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Spring Creek Holding Co., Inc. v. Shinnihon U.S.A. Co.

March 27, 2008

SPRING CREEK HOLDING COMPANY, INC., PLAINTIFF-APPELLANT,
v.
SHINNIHON U.S.A. CO., LTD., DEFENDANT-RESPONDENT.



On appeal from the Superior Court of New Jersey, Chancery Division, Sussex County, Docket No. C-43-03.

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

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

APPROVED FOR PUBLICATION

Argued September 10, 2007

Before Judges Cuff, Lisa and Lihotz.

This appeal implicates the right of a seller of real estate to declare the buyer in material breach and terminate the agreement of sale based upon the seller's assertion that it reasonably believed the buyer would not perform, it demanded adequate assurance of performance from the buyer, and the buyer failed to provide such assurance. The seller, Shinnihon U.S.A. Co., Ltd. (Shinnihon) took this action with respect to its agreement with the buyer, Spring Creek Holding Company, Inc. (Spring Creek). Spring Creek filed this suit, seeking damages from Shinnihon for breach of contract. It also sought specific performance. After extensive discovery and the submission by the parties of a documentary record which they both deemed complete, the parties filed cross-motions for summary judgment. The Chancery Division granted Shinnihon's motion and dismissed Spring Creek's complaint. The court denied Spring Creek's motion, which sought an order of specific performance.

Spring Creek appeals. It argues that its summary judgment motion should have been granted and Shinnihon's should have been denied. Alternatively, Spring Creek argues that material issues of fact are in dispute, necessitating a trial. Finally, Spring Creek argues that the case should be remanded for further consideration in light of the jury verdict in a federal lawsuit between its feuding shareholders resolving which faction was entitled to control Spring Creek's affairs. The rift between the shareholders was at the heart of its inability to fulfill its obligations under the agreement. Shinnihon terminated the agreement in June 2003. The federal action between the shareholders was pending when the trial court decided this case in October 2005. The federal jury verdict was returned in October 2006.

We conclude that the trial court correctly determined that no rational factfinder could find that Shinnihon did not reasonably believe that Spring Creek would not perform, that it did not request reasonable assurance of performance, and that Spring Creek did not fail to provide such assurance. We further conclude that the apparent resolution of the dispute among Spring Creek's shareholders more than three years after termination of the agreement has no bearing on the outcome of this litigation. We therefore affirm.

I.

The nonperformance was not a failure to pay money. Indeed, Spring Creek tendered payment of the full contract price. The agreement did not contemplate merely a sale of land in exchange for money by a seller disinterested in the buyer's use of or activities with respect to the land after completion of the sale. The seller here owned and would continue to own a large improved adjoining tract of land, in which it had a substantial investment. Thus, the agreement contemplated particular zoning approvals for the parcel being conveyed to Spring Creek and the negotiation of further agreements regarding the development and use of the conveyed parcel and that retained by Shinnihon. It was Spring Creek's inability to perform with respect to those issues that led Shinnihon to seek assurance, and, when not furnished, to terminate the agreement.

The dispute developed over an extended period of time and was not caused by a single event or circumstance. To adequately explain the dispute and place it in proper perspective, we deem it necessary to set forth a detailed recitation of the events leading up to the agreement of sale between Shinnihon and Spring Creek, and the events occurring during the pendency of the agreement up to the time of termination.

The property is part of a 600-acre tract in Vernon Township. In the 1980s, Princeton-New York Investors (PNY) owned and operated the entire property as the Great Gorge Playboy Club and Resort. Included is a twenty-seven-hole golf course covering approximately 275 acres, now known as the Great Gorge Golf Course. A hotel, now known as the Legends Resort and Country Club, covers forty-three acres. An undeveloped 280-acre parcel, referred to in various agreements as the "Remainder Property," is the subject of this litigation.

In November 1990, PNY agreed to sell the golf course to Shinnihon. To overcome land use restrictions against the separation of the golf course prior to sale, the parties agreed to transfer legal ownership of the golf course and Remainder Property to Shinnihon, with PNY retaining equitable title to the non-golf course property. This Remainder Agreement provided that Shinnihon would purchase the entire parcel for $20 million. Shinnihon agreed to return the Remainder Property to PNY for nominal consideration after an amendment to the master deed effected the division of the parcel. PNY was obligated to pay taxes and other charges associated with the Remainder Property and to pursue its subdivision.

