Delray Holding, LLC and Bay Dock Holdings, LLC v. Sofia Design and Development at South Brunswick, LLC, Sofia Homes, LLC, Anne Kelly, and Burgess Steel, LLC, and the Guerin Family Trust, Eugene Guerin, James Guerin,louis Filoso, Michael Reilly, Steven Langan, James Carey, and Marzena Carey v. Roger Passarella

• Court: New Jersey Superior Court Appellate Division
• Decided: March 2, 2015
• Docket: A-0203-13
• Status: Published

Opinion

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION DOCKET NO. A-0203-13T3

DELRAY HOLDING, LLC, and BAY DOCK HOLDINGS, LLC, APPROVED FOR PUBLICATION

March 2, 2015 Plaintiffs-Respondents, APPELLATE DIVISION v.

SOFIA DESIGN AND DEVELOPMENT AT SOUTH BRUNSWICK, LLC, SOFIA HOMES, LLC, ANNE KELLY, and BURGESS STEEL, LLC,

Defendants,

and

THE GUERIN FAMILY TRUST, EUGENE GUERIN, JAMES GUERIN, LOUIS FILOSO, MICHAEL REILLY, STEVEN LANGAN, JAMES CAREY, and MARZENA CAREY,

Defendants/Third-Party Plaintiffs-Appellants,

v.

ROGER PASSARELLA,

Third-Party Defendant- Respondent. ______________________________________

Argued December 3, 2014 – Decided March 2, 2015

Before Judges Fuentes, Ashrafi, and Kennedy. On appeal from Superior Court of New Jersey, Law Division, Monmouth County, Docket No. L-3425-11.

Andrew T. Walsh argued the cause for appellants (Chamlin, Rosen, Uliano & Witherington, attorneys; Mr. Walsh, on the brief).

Tennant D. Magee, Sr., argued the cause for respondents (Maggs & McDermott, L.L.C., attorneys; Mr. Magee, on the brief).

The opinion of the court was delivered by

ASHRAFI, J.A.D.

Appellants are individuals and a family trust that invested

in two real estate development companies, Sofia Homes, LLC

(Sofia Homes) and Sofia Design & Development at South Brunswick,

LLC (Sofia Design) (jointly the Sofia Entities). The companies

failed financially and were forced into bankruptcy proceedings.

In the course of the bankruptcy case and other litigation, the

Sofia Entities settled claims against respondent Roger

Passarella and two real estate development companies that he

owns, respondents Delray Holding, LLC, and Bay Dock Holdings,

LLC.

This appeal is from summary judgment granted against

appellants when they claimed in their individual capacities that

respondents had interfered with their investment agreements with

the Sofia Entities and thus damaged their interests. The trial

court concluded the claims belonged to the Sofia Entities, and

2 A-0203-13T3 therefore appellants lacked standing to bring them as

individuals. As an alternative ground, the court determined

that appellants did not refute respondents' accounting evidence,

which showed that respondents did not cause any damages to the

Sofia Entities. We affirm the trial court's decision.

I.

Sofia Homes, a construction company primarily engaged in

residential development, owned property in Freehold known as the

Liberty Crossing project. It was also the principal owner and

the sole Class A member of Sofia Design, which was formed to

develop and operate a single property in South Brunswick, an

office building to be named Gateway Commons. Appellants are

variously members of Sofia Homes, Class B members of Sofia

Design, or investors in the development projects.

In 2006, Sofia Homes entered into a contract with

respondent Bay Dock Holdings, LLC, to develop residential

property in Wall Township. Sofia Homes and Bay Dock also

entered into a cost sharing agreement for site improvements on

their adjacent lands in Freehold.

In 2009, respondents assisted the Sofia Entities in

obtaining financing from Amboy National Bank for the Gateway

Commons project. Anthony D'Amore, III, was then a member of

Sofia Homes and Sofia Design, and also an undisclosed employee

3 A-0203-13T3 of Bay Dock. He told appellants that Bay Dock was willing to

offer its Freehold property as collateral for Sofia Design to

receive additional funding for the Gateway Commons project. In

exchange, Sofia Design would satisfy tax liens on Bay Dock's

Freehold property and elevate D'Amore to managing member of

Sofia Design. After the parties reached an agreement, Bay Dock

transferred ownership of its Freehold land to a new company,

respondent Delray Holding, LLC, which was created and owned by

Passarella as its sole member.

