December 29, 2010
MARK MOSCHILLO, PLAINTIFF-RESPONDENT/ CROSS-APPELLANT,
CANDO JOVANOV AND LINVAS CORPORATION, DEFENDANTS-APPELLANTS/ CROSS-RESPONDENTS.
On appeal from Superior Court of New Jersey, Chancery Division, Passaic County, Docket No. C-116-08.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued November 16, 2010 - Decided Before Judges Wefing, Payne and Koblitz.
Plaintiff Mark Moschillo brought suit alleging oppressive conduct and endangerment under N.J.S.A. 14A:12-7 (Oppressed Shareholder Statute) and breach of fiduciary duty by defendants Cando Jovanov and Linvas Corporation (Linvas), regarding the business of Sunrise Gentlemen's Lounge (Sunrise). Plaintiff requested that the trial court award him Jovanov's one-half interest in Linvas. Jovanov claimed that plaintiff was not a shareholder of Linvas, and that the documents purportedly bearing Jovanov's signature used by plaintiff at trial to prove plaintiff's one-half interest in the corporation were forged. After trial, the Chancery Court declined to decide the forgery issue and ordered Jovanov to buy out plaintiff for $70,776, the money plaintiff invested in the company as well as a reasonable salary for his managing the company for five months. Defendants appealed, disputing only the amount of money the court awarded plaintiff, and repeating the claim that the documents introduced by plaintiff were forgeries. Plaintiff cross-appealed, arguing that the court found all the facts in plaintiff's favor and yet denied plaintiff the relief he sought. After reviewing the record in light of the contentions advanced on appeal, we reverse and remand for further proceedings.
The matter was opened to the court by way of a complaint and order to show cause filed by plaintiff on September 16, 2008, seeking a transfer of all shares of stock of Linvas to plaintiff. Linvas' only asset is Sunrise, located in Paterson, New Jersey. The order to show cause sought an injunction barring defendant Jovanov from participating in Sunrise due to his interference with the smooth operation of the business.
The court found that Jovanov's only defense to the current action was that the documents that allegedly demonstrated plaintiff's shareholder interest in Linvas were in fact forgeries. Plaintiff presented: a power of attorney dated December 13, 2006, allegedly signed by Jovanov and notarized, allowing plaintiff or his brother to act as Jovanov's agent, as he frequently traveled; a stock certificate allegedly signed by Jovanov dated October 4, 2007; and documents allegedly signed by Jovanov and notarized on December 12, 2007, including a contract of sale, a written consent to transfer and an application for a liquor license. The transfer of one-half ownership from Jovanov to plaintiff was approved by the Alcoholic Beverages Control Board (ABC) at a hearing in February 2008, which Jovanov allegedly attended.
Jovanov claimed at trial that he was frustrated in his efforts to prove the forgeries by the court's rulings. The court, however, found that Jovanov had not complied with numerous pre-trial orders requiring him to cooperate with the court-appointed special fiscal agent by providing proof of insurance, payment of taxes and mortgage, and the payment of the fiscal agent's fees. Jovanov also failed to provide discovery to plaintiff. Thus, the court denied his applications for time extensions to obtain discovery and retain an expert.
The Chancery Court found that the business relationship between the parties began when plaintiff loaned Jovanov $125,000 so that Jovanov could extricate himself from litigation with his prior business associate. Jovanov subsequently repaid this loan by obtaining a mortgage on the property where Sunrise is located. Plaintiff and his brother Vincent found a lawyer for Jovanov who helped him settle the litigation in late 2006. Plaintiff paid $5000 to the lawyer as half of Jovanov's retainer. Plaintiff maintained that Jovanov agreed to transfer a fifty-percent interest in Linvas to plaintiff in exchange for $25,000 and assistance from the Moschillo brothers with the renovation and restoration of Sunrise.
Vincent Moschillo was the hands-on, primary manager of Sunrise as of some time in 2007. The brothers paid for the renovations and participated in the actual renovation work. Vincent testified that Jovanov promised plaintiff a fifty-percent share in the business and that they all agreed they would split the profits three ways to compensate Vincent for the work he performed. The brothers also hired a lawyer who negotiated with the ABC board to pay a $12,000 fine to reactivate Sunrise's liquor license. Plaintiff paid the fine.
The court found the brothers were not manipulative and would have had no reason to assist the operation of Sunrise other than Jovanov's promise of ownership.
In June 2008, Jovanov began behaving inappropriately by abusing patrons and dancers and taking bottles of liquor from Sunrise. Security videotape captured several incidents of Jovanov's improper behavior. On one occasion, security videotape showed hired security guards escorting an intoxicated Jovanov from Sunrise property. Later that same night, the security tape captured a liquid coming from Sunrise's balcony. A witness testified Jovanov said he would, and then did urinate from the balcony onto the sidewalk and patrons below. At trial, Jovanov denied knowledge of such conduct. On another occasion, the videotape captured police handcuffing Jovanov outside of Sunrise. The court found that Jovanov was "out of control, disrespectful, arrogant, abusing alcohol and all of those in his path." When confronted by the brothers with his unacceptable behavior, Jovanov locked them out of Sunrise, which motivated plaintiff to file the complaint giving rise to this appeal.
Plaintiff's expert testified that the fair value of the business was $86,200, and an active manager of the business would earn $850 per week. Jovanov presented no contrary evidence. Jovanov testified that he hired the brothers to be managers of Sunrise and that the documents claiming to show a transfer in ownership were not signed by him. His testimony was inconsistent with his deposition testimony regarding which of his signatures were genuine, and he could not identify in court which signatures were authentic. He claimed not to speak English, yet the court commented that he responded in English upon occasion and did not wait for the interpreter to finish the translation before doing so. Other witnesses also testified that they spoke to Jovanov in English. The court found Jovanov's behavior in the courtroom disrespectful. He smirked, did not follow the court's direction with regard to the interpreter and was dismissive of the proceedings.
