2002-2003 Supreme Court Year in Review:
Commercial Law
By:
Arthur L. Raynes
Partner, Wiley Malehorn
& Sirota
The Supreme Court rendered a handful of commercial law cases. The cases contain few broad pronouncements, but instead settle fairly narrow questions of particular importance to certain groups.
In First American Title Insurance Company v. Lawson, 2003 N.J. LEXIS 703 (2003), the main issue before the New Jersey Supreme Court dealt with material misrepresentations made by partners in a law firm. The firm was organized as an L.L.P., and the question was whether material representations made by one or more of the partners in an application to an insurer for malpractice coverage on behalf of the firm and its partners made that coverage void ab initio as to all the partners?
The New Jersey Supreme Court in a 6-1 decision said such coverage is void only as to the firm and to the partners who committed wrongful acts, but not as to an innocent partner.
The
relevant facts of the case are as follows: The three-partner law firm of
Wheeler, Lawson & Snyder was formed among Edward Lawson, Jr., a
In
late 1997, about the same time that Lawson discovered Wheeler’s misappropriation
and misuse of funds, Wheeler, on behalf of the firm, applied for legal
malpractice insurance with Certain Underwriters at Lloyds. On the application Wheeler failed to disclose
any potential malpractice claims facing the firm. Lloyds issued a policy that
covered the firm and all three partners.
The policy was cancelled in early 1999 for failure to pay the premium,
but reinstated soon thereafter when the premium was paid and Wheeler executed a
new warranty statement which stated he did not know of any claims against the
firm or its partners during the past five years, nor of any basis for any such
claim. Shortly before the warranty was
executed by Wheeler, the Office of Attorney Ethics (OAE) had notified the firm
that it would be conducting an audit of the firm’s books based on grievances
filed as a result of various real estate transactions. On the same day that the new warranty was
faxed to the underwriter’s broker, the OAE sought the temporary suspension of
Lawson from the practice of law. Lawson,
again the only New
Two separate suits ensued based on the mishandled real estate transactions by the firm, and the client claims were paid by the title companies, who in turn filed suit against the firm to recover the funds paid out. When a notice of insurance claim was filed by Snyder, the carrier denied the claim alleging the malpractice coverage was “was void by reason of the material misrepresentation.” First American Title, supra, 2003 N.J. LEXIS 703 at *16.
The
trial court, in response to a summary judgment motion, denied the motion
against Snyder as a “separate legal entity.”
The
Court balanced the interaction of the law regarding liability for individual
partners in a limited liability partnership, and insurance law as it applies to
material misrepresentations in an insurance application. Although a material
misrepresentation in the application would normally void a policy, Justice
Verniero found to do so for all partners was inconsistent with the Uniform
Partnership Law, N.J.S.A. 42:1-1
to -49. Further, the Court found that to
rescind coverage for all the partners would potentially leave clients without
the ability to collect on a malpractice claim and would be a “harsh and
sweeping result that would be contrary to the public interest.”
Snyder,
because he did not participate in the fraud or misconduct, maintained a
separate office, did not issue checks from the New Jersey accounts, and was
assumed to have no knowledge of the records that Wheeler maintained, was viewed
as an “innocent partner”, separate and distinct from the firm, Wheeler, and
Lawson. Accordingly, the Court drew
“certain boundaries” and found that on the question of whether his coverage was
void ab initio that equity demanded that Snyder’s coverage not be
rescinded.
Justice
LaVecchia filed a dissenting opinion.
She noted that the carrier would never have issued the policy were it
not for the fraudulent misrepresentations.
She would not have found coverage for any of the partners, nor the
firm. She argued that the policy should
not have been divisible. “Allowing coverage for even one of the three attorneys
comprising the law firm that misrepresented on the application for insurance
ignores the critical fact that the insurer never would have issued a policy
covering the firm and its partners but for the deceit of one partner (who stole
money from clients), the complicity of a second partner, and the indifference
of a third partner.”
This case is significant because it provides some expectation of coverage for innocent partners. The situation of the partners having no contact with one another, being located in different states, and having virtually no financial connection seems fact sensitive. The matter was remanded, presumably for a determination whether Snyder could somehow be found negligent, despite his “innocence” of intentional wrongdoing.
Radon
In Kotkin v. Aronson, the
issue was the termination of a real estate contract based upon a clause in the
contract that permitted the purchaser to terminate the contract for property
defects. 175 N.J. 453
(2003). The Kotkins and the Aronsons had
entered into a written contract, drafted by the seller’s real estate
agent. As the purchaser of the real
estate, the Kotkins delivered $10,000 in deposit money to the Aronsons. A clause in the contract allowed the
purchaser to conduct a home inspection prior to the transfer of the property. The contract included in the definition of
defects in the property possible environmental conditions affecting the
property, including the presence of radon gas.
