BUSINESS LAWSUIT BLOG

In January 2010, the New York legislature enacted Insurance Law § 3224(a) (“Prompt Pay Law”) to ensure that insurance companies paid their claims in a timely fashion. However, it was not clear whether the statute granted a party a private right of action. In a recent decision, the New York Supreme Court for Kings County held that it did. Maimonides Medical Center v. First United American Life Insurance Co., 2012 N.Y. Misc. LEXIS 701 (N.Y. Sup. Ct. Feb. 22, 2012).

The plaintiff in the case, Maimonides Medical Center (“Maimonides”), was a non-profit hospital that provided inpatient healthcare services. The cases stemmed from the hospital’s treatment of six patients, each of whom held Medigap policies issued by the defendant, First United American Life Insurance Company (“First United”). Some of the patients remained at the hospital for more than a year. Between the six, their stays at the hospital exceeded four years. Malimonides billed First United more than $19 million, but the insurance company paid them only $4,078,663.29. Consequently, Malinonides filed suit against First United, alleging breach of contract and violation of the Prompt Pay Law.

The Prompt Pay Law provides that, where an insurer is clearly liable to pay a healthcare claim, the health care provider or patient must be paid

a)      within 30 days of receipt of an electronically transmitted claim, or

b)      within 45 days of receipt of a claim transmitted by any other means.

See Insurance Law § 3224-a.

Additionally, where liability for a claim is not reasonably clear, the insurer must pay any undisputed portion and, within 30 days of receiving the claim, provide either written notification specifying why it is not liable or a written request for any additional information necessary to determine its liability. Id. This was not done.

The issue before the New York Court was whether the Prompt Pay Act gave Maimonides the ability to sue First United. When considering whether a statute implies a private right of action, courts will consider:

a) whether the plaintiff is one of the class for whose particular benefit the statute was enacted;

b) whether recognition of a private right of action would promote the legislative purpose; and  

c) whether creation of such a right would be consistent with the legislative scheme.

Sheehy v. Big Flats Community Day, Inc., 73 N.Y.2d 629 at 633 (1989).

The Court found that Maimonides satisfied the first two prongs, but First Insurance argued that the hospital did not satisfy the third – namely, that creating a right for Maimonides to sue would go against the legislative scheme of the statute. First Insurance argued that “a private right of action would be inherently inconsistent with enforcement,” but the Court disagreed. “Although defendant argues that the Prompt Pay Law is predominantly a remedial statute, it clearly creates rights for health care providers and patients and affirmative duties for insurers,” the Court held. “Before the statute was passed, the only requirements for timely payment of health care claims were contractual.”

The statute “was enacted to protect health care providers and patients against insurance companies that fail to pay claims in a timely fashion.”

The Court concluded that Maimonides was a member of the class that the legislature intended to benefit by passing the law, particularly because the purpose of the law was interpreted to be preventing the delay in the payment of health care claims. Therefore it had a private right of action available to it.

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

Under New Jersey’s Condominium Act, housing-related disputes are required to be settled via arbitration or a similar method of alternative dispute resolution (“ADR”). In a recent decision, the Appellate Division of the Superior Court of New Jersey clarified the types of disputes to which this applies and, hence, when ADR is and is not required. Bell Tower Condominium Association v. Haffert, Docket No. A-3218-10T2.

In that case, the plaintiff, Bell Tower Condominium Association (“Association”) owned a five-unit condominium in Sea Isle. The defendants, Pat Haffert and Terry Downey, owned one of the units. In May 2010, the Association’s Board approved an $80,000 special assessment for repairs. The Defendant Haffert was the fifth of the five Board members. Unfortunately, he was not present at the 2010 meeting during which the Board approved the assessment. Four of the unit owners were each assessed $14,400, but the defendants were assessed $22,400 because their unit was substantially larger than the other four. The defendants subsequently refused to pay the amount assessed to them.

The Association filed a complaint, demanding judgment in favor of the Association in the amount of $22,400 for the unpaid special assessment, as well as attorney’s fees and costs. The defendants filed a counterclaim asserting that the Association had failed to adhere to the Association’s Master Deed, bylaws and applicable statutes, and sought an order requiring arbitration or mediation of the dispute. The defendants relied heavily on a section of the Planned Real Estate Development Full Disclosure Act (“PREDFDA”), which requires condominium associations to establish an arbitration mechanism to resolve disputes between a condominium board and its unit owners. See N.J.S.A. 45:22A-44. However, a lower court determined that the PREDFDA requirements were inapplicable to condominiums containing fewer than ten units, and Bell Tower had only five. The lower court also concluded there was no genuine dispute about the validity of the assessment or the defendant’s obligation to pay their share. The court granted summary judgment in favor of the Association. The defendants appealed.

