June 8, 2012
GERARD D. WARD, BENJAMIN BROOKS, HENRY DREW, AND GERALD G. SORRENTINO, ON BEHALF OF THEMSELVES AND THOSE SIMILARLY SITUATED, PLAINTIFFS-APPELLANTS,
PORT AUTHORITY POLICE BENEVOLENT ASSOCIATION, INC., PORT AUTHORITY DETECTIVES ENDOWMENT ASSOCIATION, PORT AUTHORITY SERGEANTS BENEVOLENT ASSOCIATION, PORT AUTHORITY LIEUTENANTS BENEVOLENT ASSOCIATION AND GASPAR DANESE, DEFENDANTS-RESPONDENTS.
On appeal from the Superior Court of New Jersey, Law Division, Monmouth County, Docket No. L-5311-04.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued January 24, 2012
Before Judges Payne, Reisner and Simonelli.
This appeal raises the issue of whether retired members of four unions representing employees of the Port Authority of New York and New Jersey were entitled to proceeds flowing from the demutualization of the Prudential Insurance Company of America. Agreeing with the trial court that they were not, we affirm. However, for reasons that we will set forth in the body of this opinion, we reverse in part the court's orders sanctioning plaintiffs and their attorneys for frivolous litigation and remand that issue for further consideration in light of this opinion.
On January 15, 1951, Prudential issued a group life insurance policy, G-10493, to the Port Authority for the benefit of its employees. Each of the Port Authority's unions*fn1 negotiated a life insurance benefit for its employees, the terms of which were contained in a memorandum of agreement (MOA) between the union and the Port Authority. In accordance with the agreements, active employees were not required to contribute to payment of premiums on the policy. Upon retirement, life insurance coverage for non-disabled former employees could be continued, but only upon payment of premiums by the retired employee. Coverage for disabled retired employees was continued through premium payments by the Port Authority.
In May 2001, Prudential announced, pursuant to the statutory right conferred by N.J.S.A. 17:17C-1 to -14, that it would convert its structure from a mutual to a stock insurance company. As a result, the owner of policy G-10493, the Port Authority, became entitled to receive "demutualization proceeds" in the form of Prudential stock with a cash value of approximately $13.3 million.
On June 28, 2001, Port Authority officials met to decide what to do with the proceeds and, following discussion of various proposals, determined to voluntarily pay them to active Port Authority employees, which at the time numbered approximately 4,100 union members and 2,600 non-union members. Because the Port Authority was prohibited by law from conferring a direct benefit on union members, it determined to distribute those members' proceeds as a lump sum to their unions, leaving to the unions a determination whether the proceeds would then be allocated per capita or by longevity. The Port Authority calculated how much each union would receive based on the number of employees in the union and their longevity of employment. In order to receive the funds, the unions had to agree to the Port Authority's calculations. Additionally, the Port Authority provided a list to each union of the active employees who were entitled to the payout. The list included approximately twenty members of the PBA who had retired after December 31, 2001 but before the proceeds were received from Prudential. Distributions to non-represented employees were made directly by the Port Authority and were based on longevity of service.
Gerard Ward, a former Port Authority police officer and a member of the PBA, retired in 1994 on a disability pension. As a result, his group life insurance coverage was maintained through premium payments by the Port Authority. Because Ward was also insured as the owner of other Prudential life insurance policies, he was aware of Prudential's demutualization. After he became aware that the PBA had distributed approximately $2,000 of the demutualization proceeds to each active union member, he sought inclusion among those receiving the pay-outs. Upon denial, he solicited Gerald Sorrentino, a former member of the LBA, Henry Drew, a former member of the SBA, Ben Brooks, a former member of the DEA, and others to join him in litigation asserting the right of retired Port Authority employees to a portion of the Prudential payment.
On November 30, 2004, plaintiffs filed a class-action complaint, and on November 23, 2005, plaintiffs filed an amended complaint against the four unions and PBA president Gaspar Danese, asserting claims of conversion, breach of fiduciary duty, breach of the covenant of good faith and fair dealing, and bad faith with respect to the exclusion of retired employees from the receipt of demutualization proceeds. From the commencement of the litigation and throughout its course, defendants served plaintiffs with multiple demand letters, pursuant to Rule 1:4-8, claiming that the litigation was frivolous and without factual and legal support, and they demanded its withdrawal. Plaintiffs declined to do so.
