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permitting negligence claims if shown to amount to negligent misrepresentation because economic loss rule does not bar such claims
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Case No. 04-60237-CIV-ALTONAGA/Bandstra.
March 1, 2005
ORDER DENYING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT
THIS CAUSE came before the Court on Defendant, Wachovia Bank, N.A.'s ("Wachovia['s]") Motion for Summary Judgment [D.E. 34]. On August 20, 2004, Plaintiffs, Dr. Robert H. Maliner ("Dr. Maliner"), RLMAL, Ltd. (the "Limited Partnership"), and the Trust-Under-Will of Martin M. Maliner for the Benefit of Celia Maliner (the "Trust") filed an Amended Complaint, alleging federal securities fraud, common law fraud, common law negligence, breach of fiduciary duty, and breach of contract. Plaintiffs claim that Wachovia's financial planners grossly mismanaged their investments, causing them to lose more than $650,000. Wachovia asserts, however, that Plaintiffs' investment losses were due to an overall decline in the stock market and that it never guaranteed Plaintiffs any return on their investments. Wachovia now moves for summary judgment, arguing that all of Plaintiffs' common law tort claims are barred by the economic loss rule, that their negligence claim is barred by a contractual agreement between the parties, and that Plaintiffs cannot substantiate the elements of their causes of action.
I. FACTUAL BACKGROUND
The parties do not dispute the following facts. Dr. Maliner is a 68 year-old resident of Hollywood, Florida and is the beneficial owner of the Robert H. Maliner Individual Retirement Account (the "IRA"). Dr. Maliner is also a limited partner in the Limited Partnership and, along with his three siblings, a beneficiary of the Trust. Dr. Maliner is a co-trustee of the Trust; the other trustee is Dr. Maliner's brother, Martin Maliner, Jr.Dr. Maliner, the Limited Partnership, and the Trust each opened a Wachovia Investment Management Account and executed, among other things, a written Investment Management Agreement ("IMA"), which provides the following:
Based on the agreed upon investment objectives and strategies, you [Wachovia] are to review all account assets or any of them periodically as to their sale or exchange. . . . You are to have complete discretion in the management of my account, and without consulting me or obtaining my approval, you are to attend to the details of carrying out for my account the investment changes you deem advisable.
In total, Plaintiffs executed four IMAs, the terms of which are identical.
. . . .
You shall exercise due care in carrying out your duties hereunder and in safekeeping the assets held from time to time, and your duties and responsibilities are limited to those set forth in this Agreement. Wachovia Bank, N.A., its officers, directors, shareholders and affiliates, as Investment Agent and individually, shall be held harmless and indemnified for any loss, claim or expense incurred in carrying out your duties and responsibilities in accordance with the provisions of this Agreement, or in any manner whatsoever directly or indirectly related to this Agreement, except for your own bad faith, gross negligence, or willful misconduct.
(IMA [D.E. 26] ¶¶ 1, 9.) By its terms, the IMA is governed by North Carolina law. ( Id. ¶ 12.) However, the parties have stipulated that, for the purposes of this litigation, Florida law shall apply.
Dr. Maliner first consulted Wachovia in 1999 about managing part of his investment portfolio. At the time, he had a financial net worth of more than $4 million and had been an investor for more than 30 years. The co-trustee of the Trust, Martin Maliner, Jr., had a net worth of approximately $2 million and had been an investor since the 1970s. Both men were aware of the investment disclaimer "past performance is no guarantee of future results" before opening accounts at Wachovia.
Dr. Maliner was a client of Wachovia's Wealth Management Group. Michael Budd is a Wachovia Client Relationship Manager and was assigned to Dr. Maliner. Mr. Budd contacted Dr. Maliner and had one or two meetings with him in approximately September 1999. Based on this initial contact, Mr. Budd brought in a Wachovia investment specialist, Dennis Koenig, to advise Dr. Maliner.
Wachovia received an asset management fee for managing Plaintiffs' Investment Management Accounts. Messrs. Budd and Koenig were salaried employees and also received bonuses. Mr. Budd's bonus was based on a number of factors, including growth in revenue from existing and new clients. Mr. Budd stated that equity funds generally generated higher revenue than fixed income funds, which was a factor in computing his bonus. Mr. Koenig's bonus was based solely on the asset management fees that Wachovia earned from clients' assets in the portfolios that he managed.
