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| Erlich v. First National Bank of Princeton
Erlich v. First National Bank of Princeton
PHILIP ERLICH, PLAINTIFF,v.FIRST NATIONAL BANK OF PRINCETON AND W. JEFFREY MAIDEN, DEFENDANTS
[208 NJSuper Page 274] This is an action seeking damages for the claimed mismanagement of a custodian management account. It alleges negligence, malpractice, breach of fiduciary duty and breach of contract by the First National Bank of Princeton (Bank) and the manager of plaintiff's account, W. Jeffrey Maiden (Maiden). Plaintiff's principal contention concerns the concentration of his account in the stock of International Systems and Controls Corp. (ISC), an engineering, manufacturing and financial company engaged in providing services and products for the development of energy, agriculture and forestry resources. The following chart, prepared from the Bank's periodic reviews of plaintiff's portfolio, shows the concentration of the account in ISC stock. [208 NJSuper Page 275]
DATE OF # INVESTMENTS MARKET VALUE TOTAL # MARKET VALUE
REVIEW IN ACCOUNT OF ACCOUNT ISC SHARES OF ISC
10/15/71 31 $109,358 100 $6,200
01/15/72 33 178,179 900 56,700
04/15/72 17 268,233 2,000 228,000
10/15/72 6 363,502 2,300 333,500
12/29/72 6 319,678 2,220 297,480
04/06/73 6 218,295*fn* 4,840 198,440
09/28/73 6 216,611 4,010 195,988
12/31/73 6 200,953 3,910 184,747
03/29/74 5 167,986 3,910 149,557
09/30/74 5 80,971 3,810 73,342
03/31/75 6 108,594 4,170 92,261
09/30/75 5 143,703 4,070 123,626
12/31/75 5 144,752 4,070 124,135
03/31/76 5 146,100 4,070 121,063
09/24/76 4 139,991 4,070 119,556
12/31/76 4 97,430 4,070 75,295
03/31/77 4 135,807 4,070 108,872
09/30/77 4 80,820 4,070 52,910
12/30/77 4 84,320 4,070 52,910
03/31/78 4 110,821 4,070 74,786
09/29/78 4 157,650 4,070 109,890
12/29/78 4 77,365 4,070 36,630
PER SHARE % MKT.
DATE OF VALUE VALUE
REVIEW ISC ACCT ISC
10/15/71 $62 5.66%
01/15/72 63 31.82
04/15/72 114 85.00
10/15/72 77.8 91.76
12/29/72 76.98 93.05
04/06/73*fn* 41.45 90.90
09/28/73 43.91 90.47
12/31/73 47.25 91.93
03/29/74 44.29 89.02
09/30/74 19.25 90.57
03/31/75 22.125 84.95
09/30/75 30.375 86.02
12/31/75 30.50 85.75
03/31/76 29.75 82.86
09/24/76 29.375 85.40
12/31/76 18 77.28
03/31/77 26.75 80.16
09/30/77 13 65.46
12/30/77 13 62.74
03/31/78 18.375 67.48
09/29/78 27 69.70
12/29/78 9 47.34 [208 NJSuper Page 276]
Plaintiff had invested in stocks and bonds for approximately 15 years prior to opening his CMA with the Bank. During this period, he invested as much as $230,000 in a portfolio of 40 different securities purchased through several brokerage firms, and incurred $110,000 in losses, half of which had been recovered by 1971. Two years prior to opening his CMA, plaintiff borrowed $75,000 from the Bank to purchase stock. Plaintiff testified to the relative degree of risk of each security he owned [208 NJSuper Page 277]
at the time his CMA was opened, opining that greater than half were of the high risk variety.
Plaintiff was dissatisfied with the results of his own investment decisions and was concerned about the burden his investing had imposed on his psychiatric practice, so he sought professional investment advice from the Bank, where he maintained his checking account. The Bank also held the mortgage on his home and was a fiduciary named in his will. Plaintiff discussed retention of the Bank for investment advice with an officer of its trust department. Plaintiff selected a custodian management account because he wanted the Bank's investment advice but wanted to retain control of the actual investment decisions. At the time he opened his CMA, plaintiff brought to the Bank a portfolio of securities worth approximately $140,000 -- $180,000, which was substantially all of his assets except for the house in which he lived.
