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City of Millville v. Rock

January 12, 2010

CITY OF MILLVILLE, PLAINTIFF,
v.
ROCK, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Hon. Joseph H. Rodriguez

Opinion

Presently before the Court is a Motion for Summary Judgment [24] filed by Defendants, The Leonard K. Nave Irrevocable Family Gifting Trust, Kenneth C. Rock, The Sue Rock Irrevocable Family Gifting GSTT Trust, and Leonard K. Nave. The Complaint in this matter seeks to hold both Kenneth Rock and Leonard Nave personally liable for two promissory notes executed between the parties (Count I) and also claims that Defendants fraudulently induced Plaintiff to rely on reports of Defendants' financial condition with the intent to induce Plaintiff to loan Defendants money (Counts II and III). Defendants argue that summary judgment is warranted because there are no genuine issues of fact related to whether (1) Kenneth Rock or Leonard Nave personally guaranteed the promissory notes at issue in this case or (2) whether Defendants' failure to disclose a potential bankruptcy constitutes fraud. In addition, Defendants argue that the Complaint should be dismissed because Plaintiff cannot prove that it sustained any loss as result of Defendants' actions, or lack thereof, because Plaintiff failed to timely record the mortgage at issue. Finally, Defendants argue that Plaintiff's expert's opinion should be struck as an impermissible "net" opinion.

After considering the initial written submissions of the parties, oral argument on the merits of the summary judgment motion was held on May 25, 2009. Soon thereafter, Defendants filed supplemental materials and briefs in further support of the motion. In light of Plaintiff's objection to these supplemental materials, discovery was re-opened for a period of ninety (90) days and Plaintiff was granted an additional thirty (30) days to file its rebuttal papers.

The subsequent supplemental briefs raised additional issues, which were discussed during a telephone conference on November 19, 2009. After considering the arguments made during the telephone conference, the Court permitted additional filings on these issues and the parties have each filed supplemental letter briefs.*fn1 The merits of the motion have now been fully explored and briefed by the parties and the Court has reviewed all of the written submissions and oral arguments of counsel presented during the hearing on May 25, 2009 and during the telephone conference call on November 19, 2009. For the reasons stated below, Defendants' Motion for Summary Judgment is granted in part and denied in part.

I. Factual Background

The Court views the facts and all reasonable inferences drawn therefrom in the light most favorable to Plaintiff because Defendants move for summary judgment. The facts are as follows. In or around Fall of 2004, Leonard 'Buzz' K. Nave ("Nave"), Vice- Chairman and General Counsel of The Glass Group, Inc., ("Glass Group" or "GGI"), approached Donald S. Ayers ("Ayers"), Millville's Economic Development Director, and indicated that GGI needed financial help from Millville. (Def. Ex. 9, Nave Dep. 33:10-24). Ayers sought to accommodate GGI, as the company employed many people in the city. In fact, GGI employed "approximately 425 to 450 hourly employees," as well as "100 salaried personnel."*fn2 (Def. Ex. 9, Nave Dep. 27:21-22.)

Around the "November, December time frame", Rock and Nave represented to Ayers that GGI's financial condition was improving. (Def. Ex. 11, Ayers Dep. 33:7-23.) Nave specifically represented that a loan would permit GGI to survive. (Id. at 34:7-11.) The basis, in part, for these representations was a report authored by the Carl Marks Group ("Report"). (Id. at 34:5-6.) Entitled, "FY 2005 Base Cash Income Statement, FY 2005 Profit Improvement Programs Draft," the Report was issued on October 25, 2004 to appraise CIT of operations of GGI.*fn3 (Def. Ex. 9, Nave Dep. 548-16.) On or about November 1, 2004, Millville agreed to loan GGI $311,430.00. (Def. Ex. 11, Ayers Dep. 12:9-19.)

