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IN RE PERNA

March 1, 1995

Re: Michael Perna, et al.
v.
Electronic Data Systems Corp.



The opinion of the court was delivered by: ROSEN

REPORT AND RECOMMENDATION

 Dear Judge Rodriguez:

 This Report and Recommendation is being submitted pursuant to 28 U.S.C. § 636(b)(1)(B) and (C) upon the motion of Angelo J. Genova, Esquire, attorney for the defendant, Electronic Data Systems. The defendant seeks an order pursuant to Fed. R. Civ. P. 41(b) and the inherent powers of the court to dismiss the complaint as a result of the plaintiffs' alleged improper conduct. This motion will be determined on a Report and Recommendation basis pursuant to 28 U.S.C. § 636(b)(1)(B) and (C) because of the potentially dispositive nature of the request.

 After careful consideration of the submissions and the hearing that was conducted on November 18, 1994, and of the record as a whole, and for the reasons noted below, I respectfully recommend granting in part the defendant's motion and dismissing the complaint as to the plaintiff. Michael D. Perna, individually. I further recommend that the jury instruction as set forth herein be submitted to the jury for their consideration at trial. Further, I recommend that Michael D. Perna and Louis Pantalone jointly and severally be responsible for paying the reasonable attorney fees and costs the defendant has incurred in filing and litigating this motion.

 FACTS AND PROCEDURAL HISTORY

 In 1983, the New Jersey Legislature created the New Jersey Automobile Full Insurance Underwriting Association, commonly referred to as the "JUA" or "the Association". The purpose of the act is "to assure to the New Jersey insurance consumer full access to automobile insurance through normal market outlets, to encourage the use of available market facilities, to provide automobile insurance for qualified applicants who cannot otherwise obtain such insurance, through a full automobile insurance underwriting association, and to require that companies be made whole for losses in excess of regulated rates on all risks not voluntarily written by providing procedures for the spreading and recoupment of losses based on actual experience." N.J. Stat. Ann. § 17:30E-2 (West 1994).

 To implement the purpose of the act, the New Jersey Legislature authorized the board of the JUA to appoint noninsurers to act as a servicing carrier for the association. Each servicing carrier had the authority to issue policies in the name of the servicing carrier, on behalf of the association, to the extent the plan of operation provides. "Servicing carriers, as agents of the association, shall have no individual liability for claims or policies written by the association." N.J. Stat. Ann. § 17:30E-7(e) (West 1994). The servicing carriers provided services to the Association such as processing applications, endorsements, broker commissions, premium adjustments and cancellations, and receiving and depositing premium payments. (Def.'s br. at 6).

 The defendant, Electronic Data Systems Corporation ("EDS") was a servicing carrier for the Association. On or about November 11, 1988, EDS and the Association entered into a contract whereby EDS agreed to provide the services mentioned above as well as the duties provided for in N.J. Stat. Ann. § 17:30E et seq. Thereafter, the plaintiff, Michael D. Perna and Associates, was assigned to EDS to serve as a "producer" or "producer agent" for the Association. A producer is an agent or broker licensed to transact the business of automobile insurance in New Jersey. N.J. Ann. Stat. § 17:30E-3(1) (West 1994). The producers are selected by the board and are assigned to a servicing carrier and are the exclusive representatives of the servicing carrier. The Association and Perna entered into a "producer contract" enabling Perna to place policies of insurance with the Association.

 The contract assigned the plaintiffs, Michael D. Perna, individually and Michael D. Perna and Associates, ("Perna and Associates"), to EDS to act as the servicing carrier. Michael D. Perna and Associates is a partnership that consists of three general partners who each have a one-third interest in the partnership, and are entitled to share in the profits and losses in like proportion. The partners are: Michael D. Perna, Greg Morano and Louis Pantalone. *fn1" Partnership Agreement at 4. The plaintiffs allege that they choose EDS to act as the servicing agent based upon the representations made by one of EDS employees at a seminar given by EDS to all area producers which explained their new automobile insurance servicing operations.

