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570 Escuela Partners, L.L.C., A Limited Liability Company v. State-Operated School District of the City of Newark


August 30, 2011


On appeal from Superior Court of New Jersey, Law Division, Essex County, Docket No. L-1462-05.

Per curiam.


Argued April 11, 2011

Before Judges A.A. Rodriguez, Grall and LeWinn.

A jury awarded plaintiff 570 Escuela Partners, L.L.C. (Escuela) $1,000,000 plus interest - $900,000 plus interest on its claim that defendant State-Operated School District of the City of Newark (District) breached a warranty clause in a lease agreement, and $100,000 plus interest on its claim of legal malpractice by defendants McManimon & Scotland, L.L.C. (M&S). The total award is equivalent to Escuela's initial nonrefundable deposit on a contract to purchase a building in downtown Newark plus interest paid on the loan taken to secure it. Escuela alleged it lost that money because 1) the District breached its warranty of compliance with the laws and procedures governing its authority to lease the building once plaintiff acquired it, and 2) M&S provided a legal opinion letter stating that the District had met those obligations.

The judge allocated responsibility for payment of interest on the loan and counsel fees as ninety percent to the District and ten percent to M&S. He assessed prejudgment interest and expert fees against M&S, but not the District.

M&S appeals,*fn1 contending only that plaintiff's expert was not qualified and was permitted to testify as to a standard of care that is contrary to the law. Finding no abuse of the judge's discretion and concluding that the expert's testimony, which discusses the need for an attorney providing an opinion to state essential caveats, read as a whole, is consistent with Petrillo v. Bachenberg, 139 N.J. 472, 486-88 (1995), we reject M&S's arguments substantially for the reasons stated by the trial court in ruling on its motions.

The District cross-appeals,*fn2 arguing, among other things, that Escuela's loss was not caused by the District's breach. For the reasons stated in part II of this opinion, we agree and vacate the judgment against the District.

Escuela also cross-appeals and claims error on two grounds. First, Escuela contends that it is entitled to prejudgment interest on the damages payable by the District. That issue is mooted by our reversal of the judgment against the District. Second, Escuela claims the trial court erred by dividing the defendants' responsibility for counsel fees. In so doing, the court relied on Grubbs v. Knoll, 376 N.J. Super. 420, 431-34 (App. Div. 2005). We affirm that determination substantially for the reasons stated by the court in its letter opinion of May 14, 2009. Escuela's arguments on this point are without sufficient merit to warrant any additional discussion. R. 2:11-3(e)(1)(E).


These facts are pertinent to Escuela's claim that the District breached the warranty clause in its lease. At all times relevant to Escuela's claims, the District was a state-operated school district and Marion Bolden was its superintendent. In 2001, the District's administrative offices were housed in an office building it leased from Hartz Mountain Industries, Inc. under terms the District had come to view as unsatisfactory. Accordingly, the District contacted a realtor. On May 9, 2001, the District executed a letter of intent to enter into an agreement to lease and then purchase a property known as 570 Broad Street from Gale & Wentworth Property Group L.L.C. or its affiliate, later designated as Escuela. Pursuant to the letter of intent, Escuela would purchase and renovate the building. On May 9, the building was owned by Investment Properties Associates (IPA). The letter of intent provided that "execution and delivery of a mutually acceptable Lease is a necessary precondition to a binding agreement between the parties."

On June 12, 2001, Bolden wrote to Eugene R. Diaz, Chief Investment Officer for Gale & Wentworth, and advised that so long as the lease included an acceptable purchase option, she had approval from the Department of Education to finalize the agreement and forward the parties' final version for approval by the Department's Commissioner.

The lease includes provisions that allocate responsibility for work that both parties had to do prior to the lease taking effect. The work was significant because Escuela did not own the building, and the District needed approvals to enter into the long-term lease and purchase agreement the parties contemplated.

In the lease, the parties recognize that Escuela must acquire the property and will have transaction costs, including acquisition costs such as the purchase price and fees paid to lawyers and realtors in connection with the purchase and lease. They also recognize that the District and its superintendent cannot agree to this long-term lease and purchase agreement without obtaining approvals.

Two paragraphs of the agreement address the District's obligation to get approvals prior to the signing of the lease. Paragraph 25.17 provides:

Prior to the date hereof, LESSEE caused the Commissioner of Education of the State of New Jersey to deliver to LESSOR a letter dated October 16, 2001, a copy of which is annexed hereto as Exhibit G ("the Commissioner's Letter"). LESSEE acknowledged that LESSOR required the Commissioner's Letter as a condition precedent to LESSOR entering into this Lease.

