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Zorbas v. United States Trust Co., N.A.

United States District Court, E.D. New York

September 29, 2014


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[Copyrighted Material Omitted]

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For Theodoros Zorbas, Plaintiff: Jeffrey H. Weinberger, LEAD ATTORNEY, New York, NY; Ian Y. Park, John E. Lawlor, Mineola, NY; Steven Cohn, Steven Cohn, PC, Carle Place, NY.

For United States Trust Company, N.A. n/n/a U.S. Trust/Bank of America Private Wealth Management, Bank of America, N.A., Defendants: David M. Marcus, LEAD ATTORNEY, Bingham McCutchen LLP, New York, NY; S. Elaine McChesney, LEAD ATTORNEY, Bingham McCutchen LLP, Boston, MA; Gillian Ivy Biron, Bingham McCutchen LLP, New York, NY.

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MARGO K. BRODIE, United States District Judge.

Plaintiff Theodoras Zorbas filed the above-captioned action against Defendants United States Trust Company, N.A. and Bank of America, N.A., in New York Supreme Court, Nassau County, alleging negligence, negligent misrepresentation, negligent supervision, breach of fiduciary duty, breach of express and implied contract, and breach of covenant of good faith and fair dealing. (Docket Entry No. 1.) Defendants removed the action to this Court on May 12, 2011, and now move for summary judgment. (Docket Entry No. 44.) Plaintiff cross-moves for summary judgment as to his breach of fiduciary duty claim.[1] (Docket Entry No. 43.) Defendants also move to strike Plaintiff's claim for damages, and to strike portions of Plaintiff's affidavit submitted in response to Defendants' motion for summary judgment as inadmissible. (Docket Entry No. 56.) For the reasons set forth below, the Court grants Defendants' motion to strike, denies Plaintiff's motion for summary judgment and grants Defendants' motion for summary judgment.

I. Background

United States Trust Company, N.A., (" U.S. Trust" ) is a division of Bank of America, N.A. (" BANA" ), which is a wholly-owned subsidiary of Bank of America Corporation. (Def. 56.1 ¶ 2; Pl. Resp. 56.1 ¶ 2.) BANA acquired U.S. Trust on July 1, 2007. (Def. 56.1 ¶ 3; Pl. Resp. 56.1 ¶ 3.) Plaintiff first became a client of U.S. Trust in 1996, when he opened an investment management account (" the Investment Account" ). (Def. 56.1 ¶ ¶ 5-6; Pl. 56.1 ¶ ¶ 5-6.) The parties dispute the nature of the relationship between Plaintiff and Defendants. According to Plaintiff, U.S. Trust's " overall relationship with [him] was that of a 'private wealth management company.'" (Pl. 56.1 ¶ 13.) Plaintiff claims that he was assigned a " private client manager," Frances Fernandez Beiro, " whose job function entailed management of both his borrowings from and investments with U.S. Trust's lending and investment management departments." ( Id. ¶ 13.) According to Defendants, while U.S. Trust provided overall private wealth management as an option for clients, Plaintiff chose not to avail himself of this full-service wealth management or financial planning, but rather engaged U.S. Trust to manage only " a sliver of his overall total wealth and assets," through the Investment Account. (Def. Resp. 56.1 ¶ 13.) Defendants contend that Beiro's responsibility was " to have an understanding of [Plaintiff's'] overall relationship with U.S. Trust, an understanding of his accounts . . . and to help manage his needs and his accounts," but she never played a role with respect to any of Plaintiff's investments. (Declaration of Frances Fernandez Beiro (" Beiro Decl." ) ¶ 3; Def. Resp. 56.1 ¶ 13.)

a. The Investment Account and its objectives

The Investment Account was managed by different portfolio managers, including

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James Dempsey who managed the account from 2004 until Plaintiff closed the Investment Account in 2010. (Def. 56.1 ¶ 8; Pl. Resp. 56.1 ¶ 8.) When U.S. Trust was acquired by BANA in 2007, U.S. Trust and Plaintiff signed an Investment Management Agreement (" IMA" ) to govern the Investment Account. (Def. 56.1 ¶ ¶ 26-27; Pl. Resp. 56.1 ¶ ¶ 26-27; Pl. 56.1 ¶ 4; Def. Resp. 56.1 ¶ 4.) The IMA incorporates by reference an Investment Management Agreement Terms Booklet (" IMA Booklet" ).[2] (Def. 56.1 ¶ 28; Pl. Resp. 56.1 ¶ 28; Pl. 56.1 ¶ 5; Def. Resp. 56.1 ¶ 5.) Pursuant to the IMA, Plaintiff selected a " Full Investment Discretion" type of account, which provided that:

