Short v. Connecticut Cmty. Bank, N.A.
| Decision Date | 28 March 2012 |
| Docket Number | Case No. 3:09-cv-1955 (VLB) |
| Court | U.S. District Court — District of Connecticut |
| Parties | AUDREY SHORT individually and FAYE, SHORT, individually and as Trustee for the Faye S. Albert Retirement Plan, Plaintiffs, v. CONNECTICUT COMMUNITY BANK, N.A. Defendant. |
SUMMARY JUDGMENT [DKT. # 67] AND GRANTING IN PART AND DENYING IN
PART DEFENDANT'S MOTION FOR SUMMARY JUDGMENT [DKT. # 69]
This action arises out of the Ponzi scheme perpetrated by Bernard L. Madoff. The two individual Plaintiffs maintained custodial accounts with Westport National Bank ("WNB"), a division of the Defendant Connecticut Community Bank, N.A. ("CCB"),1 for their investments with Bernard L. Madoff Investment Securities, LLC ("BLMIS"). After Madoff admitted his fraud, the Plaintiffs commenced this action raising claims of: (1) breach of contract, (2) breach of fiduciary duty, (3) professional negligence, and (4) aiding and abetting breach of fiduciary duty and fraud. As damages, the Plaintiffs seek to recover lost investment income and fees paid to WNB.
The Plaintiffs have moved, pursuant to Federal Rule of Civil Procedure 56,for partial summary judgment on their breach of contract claim [Dkt. # 67]. WNB has similarly moved for summary judgment on all the Plaintiffs' claims [Dkt. # 69]. Because this Court concludes that triable issues exist with respect to all but one of the Plaintiffs' claims, the Plaintiffs' motion [Dkt. # 67] is DENIED and WNB's motion [Dkt. # 69] is GRANTED IN PART and DENIED IN PART.
In December 2008, when Madoff admitted his Ponzi scheme and BLMIS collapsed, the Plaintiffs had been investors with BLMIS for 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 relying on information provided by BLMIS and making no effort to monitor BLMIS or verify this information. The Plaintiffs argue that WNB's failure to do so entitles them to recover improperly assessed fees paid to WNB 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.
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. (Pl.'s L.R. 56(a)(1) Stmt. ¶ 1.) PSCC prepared retirement plans for the Plaintiffs, submitted the plans for approval to the IRS, and served as administrator of the Plaintiffs' plans. (Id. ¶ 3.) 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. (WNB's L.R. 56(a)(1) Stmt. ¶ 4.)
Initially, Westport Bank and Trust ("WBT") served as the intermediary custodian. (Id.) In 1999, after WBT was acquired by Hudson United Bank ("HUB"), HUB terminated the custodial arrangement with PSCC and BLMIS. (Id. ¶ 8.) 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, and 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, WNB did not audit the omnibus account or take any steps to verify that the omnibus account contained the assets reported by BLMIS and no funds were deposited in WNB. (See Pl.'s L.R. 56(a)(1) Stmt. ¶¶ 12-13.)
Like the other PSCC clients, the Plaintiffs entered into custodial agreements with WNB which governed the custodial relationship. Theagreements provide that WNB will 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"). (App. to WNB's L.R. 56(a)(1) Stmt. Ex. U, at 1.) The agreements also provide that WNB has only a limited role in the Plaintiffs' investment strategy: "[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 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.)
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 Supp. L.R. 56(a)(1) Stmt. ¶¶ 1-3.) 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 calculated the value of this proportionate investment interest in the common pool of assets, the net asset value ("NAV"), periodically. (WNB's Supp. L.R. 56(a)(1) Stmt. ¶ 1; WNB's Supp. App. Ex. GG, at 101:22-102:3.)
WNB's fees, and part of PSCC's fees, were calculated based on the NAV of the combined pool of assets. (WNB's Supp. L.R. 56(a)(1) Stmt. ¶ 1.) WNB always maintained a cash balance in the custodial services accounts. (WNB's Supp. L.R. 56(a)(1) Stmt. ¶ 3.) WNB would adjust the balance based on anticipated future cash needs, but it typically did not exceed 0.5 percent of the total NAV of the PSCC clients' investments. (WNB's Supp. App. Ex. GG, at 101:11-25.)
The Plaintiffs received annual statements from WNB. (WNB's L.R. 56(a)(1) Stmt. ¶¶ 20, 24.) These statements provided the total value of their investment,the value of each share of their respective BLMIS investment, and number of shares owned, as well as with the market value of their investment one year earlier. The statements also detailed any additional investment by the Plaintiffs during the year (identified as a cash deposit followed by a purchase of shares in a BLMIS investment), as well as the fees deducted for payment to WNB and PSCC (identified as a sale of shares in a BLMIS investment followed by a deduction for administrative or record-keeping fees to PSCC or custodial fees to WNB). (Id.)
WNB asserts that Madoff was arrested, and his Ponzi scheme uncovered, on December 11, 2008. At that time, it became clear that Madoff misappropriated assets as soon as they were deposited with BLMIS (App. to WNB's L.R. 56(a)(1) Stmt. Ex. A, ¶ 1), and that the trade confirmations and monthly account statements BLMIS sent to WNB had been fabricated (id. ¶ 2). The omnibus account at BLMIS in WNB's name actually held no assets and had never held any assets. (Id. ¶ 3.)
On December 12, 2008, WNB acknowledged, in a letter to all the PSCC clients including the Plaintiffs, the "recent allegations involving Bernard Madoff" and reminded Plaintiffs that, pursuant to their custodial agreements, they could request return of their assets by delivering the request to WNB. In connection with the liquidation of BLMIS pursuant to the Securities Investor Protection Act ("SIPA"), the individualPlaintiffs filed claims with the SIPA trustee in the United States Bankruptcy Court for the Southern District of New York. (Pl.'s Response to Def.'s Mot. for Summ. J. Ex. 3.) WNB filed a statement in support of the claims submitted by the Plaintiffs and other PSCC clients. (Pl.'s Response to Def.'s Mot. for Summ. J. Ex. 2.) The SIPA trustee denied the Plaintiffs' claims in April 2011 because the Plaintiffs did not have accounts with BLMIS and therefore did not qualify for SIPA protection. (Pl.'s Response to Def.'s Mot. for Summ. J. Ex. 3.)
The Plaintiffs filed this lawsuit on December 2, 2009. The Plaintiffs seek to recover their lost investment income and fees paid to WNB and PSCC. (Compl. ¶¶ 35, 38, 46, 53.) As of December 11, 2008, the reported value of the Plaintiffs' total investments with BLMIS exceeded $1.7 million. (WNB's L.R. 56(a)(1) Stmt. ¶ 28.) During the time...
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