On February 24, 2005, the PBA and Danese filed a motion to dismiss the complaint. They were joined by the other three unions on February 25, 2005. However, defendants' motion was denied on March 24, 2005. Class certification was granted on June 12, 2006.
On July 6, 2007, defendants again moved for summary judgment, and on July 22, 2008, their motion was granted by the court, which dismissed with prejudice plaintiffs' direct claims, together with all cross claims, counter claims and third-party claims.
In a comprehensive written opinion, the court addressed each of the parties' arguments, commencing with plaintiffs' argument that a right to share in the proceeds of Prudential's eventual 2001 demutualization arose at the time of the execution by the unions of their MOAs with the Port Authority. In that regard, the court held:
While the defendants may have negotiated on behalf of all employees to ensure that they had a continuing right to coverage through employment and into retirement, i.e., death benefits for a beneficiary, under the life insurance policy, the court finds that there was no negotiated "benefit" to the demutualization proceeds set forth in the Memorandum of Agreement or any other agreement. There was no contractual right to those proceeds expressly or impliedly in the Memorandum of Agreement or any other document provided to this court. While the plaintiffs contend that a right to receive demutualization proceeds accrued to the plaintiffs at the time of the negotiation of the collective bargaining agreement between the Port Authority of New York and New Jersey and the defendant unions (as Class plaintiffs were then covered active employees) the defendants' brief correctly points out that a similar argument was addressed in the case of Bank of New York v. Janowick, 470 F.3d 264 (6th Cir. 2006)[, cert. denied sub nom Southwire Co. v. Janowick, 552 U.S. 825, 128 S. Ct. 195, 169 L. Ed. 2d 36 (2007)] and rejected. In Bank of New York v. Janowick the court found that the plaintiffs' status is to be determined as of the date of the demutualization, not as of the date upon which the alleged rights were negotiated.
Further, the court noted that the policyholder, the Port Authority, made the determination to voluntarily distribute the demutualization proceeds through the unions to active employees and to active non-unionized employees. The decision was not made by the unions. Moreover, case law established that there was "no duty on the part of the union to represent the interests of retired members when negotiating with employers or other third parties." Thompson v. Sheet Metal Workers Local Union No. 13, 132 N.J. Super. 348, 357-58 (Ch. Div. 1975); see also In re UAL Corp., 468 F.3d 456, 459 (7th Cir. 2006).
Additionally, the court rejected plaintiffs' claim that the unions owed them a fiduciary duty, as the result of their control over the demutualization proceeds, to protect their interests in those proceeds. It found such a duty to be beyond the scope of any duty undertaken by the unions as representatives of their employee-members. The court also considered and rejected plaintiffs' claim of conversion, noting that plaintiffs, who were not the policyholder, had never established a right to the proceeds; that the unions never had possession or exercised a right of ownership over the proceeds; or that the unions converted the proceeds to their own use, to the exclusion of plaintiffs' rights.
Addressing plaintiffs' claim that the unions breached the covenant of good faith and fair dealing, the court noted that the covenant was recognized only when the parties maintained a contractual relationship. It then rejected plaintiffs' argument that plaintiffs occupied the status of third-party beneficiaries under the MOA, and that status was sufficient to establish the requisite relationship. Instead, the court recognized the plaintiffs' named beneficiaries as properly qualifying for third-party beneficiary status, but held that such persons' rights were limited to the right to sue under the policy if benefits were denied. Therefore, the contractual relationship that would give rise to the operation of the covenant of good faith and fair dealing was absent.
Determining that plaintiffs had failed to establish either a legal or factual basis for their claims, the court granted summary judgment.
