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Stankovits v. Schrager


December 19, 2007


On appeal from the Superior Court of New Jersey, Law Division, Middlesex County, Docket No. L-8168-04.

Per curiam.


Argued October 17, 2007

Before Judges Payne, Sapp-Peterson and Messano.

Plaintiff Steven Stankovits and defendant Steven Schrager were long-term acquaintances who jointly acquired a string of real properties for investment purposes. After disputes arose between them, plaintiff filed this complaint in November 2004, alleging a breach of contract, specifically an alleged partnership agreement (the Agreement), and a breach of the implied covenant of good faith and fair dealing. Plaintiff sought relief that included 1) the payment of rents and profits in accordance with the Agreement; 2) dissolution of the partnership; 3) appointment of a fiscal agent until all partnership affairs were terminated; 4) the forced sale of all the properties the parties jointly owned; 5) access to the business records of the partnership; 6) compensatory damages; 7) consequential damages; 8) punitive damages; and 9) attorney's fees.

Defendant filed his answer and asserted a counterclaim. He denied the existence of a partnership, although he admitted the parties owned various properties they had "jointly acquired." Defendant denied having violated any agreement or otherwise having caused plaintiff any damages. In his counterclaim, defendant sought 1) partition of the various properties he owned with plaintiff; 2) an accounting of their respective interests; and 3) a "winding up of the [parties'] business relationship." Defendant also alleged he was entitled to compensatory and consequential damages occasioned by plaintiff's breach of certain oral and written agreements between the two and plaintiff's breach of the implied covenant of good faith and fair dealing contained within those agreements. Lastly, defendant sought compensation under the theories of quantum meruit and unjust enrichment.*fn1

On November 10, 2005, the court appointed a fiscal agent for the jointly-held properties, Arthur M. Miller, and a case management order was entered. On May 22, 2006, a jury trial commenced and we summarize the testimony adduced over the following days.

Plaintiff testified that in July of 1994, he and defendant entered into a business relationship to purchase investment properties in the Middlesex County area. Their first purchase, 10 Conover Lane in Manalapan, was a "handy man special." He and defendant agreed to equally share the costs of purchasing and rehabilitating the home and any profits that would result from its sale. Within months, they sold the property and each made a small profit.

Thereafter, plaintiff and defendant would eventually purchase a total of five additional properties: one for $53,000 in South River (the South River Property); a second for $89,900 in Monroe (the Monroe Property); two condominium units located in South Brunswick (the South Brunswick Properties) for a total purchase price of $124,000; and a parking lot adjacent to the Monroe Property for $7100.

At the start of the parties' relationship there was no written agreement. Plaintiff and defendant purchased the South River Property, performed significant rehabilitation on it, and then mortgaged the property. It was also used as collateral to secure a subsequent loan made to the parties by plaintiff's parents. Plaintiff claimed the parties operated the South River Property in the same fashion as their first purchase, that is, both worked on the property and both anticipated splitting the proceeds from any sale. Although plaintiff also claimed that his parents only received sporadic payments on their mortgage note, this apparently did not cause any problems for the parties until their ultimate break up. At the time of trial, plaintiff testified that he and defendant were about to close on the sale of the South River Property for $282,000, thus creating a significant profit after the mortgage loans were satisfied.*fn2

Plaintiff testified that when the opportunity came to purchase the Monroe Property, defendant had no ability to put any money down toward the purchase price. Nevertheless, defendant wanted to acquire the property and continue the business relationship with plaintiff. After some discussion, plaintiff agreed to fund the initial down payment for the property, and he also secured a home equity loan on his personal home sufficient to fund the full purchase price of the Monroe Property.

Because this arrangement differed significantly from how the parties had conducted their prior business relationship, they agreed to set forth the terms of their agreement in writing. This document, which was prepared by defendant and typed on the stationary of his business, Realty Executives, became the focus of the testimony at trial. Because of its brevity, we quote the agreement in its entirety as follows:

Partnership agreement between Steven Stankovits and Steven Schrager

Property: 323 Spotswood Englishtown Road Monroe, NJ

All monies put up are payable to that party at 12%. This is the first expense to be paid out. All additional profits in equity, rental share, etc. are spit 50/50. Steven Stankovits is to put up all monies. Steven Schrager will manage the property at no expense till both parties are paid in full. All out of pocket expenses of the partnership are to be paid equally to both partners. Time by Steven Schrager is not billable till all parties are paid back their outlaid principal[;] this is subject to negotiation by both parties at a later date.

