Title: IMO The Estate of Herbert P. Lash, deceased/Fireman's Fund Insurance Company v. Manuel Lopez, Jr., et al., and the Estate of Hildegard Lash, deceased

State: new-jersey

Issuer: New Jersey Supreme Court

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). ZAZZALI, J., writing for a majority of the Court. The issue before the Court is whether an estate can recover counsel fees expended to recover from the surety on the bond the funds misappropriated by the administrator of the estate, or whether the estate is responsible for those fees. The Court must also determine the appropriate interest rate on the surcharged amount and the date from which the interest calculation should start. Herbert P. Lash died without a will in April of 1987. His sole heir was his mother, Hildegard Lash, a resident of Florida. Mrs. Lash executed a power of attorney to Manuel Lopez, Jr., a stockbroker that she and Herbert both knew. In May 1987, Mrs Lash renounced her right to administrate her son's estate and asked that Lopez be appointed as administrator. The following month, the Passaic County Surrogate's Court appointed Lopez as administrator of the estate, conditioned on the posting of a surety bond in the amount of $800,000. Fireman's Fund Insurance Company (Fireman's Fund) provided that bond. During the course of his service as administrator, Lopez misappropriated funds from Herbert Lash's estate. Because of these thefts, Mrs. Lash revoked the power of attorney and filed suit in Florida against Lopez, his wife, and Fireman's Fund alleging that Lopez breached his fiduciary duty to properly administer and distribute the assets of Herbert's estate. In December 1992, the estate obtained a default judgment against Lopez and his wife in the amount of $800,000. The estate was unable to collect this money because the Lopez's had disappeared. In January 1993, Fireman's Fund filed a complaint in the Passaic County Surrogate's Court against Lopez, Lopez's wife, Lopez's attorney, and Mrs. Lash, among others. The complaint alleged that Lopez breached his fiduciary duty to properly administrate Lash's estate. By amended answer and counterclaim, the estate asserted that Fireman's Fund, as surety under the bond, was liable to the estate for the full amount of the bond, together with interest, counsel fees, and costs of suit. By stipulation, the parties resolved all issues except counsel fees and interest. The bond is silent on the issue of counsel fees. The Chancery court rejected the estate's contention that the counsel fees incurred should be charged to the bond. Instead, the court charged the fees to the corpus of the estate. In addition, rather than awarding investment market rate interest from the date of Lopez's thefts as requested by the estate, the court awarded simple interest from the date the complaint was filed. On appeal, the Appellate Division affirmed the order requiring the payment of counsel fees by the estate and directing that simple interest be awarded, but modified the portion of the order addressing the interest calculation. The court remanded to the Chancery court for further proceedings to determine the start date for the calculation of simple interest on each of the thefts that formed the basis of the surcharge against the bond. The Supreme Court granted the estate's petition for certification concerning attorneys' fees and granted Fireman's Fund's petition for certification in respect of the award of interest. HELD: The attorney's fees incurred by the estate in the action on the surety bond should be assessed against the bond. The American Rule does not preclude an award of counsel fees because they were incurred in the bond litigation, rather than the litigation to establish the administrator's liability. Moreover, the estate is entitled to simple interest running from the date of the misappropriations. 2. Liability of a surety is coextensive with the liability of the administrator. The estate should be made whole for any harm or injurious consequences caused by a misappropriating administrator. Because Lopez caused the estate to expend attorneys' fees in the proceeding on the bond, Fireman's Fund, under principles of suretyship, is liable for the full extent of the damages caused by Lopez, including attorneys' fees incurred in the proceeding on the bond. (Pp. 9-11) 3. The surety bond in this case is silent on whether damages consisting of attorneys' fees incurred as a result of the Lopez's wrongful conduct are recoverable against the surety. Thus, there is no bond language precluding an award of such damages, and the surety's and fiduciary's liabilities are coextensive. Furthermore, there is no contractual basis to prohibit attorneys' fees, and the overriding principle of the surety bond is to make the estate whole for a fiduciary's misconduct. Thus, the surety