Twiss v. Kury

Citations: 25 F.3d 1551; 1994 U.S. App. LEXIS 17949; 1994 WL 316031Docket: No. 92-2475

Court: Court of Appeals for the Eleventh Circuit; July 20, 1994; Federal Appellate Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

Dorothy G. Twiss and several co-investors appeal a summary judgment in favor of Shearson Lehman Hutton, Inc. (Hutton), a securities brokerage firm. The district court incorrectly determined that Hutton had no legal duty to the Investors under Florida law, leading to the reversal of the summary judgment on the Investors' negligence claims and a remand for further proceedings. Conversely, the court's summary judgment regarding the Investors' aiding and abetting claims is affirmed, as private plaintiffs can no longer pursue such claims.

The background reveals that David J. Kury was a registered sales representative at E.F. Hutton & Company from 1978 until January 1984, managing Hutton’s Pensacola office. In 1983, his supervisor, Fred Ronald Brown, discovered Kury misappropriating client funds for personal and corporate promissory notes. Brown reported these concerns to Hutton's legal department and requested details on Kury’s financial obligations to clients. Hutton subsequently reached out to affected customers to clarify its lack of obligation regarding Kury’s notes. Despite knowing Kury violated internal policies and securities laws, Hutton reported Kury’s resignation as voluntary and claimed no belief that he had engaged in misconduct.

After leaving Hutton, Kury continued his career in securities with various firms and later incorporated Kury Financial Planning Group, Inc. In 1988, the Florida Department of Banking and Finance began investigating Kury, leading to findings that he had sold approximately $2.4 million in promissory notes to investors, which were deemed part of a pyramid or Ponzi scheme. Kury's securities license was permanently revoked in April 1989.

Investors, who became clients of Kury after his resignation from Hutton, initiated legal action against Kury, Hutton, and other parties. They claimed Hutton was negligent for misrepresenting Kury's termination reasons and failing to report to regulatory authorities, thus breaching duties to Kury's current and future customers. Additionally, the Investors accused Hutton of aiding and abetting violations of the Securities Exchange Act of 1934 and Rule 10b-5. Hutton sought summary judgment, which the district court granted, ruling that Hutton owed no duty to the Investors under Florida law, and also dismissed the aiding and abetting claims. The Investors appealed these decisions.

The appellate court will review the summary judgment de novo, applying the same legal standards as the district court. According to Federal Rule of Civil Procedure 56(c), summary judgment is warranted when there are no genuine material facts in dispute and the moving party is entitled to judgment as a matter of law. A lack of genuine issue for trial arises when the record does not support a finding for the non-moving party. To succeed in opposing summary judgment, the non-moving party must establish essential elements of their case. The burden is on the party seeking summary judgment to demonstrate the absence of genuine disputes over material facts, and the court must view all evidence favorably towards the non-moving party. Summary judgment is only appropriate when the moving party meets this burden.

At the summary judgment stage, a judge's role is to ascertain if there is a genuine issue for trial rather than to evaluate evidence or determine truth. All reasonable doubts regarding the facts must favor the non-moving party, and if reasonable minds can differ on inferences from undisputed facts, summary judgment should be denied. When multiple reasonable inferences can be drawn, it is up to the trier of fact to choose the appropriate one. Summary judgment is not inherently disfavored but any uncertainty about the existence of a material fact must be resolved against granting it.

In the case of Palmer v. Shearson Lehman Hutton, Inc., the Florida First District Court of Appeal addressed negligence claims against Hutton related to Kury’s fraudulent activities. The court determined that Hutton had no common law duty to warn investors about Kury’s conduct since he was not employed by Hutton at the time of the alleged injuries and the investors were not clients of Hutton. However, the court found that Florida statutes imposed legal duties on Hutton, particularly concerning its obligation to report Kury’s termination and any known misconduct, thus supporting a claim for negligence. The court noted that the investors were within the protective scope of these statutes and had suffered losses due to Kury's fraudulent actions, leading to the conclusion that Hutton had a legal duty of care towards the investors regarding their claimed losses.

Hutton contends that the case of Palmer should not dictate the negligence issue for the Investors in this appeal. Hutton claims the district court did not address subsection 517.301(3), thus rendering it unpreserved for appeal. While legal theories not presented at the district court typically are not considered on appeal, discretion may allow consideration if it pertains to a pure question of law and not considering it would cause a miscarriage of justice. Legal arguments not raised at the district court are particularly relevant in summary judgment appeals. Although the Investors did not explicitly cite subsection 517.301(3), their opposition to Hutton’s summary judgment referenced subsection 517.12(11)(b) and rule 3E-600.08 to assert Hutton's legal duty. The Florida First District Court of Appeal's decision in Palmer established that these provisions, when interpreted together, impose enforceable legal duties in negligence claims. 

