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Finderne Management Company, Inc. v. Barrett

402 N.J. Super. 546, 955 A.2d 940 (App. Div. 2008)

CONSUMER FRAUD ACT — A business’s purchase of a multiple employer welfare benefit and trust product does not come under the provisions of the Consumer Fraud Act because such investment products are not consumer products.

A business purchased a financial company’s multiple employer welfare benefit plan and trust product for its employees. The business deducted its cost for tax purposes. Six years after the business began its participation in the program, the Internal Revenue Service (IRS) audited the company and disallowed the claimed deductions for two tax years. The IRS found that the plan was not an employee benefit plan, but only a method to defer compensation. As a result of the tax audit, the business paid additional taxes and interest deemed due. Thereafter, the business terminated participation in the program and sued the financial company seeking recovery of losses allegedly due to false and misleading representations that the contributions would be tax deductible. The business claimed the financial company knew of the potential adverse tax consequences. The matter was tried before a jury which fixed liability against the principals of the financial company. The business appealed the findings, specifically the dismissal of consumer fraud claims and the limited scope of damages.

The Appellate Division affirmed. While it concluded that the principals did not disclose all they knew about the potential tax risks of the plan, they questioned whether the two were learned professionals and whether the plan was a transaction encompassed by the Consumer Fraud Act (CFA). The Court recognized that certain transactions that involve services provided by learned professionals have been deemed to fall outside the scope of the CFA. While it found the principals were not the learned professionals whose actions outside fell of the CFA, the investment product itself was found outside the CFA. The Court did not view the investment product as a consumer product. It was not the type of product sold to the general public which would have CFA protection; this product was intricate and also involved a very sophisticated purchaser. It also observed that the plan contained many recommendations and disclaimers to seek independent guidance. The Court additionally agreed with the lower court’s denial of “benefit of the bargain” damages because enforcement of such damages would effectively enforce plan provisions that were disallowed by the IRS. Rather, the Court found the lower court’s approval of out of pocket damages awarded as the only damage structure permitted given the IRS disallowance.

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