Tully v. Mirz

• Decision Date: 29 November 2018
• Docket Number: DOCKET NO. A-0241-17T1
• Citation: 457 N.J.Super. 114,198 A.3d 295
• Parties: Richard W. TULLY, Jr., Plaintiff-Appellant, v. Peter MIRZ, Defendant-Respondent.
• Court: New Jersey Superior Court — Appellate Division

457 N.J.Super. 114

198 A.3d 295

Richard W. TULLY, Jr., Plaintiff-Appellant,

v.Peter MIRZ, Defendant-Respondent.

DOCKET NO. A-0241-17T1

Superior Court of New Jersey, Appellate Division.

Submitted October 16, 2018

Decided November 29, 2018

Philip E. Mazur, attorney for appellant.

The Weinstein Group, PC, attorneys for respondent (Lloyd J. Weinstein, on the brief).

Before Judges Fisher, Hoffman and Geiger.

The opinion of the court was delivered by

GEIGER, J.A.D.

Plaintiff Richard W. Tully, Jr. and defendant Peter Mirz were the sole shareholders of a closely-held corporation they jointly started known as Interstate Fire Protection, Inc. (IFP). Plaintiff and defendant, who are brothers-in-law, did not initially sign a written agreement stating how profits and losses would be shared, though for the first five years of the business they took an equal salary. When IFP began experiencing financial difficulties, plaintiff contributed significant funds to pay its expenses. Eventually, IFP defaulted on a loan from TD Bank, N.A., and judgment was entered against it in the State of New York.

After the parties were unable to reach an agreement concerning their respective contributions to IFP's debts, plaintiff filed suit to recover fifty-percent of the "substantial contributions" he and his other company made to IFP to cover its shortfalls. Plaintiff appeals from an August 28, 2017 order dismissing his complaint against defendant without prejudice following a one-day bench trial. For the following reasons, we affirm in part and reverse and remand in part.

In 2005, plaintiff and defendant formed IFP, a fire protection contractor serving primarily commercial customers, as a partnership. Two years later they incorporated the business in New York. Each party made an initial $35,000 investment in IFP, and were paid equal salaries during IFP's first five years.

The parties did not initially enter into a written agreement as to how IFP losses would be shared individually. However, they eventually entered into a Shareholders-Partners Agreement (Agreement) on January 15, 2009.¹ Under the Agreement, plaintiff and defendant are equally responsible for IFP's liabilities, "unless the losses are occasioned by the willful neglect or default, and not the mere mistake or error, of any of the parties."

Plaintiff had substantial prior experience in the construction industry and had previously formed Interstate Mechanical Services, Inc. (IMS), which provided HVAC-related mechanical contracting services to its clients. Plaintiff brought his name, reputation, and client contacts to IFP. He continued to own and operate IMS in conjunction with IFP. Defendant had no role in IMS.

Defendant worked in the fire protection field prior to forming IFP, and was licensed to perform that trade, but had no prior experience owning a business. Defendant was responsible for running IFP's day-to-day operations.

In 2008, IFP received a $250,000 line of credit from TD Bank. The line of credit was later increased to $750,000. However, financial difficulties eventually led the parties to reduce IFP's line of credit to $450,000 in 2011. Plaintiff, defendant, and IMS each guaranteed repayment of the line of credit when it was initially opened and each time it was modified.

IFP's financial difficulties led it to default on its obligation to TD Bank. Plaintiff alleges IFP's financial difficulties were caused by defendant's mismanagement and willful neglect, including failure to estimate projects properly and failure to properly mobilize and coordinate IFP's forces. On January 7, 2015, TD Bank filed a collection action against IFP, IMS, plaintiff, and defendant in the Supreme Court of New York, and in April 2016, secured a judgment in the amount of $530,687.40 plus statutory interest (IFP judgment).

Although the IFP judgment held the debtors jointly and severally liable, plaintiff and IMS entered into a settlement agreement with TD Bank, which discharged them from the obligation in exchange for payment of $300,000. Plaintiff and IMS performed and were formally released on October 20, 2016. Defendant and IFP remained liable to TD Bank for the remaining balance of $226,469.40. TD Bank receives payment from defendant through a wage garnishment.

Plaintiff alleges he and IMS extended loans to IFP, or made payments on its behalf, for which they expected to be repaid by IFP. Although payment has been demanded, it has not been remitted.

Plaintiff also alleges that in 2012, defendant sold the assets of IFP to Pace Plumbing Corp. without fully disclosing the terms of the sale to plaintiff, or by misrepresenting the terms of the sale. These claims were withdrawn by plaintiff during the bench trial.