Consistent with my investment objective and with any investment policy statement or investment guidelines (" the investment policy statement" ) that we agree upon from time to time, [U.S. Trust] will have sole and exclusive investment discretion over the Account (" Full Discretion Account" ). I understand that any investment policy statement will be annually reviewed and updated from time to time, and that any amendment will be confirmed to me in writing and become a part of this Agreement.

( IMA, annexed to Declaration of Jeffrey Weinberger (" Weinberger Decl." ) as Ex. C, and annexed to Beiro Decl. as Ex. 1, § 2.) The Investment Policy Statement associated with the Investment Account " contained [Plaintiff's] investment objective, and was reviewed annually." (Def. 56.1 ¶ ¶ 38, 40; Pl. 56.1 ¶ ¶ 38, 40; see, e.g., Investment Policy Statement dated Dec. 26, 2008, annexed to Beiro Decl. as Ex. 24 (" We understand the overall investment objective is All Fixed Income." ).) According to the parties, Plaintiff selected his own investment objective, with assistance from U.S. Trust which " helped [clients] get to that point by giving input about the markets, the opportunities and the risks that go with it." (Def. 56.1 ¶ 41; Pl. Resp. 56.1 ¶ 41.) According to Plaintiff, even though he chose his own investment objective, " asset allocation decisions were at all times within the portfolio manager's absolute discretion, for which [he] paid professional management fees . . . ." [3] (Pl. Resp. 56.1 ¶ 41.) The IMA Booklet states that:

[I]f [the client has] asked [U.S. Trust] to manage only a portion of [the client's] assets, according to a targeted investment objective, [the client] understand[s] that investing in one portfolio strategy and/or not diversifying my portfolio may not be prudent, and can increase [the client's] risk of loss. Furthermore, [the client] assumes all responsibility for the suitability and overall asset allocation of [the Investment] Account.

( IMA Booklet § 4(i); Def. 56.1 ¶ 33; Pl. Resp. 56.1 ¶ 33.)

The IMA Booklet provides that as a full investment discretion account, the Investment Account was subject to U.S. Trust's " sole and exclusive authority as set forth in the [IMA] to: . . . buy, sell and retain for [the Investment Account] any securities or other investments of any kind that are consistent with [Plaintiff's] investment policy statement, including any investment restrictions which [Plaintiff has] placed on [his] Account . . . ." (Def. 56.1 ¶ 30; Pl. Resp. 56.1 ¶ 30; IMA Booklet § 1.)

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According to Defendants, the investment objective for the Investment Account from June 16, 2006, through December 26, 2008, was " appreciation," described as " typically managed almost exclusively in equities." (Def. 56.1 ¶ ¶ 56-63; Beiro Decl. ¶ 11) The Statement of Investment Objectives dated October 25, 2005, states the investment objective for the Investment Account as " appreciation," which it describes as " almost exclusively in equities." (" Statement of Investment Objectives" dated October 25, 2005, annexed to Beiro Decl. as Ex. 3 (repeated as Ex. 18) at 1.) In December 2008, the investment objective was changed to " conservative." [4] (Def. 56.1 ¶ 63; Pl. Resp. 56.1 ¶ 63.)

