May 16, 2012
CESAR ALEX DIETRICH, PLAINTIFF,
GEORGE KONTOS; 397 E. LACEY REALTY, LLC; A/K/A 307 E. LACEY RD. LLC; A/K/A 297 E. LACEY RD. LLC;
CAPTAIN'S INN LOUNGE CORPORATION, DEFENDANTS.
CAPTAIN'S INN RESTAURANT COMPANY, LLC, A NEW JERSEY LIMITED LIABILITY COMPANY, THIRD-PARTY PLAINTIFF, AND CHRISTOFIS KONTOS, INDIVIDUALLY, THIRD-PARTY PLAINTIFF-APPELLANT,
FINALLY OURS, LLC AND
DEBRA ABRAHAMOVIC-KAY, INDIVIDUALLY AND AS OFFICER OF FINALLY OURS, LLC, THIRD-PARTY DEFENDANTS-RESPONDENTS.
On appeal from the Superior Court of New Jersey, Chancery Division, Ocean County, Docket No. C-0296-09.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued February 1, 2012
Before Judges Cuff, Waugh, and St. John.
On this appeal, we are asked to determine whether the General Equity judge erred in extending a time-of-the-essence closing date because of the alleged misconduct of an individual with an equitable interest in the proceeds of the closing. For the reasons set forth in our opinion, we hold that, although such relief was permissible, there was an insufficient factual record to support that relief at the time the order was entered. Consequently, we remand for further proceedings consistent with this opinion.
Although the relationships among the various parties to this litigation are quite complicated and not adequately explained in the briefs, the facts relevant to this appeal can be summarized as follows.
In November 2009, plaintiff Cesar Dietrich commenced litigation against defendants Christopher and George Kontos*fn1 concerning the ownership of a restaurant known as the Captain's Inn and the land in Lacey Township on which it is located. Dietrich alleged that he owned a fifty-percent interest in the restaurant and land, and that the Kontos brothers each owned a twenty-five percent interest. Formal ownership of the restaurant and the property was split between two corporations also named as defendants in Dietrich's complaint. In their answer, the Kontos brothers and the corporations denied all of Dietrich's allegations concerning the percentages of ownership.
In June 2010, the parties settled their differences and entered into a consent order. Their agreement provided that Dietrich, or "his assignee," was to purchase the "defendants'" interest in the restaurant and property for $1.15 million. If Dietrich did not close on the purchase, the "defendants" were required to pay Dietrich $575,000 for his interest. The fact that Dietrich was to pay $1.15 million for the "defendants'" interest and, in the event he failed to do so, the "defendants" would pay him $575,000 for his interest, suggests that the settlement was based upon a tacit agreement that Dietrich owned a one-third interest in the restaurant and property, with the unspecified "defendants" owning the remaining interest.
Dietrich subsequently assigned his rights under the consent order to third-party defendant Debra Abrahamovic-Kay, who presumably also acquired Dietrich's one-third ownership interest. Abrahamovic-Kay created Finally Ours, LLC (Finally Ours), to acquire both the business and the property.
After Chris and Abrahamovic-Kay were unable to agree upon a specific form for the formal purchase agreements, the parties returned to court in January 2011. They eventually reached an agreement and signed two purchase agreements, one for the property and one for the restaurant. The agreements listed Chris and the appropriate corporate entity as the "seller" and Finally Ours as the "purchaser." An addendum addressing additional details was signed in March.
On April 1, Richard Schibell, a member of the Bar, wrote to the judge expressing concern, among other things, about whether Abrahamovic-Kay's attorney had obtained opinion letters from the restaurant's insurers concerning the sufficiency of its insurance to cover any recovery resulting from two lawsuits pending against the restaurant. The letter does not state on whose behalf Schibell wrote the letter. Our understanding, based upon his subsequent statements at the May 10, 2011 hearing, is that Schibell was representing George at that time. We note that he sent a copy of his letter to Chris's attorney, as well as the attorney for Abrahamovic-Kay.
Abrahamovic-Kay subsequently exercised her right to send a time-of-the-essence letter setting the closing date as May 5. Chris and Abrahamovic-Kay appeared at the lender's office for the closing on that date, along with their attorneys and the attorney for the lender. George was also in attendance, but Schibell was not. Although all of the required documents were signed on behalf of the sellers, the closing was not completed because the lender became concerned about the pending lawsuits and refused to fund the loan. Despite the failure to close, it appears that Abrahamovic-Kay began to run the restaurant on or about May 5.
