On appeal from the Superior Court of New Jersey, Chancery Division, Bergen County, Docket No. C-135-08.
The opinion of the court was delivered by: Carchman, P.J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Before Judges Carchman, Graves and St. John.
The opinion of the court was delivered by CARCHMAN, P.J.A.D.
In this appeal, we address the question of whether, under the facts presented, a family partnership agreement that provides for a buyout based on net book value may be enforced where the disparity between book value and market value is significant. In deciding this issue, we consider the difference between book value and market value as well as addressing the issue of whether the disparity between the two renders the agreement unconscionable and unenforceable.
We conclude, as did the trial judge, that the formula utilized in calculating net book value was appropriate, the buyout agreement was enforceable, and the disparity between book value and market value does not render the agreement unconscionable.
Plaintiff Estate of Claudia*fn1 Cohen, by its executor, Ronald Perelman, appeals from a judgment awarding $178,000 for Claudia's interest in defendant Booth Computers (Booth), a family partnership in which her brother, defendant James Cohen, was also a partner. Plaintiff argues that the trial judge erred in finding that, under the buyout provision of Booth's partnership agreement, it was entitled to only the net book value of Claudia's interest in the partnership, as reflected in Booth's financial statement at the time of Claudia's death, rather than the fair market value of that interest, which plaintiff claims was $11,526,162.
Judge Contillo, in the Law Division, concluded that the value set forth in the financial statement was the "net book value," the language of the buyout clause was not ambiguous, and was supported by substantial credible evidence in the record. The award did not render the partnership agreement unconscionable because of the disparity between fair market value and book value; moreover, there was a similar buyout after the death of the other Booth partner ten years prior.
I. These are the relevant facts developed during the trial of this dispute.
Robert Cohen, Claudia and James's father, amassed a considerable fortune through his ownership and control of various business entities, including the Hudson News group of companies, a distributor of newspapers and magazines. He and his wife, Harriet, were the parents of three children - Claudia, Michael and James.
According to James, Robert requested a partnership agreement be prepared for the benefit of his children. The agreement was not negotiated but presented to the children for signature. Apparently, the partnership was formed by Robert to purchase and lease computer equipment, but this never came to fruition. At the time of Booth's formation, Claudia was twenty-seven, Michael twenty-one, and James nineteen.
James did not know who drafted the agreement but assumed that it was his father's attorney. He received the document from his father but did not recall whether he understood all its provisions, including paragraph sixteen, which governed buyouts of the partners. He did understand that the general concept of the partnership was to create a vehicle to produce income for the children. Neither he nor his siblings consulted an attorney before signing the agreement.
The agreement created Booth Computers and provided in part:
11. The Partnership shall maintain books and records setting forth its financial operations and said books and records shall reveal all monies received and expended on behalf of the Partnership. Such books shall be kept on a calendar year basis and shall be closed and balanced at the end of each year. An audit shall be made at the end of each year, or more often, as desired by the Partners.
13. Each of the Partners recognizes and agrees that one of the reasons he has entered into this Partnership is the personal and family relationship which exists among all Partners and that none of the partners wishes to enter into a partnership with non-family members. In furtherance of the foregoing, each of the Partners covenants and agrees that during his lifetime he shall not sell, assign, transfer, mortgage, pledge, encumber or otherwise dispose of all or any part of his interest in the Partnership, except upon the terms and conditions and subject to the limitations as hereinafter set forth in Paragraphs 14 and 15 of this Agreement.
The agreement also contained a buyout provision, to be implemented under certain conditions:
15. In the event of the divorce or separation of any Partner who is married, and upon the death of any Partner, the remaining or surviving Partners shall be obligated to purchase, in equal shares, and the divorced Partner or Partner whose marriage is being terminated, or the estate of a deceased Partner, as the case may be, shall be obligated to sell the entire interest in the Partnership theretofore owned by such Partner at the price and upon the terms and conditions hereinafter set forth in this Paragraph 15;
(A) The price at which such Partnership interest shall be sold shall be the value thereof, determined in accordance with the provisions of Paragraph 16;
16. The purchase price of any part or all of a Partner's interest in the Partnership shall be its value determined as follows:
(A) Each of the Partners has considered the various factors entering into the valuation of the Partnership and has considered the value of its tangible and intangible assets and the value of any goodwill which may be present. With the foregoing in mind, each of the Partners has determined that the full and true value of the Partnership is equal to its net worth plus the sum of FIFTY THOUSAND ($50,000.00) DOLLARS. The term "net worth" has been determined to be net book value as shown on the most recent Partnership financial statement at the end of the month ending with or immediately preceding the date of valuation;
(B) The value of any interest in the Partnership which is sold and transferred under the terms of this Agreement shall be determined by multiplying the full and true value of the Partnership as above determined by that percentage of the capital of the Partnership which is being sold and purchased hereunder.
