BREAD AND BUTTER CONSUMER LAW ISSUES

Monday, July 22, 2013

The Consumer Fraud Act and its Impact on Home Improvement Contracts

ByJohn J. Lavin, Esq.

A Brief History of the New Jersey Consumer Fraud Act

• Adopted in 1960 “to permit the Attorney General to combat the increasingly widespread practice of defrauding the consumer.” Senate Committee, Statement to the Senate Bill No. 199 (1960).

• Amended in 1971 to afford individuals a private right of action and give New Jersey one of the strongest consumer protection laws in the nation. Governor’s Press Release for Assembly Bill No. 2402 (June 29, 1971).

Why is this Important?

• Prior to 1971, consumers themselves could not bring an action under the Consumer Fraud Act.

• Identifies the elements required to establish standing necessary to bring a private right of action under the Consumer Fraud Act.

• Amendments include the award of treble damages and costs of suit, including reasonable attorney’s fees.

• The Amendment was designed to encourage lawsuits. Governor’s Press Release for Assembly Bill No. 2402 (June 29, 1971).

Home Improvement Claims arising under the New

Jersey Consumer Fraud Act, N.J.S.A. 56:8-1, et seq.

In Broad Strokes• The Unlawful Act

• Substantive Violations• Technical Violations

• Standing• The Remedy

The “Unlawful Act”N.J.S.A. 56:8-2 (2010)

N.J.S.A. 56:8-2. Fraud, etc., in connection with sale or advertisement of merchandise or real estate as unlawful practice

The act, use or employment by any person of any unconscionable commercial practice, deception, fraud, false pretense, false promise, misrepresentation, or the knowing, concealment, suppression, or omission of any material fact with intent that others rely upon such concealment, suppression or omission, in connection with the sale or advertisement of any merchandise or real estate, or with the subsequent performance of such person as aforesaid, whether or not any person has in fact been misled, deceived or damaged thereby, is declared to be an unlawful practice….

Promulgation of the“Unlawful Acts” Specific to

Home Improvement Contracts

N.J.S.A. 56:8-4. Additional powers

To accomplish the objectives and to carry out the duties prescribed by this act, the Attorney General, in addition to other powers conferred upon him by this act, may… promulgate such rules and regulations, and prescribe such forms as may be necessary, which shall have the force of law.

“Home Improvement Practices Regulations”

N.J.A.C. 13:45A-16.1,et seq.

Promulgated under N.J.S.A. 56:8-4

13:45A-16.1 Purpose and scope

 (a) The purpose of the rules in this subchapter is to implement the provisions of the Consumer Fraud Act, N.J.S.A. 56:8-1 et seq., by providing procedures for the regulation and content of home improvement contracts and establishing standards to facilitate enforcement of the requirements of the Act.

(b) The rules in this subchapter shall apply to all sellers as defined in N.J.A.C. 13:45A-16.1A and to all home improvement contractors as defined in N.J.A.C. 13:45A-17.2 whether or not they are exempt from the provisions of N.J.A.C. 13:45A-17.

“Home Improvement”

N.J.A.C. 13:45A-16.1A (2010) - "Home improvement" means the remodeling, altering, painting, repairing, renovating, restoring, moving, demolishing, or modernizing of residential or noncommercial property or the making of additions thereto, and includes, but is not limited to, the construction, installation, replacement, improvement, or repair of driveways, sidewalks, swimming pools, terraces, patios, landscaping, fences, porches, windows, doors, cabinets, kitchens, bathrooms, garages, basements and basement waterproofing, fire protection devices, security protection devices, central heating and air conditioning equipment, water softeners, heaters, and purifiers, solar heating or water systems, insulation installation, siding, wall-to-wall carpeting or attached or inlaid floor coverings, and other changes, repairs, or improvements made in or on, attached to or forming a part of the residential or noncommercial property, but does not include the construction of a new residence. The term extends to the conversion of existing commercial structures into residential or noncommercial property and includes any of the above activities performed under emergency conditions. (See also, N.J.S.A. 56:8-137 (2010))

“Home Improvement Contract.”

N.J.A.C. 13:45A-16.1A - "Home improvement contract" means an oral or written agreement between a SELLER and an owner of residential or noncommercial property, or a seller and a tenant or lessee of RESIDENTIAL OR NONCOMMERCIAL PROPERTY, if the tenant or lessee is to be obligated for the payment of home improvements made in, to, or upon such property, and includes all agreements under which the seller is to perform labor or render services for home improvements, or furnish materials in connection therewith.

