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Kaible v. Gropack

Superior Court of New Jersey, Appellate Division

June 14, 2013

GARY KAIBLE, Plaintiff-Respondent,
RANDI GROPACK, an individual, ALAN GROPACK, an individual, MICHAEL LAKE, an individual, and PARTNERS IN STAFFING, INC., Defendants-Appellants.


Submitted May 20, 2013

On appeal from the Superior Court of New Jersey, Law Division, Monmouth County, Docket No. L-3446-09.

Keith, Winters & Wenning, attorneys for appellants (Michael J. Wenning, on the brief).

Nicoll, Davis & Spinella, LLP, attorneys for respondent (Jack T. Spinella and Steven C. DePalma, on the brief).

Before Judges Parrillo, Fasciale and Maven.


Defendants Randi Gropack, Alan Gropack, [1] Michael Lake, and Partners In Staffing, Inc. (the "Company") (collectively, "defendants') appeal from a July 28, 2011 order entering a judgment in plaintiff's favor on liability, and a May 31, 2012 judgment awarding plaintiff damages and attorneys' fees. Defendants argue primarily that the judgments are against the weight of the evidence. We disagree and affirm.

In July 2009, plaintiff filed his complaint alleging that defendants "froze[]" him out of his own [C]ompany, N.J.S.A. 14A:12-7(1)(c) (Count One); committed fraud (Count Two); and acted with malice and intentional disregard for the consequences of their actions (Count Three). The court bifurcated liability and damages and conducted two bench trials. In July 2011, Judge John T. Mullaney, Jr., tried the case on liability and issued a written decision in plaintiff's favor. In March 2012, Judge Jamie S. Perri tried the case on damages and issued a written decision awarding to plaintiff $289, 000 in compensatory damages and awarding $22, 380.30 in post-judgment interest, and $102, 300.73 in counsel fees. We discern the following facts adduced at the trials.

In early 2007, plaintiff and Alan formed the Company, which provided information technology consulting services. The Company's original shareholders were plaintiff and Randi. Alan placed his shares in his wife's name because, according to plaintiff, Alan owed money to the IRS. Alan's name was not used in forming the business. The Company struggled in the beginning.

At some point towards the end of 2007, Alan and plaintiff offered Lake a position in the Company as an equal partner. Lake then consulted his own counsel and presented a Stock Transfer Agreement (STA) to plaintiff, which provided that Lake, Randi, and plaintiff's ownership would now each become 33.3%. Plaintiff signed the STA and returned it to Lake, and Lake subsequently informed him that it had been executed but Lake did not provide plaintiff with a copy, despite plaintiff's repeated requests. Alan became the president, Lake the CEO, and plaintiff the sales director.

In 2007, the Company performed well, and in 2008, the Company generated additional profits primarily because of one client: HSCB, which plaintiff asserts he brought to the Company in large part due to his prior years-long work experience with HSCB. According to plaintiff, he was responsible for ninety-five percent of the revenue, while both Lake and Alan made up about five percent.

Plaintiff began asking Alan for certain financial information, but Alan denied plaintiff any access to the Company's books or records and stated that plaintiff "had to focus on [their] business and that [Alan] was in control of" the books. The Company's 2008 tax disclosure shows gross income of $2, 978, 884, substantially more than the Company earned in 2007.

In January 2009, Alan and Lake approached plaintiff, informed him that the Company was experiencing "financial difficulties, " and stated that they wanted him to step down as an owner. According to plaintiff, they were "trying to push [him] out . . . to get direct relationships with [his] customers." On January 20, 2009, Lake sent plaintiff an email instructing plaintiff to continue performing his duties for the Company, but that he would no longer receive a salary; rather, he would be paid based on commission. In the email, Lake noted that there were some disagreements between plaintiff and the others. The email provides that Lake and Alan would determine plaintiff's payment structure, and that this "is a transition into a new role for [plaintiff]." Plaintiff testified that nothing in particular preceded the email – it "c[a]me out of the blue." Subsequently, Lake told plaintiff that plaintiff would no longer render services as an officer or a partner in the Company, and that he and Alan would "work out a [c]ompensation [p]lan and a [c]ommission [s]tructure for" plaintiff.

