February 7, 2012
CHRIS J. STRATIS, PLAINTIFF-APPELLANT,
BURLINGTON DINER CORPORATION, A NEW JERSEY CORPORATION, DEFENDANT, AND DJULIA KOLENOVIC, RESPONDENT.
On appeal from the Superior Court of New Jersey, Special Civil Part, Burlington County, Docket No. DC 0351-10.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Submitted January 24, 2012
Before Judges Fisher and Baxter.
This appeal raises questions about the rights and obligations of shareholders for the debts of a dissolved corporation and, more particularly, the impact of an agreement by which one shareholder agreed to indemnify and hold harmless another. Because the indemnification agreement is ambiguous --at least insofar as it purports to deal with the current situation -- and because of other uncertainties, we remand for development of the issues and particularly the parties' intentions in entering into the indemnification agreement.
The parties to this appeal -- plaintiff Chris J. Stratis and Djulia Kolenovic -- were the sole directors, officers and shareholders of Burlington Diner Corporation (BDC). Stratis filed a complaint in this action in January 2010, against only BDC, seeking damages based upon the alleged fact that he paid two claims asserted by BDC creditors. In the first of these alleged claims, a former BDC employee filed suit in Special Civil Part against Stratis and Kolenovic in March 2008, alleging BDC failed to pay him wages. Stratis alleged in his complaint here that he negotiated a settlement of that suit, but that eventually a judgment was entered in favor of the employee and against Stratis for $8,608.31. The second was a claim asserted in 2009 by a vendor seeking $2,048.31 on a lease of equipment to BDC that Stratis personally guaranteed.
On March 15, 2010, judgment was entered in favor of Stratis and against BDC in this action in the amount of $10,950.75, which represented the amount of the two claims, interest and fees. Because BDC was dissolved in 2008, Stratis filed a post-judgment motion, seeking, among other things, an order that would permit a levy against certain payments due the former shareholders of BDC. That is, as Stratis alleged in his complaint, BDC sold all its assets to KOPS, Inc. in 2008, and took back in consideration a note and mortgage, obligating KOPS to pay BDC $334,000 over time. Stratis and Kolenovic, the only shareholders of BDC, dissolved BDC, which assigned its interest in the note and mortgage to Stratis and Kolenovic in nearly equal portions.*fn1 After obtaining a judgment against BDC in this action, Stratis sought to levy against those mortgage payments in the execution proceedings in question in this appeal.*fn2
Kolenovic opposed the motion, asserting that she first became involved with BDC in 2002. In her words, Kolenovic soon realized that Stratis "was running the place into the ground" and "wasn't paying the bills, wasn't paying the taxes, and would constantly lie about the status of the business." Allegedly because of these and other concerns, Kolenovic sought and Stratis provided an agreement indemnifying her and holding her harmless from any claims against Stratis or BDC, such as -- she claims -- this suit and the underlying claims asserted by the former employee and the vendor. In addition, Kolenovic asserted that Stratis's settlement of the former employee's claim without her knowledge and his subsequent failure to abide by the settlement agreement, leading to greater liability, freed her from any responsibility for that obligation.*fn3 And, as for the vendor's claim, Kolenovic referred to the absence of any evidence that this represented a claim against BDC.
On April 29, 2011, the trial judge denied Stratis's motion; in her brief written opinion, the judge chiefly relied upon the indemnification agreement as protecting Kolenovic from claims of this sort. We reverse and remand chiefly because in relying upon the indemnification agreement, the judge mistakenly viewed it as, essentially, insulating BDC from claims brought against BDC. That is, if it is assumed that the claims of the former employee and vendor were the legitimate debts of BDC, then it is BDC's obligation, in the first instance, to pay them; BDC cannot take refuge behind an indemnification agreement given by one shareholder to another.
Nor is it likely that BDC's dissolution absolves it from suit. If we assume, despite the limitations of the record on appeal, that the claims of the former employee and the vendor are legitimate debts, then the fact that they were asserted after BDC was dissolved does not insulate BDC -- or, for that matter, its shareholders -- from liability. N.J.S.A. 14A:12-9. Moreover, as mentioned above, when it sold its business assets to KOPS, BDC received KOPS's promise to pay part of the purchase price over time, as memorialized by a note and secured by a mortgage. Upon dissolution, BDC conveyed its interest in the note and mortgage to its two shareholders. It could not, however, avoid liability for its debts by shedding its assets in this fashion, In re Collins-Doan Co., 3 N.J. 382, 389 (1949); a creditor may look to assets transferred to shareholders after a corporation's dissolution, N.J.S.A. 14A:12-9(1)(c).
