Garden State Complex Business Litigation

Commentary on complex business litigation in New Jersey.
Posted: February 26, 2019

Employment Contract Term Waiving Claims for Workplace Injuries Unenforceable in New Jersey

On December 11, 2017, the New Jersey Supreme Court issued a decision in Vitale v. Schering-Plough Corporation, No. 078294, holding that a pre-accident agreement disclaiming liability was unenforceable, explaining:

In section 39, the Legislature declared a public policy regarding certain agreements entered into in advance of a workplace accident:

No agreement, composition, or release of damages made before the happening of any accident, except the agreement defined in section 34:15-7 of this title shall be valid or shall bar a claim for damages for the injury resulting therefrom, and any such agreement is declared to be against public policy.

That provision addressing pre-accident agreements has been a component of the Workers’ Compensation Act since 1913, when section 39’s similarly-worded predecessor statute was enacted as an amendment to the Act. The provision has been construed in several decisions to void a pre-accident agreement by which the employee purports to waive his or her right to the workers’ compensation benefits authorized by the Act. Those decisions make
clear that, unless authorized by N.J.S.A. 34:15-7, a preaccident employer-employee agreement that prospectively deprives the employee of workers’ compensation benefits is contrary to public policy pursuant to section 39. The Legislature, however, did not restrict section 39 or its predecessor statute to the waiver of workers’ compensation benefits through pre-accident agreements, as it could have by means of a simple modification of the statutory language.

Instead, the Legislature chose expansive terminology in section 39. It provided that no pre-accident “agreement, composition, or release of damages,” other than an agreement authorized by N.J.S.A. 34:15-7, would bar a claim for “damages” — the same term that appears in section 40 to describe the remedy that an employee would pursue in a third-party claim. As we have frequently noted, we cannot write in an additional qualification which the Legislature pointedly omitted in drafting its own enactment. We decline to do so here. We construe section 39’s broad language to encompass not only pre-accident agreements waiving the employee’s right to assert the statutory claim for workers’ compensation benefits, but agreements waiving the employee’s right to assert a common-law action for damages against a third party based on a workplace accident, that is addressed in section 40.

. . .

In sum, we view sections 39 and 40 of the Workers’ Compensation Act to state public policy governing this appeal. Under section 40, the Act does not bar or limit common-law premises liability claims against potentially liable third parties, but provides for a lien on the employee’s recovery that may relieve the financial burden of a compensation award on the employer’s workers’ compensation carrier. To ensure that the statutory scheme properly balances the interests of the employee, the employer, the employer’s workers’ compensation carrier and any potentially liable third party, the Legislature declared in section 39 that any pre-accident agreement, composition or release of damages other than that defined in N.J.S.A. 34:15-7, is contrary to public policy.

Applying the contract principles set forth in Rudbart, Stelluti, and Rodriguez, we conclude that the Disclaimer is void because it is contrary to the public policy expressed in sections 39 and 40 of the Workers’ Compensation Act.

The Disclaimer, by which Vitale waived any claims arising from or related to injuries which are covered under the Workers’ Compensation statutes, constitutes an agreement, composition or release of damages made before the happening of any accident. It is not an agreement authorized by N.J.S.A. 34:15-7, and is therefore not within the sole exception identified in section 39. Accordingly, the Disclaimer is in the category of employment agreements that the Legislature has declared to be against public policy.

(Internal quotations and citations omitted) (emphasis added).

Litigating contract disputes is a large part of our practice. In New Jersey, contracts usually are enforced as written. However, there are exceptions, including the one here, where a statute prevents parties from including certain kinds of damages waivers in their contracts. Contact Schlam Stone & Dolan partner John Lundin at if you or a client have questions regarding a contract dispute.

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Posted: January 3, 2019

Rulings on Motion to Dismiss Were Not Binding Under Law of the Case Doctrine

On November 29, 2018, the Appellate Division of the New Jersey Superior Court issued a decision in Tully v. Mirz, Docket No. A-0241-17T1, explaining that a court’s holdings on a motion to dismiss were not binding under the law of the case doctrine, explaining:

The law of the case doctrine provides that a legal decision made in a particular matter should be respected by all other lower or equal courts during the pendency of that case. A hallmark of the law of the case doctrine is its discretionary nature. It is a non-binding rule intended to prevent relitigation of a previously resolved issue. The doctrine is only triggered when one court is faced with a ruling on the merits by a different and co-equal court on an identical issue.

