Denike v. Cupo

• Decision Date: 24 September 2008
• Docket Number: A-61 September Term 2007.
• Citation: 958 A.2d 446,196 N.J. 502
• Court: New Jersey Supreme Court
• Parties: Lawrence DeNIKE, Individually and as a member of Classic Mortgage, LLC, a New Jersey Limited Liability Company, Plaintiff-Respondent, v. Michael CUPO, Defendant-Appellant.

958 A.2d 446

196 N.J. 502

Lawrence DeNIKE, Individually and as a member of Classic Mortgage, LLC, a New Jersey Limited Liability Company, Plaintiff-Respondent, v. Michael CUPO, Defendant-Appellant.

A-61 September Term 2007.

Supreme Court of New Jersey.

Argued May 6, 2008.

Decided September 24, 2008.

James F. Keegan argued the cause for appellant (Bendit Weinstock, attorneys; Mr. Keegan, Barrett F. Kalb and Sherri Davis Fowler, West Orange, on the briefs).

Thomas J. Herten argued the cause for respondent (Herten, Burstein, Sheridan, Cevasco, Bottinelli, Litt & Harz, attorneys; Mr. Herten and Daniel Y. Gielchinsky, Hackensack, on the brief).

Chief Justice RABNER delivered the opinion of the Court.

The Judiciary derives its authority from the State Constitution but earns the public's confidence through acts of unquestioned integrity. When that trust is shaken—even slightly—our system of justice falters. To guard against that outcome, we now address an area fraught with peril: a sitting judge's exploration of future employment opportunities.

In this case, a lawyer approached a trial judge and asked if he would consider affiliating with the attorney's firm upon retirement. In response, the judge began preliminary negotiations with the lawyer. Throughout the brief period of their discussions, the lawyer was handling a contested, pending matter before the judge.

That behavior plainly violated RPC 1.12(c), which directs that a judge "shall not negotiate for employment with any person who is involved as a party or as an attorney for a party in a matter in which the [judge] is participating personally and substantially." The attorney should have waited a reasonable period of time after the case ended before broaching the subject of employment. Absent such a break in time, the trial judge should have halted discussions immediately, disclosed them on the record, and allowed the parties to evaluate the need for any further relief.

Judges must avoid actual conflicts as well as the appearance of impropriety to promote confidence in the integrity and impartiality of the Judiciary. Unfortunately, the negotiations between trial judge and lawyer in this case created an appearance of impropriety. Stated simply, the conduct here fell short of the high standards demanded of judges and fellow members of the legal profession and had the capacity to erode the public's trust.

Because any lesser remedy would allow reasonable doubts to linger about the fairness of the outcome of the case, we reverse the judgment of the Appellate Division and remand for a new trial.

I.

Plaintiff Lawrence DeNike and defendant Michael Cupo were the sole members of Classic Mortgage, LLC (Classic), a company that brokered residential mortgages. They operated the business for a number of years and eventually had a falling out. After they tried unsuccessfully to mediate their dispute, DeNike filed a lawsuit in July 2003 seeking to terminate and acquire Cupo's interest in the company. Cupo counterclaimed. Both parties sought primarily the same relief: calculation of the fair value of Cupo's interest in Classic so that DeNike could buy out Cupo's interest.

The Honorable Gerald C. Escala, then Judge of the Superior Court and Presiding Judge of the Chancery Division, oversaw two-and-a-half years of hard-fought litigation in this matter. DeNike retained Thomas J. Herten, of the law firm Herten, Burstein, Sheridan, Cevasco, Bottinelli, Litt & Harz, to represent him.

About two weeks after the lawsuit started, the trial judge issued an order directing that: (1) Cupo be deemed dissociated from Classic as of July 18, 2003; and (2) DeNike make a partial payment of $250,000 to Cupo without prejudice to a final ruling on the value of his interest in the company. The trial judge later set December 31, 2002 as the valuation date for calculating Cupo's interest.

After a five-day bench trial in February and March 2005, the trial judge made various factual findings and ruled that DeNike would acquire Cupo's interest at fair market value. The court rejected each side's valuation expert and appointed William Morrison to calculate the value of Cupo's interest. To do so, Morrison would have to determine the value of the business and make intricate adjustments for commissions received, overhead costs, monthly management fees due DeNike, and the $250,000 payment, among other items. Morrison would also have to recalculate and adjust the parties' capital accounts.

