Nuveen Municipal Trust Ex Rel. Nuveen High Yield Municipal Bond Fund v. Withumsmith Brown P.C.

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_______________
No. 10-4633
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NUVEEN MUNICIPAL TRUST, on behalf of its series
Nuveen High Yield Municipal Bond Fund, a Massachusetts
Business Trust,
Appellant
v.
WITHUMSMITH BROWN P.C., A New Jersey Professional
Corporation; LINDABURY MCCORMICK ESTABROOK
& COOPER P.C., a New Jersey Professional Corporation
_______________
On Appeal from the United States District Court
For the District of New Jersey
(D.C. Civil Action No. 3-08-cv-05994)
District Judge: Honorable Garrett E. Brown, Jr.
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Argued June 21, 2012
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Certified Question of State Law
Issued to the Supreme Court of New Jersey August 17, 2012
Submitted January 18, 2013
After Supreme Court of New Jersey Declines Certification
_______________
Before: AMBRO, VANASKIE
and ALDISERT, Circuit Judges
(Opinion filed: May 14, 2014)
Alexander Bilus, Esquire
Robert C. Heim, Esquire (Argued)
Brielle M. Rey, Esquire
Wayne Pollock, Esquire
Dechert LLP
2929 Arch Street
18th Floor, Circa Centre
Philadelphia, PA 19104
G. Eric Brunstad, Jr., Esquire (Argued)
Dechert LLP
90 State House Square
Hartford, CT 06103
Matthew J. Delude, Esquire
Primmer, Piper, Eggleston & Cramer
900 Elm Street, 16th Floor
Manchester, NH 03101
Collin O. Udell, Esquire
Jackson Lewis
90 State House Square, 8th Floor
Hartford, CT 06103
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David P. Stich, Esquire
Solomon Blum Heymann & Stich
40 Wall Street, 35th Floor
New York, NY 10005
Counsel for Appellant
Michael J. Canning, Esquire (Argued)
Catherine J. Bick, Esquire
Donald F. Campbell, Jr., Esquire (Argued)
Jaclyn B. Kass, Esquire
Giordano, Halleran & Cielsa
125 Half Mile Road, Suite 300
Red Bank, NJ 07701
Counsel for Appellee
Withumsmith Brown PC
William A. Cambria, Esquire
Louis A. Modugno, Esquire (Argued)
James J. DiGiulio, Esquire
William F. O’Connor, Jr., Esquire
McElroy, Deutsch, Mulvaney & Carpenter, LLP
1300 Mt. Kemble Avenue
P.O. Box 2075
Morristown, NJ 07962-2075
Counsel for Appellee
Lindabury McCormick Estabrook & Cooper
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Christian D. Wright, Esquire
Benjamin Z. Grossberg, Esquire
Young Conaway Stargatt & Taylor, LLP
1000 North King Street, 17th Floor
Rodney Square
Wilmington, DE 19801
Amicus Counsel for
Professor Geoffrey C. Hazard, Jr., Esquire
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OPINION OF THE COURT
_______________
AMBRO, Circuit Judge
New Jersey’s Affidavit of Merit Statute (the “AOM
Statute” or simply “Statute”), N.J. Stat. Ann. § 2A:53A 26-
29, requires certain claims against professionals to include an
affidavit from an independent professional attesting to the
claims’ merit. We decide whether the AOM Statute covers
Nuveen Municipal Trust’s action seeking money damages for
fraud, negligent misrepresentation, and malpractice, allegedly
committed by two professional firms. Though typically we
conceive such statutes as applying only to malpractice claims
rooted in negligence resulting from harm to a known
property, New Jersey courts go further, making our answer
yes.
