7th Circuit finds investment firm shielded from fiduciary duty claim by power of attorney

An opinion from a state appellate court that was issued while the Southern Indiana District Court was considering a motion to dismiss in a fiduciary duty dispute did not change the federal judge’s decision to grant the motion, but it did alter the reasoning on which the 7^th Circuit Court of Appeals affirmed.

Joseph P. Allen IV, a resident of Crawfordsville, sued Maryland-based Brown Advisory LLC and Brown Investment Advisory & Trust Co. in 2019, asserting claims under Maryland law for breach of contract and breach of fiduciary duty. The complaint arose from Allen’s belief that Elizabeth Key, his daughter who had power of attorney over his finances, had withdrawn money for her personal use and incurred tax penalties, all of which depleted the value of his IRA accounts from $2.3 million to less than $600,000.

Also, Allen alleged his daughter and son sold two of his real properties and did not fully credit the proceeds to his Brown Advisory accounts.

Brown Advisory moved to dismiss for failure to state a claim. The investment firm argued it could not be held liable for breach of contract because it acted at the behest of Allen’s daughter, who had power of attorney. In addition, the firm pointed out that Maryland does not recognize a claim for breach of fiduciary duty as an independent cause of action arising out of a contractual relationship.

Before Senior Judge Robert Miller ruled, the Maryland Court of Appeals, which is the state’s highest court, issued a ruling in Plank v. Cherneski, 231 A.3d 436 (Md. 2020), holding that a breach of fiduciary duty can be a standalone cause of action.

Miller dismissed the case, agreeing the daughter’s power of attorney shielded Brown Advisory from liability. On the fiduciary duty claim, the judge did not address Plank and ultimately accepted what had become an obsolete argument: that Maryland did not recognize a cause of action for breach of fiduciary duty arising from a contractual relationship.

The 7^th Circuit noted that while Plank changed the grounds for dismissal, the decision to grant Brown Advisory’s motion still stood.

Essentially, Plank clarified that Maryland law that had been unsettled. In part, the ruling held that a plaintiff could plead breach of fiduciary duty when another cause of action, such as breach of contract, was available to remedy the same conduct.

The 7^th Circuit found Allen had to show the breach of duty claim fell within the scope of the fiduciary relationship. A breach would arise if Allen alleged facts that the investment firm invested his assets for its own benefit.

However, that was not the argument Allen made.

“Rather, Allen’s chief allegation is that the company should not have allowed Key to make certain withdrawals from his accounts,” Chief Judge Diane Sykes wrote for the 7^th Circuit. “As we’ve already explained with respect to the contract claim, Key’s power of attorney shields Brown Advisory from liability for this conduct. Changing the theory of liability to breach of fiduciary duty does not expose the company to liability because it had no fiduciary obligation to refuse to carry out transactions authorized by the power of attorney.”

The appellate court also upheld the denial of Allen’s motion for leave to file a second amended complaint. The court determined the deadline for amending the pleadings had already expired and Allen failed to establish good cause for his untimely motion.

The case is Joseph P. Allen, IV v. Brown Advisory, LLC, and Brown Investment Advisory & Trust Company, 21-1602.