In Medve v. JPMorgan Chase Bank, N.A., a plaintiff sued a bank and three of its employees for breaches of fiduciary duties arising from fiduciary accounts. No. H-15-2277, 2016 U.S. Dist. LEXIS 11961 (S.D. Tex. February 2, 2016). The bank removed the case to federal court based on diversity jurisdiction: the plaintiff was a Texas resident and the bank was a resident of Ohio. The plaintiff filed a motion for remand, asserting that there was not complete diversity as he had sued three of the bank’s employees, who also lived in Texas, as defendants. The bank asserted that the employees were fraudulently joined, and therefore, did not count for diversity purposes. The court stated that: “If the pleading reveals a reasonable basis of recovery on one cause of action against one in-state defendant, the court must remand the entire suit to state court.” Id.
The district court reviewed whether the plaintiff pled a reasonable basis for recovery as against the bank’s employees. The bank argued that “there is no basis in the law for finding that an employee of a trustee is directly liable for breach of trust.” However, the court agreed with the plaintiff that there are three separate legal bases under Texas law for imposing liability on an employee who carries out the fiduciary functions of an entity: “(1) first, the employee owes a fiduciary duty directly as a subagent carrying out the employer’s fiduciary functions, (2) second, the employee is liable if he ‘participates’ in the employer’s breach of fiduciary duty, which the employee necessarily does if he is the one carrying out the breaches, and (3) third, the employee is personally liable for any tort he commits in the course of his employment, and breach of fiduciary duty is of course a tort.” Id. (citing In re Merrill Lynch Trust Co. FSB, 235 S.W.3d 185 (Tex. 2007); Leyendecker & Assocs., Inc. v. Wechter, 683 S.W.2d 369, 375 (Tex. 1984); Searle-Taylor Mach. Co. v. Brown Oil Tools,Inc., 512 S.W.2d 335, 338 (Tex. Civ. App.—Houston [1st Dist.] 1974, writ ref’d n.r.e.)).
The court held that the plaintiff had sufficiently pled claims against the bank’s employees. The court noted that the plaintiff clearly sued the employees in their individual capacities. The plaintiff pled that the employees acted as investment advisors and placed the bank’s interests above his interests. The plaintiff pled a list of nearly twenty specific acts of wrongdoing that the employees committed in connection with their rendition of financial and investment services, including using a fee schedule that favored investments in bank’s mutual funds over third party investments that had better rates of return. The court held that there was a reasonable basis of recovery for the plaintiff’s claims against the employees and remanded the case back to state court.
Interesting Note: This case involves an employee’s potential personal liability for breach of fiduciary duty. In Texas, in addition to employer liability, an agent/employee is liable for any torts that he or she commits. Breach of fiduciary duty is a tort. Therefore, plaintiffs who plead claims against financial institutions for breach of fiduciary duty can potentially also plead the same claims against the institutions’ employees who participated in the breach. Plaintiffs do not normally do this because the financial institution has sufficient assets to cover the claims and adding individuals will only complicate the case and make it more expensive and time-consuming. However, where there is a grudge against the employee or where there is a concern about the ability to collect on a judgment, this may be an attractive route for plaintiffs.
This case also involved breach of fiduciary duties as against investment advisors. Individuals or firms that receive compensation for managing portfolios of securities and/or giving advice on investing in securities such as stocks, bonds, mutual funds, or exchange traded funds are deemed to be investment advisers. All investment advisors (whether registered or not) are subject to Section 206 of the Advisers Act, which makes it unlawful for an adviser to engage in fraudulent, deceptive or manipulative conduct. In addition to those specific prohibitions, the U.S. Supreme Court has also held that Section 206 also imposes a fiduciary duty on investment advisors by operation of law. SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180 (1963). As a fiduciary, RIAs have the following general duties: duty of loyalty, duty of disclosure, duty to act with competence, and a duty to avoid self–dealing. The SEC has indicated that an RIA should meet the following obligations: 1) Advice: a duty to have a reasonable, independent basis for its investment advice; 2) Best Execution: a duty to obtain the best execution for clients’ securities transactions where the advisor is in a position to direct brokerage transactions; 3) Suitability: a duty to ensure that its investment advice is suitable to the client’s objectives, needs, and circumstances; 4) Personal activities: a duty to refrain from effecting personal securities transactions inconsistent with client interests; 5) Disclosure: a duty to disclose all material facts to clients, including conflicts of interest; and 6) Loyalty: a duty to be loyal to a client. Two very common issues that arise for RIAs are conflicts of interest and suitability issues.
Section 202(a)(11)(C) of the Investment Advisers Act of 1940 omits from the definition of an Investment Adviser “any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor.” Therefore, broker/dealers do not normally owe fiduciary duties. If, however, the broker/dealer gives investing advice, he or she may open himself or herself up to a breach of duty claim. However, this duty would not necessarily be the same duty as the one owed by an RIA. In fact, the SEC has recommended having a uniform fiduciary standard for RIAs and broker/dealers who give investing advice.