Our courts treat the denial of a motion to dismiss as interlocutory.

The denial of defendant’s motions to dismiss did not constitute a ruling on the merits of whether plaintiff’s claims were derivative or direct. Nor did those rulings adjudicate whether the court should exercise its discretion to treat the action raising derivative claims as a direct action under Brown. The rulings were not dispositive. Rather, the rulings merely decided that Tully’s claims were sufficient to survive a motion to dismiss.

The trial judge based his decision upon the evidence adduced at trial following discovery, not the facts as alleged in the amended complaint. The testimonial evidence presented at trial was not available when either of the motions to dismiss were decided. The law of the case doctrine does not require a trial judge to follow a prior motion ruling by a different judge if presented with substantially different evidence. The trial judge was not bound to follow the motion judges’ preliminary assessments of the facts or rulings.

(Internal quotations and citations omitted).

The law of the case doctrine discussed here, along with doctrines such as collateral estoppel, res judicata and the entire controversy doctrine, limits a party’s ability to litigate an issue more than once. Contact Schlam Stone & Dolan partner John Lundin at if you or a client have questions regarding whether a claim is barred by an earlier decision or action.

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Posted: December 27, 2018

Court Dismisses Tortious Interference Claims on Summary Judgment

On November 15, 2018, Judge Wilson of the the Bergen County Superior Court (Law Division), issued a decision in Comprehensive Neurosurgical, P.C., et al. v. The Valley Hospital, et al., Docket No.: BER-L-6794-16, dismissing tortious interference claims on summary judgment, explaining:

NJBSC alleges that Valley’s entry into the Exclusivity Agreement constituted tortious interference with prospect economic advantage. Under New Jersey law, an action for tortious interference with a prospective business relation protects the right to pursue one’s business, calling or occupation free from undue influence or molestation. To prevail on this claim, Plaintiffs must demonstrate a reasonable expectation of economic advantage, which was lost as a direct result of the Valley Defendants’ malicious interference, and that Plaintiffs suffered losses thereby.

In the defamation context, malicious is used to describe harm that is inflicted intentionally and without justification or excuse. Plaintiffs bear the burden of demonstrating the absence of justification for the Valley Defendants’ actions in the context of the case presented. New Jersey courts use an eight-factor balancing test to determine whether maliciousness was present:

(a) The nature of the actor’s conduct, (b) the actor’s motive, (c) the interests of the other with which the actor’s conduct interferes, (d) the interests sought to be advanced by the actor, (e) the social interests in promoting the freedom of the action of the actor and the contractual interests of the other, (f) the proximity or remoteness of the actor’s conduct to the inference and (g) the relations between the parties.

In this instance, the Valley Defendants undertook a rational and routine course of action in aligning with NANJ. This was designed to further Valley’s longstanding alignment strategy to improve patient care and economic efficiency. On the contrary, NJBSC’s only interest in Valley’s agreement with NANJ is that they no longer have an additional hospital to practice within and gain an additional stream of revenue. Considering the foregoing, there insufficient evidence in the record to support a finding of maliciousness, let alone the remaining factors of a claim for tortious interference with prospective economic advantage.

NJBSC [also] has failed to provide evidence supporting a claim for tortious interference with contract. To establish a claim of tortious interference with contract, a plaintiff must prove the following: (1) an existing contractual relationship; (2) intentional and malicious interference with that relationship; (3) causation; and (4) damages resulting from that interference.

NJBSC has also failed to support a claim for tortious interference with prospective economic advantage as to NANJ. As previously stated, plaintiff must show the following to succeed on such a claim: (1) a reasonable expectation of economic benefit or advantage; (2) intentional and malicious interference with that expectancy; (3) a reasonable probability that plaintiff would have realized the economic benefit but for the interference; and (4) actual damages resulting from defendant’s interference. New Jersey courts do not draw a bright-line between actions for tortious interference with prospective economic advantage and for tortious interference with existing business relationships.

(Internal quotations and citations omitted).

In New Jersey, there are circumstances where someone can be held liable for causing someone else to break their contract with you (tortious interference with contract), and they can even be held liable for causing someone not to enter into a contract with you in the first place (tortious interference with prospective economic advantage). Contact Schlam Stone & Dolan partner John Lundin at if you or a client think someone has interfered with your rights relating to a contract.