According to Millville, on or about December 1, 2004, Rock and Nave personally guaranteed the repayment of that loan. They cite the plain language of the Promissory Note to substantiate this contention. Paragraph 6 of the Note states in its entirety--"The borrower shall personally guarantee the repayment of all funds borrowed." (Def. Ex. 11, Ex. 2 Ayers Dep.) (emphasis added).

On or about December 5, 2004, Millville agreed to issue GGI a second loan in the amount $700,000.00. (Def. Ex. 15.) The Promissory Note for that loan was executed on or about December 29, 2004. (Def. Ex. 11, Ex. 7 to Ayers Dep.) With respect to that Note, Rock and Nave insisted that the 'personally guarantee' language be excised from that document. In its stead, language stating that the "Trusts guarantee" repayment was included.*fn4 The new clause stated in its entirety--"The undersigned trusts hereby guarantee the repayment of this loan made to the aforesaid corporation." Millville underscores that the personal guarantee language was not removed from the Promissory Note for the first loan of $311,430.00. (Pl. Counter Statement of Material Facts ¶ 10.)

Both Promissory Notes were signed by Nave and Rock, with official titles ("Chairman & CEO", and "Vice-Chairman and General Counsel") immediately following their names. Additionally, both loans were made pursuant to the City of Millville Economic Development Program, with funding provided by the Enterprise Zone Assistance Fund pursuant to the New Jersey Urban Enterprise Zone Authority. See N.J. Stat. Ann. § 52:27H-61.

Less than two months after obtaining the $700,000.00 loan, GGI commenced bankruptcy by filing a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code.*fn5 Plaintiff contends that Defendants began contemplating bankruptcy as early as October of 2004. (Def. Ex. 9, Nave Dep. 93:-94.) It was at that point that Nave first consulted with a bankruptcy attorney. (Id.) To buttress this contention, Plaintiff notes the language included in Nave's Declaration in Support of First Day Relief. (See Def. Ex. 25.) There, in support of the bankruptcy filing, Nave declared,

Prior to the Petition Date, Glass Group, with the assistance of its management and professionals, explored a variety of strategic and financial alternatives, including the location of alternative forms of financing and the sale of Glass Group's business . . . and assets . . . both in and outside of Chapter 11.

(Id.) The attorney with whom Nave consulted in October of 2004 is the same attorney who handled the bankruptcy in February of 2005. (Def. Ex. 9, Nave Dep. 93-95.) Millville was not notified of Defendants' contemplation of bankruptcy or sale of GGI. (Pl. Counter Statement of Material Facts ¶ 18.) In fact, the first notification received was on the date of filing-- February 28, 2005. (Id.)

On December 8, 2005, GGI commenced an adversary proceeding in Bankruptcy Court against the City of Millville. (Id.) There, GGI sought to avoid the Mortgage, given to Millville as security for the Notes, on the basis that the Mortgage was recorded within ninety days of the bankruptcy Petition date, and also to compel turnover of $43,313.00 in payments made by GGI to Millville after Petition date. (Id.) For purposes of the instant matter, the significant allegation of GGI was that Millville failed to timely record the mortgage within ten days pursuant to 11 U.S.C. § 547. (Id.) As a result, that mortgage arguably became a preference or unsecured loan upon GGI's commencement of bankruptcy. The adversary proceeding was settled, and the Bankruptcy Court did not ultimately rule on the recordation issue. (Def. Ex. 10, McCarthy Dep. 23-24.) Under the terms of the settlement, Millville was given an allowed secured claim of $140,000.00, and an allowed general unsecured claim of $860,000.00. (Def. Ex. 7.) The $140,000.00 was paid within ten days, and the City of Millville kept all prior payments received. (Id.)

