VANESSA L. BRYANT, District Judge.
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"),
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. The agreements 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. (App. to WNB's L.R. 56(a)(1) Stmt. Exs. J, K, L, S, T.) 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. (App. to WNB's L.R. 56(a)(1) Stmt. Exs. N, V.) In connection with the liquidation of BLMIS pursuant to the Securities Investor Protection Act ("SIPA"), the individual Plaintiffs 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 that WNB served as custodian, it deducted over $100,000 in fees for itself and over $430,000 in fees for PSCC. (WNB's Supp. L.R. 56(a)(1) Stmt. ¶¶ 4-8.) Accordingly, the Plaintiffs seek damages in excess of $2 million. (Compl. ¶¶ 35, 38, 46, 53.)
The standard for deciding the cross-motions for summary judgment is familiar. Summary judgment is appropriate only when "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). No genuine disputes as to any material fact exist, and summary judgment is therefore appropriate, when "the record taken as a whole could not lead a rational trier of fact to find for the non-moving party." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). A material fact is one which "might affect the outcome of the suit under the governing law," and an issue is genuine when "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). But "[c]onclusory allegations will not suffice to create a genuine issue." Delaware & Hudson Ry. Co. v. Consolidated Rail Corp., 902 F.2d 174, 178 (2d Cir. 1990).
On cross-motions for summary judgment, the same standard applies. See Morales v. Quintel Entm't, Inc., 249 F.3d 115, 121 (2d Cir. 2001). "The court must consider each motion independently of the other and, when evaluating each, the court must consider the facts in the light most favorable to the non-moving party." Natural Res. Def. Council v. Evans, 254 F.Supp.2d 434, 438 (S.D.N.Y. 2003) (citing Morales, 249 F.3d at 121).
The parties principally dispute whether WNB's contractual and common law duties extended to verifying information reported by BLMIS, or at least doing more to attempt to verify information reported by BLMIS than it did. Because this Court concludes that genuine issues of material fact exist as to whether WNB breached these duties and caused harm to the Plaintiffs as a result, summary judgment is not proper for either party on the Plaintiffs' breach of contract, breach of fiduciary duty, and professional negligence claims. Because no reasonable factfinder could conclude, on this record, that WNB aided and abetted any tortious conduct of BLMIS, Silverman, or PSCC, summary judgment for WNB is proper on the Plaintiffs' aiding and abetting breach of fiduciary duty and fraud claim.
WNB has also advanced a series of arguments which, it claims, limit its liability as a matter of law such that, at a minimum, partial summary judgment is appropriate on all claims made by one of the Plaintiffs and as to certain questions of damages. Because triable issues exist with respect to WNB's arguments, none establishes partial summary judgment as appropriate.
This ruling will discuss the arguments with respect to each of the Plaintiffs' claims, as well as WNB's liability limiting arguments, in turn.
The Plaintiffs argue that they are entitled to summary judgment on their breach of contract claim because WNB relied on fabricated account statements from BLMIS. As a result, they claim, WNB breached the custodial agreements by improperly charging fees based on the value of fictitious assets and providing inaccurate records and statements.
In Connecticut,
In determining whether breach has occurred, the court must ascertain the contractual rights and obligations of the parties.
Harbour Pointe, LLC v. Harbour Landing Condominium Ass'n, Inc., 300 Conn. 254, 260-61, 14 A.3d 284 (2011) (quoting Cantonbury Heights Condominium Ass'n, Inc. v. Local Land Development, LLC, 273 Conn. 724, 734, 873 A.2d 898 (2005)). Where a contract term is ambiguous, the court may properly discern the intent of the parties as to the meaning of the contract by considering extrinsic evidence. United Illuminating Co. v. Wisvest-Connecticut, LLC, 259 Conn. 665, 675, 791 A.2d 546 (2002).
"[T]he test of proximate cause is whether the defendant's conduct is a substantial factor in bringing about the plaintiff's injuries." Gurguis v. Frankel, 93 Conn.App. 162, 168, 888 A.2d 1083 (2006). "Proximate cause is ordinarily a question of fact." Id.
The custodial agreement provides that WNB and PSCC will receive fees based on the assets held under the custodial agreement. As to PSCC, the agreement provides for fees based on "average assets (determined on an annual basis) held by [WNB] under this Custodian Agreement" (App. to WNB's L.R. 56(a)(1) Stmt. Ex. U, at 2), or to "assets at the time of billing held by [WNB] under this Custodian Agreement" (id. at 3). As to WNB, it provides for fees based on "average assets held hereunder (determined on an annual basis)." (Id. at 2.)