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Posted: October 9, 2018

Party Bound by Arbitration Provision Despite Its Lack of Conspicuousness

On September 18, 2018, Judge Mega of the Union County Superior Court (Law Division) issued a decision in Brothers General Construction & Painting, LLC v. Tocci Building Corporation, Inc., Docket No. UNN-L-941-18, holding that a party was bound by an arbitration provision despite its lack of conspicuousness, explaining:

The strong public policy of this State favors arbitration as a means of settling disputes that otherwise would be litigated in a court. The Federal Arbitration Act (“FAA”), 9 U.S.C.A §§ 1 to 16, expresses a national policy favoring arbitration. The FAA requires courts to place arbitration agreements on an equal footing with other contracts and enforce them according to their terms. The New Jersey Arbitration Act, N.J.S.A. 2A:23B-l to -22, follows these same principles. Accordingly, the existence of a valid and enforceable arbitration agreement poses a question of law.

In light of the fact that arbitration agreements are generally favored under the law, an agreement to arbitrate is read liberally in favor of arbitration. However, this preferential status is not without limits. In determining whether the parties agreed to arbitrate, courts generally apply state-law contractual principles. An agreement to arbitrate, like any other contract, must be the product of mutual assent, as determined under customary principles of contract law. Mutual assent requires that the parties have an understanding of the terms to which they have agreed. This requirement of a consensual understanding about the rights of access to the courts that are waived in the agreements has led our courts to hold that clarity is required.

By its very nature, an agreement to arbitrate involves a waiver of a party’s right to have her claims and defenses litigated in Court. The Atalese Court noted that an average member of the public may not know – without some explanatory comment – that arbitration is a substitute for the right to have one’s claim adjudicated in a court of law. Accordingly, the absence of any language in the arbitration provision that plaintiff was waiving her statutory right to seek relief in a court of law renders the provision unenforceable. However, no magical language is required to accomplish a waiver of rights in an arbitration agreement.

New Jersey courts have upheld arbitration clauses phrased in various ways when those clauses have explained that arbitration is a waiver of the right to bring suit in a judicial forum.

In the present matter, the Tocci-Brothers General Subcontract is the 1991 edition of the standard form agreement produced and approved by the Associated General Contractors of Massachusetts. In relevant part, the Subcontract is comprised of a twenty-five-page form agreement and a fourteen-page Rider attached thereto. Both the form agreement and Rider were executed by the parties.

Page one of the Subcontract clearly indicates that: “THIS DOCUMENT HAS IMPORTANT LEGAL CONSEQUENCES: CONSULTATION WITH AN ATTORNEY IS ENCOURAGED WITH RESPECT TO ITS MODIFICATION[.]” Plaintiff does not contend and there is nothing in the record to suggest that Brothers General was not afforded, nor did they seek the opportunity to retain an attorney to review the Subcontract.

The arbitration provision at issue is not referenced in the twenty-five-page Tocci Brothers General Subcontract. The “Detailed Table of Contents” does not identify the existence of an arbitration provision. Similarly, the Rider does not contain an index or table of contents. Paragraph R.16 does not contain a heading denoting the existence of an arbitration provision therein. Unlike paragraph R.15 – which immediately precedes paragraph R.16 and is conspicuously entitled “CHANGE ORDER AUTHORIZATION[,]” – paragraph R.16 is not distinguished in any way. The Court notes that a number of the provisions contained in the rider are conspicuously labeled/titled. See~ R.15; R.22; R.23; R.24; R.25; R.26; R.27; R.30; R.31; pp. 8-14. Moreover, paragraph R.16 does not solely address the issue of arbitration. Instead, the paragraph first appears to address the issue of additional compensation. Brothers General argues that this lack of conspicuousness is fatal as it did not have notice of the arbitration provision.

. . .

The present matter is distinguishable from Atalese. Atalese is a consumer case. Neither Brothers General nor Tocci are average members of the public. This is not a consumer contract. This is not a contract of adhesion where one party possessed superior bargaining power and was the more sophisticated party. To the contrary, the contract was negotiated between sophisticated business entities with years of experience in the industry. Brothers General was not forced to enter into the Subcontract. They had ample opportunity to review the terms contained therein and could have retained counsel to review same. As such, the standard articulated in Atalese may not be applicable in this context. While agreements between sophisticated business entities may be permitted more leeway, the Court looks to the aforementioned principles for guidance as it interprets the enforceability of R.16.

