On certification to the Superior Court, Appellate Division, whose opinion is reported at 400 N.J. Super. 307 (2008).
(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).
At issue in this appeal is the so-called third-party exception to the American Rule governing counsel fees, which provides for an award to a litigant who, through the fault of another, is required to institute or defend an action involving a third party.
In 1986, Frank DiMisa, Judy Morris, Beth Thomas-Edwards (collectively "plaintiffs"), Mary MacKenzie, and Ronald Acquaviva formed 61 East Main Street, a real estate partnership. To finance the purchase of its principal place of business, the partnership obtained a $350,000 loan secured by a note and a mortgage, which were ultimately assigned to Summit Bank. At some time between 1986 and 1998, Ronald secretly transferred his partnership interest to his son, Christopher Acquaviva. On November 27, 1998, without notice to his partners, Christopher purchased the note and mortgage from Summit Bank for the discounted sum of $83,251 in the name of defendant R.E. Investors Ltd. (REI), an entity formed by Christopher.
On January 4, 1999, approximately five weeks after purchasing the note and mortgage, Christopher sent the partnership a letter stating that he had "been advised by the holder of the mortgage" that it was due in full, that the partnership owed $143,131.25 in principal plus interest, and that the holder had set a deadline of February 15, 1999 before further action would be taken. Christopher did not inform plaintiffs that, in fact, he had become the holder of the mortgage. Nor did he apprise them of the discounted price he paid for it. Two days later, Christopher filed the certificate of incorporation for REI, naming himself as the sole member of REI's one-member board of directors. Thereafter, REI instituted foreclosure proceedings that ultimately resulted in a default judgment in the amount of $154,535.95 against the partnership.
Plaintiffs subsequently sought and obtained REI's certificate of incorporation and learned of Christopher's control of REI. Plaintiffs filed a complaint and an order to show cause seeking to vacate the foreclosure judgment. The complaint charged Ronald, Christopher, and REI with breach of fiduciary duty, fraud, conspiracy, and breach of the partnership agreement. Chancery Judge Clarkson S. Fisher, Jr., granted partial summary judgment in favor of plaintiffs, vacating the foreclosure judgment, dismissing the foreclosure action, and declaring the mortgage extinguished. Judge Fisher explained that, because the same person cannot be both debtor and creditor, the mortgage was extinguished when Christopher, a partner, purchased it in the name of REI, his solely owned corporation. Nevertheless, the judge required plaintiffs to pay REI the sum of $40,852.19, which represented their pro rata share of the balance of the purchase price of the note and mortgage. Finally, the judge recognized that certain issues arising out of the partnership could only be resolved in arbitration, and transferred the remaining issues to the Law Division.
The parties proceeded to arbitration. The arbitrator, observing the applicability of the doctrine of issue preclusion, rejected Christopher's challenge to Judge Fisher's findings that he and REI were one and that a merger was effected when he purchased the mortgage. Among other things, the arbitrator expelled Christopher from the partnership, declared the partnership dissolved the date Christopher breached his fiduciary duty, awarded Christopher the value of his interest as of that date, and permitted plaintiffs to reconstitute the partnership under the same name.
The arbitration order was confirmed on April 8, 2004, by order of the Law Division. The only issues left for resolution involved plaintiffs' entitlement to compensatory and punitive damages. Plaintiffs agreed that counsel fees were the lion's share of their damages. Christopher and REI moved for summary judgment on the ground that Judge Fisher had declared that they were one, thus obviating the application of the third-party exception to the American Rule. The Law Division judge declared that no exception to the American Rule applied, and therefore denied counsel fees. Because the judge determined that plaintiffs had sustained no other damages, he dismissed plaintiffs' claims. Plaintiffs appealed.
The Appellate Division reversed the trial judge's determination barring the recovery of counsel fees. DiMisa v. Acquaviva, 400 N.J. Super. 307 (App. Div. 2008). Although acknowledging that the basis of Judge Fisher's merger ruling was the identity of interest between REI and Christopher, the panel found it significant that Judge Fisher had ruled in equity and then transferred the remaining issues to the Law Division, where, it reasoned, there is no basis for engaging in the corporate veil piercing undertaken by Judge Fisher. The panel ultimately concluded that it would be unfair to deny plaintiffs counsel fees.
Christopher and REI filed a petition for certification, which the Supreme Court granted.
HELD: The third-party exception to the American Rule governing counsel fees does not apply where the tortfeasor and the putative third party are effectively one.
1. Our courts have recognized the third-party exception to the American Rule, as discussed in the Restatement (Second) of Torts § 914(2) (1979):
One 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 loss of time, attorney fees and other expenditures thereby suffered or incurred in the earlier action.
A prerequisite to an award of counsel fees under the exception to the American Rule is litigation with a third party precipitated by another party's wrongful act. No matter how egregious that wrongful act, in the direct action between a plaintiff and a defendant, each party bears his or her own fees under the American Rule. (pp. 8-10)
2. In this case, plaintiffs argued that REI and Christopher were one. Indeed, the gravamen of plaintiffs' claim was that Christopher breached a fiduciary duty to his partners when he purchased the mortgage in the name of REI. Had REI been a legitimate third party, there would have been no basis to afford relief to plaintiffs. Plaintiffs succeeded in this litigation based on the identity of interest between Christopher and REI. It would be anomalous if the theory that underlay the sole substantive issue in the case and that gave plaintiffs the relief they sought was to be disregarded in determining whether counsel fees should be awarded. REI was the instrument of Christopher's deceit, not a separate and distinct third party. Thus, the Court disagrees with the Appellate Division's conclusion that plaintiffs were entitled to an award of counsel fees for suing REI, an alter-ego of Christopher, in a single litigation. (pp. 10-11)
JUSTICE ALBIN has filed a separate, DISSENTING opinion, expressing the view that the corporate entity, which was created by Christopher Acquaviva to perpetrate a fraud on his business partners, should be liable for the victims' legal fees.
The judgment of the Appellate Division is AFFIRMED in part and REVERSED in part. The trial judge's order denying counsel fees is REINSTATED; and plaintiff's remaining damage claims are REMANDED.
CHIEF JUSTICE RABNER and JUSTICES LaVECCHIA, WALLACE, RIVERA-SOTO and HOENS join in JUSTICE LONG's opinion. JUSTICE ALBIN has ...