After opening his CMA, plaintiff made some trades through his other brokerage accounts outside the Bank between May and August 1971. Each of these transactions involved at least 100 shares, several were short sales,*fn1 and many were carried out without Maiden's advice or recommendation.
In August 1971 Maiden recommended ISC common stock to plaintiff as a possible investment. He provided plaintiff with a [208 NJSuper Page 278]
report on ISC prepared by Hornblower Weeks, Inc., as well as other related materials. On August 26, 1971 plaintiff purchased 100 shares of ISC and followed Maiden's advice in funding the purchase with the sale of 200 shares of Compuscamp, Inc., 300 shares of GAF, Inc. and 100 shares of Great Lakes Dredge and Dock Co.
It is important to note that from May 1971 until February 1973, when plaintiff suffered a heart attack, hardly a business day went by that plaintiff and Maiden were not in communication regarding plaintiff's investments, either in person or by telephone, although plaintiff and Maiden disagree as to which of them initiated most of the telephone calls. Plaintiff often visited Maiden at the Bank to discuss his investments. Maiden would suggest securities from lists of recommended stocks prepared by the Bank. There were occasions when discussion of stock purchases was initiated by Maiden and occasions when it was initiated by plaintiff. Plaintiff and Maiden would discuss [208 NJSuper Page 279]
the trading price of the suggested stock, the corporation's activities, products or services, and the prognosis of the long or short-term profitability of the corporation. After plaintiff's heart attack, communications between plaintiff and Maiden were less frequent, although occurring several times a week.
In the fall of 1972 the pre-split price of ISC reached $160 per share. Plaintiff testified that he suggested selling some ISC [208 NJSuper Page 280]
stock while the price was high, but that Maiden told him the price was going to go to $200. Consequently, plaintiff said, no action was taken at that time with respect to the sale of stock. Maiden testified that there was no discussion of selling ISC stock at that point.
During the spring of 1973 the price of ISC fell significantly, despite the positive news of a two-for-one stock split and a possible listing on the American Stock Exchange. The market as a whole was characterized as a "bear" market, but the price of ISC was dropping at a faster rate than the overall market. This price drop caused increasing concern among Maiden, plaintiff and George McKeon, then head of the Bank's trust department. Maiden communicated with Larry Lau and arranged a meeting with the executive vice-president of ISC, Herman [208 NJSuper Page 281]
Freitsch, during Freitsch's scheduled visit to New York. In mid-April 1973 plaintiff, Maiden, McKeon and Irving Ness, another ISC investor, traveled to New York for the meeting. During their return from the meeting, they agreed that ISC remained a good investment and should be retained. Plaintiff indicated his intention to report on the meeting to the Princeton Prospectors.
Three weeks after the 1973 annual meeting, ISC announced the acquisition of a significant contract. This announcement precipitated a price rise in ISC from less than $20 per share to approximately $60 per share. However, another price decline soon followed. Maiden advised plaintiff to sell at least 500 [208 NJSuper Page 282]
shares of ISC stock to reduce his potential risk. Plaintiff was reluctant, but did authorize sale of 330 shares on August 21, 1973 at $42.75 and $44.50 per share and, on Maiden's advice, temporarily invested the proceeds in U.S. Treasury Bills for possible reinvestment in ISC. On August 27, 1973 plaintiff sold 100 shares of the ISC stock held by his wife in her account at Merrill Lynch.
Throughout 1975 and 1976, the short position in ISC stock increased moderately. Maiden attended the annual meeting of ISC shareholders in late fall 1976, discussed the annual meeting [208 NJSuper Page 283]
with plaintiff and remained optimistic about the company's potential for future success.
The day after Maiden's return from Houston, he reported his observations to plaintiff. Plaintiff was anxious to purchase an additional 300 shares of ISC. However, Maiden told him that no further purchases of ISC could be made through the Bank because, as of 1976, ISC had ceased to be on the Bank's recommended list. Plaintiff sought Maiden's assistance in executing the desired purchase outside the Bank. Maiden introduced plaintiff to one of Maiden's own brokers, and on February 25, 1977 plaintiff purchased 300 shares of ISC stock through this broker. [208 NJSuper Page 284]
While Maiden was in Houston, McKeon learned of the extent of Maiden's personal investments in ISC through confirmation slips found in Maiden's desk. He confronted Maiden on February 25, 1977 when Maiden returned from Houston, and then reported Maiden's activities to Bank management and the trust committee. On March 10, 1977 Maiden was relieved of all of his duties in the trust department. The Bank had learned that the Securities and Exchange Commission had filed a complaint against Maiden concerning Maiden's transactions in ISC stock. On March 18, 1977, at the request of the Bank's president, Maiden resigned, and the Bank informed plaintiff that Maiden had left for "greener pastures."*fn2 Plaintiff contacted Maiden at home either that night or the next day. The two men agreed that plaintiff could call Maiden from time to time for any information Maiden had on ISC.
