July 31, 2009
MIHAE LEE AND JUNGIL LEE, PLAINTIFFS-APPELLANTS,
WILLIAM J. POLICASTRO, TYRONE M. MCDONNELL, KALEBIC, POLICASTRO & D'AMICO, AND KALEBIC, POLICASTRO & MCDONNELL, DEFENDANTS/THIRD-PARTY PLAINTIFFS-RESPONDENTS, AND CHANG JOO AN, CHANG MI KIM, SEUNG WHAN KIM, AN & KIM REALTY, HY DESIGN REALTY CORP. AND MAURIZIO VALENTINO, INC., DEFENDANTS,
JOHN J. IDOUCHI, THIRD-PARTY DEFENDANT-RESPONDENT.
On appeal from the Superior Court of New Jersey, Law Division, Bergen County, Docket No. L-6629-03.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued: April 22, 2009
Before Judges Cuff, Fisher and Baxter.
This is a transactional legal malpractice action relating to discharge of a mortgage. Plaintiffs Mihae Lee and her husband, Jungil Lee, held a third mortgage on commercial property owned by several non-attorney defendants. After the bank that held the first and second mortgages initiated foreclosure proceedings, the owners of the property found a buyer who required the discharge of plaintiffs' third mortgage as a condition of the sale. Plaintiffs entered into a side agreement with a non-party to discharge their mortgage in return for $200,000 payable at closing. Attorney-defendants released the discharge to the buyer prior to closing and plaintiffs were never paid.
Plaintiffs alleged that Kalebic, Policastro & D'Amico*fn1 (attorney-defendants) committed legal malpractice by failing to escrow the discharge of mortgage. They also sued attorney-defendants for breach of contract, violation of fiduciary duty, fraud, and spoliation of evidence. Plaintiffs asserted federal and state RICO claims against all defendants. Attorney-defendants filed a third-party complaint against another attorney, John J. Idouchi, alleging he represented plaintiffs in the formation and execution of the side agreement that required the discharge of the third mortgage.
The legal malpractice claims against attorney-defendants and third-party defendant Idouchi were the only claims that proceeded to trial. The jury returned a verdict in favor of plaintiffs and awarded them $100,000, apportioned 90% to attorney-defendants and 10% to Idouchi. All parties moved for judgment notwithstanding the verdict (JNOV). Judge Martinotti granted attorney-defendants' motion and dismissed the complaint with prejudice. The judge held as a matter of law the failure to escrow the discharge was not a proximate cause of any harm incurred by plaintiffs.
On appeal, plaintiffs argue that Judge Martinotti erred in granting attorney-defendants' motion and that he erred during the trial by excluding key evidence, extending the trial date, dismissing the counts in the amended complaint, denying their summary judgment motion, and failing to enter default judgment against non-attorney defendants. We affirm.
A description of the business relationship among plaintiffs, the Kim family, Chang Joo An, Hy Design Realty Corp. (Hy Realty), Hy Design Office Furniture, Inc. (Hy Furniture), and Maurizio Valentino, Inc. (MVI) is in order to understand the context in which plaintiffs received a third mortgage from the Kims and executed the discharge of the third mortgage that is at the heart of this litigation.
Plaintiffs came to the United Sates from Korea in 1992 and bought a house in Cresskill. Jungil Lee worked in the Manhattan office of his Korean employer.
Mihae Lee's parents introduced the couple to Seung Whan Kim and his wife, Chang Mi, who was a cousin of plaintiff Mihae Lee. The couples soon became friends.
The Kims were principals of Hy Realty located in Fair Lawn, which owned three parcels of real property: a 4.7 acre commercial parcel in Fort Lee, a commercial parcel in Palisades Park, and another commercial parcel in Fair Lawn. The Fort Lee property contained an abandoned warehouse and eleven other buildings ranging from twenty to one hundred years old. The Kims were also principal owners of Hy Furniture which imported furniture from China. It did business as MVI and operated from the property in Fair Lawn.
In May 1994, plaintiff Jungil Lee joined Hy Furniture as vice-president. He was supposed to be a partner and receive equal shares in the company. No formal documents confirmed his partnership interest.
On September 2, 1994, Hy Realty executed a note and mortgage with Korea First Bank (KFB). Hy Realty received $2.8 million secured by a first mortgage on the Fort Lee property. On January 25, 1995, Hy Furniture entered a master revolving loan agreement for $1.8 million with KFB. On the same day, Seung Whan Kim signed a $300,000 promissory note with Hy Furniture listed as the borrower and plaintiff Jungil Lee listed as a guarantor. Jungil Lee signed the guaranty without legal representation because he trusted his wife's relatives. He explained it was the "Korean way" to "take your family's word."
