The opinion
NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
This opinion shall not "constitute precedent or be binding upon any court."
Although it is posted on the internet, this opinion is binding only on the
parties in the case and its use in other cases is limited. R.1:36-3.
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-1475-14T1
JOHN M. HAMMER,
Plaintiff-Appellant/
Cross-Respondent,
v.
HAIR SYSTEMS INC., a corporation
of the State of New Jersey,
WILLIAM E. COVEY and MARJORIE M.
COVEY, and WILLIAM E. COVEY, JR.,
Defendants-Respondents/
Cross-Appellants.
Argued April 5, 2017 – Decided June 9, 2017
Before Judges Alvarez, Manahan, and Lisa.
On appeal from the Superior Court of New
Jersey, Law Division, Monmouth County, Docket
No. L-1464-03.
Bruce D. Greenberg argued the cause for
appellant/cross-respondent (Lite DePalma
Greenberg, LLC, attorneys; Mr. Greenberg, of
counsel and on the briefs; Danielle Y.
Alvarez, on the briefs).
William D. Wallach argued the cause for
respondents/cross-appellants (McCarter &
English, LLP, attorneys; Mr. Wallach, of
counsel and on the briefs; Brian W. Carroll,
on the briefs).
PER CURIAM
This matter began in 2003 with the filing of plaintiff John
M. Hammer's complaint. The years of litigation which followed
include our 2009 decision on a leave-granted appeal of partial
summary judgment awarded to Hammer.1
Eventually, the Honorable Paul A. Kapalko, J.S.C., conducted
a bench trial over the course of sixteen days, and rendered a
thoughtful, detailed, and cogent 137-page decision, later
supplemented with a twenty-two-page opinion on one of two remaining
unresolved issues. On September 23, 2013, the judge rendered a
final thirteen-page decision resolving the remaining issue,
counsel fees. To say the matter was vigorously and fully litigated
is an understatement. The parties now appeal and cross-appeal.
With the exception of the counsel fee awards, we affirm based on
the judge's nuanced and careful consideration in this case, in
which oppressed minority shareholder claims, among other causes
of action, were alleged. We affirm the award of fees to Hammer
but vacate the award to defendants.
We summarize the relevant testimony. Defendant Hair Systems,
Inc. (HSI), is a closely held family-owned corporation engaged in
the business of developing, manufacturing, and packaging hair care
1
Hammer v. Hair Sys., Inc., Nos. A-2791-07, A-1893-08 (App. Div.
June 18, 2009).
2 A-1475-14T1
products. William E. Covey, Sr. (Covey), now deceased, was the
Chairman of the Board; his wife defendant Marjorie Covey
(Marjorie)2 was the Executive Vice-President and Treasurer. Their
son William E. Covey, Jr. (William), was the President and Chief
Operating Officer. Mabel Covey (Mabel), William's wife, was HSI's
Chief Technical Officer/Vice-President of Science and Technology.
Sharon Griffith (Griffith), Covey and Marjorie's daughter, was the
Corporate Secretary and Accounting Manager. A third child, Anne
Covey (Anne), and her husband served as outside counsel. Aftab
Shah (Shah) and Deborah Shah (Deborah) were the Director of
Manufacturing and Director of Customer Service, respectively, and
close friends of the Coveys. The Covey family controlled the
majority of the shares of HSI.
Hammer, after a long and successful career in the hair care
industry, retired from full-time employment in 1997 and thereafter
maintained a consultancy business. At Covey's suggestion, Hammer
joined HSI's Board of Advisors in 1998. He had access to all of
HSI's financial records while working on a report titled "Hair
Systems, Inc. State of the Company." In the report, he identified
the corporation's need to transition from a "family culture to an
organizational culture" in addition to addressing cash flow
2
We refer to some family members by their first names solely to
avoid confusion.
3 A-1475-14T1
problems. Hammer testified, however, that when he prepared his
report he was not aware of the host of personal expenses which the
company paid on behalf of the Coveys and the Shahs, ranging from
construction work on their homes to child care.
When Covey was diagnosed with multiple myeloma in 2000, he
engaged Hammer in a full-time management position, and Hammer and
his wife moved from California to New Jersey. The judge found
Hammer and HSI then entered into a five-year employment contract
in which he was employed as Chief Executive Officer (CEO)
commencing October 29, 2001. The parties agreed that during the
initial year of employment, payment of $125,000 of Hammer's salary
would be deferred, to earn interest at 6.5% per year.
Additionally, Hammer received 200 shares of HSI's common stock,
representing two percent of the company's value, as a signing
bonus, and had an option to purchase additional stock pursuant to
the company's incentive performance stock option program.
Hammer's time with the company did not go smoothly. He made
unpopular recommendations regarding both the positions and
supervision hierarchy of the Covey and Shah families. During an
April 9, 2002 performance review conducted by Covey, although
Hammer was generally rated excellent, Covey noted that Hammer's
behavior required modification, that he needed to "slow down [the]
4 A-1475-14T1
pace of organizational changes" and that he had a "tendency to
intimidate staff" with his "tone of voice, body language, etc."
At the start of his employment, Hammer received an employee
handbook that outlined HSI's anti-harassment policies, including
this definition of sexual harassment: "commentary about an
individual's body," and "unnecessary touching, including patting,
pinching, or repeated brushing against another's body." The
handbook stated that such conduct would result in disciplinary
action up to termination.
By the spring of 2002, as thoroughly detailed in the trial
judge's opinion, employees began to complain that Hammer
inappropriately touched them and made sexual comments to them.
The company, in an effort to address the problems, actually
conducted a sexual harassment training in which Hammer
participated. Afterwards, Hammer was heard to say that if he had
to keep his hands to himself, he "might as well move back to the
desert."
