July 22, 2009
HANI EL KHOURY, PLAINTIFF-RESPONDENT,
ANTOINE EL GHOUL, DEFENDANT-APPELLANT.
On appeal from the Superior Court of New Jersey, Law Division, Middlesex County, Docket No. L-8489-05.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued June 1, 2009
Before Judges R. B. Coleman and Sabatino.
This appeal arises out of litigation between two former business partners, which was referred to a private arbitrator. After the arbitration was partially completed, plaintiff voluntarily dismissed his claims on certain specified conditions. Defendant then sought to recover counsel fees, contending that he had been forced to defend a frivolous complaint. The Law Division denied the fee application, and this appeal ensued. We affirm.
We present the following chronology of relevant events, mindful that many of the underlying facts remain disputed. Prior to 2002, defendant Antoine El-Ghoul and his then-associate, Maira Anabell-Russo, formed a corporation known as Via Vita, LLC ("Via Vita"). They created Via Vita with the intention of opening a restaurant on the first floor of premises located at 58 Easton Avenue in New Brunswick.
In 2002, plaintiff Hani El-Khoury, who had come to the United States from Nigeria, expressed to defendant an interest in becoming a principal in Via Vita. To advance that objective, plaintiff began to pay for some of the expenses incurred in renovating the restaurant premises. According to plaintiff, he generally made those payments to defendant by check, and occasionally by cash.*fn1
At some point between 2002 and 2003, plaintiff and defendant entered into an agreement by which plaintiff acquired Anabell-Russo's share in Via Vita. Defendant also contends that plaintiff promised to pay an additional $40,000 to buy into the business, although that alleged promise is not documented in the record before us.
In or about August 2003, plaintiff indicated to defendant that his father would give him $75,000 to invest in their business, funds which plaintiff, in turn, would loan to defendant. Pursuant to that plan, plaintiff and defendant executed a Promissory Note and a companion Security Agreement, both dated August 19, 2003.
In its opening paragraph, the Promissory Note recited:
Borrower, [defendant], individually, and/or as a principal of Via Vita, LLC, promises to pay to the order of Lender [plaintiff], in lawful money of the United States of America, at its address indicated above or wherever else Lender may specify, the sum of Seventy-Five Thousand and No/100 Dollars ($75,000.00) or such sum as may be advanced and outstanding from time to time with no interest on the unpaid principal balance on the terms provided in this Promissory Note... and in the Loan Documents... executed contemporaneously herewith. [(Emphasis added).]
Additionally, the repayment terms in the Promissory Note stated as follows:
This Note shall be due and payable in twelve
(12) consecutive monthly payments of principal amounting to $6,250.00 per month, commencing upon the first day the restaurant and lounge establishment... begins business operations and accepts business patrons or within six (6) months of the execution of this Promissory Note, whichever shall transpire first. Each monthly payment [shall be] due on the 30th or last day of each month thereafter, with a final payment of principal to be due and payable no later than January 31, 2005.
In the event of an uncured default by defendant in repaying the funds, the Promissory Note provided that plaintiff could resort to various specified remedies. Those remedies included, among other things, acceleration of the unpaid debt, the foreclosure of collateral, and defendant's surrender and forfeiture of his ownership interest in Via Vita.
The accompanying Security Agreement had corresponding provisions concerning the terms of repayment. It designated as collateral for the loaned funds "all business assets of Via Vita," specifically including "all inventory, [c]hattel paper, accounts including accounts receivable, furniture, equipment, and all general intangibles... [.]" Plaintiff, as the lender, was granted a security interest in that collateral.
Thereafter, plaintiff received funds from his father and used those funds to make various expenditures for the parties' business venture. Eventually the parties became embroiled in disagreements. According to plaintiff, defendant did not repay him the moneys that he had put into the business, despite the commitment in the Promissory Note to do so.