In approximately September 1999, Dr. Maliner responded to a written questionnaire about his assets, liabilities, lifestyle, and investment style. Wachovia thereafter prepared a comprehensive financial analysis, which included evaluations of Dr. Maliner's investment portfolio, his net worth, debt management, retirement finances, estate planning, and insurance coverage (the "Financial Analysis"). The Financial Analysis reported that Dr. Maliner's net worth in September 1999 was approximately $4.6 million and his investment policy was "growth with income." The "Recommendations and Action Steps" accompanying the Financial Analysis stated that Dr. Maliner had "slightly more risk" in his current portfolio than he indicated he was willing to accept and suggested that he "consider reducing [his] risk exposure" as he selected future investments. (Budd Dep. Ex. 2 [D.E. 38 Ex. C] at P0367.)
Of Dr. Maliner's $4.6 million in personal assets, Wachovia was to manage 25% of the investment portfolio. On February 14, 2000, Dr. Maliner funded his Wachovia Investment Management IRA with the proceeds from a prior non-Wachovia retirement account. The IRA account was closed on March 13, 2003. Dr. Maliner's personal Wachovia Investment Management Account was opened on April 17, 2000 and was closed on April 4, 2001. The Limited Partnership Investment Management Account was funded on February 28, 2001 through the transfer of the bulk of the assets from Dr. Maliner's personal Wachovia Investment Management Account. The Limited Partnership was originally formed as a creditor-protection device for Dr. Maliner's personal assets. The Limited Partnership Investment Management Account was closed on November 12, 2002.
In July 2000, Dr. Maliner arranged for Messrs. Budd and Koenig to meet with his two brothers, Jerome and Martin, Jr., and his sister, Susan, to discuss Wachovia's management of a portion of the Trust's investment portfolio. The Maliner siblings agreed that Wachovia would manage 25% of the Trust's investment portfolio. In July 2000, the Trust had an approximate asset portfolio of $2.5 million, mostly in blue-chip stocks, including 7,100 shares of a single common stock, Schering-Plough Corporation. Messrs. Budd and Koenig represented to the Maliner family that Wachovia would reduce the percentage of Schering-Plough and some other common stocks in the Trust's portfolio and diversify those assets among ten or twelve economic sectors determined by a panel of experts. The Trust's investment objective was classified as "growth." Dr. Maliner testified that Wachovia invested the Trust, the Limited Partnership, and the IRA's assets according to the same formula. (Dr. Maliner Dep. [D.E. 38 Ex. 2] at 131.)
The Trust's Wachovia Investment Management Account was opened on July 25, 2000 and was closed on March 18, 2003. The Trust's co-trustees received monthly account statements. Martin Maliner, Jr. stated in his deposition that he looked at the monthly statements. (M. Maliner Dep. [D.E. 38 Ex. 1] at 66.) Dr. Maliner, however, stated that "these statements were very large, complicated-looking statements, sometimes a hundred pages at a time. . . . I'd say probably half of the time I would open them, and I might look at the front page just to see what the bottom line was. They were not easy statements to review, so I would say, did I really review them? No." (Dr. Maliner Dep. at 88.)
In May 2002, Dr. Maliner, acting on the recommendation of his brother, directed Wachovia to liquidate a portion of his large capitalization stock portfolio and invest a portion of it in small capitalization stocks. In October 2002, Wachovia sent Dr. Maliner an "Investment Policy Statement" indicating that his portfolio was invested "75% Large Cap Equity 15% Small Cap Equity 10% International Equity," with a time horizon of "Greater than 10 years," and that his investment objective and primary purpose was "Maximum Growth." (Inv. Policy Stmt. [D.E. 38 Ex. 16] at 1.) Wachovia requested Dr. Maliner to sign and return the policy statement if he concurred with it.
Dr. Maliner did not respond to Wachovia's October 2002 communication nor to a similar communication in December 2002. On January 13, 2003, in response to a third similar communication, Dr. Maliner wrote Wachovia a letter stating, "I have not signed and returned the Statements as you have asked because they do not fairly, accurately and completely represent the instructions given to you and your representatives regarding my financial goals." (Letter to Dennis Koenig of Jan. 13, 2003 [D.E. 38 Ex. 17] at 1.)