Following their home inspection, the
Kotkins informed the Aronsons that radon gas was present at the property. The Aronsons then undertook remedial work to
remove the radon gas from the property.
The Aronsons’ remedial efforts did not completely eliminate the radon
gas from the property; however, the amount of radon gas present was lowered to
levels that the Aronsons and their proffered expert deemed “safe” levels.
The trial court had entered summary judgment on behalf of the Kotkins. Ultimately, the Supreme Court affirmed.
The
Court ruled that the real estate contract should be terminated and the deposit
monies returned to the Kotkins because the contract as written did not refer to
any specific level of radon gas as a defective condition but simply to the
presence of radon gas.
The Supreme Court eschewed any analysis based on concepts of material or substantial breach. The Court even acknowledged that all homes have some measurable level of radon gas. Nonetheless, the Court refused to “make Sellers a better or more sensible contract than the one they made for themselves.” Id at 455.
The Court encouraged future parties
to “include such specificity” regarding the level of radon necessary to trigger
a buyer’s right to terminate.
Subcontractor
Registration
In R.C.G. Construction Company, Inc., v. The Mayor And Council Of The Borough Of Keyport, 175 N.J. 68 (2003), the two issues before the New Jersey Supreme Court were:
(1) Does the Public Works Contractor Registration Act (PWCRA) require subcontractors in a public bidding case to register (a) before the general contractor submits its bid proposal or (b) before actual work begins?
(2) Did the omission of the bid price in the corporate resolution constitute a material defect?
The relevant facts involved public bidding for the construction of a new municipal building complex for the Borough of Keyport. In soliciting bids, Keyport specified that bidders had to comply with the requirements of the PWCRA. The lowest of the seventeen bids received was submitted by A & K Excavating LLC, followed in ascending order by bids from Maharaj Construction Inc., Emara Construction Company, Inc, and R.C.G. Construction Co., Inc.
A& K was awarded the contract by Keyport, over objections from R.C.G. Specifically, R.C.G. claimed that the bid from A&K was invalid for two reasons: (1) Its steel subcontractor, D.L. Zagata, Inc., was not registered under the PWCRA when the bid proposal from A & K was submitted to Keyport; and (2) Omission of the bid price in A & K’s corporate resolution was a material defect.
The trial court vacated the award of the contract to A & K based on the non-registration of Zagata, but determined that the bid price omission was waivable. The Appellate Division reversed for the herein-stated reasons, and the New Jersey Supreme Court affirmed, based on Judge Havey’s Appellate Division opinion, reported at 346 N.J. Super 58 (App. Div. 2001).
N.J.S.A. 34:11-56.51 provides:
No contractor shall bid on or engage in any contract for public work as defined in section 2 of P.L. 1963, c. 150 (C. 34:11-56.26) unless the contractor is registered pursuant to this act.
The issue in the case was whether this statutory provision required registration of a subcontractor when the general contractor submitted its bid.
Since under the PWCRA a contractor, by definition, includes a subcontractor and lower tier subcontractor (N.J.S.A. 34:11-56.50), the trial court vacated the award to A & K because it determined that the language of the statute was intended by the legislature to mean that both the contractor and any subcontractors must be registered under the Act when a bid is submitted on a public works project.
The
Appellate Division reversed the lower court.
It determined that interpretation of the language of the statute gave
rise to the conclusion that “engage in” means “perform work on a public
project.”
Specifically,
Judge Havey found that: (1) the identities of subcontractors or lower tier
subcontractors who perform only minor aspects of the overall project are often
not known at the time of bidding; (2) the statutory scheme viewed in its
entirety suggested that “perform” and “engage” were used interchangeably; (3)
the legislative statement attached to the PWCRA focused on subcontractor
performance as critical for registration purposes; (4) State agencies had taken
the position that the time when subcontractors were required to be registered
was when the work began; (5) the legislative intent behind PWCRA was to protect
workers in public works projects, and would not be compromised by requiring a
subcontractor to be registered before work begins rather than at the time of
bidding; (6) that the requirement that subcontractors must disclose any
previous labor law violations, may be required to post a surety bond for
workers hurt by any previous violation, and are subject to “rigorous
record-keeping” gives the Department of Labor a great deal of control over the
subcontractors; and (7) the fact that the contractor may have its certification
suspended or revoked should their subcontractors not be registered, provides a
“safeguard” by providing incentive for the contractors to make sure the
subcontractors are registered.
The Appellate Division also agreed
with the Trial court and determined that omission of the bid price in the corporate
resolution was a waivable, and not a material defect. The waiver of this defect would neither
prevent Keyport from “its assurance that the contract would be entered into and
performed,” nor give A& K a competitive advantage.
Interest
Two
Supreme Court cases dealt with the award of interest. In Van Note-Harvey Associates, P.C. v.
