delray-holding-llc-and-bay-dock-holdings-llc-v-sofia-design-and ( 2015 )

NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-0203-13T3
DELRAY HOLDING, LLC, and
BAY DOCK HOLDINGS, LLC, APPROVED FOR PUBLICATION
March 2, 2015
Plaintiffs-Respondents,
APPELLATE DIVISION
v.
SOFIA DESIGN AND DEVELOPMENT AT
SOUTH BRUNSWICK, LLC, SOFIA
HOMES, LLC, ANNE KELLY,
and BURGESS STEEL, LLC,
Defendants,
and
THE GUERIN FAMILY TRUST,
EUGENE GUERIN, JAMES GUERIN,
LOUIS FILOSO, MICHAEL REILLY,
STEVEN LANGAN, JAMES CAREY, and
MARZENA CAREY,
Defendants/Third-Party
Plaintiffs-Appellants,
v.
ROGER PASSARELLA,
Third-Party Defendant-
Respondent.
______________________________________
Argued December 3, 2014 – Decided March 2, 2015
Before Judges Fuentes, Ashrafi, and Kennedy.
On appeal from Superior Court of New Jersey,
Law Division, Monmouth County, Docket No.
L-3425-11.
Andrew T. Walsh argued the cause for
appellants (Chamlin, Rosen, Uliano &
Witherington, attorneys; Mr. Walsh, on the
brief).
Tennant D. Magee, Sr., argued the cause for
respondents (Maggs & McDermott, L.L.C.,
attorneys; Mr. Magee, on the brief).
The opinion of the court was delivered by
ASHRAFI, J.A.D.
Appellants are individuals and a family trust that invested
in two real estate development companies, Sofia Homes, LLC
(Sofia Homes) and Sofia Design & Development at South Brunswick,
LLC (Sofia Design) (jointly the Sofia Entities). The companies
failed financially and were forced into bankruptcy proceedings.
In the course of the bankruptcy case and other litigation, the
Sofia Entities settled claims against respondent Roger
Passarella and two real estate development companies that he
owns, respondents Delray Holding, LLC, and Bay Dock Holdings,
LLC.
This appeal is from summary judgment granted against
appellants when they claimed in their individual capacities that
respondents had interfered with their investment agreements with
the Sofia Entities and thus damaged their interests. The trial
court concluded the claims belonged to the Sofia Entities, and
2 A-0203-13T3
therefore appellants lacked standing to bring them as
individuals. As an alternative ground, the court determined
that appellants did not refute respondents' accounting evidence,
which showed that respondents did not cause any damages to the
Sofia Entities. We affirm the trial court's decision.
I.
Sofia Homes, a construction company primarily engaged in
residential development, owned property in Freehold known as the
Liberty Crossing project. It was also the principal owner and
the sole Class A member of Sofia Design, which was formed to
develop and operate a single property in South Brunswick, an
office building to be named Gateway Commons. Appellants are
variously members of Sofia Homes, Class B members of Sofia
Design, or investors in the development projects.
In 2006, Sofia Homes entered into a contract with
respondent Bay Dock Holdings, LLC, to develop residential
property in Wall Township. Sofia Homes and Bay Dock also
entered into a cost sharing agreement for site improvements on
their adjacent lands in Freehold.
In 2009, respondents assisted the Sofia Entities in
obtaining financing from Amboy National Bank for the Gateway
Commons project. Anthony D'Amore, III, was then a member of
Sofia Homes and Sofia Design, and also an undisclosed employee
3 A-0203-13T3
of Bay Dock. He told appellants that Bay Dock was willing to
offer its Freehold property as collateral for Sofia Design to
receive additional funding for the Gateway Commons project. In
exchange, Sofia Design would satisfy tax liens on Bay Dock's
Freehold property and elevate D'Amore to managing member of
Sofia Design. After the parties reached an agreement, Bay Dock
transferred ownership of its Freehold land to a new company,
respondent Delray Holding, LLC, which was created and owned by
Passarella as its sole member.