The parties dispute the events that led to the financial

failure of the Sofia Entities. However, it is undisputed that

D'Amore transferred loan proceeds that belonged to the Sofia

Entities to a bank account controlled by Bay Dock. Appellants

allege that D'Amore conspired with Passarella to divert the

funds as part of a secret plan to gain control of the Gateway

Commons project. According to appellants, the diversion of the

loan proceeds caused the Sofia Entities' projects to fail, which

in turn led to the loss of appellants' equity interests,

investments, loans, and anticipated profits to be derived from

those projects.

Respondents, on the other hand, contend that D'Amore

transferred the loan proceeds for the benefit of the Sofia

Entities. They contend his purpose was to prevent Charles

4 A-0203-13T3 Kelly, another member of Sofia Homes who is not a party in this

litigation, from using the funds improperly for other ventures

and personal obligations. See In re D'Amore, 472 B.R. 679, 684

(Bankr. D.N.J. 2012). Respondents argue that D'Amore paid debts

owed by the Sofia Entities out of the Bay Dock account, see

ibid., and that he ultimately paid more on behalf of the Sofia

Entities than he transferred into the Bay Dock account from the

loan proceeds. Respondents contend the Sofia Entities suffered

no losses but actually benefitted from the diversion of the loan

proceeds.

By 2010, D'Amore had resigned from one of the Sofia

Entities and been voted out as a member of the other.

Litigation ensued. In March 2010, the Sofia Entities, Charles

Kelly, and appellants filed a complaint in Superior Court,

Monmouth County (MON-L-1430-10), against Bay Dock, Passarella,

and D'Amore alleging misappropriation, conversion, and related

causes of action.

D'Amore filed a voluntary petition for bankruptcy in August

2010, which stayed the Monmouth County action as to him.

D'Amore, supra, 472 B.R. at 684. In December 2010, the

plaintiffs in the Monmouth County action filed an adversary

complaint in the Bankruptcy Court against D'Amore, asserting

claims for fraud, defalcation, and similar causes of action.

5 A-0203-13T3 Ibid. Subsequently, D'Amore moved for summary judgment in the

Bankruptcy Court, contending among other grounds that the

individual investors and members of the Sofia Entities lacked

standing to pursue their claims against him. Id. at 684-85.

By written decision dated May 31, 2012, the Bankruptcy

Court agreed with D'Amore. The court stated the funds that were

allegedly misappropriated were the property of the Sofia

Entities, not the property of the individual LLC members or

investors. Any damages that could be claimed by the individuals

flowed through the companies and could not be claimed directly

by them. Id. at 694-95. The Bankruptcy Court dismissed the

individual claims of appellants. Id. at 696.

On July 5, 2012, the Monmouth County court in MON-L-1430-10

granted summary judgment on the same ground to Bay Dock and

Passarella.

The lawsuit that is the subject of this appeal, MON-L-3425-

11, was originally brought by Delray and Bay Dock. They claimed

the Sofia Entities and the individual defendants owed them money

on the several development agreements of the companies.

Appellants filed a counterclaim, and also a third-party

complaint against Passarella. Appellants sought compensation

for the loss of their investments and anticipated profits in the

Gateway Commons and the Liberty Crossing projects on the ground

6 A-0203-13T3 that the diversion of the loan proceeds was tortious

interference with their investment agreements with the Sofia

Entities and also entitled them to civil remedies under New

Jersey's racketeering (RICO) statute, N.J.S.A. 2C:41-2, -4.

In December 2012, respondents and the Sofia Entities

settled their disputes and dismissed all claims against one

another, both in the bankruptcy proceedings and in the Monmouth

County cases. As part of the settlement, respondents paid

$225,000 to the Sofia Entities.

