In this case, the New Jersey Supreme Court held that gifts giving rise to a presumption of undue influence include gifts that strip the donor of all or virtually all his assets, and gifts to a donee on whom the donor depends. Pascale v Pascale, 113 N.J. 20 (1988)

In 1939, plaintiff, John J. Pascale, founded a machine tool and die business, later incorporated under the name Quality Tool & Die Company Inc. (Quality). In 1952, plaintiff established a second, smaller machine tool company which operated out of Quality’s premises in Hoboken. By 1960, both businesses had become quite profitable.

Plaintiff had two sons, John Jr. and David. After he divorced his sons’ mother, plaintiff had a falling out with John Jr. Thereafter, plaintiff’s intention was to leave all of his business assets to David with minimal tax impact. The plan was for plaintiff to give the Hoboken properties and the Quality stock to David, with David paying the gift taxes.

Both David and a tax attorney, Bernard Berkowitz, who created and executed the plan, claimed that Pascale understood that by agreeing with this plan, he would be yielding control of Quality to David. In 1979, plaintiff signed various documents, including two stock certificates of Quality: one that described plaintiff as the owner of 310 shares, and the other that described David as the owner of 310 shares. Plaintiff also signed an assignment transferring his 310 shares of Quality to David, a deed from plaintiff and Quality conveying the Quality premises in Hoboken to David, and an affidavit of consideration.

Relations between David and Pascale cooled when plaintiff first learned that he was no longer in control of Quality. In 1982, David fired plaintiff, and David ordered plaintiff to leave the Quality premises.  Plaintiff filed a lawsuit claiming that he did not understand that the documents he signed in 1979 effected an outright transfer of the Quality stock and real estate to David.

The testimony at trial was in sharp conflict. Confronted with this conflicting testimony, the Superior Court, Chancery Division, Hudson County rejected plaintiff’s claims and held that Pascale was not entitled to rescind the 1979 transfers. The trial court found that plaintiff was “in full possession of his mental and physical faculties,” and had no “mental indisposition, psychological dependence, or lack of knowledge, comprehension or understanding on his part with respect to the gift transfers to David.” The court entered judgment for David and plaintiff appealed.

The Appellate Division reversed and remanded the case to the trial court. The appeals court found that a confidential relationship existed between plaintiff and David, and that Berkowitz was in a position of conflict when he advised plaintiff to execute the transfers. It therefore found that the trial court incorrectly failed to place on David “the burden of showing by clear and convincing evidence that his father intended to make a gift and unmistakenly intended to relinquish permanently the ownership of the companies and property.”

The Supreme Court granted certification. Thereafter, the Supreme Court found in favor of David, holding that: (1) plaintiff’s delegation of his financial and legal affairs to David evidenced that plaintiff reposed trust and confidence in David, and this trust and confidence was sufficient to give rise to presumption of undue influence when plaintiff transferred corporate stock to David; (2) attorney Berkowitz, who represented both plaintiff and David at time plaintiff transferred corporate stock to David, was in position of conflict and failed to comply with disciplinary rule requirement that he fully disclosed conflict; and (3) David rebutted the presumption of undue influence although plaintiff did not have independent counsel in transferring stock to David with whom he had confidential relationship.

When discussing the nature of gifts that give rise to a presumption the donor was the victim of undue influence, the Supreme Court held as follows:

If the donor is dependent on and makes an ‘improvident gift’ to the donee that strips the donor of all or virtually all his assets, a presumption arises that the donor did not understand the consequences of his act. . . . In this context, the donee must show that the donor ‘had the benefit of competent and disinterested counsel.’ . . . A similar rule applies when a physically or mentally weakened donor, without receiving any advice, makes a gift to a donee on whom the donor depends. If that gift leaves the donor without adequate means of support, the presumption of undue influence is conclusive. [Citations Omitted]

The case is annexed here – Pascale v Pascale

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