Opinion
C.A. No. 17446-NC.
Date Submitted: September 20, 2001.
Date Decided: December 20, 2001.
Daniel R. Losco, Esquire of LOSCO MARCONI, P.A., Wilmington, Delaware; and Richard E. Franta, Esquire, Wilmington, Delaware; Attorneys for Plaintiffs.
Joseph D. Kulesza, Esquire of AGOSTINI LEVITSKY ISAACS KULESZA, Wilmington, Delaware; Andrew G. Ahern, III, Esquire of JOSEPH W. BENSON, P.A., Wilmington, Delaware; and R. Karl Hill, Esquire of SEITZ VAN OGTROP GREEN, P.A., Wilmington, Delaware; Attorneys for Defendants.
MEMORANDUM OPINION
Pending is a proceeding arising out of an order directing the defendant, Steven H. Rudnitsky ("Steven"), to show cause why judgment should not be entered for the plaintiffs on Count III of the Amended Complaint. At issue is whether the Court should rescind a settlement between the parties, which marks the latest chapter in an ongoing feud between Steven and his mother, co-plaintiff Claire G. Rudnitsky ("Claire"). I find, for the reasons discussed below, that Steven has failed to show cause why judgment should not be entered in the plaintiffs' favor.
I. FACTUAL BACKGROUND
This litigation arises out of the tangled affairs of a family-owned partnership, C.M.S Associates ("C.M.S"), of which Steven and Claire were the partners at the time this lawsuit arose. Claire originally brought this lawsuit on behalf of herself and C.M.S., to invalidate certain mortgages that Steven had caused to be placed on the partnership's property without Claire's knowledge or consent. In its Opinion dated November 14, 2000, which was later implemented by an Order issued on January 3 2001, this Court (i) invalidated the mortgages, (ii) ordered that C.M.S. be dissolved, and (iii) entered a money judgment in favor of Claire and against Steven.
Rudnitsky v. Rudnitsky, Del. Ch., C.A. No. 17446, Jacobs, V.C., mem. op. (Nov. 14, 2000). For a more complete statement of the background facts underlying the mortgage dispute and the preceding disputes, the reader is referred to that Opinion.
A. The Settlement of The Dispute
On March 2, 2001, Steven and Claire settled their overall dispute, by entering into an agreement in which Steven (i) agreed to incur charges against his C.M.S. capital account, the effect of which was to reduce that account to a negative ($89,621.16); and (ii) assigned his C.M.S. partnership interest to Claire for consideration that included cash, the satisfaction of her judgment as assignee of a third party judgment creditor, and a waiver of her right to require Steven to restore his impaired partnership capital account. Pursuant to that settlement agreement, Steven assigned his partnership interest to Claire. He also executed an appropriate form evidencing the termination of his status as a partner of C.M.S., as well as a receipt for the cash component of the settlement consideration package. Thereafter, Claire executed and filed a revised Registration of Trade Name, which disclosed that she was the sole principal of C.M.S. Associates. Claire also took steps to sell the C.M.S. Building, which was the partnership's sole remaining asset.B. Steven Repudiates The Settlement
Ten days later, on March 12, 2001, Steven filed with the Register in Chancery a document denominated as a "Motion for Request for Cease Desist Order for all activities concerning CMS Property and Releasing and publishing all records, notes, bills, etc. for C.M.S. Associates from 1983 until present by Michael Amon CPA, Richard Franta, Esq but not limited to such." Accompanying that document were two letters to the Court enclosing a "Motion for Request for Expedited Trial, as per Request filed March 12, 2001," requesting that the Court "Prevent any action on said property both in repairs, marketing," and "[e]stablish a gag order." On April 2, 2001, Steven also filed with the Register in Chancery a "Motion of Lis Pendens" relating to the C.M.S. Building located at 1624 Delaware Avenue, Wilmington, Delaware. The effect of these motions was to upset the sale of the C.M.S. Building, which had been scheduled to close on August 4, 2001.
C. Claire Claims That The Repudiation Breached The Settlement Agreements And Seeks Judgment on Her Claims
In response to the foregoing, counsel for Claire moved to amend and supplement the complaint, to add Count III. That Count alleges that the Assignment Agreement executed by Steven was valid and binding, and that Steven's repudiation of the settlement constituted a breach of the covenants contained in the Assignment Agreement and in the other instruments that Steven had executed. The Court granted the motion to amend. It also issued an Order directing Steven to show cause why the plaintiffs should not be granted judgment on Count III of their Amended Complaint.