Also on that day, plaintiffs invested $500,000 in Hy Furniture. In doing so, they placed a second mortgage on their home; KFB was the mortgagee. They also obtained a third mortgage on property owned by Hy Realty.
Plaintiff Jungil Lee later learned that Hy Furniture was in financial disarray. He became concerned about the company's relationship with KFB, believing bank officers offered to help the firm in return for payoffs and other benefits. He learned that defendant Chang Joo An, a brother of Chang Mi Kim, had a relationship with the bank. In August 1995, Jungil Lee left Hy Furniture and asked the Kims for the money they owed him, including the investment he had made in the business. Chang Mi Kim asked KFB to release Jungil Lee from his guarantee of the $300,000 credit line but the bank refused. When Hy Furniture defaulted on the credit line, KFB looked to Jungil Lee to satisfy the debt.
Sometime prior to February 1997, plaintiffs asked Idouchi to obtain copies of all loan documents relating to the Kims' companies and KFB. While Idouchi gathered this information, he learned that KFB was considering foreclosing on plaintiffs' Cresskill home. Although not admitted to practice law in New Jersey, he wrote to KFB on behalf of plaintiffs, ordered title searches and prepared a $500,000 mortgage on the Fort Lee property and a $300,000 mortgage on the Palisades Park property owned by Hy Realty. He also prepared a Uniform Commercial Code (UCC) lien on the Fort Lee property.
Following default by Hy Realty on the first and second mortgages on the Fort Lee property, KFB filed a series of foreclosure actions against the mortgagors, guarantors, and other interested parties. On May 5, 1997, KFB filed a foreclosure action against Hy Realty and the Kims on the first mortgage.*fn2 KFB also filed a notice of lis pendens against the Fort Lee property.
On May 19, 1997, KFB filed another foreclosure action against MVI and the Kims on the Fair Lawn property.*fn3 KFB also initiated a foreclosure action and obtained a judgment of foreclosure on the Palisades Park property. On July 23, 1997, KFB filed a complaint in foreclosure against plaintiffs as guarantors of the $300,000 loan to Hy Furniture.*fn4 Meanwhile, in mid-May 1997, Chang Mi Kim, on behalf of Hy Realty, granted a third mortgage to plaintiffs on the Fort Lee property in consideration of their guaranty obligation of the $1.8 million dollar revolving loan agreement with KFB, then in default. This mortgage was granted and recorded in June 1997 after the filing of the foreclosure action. Chang Mi Kim referred plaintiffs to William Policastro, a member of the firm of Kalebic, Policastro & D'Amico, for assistance with the foreclosure action against their home.
Policastro agreed to represent plaintiffs with the goal of minimizing their mortgage debt arising from the $1.8 million personal guarantee on the revolving credit line for Hy Furniture and the $300,000 mortgage against their house. He proposed a "workout" with the bank.
Meanwhile, a broker introduced Chang Joo An to Richard Steier as a potential purchaser of the Fort Lee property. Steier wanted to purchase the property for use as a mini-storage facility. On July 19, 1997, An and Steier entered into a "binding agreement" in which Steier agreed to purchase the first mortgage for an amount "up to $2,500,000," and secure the deed and title from Hy Realty and, in return, An would pay any "money items" that sellers did not pay such as "taxes, liens, citations, etc." An and Steier also agreed that: (1) each party would receive "45% of profits and losses after all bonafide expenses in the mini-storage project"; (2) An would have no other "interest or voice" in the property's development; and (3) Tomco Realty would receive a ten-percent share as broker.
Among other things, Steier required a discharge of the third mortgage held by plaintiffs. At that time, he wanted the option of discharging the mortgage in the event he acquired the bank notes quickly and did not want to proceed with the foreclosure. Policastro, who first heard about Steier in July 1997 from Chang Mi Kim, learned in August 2007 that Steier wanted the third mortgage removed.
In September 1997, An asked Jungil Lee if he would accept $200,000 in exchange for the discharge of the third mortgage. Jungil understood that An was negotiating with KFB to get Steier the lowest price possible to buy out the loan, and that An had a forty-five percent ownership interest in Hy Realty. He further understood that the $200,000 would come from the proceeds of the sale of the Fort Lee property. Because Jungil Lee believed that An was a co-owner of Hy Realty, he accepted the terms which became what the parties referred to as the side agreement.
On September 16, 1997, An brought a handwritten copy of the side agreement to the Policastro firm and asked Tyrone M. McDonnell*fn5 if his office would type it and make it look "legal." An explained that he was Chang Mi Kim's brother. Policastro, who was at a conference in Chicago, delegated responsibility to McDonnell to handle the matter in his absence. McDonnell described himself as the "scrivener" who put the document into a legal format, but made no substantive changes. Afterwards, he faxed a copy to Jungil Lee.
