This is about as plain vanilla an event as I could imagine. Ah, but the most excruciating, complicated lawsuits often arise from the most common of circumstances, as you are about to see.
In 1994, Newman Trowbridge Jr., an experienced lawyer, opened an IRA naming his wife as beneficiary. The IRA was opened at the predecessor of Capital One Investment Services LLC, and the account was subsequently “inherited” by registered representative Rick E. Schenck Sr.
By 1999, Trowbridge and his wife divorced after bitter and protracted proceedings. Trowbridge remarried, deleted his ex-wife as his designated beneficiary on several of his financial accounts — including his law firm's profit sharing plan — and substituted his estate as beneficiary. Trowbridge rolled over the balance of his profit sharing plan into his IRA, which quadrupled the balance of the surviving account.
In 2009, Trowbridge unexpectedly died, and his widow (also the estate executrix) obtained a court order requiring that all account holders pay funds over to the estate. Notwithstanding the order, Capital One paid the IRA balance to Trowbridge's ex-wife, whose name had never been removed as the named beneficiary.
In May 2010, Trowbridge's estate filed a FINRA arbitration claim against Capital One and Schenck alleging negligence and a breach of fiduciary duty when they failed to advise Trowbridge to designate Lee Trowbridge, now his widow, as the beneficiary of the IRA. Claimant sought at least $184,000, nearly $9,000 in interest, attorneys' fees of $25,000, costs of $16,425, and additional damages. (In the Matter of the FINRA Arbitration Between Succession of Newman Trowbridge, Jr. through its Executrix, Lee Trowbridge, Claimant, vs. Capital One Investment Services, LLC, and Rick E. Schenck, Sr., Respondents; FINRA Arbitration 10-02435, May 9, 2011.)
The defendants argued that the IRA passed outside of the estate (in a manner similar to a life insurance policy) and, as such, was not covered by the order.
In ruling in the defendants' favor, the arbitration panel noted that although the order expressly listed six accounts (including a non-IRA that Trowbridge maintained at Capital One), the disputed IRA was not among the accounts listed in the order. Consequently, the panel found that the payment of the IRA to the ex-wife did not breach the order.
Either out of desperation or a lawyer's ingenuity, the estate raised a “Know Your Customer Rule” claim suggesting that the defendants had a duty to periodically review Trowbridge's accounts. The estate argued that this duty required a review of named beneficiaries in order to ensure that those designated remained consistent with any changed circumstances in Trowbridge's life.
Clever But Not Persuasive
As clever as that “Know Your Customer” argument may have been, it failed to persuade the arbitrators. They gave considerable weight to Schenck's testimony that he seldom heard from Trowbridge except when the client made his annual IRA contribution, and then Trowbridge generally would issue specific investment instructions. Consistent with those facts, the arbitrators viewed Trowbridge as an intelligent, experienced lawyer who called his own shots.
Ultimately, the panel did the best it could with some uncomfortable facts. Trowbridge had no children and likely had no intention to retain his ex-wife as the beneficiary of his IRA account. Clearly, the circumstances compel the conclusion that he intended to leave the IRA to his widow rather than to his ex-wife.
Trowbridge was a skilled lawyer who managed his professional and personal financial affairs. Regrettably, he may well have simply forgotten to change his IRA beneficiary. To err is human, but to place the blame for such a mistake upon the defendants is not the arbitrators' proper role. Consequently, the FINRA panel dismissed the estate's case and recommended that the matter be expunged from Schenck's Central Registration Depository records.
Talk to enough Wall Street veterans and you will learn that the facts in this case are not that rare. Many supposedly sophisticated professionals and business persons simply fail to stay on top of their estate planning and, more often than not, the one thing that they overlooked is the one thing that turns their heirs' lives upside-down.