Blogs

Garden State Complex Business Litigation

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

Singling Out Employee to Receive a Share of Profits Created a Fiduciary Relationship

On March 13, 2019, Judge Costello of the Hudson County Superior Court (Law Division) issued a decision in RCS Logistics, Inc. v. Expolanka USA LLC, Docket NO.: HUD-L-2668-17, holding that singling out one employee to receive a share of profits created a special relationship creating a fiduciary duty, explaining:

Shareholders cannot sue for injuries arising from the diminution in value of their shareholdings resulting from wrongs allegedly done to their corporations. Nor can stockholders assert individual claims for wages or other income lost because of injuries assertedly done to their corporations. Under Pepe, Rosen would not have standing. However, Rosen states he is not suing as a shareholder, nor does he claim to be a shareholder. Instead, Rosen claims Heaney owed him a fiduciary duty due to Heaney’s position as CEO while Rosen was the Chief Commercial Officer, the third highest position in RCS, and due to Heaney’s promise that Rosen would receive 5% of profits. Rosen offers no case law to support this position. The fact that the percentage share in the sale proceeds was offered to no one other than Rosen distinguishes him for all others who were shareholders and who stood to gain from their status as shareholders. Rosen was singled out by Heaney and offered this unique opportunity. For this reason, the Court finds that this put Heaney and Rosen in a special relationship so as to create a special injury under Weil v. Express Container Corp., 360 N.J. Super. 599, 611 (App. Div. 2003), certif. denied 177 N.J. 574 (2003) As stated in F.G. v. MacDonell, 150 N.J. 550,563 (1997), a fiduciary relationship arises between two persons when one person is under a duty to act for or give advice for the benefit of another on matters within the scope of their relationship. Heaney is alleged to have singled out Rosen for this special treatment (i.e., 5% share of the sale while not being a shareholder) and by doing so, he created a special relationship.

(Internal quotations and citations omitted).

Fiduciaries have special duties, but the questions of whether a defendant is a fiduciary and what acts breach a fiduciary duty are sometimes complicated ones. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding such claims or appeals of relating to a fiduciary.

Click here to subscribe to this or another of Schlam Stone & Dolan’s blogs.

Posted: October 24, 2019

Conversion Claim Cannot be Based on Unpaid Debt

On February 6, 2019, Judge Wilson of the Bergen County Superior Court (Law Division) issued a decision in Booth Movers Ltd. v. Sleepable Sofas Ltd., Docket No. BER L-4341-17, holding that a conversion claim could not be based on an unpaid debt, explaining:

Booth Movers’ claim for conversion is rooted in the allegation that the defendants failed to return the security deposit to Booth Movers, and retained the security deposit for their own use and/or for a use other than that which the parties agreed to under the Sublease Agreement.

In New Jersey, conversion is defined as the wrongful exercise of dominion and control over property owned by another in a manner inconsistent with the owner’s rights. In some instances, a claim for conversion can involve monetary funds. However, an action for conversion will not lie in the context of a mere debt where there is no obligation to return the identical money, but instead, an ordinary debtor and creditor relationship exists. Furthermore, a party is liable only for breach of contract if it allegedly fails to honor its obligations under a contract, and is not additionally liable for a conversion of property of the other party to the contract.

In this instance, assuming that Booth Movers would be entitled to a return of its security deposit, it would only have a claim for breach of contract and not a claim for conversion against Sleepable Sofas. This is due to the fact that DFH was never a party to the Sublease Agreement with Booth Movers or assumed it pursuant to the APA. Furthermore, DFH did not receive or retain the security deposit in which Booth Movers’ conversion claim is rooted, and cannot be held to account to Booth Movers for that security deposit. Therefore, the claim for conversion must be dismissed as to DFH for the reasons stated above.

(Internal quotations and citations omitted).

Complex business litigation often involves conversion claims. As this decision shows, conversion can involve much more than physical objects. It can involve money (in certain circumstances) as well as intangible property. As this decision shows, there are limits to the law of conversion. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding one person depriving another of her property, whether that property is tangible or intangible, or even involves a discrete fund of money.

Click here to subscribe to this or another of Schlam Stone & Dolan’s blogs.

