Court Opinion

ID: 4428419
Source: CourtListenerOpinion
Date Created: 2019-08-20 19:06:27.702644+00
Date Added: 2024-06-11T14:51:09.076703
License: Public Domain

NOT FOR PUBLICATION WITHOUT THE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.

                                                         SUPERIOR COURT OF NEW JERSEY
                                                         APPELLATE DIVISION
                                                         DOCKET NO. A-3803-17T1

ETHAN SHAPIRO,

          Plaintiff-Respondent,

v.

TRIMARAN CAPITAL
PARTNERS and DEAN
KEHLER,

          Defendants-Appellants,

and

MICHAEL ABATE and RONALD
W. GASWIRTH,

     Defendants.
_________________________________

                    Submitted March 26, 2019 – Decided May 31, 2019

                    Before Judges Fisher, Hoffman and Suter.

                    On appeal from Superior Court of New Jersey, Law
                    Division, Hudson County, Docket No. L-3889-15.

                    Paduano & Weintraub, LLP, and Leonard Weintraub
                    and Kristen Madison (Paduano & Weintraub, LLP) of
            the New York bar, admitted pro hac vice, attorneys for
            appellants (Leonard Weintraub, Anthony J. Paduano
            and Kristen Madison, on the briefs).

            Stone & Magnanini, LLP, and Douglas A. Daniels and
            Sabrina R. Tour (Daniels & Tredennick, LLP) of the
            Texas bar, admitted pro hac vice, attorneys for
            respondent (Robert A. Magnanini, Alex Barnett-
            Howell, Douglas A. Daniels and Sabrina R. Tour, on
            the brief).

PER CURIAM

      Following a bench trial, defendant Trimaran Capital Partners (Trimaran)

appeals from a Law Division order entering judgment in the amount of $569,965

in favor of plaintiff Ethan Shapiro. For the reasons that follow, we reverse.

      Trimaran serves as a marketing company for Trimaran Fund Management,

LLC and its affiliates, which manage funds of approximately $2.25 billion in

assets, with investments in hundreds of diverse companies. In 2004, Trimaran

became the majority shareholder of Urban Brands, Inc. (UBI), a clothing

business, after it invested $13 million into UBI, on top of a $5 million

investment made approximately ten years earlier. Plaintiff was promoted from

UBI's interim chief executive officer (CEO) to UBI's permanent CEO after

Trimaran became the majority shareholder in 2004; he was terminated in 2008.

      When plaintiff became CEO, he invested in UBI in order to have "skin in

the game," purchasing senior UBI notes. Between April 2004 and February

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                                       2
2008, plaintiff (and other members of UBI's senior management) purchased

senior UBI notes bearing a 10.38% interest rate.       Plaintiff paid a total of

$425,000 for the notes; by April 15, 2010, plaintiff's notes were valued at

$631,395.    Between 2006 and 2009, Trimaran purchased notes totaling

approximately $56 million.

      UBI maintained a revolving credit facility with Bank of America and its

predecessor, LaSalle Retail Finance. Beginning in 2004, the holders of the

senior UBI notes, including plaintiff and Trimaran, entered into intercreditor

agreements with UBI and Bank of America. The agreements provided that UBI

could not repay the principal on its notes without written approval of Bank of

America.

      During plaintiff's first two years as CEO, UBI performed well, but by

2007, financial difficulties ensued. UBI's respective losses for 2007 and 2008

were $38 and $44 million. 1 UBI's board of directors fired plaintiff in September

2008. At that point, plaintiff requested payment of his senior notes, which UBI

denied.

1
  Notwithstanding the large loss in 2007, in December 2007, UBI gave plaintiff
a new employment contract, which included a severance benefit of three year's
salary; his annual salary of $650,000 did not change.
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      UBI continued to struggle financially after plaintiff's termination, and the

credit facility with Bank of America was set to end in February 2010. At that

time, UBI had no cash in its accounts and began to withhold payments owed to

creditors. UBI had the maturity date of its loan agreement with Bank of America

extended from February 3, 2010 to April 15, 2010, the maturity date of the senior

UBI notes.

      Senior noteholders, including plaintiff, received letters from UBI in early

February 2010, requesting them to extend the maturity date of their notes by

four years, from April 15, 2010 to April 15, 2014. A cover letter enclosing the

letter and financial information stated: "If you have any questions . . . please

contact the [c]ompany's counsel, Randall Ray of Gardere Wynne Sewell LLP."

