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Magna Fabrics, Inc. v. New York Art & Shipping, LLC

Superior Court of New Jersey, Appellate Division

August 8, 2013

MAGNA FABRICS, INC., Plaintiff-Respondent,


Argued February 12, 2013

On appeal from Superior Court of New Jersey, Law Division, Hudson County, Docket No. L-3436-10.

Edward S. Kiel argued the cause for appellant Juil Pang (Cole, Schotz, Meisel, Forman & Leonard, attorneys; Mr. Kiel, on the brief).

Howard B. Leopold argued the cause for respondent Magna Fabrics, Inc. (Goodman & Leopold, attorneys; Mr. Leopold, on the brief).

Before Judges Messano and Kennedy.


Defendant Juil Pang appeals from a judgment for $821, 079 entered against him and in favor of plaintiff Magna Fabrics, Inc. (Magna or plaintiff), on an alleged oral guaranty of a lease between plaintiff and defendant New York Art & Shipping, LLC (NY Art). The jury found that defendant did not guarantee the lease in writing, but that he verbally guaranteed the lease. Further, although the jury was instructed not to proceed to the issue of piercing the corporate veil if it found a written or verbal guaranty to exist, it did so and found defendant liable on that theory of liability, as well.

On appeal, defendant claims there was no evidence supporting the alleged "oral" guaranty and thus the issue should not have been submitted to the jury, and that a new trial is warranted on the cause of action to pierce the corporate veil because of errors in the jury instructions. We agree, and vacate the judgment and remand for further proceedings consistent with this opinion.

We discern the following facts from the record.


NY Art is a limited liability company created by defendant Kiang Park (Park). Park and defendant were friends and members of the same church. Park borrowed $150, 000 from defendant, which was deposited in NY Art's bank account. Defendant and Park maintained that defendant was neither an owner nor an officer of NY Art, but that defendant simply lent Park money in order to help a fellow church member.

Lawrence Fink (Fink) is the president and owner of Magna, which owned a warehouse in North Bergen. Magna routinely leased the warehouse to other companies. Fink first met defendant and Park in the spring of 2008, at which time they discussed plans to rent Magna's warehouse. Fink claimed that defendant and Park represented at that time they were the owners of NY Art.

At a second meeting on June 13, 2008, Fink obtained "information disclosure agreements" from Park and defendant in order to obtain credit checks on them. Fink also wanted personal guaranties from defendant and Park. The credit checks revealed that defendant had good credit, but that Park had a bad credit history. Consequently, Fink felt that only defendant's personal guaranty really mattered. Fink also stated that both defendant and Park agreed to be personally bound on any lease of the warehouse by NY Art.

An initial draft of the lease for the warehouse listed NY Art as tenant and defendant and Park as guarantors. The final draft of the lease (the lease) also included personal guaranties by defendant and Park. While Park signed the lease on behalf of NY Art, however, defendant never signed the lease or any personal guaranty of the lease.

NY Art took possession of the premises in August 2008, and Magna later filed an eviction action against it for failure to pay rent. In June 2009, Magna obtained a judgment of eviction against NY Art.

Thereafter, plaintiff filed its complaint against NY Art, two other corporations that occupied the property as subtenants, Park and defendant, alleging breach of contract, fraud, fraudulent conveyance, and a cause of action against the individual defendants seeking to pierce the corporate veil. The breach of contract claim was based on an allegation that defendant and Park executed a written personal guaranty of NY Art's obligations under the lease. The other claims against defendant and Park were based on allegations that NY Art and other corporate defendants were alter egos of the individual defendants who operated them in a manner that resulted in fraud and injustice.

On August 23, 2011, a default judgment was entered against the two corporations, in the amount of $578, 937. NY Art also defaulted, and on December 28, 2011, Park filed a bankruptcy petition, which stayed the case as against him, leaving defendant as the only defending party at the time of trial.

