On certification to the Superior Court, Appellate Division, whose opinion is reported at
The opinion of the court was delivered by: Justice Hoens
(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).
Kent Motor Cars, Inc. d/b/a Honda of Princeton v. Reynolds and Reynolds, Co.
HOENS, J., writing for a unanimous Court.
In this appeal, the Court addresses (1) circumstances in which a court may impose the sanction of dismissal for violating the party joinder rule; and (2) whether claims that car dealers charged inflated fees for title documents falls within the meaning of a insurance policy's coverage for violations of "truth-in-lending or truth-in-leasing" laws.
Reynolds and Reynolds Company sold pre-printed "Buyer's Order" forms to Kent Motor Cars and Sports and Specialist Cars (collectively, the Dealerships). In an earlier class-action lawsuit (the Wilson action), the Wilson plaintiffs sued the Dealerships, alleging violations of the Consumer Fraud Act (CFA) and Truth-in-Consumer Contract, Warranty and Notice Act (TCCWNA) by failing to disclose license and registration fees, charging inflated fees, and using a form in which the text size of a required notice about pre-delivery/document service fees was smaller than required by Motor Vehicle Sales Practices (MVSP) regulations. Although the Dealerships knew that the third claim referred to the Reynolds forms, their answer in Wilson did not identify Reynolds as a potentially liable party that should be joined as required by Rule 4:5-1(b)(2). The court granted partial summary judgment in favor of the Wilson plaintiffs based on overcharges and the regulatory claim. During settlement discussions, the Dealerships raised concerns that Reynolds should have been joined, and the Wilson plaintiffs argued that issue should have been raised earlier. The Dealerships continued discussions without impleading Reynolds and eventually agreed to settle.
The Dealerships then filed the complaint against Reynolds in this case, alleging that the required notice concerning pre-delivery/documentary service prices in its "Buyer's Order" forms violated regulations, giving rise to one of the claims in Wilson. The Dealerships demanded that Reynolds indemnify them for all costs, losses, and counsel fees, and that those amounts be trebled under the CFA. Meanwhile, the Wilson court approved the settlement agreement and entered final judgment, which did not apportion settlement amounts among the claims. Reynolds then moved for summary judgment in this case. The trial court granted the motion, concluding that the Dealerships' failure to comply with Rule 4:5-1(b)(2) in the Wilson action "substantially prejudiced" Reynolds. The Dealerships filed an amended complaint in this case asserting coverage claims against their insurer, Universal Underwriters Group, arguing that they were entitled to a defense and indemnity relating to the Wilson claims. Under the policy, coverage for Statute and Title Errors and Omission (STEO) is limited to defense and indemnification relating to customer claims "arising out of . . . an alleged violation . . . of any federal, state or local . . . truth-in-lending or truth-in-leasing law." The trial court granted summary judgment in favor of Universal, finding that none of the Wilson litigation claims was based on a violation of a "truth-in-lending" or "truth-in-leasing" law.
The Appellate Division reversed the judgment in favor of Reynolds and remanded those claims to the trial court, and it affirmed the dismissal of the coverage claims against Universal. 412 N.J. Super. 1 (App. Div. 2010). The panel noted that under Rule 4:5-1(b)(2), a court may not dismiss a party's action based on its failure in a prior action to provide notice of potentially liable parties unless that failure was "inexcusable" and the undisclosed party's right to defend the later action is "substantially prejudiced." The panel found that Reynolds was not "substantially prejudiced" by the Rule violation. The Appellate Division also found that the Wilson claims were based on "general consumer protection laws" and not related to leasing or financing, and thus did not fall within the STEO coverage of the Universal insurance policy. The Court granted the parties' cross-petitions for certification. 203 N.J. 92 (2010).
HELD: (1) Because the Dealerships seek trebling of counsel fees and damages that were already trebled in Wilson, allowing the CFA claim to proceed following an inexcusable violation of Rule 4:5-1(b)(2) will result in substantial prejudice to Reynolds; and permitting the contribution claim will allow for fair compensation and prevent Reynolds from avoiding responsibility for an alleged regulatory violation. (2) Because the claims in Wilson did not relate to leasing or financing, they did not give rise to a duty to defend within the meaning of the Universal policy's coverage for violations of "truth-in-lending or truth-in-leasing" laws.
