On appeal from the Superior Court of New Jersey, Chancery Division, General Equity Part, Middlesex County, Docket No. C-249-07.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Submitted December 15, 2010
Before Judges R. B. Coleman, Lihotz and Harris.
This matter involves cross-appeals from a July 6, 2009 final judgment entered by Judge Travis L. Francis following a bench trial in which he determined that defendants Robert P. Perla, Robert L. Steiger, the two active partners in a real estate partnership, and defendant Heritage Partnership (Heritage) breached their fiduciary duties to a third inactive partner, plaintiff Orlando A. Munoz. The trial judge concluded that defendants caused Heritage to charge below market rent to defendant RPMS Consulting Engineers (RPMS) and defendant Foam Technology, Inc. (Foam), entities in which Perla and Steiger had interests, and caused Heritage to pay excessive fees for alleged management services performed by those entities.
The court reformed the leases between Heritage and the related tenant entities and awarded damages in plaintiff's favor. Defendants appeal and plaintiff cross-appeals. On his cross-appeal, plaintiff contends the court erred in granting the partial summary judgment dismissal concluding his claims were untimely. We affirm the judgment of the court.
Plaintiff, Perla and Steiger are all professional engineers. They were principals of RPMS, an engineering firm they started in 1983. On July 21, 1992, they entered into a partnership agreement creating Heritage to "maintain, operate, manage, sell and/or lease" a building. Each of the partners contributed to the capital of the partnership and retained one-third ownership.
Paragraph 1.03 of the Heritage partnership agreement provides that the rights and obligations of the partners are governed by the Uniform Partnership Act, N.J.S.A. 42:1A-1 to -56. Other pertinent provisions of the partnership agreement include paragraph 3.03, which provides that the partnership shall continue until June 30, 2012, unless terminated as set forth in the agreement; paragraph 6.01, which states that all decisions of the partnership are by majority vote of the three partners; paragraph 6.02, which provides that each partner has the right to inspect and examine the books and accounts of the partnership operations at all reasonable times; and paragraph 6.03, which states that no partner shall do any act detrimental to the best interests of the partnership or that would make it impossible to carry on the ordinary business of the partnership.
In August 1992, Heritage paid $1,550,000 to purchase an empty three-story, 39,490-square-foot office building in Monroe Township which contains approximately 22,800 square feet of space (the Heritage building) for rent. Steiger, Perla, plaintiff and RPMS signed a guaranty of payment to cover the $1.3 million mortgage for the building. Plaintiff, Perla and Steiger collectively decided to manage the Heritage building using RPMS employees.*fn1 Plaintiff, Perla and Steiger agreed that RPMS would negotiate with its landlord to prematurely terminate its sublease in Princeton and relocate to the Heritage building in Monroe Township. RPMS paid $9,388.37 per month in Princeton for approximately 6,800 square feet of class A space. Initially, Steiger, Perla and plaintiff did not consider what fair market rent in the Heritage building should be; they decided that rent from RPMS should cover the expenses of the building. Steiger testified that from 1992 to 1994, there was no set rent that RPMS paid Heritage. Thus, at first, RPMS paid Heritage $15,800 per month rent.
Starting in 1993, RPMS began to invoice Heritage for management services, computed as the hourly rates of RPMS's employees for services rendered with a markup to cover additional costs such as a share of health insurance and vacation time. Perla testified that RPMS's markup of thirty-five percent was rather low compared to standard business practice, and he believed there was nothing improper about it. RPMS's markup on its invoices to arms' length client accounts such as oil companies was considerably higher.
In May 1993, plaintiff, Perla and Steiger incorporated Foam, a company that provides fire protection to the oil industry, and located its principal place of business in the Heritage building. At about that time, plaintiff informed Perla and Steiger that he intended to retire in late 1993. Perla and Steiger bought plaintiff out from RPMS, but plaintiff remained a principal of Foam until December 1, 2003. He retained his interest in Heritage, but he moved to Pennsylvania and took no active part in the day-to-day activities of the real estate partnership. Plaintiff did not visit the Heritage building from 1993 to 2005, and while he knew he could look at records at any time, he did not request any information about Heritage during this time period. He did receive tax returns and K-1 forms, but did not look at them thoroughly.
On May 12, 1994, Steiger sent a letter to plaintiff, which plaintiff at first stated that he had never seen until his attorney gave it to him in 2006, but eventually he conceded that he cashed the check that was one of the referred attachments to that letter. The parties disagreed as to what was sent and whether there were later versions of the letter that included attachments, but the court ultimately found that plaintiff had received the letter and the check but not the attachments that included proposed rent calculations.
