Posts tagged with "breach of fiduciary duty"

Federal Appellate Court Affirms Lower Court Ruling Not to Vacate FINRA Award

Federal Appellate Court Affirms Lower Court Ruling Not to Vacate FINRA Award

Javier Aviles v. Charles Schwab & Co., Inc., 435 Fed.Appx. 824 (11th Cir. 2011) (per curiam)

In a case before the United States Court of Appeals, Eleventh Circuit, Javier Aviles (“Aviles”) appealed a decision by the United States District Court for the Southern District of Florida that confirmed a Financial Industry Regulatory Authority (“FINRA”) arbitration award of $1.4 million in favor of Charles Schwab & Co., Inc. (“Charles Schwab”). The appellate court affirmed the district court ruling.

In 2007, Aviles left his employment with Charles Schwab to join Banc of America Investment Services, Inc. (“BAI”). Later that year, Charles Schwab came to believe that Aviles was improperly soliciting its clients. Schwab filed a Statement of Claims with FINRA against both Aviles and BAI, alleging multiple claims arising from Aviles’s resignation from Charles Schwab and his subsequent employment with BAI: breach of contract, misappropriation and misuse of trade secrets, breach of duty of loyalty, breach of fiduciary duty, tortious interference with contractual and business relations and unfair competition. BAI was later dismissed from the arbitration proceedings. In April 2009, the arbitration panel entered an award finding Aviles liable to Charles Schwab for $1.4 million.

Aviles filed a timely motion to vacate the arbitration award in state court, and Charles Schwab removed to federal court. After removal, Aviles filed a motion to amend in order to add a new claim of arbitrator bias. The district court found that the grounds for vacating the award set out in the original motion were without merit. Additionally, the district court found that the amended motion was not filed in a timely manner and did not relate back to the original motion. Finally, the district court found that the claim of arbitrator bias contained in the proposed amended motion also failed to warrant vacatur of the arbitration award.

Appellate courts do not use a different legal standard to review arbitration related judicial decisions: district court findings of fact are reviewed for clear error and district court legal conclusions are reviewed de novo. The Federal Arbitration Act (“FAA”), 9 U.S.C. § 10(a), provides limited statutory grounds for vacating an arbitration award, including where arbitrators refused to hear evidence pertinent and material to the controversy, or where there was “evident partiality” or corruption in the arbitrator.

When a party seeks vacatur by challenging an evidentiary decision of the arbitration panel, he must show that the arbitrator’s refusal to hear pertinent and material evidence prejudiced the rights of the parties to the arbitration’s proceedings. Rosensweig v. Morgan Stanley & Co., 494 F.3d 1328, 1333 (11th Cir. 2007). Aviles argued that the arbitrators refused to hear evidence material to the controversy because the arbitration panel excluded unsworn declarations completed by former Charles Schwab clients who had followed Aviles to BAI. Aviles asserted that these were material to the controversy because they demonstrated that the clients decided to transfer their accounts to BAI because it was in their personal best interest to maintain the relationship with Aviles. The chair of the arbitration panel stated that he would not allow documents that were not sworn or authenticated; however, he would sign subpoenas to allow Aviles to present this evidence in an acceptable manner and would also permit telephonic testimony if someone was out-of-town or otherwise unable to attend the hearings. The appellate court determined that the exclusion of the unsworn declarations did not prejudice Aviles’s right to present all evidence pertinent and material to the controversy. The chair of the arbitration panel offered Aviles alternate avenues to submit this evidence, and Aviles decided not to avail himself of those options. Therefore, the district court did not err in its ruling that the arbitration award could not be vacated on the grounds that arbitrators refused to hear evidence.

When a party seeks vacatur by challenging the impartiality of the arbitration panel, he must show that the alleged partiality is “direct, definite and capable of demonstration rather than remote, uncertain and speculative.” Gianelli Money Purchase Plan & Trust v. ADM Investor Servs., 146 F.3d 1309, 1312 (11th Cir. 1998). Aviles presented an affidavit from a FINRA arbitrator not serving on his panel indicating that the chair of the arbitration panel made statements illustrating a clear bias against him. Specifically, the affidavit alleges that the chair stated that when a court enters a preliminary injunction or a temporary restraining order against a financial advisor prior to arbitration, the arbitrator’s only remaining task is to quantify and award damages. Aviles had been served with a preliminary injunction prior to the arbitration proceedings. The court found that the statements in the affidavit did not indicate that the chair of the arbitration panel was biased against Aviles. According to the court, the affidavit at most illustrated that the chair of the arbitration panel had an incorrect understanding of a legal issue, which is not enough to demonstrate bias or hostility toward a party. Therefore, the district court did not err in its ruling that the arbitration award could not be vacated on grounds of arbitrator bias.

