Opinion
DOCKET NO. A-2510-14T3
08-10-2016
PORTER CAPITAL CORPORATION, Plaintiff-Appellant, v. BRIAN K. HORNE, Defendant-Respondent.
Joseph M. Garemore argued the cause for appellant (Brown & Connery, LLP, attorneys; Mr. Garemore and Timothy E. Horn, on the briefs). Steven L. Rothman argued the cause for respondent (Lipman, Antonelli, Batt, Gilson, Rothman & Capasso, attorneys; Mr. Rothman, of counsel and on the brief; Jane B. Capasso, on the brief).
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION Before Judges Leone and Whipple. On appeal from the Superior Court of New Jersey, Law Division, Gloucester County, Docket No. L-1310-13. Joseph M. Garemore argued the cause for appellant (Brown & Connery, LLP, attorneys; Mr. Garemore and Timothy E. Horn, on the briefs). Steven L. Rothman argued the cause for respondent (Lipman, Antonelli, Batt, Gilson, Rothman & Capasso, attorneys; Mr. Rothman, of counsel and on the brief; Jane B. Capasso, on the brief). PER CURIAM
Plaintiff Porter Capital Corporation ("Porter" or "Porter Capital") appeals the trial court's November 12, 2014 order granting summary judgment to defendant Brian K. Horne, and denying Porter's cross-motion for summary judgment. Porter also appeals the court's January 9, 2015 denial of reconsideration. We reverse the grant of summary judgment to Horne, affirm the denial of summary judgment to Porter, and remand.
I.
This case involves Porter's attempt to collect on a $300,000 Promissory Note ("Note") issued by Horne to Casie Ecology Oil Salvage, Inc. d/b/a Casie Protank, Inc. ("Casie"). Casie later became Pure Earth Treatment (NJ), Inc. ("PET"), which became Pure Earth Recycling (NJ), Inc. ("PER"), which obtained a line of credit from Porter. Pure Earth, Inc. ("PEI") was the parent company of PET and PER. The following facts concerning the Note were admitted in the parties' pleadings and statements of material facts.
On June 10, 2003, Horne and Gregory W. Call entered into an Option Agreement, which gave Call the option to acquire from Horne 90% of the stock in another company, MidAtlantic Recycling Technologies, Inc. ("MART"), in exchange for 10% of the stock of both Casie and Rezultz, Inc. ("Rezultz"). The agreement provided that if Call exercised his option, Horne would be obligated to contribute $300,000 to Casie within ten years of 2003, with 6.5% interest accruing from the date the option was exercised.
Horne, Call, and Rex D. Mouser also entered into a Shareholders' Agreement dated June 10, 2003, which contained a drag-along provision. That provision stated that if the majority shareholder of Casie, MART, or Rezultz sold a percentage of that corporation's stock to a buyer, each remaining shareholder agreed to sell the same percentage of that shareholder's stock to the buyer.
On or about December 6, 2005, Call exercised his option. The stock was exchanged in November 2006.
On November 13, 2006, Horne executed the Note and gave it to Casie. In the Note, Horne promised to pay $300,000 to Casie on or before May 1, 2013, and to pay 6.5% interest.
At that time, Horne made a first payment of $1.
On February 13, 2007, Call entered into a Stock Purchase Agreement with PEI. Under that agreement, PEI ultimately acquired all of Casie's outstanding stock.
Casie, MART, and Rezultz were also parties to the Stock Purchase Agreement. Under that agreement, Call agreed to sell his stock in all three corporations to PEI, and to invoke the drag-along provisions of the Shareholders' Agreement so that Horne and Mouser would also sell their stock in the three corporations to PEI.
On May 30, 2007, Horne entered into a Joinder Agreement. In that agreement, he agreed to become a party to the Stock Purchase Agreement and transfer all of his stock in Casie to PEI in exchange for 90,000 shares of PEI, and additional PEI stock, pursuant to the Stock Purchase Agreement. Horne decided to forego a cash payment and opted to exchange his stock for PEI stock.