PNY failed to make some of the tax payments. In 1994, PNY filed for bankruptcy. In 1998, through the bankruptcy proceedings, Seasons Investment Corporation (SIC) purchased for $9.1 million the hotel and PNY's right to reacquire from Shinnihon the Remainder Property. SIC immediately conveyed the hotel to Metairie Corporation (Metairie), by way of a $9 million mortgage note issued by Noramco NJ, Inc. (Noramco). The president of Metairie was Marvin Keith. Shinnihon sued SIC seeking a declaratory judgment absolving it of its obligations under the Remainder Agreement, arguing that PNY breached the agreement by failing to pay the real estate taxes.

Keith saw tremendous potential in this project. He wished to renovate and convert the hotel into an upscale timeshare facility, which would then serve as the centerpiece of a large timeshare community adjacent to the golf course. Keith envisioned developing the Remainder Property with "very high end" timeshare units as the perfect complement to the resort.

In June 1999, during the pendency of Shinnihon's suit against SIC, Keith formed Spring Creek, and was its sole shareholder. John Lamb, an attorney representing Keith, was the registered agent of Spring Creek. Upon its incorporation, Spring Creek entered into an agreement with SIC by which SIC assigned to Spring Creek its rights under the Remainder Agreement. SIC retained a twenty percent net profit participation interest in the Remainder Property. In July 1999, SIC assigned its participation interest to Noramco.*fn1 Spring Creek was substituted in place of SIC in the litigation with Shinnihon, and, after an adverse final decision, filed an appeal.

Experiencing financial difficulties with the management of the hotel, Keith sought an investment source to avoid a loan default. Seymour Svirsky and Hillel Meyers agreed to become investors and to provide financial assistance in exchange for one-third shareholder interests in both Metairie and Spring Creek. According to Meyers, creation of the shareholder interest was critical to this January 2000 deal, because the development potential of the Remainder Property provided the sole justification for a risky investment in the hotel.

During the pendency of the appeal, Shinnihon and Spring Creek entered into settlement discussions. Shinnihon claimed entitlement to reimbursement for various sums it advanced that should have been paid by PNY or its successors. Lamb represented Spring Creek, and Steven Richman represented Shinnihon in these discussions, which resulted in the execution of a Settlement Agreement on August 24, 2000.

The Settlement Agreement required Spring Creek to dismiss the appeal and pay Shinnihon a nonrefundable sum of $100,000. The parties agreed to protect the 1989 preliminary site plan approvals from the Vernon Township Zoning Board of Adjustment (zoning board) to develop 678 residential units on the Remainder Property and to cooperate in further processing the application. Spring Creek agreed to submit final site plans to Shinnihon prior to their official submission and promised that the development of the units would not adversely affect the operation of the golf course.

The Settlement Agreement contemplated Shinnihon's construction of an additional nine-hole golf course on approximately fifty-seven acres of the Remainder Property. The Settlement Agreement defined the Remainder Property, less the fifty-seven acres, as the "Residential Development Parcel." Upon attainment of final zoning approvals, Shinnihon would convey the Residential Development Parcel to Spring Creek for an additional $2 million.

The Settlement Agreement was carefully structured to assure that Spring Creek's residential development on the Remainder Property would not interfere with Shinnihon's operation of the golf course, including the additional nine holes that Shinnihon might later develop. It contained, for example, these provisions:

6. Approval: Relocation of Units

(a) . . . . The Approvals shall consist of 678 units (including patio homes, condos, townhouses and villas) on the Remainder Property reconfigured so that if Shinnihon desires, the Additional Nine Hole Golf Course can be constructed and so that there shall be no more than 365 "unit footprints" on that portion of the Remainder Property located around the 27 Hole Golf Course, with units on that Residential Development Parcel (excluding the Non-Contiguous Part) being able to be stacked, unless Shinnihon consents in writing to additional footprints. The balance of the 678 units remaining may be located on that portion of the Remainder Property located across Route 517 by the main entrance of the Legends Resort (the "Non-Contiguous Part").

(b) The "unit footprints" shall be divided into three sections (Sections I, II and III) and the section on the Non-Contiguous Parcel (as defined herein) shall be Section IV, as reflected in the fifth revision to the site plan. Spring Creek or its assignee shall cooperate with respect to Shinnihon's maintenance, use and operation of the Golf Course, and Shinnihon shall cooperate with respect to future development of the Residential Development Parcel so long as such development does not materially and adversely affect the use, operation or playability of the Golf Course.

