Beware of quantum meruit liability.

There is a recent appellate decision in the State of New Jersey which further erodes the general rule that an owner is not liable in quantum meruit for services the owner did not contract to receive. The exception was carved out where the court found that the owner was involved in a corporate shuffle game to avoid liability for site engineering services furnished in connection with a subdivision application.

In the matter Langan Engineering Associates, Inc. vs. Equinational Randolph Corp. and Ard Mount Olive Associates, L.P., plaintiff Langan Engineering contracted with defendant Equinational to provide engineering services in connection with a residential subdivision application for a 168-acre parcel in Mount Olive in Morris County, NJ. The owner of the property at all times was the limited partnership Ard Mount Olive Associates (Ard). Partners in Ard were Equinational, which owned 1 percent, a corporation called Gard Associates, Ltd., which owned 62.5 percent, and certain individuals, all of whom wore also shareholders in Equinational. During Langan's work on the project, Langan corresponded with only the individuals and referred to Equinational as the "owner" of the parcel in question.

The claim of Langan was for $280,175.55 worth of additional engineering services performed beyond the scope of its initial agreement. It was shown at the trial that all of the necessary subdivision approvals were obtained after extensive efforts.

The theories asserted by Langan Engineering for recovery of these monies were (1) principal/agency; (2) fraud or active wrongdoing by the individuals who controlled Ard and Equinational; and (3) quantum recruit against the owner Ard. The trial court dismissed the first two theories but held that Ard was liable on the theory of quantum recruit. The Appellate Division affirmed for the reasons discussed herein.

The Appellate Division noted that quantum meruit is a doctrine that may not be "lightly used." It also conceded that in most instances an owner is not liable for services for which the owner did not contract to receive simply because the owner's property has benefitted. However, the distinction drawn in Langan Engineering is that quantum meruit will be found where the plaintiff would have expected renumeration from the defendant had the true facts been known.

In this case, both the trial court and the appellate court plainly stated that the principals of Ard concealed the distinction between Ard and Equinational as a scheme to avoid liability. The court also noted that the principals may have permitted Langan to perform extensive additional services anticipating that they could walk away from liability as Equinational, which "was and is an entity apparently bereft of all assets."

The trial court specifically stated that "[It] has the unsettling feeling that the situation might have been somewhat analogous to a cat playing with a mouse. It is far less clear to this Court whether plaintiff even considered the issue of the distinction between Ard and Equinational. In fact, the court believes plaintiff did not. It is beyond per [sic] adventure that [the Equinational shareholder] did not fully air this distinction in contract negotiations. One would expect that honest dealings between parties would have suggested that at least this distinction be discussed."

On the court's belief that the defendants intended to walk away from Langan, the trial court noted: "This court harbors strong suspicion that the defendants acted during the latter part of the project with the supposition that if the project failed and plaintiff was not paid for its efforts, the plaintiff would have no recourse of any meaning and/or substance. This type of conduct cannot and will not be countenanced by the court."

The appellate court further noted that "ample evidence exists as well for the trial judge's finding that during the period of time when the [individual principals] were requesting additional work they knew Equinational might not be in a position to pay for that work, yet implored plaintiff to continue under circumstances indicating plaintiff reasonably expected to be paid therefore."

The import of this decision is self evident. Owners need to make sure that they do not rely on their corporate separateness entities if their actions are to the contrary. Suppliers, contractors or consultants may successfully argue the deception game such as Langan did in this case.

(Peter Goetz is a founding member of the law firm of Goetz, Fitzpatrick, Carbone, Eiseman, Finegan & Rubin, LLP. Mr. Goetz and the firm devote a substantial portion of their practice to representing the real estate industry, including developers, landlords and builders in connection with property acquisition, leasing, construction and related matters. The firm does extensive litigation, arbitration and mediation in these fields.)