The parties dispute the events that led to the financial
failure of the Sofia Entities. However, it is undisputed that
D'Amore transferred loan proceeds that belonged to the Sofia
Entities to a bank account controlled by Bay Dock. Appellants
allege that D'Amore conspired with Passarella to divert the
funds as part of a secret plan to gain control of the Gateway
Commons project. According to appellants, the diversion of the
loan proceeds caused the Sofia Entities' projects to fail, which
in turn led to the loss of appellants' equity interests,
investments, loans, and anticipated profits to be derived from
those projects.
Respondents, on the other hand, contend that D'Amore
transferred the loan proceeds for the benefit of the Sofia
Entities. They contend his purpose was to prevent Charles
4 A-0203-13T3
Kelly, another member of Sofia Homes who is not a party in this
litigation, from using the funds improperly for other ventures
and personal obligations. See In re D'Amore, 472 B.R. 679, 684
(Bankr. D.N.J. 2012). Respondents argue that D'Amore paid debts
owed by the Sofia Entities out of the Bay Dock account, see
ibid., and that he ultimately paid more on behalf of the Sofia
Entities than he transferred into the Bay Dock account from the
loan proceeds. Respondents contend the Sofia Entities suffered
no losses but actually benefitted from the diversion of the loan
proceeds.
By 2010, D'Amore had resigned from one of the Sofia
Entities and been voted out as a member of the other.
Litigation ensued. In March 2010, the Sofia Entities, Charles
Kelly, and appellants filed a complaint in Superior Court,
Monmouth County (MON-L-1430-10), against Bay Dock, Passarella,
and D'Amore alleging misappropriation, conversion, and related
causes of action.
D'Amore filed a voluntary petition for bankruptcy in August
2010, which stayed the Monmouth County action as to him.
D'Amore, supra, 472 B.R. at 684. In December 2010, the
plaintiffs in the Monmouth County action filed an adversary
complaint in the Bankruptcy Court against D'Amore, asserting
claims for fraud, defalcation, and similar causes of action.
5 A-0203-13T3
Ibid. Subsequently, D'Amore moved for summary judgment in the
Bankruptcy Court, contending among other grounds that the
individual investors and members of the Sofia Entities lacked
standing to pursue their claims against him. Id. at 684-85.
By written decision dated May 31, 2012, the Bankruptcy
Court agreed with D'Amore. The court stated the funds that were
allegedly misappropriated were the property of the Sofia
Entities, not the property of the individual LLC members or
investors. Any damages that could be claimed by the individuals
flowed through the companies and could not be claimed directly
by them. Id. at 694-95. The Bankruptcy Court dismissed the
individual claims of appellants. Id. at 696.
On July 5, 2012, the Monmouth County court in MON-L-1430-10
granted summary judgment on the same ground to Bay Dock and
Passarella.
The lawsuit that is the subject of this appeal, MON-L-3425-
11, was originally brought by Delray and Bay Dock. They claimed
the Sofia Entities and the individual defendants owed them money
on the several development agreements of the companies.
Appellants filed a counterclaim, and also a third-party
complaint against Passarella. Appellants sought compensation
for the loss of their investments and anticipated profits in the
Gateway Commons and the Liberty Crossing projects on the ground
6 A-0203-13T3
that the diversion of the loan proceeds was tortious
interference with their investment agreements with the Sofia
Entities and also entitled them to civil remedies under New
Jersey's racketeering (RICO) statute, N.J.S.A. 2C:41-2, -4.
In December 2012, respondents and the Sofia Entities
settled their disputes and dismissed all claims against one
another, both in the bankruptcy proceedings and in the Monmouth
County cases. As part of the settlement, respondents paid
$225,000 to the Sofia Entities.
On July 26, 2013, the Law Division in this case granted
summary judgment in favor of respondents. The court held that
the claims remaining in the case were corporate claims and that
appellants lacked standing to assert them as individuals. The
court also determined that appellants did not have evidence of
any damages from D'Amore's diversion of the loan proceeds to Bay
Dock because they had not challenged respondents' accounting,
which showed that Bay Dock paid out more on behalf of the Sofia
Entities than it took in from their loan proceeds.
