Lyn-Anna Properties, Ltd. v. Harborview Development Corp.

• Decision Date: 16 July 1996
• Docket Number: LYN-ANNA
• Parties: PROPERTIES, LTD., Alan Husak and Alan Kipnis, Plaintiffs-Respondents, v. HARBORVIEW DEVELOPMENT CORP., Defendant and Third-Party Plaintiff, and KURENS SOUTH INC., Philip Kurens and Claire Kurens, Defendants and Third-Party Plaintiffs-Appellants, v. Robert NOTTE, Third-Party Defendant.
• Court: New Jersey Supreme Court

Page 313

145 N.J. 313

678 A.2d 683

LYN-ANNA PROPERTIES, LTD., Alan Husak and Alan Kipnis, Plaintiffs-Respondents, v. HARBORVIEW DEVELOPMENT CORP., Defendant and Third-Party Plaintiff, and KURENS SOUTH INC., Philip Kurens and Claire Kurens, Defendants and Third-Party Plaintiffs-Appellants, v. Robert NOTTE, Third-Party Defendant.

Supreme Court of New Jersey.

Argued Jan. 3, 1996.

Decided July 16, 1996.

John Barry Cocoziello, Newark, for appellants (Podvey, Sachs, Meanor, Catenacci, Hildner & Cocoziello, attorneys; H. Curtis Meanor and Mr. Cocoziello, of counsel; Amy B. Wagner, on the briefs).

Elliott Abrutyn, Livingston, for respondents (Morgan, Melhuish, Monaghan, Arvidson, Abrutyn & Lisowski, Livingston and Lum, Danzis, Drasco, Positan & Kleinberg, Roseland, attorneys; Mr. Abrutyn and Dennis J. Drasco, of counsel; Warren Usdin and Kevin J. O'Connor, on the brief).

The opinion of the Court was delivered by

O'HERN, J.

This appeal concerns the ancillary jurisdiction of the Chancery Division of Superior Court. The question is whether in a pending equitable action between business partners, the Chancery Division may retain jurisdiction over a compulsory counterclaim asserted by one group of partners against another group of partners for legal malpractice related to the partnership affairs. We hold, in the circumstances of this case, that the fiduciary relationship between the attorney-partner and the counterclaiming partner was sufficiently related to the equitable oversight of the partnership affairs to warrant the retention of jurisdiction of the counterclaim in the Chancery Division.

I

This action arose out of a failed real estate development project. We draw the facts primarily from the briefs of the defendants. The project, known as "Marina Cove," called for 96 condominium units to be built in three phases in North Miami Beach, Florida. Initially, the project was formed as a joint venture between Harborview Development Corporation (Harborview), a real estate development corporation owned by third-party defendant Robert Notte, and Lyn-Anna Properties (Lyn-Anna), a limited partnership owned by plaintiffs Alan Husak and Alan Kipnis. The original financing for Marina Cove was obtained through Sunrise Savings & Loan, which became insolvent in 1986.

After Sunrise Savings failed, the venture was able to secure replacement financing from First American Savings. However, additional funds were needed to close the loan. For those funds, Notte turned to an acquaintance, defendant Philip Kurens. In December 1987, Kurens agreed to invest in Marina Cove in return for a share of its profits. He incorporated defendant Kurens South, Inc., and became a partner in Harborview. Kurens alleges that plaintiff Alan Kipnis acted as attorney for Harborview in that matter, and served as escrow agent for the receipt of Kurens' money.

Although the replacement loan eventually closed, the project continued to lose money. By the end of 1989, Marina Cove required another infusion of capital. Notte again turned to Kurens who agreed to invest additional funds in return for receiving all of the stock in Harborview. On December 12, 1989, Kurens and Harborview entered into an agreement that provided that in exchange for his investment Kurens would assume managerial control of Marina Cove and receive all of Notte's interest in Harborview. This left Lyn-Anna (Kipnis' group) as a partner with Kurens. After Kurens assumed control of Harborview, the project continued to lose money until it became apparent that it was doomed to failure.

On December 12, 1990, plaintiffs Husak, Kipnis and their partnership, Lyn-Anna Properties, brought suit in the Chancery Division, Essex County, seeking to restrain the disbursement of funds and to obtain an accounting of monies disbursed. Plaintiffs alleged that Kurens' conduct after obtaining control of Harborview was in breach of the December 12, 1989, management agreement and that such breach led to the failure of the project.

