A Solomonic Decision Under Rule 4:5-1(b)(2)

Kent Motor Cars, Inc. v. Reynolds & Reynolds Co., 207 N.J. 428 (2011).  Rule 4:5-1(b)(2) requires the first pleading of each party to disclose the names of any non-party who should be joined in the case or who has potential liability to any party on the basis of the same transactional facts as those alleged in the case.  “If a party fails to comply with its obligations under this rule, the court may impose an appropriate sanction including dismissal of a successive action against a party whose existence was ot disclosed ….”  The Rule goes on to say, however, that dismissal should not occur “unless the failure of compliance was inexcusable and the right  of the undisclosed party to defend the successive action has been substantially prejudiced by not having been identified in the prior action.”  This case required the Court to decide whether dismissal of a second case was appropriate.  In an opinion by Justice Hoens, the Court determined that dismissal was improper.

The underlying case was a consumer class action against auto dealerships (“the Dealerships”).  The consumers alleged that the Dealerships had violated the New Jersey Consumer Fraud Act (“CFA”) and the Truth in Consumer Contract, Warranty and Notice Act (“TCCWNA”) in several ways, including using a form in which a required notice about fees was printed in a font size smaller than allowed by an administrative regulation.  The form in question had been supplied by Reynolds and Reynolds, and the Dealerships knew that from the outset of the underlying class action.  Despite that, the Dealerships’ Answer did not identify Reynolds and Reynolds as a potentially liable party that should have been joined, as Rule 4:5-1(b)(2) required.

The consumers eventually won partial summary judgment, on the claim involving the form and on another claim involving overcharges in certain fees.  The Dealerships then settled with the consumers, without apportioning the settlement amount between the two claims on which summary judgment had been granted.  Then, even before the settlement could be approved by the court as required, the Dealerships filed a separate case against Reynolds and Reynolds seeking indemnification for all of the Dealerships’ costs and losses in the underlying class action.  The dealerships also demanded that those damages be trebled pursuant to the CFA.

Reynolds and Reynolds moved for summary judgment on the grounds that the Dealerships’ failure to comply with Rule 4:5-1(b)(2) in the underlying case barred the Dealerships from any recovery in the second case.  Reynolds and Reynolds contended that it had been substantially prejudiced because (a) it had been deprived of the opportunity to defend the validity of its form, (b) the Dealerships were seeking to recover the amount of the entire settlement of the underlying case when they had not allocated the settlement amount between the claim involving the form and the claim involving overcharges (the latter claim having nothing to do with Reynolds and Reynolds), (c) the Dealerships had purged numerous e-mails that might have helped Reynolds and Reynolds defend the second case, and (d) by seeking trebling of the settlement amount under the CFA (in addition to asserting a claim for contribution), the Dealerships might recoup a windfall by trebling damages that had already been trebled.

The Law Division agreed that there was substantial prejudice and dismissed the second case.  The Appellate Division reversed.  The Supreme Court affirmed, allowing the second case to proceed, but refused to permit the Dealerships to seek treble damages under the CFA.

After a lengthy discussion of what “substantial prejudice” means under Rule 4:5-1(b)(2), Justice Hoens found that the destruction of e-mails by the Dealerships could be addressed using “all of the usual spoliation remedies … to prevent the Dealerships from deriving a benefit from their destruction of that information.”  The other forms of substantial prejudice could be addressed by preventing the Dealerships from seeking treble damages against Reynolds and Reynolds.  The Dealerships could still seek contribution.  If they succeeded, the result would be comparable to what would have happened had the Dealerships joined Reynolds and Reynolds in the class action, since the Dealerships and Reynolds and Reynolds would each have paid their respective share of the settlement, rather than Reynolds and Reynolds being responsible for the whole sum, thereby giving the Dealerships a windfall.

The Court’s decision to cut this baby in half (or, more properly, in thirds, given the rejection of treble damages in favor of potential single damages) was a wise one.  As Justice Hoens noted, the Court has a “general preference for addressing disputes on the merits and reserving dismissal for matters in which … lesser sanctions are inadequate.”  The Court’s solution here was an elegant way of preserving the merits while preventing the Dealerships from achieving a windfall.

Nonetheless, this case may be near the outer limits of circumstances in which the Court would reject dismissal.  Like Simmermon v. Dryvit Systems, Inc., 196 N.J. 316 (2008), another decision under Rule 4:5-1(b)(2), this opinion points up the importance of complying fully with that Rule.

This case also resolved an issue regarding the scope of an insurer’s duty to defend and indemnify the Dealerships in the underlying class action.  The Dealerships sought protection under policy provisions that covered “truth-in-lending or truth-in-leasing law.”  Justice Hoens found that the Dealerships’ sales practices at issue in the class action did not arise out of such laws.  “Although there may be occasional overlap in the effect of the [CFA and TCCWNA on one hand and the truth-in-lending and truth-in-leasing laws on the other hand] and regulations, the essential purpose of truth-in-lending and truth-in-leasing laws is to ensure that certain specific information is provided in connection with the extension of credit.”  Nothing in the class action complaint dealt with the Dealerships’ credit, leasing or financing practices.  Thus, the insurer had no duty to defend or indemnify.