This appeal is from the summary judgment order dismissing
all the claims contained in appellants' counterclaim and third-
party complaint.
7 A-0203-13T3
II.
It is a fundamental principle of corporate law that:
A corporation is regarded as an entity
separate and distinct from its shareholders.
It is a principle of corporation law that
[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. . . . The prevailing American
rule is that [w]hen an injury to corporate
stock falls equally on all stockholders,
then an individual stockholder may not
recover for the injury to his stock alone,
but must seek recovery derivatively in
behalf of the corporation.
[Strasenburgh v. Straubmuller, 146 N.J. 527,
549-50 (1996) (citations and internal
quotation marks omitted).]
Shareholders in a corporation may only sue individually
when they suffer a "special injury," as distinct from injuries
suffered by all shareholders. Pepe v. Gen. Motors Acceptance
Corp., 254 N.J. Super. 662, 666 (App. Div.), certif. denied, 130
N.J. 11 (1992). "A special injury exists 'where there is a
wrong suffered by [a] 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.'"
Strasenburgh, supra, 146 N.J. at 550 (quoting In re Tri-Star
Pictures, Inc., 634 A.2d 319, 330 (Del. 1993)). To determine
whether a claim presents an individual cause of action or a
derivative claim belonging solely to the corporation, "courts
8 A-0203-13T3
examine the nature of the wrongs alleged in the body of the
complaint, not the plaintiff's designation or stated intention."
Id. at 551 (citing Lipton v. News Int'l, Plc, 514 A.2d 1075,
1078 (Del. 1986)).
Our decision in Pepe, supra, 254 N.J. Super. 662, is
directly on point with respect to the issue in this appeal. In
that case, Virginia and Richard Pepe asserted contract and tort
claims resulting from the financial failure of the ten corporate
automobile dealerships they owned as shareholders. Id. at 664-
65. We held that the Pepes' claims:
all assert losses sustained by them as the
result of the destruction of their
corporations. As such, the claims are
entirely derivative of causes of action
which, but for their release by the
bankruptcy stipulation, would be available
to the corporations. The law is clear and
uniform: shareholders cannot sue for
injuries arising from the diminution in
value of their shareholdings resulting from
wrongs allegedly done to their corporations.
. . . Nor can stockholders assert individual
claims for wages or other income lost
because of injuries assertedly done to their
corporations.
[Id. at 666 (citations omitted).]
Here, appellants make tort claims similar to those the
Pepes made. Their claims of tortious interference with their
investment agreements are entirely dependent on losses the Sofia
Entities allegedly sustained as a result of the financial
9 A-0203-13T3
failure of the companies. The individual claims derive from the
claims that the Sofia Entities had against respondents and that
were settled in exchange for a substantial payment by
respondents.
Appellants cite no cases to support their argument that
they have standing to sue as individuals for the alleged losses
of the Sofia Entities. Their conclusory statements that they
"had a protected interest" and that their claims are not
identical to those of the Sofia Entities' claims are not
sufficient to overcome the prevailing law with respect to
standing to sue.
Nor can an independent investor in a corporation sue for
debts owed to the corporation. If it were otherwise, any
investor or creditor could undermine the corporation's
settlement of a dispute and bring an individual claim for causes
of action that belong to the corporation. The Sofia Entities
settled their claims against respondents, and individual
investors and creditors cannot revive those same claims by
asserting an individual cause of action.
Because the members and other investors have not alleged an
injury caused by respondents that is distinct from that suffered
by any shareholder, investor, or creditor of the corporate
10 A-0203-13T3
entities, they lack standing to assert their claims of tortious
interference or racketeering violations.
III.