A jury trial took place in January 2012. Following the close of testimony, defendant moved for a directed verdict, arguing that plaintiff had failed to make a prima facie case on any cause of action. The trial judge denied the motion for directed verdict.

Also, the parties submitted proposed jury charges. The parties disagreed on the charge respecting the effect of the statute of frauds, N.J.S.A. 25:1-15, on an alleged oral guaranty, a cause of action plaintiff had not specifically pled, and the charge pertaining to piercing the corporate veil. Over defendant's objection, the trial judge charged the jury on an alleged oral guaranty of the lease made by defendant. A jury verdict form was also presented to the jury.

The jury dead-locked on whether defendant signed a written guaranty. The jury voted "yes" on whether defendant verbally agreed to guarantee the lease (Question #2). The instructions on that question directed the jury to proceed directly to Question #6 (damages) if it answered "yes" to Question #2, but the jury disregarded that instruction and proceeded to answer Questions #3, #4, and #5, concerning the claim on piercing the corporate veil. Those questions were answered in the affirmative. The jury awarded plaintiff $821, 075, and the judgment was later amended to include $74, 820.92 in counsel fees.

Defendant filed a motion for judgment notwithstanding the verdict or, alternatively, for new trial, and the motion was denied by the trial judge.

This appeal followed.


Defendant argues on appeal that the jury's finding that he orally guaranteed the NY Art lease is against the weight of the evidence. Defendant also argues that the jury instructions failed to properly explain the legal principles governing enforcement of oral guaranties and piercing the corporate veil.

A new trial should be granted if, "having given due regard to the opportunity of the jury to pass upon the credibility of the witnesses, it clearly and convincingly appears that there was a miscarriage of justice under the law." R. 4:49-1. A new trial is required if erroneous trial rulings or erroneous or confusing jury instructions prejudiced a party. See, e.g., Crawn v. Campo, 136 N.J. 494, 511-12 (1994); Conklin v. Hannoch, Weisman, P.C., 281 N.J.Super. 448, 454 (App. Div. 1995), modified, 145 N.J. 295 (1996). A new trial is also required if the jury's verdict is "'contrary to the weight of the evidence or clearly the product of mistake, passion, prejudice or partiality.'" Crawn, supra, 136 N.J. at 512 (quoting Lanzet v. Greenberg , 126 N.J. 168, 175 (1991)).


We turn first to the argument that there was insufficient evidence of an oral promise to guarantee the obligations under the lease, and that the issue, therefore, should not have been submitted to the jury.

A guaranty is the promise to be liable for the obligation of another person. Garfield Trust Co. v. Teichmann, 24 N.J.Super. 519, 526-27 (App. Div. 1953). Essentially, "[u]nder a guaranty contract, the guarantor, in a separate contract with the obligee, promises to answer for the primary obligor's debt on the default of the primary obligor." Feigenbaum v. Guaracini, 402 N.J.Super. 7, 18 (App. Div. 2008); Great Falls Bank v. Pardo , 263 N.J.Super. 388, 398 n.5 (Ch. Div. 1993) ("A guaranty is a separate and independent contract." (citation omitted)), aff'd, 273 N.J.Super. 542 (App. Div. 1994). Therefore, when resolving questions regarding the interpretation of a guaranty, we look to the rules governing construction of contracts generally. Ctr. 48 Ltd. P'ship v. May Dep't Stores Co. , 355 N.J.Super. 390, 405 (App. Div. 2002); Garfield Trust Co., supra, 24 N.J.Super. at 526.

Here, the jury determined plaintiff did not prove that defendant signed a written personal guaranty, but that defendant verbally agreed to guarantee NY Art's obligation under the lease. Ordinarily, we must defer to the jury's judgment, and not substitute our own unless it "clearly appears that there was a miscarriage of justice under the law." Walder, Sondak, Berkeley, & Brogan, supra, 300 N.J.Super. at 79 (quoting R. 2:10-1; citing Dolson v. Anastasia , 55 N.J. 2, 6-7 (1969)). While there was some evidence at trial that defendant discussed a guaranty of the lease with Fink, such discussion was insufficient to support a finding that an oral guaranty was, in fact, given by defendant.

