Opinion
59082
9-3-2009
CAROL A. TONZI, Plaintiff, v. RICHARD H. NICHOLS, INDIVIDUALLY, AND RICHARD H. NICHOLS, D./B/A NICHOLS FINANCIAL, Defendant.
Foley and Foley, James F. Foley, Esq., of counsel, Attorneys for Plaintiff. Underberg & Kessler, LLP, Paul F. Keneally, Esq., Attorney for Defendants.
In this action the Plaintiff alleges that the Defendants, while acting as her financial advisor in February, 2003, wrongfully induced her to purchase viatical settlements from Mutual Benefits Corp. ("MBC"). Both parties now move for Summary Judgment. A principle legal issue posited by the pending motions presents the threshold question as to the existence and extent of any duty owed by the Defendants to the Plaintiff.
A viatical or life settlement is mainly a transaction in which a terminally ill or elderly life insurance policyholder (the "viator"), sells the face value of the policy at a discounted price based upon the individual's life expectancy. Contracts are then sold on the secondary market to investors who typically purchase a fractional interest in the life insurance policy, receiving a pro-rated amount of the death benefit upon the death of the insured (see People ex rel. Cuomer Coventry First, LLC, ___ NY3d ____ [June 30, 2009]; Securities and Exchange Commission v. Mutual Benefits Corp., 408 F.3d 737, 738 [Eleventh Cir., 2005]). In the instant matter, MBC was a viatical provider, selling financial interests in viaticals they had acquired to investors through commissioned sales agent as the Defendant herein who became associated with MBC in 1999.
In May, 2004, the SEC commenced an action against MBC seeking injunctive and other relief alleging that the majority of the viaticals sold by the company employed fraudulent life expectancy numbers and that 90% of its policies had surpassed their designated life expectancy (see Securities and Exchange Commision v. Mutual Benefits Corp., supra). The United States District Court for the Southern District of Florida granted the SEC's motion for a preliminary injunction suspending MBC's business and appointed a Receiver for the company. The Defendants acknowledge that MBC fraudulently altered life expectancies and failed to fund premium reserve accounts, as it had agreed, resulting in investors being required to prematurely contribute towards the payment of premiums. Subsequent to the commencement of the within action, the Plaintiff has paid $7,592.74 in premium payments to maintain her interest in the viatical through September 22, 2009, with additional contributions potentially being required from her which will increase in amount if other investors elect to disband.
Plaintiff's complaint herein sets forth Four Causes of Action, the First alleging the Defendants were negligent in rendering financial advice to her by recommending that she purchase viatical contracts from Mutual Benefits Corp.. The Second Cause of Action asserts that after a Receiver was appointed for MBC, the Defendants negligently advised Plaintiff to retain her interest in the viaticals rather than accepting the Receiver's offer to purchase them. At oral argument of motions, Plaintiff's attorney stipulated to withdraw the Third Cause of Action for Breach of Contract. The Fourth Cause of Action alleges that the Defendant participated in MBC's fraudulent marketing scheme for viaticals by representing that they were "safe" and "secure" investments "without risk since the investment was in life insurance." Although the Fourth Cause of Action specifically alleges that Defendants acted fraudulently by making false representations, the submissions by both parties refer to the claim as being one for Negligent Misrepresentation.
In support of their respective Summary Judgment motions, the parties and their attorneys submitted respective Affidavits. Additionally, the Plaintiff provided an Affidavit from John J. Duval, Sr., a FINRA arbitrator and investigative consultant with the S.E.C. following his retirement from Merrill Lynch after 22 years specializing in financial services including management in the insurance division.
The parties strongly disagree regarding the content of their discussions prior to Plaintiff's purchase of the viatical. It is undisputed, however, that from 1985 until 2004, the individual Defendant, an accountant, prepared Plaintiff's income tax returns. In addition, it is unrefuted that over the years, he advised her regarding the allocation of her deferred compensation plan, financing her childrens' education, and purchasing equipment and expenditures for occupation related training.
In February, 2003, the Plaintiff, accompanied by her husband, met with the Defendant at his office for preparation of their joint income tax return. During said meeting, the Defendant recommended that the Plaintiff roll-over a sizeable portion of her 401K account into an IRA account utilizing another type of investment which he indicated would realize substantially better returns but yet was safe and secure because it was not tied to the stock market. The Plaintiff alleges that the Defendant told her that an investment of $51,000.00 would result in a return of $82,000.00 in five years.