I. Background
This case stems from a loan transaction between
Appellant Nuveen Municipal Trust (“Nuveen”), on behalf of
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its Nuveen High Yield Municipal Bond Fund, and Bayonne
Medical Center (“Bayonne”). On October 11, 2006, Nuveen
purchased a $10 million Bond Anticipation Note (“BAN”)
from Bayonne. In connection with the transaction, Bayonne
provided Nuveen with an audit report authored by Bayonne’s
accounting firm, WithumSmith+Brown, P.C. (“Withum”),
and an opinion letter authored by Bayonne’s counsel,
Lindabury, McCormick, Estabrook & Cooper P.C.
(“Lindabury”). Soon after the transaction, Bayonne filed a
Chapter 11 bankruptcy petition. Nuveen contends that the
audit report and opinion letter concealed aspects of
Bayonne’s financial condition and, had it known about these
financial issues, it would not have purchased the BAN.
Nuveen filed this action against Withum and
Lindabury (collectively, “Appellees”). It asserts negligent
misrepresentation and fraud as to Withum and negligent
misrepresentation and malpractice as to Lindabury; the
remedy it seeks throughout is money damages. The District
Court dismissed the action with prejudice based on Nuveen’s
failure to file an affidavit of merit complying with the AOM
Statute.
After initially remanding the case to the District Court
on a jurisdictional issue, we issued an opinion in August 2012
– Nuveen Mun. Trust ex rel. Nuveen High Yield Mun. Bond
Fund v. Withumsmith Brown, P.C., 692 F.3d 283 (3d Cir.
2012). In it we held, inter alia, that the District Court was
correct in not affording Nuveen certain procedural protections
with respect to the AOM Statute. Additionally, we stated that
“[i]f the AOM Statute applies to the action, we believe that
Nuveen’s noncompliance with it calls for the action’s
dismissal.” Id. at 288. We questioned, however, whether the
action was subject to the Statute and thus reserved deciding
whether the District Court was correct to dismiss the action
with prejudice. Instead, we certified the following two
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questions of law regarding the Statute to the New Jersey
Supreme Court.
o Whether the nature of the injury alleged in this
case, i.e., the loss of money expended to
purchase the BAN from Bayonne, falls within
the AOM [Statute’s] coverage of “any action
for damages for personal injuries, wrongful
death or property damage.” Specifically, is
Nuveen seeking recovery in this action for
“property damage” as that term is used in N.J.
Stat. Ann. § 2A:53A-27?
o Whether an action alleging an intentional tort,
such as common law fraud or aiding and
abetting common law fraud, which relates to
alleged professional malpractice or negligence
but does not require proof of malpractice or
negligence, is subject to N.J. Stat. Ann.
§ 2A:53A-27?
Judge Aldisert dissented in part from our decision, contending
that no certification was necessary, as the New Jersey
Supreme Court has been adequately clear on the points in
question. In his view, Nuveen’s action was subject to the
AOM Statute and, consequently, had been correctly
dismissed.
In 2013, the New Jersey Supreme Court denied our
petition for certification. Shortly thereafter, Appellees filed a
supplemental brief addressing additional New Jersey state law
and renewing their argument that an AOM was required in
this case and that we should affirm the District Court’s
dismissal of the complaint.
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In this follow-up opinion we address what we did not
in our August 2012 opinion – essentially, whether the AOM
Statute applies to Nuveen’s action. In light of the New Jersey
Supreme Court’s denial of our petition for certification, we
decide the question based on our best understanding of how
the New Jersey Supreme Court would rule. See Sheridan v.
NGK Metals Corp., 609 F.3d 239, 253-54 (3d Cir. 2010) (A
federal court sitting in diversity is “bound to follow state law
as announced by the highest state court”; if the state’s highest
court has not decided the question, we “must predict the
position the court would take on [the] issue” and should look
to decisions by intermediate appellate state courts) (internal
quotation marks and citations omitted). We conclude that
because Nuveen’s action (1) can be characterized as one
seeking recovery for property damage and (2) requires proof
of Appellees’ deviation from professional standards of care,
the AOM Statute applies and the action was properly
dismissed under New Jersey law.
