IRWIN KATZ & ASSOC., INC. v. CONCEPTS IN HEALTH, INC. et al
Filing
53
OPINION filed. Signed by Judge Freda L. Wolfson on 11/18/2014. (eaj)
*NOT FOR PUBLICATION*
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
__________________________________________________
:
IRWIN KATZ & ASSOCS., INC.,
:
:
Plaintiff,
:
:
Civ. Action No.: 3:13-cv-1217(FLW)(LHG)
v.
:
:
OPINION
CONCEPTS IN HEALTH, INC. and
:
HOLLY ROSENTHAL,
:
:
Defendants.
:
___________________________________ :
WOLFSON, United States District Judge:
Presently before the Court is a Motion for Summary Judgment filed by Defendants
Concept in Health (“CIH”) and Holly Rosenthal (“Rosenthal”) (collectively “Defendants”). In
this case, Plaintiff, Irwin Katz & Associates, Inc. (“Plaintiff”), alleges that Defendants breached
a contract by failing to provide additional compensation upon the sale, inter alia, of a product,
the MidNite Brand (Count I of the Complaint). Plaintiff also alleges that Defendants breached
the covenant of good faith and fair dealing inherent in any contract (Count II). In the alternative,
Plaintiff seeks reformation of the contract (Count III). Defendant moves for summary judgment
on all three counts, and additionally moves to have Rosenthal dismissed from the case as an
improper party. For the reasons expressed below, Defendants’ Motion for Summary Judgment is
GRANTED as regards the breach of contract (Count I) and reformation of contract (Count III)
claims, and DENIED as to the second Count, and as to Rosenthal’s personal liability.
Factual Background
1
CIH was founded in March 2003 by Rosenthal as a New York limited liability
corporation with its principal place of business in New York State. Def. Statement of Undisputed
Material Facts (heretofore “Def. UMF”) at ¶ 1. In 2007, CIH’s business consisted solely of
selling “Midnite,” a natural sleep aid developed by Rosenthal, to several major chain stores. Def.
UMF at ¶¶ 3–4.
Irwin Katz (“Katz”) is the president and sole shareholder of Irwin Katz and Associates,
Inc.1, a New Jersey corporation which does marketing sales consulting. Def. UMF at ¶ 10–11. In
April 2007, Katz began to perform consulting services for CIH on an informal basis. Id. at ¶ 13.
In July 2007, Katz and Rosenthal decided to formalize their relationship. Id. at ¶ 14.
On July 10, 2007, Katz sent Rosenthal an email stating “Attached is a proposed
Agreement between us that is based on our conversations and intent . . . . Once we agree, let’s
have our attorneys review.” Def. Ex. D. The draft Agreement attached to the email provided that
“Consultant,” defined as “Irwin Katz & Associates, Inc.,” would provide “Client,” defined as
Concepts in Health, Inc., with marketing/sales input. Id. at § 1. Under Section 3 of the draft
Agreement, entitled “Compensation,” Katz would be compensated with a monthly commission
of 2% of CIH’s sales, plus expenses. Id. at § 3(a). In addition, under Section 3(b), “Consultant
will also receive compensation if the client sells Concepts in Health Inc. or its product(s) to a
third party,” in the amount of “$4000 for each month Consultant was under contract (Agreement)
plus a percent of the selling price.” Id. at § 3(b) The percentage Katz would receive increased
from .5% to 2% of the selling price at six month intervals, then after a total of twenty months
increased to 4%. Id. Katz would receive this compensation “from the Client, from the sale of the
client’s company or products within 30 days of Client’s receipt of sale amount from purchaser.”
1
As Katz was the only person in Irwin Katz & Assocs., Inc., who worked directly with CIH, the
Court will refer to them interchangeably.
2
Id. Either party would have the right to terminate the agreement, without cause, upon 30 days
written notice. Id. at § 2.
Between July 10 and July 12, 2007, Rosenthal modified the draft Agreement, including
making several changes to the Compensation section. Def. UMF at ¶ 16. Under this draft,
Section 3(b) read “Consultant will also receive compensation if the client sells Concepts in
Health Inc. to a third party”; the phrase “or its product(s)” was deleted. Def. Ex. E at § 3(b). In
addition, the percentage that Katz would receive if CIH was sold was limited to a percentage “of
the Principle’s portion (defined as the portion of the company owned by Holly Rosenthal and
Howard Bernstein) of the selling price.” Id.
On July 16, 2007, Katz emailed Rosenthal with comments on the agreement, saying that
he “reviewed your changes to the SERVICE AGREEMENT with my attorney2.” Def. Ex. F.
Among other comments, Katz stated that, “I would like to keep in the statement ‘or its products’
in 3(b). This prevents the sales of the product(s) but maintaining the Company.” Id.
On July 26, 2007, Katz emailed Rosenthal with another draft Agreement. In his email,
Katz stated that the agreement “reflects trust on both sides,” and that “[t]o do an Agreement that
truly protects both our interests would entail hours of work by an attorney that I do not believe is
worth while [sic].” Def. Ex. G. In this draft, Section 3(b) read “Consultant will also receive
compensation if the client sells Concepts In Health, Inc. or the MidNite Brand to a third party.”
Id.
According to Katz, Rosenthal prepared another draft Agreement on September 5, 2007.
Pl. Statement of Material Disputed Facts ¶ 5–6. This Agreement did not change the wording of
Section 3(b). Pl. Ex. 16.
2
Katz, in his deposition, stated that he “had some discussion” about the agreement with an
“attorney friend,” but did not formally consult with an attorney. Katz Dep. Tr. 98:21 to 99:19.
3
On September 16, 2007, Katz emailed Rosenthal with “attached changes to the Contract
you sent me a couple of weeks ago.” Pl. Ex. 18. In the email, Katz stated that the “major
changes” were making the contract “a three-year contract,” and removing the “reference to the
Principle’s portion.” Id. Section 3(b) again stated that “Consultant will also receive
compensation if the client sells Concepts In Health, Inc. or the MidNite Brand to a third party.”
