New Jersey Superior Court Reports

ALL MODES TRANSPORT v. HECKSTEDEN, A-0361-05T5 (N.J.Super.
12-27-2006) ALL MODES TRANSPORT, INC. d/b/a AMS LOGISTICS,
Plaintiff-Respondent, v. WILLIAM G. HECKSTEDEN, DEBORAH A.
HECKSTEDEN a/k/a DEBORAH SIECZKOWSKI, and VENDOR MANAGEMENT INTEGRITY, Defendants-Appellants. No. A-0361-05T5.
Superior Court of New Jersey, Appellate Division. Argued
October 31, 2006. Decided December 27, 2006.

On appeal from Superior Court of New Jersey, Law Division,
Morris County, Docket No. L-314-02.

Before Judges SKILLMAN, LISA and GRALL.

Joseph M. Cerra argued the cause for appellants (Forman
Holt & Eliades, attorneys; Mr. Cerra, on the brief).

Charles R. Cohen argued the cause for respondent.

The opinion of the court was delivered by

SKILLMAN, P.J.A.D.

The trial court interrupted the cross-examination of the
primary defendant in this case to warn him that
continuation of his testimony could result in the court
referring the matter to the appropriate prosecuting
authority and suggested that defendants give further
consideration to settlement. Following receipt of this
warning, defendants agreed to settle the case for a
substantial amount of money. Shortly thereafter, defendants
moved to vacate the settlement on the ground that their
agreement had been coerced by the threat of criminal
prosecution. Although the trial court expressed the opinion
that its warning had enabled plaintiff to extract a
settlement that exceeded what could have been obtained from
a jury verdict, the court nevertheless ruled that
defendants’ agreement to the settlement had not been
coerced. We conclude that the trial court erred in
interrupting the primary defendant’s cross-examination to
warn him that continuation of his testimony could result in
the court referring the matter to the appropriate
prosecuting authority. We also conclude that the trial
court took too restrictive a view of the issue of
voluntariness in denying defendants’ motion to vacate the
settlement. Therefore, we reverse the denial and remand to
the trial court.

Defendant William Hecksteden was employed by plaintiff All
Modes Transport as its chief operating officer under an
employment contract that required him to devote his entire
working time and best efforts to the performance of the
duties of his employment. After Hecksteden resigned, All
Modes brought this action alleging that Hecksteden during
the course of his employment by All Modes had secretly
formed and operated defendant Vendor Management Integrity
(VMI), which conducted a business that competed with All
Modes. All Modes asserted claims against Hecksteden for
breach of contract, fraud, breach of fiduciary duty and
conspiracy. All Modes’ complaint also named VMI and
Hecksteden’s wife Deborah, who allegedly participated with
him in operating VMI, as defendants.

At a settlement conference, All Modes’ counsel advised the
court and Hecksteden’s counsel that he planned to
cross-examine Hecksteden with documentary evidence that
would show Hecksteden had claimed deductions on his tax
returns for VMI business expenses that were identical to
expenses for which he had received reimbursement from All
Modes. All Modes’ counsel showed Hecksteden’s counsel the
documents he planned to use in this cross-examination and
told him “his client was taking an enormous risk” in
failing to settle. However, no settlement was reached
before trial.

After All Modes completed its case, Hecksteden testified
for the defense. On cross-examination, All Modes’ counsel
began questioning Hecksteden about the expense vouchers he
had submitted to All Modes and the expenses he had claimed
as deductions on his tax returns in connection with VMI’s
business operations, to show that All Modes had reimbursed
Hecksteden for the same expenses.

