Title: County of Essex v. First Union National Bank

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). Joseph Galluzzi was a financial consultant to the Essex County Board of Freeholders (County) from 1982 to June 1987, after which he served as County Treasurer for two years before becoming a financial consultant to the Essex County administration. George Tuttle was a Senior Vice President of First Fidelity Bank, now First Union National Bank (Bank), between 1985 and 1991. As the manager of the municipal securities department, he developed and negotiated municipal securities for the Bank. Beginning in 1987, as a result of an unlawful kickback scheme between Galluzzi and Tuttle, the Bank was selected by the County to serve as underwriter on three municipal bond issues (the 1987 Bond Transaction, the 1989A Bond Transaction, and the 1989B Bond Transaction). Galluzzi submitted fictitious invoices to the Bank for work he had not performed and Tuttle arranged for the Bank to pay Galluzzi. In 1995, Tuttle pled guilty in federal court to falsifying records while he was a Bank employee to induce the purchase and sale of municipal securities. He admitted his involvement in the kickback scheme with Galluzzi and that he concealed the payments. As part of a settlement with the Securities Exchange Commission (SEC), the Bank agreed to pay disgorgement plus prejudgment interest in the amount of $1,793,309.43 into an escrow fund held by the SEC. A plan was devised for injured parties to collect from that fund, either directly or by instituting a civil action. In October 1996, the County commenced this civil action against the Bank, Tuttle, and Galluzzi. Galluzzi was indicted the same month and, in April 1998, the County moved in the civil action for partial summary judgment against Galluzzi and Tuttle for the amount of the kickbacks the Bank paid to Galluzzi. The trial court granted the motion and entered judgment against Galluzzi and Tuttle in the amount of $137,769.16 plus interest, for a total of $206,809.22. The County then moved for partial summary judgment against the Bank, asserting that the Bank was responsible for its employee s actions. The trial court agreed and entered judgment against the Bank in the amount assessed against Galluzzi and Tuttle together with prejudgment interest. After the trial court certified the judgment as final, the Bank appealed. The Appellate Division affirmed. We denied the Bank s petition for certification. The Bank then paid the judgment. A jury trial was held over eight days in September 2002. The evidence showed that in connection with each bond transaction, the Bank realized a substantial fee, known in the industry as the underwriter s discount (discount or fee). In the aggregate, the Bank received underwriting fees of $2,883,019.15. The trial court placed the burden of proof on the County to establish any sharing of fees by the Bank with other underwriters. For the 1989B Bond Transaction, the evidence was clear that the Bank allocated to itself 52.34% of the bonds and allocated the balance of the bonds and discount to four other underwriting firms. Neither the County nor the Bank presented any evidence on the allocation of the fees in either the 1987 bond Transaction or the 1989A bond Transaction. The jury, in part, returned a verdict in favor of the County for its unjust enrichment/disgorgement claim on the 1989B Bond Transaction in the amount of $600,000. The trial court subsequently awarded prejudgment interest from June 30, 1989, the date of the 1989B Bond Transaction. The County s motion for a new trial and other relief was denied. The County appealed and the Bank cross-appealed. In a published opinion, the Appellate Division held that the County was entitled to full disgorgement of the fees for the 1987 Bond Transaction and the 1989A bond Transaction and affirmed the partial fee disgorgement award for the 1989B transaction. In response to the Banks argument that unjust enrichment cannot be awarded in the face of a valid contract, the panel found that even though unjust enrichment typically applies when no valid contract exists, the remedy is also applicable in the form of disgorgement when corrupt means have been employed to obtain a government contract. However, the panel concluded that if the wrongdoer passes the benefit to an innocent third party who is entitled to the fee, then the court will not treat the wrongdoer as having received that benefit for purposes of disgorgement. The panel further found that the burden of proof to show any sharing of fees was on the Bank, not the County, and that the Bank should not be given further opportunity to offer such proofs. The panel also disagreed with the trial court s starting date for prejudgment interest and found that prejudgment interest should run from the date the complaint was filed and not from the date of the bond transaction. We granted the County s petition for certification and the Banks cross-petition. HELD: Under the circumstances presented, disgorgement is an appropriate remedy, but the fees paid to innocent third parties should not be part of the disgorgement award. 