Opinion
DOCKET NO. A-0030-14T3
09-01-2015
JOHN A. PAONE, Plaintiff-Respondent, v. JOHN GROFF, SR., Defendant-Appellant.
Conrad J. Benedetto, attorney for appellant (Jacob L. Crockett, on the brief). Joel L. Schwartz, attorney for respondent.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION Before Judges Ostrer and Carroll. On appeal from the Superior Court of New Jersey, Law Division, Atlantic County, Docket No. L-7080-12. Conrad J. Benedetto, attorney for appellant (Jacob L. Crockett, on the brief). Joel L. Schwartz, attorney for respondent. PER CURIAM
Defendant John Groff, Sr. appeals from the August 8, 2014 Law Division order denying reconsideration of a June 20 order that denied his application for frivolous litigation sanctions. We affirm.
I.
We glean the following facts and procedural history from the record. In 2006, plaintiff John A. Paone entered into an agreement to sell his limousine business, Jonathan's Transportation Service, Inc. (Jonathan's), to a limited liability company, Torgro Atlantic City, LLC (Torgro), owned by defendant. Torgro defaulted on the agreement, and in March 2007 plaintiff and Jonathan's commenced an action against Torgro in the Chancery Division seeking to rescind the transaction (the Chancery action). Following a trial, the Chancery judge denied rescission, but entered an award of monetary damages against Torgro. Torgro then filed for protection under the United States Bankruptcy Code in February 2008. The bankruptcy case was closed in May 2012, with no payments on the judgment made to plaintiff.
Later in 2012, plaintiff instituted the present action in the Law Division. The complaint alleged that defendant executed a personal guaranty (the guaranty) of Torgro's debts associated with the sales agreement, and sought damages of $299,205.68 plus interest owed on the judgment in the Chancery action.
On November 16, 2012, defendant's counsel served plaintiff's counsel with a frivolous litigation notice (FLN). The FLN stated that plaintiff's action was filed in bad faith because plaintiff had failed to assert his claim against defendant in the earlier Chancery action, and that during that litigation plaintiff's counsel had certified that no other claims were contemplated. The FLN demanded that plaintiff withdraw his complaint within twenty-eight days, failing which defendant would seek damages pursuant to N.J.S.A. 2A:15-59.1. On November 20, plaintiff's counsel declined to dismiss the action. Referencing the Chancery action, counsel stated that since "the only relief sought in that complaint was [the] equitable relief of rescission. . . . there was no basis to sue the guarantor, John Groff, Sr."
Defendant filed an answer and counterclaim on December 27, 2012. The answer included a separate defense that plaintiff's claim was barred by the entire controversy doctrine. In his counterclaim, defendant alleged that plaintiff exercised bad faith by failing to bring his claims under the guaranty in the prior action, and thereby engaged in frivolous litigation in violation of N.J.S.A. 2A:15-59.1.
On March 21, 2013, plaintiff moved for summary judgment on the basis that defendant had no defense to his failure to make any agreed-upon payments under the guaranty and thus plaintiff was entitled to judgment as a matter of law. Defendant opposed the motion and filed a cross-motion for summary judgment seeking dismissal of plaintiff's complaint as barred by the entire controversy doctrine. On August 13, 2013, the court denied plaintiff's motion and granted defendant's cross-motion for summary judgment. In a written statement of reasons, the court found that "it was 'inexcusable' for [p]laintiff's counsel not to address the status of [defendant] in the Chancery litigation." Accordingly, the judge was "satisfied that [p]laintiff's claim on the Guaranty Agreement should have been brought in the Chancery Court, and at a minimum, [defendant's] potential liability should have been brought to the [c]ourt's and opposing counsel's attention."
