FBO David Sweet IRA v. Taylor

Citations: 4 F. Supp. 3d 1282; 2014 U.S. Dist. LEXIS 35770; 2014 WL 1046877Docket: Case No. 3:13-cv-166-MEF

Court: District Court, M.D. Alabama; March 19, 2014; Federal District Court

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A dispute has arisen between Plaintiff FBO David Sweet IRA and Defendants Jessie B. Taylor, Jr. and Barbara Taylor over a real estate purchase contract, with the Plaintiff alleging breach of contract and seeking specific performance. Defendants filed a motion to dismiss, claiming the Plaintiff is a 'foreign corporation' not registered to do business in Alabama, thus barred by the state's 'door-closing' statute. In response, the Plaintiff contends it does not fall under this statute and, if it did, qualifies for an exception.

The Court converted the Defendants’ motion to dismiss into a Motion for Summary Judgment. After reviewing the parties' arguments and evidence, the Court denied the Defendants' motion. The Court confirmed it has subject-matter jurisdiction under 28 U.S.C. 1332 and found no contest regarding personal jurisdiction or venue.

The legal standard for summary judgment requires that no genuine dispute exists regarding any material fact, allowing the moving party to be granted judgment as a matter of law. The moving party must clearly indicate the basis for the motion and demonstrate the absence of genuine material fact disputes. If successful, the burden shifts to the non-moving party to present specific facts indicating a genuine dispute. Summary judgment is appropriate when the non-moving party fails to provide sufficient evidence to support its claims, as mere allegations without specific evidence are insufficient. The Court is obligated to view evidence in favor of the non-moving party when ruling on such motions.

David Sweet owns a Self-Directed Individual Retirement Account (IRA) managed by Equity Trust Company (ETC), which acts solely as a passive custodian without providing investment advice or having any fiduciary duty. On September 21, 2012, Sweet entered into a sales contract with Defendants to purchase property in Randolph County, Alabama, intending to use his IRA for the investment. The contract, executed solely by Sweet and the Defendants, identified the purchaser as "Equity Trust Company Custodian, FBO David Sweet IRA." Sweet claims Defendants breached the contract by failing to convey the property as agreed, leading him to file suit in the Circuit Court of Randolph County, which was subsequently removed to the United States District Court for the Middle District of Alabama.

The Court examined whether Sweet, as the beneficiary of the Self-Directed IRA, is a proper party-plaintiff under Alabama law. It noted that while Alabama law typically restricts beneficiaries from bringing actions against third parties, a Self-Directed IRA allows the owner to act as a trustee, managing and controlling the investments. The unique structure of the Self-Directed IRA permits the owner to have the powers of management and control, despite the custodian's lack of fiduciary duties, as outlined in ETC’s custodial agreement. Thus, the legal complexities surrounding the rights of beneficiaries and trustees are central to determining the appropriateness of Sweet as a party in this action.

ETC explicitly declines to offer any legal or tax services regarding the IRA, positioning itself as a "Passive Custodian." Sole management and control of the IRA is vested in Sweet, who is responsible for all investment decisions, akin to a trustee's role. The Court concludes that ETC functions merely as a holding entity while Sweet operates as the trustee of his Self-Directed IRA, allowing Sweet to properly file a lawsuit on behalf of the IRA.

Even if Sweet were considered a beneficiary rather than a trustee, exceptions to the prohibition on beneficiary lawsuits apply, particularly when a demand on the trustees is deemed futile. Defendants argue that ETC, as a fiduciary representative, should be the proper party in interest; however, ETC has contracted away any fiduciary responsibilities to Sweet, reinforcing that a demand would be futile. Thus, Sweet's suit is necessary for addressing Defendants' breach of contract, and the demand requirement is waived.

The Court further evaluates whether Alabama's door closing statute prohibits Sweet from pursuing a breach of contract action. Although Defendants identify ETC as a foreign corporation subject to this statute, Sweet and the IRA account are not classified as foreign corporations. The focus is on the status of the plaintiff, which is Sweet, FBO David Sweet IRA. Since Sweet is not a foreign corporation conducting business in Alabama, the door closing statute does not apply, making the breach of contract claim permissible. Consequently, Defendants’ Motion for Summary Judgment is denied.

The Court orders that Defendants’ Motion for Summary Judgment (Doc. 21) is denied and that Plaintiff must file an amended complaint by March 14, 2014, to reflect the correct party designation. An IRA serves merely as an investment vehicle for individuals like Sweet, rather than as a corporate entity.