Commercial Litigation Law Info blog

When Does a Landlord’s Flat Legal Fee Violate the New Jersey Consumer Fraud Act?

May a landlord charge a tenant a fixed rate each time the landlord has to consult its lawyers for matters related to a lease agreement, even if that fixed rate is higher than the costs the landlord actually incurs?

The Appellate Division of the Superior Court of New Jersey considered this issue in a recent decision. Green v. Morgan Properties, Superior Court of New Jersey: Appellate Division (A-3203-10). In that case, the plaintiffs – tenants of apartment complexes owned by the defendant and landlord, Morgan Properties – were subject to a lease provision that required them to pay attorney’s fees of $400 plus costs anytime the landlord used the services of an attorney for any lease-related matter. The $400 fee applied regardless of whether or not litigation was commenced or whether the attorney was a member of the landlord’s in-house counsel. The landlord owned 131 apartment complexes in 10 states and filed an average of 200 evictions a month in Camden County alone.

The plaintiffs were sued on eviction complaints. In addition to alleging wrongful eviction, the plaintiffs also brought a claim under the Consumer Fraud Act (“CFA”), claiming that the attorney’s fees provision was unconscionable and that the landlord misrepresented the nature of the fees. The Law Division of the Superior Court of New Jersey in Camden County granted the defendant’s motion to dismiss, holding that a landlord is allowed to collect reasonable legal fees incurred in an eviction. The Court found the $400 fee to be reasonable. The plaintiffs appealed.

The Appellate Division rejected the plaintiffs’ claim that the landlord was barred from collecting attorney’s fees from tenants because it is represented by in-house counsel. However, the Court also found that the plaintiffs stated a claim upon which relief could be granted when they alleged that the landlord acted unlawfully in seeking legal fees that exceeded the costs incurred.

The Rules of Professional Conduct bar a non-lawyer from sharing in the fees of an attorney. R.P.C. 5.4 (a). An agreement between a lawyer and non-lawyer regarding the sharing of fees is void and unenforceable “because it is founded upon prohibited activity and is against public policy.” Green at 5 (citing Infante v. Gottesman, 233 N.J.Super. 310, 315 (App. Div. 1989).

Citing a Professional Ethics Opinion that dealt with this Rule of Professional Conduct, the Court stated that the “only situations in which a lawyer may properly permit a client to receive and retain fees paid by others on account of his legal services are when such payments are to reimburse the client in whole or in part for the client’s legal expenses actually incurred in the specific matter for which they are paid.” N.J. Adv. Comm. On Prof’l Ethics Opinion 93, 89 N.J.L.J. 248 (1966).

Though an attorney’s violation of the Rules of Professional Conduct does not give rise to a private cause of action against an attorney, the plaintiffs’ claims were directed instead against the non-attorney defendants, resting on an alleged illegality of the lease’s fees provision and misrepresentation of the nature of the fees sought. The Court held that the plaintiffs adequately alleged misrepresentation of the nature of the fees by showing that the defendants required legal costs of $400 when they had actually incurred costs much smaller than that. While fee-shifting provisions that set fixed amounts are sometimes allowable, they are subject to court review for their reasonableness. Id. at 6. The Appellate Court reversed and remanded the lower court’s decision on that basis.

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Does a New York Contractor Need A License To Sue For Breach of Contract?

New York Contractors who perform work without the requisite license could find themselves lacking the necessary tools to bring legal action against residence owners they contract to do business with.

In a recent New York case, the parties entered into a written contract that required the plaintiff to renovate the defendant’s residence. This included, among other tasks, building a second-story addition to the master bedroom. Enko Const. Corp. v. Aronshtein, 2011 WL 5222881 (N.Y.A.D. 2 Dept.). The project became larger than originally planned, resulting in the demolition of most of the original structure of the defendant’s residence. After the plaintiff had performed extensive work but before he had completed the project, the defendant terminated his services. The plaintiff sued in New York Supreme Court to recover damages for breach of contract and in quantum meruit (the measure of value) for services performed. The defendant moved to dismiss the complaint, claiming the plaintiff was not a licensed home improvement contractor. The Court granted the defendant’s motion, and the plaintiff appealed.       

