N.J. SC: Employees can be liable under Consumer Fraud Act

Jessica M. Karmasek Jul. 15, 2011, 2:00pm


TRENTON, N.J. (Legal Newsline) - The New Jersey Supreme Court, in a unanimous ruling last week, held that employees and officers of a corporation may be individually liable under the state's Consumer Fraud Act for acts they undertake through the corporate entity.

The Court, in its July 7 opinion, also determined that the individual defendants in the case are not collaterally estopped from relitigating the quantum of damages attributable to the CFA violations.

The plaintiffs, William and Vivian Allen, contracted defendant V and A Brothers Inc. to landscape their property and build a retaining wall to install a pool.

At the time, V and A Brothers was wholly owned by two brothers, defendants Vincent DiMeglio, who subsequently passed away, and Angelo DiMeglio. The corporation also had one full-time employee, defendant Thomas Taylor.

After V and A Brothers completed the work, plaintiffs filed a two-count complaint naming both corporate and individual defendants.

The first count was directed solely to V and A Brothers and alleged that the corporation breached its contract with plaintiffs by improperly constructing the retaining wall and using inferior backfill material.

The second count was directed to the corporation and Vincent's estate, Angelo and Taylor individually, alleging three "Home Improvement Practices" regulatory violations of the CFA.

Before trial, the trial court granted the individual defendants' motion to dismiss the complaint against them, holding that the CFA did not create a direct cause of action against the individuals.

The plaintiffs' remaining claims were tried and the jury returned a verdict in favor of the plaintiffs on all counts, awarding damages totaling $490,000.

The state's appellate division reversed the trial court's order dismissing the claims against the individual defendants under the CFA. The panel remanded the matter to determine whether any of the individual defendants had personally participated in the regulatory violations that formed the basis for the plaintiffs' CFA complaint.

The panel, however, precluded relitigation of the overall quantum of damages found by the jury in the trial against the corporate defendant.

The state's high court granted the defendants' petition for certification. Justice Helen E. Hoens authored the Court's opinion.

The Court said the analysis of individual liability requires consideration of the CFA's definition of "person," the act's operative provision that creates a cause of action, and the three "Home Improvement Practices" regulations that formed the basis for the CFA claims.

The CFA's broad definition of "person" supports the proposition that the act permits the imposition of individual liability upon one whose acts are part of a violation by a corporation, the Court said.

However, it notes, "Defining the term 'person' merely identifies the universe of actors who may engage in the behavior that the statute defines to be the violation; it does not independently create a basis for their liability.

"Rather, liability can only be imposed in accordance with the operative provision of the CFA, which has as its focus the 'act' that is defined as a violation of the statute's protections."

The CFA's operative provision, the Court explains, protects consumers from certain affirmative acts, knowing omissions and regulatory violations.

Individual liability for a violation of the CFA necessarily depends on an evaluation of both the specific source of the claimed violation that forms the basis for the plaintiff's complaint and the particular acts that the individual has undertaken, the Court said.

As to the "Home Improvement Practices" regulations, the Court said a distinction can be drawn between the principals of a corporation and its employees.

The principals, it explained, may be broadly liable because they are the ones who set the policies that the employees may be merely carrying out. Therefore, if they have adopted a course of conduct in which written contracts are never used, in clear violation of the regulation, there may be little basis on which to extend personal liability to the employee who complies with that corporate policy.

"However, if the employee unilaterally concludes that an inferior product should be used in place of one specified in a contract and does so without the knowledge of the homeowner, there is little reason to construe the CFA to limit liability to the corporate employer and permit that employee to escape bearing some individual liability," the Court wrote.

"As a result, although the analysis of whether there can be individual liability for regulatory violations is more complex, and although it turns on the particular facts and circumstances of the claim and the regulations, the suggestion that there can be no basis for individual liability is not one we can endorse."

The Court said because the trial in this case was limited to the plaintiffs' claims against the corporation, the record before it is insufficient to permit a "conclusive analysis" of whether any of the individually-named defendants engaged in acts that suffice for this purpose. It order the case be remanded.

As to the judgment precluding relitigation of the quantum of CFA damages, the Court disagreed.

Neither Taylor nor Vincent's estate were in privity with the corporate defendant because there is no evidence that either exercised any control over the litigation, it said.

The Court said collateral estoppel also does not apply to Angelo because although he was the sole shareholder of the corporation during litigation and appeared as a fact witness, it is unclear
whether he actually exercised control over the litigation. It said collateral estoppel would not be fair because the claims against the individuals were dismissed and Angelo might have made different tactical decisions if he was participating as a defendant.

Also, because the other individual defendants will be not be estopped from relitigating damages attributable to the CFA violations, precluding Angelo from doing likewise would serve no purpose in the context of the matters tried on remand, it said.

From Legal Newsline: Reach Jessica Karmasek by e-mail at jessica@legalnewsline.com.

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