March 18, 2008
DONALD ERICKSON, PLAINTIFF-APPELLANT,
JEFFREY S. LEONARD, ESQ., AND HERSH, RAMSEY AND BERMAN, P.C., DEFENDANTS-RESPONDENTS.
On appeal from the Superior Court of New Jersey, Law Division, Morris County, Docket No. L-47-02.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued September 24, 2007
Before Judges S. L. Reisner and Gilroy.
This is plaintiff Donald Erickson's second appeal from a dismissal of a legal malpractice action filed against Jeffrey S. Leonard, Esq., his former attorney, and Leonard's law firm, Hersh, Ramsey & Berman, P.C. We previously reversed the grant of summary judgment dismissing plaintiff's complaint, and remanded the matter to the trial court for further proceedings. Erickson v. Leonard, No. A-3410-04 (App. Div. Jan. 6, 2006) (slip op. at 2). Plaintiff now appeals from the October 24, 2006, order, which granted defendants' motion for summary judgment on remand. Plaintiff also appeals from the December 15, 2006, denial of his motion for reconsideration. We affirm.
Plaintiff was a contractor that engaged in the construction and sale of residential homes. Plaintiff was also the sole shareholder, officer, and employee of Lynn Development Corporation (LDC), a development and construction company. On November 2, 1989, LDC entered into a contract with William G. and Aida G. Visakay for the construction and sale of a new home. Plaintiff executed the contract as President of LDC only. Although plaintiff refused the Visakays' request that he personally guarantee the contract, including any necessary repairs after closing of title, he did guarantee the return of the deposit monies in the event the Visakays cancelled the contract in accordance with its terms.
Five years post-closing of title, the Visakays filed suit against plaintiff, individually and d/b/a LDC, for damages to the home caused by "foundation/structural settlement" (the underlying action). Plaintiff solicited defendants' representation in defense of the lawsuit. Although defendants recognized early in the action that the parties to the contract were the Visakays and LDC, not plaintiff, defendants failed to move for dismissal on the ground that plaintiff was not personally liable for the acts of his corporation. Plaintiff, after having received advice from defendants that he had no defense to the action, settled the action, paying the Visakays $220,375.
Following the settlement, plaintiff filed a complaint instituting a legal malpractice action against defendants, alleging among other matters, that defendants had negligently "failed to assert the corporate shield of . . . LDC, as a barrier against personal liability exposure" on the underlying claim. On October 18, 2004, the trial court granted summary judgment, determining that plaintiff had failed to demonstrate a prima facie claim of legal malpractice.
On appeal, we reversed, determining that the trial court had erred in granting summary judgment on plaintiff's claim that defendants "failed to pursue the issue of his personal liability for the defects in the house." Id. at 5. We stated in relevant part:
The undisputed evidence on the motion record supports a reasonable inference that the Visakays were well aware that they were dealing with a corporate entity and that Erickson was not agreeing to personal liability, except to a very limited extent.
There is no evidence that Erickson used the corporation to perpetuate a fraud or that the corporation was undercapitalized for the purpose for which it was created, i.e., to construct houses. The house was completed, and the Visakays did not complain about the structural defect until five years later. Erickson protected the Visakays, as the law required, by registering the house with HOW.
Further, Erickson provided an expert report detailing the alleged malpractice by the Hersh, Ramsey firm in failing to file a motion to dismiss the complaint against him in his personal capacity. The defendant law firm did not file a contesting expert report on the malpractice issue.
Ordinarily, the sole shareholder of a corporation is not personally liable for the debts of the corporation. And, generally, a breach of contract action against a corporation, premised on faulty construction of a house, cannot be parlayed into a tort claim against its sole shareholder. On this record, reasonable jurors could conclude that Erickson had a viable defense to personal liability and that the Hersh, Ramsey firm should have asserted that defense on his behalf, rather than advising him to settle the Visakay case. Of course, at trial, additional facts may be adduced on behalf of the defense that might sway the jury to reach a different conclusion. We decide only that Erickson is entitled to his day in court on this issue. [Id. at 5-7 (citations omitted).]
