SZELC v. STANGER et al

Filing 153

OPINION. Signed by Judge Anne E. Thompson on 11/21/2011. (gxh)

NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
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Richard SZELC,
Plaintiff,
v.
David STANGER, et al.,
Defendants.
Gabor GOTTESMAN,
Third-Party Plaintiff,
v.
FIRST AMERICAN TITLE INSURANCE
CO.,
Third-Party Defendant.

Civ. No. 08-4782
OPINION

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THOMPSON, U.S.D.J.
I. INTRODUCTION
This matter comes before the Court upon Defendant/Third-Party Plaintiff Gabor
Gottesman’s Motion for an Order Concerning the Reimbursement of His Legal Fees and
Expenses [docket # 133]. Third-Party Defendant First American Title Insurance Company
(“First American”) opposes the motion [141]. The Court heard oral argument on September 21,
2011. For the reasons given below, the motion is granted in part and denied in part.

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II. BACKGROUND
A. The Underlying Action
The Court assumes the parties’ familiarity with the underlying dispute, which involved a
real estate sale-leaseback agreement entered into between Plaintiff’s wife and Defendants Gabor
Gottesman, David Stanger, and several companies owned by Stanger and Gottesman.1 Plaintiff
sued these Defendants as well as title agent Madison Title Agency (“Madison”) and GMAC
Mortgage Corporation (“GMAC”)—the assignee of the new mortgage on the property—in order
to unwind the transaction and regain title. Plaintiff’s claims included forgery, fraud,
racketeering, violations of the Truth in Lending Act (“TILA”) and the Home Ownership and
Equity Protection Act (“HOEPA”), and failure to exercise due care. (See generally Second Am.
Compl.) [56]. We denied summary judgment as to all Defendants based on genuine issues of
material fact as to whether Plaintiff’s signature was forged, whether Plaintiff knew of the
forgery, whether Madison Title Agency was aware of the scheme, and whether the saleleaseback would be best characterized as an equitable mortgage. (See April 18, 2011 Op. &
Order 8, 10, 16.) On June 2, 2011, Plaintiff and Defendants appeared before the Court to state
on the record that they had settled all claims. (June 2, 2011 Hr’g Tr. 11:21–12:3) [131]. They
subsequently memorialized this settlement through a formal Consent Order, pursuant to which
Plaintiff paid GMAC $141,000.00, Madison paid GMAC $45,000, Gottesman paid GMAC the
remaining balance of $272,870.57, and Gottesman also provided Plaintiff with a deed
transferring ownership of the property back to Plaintiff. (See Consent Order Ex. A, Settlement
Agreement and Mutual Release.) Defendant Gottesman now seeks from his title insurer, First
American, reimbursement for his attorneys’ fees pursuant to the contractual duty to defend

1

A fuller recitation of the facts may be found in this Court’s Opinion & Order on the Motions for Summary
Judgment dated April 18, 2011 [126]

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contained in his title insurance policy. (See Br. in Opp’n to First Mot. for Attorney Fees, Ex. A,
Residential Title Insurance Policy (“Policy”).)
B. Gottesman’s Insurance Policy
The Policy insures Gottesman against actual losses based on title risks, entitles him to
legal defense of his “title in any court case as to that part of the case that is based on a Covered
Title Risk,” and provides for payment of “costs, attorneys’ fees and expenses” incurred in that
defense. (Id.) The Policy also contains several exceptions and exclusions. One of the
exclusions is for title risks “created, allowed, or agreed to by you [the insured]” or “that are
known to you, but not to us, on the Policy Date.”2 (Id.) The Policy further states: “If you do
anything to affect any right of recovery you may have, we can subtract from our liability the
amount by which you reduced the value of that right.” (Br. in Opp’n Ex. A, Policy, Conditions §
6.) Finally, the Policy states that First American is “required to repay you only for those
settlement costs, attorneys’ fees and expenses that we approve in advance.” (Id. § 5.)
C. The Court’s Finding of Duty to Defend
Early in this litigation, the Court determined that First American owed a duty to defend
Gottesman against only those claims that would not require Plaintiff to prove Gottesman’s
knowledge of or deliberate participation in the creation of certain title risks—namely, Counts III,
IV, V, IX, and X. (See Nov. 30, 2009 Op. & Order 6) [71]. The Court specifically rejected both
Gottesman’s contention that First American should bear all of the defense costs and First
American’s contention that it should bear none of the defense costs. Rather than telling the
parties specifically how First American should undertake this partial defense, we left it up to the
parties to work out that issue between themselves. (Id. at 8.) First American reacted by retaining
separate counsel to provide a defense specifically on those claims that the Court determined were
2