According to Plaintiff's deposition testimony, he told Dempsey in a telephone call in Fall 2007 that his investment objectives had changed. (Deposition of Theodoras Zorbas (" Zorbas Dep." ), annexed to Declaration of Elaine McChesney (" McChesney Decl." ) as Ex. 1, 76:25-77:12.) In Fall 2007, Plaintiff had become concerned about potential fluctuations in the market, based on a conversation he had with Tom Courtney, a broker at Morgan Stanley, where Plaintiff had an investment account. (Zorbas Dep. 78:5-23.) Concerned about the potential for a " huge correction" in the market, Plaintiff called Dempsey in November 2007. ( Id. at 78:22-81:22.) Dempsey " told [Plaintiff] not to worry about it, [Courtney] doesn't know what he's talking about, . . . and, you know, [Dempsey] and U.S. Trust, they [did not] see a problem." ( Id. at 80:14-18.) Plaintiff called to instruct Dempsey that he wanted to change his investment objectives, but Plaintiff " did not tell [Dempsey] what to do, what to buy, because [he] never did." ( Id. at 80:19-24.) When asked if he instructed U.S. Trust " to change the objective, to get out of all equities and move to some other asset allocation," Plaintiff responded " I did not." ( Id. at 81:2-5.) Plaintiff explained that " I was happy [with] what [Dempsey] said. He convinced me that Mr. Courtney is wrong and there's nothing wrong with the economy, there's nothing wrong with the stock market and I have nothing to worry about, so after that phone call I felt good." ( Id. at 88:3-9.) In response to a question at his deposition as to why he had not fired Dempsey after Dempsey failed to make the changes requested by him in Fall 2007, Plaintiff said: " I thought he was wrong, but then if you look at April, the rest of the month and then the market went up." ( Id. at 89:13-15.)

According to Plaintiff, sometime in the spring of 2008,[5] Plaintiff called Dempsey " in a panic" and, at a lunch meeting with Dempsey, Plaintiff told Dempsey that he should not have listened to him " back in November" when Dempsey " talk[ed Plaintiff] out of it" after Plaintiff told Dempsey what Courtney said. ( Id. at 81:9-18; 82:13-20.)

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Dempsey told Plaintiff " it was just a correction, nothing to worry about," but said that " he was thinking maybe he [would] take some money and give it to [a] hedge fund." Dempsey " didn't make a decision right there, but he was going to do -- we left it that he was going to do something about it." ( Id. at 82:25-83:3.) At his deposition Plaintiff was asked if they " specifically discuss[ed] whether you should move to all cash," and Plaintiff responded " I did not. I had no -- I left it up to him. All I said, I don't want to lose my money." ( Id. at 83:15-19.) When asked why he had not followed up with Dempsey after receiving monthly account statements between March and November 2008 showing that the investment objective and asset allocation had not been changed, Plaintiff responded, " when I spoke to [Dempsey] in March [2008] he never came back and then he kept telling me in March how the market is going to turn around, the market did turn around so I figure he's right again. I trust him a hundred percent, it was his decision." ( Id. at 160:22-161:3.)

b. The loans

Plaintiff obtained several business and personal loans from U.S. Trust. (Def. 56.1 ¶ 10; Pl. Resp. 56.1 ¶ 10.) Plaintiff signed a Commercial Pledge Agreement on September 20, 2007, for a loan of $2.75 million, pledging " all investment property . . . held by [U.S. Trust], whether now existing or hereinafter acquired, including . . . any and all securities accounts." (Def. 56.1 ¶ 3; Pl. Resp. 56.1 ¶ 13; Commercial Pledge Agreement dated September 20, 2007 (" Commercial Pledge Agreement" ), annexed to Beiro Decl. as Ex. 11 at 1.) According to the Commercial Pledge Agreement, the aggregate value of the assets in the Investment Account had to be at least a specified percentage of the value of the assets, known as the " advance rate." (Def. 56.1 ¶ ¶ 13-16; Pl. Resp. 56.1 ¶ ¶ 13-16; see Commercial Pledge Agreement at 6.) If the value of the assets ever declined to the point where the amount of the loan exceeded the advance rate, U.S. Trust had the right to make a " collateral call," which required Plaintiff to either post additional collateral in support of the loans or pay down the amount of the loan until the loan to collateral ratio reached the specified percentage. (Def. 56.1 ¶ ¶ 13-16; Pl. Resp. 56.1 ¶ ¶ 13-16.) The Commercial Pledge Agreement provided in pertinent part:

Lender may sell the Collateral, or any part it chooses, or exercise any or all other rights or remedies that are in any manner provided for in this Agreement or provided by applicable law, upon the occurrence of any one or more of the following . . . [a]nything has happened or happens which Lender reasonably believes might adversely affect its interest in or the value of the Collateral or any other property securing any of the Liabilities . . . . or [] the Collateral has declined, or threatens to decline, in value . . . ."

