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Banco Popular North America v. Pepe Sneakers

SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION


July 29, 2009

BANCO POPULAR NORTH AMERICA, PLAINTIFF,
v.
PEPE SNEAKERS, PEPE MANIA, INC., AND STEVEN PEPE, DEFENDANTS-APPELLANTS, AND THE ESTATE OF JOSEPH S. PEPE, III, AND SUSAN PEPE, INDIVIDUALLY AND AS ADMINISTRATOR OF THE ESTATE OF JOSEPH S. PEPE, III, DEFENDANTS/THIRD-PARTY PLAINTIFFS-RESPONDENTS,
v.
ANNE PEPE, THIRD-PARTY DEFENDANT.

On appeal from Superior Court of New Jersey, Law Division, Union County, Docket No. L-2469-05.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued February 10, 2009

Before Judges Fuentes, Gilroy and Chambers.

Defendants Steven Pepe and Pepe Sneakers, a/k/a Pepe Mania, Inc., appeal from the order of the Law Division granting summary judgment to defendants, third-party plaintiffs the Estate of Joseph S. Pepe, III, and Susan M. Pepe, individually and as the administrator of the Estate of Joseph S. Pepe, III. By so doing, the court dismissed Steven's cross-claim seeking to establish a constructive trust on life insurance proceeds that Steven asserts was intended to fund a shareholders' buyout agreement.

We reverse. After carefully reviewing the record before us, we are satisfied that defendants raised sufficient issues of material fact entitling them to a trial on the merits. These are the salient facts.

I.

Steven Pepe and Joseph Pepe were equal shareholders in Pepe Sneakers, Inc. and Pepe Mania, Inc. Through these corporations, the brothers operated a footwear store called Sneaker Mania. According to Steven, he and Joseph were advised by their accountant, Sam Vassallo, to purchase life insurance policies on one another's lives to enable the surviving brother to buy out the shares owned by the decedent brother from his estate. Steven alleges that he and his brother met with Vassallo, an insurance agent named John Azzara, and a lawyer named Anthony Pantano to draft a shareholders agreement that would accomplish this goal.

On March 5, 1997, before executing any shareholders agreement, each brother purchased a life insurance policy on his own life in the amount of $250,000. Steven designated his wife as the beneficiary; Joseph initially designated his mother, third-party defendant Ann Pepe, as the beneficiary; in 1999, Joseph removed his mother and designated his wife Susan M. Pepe as beneficiary.

In the insurance agent's report accompanying the policy application for Joseph's policy, question 12 asked to state the purpose of the insurance; a box located below this question was marked "buy-sell." In his memorandum of opinion, the motion judge found that the words "probable buy-sell" were written on the report for Steven's policy. However, this report was not included in defendants' appendix. In a letter accompanying the applications to the insurance company home office, the insurance agent noted that "[a]pplicants currently do not have a Buy and Sell Agreement in place, but intend to pursue one in the future."

The brothers finally executed a formal Shareholders Agreement (Agreement) on June 5, 1997, two months after purchasing their individual life insurance policies. The Agreement provided that Steven would purchase a $250,000 life insurance policy on Joseph's life, and Joseph would purchase a policy of equal value on Steven's life, designating an unnamed "trustee" as beneficiary on both policies. Under the Agreement, the policies shall be deposited with the Trustee who shall hold them and any proceeds received thereunder IN TRUST for the purposes of this agreement . . . . Each Shareholder shall pay all premiums due on the policies taken out by him on the life of the other Shareholder and shall deposit proof of payment with the Trustee within fifteen (15) days after the due date of each premium.

The provisions of the Agreement governing the purchase of the shares from the proceeds of the life insurance policies read as follows:

E. Purchase of Shares on Death

Upon the death of a Shareholder, the surviving Shareholder shall purchase from the estate of the deceased Shareholder, and the estate of the deceased Shareholder shall sell all of the decedent's Shares in the Corporation now owned or hereafter acquired.

F. Purchase Price/Other Conditions

(1) Subject to the terms set forth in this Paragraph F, the purchase price for a deceased Shareholder's Shares shall be determined pursuant to Paragraph D of Article IV hereof.

