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Rainbow Temp Services, Inc. v. Korba

SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION


May 16, 2008

RAINBOW TEMP SERVICES, INC., PLAINTIFF-RESPONDENT,
v.
MICHAEL KORBA, DEFENDANT-APPELLANT.

On appeal from the Superior Court of New Jersey, Law Division, Middlesex County, L-3566-05.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Submitted January 9, 2008

Before Judges Wefing and R. B. Coleman.

Defendant Michael Korba, the sole director, officer and shareholder of Gem Packaging and Display, Inc. (Gem), appeals from a judgment in the amount of $230,173.67, plus interest, entered in favor of plaintiff Rainbow Temp Services, Inc. (Rainbow) following a September 27, 2006 bench trial. The amount of the debt was stipulated. It represents the value of unpaid services for employees, formerly Gem employees, who were employed by Rainbow and assigned back to Gem as temporary workers.

Plaintiff and defendant began their business relationship in October 2000. To solve problems defendant was having with his employees, it was decided that Rainbow would employ all of the Gem employees and provide them back to Gem as temporary workers. Andrew Minaya, President of Rainbow, and Korba memorialized this arrangement in an October 25, 2000 contract. The invoices for the employees' services were billed to Gem without any indication that Gem was a corporation. The checks used by Gem to pay the invoices did not reveal the nature of that entity, that is, whether it was operated as a corporation, partnership or some other business form. Minaya did visit some of Gem's plants in summer 2000 and October 2000, and the buildings at those plants displayed signage that contained the company name "GEM Packaging & Display, Inc."

When defendant failed to pay plaintiff for its services, plaintiff filed a complaint in the Law Division, Middlesex County, in late 2001. On March 27, 2002, the court entered default judgment in the amount of $233,785.26 in favor of plaintiff and against defendants Gem Packaging & Display and Michael Korba. Defendants then made a motion to vacate default judgment, which was granted on September 13, 2002.

On December 20, 2002, Gem and Korba entered into an agreement with several of its creditors to settle debts owed. The agreement provided that upon default, "each Creditor shall have the right to pursue any remedy then available to it as if this Agreement had never been made." Gem and Korba did default on these debts, and in response, plaintiff filed a motion on March 11, 2005, to enter default judgment against defendant Michael Korba. The court, however, denied that motion because the matter had been dismissed for lack of prosecution in January 2003. Plaintiff then filed a new complaint against Michael Korba individually. That matter proceeded to trial on September 27, 2006, at the conclusion of which the trial court found Korba personally liable on the debts. Defendant filed the instant appeal on May 16, 2007.

Defendant states the following grounds for his appeal:

POINT I:

THE TRIAL COURT ERRED IN FINDING THAT MICHAEL KORBA WAS PERSONALLY LIABLE FOR DEBT INCURRED BY GEM PACKAGING & DISPLAY, INC. BECAUSE THE PLAINTIFF HAD NOTICE THAT IT WAS CONDUCTING BUSINESS AS A CORPORATION. POINT II: THE COURT ERRED IN FINDING MICHAEL KORBA PERSONALLY LIABLE FOR THE DEBT TO RAINBOW TEMP. SERVICES, INC. BECAUSE THERE WAS AN EXECUTED CREDITORS' AGREEMENT THAT CLEARLY INDICATED THAT GEM PACKAGING AND DISPLAY, INC. WAS RESPONSIBLE FOR THE DEBTS OF THE CORPORATION AND THAT AGREEMENT CONSTITUTED A NOVATION.

Based on the relevant facts and controlling case law, we affirm.

Defendant disputes the determination that he is individually liable for the debt of Gem. He contends that Rainbow was informed that Gem was a corporation and that it was aware or should have been aware of the corporate status by virtue of statements made to Rainbow representatives, business cards given to them and signage that was openly visible at the Gem facilities visited by representatives of Rainbow. We are in agreement with the trial court that African Bio-Botanica, Inc. v. Leiner controls in this matter. 264 N.J. Super. 359 (App. Div. 1993).

In African Bio-Botanica, the defendant was the sole stockholder and president of the corporation. Id. at 360-61. The corporation transacted business under the name "Ecco Bella," though its actual name was "Ecco Bella Incorporated." The defendant placed several orders for merchandise from plaintiff and, on occasion, had the merchandise shipped to her home. Id. at 361. Plaintiff addressed the bill for the purchases to the company name, without any corporate designation. The defendant responded by paying bills with checks imprinted with the name of the company, again without any indication of incorporation. Ibid. When the plaintiff sued the defendant personally for the debt owed, she claimed that the liability was solely that of the corporation. Id. at 361, 363.

