JOSEPH DIFALCO v. JOHN MERLINO JR ESQ MERLINO GONZALEZ (2013)

Plaintiff, Joseph DiFalco, appeals from the Law Division's order of June 29, 2012, that dismissed with prejudice his complaint against defendants Joseph R. Merlino, Jr., and his law firm, Merlino and Gonzalez (collectively, the Merlino defendants).   The order reflects the judge's determination that plaintiff “fail [ed] to join indispensable parties” and “fail[ed] to comply with the entire controversy doctrine [ (ECD) ].” We set forth the procedural history at length because it is critical to our consideration of the issues presented on appeal.

I.

The Hodgson Action

In October of 2009, represented by Lenore M. Kasperowicz, plaintiff filed a complaint against Hodgson Holding, LLC;  Sabrina Hodgson, Inc.;   Antoinette Hodgson and Sabrina Hodgson.   In December of 2009, plaintiff filed an amended complaint adding Thomas Hodgson and his wife as defendants (collectively, the Hodgson defendants).¹  Plaintiff alleged defendants failed to repay various loans and lines of credit which were secured by mortgages on several properties.

In the third count of the amended complaint, plaintiff alleged that Antoinette and Thomas had executed a mortgage for property located at 33 North Willow Street, Montclair (the Willow Street property) to secure a $400,000 loan.   Plaintiff prepared a discharge of that mortgage based upon alleged representations that it would be replaced with a mortgage on other property.   Plaintiff further contended that, even though the discharge was recorded, the Hodgson defendants never filed a substitute mortgage.

Kasperowicz's Rule 4:5–1 certification in the amended complaint stated that “the matter in controversy is not the subject of any pending litigation․  Additionally, the undersigned is unaware of any additional parties which should be joined in this matter.”   The certification continued, “I recognize the continuing obligation of each party to file and serve ․ an amended certification if there is a change in the facts stated․”  The Hodgson defendants filed an Answer to the amended complaint in February 2010.   In January of 2011, plaintiff's current counsel, Philip B. Vinick, filed a substitution of attorney and succeeded Kasperowicz.

Meanwhile, on December 9, 2010, judgment was entered against Antoinette in federal court for the Southern District of New York in connection with her guilty pleas to wire fraud and conspiracy to commit wire fraud.   Antoinette was sentenced to seventy-two months in prison;  the amount of restitution set forth in the judgment of conviction was “TBD.” On March 17, 2011, the judgment was amended to reflect restitution in the amount of $22,978,739.01.   Along with dozens of other names, plaintiff's name appeared on the “Restitution List,” along with an amount, i.e., $2 million.

In March and June 2011, plaintiff moved for and obtained summary judgments against the Hodgson defendants.²  On August 1, 2011, Thomas filed a voluntary petition in bankruptcy.   The petition identified plaintiff as having a $400,000 unsecured non-priority claim.   Thomas also identified the litigation, and other litigation plaintiff instituted against him, in the petition.   Sabrina filed a voluntary petition in bankruptcy on September 15, 2011, identifying plaintiff as a creditor.   Sabrina also identified the litigation and stated that plaintiff held an unsecured non-priority claim against her in the amount of $1,450,000.

Plaintiff was provided with notice of both petitions.   The Bankruptcy Court entered a discharge in Thomas's favor on November 10, 2011, and in Sabrina's favor on December 30, 2011.

The Merlino Action

While the first action was pending, on October 29, 2010, plaintiff filed a complaint against the Merlino defendants, alleging causes of action sounding in legal malpractice, negligent misrepresentation and negligence.   Specifically, plaintiff claimed that Merlino filed plaintiff's discharge of mortgage on the Willow Street property, permitted Antoinette to place a mortgage on the property in favor of another lender and neither paid off plaintiff's mortgage nor substituted another mortgage on other property in its place.

Vinick's Rule 4:5–1 certification in the complaint stated “the matter in controversy is not the subject of any other action pending in any Court ․ and ․ no such action ․ is contemplated.   To plaintiff's knowledge no other party should be joined in this action.”   On December 29, 2010, the Merlino defendants filed an answer to the complaint.   In his Rule 4:5–1 certification, defense counsel certified that “the matter in controversy is the subject of another action,” and he provided the caption and docket number for the Hodgson action.   He also stated, “[p]ending the outcome of further discovery, Antoinette ․ and Thomas ․ may be necessary parties to this action.”   Discovery ensued.

On April 10, 2012, more than one year after filing their answer, the Merlino defendants moved to dismiss the complaint, arguing that plaintiff failed to comply with Rule 4:5–1(b)(2) and violated the ECD. Alternatively, the Merlino defendants sought “to pierce the attorney-client privilege.” ³  After considering oral argument, the judge stated:

[T]he complaint in this matter makes it very clear, that the claims against the [Merlino defendants] were known in 2009 and yet [they weren't] added․  I do believe this is a violation of ․ the [ECD].

[A]ll the claims could have and should have been brought back in the prior case.   And the fact that they weren't, particularly now since there's judgments against the defendants, ․ it looks like to the plaintiff, I can't get my money from them so let's look for somewhere else later on․  [T]he [ECD] applies.   I believe it is an appropriate remedy because ․ the prejudice by losing the other parties is ․ just too great.