The Plaintiffs argue that, when the contract uses the term "assets," it means actual assets held. (See Pl.'s Mot. for Partial Summ. J. at 12-13.) WNB argues that the term "assets" instead means the assets as reported by BLMIS. (See WNB's Reply to Pl.'s Response to WNB's Notice of Additional Authority at 1-2.) The remaining contract language does not assist in resolving this issue.
WNB, citing to Anwar v. Fairfield Greenwich Ltd., ___ F. Supp. 2d ___, No. 09-cv-118, 2011 WL 6288406 (S.D.N.Y. Dec. 14, 2011), argues that the contract term "assets" unambiguously means the value of assets reported by BLMIS. (WNB's Notice of Additional Authority and Supp. Br. at 1-3.) The Anwar court, on a motion to dismiss claims similar to those the Plaintiffs brought here, held that a contract which called for an intermediary to assess fees based on "month-end NAV of the Shares [of a hedge fund invested in BLMIS]" unambiguously permitted the intermediary to assess fees based on NAV as reported to it. 2011 WL 6288406, at *5-6. The reasoning in this decision does not resolve the matter of contract interpretation here.
In Anwar, the relationship between the intermediary bank defendant, BLMIS, and the plaintiff seeking to recover fees on a breach of contract theory was meaningfully different. The intermediary bank defendant had custody of the plaintiff's investment in a hedge fund which, in turn, invested with BLMIS. Id. at *6. The court interpreted NAV, net asset value, as a term of art which, when concerning the assets of a hedge fund, means a value calculated and promulgated by the hedge fund. Id. Using this interpretation, the court concluded that the plaintiffs could not reasonably have expected that the intermediary bank would calculate its fees based on any figure other than the NAV reported by the hedge fund. Id. at *6-7.
Here, WNB's position is not equivalent to that of the intermediary in Anwar. Unlike the intermediary in Anwar, WNB had the responsibility to calculate the NAV of a basket of investments which included BLMIS shares held by WNB in the BLMIS omnibus account as well as other assets, namely the cash accounts at WNB. 2011 WL 6288406, at *6; (WNB's Supp. L.R. 56(a)(1) Stmt. ¶¶ 1-3.) And unlike the intermediary in Anwar, WNB contracted to base its fees on "assets," not the "NAV of the Shares [held by WNB as custodian]." Compare 2011 WL 6288406, at *5 with (App. to WNB's L.R. 56(a)(1) Stmt. Ex. U, at 2).
Moreover, WNB's position is analogous to that of the hedge fund in Anwar. Like the hedge fund in Anwar, WNB held multiple investments in which the Plaintiffs had proportionate interests. 2011 WL 6288406, at *6; (WNB's Supp. L.R. 56(a)(1) Stmt. ¶¶ 1-3.) Like the hedge fund in Anwar, WNB calculated the NAV of these investments regularly. See 2011 WL 6288406, at *6; (WNB's Supp. L.R. 56(a)(1) Stmt. ¶ 1; WNB's Supp. App. Ex. GG, at 101:22-102:3, 106:14-20.) Accordingly, because Anwar resolved claims against an intermediary which did not calculate its own NAV and contractually based its fees on the value of shares in the hedge fund, and because Anwar did not address claims against the hedge fund itself, Anwar does not resolve the contract interpretation dispute here.
The terms of the custodial agreements therefore do not conclusively resolve whether the term "assets" means actual assets or reported assets. In the absence of a clear, unambiguous meaning for the term "assets," this Court could nonetheless conclude that summary judgment is proper if sufficient extrinsic evidence exists to demonstrate the parties' intent conclusively. See Compagnie Financiere de CIC et de L'Union Europeenne v. Merrill Lynch, Pierce, Fenner & Smith Inc. (Compagnie Financiere), 232 F.3d 153, 157-58 (2d Cir. 2000); Murtha v. City of Hartford, 303 Conn. 1, 8, 35 A.3d 177 (2011) ("When the language of a contract is ambiguous, . . . the determination of the parties' intent is a question of fact."). This Court concludes that the evidence is not so conclusive as to warrant summary judgment for either party.
The Plaintiffs point to certain evidence which suggests that WNB reserved the right to audit the investments in BLMIS, but apparently never did so.
WNB counters with evidence that the relevant contract between WNB and BLMIS says nothing about a right to an audit.
