Court Dismisses Fraud Claim, But Sustains Breach of Fiduciary Duty Claim, in Financial Exploitation Case

• Posted on: May 26 2019

Financial exploitation of seniors and vulnerable adults is all too common in today’s day and age. According to a MetLife study, titled “Broken Trust: Elders, Family & Finances,” about one million seniors lose an estimated $2.6 billion annually from financial exploitation. In 2011, MetLife updated its estimate to at least $2.9 billion. Other, more recent studies estimate the losses to exceed $36 billion a year, 12 times the MetLife estimate.

Financial exploitation occurs when individuals misappropriate the financial assets and property of elderly and vulnerable adults for profit or personal gain, often without the knowledge of their victim. According to a 2016 study by the New York State Office of Children and Family Services, titled “The New York State Cost of Financial Exploitation Study,” approximately five million seniors and vulnerable Americans are financially exploited each year.” (Here.)

The financial exploitation of senior and vulnerable adults takes many forms. The most common forms include: churning; unauthorized trading; unsuitable investing; over-concentrating an investor’s portfolio in a single type of investment or industry segment; and misrepresenting the risk or potential returns of an investment product for the purpose of generating high commissions.

In prior posts, this Blog has written about the financial exploitation of the country’s senior population. (Here, here, here, here, and here.) As noted in these posts, unscrupulous professionals (such as stockbrokers, financial advisors, and insurance brokers) often exploit the lack of financial sophistication that many elder and vulnerable adults possess, as well as the trust they place in professionals having a position of authority. They capitalize on the fact that seniors and vulnerable adults are often hesitant to admit they do not understand what is being presented to them.

In today’s post, this Blog looks at Jackson v. Ffriend, 2019 N.Y. Slip Op. 31386(U) (Sup. Ct. N.Y. County May 16, 2019) (here), a case involving the sale of a $1 million “life only” annuity by insurance agents with the knowledge that the buyer was eighty years old, in poor physical and mental health, and a resident in an assisted living facility.

Jackson v. Ffriend

Background

In August 2016, defendants sold Phyllis Harrison-Ross, M.D. (“Harrison-Ross”) a $1 million single premium immediate life annuity (the “Annuity”) from defendant, Security Mutual Life Insurance Company of New York (“Security Mutual”). Defendants, Ivanhoe V. Ffriend (“Ffriend”) and Ffriend Enterprises, Ltd. (“Ffriend Enterprises”), acted as the producing agents for Security Mutual on the transaction.

The annuity contract obligated Security Mutual to pay Harrison-Ross $8,637.87 per month for the remainder of her life. Upon Harrison-Ross’ death, Security Mutual’s payment obligation would end.

On September 24, 2016, the Annuity went into effect and Harrison-Ross began receiving the monthly payments. On January 16, 2017, Harrison-Ross, at the age of 80, died of lung cancer and Security Mutual ceased the annuity monthly payments. Security Mutual had made four payments to Harrison-Ross, before its payment obligation ended.

Plaintiffs, Jane Jackson, Susane K. Berg (“Berg”), and Lewis E. Duckett (“Duckett”), as co-executors of the Estate of Phyllis Harrison-Ross (the “Estate”), demanded payment to the Estate of the unpaid balance under the Annuity. Security Mutual refused to make the demanded payment.

Plaintiffs commenced the action to recover the unpaid funds. Plaintiffs alleged that Defendants fraudulently induced Harrison-Ross to purchase the Annuity and breached their fiduciary duty to her by inducing her to purchase a financial product that was unsuitable and unreasonable given her age, inability to handle her personal financial affairs, state of health, reduced life expectancy, and financial circumstances, and that other investment strategies would have better suited her needs. Plaintiffs asserted causes of action for fraud, fraudulent inducement, rescission, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, unjust enrichment, negligence, and violations of the Insurance Law, Insurance Regulations, Title 11, Part 224 and General Business Law § 349.

Defendants moved to dismiss the complaint, contending that Harrison-Ross was fully aware of, and understood, the terms of the Annuity and their consequences, when she executed the Annuity contract. In opposition, plaintiffs contended that the motion should be denied as premature and plaintiffs should be permitted to conduct discovery regarding Harrison-Ross’ state of mind, comprehension of the Annuity terms, and ability to handle her financial affairs in 2016.

