Levinson v. Westport Nat'l Bank

• Decision Date: 28 September 2012
• Docket Number: Civil Action No. 3:09cv269 (VLB).
• Citation: 900 F.Supp.2d 143
• Parties: Stephen R. LEVINSON; Richard E. Layton; and Dr. R. Layton P.A. 401(K) Plan, Plaintiff, v. WESTPORT NATIONAL BANK; TD Banknorth NA; and Robert L. Silverman, Defendants.
• Court: U.S. District Court — District of Connecticut

900 F.Supp.2d 143

Stephen R. LEVINSON; Richard E. Layton; and Dr. R. Layton P.A. 401(K) Plan, Plaintiff,

v.WESTPORT NATIONAL BANK; TD Banknorth NA; and Robert L. Silverman, Defendants.

Civil Action No. 3:09cv269 (VLB).

United States District Court, D. Connecticut.

Sept. 28, 2012.

Deborah Clark–Weintraub, Scott & Scott, Edith M. Kallas, Ilze C. Thielmann, Joe R. Whatley, Jr., Whatley Drake & Kallas, New York, NY, James E. Hartley, Jr., Drubner & Hartley, Waterbury, CT, Richard P. Rouco, Quinn, Connor, Weaver, Davies & Rouco, Birmingham, AL, for Plaintiff.

Jenny R. Chou, Jonathan M. Freiman, Joseph C Merschman, Wiggin & Dana, New Haven, CT, for Defendants.

MEMORANDUM OF DECISION GRANTING IN PART AND DENYING IN PART PLAINTIFFS' MOTION FOR PARTIAL SUMMARY JUDGMENT [DKT. # 354] AND GRANTING IN PART AND DENYING IN PART DEFENDANT'S AMENDED MOTION FOR SUMMARY JUDGMENT [DKT. # 372]

VANESSA L. BRYANT, District Judge.

This action arises out of the Ponzi scheme perpetrated by Bernard L. Madoff. Two individuals and a pension and profit-sharing plan, along with the class they represent (collectively the “Plaintiffs”), have brought this action against: (1) Westport National Bank (“WNB”), the custodian of their retirement investments; and (2) Robert L. Silverman, the president of PSCC Services, Inc. (“PSCCSI”),¹ the Plaintiffs' pension consulting and actuarial firm (collectively the “Defendants”).² The Plaintiffs and the class they seek to represent maintained custodial accounts with WNB for their investments. WNB invested the Plaintiffs' assets with Bernard L. Madoff Investment Securities, LLC (“BLMIS”). After Madoff admitted his fraud, the Plaintiffs realized that their investments were lost and commenced this class action.

The Plaintiffs originally brought this putative class action in February 2009. After this Court dismissed their complaint with leave to amend, the Plaintiffs filed the first amended class action complaint on January 19, 2010, asserting several causes of action. Upon the Defendants' motions, this Court dismissed or entered judgment on the pleadings in favor of the Defendants with respect to several claims. The only claims still active, see discussion, supra at 151 n. 2, are the Plaintiffs' claims against WNB for (1) breach of contract, (2) breach of fiduciary duty, (3) negligence, (4) violations of CUTPA, (5) unjust enrichment, and (6) money had and received.

The Plaintiffs have moved, pursuant to Federal Rule of Civil Procedure 56, for partial summary judgment on their breach of contract, CUTPA, and money had and received claims [Dkt. # 354]. WNB has, in an amended motion, similarly moved for summary judgment on all of the Plaintiffs' claims [Dkt. # 372]. Because this Court concludes that triable issues exist with respect to some, but not all, of the Plaintiffs' claims, the Plaintiffs' motion [Dkt. # 354] is DENIED and WNB's amended motion [Dkt. # 372] is GRANTED IN PART and DENIED IN PART. WNB's earlier motion for summary judgment, superseded by the amended motion [Dkt. # 358] is DENIED AS MOOT.

I. Background³

In December 2008, when Madoff admitted his Ponzi scheme and BLMIS collapsed, the Plaintiffs had been investors with BLMIS for up to two decades, and WNB had served as custodian of their investment accounts with BLMIS since 1999. The gravamen of the Plaintiffs' claims is that, during its time as custodian, WNB breached its contractual and common law duties to the Plaintiffs by impermissibly commingling their assets, relying on information provided by BLMIS, and making no effort to monitor BLMIS or verify this information. The Plaintiffs argue that WNB's conduct entitles them to recover improperly assessed fees paid to WNB, as well as their investment principal and lost investment income which they could reasonably have anticipated earning if they had known that BLMIS was a fraudulent enterprise instead of an investment firm.

The parties have filed voluminous evidentiary submissions in the summary judgment briefing process. This ruling will briefly summarize this evidence, reserving some facts for discussion of the merits of the parties' respective motions.

A. The Plaintiffs' custodial accounts with WNB.

The Plaintiffs were clients of PSCC, Inc. and PSCC Services, Inc. (collectively “PSCC”), pension and retirement plan consulting services companies operated by Robert L. Silverman. (WNB's L.R. 56(a)(1) Stmt. ¶ 1.) PSCC provided pension and retirement plan consulting services for the Plaintiffs. ( Id.) In 1986, Silverman entered into an arrangement with Madoff whereby PSCC clients would invest with BLMIS through an intermediary custodian of their assets; the intermediary custodian would hold an omnibus account at BLMIS composed of the combined investments of the PSCC clients. ( See id. ¶¶ 1, 9.)