Dr. Maliner mentioned to Messrs. Budd and Koenig that he was unhappy that the value of his investments kept declining yet Wachovia continued to charge a management fee. He testified at his deposition: "At one of our last meetings, I indicated that I was quite unhappy with the results. . . . They just would say, you've got to trust us. You've got to hold the course." (Dr. Maliner Dep. at 83.) Plaintiffs' Wachovia Investment Management Accounts were closed in late 2002 and early 2003. Russell Kimbro, a senior vice-president at Wachovia, submitted a declaration stating that "[b]ased upon my calculations, had the Plaintiffs maintained their accounts at Wachovia Bank, N.A. instead of closing the accounts, the three accounts would have outperformed the SP 500 index by over 11% for the period between the date in 2000 when each account was opened through November 30, 2004." (Kimbro Decl. [D.E. 38 Ex. 19] ¶ 6.)
Plaintiffs commenced this action in February 2004. They claim that they sustained substantial investment losses as a direct result of Wachovia's wrongful conduct, which included making material misrepresentations and omissions concerning the fundamental nature of its investment program. Plaintiffs contend that Wachovia mismanaged their funds by failing to invest them suitably and consistently with Plaintiffs' investment objectives and risk tolerances, all in direct contravention of Wachovia's duty of care owed as a professional investment manager.
Wachovia, however, points out that Plaintiffs opened their investment accounts at the approximate peak of the large-capitalization stock market in 2000 and closed their accounts at the approximate bottom of that market in 2003. According to Wachovia, it cannot be held liable as an insurer of Plaintiffs' stock market losses when it has broken no law nor breached any duty or agreement. Wachovia moves for summary judgment, arguing that there is no evidence of wrongdoing or contractual breach, that all of Plaintiffs' torts claims are barred by the economic loss rule, and that Plaintiffs' negligence claim is further barred by the terms of the IMA.
II. LEGAL STANDARD
Summary judgment shall be rendered "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). In making this assessment, the Court "must view all the evidence and all factual inferences reasonably drawn from the evidence in the light most favorable to the nonmoving party," Stewart v. Happy Herman's Cheshire Bridge, Inc., 117 F.3d 1278, 1285 (11th Cir. 1997), and "must resolve all reasonable doubts about the facts in favor of the non-movant." United of Omaha Life Ins. Co. v. Sun Life Ins. Co. of America, 894 F.2d 1555, 1558 (11th Cir. 1990).
"By its very terms, this standard provides that the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986) (emphasis in original). "As to materiality, the substantive law will identify which facts are material. Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment. Factual disputes that are irrelevant or unnecessary will not be counted." Id. at 248. Likewise, a dispute about a material fact is a "genuine" issue "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id.
The moving party "always bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of `the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,' which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Summary judgment is proper "against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Id. at 322. In those cases, there is no genuine issue of material fact "since a complete failure of proof concerning an essential element of the nonmoving party's case necessarily renders all other facts immaterial." Id. at 323.
III. ANALYSIS
A. Federal Securities Fraud
"A successful cause of action under Section 10(b) [of the Securities Exchange Act of 1934] or [S.E.C.] Rule 10b-5 requires that the plaintiff prove (1) a misstatement or omission (2) of a material fact (3) made with scienter (4) upon which the plaintiff relied (5) that proximately caused the plaintiffs' loss." Gochnauer v. A.G. Edwards Sons, Inc., 810 F.2d 1042, 1046 (11th Cir. 1987) (citations omitted). In this case, Wachovia argues that Plaintiffs have failed to submit evidence to establish the third, fourth, and fifth elements of securities fraud.
1. Scienter
"Scienter may be established by a showing of knowing misconduct or severe recklessness." SEC v. Carriba Air, Inc., 681 F.2d 1318, 1324 (11th Cir. 1982). "`Proof of recklessness would require a showing that the defendant's conduct was an extreme departure of the standards of ordinary care, . . . which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.'" Id. (alteration in original) (quoting SEC v. Southwest Coal Energy Co., 624 F.2d 1312, 1321 (5th Cir. 1980)).
Wachovia argues that Plaintiffs have failed to establish scienter because neither it nor its employees had an incentive to harm the Plaintiffs. Plaintiffs disagree and argue that Messrs. Budd and Koenig's bonus structure provided a financial incentive for them to steer Dr. Maliner and the Trust toward riskier equity funds rather than more conservative fixed income funds. Specifically, Mr. Budd testified in his deposition that his bonus was based, in part, on revenues generated from each client. (Budd Dep. at 47.) He also stated that Wachovia received higher revenues from equity funds than from fixed income funds. ( Id. at 69.) Mr. Budd admitted that such revenue drove profitability of the private client group and of his bonus. ( Id. at 70.)
