Churchill Downs Incorporated v. NLR Entertainment, LLC et al
Filing
117
OPINION. Signed by Judge Kevin McNulty on 11/9/2020. (sm)
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
CHURCHILL DOWNS, INC.,
Civ. No. 14-03342 (KM) (MAH)
Plaintiff,
OPINION
v.
NICHOLAS L. RIBIS, SR. AND NLR
VENTURES, LLC,
Defendant.
KEVIN MCNULTY, U.S.D.J.:
In 2013, defendant Nicholas L. Ribis signed an agreement with plaintiff
Churchill Downs, Inc. (“CDI”) to purchase a casino in Atlantic City. Ribis
signed the agreement on behalf of two purported LLCs: NLR Entertainment,
LLC, (“NLRE”) and its subsidiary, NLR Acquisitions, LLC, (“NLRA”) (collectively,
the “NLR LLCs”). CDI paid the NLR LLCs $2.5 million dollars towards
purchasing the casino; pursuant to the agreement’s terms, however, if the NLR
LLCs failed to complete the purchase, then they were required to pay CDI the
money back as liquidated damages. The purchase fell through, the casino was
never bought, and the LLCs never refunded CDI the money.
Five years later, after this Court had granted judgment in favor of CDI
against NLRE for breach of contract, it was revealed that NLRE had never
existed; Ribis never actually formed the LLC. Similarly, NLRA had not existed
at the time that it purportedly entered into the agreement with CDI, though
Ribis did form the company several months later.
CDI seeks to hold Ribis individually liable on the contract. For the
reasons that follow, CDI’s motion (DE 110) is GRANTED.
1
I.
BACKGROUND 1
CDI, NLRE, and NLRA entered into a binding Term Sheet dated August 3,
2013, which Ribis signed on behalf of the NLR LLCs. (PSTMF ¶ 2.) CDI and
NLRA subsequently entered into a License and Operating Agreement on
September 4, 2013, which superseded and formalized the Term Sheet
agreement but contained essentially the same terms. (DE 110-5.) Under the
agreements, CDI would provide online gambling services to the Showboat
Atlantic City Hotel and Casino after the NLR LLCs purchased that casino. (DE
110-4 ¶ 1.4.) In exchange for the right to provide online services, CDI paid a
$2.5 million fee to the NLR LLCs upon execution of the Term Sheet; an
additional $7.5 million was due under the agreement upon the NLR LLCs’
acquisition of the Showboat. (Id. ¶ 1.6.) If the NLR LLCs failed to close on the
acquisition of the Showboat by January 31, 2014, however, they were obligated
under the agreement to repay CDI the entire $2.5 million. (Id.)
CDI paid the NLR LLCs the initial $2.5 million. The NLR LLCs never
closed on the acquisition of the Showboat, and never repaid CDI the $2.5
million. (PSTMF ¶ 1; DS2TMF ¶ 7, 15.) CDI then commenced this action
against NLRE on February 25, 2014, and prevailed on a summary judgment
motion on March 6, 2017. (Id. ¶¶ 1, 3.)
1
Certain key items from the record will be abbreviated as follows:
DE
=
Docket Entry
Opp.
=
Defendant’s Opposition (DE 114-1)
PSTMF
=
Plaintiff’s Statement of Material Facts (DE 110-1)
DSTMF
=
Defendant’s Response to Plaintiff’s Statement of
Material Facts (DE 114)
DS2TMF
=
Defendant’s Supplemental Statement of Undisputed
Facts
March 6, 2017 Op.
=
March 6, 2017 Opinion as corrected on March 10,
2017 (DE 71)
April 4, 2017 Judgment
=
April, 4, 2017 Judgment (DE 76)
September 25, 2018 Op.
=
September 25, 2018 Opinion (DE 95)
Ribis Dec.
=
Declaration of Nicholas L. Ribis (DE 114-2)
2
In ruling on CDI’s summary judgment motion, I found that NLRE was
obligated to repay the $2.5 million and had not done so. (Id. ¶ 3; March 6, 2017
Op.) The theory was breach of contract: I found that there was “no doubt that
NLR[E] breached the License Agreement when it failed to acquire Showboat and
then declined to return CDI’s $ 2.5 million.” (March 6, 2017 Op. at 12.) NLRE
did not dispute its obligation under the contract; rather, it asserted that CDI
had breached the agreement first, either by acting in bad faith or by breaching
the License Agreement. (Id. at 13.) I concluded that CDI had not breached the
contract first, which might have excused NLRE’s breach. (Id.) In that same
action, CDI brought a claim for fraud against Ribis based on certain statements
he made to them in September and December 2013 indicating that a deal with
a casino was soon forthcoming, which I rejected on the ground that CDI could
not show any damages. (Id. at 23–24.) I entered judgment in favor of CDI
against NLRE for $2.5 million on April 4, 2017. (April 4, 2017 Judgment.)
