Opinion
E041544
4-25-2008
HERACLIO A. MUNOZ et al., Plaintiffs and Appellants, v. STERLING TRUST COMPANY et al., Defendants and Respondents.
Stanley, Mandel & Iola, Matthew J. Zevin, Marc R. Stanley and Martin Woodward for Plaintiffs and Appellants. Gresham, Savage, Nolan & Tilden, Theodore K. Stream, Robert J. Hicks, Alina Amarkarian; Blackwell, Sanders, Peper, Martin, Michael Thompson and Jason R. Scheiderer for Defendants and Respondents.
NOT TO BE PUBLISHED
INTRODUCTION
The underlying class action lawsuit was brought by investors who lost substantial sums of money when investments selected by them and purchased on their behalf by Sterling Trust Company (Sterling) for placement into their self-directed individual retirement accounts, proved to be worthless. The investors sued Sterling for breach of contract, breach of fiduciary duty, and related causes of action, contending that Sterling breached fiduciary and contractual duties owed to them by failing to perform a proper administrative review of the selected investments which, but for Sterlings breach of duty, would not have been purchased. The trial court entered judgment in Sterlings favor upon its motion for summary adjudication, and the investors appealed. We agree with the trial courts conclusion that Sterling owed no duty to the investors to conduct an administrative review in a manner to insure the viability or safety of the investments and thus affirm the judgment.
FACTUAL AND PROCEDURAL BACKGROUND
The salient facts are essentially uncontroverted. Sterling is a Texas nonbank trust company, which provides administration, record keeping, and asset custody services for self-directed individual retirement accounts (IRAs). Sterling prides itself in providing specialized nondiscretionary trust services "designed to maximize [its account holders] ability to control and manage [their] IRA assets." Thus, its clients, who assume sole responsibility for the success or failure of their investments, are able to change their portfolios as often as they wish, with freedom to invest in a broad range of public and private offerings.
In 1998, the investors decided to invest in what appeared to be high-yield promissory notes guaranteed by a bond issued by a foreign surety (the bonded notes). Their decision to make this investment was based solely upon representations made by individuals who were not agents of Sterling.
The investors sent their money to Sterling, who purchased the bonded notes on their behalf. As part of their investments, each investor was required to sign an agreement consisting of an Individual Retirement Trust Account Adoption Agreement, a Transfer Request/Direct Rollover Letter, and an Investor Direction and Certification. The agreement provided the investors with a detailed description of Sterlings services, as well as the limited scope of the duties and obligations owed to them by Sterling, including maintaining a trust account in the name of the investor, making payments and distributions as directed by the investor, and maintaining adequate records.
Additionally, by signing the Investor Direction and Certification, each investor acknowledged that he or she has "sole responsibility for directing the investment of [his or her] account, and the administrative review performed by Sterling Trust on the above offering was solely to determine that the investment is administratively feasible for Sterling Trust to hold for the benefit of [his or her] account. [He or she] further acknowledge[d] that this review was not a due diligence review, and that Sterling has not rendered any investment advice, nor has Sterling expressed any opinion as to the prudence or viability of the investment. [He or she] agree[d] to hold Sterling Trust Company harmless from any liability for any loss, damage, injury or expense which may occur as a result of the execution of this investment direction and certification."
Notably, this acknowledgment was set forth in upper case lettering.
As it turned out, the bonded notes, which had been represented to the investors as "risk-free" investments promising above-market returns, were worthless. According to an SEC release issued in June 1999, "the corporate notes were offered to retirees and others as risk-free investments with above market rates of return, and as being backed by an unconditional guarantee by an independent insurance company. In fact, no such guarantee existed. The purported purpose of the investment was to acquire existing oil and gas properties and leases, and to fund operation for [the companies]. Rather than using investors monies for their stated purposes, funds were diverted to fund the operations of several other entities . . . and for personal expenses of [the perpetrators]," who "also used investors funds as `Ponzi payments to lull existing investors and to lure new ones."
In July 1999, after learning about this state of affairs and without performing an additional administrative review, Sterlings vice-president, Kelli Click, determined that the bonded notes were administratively infeasible. Click had learned that 16 states were beginning investigations into the subject investments; thus, it was determined that it would be prudent to stop processing further investments from that point forward. Click later determined that, "[b]ecause of the problems that arose out of these nine-month promissory notes," Sterling would no longer accept any promissory notes backed by foreign sureties.