Upon review, the Appellate Division of the Superior Court of New Jersey considered whether the lower court erred when refusing to send the Association’s claim for judgment to arbitration. First, the Appellate Court noted that there is a strong public policy favoring arbitration, citing prior case law that held that “[l]itigation ought to be a last resort, not a first one.” Billig v. Buckingham Towers Condominium Association I, Inc., 287 N.J. Super. 551, 564 (App. Div. 1996). Additionally, the Appellate Division had previously construed the PREDFDA statute to require condominium associations to provide a means of resolving “housing-related disputes” as an alternative to litigation. See Finderne Heights Condominium Association, Inc. v. Rabinowitz, 390 N.J. Super. 154, 163 (App. Div. 2007).

The Bell Atlantic Court determined that the resolution of the appeal turned on whether the dispute between the Association and the defendants was a “housing-related dispute” within the meaning of N.J.S.A. 46:8B-14(k) (the statute did not define the term).  If the dispute was housing-related, the Association conceded that arbitration or some other method of ADR would be required.

Though the Court noted that the term “housing-related disputes” is broad, it is not ambiguous:

“In light of the autonomy that unit owners surrender by choosing to live in a condominium, we cannot agree with the Association that its management of the condominium’s common elements, and its imposition of special assessments, should be carved out as an exception to the broad right of unit owners to demand arbitration to resolve ‘housing related disputes.’…The term ‘housing-related disputes’ signifies that only disputes that arise from the parties’ condominium relationship are subject to the arbitration provisions of N.J.S.A. 46:8B-14(k). Any other dispute would be resolved either in the Law Division or in the municipal courts.”

Bell Tower at x.

The Court differentiated other disputes – such as an auto accident in a condominium parking lot – as examples of matters that would not be treated as “housing-related disputes.” The Court concluded that the dispute between the Association and the defendants did qualify as such a dispute under the language of the statute, and consequently, arbitration or other ADR was required to resolve the dispute.

“In sum, the strong public policy of this State favoring arbitration, the broad and unconditional language chosen by the Legislature when it used the term ‘housing-related disputes,’ and the present dispute’s origins in the disagreement over the scope of the special assessment, all compel the conclusion that under the statute, arbitration or other form of alternative dispute resolution is required.” Id. at x

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© 2012 Nissenbaum Law Group, LLC

May a landlord charge a tenant a fixed rate each time the landlord has to consult its lawyers for matters related to a lease agreement, even if that fixed rate is higher than the costs the landlord actually incurs?

The Appellate Division of the Superior Court of New Jersey considered this issue in a recent decision. Green v. Morgan Properties, Superior Court of New Jersey: Appellate Division (A-3203-10). In that case, the plaintiffs – tenants of apartment complexes owned by the defendant and landlord, Morgan Properties – were subject to a lease provision that required them to pay attorney’s fees of $400 plus costs anytime the landlord used the services of an attorney for any lease-related matter. The $400 fee applied regardless of whether or not litigation was commenced or whether the attorney was a member of the landlord’s in-house counsel. The landlord owned 131 apartment complexes in 10 states and filed an average of 200 evictions a month in Camden County alone.

The plaintiffs were sued on eviction complaints. In addition to alleging wrongful eviction, the plaintiffs also brought a claim under the Consumer Fraud Act (“CFA”), claiming that the attorney’s fees provision was unconscionable and that the landlord misrepresented the nature of the fees. The Law Division of the Superior Court of New Jersey in Camden County granted the defendant’s motion to dismiss, holding that a landlord is allowed to collect reasonable legal fees incurred in an eviction. The Court found the $400 fee to be reasonable. The plaintiffs appealed.

The Appellate Division rejected the plaintiffs’ claim that the landlord was barred from collecting attorney’s fees from tenants because it is represented by in-house counsel. However, the Court also found that the plaintiffs stated a claim upon which relief could be granted when they alleged that the landlord acted unlawfully in seeking legal fees that exceeded the costs incurred.

The Rules of Professional Conduct bar a non-lawyer from sharing in the fees of an attorney. R.P.C. 5.4 (a). An agreement between a lawyer and non-lawyer regarding the sharing of fees is void and unenforceable “because it is founded upon prohibited activity and is against public policy.” Green at 5 (citing Infante v. Gottesman, 233 N.J.Super. 310, 315 (App. Div. 1989).

