March 13, 2012
JACK WHITMAN AND JOAN WHITMAN, PLAINTIFFS-APPELLANTS,
HAROLD D. HERBERT, WILLIAM J. HERBERT, AND DALLENBACH SAND COMPANY, INC., DEFENDANTS-RESPONDENTS.
JACK WHITMAN, PLAINTIFF-APPELLANT,
HAROLD D. HERBERT AND WILLIAM J. HERBERT, DEFENDANTS-RESPONDENTS
On appeal from the Superior Court of New Jersey, Chancery Division, Middlesex County, Docket Nos. C-252-07 and F-35185-07.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Submitted January 11, 2012 -
Before Judges Fuentes, Graves, and Harris.
These consolidated appeals involve a dispute regarding the performance of a settlement agreement that ended an earlier round of litigation. In 2004, through the efforts of a mediator and the coercive enforcement of the Chancery Division, the parties resolved their myriad differences over the control of several closely-held businesses. Among the commitments undertaken by defendants as part of the settlement was their promise to sell specific real estate in order to pay plaintiffs for their interests in the businesses. To secure this obligation, defendants executed mortgages on the affected parcels of real estate. With the properties still unsold after nearly three years, plaintiffs commenced a new action in the Chancery Division (Docket No. C-252-07) seeking, among other things, specific performance of the settlement agreement.
Separately, a mortgage foreclosure action (Docket No. F-35185-07) was commenced based upon the claim that defendants had incurably violated several covenants in the mortgage. The motion court granted summary judgment in favor of defendants, dismissing both actions. We affirm in part, reverse in part, and remand for further proceedings.
Plaintiff Jack Whitman*fn2 and defendants Harold D. and William J. Herbert (collectively, the Herberts) were affiliated in the ownership of several parcels of land and business enterprises, including defendant Dallenbach Sand Company, Inc. (Dallenbach). Dallenbach owned acreage in Monroe Township (the Dallenbach property). Whitman and the Herberts also individually owned one-third interests in contiguous land (the Cranbury Road property). The approximate area of both parcels (the properties) is 148.3 acres. Although the properties are zoned for residential uses, because they consist of arable land, they were mostly used for farming operations.
Adjacent to the properties is land commonly referred to as the JIS Landfill Site (the JIS site). This site includes a landfill that has contaminated the nearby ground water, and which has been listed as a federal superfund site since 1983. As such, it is under the supervision of the New Jersey Department of Environmental Protection (DEP) and the United States Environmental Protection Agency (EPA).
During the JIS site's implementation of a mandated remediation plan, it was discovered that ground water contamination had migrated underneath approximately one-third of the parties' properties. Remediation efforts have been ongoing since 1995 to stem further degradation of ground water and to extract and treat the ground water itself. More recently, a revised remediation plan -- called biosparge treatment technology -- was initiated to replace the extract-and-treat remedy, which is expected to foster the biodegradation of contaminants in place.
Starting in 2002, Whitman and the Herberts became engaged in a series of lawsuits in the Chancery Division, Somerset Vicinage, involving their common ownership interests. The parties subsequently agreed to mediate their disputes, which yielded a provisional settlement in July 2004.
The terms of the provisional settlement called for various transfers of the parties' ownership interests in jointly owned businesses. The relevant provisions provided that plaintiffs would give up their interests in Dallenbach, and Whitman agreed to transfer his individual interest in the Cranbury Road property. In exchange, defendants agreed to pay the "Whitman Family . . . a total of $11.0 million on an installment sale basis."
Under the provisional settlement, a first payment of $1.7 million would be made at the time real property referred to as the North End property was sold. The remaining $9.3 million was to be paid when both the Dallenbach property and Cranbury Road property were sold. To secure the $9.3 million expectancy, defendants agreed to execute mortgages on the two properties.
When the July 2004 mediation session ended, Whitman refused to sign the written settlement agreement because he wanted his financial advisors to review its tax implications. Over the next four months, the parties attempted to resolve the details of their provisional settlement.
In early August 2004, Whitman's attorney sent defendants' counsel a document entitled "Outline of Settlement Agreement Issues." It stated in relevant part:
5. With respect to the payment of the funds to the Whitmans at the closing of [the properties], the current structure has negative tax consequences in that the IRS will impute interest on the balance not carrying interest going forward. Since the Herberts will be gaining the value of the appreciation on the property, we need a provision in the agreement to ensure that the Herberts take appropriate timely steps to sell the property. In that regard, we require a provision whereby the unpaid balance would begin accruing interest at the prime rate compounded annually after a certain period of time if the property is unsold. We propose the time period prior to the obligation accruing interest as two years after the signing of the settlement agreement.