One of the entities created by Robert, Periodical Distributors of Florida, Inc. (Periodical), owned an oceanfront estate in Palm Beach, Florida. Periodical had purchased the property in 1976 for $750,000.
On May 26, 1978, a partnership known as HCMJ Realty Ltd. (HCMJ) was formed in Florida; its general partners were Robert and Harriet, while Booth was a limited partner. According to HCMJ's certificate of incorporation, Booth's initial capital contribution was $90,000, for which it received a forty-five percent minority interest in HCMJ. Cyril Hermele, a certified public accountant who prepared Booth's tax returns, indicated that the initial $90,000 investment by Booth was reflected as a capital contribution, but as time passed, payments made on behalf of the property reduced that figure until it became a negative number. Howard Joroff, Hudson News's controller in the 1980s and 1990s, noted that HCMJ's books were kept by Robert's secretary.
According to Hermele, Booth's cash receipts and disbursements were kept on a general ledger. Catherine Oberg, Hudson's chief financial officer, indicated that a bookkeeper who worked for Robert would enter the deposits and checks written, which produced a trial balance of the debits and credits. HCMJ's tax returns were based on these records, according to Hermele, and any distributions to the partners were generally made at Robert's direction. Periodical conveyed the Florida property to HCMJ on September 1, 1978, and Robert continued to assume the maintenance costs of the house.
Booth's assets were not limited to the Florida property, as in 1980 and 1984, it acquired two commercial warehouse buildings in Egg Harbor, which generated rental income for the partnership. According to Joroff, in 1992, Booth invested in Jacobs, Jacobs, Cohen & Booth, a firm that owned and leased property in Massachusetts.
James began working for Hudson News in 1980 and became its president in 1994. In 1985, Claudia married Perelman, and they had one child, Samantha, who was born in 1990.
According to James, no accounting firm reviewed, or certified, Booth's financial statements. Hermele did not audit Booth's financial documents while Joroff prepared financial statements for Booth from 1983 to 2001.
In 1994, Claudia and Perelman divorced. The parties to this action stipulated that the buyout provision of the partnership agreement was not invoked at that time because family ownership of the partnership was not threatened by the divorce. According to James, he told Claudia six months after the divorce that he and Michael were not going to exercise the buyout provision.
Michael died on June 30, 1997. In July 1998, beyond the sixty days set forth in the partnership agreement, James and Claudia invoked the buyout provision and Michael's estate was paid $34,503.08 for his one-third interest in Booth based on the formula in paragraph sixteen of the partnership agreement. The book value as of the date of Michael's death was set forth in a handwritten document as $47,650.20. The $50,000 required by the buyout provision of the partnership agreement was added, resulting in a total of $97,650.20. Michael's one-third share was $32,550.07.*fn2
James assumed that the buyout calculation was made by his father's employees. He also discussed the buyout with Claudia, and he and Claudia each contributed $17,251 for the buyout. Thereafter, Booth's tax returns reflected that James and Claudia each had a fifty percent interest in the partnership. Although James wrote a check to Michael's estate for the amount due, Claudia's share was deducted from her partnership distributions.
Claudia died on June 15, 2007. On July 13, 2007, Ronald Kochman, another of Robert's attorneys, sent a letter on James's behalf implementing the buyout in the sum of $177,808.50. Attached to the letter was a balance sheet of Booth's assets and liabilities as of June 30, 2007, listing Booth's cash assets as $166,056, with $97,548 subtracted for HCMJ's negative value. Net land, property and equipment was listed as $357,842, for total assets of $426,352. Liabilities were $120,735, while total equity was $305,617. Net income was $110,402. The calculations were not a year-end financial statement, but a balance sheet and income statement created for the purpose of the buyout. The statement was reviewed by Oberg. According to
Oberg, the negative $97,548 figure came from HCMJ's K-1 form. That figure appeared on Booth's 1998 tax return and remained ...