The investors complaint against Sterling was filed December 31, 2001, alleging causes of action for breach of fiduciary duty and breach of contract. In a first amended complaint filed the following March, the investors added claims under the Unfair Competition Law (UCL) (Bus. & Prof. Code, § 17200 et seq.), and the Consumers Legal Remedies Act (CLRA) (Civ. Code, § 1750 et seq.) In March 2003, a second amended complaint was filed whereby the investors named as additional defendants various of Sterlings parent companies under agency and alter ego theories.
In December 2004, the trial court entered an order certifying the case as a class action on behalf of all persons who purchased the bonded notes through Sterling. The class was certified on a nationwide basis, under Texas law, with respect to the breach of contract cause of action, and under California law, a subclass was certified with respect to the remaining causes of action. The named plaintiffs were appointed class representatives.
In August 2005, Sterling filed its motion for summary judgment or summary adjudication. It alleged that the first cause of action could not establish that Sterling assumed any fiduciary duty other than to purchase investments at the investors requests; the second cause of action could not establish any material breach by Sterling in that Sterlings only obligation was to purchase investments requested by the investors; the third through seventh causes of action could not be maintained because the investors could not show that Sterling engaged in any unlawful, unfair, or fraudulent act or practice; and the eighth cause of action could not be maintained because the investors cannot establish any deceptive practice.
In opposing the motion, the investors asserted, "Sterlings primary fiduciary and contractual obligation was the duty to conduct an `administrative review prior to purchasing and accepting any asset for a customer, including the Bonded Notes. As a trustee and custodian of Plaintiffs assets, Sterling also retained basic fiduciary and contractual duties and obligations to take title to, and custody of, its clients IRA assets, to process the investment directions it received, to issue periodic statements to its clients and to prepare and file reports to the Internal Revenue Service."
At the hearing, counsel for the investors conceded that Sterling had no responsibility for providing investment advice to his clients and that the administrative review was "not due diligence in nature." However, "they do have some duties. They do have some obligations, and they did not live up to those contractual and fiduciary obligations, and thats what this case is about."
In response, opposing counsel acknowledged that Sterling "does have duties owed to its account holders. One of those duties and probably the most critical one is to maintain custody of the assets that are delivered to it and to properly account to its account holders for those assets. [¶] And its liable if it breaches that duty of properly maintaining custody of the asset delivered to it if its shown that they breached the duty and that the breach caused damage to the plaintiff. [¶] But thats not what were talking about here. Sterling does have that duty to maintain this custody. And in order to protect itself . . . it does an administrative review so it doesnt take custody of things that it cant properly maintain." Counsel continued: "Here there was an administrative review. The asset was a promissory note. They did have procedures in place for taking care of promissory notes. [¶] But the plaintiffs are trying to turn that on its head. They dont want to prove and they cannot prove that Sterling breached a duty to properly maintain custody of the assets delivered to it. And they cant prove that, even if Sterling did do that, that it caused any loss to the plaintiffs. [¶] Its stipulated and undisputed here that the plaintiffs lost their money because they invested in a scam. These notes were worthless from the outset."
Counsel for Sterling further acknowledged that his clients "added to procedures because they did have problems, not in maintaining custody of assets they had, but the issuers of these notes werent doing things and sending Sterling the proper papers." Later, when Sterling learned that the notes were being investigated, it determined it would no longer be prudent to keep buying them, but that had nothing to do with whether or not an administrative review had been performed.
Finally, in response to the argument offered by the investors counsel that Sterling must be held responsible for its "complete failure to perform even the most minimal trust and fiduciary duties that theyve been paid to perform," counsel for Sterling stated: "If Sterling had a duty to properly maintain these things, if the plaintiff wants to bring a suit that contends that Sterling screwed up this asset and caused a loss to the plaintiffs, thats one thing. And we wouldnt be here arguing about that. [¶] But theyre arguing you are liable for having taken it in the first place, not for having screwed it up. And we had no duty to reject it in the first place. We did have a duty to maintain it properly. [¶] If they could show a loss from Sterling screwing up, more power to them. But thats not what this case is about."