One week later, the Herberts rejected the demand for interest, but agreed to add a best efforts clause to the contract:
With respect to Item 5 which you also characterize as a tax problem, the Herberts are unwilling to add an interest provision to the Agreement. Although it is true they hope to enjoy the appreciation in the property, they are also taking all the risks and obligating themselves to incur all of the expenses. The Herberts will agree to add a best efforts clause regarding their development efforts regarding the [properties].
In November 2004, a revised settlement agreement was circulated that included a provision requiring the Herberts to use "reasonable best efforts" to locate a buyer and sell the properties. It also required the Herberts to fully cooperate with potential buyers, and to send bi-monthly letters to Whitman explaining what efforts were made to market and sell the properties.
In a response dated November 23, 2004, the Herberts' counsel rejected Whitman's proposed revisions, asserting that
(1) the case "already settled in July," and (2) post-July discussions were merely "to reach an agreement on the best wa[y] to implement that agreement." Regarding the duty-to-sell issue, counsel noted that "the Herberts have every financial incentive to sell the [properties] as soon as possible."
On December 1, 2004, defendants filed a motion in the Somerset vicinage to enforce the provisional settlement reached through mediation. Notwithstanding strong opposition to the motion, including a cross-motion to declare defendants in breach, the Chancery Division (without the benefit of an evidentiary hearing) granted the motion to enforce the provisional settlement, and denied the cross-motion. The court concluded that a contract existed as of July 22, 2004, because "the essential elements of what would be sold, transferred and amounts of compensation were agreed upon" even though "[i]t appear[ed] that mechanics were not totally fleshed out."
On April 20, 2005, the court directed Whitman and his wife -- plaintiff Joan Whitman -- to execute certain documents and accept mortgages as security from the Herberts to fulfill the terms and conditions of the July 22 settlement. It also directed that the proceeds from the sale of the North End property be distributed in accordance with the settlement. On May 12, 2005, the parties executed a stipulation of dismissal with prejudice. None of the parties appealed.
Before and after the settlement agreement was declared enforceable by the court, some efforts were made to sell the properties. Several prospective buyers expressed interest, before learning about the immediate environmental issues. The Herberts described contacts they had with potential developers who gave various reasons why deals could not be struck. For example, when Centex Homes and Ryan Homes/Somerset learned of the contamination, both did not want to purchase the properties at any price. Toll Brothers allegedly did not want to acquire the properties until the JIS site was taken off the list of superfund sites. Another real estate developer was reported as entering into a letter of intent with the Herberts towards the end of 2005, but cancelled the transaction in 2007 after discovering that the environmental issues supposedly made the procurement of insurance too expensive.
According to the Herberts, even with the deployment of the biosparge treatment technology, several years were needed to complete the remediation given the scope of the known environmental contamination. Moreover, they understandably did not want to sell the properties during a depressed real estate market.
Plaintiffs disputed the quality of the Herberts' selling efforts. They obtained several expert reports that opined, among other things, that the efforts to market the properties were half-hearted at best. At worst, the Herberts were accused of dissembling, delaying, and destroying the reasonable expectations of plaintiffs that the $9.3 million would be paid, in the Herberts' attorney's words, "as soon as possible."
On November 26, 2007, Whitman filed a complaint in the Chancery Division, Middlesex Vicinage, alleging that the Herberts had breached express terms of the mortgage on the properties, and also applying for an injunction to enjoin the Herberts from barring Whitman's entry onto the properties to make inspections and conduct environmental tests. The complaint outlined that in October 2007, Whitman had observed "a large fill area and several large mounds that appeared to contain gravel, sand and asphalt" on the Cranbury Road property. Believing the debris to contain hazardous materials, Whitman's son physically went to the parcel accompanied by environmental consultants and attempted to collect samples. He was barred from removing the samples by the Herberts with the assistance of the local police.
On December 6, 2007, the court ordered that a box of samples be delivered to the court and made available for testing by both sides. Additionally, the court granted Whitman the right to return to the property on a date certain to carry out further sampling and testing.
