July 20, 2011
DOUGLAS FARALDI, INDIVIDUALLY AND AS PERSONAL REPRESENTATIVE OF THE ESTATE OF RUTH E. FARALDI, PLAINTIFF-RESPONDENT,
THOMAS LAWRENCE AND THOMAS LAWRENCE & CO., DEFENDANTS, AND HUBERT W. POTOTSCHNIG AND CARE PRODUCTS, INC., DEFENDANTS-APPELLANTS.
On appeal from Superior Court of New Jersey, Law Division, Bergen County, Docket No. L-2859-08.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued March 29, 2011
Before Judges Wefing, Payne and Hayden.
Following a bench trial, the trial court entered two judgments: one, for $500,000 plus prejudgment interest, in favor of Douglas Faraldi individually; and one, for $175,000 plus prejudgment interest, in favor of Douglas Faraldi as the personal representative of the estate of Ruth Faraldi, his deceased mother.*fn1 Both judgments were entered against defendants Hubert Pototschnig and Care Products, Inc. Defendants have appealed from those judgments. After reviewing the record in light of the contentions advanced on appeal, we affirm as to Pototschnig and remand as to Care Products.
The Faraldis owned a liquor store in Fort Lee and retained defendant Thomas Lawrence, a certified public accountant, and his firm, defendant Thomas Lawrence & Co., to perform accounting services for the business. Pototschnig was another of Lawrence's clients, and he owned a pawn shop in Connecticut, Ace Cash. Beginning in 1998, Lawrence approached the Faraldis with the proposal that they lend money to Pototschnig to help him expand his business. Lawrence told the Faraldis that Pototschnig would pay interest of 18% per annum, and he vouched for Pototschnig's reliability. Attracted by the interest rate, and Lawrence's assurances, the Faraldis agreed to lend money to Pototschnig. They did so by forwarding the money to Lawrence, who would deposit it into an escrow account and then forward it to Pototschnig. Unbeknownst to the Faraldis, Lawrence was charging Pototschnig a much higher interest rate on the loans. The Faraldis received timely interest payments and did not look for repayment of principal; rather, the notes were simply rolled over when due.
In approximately 2004 Lawrence told the Faraldis that Pototschnig had formed a new business, Care Products, which imported home health care test kits from Austria for re-sale in the United States. According to Lawrence, Pototschnig was seeking to borrow more money for this new business venture. Based upon their satisfactory experience with the earlier loans, the Faraldis agreed to advance more money, following the practice of sending the money to Lawrence, who would remit it to Pototschnig. In all, Douglas Faraldi lent $500,000 to Pototschnig, his mother $175,000. Although they received substantial interest payments over the years, the principal was never repaid.
Eventually, the interest payments became irregular and then ceased entirely. The Faraldis filed suit to collect the money due them. When the Faraldis first filed suit, they named Lawrence and his firm as defendants, as well as Pototschnig and Care Products. Their original complaint included counts for breach of contract, book account and unjust enrichment. By the time the matter proceeded to trial, plaintiffs had dismissed the counts for breach of contract and book account, and the matter was heard solely on the theory of unjust enrichment. The Lawrence defendants eventually consented to the entry of judgments against them in favor of the two Faraldis for the full amounts they had advanced, together with prejudgment interest. At trial, Lawrence testified on behalf of the Faraldis.
At trial, Pototschnig denied receiving any funds from the Faraldis but admitted he borrowed money from Lawrence, who, Pototschnig said, charged him interest of 60% per annum. Pototschnig disavowed the notes that bore his signature, claiming they were forgeries. At trial, the Faraldis relied upon these notes, as well as testimony from Douglas Faraldi and Lawrence that Pototschnig met with the Faraldis on several occasions to reassure them of the safety of their loans. Pototschnig admitted at trial that he had met with the Faraldis but said he had done so in an ultimately unsuccessful effort to convince the Faraldis to become stockholders in Care Products.
At the conclusion of this non-jury trial, the trial court made its findings and conclusions. It accepted as credible the testimony of Douglas Faraldi. That credibility assessment, and the factual findings that flowed from it, are, of course, binding upon us on appeal. State v. Locurto, 157 N.J. 463, 474 (1999); State v. Johnson, 42 N.J. 146 (1964).
On appeal, defendants raise three arguments: that the trial court erred in its application of unjust enrichment, that the trial court erred in enforcing usurious agreements, and that it erred in its calculation of damages. We reject defendants' first two arguments but agree with the third.
We recently summarized the principles applicable to a claim of unjust enrichment.