      Plaintiff testified that after reading the letter, he understood that UBI was

having financial difficulties, and believed that UBI was working to obtain a new

credit facility and needed additional time to secure new financing. However, he

believed that UBI's financial situation would improve and that its long-term

prospects were strong. He also understood that Bank of America required all

noteholders to agree to the extension in order for it to extend its loan to UBI.

Plaintiff hired attorney Lawrence Langerman to negotiate the potential

extension of his notes.

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                                        4
      UBI sent a follow-up letter dated February 12, 2010, again requesting the

noteholders to extend the majority date of the senior UBI notes, and providing

answers to "frequently asked questions" from senior noteholders following the

first letter. This letter explained that UBI needed "to refinance its existing

[c]redit [f]acility, and it need[ed] additional time to work with new lenders on a

new credit facility." The letter noted that Trimaran had "already agreed to the

four-year extension of its [n]otes."

      The letter further indicated that Bank of America had "informed [UBI]

that it will not agree to any payment on the [n]otes – principal or interest – in

connection with the [n]ote extensions." One "frequently asked question" read,

"If a . . . [n]oteholder does not agree to extend the maturity date of its [n]otes

(either outright or because of demands for different treatment that [UBI] cannot

agree to) will the [n]otes that are not extended be paid at the original maturity

date of April 15, 2010?" The letter provided:

                  No. . . . [UBI] cannot pay the [n]otes without the
            consent of [Bank of America] under the existing
            [c]redit [f]acility.

                 The [bank] is protected by Bank Intercreditor
            Agreements that each of you signed when you
            purchased your [n]otes. [UBI] cannot, without written
            consent from the [bank] or until the termination of the
            Bank Intercreditor Agreements, generally make any
            payments on the [n]otes. . . . The [bank] has informed

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                                        5
            [UBI] that it will not agree to any payment on the
            [n]otes.

      Bank of America again agreed to extend the maturity date of its loan with

UBI, this time to August 15, 2010, if each of the noteholders agreed to extend

the maturity date for their notes. UBI intended to use this extension to secure

an alternate funding source.

      Plaintiff received another letter from UBI, dated February 17, 2010,

requesting a limited extension of the maturity date from April 15, 2010, to

February 15, 2011. As a condition of agreeing to the extension, plaintiff wanted

assurance that if any of the other senior noteholders were paid on their UBI notes

as a result of refusing to extend, he would also be paid on that same basis. On

February 18, 2010, plaintiff's attorney emailed Ronald W. Gaswirth, an attorney

at the Gardere firm, stating in pertinent part, "We would like something in

writing that states if you pay any other of the [n]otes, we will also be paid."

Gaswirth responded, "As you know the [c]ompany cannot repurchase any of the

notes under the terms of the loan documents previously furnished to you. If the

[c]ompany does somehow repurchase any of the [n]otes, [plaintiff]'s notes will

also be repurchased on the same basis." On February 25, 2010, plaintiff signed

the signature section of the February 17, 2010 letter, agreeing to extend the

maturity date of his notes to February 25, 2011; however, the letter did not

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                                        6
contain language stipulating that plaintiff would receive payment on the notes

in the event other noteholders received payment for their notes after refusing to

extend their maturity dates.

      On April 15, 2010, Bank of America agreed to allow UBI to repurchase

the notes from noteholders who had refused to extend the maturity date on their

notes. In late June 2010, UBI repurchased those notes for $613,000, including

interest owed, using funds borrowed from Bank of America. Afterward, UBI

had approximately $500,000 left on its revolving line of credit with Bank of

America.      Plaintiff, who was owed $631,000, was not notified by UBI or

Trimaran of these facts.

      UBI did not repurchase the notes of plaintiff, defendant, or seven other

current or former UBI senior management members who had all agreed to extend

the maturity date of their notes. Bank of America never consented to their

repurchase.

      Throughout the spring and summer of 2010, UBI continued to search for

a commercial lender to replace Bank of America, since Bank of America refused

to extend its credit facility past August 14, 2010.     Unable to secure such

financing, UBI filed for bankruptcy on September 20, 2010. Since plaintiff's

notes were unsecured and subordinate to UBI's other debt, plaintiff recovered

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                                       7
approximately $62,000 of the $631,000 he was owed on the notes. At the time

of the bankruptcy, defendant's principal investment in UBI was approximately

$56 million (approximately $73 million with interest); Trimaran did not recover

any of that amount in the bankruptcy.

