September 19, 2013
MIDWAY GLASS & METAL INSTALLERS, INC., Plaintiff,
CONSTRUCTION CO-ORDINATORS, LLC and JOSEPH PACELLI, Defendants, and CONSTRUCTION CO-ORDINATORS, LLC, Third-Party Plaintiff/ Respondent,
MICHAEL FOTI and L&F FITNESS, LLC, Third-Party Defendants/ Appellants
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued September 10, 2013
On appeal from the Superior Court of New Jersey, Law Division, Special Civil Part, Passaic County, Docket No. DC-11588-11.
Kevin P. Harrington argued the cause for appellants (Harrington and Lombardi, LLP, attorneys; Nicholas J. Lombardi, on the brief).
Respondent has not filed a brief.
Before Judges Sabatino and Hayden.
In this unopposed appeal, third-party defendants Michael Foti ("Foti") and L&F Fitness, LLC ("L&F") seek to overturn a judgment for $6, 678.80, plus costs, entered against them in favor of third-party plaintiff, Construction Co-Ordinators, LLC ("CC"), after a one-day trial in the Special Civil Part. For the reasons that follow, we affirm the trial court's determinations on liability and damages as to L&F, but reverse the court's imposition of personal liability upon Foti.
This is a breach of contract dispute. Although the record is limited, the trial proofs essentially showed the following. Foti, an accountant by profession, is the owner of L&F. He wanted to retrofit a warehouse in Wayne into a fitness center. To advance the project, Foti contacted Joseph Pacelli, the principal of CC. Pacelli has about sixty years of experience in the construction industry.
Initially, an agreement was reached through an October 20, 2008 e-mail exchange between Foti and Pacelli for CC to act as the owner's construction manager on the project, for a fee of $7, 000. Various bids from other contractors to perform the work were received, but Foti considered them too high. As a result, CC's role was changed from construction manager to general contractor, an arrangement through which CC or its subcontractors performed the work.
There is no comprehensive contract in the record spelling out the parties' responsibilities. Instead, the evidence consists of a series of sixteen applications and certifications for payment submitted by CC, with various attached backup documents. Late in the project, Pacelli walked off the job when disputes arose. According to exhibit P-2, which is described as an "ac[c]ounting breakdown, " CC billed $672, 484.84 for the project and was paid $665, 806.04, leaving a withheld shortfall of $6, 678.80. The disputed sum of $6, 678.80 has two components: $3, 850 that had been allocated for the construction of theater platforms, and $2, 828.80 in withheld retainage. CC also claimed that it was owed an additional sum of $3, 500 that Foti allegedly authorized for overtime painting.
The litigation began when one of the subcontractors, plaintiff Midway Glass & Metal Installers, Inc. ("Midway"), which allegedly had not been paid in full for various doors and frames, sued CC and Pacelli in the Special Civil Part. CC then filed a third-party complaint against both L&F and Foti, seeking payment for the additional sums that CC itself claimed were due. In response, L&F and Foti filed a counterclaim against CC. The claims by Midway settled, apparently after Midway's counsel died, leaving solely the third-party complaint for the court's disposition.
Two witnesses testified at the trial in January 2012: Pacelli for the third-party plaintiff CC, and Foti for the third-party defendants. The judge reserved decision, and, about a week later, issued a two-page written opinion on February 8, 2012. The judge ruled in favor of CC on the $3, 850 and $2, 828.80 items, but rejected the $3, 500 overtime painting claim. The judge also rejected the counterclaim of L&F and Foti. The judge entered a corresponding final judgment for $6, 678.80, plus costs, in favor of CC against both L&F and Foti individually.
L&F and Foti moved for judgment notwithstanding the verdict, which the judge denied after hearing oral argument. This appeal ensued, which CC has not opposed. However, we have considered the substance of CC's opposing arguments that had been expressed in its letter brief opposing the post-trial motion, a copy of which is contained in the appendix on appeal.