Viewing the pertinent language of R.16 in isolation, the Court finds that the scope of the agreement clearly encompasses the underlying dispute. The relevant langue states: The Trade Contractor [Brothers General] further agrees to become a party to and to be bound by any proceeding involving the Construction Manger [Tocci], the Architect, or the Owner [Connell Hospitality] to the extent that such proceedings involve any of the rights or obligations of the Trade Contractor [Brothers General] under the subcontract.

. . .

While no magical language is required to accomplish a waiver of rights in an arbitration agreement, it is clear that this provision would not satisfy the heightened consumer standard set forth in Atalese. However, as previously stated application of such a standard in a case involving sophisticated business entities would not be appropriate. Instead, the Court searches the disputed provision for some simple explanation that arbitration is a waiver of the right to bring suit in a judicial forum. The Court finds such a general statement as R.16 clearly indicates that at the election of Tocci that the “parties agree to arbitrate any such claim or dispute in accordance with Construction Industry Rule of the American Arbitration Association and the locale shall be Boston, Massachusetts. This Agreement to arbitrate, if so elected, shall be specifically enforceable under the prevailing arbitration law. The quoted provision clearly establishes that a dispute amongst the parties will be subject to arbitration at Tocci’s election. R.16 sets forth that Construction Industry Rules of the AAA shall govern and that locale shall be Boston, Massachusetts. It is clear that the agreement to arbitrate is enforceable under the prevailing arbitration law. While R.16 does not specifically reference waiver of a trial in a judicial forum the aforementioned language is sufficient to explain to a sophisticated party that arbitration is a waiver of the right to a judicial determination.

Viewing R.16’s language in isolation supports a finding that the aforementioned language is enforceable. However, the Court is once again forced to consider the provision as it appears in the Rider. In doing so, questions of conspicuousness are once again raised. The fact that the operable language related to arbitration is intermingled with language unrelated to arbitration creates an ambiguity. This ambiguity is further complicated by the fact that R.16 does not denote the presence of an arbitration agreement with a heading or other descriptive designation. There is no reference to an arbitration provision in the table of contents. The arbitration provision is not contained in a stand-alone paragraph. Accordingly, when viewed in totality there is a question as to whether Brothers General had notice of this key provision that effects their rights.

Notwithstanding these deficiencies, the Court cannot turn a blind eye to the fact that Brothers General has already been joined to the AAA arbitration. Brothers General was properly served with Tocci’s Joinder Request pursuant to Rule 7 of the AAA’s Construction Industry Rules. Brothers General failed to timely object to same. Brothers General had a second opportunity to object to Tocci’s Joinder Request, but it once again failed to do so. Brothers General does not dispute receipt of Tocci’s Joinder Request or the subsequent communications from the AAA. Brothers is a party to the AAA arbitration and as such has waived its right to seek the instant relief. While Brothers is free to raise the aforementioned arguments before the AAA arbitrator, it is unclear that this Court has the authority to remove a properly joined party from an arbitration provision. The Court notes that Brothers General will be afforded every opportunity to litigate its claims in the AAA arbitration. In fact, AAA has incentive to do so as the sufficiency of its work has been called into question.

(Internal quotations and citations omitted) (emphasis added).

Complex commercial litigation involves more than courts. Disputes often are–by agreement–decided by private arbitrators. Contact Schlam Stone & Dolan partner John Lundin at if you or a client have a question regarding a dispute that is subject to an arbitration agreement.

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Posted: September 26, 2018

Action Not Barred by Entire Controversy Doctrine

On August 23, 2018, Judge DeAngelis of the Morris County Superior Court (Law Division) issued a decision in Maffei v. Apex Fund Services (US), Inc., Docket No. L-63-18, refusing to dismiss an action based on the entire controversy doctrine, explaining:

Defendants argue that Plaintiffs’ Complaint in the present action violates the entire controversy doctrine and Rule 4:5-1(b)(2). Plaintiffs maintain that the present action was improperly brought before this Court because Vicor, the Fund in which many of the Plaintiffs to the present action invested brought a suit against Falci seeking the return of funds that Falci unlawfully took. Defendants submit that many of the background facts in the present case are identical to the facts on which the Falci Action is predicated. Furthermore, many of the Plaintiffs herein are Limited Partners of Vicor who are seeking the same relief in both actions. Therefore, Defendants argue that Plaintiffs should not be permitted to continue the present action.