Paragraph 25.18 contains the warranty at issue here:

LESSEE represents and warrants to LESSOR that (i) the execution, delivery and performance of this Lease by LESSEE in the manner contemplated herein will not violate any law, statute, ordinance or other applicable requirement of any governmental authority to which LESSEE is subject, (ii) all proceedings required to be taken by or on behalf of LESSEE or any other governmental authority to authorize LESSEE to enter into and carry out the terms of this Lease have been properly taken and this Lease is the legal, valid and binding obligation of LESSEE enforceable in accordance with its terms.

In a third paragraph, paragraph 25.7, the parties recognize that Escuela will require financing and may need amendments to the approved lease terms in order to secure it. In that circumstance, paragraph 25.7 requires the District "not to unreasonably withhold, delay or condition its consent provided . . . further that any necessary consent is obtained from any other governmental authority pursuant to applicable Legal Requirement in order for LESSEE to grant its consent to such modifications." In that regard, paragraph 25.7 requires the District to make good faith efforts to obtain approvals required by law.

Pursuant to N.J.S.A. 18A:20-4.2e(4), this long-term lease for office space needed the approval of the Commissioner of the Department of Education and the Local Finance Board in the Department of Community Affairs. On August 22, 2001, M&S forwarded the agreement to the Commissioner and the Executive Secretary of the Local Finance Board.

Escuela's breach-of-warranty claim is based on the District's failure to comply with a law exclusively applicable to state-operated school districts, which required a vote by the District's advisory board. N.J.S.A. 18A:7A-48. The required vote is advisory in the sense that the superintendent had the power to veto it. Ibid.

Although the law has since been repealed, see L. 2005, c. 235, § 40, it was in effect at all times relevant to this lease agreement. N.J.S.A. 18A:7A-48b provided:

Beginning in the second year of State operation, the State district superintendent shall bring matters of curriculum before the board and may bring other matters before the board for a vote. Beginning in the third year of State operation, the State district superintendent shall bring legal matters before the board for a vote. Beginning in the fourth year of State operation, the State district superintendent shall bring fiscal matters before the board for a vote. However, the State district superintendent shall retain veto a power until the reestablishment of local control.

In 2001, the District had been state-operated since 1995. Consequently, the superintendent was obligated to bring legal and fiscal matters before the board for a vote.

On August 28, 2001, the lease was one of twenty-five matters on the board's agenda under the topic "Finance." The transcript of the board's meeting describes the resolution as authorizing "preliminary discussion or discussions regarding the . . . possibility of the District's leasing a building for central administration."

The members discussed the matter. One asked if it was for approval to negotiate with Escuela. Another asked if that had not been done already and was told that the parties had been discussing a lease and that the resolution was "to present the proposal to the Commissioner and to the Local Finance Board . . . in Trenton," which would enable the District to "move forward." A third member asked how long the process would take after the District had its approval and was told that it should not take very long because the District wanted to move.

Thereafter, a motion to move the twenty-five financial items on the agenda was made, seconded and carried by unanimous vote. The record does not indicate whether the board members had a copy of the lease.

The Local Finance Board approved the lease on September 12, 2001. As stated in paragraph 25.17 of the Lease, the Commissioner sent a letter on October 16, 2001, addressed to both the District and Escuela indicating that he had approved the lease and it was his understanding that the parties expected to execute the lease on or about that date.

On the same day, M&S issued a letter opinion addressed to the District, Escuela and CTL Capital, L.L.C., a lender. The letter opinion does not reference the advisory board or N.J.S.A. 18A:7A-48b. M&S opined that: "The [District] has the power and authority, and has obtained all necessary approvals, including approval by the Commissioner and the Local Finance Board . . . , as required by N.J.S.A. 18A:20-4.2 to execute and deliver the Lease"; "[t]he lease has been duly executed by the School District, and the Lease is a valid and binding obligation of the School District, enforceable against the School District in accordance with its terms"; and "[t]he execution and delivery of the Lease by the School District and the performance of the School District of its obligations thereunder does not result in any violation of any law, rule, or regulation of the State of New Jersey."