Whether viewed in the light most favorable to the Plaintiffs or WNB, a genuine issue of material fact exists based on the extrinsic evidence of the meaning of the ambiguous contract term "assets." Sufficient triable issues therefore exist to preclude summary judgment for either party on this claim.
WNB further argues that, even if it breached the custodial agreements by paying BLMIS fees based on reported assets instead of actual assets, the Plaintiffs cannot succeed on their claim because they cannot show that this breach caused them any damages. (WNB's Opp. to Pl.'s Mot. for Partial Summ. J. at 22-28.) WNB claims that the Plaintiffs cannot show that any breach proximately caused them damages because the Plaintiffs only "paid" fees in the sense that WNB sold the Plaintiffs' worthless BLMIS shares in proportion to the fees owed. (Id. at 27.)
"[T]he test of proximate cause is whether the defendant's conduct is a substantial factor in bringing about the plaintiff's injuries." Gurguis, 93 Conn. App. at 168. WNB concedes, as it must, that "[p]roximate cause is ordinarily a question of fact." Id. This Court concludes that it is such a question here too and that summary judgment is not proper on this basis.
It is undisputed that WNB actually received in excess of $100,000 in connection with performing custodial services for the Plaintiffs. (WNB's Supp. L.R. 56(a)(1) Stmt. ¶¶ 4-8.) It is equally undisputed that the Plaintiffs contributed money to their investment accounts with the reasonable expectation that it would appreciate in value and not be stolen. (WNB's L.R. 56(a)(1) Stmt. ¶¶ 13-24.) This Court has already concluded that the Plaintiffs have raised a triable issue as to whether WNB rightfully received as much in fees as it did. If WNB wrongfully received fees, then the money rightfully belongs to someone else, and WNB's improper fees would constitute a substantial factor in their loss to that person. The Plaintiffs' evidence creates a triable issue as to the source of the fees paid to WNB as well as whether at least some of the money WNB received as fees is attributable to the Plaintiffs' contributions to their accounts. (See WNB's L.R. 56(a)(1) Stmt. ¶¶ 13-24; WNB's Supp. L.R. 56(a)(1) Stmt. ¶¶ 4-8.) Accordingly, the evidence shows a genuine factual dispute about whether and to what extent WNB's improper fees rightfully belong to the Plaintiffs. Summary judgment is not warranted in WNB's favor on the issue of proximate causation.
The custodial agreement provides that 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." (App. to WNB's L.R. 56(a)(1) Stmt. Ex. U, at 2.)
As with the propriety of WNB's fees based on the contractual term "assets," the parties disagree about the proper interpretation of the terms "adequate records" and "statements reflecting the property held . . . as custodian." The Plaintiffs argue that adequate records and statements reflecting the property in which they had an interest would have shown that the Plaintiffs owned nothing because BLMIS was a fraud. (See Pl.'s Mot. for Partial Summ. J. at 12-18.) WNB argues that these terms instead mean records and statements based on the information reported by BLMIS. (See WNB's Opp. to Pl.'s Mot. for Partial Summ. J. at 17-18.) Again, the remaining contract language does not assist in resolving this issue.
This Court therefore concludes that the contract terms "adequate records" and "statements reflecting the property held . . . as custodian" are susceptible of both readings and are therefore ambiguous. Because insufficient extrinsic evidence exists to demonstrate conclusively the parties' intent with respect to these ambiguous contract terms, summary judgment is not warranted for either party. See Compagnie Financiere, 232 F.3d at 157-58; Murtha, 303 Conn. at 8.
The Plaintiffs again point to the evidence which suggests that WNB could have audited the investments in BLMIS, did not do so, and lacked proper internal controls as a result. (Pl.'s L.R. 56(a)(1) Stmt. ¶ 29; Pl.'s L.R. 56(a)(1) Stmt. Ex. H, at 23, 84; WNB's Supp. App. Ex. GG, at 119:21-120:5.) The Plaintiffs also point to the testimony of WNB's expert witness with respect to WNB's obligation to "[a]t least provide the statement. You would expect it to be accurate, you would expect it to be timely to the best of their ability." (Pl.'s L.R. 56(a)(1) Stmt. Ex. J, at 117:21-23.) Viewed in the light most favorable to the Plaintiffs, this evidence creates a triable issue with respect to whether the contract terms "adequate records" and "statements reflecting the property held . . . as custodian" mean records and statements which reflected that the Plaintiffs' BLMIS investments did not exist.
