Bartindale v. Pensco Trust
Filed 1/30/14 Bartindale v. Pensco Trust CA1/1
OFFICIAL REPORTS
California Rules
of Court, rule 8.1115(a), prohibits courts and parties from citing or relying
on opinions not certified for publication or ordered published, except as
specified by rule 8.1115(b). This
opinion has not been certified for publication or ordered published for
purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION ONE
BARBARA BARTINDALE et al.,
Plaintiffs and
Appellants,
v.
PENSCO TRUST CO., INC.,
Defendant and
Respondent.
A135392 & A136524
(San
Francisco City & County
Super. Ct. No.
CGC-10-505549)
Defendant PENSCO Trust Co., Inc. (PENSCO)
served as custodian for plaintiffs’ self-directed
(IRA’s). As an IRA investment, each
plaintiff elected to purchase a share in secured promissory notes originated by
a business known as “Cedar Funding.†Before
releasing funds from a plaintiff’s IRA in connection with these investments, PENSCO
required Cedar Funding to submit a letter of instructions signed by the
plaintiff, along with documents associated with the transaction.
Cedar Funding ultimately went
bankrupt, and an investigation revealed it had generally failed to execute the
assignments under which its investors were to receive their shares in the
promissory notes. When plaintiffs
examined the communications between Cedar Funding and PENSCO, they found Cedar
Funding had regularly submitted unsigned versions of such documents to PENSCO
in connection with their own investments.
PENSCO had released the IRA funds to Cedar Funding without ever
notifying plaintiffs of the submission of unsigned documents.
Plaintiffs sued PENSCO, contending its
release of funds in response to the submission of unsigned documents
constituted, among other claims, a breach of the agreement between PENSCO and
its clients. The
concluding PENSCO was under no obligation under its agreement to detect the
omission and notify plaintiffs.
Concluding a trier of fact could find a breach of the agreement on the
basis of the limited evidence submitted in connection with the summary judgment
motion, we reverse.
title="">[1]
Twenty-one individual plaintiffs
filed a complaint against PENSCO on November 22, 2010. The complaint alleged each
plaintiff had retained PENSCO, which is in the business of “managing self directed
Individual Retirement Accounts,†to manage his or her IRA. As part of that management function, each
plaintiff had instructed PENSCO to purchase on his or her behalf “interests in
fractionalized deeds of trust brokered by David A. Nilsen, dba Cedar Funding
and or Cedar Funding, Inc.†(collectively Cedar Funding). PENSCO, it was alleged, failed properly to
carry out the purchases, which were later ruled invalid during Cedar Funding’s
bankruptcy proceeding. The complaint
alleged causes of action for breach of
fiduciary duty, negligence, breach of contract, consumer fraud, and unfair
competition. Plaintiffs sought
compensatory and punitive damages, reimbursement of certain fees, statutory
penalties, and attorney fees. A year
later, PENSCO filed a motion for summary judgment, arguing it did not violate
its limited contractual duties to plaintiffs in its dealings with Cedar Funding.
A.
The evidence submitted by the
parties in connection with the motion demonstrated each plaintiff executed a
preprinted “IRA Application†(application) with PENSCO, establishing an IRA authorized
to hold “[a]ll IRS eligible assets.â€
application required the plaintiffs to acknowledge “PENSCO’S duties to me are
substantially limited . . . to non-discretionary, ministerial
matters.†A further series of disclaimers
made clear PENSCO’s intent to act solely in the role of an agent for the
plaintiffs, rather than an advisor.
