August 27, 2007
LAWRENCE P. THEES, PLAINTIFF-APPELLANT/ CROSS-RESPONDENT,
FREIGHT FORCE, INC., A CALIFORNIA CORPORATION, SUCCESSOR IN INTEREST TO FREIGHT FORCE, INC., A NEW JERSEY CORPORATION (FORMERLY KNOWN AS THEESA MANAGEMENT CORPORATION), AND ROBERT SERRA, INDIVIDUALLY, DEFENDANTS-RESPONDENTS/CROSS-APPELLANTS.
On appeal from the Superior Court of New Jersey, Law Division, Monmouth County, L-1249-04.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued May 23, 2007
Before Judges A. A. Rodríguez, Collester and Lyons.
In 2003, plaintiff Lawrence P. Thees, an attorney, discovered fortuitously a stock certificate evidencing his one third ownership in a closely-held corporation, Freight Force, Inc. (FFI). However, defendant Paul Serra alleges that seventeen years earlier, Thees had transferred this stock to him and Robert Etelson, now deceased, in exchange for all stock in a newly created corporation, In-Fleet I. Thees sued Serra and FFI (collectively "defendants") for breach of a fiduciary duty and sought damages and an appointment of a receiver of FFI and an accounting. He now appeals from the February 17, 2007 orders:
(1) granting summary judgment and dismissing his complaint against defendants; and (2) denying his cross-motion for partial summary judgment and to amend his complaint. Defendants appeal from the denial of their motion for counsel fees. We affirm on the appeal and cross-appeal.
We note at the outset that the judge dismissed Thees's complaint based on the equitable doctrines of judicial estoppel and laches. The judge did not address the merits of the complaint, nor decided issues of credibility.
The factual setting of this case is lengthy and complicated. This is an abbreviated version. Thees and Serra worked for Etelson and his company Special Service Freight Company (SSF), a trucking business. Thees worked as vice president and general counsel for the company. In 1983, the three men went into business together. Etelson created FFI, which was originally called Theesa Management Corporation,*fn1 and eventually transferred one-third of the shares each to Thees and Serra, and retained one-third for himself. SSF continued to operate.
In 1986, In-Fleet, an unincorporated division of SSF, was created. At this point, Etelson decided to retire. He put his daughter Tracey, who had no experience, in charge of SSF. Because of a personality conflict between Thees and Tracey, the parties decided that Thees would run In-Fleet, as a "semi-autonomous division of SSF." Eventually, In-Fleet separated from SSF altogether. The facts regarding that transaction are disputed and murky. According to Thees, "we were never able to come to terms contractually to memorialize what had, in fact, transpired." Thees's "stock percentage ownership of the In-Fleet business" was never determined. There were thirteen drafts of a Shareholder's Agreement prepared by Thees or Richard Mitchell, SSF's new general counsel. However, no agreement was ever signed.
According to Serra, as of June 30, 1986, Thees exchanged his stock in FFI for "all assets and liabilities pertaining to [the] In-Fleet Division" and "was no longer a shareholder" in FFI. Serra testified in a deposition that when Thees "took the In-Fleet business" in 1986, he "was supposed to return the [FFI] certificate." However, Thees told Serra that "he had lost his certificate and would return it as soon as he could find it." In June 1986, Etelson transferred his shares in FFI to Serra, in exchange for five percent of the company's gross revenues for one year. Thus, according to Serra, he became the sole owner of FFI.
Thees disagrees with Serra's allegation. He denied that the acquisition of his interest in In-Fleet was in exchange for his FFI shares. He alleged that In-Fleet "paid Etelson/SSF substantial royalties" and he paid "$76,500 in loans and capital" to In-Fleet between July 1986 and April 1987. Serra and Etelson contributed nothing.