WNB argues, not without persuasive force, that the Plaintiffs' proffered interpretation is unreasonable because WNB would incur liability for failing to uncover the Madoff Ponzi scheme before law enforcement and the rest of BLMIS' investors. (WNB's Mem. in Support of Mot. for Summ. J. at 16; see WNB's L.R. 56(a)(1) Stmt. ¶ 40.) WNB also again relies on evidence that relevant authorities never directed or mandated that WNB audit or verify BLMIS' periodic statements. (WNB's L.R. 56(a)(1) Stmt. ¶ 39.) Viewed in the light most favorable to WNB, this evidence creates a triable issue with respect to whether the records and statements which WNB provided complied with the custodial agreement's records and statements terms. Summary judgment is not proper for the Plaintiffs on this claim.
Whether viewed in the light most favorable to the Plaintiffs or WNB, a genuine issue of material fact exists based on the extrinsic evidence of the meaning of the ambiguous contract terms "adequate records" and "statements reflecting the property held . . . as custodian." Sufficient triable issues therefore exist to preclude summary judgment for either party on this claim.
WNB argues that its undisputed status as custodian of the Plaintiffs' investments, not as an investment advisor, necessarily means that the WNB had no fiduciary duty to the Plaintiffs at all. This Court disagrees and concludes that the record contains triable factual issues with respect to whether WNB bore any fiduciary duties to the Plaintiffs and whether WNB breached any such duties. Accordingly, summary judgment for WNB on this claim is not warranted.
"[A] fiduciary or confidential relationship is characterized by a unique degree of trust and confidence between the parties, one of whom has superior knowledge, skill or expertise and is under a duty to represent the interests of the other." Sherwood v. Danbury Hosp., 278 Conn. 163, 195, 896 A.2d 777 (2006) (quoting Biller Assocs. v. Peterken, 269 Conn. 716, 723, 849 A.2d 847 (2004)). "Although [the Connecticut Supreme Court has] not expressly limited the application of these traditional principles of fiduciary duty to cases involving only fraud, self-dealing or conflict of interest, the cases in which we have invoked them have involved such deviations." Id. (quoting Murphy v. Wakelee, 247 Conn. 396, 400, 721 A.2d 1181 (1998)) (emphasis in original).
Genuine factual issues exist as to whether a fiduciary relationship existed between WNB and the Plaintiffs. It is undisputed that WNB calculated the basis for its own fees, the NAV of the custodial accounts. (WNB's Supp. L.R. 56(a)(1) Stmt. ¶ 1; WNB's Supp. App. Ex. GG, at 101:22-102:3, 106:14-20.) It did so based on information which was unavailable to the Plaintiffs: the transaction reports which came directly from WNB and the cash balance in the custodial services accounts. (Pl.'s L.R. 56(a)(1) Stmt. Ex. C, at 100:5-19, 120:18-121:17.) Viewed in the light most favorable to the Plaintiffs, this evidence creates a triable issue with respect to whether this arrangement had the requisite trust, knowledge disparity, and duty to represent the Plaintiff's interests with respect to the calculation of the NAV of the Plaintiffs' investment accounts to give rise to a fiduciary duty.
Further, genuine factual issues exist as to whether WNB breached any such fiduciary duties. WNB's federal regulator advised, if not mandated, that "[b]anks should make certain that they have the right to audit third parties (and their subcontractors) as needed to monitor performance under the contract," OCC Bulletin 2001-47, 2001 WL 1471709, at *9 (Office of the Comptroller of the Currency, Nov. 1, 2001), and evidence in the record suggests that WNB had such a right with respect to the BLMIS investments, (Pl.'s L.R. 56(a)(1) Stmt. ¶ 29; Pl.'s L.R. 56(a)(1) Stmt. Ex. H, at 84). The evidence also shows that the Plaintiffs did not receive the detailed statements from BLMIS that WNB received, and one can reasonably infer from this evidence that the Plaintiffs, because they did not have accounts at BLMIS, also lacked the ability to audit or investigate BLMIS. (Pl.'s L.R. 56(a)(1) Stmt. Ex. C, at 100:5-19, 120:18-121:17; Pl.'s L.R. 56(a)(1) Stmt. Ex. K, at 12.) Evidence in the summary judgment record also suggests that WNB adopted certain policies which systematically overstated the NAV of the custodial accounts. (App. to WNB's L.R. 56(a)(1) Stmt. Ex. F, at 104:6-107:1; Pl.'s L.R. 56(a)(1) Stmt. Ex. H, at 83-84.)
