NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-0241-17T1
APPROVED FOR PUBLICATION
RICHARD W. TULLY, JR.,
November 29, 2018
Plaintiff-Appellant,
APPELLATE DIVISION
v.
PETER MIRZ,
Defendant-Respondent.
___________________________
Submitted October 16, 2018 – Decided November 29, 2018
Before Judges Fisher, Hoffman and Geiger.
On appeal from Superior Court of New Jersey, Law
Division, Bergen County, Docket No. L-5951-16.
Philip E. Mazur, attorney for appellant.
The Weinstein Group, PC, attorneys for respondent
(Lloyd J. Weinstein, on the brief).
The opinion of the court was delivered by
GEIGER, J.A.D.
Plaintiff Richard W. Tully, Jr. and defendant Peter Mirz were the sole
shareholders of a closely-held corporation they jointly started known as Interstate
Fire Protection, Inc. (IFP). Plaintiff and defendant, who are brothers-in-law, did
not initially sign a written agreement stating how profits and losses would be
shared, though for the first five years of the business they took an equal salary.
When IFP began experiencing financial difficulties, plaintiff contributed
significant funds to pay its expenses. Eventually, IFP defaulted on a loan from TD
Bank, N.A., and judgment was entered against it in the State of New York.
After the parties were unable to reach an agreement concerning their
respective contributions to IFP's debts, plaintiff filed suit to recover fifty-percent of
the "substantial contributions" he and his other company made to IFP to cover its
shortfalls. Plaintiff appeals from an August 28, 2017 order dismissing his
complaint against defendant without prejudice following a one-day bench trial.
For the following reasons, we affirm in part and reverse and remand in part.
In 2005, plaintiff and defendant formed IFP, a fire protection contractor
serving primarily commercial customers, as a partnership. Two years later
they incorporated the business in New York. Each party made an initial
$35,000 investment in IFP, and were paid equal salaries during IFP's first five
years.
The parties did not initially enter into a written agreement as to how IFP
losses would be shared individually. However, they eventually entered into a
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Shareholders-Partners Agreement (Agreement) on January 15, 2009. 1 Under
the Agreement, plaintiff and defendant are equally responsible for IFP's
liabilities, "unless the losses are occasioned by the willful neglect or default,
and not the mere mistake or error, of any of the parties."
Plaintiff had substantial prior experience in the construction industry and
had previously formed Interstate Mechanical Services, Inc. (IMS), which
provided HVAC-related mechanical contracting services to its clients.
Plaintiff brought his name, reputation, and client contacts to IFP. He
continued to own and operate IMS in conjunction with IFP. Defendant had no
role in IMS.
Defendant worked in the fire protection field prior to forming IFP, and
was licensed to perform that trade, but had no prior experience owning a
business. Defendant was responsible for running IFP's day-to-day operations.
In 2008, IFP received a $250,000 line of credit from TD Bank. The line
of credit was later increased to $750,000. However, financial difficulties
eventually led the parties to reduce IFP's line of credit to $450,000 in 2011.
Plaintiff, defendant, and IMS each guaranteed repayment of the line of credit
when it was initially opened and each time it was modified.
1
Defendant disputes he signed the agreement and claims his signature was
forged.
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IFP's financial difficulties led it to default on its obligation to TD Bank.
Plaintiff alleges IFP's financial difficulties were caused by defendant's
mismanagement and willful neglect, including failure to estimate projects
properly and failure to properly mobilize and coordinate IFP's forces. On
January 7, 2015, TD Bank filed a collection action against IFP, IMS, plaintiff,
and defendant in the Supreme Court of New York, and in April 2016, secured
a judgment in the amount of $530,687.40 plus statutory interest (IFP
judgment).
Although the IFP judgment held the debtors jointly and severally liable,
plaintiff and IMS entered into a settlement agreement with TD Bank, which
discharged them from the obligation in exchange for payment of $300,000.
Plaintiff and IMS performed and were formally released on October 20, 2016.
Defendant and IFP remained liable to TD Bank for the remaining balance of
$226,469.40. TD Bank receives payment from defendant through a wage
garnishment.
Plaintiff alleges he and IMS extended loans to IFP, or made payments on
its behalf, for which they expected to be repaid by IFP. Although payment has
been demanded, it has not been remitted.
Plaintiff also alleges that in 2012, defendant sold the assets of IFP to
Pace Plumbing Corp. without fully disclosing the terms of the sale to plaintiff,
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or by misrepresenting the terms of the sale. These claims were withdrawn by
plaintiff during the bench trial.
