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National Continental Insurance Co. v. J. Spinelli & Sons


August 25, 2010


On appeal from the Superior Court of New Jersey, Law Division, Salem County, Docket No. L-274-07.

Per curiam.


Argued February 22, 2010

Before Judges R. B. Coleman, Baxter and Alvarez.

This is an appeal by plaintiff National Continental Insurance Company (National) of an August 11, 2009 order denying National's motion for reconsideration of a June 23, 2009 order dismissing National's claims for unpaid insurance premiums and entering judgment in favor of defendant J. Spinelli & Sons, Inc. (Spinelli) on its counterclaim for overpaid premiums.

At trial, National was prohibited from presenting evidence of a statutorily mandated transfer of paid premiums to Spinelli's prior unpaid insurance policy because National had failed to disclose during discovery any information regarding such transfer or its obligation to make such transfer. National now argues that this discovery sanction was an abuse of discretion because it was based on a mistaken understanding of law and was unduly prejudicial. After considering the record and briefs of the parties, we are satisfied that the trial judge understood the law and that the imposition of the sanction was an appropriate exercise of discretion in light of National's complete failure to disclose in discovery the information barred by the court at trial. Accordingly, we affirm.

On May 14, 2004, Spinelli completed a New Jersey Commercial Automobile Insurance Plan (CAIP) application to obtain insurance for a fleet of trucks. CAIP is a plan which "provide[s] for the apportionment of insurance coverage for qualified applicants who are in good faith entitled to but are unable to procure the same, through the voluntary market[.]" N.J.A.C. 11:3-1.1(a)(2). National is a participant in CAIP. Because Spinelli had previously been assigned to National, the 2004 application was also assigned to it. An assignment letter and check for $100,000 was sent to National. The check was deposited into an account for Spinelli. While no policy was issued at that time, a policy number was assigned. After it received the assignment, National performed a search, which revealed that Spinelli's prior CAIP policy for the term January 7, 2002 to January 7, 2003, had an outstanding premium balance of $79,214.*fn1

National therefore moved a portion of the deposited $100,000 to satisfy Spinelli's outstanding balance on the 2002 policy, and the sum of $20,768 was applied to Spinelli's new policy with coverage dates of May 16, 2004 to May 16, 2005. National contends that this was reflected in a premium notice it sent to Spinelli on June 10, 2004. That notice listed the original premiums as $489,714, special charges as $4,897, and payments as $20,786. This left Spinelli's outstanding balance at $473,829. Spinelli retained First Insurance Funding Corp. to finance the balance of the policy premium.

Throughout the new policy period, National sent numerous endorsements to Spinelli reflecting changes in the premium because of Spinelli's additions and deletions of insured vehicles to its policy. Those endorsements are reflected in the balance sheet for Spinelli's account. According to the endorsements, the total accrued policy premium was $519,583. Spinelli's payments, which totaled $566,996, less the $79,214 applied to his prior policy, stood at $485,277. This left an unpaid balance of $34,306 for which National filed a complaint on September 10, 2007 in Salem County. Attached to the complaint was the balance sheet containing credits and debits to Spinelli's account, including a debit of $79,214 described as "Posting reversal - cash incorrectly applied to account." Spinelli filed its answer on October 29, 2007, denying all counts of National's complaint.

As the parties prepared for trial, a conversation occurred between counsel for Spinelli and National, in which National indicated it would be producing an unnamed witness at trial who would be bringing documents not previously produced in discovery. In response, at the start of the bench trial before Judge Timothy G. Farrell, Spinelli moved in limine seeking to exclude any written documents that National had not provided to Spinelli in discovery. The court initially adjourned the matter so that the parties could compare the documents in their possession to see what had not been provided.

As the matter proceeded, National presented as its witness an underwriter, Dean D'Aquilla, who testified that Spinelli came to National as a CAIP policy with an assignment page and a $100,000 check. D'Aquila then testified, as noted above, that National performed a check on Spinelli, found its previous policy with National and the unpaid balance, and then, in accordance with the New Jersey Automobile Insurance Plan manual, applied the $100,000 check first to Spinelli's prior balance.