The Court’s Decision

The granted the motion in part and denied it in part.

No Fraud

As readers of this Blog know, to plead a claim for fraud, a plaintiff must allege “a representation of a material existing fact, falsity, scienter, deception and injury.” New York Univ. v Continental Ins. Co., 87 N.Y.2d 308, 318 (1995) (internal quotation marks omitted); Nicosia v. Bd. of Mgrs. of Weber House Condominium, 77 A.D.3d 455, 456 (1st Dept. 2010).

Similarly, to plead a claim for fraudulent inducement, a plaintiff must allege facts demonstrating “the misrepresentation of a material fact, which was known by the defendant to be false and intended to be relied on when made, and that there was justifiable reliance and resulting injury.” Braddock v. Braddock, 60 A.D.3d 84, 86 (1st Dept. 2009).

Under either claim, a plaintiff must comply with CPLR § 3016(b), that is, plead fraud with particularity. The reason for the requirement is “to give adequate notice to the court and to the parties of the transactions and occurrences intended to be proved.” Accurate Copy Serv. of Am., Inc. v. Fisk Bldg. Assoc. L.L.C., 72 A.D.3d 456, 456 (1st Dept. 2010). Conclusory allegations are insufficient to state a fraud claim. Daly v. Kochanowicz, 67 A.D.3d 78 (2d Dept. 2009).

Against the foregoing standards, the Court found that plaintiffs “fail[ed] to plead any actionable misrepresentation or material omission of fact by defendants.” Slip Op. at *5. The Court explained that Plaintiffs did “not identify any sales presentations, materials, or marketing techniques” that were purportedly false. Id. Nor did plaintiffs “specify the substance of the alleged misrepresentations,” or identify “when, where, and by whom, other than Ffriend, the alleged misrepresentations were made.”  Id. Further, “Plaintiffs [did] not specify what other annuities or investment strategies were available and better suited to Harrison-Ross’ needs.” Id. Instead, plaintiffs merely alleged in conclusory fashion that Defendants “falsely and fraudulently represented to Phyllis Harrison-Ross that the subject annuity would serve her financial interests given her health, life expectancy and financial needs.” Id., quoting the complaint (internal quotation mark omitted).

Moreover, plaintiffs failed to demonstrate that Harrison-Ross was deceived by anything that Defendants said to her. Id. In fact, the record showed that she understood the terms of the Annuity, i.e., that the payments would cease upon her death. Id. at **6-7.

The Court found support for its holding in Muller-Paisner v. TIAA, 289 Fed. Appx. 461 (2d Cir. 2008), and 528 Fed. Appx. 37 (2d Cir. 2013). There, a 70-year-old professor, in ill health, purchased a fixed annuity from the defendants for more than $1 million, which represented the bulk of her accumulated assets. To recover the purchase price, the professor needed to live about twelve years after the purchase date. Like in Jackson, the annuity paid the professor $8,000 per month for life, which would terminate at her death. The professor wrote letters to the defendants acknowledging the terms of the annuity. The professor died six months after purchasing the annuity, having collected only $48,000; the remainder of the payments inured to the benefit of the defendants. The professor’s estate sued, alleging, in part, fraud and breach of fiduciary duty. The Second Circuit affirmed the dismissal of the fraud claims. Significantly, the court found that there was no misrepresentation as the professor acknowledged that all payments would cease after her death and the annuity contained language that provided for no inclusion of beneficiaries and a guarantee period.

Accordingly, the Court dismissed the fraud and fraudulent inducement claims, concluding that “Harrison-Ross’ own words and the terms of the annuity demonstrate[d] the unsustainability of the fraud claims.” Slip Op. at *8.

Breach of Fiduciary Duty

The Court granted the motion to dismiss the breach of fiduciary duty claim against Security Mutual. Slip Op. at *9. Under “long established” New York law, there is no fiduciary relationship “between an insurance company and the insured.” Id., citing Rabouin v. Metropolitan Life Ins. Co., 182 Misc. 2d 632, 634 (Sup. Ct. N.Y. County 1999), aff’d, 282 A.D.2d 381 (1st Dept. 2001) (citation omitted). The reason being “‘[e]xcept as required by statute, insurance companies deal with insureds at arm’s length. No relation involving trust or confidence is present.’” Id., quoting New York Hotel Trades Council & Assn. Ins. Fund v. Prudential Ins. Co. of Am., 1 Misc. 2d 245, 250 (Sup. Ct. N.Y. County 1955), aff’d, 1 A.D.2d 952 (1st Dept. 1956). Thus, held the Court, “the branch of the claim asserted against Security Mutual is fatally defective as a matter of law.” Slip Op. at *9.

