DARNICE GREEN v. MORGAN PROPERTIES

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-3203-10T2

DARNICE GREEN, MATHEW BLUMBERG,

MICHAEL PERMENTER AND BETH

PERMENTER INDIVIDUALLY AND AS A

CLASS REPRESENTATIVES ON BEHALF

OF OTHERS SIMILARLY SITUATED,

Plaintiffs-Appellants,

v.

MORGAN PROPERTIES, MORGAN

MANAGEMENT MITCHELL L. MORGAN,

INC., ROSEMARY SPOHN, ESQUIRE,

EAST COAST THE WILLOWS, LLC, EAST

COAST COLONIAL APARTMENTS, LLC,

Defendants-Respondents.

__________________________________

November 3, 2011

Argued September 21, 2011 - Decided

Before Judges Axelrad and Ostrer.

On appeal from the Superior Court of New Jersey, Law Division, Camden County, Docket No. L-4158-10.

Lewis G. Adler argued the cause for appellants.

Stephen M. Orlofsky argued the cause for respondents (Blank Rome, LLP, attorneys; Mr. Orlofsky, of counsel and on the brief; David C. Kistler, on the brief).

PER CURIAM

In response to defendants' pre-answer motion to dismiss for failure to state a claim upon which relief can be granted, R. 4:6-2(e), the trial court dismissed with prejudice this putative class action by tenants who alleged that their landlords' charge of attorney's fees violated various statutory and common law rights. We reverse. Viewing the complaint's allegations with liberality, we conclude that it states viable claims, and, to the extent it does not, dismissal should have been without prejudice, as the claim is susceptible to appropriate amendment. See Printing Mart-Morristown v. Sharp Elecs. Corp., 116 N.J. 739, 746, 772 (1989) (stating that a court must search a complaint liberally to discern the statement of a claim, and dismissal should presumptively be without prejudice).

Specifically, we discern a cause of action based on plaintiffs' allegation that the landlords have imposed charges on their tenants, denominated as attorney's fees, that exceed the landlords' actual cost for in-house legal representation. This runs afoul of the general proscription that an attorney's fee may not be shared with a non-attorney. R.P.C. 5.4. Therefore, we conclude that plaintiffs state a claim under the Consumer Fraud Act, N.J.S.A. 56:8-1 to 184 (CFA); and a claim for negligent misrepresentation. Although plaintiffs failed to plead an essential element of a claim for wrongful eviction under N.J.S.A. 2A:18-61.6(d), a curative amendment is possible; consequently, that claim should have been dismissed without prejudice.

I.

We accept plaintiffs' factual allegations as true and extend to plaintiffs every reasonable inference. Printing-Mart Morristown, supra, 116 N.J. at 746. Defendants consist of two single-purpose LLCs East Coast The Willows, LLC (Willows), and East Coast Colonial Apartments, LLC (Colonial) each of which owns an apartment complex in New Jersey; three related entities, Morgan Management, Mitchell L. Morgan, Inc., and Morgan Properties, which own or manage 131 apartment communities, including Willows and Colonial, with over 30,000 apartment residences in New Jersey and several other states; and Rosemary Spohn, an attorney who serves as a salaried, in-house counsel for Morgan Properties.

The four named plaintiffs were or are tenants of Willows or Colonial. They were subject to eviction actions and charged $400 as an attorney's fee, which would be reduced to $200 if they paid all their arrears before the court date of the eviction proceeding. Plaintiffs alleged that defendants filed an average of two hundred eviction actions a month in Camden County alone. They alleged that the attorney's fees that defendants charged exceeded Spohn's actual costs as a salaried employee.

In support of their motion, defendants filed with the court the leases of the individually named plaintiffs.1 The 2010 lease between Willows and plaintiff Darnice Green, and between Colonial and plaintiffs Michael and Beth Permenter included the same provision:

If the Landlord uses the services of an attorney (including in-house counsel) for any good cause in relation to the enforcement or defense of any terms of this Lease, or in any relation to this tenancy, whether or not litigation is commenced, Resident must pay Landlord's attorney fees in the amount of four hundred dollars ($400) plus costs as Additional Rent for each cause in which the attorney's services are engaged.

