New Jersey Appeals Court Increases the Risks for Special Fiscal Agents

By Vincent Gentile, Esq. – December 6, 2016
New Jersey Appeals Court Increases the Risks for Special Fiscal Agents

In matrimonial proceedings or in chancery court litigation involving closely held businesses, courts have the inherent equitable power to appoint an accountant or other financial professional as a special fiscal agent (SFA) to act with respect to the financial affairs of the business. Typically, the SFA's powers are less expansive than those of a receiver and will generally have specified responsibilities over business operations or record keeping until the court resolves the conflict among the business owners. A recent New Jersey Appellate Division decision shows that such appointments are fraught with serious professional and financial risks.

Snyder v. Snyder, A-4116-13T2 (August 25, 2016) involved an intra-family dispute over the ownership and control of a restaurant (LBI) and the shopping center in which it was located. The lawsuit included counterclaims as well as third party claims against LBI's accountant and other professionals who were alleged to have improperly aided the plaintiffs. The chancery court judge appointed Richard Trenk, Esq., as the SFA. Trenk's order of appointment empowered him to take possession of LBI and oversee its day-to-day management, and "to employ such counsel, accountants, employees, and other professionals, and such other persons as may be necessary in order to carry out the [SFA]'s duties and to preserve, maintain., and protect LBI." Slip op. at 5. The appointment order also provided that Trenk would receive "reasonable compensation" and reimbursement of his actual out-of-pocket expenses.

Upon learning of Trenk's appointment, the defendants raised a potential conflict of interest based on the fact that Trenk's firm was located in the same office building as Bederson & Company (Bederson), the accounting firm of Richard Fischbein, LBI's long-term accountant, who also served as the trustee of the David Snyder Trust, which was a plaintiff in the lawsuit. Fischbein and Bederson were themselves both named as third party defendants in the lawsuit. Trenk admitted that Bederson was also located in the same office building but denied any personal or business relationship with Fischbein or Bederson.

Thereafter, defendants moved to disqualify Trenk as SFA, alleging (a) that he, his law partner and a Bederson partner were members of a limited liability company that owned the office building in which Bederson was a tenant; (b) that one of Trenk's partners and a Bederson partner both sat as directors on the board of a local bank; (c) that Trenk and a partner of one of the other third party defendants served on the board of a local non-profit organization; and (c) that Trenk's law firm and Bederson jointly fielded a softball team for a local charity. Defendants contended that Trenk was serving in a quasi-judicial capacity and, thus, subject to the strict requirements under the Code of Judicial Conduct or, alternatively, that his relationships violated Rule 1:7, of the Rules of Professional Responsibility governing conflicts of interest for attorneys. Trenk retained Porzio, Bromberg & Newman ("PB&N") as counsel to represent him on the disqualification motion. In opposing the motion, Trenk acknowledged having a 4.07 percent interest in the LLC that owned the office building, and that Bederson "provid[ed] professional services to various parties whom [Trenk's firm] represent[ed] and in cases where [the firm] represent[s] adverse parties in interest."; Id. at 6. Trenk denied that these circumstances presented any disqualifying conflict of interest.

For an unexplained reason, the chancery court did not rule on the disqualification motion until some months later, after the parties had reached a settlement and he had ruled that the settlement was enforceable. Eventually, the chancery judge denied the disqualification motion. The judge ruled that an SFA does not act in a judicial or quasi-judicial capacity, and that Trenk the RPC conflict of interest rule only applied to clients and Trenk was not representing any party in the case. The chancery court awarded Trenk and his firm over $193,000 in fees and awarded PB&N fees of over $90,000 for its services to the SFA. Additional fees were later awarded to Trenk and PB&N in connection with subsequent proceedings, including fee applications. Defendants appealed, arguing that Trenk should have been disqualified and that neither he nor PB&N were entitled to any fees.

On appeal, the court first analyzed whether a disabling conflict of interest existed. The appeals court agreed that the RPC conflict of interest rule did not govern inasmuch as the parties were not Trenk's clients. It also agreed that an SFA was not a judicial or quasi-judicial officer subject to the Code of Judicial Conduct and that the court could not delegate judicial powers to an SFA. But that did not end the analysis. The Appellate Division likened an SFA to a court-appointed receiver with custody over corporate assets, who had the fiduciary duties to be impartial to act with undivided loyalty with respect to LBI and its property. Relying on a nearly 80-year-old equity case, the appeals court held that the appropriate standard was whether a "possibility of a conflict" existed between those fiduciary obligations and Trenk's personal interests. The Appellate Division concluded that, had the chancery court considered the defendants' allegations in light of that strict standard, the motion to disqualify would have been granted.

But that was not the final word. Recognizing that the lower court had delayed deciding the motion for several months during which Trenk continued to perform services, and that the court did not find that Trenk's "disqualifying relationships actually affected his performance as SFA, or that he breached his fiduciary obligations in any way" (ibid.), the appeals court held that Trenk might recover the reasonable value of his services under a quantum meruit theory. The appellate court remanded the matter back to the chancery court for further consideration of those issues.

