Conklin v. Hannoch Weisman

• Decision Date: 18 July 1996
• Citation: 678 A.2d 1060,145 N.J. 395
• Parties: Nathan CONKLIN; Richard Conklin; Frank Conklin, III; Audrey Conklin, Individually and as Executrix of the Estate of Franklin Conklin, Deceased, Plaintiffs-Respondents, v. HANNOCH WEISMAN, a Professional Corporation and Carleton R. Kemph, Esq., Defendants-Appellants, and Paula Hertzberg; Elliot Leibowitz and Joel Leibowitz, Individually and d/b/a Longview Estates, a New Jersey General Partnership; Theodore D. Cassera, P.E.; Canger, Schoor and Cassera Inc., a New Jersey Corporation, Defendants.
• Court: New Jersey Supreme Court

Page 395

145 N.J. 395

678 A.2d 1060

Nathan CONKLIN; Richard Conklin; Frank Conklin, III Audrey Conklin, Individually and as Executrix of the Estate of Franklin Conklin Deceased, Plaintiffs-Respondents, v. HANNOCH WEISMAN, a Professional Corporation and Carleton R Kemph, Esq., Defendants-Appellants and Paula Hertzberg; Elliot Leibowitz and Joel Leibowitz, Individually and d/b/a Longview Estates, a New Jersey General Partnership; Theodore D. Cassera, P.E.; Canger, Schoor and Cassera Inc., a New Jersey Corporation, Defendants.

Supreme Court of New Jersey.

Argued Feb. 14, 1996.

Decided July 18, 1996.

Laurence B. Orloff, Roseland, for appellants (Orloff, Lowenbach, Stifelman & Siegel, attorneys; Mr. Orloff, Linda S. Moore and Adam K. Derman, on the brief).

John B. Collins, Denville, for respondents (Bongiovanni, Collins & Warden, attorneys).

Felice T. Londa, Elizabeth, submitted a brief on behalf of amicus curiae New Jersey State Bar Association (George W. Canellis, Chairman, New Jersey State Bar Association; Amicus Committee, attorney).

The opinion of the Court was delivered by

O'HERN, J.

The primary issue in this legal malpractice action is whether plaintiffs are entitled to a new trial against their lawyer and his law firm based on the trial court's charge to the jury regarding proximate cause. In its original form, that charge would, in essence, have required defendants' negligence to have been the sole cause of the harm to the client for the attorneys to be held liable. The trial of the matter had resulted in a jury verdict of no cause for action against the defendants on the plaintiffs' major claim. Although differing as to the nature and scope of the retrial, both lower courts agreed that the charge on proximate cause contained language clearly capable of producing an unjust result and that plaintiffs were entitled to a new trial on liability. Each court, however, preserved some of the first jury's findings. We agree that plaintiffs are entitled to a new trial based on the defective jury charge below, but differ from both lower courts concerning the nature and scope of the retrial.

I

The Conklin plaintiffs are members of a farm family that settled in Montville in the 1800's. Over the years, the family diversified its activities and was, at the time of the events that led to this lawsuit, conducting, in partnership form, farm and sand and gravel operations, and had business counselors with whom it had explored the possibility of sale of the property. In the Fall of 1984, the Conklins listed for sale "100+ prime acres" of their farm. On the advice of their real estate broker, the Conklins retained the law firm of Hannoch Weisman, P.C., to represent them in the sale. The law firm assigned a then-associate, Carleton R. Kemph, to handle the matter.

In April 1985, a buyer, Longview Estates, agreed to purchase the Conklin Farm for $12 million. The contract required the purchasers to pay $3 million in cash at or before closing. A purchase-money note and mortgage to be paid within five years after closing and bearing interest at 9 per cent represented the remaining $9 million. The Longview partners guaranteed the partnership's note.

The contract of sale, executed by the parties on May 2, 1985, described the purchase-money mortgage obligation as "subordinate" to one or more institutional construction mortgages. ¹ The parties later amended the contract to subordinate the Conklin's purchase-money mortgage to a mortgage securing a loan that Longview was to obtain to raise any balance of cash due at closing.

The sale took place on December 22, 1986. By 1990, however, Longview had defaulted on its purchase-money mortgage and its construction mortgage. A mortgage lender that had priority over the Conklins by virtue of the subordination agreement contained in the contract of sale foreclosed on the property. In order to recover the land or hold onto their second mortgage, the Conklins would have had to have bid between $10 million and $12 million at the foreclosure sale to satisfy the balances due on the outstanding construction mortgage. The Conklins did not have the funds for such a buyout, not to mention that it would have made little sense to spend $12 million to recover the $9 million due to them, unless the property (with any improvements) had substantially appreciated in value. Meanwhile, Longview and its individual partners filed for bankruptcy protection. As a result of those events, the Conklins lost the $9 million owed to them under the contract of sale as well as their land.