Horne's Joinder Agreement was agreed to by Call, Mouser, PEI, Casie, MART, and Rezultz.
The Note was acquired by PER during PEI's stock purchase transaction. In the Joinder Agreement, Horne reaffirmed the validity of the Note and acknowledged its outstanding balance was $299,999.
In July 2009, Casie changed its name to PET. In December 2009, PET merged into PER. On February 11, 2010, PER entered into a Commercial Financing Agreement with Porter. The purpose of that agreement was for PER to obtain "short-term financing by selling, transferring, setting over and assigning to Porter Capital certain accounts receivable and invoices held by [PER] in return for Porter Capital making a Line of Credit available to [PER]." On the same day, the parties executed a Security Agreement which gave Porter a security interest in "Collateral" as defined in that agreement. Incorporating that definition, a UCC-1 financing statement was filed that day naming PER as a debtor and Porter as the secured party.
Other Pure Earth entities also were parties to the Commercial Financing and Security Agreements, and were named in the UCC-1.
The Note matured on May 1, 2013. On June 7, 2013, Porter wrote Horne demanding payment of all sums due on the Note.
On September 19, 2013, Porter filed a complaint in the Law Division in Gloucester County ("trial court" or "court"). Horne answered, and later filed a motion for summary judgment. Porter filed a cross-motion for summary judgment. On November 12, 2014, the trial court granted summary judgment for Horne, and denied Porter's cross-motion for summary judgment seeking the then-balance on the Note of $505,924.36.
II.
Summary judgment must be granted if the court determines "that there is no genuine issue as to any material fact challenged and that the moving party is entitled to a judgment or order as a matter of law." R. 4:46-2(c). The court must "consider whether the competent evidential materials presented, when viewed in the light most favorable to the non-moving party, are sufficient to permit a rational factfinder to resolve the alleged disputed issue in favor of the non-moving party." Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995). We must "review the trial court's grant of summary judgment de novo under the same standard as the trial court." Templo Fuente De Vida Corp. v. Nat'l Union Fire Ins. Co., 224 N.J. 189, 199 (2016). Moreover, "[w]hen a trial court's decision turns on its construction of a contract, appellate review of that determination is de novo." Manahawkin Convalescent v. O'Neill, 217 N.J. 99, 115 (2014). We must hew to the de novo standard of review.
III.
In its oral opinion, the trial court gave two reasons why it rejected Porter's contention that it had a security interest in the Note. The court's first reason was that "under general contract principles, I'm required to enforce the terms as written, and the terms tell this Court that this note was an instrument and, therefore, not an account receivable based on Porter's own language."
The Commercial Financing Agreement gave Porter the right under certain circumstances to receive payment of PER's accounts receivable directly from PER's creditors. That agreement defined "Account Receivable" as "any right for payment of goods sold, or leased, and delivered, or services rendered, which is not evidenced by an instrument or chattel paper."
Because the Commercial Financing Agreement did not define the word "instrument," we look to the Uniform Commercial Code (UCC), specifically Chapter Nine which governs "Secured Transactions." Ala. Code §§ 7-9-101 to -809; N.J.S.A. 12A:9-101 to -809. Chapter Nine defines "Instrument" as "a negotiable instrument or any other writing that evidences a right to the payment of a monetary obligation, is not itself a security agreement or lease, and is of a type that in ordinary course of business is transferred by delivery with any necessary indorsement or assignment." Ala. Code § 7-9A-102(a)(47); N.J.S.A. 12A:9-102(a)(47). Indeed, Chapter Nine specifies that "'Promissory note' means an instrument that evidences a promise to pay a monetary obligation, does not evidence an order to pay, and does not contain an acknowledgment by a bank that the bank has received for deposit a sum of money or funds." Ala. Code § 7-9A-102(a)(65); N.J.S.A. 12A:9-102(a)(65).
