Summary
concluding that neither §§ 80A.01(b) nor (c) require a showing of scienter
Summary of this case from Trooien v. MansourOpinion
No. C1-00-576.
Filed December 12, 2000.
Appeal from the District Court, Hennepin County, File No. MC 99-11253.
John G. Westrick, Scott W. Swanson, (for appellant)
Terrence J. Fleming, Ansis V. Viksnins, William F. Suite, (for respondents)
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (1998).
UNPUBLISHED OPINION
A former attorney misappropriated funds belonging to a trust for which appellant serves as trustee. Appellant brought an action against respondent security company through which the former attorney funneled the trust's assets. Appellant asserted negligence, violation of Minnesota securities laws, conversion, and money had and received. The security company moved for dismissal on a Minn.R.Civ.P. 12.02(e) motion, and the district court granted the motion. On appeal, appellant contends the district court erred by concluding (a) she did not allege facts on which her claims could be supported and (b) the security company is protected by the Uniform Fiduciaries Act and the Uniform Act for the Simplification of Fiduciary Security Transfers. We affirm in part, reverse in part, and remand.
FACTS
Appellant Elizabeth Siler serves as personal representative for her father Donald J. Siverling's estate and as trustee of a trust created by her father. Siler retained Peter Orlins as legal counsel for her father's estate and the trust. Orlins opened an account with respondent Principal Securities, Inc., et al. (Principal) on behalf of the estate. This account was later put into the trust's name. According to Siler, she had no knowledge of, or participation in, the opening or maintenance of this account. Orlins submitted to Principal an opening account agreement that contained Siler's purported signature and a fiduciary-certification-of-investment-powers document, naming Siler and Orlins as fiduciaries, that contained Siler's purported signature.
Although the record is not clear, it appears respondent Everon Securities, Inc., acquired Principal and respondent Everon Capital is the parent company of Everon Securities, Inc. We will refer to respondents, collectively, as Principal.
Two days after opening the account, Orlins directed Principal to sell stock owned by the trust and to send the proceeds to Orlins in a check payable to the estate. After this sale and the check issuance, Siler agreed to sell the stock in question but was not informed that it had already been sold. Orlins later misappropriated the proceeds from the stock sale, depositing the check into his office trust account and a savings account held in his name or in the name of his office. He has since been disbarred.
In her capacity as personal representative and trustee, Siler brought suit against Principal, asserting (a) negligence, (b) violations of state securities laws, (c) two counts of conversion, and (d) money had and received. Principal moved to dismiss Siler's claims for failure to state a claim upon which relief can be granted. See Minn.R.Civ.P. 12.02(e) (permitting defense motion for "failure to state a claim upon which relief can be granted"). The district court determined Siler failed to allege facts on which she could base her asserted claims and failed to state facts that would preclude Principal from protection under the Uniform Fiduciaries Act (UFA), Minn. Stat. §§ 520.01-.13 (1998), and the Uniform Act for Simplification of Fiduciary Security Transfers (UASFST), Minn. Stat. §§ 520.21-.31 (1998). The district court thus determined Siler had failed to state a claim upon which relief can be granted and dismissed Siler's action.
DECISION
In reviewing a case dismissed for failure to state a claim on which relief can be granted, the only question before the appellate court is whether the complaint set forth a legally sufficient claim for relief. Barton v. Moore, 558 N.W.2d 746, 749 (Minn. 1997). It is immaterial whether the plaintiff can prove the alleged facts. Elzie v. Commissioner of Pub. Safety, 298 N.W.2d 29, 32 (Minn. 1980). "Pleadings are adequate unless it appears `to a certainty' that there are no facts, consistent with the pleadings, sufficient to establish a right for relief." 614 Co. v. Minneapolis Community Dev. Agency 547 N.W.2d 400, 405 (Minn.App. 1996) (citation omitted). The determination of a claim's viability is a question of law reviewed de novo. Anderson v. Minnesota Ins. Guar. Ass'n, 534 N.W.2d 706, 709 (Minn. 1995).