Simply put, a promise to sign a contract does not give rise to a contract. See Morton v. 4 Orchard Land Trust , 180 N.J. 118, 124 (2004) (rejecting plaintiff's claim that an oral contract had been formed, concluding that "the parties intended to be bound only by a formal written contract, not by an oral agreement"). In other words, if a person says that he will sign a written guaranty, but then fails to do so, that fact alone is insufficient to support an oral guaranty, because a promise to sign a contract does not give rise to an oral contract. Because the only evidence adduced at trial was that defendant promised he would give a guaranty of the lease, but did not, in fact, give one, defendant's motion for judgment notwithstanding the verdict on this issue should have been granted.

This error was compounded by the judge's insufficient jury instructions regarding the effect of the statute of frauds on personal guaranties. The trial judge instructed the jury that "A personal guaranty may be oral if the person making the promise . . . would serve his or her own interest." This instruction was improper because it permitted the jury to find an oral guaranty existed if such a guaranty generally served an interest of the guarantor. Further, it allowed the jury to find defendant liable on an alleged oral guaranty without also finding that the "leading object" of the guaranty was for some personal purpose of defendant.

The statute of frauds bars the enforcement of oral agreements to guarantee the debts of another. N.J.S.A. 25:1-15. However, when the "leading object" of the alleged oral promise to guarantee the debt of another is to further the individual interest of the guarantor, the statute of frauds will not bar enforcement of the promise. Howard M. Schoor, Assocs., Inc. v. Holmdel Heights Constr. Co. , 68 N.J. 95, 102-05 (1975) (recognizing the exception under the prior statute of frauds and concluding that a shareholder's purpose to further his own business interest was adequate to support his oral guaranty of the corporation's loan) (quoting 2 Corbin on Contracts § 366, at 273-74 (1950)). See also Walder, Sondak, Berkeley, & Brogan, supra, 300 N.J.Super. at 75-76 (concluding that the "leading object" exception survived subsequent amendment of the statute of frauds and that the evidence was adequate to permit a finding that the corporation assumed responsibility for an associate's debt in order to further its own interests).

The Supreme Court has held that, "[i]f the only expected gain to the promisor is in the protection of the value of his shares, the promise is held to be within the statute; but there are cases in which the promisor was found to have received a special benefit that constituted his 'leading object' and made him an original debtor." Schoor, supra, 68 N.J. at 105 (quoting 2 Corbin, supra, § 372 at 298-99). Thus, the benefit to the promisor cannot be merely incidental; it must be mainly for the promisor's individual benefit. Id . at 106. Clearly, undertaking any obligation will usually serve someone's own self-interest, but it may not be the leading object or main purpose for doing so, which is precisely what the jury needs to decide in such cases.

In applying this rule, the trier of fact would have had to consider the totality of the circumstances of the transaction, and the parties' relationship and would then have to discern the promisor's intent, purpose and object. Id . at 105. Thus, "it becomes important, and probably decisive, to determine what interest, purpose or object was sought to be advanced by defendant's promise . . . ." Id . at 102. The jury here, however, did not consider any of the above factors because the trial judge improperly instructed the jury on the "leading object" or "main purpose" exception. These instructions not only misstated the law, but also prompted the jury to find an oral guaranty existed, despite insufficient evidence.

Given the absence of evidence that any oral guaranty of the NY Art lease was made by defendant, in the first instance, the trial judge erred in denying defendant's motion for a directed verdict.


Defendant also argues that he should not have been found liable on the lease based on the principle of piercing the corporate veil because the jury erred in even considering the question and the jury instructions misstated the law.