Both parties have cited only New Jersey case law, and Porter cited New Jersey's enactment of the UCC. However, the Commercial Financing Agreement and the Security Agreement both provided that the agreements "shall be in all respects governed, construed, applied and enforced in accordance with the laws of the State of Alabama." The Security Agreement added that "[t]he UCC of the State of Alabama shall govern the rights, duties and remedies of the parties," and that "[a]ll terms capitalized in [that agreement's] definition" of "Collateral" "shall have the meaning set forth for such terms in the Uniform Commercial Code as enacted by the State of Alabama." Accordingly, we will cite both New Jersey and Alabama provisions of the UCC.
Here, the Note evidenced a promise to pay a monetary obligation, namely Horne's promise to pay $300,000. The Note evidenced the holder's right to that payment, and was separate from the Security Agreement later granted to Porter. Absent any argument that the Note fell within any of the exceptions to the UCC's definition of "Instrument," we agree with the trial court that the Note was not an "Account Receivable" because the right to payment was evidenced by an "instrument" as that term is defined. Indeed, Porter makes no effort to argue otherwise.
However, that does not end the inquiry into whether Porter had a security interest in the Note held by PER. Separate and apart from its provisions allowing Porter to purchase accounts receivable, the Commercial Financing Agreement provided:
To secure the payments of all . . . sums which have or may become due by [PER] to Porter Capital under this [Commercial Financing] Agreement, and also to secure any other indebtedness or liability of [PER] to Porter Capital, direct or indirect, absolute or contingent, due or about to become due, liquidated or unliquidated, determined or undetermined, now existing or hereafter arising, including without limitation all future advances or loans which may be made at the option of Portal Capital to [PER] and attorneys' fees (hereinafter referred to as "Obligations"), [PER] hereby grants, conveys and mortgages to Porter Capital the Collateral as defined in the Security Agreement.The Security Agreement essentially repeated that language. That language made clear that PER was granting a security interest to Porter to secure not just payment of accounts receivable, but all sums and "other indebtedness or liability" owed by PER to Porter.
Moreover, that language made clear that PER was granting a security interest in the "Collateral" as defined in the Security Agreement, not just the accounts receivable as defined in Commercial Financing Agreement. Indeed, the Commercial Financing Agreement defined "Account Receivable" separately from its definition of "Collateral," which it stated "shall have the meaning ascribed thereto in the Security Agreement."
The Security Agreement defined "Collateral" to encompass fifteen categories of assets. One category was "Accounts," defined as "a right to payment of a monetary obligation . . . for services rendered" which is not "evidenced by chattel paper or an instrument." Ala. Code § 7-9A-102(a)(2); N.J.S.A. 12A:9-102(a)(2). As that category encompassed "Account Receivable" as defined by the Commercial Financing Agreement, it is clear that the Security Agreement's definition of "Collateral" was far broader.
Porter argued the Note fell within the emphasized category of the Security Agreement's definition of "Collateral":
All of the following, whether now existing or hereafter arising, shall be deemed secured and mortgaged by this Agreement (the "Collateral"):We agree that Horne's Note was a right to payment evidenced by an "Instrument," as defined in the UCC. Therefore, the Note was not excluded from "Collateral" merely because it was not an "Account Receivable." Accordingly, we reject the trial court's first reason for granting summary judgment to Horne.
All of [PER's] . . . (e) rights to payments for good[s] sold and/or services rendered that are or become evidenced by Instrument[.]
The parties' briefs did not contest that the Note represented payment for services rendered, and we express no opinion on it.
IV.
The trial court's second reason for granting summary judgment to Horne was based on litigation that occurred between Call and PEI in the federal courts and in Cumberland County.