Gottesman’s Policy Date is March 7, 2008. (Br. in Opp’n Ex. A, Policy, Schedule A.)

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covered under Gottesman’s Policy. We found that First American’s counsel had a conflict of
interest in light of the company’s incentive to show Gottesman committed fraud in order to avoid
indemnifying him. (See July 21, 2010 Op. & Order 4) [108]. We therefore held that First
American could not control Gottesman’s defense. However, we concluded that any
determination as to what portion of Gottesman’s attorneys’ work should be covered would be
best left until the conclusion of the case, after the entry of judgment. (Id. at 5.)
The parties have been unable to reach an agreement as to what portion of Gottesman’s
attorneys’ fees First American must reimburse pursuant to its duty to defend Gottesman.
Gottesman has filed a Motion for Attorneys’ Fees, requesting full reimbursement of legal
expenses for covered claims and one-third reimbursement for legal expenses that are not
allocable to covered or non-covered claims [133]. First American opposes the motion, asserting
that no legal expenses are recoverable because Gottesman failed to prove his case at trial and
sacrificed his title interest by settling [141].

III. ANALYSIS
A. First American’s Dispute as to Specifically Covered Claims
We have already held that First American owes Gottesman a duty to defend. First
American nonetheless argues that the claims for which we found a duty to defend are not
actually covered by Gottesman’s Policy. (Br. in Opp’n 23–26.) However, all of these arguments
are squarely addressed by our previous Opinions.
First American asserts that Gottesman had the burden of proving at trial that he acted
unintentionally with respect to the covered Counts, and that because there was no trial
Gottesman has failed to show coverage. (Id. at 24.) However, as we have stated in our previous

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Opinions, the duty to defend is based on the allegations in the complaint and not on the actual
facts of the case. (See Feb. 11, 2010 Op. & Order 3.) Accordingly, Gottesman’s failure to prove
facts at trial is immaterial.
Next, First American argues that Gottesman could not have been held liable for unjust
enrichment in Count IX because he merely obtained an ownership interest in the property. (Br.
in Opp’n 25.) This argument is incorrect because if Gottesman obtained the property as a result
of his knowing participation in a fraudulent conspiracy, then he would be unjustly enriched to the
extent of the equity value he gained in the property. (See April 18, 2011 Op. & Order 12.)
Finally, First American argues that Gottesman cannot be covered against the TILA and
HOEPA claims in Count III and IV, because those statutes concern lender liability and
Gottesman is “only covered as an owner.” (Br. in Opp’n 26.) However, the Court’s November
30, 2009 Opinion already foreclosed this argument in finding that, regardless of Gottesman’s
status as an owner or lender, the TILA and HOEPA claims place Gottesman’s title at risk and
therefore implicate First American’s duty to defend. (See Nov. 30, 2009 Op. & Order 4.)
B. Effect of Gottesman’s Settlement
First American asserts that, by voluntarily relinquishing title as part of the settlement,
Gottesman forfeited his opportunity to demonstrate entitlement to insurance coverage for either
indemnification or duty to defend. (Br. in Opp’n 9.) This argument is unsupported by case law,
the language of the insurance contract, or public policy.
As an initial matter, First American has not identified any cases finding that settlement
automatically destroys an insured’s right to reimbursement of defense costs. To the contrary,
New Jersey and Third Circuit cases imply that settlement does not preclude an insured’s
recovery of legal fees based on the insurer’s duty to defend. In SL Industries v. American