By April 1987, Thees "could no longer take dealing with Tracey Etelson" and "decided to sell [his] interest in In-Fleet. According to him, on April 16, 1987, a Letter of Agreement followed this decision. Thees, Robert and Tracey Etelson, Serra and their five related corporations divided their business, corporate ownership, assets and debts in order "to formally sever the relationship of [Thees] and In-Fleet from all other parties. . . ." The April 16, 1987 agreement provided that In-Fleet would be split in two, In-Fleet I and II. Thees would retain In-Fleet I, a New Jersey corporation, and specified business accounts, but In-Fleet II, a Florida corporation owned by Tracey, would service the other business accounts. The Letter of Agreement provided in pertinent part:
With respect to FFI, the parties hereto acknowledge that as of June 30, 1986 Thees exchanged his stockholdings in FFI for all assets and liabilities pertaining to the In-Fleet Division, as same were reflected on the books of FFI as of June 30, 1986.
Thus, according to the Letter of Agreement, after June 30, 1986, Thees owned no shares in FFI, although he still had possession of the stock certificate. In exchange, he was the sole shareholder of In-Fleet I. Thees disputes this, alleging that after June 30, 1986, he still owned one-third of the FFI stock because the April 16, 1987 Letter of Agreement was never effectuated. He alleges that on June 9, 1987, he sent a memorandum rejecting the Letter of Agreement. The memorandum alleged several breaches by the other parties. Serra certified that he had no memory of such rejection.
Subsequently, SSF, In-Fleet II and Etelson went into bankruptcy. Thees alleged that Etelson and Serra "conspired to transfer SSF operations" to FFI in order to avoid SSF's creditors. Thees "was a creditor of both SSF and Etelson and received nothing from the[ir] bankruptcies."
In December 1990, Serra merged FFI into a California corporation with the same name and moved it to California. From 1992 to 1997, Thees lived in the Caribbean area. Between 1988 and 1990, he moved three times and lost the files containing his FFI stock shares. In short, "over time, I forgot about them." In July 1999, Thees filed a voluntary bankruptcy petition under Chapter 7. In his Schedule of Assets and Personal Property, Thees represented that he had no "[s]tock and interests in incorporated and unincorporated businesses," and no other claims. The only assets that Thees listed were a checking account, a vehicle, household furnishings and clothing. In November 1999, the bankruptcy court released Thees from all dischargeable debts.
In late 2003, following the death of Thees's mother, his stepfather found some boxes belonging to Thees, stored at the mother's and stepfather's house. Thees retrieved them and discovered the FFI stock certificate. Thees wrote to Serra, sending a copy of the stock certificate and asked whether Serra was interested in purchasing them. Serra declined. This litigation followed.
Thees filed this action in the Chancery Division. It was transferred to the Law Division. Thees alleged that he was the record owner of one-third of the outstanding shares of FFI, which had merged into a California corporation of the same name. Thees asserted that he had "ceased active management of and participat[ion] in [FFI]" and complained that defendants should have informed him of the merger and afforded him an opportunity to dissent or sell his shares at fair market value.
Defendants answered the complaint, denying its material allegations and asserting that laches and estoppel barred Thees's claim. Defendants moved for summary judgment. Thees opposed the motion. Judge John Mullaney heard oral arguments and denied the motion without prejudice so that discovery could proceed.
Defendants filed a second motion for summary judgment. Thees opposed it and cross-moved for leave to amend his complaint to add claims for rescission of the April 16, 1987 Letter of Agreement and to avoid a fraudulent conveyance. Defendants opposed the motion. Thees also moved for partial summary judgment, to strike defendants' affirmative defenses of laches and estoppel.
Judge Mullaney granted defendants' motion for summary judgment and dismissed Thees's complaint. The judge also denied Thees's motions for partial summary judgment and to amend his complaint. Three orders were entered accordingly on February 17, 2007. The judge found:
Mr. Thees severed his relationship with the defendants' company or its predecessor companies . . . well over a decade ago. There was consideration for it. There were releases signed. I would be a fool to say the releases don't hold any water.
