JED GOLDFARB VS. DAVID SOLIMINE (L-3236-14, ESSEX COUNTY AND STATEWIDE) ( 2019 )

NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-3740-16T2
JED GOLDFARB,
Plaintiff-Appellant/
Cross-Respondent,
v.
DAVID SOLIMINE,
Defendant-Respondent/
Cross-Appellant.
_____________________________
Argued December 5, 2018 – Decided June 26, 2019
Before Judges Koblitz, Ostrer and Mayer.
On appeal from the Superior Court of New Jersey,
Law Division, Essex County, Docket No. L-3236-14.
Andrew M. Moskowitz argued the cause for
appellant/cross-respondent (Javerbaum Wurgaft Hicks
Kahn Wikstrom & Sinins, PC, attorneys; Andrew M.
Moskowitz, of counsel and on the briefs).
Carmine A. Iannaccone argued the cause for
respondent/cross-appellant (Epstein Becker & Green,
PC, attorneys; Carmine A. Iannaccone, of counsel and
on the brief; Michael D. Thompson, on the brief).
The opinion of the court was delivered by
OSTRER, J.A.D.
This appeal arises out of defendant's broken promise to hire plaintiff to
manage a portion of defendant's assets and those of his brother and father.
Defendant and plaintiff agreed that plaintiff would receive a salary plus a
percentage of investment gains. In reliance on that promise, but before
receiving a confirming writing, plaintiff quit his job with an investment firm.
Then, defendant reneged. After several months, plaintiff found another job.
For the first year at his new employment, he earned less than the $250,000
annual base salary at the promised job, and he continued to earn less than the
$400,000 average yearly compensation he alleged he earned at his prior job.
Proceeding solely on a theory of promissory estoppel, plaintiff sought
reliance damages consisting of the difference between what he would have
earned had he not quit his job, and what he ultimately earned after securing
substitute employment. He appeals from the judgment, after a jury trial, of
$237,000 minus applicable taxes. Plaintiff contends the trial court (1)
improperly barred his damages expert, who opined on what plaintiff would
have earned had he not quit his job; and (2) erred in limiting his damages to
the difference between the promised $250,000 base salary and his actual
earnings for seventeen months (after which they exceeded $250,000).
Defendant cross-appeals, contending that plaintiff's claim was legally
and equitably barred by regulations under the New Jersey Securities Law that
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2
require a written contract to provide services as an investment adviser;
Financial Industry Regulatory Authority (FINRA) rules limiting registered
persons from providing services outside their current employment with a
member firm; and the unclean hands doctrine.
Before reaching these issues, we address plaintiff's argument that the
trial judge should have recused herself upon plaintiff's pre-trial motion.
Plaintiff moved for the judge's recusal after learning that a defense attorney, in
an ex parte communication, sought the judge's assignment to the case, and the
judge responded by specifically requesting the assignment from the presiding
judge. We conclude this "judge-shopping" created an appearance of
impropriety. On that basis, we vacate the trial judge's challenged rulings, but
affirm the jury finding of liability. We decide de novo or as a matter of
original jurisdiction that plaintiff was entitled to present evidence of his
reliance damages; his expert should have been permitted to testify; and his
claims were not barred by law or equity. We remand for a new trial on
damages before a different judge. We turn first to the recusal motion.
I.
A.
The judge disclosed the ex parte communication in chambers, and
confirmed it on the record. In summary, one of the judge's former law clerks,
A-3740-16T2
3
who was an associate at the defense firm, contacted the judge by text to inquire
if she was available to preside over the trial. The judge apparently had no
prior connection to the case, which involved significant pre-trial motion
practice. The former clerk identified the senior attorney at her firm who would
try the case. The judge understood that the attorney liked to appear before her.
The judge then spoke to the presiding judge and, relying on her seniority,
secured assignment of the case.1
When plaintiff's counsel learned that the judge's assignment of the case
resulted from an ex parte contact with defense counsel, he sought the judge's
recusal. At the outset of the colloquy, the judge reproached plaintiff's counsel
for relying on statements made in chambers:
[PLAINTIFF'S COUNSEL]: Judge, you stated in
chambers that you had received a text message from
[defense counsel's] firm?
THE COURT: No . . . I did not say that. Let me be
very clear about what I said, and let us be very clear
about the following; neither one of you will be in my
chambers for the rest of this trial. I am appalled that
what had been the bedrock of practice, that what a
judge tells you in chambers stays in chambers seems
no longer to be the rule. So let me be very clear about
what I said and I didn't say.
1
Both the trial judge and presiding judge are now retired. There is no
indication in the record that the presiding judge knew that a former clerk's ex
parte communication prompted the judge's request.
A-3740-16T2
4
The judge then summarized what she had disclosed in chambers about
the assignment request:
[Defense counsel's] firm had hired a prior law clerk of
mine . . . I think that was five years ago . . . I told
both counsel that [she] had texted me this morning
saying that [defense counsel] was waiting around for a
judge and I said well I'll be in and I'd love to take the
case.
In the course of the on-the-record colloquy, the judge later added that she
requested the assignment from the presiding judge:
I'll go further. I stopped in this morning and said,
"You got a case around here, because I'm a senior
Judge, I don't like doing car accident cases." So in
some ways I get my pick. . . . Because that's what 25
years on the bench will get you.