There was considerable debate at trial whether Jungil Lee was represented by McDonnell or Idouchi. Nevertheless, plaintiffs and An signed the side agreement, which contained the following terms:
1. Chang Joo An represents to Jun Gil Lee and Mi Hae Lee that he holds a forty five percent (45%) ownership interest in the property located at 550 Main Street, Fort Lee, New Jersey.
2. Chang Joo An agrees to pay $200,000.00 to Jun Gil Lee and Mi Hae Lee from the purchase of the property at the closing.
3. In exchange for the agreements and covenants herein granted by Chang Joo An, Jun Gil Lee and Mi Hae Lee hereby agree to immediately execute a Discharge of Mortgage relevant to a Third Mortgage held by Jun Gil Lee and Mi Hae Lee in an amount of $500,000.00.
4. If the transaction contemplated by the aforementioned Purchase Agreement and the Rider thereto is not completed for any reason, the parties agree that Chang Joo An has no obligation to make the payment herein required and Jun Gil Lee and Mi Hae Lee's Third Mortgage will be automatically restored to original status. (emphasis added to show handwritten changes).
That same day, plaintiffs also signed the discharge of mortgage. McDonnell, who prepared the discharge at Policastro's request, also signed it. The discharge stated that plaintiffs' mortgage was paid in full, cancelled, and void. It did not include a provision requiring escrow of the discharge. After plaintiffs signed the side agreement and the discharge of mortgage, McDonnell took them into a conference room where Steier was waiting to enter into a purchase agreement with Hy Realty, and gave the discharge to Steier's attorney. McDonnell kept the side agreement.
Steier also executed a rider to the purchase agreement. The rider provided that simultaneously with the execution of the purchase agreement on September 16, 1997, the seller would deliver a deed to the property, affidavit of title, and corporate resolution, all of which would be held by the purchaser's attorney until the closing. The rider further provided that Steier would release $50,000 subject to various conditions, including "a duly executed [r]elease of the third lien in the amount of $500,000 presently encumbering the property." Steier agreed to purchase the assets from KFB, including the notes, which would release the Kims from personal liability.
The next day, Jungil Lee faxed to Idouchi a copy of the signed side agreement with a handwritten note on it. The note read:
John, I asked him to insert, "Automatically -to original status." Mr. An (buyer) gave a contract... late last night. Do not wa[it]... for your new draft. Thank you.
Jungil Lee did not send Idouchi a copy of the discharge of mortgage. He initially believed that the closing would take place on September 16, 1997, but when he did not get paid, Jungil Lee understood that the closing would occur soon.
Policastro initially understood that An had a relationship with KFB which would benefit plaintiffs and the Kims. By September 1998, however, his view changed as An failed to follow through on many of his representations, and he heard from other people that An was not a man of his word.
Similarly, as the transaction progressed, Steier realized that An was not favored at the bank, that he was an "accomplished con[-]artist," who was "capable of anything," and that "very little" in their deal "turned out to be true." For example, An never disclosed such extra expenses as the KFB notes, or approximately $600,000 owed to another investor in Hy Realty, who evidently was given an interest in the buildings on the Fort Lee property and was threatening to take legal action if the sale to Steier took place. Moreover, Steier testified that An kept asking for more money during the course of the contract or he would "blow up this whole deal."
On April 29, 1998, Steier and his company, RAV Realty Associates, L.L.C. (RAV), entered into an agreement ("April 1998 agreement") with Hy Realty, An and Kim Realty Corp., Chang Mi Kim, Seung Whan Kim, and MVI to purchase the mortgage and note given by Hy Realty and the Kims to KFB on the Fort Lee property, and negotiate a resolution of the foreclosure action on the Fort Lee property. Steier agreed to pay attorney-defendants' outstanding legal fees, and incorporated a fee agreement into the April 1998 agreement.
On May 11, 1998, the court entered a stipulation of settlement regarding the Fair Lawn foreclosure action (Docket No. F-8502-97), the An and Kim Realty Corp. foreclosure action (Docket No. F-7994-97), and the Fort Lee foreclosure action (Docket No. F-7527-97). A final consent judgment was entered in the Fair Lawn foreclosure action on May 19, 1998. It was recorded as a lien on June 16, 1998, released from the property on October 29, 1998, and paid on February 28, 2000.
Meanwhile, on August 19, 1998, KFB obtained a final judgment of foreclosure for $3,484,466.53 with interest from any future sheriff's sale of the Fort Lee property.*fn6 The foreclosure judgment extinguished any liens that existed on the property after its entry, including plaintiffs' third mortgage.
The following month, on September 2, 1998, Jungil Lee sent a letter to Policastro requesting: (1) proof of An's forty-five percent ownership of the property; (2) documentation on the relationship between the second mortgage and plaintiffs' Cresskill property; (3) information about what Policastro offered the bank to release plaintiffs from their personal guarantee of $1.8 million; and (4) help in getting back their Seoul property. Jungil Lee explained that he wanted Policastro to resolve the problems with the bank and that the letter expressed his "wishful thinking" that Policastro was doing his best even though plaintiffs had not heard from him.