But that conclusion, when considered here, only generates additional questions. The former employee's suit sought judgment against Stratis and Kolenovic personally; the pleadings in that suit contained in the record on appeal do not suggest that the claim was asserted against BDC or that BDC was ever found liable for that debt. To the extent this was a debt of BDC's, then as a general matter one shareholder who paid it on behalf of the corporation may be entitled to a pro rata reimbursement from another shareholder; the record, however, does not reveal enough about the claim to permit a clear disposition of the shareholders' obligations to each other.
In addition, as noted above, Stratis and Kolenovic entered into an indemnification agreement. Although, as the trial judge correctly observed, the agreement to indemnify is expressed in broad terms, the agreement nevertheless consists of provisions so general in scope and meaning as to evade a clear understanding of the parties' intentions and the agreement's application in this setting. To explain, we observe that the indemnification agreement consists of a two-paragraph preamble and a two-paragraph section containing the precise terms of Stratis's promises to Kolenovic.
The first paragraph of the preamble refers to certain specific transactions or liabilities to which the agreement applied, namely: (1) Kolenovic's purchase from Stratis of a 50% interest in BDC for $200,000 made up, apparently, of a $150,000 bank loan, which, according to the preamble, Kolenovic had paid, and a $50,000 loan from Nick Stratis, secured by a note that was unpaid and for which Stratis "agreed to assume payment of the balance owed"; (2) an agreement of sale entered into by BDC and Theodore V. Kopsaftis, which we assume to be the transaction that ultimately took place between BDC and KOPS, Inc.; and (3) "certain obligations owed by [BDC] [that] were disclosed to Kolenovic" and for which Stratis "assumed responsibility for the payment." The claims underlying the judgment entered in this action do not appear encompassed by the first two categories. The third category's reference to "certain obligations" is not otherwise defined and its understanding remains dependent upon information not revealed by the agreement itself or, for that matter, the record.
The second and last paragraph of the preamble attempts to express the parties' intent in entering into the agreement:
The purpose of this agreement is to acknowledge the existence of the facts contained in this preamble and to further guarantee, to the fullest extent possible that [Kolenovic] will incur no personal liability and to the extent efforts are made by others to extend personal liability to [Kolenovic], that [Stratis] will indemnify and hold harmless [Kolenovic] from any liability.
It is not clear whether, in acknowledging "the existence of the facts contained in this preamble," the parties intended to limit the promises contained in the subsequent operative aspects of the agreement to those "facts."
Following the preamble, the relevant part of Stratis's agreement, which was relied on by the trial judge in denying the motion, contains his assumption of liability and his promise to hold Kolenovic harmless "for any and all claims and liability for losses or damage to property or injuries to persons occasioned wholly or in part by or resulting from any acts or omissions by . . . Stratis and [BDC] . . . arising out of or by reason of the operation of said corporation and business and the conduct of the business by . . . Stratis."
To summarize, the first paragraph of the preamble sets forth three categories of liabilities, two of which are clearly defined but inapplicable and the third, which is not clearly defined but may be relevant to the matter at hand; the second paragraph of the preamble, by referring to the first paragraph, may have intended to limit the broad promises that followed in the document to the three categories referred to in the preamble. In other words, in expressing their intent in this manner, the parties may have intended to limit the scope of the indemnification agreement to the circumstances referred to in the preamble and, because it may be that the underlying claims of the employee and vendor may only fall within the third, unspecified category, the scope of Stratis's agreement to indemnify and hold Kolenovic harmless must be viewed, at least at this stage, as ambiguous. Without further illumination, the agreement's application to the circumstances underlying the judgment in question is not at all certain.
We would also observe that, notwithstanding the difficulties in attempting to apply the indemnification agreement here, the circumstances surrounding the vendor's claim present their own difficulties. Indeed, the record does not even demonstrate whether Stratis paid this obligation or whether the vendor was able to establish its entitlement to payment from BDC. Moreover, we are mindful that the record suggests that Kolenovic received a discharge in bankruptcy; its effect on Stratis's claims against Kolenovic or Kolenovic's residual obligation vis-a-vis BDC is also unclear.
We add these final comments. Following our remand, the trial judge should be careful to prevent the present proceedings from evolving into an ad hoc forum for the disposition of claims between one shareholder and the other that should be pursued by way of a separate complaint. It bears emphasis that Kolenovic is not a party to this suit, although she is certainly entitled to be heard about Stratis's attempts to execute on his judgment against BDC, because these proceedings impact upon her receipt of KOPS's payments. The present post-judgment matter involves only proceedings in aid of execution on Stratis's judgment against BDC. To the extent, in the proceedings that follow, the resolution of any of the unanswered issues to which we have referred, or others not presently revealed, suggests an actionable claim by Stratis against Kolenovic, or vice versa, those claims should not be adjudicated here but should be pursued by way of separate suit.*fn4
For these reasons, we vacate the order under review and remand for further proceedings in conformity with this opinion. We do not retain jurisdiction.