Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—N.J. Sup. Ct.: Foreclosure rescue scheme was unconscionable practice under Consumer Fraud Act, (Oct 17, 2013)

By John W. Arden, J.D., LL.M.

An individual’s mortgage foreclosure rescue scheme—which resulted in his receiving homeowners’ interest in their property for $10 and their continued obligation to pay the mortgage—constituted a unconscionable commercial practice under the New Jersey Consumer Fraud Act, according to the New Jersey Supreme Court (D’Agostino v. Maldonado, October 3, 2013, Patterson, A.). A state trial court’s restoration of the homeowner’s equity in the property was affirmed and its award of more than $150,000 in treble damages was reinstated, after the award was overturned by a state appellate court.

Richard Maldonado owned a business that purchased homes from financially distressed owners, negotiated with lenders, and repaired and sold the homes. In January 2008, Anthony and Denise D’Agostino were in default on their residential mortgage obligations and contacted Maldonado for help. They entered into a series of transactions with Maldonado, which resulted in his obtaining title to the Maldonado home, valued at $480,000, for $10. The D’Agostinos were given an option to repurchase their home, and Denise D’Agostino continued to be obligated to pay the mortgage.

The D’Agostinos later filed suit against Maldonado, alleging that the transactions constituted an unconscionable commercial practice in violation of the New Jersey Consumer Fraud Act, among other claims. The trial court agreed that Maldonado violated the Consumer Fraud Act and found that the D’Agostinos suffered an ascertainable loss. The court voided the transactions by which the D’Agostinos conveyed their home to Maldonado, calculated damages by determining the equity in the home minus the value of Maldonado’s improvements to the property, trebled that net amount under the Consumer Fraud Act, and subtracted the value of the equity returned to the D’Agostinos from the trebled damages.

Maldonado appealed. A New Jersey appellate court affirmed the trial court’s decision that Maldonado had committed an unconscionable commercial practice under the Consumer Fraud Act, but held that the D’Agostinos had failed to demonstrate an ascertainable loss because the trial court’s equitable remedy had effectively restored them to the interest they had in the property before Maldonado violated the Consumer Fraud Act. The appellate court remanded the case for an amended judgment awarding no damages to the D’Agostinos. The parties filed cross-petitions for certification in the New Jersey Supreme Court.

The Supreme Court agreed with the lower courts that Maldonado had violated the Consumer Fraud Act, but reversed the appellate court’s ruling on the issues of ascertainable loss and the damages sustained. The state high court agreed with the trial court that the transfer of the D’Agostinos’ equity in their property to Maldonado constituted ascertainable loss for the purposes of the Consumer Fraud Act, notwithstanding the restoration of the equity to the D’Agostinos, and that the determination of damages was a proper exercise of its discretion. Accordingly, the trial court’s judgment was reinstated.

Specifically, the New Jersey Supreme Court held as follows:

Scope of Consumer Protection Act. Maldonado argued that the dispute was outside of the scope of the Consumer Fraud Act because the transactions were tailored to the D’Agostinos’ individual needs and were not offered to the public. The Supreme Court disagreed, holding that the “plain language” of the Act (1) defines “sale” to include any offer to attempt to sell, rent, or distribute; (2) defines “advertisement” to include attempts to induce a person to enter into a title or interest in merchandise or to make a loan; and (3) defines “merchandise” to include services offered to the public.

“The complex transactions crafted by the defendant here—combining the conveyance of the title to the Property, an agreement for real estate related services, a trust with the authority to manage the property and a buy-back option—is not exempt from the CFA by virtue of its unique combination of terms,” the court held.

Maldonado’s actions clearly qualified as “commercial practices” under the Consumer Fraud Act. Because he offered “services” for a fee to the public by advertising “I buy houses” on his vehicle, the trial court properly found that Maldonado’s actions fell within the broad statutory definitions of “sale” and “merchandise,” the high court determined.

Unconscionable commercial practice. The trial court properly concluded that the transactions designed by Maldonado constituted an “unconscionable” commercial practice under the Consumer Protection Act, according to the Supreme Court. Maldonado admitted that the documents recording the transactions only memorialized the obligations of the D’Agostinos and did not comport with the parties’ understanding of their agreement. The transactions resulted in the D’Agostinos’ transfer of property valued at $480,000 for $10. Thus, the ruling that Maldonado committed an unconscionable commercial practice was adequately supported by competent, relevant, and reasonably credible evidence.

Ascertainable loss. In cases involving breach of contract or misrepresentation, either out-of-pocket loss or a demonstration of loss in value will suffice to meet the ascertainable loss hurdle and set the stage for establishing the measure of damages, the Supreme Court noted. The Consumer Fraud Act and case law envision that a plaintiff’s loss of money or property may constitute the requisite “ascertainable loss” entitling the plaintiff to collect damages, which are to be trebled. The D’Agostinos sustained ascertainable loss as a result of Maldonado’s unconscionable commercial practices that deprived them of title to their residence. This loss was determined by the trial court to be their lost equity less a set-off representing the value of the improvements to their property. A judicial remedy imposed at the conclusion of litigation does not preclude a finding of ascertainable loss.

Remedies. Under the Consumer Fraud Act, a plaintiff proving unlawful conduct on the part of the defendant, demonstrating an ascertainable loss, and establishing a causal relationship between the conduct and the loss is entitled to an award of treble damages, as well as other remedies. In this case, the equitable remedy of restoring the property to the D’Agostinos did not preclude the award of damages. The appellate court’s holding that they were not entitled to damages “contravenes the language of the CFA’s remedial provision,” which provides for treble damages in addition to other appropriate legal or equitable relief, the Supreme Court concluded. The existence of ascertainable loss resulting from a CFA violation should be determined on the basis of the plaintiff’s position following the unlawful commercial practice, not after a judicial remedy has been imposed.

With regard to the calculation of treble damages, the Supreme Court ruled that the trial court properly incorporated three relevant factors: (1) the Act’s mandate that “damages sustained” be trebled; (2) the impact of the equitable remedy on the parties’ positions; and (3) the improvements to the property that enhanced its value at Maldonado’s expense. The trial court elected to reconcile these factors by subtracting the value of Maldonado’s contribution from the loss and then trebling the result. This calculation was sufficiently grounded in competent, relevant, and reasonably credible evidence.

Equitable estoppel. Maldonado asserted that the D’Agostinos should be equitably estopped from asserting a Consumer Fraud Act claim, given the trial court’s observation about their lack of credibility as witnesses and their failure to assert a claim until after Maldonado had performed his contractual obligations for a year at his own expense. The Supreme Court disagreed. “The trial court’s views regarding defendant’s credibility, plaintiffs’ shortcomings as witnesses, and plaintiffs’ delay in filing suit, are irrelevant to an equitable estoppel defense,” the Supreme Court observed. “The Appellate Division properly rejected this claim.”

Concurring in part and dissenting in part, Justice Helen Hoens agreed with the majority holdings that the transactions were within the scope of the Consumer Fraud Act and that the transactions constituted an unconscionable commercial practice. However, she disagreed with the analysis of the appropriate remedy, which was “not faithful to the plain language of the CPA.” This opinion was joined by Justice Cuff.

The case is No A-82/83 September Term 2011 068940.

Attorneys: Jason L. Bittiger (Bittiger Triolo) for Anthony and Denise D’Agostino. Clifford J. Ramundo for Ricardo Maldonado.

Cases: StateUnfairTradePractices NewJerseyNews