USDC SPNY DOCUME;'-!T UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK E1. ECTRUN lCALLY FILFD DOC #J: - - - iiirlIlllll'1H........-+-· DATE FI L1:.D: ROBERT GRUND, SUSAN GRUND, on behalf of themselves and all others similarly situated, Plaintiffs, 09 Civ. 8025 OPINION -against DELAWARE CHARTER GUARANTEE & TRUST COMPANY D/B/A PRINCIPAL TRUST COMPANY, and PRINCIPAL FINANCIAL GROUP, INC., Defendants. --­ --­ --­ --­ X A P PEA RAN C E S: At LOVELL STEWART HALEBIAN JACOBSON LLP 61 Broadway, Suite 501 New York, NY 10006 By: Christopher Lovell, Esq. ZAMANSKY & ASSOCIATES LLC 50 Broadway, 32 nd Floor New York, NY 10004 By: Jacob H. Zamansky, Esq. for Defendants SIDLEY AUSTIN LLP 787 Seventh Avenue New York, NY 10019 By: Joel S. Feldman, Esq. 1 Sweet, D.J. Defendants Principal Financial Group, Inc. (" Principal Financial") and Delaware Charter Guarantee & Trust Company d/b/a ipal Trust Company (IIPrincipal Trust") (collectively, the "Defendants") have moved pursuant to Federal Rule of Civil Procedure 12(b) (6) to dismiss the Consolidated Amended Complaint ("CAC") filed by Plaintiffs Robert Grund, Susan Grund, Jef Golden, Victoria Golden, Stephanos Papademetriou, Vaciliki Papademetriou, and El Papademetriou (IIPla conclusions set forth below denied t iffs"). Upon the the motion is granted in part and part. The Plaintiffs and the Defendants entered into Self Directed Individual Retirement Trust Agreements ("SIRTA") to establish traditional individual retirement accounts ("IRAs The a proved to iffs directed investment in claims set forth At issue is the adequacy of the twenty-six the CAC t alleging breach of contract t 2 ). Westgate Fund which a Ponzi scheme operated by James Nicholson ("Nicholson"). lI negligence, breach of fiduciary duty, unjust enrichment, and violations of ERISA dut I. in its 229 paragraphs. Prior Proceedings The Plaintiffs filed the putative class action complaint on September 18, 2009 alleging breach of fiduciary duty, aiding and abetting a breach of fiduciary duty, breach of contract, unjust enrichment, negligence l Defendants moved to dismiss the complaint the Plaintiffs filed the CAC. and conversion. l The and on April 16, 2010 The instant motion of the Defendants to dismiss the CAC was heard and marked fully submitted on December 8, 2010. The CAC alleges twenty-six claims for relief as follows: First Claim for Relief Breach of Contract under Federal Law and Breach of Federally Imposed Dut to Hold Assets and Not Commingle. (CAC ~~ 119-1 32.) Second Ordinary and Gross Neglig ence under Federal Law. (CAC ~~ 133 138.) 3 Third Breach Fiduciary Duty under Federal Law and Breach of Fiduciary Duties Imposed by Law. (CAC ~~ 139 143. ) Fourth Unjust chment and Restitution under Federal Law. (CAC ~~ 144-145.) Fifth Breach of Contract to Ho Assets and Not Commingle State Law. (CAC ~~ 146 148.) Ordinary and Gross Negl under State Law. (CAC ~~ Sixth 149 151.) Breach of Fiduciary Duty under State Law. (CAC ~~ Seventh 152-154.) Eighth Unjust Enrichment and Restitution under State Law. (CAC ~~ 155-156.) Ninth Ordinary and Gross under State Law ( Furnish Statements) . igence to (CAC ~~ 157-159.) Breach of Fiduciary Duty under State Law. (CAC ~~ Tenth 160-162.) Eleventh Unjust Enrichment and Restitution under State Law. (CAC ~~ 153 165) Twelfth Breach of Contract to Provide Accurate Annual Accounting under State Law. (CAC ~~ 166-169.) 4 Thirteenth Ordinary and Gross Negligence under State Law (Failure to Furnish Statements). (CAC ~~ 170-172.) Fourteenth Breach of Fiduciary Duty under State Law. (CAC ~~ 173 175.) Fifteenth Unjust Enrichment and Restitution under State Law. (CAC ~~ 176 178.) Sixteenth Breach of Contract under Federal law. (CAC ~~ 179­ 188. ) Seventeenth Ordinary and Gross Negligence under Federal Law (Failure to Furnish Statements). (CAC ~~ 189-192.) Eighteenth Breach of duciary Duty under Federal Law (Failure to Furnish Statements). (CAC ~~ 193-196.) Nineteenth Unjust chment and Restitution under Federal Law. (CAC ~~ 197-198.) Twent Breach of Contract under State Law (Failure to Furnish Statements). (CAC ~~ 199­ 201. ) Twenty First Ordinary and Gross Negligence under State Law (Failure to Furnish Statements) (CAC ~~ 202 204.) 5 Breach of Fiduciary Duty Twenty-Second under State Law. 205-207. ) (CAC ~~ Twenty-Third Unjust Enrichment and Restitution under State Law. (CAC ~~ 208-210.) Twenty-Fourth Implied Right of Action under Federal Law Including Section 408 of the Internal Revenue Code. (CAC ~ 211-216.) Twenty- Breach of Fiduciary Duty under ERISA. (CAC ~~ 217­ 223. ) fth Twenty-Sixth Failure to sclose under ERISA (29 USC § 1132). (CAC ~~ 224 229.) According to the CAC[ the Plaintiffs entered into a standardized form contract for a drafted by Defendants[ which f-directed IRA that was turn was copied in part from a federal form contract created by the Internal Revenue Service ("IRS II ). See IRS Form 5305A; CAC ~~ 48-50. The form[ as promulgated by the IRS[ sets forth a number provisions which must be included to create a valid "Traditional Individual Retirement Custodial Accountll under Revenue Code ("IRCII). CAC ~ 48. § 408 of the Internal Under IRC § 408[ the custodian/trustee has a duty to acquire and hold particular investments; to keep custody of investments; to refrain from 6 commingling the investments of each account with any other property; to deposit assets of accounts requiring safekeeping in an adequate vault; to determine the assets held by it in trust and the value of such assets at least once in each calendar year and no more than 18 months after the preceding valuation; and to receive, issue receipts for, and safely keep securities. 42, 46; see Treas. Reg. 1.408 2(e). Defendants, was signed by Plaintiffs. standard applicat ~~ CAC The SIRTA, written by Included in Defendants' booklet for an IRA was a form letter from the IRS which ensured that the IRA contract conformed to the rules and fiduciary standards established by IRC § 408. CAC ~ 8. According to the CAC, while Defendants were collecting fees from Plaintiffs for services which they allegedly failed to perform, they were allegedly permitting an unauthorized person, Nicholson, to take a percentage of the retirement money belonging to Plaintiffs. Plaintiffs believed that Defendants were upholding their contractual obligations, adhering to their duties as custodians/trustees, and protecting Plaintiffs' retirement money, and Defendants are alleged to have negligently 7 failed to perform many of their contractual and fiduciary obligations. CAC ~ 51. Defendants are alleged to have failed to collect contributions directly from Plaintiffs, a practice which is inconsistent with industry standards, and failed to send invoices directly to their clients, instead sending them to Nicholson, again a practice inconsistent with industry standards. CAC ~ 51. Plaintiffs allegedly only received invoices from Defendants, requesting that they pay for Principal Trust's trustee services, after Nicholson's arrest. Id. According to the CAC, Plaintiffs trusted Defendants to perform their duties as trustees/custodians of their IRA accounts but, instead of performing them, Defendants delegated much of the control over the IRA accounts to Nicholson. This delegation was undertaken despite Nicholson's background and the fact that he was not an eligible party to any of the necessary IRA contracts required by federal law for the management of IRA and pension funds. Although they were in a unique position as trustees to search the Securities and Exchange Commission's ("SEC") EDGAR databases and other state and federal databases, 8 Defendants allegedly failed to discover that none of Nicholson's purported investment vehicles were registered or qualified for IRA and pension fund investment, failed in their fiduciary duties as trustees, and breached their contractual duties. CAC ~ 69. II. The Applicable Standard Fed. R. Civ. P. 8 (a) (2) requires "a short and plain statement of the claim showing that the pleader is entitled to relief." Therefore, to survive a motion to dismiss pursuant to Rule 12 (b) (6), "a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" 1949 (2009) 570 (2007)) Ashcroft v. Iqbal, 129 S.Ct. 1937, (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, Though the court must accept the factual allegations of a complaint as true, it is "not bound to accept as true a legal conclusion couched as a factual allegation." Iqbal, 129 S.Ct. at 1949 (quoting Twombly, 550 U.S. at 555) . Plaintiffs must allege sufficient facts to "nudge [ ] their 9 claims across the line from conceivable to plausible." Twombly, 550 U.S. at 570. Under these standards the CAC is not short, concise, or plain and, by its repetitive format, a number of appear to be duplicative. dismis aims (Def. Mem. in Supp. at 6)). While on Rule 8(a) (2) grounds might be tempting, in an effort to minimize unnecessary motion practice, the adequacy of the claims will be considered in the following grouping, the federal claims, including the ERISA claims (Claims, First through Fourth, Sixteenth through Nineteenth, Twenty-Fourth through Twenty-Sixth), the contract claims (Fifth, Twentieth), the negligence claims (Sixth, Ninth, Twentieth, Twenty-First), the breach of fiduciary duty claims (Seventh, Tenth, Fourteenth, Twenty-Second), and the unjust enrichment claims (Eighth, Eleventh, Fifteenth, Twenty Third) . III. Principal Financial is Not Dismissed The Defendants have urged that the CAC contains no allegations that Principal Financial was involved in the transactions at issue. (Def. Mem. in Supp. at 9). 