In any event, the first page of the letter states that there are seven items attached: (1) a vacation check; (2) a 401K plan quarterly report; (3) a 401K newsletter; (4) "RPMS rent calculation for your comment"; (5) "Foam rent calculation for your comment"; (6) "a brief outline of what is going on with Heritage"; and (7) "a brief outline of what is going on with Foam." In the intact iteration, two pages titled, "Rent Calculation," list the square footage of RPMS's area and state the rent is $12,900, and Foam's area, stating the rent is $1,050.
On December 21, 1994, without having received any comments from plaintiff, Steiger and Perla drew up written leases for Heritage that provided basic monthly rent of $12,900 for RPMS and $1,050 for Foam. Steiger and Perla came up with the amounts based on what they thought was reasonable for the spaces; they did not conduct a fair market analysis. The initial term of the lease for Foam ran from January 1, 1995 to December 31, 1997. Perla and Steiger agreed to a total of three leases for Foam, covering the period from January 1, 1998 to December 31, 2008. The initial term for the RPMS lease ran from January 1, 1995 to December 31, 1997, with three leases, covering the period from January 1, 1998 to December 31, 2012. Perla testified that RPMS would never have paid more than $12,900 per month and would have vacated the building if forced to pay more.
On October 28, 2005, plaintiff sought to withdraw from Heritage. He wrote to Steiger about possibly selling his share, which provoked a communication from Perla and Steiger's attorney to plaintiff's attorney offering $200,000 for plaintiff's share of Heritage. Plaintiff's rejection of that offer led to appraisals of the property, the collection of materials showing cash and liabilities and eventually to this litigation.
From 1992 to 2000, Heritage retained a real estate agent, Linda Cinelli, to rent and attempt to sell the building. Steiger, on behalf of Heritage, signed the listing agreement for sale, and when Cinelli changed companies, Steiger signed a new agreement to continue her services. On January 14, 2002, Mercer Associates submitted an offer to purchase the Heritage building for $3,600,000. The process went back and forth with offers from Mercer for the same price but with different contingencies. On June 3, 2004, Raritan Properties made an offer to purchase the property for $3,650,000. On March 7, 2005, Babu Cherukuri presented an offer with a purchase price of $3,700,000, which Steiger rejected as too low and because it required that RPMS sign a five-year lease. On March 18, 2005, Steiger wrote Cinelli stating they had taken the building off the market.
Nevertheless, on June 21, 2005, Cinelli submitted an offer from Birger Brinck-Lund to buy the property for $4,250,000. That offer required that RPMS remain as a tenant and pay $22 per square foot in rent.*fn2
Throughout its tenancy in the Heritage building, RPMS provided management services and submitted invoices for those management services to Heritage that contained little detail. Steiger and Perla both testified that nobody, including plaintiff, ever complained about their format, the amounts or the documentation until the amended complaint was filed after the complaint. Steiger claimed that the amounts charged were reasonable and not all work done for Heritage was invoiced.
In answers to interrogatories, defendants set forth reasons that RPMS and Foam paid lower rent, and a list of work items that Steiger and Perla did for Heritage. Steiger testified one reason for the lower rent was that RPMS's space on the third floor is of lower quality, it has a slanted ceiling and an extremely poor layout. Steiger also testified that RPMS paid more for its space than another tenant, GMAC, and GMAC's space was superior because it was on the first floor.
Steiger acknowledged that RPMS and Heritage did not employ rigorous controls against each other. The checkbook for Heritage was in the same fireproof safe with the checkbook for RPMS. Steiger sat at his RPMS desk to do work for Heritage and answered calls for Heritage on RPMS's phone.
In 2006, plaintiff obtained information that included copies of the leases and an appraisal to see the worth of the Heritage building. At that time, plaintiff saw that the rent had not changed since he retired and that there were renewals of the leases with RPMS and Foam made without his knowledge. Steiger admitted that he did not notify plaintiff about these renewals. Plaintiff concluded that the rent was too low and that RPMS had overcharged Heritage on invoices for performance incentives and maintenance fees. While the invoices did not have details on services charged, plaintiff noticed that there were many different payments to different people and concluded that invoice amounts should have been lowered after the building was fully occupied.
On November 14, 2007, plaintiff filed a five-count complaint, alleging: (1) breach of fiduciary duty, duty of loyalty, and duty of care by Perla and Steiger; (2) breach of the Heritage partnership agreement; (3) minority partner oppression; (4) formation of a constructive trust, an equitable lien, and unjust enrichment; and (5) conversion and/or wrongful appropriation. In their answer, defendants denied the key allegations and asserted eleven separate defenses, including laches, estoppel, waiver and the statute of limitations.
Plaintiff subsequently filed an amended complaint that added a sixth count seeking an accounting of the income, expenses, and assets of Heritage, based on claims relating to invoices for professional services charged to Heritage and defendants' attempts to sell the building. Defendants filed an amended answer, adding an additional defense.
