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No fiduciary duty owed to IRA beneficiary

But claim under ‘93A’ can proceed

SANKT MORITZ, SWITZERLAND - AUGUST 16, 2018: UBS swiss bank signThe commercial custodian of non-discretionary individual retirement accounts did not owe a fiduciary duty to a named beneficiary of those accounts, but the beneficiary could maintain a suit under the consumer protection statute, G.L.c. 93A, by credibly alleging that the custodian had unreasonably withheld the proceeds of those accounts, the Massachusetts Supreme Judicial Court has decided.

The decision split the difference between the conclusions reached by the trial judge and Appeals Court.

The SJC noted that fiduciary duties may arise either as a matter of law if the parties have an “archetypal” relationship, or when there is “evidence indicating that one person is in fact dependent on another’s judgment in business affairs or property matters.”

But here, the plaintiff-in-counterclaim could not support the existence of a fiduciary duty under either theory, the SJC found.

While the circumstances that may create a fiduciary relationship are varied, here the amended counterclaim did not allege that the plaintiff ever “reposed trust and confidence” in the defendant’s judgment or advice, Justice David A. Lowy wrote for the court.

Nor did the contract between the original account holder and the defendant contain any express or implicit assumption of any fiduciary responsibility, Lowy said.

On the other hand, the counterclaim plaintiff could assert her Chapter 93A claim, having met her burden to allege plausibly that the defendant was operating in a “business context” and that the defendant’s conduct was “unfair” within the meaning of Chapter 93A.

The 35-page decision is UBS Financial Services, Inc. v. Aliberti.

‘Fundamental transformation’ avoided

John K. Wells of Boston, attorney for defendant-in-counterclaim UBS, declined to comment on the SJC’s decision, as did lawyers who crafted an amicus brief on behalf of the Securities Industry and Financial Markets Association.

But the association is likely relieved that the court failed to recognize the potential existence of a fiduciary duty to IRA beneficiaries, as the Appeals Court had.

In its brief, the association called such a duty “unprecedented, irreconcilable with fiduciary principles, and unsupported by state or federal law.”

Moreover, the association warned that imposing a fiduciary duty to account beneficiaries would have “significant market consequences” by imposing costs not currently accounted for in client agreements.

Custodial IRAs are currently inexpensive, but the imposition of fiduciary duties to beneficiaries would “fundamentally transform the industry” by requiring financial institutions to hire staff to undertake a whole host of activities not currently required, the association said.

Richard M. Gelb of Beverly, Massachusetts, said he was not surprised that the SJC declined to find the existence of a fiduciary duty in Aliberti “because the relationship is administrative in nature.”

However, Gelb said he thought a fiduciary duty could have been found, if the relationship between the parties had been analyzed in the context of UBS serving as a custodian or agent holding property for a bailee.

He noted that the “essence of the case” was the failure to process and deliver property, actions that courts have found can be a breach of fiduciary duty, if done willfully.

Boston attorney Robert J. Kaler, who frequently represents financial institutions in litigation, said it would have been somewhat incongruous for the SJC to have found a fiduciary relationship, as it would have conferred onto the third-party beneficiary rights that the original account holder had not enjoyed.

But Kaler was quick to add that the SJC did not leave IRA beneficiaries in Massachusetts without a remedy for the kinds of problems the plaintiff alleged.

“Taken together with the Appeals Court’s prior decision reinstating the plaintiff’s contract claims, the appellate courts are simply saying that the remedy is found in contract law principles governing the rights of intended third-party beneficiaries and under [Chapter] 93A, not under fiduciary duty principles,” he said.

Boston attorney William A. Haddad agreed.

“The court took something away and offered something in return,” he said, noting that Chapter 93A opens up the possibility of the award of treble damages and attorneys’ fees.

A lesson from the decision for custodians is that risk aversion can backfire if taken to the extreme, Haddad added. In this case, the custodian may have given more deference to another claim on the funds than it deserved.

Haddad said the SJC’s decision should highlight for financial firms the need to have appropriate policies and procedures to ensure that inquiries like the beneficiary’s in Aliberti “go up the chain” and do not stagnate.

The counterclaim plaintiff’s attorney, Carmen A. Frattaroli of Salem, Massachusetts, did not respond to requests for comment.

Long wait for disbursement

In 2008, Patrick Kenney opened three IRAs with UBS with the assistance of a financial advisor who at one time was his sister-in-law, Margaret Kenney.

Initially, Patrick Kenney designated his long-term romantic partner, Donna M. Aliberti, as the sole primary beneficiary of each IRA.

In November 2013, Patrick Kenney sought to change the beneficiaries of the two smallest IRAs, writing on a form the names of Aliberti, Aliberti’s son, his niece and a friend, Craig Gillespie, with the notation “25 percent” next to each.