Viewed in the light most favorable to the Plaintiffs, this evidence raises genuine issues of material fact about whether WNB breached any fiduciary duty to the Plaintiffs. If the Plaintiffs can show at trial that WNB had the ability to audit or verify the BLMIS assets and failed to do so, a reasonable juror could conclude that such a failure breached a fiduciary obligation to represent the Plaintiffs' interest when the Plaintiffs, without access to the BLMIS statements or the ability to audit or investigate BLMIS, could not do so themselves. Similarly, if the Plaintiffs can show at trial that WNB adopted policies and practices which systematically overstated the NAV of the custodial accounts and, as a result, its own fees, then a reasonable juror could find the requisite self-dealing and conflict of interest to sustain liability for breach of fiduciary duty.
This record therefore contains triable factual issues with respect to whether WNB bore any fiduciary duties to the Plaintiffs and whether WNB breached any such duties. Summary judgment in WNB's favor on this claim is not proper.
WNB argues that it is entitled to summary judgment on the Plaintiffs' professional negligence claim because (1) it owed the Plaintiffs no duty to monitor, verify, or audit their investments with BLMIS, and (2) any breach of WNB's duty could not have caused the Plaintiffs' damages. (WNB's Mem. in Support of Mot. for Summ. J. at 30-37.) This Court concludes that the record contains triable factual issues with respect to what the relevant professional standard of care is in this matter and whether any breach by WNB caused the Plaintiffs' damages. Summary judgment on this claim is not proper.
"The essential elements of a cause of action in negligence are well established: duty; breach of that duty; causation; and actual injury." Pelletier v. Sordoni/Skanska Constr. Co., 286 Conn. 563, 593, 945 A.2d 388 (2008). In order to prevail on a professional negligence claim, a plaintiff must prove: (1) the relevant standard of care in the circumstances, (2) a deviation from the standard of care, and (3) harm caused by the deviation. Pisel v. Stamford Hosp., 180 Conn. 314, 334-42, 430 A.2d 1 (1980). Expert testimony is typically required to establish these elements. Mather v. Griffin Hosp., 207 Conn. 125, 130-31, 540 A.2d 666 (1988). Unlike breach of fiduciary duty claims, professional negligence claims implicate only a duty of care, rather than a duty of loyalty and honesty. Beverly Hills Concepts, Inc. v. Schatz & Schatz, Ribicoff & Kotkin, 247 Conn. 48, 56-57, 717 A.2d 724 (1998).
Although WNB argues that it had no legal duty to monitor, verify, or audit the Plaintiffs' investments with BLMIS, as an entity rendering professional services
Evidence that the proper standard of care did so extend exists in the record. One of the Plaintiffs' expert witnesses so testified. (Pl.'s L.R. 56(a)(1) Stmt. Ex. H, at 31:19-45:18; App. to WNB's L.R. 56(a)(1) Stmt. Ex. F, at 31:15-33:12, 41:12-43:19, 45:19-47:1.) Guidance issued by the Office of the Comptroller of the Currency also suggests that the proper standard of care for an entity like WNB extended to auditing a third party like BLMIS.
WNB invokes the well-established superseding cause rule to argue that Madoff's intentional fraudulent and criminal acts broke the chain of causation and relieve WNB, as a matter of law, from any liability for the Plaintiffs' damages even if it acted negligently. WNB concedes, as it must, that "an intervening intentional or criminal act relieves a negligent defendant of liability, except where the harm caused by the intervening act is within the scope of risk created by the defendant's conduct or where the intervening act is reasonably foreseeable." Medcalf v. Washington Heights Condo. Ass'n, Inc., 57 Conn.App. 12, 17, 747 A.2d 532, 536 (2000) (emphasis added).
Here, the record contains some evidence that fraud or misconduct on the part of a third-party partner is within the scope of risk of having inadequate controls or monitoring of the third-party's conduct. See OCC Bulletin 2001-47, 2001 WL 1471709, at *9 (Office of the Comptroller of the Currency, Nov. 1, 2001) ("[Compliance] risk exists when products, services, or systems associated with the third-party relationship are not properly reviewed for compliance, or when the third party's operations are not consistent with law, ethical standards, or the bank's policies and procedures. The potential for serious or frequent violations or noncompliance exists when a bank's oversight program does not include appropriate audit and control features, particularly when the third party is implementing new bank activities or expanding existing ones.") (emphasis added). Evidence in the record also tends to show that WNB's relationship with BLMIS involved "significant risk." (Pl.'s L.R. 56(a)(1) Stmt. ¶¶ 34-35; see also Pl.'s L.R. 56(a)(1) Stmt. Ex. H, at 85.)