Whitman filed an amended complaint in late December, and a second amended complaint on January 30, 2008, which added Joan Whitman as a plaintiff and Dallenbach as a defendant. This pleading asserted five counts against defendants: breach of contract (count one); breach of the implied covenant of good faith and fair dealing (count two); declaratory judgment (count three); reformation (count four); and breach of mortgages (count five).
After defendants interposed their answers,*fn3 plaintiffs filed a motion for partial summary judgment as to the declaratory judgment count only. Defendants responded with separate cross-motions for summary judgment that sought to dismiss the entire second amended complaint.
On May 21, 2008, the Chancery Division issued a detailed forty-three page written opinion that dismissed counts one, three, four, and five, but denied the application as to count two. It also denied plaintiffs' motion for partial summary judgment as to count three. On June 6, 2008, an order memorializing the court's determination was filed.
In November 2008, William J. Herbert and Dallenbach filed a counterclaim against Whitman claiming tortious interference with prospective economic advantage and breach of the covenant of good faith and fair dealing.
Approximately one year later, in December 2009, William J. Herbert and Dallenbach filed another motion for summary judgment as to count two's claim of breach of the implied covenant of good faith and fair dealing. On February 17, 2010, the court granted the motion, explaining its reasons in a ten-page written opinion. Distilled to its essence, the court found "that [t]he evidence is not sufficient to permit a rational fact finder to find that defendants, in connection with the sale of the [properties], 'acted arbitrarily, unreasonably, or capriciously, with the objective of preventing [plaintiffs] from receiving their reasonably expected fruits under the contract.'"*fn4 On April 6, 2010, the court dismissed the counterclaim.
William J. Herbert and Dallenbach moved for counsel fees and expenses pursuant to Rule 1:4-8 and N.J.S.A. 2A:15-59.1. The court denied the motion on April 30, 2010, and confirmed that order in its May 7, 2010, five-page opinion. The appeal and cross-appeal ensued.*fn5
Shortly after commencing the foregoing action in equity, Whitman filed a separate complaint in foreclosure against the Herberts alleging that they had defaulted on obligations secured by the mortgage on the Cranbury Road property. He alleged that the Herberts allowed third parties to store fill and asphalt on the land, in breach of the mortgage. The Herberts filed separate answers denying the allegations.
In May 2008, William J. Herbert filed a motion for summary judgment.*fn6 In a sixteen-page letter opinion dated August 27, 2008,*fn7 the court granted the motion in part, dismissed the foreclosure remedy, and consolidated the only potentially viable claim -- the breach of the implied covenant of good faith and fair dealing -- with the other action. On March 23, 2010, the court entered an order dismissing all remaining counts of the complaint in foreclosure. This appeal followed.
Orders granting summary judgment pursuant to Rule 4:46-2 are reviewed de novo, and we apply the same legal standard employed by the Chancery Division. Canter v. Lakewood of Voorhees, 420 N.J. Super. 508, 515 (App. Div. 2011). In execution of our appellate function we consider, as did the motion court, "'whether the competent evidential materials presented, when viewed in the light most favorable to the non-moving party, are sufficient to permit a rational factfinder to resolve the alleged disputed issue in favor of the non-moving party.'" Advance Hous., Inc. v. Twp. of Teaneck, 422 N.J. Super. 317, 327 (App. Div. 2011) (quoting Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995)), certif. granted, ___ N.J. ___ (Jan. 24, 2012).
Similarly, when the legal conclusions of a motion court's Rule 4:46-2 summary judgment decision are reviewed on appeal, "'[a] trial court's interpretation of the law and the legal consequences that flow from established facts are not entitled to any special deference[,]' and, hence, an 'issue of law is subject to de novo plenary appellate review.'" Estate of Hanges v. Metro. Prop. Cas. Ins. Co., 202 N.J. 369, 382-83 (2010) (quoting City of Atlantic City v. Trupos, 201 N.J. 447, 463 (2010)).
The motion court's reasoning for dismissing plaintiffs' counts of breach of contract, declaratory judgment, and reformation was distilled as follows:
The claims alleged in the First, Third, and Fourth counts of the Second Amended Complaint all relate to the amount, timing, and security of payments under the settlement agreement, and assert purported "terms" that are not within the settlement agreement as previously construed by Judge Williams. This Court finds that the parties fully and fairly litigated, and Judge Williams decided, the scope of the parties' agreement regarding the amount, timing, and security of payments under the settlement agreement in the prior litigation. Accordingly, the First, Third, and Fourth Counts of the Second Amended Complaint are dismissed pursuant to the doctrine of collateral estoppel.
