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Summit Trust Co. v. Baxt

July 26, 2000


Before Judges Brochin, Eichen and Wecker.

The opinion of the court was delivered by: Brochin, J.A.D. (retired and temporarily assigned on recall).


Argued March 8, 2000

On appeal from Superior Court of New Jersey, Chancery Division, Hudson County.

In October 1988, The Summit Trust Company ("Summit") made two construction loans for a total amount of 4.1 million dollars to The Grove Mercantile Center ("Grove"), a partnership, whose partners included appellants Sherwood Baxt and Saida Baxt. The loans were secured by real estate mortgages. Summit filed a foreclosure suit and Grove asserted a lender-liability counterclaim. Summit moved for summary judgment. Its motion relied in part on a mortgage modification agreement, allegedly duly signed and delivered, which contained Grove's release of any claims. The controversy which now confronts us arose from a discovery dispute engendered by the unexpected appearance among the documents in Summit's "working file" of a photocopy of that mortgage modification agreement signed by one of Grove's partners. Summit's attorneys, respondents Gerald A. Liloia and Anthony J. Sylvester, subsequently admitted that they had caused the copy of the agreement to be placed in the file. It was apparently put there to corroborate Summit's claim that it had received a fax of the signed copy from Grove, but was unable to locate the document bearing the signature in ink of a Grove partner.

The matter before us is an appeal from an order of the Chancery Division which granted the Baxts' R. 4:50-1(f) motion to reopen the judgment in the foreclosure suit, but denied sanctions on the ground that the attorneys had not violated any specific procedural rule upon which sanctions could be predicated.

The hearing judge's findings of fact and his conclusions of law were entered after a hearing conducted at the direction of our Supreme Court. These findings are binding on us because they are amply supported by the evidence presented at the hearing. Rova Farms Resort, Inc. v. Investors, Ins. Co., 65 N.J. 474, 484 (1974). But we disagree with the judge's conclusions of law. Before we relate his findings and explain the basis of our disagreement with the conclusion which he drew from them, we need to describe the unusual procedural history of this case.

During the course of the foreclosure action between Grove and Summit, Grove's attorneys moved to dismiss Summit's complaint, to expunge the mortgage and for sanctions because of the conduct of Summit's attorneys during discovery. Before that motion had been disposed of, the Baxts commenced a separate lawsuit against Mr. Liloia and Mr. Sylvester. In that separate lawsuit, the Baxts sought damages from Mr. Liloia and Mr. Sylvester for the same conduct which was the subject of the sanctions motion. The Baxts alleged that that conduct violated the Rules of Professional Responsibility and constituted spoliation of evidence. The foreclosure action was then settled and the foreclosure case was dismissed, but the settlement agreement preserved the Baxts' right to pursue their damage claims in their separate lawsuit (which we will refer to as the "damage suit") against Mr. Liloia and Mr. Sylvester.

That damage suit was eventually dismissed on Summit's motion for summary judgment. This court affirmed, with one judge dissenting from the majority's holding that no private cause of action could be based directly on a violation of the Rules of Professional Conduct. Baxt v. Liloia, 284 N.J. Super. 221 (App. Div. 1995), aff'd as modified, 155 N.J. 190 (1998). The case came before our Supreme Court by reason of the dissent, and the Court affirmed, *fn1 but it castigated Mr. Liloia and Mr. Sylvester in the following terms:

The record before this Court presents an object lesson in unprofessional behavior by experienced and knowledgeable trial lawyers. For a period spanning the course of at least one month, . . . defendants Liloia and Sylvester knowingly and deliberately obstructed the discovery process in the Summit foreclosure action by misleading plaintiffs about the source of the signed modification agreement and by refusing to respond candidly to specific requests for direct and accurate information. . . .

The inference that may be drawn from this pattern of behavior is that defendants were stonewalling and that they intended to conceal from Grove's attorney the source of the signed copy of the agreement even after repeated clear requests for that information. That defendants placed the copy of the signed agreement in the bank's files prior to producing them for inspection as the bank's "original" files is particularly disturbing and suggests purposeful misrepresentation. Such conduct appears on its face to violate the New Jersey Rules Governing Civil Practice and the Rules of Professional Conduct. [Baxt v. Liolia, supra, 155 N.J. at 206-09.]

The Court then ordered the following redress for Mr. Liloia's and Mr. Sylvester's misconduct:

But for the settlement of the foreclosure litigation, plaintiffs could have sought attorney's fees based on defendants' conduct in that lawsuit. Instead, the Baxts reserved the right to seek attorney's fees against defendants in this action. Because the dismissal of this action leaves plaintiffs without a remedy for defendants' discovery violations, and because the settlement agreement put defendants on notice that the issue of attorney's fees remained to be litigated, in the unique circumstances of this case[,] we will permit plaintiffs to go forward with their reserved right to seek counsel fees by way of a motion pursuant to Rule 4:50-1(f) . . . . They may within 30 days seek to reopen the order of dismissal in Summit Trust Company v. Grove Mercantile Center [the foreclosure suit] for the limited purpose of seeking recovery of reasonable expenses from Gerald Liloia and Anthony Sylvester for violations of the discovery rules. See R. 4:23-3, -4. If plaintiffs pursue their case in that forum, the trial court should determine the scope of defendants' misconduct and the appropriate amount of attorney's fees and costs to be assessed against them. [Id. at 210-211.]

In response to Mr. Liloia's and Mr. Sylvester's motion to the Supreme Court for reconsideration, the Court added the ...

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