On appeal from the Superior Court of New Jersey, Chancery Division, Atlantic County, Docket No. C-110-04.
The opinion of the court was delivered by: Sabatino, J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Before Judges R. B. Coleman, Sabatino and Simonelli.
After a non-jury trial, the Chancery Division ruled that defendants violated the New Jersey Consumer Fraud Act, N.J.S.A. 56:8-1 to -106 (the "CFA" or "the Act") in their sale to plaintiffs of a motel in Absecon and certain related land. The court awarded plaintiffs treble damages and counsel fees under the CFA, but rejected their separate common-law claims. The court also granted defendants' counterclaims against plaintiffs on certain promissory notes relating to the transaction.
Defendants appeal the adverse judgment under the CFA, and plaintiffs cross-appeal the court's ruling on the promissory notes. Both parties appeal the court's computation of damages.
We reverse the judgment in favor of plaintiffs because we conclude, as a matter of law, that the CFA does not apply to this sale of an ongoing business. We also sustain the dismissal of plaintiffs' common-law claims and reject their cross-appeal concerning the promissory notes.
This litigation was brought in the Chancery Division by plaintiffs, 539 Absecon Boulevard, L.L.C. ("plaintiff" in the singular or "the LLC"), and Bhudev Sharma, against defendants Shan Enterprises Limited Partnership ("Shan Enterprises"), Suniti Corp., Shan Realty Associates, L.P. ("Shan Realty"), Shan Realty Corp. ("Shan Corp."), Sunil J. Shah ("Sunil"), Nimesh Shah ("Nimesh"), Swati Shah ("Swati"), Jashvant Shah ("Jashvant"), and HJS Funding, L.L.C. ("HJS"). The complaint alleged common-law fraud, fraud in the inducement, fraudulent concealment, violation of the CFA, negligent misrepresentation, wrongful concert of action, conspiracy, breach of the implied covenant of good faith and fair dealing, unjust enrichment, unilateral mistake, and piercing of the corporate veil. The allegations arise out of the sale to plaintiffs in 2002 of an ongoing motel business and the real property where the motel was located.
Events Leading to the Purchase
Plaintiff Bhudev Sharma is a cardiologist. His sole business investment before 2002 consisted of a partnership share in a Kentucky Fried Chicken franchise. Through a patient, Sharma was introduced to a real estate broker, Babu Patel ("Patel"). In turn, Patel introduced Sharma to the Shah family. The family owned and operated the Comfort Inn located on Absecon Boulevard in Absecon ("the Inn"). The Inn is a seven-story building with 204 guest rooms.
Jashvant, a certified public accountant, was the patriarch of the Shah family. His son Sunil was also an accountant. Another son Nimesh lived and worked at the Inn and also worked as a bookkeeper in Sunil's office. The various family members, including Jashvant's wife, Hansa (who is not a named defendant), and Sunil's wife (defendant Swati), had ownership interests in several businesses throughout the years, both before and after 2002. These businesses included the Gloucester Inn; a Ramada Inn in Woodbridge; a Days Inn in Lancaster, Pennsylvania; a hotel in Dover, Delaware; and several Dunkin' Donuts stores.
Shan Enterprises, a limited partnership, operated the Inn. Suniti Corp. was the general partner of Shan Enterprises. Shan Realty was a limited partnership that owned the parcel of property adjacent to the Inn. Shan Corp. was the general partner of Shan Realty. Although the Shah family originally had other partners with them in the Inn, as of 1996, Hansa, Nimesh, and Swati owned 100% of Shan Enterprises. Hansa and Swati did not actively participate in operating the Inn.
In 2002 the Shah family decided to sell the Inn. Through Patel, they were introduced to Sharma as a prospective buyer. Jashvant and Sunil gave Sharma the Inn's profit and loss statements and tax returns for the years 1999, 2000, and 2001.
In considering the potential purchase, Sharma looked at the Inn's net income and profitability. The Inn's tax returns showed net income of $129,000 in 1999; $139,000 in 2000; and $236,000 in 2001. According to Sharma, he focused on the line on the tax return that reflected "ordinary income (loss) from trade or business activities." Sharma also looked at both the Inn's profit and loss statements and schedule of expenses for each of these three years. Having examined these documents, Sharma made the decision to buy the Inn.
Jashvant maintained that the combined asking price for the Inn, the property on which it was situated, and the adjacent parcel of land, was always $6 million; he contended that he never agreed to a lower figure. However, according to draft contracts dated May 29, 2002, prepared by defendants' attorney, the specified combined sales price for both parcels and the Inn was shown as $5,675,000. Another draft contract, dated June 26, 2002, showed a purchase price, solely for the Inn, of $5.4 million. In addition, Jashvant sent an e-mail to Patel on June 21, 2002, stating that a price adjustment had been made from $5.9 million to a lower amount.