Among the examples of objectionable conduct the trial judge
enumerated in his decision, described by witnesses he found
credible, were Hammer touching women on the neck, shoulders, and
back, and giving massages. Hammer commented to one employee that
she should participate in a "weigh in[,]" complained about another
5 A-1475-14T1
who was taking time off for a religious holiday, and referred to
those of her faith as "you people."
Ultimately, HSI retained outside counsel, Frank M. Ciuffani,
Esquire, to conduct an investigation, completed in 2002. Ciuffani
reported that although some of the employees he interviewed did
not describe any misconduct in their interactions with Hammer,
multiple workers described incidents in which Hammer made sexual
comments and weight-related remarks, and touched them without
their consent.
When Hammer was interviewed by Ciuffani, he stated that he
was very "touchy" with employees, and that he "could have" made
comments about sex to female employees. Until his interview,
Hammer was unaware of the investigation.
During the trial, Hammer challenged the validity and timing
of the harassment investigation, attributing it to the Coveys'
desire to terminate his employment. In addition to Ciuffani's
testimony, both sides presented experts who essentially evaluated
the merits and fairness of Ciuffani's investigation.
The judge, however, credited the conclusions and
recommendations reached in the investigation. In partial reliance
on the report, the judge found that although Hammer entered into
a five-year contract with HSI, and was not an employee at will,
his termination was warranted and was not retaliatory nor an
6 A-1475-14T1
instance of conduct towards him by majority shareholders that made
him an oppressed shareholder.
Hammer raises the following points for our consideration:
POINT I
The Law Division Applied the Wrong Legal
Standard in Reviewing the Majority
Shareholders' Decision to Fire Hammer.
POINT II
The Law Division Made a Legal Error in Holding
that the Individual Defendants Could Not be
Sued for Tortious Interference with Hammer's
Contract With HSI.
POINT III
The Law Division Wrongly Denied Hammer's Right
to Purchase Shares of HSI Under the Parties'
Incentive Stock Option Agreement, Thereby
Permitting Defendants to Benefit from Their
Unlawful Withholding of Hammer's Deferred
Compensation.
POINT IV
The Trial Judge Miscalculated the "Fair Value"
of Hammer's Minority Ownership Interest in HSI
by Disallowing Certain Add-Backs.
POINT V
The Trial Judge Erred in Denying Some of
Hammer's Counsel Fees and in Granting
Defendants Any Counsel Fees.
A. Hammer's Counsel Fees.
B. Defendants' Counsel Fees.
Defendants raise the following in their cross-appeal:
POINT I
The Trial Court Erred In Finding Plaintiff To
Be An Oppressed Minority Shareholder And In
Awarding Plaintiff Exorbitant Attorneys' Fees
And Prejudgment Interest.
7 A-1475-14T1
A. The Trial Court Erred In Finding
Plaintiff Was An Oppressed Minority
Shareholder.
b. The Attorneys' Fees Awarded To Plaintiff
Were Grossly Excessive In Light of
Plaintiff's Limited Recovery.
C. Prejudgment Interest Was Not Warranted.
POINT II
Plaintiff's Claims Should Be Denied on Appeal
Consistent with Well-Established Standards of
Review and Pertinent Case Law.
A. The Trial Court Properly Dismissed
Plaintiff's Wrongful Termination Claims.
i. Wrongful Termination Claim
Against Hair Systems Inc.
ii. Tortious Interference Claim
Against Individual Defendants.
B. The Trial Court Properly Dismissed
Plaintiff's Stock Option Claim.
C. The Trial Court Properly Rejected
Plaintiff's Further Adjustments to the
Value of His 2% Stock Interest.
I.
The final determinations of a trial court sitting in a non-
jury case are subject to limited appellate review, and we leave
them undisturbed if there is substantial evidence to support them.
Seidman v. Clifton Sav. Bank, 205 N.J. 150, 169 (2011). The
factual findings and legal conclusions of the trial judge should
not be disturbed unless they are "so manifestly unsupported by or
inconsistent with the competent, relevant and reasonably credible
8 A-1475-14T1
evidence as to offend the interests of justice." Rova Farms
Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474, 484 (1974).
Deference to a court's factual findings "is especially appropriate
'when the evidence is largely testimonial and involves questions
of credibility.'" Cesare v. Cesare, 154 N.J. 394, 412 (1998)
(quoting In re Return of Weapons to J.W.D., 149 N.J. 108, 117
(1997)). Our review of questions of law is plenary. Johnson v.
Roselle EZ Quick LLC, 226 N.J. 370, 386 (2016).
II.
A.
We first address Hammer's contention that his termination was
improperly orchestrated by the majority shareholders. See
N.J.S.A. 14A:12-7(1)(c). We include in the discussion defendants'
contention that although Hammer was a minority shareholder, he did
not fall within the purview of the statute because he was well
aware of company practices as a result of the report he prepared
for HSI before his employment began.
N.J.S.A. 14A:12-7(1)(c) provides that minority shareholders
of a corporation with fewer than twenty-five shareholders may
bring an action when the corporation's directors
have acted fraudulently or illegally,
mismanaged the corporation, or abused their
authority as officers or directors or have
acted oppressively or unfairly toward one or
more minority shareholders in their capacities
9 A-1475-14T1
as shareholders, directors, officers, or
employees.
If a court determines that a person is an oppressed minority
shareholder (OMS), it may in its discretion impose equitable
remedies, including the appointment of a custodian or sale of
stock. Ibid. The statute reflects the legislature's recognition
that minority shareholders in close corporations are uniquely
vulnerable because they may be "frozen out" of the decision making
process and cannot readily sell their shares when they disagree
with the majority's actions. Brenner v. Berkowitz, 134 N.J. 488,
505 (1993); Exadaktilos v. Cinnaminson Realty Co., Inc., 167 N.J.