On September 26, 2007, Katz questioned Rosenthal as to whether she “had a chance to review
the changes to our Agreement” and evidently re-sent the agreement on September 27. Pl. Ex. 19;
Pl. Ex. 18.
On October 1, 2007, Katz emailed Rosenthal to provide 30 days notice of termination of
“our Agreement.” Pl. Ex. 20. According to Katz, the “excessive time” he spent working with
CIH “has begun to adversely affect my other clients’ business and my personal life.” Id. Katz
then stated that if Rosenthal would like him to remain through the end of the year, that she
“advise and indicate you agree to the intentions of the Agreement we were about to sign.” Id.
Rosenthal responded that “this really takes me aback” and requested time “to digest this.” Id.
Later in October, Rosenthal and Katz met for lunch and discussed the draft Agreement.
See Pl. Ex. 21 at 1. In an email exchange following the lunch, Rosenthal commented that Katz
had “made many contributions to building MidNite,” asked Katz to “trust me,” and stated “I
hope you decide to continue to work with me to build MidNite so we can both make a bucket of
money.” See id. at 3, 4. Following a request by Katz, Rosenthal sent an email summarizing “the
deal” that the parties came to at the lunch. Id. at 1, 2. The “deal” gave Katz a 3% commission
rate, and an “‘earned’ percentage of sales price for business at time of sale. Earn into 4% at rate
of 0.5 points per 6 months.” Id. at 1. Katz agreed that this deal was his understanding of the
lunch conversation. Id.
4
On November 8, 2007, Katz emailed Rosenthal requesting that their Agreement be
formalized. Def. Ex. K. Katz received the next draft of the Agreement on Tuesday, November
13, 2007. Pl. Ex. 23. On November 16, 2007, Katz emailed Rosenthal with questions regarding
the definition of “Proceeds of Sale” and whether he would receive compensation if he left “after
two years. . . . [E]ven though I accumulated 2%?” Def. Ex. K. Katz concluded by saying that “I
believe there is trust between us, but I also believe contracts/agreements should be written with
trust and emotions aside.” Id. Rosenthal replied, stating “I have made the changes to the
percentage part of the contract attached,” although it is not clear that any changes were made.
Def. Ex. L at 1. No further changes were made to the draft before it was signed. Katz Dep. Tr.
137:7 to 10.
Katz signed the final Agreement on December 17, 2007, and Rosenthal signed it on
December 20, 2007. Def. Ex. A. Section 3, “Compensation,” provides that “Consultant will be
paid a monthly commission of 3% of Client’s sales,” and that “Consultant will be reimbursed for
fall out-of-pocket expenses incurred on behalf of Client.” Id. at § 3. In addition, Section 3(c)
states:
Client will also receive a percentage of the Proceeds of Sale of the
Company paid to Holly Rosenthal and/or any other non capital
contributing partners of the company per the below delineated
schedule. Proceeds of Sale are defined as all outright or timed
payments made in exchange for ownership of the company and the
right to market the MidNite and all other of the company’s brands
as a result of the sale of the company after all loans to the company
and payments to capital partners have been paid.
[Id.]
The schedule provides that Katz would earn a range of percentages from 0.5% to 4%, increasing
by .5% every six months. Id. For example, Section 3(c)(4) states:
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Consultant will be paid 2.0% off [sic] the Proceeds of Sale if sale
of the company is executed by August 1, 2009 and this agreement
is still in effect at that time. Consultant will be paid 2.0% of sales if
company is sold any time after August 1, 2009 and this agreement
was in effect on August 1, 2009.
[Id.]
Under the schedule, Katz “earned into” the highest rate, 4%, on August 1, 2011. Id. Section
3(b)(10) states that “Consultant will receive the above Proceeds of Sale no more than 30 days
from the date of Client’s receipt of sale amount from purchaser.” Id. As can be seen by Section
3(c)(4), quoted above, the Agreement is replete with typographical errors, including inconsistent
numbering of paragraphs, and mistyped words. The term “company” is not defined. The line on
which Rosenthal signed is labelled as “Concepts in Health, Inc.,” and the line on which Katz
signed is labelled as “Irwin Katz & Associates, Inc.” Id.
In early October, 2009, Katz announced his plans to retire. See Pl. Ex. 26. In an email to
Rosenthal on October 5, 2009, Katz offered to “stay until you find someone long-term and
hopefully, this can be done by the end of the year. If not, I will continue but would like the
current agreement revised on point 3.c.5 of the Compensation that is in error.” Pl. Ex. 27. On
October 25, 2009, Katz sent another email to Rosenthal, with a Letter Addendum attached that
“covers the modified Consulting Agreement we discussed.” Pl. Ex. 28. According to the letter,
Katz’s termination notice was rescinded and CIH agreed to compensate Katz an additional $1000
per month. Pl. Ex. 28, Def. Ex. M. In addition, the letter corrected an error in the original signed
Agreement, changing Section 3(c)(5) to read “Consultant will be paid 2.5% of sales if company
is sold any time after February 1, 2010, and this agreement was in effect on February 1, 2010”; a
payment of 2.0% was stated in the original. Id. Katz signed the letter as “Irwin Katz, President”
6
and Rosenthal signed on a line labelled “Concepts in Health, Inc.” Def. Ex. M. The signature of
Rosenthal is dated October 25, 2009. Id.
In or around February 2011, CIH introduced the NatuRelief brand, an analgesic providing
relief for minor pain. Def. UMF at ¶ 8. In or around April 2011, CIH introduced Nature Garden,
a form of MidNite for dollar outlets. Def. UMF at ¶ 8, Pl. Ex. 3 at 8.
The evidence indicates that Rosenthal was continually trying to sell CIH, and that she
created multiple documents describing the company for that purpose. One memorandum,
apparently created in 2008, states that the contract between CIH and Katz “includes a bonus paid
by H. Rosenthal at the time of any sale of the business and his services would terminate at that
time.” Pl. Ex. 12 at 1. An “acquisition deck” created by Rosenthal in September 2009 uses nearly
identical language. Pl Ex. 13 at IK 00806349.