Posted: October 23, 2019

Homeowners’ Association’s Decisions Protected by Business Judgment Rule

On March 5, 2019, Judge Wilson of the Bergen County Superior Court (Law Division) issued a decision in Bennett v. Malone, Docket No. BER-L-3443-17, holding that the decisions of a homeowners’ association were protected by the business judgment rule, explaining:

A homeowners’ association has a fiduciary relationship with each of its unit owners that requires it to act reasonably and in good faith. This relationship requires that the association protect the interests of the group as a whole, and the interests of each constituent owner individually. Individual owners and residents are required to subordinate their own interests to those of the community at large.

N.J.S.A. 46:8N-14 states that a condominium association, acting through its officers of governing board, shall be responsible for the performance of the following duties, and the costs of which shall be common expenses: (a) the assessment and collection of funds for common expenses and payment thereof (b) an association shall exercise its powers and discharge its
functions in a manner that protects and furthers or is not inconsistent with the health, safety and general welfare of the residents of the community. The Board was also conferred additional powers enumerated in the sections of the By-Laws reproduced in the Factual Background section above.

While certain statutory requirements, in addition to the requirements imposed by the ByLaws were to be followed by the Board in making decisions, the Business Judgment Rule (the “BJR”) applies to limit the personal liability of the Board members. The BJR applies to homeowners’ and condominium associations.

The test for applicability of the BJR in relation to a condominium or homeowners’ association is as follows: (1) whether the Association’s actions were authorized by statue or by its own by-laws or master deed, and if so (2) whether the action is fraudulent, self-dealing, or unconscionable. If a contested act of the association meets each of these tests the judiciary will not interfere.

In this matter, there is no evidence of fraud or self-dealing. The funds raised through the assessments imposed on the unit owners were used only for litigation costs. At the same time, the unit owners approved the opposition to the Caliber project, and were aware of the assessments and the litigation. Moreover, at the conclusion of the bench trial in the Chancery Matter, Judge Toskos determined that Northgate had the power to challenge the Caliber project, and also had the option to pay for the litigation fees and costs through a common assessment.

Plaintiffs claim that the BJR is inapplicable in this instance, despite admitting the absence of fraud or self-dealing by Defendants. Instead, Plaintiffs argue that the BJR is inapplicable because Northgate failed to comply with various provisions of the New Jersey Condominium Act, the Real Property Full Disclosure Act, and the Rules and Regulations of the Department of Community Affairs. However, these arguments were already made in the Chancery Matter before Judge Toskos, who ultimately found them unconvincing in his findings of fact and conclusions of law.

Therefore, as there was no fraud, self-dealing, or unconscionability shown by Plaintiffs, the BJR is applicable in this matter and insulates the individual Board members named as Defendants from liability.

(Internal quotations and citations omitted).

We frequently litigate disputes over the sale or leasing of commercial property. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you are involved in a dispute regarding a commercial real estate transaction.

Click here to subscribe to this or another of Schlam Stone & Dolan’s blogs.

Posted: October 21, 2019

Court Rejects Veil-Piercing Claim

On March 21, 2019, Judge Wilson of the Bergen County Superior Court (Law Division) issued a decision in Cajoeco LLC v. Bensi Enterprises, LLC, Docket No. BER-L-3477-16, rejecting veil-piercing claims, explaining:

It is well settled New Jersey law that a corporation is a separate entity from its shareholders and that a primary reason for incorporation is the insulation of shareholders from the liabilities of the corporate enterprise. The protection of limited liability applies equally to members of New Jersey limited liability companies.

However, under extraordinary circumstances, a court may pierce the corporate veil and attach liability to the members or shareholders of an entity. If a court determines that veil piercing is appropriate under the circumstances, an individual may be liable for actions of the corporate entity.

A plaintiff must allege the following elements to successfully plead a claim to pierce the corporate veil: (1) there was such a unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist, and (2) circumstances must be such that adherence to the fiction of separate corporate existence would sanction a fraud or promote an injustice. The following factors are also considered in determining whether piercing the corporate veil is appropriate: (1) gross undercapitalization, (2) failure to observe corporate formalities, (3) nonpayment of dividends, (4) insolvency of debtor corporation, (5) siphoning of funds from debtor corporation by dominant shareholder, (6) nonfunctioning of officers and directors, (7) absence of corporate funds, and (8) whether the corporation is merely a façade for the operations of the dominant shareholder.

A fact finder must conclude that the entity was a mere instrumentality of the individual shareholder and that the shareholder so dominated the corporation that it had no separate existence but was merely a conduit to perpetrate a fraud or injustice, or otherwise to circumvent the law.