In addition, the judge determined that the doctrine of laches applied, and that defendants were prejudiced by the passage of time. The judge said:
There comes a point in time when people are entitled to . . . repose. When they don't have to keep looking over their shoulder looking at something that happened decades ago.
The judge noted that transactions involving closely-held corporations are frequently "sloppy." For that reason, he found that the absence or presence of a certificate does not carry the day because there is other documentation that has to go along with it. Such as tax returns, dividend reports, annual reports, stockholder's reports . . . inquiries, stockholders' derivative actions. If you think you're being shortchanged you can go to court to force the corporate offices to account.
There's all kinds of things. None of that was done.
Defendants moved for counsel fees, pursuant to N.J.S.A. 2A:15-59.1 and the parties' April 1987 Letter of Agreement. Judge Mullaney denied this motion.
Four days later, Thees moved to reopen his bankruptcy matter. The bankruptcy court granted this request and ordered the appointment of a trustee. Thees filed an amendment to his schedule of assets, setting forth "33 & 1/3 shares of [FFI] and rights thereunder."
Thees argues that the doctrine of judicial estoppel does not defeat his claims because he "remains ready willing and able to take the necessary actions to protect the interests, if any, of the bankruptcy creditors." In support for this proposition, Thees argues that the judge's application of the judicial estoppel doctrine resulted in a windfall to defendants at the expense of Thees's bankruptcy creditors. We disagree.
Judge Mullaney properly found that the doctrine of judicial estoppel precludes Thees's claim. Furthermore, the judge properly determined that when Thees filed for bankruptcy he was obligated to report his claim to the bankruptcy court, even though he did not possess the stock certificate.
In Kimball Int'l, Inc. v. Northfield Metal Prods., 334 N.J. Super. 596, 606 (App. Div. 2000) (quoted in Ali v. Rutgers, 166 N.J. 280, 287 (2000)), certif. denied, 167 N.J. 88 (2001), we summarized the doctrine of judicial estoppel:
The purpose of the judicial estoppel doctrine is to protect "the integrity of the judicial process." Cummings v. Bahr, 295 N.J. Super. 374, 387 (App. Div. 1996). A threat to the integrity of the judicial system sufficient to invoke the judicial estoppel doctrine only arises when a party advocates a position contrary to a position it successfully asserted in the same or a prior proceeding. [Ibid. (citations omitted).]
In order for judicial estoppel to apply, the court in the prior proceeding must have accepted the position asserted by the party who is now arguing a position inconsistent with the one previously asserted. Kimball, supra, 334 N.J. Super. at 607. If the court in the prior proceeding did not accept the position of the party to be estopped, "no risk of inconsistent results exists" and "the integrity of the judicial process is unaffected." Id. at 606; Commercial Ins. Co. v. Steiger, ___N.J. Super. ___, ___ (App. Div. 2007).
Here, Thees filed "a schedule of assets and liabilities" pursuant to 11 U.S.C.A. § 521(a)(1)(B)(i). Because the creditors and the court relied on the disclosure statement, full disclosure in a bankruptcy proceeding is very important. Oneida Motor Freight, Inc. v. United Jersey Bank, 848 F.2d 414, 417 (3rd Cir.), cert. denied, 488 U.S. 967, 109 S.Ct. 495, 102 L.Ed. 2d 532 (1988). The court in Oneida concluded that the plaintiff was precluded from pursuing its claim. Id. at 419; but cf. Ryan Operations G.P. v. Santiam-Midwest Lumber Co., 81 F.3d 355, 356 (3d Cir. 1996) (holding that the debtor was not judicially estopped in absence of a showing of bad faith).
Thees asserts that his nondisclosure was inadvertent. However, unlike Ryan Operations G.P., here if Thees truly owned the asset that he failed to disclose, this nondisclosure might have affected the result of the bankruptcy. In Ryan Operations G.P., there was no evidence that nondisclosure affected the plan that the bankruptcy court adopted. FFI is an ongoing business. One-third of its shares would be a substantial asset that Thees's creditors would have a claim against.