Whitman argues that all elements of this preclusionary doctrine were not met. Additionally, he claims that because the focus of the earlier determination in the Somerset vicinage was limited to determining whether enough essential terms were agreed upon to enforce a settlement, that court's abbreviated proceeding -- without the benefit of discovery or an evidentiary hearing -- does not deserve preclusive effect under Hernandez v. Region Nine Housing Corporation, 146 N.J. 645, 659-60 (1996). We disagree.
The doctrine of collateral estoppel bars relitigation of an issue that was determined in a prior action, generally between the same parties, involving a different cause of action. Ziegelheim v. Apollo, 128 N.J. 250, 265 (1992). One of its purposes is "'to promote efficient justice by avoiding the re-litigation of matters which have been fully and fairly litigated and fully and fairly disposed of.'" Lopez v. Patel, 407 N.J. Super. 79, 93 (App. Div. 2009) (quoting Kortenhaus v. Eli Lilly & Co., 228 N.J. Super. 162, 166 (App. Div. 1988)). Collateral estoppel is an equitable doctrine, and the decision whether it is fair to apply rests in the motion court's discretion. Gannon v. Am. Home Prod., Inc., 414 N.J. Super. 507, 530 (App. Div. 2010).
The party asserting the bar of collateral estoppel must establish the following factors:
(1) the issue to be precluded is identical to the issue decided in the prior proceeding; (2) the issue was actually litigated in the prior proceeding; (3) the court in the prior proceeding issued a final judgment on the merits; (4) the determination of the issue was essential to the prior judgment; and (5) the party against whom the doctrine is asserted was a party to or in privity with a party to the earlier proceeding. [First Union Nat'l Bank v. Penn Salem Marina, Inc., 190 N.J. 342, 352 (2007) (quoting Hennessey v. Winslow Twp., 183 N.J. 593, 599, (2005)).]
Even when these requirements are met, however, a court will not apply the doctrine if it would be unfair to do so. Olivieri v. Y.M.F. Carpet, Inc., 186 N.J. 511, 521-22 (2006). Although a court may decline collateral estoppel on equitable grounds even when the five elements are satisfied, if any factor is not satisfied, the inquiry ends. Perez v. Rent-A-Center, Inc., 186 N.J. 188, 199 (2006), cert. denied, 549 U.S. 1115, 127 S. Ct. 984, 166 L. Ed. 2d 710 (2007).
Whitman takes issue with the motion court's conclusion that four of the five elements required of collateral estoppel were demonstrated. Contrary to his assertions, those elements were satisfied. Under the first factor -- identity of issues -- the court must determine "whether there is substantial overlap of evidence or argument in the second proceeding; whether the evidence involves application of the same rule of law; whether discovery in the first proceeding could have encompassed discovery in the second; and whether the claims asserted in the two actions are closely related." First Union Nat'l Bank, supra, 190 N.J. at 353. Collateral estoppel may apply when there is high degree of similarity between the two actions. Ibid.
The motion court found the issues presented were highly similar to those considered three years earlier at the time the settlement agreement was validated. The court explained that plaintiffs' demand for a "best efforts" clause in the prior proceeding was virtually identical to their current request for a term requiring the Herberts to use "diligent and sustained efforts" to sell the properties in the present litigation. Likewise, the court found that plaintiffs' prior urging for the court to imply a term requiring the Herberts to pay interest if the properties were not sold in two years was closely related, "if not highly similar," to their current request for damages if the properties did not sell "within a reasonable period of time."
Moreover, the court found the existence of a substantial overlap in the evidence and arguments in the two proceedings. As an example, it observed that in both proceedings plaintiffs submitted certifications "rehashing the same story of what they believe to have occurred at the 2004 mediation and arguing as before, that the settlement agreement should not be enforced as written."
Whitman further argues that there was no equivalence of issues because the breach of contract and reformation claims in the present case arose after the earlier proceeding finished, and were the result of defendants' post-judgment inaction over a long period of years during which time defendants refused to sell the properties and pay the amount owed. This passage-of-time argument is unavailing. The relief sought in this case requires revisiting the same core issues of the settlement agreement's treatment of time and resolve, which were previously addressed and decided adverse to plaintiffs.