Spinelli objected to this testimony as no information had been provided in discovery concerning the allocation of Spinelli's check to a prior balance. National acknowledged that information on this argument was "never a part of discovery." National asserted that was because "[it] was never asked." Judge Farrell ruled on this issue, stating:

Unless [National] can prove that it was [Spinelli's] intent when [Spinelli] sent the $100,000 check that we're talking about through a broker or initiator, which eventually ends up at National Continental, unless [National] can establish that it was Spinelli's intent that that money be used to pay any unpaid balances, okay, I am going to bar in this proceeding any claim that the $100,000 should be not [sic] credited to this policy, because [National] until today has never claimed such a setoff.

I disagree with [National's counsel's] argument that the $100,000 wasn't intended to go with this policy unless he can prove it. It doesn't make any sense to me. The facts as presented so far to me establish that Spinelli needed an insurance policy for . . . [May] 16, '04 to [May] 15, '05.

I recognize that . . . the purpose of the check was the new policy. I recognize that National Continental under the statutory scheme may have had the right to pay outstanding balances, but when it sued Spinelli and when Spinelli disputes the claim and when we go through discovery, National Continental has an obligation to put Spinelli on notice that the seventy-nine plus or minus thousand of the [$]100,000 of the initial premium check was used to pay what National Continental says was an outstanding balance from another policy for a different period.

It has not done that. It didn't . . . do it in the complaint. . . . [A]nd it may not have had to do it in the complaint, . . . but in discovery, [National] clearly has an obligation . . . once Spinelli shows all the payments, has an obligation to put Spinelli on notice of what its defense is, . . . [O]ne of the defenses to the counterclaim is, is of the first $100,000 you paid us for the time frame 5/16/04 to 5/15/05, pursuant to some statute under the insurance chapter here in New Jersey, under the CAIP procedure, we are permitted and I believe this witness has testified required to pay any outstanding balances, which is what we did.

That has never been done until today.

So I'm going to bar that claim unless . . . National can prove in these proceedings, . . . that it was Spinelli's intent that the $100,000 check was for the prior premium or all or part of it.

National's position was that "nowhere in the counterclaim, the discovery, or anything was that $100,000 mentioned by [Spinelli]" and that National therefore did not consider the $100,000 check as part of Spinelli's counterclaim.

Ultimately, D'Aquilla testified that the total payments from Spinelli to National, including the initial $100,000 check, totaled $566,696 and that the total premium due was $519,583.

Consistent with that proof and with the ruling that he would not consider the $79,214 transfer that National applied to Spinelli's previous account, but did not disclose during discovery, the judge found that there was a resulting overpayment of $47,413. As such, National's claim for unpaid premiums was dismissed and judgment was entered for Spinelli in the amount of $47,413. Those rulings were memorialized in a written order on June 23, 2009.

National filed a motion for reconsideration and/or a new trial, and oral argument was heard on this motion on July 31, 2009. At that time, National's counsel argued that he had not been provided with information about the CAIP-mandated $79,214 transfer and, as such, had not provided such information in discovery, but that National should nonetheless not be held to have received this amount in paid premiums because it was mandated to transfer the funds per CAIP. Judge Farrell denied the motion, characterizing it as the same argument asserted by National at trial and further barred argument because it was "a discovery violation." The judge reiterated the rationale of his ruling:

What [National] is saying is yeah, that [Spinelli] made that payment, but under the Administrative Code, he owed us money and we were permitted to transfer it, and I recognize that's what the Administrative Code says, but in this case, it never raised that defense. It never responded to discovery request[s]. Frankly, there is no other way to put it. It blind[-]sided [Spinelli] on the day of trial.

This ruling denying reconsideration was memorialized in written order on August 11, 2009, and this appeal ensued.