At the conclusion of argument, the court ruled in Sterlings favor on all causes of action. At a subsequent hearing, the court clarified its earlier ruling, explaining that summary adjudication was granted with respect to the first through seventh causes of action, while the eighth cause of action was to be dismissed. In its written ruling, the court found that Sterling had no contractual duty to the investors to investigate the safety of the selected investments, and that any administrative feasibility review conducted by Sterling was done for its benefit alone, and not for the purpose of granting any benefit upon the investors as to the safety of their investments. The court indicated that its findings were based in part upon numbers 12 through 19, and 22 through 25 of Sterlings statement of undisputed material facts, which provided essentially the following:
By entering into the agreement, the investors agreed that (1) Sterling would not assume any responsibility for rendering advice with respect to the investment and/or reinvestment of the account; (2) Sterling would not be liable for any loss which resulted from the investors exercise of control over their accounts; (3) Sterling would have no responsibility or duty to review any securities or other property held within the accounts; (4) Sterling would not be under any duty to make any investigation or inquiry as to any statement contained in any instrument, paper, or certificate believed to be genuine, and that Sterling was permitted to accept any such writing as conclusive evidence of the truth and accuracy of the statements therein contained; (5) Sterling would owe them no duties whatsoever except such duties as were specifically set forth in the agreement; and (6) the agreement and all amendments thereto would be governed by and construed in accordance with the laws of the State of Texas.
By entering into the agreement, the investors expressly acknowledged (1) it was their sole responsibility to manage the investment of the IRA; (2) Sterling had no responsibility to question any investment directions given by them regardless of the nature of the investment; and (3) Sterling was in no way responsible for providing investment advice or for monitoring the performance of the investment or for the performance of any investment product.
Finally, in directing Sterling to facilitate their chosen investments, the investors acknowledged (1) they had sole responsibility for directing the investment of their accounts; (2) the administrative review performed by Sterling was solely to determine that the investment was administratively feasible for Sterling to hold for the benefit of their accounts; (3) the administrative review was not a due diligence review; (4) Sterling had not rendered any investment advice; (5) Sterling had not expressed any opinion as to the prudence or viability of the investment; and (6) they agreed to hold Sterling harmless from any liability from any loss, damage, injury, or expense which may occur as a result of execution of the "Investment Direction and Certification."
The court also granted Sterlings motion to dismiss the eighth cause of action pursuant to Civil Code section 1781, subdivision (c)(3), finding no merit to the investors claim under the CLRA. Thus, having disposed of the entire second amended complaint, the court granted judgment in Sterlings favor.
DISCUSSION
A. Standard of review.
A defendant who moves for summary judgment or summary adjudication under Code of Civil Procedure section 437c "`must conclusively negate a necessary element of the plaintiffs case, and demonstrate that under no hypothesis is there a material issue of fact that requires the process of a trial. [Citation.]" (Brown v. California Pension Administrators & Consultants, Inc. (1996) 45 Cal.App.4th 333, 339 (Brown).) In evaluating the trial courts ruling, "[a]n appellate court determines de novo whether there is a genuine issue of material fact and whether the moving party was entitled to summary judgment as a matter of law. [Citation.]" (Ibid.)
In this case, the premise of Sterlings motion was that its only duty to the investors was to purchase investments as expressly requested by the investors. In response, the investors asserted that Sterling had a duty to conduct an administrative review to determine the feasibility of selected investments; that Sterling failed to conduct such administrative review, thereby breaching its duty; and that "but for" its failure to conduct such administrative review, which would have disclosed the investments "administrative infeasibility," Sterling would not have purchased the investments for the investors, and the investors would not have sustained their losses.
The dispositive issue, then, is whether Sterling owed a duty to the investors, contractual or otherwise, to investigate the safety or viability of the investors selected investments. Guided by the foregoing principles, we have performed a comprehensive review of the record which, as we shall explain, compels us to conclude that Sterling owed no such duty. Moreover, we find that any administrative feasibility review conducted by Sterling pursuant to the parties agreement was for Sterlings benefit alone, and not to provide the investors with any benefit or assurance as to the outcome of their investments. Accordingly, the trial court was correct in finding that Sterling met its burden to establish there was no triable issue of material fact requiring trial on whether Sterling owed a duty to the investors to perform an administrative feasibility review, and in entering judgment in Sterlings favor on all causes of action. In this regard, inasmuch as the investors acknowledge that their claims under the UCL and the CLRA are derivative of their claims for breach of fiduciary duty and breach of contract, our decision that the latter claims fail as a matter of law is dispositive as to all of the investors claims. Furthermore, in light of our conclusion Sterling owed no duty to the investors, we need not reach the investors claims that there are triable issues of material fact as to whether Sterling breached its duty and/or whether Sterlings conduct was a substantial factor in bringing about the investors financial losses.
