Brown v. California Pension Administrators & Consultants, Inc. (45 Cal. App. 4th 333, 1996)

Opinion

EPSTEIN, J.

Appellants are investors or spouses of investors in self-directed individual retirement accounts (IRA’s) who sought to recover funds based on the failure of respondents, the trustee and administrator of their IRA’s, to notify them that the borrower of their funds had defaulted in payments to other investors. We conclude that express provisions in the documents governing the business relationship between the parties limited the duties of the trustee and the administrator. As a result, neither the trustee nor the administrator had an obligation to provide appellants with information about the performance of investments other than their own.

Factual and Procedural Summary

This action originally combined the claims of 41 individuals; only 23 of these individuals remain as parties to this appeal.

Appellants invested in self-directed IRA’s (Free Choice IRA’s) in which they made their own investment decisions. The investments they selected were purchased by Sanwa Bank California (Sanwa) as trustee, and administered by California Pension Administrators and Consultants, Inc. (CALPAC). The relationship between appellants as IRA investors and respondents CALPAC and Sanwa as administrator and trustee of the IRA’s was governed by several documents, including an Adoption Agreement, Plan Document, Participant’s Handbook, Disclosure Statement, and Investment Instruction. These documents will be described in detail in the “Discussion” portion of the opinion.

Prior to August 1988, appellants’ investments consisted of loans to L & H Finance, Inc., and its principal, Charles Lewis (collectively Lewis), for which appellants received 10-year, interest-only, unsecured promissory notes. Sanwa and CALPAC also acted as trustee and administrator for other IRA clients who loaned money to Lewis.

Sometime in 1986, Lewis stopped paying interest on promissory notes held in some IRA’s being handled by CALPAC and Sanwa for appellants and other investors. In August 1988, Lewis failed to pay principal due on a promissory note held in the IRA of one of these other investors. That investor made demand of CALPAC for payment of his Lewis note. CALPAC requested and Sanwa sent demand letters to Lewis, but Lewis did not pay the note. A similar sequence occurred in December 1988 in connection with a Lewis note held in the IRA account of another nonappellant investor. After August 1, 1988, appellants made additional loans to Lewis, some through their IRA plans (new IRA loans) and others outside their IRA plans (new outside loans).

Lewis filed for bankruptcy in September 1990. Sanwa received notification of this filing from the bankruptcy court by letter dated September 10, and promptly notified appellants. Appellants pursued claims against Lewis in the bankruptcy court, and filed actions in superior court against CALPAC and Sanwa. They alleged that despite knowledge by CALPAC and Sanwa in August 1988 that Lewis had ceased to make principal and interest payments on IRA notes held by other investors, C ALP AC and Sanwa failed to notify appellants of that fact. Had appellants been informed of Lewis’s failure to pay, they would not have made further unsecured loans to Lewis. Appellants sought to recover the amounts of their new IRA loans and their new outside loans. Their complaints included causes of action for breach of contract, negligence, negligence based on contractual duty, and breach of fiduciary duty.

In a ruling in one case which was applied to actions by all these appellants, the trial court sustained respondents’ demurrer without leave to amend to the cause of action for breach of fiduciary duty, and granted respondents’ motion to strike allegations for breach of contract based on new outside loans and appellant’s prayer for damages for emotional distress.

Respondents moved for summary judgment, which was granted. The court awarded respondents attorney fees and costs. Appellants filed timely appeals, and challenge the court’s rulings sustaining the demurrer, granting summary judgment, and awarding attorney fees and costs.

Discussion

I

Duty

In one of their four summary judgment motions, respondents argued that as a matter of law, they had neither a contractual nor a common law duty to notify appellants that Lewis had defaulted in payments on other IRA loans. “A defendant is entitled to summary judgment if the record establishes as a matter of law that none of the plaintiff’s asserted causes of action can prevail. [Citation.] To succeed, the defendant must conclusively negate a necessary element of the plaintiff’s case, and demonstrate that under no hypothesis is there a material issue of fact that requires the process of a trial.” (Molko v. Holy Spirit Assn. (1988) 46 Cal.3d 1092, 1107 [252 Cal.Rptr. 122, 762 P.2d 46].) An appellate court determines de novo whether there is a genuine issue of material fact and whether the moving party was entitled to summary judgment as a matter of law. (Daniels v. DeSimone (1993) 13 Cal.App.4th 600, 607 [16 Cal.Rptr.2d 615].)

Contractual Duty

We look first at whether respondents had a contractual duty to notify appellants about Lewis’s failure to pay interest or principal to other IRA investors. The parties agree that the relevant documents are the Adoption Agreement, Plan Document, Disclosure Statement, Participant’s Handbook, and Investment Instruction.

A. Adoption Agreement

CALPAC required that an individual opening or transferring a self-directed Free Choice IRA account complete an “IRA Participant Enrollment Form.” Paragraph C of the enrollment form, the “Adoption Agreement,” provides: “I hereby adopt, and agree to, the terms and conditions of the [CALPAC] Master Individual Retirement Account under which [Sanwa] (hereinafter Trustee) acts as Trustee and [CALPAC] (hereinafter Plan Administrator) acts as the Plan Administrator. . . . For purchases or sales of assets other than listed securities, I shall notify the Plan Administrator in writing of the specific investment, transaction broker, and other parties involved. [^ In connection with my purchase or sale of any listed security in my account, I shall place the order with my broker through the account opened by the Plan Administrator. My broker will contact the Plan Administrator for instructions in opening such account. Upon receipt from the broker of confirmation of the transaction, the Plan Administrator is hereby authorized to instruct the Trustee to undertake whatever steps are necessary to complete said transaction without further authorization by me. I hereby authorize and direct the Trustee to make payment and/or deliver securities against payment on the basis of such confirmation in absence of written instructions from me to the contrary. [^Q I hereby release and discharge the Trustee and Plan Administrator from, and agree to indemnify both the Trustee and Plan Administrator from and agree to indemnify both the Trustee and Plan Administrator against, and hold each harmless from, any and all claims, actions, or liabilities (and all expenses including attorney’s fees incurred in defending against any of the foregoing) arising out of the designation and directions set forth in this letter.” (Italics added.)