On appeal, National argues that the trial court's ruling, whereby it prohibited National from presenting evidence of its CAIP-imposed obligation to transfer Spinelli's payment to its original policy, should be reversed. It argues that ruling is an abuse of discretion, and that it constitutes a mistaken understanding or application of law, which causes National to suffer irreparable prejudice. Spinelli argues that the trial court's ruling was not an abuse of discretion, that the judge well understood the law as it related to National's CAIP obligations, and that National did not suffer irreparable prejudice in light of its complete lack of disclosure during discovery. We find the court's imposition of discovery sanctions was not an abuse of discretion, when faced with National's complete lack of disclosure during discovery. Accordingly, we uphold the court's ruling and affirm the judgment against National.

A "trial court's decisions regarding discovery are normally given deference by a reviewing court, and will not be upset on appeal absent an abuse of discretion or a mistaken understanding of the applicable law." Piniero v. N.J. Div. of State Police, 404 N.J. Super. 194, 204 (App. Div. 2008); see also Wilson v. Amerada Hess Corp., 168 N.J. 236, 253 (2001). This same abuse of discretion standard applies to the admission or exclusion of proffered evidence. Dinter v. Sears, Roebuck & Co., 252 N.J. Super. 84, 92 (App. Div. 1991).

Rule 4:23-2 describes the discovery sanctions a court may impose if a party fails to obey an order of the court or fails to provide or permit discovery: the court in which the action is pending may make such orders in regard to the failure as are just, and among others the following:

(1) An order that the matters regarding which the order was made or any other designated facts shall be taken to be established for the purposes of the action in accordance with the claim of the party obtaining the order;

(2) An order refusing to allow the disobedient party to support or oppose designated claims or defenses, or prohibiting the introduction of designated matters in evidence;

(3) An order striking out pleadings or parts thereof, or staying further proceedings until the order is obeyed, or dismissing the action or proceeding or any part thereof with or without prejudice, or rendering a judgment by default against the disobedient party;

(4) In lieu of any of the foregoing orders or in addition thereto, an order treating as a contempt of court the failure to obey any orders.

[R. 4:23-2(b) (emphasis added).]

An appellate court's review of a trial court's imposition of such discovery sanctions is deferential. Thus, we are required to "abstain from interfering with those discretionary decisions unless an injustice has been done." Cavallaro v. Jamco Prop. Mgmt., 334 N.J. Super. 557, 571 (App. Div. 2000); see also Lang v. Morgan's Home Equip. Corp., 6 N.J. 333, 339 (1951) (holding that the sanctions need only be "just and reasonable in the circumstances[.]"). Trial courts have the "inherent discretionary power to impose sanctions for failure to make discovery[.]" Calabrese v. Trenton State College, 162 N.J. Super. 145, 151 (App. Div. 1978), aff'd, 82 N.J. 321 (1980). Such power is afforded to the courts in order to secure the effectiveness of discovery rules. Abtrax Pharms., Inc. v. Elkins-Sinn, Inc., 139 N.J. 499, 512 (1995) ("If the discovery rules are to be effective, courts must be prepared to impose appropriate sanctions for violations of the rules.").

In discussing the purpose of the discovery rules, the Court has stated:

The discovery rules were designed to eliminate, as far as possible, concealment and surprise in the trial of law suits to the end that judgments therein be rested upon the real merits of the causes and not upon the skill and maneuvering of counsel.

Although the discovery rules are to be construed liberally and broadly, concealment and surprise are not to be tolerated. Nonetheless, trial courts have wide discretion in deciding the appropriate sanction for a breach of discovery rules, as long as the sanction is just and reasonable. [Wymbs v. Twp. of Wayne, 163 N.J. 523, 543 (2000) (internal quotations and citations omitted).]

The imposition of discovery sanctions involves competing policies that implicate one party's "'right to have the [other party] comply with procedural rules'" and "'[each party's] right to an adjudication of the controversy on the merits.'" Abtrax, supra, 139 N.J. at 513 (quoting Zaccardi v. Becker, 88 N.J. 245, 252 (1982)). For this reason, there is a range of sanctions available to the court when faced with a discovery violation. The available sanctions, as set forth in Rule 4:23-2, allow the court to "order that designated facts be taken as established, refuse to permit the disobedient party to support or oppose designated claims or defenses, prohibit the introduction of designated matters into evidence, dismiss an action, or enter judgment by default." Rosenblit v. Zimmerman, 166 N.J. 391, 402-03 (2001).

