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Madsco v. Sherwin


November 20, 2009


On appeal from the Superior Court of New Jersey, Law Division, Sussex County, L-281-03.

Per curiam.


Argued October 6, 2008

Before Judges Carchman, R. B. Coleman and Sabatino.

Following a bench trial in the Law Division, Sussex County, the court entered a judgment dated July 5, 2007 from which defendant Joseph L. Sherwin appeals and plaintiffs Helle A. Madsco and Pascal Maillach, as trustees for IMMOTRUST*fn1 , cross-appeal. That judgment granted plaintiff sole possession of the property at issue; it awarded IMMOTRUST $51,387.96 for Sherwin's use and occupancy; and it awarded Sherwin $133,801.51 as and for quantum meruit for improvements he made to the property. In the end, the judgment yielded a net recovery of $75,181.51 in favor of defendant Sherwin. Based on our careful review of the record, the arguments of the parties and the applicable law, we affirm in part and reverse in part. Although we affirm substantially for the reasons set forth in the written opinion issued by the trial judge filed on June 28, 2007, we reverse in part - reversing only to the extent the damage award to defendant for the value of his improvements exceeds the sum awarded to plaintiff for use and occupancy.

This action was commenced by a complaint filed by the trustees of IMMOTRUST seeking a declaration that the trust is entitled to possession of property in Hopatcong (the property), and demanding damages from defendant for use and occupancy. Defendant filed a counterclaim in which he sought specific performance of the agreement*fn2 , based upon his alleged tender of the purchase price of $92,500 in accordance with the provisions of the agreement.

Emile E. Gouiran, an attorney disbarred in New Jersey living in France, was the settlor of IMMOTRUST. Acting on behalf of the trust, Gouiran entered into negotiations with defendant, Joseph Sherwin, for the sale of the property from the trust to defendant. The house on the property had suffered significant damage as the result of a fire, a circumstance which made it more difficult for defendant to obtain regular financing. Thus, defendant made an initial offer of $85,000 for the property with the seller holding a mortgage of $63,750; however, as a result of negotiations that continued through early 1999, the parties eventually entered into an installment sales contract with a purchase price of $92,000. Although the installment contract is dated October 5, 1998, it is not clear when the contract was signed or returned to the United States.

Under the terms of the installment sales contract, a first installment of $6,000 was to be held in escrow by purchaser's attorney until the seller returned a signed contract to the attorney; a second installment of $16,250 was payable on or before February 15, 1999; and the balance of $70,250, plus interest, was payable in equal monthly installments of $550, first applied to interest and then to principal, until the entire remainder of the purchase price had been paid in full. In addition to the monthly installments, the first of which was due March 15, 1999, the purchaser was to be responsible for one twelfth of the annual charges for real estate taxes, water and sewage.

Although the purchaser was entitled to possession, the title to the property was to remain in the hands of the trust until such time as the purchaser had paid the purchase price in full. Among other remedies provided for the seller, the contract provided that if any payment was not received or any check dishonored or any tax assessments or insurance premiums were paid more than fifteen days after they were due, the seller was permitted to "take immediate possession of said real estate, and remove the purchaser or any other person therefrom without any notice or demand whatever, the necessity therefor being hereby waived; and in the event of such cancellation, all payments made by the purchaser shall be retained by the Seller, not as a penalty but as liquidated damages for the breach of this agreement."

As the trial court found, defendant encountered difficulty in making timely and full payments. Due to the alleged default by defendant, Gouiran sent a letter dated March 22, 2000, in which Gouiran declared the contract null and void and by which he sought to take immediate possession. Instead of following through with that declaration and assertion of the right to reclaim possession, the parties agreed to a reinstated contract, the terms of which were articulated in a letter dated April 18, 2000, from defendant's attorney to Gouiran. Under the reinstated contract, the principal due was $150,000. That sum was to be paid, with a built-in interest rate of nine and one-half percent per annum, in monthly installments of $1,261.28. Defendant was once again to be responsible for payment of one twelfth of the annual insurance, taxes and water charges related to the land. The first payment on this contract was due June 1, 2000. The late fee in this contract was increased from $50 to $250 per late payment.

Similar to a provision in the initial installment contract, the reinstated contract specified that "[i]f the amount due to be paid remain[ed] unpaid for a period of [thirty] or more days, then, in such event, the Reinstated Contract shall be deemed to be void and of no further force or effect, without the necessity for Seller to provide notice to Purchaser." All other terms of the installment contract were to be incorporated into the reinstatement contract.

