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Arditi v. Dubitzky

decided: December 29, 1965.

ISAAC ARDITI, PLAINTIFF-APPELLANT,
v.
AARON DUBITZKY, DEFENDANT-APPELLEE



Waterman and Moore, Circuit Judges, and Tyler, District Judge.

Author: Moore

MOORE, Circuit Judge:

The plaintiff Isaac Arditi appeals from an order granting summary judgment in favor of the defendant Aaron Dubitzky and dismissing the complaint for failure to state a claim upon which relief may be granted.

The complaint alleges a joint venture agreement between Arditi and Dubitzky and seeks an accounting and damages for breach of the agreement. Jurisdiction is based upon diversity of citizenship. From the complaint it appears that plaintiff, a resident of New York, was a skilled commodity dealer and that defendant, a resident of Connecticut, was a builder and land developer; that defendant in May 1958 had made an offer to the Redevelopment Agency of the city of New Brunswick, New Jersey, to acquire and develop a site in that city with a high-rise apartment project; that the defendant interested plaintiff in joining with defendant in the development project -- plaintiff to work on the financing of the venture, defendant to work on the building and engineering end; that pursuant to the joint venture, defendant on August 14, 1958, submitted a proposal for acquisition and development of the site to the New Brunswick authorities in the name of "Parkway Constructors, Inc."; that their bid was accepted; that in furtherance of the joint venture, a New Jersey corporation named New Parkway Constructors, Inc., was formed, with Arditi, Dubitzky, a lawyer named Pollack, and two architects named Gardner and Turano as incorporators; that the last three "were to offer their professional services in consideration for a prorational share of the profits"; that the first organizational meeting of the company was held in February 1959; and that in July 1959 the lawyer and the architects sold their stock interests to Arditi and Dubitzky, so that the latter became (and still are) 50-50 owners of the business.

To this sketchy outline must be added the charges of false representations and broken promises which are fundamental to plaintiff's claim. Long prior to the formation of any corporation, plaintiff alleges that a joint venture agreement was made with defendant whereunder defendant would supervise all construction, would work with plaintiff to obtain suitable financing, and would devote all his time to the project. Defendant is said to have represented himself as skilled and experienced in such ventures. These representations are alleged to have been knowingly false when made. The complaint then lists in detail defendant's many derelictions. For purposes of this appeal it is sufficient to note charges that Dubitzky misrepresented to the plaintiff the size and nature of the financial commitments necessary to the success of the venture; failed to spend as much time supervising the project as he said he would; negligently permitted the alteration of plans for the building, with various dire and costly results; negligently approved plans for solar screens which later turned out to be structurally unsound and had to be replaced; and obstructed work on the site by quarreling with the contractor.

Upon Dubitzky's motion for summary judgment, the District Court ordered the complaint dismissed on the grounds that under both the law of New York -- where the alleged joint venture agreement was made -- and of New Jersey -- the place of performance -- any obligations which a joint venture may have created are merged into a corporation created to carry on the joint venture.

The District Court in Connecticut properly looked to Connecticut's rules on choice of law to determine what law was applicable to the case. Klaxon v. Stentor Elec. Mfg. Co., 313 U.S. 487, 61 S. Ct. 1020, 85 L. Ed. 1477 (1941). Under Connecticut law, the validity and construction of a contract are determined by the law of the place where the contract was made, unless the place of performance is in some other jurisdiction, in which case the law of the place of performance governs both the validity and the effect of the contract. Jenkins v. Indemnity Ins. Co. of North America, 152 Conn. 249, 205 A.2d 780 (1964); Illustrated Postal Card & Novelty Co. v. Holt, 85 Conn. 140, 81 A. 1061 (1912); Chillingworth v. Eastern Tinware Co., 66 Conn. 306, 33 A. 1009 (1895). Here the agreement was entered into in New York, but the principal place of performance may well have been New Jersey, although the complaint alleges that New Parkway Constructors, Inc., kept offices in New York for the receipt of bids. Since we agree with the district court that the laws of New York and New Jersey are sufficiently similar on the determinative point, we may look to the decisions of both states for guidance.

The district court based its decision entirely upon the assumption that it was the law of both New York and New Jersey that whatever rights the parties may have had under their joint venture agreement, "the rights under it were merged into the corporations at the time they were organized" and hence no longer existed. Reliance for this principle is placed primarily upon Jackson v. Hooper, 76 N.J.Eq. 592, 75 A. 568, 27 L.R.A., N.S., 658 (Ct.Err. & App.1910) for New Jersey and Weisman v. Awnair Corp. of America, 3 N.Y.2d 444, 165 N.Y.S.2d 745, 144 N.E.2d 415 (1957) for New York.

In Jackson v. Hooper, supra, the parties had formed two corporations with the understanding that they would exercise equal control over the management of the corporate business, the corporations being mere agencies for the partnership of the parties. Jackson alleged that Hooper violated this agreement by ousting him from the conduct of the business with the assistance of the "dummy" directors. The Court of Errors and Appeals held for Hooper, on the grounds that if partners

adopt the corporate form, with the corporate shield extended over them to protect them against personal liability, they cease to be partners, and have only the rights, duties, and obligations of stockholders. They cannot be partners inter sese and a corporation as to the rest of the world.

76 N.J.Eq. at 599, 75 A at 571. In Leviton v. North Jersey Holding Co., 106 N.J.Eq. 517, 151 A. 389 (Ct.Ch.1930), the court relied on Jackson v. Hooper in holding that an agreement to incorporate for the purpose of a joint venture and to wind up the company when the venture is accomplished is against the policy of the corporation statute. However, the much more recent case of Fortugno v. Hudson Manure Co., 51 N.J.Super. 482, 144 A.2d 207 (App.Div.1958), seems to mark a move away from Jackson v. Hooper. There, eight partners ran a family partnership. Over the years various aspects of the business were incorporated. The court held that in deciding how to dissolve the partnership, the corporations should be regarded as assets of the partnership and divided equally among the partners rather than divided according to stock ownership in each company.

In New York, early cases had applied the rule of Jackson v. Hooper without question. E.g., Manacher v. Central Coal Co., 284 App.Div. 380, 131 N.Y.S.2d 671 (1st Dep't 1954), aff'd mem., 308 N.Y. 784, 125 N.E.2d 431 (1955) (dismissing a complaint alleging that defendants had breached a joint venture agreement under which defendants and plaintiff were to share equally in a joint enterprise conducted through various corporations). In the most recent full discussion of the question by the Court of Appeals, in Weisman v. Awnair Corp. of America, supra, the court repeated the rationale of Jackson v. Hooper in broad terms. The complaint in Weisman alleged that the defendants had agreed with Weisman to form a new company of which Weisman was to have a certain portion of the stock. This company was to be the exclusive distributor of Awnair's products in the New York City area. After a few years, in breach of the alleged agreement, Awnair named another company as distributor. The Court of Appeals upheld the dismissal of the complaint on the grounds that the complaint really alleged an agreement

to conduct a business enterprise as joint venturers through the instrumentality of a corporation presenting itself to the world as the responsible entity. This they may not do for the rule is well settled that a joint venture may not be carried on by individuals through a corporate form. [citing cases] The two forms of business are mutually exclusive, each governed by a separate body of law. [The Court then quoted the language of Jackson v. Hooper quoted above] * * *

This is not to say * * * that individuals agreeing to go into business together jointly cannot decide to conduct the business through a corporation. What we do declare is that when individuals do determine to conduct business through a corporation, as is here alleged, they are not at one and the same time joint venturers and stockholders, fiduciaries and nonfiduciaries, ...


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