Case Title: Jan Saltiel d/b/a Edgewater Design Associates v. GSI Consultants, Inc., et als.

Citation: 

Docket Number: a-66-00

State: new-jersey

Court: New Jersey Supreme Court

Date: 2002-01-23T00:00:00Z

Document:
(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized). STEIN, J., writing for a unanimous Court. In this appeal, the Court considers whether corporate officers can be held personally liable for allegedly tortious conduct under the participation theory of liability. In March 1995, William Patterson University (WPU) awarded plaintiff, Jan Saltiel, a contract to provide landscaping architectural services for the reconstruction of its athletic fields. Prior to the award, Saltiel had requested a proposal from GSI Consultants, Inc. (GSI) outlining turfgrass specifications for the reconstruction. GSI submitted a proposal signed by one of its officers, Caton, listing the services it would perform in connection with the WPU contract. Saltiel accepted that proposal and engaged GSI to prepare the specifications for the WPU athletic fields. Pursuant to its contract with Saltiel, GSI performed various additional services, including selection of the reconstruction material and monitoring of the actual reconstruction, which was to be completed by a contractor selected by WPU after a public bid. Indyk, another GSI officer, made several site visits to the softball field, the first field to be constructed, to monitor the construction and to correct any deviations from the turfgrass specifications. WPU expressed no dissatisfaction in respect of that field. Indyk did not visit the soccer field on a regular basis as had been his practice with the softball field. Almost immediately after its completion, the soccer field developed problems of standing water and inadequate drainage. Despite many efforts to correct the problem, the soccer field remained unfit for use. Saltiel hired a consultant to determine the cause of the drainage problem. Ultimately, that consultant concluded that although the soccer field had been constructed in accordance with GSI's field specifications, the field specifications had been negligently prepared because the rootzone designed by GSI formed a nearly impermeable barrier that did not allow for proper water drainage. Saltiel then hired another contractor to reconstruct the field at a cost of $351,000. Her contract with GSI did not require GSI to provide a bond or demonstrate evidence of professional liability insurance. In December 1997, Saltiel filed suit against defendants GSI, Indyk, and Caton, seeking damages arising from the defective turfgrass specifications prepared by defendants. Since then, she has volunatrily dismissed her claims against GSI. Following the filing of suit, discovery focused primarily on whether Indyk and Caton could be held personally liable. In January 1999, Indyk moved for summary judgment on the ground that he could not be held personally liable for acts he performed as an officer on behalf of GSI. The trial court granted Indyk's motion, noting that one of the purposes of incorporation was to guard against personal liability, and further, that Indyk clearly was acting through his corporation when he agreed to undertake the responsibilities associated with the construction of the fields. Thereafter, Caton filed a similar motion, which was also granted by the trial court for the reasons it expressed during its consideration of Indyk's motion. In an unreported opinion, the Appellate Division reversed both summary judgment rulings, concluding that both Indyk and Caton could be held personally liable for negligence under the so-called participation theory of personal liability. The Supreme Court granted Indyk's and Caton's petitions for certification. HELD: The participation theory of liability, which imposes personal liability on corporate officers who have participated in the corporation's commission of a tort, cannot be applied in this case where the plaintiff has not pled and supported a cause of action sounding in tort, and has failed to establish that either the corporation or the corporate officers owed an independent duty to her outside the scope of the contract between them. 1. The essence of the participation theory of liability, which our case law has recognized, is that a corporate officer can be held personally liable for a tort committed by the corporation when he or she is sufficiently involved in the commission of the tort. (pp. 8-9) 2. New Jersey cases that have applied the participation theory of liability to hold corporate officers personally responsible for their tortious conduct generally have involved intentional torts and statutory violations. (pp. 9-12) 3. Although the participation theory of liability may encompass conduct other than intentional torts, that issue has not been settled, and other states have limited its application to cases involving intentional wrongful conduct by corporate officers that