10 Although the Plaintiffs seek to meet this contention by citing authorities relating to alter ego status, no such status is alleged in the CAC. However, by footnoting 26 C.F.R. § 1.408-2 (e) (5) (i) (A) (1), if that section has been incorporated into the contract as alleged above, "the owner or directors of the applicant will be responsible for the proper exercise of fiduciary powers by the applicant." This responsibility of Principal Financial is sufficient to defeat the Defendants' motion with respect to Principal Financial. 1 IV. The Federal Claims Are Dismissed Plaintiffs have asserted claims for breach of contract, negligence, breach of fiduciary duty, unjust enrichment, and ERISA violations under federal law, based on ERISA, the establishment of the office of Employee Plans and Exempt Organizations, Section 408(a) of the Internal Revenue Defendants have brought the order dismissing claims in Mandelbaum v. Fiserv, Inc., 09 civ. 752, at *9-12 (Mar. 29, 2011), to the Court's attention, in which claims against the parent company were dismissed. However, the Mandelbaum opinion does not consider 26 C.F.R. § 1.408-2 (e) (5) (i) (A) (1) . 1 11 Code (" IRC") and the regulations thereunder precluding Form 5305A[ and federal common law. a. (Pl. Opp. Mem. at 7-18.) IRe Section 408 Does Not Provide a Private Right of Action Initially[ Plaintiffs have asserted that § 408 of the IRC provides a private right of action. Although guidel § § 408 sets forth a series of statutory for IRAs seeking tax-deferred status[ see 26 U.S.C. 408[ the Honorable Lewis Kaplan in a well-reasoned opinion recognized the limited scope of § 408: "Section 408 of the Code does no more than establish a framework whereby individuals may obtain favorable tax treatment .... " Sirna v. Prudential Secs.[ Inc.[ No. 95 Civ. 8422[ 95 Civ. 9016[ 96 Civ. 4534[ 1997 WL 53194[ at *3 (S.D.N.Y. Feb. 10[ 1997) (involving the alleged failure of an IRA trustee to properly manage beneficiary funds) . Judge Kaplan dismissed as "frivolous" the plaintiff's argument that an IRA trustee's alleged failure properly to manage an account somehow "violated" § 408's tax deferral protocol: [T]here is nothing in the wording or effect of the statute to suggest that Congress intended to create[ via the tax code[ a private right of action against 12 errant fiduciaries. When Congress did intend to create such private rights of action/ it did so unambiguously/ as in Title I ERISA. Furthermore/ actions for breach of fiduciary duty are tradit ly matters of state law. 1997 WL 53194/ at *3. action against He held that" is no impl cause legedly errant IRA fiduciaries under Section 408 of the Internal Revenue Code." Id. See also Silva/ No. 09 Civ. 9218/ 2010 WL 743510/ at *7 (S.D.N.Y. Feb. 24/ 2010) of ("there is no private right IRC") i Hines v. 1249838/ at *2 (M.D. action for violations serv/ Inc./ No. 08 Civ. 2569/ 2010 WL . Mar. 25/ 2010). The conclusions reached in Sirna are equally applicable b. Plaintiffs' ERISA Claims are Dismissed for Lack of Standing and Failure to State a Claim Claims twenty-five and twenty-six allege that " [c]ert of class members' accounts were accounts" and therefore give fiduciary duty" and "fai 217-229. If se to claims ion or IRA "breach of to disclose" under ERISA. CAC" aintiffs could state a claim under ERISA, all twenty-four of their other claims would be preempted. Section 514(a) of ERISA states that ERISA ITshall supersede any and all State laws far as they may now or hereafter 13 ate to any plan described in section 1003(a) of this title employee benef and not exempt under section 1003(b) of this title." § 1144 (a). decisions l The term "State law" includes not only rules f e c t of law, II l regulations 2 9 U. S . C. § II 29 U.S.C. all laws I or other State action having the I 1144 (c) (1) I but so state law breach of contract and tort claims involving an ERISA plan. Pilot Life Ins. Co. v. Dedeaux I 481 U.S. 41, 52-57 (1987). Only plaintiffs who are properly considered "participants" or "beneficiaries" (or "fiduciaries ll ) of an employee benefit plan have standing to sue under ERISA. See _C_a_l~~_~________~ _____~A_ _ _ _ _ _ _ _~~_ _ _ _ 1 1 (2d Cir. 2007) i Ce~tral I Inc' l 157 Fed. Appx. 328 (quoting Aetna Health Inc. v. Davila U.S. 200 1 210 (2004)). 472 States Se. & Sw. Areas Health & Welfare Cir. 205) i DaPonte v. Manfredi Motors 331 (2d Cir. 2005) 257 Fed. Appx. 470 Therefore l 542 in a putative class action l l the named plaintiffs must properly allege facts establishing that they are ERISA "participants" or "beneficiaries" in order to survive a motion to dismiss. U.S. 488 1 494 (1974) ("if none See O'Shea v. Litteton l 414 the named plaintiffs purporting to represent a class establishes the requisite of a 14 1 case or controversy with the defendants, none may seek ief on behalf of himself or any other members of the class. lT ) (citations omitted). The CAC does not allege an ERISA lTemployee benefit plan," or that any of the named plaintiffs are ITparticipants lT in, or ITbeneficiaries" of, any such plan. Accordingly, the named Plaintiffs lack standing to sue under ERISA. Caltagirone, 257 Fed. Appx. at 473; Teagardener v. ic Franklin Inc. Pension Plan, Cir.1990) (affirming dismis 909 F.2d 947, 951 54 (6th of ERISA claim for lack of standing) . Moreover, IRA accounts like those Plaintiffs held are explicitly carved out of the scope of ERISA. 1051(6) See 29 U.S.C. § (exempting from coverage under Title I of ERISA "an [IRA] or annuity described in section 408 of [the Code] IT) i 29 C.F.R. § 2510.3-2(d) (1) (IIFor purposes of title I [ERI SA] , the terms 'employee pension benefit plan' and 'pension plan' shall not include an [IRA] described in section 408(a) of the Code.") to IRAs. Courts have repeatedly held that ERISA See,~, 828 F.2d 910, 913 v. The not apply Island R.R. Pension Plan, (2d Cir. 1987) ; Charles Schwab & Co. v. Debickero, 593 F.3d 916, 919 (9th Cir. 2010) 15 ("IRAs are specifically excluded from ERISA's coverage" because IRAs involved "no employer oversight, no ongoing employer commitment, nor any potent for employer abuse") . Plaintiffs argue that this Court may not consider their lack of ERISA standing at s stage, but rather must wait until after class certification, relying on Ortiz v. Fibreboard Corp., 527 U.S. 815, 831 (1999) and its progeny. at 18). . Opp. Mem. However, Ortiz is a "limited exception" and does not apply where standing issue would exist for the named Plaintiff if they filed their claims alone and not as a class action. ~R~i~v_e~r~a~~v. . .•. .~. . . . . ~~__~~~~_L_a_b~s_., .. (5th Cir. 2002). Here, PI 283 F.3d 315, 319 & n. 6 iffs have not alleged that there is any ERISA-covered employee benefit plan at issue, or that any named pI Plaintif iff was the beneficiary of such a plan. Therefore, have failed to establish their standing under ERISA. aintiffs also have not established any ERISA rights. Plaintif have sought to establish a private right of action under ERISA through the story and structure of the ERISA statute, ERISA Title I, Section 408, federal common law, the Erie Doctrine, and other legal princ 16 es. Part of this invocation of ERISA is premised on a conflation of Title I and Title II of that statute. tIe I of ERISA sets forth IIrules for reporting and disclosure, vesting, participation, funding, fiduciary conduct, and civil enforcement II relating to lIemployee benefit plans,1I 2 and explicitly carves out IRAs. Title II of "ERISAII consists of various amendments made to the Internal Revenue Code at the time of ERISA's passage, including guidelines. See 26 U.S.C. § 408's provision of IRA § 401 ---'""'-­ i 26 U.S.C. § 408. Title II does not give rise to an enforceable fiduciary duty claim, and, although technically part of the IIERISA statute, II Title II is not generally what courts refer to when describing "ERISA claims. II 395, 399-400 (7th Cir. 1993) Metz v. Indep. Trust Corp., 994 F.2d (II [Plaintiff I s] IRA is not even governed by ERISA") i In re Houck, 181 B.R. 187, 191-92 (Bankr. 