Market Basket in Franklin Lakes, New Jersey/photo by Carmen Natale Market Basket in Franklin Lakes, New Jersey/photo by Carmen Natale

New Jersey appeals court has ended the participation of a lawyer in a $24 million business deal with a client.

The Appellate Division ordered Debra Taylor’s cash investment in her client’s real estate venture terminated due to her failure to meet disclosure and documentation requirements in the Rules of Professional Conduct when she signed on as an investor. But an award of punitive damages and counsel fees is not warranted because Taylor’s conduct did not rise to the level of fraud, the court said.

Judges Ellen Koblitz,  Thomas Manahan and Karen Suter affirmed the ruling by Superior Court Judge Robert Contillo of Bergen County in a suit against Taylor, her husband and their real estate trust by former clients Mark Chernalis and Anthony Chernalis. They retained Taylor in 2009 to assist them with the purchase of a shopping center in Franklin Lakes, New Jersey, where their grocery and catering business, The Market Basket, was the anchor tenant.

Taylor retired from legal practice in 2001, then returned to practice in 2012, the opinion said. Besides being an attorney, Taylor is a financial planner, certified public accountant and a licensed real estate agent, according to the opinion. Although she was not authorized to practice law at the time she was retired, the ex-clients later testified that they considered her to be their attorney. But there was no retainer or other written agreement between Taylor and the ex-clients about the scope of her services.

Taylor was obligated to ensure that the clients knew she would not provide them legal advice, but “allowed them or led them to believe that she was willing and able to provide legal advice, and did not disclose her retirement from practice, which was only revealed after the closing,” the panel said.

As negotiations to buy the shopping center moved along, it became clear that the Chernalises would require additional capital to execute the deal, and they sought investors.

In the suit, Chernalis v. Taylor, plaintiffs claimed she failed to alert them to an error in the closing documents that meant a windfall for her.

An accountant involved in the matter, Martin Goldstein, structured the deal so that there were three classes of investors: Class A, consisting of outside investors who would get a 6 percent return plus a 35 percent share of the shopping center’s rental income; Class B, consisting of only Anthony and his wife Phyllis, who would receive no share of the income for estate tax reasons; and Class C, consisting of Mark Chernalis and other family members who, like the first group, would get a cut of the income.

Sometime after the engagement began but before the deal went through, Taylor proposed putting up $250,000 of her own funds to become a Class A investor, to which the Chernalises agreed. Throughout the engagement, Taylor’s fee was not made clear, but she later proposed a sweat equity arrangement whereby she would also become a Class C investor and, as compensation for her work, receive a share of the income.

But just how big her share was intended to be became the entire basis of the dispute.

Contillo found that Taylor was to get a 5 percent share of the income generated for Class C investors. The closing documents turned out to reflect an arrangement quite different from that. Taylor brought in Marc Press of Cole Schotz in Hackensack, New Jersey, to write up those documents, as well as the necessary operating agreements. They memorialized a nearly 48 percent share of the Class C income for Taylor.

Contillo said Taylor was bound by the Rules of Professional Conduct during her work for the Chernalises, and she violated RPC 1.5(b) for working without a retainer agreement and RPC 1.8(a) for failing to provide a full, written disclosure of the nature and extent of her interest and failing to advise them to seek independent counsel about it.

On appeal, the plaintiffs said they should have been awarded punitive damages and legal fees and Taylor should have been found liable for fraud. The appeals court affirmed for the reasons cited by Contillo, and said Taylor had entered into an attorney-client relationship and was bound by the Rules of Professional Conduct.

The appeals court also said Contillo’s decision not to award punitive damages is supported by sufficient evidence, and it cited the judge’s finding that Taylor was not responsible for errors in the operating agreement concerning the Class C interests. And an award of counsel fees was not warranted for the same reason, the panel said.

“There was no proof that Debra was aware of the inaccuracies prior to the closing. Even though Debra sought to utilize the inaccuracies, post-closing, to her advantage, the judge did not find her conduct was malicious. Given our limited review of punitive damages awards, we find no basis to disturb the judge’s finding,” the appeals court said.

The appeals court also said it would limit a judge’s decision on counsel fees only where there is an abuse of discretion, and none was present here.

Taylor did not respond to a reporter’s message left at her Taylor Financial Group office in Franklin Lakes. Her attorney, David Blackwell of Donnelly, Minter & Kelly in Morristown, New Jersey, declined to comment.

Anthony X. Arturi of Arturi, D’Argenio, Guaglardi & Meliti in Rochelle Park, New Jersey, and Kevin Harrington of Harrington & Lombardi in Wayne, New Jersey, who represented the plaintiffs, also did not return calls.