After Maiden left the Bank, plaintiff spoke with him from time to time concerning ISC and plaintiff's other investments. In September 1977 plaintiff was informed by Maiden that Maiden no longer owned any ISC stock. On one occasion in 1978, Maiden informed plaintiff that ISC had announced that it would be resuming payment of dividends on its preferred stock. On June 23, 1978 plaintiff purchased 300 shares of ISC preferred [208 NJSuper Page 285]
stock for his two children through a broker suggested by Maiden. On September 12, 1978 plaintiff purchased 250 shares of ISC preferred stock for himself, without first discussing this purchase with Maiden.
During the period September 1971 through August 1976 there were many securities transactions for plaintiff's CMA. A pattern emerges from these transactions: conservative holdings were not retained; aggressive growth stocks were bought [208 NJSuper Page 286]
and sold and, over the period, the number of issues held dwindled. From August 1976 until the account was closed, the portfolio in the CMA remained unchanged and held only four stocks: 4,070 shares of ISC, 1,400 shares of Threshold Technology, 3,200 shares of Penril and 200 shares of International Proteins. On February 12, 1979, plaintiff commenced this action.
Plaintiff and the Bank entered into an agreement on May 12, 1971 entitled "Investment Management Account for Philip Erlich," the first provision of which reads as follows: [208 NJSuper Page 287]
As a general rule, the courts will not enforce an exculpatory clause if the party benefiting from exculpation is subject to a positive duty imposed by law or is imbued with a public trust, or if exoneration of the party would adversely affect the public interest. McCarthy v. Nat. Assn. for Stock Car Auto Racing, 48 N.J. 539 (1967); Mayfair Fabrics v. Henley, 48 N.J. 483 (1967); Hy-Grade Oil Co. v. N.J. Bank, 138 N.J. Super. 112 (App.Div.1975); Kuzmiak v. Brookchester Inc., 33 N.J. Super. 575 (App.Div.1955).
[a]ccountants will also be encouraged to exercise greater care leading to greater diligence in conducting audits. See 44 Wash.L.Rev. at 177 (stating that '[a]lthough courts may be the poorest forum in which to formulate standards, civil liability is probably the most effective means . . . of providing a sufficient incentive for the profession to undertake further self-regulation.'). [ Id. at 351.] [208 NJSuper Page 288]
Defendants have held themselves out to be professional investment advisers, stating in the Bank's brochures that "we bring considerable experience to bear and the specialized knowledge we have gained in . . . the management of money. . . . We are highly trained in the techniques of investment." "Plain Talk About Investment Advice," (1977); "Professional Management for Your Investments," (1977).
"It is clear that the term 'professional services' is no longer limited to the traditional professions such as law and medicine." Autotote Ltd. v. N.J. Sports Expo. Auth., 85 N.J. 363, 371 (1981). "The essence of a professional service is that it involves 'specialized knowledge, labor or skill and the labor or skill is predominantly mental or intellectual, rather than physical or manual.'" Burlington Tp. v. Middle Dept. Inspec'n Agency, 175 N.J. Super. 624, 631 (L.Div.1980), quoting Atlantic Mutual Ins. Co. v. Continental Nat'l Amer. Ins. Co., 123 N.J. Super. 241, 246 (L.Div.1973) (emphasis in original).
Unlike doctors and lawyers, who are self-regulated, investment advisers who hold themselves out to the public as having special knowledge and skill are not self-regulated. This distinction does not justify a holding that they may contractually exculpate themselves from negligent advice. To allow investment advisers to exculpate themselves from the mischief caused by their breach of duty would violate the public policy of this State. I hold that the exculpatory clause in the CMA agreement is void and unenforceable. [208 NJSuper Page 289]
See generally, W. Prosser, Law of Torts, Ch. 16 (1971). The contract created the relationship between plaintiff and defendants; the cause of action lies in tort.*fn3
Every member organization is required to use due diligence to learn the essential facts relative to every customer, every order . . . and every person holding power of attorney over any account. NYSE "Know Your Customer Rule," Rule 405, NYSE Guide (CCH), para. 2405 (1978).