However, as to Ffriend and Ffriend Enterprises, the Court held that plaintiffs sufficiently stated a cause of action for breach of fiduciary duty, necessitating discovery “to glean additional information from defendants” about the nature of the relationship between them and Harrison-Ross. Id.

The Court noted that there is no fiduciary duty between an insurance agent or broker “[i]n the absence of a special relationship.” Cathy Daniels, Ltd. v. Weingast, 91 A.D.3d 431, 433 (1st Dept. 2012). This is especially so, “when an insurance broker or financial advisor … does not have discretionary authority over [the] client’s assets or investments.” Slip Op. at *10, citing Barrett v. Grenda, 154 A.D.3d 1275, 1278 (4th Dept. 2017). Notwithstanding, “where the insured can ‘establish the existence of a legally cognizable special relationship with their insurance agent[s]’, a duty may arise in the insurance context upon the showing of the requisite trust and confidence.” Id., quoting Murphy v. Kuhn, 90 N.Y.2d 266, 272 (1997). Courts have found a special relationship under circumstances in which an insurance broker maintains a long-time relationship with the client and sells that client an annuity, or other insurance product, knowing that the client is elderly and in poor physical and/or metal health. Muller-Paisner v. TIAA, 528 Fed. Appx. 37, 42 (2d Cir. 2013) (insurance broker sold 70-year-old investor in ill health an annuity knowing it was “against ‘normal logic.’”).

The Court found that the over two decade long relationship between Ffriend and Harrison-Ross, as well as the fact that Ffriend or Ffriend Enterprises “may have had discretionary authority over Harrison-Ross’ financial accounts or investments,” sufficed to establish a special relationship akin to a fiduciary one. Slip Op. at **10-11. “Indeed,” said the Court, “defendants admit[ted] the existence of that relationship. Id. at *10.  “The relationship between Ffriend and Harrison-Ross,” observed the Court, “reached beyond the typical professional procurement of insurance products to even extending a personal loan to her as well as Ffriend’s wife acting as Harrison-Ross’ attorney for estate planning purposes.” Id. at **10-11. Thus, “[a]ccepting the … facts as true, plaintiffs have alleged the requisite trust and confidence to create a special relationship between Ffriend and Harrison-Ross.” Id. at *11.

“For those reasons,” held the Court, “the branch of the motion to dismiss the fourth cause of action for breach of fiduciary duty is granted as to defendant Security Mutual only, and is otherwise denied.” Id.

Takeaway

An annuity is a complex financial product. It is an investment contract between the buyer (often a retiree, or a soon-to-be-retired person) and an insurance company in which the buyer makes an upfront payment or a series of payments in return for periodic disbursements (typically, monthly) beginning either immediately or at some point in the future.  The purpose of an annuity is to provide the investor with a steady stream of income during retirement. Insurance brokers and agents often receive substantial commissions for selling an insurance company’s annuities.

Over the past few years, the sale of annuities, and other insurance products, to America’s seniors has been seen as a “way to take advantage of the U.S. senior population.” See Investment News, “Elder Financial Abuse Grows More Prevalent In Annuity, Life Insurance Products” (Feb. 11, 2016) (here); see also Pittsburgh Post-Gazette, “As Annuity Sales Soar, Fraud Claims Have Increased” (Dec. 10, 2018) (here). According to regulators, annuities can be unsuitable for seniors, especially those in ill health and/or having a shorter life expectancy (as in Jackson and Muller). See NYS, Dept. of Fin. Servs., “Elder Financial Exploitation” (noting that seniors “most vulnerable” to exploitation “tend to be between the ages of 80 and 89”) (here). Among the reasons, reduced liquidity and the inability to receive the benefit of the initial investment.

This is not to say that all annuity products are per se unsuitable. Financial products, such as annuities, are often developed specifically for seniors because they offer benefits that are created for their circumstances. Whether such products are suitable requires a fact-intensive inquiry. And, as Jackson demonstrates, the inquiry must include the existence of a fiduciary or special relationship.