Progress on the rehabilitation of the house continued, and although the trial judge was critical of certain of the proofs of both parties in the case - noting that the testimony of the expert offered by plaintiff to establish monthly rental values "being generous, was weak," and that defendant's expert witness regarding the value of improvements "lacked credibility" - the court was able to arrive at values that found support in the competent evidence in the record. To his detailed written opinion, the trial judge attached a statement of the assumptions and findings he utilized to arrive at the values reflected in the sums awarded in the final judgment.

On appeal, defendant contends that (1) there was fraud in the contract; (2) IMMOTRUST is not a valid trust and thus defendant could not have been in breach of contract; (3) he is entitled to quantum meruit damages without an offset; (4) the court improperly denied his motions to enforce settlement, for summary judgment and to appoint a new trustee; and (5) plaintiff waived its rights by accepting a payment by defendant. In its cross-appeal, plaintiff challenges defendant's inclusion of certain facts and documents in his appellate brief and appendix.

We start our review by noting that "we do not disturb the factual findings and legal conclusions of the trial judge unless we are convinced that they are so manifestly unsupported by or inconsistent with the competent, relevant and reasonably credible evidence as to offend the interests of justice[.]" Rova Farms Resort, Inc. v. Investors Ins. Co., 65 N.J. 474, 484 (1974) (quoting Fagliarone v. Twp. of No. Bergen, 78 N.J. Super. 154, 155 (App. Div. 1963)). See also Greenfield v. Dusseault, 60 N.J. Super. 436, 444 (App. Div.), aff'd o.b. 33 N.J. 78 (1960). The court also gives due regard to the ability of the factfinder to judge credibility. See Ferdinand v. Agric. Ins. Co. of Watertown, N.Y., 22 N.J. 482, 492 (1956). Where the lower court has made credibility determinations without specifically articulating detailed findings of credibility, the reasons for the determination may be inferred from the record, and the appellate court is not free to make its own independent determinations. State v. Locurto, 157 N.J. 463, 472-75 (1999). If, on the other hand, the trial court has made errant interpretations of law, we need not accord any special deference to the trial court. Manalapan Realty v. Manalapan Twp. Comm., 140 N.J. 366, 378 (1995).

Defendant contends that numerous terms in the initial installment sales contract were illegal and other terms were applied in an illegal and fraudulent manner. The claims of fraud were not alleged in defendant's pleading. A party asserting fraud must allege "particulars of the wrong, with dates and items . . . stated insofar as practicable. Malice, intent, knowledge and other condition of mind of a person may be alleged generally." R. 4:5-8(a). A common law claim of fraud contains five elements:

(1) a material misrepresentation of a presently existing or past fact; (2) knowledge or belief by the defendant of its falsity; (3) an intention that the other person rely on it; (4) reasonable reliance thereon by the other person; and (5) resulting damages. [Gennari v. Weichert Co. Realtors, 148 N.J. 582, 610 (1997) (citing Jewish Ctr. of Sussex County v. Whale, 86 N.J. 619, 624-25 (1981)).]

As the trial judge noted in his opinion, "the only fraud allegations in the counterclaim deal with the transfer of title to the Trust." More particularly, defendant alleges in his counterclaim that Gouiran knew he did not have legal title, and knew that he could not legally convey the property to Sherwin.

According to defendant, Gouiran failed to disclose these facts, which defendant relied on when he agreed to the terms of the installment sales contract. The counterclaim asserts further that defendant would not have purchased the property had he known the facts.

It is undisputed that the purchase was never consummated. Hence, defendant did not rely to his detriment on any false representation concerning title. The trial court concluded that the purchase was not completed because defendant himself breached the agreement. The court found that "[p]utting aside late fees and reinstatement fees, Mr. Sherwin was immediately in default and remained in default through and including the period that Mr. Gouiran cancelled the contract in March of 2000." In addition, there was no evidence of a tender offer to pay the balance of the purchase price before the counterclaim was filed.

On appeal, defendant raises alternative theories of fraud, however, none of those theories has a sustainable factual basis. Moreover, we note that defendant had legal representation throughout the negotiations of the installment sales contract and the reinstatement contract. With legal counsel, defendant is presumed to have understood the contractual terms and his contractual duties. See Trinity Church v. Lawson-Bell, 394 N.J. Super. 159, 168 (App. Div. 2007); Gillman v. Bally Mfg. Corp., 286 N.J. Super. 523, 527, 530 (App. Div.), certif. denied, 144 N.J. 174 (1996).

