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Shalley v. Borough of Sea Bright


May 14, 2009


On appeal from the Superior Court of New Jersey, Law Division, Monmouth County, Docket No. L-3619-04.

Per curiam.


Argued March 30, 2009

Before Judges Lisa, Sapp-Peterson and Alvarez.

Plaintiffs filed an application with the Borough of Sea Bright Planning/Zoning Board (Board) for use and bulk variances to permit the operation of a Stewart's restaurant. The Board denied the application. Plaintiffs did not file an action in lieu of prerogative writs seeking to reverse the Board's decision. Instead, they filed this claim seeking damages for lost profits against the Board, the Borough of Sea Bright, and Gregory Harquail, Sea Bright's mayor.*fn1 Plaintiffs alleged that defendants, acting under color of law, violated their constitutional rights. Plaintiffs also alleged that defendants tortiously interfered with their contractual rights or prospective economic relations. As a result of several orders entered by the trial court over the course of the litigation, all of plaintiffs' claims were dismissed by summary judgment. Plaintiffs appeal from those summary judgment orders and from an order denying their motion to adjourn the trial date and reopen discovery to allow them to obtain a damages expert.

On appeal, plaintiffs argue that their claims should have withstood summary judgment because defendants' conduct in denying their land use application was malicious and shocking to the conscience, thus satisfying all elements of their claims of deprivation of constitutional rights and tortious interference. They further argue that plaintiff Garret Shalley (Shalley) was wrongfully precluded from testifying as to damages or, alternatively, the trial date should have been adjourned to allow plaintiffs to secure the services of an expert witness on damages. Finally, plaintiffs argue that the New Business Rule is inapplicable to this case. We reject plaintiffs' arguments and affirm.


The property that is the subject of this dispute is on Ocean Avenue in Sea Bright. At all relevant times, it was owned by John Regan. The property is in a B-1 zoning district, in which restaurants are a primary permitted use. The property contains a structure, which previously was used as a gas station and beauty salon.

In 1994, Regan obtained preliminary and final approval to operate a Dunkin' Donuts restaurant in the portion of the building previously used as a beauty salon. Two principal uses are not allowed under Sea Bright's land use ordinance on the same site. Accordingly, a variance to permit two principal uses was required. The variance approval contained conditional language that precluded cooking on the premises. The intended Dunkin' Donuts use never materialized.

In 2001, Shalley entered into a "handshake" agreement with Regan by which he would lease the former beauty salon portion of the building and operate a Stewart's restaurant. Under the verbal agreement, Shalley was required to pay no rent until his proposed restaurant opened. Defendants informed Shalley that the proposed plan would require either a request for interpretation as to whether a use variance was required or an application for a use variance. Plaintiffs chose the latter course.

After conducting two public hearings, the Board voted unanimously on August 13, 2002 to deny the application. The memorializing resolution was adopted on September 24, 2002. The Board denied "the requested use variances, bulk variances and waivers in order to permit a Stewart's Restaurant with cooking on site" because plaintiffs "failed to properly address the concerns of the Board with regard to the parking and internal traffic flow on the proposed site." The Board also found no legitimate basis for allowing a gravel rather than paved and lined parking lot. The Board found the proposed number of parking spaces inadequate. The Board found that plaintiffs failed to produce sufficient evidence to establish special reasons for granting the requested variances and that they failed to satisfy the negative criteria, namely that the proposed use would not be detrimental to the public good and would not impair the intent and purpose of the zone plan and zoning ordinance.

Plaintiffs maintained that, because the Board had already approved the Dunkin' Donuts in 1994, the only difference in their proposed use was to allow on-site cooking because "[a]ll zoning issues such as traffic, parking[,] etc., were already approved." Thus, plaintiffs contended that all that was necessary from the Board was to approve an amendment to the previously approved plan to allow cooking on the premises. They pointed out to the Board at the public hearings that cooking is permitted at many other restaurants and snack bars throughout the zone.

Shalley contended that when the Board denied his application, Regan terminated their verbal agreement. Accordingly, Shalley contended there was no purpose in his seeking any further administrative review or pursuing an action in lieu of prerogative writs to reverse the Board's action, because he no longer had an interest in the property. Thus, on August 10, 2004, Shalley, his mother, Mary Shalley, and the limited liability corporation they formed, Stewart's of Sea Bright, LLC, filed this action seeking lost profits and damages.