Plaintiffs have failed to demonstrate that limited liability should be set aside as to the individual Defendants under the circumstances. Specifically, Plaintiffs have failed to set forth any evidence of improper inter-business transfers, or failure to properly invest the funds of the Bensi entities on the part of Defendants. Plaintiffs have only set forth evidence of John Osso’s failures to do so. Regarding Mr. Ben-Yishay, there is no evidence that he violated any of his limited duties under the RULLCA, which would warrant the piercing of the corporate veil.

Therefore, this claim must be dismissed as to Defendants and summary judgment is granted.

(Internal quotations and citations omitted).

An issue that is not uncommon in complex business litigation is how do you collect on a judgment when the counter-party to your contract or the business that defrauded you has no assets. In certain circumstances, discussed in this decision, you can attempt to pierce the corporate veil and recover from a business’s owner or operators. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding whether you can seek to hold a business’s owner or operators liable for the business’s debts.

Click here to subscribe to this or another of Schlam Stone & Dolan’s blogs.

Posted: October 18, 2019

Class Action Asserting Federal Antitrust Claims Did Not Toll State Antitrust Claims

On March 29, 2019, Judge Wilson of the Bergen County Superior Court (Law Division) issued a decision in Mercedes-Benz USA, LLC, v. Nippon Yusen Kabushiki Kaisha, Docket No. BER-L-6325-18, holding that a class action asserting federal antitrust claims did not toll state antitrust claims, explaining:

MBUSA argues that the filing of federal Clayton Act claims by a putative class of direct purchasers in the New Jersey MDL action “tolled” the statute of limitations on MBUSA’s putative New Jersey Antitrust Act claim. However, no such class action tolling applies in this instance.

The doctrine of class action tolling that MBUSA seeks to invoke is sometimes referred to as the “American Pipe” rule. Under American Pipe, the commencement of a class action that is ultimately not certified due to a lack of numerosity suspends the applicable statute of limitations as to all asserted members of the class who would have been parties had the suit been permitted to continue as a class action. The weight of authority holds that American Pipe tolling is afforded only to subsequent individual causes of actions or claims identical to the ones alleged in the earlier putative class action.

In adopting class action tolling, New Jersey courts have expressly relied on American Pipe and discussed it at length. Relying on American Pipe, Staub held that if the pendency of a putative class action does not toll the statute of limitations for individual claimants who would be members of the class if it is certified, potential class members who have discovered their claims would be compelled to file suit to avoid expiration of the period of limitations.

MBUSA also misconstrues American Pipe in arguing that the statute of limitations on its state antitrust claim should be tolled because a previous federal court action asserted substantially the same claims as those asserted by MBUSA under the New Jersey Antitrust Act in this case. However, mere similarity in claims is not enough to warrant American Pipe tolling because the policies underlying American Pipe and like precedents simply do not apply in the cross-jurisdiction context, such as between the federal courts and state courts. However similar or dissimilar the function of federal antitrust law may be with respect to state law, the federal claim is part of a distinct body of law that must be pursued in a wholly different court system. This fact cuts decisively against the application of the policies of American Pipe across jurisdictional lines.

When considering the foregoing, it is abundantly clear that class action tolling under the American Pipe rule is inappropriate given the circumstances, and MBUSA’s state antitrust claims must be dismissed as time-barred.

(Internal quotations and citations omitted).

It is not unusual for the statute of limitations to be an issue in complex business litigation. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding whether a claim is barred by the statute of limitations.

Click here to subscribe to this or another of Schlam Stone & Dolan’s blogs.

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 jlundin@schlamstone.com if you or a client have questions regarding a contract dispute.

Click here to subscribe to this or another of Schlam Stone & Dolan’s blogs.

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 jlundin@schlamstone.com if you or a client have questions regarding whether a claim is barred by an earlier decision or action.

Click here to subscribe to this or another of Schlam Stone & Dolan’s blogs.

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 jlundin@schlamstone.com if you or a client think someone has interfered with your rights relating to a contract.

Click here to subscribe to this or another of Schlam Stone & Dolan’s blogs.

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 jlundin@schlamstone.com if you or a client have a question regarding a dispute that is subject to an arbitration agreement.

Click here to subscribe to this or another of Schlam Stone & Dolan’s blogs.

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 jlundin@schlamstone.com if you or a client have questions regarding whether a claim is barred by an earlier action.

Click here to subscribe to this or another of Schlam Stone & Dolan’s blogs.