Shortly after the beginning of this cross-examination, the
trial court declared a recess and asked to see counsel in
chambers. In a letter submitted to this court pursuant to
Rule 2:5-1(b), the trial court explained the reason for
declaring this recess and what occurred in chambers:

At the beginning of the cross-examination of defendant
William Hecksteden, the court noticed a stack of papers
approximately 12 to 20 inches high on plaintiff’s counsel
table. In using the first one or two of those documents
on cross-examination of defendant William Hecksteden,
plaintiff’s counsel made it apparent that Mr. Hecksteden
had received reimbursement for approximately $1,800 worth
of expenses from his employer and had deducted those same
expenses on the tax return of his “side company” [VMI] as
business expenses. Sensing that the remaining foot of
documents related to further and similar transgressions,
the court asked counsel to confer in chambers and gave the
jury a break.

In chambers, the court told counsel that it did not
consider the testimony already rendered as substantial
enough to warrant a Sheridan[fn1] letter. The court did
indicate, however, that counsel should confer and that if
the remaining documents and further testimony were to
reveal similar, and more material transgressions, counsel
should be aware that the court was going to write the
Sheridan letter: if defendants’ counsel was assured that
further testimony would not so reveal, he could proceed
on that basis. If, however, the former scenario was to be
the operative scenario, the court suggested that counsel
attempt to settle the matter, indicating to them that
there was not a single doubt in the court’s mind that a
Sheridan letter would follow if material violations of
federal or state tax law were testified to by Mr.
Hecksteden. Plaintiff’s counsel had in his briefcase a
copy of the Sheridan case, which he gave to defense
counsel.

The court told counsel to discuss the case for ten
minutes and advise as to where they were heading. Counsel
had been out of the courtroom for approximately 45
minutes, according to the bench report, when they informed
chambers that they had settled the matter and they wished
to put it on the record.

The settlement agreed to during the recess required
Hecksteden to pay All Modes $600,000.

The trial court asked Hecksteden the standard set of
questions regarding the voluntariness of his agreement to
the settlement. The agreement was subsequently memorialized
by a written stipulation of settlement signed by both
parties.

Several weeks after execution of this stipulation,
defendants filed a motion to vacate the settlement. In
support of this motion, Hecksteden submitted a
certification alleging that his counsel had reported during
the in-chambers settlement conference that “the Judge was
concerned that if I proceeded with the trial she would be
obligated to contact the federal authorities to investigate
me,” and that it was his “understanding any such
investigation could have criminal implications.” Hecksteden
also stated:

My attorney explained the Judge stated that “If I said
three more sentences she would be obligated to contact the
federal authorities[.]” I was then placed in an untenable
position where I could not explain how my accountant
prepared my return and also could not defend myself
without the Judge contacting the federal authorities.

Hecksteden further alleged that the court only granted a
“ten minute recess to discuss possible settlement,” and
that he was not able to contact his accountant or a
criminal attorney during this brief period to discuss the
consequences of the court referring the matter for a tax
fraud investigation. Hecksteden did speak to a tax attorney
during the recess, who advised him that “if there were
irregularities . . . there certainly could be civil and
criminal implications.” Based on these circumstances,
Hecksteden claimed that he had agreed to the settlement
“under extreme duress.”

After Hecksteden failed to pay the $600,000 within the time
provided under the stipulation, All Modes filed a
cross-motion to enforce the settlement.

At oral argument on the cross-motions, the trial court
expressed the opinion that plaintiff “really had the
defendants over a barrel[,]” after the court advised
counsel that the continuation of Hecksteden’s
cross-examination might require the court to report evidence
of income tax fraud to the appropriate authorities, and as
a result, plaintiffs were able to “extract[] . . . a
settlement that they never would have been able to get by
means of a jury verdict.” Nevertheless, the trial court
concluded that defendants could not vacate the settlement on
the ground that Hecksteden was coerced into the settlement
by the threat of the court referring the matter for a tax
fraud investigation. The court indicated that it would
vacate the settlement only if Hecksteden could show that he
did not enter into the settlement “knowingly” because he
had misconceived the risk that he could be prosecuted for
tax fraud.

The trial court explained the rationale for this ruling in
the letter submitted to this court pursuant to Rule
2:5-1(b):

[T]he court determined to give the defendants an
opportunity to demonstrate that they had not entered into
the settlement knowing and voluntarily because they had
not had sufficient time to contact their tax accountant,
who could have confirmed that they were without fault, an
allegation made by the defendants on the motion.

