FJERSEY CENTRAL ABSORPTION, INC v. KHUBANI ENTERPRISES, INC

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

This opinion shall not "constitute precedent or be binding upon any court." Although it is posted on the internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R.1:36-3.

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-0

CENTRAL ABSORPTION, INC.,

Plaintiff-Appellant,

v.

KHUBANI ENTERPRISES, INC.,

Defendant-Respondent.

November 1, 2016

Argued October 6, 2016 Decided

Before Judges Alvarez, Accurso, and Higbee.

On appeal from the Superior Court of New Jersey, Law Division, Essex County, Docket No. L-2022-14.

Richard P. Coe, Jr., argued the cause for appellant (Weir & Partners, LLP, attorneys; Mr. Coe and Andrew Park, on the briefs).

Martin David Katz argued the cause for respondent.

PER CURIAM

We reverse a Law Division judge's May 29, 2015 denial of plaintiff Central Absorption, Inc.'s motion to vacate a default judgment, and grant of defendant Khubani Enterprises, Inc.'s application for the turnover of funds. We remand and reinstate plaintiff's answer to defendant's counterclaim.

On March 24, 2014, plaintiff filed a complaint seeking $34,626.30 in charges allegedly owed by defendant for industrial air conditioning services. Defendant filed an answer, and counterclaimed for breach of contract, common-law fraud, and violations of the Consumer Fraud Act (CFA), N.J.S.A. 56:8-1 to 198. Plaintiff timely filed an answer to the counterclaim.

Defendant served interrogatories and a notice to produce on June 4, 2014. Receiving no reply, counsel wrote to plaintiff's first attorney on July 15, 2014, extending the time frame ten days for compliance with the discovery demands. In the absence of a response, on July 25, 2014, defendant filed a motion to dismiss without prejudice, pursuant to Rule 4:23-5(a)(1). The unopposed motion was granted on August 22, 2014.

On October 23, 2014, defendant moved to dismiss the complaint with prejudice in accordance with Rule 4:23-5(a)(2). That motion, also unopposed, was granted November 21, 2014.

On January 12, 2015, defendant sought to enter default on the counterclaim, submitting an employee's six-page certification, with attached exhibits, in support of the application. The certification and exhibits set forth defendant's basis for the $75,321.95 demand. The claim included defendant's payment to plaintiff for the initial "inspection and overhaul" of the cooling system in defendant's ninety-three-unit apartment building, and the cost of plaintiff's servicing of the system from 2008 to 2010. The certification references defendant's purchase and installation of individual air conditioning units for the apartments when the building's system failed, although it is not clear if the attachments include that cost. On February 23, 2015, the court entered final judgment against plaintiff for the requested $75,321.95.

Ultimately, the sheriff levied funds in plaintiff's bank account. Plaintiff contended the seizure was unlawful because the money in the account "represented amounts payable under [p]laintiff's employee taxes and 401K contributions . . . ." N.J.S.A. 34:11-31 (personal property shall not be seized "by virtue of any execution, attachment, or other process" until the owner of the assets has paid his employee's "wages then owing from such person"). By that point, costs and the sheriff's fee had increased the amount to $75,613.05. Plaintiff's account, having a total balance of $71,453.81, was frozen.

In opposition to the turnover of funds and support of an application to vacate the default judgment, plaintiff filed a certification by its office manager. The office manager stated that plaintiff's first attorney communicated via e-mail with the prior office manager, who left employment shortly after the complaint was filed. From July to October 2014, the first attorney wrote and called indicating he needed information, that failure to produce it would result in dismissal, and finally, that the case was dismissed. The office manager claimed she advised that attorney's office that the information relevant to the account had been already provided. She assumed, after making the calls, that the first attorney had taken care of the matter. At no time did plaintiff receive any court notices, a copy of the application for final judgment, proof of damages, or a copy of the final judgment. Finally, the office manager certified that plaintiff was not aware of the judgment until the business bank account was attached by the sheriff.

The first attorney also filed a certification, submitted with plaintiff's application to vacate the default judgment. He claimed he never received interrogatories or the two letters allegedly sent to him by defendant's counsel. The first attorney also denied receiving an application for final judgment, or a copy of the judgment once issued.

After oral argument on plaintiff's motion, the court found that although the first attorney denied receiving notice of the default application, "the court jacket contains the notices of [the] motion to dismiss . . . each of which is addressed to [the] correct address." The judge characterized plaintiff's argument that the Rule 4:23-5(a)(1) and (2) notice requirements were not satisfied as "misguided," indicating that such notices were necessary only when default was sought "against a self-represented litigant, or when an attorney must notify his or her own client as to the consequences of not producing discovery. Opposing counsel has no obligation to serve such notices upon his adversary, or his adversary's client." She therefore concluded that "the rules of court were complied with at each step, and there is no procedural obstacle to the turnover."

On appeal, plaintiff raises the following points

I. THE TRIAL COURT ERRED IN DENYING TO VACATE THE DEFAULT JUDGMENT AS PLAINTIFF DID NOT RECEIVE THE CRITICAL PROTECTIONS UNDER RULE 4:23-5.

A. Plaintiff Did Not Receive the Appendix II-A and II-B Notices or the Benefits of Representation on the Return Date of the Motion to Dismiss with Prejudice.