Once informed of the trial attorney's name, the judge said she understood he
preferred to try the case before her. "I got a text from a former law clerk that
said [defense counsel] has a case, are you there? Yeah, he likes appearing
before me."
Plaintiff's counsel argued that the ex parte contact amounted to "judge
shopping, because they like you and they want you to hear the case."
The judge rejected the argument, stating that it was common practice for
attorneys to inquire about a judge's availability to take their case.
Counsel . . . do you have any idea how many lawyers
stop in my chambers on a weekly basis and say, Judge
where you at, are you open? No, not today. Well
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5
when will you be open? Probably by Wednesday if
you can get [the presiding judge] to wait that long.
The judge added that her former law clerks "do it all the time . . . hey Judge,
the partner's coming, are you open? Yeah, I'm open." The judge concluded,
"There is nothing untoward about a judge telling a lawyer, I'm going to be
open . . . bring your case my way." The judge stated that she believed
attorneys sought her assignment because of her experience and her reputation,
and she challenged plaintiff's counsel to cite instances of bias or favoritism.
At trial, plaintiff contended that defendant promised him a base salary of
$250,000 to $275,000, plus a fifteen- to twenty-percent share of gains
generated on a portfolio of $75-100 million. Mid-trial, the judge barred
plaintiff's damages expert. The judge also limited plaintiff's form of damages.
As a result, plaintiff was prevented from claiming damages equal to the
difference between what he would have earned had he not quit his job in
reliance on defendant's promise, and his actual earnings after defendant
reneged.2 The court utilized the low end of the base salary for its instruction
on damages.
2
Plaintiff was also barred from any damages related to defendant's investment
gains based on the advice plaintiff gave him before he left his prior employer.
Plaintiff does not contest that ruling. Also, he dismissed his claims for
quantum meruit, based on defendant's subsequent investment gains, and for
breach of contract.
A-3740-16T2
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The jury found that defendant made a sufficiently clear and definite
promise of employment, such that a reasonable person would rely on it;
defendant expected plaintiff to rely on the promise; and plaintiff quit his job in
reliance on the promise of employment. It awarded damages based on the
difference between his actual earnings and the base $250,000 salary defendant
promised.
On appeal, plaintiff contends the court erred in denying his recusal
motion. Plaintiff does not expressly ask us to reverse the judgment on the
basis of this error, but he asks us to consider it in reviewing the court's
challenged rulings on expert testimony and damages. In his reply brief,
plaintiff further contends that the court's actions reflected actual partiality
toward defendant. Defendant responds that the judge did not err in denying
the recusal motion, and that the former law clerk's ex parte contact was a
permissible inquiry about scheduling.
B.
In addressing the recusal issue, we are guided by several fundamental
principles. Generally, recusal motions are "entrusted to the sound discretion of
the judge and are subject to review for abuse of discretion." State v. McCabe,
201 N.J. 34, 45 (2010). However, we review de novo whether the judge
applied the proper legal standard. Ibid.A-3740-16T2
7
A judge must act in a way that "promotes public confidence in the
independence, integrity and impartiality of the judiciary, and shall avoid
impropriety and the appearance of impropriety." Code of Judicial Conduct
Rule 2.1; see also In re Reddin, 221 N.J. 221, 227 (2015) (noting "the 'bedrock
principle' that a judge should uphold the integrity and independence of the
Judiciary" (quoting DeNike v. Cupo, 196 N.J. 502, 514 (2008))); In re
Advisory Letter No. 7-11 of Supreme Court Advisory Comm. on Extrajudicial
Activities, 213 N.J. 63, 75 (2013) (stating "[t]he purpose of our judicial
disqualification provisions 'is to maintain public confidence in the integrity of
the judicial process, which in turn depends on a belief in the impersonality of
judicial decision making'" (quoting United States v. Nobel, 696 F.2d 231, 235
(3d Cir. 1982))).
"[A]n appearance of impropriety is created when a reasonable, fully
informed person observing the judge's conduct would have doubts about the
judge's impartiality." Code of Judicial Conduct, cmt. 3 on Rule 2.1 (2016);
DeNike, 196 N.J. at 517 (enunciating the standard). 3 Judges must step aside
from "proceedings in which their impartiality or the appearance of their
3
This standard applies to a judge's judicial conduct. "To assess whether a
judge's personal behavior creates an appearance of impropriety" the standard
is: "Would an individual who observes the judge's personal conduct have a
reasonable basis to doubt the judge's integrity and impartiality?" In re Reddin,
221 N.J. at 233.
A-3740-16T2
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impartiality might reasonably be questioned." Code of Judicial Conduct Rule
3.17(B). A judge must also do so if "there is any other reason which might
preclude a fair and unbiased hearing and judgment, or which might reasonably
lead counsel or the parties to believe so." R. 1:12-1(g).
A movant need not show actual prejudice; "potential bias" will suffice.
State v. Marshall, 148 N.J. 89, 276 (1997) (quoting State v. Flowers, 109 N.J.
Super. 309, 312 (App. Div. 1970)); see also Panitch v. Panitch, 339 N.J. Super.
63, 67 (App. Div. 2001). "In other words, judges must avoid acting in a biased
way or in a manner that may be perceived as partial." DeNike, 196 N.J. at
514.