II. Discussion
The AOM Statute provides that an affidavit of merit is
required in actions seeking “damages for personal injuries,
wrongful death or property damage resulting from an alleged
act of malpractice or negligence by a licensed person in his
profession or occupation.” N.J. Stat. Ann. § 2A:53A-27. The
“overall purpose of the statute is to require plaintiffs in
malpractice cases to make a threshold showing that their
claim is meritorious, in order that meritless lawsuits readily
could be identified at an early stage of litigation.” Couri v.
Gardner, 801 A.2d 1134, 1137 (N.J. 2002) (internal quotation
marks and citation omitted). Couri, the seminal New Jersey
case on the AOM Statute, sets out the following framework
for analyzing whether the Statute applies to a particular claim:
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(1) whether the action is for “damages for
personal injuries, wrongful death or property
damage” (nature of injury); (2) whether the
action is for “malpractice or negligence” (cause
of action); and (3) whether the “care, skill or
knowledge exercised or exhibited in the
treatment, practice or work that is the subject of
the complaint [] fell outside acceptable
professional or occupational standards or
treatment practices” (standard of care).
Id. at 1137 (alteration in original) (quoting N.J. Stat. Ann.
§ 2A:53A-27). The parties do not dispute that the complaint
satisfies element (3). We only consider, therefore, whether
Nuveen’s allegations satisfy elements (1) and (2).
Nature of Injury
Element (1) requires us to address whether the money
damages sought by Nuveen in connection with its loan
transaction with Bayonne qualify as a claim for “property
damage” required by the Statute. Nuveen, relying on Couri,
contends that it seeks only compensatory damages and related
costs and, as such, is not asserting a claim for “property
damage.” See id. at 1138. The plaintiff there filed a
complaint against his psychiatrist for breach of contract and
breach of fiduciary duty resulting from the psychiatrist’s
distribution of a preliminary report to the estranged wife of
the plaintiff without his knowledge or consent. Id. at 1136.
The plaintiff initially requested “compensatory and punitive
damages” but later narrowed his request to the $12,000 he
had already paid the psychiatrist for the report and associated
costs. Id. at 1138. The latter moved to dismiss, arguing that
the claim was for malpractice and that the plaintiff had not
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filed the requisite affidavit of merit. The Court rejected this
argument, holding that because the damages sought were not
“damages for personal injuries, wrongful death or property
damage,” plaintiff’s claim did not satisfy the first element of
the Statute and no affidavit of merit was required. Id.
Unlike the plaintiff in Couri, Nuveen is not seeking to
recoup money it has already paid to Appellees. In fact, it has
never directly dealt with Appellees. Instead, it seeks
unspecified money damages stemming from its loan
transaction with non-party Bayonne.
Contrary to Nuveen’s contentions, case law from
lower New Jersey courts comports with Couri and supports
the conclusion that the monetary recovery sought by Nuveen
is of the type that triggers the AOM Statute. Cornblatt v.
Barow, 696 A.2d 65 (N.J. Super. Ct. App. Div. 1997), rev’d
on other grounds by 708 A.2d 218 (N.J. 1998), for example,
squarely addressed the issue of whether a “claim that [a
party’s] alleged malpractice resulted in money damages was
contemplated by the Legislature as a claim for ‘property
damage’ under the [AOM] statute.” Id. at 68. There the
Court held that
[m]alpractice or negligence committed by
architects, engineers, or attorneys may very well
result in damage to real and personal property.
Personal property embraces everything that
may be tangible or intangible such as a chose in
action. The right or claim to money
damages . . . is a property right . . . beyond
question. Accordingly, we conclude that a
claim against an attorney for alleged
malpractice is a claim for property damage
within the legislative intent and plain meaning
of the statute.
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Id. (internal quotation marks and citation omitted).
Similarly, in Nagim v. N.J. Transit, 848 A.2d 61 (N.J.
