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County of Essex v. First Union National Bank

186 N.J. 46, 891 A.2d 600 (2006)

PUBLIC CONTRACTS; BRIBERY; DISGORGEMENT—Where a public contract is obtained through bribery, the guilty party is required to disgorge its gross profits but any portion earned by innocent third parties may be retained by those parties.

A bank employee and a county employee engaged in an illegal kickback scheme. The bank employee paid the county employee and the county employee awarded three public bonding contracts to the bank. For underwriting the bonds, the bank was paid $2.9 million in fees. Evidence presented at trial indicated that on one of the contracts, the bank only retained 52.34% of the fee; with the remainder distributed to other, innocent, underwriting firms. At trial, the county had the burden of establishing the allocation of fees on the other contracts. Because the county could not present evidence of the fee sharing allocation for two of the contracts, the lower court barred the county from seeking disgorgement of those fees. It limited disgorgement on the third contract to the 52.34% of the fees retained by the bank and the jury returned a verdict in favor of the county on the disgorgement claim for the 52.34% of the fees retained by the bank on that contract. The jury further found the bank did not breach any fiduciary duty. The lower court awarded prejudgment interest on the proven retained underwriting fees from the date of the contract. Both the bank and the county appealed.

The Appellate Division ruled that in addition to the partial fee disgorgement on one of the bonds, the bank had to disgorge its fees earned on the other two bonds. Further, it held that it was the bank’s burden to prove how much of the underwriting fees it distributed to other underwriters. Rejecting the banks’ claim to the contrary, the Appellate Division ruled that the remedy of unjust enrichment, an equitable remedy usually not available in contract disputes, is available in the form of disgorgement when a government contract is obtained through corrupt means. Reversing the lower court, the Appellate Division held that prejudgment interest should run only from the date the complaint was filed. The Appellate Division agreed with the jury’s finding that punitive damages were not appropriate in the absence of a breach of the bank’s fiduciary duty. Both the bank and the county appealed to the New Jersey Supreme Court.

In that appeal, reasoning that awarding disgorgement is not based on the damages suffered by the county but rather on the idea of preventing the wrongdoer from retaining any profits of its wrongdoing, the Supreme Court held that “when a public contract is obtained by bribing a public official, the public entity is entitled to the gross profits obtained by the wrongdoer.” The Supreme Court affirmed the Appellate Division’s order requiring the bank to disgorge all retained fees on each of the three contracts, and further affirmed the Appellate Division’s ruling that the bank had the burden of proving whether any fees were paid to innocent third party underwriters. The issue of establishing the distribution of the underwriting fees was remanded to the lower court. Holding that the award of prejudgment interest in contract and equitable claims is based on equitable principles, the matter fell within the discretion of the lower court. Because the record did not reflect a manifest denial of justice at trial, it was reversible error for the Appellate Division to change the date on which prejudgment interest should begin to accrue. As to the issue of prejudgment interest, the Supreme Court reversed the Appellate Division and reinstated the lower court’s ruling that prejudgment interest should run from the date of the transaction. The Supreme Court affirmed that part of the Appellate Division’s ruling denying the award of punitive damages on the county’s breach of fiduciary duty claim.

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