Plaintiff testified that the owners were due to be paid three days after the email, on January 23, 2009, but he never received his payment. When he asked for his check, Alan and Lake responded that they could not "believe [he would] even ask[] that"; they "told [plaintiff that he's] no longer working for the [C]ompany" and "why would [he] expect to get paid." Plaintiff expressed to both of them that they had no right to remove him. Thereafter, plaintiff left and began working for a company he used to work for (Infinite Technology), and he also drove a taxi.

Alan conceded that when they first started the Company, all of the stock was in Randi's name. Alan admitted that Randi opened the bank account for the Company, that she had signature authority to write checks on the account, that the Company used his and Randi's home address for business purposes. Alan testified that they did not terminate plaintiff, and that they never indicated to plaintiff that his corporate stock or ability to discuss corporate matters would be affected.

Lake testified that he sent the January 20 email as a "recommendation to allow [plaintiff] to earn the money that he needed to stay on board with [the C]ompany." He also stated that the email served as a "recommendation of how [plaintiff could] continue on" with the Company. Lake explained that "transition" in the email meant a change in plaintiff's "daily responsibilities" – "transition[ing] from an outside sales [position] into inside sales." According to Lake, it was a "simple recommendation."

On appeal, defendants argue that the court erred by finding (1) they violated N.J.S.A. 14A:12-7(1)(c); (2) plaintiff was a full one-third owner of the Company; (3) Randi was personally liable; and (4) the STA was binding on all of the parties. Defendants also contend that the judge erred by awarding plaintiff attorneys' fees.

Our "review of a trial judge's findings is a limited one." Bd. of Educ. of City of Clifton v. Zoning Bd. of Adjustment, 409 N.J.Super. 389, 425 (App. Div. 2009). We "will reverse only if we are convinced the trial judge's factual findings and legal conclusions are so manifestly unsupported by or inconsistent with the competent, relevant[, ] and reasonably credible evidence as to offend the interests of justice." Ibid. (internal quotation marks omitted). "However, '[a] trial court's interpretation of the law and the legal consequences that flow from established facts are not entitled to any special deference[]' and is subject to de novo review." Ibid. (quoting Manalapan Realty v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995)).

"Deference is especially appropriate when the evidence is largely testimonial and involves questions of credibility." Seidman v. Clifton Sav. Bank, S.L.A., 205 N.J. 150, 169 (2011) (quoting Cesare v. Cesare, 154 N.J. 394, 411-12 (1998)). Moreover, this court gives "'substantial deference to a trial court's evidentiary rulings'" and reviews such rulings under an abuse of discretion standard. Benevenga v. Digregorio, 325 N.J.Super. 27, 32 (App. Div. 1999) (quoting State v. Morton, 155 N.J. 383, 453 (1998)), certif. denied, 163 N.J. 79 (2000). "An abuse of discretion 'arises when a decision is made without a rational explanation, inexplicably departed from established policies, or rested on an impermissible basis.'" Milne v. Goldenberg, 428 N.J.Super. 184, 197 (App. Div. 2012) (quoting Flagg v. Essex Cnty. Prosecutor, 171 N.J. 561, 571 (2002)).

We reject defendants' argument that the court erred by finding they violated N.J.S.A. 14A:12-7(1), the Oppressed Shareholder Statute, which provides in pertinent part:

(1) The Superior Court, in an action brought under this section, may appoint a custodian, appoint a provisional director, order a sale of the corporation's stock as provided below, or enter a judgment dissolving the corporation, upon proof that
. . . .
(c) In the case of a corporation having [twenty-five] or less shareholders, the directors or those in control have acted fraudulently or illegally, mismanaged the corporation, or abused their authority as officers or directors or have acted oppressively or unfairly toward one or more minority shareholders in their capacities as shareholders, directors, officers, or employees.
[(Emphasis added).]

