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K-T Corporation v. JB Associates

A-1513-07T3 (N.J. Super. App. Div. 2009) (Unpublished)

CONTRACTS; LETTERS OF INTENT —For a letter of intent to constitute a binding contract that would permit a court to order specific performance, the court must determine the parties’ intent including the language in the agreement, the circumstances of its preparation, and the course of dealing between the parties before and after the document’s preparation.

Four brothers and their families owned 25% of the stock of three operating companies. For a variety of business reasons, the four brothers decided to separate their business interests. Two letters of intent (LOI) were prepared at the direction of the brothers. Thereafter, the attorney for the two younger brothers sent a letter to the attorney for the two older brothers terminating all negotiations relating to the last letter of intent that had been prepared. The family business also included a real estate management company that leased property to each of the operating companies. The brothers’ parents owned the vast majority of the voting stock in the management company and the brothers each owned non-voting shares in the company. They were also officers and directors. At a meeting of the board of directors of the real estate management company, the two older brothers were removed as officers and directors. Shortly thereafter, the real estate management company sued the two older brothers and the two companies they operated. The suit asserted claims for breach of fiduciary duty, conversion, waste of the real estate management company’s assets, and unjust enrichment. The complaint also sought to reform the leases that the real estate management company had entered into with the operating companies owned by the two older brothers during a period when they managed the real estate management company. The two older brothers were also sued in their individual capacity. They responded by claiming that the parents and the two younger brothers breached their fiduciary duty to the older brothers. They also claimed that they were “oppressed minority shareholders” as described in the applicable statute, and they sought compensatory and punitive damages.

The lower court found that the last LOI superseded the first LOI and became a legally binding contract as a result of the conduct by all of the parties in performing their respective obligations under the agreement. Then, the lower court required the real estate management company to comply with all the terms and conditions of this LOI, including completing the severance payments to the two older brothers. Further, it ruled that there was nothing improper about the way the older brothers operated the real estate management company and dismissed the claims brought against them by the management company. Finally, the Court held that: (a) the two younger brothers and the parents breached their fiduciary duty to the two older brothers; (b) the two older brothers were oppressed minority shareholders; and (c) awarded the two older brothers counsel fees and costs. In reaching this conclusion, the lower court found that the older brothers were fraudulently induced to expend monies for the refinancing of the real estate management company, the company failed to pay real estate taxes, insurance, maintenance, and utility charges for one of the operating companies, and performed other actions that frustrated the reasonable expectations of the older brothers as shareholders of the real estate management company. The parents and the two younger brothers appealed.

The Appellate Division reversed in part and affirmed in part. First, it held that the lower court erred in finding that the LOI constituted a binding contract and in ordering specific performance of its terms and conditions. It pointed out that whether a letter of intent is binding is a matter of the parties’ intent. Thus, the Court needed to consider the language in the preliminary agreement, the circumstances of its preparation, and the course of dealings between the parties before and after the document’s preparation. After doing so, it found that the parties intended that: (x) the last LOI to supersede the first LOI; (y) the last LOI was not to be binding because it specifically stated in numerous instances throughout the LOI that it was “non-binding”; and (z) the last LOI made reference to the parties meeting at some future date to finalize the agreement. It concluded that since it was clear that the two older brothers did not intend the LOI to be a binding agreement, they could not seek damages for a violation of that agreement. Further, the Court noted that even though one of the essential terms of the LOI was that the father and mother would transfer all of their interest in the real estate management company to their sons equally, there was no indication in the LOI that the parents had agreed to such terms and there were no spaces at the end of the letter for their signatures. The Court ruled this was another indication that the parties did not intend the LOI to be binding. The Court found that the evidence was not persuasive that the parents agreed to these terms.

Further, the Court ruled that, since the letter of intent did not provide for any payment or benefit to be given to the parents, even if the older brothers had been able to show the parents’ intent to give them the shares, without delivery and relinquishment and control of the stock, the promise was unenforceable. Also, the Court held that regardless of any steps the four brothers may have made to fulfill their obligations under the LOI, because the older brothers failed to establish that the parents – two essential parties to the LOI – agreed to the LOI, it was not a binding contract. It noted that the brothers’ actions after the LOIs were prepared did not manifest an unequivocal intent to be bound by the provisions of the letter. Accordingly, the Court ruled that the lower court erred in finding that the real estate company and the younger brothers violated the older brothers’ rights by willfully refusing to complete the terms of the LOI because the LOI was not a binding contract.

The Court also held that the lower court erred in finding that the two older brothers were oppressed minority shareholders and in its award of counsel fees and costs to the older brothers. In reversing the lower court’s ruling on the oppressed shareholder claims, the Court found that there was no evidence to show that the older brothers were induced to expend monies and ruled that the money was spend to benefit the older brothers. Moreover, it held that there was documentary evidence indicating that the real estate management company continued making real estate tax, insurance, maintenance, and utility payments for the older brothers companies. It affirmed the lower court’s finding that the younger brothers failed to establish that there was anything improper with the administrative/management fees the older brothers removed from the real estate management company and denied the younger brothers’ claims for compensatory damages. Lastly, it reversed that part of the lower court’s order that impliedly rejected the younger brothers’ claims for reformation of the leases they had with the real estate management company. It remanded that part of the case to the lower court for further proceedings relating to the leases the real estate management company had made with the older brothers because the lower court failed to distinguish between the younger brothers’ damage claims based on insufficiency of the rent provided under the leases and their claims for reformation of the parts of the leases providing for rights of renewal which could last until 2021 and allowing the operating companies of the older brothers to assign or sublet their premises.


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