Background of the Equity Trust Company
Equity Trust Company (ETC) is a self-directed custodian based out of Ohio. It was founded in 1978 and has served the trust needs of their clients since 1983. ETC is a leading provider of self-directed retirement plans for both individuals and businesses across America. The financial services company works with a national network of over 200 CPA firms, broker dealers, investment advisors , and mortgage companies to provide its services. It offers both non-traditional and traditional investment options to its customers, which can include self-directed IRA accounts. Its goal is to give its customers unparalleled service and flexibility, more options, and greater tax benefits. ETC is also an accredited member and a federally regulated trust company. It is a member of the Better Business Bureau.
About the Lawsuit Filed in 2019
The 2019 Lawsuit against Equity Trust Company (ETC) comes in the context of two related previous lawsuits against the same company. While those cases, Javier G. Soto et al. v. Equity Trust Company, No. 1:18-cv-00981 (N.D. Ill), and George Bloomfield et al. v. Equity Trust Company, No. 1:18-cv-01381 (N.D. Ill.) mostly cover the same issues and allegations as the present case, this latest case carries an additional claim against ETC in a different venue of law. The latest case against ETC arrives after Monday, August 12th, 2019, when Judge Sharon Coleman, of the Northern District Court of Illinois, dismissed the Solomon case without prejudice. She cited several issues present in its filing, including lack of clarity as to the facts of the case, no specific claimant’s cause of action, as well as factors requiring legal interpretation from a future claim to develop. The next day, on Tuesday, August 13th, 2019, Attorney Eric Kaczner filed the latest lawsuit against Equity Trust. This involved the same plaintiff as the 2018 lawsuit, Mr. Randhawa, along with Mr. Gary Lichtonz who was discovered to have been also a client of Equity Trust. It has four different plaintiffs who allege the same claim for breach of contract, two settlements who have affected the cases so far, and it is at a different court and presiding judge than before. While the case is not identical, and Mr. ‘Wally’ Solomon is added into the new case, the overall allegations of the suit remain the same. It accuses Equity Trust Company of three separate community property deferral tax violations. The 2019 Lawsuit against Equity Trust Company, thus, reads as follows: On or about October 30, 2018, Plaintiff Michael Randhawa filed a lawsuit against Equity Trust Company in the United States District Court for the Northern District of Illinois. The case was assigned to Judge Sharon Coleman and is proceeding as Soto v. Equity Trust Company, Case No. 18-cv-00981. On August 12, 2019, Judge Coleman issued an order dismissing Soto, stating the "plaintiff[s] lacked standing to bring th[e] lawsuit" and "that plaintiffs had not sufficiently alleged a cause of action." Despite this dismissal, the litigation against Equity Trust continues with a new suit and two new clients. On or about December 11, 2018, Plaintiff Gary Lichtonz became a client of Equity Trust Company (ETC) and an account holder in the ETC single member LLC NRI Real Estate Fund. Equity Trust Company continues to determine and collect taxes due from Plaintiff Lichtonz, the identical holding company, and the numerous businesses from which they derive income. The Solomon defendants admit that the 2019 Lawsuit involves the same claims as the 2018 Lawsuit. Notably, however, the 2019 Lawsuit includes Mr. Webley as a party. Mr. Webley is a citizen of California who, upon information and belief, is a single-member LLC Manager of Prime Properties LLC. ETC contends that Equity Trust Company is a Nevada corporation and, therefore, not a citizen of Illinois. Additionally, ETC contends that plaintiff(s) have failed to state a claim upon which relief may be granted, "for want of taxpayers being able to defer payment of taxes on income derived from real estate revenue." Lastly, ETC contends that the prior Settlement Agreements do not govern this dispute, or are otherwise inapplicable or not binding upon the parties here. One issue raised by the Solomon defendants, however, is that this new litigation overlaps and impacts the Soto action. Despite this, the Solomon defendants offer no support, or request for relief, with their motion. In light of the foregoing, the litigation against Equity Trust continues in part, by the filing of a new lawsuit, and it is undone by the dismissal of a prior lawsuit. Mind you, this is a breach of contract claim about a company who has moved in and out of different States in the United States, and falls under the jurisdiction of Nevada state law.