On June 1, 2006, the parties appeared before the trial court for a case management conference, contending that they believed the issue, of whether defendants were negligent by not asserting the corporate shield defense in the underlying action, could be resolved on cross-motions for summary judgment. In presenting the matter to the trial court, plaintiff's counsel stated:
Essentially, the whole issue of the malpractice is whether or not the [defendants] should have made a motion for summary judgment to get [plaintiff] personally out of that case.
We say [they] should have. They say it wouldn't have been successful.
That's the one question: Was [plaintiff] entitled to have gotten out of the underlying case on summary judgment or not. If he was, the defendants are guilty of malpractice. If he wasn't, we lose. End . . . of story . . . .
In addressing how the motion would be presented, defense counsel stated:
[A]ll I got to show you is that there was enough for a judge . . . presented with that issue in 01 to have said, fact questions, I'm not granting the motion. So I win the motion by just demonstrating enough of a burden to show . . . that the underlying motion wouldn't have been granted.
The trial judge replied in the affirmative.
In discussing the proposed cross-motions with the judge, defense counsel inquired what would happen if, after reviewing the cross-motions, the court decided that it was necessary to hear testimony on the motions. The judge replied that he might proceed to a plenary hearing:
I might discover something that I really do need to hear . . . from somebody to help me decide . . . not a genuine issue of material fact in the sense that it defeats a summary judgment . . . but something that bears on [the motions]. [I]t could be a very technical point . . . but I need somebody to tell me . . . something other than [what may have been] in a certification.
On June 16, 2006, a consent scheduling order was entered framing the issue for resolution as follows:
Whether or not plaintiff Donald Erickson, as a defendant in the [u]nderlying [c]ase, would have been entitled to judgment therein, dismissing the complaint as to him personally, upon the ground that he lacked personal liability for the claims alleged in the [u]underlying [c]ase, had a timely and proper motion for such relief been made on his behalf by the defendants in this action?
On October 24, 2006, the trial judge entered an order supported by a written opinion, granting defendants' motion and denying plaintiff's cross-motion. The judge stated in relevant part:
[T]here are genuine issues of material fact as to the relationship between Erickson and Lynn Development that create 'the fundament of a cause of action' necessary to defeat a motion to dismiss. In a motion to dismiss during the underlying case, the evidence would have been construed in the light most favorable to the Visakays. Though [p]laintiff Erickson now asserts the corporate form as a shield, there is evidence that the corporate form was nothing more than an alter ego used to avoid taxes. For instance, in the First American litigation, there is testimonial evidence in which Mr. Erickson refers to himself and Lynn Development as "one and the same." Further, in that same lawsuit, [p]laintiff Erickson's counsel petitioned the [c]court for a judicial determination that Mr. Erickson and Lynn Development were a single entity. Admittedly, these prior inconsistent statements do not estop Erickson from asserting contrary statements in this litigation. Judicial estoppel requires an unequivocal assertion of law or fact by a party in a prior judicial proceeding that was accepted by the [c]court. The prior litigation was never tried to its completion, so estoppel is inappropriate. However, Erickson's prior inconsistent statements in the First American litigation combined with his deposition for this lawsuit raise disputed issues that would have blocked any motion to dismiss Erickson. Erickson's deposition transcript is evidence that was not before the Appellate Division. Thus, the additional information before this [c]court that was not part of the record before the Appellate Division sufficiently establishes genuine issues regarding Erickson's and Lynn Development's status as alter egos or separate entities and, accordingly, questions whether Erickson would have been successful on a motion to dismiss based upon the corporate shield defense.
Based upon the arguments before this [c]court, it appears that the cause of action against Erickson, individually, is suggested by the facts. Since a motion to dismiss Erickson individually from the Visakay litigation based upon the corporate shield defense would have likely been unsuccessful, [d]efendants are entitled to summary judgment in this matter. [(citations omitted).]