New York law provides that “no person shall own, maintain, operate, engage in or transact a home improvement business…unless he [or she] is licensed therefore.” Nassau County Administrative Code, § 21–11.2 CPLR 3015(e) states that a complaint that seeks to recover damages for breach of a home improvement contract or to recover quantum meruit for home improvement services is subject to dismissal if it does not allege compliance with the licensing requirement. “An unlicensed contractor may neither enforce a home improvement contract against an owner nor seek recovery in quantum meruit.” J.M. Bldrs. & Assoc., Inc. v. Linder¸ 67 A.D.3d 738, 741.        

The plaintiff conceded that it did not possess the requisite license. Instead, it argued that it did not need a license, due to a statutory exemption to the requirement that applies to the construction of new homes. However, the Appellate Division of the Second Department of the Supreme Court of New York concluded that “[t]he statutory exemption for ‘construction of a new home’ is limited to the creation of a structure, where none previously existed…Even if a dwelling is stripped to the frame and rebuilt, the work constitutes the renovation of an existing home, not the erection of a new one.” J.M. Bldrs. at 740. Because it was undisputed that there was an existing home on the property when the plaintiff began its work, the Court held that the plaintiff was engaged in “home improvement” and thus was required to have the requisite license for such work. Additionally, the Court held that the defendant’s home fell within the Code’s definition of buildings “used as a private residence or dwelling place” even though the homeowners moved out temporarily while the plaintiff performed the renovations.   

The Court’s decision highlights the importance that contractors engaged in “home improvement” in New York ensure that they have the requisite license to perform their work before taking on such tasks. Failure to do so might leave them without legal grounds to recover from parties who terminate their services while a project is ongoing.

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When Someone is Charged with Tax Evasion, Can the Jury Consider the Defendant’s Previous Noncompliance with the IRS?

The answer is yes. Defendant’s prior non-compliance with federal tax laws can be used to prove the defendant’s intent to commit the crime charged.

This was addressed in a case heard in the United States Court of Appeals for the Third Circuit. US v. Daraio, 445 F. 3d 253 (C.A. 3 (N.J.), 2006). In that case, the grand jury returned an indictment charging Daraio, the Defendant, with one count of tax evasion for violating 26 U.S.C. §7201 and 18 U.S.C. §2. Specifically, the indictment charged Daraio with the following:

knowingly and willfully attempt[ing] to evade and defeat the payment of a substantial part of the payroll taxes due and owing by Eagle Security, Inc. to the United States for the quarterly period that included April 1994 through April 1998, in the amount of approximately $222,607.40, by directing clients of Eagle Security, Inc. to pay their unpaid balances that they owed to Eagle Security, Inc. to E.S.S. Co.

Id.

The indictment charged that Daraio directed the clients of Eagle Security, Inc. to pay their unpaid balances to E.S.S. Co. around the same time IRS issued levies on ten clients of Eagle Security, Inc. Those levies required them to pay the IRS the balances that would otherwise be owing to Eagle Security. Id. The government introduced this evidence to prove Daraio’s willingness or intent based on her ‘general feelings or general attitude towards the IRS’. Id. The evidence included the following items:

(1) Payroll tax records for Joseph Daraio, Daraio's husband, trading as ESS–Co. and Quest Investigators, pertaining to tax periods from 1989–1993 including the records themselves, as well as, for certain tax periods, certifications of a “lack of records” indicating the failure to file tax returns;

(2) Certifications by the IRS that Eagle Security did not file payroll tax returns in 1990–1993 and 1999–2004;

(3) Payroll tax records, again including certifications of lack of records, for ESS–Co., beginning in the third quarter of 1998 through the first quarter of 2004;

(4) Certifications of lack of records for ESS–Co. from 1992–1998 and 2000–2004;

(5) Corporate tax records for Eagle Security from 1990–2003,that showed that it had not filed forms with the IRS in 1999, 2001, and 2002;

(6) Corporate tax records for ESS–Co. from 1998–2003; and

(7) Joint personal income tax returns for Joseph Daraio and Daraio from 1984 and 1989–2003.

Id. at 256.