 On March 23, 1993, the plaintiffs filed an action against the defendant Electronic Data Systems Corporation in the Superior Court of New Jersey, Law Division, Atlantic County. *fn2" The complaint alleged that the defendant had a duty to properly service its JUA insureds and that the defendant breached its duty by failing to properly service the plaintiffs' accounts. Accordingly, the plaintiffs assert that they are entitled to damages for gross negligence, fraudulent misrepresentation, negligent misrepresentation, and tortious interference with economic advantage. On April 22, 1993, EDS removed the case from the state court to federal court. On May 20, 1993, the plaintiffs moved to remand the case to state superior court. This motion was denied by the Honorable Joseph H. Rodriguez in a letter opinion and order that was entered on August 13, 1993, and this court retained jurisdiction of this matter pursuant to 28 U.S.C. § 1332.

 Thereafter, on June 2, 1993, the defendant filed a motion for summary judgment and/or dismissal of this action on the grounds that EDS owed no duty to the plaintiffs to process policies of insurance as a servicing carrier for the New Jersey Automobile Full Insurance Underwriting Association. EDS further argued that, "the issues raised by the plaintiffs complaint should be adjudicated in accordance with the statutory scheme set forth in the New Jersey Automobile Full Insurance Availability Act, N.J.S.A. 17:30E2, et seq." (Def.'s br. at 3). Specifically, the defendant argued that the plaintiffs must exhaust their administrative remedies and should bring this claim before the Association Board, with a review thereof by the Commissioner of Insurance. (Def.'s br. at 9). After the oral argument had on the record on March 17, 1994, Judge Rodriguez denied the defendant's motion for summary judgment and/or motion to dismiss without prejudice. Judge Rodriguez stated that the motions were premature and directed the parties to conduct discovery.

 Accordingly, following a scheduling conference held before me on December 7, 1993, discovery was commenced by the parties. On June 6, 1994, pursuant to Fed. R. Civ. P. 34, counsel for EDS conducted an inspection of the plaintiffs' documents at the plaintiffs' office. (Def.'s br. at 4). It is the events that occurred at this document inspection that prompted the defendant to file the instant motion to dismiss the complaint. In essence, the defendant alleges that during the document inspection while counsel was not present, Mr. Perna surreptitiously and wrongfully gained access to documents that were property of the defendants and their attorneys. Further, the defendant alleges that Perna likewise photocopied these documents. Therefore, based upon this alleged improper conduct, the defendant seeks to dismiss the complaint.

 Due to the gravity of the relief sought, and since the facts leading up to this motion have constantly been in dispute, on November 18, 1994 I conducted a hearing. Specifically, there have been many factual inconsistencies that have been brought before the court that are contained in the parties briefs including Mr. Perna's certification that was submitted by him. *fn3" Therefore, to determine the facts surrounding the inspection of documents, I heard testimony under oath from Michael Perna and Louis Pantalone.

 FACTS

 On June 6, 1994, counsel for EDS, Meryl G. Nadler, Esquire, T. Sean Jackson, Esquire, and Susan Arthur, a paralegal for EDS, travelled to the offices of Perna and Associates for the purpose of inspecting the plaintiffs' documents. The document inspection took place in Vince Ciciatiello's office. Ciciatiello is an associate at Perna and Associates. Mr. Ciciatiello's office also serves as a copy room as it contains the company's photocopier and fax machine. The defendant's representatives and counsel for the plaintiffs were all present in the office during the document inspection. The defendant alleges that their counsel brought with them approximately three briefcases which contained among other papers, documents that were "work product" constituting counsels' mental impressions and strategy for the preparation of the case for trial. While inspecting the documents, counsel for both parties took a lunch break and went to a local restaurant. Counsel for the defendant left their briefcases in Ciciatiello's office rather than tote them to lunch, fully expecting the privacy of the contents of their belongings which were not left open, to be respected. (Def.'s br. at 11).

