Unenforceable Clause In Arbitration Agreement Does Not Void Agreement

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

Arbitration (pd)One of my children's preschool teachers was fond of saying, "you get what you get and you don't get upset." (Not to my little angel, of course, but to other children.) In Curran v. Curran, the Appellate Division basically applied this admonition to the parties to an arbitration agreement, holding that they got what they intended out of the agreement, therefore they could not argue, after the fact, that an unenforceable provision in the agreement voided the entire agreement.

In Curran, plaintiff filed for divorce from defendant. With the advice of counsel, the parties entered into a consent order to refer all issues incident to their divorce to arbitration under the New Jersey Arbitration Act. In the consent order, the parties acknowledged that any arbitration award that was entered could only be set aside or modified by a court under the limited grounds set forth in the Arbitration Act — e.g., the award was procured by fraud, corruption, or undue means, the court found evidence of "evident partiality" by the arbitrator, the arbitrator exceeded his or her powers, etc.  But the parties also included a handwritten provision, which provided: "The parties reserve their rights to appeal the arbitrator's award to the appellate division as if the matter was determined by the trial court." This is the provision that would cause all of the problems.

After the arbitrator entered a preliminary award, plaintiff requested reconsideration. The arbitrator then issued a comprehensive award setting forth his findings of fact and conclusions of law. Plaintiff filed a motion in the Law Division for an order modifying the award, citing eight alleged "mistakes of law" made by the arbitrator. Plaintiff also argued that the intent of the handwritten provision was not to allow for direct appeal to the Appellate Division, but was instead was evidence that the parties intended a more searching review of the award that what would normally be allowed under the Arbitration Act. The trial court agreed, holding that the paragraph itself was unenforceable because it purported to "create subject matter jurisdiction by agreement." The trial court noted that "[t]he authority of a court to hear and determine certain classes of cases rests solely with the Constitution and the Legislature." But the trial court agreed with plaintiff that the handwritten provision demonstrated the parties' intent to provide for "a little more review" than what would normally be allowed under the Arbitration Act. Therefore, the trial court "in essence act[ed] as the Appellate Division of the arbitrator." It performed a comprehensive review of the arbitrator's decision and affirmed the award. 

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Thank You, Captain Obvious — It Is Improper To Throw Your Records In A Dumpster In Advance Of A Lawsuit

 by:  Peter J. Gallagher (@pjsgallagher)

When most litigators hear the term “spoliation” nowadays, they probably think of emails, servers, document retention policies, and back-up tapes. But the Appellate Division recently reminded us that old-fashioned spoliation is still alive and well (and improper).

In Hess Corporation v. American Gardens Management Company, plaintiff sued various single-purpose entities with which plaintiff had contracted to sell oil and gas. Plaintiff also sued the individual owner of all of these entities, which were essentially judgment proof, arguing that it was entitled to pierce the corporate veil and hold him liable because he had co-mingled funds and fraudulently conveyed and diverted assets from the various corporate entities for his personal use.

During discovery, plaintiff served the individual defendant with a document request. The individual defendant failed to respond and his answer was stricken. He later moved to reinstate his answer, first arguing that he could not answer the discovery request without implicating his Fifth Amendment right against self incrimination (which the court rejected) and then claiming that he did not have many of the documents requested. Based on the latter, the court vacated its prior order and reinstated his answer.

 

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When Can Foreclosing Lenders Be Accused Of Acting In Bad Faith?

 by:    Peter J. Gallagher

In a recent decision, the Chancery Division denied a lender’s motion to strike a borrower’s contesting answer in a foreclosure lawsuit, holding that the borrower had adequately pled a claim that the lender acted in bad faith.  While this decision is unique based on the facts of the underlying dispute, it does, by contrast, serve as a reminder that lenders generally cannot be held to have acted in bad faith when they simply attempt to enforce the terms of loan documents as written. 

In Wells Fargo Bank, N.A. v. Schultz, plaintiff obtained a mortgage from World Savings Bank (which later changed its name to Wachovia Mortgage, FSM, which was later acquired by and merged into Wells Fargo) under a “Pick-a-Payment” mortgage program.  Several years later, this program became the subject of a class action lawsuit, the settlement of which provided that Wells Fargo both pay class members, including defendant Schultz, a small sum and also make loan modifications available to them.  It is the second of these requirements that ended up getting Wells Fargo in trouble.  Defendant presented evidence to the court that led Judge Doyne to conclude that she was “getting the run around” from Wells Fargo, including by being told that she failed to submit documents that she certified that she had submitted, and when Wells Fargo eventually confirmed that she had submitted the documents, telling her that the modification program was no longer available.  Judge Doyne observed that defendant may not have a right to be approved for a specific modification, but that once Wells Fargo made one available to her, it was obligated to “act in good faith as to the provision of the modification.”  To be clear, Judge Doyne did not rule that Wells Fargo had acted with bad faith; instead, he simply ruled that defendant had pled enough in connection with her claims related to the modification that her answer could not be stricken. 

While this case presents a situation where a lender is alleged to have acted in bad faith after agreeing to entertain an application for a loan modification, the law in New Jersey is well settled that a lender cannot generally be deemed to have acted in bad faith when it seeks to enforce the terms of a note or mortgage as written.  Stated differently, lenders cannot be barred from enforcing loan and mortgage documents merely because they seek to enforce their express contractual rights.  Indeed, “a creditor's duty to act in good faith does not extend to foregoing its right to accelerate upon default or otherwise compromising its contractual rights in order to aid its debtor.” Glenfed Financial Corp. v. Penick Corp.   For instance, in Creeger Brick & Building Supply, Inc. v. Mid-State Bank & Trust Co., — a decision cited by the Appellate Division with approval in Glenfed — a Pennsylvania appeals court held:

. . . a lending institution does not violate a separate duty of good faith by adhering to its agreement with the borrower or by enforcing its legal and contractual rights as a creditor. The duty of good faith imposed upon contracting parties does not compel a lender to surrender rights which it has been given by statute or by the terms of its contract. Similarly, it cannot be said that a lender has violated a duty of good faith merely because it has negotiated terms of a loan which are favorable to itself. As such, a lender generally is not liable for harm caused to a borrower by refusing to advance additional funds, release collateral, or assist in obtaining additional loans from third persons. A lending institution also is not required to delay attempts to recover from a guarantor after the principal debtor has defaulted.

In other words, if the defendant in Schultz was accusing Wells Fargo of bad faith simply because the lender was seeking to enforce its rights under the plain language of the relevant note and mortgage, the result would likely have been different.