Construing this evidence in the Plaintiffs' favor, a genuine issue of fact exists as to whether the intervening act of BLMIS' fraud fell within the scope of risk of any negligent conduct by WNB such that the fraud did not break the chain of causation between WNB's claimed negligence and the harm to the Plaintiffs. Summary judgment is therefore not proper on the Plaintiffs' professional negligence claim based on an inability to show proximate causation.
WNB argues that summary judgment in its favor on the Plaintiffs' aiding and abetting breach of fiduciary duty and fraud claim is appropriate because (1) WNB lacked knowledge of any underlying tortious conduct by Silverman, PSCC, or BLMIS, and (2) WNB did not provide substantial assistance to any such tortious conduct. (WNB's Mem. in Support of Mot. for Summ. J. at 38-43.) This Court agrees with WNB with respect to the knowledge element of aiding and abetting liability and concludes that summary judgment in WNB's favor on this claim is proper.
In order to show aiding and abetting liability in Connecticut, a plaintiff must show: "(1) the party whom the defendant aids [performed] a wrongful act that cause[d] an injury; (2) the defendant [was] generally aware of his role as part of an overall illegal or tortious activity at the time that he provides the assistance; (3) the defendant . . . knowingly and substantially assist[ed] the principal violation." Efthimiou v. Smith, 268 Conn. 499, 505, 846 A.2d 222, 226 (2004) (quoting Halberstam v. Welch, 705 F.2d 472, 477 (D.C. Cir. 1983)). In order to be "generally aware," an aider or abetter must have actual knowledge of the underlying tort or act with reckless indifference to the possibility that the underlying tort is occurring. Master-Halco, Inc. v. Scillia Dowling & Natarelli, LLC, 739 F.Supp.2d 109, 121 (D. Conn. 2010) (citing Fidelity Nat'l Title Ins. Co. v. Kissel, No. X04CV065002386S, 2008 WL 4151299, at *2 (Conn. Super. Aug. 18, 2008); Brunette v. Bristol Sav. Bank, No. CV 92-0453957S, 1994 WL 468448 (Conn. Super. Aug. 22, 1994); FDIC v. Romaniello, No. CV 92-0294248, 1992 WL 369557 (Conn. Super. Dec. 3, 1992).
Here, the record contains no specific evidence which could establish that WNB knew that BLMIS was a fraud or was recklessly indifferent to such a possibility. The Plaintiffs rely on evidence that WNB failed to audit or verify BLMIS' reported assets, promulgated inaccurate records, and did not become suspicious when BLMIS refused WNB electronic access to its account at BLMIS or insisted that WNB have no contact with it or the PSCC clients. (Pl.'s Opp. to WNB's Mot. for Summ. J. at 37-38.) Although this Court has concluded that evidence in the record creates a genuine issue of fact as to WNB's negligence, mere negligence is not sufficient for aiding and abetting liability purposes. See Master-Halco, Inc., 739 F. Supp. 2d at 121. No evidence establishes WNB's actual knowledge of the Madoff fraud or reckless indifference to the possibility that it was occurring. No factual basis therefore exists for the Plaintiffs' claim that WNB aided and abetted the Madoff fraud.
In addition, the record similarly contains no specific evidence which could establish that WNB knew that Silverman or PSCC were acting improperly or was recklessly indifferent to such a possibility. The Plaintiffs do not offer any evidence that WNB knew, or recklessly disregarded the possibility, that Silverman's fees exceeded industry custom (or that his fees exceeded industry custom at all), that Silverman was not registered as an investment advisor, that Silverman concealed misgivings about the custodial relationship aired by other banks he approached about taking over the custodial arrangement from WBT, or that Silverman had not conducted any due diligence on Madoff or BLMIS. (See Pl.'s Opp. to WNB's Mot. for Summ. J. at 40-42.) Viewed in the light most favorable to the Plaintiffs, the evidence only creates a triable issue with respect to WNB's negligence, and negligence is not sufficient for aiding and abetting liability purposes. See Master-Halco, Inc., 739 F. Supp. 2d at 121.
This record therefore contains no evidence from which a reasonable juror could conclude that WNB knew, or recklessly disregarded the possibility, that BLMIS, Silverman, or PSCC were breaching fiduciary duties to the Plaintiffs or committing fraud. Summary judgment on the Plaintiffs' aiding and abetting claim is appropriate.