In a count brought pursuant to 42 U.S.C.A. § 1983, plaintiffs alleged that defendants violated their rights under the Due Process and Commerce Clauses. Under 42 U.S.C.A. § 1983, a person has a claim for damages against a governmental entity which acts to deprive such person of his or her constitutional rights. The statute provides, in pertinent part:

Every person who, under color of any statute, ordinance, regulation, custom, or usage, of any State . . . subjects, or causes to be subjected, any citizen of the United States or other person within the jurisdiction thereof to the deprivation of any rights, privileges, or immunities secured by the Constitution and laws, shall be liable to the party injured in an action at law, suit in equity, or other proper proceeding for redress . . . .

[42 U.S.C.A. § 1983.]

The two preliminary tasks involved in any § 1983 action are to first ensure that the state actor acted under color of state law, and second, to identify a right, privilege or immunity secured by the Constitution or other federal law. Rivkin v. Dover Twp. Rent Leveling Bd., 143 N.J. 352, 363, cert. denied, 519 U.S. 911, 117 S.Ct. 275, 136 L.Ed. 2d 198 (1996). Here, plaintiffs claim that, in denying their application, the Board deprived them of their substantive due process rights and their alleged rights under the Commerce Clause. We first address the substantive due process claim.

The principle of substantive due process found in our federal and state constitutions protects individuals from the arbitrary exercise of the powers of government and from the threat of governmental power being used for the purposes of oppression. Felicioni v. Admin. Office of the Courts, 404 N.J. Super. 382, 392 (App. Div. 2008). To prevail on a substantive due process claim arising from a municipal land use decision, a plaintiff must establish that he or she has a property interest protected by due process, and the governmental body's deprivation of that property interest shocks the judicial conscience. United Artists Theatre Circuit, Inc. v. Twp. of Warrington, 316 F.3d 392, 399-400 (3d Cir. 2003); Am. Marine Rail N.J., LLC, v. City of Bayonne, 289 F. Supp. 2d 569, 581-84 (D.N.J. 2003).

Substantive due process does not protect against all governmental actions that infringe liberty or injure property in violation of some law. Felicioni, supra, 404 N.J. Super. at 392. Substantive due process is reserved for the most egregious governmental abuses against liberty or property rights which "shock the conscience" or otherwise offend judicial notions of fairness and are offensive to human dignity. Rivkin, supra, 143 N.J. at 366.

In Rivkin, our Supreme Court held that this high standard of abuse was not satisfied where, during an application for a rental increase before a municipal rent board, an errant and biased board member berated the applicant and brought forth facts outside the record in violation of its own standards of governance. Id. at 366-68. In so holding, the Court stated that it would be a mistake to equate the required level of conscience-shocking behavior with a mere "arbitrary or irrational" land use decision. Id. at 369. The Court noted that, under both federal and state precedent, the collective conscience of the Court "is not easily shocked." Id. at 366; see also Anastasio v. Planning Bd. of Twp. of W. Orange, 209 N.J. Super. 499, 519 (App. Div.) (finding no 42 U.S.C.A. § 1983 substantive due process claim resulting from municipal planning board's arbitrary delay in approving plaintiff's applications), certif. denied, 107 N.J. 46 (1986).

Plaintiffs argue that defendants committed conscience-shocking behavior. Plaintiffs claim that they submitted facts through which a jury might reasonably conclude that defendants possessed improper motives to sabotage their business in order to (1) appease John Mulheren, who, according to plaintiffs, was a prominent citizen and benefactor of Sea Bright, and (2) because Sea Bright itself "salivated over the Site as part of its ill-fated redevelopment plan." Plaintiffs' complaint cites three instances of the Board or the municipality allegedly engaging in "preferential treatment" toward Mulheren, specifically, the "illegal Peninsula House land swap, the illegal spot zoning change, and the illegal helistop." Plaintiffs claim that Mulheren exercised his influence over the Board to have their application denied because he feared "stiff competition" from the proposed Stewart's against the snack bar of the Chapel Hill Beach Club which he owned.

