New Jersey Business Divorce Examined by Appellate Division

New Jersey business law presents no thornier area than business divorces – when a venture goes south and the owners – the partners, corporate shareholders or limited liability members – acrimoniously split up.  The Appellate Division of the Superior Court of New Jersey recently addressed such a painful business divorce in the case of Segura v. Shah.

 

Background: Christina Segura vs. Imran F. Shah

Christina Segura dated Imran Shah.  After about six months they decided it would be a good idea to go into business together, so they formed a partnership.  The partnership agreement allowed them to engage in virtually any profit-making business.

Christina wanted to open a boutique or décor store, but Shah talked her into opening a bar in New York State instead, so they formed a limited liability company (known as an LLC) to own the bar.  He told her that he had managed another bar and that they could have twice their investment returned in two years.  However, what he did not tell her was that he had two felony convictions and was therefore barred from working in a bar, much less owning or managing one.  The Partnership Agreement and LLC Operating Agreement were both drafted by Shah’s attorney.  Christina trusted Shah so she did not have her own attorney and did not read either agreement before signing.

Shah talked Christina into telling the state liquor authorities that she was the sole owner and would manage the business, although in fact Shah was the co-owner and sole manager.  Moreover, Christina testified that she had not seen the application, did not sign it, and that her signature had been forged.  Shah did not tell Christina anything about the business.  In fact, after about six months the bar ran out of money, defaulted on its lease, and closed.  Christina did not know this, and only found out when she called the state liquor authorities and was told that the liquor license had been placed in the hands of a third party “for safe keeping” by Shah’s attorney, who also represented the business.  She further found out that Shah had taken many of the business’s property and assets for himself without compensating Christina or the business.  Christina demanded the return of the more than $160,000 that she had invested in the business.  It was not returned.

 

The Proceedings in Superior Court

Christina sued Shah in the Superior Court of New Jersey for breach of contract, fraud, breach of fiduciary duty, breach of the covenant of good faith and fair dealing, and unjust enrichment.  Shah counterclaimed alleging that he was not paid for the work he did.  Only toward the end of the case did Christina and her attorney find out about Shah’s felony convictions, and one week thereafter Shah moved for summary judgment requesting that the judge dismiss her case.  Christina filed a cross-motion for summary judgment requesting that the judge find in her favor and also dismiss Shah’s counterclaims.

The judge ruled for Shah and dismissed Christina’s suit finding that her lawsuit was barred by her misrepresentation to the New York liquor authorities, and also that the partnership agreement was void because it was made for an illegal purpose, ie., for a convicted felon to own and operate a bar.

Christina appealed to the Appellate Division.

 

The Appellate Division’s Opinion

The Appellate Division reversed and reinstated Christina’s lawsuit.

First, the court explained that the trial court judge was wrong that the purpose of the partnership agreement was illegal – by its plain language it said that the purpose was any profit making endeavor, which would have included Christina’s desired boutique or décor store.  Second, even if opening the bar had been the purpose, the partnership agreement contained a severability clause, which provided that if a court found any part of the agreement illegal or invalid it would be severed and the rest of the agreement would be enforced.  Thus, there was a valid contract for which Christina could pursue a claim for breach of contact.  Finally, the judge ignored the fact that Christina alleged that Shah had manipulated her into making the misrepresentation in the first place, and that Shah should not be able to escape the consequences of his part in bringing about the situation.

It is important to note that at the summary judgment stage, the court is not looking at who should win.  Rather, it is looking at whether the party defending the motion has put forth enough evidence to create a genuine question of fact.  If there is a question of fact, the matter goes to trial; if there is no question of fact, it is decided by the judge without a trial.

So even though Christina won on summary judgment it is still possible that she might lose in a trial.  But it does mean that she will get her day in court.

 

The Takeaways

First, even if you trust the other person, have your own lawyer represent you in business negotiations, particularly if the other side has a lawyer.

Second, no matter how much you trust the other side, always read everything you sign.

Third, do not make misrepresentations to anyone, as with business partners you could be liable for fraud, and with the government you could be guilty of a crime.

 

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