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Schwartz v. Fenzel

A-7276-97T2 (N.J. Super. App. Div. 2000) (Unpublished)

PARTNERSHIPS; RECISSION—Where a partnership promoter is guilty of fraud, the partners may be entitled to recission even if that remedy would not put all parties back to where they originally stood.

An individual contracted to purchase an apartment complex and then sought investors for a limited partnership that would own the complex. In doing so, he enlisted an investor to be a second general partner. In a motion for summary judgment by the second general partner and by a number of limited partners, the lower court found it uncontroverted that the organizer had failed to disclose material facts about the property, specifically including the existence of an unread and unbilled gas meter, asbestos, lead paint, and oil tanks. The Court also found that the organizer had misrepresented his intention to invest his own money as a limited partner. The lower court ordered recission of the purchase agreement and also awarded return of the partnership investments (together with interest) to the complaining partners. The organizer argued that summary judgment was not warranted because of the factual disputes. The Appellate Division, however, found that there were no “genuine issues of fact” with regard to the allegations. In fact, it found that the “evidence was so one-sided that plaintiff was entitled to summary judgment… .” Further, had the gas meter, later discovered by the gas supplier, been factored into the operating expenses for the apartment complex, the investment could not have made any money. The organizer also argued, on appeal, that the lower court improperly ordered “rescission damages.” The Appellate Division disagreed, finding, generally, “in rescinding a contract, the parties should be returned to the ‘ground upon which they originally stood.’” Nonetheless, the Court also pointed out that this was not an absolute requirement. Rescission can be accorded even when it can only go “so far as practicable.” In this particular case, the apartment complex had been surrendered to the mortgagee when the mortgagor was unable to make a balloon payment. Nonetheless, even though it was not possible to return the parties to where they originally stood, the Court held that “a judge sitting in a court of equity has a broad range of discretion to fasten an appropriate remedy in order to vindicate a wrong consistent with principles of fairness, justice, and the law.” Thus, the Court found that return of the original investment with interest constituted a reasonable equitable remedy under the circumstances.


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