Opinion
DOCKET NO. A-0498-15T4
01-26-2017
WILLIAM COHEN, Plaintiff/Respondent, v. CAROL FORDEN, Defendant/Appellant, and SUMMETRIA, LLC AND AE2, INC., Defendants. CAROL FORDEN, Third-Party Plaintiff, v. COSTAR PARTNERS, LLC, CSG RE PARTNERS, LLC, GAWI, LLC and MITCHELL WEINBERGER, Third-Party Defendants.
O'Kelly & Ernst, LLC, attorneys for appellant (Daniel P. Murray, of counsel; Mr. Murray and Ryan M. Ernst, on the brief). Cole Schotz P.C., attorneys for respondent (Michael N. Morea, of counsel; Mr. Morea and Philip Danziger, on the brief).
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
This opinion shall not "constitute precedent or be binding upon any court." Although it is posted on the internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R.1:36-3. Before Judges Alvarez and Manahan. On appeal from Superior Court of New Jersey, Chancery Division, General Equity, Passaic County, Docket No. C-81-13. O'Kelly & Ernst, LLC, attorneys for appellant (Daniel P. Murray, of counsel; Mr. Murray and Ryan M. Ernst, on the brief). Cole Schotz P.C., attorneys for respondent (Michael N. Morea, of counsel; Mr. Morea and Philip Danziger, on the brief). PER CURIAM
Carol Forden appeals from a decision, after a bench trial, finding her liable for damages suffered by William Cohen as a result of her fraudulent and negligent conduct. We affirm.
We recite the following facts pertinent to our decision. Summetria, LLC (Summetria) was the parent company and sole member of Artic Ease, LLC (Artic Ease), and held the intellectual property rights associated with Artic Ease's products. At all relevant times, Forden served as the managing member of Summetria, pursuant to the Amended and Restated Limited Liability Company Operating Agreement of Summetria, LLC (the Operating Agreement). In accordance with the Operating Agreement, Forden exercised absolute control over day-to-day management. Moreover, Forden was the sole shareholder of Forden Holdings, Inc. (Forden Holdings), which held the largest membership interest in Summetria. Forden was also the president and chief executive officer of Artic Ease.
In October 2011, Cohen and several other investors formed Costar Partners, LLC (Costar) as a vehicle to purchase a 20% interest in Summetria for $3 million. Pursuant to the terms of the Operating Agreement, Cohen was designated as Costar's representative to Summetria's "Board of Directors" (the Board).
In April 2012, Forden executed a security agreement in connection with a $324,727 loan provided to Summetria, as memorialized by a promissory note. Forden did not file a UCC-1 financing statement or otherwise perfect her security interest.
Under Article 9 of the Uniform Commercial Code (UCC), the filing of a financing statement, i.e. UCC-1, perfects the creditor's secured interest. See N.J.S.A. 12A:9-301(1); 310(a). A UCC-1 financing statement denotes the name and address of the debtor and secured party, as well as a description of the property that a debtor has provided as collateral for a loan. See N.J.S.A. 12A:-502. "The primary purpose of a financing statement is to put a searcher on notice that an underlying security agreement may be outstanding." Pinkerton's Inc. v. John A. Roebling Steel Corp., 186 N.J. Super. 10, 14 (Law. Div. 1982) (citation omitted).
In June 2012, Forden, on behalf of Summetria, approached Cohen for a $1 million personal loan. The basis for the requested loan was due to Summetria's lower than projected sales which resulted in difficulty in meeting necessary expenses. During these negotiations, Cohen requested that Summetria provide him with a security interest. Forden informed Cohen that Summetria could not provide a security interest due to her concern that notifying the institutional lenders would prompt them to "call" the outstanding business loans and, consequently, force Summetria into bankruptcy.
The record is unclear whether the loans referenced by Forden actually contained a call provision by which the lender would have the right to demand full payment.
Cohen provided the loan, memorialized by a promissory note, without a security interest. In furtherance of the loan, Forden executed an unlimited guarantee and pledged her membership interest in Forden Holdings as security. There were three extensions of the repayment date granted by Cohen. At Forden's request, one of the extensions included an additional $250,000 loan by Cohen to Summetria. The loan was based upon Forden's continued assurances that, through its provision, the regular business expenses would be met and there would be an ability by Summetria to repay.
Nonetheless, and despite Cohen's infusion of capital, the business downfall continued. After efforts to sell the business to third-parties failed, Artic Ease ceased operations, effectively placing that entity and Summetria out of business. Thereafter, Cohen made a formal demand for payment of the loan to both Summetria and Forden. The loan was never repaid.
In August 2013, Cohen filed an order to show cause and verified complaint in the Chancery Division against Forden, Summetria, and AE2, Inc. (AE2) alleging fraud, negligent misrepresentation, breach of contract against Summetria, breach of contract against Forden, and unjust enrichment. Cohen thereafter filed a first amended and supplemental complaint. Forden responded by filing a motion to dismiss or stay the action, which the trial court denied. Forden then filed an answer which included counterclaims against Cohen, as well as a third-party complaint. In August 2014, Cohen filed a motion for summary judgment as to the breach of contract claims. The trial court granted summary judgment in favor of Cohen in the amount of $2,058,434 plus counsel's fees and costs.