Ribis represented to CDI, and repeatedly to this Court, that NLRE was a
limited liability company formed under Delaware law which was owned solely
by Ribis. (PSTMF ¶¶ 4–5; DSTMF ¶¶ 4–5.) When CDI initiated post-judgment
discovery in aid of execution on the judgment, however, it learned that NLRE
was not, and never had been, incorporated in Delaware or any other state.
(PSTMF ¶ 7; DSTMF ¶ 7.) CDI also learned that NLRA, the subsidiary of NLRE
referenced in the Term Sheet agreement, was not formed as a legal entity until
December 2013, several months after the agreements were executed. (Id. ¶ 8;
DSTMF ¶ 8; DE 110-10.)
According to Ribis, this was all an innocent error. He hired Willkie Farr &
Gallagher LLP to represent him in the negotiations with CDI. Willkie Farr, he
says, was responsible for “all legal nuances of the transactions,” including
“form[ing] NLR[E] and NLR[A],” which Ribis claims he “expressly instructed”
them to do. (Ribis Decl. ¶¶ 8–9.) Ribis claims that he “believed NLR[E] and
NLR[a] to be duly formed limited liability companies” and asserts that he “had
no reason to think otherwise,” arguing that his attorneys “prepared the formal
3
agreements, which provided the corporate structure of the NLR entity entering
into the agreement.” (Id. ¶ 12.) He claims that the “first time [he] learned that
NLR[E] was never duly formed by [his] attorney was through CDI’s motion to
modify the final judgment filed in 2018.” (Id. ¶ 14.)
After CDI determined that NLRE had never existed, it moved to modify
the April 4, 2017 judgment to impose liability on Ribis individually. (DE 90.) I
partially granted its motion, permitting it to amend its complaint to add Ribis
individually. (September 25, 2018 Op.) I concluded that amending the
judgment to impose liability on Ribis directly would be a step too far, reasoning
that “I cannot award judgment on claims that were not pled or meaningfully
explored in discovery.” (Id. at 7.)
CDI then amended its complaint on February 18, 2019 to add Ribis and
another LLC, NLR Ventures, LLC, as defendants. (DE 96.) It then initiated
discovery. Once discovery ended, CDI filed this motion for summary judgment
as to Ribis’s individual liability. (DE 110.)
II.
DISCUSSION
A. Summary Judgment
Federal Rule of Civil Procedure 56(a) provides that summary judgment
should be granted “if the movant shows that there is no genuine dispute as to
any material fact and the movant is entitled to judgment as a matter of law.”
See Kreschollek v. S. Stevedoring Co., 223 F.3d 202, 204 (3d Cir. 2000);
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). In deciding a motion
for summary judgment, a court must construe all facts and inferences in the
light most favorable to the nonmoving party. See Boyle v. Cnty. of Allegheny
Pennsylvania, 139 F.3d 386, 393 (3d Cir. 1998) (citing Peters v. Delaware River
Port Auth. of Pa. & N.J., 16 F.3d 1346, 1349 (3d Cir. 1994)). The moving party
bears the burden of establishing that no genuine issue of material fact
remains. See Celotex, 477 U.S. at 322-23. “[W]ith respect to an issue on which
the nonmoving party bears the burden of proof . . . the burden on the moving
party may be discharged by ‘showing’ — that is, pointing out to the district
4
court — that there is an absence of evidence to support the nonmoving party’s
case.” Id. at 325.
Once the moving party has met that threshold burden, the non-moving
party “must do more than simply show that there is some metaphysical doubt
as to material facts.” Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475
U.S. 574, 586, 106 S. Ct. 1348, 89 L. Ed. 2d 538 (1986). The opposing party
must present actual evidence that creates a genuine issue as to a material fact
for trial. Anderson, 477 U.S. at 248; see also Fed. R. Civ. P. 56(c) (setting forth
types of evidence on which nonmoving party must rely to support its assertion
that genuine issues of material fact exist).
Unsupported allegations, subjective beliefs, or argument alone, however,
cannot forestall summary judgment. See Lujan v. Nat’l Wildlife Fed’n, 497 U.S.