Consequently, on November 29, 2005, plaintiff filed a two-count complaint against defendant in the Law Division. The First Count referred to the Promissory Note, and alleged that:
On various occasions plaintiff demanded of [d]efendant that [d]efendant pay the sums owed on the Note, but [d]efendant refused and still refuses to pay all or any part of these sums. As a result, plaintiff has been damaged in the sum of $75,000, in addition to legal interest, late charges, and other charges allowed under the said Note.
Based on these allegations, the First Count sought monetary damages, as well as applicable counsel fees, costs and other relief deemed proper by the court.
Incorporating by reference the First Count's allegations of defendant's non-payment, the Second Count sought various forms of relief under the Security Agreement. In particular, plaintiff demanded an order: (a) fixing the amount due on the Security Agreement; (b) barring and foreclosing defendant of all equity in the goods and chattels identified in the Security Agreement; (c) requiring defendant to provide all subordinations required under the Security Agreement; (d) requiring an accounting that shows the location and physical and legal status of all collateral items relating to the Security Agreement; (e) requiring defendant to supply copies of all insurance policies covering the collateral and the premises where the collateral was located; (f) compelling delivery of the collateral to plaintiff, to the extent physically feasible; (g) compelling performance by defendant and/or monetary damages sufficient to make plaintiff whole; and (h) counsel fees, costs, and such other relief deemed appropriate by the court.
After the complaint was served, counsel for defendant wrote a letter to plaintiff's attorney dated December 14, 2005. In that letter, defense counsel contended that the claims asserted in the complaint were "frivolous and baseless" and "may, in fact, be criminal." In particular, defense counsel maintained that "[y]our client is well aware that he never loaned my client $75,000 dollars [sic] and there is no record or proof of this loan." Defense counsel further alleged that the Promissory Note and Security Agreement lacked consideration and were invalid. Defense counsel demanded that plaintiff withdraw the complaint, noting that if he failed to do so, defendant reserved the right to pursue sanctions under Rule 1:4-8 and N.J.S.A. 2A:15-59.1.
Plaintiff did not withdraw the complaint. Instead, plaintiff served upon defendant a request for admissions, seeking an acknowledgement as to the authenticity of the Promissory Note and the Security Agreement. Defendant did not answer the request for admissions, and he likewise did not timely answer the complaint.
Given the lack of an answer from defendant, plaintiff obtained default judgment in March 2006. Defendant then moved to vacate the default judgment and requested twenty days to file an answer. That motion was granted in July 2006. However, defendant still did not file an answer, so the court again entered default in December 2006. Defendant had that second default set aside, and he eventually filed an answer in February 2007. The thirteen affirmative defenses included with the answer made no mention of the statute or court rule prohibiting frivolous litigation.
The parties were unable to resolve lingering disputes over discovery and, consequently, sought to adjourn the case when it was listed for trial. Eventually the parties agreed to submit the matter to binding arbitration before a former judge.
After several delays, the arbitration was commenced and partially conducted on July 24, 2008. Plaintiff, then residing in Nigeria, testified via telephone. The arbitration proceeding was recorded and transcribed, although several portions of it were inaudible and unintelligible.
One of the main points of disagreement at the arbitration was over the exact amount of money that plaintiff had expended for the business. Plaintiff initially claimed that he possessed receipts and other documents showing that he had made about $110,000 in payments. However, plaintiff was not physically present at the arbitration to examine the supporting documents, and defendant refused to authenticate them. Nonetheless, in his telephonic testimony, plaintiff alleged that he had advanced at least $50,000, less $8,000 to buy out Anabell-Russo's ownership interests. Plaintiff attempted to explain the discrepancy between that lower sum and the $75,000 figure recited in the Promissory Note and Security Agreement, as follows:
I asked him [defendant] to sign a note of [$]75,000 because I would estimate maybe there would be more than that. I figured that I already spent [$]50 to [$]60,000, so I want him to sign a letter for [$]50 to [$]60,000. I said let me make him sign a note for [$]75,000 and then he got on my side, it is [$]75,000 when it would be [$]60,000. I would not every time, I don't want him to sign every time for [$]10,000 and another additional [$]20,000. We had been doing this and then there was [$]5,000 and at that time I thought it would be about [$]60,000.
