Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

County of Essex v. First Union National Bank

January 26, 2006

COUNTY OF ESSEX, PLAINTIFF-RESPONDENT AND CROSS-APPELLANT,
v.
FIRST UNION NATIONAL BANK, SUCCESSOR IN INTEREST TO FIRST FIDELITY SECURITIES GROUP, DEFENDANT-APPELLANT AND CROSS-RESPONDENT, AND JOSEPH GALLUZZI, LORRAINE GALLUZZI AND GEORGE L. TUTTLE, JR., DEFENDANTS.



On certification to the Superior Court, Appellate Division, whose opinion is reported at 373 N.J. Super. 543 (2004).

SYLLABUS BY THE COURT

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

The primary issues in this appeal are whether claims for unjust enrichment/disgorgement survive when there is a valid contract, and if so, when an employee of a commercial bank bribes a public official to obtain underwriting privileges on three bond issues, whether the bank must disgorge that part of the fee paid to innocent third parties.

Joseph Galluzzi was a financial consultant to the Essex County Board of Freeholders (County) from 1982 to June 1987, after which he served as County Treasurer for two years before becoming a financial consultant to the Essex County administration. George Tuttle was a Senior Vice President of First Fidelity Bank, now First Union National Bank (Bank), between 1985 and 1991. As the manager of the municipal securities department, he developed and negotiated municipal securities for the Bank.

Beginning in 1987, as a result of an unlawful kickback scheme between Galluzzi and Tuttle, the Bank was selected by the County to serve as underwriter on three municipal bond issues (the 1987 Bond Transaction, the 1989A Bond Transaction, and the 1989B Bond Transaction). Galluzzi submitted fictitious invoices to the Bank for work he had not performed and Tuttle arranged for the Bank to pay Galluzzi. In 1995, Tuttle pled guilty in federal court to falsifying records while he was a Bank employee to induce the purchase and sale of municipal securities. He admitted his involvement in the kickback scheme with Galluzzi and that he concealed the payments.

As part of a settlement with the Securities Exchange Commission (SEC), the Bank agreed to pay disgorgement plus prejudgment interest in the amount of $1,793,309.43 into an escrow fund held by the SEC. A plan was devised for injured parties to collect from that fund, either directly or by instituting a civil action. In October 1996, the County commenced this civil action against the Bank, Tuttle, and Galluzzi. Galluzzi was indicted the same month and, in April 1998, the County moved in the civil action for partial summary judgment against Galluzzi and Tuttle for the amount of the kickbacks the Bank paid to Galluzzi. The trial court granted the motion and entered judgment against Galluzzi and Tuttle in the amount of $137,769.16 plus interest, for a total of $206,809.22. The County then moved for partial summary judgment against the Bank, asserting that the Bank was responsible for its employee's actions. The trial court agreed and entered judgment against the Bank in the amount assessed against Galluzzi and Tuttle together with prejudgment interest. After the trial court certified the judgment as final, the Bank appealed. The Appellate Division affirmed. We denied the Bank's petition for certification. The Bank then paid the judgment.

A jury trial was held over eight days in September 2002. The evidence showed that in connection with each bond transaction, the Bank realized a substantial fee, known in the industry as the "underwriter's discount" (discount or fee). In the aggregate, the Bank received underwriting fees of $2,883,019.15. The trial court placed the burden of proof on the County to establish any sharing of fees by the Bank with other underwriters. For the 1989B Bond Transaction, the evidence was clear that the Bank allocated to itself 52.34% of the bonds and allocated the balance of the bonds and discount to four other underwriting firms. Neither the County nor the Bank presented any evidence on the allocation of the fees in either the 1987 bond Transaction or the 1989A bond Transaction. The jury, in part, returned a verdict in favor of the County for its unjust enrichment/disgorgement claim on the 1989B Bond Transaction in the amount of $600,000. The trial court subsequently awarded prejudgment interest from June 30, 1989, the date of the 1989B Bond Transaction. The County's motion for a new trial and other relief was denied.

The County appealed and the Bank cross-appealed. In a published opinion, the Appellate Division held that the County was entitled to full disgorgement of the fees for the 1987 Bond Transaction and the 1989A bond Transaction and affirmed the partial fee disgorgement award for the 1989B transaction. In response to the Banks' argument that unjust enrichment cannot be awarded in the face of a valid contract, the panel found that even though unjust enrichment typically applies when no valid contract exists, the remedy is also applicable in the form of disgorgement when corrupt means have been employed to obtain a government contract. However , the panel concluded that if the wrongdoer passes the benefit to an innocent third party who is entitled to the fee, then the court will not treat the wrongdoer as having received that benefit for purposes of disgorgement. The panel further found that the burden of proof to show any sharing of fees was on the Bank, not the County, and that the Bank should not be given further opportunity to offer such proofs. The panel also disagreed with the trial court's starting date for prejudgment interest and found that prejudgment interest should run from the date the complaint was filed and not from the date of the bond transaction.

We granted the County's petition for certification and the Banks' cross-petition.

