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RSI Bank v. The Providence Mutual Fire Insurance Co.

Supreme Court of New Jersey

August 7, 2018

RSI BANK, a New Jersey Banking Corporation, Plaintiff,
v.
THE PROVIDENCE MUTUAL FIRE INSURANCE COMPANY, Defendant Third-Party Plaintiff-Respondent,
v.
DR. GEORGE LIKAKIS, Third-Party Defendant-Appellant.

          Argued January 17, 2018

          On certification to the Superior Court, Appellate Division.

          Allen N. Papp argued the cause for appellant (Adams, Cassese & Papp, attorneys; Allen N. Papp, on the briefs).

          Marc L. Dembling argued the cause for respondent (Methfessel & Werbel, attorneys; Marc L. Dembling, of counsel and on the brief, and Danielle N. Singer, on the brief).

          PATTERSON, J., writing for the Court

         This appeal arises from the trial court's reliance on an indemnification obligation, designated as a condition of pretrial intervention (PTI), as evidence in a civil dispute.

         Third-party defendant Dr. George Likakis was charged with aggravated arson and insurance fraud after a fire destroyed a building he owned (the Property). Plaintiff RSI Bank held a first-priority mortgage on the Property, and defendant/third-party plaintiff The Providence Mutual Fire Insurance Company (Providence) issued a commercial liability policy that covered the Property. Following the fire, Likakis and RSI Bank submitted insurance claims. Providence denied both sets of claims.

         Providence's denial of coverage prompted the filing of two actions in the Law Division. The first was filed by Likakis against Providence. The second action gave rise to this appeal: RSI Bank asserted against Providence claims for breach of contract, fraudulent misrepresentation, violations of the Consumer Fraud Act, and bad faith. Providence filed a third-party complaint against Likakis, alleging claims for indemnification. Both civil lawsuits were pending when criminal proceedings commenced against Likakis.

         A grand jury indicted Likakis, who applied for admission into the PTI program. The PTI director recommended his admission and told the PTI court that "the victim, [Providence], does not object to the defendant's enrollment into PTI as long as" Likakis satisfied three conditions: restitution in the amount of $11, 321.89, representing the insurance proceeds already paid to RSI Bank; Likakis's commitment to "protect/compensate [Providence] from any and all claims that may be brought against [Providence] by RSI Bank as the result of the . . . fire"; and the dismissal with prejudice of Likakis's lawsuit against Providence. The prosecutor consented to those terms.

         The PTI court approved Likakis's admission into PTI and entered an order postponing further proceedings in Likakis's criminal matter for a period of one year. With Likakis's consent -- but no assessment of his ability to pay -- the court also imposed the three conditions that Providence had requested. During his PTI term, Likakis paid Providence the specific restitution amount and dismissed with prejudice his lawsuit. Likakis did not make any payment related to the separate indemnification provision. With the prosecutor's consent, the PTI court terminated Likakis's PTI supervision and dismissed his indictment.

         RSI Bank and Providence settled their coverage dispute. Providence agreed to pay RSI Bank $353, 536.90 in settlement of all of the bank's claims based on the insurance policy and moved for summary judgment against Likakis based on the provision of the PTI agreement in which Likakis agreed to indemnify and hold harmless Providence. The motion judge granted in part and denied in part Providence's summary judgment motion. He found genuine issues of material fact as to whether the parties to the PTI agreement intended that agreement to survive the PTI supervisory period, and the amount of any damages for which Likakis would be liable. Those undecided issues were litigated in a non-jury trial. Following the trial, the court held that the indemnification provision of the PTI agreement was enforceable against Likakis and ordered Likakis to pay Providence $232, 568.71, representing the portion of the settlement funds that Providence attributed to fire damage, less $11, 321.89, the amount that Likakis had paid during his PTI supervisory period. Likakis appealed, and an Appellate Division panel affirmed the trial court's judgment, rejecting Likakis's argument that the agreement could be enforced only during the one-year period of PTI supervision. The Court granted Likakis's petition for certification. 230 N.J. 414 (2017).

         HELD: A PTI court may include a restitution condition in a PTI agreement only if it can quantify the financial obligation and assess the participant's current and prospective ability to meet that obligation. An open-ended agreement to indemnify the victim of the participant's alleged offense for unspecified future losses is not an appropriate condition of PTI. Moreover, a restitution condition of PTI is inadmissible as evidence in a subsequent civil proceeding against the PTI participant. The indemnification provision of the PTI agreement at issue should have played no role in this civil litigation.