1. Initially, we agree with the Appellate Division s conclusion that unjust enrichment/disgorgement is a valid basis on which to require recovery when the wrongdoer obtained the benefit as a direct result of bribing a public official. Our case law has long recognized that in analogous circumstances, general principles of equity mandate the wrongdoer be relieved of any profits. Strong remedies are necessary to combat unlawful conduct involving public officials. Disgorgement in favor of the public entity serves as a harsh remedy against those who bribe a public official to secure a public contract and provides a deterrent to such unlawful activity. We hold that when a public contract is obtained by bribing a public official, the public entity is entitled to the gross profits obtained by the wrongdoer. The Appellate Division correctly held that the County was entitled to unjust enrichment/disgorgement from the Bank not only on the 1989B Bond Transaction submitted to the jury, but on the other two bond transactions as well. Contrary to the Bank s contentions, the County established the amount of the underwriting discounts for all three bond transactions. The reasons for disgorgement are not related to whether the County suffered damages. It is the evil of the wrongdoer retaining any of the fruits of its wrongful conduct that grounds the claim. As a matter of law, the county was entitled to recover the fees paid to the Bank on each of the bond transactions. (Pp. 12-17) 2. We need not deal at length with the County s contention that the Bank was not entitled to offset those portions of the fees that were paid to other underwriters. We agree with the Appellate Division that the Bank would not be treated as having received fees paid to other innocent underwriters. The Bank must only disgorge that portion of the fee that it received and retained. Thus, the portion of the judgment awarding $600,000 to the County for the 1989B Bond Transaction is affirmed. (Pp. 17-18) 3. The trial court erred when it placed the burden of proof on the County to show any division of fees. The burden should have been on the Bank. It is for the Bank to prove its defense that it did not retain the fees or that the fees were subsequently earned and received by a third party. In fairness, a remand is necessary to give the Bank an opportunity to present evidence to convince a factfinder that it shared the underwriting fees with innocent underwriters. (Pp. 18-19) 4. Unlike prejudgment interest in tort actions, which is expressly governed by Rule 4:42-11(b), the award of prejudgment interest on contract and equitable claims is based on equitable principles. The allowance of prejudgment interest is a matter of discretion for the trial court. Although the issue is fairly debatable, we see no manifest denial of justice in the trial court s award of prejudgment interest from the date of the bond transaction. Accordingly, we reverse the Appellate Division s judgment and reinstate that portion of the trial court s order awarding prejudgment interest from the date of the 1989B Bond Transaction. (Pp. 19-20) We AFFIRM the judgment of the Appellate Division in all respects, except that prejudgment interest must be awarded from the date of each bond transaction, and the matter is REMANDED to the trial court to enter judgment in favor of the County in the amount of the underwriter s fees for the 1987 Bond Transaction and 1989A Bond Transaction, and to determine the allocation of fees, if any, on those two bond transactions. CHIEF JUSTICE PORITZ and JUSTICES LONG, LaVECCHIA, ZAZZALI, ALBIN and RIVERA-SOTO join in JUSTICE WALLACE s opinion. Plaintiff-Respondent and Cross-Appellant, v. FIRST UNION NATIONAL BANK, Successor in Interest to First Fidelity Securities Group, Defendant-Appellant and Cross-Respondent, and JOSEPH GALLUZZI, LORRAINE GALLUZZI and GEORGE L. TUTTLE, JR., Defendants. Argued October 11, 2005 Decided January 26, 2006 On certification to the Superior Court, Appellate Division, whose opinion is reported at 373 N.J. Super. 543 (2004). Dennis T. Kearney argued the cause for appellant and cross-respondent (Pitney Hardin, attorneys). Patrick T. Collins argued the cause for respondent and cross-appellant (Franzblau Dratch, attorneys). JUSTICE WALLACE, JR. delivered the opinion of the Court. The primary issues in this appeal are whether claims for unjust enrichment/disgorgement survive when there is a valid contract, and if so, when an employee of a commercial bank bribes a public official to obtain underwriting privileges on three bond issues, whether the bank must disgorge that part of the fee paid to innocent third parties. We hold that under the circumstances presented, disgorgement is an appropriate remedy, but the fees paid to innocent third parties should not be part of the disgorgement award. [Id. at 499 (citations omitted).] This Court required the defendants to disgorge their gross profits of $3,050,347, and disallowed any credit for the expenses incurred in effectuating the fraudulent scheme, for none of those expenses can rightly be said to have been of benefit to the bridge commission or the public it represents. Id. at 500. In Manning Engineering, Inc. v. Hudson County Park Commission, 74 N.J. 113, 117-18 (1977), an engineering firm sued Hudson County for the balance of a fee allegedly due for services performed under a contract in connection with the development of a park on the Hackensack River in Jersey City. The firm was awarded a judgment for approximately half of the balance. Id. at 118. One month later, Hudson County filed a motion seeking to set aside the prior judgment on the ground that the