. . . [I]n order for a contact with their tax accountant
to have made any difference, the tax accountant would have
had to certify that any expenses that had been reimbursed
by the employer and deducted as expenses for the “side
company” [VMI] were discounted off of the “side company”
tax return in a subsequent IRS audit, because they had
been listed erroneously. Were that to have been the case,
defendants would not have committed tax fraud because
reimbursed expenses would not, in the end, have been
deducted knowingly.

Based on this view, the court scheduled a hearing to
determine whether Hecksteden’s agreement to enter into the
settlement was “unknowing” and, therefore, “involuntary.”

Hecksteden and his wife Deborah testified at this hearing.
However, they were unable to present testimony by their tax
accountant to support Hecksteden’s claim that he had not
committed tax fraud. The trial court concluded that in the
absence of such testimony, defendants were not entitled to
an order vacating the settlement:

[T]he end result was that, had a new trial been granted,
defendant Hecksteden’s cross-examination would inevitably
have revealed under oath the same tax problem that
prompted the recess of the original trial. There was thus
nothing that the tax accountant knew that Mr. Hecksteden
did not know; and the settlement was entered into
knowingly and voluntarily.

After the denial of defendants’ motion to vacate the
settlement, All Modes filed a motion for an award of the
attorney’s fees and costs that it had incurred in opposing
the motion. The trial court concluded that “there was no
reason in law or equity for [defendants’] pursuit of the
motion to vacate the settlement[.]” Accordingly, the court
awarded All Modes $78,500 for the attorney’s fees and costs
it had incurred in opposing the motion.

On appeal, defendants argue that the trial court erred in
denying their motion to vacate the settlement. Defendants
also argue that even if Hecksteden knowingly and
voluntarily consented to the settlement, it is not binding
upon his wife Deborah because she did not consent and
Hecksteden did not have authority to agree to the settlement
on her behalf. In addition, defendants argue that the court
erred in awarding All Modes attorney’s fees and costs.

We conclude that the trial court erred in interrupting
Hecksteden’s cross-examination to warn him, through
counsel, that the court would be compelled to refer the
matter to the appropriate prosecuting authorities if the
continuation of his cross-examination revealed substantial
evidence of tax fraud and suggesting that the parties give
further consideration to settlement. We also conclude that
the court took too restrictive a view of the issue of
voluntariness in ruling that defendants would be entitled
to vacate the settlement only if they could show Hecksteden
did not understand the facts relevant to his exposure to
prosecution for tax fraud. Therefore, we reverse the denial
of defendants’ motion to vacate the settlement and remand
to the trial court for reconsideration of the issue of
voluntariness. This disposition makes it unnecessary to
consider whether Hecksteden’s consent to the settlement was
binding upon his wife. We reverse the award of the
attorney’s fees and costs All Modes incurred in opposing
defendants’ motion.

It is the public policy of this State to encourage the
settlement of litigation. Ziegelheim v. Apollo, 128 N.J.
250, 263 (1992). Moreover, “[c]ourts play an important role
in effecting settlement.” Peskin v. Peskin, 271 N.J. Super.
261, 275 (App.Div.), certif. denied, 137 N.J. 165 (1994).
“However, that role must always be exercised appropriately
and with full recognition that the court must remain fair
and impartial[.]” Ibid. Consequently, “courts should never
work to coerce or compel a litigant to make a settlement.”
Ibid. In particular, “[c]ourts should not use the threat of
sanctions to force the settlement of a case.” Id. at 276.
And “[i]f a settlement agreement is achieved through
coercion, . . . undue pressure, or unseemly conduct,” a
court may set it aside. Ibid.

