Morton v. Aizenberg

Background

Daniel and Juliette Morton alleged that Salo Aizenberg and Maytal Asset Management, LLC, doing business as Downtown Investment Advisory, mishandled a discretionary investment account. The Mortons alleged that Aizenberg recommended adding margin to their portfolio, described the risk of a margin call as negligible, and later reassured them that their account was safe during the market decline associated with the coronavirus pandemic.

According to the complaint, Interactive Brokers, the defendants’ custodian firm, liquidated the Mortons’ holdings on March 18 and 19, 2020, because of violations of margin-risk limits. The Mortons alleged that they lost more than $2.5 million. They asserted claims for breach of fiduciary duty, negligence, and unjust enrichment.

Rule 12(b)(6) Standard

The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which asks whether a complaint contains enough factual allegations to state a plausible claim for relief. The court treated the complaint’s well-pleaded factual allegations as true for purposes of the motion. It also considered the Investment Advisory Contract because the complaint relied on that contract and it governed the parties’ relationship.

Breach of Fiduciary Duty

Under New York law, a fiduciary duty generally does not arise beyond the parties’ contract unless special circumstances create a relationship involving a higher level of trust. The court explained that a manager of a discretionary investment account owes duties embodied in the agreement to manage the account consistently with the client’s investment objective.

The court found that the Mortons had not alleged that the defendants managed the account in a way incompatible with the investment objectives stated in the Advisory Contract. It therefore found no breach of fiduciary duty and dismissed this claim without prejudice.

Negligence

A negligence claim requires a duty, a breach, and an injury caused by the breach; the injury must also be foreseeable. The court held that the Mortons had not adequately alleged a duty independent of the Advisory Contract. It dismissed the negligence claims without prejudice.

Unjust Enrichment

Unjust enrichment is a legal theory used when no agreement governs the parties’ obligation. The court held that the valid and enforceable Advisory Contract governed the parties’ relationship and that the unjust-enrichment claim duplicated or replaced a contract-based claim. It dismissed that claim with prejudice.

Disposition

The court granted the defendants’ motion to dismiss. The breach-of-fiduciary-duty and negligence claims were dismissed without prejudice, and the unjust-enrichment claim was dismissed with prejudice. The court granted the Mortons leave to replead the claims dismissed without prejudice by filing an amended complaint by April 28, 2023. It stated that failing to do so without good cause would result in dismissal with prejudice of those claims.