Szulik v. State St. Bank & Trust Co.

• Decision Date: 25 March 2013
• Docket Number: Civil Action No. 12–10018–NMG.
• Citation: 935 F.Supp.2d 240
• Parties: Matthew J. SZULIK, individually and as trustee of the Raymond W. Szulik Trust, Raymond W. Szulik, as trustee of the Raymond W. Szulik Trust, Edward Adams, as trustee of the Kaitlin Szulik Trust, Brendan Szulik Trust and Keenan Szulik Trust, and Kyle M. Szulik, Plaintiffs, v. STATE STREET BANK AND TRUST COMPANY, Defendant.
• Court: U.S. District Court — District of Massachusetts

935 F.Supp.2d 240

Matthew J. SZULIK, individually and as trustee of the Raymond W. Szulik Trust, Raymond W. Szulik, as trustee of the Raymond W. Szulik Trust, Edward Adams, as trustee of the Kaitlin Szulik Trust, Brendan Szulik Trust and Keenan Szulik Trust, and Kyle M. Szulik, Plaintiffs,

v.STATE STREET BANK AND TRUST COMPANY, Defendant.

Civil Action No. 12–10018–NMG.

United States District Court, D. Massachusetts.

March 25, 2013.

Benjamin M. McGovern, Michael T. Maroney, Michael J. Stromsnes, Ralph T. Lepore, III, Holland & Knight, LLP, Boston, MA, Mitchell Herr, Securities & Exchange Commission, Tracy Nichols, Holland & Knight LLP, Miami, FL, for Plaintiffs.

Andrea J. Robinson, Christopher B. Zimmerman, Eric D. Wolkoff, Wilmer Hale LLP, Boston, MA, for Defendant.

ORDER

NATHANIEL M. GORTON, District Judge.

“After consideration of Plaintiffs' Limited Objection (Docket No. 35), Defendant's Objections (Docket No. 36) and the parties responses to their opponents objections (Docket Nos. 37 and 38) thereto, Report and Recommendation is accepted and adopted.”

REPORT AND RECOMMENDATION ON DEFENDANT'S MOTION TO DISMISS

DEIN, United States Magistrate Judge.

I. INTRODUCTION

This action arises out of five Custody Account Agreements which the plaintiffs, Matthew J. Szulik, individually and as trustee of the Raymond W. Szulik Trust, Raymond W. Szulik, as trustee of the Raymond W. Szulik Trust, Edward Adams, as trustee of the Kaitlin Szulik Trust, Brendan Szulik Trust, and Keenan Szulik Trust, and Kyle M. Szulik (collectively, the “Szuliks”), entered into with defendant State Street Bank and Trust Company (“State Street”) and its predecessors, Chemical Bank and Investors Bank & Trust Company. Pursuant to the Agreements, the plaintiffs authorized State Street and its predecessors to establish and maintain custody accounts for the purpose of holding and disposing of cash and investments belonging to the plaintiffs, and to conduct certain transactions in accordance with instructions from the plaintiffs' investment advisor, TAG Virgin Islands, Inc. (“TAG”).

The plaintiffs claim that during the time they maintained custody accounts with the defendant and its predecessors, TAG defrauded the Szuliks out of millions of dollars by liquidating their conservative investments in high-quality stocks and bonds, and investing their funds in suspicious, high-risk and illiquid securities, as well as in real estate and personal loan instruments, which were incompatible with the Szuliks' investments goals and for which TAG often received illegal kickbacks and other financial benefits. The plaintiffs contend that State Street, in its capacity as their custodian, was obligated to safeguard the Szuliks' property from misappropriation or misuse by TAG. However, they claim that instead of protecting the plaintiffs' assets, State Street engaged in conduct that violated its own contractual and legal duties to the Szuliks and enabled TAG to carry out its deceptive scheme. In particular, the Szuliks contend that State Street improperly disbursed the plaintiffs' funds in exchange for securities that were defective on their face and were not delivered to the plaintiffs in a timely manner, failed to take proper custody of the plaintiffs' assets, issued misleading and inaccurate account statements to the plaintiffs, and charged the plaintiffs excessive fees based on misleading and inflated account values. The plaintiffs allege that they have suffered and will continue to suffer damages as a result of State Street's alleged misconduct. By their Complaint in this action, the plaintiffs have asserted claims against State Street for breach of contract (Counts I and II), negligence (Count III), unjust enrichment (Count IV), and breach of fiduciary duty (Count V).

The matter is presently before the court on “Defendant State Street Bank and Trust Company's Motion to Dismiss Plaintiffs' Complaint” (Docket No. 14), by which State Street is seeking an order dismissing each Count of the complaint for failure to state a claim pursuant to Fed.R.Civ.P. 8(a) and 12(b)(6). For all the reasons described below, this court recommends to the District Judge to whom this case is assigned that the defendant's motion be ALLOWED IN PART and DENIED IN PART. Specifically, this court recommends that the motion to dismiss be allowed with respect to Count V, but otherwise that the plaintiffs be permitted to proceed with the remaining claims in accordance with this Report and Recommendation.