The Snyder court then moved on to consider the challenge to the award of fees to Trenk and PB&N and made several rulings that will have a significant impact on court-appointed SFAs and receivers.

First, the court held that Trenk was not entitled to recover fees "for efforts expended in obtaining approval of fees for serving as SFA;" nor could PB&N receive a fee award for supporting its own counsel fee application. The court reasoned that Trenk was akin to "'every other pro se litigant,' who is not compensated for their time." Id. at 22.

Second, it held that Trenk was not entitled to recover the costs and fees incurred in defending the disqualification motion. Although it could not find precedent on the issue one way or the other, the court reasoned that denying fees was necessary to "encourage potential receivers and SFAs to carefully consider potential conflicts before accepting the appointment." Id. at 23.

Third, the court held that PB&N was not entitled to an award of fees and costs for representing Trenk on the disqualification motion. Reviewing the appointment order, the appeals court found that it permitted Trenk to retain counsel only “in order to carry out the [SFA’s] duties and to preserve, maintain and protect [LBI].” PB&N’s fees in opposing disqualification were not integral to these purposes, although the court conjectured that the result might be different where “an action brought against the fiduciary has the potential to deplete the very assets entrusted to him.” Id. at 28. Not only were such circumstances not present, but neither Trenk nor PB&N had ever stated that their fees would be charged against LBI, and the defendants had repeatedly objected to the potential fee awards.

Important Takeaways for the Snyder Decision

  1. SFAs and receivers must disclose to the court and the parties every conceivable relationship they (or their firm) have with any party or property involved in the dispute. The Appellate Division did not specify which of Trenk’s relationships was problematic or whether some were trivial. Presumably, a potential conflict stemmed from his ownership interest in the LLC that owned the office building in which Bederson was located, and from potential referral relationships between his law firm and Bederson, and from his firm’s use of Bederson partners as experts in the representation of other clients. But Snyder also discusses a number of alleged conflicts based on non-pecuniary interests, like being tenants in the same office building, having common board memberships, or jointly participating in charitable events. The court did not state whether individually each of these relationships would be disqualifying. Without further guidance, the most prudent practice would be for a prospective SFA to disclose anything that could reasonably lead a party to question his or her impartiality.
  2. Under the Snyder standard, it seems obvious that large accounting and professional firms will be much more likely to have the kinds of business, professional and charitable relationships that could give rise to the “possibility of conflict.” As a practical matter, it is unrealistic to expect that all of those relationships could be readily identified. To protect against a later claim of willful misrepresentation, any disclosure of those circumstances should include a statement that a diligent effort has been made to uncover any potentially significant relationships but that it is possible that some circumstance may have been inadvertently omitted.
  3. Once the prospective SFA or receiver has completely disclosed all facts that could affect his or her impartiality, the SFA should give the parties the opportunity to ask for further details and then insist that the parties expressly advise the court whether they view any of the disclosures to pose a conflict of interest. The SFA may then ask the parties to agree to waive any conflict of interest argument based on those disclosures. Better still, the SFA could ask the court to enter an order to the effect that parties have waived any such arguments.
  4. Given the Snyder court’s willingness to leave the SFA and his firm to bear the costs of defending against any allegations of conflict, it behooves the prospective SFA to try to get express protection upfront in the order of appointment or, alternatively, in a separate contract with the parties. Like corporate directors, SFAs should be entitled to indemnification for the costs of defending against claims, or at least those claims that are not proved to be the result of fraud or willful and wanton misconduct.
  5. The SFA or receiver should try to obtain an appointment order that allows for recovery of the costs and expenses incurred in the preparation and defense of his fee applications. It seems highly unfair for the SFA to have his or her compensation substantially eroded by the costs of time-consuming preparation and potential motion practice and hearings over the required fee applications. Moreover, Snyder’s rule prohibiting recovery for such costs will be a further disincentive for qualified professionals to serve as court-appointed SFAs and receivers.

The courts and litigants need qualified SFAs and receivers, particularly in complex and contentious commercial matters in which there is a deadlock among the owners or allegations that those in control are abusing their powers. While the Snyder court’s attempt to insure against potential conflicts of interest is laudable, the court’s opinion is likely to have the unfortunate effect of reducing the number of professionals willing to serve in those positions. The decision does not provide clear guidance to enable the professional to know which social, charitable or professional interactions could give rise to a “possibility of conflict” that would later result in a significant financial loss and reputational damage. What happened to Trenk will discourage others from similar engagements unless they can obtain court orders protecting them against the same result. Such protections should include orders that allow for prompt identification and resolution of potential conflicts, allow for recovery of the costs of defense of later-asserted conflict claims, and permit recovery for fees in connection with submission and approval of fee applications.

Vincent E. Gentile

Vincent E. Gentile, J.D., is a partner in the Commercial Litigation Practice Group at Drinker Biddle & Reath LLP. He has handled a broad range of civil and commercial litigation matters from trial through appeal, and has represented major corporate clients in complex, multiparty cases and individuals and small businesses in both state and federal courts. Mr. Gentile has substantial litigation experience on a host of commercial and civil issues.