Super. 141, 152-53 (Law Div. 1979), aff'd, 173 N.J. Super. 559,
certif. denied, 85 N.J. 112 (1980).
Oppression in the context of an OMS action does not always
require illegality or fraud by majority shareholders or directors.
Brenner, supra, 134 N.J. at 506-07. Instead, oppression is defined
as the frustration of a minority shareholder's reasonable
expectations. Ibid. A court must first determine the
shareholders' expectations of the corporation. Exadaktilos,
supra, 167 N.J. Super. at 155. "Armed with this information, the
court can then decide whether the controlling shareholders have
acted in a fashion that is contrary to this understanding." Ibid.
10 A-1475-14T1
The complaining shareholder has the burden to demonstrate a
nexus between the alleged oppressive conduct and his or her
interest in the corporation. Brenner, supra, 134 N.J. at 508. In
determining that nexus, "[t]he court has discretion to determine
which factors are pertinent to its evaluation of the quality and
nature of the misconduct." Ibid. Both monetary and non-monetary
harm to a minority shareholder should be considered. Id. at 509.
For example, the court should consider how the shareholder's
position within the corporation may have been affected by the
complained-of actions. Ibid.
A minority shareholder's expectations must also be balanced
against the corporation's ability to exercise its judgment to run
its business efficiently. Muellenberg v. Bikon Corp., 143 N.J.
168, 179 (1996). Mere disagreement or discord between the
shareholders is not sufficient to support a remedy under the
statute. Brenner, supra, 134 N.J. at 506.
B.
On appeal, Hammer is not challenging the Law Division's
finding that the harassment complaints were made. His position
is that it was a mistake for the court to conclude that he could
have been legitimately terminated for that reason.
Termination of a minority shareholder's employment may
constitute oppression under N.J.S.A. 14A:12-7(1)(c), because a
11 A-1475-14T1
person who acquires a minority share in a closely-held corporation
often does so "for the assurance of employment in the business in
a managerial position." Muellenberg, supra, 143 N.J. at 180-81.
Such a person thus has a reasonable expectation that they will
enjoy "the security of long-term employment and the prospect of
financial return in the form of salary," and will have "a voice
in the operation and management of the business and the formulation
of its plans for future development." Id. at 181. Where these
expectations are frustrated by majority shareholders or directors,
a court may find that oppression has occurred. Musto v. Vidas,
281 N.J. Super. 548, 556-58 (App. Div. 1995), certif. denied, 143
N.J. 328 (1996).
In this case, we agree with the trial court that Hammer's
conduct in the workplace warranted termination. This was the case
regardless of whether defendants may have also wanted to terminate
his employment for reasons related to his proposals to move the
company away from its family management style. We also agree with
the judge that a minority shareholder's termination for good cause
does not violate any reasonable expectation of continued
employment, nor does it constitute oppression within the meaning
of the statute.
In Exadaktilos, for example, the plaintiff shareholder's
termination for cause did not render him an OMS. Supra, 167 N.J.
12 A-1475-14T1
Super. at 155-56. In that case, the plaintiff failed to get along
with other employees; caused the loss of key personnel; quit on
multiple occasions without reason or notice; and "was not
compatible with the other principals." Id. at 155. Accordingly,
the court found that his termination was due to "his unsatisfactory
performance" and that he had thwarted his own expectations of
employment "through no fault of [the] defendants." Id. at 155-
56.
In this case, Hammer thwarted HSI's attempts to modify his
conduct in the workplace. He was given HSI's employee handbook,
which warned that employees faced immediate termination if, after
investigation, complaints of sexual harassment were substantiated.
He acknowledged in writing that he understood the handbook, and
knew that sexual harassment included "unnecessary touching,
including patting, pinching, or repeated brushing against
another's body," commenting on a co-worker's body, and
inappropriate jokes. Therefore, even if defendants incidentally
benefitted from the firing, Hammer could not reasonably expect his
improper behavior, about which he was warned, and which warnings
he ignored, would not result in termination. That he was a
shareholder did not immunize the corporation either from the effect
on its employees of sexual harassment, nor from potential corporate
liability.
13 A-1475-14T1
Substantial evidence and precedent support the court's
rejection of Hammer's arguments about the timing of Covey's
decision to terminate his employment, and the method by which the
investigation into his behavior was conducted. He was terminated
for good cause, which made the decision lawful. The judge's
findings were not "so manifestly unsupported by or inconsistent
with the competent, relevant and reasonably credible evidence as
to offend the interests of justice." Rova Farms Resort, supra,
65 N.J. at 484.
C.
The trial judge found that certain actions taken by HSI's
directors, after Hammer was hired, constituted oppression under
N.J.S.A. 14A:12-7(1)(c), including their use of corporate money
to pay for: outside child care services; preparation of personal
tax returns; estate planning services; other personal services for
family members; personal credit card charges; charitable
contributions; personal insurance policies; and contracting and
utility work at William's home. The court also found that the
payment to Marjorie after her husband's death of his salary, as
well as her salary, was unjustified. Furthermore, HSI's failure
to pay a dividend for 2002 was "not effectively explained."
Finally, HSI's directors failed to "fairly consider" many of
Hammer's proposed changes to HSI's organization and operation.
14 A-1475-14T1
This "refusal of family members to accommodate practical and
responsible management policies" ran contrary to Hammer's
reasonable expectations since he believed he had been hired to
transform HSI into a less insular and family-oriented company.
On appeal, defendants do not deny the expenditures and other
actions the court found to be oppressive. Instead, they argue
that because Hammer performed consultant work for HSI prior to
being hired as CEO, and had access to HSI's financial documents,
he was aware of the directors' use of corporate money for personal
expenses. Thus they contend he could not have had a reasonable
expectation that corporate funds would not be used this way going
forward.