The record does not indicate that the trial court’s purpose
in interrupting Hecksteden’s cross-examination to warn him
that if his testimony revealed substantial evidence of tax
fraud, the court would refer the matter to the appropriate
prosecuting authorities, was to coerce him to settle the
case. Instead, the court apparently conceived that it had
an obligation to warn Hecksteden of the possible penal
consequences of his anticipated testimony. However, even if
the court’s purpose in issuing this warning was to protect
Hecksteden from self-incrimination, the determination
whether the settlement was coerced does not turn on the
court’s purpose in issuing the warning but rather its
effect on defendants’ decision to enter into the
settlement. See id. at 278.

Furthermore, the trial court’s apparent view that it had an
obligation to warn Hecksteden that continuation of his
cross-examination could result in him incriminating himself
was mistaken. A trial court has no obligation to warn even
a potential witness who is not represented by counsel that
his or her testimony may be self-incriminating. See State
v. Feaster, 184 N.J. 235, 250-52 (2005); State v. Jamison,
64 N.J. 363, 374-77 (1974); State v. Vassos, 237 N.J. Super.
585, 588-94 (App.Div. 1990). Instead, the proper judicial
course “ordinarily will be to leave the matter of suspicion
of criminality attendant upon the actions of the
prospective witness . . . for such attention at the
conclusion of the case as [may be] warranted.” Feaster,
supra, 184 N.J. at 252 (quoting Jamison, supra, 64 N.J. at
376).

In a criminal case, the court generally may assume that the
prosecutor will undertake the responsibility of determining
whether it is appropriate to initiate criminal proceedings
against a witness. See ibid. In a civil case, however, the
prosecutor is not a participant in the trial, and
therefore, the trial court must undertake the
responsibility of determining whether a witness’s testimony
should be referred to the appropriate prosecuting
authority.

It is even clearer in this case than in a case involving a
non-party witness who is not represented by counsel that
the trial court had no obligation to interrupt Hecksteden’s
cross-examination to warn him that his testimony could be
self-incriminating. Hecksteden was represented by counsel.
It was the responsibility of Hecksteden’s counsel, not the
trial court, to advise Hecksteden concerning his legal
rights and potential liabilities, including the possibility
his testimony could be self-incriminating and that the
court or another party would refer that testimony to the
attention of the Internal Revenue Service or the United
States Attorney. In fact, as the trial court was aware,
Hecksteden’s counsel had discussed the risk of such a
referral with him before the trial began.

The trial court’s error in interrupting Hecksteden’s
cross-examination to warn him that it could refer any
self-incriminating testimony to the appropriate prosecuting
authorities was compounded by the juxtaposition of this
warning with the suggestion that the parties give further
consideration to settlement. Whatever the court’s purpose
may have been in giving this warning, the court’s statement
that Hecksteden’s testimony up to that point had not been
“substantial enough” to warrant a criminal referral but
that the court would make such a referral if his “further
testimony were to reveal similar, and more material
transgressions,” had to have exerted substantial pressure
upon Hecksteden to settle the case in order to avoid
criminal prosecution.

Rule of Professional Conduct 3.4(g) provides that “[a]
lawyer shall not present, participate in presenting, or
threaten to present criminal charges to obtain an improper
advantage in a civil matter.” Therefore, if All Modes’
counsel had told defendants’ counsel that he would refer
Hecksteden’s trial testimony to the appropriate prosecuting
authority unless defendants acceded to All Modes’
settlement demand, such a threat would have violated this
Rule. Although the trial court’s warning to Hecksteden did
not violate any ethical rule, it gave All Modes the same
opportunity “to obtain an improper advantage in a civil
matter” from a “threat[] to present criminal charges” that
it would have obtained if its own attorney had made the
threat. In fact, such a threat may be even more coercive
when the trial court is the source.[fn2]

Although the trial court indicated that its warning to
Hecksteden enabled All Modes to extract “a settlement that
[it] never would have been able to get by means of a jury
verdict[,]” the court concluded that this circumstance was
not a sufficient ground for setting aside the settlement.
Consequently, even though the court ordered a hearing on
defendants’ motion to vacate the settlement, it indicated
that the only issue on which evidence could be presented
was whether Hecksteden’s tax accountant would have been
able, if he had been available at the time of the
settlement, to assure Hecksteden that the deductions on his
tax returns were proper and therefore he would not be
exposed to prosecution for tax fraud if the trial
continued. In that event, in the court’s view, Hecksteden’s
agreement to the settlement would not have been “knowing.”