Before presenting this evidence at trial, the prosecutor filed and served a notice of its intent to introduce the evidence at trial. At trial, the lower court gave the following limiting instructions to the jury:

Ladies and gentlemen of the jury, you will soon, and at various other times during the trial, hear evidence of acts the defendant—of acts of the defendant that may be similar to those charged in the indictment, but which were committed on other occasions.

 You must not consider any of this evidence in deciding if the defendant committed the acts charged in this indictment. However, you may consider this evidence for other very limited purposes.

 If you find beyond a reasonable doubt from other evidence in this case, that the defendant did commit the acts charged in the indictment, then you may consider the evidence of similar acts allegedly committed on other occasions, to determine, one, whether the defendant had the intent necessary to commit the crime charged in the indictment; two, whether the defendant had the motive to commit the act charged in the indictment; or, three, whether the defendant willfully committed the acts for which she is on trial, or rather committed them by accident, negligence, or mistake.

Id. at 257.

After the jury returned a guilty verdict, Daraio appealed. The Court of Appeals rejected Daraio’s arguments and affirmed her conviction. In determining the admissibility of the evidence at issue, the Court applied the following four-part test:

(1) The evidence must have a proper purpose; Id. at 264.

(2) It must be relevant; Id.

(3) Its probative value must outweigh its potential for unfair prejudice; and Id.

(4) The court must charge the jury to consider the evidence only for the limited purposes for which it is admitted. Id.

The Court held that the evidence of Daraio’s “history of non-compliance with the IRS” was relevant to prove willfulness and the lower court’s limiting instructions were adequate to prevent any unfair prejudice. Id. at 265. The Court also relied on precedent which held that ‘a defendant’s past taxpaying record is admissible to prove willfulness circumstantially because such evidence is indicative of intent to evade the tax system.’ Id.

Thus, the Court allowed the admission of evidence of defendant’s prior taxpaying records to prove the defendant’s intent to evade taxes.

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What are the limits of the Fiduciary Duty Owed by the Members of an LLC to One Another?

Recently, the Appellate Division of New York, revived a lawsuit over the fiduciary duty owed by members of a limited liability company (“LLC”) to one another in a real estate deal. Fiduciary duty means the duty of trust that one person owes another. In that case, there was an agreement between the members of the LLC that they did not have a fiduciary relationship. However, the Court held that the agreement failed to preclude the claims for the breach of fiduciary duty owed by the members to one another. Pappas v. Tzolis, 2011 WL 4089439, 1, 1 (N.Y. A.D. 2011).

In that case, Plaintiffs, Steve Pappas and Constantine Ifantopoulos and Defendant, Steve Tzolis, were partners in Vrahos, a limited liability company. Vrahos was specifically created to enter into a long-term lease of a building in lower Manhattan. The lease required the payment of a security deposit and personal guarantees from Tzolis and plaintiff Steve Pappas. The operating agreement specified that Tzolis would furnish the security deposit for the lease. It also stated that Tzolis would have the right to sublease the building as consideration for furnishing the security deposit. But, this right to sublease was conditioned on Tzolis making certain additional payments to Vrahos.

Tzolis exercised his right to sublease the building, but failed to make additional payments to Vrahos. A few months later, Tzolis offered to buy out his partner’s shares in Vrahos. Tzolis was to pay $1 million to Mr. Pappas and $500,000 to Mr. Ifantopoulos. At the time the parties executed the assignment agreement, they also signed a handwritten closing certificate. One of the terms of the closing certificate stated: “[E]ach of the undersigned Sellers agrees that Steve Tzolis has no fiduciary duty to the undersigned Sellers in connection with such assignments.” Id at 1. Shortly after the assignments to Tzolis became effective, he assigned the lease to a third party for $17.5 million.

The plaintiffs were outraged. They alleged that Tzolis had started the negotiations for the assignment of the lease months before he offered to buy their shares, and that Tzolis had a duty to inform them and share the profits from the deal. The plaintiffs filed a complaint with causes of action for breach of contract, fraud, breach of fiduciary duty, misappropriation of business opportunity, breach of the implied covenant of good faith and fair dealing and a derivative claim filed on behalf of Vrahos.