Mayor Harquail recused himself from the vote, as he does for all use variance applications, because they could ultimately come before the governing body for further consideration. See N.J.S.A. 40:55D-17. Yet, plaintiffs argue that he exercised improper influence over the proceedings because he met with Councilman Andrew Menchinsky in the hallway outside one of the Board hearings and allegedly influenced him. In his deposition, Mayor Harquail admitted discussing traffic flow in the area of the site and "drawing on a piece of paper what I thought the traffic pattern was in my opinion." Menchinsky spoke in opposition to the application as a member of the public during the public portion of the hearing. Plaintiffs claim that Harquail coached Menchinsky on how to "testify" against the application and "thereby acted with malice, violating the civilized norms of governance."

In considering defendants' motion for summary judgment on the § 1983 claim, Judge Perri found no record support for plaintiffs' allegations. She found no conscience-shocking behavior. Citing Anastasio and Rivkin, she held:

Therefore, this Court finds that plaintiffs' claim that the Board's decision was arbitrary and irrational does not amount to a claim for violation of substantive due process under 1983. Instead such terms express the standard of review by a court on appeal of a board's decision as to whether there are sufficient facts to support the agency's action.

Plaintiffs' claim of violation of substantive due process on the basis of the Board's decision being arbitrary and irrational must be dismissed.

We agree with the judge's analysis and conclusion. Applying the Brill*fn2 standard, viewing the evidence most favorably to plaintiffs, a rational factfinder could not find bias or impropriety on the part of defendants, but only hearsay and unsubstantiated allegations. Further, even if plaintiffs' allegations of bias were established, the conduct does not rise to the level of improper action required to shock the judicial conscience. In Rivkin, the Court recognized the reality that "[e]very appeal by a disappointed developer from an adverse ruling by a local . . . planning board necessarily involves some claim that the board exceeded, abused or 'distorted' its legal authority in some manner, often for some allegedly perverse . . . reason." Supra, 143 N.J. at 368 (citation and quotation omitted). The Court found that these myriad allegations of impropriety rarely rise to the level of implicating the Constitution. Id. at 367-69.

Nothing in the facts alleged by plaintiffs is so egregious as to offend notions of judicial fairness, if indeed the handshake agreement even provided plaintiffs with a sufficient property interest to afford them substantive due process protections. This was a routine land use application, and its denial, the events leading up to the denial, and the reasons for the denial were not at all out of the ordinary.

Plaintiffs next claim that their § 1983 claim could have been grounded on violations of the Commerce Clause. The Commerce Clause provides that "the Congress shall have Power . . . to regulate Commerce . . . among the several States."

U.S. Const. art. I, § 8, cl. 3. The Commerce Clause also has a negative or "dormant" aspect, which limits the power of states to adopt regulations that benefit in-state interests by burdening interstate commerce. Am. Marine Rail, supra, 289 F. Supp. 2d at 578. Under the dormant Commerce Clause analysis, a court must first determine whether the challenged state action unduly burdens interstate commerce, whether by being facially discriminatory to out-of-state interests, enacted with a discriminatory purpose, or a facially neutral measure with a discriminatory effect. Id. at 579. The state action is per se invalid if facially discriminatory or if enacted with discriminatory purpose. Borough of Glassboro v. Gloucester County Bd. of Chosen Freeholders, 100 N.J. 134, 143-44, cert. denied, 474 U.S. 1008, 106 S.Ct. 532, 88 L.Ed. 2d 464 (1985). If the measure is not facially discriminatory, it will be upheld unless the burden imposed upon interstate commerce clearly outweighs the legitimate local benefits. Id. at 144.

Plaintiffs argue that, in addition to being influenced by Mulheren and "salivating over" the site for its own interests, the Board denied their application because Sea Bright was afraid of the increased competition that their business would provide to the other local eateries in the area. Plaintiffs deem this alleged motive "protectionist sentiment." Plaintiffs claim that Stewart's was willing to sell them the franchise rights to the New York, Pennsylvania, and California markets, and that the proposed Sea Bright location was to serve as the "flagship restaurant that would have provided the resources to operate additional Stewart's restaurants in other states." Therefore, plaintiffs claim that the Board's denial of their application imposed a substantial burden on interstate commerce, thus supporting their § 1983 claim under the Commerce Clause.