Rosenthal entered into negotiations with Prestige Brand Holdings, Inc. (“Prestige”) as
early as February 2012, to sell ownership of CIH. Id. at ¶ 31; Pl. Ex. 33. A draft stock purchase
agreement, sent out by CIH’s investment bankers, Sawaya Segalas and Co. LLC, in June 2012,
indicated that Rosenthal would sell ownership of CIH and all of its brands. Id. However, Prestige
did not complete the transaction. Id. According to Rosenthal, her investment bankers advised her
to attempt to sell MidNite Brand as an asset sale, rather than continue to try to sell CIH.
Rosenthal Dep. at 214:4 to 10; Katz Dep. At 248:22 to 249:11. On June 24, 2012, one member of
the Sawaya team sent an emailing asking why “we are not selling assets here potentially”;
however, another team member responded that Rosenthal’s intent was “focused on the CIH
entity.” Def. Ex. X.
On March 14, 2012, while Rosenthal was negotiating with Prestige, Katz emailed
Rosenthal to ask her to review their Agreement. Pl. Ex. 34. Specifically, Katz requested that
7
Rosenthal “modify [the Agreement] to more simply spell out the percent I am entitled to if you
sell all or part of the company,” and to ensure any modification included the Addendum. Id.
Rosenthal asked Katz to “resend the Addendum you wrote.” Id. Katz sent Rosenthal an unsigned
version of the Letter Addendum. Id.
In July 2012, Katz asked Rosenthal, apparently orally, if there would be an increase in the
compensation percentage because the 4% cutoff date, August 1, 2011, had occurred almost a
year earlier. Katz Dep. Tr. at 274:16 to 275:6. Katz asserts that Rosenthal denied that an
agreement existed, but stated she would give him a bonus of 2.5% if the company was sold. Id. at
275:10 to 276:10. On July 11, Katz emailed Rosenthal asking “exactly what your intentions are
relative to the After Sale Proceeds,” and stating that he had the signed Agreement and Letter
Addendum. Def. Ex. T at 4. Rosenthal responded “I fully intend to provide you with what I
believe (and any objective person would believe) is an unbelievable generous bonus from the
proceeds if there is a sale.” Id. She also stated “I would like to see what you have that you say I
have signed—please send it.” Id. Katz replied, stating, “the other day you thought the percent
was 2 or 2.5% when we spoke and now you are saying it’s a generous bonus.” Id. at 3. Rosenthal
answered, “What I said was that 2–2.5% was what was in the last ‘agreement’ you sent me. . . .
A generous bonus could potentially be in that range or not.” Id. Katz then emailed Rosenthal the
signed Agreement and Letter Addendum; Rosenthal responded “Yes, these are clearly my
signature. I need to speak with my attorney.” Id. at 2. Rosenthal now states that, upon seeing the
Agreement, she realized that Katz would be entitled to 4% upon a sale of CIH, but would not be
entitled to any compensation in the event of an asset sale. Rosenthal Decl. at ¶¶ 58–59. Any
amount he earned would therefore be a “bonus” and within her discretion. Id.
8
On July 19, Rosenthal emailed her financial consultants, indicating that she “took it upon
myself yesterday to calculate my own ‘carve out’ of NatuRelief expenses.” Pl. Ex. 37. Katz was
involved in this effort. Id. On September 30, 2012, Rosenthal’s attorney sent her a draft Asset
Purchase Agreement. Pl. Ex. 39. Rosenthal responded that she was “not sure if the agreement
should include NatuRelief—the parties have received information on MidNite only, as much as I
would ideally wish to divest both brands.” Id. In a “business valuation questionnaire,” dated
August 29, 2012, Rosenthal described Katz’ compensation as including “2.5% of net revenues
from the sale of the company.” Pl. Ex. 11 at 11.
On December 6, 2012, CIH entered into an Asset Purchase Agreement with Meda
Consumer Healthcare, Inc. and Meda AB (collectively “Meda”). Def UMF at ¶ 33. CIH sold the
MidNite brand line, the Nature Garden brand line, and a CVS house brand to Meda; the
NatuRelief brand was specifically omitted from the transaction. Def. Ex. Q. at Art. 1 (definitions
of “Core Products,” “Excluded Business,” and “Products”), Art. 2.1–2.2. Rosenthal retained
ownership of CIH, and the consideration was paid to CIH. Def UMF at ¶¶ 34, 36.
On Thursday, December 13, 2012, Rosenthal informed Katz that MidNite had been sold.
See Def. Ex. 41. On December 18, 2012, Katz emailed Rosenthal with three questions. Id. First,
he asked about the current “strategy for Concepts in Health/NatuRelief moving forward.” Id.
Second, he asked about the “status of our Agreement compliance relative to my compensation on
the sale.” Id. Finally, Katz asked if he should “be planning to spend any time on Concepts in
Health after December 31st.” Id. Rosenthal responded that she would call him that day. Id.
There is no record of the conversation which occurred on December 18. However, on
December 20, 2012, Katz sent a letter to Rosenthal, which mentions such a conversation. Def.
Ex. U. Additionally, in her deposition, Rosenthal testified that in a conversation on December
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18, 2012, she told Katz that “he was not eligible for payment under the contract, but that I
expected that I was going to be giving him a bonus.” Rosenthal Dep. 233:22 to 22.
In his December 20 letter, Katz states that, based on their earlier conversations, “it seems
that there are two issues between us regarding the payment due to me as a result of the sale of
MidNite and Nature Garden” Id. First, according to the letter, “is your interpretation that I am
entitled to 2.5% rather than 4%.” Id. Second, is that “you [Rosenthal] indicated today that you
intend to deduct legal fees incurred by you in calculating the amount due to me as a result of the
sale.” Id. Katz also reminded Rosenthal that the Agreement called for payment within 30 days
from the date of “Client’s receipt of sales amount from purchaser.” Id.
On December 26, 2012, Rosenthal sent Katz a letter terminating his services to CIH
under the Agreement. Def. Ex. V.