In 2009, PEI sued Call in the United States District Court for the Eastern District of Pennsylvania. Call counterclaimed. On March 21, 2012, the District Court denied all claims, finding as follows. Both Call and PEI breached the Stock Purchase Agreement. PEI materially breached a contractual duty by deliberately concealing from Call that a PEI subsidiary in New York was being investigated and monitored by the New York Business Integrity Commission ("BIC"). PEI's material breach precluded it from collecting damages for Call's breach. Moreover, Call would not have entered the contract if he had knowledge of the BIC monitor's presence. However, because Call's fraud claim was premised upon a breach of a contractual duty, the agreement was not void ab initio as there was no fraud in the inducement. Call's breach was not material, but he failed to prove loss causation or damages from PEI's breach.
On June 28, 2010, BIC found that PEI had deliberately concealed its business relationships with organized crime figures.
Call appealed the District Court's ruling on the issue of damages. The United States Court of Appeals for the Third Circuit concluded Call's damages expert on the value of PEI stock had been improperly excluded, and remanded to the District Court for further proceedings. Pure Earth, Inc. v. Call, 531 Fed. Appx. 256 (3d Cir. 2013). On remand, the District Court found that Call's evidence on causation and damages was not credible, and the Court of Appeals affirmed. Pure Earth, Inc. v. Call, 618 Fed. Appx. 119 (3d Cir. 2015).
Meanwhile, in 2010 Call filed suit in the Law Division in Cumberland County ("Cumberland court") against Casie and the principals of PEI to enforce his employment agreement. In a September 20, 2012 oral opinion, the Cumberland court ruled that Call could assert collateral estoppel against PEI regarding the findings of fact and conclusions of law in the District Court's March 12, 2012 decision.
The Cumberland court also admitted into evidence the June 28, 2010 BIC decision. --------
Here, Horne argued that PEI's misrepresentations to Call invalidated Horne's Note. The trial court recognized Horne's argument posed a "difficult issue because Porter has argued that Mr. Horne was not fraudulently deceived at the time of the execution of the note, that those acts occurred later." Nonetheless, the court found "that they are so intricately involved, the Horne note permitted the next steps that followed, and . . . it does not appear appropriate to grant Porter Capital, again, more rights than Pure Earth would have."
The trial court apparently assumed the findings of the District Court were binding on Porter under the doctrines of res judicata or collateral estoppel. "Application of res judicata 'requires substantially similar or identical causes of action and issues, parties, and relief sought,' as well as a final judgment." Wadeer v. N.J. Mfrs. Ins. Co., 220 N.J. 591, 606 (2015) (citation omitted). The party seeking to apply res judicata (claim preclusion) must show that:
"(1) the judgment in the prior action must be valid, final, and on the merits; (2) the parties in the later action must be identical to or in privity with those in the prior action; and (3) the claim in the later action must grow out of the same transaction or occurrence as the claim in the earlier one."
[McNeil v. Legislative Apportionment Comm'n, 177 N.J. 364, 395 (2003) (citation omitted),
cert. denied, 540 U.S. 1107, 124 S. Ct. 1068, 157 L. Ed. 2d 893 (2004)].To apply collateral estoppel (issue preclusion),
"the party asserting the bar must show that: (1) the issue to be precluded is identical to the issue decided in the prior proceeding; (2) the issue was actually litigated in the prior proceeding; (3) the court in the prior proceeding issued a final judgment on the merits; (4) the determination of the issue was essential to the prior judgment; and (5) the party against whom the doctrine is asserted was a party to or in privity with a party to the earlier proceeding."
[Winters v. N. Hudson Reg'l Fire & Rescue, 212 N.J. 67, 85 (2012) (citation omitted).]
There was no final judgment in the Cumberland court, but the District Court had entered a final judgment. See Bondi v. Citigroup, Inc., 423 N.J. Super. 377, 426 (App. Div. 2011) ("a judgment is final even pending an appeal"), certif. denied, 210 N.J. 729 (2012). However, Horne failed to show the other prerequisites to apply for res judicata or collateral estoppel against Porter. Neither Horne nor Porter was a party in the actions in the federal courts, or the Cumberland court.