871, 888, 111 L. Ed. 2d 695, 110 S. Ct. 3177 (1988) (nonmoving party may not
successfully oppose summary judgment motion by simply replacing
“conclusory allegations of the complaint or answer with conclusory allegations
of an affidavit.”); see also Gleason v. Norwest Mortg., Inc., 243 F.3d 130, 138
(3d Cir. 2001) (“A nonmoving party has created a genuine issue of material fact
if it has provided sufficient evidence to allow a jury to find in its favor at trial.”).
Thus, if the nonmoving party fails “to make a showing sufficient to establish
the existence of an element essential to that party’s case, and on which that
party will bear the burden of proof at trial . . . there can be ‘no genuine issue of
material fact,’ since a complete failure of proof concerning an essential element
of the nonmoving party’s case necessarily renders all other facts immaterial.”
Katz v. Aetna Cas. & Sur. Co., 972 F.2d 53, 55 (3d Cir. 1992) (quoting Celotex,
477 U.S. at 322-23).
Moreover, the “mere existence of some alleged factual dispute between
the parties will not defeat an otherwise properly supported motion for summary
judgment; the requirement is that there be no genuine issue of material fact.”
Anderson, 477 U.S. at 247-48. A fact is only “material” for purposes of a
summary judgment motion if a dispute over that fact “might affect the outcome
5
of the suit under the governing law.” Id. at 248. A dispute about a material fact
is “genuine” if “the evidence is such that a reasonable jury could return a
verdict for the nonmoving party.” Id.
B. Validity and preclusive effect of the April 4, 2017 judgment
The parties dispute the extent to which the April 4, 2017 judgment
against NLRE may estop Ribis. Ribis argues that he is not privy to that
judgment because it was against NLRE, and that the judgment against NLRE
was in any event void because it was entered against a non-existent entity.
(Opp. at 10–11.) The convenient result of Ribis’s mistake, from Ribis’s point of
view, would be that there is no judgment at all. CDI demurs, and adds that
Ribis cannot attack the prior judgment in this proceeding; his recourse, says
CDI, was via an appeal or motion for reconsideration. (Reply 7–8.).
It is true that my April 4, 2017 judgment of contract breach was phrased
solely in terms of NLRE, which was presented to the court as the relevant
contracting party. I determined that NLRE breached the Term Sheet and
Licensing agreements, and that NLRE therefore owed $2.5 million, plus
interest, pursuant to the liquidated damages clause. (March 6, 2017 Op. at 12–
16; DE 76.) I was not called upon to, and did not, rule that Ribis was liable on
the contract. 2 The parties’ dispute, therefore, boils down to a disagreement over
whether Ribis is collaterally estopped from disputing my findings as to NLRE
on summary judgment. I agree with CDI that he is.
I first consider privity. “Mutuality of parties no longer is an essential
condition of collateral estoppel,” but “the party against whom collateral
estoppel is to be invoked must have been in ‘privity’ with the party in the first
action.” Zirger v. General Accident Ins. Co., 144 N.J. 327, 338 (N.J. 1996) (citing
Wunschel v. City of Jersey City, 96 N.J. 651, 658 (N.J. 1984)). “Privity” is
“necessarily imprecise” and “states no reason for including or excluding one
As noted above, CDI brought only fraud claims against Ribis individually, and I
granted summary judgment on those claims in Ribis’s favor. (March 6, 2017 Op. at
24.)
2
6
from the estoppel of a judgment,” but rather “is merely a word used to say that
the relationship between the one who is a party on the record and another is
close enough to include that other within the [collateral estoppel].” Id. (quoting
Bruszewski v. United States, 181 F.2d 419, 423 (3d Cir. 1950) (Goodrich, J.,
concurring)).
A privity relationship is “usually considered ‘close enough’ only when the
party is a virtual representative of the non-party, or when the non-party
actually controls the litigation.” Id. (quoting Collins v. E.I. DuPont de Nemours &
Co., 34 F.3d 172, 176 (3d Cir. 1994) (applying New Jersey law)). As a rule,
there must be “such an identification of interest between the two as to
represent the same legal right,” id., though where a party has “had his day in
court on an issue,” privity is properly found, McAndrew v. Mularchuk, 38 N.J.
156, 161 (1962); see also Taylor v. Sturgell, 553 U.S. 880, 895 (2008) (collateral
estoppel applies to nonparties that “‘assumed control’ over the litigation in
which [a] judgment was rendered” and had “the opportunity to present proofs
and argument” and therefore “had [their] day in court”).
