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Goldsworthy v. Browndorf


January 16, 2008


On appeal from the Superior Court of New Jersey, Law Division, Civil Part, Mercer County, MER-L-2177-04.

Per curiam.


Argued: October 15, 2007

Before Judges A.A. Rodríguez and C.L. Miniman.

Plaintiff George Goldsworthy (Goldsworthy) appeals from a summary judgment in favor of defendants Eric Browndorf, Esquire (Browndorf), and Cooper, Levenson, April, Niedelman & Wagenheim, P.A. (the Cooper firm), dismissing his legal malpractice claims against them. Because the trial judge misapplied the doctrine of judicial estoppel to bar Goldsworthy's claims and did not view the facts in a light most favorable to Goldsworthy, Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995), we reverse and remand for further proceedings consistent with this opinion.

Goldsworthy has owned and operated McDonald's franchises since 1977. In December 1995, based on the recommendation of McDonald's, Goldsworthy purchased four restaurants located in Ocean City, Cape May, Wildwood and North Wildwood, all seasonal shore communities. Goldsworthy agreed to purchase these restaurants because he relied on McDonald's representations that they were turnkey operations that required little or no cash investment. This proved to be incorrect and Goldsworthy ultimately invested $800,000 or more to meet McDonald's minimum operational standards. Additionally, the revenue projections for these seasonal restaurants proved to be overstated.

As 1997 drew to a close, Goldsworthy's financial problems in connection with the operation of the four restaurants became significant. As a result, he retained the Cooper firm in the Fall of 1997 to assist him in refinancing his debt and the firm assigned the matter to Browndorf. Because Goldsworthy had some concerns about the Cooper firm's experience, he told Browndorf that another McDonald's franchisee had recommended Douglas Brooks, a Massachusetts attorney who had previously sued McDonald's on behalf of other franchisees, and Browndorf telephoned Brooks. However, after consulting with other attorneys at the Cooper firm, Browndorf told Goldsworthy that "they would be happy to work with Brooks, but that they did not believe it was necessary." The Cooper firm never sought Brooks' advice and counsel.

During the Winter of 1997-98 Goldsworthy was in significant financial difficulty as a result of reduced cash flow. Goldsworthy attributed this reduction to his mandatory participation in national McDonald's pricing promotions during the height of the summer season, a time in which much of his annual revenue was made. The decrease in cash flow also seemed to be due to unforeseen competition from two Burger King Restaurants and road work on local bridges leading into two of his four restaurants.

As a result of Goldsworthy's financial difficulties, he fell behind on his loan obligation to MetLife Capital (MetLife). On January 8, 1998, MetLife sent Goldsworthy a default notice for the nonpayment of $243,973.07. MetLife notified Goldsworthy that failure to remit the past-due amount by January 28, 1998, would cause an acceleration of the notes, repossession of the collateral, or both. MetLife, Goldsworthy's largest creditor, had a secured claim against him in the amount of $2.7 million. Goldsworthy also became delinquent on his account payable to McDonald's. On January 20, 1998, McDonald's declared him in default under his franchise agreement and demanded payment in full of the outstanding amount, $58,533.42, within sixty days. In addition to the amounts owed to MetLife and McDonald's, Goldsworthy owed over $450,000 in trade debt and another $500,000 in taxes.

After the default notices were issued, Browndorf secured Goldsworthy an extension from McDonald's, which gave Goldsworthy until April 22, 1998, to pay the amounts owed to McDonald's. MetLife, too, agreed to an extension of time to cure the default. However, Goldsworthy did not cure the default within the extended time. Indeed, Goldsworthy's indebtedness to McDonald's grew to about $150,000. When the default on the MetLife loan was not cured by the extended deadline, MetLife accelerated the balance on Goldsworthy's $2.7 million loan.

Thereafter, Browndorf attempted to negotiate with McDonald's and MetLife. First, on February 19, 1998, Browndorf wrote to McDonald's general counsel in advance of a settlement conference to explain why Goldsworthy was having financial difficulties. Browndorf ascribed those difficulties primarily to McDonald's misrepresentations respecting the turnkey nature of the four restaurants and the significant funds Goldsworthy expended to bring them into compliance with McDonald's standards. Browndorf also ascribed Goldsworthy's financial difficulties to a $2.5 million decrease in gross receipts as a result of competition and "certain McDonald's pricing and promotion policies." Browndorf proposed a restructuring of the debt. He advised McDonald's general counsel that his focus [was] not on litigation. These are last resorts. While we have retained Douglas Brooks to assist us in litigation in the bankruptcy court[,] it is absolutely not something Mr. Goldsworthy wants to pursue.

