New Jersey’s Appellate Division has rejected an attempt to apply the New Jersey Consumer Fraud Act to financial planning services. In Finderne Management Co., Inc. v. Barrett, plaintiffs hired the defendants, a licensed insurance agent and a certified accountant, to perform a comprehensive review of their finances and to provide tax and estate planning advice. Included among the defendants’ recommendations was a proposal for the plaintiffs to participate in a program known as Employers Participating Insurance Cooperative (EPIC), which promised to yield significant tax savings. EPIC was structured as a multi-employer trust to which employers made annual tax-deductible contributions. It purportedly offered death benefits to the participants’ employees from group term life insurance and annual tax-free annuity-like payments after the employees’ retirement. After plaintiffs participated in the program for six years, the IRS challenged and subsequently rejected the plan’s tax benefits for two of those years. Plaintiffs were compelled to remit to the IRS over $50,000 in back taxes, as well as accumulated interest. They then filed suit against defendants to recover losses sustained as a result of defendants’ failure to warn that the claimed tax benefits were not sanctioned by the IRS. At trial, the jury awarded plaintiffs $36,734.60 against each defendant.
Dissatisfied with their recovery, plaintiffs appealed from the trial court’s ruling dismissing their consumer fraud claim before it was submitted to the jury. Although it affirmed the dismissal of the consumer fraud claim, the Appellate Division made three important rulings.
The court disagreed with the trial court’s ruling that defendants’ financial planning services were within the “learned professional” exception to the New Jersey Consumer Fraud Act (CFA). Courts created that exception for transactions involving services of learned professionals such as doctors, accountants, attorneys and architects, who were considered to be “beyond the reach of the [CFA] so long as they are operating in their professional capacities.” The appeals court held that the Finderne defendants were learned professionals when acting as a licensed insurance broker and CPA, but not when rendering financial planning services, which fell outside the scope of their specific professional licenses. The court found the lack of governmental board or agency regulation, or minimum uniform education or training criteria, disqualified financial planners from the protections of the learned professional exemption.
But the court ruled that this determination did not make defendants’ financial planning services subject to the CFA. To the contrary, the Appellate Division found that a sophisticated tax-planning product like EPIC did not fall within the CFA’s protections. To qualify as a consumer transaction under the CFA, services rendered must be of the type sold to the general public. Products marketed to a discrete and specific class of capable or sophisticated investors, rather than the general public, did not merit the consumer protections contemplated by the legislature. Unlike a consumer transaction, EPIC was targeted specifically to a sophisticated group of buyers, who were required to review a 60-page disclosure statement, be familiar with complicated provisions of the tax code and consult their own legal and tax advisors.
The appeals court also agreed that the lower court had properly limited plaintiffs’ damages to their out-of-pocket costs resulting from participation in the plan. The court articulated two reasons for excluding plaintiffs’ claims for benefit-of-thebargain damages, i.e., the benefits they would have received had defendants’ representations about the plan’s tax benefits been true. The court found that those benefits were speculative and uncertain, and more important to the decision, it was reluctant to allow recovery based on a financial planning device that the IRS itself had determined to violate the tax laws. The court refused to award damages for lost tax benefits to which the IRS had already ruled plaintiffs were not entitled.
Finderne Management teaches that, even though financial planners may not be within the learned professional safe-harbor, the complexity and sophistication of tax planning services make it unlikely that such transactions will be subject to the CFA. Solace can also be taken from the fact that the plaintiffs in Finderne Management were only awarded their costs incurred in participating in the EPIC program. This may ultimately prove small consolation, given the many other claims can be brought against financial planners, including fraud, misrepresentation and negligence.