On July 26, 2013, the Law Division in this case granted

summary judgment in favor of respondents. The court held that

the claims remaining in the case were corporate claims and that

appellants lacked standing to assert them as individuals. The

court also determined that appellants did not have evidence of

any damages from D'Amore's diversion of the loan proceeds to Bay

Dock because they had not challenged respondents' accounting,

which showed that Bay Dock paid out more on behalf of the Sofia

Entities than it took in from their loan proceeds.

This appeal is from the summary judgment order dismissing

all the claims contained in appellants' counterclaim and third-

party complaint.

7 A-0203-13T3 II.

It is a fundamental principle of corporate law that:

A corporation is regarded as an entity separate and distinct from its shareholders. It is a principle of corporation law that [r]egard for the corporate personality demands that suits to redress corporate injuries which secondarily harm all shareholders alike are brought only by the corporation. . . . The prevailing American rule is that [w]hen an injury to corporate stock falls equally on all stockholders, then an individual stockholder may not recover for the injury to his stock alone, but must seek recovery derivatively in behalf of the corporation.

[Strasenburgh v. Straubmuller, 146 N.J. 527, 549-50 (1996) (citations and internal quotation marks omitted).]

Shareholders in a corporation may only sue individually

when they suffer a "special injury," as distinct from injuries

suffered by all shareholders. Pepe v. Gen. Motors Acceptance

Corp., 254 N.J. Super. 662, 666 (App. Div.), certif. denied, 130

N.J. 11 (1992). "A special injury exists 'where there is a

wrong suffered by [a] plaintiff that was not suffered by all

stockholders generally or where the wrong involves a contractual

right of the stockholders, such as the right to vote.'"

Strasenburgh, supra, 146 N.J. at 550 (quoting In re Tri-Star

Pictures, Inc., 634 A.2d 319, 330 (Del. 1993)). To determine

whether a claim presents an individual cause of action or a

derivative claim belonging solely to the corporation, "courts

8 A-0203-13T3 examine the nature of the wrongs alleged in the body of the

complaint, not the plaintiff's designation or stated intention."

Id. at 551 (citing Lipton v. News Int'l, Plc, 514 A.2d 1075,

1078 (Del. 1986)).

Our decision in Pepe, supra, 254 N.J. Super. 662, is

directly on point with respect to the issue in this appeal. In

that case, Virginia and Richard Pepe asserted contract and tort

claims resulting from the financial failure of the ten corporate

automobile dealerships they owned as shareholders. Id. at 664-

65. We held that the Pepes' claims:

all assert losses sustained by them as the result of the destruction of their corporations. As such, the claims are entirely derivative of causes of action which, but for their release by the bankruptcy stipulation, would be available to the corporations. The law is clear and uniform: shareholders cannot sue for injuries arising from the diminution in value of their shareholdings resulting from wrongs allegedly done to their corporations. . . . Nor can stockholders assert individual claims for wages or other income lost because of injuries assertedly done to their corporations.

[Id. at 666 (citations omitted).]

Here, appellants make tort claims similar to those the

Pepes made. Their claims of tortious interference with their

investment agreements are entirely dependent on losses the Sofia

Entities allegedly sustained as a result of the financial

9 A-0203-13T3 failure of the companies. The individual claims derive from the

claims that the Sofia Entities had against respondents and that

were settled in exchange for a substantial payment by

respondents.

Appellants cite no cases to support their argument that

they have standing to sue as individuals for the alleged losses

of the Sofia Entities. Their conclusory statements that they

"had a protected interest" and that their claims are not

identical to those of the Sofia Entities' claims are not

sufficient to overcome the prevailing law with respect to

standing to sue.

Nor can an independent investor in a corporation sue for

debts owed to the corporation. If it were otherwise, any

investor or creditor could undermine the corporation's

settlement of a dispute and bring an individual claim for causes

of action that belong to the corporation. The Sofia Entities

settled their claims against respondents, and individual

investors and creditors cannot revive those same claims by

asserting an individual cause of action.

Because the members and other investors have not alleged an

injury caused by respondents that is distinct from that suffered

by any shareholder, investor, or creditor of the corporate

10 A-0203-13T3 entities, they lack standing to assert their claims of tortious

interference or racketeering violations.