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Motorists Insurance Company, the New Jersey Supreme Court remanded regarding the insurer’s
duty to defend an emotional injury claim that had settled. See 607 A.2d 1266, 1270 (N.J. 1992).
In Federal Home Loan Mortgage Corporation v. Scottsdale Insurance, the Third Circuit
affirmed the district court’s holding that the insurer would need to reimburse defense costs
leading up to a settlement. See 316 F.3d 431, 436, 446 (3d Cir. 2003). Thus, there is no
absolute rule that an insured party’s decision to settle forecloses its ability to seek reimbursement
of defense costs.
First American’s contractual argument is primarily based on a provision in Gottesman’s
Policy entitled “Limitation of the Company’s Liability,” which states: “If you do anything to
affect any right of recovery you may have, we can subtract from our liability the amount by
which you reduced the value of that right.” (Br. in Opp’n Ex. A, Policy, Conditions § 6.e.)
However, there are at least two reasons why the word “liability” in that sentence is best read as
applying solely to the “actual loss” covered by First American and not to the company’s duty to
defend. First, the Policy states in the same “Limitation” section: “The Policy Amount will be
reduced by all payments made under this Policy – except for costs, attorneys’ fees and
expenses.” (Id. § 6.c.) This language suggests that First American’s “liability” for “actual loss”
is distinct from attorneys’ fees. Second, the cover page of the Policy separates out First
American’s coverage of “actual loss” and First American’s “duty to defend.” (Id. Ex. A, Policy,
Owner’s Coverage Statement.) This reflects that the funds paid for “actual loss” liability are
distinct from the costs reimbursed for the duty to defend. Because the “Limitation” section is
phrased in terms of First American’s payment of “actual loss,” it likely does not apply to the duty
to defend. Thus, while Gottesman’s decision to transfer title to Plaintiff as part of the settlement

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might have resulted in a deduction from his “actual loss” coverage, the settlement does not affect
Gottesman’s right to seek reimbursement of defense costs.
Finally, the Court notes that there is a strong public policy in favor of settlement of legal
disputes. See State v. Williams, 877 A.2d 1258, 1266 (N.J. 2005). This policy would be
impeded if an insured were to forfeit its ability to seek reimbursement of defense costs by
settling rather than proceeding to trial.
Thus, Gottesman is entitled to reimbursement of defense costs despite his participation in
the settlement.
C. Apportionment of Non-Allocable Legal Fees
The general rule is that an insurer must reimburse defense costs, provided that they can
be apportioned between covered and non-covered claims. S.L. Indus. v. Am. Motorists Ins. Co.,
607 A.2d 1266, 1280 (N.J. 1992) (collecting cases). If defense costs cannot be apportioned, the
insurer must assume the cost of defending both covered and non-covered claims. Id. However,
the New Jersey Supreme Court applies a presumption that, when parties are unable to agree upon
a satisfactory apportionment, the reviewing court “will be able to analyze the allegations in the
complaint in light of the coverage of the policy to arrive at a fair division of costs.” Id.
The fees Gottesman has incurred fall into three categories: (1) legal expenses specifically
allocable to covered claims; (2) legal expenses specifically allocable to non-covered claims; and
(3) legal expenses not specifically allocable to either covered or non-covered claims. As noted
above, the Court finds that fees allocable to covered claims should be reimbursed in full.
Gottesman does not seek reimbursement for fees allocable to non-covered claims. Thus, the core
of the present controversy is what percentage of non-allocable claims should be covered.