One week later, Policastro wrote to KFB's attorney, Joan Lovell, regarding a workout of the Lee foreclosure action in which the bank demanded $367,184.54 plus interest. Policastro offered $100,000 to settle the second mortgage in return for the release of plaintiffs' Cresskill residence. Also on September 9, 1998, approximately three weeks after entry of the judgment of foreclosure on the Fort Lee property, plaintiffs' discharge of mortgage on the Fort Lee property was recorded and the lien released.
In October 1998, Steier became aware of the UCC lien. Negotiations commenced between Steier and plaintiffs during which Steier proposed creating an escrow account of $125,000 against which plaintiffs could seek satisfaction. Plaintiffs rejected the offer. During discussion of this offer, plaintiffs learned through Idouchi that the discharge of the third mortgage had been recorded.
On October 23, 1998, the deed on the Fort Lee property was recorded. Sometime that month, Steier acquired the bank notes. The closing took place on October 29, 1998. Steier, through RAV, took title to the property from Hy Realty, and simultaneously sold a parcel to an entity called ECS, a company in the warehouse business, for $2.35 million. Steier then gave $2.25 million to KFB which released the bank's lien from the property. At closing, he also apparently obtained good title to the personal assets subject to the UCC lien, and paid An without any escrow arrangement. Ultimately, Steier sold the other three plots on the property as well.
No one acting on plaintiffs' behalf attended the closing. Policastro said it was not a closing in the "technical sense," but effectuated a purchase agreement. Plaintiffs never received any money from An.
Following Steier's acquisition of the Fort Lee property, plaintiffs sought to settle the foreclosure action commenced by KFB on their home. During this time they were represented by a series of attorneys. No settlement was reached and plaintiffs sold their home in 2000 and paid KFB from the proceeds.
On May 18, 1999, plaintiffs received formal notice that Steier was going to foreclose on their UCC lien. On June 9, 1999, Steier confirmed that the private sale was completed and that the UCC lien was, in effect, foreclosed. Sometime that year, Steier paid $75,000 to An in a settlement to ensure that he would "never hear from him again."
Jungil Lee retained another attorney in September 1999 to investigate why the mortgage had been discharged without payment in accordance with the side agreement.
When Jungil Lee had not received a satisfactory response following three inquiries over six months, plaintiffs sued the Policastro firm, An, the Kims, Hy Realty, and MVI. As noted, the only issue that proceeded to trial was the attorney negligence claim against attorney-defendants, and their third-party claim against Idouchi. The jury found that attorney-defendants and Idouchi were plaintiffs' attorneys or fiduciaries on September 16, 1997 (the date the side agreement and the discharge were executed), that they deviated from accepted standards of care by failing to include an escrow provision in the side agreement, and that the absence of this provision was the proximate cause of the loss of plaintiffs' third mortgage interest and rights under the side agreement. The jury apportioned liability ninety percent to attorney-defendants and ten percent to Idouchi and awarded $100,000 in damages. In his September 2006 written decision on the parties' post-trial motions, Judge Martinotti found that the evidence adduced at trial established the following facts:
[Idouchi] prepared and recorded a Third Mortgage in the amount of $500,000[;]....
The Third Mortgage was filed on June 10, 1997[;]....
On August 26, 1997, defendant Policastro and the plaintiffs discussed their request that the [attorney] defendants represent them in [the] foreclosure proceeding filed against their home[;]
The [attorney] defendants were already representing the Kims in foreclosure proceedings[;]
[The side agreement] was typed in Policastro's office, but the substantive terms... were not negotiated[;]
[O]n September 16, 1997, [plaintiffs] asked [Idouchi] to review [the draft side agreement and he] suggested changes that were incorporated into the final version of the agreement and initialed by the parties[;]....
Plaintiffs did not agree to have these [attorney] defendants represent them until October 21, 1997[,] at which time they mailed part of the requested $2500 retainer based on the parties['] conduct, there was an attorney client relationship prior to the execution of the retainer agreement[;]
Plaintiffs' mortgage rights were extinguished, not by the signed discharge of mortgage, but by a judgment of foreclosure on the property entered on August 19, 1998[;]
Plaintiffs' discharge of mortgage was actually recorded on September 9, 1998[;]
The closing of the property took place between Hy [Realty], [KFB,] and Steier on October 29, 1998[;]
An breached the... Side Agreement by defaulting on his payment of $200,000 to the plaintiffs.
