[267 NJSuper Page 176] Pending before me are various motions by the defendant, Lampf, Lipkind, Prupis, Petigrow & Labue, P.A. (hereinafter called "Lampf-Lipkind") for dismissal, judgment notwithstanding the verdict (JNOV) and for a new trial pursuant to R. 4:6-2(a), R. 4:40-2(b), and R. 4:49-1 following a jury verdict in favor of the plaintiff for $449,600.00. Except for the motion to dismiss for lack of subject matter jurisdiction, which could require a factual determination by me, the other motions now pending require that I view the facts presented at trial in the light of the jury verdict. For the motion under R. 4:40-2(b) I must accept as true all evidence and all legitimate inferences that sustain the jury verdict. Dolson v. Anastasia, 55 N.J. 2, 258 A.2d 706 (1969). In this context my role "is quite a mechanical one. The trial court is not concerned with the worth, nature or extent (beyond a scintilla) of the evidence, but only with its existence, viewed most favorably to the party opposing the motion." Id. at 5-6, 258 A.2d 706. R. 4:49-1 sets forth a less arduous standard that requires me to decide after giving:
due regard to the opportunity of the jury to pass upon the credibility of the witnesses, whether it clearly and convincingly appears that there was a miscarriage of Justice under the law. R. 4:49-1
The question is whether a reasonable jury could have found liability in favor of the plaintiff Trust based upon the evidence. The following facts are cast in that light.
Plaintiff is the profit sharing trust for Marprowear Corporation. This trust shall be called the "Trust" while the corporate entity, the employer, shall be called "Marprowear." The Trust is a benefit plan and trust organized under 29 U.S.C.A. §§ 1001, et seq. (hereinafter called "ERISA"). Two trustees were the principal witnesses at trial along with their experts.
The defendant, Lampf-Lipkind, is a law firm practicing in West Orange, New Jersey, specializing in tax and pension benefit law. Marprowear first hired Lampf-Lipkind in the 1970s when the Trust had a disagreement with the Internal Revenue Service in connection with a complex real estate transaction. Because legal fees of an ERISA trust are tax deductible to the employer, Marprowear was the entity that actually hired Lampf-Lipkind.
For the past decade, if not longer, Lampf-Lipkind's legal representation extended not only to tax work involving the Trust, but also to more generalized legal services to Marprowear and its individual shareholders. The evidence disclosed no other employees of Marprowear, showed that Marprowear was a closely held corporation, and revealed that its shareholders, its employees and the beneficiaries of the Trust were essentially the same people or members of the same family. In addition, Lampf-Lipkind drafted complex buy-sell agreements for Marprowear and its principals as part of planning for the contingencies of death or disability.
In 1982 Lampf-Lipkind borrowed money from the Trust or Marprowear. The loan was substantial and the interest rate was high, reflecting the then current interest rate environment. This transaction was not alleged to be wrongful because at the time, the relevant disciplinary rule, DR 5-104(A), did not require disclosures of conflicts nor consents in writing.
Over time Lampf-Lipkind became, in effect, general counsel for Marprowear. They handled real estate matters for Marprowear, wills and trusts for its principals and family members, and, of course, all the plan amendments and other legal work related to the Trust. Because of the constant stream of changes in laws and regulations, plan amendments were required periodically. Lampf-Lipkind would advise the Trust about these plan amendments. Typically, because of the complex and arcane nature of legislative and regulatory requirements, Lampf-Lipkind would prepare the necessary papers and the trustees would execute them routinely and without question.
Sometime in 1985, a member of Lampf-Lipkind mentioned the law firm's involvement with Southeastern Insurance Group (hereinafter "SIG"). Lampf-Lipkind asked if Marprowear might be interested in lending money to SIG. No one followed-up on this suggestion. Later, however, in early 1986, Prupis, on behalf of Lampf-Lipkind,*fn1 approached the Trust about making an investment in SIG. Prupis explained that this would be an appropriate, safe and conservative investment. Like Marprowear, Prupis claimed that SIG would be run as a family business with the direct involvement of Prupis and others from Lampf-Lipkind. They could thus protect and watch over the Trust's investment. Prupis revealed that Lampf-Lipkind partners were investing their own money in SIG, thus proving their confidence in its success. Based upon these representations and without benefit of any independent counsel or other advice, the Trust invested some $449,600.00 in a complex package of stock, debentures and other securities that comprised two "units" of an investment in SIG.