B. The Trial Court Failed to Take Any Required Action to Ensure Compliance under Rule 4:23-5 Before Dismissing Plaintiff's Complaint with Prejudice.

II. THE TRIAL COURT ERRED IN DENYING TO VACATE THE DEFAULT JUDGMENT GIVEN THE SIGNIFICANT PROCEDURAL DEFICIENCIES.

A. Defendant Improperly Entered Default by Failing to Comply with the Requirements of Rule 4:43-2.

B. Defendant Failed to Serve the Application for Judgment by Default and the Final Judgment on Plaintiff.

III. THE TRIAL COURT ERRED IN ORDERING THE TURNOVER OF PLAINTIFF'S FUNDS IN LIGHT OF THE PROCEDURAL DEFECTS AND EXEMPTIONS UNDER NEW JERSEY LAW.

We address only the first point. Our decision on that issue renders the other two points moot.

The grant or denial of a motion to reinstate a complaint dismissed under 4:23-5 "lies within the sound discretion of the trial court." Sullivan v. Coverings and Installation, Inc., 403 N.J. Super. 86, 93 (App. Div. 2008). Matters of discretion are not to be overturned unless "it appears that an injustice has been done." Ibid. We do not to disturb the factual findings of the trial judge unless "they are so manifestly unsupported by or inconsistent with the competent, relevant and reasonably credible evidence as to offend the interests of justice." D'Agostino v. Maldonado, 216 N.J. 168, 182 (2013). Ibid. However, "a trial court's interpretation of the law and the legal consequences that flow from established facts are not entitled to any special deference." Manalapan Realty L.P. v. Twp. Comm., 140 N.J. 366, 378 (1995).

Rule 4:23-5(a)(1) provides that "[i]f a demand for discovery . . . is not complied with . . . the party entitled to the discovery may . . . move, on notice, for an order dismissing or suppressing the pleading of the delinquent party." The motion must be supported by "an affidavit reciting the facts of the delinquent party's default," and "[u]nless good cause for other relief is shown, the court shall enter an order of dismissal or suppression without prejudice." Ibid.

When counsel for the delinquent party is served with the notice required by Rule 4:23-5(a)(1), counsel is in turn obligated to "serve a copy of the order on the client by regular and certified mail, return receipt requested, accompanied by a notice in the form prescribed by Appendix II-A of these rules, specifically explaining the consequences of failure to comply with the discovery obligation and to file and serve a timely motion to restore." Ibid.

In those instances in which the dismissal without prejudice is not vacated, the party entitled to discovery has the right after sixty days to move on notice for an order of dismissal with prejudice. R. 4:23-5(a)(2). Counsel for the delinquent party is then required, within seven days, "to file and serve an affidavit reciting that the client was previously served as required by subparagraph (a)(1) and has been served with an additional notification, in the form prescribed by Appendix II-B, of the pendency of the motion to dismiss . . . with prejudice." Ibid. The rule further requires the attorney for the delinquent party to appear on the return date of the motion. Ibid. The appearance is mandatory. Ibid.

The rule thus outlines a process in which the court must ensure that the defaulting party has been noticed of the application even if represented. In order to guarantee that notice is given, where either counsel does not appear or does not file an affidavit regarding notification, under Section 3 of the rule: "the court shall, unless exceptional circumstances are demonstrated, proceed by order to show cause or take such other appropriate action as may be necessary to obtain compliance with the requirements of this rule." Thus, the judge in this case was obliged to ensure plaintiff had notice.

Both the first attorney and plaintiff's office manager certified that they were unaware of the application for default judgment. Plaintiff's office manager knew that defendant was seeking information and that the case might be dismissed if it was not provided. But that is not equivalent to being formally put on notice that failure to respond to discovery requests might result in the entry of a judgment on the counterclaim in more than twice the amount demanded in the complaint. Because the first attorney did not appear or file anything with the court documenting service of the Appendix notices, the court should have taken steps to ensure that compliance with the rule had occurred.

The objective of Rule 4:23-5 is "to compel discovery responses rather than dismiss the case." A&M Farm & Garden Center v. Am. Sprinkler Mechanical, 423 N.J. Super., 528, 534 (App. Div. 2012) (citing Sullivan, supra, 403 N.J. Super. at 96). Simply stated, a court must not dismiss a pleading with prejudice where "there is nothing before the court showing that a litigant has received notice of its exposure to the ultimate sanction." Id. at 539. A court simply cannot dismiss such a pleading until it has taken "some action" to ensure "the rights of the litigant have been adequately protected." Ibid. And by "litigant," the rule means the party in the case, not his or her attorney. Even if we assume for the sake of argument, contrary to the certifications, that the first attorney actually did provide the notices required under Appendices II-A and II-B, the absence of any filing with the court verifying the notices, or a court appearance by counsel, places a duty on the judge to issue an order to show cause to verify compliance.

The court should have acted to ensure plaintiff had proper notice prior to granting the motion to dismiss with prejudice and entering a default judgment. R. 4:23-5(a)(3); A&M, supra, 423 N.J. Super. at 539. Because the court did not ensure that procedural safeguards were met, the judgment will be vacated, the funds released, the answer to the counterclaim reinstated, and the matter will go forward in the ordinary course. In light of this decision, we will not reach plaintiff's points II and III.

Reversed and remanded.