The judge then determined as a matter of law that attorney-defendants' alleged negligence relating to the side agreement and their alleged failure to escrow the discharge of mortgage until payment of the $200,000 could not have been a proximate cause of any damages sustained by plaintiffs. He held that KFB filed the foreclosure proceedings and lis pendens prior to the recordation of the third mortgage and the foreclosure judgment entered in August 1998 extinguished plaintiffs' mortgage rights. In short, when the discharge of mortgage was filed in September 1998, the mortgage already had been extinguished by operation of law. He also held that the opinion offered by plaintiffs' expert failed to establish the requisite nexus between the alleged negligence and plaintiffs' damages.
On appeal, plaintiffs argue that they established that attorney-defendants failed to protect their interests and that failure proximately caused damage to them. Thus, they argue that the trial judge erred by granting attorney-defendants' motion for JNOV. We disagree.
The standards for determining a Rule 4:40-1 motion for judgment and a Rule 4:40-2 motion for JNOV are the same, and apply both at trial and on appeal. Frugis v. Bracigliano, 177 N.J. 250, 269 (2003); Boyle v. Ford Motor Co., 399 N.J. Super. 18, 40 (App. Div.), certif. denied, 196 N.J. 597 (2008); Velazquez v. Jiminez, 336 N.J. Super. 10, 30 (App. Div. 2000), aff'd, 172 N.J. 240 (2002). The court must accept as true all the evidence which supports the position of the nonmoving party and, according that party the benefit of all legitimate inferences, must deny the motion if reasonable minds could differ. Zive v. Stanley Roberts, Inc., 182 N.J. 436, 441-42 (2005); Dolson v. Anastasia, 55 N.J. 2, 5 (1969); Velazquez, supra, 336 N.J. Super. at 30; Pressler, Current N.J. Court Rules, comment 1 on R. 4:40-2 (2009). "The trial court is not concerned with the worth, nature or extent (beyond a scintilla) of the evidence, but only with its existence, viewed most favorably to the party opposing the motion." Dolson, supra, 55 N.J. at 5-6. The test's purpose is to ensure that the jury resolves disputed factual matters. Lewis v. Am. Cyanamid Co., 155 N.J. 544, 567 (1998). As the Court explained in Tomeo v. Thomas Whitesell Construction Co., 176 N.J. 366, 370 (2003) (quoting Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 536-37 (1995)):
"[A] dismissal under Rule 4:37-2(b), Rule 4:40-1, Rule 4:40-2 or for failure to allege or prove a prima facie case, does not unduly intrude into the province of the jury. In those instances, there simply is no issue to be decided by a jury based on the evidence."
A legal malpractice action is a variation on the tort of negligence relating to an attorney's representation of a client. Garcia v. Kozlov, Seaton, Romanini & Brooks, P.C., 179 N.J. 343, 357 (2004); Sommers v. McKinney, 287 N.J. Super. 1, 9 (App. Div. 1996). To establish malpractice, a plaintiff must prove: (1) the existence of an attorney-client relationship creating a duty of care by the defendant attorney; (2) the breach of that duty by the defendant; and (3) proximate causation of the damages claimed by the plaintiff. Jerista v. Murray, 185 N.J. 175, 190-91 (2005). An attorney is only liable for a client's loss if that loss is proximately caused by the attorney's legal malpractice. 2175 Lemoine Ave. Corp. v. Finco, Inc., 272 N.J. Super. 478, 487 (App. Div.), certif. denied, 137 N.J. 311 (1994).
To establish proximate cause, a "plaintiff must present evidence to support a finding that defendant's negligent conduct was a 'substantial factor' in bringing about plaintiff's injury, even though there may be other concurrent causes of harm." Froom v. Perel, 377 N.J. Super. 298, 313 (App. Div.) (quoting Conklin v. Hannoch Weisman, 147 N.J. 395, 419 (1996)), certif. denied, 185 N.J. 267 (2005). In a case involving transactional legal malpractice, the evidence must establish that the negligence was a substantial factor in bringing about the loss of a gain or benefit from the transaction. Id. at 315. Where a plaintiff alleges a loss in a particular transaction because an attorney failed to take steps to protect his or her interest, the plaintiff must present evidence that, even in the absence of the attorney's negligence, the other parties to the transaction would have recognized the plaintiff's interest and the plaintiff would have derived a benefit from it. Ibid.
The client, therefore, has the burden to show what injuries were suffered as a proximate consequence of the attorney's alleged breach of duty. 2175 Lemoine Ave., supra, 272 N.J. Super. at 487-88. That burden will be satisfied only by "a preponderance of the competent, credible evidence" and not by mere "'conjecture, surmise or suspicion.'" Id. at 488 (quoting Long v. Landy, 35 N.J. 44, 54 (1961)). As this court explained in 2175 Lemoine Avenue, supra, 272 N.J. Super. at 488, "the measure of damages is ordinarily the amount that a client would have received but for the attorney's negligence."
