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Compost Partners of New Jersey v. S. Rotondi & Sons, Inc.

A-6218-00T1 (N.J. Super. App. Div. 2004) (Unpublished)

CONTRACTS; CORPORATIONS; OPPRESSION—Breach of a contract, not their shareholder agreement, between a corporation’s shareholders, is not necessarily an act of shareholder oppression.

A recycler operated a leaf and grass composting facility under a permit from the New Jersey Department of Environmental Protection (DEP). A construction company delivered truckloads of leaf and grass material to the facility. Because the recycler was having financial difficulties, it entered into an agreement giving a half interest in the facility to the construction company. To implement this arrangement, two new entities were created and the other party and the construction company entered into their own partnership. The recycler formed a new corporation and sold half of the corporation’s stock to the partnership. The recycler’s original company gave the new corporation permission to operate the facility, as an “agent,” using the DEP permit. The original corporation also promised to use its “best efforts” to “assist” the new corporation in getting a DEP permit in the new corporation’s own name. The agreements provided that the new corporation would pay all operating expenses. Finally, the new corporation agreed that, for five years, it would accept not less than 45,000 tons per year of leaf and grass waste from the construction company for disposal and processing. After the agreement was executed, the construction company brought its equipment to the site and began managing the operation of the new facility. Both the construction company and the recycler’s original corporation continued to bring substantial quantities of materials to the facility.

The DEP issued a notice of violation to the construction company for operating the new facility without a permit. It also issued a notice of violation to the recycler’s original corporation for transferring “operational control” to an entity that lacked the required permit. In addition, the DEP issued a notice of violation because it found unpermitted material at the composting facility.

In response, the partnership asked the recycler’s principal to sign a copy of an application for the new corporation to operate the facility. The signature was all that remained to complete the application. The principal refused to sign the application because he claimed that the partnership had breached the contract by delivering waste loads containing substantial unpermitted materials. He believed that such a breach relieved the original corporation of its contractual obligation to use its best efforts to assist the new corporation in obtaining its own permit.

The DEP issued another notice of violation. The notice directed the new corporation to cease operations, and it imposed penalties. The DEP also insisted that the original corporation was the only permitted operator of the facility. In response, the original corporation retook control of the facility, but allowed the construction company to continue deliveries. Soon thereafter, the original corporation again complained that unpermitted materials being included in the shipments, and it stopped accepting deliveries from the construction company. In response, the partnership sued the recycler’s original corporation over its failure to assist the new corporation in obtaining a DEP permit. The recycler’s original corporation filed a counterclaim asserting breach of contract.

A consent order was isued, allowing the construction company to deliver the materials to the facility if the site manager found that the delivery complied with the permit. After the construction company made a new waste disposal contract with another party, the facility site manager told the construction company that there were “some issues” at the facility and that the construction company would have to take its deliveries to another site for a few days. Instead of using another particular site for only a few days, the construction company used a different site for all of its deliveries and never used the corporation’s facility again. It then removed its equipment from the facility, and the original recycler’s corporation brought in its own replacement equipment.

The lower court found that the original recycler’s corporation had breached its obligations to “cooperate with” and exert “best efforts” to assist the new corporation in obtaining the DEP permit. It also found that the original recycler’s corporation breached its obligation to pay tipping fees it owed the new corporation. However, the Court also concluded that the way in which the original recycler’s corporation breached the agreement did not constitute “stockholder oppression.” Therefore, the partnership was not entitled to relief under the Stockholder Oppression Statute. As to the original recycler’s corporation’s counterclaim, the lower court found that the construction company had not breached the contract because the original recycler’s corporation had, in fact, routinely allowed the non-permitted material to be dumped. Also, the lower court found that the proofs failed to establish what proportion of the offensive material had been dumped by the original recycler’s corporation, by the construction company or by others. Lastly, the lower court found that the construction company breached its supply contract by failing to deliver the required quantity of yard waste.

On appeal, the original recycler’s corporation argued that there was insufficient support for the lower court’s finding that it breached the “best efforts” and “cooperation” provisions of the agreement. The Appellate Division disagreed, holding that even if the construction company had breached the contract by bringing some unpermitted materials to the facility, the original recycling company was not excused from exercising its best efforts to transfer its permit to the new corporation, because the way it continued to deal with the construction company proved that it did not consider the contract to have terminated at that time.

The original recycler’s corporation also argued that the construction company should have been held solely responsible for the DEP penalties. The Appellate Division disagreed, holding that because the corporation had itself brought prohibited materials to the facility, the construction company could not be held solely liable.

In the appeal, the partnership claimed that the lower court erred in concluding that it breached the contract by not delivering waste to the facility. The Appellate Division agreed. It noted that the original agreement provided that the new corporation “shall accept [from the construction company] not less than 45,000 tons per year of leaf and grass waste ... In exchange ... the partnership would pay [the new corporation] $10.00 per ton.” According to the Court, this did not obligate the partnership to bring 45,000 tons or any other amount to the facility. Further, the essential motivation for the agreement was to obtain additional financial backing, not to obtain a guaranteed flow of waste from the partnership.

The Appellate Division also affirmed the lower court’s holding that the Oppressed Shareholder Statute was not designed to apply in this type of situation where one stockholder does not follow through on its promise to assist the corporation

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