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David Cronheim Mortgage Corporation v. Estate of Dodge

2005 WL 3050692 (N.J. Super. App. Div. 2005) (Unpublished)

CORPORATION; SHAREHOLDERS; LOANS—Corporate records and tax returns, coupled with evidence that a shareholder acknowledged that his or her personal expenses were paid by the business and treated as a loan to the shareholder, are sufficient to oblige the shareholder to repay that loan; a promissory note is not required.

During his lifetime, a 50 percent owner and chief executive officer of a mortgage company had many of his personal expenses paid by the company. Those payments were carried on the company’s books as loans and shown as an asset on the company’s balance sheets. The company’s outside accountant kept a running handwritten tally of the loan amounts and then, each year, he would meet with the chief executive officer and another major shareholder “to go over the personal expenses and determine the aggregate amount of expenditures that were made by [the company] on [the chief executive officer’s] personal behalf during the year.” With the borrower’s consent, the resulting amount would be added to the borrower’s loan account. At the end of every year, the company’s accountant would prepare a financial statement and an income tax return. It reflected “the aggregate amount of the loan extended to [the officer] as a result of the meeting… .” As to company’s chief executive officer, the borrower signed all of the company’s tax returns until his death. He also reviewed the financial statements each year. Those financial statements had a “notes” section, “indicating the dates and amounts that were advanced from [the company] to [him] as the borrowing officer.” With the borrower’s knowledge and consent, those statements were given to numerous institutions with whom the company did business. There was no formal promissory note and no interest rate was ever discussed. According to the other key shareholder, this was because the amount owed was constantly changing. That same officer testified that the borrower “assured me during conversations that we would have at least on an annual basis that he intended to repay the loan.” The officer stated that he would have been very happy to receive the principal without interest. Accordingly, that same officer claimed to have considered that the loan was “due on demand but I never made the demand.” Essentially, “there was no document signed by [the borrower] to [the company] evidencing the terms, conditions of repayment, maturity date, interest rate, or security for the loan. Additionally, there was no board of director’s resolution authorizing loans to the president.” Following the borrower’s death, his estate’s executor filed an estate tax return listing an amount substantially equal to what was shown on the company’s books as being owed to the company. Further, during his life, the borrower never declared the “monies charged to his loan account as income on any income tax returns filed with the Internal Revenue Service or the State of New Jersey.”

The company sued to collect the debt and sought relief by way of summary judgment. This gave rise as to whether the evidence before the court “established by clear and convincing evidence that the money advances made from [the company] to [its chief executive officer] constituted a loan to which [the company was] entitled to repayment or whether a material issue or fact exist[ed] as to whether the advances were intended as compensation or subject to a condition precedent, i.e., that repayment was conditioned on the corporation’s profitability and that condition never occurred.

The lower court ruled in favor of the company and the Appellate Division affirmed. In its affirmation, it added the following: “We are completely satisfied that the undisputed proofs demonstrate[d] that neither [the company] nor [the borrower] ever viewed the payments made by [the company] for [the borrower’s] personal expenses as anything other than advances to [the borrower] in the nature of loans which [the borrower] had an obligation to pay in the future.” It was also convinced that repayment was never contingent upon corporate profitability. “There was no writing establishing such a condition precedent and a clear understanding from the excerpted deposition statements of [the other key stockholder and the company’s accountant], relied upon by [the estate of the borrower], [was] that the monies lent constituted a debt that [the borrower] owed [the company] and that he would repay, hopefully from funds derived from corporate profits, but not conditioned upon them.” Further, the Court held that “the corporate records maintained by [the company] and its accountant provided clear and convincing proof of [the borrower’s] indebtedness to [the company].”

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