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Kas Oriental Rugs, Inc. v. Ellman

June 8, 2009

KAS ORIENTAL RUGS, INC., PLAINTIFF-RESPONDENT/ CROSS-APPELLANT,
v.
MATT ELLMAN, DEFENDANT-APPELLANT/ CROSS-RESPONDENT.



On appeal from the Superior Court of New Jersey, Law Division, Somerset County, Docket No. L-525-04.

The opinion of the court was delivered by: Fisher, J.A.D.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued February 25, 2009

Before Judges Cuff, Fisher and C.L. Miniman.

In this appeal, we consider the consequences of the Rule 4:58 amendments, which were adopted subsequent to an offer of judgment and its rejection, but prior to an award of fees. Last term, our Supreme Court considered a similar perplexing problem, Romagnola v. Gillespie, Inc., 194 N.J. 596 (2008), and recently heard argument in another, Best v. C & M Door Controls, Inc., 402 N.J. Super. 229 (App. Div.), certif. granted, 197 N.J. 13 (2008).

Here, we consider yet another variation of the problems considered in Romagnola and Best. The trial in this action produced an award in favor of defendant Matt Ellman *fn1 that exceeded the offer of judgment he rejected. In reviewing the judgment, Kas Oriental Rugs, Inc. v. Ellman, 394 N.J. Super. 278 (App. Div.), certif. denied, 192 N.J. 74 (2007), we reduced the damage award and, for the first time, made relevant Ellman's rejection of Kas's offer of judgment; however, by the time we decided the appeal Rule 4:58 had been amended and, in its amended form, made available defenses to a fee allowance that were not expressed in the Rule as it existed when the offer was made and rejected.

We hold that, absent an injustice or interference with vested rights, Rule 4:58 amendments should apply to cases pending at the time of amendment. Even if this were not so, we would in this case apply the new rule amendments due to the idiosyncratic nature of the circumstances presented. As a result, we reverse the allowance of fees in Kas's favor and remand for further proceedings.

I.

This litigation has been more fully described in our earlier opinion in this matter. In a nutshell, the parties' disputes were triggered on February 27, 2004, when Kas wrote to Ellman, advising he was terminated from his position as sales representative effective March 1, 2004.

Before suit was filed, Kas recognized that Ellman was entitled to commissions on purchase orders that were "in house" as of March 1, 2004. To resolve the matter before litigation was commenced, Kas offered to pay Ellman commissions on purchase orders "in house" through April 30, 2004. At trial, Kas's president testified that this was a "good will gesture." 394 N.J. Super. at 282. Ellman rejected this offer, contending he was entitled to a far greater amount in post-termination commissions.

Kas brought this declaratory judgment action on April 5, 2004, seeking a determination of the commissions or other obligations it owed Ellman, who filed a counterclaim for commissions he claimed were due and owing. The parties engaged in extensive discovery and eventually proceeded to trial.

Following a bench trial, the judge recognized that Ellman was entitled to pre-termination commissions in an amount stipulated by the parties: $12,774.02. The judge also held that Ellman was not wrongfully terminated and that the parties' oral agreement limited Kas's obligation to pay commissions to those "in house" on the termination date, i.e., $12,774.02, but he also held, based on a quantum meruit theory, that Ellman was entitled to $15,987.33 in post-termination commissions, as well as an additional $48,736.95 in counsel fees and costs. Kas appealed, arguing that the judge's findings as to the terms of the parties' oral agreement precluded the post-termination commission award, and that the award of counsel fees was either precluded by the circumstances or unreasonable; Ellman cross-appealed, arguing that he should have been awarded additional counsel fees and costs.

We held that Ellman was not entitled to post-termination commissions. We also concluded that "[b]ecause our decision regarding the compensatory damages to which Ellman was entitled dramatically alters the landscape upon which the judge's fee award was based," "a fresh look by the judge of the parties' contentions in this regard" was required. Id. at 289. We recognized that the ultimate resolution of Ellman's fee claim turned on application of the Sales Representatives' Rights Act (SRRA), N.J.S.A. 2A:61A-1 to -7; we also noted that Kas had made an offer of judgment that might come into play in light of our judgment. 394 N.J. Super. at 290-91.

II.

