January 30, 2012
LOUISE A. DAVIDOWSKI, PLAINTIFF-APPELLANT,
ALAN DAVIDOWSKI AND GAIL DELLAIRA, DEFENDANTS-RESPONDENTS.
On appeal from Superior Court of New Jersey, Chancery Division, Burlington County, Docket No. C-000055-09.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued October 24, 2011
Before Judges Sabatino, Ashrafi and Fasciale.
Plaintiff Louise Davidowski appeals from dismissal at trial of her cause of action for fraud. Defendants are her son, Alan Davidowski, and his friend, Gail Dellaira, who is a realtor. Louise alleged that Alan*fn1 and Dellaira defrauded her of about $125,000 by means of a sham private mortgage and note to Dellaira executed near the time that her husband, Henry Davidowski, died. Louise also claimed that Alan had promised to make her a beneficial co-owner of a home he purchased using proceeds from the sale of Louise's home after Henry's death.
During several days of testimony at trial, evidence was presented that Louise had filed a petition for bankruptcy soon after selling her home in 2005, and her debts had been discharged. In the bankruptcy petition, Louise had not listed a beneficial interest in Alan's property or a potential claim against Dellaira. Consequently, at the conclusion of Louise's case in chief, the trial judge dismissed her claims of fraud on grounds of judicial estoppel.
We must determine whether the doctrine of judicial estoppel was correctly applied in the circumstances of this case. If plaintiff can prove that Alan and Dellaira fraudulently procured a private mortgage on her former home, the bankruptcy filing may have been part of the same scheme, and Louise's creditors may be the innocent victims of the fraud. We now reverse the order dismissing Louise's complaint and remand for further proceedings to determine whether fraud was committed, which of the parties participated in the alleged fraud, whether the bankruptcy trustee has any interest in Louise's claim, and whether a remedy can be devised to correct wrongful conduct.
Louise is a widow in her seventies, retired from her employment as a maintenance worker for a municipal Buildings and Grounds Department. In July 2009, she filed a complaint against Alan in the Chancery Division seeking a constructive trust on proceeds from the sale of a house owned by Alan in which Louise had been living for several years until disputes arose and Alan allegedly forced her out. Dellaira was not a party in Louise's original complaint but was later added as a defendant in an amended complaint.
Louise claimed that Alan and Dellaira had fraudulently procured a private third mortgage and note for $125,000 on the Florence Township home she had owned for many years with her husband Henry. Dellaira was the named mortgagee. Louise claimed that she had no recollection of the mortgage and either her signature had been forged or she had been deceptively induced to execute the mortgage and note near the time of Henry's death in October 2004. She claimed she was defrauded of the equity in her home when the sham private mortgage was paid off to Dellaira at the time she sold her home in August 2005.
The Chancery judge considered the papers submitted and heard argument on an order to show cause, and then denied Louise's application for a constructive trust. Alan's property was sold and the proceeds of the sale were distributed without benefit to Louise. Louise's claim of fraud proceeded through pretrial discovery and came to trial before a different judge in October 2010. At the bench trial, counsel did not make opening statements, and our record does not otherwise clarify the remedies that Louise was seeking at the time of trial. It appears that the only available remedy was money damages from Alan and Dellaira.
The trial judge heard testimony from Louise, Alan, Dellaira, and Michael Nieschmidt, the attorney who had represented Louise in 2005 and 2006 for the sale of her house and for her bankruptcy petition. After Louise rested her case, the judge granted defendants' motion to dismiss the complaint on grounds of judicial estoppel.*fn2
A trial judge's authority to dismiss a cause of action at the close of a party's case is found in Rules 4:37-2(b) and 4:40-1. Under those rules, the judge must determine whether the evidence and all reasonable inferences drawn from that evidence can sustain a judgment in favor of the claimant. See R. 4:37-2(b); Zive v. Stanley Roberts, Inc., 182 N.J. 436, 441 (2005). If "reasonable minds could differ," the motion to dismiss must be denied. Sons of Thunder v. Borden, Inc., 148 N.J. 396, 415 (1997); Dolson v. Anastasia, 55 N.J. 2, 5 (1969).