Hutton argues against reliance on Palmer, asserting it conflicts with E.F. Hutton & Co. v. Rousseff, but the court finds this argument unfounded. Rousseff is distinguished as it does not address statutory violations relevant to the current claims, specifically focusing on securities transactions and not mandating proof of loss causation in those contexts. The court asserts that Rousseff does not limit the available remedies under other sections of chapter 517 and affirms Palmer as the controlling authority. Furthermore, Hutton claims the Investors did not rely on its Form U-5, as they failed to consult regulatory authorities before their loans to Kury. However, the Investors argue that had Hutton reported Kury's suspicious activities accurately, regulatory intervention could have prevented further fraudulent actions. Evidence supports this claim, and the district court appropriately found that material factual disputes persist in the case.

The Investors argued that the trial court mistakenly granted summary judgment in favor of Hutton regarding their aiding and abetting claims. To establish liability under Section 10(b) or Rule 10b-5 for aiding and abetting, a party must demonstrate: (1) a violation of securities law by another party, (2) the accused's general awareness that their actions were part of an improper scheme, and (3) that the aider and abettor knowingly and substantially assisted in the violation, as outlined in Rudolph v. Arthur Andersen Co. and Woodward v. Metro Bank of Dallas. However, the Supreme Court's ruling in Central Bank of Denver clarified that private plaintiffs cannot pursue aiding and abetting claims under Section 10(b). Consequently, the court affirmed the summary judgment in favor of Hutton on these claims. Conversely, it reversed the summary judgment regarding the Investors' negligence claims, remanding the case for further proceedings. The summary mentions that Hutton assumed liabilities and assets from E.F. Hutton & Company through a corporate merger and highlights discrepancies in testimony during related proceedings. Additionally, it notes that Kury borrowed substantial amounts from clients, indicating a Ponzi scheme-like structure. Section 10(b) prohibits manipulative or deceptive practices in securities transactions.

Rule 10b-5 prohibits any person from using interstate commerce, the mails, or national securities exchanges to commit fraud related to securities transactions. This includes employing deceptive devices, making false statements or omissions of material facts, or engaging in practices that constitute fraud or deceit in the purchase or sale of securities. The Eleventh Circuit's en banc decision in Bonner v. City of Prichard established that past Fifth Circuit decisions are binding precedent. Florida Statutes, specifically subsection 517.301(3), criminalizes knowingly falsifying or concealing material facts or making fraudulent statements within the jurisdiction of the department. Subsection 517.12(11)(b) mandates that dealers notify the department promptly about the termination of employment of associated persons, providing reasons for such termination. An "associated person" is defined broadly to include partners, officers, and directors of dealers or investment advisers, among others. Florida Administrative Code Rule 3E-600.08 requires registrants to file termination notice within 20 calendar days, using prescribed forms like Form U-5. Hutton contends that it did not violate subsection 517.301(3), but the court finds genuine issues of material fact regarding whether Hutton knowingly filed a false Form U-5 after Kury's termination. Federal courts must adhere to state court rulings, irrespective of their agreement with the underlying reasoning or outcomes.

On July 6, 1985, Tamara K. Cain, Assistant Director of the Division of Securities and Investor Protection, communicated to David O. Stefl and Patricia A. Stefl regarding the delay in recognizing Mr. Kury's unlawful activities. Cain asserted that the delay was not due to a lack of acknowledgment of Kury's violations, but rather because the Department was not informed of his actions by those aware of his misconduct. She emphasized that had the Department received timely notifications, an independent examination of Kury's activities would have been initiated earlier. Upon finally being informed, the Department conducted an examination which confirmed Kury's ongoing violations of Florida law. This examination addressed Hutton's claim that Investor Dorothy G. Twiss had actual knowledge of Kury borrowing from other investors. To establish a violation of Section 10(b) or Rule 10b-5, the following elements must be proven: (1) a misstatement or omission, (2) of a material fact, (3) made with scienter, (4) upon which the party relied, and (5) which caused injury to that party, as outlined in case law including Ross v. Bank South, N.A. and Gochnauer v. A.G. Edwards & Sons, Inc.