Expert testimony is required in professional malpractice cases where the matter to be addressed is so esoteric that the average juror could not form a valid judgment as to whether the professional's conduct was reasonable. Sommers, supra, 287 N.J. Super. at 10. In rare legal malpractice cases, expert testimony is not required where the duty of care to a client is so basic that it may be determined by the court as matter of law. Ibid. Moreover, "[e]xpert testimony may not be appropriate or necessary to establish proximate cause in every legal malpractice case, particularly where the causal relationship between the attorney's legal malpractice and the client's loss is so obvious that the trier of fact can resolve the issue as a matter of common knowledge." 2175 Lemoine Ave., supra, 272 N.J. Super. at 490.
In 2175 Lemoine Avenue, the trial court held that an attorney had committed legal malpractice in a loan transaction, and awarded her former client damages in the amount of $111,283. Id. at 483-85. In connection with the transaction, the attorney prepared purchase options which were declared invalid because they violated the New Jersey Real Estate License Act. Id. at 482. While this court agreed that the attorney was negligent, we held that the trial court erred in awarding damages because the client failed to prove that the attorney's negligence was a proximate cause of its loss. Id. at 487. Although the plaintiff argued on appeal that there were ways the attorney could have legally structured the transaction, this court held that the client failed to present expert testimony in support of this claim. Id. at 490. Moreover, even if the transaction could have been legally structured, we concluded there was no evidence to show that the other parties were willing or able to do so. Ibid.
In another legal malpractice case, Lamb v. Barbour, 188 N.J. Super. 6, 9 (App. Div. 1982), certif. denied, 93 N.J. 297 (1983), the trial court found an attorney, who represented the plaintiffs in the acquisition of a business that failed within two months, was professionally negligent. The court based its finding on a wide range of shortcomings relating to the attorney's "duty to furnish advice and guidance and to safeguard his client's legal position." Id. at 10. These shortcomings included the attorney's failure to: (1) tell the plaintiffs of his doubts concerning the sufficiency of their judgment, skill and experience to operate a business of that size; (2) warn the plaintiffs that the sellers might have mentioned unreported income to make the business seem more attractive; (3) caution the plaintiffs that the failure to report income could result in a liability to the Internal Revenue Service for back taxes and penalties; and (4) suggest that the plaintiffs acquire a more current financial statement, an accounting of the company's books, and an examination of its physical equipment. Id. at 10-11. The court further found that the attorney failed to obtain UCC and judgment searches, check state and federal tax liabilities, and verify customer lists and accounts payable. Id. at 11. The trial court concluded that if the attorney had properly performed his duties, the plaintiffs would have been able to make an informed decision as to whether they should buy the business. Ibid.
This court, however, held that even if the attorney was negligent, there was no evidence to support a finding of proximate cause. Id. at 12. We stated:
Most conspicuous is the absence of testimony by either of plaintiffs as to any circumstances reasonably to be hypothesized under which they could have been dissuaded from completing the transaction. It should not be lightly assumed that these young people would have been easily discouraged from acquiring for a net cash investment of only $4,000 a business which as we said earlier, grossed annual revenues of more than $1,000,000 and which had been successfully operated for approximately 16 years. [Id. at 12-13.]
More recently, in Froom, supra, 377 N.J. Super. at 309, the plaintiffs, including a broker and his real estate development company, brought a legal malpractice action against a law firm and others in connection with the acquisition of a shopping center property. The development company had entered into an agreement with an experienced investor and developer (defendant-investor) under which the latter would provide all the money to acquire and develop the property and, in return, the development company, which located the property, performed preliminary research and investigations, prepared a demographic profile report, and retained an architect, would receive a fifty percent non-dilutable ownership interest in the project. Id. at 302.
The plaintiffs advised their lawyer that the defendant-investor was participating in the transaction. Id. at 311. The lawyer then prepared draft agreements which initially identified the plaintiffs and defendant-investor as the purchasers, and addressed his engagement letter to both parties. Ibid. Over time, a dispute arose as to whether the attorney and his law firm continued to represent the development company. Ibid. Ultimately, the plaintiffs lost their fifty percent interest in the project. Id. at 308-09.
The plaintiffs claimed that the law firm defendants were negligent in failing to protect their interests. Id. at 315. Their expert testified that the law firm owed the plaintiffs a duty of loyalty, that it could not represent others in conflict with the plaintiffs' interests, and that it had a responsibility to advise the plaintiffs about another company's role in the project. Id. at 316. When asked if the law firm proximately caused the plaintiffs' damages, the expert replied only that, "[t]hey committed malpractice" and "caused the damages." Ibid. The jury returned a verdict for $2.7 million against the law firm defendants, and the court denied the law firm's motions for a new trial and JNOV. Id. at 309.
