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Knox v. The Vanguard Group, Inc.

United States District Court, D. Massachusetts

January 5, 2018

PETER L. KNOX, as attorney-in-fact for Margaret A. Knox under power of attorney, Plaintiff,
v.
THE VANGUARD GROUP, INC.; VANGUARD FIDUCIARY TRUST COMPANY; and VANGUARD MARKETING CORPORATION, Defendants.

          MEMORANDUM AND ORDER ON PLAINTIFF'S MOTION TO STRIKE AND CROSS-MOTIONS FOR SUMMARY JUDGMENT

          F. Dennis Saylor IV United States District Judge.

         This is a dispute concerning the handling of an individual retirement account (“IRA”). Plaintiff Peter Knox, acting as attorney-in-fact for his mother, Margaret A. Knox, alleges that defendants The Vanguard Group, Inc.; Vanguard Fiduciary Trust Company; and Vanguard Marketing Corporation (collectively, “Vanguard”) improperly refused to comply with his instructions concerning his mother's account. Jurisdiction is based on diversity of citizenship.

         At the heart of this dispute is a seemingly trivial disagreement over the execution of the paperwork necessary to distribute the funds from an IRA.

         Peter Knox is the son of Kenneth and Margaret Knox. He is a lawyer who lives in Massachusetts; his mother is elderly and lives in Ohio. In 2009, Peter obtained a general power of attorney from his mother that permitted him to conduct her financial affairs.

         Kenneth Knox had an IRA at Vanguard. When he established the account in 1999, Kenneth named his wife Margaret as the beneficiary in the event of his death. Kenneth died in 2012, at which point the IRA had a balance of more than $44, 000.

         After Kenneth's death, at Peter's request Vanguard created a new IRA account in Margaret's name and transferred the funds to that account. Peter was unhappy with the way Vanguard handled the transfer, and attempted-using the 2009 power of attorney-to withdraw the funds in order to transfer them to a new account at Fidelity Investments.

         From that point, things became problematic. In essence, Vanguard insisted that Peter use its own power-of-attorney form, and otherwise comply with its requirements, in order to have access to Margaret's account. Because Peter had signed his mother's name to a document naming him as beneficiary, Vanguard became suspicious, and insisted on strict enforcement of its policies. Peter insisted that his own documentation was sufficient. Neither party was willing to yield. As a result, the funds were not distributed for more than three years. Because nothing was distributed during that time, Margaret suffered various adverse tax consequences and other alleged financial injuries.

         Peter, as attorney-in-fact for his mother, has moved for summary judgment on Counts 3 (breach of fiduciary duty) and 5 (consumer fraud), and Vanguard has cross-moved for summary judgment on all counts. In addition, Peter has moved to strike two exhibits offered by Vanguard in support of its motion.

         The principal questions before the Court are (1) whether there was a contract that allowed Vanguard to impose its own requirements on the distribution of funds to someone who is not the named account holder; (2) whether Vanguard breached the terms of that contract; (3) whether Vanguard violated the implied covenant of good faith and fair dealing; and (4) whether Vanguard otherwise acted improperly. For the reasons set forth below, the Court concludes that such a contract existed, that it was not breached, and that Vanguard cannot be held liable on any other theory of recovery. Plaintiff's motion to strike and motion for partial summary judgment will be denied, and defendants' motion for summary judgment will be granted.

         I. Background

         Unless otherwise noted, the following facts are undisputed.

         A. Factual Background[1]

         Peter Knox is the son of Margaret Knox and Kenneth Knox. (Docket No. 65, Ex. 1 ¶ 8). He is a tax attorney who practices in Massachusetts. (Docket No. 94, Ex. C at 13). He has been a member of the Massachusetts bar since 1976. (Docket No. 65, Ex. 1 ¶ 3). Margaret is approximately 98 years old; she has resided in Ohio since 1964 and currently lives in an assisted-living facility there. (Id. at ¶ 5; Compl. ¶ 2).

         The Vanguard Group, Inc.; Vanguard Fiduciary Trust Co.; and Vanguard Marketing Corporation are Pennsylvania corporations with principal places of business in that state. (Compl. ¶ 7). Vanguard is an investment advisor that provides mutual funds, brokerage services, asset management services, and a variety of other investment products and services. (Id. ¶ 9).