B. Sterling owed neither a contractual nor fiduciary duty to the investors to perform an administrative feasibility review.
The investors do not dispute that by signing the agreement, they acknowledged they were solely responsible for directing the investment of their accounts, that the sole purpose of any administrative review was to determine the administrative feasibility of the investment, that the administrative review was not a due diligence review, and that Sterling neither rendered investment advice nor expressed any opinion as to the prudence or viability of the investments. Nonetheless, they maintain that Sterling had a specifically enumerated contractual obligation to perform a proper administrative review of all trust assets prior to accepting them in trust for their benefit, that this obligation "indisputably constitutes a fiduciary duty," and that Sterling breached that duty by failing to perform the requisite review. They insist that if Sterling had complied with that duty, it would have known that it had no systems or procedures in place for processing or administering the bonded notes and would therefore have refused to purchase them. The investors position is untenable.
Sterlings duties and responsibilities under the agreement were limited. Specifically, its sole responsibility was to follow the investors directions. Moreover, the agreement expressly provided that Sterling "shall be under no duties whatsoever except such duties as are specifically set forth in this Agreement."
However, the agreement gave Sterling the right "to not follow the [investors] direction or process such an investment" which Sterling identified as "unacceptable due to [its] posing an administrative burden on [Sterling]." In such event, the investor "agree[d] to submit or cause to be submitted all offering documentation related to [any such] investment for an administrative review by [Sterling] . . . [who] reserve[d] the right to charge a reasonable fee for such administrative review so requested by the [investor]." Furthermore, the agreement provided that any decision by Sterling "to reject certain assets for reasons of administrative feasibility should not be construed as investment advice or an opinion of [Sterling] as to the investments prudence or viability." The agreement contains no language even remotely suggesting that the purpose of an administrative review was anything other than providing an assurance to Sterling that it would be administratively capable of handling the particular nonstandard investment identified by the investor. According to one of Sterlings internal documents, the sole purpose of an administrative review was "to determine if the assets offering documentation has all necessary language, restrictions, opinions, and operational characteristics which would make it an acceptable investment in light of appropriate law and Sterlings systems and procedures."
Our review of the agreement discloses the following provision which is not referenced in either of the parties briefs: "If the non-standard investment(s) contain administrative and/or management requirements or duties beyond [Sterlings] capabilities or expertise to provide, then [the investor] agrees to seek out suitable agents or counsel necessary to perform such duties and deliver a written service agreement acceptable to [Sterling] for execution on behalf of the [investors] IRA account[.]" We read this provision to mean that even if Sterling had determined, after conducting an administrative review, that the particular selected investment was administratively infeasible, the investors would be given an opportunity to purchase the investment through another source. For this reason, we question the investors contention that, in the event Sterling characterized a particular investment as administratively infeasible, it had a contractual duty to reject and refuse to purchase assets of that type, even if it had been requested to do so.
Nonetheless, the investors point to Clicks deposition testimony that Sterlings determination of the administrative feasibility of an asset is part of the custodial and administrative service that Sterling provides to its account holders. However, even if the review is deemed part of Sterlings routine custodial and administrative service to its clients, this does not mean that Sterling owed a duty to the investors to conduct a review, a breach of which, along with proof of causation and damages, would entitle the investors to damages. The investors overlook Clicks testimony to the effect that Sterling cannot properly "custody" an asset which is administratively infeasible, as it would create a burden upon Sterling. In response to an inquiry as to what the effect would be upon the investor if Sterling was to custody an asset that was administratively infeasible, Click stated: "I dont know that it would harm the account holder in any way. It would just—you know, it could create some undue burden on our part to custody an asset that would be considered administratively infeasible." Furthermore, we are not persuaded by the investors unsubstantiated assertion that "the administrative review is a vitally important screening function, because Sterling necessarily cannot perform its trust duties for assets that are administratively infeasible."