Moreover, the issue here — whether Porter can collect on Horne's Note — was not an issue in the federal or Cumberland court litigation. The Note was not mentioned in the opinions of the federal or Cumberland courts, nor was Porter. Horne was mentioned but was not a subject of adjudication. Thus, the issue here was not actually litigated, decided, or essential in the federal or Cumberland litigation. Further, the parties, causes of action, issues, and relief sought were not substantially similar. The claim by Porter on Horne's Note does not grow out of the same transaction or occurrence as the claims between Call and PEI under the Stock Purchase Agreement in the federal litigation.
In any event, the final judgment in the federal litigation does not entitle Horne to relief. The District Court rejected Call's claim that PEI's misrepresentation voided the Stock Purchase Agreement. The District Court reiterated on remand that agreement was valid and binding on Call. The federal litigation did not undo or invalidate the stock transfers.
Horne argues that because the District Court held PEI could not collect damages from Call's breach, PEI and thus Porter cannot collect damages from Horne. However, the District Court based its ruling on Pennsylvania law that a party's material breach of contract precludes it from collecting contractual damages from the other party. The District Court did not rule that PEI could not collect money owed it by other debtors under other contracts, such as Horne's obligation under the Note.
Horne makes the unsupported assertion that he opted to exchange his stock for PEI stock based on fraudulent representations by PEI regarding the value of its stock. However, the District Court rejected Call's claim that PEI's misrepresentation affected the value of the PEI stock he received in the stock purchase, finding Call's evidence related to loss causation and damages was not credible. The Court of Appeals agreed that "Call was unable to establish with any level of certainty the true value of the PEI shares at the time of the transaction," or show the "'misrepresentations of [PEI] proximately caused the decline of values in the [PEI] shares after the merger.'" Pure Earth, supra, 618 Fed. Appx. at 125-26 (citation omitted).
Horne made the same unsupported assertion in his motion's proposed statement of material facts. However, Porter did not admit that assertion. Moreover, Horne failed to provide "a citation to the portion of the motion record establishing the fact or demonstrating that it is uncontroverted," so these alleged facts were not "sufficiently supported [to be] deemed admitted." R. 4:46-2(a), (b). Compliance with these "[s]ummary judgment requirements" is "not optional." Lyons v. Twp. of Wayne, 185 N.J. 426, 435 (2005). Because Horne "presented this [c]ourt with an inadequate record, we are unable to conclude that there is no genuine issue as to any material fact." Id. at 437.
Moreover, a party claiming fraud based on a misrepresentation must show "'reasonable reliance'" and "'resulting damages.'" Marino v. Marino, 200 N.J. 315, 341 (2009) (citation omitted). Thus, the misrepresentation must occur before, and cause, the damages. Here, the undisputed facts do not show that PEI made any misrepresentations to Call or Horne before Horne agreed to contribute the $300,000 in 2003, before that contribution was triggered by Call's exercise of his option in 2005, or before Horne executed the Note in November 2006. Indeed, the District Court found that PEI's misrepresentation was non-disclosure breaching the Stock Transfer Agreement, which presumably could not occur until that agreement was executed in 2007. Moreover, to the extent Horne's actions were mandated by the 2003 Option Agreement or the 2003 Shareholders' Agreement, those actions were not caused by any misrepresentation by PEI. Thus, the undisputed facts did not show reasonable reliance or damages.
Even if PEI was barred from collecting on the Note, the undisputed facts do not show that it was inappropriate to allow Porter to do so. The undisputed facts do not show that Porter was in privity with PEI or PER, its debtor in a financing agreement. "'"[A] relationship is . . . considered 'close enough' only when the party is a virtual representative of the non-party, or when the non-party actually controls the litigation."'" Allen v. V & A Bros., Inc., 208 N.J. 114, 139 (2011) (citations omitted). There is no reason to believe PEI was representing or controlled by Porter in the federal litigation. Nor do the undisputed facts establish that Porter is acting as PEI's agent in this action.