Jashvant claimed that he never reviewed these drafts before his attorney sent them out, that he never approved lower prices, and that the drafts did not constitute offers. Rather, he maintained that they were merely for discussion purposes only. Jashvant also contended that his June 21 e-mail to Patel was not true or complete. He insisted that plaintiffs had taken the e-mail out of context, although he could not say in what context he had written it.
The Sale Contracts and Other Related Documents
Two contracts of sale were executed on July 18, 2002. One was for the adjoining parcel (Block 225, Lot 8), and designated the seller as Shan Realty and the buyer as Sharma. It specified a purchase price for that lot of $275,000. The companion contract was for the Inn and the land at 539 Absecon Boulevard (Block 225, Lots 9 and 10) ("the Inn contract"), and designated the seller as Shan Enterprises and the buyer as Sharma. The purchase price for this portion of the transaction was $5,725,000, allocated as follows: $2,300,000 for the premises and improvements; $175,000 for personal property; and $3,250,000 for good will. Under these two contracts, the combined purchase price for the transaction was $6 million.
With respect to the Inn contract, Sharma paid a deposit of $100,000. The parties contemplated that at closing Sharma would pay an additional $5,050,000 by check and that he would also sign two notes, one for $250,000 and one for $325,000. Both notes were to be subordinate to a first mortgage on the property, in an amount not to exceed $3,900,000.
The "due diligence" section of the Inn contract referred to environmental and engineering due diligence. It also provided that the transfer of the Inn's franchise agreement was a condition of the sale.
Section 9.06 of the Inn contract, entitled "Buyer's Acknowledgments," provided as follows:
EXCEPT AS OTHERWISE EXPRESSLY SET FORTH HEREIN, BUYER ACKNOWLEDGES THAT BUYER HAS MADE OR HAS CAUSED TO BE MADE A THOROUGH PHYSICAL AND ENVIRONMENTAL EXAMINATION AND INSPECTION OF THE PROJECT AND IS NOW FAMILIAR WITH THE PHYSICAL AND ENVIRONMENTAL CONDITION THEREOF AND HAS INDEPENDENTLY INVESTIGATED, ANALYZED AND APPRAISED THE VALUE AND PROFITABILITY OF THE PROJECT. BUYER ACKNOWLEDGES AND AGREES THAT BUYER HAS ENTERED INTO THIS AGREEMENT WITHOUT ANY REPRESENTATIONS AND WARRANTIES HAVING BEEN MADE BY SELLER, ANY AGENT OR EMPLOYEE OF SELLER OR ANY BROKER, IF ANY, ACTING FOR SELLER OR ANY OTHER PERSON OR PERSONS, AS TO THE PRESENT OR FUTURE PHYSICAL OR ENVIRONMENTAL CONDITION OF THE PROJECT, THE STATUS OF TITLE, INCOME, LEASES, EXPENSES, OPERATION, SIZE, ZONING OR ANY OTHER MATTER OR THING WHOSOEVER [sic] AFFECTING OR RELATING TO THE PROJECT, EXCEPT TO THE EXTENT, IF ANY, SPECIFICALLY SET FORTH IN THIS AGREEMENT. EXCEPT AS MAY OTHERWISE BE EXPRESSLY SET FORTH IN THIS AGREEMENT, BUYER FURTHER AGREES TO ACCEPT THE PROJECT "AS IS, WHERE IS" IN THE CONDITION ON THE DATE OF THIS AGREEMENT, SUBJECT TO NORMAL WEAR AND TEAR AND DAMAGE BY THE ELEMENTS FROM THE DATE HEREOF TO THE CLOSING DATE.
In addition, the Inn contract contained a "Disclaimer" provision at Section 11.04, which provided as follows:
A. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, BUYER ACKNOWLEDGES THAT IT HAS EXAMINED THE PROJECT AND IS BUYING ALL OF THE PROJECT "AS IS, WHERE IS", WITHOUT WARRANTY OR REPRESENTATION OF ANY KIND WHATSOEVER, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTY OF FITNESS OF THE PROJECT FOR A PARTICULAR USE, WHETHER BY SELLER, OR BY ANY AGENT, BROKER, EMPLOYEE OR OTHER REPRESENTATIVE OF SELLER, NOT EXPRESSLY STATED HEREIN. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT ALL UNDERSTANDINGS AND AGREEMENTS HERETOFORE AND BETWEEN THE PARTIES HERETO ARE MERGED IN THIS AGREEMENT, WHICH ALONE FULLY AND COMPLETELY EXPRESSES THEIR AGREEMENT.
B. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, BUYER ACKNOWLEDGES THAT BUYER HAS HAD AN ADEQUATE OPPORTUNITY TO INSPECT THE PROJECT AND TO MAKE SUCH LEGAL, FACTUAL AND OTHER INQUIRIES AND INVESTIGATIONS AS BUYER DEEMS NECESSARY, DESIRABLE OR APPROPRIATE WITH RESPECT TO THE PROJECT. WITHOUT ANY WAY LIMITING THE GENERALITY OF THE FOREGOING, BUYER SPECIFICALLY ACKNOWLEDGES AND AGREES THAT IT HEREBY WAIVES, RELEASES AND DISCHARGES ANY CLAIMS THAT IT HAS OR MAY HAVE AGAINST SELLER WITH RESPECT TO ANY CONDITION ON THE PROJECT, OR ANY OTHER STATE OF FACTS WHICH EXIST WITH RESPECT TO THE PROJECT. BUYER FURTHER ACKNOWLEDGES AND AGREES THAT THERE SHALL BE NO ADJUSTMENTS IN THE PURCHASE PRICE FOR ANY PHYSICAL, FUNCTIONAL, ECONOMIC OR ENVIRONMENTAL CONDITIONS. [(Emphasis added).]
The Inn contract also contained a merger clause at Section 12.06. The clause specified that the agreement contained "all of the covenants, representations, warranties and agreements between the parties with respect to the subject matters contained herein," that "no other agreement, covenant, representation, inducement, promise or statement not set forth in writing in this Agreement and its Exhibits shall be binding on the parties," and that the agreement had been negotiated at arm's length. The merger clause further recited that both parties had received the advice of independent counsel and "ha[d] not relied upon the advice of any but its own accountants, counsel or advisors, concerning any aspect of the transactions contemplated by this Agreement including, without limitations, the tax implications thereof." (Emphasis added).
Additionally, Section 12.12 of the Inn contract, entitled "No Oral Change," provided in part:
No amendment, modification, termination, discharge or waiver of any provision of this Agreement will be effective unless it is in writing and signed by the party intended to be bound thereby and then such amendment, modification, termination or waiver will be effective only in the specific instance and for the specific purpose for which given.
Plaintiffs' Consultant Frick's Pre-Sale Review of the Business
Sharma thought he could improve the marketing of the Inn by putting it under new management. Sharma hired Gas Lamp Management ("Gas Lamp"), a management company, for this purpose. He had discussions with Steven Frick, who was one of the principals of Gas Lamp.
Although Frick was not an accountant or a real estate appraiser, he had been in the hotel business since 1999, overseeing operations and handling bookkeeping. He visited the Inn in June 2002, at which time he was provided with the Inn's tax returns and profit and loss statements for the years 1999 through 2001.
Frick noticed that the Inn had consistent yearly income. He found it especially significant that the 2001 tax return showed $236,000 in net income. Although Frick knew that Sharma's operating costs would be higher, he was confident that he could increase revenue, primarily by improving marketing and increasing the room rate during high demand periods. Frick believed there was "quite a bit" of net income to work with.
Sharma testified that the due diligence was Frick's responsibility. According to Frick, the "due diligence" list that he provided to defendants included a request for documents, such as bank statements and accounts receivable, which he never received. Frick explained that he did not go back to defendants to request those documents because he "didn't hold their hand." Frick admitted that he was "pretty inexperienced at the time so [he] just did what [he] thought should be done."
In June 2002, Frick prepared a one-page "pro forma" accounting for the proposed transaction, based on an assumed purchase price of $6 million and a down payment of $1 million. This work-up was intended to be provided to the bank issuing the loan, so that the bank could see plaintiffs' expected income and expenses. Frick estimated a 15.6% rate of return on capital, based on net earnings before interest, depreciation, and amortization.
Based on defendants' reported gross revenues of almost $1.9 million, Frick applied a shorthand multiplier of three and determined that the purchase price should be around $6 million. In December 2002 Frick prepared a second pro forma calculation, this time based on a purchase price of $5.675 million and a down payment of $1.6 million.
Sharma applied to Madison Bank for his mortgage to finance this transaction. As part of its loan review, Madison Bank arranged for an appraisal. The appraisal report, completed by Integra Realty Resources ("Integra") on November 25, 2002, estimated the "going concern value" of the business and land to be only $4,900,000. This estimate was composed of the following: the real estate was valued at $3,685,000; the furniture, fixtures and equipment ("FFE") were valued at $715,000; the business and other intangibles were valued at $500,000; and the "excess land" (i.e., the adjoining parcel) was valued at $100,000. There was a deduction of $100,000 for the "keep fee," which was the buyer's cost of keeping the Comfort Inn franchise. Notably, Sharma was concurrently provided with a copy of the Integra appraisal.