The next day Browndorf, another attorney from the Cooper firm, and Goldsworthy traveled to Philadelphia to meet with McDonald's representatives and attempt to negotiate a restructuring of Goldsworthy's obligations. This meeting was unsuccessful and on March 10, 1998, Browndorf wrote to Goldsworthy stating that his impression was that McDonald's "played hardball" and that McDonald's representatives clearly indicated they were unwilling to make any concessions.

By letter dated March 16, 1998, Browndorf confirmed his earlier discussion with Goldsworthy about a potential Chapter 11 proceeding. He pointed out that Chapter 11 would permit a workout with MetLife but not with McDonald's unless Goldsworthy could cure the default under the franchise agreement as required by § 365 of the Bankruptcy Code. He advised that "[t]he only possible exception [to the requirement of a full cure] would be if you could establish the type of extensive fraud claim against McDonald's that we discussed." If Goldsworthy wished to proceed with litigation, Browndorf opined that there would not be "a high probability of ultimate success." Nevertheless, Browndorf assured Goldsworthy that the Cooper firm would pursue litigation if that was what Goldsworthy wanted to do. He stated that the Cooper firm "will rely heavily upon your documentation of the facts." He also observed that the firm would not interview witnesses at that point "[i]n recognition of your limited resources." Browndorf and the Cooper firm did not advise Goldsworthy of his rights under the New Jersey Franchise Practices Act, N.J.S.A. 56:10-1 to -29, at any time before or during the discussions that preceded this confirmatory letter. They also did not advise him that he would be entitled to an award of attorney's fees if he was successful in an action against McDonald's. N.J.S.A. 56:10-10.

After further settlement negotiations with McDonald's were unsuccessful, Browndorf wrote to Goldsworthy on April 16, 1998, advising him that they needed to "take immediate steps to try and resuscitate [the] negotiations." Browndorf further informed Goldsworthy that if no settlement was reached, he needed to authorize the Cooper firm to proceed with a Chapter 11 proceeding in order to give him "the best possible shot at reorganization." Browndorf warned that Goldsworthy would "have to engage in a long shot litigation, notwithstanding the filing, to establish that McDonald's failure to rewrite the Ocean City and Cape May Court House stores was unjustified. This rewrite litigation, as we have discussed several times, is going to be extraordinarily difficult to win."

As April 22, 1998, loomed on the horizon, Goldsworthy agreed to file a bankruptcy petition to forestall loss of the franchises. The Chapter 11 petition was prepared and signed by Goldsworthy on May 12, 1998, and filed thereafter. McDonald's filed a series of motions on June 19, 1998, including a motion to appoint a trustee and a motion to permit McDonald's to sell substantially all of Goldsworthy's assets.

In late June Browndorf met with Goldsworthy and Paul Cornog, another McDonald's franchisee, "about tactics used by McDonald's against other franchisees and about previous attempted lawsuits." Nevertheless, Browndorf did not advise Goldsworthy of his rights under the Franchise Practices Act.

Following this meeting Browndorf and the Cooper firm continued to negotiate with McDonald's for a potential resolution of the matter. Eventually, Goldsworthy, MetLife, and McDonald's agreed to a settlement that required Goldsworthy to resolve all issues by selling his four McDonald's restaurants.

The settlement agreement provided that (1) a §363 sale would take place to sell all four McDonald's restaurants by auction to the highest and best-qualified bidder; (2) Goldsworthy would retain all of his personal property; (3) Goldsworthy's tax liability totaling in excess of $500,000 would be satisfied by auction proceeds; and (4) Goldsworthy would retain the ability to recover excess proceeds, if available. The Bankruptcy Court had to approve the terms of the settlement. As a consequence, the parties appeared on August 4, 1998. Goldsworthy consulted with Browndorf and then took the stand. The judge asked, "Mr. Goldsworthy, you have only . . . less than two weeks to advertise and sell your stores, are you alright with this?" Goldsworthy replied, "Yes." At that time he was still unaware of his rights under the Franchise Practices Act. The Bankruptcy Court determined that Goldsworthy acted in good faith and exercised sound business judgment in deciding to enter into the settlement. The judge approved the settlement and incorporated it into an order on August 4, 1998.

