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Geranio v. FEC Mortgage Corp.


February 18, 2009


On appeal from the Superior Court of New Jersey, Law Division, Bergen County, L-9915-04.

Per curiam.


Argued January 21, 2009

Before Judges Winkelstein, Fuentes and Gilroy.

Plaintiffs Steven Geranio and World Class Leather, Inc. appeal from the amount of a fee award in their favor following a bench trial in which they were successful in a legal malpractice action against Anthony Gualano and his law firm, Lucariello & Gualano (the attorney defendants), who cross-appeal from the judgment of legal malpractice.*fn1 With the exception of the amount of the fee award, we affirm.

In 1994, Geranio was the president and a shareholder of World Class Leather, which purchased two residential lots from LHW Development Corp. (LHW). The seller corporation was owned by Warren Lebers. When World Class Leather purchased the property, LHW took back a mortgage for $190,000. At closing, plaintiff received an amortization schedule prepared by LHW's attorney, showing the required monthly payments of principal and interest, which were payable over eight years, to be paid in full no later than August 12, 2002.

When, in 1998, plaintiffs sought to refinance, they applied for a mortgage from defendant, FEC Mortgage Corp. (FEC). FEC's attorney, Gualano, represented FEC in the loan transaction. FEC advised plaintiff that Gualano would prepare the necessary paperwork. Plaintiff did not sign a retainer agreement with Gualano, nor did he contact Gualano to request his services for the refinance transaction. According to plaintiff, Gualano contacted him one week before closing to obtain the name and contact information for LHW, so Gualano could obtain the payoff amount for the LHW mortgage. Plaintiff believed that Gualano would "help [him]" and "represent [him] on the paperwork" at the closing. Gualano asserted that he never communicated with plaintiff prior to closing.

At closing, plaintiff did not have his own attorney. Gualano presented plaintiff with the settlement sheet and told him that the principal payoff amount was $121,749.27, as it appeared on the settlement sheet. Plaintiff had not reviewed his amortization schedule, which he had misplaced, to confirm that the payoff amount was correct; he relied on Gualano's representation that it was the correct amount. Plaintiff signed the settlement sheet; Gualano issued a check from his attorney trust account to pay off the existing LHW mortgage; and he issued a check to plaintiffs for the net balance of the FEC loan.

Four years later, plaintiff found the LHW mortgage amortization schedule and discovered that he had overpaid the LHW mortgage by approximately $15,000. Rather than only paying off the principal amount as of the closing date, $106,216.33, he paid $121,749.27, representing the total outstanding loan balance of principal plus interest as if the mortgage had been paid through the end of its eight-year term. Plaintiff asked Lebers for reimbursement, and although Lebers acknowledged that he was overpaid, he refused to repay plaintiffs. Plaintiff also told Gualano of the error, who, according to plaintiff, responded that it was not his fault.

Plaintiffs filed suit against Gualano, his partner, Hugh Lucariello,*fn2 and their law firm for "professional negligence." Plaintiffs also brought claims against LHW for unjust enrichment and conversion, and against FEC for breach of duty, negligence and consumer fraud. Soon after the trial began, the parties settled the overpayment issue, and defendants, including Gualano, agreed to pay plaintiffs the full amount of the overpayment plus prejudgment interest, each paying one-third of the total settlement of $20,353. The court dismissed plaintiffs' claims against LHW and FEC, and the only remaining claim to be tried was plaintiffs' claim for professional negligence against the attorney defendants; damages were limited to counsel fees, costs and expert fees.

Following a bench trial, the court found that Gualano "knew or should have known that plaintiff[] expected that [he] would protect their interests." The court stated:

Mr. Gualano, according to his testimony, was aware that at least in all probability an amortization schedule had been prepared at the original closing and affixed to the mortgage. To my mind, it makes no sense and would, therefore, constitute a deviation from the standard of reasonable care to decline to secure a copy of the amortization schedule and to rely on the prior lender's representation alone. The accuracy of which could not be known.

In that respect, as well as several others, I find that Mr. Gualano deviated from the applicable standards of care and failed to exercise a reasonable care on behalf of the plaintiffs.

I find that Mr. Gualano's failure to secure a payoff statement was negligent. That his failure to secure an amortization schedule before the closing, or at the very latest at the closing, was a deviation from the standard of care and was negligent. That his failure to ask [plaintiff] if the payoff figure appeared to be accurate . . . was a deviation from the standard of care.