Plaintiff also alleges defendant misappropriated IFP funds by falsifying
the time sheets of former IFP employee James Gould in an alleged kickback
scheme wherein Gould was paid for overtime he did not perform, with the
unearned income being applied to the debt defendant owed Gould on a
personal loan from 2010. Plaintiff further alleges defendant converted IFP
funds through Gould's bank account in 2012. Finally, plaintiff alleges
defendant misused IFP funds for personal expenses, such as excessive
payments for company vehicles that were used personally by defendant.
Plaintiff filed a six-count Chancery action against defendant alleging:
breach of fiduciary trust (count I); breach of contract (count II);
mismanagement (count III); breach of the covenant of good faith and fair
dealing (count IV); conversion (count V); and fraud (count VI). Plaintiff
demanded judgment against defendant: (1) compelling repayment to IFP of
monies wrongfully converted by defendant or compelling defendant to repay to
plaintiff his proportionate share; (2) compelling repayment of loans made to
IFP or payments made on its behalf or compelling defendant to repay to
plaintiff his proportionate share; (3) compelling defendant to comply with all
obligations imposed by the Agreement, including the obligation to pay one-
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half of IFP's liabilities and debts; (4) for compensatory, consequential, and
incidental damages; and (5) for interest, attorney's fees, and costs.
Defendant moved to dismiss the complaint for failure to state a claim
upon which relief can be granted pursuant to Rule 4:6-2(e), or for violation of
the single controversy doctrine pursuant to Rule 4:30A. The Chancery judge
denied the motion, noting:
While many of the claims could be characterized as
derivative, the court is empowered in a closely held
company case to treat an action raising derivative
claims as a direct action. Brown v. Brown, 323 N.J.
Super. 30, 36-38 (App. Div. 1999). That is sufficient
to survive a motion to dismiss.
The case was subsequently transferred to the Law Division. By leave
granted, plaintiff filed an amended complaint alleging the same causes of
action and seeking the same relief. 2 Defendant moved to dismiss the amended
complaint pursuant to Rules 4:6-2(e) and 4:30A. The Law Division judge
denied the motion, noting the motion was based on the same arguments raised
by defendant in the prior motion to dismiss. The motion judge reasoned:
The plaintiff has correctly noted that the law of
the case doctrine requires this [c]ourt to abide by
Judge Contillo's decision.
2
The amended complaint differed from the original complaint by adding the
following additional language to paragraph four: "In the alternative and/or in
addition, the parties agreed verbally, and/or by their conduct reached an
implied agreement, to pay equally on behalf of [IFP] its debts and liabilities."
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Judge Contillo did not reach the merits of the
defendant's motion to dismiss based upon the Entire
Controversy Doctrine and [Rule] 4:30A. He noted
that insufficient information had been supplied. That
notation leaves this court free to consider that
argument.
This court finds itself in the same position. This
court has not been supplied with copies of the
pleadings in the N.Y. State litigation. This court has
no certification establishing a basis for first-hand
knowledge as to what is involved in the disputes being
litigated in N.Y. State Court.
....
This court has no detail as to the claims
involved in the New York State litigation. It is the
moving party's obligation to supply that information to
this court.
Defendant then filed an answer with affirmative defenses and a four-
count counterclaim, alleging fraud (count one), breach of fiduciary duty (count
two), conversion (count three), and unjust enrichment (count four).
Following the completion of discovery, the case proceeded to a one-day
bench trial. The trial judge issued a written opinion and order dismissing the
amended complaint without prejudice for lack of standing, concluding "this
action was improperly brought as a direct action against [d]efendant rather
than a derivative claim on behalf of IFP." Recognizing the well-established
rule "that standing is a firm requirement for all actions brought before a court,
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even if the issue is not addressed by [d]efendant," the judge engaged in the
following analysis:
In the instant action, IFP was a closely held
organization and therefore subject to the [c]ourt's
discretion on whether or not the claims made against
[d]efendant should be considered direct [or]
derivative. Because the interests of IFP's creditors
would be materially prejudiced by allowing [p]laintiff
to directly recover from [d]efendant, this [c]ourt is
precluded from treating this matter as a direct action
and must hold that [p]laintiff has no standing to bring
this action against [d]efendant.
Plaintiff seeks to recover funds directly from
[d]efendant, as an individual, despite the fact that the
injury he claims appears to be suffered by IFP. The
funds supposedly mismanaged, converted and
siphoned by the [d]efendant were clearly IFP company
funds. Thus, the allege[d] injury sustained by the
[d]efendant's actions effected the company as a whole
and did not represent a "special injury" to [p]laintiff as
an individual. Additionally, most of the funds
advanced by [IMS] to IFP were carried as loans from
[IMS] to IFP on [IMS's] records. Accordingly, it is
[IMS] that needs to file a complaint based on the
breach of the loan agreements.