In deciding when to impose discovery sanctions and which sanction to use, courts must evaluate "the extent of the prejudice caused by the discovery violations and the ability to redress that prejudice[.]" Abtrax, supra, 139 N.J. at 521. See also Casinelli v. Manglapus, 181 N.J. 354, 365 (2004) (holding that the facts, the willfulness of the violation, the proximity of trial, and prejudice to the adversary are all important considerations in imposing discovery sanctions).

In Wymbs, the New Jersey Supreme Court evaluated the appropriate sanctions when one party attempted to produce a witness at trial whose identity had not been disclosed in discovery. Supra, 163 N.J. at 543-44. The State, four and one-half years after the start of the case, after discovery had ended, and twelve days into trial, proffered a surprise witness. Id. at 540. Plaintiffs objected to the testimony, as the witness had not been named in the State's interrogatories and as his proposed testimony would contain substantive information that had also not been disclosed. Ibid. Despite finding the State's failure to amend its interrogatories "'inexcusable,'" the trial court allowed the witness's testimony as it was the State's only evidence and was pivotal to their case. Id. at 541. We affirmed that decision, but the Supreme Court disagreed with the admission of the witness's testimony. Id. at 543.

In discussing what a trial court should do when confronted with a surprise witness, the Court stated: possible sanctions to be explored by the trial court include granting a continuance or declaring a mistrial with or without an award of fees to the surprised party.

Another option is to exclude the testimony if such an outcome is just and reasonable.

However, when the testimony in question is "pivotal" to the case of the party offering the testimony, a court should seek to avoid exclusion where possible. Factors that would strongly urge the trial judge, in the exercise of his discretion, to suspend the imposition of sanctions, are (1) the absence of a design to mislead, (2) absence of the element of surprise if the evidence is admitted, and (3) absence of prejudice which would result from the admission of the evidence. [Id. at 543-44 (internal quotations and citations omitted).]

Because the surprise to the plaintiffs was real, the State's conduct in discovery was inexcusable, and the prejudice to plaintiffs was irreparable, the Court held that the testimony from the surprise witness should have been excluded. Id. at 545. It stated, "[a]lthough exclusion may not be appropriate in cases in which the surprised evidence is pivotal to the offering party's case and other options are available, here exclusion was the only option." Ibid.

In this case, National offers two main arguments to support its position that deference should not be paid to the trial judge's evidentiary ruling. First, National asserts that the ruling should be reversed because it constitutes a mistaken understanding and application of the law. National suggests, for example, that the judge's use of the word "setoff" to describe National's transfer of the $79,214 to Spinelli's prior unpaid policy reflects a mistaken understanding of the law inasmuch as this transfer was not merely a setoff but was statutorily mandated. National also cites to the CAIP Plan of Operation, which states:

A servicing carrier which has been reassigned an applicant who owes that same servicing carrier earned premium for prior coverage shall proceed as follows:

A. If the reassigned applicant's deposit premium is sufficient to resolve outstanding premium from prior coverage, the servicing carrier shall so apply the deposit and bill the applicant as if the deposit premium was insufficient. The servicing carrier shall allow the applicant at least 15 days to pay the remainder of the deposit premium.

While the trial judge may have been imprecise in his use of the word setoff to describe the transfer of Spinelli's deposit, this does not indicate that he misunderstood the CAIP requirements. At several other points in the record, the judge showed that he did understand the statutory mandate National was attempting to emphasize. He stated:

I recognize that National Continental under the statutory scheme may have had the right to pay outstanding balances, but when it sued Spinelli and when Spinelli disputes the claim and when we go through discovery, National Continental has an obligation to put Spinelli on notice that the seventy-nine plus or minus thousand of the [$]100,000 of the initial premium check was used to pay what National Continental says was an outstanding balance from another policy for a different period.