In thus limiting the evidence that could be presented in
support of defendants’ motion, the trial court took too
restrictive a view of the issue of voluntariness. The issue
before the court was not whether Hecksteden was guilty of
or faced a substantial risk of prosecution for tax fraud.
Instead, the issue should have been whether Hecksteden
entered into the settlement agreement under duress because
he feared that a continuation of the trial would result in
the trial court referring his testimony to the appropriate
prosecuting authority. The court’s apparent view that
Hecksteden committed tax fraud did not provide a basis for
rejecting his claim that his consent to the settlement was
coerced. To the contrary, it is reasonable to conclude that
the court’s warning to Hecksteden would have been even more
coercive if Hecksteden knew he was guilty of tax fraud. See
Restatement (Second) of Contracts § 176 cmt. c
(1981) (noting that “[t]he guilt or innocence of the person
whose prosecution is threatened is immaterial in
determining whether the threat is improper, although it may
be easier to show that the threat actually induced assent
in the case of guilt”). Therefore, the case must be
remanded to the trial court to determine, based on a
complete evidentiary record, whether defendants’ consent to
the settlement was coerced by the court’s warning that
continuation of Hecksteden’s cross-examination could result
in a referral to the appropriate prosecuting authority.

Because we reverse the order denying defendants’ motion to
vacate the settlement agreement, we also reverse the order
awarding All Modes the attorney’s fees and costs it
incurred in opposing the motion.[fn3]

Accordingly, we reverse the orders denying defendants’
motion to vacate the settlement and awarding All Modes
counsel fees and costs and remand to the trial court for
further proceedings in conformity with this opinion.

[fn1] Sheridan v. Sheridan, 247 N.J. Super. 552, 563-66
(Ch.Div. 1990) (holding that judges have duty to report
intentional misrepresentation of income to the appropriate
authorities).

[fn2] We have no occasion in deciding this appeal to
consider the circumstances under which a trial court should
refer possible criminality revealed by trial testimony to
the prosecutor. We only hold that a court has no obligation
to interrupt a party’s testimony to issue a warning that it
may be self-incriminating and that a court should not
inform a party that his or her testimony may be referred to
the prosecutor if the case is not settled. We note,
however, that advisory opinions issued by judicial ethics
committees in other jurisdictions indicate that the
determination whether to refer incriminating testimony to
the prosecutor is committed to the trial court’s sound
discretion, which should be exercised in light of the
nature of the alleged crime, the quality of the evidence
and other relevant circumstances. See, e.g., Arizona
Judicial Ethics Comm., Op. 15 (1992); Maryland Judicial
Ethics Comm., Advisory Op. 07 (2004); New York Advisory
Comm. on Judicial Ethics, Joint Op. 85, 103 (1988); see
generally, Cynthia Gray, A Judge’s Obligation to Report
Criminal Activity, 18 No. 3 Jud. Conduct Rep. 3 (1996).
Pertinent to the issue presented by this appeal, the New
York Advisory Committee on Judicial Ethics cautioned that a
court’s authority to report evidence of criminal conduct to
the prosecutor should not be exercised in a manner that
would “encourage the threat of possible criminal
proceedings as a means of pressure, for settlement purposes
or otherwise, by one litigant against another.” New York
Advisory Comm. on Judicial Ethics, Joint Op. 85, 103 (1988).

[fn3] We question whether N.J.S.A. 2A:15-59.1(a)(1) would
have provided authority for an award of counsel fees and
costs even if defendants’ motion to vacate the settlement
had been frivolous. See Lewis v. Lewis, 132 N.J. 541, 545
(1993).