Our standard of review from the court's findings in this bench trial is limited. An appellate court shall "'not disturb the factual findings and legal conclusions of the trial judge unless [it is] convinced that they are so manifestly unsupported by or inconsistent with the competent, relevant and reasonably credible evidence as to offend the interests of justice[.]'" Seidman v. Clifton Sav. Bank, S.L.A., 205 N.J. 150, 169 (2011) (quoting In re Trust Created by Agreement Dated December 20, 1961, 194 N.J. 276, 284 (2008)); see also Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474, 484 (1974); Anderson v. City of Bessemer City, 470 U.S. 564, 574, 105 S.Ct. 1504, 1512, 84 L.Ed.2d 518, 529 (1985) (noting that the trial court's "major role is the determination of fact"). We only review de novo the trial court's legal determinations. 30 River Court E. Urban Renewal Co. v. Capograsso, 383 N.J.Super. 470, 476 (App. Div. 2006) (citing Rova Farms, supra, 65 N.J. at 483-84).
L&F and Foti first argue that the $3, 850 item should not have been awarded to CC because there were no theater platforms erected. The trial judge was persuaded, however, by Pacelli's testimony that the parties agreed to offset this amount for other work done by CC associated with the installation of security cameras by another contractor and in putting hand dryers in the lavatories. Although there is no change order specifically detailing this substitution, the judge as fact-finder had a credible basis from the testimony to accept CC's explanation.
"[P]arties to an existing contract may, by mutual assent, modify it." Cnty. of Morris v. Fauver, 153 N.J. 80, 99 (1998). "Such modification can be proved by an explicit agreement to modify, or . . . by the actions and conduct of the parties, so long as the intention to modify is mutual and clear." Ibid. The trial judge reasonably concluded from the sworn testimony that such mutual assent to modify the contract in this limited respect was attained. The judge was not obligated to reject this claim for lack of substantiation merely because he rejected CC's unsubstantiated separate claim for $3, 500 in overtime painting costs; each discrete claim was appropriately considered on its own merits and on the persuasiveness of the testimony associated with it.
L&F and Foti argue that there is no proof that the value of the substituted items was the same as the platform work, but the values need not be identical so long as there was a mutual agreement to modify the contract in that manner. L&F and Foti also contend that another vendor actually provided the security cameras, but the record indicates that CC still had to do other work to accommodate that vendor's installation.
L&F and Foti next contend that the judge erred in concluding that CC was entitled to be paid the withheld retainage of $2, 828.80. We disagree.
The purpose of retainage in a construction contract is to ensure that approved work does not require repair or redoing. Tretina v. Fitzpatrick & Assocs., 135 N.J. 349, 353-354 (1994). An owner is required to pay the retainage withheld to the contractor upon completion. Ibid. "Completion" does not mean the end of all contractual obligations, "but is a word of art signifying entitlement to final payment upon acceptance of the work[.]" Carbro Constr. Co. v. Middlesex Cnty. Utils. Auth., 233 N.J.Super. 116, 120 (App. Div. 1989).
By statute, when a contractor bills a private owner for work to improve real property, the bill is deemed approved and certified within twenty days of the owner's receipt of the bill, unless the owner provides within that time frame "a written statement of the amount withheld and the reason for withholding payment[.]" N.J.S.A. 2A:30A-2(a). Absent such a timely written statement justifying non-payment, "the owner shall pay the amount due to the prime contractor for each periodic payment, final payment or retainage monies not more than 30 calendar days after the billing date, which for a periodic billing, shall be the periodic billing date specified in the contract." Ibid. (emphasis added).
Here, L&F and CC agreed to written retainage terms, allowing L&F to hold back sums for "2% of completed work, " within most of the sixteen sequential contract documents. As the bills from CC were submitted, the retainage amount increased, as two percent of the total work completed and billed cumulatively grew higher.
CC ultimately submitted its sixteenth and final "Application and Certification" for payment on or about May 13, 2009, which stated that the balance due was $31, 044.82. The cumulative retainage amount was $12, 828.80, of which L&F paid CC $10, 000, holding back a net retainage of $2, 828.80. The statutory twenty-day period elapsed without L&F responding to CC in writing to provide notice that it would be withholding the retainage, and its reasons for doing so.
As the trial judge found, L&F never gave CC any "punch list" of items needing completion, repair, or modification. Although such a punch list was apparently provided by Foti to his attorney in or about September 2011, the judge found that the list was not provided in a timely manner to Pacelli, nor was it discussed with him. Hence, as a matter of law under N.J.S.A. 2A:30A-2(a), L&F was deemed to have approved and certified the bills. However, L&F nevertheless withheld $2, 828.80 from the accumulated retainage, and an additional $3, 850 evidently relating to the theater platform item. The trial judge reasonably found that these withholdings occurred "without explanation."