Similarly, at the hearing on National's motion for reconsideration, the judge said:

What [National] is saying is yeah, that [Spinelli] made that payment, but under the Administrative Code, he owed us money and we were permitted to transfer it, and I recognize that's what the Administrative Code says, but in this case, it never raised that defense. It never responded to discovery request[s]. Frankly, there is no other way to put it. It blind[-]sided [Spinelli] on the day of trial.

Thus, it is clear from the record that the judge understood that National was entitled to transfer Spinelli's initial payment to his previous outstanding balance. The judge's use of the word "setoff" does not evince a lack of understanding of the law; it is merely a simplification of the CAIP policy and does not indicate that he believed National to have any other motivation for such a transfer. He rightfully concluded that National was obliged to give notice of what it had done and to disclose the basis for its action.

Moreover, National weakens its own argument in its reply brief, wherein it states, "[i]t is abundantly clear that the trial court was aware of and acknowledged National's statutory obligation under the CAIP to apply Spinelli's premium deposit to the outstanding balance on the prior policy." Plainly, the imposition of discovery sanctions did not rest on a misinterpretation of CAIP, but rather on the judge's reaction to National's failure to be forthcoming in discovery.

As further proof of a mistaken understanding of law, National cites the judge's apparent imposition of a burden upon National to prove Spinelli intended for the initial deposit check to be credited against his previous policy in order to introduce evidence of the transfer. Again, we do not discern a lack of understanding on the part of the judge. As evidenced by the record, the decision to impose this burden to establish intent was based on arguments made by National's counsel. At trial, this exchange occurred:

[National's counsel]: No. No. [$]79,000 - they paid [$]100[000]. [$]79,000 - before this policy was issued, before they -

The court: Well, it was for - it was to buy this policy, wasn't it . . . ?

[National's counsel]: No.

The court: Are you suggesting that the defendant sent the $100,000 check not in contemplation as a down payment for the policy?

[National's counsel]: My - my argument is if the check had been for [$]78,000, they would have kept the 78 and [would have been] required by law to send the whole thing back because it was short. Because it paid - that was his testimony. I mean, I can go into this better.

Although it is apparent that the judge's ruling regarding proof of intent was a response to National's characterization of its own argument, which suggested that Spinelli's $100,000 was not sent merely to secure the second policy, intent is not the relevant consideration. The relevant consideration is the duty of the servicing carrier to apply the deposit appropriately and to allow the applicant to pay the remainder. Withholding notice of its action and the reason therefore is inimical to the purposes of the CAIP Plan of Operation. By requiring National to show that Spinelli had intended for the check to be applied to his prior account if it was to argue the transfer at all, the judge provided it the opportunity to present its argument without allowing it any advantage gained through its failure to provide discovery on such a critical issue. Whereas Spinelli could hardly be surprised by evidence of his own intent, even if such evidence had not been disclosed in discovery, National would not be precluded from its argument on that limited issue.

National also argues that the discovery sanction imposed upon it was unduly prejudicial and produced an unjust result. National argues that the complete bar on evidence relating to its CAIP responsibilities was an irreparable harm, particularly in light of the fact that there were also "issues" with Spinelli's conduct during discovery. Spinelli argues that National's conduct, and its complete lack of disclosure, warranted the sanctions.

In evaluating whether the imposition of this sanction was unduly prejudicial, we are obliged to afford deference to the trial judge's holding so long as it was "just and reasonable in the circumstances." Lang, supra, 6 N.J. at 339. While the bar on evidence of the CAIP claim is a drastic sanction, it was both fair under the circumstances and less harsh than the sanction of dismissal of National's complaint entirely. See Zaccardi, supra, 88 N.J. at 253.

The prejudice to Spinelli caused by National's failure to disclose its CAIP argument or any supporting evidence thereof was great. Had its argument and evidence been allowed, it would have been unfair to Spinelli, which had sought unsuccessfully to learn during discovery the basis for National's claim of deficient premium payments. A further postponement of trial might have allowed Spinelli to receive the information related to National's CAIP claim and would have afforded it time to investigate that information. However, it also would have prolonged the amount of time between the filing of the complaint and trial*fn2 and would have caused both parties to incur greater costs.