Months later, in December 2005, Morrison testified about his findings, subject to cross-examination. The trial court then issued a supplemental decision directing DeNike to purchase Cupo's interest in Classic for the net amount of $436,682.

As directed, DeNike submitted a proposed form of order on January 3, 2006; Cupo objected and submitted his own proposed order. Specifically, Cupo requested that judgment be entered against DeNike both individually and in his capacity as a member of Classic, jointly and severally; that DeNike not be permitted to pay in installments over five years; and that the court address whether it had considered a $98,530 adjustment for taxes Cupo reportedly paid, on monies he would no longer receive because of an adjustment to his capital account. Cupo also argued that the net amount due him was $493,271, not $436,682, relying on a different figure Morrison had used to adjust the capital accounts.

On January 11, 2006, the court entered an order affirming that $436,682 was owed to Cupo. The following day, the court invited both parties to submit motions to address the error Cupo had raised about the net amount due as well as the proper payment schedule. Both parties filed motions, and the court issued its second supplemental decision on January 20, 2006. In that ruling, the trial judge agreed with Cupo and noted that it erred regarding the expert's calculations. As a result, Cupo was due $493,271. As for the manner of payment, the court ruled that a five-year payment period was appropriate, and that the obligation belonged to the company, not DeNike individually.

On January 24, 2006, one day after receiving a copy of the court's latest decision, DeNike's attorney, Thomas Herten, visited Judge Escala in chambers and asked about his retirement plans. (We rely on a certification Herten later submitted to the court for that fact and the related statements that follow.) Herten was aware of Judge Escala's mandatory retirement date of February 24, 2006, and asked whether he would consider joining Herten's law firm. The judge replied that he was open to considering the firm but wanted an independent "of counsel" type relationship. Because of the expenses involved in such a relationship, Herten responded that he would discuss the matter with his partners.

Herten met with his partners the next day, January 25, and they agreed to investigate the potential overhead costs of Judge Escala joining the firm. Either that same day or the next, Herten spoke with the judge by telephone and told him it would probably take several days to analyze the projected overhead expenses and get back to him.

Meanwhile on January 26, 2006, Cupo submitted a proposed form of order and promissory note as directed by the trial judge's January 20 second supplemental decision. In a cover letter, Cupo also sought to raise two issues about the promissory note, which the second supplemental decision had addressed. First, while the decision and draft promissory notes provided for annual payments at the judgment rate set by Rule 4:42-11, Cupo argued for quarterly installments with interest at the prime rate, based on the company's Operating Agreement. Second, Cupo once again asked the court to address the $98,530 adjustment for taxes Cupo claimed he had already paid.

Five days later, on January 31, 2006, DeNike's counsel objected and submitted an alternate proposed order and note. Herten wrote that Cupo's proposed forms "greatly exceed the scope of Your Honor's Second Supplemental Decision dated January 20, 2006 and the terms of the [LLC's] Operating Agreement." In particular, Herten complained that "[v]arious terms of the proposed Promissory Note . . . are so unilateral that the proposed note would never be executed in a negotiated transaction." According to Herten, those "terms are either not provided for in the Operating Agreement, or directly contrary to the terms of the Operating Agreement." Herten asked the judge to exercise his "discretion to execute the enclosed Order" instead.

The dueling sets of forms had certain apparent differences. Cupo's proposed order allowed for the option of one lump sum payment or payment in installments, while DeNike's provided for installment payments only. Regarding the promissory notes, among other points, Cupo's called for a five percent late fee on payments more than fifteen days late, and DeNike's did not; Cupo's allowed the note to be accelerated and become immediately due and payable if any payment was thirty days late, while DeNike's provided for written notice and an opportunity to cure a default within fifteen days; and Cupo's allowed the note to be assigned, while DeNike's expressly prohibited assignment.

On February 1, 2006, the judge adopted DeNike's proposed form of order and modified it in two ways: (1) he directed Classic to deliver "a promissory note" to Cupo within ten days but declined to endorse either note the parties had submitted; and (2) he inserted a handwritten paragraph explaining that he set the interest rate at the judgment rate "to recognize the effect of the `advance' payment of $250,000 . . . and the fact that the matter was litigated." By signing the order, the court denied Cupo's motion to award the additional amount of $98,530.

Later that same day, after receiving a copy of the final judgment, Herten spoke with Judge Escala by telephone. Herten told the judge the firm had not completed its analysis but that whatever financial arrangement the...