In furtherance of our mandate, an order was entered on August 23, 2007. That order fixed Ellman's compensatory damages at $12,774.02, and scheduled the necessary additional proceedings required to resolve the competing counsel fee disputes. In accordance with that schedule, Ellman filed papers in support of his request for SRRA counsel fees. Kas thereafter filed papers in support of its request for counsel fees pursuant to the offer of judgment rule, Rule 4:58-3, the frivolous litigation statute, N.J.S.A. 2A:15-59.1., and the SRRA.

The remand judge took no testimony. *fn2 She instead heard argument on the parties' legal contentions.

In support of his claim for fees and court costs, Ellman argued that N.J.S.A. 2A:61A-2 obligated Kas to pay "the commissions and other compensation earned and unpaid through the last day of the contract . . . within 30 days." *fn3 N.J.S.A. 2A:61A-3a then declared that a violation of N.J.S.A. 2A:61A-2 renders a principal "liable to the sales representative for all amounts due the sales representative and all attorney's fees actually and reasonably incurred by the sales representative in the action and court costs." *fn4 Because there is no dispute that Kas never paid the stipulated pre-termination commissions, Ellman claimed he was entitled to an award of fees flowing from that failure.

By way of an oral decision of November 2, 2007, the judge rejected this contention for the following reasons:

Now Mr. Ellman's motion for attorney's fees and costs pursuant to [N.J.S.A. 2A:61A-3]. I don't believe that Mr. Ellman -- I don't believe that that comes into play here. And I don't believe it's applicable to the issue that we have.

[N.J.S.A. 2A:61A-2] states that when a contract between a principal and sales representative to solicit wholesale orders is terminated the commissions and compen-sations earned and unpaid through the last day of the contract shall be due and payable within 30 days.

This is a -- and they're saying that these monies have not been paid. However, here this case has been well litigated and there was even a bond taken by the Kas -- by the plaintiffs in this matter to be able to appeal this matter. So in essence that bond ensured that that payment would be made.

But, again, in New Jersey customarily and under case law the judgment -- as long as there's a bond the judgment does not have to be paid. This case was remanded by the Appellate Division. Again, until the -- until the lower [c]court completely heard this and 45 days for the time of appeal has passed that's when the judgment is due and owing.

And none of those things have happened here yet. So, therefore, I don't believe -- and the moment that there's a litigation and agreeably Kas instituted the litigation that this litigation was ongoing I don't believe that [N.J.S.A. 2A:61A-2] did apply. And, therefore, there will be no award of attorney's fees for Mr. Ellman.

The judge decided Kas's application for fees and costs by way of a letter opinion dated November 30, 2007. The judge did not consider the claim insofar as it was based on the frivolous litigation statute or the SRRA, but concluded that Kas was entitled to fees through application of Rule 4:85. The judge observed that Kas sought $500,000 in fees and costs, *fn5 but found that such an award would impose undue hardship and concluded that a fee of $218,271.21 was reasonable. This amount was determined by using the date of the trial as a cutoff of the allowable fees in this case.

As a result, after deducting the compensatory damages due Ellman of $12,774.02, the judge entered judgment in favor of Kas and against Ellman in the amount of $205,497.19.

Ellman appealed, arguing that the judge misapplied Rule 4:85 in a number of respects and "disregarded the letter and the policy" of the SRRA in denying his application for fees; he lastly argues that even if Kas is entitled to fees, the amount of the award was unreasonable. Kas cross-appealed, arguing: the judge's finding of an undue hardship was erroneous and "legally irrelevant"; the judge failed to award prejudgment interest as required by the offer of judgment rule; and the judge mistakenly made no mention of the frivolous litigation statute and the SRRA as bases for an award of counsel fees.

III.

As we observed at the outset, this case presents another difficult problem regarding the impact of the amendments to Rule 4:58 on these pending proceedings. In resolving these questions, we: (a) recognize that the application of the 2004 version of Rule 4:58 would permit an award in favor of Kas; (b) but conclude that, in these circumstances, the newer version of the rule, which became effective when this case was last pending appeal, should be applied; and (c) determine that application of the current version of Rule 4:58 bars an allowance of fees in favor of Kas.

A.