It is clear that Ribis was in privity with NLRE in the previous litigation.
He was a party to the action, although not to the contract count. He directed
NLRE’s defense against CDI’s motion for summary judgment. He and NLRE
were represented by the same attorneys and submitted a joint statement of
material facts. (See DE 66; DE 66-1; DE 66-2). Ribis repeatedly represented
himself to CDI and this Court as NLRE’s sole shareholder. (PSTMF ¶¶ 4–8;
DSTMF ¶¶ 4–8). Ribis had every opportunity to present arguments on NLRE’s
behalf, and did so vigorously, submitting numerous filings defending against
the claims and contesting discovery. (See DE 1–116, passim). Ribis’s financial
connection to NLRE, and his full involvement in the litigation on NLRE’s behalf,
indicates that he and NLRE shared identical interests in protecting NLRE from
liability. Ribis was in privity with NLRE.
Ribis next argues that my prior judgment cannot have any estoppel effect
because it was void, having been rendered against a nonexistent entity. He
7
cites Conway v. Samet, in which a New York court concluded that a judgment
against a nonexistent corporation was void and could not form the basis for res
judicata or collateral estoppel:
The predicate of either res judicata or collateral estoppel is a valid
prior judgment. The 1964 judgment upon which plaintiffs rely to
establish the amount of their damages was obtained by default
against a nonexistent corporation. Since the corporation was
nonexistent, the court obtained jurisdiction over no one, its
judgment determined nothing and being void cannot be asserted as
an estoppel.
300 N.Y.S.2d 243, 247 (Sup. Ct. N.Y. 1969); see also First Nat’l Bank v.
Alexander, 236 S.W. 229, 230 (Tex. 1921) (judgment against nonexistent
corporation is a “nullity”); Leckie v. Seal, 161 Va. 215, 223 (Va. 1933) (“where
the right party is sued by the wrong name and makes no objection, the
judgment against him by the wrong name is binding . . . . [though w]here the
mistake in the name of the corporation . . . . is so material . . . that no such
corporation exists, it is fatal at the trial.”). Some courts, however, appear to
disagree with this principle. Jones v. Fuller, 280 Ky. 671, 675 (Ky. 1939)
(finding that judgment against nonexistent corporation could have bound
individual had service against corporation been sufficient); Akande v.
Transamerica Airlines, Inc. Del. Ch. LEXIS 68 at *63–64 (Del. Ch. May 25,
2007) (permitting judgment against nonexistent corporation for up to three
years after corporation was dissolved).
I am not convinced that citation to Conway frames the issue correctly. To
begin with, this was not a default judgment against an absent corporation that
turned out not to exist. It was a fully litigated case in which the corporation’s
sole shareholder mounted a full defense. Nor is it a case in which the plaintiff
made a mistake and sued the wrong party. On the contrary, it sued the very
party on whose behalf Ribis signed the contract. Ribis now attempts to
capitalize on his own (or possibly his lawyers’) mistake, a wholly
distinguishable situation.
8
As I see it, Ribis’s belatedly-discovered failure to incorporate NLRE
signifies that NLRE functioned as no more than a “doing business as” (d/b/a)
name for Ribis himself. There is no doubt that Ribis is the human being with
whom CDI dealt, and that he held out NLRE as his wholly-owned entity.
Whether inadvertently or not, he falsely conveyed to CDI that NLRE was an
incorporated entity. CDI was entitled to rely on Ribis’s representations that
NLRE existed. Incorporation of NLRE, after all, was not for CDI’s benefit; like
any corporate entity, it was a means for Ribis to protect himself against
unlimited personal liability. It would be inequitable to hold that his failure to
incorporate NLRE protects him in precisely the same manner. By failing to
incorporate NLRE, Ribis allowed it to remain no more than a name. But it was
thus a name for Ribis—a d/b/a.
Courts tend to find judgments against a d/b/a entity to be binding
against the individual standing behind it. In Chandler v. Pacific Coast Funding,
for example, the plaintiffs received a judgment against the defendant’s d/b/a,
which was not a separately incorporated entity, but merely a separate business
name for the defendant. 2003 Cal. App. Unpub. LEXIS 583 at *11 (Cal. Ct.