In particular, a judge may not "initiate or consider ex parte or other
communications concerning a pending or impending proceeding." Code of
Judicial Conduct Rule. 3.8. However, "[i]n general . . . discussions regarding
scheduling . . . are not considered to constitute ex parte communications in
violation of [the] rule." Code of Judicial Conduct, cmt. 4 on Rule 3.8.
Judges may not "err on the side of caution and recuse themselves unless
there is a true basis that requires disqualification." Johnson v. Johnson, 204
N.J. 529, 551 (2010). A judge's duty to sit where appropriate is as strong as
the duty to disqualify oneself where sitting is inappropriate. Ibid.; Hundred E.
Credit Corp. v. Eric Schuster Corp., 212 N.J. Super. 350, 358 (App. Div. 1986)
A-3740-16T2
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("It is not only unnecessary for a judge to withdraw from a case upon a mere
suggestion that he is disqualified: it is improper for him to do so unless the
alleged cause of recusal is known by him to exist or is shown to be true in
fact.").
Judge-shopping – an attorney's attempt to have a particular judge try his
or her case – may undermine public confidence in the impartial administration
of justice. See United States v. Phillips, 59 F. Supp. 2d 1178, 1180 (D. Utah
1999) (stating that a random case assignment system was designed to "prevent
judge shopping by any party, thereby enhancing public confidence in the
assignment process" (quoting United States v. Mavroules, 798 F. Supp. 61, 61
(D. Mass. 1992))). Judge-shopping is problematic for two reasons. First,
"judge-shopping by one party can influence case outcomes in a way that is
unfair to the non-shopping party. Second, judge-shopping creates a perception
of partiality that undermines the legitimacy and credibility of the courts."
Alex Botoman, Note, Divisional Judge-Shopping, 49 Colum. Hum. Rts. L.
Rev. 297, 321 (2018). "[W]hen the public begins to believe that atto rneys
have the power to select judges . . . its belief in the impartiality of the judicial
system is eroded." Theresa Rusnak, Related Case Rules and Judge-Shopping:
A Resolvable Problem? 28 Geo. J. Legal Ethics 913, 913 (2015).
A-3740-16T2
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Our Supreme Court has expressed its disapproval of defendants'
manipulation of the system to secure the removal of a judge they dislike. See,
e.g., State v. Dalal, 221 N.J. 601, 607-08 (2015). It is just as damaging to the
integrity of the judicial process when parties secure, without the opposition's
knowledge or consent, the assignment of a judge they prefer. When the judge
affirmatively facilitates his or her selection by that one party, public
confidence and the appearance of impartiality are further undermined.
C.
Applying these principles, we are persuaded that the trial judge abused
her discretion in denying the recusal motion. Contrary to Code of Judicial
Conduct Rule 3.8, the judge here considered and responded to an inappropriate
ex parte communication from her former law clerk. The contact was not about
scheduling, such as when the trial would occur. It was about judicial
assignment – that is, who would preside.
The prohibition of ex parte communications by attorneys does not bar
"routine and customary" scheduling communications, but it "does apply to
communications for the purpose of having a matter assigned to a particular
court or judge." Restatement (Third) of the Law Governing Lawyers § 113
cmt. c (Am. Law Inst. 2000). The reason is apparent. "The prohibition applies
to communications about the merits of the cause and to communications about
A-3740-16T2
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a procedural matter the resolution of which will provide the party making the
communication substantial tactical or strategic advantage." Ibid. As set forth
above, judge-shopping communications, by securing a desired assignment, can
affect the court's decisions and undermine public confidence in its impartiality.
Just as lawyers are prohibited from making such ex parte communications,
judges may not consider them. 4
In this case, the judge's consideration of the ex parte communication,
and her active participation in ensuring the case was assigned to her,
compounded the usual concerns of judge-shopping and tainted the proceedings
with the appearance of partiality. The source and manner of the ex parte
communication – a text message from a former law clerk to the judge's cell
phone – exacerbated the improper appearance that one party had exploited a
prior relationship with the judge. A reasonable person, informed of these
facts, would have doubts about the judge's impartiality. Therefore, it is
4
We add that even in the case of scheduling matters, a court should not
consider an ex parte communication if a party would gain an unfair advantage
as a result; and if it does consider such a communication, the other parties
should have an opportunity to respond. See Model Code of Judicial Conduct
Rule 2.9(A)(1) (Am. Bar Ass'n 2011) (stating that a court may consider an ex
parte non-substantive scheduling communication only if "the judge reasonably
believes that no party will gain a procedural, substantive, or tactical advantage
as a result . . . and . . . makes provision promptly to notify all other parties of
the substance of the ex parte communication, and gives the parties an
opportunity to respond").
A-3740-16T2
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unnecessary to reach plaintiff's argument that the judge in fact favored
defendant in the course of her rulings and conduct of the case.
The record does not disclose whether, as the trial judge contends, it is
common in her vicinage for attorneys to inquire directly of judges about their
availability. We withhold comment on such a practice, noting there is a
significant difference between ascertaining whether a judge will be available
and inquiring whether the judge would agree to preside over a particular case.