Procedural History
On January 28, 2013, Irwin Katz and Associates, Inc. (“Plaintiff”), filed a four-count
Complaint against Concepts in Health, Inc., and Holly Rosenthal (collectively “Defendants”) in
New Jersey Superior Court, alleging breach of contract (Count I), breach of the implied covenant
of good faith and fair dealing (Count II), reformation of contract (Count III), and promissory
estoppel (Count IV). Defendants removed the case to this Court on March 1, 2013, on the basis
of diversity jurisdiction under 28 U.S.C. § 1332, asserting that the parties are citizens of different
states, and the amount in controversy exceeds $75,000.
On March 29, 2013, Defendants filed a Motion to Dismiss all counts, and to dismiss the
suit against Rosenthal in her personal capacity. On September 12, 2013, the Court dismissed the
promissory estoppel claim. The Court also dismissed the claim for reformation of contract, but
10
permitted Plaintiff to refile the claim within 20 days. The remainder of Defendants’ Motion to
Dismiss was denied.
On September 19, 2013, Plaintiff submitted an Amended Complaint, alleging breach of
contract (Count I), breach of the implied covenant of good faith and fair dealing (Count II), and,
in the alternative, reformation of contract (Count III).
Following discovery, Defendants filed a Motion for Summary Judgment, which Plaintiff
opposed. Defendants assert: on Count I, the only reasonable interpretation of the contract shows
that there is no breach of contract; on Count II, that there is no evidence of ill motive to support a
claim for a breach of the implied covenant of good faith and fair dealing; and on Count III, there
was no unconscionable conduct entitling Plaintiff to reformation. Additionally, Defendants assert
that Rosenthal is not a proper party, and claims against her should be dismissed.
Standard of Review
Summary judgment is appropriate “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.” Fed. R. Civ. P.
56(a). The party requesting summary judgment must show that a material fact is not genuinely
disputed by “citing to particular materials in the record” or by “showing that the materials cited
do not establish the absence or presence of a genuine dispute, or that an adverse party cannot
produce admissible evidence to support the fact.” Id. at 56(c). For an issue to be genuine, there
must be “a sufficient evidentiary basis on which a reasonable jury could find for the non-moving
party.” Kaucher v. County of Bucks, 455 F.3d 418, 423 (3d Cir. 2006); Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 248 (1986). For a fact to be material, it must have the ability to
“affect the outcome of the suit under governing law.” Kaucher, 455 F.3d at 423.
11
The party seeking summary judgment “always bears the initial responsibility of
informing the district court of the basis for its motion” and identifying the evidence which
“demonstrate[s] the absence of a genuine issue of material fact.” Celotex Corp. v. Catrett, 477
U.S. 317, 323 (1986). Once that burden is met, the non-moving party has the “burden of
producing in turn evidence that would support a jury verdict.” Anderson, 477 U.S. at 256. To
determine whether a genuine issue exists, the court must view the facts, and all reasonable
inferences to be drawn from those facts, in the light most favorable to the non-moving party.
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); Curley v. Klem,
298 F.3d 271, 276–77 (3d Cir. 2002).
The Court notes that although Defendants are a New York citizen and a New York
corporation, and it is not clear where the contract was signed, the parties do not dispute that New
Jersey law governs in this case. This issue was raised at oral argument on Defendants’ Motion to
Dismiss, and the Court pointed out that the law differs in the two states, particularly on the
question of the breach of the covenant of good faith and fair dealing. Motion to Dismiss Tr.
21:20 to 23:3. Although Defendants’ counsel reserved the right to raise the issue, id. at 22:23,
neither party has cited to New York law, nor raised a conflict of law question in any way.
Because the parties concede that New Jersey law applies, that is the law that will be used in this
decision.
Breach of Contract
In an action involving contract interpretation, “summary judgment is appropriate only
where the contractual language is unambiguous—i.e., ‘subject to only one reasonable
interpretation.’” Mylan, Inc. v. SmithKline Beecham Corp., 723 F.3d 413, 419 (3d Cir. 2013)
12
(quoting Arnold M. Diamond, Inc. v. Gulf Coast Trailing Co., 180 F.3d 518, 521 (3d Cir. 1999)).
Where the nonmoving party presents a reasonable alternative reading of a contract, “‘then a
question of fact as to the meaning of the contract exists which can only be resolved at trial.’” Id.
(quoting Newport Assocs. Dev. Co. v. Travelers Indem. Co., 162 F.3d 789, 792 (3d Cir. 1998).
Under New Jersey law, “a contract is ambiguous ‘where the contract is susceptible of
more than one meaning.’” Sumitomo Mach. Corp. of Am., Inc. v. Allied Signal Inc., 81 F.3d
328, 332 (3d. Cir. 1996) (quoting Briggs v. United Shoe Machinery Corp., 92 N.J. Eq. 277, 287
(Err. & App.), cert. denied, 254 U.S. 653 (1920)). In interpreting the contract
“Evidence of the circumstances is always admissible in aid of the
interpretation of an integrated agreement. This is so even when the
contract on its face is free from ambiguity. The polestar of
construction is the intention of the parties to the contract as
revealed by the language used, taken as an entirety; and, in the
quest for the intention, the situation of the parties, the attendant
circumstances, and the objects they were thereby striving to attain
are necessarily to be regarded.”
[Id. (quoting Atlantic Northern Airlines, Inc. v. Schwimmer, 12
N.J. 293, 301 (1953)]
To help with interpretation, a court should “consider, for example, ‘the particular
contractual provision, an overview of all the terms, the circumstances leading up to the formation
of the contract, custom, usage, and the interpretation placed on the disputed provision by the
parties’ conduct.’” Mylan, 723 F.3d at 419 (quoting Kearny PBA Local No. 21 v. Town of
Kearny, 81 N.J. 208, (1979)). A court is required to examine such evidence to determine if it
demonstrates “the existence of a latent ambiguity”; the court may not “reject such evidence on
the ground that it [finds] the agreement on its face free from ambiguity.” Id. at 420.
Defendants assert that the extrinsic evidence proves that the Agreement is unambiguous.