In arriving at its $4.9 million valuation, Integra used two appraisal methodologies: the sales comparison approach and the income capitalization approach. Using the sales comparison approach, Integra looked at four comparable sales and concluded that $24,000 per hotel room was an appropriate measure of value. Thus, 204 rooms in the Inn, multiplied by $24,000, yielded an appraised value of $4,896,000.
Under the alternative income capitalization approach, Integra considered the relationship between the property's potential income and its market value, expressed as a capitalization rate. The validity of this approach depended on the quality of the data available to estimate income, vacancy, and expenses. Integra applied only a direct capitalization analysis (as opposed to a discounted cash flow analysis) when using this methodology. Integra did so because it anticipated continued stability within the market, and also because it had been provided with an operating history for the Inn that indicated fairly stable revenues and expenses.
Through its income analysis, Integra first determined the potential gross income of the Inn by multiplying the number of rooms by the average daily room rate ("ADR") and the projected average annual occupancy. This calculation yielded estimated room revenue of $1,900,000 (rounded) (i.e., 365 days x 204 rooms x 35% occupancy rate x $70 ADR).*fn1 After deducting total operating expenses of $1,413,760, Integra computed net operating income at $508,240, which it rounded to $510,000. It then used a capitalization rate of 10.5% and came to a final appraised value of $4,857,142 (i.e., $510,000 divided by 10.5%), which it rounded to $4,900,000. Integra noted that the Inn's occupancy rate of 35% and its ADR of $70 showed that it was slightly underperforming when compared to its peer group.
Integra determined that the business value segment of the appraisal, which included intangibles, was based on three components: (1) the franchise affiliation; (2) management expertise; and (3) service. Integra allocated ten to eleven percent of its appraisal, or about $500,000, to such business value. It also allocated FFE at $715,000. The remainder was attributed to real estate, which included the land and improvements.
Accordingly, Integra allocated a $3,685,000 value to the Inn property. The parcel adjacent to the hotel, which was not severable as a stand-alone tract, was allocated a value of $100,000. This figure recognized the costs to prepare that parcel for development in conjunction with the hotel property.
As a result of Integra's total appraisal of $4.9 million, which was much less than the $6 million contract purchase price, the bank decided it would loan Sharma only $3.185 million. Sharma claimed that Sunil and Jashvant were willing to lower the sale price to $5.675 million. In addition, defendants were willing to take back a second mortgage on the property in the amount of $715,000. Nevertheless, Sharma was forced to look for other investors.
Shortly before closing, Sharma assigned the contract of sale to the LLC (539 Absecon Boulevard) that he had just formed. Based on investment contributions, Sharma owned 78% of the LLC, Thankar Narang (a neighbor of Sharma's) owned 11%, Frick owned 5.5%, and Dana Blasi (Frick's partner) owned 5.5%.*fn2
Sharma was still willing to go ahead with the transaction with the Shahs even though the appraisal came in so low because ------based on defendants' tax returns------Sharma claimed "you're still seeing a tremendous return on investment." Based on the net income shown in those tax returns, Sharma expected that he could get a 15% return.
On January 20, 2003, a "dry" closing took place, at which all of the transactional documents were signed but no funds were actually transferred until several days later. That same day, Sharma and Shan Enterprises signed an amendment to the contract of sale.*fn3 According to this amendment, Sharma was obligated to pay at closing the balance of the purchase price of $5,625,000 as follows: $4,910,000 by check and $715,000 by purchase money mortgage (i.e., the second mortgage). Shan Enterprises agreed to accept two promissory notes from Sharma, in the aggregate amount of $575,000, to reduce the amount of cash payable by Sharma at closing.
Four promissory notes were signed that day. Three of these notes, respectively in the amounts of $200,000, $250,000, and $325,000, named Sharma as the borrower and Shan Enterprises as the lender. On that same date, Shan Enterprises assigned to HJS its interests in the notes for $200,000 and $250,000. A fourth note, in the amount of $715,000, was secured by a second mortgage on the property and showed plaintiff (i.e., the LLC) as the borrower and HJS as the lender.
Also on January 20, 2003, a separate "letter agreement" was executed by Sharma, the LLC, and Shan Enterprises. According to this document, Shan Enterprises was "delivering to Sharma" its check in the amount of $200,000, "which Sharma is simultaneously returning to" Shan Enterprises. The document also provided that, in consideration of the execution by Sharma of the $200,000 promissory note, "the amount of funds which would otherwise be due and payable to" Shan from plaintiffs in connection with the sale of the Inn "shall be reduced by" $200,000.
According to the escrow agreement also executed that same day, four notes were delivered to the escrow agent: the three notes signed by Sharma in the amounts of $200,000, $250,000, and $325,000, and the note for the second mortgage in the amount of $715,000. The escrow ...