Sometime in late July or early August of 1998, Goldsworthy's wife, Barbara, stated that she spoke with Browndorf about possibly submitting a bid at the auction to purchase the restaurants. Browndorf told Barbara that he could not advise her and that she should retain her own independent counsel. Barbara then contacted Brooks, the Massachusetts franchise attorney. Brooks, however, was not licensed to practice law in New Jersey and recommended another attorney to assist Barbara, Harris Chernow.

The §363 auction for the four restaurants took place on August 20, 1998. McDonald's purchased the Ocean City restaurant for $1.22 million and the other three restaurants were purchased by a private individual for $1.4 million. Barbara attended the auction with Chernow. She was "flabbergasted" because only one bidder other than McDonald's was present, despite the fact that she was told by the Cooper firm that there was quite a bit of interest in the days leading up to the auction.

Barbara wrote to the president of McDonald's, Alan Feldman, on August 25, 1998, to express her frustration over what had transpired at the auction and more generally to complain about McDonald's mistreatment of her husband and similar franchisees. She forwarded this letter to Brooks on September 1, 1998, and he replied by letter on September 11, 1998. In this letter Brooks observed,

Most of the legislation affecting franchising, including the Federal Trade Commission Disclosure Rule, focuses on disclosure issues at the inception of the franchise. In our experience, most disputes between franchisees and franchisors arise long after the franchise is sold, and do not result from any violation of the various disclosure laws. While a few states have statutes which govern some aspects of the franchise relationship, and most states theoretically recognize that there is an implied covenant of good faith and fair dealing in every contract, in actual practice it is difficult and expensive to enforce these rights.

Other than this communication, Barbara had no contact with Brooks. Neither she nor her husband ever received information about the New Jersey Franchise Practices Act from Brooks.

Goldsworthy sought dismissal of his bankruptcy petition in a certification filed on October 14, 1998. He clearly restated his position that McDonald's was the cause of his financial problems, but stated that the sale was a success. He certified as follows:

Under all the facts and circumstances, I believe the dismissal of this matter represents the most cost effective and efficient manner to resolve this matter. I believe it is in the best interest of all creditors, since they will either get paid in full, get paid agreed upon compromised amounts or they have consented to the dismissal.

The bankruptcy judge approved the dismissal of Goldsworthy's Chapter 11 bankruptcy petition on October 22, 1998.

On August 19, 2004, Goldsworthy filed a complaint against Browndorf and the Cooper firm alleging legal malpractice. Browndorf and the Cooper firm moved on June 21, 2006, for summary judgment, apparently before the end of discovery, relying on four alternative theories. First, they argued that judicial estoppel barred any relief. Second, they contended that the settlement was voluntary, fair and equitable and thus no cause of action existed, citing Puder v. Buechel, 183 N.J. 428 (2005). Third, they claimed that the action was barred by the six-year statute of limitations, N.J.S.A. 2A:14-1.*fn1 Fourth, they contended they were not liable to Goldsworthy because they exercised reasonable legal judgment in advising him.*fn2 In support of their estoppel argument, Browndorf and the Cooper firm contended that Goldsworthy must have known of his rights under the Franchise Practices Act because he received a Franchise Offering Circular from McDonald's in May of 1998 that referred generally to Federal Trade Commission information requirements, state franchise laws and multiple lawsuits against McDonald's. Goldsworthy denied that he read the circular, stated that he had merely given it to Browndorf and the Cooper firm when it arrived and pointed out that their billing records did not reflect any time spent reviewing the circular. At the oral argument, counsel for Browndorf and the Cooper firm handed up the September 11, 1998, letter from Brooks and argued that this letter also demonstrated Goldsworthy's knowledge about franchise law.

The motion judge held that the claim was not barred by the applicable six-year statute of limitations but dismissed Goldsworthy's claim with prejudice under the doctrine of judicial estoppel. The judge found that Goldsworthy's sworn statements in his testimony respecting the merits of the settlement and his later certification in the bankruptcy proceeding respecting dismissal of his petition precluded him from now asserting that he was not sufficiently informed about his franchise options. The judge also expressed concern about the inequity to the creditors in the bankruptcy proceedings were Goldsworthy to prevail on this malpractice action.*fn3 She did not rule on the alternate theories for summary judgment.