Judge Perri was not persuaded, and neither are we. Nothing in the facts or arguments raised by plaintiffs would permit a jury to find that, in denying plaintiffs' application, the Board somehow imposed a burden on interstate commerce. The mere fact that plaintiffs hoped to become national or regional franchisors operating a number of Stewart's restaurants in various states is not enough to bring the Board's denial into conflict with the Commerce Clause. No further discussion on this point is warranted. R. 2:11-3(e)(1)(E).


We next address dismissal of plaintiffs' action for tortious interference with contract or prospective economic relations. Such a claim is designed to protect the right to pursue one's calling free from undue outside influence. Lamorte Burns & Co., Inc. v. Walters, 167 N.J. 285, 305 (2001). A cause of action for intentional interference with prospective economic relations is distinct from the related tort of intentional interference with contract. Printing Mart-Morristown v. Sharp Elec. Corp., 116 N.J. 739, 750 (1989). Each cause of action contains four elements: (1) a protected interest giving rise to the reasonable expectation of economic advantage (whether a prospective economic or contractual relationship); (2) that the interference was done with malice, meaning intentionally and without justification or excuse; (3) that the interference caused the loss of the prospective gain; and (4) resulting damages. Id. at 751-52.

Judge Kapalko ultimately dismissed these claims because plaintiffs were unable to present competent evidence of damages. Plaintiffs claimed only compensatory damages for lost profits. Lost profits are a measure of compensatory damages that may be recoverable if capable of being established to a "reasonable degree of certainty." Desai v. Bd. of Adjustment of Town of Phillipsburg, 360 N.J. Super. 586, 595 (App. Div.) (citing Stanley Co. of Am. v. Hercules Powder Co., 16 N.J. 295, 314 (1954)), certif. denied, 177 N.J. 492 (2003). Anticipated profits that are too remote, uncertain, or speculative are not recoverable. Ibid. The fact that a plaintiff may not be able to fix its lost profits with precision will not preclude recovery of damages, but courts require a "reasonably accurate and fair basis for the computation of alleged lost profits."

V.A.L. Floors, Inc. v. Westminister Communities, Inc., 355 N.J. Super. 416, 424 (App. Div. 2002).

Under the New Business Rule, however, prospective profits of a new business are considered too remote and speculative to meet the legal standard of reasonable certainty. RSB Lab. Servs., Inc. v. BSI, Corp., 368 N.J. Super. 540, 556 (App. Div. 2004) (citing Weiss v. Revenue Bldg. & Loan Ass'n, 116 N.J.L. 208, 212 (E. & A. 1936)). The vast majority of jurisdictions have rejected the New Business Rule as a per se rule of exclusion and instead have chosen to allow lost profits when they can be proven with a reasonable degree of certainty. Id. at 559 (e.g., N.Y., Pa., Ala., Minn., N.C., Or., R.I., S.C., Tex., and various federal circuits).

In 1990, the Third Circuit predicted that our Supreme Court would reject the New Business Rule, in light of the recent trend to do so. See In re Merritt Logan, Inc., 901 F.2d 349, 356-57 (3d Cir. 1990). However, in Bell Atl. Network Servs., Inc. v. P.M. Video Corp., 322 N.J. Super. 74, 97-100 (App. Div.), certif. denied, 162 N.J. 130 (1999), this court adhered to the New Business Rule of Weiss despite the three judge plurality opinion in Perini Corp. v. Greate Bay Hotel & Casino, Inc., 129 N.J. 479, 509-10 (1992), which noted the recent trend to allow an award for lost profits even in the case of a new business "when they can be proved with reasonable certainty." V.A.L. Floors, supra, 355 N.J. Super. at 425 n.8. In RSB Lab. Servs., we held that the New Business Rule remains the law of New Jersey and that we are "constrained" to follow it until our Supreme Court holds otherwise. Supra, 368 N.J. Super. at 558-60.

Before addressing plaintiffs' proffered evidence on damages and assessing whether Judge Kapalko erred in finding that plaintiff would be unable to prove damages, it is necessary that we explain how that issue arose. Throughout the litigation, plaintiffs did not retain an expert to evaluate anticipated lost profits. Extensive discovery and motion practice transpired. Numerous trial dates were set and adjourned (none at the request of plaintiffs). On April 28, 2008, the case was assigned to Judge Kapalko for a conference. During the course of that conference, Judge Kapalko apparently expressed some doubt as to whether plaintiffs could prove damages without expert testimony.