Citing a Professional Ethics Opinion that dealt with this Rule of Professional Conduct, the Court stated that the “only situations in which a lawyer may properly permit a client to receive and retain fees paid by others on account of his legal services are when such payments are to reimburse the client in whole or in part for the client’s legal expenses actually incurred in the specific matter for which they are paid.” N.J. Adv. Comm. On Prof’l Ethics Opinion 93, 89 N.J.L.J. 248 (1966).

Though an attorney’s violation of the Rules of Professional Conduct does not give rise to a private cause of action against an attorney, the plaintiffs’ claims were directed instead against the non-attorney defendants, resting on an alleged illegality of the lease’s fees provision and misrepresentation of the nature of the fees sought. The Court held that the plaintiffs adequately alleged misrepresentation of the nature of the fees by showing that the defendants required legal costs of $400 when they had actually incurred costs much smaller than that. While fee-shifting provisions that set fixed amounts are sometimes allowable, they are subject to court review for their reasonableness. Id. at 6. The Appellate Court reversed and remanded the lower court’s decision on that basis.

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© 2012 Nissenbaum Law Group, LLC

The answer is yes. Defendant’s prior non-compliance with federal tax laws can be used to prove the defendant’s intent to commit the crime charged.

This was addressed in a case heard in the United States Court of Appeals for the Third Circuit. US v. Daraio, 445 F. 3d 253 (C.A. 3 (N.J.), 2006). In that case, the grand jury returned an indictment charging Daraio, the Defendant, with one count of tax evasion for violating 26 U.S.C. §7201 and 18 U.S.C. §2. Specifically, the indictment charged Daraio with the following:

knowingly and willfully attempt[ing] to evade and defeat the payment of a substantial part of the payroll taxes due and owing by Eagle Security, Inc. to the United States for the quarterly period that included April 1994 through April 1998, in the amount of approximately $222,607.40, by directing clients of Eagle Security, Inc. to pay their unpaid balances that they owed to Eagle Security, Inc. to E.S.S. Co. Id.

The indictment charged that Daraio directed the clients of Eagle Security, Inc. to pay their unpaid balances to E.S.S. Co. around the same time IRS issued levies on ten clients of Eagle Security, Inc. Those levies required them to pay the IRS the balances that would otherwise be owing to Eagle Security. Id. The government introduced this evidence to prove Daraio’s willingness or intent based on her ‘general feelings or general attitude towards the IRS’. Id. The evidence included the following items:

(1) Payroll tax records for Joseph Daraio, Daraio’s husband, trading as ESS–Co. and Quest Investigators, pertaining to tax periods from 1989–1993 including the records themselves, as well as, for certain tax periods, certifications of a “lack of records” indicating the failure to file tax returns;

(2) Certifications by the IRS that Eagle Security did not file payroll tax returns in 1990–1993 and 1999–2004;

(3) Payroll tax records, again including certifications of lack of records, for ESS–Co., beginning in the third quarter of 1998 through the first quarter of 2004;

(4) Certifications of lack of records for ESS–Co. from 1992–1998 and 2000–2004;

(5) Corporate tax records for Eagle Security from 1990–2003,that showed that it had not filed forms with the IRS in 1999, 2001, and 2002;

(6) Corporate tax records for ESS–Co. from 1998–2003; and

(7) Joint personal income tax returns for Joseph Daraio and Daraio from 1984 and 1989–2003.

Id. at 256.

Before presenting this evidence at trial, the prosecutor filed and served a notice of its intent to introduce the evidence at trial. At trial, the lower court gave the following limiting instructions to the jury:

Ladies and gentlemen of the jury, you will soon, and at various other times during the trial, hear evidence of acts the defendant—of acts of the defendant that may be similar to those charged in the indictment, but which were committed on other occasions.

 You must not consider any of this evidence in deciding if the defendant committed the acts charged in this indictment. However, you may consider this evidence for other very limited purposes.

 If you find beyond a reasonable doubt from other evidence in this case, that the defendant did commit the acts charged in the indictment, then you may consider the evidence of similar acts allegedly committed on other occasions, to determine, one, whether the defendant had the intent necessary to commit the crime charged in the indictment; two, whether the defendant had the motive to commit the act charged in the indictment; or, three, whether the defendant willfully committed the acts for which she is on trial, or rather committed them by accident, negligence, or mistake.

