On July 7, 2011, the New Jersey Supreme Court expanded the reach of the Consumer Fraud Act (CFA), arguably already the most extensive of consumer protection laws in the United States, and held that under certain circumstances, owners and employees of a corporation may be individually liable for regulatory violations of CFA undertaken by them through the corporate entity.
In Allen v. V and A Bros., Inc., ___ N.J. ___ (2011), the New Jersey Supreme Court had before it William and Vivian Allen, homeowners who had contracted with V and A Brothers, Inc. to landscape their property and to construct a retaining wall in preparation for the installation of a pool. At no time was the parties’ agreement reduced to writing. When construction of the pool did not proceed as initially contemplated, V and A Brothers modified their plan and moved the location of the retaining wall and increased its height. V and A Brothers did not obtain the Allens’ consent for the change in design, nor did it obtain municipal approval before accepting final payment from the Allens after completion of work. Not long after the work was completed, the retaining wall developed cracks and a visible bulge, undermining the integrity of the pool installation.
After consulting with an engineer who concluded that the movement of the retaining wall was caused by its excessive height and the use of inferior backfill material to support it, the Allens filed their two-count complaint. The first count, alleging breach of contract, was directed solely at V and A Brothers. The second count, alleging violations of the CFA, was brought against the corporation as well as the two owners of the corporation and its employee. The latter count alleged violations of the Home Improvement Practices regulations, specifically failure to execute a written contract, failure to obtain final approval before accepting final payment, and the failure to obtain the Allens’ consent before modifying the design of the retaining wall and substituting backfill material.
Before trial, the lower court granted the individual defendants’ motion to dismiss the complaint as to them, reasoning that the CFA does not create a direct cause of action against individuals, and absent allegations to support traditional veil-piercing, there is no basis on which to recover against the individual defendants. After trial, where the Allens secured treble damages and attorneys’ fees against the corporation in excess of $550,000, the Allens appealed the dismissal of the individual defendants. The Appellate Division reversed the dismissal, but also barred the individual defendants from litigating damages. The Supreme Court then granted the defendants’ petition for certification to review the Appellate Division’s order.
Defendants argued that the principals and employees of a corporation are not “persons” as contemplated by the CFA, and that personal liability under the CFA must be supported by grounds to pierce the corporate veil. They also argued against barring the individual defendants from contesting the quantum of damages.
After examination of the statutory provisions of CFA, the Home Improvement Practices regulations which formed the basis of the Allens’ claim and subsequent case law, the Supreme Court concluded that the CFA unquestionably does not limit recourse to the corporation, and, accordingly, does not preclude personal liability. That conclusion was nothing new, as New Jersey courts have long held that corporate officers and employees may be held individually liable for their substantive violations of the CFA, but for the first time, the court also held that these individuals may also be personally liable when the basis for the CFA claim is a regulatory violation. Accordingly, no veil piercing is required to reach the individuals behind the corporation, those individuals having already been identified in the explicit definition of “person” under the CFA.
Having answered the question whether personal liability may attach in the context of a regulatory violation of the CFA, the Supreme Court then addressed the circumstances under which personal liability may be warranted. It concluded that while principals of a corporation may be “broadly liable,” as they are the ones who determine corporate policy, employees may be liable when they take unilateral actions which are unlawful.
Homeowners have been given one more weapon to combat against home improvement contractors, their principals and their employees who employ unlawful practices. To ensure proper handling of the matter and to help ensure individual wrongdoers are taken to task for their misdeeds, homeowners should seek counsel experienced in these matters and equipped to wield the weapons of this enhanced arsenal.