Def. Brief at 11. According to Defendants, the Agreement provides that Plaintiff would receive a
13
payment only if CIH itself was sold, in conjunction with the right to market MidNite and all
other brands. Id. Because CIH itself was not sold, and because CIH retained the right to market
NatuRelief, Defendants assert that Plaintiff has no right to payment and there is no breach of
contract.
Plaintiff contends that the Agreement is replete with inconsistencies and ambiguities on
its face. Pl Brief at 11. However, in light of the extrinsic evidence, Plaintiff argues that it is clear
that the parties intended Plaintiff to receive a percentage of any sale of “the business,” regardless
of whether the form of the sale was an asset or stock purchase, and that “the business” or “the
company” was understood by both parties to mean MidNite. Id. at 14–16.
In light of all relevant evidence, the Court cannot find that at the time the contract was
signed, the parties understood the clause in question to provide for payment in the event of an
asset sale that did not include all of CIH’s brands. Although the contract as a whole contains
numerous errors and inconsistencies, the clause at issue is unambiguous on its face. The clause
provides that Plaintiff will receive a percentage of the “Proceeds of Sale of the Company paid to
Holly Rosenthal and/or any other non capital contributing partners of the company.” Def. Ex. A.
§ 3(c). “Proceeds of Sale” is defined as “as all outright or timed payments made in exchange for
ownership of the company and the right to market the MidNite and all other of the company’s
brands.” Id. It is clear that “the Company” in the first part of “Proceeds of Sale” definition refers
to CIH; indeed, Katz acknowledged as much in his deposition. Def. Ex. BB, Katz Tr. 147:24.
Despite Plaintiff’s assertions to the contrary, it is illogical to think that the same word, used in
the same section, has a different meaning. Furthermore, if “the company” is synonymous with
“MidNite,” as Plaintiff claims, the language requiring sale of the company and “the right to
market MidNite” would be superfluous, violating a basic tenet of contract interpretation. See
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Cumberland Cnty. Improvement Auth. v. GSP Recycling Co., 358 N.J. Super. 484, 497
(App.Div.), certif. denied, 177 N.J. 222 (2003) (A logical interpretation of the instruction, like a
logical interpretation of a statute or contract, is one that does not render language superfluous, or
meaningless); see also Penske Logistics, Inc. v. KLLM, Inc., 285 F. Supp. 2d 468, 474
(D.N.J.2003) (“Under the principles of contract interpretation, a contract should not be given an
interpretation which renders a term or terms superfluous or meaningless.”) (citing 11 Williston
on Contracts, § 32:11(4th ed.1999)).
Plaintiff further asserts that the contract language is “expansive” and covers any
transaction, regardless of the form. Pl. Brief at 4. According to plaintiff, the “and” language
“accomplish[es] the same goal as the prior draft’s use of ‘Concepts In Health Inc. or the MidNite
Brand.” Id. at 5. I disagree. The prior draft used “or” rather than “and,” which made it clear that
Plaintiff would be entitled to payment in the event of a sale of either the company or the brand.
In contrast, the language used in the final Agreement states that Plaintiff will receive a portion of
any payments made for the sale of “ownership of the company and the right to market the
MidNite and all other of the company’s brands.” Def. Ex. A. at § 3(c) (emphasis added). Despite
other inconsistencies and errors in the Agreement, this pertinent language is not, on its face,
ambiguous.
Plaintiff argues that extrinsic evidence both contemporaneous with the drafting of the
Agreement and after the Agreement was signed show that “company” and “MidNite” were
synonymous to the parties. However, the extrinsic evidence does not create a “latent ambiguity
in the contractual language.” See Mylan, 723 F.3d at 420. The earlier drafts of the Agreement,
and the emails exchanged between Katz and Rosenthal show that Katz was aware of the
distinction between the “company,” which he knew to be CIH, and its products. In fact, in one
15
email, Katz stated that he wanted to “prevent[] the sales of the product(s) but maintaining the
Company”—precisely what occurred here. Def. Ex. F. Although the only product CIH produced
at the time was MidNite, Katz expressed concern that the product would be sold separately from
CIH. Katz also accounted for the possibility that additional products would be created. This
belies Plaintiff’s assertion that Katz believed MidNite and CIH to be synonymous. On the other
hand, the evidence shows that Rosenthal did not want Katz to receive compensation if only some
of CIH’s assets were sold, as she removed the phrase “or its product(s)” from his original draft.
Def. Ex. E. at § 3(b). Contrary to Plaintiff’s argument, the fact that the phrase “or the MidNite
brand” later remained in several drafts before being changed does not prove that Rosenthal had
accepted that term.
Furthermore, while the parties used the ambiguous phrase “the business” in several
different documents, there is no evidence to suggest that either party ever believed “the business”
referred only to the MidNite brand. Rosenthal, in one email, stated that Katz would receive
compensation upon sale of “the business,” but did not clarify the meaning of the term. See Pl.
Ex. 21. In contrast, in two later documents, apparently intended for potential buyers of CIH,
Rosenthal stated that Katz would receive his bonus upon sale of “the business”—and then stated
that Katz’ contract with CIH would terminate at that time. Pl. Exs. 12, 13. Yet the Agreement in
no way suggests that it relates only to the MidNite brand rather than to the company as a whole.
Indeed, following the sale of MidNite to Meda, Katz expressed uncertainty as to whether he
would continue with CIH and NatuRelief, but did not seem to believe that the Agreement had
automatically terminated. Pl. Ex. 41. The documents describing Katz’ “bonus” therefore do not
show that “the business” meant only MidNite.
16
In sum, the evidence presented shows that there is only one reasonable meaning of the
contract: that Katz was entitled to compensation upon the sale of CIH and all of its brands. As
CIH was not sold, nor were all its brands, Defendants’ failure to compensate Katz was not a
breach of contract. For that reason, on the issue of breach of contract, Defendant’s motion for
summary judgment is granted.
Good Faith and Fair Dealing
Under New Jersey law (which the parties do not dispute applies), every contract includes
an implied covenant of good faith and fair dealing. Black Horse Lane Assoc., L.P. v. Dow Chem.
