In a decision that clarifies the obligations of IRA custodians during transfers, the U.S. Court of Appeals for the Seventh Circuit ruled that Capital One did not violate its contractual duties when it selected Inspira Financial Trust as successor custodian for plaintiffs Daniel Hewitt and Lynne Thompson's retirement accounts.
Capital One resigned as custodian and, after giving customers more than the required 30 days' notice, transferred the funds to Inspira when the plaintiffs failed to specify an alternative. Inspira placed the money in sweep accounts paying only 0.02% annual interest—less than the management fees charged—leading to the breach of contract lawsuit.
The plaintiffs argued Capital One acted imprudently by selecting a successor offering such low returns and violated the implied covenant of good faith and fair dealing. However, the court found no breach even assuming the good faith principle applied, noting that Capital One did not exploit contractual loopholes for self-enrichment.
Judge Easterbrook emphasized that the arrangement preserved customer choice, writing that Capital One gave customers 'complete discretion to choose a successor custodian and complete discretion to choose the vehicles through which the successor deploys the money.' The court noted that sweep accounts are standard in the industry and carry minimal risk compared to market investments.
The decision reinforced that customers bore responsibility for their investment choices, as they could have researched returns, selected different investment vehicles, or chosen alternative custodians. The court distinguished cases involving theft or fraud, finding Capital One selected a reputable institution while preserving customer autonomy.