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K-T Corp. v. JB Associates

August 4, 2009

K-T CORPORATION, JAMES THUL AND LAWRENCE THUL, PLAINTIFFS-APPELLANTS,
v.
JB ASSOCIATES, THUL AUTO PARTS, INC. AND THUL ENGINE & PARTS WAREHOUSE, INC., DEFENDANTS-RESPONDENTS, AND FREDERICK W. THUL, JR. AND NICHOLAS R. THUL, DEFENDANTS/THIRD-PARTY PLAINTIFFS-RESPONDENTS,
v.
FREDERICK W. THUL, LOUISE THUL, LAWRENCE THUL, JAMES THUL AND THUL MACHINE WORKS, INC., THIRD-PARTY DEFENDANTS-APPELLANTS.



On appeal from Superior Court of New Jersey, Law Division, Somerset County, Docket No. L-659-05.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued September 29, 2008

Before Judges Skillman, Graves and Grall.

This case involves a family business dispute between, on the one side, a father and his two younger sons, and on the other side, the father's two older sons.

The father, third-party defendant Frederick W. Thul (Fred) inherited part of the business from his father and purchased the other part from his sister. Fred made gifts to his sons of their shares of the business.

The business consists of three operating companies: Thul Auto Parts, Inc. (TAP), Thul Engine and Parts Warehouse, Inc. (TEPW), and Thul Machine Works (TMW). Each of the four brothers and their families own 25% of the stock in each of these operating companies. However, the two older brothers, defendants Frederick W. Thul, Jr. (Rick) and Nicholas R. Thul (Nick), are solely responsible for the operation of TAP and TEPW, and the two younger brothers, plaintiffs James Thul (Jim) and Lawrence Thul (Larry), are solely responsible for the operation of TMW.

In addition to these three operating companies, the family business includes a real estate management company, plaintiff KT Corporation (K-T). Fred and his wife (also the four brothers' mother), third-party defendant Louise Thul (Louise), own 246 of the 250 voting shares of K-T stock. There are also 5,460 non-voting shares of K-T, 1,150 of which are owned by Louise and 1,077.50 of which are owned by each of the brothers and their families. Fred is the President and a Director of K-T. His four sons were also officers and directors.

As of 1998, K-T owned the properties on which TAP, TEPW and TMW operated their businesses. Each of these operating companies paid rent to K-T. However, there were no written leases as of that time, and the amount of rent the operating companies paid to K-T appears to have depended more on their financial success than the fair rental value of the properties.

The parties also operated another entity called JB Associates (JB), which was used primarily as a vehicle for distributing the profits from the family business to the four brothers. The three operating companies and K-T would pay JB what were designated as "management fees," and JB would make payments to the brothers which were apparently designated as "salaries." JB also paid for certain other benefits for the brothers and their families, such as health insurance. At Fred's direction these payments were approximately equal.

The four brothers also operated another business called TB Investments (TB), which invested in equipment, vehicles, computers and real estate, and leased these assets to third parties. This business appears to have been operated independently of TAP, TEPW, TMW, K-T and JB.

As of 1998, TMW, operated by Jim and Larry, was enjoying significantly greater financial success than TAP and TEPW, operated by Rick and Nick. To improve TAP's financial outlook, Rick and Nick decided to mount a marketing campaign to introduce TAP's newly remodeled stores. However, TAP was unable to borrow money from a financial institution for the marketing campaign. Consequently, TMW advanced money to TAP for this purpose.

TAP apparently failed to use all of the money advanced by TMW for the planned marketing campaign and instead used part of it for other purposes. As a result of his dissatisfaction with TAP's use of the money advanced by TMW and general dissatisfaction with TMW's subsidization of TAP, TEPW, Rick and Nick, Larry confronted Rick in the summer of 1998 about TAP's failure to apply monies advanced by TMW for marketing purposes. In the course of this confrontation, Larry told Rick that Rick and Nick should go their own way with TAP and TEPW, and that Larry and Jim would go their own way with TMW. Thereafter, the four brothers had a series of communications regarding proposals for the separation of the business of TAP and TEPW from the business of TMW.

In December 1998, two letters of intent relating to the separation of the businesses were prepared at the direction of the brothers, the first on December 17, 1998, and the second on December 30, 1998. The primary issue presented by this appeal is whether those letters of intent, followed by alleged performance of certain obligations set forth in the letters, resulted in a binding contract, which was subsequently breached by Larry, Jim, Fred and Louise. The text of the letters, the circumstances surrounding their preparation, and the alleged performance of certain obligations set forth therein are discussed in detail later in this opinion. Suffice it to note at this point that the letters not only provided for a separation of the business of TAP and TEPW from the business of TMW but also the transfer to Rick and Nick of all of Jim's, Larry's, Fred's and Louise's shares of stock in K-T and that Fred and Louise were not named parties to the letters of intent.