On May 6, Chris's attorney wrote to counsel for Abrahamovic-Kay, declaring that she was in default of the time-of-the-essence closing and the purchase agreements. On May 9, Chris and one of his corporations, now all represented by Schibell, filed a third-party complaint against Abrahamovic-Kay and Finally Ours. George was not a party to the third-party complaint.
The third-party complaint alleged breach of the purchase agreements. It sought a declaration that the time-of-the- essence provision and the agreements had been breached, as well as injunctive relief addressed to control of the business and damages from breach of contract. Third-party plaintiffs also sought an order to show cause with temporary restraints (TRO), prohibiting Abrahamovic-Kay from disbursing any proceeds from operation of the restaurant and from continuing to exercise control over it.
Abrahamovic-Kay filed opposition to the TRO on May 10. She argued that George, who had appeared at the closing with documents about the lawsuits, engaged in disruptive conduct that caused the lender to refuse to fund the loan. Her attorney certified that, prior to the closing date, he had ascertained that the lawsuits did not endanger the lender's collateral and that there was no duty to disclose them to the lender.
The judge heard argument on the application for the TRO on the afternoon of May 10. Schibell took the position that Abrahamovic-Kay breached the time-of-the-essence provision and the agreements and argued that the failure to close was the result of her failure to disclose the lawsuits to the lender. He further argued that she had a duty to make the disclosure, even if she was satisfied that the pending lawsuits were not a problem for her. He also pointed to the fact that there was no allegation that Chris, who was "the record owner" of the restaurant and property, had been disruptive or had caused the lender to question the loan.
Abrahamovic-Kay's attorney argued that the lender had been willing to close until George appeared at the closing, started talking about the lawsuits, became disruptive, and caused the lender to refuse to fund the loan. He asserted that Abrahamovic-Kay had no duty to disclose the lawsuits to the lender. Finally, he informed the judge that Abrahamovic-Kay had obtained other funding and was prepared to close that day.
The judge recessed the hearing so that representatives of the lender, which was not a party to the litigation, could be contacted and appear by telephone. When the hearing resumed a short time later, two attorneys for the lender, one who had been present at the closing and one who had not, participated by speakerphone. The judge told them that he wanted to hear their understanding of what had happened at the closing. He did not put them under oath or permit questioning of them by counsel for the parties.*fn2
The lender's attorney who attended the closing gave the following recitation of the events of May 5:
So the closing probably started in terms of signing documents with the borrower probably around a little after noon. I would say about two and a half hours maybe into it when we had kind of taken a break --there's a lot of documents to sign -- one of the representatives from the bank came upstairs -- and throughout this time there were a lot of parties there that were downstairs having, you know, having conversation. I believe the seller was down there, the attorney was there, because really the only parties upstairs were myself and Ms. Abrahamovic[-Kay] and [her attorney] going through the bank documents.
At that point one of the bankers came upstairs and had stated to me that they had been made aware from some conversations that had occurred downstairs -- and my understanding from what the banker said, it was between the seller and the attorney. I think it was [Chris's attorney] -- that there were some lawsuits and some Complaints that had transpired. To be honest, I believe the banker said she was actually making copies of the Complaints for the seller, for [Chris's attorney]. And at that point she had brought it to my attention, saying there were some concerns; she had no idea apparently this litigation was out there. So at that point I had asked [Abrahamovic-Kay's attorney] that the bank had some concerns. They've been downstairs, one of the representatives from the bank and they overheard the seller and his attorney talking, and they're talking about some litigation that per what the banker told me, that they hadn't been aware of. And [Chris's attorney], actually, from my understanding wasn't made aware of, from what the banker told me, that this was a surprise to a lot of the parties. So at that point I had asked [Abrahamovic-Kay's attorney], which I got the impression that that was also a surprise. The bank wasn't made aware of it. So at that point I asked [him] to try and get some more information as to exactly what these claims were, where they were. The bank wanted to get some comfort as to, you know, what's going on really with these two claims. One was for a gentleman that had left the restaurant in, I think it was 2007 and had been in a motorcycle accident. He himself had been killed and also he had killed someone else in that accident that had taken place and the Captain's Inn was a party to that suit. There was another one which I believe was a slip and fall from a worker, and that lawsuit was also going on.