"[O]ppression by shareholders is clearly shown when they have
awarded themselves excessive compensation, furnished inadequate
dividends, or misapplied and wasted corporate funds."
Muellenberg, supra, 143 N.J. at 180. However, a court should
consider "whether the minority shareholder was aware of the
misconduct prior to filing suit but failed to act, and whether the
minority shareholder participated in the misconduct." Brenner,
supra, 134 N.J. at 509-10. A minority shareholder may be found
to have waived the right to raise an OMS claim if he or she was
"well aware" of the majority's misuse of corporate money but did
not raise any objection or in fact benefitted from an improper
15 A-1475-14T1
practice. Belfer v. Merling, 322 N.J. Super. 124, 138-39 (App.
Div.), certif. denied, 162 N.J. 196 (1999).
Hammer testified that while acting as a consultant, he was
unaware of the specific personal uses to which HSI's funds were
being put, and that he only noted general "cash flow" issues when
reviewing HSI's records for his consulting report.
The court found that any misappropriation of funds that
occurred before Hammer became a shareholder could not be considered
"oppression" for purposes of his OMS claim. Indeed, the judge
stated that Hammer knew, as demonstrated in the report he authored,
of HSI's pervasive "family culture" and the resulting financial
consequences. Hammer had urged updates to record keeping
methodology. He tried to alter HSI's organizational structure to
remove conflicts of interest, thus further indicating that he knew
about defendants' practices, and expected defendants to change
them. However, the court went on to find that Hammer's report,
which stressed the need for HSI to eliminate informalities in its
financial practices, also established that defendants were aware
that Hammer expected this type of change to occur once he was
hired and acquired an ownership interest.
Substantial evidence in the record supports the judge's
findings. It is undisputed that HSI's directors diverted corporate
funds for personal use, that Hammer identified the problem this
16 A-1475-14T1
created when he acted as HSI's consultant and afterwards, and that
the diversion of funds for the benefit of the Covey and Shah
families to the corporation's detriment continued after Hammer
became a shareholder. By contrast, there is no evidence to support
defendants' assertion that Hammer waived his right to raise an OMS
claim because he acquiesced in their behavior. Hammer began
attempting to make changes to HSI almost immediately after becoming
CEO, to the extent that Covey, during his performance review,
instructed him to temper his efforts. Hammer reasonably expected
his recommendations as CEO to be considered and implemented, but
they were not. Therefore, the court's rejection of defendants'
waiver argument was appropriately based on the record.
We agree that Hammer was an OMS in light of defendants'
business practices based on substantial credible evidence. The
conclusion the judge reached, in light of this record, does not
offend the interests of justice. See Seidman, supra, 205 N.J. at
169.
III.
A.
Hammer contends that the court erred in granting summary
judgment dismissing his claim against the individual defendants
for tortious interference with his employment contract. He argues
that these defendants, although shareholders and officers of HSI,
17 A-1475-14T1
were distinct from the corporation and subject to individual
liability. The dismissed defendants include Covey and Marjorie.
"A ruling on summary judgment is reviewed de novo." Davis
v. Brickman Landscaping, LTD., 219 N.J. 395, 405 (2014) (citing
Manahawkin Convalescent v. O'Neil, 217 N.J. 99, 115 (2014)). Thus,
appellate review requires application of the same standard which
governs the trial court. Ibid. (citing Murray v. Plainfield Rescue
Squad, 210 N.J. 581, 584 (2012)).
A motion for summary judgment should be granted when there
are no genuine issues of material fact in dispute and the moving
party is entitled to judgment as a matter of law. R. 4:46-2;
Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995).
Facts are to be viewed in a light most favorable to the non-moving
party. Brill, supra, 142 N.J. at 540.
The tort of interference with a business relationship or
contract involves four elements:
(1) a protected interest; (2) malice — that
is, defendant's intentional interference
without justification; (3) a reasonable
likelihood that the interference caused the
loss of the prospective gain; and (4)
resulting damages.
[DiMaria Constr., Inc. v. Interarch, 351 N.J.
Super. 558, 567 (App. Div. 2001), aff'd, 172
N.J. 182 (2002).]
18 A-1475-14T1
A claim of tortious interference "will only lie against defendants
who are not parties to the contract." Id. at 568. This is because
"[u]nder New Jersey law, a tort remedy does not arise from a
contractual relationship unless the breaching party owes an
independent duty imposed by law." Saltiel v. GSI Consultants,
Inc., 170 N.J. 297, 316 (2002). Instead, "the actions of the
parties to a contract are judged under contract law." Printing
Mart-Morristown v. Sharp Elecs. Corp., 116 N.J. 739, 760-61 (1989).
In Printing Mart, the Court held that where a party to a
contract is a corporation, employees of that corporation "can be
answerable for interfering with their employer's . . . contractual
relationship" with another party, because they are not, as
individuals, parties to any contract that the corporation enters.
Id. at 761. Since that case, "a clear-cut consensus has emerged
that if an employee . . . is acting on behalf of his or her
employer . . . then no action for tortious interference will lie."
DiMaria, supra, 351 N.J. Super. at 568. By contrast, if an
employee acts outside the scope of his or her employment, a
tortious interference claim may be brought. Id. at 568-69. An
employee's conduct "falls outside the scope of the privilege if
he or she 'acts for personal motives, out of malice, beyond his
[or her] authority, or otherwise not in good faith in the corporate
19 A-1475-14T1
interest.'" Ibid. (quoting Varrallo v. Hammond Inc., 94 F.3d 842,
849 n.11 (3d Cir. 1996)).
B.
Here, the individual defendants, Covey and Marjorie were
directors, majority shareholders, and employees of HSI.