As part of that earlier effort, plaintiffs sought to inject an express provision requiring the Herberts to use "reasonable best efforts" to locate a buyer for, and to sell, the properties. In the present action, plaintiffs claimed the settlement agreement contemplated that the Herberts would undertake "diligent and sustained efforts" to sell these properties. The differences are purely semantic and the court appropriately viewed them as congruent under the law.
The second and third elements of collateral estoppel address whether the issues were actually litigated in the prior proceeding and whether a final judgment was entered. Id. at 354. Whitman argues that the first court decided the motion to enforce the settlement without the benefit of discovery, a plenary hearing, or oral argument. He contends, again, that the critical issues in the present proceeding had not yet arisen at that time. Moreover, in highly conclusory terms, he claims that a final judgment on the issue of whether the settlement agreement contained implied covenants was never entered. This latter argument ignores that all parties considered that matter to have been conclusively decided with all disputes resolved, and no one sought appellate review. Its finality cannot be doubted.
An issue is actually litigated when it is properly raised by pleadings or otherwise, is submitted for determination, and a decision is rendered. Velasquez v. Franz, 123 N.J. 498, 506 (1991) (citing Restatement (Second) of Judgments § 27 comment d (1982)). In both fora, all parties were represented by counsel and had ample opportunity to fully and fairly litigate any relevant issues. They also had the right to seek appellate review if it were honestly believed that an error had been committed. As the motion court found, the parties submitted extensive documentary evidence and legal argument in support of their respective positions, and had a fulsome opportunity to have their positions considered. If plaintiffs were truly aggrieved by the first court's failure to permit discovery, conduct an evidentiary hearing, or allow oral argument, those concerns should have been raised by appeal years earlier. This silence, at least until the present series of disputes arose, fortifies our view that the relevant issues were, in fact, actually litigated to a final conclusion.
Both sides relied on the earlier adjudication and set into motion certain aspects of performance under the auspices of the settlement agreement. This included the payment of the first monetary installment and the transfer of ownership interests in the businesses. Because this prior adjudication was "sufficiently firm to be accorded conclusive effect," it is considered a final judgment for purposes of issue preclusion. Cf. Hills Dev. Co. v. Twp. of Bernards, 103 N.J. 1, 59-60 (1986).
Regarding the fourth element, Whitman argues that the determination of whether the settlement agreement contained an implied covenant of reasonable time was not previously litigated or essential for the first court's decision to enforce the settlement agreement. This argument has no merit. While the existence of an implied covenant was not directly at issue in the enforcement action, the facts asserted were the same. Moreover, the determination of the issue of timing was essential to the decision in the first action.
We now turn to the gravamen of the second count: a breach of the implied covenant of good faith and fair dealing. Every contract entered into under the laws of this state contains an implied covenant of good faith and fair dealing. Kalogeras v. 239 Broad Ave., L.L.C., 202 N.J. 349, 366 (2010). The implied covenant of good faith and fair dealing "applies to settlements as it does to any other contract." Brundage v. Estate of Carambio, 195 N.J. 575, 608 (2008); see also Kaur v. Assured Lending Corp., 405 N.J. Super. 468, 475 (2009). "'Good faith'" imports "'standards of decency, fairness or reasonableness'" and "requires a party to refrain from 'destroying or injuring the right of the other party to receive' its contractual benefits." Iliadis v. Wal-Mart Stores, Inc., 191 N.J. 88, 109-10 (2007) (internal citations omitted). "The party claiming a breach of the covenant of good faith and fair dealing 'must provide evidence sufficient to support a conclusion that the party alleged to have acted in bad faith has engaged in some conduct that denied the benefit of the bargain originally intended by the parties.'" Brunswick Hills Racquet Club, Inc. v. Route 18 Shopping Ctr. Assocs., 182 N.J. 210, 225 (2005) (quoting 23 Williston on Contracts § 63:22, at 513-14 (Lord ed. 2002)). The covenant of good faith and fair dealing focuses on the performance and enforcement of a valid agreement more than it regulates contract formation. Id. at 224; see also Restatement (Second) of Contracts § 205 (1981) ("Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.").
In exercising discretionary authority as expressly authorized by an agreement, if a party does so "arbitrarily, unreasonably, or capriciously, with the objective of preventing the other party from receiving its reasonably expected fruits of the contract," the party taking the action may breach the covenant. Wilson v. Amerada Hess Corp., 168 N.J. 236, 251 (2001). The essential element in a claim of a breach of the good faith obligation is a finding of improper motive. "Without bad motive or intention, discretionary decisions that happen to result in economic disadvantage to the other party are of no legal significance." Ibid. The critical inquiry is whether the party exercised its contractual right arbitrarily and in bad faith in such a manner as to deprive the other party of the reasonably expected benefit of his or her bargain.