So the next hour or two hours were spent upstairs with the attorneys trying to get counsel and insurance companies on the phone, trying to get items in writing to give the bank some comfort as to where these lawsuits stood, what coverage was out there, if coverage was in place at the time, those types of items.
In the meantime another event that occurred while we were upstairs, the attorneys were all upstairs and the parties were downstairs at this point which was Mrs. Abrahamovic[-Kay], . . . I think there was a couple other guys. To be honest, I'm not even sure who they were. But the attorneys . . . and myself, were all upstairs on the phones, trying to get in touch with people to kind of get more information on the insurance issues. And apparently two of the bankers came running up the stairs . . . a little flustered, that there was some serious arguments going on downstairs and someone was . . . punching furniture and screaming and swearing, and the bankers were extremely concerned. And at that point both attorneys went downstairs. I think there was some issues going on between the buyer and seller that were being very disruptive in the bank.
And those were really the two issues of anything that really of substance occurred. I wasn't downstairs for whatever took place downstairs between the parties. I believe, my understanding was it was extremely contentious. There was a lot of yelling, and screaming, and swearing. I think there was somebody who was hitting furniture within the bank or whatnot. And the bankers . . . at one point were concerned about that. At that point the attorneys were upstairs trying to iron out the insurance issue.
By the time the end of the day at five or six, we knew we weren't going to fund any time after 4:00 because we still had these open issues that the bank wanted to get more information on and we couldn't get at that point. One of the attorneys representing the insurance companies was out on Friday --that was Thursday at 5:00. He was in with a client. He couldn't provide any information to make . . . the bank feel comfortable as to what was going on with these lawsuits. So we ended up calling it a day probably about 6:00 and asked everybody really to leave the bank at that point.
The next morning when we had spoken to the bank, the bank had made the decision after the information we had collected from what we could relating to the lawsuits and provided it to them, they had made the call that they did not want to proceed forward.
The lender's other attorney, who had not been at the closing but had been in touch with his client about it during the day on May 5, explained the lender's reasons for deciding not to fund the loan, which decision was finally made on the morning of May 6.
After hearing further argument, the judge determined that the time-of-the-essence requirement had not been breached, based upon George's conduct at the closing. He declined to issue the TRO and instead ordered the parties to proceed with the closing. The judge explained his reasons as follows:
The issue is quite unique in this particular case. All parties attended the closing. The bank is ready, willing, and able to close. All the parties are essentially there for purposes of closing, but during the closing process two issues were brought to the bank's attention; in particular, there were two lawsuits that had not been specifically called to their attention. The Court has been offered the explanation by [Abrahamovic-Kay's] counsel as to actually what had transpired; that the bank did require a letter, that he issued a letter to the bank indicating, in essence, that he was unaware of any activity, if you will, which would in any way impede the asset that the bank would have an interest in as a result of the closing and the bank was willing to rely upon that.
There were two specific lawsuits that were raised, and essentially they were raised because they were brought to the attention of the borrower through the actions, it would appear to the Court at this point, of George Kontos, not Christopher Kontos, but George. Quite frankly, though, counsel for [AbrahamovicKay] offered the letter. The letter was satisfactory to the bank, but because of this information now being brought, the bank took a closer look at what was going on at that point in time and had serious questions as to whether or not it should go forward with its decision that there be an equity acquisition versus an asset purchase. They clearly became nervous because of the activities that occurred during the closing. They thought about it and decided based on the information at hand because they were not ultimately satisfied that these two pieces of litigation did not pose a threat to their assets, that they decided that they would be more than willing to go forward with the funding but it had to be an asset purchase which, of course, at that point made it physically impossible for [Abrahamovic-Kay] to be able to go forward with the closing.
So the question then becomes -- you have to look at both sides -- was there anything that [Abrahamovic-Kay] did that day that caused the bank to pull the financing? The Court cannot find the fault with what [she] did that which caused the bank to pull financing. The letter by [AbrahamovicKay's] counsel was appropriate. Looking at all of this and knowing, by the way, the history of those two lawsuits now and knowing about these lawsuits, they really didn't pose a threat to the bank, but there was enough at that point to cause concern. So as a result of that, the bank then took a second look at it. There was no affirmative obligation by [Abrahamovic-Kay] to do more than [she] did. Had [she] done [more], in retrospect, this fiasco would not have occurred because the bank would have those questions answered well in advance and if they were going to change their mind about the asset purchase versus an equity purchase they long would have been able to do that, the defense could have adjusted their position, and ultimately been able to close.