Defendants Harborview, Kurens South, Philip Kurens and Claire Kurens filed a counterclaim against plaintiffs, also seeking to recover losses. However, their counterclaim focused on events that occurred between the fall of 1987 and December 12, 1989. Defendants alleged that Kipnis' conduct constituted legal malpractice and fraud. (For convenience, we sometimes refer to the defendants collectively as Kurens.) Kipnis and Husak demanded a trial by jury in their complaint. Defendants also demanded a jury trial. In 1992, plaintiffs waived their jury trial right. Presumably to confirm their continued right to a jury trial in the face of plaintiffs' waiver, defendants then made a motion for a jury trial, which was denied by the trial court in a letter opinion dated February 17, 1993. Following a bench trial, the Chancery Division dismissed both plaintiffs' complaint and defendants' counterclaim with prejudice.

Defendants appealed, arguing that the trial court erred in denying their request for a jury trial on their counterclaim against Kipnis. The Appellate Division affirmed for substantially the same reasons expressed in the trial court's letter opinion. The Appellate Division noted that the parties' claims arose out of and stemmed from the same transaction. Each of the claims relied in part on the parties' December 1987 agreement, and the disputed events all took place while that agreement was in effect. As a result, the court concluded that defendants' counterclaim was ancillary to the equitable claims raised by plaintiffs' complaint. Thus, the trial court properly applied the doctrine of ancillary jurisdiction that enables a court in equity to try without a jury those legal counterclaims that are ancillary or incidental to the equitable claims raised in plaintiffs' complaint.

We granted certification limited to the issue of whether the defendants are entitled to a jury trial on their counterclaims for malpractice and fraud. 142 N.J. 454, 663 A.2d 1361 (1995). Defendants contend that those claims are temporally and factually distinct from plaintiffs' claims and, as such, are not ancillary or incidental to plaintiffs' claims.

II

A.

The problem is as old as the Republic. In his brief, defendant-counterclaimant argued that he was "entitled to a trial by jury under the 1776 constitution, the 1884 constitution, and the 1947 constitutions" of the State of New Jersey. When New Jersey declared its independence in 1776, it adopted as its law the common law of England. N.J. Const. of 1776 p XXII. The traditions of civil law generally received into the American Colonies included the twin features of the English system of laws--the right to trial by jury for an action at common law, and the right to an equitable action when a remedy of law might be inadequate.

Time does not permit an exhaustive study of the origins of equity jurisprudence.

Both equity and the common law have roots in the early English legal system: the gradual assumption of judicial power over controversies by courts deriving their power from the King and his Council to the disposition of the various local courts. As King and Curia Regis [King's Council] assumed power to resolve more controversies, they had to delegate that power to more judicial officers. The judges of the King's Bench and Common Pleas became the common law courts. Others, such as the Courts of Admiralty and the Marches, applied separate bodies of law to the cases in their peculiar areas of jurisdiction. Initially all these royal courts were closely connected with the King personally and politically and were willing to be innovative and "equitable." Over time, however, the common law courts lost their close connection with the King and their willingness to be innovative or equitable.

[Honorable H. Brent McKnight, How Shall We Then Reason? The Historical Setting of Equity, 45 Mercer L.Rev. 919, 926 (1994) (footnotes omitted).]

The early common law was closely tied to formal rules of pleading, and the ability to bring suit in the King's Court depended upon the availability of a "form of action," a writ, that would encompass a would-be plaintiff's claim. "As Professor Maitland put it in his famous commentary on the old system, 'the system of forms of action ... is the most important characteristic of English medieval law.' " Ian Holloway, Judicial Activism in an Historical Context: Of the Necessity for Discretion, 24 Mem. St. U.L.Rev. 297, 307-08 (1994) (quoting F.W. Maitland, The History of English Law Before the Time of Edward I (1895)). "[A]s the common law became more formal, people began to seek and the system began to provide a less rigid means of redress. The common law system responded to the need for change, most notably developing a system of equity." Id. at 317. The Chancellor was encharged as early as 1468 A.D. to determine all matters according to equity and conscience. J.H. Baker, An Introduction to English Legal History 90 (2d ed. 1979) (quotation omitted). Because the Chancellor was unable to discharge all of his new duties individually, the Court of Chancery developed to grant special remedies that common law courts could not give.

Thus it came about that ... we had alongside of the courts of common law, a court of equity, the Court of Chancery.... They are supplementing the meagre common law, they are enforcing duties which the common law does not enforce, e.g. they are enforcing those understandings known as uses or trusts, and they are giving remedies which the common law does not give, thus if a man will not fulfil his contract, all that a court of common law can do is to force him to pay damages for having broken it--but in some cases the Chancery will give the more appropriate remedy of compelling him ... to specifically perform his contract, to do exactly what he has promised.

[F.W. Maitland, The Constitutional History of England 225-26 (H.A.L. Fisher ed. 1908).]

Forms of pleading were simplified and witnesses were compelled to...