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DEB Associates v. Forever Young Medical Daycare, LLC

A-3373-09T3 (N.J. Super. App. Div. 2011) (Unpublished)

AGREEMENTS; GOOD FAITH AND FAIR DEALING — The implied covenant of good faith and fair dealing may not override an express provision in an agreement absent proof of any bad motive or intention on the part of the party allegedly breaching that covenant to do harm to the other party.

An investor sued a daycare company alleging it had an interest in the company. A settlement was reached on an oral record before the lower court. In it, the investor was to receive the functional equivalent of five percent of the company, directly transferred from a principal of the company. The first $400,000 in distributions to the investor were to be allocated to payment of a loan, and the investor would receive a 20 percent interest in a contemplated new facility to be established by that same principal. The agreement gave the principal had the discretion not to open for business at that location and he would not be in breach if she decided not to do so. In such an event, the investor would be given a similar interest in any other substitute facility in which the principal had an active interest. During settlement discussions, the investor never asked the principal about the probability of her opening a new center. Subsequent to settlement, the principal advised the investor that the contemplated facility had been suspended and no comparable project would be pursued. The investor moved to enforce the settlement or vacate the dismissal of the litigation and return the matter to the trial calendar. The investor contended the principal had breached the settlement agreement, had fraudulently induced him to settle the case on those terms, and violated the covenant of good faith and fair dealing. The principal opposed the motion, reiterating that the investor understood her failure to proceed with a new facility would not constitute a breach.

The lower court rejected the motion, finding that the principal had intended to open the contemplated facility as of the day of settlement and could not be found in breach of the agreement for ultimately not opening the center. It found the investor understood that future circumstances might cause the principal to decide not to open another center. The lower court also noted an implied covenant of good faith and fair dealing may not override an express provision in the agreement. Further, the investor failed to prove any bad motive or intention by the principal.

The investor appealed, but the Appellate Division affirmed, finding the investor did not rely upon the opening of another facility as a material element of the settlement because, at the time he entered the settlement, he had been specifically told that the principal could exercise unchallengeable discretion in making her decision. Therefore, there was no proof of a material misrepresentation. Further, because the settlement agreement expressly provided the principal with complete discretion, the claim of a breach of the implied covenant and fair dealing was similarly unsupportable.

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