This court held that the evidence was insufficient to support a finding by the jury that professional negligence by the law firm defendants was a proximate cause of the development company's loss of its purported interest in the project. Id. at 315. Even if the law firm had acted to protect the plaintiffs' interests, we concluded that a rational jury could not find that the other parties to the transaction would have agreed to give the development company a fifty percent ownership interest in the project when it made no financial contribution to the property's acquisition or development. Id. at 315-16.
We further concluded that the testimony of the plaintiffs' expert was "patently insufficient" to establish the requisite causal connection between the alleged legal malpractice and the damages allegedly sustained by the plaintiffs, and that his conclusions were "net opinions" unsupported by any factual evidence. Id. at 317. This court rejected the plaintiffs' contention that expert testimony was not necessary, finding the transaction was an "undoubtedly" complex real estate acquisition and development. Id. at 318. We held "jurors could not be expected to know, based on their own common knowledge and experience, whether sophisticated investors would be willing to invest in the acquisition and development of the property and allow the development company to retain a 50% interest while making no monetary contribution to the project." Ibid. Moreover, even if expert testimony was not required, this court concluded that the testimony of fact witnesses failed to provide an evidential foundation for a finding that the other parties to the transaction would have recognized the development company's ownership interest or would have acquiesced to giving it any percentage of the project. Id. at 318-20; see also, Brach, Eichler, Rosenberg, Silver, Bernstein, Hammer & Gladstone, P.C. v. Ezekwo, 345 N.J. Super. 1, 15 (App. Div. 2001) (holding the trial court properly dismissed the legal malpractice claim in a medical malpractice action where the defendant had no expert testimony to establish proximate causation).
The record below contains sufficient evidence to support the jury's findings that attorney-defendants and Idouchi had attorney-client relationships with plaintiffs, and that they deviated from the accepted standard of care by failing to include an escrow provision in the side agreement. The issue here, however, is whether the failure by attorney-defendants and Idouchi to include the escrow provision was a proximate cause of plaintiffs' damages.
Jungil Lee's testimony and the language of the side agreement make clear that the $200,000 would come from An's share of the proceeds from the sale. Thus, the question is whether attorney-defendants were negligent by failing to include a provision in the side agreement which would have held the discharge of mortgage in escrow until the closing, when the money would have been available to An for release.
New Jersey is a "race-notice" jurisdiction, where the party who first records an instrument will prevail so long as that party had no actual knowledge of another party's previously-acquired interest. Cox v. RKA Corp., 164 N.J. 487, 496 (2000). Generally, parties are charged with constructive notice of instruments that are properly recorded. Ibid.; see N.J.S.A. 46:22-1.*fn7 Thus, under the statute's scheme, a recording purchaser divests a former non-recording title owner and prevents a subsequent purchaser from divesting him or her of title. Cox, supra, 164 N.J. at 496-97 (citing Palamarg Realty Co. v. Rehac, 80 N.J. 446, 453 (1979)). The scheme's underlying purpose is to permit purchasers to rely on the record title, and to purchase and hold title to lands with confidence. Id. at 496 (citing Palamarg, supra, 80 N.J. at 453).
Pursuant to the lis pendens statute, N.J.S.A. 2A:15-6 to 15-17, a notice of lis pendens must be "filed and recorded for subsequent interest takers to have constructive notice of the pendency of a lawsuit and to take subordinate to the rights the plaintiff derives in the outcome of the litigation." Manzo v. Shawmut Bank, N.A., 291 N.J. Super. 194, 199 (App. Div. 1996). Further, under N.J.S.A. 2A:50-30, in any action where a mortgage is unrecorded prior to the filing of the foreclosure complaint, the person "shall be bound by the proceedings in the action so far as such property is concerned, in the same manner as if he had been made a party to and appeared in such action, and the judgment therein had been made against him as one of the defendants therein." Thus, under N.J.S.A. 2A:50-30, if a mortgage is unrecorded prior to the filing of the foreclosure complaint, the holder of the unrecorded interest is bound by the foreclosure judgment as if it had been made a party. PNC Bank v. Axelsson, 373 N.J. Super. 186, 191 (Ch. Div. 2004).
Here, KFB filed the foreclosure proceeding and lis pendens in May 1997, prior to plaintiffs' recordation of the third mortgage in June 1997. The bank, therefore, was not required to name plaintiffs in the foreclosure proceedings. Because plaintiffs were bound by the foreclosure judgment pursuant to N.J.S.A. 2A:50-30, their third mortgage was extinguished as a matter of law well before the discharge was filed. Thus, the court correctly found that plaintiffs could not sustain the legal malpractice action because attorney-defendants' alleged negligence relating to the side agreement and failure to include an escrow provision for the discharge of mortgage payment could not have been a proximate cause of their damages.