At no time during the conference did plaintiffs' counsel suggest that he intended to retain an expert or that plaintiffs had been unable to do so during the pendency of the case for financial reasons. Accordingly, the court set a peremptory trial date of June 16, 2008.

This induced plaintiffs' counsel to have a "heart to heart" talk with his clients about going to the considerable expense of hiring an expert. Plaintiffs filed a motion to adjourn the trial date and reopen discovery to obtain an expert. In support of the motion, it was disclosed that at the commencement of the litigation, nearly four years earlier, plaintiffs' counsel and plaintiffs discussed the possible or probable need for a damages expert. However, plaintiffs chose to forego the expense of hiring an expert and believed they could present damages evidence through the testimony of Shalley, who had prior experience in the restaurant business.

Shalley had been deposed two years prior, and was questioned on his basis for projecting lost profits from the proposed restaurant venture. Believing Shalley's testimony on this subject to be incompetent, and in the absence of an expert, defendants moved to bar Shalley's proposed damages testimony and to dismiss the tortious interference claims because of lack of evidence of one of the elements, damages.

On June 6, 2008, Judge Perri heard argument on plaintiffs' discovery motion. The discovery period had ended on October 31, 2006. Neither party had ever previously requested an extension of discovery. Judge Perri denied the motion, finding an absence of exceptional circumstances. See R. 4:24-1(c).

Plaintiffs argued before Judge Perri that an adjournment of only a few weeks would be required. Defendants took issue with that optimistic assessment. Plaintiffs were claiming damages of multi-millions of dollars. Surely, if plaintiffs produced an expert report, defendants would be required to engage an expert of their own. The competing experts would probably have to be deposed. Judge Perri assessed the situation much as defendants did and estimated that reopening discovery for this purpose would delay the trial for at least six months. Relying on Szalontai v. Yazbo's Sports Café, 183 N.J. 386, 397 (2005), the judge held:

Clearly, the fifth trial date, and a settlement conference with a Judge should not be the screening event where the parties finally decided that they need additional proofs in order to present their case.

While I'm very sympathetic to the plaintiff's situation, I am bound by the words of the Supreme Court. The Court finds that plaintiff has failed to show exceptional circumstances which would warrant an adjournment of the trial date, or further extension of discovery.

The belated excuse of financial hardship is unpersuasive. At no time during the four year pendency of the case did plaintiff ever assert that he wished to retain an expert, or that he was precluded from doing so due to financial difficulties.

Accordingly, the motion is denied.

A trial court's determination of whether to extend discovery is a discretionary decision, with which we will not interfere in the absence of a mistaken exercise of discretion. Bender v. Adelson, 187 N.J. 411, 428 (2006); Rivers v. LSC P'ship, 378 N.J. Super. 68, 80 (App. Div.), certif. denied, 185 N.J. 296 (2005); Huszar v. Greate Bay Hotel & Casino, Inc., 375 N.J. Super. 463, 471-72 (App. Div. 2005). We are satisfied that Judge Perri acted within the bounds of her discretion in denying plaintiffs' motion.

In Bender, the Court refused to find exceptional circumstances to allow submission of additional expert reports, in the absence of a persuasive reason why they were not submitted earlier. Supra, 187 N.J. at 428-30. Failure of plaintiffs' counsel to retain an expert in a timely manner does not constitute the required exceptional circumstances under Rule 4:24-1(c). Huszar, supra, 375 N.J. Super. at 474.

In Szalontai, the Court affirmed the trial judge's rejection of a plaintiff's motion to extend discovery after the discovery deadline had passed and after an unfavorable arbitration award had been rendered to enable plaintiff to retain the services of an expert. Supra, 183 N.J. at 392. The Court endorsed the trial judge's reasoning that "allowing discovery to reopen at this point . . . would be using the arbitration procedure as almost a screening event to figure out where the weaknesses are . . . go forward and plug in all the holes in our case." Id. at 397. The situation here is similar, and it was recognized as such by Judge Perri. She did not mistakenly exercise her discretion.