By its plain language, the fee-shifting provision is not limited to fees incurred in eviction actions. Rather, anytime the landlord turns to its attorney for assistance, a flat $400 liability may arise. This apparently would include preparing and serving various notices relating to any breach of the lease.

Previous leases for Green and the Permenters, and for plaintiff Mathew Blumberg differed in significant respects from the 2010 lease. They allowed the landlord to seek more than $400 if the attorney's fee actually exceeded that amount. They permitted collection of interest on the fee; reduced the fee-shift to $200 if the tenant paid all rent and late charges before the attorney had to appear in court; and authorized charging the $400 fee for "matters that do not require the filing of an action with a court" such as service of notices. Reading the complaint indulgently, the named plaintiffs actually paid fees charged.

In count one of their three-count complaint, plaintiffs allege wrongful eviction under N.J.S.A. 2A:18-61.6. In support of that claim, plaintiffs allege that defendants represented that plaintiffs would be subject to eviction if the attorney's fees were not paid. In count two, plaintiffs ground a CFA claim on the unconscionability of the attorney's fee provision and the allegation that the landlords misrepresented the nature of the attorney's fees. In count three, plaintiffs claim common law negligent misrepresentation, based on the same misrepresentation.2

In response to the motion to dismiss before the trial court, plaintiffs argued that the collection of the attorney's fees was unlawful on two grounds. They asserted that the defendant-landlords, as non-lawyers, were not permitted to collect attorney's fees when defendants were self-represented through in-house counsel. They also claimed the fees sought exceeded the actual expenses for the legal services, which constituted illegal fee-sharing.

In dismissing the entire complaint with prejudice, the court rejected the claim of unlawful eviction under N.J.S.A. 2A:18-61.6. In an oral opinion, the court relied on Community Realty Management, Inc. v. Harris, 155 N.J. 212, 242 (1998), which approved in principle a landlord's collection of reasonable attorney's fees incurred in connection with an eviction action, if clearly set forth in the lease. The trial court held relying primarily on its own sense of the work associated with a summary dispossess action that a pre-set $400 fee was fair and reasonable, perhaps even modest. The court held that defendants were not required by law to establish their fees were reasonable in each case, if they were reasonable generally.

The court dismissed the CFA and negligent misrepresentation claims, finding that there was no misrepresentation or unconscionable practice because defendants were permitted to collect a reasonable attorney's fee and the court concluded that the lease amount was reasonable. Recognizing that it considered facts outside the pleadings by finding $400 to be reasonable fee, the court concluded that dismissal was also warranted under summary judgment standards. Lastly, finding that curative amendments to the complaint were not possible, the court dismissed the complaint with prejudice.

Plaintiffs appeal.

II.

We review de novo the trial court's decision to dismiss. Manalapan Realty, L.P. v. Manalapan Twp. Comm., 140 N.J. 366, 378 (1995); J.D. ex rel. Scipio-Derrick v. Davy, 415 N.J. Super. 375, 398 (App. Div. 2010). Plaintiffs' three causes of action are based on the argument that collection of the attorney's fees under the facts alleged is unlawful. Plaintiffs proffer two grounds for the illegality, the second of which defeats dismissal at this stage. Plaintiffs argue: (1) the non-attorney defendant-landlords may not recover attorney's fees for their self-representation through the use of in-house counsel; and (2) the non-attorney defendant-landlords may not collect an amount as attorney fees that exceeds the actual cost of the defendant-landlords' representation. We discuss these points in turn.

A.

We reject plaintiffs' argument that defendants may not recover attorney's fees because they represent themselves through in-house counsel. Defendants may seek reasonable attorney's fees if their leases clearly so provide. "[A] tenant in New Jersey may contractually agree to pay reasonable legal fees related to an eviction." Community Realty Mgmt., Inc., supra, 155 N.J. at 234. The Supreme Court did not limit its holding to legal fees incurred through the retention of outside counsel.

An in-house attorney licensed to practice in our State is authorized to represent not only her direct employer, but also corporate parents, subsidiaries or affiliated entities; and may do so in landlord-tenant actions. See R. 1:21-1(c) (stating that a business entity, other than a sole proprietor, shall appear in court through an attorney licensed in New Jersey); R. 1:27-2(d) (stating that an in-house counsel, when licensed in New Jersey, may appear as attorney of record for his or her "employer, its parent, subsidiary, affiliated entities or any of their constituents in any case or matter pending before the courts of this State"). Defendant Spohn is a licensed New Jersey attorney.