The show cause hearing was held on July 23, 2001. At that hearing the Court heard testimony from four witnesses: Claire, Richard Franta, Esquire (Claire's attorney), Rabbi Daniel Satlow, Howard Hyman (Steven's cousin), and Steven, who represented himself. Having considered these witnesses' testimony, as well as the other evidence of record, I find the pertinent facts to be as set forth below.
D. Facts Relating To The Validity Of The Parties' Settlement
As earlier stated, Steven, who is a college graduate and holds a Masters of Business Administration, was a partner in C.M.S. After his father's death, Steven also operated The Smoke Shop, a family business located in the C.M.S. Building. By early 2000, Steven had become embroiled in litigation with the State of Delaware Department of Revenue over nonpayment of a sizeable judgment lien for taxes generated by The Smoke Shop. He was also embroiled in litigation with his ex-wife over unpaid child support that the Division of Child Support (and Steven's former wife) were attempting to collect. The dispute with the Department of Revenue was resolved by this Court ordering (at the instance of the Department) that The Smoke Shop be closed and its assets sold. In connection with the tax-related litigation, Steven took the position that he had sold The Smoke Shop to his cousin, Howard Hyman, and was no longer in a position to comply with the Court's order, since he no longer controlled the business operations. After a factual hearing, the Court rejected Steven's position, finding that his testimony lacked credibility. Ultimately, The Smoke Shop was shut down, and what assets it had were liquidated. Because Steven lacked the funds to pay his share of the debts of the partnership business, the resulting financial burden fell to C.M.S.'s other partner — Steven's mother, Claire.
After the tax litigation was resolved, Claire attempted to get a fix on the assets and liabilities of the partnership. In the course of doing that, she learned that Steven had, unbeknownst to her and without her permission, placed several mortgages on the partnership property to secure personal loans to himself Claire then filed this action against her son for a declaration that the mortgages were invalid, and for an order canceling the mortgage instruments. As earlier noted, this Court invalidated the mortgages, finding them in violation of the partnership agreement, which required Claire's consent as a precondition. Thereafter, Claire and Steven entered into the settlement which Steven now seeks to repudiate.
Initially, Steven did not specify the basis for his contention that the various settlement agreements were invalid, but at the July 23, 2001 show cause hearing he advised the Court that the legal grounds for his position were that: (i) he had signed the various settlement instruments under duress, and (ii) he lacked the mental capacity to contract. The evidence that Steven introduced to support these contentions was essentially his own unsubstantiated testimony, which is next summarized.
Steven testified that at the time of the settlement, he was in urgent need of money, to pay over $7,200 of unpaid child support obligations. Those arrearages had resulted in Steven spending the prior three weekends incarcerated, by reason of a Family Court Order, in the Plummer Center in Sussex County. Steven testified that he settled his dispute with Claire solely to obtain the cash he so desperately needed to discharge that obligation, to avoid having to spend another weekend in jail. Avoiding further jail time was essential, Steven said, because: (i) his life had been threatened, and he also had been approached by a homosexual inmate, while at Plummer; (ii) he was mentally depressed, was on antidepressant medication, and was desperate and incoherent; and (iii) he would have done anything to keep out of prison.
Accordingly, Steven called Mr. Franta and agreed to settle the case. Thereafter, on March 2, 2001, Steven drove 89 miles to Mr. Franta's office, where he (1) executed the assignment of his partnership interest and other settlement documents, (2) accepted a settlement check for $7,248.67 from Claire, and then (3) immediately drove to the Division of Child Support, where he (4) delivered the check and received documentation of the payment that enabled him to secure his release from custody.
Steven also testified that even though he read the settlement papers before he signed them, he did not know that he was signing away his partnership interest to his mother. Nor did he realize he had done this until the end of that week. One week thereafter, on March 12, 2001, Steven filed his motion to rescind the settlement.