Following the grant of summary judgment, Browndorf and the Cooper firm moved on September 1, 2006, for an award of attorney's fees and costs of suit. Goldsworthy cross-moved to vacate the summary judgment or, alternatively, to alter or amend it based on his inability to respond to the September 11, 1998, letter from Brooks. The letter had been introduced into evidence on the morning of August 18, 2006, at oral argument. The judge found the letter should have caused Goldsworthy to raise the franchise issue with Browndorf and the bankruptcy judge. On October 20, 2006, the judge permitted Goldsworthy to supplement the record to respond to the Brooks letter and heard oral argument on both motions. She then denied Goldsworthy's motion to vacate the judgment and denied the motion of Browndorf and the Cooper firm for an award of attorney fees and costs of suit. This timely appeal followed.

In reviewing a ruling on a summary judgment motion, we apply the same standard as that governing the trial court. Prudential Prop. & Cas. Ins. Co. v. Boylan, 307 N.J. Super. 162, 167 (App. Div.), certif. denied, 154 N.J. 608 (1998); Antheunisse v. Tiffany & Co., 229 N.J. Super. 399, 402 (App. Div. 1988), certif. denied, 115 N.J. 59 (1989). Summary judgment is only appropriate if "there is no genuine issue as to any material fact challenged." R. 4:46-2(c). As previously noted, the "competent evidential materials" must be "viewed in the light most favorable to the non-moving party. Brill, supra, 142 N.J. at 540. If they "are sufficient to permit a rational factfinder to resolve the alleged disputed issue in favor of the non-moving party," summary judgment must be denied. Ibid. The motion must be considered on the basis that the opposing party's assertions of fact are true. Id. at 536. The determination is whether the evidence "is so one-sided that one party must prevail as a matter of law." Id. at 536 (quotation omitted). It is readily apparent that summary judgment, predicated as it was on Goldsworthy's alleged familiarity with franchise law, should not have been granted in the face of his unswerving denial of any such knowledge.

Judicial estoppel is an equitable doctrine that protects the integrity of the judicial process. Cummings v. Bahr, 295 N.J. Super. 374, 387 (App. Div. 1996). It "preclud[es] a party from asserting a position in a case that contradicts or is inconsistent with a position previously asserted by the party in the case or a related legal proceeding." Tamburelli Prop. Ass'n v. Borough of Cresskill, 308 N.J. Super. 326, 335 (App. Div. 1998) (citation omitted).

Judicial estoppel does not prevent litigants from pleading alternative positions; rather, it "is designed to prevent litigants from playing fast and loose with the courts." Newell v. Hudson, 376 N.J. Super. 29, 38 (App. Div. 2005) (citation omitted). "[A] party must successfully assert a position in order to be estopped from asserting a contrary position in future proceedings." Cummings, supra, 295 N.J. Super. at 386. Prior success does not necessarily mean that the party benefited from the position taken, but only that a court allowed them to maintain that position and relied on it to make a judicial determination. Id. at 387.

New Jersey "has a longstanding policy that encourages settlements." Ziegelheim v. Apollo, 128 N.J. 250, 263 (1992). However, our policy favoring settlements and the doctrine of judicial estoppel only bar a litigant from subsequently disputing the fairness and reasonableness of a settlement where the litigant was fully aware of all of the facts and was reasonably advised as to the legal remedies available based on those facts. Newell, supra, 376 N.J. Super. at 33; Puder v. Buechel, 183 N.J. 428, 437-39 (2005).

The motion judge relied on Newell to apply the doctrine of judicial estoppel in this case. The issue in Newell, was "whether a litigant who either lied, or later claimed she lied, about her understanding and voluntary acceptance of the terms of her property settlement agreement, in order to induce the court to accept and incorporate it into a judgment of divorce, is judicially estopped from asserting a [counter]claim for malpractice against her matrimonial attorney based on the settlement." Newell, supra, 376 N.J. Super. at 30. At the time of the divorce hearing, Hudson represented in court that she understood and voluntarily consented to the terms of the property settlement agreement. Id. at 32. Based upon this testimony, the judge approved the settlement and incorporated the agreement into the judgment of divorce. Ibid.

Thereafter, the wife sought a modification of the alimony amount, claiming that her former husband's salary was misstated in the agreement as a result of her attorney's negligence and, as a consequence, she received an insufficient alimony award. Id. at 32-33. That motion was denied by the Family Part judge. Id. at 33.

