Burns v. Delaware Charter Guarantee & Trust Co.

Decision Date08 June 2011
Docket NumberNo. 10 Civ. 4534.,10 Civ. 4534.
PartiesBarbara A. BURNS et al., Plaintiffs, v. DELAWARE CHARTER GUARANTEE & TRUST COMPANY d/b/a Principal Trust Company, and Principal Financial Group, Inc., Defendants.
CourtU.S. District Court — Southern District of New York


Dorfman Knoebel & Conway LLP, by: Burton Dorfman, Esq., Nyack, NY, for Plaintiffs.

Sidley Austin LLP, by: Lynn Ann Dummett, Esq., Joel S. Feldman, Esq., Kevin M. Fee, Esq., Michael C. Adolina, Esq., New York, NY, for Defendants.


SWEET, District Judge.

Defendants Principal Financial Group, Inc. (Principal Financial) and Delaware Charter Guarantee & Trust Company d/b/a Principal Trust Company (Principal Trust) (collectively, the Defendants) have moved pursuant to Federal Rule of Civil Procedure 12(b)(6) to dismiss the Amended Complaint 1 (“AC”) filed by Plaintiffs Barbara Burns, James Burns, Daniel Mancuso, Kevin Romano, Robert Sheridan, Michelle Venema, Karen Mancuso, Joanne Romano, Michael Heaphy, and Suzanne Heaphy (Plaintiffs). Upon the conclusions set forth below, the motion is granted in part and denied in part.

The Plaintiffs and the Defendants entered into Self–Directed Individual Retirement Trust Agreements (“SIRTA” or “Trust Agreement”) to establish traditional individual retirement accounts (“IRAs”). The Plaintiffs directed investment in the Westgate Fund which proved to be a Ponzi scheme operated by James Nicholson (“Nicholson”). At issue is the adequacy of the eight claims set forth in the AC, alleging breach of contract, negligence, gross negligence, breach of fiduciary duty, unjust enrichment, negligent misrepresentation, fraud, and aiding and abetting fraud.

I. Prior Proceedings

This case was removed from New York State Supreme Court for Rockland County on June 9, 2010. The Plaintiffs filed their AC on July 21, 2010. The Defendants moved to dismiss the AC on August 31, 2010, and the motion to dismiss was heard and marked fully submitted on December 8, 2010. This court recently granted in part and denied in part a similar motion to dismiss in the related case of Grund v. Delaware Charter Guarantee & Trust Co., No. 09 Civ. 8025, 788 F.Supp.2d 226, 2011 WL 2118754 (S.D.N.Y. May 26, 2011).

According to the AC, the Plaintiffs entered into a standardized form contract for a self-directed IRA that was drafted by Defendants, which in turn was copied in part from a federal form contract created by the Internal Revenue Service (“IRS”). See IRS Form 5305A; AC ¶¶ 62, 64, 67, 92, 94, 123, 125. The form, as promulgated by the IRS, sets forth a number of provisions which must be included to create a valid “Traditional Individual Retirement Custodial Account” under § 408 of the Internal Revenue Code (“IRC”). Under IRC § 408, the custodian/trustee has a duty to acquire and hold particular investments; to keep custody of investments; to refrain from commingling the investments of each account with any other property; to deposit assets of accounts requiring safekeeping in an adequate vault; to determine the assets held by it in trust and the value of such assets at least once in each calendar year and no more than 18 months after the preceding valuation; and to receive, issue receipts for, and safely keep securities. See Treas. Reg. 1.408–2(e). The SIRTA, written by Defendants, was signed by Plaintiffs, AC ¶¶ 64, 94, 125.

According to the AC, while Defendants were collecting fees from Plaintiffs for services which they allegedly failed to perform, they were allegedly permitting an unauthorized person, Nicholson, to take a percentage of the retirement money belonging to Plaintiffs. AC ¶¶ 32, 36, 40, 47. Plaintiffs believed that Defendants were upholding their contractual obligations, adhering to their duties as custodians/trustees, and protecting Plaintiffs' retirement money, and Defendants are alleged to have negligently or intentionally failed to perform many of their contractual and fiduciary obligations, as well as provided false information to Plaintiffs and aided Nicholson's fraud. AC ¶¶ 32, 36, 38–46.

Defendants are alleged to have willfully avoided uncovering Nicholson's scheme because they were benefitting from substantial fees gained though their relationship with him and Westgate. AC ¶¶ 40, 41, 44, 45.