On the other hand, "when the proof of a particular fact is so meager or so fraught with doubt that a reasonably intelligent mind could come to no conclusion but that the fact did not exist[,]" the court may grant a motion to dismiss without further presentation of evidence. Ferdinand v. Agric. Ins. Co., 22 N.J. 482, 493 (1956); see City Check Cashing, Inc. v. Mfrs. Hanover Trust Co., 166 N.J. 49, 64-65 (2001); cf. Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 532-40 (1995) (similar standards apply to a motion for dismissal under Rule 4:37-2(b) and a motion for summary judgment under Rule 4:46-2(c), including whether the evidence "'is so one-sided that one party must prevail as a matter of law'" (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106 S. Ct. 2505, 2512, 91 L. Ed. 2d 202, 214 (1986))). A trial court must take into consideration the entirety of testimony from a witness rather than isolated excerpts favorable to one party or the other on a motion to dismiss. See Ritondo v. Pekala, 275 N.J. Super. 109, 111 (App. Div.), certif. denied, 139 N.J. 186 (1994).
On appeal, we apply the same standard as the trial judge in considering dismissal of claims. RSB Lab. Servs., Inc. v. BSI Corp., 368 N.J. Super. 540, 555 (App. Div. 2004). That is, we conduct plenary review of the record and consider de novo whether a claim should have been dismissed under Rules 4:37-2(b) or 4:40-1.
We will recount in some detail the evidence presented in Louise's case in chief. The private third mortgage and note to Dellaira were dated September 30, 2004, just two weeks before Henry's death and at a time when Henry was hospitalized with a deteriorating heart condition. Louise was the only named mortgagor; Henry was not named in the documents although he was alive on that date and an owner of the Florence Township home.
Dellaira testified about the circumstances of obtaining the mortgage. She had met Henry in 1997 at the site of a new housing development where Alan was having a house built. She testified that soon after becoming acquainted with Henry, she began to lend him large sums of cash. Over the next six years, she testified, she lent Henry more than $125,000 in cash. She had no documents as evidence of these loans. She claimed Henry and Louise spent the cash gambling at Atlantic City casinos and for other purposes unknown to her.
Dellaira had no business dealings with Henry or Louise, and she did not actively socialize with them. She had a passing acquaintance with Louise and had seen her "a handful" to a dozen times over the years, often exchanging only a greeting. She would see Henry more often, and he would frequently ask her if she had extra cash to lend. She testified that she kept cash in a box in her home and at times made cash loans to friends. Her husband was not aware of the loans to Henry at the time she was making them, although she and her husband had a close relationship. She was not concerned about being repaid because Henry had told her his Florence Township home would be sold in the future and he would pay her back from the proceeds of the sale. She considered the loans to be secured by his promise.
Dellaira testified that while Henry was hospitalized in September 2004, he instructed her to prepare a mortgage and note for Louise to execute as security for the loans. Dellaira had the mortgage documents prepared, and Louise executed them before a notary on September 30, 2004.
Alan testified that he had no knowledge of the mortgage until after Henry died, although he was in daily contact with his parents at the time of Henry's hospitalization. Counsel for Louise questioned Alan to show that the printing of Louise's name under her signature on the mortgage resembled Alan's style of printing, using other documents in evidence for comparison. Alan denied he had printed Louise's name on the mortgage.
In her testimony, Louise denied knowledge of any cash loans to Henry and denied large gambling losses by her or Henry.*fn3
Louise claimed she did not even meet Dellaira until the time of depositions in this litigation. She had no recollection of executing the mortgage and note on September 30, 2004, and she asserted she was at Henry's bedside at a Philadelphia hospital on that date.
Louise also testified that Alan spoke to her about her debts, and the two went together shortly after Henry's death to consult with attorney Nieschmidt about her financial circumstances. They discussed her filing for bankruptcy, but Nieschmidt stated that she had equity in her home that would affect discharge of her debts in bankruptcy. They also discussed selling her home. She anticipated she would obtain net proceeds of about $80,000 to $90,000 after payment of the first and second mortgages, which totaled about $70,000 and were both to Wachovia Bank.