Mr. Budd, however, testified that he was not responsible for recommending particular securities or products to Wachovia's clients; rather, he referred clients to Wachovia's specialists. ( Id. at 59.) Mr. Koenig, for example, recommended specific investments. His bonus, however, was based solely on management fees generated from assets within the portfolios that he managed. (Koenig Dep. [D.E. 38 Ex. 5] at 18-19.) Mr. Koenig explained that Wachovia charges each customer a fee equal to a certain percentage of the value of the customer's assets managed by the bank. ( Id. at 20.) Mr. Keonig's bonus was then computed as a percentage of these fees. ( Id. at 18.) Therefore, Mr. Koenig's bonus was based solely on the value of his clients' assets at Wachovia, regardless of the types of investments that he recommended.
Nevertheless, a genuine issue of material fact exists regarding whether Wachovia, as an institution, had a financial incentive to recommend higher risk equity funds over more conservative fixed income funds. This is based on Mr. Budd's testimony that Wachovia received higher revenues from equity funds than from fixed income funds and that such revenue drove the profitability of the private client group. Summary judgment is therefore inappropriate. 2. Reliance
The parties have focused their arguments on whether Wachovia or its employees had a financial incentive or other motive to commit fraud. The Court concludes that a question of fact exists based on the evidence in the record and, considering the evidence in the light most favorable to the Plaintiffs, concludes that summary judgment is inappropriate. However, the standard for proving scienter, as discussed above, includes proof of "knowing misconduct or severe recklessness." Carriba Air, 681 F.2d at 1324. Therefore, at trial, Plaintiffs must prove, through evidence of an alleged financial incentive or through other evidence, that Wachovia engaged in knowing misconduct or severe recklessness with regard to recommending investments to Dr. Maliner and the Trust.
Justifiable reliance is "frequently translated into a requirement of due diligence by the plaintiff." Thompson v. Smith Barney, Harris Upham Co., 709 F.2d 1413, 1418 (11th Cir. 1983). In Thompson, for example, the court found that, despite the defendant's "questionable practices," the plaintiff "knew of the unusual risks inherent in options trading, or with the exercise of reasonable diligence, he could have found out about such risks." Id.
In this case, Wachovia claims that its employees omitted no material facts from disclosure to the Plaintiffs. Furthermore, it asserts that Plaintiffs are educated and experienced investors who failed to make inquiries from Wachovia regarding facts that they believed were material. See Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343 F.3d 189, 195 (2d Cir. 2003) ("In assessing the reasonableness of a plaintiff's alleged reliance, we consider the entire context of the transaction, including factors such as its complexity and magnitude, the sophistication of the parties, and the content of any agreements between them.")
Dr. Maliner, however, submitted an affidavit, in which he states that Wachovia made several misrepresentations upon which he reasonably relied:
Messrs. Budd and Koenig assured me that Wachovia would tailor an investment plan uniquely for me and my individual financial circumstances. . . . I explained to [them] that I was a conservative investor, sought to protect my principal and would be content with modest returns. . . . [They] assured me that Wachovia, given its extensive research resources, knowledge and professional experience, would competently manage my funds wholly consistently with my stated objectives and risk tolerance.
(Dr. Maliner Aff. [D.E. 48 Ex. 1] ¶¶ 4-6.)
Dr. Maliner argues that instead of a unique investment plan, he and the other Plaintiffs were given the same model investment program. He claims that he did not monitor his voluminous monthly account statements because he did not understand them and stated, "I trusted and assumed that Wachovia was investing and managing my assets consistent with the goals and risk tolerance I articulated for them. That is precisely why I sought out professional investment managers in the first place, so I did not have to be burdened with such a responsibility." ( Id. ¶ 10.) These statements demonstrate a genuine issue of material fact regarding whether Wachovia made material misrepresentations or omissions which were reasonable, under the circumstances, for Dr. Maliner to rely upon and whether he satisfied his obligation of due diligence regarding his investments. 3. Proximate Cause
"The causation element has two aspects, both [of] which must be alleged and proven: transaction causation and loss causation. . . . [T]ransaction causation refers to the causal link between the defendant's misconduct and the plaintiff's decision to buy or sell securities. It is established simply by showing that, but for the claimed misrepresentations or omissions, the plaintiff would not have entered into the detrimental securities transaction." Emergent Capital, 343 F.3d at 196-97 (citations omitted). In this case, Plaintiffs contend that "but for" Wachovia's misrepresentations about the intended investment portfolio and the material risks involved, they would not have entrusted their money to the bank.