Corp., 228 F.3d 275, 288 (3d Cir. 2000). This covenant is independent of the duty to perform the
express terms of the contract, and may be breached without a violation of the contract terms.
Sons of Thunder, Inc. v. Borden, 148 N.J. 396, 423 (1997). There are “myriad forms of conduct
that may constitute a violation of the covenant of good faith and fair dealing.” Brunswick Hills
Racquet Club, Inc. v. Route 18 Shopping Ctr. Associates, 182 N.J. 210, 225 (2005). For that
reason, “[e]ach case is fact-sensitive.” Id. As a general rule, “[a] plaintiff may be entitled to relief
under the covenant if its reasonable expectations are destroyed when a defendant acts with ill
motives and without any legitimate purpose.” Id. at 226 (citing Wilson v. Amerada Hess Corp.,
168 N.J. 236, 251 (2001)). A plaintiff may also get relief if “it relies to its detriment on a
defendant’s intentional misleading assertions.” Id. (citing Bak-a-Lum Corp. v. Alcoa Bldg.
Prods., Inc., 69 N.J. 123, 129–30 (1976)). However, “proof of ‘bad motive or intention’ is vital
to an action for breach of the covenant.” Id. at 225 (citing Wilson, 168 N.J. at 251).
In certain contracts, one party is given discretion to “make decisions as to . . . conditional
aspects of the contract.” Wilson, 168 N.J. at 246. In the context of discretionary price-setting, the
17
New Jersey Supreme Court created a test for “a party exercising its right to use discretion in
setting price under a contract breaches the duty of good faith and fair dealing”: when the party
“exercises its discretionary authority arbitrarily, unreasonably, or capriciously, with the objective
of preventing the other party from receiving its reasonably expected fruits under the contract.”
Id. at 251.
Even if a party’s actions “do not literally violate any express term of the contract” but the
party “withheld vital information from plaintiff with the purpose of exploiting the terms of the
contract without regard to the harm caused to plaintiff,” the party will be in violation of the
covenant of good faith and fair dealing. Brunswick Racquet Club, 182 N.J. at 227. For example,
in one case, a contract provided that the plaintiff would be the exclusive distributor for the
defendant; defendant decided to terminate the exclusivity portion but withheld that information
from the plaintiff for a period of time. Bak-a-lum Corp. v. Alcoa Bldg. Prods. Inc., 69 N.J. 123,
126–27 (1976). The plaintiff, meanwhile, undertook an expansion of its warehouse facilities,
which the defendant “knew of and encouraged.” Id. at 127. The defendant’s “selfish withholding
from plaintiff of its intention to seriously impair” the relationship “constituted a breach of the
implied covenant of dealing in good faith.” Id. at 130.
In a similar case, a plaintiff notified the defendant that it intended to exercise an option to
purchase a lease, but the execution of the option “remained unperfected.” Brunswick Racquet
Club, 182 N.J. at 229. However, “[d]uring a nineteen-month period, defendant, through its
agents, engaged in a pattern of evasion, sidestepping every request by plaintiff to discuss the
option and ignoring plaintiff’s repeated written and verbal entreaties to move forward on closing
the ninety-nine-year lease.” Id. Rather, “because the successful exercise of the option was not in
defendant’s economic interest[,] [d]efendant preferred to watch the option die and did not break
18
its silence until after the deadline had passed.” Id. The New Jersey Supreme Court concluded
that the defendant breached the covenant of good faith and fair dealing through “a demonstrable
course of conduct, a series of evasions and delays, that lulled plaintiff into believing it had
exercised the lease option properly.” Id. at 231.
Defendants assert that there is insufficient evidence of bad intention to sustain a claim of
breach of the covenant of good faith and fair dealing. Def. Br. at 20. According to defendants,
the duty of good faith and fair dealing arises only in the performance of the contract, and any
claims regarding the negotiation of the contract are not actionable. Id. Furthermore, defendants
argue that Plaintiff’s good faith and fair dealing claim is not distinct from the breach of contract
claim. Id. at 21. To the extent that Plaintiff claims that the structuring of the Meda deal violated
the covenant of good faith and fair dealing, Defendants allege that the decision “was driven
purely by practical economic factors rather than Katz’ rights under the Consulting Agreement.”
Id. at 22.
Plaintiff argues that Rosenthal’s actions “display[ed] bad faith at every turn.” Pl. Br. at
19. According to Plaintiff, Rosenthal first tried to deny that an agreement existed, and then
“restructur[ed] the deal in a way which she believed would preclude plaintiff from
compensation.” Id. At the same time, Plaintiff asserts, Rosenthal reinforced Katz’ expectations
by telling third parties that he would “receive a percentage of the proceeds of the sale of the
business.” Id.; see Pl. Exs. 11, 12, 13. Rosenthal also did not dispute Katz’s emailed assertion
that he was entitled to a percentage of the sale of “all or part” of the company. Pl. Br. at 20; see
Pl. Ex. 34. Moreover, Plaintiff contends that Rosenthal’s statements in her deposition show
additional bad faith. Pl. Br. at 21. Rosenthal has now stated that she offered to give Katz a bonus
because she intended to pursue an asset deal, which would preclude Katz from recovering the
19
additional compensation. Id.; Rosenthal Decl. ¶ 59. Yet, Plaintiff states, Rosenthal never told
Katz about her intentions but instead led Katz to believe there would be further discussion of his
additional compensation. Pl. Br. at 21; see Def. Ex. T. Plaintiff also maintains that Rosenthal’s
timing of her decision to prepare a “carve out” of NatuRelief—shortly after the email exchange
with Katz—indicates her intention to deprive Plaintiff of compensation. Pl. Br. at 22.3
The Court finds that there remain genuine issues of material facts on the claim of breach
of the covenant of good faith and fair dealing. Plaintiff had, under the Agreement, a reasonable
expectation that he would eventually profit from the sale of CIH. However, according to
Rosenthal, compensation could only occur “in the circumstance of a sale of the entire company
and all of its brands.” Rosenthal Decl. at ¶ 28. Looking at the evidence in the light most
favorable to Plaintiff, the Meda deal, which sold the MidNite brand and all other brands except
the NatuRelief brand, precludes Katz from ever receiving the additional compensation that he
reasonably expected under the contract. In that case, Plaintiff was precluded from “receiving
[his] reasonably expected fruits under the contract.” Wilson, 168 N.J. at 251.
