On Cloaking Devices And Usury: Lender Can Be Sued If It Uses Corporate Shell To Cloak A Personal Loan As A Business Loan

by: Peter J. Gallagher (@pjsgallagher) (LinkedIn)

Cloaking devices are common in sci-fi movies like Star Trek and Star Wars. They are used to render an object, usually a spaceship, invisible to nearly all forms of detection. Although scientists are apparently working to make real-life cloaking devices, at this point they exist only in the movies and, apparently, in New Jersey courts, at least according to the Appellate Division in Amelio v. Gordon.

In Amelio, plaintiff owed an apartment building in Hoboken. He approached defendants about obtaining a loan to finish renovations on three units in the building, along with the common areas. Plaintiff claimed that defendants instructed him to create a corporate entity to obtain the loan. Plaintiff did as he was instructed, and formed a limited liability company, which obtained the loan from defendants. Plaintiff, who was identified as the managing member of the limited liability company, signed the loan documents on behalf of the company.

Plaintiff later sued, arguing that the fees and interest payments under the loan exceeded the amounts allowable under New Jersey's usury laws. He also claimed that defendants fraudulently convinced him to create a limited liability company and have that entity obtain the loan, just so they could charge him usurious fees and interest. Plaintiff sued in his individual capacity, not on behalf of the limited liability company. On the day of trial, defendants argued that the complaint had to be dismissed because plaintiff lacked standing to sue since the company was the borrower, not plaintiff. With little explanation, the trial court granted the motion and dismissed the complaint. Plaintiff appealed.

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Transfer Made On The Morning Of Sheriff’s Sale, For The Purpose Of Delaying The Sheriff’s Sale, Deemed Fraudulent

by: Peter J. Gallagher (@pjsgallagher) (LinkedIn)

Sometimes you read decisions and you don't understand how the court arrived at its conclusion based on the facts of the case. Then other times, the conclusion just makes sense. These are the decisions you read and think to yourself, "of course you can't do that." The Appellate Division's opinion in 5 Perry Street, LLC v. Southwind Properties, LLC, is one of these cases.

In Perry Street, defendants were a limited liability corporation and the sole member of that corporation. The corporate defendant owned property in Cape May that it operated as a bed and breakfast.Two "non-institutional lenders" held mortgages on the property. After they foreclosed and obtained a final judgment of foreclosure, a sheriff's sale was scheduled. The corporate defendant obtained four adjournments of the sheriff's sale and attempted to refinance the property, but was "unable to consummate a transaction" before the sheriff's sale.

Instead, the day before the sheriff's sale, the individual defendant filed for bankruptcy. She then transferred the underlying property from the corporate defendant to herself. The consideration for the transfer was $1 and the "Balance of outstanding mortgages $80,000.00." The $1 consideration was typed into the deed, but the individual defendant hand wrote the part about the outstanding mortgages. She claimed that her intent was to "assume personal liability for the mortgages," but the Appellate Division noted that the balance of the mortgages at the time was almost $250,000, not $80,000, and that other documents she signed reflected that the only consideration was $1. She "filed the deed the next day, an hour and a half before the Sheriff's sale."

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Let Sleeping Dogs Lie . . . Just Not In A Hallway Where They Might Create A Dangerous Condition?

by: Peter J. Gallagher (@pjsgallagher) (LinkedIn)

When is a sleeping dog a dangerous condition? This is the burning question that the Appellate Division answered in Parella v. Compeau.

In Parella, plaintiff attended Christmas dinner at a friend's house along with approximately 20 other guests. After the second course, she got up from her chair to put her dish in the kitchen sink and check on her child who was in an another room. To do so, she had to walk behind several seated guests. She did not have to ask anyone to move until she got to the last guest in the row. That guest moved her chair in and plaintiff made a move familiar to anyone who has been to a crowded holiday dinner — she "lifted [her] glass and plate, turned her back to the wall and shuffled her feet to pass behind [the] chair." "As she cleared the chair, plaintiff turned right to enter the hall toward the kitchen, and fell."

What caused her fall was a "tan, fairly large dog" that was "lying in the hallway, past the threshold of the dining room." The dog did not belong to defendants, the owners of the house and the hosts of the party, and was one of two dogs in the house for the party. When plaintiff fell, the wine glass she was holding broke, cutting her finger and severing a tendon. Plaintiff sued, alleging that defendants failed to warn of her of a dangerous condition — the dog — in their home. The trial court granted summary judgment to defendants and plaintiff appealed.