The "Suitability" rule has two formulations. The NASD rule is: [208 NJSuper Page 290]
In recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer. . . . NASD Rules, Art. III, § 2.
Plaintiff maintains that the Bank and Maiden owed him a higher degree of care than that urged by defendants because he was an unsophisticated investor, albeit one familiar with investment terms and procedures, who was paying for professional management advice for his CMA. He essentially views his purchase and sale authorizations as pro forma, and says that his authorization power did not limit defendants' duty to exercise due care in giving investment advice.*fn4 He argues that principles of tort law, particularly as applied in malpractice cases, dictate this higher degree of care. Plaintiff contends that defendants did not meet the standard of care required of a professional investment adviser because they failed to advise diversification and failed to advise sale of ISC stock. He further claims that Maiden lost his objectivity and thus failed to provide competent professional advice.
In response, defendants argue that such a high standard of care is inapplicable to a situation where a CMA customer is "running the account." With respect to the allegation that defendants had a duty to diversify plaintiff's account, they argue that diversification is only one possible standard by which their conduct should be judged. They suggest that an [208 NJSuper Page 291]
alternative to the principle of diversification is a "single stock strategy."
A professional must exercise that degree of care, knowledge and skill ordinarily possessed and exercised in similar situations by the average member of the profession practicing in his field. St. Pius X House of Retreats v. Camden Diocese, 88 N.J. 571, 588 (1982); Hoppe v. Ranzini, 158 N.J. Super. 158, 163 (App.Div.1978); In re Quinlan, 137 N.J. Super. 227, 257 (Ch.Div.1975), mod., 70 N.J. 10 (1976). Industry custom and practice are commonly looked to for illumination of the appropriate standard of care in a negligence case. Fantini v. Alexander, 172 N.J. Super. 105, 108 (App.Div.1980); Restatement, Torts 2d, § 299A at 73 (1965). The Bank offered plaintiff professional investment advisory services. This was not merely a brokerage account.*fn5 It is therefore the degree of care, knowledge and skill expected of professional investment advisers to which we must look for the standard of care.
There is a dearth of case law on this issue, but I find that the obligation of the investment manager to give prudent advice is the standard of care to be applied in this case. This is a higher standard of care than that found in the "Know Your Customer" and "Suitability" rules. Prudent advice includes: (1) knowing the customer, his assets and objectives; (2) diversifying investments; (3) engaging in objective analysis as the basis for purchase and sale recommendations and (4) making the account productive. See Bines, The Law of Investment Management (1979), Ch. 6 passim. [208 NJSuper Page 292]
The single stock strategy related by Gerald Loeb, The Battle for Investment Survival (1965), upon whom defendants rely, requires an investor to have a large cash reserve. Id. at 119. Plaintiff's annual income was not substantial. He had minimal assets beyond the securities in his CMA. When he opened his account in 1971, aside from securities, he had assets of $5,000 in savings, $5,000 in Series E bonds, a vacant lot [208 NJSuper Page 293]
valued at $5,000, and $50,000 equity in the home he owned jointly with his wife. I find that it was not prudent of the Bank to use a single stock strategy for plaintiff, given his circumstances.
The investment manager has an obligation to the customer to exercise prudence in diversifying investments in order to minimize the risk of large losses. Restatement, Trusts 2d, § 228 (1959). Frederick Todd, the investment expert for plaintiff, [208 NJSuper Page 294]
and Joseph A. Gallagher, the former Bank officer who testified for defendants, agreed that diversification of investment is a fundamental principle of portfolio management. Todd testified that the benefits of a single stock strategy do not outweigh its risks, and Gallagher testified that diversification was necessary to minimize risk. They both recommended investment in many issues. Todd stated that no one stock should constitute more than 10% of the portfolio, and Gallagher was of the opinion that 5 to 7% should be the limit. Professor James Mofsky, who testified as an investment expert for defendants, stated that the investment adviser need not advise a diversified portfolio when the customer is in control of the account and dictating a different strategy. He said that a diversification strategy will produce a result equivalent to the market, but diversification of the portfolio is not the standard where the customer seeks to outperform the market.