Plaintiff moved for reconsideration, largely relying on Kent Motor Cars, Inc. v. Reynolds & Reynolds, Co., 207 N.J. 428 (2011). In Kent, the Court noted that dismissal of a subsequent action under the entire controversy doctrine requires a three-prong finding that: (1) the action is a "successive action;" (2) "the failure to provide notice of other potentially liable parties was 'inexcusable;'" and (3) substantial prejudice will result to the undisclosed party's right to defend the action. Id. at 440 (citation omitted). Plaintiff argued that defendant, as the sole member of Torgro, did not establish that he was "substantially prejudiced" by the failure to name him in the Chancery action because he had every opportunity to defend that action through his LLC. On October 18, 2013, the trial court denied the motion, explaining that plaintiff's disagreement with its interpretation of Kent was "not a sufficient ground . . . for reconsideration."
In the interim, on September 11, 2013, defendant filed a motion for frivolous litigation sanctions, pursuant to N.J.S.A. 2A:15-59.1 and Rule 1:4-8. The motion sought an award of $18,528.08 for counsel fees and expenses incurred by defendant against plaintiff and plaintiff's attorney, jointly and severally. The court denied the motion on October 18, 2013. In his written statement of reasons, the judge found that defendant's November 16, 2012 FLN was inadequate because it failed to cite Rule 1:4-8(b) and did not state with specificity why plaintiff's complaint violated the Rule. Defendant does not appeal this order.
After arbitration apparently did not succeed in resolving the dispute, on May 20, 2014, defendant again moved for frivolous litigation sanctions. The motion sought an award of fees and expenses totaling $26,537.58 against plaintiff only, pursuant to N.J.S.A. 2A:15-59.1. Defendant argued that
[plaintiff] knew or should have known that the claims for breach of the personal guarantee were legally insufficient as they were barred under the entire controversy doctrine because, at the very least, he was so advised in [d]efendant's November 16,
2012 "frivolous claim" letter as well as by [d]efendant's counterclaim.
Notably, in opposing the motion, plaintiff certified:
12. I chose to pursue enforcement of the Guaranty because my attorney advised me that the lack of prejudice to the [d]efendant (he was/is the sole owner of [Torgro] (the judgment creditor)) and the interests of equity and fairness ought to have been sufficient to overcome any issues associated with our failure to name . . . defendant in the rescission [c]omplaint.Additionally, plaintiff's attorney certified:
3. In reviewing the facts of this case and its protracted history, I researched the [e]ntire [c]ontroversy doctrine to determine when and if any exceptions to its applications might apply to the facts of this case.
4. My research revealed that the decision and rationale of the [C]ourt in Kent Motors v. Reynolds, 207 N.J. 428 (2011) could apply to the present case and the transactions at issue.
5. Based upon the facts, it seemed as if the current [d]efendant would suffer no prejudice to the imposition of the judgment from the underlying case as his solely owned LLC was the original defendant and it seemed as if issues of equity and fairness would allow a relaxation of the [e]ntire [c]ontroversy doctrine since [] [d]efendant and his single member LLC essentially stole [] [p]laintiff's business.
6. Given my thought process . . . I advised [] [p]laintiff to pursue enforcement of the guaranty.
7. [] [p]laintiff at all times acted on my advice, and would not have filed this complaint had I not advised him that he had a valid cause of action based on the facts as he understood them.
On June 20, 2014, the court denied the motion. As with the prior motion, the judge again found defendant's FLN deficient under Rule 1:4-8(b), as it failed to "cite the Rule, nor provide the specificity contemplated by the Rule." The judge further stated, "[a]dditionally, citing N.J.S.A. 2A:15-59.1 in his [c]ounterclaim does not satisfy the requirements of a 'Notice and Demand' as contemplated by the Rule."