On November 10, 2004, four weeks after Henry's death, Alan accompanied Dellaira to the County Clerk's office to record Dellaira's private third mortgage on the Florence Township home of his parents. He testified at trial that he did so at Louise's request.
For eight months after the mortgage was recorded, checks on Louise's checking account were issued to Dellaira for $671.25 each in payment of the mortgage debt for the months of December 2004 through July 2005. Louise testified that Alan prepared the payments and, if the signatures and writing on the checks were actually hers, she wrote and signed the checks following his trusted advice.
In August 2005, Louise sold her Florence Township home. She was represented for the sale by attorney Nieschmidt. Alan's personal and business telephone and fax numbers, rather than Louise's phone number, appeared in Nieschmidt's file for the sale of the property. The proceeds of the sale were used to pay off the balances on all three mortgages. The payoff figure of $123,568 for the Dellaira mortgage was transmitted to Nieschmidt's office from Alan's business fax number. Alan denied in his testimony that he had obtained the payoff figure.
He claimed that Louise had provided it to him to fax to Nieschmidt.
Neither Louise nor Nieschmidt attended the closing, which was completed by the attorney for the buyers of the Florence Township property. From the sale, Louise received net proceeds of $7,889.99.*fn4 Louise testified that she was shocked by the small amount, and she complained vehemently to Nieschmidt that she had been "scammed." The defense countered her claim that she was unaware of the Dellaira mortgage and the resulting net proceeds of the sale by offering in evidence the "HUD 1 Uniform Settlement Statement" used for the closing. That document included the payoff for the Dellaira mortgage and the amount of net proceeds payable to Louise.
After selling her house on August 19, 2005, Louise moved into a home located in Mansfield Township that Alan had purchased for her use in early July 2005. At trial, Louise testified that she used a significant amount of her own money to make repairs and improvements on the Mansfield Township home before moving in. More significantly, she alleged that Dellaira transferred about $80,000 to Alan from the proceeds of the sale of her Florence Township home to fund the purchase of the Mansfield Township property. As evidence supporting that allegation, Louise pointed to a check for $24,500 from Dellaira to Alan's painting business issued on September 19, 2005, one month after the sale of the Florence Township property. Alan testified that he had personally painted Dellaira's entire 5,000 square-foot house in the several months before September 2005 and the check was payment for those services.
Louise also placed in evidence other checks on Dellaira's account made payable to Dellaira herself in amounts ranging from $5,000 to $9,500, dated from September 14, 2005 through March 22, 2006, and totaling more than $56,000. Counsel for Louise argued that these checks were evidence of cash transfers from Dellaira to Alan for the purpose of funding his purchase of the Manchester Township property. He argued that the mortgage to Dellaira was a sham intended to procure for Alan his mother's equity in her home, which was then converted into Alan's titled interest in the Mansfield Township home.
Alan contended that his purchase of the Mansfield Township home had preceded by several weeks the sale of Louise's Florence Township home, and so, it could not have been funded with proceeds from the subsequent sale. He testified that he had obtained a first mortgage and a home equity loan on other property he owned to pay for the Mansfield Township property. When questioned about whether the home equity loan had been paid off, Alan testified at trial that it had been paid but through funds from yet a different home equity loan on another property that he owned. In deposition, however, Alan had not mentioned the other home equity loan. Counsel for Louise argued at trial that Dellaira transferred a substantial portion of the proceeds she received from the sale of Louise's Florence Township home to Alan over several months, and Alan used those proceeds to repay the home equity loan he had obtained to purchase the Manchester Township property in his own name.
Dellaira denied transferring cash to Alan. She explained the checks payable to herself as supplying her with funds for cash payments she was in the habit of making to certain contractors and vendors. She claimed, for example, that she paid thousands of dollars in cash to the company that worked on the construction of her swimming pool and to a retailer from which she purchased two all-terrain vehicles. Counsel for Louise questioned her about other checks on her account made payable to the same swimming pool contractor and the same retailer. Dellaira testified that sometimes she paid them by check and sometimes in cash. She had no receipts for the cash payments she claimed. She relied on sales and work orders as evidence of her alleged cash payments.