firm had engaged in illegal kickbacks to obtain the contract. Id. at 119. This Court found that the firm was barred from recovery under the contract, id. at 142, and upheld its prior holding in Driscoll, supra, that a contract is unenforceable where it is held to be contrary to public policy, id. at 138. Although the defendant had not sought to recover the amount it had previously paid, the Court noted that the only arguable question is whether restitution by the plaintiff would not also be justified under these circumstances. Id. at 139 (citing S.T. Grand, Inc. v. City of New York, 298 N.E.2d 105 (N.Y. 1973)). In S.T. Grand, supra, 298 N.E.2d at 106, the plaintiff had bribed a City of New York employee in connection with a reservoir cleaning contract with the City. The plaintiff sued for the balance due on the contract, and the defendant counterclaimed for the amount it had previously paid. Ibid. As a deterrent to illegal conduct in public contracts, New York s highest court allowed the defendant to recover from the plaintiff all amounts paid under the contract that had been obtained through bribes. Id. at 109. Strong remedies are necessary to combat unlawful conduct involving public officials. Disgorgement in favor of the public entity serves as a harsh remedy against those who bribe a public official to secure a public contract and provides a deterrent to such unlawful activity. We hold that when a public contract is obtained by bribing a public official, the public entity is entitled to the gross profits obtained by the wrongdoer. Applying that principle here, Tuttle, a senior vice president of the Bank, pled guilty to falsifying records to induce the purchase and sale of municipal securities while he was employed by the Bank. In that context, the illegal conduct of Tuttle is attributable to the Bank, which, absent disgorgement, would receive a benefit from the wrongful conduct of its employee committed in the scope of his employment. The Appellate Division correctly held that the County was entitled to unjust enrichment/disgorgement from the Bank not only on the 1989B Bond Transaction submitted to the jury, but on the other two bond transactions as well. Contrary to the Bank s contention, the County established the amount of the underwriting discounts for all three bond transactions. It was undisputed that the total underwriting discounts were $375,000 on the 1987 Bond Transaction; $968,176.92 on the 1989A Bond Transaction; and $1,539,842.23 on the 1989B Bond Transaction. The Bank official s unlawful conduct entitled the County to disgorgement of the total fees received by the Bank on each of those transactions. It was error for the trial court to limit disgorgement to the 1989B Bond Transaction and not to permit the jury to award the fees on the other two bond transactions. Further, we disagree with the Bank s assertion that the County waived its claim for disgorgement on the first two bond transactions. Although the County acknowledged it suffered no damages on those transactions, it still sought to recover under a disgorgement theory. As noted, the reasons for disgorgement are not related to whether the County suffered damages. It is the evil of the wrongdoer retaining any of the fruits of its wrongful conduct that grounds the claim. As a matter of law, the County was entitled to recover the fees paid to the Bank on each of the bond transactions. [Rova Farms Resort, Inc. v. Investors Ins. Co., 65 N.J. 474, 506 (1974) (citations omitted).] The allowance of prejudgment interest is a matter of discretion for the trial court. In re Estate of Lash, 169 N.J. 20, 34 (2001). Unless the award represents a manifest denial of justice, an appellate court should not interfere. Musto v. Vidas, 333 N.J. Super. 52, 74 (App. Div.), certif. denied, 165 N.J. 607 (2000). Both the trial court and the Appellate Division concluded that awarding prejudgment interest to the County was appropriate, but they differed on the starting date. It is obvious that the County s cause of action for unjust enrichment/disgorgement is an equitable claim. As we noted above, it is grounded in the theory that a wrongdoer should not profit from its wrongdoing regardless of whether the innocent party suffered any damages. From the date of each bond transaction, the Bank had the benefit of the money that the [County] is found to have been earlier entitled. Rova Farms, supra, 65 N.J. at 506. Although the issue is fairly debatable, we see no manifest denial of justice in the trial court s award of prejudgment interest from the date of the bond transaction. See Driscoll, supra, 8 N.J. at 501 (awarding prejudgment interest on disgorgement award from date of closing). Accordingly, we reverse the Appellate Division s judgment and reinstate that portion of the trial court s order awarding prejudgment interest from the date of the 1989B Bond Transaction. SUPREME COURT OF NEW JERSEY NO. A-107/108 SEPTEMBER TERM 2004 ON CERTIFICATION TO Appellate Division, Superior Court COUNTY OF ESSEX, Plaintiff-Respondent and Cross-Appellant, v. FIRST UNION NATIONAL BANK, Successor in Interest to First Fidelity Securities Group, Defendant-Appellant and Cross-Respondent, And JOSEPH GALLUZZI, LORRAINE GALLUZZI and GEORGE L. TUTTLE, JR., Defendants. DECIDED January 26, 2006 Chief Justice Poritz PRESIDING OPINION BY Justice Wallace CONCURRING/DISSENTING OPINIONS BY DISSENTING OPINION BY