Plaintiff was the sole witness to testify in the arbitration, which was never completed. During the course of plaintiff's testimony, the arbitrator expressed some doubts about the viability of plaintiff's claims.
In particular, in reacting to plaintiff's testimony acknowledging that the $75,000 specified in the Promissory Note was not fully advanced at the time the note was signed, the arbitrator mused, without elaboration, that "you can't sign a note for a future consideration." The arbitrator also expressed concerns about how to determine when the six-month contractual repayment period would begin, if the full $75,000 had not been provided by plaintiff in a lump sum.
After plaintiff's direct and cross examination was completed, the parties took a short recess. When the arbitrator came back on the record, he noted that he had undertaken consensual discussions with the parties attempting to resolve the matter. Those discussions led to plaintiff voluntarily dismissing his complaint with prejudice, but leaving open the possibility of "subsequent action[s] between the parties that do not relate specifically to the note or enforcement of the security agreement," including claims for attorney's fees and for the partition of the corporation, Via Vita, or its assets.
Thereafter, defendant filed a motion with the Law Division asking the court to declare plaintiff's complaint frivolous, and to award counsel fees and costs. Plaintiff, in response, alleged that defendant's fee-shifting application was itself frivolous, and cross-moved for costs and fees. The trial court denied both parties' respective motions.
Defendant now appeals the denial of counsel fees and costs. In essence, defendant argues that because plaintiff could not substantiate that he expended or loaned the full sum of $75,000, as he had alleged in the complaint, the lawsuit was frivolous. Defendant asserts that he is therefore entitled to sanctions under Rule 1:4-8 and N.J.S.A. 2A:15-59.1. Plaintiff does not cross-appeal.
Our review of this matter is complicated by the trial court's failure to render a statement of reasons, as required under Rule 1:7-4, explaining the basis for its order denying fees. See Pressler, Current N.J. Court Rules, comment 1 on R. 1:7-4 (2009) (emphasizing that the Rule "requires findings to be made on all motions decided by written orders appealable as of right", and the "critical importance of that function"); see also Vartenissian v. Food Haulers, Inc., 193 N.J. Super. 603, 611-12 (App. Div. 2004). Nevertheless, we will spare the parties and the trial court the burden of a remand, because it is readily apparent that the present circumstances do not warrant fee-shifting under either the applicable rule or statute.
N.J.S.A. 2A:15-59.1, which addresses the frivolous conduct of litigants, provides that a plaintiff or defendant who prevails in a case "may be awarded all reasonable litigation costs and reasonable attorney fees... if the judge finds at any time during the proceedings or upon judgment that a complaint, counterclaim, cross-claim or defense of the non-prevailing person was frivolous." N.J.S.A. 2A:15-59.1(a)(1).
Frivolous conduct exists where the trial judge finds "on the basis of the pleadings, discovery, or the evidence presented" that either:
(1) The complaint, counterclaim, cross-claim or defense was commenced, used or continued in bad faith, solely for the purpose of harassment, delay or malicious injury; or
(2) the non-prevailing party knew, or should have known, that the complaint, counterclaim, cross-claim or defense was without any reasonable basis in law or equity and could not be supported by a good faith argument for an extension, modification or reversal of existing law. [N.J.S.A. 2A:15-59.1(b) (emphasis added).]
Similarly, with respect to the conduct of attorneys practicing in our State, Rule 1:4-8 provides that:
The signature of an attorney or pro se party constitutes a certificate that the signatory has read the pleading, written motion or other paper. By signing, filing or advocating a pleading, written motion, or other paper, an attorney or pro se party certifies that to the best of his or her knowledge, information, and belief, formed after an inquiry reasonable under the circumstances:
(1) the paper is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation;
(2) the claims, defenses, and other legal contentions therein are warranted by existing law or by a non-frivolous argument for the extension, modification, or reversal of existing law or the establishment of new law;
(3) the factual allegations have evidentiary support or, as to specifically identified allegations, they are either likely to have evidentiary support or they will be withdrawn or corrected if reasonable opportunity for further investigation or discovery indicates insufficient evidentiary support.... [(Emphasis added).]