         In 1999, Kenneth opened an IRA account with Vanguard (the “Kenneth IRA”). (Docket No. 61, Ex. 1). In the process of doing so, he executed an IRA Adoption Agreement (the “IAA”). (Id.).[2] By signing the IAA, Kenneth acknowledged “having received and read the Vanguard IRA Disclosure Statement.” (Id. at 5). In addition, by signing the IAA, Kenneth agreed to the terms of the standard Vanguard Individual Retirement Custodial Account Agreement, which was incorporated by reference. (Id.). The IRA Disclosure Statement and the IRA Custodial Account Agreement are contained in a single continuously paginated document, and will be referred to for convenience as the “1999 CAA.” (Id., Ex. 2).[3]

         The IAA provided that “Vanguard will transfer ownership of your IRA to your primary beneficiaries following your death.” (Id., Ex. 1 at 4). When he opened the account, Kenneth named Margaret as the sole beneficiary. (Id.).

         The 1999 CAA provided that Vanguard “is authorized to amend the Agreement in any respect and at any time . . . to comply with the applicable provisions of the [Tax] Code” and that “[a]ny other amendment . . . shall require the consent of [Vanguard] and the Depositor.” (Id., Ex. 2 at 32). It continues: “[f]or these purposes, the Depositor shall be deemed to have consented to any amendment . . . if [he] fails to object thereto within 30 days after having received written notice of the amendment.” (Id.).

         By the time Kenneth died in 2012, the 1999 CAA had been amended. Section 4.1(b) of the 2012 version (the “2012 CAA”) provided that “[t]he Investor's or Beneficiary's request [for distribution of account assets] must be made in a form and manner acceptable to [Vanguard].” (Id., Ex. 3 at 19). Section 4.5(b) likewise provided that “[Vanguard] shall not have any responsibility to make any distribution . . . until it receives . . . directions [from the Investor or Beneficiary] in form and manner acceptable to [Vanguard].” (Id. at 22).[4]

         Vanguard generally requires that requests for distributions from accounts be executed on its own forms. (Id., Ex. 7-9).[5] It has specific forms and requirements when the person requesting the distribution is not the account holder, and is acting under a power of attorney or similar grant of authority. (Id., Ex. 8). It will accept externally drafted powers of attorney on a transaction-by-transaction basis, subject to its own determination that the person in fact has the authority to act on behalf of the account holder. (Id. at 2). It requires, under some circumstances, that such a power of attorney be certified independently (such as by outside counsel) that it is valid and in force. (Id.). According to Vanguard, its policies and requirements have been established in order to protect itself, its account holders, and the rightful beneficiaries of those accounts from potential fraud. (Defs.' SMF ¶ 17).

         On May 7, 2009, in Ohio, Margaret signed a 2009 Durable General Power of Attorney (the “2009 DGPOA”) appointing Peter as her attorney-in-fact. (Docket No. 65, Ex. 33 at 5-6). The 2009 DGPOA in essence provided that Margaret granted to Peter the authority to perform any action on her behalf that she could personally perform. (Id.). That authority specifically included the power to “sign checks, withdraw funds, and to open and close and manage bank, brokerage, mutual fund, and other retirement accounts.” (Id. at 5).

         On September 30, 2009, Peter sent Vanguard a letter enclosing a copy of the 2009 DGPOA. (Id., Ex. 8). Peter had apparently obtained a copy of Vanguard's standard Agent Authorization form, but declined to execute the form. (Id.). According to his letter, Peter believed that the 2009 DGPOA was sufficient to authorize any of the actions that Vanguard's form would authorize. (Id.).[6]

         On September 30, 2012, Kenneth died. At that point, the Kenneth IRA held investments totaling approximately $44, 896. (Compl. ¶ 19).

         On October 2, 2012, after Kenneth's death, Peter called Vanguard employee Joseph McHugh to discuss transferring the assets in the Kenneth IRA to an inherited IRA in Margaret's name. (Docket No. 65, Ex. 6).[7] McHugh told Peter that he would send the necessary forms to him to effect the transfer, including a Vanguard Agent Authorization form. (Id. at 36-37). McHugh further told him that in Vanguard's view, the 2009 DGPOA was good only for “a onetime transaction” and that if he wanted “permanent or ongoing authority” for Margaret's account, he would need “to complete an agent authorization.” (Id. at 35-36).[8] During the October 2 phone call, McHugh acknowledged that Peter had been granted a power of attorney under the 2009 DGPOA, but stated if Vanguard did not have an executed Agent Authorization form on file, it could not accept his signature in lieu of Margaret's. (Id.).

         Vanguard then sent its IRA application package to Margaret to effect the transfer of the Kenneth IRA assets to a new inherited IRA in Margaret's name. (Id., Ex. 1 ¶ 10; Ex. 11). The package was sent to Margaret's address of record, which was Peter's address in Massachusetts. (Id.). The Inherited IRA Form, which was part of the package, required the new account owner to sign the form and to confirm, among other things, “that I am signing below to identify myself as the beneficiary of the account(s).” (Id., Ex. 9 at 7).