Tzolis moved to dismiss the complaint based on the terms of the closing certificate executed by the parties. The lower court granted Tzolis’ motion, finding that the plaintiffs had no cause of action because the contract “eliminates the fiduciary relationship that would, otherwise, be owed by the members to each other and to the LLC.” Id at 3.

 The Appellate Division disagreed with the lower court’s ruling. It held that “[A] fiduciary cannot by contract relieve itself of the fiduciary obligation of full disclosure by withholding the very information the beneficiary needs in order to make a reasoned judgment whether to agree to the proposed contract.” Id. at 5. It also held that the plaintiffs and the defendant were fiduciaries in matters relating to Vrahos until the closing of the buy-out transaction. Therefore, up until that moment, Tzolis had a fiduciary duty to disclose to his partners, the negotiations related to the assignment of the Vrahos lease.

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Which state has jurisdiction when the sale of New Jersey real estate is handled by a New York law firm?

The Appellate Division of the New Jersey Superior Court  has refortified the commitment to holding persons responsible for actions they take in one state but knowing it will or might have a tendency to have an effect in another. Lee v. Rah, 2011 WL 2802794 (N.J.Super.A.D.,2011).

This case is about Rah, a New York attorney, who did not practice in New Jersey, but drafted documents for his clients regarding the ownership and sale of a piece of real estate in New Jersey. Rah performed all the work in his New York office. He also claimed that at all times the deed for the real estate was held in escrow in New York, and it was never recorded in New Jersey. Also, the fees for his services were paid by a New York Corporation. When the Lees tried to sell their real estate, the transaction went sour because the documents Rah drafted had not been recorded and, even if they had been, were improper because they were drafted on a New York form. Thereafter, the Lees sued Rah in New Jersey for malpractice.

Rah moved to dismiss the action on the grounds that he was not subject to the Court’s jurisdiction in New Jersey. The lower court agreed and dismissed the complaint on the grounds of lack of in personam (personal) jurisdiction. The Appellate Division disagreed and reinstituted the lawsuit. The Court held that Rah provided legal services for the transfer and sale of a New Jersey property. Although all of Rah’s activities occurred in New York, he was handling a New Jersey transaction for New Jersey residents. Therefore, even though Rah had no presence in the state of New Jersey, he “was well aware that his legal activities ‘would have direct consequences in New Jersey’”. Id. at 5.  This meant that Rah could not avoid a New Jersey lawsuit by remaining in New York to do work related to New Jersey real estate. Any malpractice attributed to him regarding the real estate would have a predictable impact in New Jersey and, thus, New Jersey was well within its rights to exercise its judicial authority over Rah.

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May an oral settlement agreement reached through mediation be enforced by the court?

In a recent case, the Appellate Division of the Superior Court of New Jersey held that an oral settlement agreement reached during a mediation session could be enforced. However, the party seeking to enforce the mediator’s decision would need to waive his right to confidentiality of the mediation proceedings.  N.J. Ct. Rule 1:40-4(d).  Willingboro Mall, Ltd. v. 240/242 Franklin Avenue, L.L.C.  421 N.J. Super. 445 (N.J. Super. 2011).

On Feb. 2, 2005, plaintiff agreed to sell a Willingboro Township property to defendants. Id. at 449.  In a separately executed indemnification agreement, the defendants also agreed to pay the fines and penalties imposed on the property by the township. Id. On Aug. 22, 2005, plaintiff filed a foreclosure complaint alleging that the defendants defaulted on their obligation to pay the fines and penalties.  Id.  Defendants responded by asserting that foreclosure should not be granted because no such default had occurred. Id.

The General Equity Judge referred the parties to mediation. Id.  On November 6, 2007, the parties and their attorneys attended a mediation session at which the parties reached a settlement. Id. Three days after the mediation session, the defendant’s attorney sent a letter memorializing the terms of the settlement.  Id. Two weeks later, the defendants’ attorney sent another letter to the court and the plaintiff informing them that he had placed $100.000 in the escrow as settlement funds. Id. at 450.