“Seller”

N.J.A.C. 13:45A-16.1A – “Seller” means a person engaged in the business of making or selling home improvements and includes corporations, partnerships, associations and any other form of business organization or entity, and their officers, representatives, agents and employees.

Home Improvement Contractors Required to Register with the State

• N.J.S.A. 56:8-136, et seq. requires all home improvement contractors register with the New Jersey Department of Consumer Affairs.

• N.J.S.A. 56:8-137 The Act now defines “home improvements.”

• N.J.A.C. 13:45A-17.1 details the registration process, and also sets forth exemptions to the registration requirements.

“Unlawful practices”

N.J.A.C. 13:45A-16.2 – Enumerates specific writing and business requirements as well as certain practices that are per se unlawful acts.•“Model home” misrepresentations;•Product and material misrepresentations;

• False maintenance schedule, “well known brand,” etc.•Bait selling;•Representations regarding the identity of seller;•Gift offers;•Price and financing;•Performance;

• Unduly pressure buyer (deliver materials, mobilize)• Fail to start work as specified in the contract, notice of delay required

•Competitors;•Sales representations;•Fail to make sure the work is being performed under the appropriate building permits (contractor is not required to apply for and obtain them); •Guarantees or warranties; and•Demanding full and final payment prior to the issuance of a certificate of occupancy.

“The Writing Requirement”

N.J.A.C. 13:45A-16.2(a)(12) – specific writing requirements which must be included in all home improvement contracts for a purchase price of $500.00 or more.

Including, but not limited to:•Start and completion date•Legal name and business address of seller•Description of work to be done and identification of principal materials to be used

These are conditions precedent. Without them, the contract is void and unenforceable. Huffmaster v. Robinson, 221 N.J. Super. 315, 322 (Law. Div. 1987).

Defective Work and Poor Workmanship Do Not Automatically Equal Unlawful

Acts

• Defective work and poor workmanship do not automatically equal an unlawful act. See, D’Ercole Sales, Inc. v. Fruehauf Corp., 206 N.J. Super 11, 25 (App. Div. 1985).• Must undergo Cox analysis:

• Was a permit required?

• If so, and the contractor failed to perform the work under the appropriate permit(s):

• Would the permit have required an inspection of the work?

• Would the inspection have identified the work as defective?• Note: Building inspectors cannot comment on quality of work – only

if it meets the minimum requirements of the Uniform Construction Code.

• Would the work have to be remediated/repaired in order to pass inspections?

• If the answers to the above questions have been YES – then the defective work would be considered an unlawful act.

Summation of the “Unlawful Act”

• The employment of “any unconscionable trade practice, deception, fraud, false pretense, false promise, misrepresentation, or the knowing concealment, suppression, or omission of any material fact with the intent that the other rely upon such concealment, suppression or omission….” N.J.S.A. 56:8-2 (2010).

• A violation of a statutory or regulatory requirement that need not require intent or an "unconscionable commercial practice.” See, N.J.S.A. 56:8-2.1-2.31 (2010); N.J.S.A. 56:8-4 (2010); N.J.A.C. 13:45A-16.1 et seq. (2010).

Standing

In order for a Homeowner to bring an action under the Consumer Fraud Act against a Home Improvement Contractor:

The Homeowner must be able to assert a prima facie showing of “ascertainable loss.”

It is ascertainable loss that gives rise to a cause of action under the Consumer Fraud Act to the Homeowner – not the mere existence of a defective contract.

N.J.S.A. 56:8-19

Action, counterclaim by injured person; recovery of damages, costs.

Any person who suffers any ascertainable loss … as a result of the use or employment by another person of any method, act, or practice declared unlawful under this act or … may bring an action … in any court of competent

jurisdiction. In any action under this section the court shall, in addition to any other appropriate legal or

equitable relief, award threefold the damages sustained by any person in interest. In all actions under this section …

the court shall also award reasonable attorneys' fees, filing fees and reasonable costs of suit.

Discussion of Standing and the Private Right of Action

• As to the cause of action• Technical violation, i.e. defective contract• Substantive, i.e. deviation from specification

without prior written approval

• As to damages• Greatly affects the remedies available

• As to attorney's fees and costs of suit• When is the homeowner entitled to attorneys

fees?

When is the Homeowner Entitled to Attorney’s Fees and Costs of

Suit?

• Although it is a remedy – discussion here is important as the award is based on standing, not the ultimate success of a claim.

• Serious Conflict in Court Opinions.• Homeowner only needs to show an unlawful act.