See Restatement § 113 cmt. c. Exacerbating the situation here, the judge
affirmatively responded to such an ex parte communication and secured the
case assignment.
In sum, having created an appearance of impropriety and partiality
through her response to an inappropriate ex parte communication, the judge
was obliged to step aside. Code of Judicial Conduct Rule 3.17(B); R. 1:12-
1(g). We turn next to the question of remedy.
D.
When a trial judge's actual or apparent impartiality "might reasonably be
questioned," Code of Judicial Conduct Rule 3.17(B), and the trial judge fails to
step aside, the reviewing court must fashion a remedy "to restore public
confidence in the integrity and impartiality of the proceedings, to resolve the
dispute in particular, and to promote generally the administration of justice."
A-3740-16T2
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DeNike, 196 N.J. at 519. The appropriate relief depends on the facts and
circumstances.5
In DeNike, the trial judge commenced negotiations about post-retirement
employment with the plaintiff's law firm after the judge rendered a bench-trial
verdict, but while substantive issues regarding the form of the judgment
remained pending. The Supreme Court held that "a knowledgeable, objective
observer" could reasonably conclude that the negotiations "infected all that
occurred beforehand." Therefore, the Court held that the appearance of
impropriety required vacating the judgment and ordering a new trial before a
new judge. Id. at 518-19.
In Chandok v. Chandok, 406 N.J. Super. 595, 606-07 (App. Div. 2009),
we required retrial of a matrimonial case where, two months before trial,
defendant retained the judge's former law partner, with whom the judge had an
earlier acrimonious relationship. We considered, but found inadequate, the
option of remanding to a new judge to decide the divorce case based on the
5
We are also informed by the United States Supreme Court's holding that, in
determining whether to vacate a judgment for a trial judge's failure to recuse in
a "proceeding in which [the judge's] impartiality might reasonably be
questioned" under 28 U.S.C. § 455(a), the court should consider "the risk o f
injustice to the parties in the particular case, the risk that the denial of relief
will produce injustice in other cases, and the risk of undermining the public's
confidence in the judicial process." Liljeberg v. Health Servs. Acquisition
Corp., 486 U.S. 847, 863 (1988).
A-3740-16T2
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record and to reconsider the rulings that the first judge had issued after his
former partner entered the case. We noted that a judge confined to reviewing
the cold record would be unable to make credibility determinations essential to
resolving the case. Id. at 607. For the same reason, we declined to exercise
original jurisdiction and decide the case ourselves. Ibid.
However, a new trial is not invariably required to achieve the goals
identified in DeNike. Unlike the defendant in DeNike, plaintiff here does not
demand a complete retrial. Rather, he asks us to consider the trial judge's
failure to recuse herself in the course of resolving the other issues on appeal.
To promote economy in the administration of justice, we should endeavor to
avoid a retrial that would further burden the party most aggrieved by the trial
judge's refusal to step aside. A more surgically crafted form of relief may
restore public confidence in the integrity of judicial proceedings while fairly
and efficiently resolving the particular dispute.
We note that federal courts have held that a retrial is unnecessary where
the appellate court's de novo review would suffice to cure any taint at the trial
level. For example, in In re Continental Airlines, 981 F.2d 1450, 1463 (5th
Cir. 1993), the Court of Appeals held that the trial judge's failure to recuse did
not necessitate a remand on a motion for summary judgment because appellate
review of the decision was de novo. "[N]othing would be gained by vacating
A-3740-16T2
15
and remanding . . . when [the appellate court] . . . utilized the same criteria as
the courts below in ruling on the summary judgment issue." Ibid.; see also In
re Sch. Asbestos Litig., 977 F.2d 764, 787 (3d Cir. 1992) (stating that vacatur
of summary judgment rulings would burden heavily the parties and the court
"with little corresponding gain," as those rulings are "subject to plenary review
upon final judgment").
On the other hand, federal courts have found it appropriate to vacate, in
whole or in part, those trial decisions that it would otherwise review for an
abuse of discretion, and to remand for reconsideration by a new judge. Cont'l
Airlines, 981 F.2d at 1463 (stating that "[t]he risk of injustice to the parties is
much greater when a court lacks broad powers of review" because "the parties
may remain subject to an order entered by a judge who has violated 28 U.S.C.
455(a), yet has not abused his discretion in entering the order"); Sch. Asbestos
Litig., 977 F.2d at 787 (stating that "[d]eferential review . . . might not cure
any prejudice").
We conclude that public confidence will be restored by our leaving in
place the jury's findings; vacating the trial judge's rulings challenged on appeal
and cross-appeal; deciding those issues de novo or in the exercise of original
jurisdiction; and remanding for a new trial on damages. In contrast to both
DeNike and Chandok, the fact-finder in this case was a jury, not a judge who
A-3740-16T2
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was so tainted by the appearance of impropriety as to require a retrial. We see
no need to retry the jury's factual findings of liability – unchallenged on cross-
appeal – that defendant made a sufficiently clear and definite promise of
employment such that a reasonable person would rely on it; defendant
expected plaintiff to rely; and plaintiff did, quitting his job. Retrial of those
findings would disserve the party aggrieved by the trial judge's refusal to
recuse herself, undermine public confidence in the judicial process, complicate
resolution of the dispute, and burden the administration of justice.
