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Paparone Housing Company, Inc. v. The Wynford Group

A-1003-06T3 (N.J. Super. App. Div. 2008) (Unpublished)

CONTRACTS — Where a contract-seller operates and controls a number of business entities, in a complex arrangement, it cannot refuse to consummate the transaction based upon a technicality that the property subject to the contract is actually owned by one of the other controlled entities, especially where, through the course of the transaction, the various entities performed various obligations under the contract.

A buyer sought to obtain a property for the purpose of developing it for residential use. The seller held an interest in a number of business entities, all of which, at varying times, held title to the property. One of the business entities, a corporation, contracted to sell the property in two phases. The corporation, itself, did not obtain title to the property for the first phase until just before closing. The property owner, also one of the entities owned by the seller, transferred the property involved in the first phase to its affiliate corporation pursuant to an oral agreement, but retained title to the property contracted for the second phase. The closing for the first phase took place without incident, but closing for the second phase was delayed due to a dispute the between seller’s son, who was an attorney, and the municipality regarding certain easements. The second phase was also delayed by a dispute between the seller and his son regarding the ownership of family properties which included the property contracted for sale to the buyer.

As a result of the delays, the seller-corporation never fulfilled its obligations to obtain subdivision approval from the municipality, nor did it get sewer and construction approvals from the state and the municipality, or easements for access, drainage, and utilities from adjacent property owners. Roughly two years after the contract was executed, the buyer obtained the approvals and easements and also modified the sewer system. Under the terms of a subsequent settlement of the dispute between the seller and his son, the son was to receive title to the land contracted for the second phase of the transaction. A subsequent modification to the settlement agreement was executed. It stripped the son of the second phase property which was to remain with the previous owner. Under the terms of a subsequent consent judgment, the corporation acknowledged its obligation to sell the second phase property to its buyer once it acquired the land from a limited partnership that was the successor in title to the owner of the property and also from another one of the business entities controlled by the seller. The limited partnership then sought to terminate the second phase of the transaction as the value of the property had increased in the intervening years. It instructed the seller-corporation not to proceed with phase two of the transaction.

The buyer brought an action for specific performance against the seller, the limited partnership, and the other business entities in which the seller held an interest. The lower court found the seller and his son lacking in credibility and found that the seller retained control over all of the business entities which were established for the purpose of avoiding or reducing certain taxes. The lower court also found that since the seller controlled all of the business entities, the fact that the property owner was not a party to the contract of sale was of no consequence to the buyer’s claim. Additionally the lower court found that the buyer reasonably relied on the seller’s assurances (given during previous dealings, including during the first phase of the transaction) that the stop orders initiated by his son along with the dispute between the seller and his son were responsible for the delays in the transaction. The lower court rejected the seller’s arguments that he never authorized the improvements made by the buyer and never authorized the buyer’s obtaining the state and local development approvals for the property or that he never authorized the extensions of the phase two closing date during the delay

The lower court held that the seller and his business entities had breached their duty of good faith and fair dealing. It estopped the seller and his business entities from avoiding their obligations under the contract and noted that at no time did the seller attempt to refund the deposit paid by the buyer. The doctrine of apparent authority was invoked by the lower court in its finding that the seller was responsible for the actions of the other parties in his business entities. The lower court also invoked the doctrine of waiver in its finding that, by inaction, silence, and acquiescence on the part of the business entities regarding the buyer’s development efforts, the seller was precluded from exercising any right to avoid its obligations under the contract.

On appeal, the Appellate Division rejected the seller’s arguments that the lower court did not have the authority to enforce the oral agreement between the property owning entity and the corporation which had contracted to sell the property to the buyer or that the oral agreement was unenforceable because it was indefinite. It found that the seller’s arguments bore little relevance because it considered the transaction for the sale of the property in both phases to have been an agreement between the seller, himself, and the buyer, and agreed with the lower court’s conclusion that the complex arrangement of business entities were solely for the purpose of paying less tax on the proceeds of the sale. The Court also found that the lower court’s conclusion was based on substantial evidence which included statements by the seller, his son, his wife, and by the partners to the seller’s business entities.

The Court further found the buyer did not have to seek specific performance of the oral agreement between the property owner and the corporation because the actual property owner was bound by the corporation’s contract to sell the property due to the fact that the seller controlled both entities. The Court also rejected the seller’s argument that the lower court’s inclusion of the property owner in the agreement between the corporation and the buyer was an improper reformation of the contract. It pointed out that the seller ratified the agreements involving the sale of the property until it realized that the properties had increased in value. Further, the Court held that principles of equity permit courts to go beyond the terms of a contract and that a court has a great deal of discretion when formulating equitable remedies. Based on evidence of a promise by the seller to convey the property and the reliance on that promise by the buyer, the Court found the lower court properly estopped the seller and his business entities from avoiding the second phase of the transaction. The Court additionally found that the lower court properly decided that the seller had breached its covenant of good faith and fair dealing because of his attempts to repudiate the contract without any reasonable basis.

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