What was so unique about this particular set of circumstances is that while I know the history that the Kontoses really preferred not to close and believed that this should not have occurred but they were going to the closing as a result of the Court Order, George goes to the closing and he essentially really is only going to receive a very small amount of money as a result of the closing calls these litigations to everyone's attention. Now, the odd part about that is I can't figure out why that would be done. It would have never adversely impacted him, had nothing to do with him ultimately. It would have been as between [Abrahamovic-Kay] and [her] counsel's malpractice carrier, if need be, and the [third-party] defendants who were taking title to the property; not the [third-party] plaintiff[s]. So what was the purpose of actually calling those to attention? One was handled by [Chris's attorney's] firm, anyway. There was a limitation on the amount of the policy that was going to be taken. The other was a slip and fall, clearly worth well less than the value. So all it really did was cause unnecessary concern to the bank. But in this environment I would clearly expect the bank to take a second look and to get nervous over what was going on at that point in time because if this was out there, then the thought might be what else is out there. But I still for the life of me can't figure out why Mr. Kontos would have bothered. There was no purpose to it. It didn't affect the amount of money he was going to get. It didn't do anything other than to cause the bank to call in the financing.
So under the circumstances now I'm forced to look at this and determine whether or not through no fault of [AbrahamovicKay], though an action at least an equitable owner in the closing did something at the closing which precipitated the bank to change their position. It's still a Court of Equity and it would be fundamentally unfair for the Court to penalize [Abrahamovic-Kay] immediately at that point in time for the bank pulling the closing because, quite frankly, had George not done this, none of this would have happened. Now, I will tell you that if Mr. Kontos had not been there and this information or something occurred, I think the [third-party plaintiffs'] counsel would be absolutely one hundred percent right on the law. I think [Chris and George's attorney] is absolutely correct on Gorrie[v. Winters, 214 N.J. Super. 103 (App. Div. 1986), certif. denied, 107 N.J. 114 (1987)]. I have no criticism of that. I think he's exactly right. And you so much as don't always get a half hour if you walk from the time [of] the essence closing. I've seen it in private practice. I've been exposed to them as a result of being on the Bench, and I don't disagree with him. But as a Court of Equity if there was a problem that there was some kind of a damage because of what George did, well, why would I force the defendants to sue him and bring a cause of action for intentional interference or malicious interference? That makes absolutely no sense. That is a matter best resolved as between Christopher and George after what George did at the closing. George didn't even really need to be at the closing. The fact that he was there and this all occurred created more of a problem than it really should have. In 20-20 hindsight these two pieces of litigation were really non-issues and probably would not have caused any real concern had they been called to the attention of the bank and all this information had been given. But [Abrahamovic-Kay] didn't actually have to do that. It was sufficient for what they did. And in retrospect, since I now know this litigation really did not impede and should not have impeded the equity that the bank was going to hold or the lien they would have held on this property, therein lies the problem for the Court and it's a rather unfortunate set of circumstances.
But there is two sides to all of this. One side is I'm not going to penalize [Abrahamovic-Kay] because of what George Kontos did. I know he did what he did, and it's not a matter of criticism, simply an observation. I'm struggling with why he's there to do that or why bother to do that.
Having said all that, . . . if [Abrahamovic-Kay] had disclosed that litigation up front, we wouldn't have been here either. But I believe it would be appropriate for the Court to do what it did before, and that was to set a time of the essence closing. Now, I've had a representation by [Abrahamovic-Kay's attorney] that there is funding to close this item and I'm sorely tempted to close it right now, to order it closed right now. But I think the more prudent approach should be to order it to close tomorrow. If it does not close by midnight tomorrow with the funds in the hands of the [third-party] plaintiff[s], then under those circumstances there will be a trial on the issue and the call for damages by the [third-party] plaintiff[s] will be something the Court may consider. But since [Abrahamovic-Kay's attorney] has made that representation that the funding is in place, by midnight tomorrow . . . .
