On certification to the Superior Court, Appellate Division, whose opinion is reported at
For reversal and remandment -- Chief Justice Wilentz, and Justices Clifford, Handler, Pollock, O'Hern, Garibaldi and Stein. Opposed -- None. The opinion of the Court was delivered by Pollock, J.
[113 NJ Page 22] Plaintiff, John J. Pascale (Pascale), seeks to set aside a transfer of stock and real estate to his son David P. Pascale (David). Pascale contends that a confidential relationship existed between him and David and that the same attorney advised both of them in connection with the transfer. The issue is
whether the transfers are invalid because David exercised undue influence over Pascale.
In an unreported opinion, the trial court dismissed Pascale's complaint, finding that he fully understood the transfers and that they were untainted by either a confidential relationship or a conflict of interest. The Appellate Division reversed because it believed the transfers were the product of undue influence. 216 N.J. Super. 133 (1987). We granted certification, 108 N.J. 183 (1987), and now reverse the judgment of the Appellate Division.
Nearly fifty years ago, in 1939, Pascale founded a machine tool and die business, which was later incorporated under the name Quality Tool & Die Company Inc. (Quality). In 1952, plaintiff established a second, smaller machine tool company, Majoda Tool and Die Company (Majoda), which operated out of Quality's premises in Hoboken. By 1960, both businesses had become quite profitable.
In the 1960s, Pascale introduced his older son, John, Jr., into the businesses, and six years later, Pascale gave all the stock in Majoda to John, Jr. David began full-time employment with Quality in 1971. Sometime before 1972, John, Jr. left Majoda and assigned all of his stock to Pascale and David.
In March 1972, Pascale's wife instituted a divorce action, and the two sons chose sides: John, Jr. sided with his mother, and David with Pascale. Consequently, Pascale did not see John, Jr. again until their apparent reconciliation in 1978. In 1973, to minimize his net worth and thereby to reduce his wife's share in an equitable distribution of his assets, Pascale signed a stock certificate, which purported to transfer ownership of his Quality shares to David. The certificate, however, was backdated to 1968, four years before the institution of the divorce action.
Initially, the fraud worked. An accounting firm, which was appointed by the matrimonial court to investigate Pascale's
assets, reported on June 7, 1973, that Pascale was "essentially responsible" for the operations of Quality and Majoda, but that he had transferred his stock in both corporations to David on October 16, 1968. The matrimonial court approved the property settlement based on this false information. Although Pascale claims that the stock certificate and corporate books are lost, David produced at the trial of the within matter a photocopy of a signed copy of the backdated October 16, 1968, stock certificate.
Consistent with the certificate, David claimed in his deposition that Pascale transferred all the Quality stock to him in 1968. David denied that any transfer of stock from his father to him occurred between 1970 and 1976. When asked at trial who owned the Quality stock in 1976, however, David testified, "my father did." The foregoing facts led the trial court to find that Pascale signed the backdated certificate in 1973 as part of "a scheme to defraud [Pascale's] wife and the matrimonial court."
Following the transfer, Pascale and David continued in their respective roles at Quality. Until 1979, Pascale remained in control, with David managing accounts and performing other office work. From 1971 until late 1981, Pascale and David enjoyed a close personal relationship. Pascale lavished expensive gifts on David and his wife, including cars, real estate, a sable coat, jewelry, and large amounts of cash. David handled Pascale's personal financial affairs, such as check writing, personal bills, safe deposit boxes, and securities.
Late in 1975, however, the Internal Revenue Service asserted a tax deficiency claim against Pascale personally and also against Quality. On the advice of his personal and business accountant, J. Bennett Schwartz, Pascale retained a tax attorney, Bernard Berkowitz, who resolved the IRS matter in January 1979. In the interim, Pascale asked Berkowitz to prepare an estate plan for him.
Early in his representation on both matters, Berkowitz communicated exclusively with Pascale. Pascale, however, directed Berkowitz to "deal directly with David Pascale or Ben Schwartz, but primarily David." According to Berkowitz, Pascale instructed him to develop an estate plan that left "everything to David" while incurring as little tax liability as possible. David confirmed Berkowitz's testimony by acknowledging that he served as an agent for Pascale in dealing with Berkowitz.
As early as 1977, Berkowitz and his associate, Stephen C. Levitt, discussed with David and Schwartz an estate plan that would have left Pascale in control of Quality. For tax purposes, Berkowitz recommended that Pascale transfer to Quality land he owned in Hoboken and that Pascale convert his common stock in Quality into three classes: preferred stock, voting common stock, and nonvoting common stock. The then-existing value of Quality would be ascribed to the preferred stock, which Pascale would retain along with all the voting common stock. David would receive the nonvoting common stock to which all future growth would be attributed.
In May 1978, Berkowitz worked out the details of the recapitalization with David and Schwartz, who in turn informed Pascale of the plan. Although Pascale approved the recapitalization, the plan was never executed.
A year later, on May 9, 1979, Berkowitz, Levitt, and Schwartz met with David. At this meeting, while reading the 1973 accountant's report from the matrimonial action, Berkowitz first learned that Pascale apparently had transferred the Quality shares to David in 1968. It became apparent to Berkowitz that there was a conflict between David and Pascale about the ownership of the Quality stock. As Berkowitz testified, "David Pascale thought he owned the stock; John Pascale thought that he owned the stock." Because the recapitalization plan was premised on Pascale's ownership of the Quality stock, the confusion about stock ownership caused Berkowitz to abandon this plan.
Berkowitz also ascertained that no gift tax had been paid on the backdated transaction. Confronted with this information, Berkowitz devised an alternate plan to fulfill Pascale's intention of leaving, with a minimal tax impact, all of his business assets to David. The plan was for Pascale to give the Hoboken properties and the Quality stock to David, with David paying the gift taxes of $54,947. That proposal was consistent with the will prepared by a different attorney and executed by Pascale on December 10, 1975, in which Pascale left his entire estate to David. Berkowitz further believed that the gift to David would reduce the problems inherent in the fraudulent matrimonial scheme, which was evidenced by the backdated stock certificate.
The trial court found that Berkowitz discussed the alternate plan with David and Schwartz, and that each of them in turn discussed it with Pascale. Both David and Schwartz claimed that Pascale understood that by agreeing with this plan, he would be yielding control of Quality to David. Indeed, Schwartz testified that he spoke with Pascale on May 24, 1979, the day Pascale executed the alternate plan, and specifically admonished him that by executing the plan, "he was giving the company away, he could be thrown out in a week."
On that date, Berkowitz, David, and Pascale met at Pascale's office in Hoboken to execute the plan. According to Levitt, with the exception of several letters that his law firm had mailed to Pascale, this meeting was the first time since January 11, 1978, that the firm "had any contact or has any records that reflect any contact with John Pascale." At the meeting, Pascale signed various documents, including two stock certificates of Quality: one that described Pascale as the owner of 310 shares, and the other that described David as the owner of 310 shares. Pascale also signed an assignment transferring his 310 shares of Quality to David, a deed from Pascale and Quality conveying the Quality premises in Hoboken to David, and an affidavit of consideration.
The main dispute in this case is whether Pascale understood that these documents effected an outright transfer of the Quality stock and real estate to David. On this point, as on ...