This court held that, under the circumstances, the defendant was personally liable for the debts of the corporation:

[t]he [corporate] agent who seeks protection from his status as agent has the means and the motive to communicate that status to the person with whom he is dealing. If the person with whom the agent is dealing does not know of the agency and has no reasonable way to know except by asking, the agent has the burden of disclosing his agency and the identity of his principal in order to avoid liability on the contracts he makes. In that situation the person with whom the agent is dealing has no duty to inquire. [Id. at 365.]

Quoting a treatise, the opinion continued:

"The duty of disclosure clearly lies with the agent alone, so that a third party with whom the agent deals has no duty to discover the existence of the agency or to discover the identity of the principal. Accordingly, the agent is not relieved from personal liability on the contract involving an undisclosed or partially disclosed principal merely because the party with whom he or she deals had the theoretical means of discovering that the agent was acting only in a representative capacity." [Ibid. (quoting 3A William M. Fletcher, Fletcher Encyclopedia of the Law of Private Corporations § 1118 (perm. ed. rev. vol. (1986)).]

Defendant therefore has the burden of going forward if he wishes to avoid personal liability. See Ibid.

We are satisfied that defendant here acted for an undisclosed or partially disclosed principal, and as such had a duty to formally communicate the corporation's status to plaintiff. He also had a burden to demonstrate that fact before the trial court. The record does not indicate that he carried this burden. Defendant, himself, testified that he was unsure whether he mentioned to representatives of Rainbow that Gem was a corporation. The original October 25, 2000 contract had no indication that Rainbow was reaching an agreement with Gem as a corporation. Instead, the agreement was made between "GEM PACKINGING & DISPLAY AND RAINBOW TEMP. SERVICES, INC." The same designation appears on the signature lines to the contract.

As was the case in African Bio-Botanica, defendant here used a company name without expressly mentioning its status as a corporation. In that scenario, plaintiff had reason to assume it was contracting with Michael Korba personally. Furthermore, plaintiff cannot be charged with notice simply because Gem displayed "Inc." on the doors to its warehouse. Therefore, the trial court correctly ruled that defendant could not escape personal liability under the contract.

Defendant also argues that an agreement reached between Gem and seven of its creditors in December 2002 was a novation, which would have discharged any personal obligations Korba may have had prior to the date of the new agreement.

Novation is generally accepted to mean that there being a contract in existence, some new contract is substituted for it, either between the same or different parties, the consideration mutually being the discharge of an old contract. In order to effect a novation there must be a clear and definite intention on the part of all concerned that such is the purpose of the agreement, for it is a well settled principle that novation is never to be presumed. The intention by the obligor that the existing debt should be discharged by the new obligation must be concurred in by both debtor and creditor. The existence of such an intention need not be shown by express words to that effect, but the same may be implied from the facts and circumstances attending the transaction and the conduct of the parties thereafter. [The Sixteenth, Ward Bldg. and Loan Ass'n of Newark, N.J. v. Reliable Loan, Mortgage and Sec. Co., 125 N.J. Eq. 340, 342-43 (E & A 1939) (emphasis added) (citations omitted).]

The party alleging such a novation carries the burden of proof. Id. at 345. In that regard, paragraph 9 of the December 20, 2002 agreement reads that in the event of default, "each Creditor shall have the right to pursue any remedy then available to it as if this agreement had never been made." This language signifies that this Agreement would not serve to extinguish prior contracts. Rather, if a party to the contract defaulted, any prior debt could be pursued regardless of the December 20, 2002 creditors' agreement.

The 2002 creditors' agreement does not state an express or implied intent to effectuate a novation. Defendant still had an obligation to pay his outstanding debt to plaintiff notwithstanding the agreement. He did not carry his burden of proving novation; thus, this defense lacks merit.

Finally, Korba contends the trial judge failed to take into account proposed findings of fact and conclusions of law and that the decision was essentially arbitrary, capricious and unreasonable. This point wholly lacks merit and does not warrant further discussion in this written opinion. R. 2:11-3(1)(E).

Affirmed.

20080516

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