The only other witness whose testimony was probative on the material issues was Mr. Franta, Claire's counsel. Mr. Franta testified that Steven himself proposed the settlement, and that when Steven came to his office to read and sign the settlement documents he seemed normal, did not appear delirious, was not crying or hallucinating, did not exhibit slurred speech, and was more focused than usual. Importantly, Mr. Franta testified that he exerted no pressure on Steven to sign the documents, and that Steven read the documents before he signed them. Mr. Franta specifically recalled that when Steven came across the provision of the Assignment Agreement which recited that he (Steven) was not acting under duress, Steven commented to Mr. Franta that he was acting under duress. To that Mr. Franta replied "Steven, if you think that you are under duress, we won't sign. Go see a lawyer if you wish." Steven declined that invitation and signed the agreements.
Claire, who was called by Steven as a hostile witness, did not testify on any matter of significance to the issues presented here. Rabbi Satlow and Mr. Hyman were called as witnesses by Steven. Although their testimony was credible, it did little to aid Steven's cause. Rabbi Satlow and Mr. Hyman, who had communicated with Steven during the days before the settlement, essentially corroborated Steven's testimony that he (Steven) was distraught and depressed, but those witnesses were otherwise unable to shed any helpful light on Steven's claims of duress and mental incapacity.
Mr. Franta also testified that although Steven had made suicide threats to him (Franta) on past occasions, he made no such threats at the time he executed the settlement documents.
Lastly, Mr. Franta testified that Claire substantially changed her position in reliance on the settlement, in that she solicited offers to sell the C.M.S. Building, entered into an agreement of sale, paid all tax arrearages, and satisfied the claims of other partnership creditors. Claire would not have done this absent the settlement, because if Steven were still a C.M.S. partner, he would have had the power to veto those financial arrangements that Claire paid (on behalf of the partnership) out of her own pocket.
As discussed more fully below, I find Mr. Franta's testimony entirely credible, and find Steven's testimony — that he entered into the settlement under duress and that he could not understand the significance of the documents he was signing — entirely incredible.
II. ANALYSIS A. Summary of Steven's Invalidity Claims
Although at the hearing Steven limited his challenge to the settlement to claims of duress and lack of mental capacity, in a post-hearing letter memorandum dated Augnst 19, 2001 Steven enlarged his challenge to encompass other claims. The additional claims were that (1) Steven was unduly influenced to sign the settlement papers, (2) Claire breached the C.M.S. Partnership Agreement, and (3) Mr. Franta committed perjury and also engaged in conduct amounting to contempt of court. All these claims are addressed in this Opinion. The burden of proving those claims and (as a consequence) of establishing the invalidity of the settlement, rests upon Steven. For the reasons next discussed, Steven has failed to carry that burden.
McAllister v. Schetter, Del. Ch., 521 A.2d 617 (1986) (burden of proving incompetence to enter into a transaction falls on the party attacking the transaction); accord 13 Am. Jur. 2d Cancellation, § 10 (2000); Berdel, Inc. v. Berman, Del. Ch., C.A. No. 13579, Jacobs, V.C., mem. op. at 12 (Dec. 15, 1997) (absent a confidential or fiduciary relationship, the party asserting undue influence has the burden of proof).
B. The Claim of Mental Incapacity
Steven's mental incapacity claim amounts to a contention that he was "under heavy medication that causes mind altering moods." That claim finds support only in Steven's uncorroborated, self serving testimony. Steven submitted no evidence of precisely what medications he was taking, and no medical evidence as to the effect of such medications on his mental state. In addition, and apart from that failure of proof the undisputed facts show that Steven's mind was not so altered or befuddled so as to prevent him from understanding the nature of his impending jail sentence, from traversing major highways to arrive safely at Mr. Franta's office to pick up a settlement check, or from driving a further distance to discharge his child support obligation so as to avoid further jail time at the Plummer Center. Steven's claim of mental incapacity is rejected for failure of proof
C. The Duress/Undue Influence Claim
Although Steven claims that when he entered into the settlement agreement he was under duress, his post-trial letter memorandum suggests that the settlement was also the product of undue influence. To establish duress sufficient to void a contract there must be "(1) a `wrongful' act, (2) which overcomes the will of the aggrieved party, and (3) who has no adequate remedy to protect himself." To establish undue influence sufficient to prevent the formation of a binding contract, the party asserting that claim must show that he was unfairly persuaded to enter into the agreement in circumstances where the person exercising the persuasion either dominated the victim, or where the relationship between the parties justified the assumption that that influencing person would not act detrimentally to the victim's interests. Where (as here) no fiduciary or confidential relationship exists between the parties, the party who claims undue influence has the burden of proof. That burden was not met. In this case the claims of duress and undue influence fail, both factually and legally.