Additionally, remanding the Securities Act and FINRA issues that defendant
raises on cross-appeal, which we would normally review de novo as questions
of law, see Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J.
366, 378 (1995), would also disserve the efficient administration of justice and
undermine public confidence.
Absent an abuse of discretion, we would normally defer to the trial
judge's rulings on the admissibility of expert opinion, see Townsend v. Pierre,
221 N.J. 36, 52 (2015); and the applicability of the unclean hands doctrine, see
Untermann v. Untermann, 19 N.J. 507, 517-18 (1955). However, that
deference is inappropriate with respect to discretionary rulings tainted by the
appearance of impropriety. Yet, unlike the federal courts, we need not remand
such discretionary determinations to a new trial judge. Rather, we may
A-3740-16T2
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exercise original jurisdiction and decide those issues. See R. 2:10-5 (stating
that "[t]he appellate court may exercise such original jurisdiction as is
necessary to the complete determination of any matter on review"). The record
here is sufficient to enable us to do so, and, unlike in Chandok, no essential
questions of credibility impede our decision.
We recognize that original jurisdiction "should not be exercised in the
absence of imperative necessity." City of Newark v. W. Milford Twp., 9 N.J.
295, 301 (1952). However, "it will be invoked in those situations where the
sound administration of justice calls for appellate 'intervention and
correction.'" State v. Yough, 49 N.J. 587, 596 (1967) (quoting State v.
Johnson, 42 N.J. 146, 162 (1964)). This case presents such a situation.
II.
A.
We begin with the threshold question presented by defendant's cross-
appeal: whether plaintiff's claim is barred by the Securities Law, FINRA rules,
or the doctrine of unclean hands.
Defendant contends that the Securities Law requires a detailed writing as
a precondition to enforcing a promise to employ an "investment adviser";
plaintiff was seeking employment as an "investment adviser" but lacked a
writing; and promissory estoppel cannot afford him relief where a breach of
A-3740-16T2
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contract claim would not. We are unconvinced. Plaintiff was exempt from the
Securities Law because he was seeking employment with a "family office" and
was therefore not deemed an "investment adviser." Furthermore, even if the
law did apply, failure to satisfy the writing requirement bars only an action on
the unwritten employment contract, not a claim for reliance damages based on
promissory estoppel.
Regulations under the Securities Law require that any agreement for
compensation of an "investment adviser" be in writing. Investment advisers
may not "engage in dishonest or unethical practices," N.J.S.A. 49:3-53(a)(3),
and the regulations include, as such practices, "[e]ntering into . . . any
investment advisory contract unless such contract is in writing" and details the
adviser's compensation and authority, N.J.A.C. 13:47A-6.3(a)(57). A party
may not "base any suit on . . . [a] contract" that violates the Securities Law or
regulations. N.J.S.A. 49:3-71(h).
However, plaintiff was exempt from these provisions under both state
and federal law, which are co-extensive. Under the New Jersey Securities
Law, "investment adviser" includes "any person who, for direct or indirect
compensation, engages in the business of advising others, either directly or
through publications or writings, as to the value of securities or as to the
advisability of investing in, purchasing, selling or holding securities."
A-3740-16T2
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N.J.S.A. 49:3-49(g)(1)(ii). This definition tracks the one found in the federal
Investment Advisers Act of 1940 (federal Act), see 15 U.S.C. § 80b-2(a)(11),
and expressly excludes from "investment adviser" anyone excluded by the
federal Act. N.J.S.A. 49:3-49(g)(2)(vi). The federal Act excludes, among
others, "any family office, as defined" by the Securities and Exchange
Commission (S.E.C.) rules, regulations or orders. 15 U.S.C. 80b-2(a)(11)(G). 6
The S.E.C. defines a "family office" as:
a company (including its directors, partners, members,
managers, trustees, and employees acting within the
scope of their position or employment) that:
(1) Has no clients other than family clients . . . ;
(2) Is wholly owned by family clients and is
exclusively controlled (directly or indirectly) by
one or more family members and/or family
entities; and
(3) Does not hold itself out to the public as an
investment adviser.
[17 C.F.R. 275.202(a)(11)(G)-1(b).]
6
The family office exclusion was adopted as part of the Dodd-Frank Wall
Street Reform and Consumer Protection Act. See Family Offices, 76 Fed.
Reg. 37983, 37983-84 (June 29, 2011). The statute preserved S.E.C. policy.
See S. Rep. No. 111-176, at 75 (2010) (stating that "[s]ince the enactment of
the Investment Advisers Act of 1940, the SEC has issued orders to family
offices declaring that those family offices are not investment advisers within
the intent of the Act (and thus not subject to the registration and other
requirements of the Act)").
A-3740-16T2
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The purpose of the family office exemption is to shield private family
investments from regulation. See S. Rep. No. 111-176, at 75 (2010) (stating
the federal Act was "not designed to regulate the interactions of family
members, and registration would unnecessarily intrude on the privacy of the
family involved"). Also, underlying the family office exclusion may be "a
belief that members of what are typically financially sophisticated families are
not in need of the protections and safeguards provided by the [Investment
Advisers] Act." Nathan Crow & Gregory S. Crespi, The Family Office
Exclusion Under the Investment Advisers Act of 1940, 69 SMU L. Rev. 97,
117 (2016).7
Plaintiff established that he was promised a position in such a "family
office." According to plaintiff's proofs at trial, defendant promised to hire him
to provide investment advisory services exclusively to defendant, his brother
and his father, in connection with their wholly-owned fund of $75-100
million.8 Even if plaintiff were granted discretion in managing or investing the
7
Plaintiff characterized defendant and his family as wealthy, sophisticated
investors. Plaintiff contended that defendant reported receiving $200 million
upon the sale of the insurance firm his father founded.