On November 9, 2004 -- a few months after the parties stipulated that "[t]he amount of commissions to be paid on orders in house at Kas as of the date of Ellman's termination from Kas and not yet paid to Ellman is $12,774.02" -- Kas's counsel served an offer of judgment on Ellman's counsel. That pleading cited Rule 4:58 and contained Kas's offer "to allow judgment to be taken against [Kas] in the following manner: for the sum of $16,020.12, with the parties each to bear their respective costs." Ellman rejected the offer. As we have noted, the case was tried in 2005, resulting in a judgment in favor of Ellman that rendered the offer of judgment irrelevant; however, as a result of our decision on appeal, Ellman's compensatory damage award was reduced to $12,774.02, bringing Ellman's earlier rejection of Kas's offer of judgment into play.

At the time Kas's offer was made and rejected, Rule 4:58-3 stated:

If the offer of a party other than the claimant is not accepted and the determination is favorable to the offeror as defined by this rule, the offeror shall be allowed, in addition to costs of suit, the allowances as prescribed by R. 4:58-2, which shall constitute a prior charge on the judgment. A favorable determination qualify-ing for allowances under this rule is a verdict or determination at least as favorable to the offeror as the offer or, if a money judgment, is in an amount, excluding allowable prejudgment interest and counsel fees, that is 80% of the offer or less.

Viewing the relevant circumstances against these standards, by rejecting Kas's offer of $16,020.12, Ellman's "verdict or determination" had to meet or exceed 80% of the offer to avoid liability for the consequences of his rejection. Because 80% of the offer is $12,816.10, Ellman's award of $12,774.02 fell short of the 80% mark by $42.08.

The "verdict or determination" referred to in the earlier version of Rule 4:58-3 is gauged by the amount awarded less prejudgment interest, fees and costs. See Lobel v. Trump Plaza Hotel and Casino, 335 N.J. Super. 319, 322-23 (App. Div. 2000). Accordingly, if this is the version of the rule to be applied in the matter at hand, Ellman was potentially liable for fees based upon his rejection of the offer. Although he argued in the trial court that he was not liable to Kas for fees based upon the 2004 version of the offer of judgment rule, *fn6 with new counsel on appeal Ellman only argues that the version adopted in 2006 applies and that it bars relief.

We agree that the 2004 version, if applied, renders Ellman liable to pay Kas's fees, even though the amount of the award is greatly disproportionate to the difference between the judgment and the rejected offer. Our courts have not previously held that fee allowances based on the Rule could be denied or reduced because of a slim margin, here $42.08, that triggered its application. See City of Cape May v. Coldren, 329 N.J. Super. 1, 7 (App. Div. 2000) (sixty-eight-cent difference between offer and verdict); Sussna Assocs. v. Randolph Twp., 122 N.J. Super. 458, 459 (App. Div. 1973) ($350 difference). The rule creates a bright, monetary line in determining when fees will or will not be shifted. We, thus, turn to the later amendments to the rules and the important question of whether those amendments or the rule as it previously existed apply to this case.

B.

In 2006, while this matter was on appeal, Rule 4:58-3 was amended. The phrase "monetary judgment" has replaced "verdict or determination" and other limitations on awards based on the rule were incorporated to avoid difficulties presented by the less-nuanced former version:

(a) If the offer of a party other than the claimant is not accepted, and the claimant obtains a monetary judgment that is favorable to the offeror as defined by this rule, the offeror shall be allowed, in add-ition to costs of suit, the allowances as prescribed by R. 4:58-2, which shall con-stitute a prior charge on the judgment.

(b) A favorable determination qualify-ing for allowances under this rule is a money judgment in an amount, excluding allowable prejudgment interest and counsel fees, that is 80% of the offer or less.

(c) No allowances shall be granted if (1) the claimant's claim is dismissed, (2) a no-cause verdict is returned, (3) only nominal damages are awarded, (4) a fee allowance would conflict with the policies underlying a fee-shifting statute or rule of court, or (5) an allowance would impose undue hardship. If, however, undue hardship can be eliminated by reducing the allowance to a lower sum, the court shall reduce the amount of the allowance accordingly.

Before turning to the parties' arguments concerning the manner in which this new version would apply to Ellman's rejection of Kas's offer of judgment, we consider the question of whether this new version should apply to an offer made and rejected while the former version was in effect.

Whether the offer of judgment rule is "procedural" and therefore applied retrospectively, was briefly discussed in the recent decision of the Supreme Court in Romagnola and our decision in Best, which is now before the Court. In Romagnola, the ...


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