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DiMisa v. Acquaviva

198 N.J. 547, 969 A.2d 1091 (2009)

ATTORNEYS FEES — The so-called third-party exception to the American Rule governing counsel fees, which provides for an award to a litigant who, through default of another, is required to institute and defend an action involving a third party, does not apply where the tortfeasor and the putative third party are effectively one.

A real estate partnership, to finance the purchase of its principal place of business, obtained a loan secured by a mortgage. One of the partners secretly transferred his partnership interest to his son. The bank, for a discounted sum and, without notice to the other partners, subsequently transferred the note and mortgage to a corporation formed by the son. The partner’s son then gave notice to the partnership that the loan had matured and was now due in full. He did not inform the other partners that he had become the holder of the mortgage. His corporation instituted foreclosure proceedings. At this point, the partners sought and obtained the mortgagee’s certificate of incorporation and learned that one of their own partners owned the corporation. They sued the corporation seeking to vacate the foreclosure judgment.

The Chancery Court vacated the foreclosure judgment, dismissed the foreclosure action, and declared the mortgage extinguished (because the same person cannot be both debtor and creditor). It held that the other partners had to pay the corporation their pro rata share of the balance of the purchase price of the note and mortgage. Issues relating to the borrower’s partnership agreement were dealt with pursuant to arbitration proceedings with all remaining questions pertaining to monetary relief transferred to the Law Division.

The arbitrator found the partner and his corporation to be “one” and the same and expelled the partner from the partnership. He awarded the expelled partner the value of his interest in the partnership after declaring the partnership to be dissolved and he permitted the remaining partners to reconstitute the partnership under the same name. The Law Division confirmed the arbitrator’s award. The lower court denied the partners’ application for legal fees. However, it did find that the partners had sustained no other damages, and thus it did not award compensatory or punitive damages to the partners. The partners appealed.

The Appellate Division reversed the lower court’s holding that had barred the recovery of counsel fees. It remanded the case for trial on the issue of damages, including to find the amount of the partners’ counsel fees. The ousted partner appealed.

On further appeal, the Supreme Court reversed. It noted that although the “American Rule” is based upon the notion that each of the parties should be responsible for their own counsel fees, New Jersey’s courts have recognized a “third-party exception” to the rule. This exception provides for an award of attorney’s fees incurred by an injured party in a tort action brought against a third party. The Court noted that such fees are to be considered as an additional element of damages in the tort action. But, in a direct action between a plaintiff and a defendant, no matter how egregious the wrongful act, each party should bear its own legal fees. Here, the fact that the litigation was also against a stranger called the exception into play. It ruled that even though the expelled partner’s actions “left much to be desired,” what he did was to act wrongfully through the entity that he formed. That made the entity the instrument of the partner’s deceit, not a separate and distinct third party which would be subject to the third-party exception.

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