(2) The Trustee shall collect the proceeds of the life insurance policies on the life of the deceased Shareholder and shall use such proceeds to pay the purchase price hereunder. The Trustee shall distribute such life insurance proceeds to the estate of the deceased Shareholder in exchange for his Shares. To the extent that the proceeds of the aforementioned life insurance policy are not sufficient to pay the purchase price for the Shares, the purchasers of the Shares shall pay the balance of the purchase price, if any, in accordance with Paragraph (G) of this Article V.

G. Payment of Purchase Price

The purchase price for a deceased Shareholder's Shares shall be paid to his estate within thirty (30) days after the qualification of the estate's legal representative. Not less than the amount available from life insurance proceeds shall be used to pay the purchase price at closing in cash. The balance shall be paid by the delivery of a negotiable promissory note or notes. The note or notes shall bear interest at the rate of ten (10%) percent per annum, for a period of not more than ten (10) years from the date of closing, payable quarterly, and shall provide for the acceleration of the due date of all unpaid notes if default should occur in the payment of the principal of or interest on any note. Each surviving Shareholder shall have the right to prepay all or any of the promissory notes at any time with interest computed only to the date of payment.

Paragraph D of Article IV states

D. Option Price; Terms of Sale

(1) The exercise of an option granted hereunder shall obligate the Corporation or the remaining Shareholders, as the case may be, to purchase Shares of the Offering Shareholder for a price equal to the Per Share Book Value which shall be: (a) the value of the Corporation, divided by the total number of shares outstanding; (b) multiplied by the number of shares to be purchased.

(2) Within (ninety (90) days following the end of each fiscal year of the Corporation, with the assistance of the Corporation's accountant, the Shareholders who are parties to this Agreement, shall, by unanimous agreement, redetermine the Per Share Book Value of each of said shares, and endorse said value in the schedule to this Agreement, which is made a part hereof. If such Shareholders cannot unanimously agree upon such value, the Shareholders shall unanimously select an independent and qualified appraiser, who shall never have been employed by or otherwise have been associated with any of such Shareholders, or their family members, to determine such value.

The Agreement was accompanied by another document entitled "Spousal Acknowledgment, Consent and Waiver;" Joseph's wife Susan, signed this Acknowledgment, stating that the spouse of the shareholder agreed to be bound by the terms of the Agreement.*fn1

The record shows that the brothers did not assiduously comply with all of the terms of the Agreement. Each brother continued to hold an insurance policy on his own life, designating his spouse as the beneficiary; the policies were not given to the Trustee to hold in trust; there is no evidence the per share book value of the business was determined "90 days following the end of each fiscal year," as required by Paragraph D Section (2) of Article IV; the corporate shares were not endorsed with a notation stating that any transfer of the shares was limited by the Agreement, as required by Article VIII of the Agreement; and there is no evidence that premium payments were deposited with the Trustee every month, as required by Article V Paragraph C.

Joseph died on March 26, 2004. The proceeds from his insurance policy were paid to his wife Susan, as the designated beneficiary. Although there is no evidence in the appellate record pertaining to the direct litigation between Banco Popular North America and Sneaker Mania, the motion judge noted that Steven continued to operate the business after Joseph's death, but ceased making payments on loans that Banco Popular had made to the company. On July 11, 2004, Banco Popular filed suit against Steven, Joseph's estate, and Pepe Sneakers and Pepe Mania to recover on promissory notes signed by Steven and Joseph.

Steven, Pepe Sneakers and Pepe Mania filed a cross-claim against Joseph's estate and Susan, individually and as administrator of Joseph's estate, seeking to recover the proceeds of Joseph's life insurance policy. In this cross- claim, defendants argued that the proceeds of this policy should have been delivered to them under the terms of the Agreement. Steven, Pepe Sneakers and Pepe Mania joined in a motion made by Anne Pepe, Steven and Joseph's mother, for summary judgment, petitioning the court to place a constructive trust on the proceeds of Joseph's life insurance policy. Susan opposed the motion, and affirmatively moved to dismiss the case against her. The motion judge granted Susan's motion, finding that Steven and Joseph had abandoned their Agreement.