Although this [c]ourt does have the discretion to
treat [p]laintiff's claim as a direct action since IFP was
a closely held corporation, the fact that IFP has
creditors who are still seeking recovery from IFP
funds precludes [p]laintiff's recovery as an individual.
Allowing [p]laintiff to personally recover funds that
were assets of the corporation could affect the
recovery of the existing judgment creditor, TD Bank,
and potential future judgment creditor, Ideal Supply
Co.
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This appeal followed. Plaintiff argues:
POINT I
THE COURT ERRONEOUSLY FOUND THAT ALL
OF [PLAINTIFF]'S CLAIMS ARE DERIVATIVE
CLAIMS EVEN THOUGH [PLAINTIFF] WAS
DAMAGED DIRECTLY BY DEFENDANT'S
MISCONDUCT, INCLUDING DEFENDANT'S
BREACH OF THE PARTIES' AGREEMENT.
POINT II
EVEN IF THE CLAIMS ARE DERIVATIVE,
THERE IS NO REASONABLE BASIS FOR
IMPOSING THE PROCEDURAL BURDENS THAT
APPLY TO A DERIVATIVE ACTION WHERE
BOTH SHAREHOLDERS ARE PARTIES AND THE
DERIVATIVE CLAIMS PROCEDURES DO NOT
SERVE ANY REASONABLE PURPOSE.
POINT III
THE TRIAL COURT SHOULD HAVE ALLOWED
THE CLAIMS TO PROCEED INDIVIDUALLY
UNDER THE LAW OF THE CASE DOCTRINE.
The issue of standing is a matter of law that we review de novo. People
for Open Gov't v. Roberts, 397 N.J. Super. 502, 508 (App. Div. 2008). "A
trial court's interpretation of the law and the legal consequences that flow from
established facts are not entitled to any special deference." Manalapan Realty
v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995).
"Our courts have traditionally taken a generous view of standing in most
contexts." In re State Contract A71188, 422 N.J. Super. 275, 289 (App. Div.
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2011) (citations omitted); see Rule 4:26-1 (requiring plaintiffs to be "real party
in interest"). To have standing to bring a claim, "a party must present a
sufficient stake in the outcome of the litigation, a real adverseness with respect
to the subject matter, and a substantial likelihood that the party will suffer
harm in the event of an unfavorable decision." In re Camden County, 170 N.J.
439, 449 (2002).
Plaintiff first contends the trial court erred by finding all of his claims
were derivative of IFP rather than direct. Plaintiff further contends, even if the
claims are derivative, the trial court should have allowed them to proceed
directly because of the closely-held nature of IFP. The trial court relied on the
determination that all of plaintiff's claims were derivative to conclude plaintiff
was without standing to proceed.
"A corporation is regarded as an entity separate and distinct from its
shareholders." Strasenburgh v. Straubmuller, 146 N.J. 527, 549 (1996) (citing
Dep't of Labor v. Berlanti, 196 N.J. Super. 122 (App. Div. 1984)). "[R]egard
for the corporate personality demands that suits to redress corporate injuries
which secondarily harm all shareholders alike are brought only by the
corporation." Ibid. (quoting Note, Distinguishing Between Direct and
Derivative Shareholders' Suits, 110 U. Pa. L. Rev. 1147, 1148 (1962)). New
Jersey follows the American rule, which provides shareholders who suffer an
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injury "may not recover for the injury to [their] stock alone, but must seek
recovery derivatively [on] behalf of the corporation." Id. at 550 (citing Cowin
v. Bresler, 741 F.2d 410, 414 (D.C. Cir. 1984)). "Only upon proof of fraud or
injustice will the corporate veil be pierced to impose liability on the corporate
principals." Berlanti, 196 N.J. Super. at 127 (citing Lyon v. Barrett, 89 N.J.
294, 300 (1982)).
The purpose of a derivative suit is to provide shareholders, or a
representative shareholder, with "a means to protect the interests of the
corporation from the misfeasance and malfeasance of 'faithless directors and
managers.'" Strasenburgh, 146 N.J. at 548-49 (quoting Kamen v. Kemper
Financial Servs., Inc., 500 U.S. 90, 95 (1991)). By contrast, a direct action is
one in which liability is based upon an injury or violation of a duty owed to a
particular shareholder. Brown v. Brown, 323 N.J. Super. 30, 36 (App. Div.