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NJ Supreme Court: LLP Cannot Be Converted To General Partnership For Failing To Maintain Liability Insurance

by: Peter J. Gallagher (@pjsgallagher) (LinkedIn)

On June 23, 2016, the New Jersey Supreme Court released its decision in Mortgage Grader, Inc. v. Ward & Olivo, LLP, a case in which I had the privilege of representing the New Jersey State Bar Association as amicus curiae. (I previously wrote about the case here.) As discussed below, the Supreme Court agreed with our arguments.

In Mortgage Grader, a former client sued the defendant law firm and each of its partners after the firm dissolved. While the firm had maintained professional liability insurance while it was actively practicing, it did not purchase a "tail" policy to cover claims that arose after it dissolved. The trial court held that this violated Rule 1:21-1C(a)(3), which requires attorneys practicing as an LLP to "obtain and maintain in good standing one or more policies of lawyers' professional liability insurance which shall insure the [LLP] against liability imposed upon it by law for damages resulting from any claim made against the [LLP] by its clients." Accordingly, the trial court held that the individual partners were not shielded from liability as they would normally be as members of an LLP and were instead vicariously liable for their partners' negligence. In other words, the trial court effectively converted the LLP to a general partnership because it failed to maintain liability insurance. The Appellate Division reversed, holding that the trial court did not have the authority to strip the individual partners of their liability protections under either Rule 1:21-1C(a)(3) or the Uniform Partnership Act.

The NJSBA asked the New Jersey Supreme Court to affirm the Appellate Division's decision. The Supreme Court agreed, holding that: (1) the insurance requirements for LLPs did not extend to the period when a firm is "winding up" its business — i.e., when it is collecting receivables but no longer providing legal services; and (2) even if they did, an LLP could not be converted to a general partnership as a "sanction" for failing to maintain liability insurance. Justice Albin wrote a separate opinion, concurring with the judgment of the majority, but suggesting that the Court Rules be amended to provide that an LLP would lose its liability protection if it failed to meet the insurance requirements, and to require LLPs to purchase tail insurance for six years following their dissolution.

The Supreme Court's opinion can be found here.

When is an LLP not an LLP? NJ Supreme Court to Consider Whether an LLP Converts to a GP if it Fails to Maintain Malpractice Insurance

On Monday, the New Jersey Supreme Court will hear oral argument in a case – Mortgage Grader, Inc. v. Ward & Olivo, LLP — that involves insurance, court rules, and statutory interpretation, but still manages to be interesting. I have the privilege of representing the New Jersey State Bar Association as amicus curiae in the case and will be part of the oral argument. (Unlike the U.S. Supreme Court, the New Jersey Supreme Court live streams all of its oral arguments. Click here on Monday at 1 pm to watch.)

In Mortgage Grader, a former client sued the defendant law firm and each of its partners after the firm dissolved. While the firm had maintained professional liability insurance while it was actively practicing, it did not purchase a "tail" policy to cover claims that arose after it dissolved. The trial court held that this violated Rule 1:21-1C(a)(3), which requires attorneys practicing as an LLP to "obtain and maintain in good standing one or more policies of lawyers' professional liability insurance which shall insure the [LLP] against liability imposed upon it by law for damages resulting from any claim made against the [LLP] by its clients." Accordingly, the trial court held that the individual partners were not shielded from liability as they would normally be as members of an LLP and were instead vicariously liable for their partners' negligence. The Appellate Division reversed, holding that the trial court did not have the authority to strip the individual partners of their liability protections under either Rule 1:21-1C(a)(3) or the Uniform Partnership Act.

The NJSBA has asked the New Jersey Supreme Court to affirm the Appellate Division's decision. It has further suggested that if the Supreme Court is inclined to change Rule 1:21-1C(a)(3) to require that attorneys practicing as an LLP obtain a "tail" insurance policy to cover claims that arise after they dissolve, that this change be made through the normal rule making process and not as part of a decision in Mortgage Grader.

[BONUS COVERAGE: I plan to stick around after the oral argument in Mortgage Grader to hear oral argument in Robertelli v. The New Jersey Office of Attorney Ethics, a case I blogged about here and here. Robertelli involved an ethics grievance filed against a defense lawyer who "friended" a plaintiff on Facebook.]