Corporate Counsel Daily, did financial adviser-beneficiary exercise undue influence over client-testator?, (Jan 3, 2024)

By Jay Fishman, J.D.

Remand for reconsideration was appropriate since the facts could equally find or not find undue influence.

The District of Columbia Court of Appeals remanded a case to the District of Columbia Department of Insurance, Securities & Banking (DISB) for the DISB to reconsider whether an investment adviser (IA) exercised undue influence over his client who, in the year leading up to her death, made him the near sole beneficiary of her estate. The DISB found that the IA had violated the District of Columbia Securities Act by exercising undue influence over the client-testator (C-T) to whom he owed a fiduciary duty to protect her financial interests. The IA was set to inherit almost her entire $500,000 estate, but after the C-T passed away, the court ordered him to pay a $40,000 civil penalty, $10,000 in hearing costs, and $233,818.20 plus interest as restitution to the C-T’s estate (Divver v. D.C. Department of Insurance, Securities & Banking, December 28, 2023, Deahl, J.).

A long-term financial relationship that became more involved—or suspicious. The C-A became the IA’s client back in 1990 when he sold her a Medicare Supplement policy. At this time and up until a year before her death, the C-T was of sound mind and followed through on the C-T’s financial recommendations that included: (1) taking out an annuity whose value, at the end of her life, was $500,000; and (2) hiring the IA’s lawyer-friend to create a living trust for her.

Initially, the IA was set to inherit $10,000, the same amount the C-T bestowed on her nieces and nephews. However, when the C-T developed pancreatic cancer and dementia and moved into assisted living followed by hospice, thereby becoming increasingly isolated from her sister and the nieces and nephews, the IA took total control of her health care and finances by officially becoming her power of attorney. Moreover, the C-T changed the trust to make the IA her sole beneficiary (aside from some jewelry going to other relatives) even though the IA's firm prohibited investment advisers from becoming their clients’ beneficiaries.

Just before the C-T's death, the IA transferred $76,000 from her bank account to his and then, upon her death, attempted to cash the annuity, but the life insurance company holding the annuity ordered a stop payment that prevented the withdrawal.

The annuity suit and DISB’s investigation. Just after the C-T’s death, the life insurance company filed an interpleader action in Maryland to determine whether the IA or the C-T’s sister were entitled to the annuity. The suit was settled rather evenly, with the IA receiving $233,818.20 including his already withdrawn $76,000, while the sister received $309,818.20. Simultaneously with the interpleader action, a friend of the C-T became increasingly suspicious of the IA and got the DISB to investigate the matter, leading to the abovementioned decision against him.

IA’s appeal. The IA appealed the abovementioned DISB decision, arguing:

1. The DISB applied the wrong legal standard for determining undue influence;

2. The correct standard would have shown insufficient evidence for finding undue influence; and

3. The DISB had no authority to order restitution because there were no victims, specifically direct descendants—only the deceased C-T—who could be made whole.

Court’s decision—a mix. The court agreed with the IA that the wrong legal standard was applied and observed that the correct legal standard, when applied, could uncover facts stacking up equally for or against the presence of undue influence. A new DISB opinion that determined the presence of undue influence after subjecting the case to the court’s guidelines would absolutely permit restitution.

Wrong legal standard applied. Basically, the court determined that the DISB Commissioner applied a too-relaxed standard that contradicted DC court precedent. Precedent mandated proof of coercion for undue influence, not mere suspicion that one person was using undue influence over another. The Commissioner simply failed to produce any facts showing the IA coerced the C-T to make him her power of attorney or beneficiary. Also, the Commissioner incorrectly presumed that the IA’s status as the C-T’s fiduciary automatically catapulted his activities to the unjust enrichment realm using undue influence to get there.

The correct legal standard when applied. The court, however, remanded the case to DISB to apply the correct legal standard using the guidelines set forth in the court’s opinion. The court proclaimed that applying those guidelines on remand could potentially yield a case for or against the IA’s having exercised undue influence over the C-T. Facts showing undue influence could be: (a) the IA’s taking control over her finances once she was debilitated in assisted living and hospice without the presence of the previous beneficiaries; (b) his immediately cashing the $76,000 and then trying to cash the annuity; and (c) his failing to tell anyone that his firm prohibited his becoming his client’s near sole beneficiary. On the other hand, the IA’s having a long-term friendly financial relationship with the C-T long before her mental and physical health declines suggests that she was of sound mind when following his recommendations and, therefore, was not unduly influenced by him.

Restitution. The IA’s main arguments against restitution were: (i) that there were no victims whom restitution would make whole since he was, in the end, the C-T’s near sole beneficiary, which effectively allows him to keep the $233,000; and (ii) that the interpleader action’s settlement upon the C-T’s sister precluded her from going after him for restitution. Regarding (i), the IA emphasized the C-T had no direct descendants to be made whole following her changing the trust to benefit him. The court disagreed, however, declaring that the purpose of restitution is not simply to make victims whole but to disgorge the wrongdoer of ill-gotten gains. Hence, should the DISB find undue influence on reexamination of the facts, restitution to disgorge the IA of his wrongdoing would be proper.

Pertaining to (ii), the court pointed out that the settlement with the C-T’s sister would preclude her from going after the IA for more, but since the matter at hand is the C-T’s estate and not her sister’s estate, the settlement does not preclude the DISB from reexamining the IA’s behavior in relation to the C-T’s estate and, upon finding undue influence, order restitution against him for the reason stated in (i).

The case is No. 22-AA-169.

Attorneys: Stuart M.G. Seraina (Baldwin | Seraina, LLC) for Danny P. Divver. Thais-Lyn Trayer, Attorney General for the District of Columbia, for D.C. Department of Insurance, Securities & Banking.

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