Wachovia, however, argues that Plaintiffs have failed to come forward with evidence of loss causation.
[L]oss causation has often been described as proximate cause, meaning that the damages suffered by plaintiff must be a foreseeable consequence of any misrepresentation or material omission. "The loss causation inquiry typically examines how directly the subject of the [omission] caused the loss, and whether the resulting loss was a foreseeable outcome of the [omission]," while also taking into account issues such as the presence of intervening causes and the lapse of time between the behavior complained of and the loss.Castellano v. Young Rubicam, Inc., 257 F.3d 171, 186 (2d Cir. 2001) (citation omitted) (alteration in original) (quoting Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 96 (2d Cir. 2001)). Wachovia argues that an intervening cause — the general decline in the stock market from 2000 to 2003 — caused Plaintiffs' losses, rather than any alleged fraud by Wachovia. See Emergent Capital, 343 F.3d at 197 ("Of course, if the loss was caused by an intervening event, like a general fall in the price of Internet stocks, the chain of causation will not have been established.").
However, a genuine issue of material fact exists regarding whether the general decline of the stock market, as shown by the SP 500, was an intervening cause, or the cause of Plaintiffs' alleged losses. Dr. Maliner stated in his affidavit that "[a]t no time did Messrs. Budd or Koenig tell me that my funds would be invested solely in an all equity fund designed to beat the SP 500 Index Fund, and similarly failed to disclose to me the attendant risks inherent in this type of portfolio." (Dr. Maliner Aff. ¶ 9.) A question of fact exists regarding whether Wachovia made material misrepresentations or omissions which caused the Plaintiffs to suffer investment losses or whether those investment losses were instead a result of a general decline in the market.
Wachovia argues that Dr. Maliner's affidavit statement contradicts his previous deposition testimony without explanation and therefore fails to create a genuine issue of material fact. See McCormick v. City of Fort Lauderdale, 333 F.3d 1234, 1240 n. 7 (11th Cir. 2003) ("[W]e may disregard an affidavit submitted solely for the purpose of opposing a motion for summary judgment when that affidavit is directly contradicted by deposition testimony."). Wachovia points to portions of Dr. Maliner's deposition testimony in which he acknowledges that the bank may have understood his investment objective to be "growth." ( See, e.g., Dr. Maliner Dep. at 77.) However, Wachovia fails to point out a direct contradiction in Dr. Maliner's prior testimony. Notably, at the same point in his deposition that Dr. Maliner acknowledged his investment objective to be "growth," he stated that "I remember emphasizing that I was conservative." ( Id.)
B. The Economic Loss Rule
Wachovia contends that Plaintiffs' claims for common law fraud, common law negligence, and breach of fiduciary duty arise from the same facts that underlie Plaintiffs' claim for breach of contract; therefore, the economic loss rule bars recovery for these tort claims.
"The economic loss rule is a judicially created doctrine that sets forth the circumstances under which a tort action is prohibited if the only damages suffered are economic losses." Indem. Ins. Co. v. Am. Aviation, Inc., No. SC03-1601, 2004 Fla. LEXIS 2403, at *7-8 (Fla. Dec. 23, 2004) (footnote omitted). In Florida, the economic loss rule provides that "when the parties have negotiated remedies for nonperformance pursuant to a contract, one party may not seek to obtain a better bargain than it made by turning a breach of contract into a tort for economic loss." Id. at *27-28.
There are exceptions to the rule, however. "Intentional tort claims such as fraud, conversion, intentional interference, civil theft, abuse of process, and other torts requiring proof of intent generally remain viable. . . ." Id. at *29 n. 3. Furthermore, other exceptions "such as for professional malpractice, fraudulent inducement, and negligent misrepresentation, or freestanding statutory causes of action, still apply." Id. at *30 (footnotes omitted). Finally, "some courts have extended the exception . . . to causes of action for breach of fiduciary duty, even if there was an underlying oral or written contract." Id. at *26-27 (citations omitted).