II.

Before addressing the merits of the motion judge's ruling, we must first articulate the relevant standard of review. Summary judgment can only be granted if "there is no genuine issue as to any material fact challenged and . . . the moving party is entitled to judgment . . . as a matter of law." R. 4:46-2(c). A party resisting a motion for summary judgment is entitled to all reasonable inferences in its favor. Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995); Dairy Stores, Inc. v. Sentinel Pub. Co., 104 N.J. 125, 135 (1986).

Thus, summary judgment is appropriate only if the evidence in favor of the party seeking the relief is so one-sided that no rational factfinder can reach a different result as a matter of law. Brill, supra, 142 N.J. at 540 (quoting Anderson v. Liberty Lobby Inc., 477 U.S. 242, 252, 106 S.Ct. 2505, 2512, 91 L.Ed. 2d 202, 214 (1986)). We apply the same standards on appeal. Prudential Property & Cas. Ins. Co. v. Boylan, 307 N.J. Super. 162, 167 (App. Div. 1998). Against this standard, we are satisfied that defendants are entitled to their day in court before a jury.

In County of Morris v. Fauver, the Supreme Court encapsulated the law of abandonment as follow:

[A]bandonment of a contract 'can only take place by the consent of both parties, and requires as clear evidence of the waiver as of the existence of the contract. To effectuate an abandonment, mutual assent is always required.

As with the formation of a contract, a proposal to terminate the contract by one party must actually be accepted by the other in order to constitute an abandonment.

The determination of whether contracting parties intend to abandon their agreement need not be express; it may be inferred from all their acts and circumstances. As a general rule, a contract will be treated as abandoned where one party acts in a manner inconsistent with the existence of the contract and the other party acquiesces in that behavior. The intention to abandon a contract by actions or acquiescence, however, must be clearly expressed. Under New Jersey law, when rescission or abandonment of a contract is to be implied from the conduct of the parties, the actions must be positive and unequivocal.

[153 N.J. 80, 96 (1998) (internal quotations and citations omitted).]

Here, the motion judge found that the brothers had abandoned their Agreement because neither of them performed under the Agreement, neither of them did anything to try to force the other party to perform, and the corporation, through the Trustee, never enforced the provision that the two shareholders continually notify the Trustee that they were making timely payments on the policies.

The judge emphasized that, under the terms of the Agreement, Steven's failure to take out insurance on his brother's life was the direct cause of the loss of funds to the company. Concomitantly, the judge also found that "there is no showing that Joseph was the cause of Steven's non-performance in this case."

In some circumstances, the question of abandonment can be definitively established from the parties' conduct. Ordinarily, however, abandonment can only be found from conduct that expressly and consistently repudiates the material provisions of the contract. Thus, in Fauver, the Court found that, despite accepting a lower rate for over seven years, Morris County had not abandoned the right to collect a higher per diem rate for housing state prisoners, because most importantly, although the parties acted inconsistently with the payment provisions of their contract, they did adhere to the material portions of their agreement. Because the State advanced construction funds, the County expanded its facilities, and the County housed State prisoners, the parties did not completely ignore the contract and operate contrary to it or under the terms of a different agreement.

[Fauver, supra, 153 N.J. at 98 (internal quotations omitted).]

Here, the question of abandonment turns not only on ascertaining the material provisions of the Agreement, but on evidence that may explain Steven's failure to adhere to those provisions. In this respect, the motion judge overlooked Steven's claims that he was misled and prejudiced by the advice and actions of the insurance broker when he obtained the March 5, 1997, policy. A rational jury could find that the application indicating that the purpose of the insurance was a "buy-sell" arrangement is sufficient to negate an intent to abandon. Questions dealing with the state of mind of a party are ordinarily poor candidates for summary judgment resolution. Liberty Surplus Ins. Corp. v. Norwell Amoroso, P.A., 189 N.J. 436, 447 (2007).

Reversed and remanded. We do not retain jurisdiction.


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