App. Jan. 21, 2003). The court concluded that the judgment against the d/b/a
was a judgment against the individual, because “[a] person doing business as a
fictitious name remains personally liable for the debts of the fictitiously named
entity.” Id.; see also Pinkerton’s, Inc. v. Superior Court, 49 Cal. App. 4th 1342,
1348 (Cal. App. 1996) (same); Wood Mfg. Co., Inc. v. Schultz, 613 F. Supp. 878,
884 n.7 (W.D. Ark. 1985) (same); American Exp. v. Beryle, 202 Ga. App. 358,
360 (1991) (same); Jaffe v. Nocera, 493 A.2d 1003, 1008 (D.C. App. 1985);
State v. Ivanhoe, 798 P.2d 410, 412 (Ariz. 1990). In short, it is creation of an
adequately capitalized corporation, not the invention of a fictitious name, that
shields an individual from liability.
There does not seem to be a New Jersey case on point. I conclude,
however, that the judgment against NLRE was not a void judgment against
nobody, but rather a judgment against Ribis, based on the rationales of the
9
d/b/a cases cited. Ribis represented that NLRE was an existing entity,
controlled by him, and was at least negligent—if not fraudulent—in failing to
disclose to CDI that there was no such entity. He cannot be permitted to
benefit from his apparent abuse of the corporate form. See DEP v. Ventron
Corp., 94 N.J. 473, 500 (N.J. 1983) (corporate form should not be permitted to
be abused so as to “defeat the ends of justice, to perpetrate fraud, to
accomplish a crime, or otherwise evade the law”).
On discovery of the facts regarding NLRE, however, I did not merely
convert the judgment into one against Ribis, although perhaps I could have
done so. After all, Ribis was served as a party defendant, 3 he appeared in the
action, and he controlled the defense of the action, including the contract claim
against NLRE. I therefore reject Ribis’s argument that the prior judgment was
void. His lapse did not deprive him of any procedural opportunity to which he
would have been entitled if he had properly disclosed the status of NLRE at the
outset. 4 I remained concerned, however, that on at least one version of the
facts Ribis might have been taken by surprise and failed to put his best foot
forward on the issue of personal liability. So I held in my September 25, 2018
opinion that CDI would be given a chance to amend its complaint, and that
Ribis would be given a chance to respond. See Aouf v. Pyramid Express Corp.,
2019 N.J. Super. Unpub. LEXIS 1079 at *14–15 (App. Div. May 10, 2019); see
also Nelson v. Adams USA, Inc., 529 U.S. 460, 467 (2000). I permitted
additional discovery and granted Ribis the opportunity to make factual and
legal arguments in opposition to personal liability on the judgment.
He was served in his own right, because some of the claims were directed
against him personally. Therefore, it is not necessary to impute notice of the action to
him Cf Atkinson v. North American Smelting Co., 245 A.2d 436, 437 (Del. Super. Ct.
1968) (service directed to nonexistent company still adequate where defendant was
aware of the action and able to appear).
3
I say nothing of the repeated factual misrepresentations to the Court, or the
lack of due diligence.
4
10
With the benefit of those additional proceedings, I now hold that the
judgment against NLRE is not void, that NLRE is properly viewed as a d/b/a
name of Ribis, and that the judgment is effective to estop Ribis from relitigating
the issues of breach and damages.
Ribis cannot dispute that the agreement was breached and that CDI is
owed its $2.5 million deposit, pursuant to the agreement’s liquidated damages
clause. (PSTMF ¶ 1 (in describing the complaint against NLRE, explaining that
it was “based on [NLRE’s] failure to refund $2.5 million paid by CDI, in breach
of the parties’ agreements, after Ribis failed to acquire the Showboat Atlantic
City Hotel and Casino”); DSTMF ¶ 1 (“Defendants do not dispute the allegations
contained within Paragraph 1”.); DS2TMF ¶¶ 7, 15).
Those undisputed facts are sufficient to estop Ribis from relitigating the
breach and resulting damages, for which Ribis himself is prima facie liable. In
the following section, I consider three defenses to personal liability which were
not litigated in the prior proceedings.
C. Ribis’s personal liability on the NLRE contract
To defeat personal liability, Ribis asserts (1) the “de facto” corporation
doctrine; (2) that he is a mere “promoter”; and (3) that there are material
factual disputes about the manner in which the $2.5 million was spent, which
would reduce the damages. I reject all three arguments.
1. De facto incorporation of NLRE and NLRA
There is no dispute that Ribis signed the Term Sheet on behalf of the
NLR LLCs. Since those LLCs did not exist at the time of signature, he is
personally liable for a breach of that agreement. “A person is individually liable
for contracts he signs under a nonexistent corporate name.” Fashion Brokerage
Intern., LLC v. Jhung Yuro Intern., LLC, 2011 WL 976478 at *4 (D.N.J. Mar. 14,
2011). That is because “a person conducting business on behalf of a
nonexistent company holds himself out as an agent of a fictitious principal.”