On November 13, 2006, plaintiff moved for reconsideration, asserting among other matters that the judge erred by not "fix[ing] a date for a hearing at which to resolve whatever issues of fact [the court] may have found as grounds for denying the motion," citing R. 4:46-3(b). On December 15, 2006, an order was entered denying plaintiff's motion. Appended to the order was the judge's statement of reasons, pursuant to Rule 1:2-6(f), which provided in relevant part:
[P]laintiff's argument that the [c]court misconstrued the issue before it for its consideration is unfounded. The record is clear. The Appellate Division reversed and remanded the issue so that [p]laintiff could have "his day in court on this issue." At both the case management conference on June 1, 2006, and at oral argument on the motions for summary judgment on September 22, 2006, the parties agreed that the issue before the [c]court was whether Erickson would have prevailed on a motion to dismiss himself personally in the underlying matter. Thus, in its October 24, 2006, decision, the [c]court considered whether Erickson would have prevailed on a motion to dismiss the underlying matter against him, individually, based upon the corporate shield defense . . . .
On appeal, plaintiff argues that summary judgment was improvidently granted to defendants because the trial judge misstated the issue, applied the wrong standard of review, and failed to carry out this court's mandate regarding the remand. Plaintiff requests that we reverse the grant of summary judgment and remand the matter to the Law Division for trial.
A trial court will grant summary judgment to the moving party "if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact challenged and that the moving party is entitled to a judgment or order as a matter of law." R. 4:46-2(c); see also Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 523 (1995). "An issue of fact is genuine only if, considering the burden of persuasion at trial, the evidence submitted by the parties on the motion, together with all legitimate inferences therefrom favoring the non-moving party, would require submission of the issue to the trier of fact." R. 4:46-2(c).
On appeal, "the propriety of the trial court's order is a legal, not a factual, question." Pressler, Current N.J. Court Rules, comment 3.2.1 on R. 2:10-2 (2008). "We employ the same standard that governs trial courts in reviewing summary judgment orders." Prudential Prop. & Cas. Ins. Co. v. Boylan, 307 N.J. Super. 162, 167 (App. Div.), certif. denied, 154 N.J. 608 (1998).
Plaintiff argues that the grant of summary judgment conflicts with our prior opinion, determining that "Erickson is entitled to his day in court on this issue," whether he had a viable defense to personal liability via the corporate shield. Plaintiff contends that the trial judge "never reached the merits of the lynchpin issue upon which Erickson's malpractice claim turned: [he] never ruled on the question of whether or not Erickson had a viable defense to personal liability in the underlying action." Plaintiff asserts that the judge only determined that if Erickson had brought a motion for summary judgment in the underlying action based on the corporate shield defense, the motion would have been denied because there were "genuine issues of material fact" concerning whether LDC was a separate entity from Erickson or whether it was merely his alter ego. Plaintiff also argues that in deciding the cross-motions, the judge applied the wrong legal standard by determining whether or not the Visakays's complaint had stated "the fundament" of a cause of action against Erickson personally, rather than using the summary judgment standard of review.
Defendants counter that plaintiff cannot pursue a theory of negligence broader than that contained in his liability expert's report, which provided in relevant part: "The personal liability of Mr. Erickson should have been the subject of a Summary Judgment motion, which motion, based upon the information reviewed, would have resulted in an Order dismissing the case against Mr. Erickson individually." Defendants contend that the trial judge decided the issue as framed by the consent order:
[s]pecifically, the motion before the Trial Court was unique in that the essence of the inquiry was whether a motion for summary judgment would have been granted in the Visakay Litigation. Simply, in disposing of Plaintiff['s] remaining claim for legal malpractice, Hersh Ramsey implicitly steps into the shoes of the Visakays and thereby, need only prove that the proposed underlying motion would have been denied under the Brill standard.
