Opinion
Case No. 1:05cv15 (GBL).
April 15, 2005
MEMORANDUM ORDER
THIS MATTER is before the Court on Motion of Defendant, Wachovia Bank, National Association, f/k/a First Union National Bank ("First National," "Bank," or "Defendant") to Dismiss Pursuant to Federal Rule of Civil Procedure 12(b)(6). This case is a breach of contract case in which Plaintiffs Trumball Investments Ltd. I, Trumball Investments Ltd. II, Molina International, Ltd., Ivywild Investment Corp., Cortland Overseas, Ltd., and Terrel Overseas, Inc. (hereinafter collectively "Plaintiffs") allege that Defendant failed to carry out legitimate trades as ordered by Humayun Baigmohamed, an authorized agent for Plaintiffs. The issue in this case is whether Plaintiffs have stated a claim for breach of contract by alleging that Defendants failed to follow the oral instructions issued by Mr. Baigmohamed with respect to the six investment accounts (hereinafter "Accounts") between Plaintiffs and First Union, predecessor in interest to Defendant Wachovia Bank. The Court holds that Motion of Defendant to Dismiss Pursuant to Federal Rule of Civil Procedure 12(b)(6) is granted because under the Discretionary Account Agreement, First Union was not required to follow oral instructions. Furthermore, the exculpatory clause in the Agreement states that Defendants are only liable for actions constituting gross negligence or actual wrongdoing, which Plaintiffs do not allege in their complaint.
I. BACKGROUND
This lawsuit arises out of Accounts between Plaintiffs and First Union. Complaint ¶¶ 5, 7. Humayun Baigmohamed acted as an officer and authorized agent for each Plaintiff company with respect to the Accounts, and was the primary contact between Plaintiffs and Defendant. Id. ¶ 6. Plaintiffs allege that on April 4, 2000, Mr. Baigmohamed and First Union representative Jim Lu had a meeting at which Mr. Baigmohamed "noted that the federal funds interest rate had been raised, and instructed Mr. Lu to liquidate all of the Accounts' securities holdings and to convert the Accounts' holdings entirely into cash." Id. ¶ 11. In addition, Mr. Baigmohamed instructed Mr. Lu to invest the proceeds of these sales in United States Treasury issues. Id. Plaintiffs further allege that First Union failed to carry out Mr. Baigmohamed's instructions and continued trading in securities in the Accounts. Mr. Baigmohamed was unaware of Mr. Lu's failure to convert the Accounts holdings into cash until approximately May 10, 2000. Id. ¶ 13. Plaintiffs allege that between April 3, 2000 through May 10, 2000 the value of the Accounts declined by approximately $1,626,889. Id.
The Accounts are each governed by a Corporate Agency Agreement (Discretionary Account) ("Discretionary Account Agreement" or "Agreement"). Plaintiffs attached an exemplar Discretionary Account Agreement as an exhibit to the Complaint. Id. ¶ 9, Attachment A. The Discretionary Account Agreement provides in pertinent part:
1. You are to provide investment review and management of the Account, taking such actions as you, in your discretion, deem best with respect to the investment and reinvestment of the property held therein as though you were the owner of such property.
* * * * *
7. You shall be liable only for losses caused by gross negligent management or actual wrongdoing and in the exercise of your discretionary powers you shall not be limited by rules applying to trusts and similar fiduciary relationships. You have no responsibility for the acts of agents (other than regular employees) provided you use reasonable care in selecting them. It is understood and agreed that you shall be under no duty to take any action other than herein specified with respect to any securities or other property at any time deposited hereunder unless specifically agreed to by you in writing or to appear in or defend any suit with respect thereto unless requested by the undersigned in writing and indemnified to your satisfaction.
8. You may in your discretion, follow and rely on any instructions given orally, by telephone, cable, or radio that you believe to be genuine. You shall endeavor to obtain written confirmation of such instructions. * * * * *
ADDENDUM
B. It is agreed that First Union National Bank of Virginia ("Agent") shall in its discretion, follow and rely on any instructions given by Humayan H. Baigmohamed, given via facsimile transmission, or given orally, by telephone, that Agent believes to be genuine. Agent shall endeavor to obtain written confirmation of such instructions.
Discretionary Account Agreement. The Discretionary Account Agreement represents a binding contract between Plaintiffs and the Bank. Id. ¶ 15.