 Once counsel for the parties went to lunch, and although Mr. Perna knew that opposing counsel was in Mr. Ciciatiello's office conducting the document inspection, Mr. Perna decided to enter the office to photocopy a life insurance policy for a client. (Tr. at 26). Upon entering the office, Perna noticed that the briefcases were stacked on top of each other along side of a desk, and that a briefcase fell over and some papers were scattered over the floor. The plaintiffs argue that Mr. Perna had no idea to whom the briefcase belonged and that Mr. Perna gathered the papers together in an effort to clean them up. (Tr. at 15). However, once Mr. Perna picked up the papers he noticed the words, "weasel out of". Id. At this point, Mr. Perna realized that the documents belonged to the defendant since it contained items that he had never seen before. (Tr. at 21). However, he continued to review the documents. Once Mr. Perna saw the words, "weasel out of", it was his "instinctive reaction" to browse through the papers. Mr. Perna stated that,

 
and as far as this case, I've been working on it in litigation in and out of courts for five years and it just kind of took the wind out of my sails, everything that took place. And when I saw the word "weasel out of", I said well here's a situation where everything I worked for and I tried to build up and I'm trying to resolve it in the best way that I can is--you know, that these people are against me and I'm never going to win this case that I've been fighting so hard for for [sic] the last five years. But nothing was, you know, premeditated. What it was, it was a wrong reaction to a situation that I was in.

 (Tr. at 18-19).

 The papers were approximately an inch and half thick. Mr. Perna proceed to make copies of all the papers that were in the pile. (Tr. at 28). Since Mr. Perna knew that the activity in which he was engaged was wrong, he asked his partner, Louis Pantalone to serve as a "lookout". (Tr. at 29). He called to Pantalone and stated, "do me a favor, just watch the door, you know, I have to do something right now". (Tr. at 16). The plaintiffs allege that Mr. Pantalone did not know that Mr. Perna was photocopying the documents. Subsequently, Perna informed Pantalone that he was going to get something to eat and that he, Perna, would talk to Pantalone when he got back. (Tr. at 42). Mr. Perna then took the photocopied papers, without Mr. Pantalone's knowledge, and went to lunch to read their contents. Id.

 All counsel then returned from lunch to resume the document inspection. At that time, Pantalone informed Barbara Ayars, Esquire, attorney for the plaintiffs, that Mr. Perna has "some stuff that I think would be interesting". (Tr. at 43, 48). However, the plaintiffs allege that at this point, Mr. Pantalone never knew the contents of the documents and the only basis for his state of excitement was based on Mr. Perna's demeanor and Mr. Pantalone's own, "interpretation of hopefulness." (Tr. at 48). Mr. Pantalone believed that the information Mr. Perna had acquired would be helpful in the favorable resolution of the litigation. (Tr. at 49). Thereafter, Mr. Perna returned from lunch. He informed his partner, Mr. Pantalone that, "unfortunately everything [he] made copies of and [he] was looking at is nothing that we don't already have, outside of that letter which, you know, stated something about manuals or whatever". (Tr. at 18). The plaintiffs allege that without showing anyone the contents of the photocopied documents, Mr. Perna threw the documents in the garbage. (Tr. at 31). Mr. Pantalone told his attorney, Ms. Ayars, of the events noted above. Realizing that an ethical violation may have been committed, Ms. Ayars related the events to Mark Soifer, Esquire, attorney for the plaintiffs, and a partner in the law firm of Horn, Goldberg, Gorny, Daniels, Plackter & Weiss. Mr. Soifer contacted Mr. Pantalone and Mr. Perna to discuss the incident. It is at that time that plaintiffs' counsel first learned that Mr. Perna photocopied the documents. See, (Tr. at 53).

 However, at this juncture, based on Mr. Pantalone's representation, Mr. Soifer felt he was confronted with an ethical dilemma as to whether or not his client engaged in improper conduct. (Pls.' br. at 5). Therefore, a few days before the deposition of Michael Perna was scheduled, Mr. Soifer contacted counsel for EDS and informed them that an unspecified ethical issue had arisen which necessitated a temporary stay of all proceedings in this matter. On June 15, 1994, I held a phone conference with all parties and issued an order staying all proceedings in this matter pending an opinion from the New Jersey Supreme Court Advisory Committee on Professional Ethics concerning the then unknown ethical issue.

 Plaintiffs' counsel disclosed to the Ethics Committee the version of the events as they were relayed to them by Perna and Pantalone. Specifically, Mr. Perna's version stated that he "entered Mr. Ciciatiello's office, found and read documents which were on the floor and which had apparently fallen out of counsel for Perna's briefcase." Id. Mr. Pantalone's version maintained that "the plaintiffs had viewed the contents of the briefcases belonging to EDS's counsel without authorization and made copies of the contents thereof". Id.