is liable for fees proximately caused by the administrator's misconduct. (Pp.11-12) 4. New Jersey generally follows the American Rule, which prohibits a litigant from recovering counsel fees from a defendant when the fees are incurred in an action to establish the defendant's liability. However, the rule does not preclude an allowance of reasonable counsel fees where they are incurred as an element of damages in a particular cause of action. The Lash estate's damages include counsel fees incurred in proceeding on the bond as they are a foreseeable consequence of the misappropriation. That conclusion does not conflict with the American Rule, which does not prohibit awards of attorneys' fees incurred in litigation with a third party--these fees were incurred in the litigation on the bond, rather than the litigation against Lopez. (Pp. 12-16) 5. The Court's decision is not an application of Saffer and Packard-Bamberger, which authorized the award of attorneys' fees against an attorney-defendant when those fees were incurred as a result of the litigation to establish the attorney-defendant's liability. The holding here involves an award to the estate of attorneys' fees incurred in litigation on the bond that were consequential damages of Lopez's misconduct. That award is distinct from Saffer because the fees are damages incurred in litigation other than to establish Lopez's liability. This case neither applies nor expands Saffer or Packard-Bamberger. (Pp. 16-19) 6. On this record, there is no abuse of discretion in the court's award of simple interest. Moreover, the date of misappropriation should serve as the start date from which the interest should be assessed. (Pp. 19-21) Judgment of the Appellate Division is AFFIRMED IN PART and REVERSED IN PART and the matter is REMANDED for entry of an order requiring the surety to pay the attorneys' fees incurred in the bond litigation. JUSTICES VERNIERO and LAVECCHIA, dissenting, are of the view that a surety is not liable beyond its obligation under statute and the express terms of the bond. There is no provision in the bond or in any statute in New Jersey that provides that the surety may be surcharged for attorneys' fees. Neither tort principles nor general invocations of equitable principles should be relied on here to recast the obligation that the surety has undertaken. Its contractual obligation is to restore the funds to the estate that were taken by the administrator. CHIEF JUSTICE PORITZ and JUSTICES STEIN, COLEMAN and LONG join in JUSTICE ZAZZALI'S opinion. JUSTICES VERNIERO and LaVECCHIA filed a separate dissenting opinion. IN THE MATTER OF THE ESTATE OF HERBERT P. LASH, deceased. FIREMAN'S FUND INSURANCE COMPANY, Plaintiff-Respondent and Cross-Appellant, v. MANUEL LOPEZ, JR.; CHERYL S. LOPEZ, his wife; DONALD J. MELIADO; PRUDENTIAL-BACHE SECURITIES, INCORPORATED; L&L ASSOCIATES; LOPEZ, LOPEZ & CRINGOLI; LOUIS H. MILLER; and WILLIAM R. DENI, Defendants, and THE ESTATE OF HILDEGARD LASH, Defendant-Appellant and Cross-Respondent. Argued November 28, 2000 -- Decided July 2, 2001 On certification to the Superior Court, Appellate Division, whose opinion is reported at 329 N.J. Super. 249 (2000). Timothy J. Korzun argued the cause for respondent and cross-appellant (Sheak & Korzun, attorneys; Mr. Korzun, J. Charles Sheak and Deborah I. Hollander, on the briefs). The opinion of the Court was delivered by ZAZZALI, J. In this case, the administrator of an estate misappropriated the estate's funds. We must decide whether the estate can recover counsel fees incurred in the proceeding to recover the misappropriated amounts from the surety on the bond, or whether the estate is responsible for those fees. We also must determine the appropriate interest rate on the surcharged amount and the date on which the interest should commence. The Appellate Division found that the surety was not liable for attorneys' fees on the bond. In re Estate of Lash, 329 N.J. Super. 249, 252 (App. Div. 2000). Because we conclude that the estate is entitled to recover those fees as damages caused by the administrator's wrongful conduct, we reverse that determination and remand for entry of an order requiring the surety to pay the attorneys' fees incurred in the bond litigation. The panel also determined that the trial court did not abuse its discretion in awarding simple interest from the date that the complaint was filed. Ibid. We affirm that conclusion. [Lash, supra, 329 N.J. Super. at 263-64.] For those reasons, we affirm the Appellate Division's conclusions with regard to the award of interest. IN THE MATTER OF THE ESTATE OF HERBERT P. LASH, deceased. ____________________________ FIREMAN's FUND INSURANCE COMPANY, Plaintiff-Respondent and Cross-Appellant, v. MANUEL LOPEZ, JR.; CHERYL S. LOPEZ, his wife; DONALD J. MELIADO; PRUDENTIAL-BACHE SECURITIES, INCORPORATED; L&L ASSOCIATES; LOPEZ, LOPEZ & CRINGOLI; LOUIS H. MILLER; and WILLIAM R. DENI, Defendants, and THE ESTATE OF HILDEGARD LASH, deceased. Defendant-Appellant and Cross-Respondent. _____________________________ VERNIERO, LaVECCHIA, JJ., dissenting. This matter involves the misappropriation or misapplication of assets by an estate's administrator. The narrow issue is whether the counsel fees incurred by the estate in seeking recovery of those assets are surchargeable against the administration bond. We would affirm the judgment of the Appellate Division substantially for the reasons expressed in Judge Fall's persuasive opinion. In re Estate of Lash, 329 N.J. Super. 