Defendants moved for summary judgment and on November 7, 2008, Judge Francis ordered partial summary judgment entered in favor of defendants based on laches on all of plaintiff's equitable claims that accrued on or before November 13, 2001, including reformation of the leases, imposing a constructive trust, appointing an independent trustee, imposing an equitable lien, rescission of the leases, dissolution of the partnership, and production of an accounting. He also ordered that all legal claims which accrued on or before November 13, 2001, shall be subject to a Lopez hearing, which was conducted at the start of the trial.*fn3
Judge Francis ruled that there was no basis for tolling the applicable six-year statute of limitations and barred plaintiff's claims related to below fair market rent that accrued before January 1, 2004, and the balance of his claims that accrued before November 14, 2001.
Peter Sockler, a tax assessor and owner of an appraisal firm, issued an appraisal report in July 2006 appraising the Heritage property at $4,300,000, and he testified as an expert for plaintiff at trial. He issued a second appraisal report dated August 14, 2008, appraising the property at $4,000,000. He also issued a report, dated September 12, 2008, estimating market rent value for the owner-occupied spaces of the Heritage building for the appraisal dates of July 30, 1994 through July 30, 2008, with market rent rates between $14.09 and $23 per square foot. In calculating the rental for RPMS, he applied a twenty percent reduction to the estimated rates, because of the dormers and unusable space on the third floor.
David Stafford, a certified public accountant issued a September 26, 2008 report, setting forth an analysis of plaintiff's damages, in which he concluded that the damages for RPMS's overcharging of expenses, RPMS's rental differential, and interest to December 31, 2008, totaled $1,575,137.97, with plaintiff due one-third of the total, or $525,045.99.
Sockler acknowledged that a hypothetical landlord's anticipated tenant expense obligations are a relevant component of a hypothetical tenant's rental rate, as are risk factors such as rent defaults (collection losses) and vacancy losses. One such expense obligation is a tenant fit-up expense, where a tenant asks a landlord to reconfigure an interior space.
Joel L. Krinksy of J.L. Krinsky & Co., defendants' expert in real estate, issued a report, dated October 13, 2008, addressing the valuation of the building, the fairness of rents charged RPMS and Foam, and the charges to Heritage. The report included statistical information on rental rates, capitalization rates, and management fees, as well as summaries of annual rent from each of Heritage's tenants, effective rents based on tenant fit-up, and an analysis of RPMS's fees. Krinsky concluded: (1) the value of the Heritage building has lowered due to prevailing market conditions, not because of the rents being paid by RPMS and Foam; (2) the rents being paid by RPMS and Foam are at market levels when all factors (including usable space, initial tenant fit-up, and ongoing tenant space improvements) are taken into consideration; and (3) the charges to Heritage for fees and services have been both fair and at market levels.
After considering the evidence presented, Judge Francis concluded that in 1992 and 1993, RPMS paid varying amounts of monthly rent to Heritage, not based on a fair market rental value analysis, but instead based on the amount of rental income Heritage needed to remain solvent. The judge found that there were "several iterations" of Steiger's May 12, 1994, letter. The iteration plaintiff received referred to rents paid by RPMS and Foam in the body of the letter but not in separate attachments. Thus, the judge concluded plaintiff did not receive notice of the rent calculations. Defendants sent plaintiff tax returns, which plaintiff only "browsed" and did not review thoroughly.
Other than plaintiff's request in 2006 for a copy of RPMS's lease agreement, at no time between January 1, 1995, and November 14, 2007, did plaintiff initiate any contact with Perla and Steiger or request any information or records from them pertaining to Heritage. During the same period, plaintiff did not seek to inspect Heritage's financial or other records personally or through any representative.
Judge Francis concluded that plaintiff, Perla, Steiger and employees of RPMS rendered free services to Heritage between 1992 and mid-1993, and then, with plaintiff's knowledge, RPMS began invoicing Heritage for services. Based on Heritage's income tax returns and form K-1 sent to him by defendants, at all times after January 1, 1995, plaintiff had some inferable notice of the rents paid to Heritage by RPMS and Foam, as well as management and other professional services rendered by RPMS and Foam to Heritage.
Judge Francis found the Sockler report credible as to rent valuations. The judge noted that Sockler factored in a twenty percent reduction from market rent for all building spaces due to the dormers on the first and second floors, as well as limited non-usable areas and the physical condition of the building. Both Sockler and Krinsky concluded that management fees based on gross rents should be between four and six percent. The management fees, which included the incentives and administrative fees, that were assessed to Heritage were in excess of six percent. The judge ruled that anywhere between four and six percent was reasonable for management fees, clarifying that the fees should not include payment for repairs of the building.
Judge Francis stated that it was difficult to determine if the comparable properties in Krinsky's report were in buildings of the same age, location and building condition. Nevertheless, the judge found that Krinsky's statistics buttressed Sockler's conclusion that the building and property were worth about $4,000,000. The judge rejected Krinsky's opinion that the RPMS management fees were ...