In enacting subsection (1)(c), "[t]he [L]egislature intended to expand the protection available to minority shareholders 'who are powerless within a corporation, as well as powerless to leave.'" Muellenberg v. Bikon Corp., 143 N.J. 168, 178 (1996) (quoting Brenner v. Berkowitz, 134 N.J. 488, 506 (1993)).

The Legislature enacted subsection (1)(c) "in response to the failure of traditional principles of corporate law, such as the business judgment rule, to curb these abuses." Id. at 179; see Grato v. Grato, 272 N.J.Super. 140, 152 (App. Div.) ("[J]udicial consideration of a claim of majority oppression or freeze-out in a closely held corporation is guided by considerations broader than those espoused in . . . the 'business judgment rule.'"), certif. denied, 138 N.J. 264 (1994). Moreover, "the business judgment rule . . . actually [has] only limited validity in small business corporations." Muellenberg, supra, 143 N.J. at 177 (internal quotation marks omitted). To determine whether a particular course of conduct has oppressed a minority shareholder in violation of subsection (1)(c), "courts should examine the understanding of the parties concerning their roles in corporate affairs." Id. at 179. After determining the parties' initial understanding of the shareholders' roles, the court can then decide whether the shareholders acted oppressively. Ibid. Oppressive conduct includes "that which frustrates the reasonable expectations of the minority shareholder." Ibid.

Courts must be "flexible in their treatment of [N.J.S.A.] 14A:12-7(1)(c) cases because of the fact-sensitive nature of their inquiry." Ibid. Nevertheless, "courts should always be wary of interfering in the internal affairs of a corporation." Id. at 180. As such, "'[m]ere disagreement or discord between the shareholders is not sufficient for a violation of the close corporation statutory provision.'" Ibid. (quoting Brenner, supra, 134 N.J. at 506). "Ordinarily, oppression by shareholders is clearly shown when they have awarded themselves excessive compensation, furnished inadequate dividends, or misapplied and wasted corporate funds, " but that is not always the case. Ibid. In the small corporation, "[t]he remaining measure of oppression . . . is whether the fair expectations of the parties have been met." Ibid. One "who buys a minority interest in a close corporation does so, not only in the hope of enjoying an increase in the value of the shareholder's stake in the business, but for the assurance of employment in the business in a managerial position." Id. at 180-81. In addition, such a shareholder can reasonably expect to have "a voice in the operation and management of the business and the formulation of its plans for future development." Id. at 181.

The voting power of the controlling shareholders "enables them to freeze-out minority shareholders by terminating their employment, excluding them from participation in management decisionmaking, and reducing their salary and other income." Id. at 176. A minority shareholder's "vulnerability" is "exacerbated by the illiquidity of [his or her] financial stake in the company." Ibid. Furthermore, "claims of oppression are typically remedied by arranging for the corporation or the majority shareholders to buy out the interests of the minority shareholder." Id. at 182. Courts "have a wide variety of equitable remedies . . . available to them, " and are not limited to statutory remedies. Id. at 183.

The New Jersey Supreme Court addressed the Oppressed Shareholder Statute in Muellenberg, supra. There, three individuals – Muellenberg, Burg, and Passerini – formed a company and executed a stockholders' agreement encompassing their respective shares and positions as officers of the company. Id. at 171-72. Muellenberg complained that Burg acted as though he had exclusive control over the company and instituted the proceeding seeking a dissolution of the company. Id. at 172-73. Burg counterclaimed, seeking that Muellenberg sell his stock to Burg. Id. at 173. Muellenberg and Passerini held a shareholders' meeting outside Burg's presence wherein they, among other things, issued a large dividend to each other and authorized Muellenberg alone, or with Burg, to make future bank withdrawals. Ibid. The trial court found that Muellenberg and Passerini had begun efforts to freeze out Burg at the meeting, and that "despite the lack of any showing of abuse by Mr. Burg in operating the company, they began to strip Burg of his day-to-day control as general manager by resolving that bank account withdrawals should be made only by plaintiff or by joint signatures of plaintiff and defendant Burg." Id. at 174. Thus, the trial court found that they acted oppressively towards Burg and ordered that Burg, as minority shareholder, buy-out Muellenberg and Passerini's shares. Id. at 174-75.