I have to say it's one of the most unusual cases I've seen in a while. As I said, I don't sit here and criticize anybody. I know it's a rather contentious matter and I feel badly insofar that it's that for counsel. But I think because of what had occurred I cannot penalize [Abrahamovic-Kay] and I don't think that's what the law was ever intended to do. Because Mr. Kontos has an equitable interest as part of the [third-party] plaintiffs, he wasn't some independent third party stranger to the transaction, then it would behoove the Court not to strictly enforce the terms of the time of the essence and permit the extension since the Court called for the time of the essence to begin with.
An implementing order was entered on June 16, 2011. This appeal followed.*fn3 We denied Chris's application for an emergent stay, as did the Supreme Court.
On appeal, Chris argues that the General Equity judge erred in extending the time of the time-of-the-essence closing. First, he argues that the judge had no legal or equitable authority to extend the time. Second, he argues that, even if such an extension were permitted, there was no basis for the judge to have done so in this case. Third, in the alternative, Chris argues that the matter should be remanded to allow for discovery and, at least implicitly, an evidentiary hearing.
We turn first to the issue of whether there are any circumstances under which a time-of-the-essence closing date can be extended. We conclude that there are, but that they are very limited.
The general rule in New Jersey is that, when the parties to a contract for the sale of property agree that time is of the essence, "a Court of Equity is powerless to come to the relief of the Purchasers of property who have failed to pay at the time specified in the agreement." Doctorman v. Schroeder, 92 N.J. Eq. 676 (E. & A. 1921). See also Sonek v. Hill Bldg. & Loan Ass'n, 138 N.J. Eq. 534, 539 (Ch. 1946), aff'd o.b., 140 N.J. Eq. 108 (E. & A. 1947); Strauss v. Rabe, 97 N.J. Eq. 208, 211 (Ch.), aff'd o.b., 98 N.J. Eq. 700 (E. & A. 1925); Wachung Realty & Dev. Co. v. Llewellyn Holding Corp., 96 N.J. Eq. 498, 500 (Ch. 1924); Collins v. Delaney Co., 71 N.J. Eq. 320, 322-23 (Ch. 1906).
In Labash v. Mancini, 14 N.J. Super. 116, 120-21 (Ch. 1951), the parties set a date for closing and made time of the essence. The purchasers were thirty minutes late to the closing, having previously informed the sellers that they would be late. Id. at 120. When the sellers refused to continue with the sale, the purchasers filed an action for specific performance. The General Equity judge noted that the parties had a long history of disagreement, observing that the sellers had sought to repudiate the contract "[a]lmost before the ink of the contract was dry," that they "defaulted in the first instance," and that they "attempt[ed] to use a technicality," the purchaser's failure to arrive on time, "as a means of escape from their bargain." Ibid.
The judge ordered specific performance despite the purchaser's late arrival. Id. at 121. Citing Doctorman, he explained his decision by asserting that it is the aim of a court of equity, wherever possible, to relieve a purchaser from the forfeiture of his right to purchase property as a result of his failure to comply strictly with the terms of the contract. If the failure to comply is not deliberate or flagrant and there are no overriding equities, a court of equity will grant relief. [Id. at 120-21.]
Noting that the sellers "sought by every means in their power to break the agreement," the judge reasoned that relieving them of their obligation to sell the property "would be inequitable to the extreme." Id. at 121.
In Bertrand v. Jones, 58 N.J. Super. 273, 280-81 (App. Div. 1959), certif. denied, 31 N.J. 553 (1960), we relied on Labash in concluding that the purchasers had an "inadequate reason" to rely on a time-of-the-essence provision to refuse the sale when they provided documents for signature by the sellers, one of whom was absent, for the first time at closing. However, the case was actually decided in favor of the purchasers on other grounds. Id. at 287.
We questioned Labash in Gorrie, supra, 214 N.J. Super. at 105-07. We observed that the judge in Labash had not quoted all of the applicable language from Doctorman. Id. at 106. The full quotation from Doctorman is as follows: the aim of a court of equity appropriately would be always to relieve a purchaser, who had failed to comply strictly with the terms of a contract, from the forfeiture of his right to purchase a property, if it should be in the power of the court to do so. [Doctorman, supra, 96 N.J. Eq. at 676 (emphasis added).]