On February 27, 2003, the Plaintiff returned to the Defendant's office with the requisite investment funds, and although she did not read the agreement and the Defendant did not review its terms with her, she signed a complex document entitled "Viatical Settlement Agreement", initializing six of its fourteen pages as directed by the Defendant. The Plaintiff maintains that she had no understanding of the nature of her investment until several weeks later when she received a packet of information from MBC alerting her that she had a stake in another person's life insurance. She claims she invested her funds because she trusted Defendant's advice and representations that no risks were involved and no additional costs would be incurred.
The Defendant states that when he first met with the Plaintiff in February, 2003, he informed her that the investment was predicated upon a percentage interest in another's life insurance policy, recommending that it was a sound, safe, and secure investment because it was not linked to the stock market. While acknowledging that he did not warn the Plaintiff of any associated risks, including the potential that she would be called upon to contribute towards premium payments over and above here initial investment, he alleges that he explained that her return was dependent upon the insured's estimated life expectancy.
The Defendant notes that his business provides both tax and payroll services and sells various types of insurance, including life insurance, but stresses that he does not engage in financial planning or "non-insurance investment advice". He also argues that since a viatical is an insurance based product, his duty to the Plaintiff was confined to that which is owed by an insurance agent to its insured and that no fiduciary relationship duty existed (see Murphy v. Kuhn, 90 NY2d 266 [1997]). He further maintains that the Plaintiff cannot recover based upon an alleged failure by him to advise her of the nature of her investment and its attendant risks because she did not avail herself of the opportunity to read the viatical purchase agreement which fully disclosed such relevant data.
The Plaintiff counters by adducing evidence that the Defendant held himself out as a financial advisor and that she relied upon his advice regarding the suitability of the investment, further contending that the parties' relationship was such that the Defendant owed her a fiduciary duty to provide accurate and meaningful advice regarding her investment. Mr. Duval, Plaintiff's expert, opined that Nichols' due diligence investigation of MBC was negligent in that he overlooked indicators which should have raised grave concerns about the company's integrity. He additionally states that the viatical was not an appropriate investment for several reasons, including the Plaintiff facing potential tax consequences as a result of her tax deferred funds being utilized to purchase the asset.
LAW
Summary judgment is a drastic remedy which should not be granted where there is any doubt regarding the existence of a material issue of fact (see Rotuba Extruders v. Cappos, 46 NY2d 223, 231 [1978). The court's function when considering such a motion is not to resolve issues of fact, but simply to determine whether material questions of fact are present (see Sillman v. Twentieth Century-Fox Film Corp., 3 NY2d 395, 404 [1957]; Jablonski v. Rapalje, 14 AD3d 484 [2005]). Moreover, the court is required to accept the truth of the facts proffered by the party opposing the motion (see Rizk v. Cohen, 73 NY2d 98 [1989]), and as such, conflicting affidavits will usually preclude the granting of the motion (see Brunetti v. Musallam, 11 AD3d 280 [2004]; Talansky v. Schulman, 2 AD3d 255 [2003]).
Essential to a claim of common law negligence is the existence of a duty of care owed by the tortfeasor to the plaintiff (see Kimmell v. Schaefer, 89 NY2d 257, 263 [1996]; State Ins. Fund v. Anderson Trucking, 281 AD2d 838 [2001]).
The Defendants' contention that its duty to Plaintiff was narrowly limited because she was only being sold insurance is patently disingenuous. Clearly, the Plaintiff was not interested in insuring anything or anybody and the intended purpose of the transaction was to roll-over her 401K into another qualified investment.Additionally, the Defendant's assertion in his Affidavit that he does not provide financial planning, is flatly contradicted not only by his Answer to Plaintiff's Complaint, but also by his own website. His admission to Plaintiff's allegation in her Amended Complaint that he held himself out as a financial consultant constitutes a judicial admission binding upon him (see Aronitz v. Pricewaterhouse Coopers LLP Falkowski v. 81 and 3 of Watertown, Inc., 288 AD2d 890 [2001]; Technicon Electronics Corp. v. American Home Assur. Co., 141 AD2d 124 [1988]; Prince, Richardson on Evidence, Sec. 8-215 [Farrell 11th ed.]).