Hudson failed to pay the divorce attorney's fee and a collection suit was instituted against Hudson. Ibid. Hudson counterclaimed alleging malpractice. Id. at 33-34. In responding to questions posed at her deposition, Hudson essentially testified that her sworn testimony to the judge hearing the divorce proceeding was false. Id. at 34. The attorneys then filed a motion for summary judgment. Ibid. In dismissing the malpractice action on the basis of judicial estoppel, the motion judge found that the wife was not misled by her attorney because she testified under oath that she knew what she was doing. Id. at 36. The judge also stressed that the wife, who was an accountant, although not tutored in the law, was nevertheless a sophisticated individual who had received sufficient factual information to inform her decision regarding the settlement. Id. at 35-36.

In reviewing the grant of summary judgment, we noted that the Ziegelheim and Puder courts recognized legal malpractice as a viable cause of action where a matrimonial attorney's negligent pretrial preparation and advice led to the recommendation of an improper settlement. By declining to apply a per se bar, these cases preserve a malpractice claim of a vulnerable litigant who unknowingly enters into an inadequate settlement, believing it is fair, as a result of the arguable negligence of her matrimonial attorney. [Id. at 44.]

We agreed that a legal malpractice action was reserved for "vulnerable litigant[s] who unknowingly enter[] into an inadequate settlement, believing it is fair, as a result of the arguable negligence of [their] . . . attorney." Ibid. Further, we adopted the position of the Idaho Supreme Court, stating that judicial estoppel should only be applied when the party maintaining the inconsistent position did have, or was chargeable with, full knowledge of the attendant facts prior to adopting the initial position. . . . [T]he concept of judicial estoppel takes into account not only what a party states under oath in open court, but also what that party knew, or should have known, at the time the original position was adopted. [Ibid. (quoting McKay v. Owens, 937 P.2d 1222 (1997)).]

We specifically held that the case before us was "not a case where the litigant was misinformed of the criteria to be employed or was without full knowledge of the attendant facts prior to adopting her initial position." Id. at 46.

Quite a different result was reached in Ziegelheim. There our Supreme Court held that a client's legal malpractice action against her divorce attorney was not barred under the doctrine of judicial estoppel, despite the fact that the wife had previously accepted a negotiated matrimonial settlement. Ziegelheim, supra, 128 N.J. at 265. In that case, the wife retained defendant attorney to represent her in an anticipated divorce action. Id. at 254. According to the wife, during several meetings they discussed her suspicion that her husband was hiding marital assets and she requested that Apollo inquire into the matter. Ibid. Thereafter, the wife executed a property settlement agreement with her husband which was incorporated into their judgment of divorce. Id. at 256. The property settlement agreement provided that the wife would receive fourteen percent of the marital assets. Id. at 256-57.

When testifying before the lower court after the settlement was read into the record, both parties testified "that they understood the agreement, that they thought it was fair, and that they entered into it voluntarily." Id. at 257. Later on, however, the client filed a malpractice action asserting, among other things, that she only agreed to accept the terms of the property settlement based on her attorney's advice that "wives could expect to receive no more than ten to twenty percent of the marital estate if they went to trial." Id. at 258. The wife claimed that this advice did not comport with what a reasonably prudent attorney would have provided under the circumstances. Ibid.

The Supreme Court "recognize[d] that litigants rely heavily on the professional advice of counsel when they decide whether to accept or reject offers of settlement." Id. at 263. In addressing the issue of estoppel, the Court observed, "The fact that a party received a settlement that was 'fair and equitable' does not necessarily mean that the party's attorney was competent or that the party would not have received a more favorable settlement had the party's incompetent attorney been competent." Id. at 265. The Court concluded that it was error to grant summary judgment on some of the wife's malpractice claims and reversed in part. Id. at 267.

The facts in this case are not sufficient to trigger the bar of judicial estoppel under Newell or Puder, supra, 183 N.J. at 430 (where the client accepted a renegotiated divorce settlement with full knowledge of the alleged malpractice in connection with the first divorce settlement). Goldsworthy did not admit that he was lying when he testified before the bankruptcy court respecting the settlement and when he signed a certification seeking dismissal of the bankruptcy proceeding. Rather, he states that he believed he was telling the truth but was ignorant of his rights under the Franchise Practices Act as a result of the malpractice of Browndorf and the Cooper firm. He asserts that but for such ignorance he would not have settled with McDonald's and sold his four restaurants. As a consequence, the doctrine of judicial estoppel has no application to the facts before us.

Reversed and remanded for further proceedings consistent with this opinion. We do not retain jurisdiction.

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