Plaintiffs hired a contractor to renovate a bathroom at their residence. They dealt with JH, the principal of O&J Contracting, LLC (“the LLC”).
JH prepared a contract for the work, listing his LLC on the first page but having a signature line that simply stated “John Harris” rather than “John Harris, for O&J Contracting, LLC.” The copy of the contract was unsigned by anyone. The contract detailed the work to be performed, but it omitted several items required to be specified by state regulations. The contract price was $10,645.95, which plaintiffs fully paid over three installments. Plaintiffs claimed the work on the bathroom was defective. They consulted with a replacement contractor, which gave them an estimate of $21,350 to remove defendants’ subpar work and install a new bathroom. Plaintiffs retained for litigation a construction expert, who identified numerous violations by defendants of the NJ home construction regulations. One of the CFA violations was defendants’ failure to have the work inspected by building code officials under N.J.A.C. 13:45A-16.2(10).
Plaintiffs sued both the LLC and JH in the Law Division, alleging common-law breach of contract and violations of the Consumer Fraud Act, N.J.S.A. 56:8-1 to 8-20. The contractor LLC defaulted but JH individually appeared and was allowed to question plaintiffs’ witnesses.
After considering the evidence, the court granted plaintiffs only a part of the damages they sought. Specifically, the court awarded plaintiffs a refund of the $10,645.95 they paid, which the court considered to be CFA damages, and trebled them as required by N.J.S.A. 56:8-19. The court also awarded plaintiffs $6,983.16 in counsel fees under the CFA.
However, the trial court denied the homeowner any of the costs to remove the defective work. The court also did not award plaintiffs any portion of the price they would have to pay to obtain a conforming bathroom. In addition, the court declined to extend the judgement to JH personally, because it assumed plaintiffs could try to recover the debt from the LLC when it was dissolved.
Plaintiffs’ appeal requested an increase of the damages and to have the judgement extended to JH personally. The appellate court held that the trial court undervalued plaintiffs’ compensable damages. Under basic contracts law, plaintiffs are entitled not only to restitution of the money they paid, but also to recover the consequential damages caused by the cost of removing the contractor’s defective work. Plaintiffs were further entitled to the benefit of their bargain, which would be the reasonable costs of a bathroom conforming to the contract, minus the $10,645.95 the court directed to be refunded to them. That net amount could not be calculated because the replacement contractor’s $21,350 estimate did not break out the price for removing the defective work. There could have also been “extras” in the new price beyond the scope of defendant’s promised work.
As for the CFA damages, the court reasonably found that the contract price paid by the homeowner was an “ascertainable loss” under N.J.S.A. 56:8-19.
The trial court made a few errors of law in calculating damages, so the case was remanded to afford plaintiffs a supplemental proof hearing to amplify the record and to enable the court to calculate a revised damages award under both the common law and the CFA. In the meantime, the monetary judgement, including the counsel fees, would remain in place, subject to possible enhancement on remand.
Managing Personal Liability of the LLC Members
The appellate court then evaluated the question of potential personal liability of JH. The court did not necessarily have to “pierce the corporate veil” to extend the judgement to JH. Under present New Jersey case law, JH might be personally liable for the company’s CFA violations if he had a “policy” to disobey the regulations. On remand, the plaintiffs were given an opportunity to depose JH concerning (1) his policies in operating his business; and (2) his personal assets.
Plaintiffs might also be able to successfully prove a claim of veil-piercing. Under New Jersey law, a court may pierce the corporate veil when there is “evidence sufficient to justify disregard of the corporate form.” Discovery was permitted to address the pertinent veil-piercing factors, including, among other things, whether the LLC was undercapitalized and whether, de facto, this business was operated like a sole proprietorship. The court’s assumption that the debts of the LLC would be paid in the dissolution process might be overly optimistic. The LLC statute, N.J.S.A. 42:2C-49(b)(1), does prescribe that the debts of the LLC are to be paid when it winds down. But the statute contains no enforcement mechanism for such payment to occur, especially if the LLC has no assets.
Finally the appellate counsel fees sought by plaintiffs were ordered to be considered by the trial court. The outcome of the case; it was remanded back to the trial court for further discovery and proceedings concerning the damages calculation and potential personal liability of codefendant JH.
To discuss your NJ consumer fraud matter, please contact Fredrick P. Niemann, Esq. at (732) 863-9900 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing or telephone consultations if you are unable to come to our office.
By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County, NJ Consumer Fraud Attorney