However, he made a mistake, writing Gillespie’s name on the line designated for “primary beneficiary,” while the other people were listed as “contingent” beneficiaries. Due to the error, UBS declined to process the changes.

Before Patrick Kenney could correct his mistake, he died unexpectedly on Dec. 2, 2013.

Approximately two weeks following Patrick Kenney’s death, Aliberti contacted Margaret Kenney about the three IRAs.

Margaret Kenney first responded innocuously but was soon attacking Aliberti’s character in text messages, calling her “a whore” and “the … worst piece of filth I have ever encountered.”

Margaret Kenney also accused Aliberti of having failed to notice errors on Patrick Kenney’s death certificate because she was “too busy ransacking” and “so eager to grab the money.”

In the meantime, near the end of December 2013, UBS received a letter from Gillespie’s attorney, stating his belief that Patrick Kenney had “changed the named beneficiaries on two of the IRA accounts and that he was in the process of changing beneficiaries with regard to the third IRA account at the time of his passing.”

The attorney asked UBS not to make any distributions from the largest IRA until he could resolve the matter in court.

As a result of the attorney’s letter, UBS effectively froze the proceeds from the largest IRA, valued at $276,000, until UBS received a court order with instructions, Gillespie withdrew his claim, or all applicable statutes of limitations had expired.

In the ensuing months, Aliberti’s efforts to get UBS to release the funds went nowhere.

Within five months of Patrick Kenney’s death, UBS liquidated each of the smaller IRAs, making four equal distributions of funds to Aliberti, Aliberti’s son, Gillespie and Patrick Kenney’s niece, which prompted Aliberti to retain counsel to communicate with UBS on her behalf.

UBS failed to respond to Aliberti’s attorney’s initial request for information, responding only after it was served with a keeper-of-the-records deposition.

On Aug. 29, 2014, Aliberti’s attorney sent a second letter to UBS demanding immediate distribution of the date-of-death balance of the larger IRA, threatening to sue if UBS failed to respond. Aliberti did not follow through on that threat, however.

On April 2, 2015, Margaret Kenney admitted in a deposition to sending Aliberti the offending text messages. Aliberti’s counsel included Margaret Kenney’s deposition transcript when he sent UBS a Chapter 93A demand letter on May 18, 2015. UBS responded a month later denying the legal merit of Aliberti’s claims.

As the dispute dragged on, UBS filed a complaint for interpleader in Superior Court on Aug. 4, 2015, asking the court to determine ownership of the larger IRA.

On June 9, 2016, UBS and Aliberti entered into a limited stipulation and release under which UBS would distribute all proceeds of the larger IRA to Aliberti “promptly and without delay,” while Aliberti would still be allowed to pursue her breach of contract, breach of fiduciary duty, and Chapter 93A claims against UBS.

UBS distributed the larger IRA proceeds to Aliberti on July 1, 2016, approximately two and a half years following Patrick Kenney’s death.

UBS eventually filed a motion for judgment on the pleadings, which Superior Court Judge Karen F. Green granted, dismissing each of Aliberti’s counterclaims.

The Appeals Court reversed in part, finding Aliberti’s claims of breach of contract, breach of fiduciary duty, and violation of Chapter 93A had been well pleaded.

The SJC granted further appellate review as to the issues of breach of fiduciary duty and violation of Chapter 93A.

‘Facially plausible’

UBS had at least partially conceded that it provides custodial IRA services to consumers in the ordinary course of its business, for profit, and under standard form contracts it drafts, which includes the promise to the account holder that the IRA will be transferred to a designated beneficiary or beneficiaries at the account holder’s death, the SJC noted.

Even if UBS did not charge a specific fee for this “postmortem asset delivery service,” it was sufficient to establish that the interactions between UBS, as IRA custodian, and Aliberti, as the designated beneficiary of the IRAs following Patrick Kenney’s death, occurred in a business context within the meaning of Chapter 93A, Lowy wrote for the court.

The SJC emphasized that its holding — that the interactions between an IRA custodian and a named beneficiary of the IRA following the initial account holder’s death typically occur in a business context within the meaning of Chapter 93A — extends beyond the specific facts of Aliberti.

Between the protracted withholding of the proceeds of the largest IRA and Margaret Kenney’s “abusive” text messages, Aliberti had also alleged sufficient facts to demonstrate that the manner in which UBS interacted with her was “unfair” within the meaning of the statute, Lowy wrote.

It was also a problem that UBS had allegedly refused to communicate with Aliberti about assets that its own records and policies indicated belonged to her until she hired counsel and served a subpoena, he added.

Such conduct is commercially unreasonable and “unfair” for the purposes of Chapter 93A and can form a “facially plausible” claim, the SJC ruled.

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