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Allen v. V and A Bros., Inc.

20 N.J. 114, 26 A.3d 430 (2011)

CONSUMER FRAUD ACT; PERSONAL LIABILITY — Even though individuals are acting on behalf of an entity, such as a corporation, they still can be held liable as “persons” under the Consumer Fraud Act for certain affirmative acts.

Homeowners contracted a corporate-contractor to landscape their property and to build a retaining wall to enable the installation of a pool. At that time, the corporation was wholly owned by two brothers; one of whom subsequently died during the course of the lawsuit that arose out of the contract. The corporation also had one full-time employee. After the corporation completed the work, the homeowners sued and named both corporate and individual defendants. The first count was directed solely to the contractor and alleged that the contractor had breached its contract by improperly constructing the retaining wall and by using inferior backfill material. The second count was directed to the contractor, as well as to each of its owners and the employee, individually. It alleged three “Home Improvement Practices” regulatory violations of the Consumer Fraud Act (CFA): (1) failure to execute a written contract; (2) failure to obtain final approval for the construction before accepting final payment; and (3) failure to obtain the homeowners’ consent before modifying the design of the retaining wall and substituting the inferior backfill material.

Before trial, the lower court granted the individuals’ motion to dismiss the complaint against them, holding that the CFA did not create a direct cause of action against the individuals, only against the corporate contractor. The homeowners’ remaining claims were tried and the jury returned a verdict in their favor on all counts against the corporate defendants and awarded corresponding damages.

The homeowners appealed, and the Appellate Division reversed the order that had dismissed the claims against the individuals under the CFA. It remanded the matter to determine whether any of the individual defendants had personally participated in the regulatory violations that formed the basis for the homeowners’ CFA complaint. However the Appellate Division’s order precluded relitigation of the overall quantum of damages found by the jury in the trial against the corporate contractor.

The individuals appealed to the New Jersey Supreme Court, arguing that the term “person,” as used in the CFA, should be narrowly construed. They furthermore argued that the Appellate Division’s definition did not conform with the legislative intent behind the CFA. They also contended that the Appellate Division erred by imposing individual liability without requiring the homeowners to prove grounds for piercing the corporate veil. To their chagrin, the Supreme Court held that employees and officers of a corporation may be individually liable under the CFA for certain acts they undertake through the corporate entity. Deciding whether there was individual liability required the Court to analyze the CFA’s language and its relationship to traditional theories used by courts to impose personal liability when acts are undertaken through a corporation. In interpreting a statute, a court seeks to effectuate the Legislature’s intent by first looking to the law’s plain language, and then seeking further guidance only if the intent cannot be derived from the words chosen by the legislature. The analysis of individual liability in this particular matter required consideration of the CFA’s definition of “person” – the CFA’s operative provision that creates a cause of action, and by considering the three “Home Improvement Practices” regulations that formed the basis for the CFA claims.

Following its review, the Court concluded that the CFA’s broad definition of “person” supported the idea that the CFA permits the imposition of individual liability upon individuals whose actions are part of a violation by the corporation. The definition of “person” only identifies the scope of actors who may engage in the kind of behavior that the statute defines to be a violation. It doesn’t create a basis for that person’s liability. Liability can only be imposed in accordance with the provisions of the CFA, which has, as its focus, the"act” that is defined as a violation of the statute’s protections.

The CFA’s operative provision protects consumers from certain affirmative acts, from knowing omissions, and from regulatory violations. In light of the broad remedial purposes of the CFA, and the expansive sweep of the definition of “person” in the CFA, it was clear to the Court that an individual who commits an affirmative act or a knowing omission that the CFA has made actionable can be individually liable. Although the CFA would also impose liability on the individual’s corporate employer for such an affirmative act, the Court found no basis on which to conclude that the CFA intended to limit recourse to the contractor-corporation and to shield the acting individuals from liability. On the contrary, it has long been held that corporate officers and employees can be individually liable pursuant to the CFA for their affirmative acts, notwithstanding that the individuals might be acting through a corporation. Although one might engage in an alternative veil-piercing approach, nothing in the CFA or the relevant precedents suggested to the Court that, in the absence of veil-piercing, individual employees or officers would be shielded from liability for a CFA violation.

Individual liability of a corporate employee or officer for CFA regulatory violations, rather than for an affirmative act or a knowing omission, is dependent on the language of the particular regulation upon which the complaint is based and the nature of the individual defendant’s actions. Regarding the “Home Improvement Practices” regulations at issue in this case, a distinction was drawn between the principals of a corporation and its employees. Principals may be broadly liable because they are the ones who set the policies that a corporation’s employees have to carry out. Therefore, if the principals, in clear violation of the regulation, have adopted a course of conduct in which written contracts are never used, there may be little basis on which to extend personal liability to an employee who complied with that corporate policy. However, if the employee, by herself or himself, concludes that an inferior product should be used in place of one specified in a contract and does so without telling the consumer, there is little reason to construe the CFA to limit liability to the corporate employer and permit that employee to escape bearing some individual liability. As a result there can be individual liability under the CFA. Here, the Court held that because the trial in this matter was limited to the homeowners’ claims against the corporation, the matter had to be remanded to decide whether any of the individually-named defendants could also be individually liable.

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