If Porter was not in privity or agency with PEI, Porter has not had an opportunity to litigate whether PEI made misrepresentations, or whether any misrepresentations affected Horne's obligation to pay the Note. Res judicata and "collateral estoppel will not apply if a party did not have a 'full and fair opportunity to litigate the issue.'" State v. K.P.S., 221 N.J. 266, 278 (2015) (quoting Zirger v. Gen. Accident Ins. Co., 144 N.J. 327, 338 (1996)).
For all the reasons above, Horne did not show that res judicata or collateral estoppel applied here. Moreover, the trial court's second reason is not supported by the undisputed facts. Accordingly, we reverse the grant of summary judgment to Horne.
V.
Porter also appeals the trial court's denial of its cross-motion for summary judgment. We affirm, but for different reasons. There are genuine issues of material fact which prevent us from finding that Porter "is entitled to a judgment or order as a matter of law." R. 4:46-2(c).
First, as discussed above, Horne has asserted that PEI's misrepresentations during the stock transactions caused him to choose to receive PEI stock rather than cash, and bar Porter from enforcing the Note PERS acquired due to those stock transactions. As the federal litigation is not binding in this case as to either Horne or Porter on this issue, we cannot say there is no genuine issue as to any material fact, and Horne as well as Porter should have the opportunity to litigate their factual dispute.
Second, even if the Note was Collateral, the undisputed facts did not establish that Horne must pay the Note to Porter. The Security Agreement gave Porter remedies "upon the occurrence of a Default" as defined in the Commercial Financing Agreement and the Security Agreement. "If any Default shall occur, which remains uncured," Porter can sell the Collateral. However, the undisputed facts did not show an uncured default.
Porter points to its June 7, 2013 letter, which asserted that "Porter is the assignee of the Note." However, Porter's proposed statement of material facts did not assert such an assignment. Nor did the undisputed facts show that PER "agreed" Porter could collect the Note under the UCC without a default. See Ala. Code § 7-9A-607(a)(3); N.J.S.A. 12A:9-607(a)(3) & comment 4. Thus, Porter's right to have Horne pay on the Note remains a genuine issue of disputed fact.
We express no opinion on these issues. However, they show the evidence was not "'so one-sided that [Porter] must prevail as a matter of law,'" or that "there exists a single, unavoidable resolution of the alleged disputed issue of fact," or "that a rational jury can reach but one conclusion." Brill, supra, 142 N.J. at 536, 540-41 (citation omitted). Because neither party is entitled to summary judgment, and there are genuine issues of material fact, we must remand.
VI.
Porter also appeals the trial court's January 9, 2015 denial of its motion for reconsideration of the November 12, 2014 order. Because we have already reversed that order, we need not decide the propriety of the denial of reconsideration.
Porter attached to its motion a First Amendment to the Security Agreement (Amendment), executed by PER and Porter and dated December 2, 2014. The Amendment stated that the Security Agreement's definition of "Collateral" already included the Note; revised that definition to explicitly include the Note; and asserted the PER "has authorized [Porter] to exercise its rights to enforce the Note against Mr. Horne under the [UCC]."
In its oral opinion and written amplification, the trial court denied reconsideration because the December 2, 2014 Amendment was not before the court when it issued the November 12, 2014 order. That issue is moot. The court also stated that the Amendment had been submitted after the discovery end date, and was "an improper attempt to circumvent the discovery process." We do not address that discovery issue, leaving it to be addressed on remand after briefing by the parties.
Affirmed in part, reversed in part, and remanded for further proceedings. We do not retain jurisdiction. I hereby certify that the foregoing is a true copy of the original on file in my office.
CLERK OF THE APPELLATE DIVISION