• Cox v. Sears Roebuck & Co., 138 N.J. 2 (1994)

• Roberts v. Cowgill, 316 N.J. Super. 33, 45 (App. Div. 1998)

• Branigan v. Level on the Level, Inc., 326 N.J. Super. 24 (app Div. 1999)

• Homeowner must make a prima facia showing of ascertainable loss.• Weinberg v. Sprint Corp., 173 N.J. 233, 253 (2002).

Attorney’s Fees Without Showing Ascertainable Loss

• “The fundamental remedial purpose of the Act dictates that plaintiffs should be able to pursue consumer-fraud actions without experiencing financial hardship.” Cox v. Sears Roebuck & Co., 138 N.J. 2 (1994)

• “The Supreme Court has made it clear that the statute mandates an award of counsel fees and costs for any violation of the Act, even if that violation caused no harm to the consumer.” Branigan v. Level on the Level, Inc. 326 N.J. Super. 24 (App. Div. 1999)• “[L]owest conceivable level of violation of the Consumer Fraud

Act….” Id.• “We note, however, the error in the trial judge’s

conclusion that his determination not to award treble damages necessarily precluded an award of attorneys fees. The two remedies are clearly independent of each other.” Roberts v. Cowgill, 316 N.J. Super. 33, 45 (App. Div. 2008)

Prima Facia Showing of Ascertainable Loss Necessary to Recover Attorney’s

Fees and Costs of Suit

• Must be able to survive a Motion for Summary Judgment/Directed Verdict as to ascertainable loss to be awarded attorneys fees and costs of suit• Read sensibly, the statute allows a private cause

of action to proceed for all available remedies, including an injunction, whenever a consumer can plead a claim of ascertainable loss that can survive a motion for summary judgment. The legislative intent to permit a private cause of action under the Act would be frustrated if a private litigant, who succeeds in bringing such a claim to a jury, must gamble on whether he or she will prevail ultimately on proof of the loss in order to obtain attorneys' fees, when he or she otherwise proves unlawful conduct.(Weinberg v. Sprint Corp., 173 N.J. 233, 253 (2002))

Discussion of Attorney’s Fees and Costs of Suit

• Conservative interpretation

• Practice notes• Why risk it?• Methods to increase the likelihood that fees

will be awarded:• The well plead complaint as a litmus test

• Methods to decrease the likelihood that fees will be awarded:

• Specific questions as to damages incurred and from what – look for the nexus!

Consumer Fraud Act Remedies

• Three times damages - N.J.S.A. 56:8-19• Damages must = “Ascertainable Loss”

• Attorney’s fees and cost of suit - N.J.S.A. 56:8-19

• Refund (may be awarded) - N.J.S.A. 56:8-2.12

• Artistic Lawn & Landscape Co. v. Smith, 381 N.J. Super. 75 (App. Div. 2005). • Refund awarded – initial payment of $500.00.

• “The defendant is entitled to the refund regardless of whether he suffered ascertainable loss. There is no causal relationship needed to be eligible for a refund.” Id. at 89.

• What about ascertainable loss as the basis for a private right of action?

The Private Right of Action Differs Greatly from the Enforcement

Powers of the Attorney General

• Attorney General can bring an action under the Consumer Fraud Act against a Home Improvement Contractor for any violation of the Act and any regulation promulgated there under. N.J.S.A. 56:8-1 et seq.• Strict liability - “[T]he Attorney General need not prove

that a victim was damaged by the unlawful practice….” Cox v. Sears Roebuck & Co., 138 N.J. 2, 21 (1994).

• Penalties (N.J.S.A.56:8-3.1; 56:8-13)• Mandatory Refund (N.J.S.A. 56:8-2.11; 56:8-13)• Compared to refund in private action (N.J.S.A. 56:8-2.12)• “may be recovered” as an additional remedy

Use of the Consumer Fraud Act as a Defense Only

• When a Homeowner has not sustained ascertainable losses

• Defective contract and/or unsigned change orders• Void and unenforceable as a matter of law• “Contracts involving consumer fraud…are therefore

unenforceable by violators because:(1) They are void, being contrary to public policy as expressed in the Act; or

(2) They have not been consummated because the conditions precedent established by the Act have not been fulfilled; or

(3) They are illegal as to the violator of the Act.”

Huffmaster v. Robinson, 221 N.J. Super. 315, 322 (Law. Div. 1987) (internal citations omitted).

Ascertainable Loss

• What is it?

• What isn’t it?

• How do you prove it?

