Opinion
DOCKET NO. A-1919-12T1
03-04-2014
ROBERT KOHN, Plaintiff-Respondent, v. PROTEONOMIX, INC., Defendant-Appellant.
Jeffrey P. Gardner, attorney for appellant. Jay I. Lazerowitz, attorney for respondent.
NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
Before Judges Yannotti and Ashrafi.
On appeal from Superior Court of New Jersey, Law Division, Passaic County, Docket No. L-3611-12.
Jeffrey P. Gardner, attorney for appellant.
Jay I. Lazerowitz, attorney for respondent. PER CURIAM
Defendant Proteonomix, Inc., appeals from summary judgment awarding $225,000 to plaintiff Robert Kohn pursuant to an employment separation agreement executed by the parties. Defendant contends summary judgment was improperly granted because plaintiff fraudulently induced defendant to enter into the separation agreement and because no discovery was conducted in the litigation. We affirm.
In reviewing a grant of summary judgment, we apply the same standard under Rule 4:46-2(c) that governs the trial court. Mem'l Props., LLC v. Zurich Am. Ins. Co., 210 N.J. 512, 524 (2012). We 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). Viewed in the light most favorable to defendant, the record reveals the following facts.
Plaintiff was employed as the Chief Financial Officer (CFO) of defendant company from June 2009 to September 2010. The employment was pursuant to a written employment agreement dated July 1, 2009, which was to run for an initial term of three years. Plaintiff's compensation under the employment agreement included a signing bonus of 250,000 shares of the common stock of the company. Salary of $150,000 per year would accrue but would not be paid until defendant raised $1.5 million in equity financing for the company. The employment agreement also provided plaintiff with other forms of compensation and benefits.
Before he was hired, plaintiff told defendant's President and Chief Executive Officer, Michael Cohen, that he could raise money for the company through his business contacts and that he could establish and maintain the accounting protocols needed to complete financial statements and other related documents for filings with the Securities and Exchange Commission (SEC). Sometime before September 2010, Cohen came to believe that plaintiff was not capable of accomplishing either of these tasks. According to Cohen, plaintiff was "totally inadequate and in fact incompetent" when it came to raising money for defendant. Cohen also concluded that plaintiff was incapable of establishing and maintaining the required accounting protocols.
By several email exchanges in September 2010, Cohen and plaintiff agreed to terminate plaintiff's employment contract. The parties then negotiated a detailed separation agreement, defendant's attorney drafting the agreement and communicating directly with plaintiff. Plaintiff's attempt to include mutual releases was rejected by defendant's attorney, who insisted that plaintiff accept the negotiated agreement as defendant had presented it.
The September 30, 2010 separation agreement provided for the immediate cessation of plaintiff's employment upon specified terms. Plaintiff would be paid deferred compensation of $187,500, plus an additional $37,500 as the value of lost benefits under his employment contract, but payment would be made only on the condition that defendant obtained at least $1.5 million in equity financing. Plaintiff would make no further claim for compensation. Plaintiff would retain only 156,250 shares of the common stock of the company, and he would return to defendant the balance he had received as a signing bonus (93,750 shares valued at about $200,000, according to plaintiff).
In March 2012, plaintiff learned that defendant had in fact received financing in an amount greater than $1.5 million. He wrote to defendant's attorney seeking payment of the total $225,000 due to him under the separation agreement. Defendant did not respond.
In August 2012, plaintiff filed suit seeking that amount. Defendant filed an answer in November 2012, denying liability and also asserting an affirmative defense of fraud in the inducement of the contract upon which plaintiff sought recovery. The day after the filing of defendant's answer, plaintiff filed his motion for summary judgment.
In opposition to summary judgment, defendant did not deny the terms of the separation agreement, the fact that defendant had achieved the financing milestone, or its refusal to pay. It relied on its defense that the agreement was induced by plaintiff's alleged fraud, and it also argued that summary judgment would be premature because no discovery had been conducted in the litigation. By means of Cohen's certification, defendant alleged that an annual audit of defendant's books for December 31, 2010, revealed errors in financial documents that were created under plaintiff's supervision as CFO. Cohen claimed that defendant had incurred substantial costs to correct these errors. Cohen also said that defendant had incurred other costs associated with plaintiff's deficient work product. For instance, there were delays in filing documents with the SEC and in responding to concerns the SEC had with certain filings. These delays prevented defendant from securing funding needed to conduct its business. The errors and delays also caused the SEC to perform additional and ongoing review of defendant's records. According to Cohen, "the majority of comments received from the SEC," initially and throughout the course of this ongoing review, "related to deficiencies in [plaintiff's] work product."
Cohen also claimed that plaintiff "had systematically engaged in breaches of his fiduciary duty to our Company by failing to disclose a business relationship with a publicly traded company BioPower Operation Corporation . . . while in the employ of our Company." Cohen further stated that plaintiff had "perpetuated this deception by advising the Company to hire" two persons with whom he had "an undisclosed business relationship." Defendant contended that factual issues were in dispute and that its defense of fraudulent inducement required further development in the discovery process.