Although Defendants assert that there is no evidence of bad intention on Rosenthal’s part,
there remains a genuine issue of fact on this question. Albeit Rosenthal repeatedly insists that in
structuring the deal as an asset sale, she acted on her investment bankers’ advice, Defendants
have provided no evidence to support this assertion. Notably absent is an affidavit, document, or
deposition from Sewaya Segalas employees on this point. Moreover, Rosenthal’s declaration on
this point is hearsay. Rosenthal Decl. ¶43. Furthermore, while there is some evidence that
Sewaya Segalas employees may have thought an asset sale would benefit Rosenthal, there is no
3
Plaintiff’s counsel also contends, in hyperbolic fashion, that if these facts do not show bad
faith, “no set of facts will ever replicate the bad faith found by” the New Jersey Supreme Court
in prior cases. This Court, however, does not agree with this extreme assertion.
20
evidence that they shared this belief with her. See Def. Ex. X. Indeed, at the time those doubts
were expressed, on June 24, 2012, Rosenthal had always been “focused on the CIH entity.” Id. It
is a logical inference to draw that Rosenthal’s later decision to carve out the NatuRelief brand
and pursue an asset sale was made in response to Katz’ continual assertions that he was entitled
to a percentage of any sale proceeds—and to block such an entitlement. As the initial burden in a
summary judgment motion is on the moving party, it is Defendants’ responsibility to provide
evidence of an economic motive; they have not.
Furthermore, Plaintiff may recover if Rosenthal “withheld vital information from plaintiff
with the purpose of exploiting the terms of the contract.” Brunswick Racquet Club, 182 N.J. at
227. Rosenthal states that as early as July 2012, she was considering an asset deal, and knew that
Katz would not be entitled to compensation for such a deal. Rosenthal Decl. at ¶ 59. It is for that
reason she began stating that she would provide him with a “generous bonus” if such a
transaction occurred. Id. However, Rosenthal never informed Katz that she was considering an
asset sale, nor did she correct his misapprehension that he would be entitled to additional
compensation in the event of such a sale. While this withholding of information may not rise to
the level of egregiousness as in Bak-a-Lum, nonetheless, Rosenthal’s actions provide “a
sufficient evidentiary basis on which a reasonable jury could find for the non-moving party.”
Kaucher, 455 F.3d at 423 (3d Cir. 2006); Anderson, 477 U.S. at 248. The true motivation for
Defendants’ action is a question of fact for the trier of fact. Therefore, on the claim for a breach
of the covenant of good faith and fair dealing, summary judgment is denied.
Reformation of Contract
21
“The general rule with respect to the reformation of contracts . . . [is that] relief will be
granted only where there is mutual mistake or where a mistake on the part of one party is
accompanied by fraud or other unconscionable conduct of the other party.” Heake v. Atlantic
Cas. Ins. Co., 15 N.J. 475, 481 (1954). A contract may be found unconscionable where “grossly
disproportionate bargaining power” between the parties results in “grossly unfair contractual
provisions.” See Shell Oil Co. v. Marinello, 63 N.J. 402, 408, 307 A2d 598, 601 (1973). The
parties agree that any mistake was a unilateral one, see Def. Br. At 23, Pl. Br. at 23, and Plaintiff
does not allege that Defendants committed fraud in the formation of the contract. The Court
therefore need only look at whether the contract term is unconscionable.
A determination of unconscionability requires a court to examine two factors:
“procedural” and “substantive” unconscionability. Rodriguez v. Raymours Furniture Co., 436
N.J. Super. 305, 317 (N.J. App. Div. 2014). Procedural unconscionability “arises out of defects
in the process by which the contract was formed, and ‘can include a variety of inadequacies, such
as age, literacy, lack of sophistication, hidden or unduly complex contract terms, bargaining
tactics, and the particular setting existing during the contract formation process.’” Id. (quoting
Muhammed v. Cnty. Bank of Rehoboth Beach, 189 N.J. 1, 15 (2006)). Substantive
unconscionability “‘generally involves harsh or unfair one-sided terms,’” and “‘suggests the
exchange of obligations so one-sided as to shock the court's conscience.’” Id. (citing
Muhammed, 189 N.J. at 15; Sitogum Holdings, Inc. v. Ropes, 352 N.J. Super. 555, 565 (N.J. Ch.
Div. 2002)). The analysis of these two factors uses a “sliding scale,” such that “overall
unconscionability may be found if there is a gross level in one category but only a lesser level in
the other.” Id.
22
Defendants argue that there was no procedural unconscionability, as Katz was “a
sophisticated businessman” with “extensive experience with written agreements” and thus was
“not in a disproportionate bargaining position.” Def. Br. at 24. Defendants note that Katz had a
month between receiving the final draft Agreement and signing it, during which time he could
have consulted an attorney or continued to negotiate; thus, according to Defendants, any
misunderstanding of the contract language is a result of Katz’ neglect. Id.
Plaintiff, though acknowledging that “with respect to age, literacy, sophistication or basic
business acumen, Katz and Rosenthal were on a relatively level playing field,” asserts that there
was procedural unconscionability as a result of “the setting in which the final writing was
prepared and the bargaining tactics Rosenthal now claims to have used.” Pl. Br. at 24–25.
Plaintiff emphasizes that Rosenthal told Katz to “trust” her and that she is “an innately honest
and thankful person.” Id. at 25. Plaintiff argues that Rosenthal then drafted a definition of
Proceeds of Sale that is “unduly complex and inherently confusing,” while Katz “trusted that the
writing retained the same meaning” as earlier drafts. Id. at 26–27. Plaintiff then contends that the
language is substantively unconscionable, because “additional payment upon sale of the business
was a critical term” which enabled Rosenthal “to pay Katz less in monthly compensation than his
predecessor.” Id. at 27.
