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Xpekt Corporation A/K/A Dodeka v. Fame of New York


April 19, 2011


On appeal from the Superior Court of New Jersey, Law Division, Bergen County, Docket No. L-2313-10.

Per curiam.


Argued April 6, 2011

Before Judges Sapp-Peterson and Simonelli.

Defendants Fame of New York, Inc., Jung Hye Lee and Sung Kwon Lee (collectively defendants) appeal from the denial of their motion for sanctions against plaintiff's attorney pursuant to Rule 1:4-8. We reverse and remand for further proceedings.

The facts are straightforward. On June 4, 2009, plaintiff XPEKT Corporation filed a complaint against defendants alleging, in part, that they engaged in the fraudulent transfers of money from co-defendants. Plaintiff's counsel also represented other litigants in other cases against some of the co-defendants in this case. In their answer filed on August 12, 2009, as a defense, defendants asserted that the claim was frivolous, and demanded its withdrawal.

In mid-November 2009, plaintiff and its attorney decided not to proceed with the fraudulent transfer claim (the claim) and planned to voluntarily dismiss it at trial. Defendants, their attorney and plaintiff's attorney appeared for trial on November 19, 2009. Plaintiff's counsel, however, did not voluntarily withdraw the claim, instead, the trial judge dismissed the complaint without prejudice because plaintiff failed to appear.

Defense counsel then wrote to plaintiff's counsel on November 24, 2009, requesting that he withdraw the complaint because it "was filed in violation of the Entire Controversy Doctrine, and for the sole purpose of harassment and unnecessary litigation." Counsel also warned he would file a motion for sanctions pursuant to Rule 1:4-8 if the complaint was not withdrawn within twenty-eight days. Plaintiff's counsel did not agree the entire controversy doctrine applied. He telephoned defense counsel and left a message asking for clarification of defendants' position. Defense counsel did not respond.*fn1

Despite having decided to withdraw the claim, plaintiff's counsel filed a motion to reinstate the complaint, which the court granted on December 18, 2009. Trial was then re-scheduled for January 28, 2010; however, defense counsel received no notice, and thus, he and his clients did not appear. Instead of voluntarily dismissing the claim as planned in November, plaintiff's counsel obtained a default against defendants.

Defense counsel wrote to plaintiff's counsel on January 28, 2010, demanding that he execute a consent order vacating the default and a stipulation of dismissal with prejudice, which provided for payment of defendants' attorney's fees. Defense counsel also warned, "[i]f we are forced to file a motion to vacate the default and to defend this action in [c]court we will file a motion seeking costs and sanctions for frivolous litigation."

Plaintiff's counsel did not respond to the letter or sign the stipulation of dismissal. Nevertheless, he could have, but did not, seek leave of court to dismiss the claim. See R. 4:37-1(b).

Defendants filed a motion to vacate the default, which plaintiff's attorney opposed. The judge denied the motion. Defendants sought reconsideration. Plaintiff's attorney opposed the motion despite having received defense counsel's April 27, 2010 letter demanding that he withdraw the claim "within 28 days of this demand or we will make an application seeking sanctions pursuant to [Rule] 1:4-8(b)(1)."

On May 26, 2010, defendants filed a summary judgment motion. Plaintiff's counsel represented to the judge that the parties had agreed to voluntarily dismiss the matter. Defense counsel responded there was no such agreement and plaintiff could not voluntarily dismiss without a stipulation or court order, as required by Rule 4:37-1.

Again, plaintiff's counsel did not seek leave of court to dismiss the claim. Instead, he opposed the summary judgment motion arguing it was premature because he was awaiting discovery from defendants, and the claim was not frivolous and had merit. The judge granted summary judgment concluding that discovery had ended and plaintiff failed to raise any genuine issue of fact supporting the claim.

Defendants filed a motion for sanctions against plaintiff's attorney pursuant to Rule 1:4-8. In opposition, plaintiff's counsel filed two certifications and a certification from his client, which provided information on which counsel claims he relied in good faith to assert the claim. The judge denied the motion concluding that based on the client's certification, plaintiff's counsel neither acted in bad faith nor intentionally or unjustifiably proceeded with the claim. This appeal followed.

