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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Legal Fees Incurred Defending Against Counterclaim Recoverable Under New Jersey Consumer Fraud Act

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

Perhaps no three letters strike fear in the heart of New Jersey defense attorneys more than C-F-A. It is the common abbreviation for the New Jersey Consumer Fraud Act, a consumer protection statute that, among other things, allows successful plaintiffs to recover their attorney's fees. Until recently, however, it was not clear whether the fees incurred in defense of a counterclaim raised in response to a CFA lawsuit, as opposed to fees incurred in prosecuting the affirmative CFA claim, were recoverable. In Garmeaux v. DNV Concepts, Inc., a case of first impression, the Appellate Division held that they are, provided that the counterclaim is "inextricably caught up with" the CFA claim.

Plaintiffs in Garmeaux visited a store named The Bright Acre (operated by defendant, DNV Concepts Inc t/a The Bright Acre) for the purpose of replacing their gas fireplace which had been damaged in a storm. The store manager agreed to sell them a new fireplace and help them file an insurance claim for the costs associated with the purchase and installation. During the visit, Plaintiffs met defendant, James Risa, who the manager introduced as "[plaintiffs'] installer Jim." What plaintiffs did not know at the time, however, was that Risa owned and operated an independent fireplace installation company — defendant, Professional Fireplace Services — and that Bright Acre had a practice of referring installation work to its own employees who, like Risa, owned installation service companies. In other words, Risa would be installing the fireplace in his capacity as the owner of Professional Fireplace Services, not as an employee of Bright Acre.

Shortly after their visit to the store, plaintiffs received a proposal from Risa for the installation. They accepted and made the first installment payment. Unfortunately, not long after he began the installation, plaintiffs became dissatisfied with Risa's work habits — they alleged that he "kept an unpredictable schedule" — and the quality of his workmanship. Around the same time, they also learned that he was performing the installation in his capacity as owner of Professional Fireplace Services, not Bright Acre. After several calls to Bright Acre to attempt to resolve their issues were ignored, plaintiffs sued.

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Arbitration Provision Without Clear Jury Trial Waiver Still Not Enforceable

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

In recent years, and certainly ever since the New Jersey Supreme Court decided Atalese v. U.S. Legal Services Group, L.P., there is a perception that arbitration provisions have been more difficult to enforce in New Jersey. In Scamardella v. Legal Helpers Debt Resolution, LLC, defendants tried to get around the notice requirements set forth in Atalese — namely that an arbitration provision contain a clear waiver of a party's right to a jury trial — by arguing that those requirements were against public policy. They did not succeed, partly because the Appellate Division held that there was no evidence supporting the anecdotal belief that arbitration provisions were being struck down more frequently since Atalese.

In Scamardella, plaintiff entered into an agreement with defendants to negotiate a settlement of his debts with his creditors. As part of this agreement, plaintiff was required to establish a special purpose bank account with one of the defendants. The account agreement for the account contained an arbitration provision that included the following language:

In the event of a dispute or claim relating in any way to this Agreement or our services, you agree that such a dispute shall be resolved by binding arbitration in Tulsa, Oklahoma utilizing a qualified independent arbitrator of [defendant's] choosing. The decision of an arbitrator will be final and subject to enforcement in a court of competent jurisdiction.

Plaintiff alleged that one of the defendants did not perform as agreed and sued all of them, alleging violations of the RICO, Consumer Fraud, and Debt Adjustment and Credit Counseling Acts, along with various common-law claims. The trial court concluded that these claims were not subject to arbitration because the arbitration provision did not, as required under Atalese, "at least in some general and sufficiently broad way, [ ] explain that the plaintiff [was] giving up [his] right to bring [his] claims in court or have a jury resolve the dispute." In other words, the arbitration provision did not clearly indicate that plaintiff was waiving his right to a jury trial.

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Enforcement Action Against Rating Agency Allowed To Proceed

by: Peter J. Gallagher (@pjsgallagher)

In an interesting decision issued today, Judge Katz (Essex County) denied a motion to dismiss filed by the ratings agency Standard & Poor's ("S&P") in an enforcement action brought against S&P by the New Jersey Attorney General. In Hoffman v. McGraw-Hill Financial, Inc., the Attorney General alleged that S&P violated the Consumer Fraud Act ("CFA") by misrepresenting to New Jersey consumers that S&P's analysis and rating of structured finance securities was independent and objective. The opinion contains decisions on both procedural personal jurisdiction issues and substantive CFA issues that all litigators should find interesting.

[Lawsuits against ratings agencies are nothing new. Several years ago, I wrote an article about these lawsuits and, at the time, the relative success the rating agencies had defending against them. (If you did not save your copy of the article, click here for another copy.) Historically, the rating agencies argued that their ratings were proetced under the First Amendment, but at least one court rejected this argument in the context of a motion to dismiss in a lawsuit that eventually settled.]

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Lender Allowed To Foreclose But Punished By Court For Violating Consumer Fraud Act

by: Peter J. Gallagher

A New Jersey trial court issued an interesting opinion last week, allowing a lender to foreclose but imposing significant limitations on the lender because the court concluded that the lender had violated the Consumer Fraud Act.

In Freedom Mortgage Corporation v. Mamie E. Major, borrower wanted to refinance the mortgage on her home to lower the 5 5/8 interest rate and take out additional money to help pay for her grandson’s college tuition. Defendant was 70 years old, earned approximately $30,000 per year and owed $341,500 on her existing mortgage. At the time of the refinance her home had a market value of $365,000, but she eventually abandoned her plan to obtain more equity from the home and instead refinanced just to lower the interest rate.

Her existing home loan was an FHA-insured loan and was current, so Freedom Mortgage Company treated the refinance as an FHA “Streamline loan,” which required little or no new or extra documentation and did not require a new appraisal. According to Freedom, FHA guidelines allowed it to rely on the underwriting performed by the prior lender. Nonetheless, before approving the refinance, Freedom used a “net benefit” test to determine whether it was justified, and concluded that it was because both the interest rate and the monthly payment would be lower under the new loan.

At the closing, borrower signed a HUD-1A Settlement Statement that showed a new loan of $354,005, which included the payoff of the prior loan, the payoff of open tax balances, and $11,479.65 in settlement charges, payable to Freedom, for, among other things, a loan discount fee, commitment fee, application fee, and courier fee.

After making six payments on the new loan, borrower defaulted. Freedom filed a foreclosure complaint, which borrower answered. Freedom then moved to strike the answer and proceed with the foreclosure as uncontested. The court granted this motion, but found that there was a factual issue as to whether Freedom violated the New Jersey Consumer Fraud Act (“CFA”) in connection with the refinance. After trial on this issue, the court concluded that Freedom had, in fact, violated the CFA.

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