Insurance Carriers Beware: Statutory Fraud Claims Must Mirror Actual Fraud to Ensure Non-Dischargeability

By Richard D. Trenk, Esq. and Joao F. Magalhaes, Esq.

     Insurance carriers litigating fraud claims often look to statutory rights, for example the New Jersey Insurance Fraud Prevention Act, for relief against those who have submitted false claims or otherwise defrauded a carrier. Prevailing carriers may be subsequently confronted with debtor-defendants who attempt to frustrate collection efforts through initiating bankruptcy proceedings, which automatically invokes the jurisdiction of the United States Bankruptcy Court. Carrier-creditors must act quickly to avoid the presumptive discharge of all pre-petition debts pursuant to Title 11 of the United States Code, which is also known as the Bankruptcy Code. Depending upon the type of relief that the creditor seeks, an adversary proceeding must be filed as early as 60 days after the first date set for the meeting of creditors.[1]

     Bankruptcy Code section 523 (“Exceptions to discharge”) governs the types of debt that may be excepted from a debtor’s discharge; i.e., the debts that will not be erased as a result of the bankruptcy proceeding. Included within these exceptions, pursuant to section 523(a)(2), are debts in connection with money or other property obtained through, among other acts, false pretenses, false representations, or actual fraud.[2] Whether a claim is non-dischargeable under the Bankruptcy Code is a matter within the sole authority of bankruptcy courts.[3] Notwithstanding, principles of collateral estoppel – the doctrine prohibiting the relitigation of issues that have been adjudicated in a prior lawsuit – apply such that bankruptcy courts can rely upon state court findings for purposes of establishing non-dischargeability under Bankruptcy Code section 523.[4]

     For collateral estoppel to applied, it must be shown that a state court’s findings were the types of findings necessary under the subsections of Bankruptcy Code section 523. For instance, in In re Drossel, wherein judgment creditors cross-moved for summary judgment to except a state court judgment under the New Jersey Consumer Fraud Act from discharge pursuant to Bankruptcy Code section 523(a)(2)(A), the United States Bankruptcy Court for the District of New Jersey denied summary judgment because “[t]he state court opinion did not affirmatively articulate, that the Debtor’s violations were the result of his intentional conduct or that they amounted to actual fraud.”[5] As the court further explained:

     Here, the underlying state court opinion did not address the crucial elements of actual fraud such as intent, knowledge, and reliance but instead found regulatory violations for which knowledge and intent are not elements. Even though a regulatory violation of the Act has already been determined, whether the Defendant committed actual fraud when entering into the home improvement contract with the Plaintiffs is still an open issue for which Plaintiff must be afforded a “full and fair opportunity” to litigate.

     The bankruptcy court’s decision in Drossel was consistent with the Third Circuit’s decision in In re Schlessinger, wherein a judgment creditor pursued non-dischargeability based on a debtor’s diversion of partnership funds. The Third Circuit held that the debtor was not collaterally estopped from denying that the damages award arose from the conduct specified by Bankruptcy Code section 523 because the issue decided in the state court was not identical to a finding that the debtor willfully and maliciously injured the partnership or its property.<a

     Thus, an insurance carrier pursuing fraud claims against a defendant must be aware of whether a bankruptcy court would construe the carrier’s judgment as satisfying the elements of fraud mandated under Bankruptcy Code section 523. Carriers must be mindful of these critical points of differentiation, and should consult with a bankruptcy specialist during the pendency of a state court action to ensure that the findings made will suffice to ensure that the resulting judgment will not be nullified by a bankruptcy proceeding. In any event, if a bankruptcy filing does ensue, additional litigation within the bankruptcy court will almost certainly be necessary to determine the non-dischargeability of the debt.

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Endnotes

[1] 11 U.S.C. § 341(a); compare Fed. R. Bankr. P. 4004 (requiring that, in a chapter 7 case, objections to a debtor’s discharge under 11 U.S.C. § 727(a)(8) or (a)(9) must be filed no later than 60 days after the first date set for the meeting of creditors under § 341(a)) with Fed. R. Bankr. P. 4007 (providing that a complaint to determine the dischargeability of a particular debt, except under § 523(c), may be filed at any time).

[2] 11 U.S.C. § 523(a)(2)(A).

[3] Grogan v. Garner, 498 U.S. 279, 284-85 n. 11 (1991).

[4] In re Leonelli-Spina, 426 Fed.Appx. 122, 125-26 (3d Cir. May 4, 2011) (wherein former client of debtor who had obtained state court judgment against debtor-attorney brought adversary proceeding to except judgment from discharge, holding that state court judgment finding violation of New Jersey Rules of Professional Conduct in withdrawing funds from client trust account, and in turn committing fraud, breach of contract and breach of fiduciary duty, was entitled to issue preclusive effect in non-dischargeability proceeding under 11 U.S.C. § 523(a)(4) because determination that attorney had committed fraud or defalcation while acting in fiduciary capacity was essential to judgment entered in state court lawsuit, and matter was actually litigated to final judgment on merits in proceeding in which parties were identical, and in which attorney, as party against whom preclusion was sought, had full and fair opportunity to defend).

