Solowiej v. Feingold

ESX-L-7465-95 (N.J. Super. Law Div. Esx. Cty. 1999) (Unpublished)
  • Opinion Date: September 3, 1999

CONTRACTS; FRAUD—Structuring a contract with the intent of depriving the other party of the fruits of its bargain is a breach of the duty of fair dealing, renders the contract subject to rescission, and may subject the tortfeasor to punitive damages.

Two men sought to buy a restaurant and liquor business but told the owner that they did not have sufficient money to complete the purchase. The owner, in response, proposed that they gradually work their way into the business by managing it first. He suggested a structure pursuant to which a transaction eventually took place, namely, a combination of a three-year lease of the premises and a “management agreement.” The owner testified that the purpose of the structure was to find a cheaper way for the buyers to get into the business as a prelude to becoming buyers. The Court, following a trial without a jury, found that statement to be the crux of a fraud. It held that the restaurant owner knew that the scheme used to induce the buyers to enter into the agreements was doomed to failure; that it had no rational basis in fact; and that it was solely a device to defraud the buyers. The scheme required the buyers to pay the restaurant owner about $65,000 as so-called security deposits. The lease provided for varying monthly rental payments of between $10,000 and $22,500. Pursuant to the management agreement, the buyers became employed by a management company related to the restaurant owner. All profits (if any) were to go to the buyers after payment of certain expenses of operating the restaurant and bar. The term “profit” was not defined. Under the terms of the lease and management agreement, the buyers did not acquire title to any assets. Instead, the agreement provided that would have an opportunity to buy the restaurant and liquor license at fair market value at the end of the lease term. The Court termed the transaction irrational and said it did not provide a basis to achieve the undisputed purpose of the buyers, i.e., to purchase the business. Therefore, the scheme served no legitimate purpose but only provided a means to extract money from the buyers based upon the false premise that as “owners” of the business they had to lease the premises. In addition, the restaurant owner knew at the outset that there would be no profits. “The sole purpose of the lease was to create an obligation to pay rent without regard to the profitability of the business.” The restaurant owner prepared all drafts of the agreement and convinced the buyers not to use an attorney to review the documents or, indeed, to make any investigation with respect to the status of the business, its profitability, solvency, or the state of the liquor license. There was no closing statement or closing. To satisfy the buyers’ concern that there might be liens against the property, the restaurant owner produced the “certificate of good standing” with respect to two related corporations. The owner did not disclose that it had just pledged the corporate stock to a lender. The owner also failed to reveal that there were substantial trade obligations for unpaid food and liquor purchases. The evidence showed that the restaurant owner knew that the buyers did not have the necessary capital to meet the working capital requirements of the business; that the business was in a poor financial position; and the business had not been profitable in the past. “In short, [the buyers] had no realistic opportunity to make a profit, no less to accumulate enough capital to purchase the property and the business at the end of the term of the lease.” The Court’s conclusion was based, in part, on the owner testifying several times that, for all he knew, the buyers had a rich uncle or could win the lottery.

Every fraud in the most general and fundamental sense consists of obtaining an undue advantage or some act or omission that is “unconscionable or a violation of good faith.” “Silence in the face of a duty to disclose may be fraudulent concealment, and a suppression of truth when it should be disclosed is equivalent to expression of a falsehood.” Here, the owner suppressed the basic truth that the lease and management agreement could not possibly generate profits or lead to the purchase of the restaurant and license. Further, the owner was found to have breached the basis of the contract between the parties by creating a situation in which the object of the contract was impossible to achieve. In effect, the owner deprived the buyers of the fruits of their bargain and, as a result, was held to have violated the implied covenant of fair dealing. For all those reasons, the Court found that both the lease and management agreement were obtained by fraud and should be rescinded. Further, it found that the intentional tort intended by the restaurant owner was “especially egregious” conduct and that punitive damages were appropriate in this matter.