has resulted in personal injuries. (pp. 12-15) 4. The application of the participation theory to negligent conduct by corporate officers in other jurisdictions also has involved personal injury claims. (pp. 15-17) 5. If the breach of a corporation's duty to a plaintiff is determined to be governed by contract rather than tort principles, the participation theory of tort liability is inapplicable. Thus, distinctions between tort and contract actions are critical because attaching a tort claim to a breach of contract action dramatically alters the rules governing damages. (pp. 17-20) 6. Relationships created by contract can give rise to affirmative duties imposed by law. (pp. 21-27) 7. Saltiel has not pled and supported a cause of action sounding in tort and has failed to establish that either GSI or defendants Indyk and Caton owed an independent duty to her outside the scope of the contract. Thus, the participation theory cannot be applied to these facts to hold Indyk and Caton personally responsible for the damages she seeks. (pp. 27-28) 8. When a company agrees to render a service or sell a product, a contract normally will define the scope of the parties' specific obligations. In addition, in commercial transactions, the law may recognize certain implied contractual obligations, such as an implied obligation of good faith and fair dealing. In this case, however, the scope of the parties' obligations was defined by the contract, which imposed responsibilities only on the corporate defendant, GSI, and not on the individual defendants, Indyk and Caton. (pp. 28-29) 9. Under New Jersey law, a tort remedy does not arise from a contractual relationship unless the breaching party owes an independent duty imposed by law, which is absent from this case. (pp. 29-31) 10. Although an independent duty could be implicated if a soccer player were to have sustained personal injuries proximately caused by the allegedly deficient design work provided by GSI, plaintiff Saltiel alleges damages that do not arise from any duty imposed by law but rather result from GSI's breach of contract, and Saltiel cannot convert basic contract claims into negligence claims in order to create a basis for the imposition of personal liability on corporate officers. (pp. 31-32) 11. Because this appeal essentially involves a breach of contract claim, the participation theory of liability is inapplicable. (p. 32) Judgment of the Appellate Division is REVERSED and summary judgment in favor of defendants Indyk and Caton is REINSTATED. CHIEF JUSTICE PORITZ and JUSTICES COLEMAN, LONG, VERNIERO, LaVECCHIA, and ZAZZALI join in JUSTICE STEIN's opinion. SUPREME COURT OF NEW JERSEY A-66/ 67 September Term 2000 Plaintiff-Respondent, v. GSI CONSULTANTS, INC., JOHN DOES 1-5 and ABC CORPORATIONS 1-10, Defendants, and HENRY INDYK and RICHARD G. CATON d/b/a TURFCON, PROFESSIONAL TURFGRASS CONSULTANTS, Defendants-Appellants. Argued September 17, 2001 -- Decided January 23, 2002 On certification to the Superior Court, Appellate Division. David R. Forrey argued the cause for appellant Henry Indyk (Francis J. Brennan, III, attorney). Gary S. Shapiro argued the cause for appellant Richard G. Caton (Shapiro & Sternlieb, attorneys). Gregory B. Reilly argued the cause for respondent (Lowenstein Sandler, attorneys; John E. Clark and Michele Nance Breen, on the brief). The opinion of the Court was delivered by STEIN, J. In this appeal we consider whether corporate officers can be held personally liable for allegedly tortious conduct under the participation theory of liability. The conduct at issue arose after the corporate defendant entered into a contract with plaintiff pursuant to which it was to design and prepare specifications for the turfgrass to be used on two athletic fields at a New Jersey university. Plaintiff alleged that the corporation and its officers negligently prepared the turfgrass specifications resulting in substantial financial loss to plaintiff. Accordingly, plaintiff sought to recover in tort against the officers personally based on the participation theory of liability. The trial court granted summary judgment for both individual defendants, concluding that their status as corporate officers insulated them from personal liability. In an unpublished opinion the Appellate Division reversed, holding that the officers' complicity in the preparation of the allegedly defective specifications could provide a basis for personal tort liability under the participation theory. We granted the officers' petitions for certification, 167 N.J. 89 (2001), and now reverse the judgment below. Other jurisdictions also adhere to that principle. In Central Benefits Mutual Insurance Co. v. RIS Administrators Agency, Inc., 638 N.E.2d 1049, 1053 (Ohio Ct. App. 1994), the court applied the participation theory in holding that the defendant corporate officer could be personally liable for a conversion that occurred during his tenure as president