In this case, Plaintiffs' common law fraud claim (an intentional tort) is an exception to the economic loss rule. Id. at *29 n. 3. Likewise, Plaintiffs' claim for breach of fiduciary duty "is one of those well-established torts" which remains viable, "even if there is an underlying oral or written contract." Invo Fla., Inc. v. Somerset Venturer, Inc., 751 So. 2d 1263, 1267 (Fla. 3d DCA 2000). Summary judgment is therefore inappropriate on these two counts by virtue of the economic loss rule.
Only a claim for fraud in the inducement, rather than fraud in the performance, is an exception to the economic loss rule. See Samuels v. King Motor Co. of Fort Lauderdale, 782 So. 2d 489, 498 (Fla. 4th DCA 2001) ("[B]ecause fraud in the performance cases involve misrepresentations related to the breaching party's performance of a contract and thus fraud in the performance is inextricably linked to breach of contract, the economic loss rule bars the Plaintiffs' cause of action for fraud in the performance."). Therefore, to succeed at trial, Plaintiffs must establish fraud in the inducement by proving (a) that Wachovia made "a misrepresentation of a material fact; (b) that the representor of the misrepresentation knew or should have known of the statement's falsity; (c) that the representor intended that the representation would induce another to rely and act on it; and (d) that the plaintiff suffered injury in justifiable reliance on the representation." Id. (citation omitted).
Regarding Plaintiffs' common law negligence claim, Wachovia argues that it is barred by the economic loss rule because Messrs. Budd and Koenig are not considered "professionals" for purposes of the professional malpractice exception. "[T]he economic loss rule does not bar a cause of action against a professional for his or her negligence even though the damages are purely economic in nature and the aggrieved party has entered into a contract with the professional's employer." Moransais v. Heathman, 744 So. 2d 973, 983-84 (Fla. 1999). For purposes of professional malpractice, "a `profession' is any vocation requiring at a minimum a four-year college degree before licensing is possible in Florida." Garden v. Frier, 602 So. 2d 1273, 1275 (Fla. 1992). In Warter v. Boston Securities, for example, the court concluded that "a securities broker is not a `professional' for purposes of the economic loss rule because securities brokers are not required to obtain a four-year degree for licensing in Florida." No. 03-81026-CIV-RYSKAMP/VITUNAC, 2004 U.S. Dist. LEXIS 5682, at *13 (S.D. Fla. Mar. 22, 2004). In this case, Plaintiffs concede that Messrs. Budd and Koenig were not required to obtain a four-year degree to be licensed as professional financial advisors in Florida.
However, in addition to professional malpractice, "a plaintiff may recover purely economic losses arising from a misrepresentation that is made in a negligent manner," which is "not necessarily barred by the Florida economic loss rule." Hilliard v. Black, 125 F. Supp. 2d 1071, 1081 (N.D. Fla. 2000); see also PK Ventures v. Raymond James Assocs., 690 So. 2d 1296, 1297 (Fla. 1997) (holding that a buyer of commercial property is not prevented by the economic loss rule from recovering damages for negligent representation against the seller's broker).
"Section 552 of the Restatement (Second) of Torts is a narrow exception to the economic loss rule which has been applied in certain limited circumstances. . . . [It] `is not confined solely to the learned professions.'" Russell v. Sherwin-Williams Co., 767 So. 2d 592, 593-94 (Fla. 4th DCA 2000) (quoting Palau Int'l Traders, Inc. v. Narcam Aircraft, Inc., 653 So. 2d 412, 419 (Fla. 3d DCA 1995) (Cope, J., concurring)). Section 552 provides the following:
One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.Id. (quoting Restatement (Second) of Torts § 552(1) (1977)).
In this case, Plaintiffs' common law negligence claim may proceed notwithstanding Florida's economic loss rule. Even though Messrs. Budd and Koenig are not "professionals" for purposes of professional malpractice exception, Plaintiffs may seek to show that they engaged in negligent misrepresentation, which is also an exception to the economic loss rule.
C. Exculpatory Contract Language
The IMA provides that Wachovia and its employees "shall be held harmless and indemnified for any loss, claim or expense incurred" in carrying out their duties under the agreement, except for "bad faith, gross negligence, or willful misconduct." (IMA ¶ 9.) Wachovia therefore argues that Plaintiffs are estopped from bringing suit for negligence or breach of fiduciary duty based on negligent conduct.
