Alpha Beauty Distribs., Inc. v. Winn-Dixie Stores, Inc.

• Decision Date: 03 April 2012
• Citation: 425 N.J.Super. 94,39 A.3d 937
• Court: New Jersey Superior Court
• Parties: ALPHA BEAUTY DISTRIBUTORS, INC., Plaintiff–Appellant, v. WINN–DIXIE STORES, INC., Fruth Pharmacy, Inc., Primary One, LLC, JPM LLC, and URM Stores, Inc., Defendants,andC & S Wholesale Grocers, Inc., and United Natural Foods, Inc., Defendants–Respondents.

39 A.3d 937

425 N.J.Super. 94

ALPHA BEAUTY DISTRIBUTORS, INC., Plaintiff–Appellant,

v.WINN–DIXIE STORES, INC., Fruth Pharmacy, Inc., Primary One, LLC, JPM LLC, and URM Stores, Inc., Defendants,andC & S Wholesale Grocers, Inc., and United Natural Foods, Inc., Defendants–Respondents.

Superior Court of New Jersey, Appellate Division.

Submitted March 13, 2012.Decided April 3, 2012.

McCusker, Anselmi, Rosen & Carvelli, attorneys for appellant (Paul F. Carvelli and Kathleen A. Hirce, Florham Park, on the brief).

Drinker Biddle & Reath, attorneys for respondent C & S Wholesale Grocers, Inc. (Frank F. Velocci and Marita S. Erbeck, Florham Park, on the brief).

Brenner & Levine, attorneys for respondent United Natural Foods, Inc., join in the brief of respondent C & S Wholesalers, Inc.Before Judges FISHER, BAXTER and MAVEN.

The opinion of the court was delivered by

FISHER, J.A.D.

In this appeal, we consider whether the trial judge properly dismissed this action because plaintiff Alpha Beauty Distributors, Inc. did not include the claims asserted in this action or join the defendants here in a pending federal action. We conclude that the trial judge did not equitably apply the entire controversy doctrine. The core of the federal action was Alpha shareholder Bebert Azran's claim that the two other shareholders, Noel and Reid Kleinman, breached the fiduciary duties they owed to Azran and Alpha, while the object of the suit at hand was to collect customer debts that the Kleinmans may have unduly or inappropriately reduced or compromised. We, thus, reverse the order under review.

I

The inapplicability of the entire controversy doctrine is demonstrated by reference to the procedural histories of the federal action and this action and the nature of the claims asserted in both. In dismissing this suit against defendants C & S Wholesale Grocers, Inc., and United Natural Foods, Inc., the trial judge did not conduct an evidentiary hearing to ascertain the facts deemed relevant to the disposition, but instead relied upon what was revealed by the pleadings in the federal suit and this suit. Accordingly, we examine the record in the light most favorable to Alpha. See NCP Litig. Trust v. KPMG LLP, 187 N.J. 353, 365, 901 A.2d 871 (2006) (holding that, on a motion to dismiss, the opponent is entitled to “a generous and hospitable approach,” an assumption of the truth of its allegations, and the benefit of all reasonable inferences).

Alpha was formed by the Kleinmans. Azran made several loans to the Kleinmans to help establish Alpha, in return for which he became the owner of eight percent of Alpha's outstanding shares. According to Azran, he lent additional funds to Alpha and as a consequence, in September 2008, the Kleinmans “agreed to convey to Azran the majority of their ownership interests in Alpha ... such that Azran assumed ownership” of eighty percent of Alpha's outstanding shares.

Azran formally terminated the Kleinmans' employment relationships with Alpha on November 6, 2008. That same day, Azran commenced a civil action on behalf of Alpha and himself against the Kleinmans in the United States District Court for the District of New Jersey. Azran alleged he had “only very recently learned the extent to which [the] Kleinman[s] ... engaged in a blatant and systematic pattern of fraudulent conduct concerning Alpha in rampant violation of their fiduciary duties.” Azran and Alpha sought “to recover damages from [the Kleinmans] to satisfy the debts and obligations they incurred on Alpha's behalf during the period when they controlled its business and operations, from January to September 2008, by which time they had abandoned all responsibility for Alpha—but only after stripping Alpha of its assets, destroying its business relationships and implicating substantial guarantees of Alpha's debts made by Azran as a result of their unlawful conduct.” In describing this parade of wrongdoings, Azran asserted that his “review of Alpha's purchase and sales records ... showed that many of Alpha's customers and vendors had requested [and] were permitted to assert certain credits and chargebacks against purchases from Alpha that reduced the amount of money owed to Alpha for the inventory purchases they made.” In this regard, Alpha mentioned a few customers by name but did not refer to C & S or United. In fact, Azran and Alpha alleged they had “yet to unravel the provenance and legitimacy of numerous other credits or chargebacks that [the Kleinmans] agreed to on Alpha's behalf.”