/s/ Steven Schrager 12/29/98

/s/ Steven Stankovits 12/29/98

Plaintiff testified that the parties intended that he would "function as the bank." As such, it was his understanding that he would receive compound interest on the monies he "put up" under the agreement.

Plaintiff testified that the monthly payments on his home equity loan were paid from the rental income generated by the Monroe Property. Up until July 2004, when disputes between them led to the dissolution of their business arrangement, the parties operated under the terms of the written agreement. Plaintiff did not receive any return of his capital investment, and defendant never sought compensation for the work he performed at the Monroe Property.

Plaintiff claimed that the written agreement was intended to extend to the parties' subsequent purchases of the South Brunswick Properties and the parking lot for the Monroe Property. The South Brunswick Properties, purchased in early 2000, consisted of two condominium units. With respect to one unit, plaintiff secured financing for the purchase price by placing another mortgage on his personal home. The other unit was purchased through the proceeds of a refinancing the parties consummated on the Monroe Property. The parties continued to work on the properties together and neither was paid for the work they performed. Plaintiff testified that at the time of the trial, a contract for sale existed with defendant intending to purchase the South Brunswick Properties for $500,000.

Plaintiff provided the details of the purchase of the parking lot. This was adjacent to the Monroe Property, a mixed use commercial and residential property. The acquisition of the parking lot greatly enhanced the value of the Monroe Property because it provided much-needed parking for the commercial portion of the premises.

Plaintiff testified regarding the demise of his business relationship with defendant. In early 2004, plaintiff and his wife began to look for a new, larger home for their family. Plaintiff consummated the purchase of that new house using another realtor, not defendant. He claimed defendant was infuriated, and told him their partnership was over. By August 2004, there was little communication between the two. Plaintiff claimed that before he filed suit in November 2004, he was unable to obtain any financial data from defendant, and all partnership payments toward his outstanding loan balances stopped. Plaintiff claimed that he suffered periods thereafter during which carrying the ongoing debt service from the various loans caused him financial hardship. Plaintiff calculated that the total amount due to him based upon the various acquisition costs that he funded, computed with a return of twelve percent compound interest, was $326,296.*fn3

Plaintiff also testified regarding aspects of defendant's counterclaim and disputed some of the amounts defendant claimed were reimbursable partnership expenses based upon the services defendant performed. After plaintiff moved various items in to evidence, he rested his case without calling any other witnesses.

Defendant made no motion, but proceeded directly to present his side of the story. He disputed plaintiff's claim that the Agreement covered any property other than the Monroe Property. He also disputed plaintiff's claim that interest under the Agreement was to be calculated on a compound basis. Defendant claimed that plaintiff specifically agreed that any funds he advanced to purchase the South Brunswick Properties would be repaid without any interest whatsoever.

Defendant also set forth the various claims he now made for expenses that were due to him based upon the work he performed at the various properties over the years. He claimed that plaintiff agreed that the partnership would pay defendant thirty-five dollars per hour for his management services. Defendant estimated the total amount due to him to be "somewhere around . . . [$80,000] or [$90,000]." Defendant also disputed the claim that plaintiff was entitled to any reimbursement for the work he did or the miscellaneous expenses he paid. Defendant acknowledged that he had used partnership monies for his personal use on one occasion when he purchased an engagement ring for his fiancée, and he further testified that plaintiff specifically approved this.

After defendant testified, and other items were moved into evidence, the defense rested without calling another witness.*fn4

The judge then asked counsel whether they were making any motions. Defense counsel moved to dismiss plaintiff's claim for punitive damages, and plaintiff's counsel consented. The judge dismissed the claim, noting a lack of "willful and wanton or inappropriate" conduct by either party, and continued

I think both parties have to be complimented because [plaintiff] never once said that [defendant] put his . . . hand into the cash register till, so to speak, and took money out without him knowing about it.

[Defendant] never once said that [plaintiff] took a distribution without telling him about it[,] that he only found out about later. So that basically shows that there's a fundamental level of honesty here which is very much appreciated by the Court.