The Bank and Maiden owed plaintiff the duty to act with skill and care in accordance with industry practice, and to advise an investment strategy that, under the circumstances, was prudent. That duty encompassed an obligation not to recommend or approve purchases inconsistent with diversification. By the [208 NJSuper Page 295]
spring of 1972, 80 to 90% of the assets (by market value) in the account were concentrated in ISC. The percentage of concentration remained within this range until the end of 1976. Thereafter, as the value of ISC declined, the percentage of concentration also declined.
If a customer's assets and cash reserves do not justify a single stock strategy but the customer nevertheless insists on concentrating his portfolio in a few aggressive growth stocks, abandoning diversification, the investment adviser, after informing the customer of the risks of concentration, should obtain the customer's express acknowledgement of the admonitions and his authorization to pursue this strategy. In essence, the customer would be expressly authorizing the investment [208 NJSuper Page 296]
adviser to give advice that, by objective standards, might amount to malpractice.
The hallmark of a professional is the ability to exercise sound judgment in advising clients. The Bank acknowledged as much when it stated in one of its pamphlets that "Research, Vigilance and Responsible Judgment are three elements essential to the successful management of investments." [Capitals in original]. [208 NJSuper Page 297]
"Professional Management for Your Investments," (1977), p. 1. Whether it was due to personal interest or lack of experience or lack of professionalism, it is clear that Maiden's advice was not based on independent, objective analysis.
The Bank acknowledged this duty in its brochures by saying, "As a trust institution, our living depends on making money earn money," and further, "the good of your fund is more important than any impression we might make on you of alertness -- of being always 'on the ball'." "Plain Talk About Investment Advice," (1977), p. 4. The Bank's Statement of Basic Investment Principles, supra, states in part, "3 . . . . [e]ach account should have active supervision with careful attention to possibilities for improving income and capital performance by the exercise of imagination and initiative."
Defendants had the further duty not to speculate by purchasing volatile issues or leveraging the account when the portfolio was not diversified. Even Loeb, whom defendants cite for the proposition that a single-stock strategy is an acceptable mode of investment, has stated that it is necessary to "get out of long positions which begin to prove themselves wrong by declining in price. This is one automatic proceeding in handling securities, the only proceeding in which no judgment is needed." Loeb, supra, at 57. Loeb describes this situation as calling for following a "mechanical rule[:] . . . losses must always be cut." Ibid.
Through the end of 1972, the market value of plaintiff's portfolio exceeded his cost. Beginning with the Bank's April 6, 1973 quarterly statement on his CMA, every quarterly report [208 NJSuper Page 298]
through December 29, 1978 showed that the portfolio was worth less than plaintiff's "carrying cost," with the net value reflecting a paper loss ranging from approximately minus $79,000 to as much as minus $142,000.
New Jersey negligence law was changed on August 22, 1973, to substitute comparative negligence for contributory negligence. While prior to the change in the law any contributory negligence on the part of the plaintiff would have barred his claim altogether, Mattero v. Silverman, 71 N.J. Super. 1 (App.Div.1962), under the new law, plaintiff's award is reduced by a percentage reflecting the comparative amount of his own negligence. Portee v. Jaffee, 84 N.J. 88, 101-102 (1980). Plaintiff cannot recover if his negligence outweighs the combined negligence of the defendants.
The Comparative Negligence Act, N.J.S.A. 2A:15-5.1 et seq., applies to "causes of action arising on or after" the effective [208 NJSuper Page 299]
date of the statute, August 22, 1973. L. 1973, c. 146 § 4. It is necessary to determine when the cause of action in this case "arose" in order to determine the applicability of the Comparative Negligence Act.
Maiden and the Bank engaged in a course of negligent conduct that continued throughout their professional relationship with plaintiff. The negligent acts at issue continued over several years beyond August 1973. "The malpractice in such cases is regarded as a continuing tort because of the persistence of the [professional] in continuing and repeating the wrongful treatment," in this case, of the customer's account. Tortorello v. Reinfeld, 6 N.J. 58, 66 (1950), followed by Lopez v. Swyer, 115 N.J. Super. 237 (App.Div.1971), aff'd, 62 N.J. 267 (1973). See also, Hughes v. Eureka Flint and Spar Co. Inc., 20 N.J.Misc. 314, 316, 26 A.2d 567 (Cty.Ct.1939) ("This wrong should be treated as single and continuous, not plural and discreet").
