On appeal from Superior Court, Chancery Division, Ocean County.
Matthews, Antell and Francis. The opinion of the court was delivered by Antell, J.A.D.
On July 15, 1982 plaintiffs husband and wife acquired from Harry Stoller, Murray Stoller and Burt Swersky the capital stock of Middlesex Baking Co., Inc. and Stoller-Carteret Baking Co., Inc. The terms of sale called for payment of $120,000 for the stock, $12,000 at closing and the balance of $108,000 to be paid under a promissory note. Plaintiffs also agreed to assume the obligations and liabilities of the sellers on a Small Business Administration-guaranteed loan of approximately $200,000. Their actual cash investment at the time of closing was only $4,000, the remaining $8,000 being supplied by defendant, an attorney-at-law who represented them in connection with the acquisition.*fn1 The businesses failed within two months and plaintiffs brought this action against defendant, alleging that their resulting losses were causally related to his professional negligence.
For reasons given in his detailed written opinion the Chancery Division judge found in plaintiffs' favor and adjudged defendant obligated to indemnify them for certain losses and liabilities caused by the business' collapse. The judge also found defendant to be a partner "in the enterprise" and ordered him to replace his $8,000 investment which he withdrew when its demise was imminent. Defendant appeals, denying professional negligence and asserting that any omissions for which he may have been responsible were causally unrelated to plaintiffs' anticipated losses.
Our understanding of the factual context is gathered from the findings of the trial judge, which we fully credit. Rova Farms Resort v. Investors Ins. Co., 65 N.J. 474, 484 (1974).
At the time of acquisition plaintiff Barry Lamb was a 23-year-old high school graduate with limited business experience as the operator of a small wholesale bagel business. He started negotiating with the Stollers early in 1977. In May of that year he brought a preliminary draft of a sales agreement to defendant and asked defendant to represent him in negotiating final terms of the purchase and in consummating the transaction. Defendant had previously worked for plaintiff, and plaintiff was aware of defendant's special skills in the fields of tax law and business accounting. The trial judge observed that plaintiffs "repeatedly emphasized in their testimony that they trusted Barbour and depended on him to advise them regarding the financial and legal matters of which they knew little."
Five further meetings followed, in the course of which plaintiff provided defendant with three financial statements, the most recent of which was six months old, and asked for defendant's help in reading them. Defendant "indicated that the statements showed an overall operating loss and unduly high amounts of accounts receivable." To this comment plaintiff replied that the sellers had told him that the companies also enjoyed substantial amounts of unreported income. Apparently, there was no rejoinder from defendant.
The trial judge grounded his finding of negligence on a wide range of shortcomings touching defendant's duty to furnish advice and guidance and to safeguard his client's legal position. As to his duty to advise, he concluded that defendant should have told plaintiffs of his doubts concerning the sufficiency of their judgment, skill and experience to operate businesses which involved annual gross revenues of over a million dollars and approximately 100 employees. The judge also found that when plaintiff told him of the unreported income defendant should have warned plaintiffs that the Stollers might have said this
just to make a failing business seem more attractive; he further found that defendant should have cautioned plaintiffs that the failure to report income could result in a liability to the Internal Revenue Service for back taxes and penalties. In addition, the judge found negligence in defendant's failure to suggest that plaintiffs acquire a more current financial statement, to recommend that an accountant examine the books of the company and to recommend an examination of the company's physical equipment.
With regard to defendant's obligation to furnish services purely legal in nature, the trial judge found that he had failed to obtain UCC and judgment searches, failed to check state and federal tax liabilities, and failed to verify customer lists and accounts payable. He also found that defendant neglected to secure in the contract a clause warranting the condition of the accounts receivable and accounts payable, a warranty as to the condition of the company's equipment, a specification of what the corporate assets would be on the day of closing, and a requirement for the sellers to remain on the premises for a transition period. There was also a finding that at the closing defendant "made no affirmative attempt to enlighten his clients as to the meaning of the documents."
According to the findings, plaintiffs took over a business with a severe cash flow problem, some equipment which was not operational and customer records which were kept "on cards which were often smudged or otherwise unuseful." The judge concluded that at the time of closing the failure of the businesses "appears to have been inevitable." But the only nexus which he found between defendant's omissions and plaintiff's losses lies in his conclusion that had defendant properly performed his duties plaintiffs "would have been able to make an informed decision as to whether they should buy the businesses." The underlying premise seems to be that, but for defendant's inadequacies, ...