( Commercial Pledge Agreement at 4.)

c. 2008 market crash and collateral calls

On July 14, 2008, U.S. Trust informed Plaintiff in writing that it was issuing a " collateral" or " margin" call on the Investment Account. (Def. 56.1 ¶ 111; Pl. Resp. 56.1 ¶ 111; Pl. 56.1 ¶ 29; Def. Resp. 56.1 ¶ 29.) According to Defendants, Plaintiff instructed Dempsey to " raise cash" (that is, liquidate the stocks), in the Investment Account in order to satisfy the collateral call. (Def. 56.1 ¶ 120.) U.S. Trust also had standing instructions or permission to liquidate the stocks as needed to satisfy any collateral calls. (Def. 56.1 ¶ 121.) Plaintiff disputes giving this instruction; according to Plaintiff, after he received the July 2008 margin call letter, he received a

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voicemail message from Dempsey that said " do not worry about the letter, everything is okay, everything is under control." (Zorbas Dep. 114:8-23.) U.S. Trust liquidated some of the equities in the Investment Account to cash and used that cash to " cover the margin call." (email dated July 15, 2008, from Dorothy Doyle, annexed to Beiro Decl. as Ex. 40; see Def. 56.1 ¶ 120.)

U.S. Trust made three subsequent collateral calls on the Investment Account in 2008, the last of which was on September 5, 2008. (Pl. 56.1 ¶ ¶ 30-32.) In September 2008, Plaintiff chose to sell stock in the Investment Account to satisfy the last margin call. (Def. 56.1 ¶ 132; Pl. 56.1 ¶ 132.) Sometime between September 8 and September 10, 2008, Plaintiff instructed Dempsey to " liquidate the [Investment] Account into cash." (Def. 56.1 ¶ ¶ 133-34; Pl. Resp. 56.1 ¶ ¶ 133-34.)

d. Waiver of conflict of interest

According to Defendants, on November 3, 2008, Plaintiff executed a Waiver of Conflict of Interest, Acknowledgment and Release. (Def. 56.1 ¶ 137.) This waiver provided that:

The Bank will serve in a dual capacity as a result of your investment services/trust relationship and the Credit requested, which can create a conflict between your interest and the interests of the Bank. The Bank, as lender, shall have and may exercise the same rights and powers as a lender that is not acting as trustee and/or investment manager. Such rights and powers, including the disposition and sale of any and all assets pledged as collateral for the Credit, may be contrary to your interests and/or investment objectives. Any action taken by the Bank against investment/trust assets pursuant to the loan documents shall not be a breach of its fiduciary duties under the terms governing your investment/trust account.

( Waiver of Conflict of Interest dated Nov. 3, 2008, annexed to Beiro Decl. as Ex. 42.) Defendants contend that Plaintiff signed another similar waiver on January 21, 2010, and on July 30, 2010. (Waiver of Conflict of Interest dated Jan. 21, 2010, annexed to Beiro Decl. as Ex. 43; Waiver of Conflict of Interest dated July 20, 2010, annexed to Beiro Decl. as Ex. 44.) These waivers required Plaintiff to release Defendants and to indemnify them and hold BANA harmless. They provide in pertinent part:

I further release, indemnify and hold harmless Bank of America, N.A., in its corporate capacity and in its capacity as investment manager and/or trustee, . . . from and against any claim, action, liability, loss, damage, or expense, of any nature whatsoever, arising out of or relating to any allegation of a conflict of interest or breach of fiduciary duty as a result of any action taken by Bank of America, N.A., as permitted in the document relating to the Credit.

( Waiver of Conflict of Interest dated Nov. 3, 2008, at 2.) Plaintiff denies signing these documents, disputes the authenticity of his signature on these documents, and asserts that he did not meet with Beiro or waive any claims. (Zorbas Decl. ¶ 14.)

II. Motion to Strike

Defendants move to strike paragraphs 6 through 9 of Plaintiff's Declaration, submitted in support of his opposition to Defendants' motion for summary judgment, as inadmissible under the " sham affidavit" rule.[6] ( See Defendants' Memorandum in Support of Motion to Strike, Docket Entry

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No. 57 (" Def. Strike Mem." ).) According to Defendants, statements in this declaration directly contradict Plaintiff's deposition testimony, and raise issues that were not ...

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