Defendant's employment contract was with HSI, a corporation. Thus,
under Printing Mart and its progeny, an action for tortious
interference with the employment contract could proceed against
the individuals only if the conduct alleged to be damaging fell
outside the scope of their employment.
Sufficient evidence supports the court's determination that
in terminating Hammer's employment, the individual defendants were
acting in the interest of HSI, the corporate party to the contract.
The individual defendants, particularly Covey, held the highest
positions at HSI and had decision-making authority over Hammer's
continued employment as part of their duties as employees and
directors.
Covey terminated Hammer's employment for cause, only after
an investigation by an outsider substantiated the complaints of
harassment made against the employee. Although the individual
defendants may have been troubled by some of Hammer's
recommendations, there was no actual evidence tending to suggest
that they held personal malice against him, or that the decision
20 A-1475-14T1
to terminate his employment was made "without justification[.]"
DiMaria, supra, 351 N.J. Super. at 567-68. Even viewing the facts
in the light most favorable to Hammer as the non-moving party, it
is clear that the individual defendants, to the extent they acted
to terminate Hammer, did so as corporate officers who were parties
to a contract. Dismissal of his claims against individual
defendants for tortious interference was therefore proper.
IV.
A.
"When a trial court's decision turns on its construction of
a contract, appellate review of that determination is de novo."
Manahawkin Convalescent, supra, 217 N.J. at 115. No special
deference is given to the trial court's interpretation, and the
appellate court "look[s] at the contract with fresh eyes." Kieffer
v. Best Buy, 205 N.J. 213, 223 (2011).
"[U]nambiguous contracts will be enforced as written unless
they are illegal or otherwise violate public policy." Leonard &
Butler, P.C. v. Harris, 279 N.J. Super. 659, 671 (App. Div.),
certif. denied, 141 N.J. 98 (1995). If a contract's language is
plain, that language alone must determine the agreement's effect.
Manahawkin Convalescent, supra, 217 N.J. at 118. A contract "must
be construed as a whole," and a court should endeavor to construct
a contract in the manner "most equitable to the parties."
21 A-1475-14T1
Krosnowski v. Krosnowski, 22 N.J. 376, 387-88 (1956) (citation
omitted). Further, every New Jersey contract "contains an implied
covenant of good faith and fair dealing," intended to ensure that
neither party does anything which destroys or injures the right
of the other party to receive the benefit of the contract. Sons
of Thunder, Inc. v. Borden, Inc., 148 N.J. 396, 420 (1997).
However, this implied covenant cannot override an unambiguous,
express term in a contract, id. at 419, and a court must not
"'interfere to substitute a different and more liberal agreement'
than that which existed between the parties." Gillman v. Bally
Mfg. Corp., 286 N.J. Super. 523, 528 (App. Div.) (quoting Fox v.
Haddon Twp., 137 N.J. Eq. 394, 398 (Ch. 1945)), certif. denied,
144 N.J. 174 (1996).
The courts have enforced stock option contracts strictly.
Id. at 529. For example, in Gillman, the court enforced an express
term in a stock option contract delineating the time for the
exercise of an option. Id. at 529-531. The plaintiff's untimely
request to exercise his option resulted in the forfeiture of a
right to which he was otherwise entitled. Nonetheless, we found
that despite the "harsh result[], a court must act only upon the
language of the written contract." Id. at 528 (quoting Fredericks
v. Georgia-Pacific Corp., 331 F. Supp. 422, 427 (E.D.Pa. 1971)).
22 A-1475-14T1
Similarly, in Brunswick Hills Racquet Club, Inc. v. Route 18
Shopping Center Associates, 182 N.J. 210, 223 (2005), the plaintiff
did not abide by the strict terms governing exercise of its option
contract with the defendant to enter into a long-term lease for a
property it occupied. Because the plaintiff failed to pay the
option price along with its request to exercise the option, as
expressly required by the contract, the Court stated that
ordinarily, it would "suffer the consequences of its default."
Ibid. Only because the defendant acted in bad faith by
deliberately withholding information from the plaintiff about the
deficiency in its request for years until after the deadline
expired, despite the plaintiff's diligent efforts, did the Court
find that the plaintiff was entitled to specific performance of
the option contract. Id. at 224-32.
B.
Hammer contends that the court erred in dismissing his breach
of stock option claim on partial summary judgment. HSI's Stock
Option Program (SOP), granted Hammer the option to purchase up to
1350 shares of stock at a price of $267 per share. On or after
November 1, 2001, Hammer could exercise his option to purchase up
to 270 shares. Then, on or after each anniversary of that date,
he could exercise the option to buy up to an additional 270 shares,
until all of the 1350 shares had been bought. The option could
23 A-1475-14T1
be exercised by giving written notice to the Secretary of HSI,
"accompanied by payment of the option price for the total number
of shares" Hammer wished to purchase.
The SOP provided:
The payment may be in any of the following
forms: (a) cash, which may be evidenced by a
check and includes cash received from a stock
brokerage firm in a so-called "cashless
exercise;" (b) . . . certificates representing
shares of Common Stock of the Company . . .
or (c) . . . any combination of cash and Common
Stock of the Company . . .
The SOP further stated that Hammer's option would terminate thirty
days after the date on which his employment with HSI ended other
than by reason of disability or death.
On November 1, 2002, within the thirty-day window after his
termination on October 18, Hammer wrote to HSI stating that he
wished to exercise his option to purchase the 270 shares of stock
available as of November 1, 2001. The letter stated that he wished
to use $72,090 of the $125,000 in deferred compensation held by
the company as payment for the shares. On November 15, 2002, HSI
denied Hammer's request, stating that he had failed to comply with
the SOP's requirement that the request to purchase be accompanied
by cash or its equivalent.