Thereafter, defendants moved for attorneys' fees and costs for frivolous litigation. Their motions were granted on June 1, 2010. In connection with the litigation against the DEA, the SBA and the LBA, the court entered an order assessing plaintiff Gerard Ward $14,120.96 as instigator of the frivolous litigation, the remaining named plaintiffs $4,706.98 each, and the two firms representing plaintiffs $21,181.43 each. In connection with the litigation against the PBA and Danese, the court entered an order assessing Ward $13,567.20, the remaining named plaintiffs $4,522.40 each, and the two firms representing plaintiffs $20,350.79 each.
In a lengthy written opinion accompanying the award, the court found that plaintiffs and their counsel did not violate either the frivolous litigation statute, N.J.S.A. 2A:15-59.1,*fn2 or Rule 1:4-8 by filing the class-action complaint, because it was possible at that time that they did not know that the Port Authority was the only named policy owner. Further, the court found that plaintiffs and their counsel had adequately pled the causes of action asserted by them, as reflected in the court's denial of defendants' motion to dismiss the complaint.
However, the court found that plaintiffs, and particularly their counsel, should have known that plaintiffs' claims lacked factual support very shortly after taking the depositions of plaintiffs Drew and Brooks in June 2005. According to the court, "[b]oth Drew and Brooks testified, under oath, that the only reason they were participating in the litigation was because Plaintiff Gerard Ward induced them to." The court concluded:
Based on the deposition testimony of Plaintiffs Drew and Brooks, it became evident that, after six months of discovery, the Plaintiffs had no basis in fact as to why they were entitled to the demutualization proceeds from the Prudential Life Insurance policy. It is at this point in the litigation that counsel for the Plaintiffs should have begun a rigorous more diligent inquiry into the facts of this lawsuit.
Thereafter, according to the court, on January 24, 2006, plaintiff Sorrentino stated as a former member of the PBA executive board that he did not believe that a union had any legal responsibility toward a retired, former member under the circumstances presented. Nonetheless, when served with a further demand letter in February 2006, pursuant to Rule 1:4-8, the action should have been dismissed, but it was not.
The court found the "final 'wake-up call'" to plaintiffs and their counsel came with the decision of the Sixth Circuit in Janowick, supra, which was reported on November 22, 2006. That decision "disemboweled" plaintiffs' theory of recovery by holding that entitlement to proceeds was to be determined as of the date of demutualization, not as of the date upon which the alleged rights were negotiated. Although defendants did not specifically bring the Janowick decision to plaintiffs' attention, the court found that ignorance of the law was no excuse.
Accordingly, the court found that, although plaintiffs' claims were not "continued in bad faith, solely for the purpose of harassment, delay or malicious injury," thereby violating N.J.S.A. 2A:15-59.1b(1), plaintiffs' claims violated N.J.S.A. 2A:15-59.1(b)(2) because they were "without any reasonable basis in law or equity and could not be supported by a good faith argument for an extension, modification or reversal of existing law." The court continued:
The Plaintiffs, in response to this motion, have failed to evidence what their reasonable basis in law was, or their good faith argument for an extension, modification or reversal of existing law was. Furthermore, the Plaintiffs were never able to secure an expert opinion showing why the Unions owed them a duty, or why they were negligent. That, among many other facets outlined hereinabove, should have been a red flag for the Plaintiffs.
Accordingly, the court awarded attorneys fees "after January, 2006" in the total amount of $138,440.74, apportioning them as previously stated. The court based its awards against Ward as "the moving force" in bringing the action, and against the remaining named plaintiffs "for advancing this litigation as far as [they] did." "While at the outset these Plaintiffs may have thought a cause of action existed, following the Plaintiffs' depositions they should have known that their complaint was without any reasonable basis in law or equity and could not be supported by a good faith argument for an extension, modification or reversal of existing law."
This appeal followed.
On appeal, plaintiffs claim that the unions failed "to deal fairly and nondiscriminator[ily]" with respect to the demutualization proceeds. They accept the principle that a right to proceeds arose when the demutualization was announced. Additionally, they agree that the Port Authority was the policyholder, and they concede that case law holds generally that a union does not owe a retiree a duty to collectively bargain on the retiree's behalf, and that the failure to collectively bargain on plaintiffs' behalf did not give rise to plaintiffs' claim. Rather, plaintiffs state, "the Plaintiffs contend only that it was grossly inequitable for the Unions, having accepted the responsibility to allocate the demutualization proceeds, to discriminate against the retirees by diverting all proceeds to current employees when Plaintiffs and class members had paid for the insurance." In that regard, plaintiffs assert that there was "no reason why the retirees should be treated any differently than the active employees." But plaintiffs do not address the fact that it was the Port Authority that determined that it would voluntarily distribute the demutualization proceeds only to active employees, not the unions. The Port Authority was not a party to the litigation.