Where, as here, a pivotal issue in the case concerns an actor's state of mind, our courts are reluctant to grant or sustain summary judgment without a plenary hearing or trial unless the proofs concerning the state-of-mind issue are so one sided or conclusive to render such an evidential proceeding unnecessary. See, e.g., Cumberland Mut. Fire Ins. v. Beeby, 327 N.J. Super. 394 (App. Div. 2000); Prudential Prop. & Cas. Ins. Co. v. Karlinski, 251 N.J. Super. 457, 467 (App. Div. 1991).
The motion court's analysis of the Herberts' conduct does not survive our summary judgment jurisprudence. The record is replete with evidence suggesting foot-dragging, apathy, and outright obstructionism by the Herberts in their efforts to dispose of the properties in order to fund the settlement. That they presented reasonable explanations for the more-than-three-year delay does not conclusively disprove a breach. Where there are two sides to a dispute, both replete with competent evidence, summary judgment is not the appropriate means to decide such differences, even in the Chancery Division where a bench trial will ensue.
We by no means conclusively determine that the Herberts engaged in such untoward conduct in the first instance, or that it was intentionally designed to thwart plaintiffs' reasonable expectations under the settlement agreement. However, giving the non-moving parties the mandatory benefit of all reasonably favorable inferences in the record, we would not view it irrational if a trier-of-fact agreed with plaintiffs' assessment of the Herberts' inaction as being the product of an improper motive.
It is not enough to simply measure the Herberts' conduct under the lens of the arbitrary, capricious, and unreasonable standard. However, given the low threshold for such review, see D'Atria v. D'Atria, 242 N.J. Super. 392, 401 (Ch. Div. 1990), we consider it reasonably plausible that a fact finder would not be impelled to one, and only one, determination by this measure as well. Accordingly, it was improvident to grant summary judgment dismissing the claims of a breach of the implied covenant of good faith and fair dealing, even when an explicit time-for-performance provision was absent from the settlement agreement.
Plaintiffs are entitled to present their evidence and examine all relevant witnesses under oath before the court can be in a position to make principled conclusions regarding the elements of a breach of the implied covenant of good faith and fair dealing. We are not oblivious to the environmental condition of the properties and the effect that global (and local) economic forces have had on the lands' marketability. Nevertheless, we are not at all sanguine that the Herberts' resolve not to sell -- at a price dictated, in part, by the constraints of the settlement agreement -- can continue to resist the inexorable passage of time. As of this writing, the properties have remained unsold for almost eight years post-settlement. A plenary proceeding is required to determine whether, in fact, plaintiffs can prove that the delay was occasioned by a breach of implied covenant of good faith and fair dealing or by other means.
Whitman also takes issue with the dismissal of his foreclosure-related claims. The $4.95 million mortgage on the Cranbury Road property required the Herberts as mortgagors to pay to Whitman -- through Wachovia Bank, as the mortgagee -- "all amounts secured by this Mortgage upon the sale of the [Cranbury Road property] from the sale proceeds," and to "strictly perform" all of their obligations under the mortgage. It further provided that the Herberts must maintain the property in its present condition and use it "exclusively for farming." Moreover, under its terms, "neither [the Herberts] nor any tenant, contractor, agent or other authorized user of the [Cranbury Road property] shall use, generate, manufacture, store, treat, dispose of, or release any hazardous waste or substance on, under, or about the [Cranbury Road property]."
The mortgage also required the Herberts to authorize Whitman or his agents "to enter upon the [Cranbury Road property] to make such inspections and tests as [Whitman] may deem appropriate to determine compliance of the [Cranbury Road property] with this section of the Mortgage." Additionally, it required prompt compliance "with all laws, ordinances, and regulations," but allowed a thirty-day cure period, provided that, upon the occurrence of a default, Whitman could obtain a "judicial decree foreclosing [the Herberts'] interest in all or part" of the mortgaged land.
In 2007, Greenfield Builders, Inc. (Greenfield) purchased the land across the street from the Cranbury Road property and began construction of a warehouse. Greenfield sought permission from the Herberts to store clean aggregate on the Herberts' mortgaged land. The Herberts granted approval, and entered into an agreement to store approximately 300,000 tons of sand and gravel on a designated area comprising approximately ten percent of the Cranbury Road property. Farming operations continued elsewhere on the tract.