Although generally there is no fiduciary relationship between an accountant and client (see Caprer v. Nussbaum, 36 AD3d 176 [2006]; Friedman v. Anderson, 23 AD3d 163 [2005]), an accountant or insurance agent may be found to have assumed additional duties of care when acting as a financial advisor (see Bullmore v. Ernst & Young Cayman Islands, 45 AD3d 461 [2007]; Brooks v. Key Trust Co. Nat. Assn., 26 AD3d 628 [2006]; Lynch v. McQueen, 309 AD2d 790 [2003]; Fortino v. Hersh, 307 AD2d 899 [2003]; Rasmussen v. A.C.T. Environmental Services, Inc., 292 AD2d 710 [2002]; Davis v. CCF Capital Corp., 277 AD2d 342 [2000]; see also, Scalp & Blade, Inc. V. Advest, 281 AD2d 882 [2001].
"A fiduciary relationship exists between two persons when one of them is under a duty to act for or give advice for the benefit of another upon matters within the scope of the relation" (EBC I., Inc. V. Goldman, Sachs & Co., 5 NY3d 11, 19 [2005], quoting Restatement [Second] of Torts, Sec. 874 Comment a)). Such a relationship is formed "when confidence is reposed on one side and there is resulting superiority and influence on the other" (Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 NY3d 553, 561 [2009], quoting AG Capital Funding Partners, LP v. State St. Bank & Trust Co., 11 NY3d 146, 158 [2008]). Fiduciary "liability is not dependent solely upon an agreement or contractual relation between the fiduciary and beneficiary but results from the relation" (EBC I., Inc. v. Goldman, Sachs & Co., supra at 20, quoting Restatement [Second] of Torts 874 Comment b); see Frydman & Co. V. Credit Suisse First Boston Corp., 272 AD2d 236, 237 [2000]).
As regards the First and Second Causes of Action, the Plaintiff has presented sufficient evidence to raise triable issues of fact as to whether Defendants assumed the role of financial advisor to her, whether a fiduciary relationship developed between them, and, if so, whether Defendant's conduct and advice complied with his concomitant duties (see Fortino v. Herch, supra at 900; see also, Smith v. Ameriquest Mortg. Co., 60 AD3d 1037, 1040 [2009]; People v. Grasso, 50 AD3d 535, 548 [2008]; Sergeant's Benevolent Assn. Annuity Fund v. Renck, 19 AD3d 107, 110 [2005]; Talansky v. Schulman, 2 AD3d 355 [2003]; DeRossi v. Rubenstein, 233 AD2d 220 [1996]).
Contrary to Defendants' argument, the Plaintiff's failure to read the viatical agreement is not a complete defense to her negligence claim (see Arnav Industries, Inc. Retirement Trust v. Brown, Raysman, Millstein, Felder & Steiner, 96 NY2d 300, 305 N 2 [2001]; SF Holdings Group, Inc. v. Kramer Levin Naftalis & Frankel, 56 AD3d 281, 282 [2008]; Maurice W. Pomfrey & Associates, Ltd. v. Hancock & Estabrook, 50 AD3d 1531 [2008]), particularly since Plaintiff was an unsophisticated investor confronted with a complex agreement. Additionally, the Defendant has not established, as a matter of law, that the Plaintiff has not suffered any damages. Although her percentage interest in the viator's policy has increased due to other investors opting out, she faces the distinct possibility that she will forfeit her interest in the policy should she be unable to afford to pay additional future premiums.
As to Plaintiff's Fourth Cause of Action, the only misrepresentations plead in the Complaint consist of Defendants' characterizations of the investments as "safe" investments in "secure" life insurance policies which were without risk.
Fraud and negligent misrepresentation claims are composed of similar elements. To sustain a Cause of Action for Fraud, a claimant must establish a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance, and damages (see Eurycleia Partners, LP v. Seward & Kissel, LLP, supra at 559 [2009]; Gaidon v. Guardian Life Ins. Co. Of America, 94 NY2d 330 [1999]). A claim of Negligent Misrepresentation requires proof of a special or privity-like relationship imposing a duty on the Defendant to impart correct information to the Plaintiff, that the information was inaccurate, and reasonable reliance upon the information (see J.A.O. Acquisition Corp. V. Stavitsky, 8 NY3d 144, 148 [2007]).