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Gottesman requests an equitable allocation of one-third, or 33%, based on the ratio of covered
claims to the total number of claims. (Br. in Supp. 9.) We agree, with two reservations.
First, we adjust the ratio applied to the non-allocable fees from the time of our summary
judgment order onwards. Under New Jersey Law, an insurer’s duty to defend continues “‘until
every covered claim is eliminated.’” Sahli v. Woodbine Bd. of Educ., 938 A.2d 923, 930 (N.J.
2008) (quoting Voorhees v. Preferred Mut. Ins. Co., 607 A.2d 1255, 1259 (N.J. 1992)). The
logical extension of this rule is that when specific covered claims are eliminated, those claims
can no longer command a duty to defend. Our Summary Judgment Order dated April 18, 2011,
terminated four claims: covered Counts V and X, and non-covered Counts I and XII. (See April
18, 2011 Op. & Order 24.) Accordingly, we will adjust the percentage of covered claims from
that date onwards to 27% to account for the fact that there were three covered claims out of
eleven total claims thereafter.
Second, we will further divide the non-allocable work based on the fact that Gottesman’s
attorneys represented him jointly along with other Defendants. We recognize Gottesman’s
position that, “given the interwoven nature of the claims in this case, the defense costs do not
lend themselves to simple apportionment” because “it is impossible to segregate the work to any
one particular Count of the complaint.” (Br. in Supp. 133.) However, by the same logic, the
non-allocable costs were generated by work performed not only for covered and non-covered
claims, but also for covered and non-covered Defendants. It would be inequitable to award
Gottesman a percentage of fees greater than that expended on defending his interests. The
covered claims include allegations against Gottesman as well as Defendants Stanger, Parkstone
Acquisition LLC (“Parkstone”), Westmarq Property Group LLC, Acqes LLC, Westmarq
Financial, Westmarq Fund Management, and Madison Title Agency. (See, e.g., Second Am.

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Compl. ¶¶ 129, 136a, 138, 144a, 147, 149a, 164, 168.) Gottesman’s law firm, Gruen &
Goldstein, jointly represented all of these Defendants with the exception of Madison Title
Agency. Indeed, the firm submitted its brief in support of a motion for summary judgment on
behalf of “Stanger, Gottesman and Parkstone (and the other Stanger-related defendants which are
defendants only nominally—Westmarq Property Group, Acqes, LLC, Westmarq, LLC,
Westmarq Fund Management, LLC).” (Br. in Supp. of Mot. for Summ. J. 3) [111]. Accepting
Gruen & Goldstein’s representation that the other Stanger-related defendants are merely
nominal, only one-third of the non-allocable work performed consisted of defending
Gottesman’s title interest. Therefore, we find that the most equitable allocation would be onethird of the applicable ratio of covered to non-covered claims.
D. Adequacy of Fee Application
First American argues that Gottesman’s fee application is inadequate under Fed. R. Civ.
P. 54 because Gottesman has not addressed any lodestar factors. (Br. in Opp’n 11–12, 27–30.)
Gottesman responds that, because the request for attorneys’ fees arises under Gottesman’s
insurance policy, it is not subject to Rule 54. (Reply Br. 13.) Whether a contractual fee
application must conform to Rule 54 is within this Court’s discretion. See Fed. Home Loan
Mortg. Corp. v. Scottsdale Ins., 316 F.3d 431, 449 (3d Cir. 2003) (stating that “district court
[may] accept a noncompliant application for fees”).3 In light of that discretion, we will not
require Gottesman’s fee request to conform to Rule 54.

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First American relies on Sokoloff v. General Nutrition Companies, Inc., an unpublished opinion stating that,
“[u]nder New Jersey law, a claim for attorneys’ fees pursuant to a contractual agreement is an element of damages
that must be pleaded and proved at trial.” No. 00-0641, 2001 WL 536072, at *7 (D.N.J. May 21, 2001). However,
Sokoloff is inapposite because the contract there required a finding that the claimant was a “prevailing party,”
whereas here the contractual duty to defend attaches regardless of Gottesman’s success in defending against any
claims.

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E. Amount of Legal Fees
Gottesman was represented by three firms over the course of this litigation: (1) Podvey,
Meanor, et al., from October 2008 through March 2009; (2) Stahl & Zelmanovitz from March
25, 2009 through December 22, 2009, and again from January 1, 2010 through May 31, 2011;
and (3) Gruen & Goldstein from March 2009 through December 2009 and from January 2010
through May 2011. (Joseph Zelmanowitz Decl. Ex. A, Analysis of Legal Fees) [136]. From the
inception of the case through May 31, 2011, Gottesman incurred attorneys’ fees of $295,245.40
in total. (Zelmanovitz Decl. ¶ 8.) Of that amount, $5,839.89 is allocable to covered claims;
$32,881.32 is allocable to non-covered claims or non-reimbursable items; and the balance of
$256,524.19 is non-allocable. (Id.) Gottesman seeks the full covered amount of $5,839.89 plus
one-third of the non-allocable amount—$91,347.89—for a total of $97,187.78. (Id.) Gottesman
also seeks one-third of fees and costs incurred after May 31, 2011 with respect to the nonallocable work performed.
1. Vague
First American objects to several of Gottesman’s attorneys’ fee entries on the ground that
they are too vague to indicate whether or not the work being billed relates to a covered claim.
(Br. in Opp’n 33.) However, as noted above, vagueness is only a concern insofar as it would
prevent this Court from determining what work was performed. Therefore, we are not moved by
First American’s argument that fees should be rejected solely because the listed fee entries fail to
identify whether the work relates to covered or non-covered claims

