On appeal from the Superior Court of New Jersey, Law Division, Bergen County, Docket No. L-7682-02.
The opinion of the court was delivered by: Hoens, J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Submitted October 18, 2005
Before Judges Kestin, Hoens and R. B. Coleman.
This appeal raises questions of first impression concerning the scope of an arbitrator's powers. In addition, the appeal calls upon us to draw distinctions among arbitrations involving fee disputes between attorneys and their clients, arbitrations conducted in court-annexed proceedings, and arbitrations undertaken pursuant to private agreements. Finally, this appeal calls upon us to analyze the meaning of the recently-enacted New Jersey Arbitration Act, N.J.S.A. 2A:23B-1 to -32, as it relates to the powers of an arbitrator.
The facts that give rise to the issues before us, and the procedural history of this matter, are complex. Nevertheless, the precise issues that we are called upon to address cannot be understood except in the larger context of the factual and procedural history of the matter. We therefore set them forth at some length.
Plaintiff Michael S. Kimm is an attorney. He was retained in December 2001 to represent defendants Roseanne Magliato, On Set Transportation, Inc. ("On Set"), and Nayda's Salon, Inc. ("Nayda's"), in connection with a law suit which was then pending against them. At the same time, plaintiff also agreed to provide these clients with legal advice on general business matters. The written retainer agreement, dated December 13, 2001, included terms governing fees for plaintiff's professional services.
The retainer agreement also provided that, in the event of a dispute between plaintiff and his clients relating to the fees or the quality of his services, plaintiff would be entitled to a supplemental attorney's fee to compensate him for his time spent enforcing the terms of the fee agreement. In particular, Paragraph Three of the retainer agreement provided that plaintiff would be compensated at his usual hourly rate for all time that he expended in a fee dispute or in a collection action against his clients, together with any additional legal expenses or out-of-pocket costs that he might incur in that endeavor. Defendant Roseanne Magliato signed the agreement in her personal capacity as well as in her capacity as the principal of the two corporations, On Set and Nayda's.
Plaintiff performed services for these three clients until August 2002, at which time he terminated his relationship with them, contending that they were significantly indebted to him for past due legal fees. On August 16, 2002, plaintiff sent a pre-action letter as required by R. 1:20A-6. That letter was directed to Roseanne Magliato, who had signed the retainer agreement, as well as to Nayda Magliato.*fn1 The letter informed them that legal fees in excess of $20,000 were then due from them for services rendered for them and on behalf of the two corporations, On Set and Nayda's. That letter advised them of their right to demand fee arbitration, see R. 1:20A-6, if they chose to dispute their outstanding obligation to plaintiff. The letter also reminded its recipients that if they sought to dispute the fees either by way of fee arbitration or through litigation, plaintiff would seek additional fees for such time as he might be required to devote to that matter, in accordance with Paragraph Three of the retainer agreement.
Because neither the individuals nor the corporate entities pursued their rights to fee arbitration, on September 17, 2002, plaintiff filed a complaint in the Law Division seeking to recover his unpaid legal fees. That complaint named as defendants Roseanne Magliato, Nayda Magliato, Nayda's, On Set and Blisset, LLC ("Blisset"). According to the complaint, Roseanne Magliato and Nayda Magliato were the owners of both On Set and Nayda's. The complaint also asserted that the two corporations had ceased operations and that Blisset was the corporate successor in interest to On Set. In addition, plaintiff asserted that Roseanne Magliato and Nayda Magliato were the principals of Blisset and that each of the business entities was an alter ego of the two individual defendants. Plaintiff's complaint sought to recover all of the outstanding fees from Roseanne Magliato and Nayda Magliato, jointly and severally, and from Blisset, on a successor liability theory.
The complaint included counts sounding in breach of contract, quantum meruit, and unjust enrichment and it also asserted a book account claim. In addition to $20,062.50 in outstanding fees demanded, the complaint further sought an award of any and all attorney's fees and costs that plaintiff might incur in prosecuting the litigation against defendants. Only defendants Blisset and Nayda Magliato*fn2 filed an answer to the complaint.
On May 14, 2003, the matter was referred for court-annexed non-binding contract arbitration.*fn3 Defendants assert, and plaintiff does not dispute, that during that proceeding, the arbitrator concluded that Nayda Magliato was not liable for any of the fees and that Blisset was liable only for fees in the amount of $750.*fn4 On June 9, 2003, plaintiff filed his demand for trial de novo, see R. 4:21A-6(b)(1), rejecting the award of the court-annexed arbitration proceeding. Plaintiff thereafter amended his complaint, asserting the same causes of action but restating the factual assertions supporting his alter ego theory to better support his demand for relief from the individual defendants. Once again, only Blisset and Nayda Magliato filed an answer to the amended complaint.