of an insurance company. See also Bernhardt v. Needleman, 705 A.2d 875, 878 (Pa. Super. Ct. 1998)(holding attorney and his corporation liable for breach of contract and conversion in claim for recovery of referral fee); Shonberger v. Oswell, 530 A.2d 112, 114-15 (Pa. Super. Ct. 1987)(holding that consignment agreements formed basis for conversion action under participation theory); Johnson v. Harrigan-Peach Land Dev. Co., Inc., 489 P.2d 923, 928 (Wash. 1971)(holding corporate officers personally liable for conversion of plaintiff's property under participation theory). A number of jurisdictions, including New Jersey, also apply the participation theory to hold corporate officers personally liable for certain statutory violations. For instance, in Kugler v. Koscot Interplanetary, Inc., 120 N.J. Super. 216, 257 (App. Div. 1972), the defendant corporate director of a cosmetics corporation was held personally liable for unlawful practices under the Consumer Fraud Act. A Texas court of appeals recently concluded that a corporate officer of a construction company could be held personally liable for violation of that state's Deceptive Trade Practices Act. Keyser v. Miller, 47 S.W.3d 728, 733 (Tex. App. 2001). See also Plowman v. Bagnal, 450 S.E.2d 36, 37-38 (S.C. 1994)(acknowledging controlling persons of a corporation are potentially personally liable for violations of Unfair Trade Practices Act). In contrast, the Virginia Supreme Court held that the corporate director and majority shareholder of a check cashing company could not be personally liable for actively participating in illegal acts that violated Virginia's Consumer Finance Act. Greenberg v. Commonwealth, 499 S.E.2d 266, 270 (Va. 1998). The conduct at issue in this appeal does not implicate intentional tortious conduct, but rather the individual defendants' allegedly negligent conduct in designing the specifications for the soccer field. Indyk and Caton assert that the participation theory is limited to intentional torts by corporate officers. The Appellate Division, although recognizing the lack of precedent in New Jersey and other jurisdictions applying the participation theory to negligent conduct, was unwilling to limit the doctrine to intentionally tortious acts. That court relied on three New Jersey decisions to support its broader application of the participation theory. In Tompkins v. Burlington Island Amusement Co., 102 N.J.L. 411 (1926), the Court of Errors and Appeals affirmed a judgment against the general manager of an amusement park located on an island in the Delaware River. The general manager's liability stemmed from his allegedly supervisory responsibility for the defective construction of a slip connecting the pier leading to the park to a float that provided access to small boats. Plaintiff sustained injuries when the slip collapsed. The Court relied on the general manager's alleged responsibility for construction of the defective slip as the basis for his potential personal liability. In Sensale v. Applikon Dyeing & Printing Corp., 12 N.J. Super. 171 (1951), the Appellate Division recognized the potential for liability under the participation theory for negligent conduct, but held that the facts presented did not personally implicate the president of the defendant corporation in the events leading to an employee's death. The decedent was electrocuted while moving a machine for his employer. The court found that there was insufficient evidence to establish the president's requisite participation in the events resulting in the plaintiff's death. Id. at 175. In Evans v. Rohrbach, 35 N.J. Super. 260 (App. Div.), cert denied, 19 N.J. 362 (1955), the plaintiff employee sustained serious injuries from an explosion and fire inside the metal tank where he had been working. Although the court acknowledged that the worker's compensation statute in force at that time did not necessarily preclude an employee's cause of action against a fellow employee, the court declined to hold several corporate officers of the employer corporation named in the complaint personally liable for the alleged negligence resulting in the plaintiff's injuries. However, the court acknowledged the potential for such liability: The problem confronting us here is whether the relationship of the defendants, or of any of them, to the specific industrial operation which gave rise to plaintiff's injuries was sufficiently direct or close so that it may be fairly said that they did participate or co-operate therein to an extent which should preclude their exculpation from liability to the plaintiff [based on negligence] as a matter of law. NO. A-66/67 JAN SALTIEL d/b/a EDGEWATER DESIGN ASSOCIATES, Plaintiff-Respondent, v. GSI CONSULTANTS, INC., JOHN DOES 1-5 and ABC CORPORATIONS 1-10, Defendants, and HENRY INDYK and RICHARD G. CATON d/b/a TURFCON, PROFESSIONAL TURFGRASS CONSULTANTS, Defendants-Appellants. DECIDED January 23, 2002 Chief Justice Poritz