Cianci v. JEM Enterprise, Inc., Del. Ch., C.A. No. 16419, Lamb., V.C., mem. op. at 23 (Aug. 22, 2000); Restatement (Second) of Contracts § 175(a); see also 25 Am. Jur. 2d Duress § 1 (1996).
Restatement (Second) of Contracts § 177 (1979).
Berdel, Inc. v. Berman, supra n. 4.
Steven has failed to carry his burden of proving duress, because there is no evidence that Claire or her attorney, Mr. Franta, made an improper threat — or indeed, any threat — to Steven. Indeed, no threat is claimed. The only "threat" Steven faced was a lawful sentence, imposed by the Family Court, ordering his incarceration for non-payment of child support. And if that were not enough, the interchange between Steven and Claire's attorney, Mr. Franta, demolishes any duress claim. It will be recalled that before he executed the Assignment of his partnership interest, Steven read its recital stating that he was not acting under duress, and then suggested to Mr. Franta that the recital was incorrect because he (Steven) was signing under duress. Mr. Franta pointedly responded that "if you think that you are under duress, we won't sign. Go see a lawyer if you wish." As earlier noted, Steven declined that invitation and signed the settlement documents.
Regarding undue influence, it is clear to begin with, that Claire was not in a dominant or fiduciary relationship with Steven. Their relationship at the time was solely as litigation adversaries and was manifestly hostile. Not only was Claire not in a position to exert improper influence over Steven, but also she exerted no influence at all. It was Steven — not Claire — who proposed the settlement and was its driving force. Besides not having contacted Steven to propose the settlement and assignment of partnership interest, throughout the settlement discussions Claire never spoke with her son at all. Nor can Steven credibly claim that he lacked any reasonable alternative or adequate legal remedy to protect himself. He had the alternative of not settling, which meant returning to the Plummer Center to which he had been lawfully sentenced. Having to serve that sentence may have been unpleasant, and perhaps (to Steven) unpalatable, but that prospect, without more, does not constitute duress.
In short, Steven has not made out, even prima facie, a case of duress or undue influence that would void the settlement. All he has shown is that he was depressed and terrified about the prospect of returning to jail. Of that the Court has no doubt. At that point Steven had lost his livelihood from the family business, he was embroiled in bitter litigation with his mother and his ex-wife, and he had been sentenced to prison for non-payment of child support. What rational person would not be depressed over that state of affairs? But that, without more, does not establish that Steven signed away his partnership interest because he was improperly persuaded to do so or because (inconsistently) the proverbial gun was pointed at his head. To the contrary, Steven's agreement to the settlement — which he had proposed — was an act of consummate rationality: it was the only way left for Steven to extricate himself from his prison sentence. Having made a deliberate, calculated decision to enter into the settlement, and having enjoyed its benefits, Steven now, without the threat of incarceration hanging over him, seeks to renege on his agreement without offering (or showing the ability) to return the parties to the status quo ante.
I pause on this last point — Steven's retention of the benefits of the settlement — because that fact defeats not only his claim of duress and undue influence, but also the remedy of rescission altogether. A critical requirement for rescission is that the plaintiff be willing and able to restore the status quo ante. Steven has made no such offer or shown that he has the financial ability to do so. Restoration of the status quo would require Steven to repay not only the over $7,200 cash component of the settlement consideration, but also the tens of thousands of dollars Claire paid to discharge partnership debts for which Steven was legally responsible.
Norton v. Poplos, Del. Supr., 443 A.2d 1, 4 (1982).
Steven's retention of the settlement benefits also independently defeats his claims of duress and undue influence. Because a contract agreed to under duress (or by reason of undue influence) is voidable at the option of the victim, such an agreement may be ratified and rendered fully enforceable. As Vice Chancellor Lamb has stated, "[r]atification results if the party who executed the contract under duress accepts the benefits flowing from it for any considerable length of time after opportunity is afforded to annul or void it." Thus, even if (contrary to my finding on this point) Steven's claims of duress and undue influence had been established factually as a legal matter, Steven's retention of the benefits of the transaction since March, 2001 defeats those claims. Accordingly, the claims of duress and undue influence are rejected.