Plaintiffs argue, however, that the exculpatory clause in Paragraph 9 of the IMA is unenforceable under Florida law. "Generally, Florida law disfavors exculpatory clauses. While a release need not refer expressly to `negligence' to bar a negligence claim, it must clearly and unequivocally include negligence within its scope." Sunrise Village Mobile Home Park v. Phillips Jordan, Inc., No. 94-0101-CIV-HURLEY, 1996 U.S. Dist. LEXIS 22374, at *4 (S.D. Fla. 1996) (citations omitted). In Sunrise Village, for example, the court concluded that a clause releasing a party "from all claims of whatever nature" was unenforceable because "general language in a release agreement, such as a reference to `any and all claims,' is not sufficient to constitute the sort of clear and unequivocal reference necessary to include negligence claims within the ambit of a release." Id. at *8-9.
In this case, the IMA does not seek to exclude liability for "any and all claims" or for "all claims of whatever nature." Rather, the IMA seeks to hold Wachovia harmless except for bad faith, gross negligence, or willful misconduct. Plaintiffs' Amended Complaint alleges four torts: federal securities fraud, common law fraud, common law negligence, and breach of fiduciary duty. Of these causes of action, two (federal securities fraud and common law fraud) are intentional torts. Therefore, bad faith, gross negligence, or willful misconduct is already an element of these torts.
For the remaining two torts (common law negligence and breach of fiduciary duty), Plaintiffs will have to prove more than mere negligence to recover. Plaintiffs allege that Wachovia's management of their investment accounts was "grossly negligent." (Amend. Compl. ¶ 47.) Consistent with this allegation and Paragraph 9 of the IMA, Plaintiffs will have to prove that Wachovia engaged in bad faith, gross negligence, or willful misconduct in order to recover on their common law negligence and breach of fiduciary duty claims.
D. Proof of Plaintiffs' Causes of Action
Wachovia also argues that Plaintiffs have failed to submit evidence sufficient to prove each element of their causes of action, which entitles it to summary judgment. 1. Common Law Fraud
Wachovia also argues, for the first time in its reply brief, that the Limited Partnership lacks standing to bring the causes of action in the Amended Complaint and that no evidence was proffered on behalf of the Limited Partnership or its general partner in opposition to Wachovia's Motion for Summary Judgment. Under the Local Rules of this Court, a "reply memorandum shall be strictly limited to rebuttal of matters raised in the memorandum in opposition" to a motion. S.D. Fla. L.R. 7.1(C). Therefore, Wachovia's standing argument is improperly raised. Furthermore, the argument lacks merit. Under Florida law, "a partnership may institute litigation in its firm name to protect its assets." Louis Benito Advertising, Inc. v. Brown, 517 So. 2d 775, 776 (Fla. 2d DCA 1988) (citation omitted). Wachovia recognizes that Dr. Maliner transferred his personal assets to the Limited Partnership as a creditor-protection device for his benefit. Therefore, Dr. Maliner's testimony regarding his investment objectives and Wachovia's alleged misrepresentations are directly relevant to Dr. Maliner's purported investment losses, whether the investments were held in the IRA or by the Limited Partnership.
Wachovia argues that it is entitled to summary judgment on Plaintiffs' common law fraud claim for the same reasons that it is entitled to summary judgment on the federal securities law claim. To prove fraud under Florida law, Plaintiffs must prove "(a) a misrepresentation of a material fact; (b) that the representor of the misrepresentation knew or should have known of the statement's falsity; (c) that the representor intended that the representation would induce another to rely and act on it; and (d) that the plaintiff suffered injury in justifiable reliance on the representation." Samuels v. King Motor Co. of Fort Lauderdale, 782 So. 2d 489, 498 (Fla. 4th DCA 2001) (citation omitted).
As discussed above, genuine issues of material fact exist regarding Wachovia's alleged intent to defraud, based on evidence that Wachovia may have had a financial incentive to steer clients toward higher revenue generating equity funds rather than more conservative fixed income funds. Furthermore, questions of material fact exist regarding whether Plaintiffs reasonably relied on Wachovia's alleged misrepresentations and whether such misrepresentations caused Plaintiffs to suffer their investment losses.
2. Breach of Contract
Wachovia argues that it performed every aspect of the IMA as it was contractually obligated to do and that there is no evidence that it breached the terms of the agreement. It contends that Plaintiffs are unhappy with the performance of their accounts, but, according to Wachovia, it did guarantee any return on Plaintiffs' investments. To the contrary, Plaintiffs knew that making stock market investments was risky, and Wachovia reminded Plaintiffs that the performance of their accounts was not guaranteed.