On appeal, defendants contend the judge abused his discretion in denying its motion because plaintiff's counsel acted in bad faith by filing a frivolous complaint, which was unsupported by any credible evidence, and refusing to dismiss the claim. We agree, in part.

Rule 1:4-8 counsel fee sanctions "are specifically designed to deter the filing or pursuit of frivolous litigation . . . ." LoBiondo v. Schwartz, 199 N.J. 62, 98 (2009). A second purpose of the rule is to compensate the opposing party in defending against frivolous litigation. Toll Bros., Inc. v. Twp. of W. Windsor, 190 N.J. 61, 71 (2007). The Rule provides for imposition of sanctions where the attorney files a pleading or a motion with an "improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation[,]" Rule 1:4-8(a)(1), or by asserting a claim or defense that lack the legal or evidential support required by Rule 1:4-8(a)(2), (3), and (4), State v. Franklin Sav. Account No. 2067, 389 N.J. Super. 272, 281 (App. Div. 2006). "For purposes of imposing sanctions under Rule 1:4-8, an assertion is deemed 'frivolous' when 'no rational argument can be advanced in its support, or it is not supported by any credible evidence, or it is completely untenable.'" United Hearts, L.L.C. v. Zahabian, 407 N.J. Super. 379, 389 (App. Div.) (quoting First Atl. Fed. Credit Union v. Perez, 391 N.J. Super. 419, 432 (App. Div. 2007)), certif. denied, 200 N.J. 367 (2009).

The nature of litigation conduct warranting sanctions under this rule has been rather strictly construed. Pressler & Verniero, Current N.J. Court Rules, comment 2 on R. 1:4-8 (2011); see also Wyche v. Unsatisfied Claim & Judgment Fund, 383 N.J. Super. 554, 560 (App. Div. 2006). Accordingly, Rule 1:4-8 sanctions will not be imposed against an attorney who mistakenly files a claim in good faith. Horowitz v. Weishoff, 346 N.J. Super. 165, 166-67 (App. Div. 2001); see also Perez, supra, 391 N.J. Super. at 432 (holding that an objectively reasonable and good faith belief in the merits of a claim precludes an attorney's fee award); Wyche, supra, 383 N.J. Super. at 560-61 (holding that a legitimate effort to extend the law on a previously undecided issue precludes the award of sanctions); K.D. v. Bozarth, 313 N.J. Super. 561, 574-75 (declining to award counsel fees where there is no showing that the attorney acted in bad faith).

However, "'continued prosecution of a claim or defense may, based on facts coming to be known to the party after the filing of the initial pleading, be sanctionable as baseless or frivolous even if the initial assertion of the claim or defense was not.'" United Hearts, supra, 407 N.J. Super. at 390 (quoting Iannone v. McHale, 245 N.J. Super. 17, 31 (App. Div. 1990)). Rule 1:4-8(a)(3) compels the attorney's withdrawal of a pleading where the factual allegations have no, or are not likely to have, evidentiary support.

We consider the imposition of Rule 1:4-8 counsel fee sanctions under the abuse-of-discretion standard. Ibid. "An 'abuse of discretion is demonstrated if the discretionary act was not premised upon consideration of all relevant factors, was based upon consideration of irrelevant or inappropriate factors, or amounts to a clear error of judgment.'" Ibid. (quoting Mansone v. Levine, 382 N.J. Super. 181, 193 (App. Div. 2005)).

Based on our review, we conclude the judge mistakenly exercised his discretion in denying defendants' motion for sanctions. Although plaintiff's counsel may have acted in good faith when he filed the complaint, he did not do so when he obtained the default and filed opposition to the motion to vacate and the summary judgment motion. Counsel knew the claim had no, and was not likely to have, legal or evidential support whatsoever, yet he continued to prosecute it. His conduct was frivolous, warranting sanctions pursuant to Rule 1:4-8 for the reasonable attorney's fees and costs defendants incurred from the date of the filing of the motion to vacate to the grant of summary judgment.

Reversed and remanded for further proceedings consistent with this opinion. We do not retain jurisdiction.

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