         1. PTI is an alternative to the traditional process of prosecuting criminal defendants. It exists to provide prosecutors an alternate method to dispose of charges levied against qualified applicants consistent with the interest of the applicant and the overall interests of society and the criminal justice system. The PTI statute, N.J.S.A. 2C:43-12 to -22, prescribes seventeen criteria for admission to PTI. See id. § 12(e). When Likakis applied for PTI, Rule 3:28 and its Guidelines supplemented the statutory criteria. The PTI statute and court rule recognize the importance of a victim's concerns in PTI determinations, as does case law. (pp. 14-19)

         2. Restitution serves to rehabilitate the wrongdoer and to compensate the victim of the wrongdoer's conduct. An order of restitution is designed to strip a defendant of pecuniary gain from the crime where that gain is directly related to the crime itself and the defendant has the ability (though not necessarily the immediate means) to pay. (pp. 19-20)

         3. In criminal sentencing, a court imposes restitution in addition to a term of imprisonment or probation if "(1) [t]he victim . . . suffered a loss; and (2) [t]he defendant is able to pay or, given a fair opportunity, will be able to pay restitution." N.J.S.A. 2C:44-2(b). The statutory constraints ensure that the defendant will be capable of paying the restitution amount, thus achieving the rehabilitative goal. When a sentencing court has not conducted a meaningful evaluation of a defendant's ability to pay, appellate courts routinely vacate restitution orders and remand for reconsideration. Thus, in the sentencing context, a restitution order will not survive appellate review if the sentencing court has not specified the restitution amount and determined whether the defendant will be capable of paying that amount. (pp. 20-22)

         4. For purposes of PTI, Rule 3:28 incorporated the core principles that govern restitution awards in criminal sentencing. First, in PTI proceedings as in sentencing, restitution exists to serve a rehabilitative goal and to compensate the victim. Second, a PTI court was authorized to impose a restitution obligation only after a careful assessment in a hearing of the defendant's ability to pay. PTI Guideline 3(k) mandated that any restitution requirement "be judicially determined at the time of enrollment." Thus, before entering a restitution order, the court was required to quantify the obligation to be imposed and determine whether the defendant would be in a position to meet that obligation. Third, the court rule governing Likakis's admission into PTI maintained a clear distinction between a PTI restitution order and any civil claim that may arise from the PTI participant's offenses against the victim. Evidence of a restitution condition imposed in PTI was "not admissible against [the participant] in any subsequent civil or criminal proceeding." Pressler & Verniero, Current N.J. Court Rules, Guideline 3(k) to R. 3:28, at 1292 (2018). Consistent with its rehabilitative purpose, a PTI agreement is not intended to serve as the basis for civil liability. (pp. 23-25)

         5. Here, the PTI court appropriately took into account Providence's view. The PTI court did not, however, take the steps necessary to properly impose the indemnification requirement as a condition of PTI. The record reflects no ability-to-pay hearing to assess Likakis's current and future resources, and the PTI court did not impose a specific restitution obligation or payment schedule for any restitution amount beyond the $11, 321.89 that Likakis was required to pay. The indemnification provision in Likakis's PTI agreement did not conform to the requirements of a valid restitution condition of PTI. (pp. 25-27)

         6. Based on the record, there is no indication that any party or the PTI court addressed the indemnification provision at the close of Likakis's one-year PTI supervisory period. Instead, the PTI court terminated Likakis's PTI period and dismissed his indictment with no order regarding any outstanding restitution obligation. With his PTI proceedings thus concluded, Likakis had no obligation to make additional payments under the restitution provision of the PTI court's order. (pp. 27-28)

         7. Even if the PTI court had imposed an appropriate restitution condition on Likakis, that condition could not have been properly admitted in this civil matter. The invalid indemnification provision of the PTI agreement was clearly inadmissible in this case, either as the basis for the motion court's grant of partial summary judgment or as the dispositive evidence in the non-jury trial. Accordingly, the trial court improperly enforced the indemnification provision and entered judgment in Providence's favor. (pp. 28-29)

         REVERSED.