I. Negligence
The elements of negligence include duty, breach, causation, and damages. Hudson v. Snyder Body, Inc., 326 N.W.2d 149, 157 (Minn. 1982). "A person practicing a profession is bound to exercise the degree of care and skill usually exercised by members of the profession under similar circumstances." Minneapolis Employees Retirement Fund v. Allison-Williams Co., 519 N.W.2d 176, 182 (Minn. 1994) (citation omitted) [hereinafter MERA].
In MERA, the supreme court determined that a securities broker is not a guarantor or insurer against a customer's losses. Id. The supreme court also noted that
absent a special agreement to the contrary, a broker owes [the] customer only the duty to exercise due care in executing all instructions expressly given to the [broker].
Id. Relying on MERA, the district court determined Principal had only a duty to follow Siler's instructions. The court concluded that although Siler gave respondents no express instructions, her attorney (Orlins), acting as her agent, gave instructions to respondents and these instructions were followed.
Unlike in MERA, Siler did not assert Principal gave her poor investment advice. Instead, she asserted Principal had a duty to ensure that she had, in fact, signed the documents submitted on her behalf by Orlins. Contrary to the district court's decision, as a securities company, Principal was bound to exercise the degree of care usually exercised by other securities companies under similar circumstances. See id. (stating person in profession has duty to exercise degree of care and skill usually exercised by members of that profession in similar circumstances); see also West Concord Conservation Club, Inc. v. Chilson, 306 N.W.2d 893, 896 (Minn. 1981) ("Every person who undertakes to deal with an agent is put on inquiry and must discover whether the agent has the authority to complete the proposed act." (citation omitted)). The district court erred by not giving Siler an opportunity to present evidence establishing the degree of care securities firms generally exercise when ensuring the identity of their customers.
Further, to arrive at its decision on this issue, the district court first determined Orlins acted as Siler's agent. Siler contends Orlins acted outside the scope of his authority and was, thus, not acting as her agent. Because "[t]he existence of an agency relationship is a question of fact," the district court erred in determining on a rule 12.02(e) motion that Orlins acted as Siler's agent. PMH Properties v. Nichols, 263 N.W.2d 799, 802 (Minn. 1978) (citations omitted).
II. Securities Laws
Siler asserted Principal violated Minnesota securities laws, "Minn. Stat. § 80A, et seq." Siler did not state the specific provision under which she was asserting a violation, but the text of the arguments she made within her complaint indicates she has asserted a violation of at least Minn. Stat. § 80A.01 (1998) and Minn. Stat. § 80A.03 (1998).
Pursuant to Minn. Stat. § 80A.01:
It is unlawful for any person, in connection with the offer, sale or purchase of any security, directly or indirectly:
(a) to employ any device, scheme, or artifice to defraud;
(b) to make any untrue statement of a material fact or to omit to state material facts necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading; or
(c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.
In relevant part, Minn. Stat. § 80A.03 states:
It is unlawful for any person to effect any transaction in, or induce the purchase or sale of any security by means of any manipulative, deceptive or other fraudulent device or contrivance, including any fictitious quotation.
The district court determined Siler (a) did not allege Principal made any misrepresentations or omissions causing Siler to sell or purchase stock and (b) did not allege "intent to deceive, manipulate, or defraud" by Principal that would satisfy a scienter requirement. Thus, the district court concluded Siler did not allege facts on which she could claim violation of Minn. Stat. § 80A.01.
The district court did not address Minn. Stat. § 80A.03.
A. "In Connection With"
Siler's ability to recover under Minn. Stat. § 80A.01 depends, in part, on construction of the phrase "in connection with the offer, sale or purchase of any security." To present a claim under Minn. Stat. § 80A, the plaintiff "must allege a misstatement or omission in connection with his own decision to purchase or sell a security." Davis v. Midwest Discount Sec., Inc., 439 N.W.2d 383, 388 (Minn.App. 1989) (emphasis added). This court recently noted that federal courts have interpreted the "in connection with" requirement contained in a similar federal law as requiring a "causal connection between a defendant's misstatements or omission and plaintiff's purchase [or sale]." Fawcett v. Heimbach, 591 N.W.2d 516, 522 (Minn.App. 1999), (quotation omitted).
