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Lee v. Policastro

July 31, 2009


On appeal from the Superior Court of New Jersey, Law Division, Bergen County, Docket No. L-6629-03.

Per curiam.


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 ...

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