AE2, Inc. was later dismissed as a defendant for lack of prosecution. R. 1:13-7.
Prior to trial, by stipulation pursuant to Rule 4:37-1(a) and Rule 4:37-3, the parties agreed to dismiss with prejudice Forden's counterclaims against Cohen and the third-party complaint.
Involuntary bankruptcy proceedings were instituted against Artic Ease and Summetria, and accordingly, the action was stayed pursuant to the automatic stay provisions of 11 U.S.C.A. § 362.
The remaining individual claims against Forden for fraud and negligent misrepresentation were tried during a two-day bench trial. At trial, Cohen testified, as did the attorney who represented Costar in connection with its acquisition of its interest in Summetria and in connection with Cohen's loan. Forden testified on her behalf.
Cohen testified that at the time of his loan, he was neither aware Forden previously provided a loan to Summetria nor aware she held a security agreement. Cohen acknowledged neither he nor his counsel performed a UCC search at the time of his loan in June 2012.
Furthermore, Cohen testified he would not have agreed to provide an unsecured loan had he been aware of the other secured interests. Cohen's counsel testified that he was aware Forden provided a loan to Summetria, although he believed it to be in the form of unsecured deferred salary. Cohen's counsel further testified that a search was conducted prior to the July 2013 asset sale which revealed that the institutional lenders held the only security interests of record. Both Cohen and his attorney stated they had no reason to doubt the representations of Forden or her counsel.
Forden testified she did not file a UCC-1 financing statement because she did not intend to invoke her security interest. However, the judge noted the discrepancy of her intent to invoke the security agreement:
When asked directly about her statements to Mr. Cohen regarding a UCC security agreement, Ms. Forden never directly answered
the question. Ms. Forden simply indicated to this [c]ourt that in the discussion of his loan both she and counsel made it clear that the institutional lender[s] could have called their loan and that a business decision was jointly made not to seek permission from those institutional lenders to afford Mr. Cohen a UCC security interest.
Ms. Forden indicated on cross examination that while she never received anything in writing from the institutional lender, she discussed a security agreement for her loan with a loan officer. His verbal response was "go ahead" and she did so without any written approval or request for a subordination of her debt.
In reaching his decision, the judge referenced both Forden's and Cohen's business acumen. Nonetheless, the judge found Forden's failure to forthrightly disclose her secured, yet unrecorded, security interest constituted a knowing withholding of information which had a substantial impact on Cohen's decision to lend and further invest in a failing business. In a written opinion, the judge found in favor of Cohen on his claims for fraud and negligent misrepresentation and entered final judgment in the amount of $1,250,000 plus interest and costs of suit.
The award on the fraud and negligent misrepresentation counts was non-cumulative with the previous breach of contract award. --------
Forden raises the following points on appeal:
POINT [I]
COHEN FAILED TO PROVE DAMAGES.
POINT [II]
COHEN FAILED TO PROVE A MATERIAL MISREPRESENTATION OR REASONABLE RELIANCE ON ANY MISREPRESENTATION, IF MADE.
Our review of the factual findings made by the trial judge in a non-jury trial is limited. Estate of Ostlund v. Ostlund, 391 N.J. Super. 390, 400 (App. Div. 2007). "Factual findings premised upon evidence admitted in a bench trial 'are binding on appeal when supported by adequate, substantial, credible evidence.'" Potomac Ins. Co. of Ill. v. Pa. Mfrs.' Ass'n Ins. Co., 215 N.J. 409, 421 (2013) (quoting Cesare v. Cesare, 154 N.J. 394, 411-12 (1998)). We will only determine "whether the findings made could reasonably have been reached on sufficient or substantial credible evidence present in the record, considering the proof as a whole." Quality Guaranteed Roofing, Inc., v. Hoffmann-La Roche, Inc., 302 N.J. Super. 163, 166 (App. Div. 1997); see also Brunson v. Affinity Fed. Credit Union, 199 N.J. 381, 397 (2009). Notwithstanding, "[a] trial court's interpretation of the law and the legal consequences that flow from established facts are not entitled to any special deference." Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995) (citations omitted).
"Thus, '[w]e do not weigh the evidence, assess the credibility of witnesses, or make conclusions about the evidence.'" Mountain Hill, L.L.C. v. Twp. of Middletown, 399 N.J. Super. 486, 498 (App. Div. 2008) (quoting State v. Barone, 147 N.J. 599, 615 (1997)), certif. denied, 199 N.J. 129 (2009). "Deference is especially appropriate 'when the evidence is largely testimonial and involves questions of credibility.'" Cesare, supra, 154 N.J. at 412 (quoting In re Return of Weapons to J.W.D., 149 N.J. 108, 117 (1997)). Here, the judge found Cohen's testimony to be "compelling and credible." By contrast, the court found Forden's defense to be "disingenuous."