The doctrine of unjust enrichment rests on the equitable principle that a person shall not be allowed to enrich himself unjustly at the expense of another. A cause of action for unjust enrichment requires proof that defendant[s] received a benefit and that retention of that benefit without payment would be unjust. Unjust enrichment is not an independent theory of liability, but is the basis for a claim of quasi-contractual liability. We have recognized, however, that a claim for unjust enrichment may arise outside the usual quasi-contractual setting. [Goldsmith v. Camden County Surrogate's Office, 408 N.J. Super. 376, 382 (App. Div.), certif. denied, 200 N.J. 502 (2009) (citations omitted).]
We agree with the trial court that the transactions at issue here fit squarely within the concept of unjust enrichment. Defendants contend that unjust enrichment is inapplicable because plaintiffs failed to prove that Pototschnig received a benefit from them. The trial court, however, found that the Faraldis' money, forwarded by Lawrence, was deposited into Pototschnig's personal account. Pototschnig's receipt of those funds was clearly a benefit to him.
Defendants also contend that unjust enrichment is inapplicable because the Faraldis did not expect, at the time they advanced these sums, to be repaid by Pototschnig, but rather by Lawrence. The trial court's findings, however, are to the contrary, that the Faraldis always knew their money was going to Pototschnig, and they expected to be repaid by him. Pototschnig, through Lawrence, received $675,000 from Douglas and Ruth Faraldi. He may have paid a significant amount of interest over the years for the use of that money, but that does not relieve him of the obligation to repay the principal.
We see no significant merit in defendants' second argument. There are
two statutes dealing with usury. The civil statute,
31:1-1(a), forbids charging an interest rate greater than 16% per
year. N.J.S.A. 31:1-3 provides that if a creditor sues to collect on a
loan that calls for a greater interest
rate, the lender may only
recover "the amount or value actually lent," and not the usurious
interest. N.J.S.A. 2C:21-19 makes
it a criminal offense to charge
an excessive interest rate for a
loan; the permissible rate of interest, and the degree of the offense,
depends upon the status of the borrower.
Here, however, the trial court limited plaintiffs' recovery to the principal amounts they had loaned to Pototschnig. It did not award plaintiffs the interest they had anticipated receiving, and thus it did not enforce usurious contracts. Defendants on appeal, moreover, point to the 60% per annum interest they contend Lawrence was charging them. Defendants, however, were not defending against a claim from Lawrence but against a claim from the Faraldis. Defendants' transaction with Lawrence does not serve to defeat his liability to plaintiffs, who were unaware of Lawrence's dealings.
Defendants, in their third point, point to various errors they assert the trial court committed in its computation of plaintiffs' damages. These include failure to credit defendants with payments they made to Lawrence, and Lawrence made to plaintiffs; entering judgment against Pototschnig individually; including in the judgment amount a $50,000 loan for which only Lawrence signed the promissory note; including in the judgment amount $100,000 in loans the proceeds of which went to Ace Cash; and awarding usurious interest. There is no need to discuss this latter contention beyond what we have set forth earlier.
With respect to the argument that judgment should not have been entered against Pototschnig, individually, the trial court found that the funds forwarded by Lawrence were deposited into Pototschnig's individual account and then disbursed by him. Because he received the funds individually, it is appropriate that judgment be entered against him individually.
Defendants' argument with respect to the loan for $50,000 refers to a note dated January 26, 2006, that was signed only by Lawrence. That the note only bore Lawrence's signature might be material to a claim based upon contract, but plaintiffs' claim against Pototschnig was not for breach of contract but for unjust enrichment. That plaintiffs understood that the money was being lent to Pototschnig, and would be repaid by him, was established by the testimony of Douglas Faraldi, which the trial court found credible.
We are also not persuaded by defendants' argument that $100,000 of the loan proceeds were advanced prior to the incorporation of Care Products and went to Pototschnig's other business, Ace Cash. That is not material to Pototschnig's individual liability.
We do agree, however, that this does bear upon the extent of the liability of Care Products. If the money was lent prior to the formation of Care Products, and was not used in the business of Care Products, there is no basis to impose judgment against Care Products for those funds. Because of the parties' practice of rolling over the various notes as they became due, it is not possible for us to determine from this record whether those funds, or any portion of them, did, in fact, enrich Care Products.
Finally, we see no error in the trial court's failure to award a credit to defendants for the interest payments made over the years. Those interest payments did nothing to reduce the principal balance owed.
The judgments under review are affirmed with respect to defendant Pototschnig and remanded for further proceedings with respect to defendant Care Products.