 The New Jersey Supreme Court Advisory Committee on Professional Ethics ruled "that counsel for plaintiffs was required to disclose to counsel for EDS that the contents of their briefcases may have been reviewed by plaintiffs during the document inspection and that copies of the contents thereof may or may not have been copied." *fn4" (Pls.' br. at 5). Accordingly, on July 25, 1994, on the advise of the New Jersey Supreme Court Advisory Committee on Professional Ethics, counsel for the plaintiffs', Mr. Soifer, advised the court and defense counsel of the facts surrounding plaintiffs' counsel inquiry brought before the Ethics Committee.

 Mr. Soifer divulged the following information by correspondence to Mr. Angelo Genova, Esquire, counsel for EDS:

 
on June 6, 1994, during the inspection of documents at Perna Associates offices in reference to the above case, the contents of the briefcases of the representatives of your client [EDS] who were in attendance were examined without permission, while they were unattended in the conference room. I am advised that no copies of any documents which were inspected have been retained. It is possible that copies of certain documents were made at one time, although that is unclear. (Letter from Soifer to Genova of 7/26/94).

 Therefore, armed with this information, the defendant filed the instant motion to dismiss. The defendant asserts that dismissal of this case is the only viable sanction to redress the plaintiffs' conduct, and unless the plaintiffs' actions are sanctioned, the entire proceeding will be irreparably tainted. *fn5" The defendant argues that the improper access to the information contained in the briefcase in and of itself, irrespective of its contents, is a transgression of the most egregious nature that warrants dismissal of the action. (Tr. at 5). The defendant alleges that Mr. Perna's acts were willful and will forever taint the litigation. The defendant states that since the act was committed by the plaintiffs themselves, disqualification of plaintiffs counsel is definitely not the appropriate remedy. Further, the defendant argues that the information that was obtained cannot be "purged" out of Mr. Perna's mind. The defendant alleges that there is every reason to believe that Perna or his agents may have shared the wrongfully obtained information with other potential witnesses in the case who work in the offices of Perna and Associates. (Def.'s br. at 2).

 The defendant seeks dismissal of Mr. Perna's individual claim as well as the claim of the partnership. The defendant alleges that: (1) the egregious actions of Mr. Perna during the inspection of documents warrant dismissal of this action pursuant to Fed. R. Civ. 41(b), and (2) the court should exercise its inherent powers and dismiss the action to punish the perpetration of a fraud upon the court.

 In its opposition, the plaintiffs do not contest that it is within the authority of the court to order that this matter be dismissed. (Tr. at 10). However, the plaintiffs allege that the court should not impose such a harsh sanction since there was nothing prejudicial that was gained from Perna's unauthorized access to the documents. The plaintiffs contend that Mr. Perna has never disclosed to anyone the contents of the documents; nor did he retain copies of them. (Pls.' br. at p. 1). The plaintiffs allege that the court cannot properly rule upon the instant motion without an in camera inspection of the actual documents at issue to determine their contents. They also state that dismissal of the complaint, especially the claim filed on behalf of the partnership, is an inappropriate sanction since Mr. Pantalone and Mr. Morano, the other partner, will be fatally prejudiced by the improper and unauthorized act of one partner. Further, the plaintiffs allege that dismissal is not an appropriate sanction to punish the perpetration of a fraud upon the court since Perna's actions did not involve the court at all.

 The defendant has moved for the following sanctions as a result of the plaintiffs' conduct: (1) dismissal of the action pursuant to Fed. R. Civ. P. 41(b) and (2) and dismissal of the action pursuant to the court's inherent powers to prevent the perpetration of fraud upon the court. First, I will address the defendant's motion to dismiss pursuant to Fed. R. Civ. P. 41(b) as it pertains to the claim of Michael D. Perna, individually and the claim of the partnership, Perna and Associates. Next, I will separately analyze how the defendant's motion to dismiss pursuant to the court's inherent powers to prevent fraud upon the court will affect the individual claim of the Michael D. Perna, as well as the claim of the partnership, Perna and Associates.

 DISCUSSION

 A) DISMISSAL OF THE ACTION PURSUANT TO FED. R. ...


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