      In September 2015, plaintiff filed a complaint asserting fraud and

negligent misrepresentation in connection with the extension of the maturity

dates on his notes. In his complaint, plaintiff sued Trimaran, its managing

partner and UBI board member Dean Kehler, former UBI officer Michael Abate,

and Gaswirth. In March 2016, plaintiff dismissed his claims against Gaswirth,

and in March 2017, plaintiff settled his claims with Abate. In July 2017, the

remaining defendants moved for summary judgment, which the trial court

denied.

      A bench trial was held before the Law Division in November and

December 2017. On March 12, 2018, the trial judge, in a written opinion, ruled

in favor of plaintiff, and against Trimaran, on the negligent misrepresentation

claim, for $569,965 – the difference between the amount originally owed to

plaintiff on the notes, and the amount he received in UBI's bankruptcy

proceeding. The judge found Trimaran liable to plaintiff as a shareholder by

piercing the corporate veil. The judge dismissed plaintiff's fraud claim against

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                                        8
Trimaran, and dismissed the entire complaint against Kehler individually. On

March 26, 2018, the trial court entered an order consistent with its opinion.

       In dismissing plaintiff's fraud claim, the judge found that Gaswirth

correctly represented that: Bank of America had to consent to UBI's payment of

the notes, as expressed in the intercreditor agreements; the bank had

"consistently refused . . . the payment of any senior UBI notes"; and it "was only

until April 2010[] that the [b]ank . . . consented to the payment of some of the

note[]holders. This was very close to the notes' maturity dates." The judge

determined the elements of fraud were not established when the contents of

Gaswirth's email were proven false, because plaintiff had "not set forth any

evidence that . . . defendants knew or believed that the representation was false

at the time that the statement was made, or that . . . defendants intended to

deceive plaintiff by making the statement." On the whole, the judge stated that

no evidence was presented demonstrating that defendants acted with a

"nefarious purpose," a "fraudulent intent," or "with any actual malice" toward

plaintiff.

       However, the judge found that the representations in Gaswirth's email to

plaintiff were made negligently. The judge first found Trimaran vicariously

liable for Gaswirth's actions, as Gaswirth "reported directly and exclusively to"

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                                        9
Wes Barton, an employee of Trimaran, "as it concerned the negotiations with

plaintiff." Barton, who was never employed by UBI, interacted with plaintiff

when he was UBI's CEO on behalf of Trimaran, and often reviewed UBI's

financial records on behalf of Trimaran. The judge found that the statements in

Gaswirth's email triggered a duty to speak truthfully, that this duty was breached

when the statements were proven "incorrect and uncorrected," and that

proximate cause was established when "the decision that [plaintiff] was induced

to make ultimately and directly le[]d to" his losses. However, the judge noted

"there might have been, but unbeknownst to . . . plaintiff, a lack of funds by

which UBI was unable to pay for . . . his notes plus interest . . . ."

      Finally, the judge held that "any immunity that [Trimaran] claim[ed] as a

shareholder of UBI [was] dissolved and any corporate veil sought by [defendant]

to shield the imposition of liability for its negligent misrepresentation to . . .

[p]laintiff is pierced because of the dominance that [Trimaran] exercised over

UBI's business affairs."     According to the judge, "the credible direct and

circumstantial [evidence] demonstrate[d] that [defendant] so dominated UBI

that UBI was a mere instrumentality and conduit for [Trimaran]." "Essentially,

because of the influence possessed by [Trimaran], UBI and [Trimaran] were . .

. one and the same."

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                                        10
      The judge listed the following factors, among others, in support of his

holding that Trimaran exerted "substantial influence" over UBI: "Trimaran was

the majority shareholder of UBI and had the largest concentration of allies and

votes on . . . UBI's board"; Kehler had a "significant influence" on UBI's board,

such that "[n]o decisions of consequence could be made without [his] approval";

UBI paid $250,000 per year to defendant as a management fee; Kehler and Bill

Phoenix, a managing director of Trimaran who served on UBI's board, "had a

conspicuous presence at UBI, as opposed to the other directors"; "[a]t least two

of the other directors acknowledged the import and dominance of Trimaran's

presence on the board"; "UBI [was] dependent on Trimaran as a source of

funding"; there was evidence Trimaran "coordinated the negotiations between

UBI and . . . Bank of America, and [was] integrally involved with note

transactions and related negotiations"; and "Barton was 'very involved' with the

business pursuits of UBI as Trimaran's representative with the company."

      Our standard of review of the court's findings in this bench trial is limited.