Thees contends that the doctrine of laches does not defeat his claims because defendants did not demonstrate prejudice. We disagree.
Thees argues that passage of time alone does not extinguish a shareholder's rights, and that he offered a plausible explanation for his delay in asserting his claim, the loss of the stock certificate. He also argues that defendants were not prejudiced by the delay; and that defendants cannot claim laches because they had unclean hands. Defendants cite to Etelson's death, the dissolution of In-Fleet's accounting firm and their move to California as prejudice resulting from the delay.
The doctrine of Laches: is invoked to deny a party enforcement of a known right when the party engages in inexcusable and unexplained delay in exercising that right to the prejudice of the other party. Laches may only be enforced when the delaying party had sufficient opportunity to assert the right in the proper forum and the prejudiced party acted in good faith believing that the right had been abandoned. [Knorr v. Smeal, 178 N.J. 169, 181 (2003) (citations omitted).]
The factors to consider in determining whether laches applies are "[t]he length of the delay, reasons for delay, and changing conditions of either or both parties." Lavin v. Bd. of Educ. of Hackensack, 90 N.J. 145, 152 (1982). Thus, "the central issue is whether it is inequitable to permit the claim to be enforced," which usually "will turn on whether a party has been misled to his harm by the delay." Id. at 152-53.
Here, the length of the delay is lengthy. Thees's explanation for his delay, that he lost the stock certificate and believed that he needed it to assert his claim, is inadequate. He could have pursued that claim without his stock certificate and does not explain why he failed to do so. Thees concedes that he had the stock certificate on June 9, 1987, when he wrote the memorandum rejecting the Letter of Agreement. In that memorandum, he stated that he was holding the stock in escrow. Moreover, he asserts that he lost his files between 1988 and 1990. However, he offers no explanation why he did not assert his claim before then.
The conditions have changed for defendants. Etelson has since passed away. In-Fleet's accounting firm dissolved. Its records were destroyed, and only one partner of the accounting firm is still alive. Thus, defendants are clearly adversely affected by the delay.
Thees also contends that defendants had unclean hands, relying on Borough of Princeton v. Bd. of Chosen Freeholders of Mercer, 169 N.J. 135, 158 (2001) (quoting Faustin v. Lewis, 85 N.J. 507, 511 (1981)), in which the Court explained that "a court should not grant relief to one who is a wrongdoer with respect to the subject matter in suit." Thees alleges that defendants are guilty of wrongdoing because (1) "defendants assert facts which are not true;" (2) Serra acquired Etelson's share of FFI dishonestly; (3) Serra failed to make any demand or request for Thees' shares of FFI; and (4) defendants failed to comply with N.J.S.A. 14A:10-3, requiring stockholder approval of a corporate merger.
We reject Thees's unclean hands argument. The facts that defendants assert may or may not be true. However, responding to a claim with one's own version of the underlying facts is not wrongdoing.
Thees alleges that Serra acquired Etelson's shares of FFI dishonestly, by fraudulently backdating their Stock Purchase and Escrow/Trust Agreement to June 30, 1986, in order to defraud Etelson's bankruptcy creditors. Although Mitchell corroborated the backdating, his assertion of fraudulent intent is a bald statement with no evidential support. The record contains no documents pertaining to Etelson's bankruptcy or creditors, or any claim that Thees may have asserted as a creditor of Etelson.
Mitchell testified that the transfer occurred after Thees left the business and offered no reason why the agreement was backdated. Serra offered the plausible explanation that Thees was not aware of this Etelson-to-Serra transfer because Thees was no longer a FFI shareholder when it occurred.
Serra's failure to make a demand or request for Thees's stock certificate was "sloppy," but not wrongdoing or inequitable. Serra believed that Thees was no longer a stockholder and did not return the certificate because he had claimed he lost it.