Defendant contends that the two notices of default were improper, void and against public policy, citing Wells Fargo Home Mort., Inc. v. Stull, 378 N.J. Super. 449, 456 (App. Div.), certif. denied, 185 N.J. 267 (2005). That case reiterated that a judgment creditor has an unfettered right to adjourn a sheriff's sale as such adjournments advance the goal of the Fair Foreclosure Act to ensure that borrowers be given every opportunity to save their homes. Id. at 457. That case is readily distinguishable. This was not a foreclosure action, and defendant never owned the home located at the property; so, the statutory protections discussed in Wells Fargo do not apply. In addition, in the present case, plaintiff had a contractual right to notify defendant of default once defendant materially breached the contract.

Defendant also contends the language of the default notices was insufficient because it did not specify the amount owed. Pursuant to the plain language of the contract, plaintiff was not required to state the amount of the delinquency. It was only required to provide written notice of default and its election to terminate. The amount owed was certainly subject to dispute, however, Gouiran not only provided notice declaring default, he also specifically cited the applicable contractual paragraphs in his letters. The notices of default were adequately informative and do not amount to fraud.

Any additional fraud-related issues raised by defendant lack merit and do not warrant further discussion. R. 2:11-3(e)(1)(E).

Next, defendant questions the validity of IMMOTRUST. He asserts that the trust acted only as an alter ego of Emile Gouiran and as such did not hold valid title to the property in question. Because the trust-creation document states that New York law will govern the trust, the validity of the trust is to be determined in accord with New York law. There, it is well settled that to have standing to challenge the acts of a trustee, the challengers must have been "beneficially interested in the trust [when] created." In re Estate of McManus, 390 N.E. 2d 773, 774 (N.Y. 1979). Defendant was never a beneficiary of IMMOTRUST, and thus lacks standing to challenge its validity. In addition, as the trial judge observed, any problems posited by defendant with regard to the trust agreement were curable and would not have prevented a transfer upon satisfaction of the terms of the installment contract.

The trial court found that defendant is entitled to recover quantum meruit for his improvements on the property, however, defendant contends such recovery should be without any offset for rental value. Plaintiff, on the other hand, asserts that the trial judge erred by awarding defendant any measure of quantum meruit because defendant lacked a good faith bona fide claim of ownership of the property.

To recover under a theory of quantum meruit, a plaintiff must establish: "(1) the performance of services in good faith, (2) the acceptance of the services by the person to whom they are rendered, (3) an expectation of compensation therefor, and (4) the reasonable value of the services." [Starkey, Kelly, Blaney & White v. Estate of Nicolaysen, 172 N.J. 60, 68 (2002) (quoting Longo v. Shore & Reich, Ltd., 25 F.3d 94, 98 (2d Cir. 1994)).]

In Brick v. Vannell, 55 N.J. Super. 583, 594 (App. Div. 1959), this court observed that at common law there was no right to compensation for improvements mistakenly made on the lands of another. That principle was ameliorated in equity where recovery would be allowed to avoid unjust enrichment where the improver acted innocently, upon a bona fide belief that he was the owner and had a legal right to make the improvements. Ibid. Distilling the equitable principles that govern, this court articulated the general methodology to be applied to achieve equity:

[W]here a stranger to the title of realty, in good faith, under the belief of ownership, places improvements on said lands with the knowledge of the true owner, the latter will be denied relief in a subsequent suit for possession unless adequate compensation is made to such stranger for the reasonable cost of the improvements. Alternatively, in such a circumstance, the stranger has been permitted to obtain title to the lands upon payment of the reasonable value thereof to the true owner. For defendant to succeed it is vitally essential that three elements be present: (1) the stranger must have been mistaken in his belief of ownership; (2) such mistake must not have resulted from the stranger's culpable negligence, and (3) the true owner must have had either actual or constructive knowledge of the construction of improvements and yet remained silent. [Id. at 593.]

Defendant was not mistaken about his belief that he owned the property. He well understood or should have understood that he would not own the property unless he fulfilled his obligation to pay the full purchase price. He had a legitimate expectancy, but an expectancy nonetheless.