Louise and Alan met again with attorney Nieschmidt about one month after the sale of Louise's home. Nieschmidt's services were retained to file a petition in bankruptcy on behalf of Louise. Nieschmidt provided a questionnaire, which Louise took home and answered with Alan's assistance. She answered "no" to questions about whether she had any interest in real estate and whether anyone owed her money or she had any claims against anyone. Relying on the answers to the questionnaire, Nieschmidt filed a petition for Louise in the United States Bankruptcy Court in the fall of 2005. Louise signed a declaration under penalty of perjury attesting to the accuracy of the schedules attached to the petition. A creditors' meeting was conducted in the United States Bankruptcy Court, see 11 U.S.C. § 341, at which time Louise again stated she had no interest in real estate and made no reference to a potential claim against Dellaira. The Bankruptcy Court entered judgment on February 24, 2006, discharging Louise's unsecured debts, which totaled about $82,000.
Louise lived at the Mansfield Township property from August 2005 until April 2009. She made monthly payments to Alan marked as "rent" in amounts about equal to the carrying expenses of that home, and she paid for routine repairs and maintenance. In her income tax returns during those years, she claimed she rented her residence, not that she owned it. These representations were contrary to the allegations of her Chancery Division complaint that she was a co-owner of the Mansfield Township property. She claimed an equitable interest in the property because she claimed Alan had orally agreed that the home would belong to both of them and because he had used proceeds from the sale of her Florence Township home to fund its purchase. As further support for that claim, she produced at trial a handwritten note dated May 2, 2008, and signed by Alan that stated: "I Alan Davidowski if I should die before Louise Davidowski, after my death she should pay off the mortgage on [the Mansfield Township property] and becomes the owner."
As a result of disputes with Alan, Louise moved out of the Mansfield Township home in April 2009. Alan listed the property for sale. Louise consulted an attorney and then filed her complaint alleging fraud.
Louise's claims in the Chancery Division were clearly inconsistent with her declarations in the bankruptcy proceedings. At least one set of factual assertions in the two courts had to be false.
The doctrine of judicial estoppel forecloses a party from making a factual assertion when: (1) the party made a contrary assertion in an earlier proceeding, and (2) that tribunal relied upon or accepted that contrary assertion. Kimball Inter'l, Inc. v. Northfield Metal Prods., 334 N.J. Super. 596, 606-07 (App. Div. 2000), certif. denied, 167 N.J. 88 (2001); see Ali v. Rutgers, The State Univ. of N.J., 166 N.J. 280, 287-88 (2000) (citing Kimball Inter'l with approval). "[A] party to litigation will not be permitted to assume inconsistent or mutually contradictory positions with respect to the same matter in the same or a successive series of suits." Scarano v. Cent. R.R. Co. of N.J., 203 F.2d 510, 513 (3d Cir. 1953).
Judicial estoppel, however, does not "bar every conceivable inconsistency" in a party's present and past assertions. Cummings v. Bahr, 295 N.J. Super. 374, 387 (App. Div. 1996). A "good explanation" for inconsistent positions may refute judicial estoppel. See Ryan Operations G.P. v. Santiam-Midwest Lumber Co., 81 F.3d 355, 358 (3d Cir. 1996).
The doctrine of judicial estoppel may be invoked when a prior inconsistent position was taken in bankruptcy proceedings. See Oneida Motor Freight, Inc. v. United Jersey Bank, 848 F.2d 414, 419-20 (3d Cir.), cert. denied, 488 U.S. 967, 109 S. Ct. 495, 102 L. Ed. 2d 532 (1988). The party invoking the doctrine need not have been a creditor or otherwise involved in the bankruptcy proceedings. Ryan Operations, supra, 81 F.3d at 359-61. Federal bankruptcy law requires that a debtor's "assets and liabilities" and "a statement of the debtor's financial affairs" be listed in the petition. 11 U.S.C. § 521(1). "[F]ull and honest disclosure" of this information is very important to disposition of the petition, but judicial estoppel is not automatically applicable in a subsequent proceeding because a litigant failed to list a claim. Ryan Operations, supra, 81 F.3d at 362. Citing precedents, the United States Court of Appeals for the Third Circuit has stated that judicial estoppel requires at least an inference that the failure to list a claim was because of "intentional wrongdoing," "deliberate inconsistencies," "knowing misrepresentation," or "a scheme to mislead the court." Id. at 362-63.