The issue of whether Shalley could testify competently as to projected lost profits came before Judge Kaplako. On June 13, 2008, he conducted an evidentiary hearing pursuant to N.J.R.E. 104(a), receiving the testimony of Shalley. On June 16, 2008, the judge heard closing arguments on the motion and rendered his decision. He found that Shalley was not competent to render reasonably reliable testimony regarding prospective lost profits. He therefore granted defendants' motion to bar Shalley's testimony on the subject. He also granted defendants' motion to dismiss the tortious interference claims for lack of evidence on one of the elements of the claims. The dismissal order was memorialized in Judge Kapalko's June 30, 2008 order.

At the Rule 104 hearing, Shalley based his profit projections on profit margins he realized from operation of the Windmill Restaurant in Red Bank, which he owned. He also previously operated a Stewart's Restaurant in Neptune, which was unsuccessful and went out of business after one-and-one-half years of operation.

Judge Kapalko declined to accept the Windmill Restaurant information as a reasonably certain basis for projected lost profits of the proposed Sea Bright Stewart's Restaurant. The judge noted that Shalley did not know the population density for the areas surrounding the Red Bank or Sea Bright locations and offered no traffic or population density comparisons. Further, Shalley recognized that he and his mother would be required to work in the Sea Bright location for over eighty hours per week, but his financial projections failed to include any salary for them. Although Shalley contended that Sea Bright was not a seasonal location, he acknowledged that gross sales would be considerably higher in the summer months, whereas the revenue flow at the Windmill Restaurant in Red Bank was relatively consistent throughout the year. Shalley acknowledged that he would need approximately $100,000 in start-up capital for renovations to the Sea Bright site, which he planned to borrow from his mother.

The judge further noted that the Stewart's Restaurant would carry a different menu, different supplier, different name, different financing scheme, and the like, than the Windmill. He found the ocean-side location of the proposed Stewart's "uniquely different" from the urban location of the Windmill in Red Bank. The proposed Stewart's was significantly smaller than the Windmill. And, the judge noted that plaintiff failed to produce any business records for the Stewart's he previously operated in Neptune, although he testified that the Neptune operation ran at a loss of about $2000 per month until it went out of business.

The judge made further similar findings, which, in combination with those we have outlined, supported his conclusion that even if the New Business Rule did not apply, plaintiffs failed to submit adequate facts to allow a jury to determine with a reasonable degree of certainty any lost profits with respect to the proposed Sea Bright location. He held:

Plaintiff offers no evidential support as to his basis in arriving at the revenue numbers. Plaintiff relies on past and projected gross profit numbers of the Windmill restaurant of Red Bank, New Jersey in support of his assertions for the Sea Bright business.

It is clear from the facts, and my earlier comments regarding this application, that the Windmill is a separate and distinct restaurant from that of the Sea Bright restaurant, and that it does not lend any factual basis from which a jury could, other than through pure speculation, opine as to what the revenues would have been for the Sea Bright site.

On appellate review, we will not interfere with a trial court's determination on the admissibility of evidence in the absence of a mistaken exercise of discretion. State v. Burns, 192 N.J. 312, 332 (2007); State v. Fortin, 189 N.J. 579, 597 (2007). Our review of a trial court's factual findings is limited to a determination of whether those findings are supported by adequate, substantial, and credible evidence in the record. Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474, 484 (1974). We will not disturb those findings unless they are so wholly unsupportable as to result in a denial of justice. Id. at 483-84.

From our review of the motion record, we are satisfied that Judge Kapalko's factual findings are well supported by the evidence. We are also satisfied that he did not mistakenly exercise his discretion in barring as speculative Shalley's proposed testimony on future loss profits.

Because of our determinations that (1) Judge Perri did not err in refusing to allow plaintiffs to reopen discovery and obtain a damages expert, and (2) Judge Kapalko did not err in barring Shalley's proposed damages testimony as speculative and incompetent, we need not address the New Business Rule. Although the continued viability of that rule in New Jersey has come into question, in the absence of competent evidence that could support a finding of lost profits in a new business to a reasonable degree of certainty, whether the New Business Rule should be applied is a moot point.

Finally, because of plaintiffs' inability to produce evidence of an element of the tortious interference claims, namely damages, Judge Kapalko correctly dismissed those claims.


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