Because the district court did not err in ruling that there were insufficient grounds to vacate the arbitration award on the basis of refusal to hear evidence and arbitrator bias, the appellate court affirmed the district court ruling denying Aviles’s motion to vacate the arbitration award.

Should you have any questions relating to FINRA, arbitration or employment issues, please do not hesitate to contact Attorney Joseph C. Maya in the firm’s Westport office in Fairfield County, Connecticut at 203-221-3100 or at JMaya@Mayalaw.com.

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Trustee Interpretation of Ambiguous Trust Provisions will not be Changed by a Court Without Evidence of a Clear Abuse of Trustee Discretion

Trustee Interpretation of Ambiguous Trust Provisions will not be Changed by a Court Without Evidence of a Clear Abuse of Trustee Discretion

Heath v. Heath, CV094044709S, 2012 WL 2477953 (Conn. Super. Ct. June 5, 2012)

In a recent case before the Superior Court, four trust beneficiaries filed a three-part complaint against the trustees of a trust created by their mother. The complaint alleged breach of fiduciary duty, unjust enrichment, and other charges. The trial court ruled that the trustees had properly distributed the trust interests and entered judgment in their favor.

In 1953, a trust indenture known as the Hembdt Trust was drafted with assets consisting of royalty interests in oil, gas and mineral rights. During her lifetime, the settlor and beneficiary of this trust (“the decedent”) married and had ten children. Upon her death, the terms of the trust provided that the royalty interests would pass to “his or her legal representatives, heirs at law or next of kin in accordance with the provisions of law applicable to the domicile of the deceased beneficiary.” In 1967, the decedent died. Pursuant to her will, several testamentary trusts were created, including a testamentary trust for the benefit of her husband (“marital trust”) and a trust for her children (“children’s trust”). The trustees and executors of the decedent’s will determined that the provision in the Hembdt Trust required the trust’s royalty interests to pass into her estate which, in accordance with her will, resulted in these interests being distributed in a 54/46 ratio between the marital trust and the children’s trust.

The beneficiaries of the children’s trust argued that the entirety of the royalty interest should have been distributed to them as the decedent’s heirs at law because the term “legal representatives” in the Hembdt Trust provision, used under the circumstances provided, could only be interpreted to mean the children of the decedent. The decedent’s husband, in his capacity as a fiduciary of the trusts, argued that the beneficiaries’ interpretation was inconsistent with the language of the trust instrument and the law. He argued that the term “legal representatives” was used in conjunction with “heirs at law” and “next of kin;” therefore, the clear intent of the Hembdt Trust provision was that upon the death of the individual beneficiary, his or her interest would pass to: (1) the beneficiary’s legal representatives, which would be the beneficiary’s executors, if the person died testate, to be administered according to the beneficiary’s will, or the beneficiary’s administrators, if the person died intestate and a probate estate was opened; (2) the beneficiary’ heirs at law if the person died intestate and no probate estate was opened; and (3) the beneficiary’s next of kin if there were no heirs at law. The decedent’s husband further argued that if all three conditions existed, then the distributions would have to be in accordance with Connecticut law, which requires that, when a decedent leaves both a spouse and children, they both inherit. Finally, the decedent’s husband argued that Connecticut law requires that if a decedent leaves a will, a distribution is made according to the will. Conn. Gen. Stat. § 45a-431. The remaining trustees adopted the arguments of the decedent’s husband.

According to Connecticut case law, a court’s role in the construction of a trust instrument is to determine the meaning of what the grantor stated in the trust instrument and not to speculate upon what the grantor intended to state in the instrument. Connecticut Bank & Trust Co. v. Lyman, 148 Conn. 273, 278-79, 170 A.2d 130 (1961). Language in the trust instrument is to be accorded its common, natural and ordinary meaning and usage. WE 470 Murdock, LLC v. Cosmos Real Estate, LLC, 109 Conn.App. 605, 609, 952 A.2d 106, cert. denied, 289 Conn. 938, 958 A.2d 1248 (2008) (internal quotation marks omitted). Furthermore, no language will be construed as to remove a trustee from equitable control; courts may intervene only to protect and preserve the trust in circumstances where the trustees have abused their discretion. Gimbel v. Bernard F. & Alva B. Gimbel Foundation, Inc., 166 Conn. 21, 34, 347 A.2d 81 (1974)