III.

A secondary ground for summary judgment was that, even if

appellants have standing to pursue their claims, they failed to

produce evidence to contradict respondents' accounting. The

trial court discussed the importance of the accounting evidence

presented on respondents' summary judgment motion:

[T]he accounting records indicate that the amount put into the [Bay Dock] account . . . was less than the amount paid out of the account for corporate bills [of the Sofia Entities]. Thus, these records indicate that D'Amore did not gain personal benefit from those funds and neither did [Bay Dock] or Passarella. . . . [A]ccording to the record evidence and the uncontested calculations by [respondents], the accounting records suggest that the [Bay Dock] account was used to pay for [the Sofia Entities'] corporate bills. Thus, [appellants] have failed to establish how D'Amore's deposit of the proceeds into the [Bay Dock] account . . . caused their injuries or resulted in damages. As such, apart from the issue of standing, the evidence here is so one-sided that [respondents] must prevail as a matter of law with regard to the counterclaims.

Appellants dispute this finding of the court. They rely on

a certification of their attorney, and the exhibits attached to

that certification, and claim there was opposing accounting

11 A-0203-13T3 evidence. They contend that whether the diversion of the loan

proceeds damaged the Sofia Entities is a disputed issue of fact.

In December 2013, respondents moved in this court to strike

from our record on appeal the certification of appellants'

attorney dated September 18, 2012, and its accompanying

exhibits. Respondents asserted that these items were not

included in the summary judgment papers submitted to the trial

court. By order dated January 24, 2014, we remanded to the

trial court pursuant to Rule 2:5-5(a) for the limited purpose of

settling the summary judgment record. On March 5, 2014, the

motion judge issued a letter-decision stating that the trial

court had not retained the summary judgment record. Although

the judge could not verify the summary judgment record, he

inferred from the contents of the parties' motions in this court

that the 2012 certification and its exhibits were not part of

the summary judgment record.1

Appellants are not able to assert that their attorney's

2012 certification was submitted in opposition to the summary

1 We have not been formally informed of the record-retention practices of the Law Division, but we know that the court discarded the motion papers in less time than six months from the summary judgment order of July 26, 2013, until our remand order of January 24, 2014. Even a timely notice of appeal did not prompt the Law Division to retain the papers pertinent to this appeal. Civil litigants would be well-advised to keep accurate records of motions and other papers in the event of an appeal or other future proceedings.

12 A-0203-13T3 judgment motion in this case. Instead, they contend it was

submitted in a motion for summary judgment in the prior Monmouth

County case, MON-L-1430-10. Nevertheless, appellants argue that

all parties had in their possession an accounting exhibit that

contradicts respondents' evidence. Appellants contend that,

therefore, respondents' accounting was in fact disputed.

Appellants cannot base a challenge to factual evidence

presented for the court's summary judgment review on evidence

that was not presented to the court but was instead presented in

a different although related case.

Furthermore, the contradictory accounting evidence upon

which appellants now rely is only a single page summary of

several figures with no explanation or backup information. In

contrast, respondents submitted a detailed spreadsheet of a

"Cash Analysis" of "All Transactions" of the Bay Dock account.

The trial court viewed respondents' detailed accounting evidence

to be "unchallenged" for purposes of the summary judgment

motion. We can find no error in the court's determination.

Appellants also argue that the accounting evidence is

irrelevant to this case because their claim is not for the

misappropriation of the Sofia Entities' funds. They are

mistaken. The accounting evidence is relevant to whether

appellants can prove damages and causation. If Bay Dock in fact

13 A-0203-13T3 paid out more on behalf of the Sofia Entities for legitimate

debts related to the appropriate projects than D'Amore removed

from their loan proceeds, Bay Dock did not cause any damage to

the Sofia Entities. Consequently, respondents cannot be held

responsible for the financial failure of those companies and the

loss of appellants' investment interests.

IV.

Having concluded that respondents were entitled to summary

judgment on both grounds — lack of standing and the merits of

appellants' claims for damages — we need not address any other

arguments raised by either side in this appeal.

Affirmed.

14 A-0203-13T3