The concept of a continuing tort has its origins in medical malpractice cases, e.g. Lynch v. Rubacky, 85 N.J. 65 (1981); Lopez v. Swyer, 115 N.J. Super. 237, but it has also been applied to professional malpractice cases in other fields. See Farley v. Goode, 219 Va. 969, 252 S.E. 2d 594 (1979) (dentist); Berry v. Zisman, 70 Mich.App. 376, 245 N.W. 2d 758 (Mich.App.1976) (attorney); see also, Muller v. Sturman, 79 A.D. 2d 482, 437 N.Y.S. 2d 205 (A.D.1981) (general discussion of continuing representation doctrine).
The cause of action in the case of a continuing tort accrues at the time the professional relationship or course of treatment comes to an end unless, under the "discovery rule," the cause of action is deemed by the court to have accrued at some earlier point. Lopez, 115 N.J. Super. at 250. Continuing tort cases are generally analyzed in terms of the statute of limitations. However, in the case at bar, we are concerned not with the statute of limitations but with the date of the change in the law to a comparative negligence standard. I interpret the word [208 NJSuper Page 300]
"arising" in Chapter 146, § 4 of the Laws of 1973 to be synonymous with the word "accruing." Thus, in this case we are concerned with the time of accrual.
In New Jersey, in order to determine whether the cause of action should be deemed to have accrued at some point earlier than the end of the professional relationship or course of treatment, the "discovery rule" is applied. This rule, which refers to plaintiff's discovery of his injuries, was set forth in Lopez v. Swyer, 115 N.J. Super. 237, as follows: "The cause of action does not accrue until plaintiff is or should be aware of his injury and its causal relationship to the negligent treatment." Id. at 248. In Mant v. Gillespie, 189 N.J. Super. 368 (A.D.1983), a legal malpractice case, the court held that the cause of action accrues "when plaintiffs were or ought to have been aware of facts suggesting that they had sustained damage which was, or might be, attributable to the malpractice." The inquiry for time of accrual is two-pronged. The court must find that plaintiff: (1) had sustained damages and (2) "had an awareness of material facts" indicating that his injury might be traceable to the malpractice of the professional. Lynch v. Rubacky, 85 N.J. at 71.
Plaintiff's position as an investor who sought professional management of his CMA is analogous to that of the patient in Lynch v. Rubacky, 85 N.J. at 75. The patient's feeling "that [208 NJSuper Page 301]
something was 'wrong'" was "not incompatible with a belief that her doctor was treating her fully in accordance with proper medical standards." The court continued, "moreover, as in this case, a doctor's repeated assurances of progress may reinforce the reluctance of an average patient to find medical fault. Hence it is extremely unlikely that [plaintiff], who was constantly encouraged by [defendant's] optimistic prognosis of healing, sensed the real possibility of malpractice." Ibid.
Plaintiff also was negligent in his conduct with respect to his CMA. "Contributory negligence is negligence on the part of the plaintiff that involves an unreasonable risk of harm to him and contributes as a legal cause to his injury . . . [T]he unreasonableness of the plaintiff's conduct must have been in its tendency to expose him to the particular risk from which his injury resulted." Stoelting v. Hauck, 32 N.J. 87, 101 (1960). [208 NJSuper Page 302]
Plaintiff failed to take any steps to protect himself against losses even after it became apparent that the concentration in ISC was failing to produce the profit he had anticipated. Maiden and plaintiff were caught up in the speculative zeal inspired by ISC's strong upward movement from 1971 to 1973. Thereafter, plaintiff's enthusiasm for this stock, fueled by Maiden's optimism and encouragement, continued until the stock became virtually worthless.
Defendants are jointly and severally liable for plaintiff's losses, but plaintiff's award will be reduced by 40% because of his own negligence. Plaintiff's negligence is less than that of [208 NJSuper Page 303]
defendants because defendants were the professionals charged with the duty to give prudent advice. I will reserve allocation of fault between the defendants until a hearing may be had on determination of damages.
Estoppel is not available to defendants in this negligence case. Defendants may not base a claim of estoppel in their favor on their own wrongful acts or dereliction of duty, or on acts by plaintiff induced by their conduct. The New Jersey Supreme Court stated the general rule as follows: "Estoppel [208 NJSuper Page 304]
cannot be interposed to protect an active wrongdoer." Gould & Eberhardt, Inc. v. City of Newark, 6 N.J. 240, 244 (1951). Principles of equitable estoppel preclude defendants from taking advantage of their violation of their legal duty to exercise due care in giving plaintiff prudent investment advice. Cf. Rudikoff v. Byrne, 101 N.J. Super. 29, 37 (L.Div.1968). See, generally, 28 Am.Jur. 2d § 79.