The Court cannot find that the contract negotiation was procedurally unconscionable.
That Rosenthal asked Katz to trust her, and that she inserted the disputed language into the
agreement, did not result in any kind of disproportionate bargaining power between the parties.
See Shell Oil Co., 63 N.J. at 408. As noted by Defendants, Katz had the ability and time to read
the Agreement before signing, and to seek advice on the contractual language. Furthermore,
while Rosenthal asked that Katz trust her, Katz had earlier stated that a draft Agreement “reflects
23
trust on both sides,” Def. Ex. G. Moreover, Katz responded to Rosenthal’s requests for trust by
saying that “contracts/agreements should be written with trust and emotions aside.” Def. Ex. K.
Lastly, the final Agreement was written under Katz’ threat to terminate his relationship with
CIH, Pl. Ex. 20, a circumstance which gave Katz additional bargaining power. The setting and
bargaining tactics used by Rosenthal in no way created disproportionate bargaining power, nor
did they undermine Katz’ ability to bargain.
Nor can the Court find that the contract language is substantively unconscionable. The
interpretation of the contract which Plaintiff claims is unconscionable is that Katz would only
receive his additional compensation in the event that CIH sold the entire company, including the
right to market MidNite and all of its other brands, in a single transaction; under this
interpretation, following the sale of MidNite to Meda, Katz can never receive his additional
compensation. Even this interpretation of the contract, however, is not an “exchange of
obligations so one-sided as to shock the court's conscience.” Rodriguez, 436 N.J. Super. at 317.
Katz may very well have accepted a lower monthly compensation because of his expectations
that he would eventually receive a large payout; yet even if that payout will not, now, ever occur,
his compensation was not so low as to shock the conscience. Indeed, the evidence shows that he
negotiated for, and received, increased compensation on multiple occasions between the signing
of the Agreement and the sale of MidNite. See Def. Ex. M, Rosenthal Decl. at 33.
In the absence of any evidence of fraud or unconscionability, the Court cannot grant
reformation of the contract. Defendants’ motion for summary judgment on Count III is therefore
granted.
Personal Liability of Holly Rosenthal
24
As a general rule, “in the absence of a basis for piercing the corporate veil, an officer is
not liable for the contractual obligations of a corporation.” Home Buyers Warranty v. Roblyn
Dev. Corp., No. MER-L-464-05, 2006 WL 2190742, at *4 (N.J. App. Div. Aug. 4, 2006); see
also City of Millville v. Rock, 683 F. Supp. 2d 319, 327 (D.N.J. 2010). “[T]he mere fact that an
individual executed a contract for the purpose of binding a corporation does not also render that
individual liable.” Home Buyers Warranty, 2006 WL 2190742, at *4.The person who signs the
contract on behalf of a corporation is acting as an agent for that corporation, and “‘will not be
personally bound unless there is clear and explicit evidence of the agent's intention to substitute
or superadd his personal liability for, or to, that of his principal.’” Id. (quoting Salzman Sign Co.
v. Beck, 176 N.E.2d 74, 76 (N.Y. 1961) Thus, where “the corporation was unambiguously
referred to in the contract as the party to be bound, and the contract is utterly silent as to the
imposition of personal liability upon the person executing the contract on behalf of the
corporation,” the individual signing the contract will not be personally liable. Id.
Plaintiff argues that the language in the Agreement, which states that the Consultant will
“receive a percentage of the Proceeds of Sale of the company paid to Holly Rosenthal,” creates a
personal obligation on behalf of Rosenthal to pay the additional compensation. Pl. Br. at 29.
According to Plaintiff, Rosenthal, rather than CIH, is required to pay Katz at the time of a sale,
and she is personally liable for the failure to make such a payment. Id. at 29–30. Plaintiff also
points to several documents where Rosenthal indicated that the “bonus” Katz would receive
upon the sale of the company would be paid by Rosenthal herself. On the other hand, Defendants
argue that Rosenthal signed the contract only on behalf of CIH, and cannot be personally liable
absent “clear and explicit evidence” that she intended to bind herself personally. Def. Br. at 26.
25
This case is not analogous to Home Buyers Warranty, where the contract was “utterly
silent” as to the liability of the individual signing the contract on behalf of the corporation. 2006
WL 2190742, at *4. The language in the contract, when read in the light most favorable to
Plaintiff, could impose a personal obligation on Rosenthal. Defendants have pointed to no
evidence, beyond the single signature on the contract and Rosenthal’s own testimony, to
demonstrate that Rosenthal did not intend to be bound by the obligations in the contract.
Moreover, the sole remaining issue in this case is a breach of the covenant of good faith
and fair dealing, not breach of contract. Rosenthal, though acting on behalf of CIH, was the
person who took the actions which might constitute a breach of the covenant of good faith and
fair dealing. By choosing to structure the deal as an asset sale, and by potentially withholding
that information from Katz, Rosenthal maybe have prevented Katz from receiving his reasonably
expected fruits of the contract. The covenant of good faith and fair dealing is a claim
independent of the contractual terms, see Sons of Thunder, Inc., 148 N.J. at 423. Thus, even if
the contract binds only CIH, Rosenthal, as the party potentially responsible for the breach of the
covenant of good faith and fair dealing, may be personally liable.
For these reasons, the Court finds that Defendants have not met their burden of showing
no genuine dispute of material facts, and therefore denies summary judgment regarding Holly
Rosenthal’s personal liability.
Conclusion
For the reasons expressed above, the Court GRANTS Defendants’ Motion for Summary
Judgment with regard to the claims for breach of contract and reformation. Thus, Counts I and III
of the Amended Complaint are dismissed with prejudice. However, the court DENIES
26
Defendants’ Motion for Summary Judgment with regard to Count II, breach of the implied
covenant of good faith and fair dealing, and denies Defendants’ motion to dismiss Holly
Rosenthal from the case.
27
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