The Beginning of Consumer Fraud Act Analysis in Home Improvement

Projects

• Blake Constr. v. Pavlick, 236 N.J. Super. 73, (Law. Div. 1989).• Home Improvement Contract• Waiver of enforcement rights under contract

by failing to obtain approved written change orders. Followed Huffmaster

• No discussion of ascertainable loss

Clear Examples of Ascertainable Loss

Cox v. Sears Roebuck & Co., 138 N.J. 2 (1994)

• The Cox Analysis:• Working without permit?• Not ascertainable loss by itself• Need to show:• That a permit was necessary for work being performed

• That an inspection was necessary

• That contractor performed faulty work

• AND that the faulty work would have been identified by inspector and required correction

• The nexus between the unlawful act and the damages must be shown

Clear Examples of Ascertainable Loss Based on an Enumerated Unlawful Act

• Examples• Failure to assure that work was being

performed under appropriate permits• Deviation from work specified in contract• Unauthorized substitution of materials (No

Change Order)• Windows• Floor beams and structural elements • Unauthorized design change or work-around

Example 1The Contractor fails to perform contract

work and the homeowner did not expressly agree to any amendment to the contract.

The Elements

The Contract Required

• Contractor to obtain all necessary permits.

• Install 2x8 floor beam and 2x10 rafter

• Construct crawlspace under new addition and insulate with “R-30” insulation

• Furnish and install new furnace and baseboard heat

The Contractor:

• Failed to obtain necessary building permits• Plumbing, electrical, fire protection,

foundation and building permits were required.

• Installed slab floor in lieu of floor beams, installed 2x8 rafter

• No insulation installed (slab floor)

• Furnace installed does not comply with multiple codes, baseboard heat installed with copper pipes directly buried in concrete slab

• Footing depth does not meet minimum code requirement of 30 inches

Inspection would have revealed footing not excavated to proper depth.

Inspection would have revealed footing defect.

Inspection would have revealed deviation from plan – installation of floor slab in lieu of crawlspace.

Inspection would have revealed defect in roof construction and deviation from

plans.

Inspection would have revealed copper pipes improperly buried in cement slab.

Other Unlawful Acts

• Unconscionable commercial practice

• Deception

• Fraud

• Knowing omission, concealment of material facts

Example 2

• Fraud in the permitting process• Deliberate misidentification of work• Applying in the name of homeowner• Submitting plans prepared by contractor (not

architect) under single family residence exception

Forging the name of the homeowner on permit application

Contractor prepares and submits design drawings as if he were the

homeowner

Contractor prepares and submits design drawings as if he were the

homeowner

Contractor Deliberately Misidentifies Work on Design

Drawings Submitted to Building Department

Contractor Fails to Properly Identify Use of Construction

Proving Ascertainable Loss

ConstructionDefect

CABO Section CABO Requirement

IRC 2000 Code Section

IRC 2000 Requirement

Code Violation

Footing Depth 403.1Table 301.2a

Minimum depth of footing is

30”

R403.1.4 &Table R301.2(1)

Minimum depth of footing is

30”

Joe Contractor installed footings at 15” below grade in violation of both CABO and IRC 2000

Grading & Drainage

406.3.5 Grading shall provide min. downward slope of 1:12 for min. of 6’ from house

R401.3 Grading shall provide min. downward slope of 1:10 within 10’ from foundation

Joe Contractor did not install proper slope drainage as req’d by CABO and IRC2000 or alternative drains and/or swales as permitted by IRC2000

No footing provided at rear entry foyer

403.1 & Table 301.2a

All exterior walls shall be supported on continuous solid masonry or concrete footings…

R403.1.4 &Table R301.2(1)

All exterior walls shall be supported on continuous solid masonry or concrete footings…

Joe Contractor did not install footings under walls of rear entry foyer in violation of both CABO and IRC 2000

Improper roof drainage at several areas

801.3…all dwellings shall have a controlled method of water disposal from roofs that will collect and discharge all roof drainage to the ground surface at least 5’ from foundation wall or approved drainage system.

R801.3…all dwellings shall have a controlled method of water disposal from roofs that will collect and discharge all roof drainage to the ground surface at least 5’ from foundation wall or approved drainage system.

Joe Contractor did not provide a controlled method of water disposal from roofs that will collect and discharge all roof drainage to the ground surface in violation of both CABO and IRC 2000

Proving Ascertainable Loss

ConstructionDefect

CABO Section CABO Requirement

IRC 2000 Code Section

IRC 2000 Requirement

Code Violation

Excessive notching at roof rafter front soffit extension and at the ridge support

802.6 …Notching at the ends of the rafter or ceiling joists shall not exceed ¼ the depth of the member…

R802.7.1 …Notching at the ends of the rafter or ceiling joists shall not exceed ¼ the depth of the member…

Joe Contractor installed roof rafters that have saw cuts at notches that extend beyond the allowable ¼ the depth of the member in violation of both CABO and IRC 2000

Improper roof assembly, roof construction at “cricket”

901.2 The roof covering shall be capable of accommodating the loads indicated in Section 301 and provide a barrier against the weather to protect its supporting elements and the structure beneath.