In holding Forden personally liable for fraud and negligent misrepresentation, the judge found:
At all times [Ms.] Forden knew her legal team intended that Mr. Cohen would rely upon their representations in order to obtain the funding necessary to maintain the liquidity of Summetria and Artic Ease. Mr. Cohen's testimony that he relied upon the representations from Ms. Forden and her legal team was compelling and credible. He now has been damaged as he stands as an unsecured creditor in a bankruptcy proceeding.
. . . This [c]ourt has no question, based upon the testimony of all of the parties including Ms. Forden, that the representations were made to Mr. Cohen to solicit his cash infusion to continue the life of these failing companies. In her passion to see the business survive, she would have done anything to continue to pay the business bills, keep the business operating and protect her relationship with the prime lender. These facts came directly from her own testimony. Therefore, this [c]ourt is satisfied that [j]udgment against Ms. Forden personally in favor of Mr. Cohen is appropriate.
We briefly recite the law applicable to the claims of fraud and negligent misrepresentation pertinent to our decision.
"Every fraud in its most general and fundamental conception consists of the obtaining of an undue advantage by means of some act or omission that is unconscientious or a violation of good faith." Jewish Ctr. of Sussex Cty. v. Whale, 86 N.J. 619, 624 (1981) (citation omitted). "To establish common-law fraud, a plaintiff must prove: '(1) a material misrepresentation of a presently existing or past fact; (2) knowledge or belief by the defendant of its falsity; (3) an intention that the other person rely on it; (4) reasonable reliance thereon by the other person; and (5) resulting damages.'" Banco Popular N. Am. v. Gandi, 184 N.J. 161, 172-73 (2005) (quoting Gennari v. Weichert Co. Realtors, 148 N.J. 582, 610 (1997)). The hallmarks of any claim of fraud are "[m]isrepresentation and reliance" and "a fraud cause of action fails without them." Id. at 174.
Negligent misrepresentation is "[a]n incorrect statement, negligently made and justifiably relied upon, [and] . . . economic loss or injury sustained as a consequence of that reliance." H. Rosenblum, Inc. v. Adler, 93 N.J. 324, 334 (1983) (citation omitted). "Because negligent misrepresentation does not require scienter as an element, it is easier to prove than fraud." Kaufman v. i-Stat Corp., 165 N.J. 94, 110 (2000). Further, "[t]he element of reliance is the same for fraud and negligent misrepresentation." Id. at 109. Reliance upon the representation must be justifiable. H. Rosenblum, supra, 93 N.J. at 334.
On the critical issue of misrepresentation, the judge found:
At the time that Mr. Cohen lent the initial funds to Summetria[,] inquiries were made with regard to security interests held by any other lenders. Ms. Forden and her legal team failed to disclose the existence of another security interest, her own security interest, and averred that no other security interests could be given. Those statements were material misrepresentations of existing facts. The statement that the application for the security interest to the bank would potentially result in the calling of the note was made with the knowledge that a security interest existed, and such an interest was held by Ms. Forden.
In light of our standard of review and considering the proofs as a whole, we hold there was sufficient credible evidence in the record to support the finding that Forden's failure to disclose her own security interest constituted a knowing misrepresentation.
Forden also contends that Cohen's failure to review the institutional lenders' security agreements for a prohibition on other security interests or investigate the existence of other security interests was unreasonable. We disagree.
Arguably, Cohen did not engage in due diligence prior to making the loan by his failure to verify the presence or absence of other security interests. However, that does not absolve Forden's knowing misrepresentation nor is it determinative as to the reasonableness of Cohen's reliance on that representation. See Byrne v. Weichert Realtors, 290 N.J. Super. 126, 137-39 (App. Div.) (finding that even where a party conducts an independent investigation, there may still be reliance on a defendant's representation), certif. denied, 147 N.J. 259 (1996). Saliently, even had Cohen conducted a UCC search at the time of the loan it would not have disclosed Forden's unrecorded security interest.
Forden next argues that since she did not intend to enforce her security interest in the bankruptcy proceeding, Cohen may ultimately recover any loss he sustained. We find this argument to be without sufficient merit to warrant discussion in a written opinion. R. 2:11-3(e)(1)(E).
Finally, we reject Forden's argument that Cohen failed to prove damages. "[D]espite the problem in measuring damages in a fraud case, so long as the amount of the lost benefit can be established by the proofs with sufficient certainty, a court will award damages equal to that which a plaintiff would have received had the representation been true." McConkey v. Aon Corp., 354 N.J. Super. 25, 52 (App. Div. 2002) (citing Gardner v. Rosecliff Realty Co., 41 N.J. Super. 1, 10-11 (App. Div. 1956)), certif. denied, 175 N.J. 429 (2003). Here, the record contains sufficient evidential support to establish the amount of Cohen's "lost benefit"; the undisputed amount of his loan.
Affirmed. I hereby certify that the foregoing is a true copy of the original on file in my office.
CLERK OF THE APPELLATE DIVISION