The purpose of the entire controversy doctrine is to ensure that related claims and matters arising among related parties are adjudicated together rather than in separate, successive, fragmented, or piecemeal litigation. The doctrine is intended to prevent parties from voluntarily holding back a component of a controversy in a single proceeding, by precluding it from being raised in a subsequent proceeding. The rules implementing the entire controversy doctrine have changed over time. Although the doctrine previously required the joinder of related claims and parties, today the scope of the entire controversy doctrine is limited to the preclusion of claims omitted from a first proceeding, as described in Rule 4:30A. The preclusion of a successive action against a person not a party to the first action has been abrogated except in special circumstances involving inexcusable conduct and substantial prejudice to the non-party resulting from omission from the first suit.

Moreover, R. 4:5-1(b)(2) substitutes disclosure for mandatory joinder of non-parties. R. 4:5-1(b)(2) requires a party to certify in its first pleading as to whether the matter in controversy is the subject of any other action pending in any court, and requires the party to disclose in the certification the names of any nonparty who may be joined in the action because of potential liability to any party on the basis of the same transactional facts. Based on this certification, the court determines whether to compel the non-party’s joinder. The purpose of Rule 4:5-1(b)(2) is to provide notice to all parties in each action of the pendency of other actions involving the same controversy. The Rule also provides:

If a party fails to comply with its obligations under this rule, the court may impose an appropriate sanction including dismissal of a successive action against a party whose existence was not disclosed or the imposition on the noncomplying party of litigation expenses that could have been avoided by compliance with this rule. A successive action shall not, however, be dismissed for failure of compliance with this rule unless the failure of compliance was inexcusable and the right of the undisclosed party to defend the successive action has been substantially prejudiced by not having been identified in the prior action.

Courts should analyze both fairness to the parties and fairness to the system of judicial administration before dismissing claims.

Vicor filed the Falci Action on September 22, 2016 against Falci, his son and business partner. Although Plaintiffs are Vicor investors, neither Plaintiffs nor the Defendants are parties to the Falci Action. Plaintiffs claim that at the time the Falci Action was filed, Plaintiffs did not know the extent of the fraud and the enterprise. At the time of the commencement of the Falci Action, Vicor was not yet in possession of the vast majority of Vidon’s or Fund’s bank account records, Apex’s internal records or emails relating to Vicor, its own email files or the records of its outside auditor. Apex’s involvement in the enterprise and the facts upon which this action was predicated, were uncovered through discovery upon the receipt of these and other documents.

Since Plaintiffs seek to pursue a cause of action against new defendants in this action, rather than to pursue new claims against the defendants from a prior litigation, the entire controversy doctrine may only preclude the Complaint if Plaintiffs engaged in inexcusable conduct and the individual Defendants would be substantially prejudiced by their omission from the first litigation. Moreover, Vicor executed a R. 4:5-1(b)(2) certification at the outset of the first litigation and thereby certified that it was not aware of any other parties who might be potentially liable to Vicor on the basis of the facts pled. R. 4:5-1 provides that dismissal may be an appropriate remedy if Vicor was aware of the Defendants’ role in the facts alleged when it executed the certification.

Defendants argue that they are prejudiced by Plaintiffs’ failure to identify and include the Apex Defendants in the Falci Action because the passage of time has caused depletion in the Fund’s assets affecting Defendants’ right to indemnity from the Funds. Further, Plaintiffs failure to assert their claims or identify the Defendants within the Falci Action resulted in the expiration in the statute of limitation on Plaintiffs’ securities claims. Defendants also state that they are prejudiced by the delay in discovery, because witness’ memories fade and evidence is lost through the passage of time.

The defendants in the Falci Action defaulted and both Falci and his son filed for bankruptcy protection, staying the Falci Action. Defendants have not indicated what discovery was done in the Falci Action to date. The crux of Defendants’ prejudice lies in the passage of time since the initiation of the Falci Action until the commencement of the present matter. However, Plaintiffs assert that they did not know of the claims against Defendants asserted here, contending that Plaintiffs’ awareness of the existence of the Defendants and their general work and involvement with the Sub-Fund and Falci is distinct from the awareness it now has as to the Defendants’ alleged roles with the enterprise including Defendants’ alleged misrepresentations to Plaintiffs’ and involvement in conspiracy. If the Court accepts that Plaintiffs filed the present action promptly upon becoming aware of their claims against the present Defendants, it is unclear how Defendants concerns would have been cured had Plaintiffs filed the within claims in the Falci Action at the same time that the present action was commenced.

