Statewide Realty Co. v. Fidelity Management and Research Co., Inc.

• Decision Date: 11 May 1992
• Citation: 259 N.J.Super. 59,611 A.2d 158
• Parties: STATEWIDE REALTY COMPANY, a New Jersey General Partnership, Jack Pomeranc, Frank Blaichman, Jacob Burstyn, Monroe Markovitz and Jesse S. Weissberg, Plaintiffs, v. FIDELITY MANAGEMENT AND RESEARCH COMPANY, INC., a Massachusetts Corporation, for and on behalf of itself and the several Fidelity Tax-Exempt Bond Funds which hold the Statewide Bonds, Fidelity Aggressive Tax-Free, Portfolio, a Massachusetts Business Trust, Fidelity High-Yield Tax-Free Portfolio, a Massachusetts Business Trust, New Jersey Economic Development Authority, a Public Body Corporate and Politic constituting an Instrumentality of the State of New Jersey and United Jersey Bank, a Banking Institution of New Jersey, Defendants.
• Court: New Jersey Superior Court

Page 59

259 N.J.Super. 59

611 A.2d 158

STATEWIDE REALTY COMPANY, a New Jersey General Partnership Jack Pomeranc, Frank Blaichman, Jacob Burstyn Monroe Markovitz and Jesse S. Weissberg Plaintiffs, v. FIDELITY MANAGEMENT AND RESEARCH COMPANY, INC., a Massachusetts Corporation, for and on behalf of itself and the several Fidelity Tax-Exempt Bond Funds which hold the Statewide Bonds, Fidelity Aggressive Tax-Free, Portfolio, a Massachusetts Business Trust, Fidelity High-Yield Tax-Free Portfolio, a Massachusetts Business Trust, New Jersey Economic Development Authority, a Public Body Corporate and Politic constituting an Instrumentality of the State of New Jersey and United Jersey Bank, a Banking Institution of New Jersey, Defendants.

Superior Court of New Jersey, Law Division Union County.

May 11, 1992.

Michael R. Griffinger and John T. Wolak, for plaintiffs Statewide Realty Co., a New Jersey General Partnership, Jack Pomeranc, Frank Blaichman, Jacob Burstyn, Monroe Markovitz and Jesse S. Weissberg (Crummy, Del Deo, Dolan, Griffinger & Vecchione, attorneys).

Bruce F. Metge and Kevin M. McGinty (Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, attorneys) and Joanne G. Eyler (Budd Larner Gross Rosenbaum Greenberg and Sade, attorneys), for defendants Fidelity Aggressive Tax-Free Portfolio and Fidelity High-Yield Tax-Free Portfolio.

ALLEY, J.S.C.

A. Findings of Fact

This case arises from the development and financing of the Vista Hotel near Newark International Airport. The hotel, which is operated by Hilton International under a management agreement, was constructed in the late 1980's after permanent financing had been arranged through an issue of $31,000,000 in unrated bonds of the New Jersey Economic Development Authority ("NJEDA" or "Authority") on December 30, 1985.

At the time of the 1985 bond issue, the developer was a New Jersey general partnership named Statewide Realty Company, referred to in the Loan Agreement and other documents pertaining to the bond issue as the "Borrower" (and referred to below as "Statewide" or the "Borrower"). The general partners of the Borrower when the bonds were issued were five individuals, Jack Pomeranc, Frank Blaichman, Monroe Markovitz, Jacob Burstyn, and Jesse S. Weissberg (sometimes referred to below as the "Individual General Partners"). These individuals and Statewide are the plaintiffs.

The bonds issued by the NJEDA in connection with the December 1985 closing were immediately purchased from the underwriter by two tax-exempt mutual funds managed by the Boston-based Fidelity Management and Research Co. ("Fidelity"). The proceeds of the bond sale to Fidelity were used to fund the NJEDA's Loan to Statewide, and Fidelity continues to hold the bonds in those tax-exempt mutual funds.

The December 1985 Loan Agreement for the bond issue, which was entered into between the NJEDA and Statewide, expressly defines the "Borrower" as

"(i) Statewide ..., a general partnership consisting of ... [the named Individual General Partners], general partners, organized and existing under the laws of the State of New Jersey and (ii) its successors and assigns as provided in Section 7.15 hereof." (Section 1.1).

The Loan Agreement provided for a "loan in the amount of $31,000,000 made hereunder by the ... [NJEDA], as lender, from the proceeds of the issuance of the initial Bonds to the Borrower, as debtor, to provide for part of the cost" relating to the "construction of an airport hotel [on property of Statewide] of approximately 375 rooms, together with the purchase of machinery, equipment, and furnishings to be used in connection therewith, located adjacent to Newark International Airport."

Of the numerous obligations set forth in the Loan Agreement, this decision focuses on the agreement of the "Borrower" (i.e., Statewide, comprised of the five Individual General Partners), to pay the principal and interest on the $31,000,000 loan. Under the bond issue closing documents, the Borrower's payments are to be in an amount sufficient to pay the principal and interest on the bonds.

