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Ginsberg v. Bistricer

2007 WL 987162 (N.J. Super. App. Div. 2007) (Unpublished)

CONTRACTS — Even though one property owner, in bailing out another property owner, may become the record owner of their previously jointly owned property, if the parties have reached agreements intended to preserve the bailed-out owner’s interest in the property, then the bailed-out owner retains an equitable interest in the property.

An experienced real estate investor purchased a fifty-percent share of a residential apartment complex. The other half was held by a married couple, who were also experienced real estate investors. A number of years later, the investor encountered financial difficulties because of judgments against him. As a result, the complex became the subject of a foreclosure action. The investor and the couple entered into an agreement that was memorialized by a memorandum and two subsequent amendments. The agreement was intended to prevent the impending foreclosure and to allow the investor to retain his interest in the complex. The agreement required the investor to obtain financing in order to satisfy the judgments against him. The couple was allowed to cancel the agreement if the judgments totaled more than $500,000 or to provide the financing for anything over $5,000 in judgments at an eighteen percent interest rate. The agreements also allowed for the investor to maintain his rights and responsibilities as if he were still a half owner of the complex. The couple ultimately advanced more than $1,000,000 to satisfy the judgments against him. He and the couple also formed a single purpose entity to purchase the property as part of the plan to save it from foreclosure.

The investor eventually sued the couple and their other ventures. He alleged that the couple had breached their fiduciary duty to him and maintained that although he transferred his entire interest to the couple, he still held a fifty percent equitable and beneficial interest in the complex and was entitled to his share of the property’s earnings.

The lower court declared that the investor had a fifty percent equitable interest in the property. It also awarded him compensatory damages, rejected his request for punitive damages, and issued a permanent injunction against the couple and their other venture to stop them from taking any action on the judgments they purchased from the investor. The couple’s other venture was ordered to convey a fifty percent interest in the complex to the couple and another relative and the remaining fifty percent was to be transferred to the investor. Both parties appealed.

The Appellate Division rejected the couple’s first argument that the lower court erroneously interpreted the memorandum and its subsequent amendments. The Court, invoking legal principles and precedent, found that the lower court properly interpreted the term “agreement” in the memorandum and rejected the couple’s interpretation that would have allowed the term to be construed differently in different parts of the memorandum to their benefit. It noted that the couple retained options under the memorandum and its amendments and that the memorandum was drafted by experienced real estate investors. The Court also rejected the couple’s argument that the lower court wrongly refused to consider extrinsic evidence in interpreting the memorandum that would have construed it as fraudulent.

Further, the Court rejected the couple’s argument that the lower court had erred by dismissing their claims of promissory and judicial estoppel as meritless. It held that the couple’s claims of judicial estoppel failed because the investor’s failure to manage, or pay taxes on, the complex did not constitute evidence that he concealed his continued ownership in an attempt to mislead the couple. The Court also found that the investor made no contradictory remarks during the proceedings or during prior proceedings. Further, it found that equitable estoppel was inapplicable because the couple never relied on the investor’s alleged misrepresentations to their detriment. The couple’s promissory estoppel claim was likewise rejected by the Court because the agreements were negotiated by the parties, in person, and memorialized on the same days and because the couple could not establish that they relied on the investor’s promises to their detriment.

The couple’s argument that the lower court wrongly denied them half of the income taxes they paid on the proceeds earned from the complex also was rejected. The Court found that the lower court adhered to the principle that tax consequences are not to be considered when determining damages for a breach of contract claim. It noted that the couple never offered any legal sources in support of their argument and they only testified as to the amount that they paid in taxes but didn’t provide any calculations showing how much money should have been contributed by the investor toward their payment of the incomes taxes. The Court upheld the lower court’s finding that the couple could not profit by receiving the face value of the judgments they had purchased from the investor in order to diminish or eliminate the investor’s interest in the complex. It added that they could only be made whole for their expenditures and that the award the couple sought would have rewarded them for their breach of fiduciary duty to the investor.

On the other hand, the Court found that the lower court erred when it denied the couple’s request for the management fees they expended and pointed out that had the couple been co-tenants, they would have been allowed to recover payment for operating and maintenance expenses for the property. Thus, it remanded that matter to the lower court for a determination as to whether the entity it referred to in its decision was the single purpose entity created to salvage the property from foreclosure to which limited liability law would apply and deny the couple’s claims for remuneration, or whether it was the previous entity which was a commonly-held property and would have allowed the couple to recover management expenses from the investor.

On the investor’s appeal, the Court reversed the lower court’s denial of punitive damages. It pointed out that in order to receive an award of punitive damages, a party must prove that its adversary’s actions or omissions were motivated by malice or a wanton and willful disregard for it. Here, the Court noted that the lower court found no evidence of such malice but found that the lower court improperly dismissed the claim for punitive damages based on evidence presented during the proceedings to determine the compensatory damages and that the lower court could only have made such a decision based on evidence presented during the punitive phase. Since the lower court dismissed the claims for punitive damages before considering the evidence during the punitive phase, the Court reversed and remanded the matter for a determination as to whether punitive damages were appropriate.

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