B. Plan Document

CALPAC’s “Master Individual Retirement Account” referred to in the Adoption Agreement was contained in an 11-page “Plan Document." Article VII of the Plan Document addresses the investment of trust assets. Paragraph 7.01 provides in part: “All Trust investments shall be made in accordance with directions given to the Plan Administrator in writing by the Individual, who shall select the media of investment, including reinvestment, disposal and exchanges, of all funds in the account. The Trustee and Plan Administrator shall have no discretion with respect to, and no responsibility for, such investments.” (Italics added.)

Paragraph 7.02 provides: “It is intended that the funds in an Individual’s Account shall be invested and reinvested in all types of investments allowable under the Code and designated from time to time as a permissible investment medium by the Trustee and Plan Administrator. No part of the Account shall be invested in life insurance contracts, and no part of the Account shall at any time be commingled with other property except in a common trust fund or a common investment fund qualified for the purpose of investing assets of individual retirement accounts.” Paragraph 7.02 describes types of investments which the individual can designate, including (a) savings accounts; (b) regulated investment companies; (c) annuity contracts; (d) stocks; (e) common trust fund; (f) automatic stock investment plan; (g) bonds; and (h): “Other Authorized Investments. The Individual shall have the right to direct that a specified portion, as determined by the Trustee and Plan Administrator, of his Account shall be invested in any other investment medium which is an authorized investment under the Code, and which is designated in writing from time to time as a permissible investment medium by the Trustee and Plan Administrator.”

Paragraph 7.03 provides: “Neither the Trustee nor the Plan Administrator shall have any duty or responsibility whatsoever to make any review of investments or to inquire into the propriety of making, selling, or retaining any investment, nor shall the Trustee or the Plan Administrator be accountable for any loss sustained by reason of any action taken or omitted pursuant to the provisions of this Article VII.” (Italics added.)

Article XIII describes the administration of the trust. Paragraph 13.01 provides: “The Trust shall be administered by the Plan Administrator who shall be responsible for the operation of the Trust in accordance with its terms. It shall be the responsibility of the Individual to determine the amount of the contributions and distributions to be made hereunder and neither the Trustee nor the Plan Administrator shall be responsible for any consequences to the Individual resulting from the making of contributions, investments or withdrawals. . . . The Plan Administrator shall determine all questions arising out of the administration, interpretation, and application of the Trust.” (Italics added.)

Paragraph 13.02 sets out the power and authority of the Trustee “to do all acts, to execute and deliver all instruments and to exercise for the sole benefit of the Individual any and all powers which would be lawful to it were it in its own right the actual owner of the property held, including by way of illustration, but not in limitation of the powers conferred by law, the following: FJD (a) To invest and reinvest trust assets (if directed to do so in accordance with the terms hereof) in savings or similar accounts, Certificates of Deposit or other deposits in a bank or savings and loan association, including those maintained by the Trustee: . . .”

Article XVI contains miscellaneous provisions, including paragraph 16.07: “Trustee and Plan Administrator may rely upon any direction, election, or notice by the Individual until receipt by them of notice of his death or incompetence which notice establishes such fact to their reasonable satisfaction. In the event any investment direction is, in the opinion of the Plan Administrator or the Trustee, ambiguous, the Plan Administrator and the Trustee need not act thereon, but the Plan Administrator shall promptly give Individual notice thereof.”

C. Disclosure Statement

Paragraph 8 of the “Disclosure Statement” for CALPAC Free Choice IRA’s contains language similar to that in article VII of the Plan Document regarding the individual’s responsibility to make investment decisions. The final portion of paragraph 8 provides: “Neither the Trustee nor the Plan Administrator shall have liability whatsoever for losses of any kind resulting from the making of any investment, from the retention of any specified investment unless and until you direct its liquidation and for a reasonable time thereafter, from any other action taken in accordance with your investment directions, from any failure of the Trustee or Plan Administrator to act in the absence of such investment direction, or from the exercise of the Trustee’s option to pay any charges, expenses, or other items incurred in connection with your IRA. [^Q Neither the Trustee nor the Plan Administrator shall have any duty, whatsoever to question, to review, or to make any recommendations in connection with the acquisition, retention, or disposing of any investments in your IRA.” (Italics added.)

D. Participant’s Handbook

Participants in CALPAC’s Free Choice IRA’s were given a “Participant’s Handbook and Appendix.” Section XII of the Participant’s Handbook describes investment procedures: “As the owner of a CALPAC ‘Free Choice’ IRA, it is your responsibility to select the investments with which to fund your plan.” (Italics added.) Various allowable types of investments are described in this section, including “Bankers Acceptances, Commercial Paper, Other Money Market Funds and Government Obligations: To invest in money instruments other than the CALPAC/Sanwa Bank C.D. Fund, you must send a directive letter to CALPAC stating the amount of money to be invested, the type of investment and the terms of the investment. (See Form G-l.) Since the interest payable in these types of investments is constantly changing, you should consult your investment advisor before making these types of investments.”

E. Investment Instruction

Each time an IRA participant decided to make an IRA investment, he or she was required to sign an “Investment Instruction.” This form stated in part: “/ understand and acknowledge that CALPAC, Inc. and Sanwa Bank California, Trustee, are making this investment on my instruction and that they, or either of them, are not responsible in the event that this investment does not prove successful, whether in whole or in part, or fails totally. [