Moreover, expert testimony was required on the issue of proximate cause because this case involved transactional legal malpractice and the interrelationship between a discharge of mortgage, a judgment of foreclosure, and a side agreement. Froom, supra, 377 N.J. Super. at 318; 2175 Lemoine Ave., supra, 272 N.J. Super. at 490. Plaintiffs' expert opined that attorney-defendants failed to follow standard practice in New Jersey to hold the signed discharge of mortgage in escrow and to release and file it only after the money was actually tendered. The expert explained that without an escrow provision, the property could be transferred free of any lien, and there would be no mechanism to automatically restore the third mortgage to its original status if the $200,000 was not paid. Thus, he believed that attorney-defendants' failure to follow "the standard practice escrow requirement" proximately caused plaintiffs' loss by permitting the transfer of the property without payment of the promised funds.
Nonetheless, plaintiffs' expert acknowledged that the judgment of foreclosure of the first and second mortgages in August 1998 extinguished plaintiffs' third mortgage. The following colloquy took place between counsel for attorney-defendants and the expert as to the foreclosure judgment's effect on the third mortgage:
Q: Basically, when the final judgment of foreclosure occurred in August 1998, that mortgage was gone, correct?
A: Yeah, and the agreement didn't deliver what it promised, that some lien against the property would be retained by Lee if they didn't get the 200,000.....
Q: What happened on August 19, '98?
A: The judgment that had been sought by Korea First Bank and which was purchased by St[e]ier was entered on the record of Superior Court.
Q: And that extinguished the mortgage.
A: That extinguished the mortgage which was not automatically restored, the way the Lee's [sic] were led to think it would be.
Q: Okay. So after August of 1998, they could not have revived any mortgage, correct?
A: That original mortgage could not be restored --
Q: And prior --
A: -- after the judgment of foreclosure.
A: Because the judgment of foreclosure extinguishes the mortgage.
Q: Right. So in August 1998, that mortgage was extinguished, correct?
A: By virtue of the judgment of foreclosure.
Q: Right. And the filing of the discharge of mortgage a month later didn't make any difference did it?
A: It's clean up at that point, to change the contemplated... deal.
Q: But there was nothing to extinguish because it was gone a month before, correct?
Q: So if the mortgage had been held in escrow until the closing in October of 1998 and An balked at that time would it have changed anything?
A: Would St[e]ier have gone ahead with the deal? I don't know.
When asked whether any obligation remained with respect to the money, this exchange took place between counsel for attorney-defendants and plaintiffs' expert:
Q: So when you talk about the obligation still exists, the lien is gone, but the obligation still exists, you're referring to that; that is the obligation under the promissory note and the guarantee, correct?
A: I'm referring to that, yes, and I'm referring to --
Q: Chang Joo An's obligation under the side agreement, correct?
Q: So --
A: Neither of which is extinguished by the foreclosure judgment.
Gary L. Falkin, expert for attorney-defendants, similarly testified that the foreclosure judgment "wiped out" plaintiffs' third mortgage.
Thus, plaintiffs' contention that they would not have relinquished their rights to the $500,000 third mortgage if they knew they would not receive the $200,000 at closing misses the point. Likewise unpersuasive is their argument that the outcome would have been very different if the money was placed in escrow. Indeed, plaintiffs' reliance on the dissenting opinion in VRG Corp. v GKN Realty Corp., 135 N.J. 539, 557 (1994) (Stein, J., dissenting), and on Tabaac v. Atlantic City, 174 N.J. Super. 519, 528 (Law Div. 1980), is misplaced, because these cases involved the escrow of unpaid real estate commissions and part of a purchase price to secure an agreement, respectively.
Further, plaintiffs argued at trial, and now argue on appeal, that Steier required the discharge as a precondition to the closing. If plaintiffs had not signed the side agreement, they claim it was "highly likely that the deal would not have gone through... because Mr. Steier insisted that the third mortgage be extinguished before any deal was consummated."
Judge Martinotti considered this claim speculative and not supported by competent evidence. We agree. To the contrary, Steier testified that the discharge of the third mortgage was a condition of his contract with An, but had nothing to do with his agreement with KFB. He explained that, at the time he signed the purchase agreement in September 1997, he needed to keep his options open. If he acquired the bank notes and project approvals quickly, and did not want to proceed with the foreclosure, he would need the discharge. By September 1998, however, the discharge was no longer important because the bank had already obtained a judgment of foreclosure. Thus, the evidence in the record does not support plaintiffs' claim that the discharge was a precondition to the closing.
We, therefore, affirm the order granting attorney-defendants' JNOV. The remaining issues raised by plaintiffs are without sufficient merit to warrant further discussion in a written opinion, Rule 2:11-3(e)(1)(E), or need not be addressed due to our affirmance of the JNOV.