Initially, Westport Bank and Trust (“WBT”) served as the intermediary custodian. ( Id. ¶ 1.) In 1999, after WBT was acquired by Hudson United Bank (“HUB”), HUB terminated the custodial arrangement with PSCC and BLMIS. ( Id. ¶ 9.) PSCC approached WNB about serving as custodian of the PSCC clients' investments with BLMIS, and WNB agreed. ( Id.) The Plaintiffs terminated their accounts at WBT and opened new accounts at WNB. Thereupon, BLMIS transferred the assets in the omnibus account in WBT's name to a new omnibus account in WNB's name. ( Id. ¶¶ 9–10.) At the time of the transfer, neither PSCC, WBT nor WNB verified the account balances reported by BLMIS. None of the entities conducted an audit the omnibus account or took any other steps to verify either that there were any actual assets in the omnibus account or the amount of such assets. No funds were deposited in WNB. (Pl.'s L.R. 56(a)(1) Stmt. ¶¶ 29, 32.)

Each Plaintiff entered into a separate custodial agreement with WNB which governed the custodial relationship. All of the agreements were identical. The agreements provide that WNB would undertake to perform certain specified functions. WNB agreed to act as custodian with respect to all funds transmitted to WNB by Plaintiffs and invest Plaintiffs' funds in an omnibus account maintained at Bernard L. Madoff Investment Services, Inc. (“BLMIS”). (Whatley Decl. Ex. 49, at 1.) The agreements state that “[WNB] shall accept such property from [the Plaintiffs,] and [WNB] shall invest all such cash and cash equivalents held hereunder, and any interest, dividend or other income earned from property held by [WNB] hereunder, in [WNB's] deposit money market account until [WNB] transfers the funds to [BLMIS].” Id. In addition, as described below, WNB was responsible for paying fees to itself and PSCC.

Each agreement provides that WNB had only a limited role in the Plaintiffs' investment strategy: “Principal has chosen BLMIS to receive and invest Principals funds and has not relied on the Bank in choosing to give BLMIS full discretionary authority.” ( Id.) “[WNB] has no authority or ability to direct or oversee in any manner the discretionary investments made by BLMIS; ... [WNB] is acting solely in a ministerial capacity; ... [and WNB] assumes no responsibility for the investment performance of BLMIS.” ( Id.) But the agreements also provide that WNB has certain other responsibilities: WNB “shall maintain adequate records indicating the ownership by [the Plaintiffs] of investments with BLMIS and held by [WNB] as custodian for [the Plaintiffs]” and “shall render at least annually statements reflecting the property held by it as custodian hereunder.” ( Id. at 2.) “The Principal and the Bank also acknowledge that the Principal has entered into an agreement with PSCC ... for services to be performed by ... [PSCC] with respect to Principal's investments made by BLMIS. The Bank is authorized and directed to coordinate its recordkeeping with that provided by PSCC.” ( Id. at 4.)

The contracts also govern the Plaintiffs' payment of fees to WNB and PSCC; the fees due to both entities depended on the “average assets” held on behalf of the PSCC clients. For services prior to December 31, 2004, PSCC received “an amount equal to .010 of the average assets (determined on an annual basis) held by [WNB] under this Custodian Agreement, plus .002 of the amount of each transaction effected by BLMIS on behalf of [the Plaintiffs] with a maximum of .025 of average assets.” ( Id.) For services after December 31, 2004, PSCC received “an amount equal to .006 of the assets at the time of billing held by [WNB] under this Custodian Agreement,” plus any separately itemized “administrative services.” ( Id. at 3.) WNB received “fees ... of .006 of the average assets held hereunder (determined on an annual basis).” ( Id. at 2.) Lastly, the agreements provide that WNB “is further authorized and directed to pay to [PSCC] from the custodial account of Principal established hereunder.” ( Id.)

B. WNB's administration of the Plaintiffs' accounts.

WNB held the Plaintiffs' total assets in two types of investments: (1) the omnibus account with BLMIS, which held the Plaintiffs' investments in combination with the other PSCC clients, and (2) cash in multiple custodial services accounts at WNB which WNB used to receive deposits from investors, receive disbursements from BLMIS, and pay fees to itself and PSCC. (WNB's L.R. 56(a)(1) Stmt. ¶¶ 28.)

The Plaintiffs therefore held proportionate investment interests in a common pool of assets composed of the omnibus account at BLMIS and the custodial services accounts at WNB. ( Id.) WNB attempted to have a cash balance in the custodial services accounts at all times. (Clark–WeintraubDecl. Ex. 31, at 47:17–48:13.) WNB would make the determination about when to transfer money and would do so to adjust the balance based on anticipated future cash needs. ( Id. at 47:17–48:13, 138:3–139:4; see also Whatley Decl. Ex. 3, at 169:15–25.) WNB administered the custodial services accounts in a manner which minimized the number of transfers which took place between WNB and BLMIS; when a customer deposited cash, WNB...