At the motion to dismiss stage, the Court must accept Plaintiffs’ allegations as true and afford Plaintiffs all reasonable inferences. Furthermore, Defendants have not presented any evidence of Plaintiffs knowledge of the present claims at the time of the Falci Action except general assertions that Plaintiffs should have known of the claims against Defendants when they knew the facts upon which the Falci Action is predicated. Accordingly, the entire controversy doctrine and R. 4:5-1(b) are not grounds for dismissal of Plaintiffs’ Complaint.

(Internal quotations omitted).

Doctrines such as the entire controversy doctrine (called res judicata in other jurisdictions) limit a plaintiff’s ability to litigate a dispute more than once. Contact Schlam Stone & Dolan partner John Lundin at if you or a client have questions regarding whether a claim is barred by an earlier action.

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Posted: September 26, 2018

Court Analyzes Question of Successor Liability

On August 22, 2018, Judge Vignuolo of the Middlesex County Superior Court (Law Division) issued a decision in Babulal v. Dynamic Metals Processing, Inc., Docket No. L-1508-14, analyzing whether two defendants were entitled to summary judgment dismissing claims based on successor liability, explaining:

We turn now to the substance of Gary Metal and Gary Machinery’s Motion. The issue is whether the defendants may be held liable under the successor liability doctrine despite the undisputed fact that neither entity manufactured the Subject Straightener, nor does either entity continue to manufacture the Subject Straightener.

. . .

Generally, where one company sells or otherwise transfers all its assets to another company the latter is not liable for the debts and liabilities of the transferor, including those arising out of the latter’s tortious conduct. However, traditionally four exceptions to the general rule of successor liability have been applied, which exposed the purchasing corporation to the liabilities of the selling corporation:

(1) the purchasing corporation expressly or impliedly agreed to assume such debts and liabilities, (2) the transaction amounts to a consolidation or merger of the seller and purchaser, (3) the purchasing corporation is merely a continuation of the selling corporation, or (4) the transaction is entered into fraudulently in order to escape responsibility for such debts and liabilities.

In Ramirez, the Supreme Court analyzed the appropriateness of the traditional approach and determined that it is inconsistent with the developing principles of strict products liability and unresponsive to the interest of persons injured by defective products in the stream of commerce. The Court reasoned the traditional approach “was developed not in response to the interests of parties to product liability actions, but rather to protect the rights of commercial creditors and dissenting shareholders following corporate acquisitions..

Further, the traditional approach has been narrowly applied, placing an unjustified amount of emphasis on the form of the corporate transaction, rather than its practical effect..

After analyzing the approaches of multiple other jurisdictions, the Ramirez Court decided to adopt the product line exception for successor corporation liability. The product line exception completely abandons the traditional rule and its exceptions. The product line exception provides that a successor corporation will be held strictly liable for the product liability claims of its predecessor if two requirements are met: (1) the successor corporation acquires all or substantially all the assets of the predecessor corporation; and (2) the successor corporation continues essentially the same manufacturing operation as the predecessor corporation. The plaintiff bears the burden of establishing these requirements. Potwora ex rel. Gray v. Grip, 319 N.J. Super. 386, 406 (App. Div. 1999).

The policy considerations justifying the product line exception are three-fold:

(1) The virtual destruction of the plaintiff’s remedies against the original manufacturer caused by successor’s acquisition of the business, (2) the successor’s ability to assume the original manufacturer’s risk spreading role, and (3) the fairness of requiring the successor to assume a responsibility of defective products that was a burden necessarily attached to the original manufacturer’s good will being enjoyed by the successor in the continued operation of the business.

Ultimately, the product line exception presents a mixed question of law and fact to a trial judge, and if the factual component of the issue is subject to a bona fide issue of material fact, the resolution of the question must await a trial.

(Internal quotations and citations omitted).