The New Jersey Supreme Court has cautioned that: "Judicial estoppel . . . is an extraordinary remedy that courts invoke only when a party's inconsistent behavior will otherwise result in a miscarriage of justice." State v. Jenkins, 178 N.J. 347, 359 (2004) (internal quotation marks omitted); see also Teledyne Indus., Inc. v. NLRB, 911 F.2d 1214, 1218 (6th Cir. 1990) ("Judicial estoppel is applied with caution to avoid impinging on the truth-seeking function of the court because the doctrine precludes a contradictory position without examining the truth of either statement."). In Ali, supra, 166 N.J. at 288, the Supreme Court stated: "courts must analyze each case by considering the totality of circumstances to determine whether the extraordinary remedy of estoppel should be invoked."
Similarly, this court has observed that judicial estoppel is a harsh remedy and should only be used when the integrity of the judicial process is undermined. Kimball Inter'l, supra, 334 N.J. Super. at 608. Inconsistent assertions typically undermine the integrity of the judicial process when a party is "playing fast and loose with the courts" to gain an advantage in litigation. Cummings, supra, 295 N.J. Super. at 387; see also Delgrosso v. Spang & Co., 903 F.2d 234, 242 (3d Cir.) (because of the threat to judicial integrity, "judicial estoppel is particularly appropriate in situations . . . where the party benefited from its original position"), cert. denied, 498 U.S. 967, 111 S. Ct. 428, 112 L. Ed. 2d 412 (1990).
Courts and commentators have also considered whether proof must be presented that the adverse party has been prejudiced by the inconsistent factual assertions. See Kimball Inter'l, supra, 334 N.J. Super. at 608 n.4. Our former Supreme Court succinctly formulated the doctrine of judicial estoppel in the following words: "The general rule is that a party who, with knowledge of the facts, has assumed a particular position in judicial proceedings, and has succeeded in maintaining that position, is estopped to assume a position inconsistent therewith to the prejudice of the adverse party." Brown v. Allied Plumbing & Heating Co., 129 N.J.L. 442, 446 (Sup. Ct.) (cited in Kimball Inter'l, supra, 334 N.J. Super. at 606), aff'd, 130 N.J.L. 487 (E. & A. 1943). Thus, application of the doctrine required a showing that the party against whom it was applied had "knowledge of the facts" and that the other party was prejudiced by the prior inconsistent position. While subsequent cases have not consistently applied both those requirements, the general admonition of our courts to apply the doctrine cautiously suggests that knowledge of the offending party and prejudice to the adverse party are relevant considerations.
In this case, there was a factual dispute as to Louise's knowledge of the relevant facts at the time her bankruptcy petition was filed, and there was clearly no prejudice to Alan and Dellaira from Louise's factual assertions in the Bankruptcy Court. Louise asserted that the bankruptcy petition was prepared upon the advice of Alan and with his assistance. She claimed she was unaware that her beneficial interest in the Mansfield Township property should be listed, or that she had a viable claim at that time against Dellaira.
Moreover, the discharge of her debts did not place Alan and Dellaira at any disadvantage in the current litigation. In fact, they likely benefited from Louise's failure to make full disclosure in the bankruptcy proceedings because the recent payoff of the questionable private mortgage to Dellaira was not examined in those proceedings.