We agree that when we remanded this matter, we contemplated that the issue concerning plaintiff's personal liability in the underlying action would be resolved by trial. "On this record, reasonable jurors could conclude that Erickson had a viable defense to personal liability and that the Hersh, Ramsey firm should have asserted that defense on his behalf, rather than advising him to settle the Visakay case." Erickson, supra, slip op. at 6-7 (footnote omitted); see Verni ex rel. Burstein v. Harry M. Stevens, Inc. of N.J., 387 N.J. Super. 160, 199 (App. Div. 2006) ("[T]he issue of piercing the corporate veil is submitted to the fact finder, unless there is no evidence sufficient to justify disregard of the corporate forum."), certif. denied, 189 N.J. 429 (2007); see also G-I Holdings, Inc. v. Bennet (In re G-I Holdings, Inc.), 380 F. Supp. 2d 469, 477-78 (D.N.J. 2005) (determining that a plaintiff pursuing a damage claim had a right to trial by jury on the issue of piercing the corporate veil). We also stated: "[O]f course, at trial, additional facts may be adduced on behalf of the defense that might sway the jury to reach a different conclusion. We decide only that Erickson is entitled to his day in court on this issue." Erickson, supra, slip op. at 7. However, we did not direct that the matter could only be resolved by a trial. The parties were free to resolve the issue by any reasonable course of action approved by the trial court.
The parties requested that the trial judge resolve the issue on cross-motions for summary judgment. The issue as framed was whether plaintiff would have been entitled to judgment in the underlying action, on the ground that he lacked personal liability, "had a timely and proper motion for such relief been made on his behalf by defendants in this action[.]" The judge resolved the issue in accord with the parties' request. Plaintiff cannot assert on appeal that the judge improperly resolved the issue on cross-motions for summary judgment, rather than by a trial, when plaintiff requested the court to proceed by motion. Lucia v. Monmouth Med. Center, 341 N.J. Super. 95, 102-03 (App. Div. 2001); see also Pressler, Current N.J. Court Rules, comment 2.2 on R. 2:10-2 (2008) ("Where counsel does not merely acquiesce in the error, but affirmatively solicits it, the doctrine of invited error applies.").
Plaintiff argues next that the trial judge applied the wrong standard of review in deciding the cross-motions, asserting that the judge applied the standard governing motions to dismiss for failure to state a cause of action, rather than summary judgment. We acknowledge that the judge intermixed the two standards of review. However, the error is harmless, because appeals are taken from judgments, not from oral opinions. Glaser v. Downes, 126 N.J. Super. 10, 16 (App. Div. 1973), certif. denied, 64 N.J. 513 (1974). An order of judgment will be affirmed on appeal if it is correct, even though the judge gave the wrong reasons for it. Isko v. Planning Bd. of Twp. of Livingston, 51 N.J. 162, 175 (1968), abrogated on other grounds by, Commercial Realty & Res. Care v. First Atl. Properties Co., 122 N.J. 546 (1991). On appeals from a grant of a motion for summary judgment, we consider the matter anew and apply the Brill standard. See Prudential, supra, 307 N.J. Super. at 167.
It is a well established principle of corporate jurisprudence "that a corporation is a separate entity from its shareholders and a primary reason for incorporation is the insulation of shareholders from the liabilities of the corporate enterprise." State of N.J., Dep't of Envtl. Prot. v. Ventron Corp., 94 N.J. 473, 500 (1983) (citation omitted). The general purposes of "the doctrine of piercing the corporate veil is to prevent an independent corporation from being used to defeat the ends of justice, to perpetrate fraud, to accomplish a crime, or otherwise to evade the law." Ibid. (citations omitted). "In the absence of fraud or injustice, courts generally will not pierce the corporate veil to impose liability on the corporate principals." Lyon v. Barrett, 89 N.J. 294, 300 (1982). The party seeking to pierce the corporate veil "bears the burden of proof and must demonstrate the misuse of the corporate form and the necessity of disregarding it in order to do equity." Dep't of Labor v. Berlanti, 196 N.J. Super. 122, 127 (App. Div. 1984), appeal dismissed as moot, 101 N.J. 568 (1985).