Further, plaintiffs cite to the deposition testimony of David McCausland, General Counsel to the Port Authority PBA, who admitted that, on occasion, the union sought benefits on behalf of retired union members, and they assert as a result that the unions were estopped from refusing to protect the interests of retired employees here. However, what the argument fails to recognize is that plaintiffs in this case lacked any contractual right to the demutualization proceeds that the unions could seek to enforce.
We therefore reject plaintiffs' arguments as having insufficient legal or factual merit to warrant further discussion in a written opinion. R. 2:11-3(e)(1)(A) and (E). We affirm the orders of summary judgment entered in this matter substantially on the basis of the trial court's thoughtful written opinion.
As we stated previously, the court awarded defense counsel $138,440.74 in fees and costs, which it apportioned between plaintiffs' counsel and the four individually named plaintiffs. The award represented work done after January 2006, when the court found plaintiffs should have withdrawn their complaint. Although the court made extensive findings of fact as to the frivolous nature of plaintiffs' litigation and as to when plaintiffs and their counsel should have recognized that the litigation was frivolous, it failed to articulate its findings regarding the reasonableness of the fees and hours expended or the factors it considered in entering the award. See Rule of Professional Conduct (R.P.C.) 1.5(a) (setting forth relevant factors)*fn3 ; see also, e.g., Rendine v. Pantzer, 141 N.J. 292, 333-37 (1995); Furst v. Einstein Moomjy, Inc., 182 N.J. 1, 21-23 (2004); R.M. v. Supreme Court of N.J., 190 N.J. 1, 9-11 (2007) (establishing proper methodology for assessing attorneys' fees). We note as well that Rule 1:4-8(d) provides that sanctions "shall be limited to a sum sufficient to deter repetition" of the complained-of conduct - a restriction that the court must consider in entering a fee award. We therefore remand to permit the appropriate findings to be set forth after consideration of plaintiffs' objections to the charges incurred.
We reject plaintiffs' claim that, because the PBA served only one demand letter in January 2005, it was not entitled to sanctions. We find that one letter to have been sufficient to apprise the plaintiffs of the lack of a legal or factual basis for their complaint against the PBA and its president, Danese.
Plaintiffs claim that the unions' demand letters did not meet the requirements of Rule 1:4-8(b)(1) because they never referred to Janowick, and such reference was necessary in light of the court's reliance on that case both in granting summary judgment and in determining that plaintiffs' claims were frivolous. We disagree. As the court found, by January 2006, after the depositions of three of the plaintiffs, their counsel should have realized that the complaint was without merit, given that plaintiffs understood that the unions had no responsibility for retirees; the only basis for asserting that they were policy owners was because their names appeared on the insurance certificates furnished to the individual covered persons; and plaintiffs had no idea why the unions owed them money, but had entered the lawsuit because Ward advised them to do so.
Although the November 2006 decision in Janowick provided the final "wake-up call" that plaintiffs' complaint had no legal foundation, it was not the sole basis for the court's finding of frivolity. In fact, the demand letters were explicit in noting that the retirees had no entitlement to demutualization proceeds because they were not policy owners. It thus was not necessary to mention Janowick to establish the frivolity of plaintiffs' complaint.*fn4
Plaintiffs claim additionally that fees should have been assessed only after November 2006 when Janowick was decided. We disagree with this argument, as well. Although that decision provided definitive legal authority for the union's position, the deposition testimony of plaintiffs given in June 2005 and January 2006 was sufficient for plaintiffs' counsel to know that plaintiffs were not policy owners, the unions had no obligation to represent retirees, and the Port Authority was entitled to voluntarily distribute the demutualization proceeds as it saw fit.
