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Authored - NJ Contract Law Update - Interplay Among Issues of Contractual Illegality, Unclean Hands and Unjust Enrichment
MARCH 29, 2013 | Windels Marx - Commercial Litigation

Meadowbrook Industries, LLC v. Walker Management Systems, Inc., 2013 WL 791216 (N.J.App.Div. March 5, 2013), presents the following interesting facts:

  1. There was a sale of assets (including commercial and government contracts and arrangements) between two solid waste collection utilities; specifically, Walker Management sold its assets to another such company, Meadowbrook Industries.
  2. "Walker entered into the APA [Asset Purchase Agreement] against the advice of counsel and later elected to proceed without independent counsel."
  3. The purchase documents (a) were later amended to expressly reflect the fact that Walker could no longer service commercial customers; and also (b) involved problems with the assignment of government contracts.
  4. What appears to have been an incomplete closing took place on July 10, 2009, with refinements continuing over the next few days. All in all, it appears that the closing was deemed binding, but Walker "was unable to deliver its containers free of liens" totaling $119,695. Meadowbrook agreed to assume that debt; and was still owed $43,767.36 after the closing. "Approximately one week after the closing, Meadowbrook advised Walker that it was disqualified from taking the assignment of the State contracts because of restrictions under the 'pay to play' law."
  5. In September 2009, Walker filed a Chapter 11 Bankruptcy, seeking to reject the contract as executory. The bankruptcy court issued an Order on November 11, 2009, declaring that the APA was not an executory contract and therefore could not be rejected by Walker.

In the state-court case, the facts apparently were undisputed, and the legal issues seem to essentially have been as follows:

  1. Did the absence of DEP approval (which the Court implied each party was independently required to seek) render the contract illegal? The Court held in the negative.
  2. Apparently the unpaid balance of the $43,767.36 (totaling $38,166.50--the Opinion is unclear, but it seems likely the two sums are related) was entered by way of summary judgment in favor of Meadowbrook against Walker, concluding the case.
  3. The Appellate Division agreed that "DEP approval was required for the transaction", perhaps with Walker having the laboring oar of seeking such approval.
  4. Because the purchaser was a licensed solid waste collector, the transaction--even though it may have violated various New Jersey statutes in terms of notice--was not inherently illegal; especially (a) in the absence of any statutory declarations to that effect, and (b) because the purchaser was otherwise qualified.
  5. Surprisingly, the Appellate Division appears to have further held that the doctrine of unclean hands precluded Walker from asserting the issue of illegality, and to have so held because Walker itself had the primary obligation to seek DEP approval. This appears to be a novel equitable twist on what ordinarily is simply an issue of law: namely (and ordinarily), whether the contract is illegal, without necessarily comparing the parties' 'relative equities' in deciding whether to void the illegality.
  6. As presented by the Meadowbrook Court, the unclean-hands defense actually appears to be more of an estoppel concept. Again, applicability of that concept to contract illegality seems somewhat novel.
  7. More interestingly, the Court appears to have constructed an 'equitable defense to illegality', as it were. Specifically, because of the "substantial benefit of the bargain" Walker already received, the Court apparently felt that Walker should be estopped to assert the illegality.1

The lesson (and arguably the effect) of Meadowbrook is that parties asserting and defending illegalities should also consider equitable principles.

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 Again the Court did not use these precise words; but that appears to be the essence (and most conceptually-accurate description) of its ruling.

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