A “Fundamental Principle of Corporate Law,” and a Warning to Parties to Preserve Motion Papers

Delray Holding, LLC v. Sofia Design & Development, 439 N.J. Super. 502 (App. Div. 2015).  Two real estate development entities (“the Sofia Entities”) went into bankruptcy and, during bankruptcy proceedings, settled claims that they had against two other real estate development entities and their owner (“the Passarella Entities”), who were the respondents on this appeal.  The appellants were a group of investors (a family trust and a numbeer of individuals) in the Sofia Entities.  Appellants claimed that the Passarella Entities had interfered with appellants’ investment in the Sofia Entities and had thereby damaged appellants’ interests.  The Passarella Entities won summary judgment in the Law Division on two grounds.  First, the Law Division ruled that the claims that appellants sought to advance belonged to the Sofia Entities only, not to investors, so that appellants had no standing to assert those claims.  Second, even if appellants had standing, they did not refute accounting evidence submitted by the Passarella Entities that showed that appellants had not suffered any damage.  Today, the Appellate Divison affirmed on both grounds, with Judge Ashrafi writing for the unanimous panel.

Quoting Strasenburgh v. Straubmuller, 146 N.J. 527 (1996), and Pepe v. General Motors Acceptance Corp., 254 N.J. Super. 662 (App. Div. 1992), Judge Ashrafi set out the “fundamental principle of corporate law” that when an injury befalls a corporation, only the corporation, or shareholders derivatively on behalf of the corporation, can sue for that injury, unless there is some “special injury” to certain shareholders that is distinct from the injury sustained by all shareholders by virtue of their status as shareholders.  Here, the Sofia Entities had settled with the Passarella Entities the very claims that appellants sought to assert.  Judge Ashrafi found that “individual investors and creditors cannot revive those same claims by asserting an individual cause of action.”  A contrary result would have meant that “any investor or creditor could undermine the corporation’s settlement of a dispute” by bringing his or her own suit, an untenable result.  Accordingly, the Appellate Division agreed that appellants lacked standing to bring their claim, since they had not alleged “an injury caused by respondents that is distinct from that suffered by any shareholder, investor, or creditor of the corporate [Sofia E]ntities.”

Judge Ashrafi also upheld the Law Division on the accounting evidence issue.  In their appeal, appellants had submitted a certification of their attorney and exhibits that they asserted had been before the Law Division.  The Passarella Entities moved to strike that certification and exhibits, contending that they had not been submitted to the Law Division.  The Appellate Division ordered a limited remand to determine who was right.  On remand, the motion judge stated that the court had not retained the summary judgment record even though less than six months had elapsed from the date of the summary judgment until the date of the limited remand.

Ultimately, as Judge Ashrafi noted, appellants were unable to state that the certification their attorney submitted on appeal was presented in the Law Division in opposition to the summary judgment motion.  Instead, appellants could show only that an accounting exhibit that had been attached to that certification was submitted in a prior, related case, and that all parties had that evidence.  Judge Ashrafi found that insufficient.  “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.”

In commenting on the fact that the Law Division had discarded the summary judgment record, Judge Ashrafi cautioned that “[c]ivil litigants would be well-advised to keep accurate records of motions and other papers in the event of an appeal or other future proceedings.”  That is important advice.  Evidently, parties cannot now rely on the courts to maintain their case files even for a few months, as extraordinary as that seems.