This decision relates to tort liability for a defective product, something that is not usually considered business litigation. But cases like this raise a question that applies to all companies: when will a successor company be liable for something a predecessor did. Contact Schlam Stone & Dolan partner John Lundin at if you or a client have questions regarding a business’ liability for something done by a company that it acquired or with which it merged.

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Posted: September 26, 2018

Business Judgment Rule Applies to Allegations of Board’s Incompetence

On August 22, 2018, the New Jersey Appellate Division issued a decision in Alloco v. Ocean Beach and Bay Club, Docket No. A-0922-16T3, holding that the business judgment rule protects a board from allegations of incompetence, explaining:

Plaintiffs also argue that the Board and its rules are incompetent. However, showing Board members or their rules were incompetent does not show that they were fraudulent, selfdealing, or unconscionable, as required by our Supreme Court.

Plaintiffs cite a Chancery Division decision, Papalexiou v. Tower W. Condo., 167 N.J. Super. 516 (Ch. Div. 1979), which stated that courts will not second-guess the actions of directors unless it appears that they are the result of fraud, dishonesty or incompetence. However, the chancery court preceded this statement by properly stating that the business judgment rule

requires the presence of fraud or lack of good faith in the conduct of a corporation’s internal affairs before the decisions of a board of directors can be questioned. If the corporate directors’ conduct is authorized, a showing must be made of fraud, self-dealing or unconscionable conduct to justify judicial review. All that is required is that persons in such positions act reasonably and in good faith in carrying out their duties.

Thus, it appears the chancery court was attempting to state the business judgment rule, not change it to an incompetence standard.

Moreover, the chancery court mistakenly cited Sarner’s language addressing, not the business judgment rule, but the requirements for imposition of a receiver: Short of a showing of such fraud, dishonesty or incompetency as would disqualify an officer or director from serving a corporation, the court will not interpose a receiver between the stockholders and the directorate to conduct the ordinary business affairs of the corporation. Even if incompetence is relevant to appointing a receiver, it does not constitute fraud, self-dealing, or unconscionability.

We have cited that language from Papalexiou and Sarner only in cases where we did not apply the business judgment rule, and thus those citations were dicta. Our Supreme Court has cited Papalexiou only as stating that fraud, self-dealing or unconscionable conduct at the very least should be subject to exposure and relief. We must continue to follow the Supreme Court’s lead and require a showing of fraud, self-dealing or unconscionable conduct.

(Internal quotations and citations omitted).

This decision touches on an area of business litigation that is a significant part of our practice: disputes regarding the management, ownership and control of closely-held businesses. Contact Schlam Stone & Dolan partner John Lundin at if you or a client have questions regarding such a dispute.

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Posted: September 26, 2018

Duty to Defend is Merely Duty to Reimburse Until Question of Coverage is Resolved

On July 20, 2018, the New Jersey Appellate Division issued a decision in Woodbury Medical Center Associates, LLP v. Selective Insurance Company, Docket No. A-5526-15T1, holding that an insurer’s duty to defend was merely a duty to reimburse until the question of whether claims are covered is resolved, explaining:

At the outset, we agree with the judge that, when disputes arise between the insured and insurer, the duty of an insurer to defend is generally determined by a side-by-side comparison of the policy and the complaint, and is triggered when the comparison demonstrates that if the complaint’s allegations were sustained, an insurer would be required to pay the judgment. In making that comparison, it is the nature of the claim asserted, rather than the specific details of the incident or the litigation’s possible outcome, that governs the insurer’s obligation.

The interpretation of an insurance policy upon established facts is a question of law for the court to determine. Generally, when interpreting an insurance policy, courts should give the policy’s words their plain, ordinary meaning. An insurance policy is a contract that will be enforced as written when its terms are clear in order that the expectations of the parties will be fulfilled.

As this court held in New Jersey Manufacturers Insurance Co. v. Vizcaino, in permitting the dispute of uncovered claims, courts protect both parties by ensuring that the insurer does not incur responsibility for uncovered claims and that the insured is entitled to both defense and indemnity if the dispute is resolved in its favor. In line with those principles, exclusions in insurance policies are presumptively valid and enforceable if they are specific, plain, clear, prominent, and not contrary to public policy. In contrast, courts will find a genuine ambiguity to arise where the phrasing of the policy is so confusing that the average policyholder cannot make out the boundaries of coverage.