WNB argues that the claims of one of the Plaintiffs, the Faye S. Albert Retirement Plan (the "Plan"),
First, WNB cannot be the "custodian" of the Plan because it is not a party to the Plan Document or the Adoption Agreement. Section 10.03 of the Plan Document provides, in relevant part, that "[t]he Employer may appoint a Custodian under the Plan, the acceptance by the Custodian indicated on the execution page of the Adoption Agreement." (WNB's Supp. App. Ex. MM, at 933.)
Second, WNB has presented no evidence that it is a third-party beneficiary of the Plan Document and the Adoption Agreement. "[T]he only way a contract could create a direct obligation between a promisor and a third party beneficiary would have to be . . . because the parties to the contract so intended." Dow & Condon, Inc. v. Brookfield Development Corp., 266 Conn. 572, 580-81, 833 A.2d 908 (2003).
WNB, citing to Federal Rule of Civil Procedure 56(g), argues that this Court should limit the damages available to the Plaintiffs so as to exclude (1) money the Plaintiffs invested before WNB became custodian, and (2) fictitious profits reported by BLMIS. (WNB's Mem. in Support of Mot. for Summ. J. at 8-14.) This Court concludes that triable issues exist with respect to the availability of both categories of damages based on the Plaintiffs' claims. Summary judgment excluding such damages from the jury's consideration is therefore not proper.
WNB argues that, as a matter of law, it cannot have proximately caused the loss of money the Plaintiffs contributed to their accounts prior to WNB becoming custodian of the accounts. Again, "[p]roximate cause is ordinarily a question of fact." Gurguis, 93 Conn. App. at 168. This Court concludes that it is so here.
WNB's argument relies on its assertion that nothing it could have done after assuming the custodian role could have recovered money which Madoff had already stolen. (WNB's Mem. in Support of Mot. for Summ. J. at 9-10.) Evidence in the record indicates that WNB continued to withdraw money from BLMIS through at least 2007, long after it became custodian (Am. Gard Aff. Ex. B, at 1-2.), that the Plaintiffs knew they could request that WNB withdraw their investments from BLMIS (App. to WNB's L.R. 56(a)(1) Stmt. Ex. H, at 57:6-8.), and that WNB offered the Plaintiffs the opportunity to withdraw their money from BLMIS after the Madoff fraud was revealed (App. to WNB's L.R. 56(a)(1) Stmt. Exs. N, V). Viewed in the light most favorable to the Plaintiffs, this evidence creates a triable issue about whether the Plaintiffs both could and would have withdrawn some or all of their investments with BLMIS if WNB had attempted to audit or verify BLMIS' assets, uncovered evidence of fraud or other suspicious activity, and disclosed it to the Plaintiffs. Summary judgment limiting the Plaintiffs' ability to recover based on investments made prior to 1999 is not warranted.
WNB argues that the Plaintiffs cannot recover lost profits damages because such damages based on the fictitious profits reported by a Ponzi scheme are not legally cognizable. The Plaintiffs argue that they invested with BLMIS with the expectation that their investments would appreciate; now that their investments have no value, they seek to recover lost profits in the form of lost investment income which they could reasonably anticipate had they invested in a bona fide investment instead of a Ponzi scheme. This Court concludes that the Plaintiffs' theory of damages is legally permissible and that they may present it to the jury at trial.
In Connecticut, the default rule is that recovery of lost profits on a breach of contract claim is permissible: "[u]nless they are too speculative and remote, prospective profits are allowable as an element of damage whenever their loss arises directly from and as a natural consequence of the breach." West Haven Sound Development Corp. v. City of West Haven, 207 Conn. 308, 317, 541 A.2d 858 (1988). In addition, the Connecticut Supreme Court has endorsed a flexible approach to permit consideration of lost profits damages based on professional negligence and breach of fiduciary duty claims. Beverly Hills Concepts, Inc. v. Schatz & Schatz, Ribicoff & Kotkin, 247 Conn. 48, 67-68, 717 A.2d 724 (1998).
In the context of SIPA liquidations and securities fraud claims, WNB is quite right that victims of Ponzi schemes or other fraud may not recover fictitious profits. See, e.g.,
But WNB has cited no authority imposing such a restriction on contract or tort claims. Analysis from the BLMIS liquidation proceedings suggests that such a restriction does not apply with a solvent defendant, like WNB, instead of a limited fund.
The Plaintiffs have presented evidence that they invested in BLMIS with the expectation that their investments would appreciate. (E.g. App. to WNB's L.R. 56(a)(1) Stmt. Ex. H, at 32:2-33:25.) This evidence creates an appropriate jury issue as to whether the Plaintiffs may recover lost investment income if they succeed on their claims for relief. Accordingly, summary judgment limiting the Plaintiffs' ability to recover lost investment income as damages is not proper, and the Plaintiffs may permissibly seek to recover lost profits damages in the form of lost investment income at trial.