         Peter received the package at his address. (Id., Ex. 1 ¶ 10; Ex. 11). He signed Margaret's name on the forms. (Id., Ex. 1 ¶ 16). However, he did not indicate on the forms that he was signing her name in his capacity as her attorney or agent. (Id. ¶ 18). He named himself and his sister as the beneficiaries on the account. (Id., Ex. 9 at 5).[9] He then mailed the forms to Vanguard on October 30, 2012. Because Peter believed that Vanguard had the 2009 DGPOA on file, he did not include another copy. (Id., Ex. 1 ¶¶ 21-24).

         The Inherited IRA Form executed by Peter on behalf of Margaret included the following language: “I have elected to inherit/assume the IRA(s) of the decedent . . . and I agree to the terms set forth in this Inherited/Assumed IRA Form for Spouse Beneficiaries. I hereby adopt the [2012 CAA] that is incorporated herein by reference and that I acknowledge having received and read.” (Id., Ex. 9 at 7).

         In the package that he mailed to Vanguard, Peter included a Vanguard IRA Distribution Form. (Id., Ex. 10). Although the form indicated that it was not to be used “to establish required minimum distributions, ” Peter handwrote various instructions and alterations on the form, including the notation, “minimum required distribution based on inherited DOB.” (Id. at 2-3). He signed his mother's name to the form. (Id. at 8; Ex. 1 ¶ 28).

         On November 2, 2012, Vanguard received the forms from Peter. That day, Vanguard electronically created an inherited IRA account titled “Margaret A. Knox BENEF Kenneth L. Knox” (the “Margaret IRA”). (Compl. ¶ 29). All of the funds in the Kenneth IRA were then transferred to the Margaret IRA. (Docket No. 65, Ex. 12).[10]

         On November 5, 2012, McHugh called Peter. (Id., Ex. 15). McHugh advised him that his handwritten notations on the IRA Distribution Form were unclear. (Id. at 12). Peter expressed frustration with what he perceived to be Vanguard's delays and repeated mistakes, and indicated that he wanted to transfer all of the funds in the Margaret IRA to a new account at Fidelity Investments. (Id. at 27-28). He therefore requested that Vanguard make a distribution of all of the funds in the Margaret IRA. (Id. at 18). McHugh advised him that he could send written instructions with a power of attorney, and that if it was in good order, the transaction would be processed. (Id. at 23).[11]

         After the conversation with McHugh, Peter e-mailed written trade instructions to Vanguard. (Id., Ex. 16). He attached the 2009 DGPOA, but without any form of certification. (Id.).

         The following day, November 6, Vanguard issued check no. 19198616 in the amount of $44, 504.12 payable to “MARGARET A. KNOX BENEF KENNETH L. KNOX” and mailed it to Margaret's address of record (that is, Peter's address in Massachusetts). (Id., Ex. 63). However, on November 7, Vanguard stopped payment on that check. (Id., Ex. 20). Vanguard then returned the $44, 504.12 distribution to the account. (Id., Ex. 22-23).

         Vanguard contends that after the check had been issued it had determined that the uncertified 2009 DGPOA was insufficient authorization to process the transaction. (Id., Ex. 23).[12] At some point, Vanguard's Fraud Prevention Department had become involved, and expressed concern that Margaret herself had not signed the Inherited IRA form and that one of the named beneficiaries, Peter, had instead signed her name. (Id., Ex. 22).[13] On November 7, Vanguard froze the Margaret IRA account. (Id.).

         On November 12, 2012, Vanguard employee Patrick Rogan telephoned Peter and informed him that the check had been stopped because Vanguard believed that the proper procedures had not been followed. (Id., Ex. 25 at 5). He stated that the 2009 DGPOA was ineffective because “the power of attorney would [need to] be certified by an authorized officer of a commercial bank . . . [or] brokerage firm or a practicing attorney, which could not be you . . . .” (Id. at 19). During the call, Peter acknowledged that Margaret had not actually signed the forms to open the inherited IRA. He told Rogan, “I signed it for her under the power of attorney. She's not here. She lives in Cincinnati and I take care of this stuff.” (Id. at 18).

         In that conversation, and in a subsequent e-mail sent on November 13, 2012, Rogan advised Peter that Vanguard would not accept his signature on the Inherited IRA Form. (Id. at 19; Ex. 27). In the November 13 e-mail, he stated that “we would encourage you and your mother to complete the Vanguard Agent Authorization Form to avoid any potential delays in sending in a certified power of attorney, ” and that “[y]our mother can designate you as a full or limited agent, and it requires your mother to receive a notarized signature.” (Id., Ex. 27). He also noted that because Peter had signed his mother's name to the Inherited IRA Form, his mother would need to sign a new copy of that form, and that Vanguard would not accept his signature even if he completed the Agent Authorization Form. (Id.). Rogan attached blank copies of the two forms to the e-mail. (Id.).