Hammer sent a second letter stating that he had earned the
compensation by working for the year in which it was deferred, and
24 A-1475-14T1
that it was due and owing to him, and income solely in the company's
control. He asserted that this indebtedness was the equivalent
of cash for purposes of exercising his stock option. HSI replied
on December 10, 2002, disagreeing that his deferred compensation
was due at that time.3
Grant of partial summary judgment on this issue was thus
proper. The SOP explicitly provided that Hammer was expected to
make his request "accompanied by payment of the option price." He
did not do so. The express terms of the SOP were clear and
unambiguous, and there is no evidence that defendants' response
to his request was made in bad faith, as the company disputed his
entitlement to the funds. Defendants clearly explained the
deficiency and responded promptly. The judge's strict
construction of the purchase terms were was not error.
V.
The Supreme Court has described the valuation of a closely-
held corporation as "inherently fact-based[]" and "not an exact
science." Balsamides v. Protameen Chems., Inc., 160 N.J. 352, 368
(1999). Factual findings of a trial judge on the subject of a
corporation's value thus are shown "great deference," and should
not be disturbed unless they are clearly erroneous or demonstrate
3
Ultimately, HSI did not pay Hammer this compensation until
July 28, 2009.
25 A-1475-14T1
an abuse of discretion. Ibid. Further, "[d]eference should be
given to those findings of the trial judge that are substantially
influenced by his or her opportunity to hear and see witnesses and
to have the feel of the case." Valdez v. Tri-State Furniture, 374
N.J. Super. 223, 231-32 (App. Div. 2005).
"Valuing a closely-held corporation is a difficult task."
Torres v. Schripps, Inc., 342 N.J. Super. 419, 435 (App. Div.
2001) (citation omitted). In determining fair value, "the judge
should consider 'proof of value by any techniques or methods which
are generally acceptable in the financial community and otherwise
admissible in court.'" Id. at 434 (quoting Balsamides, supra, 160
N.J. at 375). Valuation "depends upon the judgment and experience
of the appraiser and the completeness of the information upon
which his conclusions are based." Bowen v. Bowen, 96 N.J. 36, 44
(1984). Moreover, the court is not bound to accept a valuation
provided by any particular expert witness. Torres, supra, 342
N.J. Super. at 431.
Hammer argues that the court erred when calculating the fair
value of his share of HSI because the court should have allowed
an add-back to HSI's total value of a $630,238 "CEO expense" and
a $137,812 "royalty expense." He contends these expenses were
non-recurring.
26 A-1475-14T1
The findings of a court in a bench trial, however, are
"considered binding on appeal when supported by adequate,
substantial and credible evidence" and when they are not "so wholly
insupportable as to result in a denial of justice." Rova Farms
Resort, supra, 65 N.J. at 483-84 (citation omitted).
Hammer's expert witness Chris Campos asserted that his salary
and benefits should be "added back" into HSI's income for purposes
of determining the company's value, because these expenses were
non-recurring. After Hammer's termination, HSI eliminated the CEO
position entirely. However, the court agreed with defendants'
expert witness Gerald Shanker that to add back the figure was not
supported by the facts.
Hammer's salary and benefits "were plainly recurring when
paid to him," and were not rendered a "non-recurring expense
retroactively" after he was fired and his position eliminated.
His hiring was not an "extraordinary event," and his functions and
duties were not outside the normal scope of a CEO position. For
these reasons, the judge disallowed an add-back to HSI's value of
$630,238 representing amounts paid to Hammer as salary and
benefits.
Hammer claimed that $137,812 should be added back to HSI's
value for the year 2002, representing royalty payments to product
manufacturers with which HSI did business in that year. The court
27 A-1475-14T1
disagreed that these payments were a non-recurring expense,
stating that Campos's conclusion on the subject was a net opinion.
The court instead credited Shanker's characterization of the
payments as "normal business transactions" for a company like HSI
because, as Shanker noted, product manufacturers "often produce
products under license and receive a royalty therefore." Although
HSI may not have made royalty payments frequently, the payments
made in 2002 were "acceptable" and Hammer offered no evidence
challenging their validity. As a result, the court disallowed the
add-back of this expense.
The court's conclusion that neither of the disputed expenses
should be added back into HSI's fair value is supported by the
testimony of a credible expert witness. That the trial judge
agreed with defendants' expert, not Hammer's, does not render his
decision an abuse of discretion. Rather, by the standards
discussed above, great deference is given to a judge's
determination that one expert was more credible than another. In
light of the fact-sensitive nature of valuing a closely-held
corporation, the court's findings were supported by adequate,
substantial and credible evidence, and did not result in a denial
of justice. Rova Farms Resort, supra, 65 N.J. at 483-84.
28 A-1475-14T1
VI.
A.
A trial judge's decision on an application for fees is
reviewed under an abuse of discretion standard. United Hearts v.
Zahabian, 407 N.J. Super. 379, 390 (App. Div.) (citing Masone v.
Levine, 382 N.J. Super. 181, 193 (App. Div. 2005)), certif. denied,
200 N.J. 367 (2009). "[F]ee determinations by trial courts will
be disturbed only on the rarest of occasions," Rendine v. Pantzer,
141 N.J. 292, 317 (1995), such as when an award "was not premised
upon consideration of all relevant factors, was based upon
consideration of irrelevant or inappropriate factors, or amounts
to a clear error in judgment." Masone, supra, 382 N.J. Super. at
193. This is because a trial court is "in the best position to
weigh the equities and arguments of the parties." Packard-
Bamberger & Co., Inc. v. Collier, 167 N.J. 427, 447 (2001).
As a result of the litigation, Hammer received $81,5944 for
his two percent interest in HSI, plus counsel fees, costs, and
expert fees totaling $758,956.29, in addition to $34,006.23 in
prejudgment interest. The court granted defendants $186,276.27
in fees unrelated to Hammer's OMS claims, which is the only
decision with which we do not agree, and which we reverse.
