Baratta v. Deer Haven, LLC, L-3682-09; Law Division, Essex County; opinion by Rothschild, J.S.C.; decided September 8, 2011; approved for publication July 12, 2013. DDS No. 113-0641 [13 pp.]

The issue in this case is whether it is possible under New Jersey law for defendants to assert a counterclaim against plaintiffs because plaintiffs sued to recoup their investment in the defendants' enterprise.

Plaintiffs live and work in New Jersey. They invested $1.9 million in a Pennsylvania real estate venture in mid-2004, eventually becoming limited partners. Plaintiffs filed suit in May 2009 because they lost their entire investment, and because they believed the general partners had usurped certain partnership opportunities.

The judge allowed defendants to file a counterclaim, which asserted that plaintiffs' suit constituted (a) corporate waste, (b) a breach of fiduciary duty, and (c) a breach of the covenant of good faith and fair dealing. Since then, defendants' pleadings were amended twice, but the counterclaim remained essentially the same. Plaintiffs sent defendants three letters demanding that the counterclaim be withdrawn, but defendants refused each time.

After the close of discovery, the parties moved and cross-moved for summary judgment on the merits. The court dismissed the entire counterclaim, as well as three of plaintiffs' claims.

Plaintiffs then moved under N.J.S.A. 2A:15-59.1 and Rule 1:4-81 for sanctions, attorney fees, and costs on the basis that the counterclaim constituted frivolous litigation. The court granted the motion, and now faces a motion for reconsideration.

Held: Defendants may not assert a counterclaim against plaintiffs because plaintiffs sued to recoup their investment in defendants' enterprise. N.J.S.A. 2A:15-59.1 and Rule 1:4-8 permit legal fees to be awarded without proof that the offending party was either motivated by "ill will" or acted "for the purpose of harassment, delay or malicious injury." Here, fees were awarded because the offending party acted for litigation leverage, and did not have a "reasonable belief in law or equity" that the claim could prevail.

Defendants argue that (a) the judge's order allowing them to file the counterclaim immunizes them from liability; (b) plaintiffs' status as limited partners gave them a fiduciary duty not to harm the partnership in any way; (c) even if plaintiffs had a right to sue, they did not have a right to sue as soon as they did, because with more time, and no lawsuit, the defendants (who also lost money) could have rescued the enterprise; (d) plaintiffs had no standing to file their motion for sanctions because three of plaintiffs' 13 counts (consumer fraud, fraudulent conveyance, and federal securities law) were dismissed on summary judgment; and (e) given the entire-controversy rule in New Jersey, defendants had to file their counterclaim or be forever barred.

As to the first argument, the judge was correct to allow the counterclaim under the liberal standards of Rule 4:9-1. After discovery revealed nothing other than the obvious fact that plaintiffs' lawsuit cost defendants legal fees and helped speed the demise of the already fragile enterprise, it became clear that there was nothing to the counterclaim but an attempt to gain litigation leverage. Further, there are no cases holding that the grant of a Rule 4:9-1 motion serves as court approval of the substance of the amended pleading.

Defendants' second argument is that plaintiffs' status as partners may differentiate them from the general class of disgruntled investors. Defendants' argument that plaintiffs had a fiduciary duty to them would have been plausible if plaintiffs were the majority owners of the enterprise rather than mere passive minority investors. The law is clear in New Jersey that the fiduciary duty rests on the majority owners. Plaintiffs herein were neither majority owners nor directors, nor in any position of dominance. They, therefore, were not bound by fiduciary duty not to sue.

Defendants' third argument is that plaintiffs sued too soon. Defendants alleged that the documents plaintiffs signed did not allow them to recover any monies until units in the real estate development were sold. The investment was made in 2004, and plaintiffs filed suit in 2009. Since the suit contained numerous counts and theories, plaintiffs had innumerable statute of limitations considerations in deciding when to sue. Indeed, defendants assert time-related defenses. With so many timeliness problems, the court cannot conclude that plaintiffs should have waited to sue. In fact, by waiting any longer to sue, plaintiffs' counsel would have been violating his duty of vigorously representing his clients.

Neither of defendants' fourth or fifth arguments — plaintiffs had no standing to seek sanctions because the court dismissed three of their 13 counts, and defendants had to file their counterclaim because of the entire controversy doctrine — merit discussion.

The statute and rule must be interpreted restrictively. Accordingly, if the court found any precedent approving a counterclaim, it would not award sanctions. Further, neither the statute nor the rule requires "ill will toward the plaintiff." Rather, the statute and rule are satisfied if the action was filed "solely for the purpose of harassment, delay, or malicious injury."

In the present case, the court is not certain that defendants thought their counterclaim would cause "delay." On the other hand, the court believes the counterclaim was filed for litigation leverage — to force the plaintiffs to expend more money, while also serving as a potential trade-off on settlement talks, since a counterclaim seeking $1 million could alarm the three individuals who are the target of that counterclaim. Furthermore, the court is convinced the counterclaim does not have any "reasonable basis in law."

The motion for reconsideration is denied. Plaintiffs are entitled to sanctions under N.J.S.A. 2A:15-59.2 and Rule 1:4-8.

For plaintiffs — Paul H. Schafhauser (Herrick, Feinstein). For defendants — Kimberly L. Russell (Kaplan, Stewart, Meloff, Reiter & Stein).