We noted that, except for Labash, the holding of Doctorman had been followed in subsequent opinions. Gorrie, supra, 214 N.J. Super. at 106. We observed that [m]aking time of the essence is an effective, time honored tool of contract administration and enforcement. It provides certainty and objectivity in the definition of rights and obligations between contracting parties, particularly when it has been negotiated between the parties and expressly made a part of their agreement. The alternative is a date for performance which is subject to adjournment and, ultimately, to a test of reasonableness applied by a trier of fact. The effectiveness of making time of the essence is dependent upon the expectation and understanding of the parties that their negotiated agreement requiring performance on a specified day and at a specified time will be strictly enforced without resort to litigation to determine whether the defaulting party's non-performance should be excused. Judicial tampering with the parties' agreement emasculates this tool and promotes litigation instead of the certainty and objectivity sought by the parties. [Id. at 107.]
Relying on Doctorman, we held that the purchaser, who was forty-five minutes late to the closing due to a "scheduling mixup," lost his rights under the contract because the seller had made time of the essence. Id. at 104, 106-08.
It is important to note that Doctorman was decided by the former Court of Errors and Appeals, the State's then highest court. Consequently, we are not at liberty to depart from the holding in that case, something that can only be done by the current Supreme Court. For that reason, we conclude that the trial judge did not have broad equitable powers to relieve Abrahamovic-Kay from the strictures of the time-of-the-essence provision she herself invoked. That does not, however, end the inquiry. There are circumstances in which the conduct of the party seeking to invoke a time-of-the-essence provision will justify a court's refusal to enforce it.
The right to enforce such a provision can be waived. "'Where time of performance is of the essence of the contract, a party who does any act inconsistent with the supposition that he continues to hold the other party to his part of the agreement will be taken to have waived it altogether.'" Marioni v. 94 Broadway, Inc., 374 N.J. Super. 588, 608 (App. Div.) (quoting 15 Williston, Contracts, § 46:14 at 477-78 (Lord ed., 2002)), certif. denied, 183 N.J. 591 (2005). It is clear that courts will make an exception to a time-of-the-essence provision where the parties' conduct represents a de facto waiver of such a provision. See, e.g., Salvatore v. Trace, 109 N.J. Super. 83, 91-92 (App. Div. 1969), aff'd o.b., 55 N.J. 362 (1970); Kerney v. Johnson, 104 N.J. Eq. 244, 246-47 (E. & A. 1929). We do not, however, find any facts in the record now before us that would warrant a finding of waiver.
In addition to waiver, a party whose actions unfairly prevented a timely closing cannot insist on enforcement of a time-of-the-essence provision. Specific performance is an equitable remedy that a court has the discretion to deny to a party with unclean hands. See Marioni, supra, 374 N.J. Super. at 599-600 (citations omitted).
In Borough of Princeton v. Board of Chosen Freeholders of Mercer, 169 N.J. 135, 158 (2001), the Supreme Court described the doctrine of unclean hands as follows:
The essence of that doctrine, which is "discretionary on the part of the court," Heuer v. Heuer, 152 N.J. 226, 238 (1998), is that "[a] suitor in equity must come into court with clean hands and he must keep them clean after his entry and throughout the proceedings." A. Hollander & Son, Inc. v. Imperial Fur Blending Corp., 2 N.J. 235, 246 (1949). "In simple parlance, it merely gives expression to the equitable principle that a court should not grant relief to one who is a wrongdoer with respect to the subject matter in suit." Faustin v. Lewis, 85 N.J. 507, 511 (1981).
To prevail on such a theory, however, the party seeking to avoid enforcement of a time-of-the-essence provision would have to demonstrate that the party seeking to invoke it wrongly prevented the closing. See Bertrand, supra, 58 N.J. Super. at 280-81. Nevertheless, it would not be enough to demonstrate that the closing was prevented by the good faith exercise of the enforcing party's own rights under the contract or by the conduct of a truly independent third-party.
Unfairly interfering with a time-of-the-essence closing could also be a violation of the "covenant of good faith and fair dealing [which] is implied in every contract in New Jersey." Wilson v. Amerada Hess Corp., 168 N.J. 236, 244 (2001) (citations omitted). The Supreme Court has held that, for a claim for breach of this covenant, "bad motive or intention is vital," and that "[t]he party claiming a breach . . . must provide evidence sufficient to support a conclusion that the party alleged to have acted in bad faith has engaged in some conduct that denied the benefit of the bargain originally intended by the parties." Brunswick Hills Racquet Club, Inc. v. Route 18 Shopping Ctr. Assocs., 182 N.J. 210, 225 (2005) (citations and internal quotation marks omitted).