While the Trust admits the delivery of a Confidential Private Placement Memorandum (the "PPM"), all of the trustees claim that they did not read it because they relied upon Lampf-Lipkind
for legal advice and they considered the PPM a "legal" document. Once, Prupis came to Marprowear's offices and explained some financial projections in the PPM to one or more trustees who were present, but never revealed the conflicts of interest nor gave the Trust notice that it should obtain independent counsel. There was no doubt that everyone knew that Lampf-Lipkind was involved with SIG and in that sense a "conflict" was known, but this "conflict" was used by Lampf-Lipkind as a selling point. More importantly, the potential for or actuality of differing and conflicting interests was never disclosed.
The PPM, while not read by the Trustees before their investment, was allowed in evidence. The PPM was critical in two respects. First, Lampf-Lipkind claimed that it contained the required disclosures under R.P.C. 1.8, was read by the trustees, and fulfilled both its ethical and legal duties. Second, the Trust claimed that the PPM showed that the eventual collapse was a foreseeable risk known to Lampf-Lipkind. The PPM revealed the following:
1. On Page 1, in bold print and all capitals, the PPM warned:
POTENTIAL INVESTORS SHOULD THOROUGHLY CONSIDER THIS OFFERING MEMORANDUM AND THEIR PERSONAL TAX, FINANCIAL AND OTHER CIRCUMSTANCES PRIOR TO PURCHASING UNITS. THE PURCHASE OF UNITS IS SUITABLE ONLY FOR INVESTORS OF SUBSTANTIAL FINANCIAL MEANS WHO HAVE NO NEED FOR LIQUIDITY OF THEIR INVESTMENT AND WHO UNDERSTAND AND CAN AFFORD THE HIGH FINANCIAL AND OTHER RISKS OF SUCH AN INVESTMENT INCLUDING THE RISK OF LOSING THEIR ENTIRE INVESTMENT.
2. Also on Page 1 and in bold capitals was the following warning:
INVESTORS SHOULD CONSULT THEIR OWN LEGAL COUNSEL, ACCOUNTANTS AND OTHER PROFESSIONAL ADVISORS AS TO LEGAL, TAX, INVESTMENT AND OTHER RELATED MATTERS CONCERNING AN INVESTMENT IN THE UNITS.
3. On Page 10, the PPM warned that only those who could bear the loss of their entire investment should purchase units.
4. On Pages 12 through 17, the PPM summarized sixteen risk factors and warned potential investors of the risk of losing their
entire investment. Among the risk factors identified were: a limited operating history; problems in obtaining reinsurance; high operating expenses; dependency on an outside sales force; risks of underwriting losses; risks of inadequate investment income; risks of government regulation; risks of concentration of business both geographically and by product line; risks that the units were overpriced and had no public market; and financial risks in general including the intention not to pay dividends.
5. At many places throughout the fifty-eight page (excluding exhibits) PPM, it was disclosed that Prupis and Lipkind were directors of SIG, that Prupis' brother was president of the company, that Prupis and others would be released from obligations if the offering were successful, that Lampf-Lipkind leased space to SIG, and that Lampf-Lipkind had been and would continue to be attorneys for SIG.
Lampf-Lipkind revealed neither these conflicts nor these risks to the Trust verbally or in writing. Had the Trust been so warned it would not have made the investment of $449,600.00.
A year or two later, SIG began having financial problems, and finally filed for bankruptcy. A series of meetings was held at which Prupis and others from Lampf-Lipkind assured the Trust and other investors that things were under control. By 1991 the "units" purchased by the Trust were conceded by Lampf-Lipkind to be worthless. There was no evidence submitted as to the specific cause or reason for the subsequent failure of SIG. At oral argument on this motion, counsel for the Trust admitted that he had submitted no such proof.
The expert testimony was in sharp contrast. Bennet Wasserman, Esq., the Trust's expert, claimed that Lampf-Lipkind's conduct was a clear violation of R.P.C. 1.8(a)*fn2 because Lampf-Lipkind
failed to advise the Trust in writing of both the conflict of interest and the need to get independent counsel. Moreover, there was no evidence of the Trust's consent to the conflict in writing. Lastly, Wasserman claimed that R.P.C. 1.8(b)*fn3 was violated because Lampf-Lipkind used its knowledge of the Trust's financial wealth as a basis for targeting the Trust as a potential investor. Wasserman did not render any opinion on proximate causation.