We deem inapplicable the authority plaintiffs cite holding a plaintiff-attorney who appears pro se may not recover fees under certain statutory fee-shifting provisions. First, the landlords in this case are not attorneys, and in-house counsel is not a plaintiff in actions to enforce the leases. Second, the fee-shifting provision before us is contractual, not statutory. Compare Dunn v. N.J. Dep't of Human Servs., 312 N.J. Super. 321, 333 (App. Div. 1998) (attorney as prevailing party not entitled to fees under fee-shifting provision of Fair Housing Amendments Act, 42 U.S.C. 3613(1)(2)), with Hyrcak v. Kiernan, 367 N.J. Super. 237, 240-41 (App Div. 2004) (pro se attorney may enforce contractual right to attorney's fees in action against former client to recover fee arbitration award).

In sum, defendant-landlords may represent themselves through their in-house counsel, and may collect, pursuant to contract, reasonable fees incurred in actions filed by their in-house counsel.

B.

Plaintiffs also argue (1) it is unlawful for defendants to recover, as attorney's fees, amounts exceeding the costs actually incurred in obtaining representation; and (2) defendants engaged in misrepresentation by denominating as attorney's fees amounts that exceed the actual costs of obtaining representation. On those grounds, we agree that plaintiffs have stated claims upon which relief may be granted.

The Rules of Professional Conduct bar a non-lawyer from sharing in the fees of an attorney. R.P.C. 5.4(a) ("A lawyer or law firm shall not share legal fees with a nonlawyer . . . ."). Pursuant to the prohibition on fee-sharing, "[a] client cannot collect reimbursement of legal fees unless there is an actual coincidence of cost with reimbursement . . . ." K. Michels, N.J. Attorney Ethics, 36:3-1 at 839 (2010).

For example, an in-house attorney may not participate in an arrangement in which a municipality charges purchasers of municipal property a flat $125 "legal fee," the in-house attorney performs the legal services for the municipality, and the $125 amount is neither based on services actually rendered nor reimbursement of fees actually incurred. N.J. Adv. Comm. on Prof'l Ethics Opinion 93, 89 N.J.L.J. 248 (1966). "'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.'" Id. (quoting Drinker, Legal Ethics 182 (1953)).

Other opinions of the Advisory Committee on Professional Ethics affirm that view. See also N.J. Adv. Comm. Prof'l Ethics Opinion 669, 132 N.J.L.J. 574 (1992) (salaried in-house attorney may not bill affiliate for services on hourly basis, where affiliate is reimbursed by its client-governmental-agencies, and the attorney remits the receipts to his parent company); N.J. Adv. Comm. Prof'l Ethics Opinion 103, 90 N.J.L.J. 49 (1967) (salaried attorney may not bring collection actions on promissory notes, which authorize attorney's fees based on percentages of amounts due, where attorney would remit any recovered fees to New York attorney for transmission to the lender).

Applying these principles, it may be impermissible for the non-attorney defendants in this case to receive as attorney's fees an amount greater than their cost of legal services. We recognize that an attorney's violation of the Rules of Professional Conduct does not alone give rise to a private cause of action against the attorney. Baxt v. Liloia, 155 N.J. 190, 201 (1998). However, plaintiffs' claims are directed largely against the non-attorney defendants. Moreover, they rest not on a violation of duty by an attorney, but on the alleged illegality and unconscionability of the lease's attorney's fees provision, and defendants' misrepresentation of the nature of the fees sought.

An agreement between a lawyer and a non-lawyer regarding the sharing of fees is void and unenforceable "because it is founded upon prohibited activity and is against public policy." Infante v. Gottesman, 233 N.J. Super. 310, 315 (App. Div. 1989). We reached that conclusion because such an agreement violated the prohibitions on fee-sharing under R.P.C. 5.4 and the unauthorized practice of law under N.J.S.A. 2A:170-85 (now prohibited under N.J.S.A. 2C:21-22). Ibid. See Slimm v. Yates, 236 N.J. Super. 558, 564 (Ch. Div. 1989) ("Recovery of compensation for legal services by one not authorized to practice law will not be permitted by our courts."). Cf. Goldberger & Shinrod v. Baumgarten, 378 N.J. Super. 244, 252 (App. Div. 2005) (declining to enforce agreement that violates R.P.C. 1.5(e), governing division of fees between lawyers, as it was contrary to law).

