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DiMisa v. Acquaviva

400 N.J. Super. 307, 947 A.2d 168 (App. Div. 2008)

PARTNERSHIPS; ATTORNEYS FEES — When a partnership is defrauded by an entity owned and controlled by one of its partners, under a tort theory the partnership may seek attorney’s fees from that entity even if the entity is closely related to one of the other partners of the partnership.

Four individuals formed a general partnership to acquire an investment property. The partnership then borrowed money from a bank. The loan was secured by a mortgage on the property. One of the partners, in violation of the partnership agreement, transferred his partnership interest to his son. The son then had the mortgage assigned by the bank to his own company. The bank was paid with funds obtained from his grandfather’s estate with the consent of his father. It was only when the other three partners attempted to obtain a payoff figure that they found out that the mortgage had been assigned. The son then told the partnership that the mortgage was in default and that the entire principal balance was due. He had not yet told the partnership that he owned the assignee. When the loan balance went unpaid, the assignee obtained a default judgment and initiated a foreclosure action.

The three partners brought a separate action against the assignee, their former partner, and the son, for fraud, conspiracy, breach of contract, and breach of fiduciary duty. They also sought to have the foreclosure action dismissed. The lower court dismissed the foreclosure action and declared the mortgage extinguished as an equitable matter because “the debt had been assigned to a debtor [and] ‘the same person cannot be both debtor and creditor with respect to the same debt.’” The three partners were ordered to pay the assignee their share of the balance due on the mortgage and their request to dissolve the partnership was remanded for arbitration in keeping with the partnership agreement. As an outcome of the arbitration proceedings, the partnership was dissolved and reformed without the son; the son was awarded his share of the partnership’s net worth. In the lower court, the father and the son argued that the three other partners were entitled to no damages except for attorneys’ fees, which could not have been awarded without any compensatory damages. The three partners argued that an exception applied because the conduct of the son caused them to incur legal costs in their action against the assignee, which they asserted was a third party. The lower court dismissed the claims against the father, the son, and the assignee, finding that given their close relationship, the assignee was not a third party and as a result, the three partners were not allowed to recover attorney’s fees. In essence, the lower court adhered to the “American Rule that parties should bear their own attorney’s fees unless fee shifting is authorized by statute, court rule or contract… .”

On appeal, the Appellate Division noted that there is an exception to the American Rule and it provides that attorneys’ fees can be awarded to a party that finds itself having to litigate a matter against a third party as a result of another party’s tortuous actions. It disagreed with the lower court’s finding that the assignee was not a separate entity from the son. In doing so, the Court pointed out that the basis for deeming a business entity and an individual as the same party was not for the purpose of determining liability but for preventing an individual from avoiding liability for actions committed through the auspices of a business entity. It also pointed out that when the three partners brought the action against the assignee, they were not yet aware that the company was controlled by the son and did not find out until after the proceedings were underway. Thus, the Court found that as a matter of equity, the assignee was to be considered a third party and that as a result, an award of attorneys’ fees for the three partners was appropriate. The lower court’s finding that the three partners were not entitled to an award of attorneys’ fees was reversed.

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