The Borrower was represented by various advisors who negotiated the transaction on its behalf. Before the closing, it received from advisors a revenue and expense estimate which projected a positive cash flow to the Borrower after an initial start-up period. When the hotel opened, however, whether due to a downturn in the economy or other factors, plaintiffs found the reality far less rosy than the projections.

Faced with continuing losses rather than profits from the hotel, and faced with the Borrower's liability to pay principal and interest on the $31,000,000 Loan from the NJEDA, the Individual General Partners entered into a transaction as of February 28, 1991, in which they transferred their respective general partnership interests in the Borrower to other entities pursuant to an "Assignment and Assumption Agreement." ¹ A number of professed purposes for the transfer were set forth in the Assignment and Assumption Agreement and were testified to on behalf of Statewide at the trial, including limiting or avoiding liability of the Individual General Partners for personal injuries at the hotel or in environmental matters. As plaintiffs admitted at trial, the transfer was also designed to enable the Individual General Partners to avoid whatever personal liability they might have as Statewide's general partners for the $31,000,000 Loan under the Loan Agreement.

When Fidelity learned of the February 1991 transfer of the individual partnership interests in Statewide, it asserted that no such transfer would relieve the partners of what Fidelity contends is their continuing personal liability, as general partners of Statewide, for repayment of the principal and interest of the $31,000,000 Loan under the Loan Agreement. Plaintiffs then agreed to postpone the effective date of the transfer to January 18, 1992. ²

Statewide and the persons who were its general partners as of the making of the Loan Agreement filed their complaint in this action on September 3, 1991. Named as defendants were the NJEDA, Fidelity, and United Jersey Bank ("UJB") as successor Trustee under the Trust Indenture for the bond issue. On April 20 and 21, 1992, the case proceeded to trial by the court without a jury on plaintiff's request that the court:

(a) Declare that the transfers heretofore made by the general partners of Statewide of their respective partnership interests in Statewide, and any other transfers they wish to make, be deemed permissible and proper transfers as of January 18, 1992 or thereafter. ³

(b) Declare that as of the date of such transfer, assignment or divestiture of a partnership interest in Statewide, the partner so transferring, assigning or divesting his interest shall be discharged from all liability under the Loan Agreement, and such liability shall be the liability of the transferee or assignee of the interest." ⁴

Pursuant to Rule 1:7-4, in addition to the foregoing facts, the court also makes the following findings of fact.

Under the Promissory Note and the Loan Agreement, Statewide obligated itself to make semiannual interest payments and annual principal payments every year from 1986 through 2017. The successor Statewide partnership formed by the Individual General Partners' transfers has the same name and the same assets as Statewide, and the new transferee corporations (the "Holding Corporations") all have the same partnership interests and liabilities as did the Individual General Partners, who through the Holding Corporations retain all of their financial interest in the Vista Hotel.

As noted, the motivation for the Individual General Partners' transfer to the Holding Corporations included their desire to avoid all forms of personal liability relating to the Vista Hotel, including personal liability under the Loan Agreement. They received no consideration for the transfers, and the Holding Corporations have no capital, no bank accounts, and no assets other than the general partnership interests which the Individual General Partners attempted to convey.

Section 10.7 of the Loan Agreement is an integration clause under which the Loan Agreement supersedes all prior agreements, and Section 10.2 requires all amendments to be in writing and signed by the "party against whom enforcement ... is sought." No relevant written amendments were shown to have been made or approved by Fidelity, by the Trustee, or by the NJEDA.

Indeed, there was no persuasive showing that Fidelity, the NJEDA, UJB, or their agents, agreed to allow, or engaged in a course of dealing that allowed, any of the Individual General Partners to be discharged from their liability after January 18, 1992. On the contrary, at the time of the attempted transfers, the Individual General Partners did not seek the agreement of Fidelity, the NJEDA, or UJB. Upon hearing of the transfers, the NJEDA reserved its approval of the transaction subject to additional documentation from Statewide, which was never sent to the NJEDA. The Assumption Agreement, by which the Individual General Partners attempted to accomplish the transfers, does not refer to Section 7.19 of the Loan Agreement. Furthermore, it does not contain the signature of Fidelity as a partnership creditor assenting to the transfer or to a discharge of partnership liability, nor does it recite any agreement of Fidelity to relieve the Individual General Partners of their personal liability. ⁵ The Individual General Partners attempted unsuccessfully to renegotiate documents relating to the Loan, as is shown by a December 12, 1988, memo from their lawyer to their financial consultant mentioning a need to find a justification to avoid posting a $3.6 million Start-up Letter of Credit required under the Loan Agreement.

The Individual General Partners at the time of the bond issue were highly experienced real estate developers, familiar with large transactions, and upon becoming general...