Plaintiffs have also adequately alleged misrepresentation. Reading their complaint indulgently, they allege defendants falsely represented that the $400 and $200 charges constituted the legal costs defendants actually have incurred, while defendants' actual legal costs were significantly less than that. Based on the foregoing, plaintiffs have stated claims under the CFA and for negligent misrepresentation.

To establish a claim under the CFA, plaintiffs must prove that they have suffered an ascertainable loss resulting from an unlawful practice, which includes

any unconscionable commercial practice, deception, fraud, false pretense, false promise, misrepresentation, or the knowing, concealment, suppression, or omission of any material fact with intent that others rely upon such concealment, suppression or omission, in connection with the sale or advertisement of any merchandise or real estate . . . whether or not any person has in fact been misled, deceived or damaged thereby. . . .

[N.J.S.A. 56:8-2.]

It is well-settled that the CFA applies to the landlord-tenant relationship. 49 Prospect Street Tenants Ass'n v. Sheva Gardens, Inc., 227 N.J. Super.449, 468 (App. Div. 1988). The plaintiffs have adequately alleged an unconscionable practice, as well as deception and misrepresentation.

Plaintiffs' allegation that defendants misrepresented their actual legal costs may also form the basis of a claim for negligent misrepresentation. SeeKaufman v. i-Stat Corp., 165 N.J.94, 109 (2000) ("'Negligent misrepresentation is . . . [a]n incorrect statement, negligently made and justifiably relied on, [and] may be the basis for recovery of damages for economic loss . . . sustained as a consequence of that reliance.'") (quoting H. Rosenblum, Inc. v. Adler, 93 N.J.324, 334 (1983)).

We are unpersuaded by defendants' argument that the attorney's fees provision should be sustained at this stage as a liquidated damages clause. Our courts have enforced stipulated or liquidated damages clauses where the amount is "'a reasonable forecast of just compensation for the harm that is caused by the breach.'" Wasserman's Inc. v. Twp. of Middletown, 137 N.J. 238, 250 (1994) (quoting Westmont Country Club v. Kameny, 82 N.J. Super. 200, 206 (App. Div. 1964)). "Treating reasonableness 'as the touchstone,' . . . the difficulty in assessing damages, intention of the parties, the actual damages sustained, and the bargaining power of the parties all affect the validity of a stipulated damages clause." Metlife Capital Fin. Corp. v. Washington Ave. Assoc., L.P., 159 N.J. 484, 495 (1999) (quoting Wasserman's Inc., supra, 137 N.J. at 252).

However, our rule on liquidated damages may be an inapt test for determining the enforceability of a fee-shifting provision. First, attorney's fees are not generally an element of recoverable damages. See In re Estate of Lash, 169 N.J. 20, 30-32 (2001). Second, while the party challenging a liquidated damages clause bears the burden, since such clauses are presumptively reasonable, Wassermans, Inc., supra, 137 N.J. at 258, the party seeking an attorney's fee award bears the burden, since fee-shifting is an exception to the general rule that parties bear their own legal fees. Mason v. City of Hoboken, 196 N.J. 51, 76 (2008); N. Bergen Rex Transp. v. Trailer Leasing Co., 158 N.J. 561, 570-71 (1999). Fee-shifting provisions are also strictly construed against the proponent of the clause. McGuire v. City of Jersey City, 125 N.J. 310, 326-27 (1991).

Although we have permitted fee-shifting provisions that set fixed amounts, they are nonetheless subject to court review as to their reasonableness. Belfer v. Merling, 322 N.J. Super. 124, 141 (App. Div. 1999), certif. denied, 162 N.J. 196 (1999). See also Pressler & Verniero, N.J. Court Rules, Comment 4:42-9[2.10] (2011) ("[W]here the agreement to pay counsel fees states a specific or easily ascertainable sum, the court is not bound thereby, but must make its own determination, upon appropriate proofs, of the amount to be allowed."). While Community Realty Management, Inc., supra, 155 N.J. at 234 recognized that a lease may require the payment of a reasonable attorney's fee, the Court did not address, let alone approve, the inclusion of a fixed fee amount that was unrelated to the actual cost of services performed in a particular case.