1. The preference that related claims and matters among related parties be decided in the same case resulted in the Entire Controversy Doctrine, which seeks to ensure fairness to parties and economy of judicial resources. Significant changes in 1998 included adoption of Rule 4:5-1(b)(2). The Rule requires parties to identify any non-party who should be joined or might have "potential liability" to a party. The court decides whether to compel joinder. The court may impose "an appropriate sanction" for failure to disclose -- including dismissing a later action against a party whose existence was not disclosed if the failure was "inexcusable" and the undisclosed party's right to defend was "substantially prejudiced" by not having been identified in the prior action. (pp. 18-23)
2. Cases interpreting the phrase "substantial prejudice" have equated it with loss of witnesses and evidence. As used in Rule 4:5-1(b)(2), the phrase is consistent with the preference for addressing disputes on the merits and dismissing cases only if lesser sanctions are inadequate. The Dealerships' destruction of e-mails generated during the Wilson case falls short of "substantial prejudice." They will bear the burden of proving that the Reynolds form proximately caused damages and how the settlement amounts and attorneys' fees are attributed to the form and the Wilson regulatory claim rather than to other claims. To the extent the e-mails might have been favorable to Reynolds, spoliation remedies can prevent the Dealerships from benefiting from their destruction of information. (pp. 23-29)
3. Permitting the Dealerships' CFA claim to proceed equates with "substantial prejudice." If Reynolds had been joined in Wilson, its liability would have been limited to a portion of damages, trebled under the CFA, and a portion of counsel fees associated with the claim against Reynolds for a regulatory violation. By ignoring the Rule and filing a successive CFA claim, the Dealerships seek from Reynolds all of their damages and counsel fees incurred in Wilson, and they seek trebling of both under the CFA. The Court cannot endorse a plan to permit trebling of damages already trebled. However, the claim for contribution, which may fairly compensate a party, may be pursued without causing such prejudice because the Dealerships must prove what parts of the Wilson settlement and attorneys' fees are attributable to Reynolds' form. Thus, although the violation of Rule 4:5-1(b)(2) was inexcusable and it would have been more efficient to address the contribution claim in Wilson, to the extent that its form violated regulations, dismissal of the entire complaint would unjustly allow Reynolds to avoid any responsibility. (pp. 29-33)
4. The Dealerships also challenge dismissal of their claims against Universal for defense and indemnity. When the factual allegations in the complaint correspond with the coverage language of the policy, the duty to defend arises. It is the nature of the claim asserted, rather the litigation's possible outcome, that governs that duty. (pp. 33-36)
5. In Wilson, the complaint alleged the Dealerships made misrepresentations to customers by overcharging license and registration fees, charging a misleading documentary fee, and using an improper form. Those claims were tied to the CFA, TCCWNA, and MVSP regulations. Contrary to the Dealerships' argument, those general purpose laws do not advance objectives similar to truth-in-lending and truth-in-leasing laws. The latter are intended to ensure that certain information is provided when extending credit. In the Wilson complaint, none of the claims were directed at credit, leasing, financing, or "truth-in-lending" or "truth-in-leasing" laws. Here, coverage turns on the meaning of "truth-in-lending or truth-in-leasing law" in the policy. Because the Wilson claims attacked the Dealerships' sales practices and did not relate to leasing, financing, or extending credit, the Wilson complaint did not raise a covered claim and Universal was not obligated to defend or indemnify under the policy's clear language. (pp. 36-41)
The judgment of the Appellate Division reversing the grant of summary judgment in favor of defendant Reynolds and Reynolds Company is AFFIRMED IN PART and REVERSED IN PART;the judgment affirming the grant of summary judgment in favor of defendant Universal Underwriters Group is AFFIRMED; and the matter is REMANDED to the trial court for further proceedings consistent with the Court's opinion.
CHIEF JUSTICE RABNER, JUSTICES LaVECCHIA and ALBIN, and JUDGE STERN (temporarily assigned) join in JUSTICE HOENS's opinion. JUSTICES LONG and RIVERA-SOTO did not participate.