In June 2007, a Monroe Township zoning official notified the Herberts that the storage of fill on the Cranbury Road property violated the applicable zoning ordinance, and a summons was later issued. On September 11, 2007, Harold D. Herbert pleaded guilty to the local charge of not having a valid site plan because of the presence of the fill. The municipal court imposed a $150 fine in the expectation that the fill would be removed within sixty days.
On October 26, 2007, however, a Greenfield contractor deposited fill containing asphalt on the Cranbury Road property. The Herberts did not learn of this incident until October 31, 2007, when they received a telephone call asking if they had authorized the storage of this material. They proceeded to the property, where they found Whitman's son and two environmental consultants in the process of collecting samples. Police arrived and instructed that the samples be left at the site.
On November 5, 2007, plaintiffs, through counsel, notified defendants that their "failure . . . to allow removal of samples of the material being stockpiled on the property constitute[d] a default under the mortgages." They demanded access to the property to retrieve the samples.
Within days, the asphalt-laden fill was removed. Access to the property was provided by December 3, 2007. The remaining material dumped on the property by Greenfield was removed by the end of the year.
In his action for a foreclosure remedy, Whitman alleged failure to provide access, engaging in improper fill activities at the site, allowing hazardous materials to be dumped at the site, and violation of municipal ordinances and regulations. In its August 2008 opinion dismissing the foreclosure remedy with prejudice, the Chancery Division determined that all of the alleged defaults were remedied within the thirty-day cure period provided by the mortgage. The court further found that any "incurable defaults" were not material enough to impose the "harsh remedy" of foreclosure. Accordingly such a remedy was dismissed.
Foreclosure is an equitable remedy. Bank of N.Y. v. Raftogianis, 418 N.J. Super. 323, 362 (Ch. Div. 2010). Because equity abhors a forfeiture, it is not automatically available to a creditor in the face of every contractual breach. Sovereign Bank, FSB v. Kuelzow, 297 N.J. Super. 187, 198 (App. Div. 1997). In such cases, a court should apply traditional notions of fairness. Sanguigni v. Sanguigni, 197 N.J. Super. 505, 509-10 (Ch. Div. 1984). Thus, "whether a breach of the mortgage warrants the remedy of foreclosure involves the operation of equitable principles and is subject to the exercise of discretion by the court." Id. at 507.
The record substantially supports the court's findings that any defaults were cured within the period allowed by the mortgage. The court, therefore, properly dismissed the foreclosure complaint. See Totowa Sav. & Loan Ass'n v. Crescione, 144 N.J. Super. 347, 351 (App. Div. 1976) (holding that the trial court properly exercised its equitable jurisdiction to delay implementation of the harsh remedy of foreclosure so as to allow the parties to make satisfactory arrangements for payment of the amount due); Kaminski v. London Pub., Inc., 123 N.J. Super. 112, 116-17 (App. Div. 1973) (noting that the remedy of foreclosure could not be invoked for a default in the failure to pay taxes where payment was made prior to filing of foreclosure complaint, and no actual impairment of the security occurred); Sanguigni, supra, 197 N.J. Super. at 507 (recognizing that an appropriate equitable response to the defendants' failure to abide by a tax and insurance escrow clause was to specifically enforce the provision, not declare a forfeiture).
Next, Whitman contends that the Herberts engaged in spoliation of evidence by arranging for the removal and disposal of the foreign materials before further testing could take place. He again asserts that the destruction of this evidence constituted an incurable breach of the mortgage.
The motion court rejected this spoliation argument, as do we. For purposes of the summary judgment motion, the court assumed that there was spoliation and that the material removed from the property contained hazardous substances. Even so, it found that the Herberts had cured the defect, explaining that the undisputed facts showed that the storage of fill on the property had ceased, and that any hazardous materials had been removed. Moreover, environmental testing failed to reveal the presence of any contaminants on the site.
Defendants William J. Herbert and Dallenbach argue on cross-appeal that the Chancery Division erred by denying their request for attorneys' fees pursuant to the frivolous litigation statute, N.J.S.A. 2A:15-59.1, and Rule 1:4-8. They claim that Whitman engaged in misrepresentations and falsehoods, and that he acted in bad faith by filing the foreclosure complaint.