N.J.S.A. 2A:15-59.1 and Rule 1:4-8 represent limited exceptions to the general approach of the "American Rule" for civil justice, whereby litigants are expected to bear their own counsel fees. Traditionally, our courts have strictly adhered to the American Rule because "sound judicial administration will best be advanced by having each litigant bear his own counsel fees." First Atlantic Federal Credit Union v. Perez, 391 N.J. Super. 419, 425 (App. Div. 2007) (citing Gerhardt v. Continental Ins. Co., 48 N.J. 291, 301 (1966)). We have approached fee-shifting requests under the frivolous litigation statute and associated court rule restrictively, because "the right of access to the court should not be unduly infringed upon, honest and creative advocacy should not be discouraged, and the salutary policy of the litigants bearing, in the main, their own litigation costs, should not be abandoned." Gooch v. Choice Entertaining Corp., 355 N.J. Super. 14, 18 (App. Div. 2002) (citation omitted); see also Belfer v. Merling, 322 N.J. Super. 124, 144 (App. Div. 1999); Venner v. Allstate, 306 N.J. Super. 106, 113 (App. Div. 1997).
As a threshold matter, it is not certain that defendant is definitively the "prevailing party" here. See First Atlantic, supra, 391 N.J. Super. at 432 (noting that, in order to invoke N.J.S.A. 2A:15-59.1 successfully, a litigant must actually "prevail"); see also Fagas v. Scott, 251 N.J. Super. 169, 192 (Law Div. 1991). We recognize that plaintiff voluntarily dismissed, with prejudice, his two-count complaint seeking enforcement of the Promissory Note and the Security Agreement. We further recognize that ordinarily "a plaintiff's voluntary dismissal of its complaint with prejudice operates as an adjudication on the merits," thereby making the defendant the prevailing party. Mayflower Industries v. Thor Corp., 17 N.J. Super. 505, 510 (Ch. Div. 1952) (citing Chirelstein v. Chirelstein, 12 N.J. Super. 468 (App. Div. 1951)); see also Alan J. Cornblatt, P.A. v. Barow, 153 N.J. 218, 243 (1998).
However, as indicated by the arbitrator's explicit comments on the record at the end of the proceeding, the parties mutually contemplated that plaintiff would preserve his ability to bring a subsequent action that did not "relate specifically to the note or enforcement of the security agreement," such as an action for partition to divide up the parties' respective shares in the business. Defense counsel explicitly concurred with the arbitrator's representation. The arbitrator further stated, without contradiction, that the entire controversy doctrine would not be raised as a bar to such an ensuing lawsuit.
Given these representations, it is still conceivable that plaintiff may bring such an action within the unexpired statute-of-limitations period and recover financial relief from defendant.*fn2 Accordingly, the question of who will ultimately "prevail" in the parties' overall business dispute is not yet resolved.
Even if defendant is viewed as the prevailing party in the now-dismissed litigation and the related arbitration, the record before us does not demonstrate that plaintiff's efforts in pursuing those proceedings were necessarily frivolous. A claim is frivolous "if no rational argument can be advanced in its support, when it is unsupported by any credible evidence, when a reasonable person could not have expected its success, or when it is completely untenable." Belfer, supra, 322 N.J. Super. at 144. Our Supreme Court has observed that even "false allegations of fact will not justify a fee award unless they are made in bad faith, for the purpose of harassment, delay, or malicious injury." McKeown-Brand v. Trump Castle Hotel & Casino, 132 N.J. 546, 561 (1993).