Generally, exclusions are narrowly construed. The insurer has the burden of bringing the case within the exclusion. Courts must be careful, however, not to disregard the clear import and intent of a policy’s exclusion. Far-fetched interpretations of a policy exclusion are insufficient to create an ambiguity requiring coverage.

In a situation where two or more identifiable causes — one a covered event and one excluded — may contribute to a single property loss, there is coverage absent an anti-concurrent or anti-sequential clause in the policy. As noted, the policy at issue contains within the exclusion language an anticoncurrent and anti-sequential clause and excludes coverage from any loss or damage regardless of whether any other cause, event, material or product contributed concurrently or in any sequence to such injury or damage. We do not consider the exclusion language to be ambiguous. A fair reading of the exclusion is that, despite other potential causes, mold must be excluded as a causative factor in order for there to be a covered loss.

The judge concluded that Selective owed a defense to Woodbury Medical while acknowledging that mold was averred in the complaint as a causative factor. The judge found that the complaint averred other environmental hazards as causative factors thus requiring a defense. However, other than referencing those allegations, the judge did not analyze whether the anti-concurrent and anti-sequential language in the exclusion would bar coverage or, at a minimum, raise a substantial question as to the existence of coverage.

Succinctly, in the absence of a comparison of the complaint with the exclusion’s anti-concurrent and anti-sequential language, we conclude that the issue of coverage was not of such clarity at this stage of the action to require Selective to defend. In reaching our conclusion, we are informed by the following.

Neither the duty to defend nor the duty to indemnify exists except with respect to occurrences for which the policy provides coverage. Here, the judge cited Flomerfelt as authority, which provides that:

in circumstances in which the underlying coverage question cannot be decided from the face of the complaint, the insurer is obligated to provide a defense until all potentially covered claims are resolved, but the resolution may be through adjudication of the complaint or in a separate proceeding between insured and insurer either before or after that decision is reached.

There are two exceptions to this general rule.

The insurer need not provide the defense at the outset if the allegations include claims that are not covered by the policy as well as claims that are covered or if the question of coverage is not, by its nature, capable of determination in the underlying action against the insured. In those situations, the insurer’s obligation to defend becomes an obligation to reimburse for defense costs to the extent that the defense is later determined to have been attributable to the covered claims and, if coverage is not determinable in the underlying action, it is later determined that there was in fact coverage.

In short, if an insurer believes that the evidence indicates that the claim is not covered, the insurer is not always required to provide a defense.

Although the duty to defend is broader than the duty to pay, the duty is not broader in the sense that it extends to claims not covered by the covenant to pay. Therefore, if an excluded claim is made, the insurer has no duty to undertake the expense and effort to defeat it, however frivolous it may appear to be.

Grand Cove II addressed an alternative to the duty to defend, the duty to reimburse.

Where a conflict exists between an insurer and its insured by virtue of the insurer’s duty to defend mutually-exclusive covered and non-covered claims against the insured, the duty to defend is translated into a duty to reimburse the insured for the cost of defending the underlying action if it should ultimately be determined, based on the disposition of that action, that the insured was entitled to a defense. Similarly, where an insurer did not undertake defense of the case at the inception of the litigation, the duty to defend may be converted into a duty to reimburse.

In Grand Cove II, this court found the insurance coverage issues in the case created problems with the trial court’s mandate that the insurance company must immediately assume defense of all the causes of action of the insured. Such issues included, but were not limited to: the trial court’s concession that certain claims were not covered, an inherent conflict due to late-raised claims, and the fact that the underlying litigation would not resolve the coverage issues. Therefore, we held the insurers’ duty to defend should have been converted to a duty to reimburse pending the outcome of the coverage litigation.

Here, through our comparison of the averments in the complaint to the policy’s exclusion, we conclude it was premature to order Selective to assume responsibility for the defense since it was unclear, based on the anti-concurrent and anti-sequential language in the exclusion, whether any claims would be covered. Therefore, as in Grand Cove II, we hold that the duty to defend should be converted to a duty to reimburse pending resolution of the coverage action.

Insurance coverage disputes are a substantial part of our practice. Sometimes, whether an insurer can be made to cover a claim makes the difference between a defendant in a civil or criminal proceeding being able to mount a vigorous defense or not. Contact Schlam Stone & Dolan partner John Lundin at or Schlam Stone & Dolan partner Bradley J. Nash at if you or a client have a question regarding whether the defense of a claim is covered by an insurance policy.

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