Plaintiff claimed that no final, binding settlement agreement was reached at the mediation session. Id. Defendants’ responded by filing a motion to enforce the mediation settlement. Id.  Following discovery, five witnesses including the mediator testified at a hearing.  Id. at 451. The lower court held that the parties had reached a final, binding settlement at the mediation session. Id.  Plaintiff appealed, arguing that under Rule 1:40-4(i), the oral settlement was not enforceable because it did not meet the following criteria:

1)      It was not reduced to writing at the mediation session.

2)      A copy of the settlement was not given to each party.

3)      The parties did not sign the writing at the mediation session.

Id.

The Court considered the express terms of the rule governing mediation which states:

If the mediation results in the parties' total or partial agreement, it shall be reduced to writing and a copy thereof furnished to each party. The agreement need not be filed with the court, but if formal proceedings have been stayed pending mediation, the mediator shall report to the court whether agreement has been reached. If an agreement is not reached, the matter shall be referred back to court for formal disposition.

            R. 1:40-4(i)

The Court held that the rule does not require the parties to reduce the settlement agreement to writing at the mediation session, nor does it provide that all parties should receive a copy of the writing before leaving the mediation session. Id. at 453. “A delay of three days to memorialize a settlement reached through mediation does not vitiate the settlement.” Id. at 454. Thus, the Court rejected the plaintiff’s argument that the rule requires “contemporaneous reduction of the terms to writing and obtaining signatures on the document at the mediation” session.  Willingboro Mall, Ltd. v. 240/242 Franklin Avenue, L.L.C.,  421 N.J. Super.  445, 453 (N.J. Super. 2011).

Accordingly, the oral agreement was enforceable.

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Consumer Class Actions: Have They Reached the Vanishing Point?

Have we just heard the death knell for class action lawsuits? Probably not, but the distant sounds of court decisions undermining the power and scope of class actions are coming from just over the horizon.

In April 2011, the United States Supreme Court issued a ruling which held that the Federal Arbitration Act (“FAA”) preempted the California Supreme Court ruling which outlawed class action bans in many consumer contracts “because it ‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.’” AT&T Mobility LLC v Conception, 131 S.Ct. 1740, 1742 (U.S., 2011).

In that case, Conception brought this lawsuit in the federal court claiming that AT&T had engaged in false advertising and fraud by charging sales tax on “free” phones. Id. The cell phone contract between the parties provided for arbitration of all disputes in individual capacity but did not permit class action arbitration. Id. Although AT&T moved to compel arbitration, the District Court and the Ninth Circuit Court of Appeals denied AT&T’s motion on the grounds that the arbitration provision was unconscionable because it disallowed class actions. Id. In issuing this ruling, the District Court relied on the California State Supreme Court’s ruling in  Discovery Bank v Superior Court, 36 Cal 4th 148 (Cal., 2005). The Ninth Circuit Court of Appeals also found that the ruling in Discovery Bank was not preempted by the Federal Arbitration Act because Section 2 of FAA permits arbitration agreements to be not enforced “upon such grounds as exist at law or in equity for the revocation of any contract.” Id.

However, the U.S. Supreme Court held that although Section 2’s “saving clause preserves generally applicable contract defenses”, it does not “preserve state-law rules that stand as an obstacle to the accomplishment of FAA’s objectives” of enforcing arbitration agreements according to their terms to facilitate an informal and streamlined proceeding. Id at 1743. Justice Breyer dissented stating that “a single class proceeding is surely more efficient than thousands of separate proceedings for identical claims. Thus, if speedy resolution of disputes were all that mattered, then the Discover Bank rule would reinforce, not obstruct, that objective of the Act.” Id. at 1759.

Following this lead, another Federal Circuit Court, the 11^th Circuit U.S. Court of Appeals, has ruled that a clause in AT&T’s user agreement compelling individual arbitration can be enforced despite a Florida law against such class-action bans. Cruz v. Cingular Wireless, LLC, 648 F.3d 1205 (C.A.11 (Fla.),2011). Once again, the Court held that the class action waiver in the plaintiff’s arbitration agreement is enforceable under FAA because FAA preempted Florida state law since the state law would “stand [ ] as an obstacle to the accomplishment and execution” of the FAA. Id. at 1207. These holdings are not favorable to the consumers and are in fact depriving the consumers of “class actions”, a powerful tool by which consumers can recover and also change some unlawful corporate practices.