Super. Ct. Law. Div. 2003), the plaintiff sued for property
damage against New Jersey Transit (“Transit”), which in turn
filed a third-party complaint for contractual indemnification
against an engineering services company (“Urbitran”) whose
project design allegedly caused the underlying damage to the
plaintiff’s property. The Court dismissed New Jersey
Transit’s complaint against Urbitran for failure to file an
affidavit of merit, noting that “jurisprudence under the [AOM
Statute] has conclusively recognized that the ‘property
damage’ language of the statute includes a claim for money
damages,” and holding that Transit’s claim against Urbitran
implicated “both intangible and tangible property rights.” Id.
at 70. It specifically distinguished the case from Couri on the
ground that “[t]here, the plaintiff’s initial claim for
compensatory and punitive damages was narrowed and
limited solely to . . . compensatory damage . . . . That injury
thus became a finite sum of money already paid by the
plaintiff to the defendant and for which recompense was
sought.” Id. at 70-71. In Nagim, by contrast, Transit sought
to assert a cause of action against a third-party, Urbitran, “not
for any monies already paid by Transit to Urbitran for
services provided . . . [but] for the actual defense and/or the
yet unspecified defense costs associated with plaintiff’s
claims against Transit.” Id. at 71. This, the Court held, was a
claim for property damage within the meaning of the AOM
Statute. Id. Like the relevant party in Nagim and unlike the
plaintiff in Couri, Nuveen is not seeking to recover a sum
certain already paid to Appellees, but rather asks for damages
relating to its transaction with Bayonne. See SRC Constr.
Corp. of Monroe v. Atlantic City Hous. Auth., No. 10-3461,
2011 WL 1375680, at *3-4 (D.N.J. Apr. 12, 2011)
(considering both Couri and Nagim and concluding that
plaintiff’s claims were for “property damage” under the AOM
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Statute, as they “[did] not seek to recoup a finite sum already
paid to [defendants]” but rather sought unspecified monetary
damages).
If any doubt remains that negligence or malpractice
actions for unspecified money damages meet the property
damage requirement of the AOM Statute, the New Jersey
Supreme Court has, post-Couri, stated generally that “[t]he
[S]tatute applies to all actions for damages based on
professional malpractice.” Paragon Contractors, Inc. v.
Peachtree Condo. Ass’n, 997 A.2d 982, 985 (2010).
Although Paragon’s ultimate holding turned on the time
limits for filing an affidavit of merit and so did not directly or
extensively address the applicability of the AOM Statute, the
Court’s broad statement that the AOM Statute applies to all
actions for damages based on professional malpractice has
not been questioned by any other New Jersey court decision.
Thus we conclude that Nuveen has brought an action for
property damage under the AOM Statute.
Cause of Action
Nuveen asserts claims of fraud, aiding and abetting
fraud, and negligent misrepresentation against Withum, along
with claims of malpractice and negligent misrepresentation
against Lindabury. Nuveen concedes that the AOM Statute
applies to its negligence and malpractice claims against both
Appellees. It argues, however, that its claims for common
law fraud, and aiding and abetting common law fraud, against
Withum are intentional tort claims to which the AOM Statute
does not apply.
The problem for Nuveen is that in New Jersey an
action need not be styled as one for malpractice or negligence
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for the AOM Statute to apply. Rather, in Couri1 the New
Jersey Supreme Court explained that
[i]t is not the label placed on the action that is
pivotal but the nature of the legal inquiry.
Accordingly, when presented with a tort or
contract claim asserted against a professional
specified in the statute, rather than focusing on
whether the claim is denominated as tort or
contract, attorneys and courts should determine
if the claim’s underlying factual allegations
require proof of a deviation from the
professional standard of care applicable to that
specific profession. If such proof is required,
an affidavit of merit is required for that claim,
unless some exception applies.
801 A.2d at 1141. Applying this standard to the case before
it, the Couri Court held that no AOM was required.
