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Kalogeras v. 239 Broad Avenue, L.L.C.

A-4170-06T2 (N.J. Super. App. Div. 2010) (Unpublished)

CONTRACTS; LIQUOR LICENSES — The requirement for government approval is an implied condition for all agreements for the transfer of alcoholic beverage licenses and the implied covenant of good faith and fair dealing requires the parties to cooperate with each other in effectuating such a transfer.

Two brothers purchased and co-owned a diner. When their relationship deteriorated, they decided to separate their business interests. They had the diner business appraised at $4,000,000. Because they were equal owners, they agreed that the first brother would receive half the amount in exchange for transferring his interest to businesses controlled by the second brother. At closing, the first brother was paid $1,050,000 and took back a $950,000 mortgage note payable over a ten year period.

The first brother received additional rights under the sale agreement, as he was concerned the second brother would immediately sell the diner for greater value. The first right gave the first brother half of any proceeds over $4,000,000 if the diner was sold within two years. The second right gave him a right of first refusal on any sale of the business while any portion of the mortgage remained unpaid. Counsel for the second brother signed a letter memorializing these terms; however the buyout agreements did not include the term of the right of first refusal (RFR) and did not contain language stating whether the parties’ respective rights could be assigned to a third party. Additionally the buyout agreement stated in part that it superseded any and all prior agreements or understandings between the parties.

Three years after the sale, but while the mortgage was still outstanding, the second brother entered into an agreement of sale with a buyer, selling the diner, the land it occupied, and the liquor license for $6,500,000. The sale agreement referred to a valid RFR held by the first brother. When the first brother heard of the agreement, he negotiated the assignment of his rights under the RFR, to a second buyer, for $100,000, and simultaneously exercised his right of first refusal. The second brother countered by terminating the underlying agreement of sale, alleging that he no longer was interested in selling the diner.

The first brother filed suit, seeking enforcement of his right of first refusal. The assignee intervened in the action and requested that the court recognize him as the purchaser of the diner under the original agreement of sale. After a trial, the lower court granted specific performance in favor of the first brother and the assignee. With regard to the liquor license, the court determined that the governing contract implied the need for prior approval pursuant to the New Jersey Alcohol Beverage Control Act (ABC Act), and that the second brother had to cooperate in its transfer.

On appeal, the Appellate Division reversed, finding there was no explicit provision in the agreement that stated the transfer of the liquor license was conditioned on ABC approval, and so specific performance could not be granted for a contract of sale of a liquor license. Certification of the issue was granted by the New Jersey Supreme Court.

The Supreme Court reinstated the lower court’s ruling, holding that the requirement for governmental approval is an implied condition of all agreements for the transfer of alcoholic beverage licenses. The Court held that the fact that the government may possess the ultimate right to determine whether a contractual term is to be enforced does not relieve the contracting parties of the implied covenant of good faith and dealing. It concluded that even after cooperating in good faith, the parties may be unable to obtain the governmental approvals needed to secure the transfer of the liquor license. In such an instance, the lower court retains the authority to invoke the contractual doctrine of novation or other similar equitable power to adjust any of the terms or conditions of the contract. The Supreme Court then remanded the matter to the Appellate Division for consideration of other appeals raised by the second brother who refused to sell the diner pursuant to the right of first refusal held by the first brother.

On remand, the Appellate Court affirmed the lower court’s ruling that the RFR was valid and applicable because the second brother had ratified his counsel’s agreement to that term when he signed the sales agreement, which incorporated the RFR, and the second brother knew or should have known that the first brother could exercise that right. The Court also held that the equitable doctrine of unclean hands or equitable estoppel did not apply to bar the first brother from exercising, and then assigning, the RFR, as his actions, though questionable, were not evil or unconscionable.

The Court also upheld the assignment of the rights under the RFR, finding no language in any governing document prohibiting it, and also finding no confidentiality clause in the sales agreement that would prohibit the disclosure of the RFR to a third party. The Court found the contemporaneous exercise of the RFR and the assignment of rights under the RFR to be lawful and neither harsh nor oppressive.

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