2 "Employee benefit plan" is defined under ERISA as "an employee welfare benefit plan or an employee pension benefit plan or a plan which is both an employee welfare benefit plan and an employee pension benefit plan." 29 U.S.C. § 1002(3). A "participant" includes "any employee or former employee of an employer, or any member or former member of an employee organization, who is or may become eligible to receive a benefit of any type from an employee benefit plan which covers employees of such employer or members of such organization, or whose beneficiaries may be eligible to receive any such benefit." 29 U.S.C. § 1002(7). Plaintiffs do not fall within this umbrella. 17 E.D.Pa. 1995) (I1IRAs are tax qualified ... but they are not subject to ERISAI1) . authorities the Plaintiffs cite do not hold to the contrary. Investment Co. Inst. v. Conover, 596 F. Supp. 1496 (D.D.C. 1984), Investment Co. Inst. v. Clarke, 630 F. Supp. 593 (D. Conn. 1986), and Masi v. Ford City Bank & Trust Co., 779 F.2d 397 (7th Cir. 1985), do not hold that Title I of ERISA applies to IRAs, nor that Title II gives rise to actionable duties or a private right of action. Conover and Clarke were parallel actions seeking declaratory relief on the question of whether federally-regulated banks were permitted, under the Glass-Steagall Act, to establish discretionary, fiduciary I!collective investment trusts.!! Because these factually distinguishable cases dealt with accounts the banks expressly intended to function as discretionary, I1fiduciary" accounts, they are not relevant to the non-discretionary IRA accounts at issue here. See Conover, 596 F. Supp. at 1502; Clarke, 630 F. Supp. at 596-97. Masi also involved a discretionary IRA account, and, in any event, was limited by the Seventh Circuit's later decision in Metz, 994 F.2d at 402, which held that non 18 discretionary IRA custodians owe no duties beyond those defined in the parties' trust agreement. Plaintiffs cite the Id. at 398. islative history of the ERISA statute and contend that Congress's creation of the Office of Assistant Commissioner, Employee Plans and Exempt Organizations 1974 and amendment of tax- § 408 in 1974 to include guidelines for ferred IRAs indicates that Congress intended to create an IRA fiduciary duty, although no court decision has so held. This argument is unpersuasive and contradicted by the weight of authority cited above. The ERISA cIa and c. are dismissed for lack of standing lure to state a claim. Plaintiff's Federal Common Law Claims Fail In addition to their federal statutory claims, PIa iffs' CAC has added eight common law claims under "federal" law. 19 Plaintiffs' common law causes of actions are fundamentally creatures of state law. v. Datatab See Data Probe Inc., 722 F.2d 1, 4 (2d Cir. 1983) --~------------~------------~------ (fiduciary duty); Caceres Agency, Inc::. v. Trans World Airways, Inc., 594 F.2d 932, 934 (2d r. 1979) (breach of contract); v. Pfizer Inc., 384 F. Supp. 2d 689, 691 2005) (negligence). (S.D.N.Y. The circumstances in which it is appropriate to create federal rules of decision are "few and restricted," and limited to situations where is a "significant conflict between some federal policy or interest and the use of state law." 218 (1997) Trust Atherton v. F.D.I.C., 519 U.S. 213, (citations and quotation marks omitted); Resolution , 925 F. Supp. 164, 167 68 (quot also (II (S.D.N.Y. 1996) 512 U.S. 79, 87 (1994)) see , 34 F.3d 1529, 1538 (10th Cir. 1994) [s]tate law is presumed adequate" absent conflict) omitted). i See also 0'Melveny, 512 U.S. at 87 88 (citations (finding that courts only apply federal law if it preempts state law, or if there is some conflict significant enough to warrant the creation of federal common law) . 20 State law is preempted under the Supremacy Clause, U.S. Const., Art. VI, cl. 2, in only three circumstances: (1) where Congress expressly provides for preemption on a particular subject ish v. Gen. Elec. CO' I 496 U.S. 721 78-79 (1990) ing Shaw v. Delta Air Lines, Inc' (1983») i l 463 U.S. 85 1 (2) where Congress so thoroughly 95-98 ates conduct in a field that Congress implies that it the federal government to occupy the field exclusively (llfield ll preemption) ish, 496 U.S. at 79) i and (3) state law "actually --"'---­ conflicts with federal law" Ni Mohawk Power 138 (2d Cir. 2010). lict ll preemption). (I! . v. Chevron USA IIAbsent clear contrary, federal preemption Inc' l Id. i 596 F.3d 1121 ional intent to the state law is not favored ... especially in areas of law traditionally occupied by the states. I! 2007) Marsh v. Rosenbloom, 499 F.3d 165, 177-78 (2d Cir. (citations omitted) . Plaintiffs have not Congress expressly provided to IRAs, nor that the IIf a federal regulatory "conflict" between f leged and cannot maintain that preemption of all law relating II of IRAs is completely occupied by Plaintiffs also do not allege any law and state law. 21 Plaintiffs have 1 that identical state and federal law causes of action can co ef st in the same complaint. Plaintiffs have thus ively conceded that there is no federal preemption These same principles preclude Plaintiffs' argument that this Court should create new IIfederal common law. II II , [T] here is no federal general common law. IVI"QY·~, 512 U.S. at 83 64, (1938)). 78 ! II (quoting Erie R. Co. v. , 304 U.S. As noted above, the circumstances in which it is appropriate to create federal rules of restricted, II and limited to situations ision are IIfew and is a IIsignificant conflict between some federal policy or interest and the use of state law. II Atherton, 519 U.S. at 218. No basis has been established the federal claims alleged, and they are dismissed. V. Plaintiffs' State Law Claims Are Dismissed in Part and Survive in Part a. Plaintiffs' State Law Claims Are Not Precluded By Federal Securities Laws 22 The enactment of the Securities tigation Uniform Standards Act ("SLUSA") has created difficult issues for the courts 1 in particular the elasticity of "in connection with" phrase relating to the purchase and sale of covered securities. 3 Distinguished judges of this circuit and have reached differing conclus in the factual settings with which they have been presented. For the reasons set forth below, the result here is closer to that reported in Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 372 (S.D.N.Y. 2010), and Pension Committee of the University of Montreal Pension Plan v. Banc of America Securities, 750 F. Supp. 2d 450 the conclusions reached 3:09 Civ. 00269 1 (S.D.N.Y. 2010), than Levinson v. PSCC Services, Inc., No. 2009 WL 5184363 (D.Conn. Dec. 23, 2009), Mandelbaum, 09 Civ. 752, at *29-40 4 , and Barron v. ------------~-------- , No. 09 Civ. 4471, 2010 WL 882890 (S.D.N.Y. Mar. 10, 2010) Congress enacted Reform Act (IIPSLRA") Private Securities t in 1995 to heighten pleading standards and strengthen procedural safeguards in an effort to stem Neither SLUSA itself nor its with." 3 ion tide ive history defines "in connection In the court determined that the plaintiffs, though stat it outright, had alleged fraudulent misrepresentation by the defendants. Id. at *37-38. That is not the case here. 4 23 avoided of abus securities lit ion. Merrill Pierce Fenner & Smith Inc. v. Dabit/ 547 U.S. 71/ 81-82 (2006); In re Lord Abbett Mut. Funds Fee Litig./ 553 F.3d 248/ 249-50 (3d Cir. 2009). After the PSLRA's enactment/ however/ aintiffs sought to bring ties class actions under state/ rather than federal/ law. As the Second Circuit recogni "By suing in state court under state statutory or common law/ these litigants were able to assert many of the same causes of action/ but avoid the heightened procedural requirements instituted in federal court." Lander v. Hartford Life & Annui 101, 107-08 (2d r. 2001). counter these measures. Ins. Co./ 251 F.3d In 1998, Congress enacted SLUSA to Id.; Ring v. AXA Fin., Inc., 483 F.3d 95/ 97-98 (2d Cir. 2007). SLUSA requires dismissal the following types of ims: (1) A "covered" class action; (2) Brought under state statutory or common law; (3) All misrepresentation or omission mater fact or use of a manipulative or decept device; 24 a (4) In connection with the purchase or sale of a covered security. 15 U.S.C. § 78bb(f) (1). Because it only addresses class actions, SLUSA does not prevent a plaintiff from individually asserting any valid state law claims that he or she might have. SLUSA does not actually "preempt" any individual state law causes of action, but rather denies plaintiffs the right to use the class action device to bring a securit claim in state or federal court unless they can satisfy the pleading standards applicable to federal securit s laws claims. The Supreme Court has held that courts should give SLUSA a broad reading. Pierce Fenner & Smith 1278, 1284 (lOth Cir. 2008) See Inc., 521 F.3d (citing Dabit, 547 U.S. at 85-86 (2006) ) . The CAC satisf SLUSA. s two requirements dismissal under First, this is a "covered class action," which is defined by SLUSA to include "any single lawsuit in which ... one or more named parties seek to recover damages on a representative basis on behalf of themselves and other unnamed 25 parties similarly situated .... 