Defendant's allegation that he was unaware of MBC's fraudulent scheme and that he did not convey any inaccurate information to Plaintiff establishes his prima facie entitlement to Summary Judgment dismissing her misrepresentation claim (see Reilly Green Mountain Platform Tennis v. Cortese, 59 AD3d 695 [2009]; Prince v. Accardo, 54 AD3d 837 [2008]; Friedler v. Palyompis, 44 AD3d 611 [2007]; In re Valentin, 43 AD3d 942 [2007]; McGovern v. T.J. Best Building and Remodeling, Inc., 245 AD2d 925 [1997]). On this issue, the Defendant's alleged representations that the investment was safe, secure, and without risk are merely opinion, not actionable statements of fact (see ESBE Holdings, Inc. v. Vanquish Acquistition Partners, LLC, 50 AD3d 397 [2008]; Sidamondize v. Key, 304 AD2d 415 [2003]; Longo v. Butler Equities, II, LP, 278 AD2d 97 [2000]; Elghanian v. Harvey, 249 AD2d 206 [1998]; D.H. Catttle Holdings Co. v. Smith, 195 AD2d 202 [1994]; Zaref v. Bork & Michaels, P.C., 192 AD2d 346 [1993]).
Furthermore, any claim by the Plaintiff that she was deceived as to the nature of her investment is undermined by paragraph 23 of her Complaint wherein she alleges that the Defendant advised her that the investment was in life insurance (see Milton Weinstein Associates v. Nynex Corp., 266 AD2d 138 [1999]; Bogoni v. Friedlander, 197 AD2d 281 [1994]). Moreover, as previously noted, reasonable reliance is an essential element of those Causes of Action sounding in both Fraud and Negligent Misrepresentation (see Vasquez v. Soto, 61 AD3d 968 [2009]; Hoffend & Sons, Inc. v. Rose & Kiernan, Inc., 19 AD3d 1056 [2005]). The purchase agreement signed by Plaintiff contained disclosures warning her of the "very risks of which she now complains" (Pautienis v. Legacy Capital Corp., 36 AD3d 462, 463 [2007] — viaticals) rendering untenable any claim of justifiable reliance on Defendant's alleged contradictory representations (see In re Dean Witter Managed Futures Ltd. Partnership Litigation, 282 AD2d 271 [2001]; Fitch v. TMF Systems, Inc., 272 AD2d 775 [2000]). Plaintiff's inexcusable failure to avail herself of the opportunity to read the agreement defeats any contention of justifiable reliance (see Sorenson v. Bridge Capital Corp., 52 AD3d 265, 282 [2008]; Marby v. DiSiena Associates, LPA, 291 AD2d 604 [2002]). "Where a party has the means to discover the true nature of the transaction by the exercise of ordinary intelligence, and fails to make use of those means, he [or she] cannot claim justifiable reliance on [the] defendant's misrepresentations" (Tanzman v. LaPietra, 8 A.D. 706, 707, quoting Stuart Silver Assoc. V. Baco Dev. Corp., 245 AD2d 96, 98-99 [1997]).
Accordingly, for the reasons stated herein, the Defendants' motion for Summary Judgment dismissing Plaintiff's First and Second causes of action is denied; however, Defendant's motion is hereby granted dismissing the Fourth Cause of Action. Since the Plaintiff has withdrawn her Third Cause of Action the motion is moot as to same. The Plaintiff's cross-motion for Summary Judgment is hereby denied.
STAY
As alternative relief, the Defendant seeks a stay of this action to abide resolution of a class action lawsuit of which Plaintiff is a member now pending in Federal District Court, entitled Scheck Investments LP v. Kensington Management, Inc.
"Although the actions arise out of the same set of transactions, they do not share complete identity of issues or parties which would warrant granting a stay." (Eposit v. Anderson Kill Olick & Oshinsky, 237 AD2d 246 [1997]; see Green Tree Financial Servicing Corp. V. Lewis, 280 AD2d 642 [2001]).
Therefore, Defendant's application for a stay is hereby denied.
DISCOVERY
The Affirmation submitted by Plaintiff's attorney in opposition to Defendant's motion dated March 24, 2009, includes a request for an order compelling Defendant to produce information regarding "the number of policies sold by the defendant and the number of policies that actually matured." Plaintiff previously sought the information in her Notice to Produce dated January 6, 2009 which Defendant refused to provide. At oral argument of the motions herein, Defendants did not oppose Plaintiff's application but merely argued that they should not be required to provide confidential information. Accordingly, Plaintiff shall submit an Order including a provision directing Defendants to provide "a listing of the number of policies and denominations of each policy sold by Defendants during the entire time period that Richard Nichols acted as sales agent for MBC, and the corresponding numbers of policies that paid during this same period and the date that said policies paid, if any". Document production shall not be required and confidential or identifying information likewise need not be submitted or provided.
The above shall constitute the Decision and Order of this Court.