The trial court considered all the summary judgment submissions, heard oral argument, and ruled from the bench that the fraudulent inducement defense was not legally viable and that plaintiff was entitled to summary judgment. The court concluded that defendant's claims of fraud pertained primarily to plaintiff's alleged misrepresentations of his abilities before the execution of the July 2009 employment contract. The court stated that Cohen had determined before executing the September 2010 separation agreement that plaintiff's claims regarding his abilities were untrue. The court concluded that defendant had not presented any factual evidence of fraud in the inducement of the separation agreement, which was the contract of the parties that plaintiff was seeking to enforce. Consequently, the court granted summary judgment in favor of plaintiff. We agree with the trial court's findings and conclusions.
An allegation of equitable fraud, by which a party seeks to nullify a contract, requires evidence "of (1) a material misrepresentation of . . . fact; (2) the maker's intent that the other party rely on it; and (3) detrimental reliance by the other party." First Am. Title Ins. Co. v. Lawson, 177 N.J. 125, 136-37 (2003); accord Jewish Ctr. of Sussex Cnty. v. Whale, 86 N.J. 619, 624-25 (1981) (elements of equitable fraud in action seeking rescission of employment contract based on misrepresentations in employee's resume). The detrimental reliance of the party alleging fraud must be reasonable under the circumstances. See, e.g., Marino v. Marino, 200 N.J. 315, 341 (2009); Gennari v. Weichert Co. Realtors, 148 N.J. 582, 610 (1997) .
Here, Cohen's certification in opposition to summary judgment focused chiefly on plaintiff's representations before he was hired in 2009. But plaintiff's alleged falsehoods about his capabilities induced defendant to enter into the employment agreement, not the separation agreement that replaced the employment agreement. The separation agreement is a separate contract that resulted from the alleged failure of plaintiff to perform as he had represented he could. At the time of plaintiff's termination, defendant had come to conclude that plaintiff was inadequate and incompetent as a CFO. Defendant did not rely on the earlier alleged misrepresentations in entering into a new contract to separate plaintiff amicably from the company.
Defendant did not specifically allege any facts regarding affirmative misrepresentations by plaintiff during the September 2010 negotiations preceding the separation agreement. Rather, defendant contends plaintiff alone knew of the extent of his errors in maintaining accounting protocols and in preparing SEC documents, and he did not reveal that information. Defendant learned of additional problems only when an audit was conducted several months later. Thus, defendant alleges that material omissions of fact by plaintiff fraudulently induced defendant to execute the separation agreement.
The legal deficiency of this contention is that plaintiff cannot prove it reasonably relied on plaintiff's performance as the CFO when it entered into the separation agreement. Having already come to the opinion that plaintiff's work was inadequate, defendant cannot claim it expected no further problems with the work done under plaintiff's supervision. Viewed most favorably to defendant, the facts alleged would not permit a rational fact-finder to conclude that defendant reasonably relied to its detriment upon the alleged material omissions of plaintiff in failing to disclose the extent of his defective work product.
Defendant also alleges that plaintiff fraudulently induced the separation agreement by covering up his business relationship with BioPower Operation Corporation and two individuals that he recommended to defendant. Plaintiff's original employment contract, however, expressly permitted him to engage in other business activities as long as they did not impair or otherwise affect his duties as CFO of defendant. Cohen's certification does not state how plaintiff's relationship with the two individuals impaired or adversely affected plaintiff's job duties. Furthermore, defendant's claim regarding BioPower is not supported by any showing that plaintiff was involved with that company before his September 2010 termination.
Plaintiff gave valuable consideration in exchange for the compensation he was promised in the separation agreement. Plaintiff agreed to return a substantial portion of his stock in the company and his rights under the existing employment contract. In exchange, defendant agreed to pay plaintiff $225,000. Defendant cannot enjoy the benefit of the bargain without performing as it promised to do.
In sum, we conclude that defendant's allegations are insufficient to support the defense of fraud in the inducement of the separation agreement.
Finally, defendant argues that further discovery is needed to resolve the disputed issues. Summary judgment is inappropriate when discovery is incomplete if "critical facts are peculiarly within the moving party's knowledge." Velantzas v. Colgate-Palmolive Co., 109 N.J. 189, 193 (1988) (quoting Martin v. Educ. Testing Serv., Inc., 179 N.J. Super. 317, 326 (Ch. Div. 1981)) (internal quotation marks omitted). Summary judgment may be granted, however, if further discovery will not alter the deficiency in the case of the party opposing summary judgment. Minoia v. Kushner, 365 N.J. Super. 304, 307 (App. Div.), certif. denied, 180 N.J. 354 (2004); Wellington v. Estate of Wellington, 359 N.J. Super. 484, 496 (App. Div.), certif. denied, 177 N.J. 493 (2003).
Here, further discovery would not help defendant's fraudulent inducement defense. Discovery regarding the extent of plaintiff's alleged shortcomings as a CFO, or the extent of his involvement in other business ventures, could not change the absence of an essential element of fraud, that is, the absence of defendant's reasonable reliance on plaintiff's alleged material omissions. "Misrepresentation and reliance are the hallmarks of any fraud claim, and a fraud cause of action fails without them." Banco Popular N. Am. v. Gandi, 184 N.J. 161, 174 (2005) (citing Gennari, supra, 148 N.J. at 610).
The trial court correctly granted summary judgment to plaintiff because defendant cannot prove all the necessary elements of fraud in the negotiation and execution of the September 30, 2010 separation agreement.
Affirmed.
I hereby certify that the foregoing is a true copy of the original on file in my office.
CLERK OF THE APPELLATE DIVISION