11 15 U.S.C. 77p(f) (2) (A) (i) (II). ~~ 1t See CAC 26 t § 107. Second t iffs' state law claims of breach of fiduciary dutYt of contract t unjust enrichment t and negligence are all state common law. on However t the CAC does not satisfy SLUSA's remaining two requirements: there are no misrepresentat or omissions of a material fact or use of a manipulative or deceptive device made in connection with the purchase or e of a covered security. The CAC alleges that the Defendants: (1) turned the trust assets they were obligated to safeguard over to a third party (Nicholson); (2) failed to check with itory Trust Corporation or other such organizations as to whether Nicholson continued to hold the assets in a all; (3) segregated form or at failed to act in accordance with the customs and standards in the industry to track t rna in custody overt hold t commingling of the trust preservet safeguard t and avoid assets; (4) failed to maintain title to the assets; (5) failed to contact their fiduciary relationship; financial statements (non-existent) ficiaries during the course of (6) failed to obtain audited a recognized accountant; 26 (7) failed to conduct the required basic due diligence that would have revealed numerous flags, including the fact that Nicholson had been permanently barred from securities industry back in 2001; and (8) failed to furnish legally mandated statements accurately reflecting the value of the assets Plaintiffs' retirement and pension accounts. The CAC d in CAC, 51. leges that Defendants violated state and federal law by breach of fiduciary duty, ordinary and gross negligence, and unjust enrichment, thereby entitling Plaintiffs to restitution. No claim is made of misrepresentation or omission or the employment of a single manipulative or decept device in connection with the purchase or sale of a single covered security. Courts have held that it is the allegations made the complaint that form the basis 11 their SLUSA analysis: [b]ecause the determination of whether SLUSA appl s may only be made by reference to what a party has alleged, and not what it could have alleged, courts should be wary of a defendant's attempts to recast the plaintiff's comp int as a securities lawsuit in order to have it preempted by SLUSA." 27 MDCM Holdings, Inc. v. Credit Suisse First Boston Corp., 216 F. Supp. 2d 251, 257 n. 12 (S.D.N.Y. 2002) overruled on other grounds by v. Merrill Pierce 123 (2d Cir.2003) i Fenner & Smith Inc., 332 F.3d 116, see also Paru v. Mutual of America Life Ins. Co., No. 04 Civ. 6907, 2006 WL 1292828, at *3 2006) ( ll defendant may not recast. (S.D.N.Y. May II, Complaint as a securities fraud class action so as to it preempted by SLUSA") . Plaintiffs acknowledge the Court may choose to IIl ook beyond the face of the [compl ] to determine whether [it alleges] securities fraud in connection with the purchase or sale of covered securities." 519 (2d Cir. 2010). Romano v. Kazacos, 609 F.3d 512, Furthermore, a "narrow reading" SLUSA "would undercut the effectiveness of [the PSLRA] and thus run viz., 'to prevent cert to SLUSA's stated purpose, State private securities class action lawsuits alleging fraud objectives' of [ Court must be mindful that PSLRA]." being used to frustrate the Dabit, 547 U.S. at 86. At the same time, in SEC v. , 535 U.S. 813, 825 & n. 4 (2002), the Supreme Court, Section 10(b) and Rule 10b-5 in a civil securities fraud case brought by the SEC, noted that 28 although the phrase "in connection with" should be interpreted "flexibly to effectuate its remedial purposes," it "does not transform every breach of fiduciary duty into a federal securities violation." Id. (citations omitted). Applying Zandford's reasoning in the SLUSA context, courts have held that "'the fraud in question must relate to the nature of the securities, the risks associated with their purchase or sale, or some other factor with similar connection to the securities themselves. ' " Falkowski v. Imation ., 309 F.3d 1123, 1130­ 31 (9th Cir. 2002), as amended in 320 F.3d 905 (9th Cir. 2003) (quoting Ambassador Hotel Co. v. Wei-Chuan Inv., 189 F.3d 1017, 1026 (9th Cir. 1999)). Explaining further, the court in Falkowski noted that "[w]hile the fraud in question need not relate to the investment value of the securities themselves, must have more than some tangenti transaction." relation to it securit Falkowski, 309 F.3d at 1130-31 (quoting Ambassador Hotel, 189 F.3d at 1026). Reviewing Plaintiffs' allegations with these holdings in mind, the Court still finds that the CAC's allegations are outside SLUSA's preemptive scope. The guidance provided by the Court in Xpedior Creditor _______v._,__ C_r_e_d_l_·_t__ S_U_l_·s_s e __ __ F_i_r_s_t B_o_s_t_o_n ~__~__ __, 341 F. Supp. 2d ___ __ I_n_c . 29 258 (S.D.N.Y. 2004), is useful. under SLUSA, In Xpedior, the Court held that "regardless of the words used by a plaintiff in framing her allegations and regardless of the labels she pastes on each cause of action, a court must determine whether fraud is a necessary component of the claim." original) . In other words, Id. at 261 (emphasis in "the simple inquiry is whether plaintiff is pleading fraud in words and substance." 268. Under the necessary component test, Id. at "a complaint is preempted under SLUSA when it asserts (1) an explicit claim of fraud or misrepresentation (e.g., common law fraud, negligent misrepresentations, or fraudulent inducement), or (2) other garden-variety state law claims that 'sound in fraud. 261. III Id. at In Xpedior, the court held that the claims of violation of an underwriting agreement were not preempted by SLUSA, reasoning that fraud was not a necessary component of the breach of contract claims. Id. at 270. In Romano, the Second Circuit recently dealt with this issue when it held that a "defendant's alleged fraud must 'coincide' with plaintiff's purchase or sale of covered securities to meet SLUSA's 'in connection with' requirement." 609 F.3d at 521 (quoting Dabit, 547 U.S. at 85). 30 The Court explained that "SLUSA's 'in connection with' standard is met where plaintiff's claims 'turn on injuries caused by acting on misleading investment advice'-that is, where pIa 'necessarily allege,' 'necessarily involve, purchase or sale of securities." Merrill Lynch Fenner & Smith 1 l I Id. at 522 InC' 1 iff's claims or 'rest on' the (quoting Dabit v. 395 F.3d 25 1 48 1 50 (2d Cir. 2005)). Courts have demonstrated a willingness to preclude cases under SLUSA where the plaintiffs clearly raise claims involving or sounding in fraud. See Dabit, 547 U.S. at 89 (finding SLUSA pre emption appropriate where the complaint made explicit allegations of securities fraud through manipulation designed to inflate the prices of stocks). 5184363, at *9 1 the plaintiffs In Levinson l 2009 WL leged that the defendants !!engaged in a schemel! with Madoff "to operate a common investment fund" and "induced plaintiffs into investing their assets in the fund by mi ing the extent to which [they] would safeguard their assets.!! to the terms of the complaint 1 The Court found that according !!some of the misrepresentations ... were necessary conditions for ... Madoff's purported purchase e of securities for Plaintiffs' fund." 31 Id. iffs also brought claims for c The Levinson pI 1 RICO fraud, negligent (with fraud as the predicate act), common misrepresentation and aiding and abetting conversion and statutory ft. Id. at *1. Applying ------- fS necessary component test, the Court found that "because a misrepresentation or other fraudulent conduct were preempted by element of [those] causes of action," SLUSA. Id. at *12. [was] a necessary complaint Notably, Levinson leged that the defendants intended to breach their contractual obligations at the time contracts were formed. Id. at *13. The non-fraud-based causes of action had incorporated by reference all the preceding allegations, including intentional misrepresentation. Id. legations See also Newman v. Family Management Corp., 748 F. Supp. 2d 299 (S.D.N.Y. 2010) (where plaintiffs alleged that defendants had engaged in common law fraud as well as numerous Securities Act violations, SLUSA preclusion was appl i F. Supp. 2d 386, 429-31 In re Beacon Associates Lit (S.D.N.Y. 2010) ion, 745 (same). However, where claims of fraud or sounding in fraud are not rai by a plaintiff, Courts apply SLUSA prec ion. See 32 been unwilling to Ltd., 510 F. Supp. 2d 246, 273-74 (S.D.N.Y. 2007) (cautioning, post-Dabit, against overreaching interpretations of the "in connection with" requirement that would lead to absurd results, and rejecting a motion to dismiss claims that did not sound in fraud) i Montreal Pension Plan, 750 F. Supp. 2d at 453, 454, 455 (where plaintiffs alleged that certain defendants had made various "untrue statements of material fact" about hedge funds by distributing "materially se monthly statements regarding the net