Opinion
DOCKET NO. A-5896-13T1
01-20-2016
DAVID CATANOSO, SUSAN CATANOSO and DOUBLE DIAMOND TECHNOLOGIES, INC., Plaintiffs-Appellants, v. STRATEGIC PLANNING AND MANAGEMENT, LLC, Defendant-Respondent, and JOSEPH TESTA, SHERRY TOMASSO, DONALD LARICKS, ELVIRA LARICKS, JAMES ANDERSON and GIORGI STOYNEV, Defendants.
Andrew D. Catanese argued the cause for appellants (Monzo Catanese Hillegass, P.C., attorneys; Mr. Catanese, of counsel; Daniel S. Reeves, on the brief). Christopher P. Leise argued the cause for respondent (White and Williams, L.L.P., attorneys; Mr. Leise, of counsel; James D. Burger, on the brief).
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION Before Judges Sabatino, Accurso and Suter. On appeal from Superior Court of New Jersey, Chancery Division, Cape May County, Docket No. C-30-11. Andrew D. Catanese argued the cause for appellants (Monzo Catanese Hillegass, P.C., attorneys; Mr. Catanese, of counsel; Daniel S. Reeves, on the brief). Christopher P. Leise argued the cause for respondent (White and Williams, L.L.P., attorneys; Mr. Leise, of counsel; James D. Burger, on the brief). PER CURIAM
Plaintiffs David and Susan Catanoso participated for almost ten years in a business organized and run by David's cousin by marriage, defendant Joseph Testa, the managing member. The business, defendant Strategic Planning and Management, L.L.C., provided computer software for real estate agents and property managers engaged in the rental and management of vacation properties. Testa's brother-in-law, defendant Donald Laricks, provided the idea for the company, and he and his wife, defendant Elvira Laricks, through their company Laricks Property Management Corporation, were original members. Defendant Sherry Tomasso was also an original member and served as the company's sales manager.
Testa, Tomasso and the Laricks' company executed Strategic's operating agreement in January 2000 at its formation. Testa at that time was already in negotiations with David Catanoso to develop software for the company. Catanoso proposed that he and his wife Susan be granted an equity interest in Strategic. Instead, Strategic employed a company partly owned by the Catanosos, Webclothes, Inc., to provide it I.T. (information technology) services. In January 2001, those I.T. services began to be provided by a company wholly owned by the Catanosos, Double Diamond Technologies, Inc. To accommodate the Catanosos' desire for equity in Strategic, Testa orally agreed that the company would pay 94% of Double Diamond's invoices, with the remaining 6% to be listed as a credit to the Catanosos personally on Strategic's books as their capital investment in the company. The Catanosos received IRS schedule K-1s reflecting capital account balances of 3% each.
Double Diamond invoiced Strategic for I.T. services from January 2001 through December 2004. In 2003, Strategic landed an important multi-year contract to develop and deliver software for a company called RCI. The company needed Catanoso's services to fulfill that contract. Catanoso used the opportunity to press his case with Testa that he and his wife become members of Strategic. Testa presented an amended operating agreement to the Catanosos in 2003 that would give them a combined 17% share in Strategic. The Catanosos rejected that agreement and sent Testa a counter-offer. Neither document was ever executed, but the Catanosos began working directly for Strategic as part-time employees, and their K-1 allocations were adjusted upward to 8.5% each.
The RCI contract ended in 2008 and the Catanosos left the company a year later. In 2010, Testa presented the Catanosos with a recapitalization agreement signed by him, the Laricks and Tomasso which would have exchanged the $26,000 balance the company claimed existed in the Catanosos' capital accounts for a 1% ownership share in Strategic. The Catanosos rejected the agreement and filed suit a year later seeking reinstatement of their ownership interests in Strategic, access to its books and records, correction of their capital accounts, payment of outstanding invoices to Double Diamond, payment of unpaid wages to David Catanoso, damages for failure to make IRA contributions, as well as for Testa's breach of fiduciary duties and for misappropriation by Testa and Tomasso. Two months before trial, the Catanosos were allowed to amend their complaint to assert additional claims for legal and equitable fraud, a derivative claim, and a claim for punitive damages.
Judge Nelson Johnson presided over an eight-day trial in Chancery, hearing the testimony of over ten witnesses, including all of the individual parties as well as their experts. In a comprehensive written opinion, he found none of the parties had "a complete understanding of 'the deal' they were embarking upon in January of 2000," and that they never defined the Catanosos' roles in Strategic, never established the value of their services to Strategic, nor the intrinsic value of those services as a percentage interest of the equity of the company. In an overview of the proofs, the court observed that
[t]he testimony reveals that [Strategic] primarily treated the Catanosos as an
independent contractor providing I.T. services, and secondarily as a business partner. The flip-side of that was the Catanosos primarily treated [Strategic] as a customer of I.T. services and secondarily as a partner. Critical to the facts giving rise to this lawsuit is that, throughout the entirety of their relationship, the Catanosos viewed [Strategic] as their primary customer from whom they expected a reliable source of revenue; so much so that their personal finances depended upon that source of revenue, viz., as so aptly stated by [p]laintiff's counsel, "they could not afford not to get paid."