As a result, we hold that the judge had authority to decline to enforce the time-of-the-essence clause and to force defendants to close with Abrahamovic-Kay and her companies, assuming there was an adequate basis for him to do so.
The basic premise of the judge's decision to order the closing to go forward despite Abrahamovic-Kay's earlier failure to close on May 5 was his conclusion that George's conduct at the closing precipitated the lender's decision not to fund the loan. The judge found that there was no reason for George to have raised the lawsuits at the closing, inasmuch as any potential harm related to them would not have been to the sellers. In fact, the judge observed that George had little if any interest in the transaction and no apparent role at the closing, although he did have a small equitable interest in the proceeds of the sale.
George's conduct, whether as someone with an equitable interest in the transaction or possibly as an employee or agent of the sellers, could potentially constitute the basis for a finding of unclean hands or breach of the implied covenant of good faith and fair dealing, especially if he was acting at Chris's behest or with his knowledge. However, based upon our review of the record and the applicable law, we are constrained to conclude that the judge's actions were based upon a factual record insufficient for the purpose. We must, therefore, remand to the General Equity Part for further proceedings.
Although the judge did considerable fact gathering during the hearing on the TRO application, he did not put anyone under oath, nor did he allow cross-examination of any of those who made the factual representations on which he relied. Compounding that problem, we note that much of the factual information relied upon by the judge came from the attorney for the lender who had attended the closing on May 5, crucial portions of which consisted of what she had been told by others, rather than her personal observation of George's conduct. Those crucial facts were based on hearsay, N.J.R.E. 801(c), the admissibility of which appears questionable.
George's interest in the restaurant and property being sold is also far from clear. Dietrich's verified complaint described George as owning a one-quarter interest in them, while Chris's certification in support of the TRO described Chris as the "primary/sole shareholder as the case may be." At the TRO hearing, Schibell described Chris as the "record owner." Nevertheless, George was at times an active participant in the litigation, represented by his own attorney. In addition, he had some sort of interest in the proceeds of the sale. He was also an employee of Chris and his corporation.
The record is silent on what, if any, understandings there were between Chris and George with respect to George's role at the closing. Schibell, who had been representing George individually but was representing both brothers at the TRO hearing, conceded that the brothers had previously been represented by separate counsel "because one brother was eager to sell and the other was reticent to sell." It is also not clear from the record whether George conducted himself at the closing in a manner designed to sabotage the closing, so that he and Chris could purchase Abrahamovic-Kay's interest, or whether the passing bankers merely overheard an argument among George and others by simple coincidence.
There is also a question as to the precise nature of Abrahamovic-Kay's duty to disclose the pending lawsuits to the lender. She asserts, and the judge found, that there was no such duty, and that her only obligation was to certify at closing that there were no conditions materially affecting the assets securing the loan. Yet, the lender gave AbrahamovicKay's failure to disclose the lawsuits as its reason for refusing to close. Consequently, it is not entirely clear whether and to what extent Abrahamovic-Kay shared responsibility for the failure to close and, if so, how such failure should be weighed in the balance for the purposes of determining whether to enforce the time-of-the-essence provision.
While we appreciate that there were indications that George's conduct caused the closing to fail and a sense of urgency to resolve the case expeditiously, they cannot justify the making of such a fact-sensitive decision on the record then before the judge. There was a need for a factfinding hearing, however brief, at which the facts could have been developed through competent testimony, with each side allowed to present its evidence and to challenge the evidence presented against it. It could have been done expeditiously, probably within a day or two of the TRO hearing.
The facts in this case are not so clear that such a hearing could appropriately be dispensed with on the theory that they were uncontested. Consequently, a remand is necessary.
Although the relief granted was within the judge's legal authority to grant, there was an insufficient record to support the granting of that relief at the TRO hearing. Nevertheless, we do not vacate the order on appeal because the remand may not change the ultimate result, and we see no reason to undo the sale until it has been determined that it is necessary to do so.
Instead, we remand to the General Equity judge for reconsideration.
On remand, the judge shall expeditiously hold an evidentiary hearing. He shall then reconsider his decision based upon the facts as he finds them and the law as outlined in our opinion. If he reaches the same conclusion, he shall enter an appropriate order. If he reaches a different result, he shall make whatever provisions are appropriate to implement that decision. The order resulting from the remand will be appealable by any party. We do not retain jurisdiction.