R903.1…Roof assemblies shall be designed and installed in accordance with this code and the approved manufacturer’s installation instructions such that the roof assembly shall serve to protect the building or structure

Joe Contractor installed ill conceived roof design. Cricket, gutters & leaders do not drain properly or shed snow. Cricket has insufficient pitch. The roof system leaks water into the structure in violation of both CABO and IRC 2000

Questionable design and installation of baseboard heating system

1307.1 Installation of appliances shall conform to the installation instructions. The manufacturer’s operating instructions shall remain attached to the appliance.

M1307.1 Installation of appliances shall conform to the installation instructions. The manufacturer’s operating instructions shall remain attached to the appliance.

Baseboard heating elements have been altered by removing fins, heating is irregular and inconsistent, design criteria and specification required by both CABO and IRC 2000

Proving Ascertainable Loss

ConstructionDefect

CABO Section CABO Requirement

IRC 2000 Code Section

IRC 2000 Requirement

Code Violation

Roof rafter span length of 15’ for 2x8 lumber is excessive

Table 502.3.1cTable 802.4q

Using #3 grade Southern Pine Fb=720 psiE=1.2x106 psiD.L. = 7 psfL.L. = 20 psf@16” o.c. max. length of a 2x8 roof rafter = 13’-1”

Table 802.5.1(3) Using #3 grade Southern Pine D.L. = 10 psfL.L. = 20 psf@16”o.c.max. length of a 2x8 roof rafter = 12’-1”

Joe Contractor failed to provide 2x10 roof rafters as agreed in the contract and as required by both CABO and IRC 2000. The 2x8 roof rafters provided are not sufficient for the span length of 15’.

Proving Ascertainable Loss

Third Party Liability?

• Aronson v. Madara, 98 N.J. 92, (1984) – “[A] contractor has a duty to persons, other than the one with whom the contractor has made the contract, to carry out his undertaken work in a careful and prudent manner….” Extended the implied warranty of good workmanship to subsequent purchaser. (No discussion of the CFA)

• Perth Amboy Iron Works, Inc. v. American Home Assurance Co., 226 N.J. Super. 200 (App. Div. 1988) – “We therefore interpret the Consumer Fraud Act to encompass the the acts of remote suppliers, including suppliers of component parts, whose products are passed on to a buyer and whose representations are made to or intended to be conveyed to the buyer.” Involved a chain of misrepresentations.

• Chattin v. Cape May Greene, Inc., 216 N.J. Super. 618 (App. Div 1987) – “Plaintiffs’ argument that subsequent purchasers of homes should have been permitted to recover consumer fraud damages, even though they never received either the brochure or any oral representations from CMG concerning the windows, is clearly lacking in merit. There is no basis for finding a violation of the Consumer Fraud Act with respect to these purchasers because CMG made no representation to them. Showing of reliance on a misrepresentation required.

Third Party Liability?

• Marrone v. Greer & Polman Const., Inc., 405 N.J. Super. 288 (App. Div. 2009) – “[P]rivity is not a condition to recovery under the Consumer Fraud Act…. There is no provision that the claimant have a direct contractual relationship with the seller of the product or service” Id., quoting, Katz v. Schachter, 251 N.J. Super. 467, 474 (App. Div. 1991). However – Marrone makes it clear that there must be a causal connection between the misrepresentation/omission and the plaintiff’s decision to purchase the good or service (house).

• Dean v. Barrett Homes, Inc., 406 N.J. Super. 453 (App. Div. (2009), cert. granted, 200 N.J. 207 (2009) – CFA claims dismissed as there was “[no] nexus between plaintiffs’ purchase of the house and Sto’s conduct or lack thereof.”

Third Party Liability

• Matera v. M.G.C.C. group, Inc.,402 N.J. Super. 30 (Law. Div. 2007).

• “In order to establish a claim under N.J.S.A. 56:8-19, a plaintiff must prove three elements:• 1) the existence of an unlawful act under the

Consumer Fraud Act• 2) an ascertainable loss on the part of the

plaintiff, and• 3) a causal nexus between the unlawful

conduct and the ascertainable loss.”

Conclusion

• Poor workmanship does not equal consumer fraud on its own.

• Not all cases involving home improvements are Consumer Fraud Act cases – must be able to make a prima facia showing of ascertainable loss in order to have standing under the act.

• Must show a nexus between the unlawful act and the ascertainable losses.