JUSTICE HOENS delivered the opinion of the Court.
These consolidated appeals present this Court with two discrete questions that have arisen as a result of separate, but related, litigation among the parties. The first of those two questions arose in the context of a dispute between a group of car dealers and a company that supplied the dealers with pre-printed forms to be used when selling cars to customers. That dispute raises issues about the meaning and intent of the party joinder rule that was adopted as part of the evolution of our Entire Controversy jurisprudence. More specifically, it requires this Court to address the scope of sanctions that our trial courts are authorized to impose for violations of the party joinder rule and the circumstances in which imposition of those sanctions is appropriate.
The second dispute also involves the car dealers, but relates to the extent of insurance available to them under their "Statute and Title Errors and Omissions" (STEO) coverage. In resolving that dispute, we address the meaning of the policy's coverage for violations of "truth-in-lending or truth-in-leasing" laws in the context of the claims made against these car dealers by their customers for having charged inflated fees for securing title documents.
Although there are some facts that are relevant to both aspects of this appeal, the legal analysis is entirely separate. We begin, therefore, with the facts that are relevant to the party joinder claims.*fn1
Plaintiff Kent Motor Cars, Inc. is an automobile dealer doing business as Honda of Princeton, an entity that primarily sells, leases, and services Honda vehicles. Plaintiff Sports and Specialist Cars, Inc. is an automobile dealer that primarily sells, leases, and services Saab vehicles. Plaintiff Robert Burt is an individual who has an ownership interest in the two dealerships and who also serves as the general manager of Honda of Princeton. For purposes of these appeals, there are no distinctions to be drawn among these corporate and individual plaintiffs, as a result of which we refer to them collectively as the Dealerships.
Defendant Reynolds and Reynolds Company is a consulting and management-support firm that provides a variety of goods and services to automobile dealers and manufacturers. Included among the goods and services it sells to automobile dealers are pre-printed forms used in connection with motor vehicles sales. During the timeframe that is relevant to this dispute, the Dealerships purchased "Buyer's Order" forms from Reynolds.
Although the issues before this Court relate directly to the contractual and business relationships between the Dealerships and Reynolds, the dispute between the parties finds its roots in an earlier class action litigation brought by others against the Dealerships. As such, a brief explanation of the facts and the procedural history of that earlier matter is an essential underpinning for the dispute now before this Court.
In 2003, Henry Wilson, personally and as the representative of a putative class, sued the Dealerships (the Wilson action), alleging that the Dealerships had violated the Consumer Fraud Act (CFA), N.J.S.A. 56:8-1 to -20, and the Truth-in-Consumer Contract, Warranty and Notice Act (TCCWNA), N.J.S.A. 56:12-14 to -18. The Wilson complaint was based on three specifically-alleged violations: (1) overcharging customers and failing to disclose license, title, and registration fees; (2) charging a deceptive and misleading "Documentary Fee" that included charges for services that were not performed or the value of which was inflated; and (3) utilizing a form in which a required notice about fees was printed in a font size smaller than that required by the applicable regulation.
From the outset of the Wilson action, the Dealerships knew that the third claim, asserting a regulatory violation based on the font size of the forms being used, referred to the "Buyer's Order" forms they had purchased from Reynolds. The specific allegation in the Wilson complaint relating to the Reynolds form was that the language advising automobile purchasers about their right to be given itemized prices for each pre-delivery service and documentary service was not sufficiently prominent, and that it therefore violated two Motor Vehicle Sales Practices (MVSP) Regulations in effect at the time the Wilson plaintiffs purchased cars from the Dealerships. See N.J.A.C. 13:45A-26B.2(a)(1)(iii), -26B.2(a)(2)(iii).*fn2 That language, in relevant part, advised as follows:
YOU HAVE THE RIGHT TO A WRITTEN ITEMIZED PRICE FOR EACH SPECIFIC DOCUMENTARY AND PRE-DELIVERY SERVICE WHICH IS TO BE PERFORMED.
THE AUTOMOTIVE DEALER MAY NOT CHARGE FOR PRE-DELIVERY SERVICES FOR WHICH THE AUTOMOTIVE DEALER IS REIMBURSED BY THE MANUFACTURER.