4
$60,000 towards the value of Hammer's share was voluntarily paid
by defendant prior to the trial date.
29 A-1475-14T1
B.
Because Hammer was declared an OMS, he sought reimbursement
of counsel fees and costs under the OMS statute's fee-shifting
provision. N.J.S.A. 14A:12-7(8)(d) provides that if, as here, the
court finds that an action was maintainable under N.J.S.A. 14A:12-
7(1)(c), it may award reasonable fees and expenses of counsel to
a "selling shareholder," meaning a party receiving the fair value
of their stock in the close corporation as a remedy for oppression.
Once it is determined that a plaintiff is a prevailing party
under a fee-shifting statute, the judge must compute a "lodestar"
amount for fees by multiplying the number of hours reasonably
expended on the litigation by a reasonable hourly rate. R.M. v.
Supreme Court of N.J., 190 N.J. 1, 10 (2007). This amount may
then be reduced or enhanced in the court's discretion. Id. at 10-
11. A court must analyze any relevant factors when determining
the final fee award, and must then state its reasons on the record.
Id. at 12.
A reduction of a party's requested attorney fees may be
appropriate if
the hours expended, taking into account the
damages prospectively recoverable, the
interests to be vindicated, and the underlying
statutory objectives, exceed those that
competent counsel reasonably would have
expended.
30 A-1475-14T1
[Rendine, supra, 141 N.J. at 336.]
A fee should also be reduced if "the level of success achieved in
the litigation is limited as compared to the relief sought." Id.
at 336. "[W]hen a party has succeeded on only some of its claims
for relief, the trial court should reduce the lodestar to account
for the limited success." Litton Indus., Inc. v. IMO Indus.,
Inc., 200 N.J. 372, 387 (2009) (citation omitted). Such action
may be taken "even where the plaintiff's claims were interrelated,
nonfrivolous, and raised in good faith." Rendine, supra, 141 N.J.
at 336 (quoting Hensley v. Eckerhart, 461 U.S. 424, 436, 103 S.
Ct. 1933, 1941, 76 L. Ed. 2d 40, 52 (1983)).
The courts have rejected a purely mathematical approach
comparing the total number of issues raised by a plaintiff with
those he or she actually prevailed upon. New Jerseyans for a
Death Penalty Moratorium v. N.J. Dep't of Corr., 185 N.J. 137, 154
(2005). However, "hours devoted to claims that are entirely
distinct from the relevant successful claims should be excluded"
from a fee award. Singer v. State, 95 N.J. 487, 500, cert. denied,
469 U.S. 832, 105 S. Ct. 121, 83 L. Ed. 2d 64 (1984). If a
plaintiff's unsuccessful claims are not fully distinct, and
instead are "related to the successful claims, either by a 'common
core of facts' or 'related legal theories,'" the court must analyze
"the significance of the overall relief obtained to determine
31 A-1475-14T1
whether those hours devoted to the unsuccessful claims should be
compensated." Ibid. (quoting Hensley, supra, 461 U.S. at 435, 103
S. Ct. at 1940-41, 76 L. Ed. 2d at 51-52).
If the plaintiff obtained "excellent results" despite not
succeeding on every claim raised, his or her attorney "should be
duly compensated for all time reasonably expended on the
litigation." Robb v. Ridgewood Bd. of Educ., 269 N.J. Super. 394,
405 (App. Div. 1993). If, on the other hand, the plaintiff
obtained only "partial or limited success," the court "may reduce
the lodestar amount if it believes that amount is excessive in
relation to the plaintiff's relief." Ibid.
Ultimately, "there need not be proportionality between the
damages recovered and the attorney-fee award itself." Furst v.
Einstein Moomjy, Inc., 182 N.J. 1, 23 (2004). "Nonetheless, the
amount a plaintiff recovers in damages is relevant to the
determination of whether the fees sought are reasonable." Grubbs
v. Knoll, 376 N.J. Super. 420, 432 (App. Div. 2005). Particularly
where the fees requested far exceed the damages recovered by the
prevailing party, "the trial court should consider the damages
sought and the damages actually recovered" when determining an
appropriate fee award. Packard-Bamberger, supra, 167 N.J. at 446.
A trial court must "evaluate carefully and critically the
aggregate hours and specific hourly rates advanced by counsel for
32 A-1475-14T1
the prevailing party to support the fee application." Rendine,
supra, 141 N.J. at 335. An application for fees "should be
sufficiently detailed to allow a trial court to determine the
nature of the work performed and by whom, as well as the
reasonableness of the hourly rate and the hours expended." Furst,
supra, 182 N.J. at 25. Where "an attorney's time . . .
substantially exceed[s] the result obtained for the client," an
attorney is particularly "obliged to document the effort" he or
she has undertaken. Grubbs, supra, 376 N.J. Super. at 433.
C.
The trial judge here carefully reviewed Hammer's request for
$1,222,610.19 in attorney's fees. Current counsel indicated which
charges related solely to successful OMS claims. However, some
charges were not so clearly designated, and required the judge's
close scrutiny. After careful evaluation, he awarded Hammer a
total of $635,467.96 for counsel fees related to only the OMS
claims. We see no abuse of discretion in the judge's analysis of
the materials and his discussion of the legal principles that
guided his examination.
Hammer also sought a total of $181,491.84 for his expert fee
as well as $29,186.45 for litigation expenses. Because in the
trial judge's opinion Hammer did not adequately explain these
costs, he reduced the request by forty percent to $108,895.10 for
33 A-1475-14T1
Campo's fee and by fifty percent to $14,593.23 for other fees.
