It Doesn’t Pay to be Kind to Fraud Perpetrators

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Arch-Concept Construction, Inc. and its president Dusan Lazetic appealed from the Law Division’s April 1, 2021 order enforcing the parties’ settlement agreement. Judge Linda Grasso Jones entered the order after determining that defendants’ performance of its obligations under the agreement was not excused by the doctrine of impossibility, that she could not rewrite the parties’ agreement, and that the damages stipulated in the agreement were enforceable liquidated damages.

In Hartford Underwriters Insurance Company v. Arch-Concept Construction, Inc. and Dusan Lazetic, individually and as President of Arch-Concept Construction, Inc., No. A-2430-20, Superior Court of New Jersey, Appellate Division (June 29, 2022) the New Jersey appellate court resolved the dispute.

The defendants argued that the doctrine of impossibility applies to its inability to perform under the settlement agreement, that the judge should have extended a forbearance as a matter of equity, and that the damages awarded under the parties’ agreement and a consent judgment are an unenforceable penalty.

FACTS

Plaintiff Hartford Underwriters Insurance Company provided worker’s compensation insurance to Arch-Concept from May 2012 through January 2016. On November 4, 2016, plaintiff filed a complaint against defendants to recover what it alleged were unpaid premiums based upon Arch-Concept understating its payrolls and misclassifying certain workers. It also sought relief under the New Jersey Insurance Fraud Prevention Act (IFPA), N.J.S.A. 17:33A-1 to -34. Plaintiff alleged that audits estimated defendants owed plaintiff $583,665 in unpaid premiums and that it was also entitled to treble damages for defendants’ violation of the IFPA. Caught, without a defense, Arch-Concept and Hartford, avoiding a lengthy trial, agreed to settle plaintiff’s claims pursuant to a written settlement agreement.

The agreement required plaintiff to accept and defendants to pay $275,000 (half of what was obtained by fraud) over twelve quarterly installments. In the event defendants breached the agreement, they agreed to the entry of a consent judgment in favor of plaintiff and against defendants in the amount of $425,000, less any payments made under the agreement. The parties attached to the agreement a form of consent judgment signed by defendants that reflected the default provision in their agreement. An obviously great deal for the defendant who was exposed to a judgment (with treble damages) of over $2 million.

Defendants remitted payments as agreed until June 2020, when they requested the first of three consecutive requests for forbearances due to circumstances allegedly arising from the COVID-19 pandemic and its impact on defendants’ business. Although Hartford was not contractually obligated to do so under the settlement agreement, it agreed to the first two requests, each resulting in a written forbearance agreement that did not otherwise alter the terms of the original settlement agreement, aside from extending the time to remit full payment then-due until the following quarter and adjusting the remaining installments accordingly. Plaintiff rejected the third request in December 2020, and defendants remitted only a partial payment. Including the partial payment, defendants remitted a total of $200,374.33 by the end of 2020.

Plaintiff filed a motion to enforce the settlement, seeking judgment in the amount of $224,625.67 ($425,000 less $200,374.33 in payments remitted).

After considering oral arguments, Judge Grasso Jones entered an order granting plaintiff’s motion, enforcing the settlement agreement, and awarding plaintiff $224,625.67.

DISCUSSION

The appellate court concluded that Judge Grasso Jones properly determined that defendants did not provide any proof to excuse its nonperformance under the doctrine of impossibility or that they were entitled to a reformation of the settlement agreement on equitable grounds.

The appellate court noted that there is a strong public policy favoring settlement agreements. It is beyond an objection that parties to a dispute are in the best position to determine how to resolve a contested matter in a way which is least disadvantageous to everyone. A court of appeal should not, and will never rewrite, vary, enlarge, alter, or distort such agreements’ terms for the benefit of one party to the detriment of the other under the guise of judicial interpretation. [Camden Bd. of Educ. v. Alexander, 181 N.J. 187, 197 (2004).]

The doctrine of impossibility is not applicable where the difficulty is the personal inability of the promisor to perform. A party cannot render contract performance legally impossible by its own actions.

Defendants’ arguments that the doctrine of impossibility applies to their circumstances or that the court should extend their time to make installment payments lack sufficient merit to warrant further discussion in a written opinion. Judge Grasso Jones’ determination that defendants did not provide any proof to support that Arch-Concept was unable to remit installments as promised because of a supervening event that was not within the original contemplation of the contracting parties.

Stipulated damage clauses in commercial contracts between sophisticated parties are viewed as presumptively reasonable liquidated damages and courts will enforce such a clause unless the party challenging it proves they are instead an unreasonable penalty.

Essentially, stipulated damages clauses are meant to compensate a party for the breach of another but not as a “shotgun” to compel the party to perform. Under these principles, defendants failed to demonstrate the consent judgment for $425,000 less payments made was a penalty.

The parties are sophisticated commercial entities represented by counsel, who settled defendants’ exposure to over $2,000,000 in damages for a fraction of that amount. In the event of a breach, the parties negotiated a backstop meant to not only compensate plaintiff for the breach but also to limit defendants’ residual exposure from a reinstatement of the complaint so as to ensure defendants were not required to litigate plaintiff’s original claim. The judgment was affirmed.

Workers’ compensation fraud is a crime and a breach of the contract between the insurer and the insured. Under the New Jersey Insurance Frauds Prevention Act an insurer, defrauded, can collect three times the monies owed. In this case the defendant was faced with more than $2 million in exposure that was satisfied, by the settlement for slightly more than 10% of the exposure paid in installments. Hartford protected its right to the payments by requiring a judgment for twice the agreed settlement if the installments were not paid. It even gave the defendants an extra two months to pay only to be thwarted with claims of impossibility.  Hartford succeeded and should immediately execute on the judgment and remember in the future that it is not wise to trust a person willing to defraud the insurer.

(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

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