8
The proposed arrangement would have constituted a "family office" even if
plaintiff contributed personally to the pool of investment funds, to enhance his
commonality of interest with defendant, because the regulation permits "key
employees" to invest with family members. See 17 C.F.R. 275.202(a)(11)(G)-
(continued)
A-3740-16T2
21
funds, defendant and his family members would still have "directly or
indirectly" controlled the funds, because they would have retained the power to
direct plaintiff. See 17 C.F.R. 275.202(a)(11)(G)-1(d)(2) (defining "control"
as "the power to exercise a controlling influence over the management or
policies of a company, unless such power is solely the result of being an
officer of such company").
It is of no moment that, as defendant highlights, plaintiff did not identify
the specific entity that would have served as the "company" that employed
him. Defendant, his brother and his father constituted an "organized group of
persons," qualifying as a "company" under the federal Act. See 15 U.S.C. §
80b-2(a)(5) (defining "company" to mean "a corporation, a partnership, an
association, a joint-stock corporation, a trust, or any organized group of
persons, whether incorporated or not"); Family Offices, 79 Fed. Reg. at 37984
n.15 (stating that "'company' used throughout rule 202(a)(11)(G)-1 has the
(continued)
1(d)(8); see also Family Offices, 76 Fed. Reg. at 37991 (noting comments that
"permitting investment participation by key employees of family offices would
align their interests with those of family members and enable family members
to attract highly skilled investment professionals who may not otherwise be
attracted to work at a family office"); S. Rep. No. 111-176, at 76 (recognizing
that some professionally run family offices may employ non-family members,
who "may co-invest with family members, enabling them to share in the profits
of investments they oversee, and better aligning" their interests with those of
the family members). Plaintiff would have satisfied the prerequisites of a "key
employee." See 17 C.F.R. 272.202(a)(11)(G)-1(d)(8).
A-3740-16T2
22
same meaning as in section 202(a)(5) of the Advisers Act," which is codified
at 15 U.S.C. § 80b-2(a)(5)); see also Clifford E. Kirsch, Investment Adviser
Regulation: A Step-by-Step Guide to Compliance and the Law § 59:4.2[A] (3d
ed. 2018) (stating, based on the broad definition of "company," "it should not
matter what type of organizational structure the family decided to use when
forming the family office").
Furthermore, even if the agreement were subject to a writing
requirement, plaintiff's promissory estoppel claim would not necessarily be
barred. We have adopted the Restatement's rule that a party may proceed
under a theory of promissory estoppel even where the Statute of Frauds
renders an oral contract otherwise unenforceable.
A promise which the promisor should reasonably
expect to induce action or forbearance on the part of
the promisee or a third person and which does induce
the action or forbearance is enforceable
notwithstanding the Statute of Frauds if injustice can
be avoided only by enforcement of the promise. The
remedy granted for breach is to be limited as justice
requires.
[Mazza v. Scoleri, 304 N.J. Super. 555, 560 (App.
Div. 1997) (quoting Restatement (Second) of
Contracts § 139(1) (Am. Law Inst. 1979)).]
See also Pop's Cones, Inc. v. Resorts Int'l Hotel, Inc., 307 N.J. Super. 461, 471
(App. Div. 1998).
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In determining whether justice requires a remedy on a theory of
promissory estoppel, a court should consider:
(a) the availability and adequacy of other remedies,
particularly cancellation and restitution;
(b) the definite and substantial character of the action
or forbearance in relation to the remedy sought;
(c) the extent to which the action or forbearance
corroborates evidence of the making and terms of the
promise, or the making and terms are otherwise
established by clear and convincing evidence;
(d) the reasonableness of the action or forbearance;
(e) the extent to which the action or forbearance was
foreseeable by the promisor.
[Restatement (Second) of Contracts § 139(2) (Am.
Law Inst. 1981).]
"Restatement § 139 directs courts to assess the facts as the basis for
judicious intervention when it appears that the statute of frauds may operate to
support rather than to discourage the very wrong it was meant to avoid." 4
Corbin on Contracts § 12.8[I][C][1] (Murray ed., rev. ed. 2018). That "wrong"
includes both the false assertion and false denial of an agreement. Promissory
estoppel is especially appropriate where the promisor also falsely promised to
provide a written memorialization. Ibid.
We discern no reason why the writing requirement of N.J.A.C. 13:47A-
6.3 should preclude promissory estoppel where the Statute of Frauds would
A-3740-16T2
24
not. Here, barring promissory estoppel would thwart the purpose of a writing
requirement by leaving unremedied the injustice of defendant's false promises
of employment and of providing a written memorialization. Plaintiff's lawsuit
does not run afoul of N.J.S.A. 49:3-71(h), since plaintiff does not "base [his]
. . . suit on the contract." Rather, he bases it on his detrimental reliance.