The court found that Gualano had a "defacto attorney/client relationship" with plaintiff, entitling him to recover reasonable attorneys' fees for Gualano's negligence. The court found it reasonable for plaintiff to believe that his interests would be represented by Gualano after Gualano advised him not to obtain the payoff amount, indicating that it was his responsibility to do so; further, there was no evidence that plaintiff was "in any way, informed that Mr. Gualano's role was limited and that Mr. Gualano only represented FEC." The court held that if Gualano intended to limit his representation to FEC only, he should have made sure that the appropriate notification was provided to plaintiff.

The judge advised the parties that he was entering a judgment as to liability, but the amount of the "reasonable attorneys' fees and expenses" would "have to be fixed by some other judge following [his] retirement." Accordingly, the court entered the following order: "Judgment be and hereby is entered on plaintiffs' legal malpractice claims (I found there was an attorney-client relationship as well as reasonable reliance) in favor of plaintiffs and against Gualano and L&G . . . jointly and severally, for the amount of the legal fees and disbursements awarded as set forth below . . . ."

Plaintiffs made a motion for counsel fees of $144,639.75, and the attorney defendants moved to set aside the liability determination. The court denied the attorney defendants' motion and awarded plaintiffs counsel fees and disbursements in the amount of $37,924.75, for legal work from November 2, 2006 through March 2, 2007, which only included legal services for the trial after the overpayment issue had been settled. In the fee application, however, plaintiffs' attorney certified that his representation of plaintiffs in connection with their claims against defendants had begun in December 2003. The complaint was filed in June 2004 and there were several days of trial in October 2006 prior to the November 2 date the court chose as the starting point to determine fees. Nevertheless, the court reasoned that until October 18, 2006, when the parties settled the overpayment issue, the counsel fee request included legal work for plaintiffs against three defendants, not just the attorney defendants; and that only after the settlement did the case focus on the claim of legal malpractice, which was the appropriate starting point to calculate plaintiffs' legal fees for the attorney defendants' malpractice.

In light of this factual history, we begin our discussion with the attorney defendants' cross-appeal of the legal malpractice judgment against them. The findings on which a trial court bases its judgment in a non-jury case "are considered binding on appeal when supported by adequate, substantial and credible evidence." Rova Farms Resort v. Investors Ins. Co. of Am., 65 N.J. 474, 484 (1974). Our function on appeal is limited: "we do not disturb the factual findings and legal conclusions of the trial judge unless we are convinced that they are so manifestly unsupported by or inconsistent with the competent, relevant and reasonably credible evidence as to offend the interests of justice." Ibid. (quoting Fagliarone v. Twp. of No. Bergen, 78 N.J. Super. 154, 155 (App. Div. 1963)).

The elements of a cause of action for legal malpractice are: the existence of an attorney-client relationship creating a duty of care by the defendant attorney, the breach of that duty, and proximate causation of the damages claimed by the plaintiff client. McGrogan v. Till, 167 N.J. 414, 425 (2001). The focus of the trial here was whether an attorney-client relationship existed between plaintiffs and the attorney defendants.

Whether an attorney-client relationship exists is a factual determination. Froom v. Perel, 377 N.J. Super. 298, 310-12 (App. Div.), certif. denied, 185 N.J. 267 (2005). An attorney-client relationship may arise by implication, even when the attorney's representation is not expressly "articulated in writing or speech." In re Palmieri, 76 N.J. 51, 58-59 (1978). An attorney-client relationship may be implied when a person seeks advice or assistance from an attorney, the advice or assistance sought pertains to matters within the attorney's professional competence, and the attorney expressly or impliedly agrees to give or actually gives the desired advice or assistance. Herbert v. Haytaian, 292 N.J. Super. 426, 436 (App. Div. 1996) (citations omitted). Stated another way, an attorney-client relationship arises when:

(1) a person manifests to a lawyer the person's intent that the lawyer provide legal services for the person; and either

(a) the lawyer manifests to the person consent to do so; or

(b) the lawyer fails to manifest lack of consent to do so, and the lawyer knows or reasonably should know that the person reasonably relies on the lawyer to provide the services. [Id. at 437 (quoting The Restatement of the Law Governing Lawyers (Proposed Final Draft No. 1) § 26 (1996)).]

"As the Restatement formulation suggests, the common thread in cases in which a lawyer-client relationship is said to have arisen by implication is reliance by the 'client' on the professional skills of the attorney coupled with the attorney's awareness of that reliance and tacit acceptance of it."

Michels, New Jersey Attorney Ethics at 256 (Gann 2009). "[A] member of the bar owes a fiduciary duty to persons, though not strictly clients, who he knows or should know rely on him in his professional capacity." Albright v. Burns, 206 N.J. Super. 625, 632-33 (App. Div. 1986). "[P]rivity should not be required between the attorney and one harmed by his breach where the attorney had reason to foresee the specific harm which occurred." Id. at 633.