L&F argues that portions of the retainage were appropriately withheld because it wanted to incentivize CC to complete the job. However, it did not provide CC with the required timely written notification of its reasons for holding back the money. According to Pacelli's testimony, by the time that the final application for payment was submitted, CC had already received a temporary occupancy permit from the Township of Wayne in May 2009. Electrical, plumbing, structural, and other inspections had already been completed. Having received nothing in writing timely protesting the bills, CC justifiably suspended its final closing activities until L&F paid the outstanding sums. That is so even though, as Pacelli acknowledged in his testimony, the project was not totally finished but "ninety nine percent" complete.
Applying our deferential review of the judge's fact-finding in light of the applicable law, we are satisfied that the judge did not err in awarding to CC the $2, 828.20 in withheld retainage.
Lastly, appellants challenge the imposition of personal liability on Foti, arguing that there is no adequate basis in the trial record to pierce the corporate veil of L&F. On this discrete point, we concur with appellants.
The primary purpose of forming a corporation, such as a limited liability company ("LLC"), is to insulate its members from the liabilities that accompany a business enterprise. State of N.J., Dep't of Envtl. Prot. v. Ventron Corp., 94 N.J. 473, 500 (1983). Courts are generally unwilling to pierce the corporate veil and hold members personally liable unless the corporation is "being used to defeat the ends of justice, to perpetrate fraud, to accomplish a crime, or otherwise to evade the law." Ibid. (citations omitted). "In 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). The party seeking to pierce the corporate veil, here CC, "bears the burden of proof and must demonstrate the misuse of the corporate form and the necessity of disregarding it in order to do equity." Dep't of Labor v. Berlanti, 196 N.J.Super. 122, 127 (App. Div. 1984). We agree with appellants that CC did not sustain its burden in establishing Foti's personal liability for the contract sums that L&F, an LLC, owed to CC.
The initial e-mail exchange on October 20, 2008 between Pacelli and Foti that resulted in the contract arrangements, which was admitted as exhibit "P-1" at trial, plainly shows a mutual contemplation that both Pacelli and Foti were entering into those arrangements through their respective companies. Pacelli's e-mail reads:
Mike, In furtherance of our conversation regarding my construction management services, this correspondence shall serve as the agreement between us; whereas, Construction Co-[O]rdinators will provide the CM [construction manager] services to the project for the total sum of $7000.00 and therefore, L&F Fitness shall make progress payments to Construction Co-[O]rdinators equal to the value of the percentage of the work completed by the contractor. Shoul[d] you disagree with any of the above stated, kindly respond ASAP.
Foti responded by e-mail that same day with, "Joe: As agreed. Thank you, Michael."
Although the role of CC was eventually converted from that of construction manager to general contractor on the project, the inherent company-to-company nature of the mutual undertaking was maintained in the parties' course of performance. Each of the payment checks to CC were drawn on L&F's bank account, not Foti's personal account. All sixteen of the Applications and Certifications for Payment from CC were issued to "Owner L&F Fitness, LLC." There is no document in which Foti personally guaranteed payment. Neither fraud nor inadequate capitalization of L&F were alleged or substantiated by CC.
In considering appellants' post-trial motion for relief, the trial judge expressed on the record some doubts about the propriety of continuing to include Foti with L&F as a joint obligor on the final judgment. Even so, the judge decided to "leave it [the form of judgment] as it is, " in anticipation that the court on appeal would "sort that one out." In any event, we now address the issue conclusively and hold that Foti must be removed from the judgment as a co-obligor. There is no basis on this record to declare him personally liable for L&F's obligations to CC.
A revised final judgment solely against L&F accordingly shall be issued by the Special Civil Part within twenty days of this opinion. We were advised at oral argument that CC has already levied on funds of Foti in satisfaction of the judgment. We leave it to the parties and, if necessary, the trial court, to work out whatever payment or repayment arrangements are appropriate in light of our opinion.
Affirmed in part, and reversed in part.