Edward Wacks, Esq., the expert for Lampf-Lipkind,*fn4 agreed that R.P.C. 1.8 governed but he opined that the warnings contained in the PPM were sufficient both as to form, i.e., that the notice be in writing, and as to content. Wasserman disagreed, claiming that the information mentioned only within a lengthy offering statement was not a meaningful disclosure; his understanding of R.P.C. 1.8 required a separate, understandable, written document. Moreover, Wasserman said that the statement "INVESTORS SHOULD CONSULT THEIR OWN LEGAL COUNSEL" was not sufficient to advise the Trust to consult independent legal counsel because from the Trust's perspective, Lampf-Lipkind was "their own legal counsel."
Wasserman's opinion is better supported by case law. In Matter of Smyzer, 108 N.J. 47, 527 A.2d 857 (1987), the Court disbarred an attorney who was approached by his clients for
investment advice and, in response, encouraged them to invest in businesses in which the lawyer had an interest. The Court said:
We have consistently emphasized that an attorney should approach such business arrangements with caution, and must carefully explain to his client the need for independent legal advice. Id. at 54, 527 A.2d 857.
When a lawyer has a personal stake in a business deal, he must see to it that his client understands that his objectivity and his ability to give his client his undivided loyalty may be affected . . . . Nor will a passing suggestion that the client consult a second attorney discharge the lawyer's duty when he and the client have differing interests. [citations omitted]. In view of the trust placed in an attorney by his clients and the attorney's often superior expertise in complicated financial matters, a lawyer must take every possible precaution in ensuring that his client is fully aware of the need for independent and objective advice. [108 N.J. at 54-55, 527 A.2d 857]
After the bankruptcy filing, the Trust was contacted and attended a meeting arranged by other investors and the law firm of Sills, Cummis, Zuckerman, Radin, Tischman, Epstein and Gross, P.A., hereafter called "Sills Cummis." At this meeting, Sills Cummis advised the Trust and other investors about a potential legal action against SIG, Lampf-Lipkind, accountants and others. The Trust was asked to join in for a fee of $2,500.00. It did so, but this was the last contact it had with the law firm until the case was completed. The federal lawsuit apparently alleged violations of securities laws on behalf of the Trust and twenty other plaintiffs. The trustees were not interviewed, did not provide facts to Sills, Cummis and were not informed nor aware of the progress of the federal lawsuit. The suit was later dismissed by Judge Lechner. Insurance Consultants of America v. Southeastern Insurance Group, et al., 746 F. Supp. 390 (D.N.J.1990).
In 1990, in an unrelated matter, Lampf-Lipkind sued Marprowear and the Trust for unpaid legal fees in the Special Civil Part. This lawsuit followed as a counterclaim in that suit. For procedural reasons unclear to me, a default judgment was entered in the legal fee action but this legal malpractice action went on, with the counter-claimant denominated as the plaintiff.
Subject Matter Jurisdiction
Lampf-Lipkind moves to dismiss alleging that this court lacks subject matter jurisdiction. It is axiomatic that such a motion is always timely as this is a defense that can never be waived. Gilbert v. Gladden, 87 N.J. 275, 432 A.2d 1351 (1981).
After the case was assigned to me for trial, this motion was made first orally and then with written support, in each instance without giving the Trust a fair opportunity to respond. I refused to decide this complex issue in that circumstance and advised the parties that I would deny these applications without prejudice but permit them to be raised after trial in the event of a verdict adverse to Lampf-Lipkind, pursuant to R. 4:6-3 which provides as follows:
Defenses (a) (e) and (f) in R. 4:6-2, whether made in an answer or by motion, shall be heard and determined before trial on application of any party, unless the court for good cause orders that the hearing and determination thereof be deferred until the trial.
It is clear that Justice would have better been served if these and the other applications had been made prior to trial. I cannot help but wonder whether or not the decision by Lampf-Lipkind to represent itself throughout this litigation, contributed to this decision and others which were clearly detrimental to its case. For example, Lampf-Lipkind did not even retain an expert on its defense until after the case was assigned out to me for trial. I had to delay trial to allow plaintiff's counsel the opportunity to depose this new expert.
In this motion, Lampf-Lipkind contends quite simply that because this lawsuit relates to an ERISA trust, only a federal court has jurisdiction. In its most extreme form, the literal language of 29 U.S.C.A. § 1132(a) narrowly defines who can bring a lawsuit under ERISA as follows:
(a) Persons empowered to bring a civil action
A civil action may be brought --
(1) by a participant or beneficiary --
(A) for the relief provided for in subsection (c) of this section, or
(B) to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to ...