In general, "[t]he nature of conduct warranting sanction" for litigation said to be frivolous "has been strictly construed." First Atlantic, supra, 391 N.J. Super. at 432 (citing Wyche v. Unsatisfied Claim & Judgment Fund, 383 N.J. Super. 554, 560 (App. Div. 2006)). Where "some of the allegations made at the outset of litigation [are] later proved to be unfounded[, that] does not render frivolous a complaint that contains some non-frivolous claims." First Atlantic, supra, 391 N.J. Super. at 432 (quoting Iannone v. McHale, 245 N.J. Super. 17, 32 (App. Div. 1990)).
As we have already noted, the essence of defendant's argument is that plaintiff's lawsuit must be declared frivolous because plaintiff was never able to substantiate that he had ever loaned or expended the full sum of $75,000 referenced in his complaint and the two instruments upon which the complaint was based. Even so, plaintiff did put forth proofs at the arbitration that he had spent $42,000 or more in connection with the parties' business venture, which directly or indirectly benefited defendant. Given those proofs, the problem with plaintiff's complaint appears to be not one of outright fabrication, but rather that his claims of damages may have been exaggerated.
Although we surely do not encourage imprecision or exaggeration in court filings, plaintiff's claims of financial harm in this case were not shown to be "completely untenable." Belfer, supra, 322 N.J. Super. at 144. There is substantial testimony that plaintiff put money into the parties' business venture, as well as apparent supporting documentation that plaintiff was unable to examine and authenticate in person, due to his participation in the arbitration by telephone from Nigeria. While those expenditures may not add up to $75,000, they signify that plaintiff's claims for monetary redress were not patently unfounded.
We also do not treat as dispositive the arbitrator's preliminary comments to counsel, in which he perceived a lack of consideration for the claimed debt. Generally, consideration is "is the price bargained for and paid for a promise... [which] may take the form of either a detriment incurred by the promisee or a benefit received by the promisor." Cont'l Bank of Pa. v. Barclay Riding Acad., 93 N.J. 153, 170 (1983). A promise may be enforceable based upon a reciprocal commitment to be furnished with future benefits. Oscar v. Simeonidis, 352 N.J. Super. 476, 485 (App. Div. 2002) (citing Coast National Bank v. Bloom, 113 N.J.L. 597, 602 (E. & A. 1934)); see also Atl. Pebble Co. v. Lehigh, 89 N.J.L. 336, 343 (E. & A. 1916) (holding that where promises become "mutually supporting" a valid agreement may exist). Negotiable instruments, such as the Promissory Note and Security Agreement executed by the parties here, are generally afforded a presumption of consideration. Gaddis v. Gaddis, 10 N.J. Misc. 521, 523 (Sup. Ct. 1932).
Significantly, the literal terms of the Promissory Note specify that plaintiff would loan defendant "$75,000... or such sum as may be advanced and outstanding from time to time... [.]" (Emphasis added). This language signifies that the parties reasonably could have expected that, in light of the ongoing nature of the restaurant renovations, plaintiff might not remit $75,000 in a lump sum but instead might infuse capital into the business in periodic "advances," not unlike a line of credit extended by a commercial lender. In such a circumstance, plaintiff may have reasonably anticipated that defendant would repay him for the sums that were actually advanced. Without deciding the presence of consideration definitively in this opinion, we are, at the very least, satisfied that plaintiff had a "reasonable basis in law or equity," see N.J.S.A. 2A:15-59.1(b)(2), to contest that particular defense, despite the arbitrator's preliminary observation.
In sum, we conclude that the trial court did not misapply the law, nor did it abuse its discretion, in rejecting defendant's motion for counsel fees and costs. See Shore Orthopaedic Group, LLC v. Equitable Life Assurance Society, 397 N.J. Super. 614, 623 (App. Div. 2008), aff'd, ___ N.J. ____ (June 22, 2009) (generally applying an abuse-of-discretion review standard in appeals of the grant or denial of counsel fees); Maudsley v. State, 357 N.J. Super. 560, 590 (App. Div. 2003) (same).