7. No Material Adverse Effect on Golf Course

(a) The 678 units (or such lesser amount as approved and accepted) to be constructed shall not materially or adversely affect the use of the Golf Course by Shinnihon, in Shinnihon's sole opinion, and the parties shall exercise their best efforts to reasonably agree upon the location of the units to minimize any interference with Shinnihon's Golf Course, including without limitation impact on sewage, drainage and irrigation, as well as construction. The parties agree that Shinnihon has no objection to the number of units developed on the Non-Contiguous Part of the Remainder Property, since any proposed units are not contiguous to the Golf Course, but Shinnihon reserves the right to require Spring Creek to take appropriate corrective measures, at Spring Creek's sole cost and expense, in the event a material and adverse effect on the Golf Course occurs. Notwithstanding the foregoing, Shinnihon agrees that the 365 footprint units have no material adverse effect in terms of their location in accordance [with] the fifth amended site plan prepared by Shinnihon. In addition, in connection with the construction of any roads that cause relocation or replacement of any Golf Course features such as greens, fairways, bunkers, cart paths, hazards and the like, then the cost of such replacement or relocation shall be the sole responsibility of Spring Creek.

(b) Spring Creek agrees to utilize best efforts to deliver any final site plans relating to the future development of the Residential Development Parcel to Shinnihon for review at least 30 days prior to the intended submission of such plan to the Vernon Township Zoning Board or such other agency as may be appropriate or relevant.

The Settlement Agreement provided that Shinnihon would be required to convey the Residential Development Parcel to Spring Creek upon "obtaining any and all of the Approvals referenced in Paragraph 6 which have become final and non-appealable, or agreement by Spring Creek to accept a lesser amount of approved units." The Settlement Agreement also contained the following "Remedies" clause:

13. Remedies

In the event that the Approvals referenced in Paragraph 6 are not obtained and Spring Creek does not otherwise accept Approvals for a lesser number of units or units not containing the mix of types specified in Paragraph 6 ["including patio homes, condos, townhouses and villas"], then Shinnihon shall have no obligation to convey the Residential Development Parcel referenced in Paragraph 9, and shall retain title to the Remainder Property in its entirety.

Meyers, Svirsky and Keith each signed the Settlement Agreement on behalf of Spring Creek. Spring Creek dismissed the appeal and paid $100,000 to Shinnihon on August 28, 2000. At that point, the contours of Lamb's representation began to blur. A rift over the right to control Spring Creek was developing between Keith on the one hand and Svirsky and Meyers on the other. By letter dated August 29, 2000, Lamb informed Richman that his firm "no longer represents Spring Creek, and my clients, Messrs. Svirsky and Meyers, will decide how to acquire the property."

Contrary to Lamb's statement that he would not represent Spring Creek, he continued to act on its behalf in correspondence with Shinnihon, Vernon Township, and other attorneys, engineers and entities. Lamb's uncertain scope of representation was a symptom of a larger growing problem. According to Meyers, Keith began in late 2000 to experience "seller's remorse" and did not wish to be bound by the terms of the earlier shareholder agreements. Keith began to represent to third parties that Svirsky and Meyers lacked authority to bind Spring Creek. According to Keith, Svirsky and Meyers breached their agreements with him, thus divesting Svirsky and Meyers of their right to control Spring Creek. The validity of either faction's contentions was immaterial. The significant circumstance was that the dispute over control existed and affected the ability of the parties to proceed with development approvals. The disagreement also interfered with the ability of the parties to proceed with other agreements mutually affecting them. The Settlement Agreement contemplated that the parties would negotiate "any other agreement they deem necessary to resolve other miscellaneous issues between them, including but not limited to those affecting sewage and effluent, borders and boundaries, and other environmental issues." The record reflects that negotiations regarding some of these issues were in progress. Of course, if it could not be determined which faction spoke for and had authority to bind Spring Creek, any such discussions and ultimate agreements could be for naught.

On July 20, 2001, Keith wrote to Shinnihon's president questioning Lamb's ability to bind Spring Creek:

I only recently was apprised that Shinnihon wished to set a time of the essence closing for the above transaction. I now understand Shinnihon's counsel sent the notice . . . to John Lamb, Esq. I have great difficulty in determining who John Lamb represents at any given time, but he does not represent me or my company, Spring Creek Holding Company, Inc. Richman wrote to Lamb on August 7, 2001 to express concern over Keith's assertions:

While it does not appear that there is a challenge to Spring Creek's authority to have entered into the settlement agreement at the time, we are concerned that we are receiving communications from someone else purporting to speak on behalf of Spring Creek while we are continuing to pursue discussions with you on behalf of Spring Creek.

Please clarify who speaks for Spring Creek.

Lamb replied on August 15, 2001, expressing somewhat inconsistent positions:

I have been authorized by Messrs. Meyers and Svirsky, who own a majority of the shares of stock in [Spring Creek], are President and Secretary of Spring Creek, respectively, and constitute the sole members of the Board of Directors, to take certain ...


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