Recently, the Supreme Court endorsed the equitable principles of Brick in Middletown v. Simon, 193 N.J. 228 (2008). In Simon, the Court considered "whether the issuance of a tax sale certificate and a successful foreclosure action by the certificate holder prevented a municipality from subsequently accepting the lot as dedicated." Id. at 232. The Court ruled that builders on the subject lot "were innocent parties and lacked the requisite knowledge that the Park lot was dedicated property at the time the Township offered and defendants purchased the tax sale certificates of the Park lot." Id. at 245. Therefore, awarding the property to the Township without reimbursing defendants would "be an unfair and harsh result that would unjustly enrich the Township." Id. at 246.

In the case at bar, the trust was, of course, aware of defendant's intention to rehabilitate the house on the property. That was expressly contemplated in the original sales contract. Defendant also gave plaintiff updates as the construction proceeded and defendant notified Gouiran of problems with soil disruption near the lake. As noted above, however, defendant was aware that he was obligated to complete payment of the installment sales contract before he would become title owner to the land. He therefore undertook the rehabilitation at his peril. Under such circumstances, the trial court appropriately attempted to balance defendant's reasonable expectation of ownership upon the completion of a contract against the prospect that his good faith efforts at rehabilitation of the property might unjustly enrich the trust. The court found, and we agree, that defendant's reasonable expectation ceased upon his receipt of the notice that declared the contract a nullity due to defendant's breach. Improvements completed after the default were found not to be compensable.

In Farese v. McGarry, we scrutinized an analogous scenario involving a landlord and his tenant. 237 N.J. Super. 385 (App. Div. 1989). The tenant in Farese entered into a lease with an alleged option to purchase a one family house. Id. at 387-88. After a period of time, the plaintiff landlord issued a notice to vacate, but the tenant continued in possession. Id. at 387. The landlord then sued seeking possession and compensation for damage to the apartment and for failure to vacate. Ibid. The tenant counterclaimed alleging that the landlord had breached his option to purchase and alleging further that the landlord had been unjustly enriched as a result of improvements the tenant made to the property in anticipation of his acquiring title. Id. at 387-88. Utilizing the same principle articulated in Brick, we held that "the tenant made improvements to the landlord's house as the result of a mistake, which the landlord encouraged or at least did not dispel[.]" Farese, supra, 237 N.J. Super. at 392. Upon those facts, we affirmed the trial court's award of damages to the tenant based on unjust enrichment. Ibid.

Under the circumstances of this case, we are satisfied that the trial court appropriately concluded that defendant was entitled to a quantum meruit award for pre-breach improvements, made in good faith. A different result would grant a windfall upon plaintiff in violation of principles of equity. On the other hand, we note that such an award is limited by statute to an offset on the value of defendant's use and occupancy. In this regard, N.J.S.A. 2A:35-1 authorizes an action in Superior Court by one claiming the right of possession of real property or claiming title to such property. Further, N.J.S.A. 2A:35-2 recognizes the right of the owner to recover damages incident to the occupier's possession of the property by providing:

In any such action [to determine the right of possession], the plaintiff shall be entitled to recover from the defendant any and all incidental damages, including mesne profits, and the full value of the use and occupation of the premises for the time, not exceeding 6 years, before the commencement of the action, during which the defendant was in possession thereof.

The right of recovery thus recognized is balanced, however, against the right of an occupant who made improvements to the premises in good faith to offset the value of such improvements. To that end, N.J.S.A. 2A:35-3 provides:

Where permanent improvements have been made on the premises in good faith, under circumstances entitling the defendant to have the value thereof allowed to him, the court may allow the same to be set off against the damages of plaintiff, but only to the extent of such damages.

Accordingly, while we accord deference to the trial court's findings that defendant is entitled to damages in quantum meruit, such damages are by statute subject to a setoff for the fair and reasonable rental value of the premises during the time after which defendant defaulted. The quantum meruit recovery cannot exceed the amount defendant owes to plaintiff for use and occupancy.

The remaining arguments raised by defendant, including his argument that the court should have enforced an earlier alleged settlement, lack sufficient merit to warrant discussion in a written opinion. R. 2:11-3(e)(1)(E). We find no abuse of discretion in the trial court's refusal to enforce the alleged settlement or in its refusal to appoint a substitute trustee so a closing could be conducted. Similarly, plaintiff's argument concerning the allegedly improper content of defendant's brief and appendix do not warrant discussion in a written opinion.

Affirmed in part; reversed in part for a vacation of that portion of the judgment that awarded a net sum to defendant for the value of improvements made to the property.

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