[5] 2007 WL 3375073, at **1, 8 (Bankr. D.N.J. Nov. 7, 2007) (denying dueling motions for summary judgment, and scheduling trial, in part on grounds that plaintiffs’ judgment was not premised upon a finding of actual fraud).

[6] Id. at *5.

[7] 208 Fed.Appx. 131, 133-34 (3d Cir. Dec. 14, 2006) (explaining that (1) “embezzlement and larceny both require the appropriation or taking of another’s property[,]” and (2) “[n]egligent or reckless acts do not suffice to establish that a resulting injury is ‘willful and malicious.’”).

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INSURANCE BROKER MALPRACTICE TARGETED

By: Richard Trenk, Esq., Franklin Barbosa, Jr., Esq., and Michael Mondelli, III.

Richard Trenk and Franklin Barbosa, Jr., are attorneys at Trenk, DiPasquale, Della Fera & Sodono, P.C. Michael Mondelli, III, is a summer law clerk at Trenk DiPasquale and a third-year law student at Seton Hall University School of Law.

             Insurance is one of the most overlooked and misunderstood commodities purchased by nearly all individuals or businesses.  Insurance coverage is critical and offers invaluable protection against the many risks and dangers that may befall an individual or business.  As per Murphy’s law, anything that can go wrong will go wrong, and thus it is important to have adequate coverage in place when a challenge inevitably arises.

Herein lies the role of the insurance broker. Insurance brokers, once retained, are responsible for procuring insurance coverage that is tailored to meet a client’s particular needs and minimize the client’s risk exposure.  For that reason, brokers are required to exercise a duty of care when dealing with clients.  Under New Jersey law, insurance brokers owe the following duties to their clients: (i) having the knowledge and skill necessary to carry out their employment responsibilities; (ii) exercising good faith and reasonable care, diligence, and skill in the execution of their employment responsibilities; (iii) possessing “reasonable” knowledge of available policies and terms of coverage in the areas in which the insured seeks coverage; and, (iv) procuring the necessary coverage tailored to meet a client’s needs and wants, or advise the client of their inability to procure the desired coverage.  See Rider v. Lynch, 42 N.J. 465, 476-77 (1964).

The average individual or business owner justifiably assumes that the insurance broker has performed his/her duties to the best of his/her abilities.  Sometimes, however, brokers fail to adhere to their mandated duties and leave insureds exposed to unnecessary risks and liabilities. In assessing whether a broker failed to meet their duty of care, insureds should look for certain telltale signs, such as the following: (i) failure to procure the insurance coverage requested; (ii) invalid, illusory, or deficient coverage; (iii) coverage that does not cover the risks or liabilities that the broker said it would cover; or, (iv) lack of coverage for certain risk factors that directly affect or apply to the client.  The presence of any of these factors could signal a valid cause of action for broker negligence and/or malpractice.

In recent years, brokers have tried to use automation processes to limit their liability for negligence or malpractice.  For example, brokers will often send mass mailings to clients vaguely notifying them of possible coverage deficiencies and/or the general availability of greater coverage limits.  Unfortunately, courts have occasionally found that even the most perfunctory forms of notice adequately put clients on notice of deficient coverage or the availability of greater coverage limits, and thus satisfy the broker’s duty to its clients.  C.S. Osborne & Co. v. Charter Oak Fire Ins. Co., 2017 WL 1548796, (N.J. Super. Ct. App. Div. May 1, 2017).   This practice, however, does not completely insulate brokers from the duty to diligently provide adequate coverage to their clients.

For example, the duty of care owed by brokers is largely informed by industry standards. When a broker’s conduct falls below these industry standards, the duty of care owed to the client is breached.  Industry standards and customary practices dictate that brokers are responsible for providing the following services: (i) surveying business operations for the purpose of identifying exposures; (ii) analyzing exposures in relation to the available and applicable policy coverages, exclusions, and endorsements; (iii) completing all applications necessary to acquire the desired or selected coverages, limits, and coverage-extending endorsements; and (iv) reviewing policies, especially during renewal periods, to assure that they are maintained accurately and properly, and continue to provide coverage against the client’s exposures without any lapses or gaps in coverage.

Brokers can also be subjected to a more exacting and strict duty of care where a “special relationship” exists between a broker and the insured.  A special relationship exists where a broker invites reliance upon their expertise, as evidenced by the broker’s conduct and whether the client clearly exhibited reliance.  Where an average, unsophisticated insurance consumer requests the “best” coverage available or otherwise notifies the broker that it is relying upon the broker’s expertise, a special relationship is formed.  Asking for the “best” available coverage creates a heightened burden on the broker to adequately explain all relevant, applicable coverage options and limits.  The existence or creation of a special relationship is the best way to ensure that your rights as an insurance consumer are preserved and protected.

