Iowa Supreme Court Extends Intended Beneficiary Duty Rule to Financial Advisors

January 2, 2014 | Kristine A. Tidgren

St. Malachy Roman Catholic Congregation v. Ingram, No. 12-1817, 2013 Iowa Sup. LEXIS 133 (Iowa Sup. Ct. Dec. 27, 2013)

Note: The Iowa legislature responded to this case by passing legislation effectively overruling its holding. See the new law here.

Overview

The Iowa Supreme Court has ruled that a financial advisor can owe a legal duty of care to a specifically identifiable beneficiary of a client’s estate plan if that financial advisor’s negligence causes the beneficiary to lose an intended inheritance. In St. Malachy, the Court found no reason to treat financial advisors differently from attorneys and life insurance agents in determining whether an actionable claim of negligence exists. “We see no reason to treat one kind of agent differently from another,” stated the Court, “so long as the plaintiffs are direct, intended, and specifically identifiable beneficiaries.”

Background Facts

In St. Malachy, a financial advisor who was a securities registered representative had a long-standing relationship with the decedent. In 1999, the financial advisor worked with the decedent and an attorney to create a revocable living trust and a charitable foundation. The attorney drafted the documents, and the advisor transferred the decedent’s assets, including his home, into the revocable trust. The revocable trust named the advisor as a successor trustee, and he acted as a director of the charitable foundation, which was to be funded upon the decedent’s death, to the extent necessary to minimize estate taxes.

In 2003, the decedent attempted to alter his estate plan, by executing a new will and a charitable trust agreement. The documents were drafted by a new attorney, who received the referral from the advisor. The advisor was “heavily involved” in the development of these instruments He informed the attorney of the decedent’s estate planning wishes before she met with the decedent, and the advisor’s assistant was present at the attorney’s one meeting with the decedent. The advisor did not inform the attorney of the existing revocable trust, and the attorney did not discover its existence or the fact that all of the decedent’s assets were titled in the trust, until after his death. As such, the revocable trust controlled the disposition of the decedent’s assets, and the new will and charitable trust executed by the decedent to alter that disposition were of no consequence.

The decedent’s last will specified that the decedent’s neighbor was to receive his house. The charitable trust, which was to be funded with the residue of the will, gave the trustees sole discretion to distribute income and principal to several named charities and other unnamed charities, as the trustees deemed appropriate. The controlling revocable trust provided for neither disposition.

After the decedent’s death, the neighbor and a charity named in the charitable trust filed a negligence action against the attorney and the advisor. A second charity originally named as a defendant was realigned as a plaintiff. The plaintiffs alleged that, as specifically intended beneficiaries of the will and charitable trust, they were injured by the defendants’ negligence in failing to ensure that the decedent’s wishes were implemented.

District Court Ruling

The district court granted summary judgment for the advisor, finding that he owed no duty to the beneficiaries of the will or the charitable trust. The district court stated, “Judicial creation of a duty to beneficiaries of a client’s estate or trust would lead to divided loyalties of securities registered representatives.” The district court continued, “The court simply cannot and should not create a duty for a securities registered representative that would, in any manner, require or encourage that individual to practice law without a license.”

Supreme Court Analysis

On interlocutory appeal, the Supreme Court disagreed. In reversing that portion of the district court’s order, the Court stated that the neighbor “was owed a duty by the decedent’s financial advisor” and that the neighbor had “raised a genuine issue of material fact as to whether the financial advisor’s negligent performance of his agency responsibilities caused [the neighbor] not to receive a specific devise set forth in the decedent’s will.”

In reaching this decision, the Court relied upon the rationale of Schreiner v. Scoville, 410 N.W.2d 679, 682 (Iowa 1987), which held that a lawyer owes a duty of care to the direct, intended, and specifically identifiable beneficiaries of the testator, as expressed in the testator’s testamentary instruments. The Court noted that it had subsequently extended the Schreiner decision to apply to non-testamentary documents in Holsapple v. McGrath, 521 N.W.2d 711, 713–14 (Iowa 1994)(duty applied to drafting of a deed) and to life insurance agents in Pitts v. Farm Bureau Life Ins. Co., 818 N.W.2d 91, 113-14 (Iowa 2012).

The Court stated that it saw no reason to treat one agent differently from another in cases where an agent’s negligence deprived an intended beneficiary of a devise “so long as the plaintiffs are direct, intended, and specifically identifiable beneficiaries.” 

The Court summarized its holding by stating that where “an agent negligently performs his or her duties to a principal, and as a result of that negligence a direct, intended, and specifically identifiable beneficiary of a written instrument executed by the principal does not receive the benefits set forth in the written instrument, the beneficiary is owed a duty by the agent and may have a cause of action against him or her.”

The Court was careful to clarify that it was not prejudging the ultimate outcome of the case. The question for the fact finder, the Court noted, would be whether the financial advisor or the attorney breached their duties to the neighbor, thereby causing him to lose his specifically identified inheritance.

The Court did affirm the portion of the district court’s order granting summary judgment to the defendants as to the claim by the charities. Because the trustees were granted “essentially unbridled discretion” to select charitable recipients to receive the income and principal of the trust, the fact and amount of damages were “too speculative” for either charity to recover.

Analysis and Conclusion

In this case, the advisor argued that he owed no duty to the beneficiaries because he was merely a securities registered representative, not an actual estate planner. Rather than looking to the advisor’s title, the Court looked to his actions to find that he had “done far more than merely recommending financial investments.” The advisor, the Court found, had a “general legal duty to exercise care in whatever services he did provide” as the decedent’s agent. The Court failed to address the district court’s apt policy concern that creating a new duty for a securities registered representative might lead to divided loyalties or require or encourage that individual to practice law without a license.

Yet the Court’s analysis seems to suggest that this advisor was indeed engaging in the unauthorized practice of law.  It is difficult to see how this advisor’s actions could have deprived an intended beneficiary of “benefits set forth in the written instrument” if he did not engage in the practice of law. Non-lawyers have no authority to develop such “written instruments.” Confined to its facts, this case could arguably stand only for the proposition that if a person—licensed to practice law or not—sets out to provide legal estate planning services to a client, he will be held to the same professional standard as a practicing attorney, including owing a duty of care to that client’s intended beneficiaries. It appears more likely, however, that this case, like Pitts v. Farm Bureau Life Ins. Co., is yet another expansion of long-held duty rules. This case never would have arisen had the attorney drafting the new will and charitable trust offered independent professional judgment to this client. She had an obligation to inquire about existing estate planning documents and could have avoided the resulting litigation involving the client if the client would have been required to complete a data sheet and a summary of assets, including a listing of how current title to each asset was held. Instead, it appears the attorney acted merely as a scrivener for an estate plan actually developed by the financial advisor.

St. Malachy serves as a warning to anyone assisting clients in any capacity with estate planning. Specifically, it highlights the dangers of professionals failing to operate within the boundaries of their professions. When the lines between financial advising and practicing law become blurred, clients and their beneficiaries stand to be harmed. St. Malachy establishes that duty rules won’t bar recompense in such cases.