We reject plaintiffs' argument that the court erred in sanctioning plaintiffs' counsel because the court had originally recognized the validity of plaintiffs' claim by not dismissing the complaint and certifying the class. In denying defendants' motion to dismiss the complaint, the court merely made the mechanical determination that the facts as pled supported the causes of action that were asserted. Rule 4:37-2 permits dismissal of an action when "upon the facts and upon the law the plaintiff has shown no right to relief." However, a motion should be denied if the evidence and legitimate inferences could sustain a judgment in the plaintiff's favor. R. 4:37-2(b). In deciding a motion, the court must accept as true all the evidence that supports the party defending against the motion and must give all legitimate inferences to that party. Pressler and Verniero, Current N.J. Court Rules, cmt. 1 on R. 4:40-2 (2012). The trial court is not concerned with the "worth, nature or extent (beyond a scintilla) of the evidence, but only with its existence, viewed most favorably to the party opposing the motion." Id. at cmt. 2.1 on R. 4:37-2 (citing Dolson v. Anastasia, 55 N.J. 2, 5-6 (1969)). Thus, the court's ruling cannot be considered to reflect a measured evaluation of the evidence as revealed in the course of the litigation. Further, contrary to plaintiffs' arguments, the fact that the court granted class certification cannot be construed as demonstrating that the complaint had merit. Delgozzo v. Kenny, 266 N.J. Super. 169, 180-81 (App. Div. 1993) (citing Eisen v. Carlisle & Jacquelin (Eisen IV), 417 U.S. 156, 94 S. Ct. 2140, 40 L. Ed. 2d 732 (1974); Olive v. Graceland Sales Corp., 61 N.J. 182, 189 (1972); Kronish v. Howard Sav. Inst. (Kronish I), 133 N.J. Super. 124, 135-36 (Ch. Div. 1975)).
We also are unwilling to accept plaintiffs' argument that the court incorrectly awarded fees for time spent by defense counsel in opposing plaintiffs' motion for class certification - a motion upon which plaintiffs prevailed. Because the court ultimately granted summary judgment, determining that plaintiffs did not have a valid complaint, we do not find that it abused its discretion in sanctioning plaintiffs for work that defense counsel had to perform to oppose the class certification that later was found to be of no effect.
We do find, however, that the court abused its discretion in sanctioning the individual plaintiffs by assessing attorneys' fees against them for frivolous litigation pursuant to N.J.S.A. 2A:15-59.1b. That rule permits an award of attorneys' fees against a party for frivolous litigation (1) when a pleading "was commenced, used or continued in bad faith, solely for the purpose of harassment, delay or malicious injury" or (2) when the party should have known the pleading "was without any reasonable basis in law or equity and could not be supported by a good faith argument for an extension, modification or reversal of existing law." However, we have held:
When a prevailing defendant's allegation is based on the absence of "a reasonable basis in law or equity" for the plaintiff's claim and the plaintiff is represented by an attorney, an award cannot be sustained if the "plaintiff did not act in bad faith in asserting" or pursuing the claim. McKeown-Brand, supra, 132 N.J. at 549. The rationale for requiring proof of bad faith is that clients generally rely on their attorneys "to evaluate the basis in 'law or equity' of a claim or defenses," and "a client who relies in good faith on the advice of counsel cannot be found to have known that his or her claim or defense was baseless." Id. at 557-58. [Ferolito v. Park Hill Ass'n, 408 N.J. Super. 401, 408 (App. Div.), certif. denied, 200 N.J. 502 (2009).]
See also Lake Lenore Estates v. Twp. of Parsippany-Troy Hills Bd. of Educ., 312 N.J. Super. 409, 426 (App. Div. 1998).
In the present case, the court did not find that plaintiffs, who clearly were represented and guided by counsel, acted in bad faith in connection with either the initiation or pursuit of their action. Further, our review of the record satisfies us that the evidence does not support such a claim. As a consequence, the award of attorneys' fees against plaintiffs cannot stand.
We thus remand the matter for further consideration of the issue of sanctions, limiting those sanctions to an award against plaintiffs' attorneys pursuant to Rule 1:4-8.
Affirmed in part; reversed and remanded in part.