249 (App. Div. 2000). The panel correctly concluded that there is no authority in this State to surcharge counsel fees against the administration bond. Id. at 252. We write to emphasize the following. Nevertheless, the majority finds support for its conclusion that the surety may be surcharged for counsel fees over and above the amount of the bond from the decision in Jugan v. Friedman, 275 N.J. Super. 556 (App. Div.), certif. denied, 138 N.J. 271 (1994). In Jugan, the defendant fraudulently transferred his assets to other members of his family to avoid paying the plaintiff's judgment. Id. at 560-61. In a subsequent action, the court permitted the plaintiff to recover the litigation costs associated with suing the defendant's family members to recover the assets. Id. at 560. The court referred to the general rule in New Jersey that each party must bear his or her own litigation expenses, including attorneys' fees. Id. at 573. The court then observed that there is an exception to the rule when the commission of a tort proximately causes litigation with parties other than the tortfeasor. Ibid. In those circumstances, the plaintiff was entitled to recover damages measured by the expense of that litigation with the third parties. Ibid. (citing Feldmesser v. Lemberger, 101 N.J.L. 184, 186-88 (E. & A. 1925)). The Appellate Division correctly distinguished Jugan from this case. The majority contends that the estate should be permitted to recover the amount of money it expended in litigating with the surety, now characterized as a third-party, to collect on its $800,000 Florida judgment. The Court reasons that Lopez's defalcation as administrator of the estate is the proximate cause of the litigation that ensued between the estate and the surety and therefore the surety should be liable for the fees the estate spent in correcting the administrator's misdeeds. That reasoning is circular and avoids the essential question that still remains: whether the surety is responsible in tort for attorneys' fees as part of its contractual liability for the administrator's defalcation to the estate. We believe that the answer to that question must be no. In Jugan, the liability was born solely of tort principles. Here we are addressing liability founded only in contract. The contract defines the exposure. That exposure cannot be altered by attempting to identify the surety as a third party. The surety is not a third party. It is a direct participant in this matter as a result of its direct contractual relationship to the estate. The Court finds the surety liable for the fees because the liability of a surety on a personal representative's bond is coextensive with that of the representative for losses occasioned by official acts and defaults. Ante at ___ (slip op. at ___) (citing 31 Am. Jur. 2d Executors and Administrators 349 (1989)). But, that characterization is too broad and, therefore, does not appropriately describe the surety's liability in this setting. More completely, American Jurisprudence states that the surety has a right to stand strictly upon the contract, which neither the courts nor the parties can vary. 31 Am. Jur. 2d Executors and Administrators 349 (1989); see also 34 C.J.S. Executors and Administrators 900 (1998) ( [T]he principal and sureties are equally and primarily liable in case of a breach of its conditions . . . . The obligation of the sureties, however, rests solely in contract and they cannot be held liable contrary to or beyond the condition of the bond. ) (emphasis added). As for attorneys' fees, that section of Corpus Juris Secundum refers only to Lawyers Surety Corp. v. Larson, 869 S.W.2d 649, 653 (Tex. Ct. App. 1994), in which the court allowed attorneys' fees to be assessed against the surety after finding that the applicable Texas statute permitted recovery of fees against the surety resulting from the administrator's failure to meet statutory obligations. In New Jersey, however, the statute governing sureties and the actual surety agreement involved here do not include provisions requiring the surety to be responsible for counsel fees when sued on its own bond. N.J.S.A. 3B:15-5 