On July 10, 2003, the parties appeared for a settlement conference before a Superior Court judge. It is undisputed that in the course of that conference the parties agreed to submit their differences to binding arbitration and agreed to the appointment of a retired judge of the Superior Court to act as their arbitrator. Apart from the oral agreement to submit the dispute to binding arbitration and their agreement to the appointment of the retired judge to serve as their arbitrator, the record does not reflect that they made any other agreement. That is to say, there was no agreement, either written or oral, at the time the matter was sent to binding arbitration, concerning the manner in which the arbitration would be conducted, the rules that would govern that proceeding, the scope of the issues to be resolved in the arbitration, or the powers that would be vested in the retired judge the parties picked to act as their arbitrator.
The parties appeared for the arbitration on December 3, 2003. Plaintiff insisted that the arbitration hearing be transcribed by a certified court reporter whom he had hired for the occasion. Defendants objected, insisting that it was inappropriate to conduct the proceeding on the record. In the end, the arbitrator permitted the court reporter to transcribe the proceedings, but advised the parties that because of defendants' objection, he would rely on his own notes and understanding of the issues and would not use a transcript in reaching his decision. With that caveat, defendants acquiesced and the arbitration proceedings were transcribed.
The existence of the transcript is significant to the issues before this court on appeal because the arbitration proceeding began without any discussion between counsel or among the parties concerning the arbitration, its scope, or its limitations. Apart from a statement on the record by counsel for defendants that he was only representing Nayda Magliato and Blisset, there was no other agreement set forth between counsel concerning their understanding of what matters would and would not be heard by the arbitrator; nor, for that matter, was there any reference to the rules that would govern the arbitration. There was, therefore, no agreement made between the parties that would vest the arbitrator with any particular authority.
The principal focus of the arbitration hearing was on the relationship between the signatories to the retainer agreement, namely, Roseanne Magliato, On Set and Nayda's, and the defendants, namely, Nayda Magliato and Blisset, who had answered the complaint and appeared at the arbitration. Because the only viable defendants were not parties to the retainer agreement, plaintiff could only secure an award against them if he could prove that they were legally responsible for the fees.
As a part of their defense, Nayda Magliato and Blisset argued that plaintiff's complaint against them for fees was frivolous and that they were entitled to an award of counsel fees pursuant to R. 1:4-8. Near the end of the arbitration proceeding, the arbitrator asked counsel for both parties to submit post-hearing written submissions on the issue of alter ego or successor liability as a means to hold Nayda Magliato and Blisset liable for fees when neither was a party to the original retainer agreement. In response, counsel for defendants explicitly reiterated the demand for frivolous litigation sanctions, which he had also set forth in an arbitration memo that had been submitted prior to the hearing.
In that context, the arbitrator told defendants' counsel that he was aware of the demand for fees based on the frivolous litigation rule and that counsel could include that request in the post-hearing submission. In response, plaintiff commented that he believed that an application for fees would be required to be submitted "after an initial judgment." It is not clear whether plaintiff believed that the arbitrator would have the power to make an award of fees after he had issued an arbitration award or whether he believed instead that an application for fees could be addressed to a court in the context of confirming an arbitration award as a judgment. Equally unclear was the response from the arbitrator, who said: "Yeah, well, no, I understand that and if that became an issue where I was leaning in that manner, I would probably want your input. So I'll give you an opportunity to respond to that but let me resolve this item first."
The parties agreed to submit post-hearing briefs to the arbitrator for his consideration in addressing the issues that had been raised. Although the record does not include a copy of plaintiff's submission, defendants assert, and plaintiff does not deny, that plaintiff specifically requested that he be awarded both the legal fees that formed the basis for the complaint, together with "costs and fees incurred in bringing the action against Blisset, LLC and Nayda Magliato" as permitted by the retainer agreement. Likewise, in their post-hearing brief, defendants asserted that plaintiff's action against them was frivolous and that they were entitled to fees and costs pursuant to R. 1:4-8.
On February 4, 2004, the arbitrator issued his written decision and award. The arbitrator concluded that Blisset was, in fact, a successor to On Set and was therefore responsible for its unpaid legal fees, which the arbitrator fixed at $10,760 of the legal fees sought. The arbitrator concluded, however, that because Nayda Magliato had not executed the retainer agreement, she was not individually liable for any of the fees owed to plaintiff.
The February 4, 2004 award also addressed the demand by each party for attorney's fees. The arbitrator first rejected defendants' assertion that the complaint was frivolous and denied, therefore, the claim for attorney's fees pursuant to R. 1:4-8. Turning to plaintiff's affirmative demand for an award of fees and costs incurred in pursuing the collection action, the arbitrator concluded that, based upon his findings, such an award was not appropriate. Rather, he found: "it is better to ...