Connecticut case law has established that the phrase “legal representatives” in a testamentary instrument is an ambiguous or equivocal term. Smith v. Groton, 147 Conn. 272, 274–75, 160 A.2d 262 (1960). In interpreting the trust provisions, the court determined that the language did not permit the decedent’s beneficial interest to pass to each of the three categories (“legal representatives, heirs at law and next of kin”) or to pass to different recipients depending on an exercise of discretion (“legal representatives, or heirs at law, or next of kin”). For that reason, the court found that the terms “legal representatives,” “heirs at law,” and “next of kin” did not conflict and that the provision required that the decedent’s beneficial interest pass to the recipients in the order clearly listed the trust instrument. Therefore, the trustees did not abuse their discretion in determining that the royalty interests passed to the executors, as the decedent’s legal representatives, to be distributed to the marital trust and children’s trust in accordance with the decedent’s will.

Because the trial court did not find that the trustees of the decedent’s trusts abused their discretion, the court refused to upset their determination of how the decedent’s interests should be distributed.

Should you have any questions relating to wills, trusts, estates and other personal asset protection issues, please do not hesitate to contact Attorney Susan Maya, at SMaya@Mayalaw.com or 203-221-3100, and Attorney Russell Sweeting, at RSweeting@Mayalaw.com or 203-221-3100, in the Maya Murphy office in Westport, Fairfield County, Connecticut.

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Trustees May Evict Beneficiaries from Real Property Held by the Trust

Trustees May Evict Beneficiaries from Real Property Held by the Trust

Dudek v. Dudek, HDSP-150182, 2011 WL 767790 (Conn. Super. Ct. Feb. 9, 2011) aff’d, 136 Conn. App. 902, 44 A.3d 222 (2012)

In a case before the Superior Court of Connecticut, a sister, acting in her capacity as trustee of the family trust, brought a summary process action for possession of two properties against her brother, a beneficiary of the trust, alleging that his original right or privilege to occupy the contested properties had been terminated. The trial court entered judgment for immediate possession of the subject properties in favor of the trustee. The Connecticut Appellate Court affirmed this ruling in a later court proceeding.

Since 2006, the contested properties had been held in trust by the family trust, which was created by the siblings’ father and funded with his assets upon his death that year. The trust instrument named the sister as the trustee of the family trust and clearly laid out her duties. The brother lived at the contested properties for almost his entire life, and provided physical care and support to his parents at the properties in the years before their death. While the brother provided care for his parents, he did not pay rent to them because no rent was requested. After his parents’ death, the brother remained in possession of the contested properties, and did not pay rent or other monies to the trust. The trust paid all the real estate taxes, insurance bills and most utility bills for the properties. The sister alleged that the brother engaged in negative behaviors that prevented her from properly managing the properties as trustee. Such alleged behaviors included preventing an insurance company representative from inspecting the premises, which resulted in the loss of insurance on the property, and denying her access to the properties. She also alleged that her brother was unwilling to cooperate with her relocation to a portion of the property and to conduct repairs to another portion of the property so that it could be rented out to generate income for the trust.

According to Connecticut law, Conn. Gen. Stat. § 47a-23(a)(3), the essential elements of a summary process action are: (1) the plaintiff is the owner of the property; (2) the defendant originally had a right or privilege to occupy the premises but such right or privilege has terminated; (3) the plaintiff caused proper notice to quit possession to be served on the defendant to vacate the premises on or before a certain date; and (4) although the time given the defendant to vacate in the notice to quit possession has passed, the defendant remains in possession of the premises. The general burden of proof in a civil action is on the plaintiff, who must prove all the essential elements of the cause of action by a fair preponderance of the evidence. Upon reviewing the facts of the case, the trial court determined that that the trust was the legal owner of the contested properties, the actions that the sister took related to the summary process action were within her powers as trustee, and that she had established all the remaining essential elements of her case by a fair preponderance of the evidence.