1999) (citation omitted). "To determine whether a complaint states a
derivative or an individual cause of action, courts examine the nature of the
wrongs alleged in the body of the complaint, not the plaintiff's designation or
stated intention." Strasenburgh, 146 N.J. at 551 (citing Lipton v. News Int'l,
PLC, 514 A.2d 1075, 1078 (Del. 1986)).
A shareholder may maintain a direct action against a corporation or its
directors if the shareholder suffers a "'special injury.'" Ibid. (citing Elster v.
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American Airlines, Inc., 100 A.2d 219 (Del. Ch. 1953)). "A special injury
exists 'where there is a wrong suffered by [the] plaintiff that was not suffered
by all stockholders generally or where the wrong involves a contractual right
of the stockholders, such as the right to vote.'" Id. at 550 (quoting In re Tri-
Star Pictures, Inc., 634 A.2d 319, 330 (Del. 1993)).
In the context of a closely-held corporation, courts have discretion to
construe a derivative cause of action as a direct claim if doing so "will not (i)
unfairly expose the corporation or the defendants to a multiplicity of actions,
(ii) materially prejudice the interests of creditors of the corporation, or (iii)
interfere with a fair distribution of the recovery among all interested persons."
Principles of Corporate Governance: Analysis and Recommendations, § 7.01
(d) (Am. Law Inst. (1992)). See also Brown, 323 N.J. Super. at 39
("adopt[ing] the approach of the ALI's § 7.01(d)").
The factors enumerated in § 7.01(d) follow the holding in Watson v.
Button, 235 F.2d 235 (9th Cir. 1956), "which found the usual policy reasons
requiring an action that principally alleges an injury to the corporation to be
treated as a derivative action are not always applicable to the closely held
corporation." Principles, § 7.01 cmt. e. In Watson, a multiplicity of actions
could not have resulted because there were only two shareholders; each
shareholder had agreed to be individually liable for corporate debts; and an
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individual recovery would not have prejudiced the rights of any other
shareholders. 235 F.2d at 237.
The main consequence of construing an action as direct is to relieve the
plaintiff of the procedural requirements that attend a derivative suit. For
example, in a derivative suit, a would-be plaintiff is required to issue demand
upon the corporation to take action and to then allow ninety days to elapse,
unless notified the demand was rejected by the corporation, prior to
commencing a derivative suit. N.J.S.A. 14A:3-6.3. In this case, plaintiff
would be required to issue demand on defendant, which would almost certainly
be futile. Further frustrating the procedural purpose of a derivative suit,
defendant asserted counterclaims against plaintiff, and "the general rule is to
prohibit counterclaims in a derivative action." Principles, § 7.01 cmt. e (citing
Welch, Shareholder Individual and Derivative Actions: Underlying Rationales
& the Closely Held Corporation, 9 J. Corp. L. 147, 190-91 (1984)).
Some of the wrongs alleged by plaintiff are direct claims. For example,
at its core, plaintiff's claim is founded on defendant's failure to contribute his
fair share (fifty percent) to the debts and liabilities of IFP, in breach of an
alleged agreement between the parties and the covenant of good faith and fair
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dealing. (counts II and IV).3 Plaintiff, unlike IFP, is a party to the Agreement
and, therefore, has standing for this claim as an interested party. See Sean
Wood v. Hegarty Grp., Inc., 422 N.J. Super. 500, 519 (App. Div. 2011)
(finding corporation lacked standing to pursue counterclaim for lost profits on
alleged breach of contract when evidence demonstrated principal of the
corporation had been the real party in interest on the contract).
However, plaintiff's other claims weigh more in favor of a derivative
action on behalf of IFP. For example, the mismanagement claim (count III) is
grounded in the assertion that defendant failed to manage IFP in a
commercially reasonable manner. Additionally, the conversion claim (count
V) and fraud claim (count VI) allege defendant "exercised wrongful dominion
and control over the assets of [IFP]" and engaged in a fraudulent kickback
scheme. These claims are derivative in nature because they concern IFP's
assets and operations rather than plaintiff as an individual. Plaintiff partially
withdrew his claims of mismanagement (count III) and fraud (count VI) at trial
3
See Principles, § 7.01 cmt. c (explaining decisions in both Delaware and
New York have held an action may be treated as direct in circumstances in
which there was a special dual relationship between plaintiff and defendant,
such as a contractual relationship, or in which the latter acted with deliberate
intent to harm the former) (citing the holding in Elster, 100 A.2d 219).
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to the extent they pertain to the agreement to sell IFP's assets to Pace Plumbing
Corp.