Typical, both in their content and their overlapping nature, are the
following “representationsâ€: “PENSCO
will rely on my instructions or the instructions of my Designated
Representative without making any
investmentâ€; “PENSCO renders no advice with respect to any investment and will
act solely at my direction or that of my Designated Representative in
purchasing assets for my accountâ€; “PENSCO does not act as a fiduciary except
in respect to its custodial duties and has no duty to evaluate any investment,
investigate, evaluate or report to me any information regarding any investment
opportunity or any investment that I have directed it to make or to inquire
into its suitabilityâ€; and “PENSCO has no duty to report to me any information
it may learn concerning any investment other than information provided by the
Issuer for my benefit.â€
Pursuant to the terms of the
application, the primary contract
between the parties was an “Individual Retirement Account Custodial Agreementâ€
(agreement). Under the heading “The
Depositor’s Responsibilities for Investment Decisions and Authorization,†the
most recent version of the agreement authorized the client to “direct PENSCO
Trust to invest Custodial Account assets in any lawful investment acceptable to
PENSCO Trust, in a format prescribed by PENSCO Trust,†but it stated PENSCO
“shall have no investment responsibility with respect to the investment of
assets†and placed on the client the “SOLE right and responsibility†for directing
the investment of funds. The client was
also assigned sole responsibility for “determining the suitability, nature,
prudence, value, viability, risk, safety, legality, tax consequences and merit
of, and to perform any ‘due diligence’ or other investigation with respect to,
any particular investment, strategy or transaction involving Custodial Account
assets.†PENSCO was assigned “the
responsibility . . . only to acquire, hold and dispose of such
investments as directed by the Depositor and/or the Depositor’s Designated
Representative . . . .â€
Under another heading, “Limited
Duties of PENSCO Trust,†PENSCO assumed the duties, among others, to “purchase,
sell, transfer, hypothecate, mortgage, encumber, take title to, record, and
obtain title and other insurance for, real or personal property, anywhere
situated, according to the instructions of . . . the Depositor or
Depositor’s Designated Representative,†to pay insurance premiums and taxes
associated with account assets, and to make periodic reports. Again, PENSCO disclaimed any duty to
determine the wisdom and legal propriety of client investments, and it
expressly disclaimed “ANY FIDUCIARY DUTY OR RESPONSIBILITY.â€
In addition to an annual maintenance
fee, calculated according to the value of the account, PENSCO charged its
clients for various specific activities and services, such as the “setup†of a
secured or unsecured note, purchasing and selling real property, and
safekeeping of documents. Among the many
other provisions of the agreement were an attorney fees clause and a
designation of New Hampshire law (in all but one version of the agreement) as the governing law.
B.
Plaintiffs characterize the
investments at issue here as “fractionalized interests in Notes and Deeds of
Trust brokered by Cedar Funding.†As
explained in a report prepared by Cedar Funding’s trustee in bankruptcy after
the business’s failure, Cedar Funding was a fictitious business name used by
David Nilsen, a real estate broker. In
2003, Nilsen formed a corporation, Cedar Funding, Inc. (CFI), that “originated
and serviced loans that were funded by third party investors who took
fractionalized interests in CFI’s notes and deeds of trust.†(In re
Cedar Funding, Inc. (2009) 408 B.R. 299, 304.) In other words, Cedar Funding arranged loans
secured by deeds of trust to real property.
It then sold to investors ownership interests in the promissory notes evidencing
the loans, entitling the investors to receive the interest payments made on the
notes. Rather than owning an entire
promissory note, investors typically owned only a “fractionalized interest†in the
note, with the fraction determined by the size of their investment.
Unfortunately, the trustee
determined, by 2004 CFI “no longer executed or recorded the documents necessary
to transfer fractional interests to its investors,†leaving investors without enforceable
documentation of their investment. (
B.R. at p. 304.) In dealing with third party
investors in the notes, “CFI generally transmitted to the investors copies of
the original note and deed of trust, along with a Loan Servicing Agreement, a
Lender/Purchaser Disclosure Statement, an unsigned Promissory Note Endorsement
from CFI to the investor and an unsigned Assignment of Deed of Trust.†(Ibid.) In this way, Cedar Funding was able to use
the same note as the basis for multiple investments. The enterprise evolved into a classic Ponzi
scheme, with funds from new investors used to pay obligations to existing
investors. (Id. at pp. 305–308.)
Nilsen was later indicted by a federal grand jury for his role in the
scheme.