The Court discussed the history of minority oppression legislation, id. at 176, and then stated that "the expectations of Muellenberg and Passerini that they might exercise majority power conflicted with the expectations of Burg, " id. at 181. "Due in large measure to Burg's efforts, " the company became profitable, and he could not reasonably expect that after his years of service to the company, he would be frozen out. Ibid. Therefore, the Court held that the trial court did not abuse its discretion and upheld its finding that Burg was an oppressed minority shareholder. Id. at 183.

Here, plaintiff testified that he was forced out of the Company, excluded from participating in any management or decisionmaking, and was required to assume a different position within the Company at Alan and Lake's command. The judge determined that the January 20, 2009 email "clearly delineate[d] to [plaintiff] that his role in the [C]ompany was changing, his method of compensation was changing and that he had no control over either, " and that "Alan . . . was going to determine what [plaintiff's] payment or commission structure was and that combination with Mr. Lake, [Alan] would further define and limit the activities of [plaintiff] in this [C]ompany." In addition, Lake informed plaintiff that he would no longer render services as an officer in the Company. Moreover, plaintiff never received the final paycheck that he testified was owed to him, and Alan "had the ability to make unauthorized expenditures" to plaintiff's detriment. Alan was in "sole possession" of the Company's books and records and refused to provide plaintiff with access to such.

Similar to Muellenberg, the oppressed minority shareholder here – plaintiff – was largely responsible for the Company's success by way of his HSBC client, and he could not have reasonably expected to have been frozen out after his years of service to the Company. In assessing credibility, the liability judge stated that "the [c]ourt [did] not find the testimony of [Alan and Lake] to be . . . convincing or persuasive in attempting to refute or rebut the testimony of the [p]laintiff." As indicated in Muellenberg, supra, 143 N.J. at 179, the Legislature enacted subsection (1)(c) "in response to the failure of traditional principles of corporate law, such as the business judgment rule, to curb these abuses." See Grato, supra, 272 N.J.Super. at 152.

Next, defendant argues that the judge erred by finding plaintiff to be a one-third owner in the Company. The judge heard testimony from each of the parties and found plaintiff more credible. Plaintiff testified at length that he was a one-third owner of the Company. Also, Alan conceded that the stock was never actually transferred to another individual — Maggie Duckstad — with ties to the Company post-formation; instead, her minority share would be realized upon a sale of the Company. In addition, the Company's 2008 tax return Schedule K-1 lists plaintiff's percentage of stock ownership as 33.3%. The 2009 tax returns list plaintiff, Randi, and Lake as 31.5% owners, and Duckstad as a 5.5% owner. Plaintiff, however, left the Company in January 2009. Thus, the judge's findings are not "so manifestly unsupported by or inconsistent with the competent, relevant[, ] and reasonably credible evidence as to offend the interests of justice." Bd. of Educ. of City of Clifton, supra, 409 N.J.Super. at 425.

Additionally, defendants argue that Randi had no active involvement in the Company, and that the judge found Randi "had nothing to do with the day[-]to[-]day operation of the Company." We conclude that the judge did not err by finding that Randi was personally liable.