Not long after the Wilson complaint was filed, the Dealerships were advised by the New Jersey Coalition of Automotive Retailers (NJCAR), a trade association to which the Dealerships belonged, that the font size on the Reynolds form was smaller than the regulations required. In spite of their knowledge that one of the three claims upon which the Wilson plaintiffs relied to support their CFA claim rested on the Reynolds form, the answer that the Dealerships filed and served in Wilson did not identify Reynolds as a party that was potentially liable and therefore should be joined as required by Rule 4:5-1(b)(2). Moreover, the Dealerships made no effort to assert a claim against Reynolds in the Wilson action.
The Wilson action proceeded for two more years until the trial court, in June 2005, granted partial summary judgment in favor of the Wilson plaintiff class. The court's Order identified the overcharges and the regulatory violation arising from the form's inadequate font size as its bases for granting relief. Immediately after the grant of partial summary judgment, the parties in Wilson began settlement discussions. At about that time, the Dealerships retained new counsel to represent them and it was the new attorney who first raised an issue about whether Reynolds should be participating in the Wilson action. In particular, in the context of extending a settlement offer to the Wilson plaintiffs late in August 2005, the new counsel for the Dealerships wrote:
Reynolds & Reynolds probably should have been imple[a]ded into this action and we intend upon doing so shortly. Our commitment to settling this matter in part hinges upon your commitment that plaintiffs [the class members] will consent to our imple[a]ding Reynolds & Reynolds (although frankly, I'd rather litigate against them in an independent action but may be required to bring them in as a third-part[y] defendant as a result of whatever is left of the entire controversy doctrine.)
The attorneys representing the Wilson plaintiffs had several responses to the question of participation by Reynolds. In short, the Wilson plaintiffs argued that the issue should have been raised far earlier, that adding Reynolds as a party would "drastically change our position regarding settlement," and that they "would seek that additional cash to be paid directly to class members" if the Dealerships secured a contribution from Reynolds based on the inadequate font size.
Rather than implead Reynolds, the Dealerships proceeded with their settlement negotiations, eventually agreeing in principle to the terms of a settlement with the Wilson plaintiffs on September 16, 2005. As soon as that agreement had been made, the Dealerships filed their complaint against Reynolds*fn3 in this case. The complaint alleged that the notice of the buyer's right to written itemized prices for each pre-delivery and documentary service in the "Buyer's Order" forms purchased from Reynolds violated the font-size requirement, see N.J.A.C. 13:45A-26B.2(a)(1)(iii), -26B.2(a)(2)(iii), and therefore gave rise to one of the Wilson claims as to which the court had granted summary judgment. The Dealerships demanded that Reynolds indemnify them for all of their costs and losses in the Wilson action, together with interest and counsel fees. Moreover, the Dealerships demanded that all of those damages be trebled pursuant to the CFA. Unlike their first-filed pleading in Wilson, the Dealerships included in the complaint in this action the required certification, see R. 4:5-1(b)(2), advising that the "matter in controversy" was related to the then-still-pending Wilson action. Reynolds filed its answer to the complaint in this matter on November 28, 2005, but did not attempt to intervene in Wilson.
A formal settlement agreement in the Wilson action was executed on November 8, 2005, and approved by the trial court, see R. 4:32-2(e)(1)(A), in March 2006. On June 12, 2006, the court entered final judgment in the Wilson action. Neither the settlement nor the final judgment in Wilson undertook to apportion the agreed-upon settlement amounts among the various claims that the Wilson plaintiffs had raised.
In December 2007, Reynolds moved for summary judgment in this matter, arguing that the failure of the Dealerships to comply with Rule 4:5-1(b)(2) in the Wilson action barred them from any recovery. The trial court granted that motion, expressing its reasoning in a lengthy written opinion. The court analyzed three key questions, considering whether the complaint was a "successive action," whether the Dealerships' failure to comply with the Rule was inexcusable, and whether Reynolds had been "substantially prejudiced" by the Dealerships' failure to comply with the notice requirements imposed by the Rule. Because only the ...