The Conklins, believing that their attorneys had failed to protect them in this transaction, sued Hannoch Weisman and Carleton Kemph for malpractice. Plaintiffs' major claims at trial were that defendants had been negligent in preparing the contract documents and had failed adequately and accurately to explain to the Conklins the meaning and risks of subordination.

Subordination of a mortgage is an innocuous sounding expression but in the field of commercial financing it has the potential for disaster. To put the concept in simple terms, if you are a lender, to subordinate a loan to that of another means that someone else must be paid before you can collect anything from the borrower. If the borrower owes a substantial sum of money to that other party, you may not be paid at all. To protect themselves, lenders often insist on collateral, an interest in the property of the borrower that the lender can acquire if the borrower does not pay. A mortgage on real estate is perhaps the most familiar form of collateral. Again, if you are a lender, to subordinate your mortgage to the mortgage of another means that you cannot reach the collateral (the property) until that other party (holding the mortgage with priority) has been fully paid. In effect, you stand on line until all other holders of mortgages with priority have been paid.

A mortgage is thus only as good as the collateral that it secures. A $100,000.00 mortgage on a house worth $50,000.00 puts the lender at risk for $50,000.00. A $100,000.00 mortgage on the same property that is subordinated to another mortgage of $50,000.00 is really worthless unless the borrowers have other money or assets to pay the loan. As events turned out, the partnership that bought the Conklin farm did not have other money or assets sufficient to pay the loan. Assuming that the property was worth what it sold for, the Conklin's $9 million mortgage was at risk the minute that other lenders were to be paid out of the property before the Conklins were. The more that was owed to those other preferred lenders, the more the Conklins were put at risk. ²

At trial, the parties presented diametrically opposed positions concerning the communications between them on the subject of subordination. Plaintiffs claimed that defendants failed to provide any explanation of the meaning of subordination or the ramifications of subordination in the event of default by the buyers on any of the loans, including any attendant foreclosure. Defendants, on the other hand, asserted that on numerous occasions they provided plaintiffs with detailed explanations concerning the meaning and risks of subordination, including the effects of foreclosure and default.

Defendants emphasize that Frank Conklin, Jr., the since-deceased managing partner for the family, fully understood the meaning and consequences of subordination. Defendants point out that the Conklins' family lawyer had counseled against subordination and that the Conklins' prior negotiations with potential purchasers made the Conklins fully aware that they could not sell the farm for $12 million without allowing purchasers to obtain mortgage money to construct the housing that gives the property its value. One family member acknowledged that they had "agreed to compromise" to make the deal. Although the evidence presented by both parties at trial was thus in conflict, the jury determined by way of answers to special interrogatories that defendants were negligent in explaining subordination and the risks associated with subordination. The jury answered "Yes" to the following special interrogatory: Were Carleton R. Kemph and Hannoch Weisman negligent in representing the Conklin Farm partnership in connection with explaining subordination and the risks associated with subordination?

However, the jury answered "No" to the next interrogatory:

Was the negligence of Carleton R. Kemph and Hannoch Weisman a proximate cause of damage suffered by the Conklin Farm partnership?

In addition, the jury found that defendants were not negligent in drafting the contract documents insofar as they concerned subordination. ³

Plaintiffs moved for judgment notwithstanding the verdict or for a new trial on the subordination issue. After reviewing the filings and hearing oral argument, the trial court concluded that a paragraph in its charge may have misled the jury. That paragraph read as follows:

Thus, for example, if you as jurors find that the proximate cause of plaintiffs' alleged losses was the bankruptcy of Longview Estates [and its principals], then you may not find Kemph liable for malpractice because his acts and omissions, even if you conclude they were deviations from accepted standards of practice, were not the proximate cause of the plaintiffs' losses.

The court found that the paragraph could have misled the jury to believe that defendants' malpractice could not be considered a proximate cause of plaintiffs' losses if those losses were also caused by the bankruptcy of Longview Estates and its partners.

The court further concluded that a second paragraph in the charge, which the court added just before the jury began its deliberations, failed to overcome the misleading effect of the original charge. That paragraph read:

However, the defendant is not relieved from liability for his negligence by the intervention of acts of third persons if those acts were reasonably...