Even if defendants' lease provision were viewed as a liquidated damages clause, it may be challenged "if it does more than compensate plaintiffs for their approximate actual damages caused by the breach." Wasserman's Inc., supra, 137 N.J. at 254. For example, a contract clause that entitled a prevailing party to receive twice the attorney's fees actually incurred was an unenforceable penalty. In re Unanue, 311 N.J. Super. 589, 597 (App. Div.), certif. denied, 157 N.J. 541 (1998), cert. denied, 526 U.S. 1051, 119 S. Ct. 1357, 143 L. Ed. 2d 518 (1999).

Also, we are unpersuaded by defendants' argument that the complaint against in-house attorney Spohn should be dismissed on the independent ground that she filled only the limited role as trial counsel in the summary dispossess actions. Reading the complaint indulgently at this early stage, we may not view her role so narrowly. See Banco Popular N. Am. v. Gandi, 184 N.J. 161, 179-181 (2005) (describing circumstances under which attorney may be liable for negligent misrepresentation to a non-client third party).

On the other hand, plaintiffs have failed to allege an essential element of their cause of action under the Anti-Eviction Act, N.J.S.A. 2A:18-61.6. They have not alleged they vacated their apartments in the face of an unlawful eviction. Plaintiffs ground their claim in subsection (d), which states:

If a tenant vacates a dwelling unitafter receiving from an owner an eviction notice (1) purporting to compel by law the tenant to vacate the premises for cause or purporting that if the tenant does not vacate the premises, the tenant shall be compelled by law to vacate the premises for cause; and (2) using a cause that is clearly not provided by law or using a cause that is based upon a lease clause which is contrary to law pursuant to section 6 of P.L. 1975, c. 310(C. 46:8-48); and (3) misrepresenting that, under the facts alleged, the tenant would be subject to eviction, the owner shall be liable to the former tenant in a civil action for three times the damages plus the tenant's attorney fees and costs. An owner shall not be liable under this subsection for alleging any cause for eviction which, if proven, would subject the tenant to eviction pursuant to N.J.S. 2A:18-53 et seq. or P.L. 1974, c. 49 (C. 2A:18-61.1 et seq.).

[N.J.S.A. 2A:18-61.6(d) (emphasis added).]

See Hale v. Farrakhan, 390 N.J. Super. 335, 342 (App. Div. 2007) (stating that the "the specific purpose of the wrongful eviction causes of action created by N.J.S.A. 2A:18-61.6 is to protect tenants against pretextual evictions"); Spruce Park Apartments v. Beckett, 230 N.J. Super. 311, 316 (Law Div. 1988) (granting judgment of possession to landlord against tenant, noting that defendant retained right to seek damages under N.J.S.A. 2A:18-61.6, which provides "tenants with a remedy where a landlord has caused a tenant to vacate premises wrongfully").

The complaint alleges that plaintiffs Green and the Permenters continue to reside at defendants' apartment complexes. Although plaintiff Blumberg alleges that he formerly resided at Colonial, he does not allege that he vacated because of an eviction, rather than other reasons. Plaintiffs' omission is subject to a curative amendment. Therefore, the trial court should have dismissed count one without prejudice rather than with prejudice.

Reversed and remanded for reinstatement of counts two and three of the complaint, and dismissal of count one without prejudice.

1 The court may consider documents upon which the claims are based without converting the motion to dismiss into a motion for summary judgment. See Banco Popular N. Am. v. Gandi, 184 N.J. 161, 183 (2005) (stating that in evaluating a motion to dismiss, a court may consider documents upon which the claim is based); N.J. Citizen Actions, Inc. v. Cnty. of Bergen, 391 N.J. Super. 596, 605 (App. Div.), certif. denied, 192 N.J. 597 (2007); R. 4:6-2 (stating that presentation of matter outside the pleadings converts a motion to dismiss into one for summary judgment under R. 4:46).

2 Although not presented in a separate count, plaintiffs apparently allege that the attorney's fees provision is void under N.J.S.A. 46:8-48. That statute empowers a tenant to petition a court to terminate a lease containing a provision that "violates clearly established legal rights of tenants or responsibilities of landlords." Ibid. However, plaintiffs do not seek termination of their leases.