On March 12, 1999, the attorney for Jim and Larry sent a letter to the attorney for Rick and Nick, which stated:

As a follow[-]up to our telephone call this morning, this is to give you formal written notice that Larry and James Thul have terminated all negotiations with their brothers, pursuant to the Letter of Intent which was executed as of December 30, 1998. While it is my understanding that negotiations along different lines may ensue in the future, there will be no further discussions respecting the [transactions] that were proposed in the Letter of Intent.

I have also been requested to inform you that Frederick Thul, Sr., is no longer committed to undertake anything that had been proposed as part of the Letter of Intent.

Starting in January 1999, Rick and Nick assumed responsibility for the day-to-day management of K-T, which included the lease of one of its properties to a third-party and the sale of another property. Rick and Nick also maintained the books of K-T from January 1999 until April 2005. However, Fred continued to be the president and a director of K-T during this period and major decisions regarding the management of K-T were subject to his approval. Jim and Larry also continued to be directors and officers of K-T, but were not actively involved in management.

In July 1999, the property on which TMW's business operates was purchased from K-T for $756,341,52. The purchaser was L-J Real Property L.L.C. (L-J), which was established by Jim, Larry and Louise for the purpose of taking title to this property and leasing it to TMW. The purchase price, which was paid by promissory note, was fixed by Fred after consulting with Rick. Despite Rick's and Nick's request for security, Fred directed that the promissory note not be secured by a mortgage or other collateral.

On September 1, 2001, again at Fred's direction, a new promissory note was executed that replaced the July 1999 note, under which L-J's monthly payments were reduced and the note's term was extended. The reason for the modification of the terms of the note was a downturn in the profitability of TMW between 1998 and 2001, which made it difficult for TMW to pay the rent provided under its lease with L-J.

In May 2002, Fred, as President of K-T, agreed to a moratorium on payments under the amended promissory note due to a further downturn in TMW's financial situation. This moratorium lasted until April 2005.

In April 2005, Fred, Jim and Larry convened a meeting of K-T's Board of Directors at which they removed Rick and Nick as officers and directors. Since that time, Jim and Larry have assumed responsibility for the day-to-day management of K-T, subject to Fred's direction, and Rick and Nick have had no role in management of the company.

On May 3, 2005, shortly after the removal of Rick and Nick as officers and directors, K-T brought this action against Rick, Nick, and the two companies they operate, TAP and TEPW. The complaint asserted claims for breach of fiduciary duty, conversion, waste of K-T's assets, and unjust enrichment. The complaint also sought to reform leases that K-T had entered into with TAP and TEPW while K-T was controlled by Rick and Nick. The complaint was subsequently amended to add Jim and Larry as plaintiffs.

Rick and Nick filed what they designated as a third-party complaint against Jim, Larry, Fred and Louise,*fn1 which asserted an oppressed minority shareholder claim under N.J.S.A. 14A:12-7(1)(c), and a claim for breach of fiduciary duty. The third-party complaint sought compensatory and punitive damages.

The case was tried over five days in a bench trial, and following the trial, the parties submitted proposed findings of fact and conclusions of law.

The trial court decided the case by a written opinion, which in large part incorporated by reference the proposed findings of fact and conclusions of law submitted by Rick and Nick. The trial court found that "[t]he December 30, 1998 Letter of Intent became a legally binding and enforceable contract as a result of the conduct by all parties in performing their respective obligations under the agreement[,]" and that "[t]he Plaintiffs breached the December 30 Agreement by failing to fully perform their obligations, while retaining the benefits they received under the agreement." Based on these findings, the court entered an order requiring "Plaintiffs [to] comply with all terms and conditions of the December 30, 1998 Letter of Intent including completion of the severance payments[,]" and also providing that "all stock shall be transferred such that:

(1) Defendants own all of [K-T, TAP, TEPW] and Regional Automotive Warehouse, Corp."*fn2 The order also provided for transfers of stock so that plaintiffs would own all of TMW and all real property associated therewith.

The trial court concluded that there was nothing improper about the way Rick and Nick operated K-T between January and April 2005 when they were removed as officers and directors. Accordingly, the court rejected the claims asserted in plaintiffs' complaint. The order entered by ...


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