Defendant's arguments under FINRA and the unclean hands doctrine
require only brief comment. Defendant seeks to avoid liability based on
plaintiff's allegedly wrongful conduct toward his former employer. Defendant
cites FINRA Rule 3270, which bars a registered person from obtaining
compensation "as a result of any business activity outside the scope of the
relationship with his or her member firm," absent "prior written notice."
Defendant also contends that plaintiff had unclean hands because he breached
his duty of loyalty to his prior employer by sharing his investment insights
with defendant.
We need not decide whether plaintiff violated the FINRA rule, because
defendant lacks standing to allege a FINRA violation against plaintiff's former
employer. "[A] litigant usually has no standing to assert the rights of a third
party." In re Six Month Extension of N.J.A.C. 5:91-1 et seq., 372 N.J. Super.
61, 85 (App. Div. 2004). Although a registered person's activities outside his
or her member firm could conceivably "raise[] investor protection concerns,"
A-3740-16T2
25
see Rule Change Relating to Outside Business Activities of Registered
Persons, 74 Fed. Reg. 32668, 32669 (proposed June 30, 2009), no such
concerns were at issue here because defendant, a sophisticated investor, only
benefitted from plaintiff's advice. 9
Nor does the doctrine of unclean hands – based on plaintiff's alleged
disloyalty to his former employer – shield defendant from plaintiff's claim.
Defendant has not shown that that plaintiff's alleged disloyalty caused
defendant harm or that it related to his promise to plaintiff. See Untermann,
19 N.J. at 517 (stating that only "evil practice or wrong conduct in the
particular matter or transaction" forming the basis of a claim will deprive a
plaintiff the "right to justice in a court of equity (quoting Neubeck v. Neubeck,
94 N.J. Eq. 167, 170 (E. & A. 1922))); see also Sprenger v. Trout, 375 N.J.
Super. 120, 136-37 (App. Div. 2005) (declining to apply the unclean hands
doctrine where plaintiff's alleged wrong was against his employer, not
defendants whom he hired to repair and customize his vehicle); Med. Fabrics
Co. v. D.C. McLintock Co., 12 N.J. Super. 177, 181 (App. Div. 1951)
(declining to apply the unclean hands doctrine where the wrongful conduct
9
While we do not reach defendant's FINRA claim, we note that plaintiff did
not seek commissions for his investment advice to defendant, nor was his
future employment fairly characterized as compensation for that advice given.
Rather, plaintiff offered the advice to demonstrate his investment acumen to
defendant and his family.
A-3740-16T2
26
was "insufficiently related to the basic controversy"). Here, defendant cannot
demonstrate any injury he suffered from plaintiff's alleged breach of loyalty to
his former employer.
In sum, we reject defendant's contention that plaintiff's claims were
barred by the Securities Law, FINRA or the unclean hands doctrine. 10
B.
Plaintiff was entitled to present his claim for reliance damages to the
jury, supported by his expert's opinion.
Plaintiff contended he was entitled generally to what he would have
earned at his former job, had defendant's promise not induced him to quit,
minus his subsequent earnings. Plaintiff contended that he earned, on a pure
commission basis, an average of roughly $400,000 a year in his former
position. According to his W-2 forms for 2009, 2011, 2012 and 2013, and his
tax returns for 2010 and 2014, he earned $307,741 for nine months of 2009;
$436,309 in 2010; $347,752 in 2011; $466,159 in 2012; $193,003 through
mid-July 2013, when he gave two weeks' notice; and $116,935 in 2014, when
10
Given our conclusion, we need not address plaintiff's arguments that (1) the
Securities Law does not govern private employment arrangements; and (2)
defendant was equitably estopped from raising the absence of a writing as a
defense after assuring plaintiff he had sent one.
A-3740-16T2
27
he secured alternative employment. Plaintiff testified that he earned $300,000
in 2015.
Plaintiff's expert took the average of 2010 through 2012, which was
$416,740. He projected that plaintiff would have replicated that in 2013,
although he admitted that plaintiff was earning at a lower annual rate when he
resigned in mid-July. The expert discounted future earnings at plaintiff's
former employer to account for the risk of unemployment; increased the
earnings for inflation; and made various other adjustment in both projected and
mitigation income. In calculating plaintiff's past earnings, the expert relied on
plaintiff's answers to a questionnaire; W-2 earnings statements from his
employer for 2009, 2011, 2012 and 2013; and excerpts of plaintiff's 2010 tax
return.11 In calculating his mitigation earnings, he relied on plaintiff's partial
2014 tax return and, for 2015, a W-2 and a bank statement reflecting the
deposit of a bonus attributed to his 2015 performance. 12 Notably, even as of
the trial in 2016, plaintiff's earnings did not reach their pre-resignation levels.
Defendant does not challenge the principle, established in Peck v.
Imedia, Inc., 293 N.J. Super. 151, 167 (App. Div. 1996), that a person may
11
In a pre-trial discovery ruling, plaintiff was permitted to withhold disclosure
of his complete joint returns. However, at trial, in response to defendant's
completeness objection, plaintiff introduced his complete 2010 return.
12
Plaintiff introduced his complete 2014 tax return at trial.