Plaintiff argues that he would have prevailed on a motion for summary judgment in the underlying action, because the record is devoid of any evidence that he misused the corporation to commit a fraud or injustice against the Visakays in relation to either the contract for sale or the subsequent construction of the home. In other words, plaintiff contends that the alter ego status between him and LCD should be determined only by the conduct of the parties material to the dispute at hand.
We acknowledge that a majority of the cases where courts have pierced the corporate veil concern fraud or injustice in the transaction between the injured party and the corporation. See Hartford Fire Ins. Co. v. Conestoga Title Ins. Co., 328 N.J. Super. 456, 458 (App. Div.) (a corporate theft committed by an individual who served as president and the corporation's alter ego), certif. denied, 165 N.J. 137 (2000); Walensky v. Jonathan Royce Int'l, Inc., 264 N.J. Super. 276, 282 (App. Div.) (shareholder defrauded a fellow shareholder), certif. denied, 134 N.J. 480 (1993); Stochastic Decisions, Inc. v. DiDomenico, 236 N.J. Super. 388, 393-96 (App. Div. 1989) (pervasive commingling of corporate assets and identities, together with false representations by an individual shareholder), certif. denied, 121 N.J. 607 (1990); Kugler v. Koscot Interplanetary, Inc., 120 N.J. Super. 216, 254-58 (Ch. Div. 1972) (corporate form used by individuals to conduct a pyramid sales practice prohibited by law); and Yacker v. Weiner, 109 N.J. Super. 351, 356-57 (Ch. Div. 1970) (individual shareholders perpetrated fraud upon subcontractors), aff'd, 114 N.J. Super. 526 (App. Div. 1971). However, fraud or injustice in the specific transaction between the party seeking to pierce the corporate veil and the corporation is not always required.
"One who accepts the benefits of incorporation must also accept the burdens that flow from the use of a corporate structure." Lyon, supra, 89 N.J. at 300. "A sole (individual or corporate) shareholder or multiple shareholders run the risk of a piercing claim when they (i) make no distinction between their pocketbooks and the corporate pocketbook; (ii) fail to capitalize the corporation adequately; and (iii) fail to comply with corporate formalities." Pachman, Title 14A Corporations, Comment 6c(1) on N.J.S.A. 14A:5-30 (2007). "[T]he failure to distinguish between shareholder money and assets[,] and corporate money and assets is probably the most significant." Ibid. Misuse of the corporate form may also be evidenced by disregard of the form. Id. at comment 6c(3) on N.J.S.A. 14A:5-30. "[I]n order to receive the benefits of the corporate form, entrepreneurs must act in a corporate capacity, as shareholders, directors, officers, employees, or any combination thereof, rather than individuals." Ibid.
As stated, the determination that a corporation was inadequately capitalized may result in the piercing of the corporate veil and individual shareholder liability. A party entering into a business relationship with a corporation does "not assume the risk of grossly inadequate capitalization. In entering into such contractual relationships with corporate entities[,] the parties are generally entitled to rely upon certain assumptions, one being that the corporation is more than a mere shell - that it has substance as well as form." 1 William M. Fletcher, Fletcher Cyclopedia of Law of Private Corporations, § 41.33 at 653 (perm. ed., rev. vol. 1999). The inquiry into inadequate capitalization becomes relevant in determining whether the corporation was formed or used for improper purposes, including risks attendant to the nature of the business. Verni, supra, 387 N.J. Super. at 200-01.
Inadequate capitalization has been defined as "capitalization very small in relation to the nature of the business of the corporation and the risks . . . attendant to such business." 1 Fletcher, supra, § 41.33 at 652. Generally, "[t]he adequacy of capital is to be measured as of the time of formation of the corporation." Ibid. However, we are satisfied that one may not sufficiently capitalize a corporation, later withdraw most of its capitalization, and then continue to enter into contracts with third parties who are relying on the corporation being adequately capitalized. "[I]t is inequitable to allow the shareholders to escape personal liability" where a corporation "carries on a business without substantial capital and is likely to have insufficient assets available to meet its debts." Id. at 648.