A secondary ground for summary judgment was that, even if
appellants have standing to pursue their claims, they failed to
produce evidence to contradict respondents' accounting. The
trial court discussed the importance of the accounting evidence
presented on respondents' summary judgment motion:
[T]he accounting records indicate that the
amount put into the [Bay Dock] account . . .
was less than the amount paid out of the
account for corporate bills [of the Sofia
Entities]. Thus, these records indicate
that D'Amore did not gain personal benefit
from those funds and neither did [Bay Dock]
or Passarella. . . . [A]ccording to the
record evidence and the uncontested
calculations by [respondents], the
accounting records suggest that the [Bay
Dock] account was used to pay for [the Sofia
Entities'] corporate bills. Thus,
[appellants] have failed to establish how
D'Amore's deposit of the proceeds into the
[Bay Dock] account . . . caused their
injuries or resulted in damages. As such,
apart from the issue of standing, the
evidence here is so one-sided that
[respondents] must prevail as a matter of
law with regard to the counterclaims.
Appellants dispute this finding of the court. They rely on
a certification of their attorney, and the exhibits attached to
that certification, and claim there was opposing accounting
11 A-0203-13T3
evidence. They contend that whether the diversion of the loan
proceeds damaged the Sofia Entities is a disputed issue of fact.
In December 2013, respondents moved in this court to strike
from our record on appeal the certification of appellants'
attorney dated September 18, 2012, and its accompanying
exhibits. Respondents asserted that these items were not
included in the summary judgment papers submitted to the trial
court. By order dated January 24, 2014, we remanded to the
trial court pursuant to Rule 2:5-5(a) for the limited purpose of
settling the summary judgment record. On March 5, 2014, the
motion judge issued a letter-decision stating that the trial
court had not retained the summary judgment record. Although
the judge could not verify the summary judgment record, he
inferred from the contents of the parties' motions in this court
that the 2012 certification and its exhibits were not part of
the summary judgment record.1
Appellants are not able to assert that their attorney's
2012 certification was submitted in opposition to the summary
1
We have not been formally informed of the record-retention
practices of the Law Division, but we know that the court
discarded the motion papers in less time than six months from
the summary judgment order of July 26, 2013, until our remand
order of January 24, 2014. Even a timely notice of appeal did
not prompt the Law Division to retain the papers pertinent to
this appeal. Civil litigants would be well-advised to keep
accurate records of motions and other papers in the event of an
appeal or other future proceedings.
12 A-0203-13T3
judgment motion in this case. Instead, they contend it was
submitted in a motion for summary judgment in the prior Monmouth
County case, MON-L-1430-10. Nevertheless, appellants argue that
all parties had in their possession an accounting exhibit that
contradicts respondents' evidence. Appellants contend that,
therefore, respondents' accounting was in fact disputed.
Appellants cannot base a challenge to factual evidence
presented for the court's summary judgment review on evidence
that was not presented to the court but was instead presented in
a different although related case.
Furthermore, the contradictory accounting evidence upon
which appellants now rely is only a single page summary of
several figures with no explanation or backup information. In
contrast, respondents submitted a detailed spreadsheet of a
"Cash Analysis" of "All Transactions" of the Bay Dock account.
The trial court viewed respondents' detailed accounting evidence
to be "unchallenged" for purposes of the summary judgment
motion. We can find no error in the court's determination.
Appellants also argue that the accounting evidence is
irrelevant to this case because their claim is not for the
misappropriation of the Sofia Entities' funds. They are
mistaken. The accounting evidence is relevant to whether
appellants can prove damages and causation. If Bay Dock in fact
13 A-0203-13T3
paid out more on behalf of the Sofia Entities for legitimate
debts related to the appropriate projects than D'Amore removed
from their loan proceeds, Bay Dock did not cause any damage to
the Sofia Entities. Consequently, respondents cannot be held
responsible for the financial failure of those companies and the
loss of appellants' investment interests.
IV.
Having concluded that respondents were entitled to summary
judgment on both grounds — lack of standing and the merits of
appellants' claims for damages — we need not address any other
arguments raised by either side in this appeal.
Affirmed.
14 A-0203-13T3