The sanctions here appear analogous to the exclusion of the surprise witness testimony in Wymbs. Like the State in Wymbs, National's undisclosed evidence was pivotal to the case. However, as in Wymbs, exclusion was a feasible sanction. In light of National's complete lack of disclosure in discovery, the surprise to Spinelli in having to respond to an argument that was not previously mentioned or supported in discovery, and the prejudice that would have been suffered by Spinelli had National been allowed to introduce evidence of its CAIP obligations, it was reasonable for the judge to utilize this sanction, both to protect Spinelli and to sanction National's concealment in contravention of the language and the spirit of the discovery rules.

As noted, National argues that the sanction was inappropriate in light of Spinelli's own misconduct during discovery. However, as evidenced by the record and parties' briefs, Judge Farrell was the judge in this case from its outset. He was well-acquainted with both parties, their numerous motions, and the problems, including discovery issues that arose throughout the pendency of the litigation. He was therefore familiar with Spinelli's alleged discovery misconduct. The judge was able to evaluate the parties' conduct in litigation, and he determined that sanctions against National were just under the circumstances. We will not second-guess that evaluation.

Also, National provided no documents to Spinelli despite its having received discovery requests for documents and information. Though National argues that the $79,214 transfer was disclosed because that sum was listed as a "posting reversal" on the policy balance sheet attached to the complaint, such an oblique disclosure was effectively no disclosure. The balance sheet reference to the $79,214 transfer, listed as "Posting reversal - cash incorrectly applied to account," gives no indication that a transfer had been made to a prior account or that such transfer was effected pursuant to a statutory right or mandate. This listing alone does not constitute a disclosure of the reasons for the transfer or of National's CAIP claim. Furthermore, National's assertion that it did not answer discovery because it was not served upon them until late in the discovery period is equally unavailing, as the discovery request was not out of time.

Finally, National's lack of disclosure is not justified by Spinelli's not having requested the information specifically. Spinelli served general requests for production upon National.*fn3 Within those requests were numerous phrases under which information regarding the $79,214 transfer would have been encompassed. National, however, provided no information regarding the transfer until it announced days before the trial that it would be producing an unnamed witness who would be bringing documents not provided to Spinelli in discovery.

In light of the fact that National did not provide any discovery despite its obligation to do so, it was just under the circumstances to preclude it from presenting new evidence at trial regarding the CAIP requirements. This is made clear by an application of the Abtrax test for discovery sanctions whereby the court should examine "the extent of the prejudice caused by the discovery violations and the ability to redress that prejudice[.]" Abtrax, supra, 139 N.J. at 521. Allowing National to present evidence of the CAIP requirements that precipitated the $79,214 transfer would have certainly caused an irreparable prejudice to Spinelli.

The CAIP argument and its supporting evidence was a complete surprise to Spinelli. At trial, when National referenced the CAIP obligation for the first time, Spinelli had no knowledge of the argument, was not in possession of any disclosed documentation either of the CAIP obligation or of Spinelli's prior policy and unpaid balance, and had not been afforded the opportunity to investigate the argument to discover whether Spinelli did have outstanding premiums on a prior policy with National and whether National had fulfilled its own obligations under CAIP. The surprise suffered by Spinelli strongly militated toward the imposition of discovery sanctions.

Furthermore, the second prong of Abtrax, the "ability to redress that prejudice," ibid., supports the imposition of sanctions. Considering the severe prejudice that would have been suffered by Spinelli and National's complete lack of disclosure, we cannot say that a different sanction would have been more appropriate in the current instance. While the most drastic sanction, dismissal of the complaint, would have likely been inappropriate, sanctions lesser than the one imposed here would not have redressed the prejudice suffered by Spinelli. A recess, during which Spinelli could have examined National's CAIP evidence, might have been feasible, but would not have been fair to Spinelli.


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