Id.; Lockwood Boat Works, Inc. v. Motor Vessel, A “1960” Flying Bridge Sportfish,
2013 WL 5946544 at *1 n.1 (D.N.J. Nov. 6, 2013); see also Gallant v. Fashion
11
Piece Dye Works, 174 A. 248, 249 (N.J. Ch. Div. 1934) (“if there is no
corporation [then the defendant] is personally liable for the debts created by
him in the [corporation’s] name”); Fed. Advert. Corp. v. Hundertmark, 160 A.
40, 40 (N.J. 1932) (“there w[as] no incorporation . . . . therefore, the defendants
. . . were constituting themselves agents of a nonexisting principal, and became
personally liable”).
Having unsuccessfully claimed that no one is liable because the
corporation(s) did not exist, Ribis now performs an about-face, and argues that
he is not liable because the corporation(s) did exist. That is, Ribis argues that
the NLR LLCs were de facto corporations, which shield him from personal
liability in the same manner as an ordinary, legally established corporation.
This argument takes on slightly different contours as applied to each of
the NLR LLCs. Though CDI sought previously to impose liability for breach of
contract solely on NLRE (March 6, 2017 Op.), both NLRE and NLRA were
parties to the binding Term Sheet agreement, (see DE 110-4 (agreement
between CDI, NLRE, and NLRA, which was denoted as a “wholly owned
subsidiary” of NLRE), and only NLRA was a party to the Licensing Agreement,
(see 110-5.) NLRE was not incorporated at the time Ribis signed the Term
Sheet and Licensing agreements on its behalf, and has not been incorporated
since. Ribis claims, however, that NLRE was de facto incorporated at the time
of the agreement.
NLRA, like NLRE, did not exist at the time of the Term Sheet or Licensing
Agreements. (PSTMF ¶ 8; DSTMF ¶ 8.) It was, however, eventually incorporated
on December 12, 2013, three months after the parties entered into the
Licensing Agreement, and only one month before the NLR LLCs defaulted on
the agreements. (DE 110-10; March 6, 2017 Op. at 4.) Ribis now argues that
NLRA existed as a de facto LLC well before it became a de jure LLC.
12
I will assume arguendo, if dubitante, that the de facto incorporation
doctrine retains its vitality in New Jersey. 5 In order to invoke the doctrine of de
facto incorporation under New Jersey law, Ribis must show “(1) there is a law
under which a corporation with the power assumed might be incorporated; (2)
there has been a bona fide attempt to organize a corporation in the manner
prescribed by the statute; and (3) there has been an actual exercise of
corporate powers.” Pharm. Sales & Consulting Corp. v. JWS Delavau Co., Inc.,
59 F. Supp. 2d 398, 402 (D.N.J. 1999) (Delavau I). Ribis bears the burden of
The parties both note that the continued applicability of the doctrine of de
facto incorporation is disputed in New Jersey. There is indeed some uncertainty as to
the continued vitality of the doctrine, as state and federal courts in New Jersey have
suggested it was abrogated by the passage of the New Jersey Business Corporation Act
in 1968. See Pharm. Sales & Consulting Corp. v. J.W.S. Delavau Co., 59 F. Supp. 2d
408, 414 (D.N.J. 1998 (Delavau II); Trenton Dressed Poultry, Inc. v. Jamson, 116 N.J.
Super. 327, 328–29 (App. Div. 1971) (“Authority exists for the proposition that in the
absence of the execution of the necessary certificate, there could be no de facto
corporation”); see also Thomson-CSF Components Corp. v. Hathaway Instruments, Inc.,
85 F.R.D. 344, 348 (D.N.J. 1980).
5
I am not convinced, however, by the reasoning in these decisions. They rely on
ambiguous passages in New Jersey statutes, see N.J.S.A. § 14A:2-7 (stating only that
a corporation can be established by filing a certificate of incorporation), ambiguous
Commissioner’s Comments, see Delavau II, 59 F. Supp. 2d at 413 (noting
Commissioner’s Comment that N.J.S.A. § 14A:2-7 “virtually eliminates the distinction
between de jure and de facto corporations” but which makes no reference to
eliminating the de facto doctrine), and decisions in other jurisdictions which rely on
provisions which far more clearly remove the de facto incorporation defense and which
have no analogue among New Jersey’s statutes, see, e.g., American Vending Servs. v.