Cianci v. JEM Enterprise, Inc., supra at n. 6, mem. op. at 30 (Aug. 22, 2000) (quoting Gallon v. Lloyd-Thomas Co., 264 F.2d 825, at 826 (8th Cir. 1959).
D. Steven's Remaining Claims
In addition to the claims previously addressed, Steven advances four other contentions. Those other contentions have either no or (at best) marginal relevance to the requested rescission remedy, but for the sake of completeness the Court addresses them at this point.
1. Mr. Franta's Alleged Perjury
Steven accuses Mr. Franta of perjury in connection with his hearing testimony relating to telephone messages left by Steven at Mr. Franta's office. Specifically, both Mr. Franta and Mr. Hyman testified that Steven had made several veiled suicide threats over the course of this litigation. One of those threats was left on Mr. Franta's answering machine. Mr. Franta testified that he passed this information on to Dr. David Mandelbaum, a psychologist with offices in Mr. Franta's building. Steven claims that Franta's testimony was false, because he had not been Dr. Mandelbaum's patient since 1999 and because Dr. Mandelbaum had denied (presumably to Steven) that the referral had ever occurred. Dr. Mandelbaum did not, however, testify, nor was his affidavit submitted at the show cause hearing. Thus, Steven's claim of perjury rests solely on Steven's unsubstantiated statement — hardly proof that Mr. Franta committed perjury.
Of a similar piece is Steven's claim that Mr. Franta falsely testified that he had faxed certain documentation to the Division of Child Support on March 2, 2001 to help assure that Claire's $7,248.67 check reached the Division in time for Steven to avoid further jail time. Steven's charge that this was not done is also unsubstantiated.
2. Mr. Franta's Alleged Contempt of Court
Steven next contends that Mr. Franta stands in contempt of court because he (Steven) had subpoenaed certain business records of C.M.S. in March, 2001 while Mr. Franta was counsel of record for C.M.S., and Mr. Franta never produced the subpoenaed documents. The short answer is that no subpoena was ever issued for the records and no other order of this Court required Mr. Franta or Claire to produce any records. There was no contempt of court.3. Alterations to the C.M.S. Property
Steven next complains of certain alterations made to the C.M.S. real estate located at 1624 Delaware Avenue in Wilmington. The claim is that certain signage had been removed, thereby devaluing the property, and that repair work was done to the building without certified craftsmen. The short answer is that that claim, even if true, has no relevance to the issue before the Court. If the assignment of partnership interest stands (as I conclude it does), then Claire, as the sole owner of C.M.S., is entitled to do with her property as she pleases.
4. Challenge to Settlement Consideration
Lastly, Steven challenges the consideration for the settlement, which totaled over $189,000 of cash, credits and debt forgiveness. The essence of this claim is that that amount is inadequate to compensate Steven for his one-third interest in a partnership whose sole asset is real estate that he values — again without substantiation — at $1.3 million. The only evidence of the property's fair market value, i.e., what a willing seller will sell and what a willing buyer will offer for it, is that the real estate was under contract to a bona fide purchaser for $500,000. There is no evidence of record that the property was worth any more.
* * * *
To summarize the rulings and findings made here, Steven has failed to establish that the settlement into which he entered, including the assignment of his partnership interest to Claire, was other than knowing and voluntary. Steven had a choice: return to jail for nonpayment of child support or assign his partnership interest to raise the cash that would enable him to pay the support obligation. Steven chose to settle. No one forced him to make that choice, and when he made it he possessed all of his rational mental faculties. Steven made an informed, calculated decision to settle, specifically to extricate himself from his jail sentence. In all likelihood he did that with the intent to repudiate the settlement at the earliest opportunity. This Court will not allow its processes to be used to aid that effort. Steven must live with the consequences of his choice.
III. CONCLUSION
For the foregoing reasons, Steven has failed to show cause why the settlement should not be upheld, and therefore judgment will be entered in plaintiffs' favor on Count III of their Amended Complaint. Counsel for plaintiffs shall submit an appropriate implementing form of order on notice.