The judge entered an order dismissing the complaint with prejudice, and this appeal ensued.

II.

Plaintiff contends in a single point heading that the motion judge erred in granting the Merlino defendants' motion to dismiss the complaint pursuant to Rule 4:5–1(b)(2).   We agree and reverse.

“[A]pplication of the [ECD] depends on the exercise of judicial discretion in the facts of each case.”  Prevratil v. Mohr, 145 N.J. 180, 190 (1996).   In considering the propriety of granting a motion to dismiss, we examine the record in a light most favorable to plaintiff.  Alpha Beauty Distributors, Inc. v. Winn–Dixie Stores, Inc., 425 N.J.Super. 94, 97 (App.Div.2012) (citation omitted).   With these standards in mind, we consider plaintiff's argument.

The ECD reflects our courts' “long-held preference that related claims and matters arising among related parties be adjudicated together rather than in separate, successive, fragmented, or piecemeal litigation.”  Kent Motor Cars, Inc. v. Reynolds and Reynolds, Co., 207 N.J. 428, 443 (2011).   “Underlying the [ECD] are the twin goals of ensuring fairness to parties and achieving economy of judicial resources.”  Ibid. The doctrine has undergone significant evolution.

“Originally a claim preclusion rule, over time, the doctrine evolved to require joinder of parties as well, and culminated in the 1990 adoption of Rule 4:30A.” Ibid. (citations omitted).  “In its first formulation, Rule 4:30A was broad, requiring joinder of claims and parties and imposing preclusion as a penalty to ensure compliance with that mandate.”  Ibid.

However, following “[s]cholarly criticism of the doctrine's growth,” the Court ultimately agreed with “two significant changes” recommended by the Civil Practice Committee.  Id. at 444.  “First, Rule 4:30A was amended to limit its scope to mandatory joinder of claims.   Second, Rule 4:5–1(b)(2) was adopted to address joinder of parties.”  Ibid.

Taken together, both Rule 4:30A and Rule 4:5–1(b)(2) advance the same underlying purposes.   As it relates to claims and to parties, they express a strong preference for achieving fairness and economy by avoiding piecemeal or duplicative litigation.   Both, however, recognize that the means of accomplishing those goals rests with the court.   That is, Rule 4:30A requires joinder of claims but grants authority to a trial judge to create a safe harbor in an appropriate case.   Similarly, Rule 4:5–1(b)(2) requires that names of potentially liable or relevant parties be disclosed to the court, leaving to it the decision about whether to join them or not.

[Id. at 445.]

As currently articulated, the ECD requires only that “all aspects of the controversy between those who are parties to the litigation be included in a single action.”   Pressler and Verniero, Current N.J. Court Rules, comment 1 on R. 4:30A (2013).

“The purpose of paragraph (b)(2) of [Rule 4:5–1] is to implement the philosophy of the [ECD].” Pressler and Verniero, Current N.J. Court Rules, comment 2.1 on R. 4:5–1 (2013) (citing R. 4:27–1, R. 4:29–1(b), R. 4:30A and commentary).   Rule 4:5–1(b)(2) requires each party to include with its first pleading:

a certification as to whether the matter in controversy is the subject of any other action pending in any court ․, or whether any other action ․ is contemplated;  and, if so, ․ identify such actions and all parties thereto.   Further, each party shall disclose in the certification the names of any non-party who should be joined in the action pursuant to R. 4:28 or who is subject to joinder pursuant to R. 4:29–1(b) because of potential liability to any party on the basis of the same transactional facts.   Each party shall have a continuing obligation during the course of the litigation to file and serve on all other parties and with the court an amended certification if there is a change in the facts stated in the original certification.   The court may require notice of the action to be given to any non-party whose name is disclosed in accordance with this rule or may compel joinder pursuant to R. 4:29–1(b).

The Rule continues:

If a party fails to comply with its obligations under this rule, the court may impose an appropriate sanction including dismissal of a successive action against a party whose existence was not disclosed or the imposition on the non-complying party of litigation expenses that could have been avoided by compliance with this rule.   A successive action shall not, however, be dismissed for failure of compliance with this rule unless the failure of compliance was inexcusable and the right of the undisclosed party to defend the successive action has been substantially prejudiced by not having been identified in the prior action.

[R. 4:5–1(b)(2).]

Thus, “[t]he Rule's only authorization for a dismissal relates to the preclusion ‘of a successive action’ that is appropriate only if ‘the failure of compliance was inexcusable and the right of the undisclosed party to defend the successive action has been substantially prejudiced by not having been identified in the prior action.’ ”  Alpha Beauty, supra, 425 N.J.Super. at 101 (quoting R. 4:5–1(b)(2)).

We have explained:

[A] trial court deciding an entire controversy dismissal motion must first determine from the competent evidence before it whether a Rule 4:5–1(b)(2) disclosure should have been made in a prior action because a non-party was subject to joinder pursuant to Rule 4:28 or Rule 4:29–1(b).  If so, the court must then determine whether (1) the actions are “successive actions,” (2) the opposing party's failure to make the disclosure in the prior action was “inexcusable,” and (3) “the right of the undisclosed party to defend the successive action has been substantially prejudiced by not having been identified in the prior action.”