Morse, 881 P.2d 917, 920 (Utah 1994) (citing provision which holds that “[a]ll persons
who assume to act as a corporation without authority to do so shall be jointly and
severally liable for all debts and liabilities incurred or arising as a result thereof”). I
also note that a New Jersey Appellate Division case applied the doctrine after it was
purportedly abrogated, Cantor v. Sunshine Greenery, Inc., 398 A.2d 571 (App. Div.
1979) though no courts appear to have done so in the forty years following Cantor.
Other district courts after Delavau II have agreed that the precedent on this
issue is mixed. See Fashion Brokerage Intern., 2011 WL 976478 at *4 n.3 (D.N.J. Mar.
14, 2011). Since I conclude that the de facto doctrine does not apply to NLRE and
NLRA in any event, it is not necessary to settle the legal status of the doctrine
definitively.
13
establishing this defense. Id. at 402 (citing Asplund v. Marjohn Corp., 168 A.2d
844, 849 (App. Div. 1961)). As for the first element, New Jersey obviously has a
statutory regime for establishment of corporations and LLCs. See, e.g., N.J.
Stat. Ann. § 14A:2-7(2). As for the third element, it appears that NLRE and
NLRA at least purportedly exerted their corporate powers by negotiating and
entering into an agreement with CDI. See Cantor v. Sunshine Greenery, Inc.,
398 A.2d 571, 573 (App. Div. 1979) (“there was an actual exercise of the
corporate powers by the negotiations with plaintiffs and the execution of the
contract involved in this litigation”).
The second element, a “bona fide” attempt to organize a corporation in
the manner prescribed by the statute, is not met, however. That element
requires some colorable, substantial (if imperfect) compliance with the
statutory requirements. Fashion Brokerage, 2011 WL 976478 at *4. Courts
may find this element satisfied, for example, when the purported corporation’s
representatives file a certificate of incorporation within a reasonable time after
they entered into the agreement in the corporation’s name. Thus, in Cantor v.
Sunshine Greenery, Inc., the organizers of a corporation signed a certificate of
incorporation in compliance with New Jersey’s statutory requirements and
forwarded it to the New Jersey Secretary of State on December 3, 1974. 398
A.2d at 573. Thirteen days later, on December 16, 1974, they signed a lease
agreement in the corporation’s name. Id. Unbeknownst to the parties, however,
the Secretary of State did not officially file the certificate of incorporation until
December 18, 1974, two days after execution of the lease. Id. The Appellate
Division refused “[t]o deny [corporate] existence because of a mere technicality
caused by administrative delay,” reasoning that to do so would “run[] counter
to the purpose of the de facto concept.” Id.; Paragon Distributing Corp. v.
Paragon Laboratories, Inc., 129 A. 404 (N.J. Ch. Div. 1925) (de facto
incorporation where plaintiff attempted to file a certificate of incorporation prior
to the date the contract was executed but did not take certain final steps until
after the parties entered into a contract).
14
The facts of Ribis’s case do not approach these. Ribis provides no
evidence that he or his agents attempted to file such a certificate for either
NLRA or NLRE at any time reasonably close to the date that he entered into the
Term Sheet or Licensing agreements. Indeed, Ribis acknowledges that this did
not occur, but blames his attorneys. He intended to incorporate the entities, he
says, and he “understood that his attorneys at that time would handle the
corporate formation,” because he had “directed” them to do so. (Opp. at 3, 7;
Ribis Dec. ¶ 11) He claims that he simply assumed the lawyers had carried out
their duties to draft and file the relevant documents. (Id. ¶¶ 8–12.)
Whatever issues of fact this may raise are not genuine and material. The
question is not whether Ribis thought his attorneys were taking care of
registering his LLCs; that is a matter between himself and his attorneys, not
between himself and CDI. Rather the issue is whether his attorney, as his
agent, made a bona fide attempt to incorporate. See Delavau I, 59 F. Supp. 2d
at 404 (concluding that “plaintiff, through its agent . . . did not make a bona
fide attempt to incorporate”); see also Conway v. Samet, 300 N.Y.S.2d 243 (N.Y.
Sup. Ct. 1969) (attorney’s failure to file corporate certificate “evidence[s] a
malpractice claim against the attorney involved, but do[es] not constitute a
defense to the claims made against her in the present action”). It is undisputed
that the attorneys, for whatever reason, did not make any such filing or
attempted filing.