Defendant next re-argued a motion he had originally made pre-trial that had been denied by the judge. Essentially, defendant contended that the Agreement was unambiguous on its face, and that it did not provide for compound interest on plaintiff's investments and did not cover any property other than the Monroe Property. The judge denied this application, finding that "the parties . . . can modify the partnership position and can seek compensation for services rendered . . . based on an oral agreement [and] they can do the same thing with respect to contributions made by one or another to the partnership."

Next, defendant argued that plaintiff had proven no breach of any agreement, written or oral. He characterized the case as one in which plaintiff's "allegation is that he deserves compound interest on both properties pursuant to the agreement and [that defendant] doesn't get [payment] for any [of his] labor." The judge denied the request. He reasoned that plaintiff's contention was that defendant "breached the covenant of good faith in terms of his position that he's entitled to compensation for labor." Turning to defendant's contentions, the judge noted, "I think [defendant] is implicitly arguing that [plaintiff] breached the covenant of good faith in terms of his position that he's entitled to compound interest." As a result, he determined the question of whether either side breached the contract needed to be submitted to the jury.

An extended discussion regarding the proposed charge and jury verdict sheet followed these rulings. On the following day, the jury was charged and returned its verdict. We summarize the contents of the verdict by reference to the specific questions posed by the judge via the jury interrogatories.

First, the jury concluded plaintiff was not entitled to receive compound interest on his "advancements" for the Monroe Property or the South Brunswick Properties. They then decided that plaintiff was entitled to $92,000 in interest on his investments in all the properties. The jury further found that plaintiff had proven that defendant had breached the contract and they awarded plaintiff $40,000 in damages. Although the jury concluded defendant had proven entitlement to payment "for the work done by him," and awarded defendant $13,600, they also concluded that defendant failed to prove any breach of the contract by plaintiff.

On June 30, 2006, the judge entered an order for judgment. It provided for judgment in favor of plaintiff in the amount of $94,079.51, which included prejudgment interest, and further ordered this amount to be paid from the "partnership assets of the parties." The order also entered judgment in favor of plaintiff in the amount of $40,904.11, which included prejudgment interest, and further ordered that defendant was individually responsible for that amount. Lastly, the order also entered judgment in favor of defendant for a total of $13,870.88, which also included prejudgment interest, and further ordered this amount to be paid from the partnership's assets.

In the interim, defendant had moved for a judgment notwithstanding the verdict (JNOV), or, alternatively, for a new trial. Defendant argued that the verdict was against the weight of the evidence and also contended that plaintiff's breach of contract claims should have been dismissed. Defendant argued that there was no proof of any breach of the contract, but, rather, only a dispute as to the meaning of the contractual terms. Defendant further argued that there was no proof of any breach of the covenant of good faith and fair dealing, and that it was error for the judge to have charged the jury on the issue. He also argued that plaintiff had failed to prove any damages as a result of any alleged breach of the agreement. Defendant contended the judge failed to instruct the jury as to any specific breach of the contract and that the jury verdict sheet further compounded the problem because the jury was not asked to find any specific breach of the contract. Lastly, defendant argued that plaintiff had breached the contract and that the jury's failure to find so required that portion of the verdict be set aside.

The judge considered oral argument of defendant's motion on August 4, 2006. He noted that the jury had the opportunity to assess the respective credibility of the parties and he found no error in the charge given to the jury. Concluding "there was no manifest injustice [that] occurred," the judge denied defendant's motion in its entirety. This appeal ensued.

Defendant reiterates the legal arguments he raised before in the context of his motion for JNOV or for a new trial. He also argues that the judge erred by permitting the jury to decide issues of contract interpretation, specifically whether the Agreement covered the South Brunswick Properties. We have considered these arguments in light of the record and applicable legal standards. We reverse and vacate that portion of the order of judgment awarding plaintiff $40,904.11 in consequential damages for an alleged breach of contract; we affirm the balance of the order under review.

We begin by stating the reasons that require our reversal of the damage award to plaintiff. In short, we agree with defendant that plaintiff failed to prove a breach of any agreement.

A motion for judgment at the close of the evidence or a motion for JNOV employs the same standard of review applied to a motion for summary judgment. Schneider v. Simonini, 163 N.J. 336, 360 (2000). The court should not weigh the evidence, but instead must accept as true those facts asserted by the non-moving party and give that party the benefits of all favorable inferences that may be drawn. Penbara v. Straczynski, 347 N.J. Super. 155, 160 (App. Div. 2002). "The trial court is not to concern [itself] with the worth, nature, or extent . . . of the evidence, but only with its existence . . . ." Ji v. Palmer, 333 N.J. Super. 451, 460 (App. Div. 2000). The court must determine whether reasonable minds could differ and if so, the motion must be denied. Verdicchio v. Ricca, 179 N.J. 1, 30 (2004). Our review of the trial judge's decision is de novo and employs the same standard. Dolson v. Anastasia, 55 N.J. 2, 7 (1969).

