tripp, an attorney at the firm with zoning experience. Froom told Maltese and Tripp that he wanted to retain the Wilentz firm and he encouraged Tripp to make inquiries about rezoning of the property. Froom informed Maltese that Walsey also would be participating in the project and Maltese would soon be hearing from him.

Walsey called Maltese several days later. As a result, in mid-November 1993, Maltese attended a meeting where discussions were held with Berger's representatives and certain creditors with liens on the property. In November or December 1993, Maltese prepared draft contracts for the purchase of the property. Initially, FDC was listed as the sole purchaser, but later the contracts were changed and FDC and Walsey's company, W.L. Associates (WL), were identified as purchasers. At or about this time, Berger filed for protection under the federal bankruptcy code.

In December 1993, Maltese prepared an engagement letter and he addressed the letter to FDC and to WL. Maltese noted that he was writing to confirm that Froom Development Corp., a Florida Corporation ("Froom"), and W.L. Associates, Inc. ("Associates") have requested this law firm to represent their interests in connection with the purchase of a parcel of land located along Route 1 in Edison, New Jersey presently owned by Berger Industries, Inc.

After setting forth billing rates and the obligation to reimburse the firm for its expenses and disbursements, Maltese requested an advance retainer of $7,500. Maltese added that "[t]he terms of this engagement do not cover any litigation matters related to the Project, the partners' interests therein or for any other reason. Litigation matters must be covered by a separate engagement arrangement." Maltese also stated:

Although we don't anticipate a problem in this matter, in the event any conflict of interest arises during the course of our representation it may become necessary for our firm to cease all work on this matter pending resolution of the conflict. In the event the conflict cannot be resolved you reserve the right to transfer the file to another lawyer but, in any event, you agree to pay our firm for all work performed even if the resolution of the conflict results in a transfer of the matter to another attorney or law firm.

Maltese requested that Froom and Walsey countersign the letter and return it to him.

When he received no response from Froom to his letter, Maltese wrote to Froom in January 1994 and requested that the signed engagement letter and retainer be forwarded to him in short order. Froom responded and told Maltese that he "was not going to be responsible for any financial obligation" in hiring the firm and he wanted to check with Walsey before proceeding any further. Walsey thereafter told Froom, "[S]top wasting time, sign the letter and send it back." Froom claimed that he signed the letter and returned it.

Maltese testified that during a January 1994 telephone conversation, Froom told him for the first time that Wilentz was not representing FDC but was representing WL. Maltese said that Froom informed him that FDC would not be paying any legal fees and WL would be the responsible party. Froom told Maltese that Walsey would call him to discuss the matter. After receiving a telephone call from Walsey, Maltese concluded that the Wilentz firm no longer represented FDC. Maltese testified that he never received a signed retainer from Froom on behalf of FDC.

On January 21, 1994, Maltese sent to FDC an invoice for services rendered to that date by the Wilentz firm. Froom testified that after receiving this bill, he immediately called Maltese and reminded him that Walsey was responsible for paying Wilentz's charges. According to Froom, Maltese replied, "That's right, you did tell me that Ron, I'm sorry, don't worry about it."

A meeting was held at the Wilentz offices on February 28, 1994, attended by Berger's representatives, Froom, Walsey, and defendant Ronald Saverin, who was introduced to Maltese by Walsey as a prospective participant in the venture. In June 1994, Maltese forwarded to Berger's counsel a term sheet he had prepared. The document listed "W.L. Associates, Inc. (or its nominee)" as the prospective purchaser and it was initialed by Walsey as President of WL. Walsey faxed a copy of the letter and the term sheet to Froom.

At or about this time, Froom learned that draft contracts prepared by Maltese only contained Walsey's name. Froom testified that he called Maltese and Maltese told him that with the amount of paperwork going back and forth with the bankruptcy issues[,] John [Walsey] [is] in Atlanta, you're in Florida, you're all moving around a bit, to streamline the process it's just easier, but it doesn't really matter because when you get ready to close on the property and the ultimate purchaser, which will be new corporation or a new LLC as they call it, is formed that's when you'll get your stock issue. I know you own 50 percent of the deal and don't worry about it.

On August 2, 1994, Maltese faxed Froom a copy of the term sheet with changes made by Berger's counsel. When questioned about the significance of this and other faxes sent to Froom, Maltese testified that he had been instructed by Walsey to keep Froom "in the loop." Froom asserted that he advised Maltese on numerous occasions that he and Walsey were 50/50 partners in the project and he was going to own 50% of the project. According to Froom, Maltese responded that was "fine."

In September 1994, Maltese forwarded a second billing statement to Walsey in which WL was identified as the firm's client. Several months later, Maltese prepared a certificate of formation for the limited liability company that would acquire the property. The company was called "Edison One, LLC." The certificate stated that the entity was to be comprised of two or more members. Maltese said that he understood at that time that Walsey and Saverin were to be the members.

The purchase agreement was executed on March 25, 1995. Walsey signed the contract in his capacity as managing member of Edison One. Prior to execution of the contract, Maltese may have faxed or called Froom, but Maltese had no distinct recollection of speaking with him. During cross-examination, Maltese acknowledged that in March 1995 he left a message on Froom's answering machine and advised that FDC "was there on the deal." In that message, Maltese advised Froom in detail of the status of certain negotiations with the Berger tenants and informed Froom that he was "certainly part of this deal." Maltese insisted, however, that he was only following Walsey's direction to keep Froom informed of developments with the transaction.

During the summer of 1995, a meeting was held at the Wilentz offices to negotiate the terms of an operating agreement for the project. Walsey and Saverin negotiated the agreement. Froom was present and said nothing when Saverin asked for a 70% to 80% interest in the project. Walsey would not agree to Saverin's demand. Maltese prepared a draft operating agreement with spaces left blank for insertion of the percentages of each individual's ownership interest. Subsequently, the Edison One operating agreement, dated August 31, 1995, was prepared and executed. It provided that Walsey and Saverin would each own 50% of the project, through their respective companies.

Sometime in 1995, Edward Jaten of ARC (a development group comprised of Jaten, defendant Marc A. Perel and defendant Robert J. Ambrosi) learned that Berger had entered into a contract for the sale of the property to WL. Jaten called Tripp at the Wilentz firm and asked him to set up a meeting with WL. A meeting was arranged at the Wilentz offices. At the meeting, Jaten told Walsey that ARC was interested in participating in the project, had recently completed a ...


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