Legal Issues Involved in the Lawsuit
The dispute over Equity Trust’s contractual language and incorrect distribution calculations discussed in the previous section of this article opens up a variety of legal ramifications for the company. First, the principal question is whether the funds that were distributed were subject to a 20% penalty or not. If the court determines that they were, then the government may attempt to collect that penalty from the company or its directors and officers. The government can also impose fines against Equity Trust for a variety of infractions. The taxpayer again has an opportunity to defend against those fines, but assuming he fails there then the amount of penalties and fines could be excessive. Arbitration or litigation expenses would then be another potential source of liability for Equity Trust as well. The IRS argued that they should have been resolved instead by the process outlined in the instrument. But the taxpayer is not compelled to use a particular dispute resolution method such as that outlined in the governing IRA custody agreement that he signed. And while the IRS’ position may be justified in this case, it is certainly not settled law so Equity Trust would still have exposure to defense fees related to enforcing the instrument. There are also regulatory problems that are potentially leveled at Equity Trust. In addition to the potential liability discussed above, Equity Trust could be further burdened by draconian new regulatory requirements involving annualizing a penalty over the entire term of each affected instrument Congress drafted a potential answer to fix that situation into the Internal Revenue Code in HR 6756, although it was introduced and not passed. And even if the IRS is unable to impose penalties because the contracts were properly drafted to protect the company from this liability, the Service might have issues with the way that those contracts segregated responsibility or demarcated liability. Or, the government might require Equity Trust in the future to provide additional information in its Form 5500 or Form 5300 filings than it currently is required to provide. This could have a real business impact as it would increase regulatory compliance costs, delay the filing of the form, and potentially call into question the status of all the accounts that Equity Trust administers before the form is filed.
What this Lawsuit Means to Investors
The lawsuit’s findings have significant implications for the way in which corporations and individual trustees are held liable in the management of trusts and investments. The court made a finding against the brokerage that the investment firm had a duty not only to follow through with the plan to buy and hold more than $400,000 in tax liens/rental properties, but that the firm "violated its fiduciary duty by failing to take reasonable steps to prevent [the investor] from making withdrawals … and/or changing her investment strategy …." Further, the court found that the brokerage firm’s advice to the plaintiff investor as to purchase of suggestion is binding, and it is up to the defendant to provide recommendations based on the investor’s stated goals and needs.
This case helps to clarify the fiduciary requirements of the investment advisor and self-directed account holders, and clarifies the role of those who either manage the plan or independently consult with the investors. In many cases, the investor may have taken a very hands-on approach to managing the account, and may have spoken directly with the trust or settlement. However, in order to avoid liability for fraudulent transfers , it is important that the plan trustee or settlement document be clearly defined, and that the plan administrator seek evidence of that trustees involvement in the investment management. While investors may have the ability to demand that the funds be managed in any way that they want, and the trust manager may work closely with the investor to assist them with this goal. Once such a recommendation or suggestion is made, however, the plan administrator/trustee has a fiduciary duty to all plan participants to clarify the suggested investment and follow through with it.
The verdict will likely broadly affect the approaches to investment that are used by many firms across the U.S., with more formal agreements established and more stringent rules being put into play as to the investment advice provided. Estate lawyers may see an increase in litigation involving investments in practice and how the funds are directed, and it is likely that plaintiffs’ attorneys will look closely at any questionable practices in these cases. Trusts will be expected to help guide investors in the investments that they make to reach certain goals and needs, and active involvement is necessary.
Resolution of the 2019 Equity Trust Lawsuit
The lawsuit was ultimately resolved in favor of the plaintiffs. A settlement agreement was reached that required in some instances that the company pay affected customers back various fees. In some of the affected accounts, the fees exceeded $40,000. In the end, the company agreed to pay a total of $660,000 to various class members. Although there were other settlement options that were made available to certain affected clients, the high cost of that option basically made it cost-prohibitive for many.
The outcome of the settlement gave clients of Equity Trust Company funds that they felt they had lost due to the income optimization fees that had been charged. Further, the final settlement dictated that the account maintenance fees be reduced by 50% and that the company was required to cap the common fees that they could charge to their clients. Although the company acknowledged that this lawsuit may have had some impact on the way that they did business going forward, the company was unwilling to discuss the specifics of any changes or alterations to their business model.
What the Equity Trust Company Lawsuit Teaches You and How to Avoid It
In the wake of the settlement against Equity Trust Company in 2019, they have taken and are actively taking measures to ensure that oversight on disbursements is stronger. The company has proactively made such changes as revised procedures and additional checks and balances for all disbursements, as well as enhanced system controls and audits. The company has also deactivated the ability of account holders to request a change of address to their IRA account online and will be increasing training to its employees surrounding the red flags in detecting whether disbursements are going to the custodian directly versus a third party person and decreasing reliance on "power of attorney" designations which can more easily be abused .
The industry as a whole has also considered eliminating the ability of account holders to request changes of address over the phone or web portals to prevent what happened in the Equity Trust Company lawsuit in the future. This includes requiring that all changes of address be verified in writing to further protect the account holder by sending the new address to the old address so that its receipt can be verified. However, this would also make it more difficult for the account holder to change addresses, which is contrary to the intentions of the laws and regulations that grant account holders the right to do so.