We have reviewed the record of the cross-motions for summary judgment under the Brill standard. We are satisfied that the trial judge correctly determined that material questions of fact existed concerning whether LDC was plaintiff's alter ego. Specifically, the record contained evidence that:
(1) plaintiff testified in his deposition that he considered himself and LDC as "one and the same"; (2) plaintiff's accountant testified in a deposition that "[v]ery often Don Erickson [and LDC] are the alter egos of each other. It's a closely held business, and you know, Don is not a sophisticated financier, nor is he a trained accountant"; (3) LDC never conducted any corporate meetings; (4) there was an intermingling of corporate and personal funds with Erickson, considering "[f]or all intents and purposes," LDC's cash position was also his cash position; (5) plaintiff would individually purchase real property for future development with LDC obtaining construction financing secured by the property owned by plaintiff; (6) LDC paid taxes on the real property owned by plaintiff; (7) profits from the construction of the sales of homes passed to plaintiff, irrespective of whether LDC sold or developed properties; and (8) in 1996, during the pendency of the underlying action, LDC neither owned any real estate or equipment, nor did it possess any other assets.
Here, on plaintiff's motion for summary judgment, the trial judge would have considered the motion as if it had been brought by plaintiff in the underlying action, seeking dismissal of Visakays' complaint, and as such, would have construed the facts, giving the Visakays, the non-moving parties, "all legitimate inferences therefrom." R. 4:46-2(c). We are satisfied that the trial judge properly denied plaintiff's motion for summary judgment, which sought a determination that he was not liable to the Visakays in the underlying action as a matter of law because of the corporate shield doctrine. We do not determine whether plaintiff would have been successful in defending the underlying action based on the corporate shield doctrine if the matter had proceeded through trial to a final judgment, only that questions of material fact existed, prohibiting the grant of summary judgment. Having correctly denied plaintiff's motion, the judge properly granted defendants' cross-motion, not only because of the limited theory of negligence contained in plaintiff's expert liability report, but because of the agreement reached between the parties at the case management conference. "That's the one question: Was [plaintiff] entitled to have gotten out on the underlying case on summary judgment or not. If he was, the defendants are guilty of malpractice. If he wasn't, we lose. End . . . of story . . . ."
Plaintiff argues next that having decided material questions of fact existed, the trial judge should have conducted an evidentiary hearing to resolve the issue of whether plaintiff would have been successful in avoiding liability in the underlying action via the corporate shield. Plaintiff contends that the preamble to the scheduling order, which framed the question for the cross-motions, provided in pertinent part that the issue "should be resolved . . . upon cross[-]motions for summary judgment, subject to the right of either party to request, or the Court, on its own motion to direct, an evidentiary hearing with respect to any genuinely disputed issue of material fact necessary to the resolution of the issue by the Court . . . ." Plaintiff asserts that the court was required to have conducted an evidentiary hearing to resolve the issue pursuant to Rule 4:46-3(b). We reject these contentions.
The language in the preamble of the scheduling order did not mandate the court to conduct an evidentiary hearing. The preamble only provided that the court could elect to proceed to an evidentiary hearing if the court deemed it necessary, or if requested by a party. The court did not so direct, nor did either party request an evidentiary hearing on the original hearing date. Additionally, at the case management conference, when the judge was asked whether he would conduct an evidentiary hearing if he was to find a material question of fact, the judge answered in the negative. "I might discover something that I really do need to hear from somebody to help me decide . . . not a genuine issue of material fact in the sense that it defeats a summary judgment . . . . [B]ut I need somebody to tell me . . . something other than [what may have been] in a certification."
Nor do we believe that Rule 4:46-3(b) required the trial judge to proceed to an evidentiary hearing. The rule provides for an evidentiary hearing if the court decides after hearing a summary judgment motion that "the case may be fully or partially adjudicated upon limited testimony." R. 4:46-3(b). Because of the evidence contained in the summary judgment record, we are satisfied that the testimony required to resolve the issue would not have been limited. Moreover, in this case, proceeding with an evidentiary hearing or trial on the issue would have run counter to the parties agreeing to the resolution of the issue by cross-motions for summary judgment.
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