An appellate court shall "not disturb the factual findings and legal conclusions

of the trial judge unless [it is] convinced that they are so manifestly unsupported

by or inconsistent with the competent, relevant and reasonably credible evidence

as to offend the interests of justice . . . ." Seidman v. Clifton Sav. Bank, S.L.A.,

                                                                            A-3803-17T1
                                        11
205 N.J. 150, 169 (2011) (quoting In re Trust Created by Agreement Dated

December 20, 1961, 194 N.J. 276, 284 (2008)); see also Rova Farms Resort, Inc.

v. Investors Ins. Co. of Am., 65 N.J. 474, 484 (1974); Anderson v. City of

Bessemer City, 470 U.S. 564, 574 (1985) (noting that the trial court's "major

role is the determination of fact"). We only review de novo the trial court's legal

determinations. 30 River Court E. Urban Renewal Co. v. Capograsso, 383 N.J.

Super. 470, 476 (App. Div. 2006) (citing Rova Farms, 65 N.J. at 483-84).

      Defendant first argues that the trial court lacked an adequate evidentiary

basis in holding it liable to plaintiff for negligent misrepresentation. We agree.

      Piercing the corporate veil is an equitable doctrine invoked to provide a

remedy for an underlying wrong, where a remedy would otherwise be

unenforceable because the primary defendant is a corporation without sufficient

assets to pay the award. See Verni ex rel. Burstein v. Harry M. Stevens, Inc.,

387 N.J. Super. 160, 198-99 (App. Div. 2006). Courts developed the doctrine

to prevent the corporate form from "being used to defeat the ends of justice" or

as a vehicle for an illegitimate purpose. State, Dept. of Envtl. Prot. v. Ventron

Corp., 94 N.J. 473, 500 (1983).

      A party seeking to pierce the corporate veil bears the burden of proving

that doing so is appropriate. Richard A. Pulaski Constr. Co. v. Air Frame

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                                       12
Hangars, Inc., 195 N.J. 457, 472 (2008) (citations omitted). "[A] corporation is

an entity separate from its stockholders[,]" and "[i]n the absence of fraud or

injustice, courts generally will not pierce the corporate veil to impose liability

on the corporate principals." Lyon v. Barrett, 89 N.J. 294, 300 (1982) (citations

omitted).

      To pierce the corporate veil, a plaintiff must establish two elements: 1)

that a subsidiary was "a mere instrumentality of the parent corporation" and "the

parent so dominated the subsidiary that it had no separate existence but was

merely a conduit for the parent," Ventron, 94 N.J. at 500-01 (citations omitted),

and 2) "the parent has abused the privilege of incorporation by using the

subsidiary to perpetrate a fraud or injustice, or otherwise to circumvent the law."

Id. at 501 (citing Mueller v. Seaboard Commercial Corp., 5 N.J. 28, 34-35

(1950)); see Verni, 387 N.J. Super. at 199-200. Here, assuming all of the trial

court's factual findings as true, plaintiff establishes neither of these elements.

      Regarding the first element, in determining whether a parent corporation

so dominated a subsidiary that it was a conduit for the parent, the extent of

control sought by courts is "not merely majority or complete stock control, but

complete domination, not only of the finances, but of policy and business

practice in respect to the transaction so that the corporate entity . . . had at the

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                                        13
time no separate mind, will or existence of its own . . . ." 1 William Meade

Fletcher, Fletcher Cyclopedia of the Law of Corporations § 41, at 156 (perm.

ed., rev. vol. 2015); see also Ventron, 94 N.J. at 500-01; Mueller, 5 N.J. at 34-

35. With this domination, "the corporate form is used as a shield behind which

injustice is sought to be done by those who have the control" of the subsidiary.

Mueller, 5 N.J. at 35 (quoting Irving Investment Corp. v. Gordon, 3 N.J. 217,

223 (1949)).

      Here, there was no credible evidence that Trimaran so dominated UBI that

UBI had no separate existence and was merely a conduit of Trimaran. Verni,

387 N.J. Super. at 199. Trimaran had substantial influence over UBI's Board of

Directors (Board) because it was the majority shareholder. As the majority

shareholder, defendant had the votes necessary to place a majority of the

members on the Board; however, Trimaran only held two out of the six Board

seats. The remainder of the Board was filled by three independent Board

members, with no affiliation to Trimaran: Ed Finkelstein, Joi Gordon, and

Darryl Thompson, as well as plaintiff when he was the CEO.