These claims are captured by the breach of fiduciary duty claim (count
I), which we "generally regard[] as derivative claims unless the injury to
shares is distinct." Strasenburgh, 146 N.J. at 552 (citation omitted). However,
"[i]f the breach of duty causes a 'special injury,' shareholders may sue
directly." Ibid.
Returning to the factors enumerated in Principles, § 7.01(d) and adopted
by Brown, other shareholder interests would not be harmed if these claims
proceed because plaintiff and defendant are the only shareholders . Thus, this
court need only consider whether, as the trial court held, the rights of IFP's
creditors would potentially be materially prejudiced if plaintiff's derivative
claims are allowed to proceed as a direct action.
As previously discussed, TD Bank has reduced its claims against
defendant and IFP to judgment and collects on a wage garnishment against
defendant. On this record we are unable to determine if allowing plaintiff's
derivative claims to proceed will prejudice TD Bank, Ideal Supply, or any
other creditor of IFP. Therefore, the trial court properly declined to construe
plaintiff's derivative claims as a direct action. We affirm the dismissal without
prejudice of plaintiff's derivative claims, which include his breach of fiduciary
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duty claim (count I) and the mismanagement, conversion, and fraud claims
(counts III, V, and VI, respectively).
That said, the discretion granted by Brown and § 7.01(d) does not run
both ways. Plaintiff's essential claim is for breach of contract, to which he and
defendant are the sole parties. We discern no principle of law that prevents
plaintiff from bringing this direct action against defendant. Accordingly, we
reverse the dismissal of plaintiff's direct claims based on breach of contract
(count II) and breach of the covenant of good faith and fair dealing (count IV) ,
and remand those claims to the trial court for a decision on the merits.
Tully also argues the trial court should have allowed his derivative
claims to proceed pursuant to the law of the case doctrine based on the prior
motion rulings. We are unpersuaded by this argument.
The law of the case doctrine provides "that a legal decision made in a
particular matter 'should be respected by all other lower or equal courts during
the pendency of that case.'" Lombardi v. Masso, 207 N.J. 517, 538 (2011)
(quoting Lanzet v. Greenberg, 126 N.J. 168, 192 (1991)). "A hallmark of the
law of the case doctrine is its discretionary nature. . . ." Ibid. (citations
omitted). "It is a non-binding rule intended to 'prevent relitigation of a
previously resolved issue.'" Ibid. (quoting In re Estate of Stockdale, 196 N.J.
275, 311 (2008) (citing Pressler, Current N.J. Court Rules, cmt. 4 on R. 1:36-3
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(2008))). The "doctrine is only triggered when one court is faced with a ruling
on the merits by a different and co-equal court on an identical issue." Id. at
539.
Our courts treat the denial of a motion to dismiss as interlocutory.
Parker v. City of Trenton, 382 N.J. Super. 454, 457 (App. Div. 2006); see also
GMAC v. Pittella, 205 N.J. 572, 577 n.2 (2011) (citing Parker, 382 N.J. Super.
at 458).
The denial of defendant's motions to dismiss did not constitute a ruling
on the merits of whether plaintiff's claims were derivative or direct. Nor did
those rulings adjudicate whether the court should exercise its discretion to treat
the action raising derivative claims as a direct action under Brown. The
rulings were not dispositive. Rather, the rulings merely decided that Tully's
claims were "sufficient to survive a motion to dismiss."
The trial judge based his decision upon the evidence adduced at trial
following discovery, not the facts as alleged in the amended complaint. The
testimonial evidence presented at trial was not available when either of the
motions to dismiss were decided. The law of the case doctrine does not
require a trial judge to follow a prior motion ruling by a different judge if
presented with "substantially different evidence." Pressler & Verniero,
Current N.J. Court Rules, cmt. 4 on R. 1:36-3 (2019) (citing State v. K.P.S.,
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221 N.J. 266, 276 (2015)); cf. State v. Cullen, 424 N.J. Super. 566, 579-80
(App. Div. 2012) (holding a judge deciding a motion for summary judgment
based upon evidence developed during discovery is not bound to adhere to the
preliminary assessment of the facts as alleged in the complaint made by a
different judge when deciding an earlier Rule 4:6-2(e) motion). The trial judge
was not bound to follow the motion judges' preliminary assessments of the
facts or rulings.
In sum, we hold plaintiff had standing to bring his breach of contract
(count II) and breach of the covenant of good faith and fair dealing (count IV)
claims. We reverse the dismissal of counts II and IV and remand those claims
to the trial court for a decision on the merits. We affirm the dismissal without
prejudice of plaintiff's remaining derivative claims (counts I, III, V, and VI).
Affirmed in part and reversed and remanded in part for proceedings
consistent with this opinion. We do not retain jurisdiction.
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