provides for the conditions of the bond on intestate administration, and N.J.S.A. 3B:15-26 concerns proceedings to satisfy judgment on the bond. Neither section provides that the surety is responsible for attorneys' fees. The majority's view of the surety's exposure to damages in the form of attorneys' fees, premised on a theory of tort liability, simply is wide of the mark. As this Court said a few short years ago, the surety is chargeable only according to the strict terms of its undertaking, and its contractual obligations cannot and should not be extended by implication or by construction. Eagle Fire Prot. Corp., supra, 145 N.J. at 354 (quoting Monmouth Lumber Co., supra, 21 N.J. at 452); see also Cruz-Mendez v. ISU/Ins. Servs., 156 N.J. 556, 571 (1999) (same). Other courts have addressed whether attorneys' fees are recoverable against the surety as an element of damages. In Faulkner Concrete Pipe Co. v. United States Fidelity & Guaranty Co., 218 So. 2d 1, 2 (Miss. 1968), the City of Laurel contracted with the American Construction Company to add additional lines to the city's sewer system. As part of the contract, the construction company entered into a surety agreement with Fidelity & Guaranty whereby the contractor would promptly make all payments to those supplying labor or materials for the project. Ibid. Nowhere in the surety agreement was there a provision for the payment of attorneys' fees. Ibid. In the contract between the city and the construction company, however, there was a provision that stated that the construction company would be liable for all attorneys' fees and costs of collection. Ibid. A subcontractor sued the construction company for its alleged failure to pay for the subcontractor's services and included a claim for attorneys' fees. Ibid. The question arose whether the surety could be responsible for the fees. Id. at 3. In rejecting that claim, the court stated: We have no statute making the surety on a contractor's bond liable for attorney's fees incurred by the obligee in case of default by the principal and suit on the bond, and neither the contract nor the bond in the case at bar contained any such provision. Ibid. (quoting Nat'l Sur. Co. v. Trs. of Runnelstown Consol. Sch., 111 So. 445, 448 (Miss. 1927)). Another example is New Amsterdam Casualty Co. v. Texas Industries, Inc., 414 S.W.2d 914 (Tex. 1967). In that case, the respondent was not paid for materials furnished to a contractor. He sued the contractor and the surety and, in addition to damages, claimed $19,773.62 in attorneys' fees against the surety. Ibid. The court held that attorneys' fees are not recoverable against the surety on the payment bond, nor are attorneys' fees recoverable in an action for tort or contract unless provided by statute or contract between the parties. Id. at 915. See L.S. Tellier, Annotation, Surety's Liability for Obligee's Attorney Fees Under Provisions of Performance Bond of Public Contractor or Subcontractor, 69 A.L.R.2d 1046 (1960) (summarizing cases in which surety was held not liable for attorneys' fees in absence of provision expressly creating that liability in surety bond or under statutory law). We would conclude that the surety is not liable beyond its obligation under statute and the express terms of the bond. There is no provision in the bond or in any statute in New Jersey that provides that the surety may be surcharged for counsel fees. Neither tort principles nor general invocations of equitable principles ought to be imported here to recast the obligation that the surety has undertaken. Its contractual obligation is to restore the monies to the estate that were taken by the administrator. Although the estate sued the surety to compel payment on the bond, the attorneys' fees incurred in that suit are not part of the surety's liability. Attorneys' fees expended in litigation with the surety do not fit within that contractual obligation. Nor do our statutes governing bonds given in intestate administration require such coverage. The surety is entitled to stand on the limits of the obligations it bargained for in its contract. As a practical matter, insurers writing surety bonds in New Jersey now will have reason to regard their exposure on their bonds as greater than that for which they bargained. We can expect that they will price their bonds to reflect that new undefined exposure. The impact will be borne by none other than our citizens when they are required to obtain a surety bond, pursuant to N.J.S.A. 3B:15-1 to -6, as part of the administration of estates in this State. NO. A-125/126 IN THE MATTER OF THE ESTATE OF HERBERT P. LASH, deceased. ____________________________ FIREMAN'S FUND INSURANCE COMPANY, Plaintiff-Respondent and Cross-Appellant, v. MANUEL LOPEZ, JR., et al., Defendants. DECIDED July 2, 2001 Chief Justice Poritz