         On November 15, Rogan sent Peter another e-mail, in which he noted that Peter had “admitted” to signing the Inherited IRA Form for his mother, and that “[a]s a result, we must receive a new form signed by [Margaret] before any distributions or transfers out of Vanguard could occur.” (Id., Ex. 26 at 2). The e-mail explained Vanguard's policy with regard to powers of attorney and indicated that an externally prepared power-of-attorney form could be used, but would need to be certified each time and would be subject to Vanguard's internal approval. (Id.). Rogan also advised that he had sent blank copies of the Agent Authorization Form and the Inherited IRA Form for Peter and his mother to execute. (Id. at 3).

         On November 16, 2012, Rogan sent Peter a letter that essentially repeated the contents of the two e-mails. (Id., Ex. 30 at 4). Among other things, the letter repeated that Margaret needed to sign the Inherited IRA Form, and suggested that Peter should fill out a “Vanguard Agent Authorization Form” so he could have “ongoing authority” to manage Margaret's account. (Id.). Alternatively, Peter could use a power of attorney that had been certified. (Id. at 5). However, Vanguard would only accept certified externally drafted powers of attorney for one-off transactions because they vary greatly and state laws differ in interpreting durable powers of attorney. (Id.). Vanguard “require[d] a new certification with each [DGPOA] submission” to ensure that the power of attorney was still in effect. (Id.).

         In response, on November 17, 2012, Peter sent another letter to Vanguard that simply included a copy of the 2009 DGPOA. (Id., Ex. 40). Again, however, the 2009 DGPOA was not accompanied by a current certification that it remained valid. (Id.; Defs.' Resp. ¶ 85).

         On November 22, 2012, Peter mailed a signed letter to Vanguard demanding immediate payment of funds held in the Margaret IRA. (Docket No. 65, Ex. 33). The letter itself was purported to have been signed by Margaret. (Id. at 4). The letter did not include an executed copy of the Inherited IRA Form.

         On December 4, 2012, Peter wrote to Vanguard stating that Margaret's distribution needed to occur during the current tax year to avoid significant penalties. (Id., Ex. 34 at 4). The letter included another copy of the 2009 DGPOA, which again was not certified. (Id. at 5-6). Instead, Peter simply stated that “[y]ou may rely on my representation that this DGPOA remains in full force and effect.” (Id. at 4).

         Rogan replied in a letter dated December 7, 2012, reiterating that Margaret had to sign the relevant Vanguard forms before Vanguard would “update her beneficiaries, or process a monetary transaction or asset transfer.” (Id., Ex. 52 at 2). Peter sent follow-up e-mails on December 13 and 19, 2012, stating that “[t]he tax consequences of [Vanguard's] delaying the IRA distribution beyond the end of 2012 are horrendous.” (Id., Ex. 35 at 3-4; Ex. 36 at 3).

         Throughout this process, Peter never advised Vanguard that his mother was incompetent or otherwise unable or unwilling to execute the necessary forms. He did have his mother sign her name to at least one letter (on November 22, 2012) and at least one Vanguard form, as set forth below (on February 3, 2013). At no point did he request that his mother execute the Inherited IRA Form or the Agent Authorization Form, as Vanguard had requested.[14]

         On December 21, 2012, Vanguard employee Brian Arletti wrote a letter to Peter stating that if Margaret was unable to complete and sign the relevant forms, Peter would have to submit an Agent Certification for Incapacitation Form including both a valid durable power of attorney along with a physician's certification of incapacity. (Id., Ex. 32 at 7). In addition, if the durable power of attorney did not state the authority for the request, Vanguard would require an opinion letter from an attorney. (Id.).

         On February 15, 2013, Peter sent Vanguard an executed IRA Distribution Form, accompanied by a letter from Margaret instructing Vanguard to cash out the Margaret IRA. (Id., Ex. 38, 39). The IRA Distribution Form, as submitted to Vanguard, sought distribution of all of the funds in the Margaret IRA in the form of a check made payable to her at her address of record. (Id., Ex. 38 at 4). It was filled out by hand, with a variety of provisions crossed out. It contained three signatures: (1) “Margaret A Knox by Peter L Knox as her attorney in fact”; (2) “Margaret A Knox by Peter L Knox as her [illegible]”; and (3) “Margaret A. Knox.” (Id. at 8). Under the latter signature is written the inscription, “Margaret A. Knox, by her own hand”; next to it is the date “Feb. 3, 2013.” (Id.). Peter contends that the signature is that of his mother.[15]

         Peter sent additional letters to Vanguard between March 1, 2013, and November 21, 2014. (Id., Ex. 46-50). However, no distributions were made from the Margaret ...


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