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Q Capital Corporation v. Wilmington Trust Company

A-2780-05T5 (N.J. Super. App. Div. 2007) (Unpublished)

CONTRACTS; DAMAGES — New Jersey’s bar against tort theories to recover for losses due to a breach of contract has been applied only to actions seeking recovery of damages for costs of repair, replacement of defective goods, and consequential loss of profits; therefore, a contracting party may recover economic losses due to the other party’s fraud.

A trust company and some investors financed a corporation’s business of purchasing receivables. The corporation sold interest-bearing senior certificates to the investors. It used the proceeds to buy receivables at a discount from businesses that were unable to collect money owed to them. Pursuant to the loan agreement, the corporation purchased a credit risk insurance policy to protect the senior certificate holders. Under the required procedure, once the corporation purchased the receivables, it then was to assess their value. Two percent of the value would be used to pay interest on the senior certificates. The receivables were then assigned to the trust, and the trust would pay the corporation between eighty and eighty-eight percent of the discounted purchase price. The higher the corporation assessed the value of the receivable, the higher the percentage the trust would pay. The corporation was then responsible for collecting from the receivable’s debtor, with the trust receiving ninety percent of the receivable’s value and the balance being paid to the corporation.

Problems arose between the parties when the corporation failed to provide financial statements and certificates required under the written loan agreement. The investors and insurance company became concerned over financial reporting problems, the high number of receivables that were long overdue, and the general quality of the receivables the corporation had obtained. The trust hired financial consultants to examine the corporation’s records and later an accounting firm to prepare a full accounting of funds. The financial consultants discovered a series of breaches and concluded that the corporation had improperly withheld $11.6 million from the trust. It also found various other irregularities in the corporation’s accounting. As a result, the trust terminated the loan agreement, and both groups filed suits against each other.

The corporation claimed that the trust had not obtained a certain bank’s consent as required by the agreement. The trust and investors claimed that the corporation had engaged in fraudulent dealing. The parties agreed to resolve their dispute by binding arbitration. The arbitrator found in favor of the trust and the other investors on all of the fraud and breach of contract claims. He also dismissed the corporation’s claims, finding they were without merit. The corporation appealed, but the lower court affirmed the arbitrator’s decision.

The corporation appealed further, but the Appellate Division affirmed the lower court’s and the arbitrator’s decision. It noted that to encourage the use of alternate dispute resolution in resolving commercial disputes, the grounds for setting aside an arbitrator’s decision are extremely limited. Because there was no evidence of fraud, corruption, undue influence or other misconduct by the arbitrator, the Court held that vacating the award was inappropriate. Furthermore, the Court found that whether the trust could seek to recover economic losses based on breach of contract remedies and tort remedies was an open question. It explained that the state’s bar against tort theories to recover for losses due to a breach of contract had been applied only to actions seeking recovery of damages for costs of repair, replacement of defective goods, and consequential loss of profits. Therefore, the Court concluded that the corporation’s argument that the trust could not recover economic losses due to the corporation’s fraud was without merit.

The corporation also argued that the arbitrator’s award was not a reasoned award because he did not exhibit personal attention to the award. The Court took this argument to stem from the arbitrator’s adoption of many of the trust’s proposed findings of fact. The Court explained that the manner of determining findings of fact is left to the discretion of the arbitrator. It found that nothing in the present case suggested that the arbitrator failed to consider all of the evidence, evaluate the credibility of such evidence, or make the appropriate findings of fact. Therefore, the Court rejected the corporation’s arguments on appeal and affirmed the lower court’s decision in favor of the trust and investors.


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