For the moment, therefore, we assume plaintiff was entitled to the benefits of the Agreement as it applied to both the Monroe Property and the South Brunswick Properties. Nevertheless, we have difficulty discerning what conduct on the part of the defendant breached the contract.

Plaintiff testified that defendant failed to repay the monies plaintiff advanced to purchase the properties in a timely fashion, leaving him to carry the costs on the loans he procured to fund the purchase price or down payments on the various properties. However, the Agreement is silent as to when plaintiff was entitled to repayment of these amounts, stating only that this was "the first expense to be paid out" by the partnership. Plaintiff testified that in fact the partnership paid him a monthly sum to defray the costs of his home equity line of credit for many months, although the payments became more sporadic and eventually stopped a few months before he filed his complaint. However, he never contended that he was entitled to the repayment of his principal with interest on any regular basis, nor did he contend that the Agreement provided for such regular payments.*fn5

Moreover, whatever payments were due to plaintiff were partnership obligations, not the personal obligation of defendant. Although defendant controlled the finances of the partnership, plaintiff failed to demonstrate that there was sufficient cash flow to regularly pay plaintiff his carrying costs, or that defendant did anything to reduce the solvency of the endeavor. In fact, as the judge's own comments quoted above demonstrate, neither side introduced any evidence that the other party had their "hand in[] the cash register till."

In the end, we agree with defendant's argument that this was a dispute about the terms of the Agreement, and there was no evidence introduced that defendant breached any obligation he owed to plaintiff. Therefore, the judge should have dismissed plaintiff's claim for breach of contract and not submitted the issue to the jury.

We gather from the extended discussion that took place when the motion to dismiss was first made at trial, repeated again during the charge conference, and considered once again at the time of defendant's motion for JNOV, the judge agreed that evidence of a specific breach of the Agreement by defendant was lacking. Indeed, in charging the jury and framing the interrogatories on the verdict sheet, he refrained from identifying any specific breach of the Agreement by either party.*fn6 Instead, he reasoned since each party owed the other the obligation to operate in good faith and to deal with each other fairly, the jury could find a breach of the Agreement if this implied covenant had been broken.

The implied covenant of good faith and fair dealing is present in every contract. Wilson v. Amerada Hess Corp., 168 N.J. 236, 244 (2001); Wade v. Kessler Inst., 172 N.J. 327, 340 (2002); Sons of Thunder v. Borden, 148 N.J. 396, 420 (1997). The duty imposed by this covenant prohibits either party from doing anything that would have the effect of injuring the other party's right to receive "the fruits of the contract." Wade, supra, 172 N.J. at 340. Thus, parties are bound to perform the contract with "faithfulness to [the] agreed common purpose . . . ." R.J. Gaydos Ins. Agency, Inc. v. Nat. Consumer Ins. Co., 168 N.J. 255, 277 (2001)(quoting the Restatement (Second) of Contracts § 205, comment (a) (1981)).

The covenant provides redress for the bad faith performance of a contract, even where the defendant has not committed a breach of an express term. Seidenberg v. Summit Bank Corp., 348 N.J. Super. 243, 257 (App. Div. 2002). However, when the defendant has not breached an express term of the agreement, the plaintiff may be entitled to recovery only if the defendant acted with ill motive and absent any legitimate purpose. Wade, supra, 172 N.J. at 341; Brunswick Hills Racquet Club, Inc., v. Route 18 Shopping Ctr. Assocs., LLP, 182 N.J. 210, 226 (2005). In particular, the presence of bad faith is to be determined by evaluating the defendant's state of mind in light of the proffered evidence. Seidenberg, supra, 348 N.J. Super. at 262-63.