Recently, Sony changed its terms and conditions of use for the PlayStation Network (PSN) to include class action waivers. Thus, under the new terms and conditions, users must now agree to forgo their right to join a class-action lawsuit against Sony. Sony’s new terms and conditions apply to the new as well as the existing customers and the existing customers may decline these new terms by sending a letter to Sony.

Thus, the day when the majority of companies will follow Sony’s footsteps in adding class action waivers to their arbitration contracts may be on the horizon. Change is coming.

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May Attorneys Fees Be Awarded to a Prevailing Party Even When a Case Doesn’t Reach Trial?

In a recent case, the Appellate Division of the Superior Court of New Jersey held that a plaintiff can be awarded fees even when a case does not reach trial if the suit itself helped encourage a defendant to correct an unlawful practice. Sika Corp. v. Hostler, 2011 N.J. Super. LEXIS 1202 (App. Div. May 11, 2011).

In 2004, the plaintiff, Sika Corporation (“Sika”), hired the defendant, Joseph Hostler (“Hostler”), as the national sales manager of its chemical manufacturing company. Upon being hired, Hostler signed a contract that included a non-compete clause preventing him from disclosing the company’s confidential information; soliciting Sika customers or employees on behalf of a different employer within a year of being terminated; or working, without consent, with a competitor anywhere Sika does business. Id. The agreement also stated that “[i]n the event of a breach… , [plaintiff] shall be entitled to such injunctive relief and damages and also shall be entitled to reimbursement…of [plaintiff’s] reasonable attorneys’ fees and costs incurred by [plaintiff] in enforcing” the agreement. Id. at 2, 3.

In April 2009, Hostler notified Sika that he was leaving the company in order to take a position at BASF Group (“BASF”). Shortly after, Sika filed a complaint against Hostler, alleging that he breached his contract with Sika by emailing a customer contact list to his private email address; soliciting Sika’s customers on behalf of BASF while still employed by Sika; and soliciting Sika employees to work with him at BASF.  

The lower court entered a preliminary injunction against Hostler and BASF in June 2009 and the parties reached a settlement embodied in a final consent order in September 2009. Sika later applied for attorney’s fees, arguing “that there had been "certain breaches" of the confidentiality agreement that caused it to file suit to enforce the agreement. Finally, plaintiff argued that Hostler had violated his duty of good faith and loyalty, which caused plaintiff to incur costs to enforce the agreement.” Id. at 7. On that basis, Sika argued that Hostler should pay Sika’s attorney’s fees.

However, the Court denied the motion and a subsequent motion for reconsideration. The Court  reasoned that it had been settled prior to moving past the preliminary injunction, and therefore, the Court had not made a final ruling on the merits of the case. On that basis, there was no finding that bad faith had occurred.  

In a 2008 case, the New Jersey Supreme Court addressed the question of whether a litigant is entitled to exercise its right to attorneys fees on the basis of a contract that states attorneys fees will be paid to the “prevailing party.” The issue is how to determine who is the prevailing party if the case was settled before anyone could prevail in the conventional sense.

The test for determining whether someone is a prevailing party is whether the claimant can demonstrate:

1)      a factual causal nexus between the plaintiff’s litigation and the relief ultimately achieved, and

2)      that the relief ultimately secured by plaintiffs had a basis in law.

Mason v. City of Hoboken, 196 N.J. 51, 76 (2008). (“Put differently, a party prevails "when actual relief on the merits of [the] claim materially alters the relationship  [*18]  between the parties by modifying the defendant's behavior in a way that directly benefits the plaintiff." Id. at 73.)

In Sika, the Appellate Division decided that the lower court had raised the bar of the second prong too high. The Appellate Division agreed with Sika’s argument that the focus should be on whether the “plaintiff’s lawsuit acted as a catalyst that prompted defendant to take action and correct an unlawful practice.” Sika at 19. The Court held that

“[w]hether that resolution involves ‘a judicial decree, a quasi-judicial determination, or a settlement [is] not a factor.” Id.

The Court’s decision is significant because it allowed attorneys fees to a prevailing party that did not actually prevail in the conventional sense. In other words, it highlights the legal concept that a party can prevail (and be entitled to legal fees) even if it settles the case.

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