asset value_ and other performance information," the Court found that defendants were "taking out of context" and noted that, in Dabit, the Supreme Court had "addressed the narrow question of whether SLUSA preempted state law claims brought by holders of securities( as well as those of purchasers and sellers." In rejecting the defendants' bid for summary judgment on state-law claims, the Court found that "covered securit s are not 'at the heart'" of pIa iffs' case and ruled that "[t]he interpretation of SLUSA urged by the. [d]efendants stretches the statute beyond its plain meaning.") (internal citations omitted); Paru, 2006 WL 1292828, at *5 (denying defendantls motion to dismiss under SLUSA where it was clear pIa iffls al ions were not based, "either explicitly or implicitly, on any misstatements or omissions, 33 II but rather on the allegation that "defendant had a fiduciary obligation to take certain measures to protect the long term viability of plaintiff's investments, defendant failed to do so, and such failure resulted in plaintiff being harmed.") The CAC also fails to satisfy the fourth SLUSA requirement, that the misrepresentations be made in connection with the purchase or sale of a covered security. In Anwar v. Fairfield Greenwich Ltd., the Court addressed similar facts to those presented here. The defendants in Anwar argued that because the plaintiffs' assets were ultimately funneled into a Ponzi scheme that outwardly purported to invest in covered securities, the complaint's state law claims were preempted. Anwar, 728 F. Supp. 2d at 398-99. After acknowledging that, post-Dabit, it was obliged to interpret the statute's "in connection with" language broadly, the Court found that "stretching" the statute to preclude the allegations before it would "snap[] even the most flexible rubber band." Id. at 399. Here, as in Anwar, the investment to be purchased was an intermediate fund, the Westgate Fund, itself not a covered security. Plaintiffs' allegations against Defendants do not 34 sound in fraud or allege fraud-based causes of action. The rubber band of "in connection with" does not reach beyond Westgate to Nicholson's Ponzi scheme. b. Delaware Law Applies to the Contract Claims While New York, New Jersey, and California Law Apply to the Tort Claims A federal district court appl rules of the State in which it sits. Mfg. Co., 313 U.S. 487 (1941). the choice of-law Klaxon v. Stentor Elect In New York, c "[i]t is well settled that courts will enforce a choice of law clause so long as the chosen law bears a reasonable relationship to the part or the transaction." (4th Dept. 2009) omitted). Lupien v. Lupien, 819 N.Y.S.2d 785, 785-86 (internal citations and quotation marks The SIRTA governing the parties' relationship contains a choice of law provision that states: "This Trust Agreement is made pursuant to and shall be construed accordance with the laws of the State of Delaware." 5.8(K). As Plaintif al SIRTA § , Delaware Charter Guarantee & Trust Company is organized under the laws of Delaware with its principal place of business in Wilmington, Delaware. As a result, this Court will enforce the Trust Agreement's choice of 35 law clause and apply Delaware law with respect to Plaintiffs' breach of contract claims. Under New York choice of law rules, tort claims are outside the scope contractual cho --~----------~--~------~~---- of law provisions. , No. 93 Civ. 2655, 1995 WL 606272, at *5 (S.D.N.Y. Oct. 12, 1995) (Under New York law, II [a] contractual choice of law provision ... does not bind the parties with respect to non-contractual causes _F~u~s~t~o~k~v~.__ C_o~n_t~i_c~o~m~m~o~d~i~__S~e~r_v~s~.~~I_n_c~., (S.D.N.Y. 1985)). action. ") (citing 618 F. Supp. 1082, 1089 To determine which law applies in a tort action, New York courts apply an "interest analysis," under which the law of the jurisdiction with the greatest interest the lit ion applies. AroChem Int'l, Inc. v. Buirkle, 968 F.2d 266, 270 (2d Cir. 1992) (citing Schultz v. Boy Scouts of America, Inc., 65 N.Y.2d 189, 197 (1985}) Jackson, 12 N.Y.2d 473, 481 82 (1963). i see also Babcock v. "Two separate inquiries are ... required to determine the greater interest: the significant contacts and located; and, conduct or (1) what are which jurisdiction are they (2) whether the purpose of the law is to regulate locate loss." 84 N.Y.2d 519, 521 (1994) (cit Schultz, 65 N.Y.2d at 198). 36 Where the laws alleged to be in conflict are conduct-regulating, "the law of the jurisdiction where the tort occurred will generally apply because that jurisdiction has the greatest interest in regulating behavior within its borders." Osgood Mach., 81 N.Y.2d 66, 72 (1993) i Cooney v. _s_e_e____s_o_ Ackerman v. ce-Waterhouse, 683 N.Y.S.2d 179, 189 (1st Dept. 1998) (quoting Cooney, 81 N.Y.2d at 72) In re New York Ci i Litigation, No. 190078/08, 2011 WL 921366, at *4 11, 2011) (quoting Cooney, 81 N.Y.2d at 72). Asbestos (N.Y.Sup. Mar. "With respect to tort claims, this is usually the state where the tort took place. II In re Currency Conversion Fee Antitrust Litig., 230 F.R.D. 303, 311 (S.D.N.Y. 2004). In cases such as this, the locus of the tort tends to be where the alleged victims resided, as that is locus their economic loss. Id. See also Bon Jour Group, Ltd v. Elan-Polo, Inc., No. 96 Civ. 6705, 1997 WL 401814, at *4 (S.D.N.Y. July 16, 1997) (llwhere the location of the alleged tort is not apparent, the tort is deemed to occur where party resides and sustained an economic loss resulting from the tort") (citation omitted). the conflicting laws are losstaken into consideration, On the other hand, where locating, "other tors are fly the parties' domiciles." 37 New York City Asbestos Litigation, 2011 WL 921366, at *4 (quoting Cooney, 81 N.Y.2d at 72). Here, Plaintiffs allege that Defendants breached their fiduciary duties and were otherwise negligent in fulfilling their obligations to Plaintiffs. conduct-regulating. These alleged legal dut are In terms of contacts, Defendants are Delaware corporations with their primary places of business in Delaware and Iowa. Plaintiffs resided in New York, New Jersey, and California when injured. Defendants contend that the Court should apply the laws of these three jurisdictions, as they represent the locus of the harm. s In light of the foregoing, the laws of New York, New Jersey, and California will be applied to Plaintiffs' tort claims. c. The Motion to Dismiss the Contract Claims is Granted in Part and Denied in Part Plaintiffs assert three state common law breach of contract claims (Pl. Opp. Mem. at 20): (1) Defendants breached 5 Plaintiffs contend that only New York law should be applied because the underlying fraud which damaged the Plaintiffs' accounts was orchestrated in New York. However, that conduct is not the alleged tort in this action, and it was not perpetrated by any of the defendants. Therefore, it is not part of the interest analysis. 38 their contractual obligation "[t]o hold any securities in bearer form or in the name of the banks, brokers, and other custodians or in the name of the trustee without qualification or descriptions or the name of any nominee" (CAC ~~ 51, 122) i (2) Defendants breached their contractual obligations not to commingle the trust with any other property they held (CAC at 124, IRC §408 (a) (5) t ~ 26 C.F.R. §§1.408 2 (b) (5) (i)) i and (3) Defendants breached their obligations to determine the assets of each calendar year and make a report of same, held at the and (CAC at ~ 168.) sh such report to Plaintiffs. Defendants t obligation "[t]o hold any securities in bearer form or the name of the banks t brokers t and other custodians or in the name of the trustee without qualification or § script ions or in the name of any nominee" comes from SIRTA 5.5(F). Plaintiffs claim that Defendants failed to meet the obligations in this regard. ~~ 51 See CAC t 90. Defendants contend that they met all of their contractual obligations particularly in light of that fact that SIRTA § t 5.5(F) allows Defendants "[t]o leave any securities or cash for safekeeping or on deposit t with or without interest t with such banks and other custodians as the Trustee may select." 