In the decision cited above, the
bankruptcy court ruled that the typical Cedar Funding investor who did not
receive executed documents transferring an interest in the underlying promissory
note and deed of trust would not be granted an equitable lien in the real
estate securing the promissory note. Such
investors therefore became general, unsecured creditors of the Cedar Funding
bankruptcy estate. (In re Cedar Funding, Inc., supra, 408 B.R. at pp. 315–316.)
C.
The summary judgment record reveals
little about the manner in which plaintiffs’ Cedar Funding investments came to
be made. We know that in order to
authorize the release of client funds to Cedar Funding, PENSCO required that it
receive a completed form, entitled “Deed of Trust/Mortgage Direction Letter†(direction
letter).
We assume the form of the direction
letter was prepared by PENSCO, since it bore PENSCO’s logo. The direction letter was in three parts. The top portion required information about
the nature of the investment, including the name and account number of the PENSCO
client making the investment, the dollar amount of the investment, the “Percentage
of ownership,†apparently referring to the percentage of ownership the client would
have in the underlying note upon making the investment, the interest rate, date
of maturity, and date of the underlying note, the name of the borrower on the
note, and the borrower’s monthly payment.
The second section of the direction
letter contained PENSCO’s requirements to authorize the transaction. The first line dictated to whom the “original
note and deed of trust/mortgage, must be made payable,†a combination of PENSCO,
the name of the investor, and the investor’s PENSCO account number.
including a “Copy of note and deed of trust. (Originals if client is the sole
beneficiary).â€
title="">[5] Also required were copies of various
documents relating to the underlying loan.
Finally, this section required information about the loan servicer,
which, for the letters in the record, was invariably Cedar Funding.
The final section was a series of
printed “Client’s Representations.â€
These representations reiterated the type of warnings contained in the
application and the agreement, essentially requiring the client to confirm his
or her knowledge that PENSCO took no responsibility for the nature and wisdom
of the investment. At the bottom, the client’s
signature was required.
The record includes all or most of
the direction letters relating to the challenged investments made by plaintiffs
with Cedar Funding. In each of the direction
letters, the blanks are filled in by hand, rather than typewriter or computer. The record is silent on who completed the direction
letters and how it was done, but given the nature of the information requested
by the first section, it is likely the direction letters were completed by
Cedar Funding. Each direction letter
appears to have been accompanied by several documents: a “Promissory Note Endorsement,†assigning to
the investor a fractional interest in the particular promissory note described
in the direction letter; an “Assignment of Deed of Trust,†assigning to the investor
a fractional beneficial interest in the deed of trust securing that promissory
note; a copy of the promissory note; and a copy of the deed of trust.
endorsements and assignments of deed of trust sent to PENSCO by Cedar Funding were
not signed, and therefore were presumptively unenforceable.
The PENSCO employee who received the
direction letters and authorized the payments to Cedar Funding from plaintiffs’
IRA’s was Ignacio de Souza. At his
deposition, de Souza testified that, with respect to the transactions at issue
here, a completed direction letter would arrive at PENSCO by facsimile
transmission. The transmissions always
originated with Cedar Funding, rather than a client. Upon
receiving the fax, de Souza would compare the amount of the investment
requested with the available funds in the client’s account to ensure the
investment could be financed. He
examined the direction letter to ensure it had been signed by the client,
although he did not attempt to authenticate the client’s signature. If the direction letter was in order, de
Souza would issue a check to Cedar Funding from the client’s account, after
entering appropriate information into the computer records.
De Souza acknowledged he received
other documents with the direction letter, including a copy of the underlying
note and deed of trust, but he said they were “[not] important†to him,
explaining, “These documents [were] normally supposed to go to the client, and
the service center, and we normally get a copy.†He did not “examine them at all.†When shown a promissory note endorsement from
one of the Cedar Funding direction letters, de Souza claimed not to know “what the
document was for.†He did not require
that these documents be included in a transmission in order to authorize a
payment to Cedar Funding, and he had never sought a signed copy of a promissory
note endorsement or assignment of deed of trust from either Cedar Funding or
plaintiffs.