The brother asserted several special defenses related to the nature of the family trust: (1) the intent of the grantors was to allow him to remain in possession of the subject premises during his lifetime; (2) as a trust beneficiary in current possession of the premises, he is co-owner of the premises and not subject to a summary process action; (3) his beneficial interest in the trust generally equates to an equitable interest in the individual assets of the premises as part of the trust estate; and (4) a constructive trust should be imposed on the premises based on the grantor’s promise that he could remain in possession for his lifetime and his sister would be unjustly enriched if he were to be dispossessed from the premises. Defendants have the burden of proving the allegations in their special defenses by a fair preponderance of the evidence.

According to Connecticut case law, a court’s role is to determine the meaning of what the grantor stated in the trust instrument and to not speculate upon what the grantor intended to state in the instrument. Connecticut Bank & Trust Co. v. Lyman, 148 Conn. 273, 278-79, 170 A.2d 130 (1961). Expressed intent must control the court’s interpretation of the instrument. Therefore, the plain language of the trust instrument itself, rather than extrinsic evidence of actual intent, is determinative of the grantors’ intent. Cooley v. Cooley, 32 Conn.App. 152, 159, cert. denied, 228 Conn. 901 (1993) (citing Heffernan v. Freedman, 177 Conn. 476, 481, 418 A.2d 895 (1979). Because the court found nothing within the plain language of the trust supported the brother’s proposition that the grantors intended for him to remain in possession of the contested properties during his lifetime, the court found that brother failed to establish his first special defense.

Connecticut case law further establishes that the trustee holds legal title and legal ownership of the property in the trust. Fandacone v. Fandacone, Superior Court Judicial District of New Britain, Housing Session, Docket No. NBSP-052634 (March 16, 2010, Gilligan, J.). A beneficiary of the trust enjoys only a beneficial interest in trust assets. Despite the beneficial or equitable interest that a beneficiary may hold in the trust estate, this does not equate to legal or equitable title to the individual assets of the trust. Stepney Pond Estates, Ltd. v. Monroe, 260 Conn. 406, 433 n. 28 (2002). Therefore, the court found that the brother failed to establish his second and third special defenses.

A constructive trust arises where an individual who holds title to a property is subject to an equitable duty to convey it to another on the grounds that he would be unjustly enriched if he were permitted to retain the property. See Filosi v. Hawkins, 1 Conn.App. 634, 639 (1984); Gulack v. Gulack, 30 Conn.App. 305, 311-12 (1993). A constructive trust may also be imposed to prevent the abuse of a confidential relationship. Schmaling v. Schmaling, 48 Conn.App. 1, 13, cert. denied, 244 Conn. 929 (1998). In order to find that a constructive trust exists and should be imposed, the court must first find that a special or confidential relationship existed between the parties. Id. In Connecticut, two types of confidential relationships give rise to a constructive trust: (1) where one party is under the domination of another and (2) where circumstances justify one party’s belief that the other party’s actions will be guided by his or her welfare or instructions. See Riccio v. Riccio, 75 Conn.App. 556, 559 (2003); Starzec v. Kida, 183 Conn. 41, 43 n. 1 (1981). The court found that the brother did not establish clear and satisfactory facts from which a constructive trust may be implied. He did not establish that his sister, in her capacity as trustee, had an equitable duty to convey the contested properties to him. The trust instrument did not dictate that the brother’s individual welfare was not the sole focus of the family trust; instead, the instrument dictated that the sister’s fiduciary duties as trustee extended to all trust beneficiaries. The brother did not establish that his sister, in any capacity, misappropriated or attempted to misappropriate trust assets. Finally, the brother did not establish that his sister, as an individual, would be unjustly enriched if the family trust were to regain possession of the contested properties. The sister would still be bound by the trust instrument, and the brother would still retain his recourse to legal action to safeguard his rights as a trust beneficiary. Therefore, the court found that the brother failed to establish his fourth special defense.

Because the court found that the sister had established the essential elements of her cause of action with a preponderance of the evidence and that the brother failed to establish any special defense, the court entered judgment for immediate possession of the subject properties in favor of the sister, acting in her capacity as the trustee of the family trust.

Should you have any questions relating to real estate or personal asset protection issues, please do not hesitate to contact Attorney Susan Maya, at SMaya@Mayalaw.com or 203-221-3100, and Attorney Russell Sweeting, at RSweeting@Mayalaw.com or 203-221-3100, in the Maya Murphy office in Westport, Fairfield County, Connecticut.

