Business owners in New Jersey are anxiously awaiting the outcome of a state Supreme Court case that could remove legal protection from their personal assets.
The case involves a decision against a landscape firm that had been accused of consumer fraud by customers. A judgment awarded the homeowners nearly $500,000 in damages, and an appellate court held the company principals and an employee liable as individuals, in addition to their corporation. Unless the New Jersey Supreme Court overturns the decision, company owners and their staffs could face more exposure to financial harm.
“I think it’s ridiculous to have a principal viable in the case of a corporate occurrence,” said Steven Metz, president of Central Jersey Pools in Freehold, N.J. “Isn’t that why there are corporations and limited liability companies? It used to be very limited. … Now it’s getting much more widespread.”
The landscape contractor was sued after a 12-foot retaining wall fell and caused substantial damage to the property. In the suit, the homeowners named the company, its principals and an employee for breach of contract, saying the fill material used on the wall was of a lower quality than specified. They also claimed that the firm violated consumer-protection codes by building without a contract and taking final payment without gaining final approval.
Before trial, the judge dismissed the individuals, saying they didn’t directly participate in building the retaining wall. A jury eventually found in favor of the homeowners. New Jersey’s Consumer Fraud Act states that contractors in violation can be charged triple the court-determined damages plus the plaintiff’s attorney’s fees. In this case, damages owed by the corporation added up to nearly $500,000.
The homeowners appealed the dismissal of the individuals and, in an unusual turn, the appellate court sided with the plaintiffs, stating that the Consumer Fraud Act allows individuals to be held liable even if no intent to defraud was proven, and that it should be assumed that corporate officers know the regulations.
Though some find New Jersey’s consumer protection laws to be fairly stringent, individuals have rarely been held liable, and never for regulatory infractions. Such penalties traditionally have been reserved for those who knowingly committed malicious acts, as opposed to contractual missteps.
“When the contractor comes in, takes $30,000 and you never see him again — those are the cases where you make the owner personally liable,” said Lawrence Caniglia, executive director of the Northeast Spa & Pool Association, “not where you have a regulatory issue.”
During the Supreme Court hearing, which took place on Feb. 28, the defendants’ attorney argued that the violations were unintentional and the Consumer Fraud Act was not designed for people to be individually named unless they’d been found to commit a malicious act. “I think he did a credible job explaining the distinction between malicious conduct that constitutes fraud and simple regulatory noncompliance, when there’s no intent to defraud anybody,” said Caniglia who observed the hearing.
The attorney also stated that the homeowners should have to show cause before his clients lose their corporate protection.
The plaintiffs’ attorney argued that the Consumer Fraud Act clearly states courts can impose fines on individuals. Additionally, he said that the fines weren’t just in response to the contractual omission, but also for the wall collapse, which he stated happened when the involved parties intentionally used substandard fill.
Both sides were questioned rather aggressively by the justices. The defendants’ attorney was asked several times about his claim regarding the intent of the law, considering that the word “persons” is actually contained among the entities that can be held liable.
“The issue [is] what the word ‘person’ means, if it means the principal of the company or just the company itself,” Caniglia said. “Unfortunately, when the court looks at the plain language, it says that ‘person’ includes the principal of the company. But if you interpret it the way the homeowners’ attorney wants the court to interpret it, [all lawsuit payouts] would automatically include the principal of the company. We are resisting that because that’s not what we say the original law was meant to do.”
Observers expect a decision to take 60 to 90 days.