II. STATEMENT OF FACTS

When ruling on a motion to dismiss brought under Fed.R.Civ.P. 12(b)(6), the court must accept as true all well-pleaded facts, and give the plaintiff the benefit of all reasonable inferences. See Cooperman v. Individual, Inc., 171 F.3d 43, 46 (1st Cir.1999). “Ordinarily, a court may not consider any documents that are outside of the complaint, or not expressly incorporated therein, unless the motion is converted into one for summary judgment.” Alt. Energy, Inc. v. St. Paul Fire & Marine Ins. Co., 267 F.3d 30, 33 (1st Cir.2001). “There is, however, a narrow exception ‘for documents the authenticity of which are not disputed by the parties; for official public records; for documents central to plaintiffs' claim; or for documents sufficiently referred to in the complaint.’ ” Id. (quoting Watterson v. Page, 987 F.2d 1, 3 (1st Cir.1993)). Applying this standard to the instant case, the facts relevant to State Street's motion to dismiss are as follows. ¹

The Parties

Plaintiff Matthew J. Szulik, his wife plaintiff Kyle M. Szulik, and Matthew's father, plaintiff Raymond W. Szulik, are individuals who reside in Raleigh, North Carolina. (Compl. ¶¶ 1–2). Matthew and Raymond are the trustees of the Raymond W. Szulik Trust, which was established for the benefit of Raymond Szulik. ( Id. ¶ 2). Plaintiff Edward Adams (“Adams”) is an individual who resides in Richmond, Vermont. ( Id. ¶ 3). He is currently the trustee of three separate trusts—the Kaitlin Szulik Trust, the Brendan Szulik Trust, and the Keenan Szulik Trust (collectively, the “Szulik Children Trusts”)—that were established for the benefit of Matthew and Kyle Szulik's children. ( Id.). As detailed below, the custodial accounts at issue in this case were established for the benefit of Matthew and Kyle Szulik jointly, the Raymond W. Szulik Trust, and each of the Szulik Children Trusts.

The defendant, State Street, is a trust company that is organized under the laws of the Commonwealth of Massachusetts and maintains a principal place of business in Boston, Massachusetts. ( Id. ¶ 4). The plaintiffs claim that State Street succeeded to the rights, liabilities and obligations of Chemical Bank and Investors Bank & Trust Company (“IBT”) as a result of one or more corporate mergers or acquisitions. ( Id. ¶¶ 10, 12). As the successor to Chemical Bank and IBT, State Street allegedly assumed responsibility as custodian of the plaintiffs' custody accounts with those entities. ( See id. ¶¶ 9–12). By their claims in this action, the plaintiffs are seeking to hold State Street liable for the alleged misconduct of Chemical Bank and IBT, as well as for its own misconduct, in connection with the plaintiffs' custody accounts.²

The Custody Account Agreements

During the time period from about 1996 until 2009, the Szuliks employed TAG ³ as their investment advisor to manage various family investment portfolios, which at certain times had a combined value of over $80 million. ( Id. ¶ 7). In order to ensure that their assets would be held by a qualified custodian that was entirely independent from TAG, the plaintiffs entered into a series of custodial agreements (the “Custody Account Agreements”) with State Street. ( Id. ¶ 8). Specifically, Matthew and Kyle Szulik entered into a Custody Services Custodian Account Agreement with the defendant on or about March 6, 1996 for the purpose of establishing a custody account for the joint benefit of Matthew and Kyle Szulik (the “Joint Account Agreement”), and Matthew and Raymond Szulik entered into a Custody Account Agreement with the defendant on or about December 23, 2004 for the purpose of establishing a custody account for the benefit of the Raymond W. Szulik Trust (the “Raymond Trust Agreement”). ( See Compl. ¶¶ 9, 11; Compl. Ex. A at 1–2; Compl. Ex. B at 1). In addition, on or about July 1, 2008, the then-trustee of the Szulik Children Trusts entered into three separate Custody Account Agreements with State Street in order to establish custody accounts for the benefit of the Szulik Children Trusts (the “Szulik Children Trust Agreements”). ( See Compl. ¶ 13; Compl. Exs. C–E). The plaintiffs claim that the intended purpose of those Agreements was to limit the circumstances under which TAG could disburse or transfer their assets, and to safeguard those assets from misappropriation or misuse by TAG. ( See id. ¶¶ 8–9, 11, 13). As described below, the plaintiffs contend that State Street's own misconduct and lack of oversight enabled TAG to defraud them out of millions of dollars worth of investments.

The details of the Custody Account Agreements will be described below in connection with this court's analysis. However, as a general matter, under the Agreements the plaintiffs authorized State Street to establish custody accounts for the purpose of holding and disposing of property that State Street received for the plaintiffs. ( See Compl. Ex. A at preamble, Compl. Ex. B at preamble). ⁴ They also authorized State Street to perform various transactions in accordance with TAG's instructions, including but not limited to, transactions involving the disbursement of funds and the purchase and sale of securities. ( See Compl. Ex. A ¶ 12; Compl. Ex. B ¶ 23; Def. Ex. A ¶ 1). In addition, the Agreements required State Street to issue periodic account statements describing the transactions in the custody accounts, and listing the securities held in the accounts along with the current market value of those...