According to Eugene R. Diaz, of both Gale & Wentworth and Escuela, Escuela had cancelled two prior contracts to purchase 570 Broad Street from IPA before any deposit was due because the District had not yet obtained approval of the lease. Despite the fact that Escuela had not received the opinion letter from M&S, it signed a third contract on October 18 to purchase 570 Broad Street for $11,500,000. That contract provided for Escuela to make a $1,000,000 deposit on the day of signing, but Escuela did not make that deposit until the next day, which is also the day Diaz received M&S's opinion letter and Escuela and the District executed the lease.

Escuela's contract with IPA set the closing for a specific time on November 21, 2001 and made time of the essence. Nonetheless, that contract also gave Escuela the right to one extension for a date no later than December 3, 2001.

Escuela was not able to close on either of the dates specified in the contract. On November 12, 2001, Diaz wrote to the Department of Education and M&S seeking modification of certain terms in the lease that were "causing some difficulties with [the] financing of the property." Diaz enclosed the proposed amendments to the lease, implicitly acknowledging his need for approval of the amendments. According to Diaz, approval was delayed due to a shift in governors and commissioners that followed the gubernatorial election.

While the parties to the lease awaited approval of Escuela's amendments, the District's landlord Hartz took legal action to reverse the initial approval of the Escuela lease. On November 21, 2001, Hartz filed an application with the Commissioner seeking reconsideration of the Commissioner's October 16, 2001 approval of the District's lease with Escuela. Hartz raised several procedural challenges, but the District's failure to present the lease to the advisory board for a vote was not one of them.

The District continued to focus on its lease with Escuela. On November 27, 2001, Bolden went to a meeting of the advisory board and updated it on the status of the Escuela lease. She explained that the District was weighing its options, noted the District's dissatisfaction with the Hartz lease and reiterated that the District was "looking to own." No vote was taken.

Hartz filed a second challenge, this time to the approval given by the Local Finance Board. On November 30, 2001, Hartz filed an appeal from the Local Finance Board's approval of the lease with this court. Neither the notice of the appeal nor the case information statement referred to action of the advisory board as a basis for its challenge.

Escuela continued its efforts to keep its contract with IPA alive. On December 6, 2001, Escuela obtained from IPA an extension of the closing date to December 21, 2001. In return, it made an additional deposit of $500,000.

The District also continued on a course to lease 570 Broad Street with an option to purchase. On December 21, 2001, the District gave Hartz the one-year notice of cancellation required by their lease, and Bolden executed an estoppel certificate indicating that the lease remained in effect and that neither party was in breach. The lease called for the issuance of such certificates.

Hartz failed in its effort to have the Commissioner reconsider approval of the Escuela lease. By letter of December 26, 2001, the Commissioner questioned Hartz's standing, but also denied the request on the merits. The Commissioner explained that even if Hartz had standing, Hartz had not shown a basis for overturning the approval, which the Commissioner said was granted on the ground that the lease addressed the district's "short- and long-term facility needs," was fiscally appropriate and "generally comport[ed] with applicable school law."

Although the extended closing date on Escuela's purchase had passed on December 21, 2001, the District continued to favor its lease purchase agreement with Escuela over any other option. On December 27, Bolden's office again informed the members of the advisory board of the District's preference to move to 570 Broad Street under the Escuela lease and purchase agreement.

Hartz meanwhile continued its campaign to overturn the approvals. On January 2, 2002, Hartz filed an appeal with the Commissioner challenging the District's resolution approving the Escuela lease. For the first time, Hartz raised a question about the advisory board. One of the assertions included in its petition was that: "Despite a requirement that she do so, on information and belief, State District Superintendent Bolden failed to submit for fiscal review the impact of the proposed 570 Lease to the State Advisory Board, in violation of N.J.S.A. 18A:7A-48b."

Despite Hartz's new attack and that Escuela did not have a contract of purchase or closing date, the District continued to cooperate with Escuela's efforts to obtain financing. On January 7, 2002, M&S issued another opinion letter. On January 14 and 23, Escuela asked the Commissioner to act on the amendments, and on February 7, the District made a formal request for approval of the lease amendments. The Commissioner approved the amendments on February 11.

On February 12, 2002, Bolden and Diaz appeared before the advisory board and responded to questions posed by the members. On the same day, Bolden issued another estoppel certificate, and on February 15, the District applied for the Local Finance Board's approval of the amendments.

Hartz then turned its attention to the Commissioner's February 11, 2002 approval of the lease amendments. It filed an administrative appeal seeking to have the Commissioner reverse his decision.