Id. at 257.

After the jury returned a guilty verdict, Daraio appealed. The Court of Appeals rejected Daraio’s arguments and affirmed her conviction. In determining the admissibility of the evidence at issue, the Court applied the following four-part test:

(1) The evidence must have a proper purpose; Id. at 264.

(2) It must be relevant; Id.

(3) Its probative value must outweigh its potential for unfair prejudice; and Id.

(4) The court must charge the jury to consider the evidence only for the limited purposes for which it is admitted. Id.

The Court held that the evidence of Daraio’s “history of non-compliance with the IRS” was relevant to prove willfulness and the lower court’s limiting instructions were adequate to prevent any unfair prejudice. Id. at 265. The Court also relied on precedent which held that ‘a defendant’s past taxpaying record is admissible to prove willfulness circumstantially because such evidence is indicative of intent to evade the tax system.’ Id.

Thus, the Court allowed the admission of evidence of defendant’s prior taxpaying records to prove the defendant’s intent to evade taxes.

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

Recently, the Appellate Division of New York, revived a lawsuit over the fiduciary duty owed by members of a limited liability company (“LLC”) to one another in a real estate deal. Fiduciary duty means the duty of trust that one person owes another. In that case, there was an agreement between the members of the LLC that they did not have a fiduciary relationship. However, the Court held that the agreement failed to preclude the claims for the breach of fiduciary duty owed by the members to one another. Pappas v. Tzolis, 2011 WL 4089439, 1, 1 (N.Y. A.D. 2011).

In that case, Plaintiffs, Steve Pappas and Constantine Ifantopoulos and Defendant, Steve Tzolis, were partners in Vrahos, a limited liability company. Vrahos was specifically created to enter into a long-term lease of a building in lower Manhattan. The lease required the payment of a security deposit and personal guarantees from Tzolis and plaintiff Steve Pappas. The operating agreement specified that Tzolis would furnish the security deposit for the lease. It also stated that Tzolis would have the right to sublease the building as consideration for furnishing the security deposit. But, this right to sublease was conditioned on Tzolis making certain additional payments to Vrahos.

Tzolis exercised his right to sublease the building, but failed to make additional payments to Vrahos. A few months later, Tzolis offered to buy out his partner’s shares in Vrahos. Tzolis was to pay $1 million to Mr. Pappas and $500,000 to Mr. Ifantopoulos. At the time the parties executed the assignment agreement, they also signed a handwritten closing certificate. One of the terms of the closing certificate stated: “[E]ach of the undersigned Sellers agrees that Steve Tzolis has no fiduciary duty to the undersigned Sellers in connection with such assignments.” Id at 1. Shortly after the assignments to Tzolis became effective, he assigned the lease to a third party for $17.5 million.

The plaintiffs were outraged. They alleged that Tzolis had started the negotiations for the assignment of the lease months before he offered to buy their shares, and that Tzolis had a duty to inform them and share the profits from the deal. The plaintiffs filed a complaint with causes of action for breach of contract, fraud, breach of fiduciary duty, misappropriation of business opportunity, breach of the implied covenant of good faith and fair dealing and a derivative claim filed on behalf of Vrahos.

Tzolis moved to dismiss the complaint based on the terms of the closing certificate executed by the parties. The lower court granted Tzolis’ motion, finding that the plaintiffs had no cause of action because the contract “eliminates the fiduciary relationship that would, otherwise, be owed by the members to each other and to the LLC.” Id at 3.

 The Appellate Division disagreed with the lower court’s ruling. It held that “[A] fiduciary cannot by contract relieve itself of the fiduciary obligation of full disclosure by withholding the very information the beneficiary needs in order to make a reasoned judgment whether to agree to the proposed contract.” Id. at 5. It also held that the plaintiffs and the defendant were fiduciaries in matters relating to Vrahos until the closing of the buy-out transaction. Therefore, up until that moment, Tzolis had a fiduciary duty to disclose to his partners, the negotiations related to the assignment of the Vrahos lease.

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

If the mediation results in the parties’ total or partial agreement, it shall be reduced to writing and a copy thereof furnished to each party. The agreement need not be filed with the court, but if formal proceedings have been stayed pending mediation, the mediator shall report to the court whether agreement has been reached. If an agreement is not reached, the matter shall be referred back to court for formal disposition.

Comments/Questions: gdn@gdnlaw.com

© 2011 Nissenbaum Law Group, LLC