On appeal from the Superior Court of New Jersey, Law Division, Bergen County.
Before Judges Long, Stern and Kimmelman.
The opinion of the court was delivered by: Kimmelman, J.A.D.
We granted leave to appeal from two orders entered by the Law Division on June 3, 1997, (1) denying the motion by the third-party defendants Ray Saoud, Saoud Enterprises, Inc., and Ray Saoud Farms, Inc. ("the Saoud parties"), seeking leave to file an out-of-time affidavit of merit, pursuant to N.J.S.A. 2A:53A-27, and dismissing their counterclaim for legal malpractice against defendants and third-party plaintiffs Nowell, Amoroso & Mattia, P.A., and Jeffrey C. Mason ("the Nowell law firm" and "Mason"); and (2) granting Mason and the Nowell law firm's motion to dismiss the cross-claim for legal malpractice filed against it by co-defendants Gerald R. Cornell, Anthony Adamo, Stephen Levatino, and G.A.S. Holdings Limited ("the G.A.S. parties") for failure to file a timely affidavit of merit. The appeals from each order have been consolidated for our review.
The issue on appeal is whether, under the facts of this case, the failure to file a timely affidavit of merit should have resulted in a dismissal of the legal malpractice causes of action either with or without prejudice. If the facts did not warrant a dismissal with prejudice, then leave to file an affidavit of merit nunc pro tunc should have been granted and the legal malpractice causes of action against Mason and the Nowell law firm should not have been dismissed. If, on the other hand, the facts warranted a dismissal with prejudice of the legal malpractice claims, then the orders entered by the Law Division must be affirmed. Under the Supreme Court's recent ruling in Cornblatt v. Barow, ___ N.J. ____, ____ (1998) (slip op. at 32-33), we hold that the orders entered by the trial court should have been without prejudice.
By way of factual background, the Saoud parties owned a wholesale and retail produce and grocery business, together with the real estate on which the business was operated. The G.A.S. parties bought the business from the Saoud parties and entered into a lease of the real estate, which lease contained an option to purchase. Shortly thereafter, the G.A.S. parties gave notice of their intention to exercise the option. They also entered into an agreement to sell the business to plaintiffs Hyman Zamft and Manard, L.L.C. ("Zamft"). The G.A.S. parties were represented in the transaction by Mason, an attorney associated with the Nowell law firm.
The completion of the sale to plaintiffs was contingent upon the ability of the G.A.S. parties to deliver the business free and clear of liens. At the closing of the transaction, plaintiffs deposited with Mason the sum of $350,000, which was to be held in escrow until all conditions of the sale were met. It is alleged that Mason released the escrow funds before all of those conditions were met, causing the main transaction between the parties to founder.
Plaintiffs instituted this action in the Chancery Division against the G.A.S. parties for specific performance and damages, and against Mason and the Nowell law firm for damages. Temporary relief was sought for the restoration of the escrow funds or the posting of cash or a bond in the amount of $350,000. After oral argument, the court ordered the posting of cash or a bond in that amount. The cash was posted in escrow.
On January 11, 1996, the G.A.S. parties, represented by new counsel, answered plaintiffs' complaint, counterclaimed for specific performance, and cross-claimed against Mason and the Nowell law firm, seeking damages for their alleged legal malpractice.
On February 12, 1996, Mason and the Nowell law firm answered the malpractice cross-claim of the G.A.S. parties and filed a third-party complaint against the Saoud parties, alleging that they had been unjustly enriched because they had received the bulk of the escrow funds. For some reason not apparent in the record, it was not until May 6, 1996, that the answer to the legal malpractice claim was served on the G.A.S. parties.
On July 9, 1996, following an extension of time within which to file a responsive pleading, the Saoud parties answered the third-party complaint and counterclaimed against Mason and the Nowell law firm, seeking damages for legal malpractice. On August 7, 1996, Mason and the Nowell law firm filed an answer to the Saoud parties' counterclaim.
At this point, it is significant to consider the time frames surrounding the initial pleadings as the scenario of this case developed. By order dated March 4, 1996, the Chancery Division Judge referred the entire matter to mediation, pursuant to R. 1:40-4(a), and ordered that: "Discovery and other proceedings shall be stayed until completion of the mediation (unless the parties agree otherwise). . . ." We observe that, notwithstanding the mediation standstill order, the parties continued ...