In support of his argument that an attorney-client relationship did not exist, Gualano argues that plaintiff did not consider him to be his attorney as demonstrated by plaintiffs' pleadings, which did not allege an attorney-client relationship; rather, the attorney defendants claim that plaintiffs pleaded a negligence cause of action based on a reliance theory. Thus, according to the attorney defendants, "this was never a legal malpractice action."

This argument is without merit. The first count of the complaint against the attorney defendants is captioned "Professional Negligence." Proofs presented by the parties and colloquy between the trial court and the attorneys demonstrate that the attorney defendants were well aware that plaintiffs' claim was for legal malpractice. Indeed, plaintiffs and the attorney defendants presented expert attorney witnesses at trial to testify as to an attorney's standard of care in handling a real estate transaction.

The next question, then, is whether the record supports the trial court's finding that an attorney-client relationship existed between plaintiffs and the attorney defendants. It does.

Plaintiff testified that FEC advised him that it retained a New Jersey attorney to represent both parties in the refinancing and who would prepare the paperwork. He further testified that he was contacted by Gualano a week prior to closing when Gualano stated, "I'm gonna be doing your closing," and asked plaintiff for the lender's information so that he could contact LHW to obtain the payoff amount. Plaintiff offered to get that information for Gualano, but Gualano told him that he had to obtain the information himself "because it's against the law for you to get the pay off."

The closing took place at Gualano's office. Prior to plaintiff signing the settlement sheet, which included the payoff amount, Gualano reviewed it with him. Plaintiff relied on Gualano's representation of the payoff amount as being correct. Gualano also explained each settlement expense and the required fees that plaintiffs had to pay, including Gualano's fee for preparing the paperwork. Gualano presented plaintiff with several other closing documents, explaining each document and asking plaintiff to sign them. Gualano never told plaintiff that he should have his own lawyer review the documents.

Gualano contends that plaintiffs were represented by an attorney, John Wiley, Jr.; however, both Wiley and plaintiff testified that Wiley only represented plaintiff in connection with the restaurant purchase for which plaintiff sought the refinancing, not the loan transaction. Gualano admitted that he did not have any conversations with Wiley regarding the loan transaction, and he did not provide Wiley with any of the loan documents or disbursement figures prior to the closing.

Gualano also acknowledged that in prior transactions in which he represented the lender, he customarily required borrowers who appeared at closing without an attorney to sign a document reflecting the borrower's understanding that Gualano represented the lender only and that the borrower had the right to have an attorney present. Gualano did not require plaintiff to sign such an acknowledgement.

Consequently, the record supports the trial court's findings that Gualano knew or should have known that plaintiff would rely on him at closing in his professional capacity; and, Gualano's tacit consent to provide assistance during the closing created an implied attorney-client relationship imposing a duty on Gualano to represent plaintiffs' interests.

Gualano contends that even if he had a duty to plaintiffs, his duty did not require him to verify the payoff amount owed to LHW. Not so. Lawyers owe a duty to their clients to provide their services with reasonable knowledge, skill, and diligence. Davin v. Daham, 329 N.J. Super. 54, 72 (App. Div. 2000). An attorney is obligated to exercise that degree of reasonable knowledge and skill that lawyers of ordinary ability and skill possess and exercise. Ibid. For example, in a real estate transaction, an attorney's failure to collect sufficient funds to pay a title insurance fee demonstrates a lack of diligence. In re Williams, 142 N.J. 553, 553-54 (1995). That is substantially similar to what happened here. See also Petrillo v. Bachenberg, 139 N.J. 472, 487 (1995) (attorney for seller of real estate liable to prospective purchaser where attorney compiled misleading composite report of percolation tests; by providing the report, attorney assumed a duty to provide the purchasers with reliable information regarding percolation tests).

Gualano contends that plaintiff, not Gualano, was in the best position to control the risk that the payoff amount was accurate. This argument lacks merit. The record shows that one week prior to closing Gualano told plaintiff, in response to plaintiff's offer to obtain the payoff amount from Lebers, that it would be illegal for plaintiff to do so and that he, Gualano, had to obtain the payoff amount himself. After making that representation, Gualano put himself in the best position to ensure the accuracy of the payoff amount.

Despite having asked plaintiff for LHW's and Lebers's contact information to obtain the payoff amount, Gualano never requested and never received a payoff letter from LHW. Nor did he recommend to plaintiff that he verify the accuracy of the number. He testified that he made no effort either before or during closing to verify the payoff amount that was provided to him by FEC. He merely compared the number that was given to him by FEC against the number that appeared on the settlement sheet prepared by FEC and, because both numbers matched, he was satisfied that the payoff amount was correct. He did not verify the number with LHW. He made no inquiry as to how FEC obtained the payoff amount, nor did he advise FEC that it needed to obtain a payoff statement from LHW.