The crux of Plaintiff's claim is that Millville purposely failed to disclose that it was contemplating bankruptcy and/or the sale of the business and through their own statements that the loan would permit GGI to survive and the Carl Marx Report fraudulently attempted to secure the loan. In support, Plaintiff's experts, Terry Ann Marion, CPA and Kenneth W. Moore, CPA, Swartz & Company, LLC, issued reports to determine whether the information presented in the Carl Marks Report was fair and accurate. (Pl. Counter Statement of Material Facts ¶ 21.) They concluded that it was not. (See Def. Ex. 6.) Marion and Moore opined "that the $700,000.00 loaned to Glass Group was minuscule in relation to the company's operations and outstanding debt" and that the loan comprised 1% of the total debt and liabilities for 2004 and 0.85% of the same for 2005. (Id.) In short, they opined, the $700,000.00 loan "could not, in itself, revitalize Glass Group's finances." (Pl. Counter Statement of Material Facts ¶ 23.)

Defendants argue that the bankruptcy was necessitated by a snowstorm and Capital Source's decision to withdraw conventional financing in favor of restructuring. Defendants point out that a snowstorm hit Millville and Pennsylvania in January of 2005. (Def. Ex. 9, Nave Dep. 98:2-3.) According to Nave, this snowstorm had a devastating impact on GGI's bottom line;

[I]n our operations, we use oxygen, as well as gas, for the furnaces. And the oxygen is delivered from Pennsylvania by truck on a weekly basis. The snowstorm shut down the roads, shut down the oxygen delivery, which shut down our furnaces. And we were unable to get the furnaces back and running properly for probably at least 20 days, maybe as much as 30 days. So it just obliterated our month of January.

(Id. at 98:6-15.) This snowstorm had a "snowball effect" on GGI. (Id. at 100:19.)

[I]t effected our operating statement for January, obviously, which then effected our lenders. And it put them in a position to question whether or not we would survive it based on the fact that we had that significant loss. Because we had shown profitability in the . . . last couple of months of '04. And would have continued--I think, would have continued in January . . . but for that happening.

(Id. at 100:19-25, 101:1-3.)

In any event, the United States Bankruptcy Court in the District of Delaware entered an Order confirming an Amended Liquidated Plan proposed by GGI on June 21, 2006. (Def. Ex. 7.) This lawsuit followed.

III. Procedural History

This case was removed from the Superior Court of New Jersey, Law Division, Cumberland County on March 7, 2007 pursuant to 28 U.S.C. § 1441 on the basis of diversity jurisdiction. See 28 U.S.C. § 1332.Because this Court sits on the basis of diversity jurisdiction, the laws of the state govern. See Thabault v. Chait, 541 F.3d 512, 521 (3d Cir. 2008) (citing Erie R. Co. v. Tompkins, 304 U.S. 64, 78 (1938)).Accordingly, the laws of the State of New Jersey govern the instant dispute.

III. Legal Standard

Summary judgment shall be granted "if there is no genuine issue of material fact and if, viewing the facts in the light most favorable to the non-moving party, the moving party is entitled to judgment as a matter of law." See Pearson v. Component Tech. Corp., 247 F.3d 471, 482 n.1 (3d Cir. 2001) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986)); accord Fed. R. Civ. P. 56(c). This Court will enter summary judgment only when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." See Fed. R. Civ. P. 56(c).

An issue is "genuine" if it is supported by such evidence that a reasonable jury could return a verdict in the nonmoving party's favor. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A fact is "material" if, under the governing substantive law, a dispute about the fact might affect the outcome of the suit. Id. In determining whether a genuine issue of material fact exists, the court must view the facts and all reasonable inferences drawn from those facts in the light most favorable to the nonmoving party. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).

Initially, the moving party has the burden of demonstrating the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Once the moving party has met this burden, the nonmoving party must identify, by affidavits or otherwise, specific facts showing that there is a genuine issue for trial. Id.; see also Maidenbaum v. Bally's Park Place, Inc., 870 F. Supp. 1254, 1258 (D.N.J. 1994). Thus, to withstand a properly supported motion for summary judgment, the nonmoving party must identify specific facts and affirmative evidence that contradict those offered by the moving party. Andersen, 477 U.S. at 256-57. "A nonmoving party may not 'rest upon mere allegations, general denials or ... vague ...


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