Township of East Hanover, 175 N.J. 535 (2003), the Court addressed
whether contractual prejudgment interest on accumulating accounts receivables
should be awarded in a suit on a book account against a public entity. The case arose out of a 1972 agreement to
provide professional engineering services for a multi-million dollar sanitary
sewer construction project for the
The jury rejected the Township’s counterclaim alleging professional negligence and other issues. The instructions to the jury failed to include an instruction about contractual prejudgment interest. When determining the appropriate level of damages to award, the jury requested direction from the trial court regarding interest. The trial court instructed the jury that it should not be concerned with prejudgment interest or other interest because the Judge would determine interest. Accordingly, the jury award did not include prejudgment or other interest.
The
trial court rejected the plaintiff’s post-trial application for prejudgment
interest “because … plaintiff has not shown overriding and compelling equitable
reason to justify such an award.” Van Note-Harvey Associates, 175 N.J.
at 541. The Appellate Division affirmed
the trial court, deferring to the trial court determination that “prejudgment
interest was not warranted under the contract or the equities of the
case.”
The lower courts had utilized a standard for awarding prejudgment interest in a contract or contract-like action against a governmental agency where a statute did not specifically authorize interest. The Supreme Court reversed the lower courts’ determinations because those courts failed to address the claim that the Township obligated itself by the contract to pay prejudgment interest, in the same manner as a private enterprise. The unanimous Court, in an opinion written by Justice Coleman, found that the Township had to comply with its contractual obligations and remanded the issue of contractual prejudgment interest on the accumulating overdue accounts receivable to the Law Division for a non-jury determination.
The Court stated:
The claim here is based on the contractual provisions previously expressed. In the face of those contractual provisions, the Township, as any private entity, must be required to comply with its contractual obligations.
The reasoning for remanding for a non-jury determination was that the conduct of the parties constituted a waiver of the prior demand for a jury trial as to the prejudgment interest issue. The suggestion was that the award of contractual interest would otherwise have been a matter for jury consideration.
Interest was also at issue in Henderson v. Camden County Municipal Utility Authority, 826 A.2d 615, 2003 N.J. LEXIS 686 (2003). The primary issue there was whether the Municipal and County Utilities Authority Law (MCUAL) allows utilities to charge compound interest on delinquent customer accounts. The Court also considered whether its decision should be applied retroactively and whether Plaintiff was entitled to attorney’s fees.
The
relevant facts involve Sheila Henderson, a water and sewer customer of Camden
County Municipal Utilities Authority (CCMUA).
After not paying CCMUA for seven years,
The
trial court determined that the statute permitted utilities to charge compound
interest and entered summary judgment for CCMUA. The Appellate Division, in an
unreported decision, reversed and remanded for further proceedings. The
Appellate Division stayed
N.J.S.A. 40:14B-41 provides:
In the event that a service charge of any municipal authority with regard to any parcel of real property shall not be paid as and when due, interest shall accrue and be due to the municipal authority on the unpaid balance at the rate of 1 1/2 % per month until such service charge, and the interest thereon, shall be fully paid to the municipal authority.
[Emphasis added]
The Court focused on the term “unpaid balance”, which was undefined in the statute. The utility maintained that “unpaid balance” meant principal plus previously accumulated interest, while plaintiff argued that it meant principal alone.
In deciding that N.J.S.A. 40:14B-41 refers only to simple interest, the Court relied on the following: (1) Courts have generally regarded the imposition of compound interest as unfairly "harsh and oppressive" and compound interest has been disfavored at common law; (2) the legislative history that had accompanied the increase of the chargeable interest rate in the statute referred only to an increase as applied to user charges and not unpaid interest; (3) the legislative history also indicated the increase was meant to “parallel” other legislation that imposed a ceiling on interest on tax delinquencies, and that if compound interest were charged the annual accumulated interest could exceed the ceiling set in the other statute; and (4) where the legislature had authorized compound interest in other statutes it has done so explicitly, and in this case it had not. Unpaid balance, therefore, “contemplates unpaid service charges only and not accrued unpaid interest.” Id at *10-14.
The Court decided that to apply the
decision retroactively, requiring CCMUA to essentially refund any compound
interest already paid by any of its customers, would be inequitable because the
time and expense that would be required for CCMUA (as well as the other utility
authorities that similarly charged compound interest) to review the records and
issue refunds would be so burdensome as to be unfair. The decision was
therefore applied prospectively, and only those customers who still owed on
delinquent accounts or who accumulated future delinquent accounts, could have
the benefit of recalculation of interest based on a simple interest
accounting.
The
Court also awarded
Justice Zazzali, writing for a unanimous Court affirmed the unreported judgment of the Appellate Division.
Consumer Fraud Act
Finally, Zorba Contractors, Inc.
v. Housing Authority of the City of