II. DISCUSSION
A. Standard of Review
A Federal Rule of Civil Procedure 12(b)(6) motion should not be granted unless it appears beyond a doubt that plaintiff can prove no set of facts in support of his claim that would entitle him to relief. FED. R. CIV. P. 12(b)(6); Conley v. Gibson, 355 U.S. 41, 45-46 (1957). In considering a Rule 12(b)(6) motion, the Court must construe the complaint in the light most favorable to the plaintiffs, read the complaint as a whole, and take the facts asserted therein as true. Mylan Labs, Inc. v. Matkari, 7 F.3d 1130, 1134 (4th Cir. 1993). Conclusory allegations regarding the legal effect of the facts alleged need not be accepted. See Labram v. Havel, 43 F.3d 918, 921 (4th Cir. 1995). Because the central purpose of the complaint is to provide the defendant "fair notice of what the plaintiff's claim is and the grounds upon which it rests," the plaintiff's legal allegations must be supported by some factual basis sufficient to allow the defendants to prepare a fair response. Conley, 355 U.S. at 47.
B. Analysis
The Court grants Defendant's Motion to Dismiss because the Discretionary Account Agreement and its Addendum vest First Union with discretion for investment decisions and does not require First Union to follow the oral instructions of Mr. Baigmohamed. Additionally, the Discretionary Account Agreement contains an exculpatory clause that limits First Union's liability to losses in the Accounts caused by gross negligence or actual wrongdoing. For these reasons, Plaintiffs fail to state a claim upon which relief can be granted. Accordingly, the Court grants Defendants motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). No Obligation to Follow Oral Instructions Under Discretionary Account Agreements
Plaintiffs do not state a cause of action for breach of contract because the Discretionary Account Agreements do not obligate First Union to follow Mr. Baigmohamed's oral instruction. Under Virginia law, to recover for breach of contract, a plaintiff must prove "(1) a legally enforceable obligation of the defendant to the plaintiff; (2) the defendant's violation or breach of that obligation; and (3) injury or damage to the plaintiff caused by the breach of the obligation." Filak v. George, 267 Va. 612, 619, 594 S.E.2d. 610, 614 (2004). Plaintiffs do not state a claim for breach of the Discretionary Account Agreements.
A discretionary account gives a broker the authority to carry out transactions on behalf of its clients without prior authorization. In a discretionary account, "the broker has the authority to make trades on the broker's own initiative for the best interests of the customer." Prudential Bache Securities, Inc. v. Pittman, No. CIV.A. 89-85-T, 1991 WL 160039 at *4 (N.D. Ga. April 4, 1991). As the Supreme Court of the United States explained, "[t]he benefit of a discretionary account is that it enables individuals, . . . who lack the time, capacity, or know-how to supervise investment decisions, to delegate authority to a broker who will make decisions in their best interests without approval." Securities and Exchange Commission v. Zandford, 535 U.S. 813, 823 (2002).
In this case, the Discretionary Account Agreements between First Union and Plaintiffs vested First Union with discretion to make investment decisions for each of the Accounts. The Discretionary Account Agreements state that First Union was "to provide investment review and management of the Account, taking such actions as you, in your discretion, deem best with respect to the investment and reinvestment of the property held therein as though you were the owner of such property. " Complaint, Ex. A, Agreement ¶ 1 (emphasis added).
The agreements further provide that First Union could in its discretion follow oral instructions. The Agreements state, "You may in your discretion, follow and rely on any instructions given orally, by telephone, telegraph, cable or radio that you believe to be genuine. You shall endeavor to obtain written confirmation of such instructions." Id. ¶ 8. This same paragraph was modified by the addendum with language that in pertinent part states,
[i]t is agreed that First Union . . . shall in its discretion, follow and rely on any instruction given by Humayun H. Baigmohamed, given via facsimile transmission, or given orally, by telephone, that Agent believes to be genuine. Agent shall endeavor to obtain written confirmation of such instructions.
Agreement Addendum ¶ B. In addition, the Agreements stated that First Union does not have a duty to take action unless it was specifically agreed to in writing. The Agreements state, "[i]t is understood and agreed that you shall be under no duty to take any action other than herein specified with respect to any securities or other property at any time deposited hereunder unless specifically agreed to by you in writing . . ." Agreement ¶ 7 (emphasis added).
Under the Agreements, First Union was given discretion to make investment decisions with regard to the Accounts and was to treat the Accounts as if it were the owner. First Union was also given discretion as to whether or not to follow any oral instructions. Specifically, First Union was under no duty to follow any instructions with regards to the account unless they were agreed to in writing. In this case, there was no written instruction from Mr. Baigmohamed and there can be no liability for breach of contract.