The jury was instructed that, if they found defendant verbally agreed to guarantee the lease, they were to proceed directly to the question on damages. However, the jury proceeded to answer all of the questions on the jury verdict form, specifically those regarding piercing the corporate veil, despite having found an oral guaranty. It is unclear whether that undertaking by the jury reflected confusion over procedure or confusion over the substantive legal issues as well. Nonetheless, we find the jury instructions to be inadequate, and, thus, we reverse the judgment and remand for a new trial.

The doctrine of piercing the corporate veil was developed to prevent the corporate form from being used to defeat the ends of justice, perpetrate fraud, accomplish a crime, or otherwise evade the law or be a vehicle for an illegitimate purpose. N.J. Dept. of Envtl. Prot. v. Ventron Corp. , 94 N.J. 473, 500 (1983) (mere showing of dominance or control is not sufficient unless fraud, illegality, or injustice is also involved). A party seeking to pierce the corporate veil separating entity from owner bears the burden of proving that doing so is appropriate. Richard A. Pulaski Constr. Co. v. Air Frame Hangars, Inc., 195 N.J. 457, 472 (2008); Verni ex rel. Burstein v. Stevens , 387 N.J.Super. 160, 199 (App. Div. 2006), certif. denied, 189 N.J. 429 (2007). The issue is one for the factfinder, "unless there is no evidence sufficient to justify disregard of the corporate form." Verni, supra, 387 N.J.Super. at 199.

"[A] corporation is an entity separate from its stockholders[, ]" and "[i]n the absence of fraud or injustice, courts generally will not pierce the corporate veil to impose liability on the corporate principals." Lyon v. Barrett, 89 N.J. 294, 300 (1982). See also Frank v. Frank's, Inc. , 9 N.J. 218, 224 (1952). In general, veil-piercing is only appropriate where the corporation's principals have misused the entity "to perpetrate fraud, to accomplish a crime, or otherwise to evade the law." N.J. Dept. of Envtl. Prot., supra, 94 N.J. at 500. Some factors to consider in the analysis include whether the corporation was undercapitalized at its formation (that is, did not have enough capital to satisfy then existing or reasonably foreseeable debts), whether the principals failed to observe corporate formalities, insolvency, and the absence of corporate records or accounts. See id. at 500, 501; Canter v. Lakewood of Voorhees , 420 N.J.Super. 508, 519-21 (App. Div. 2011); 18 Am. Jur. 2d Corporations § 54 (2004).

Our courts have held that piercing the corporate veil as to a particular person requires his or her personal complicity in the misuse of the corporation or in failure to observe corporate formality. See, e.g., Marascio v. Campanella , 298 N.J.Super. 491, 502 (App. Div. 1997) (holding that the fact that a shareholder was alleged to have paid some corporate obligations from his personal checking account, without more, does not provide a basis to justify piercing the corporate veil and imposing personal liability on that shareholder); Arrow Mfg. Co., Inc. v. Levinson, 231 N.J.Super. 527, 533-34 (App. Div. 1989) (setting aside the judgment because there was insufficient evidence to support piercing the corporate veil and holding appellant personally liable for the corporate debt).

Defendant claims that the judge improperly instructed the jury on the requirements to pierce the corporate veil. The judge instructed the jury that:

Plaintiff has the burden of establishing by clear and convincing evidence all the facts necessary to prove the following:
A, [the other corporations] and New York Art and Shipping, LLC were not operated or run as businesses, and thus, their corporate forms must be disregarded. Plaintiff alleged that since these companies operated without enough money; that is, were undercapitalized and otherwise failed to follow corporate formalities, [defendant] should be responsible for the debts of these companies and B, [defendant] is using [the other corporations] and/or New York Art and Shipping to defraud Magna Fabrics.
In determining whether an owner of a company should bear responsibility for that company's liabilities, you must look to the following factors:
One, whether the entity was undercapitalized such that it had insufficient funds to pay its expenses and bills; two, whether corporate formalities were followed, and three, the lack of corporate records.
If you find that these conditions existed, the you must find that the owners of New York Art are individually liable for the company's debts. Another basis to impose liability on an individual for a company's debts is that . . . the corporation was operated in a fraudulent manner so that other persons would rely on the company and not the individuals.