Consequently, the record supports the trial court's findings that Gualano owed a duty to plaintiffs to obtain and verify the correct payoff amount of the LHW mortgage by obtaining the amortization schedule from LHW; his failure to do so was a breach of that duty; and his breach proximately caused plaintiffs' overpayment of the LHW mortgage by $15,000. We therefore affirm the trial court's finding of legal malpractice.

We turn next to the legal fee issue. A negligent attorney is liable for the reasonable legal expenses and attorney fees incurred by a client in prosecuting a successful legal malpractice prosecution against the negligent attorney. Saffer v. Willoughby, 143 N.J. 256, 272 (1996). "A client 'may recover for losses which are proximately caused by the attorney's negligence or malpractice.'" Id. at 271 (quoting Lieberman v. Employers Ins., 84 N.J. 325, 341 (1980)). Consequently, "[o]ne who through the tort of another has been required to act in the protection of his interests by bringing or defending an action against a third person is entitled to recover reasonable compensation for . . . attorney fees . . . thereby suffered or incurred . . . ." In re Estate of Lash, 169 N.J. 20, 26 (2001) (quotation omitted).

A trial court must analyze the relevant factors in determining an award of counsel fees and must state its reasons on the record for awarding a particular fee. R.M. v. Supreme Court of N.J., 190 N.J. 1, 12 (2007). "[F]ee determinations by trial courts will be disturbed only on the rarest occasions, and then only because of a clear abuse of discretion." Rendine v. Pantzer, 141 N.J. 292, 317 (1995).

The first step in the fee-setting process is to determine the "lodestar" - the number of hours reasonably expended multiplied by a reasonable hourly rate. Id. at 334-35. The trial court must carefully evaluate and critically aggregate the hours and specific hourly rates advanced by counsel for the prevailing party to support the fee application. Id. at 335. The time actually expended, as certified to by counsel, is not necessarily the amount of time reasonably expended. Ibid.

In cases in which a plaintiff seeks fees for legal services far in excess of the value of the benefits obtained, the trial court should consider the damages sought and the damages actually recovered. Packard-Bamberger & Co., Inc. v. Collier, 167 N.J. 427, 445-46 (2001). A trial court may exercise its discretion to exclude excessive hours from the lodestar calculation when the hours expended, in light of the prospective damages and the interests to be vindicated, exceed those that competent counsel reasonably would have expended to achieve a comparable result. Rendine, supra, 141 N.J. at 336.

Here, the motion judge, who ruled on the fee application after the trial judge retired, appropriately scrutinized plaintiffs' fee application in light of the excessive award sought compared to the actual damages. Nevertheless, the judge failed to consider the legal fees plaintiffs incurred in having to litigate claims against FEC and LHW in order to recoup the $15,000 overpayment. The trial court concluded that Gualano was negligent in failing to secure an amortization schedule and verify the accuracy of the payoff amount, and that Gualano's negligence proximately caused plaintiffs to overpay the LHW mortgage. Thus, were it not for Gualano's negligence, plaintiffs would not have had to file suit against FEC and LHW to recoup the overpayment. The motion judge, therefore, should have considered plaintiffs' counsel's legal work before the $20,000 settlement was reached. In failing to consider that legal work, the court mistakenly exercised its discretion in setting November 2, 2006 as the date from which to begin calculating counsel fees.

Finally, the attorney defendants contend that it was error for the court to charge them with full liability for the fee award when each defendant settled the overpayment issue with plaintiffs by agreeing to pay plaintiffs one-third of the overpayment. They assert that there should be a retrial to determine the percentages of each defendant's liability, or alternatively, they should only be required to pay one-third of the fee award. We reject that argument.

The attorney defendants willingly entered into the settlement agreement knowing that it did not allocate percentages of liability among defendants and that the court would not be making such a determination. They also acknowledged that the settlement is not an admission of liability and, therefore, reducing the fee award by one-third would presume that each party has admitted liability for that percentage of the overpayment. Moreover, as the trial court found, Gualano was liable for legal malpractice by failing to verify and accurately represent the payoff amount plaintiffs owed to LHW. As a result, the attorney defendants are responsible for plaintiffs' legal fees proximately caused by Gualano's own negligence, which include plaintiffs' legal fees in prosecuting both the legal malpractice claim and their claims against FEC and LHW.

We affirm the judgment for legal malpractice. We reverse the counsel fee award and remand for further proceedings consistent with this opinion.

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