Although the evidence as a whole could lead one to conclude that
Louise knowingly participated in making false assertions before the
Bankruptcy Court, and she should justifiably be estopped from
recovering in this case, the effect of dismissing her cause of action
only benefits the other alleged perpetrators of the fraud.*fn5
Where the doctrine of judicial estoppel may benefit those who
engaged in a fraud related to the same inconsistent assertions, "no
compelling circumstances or injustice" warrant the court's "invoking
the doctrine." Ali, supra, 166 N.J. at 288-89.
Here, the appropriate course of action would have been for the trial court to continue the trial and determine from all the evidence whether fraud was proven, and if so, who participated in the fraud. Alternatively, the court could find from all the evidence that fraud was not proven and that Louise in fact had no interest in property or claim against Alan and Dellaira.
On the factual record we have recited, defendants' motion to dismiss should have been denied, and the trial court should have completed the presentation of evidence and decided contested factual issues - including whether the mortgage to Dellaira was valid security for undocumented cash loans or whether it was knowingly and fraudulently used by some or all the parties to conceal Louise's assets from her creditors.
If the mortgage was fraudulent, so may have been the bankruptcy filing. The bankruptcy may have been part of an overall scheme, devised or assisted by Alan, to avoid the claims of his mother's creditors and to preserve his own prospective interest in her assets. The evidence presented in Louise's case in chief showed Alan's active participation in disposing of Louise's interest in the Florence Township property and in her filing for bankruptcy. The trial court never considered what Alan's role may have been in presenting allegedly false information for Louise's bankruptcy filing.
It would also have been appropriate for the trial court, as a court of equity, to order Louise to notify the Bankruptcy Court that her 2006 discharge may have been wrongfully obtained. We shall not attempt to determine whether any recourse was still available in the bankruptcy proceedings, but it may be that a bankruptcy trustee could have moved to intervene in the Chancery matter, or to reopen Louise's 2006 bankruptcy case for the benefit of her creditors.*fn6
As we have stated, on a motion to dismiss under Rules 4:37-2(b) and 4:40-1, the trial court must view the evidence most favorably to the party whose claims may be dismissed. Here, the trial court erred in relying in part on a one-sided credibility finding against Louise. Although the testimony of Dellaira was highly suspect and inherently incredible, the judge accepted as an "unrebutted" fact her claim that Henry had instructed her while in the hospital to prepare a mortgage and note for Louise to execute. At the same time, the judge neglected to view favorably Louise's testimony that either her signature had been forged or that she had been unwittingly induced to execute the mortgage documents. He found as a fact that Louise had signed the mortgage documents, and he concluded that her signature was sufficient for enforcement of the mortgage and note.
We do not sit as a court making credibility determinations. We note, however, that credibility of the three parties was hotly contested in this trial. The trial judge's credibility findings, unfavorable to Louise's claims, appear to have derailed the appropriate analysis of defendants' motion to dismiss. At that stage of the proceedings, the court should have granted Louise favorable inferences and accepted the credibility of her testimony that she was not aware of any omission in her bankruptcy petition. Relevant to the issue of judicial estoppel, Louise's assertion was not inherently incredible that Alan advised her in completing the bankruptcy questionnaire and filing the petition, and that she relied upon his advice for that and other financial matters. In the factual circumstances of this case, Louise's claims of ignorance and Alan's participation should have led the court to deny the motion to dismiss, at least until the court had heard the entire case and could appropriately make relevant findings of fact.
We conclude that the doctrine of judicial estoppel should not have been applied at the conclusion of Louise's case in chief, and that Louise's complaint should not have been dismissed.
On remand, the trial court shall initially determine whether the bankruptcy trustee has any interest in the outcome of this litigation. The court shall conduct further proceedings consistent with our conclusions and determine whether Louise proved her claims of fraud. If fraud is proven, the court shall next consider the role of each party in the commission of the fraud, including whether Louise may have knowingly participated in the concealment of her assets from the Bankruptcy Court and her creditors. The court shall consider any resolution of the dispute and remedies that may benefit the victims of fraud. We make no determination whether a new trial is warranted or whether the prior trial proceedings may be reopened and continued. We leave to the discretion of the Chancery Division to determine what further proceedings are necessary to resolve the case.
Reversed and remanded. We do not retain jurisdiction.