"The imputation doctrine is derived from common law rules of agency relating to the legal relationship among principals, agents, and third parties." NCP Litig. Trust v. KPMG LLP, 187 N.J. 353, 366 (2006). Under those rules, "a principal is deemed to know facts that are known to its agent." Ibid. "Courts have used interchangeable terms to express this legal rule with some describing the principal as 'imputed' with the agent's knowledge and others stating that the principal has 'constructive knowledge.'" Ibid. (citations omitted). Moreover, "implied notice is invocable to protect the innocent." Id. at 366-67 (quoting Nischne v. Firestone Tire & Rubber Co., 116 N.J. Eq. 305, 308 (Ch. 1934), aff'd o.b., 119 N.J. Eq. 541 (E. & A. 1936)). As such, principals "are prevented from obtaining benefits through their agents while avoiding the consequences of agent misdeeds." Ibid. (internal quotation marks omitted).

Here, plaintiff conceded that Randi had nothing to do "hands-on with the day-to-day operation of the business." Nevertheless, the judge found that Randi acted as a "straw man" for Alan, and that he could not act as though he were a shareholder in the Company without her consent and knowledge. Although Randi did not participate in the daily operation of the Company, the Company was formed in her name, she had signature authority to write checks on the account, and she earned a $7000 management fee. Moreover, the judge found that Randi brought "on to herself a legal status as a minority shareholder who adopts the actions of her husband who acted on her behalf." see NCP Litig. Trust, supra, 187 N.J. at 366-67. Without Randi being a part of the Company, Alan would have no business interest in the Company. Therefore, the judge did not err in finding Randi personally liable.

Next, we see no error in awarding plaintiff attorneys' fees pursuant to N.J.S.A. 14A:12-7(8)(d). We review a trial judge's award of attorneys' fees under an abuse of discretion standard. Musto v. Vidas, 333 N.J.Super. 52, 71-72 (App. Div.), certif. denied, 165 N.J. 607 (2000); see Milne, supra, 428 N.J.Super. at 197 (defining abuse of discretion). N.J.S.A. 14A:12-7(8)(d) provides that

(8) Upon motion of . . . any shareholder who is a party to the proceeding, the court may order the sale of all shares of the corporation's stock held by any other shareholder who is a party to the proceeding to either the corporation or the moving shareholder or shareholders, whichever is specified in the motion, if the court determines in its discretion that such an order would be fair and equitable to all parties under all of the circumstances of the case.
(d) Interest may be allowed at the rate and from the date determined by the court to be equitable, and if the court finds that the refusal of the shareholder to accept any offer of payment was arbitrary, vexatious, or otherwise not in good faith, no interest shall be allowed. If the court finds that the action was maintainable under paragraph [N.J.S.A.] 14A:12-7(1)(c), the court in its discretion may award to the selling shareholder or shareholders reasonable fees and expenses of counsel and of any experts, including accountants, employed by them.
[(Emphasis added).]

The trial judge is not "required to find that defendants acted in bad faith in order to award plaintiff counsel fees pursuant to" subsection (8)(d), but rather, "that the judge find that shareholder oppression took place." Musto, supra, 333 N.J.Super. at 71.

Here, Judge Perri awarded plaintiff counsel fees and expert fees pursuant to N.J.S.A. 14A:12-7(8)(d). The judge also found that the STA entitles plaintiff to attorneys' fees. The judge stated:

In light of the lack of merit[, ] the court has found in defendants' position on the issue of damages, and defendants' failure to make a good faith offer to purchase plaintiff's stock consistent with Judge Mullaney's prior order, the court finds that it is fair and reasonable to exercise its discretion under N.J.S.A. 14A:12-7(8)(d) and award plaintiff reasonable costs and counsel fees . . . . Plainitff is similarly entitled to reimbursement pursuant to the [STA]. . . .

Additionally, the judge reviewed plaintiff's counsel's certification of services and found the services rendered were "fair and reasonable" because the services covered "approximately [three] years and . . . involved [two] bench trials."