The trial court granted PENSCO’s
motion for summary judgment, holding, “Nothing in the Custodial Agreement
obligated defendant to perfect the ownership interests of plaintiffs’
investments or confirm that the transfer documents were signed and
recorded. Nor was defendant required
under the Custodial Agreement to notify plaintiffs that defendant had not
received endorsed copies of notes or deeds.â€
The court later denied plaintiffs’ motion for a new trial and awarded
attorney fees to PENSCO.
Plaintiffs contend PENSCO’s release
of their IRA funds upon receiving unsigned promissory note endorsements and
assignments of deeds of trust constituted a breach of its contractual obligations.
“ ‘This case comes to us on review
of a summary judgment.
Defendants are entitled to summary judgment only
if “all the papers submitted show that there is no triable issue as to any
material fact and that the moving party is entitled to a judgment as a matter
of law.†[Citation.] To determine whether triable issues of fact
do exist, we independently review the record that was before the trial court
when it ruled on defendants’ motion.
[Citations.] In so doing, we view
the evidence in the light most favorable to plaintiffs as the losing parties,
resolving evidentiary doubts and ambiguities in their favor.’ †(Elk
Hills Power, LLC v. Board of Equalization (2013) 57 Cal.4th 593, 606.)
The sole issue on this appeal is the
scope of PENSCO’s duty to plaintiffs under the agreement. “ ‘Because the proper interpretation of
a contract is ultimately a question of law for this court, we review the trial
court’s interpretation of the contract de novo.’ †(Lawyers
Title Ins. Corp. v. Groff (2002) 148 N.H. 333, 336 [808 A.2d 44, 48].)
of fact as to the existence and terms of a contract, they should be resolved by
the jury.†(Dillman v. N.H. College (2003) 150 N.H. 431, 434 [838 A.2d 1274, 1276].)
“ ‘When interpreting a written
agreement, we give the language used by the parties its reasonable meaning,
considering the circumstances and the context in which the agreement was
negotiated, and reading the document as a whole.’ [Citation.]
‘Absent ambiguity, however, the parties’ intent will be determined from
the plain meaning of the language used in the contract.’ †(Lawyers
Title Ins. Corp. v. Groff, supra, 808 A.2d at p. 48.) “ ‘The language of a contract is
ambiguous if the parties to the contract could reasonably disagree as to the
meaning of that language.’ [Citation.] If the agreement’s language is ambiguous, it
must be determined, under an objective standard, what the parties, as
reasonable people, mutually understood the ambiguous language to mean.†(
Outside the generalities of the agreement
and the narrow circumstances relating to the Cedar Funding investments, the
record is, so far as we can tell, silent as to the typical services PENSCO
performed for its clients. Repeatedly in
the agreement, however, PENSCO characterizes itself as the “custodian†of
plaintiffs’ self-directed IRA’s, and the agreement is titled, “IRA Custodial
Agreement.†By the dictionary
definition, a “custodian†is “one that guards and protects or maintains;
keeping property or records . . . .†(Merriam-Webster’s Collegiate Dict. (10th ed.
2000) p. 285, col. 2.) At a minimum, PENSCO
appears to have agreed to maintain the IRA’s and to safeguard the funds and
other assets in those accounts, as well as to keep records regarding those
assets.
The agreement, however, anticipates
that PENSCO’s duties would go beyond those of a custodian, as defined above. In addition to merely maintaining the
accounts, PENSCO undertook to acquire assets for plaintiffs to hold in the IRA’s. As noted above, the portion of the agreement
that characterized PENSCO’s duties authorized it to “purchase, sell, transfer,
hypothecate, mortgage, encumber, take title to, record, and obtain title and
other insurance for, real or personal property, anywhere situated, according to
the instructions of . . . the Depositor or Depositor’s Designated
Representative.†Reflecting this
authorization, the fee schedule in the agreement contained potential charges to
PENSCO clients for “Unsecured Note Setup,†“Secured Note (i.e. Mortgage) Setup,â€
“Purchase/Sale/Re-registration of Real Property,†and “Foreign Real Estate
Purchase,†presumably performed by PENSCO.