It is therefore not necessary to resolve factual issues regarding Ribis’s
instructions, if any, to his attorneys. The record is devoid of any facts
suggesting that Ribis’s attorneys made any attempt whatsoever to incorporate
these entities prior to the date that the NLR LLCs entered the Term Sheet
agreement, or within a reasonable time thereafter. Delavau I, 59 F. Supp. 2d at
404 (rejecting de facto incorporation where parties’ agent admitted in his
certificate that he prepared and mailed the certificate of incorporate just over a
month after entering into the contract); Asplund, 168 A.2d at 849 (party
15
seeking corporate protection bears the burden of proving entitlement to de
facto incorporation).
Ribis has failed to carry his burden of establishing a triable issue of fact
as to the de facto incorporation defense.
2. Liability as “promoter”
NLRA was incorporated in December 2013, several months after the
agreements were signed by Ribis. See Delavau I, supra (incorporation one
month later not “prompt” for purposes of de facto incorporation). As a backup
argument, however, Ribis asserts that he signed the agreements as a mere preincorporation “promoter” with respect to NLRA, and therefore should not be
personally liable.
Ribis asserts that “[i]n New Jersey, a corporation is entitled to all the
rights, and assumes full liability, under a pre-incorporation contract made by
its agent (“promoter”) on its behalf once it comes into existence.” (Opp. at 9.)
The implication is misleading. True, a corporation that comes into existence
after a promoter has executed a contract on its behalf can “adopt a contract
made for its benefit.” K & J Clayton Holding Corp. v. Keuffel & Esser Co., 113
N.J. Super. 50, 53 (App. Div. 1971). To do so does not affect or impair the
rights of the other contracting party. That does not entail, however, that a
person may sign a contract and then unilaterally relieve himself of liability to
the other party by forming a corporation. “Whether or not the corporation were
later to ‘adopt’ the contract, a promoter could be held liable thereon.” Id.
(emphasis added). A switch could of course still be accomplished if the parties
so agreed, as in many cases they may.
But unless CDI agreed to the contrary (and there is no evidence that it
did), Ribis would still be liable on any pre-incorporation agreement he signed
with CDI, even if the newly-formed NLRA later adopted the contract.
3. Damages
Ribis argues that he spent the “majority” of the $2.5 million he received
from CDI on “operational or business related expenses.” He details a number of
business costs that ate up much of the $2.5 million. (Opp. at 11.) He then
16
claims this creates a material dispute of fact barring entry of summary
judgment on the amount of damages. (Id.)
In my March 6, 2017 opinion and the accompanying judgment, I
concluded that NLRE breached the contract and as a result owed $2.5 million,
plus interest. This was not some calculation of outlays net of expenses. It was
based on the contract’s liquidated damages clause. (March 6, 2017 Op. at 4.)
That sum represents, in substance, the return of CDI’s initial deposit, which
was agreed to be refundable in the event that Ribis failed to acquire the casino
that was to engage CDI’s online gambling services.
Liquidated damages are “the sum a party to a contract agrees to pay if he
breaks some promise, and . . . is legally recoverably as agreed damages if the
breach occurs.” Wasserman’s v. Twp. of Middletown, 137 N.J. 238, 248 (N.J.
1994) (quoting Westmount Country Club v. Kameny, 82 N.J. Super. 200, 205
(App. Div. 1964)). Such clauses “specify damages payable in the event of
breach,” id. and damages specified by the clause need only be “reasonably
related to,” not actually based upon, actual damages, Metlife Capital Fin. Corp.
v. Wash. Ave. Assocs. L.P., 159 N.J. 484, 493 (N.J. 1999). The measure of
damages in this case, then, is set by the enforceable liquidated damages
provision. See Fashion Brokerage Intern., LLC v. Jhung Yuro Intern., LLC, 2011
WL 976478 at *4 (D.N.J. Mar. 14, 2011) (liability on the contract). It is not
affected by the manner in which Ribis spent the money he received from CDI in
the hope of acquiring the casino. Anderson, 477 U.S. at 248 (facts are only
“material” for purposes of a summary judgment motion if a dispute over them
fact “might affect the outcome of the suit under the governing law”).
I therefore reject this argument and hold the parties to the liquidated
damages portion of the agreement.
17
III.
CONCLUSION
For the foregoing reasons, CDI’s motion for summary judgment is
GRANTED. An appropriate Order granting the motion follows.
Dated: November 9, 2020
/s/ Kevin McNulty
___________________________________
Hon. Kevin McNulty
United States District Judge
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