      Outside of their affiliation with Trimaran, there was no evidence that

Kehler or Phoenix dominated or controlled UBI's Board. At trial, plaintiff

admitted his contention that Kehler dominated or controlled the UBI Board was

                                                                         A-3803-17T1
                                      14
based on his subjective belief, and he could not provide a specific example of

Kehler's dominance or control. Rather, he testified that Trimaran "probably"

controlled the UBI Board as a result of its financial position.

      Both Gordon and Thompson testified that although Trimaran was the

majority shareholder, and could move the company in the directions that a

majority shareholder could, Kehler and Phoenix did not override the UBI Board,

and neither could recall one instance where either blocked a measure that the

remainder of the Board wanted to pursue. Thus, Trimaran's influence over the

Board was a result of its inherent rights as majority shareholder, not as a result

of any improper or undue influence over the other Board members.

      The trial court's conclusion that Kehler and Phoenix had a "conspicuous

presence" at UBI was also not supported by the credible evidence. Neither

Kehler nor Phoenix had an office at UBI's headquarters, oversaw or supervised

any of UBI's employees, or were involved in UBI's day-to-day business. The

trial testimony revealed that other than quarterly Board meetings, Kehler and

Phoenix visited UBI's office in Secaucus approximately once or twice a year .

Even plaintiff testified that he did not specifically remember Kehler visiting

UBI's offices more frequently, and admitted that he or other UBI officers

requested that Kehler attend some of those meetings.

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                                       15
      While the trial court correctly pointed out that Trimaran was a source of

funding, UBI had other sources of funding, including its credit facility with

Bank of America, and its cash receivables. Although UBI was cash -poor and

continuously looked to Trimaran for additional funding, defendant invested in

UBI and secured promissory notes. These investments, along with the fact that

UBI paid $250,000 per year to Trimaran as a management fee, demonstrate that

Trimaran and UBI maintained appropriate separation as entities and avoided the

commingling of funds.

      It is undisputed that all the corporate formalities were followed. Trimaran

and UBI had, among other things, separate offices, phones, emails, computer

systems, and bank accounts.     They maintained and filed separate financial

statements and corporate records, had separate bylaws, held separate board

meetings, and they did not share any employees.            Trimaran's apparent

involvement in UBI's day-to-day operations was the result of Trimaran

monitoring its investment, performing due diligence to determine whether any

further investment was warranted and prudent, and fulfilling its obligations

under its management agreement with UBI. There is no evidence that the

presence of Kehler, Phoenix, or Barton at UBI's offices, or their alleged

involvement in UBI's operations, exceeded Trimaran's authority under its

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                                      16
management agreement with UBI. Plaintiff did not establish that Trimaran

exerted corporate dominance over UBI. Verni, 387 N.J. Super. at 199.

      As to the second element, no fraud or injustice appears in the record, nor

any other fact indicating the desire to circumvent the law on the part of either

company.     Ventron, 94 N.J. at 500-01.       Indeed, the trial court explicitly

dismissed plaintiff's fraud claim in its written opinion, finding no evidence of

"fraudulent intent," or "actual malice" by Trimaran toward plaintiff. Moreover,

there is no evidence of injustice to warrant piercing the corporate veil given that

Trimaran lost substantially more funds from UBI's bankruptcy than plaintiff,

after it too agreed to extend the maturity date on its notes. Plaintiff failed to

demonstrate that Trimaran abused the privilege of incorporation to perpetrate an

alleged injustice.

      Having found reversible error occurred in this regard, we need not address

plaintiff's remaining arguments. However, we observe that plaintiff also failed

to demonstrate that any alleged misrepresentation was the proximate cause of

his loss. Namely, plaintiff offered no evidence that if had he had refused to

extend the maturity dates of his notes in February 2010, he would have been

paid on his notes along with the other noteholders that refused to extend the

maturity date on their notes. UBI repurchased the notes of those shareholders

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                                       17
for $613,000, after Bank of America consented. Going into the repurchase, UBI

had no cash and less than $1 million left in its revolving line of credit. Plaintiff

was owed approximately $631,000 on his notes, thus the total payout including

plaintiff would have been $1.24 million, which exceeded the credit available to

UBI.    Plaintiff presented no evidence that Bank of America would have

increased the available credit to UBI in order to repurchase plaintiff's notes, or

that Trimaran would have provided UBI with funds to do so. Rather, Kehler

testified that defendant had reached its limit and did not intend to make any

further investments in UBI. Thus, plaintiff did not "show that the [alleged]

negligence was a 'substantial factor' contributing to the result." Broach-Butts v.

Therapeutic Alts., Inc., 456 N.J. Super. 25, 40 (App. Div. 2018).

       Reversed.

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