The Local Finance Board considered the Escuela amendments to the lease on March 12, 2002. A member of M&S appeared for the District. The Board requested additional information and the board considered the proposal again on May 18. On that date, the Local Finance Board did not vote on the amendments and scheduled another meeting.

On June 5, 2002, the Commissioner dismissed Hartz's administrative challenges on the ground that Hartz lacked standing. Despite the Commissioner's dismissal of Hartz's challenges, at a June 12 meeting of the Local Finance Board, the District's request for approval of the amended lease was withdrawn by an attorney from M&S at the request of the Department of Education. On June 26, this court granted the Department's motion to dismiss Hartz's appeal as moot.

On this evidence, Escuela's contract claim against the District was submitted to the jury solely on the basis of an alleged breach of the lease's warranty clause based on the District's failure to bring the lease before the advisory board on August 28, 2001 as required by N.J.S.A. 18A:7A-48. The jurors were directed that the questions for them to resolve was whether the proceedings on August 28 were "properly taken" in accordance with that law and whether the District therefore breached the warranty clause of the lease agreement. The jurors were further directed that Esculea was entitled to recover damages for losses that "may fairly be considered to have arisen from the [District's] breach" and would put Escuela in the position it would have been had it not entered into the contract.

No party objected to the submission of the case on those grounds and no party objected to the jury instructions. Moreover, those determinations are not challenged on this appeal.

After trial, the court denied the District's motion for judgment notwithstanding the verdict and addressed Escuela's motion for prejudgment interest and counsel fees.


On a motion for judgment notwithstanding the verdict, "the judicial function . . . is quite a mechanical one." Dolson v. Anastasia, 55 N.J. 2, 5-6 (1969). The motion should be granted when the evidence and reasonable inferences to be drawn therefrom, "viewed most favorably to the party opposing the motion," do not permit reasonable minds to differ about a material element the jury found in favor of the non-moving party. Ibid. Stated differently, the question is "whether the evidence, together with the legitimate inferences therefrom, could sustain a judgment in favor of the party opposing the motion." Id. at 5 (internal quotations omitted). This court applies the same standard. Id. at 7.

Applying that standard, the judgment against the District must be reversed because there is no evidence to support a finding that Escuela's loss of its $1,000,000 deposit was due to the District's breach of the warranty during the August 28, 2001 meeting of the advisory board. See Donovan v. Bachstadt, 91 N.J. 434, 444 (1982). No doubt such a loss was a foreseeable result of a breach of the warranty. But there must be some factual nexus between the breach and the loss; foreseeability is a limitation on damages, not a basis for awarding them. See Restatement (Second) of Contracts §§ 347, 350 (1979) (stating, in section 347, the general measure of damages and referencing a limitation stated in section 350, which is based on unforeseeability).

The initial lease was fully approved and executed. Although Hartz filed several challenges to the approval of the lease, each failed. More importantly, no challenge based on the presentation to the advisory board in August 2001 was raised until January 2002. At that point, Escuela had no contract to purchase and had, under the terms of its contract with IPA, lost its initial deposit and the second deposit it made upon obtaining an extension of the closing date to December 21, 2001.

The jurors could not infer that Escuela could have obtained a third extension if the District had obtained valid approval of the initial lease. The undisputed evidence is that the approval of the initial lease became irrelevant once Escuela sought amendments to the lease for its own benefit to obtain necessary financing. Escuela's November 2001 request for approval of the amendments to the approved lease made the validity of the initial lease irrelevant. Regardless of the validity or invalidity of the initial lease, Escuela could not proceed without approval of the amended lease. Escuela's need for amendments to facilitate financing was wholly independent of and unrelated to the August proceeding before the advisory board. The lease purchase agreement the parties executed in 2001 contemplated the need for separate approval of subsequent amendments, and Escuela recognized that by seeking approval.

On these facts, the judgment against the District must be vacated because no reasonable jurors could find that the breach of warranty the jury found based on the August 28, 2001 advisory board meeting caused any of Escuela's damages. Restatement, supra, § 347(a)-(b).

There was no request for nominal damages based on breach of the warranty. Nappe v. Anschelewitz, Barr, Ansell & Bonello, 97 N.J. 37, 45--46 (1984). Accordingly, we vacate the judgment against the District in its entirety, including the award of counsel fees, because Escuela did not prevail on its claim of breach.*fn3

Reversed in part and affirmed in part.

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