Defendant Maiden contends that the complaint filed by plaintiff is couched in terms that indicate that the claim against him for damages is set forth only in count seven of the complaint and is only for his actions outside the scope of his employment. Plaintiff contends that the complaint is general in its terms with respect to both defendants and seeks damages from Maiden for his actions both within and without the scope of his employment. Plaintiff urges that a liberal construction be given to the complaint and cites R. 4:5-7.*fn6 In addition, he [208 NJSuper Page 305]
has moved pursuant to R. 4:9-2*fn7 to amend the complaint to conform to the proofs, if such a motion is necessary.
I find that the wording of the complaint is sufficiently broad to encompass an action against Maiden for negligence both within and without the course of his employment. Although count seven is the only count that specifically seeks damages from Maiden individually, the "wherefore" clause of the complaint seeks damages from both defendants, and para. 49 of the seventh count incorporates and repeats all allegations made earlier in the complaint. Furthermore, in his answer to the complaint, Maiden responded by way of denial to each of the first six counts of the complaint, which he now contends do not apply to him.*fn8
The foregoing reasoning would permit amendment of the complaint. I am therefore allowing an amendment of the [208 NJSuper Page 306]
complaint to conform to the proofs, as permitted by R. 4:9-2. See 68th St. Apts. Inc. v. Lauricella, 142 N.J. Super. 546, 561 n. 3 (Law Div.1976), aff'd o.b. 150 N.J. Super. 47, 48 (App.Div.1977).
I find that Maiden was on notice from the outset of the case that plaintiff sought damages from him for negligently performing his duties as an investment adviser. Furthermore, Maiden actively participated in the case. Maiden has, therefore, had adequate opportunity to meet the contentions of the complaint. See Cola v. Packer, 156 N.J. Super. 77 (App.Div.1977).
As a general matter, an employer who "has been compelled to pay damages to a third person for the negligence of his . . . employee . . ." has a common law right to maintain an action for indemnification over against the employee. Frank Martz Coach Co. v. Hudson Bus, etc. Co., 23 N.J.Misc. 342, 346, 44 A.2d 488 (Sup.Ct.1945), and cases cited therein. The right to indemnification is predicated on the employer being only secondarily liable for the injuries sustained by the plaintiff. Where both employer and employee are at fault, the right to indemnification disappears. Schramm v. Arsenal Esso Station, 124 N.J. Super. 135, 138 (App.Div.1973), aff'd, per curiam o.b., 63 N.J. 593 (1973); Hut v. Antonio, 95 N.J. Super. 62 (L.Div.1967); cf. Adler's Quality Bakery, Inc. v. Gaseteria, 32 N.J. 55, 80 (1960) "should Gaseteria be able to prove itself or its agents free from any fault contributing to the accident, then it is entitled to indemnity from a person whose fault in fact caused it"). The Bank, by virtue of its joint liability with its employee, Maiden, is not entitled to indemnification.
Maiden has crossclaimed against the Bank for both contribution and indemnification. His claim for contribution is [208 NJSuper Page 307]
premature, for the right to contribution from a joint tortfeasor does not exist until the claimant has paid the plaintiff more than the claimant's pro rata share of the judgment. Contribution Act, N.J.S.A. 2A:53A-3. In any event, the Contribution Act considers employer and employee as a single tortfeasor, and the right to contribution would thus not be available in this case. N.J.S.A. 2A:53A-1. See Marley v. Palmyra Boro., 193 N.J. Super. 271, 298 (L.Div.1983) (borough administrator cannot recover contribution from Borough, his employer). Maiden's crossclaim for contribution must be dismissed for failure to state a claim on which relief can be granted.
As to Maiden's claim for indemnification, "there is a general rule in the law of agency that an employer cannot be compelled to reimburse an employee for damages the employee may be obligated to pay because of personal injuries to others resulting from his own negligent conduct." Hagen v. Koerner, 64 N.J. Super. 580, 585 (App.Div.1960) (emphasis omitted); Restatement, Agency 2d, § 440 (1958). Maiden's status as a joint tortfeasor and employee whose own negligence caused the harm to plaintiff bars him from obtaining indemnity from the Bank.