39 t brokers However, as is scussed in further detail below, such factual disputes, including the interpretation of ambiguous contract provisions, are inappropriate for resolution on a motion to dismiss. However, Plaintiffs have failed to of a contractual duty not to commingle other properties. on IRC trust funds with any aintiffs apparently base this asserted duty 408 (a) (5) and 26 C.F.R. § lege the breach §§ 1.408-2 (b) (5) (i). Even if is assumed that such a duty is read into the SIRTA by its stated purpose ("to establish a Traditional IRA under Internal Revenue Code ("Code") Section 408(a) "), Defendants have contended that Plaintiffs' allegation that Principal Trust !lcommingled ll their funds is unsupported by any specif allegations. See, e.g., CAC ~~ 11, 12, 14/ 140. Nicholson commingled alleges ainti Sf The CAC assets within the Westgate funds, not that Defendants ever actually "commingled" any assets themselves. See CAC ~~ 16, 22, 146. Plaintiffs' allegations fail to identify how or why Defendants would be contractually liable for the "commingling" of funds by a third party. To the contrary, IRA trustees such as Principal Trust cannot be d liable for a third party's 40 leged breaches of trust. See Metz v. Indep. Trust ~orp., 994 F.2d 395, 402 (7th Cir. 1993). With regard to the third listed obligation, SIRTA § 5.5(N) provides as follows: Within ninety (90) days from the close of each Trust Year, the Trustee shall render an accounting, valuing the assets at fair market value, to the Account Holder. The accounting may consist of copies of regularly issued broker-dealer statements to the Trustee and copies of mutual fund, insurance company, and other investment summary account statements supplied to the Trustee. The Account Holder must file any exceptions or objections to the accounting with the Trustee in writing, within sixty (60) days of the mailing of such accounting. In the absence of such filing, the Account Holder shall be deemed to have approved such account; and in such case, or upon the written approval of the Account Holder of any such account, the Trustee shall be released, relieved and discharged with respect to all matters and things set forth in such account as though such account had been settled by the decree of a court of competent jurisdiction. No person other than the Account Holder may require an accounting or bring any action against the Trustee with respect to the Trust or its actions as Trustee. The CAC at ~ 168 provides: 168. The defendants breached their contract by failing to furnish the required annual report. See IRS Letter Application Booklet. 41 Defendants' disputes and denials of the facts alleged in the CAC are improper for a Rule 12(b) (6) motion to dismiss l where factual allegations are taken as true and viewed in a light most favorable to Plaintiffs. Litig' l ~I_n~r~e~___c~~~~~~~~~E~R~I_S~A~ 696 F. Supp. 2d 345 1 353 (S.D.N.Y. 2009). Defendants have contended that Plaintiffs actually received quarterly statements from the Trust Company regarding their IRA accounts. (Def. Mem. in Supp. at 26). This is contrary to the CAC 1 which alleges that documents were sent directly to Nicholson and not to Plaintiffs l and that no funds actually remained in Class Member accounts after Nicholson's depredations. CAC ~~ 51 1 126-29. These allegations are sufficient to state a claim for breach of contract. Defendants contend that the SIRTA/s exculpatory language immunizes them from Plaintiffs claims. However 1 l breach of contract the exculpatory language in the agreement does not clearly apply to Plaintiffs and furnishing annual reports. l claims regarding holding assets Therefore l these breach of contract claims survive the exculpatory language at this stage. 42 Furthermore 1 the SIRTA self acknowledges in § 5.8(B) that the trustee may be liable for intentional misconduct or negligence. Plaintiffs' breach of contract claims are also based in part on various "letters" Principal Trust allegedly sent to Plaintiffs. For example 1 Plaintiffs' first breach of contract legations based on a "Form letter claim (Count 1) contains two of understanding ll allegedly transmitted to Plaintiffs: namelYI that Principal Trust failed to perform by (i) not undertaking an administrative review of Nicholson prior to Plaintiffs investment;6 (ii) "having a business relationship" with Nicholson; and (iii) "engaging in a prohibited transaction" under Section 4795 of the Internal Revenue Code. 126-128. l CAC ~~ 51 (h) , Plaintiffs further allege that Defendants failed to provide Plaintiffs with reports of all transactions related to the IRA based on an IIIRS letter in Application Booklet." 129; see also CAC ~~ 21, 51(j) 1 61, 63 1 131 1 168. CAC ~ Plaintiffs have sufficiently identified the letters at issue and have sufficiently alleged that they constitute agreements between the 6 The CAC states that the administrative review was "contractual obligated. II CAC ~ 51{h}. To the extent that Plaintiffs allege that the SIRTA provided for such a review, the Court finds that the contractual language is ambiguous as to Defendants' responsibilities to evaluate Nicholson in advance of investment. Therefore, this claim is not appropriate for resolution on a motion to dismiss. 43 parties which Defendants then breached. As such, these claims survive the motion to dismiss. d. The Economic Loss Doctrine Does Not Bar Plaintiffs' Negligence Claims Defendants contend that the economic loss rule bars all of Plaintiffs' tort claims. (Def. Mem. Where plaintiffs allege primari Supp. at 31). economic loss as an injury in a tort claim, "'the usual means of redress is an action for breach of contract; a tort action for economic loss will not 1 ie. '" In re Communications., No. 02­ ----------~~------------------------~ 41729, 2007 WL 2403553, at *9 (Bankr. S.D.N.Y. Aug. 17, 2007) (citation omitted) i see also --------------.~-~--------~~~--~ Robinson Hel Dana ., 102 P.3d 268, 272 Homes, Inc., 968 A.2d 192,202 (Cal. 2004); Dean v. Barrett (N.J. Super. Ct. App. Div. 2009) (describing standards similar for motion to dismiss purposes) . The purpose of the rule is: [T]o keep contract law from drown [ing] in a sea of tort ... [and with this goal mind] New York courts restrict plaintiffs who have suffered economic loss, but not personal or property injury, to an action for the benefits of their bargains. Thus, [i]f the damages suffered are of a type remediable in contract, a plaintiff may not recover in tort. 44 Manhattan Motorcars Inc. v. Automobili F.R.D. 204 1 220 (S.D.N.Y. 2007) omitted). Dean S.P.AI 244 (quotation marks and citations See also Robinson Helicopter CO' 968 A.2d at 202. "Moreover I 102 P.3d at 272; I by preventing the encroachment of tort law into the domain of contract the l economic loss doctrine protects parties' abilities to allocate risk by mutual agreement and thereby form reliable expectations about their potential financial exposure with respect to the duties and liabilities that they have contractually assumed. Travelers Cas. and Sur. Co. v. Dormi New York Danai 1 734 F. Supp. 2d 368 1 379 (S.D.N.Y. 2010) of See also 102 P.3d at 276 (economic loss doctrine allows part allocate 620 l Authori sk) i Al 628 (N.J. 1997) 11 s to v. General Marine Indus. L,P' I 149 N.J. (same). As stated by the New York Court of Appeals l [A] defendant may be liable in tort when it has breached a duty of reasonable care distinct from its contractual obligations or when it has engaged in tortious conduct separate and apart from its failure to fulfill its contractual obligations. The very nature a contractual obligation and the public interest in seeing it performed with reasonable care, may give se to a duty of reasonable care in performance of the contract obligations and the l l l 45 breach of that independent duty will give se to a tort claim. Where a party has fraudulently induced the plaintiff to enter into a contract, it may be liable in tort, or where a party engages in conduct outside the contract but intended to defeat the contract, its extraneous conduct may support an independent tort claim. Conversely, where a party is merely seeking to enforce its bargain, a tort claim will not lie. New York Univ. v. Continental Ins. Co., 87 N.Y.2d 308, 316 (N.Y. 1995) . Significantly, the SIRTA expli negligence from its coverage. tly carves out claims Section 5.8(B) provides that "[t]he Trustee shall not be liable for any act or omission made in connection with the Trust except for misconduct or negligence." s intentional Plaintiffs' negligence claims thus seek to enforce duties outside of the contract and cannot be precluded by Plaintiffs' contract claims. As noted above, the purpose of the economic loss doctrine is to allow parties to allocate SIRTA § sk. In light of 5.8(B), it would be improper to apply the economic loss doctrine to dismiss Plaintif ' negligence claims. 