Having agreed to undertake these
various functions at its clients’ direction, PENSCO had a contractual duty to exercise
reasonable care in their execution. New Hampshire law
recognizes that parties who undertake to perform a service under a contract have
“a general duty to use due care in the performance of
their work.†(Morvay v. Hanover
[876 A.2d 241, 244] [recognizing a contractual cause of action for failure to
use due care in home construction]; Robinson
v. Colebrook Guar. Sav. Bank (1969) 109 N.H. 382, 384–385 [254 A.2d 837,
839] [“ ‘The duty to use due care in rendering a
service arises not from a right to receive the service, but from the relation
between the parties which the service makes.’ [Citation.] Thus, a relation created by contract may
impose a duty to exercise care.â€].)
name="_ftnref8" title="">[8] In a back-handed way, the application
recognizes the existence of some type of duty, stating, “PENSCO does not act as
a fiduciary except in respect to its
custodial duties.†(Italics added.) The same phrase was repeated in four of the
five versions of the direction letter.
Because evidence in the record with
respect to the manner in which these transactions were initiated is scanty, it
is not possible to define precisely PENSCO’s role in handling the investments
at issue. We have no information, for
example, about the manner in which PENSCO was made aware of plaintiffs’ intent
to purchase fractional interests from Cedar Funding, the communications, if
any, between and among Cedar Funding, PENSCO, and plaintiffs about PENSCO’s
handling of the investments, or the timing and nature of information given to
plaintiffs about their investments by Cedar Funding. All of these might define more precisely the
exact nature of PENSCO’s involvement in the transactions. At a minimum, however, the evidence in the
record demonstrates PENSCO was responsible for performing the final act in the
acquisition of the investments: it
approved and implemented the release of funds from the IRA’s to compensate the “sellerâ€
of the investments, Cedar Funding. There
is no evidence in the record plaintiffs played any role in the actual release
of funds, beyond conveying the instructions contained in the direction letters
through their respective signatures. The
decision to pay Cedar Funding appears to have been, in the end, PENSCO’s. In deciding to release the funds to Cedar
Funding in response to the direction letters, PENSCO was required to exercise
reasonable care.
On the record before us, a trier of
fact could conclude PENSCO breached its duty of reasonable care in releasing
funds in response to the faxed direction letters and their attendant
documents. The purpose of each direction
letter was to instruct PENSCO with respect to the acquisition for the
plaintiff’s IRA of a particular secured fractional interest in a particular
secured promissory note, both of which were precisely specified in the
direction letter. Four of the five
versions of the direction letter expressly “authorize[d] [PENSCO] to purchase
for my account the percentage interest in the note secured by a deed of
trust/mortgage, as described above.â€
it was necessary for the IRA owner to obtain an executed assignment of that
fractional interest and the deed of trust.
In the absence of an executed copy of those documents, no transfer of an
interest in the promissory note or its accompanying security had occurred, and nothing
had been acquired by the IRA owner.
There is no indication in the record
that plaintiffs were aware of the nature of the documents sent by Cedar Funding
to PENSCO, much less that they had approved them as adequate. The documents submitted to PENSCO came
directly from Cedar Funding, and although plaintiffs signed the direction
letters, there is no indication in the record the plaintiffs were shown the
documentation submitted to PENSCO to secure the release of funds. On that basis, it was PENSCO’s role as
custodian of account funds to use reasonable care in ensuring that appropriate
documentation was submitted before releasing them to Cedar Funding. In these circumstances, for PENSCO to
authorize a transfer of funds—to pay for the fractional interest—without
obtaining an executed copy of the documents required to effect an acquisition
of the fractional interest could be found by a trier of fact to constitute a
breach of its duty of reasonable care in acting as custodian of its clients’
accounts. The trial court erred in
granting summary judgment to PENSCO on this record.