Defendant moved for reconsideration, arguing that the court's determination was erroneous because it "was made pursuant to Rule 1:4-8, which sets forth the requirements for obtaining sanctions against a party's attorney, rather than pursuant to N.J.S.A. 2A:15-59.1, which permits the court to issue sanctions against a party . . . ." On August 8, 2014, the court rejected this argument and denied reconsideration. While noting that defendant's motion for sanctions was initially denied solely because it failed to comply with the procedural requirements of Rule 1:4-8, substantively, "[d]efendant failed to demonstrate that [p]laintiff, individually, acted in bad faith . . . ." Citing McKeown-Brand v. Trump Castle Hotel & Casino, 132 N.J. 546, 563 (1993), the court determined that, even if it were to reconsider its decision, defendant's application still failed since "at all times [p]laintiff acted on the advice of counsel that he had a viable [c]omplaint against [d]efendant in commencing the instant action."
II.
A trial court's determination granting or denying fees and costs for frivolous litigation is reviewed for abuse of discretion. Ferolito v. Park Hill Ass'n, 408 N.J. Super. 401, 407 (App. Div.), certif. denied, 200 N.J. 502 (2009); see also McDaniel v. Man Wai Lee, 419 N.J. Super. 482, 498 (App. Div. 2011). "[A]buse of discretion is demonstrated if the discretionary act was not premised upon consideration of all relevant factors, was based upon consideration of irrelevant or inappropriate factors, or amounts to a clear error in judgment." Masone v. Levine, 382 N.J. Super. 181, 193 (App. Div. 2005) (affirming award of sanctions). To the extent that the trial court's decision implicates legal principles, we independently evaluate those legal assessments de novo. See Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995); Finderne Mgmt. Co. v. Barrett, 402 N.J. Super. 546, 573 (App. Div. 2008), certif. denied, 199 N.J. 542 (2009).
On appeal, defendant first argues that the trial court erred in denying his application for frivolous litigation sanctions for failure to comply with the procedural requirements of Rule 1:4-8. Defendant contends that there is nothing in Rule 1:4-8(b) that requires that the Rule itself be cited in a FLN. Defendant asserts that the FLN sufficiently specified that relief was sought based on plaintiff's failure to assert his claim in the Chancery litigation and the certification by counsel that no other claims were contemplated. Additionally, defendant argues that reconsideration of the June 20, 2014 order was warranted because it was "palpably incorrect" in relying solely upon Rule 1:4-8, which applies where sanctions are sought against plaintiff's counsel, rather than N.J.S.A. 2A:15-59.1, which applies to claims for sanctions against a represented party individually.
When seeking sanctions for frivolous litigation, a moving party must comply with Rule 1:4-8. To the extent practicable, the procedures prescribed by the Rule also apply to the assertion of counsel fees and costs against a represented party pursuant to N.J.S.A. 2A:15-59.1. R. 1:4-8(f). The motion for sanctions must describe the specific conduct alleged to have violated the Rule, and include a certification that the applicant served written notice and demand on the attorney who signed or filed the challenged paper. R. 1:4-8(b)(1). "No motion shall be filed if the paper objected to has been withdrawn or corrected within [twenty-eight] days of service of the notice and demand[.]" Ibid.
The notice and demand must include a demand that the paper be withdrawn, and notice that an application for sanctions will be made within twenty-eight days of service. Ibid. This is known as the "safe harbor" provision. Toll Bros., Inc. v. Twp. of W. Windsor, 190 N.J. 61, 69 (2007). The safe harbor provision of the rule is designed to give prompt warning to those engaged in frivolous litigation, and the opportunity to take remedial action. Id. at 72. Although the procedural requirements of the frivolous litigation rule and statute should be observed where it is practicable to do so, those requirements should not always be treated rigidly, and they may be relaxed on a "case-by-case basis." ASHI-GTO Assocs. v. Irvington Pediatrics, P.A., 414 N.J. Super. 351, 363-64 (App. Div.), certif. denied, 205 N.J. 96 (2010).
