Seventh Circuit Rules in Favor of Investment Firms in Breach of Fiduciary Duty Lawsuit

In a recent decision, the Seventh Circuit federal court of appeals affirmed the dismissal of an action for breach of fiduciary duty brought against two investment firms by a disgruntled customer. In ruling that the District Court properly dismissed the claims, the Court found that the fiduciary duties the investment firms owed to the plaintiff did not include a duty to stop the plaintiff’s daughter who acted under a power of attorney from making certain withdrawals from the plaintiff’s accounts.

The plaintiff, Joseph Allen, amassed a net worth of nearly $8 million dollars. He enlisted the services of the defendants, Brown Advisory, LLC and Brown Investment Advisory & Trust Company, to help him invest and manage his wealth. When Allen and his wife experienced declining health and he could no longer manage their finances, Allen granted a financial power of attorney to his daughter Elizabeth Key. For several years Key used the power of attorney to make withdrawals from Allen’s investment accounts. Those withdrawals had depleted the value of Allen’s IRA accounts from approximately $2.3 million to less than $600,000.

Five years later, Allen revoked the power of attorney and sued the two investment companies in Indiana state court accusing the defendants of breach of fiduciary duty and breach of contract. He alleged that Key’s withdrawals (or some of them) were not to his benefit and that the investment companies should not have honored them. The defendants moved to dismiss Allen’s complaint.

The District Court judge granted the defendants’ motion, reasoning that the investment firms could not be liable for breach of contract because the challenged withdrawals were directed by Key and authorized by her power of attorney. The trial court also dismissed Allen’s breach of fiduciary duty claim after holding that Maryland law does not recognize a separate cause of action for breach of fiduciary duty arising from a contractual relationship. Allen appealed the dismissal.

On appeal, Allen argued that the District Court judge erred in dismissing his breach of fiduciary duty claim on the basis that Maryland law does not recognize the cause of action. After the defendants filed their motion but before the District Court judge ruled, the Maryland Court of Appeals, the state’s highest court, issued its ruling in Plank v. Cherneski, which, as we wrote about, held that a breach of fiduciary duty can be a standalone cause of action.

The Seventh Circuit acknowledged that the District Court erred in holding that Maryland law did not recognize a standalone cause of action for breach of fiduciary duty in the presence of a contractual relationship. Despite this error, however, the Court concluded that the District Court had properly dismissed Allen’s breach of fiduciary duty claim.

Summarizing Maryland law concerning fiduciary duties, the Court explained that a fiduciary relationship arises when one party places special confidence in another who is bound to act for the interest of the first. The Court found that Allen had adequately alleged the existence of a fiduciary relationship with the defendants. Allen gave the investment companies his money to manage investments on his behalf, thereby imposing on the company the duty to act for Allen’s benefit within the scope of that relationship.

Allen’s problem, the Court explained, was alleging a breach of a duty within the scope of the fiduciary relationship. A breach would surely arise, the Court reasoned, if the defendants had invested Allen’s assets for its own benefit in an act of self-dealing. But that is not what Allen alleged. Instead, the basis of Allen’s claim was that the defendants should not have allowed his daughter to make certain withdrawals from his accounts. However, Allen’s daughter had a power of attorney authorizing her to make such withdrawals from his account. This fact, the Court concluded, shielded the defendants from liability under either a breach of contract theory or a breach of fiduciary duty theory. Accordingly, the Court affirmed the District Court’s dismissal of Allen’s claims.

The Court’s full opinion is available here.

Lubin Austermuehle P.C.’s Wheaton, Naperville, and Oakbrook Terrace litigation attorneys have more than three decades of experience defending and prosecuting breach of fiduciary duty, minority oppression, business divorce, stolen corporate opportunity and breach of contract lawsuits. Helping business clients unravel the complexities of Illinois and out-of-state business laws is what we do. Our Chicago business divorce litigation lawyers represent individuals, family businesses and enterprises of all sizes in a variety of legal disputes, including disputes among partners and shareholders as well as lawsuits between businesses and consumer rights, auto fraud, and wage claim individual and class action cases. If you’re facing a business or class-action lawsuit, or the possibility of one, and you’d like to discuss how the experienced Illinois breach of fiduciary duty attorneys at Lubin Austermuehle can help, we would like to hear from you. To set up a consultation with one of our Chicago class action attorneys and Chicago business trial lawyers, please call us locally at 630-333-0333 or contact us online.

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