[700 Highway 33 LLC v. Pollio, 421 N.J.Super. 231, 236 (App.Div.2011) (quoting R. 4:5–1(b)(2)).]

“If those elements have been established, the trial court may decide to impose an appropriate sanction.   Dismissal is a sanction of last resort.”  Id. at 236–37 (citing Kent Motor Cars, supra, 207 N.J. at 453–54).

Plaintiff contends that the Merlino action was not a “successive action” because the Hodgson action was based on different operative facts, the relief sought was appreciably different, and the Hodgson action was still pending when he filed his complaint in the Merlino action in October 2010.   He also argues that any failure to comply with the Rule was not inexcusable, the Merlino defendants were not substantially prejudiced and the Merlino defendants waived any assertion of the ECD. Because we agree that any violation of Rule 4:5–1(b)(2) by plaintiff did not cause “substantial prejudice” to the Merlino defendants, and, therefore, dismissal was a mistaken exercise of the judge's discretion, we choose not to address the other arguments.

“The phrase ‘substantial prejudice’ is used in Rule 4:5–1(b)(2) as a limitation on the court's exercise of the power of dismissal as a sanction.   As a result, the Rule is consistent with our general preference for addressing disputes on the merits and reserving dismissal for matters in which those lesser sanctions are inadequate.”  Kent Motor Cars, supra, 207 N.J. at 447.   We have said, “Substantial prejudice in th[e] context [of Rule 4:5–1(b)(2) ] means substantial prejudice in maintaining one's defense.   Generally, that implies the loss of witnesses, the loss of evidence, fading memories, and the like.”  Mitchell v. Procini, 331 N.J.Super. 445, 454 (App.Div.2000) (citation omitted);  see also Kent Motor Cars, supra, 207 N.J. at 446 (citing Mitchell with approval).

In granting the motion to dismiss, the judge only briefly described the prejudice incurred by the Merlino defendants as their “los[s][of] the other parties.”   In their brief, the Merlino defendants contend the prejudice suffered was the “eviscerat[ion]” of their “ability to pursue the other defendants in the Hodgson [a]ction both by way of cross-claims for contribution and to apportion liability as joint tortfeasors.”   We reject the argument.

The Merlino defendants knew of the Hodgson action and identified it in the Rule 4:5–1(b)(2) certification in their answer, which was filed before Vinick substituted as counsel in the Hodgson action, while that action was pending, before the grant of summary judgment and prior to either Thomas or Sabrina seeking protection in the bankruptcy court.   The Merlino defendants' certification also identified the potential need for other necessary parties to be impleaded.   Yet, the Merlino defendants chose not to file a third-party complaint in which they could have sought the exact relief they now assert has been denied.   We do not know enough about the circumstances regarding the Merlino defendants' representation of the Hodgson defendants to determine whether a reasonable explanation exists for this decision;  but, the circumstances mitigate strongly against any finding that the Merlino defendants suffered “substantial prejudice” by being omitted from Kasperowicz's certification.

To the extent the Merlino defendants assert other claims of substantial prejudice, we reject them.   The contention that the opportunity to have obtained discovery from the Hodgson defendants has been lost rings hollow, because the Merlino defendants have failed to demonstrate why any of the Hodgson defendants cannot be compelled to provide information through the use of subpoena or at a deposition.   Additionally, whether the Merlino defendants were parties in the Hodgson action or not, there is nothing to indicate that Antoinette's indictment, guilty plea and sentence, or Thomas' or Sabrina's bankruptcies would otherwise not have occurred.   Thus, the Merlino defendants would have found themselves in the same position they are now even if they were parties in the Hodgson action.

Lastly, we reject any argument that plaintiff will obtain a windfall if permitted to prosecute his complaint against the Merlino defendants.   The record does not reveal what, if any, monies plaintiff has actually collected from the Hodgson defendants, although defendants assert in their brief that “plaintiff [has] obtained possession of a different property [in] Montclair.”   We are certain that, to the extent he has and those amounts reflect the same quantum of damages he claims were proximately caused by the Merlino defendants, the trial judge has adequate means at his disposal to assure plaintiff does not obtain a “double recovery.”

Reversed and remanded.   We do not retain jurisdiction.

FOOTNOTES

FN1. To avoid confusion, we will sometimes utilize the first names of the Hodgson defendants.   We intend no disrespect by this informality..  FN1. To avoid confusion, we will sometimes utilize the first names of the Hodgson defendants.   We intend no disrespect by this informality.

FN2. Mrs. Thomas Hodgson successfully moved for and obtained an order dismissing the case against her..  FN2. Mrs. Thomas Hodgson successfully moved for and obtained an order dismissing the case against her.

FN3. It is unclear from the record the exact nature of this request for alternative relief.   At oral argument on the motion, the issue was never addressed..  FN3. It is unclear from the record the exact nature of this request for alternative relief.   At oral argument on the motion, the issue was never addressed.

PER CURIAM