The court rejected the Catanosos' claim that they had become members of Strategic pursuant to an oral agreement with Testa.
Whether applying the provisions of the former [New Jersey Limited Liability Company] Act, namely, N.J.S.A. 42:2B-21, or the current language, namely, N.J.S.A. 42:2C-31, the Plaintiffs are neither "founding members" or "members" of the Company. The only signed Agreement among [Strategic's] members is [the operating agreement] which was signed on January 3, 2000. There is nothing in the Operating Agreement which contemplates that other individuals are to be included in the original Agreement. All of the shares are allocated between the founding members; the Plaintiffs are not among the people listed in [the operating agreement].
As noted by Finding of Fact #11, Mr. Testa and Mr. Catanoso were having discussions regarding Plaintiff's role in the business during that time period. Neither gentleman thought it necessary to include language providing for future ownership interest by the Catanosos. It
wasn't until several weeks later, on January 22, 2000, in his letter, that Mr. Catanoso raised the question of an equity interest in the Company. There's nothing contradicting the fact that everyone knew the Operating Agreement was in place and that Plaintiffs were not part of it. A review of [the operating agreement] reveals that it does provide a means for adding new members. Section 6.2 requires a "written instrument of assignment" and the written consent of members holding at least a majority of the percentage interests (see 6.3 and 6.5). There was no testimony at trial to support the satisfaction of these requirements.
Judge Nelson described Testa throughout much of the parties' relationship as "doing a high-wire performance trying to placate both the Catanosos and his fellow partners," all of whom were opposed to the Catanosos becoming members in Strategic. The judge found that Testa had the 2003 unsigned amended operating agreement prepared "in response to Catanoso's request/demand for a substantial equity interest in [Strategic]" in connection with the RCI contract.
He observed that the Catanosos' rejection of that amended operating agreement and counter-offer likely "saved Testa the discomfort of having to discuss" the issue of making the Catanosos members with his partners. The judge found that "[a]t the end of the day, what [the proposed 2003 amended operating agreement] represents to the Court is an unaccepted offer (which given the hostility of the Laricks's and Tomasso was of dubious value) and a counter-offer which was never replied to by the offeror." Judge Nelson concluded that
[w]hether Catanoso was attempting to "extort" an equity position in [Strategic], or use his leverage as the only provider of I.T. services, and, whether Testa was sincere in his desire to establish a reasonable percentage of equity interest (opposed by his partners), or merely playing Catanoso to keep the software development going forward, are all eclipsed by the fact that there is no signed agreement.
He found "Testa and Catanoso were — as to any equity position — at what amounted to an unspoken impasse and continued working together until September 2009, when Catanoso left the Company after Testa had reduced his hours substantially and assigned the lead role for I.T. services" to someone else.
Although rejecting plaintiffs' claims of membership in Strategic, Judge Nelson nevertheless found that they had a protectable interest in the company recognizable in a court of equity. Relying on Testa's testimony that he viewed the Catanosos "as 'something' to the Company, more than employees or private contractors; 'a member in waiting,'" the judge concluded plaintiffs possessed an inchoate interest in Strategic. The judge, however, rejected plaintiffs' claims that the percentages listed in their K-1s accurately reflected that interest, noting that "inserting numbers in a K-1 that have no negligible impact upon anyone's finances in any of the given years is not the same thing as formally amending the Operating Agreement; something Testa did not want and something Catanoso failed to pursue." He wrote:
While Mr. Testa views Mr. Catanoso's conduct as "extortion," and Mr. Catanoso views Mr. Testa's conduct as "fraud," neither party's testimony supports a finding that either of them engaged in unconscionable or sharp business practices. The Court's conclusion is based upon not only the testimony of the two principal parties, but also upon what was reasonable versus unreasonable in the business relationship these two gentlemen had cobbled together, absent a written agreement.
The judge found that "[d]espite the lack of a written agreement, between the years 2000 through 2009, the Catanosos and their businesses were paid approximately $1.5 Million for providing I.T. services" as contractors and part-time employees. In contrast, the combined salary of full-time employees Tomasso ($495,000) and Testa ($263,000) over the same period totaled $758,300, slightly more than 50% of the total paid to the Catanosos and their businesses.
The judge concluded Strategic was indebted to the Catanosos in the sum of $45,390 for fifteen payroll checks written to them that Testa asked them not to cash; the $8650 it was undisputed plaintiffs contributed to the company, and the 6% of Double Diamond invoices that Strategic credited to plaintiffs as capital contributions, amounting to $33,000. The judge also added pre-judgment interest in the amount of $6470.77 for a total of $93,510.77.