WNB argues, based on the economic loss rule, that the Plaintiffs may not recover on their tort claims because the relationship between the parties is exclusively contractual and the Plaintiffs only allege economic injury. (WNB's Mem. in Support of Mot. for Summ. J. at 19-21.) Because the Plaintiffs have produced sufficient evidence of liability and damages to maintain separate contract and tort causes of action through the summary judgment stage, this Court concludes that the economic loss rule does not bar the Plaintiffs' tort claims at this point.
In general, Connecticut law permits contract and tort claims to coexist. See Williams Ford, Inc. v. Hartford Courant Co., 232 Conn. 559, 579, 657 A.2d 212 (1995) ("The [plaintiffs] were not barred from pursuing a negligence claim solely because they also might have had a breach of contract claim."); Johnson v. Flammia, 169 Conn. 491, 496, 363 A.2d 1048 (1975) ("A party may be liable in negligence for the breach of a duty which arises out of a contractual relationship."). The Connecticut Supreme Court has held that the economic loss rule, an exception to this general principle, prevents a plaintiff bringing a claim based on a contract for the sale of goods from also seeking to recover on a negligent misrepresentation theory. Flagg Energy Development Corp. v. General Motors Corp., 244 Conn. 126, 153, 709 A.2d 1075 (1998). The Connecticut Supreme Court has declined to clarify whether and to what extent the economic loss rule applies in other circumstances. See American Progressive Life & Health Ins. Co. of New York v. Better Benefits, LLC, 292 Conn. 111, 118-19, 971 A.2d 17 (2009).
This Court has previously concluded that, at the motion to dismiss stage, the general rule permitting simultaneous contract and tort claims allows "a plaintiff [to] pursue contract and tort claims simultaneously as long as the plaintiff has alleged sufficient facts and damages to maintain separate contract and tort causes of action." Factory Mut. Ins. Co. v. Pike Co., Inc., No. 3:08-cv-1775 (VLB), 2009 WL 1939799, at *3 (D. Conn. July 6, 2009). This Court concludes that the same principle should apply at the summary judgment stage. Accordingly, because the Plaintiffs here have presented evidence sufficient for both their contract and tort claims to survive summary judgment separately, this Court similarly declines to restrict them to their contract remedies at this stage.
Finally, WNB argues that the six-year statute of limitations on contract claims found in Conn. Gen. Stat. Ann. 52-576(a) has run on all of the Plaintiffs' claims for fees paid to WNB prior to December 2, 2003. (WNB's Opp. to Pl.'s Mot. for Partial Summ. J. at 30-31.) Because the Plaintiffs' claims arise out of a contract for ongoing services and a continuing course of conduct breaching that contract, WNB's argument fails.
"No action for an account, or on any simple or implied contract, or on any contract in writing, shall be brought but within six years after the right of action accrues." Conn. Gen. Stat. Ann. 52-576(a). "Connecticut permits its six-year statute of limitation for contract claims to be tolled where the breach constitutes a continuing course of conduct." Air Brake Sys., Inc. v. TUV Rhineland of N. Am., Inc., 699 F.Supp.2d 462, 474 (D. Conn. 2010) (citing City of West Haven v. Commercial Union Ins. Co., 894 F.2d 540, 545 (2d Cir. 1990); Beckenstein v. Potter & Carrier, Inc., 191 Conn. 150, 464 A.2d 18, 23 (1983)); see also Skidmore, Owings, & Merrill v. Conn. Gen. Life Ins. Co., 25 Conn.Sup. 76, 93, 197 A.2d 83, 91 (Super. 1963) ("In considering the application of the [s]tatute of [l]imitations to this case, one must distinguish between a contract obligation, such as was undertaken by the plaintiff, providing for a continuing, indivisible responsibility for the attainment of an end result, and a contract for the performing of a specific, definable act.").
Here, the custodial agreement was clearly a contract for ongoing services; it provides for its continuous operation until one of the parties terminates it upon 90 days written notice to the other party. (App. to WNB's L.R. 56(a)(1) Stmt. Ex. U, at 2.) WNB charged its ongoing fees based on this ongoing relationship.
As stated and for the reasons articulated above, the Plaintiffs' motion for summary judgment [Dkt. # 67] is DENIED and WNB's motion [Dkt. # 69] is GRANTED IN PART and DENIED IN PART.
SO ORDERED.