HELD: Under the circumstances presented, disgorgement is an appropriate remedy, but the fees paid to innocent third parties should not be part of the disgorgement award.

1. Initially, we agree with the Appellate Division's conclusion that unjust enrichment/disgorgement is a valid basis on which to require recovery when the wrongdoer obtained the benefit as a direct result of bribing a public official. Our case law has long recognized that in analogous circumstances, general principles of equity mandate the wrongdoer be relieved of any profits. Strong remedies are necessary to combat unlawful conduct involving public officials. Disgorgement in favor of the public entity serves as a harsh remedy against those who bribe a public official to secure a public contract and provides a deterrent to such unlawful activity. We hold that when a public contract is obtained by bribing a public official, the public entity is entitled to the gross profits obtained by the wrongdoer. The Appellate Division correctly held that the County was entitled to unjust enrichment/disgorgement from the Bank not only on the 1989B Bond Transaction submitted to the jury, but on the other two bond transactions as well. Contrary to the Bank's contentions, the County established the amount of the underwriting discounts for all three bond transactions. The reasons for disgorgement are not related to whether the County suffered damages. It is the evil of the wrongdoer retaining any of the fruits of its wrongful conduct that grounds the claim. As a matter of law, the county was entitled to recover the fees paid to the Bank on each of the bond transactions. (Pp. 12-17)

2. We need not deal at length with the County's contention that the Bank was not entitled to offset those portions of the fees that were paid to other underwriters. We agree with the Appellate Division that the Bank would not be treated as having received fees paid to other innocent underwriters. The Bank must only disgorge that portion of the fee that it received and retained. Thus, the portion of the judgment awarding $600,000 to the County for the 1989B Bond Transaction is affirmed. (Pp. 17-18)

3. The trial court erred when it placed the burden of proof on the County to show any division of fees. The burden should have been on the Bank. It is for the Bank to prove its defense that it did not retain the fees or that the fees were subsequently earned and received by a third party. In fairness, a remand is necessary to give the Bank an opportunity to present evidence to convince a factfinder that it shared the underwriting fees with innocent underwriters. (Pp. 18-19)

4. Unlike prejudgment interest in tort actions, which is expressly governed by Rule 4:42-11(b), the award of prejudgment interest on contract and equitable claims is based on equitable principles. The allowance of prejudgment interest is a matter of discretion for the trial court. Although the issue is fairly debatable, we see no manifest denial of justice in the trial court's award of prejudgment interest from the date of the bond transaction. Accordingly, we reverse the Appellate Division's judgment and reinstate that portion of the trial court's order awarding prejudgment interest from the date of the 1989B Bond Transaction. (Pp. 19-20)

We AFFIRM the judgment of the Appellate Division in all respects, except that prejudgment interest must be awarded from the date of each bond transaction, and the matter is REMANDED to the trial court to enter judgment in favor of the County in the amount of the underwriter's fees for the 1987 Bond Transaction and 1989A Bond Transaction, and to determine the allocation of fees, if any, on those two bond transactions.

The opinion of the court was delivered by: Justice Wallace, Jr.

Argued October 11, 2005

CHIEF JUSTICE PORITZ and JUSTICES LONG, LaVECCHIA, ZAZZALI, ALBIN and RIVERASOTO join in JUSTICE WALLACE's opinion.

The primary issues in this appeal are whether claims for unjust enrichment/disgorgement survive when there is a valid contract, and if so, when an employee of a commercial bank bribes a public official to obtain underwriting privileges on three bond issues, whether the bank must disgorge that part of the fee paid to innocent third parties. We hold that under the circumstances presented, disgorgement is an appropriate remedy, but the fees paid to innocent third parties should not be part of the disgorgement award.

I.

Joseph Galluzzi was a financial consultant to the Essex County Board of Freeholders (County) from 1982 to June 1987, after which he served as County Treasurer for two years before becoming a financial consultant to the Essex County administration. George Tuttle was a Senior Vice President of First Fidelity Bank, now First Union National Bank (Bank), between 1985 and 1991. As the manager of the municipal securities department, he developed and negotiated municipal securities transactions for the Bank.

Beginning in 1987, as a result of an unlawful kickback scheme between Galluzzi and Tuttle, the Bank was selected by the County to serve as underwriter on three municipal bond issues. Galluzzi submitted fictitious invoices to the Bank for work he had not performed and Tuttle arranged for the Bank to pay Galluzzi.

The record does not clearly show when the illicit scheme was discovered. However, in 1995 Tuttle pled guilty in federal court to falsifying records while he was a Bank employee to induce the purchase and sale of municipal securities. He admitted his involvement in the kickback scheme with Galluzzi and that he concealed the payments.

In addition, the Securities and Exchange Commission (SEC) brought administrative proceedings against the Bank. On January 9, 1996, the SEC released its findings that Tuttle, on behalf of the Bank, agreed to a "kickback arrangement" with Galluzzi to secure municipal bond underwriting business from the County. The matter was resolved after the SEC agreed to the Bank's offer of settlement. The Bank agreed to pay disgorgement plus prejudgment interest in the amount of $1,793,309.43 into an escrow fund held by ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.