According to the AC, Plaintiffs trusted Defendants to perform their duties as trustees/custodians of their IRA accounts but, instead of performing them, Defendants delegated much of the control over the IRA accounts to Nicholson and were willfully blind to the consequences of that action. This delegation was undertaken despite Nicholson's background and the fact that he was not an eligible party to any of the necessary IRA contracts required by federal law for the management of IRA and pension funds. Although they were in a unique position as a large, established IRA custodian and trustee, Defendants allegedly failed to discover Nicholson's fraud, failed in their duties as trustees, provided false statements to their clients, and breached their contractual duties.

II. The Applicable Standard

Fed.R.Civ.P. 8(a)(2) requires “a short and plain statement of the claim showing that the pleader is entitled to relief.”

Therefore, to survive a motion to dismiss pursuant to Rule 12(b)(6), “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). Though the court must accept the factual allegations of a complaint as true, it is “not bound to accept as true a legal conclusion couched as a factual allegation.” Iqbal, 129 S.Ct. at 1949 (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955). Plaintiffs must allege sufficient facts to “nudge [ ] their claims across the line from conceivable to plausible.” Twombly, 550 U.S. at 570, 127 S.Ct. 1955.

III. Principal Financial is Not Dismissed

The Defendants have urged that the AC contains no allegations that Principal Financial was involved in the transactions at issue. (Def. Mem. in Supp. at 8). Plaintiffs seek to meet this contention by citing authorities relating to alter ego status and fraud, but Plaintiffs fail to adequately allege either of these conditions in the AC.

However, under 26 C.F.R. § 1.408–2(e)(5)(i)(A)(1), if that section has been incorporated into the contract as alleged, “the owner or directors of the applicant will be responsible for the proper exercise of fiduciary powers by the applicant.” This responsibility of Principal Financial is sufficient to defeat the Defendants' motion with respect to Principal Financial.2

IV. Plaintiffs' New Allegations Regarding a Lack of a Contract Are Rejected

The AC alleged that Plaintiffs entered into a “trust agreement” with Principal Trust and that all Plaintiffs entered into this same “form contract.” AC ¶¶ 62, 64, 67, 92, 94, 123, 125. Plaintiffs quoted from the contract in the AC (AC ¶¶ 95, 126), and it formed the basis for their breach of contract claim (AC ¶¶ 91–105). Defendants attached to their motion to dismiss the contracts in force and governing Plaintiffs' accounts during the relevant time period, all of which contained identical terms, identifying them as the “Trust Agreement.” The same contract has been incorporated into the pleadings without dispute in the parallel Grund case. Plaintiffs' Response does not appear to contest that the Trust Agreement is the document quoted in the AC and appears to accept that the Trust Agreement's terms governed Plaintiffs' relationship with Principal Trust. The Response also quotes from the Trust Agreement when describing Principal Trust's contractual duties. Pl. Response at 12–14, 22. Plaintiffs still refer to the Trust Agreement as containing the terms underlying their breach of contract claim. Id. at 12–13.

At various points in the Response, however, Plaintiffs challenge their own allegations of a uniform trust agreement, suggesting that there was no uniform trust agreement at all. Plaintiffs claim that they received only an “application,” “disclosure form,” various transfer documents, IRS documents, (Pl. Response at 2), and a “letter of understanding” from Principal Trust, and that they never received the SIRTA referenced and quoted in their complaint. Id. at 12. To support these contentions, the Response attaches affidavits from each individual plaintiff, as well as varying sets of what appear to be IRA-related documents in each plaintiff's possession. The Response does not claim that the newly referenced documents contain the alleged contractual terms upon which Plaintiffs base the AC'S breach of contract allegations. See AC ¶¶ 32, 44, 59, 75, 81. Plaintiffs do not attach or identify any new trust agreement that they claim governs their IRAs.

Plaintiffs' new factual allegations, which contradict the AC'S allegation that all plaintiffs signed a form “trust agreement” governing their IRAs, are rejected. Compare AC ¶¶ 62, 67, 91–105. Plaintiffs cannot use their briefs to disavow the allegations in their complaint. Shervington v. Village of Piermont, No. 09 Civ. 4273, 2010 WL 93158, at *6 (S.D.N.Y. Jan. 8, 2010) withdrawn in part on other grounds in 732 F.Supp.2d 423 (S.D.N.Y.2010) (citations omitted); G–I Holdings, Inc. v. Baron & Budd, 179 F.Supp.2d 233, 265–66 (S.D.N.Y.2001) (Sweet, J.) (“It is inconsistent with the standards for resolving a motion to dismiss to have this Court draw inferences from facts not pleaded in the Complaint.”).

Defendants contend that Plaintiffs' refusal to recognize the contract governing their relationship with Defendants and forming the basis for their breach of contract claim merits dismissal of that claim. While this invitation is tempting, for the sake of efficiency the breach of contract claims will be evaluated as alleged in the AC.

V. The Federal Breach of Fiduciary Duty Claims are...

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