Plaintiff is not claiming that defendant erred in
respect of the conclusions that he drew
concerning psychiatric/medical matters or that
defendant acted improperly from a
psychiatric/medical standpoint . . . . Instead, the
crux of plaintiff’s complaint is that defendant
acted improperly as an expert witness by
1
Though the New Jersey Supreme Court in Couri
acknowledged it could conclude its opinion on the first
element of the statute – the “nature of the injury” – alone, it
continued to analyze the second element of the statute – the
“cause of action” – in order to resolve conflicts and provide
future guidance to lower courts. 801 A.2d at 1138.
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disseminating the report to others without the
knowledge or consent of plaintiff. Although
defendant’s unauthorized dissemination of the
report also might implicate a deviation from
prevailing professional standards of practice,
proof of that deviation is not essential to the
establishment of plaintiff’s right to recover
based on breach of contract.
Id. at 1142.
To determine whether an affidavit of merit was
required in our case, we examine the evidence needed to
prove the fraud allegations in Nuveen’s complaint. Those
claims against Withum are premised on the theory that it
made material misrepresentations and omissions of past and
present facts in its audit report. For example, Nuveen alleges
that Withum in its audit report, inter alia, allowed Bayonne to
count a conditional or unenforceable pledge as revenue, failed
to ensure that Bayonne had adequately reserved for
uncollectible accounts receivable, and failed to evaluate
adequately Bayonne’s ability to continue as a going concern.
These misrepresentations and omissions are alleged to be a
direct consequence of Withum completing its audit
examination and report of Bayonne in a manner that violated
Generally Accepted Auditing Standards (“GAAS”) and
Generally Accepted Auditing Principles (“GAAP”). The
complaint does not allege that Withum made any material
misrepresentations other than those resulting from the failure
to comply with GAAS and GAAP.
Though Nuveen’s allegations of fraud against Withum
are styled as intentional torts, rather than negligence or
malpractice claims, they nonetheless require proof that
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Withum deviated from professional standards of care. And
New Jersey Courts, following what they perceive to be the
path set out by the State Supreme Court in Couri, stretch
“malpractice or negligence” to include even those instances.
See, e.g., Alpert, Goldberg, Butler, Norton & Weiss, P.C., v.
Quinn, 983 A.2d 604, 621-22 (N.J. Super. Ct. App. Div.
2009) (requiring affidavit of merit in breach-of-contract claim
against attorney because pleadings alleged that “the quality of
work product was not sufficient,” and that the attorney “failed
to do a complete and competent job”; those allegations
required “proof of a deviation from the professional standard
of care applicable to attorneys”); Charles A. Manganaro
Consulting Eng’rs., Inc. v. Carneys Point Twp. Sewerage
Auth., 781 A.2d 1116, 1119 (N.J. Super. Ct. App. Div. 2001)
(affidavit of merit required in breach-of-contract claim
against engineer when “the essential factual allegations . . .
[were] that [the engineer] failed to properly prepare the plans
and specifications”; this is an “allegation[] of professional
malpractice – that [he] failed to act with that degree of care,
knowledge, and skill ordinarily possessed and exercised in
similar situations by the average member of the profession
practicing in the field” (internal quotation marks and citation
omitted)).
Though this is counterintuitive (one may argue
illogical), it is the suit we must follow; while intentional torts
are by definition not negligent, the focus is deviation from a
professional standard devoid of any claim label. Hence the
fraud claims against Withum require an affidavit of merit.
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III. Conclusion
Based on our understanding of the New Jersey courts’
view of the AOM Statute’s applicability, we conclude that the
money damages sought by Nuveen are considered a claim for
“property damage” and that the underlying factual allegations
of Nuveen’s fraud claims against Withum require proof of a
deviation from the professional standard of care.
Accordingly, the District Court correctly held that the AOM
Statute applies and that Nuveen’s noncompliance with the
Statute warranted dismissal of its case.
For these reasons, we affirm.
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