PENSCO argues it had no duty to
advise plaintiffs it had received unexecuted assignments, citing the extensive
and repetitive disclaimers in the application, agreement, and direction
letter. PENSCO leans heavily on the
broad language of these disclaimers, which state PENSCO has no duty, for
example, to “report to me any
information†about or to make any inquiry into the investments. (Italics added.) The language of those disclaimers, however, must
be read in its context, and the context of each relates solely to PENSCO’s lack
of duty to advise its clients with respect to the propriety of their
investment. It is undisputed PENSCO had
no duty to advise plaintiffs with respect to the wisdom, suitability, or
legality of their investments, or otherwise to assist plaintiffs in making
their investment decisions. Without
more, however, the absence of executed contractual documents does not raise an
issue of the wisdom or suitability of the investments. It is an issue of the very
release them without evidence of an actual investment could be found a failure
to exercise reasonable care.
PENSCO also argues that to construe
its duty in this manner would “lead to absurdity by requiring PENSCO to
effectively serve as [plaintiffs’] lawyer.†It hardly requires a lawyer to recognize that
an unsigned contractual document does not convey an enforceable legal
interest. In any event, PENSCO
contractually bound itself to “purchase†interests for plaintiffs, even to the
extent of charging them for the service.
Purchasing an investment in a nontangible asset presupposes the receipt
of enforceable legal documentation of the investment. To the extent PENSCO was required to serve as
plaintiffs’ lawyer to this degree, it had agreed to do so.
In finding no breach of duty, the
trial court relied primarily on Brown v.
California Pension Administrators & Consultants, Inc. (1996) 45
Cal.App.4th 333 (Brown). The defendants in Brown included an IRA custodian like PENSCO, operating under
contractual documents materially identical to those found here. The plaintiffs in Brown instructed the defendant custodian to invest their IRA funds
in unsecured promissory notes issued by one Lewis. (Id.
at p. 338.) In 1988, Lewis
defaulted on notes held by two of the custodian’s clients, and he later
declared bankruptcy. The complaint
alleged the custodian breached its duty to the plaintiffs by failing to inform
them of Lewis’s default in 1988, which, they argued, would have prevented them from
continuing to invest with him. (
concluding the parties’ agreement “unambiguously limited [defendants’]
contractual and common law duties to appellants, absolving them of any duty to
investigate, select or monitor appellants’ IRA investments. . . . The
documents repeatedly advised that appellants were to make their own investment
choices, and that respondents would carry out direct written investment
instructions and account for appellants’ funds in their possession, but
undertook no responsibility for the soundness of the investment choice or the
performance of the investment.†(
For reasons the discussion above should
have made clear, we find Brown distinguishable. The plaintiffs in Brown contended the defendants were under a duty to reveal to them
information in the defendants’ possession about the advisability of their
investments. The Brown court held the IRA custodian was under no duty to reveal that
type of information. We agree with
respect to PENSCO. The breach of duty
alleged by plaintiffs, however, is qualitatively different, relating as it does
to the acquisition of the investments, rather than their advisability.
PENSCO also discusses
808 A.2d 44, but we find that case unhelpful, since it deals primarily with
issues of liability for the conduct of a third party that have no application
here. (Id. at pp. 47–49.)
The judgment of the trial court,
including its order awarding attorney fees and costs to PENSCO, is reversed,
and the matter is remanded for further proceedings.
>
_________________________
Margulies,
Acting P.J.
We concur:
_________________________
Dondero, J.
_________________________
Banke, J.
name="_ftn1" title="">[1] This decision is rendered in both case No. A135392 and case No.
A136524, which were consolidated by order of October 30, 2012. The appeal in case No.
A136524 is directed solely at the trial court’s award of attorney fees and
costs, which stands or falls with decision on the summary judgment motion.
name="_ftn2" title="">[2] The plaintiffs signed different, evolving account documents at
different times, but the material terms of their agreements with PENSCO were
the same.