In its May 2010 opinion, the court concluded that "[p]laintiffs' pleadings were not frivolous as a whole," and sanctions were not warranted. First, the court found that when the litigation started by way of an order to show cause, plaintiffs had legitimate claims that defendants were in breach of the mortgage through their purposive conduct of allowing the storage of foreign materials on the Cranbury Road property.
Second, the court found that plaintiffs' claim of breach of the implied covenant of good faith and fair dealing had survived defendants' initial motion for summary judgment. Given the fact that it had previously and expressly ruled that the litigation was to continue and that the parties were to move forward with discovery, the court stated that it would be inequitable to sanction plaintiffs for continuing to litigate.
Our review of the record of this matter satisfies us that the motion court properly exercised its discretion in not imposing sanctions. See United Hearts, L.L.C. v. Zahabian, 407 N.J. Super. 379, 390 (App. Div.) (recognizing abuse of discretion as standard for review of an award of sanctions), certif. denied, 200 N.J. 367 (2009). "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 Flagg v. Essex Cnty. Prosecutor, 171 N.J. 561, 571 (2002)).
The frivolous claims statute provides:
A party who prevails in a civil action, either as a plaintiff or defendant, against any other party may be awarded all reasonable litigation costs and reasonable attorney fees, if the judge finds at any time during the proceedings or upon judgment that a complaint, counterclaim, cross-claim or defense of the non-prevailing person was frivolous. [N.J.S.A. 2A:15-59.1(a)(1).]
To award costs to a prevailing party for a frivolous claim, the statute requires a showing that "the non-prevailing party either brought the claim in bad faith for harassment, delay, or malicious injury; or 'knew, or should have known that the complaint [or] counterclaim . . . was without basis in law or equity . . . .'" Buccinna v. Micheletti, 311 N.J. Super. 557, 562-63 (App. Div. 1998) (quoting N.J.S.A. 2A:15-59.1(b)(2)).
Rule 1:4-8 permits an attorney to be sanctioned by the court for asserting frivolous claims on behalf of his or her client. United Hearts, L.L.C., supra, 407 N.J. Super. at 389. The court deems an assertion frivolous when "no rational argument can be advanced in its support, or if it is not supported by any credible evidence, or it is completely untenable." First Atl. Fed. Credit Union v. Perez, 391 N.J. Super. 419, 432 (App. Div. 2007). Where a party has a reasonable and good faith belief in the claims being asserted, reallocation of attorneys' fees and expenses will not be awarded. Ibid.
"[A] pleading will not be considered frivolous for purposes of imposing sanctions under Rule 1:4-8 unless the pleading as a whole is frivolous." United Hearts, L.L.C., supra, 407 N.J. Super. at 394. Thus, when some allegations are later proved unfounded, a complaint is not rendered frivolous if it also contains non-frivolous claims. Id. at 390.
Here, there was no showing that the foreclosure complaint was filed "in bad faith, solely for the purpose of harassment, delay or malicious injury" or had no "reasonable basis in law or equity." N.J.S.A. 2A:15-59.1(b)(2). Some of the alleged claims that were not frivolous included the Herberts' use of the property to store fill in violation of the mortgage covenant to use the land exclusively for farming, and to comply with all laws, ordinances and regulations. In fact, Harold D. Herbert pled guilty to violating a local ordinance by storing fill on the property without a valid site plan. Additionally, the court denied the initial motion for summary judgment on plaintiffs' cause of action for breach of the implied covenant of good faith and fair dealing, and allowed discovery to proceed. Thus, as we explained in United Hearts, the pleadings as a whole cannot be deemed frivolous.
Lastly, in light of our determination that summary judgment should not have been granted on the second count's assertion of a breach of the implied covenant of good faith and fair dealing, we do not find sufficient evidence to warrant reallocation of attorney's fees and expenses under either the statute or rule.
In sum, we affirm everything that was decided by the Chancery Division, except for its dismissal of count two of plaintiffs' second amended complaint in Docket No. C-252-07.*fn8 We remand that count for further proceedings in accordance with this opinion. Our review of the remainder of plaintiffs' arguments -- for example, that a mutual mistake infected the settlement agreement, that other implied covenants were contained in the settlement agreement, and that the Herberts spoliated evidence -- convinces us that they are without sufficient merit to warrant discussion in a written opinion beyond what we have already written. R. 2:11-3(e)(1)(E).
Affirmed in part; reversed and remanded in part. We do not retain jurisdiction.