A-3740-16T2
28
obtain reliance damages on a promissory estoppel theory based on a broken
promise of employment, even if the employment would have been at will. See
also Pop's Cones, 307 N.J. Super. at 472 (approving reliance damages where
hotel withdrew promise to lease space to plaintiff). Instead, relying on the
Restatement, defendant contends permitting plaintiff reliance damages, based
on the difference between past earnings and what he subsequently earned post-
resignation, would leave him better off than had the promise been performed.
See Restatement (Second) of Contracts § 90 cmt. d (stating that damages for a
promissory estoppel claim "should not put the promisee in a better position
than performance of the promise would have put him").
Defendant's argument is based on the false premise that plaintiff would
have earned only $250,000 as defendant's employee and discounts the prospect
of performance-based income as speculative. However, "[i]f the evidence
affords a basis for estimating the damages with some reasonable degree of
certainty, it is sufficient." Tessmar v. Grosner, 23 N.J. 193, 203 (1957). A
jury need not calculate the amount of plaintiff's future performance-based
income with certainty, so long as it was convinced that plaintiff would have
earned enough, along with his base salary, to match his prior income. "The
rule relating to the uncertainty of damages applies to the uncertainty as to the
fact of damage and not as to its amount, and where it is certain that damage
A-3740-16T2
29
has resulted, mere uncertainty as to the amount will not preclude the right of
recovery." Ibid.; see also V.A.L. Floors, Inc. v. Westminster Cmtys., Inc., 355
N.J. Super. 416, 423 (App. Div. 2002) (stating "we do permit considerable
speculation by the trier of fact as to damages").
A jury could reasonably conclude that plaintiff would not have quit a job
at which he earned roughly $400,000 a year on a commission-only basis for a
job paying $250,000 plus performance-based income, unless he believed
himself likely to at least match his prior income. Proceeding on this
assumption, the jury would have effectively relied on plaintiff's past
experience to predict his future performance. That method is acceptable. See
V.A.L. Floors, 355 N.J. Super. at 425 (stating that "past profit experience on
other projects . . . is widely accepted as relevant to a determination of damages
based on lost profits" (quoting Tull v. Gundersons, Inc., 709 P.2d 940, 945
(Colo. 1985))).
We also reject defendant's argument to preclude reliance damages
because plaintiff's proofs were insufficient to establish his past income.
Plaintiff provided adequate proof – in the form of his oral testimony, his W-2s
for 2009 and for 2011 through 2013, and his complete 2010 tax return – to
establish his earnings at his prior firm. Whether plaintiff suffered losses or
gains from other investments or business pursuits – which undisclosed tax
A-3740-16T2
30
documents may have reflected – had no bearing on his claim, which sought
only to recover the earned income he lost in reliance on defendant's promise.
We also conclude that plaintiff's expert should be permitted to testify.
Defendant argues that the expert should be barred primarily because he relied
on inadequate documentation, as he saw only excerpts of plaintiff's tax returns;
lacked information about how plaintiff earned his commissions (for example,
whether he had multiple clients or a single client); and lacked documentation
of other potential sources of income. Defendant contends this inadequate
foundation rendered the expert's conclusions a net opinion.
We are unconvinced. An expert's opinion must be grounded in "facts or
data derived from (1) the expert's personal observations, or (2) evidence
admitted at the trial, or (3) data relied upon by the expert which is not
necessarily admissible in evidence but which is the type of data normally
relied upon by experts." State v. Townsend, 186 N.J. 473, 494 (2006) (quoting
Richard Biunno, New Jersey Rules of Evidence 896 (2005)). "[T]estimony is
not inadmissible simply 'because it fails to account for some particular
condition or fact which the adversary considers relevant.'" Creanga v. Jardal,
185 N.J. 345, 360 (2005) (quoting State v. Freeman, 223 N.J. Super. 92, 116
(App. Div. 1988)). An expert's opinion is inadmissible as a "net opinion" if it
is a mere conclusion that lacks the essential "why and wherefore." Pierre, 221
A-3740-16T2
31
N.J. at 54 (quoting Borough of Saddle River v. 66 E. Allendale, LLC, 216 N.J.
115, 144 (2013)).
Under that standard, plaintiff's expert was qualified to testify. He
testified at an N.J.R.E. 104 hearing that he relied on information on which
damages experts normally rely. He also relied on evidence that was admitted
at trial – plaintiff's W-2s and tax return documents (although he did not have
the complete 2010 return when he prepared his report). He used accepted
measures to discount plaintiff's past income for the possibility of
unemployment. The expert's partial access to plaintiff's tax returns, and his
lack of information about the source of plaintiff's past commission income –
which may be relevant to its replicability in the future – may be a fruitful area
of cross-examination. But those alleged deficiencies do not render his opinion
inadmissible.
III.
In summary, the trial judge should have recused herself because she
created an appearance of impropriety by affirmatively responding to an ex
parte communication inquiring whether she would preside over the trial.
Having vacated the judge's challenged rulings, we conclude plaintiff was
entitled to present claims for reliance damages, supported by his expert's
A-3740-16T2
32
opinion and unrestrained by the Securities Law, FINRA, or the unclean hands
doctrine.
Reversed in part, affirmed in part, and remanded for a new trial on
damages. We do not retain jurisdiction.
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33