He rejected their claims of unpaid invoices to Double Diamond as barred by the statute of limitations, N.J.S.A. 2A:14-1, because the final invoice was dated December 31, 2004 and the lawsuit was filed more than six years later. Judge Johnson further found plaintiffs failed to meet their burden of clear and convincing evidence that Testa committed fraud or breached his fiduciary duties, and that, in any event, Testa's actions were immune from liability under the business judgment rule, largely because his conduct "has been endorsed by all the prescribing members of the LLC," citing Seidman v. Clifton Sav. Bank, S.L.A., 205 N.J. 150, 177 (2011) and In re PSE&G Shareholder Litigation, 173 N.J. 258, 277 (2002), among other cases. The court found that to the extent any breach of the covenant of good faith and fair dealing could be found, both Testa and Catanoso were equally at fault and thus the claim was unavailable to either. Finding no basis to pierce the corporate veil under State, Dept. of Envtl. Prot. v. Ventron Corp., 94 N.J. 473 (1983), the court found there was no basis upon which to impose personal liability for the judgment on any of the individual defendants. Finally, the court rejected defendants' counterclaim for damages arising out of alleged shoddy work by the Catanosos as speculative.
Plaintiffs appeal claiming defendants "judicially admitted" the Catanosos were members of Strategic, and that the court erred in concluding otherwise based both on defendants' admissions and the "overwhelming evidence" in the record. They claim the court erred in concluding their economic interest was limited to a return of capital, which they also contend the court miscalculated in any event. They further claim the Double Diamond invoices are not barred by the statute of limitations, that Testa's actions are not protected by the business judgment rule and that they are entitled to their legal fees for the derivative claims they brought on behalf of the company. Finally, they claim they are entitled to an additional $5612 for services performed by David Catanoso after he resigned from the company.
We reject these claims with the exception of the last, which we cannot find the court addressed, and affirm substantially for the reasons expressed by Judge Johnson in his cogent and comprehensive written opinion of July 10, 2014. We remand plaintiffs' claim for $5612 for consideration and decision. We add only the following limited comments.
Plaintiffs' claim that defendants should be estopped from denying the admissions in their pleadings, interrogatory answers and deposition transcripts that the Catanosos were members of Strategic was considered and rejected by the trial court. A judicial admission is
An express waiver made in court or preparatory to trial by the party or his attorney conceding for the purposes of the trial that the truth of some alleged fact, has the effect of a confessory pleading, in that the fact is thereafter to be taken for granted; so that the one party need offer no evidence to prove it and the other is not allowed to disprove it.Wigmore further explains that a judicial admission must be "by intention an act of waiver relating to the opponent's proof of the fact and not merely a statement of assertion or concession made for some independent purpose." Wigmore, supra, § 2594(2). A trial court has discretion "to avoid the consequence of conclusiveness of an admission." Id. at § 2590.
[Saltsman v. Corazo, 317 N.J. Super. 237, 244-45 (App. Div. 1998) (quoting Chaffee v. Kraft Gen. Foods, Inc., 886 F. Supp. 1164, 1168 (D.N.J. 1995) (quoting 9 Wigmore on Evidence § 2588 (Chadbourn rev. 1981)))].
Having reviewed the record, we cannot conclude the court erred in rejecting plaintiffs' judicial admission claims. There is no question on this record but that the main dispute between the parties was over whether plaintiffs were members of Strategic. The parties had filed cross motions for summary judgment on the issue some twenty months before the case was tried. The motions were denied because Judge William Todd found material facts in dispute that precluded resolution of the issue as a matter of law.
To be sure, defendants were pursuing alternate theories. They were urging that the 2010 recapitalization agreement, unsigned by the Catanosos, was valid. That agreement would have exchanged the balance in the Catanosos' capital accounts for a 1% interest in Strategic. In the event the judge disagreed, defendants argued in the alternative that the Catanosos were not members because they had refused to sign agreements providing them a membership interest. Rule 4:5-6 expressly allows the advancement of alternative defenses "regardless of their consistency" and although we queried their counsel at oral argument to identify surprise or prejudice to plaintiffs, we cannot find either shown on this record.
Plaintiffs remaining arguments on appeal reduce to quarrels with the judge's fact-finding which we are simply in no position to reject. We will not overturn the factual findings and legal conclusions of a trial judge sitting in a non-jury case "unless we are 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, supra, 205 N.J. at 169 (quoting In re Trust Created By Agreement Dated December 20, 1961, ex rel. Johnson, 194 N.J. 276, 284 (2008)). Deference is especially appropriate in a case such as this where "the evidence is largely testimonial and involves questions of credibility." Ibid.
The trial court's factual findings and legal conclusions with regard to plaintiffs' claims as to their membership in Strategic, their economic interest in the company and calculation of their capital contributions, as well as the court's rulings on the Double Diamond invoices and findings pursuant to the business judgment rule all have substantial support in the record, despite each being aggressively disputed. Moreover, plaintiffs' failure to prove that they were members of Strategic bars all their derivative claims. See N.J.S.A. 42:2B-61 (barring derivative actions by those who are not members of the limited liability company).
Because we cannot discern that the court addressed plaintiffs' claim that David Catanoso is owed $5612 for work performed at Testa's behest at an agreed hourly rate after his resignation in 2009, we remand that modest claim to the trial court for resolution in a manner it deems fair and appropriate.
Affirmed in part; and remanded in part. 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