Plaintiffs, however, argue that Wachovia breached Paragraph 1 of the IMA, which states that "[b]ased on the agreed upon investment objectives and strategies," Wachovia shall review all account assets and shall "have complete discretion in the management" of the account. (IMA ¶ 1.) Plaintiffs contend that Wachovia failed to invest Plaintiffs' funds consistent with their objectives, risk tolerances, and approach. Furthermore, Plaintiffs assert that Wachovia failed to exercise proper discretion in the management of their accounts.
A genuine issue of material facts exists whether Wachovia breached its obligation under the IMA to invest Plaintiffs' assets based upon their agreed objectives. Dr. Maliner stated that he had "explained to Messrs. Koenig and Budd that [he] was a conservative investor, sought to protect [his] principal and would be content with modest returns." (Dr. Maliner Aff. ¶ 5.) It is a question of fact whether Plaintiffs' investment plan, which Wachovia established in its complete discretion, was consistent with Dr. Maliner's stated objectives. 3. Breach of Fiduciary Duty
Wachovia claims that its relationship with Plaintiffs was based on arm's length, written contracts which limited Wachovia's duties to those specifically stated in the IMA. It therefore claims that no fiduciary duty existed between it and Plaintiffs.
A fiduciary relationship exists "[i]f a relation of trust and confidence exists between the parties (that is to say, where confidence is reposed by one party and a trust accepted by the other, or where confidence has been acquired and abused)." Doe v. Evans, 814 So. 2d 370, 374 (Fla. 2002). Furthermore, "[u]nder Florida common law, a stockbroker is charged with the duty of dealing with utmost honesty and good faith in his transactions on behalf of his client. The stockbroker has breached this duty where there is a showing of fraud, deceit or absence of good faith." Messer v. E.F. Hutton Co., 833 F.2d 909, 920 (11th Cir. 1987) (citations omitted).
In this case, the IMA gave Wachovia "complete discretion" to manage Plaintiffs' accounts. (IMA ¶ 1.) Therefore, a fiduciary relationship existed. Furthermore, under Paragraph 9 of the IMA, Plaintiffs must prove bad faith, gross negligence, or willful misconduct, which is consistent with the court's conclusion in Messer v. E.F. Hutton that a stockbroker breaches his duty "where there is a showing of fraud, deceit or absence of good faith." 833 F.2d at 920. Summary judgment is therefore inappropriate on Plaintiffs' breach of fiduciary duty claim.
4. Negligence
Wachovia claims that Plaintiffs have failed to adduce any evidence of Wachovia's negligence in the management of their accounts. Specifically, Wachovia asserts that its employees satisfactorily performed all of their duties pertaining to the accounts. It claims that Plaintiffs base their negligence allegation on Wachovia's failure to abandon its investment strategy in the face of a down market. Wachovia points out that its strategy was prudent and that if Plaintiffs had remained invested in their managed accounts, they would have enjoyed more than a 14% return on their investments as of September 30, 2004.
Plaintiffs' negligence claim, however, is based on Wachovia's financial advisor's failure to exercise reasonable care in obtaining or communicating information for Plaintiffs' guidance in their investment transactions. A genuine issue of material fact exists whether Wachovia's advisors exercised reasonable care in properly representing the investment program that they instituted for Plaintiffs or whether, instead, they acted with bad faith, gross negligence, or willful misconduct.
IV. CONCLUSION
For all of the reasons stated above, it is ORDERED AND ADJUDGED that Wachovia's Motion for Summary Judgment [D.E. 34] is DENIED as follows:
1. The parties shall proceed to trial on all counts of the Amended Complaint (federal securities fraud, common law fraud, common law negligence, breach of fiduciary duty, and breach of contract).
2. Plaintiffs' common law negligence claim shall be based on negligent misrepresentation, as described in Restatement (Second) of Torts § 552.
3. Consistent with Paragraph 9 of the IMA, Plaintiffs must prove that Wachovia acted with bad faith, gross negligence, or willful misconduct to recover on their tort claims.
4. The parties are reminded that under the January 14, 2005 Order [D.E. 45], jury instructions and a joint pre-trial stipulation are due within five days of this Order.
5. The partes are further reminded of the Court's Instructions for Jury Trial [D.E. 16] and Order Regarding the Use of Depositions at Trial [D.E. 15].
6. Trial is scheduled to commence during the week of March 14, 2005. The parties will receive 24 hours' notice by telephone of the date and time that they are to report for the start of trial.