Plaintiff also alleges defendant misappropriated IFP funds by falsifying the time sheets of former IFP employee James Gould in an alleged kickback scheme wherein Gould was paid for overtime he did not perform, with the unearned income being applied to the debt defendant owed Gould on a personal loan from 2010. Plaintiff further alleges defendant converted IFP funds through Gould's bank account in 2012. Finally, plaintiff alleges defendant misused IFP funds for personal expenses, such as excessive payments for company vehicles that were used personally by defendant.

Plaintiff filed a six-count Chancery action against defendant alleging: breach of fiduciary trust (count I); breach of contract (count II); mismanagement (count III); breach of the covenant of good faith and fair dealing (count IV); conversion (count V); and fraud (count VI). Plaintiff demanded judgment against defendant: (1) compelling repayment to IFP of monies wrongfully converted by defendant or compelling defendant to repay to plaintiff his proportionate share; (2) compelling repayment of loans made to IFP or payments made on its behalf or compelling defendant to repay to plaintiff his proportionate share; (3) compelling defendant to comply with all obligations imposed by the Agreement, including the obligation to pay one-half of IFP's liabilities and debts; (4) for compensatory, consequential, and incidental damages; and (5) for interest, attorney's fees, and costs.

Defendant moved to dismiss the complaint for failure to state a claim upon which relief can be granted pursuant to Rule 4:6-2(e), or for violation of the single controversy doctrine pursuant to Rule 4:30A. The Chancery judge denied the motion, noting:

While many of the claims could be characterized as derivative, the court is empowered in a closely held company case to treat an action raising derivative claims as a direct action. Brown v. Brown, 323 N.J. Super. 30, 36-38, 731 A.2d 1212 (App. Div. 1999). That is sufficient to survive a motion to dismiss.

The case was subsequently transferred to the Law Division. By leave granted, plaintiff filed an amended complaint alleging the same causes of action and seeking the same relief.² Defendant moved to dismiss the amended complaint pursuant to Rules 4:6-2(e) and 4:30A. The Law Division judge denied the motion, noting the motion was based on the same arguments raised by defendant in the prior motion to dismiss. The motion judge reasoned:

The plaintiff has correctly noted that the law of the case doctrine requires this [c]ourt to abide by Judge Contillo's decision.

Judge Contillo did not reach the merits of the defendant's motion to dismiss based upon the Entire Controversy Doctrine and [Rule ] 4:30A. He noted that insufficient information had been supplied. That notation leaves this court free to consider that argument.

This court finds itself in the same position. This court has not been supplied with copies of the pleadings in the N.Y. State litigation. This court has no certification establishing a basis for first-hand knowledge as to what is involved in the disputes being litigated in N.Y. State Court.

....

This court has no detail as to the claims involved in the New York State litigation. It is the moving party's obligation to supply that information to this court.

Defendant then filed an answer with affirmative defenses and a four-count counterclaim, alleging fraud (count one), breach of fiduciary duty (count two), conversion (count three), and unjust enrichment (count four).

Following the completion of discovery, the case proceeded to a one-day bench trial. The trial judge issued a written opinion and order dismissing the amended complaint without prejudice for lack of standing, concluding "this action was improperly brought as a direct action against [d]efendant rather than a derivative claim on behalf of IFP." Recognizing the well-established rule "that standing is a firm requirement for all actions brought before a court, even if the issue is not addressed by [d]efendant," the judge engaged in the following analysis:

In the instant action, IFP was a closely held organization and therefore subject to the [c]ourt's discretion on whether or not the claims made against [d]efendant should be considered direct [or] derivative. Because the interests of IFP's creditors would be materially prejudiced by allowing [p]laintiff to directly recover from [d]efendant, this [c]ourt is precluded from treating this matter as a direct action and must hold that [p]laintiff has no standing to bring this action against [d]efendant.

Plaintiff seeks to recover funds directly from [d]efendant, as an individual, despite the fact that the injury he claims appears to be suffered by IFP. The funds supposedly mismanaged, converted and siphoned by the [d]efendant were clearly IFP company funds. Thus, the allege[d] injury sustained by the [d]efendant's actions effected the company as a whole and did not represent a "special injury" to [p]laintiff as an individual. Additionally, most of the funds advanced by [IMS] to IFP were carried as loans from [IMS] to IFP on [IMS's] records. Accordingly, it is [IMS] that needs to file a complaint based on the breach of the loan agreements.

Although this [c]ourt does have the discretion to treat [p]laintiff's claim as a direct

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