Exculpatory Clause
Plaintiffs can not recover because the Discretionary Account Agreements contain exculpatory clauses. The Agreements state that First Union is liable to Plaintiffs only for losses caused by gross negligence or actual wrongdoing. Agreement ¶ 7. Specifically, the Agreements state, "you shall be liable only for losses caused by gross negligent management or actual wrongdoing and in the exercise of your discretionary powers you shall not be limited by rules applying to trusts and similar fiduciary relationships." Id. Virginia courts regularly enforce exculpatory agreements. See, e.g., Barnes v. Crystal Plaza, 11 Va. Cir. 442 at *2 (Arl. Cir. 1977) Generally an exculpatory clause will be enforced if the agreement (1) does not contravene public policy (2) can be readily understood by a reasonable person in the plaintiff's position, and; (3) it clearly and unequivocally releases the defendant from precisely the type of liability alleged by the Plaintiff. See Hiett v. Barcroft Beach Inc., 18 Va Cir. 315 (1989), rev'd on other grounds, Hiett v. Lake Barcroft Community Association, Inc., 244 Va. 191 (1992). The exculpatory clauses contained in the Agreements meet these requirements and are therefore valid and enforceable.
First, the exculpatory clauses contained in the agreement do not offend public policy. Courts regularly enforce exculpatory clauses in discretionary investment accounts. See, e.g., Wolf v. Ford, 335 Md. 525, 644 A.2d 522 (1994), Piercy v. Citibank, N.A., 101 Misc.2d 302, 424 N.Y.S.2d 76 (1978), aff'd 48 N.Y.2d 900, 400 N.E.2d 1349 (1979). In this case, the exculpatory clauses are agreements between sophisticated parties to allocate the risk of negligence in the management of discretionary accounts and therefore do not offend the public interest.
Second, the exculpatory clauses can be easily understood by the parties. An exculpatory clause must be "clear and definite" to relieve a party from liability for his own negligence. See Krazek v. Mountain River Tours, Inc. 884 F.2d 163, 165 (4th Cir. 1989). In this case, the exculpatory clauses contained in the Agreements are easily understandable and clearly and definitely state that First Union is liable "only for losses caused by gross negligent management or actual wrongdoing . . ." Agreement ¶ 7. Third, the language of the Agreements clearly releases the defendant from liability for losses other than those resulting from gross negligence or actual wrongdoing.
Furthermore, there are no allegations of gross negligence or actual wrongdoing. Virginia law defines gross negligence as follows:
"Gross negligence" has been defined as the absence of slight diligence, or the want even of scant care. It is the degree of negligence as should shock fair-minded men although something less than willful recklessness. Although the term is difficult to define apart from the context of specific facts, it is apparent that it is closely related to, if not identical to, civil recklessness.Coppage v. Mann, 906 F. Supp. 1025, 1048 (E.D. Va. 1995) (citations omitted). In this case there are no allegations of gross negligence or other conduct that constitutes recklessness or actual wrongdoing. Plaintiffs merely allege that First Union failed to follow Mr. Baigmohamed's oral instructions with respect to the Accounts. Under the Discretionary Account Agreement, First Union had the discretion to decide whether or not to follow the oral instructions. Accordingly, the fact that First Union did not follow the oral instruction does not constitute gross negligence or actual wrongdoing. It was merely a discretionary decision for which First Union can not be held liable under the clear terms of the agreement. Accordingly, Defendants can not be held liable for breach of contract and the Plaintiffs complaint is dismissed for failure to state a claim upon which relief can be granted.
III. CONCLUSION
Plaintiffs fail to state a claim upon which relief can be granted because under the Discretionary Account Agreement, First Union was not required to follow oral instructions. Additionally, the Agreements contain exculpatory clauses that state Defendants are only liable for actions constituting gross negligence or actual wrongdoing, which Plaintiffs do not allege in their complaint. Accordingly, it is hereby
ORDERED that Motion of Defendant, Wachovia Bank, National Association, f/k/a First Union National Bank to Dismiss Pursuant to Federal Rule of Civil Procedure 12(b)(6) is GRANTED. The Plaintiff's complaint is DISMISSED.
The Clerk is directed to forward a copy of this Order to Counsel.
ORDER
THIS MATTER is before the Court on Plaintiffs Trumball Investments Ltd. I, Trumball Investments Ltd. II, Molina International, Ltd., Ivywild Investment Corp., Cortland Overseas, Ltd., and Terrel Overseas, Inc. (hereinafter collectively "Plaintiffs") Motion for Leave to File a Surreply. The Court grants Plaintiffs' Motion for Leave to File Surreply. Upon consideration of the Surreply Memorandum of Law, Defendants' briefs in support of their Motion to Dismiss, and Plaintiffs' Opposition, the Court has issued a Memorandum Order granting Defendants' Motion to Dismiss. Accordingly, it is herebyORDERED that Plaintiffs' Motion for Leave to File a Surreply is GRANTED.
It is FURTHER ORDERED that Plaintiffs' proposed Surreply Memorandum of law, which was filed as an attachment to their Motion for Leave to File a Surreply is hereby deemed filed.
The Clerk is directed to forward a copy of this Order to Counsel.