Nor did Sterling have a fiduciary duty to reject assets determined not to be administratively feasible. A fiduciary relationship is one "in which one person is under a duty to act for the benefit of the other on matters within the scope of the relationship. Fiduciary relationships . . . require the highest duty of care. Fiduciary relationships usually arise in one of four situations: (1) when one person places trust in the faithful integrity of another, who as a result gains superiority or influence over the first, (2) when one person assumes control and responsibility over another, (3) when one person has a duty to act for or give advice to another on matters falling within the scope of the relationship, or (4) when there is a specific relationship that has traditionally been recognized as involving fiduciary duties, as with a lawyer and a client or a stockbroker and a customer." (Blacks Law Dict. (7th ed. 1999) p. 640, col. 2.) In our view, Sterlings relationship with the investors does not fall within this definition. Rather, Sterling was essentially an investment administrator, exercising no control or responsibility over the investors assets or their disposition other than as directed by the investors. Nothing in the agreement supports the notion that the relationship between Sterling and the investors was one typically viewed as fiduciary in nature. Indeed, any fiduciary duty which Sterling owed to the investors was limited to executing the transactions requested by them. Nothing more.
Furthermore, the Brown decision supports Sterlings position that its duties to the investors are limited. The plaintiffs in Brown were investors in self-directed IRAs; the defendants were the trustee and administrators of the IRAs. The plaintiffs sued the defendants for breach of contract, negligence, negligence based on contractual duty, and breach of fiduciary duty, contending that the defendants failed to notify them that a borrower of their funds had defaulted in payment to other investors and on that basis sought to recover monies they had lost. They argued that had they been informed of the borrowers failure to pay, they would not have made further unsecured loans to him. (Brown, supra, 45 Cal.App.4th at pp. 338-339.) The trial court granted the defendants demurrer to the cause of action for breach of fiduciary duty, without leave to amend, and also granted the defendants motion for summary judgment. On appeal, the court concluded that the documents which governed the parties relationship limited the administrators duties, absolving it of any duty to investigate, select or monitor plaintiffs investments. (Id. at p. 343.) As for the cause of action for breach of fiduciary duty, the court explained: "[T]he relationship between [the plaintiffs] and [the defendants] encompassed very limited responsibilities. . . . [T]he relationship was confined to [the defendants] performance of transactions selected by their customers; [the defendants] had absolutely no responsibility to advise [the plaintiffs] with regard to the wisdom of their investment choices. This was not an expansive fiduciary relationship giving rise to a duty to notify the customer of the risky nature of an investment, or . . . of the poor performance of similar investments held by different customers. [Citations.] [The plaintiffs] did not and cannot allege facts supporting a cause of action for breach of fiduciary duty." (Id. at p. 348.)
According to Sterling, Brown "requires trial courts to refuse to impose fiduciary obligations on a trustee of a customers self-directed IRA investment accounts, where such obligations on the trustee have been expressly excluded." Thus, contending that it was absolved by contract of any duty to investigate, select or monitor the investors investments, Sterling urges us not to allow the investors "to suddenly change the scope and terms of the parties relationship in an attempt to impose fiduciary duties that contradict the express terms of the Agreement." Sterling insists that here, as in Brown, the agreement expressly limited the scope of its duties and obligations to the investors and it retained no discretion as to the investors choice of investments or any responsibility for advising them of any risk associated with their selected investments. In other words, the investors expressly assumed any risk associated with their decisions.
The investors maintain that Brown is inapposite, insisting that their cause of action for breach of fiduciary duty is premised on Sterlings duty to perform an administrative review "encompassed within the scope of the standard form contract." They argue Brown is not controlling here because, even though they acknowledge Sterling had no duty to give advice to them as to the investments viability, the alleged breach of fiduciary duty is based on Sterlings failure to perform a duty expressly stated in the agreement. As we have already said, Sterling owed no duty to plaintiffs to perform an administrative review; thus, the agreement precludes any liability for doing anything other than that specifically set forth in the agreement. Moreover, the agreement also provides that the investors indemnified Sterling from any liability under the agreement except that which arises from Sterlings gross negligence or willful misconduct, neither of which is applicable here.
DISPOSITION
The judgment is affirmed. Respondents are awarded their costs on appeal.
We Concur:
GAUT, Acting P.J.
KING, J.