It may seem as though purchasing insurance coverage is a fairly innocuous transaction, but inadequate coverage can expose an insured to suffocating liabilities potentially amounting to millions of dollars.  That is why it is essential that you remain vigilant of the duties owed by a broker, carefully choose your coverage, and consult an attorney if you believe the broker has violated the duty of care owed to you.

Richard D. Trenk and Franklin Barbosa, Jr., of Trenk DiPasquale have vigorously litigated claims against insurance brokers and agents.  They are available for consultation to help you determine whether you have a viable claim against your broker.

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BROKEN WINDOWS MATTER

Since the 1990’s when then New York City Mayor Giuliani got rid of the squeegee people in New York City, many municipalities have vigorously pursued code enforcement matters.  Since the Honorable John F. McKeon was elected mayor in 1998, The Township of West Orange has pursued these cases with a cadre of young and talented lawyers at Trenk, DiPasquale, Della Fera & Sodono, P.C.

Most recently, these cases have led to certain appeals and affirmances before the Superior Court of New Jersey, Law Division, Essex County.  Specifically, two trial courts in November, 2016 and January 2017 have affirmed fines in excess of $35,000 concerning peeling paint, exterior mildew, and broken fences.  In both cases, the property owner argued that the Township Ordinances were “unconstitutionally vague” and that the fines imposed “shocked the conscience” as excessive.  Both claims were rejected.

Property maintenance codes are designed to ensure that standards of maintenance and norms are maintained.  When one property is allowed to become dilapidated or unkept, an entire neighborhood is directly impacted.   Additionally, a property that is not maintained, including a failure to cut the lawn, can become a breeding ground for vermin and other health hazards.

Next, if someone was looking for a property to burglarize or vandalize, an unkept property is probably a good candidate because it is likely the property is abandoned.

Next, when properties in the neighborhood become run down, it is highly likely that any potential buyer will devalue the neighboring properties or refuse to live near a dilapidated property.  Thus, property values decline.

Plain and simple, quality of life matters and requires vigilance in maintaining properties.

Fixing peeling paint, picking up garbage and repairing fences are not overly expensive ventures.  If the property owner involved had immediately abated the violations by investing in their property, then it is likely that the fines would have been negligible or non-existent.  However, when a property owner is convicted of ten (10) violations during a thirteen (13) year period, it becomes clear that that property owner’s willfulness requires punishment and a need to deter others from similar conduct.

Plain and simple, if you are going to own real property, maintain it.  It affects not only you as an owner, but everyone around you and the entire community.  The result of not maintaining your property is substantial.  The attorneys at Trenk DiPasquale understand the ramifications both from a governmental and property owner prospective.  Feel free to contact the firm if you are faced with property maintenance violations or your neighbor fails to take care of their property.

by George P. Cornell, Esq.
973-243-8600

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BAD FACTS (again) CREATE MISLEADING LAW

It is generally acknowledged that Chapter 13 Plans are rarely successful. Even if a Plan is confirmed, it is rarely consummated. The nitty-gritty of what happens in a post-confirmation conversion was considered by the United States Supreme Court in the recent decision of Harris v. Viegelahn, 575 U.S. — (May 18, 2015). As someone who plays in these trenches, I can assure you that the facts at issue in Harris are unlikely to be repeated and, thus, the decision is of limited utility. However, since it is a Supreme Court decision, it merits our attention nonetheless. Continue reading

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CREDITORS BEWARE: FDCPA LIABILITY ATTACHED TO FILING A PROOF OF CLAIM

The Fair Debt Collection Practices Act imposes liability on the debt collector who uses false, deceptive, or unfair debt collection practices.  To achieve its goal, the FDCPA grants consumers a private right of action against debt collectors engaging in such practices.  But does the FDCPA apply to debt collection in bankruptcy proceedings when a creditor’s only action is that it files a Proof of Claim?  By declining to review LVNV Funding, LLC v. Crawford, the U.S. Supreme Court seemingly says that it does. Continue reading

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BEWARE OF FEDERAL TAX LIENS ON PERSONAL PROPERTY OF THE BANKRUPTCY ESTATE

     Every day, trustees and their professionals seek to liquidate assets of a bankruptcy estate for the benefit of the estate and its creditors. When analyzing a potential sale of property of the estate, title and/or UCC searches may reveal certain encumbrances. Bankruptcy practitioners may assume that if searches do not reveal liens on the personal property to be sold, any undisclosed lien is unperfected and the property can be sold free and clear of any such lien. However, to the extent a federal tax lien does not appear on such search results (e.g., UCC lien searches), practitioners must be diligent in investigating if such liens exist. Section 545(2) of the Bankruptcy Code prohibits a trustee from using his/her avoidance powers to avoid such liens. Unbeknownst to a trustee/seller, a federal tax lien may erode potential equity in the property. Continue reading

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Maternity Leave Constitutes Continued Employment For Tenure Purposes

     In a recent decision by the New Jersey Superior Court, Appellate Division, the Court considered for the first time whether an employee whose service was interrupted by maternity leave could be denied tenure as a result. Continue reading

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