The testimony provided by both parties indicated that defendant was granted much leeway in overseeing the partnership's accounts and in making payments to plaintiff and third parties (for example, plaintiff's parents who had acted as a lender to the parties, contractors, workmen on the properties, etc.). Given the seemingly discretionary power afforded to defendant by the parties' course of conduct, in order to prove a breach of the covenant of good faith and fair dealing, plaintiff needed to demonstrate that defendant exercised his "discretionary authority arbitrarily, unreasonably, or capriciously, with the objective of preventing [plaintiff] from receiving [his] reasonably expected fruits under the contract." Wilson, supra, 168 N.J. at 251. Absent sufficient proof of bad motive or intention, discretionary decisions that happen to result in an economic disadvantage to plaintiff are not actionable. Brunswick Hills, supra, 182 N.J. at 225; Wilson, supra, 168 N.J. at 251.

The trial testimony indicates that the objective of the parties' partnership was to acquire, rehabilitate, rent, and sell real estate. Plaintiff never provided evidence that defendant prevented the parties from achieving this end. Wade, supra, 172 N.J. at 340. Instead, the record reveals, and plaintiff confirmed at oral argument, that both parties received substantial profits from their endeavors.

Once again, we discern from the judge's own characterization of the testimony that he believed neither plaintiff nor defendant had engaged in any bad faith during their relationship. Our review of the evidence supports this conclusion. Therefore, even as to plaintiff's claim that defendant breached the implied covenant of good faith and fair dealing, defendant's motion to dismiss should have been granted and the issue should not have been submitted to the jury.

Having reached this conclusion, we need not consider the balance of the arguments raised by defendant with regard to this aspect of the order for judgment. We reverse that portion of the order that awarded plaintiff $40,904.11 in damages for defendant's breach of the Agreement, and remand the matter to the trial judge for the entry of an amended order entering judgment in favor of defendant and dismissing plaintiff's breach of contract claim.*fn7

Defendant also contends that the judge erred in asking the jury to decide "issue[s] of contractual interpretation." Specifically, he contends that whether the Agreement covered the South Brunswick Properties or only the Monroe Property, and whether plaintiff was entitled to compound or simple interest, were purely legal questions of contract interpretation. However, he concedes the submission of the latter point to the jury was, at worst, harmless error because the verdict reflected the jury's rejection of plaintiff's claim for compound interest.*fn8

Defendant asserts that the terms of the contract were clear and it was not for the trial court to "make a contract for the parties" as to the South Brunswick properties. Defendant argues that by its express terms, the Agreement applied only to the Monroe Property and there was no ambiguity that required the jury's interpretation. Defendant's argument must fail on this point.

It is undisputed that a written contract can be subsequently modified by the conduct of the parties, County of Morris v. Fauver, 153 N.J. 80, 99 (1998), or by their consent. Bohlinger v. Ward & Co., 34 N.J. Super. 583, 587 (App. Div. 1955), aff'd, 20 N.J. 331 (1956). In this case, the judge appropriately instructed the jury on the issue of whether there was an oral modification of the parties' written agreement and further instructed the jury to consider the parties' conduct in this regard.

There was ample testimony in the record regarding the business relationship between plaintiff and defendant before and after the Agreement was signed in 1998. Plaintiff contended that defendant agreed to apply the Agreement's essential terms to the purchase of the subsequent properties. Defendant denied that, and he claimed that the parties had a specific understanding that plaintiff would not receive any return of interest on the amount he contributed to the purchase price of the South Brunswick Properties.

However, defendant also conceded at trial that plaintiff was entitled to twelve percent interest on the Parking Lot, even though it was acquired in 2000 after the South Brunswick Properties, because plaintiff had "put up" the funds. This concession is completely at odds with defendant's position that the Agreement only applied to the Monroe Property.

Juries are entitled to afford "great weight" to the conduct of the parties in determining the meaning of a contract and the intent of the parties. Joseph Hilton & Assocs. v. Evans, 201 N.J. Super. 156, 171 (App. Div.), certif. denied, 101 N.J. 326 (1985); Purich v. Weininger, 72 N.J. Super. 344, 350-51 (App. Div.), certif. denied, 37 N.J. 221 (1962). Given the issues of credibility and ambiguity as to the intent of the parties, it was proper for the issue of whether the terms of the Agreement covered the South Brunswick Properties to be submitted to the jury.

We therefore affirm that portion of the order of judgment that awarded plaintiff $94,079.51 to be paid from the assets of the partnership.

Affirmed in part; reversed in part; remanded for the entry of an amended order of judgment. We do not retain jurisdiction.

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