Finally, the judge did not err by holding that the STA was binding on all parties. We are not "convinced [that] the trial judge's factual findings and legal conclusions are so manifestly unsupported by or inconsistent with the competent, relevant[, ] and reasonably credible evidence as to offend the interests of justice." Bd. of Educ. of City of Clifton, supra, 409 N.J.Super. at 425. Here, the judge found plaintiff's testimony, regarding the STA and his execution of it, to be credible, while rejecting defendants' testimony as "not convincing or persuasive." As to the STA, the judge stated:

What's becoming painfully obvious in this case is not so much what we have, it's what we don't have. There's an awful lot of documentation that is lacking.
And[, ] the [STA] that [plaintiff] testified to, he said he received it. It's on attorney's letterhead. He signed it, he sent it back in. That goes to the weight, not the admissibility.

This court gives "substantial deference" to the judge's decision to admit the STA into evidence. Benevenga, supra, 325 N.J.Super. at 32. There is adequate support for the judge's findings. Plaintiff testified that Lake, who was CEO of the Company, produced the STA for plaintiff's signature after consulting with a law firm; plaintiff signed it and returned it to Lake; Lake informed plaintiff that it had been executed, but refused to provide him with a copy; and plaintiff believed that the STA was signed, properly executed, binding on the three parties, and valid. Specifically, plaintiff testified:

[PLAINTIFF]: The document that I see here in front of me[, the STA, ] was presented to me and Alan . . . by Mr. Lake, at which time I did sign my portion of it and [gave] it back to Mr. Lake, at which time I was told that it was going to be executed by this law firm. Later on, I was told by Mr. Lake it had been executed. When I asked Mr. Lake for a copy of it[, ] I never received a copy back from him.
[COURT]: The copy that you have in front of you, go to the last page. There[ are] two signature blanks. I don't see your name. And you say you signed this?
[PLAINTIFF]: Yes, I did, sir.
. . . .
[COURT]: How did you get your copy of [the STA]?
[PLAINTIFF]: Via an email, sir.
[COURT]: And you signed a hard copy?
[PLAINTIFF]: [Yes, and I] handed it to Mr. Lake.
[COURT]: Handed it[?]
[PLAINTIFF]: Yes, because . . . it was not acceptable as a faxed or emailed scanned copy. It had to be the original.
. . . .
[PLAINTIFF'S COUNSEL]: [J]ust to be clear[, ] you don't have a signed copy of your [STA]?
[PLAINTIFF]: No. Every time I requested it from Mr. Lake[, ] he said no problem, next time I see you I'll give it to you. That never happened.
[PLAINTIFF'S COUNSEL]: But nonetheless it was your understanding that —
[PLAINTIFF]: It was completed.
[PLAINTIFF'S COUNSEL]: — the [STA] was valid and you were operating by that?
[PLAINTIFF]: Yes, sir.
[PLAINTIFF'S COUNSEL]: What was your belief as to [Alan] and Mr. Lake's view of this [STA] in August of 2007?
[PLAINTIFF]: It was understood from day one that we all owned [thirty-three] percent of the [C]ompany. After I seen there [were] concerns about the partners I was involved with, I asked them to please make it legal. At which point Mr. Lake reached out to this law firm to get the proper documents drawn up, of which was given to me in and around the middle of August, at which time I signed it and handed it back to Mr. Lake. . . .
[COURT]: Who [were] going to be the shareholders, one-third, one-third, one-third?
[PLAINTIFF]: Randi Gropack, Mike Lake, and [plaintiff].
. . . .
[PLAINTIFF'S COUNSEL]: [Did you have any concerns that the STA] wasn't valid because you didn't have it?
[PLAINTIFF]: I never questioned it. I was in firm belief that we all owned a third of the [C]ompany. . . .
. . . .
[PLAINTIFF'S COUNSEL]: Shortly after the [STA] was signed by you, did [Alan] or Mr. Lake ever express concern that this thing wasn't consummated, wasn't signed?
[PLAINTIFF]: None whatsoever. I was told and led to believe by both of them that it was all taken care of.

Plaintiff provided sufficient testimony regarding the STA. In addition, Alan's presence during STA-related conversations and his lack of objection suggests that the STA was binding on all three shareholders: Randi, Lake, and plaintiff.


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