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2. Transitional
As noted above, Gottesman was represented by three different law firms over the course
of this litigation. First American argues that Gottesman cannot recover fees associated with the
decision to substitute counsel. (Br. in Opp’n 39.) We agree. Another judge in this district
recently rejected a request for copying costs relating to the transition of files. Ill. Nat’l Ins. Co.
v. Wyndham Worldwide Operations, Inc., 09-1724, 2011 WL 229334, at *9 (D.N.J. June 7,
2011). In the same vein, this Court will deny fee requests relating to the substitution of counsel.
Accordingly we will deduct from the total recoverable amount the $148.25 and $390.00 fees that
First American has marked as “Transition” relating to pro hac vice motions. (Br. in Opp’n Ex.
L) [141-12].
3. Fee Calculations
Over the course of this litigation, Gruen & Goldstein has billed $4,389.09 in covered
legal expenses, and Podvey, Meanor, et al., has billed $1,450.80 in covered legal expenses.
(Zelmanowitz Decl. Ex. A, Analysis of Legal Fees). The total amount of covered expenses is
$5,839.89, which is fully reimbursable.
From the time of this Court’s summary judgment order onwards, Stahl & Zelmanowitz
billed $6,412.50 (Zelmanowitz Decl. Ex. C) [136-2 at 59–61], in non-allocable legal expenses,
(see Zelmanowitz Decl. Ex. A, Analysis of Legal Fees). Applying the ratio of three covered
claims to eleven non-covered claims leads to a covered $1,748.86, which, after dividing by three
based on counsel’s joint representation of other Defendants, produces a reimbursable amount of
$582.95.
From the time of this Court’s summary judgment order onwards, Gruen & Goldstein
billed $2887.50, of which $157.50 was not covered, (Zelmanowitz Decl. Ex. C) [136-2 at 62]

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and the remainder—$2730—was non-allocable, (see Zelmanowitz Decl. Ex. A, Analysis of
Legal Fees). Applying the 3:11 ratio leads to a covered $744.54, which, divided by three,
produces a reimbursable amount of $248.18.
Prior to the Court’s summary judgment order, Stahl & Zelmanowitz billed $48,030.51 in
non-allocable legal expenses. Applying the 1:3 ratio leads to a covered $16,010.17, one-third of
which is $5,336.72.
Prior to the Court’s summary judgment order, Gruen & Goldstein billed $155,704.71 in
non-allocable legal expenses. Applying the 1:3 ratio leads to a covered $51,901.57, one-third of
which is $17,300.52.
Prior to the Court’s summary judgment order, Podvey, Meanor, et al., billed $43,646.39
in non-allocable expenses. Applying the 1:3 ratio leads to a covered $14,548.79, one-third of
which is $4,849.59.
As to the attorneys’ fees incurred after May 31, 2011, the Court notes that Gottesman has
not submitted any documentation relevant to that time period and therefore is not presently
entitled to reimbursement of those fees.
From the subtotal of $34,157.85, the Court deducts the transitional expenses of $538.25,
In light of these calculations, the total reimbursable amount is $33,619.60.

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IV. CONCLUSION
For the reasons stated above, and for good cause shown, Gottesman’s Motion for an
Order Concerning the Reimbursement of His Legal Fees and Expenses [docket # 133] is granted
in part and denied in part, and Gottesman is entitled to collect from First American a total of
$33,619.60. An appropriate order will follow

/s/_Anne E. Thompson________
ANNE E. THOMPSON, U.S.D.J.
Dated_November 21, 2011_______

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