In this case, we agree with defendant that his FLN was sufficient to comply with the "safe harbor" provision of Rule 1:4-8(b)(1). While it did not specifically cite the Rule, it did cite the statute under which frivolous sanctions would be sought against plaintiff individually if the complaint was not withdrawn within twenty-eight days. Also, while the FLN made no mention of the entire controversy doctrine, it gave adequate notice that it was based on plaintiff's failure to assert his claims in the Chancery action, where plaintiff's pleadings had indicated that no other claims were contemplated.
Defendant next argues that the trial court erred in finding that he failed to demonstrate that plaintiff individually acted in bad faith in filing the complaint. We disagree.
To support an award against a represented party under N.J.S.A. 2A:15-59.1, the court must find that the claim was pursued in "bad faith, solely for the purpose of harassment, delay or malicious injury," N.J.S.A. 2A:15-59.1(b)(1), or the non-prevailing party knew or should have known it was pursued "without any reasonable basis in law or equity and could not be supported by a good faith argument for an extension, modification or reversal of existing law." N.J.S.A. 2A:15-59.1(b)(2). The statute applies only to actions of the parties, not the attorneys representing them. McKeown-Brand, supra, 132 N.J. at 560; ASHI-GTO Assocs., supra, 414 N.J. Super. at 363. When a frivolous litigation claim is based on the lack of a reasonable basis in law or equity, and the non-prevailing party is represented by an attorney who presumably advised the party to proceed, an award cannot be sustained unless the court finds that the party acted in bad faith in pursuing or asserting the unsuccessful claim. Ferolito, supra, 408 N.J. Super. at 408.
Rule 1:4-8(d) authorizes a sanction against an attorney and pro se party for a violation of Rule 1:4-8(a), which requires an attorney to certify, based on "knowledge, information, and belief" after reasonable inquiry, that, among other things: "the claims, defenses, and other legal contentions therein are warranted by existing law or by a non-frivolous argument for the extension, modification, or reversal of existing law or the establishment of new law[.]" R. 1:4-8(a)(2).
The rule and statute must be interpreted strictly against the applicant for an award of fees. See LoBiondo v. Schwartz, 199 N.J. 62, 99 (2009); DeBrango v. Summit Bancorp, 328 N.J. Super. 219, 226 (App. Div. 2000). This strict interpretation is grounded in "the principle that citizens should have ready access to . . . the judiciary." Belfer v. Merling, 322 N.J. Super. 124, 144 (App. Div.), certif. denied, 162 N.J. 196 (1999). "The statute should not be allowed to be a counterbalance to the general rule that each litigant bears his or her own litigation costs, even when there is litigation of 'marginal merit.'" Ibid. (citation omitted). Sanctions should be awarded only in exceptional cases. See Iannone v. McHale, 245 N.J. Super. 17, 28 (App. Div. 1990). "When the plaintiff's conduct bespeaks an honest attempt to press a perceived, though ill-founded and perhaps misguided, claim, he or she should not be found to have acted in bad faith." Belfer, supra, 322 N.J. Super. at 144-45. The party seeking sanctions bears the burden to prove bad faith. Ferolito, supra, 408 N.J. Super. at 408. Moreover, the grant of a dispositive motion, without more, does not suffice to establish a losing party's bad faith. Ibid.
Guided by this authority, we conclude that the judge did not abuse his discretion in denying defendant's application for frivolous lawsuit sanctions. The record reveals that plaintiff instituted the Law Division action on the guaranty signed by defendant in reliance on counsel's advice that the claim was tenable. An unrefuted certification from plaintiff's attorney states that he researched the potential applicability of the entire controversy doctrine and concluded that it did not necessarily bar plaintiff's claim. The certification also confirms that plaintiff acted entirely on counsel's advice. That the trial court ultimately disagreed, and dismissed plaintiff's complaint on summary judgment, without more, did not establish that plaintiff acted in bad faith so as to necessitate an award of attorney's fees for frivolous litigation. See Ferolito, supra, 408 N.J. Super. at 408.
Affirmed.
I hereby certify that the foregoing is a true copy of the original on file in my office.
CLERK OF THE APPELLATE DIVISION