Thus the total amount awarded for counsel fees, costs, and related
litigation expenses came to $758,956.29. That figure is
disproportionate to Hammer's recovery which came to $81,594 —— the
fair value of his remaining interest in HSI and prejudgment
interest of $34,006.23.
Under the OMS statute, however, a proportionality analysis
is not applied to the detriment of a plaintiff seeking the
protection of the statute. The trial judge considered this very
point, and noted that defendants' total award came to $202,594
including his deferred compensation payment, the fee was
"approximately seven times the overall recovery," and thus
reasonable. We are constrained to agree given the OMS statute and
the judge's careful and detailed review of the billing records.
He did not abuse his discretion.
VII.
Defendants also object to the prejudgment interest totaling
$34,006.23. They assert Hammer caused "much of the delay in this
litigation." Certainly, the number of years this matter has been
pending approaches on the Dickensian. But defendants themselves
caused significant delay by pursuing an interlocutory appeal of a
grant of partial summary judgment awarding Hammer $166,913.86,
34 A-1475-14T1
including interest, in deferred compensation payable under the
terms of his employment contract.
Under N.J.S.A. 14A:12-7(8)(d), the court may award interest
on a minority shareholder's interest representing the fair value
of his or her share in a closely-held corporation if, as here, he
or she is successful in an action under N.J.S.A. 14A:12-7(1)(c).
This interest "may be allowed at the rate and from the date
determined by the court to be equitable." N.J.S.A. 14A:12-7(8)(a).
"Generally, the awarding of prejudgment interest is subject
to the trial judge's broad discretion in accordance with principles
of equity." Musto v. Vidas, 333 N.J. Super. 52, 74 (App. Div.),
certif. denied, 165 N.J. 607 (2000). An appellate court must
defer to the trial judge's discretion "unless it represents a
manifest denial of justice." Ibid.
The primary consideration in awarding
prejudgment interest is that "the defendant
has had the use, and the plaintiff has not,
of the amount in question; and the interest
factor simply covers the value of the sum
awarded for the prejudgment period during
which the defendant had the benefit of monies
to which the plaintiff is found to have been
earlier entitled."
[Ibid. (quoting Rova Farms Resort, supra, 65
N.J. at 506).]
N.J.S.A. 14A:12-7(8)(d) provides that if the successful
minority shareholder's refusal to accept an offer of payment was
35 A-1475-14T1
"arbitrary, vexatious, or otherwise not in good faith, no interest
shall be allowed." Ibid. However, in Musto, supra, 333 N.J.
Super. at 74, the court found that although the defendants made a
buyout offer for the plaintiff's stock that was greater than the
plaintiff's ultimate award, this "[did] not mean that [the]
plaintiff's refusal to accept such an offer constitute[d]
unjustified delay." Instead, the defendants were responsible for
much of the delay that extended the proceedings, because they
filed an interlocutory appeal. Ibid.
Like the trial judge, we do not agree that Hammer pursued
meritless claims requiring aggressive pursuit by defendants of
summary judgment applications and dismissals prior to trial. The
record is devoid of support of the notion that Hammer pursued the
complaint in bad faith. Thus the trial court did not abuse its
discretion in awarding prejudgment interest under N.J.S.A.
14A:12-7(8)(d).
VIII.
On June 30, 2009, defendants filed an offer of judgment which
would have allowed Hammer to take judgment against them in the
amount of $51,150 including costs but excluding litigation
expenses, prejudgment interest and counsel fees. Hammer did not
accept. Because Hammer ultimately received a net award for his
OMS claim of $21,594, a significantly lower amount than defendants
36 A-1475-14T1
offered, defendants sought counsel fees and costs under the Offer
of Judgment Rule (OJR), Rule 4:58-3(c).
The OJR provides that
[i]f the offer of a party other than the
claimant is not accepted, and the claimant
obtains a monetary judgment . . . that is
favorable to the offeror as defined by this
rule, the offeror shall be allowed, in
addition to costs of suit, the allowances as
prescribed by R. 4:58-2 . . . .
[R. 4:58-3(a).]
Rule 4:58-2(a) provides for an award of all reasonable litigation
expenses incurred following the rejection of the offer,
prejudgment interest, and "a reasonable attorney's fee for such
subsequent services as are compelled by the non-acceptance." A
determination in the claimant's favor that entitles an offering
party to such an allowance is "a money judgment . . . in an amount,
excluding allowable prejudgment interest and counsel fees, that
is 80% of the offer or less." R. 4:58-3(b). Under Rule 4:58-
3(c), no such allowances shall be granted if "(4) a fee allowance
would conflict with the policies underlying a fee-shifting statute
or rule of court."
Here, the court eventually found that the value of Hammer's
two percent interest in HSI was $81,594, but defendants had already
paid $60,000 of that sum. Hence the judge concluded that Hammer
received a net award on his OMS claim of only $21,594. Because
37 A-1475-14T1
this amount was less than 80% of defendants' offer, the court
found that "[Hammer]'s failure to accept the offer of judgment
entitles the defendant[s] to an award of reasonable litigation
expenses and attorney's fees from June 30, 2009 through the entry
of final judgment."
We respectfully disagree with the trial judge's
characterization of the full amount owed to Hammer on his OMS
claim as $21,594. The $60,000 HSI earlier paid, we were advised
at oral argument, was payment on account of the stock. The
discrepancy in the figures was a dispute regarding valuation.
Because defendants prepaid a portion of the total finally assessed
against them is no reason to exclude that portion from the total
recovery Hammer actually obtained because of the litigation. If
that amount is added back in, the total is $81,594, an amount
greater than the figure in the offer of judgment notice.
Accordingly, we reverse on this point.
Affirmed, except reversed as to the award of attorney fees
to defendants.
38 A-1475-14T1