A final pretrial order was entered in the federal shareholder suit on May 24, 2010. The detailed pretrial order reveals that the suit involved only Azran's multi-faceted claim that the Kleinmans had damaged Azran and Alpha through a course of self-dealing and conversion of corporate assets. The pretrial order did not encompass any claims that Alpha may have possessed against any customers or other entities that may have received goods or funds and paid less than the proper amount as a result of the Kleinmans' alleged violation of their fiduciary duties.

A month after entry of the federal final pretrial order, Alpha commenced this action against C & S and United, among others, alleging, in essence, unpaid book accounts. As for C & S, Alpha alleged that between approximately March and June 2008, C & S purchased $157,712.82 worth of goods for which it paid only $65,754.08. Alpha's complaint recognized that C & S had asserted certain “credits, chargebacks and deductions” and that, between October 2009 and February 2010, Alpha had attempted “to reconcile its accounts with C & S,” which included a request for information from C & S. According to the complaint, “C & S thereafter requested an opportunity to review its records and justify its having taken credits, chargebacks and deductions in excess of the amount due Alpha,” but C & S had not responded by the time Alpha filed its complaint. The complaint makes similar allegations against United; Alpha claimed that United was indebted to it in the amount of $7,137.15, and recounted similar attempts made between October 2009 and February 2010 to ascertain United's entitlement to credits, chargebacks and deductions in excess of the amount Alpha believed to be owed.

Alpha did not refer to the federal action in its Rule 4:5–1(b)(2) certification. In October 2010, approximately one month after C & S and United filed their answers to the complaint, and having learned of the federal suit, United moved for leave to amend its answer to include an entire-controversy defense; C & S and United also sought dismissal of the complaint on that ground. After summarizing the parties' arguments and after referring to parts of the considerable body of case law that has developed regarding the entire controversy doctrine, the trial judge drew the following conclusions from the pleadings:

It was inexcusable for [Alpha] to fail to disclose the existence of the federal court action which had been pending for two years. The failure to comply with [ Rule ] 4:5–1(b)(2) was addressed at oral argument at which time counsel for [Alpha] acknowledged it as a purposeful omission by saying that she determined that the cases were so different that it did not bear mentioning. The rule requires disclosure of other actions regarding the same “matter in controversy.” Clearly, the allegations and remedies sought in the federal court action arise from the same set of transactions. The same chargebacks and credits form the basis for both cases. The failure to disclose the existence of the federal court action resulted in substantial prejudice to [defendants] inasmuch as the Kleinmans are identified as the wrongdoers who had full authority to act on behalf of Alpha [ ]. This contention alone would have serious impact on the defense posture of [defendants] to the allegations that they took improper credits or chargebacks. Moreover, the federal case seeks monetary damages from the [Kleinmans] for the same transactions (albeit many other[s] as well) as involve the movants. The potential for a double recovery is real and likely since the federal court matter is much further along and about to go to trial. The intention of and the policy considerations underlying the [e]ntire [c]ontroversy [d]octrine warrant dismissal of the [c]omplaint.

An order of dismissal of the claims against C & S and United was entered on November 17, 2010. The claims against Winn–Dixie Stores, Inc. had been previously dismissed for lack of personal jurisdiction; Alpha and Fruth Pharmacy, Inc. had previously reached a settlement. On January 14, 2011, the claims against the remaining defendants were dismissed for lack of prosecution.

Meanwhile, on February 8, 2011, the federal district judge entered summary judgment in favor of Azran and Alpha and against the Kleinmans in the amount of $1,366,358.30.

Alpha then filed this timely appeal, which seeks review of the order that dismissed its action against C & S and United.

II

We discern from the trial judge's written decision two separate components to the dismissal of Alpha's claims against C & S and United. The first stemmed from what the judge perceived to be a violation of Rule 4:5–1(b)(2), and the second ground was the judge's belief that the entire controversy doctrine obligated Alpha to assert its claims against C & S and United in the federal action. Although the judge's decision conflated the two concepts, we view them separately.

A

The judge's invocation of Rule 4:5–1(b)(2) and the sanctions available for its breach were simply inapplicable here. The Rule itself, as relevant here, obligates a party in its first pleading—and further imposes a continuing obligation—to advise the court of other related matters or potentially necessary parties. Specifically, the Rule requires that a pleader give notice “as to whether the matter in controversy is the subject of any other action pending in any court or of a pending arbitration...