46 e. Plaintiffs Adequately Plead Their Negligence Claims To establish a prima fac case of negligence, a plaintiff must establish U(l) a duty of care owed to plaintiff by defendant, fendant, (2) a breach of that duty by proximate cause, and (4) actual damages." Brunson v. Fed. Credo Union, 199 N.J. 381, 400 (2009) ~C~a~l~i~f~o~r~n=i~a~V~l~'l~~~~H~o~m~e~o~w~n~e~. .r~s~A~s~s~n~., (Cal.App.Dist.2 2011) (3) See also Iversen v. 123 Cal. Rptr. 3d 360 (Negligence requires U a legal duty to use due care, a breach of that duty, and [that] the breach is the proximate or legal cause of the resulting injury."); Jiminez v. Shahid, 2011 N.Y. Slip Op. 03212, 2011 WL 1499905, at *1 (2d Dept. Apr. 19, 2011) (same). The Defendants urge dismissal of the Plaintiffs' claims negligence because of the absence of any duty enumerated in the SIRTA. (Def. Mem. in Supp. at 25-29.) The SIRTA is characterized throughout as a Trust and describes the aspects of a "Traditional IRA under the Internal Revenue Code ("Code") Section 408(a)" and includes provisions with respect to investments and administration. I, V. See SIRTA, Art. The SIRTA charges Defendants with three main duties: 47 (1) to accept contributions and make investments "in accordance with the instructions of the Account Holder/" including "through the ilities of [aJ Brokerage Firm" selected by the Account Holder (SIRTA §§ 5.1{E) / 5.5{G)); (2) to make distributions out of the IRA account lion the written directions of the Account Holder ll (SIRTA § 5.3(A)) i and (3) to perform limited administrative services with respect to the accounts, including rendering accountings (including through information supplied in broker­ dealer statements) (SIRTA § 5.5 (N)) . CAC Count 2 alleges that, under federal law, Defendants "negligently failed to preserve, to retain control over, to hold, and to safe-keep the Trust res" and "negligently failed to prevent the commingling and dissipation of the Trust res." CAC ~~ 135-36. Count 6 appears to bring Count 2's allegations under state law. CAC ~ 150. Count 9 appears to lege negligence under state law for failure to furnish statements to Plaintiffs, though the Count refers to Count 6. CAC ~ 158. Count 13 also alleges that Defendants were negligent under state law for their failure to furnish an accurate report. CAC ~ 171. Count 17 alleges negligence under federal law on the basis of Defendants' failure to render accurate annual 48 statements. CAC, 190. Count 21 appears to bring Count 17's legations regarding Defendants' failure to render reports under state law. CAC, 203. As discussed above, the SIRTA itself acknowledges in § 5.8(B) a liability for intentional misconduct or negligence by the trustee. This acknowledgement trumps Defendants' contention. f. The Motion to Dismiss the Breach of Fiduciary Duty Claims is Denied Under New York law, a claim for breach of fiduciary duty requires: the parties; (1) the existence of a fiduciary duty between (2) a breach that dutYi (3) the defendant's knowing participation in that breach; and (4) damages resulting from that breach. Pension Committee of the Univers of Montreal Pension Plan v. Banc of America Securities, 446 F. Supp. 2d 163, 195-96 (S.D.N.Y. 2006). may arise through contract. Id. A fiduciary relationship See also Gutierrez v. Girardi, 194 Cal.App.4th 925, 2011 WL 1566979, at *4 27, 2011) (Cal.App.Dist.2 Apr. ("The elements of a cause of action for breach fiduciary duty are: (1) existence of a fiduciary duty; 49 (2) breach of the fiduciary duty; and (3) damage proximately caused by the breach") (quoting St v. Richmond, 35 Cal.App.4th 1070, 1086 (Cal.App.Dist.1 1995)). Such a breach may be found in any case Hin which influence has been acquired and abused, in which confidence has been reposed and betrayed." cate Inc. v. Miller Features United Feature Inc., 216 F. Supp. - A_ _ _ _ _ _ _ _~_______________________ _ _ _ _ _~_ _ _ _ _ _ _ _~_ _ _ __ 2d 198,218 (S.D.N.Y. 2002) N.Y.S.2d 900, 904 (quoting Penato v. George, 383 (2d Dept. 1997». Under New Jersey law, The essence of a fiduciary relationship is that one party places trust and confidence in another who is in a dominant or superior position. A fiduciary relationship arises between two persons when one person is under a duty to act for or give advice for the benefit of another on matters within the scope of their relationship. Restatement Second of Torts § 874 cmt. a (1979) i see In , 12 N.J.Super. 217, 224, 79 A.2d 492 (App.Div.), certif. denied, 8 N.J. 319, 85 A.2d 272 (1951) (stating essentials of confidential relationship "are a reposed confidence and the dominant and controlling position of the beneficiary of the transaction") i Blake v. Brennan, 1 N.J.Super. 446, 453, 61 A.2d 916 (Ch.Div. 1948) (describing "the test (as] whether the relationship between the parties were of such a character of trust and confidence as to render it reasonably certain that the one party occupied a dominant position over the other") i Bogert, Trusts and Trustees 2d § 481 (1978) (stating" [t] he exact limits of the term 'fiduciary relation' are impossible of statement. Depending upon the circumstances of the particular case or transaction, certain business, public or social relationships mayor may not create or involve a fiduciary character."). The fiduciary's obligations to the dependent party include a duty of loyalty and a duty to exercise reasonable skill and 50 care. Restatement (Second) of Trusts §§ 170, 174 (1959). Accordingly, the fiduciary is liable for harm resulting from a breach of the duties imposed by the existence of such a relationship. Restatement (Second) of Torts § 874 (1979). F.G. v. MacDonell, 696 A.2d 697, 703 04 (N.J. 1997). Under California law, a plaintiff must establish that the fiduciary volunt ly accepts his role: "a confidence is reposed by one person in the integrity of another, and in such a relation the party in whom the confidence is reposed, if he volunt ly accepts or assumes to accept the confidence, can take no advantage from his acts relating to the interest of the other party without the latter I s knowledge or consent .... ' Superior Court, 130 Cal. Rptr. 2d 860, 863 II Wolf v. (Cal.App. (citing Herbert v. Lankershim, 9 Cal.2d 409, 483 st.2 2003) (1937) i In re of Varner, 55 Cal.App.4th 128, 141 (Cal.App.Dist.4 ------~.------------- 1997) ) . The CAC has to Plaintiffs and leged that the Defendants acknowledged ass Members, in various IRA account documents and other written materials, the fiduciary obligations to monitor and safeguard the investments of Plaintiffs and Class Members. The CAC has also alleged that Defendants were fiduciaries through their role as account 51 custodians and trustees. The CAC has sufficiently alleged that Defendants had fiduciary duties with respect to Plaintiffs and that Defendants breached those duties. 7 Plaintiffs correctly note that the extent to which Defendants owed fiduciary duties to Plaintiffs! and then breached those duties! are questions of fact that should not be See Musalli Factory for Gold & resolved on a motion to dismiss. Jewel 2009) Chase Bank! 261 F.R.D. 13! 26 (S.D.N.Y. ("New York courts generally avoid dismissing a claim of breach of fiduciary duty . question of fact: . because it usual involves a whether someone reposed trust and confidence another who thereby gains a resulting superiority or influence") i Abercrombie v. Andrew ColI.! 438 F. Supp. 2d 243! 274 (S.D.N.Y. 2006) (whether a fiduciary duty exists "normally depends on the facts of a particular relationship! [and] therefore a claim alleging the existence of a fiduciary duty is not subject to dismissal") i F.G.! 696 A.2d at 704. 7 In Hines, 2010 WL 1249838, at *2-3, the court held that custodial, non­ discretionary IRAs do not impose fiduciary duties upon the trustees and are not trusts for any other purpose by taxes. See Id., citing IRC § 408(h). Here, the Court finds that Plaintiffs sufficiently allege the existence of fiduciary duties ari from Defendants' relationship with Plaintiffs. 52 However t under New York law t "a cause of action for breach of fiduciary duty that is merely duplicative of a breach contract claim cannot stand. 1I S.A. v. America Movil (1st Dept. 2010) t Centro Empresarial Cempresa S.A.B. de C.V.[ 901 N.Y.S.2d 618/ 636 (citing 396[ 399 (1st Dept. 2008) -=____~__~~__-=[ -=~__ i v. Graham & William Kaufman James [ 703 N.Y.S.2d 439[ 442 (1st Dept. 2000)). California have similar pleading rules. 863 N.Y.S.2d New Jersey and See Jack v. Concordia Homes of Cal.[ LLC[ No. D049863[ 2008 WL 802605[ at *6 (Cal. Ct. App. Mar. 27[ 2008) (IIA person may not ordinarily recover in tort for the breach of duties that merely restate contractual obligations. ") (citation omitted); Stewart tIe Guar. ---------------- Greenlands Real Co. v. L.L.C[ 58 F. Supp. 2d 370[ 386-87 (D.N.J. ----------------~~------- 1999) (" [the] tort claim for breach of fiduciary duty arises out of its title insurance policy ... [t] hus t [the] claim ... for breach of fiduciary duty sounds in contract [ rather than in tort."). See also Mandelbaum[ 09 Civ. 752 t at *21 (dismissing breach of fiduciary duty claims under Colorado law where they overlapped with breach of contract claims and where the defendants did not have independent fiduciary duty c because IRC § ims 408 did not provide them and state law did not govern IRAs) . 53 However, "the same conduct which may constitute the breach of a contractual obligation may also constitute the breach of a duty arising out of the relationship created by contract but which is independent of the contract itself.· Mandelblatt v. Devon Stores, 521 N.Y.S.2d 672, 676 (1st Dept. 1987). In Centro ~'~~r.osarial, ~--.