Thees also contends that: (1) the judge committed error in considering hearsay evidence contained within the certification of defendants' attorneys; (2) defendants are not entitled to summary judgment against him as there are genuine issues of material fact and defendants are not entitled to judgment as a matter of law; (3) the judge erred by failing to recognize his ownership of shares of stock in FFI; and (4) he is entitled, as owner of shares in FFI, to the relief sought in the complaint and his motion to amend his complaint should have been granted. These arguments are without sufficient merit to warrant discussion in a written opinion. R. 2:11-3(e)(1)(E).
On cross-appeal, defendants contend that the judge should have awarded counsel fees. We disagree. Defendants assert that Thees has "no reasonable basis in law or equity, to explain why he delayed in bringing this suit for over seventeen years," or why he filed his bankruptcy petition without listing his claim to an interest in FFI.
The judge determined that Thees's claim was not frivolous and that plaintiff's motive was not malicious. The judge said:
Although the Court never really thought much of the plaintiff's cause of action, [Thees] was in possession of a stock certificate in the predecessor company of the defendant, and there had been clearly a prior business relationship between the plaintiff and the defending corporation and the principals of that corporation at this time.
The plaintiff believed that coming forward with a stock certificate would entitle him to the benefits of financial remuneration from the corporation . . . .
N.J.S.A. 2A:15-59.1(a) allows a judge to award "reasonable litigation costs and attorney fees" to a prevailing party upon a finding that the non-prevailing party's complaint was frivolous. In order to determine that a complaint was frivolous, the judge must find that either:
(1) The complaint . . . was commenced, used or continued in bad faith, solely for the purpose of harassment, delay or malicious injury; or
(2) The non-prevailing party knew, or should have known, that the complaint . . . was without any reasonable basis in law or equity and could not be supported by a good faith argument for an extension, modification or reversal of existing law. [N.J.S.A. 2A:15-59.1(b).]
Here, contrary to defendants' assertion, there is no indication in the record that Thees sued in bad faith with the intention to harass, delay or maliciously injure defendants. The judge was also correct that Thees's belief that he had a valid claim was reasonable. Although the judge did not address the merits of Thees's claim because it was barred by laches and judicial estoppel, a finding that the complaint was frivolous requires a conclusion that Thees knew or should have known that his complaint had no reasonable basis. The equitable defenses of laches and estoppel do not undermine the basis of Thees's claim. They only bar its prosecution. Moreover, in McKeown-Brand v. Trump Castle Hotel & Casino, 132 N.J. 546, 561-62 (1993) (citations omitted), the court in explaining the history of N.J.S.A. 2A:15-59.1, noted that, "the term 'frivolous' should be given a restrictive interpretation. . . . That limitation is consistent with the premise that in a democratic society, citizens should have ready access to all branches of government, including the judiciary."
We also agree with Thees's argument that the fee-shifting provision of the April 16, 1987 Letter of Agreement do not apply to defendants, but only to the parties named therein: Tracey and Robert Etelson, In-Fleet II and SSF. The Letter of Agreement provides for counsel fees, together with joint and several liability, "[i]n the event of default by one." "One" refers to the parties named in the previous sentence.
As our Supreme Court has said,
New Jersey has a strong policy disfavoring shifting of attorneys' fees. . . . [A] party may contract to pay attorneys' fees. . . . However, even where attorney-fee shifting is controlled by contractual provisions, courts will strictly construe that provision in light of the general policy disfavoring the award of attorneys' fees.
[N. Bergen Rex Transp., Inc. v. Trailer Leasing Co., 158 N.J. 561, 569-70 (1999) (citations omitted).]
Interpreting the Letter of Agreement to restrict the fee-shifting provision to the specified parties is a strict construction in accordance with this policy.
Accordingly, we affirm on the appeal and cross-appeal.