News & Noteworthy

Authored - NJ Contract Law Update - Equitable Fraud Sub Silentio
FEBRUARY 12, 2013 | Windels Marx - Commercial Litigation

In Luna v. Salvio, 2012 WL 65542234 (N.J.App.Div. Dec. 17, 2012) -- although occurring in the sometimes sui generis context of residential tenancies--actually provides a small 'window' into the infrequently utilized concept of equitable fraud. Luna also involves the anomaly of a successful equitable fraud claim also indirectly yielding damages and enhanced damages--even though it is an equitable doctrine directly yielding only equitable remedies1--due to the interplay (in Luna) there between (1) equitable fraud and (2) the "doubling" due to a tenant under N.J.S.A. 46:8-19 et seq. when a residential security deposit refund is wrongfully withheld.

Specifically in Luna, the Appellate Division (a) made the following findings, and (b) confirmed the following additional matters of interest to the contract practitioner (keeping in mind, again, the caveat that a sui generis residential-tenancy setting may always influence a court):

1. Plaintiffs had rented a first-floor apartment, with allocated basement storage as well. The trial Court found that the plaintiffs had not been informed by defendant landlord that "the premises had previously been flooded by severe weather events". The Court felt that (1) the "debris line" on the wall, presumably being attributed by plaintiffs to prior flooding, and (2) the fact that plaintiffs had stored everything in the basement, contraindicated the plaintiffs having been told by the landlord ab initio that the basement flooded.

2. The Court implied that the requirement in N.J.S.A. 46:8-50 to notify tenants of flood zone locations (in certain circumstances) is not exclusive of the requirement to warn of still other flooding information known to the landlord.2

3. (a) Both courts in Luna clearly found concealment in some sense. However the remedy applied was not money damages (although "money" was awarded--as previewed above and set forth below), but rather the "void[ing] of the contract."

(b) This is a classic application of the remedy of equitable fraud. There was no finding of intentional concealment, although the trial Court did find that the testimony about having disclosed the flooding was not credible. Non-credible testimony in court is a far different matter from intentional fraud in the first place. Nor were there direct money damages (neither compensatory nor punitive) awarded for intentional fraud. Therefore, the courts must have concluded that the concealment constituted a material withholding of information that the landlord had a duty to reveal. Such a conclusion essentially constitutes "equitable fraud"--which is a misnomer, since mens rea (let alone intentionally-fraudulent mens rea) is essentially irrelevant.

(c) The Court did not give voice to its legal theory, nor expressly invoke equitable remedies such as rescission. However, equitable fraud appears to have been the nature of its holding, rather than the awarding of legal relief such as compensatory or punitive damages as such; neither of which is mentioned in the Opinion.

(d) This article does not comment on the accuracy of the Luna courts' findings; and the courts did not present any detailed analysis or cite precedent as to whether the circumstances present in Luna matched prior such equitable-fraud holdings.

4. As noted, because of the residential tenancy context, the plaintiffs/tenants were entitled to double any security deposits not properly returned--i.e., not returned (net of unpaid rent or physical damage, if applicable) when the Luna plaintiffs properly (as the courts found) terminated the lease. For this reason, the security-refund shortfall was doubled and that doubled amount awarded, net of credits not relevant to the present analysis.

In sum, it is worth remembering that even where intentional fraud cannot be proven, equitable fraud--which ostensibly requires no mens rea, though some analysts have found a strain of inequitability in the defendants' conduct in the reported cases--can still afford a viable remedy under certain circumstances.

Finally, whether such a purely-equitable remedy may require a different quantum of proof is not discussed in the Opinion (which, as noted, does not actually express the concept it seems to have applied).

Contact & Legal Disclaimer

Clark Alpert is the author of Guide to New Jersey Contract Law, published by the New Jersey Institute for Continuing Legal Education, originally published in 2007 and updated in November 2011. His updates on New Jersey contract law are based in recent issues and practical methods for addressing similar situations in your practice or business. They are not intended to serve as legal advice. Clark welcomes your questions and comments.

1 Although sometimes equitable doctrines such as restitution can mimic (to some extent) a money damages remedy.

2 This concept of a statute setting a partial (not exclusive) remedy or standard is a recurring theme in the law.

Windels Marx helps you harness opportunity and mitigate risk with a team that provides your business with the service, quality and value essential to a trusted relationship.