-----~-------- the Court held that the relevant fiduciary duties arose from the contract at issue, but that they existed independently of that agreement and thus were not subject to dismissal on duplicity grounds. 901 N.Y.S.2d at 636. See also Prohealth Care Associates , No. 15830-03, 2004 WL 1872915, at *5 (N.Y.Sup. Aug. 18, 2004) ("The same conduct may constitute both a breach of contract and a breach of a fiduciary duty.·) (citing Bender Ins. Agency, Inc. v. Treiber Ins. Agency, Inc., 729 N.Y.S.2d 142 (2nd Dept. 2001) Dime 1990) ) Bank of New York, 557 N.Y.S.2d 775 i Davis v. (3rd Dept. Similar exceptions exist under California and New Jersey law for independent fiduciary duty claims. Jack, 2008 WL 802605, at *6 (under California law, "[c]ourts will generally enforce the breach of a contractual promise through contract law, except when the actions that constitute the breach vi a soci ate policy that merits the imposition of tort remedies·) 54 (quotation marks and citation omitted); Stewart, 58 F. Supp. 2d at 387 (indicating an exception under New Jersey law where a defendant takes on an obligation independent of the contractual obligations) . Plaintiffs' state law breach of fiduciary duty claims invoke breaches of the SIRTA and appear to overlap with their contract claims, particularly given that PI ntiffs contend that the SIRTA necessarily incorporated Defendants' fiduciary duties. See CAC , 9 ("Defendants' standardized contract incorporated federal law concerning IRAs"), , 10 ("Under this standardized form contract and federal law, Defendants owed minimum federal fiduciary duties to each Class member"). See also CAC " 42, 44, 45, 46, 47, 48, 50 (setting forth the alleged fiduciary duties which federal law required to be written into the SIRTA, and which allegedly were written into the SIRTA). Despite these apparent overlaps, Plaintiffs contend that Defendants owed them independent fiduciary duties because of their roles as IRA trustees. As noted above, it is inappropriate at the motion to dismiss stage to assess whether, as a matter of fact, Defendants 55 actually owed fiduciary duties to Plaintiffs. F.R.D. at 26. See Musalli, 261 Plaintiffs have sufficiently alleged the existence of a fiduciary relationship through as trustees and custodians Plaintiffs l Plaintiffs' breach of fiduciary duty IRAs. 8 fendants' roles Therefore l aims survive. g. The Motion To Dismiss The Unjust Enrichment Claim Is Granted To state a claim for unjust enrichment in New York 9 , a plaintiff must lege that: (1) the defendant was enriched; (2) the enrichment was at plaintiff's expense; and (3) the circumstances were such that equity and good conscience require defendant to make restitution. Intellectual In Adams v. Fiserv ISS, No. D051778, 2008 WL 3890036, at *2-4 (Cal.App.Dist.4 Aug. 22, 2008), the Court held that the defendant owed fiduciary duties to the plaintiffs through its role as trustee of self directed IRA accounts. 8 Under New York choice of law rules, interest analysis is applied to claims arising in equity, such as claims for unjust enrichment. See In rem Hydrogen, LLC, 431 B.R. 337,359 (Bkrtcy S.D.N.Y. 2010) (citing Iceb()x-Scoops, Inc. v. 676 F. Supp. 2d 100, 109-10 (E.D.N.Y. 2009) (applying New York's interest analysis to determine the governing law for an unjust enrichment claim) i In re Grand Theft Auto Video Game Consumer Litigation, 251 F.R.D. 139. 149 (S.D.N.Y. 2008) (applying the "significant contacts test" to unjust enrichment claims.) As with the tort claims, the states in which Plaintiffs resided have the most significant contacts, as they are the places of contracting, where performance was to occur, and where Plaintiffs suffered losses. Grand Theft Auto, 251 F.R.D. 149-50. In this case, these states are New York, New Jersey, and California. 9 56 Institutional t Partners LLC, No. 08 Civ. 10580, 2009 WL ~~~-~~~~~-~~~---------------- 1974392, at *8 (S.D.N.Y. Jul. 8, 2009). See also VRG GKN Realty Corp., 135 N.J. 539, 554 (1994) . v. (under New Jersey law, unjust enrichment claims require a plaintiff to "show both that defendant received a benefit and that retention of that benefit without payment would be unjust."). Unjust enrichment does not require a direct relationship between the parties. In re Cameras Lit See ., No. 05 Civ. 7233, 2006 WL 1751245 at *2 (S.D.N.Y. June 23, 2006) i see also Cox v. Microsof , 8 A.D.3d 39, 40-41 (1st Dept. 2004). There does not appear to be a claim for unjust enrichment as such under California law. See Levine v. Blue Shield of California, 117 Cal. Rptr. 262, 278-79 (Cal.App.Dist.4 2010) ("Although some California courts have suggested the existence of a separate cause of action for unjust enrichment, this court has recently held that there is no cause of action in ifornia for unjust enrichment. synonymous with restitution. Unjust enrichment is Thus, the [plaintiffs'] unjust enrichment claim does not properly state a cause of action.") (internal quotation marks and citations omitted). Plaintiffs' unjust enrichment claim under California law will thus be 57 treated as a claim for restitution under a theory of unjust enrichment. The elements of such a claim are "the receipt of a benefit and unjust retention of the benefit at the expense of another. II Madrid v. JPMorgan Chase E3ank, N.A., No. 09 Civ. 731, 2009 WL 3255880, at *5 (E.D.Cal. Oct. 8, 2009) Lect (citing v. SeoulBank, 77 Cal.App.4th 723, 726 (Cal.App.Dist.2 2000». The CAC has leged that Defendants received fees from aintiffs while unjustifiably failing to perform their dut under the agreement. s CAC ~~ 53, 54, 64, 75, 92. However, under the law of New York, New Jersey, and California, the existence a valid and enforceable contract governing a particular subject matter precludes recovery for unjust enrichment sing out of the same matter. See Chrysler ~~~___ ~~__~~__~__~~________~., (S.D.N.Y. 1991) (If Unjust 778 F. Supp. 1260, 1272 enrichment is a quasi-contract claim, and the existence of a valid and enforceable written contract governing a particular subject matter ordinarily precludes recovery in quasi contract for events arising out of the subject matter.") (internal quotation marks and citations omittedi 58 emphasis in original); Hartford Fire Ins. Co. v. Federated Dep't Stores, Inc", 723 F. Supp. 976, 994 (S.D.N.Y. 1989) (IlUnjust enrichment is designed to prevent one person who has obtained a benefit from another without ever entering into a contract with that person from unjustly enriching himself at the other person's expense.ll) omitted) i (internal quotation marks and citation Durell v. Sharp Healthcare, 108 Cal. Rptr. 682, 699 (Cal.App.Dist.4 2010) (IlAs a matter of law, an unjust enrichment claim does not lie where the parties have an enforceable express contract. ") (c A.2d 568, 571 t 1994) ationsomitted)i Shalitav. TWp. of Wash., 636 270 N.J. Super. 84, 90 (N.J. Super. Ct. App. Div. (lilt has been said that [q]uasi-contract liability [should] not be imposed ... if an express contract exists concerning the identical subj ect matter. ") original; citations omitted). (alteration in Plaintiffs cannot enrichment claim where, as here, a valid t se an unjust enforceable contract governs their relationship with Defendants. aintiffs contend that, under IRS rules t IRA contracts must contain certain minimum requirements or they fail. If Defendants' express contracts do not meet the regulations and thus are inval IRA contracts, Plaintiffs are 59 ent led to assert an unjust enrichment theory in the ternative. Intellectual Partner v. Institutional Credit Partners, LLC, No. 08 Civ. 10580, 2009 WL 1974392, at *8 (S.D.N.Y. Jul. 8, 2009) (IIWhere, as here, the existence of an enforceable contract is disputed, these claims may proceed alongside IntelCap's breach of contract claim as alternative theories. II) ; 523 1 1 531 (S.D.N.Y. 2007) 478 F. Supp. 2d ("When there is a bona fide dispute as to the existence of a contract, a party may proceed upon a theory of unjust enrichment, and an unjust enrichment claim may be alleged alongside a breach of contract claim."); Durell, 108 Cal. Rptr. at 699 (where contract is procured by fraud or otherwise unenforceable or ineffective pleaded). l unjust enrichment may be While Plaintiffs claim that the written contracts unlawfully purport to disclaim some of these requirements in their opposition papers (Pl. Opp. Mem. at 29), they do not appear to allege such contractual shortcomings Rather, aintiffs allege that the SIRTA was a valid contract which Defendants breached. is invalid the CAC. l Without an allegation that the SIRTA aintiffs may not proceed with their unjust enrichment claim. 60 Pl ntiffs' unjust enrichment claim is dismissed. Conclusion Based on the foregoing, Defendants' motion to dismiss is granted in part and denied in part. Plaintiffs are granted leave to file an amended complaint with claims under state law within 60 days. It is so ordered. New York, NY May J,S, 2011 61