. . . .

Corporate veil piercing principles can be applied to a New Jersey limited liability company, an LLC under appropriate circumstances. However, to pierce the veil, there must be evidence that the individual participated in the control of the LLC's business and used the LLC to perpetrate a fraud or injustice or otherwise circumvent the law. This must be established as we have previously mentioned by clear and convincing evidence.
One who is a shareholder or owner of an LLC may be liable for the debts of the LLC if the person, one, makes no distinction between their pocketbooks and the corporation pocketbook; two, fails to capitalize the corporation adequately, and three, fails to comply with corporate formalities.
In other words, personal liability will be imposed to prevent an injustice or if the officer or director of the LLC disregarded the corporate form and utilized the LLC as a vehicle for committing fraud.

On the verdict sheet, the jury unanimously answered "yes" to the following questions:

3. Was [defendant] an owner, principal, member, or a person in financial control of New York Art & Shipping, LLC in 2008?
4.Was New York Art & Shipping, LLC operated in a manner that disregarded formalities of a limited liability company such that its corporate existence should be disregarded?
5. Was New York Art & Shipping, LLC operated in a fraudulent manner so as to avoid paying rent to plaintiff?

Appropriate and proper jury charges are essential to a fair trial. State v. Savag e, 172 N.J. 374, 387 (2002). When a party claims an error in the jury charge, the entire charge must be reviewed to determine its overall effect. Myrlak v. Port Auth ., 157 N.J. 84, 107 (1999); Feldman v. Lederle Lab., 132 N.J. 339, 363-64 (1993). While the trial judge's instructions may not have been a verbatim repetition of the law, "a party is not entitled to have the jury charged in words of his own choosing." Kaplan v. Haines, 96 N.J.Super. 242, 251 (App. Div. 1967), aff'd o.b., 51 N.J. 404 (1968), overruled on other grounds, Largey v. Rothman, 110 N.J. 204, 213 (1988). All that is necessary is that the charge, as a whole, be accurate. State v. Wilbely , 63 N.J. 420, 422 (1973).

The jury charge here, however, was inaccurate because it permitted the jury to find defendant personally liable without finding that he was personally complicit in perpetrating the alleged fraud. In essence, the inaccurate instructions allowed jurors to find defendant personally liable simply if the corporation was operated in a "fraudulent" manner or if it "disregarded formalities." The jury was not fairly instructed that defendant had to have been personally complicit in the piercing acts to become personally liable. See Shotmeyer v. N.J. Realty Title Ins. Co., 195 N.J. 72, 86-87 (2008); N.J. Dept. of Envtl. Prot., supra, 94 N.J. at 500-01; Marascio, supra, 298 N.J.Super. at 502; Arrow Mfg. Co., Inc., supra, 231 N.J.Super. at 533-34.


Lastly, defendant argues that the admission of irrelevant evidence of Park's actions relating to other companies was prejudicial error. We agree.

On direct examination, plaintiff elicited testimony from Park regarding his past business ventures, in which defendant was not involved. Park, at this time, had filed for bankruptcy protection, and the trial concerned the liability of defendant only. When defense counsel objected as to relevance of the testimony regarding Park's past business ventures, plaintiff's counsel argued that the testimony was relevant for "impeachment purposes." The trial judge permitted this testimony, and stated: "I'm not going to bar . . . any testimony with respect to other successor or predecessor companies . . . to the extent that this individual was involved with them. So that is . . . going to be permitted." He also later gave the following limiting instructions:

Members of the jury, so you understand, the testimony that you've just heard was offered not for the truth of what was testified to but rather as it affects this witness' credibility.
. . . .
You heard various testimony -- various lines of testimony over the last 45 minutes or so. The first of them dealt with his answers to deposition testimony wherein he answered no, that -- that [the other corporations] had never been sued. And then there was a series of questions with respect to various landlord/tenant cases, amounts of money that were due which were the basis of the landlord/tenant cases for possession. Those lines of questions and answers are not admissible to prove that there were, in fact, eviction cases and that there were amounts of money that were due and owing that were the basis of that. Rather, that whole line of testimony is admitted for the purpose of showing that he may not have been credible when he answered no, that he had not been sued. Similarly, the same instruction would apply to the line of testimony that you just heard relative to his statement that at a prior deposition that when he began occupying the plaintiff's premises, the [the other corporations'] business had been closed. That whole line of questioning as to its being operable in 2011 and 2012 (sic) is not admissible for the purpose of showing that it was, in fact, still operating during those times but rather as it affects his credibility on the -- on the answer he gave that it, in fact, had been closed.

A judge's ruling as to whether such evidence is admissible is viewed under an "abuse of discretion" standard. Estate of Hanges v. Metro. Prop. & Cas. Ins. Co., 202 N.J. 369, 384-85 (2010). An abuse of discretion occurs when the danger of undue prejudice outweighs the probative value "so as to divert jurors from a reasonable and fair evaluation of the basic issue." State v. Moore , 122 N.J. 420, 467 (1991).

The trial judge abused his discretion in admitting Park's testimony regarding his past business ventures. N.J.R.E. 105 permits a trial judge to give a "limiting" or "curative instruction" to the jury in order to "restrict the evidence to its proper scope." However, the instructions here failed to consider N.J.R.E. 403, which provides that otherwise admissible evidence may nevertheless be excluded if "its probative value is substantially outweighed by the risk of . . . undue prejudice . . . ." N.J.R.E. 403(a). "Determinations pursuant to N.J.R.E. 403 should not be overturned on appeal 'unless it can be shown that the trial court palpably abused its discretion, that is, that its finding was so wide off the mark that a manifest denial of justice resulted.'" Green v. N.J. Mfrs. Ins. Co. , 160 N.J. 480, 492 (1999) (quoting State v. Carter , 91 N.J. 86, 106 (1982)). Although, extrinsic evidence may be admitted to impeach a witness, "its probative value as impeachment evidence must be assessed independently of its potential value as substantive evidence." Id . at 494 (citing State v. Burris, 145 N.J. 509, 535 (1996)).

Here, testimony about Park's other companies and their default of leases had no probative value as to defendant's alleged oral guaranty of the lease or his involvement in the company. The sole effect of the testimony was to discredit Park, and by association, defendant. Indeed, such evidence was highly prejudicial because it sought to impose liability on defendant based on the bad acts of Park.

Moreover, one cannot call a witness simply to impeach him. N.J.R.E. 607 makes clear that any party may attack or support the credibility of a witness, including the party who called the witness. Biunno, Weissbard & Zegas, Current N.J. Rules of Evidence, comment 1 on N.J.R.E. 607 (2013). A party may affect the credibility of a witness by direct and cross-examination upon the issues involved in the case, and may introduce extrinsic evidence relevant to credibility, whether or not that extrinsic evidence bears upon the subject matter of the action. State v. Martini , 131 N.J. 176, 255 (1993). However, because impeachment "testimony can be considered solely in relation to [a witness's] credibility, the only relevant previous statements would be those that contradict or call into question the [witness's] version of events as recounted at trial." Burris, supra, 145 N.J. 509 at. Park's testimony was plainly irrelevant and unduly prejudicial to defendant.

Reversed and remanded for a new trial on the issue of whether defendant personally used NY Art to commit a fraud or injustice, and thereby should be held personally accountable for the corporation's obligations under the lease with plaintiff.

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