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Court Denies Motion to Vacate FINRA Arbitration Award Without A Hearing

In a recent case before the Northern District of California, Farhang Oshidary (“Oshidary”), a securities broker, filed a petition to vacate a Financial Industry Regulatory Authority (“FINRA”) Arbitration Award issued on February 10, 2012 in favor of Grace Purpura–Andriola, Trustee FBO Grace Purpura–Andriola Revocable Living Trust (“Andriola”) and Olga Michel Basil ( “Basil”). Andriola and Basil filed an opposition to the motion, and a request for entry of judgment on the FINRA award pursuant to 9 U.S.C. § 9. The court denied the motion to vacate without a hearing, and confirmed the FINRA award.

The underlying dispute in this case arose from Oshidary’s investment advice to Andriola, Basil, and others while Oshidary was a broker at the Menlo Park, California office of Smith Barney, now Citigroup Global Markets, Inc (“Citigroup”). Andriola and several other claimants filed suit against Oshidary and Citigroup in California Superior Court, which ordered the case to FINRA Arbitration. After multiple hearing sessions, the FINRA arbitration panel dismissed all claims against Citigroup and dismissed all claims against Oshidary, except for claims for breach of fiduciary duty brought by Andriola, Basil and three other parties. On February 10, 2012, the panel issued its Arbitration Award. It found that Oshidary was liable for breach of fiduciary duty to Andriola for $250,000 plus seven-percent interest from April 1, 2001. Oshidary was also found liable for breach of fiduciary duty to Basil for $120,000 plus seven-percent interest from January 1, 2005.

Two of the four separate theories under which Oshidary proposed to vacate the FINRA award were rejected by the court for failure to satisfy the burden of proof. Under one of the remaining theories, Oshidary argued that, in violation of California Civil Procedure Code § 1281.9, the Chairman of the FINRA arbitration panel failed to disclose information that might preclude him from being impartial. Under his final theory, Oshidary argued that the FINRA arbitration panel manifestly disregarded the law by acting without jurisdiction over Andriola’s claims, which were barred by the “six year rule” regarding arbitration eligibility.

The Federal Arbitration Act (“FAA”), 9 U.S.C. § 10(a), provides four narrowly delineated circumstances in which a federal district court can vacate an arbitration award:
(1) where the award was procured by corruption, fraud or undue means;
(2) where there was evident partiality or corruption in the arbitrators, or either of them;
(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or
(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

Courts may not reverse an arbitration award even in the face of an erroneous interpretation of the law. However, the court may vacate an award where the arbitrators’ decision is in manifest disregard of the law. Johnson v. Wells Fargo Home Mortg., Inc., 635 F.3d 401, 414–15 (9th Cir.2011). “Manifest disregard of the law” has been interpreted to mean “something beyond and different from a mere error in the law or failure on the part of the arbitrators to understand and apply the law.” Collins v. D.R. Horton, Inc., 505 F.3d 874, 879 (9th Cir.2007) (quotation omitted).

California Civil Procedure Code § 1281.9, subdivision (a), imposes on arbitrators a duty to “disclose all matters that could cause a person aware of the facts to reasonably entertain a doubt that the proposed neutral arbitrator would be able to be impartial.” In decisions interpreting this statute, courts have highlighted the importance of the link between the subject matter of the arbitration and the matter subject to disclosure. In the instant case, the alleged conflict occurred over two decades ago, and was completely unrelated to the subject of the arbitration. Therefore, the court denied vacatur on these grounds.

FINRA Rule 12206(a) provides that “[n]o claim shall be eligible for submission to arbitration under the Code where six years have elapsed from the occurrence or event giving rise to the claim. The panel will resolve any questions regarding the eligibility of a claim under this rule.” Eligibility under Rule 12206 is a question for the arbitrators and not for the court. The FINRA arbitration panel was free to interpret Rule 12206 as it saw fit, in particular with respect to the triggering date, i.e. the “occurrence or event giving rise to the claim.” FINRA Rule 12206. That the investments at issue were loans supported the Panel’s decision to not choose the purchase date as the triggering event because, unlike other investments, the investor likely will not know whether repayment will occur until the agreed-upon return date.

Because the court denied Oshidary’s vacatur of the award on each of the four separate grounds, the court found that confirmation of the FINRA arbitration award was appropriate. Judgment would be entered by separate order, once respondents confirmed that they withdrew their parallel request to the state court.

Should you have any questions relating to FINRA or arbitration issues, please do not hesitate to contact Attorney Joseph C. Maya in the firm’s Westport office in Fairfield County, Connecticut at 203-221-3100 or at JMaya@Mayalaw.com.

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