Defendant's notarized signature is prima facie evidence that he signed the document without the need for the notary's testimony. N.J.R.E. 902(h); N.J.S.A. 2A:82-17. Although strongly implying that Jovanov did not demonstrate the falsity of the signatures, the court declined to make that decision when granting relief. Rather, the court decided that because Jovanov owned the property where Sunrise was located and frequently resided in the apartment above Sunrise, the dissolution of the parties' business relationship should take the form of Jovanov buying plaintiff out of the business. The court ignored the valuation of the business except for the $850 per week management salary plaintiff's expert deemed appropriate. The court, citing to Musto v. Vidas, 281 N.J. Super 548, 562 (App. Div. 1995), found that as a court of equity it had the authority to fashion a remedy that was equitable and reasonable and fit the facts. The court decided that defendant should reimburse plaintiff for the money he and his brother put into the business. The court did not grant plaintiff's application to buy out Jovanov because "to put Mark Moschillo in place as the owner of Linvas Corporation and leave him to operate a business in the premises owned by Mr. Jovanov would more than certainly create additional issues for the parties and work for this court."
The court awarded plaintiff: 1) $25,000, representing the money plaintiff paid for the interest in Linvas; 2) $16,515.92, representing plaintiff's out-of-pocket expenses for the renovation of Sunrise; 3) $12,000 paid by plaintiff in fines to restore Sunrise's liquor license; and 4) $17,000 in management fees for five months of management provided by plaintiff and his brother. The court did not clarify why it found that five months of management fees were appropriate, given that the brothers had renovated and run the establishment for longer than that. The liquor license was restored to Sunrise in April 2008 and the complaint was filed in September 2008, so the five months that Sunrise was fully in operation prior to the complaint could explain the five-month time period chosen by the court. Once the complaint was filed, the court appointed a special fiscal agent to run Sunrise. The court did not include any compensation to the brothers for their time or work invested in Sunrise other than the five months of management fees.
We do not disagree with the trial court that plaintiff's ownership of Sunrise would be difficult from a practical standpoint because, as owner of the premises, Jovanov would be plaintiff's landlord. Jovanov signed a twenty-year lease with Linvas on February 1, 2007, however, so any future disputes between the parties would likely be resolved in a landlord/tenant action and not before the Chancery Court. Courts of equity have the ability to craft creative solutions, but they do not have unlimited authority to fashion remedies not requested by either party to the litigation. N.J.S.A. 14A:12-7 "does not allow the oppressor to harm his partner and the company and be rewarded with the right to buy out that partner at a discount." Balsamides v. Protameen Chems., Inc., 160 N.J. 352, 382 (1999). If indeed defendant signed the documents in question and engaged in conduct detrimental to the company, the court's allowing him to buy out plaintiff at a reduced cost directly conflicts with the cautionary language in Balsamides. Ibid.
Further, the court was required to determine whether or not the documents were forged to fashion an equitable remedy consistent with the statute. The court states that "whether the signatures are Mr. Jovanov's or not," Moschillo "must be compensated." A party may not, however, knowingly base a case on forged documents, commit and suborn perjury, and yet be awarded an equitable remedy. This result does violence to the time-honored doctrine that "'he who seeks equity must do equity.'" Thompson v. City of Atl. City, 190 N.J. 359, 384 (2007) (quoting Ryan v. Motor Credit Co., 132 N.J. Eq. 398, 401 (E. & A. 1942)).
If the documents were forged, Moschillo was not a shareholder in Linvas. N.J.S.A. 14A:12-7(c)(2) provides that "one or more directors or . . . one or more shareholders" may bring suit. This statutory grant of standing, by its plain language, only applies to those who direct or own shares in a corporation. If plaintiff is not a shareholder, he needs some other justification for standing, or must pursue his action under another theory. Additionally, if Moschillo is not a shareholder in Linvas, Jovanov does not owe him a fiduciary duty, whereas co-equal shareholders in a closely held corporation owe each other a fiduciary duty similar to that of a partnership. See Balsamides v. Perle, 313 N.J. Super. 7, 14 (App. Div. 1998), aff'd in part, rev'd in part, remanded sub nom Balsamides v. Protameen Chems., Inc., 160 N.J. 352 (1999).
If, as the court implies, Jovanov has perpetrated a fraud on the court, then plaintiff should have been awarded legal fees, as the entirety of Jovanov's defense, which necessitated prolonged litigation, was completely manufactured. In an action under the Oppressed Shareholder Statute, a party is entitled to legal fees and expenses when the adverse party "has acted arbitrarily, vexatiously, or otherwise not in good faith." N.J.S.A. 14A:12-7(10). If Jovanov signed the documents in question and then claimed they were forged, he litigated in bad faith and should be required to pay plaintiff's counsel fees. The trial court entered two orders during the proceedings awarding plaintiff pre-trial legal fees, but ultimately never addressed the issue of legal fees in its final opinion or judgment.
We remand to the trial court to determine whether or not the documents in question were forged. If further testimony is necessary, the court may allow it to be presented. If the court finds that the documents were not forged, it should then consider whether or not to grant the relief sought by plaintiff, including a buy-out of Jovanov's share of the business at the value presented by plaintiff's expert, should the court find that expert testimony reliable. If the court finds that plaintiff forged the documents, then all relief should be denied. No cross-complaint was prosecuted by defendants and therefore they are not entitled to affirmative relief in this action even if the court finds the plaintiff prosecuted the matter in bad faith.
Reversed and remanded for proceedings consistent with this opinion.
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