          CHIEF JUSTICE RABNER and JUSTICES LaVECCHIA, ALBIN, FERNANDEZ-VINA, SOLOMON, and TIMPONE join in JUSTICE PATTERSON's opinion.

          OPINION

          PATTERSON JUSTICE

         When a criminal defendant is admitted into pretrial intervention (PTI), the court may impose on that defendant the obligation to pay restitution to the victim of his or her alleged offense as a condition of PTI. In accordance with the PTI program's rehabilitative goal, the PTI court holds a hearing to determine the participant's ability to pay and orders the participant to pay a specific amount. Evidence of a restitution obligation imposed as a condition of PTI is inadmissible in any subsequent civil or criminal proceeding against the defendant.

         This appeal arises from the trial court's reliance on an indemnification obligation, designated by a PTI court as a condition of PTI, as dispositive evidence in a civil dispute. Third-party defendant Dr. George Likakis was charged with aggravated arson and insurance fraud after a fire destroyed a residential building that he owned. When Likakis was admitted into PTI, the PTI court required him to pay a specific amount in restitution to his insurer, defendant/third-party plaintiff The Providence Mutual Fire Insurance Company (Providence), based on Providence's prior insurance payments to plaintiff RSI Bank, holder of a mortgage on the property. The PTI court also ordered Likakis to indemnify Providence and hold it harmless for its undetermined future liability to RSI Bank arising from the fire. The PTI court thus imposed on Likakis an unquantified restitution requirement, without first determining that Likakis could meet such an obligation.

         During his one-year period of PTI supervision, Likakis paid Providence the specified restitution amount but did not indemnify Providence or hold it harmless for any additional liability to RSI Bank. With the prosecutor's consent and with no discussion of the indemnification provision, the PTI court terminated Likakis's PTI supervision and dismissed his indictment.

         In this insurance coverage litigation, Providence relied on the indemnification provision of Likakis's PTI agreement in its third-party complaint against Likakis. It settled its claims with RSI Bank for $353, 536.90, and sought to recover $243, 890.60 from Likakis on the basis of the indemnification provision. The trial court enforced the provision and entered judgment in Providence's favor against Likakis. An Appellate Division panel affirmed that determination.

         In appropriate settings, a PTI court's imposition of restitution as a condition of PTI furthers the participant's rehabilitation as it compensates the victim of the alleged offense. A PTI court, however, may include a restitution condition in a PTI agreement only if it can quantify the financial obligation and assess the participant's current and prospective ability to meet that obligation. An open-ended agreement to indemnify the victim of the participant's alleged offense for unspecified future losses is not an appropriate condition of PTI. Moreover, a restitution condition of PTI is inadmissible as evidence in a subsequent civil proceeding against the PTI participant. The indemnification provision of Likakis's PTI agreement should have played no role in this civil litigation.

         Accordingly, we hold that the trial court erred when it entered judgment in favor of Providence. We reverse the Appellate Division's judgment and remand the matter to the trial court for further proceedings.

         I.

         We derive our summary of the facts from the record presented to the trial court in this matter.

         Pursuant to a Mortgage and Security Agreement dated October 14, 2003, RSI Bank held a first-priority mortgage on several properties as collateral for a $700, 000 loan to Perth Amboy Professional Center, LLC, a limited liability corporation owned by Likakis. One of the properties subject to the mortgage was a residential property located at 519 New Brunswick Avenue in Perth Amboy (the Property).

         On June 21, 2011, Providence issued a commercial liability policy to Likakis and Perth Amboy Professional Center, LLC, which covered the Property. The policy, in effect from August 20, 2011 to August 20, 2012, named RSI Bank as first mortgagee/loss payee. The policy obligated Providence to "pay for covered loss of or damage to buildings or structures to each mortgageholder shown in the Declarations in their order of precedence, as interests may appear." It included the following provision:

If we pay the mortgageholder for any loss or damage and deny payment to you because of your acts or because you have failed to comply with the terms of the Coverage Part:
(1) The mortgageholder's rights under the mortgage will be transferred to us to the extent of the amount we pay; and
(2) The mortgageholder's right to recover the full amount of the mortgageholder's claim will not be impaired.
At our option, we may pay to the mortgageholder the whole principal on the mortgage plus any accrued interest. In this event, your mortgage and note will be transferred to us and ...

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