The district court interpreted Fawcett as precluding Siler's claim because Principal's actions did not cause Siler to sell her stock. Neither Davis nor Fawcett involved a situation such as this one. Although Siler did not assert that Principal made any misrepresentations or omissions that caused her to sell her stock, Siler did assert that Principal's misrepresentations and omissions caused the sale of her stock. Because the result is identical, we conclude application of Minn. Stat. § 80A.01 to this case is consistent with Davis and Fawcett.
B. Scienter
Siler disputes the district court's conclusions that (a) she did not assert Principal acted with intent and (b) Minnesota's securities laws contain a scienter element.
The existence of intent is a question of fact. Dannheim Dev., Inc. v. Mogler, 412 N.W.2d 398, 400 (Minn.App. 1987). As Siler points out, she alleged actions by Principal that could potentially support an intent finding. For example, she asserted Principal altered the account opening form and the fiduciary-certification-of-investment-powers form, thereby changing the account holder from the estate to the trust. This facilitated the sale of the stock, which was held by the trust. Because these facts might support a finding of intent, the district court erred by concluding on a rule 12.02(e) motion that Siler did not allege Principal acted with intent.
Whether Minn. Stat. § 80A.01 contains a scienter requirement is a more difficult question. In Sprangers v. Interactive Techs., Inc., 394 N.W.2d 498, 503 (Minn.App. 1986), review denied (Minn. Nov. 19, 1986), this court stated that Minn. Stat. § 80A.01(b) does not require scienter. Section 80A.01 is almost identical to section 101 of the Uniform Securities Act. Id. The section 101 comments state that it is "`substantially'" like Securities and Exchange Commission Rule 10b-5, which was modeled upon § 17(a) of the Securities Act of 1933 (codified at 15 U.S.C. § 77(q)(a) (1994)). Id.
In Aaron v. Sec. Exch. Comm'n, 446 U.S. 680, 697, 100 S.Ct. 1945, 1956 (1980), the Supreme Court held that 15 U.S.C. § 77q (a)(1) requires scienter but § 77q(a)(2) and § 77q(a)(3) do not require scienter. Section 77q(a)(1) is nearly identical to Minn. Stat. § 80A.01(a), and sections 77q(a)(2) and 77q(a)(3) are nearly identical to Minn. Stat. § 80A.01(b) and (c).
Because this court's basis for concluding in Sprangers that scienter is not required under Minn. Stat. § 80A.01(b) was the similarity between this section and 15 U.S.C. § 77q(a)(2), which does not contain a scienter element, Minn. Stat. § 80A.01(a) requires scienter, just as 15 U.S.C. § 77q(a)(1) requires scienter. Similarly, Minn. Stat. § 80A.01(c) corresponds with 15 U.S.C. § 77q(a)(3) and does not require scienter. Further, Minn. Stat. § 80A.03, includes a scienter element because its plain language evinces such a requirement and its language is similar to 15 U.S.C. § 78j(b) (1994), which the U.S. Supreme Court determined requires scienter. See Aaron, 446 U.S. at 696, 100 S.Ct. at 1955 (holding scienter is necessary element of section 10(b) of the Securities Exchange Act of 1934, codified at 15 U.S.C. § 78j(b) (1994)).
Our conclusion on this issue is not inconsistent with our recent decision in Fawcett. We stated in Fawcett, "The federal corollary to Minn. Stat. § 80A.01 is section 10(b) of the Securities Exchange Act of 1934, codified at 15 U.S.C. § 78j(b) (1994)," and noted that rule 10b-5 was enacted to enforce section 10(b). Fawcett, 591 N.W.2d at 522. We recognize that because the United States Supreme Court determined in Aaron, 446 U.S. at 696, 100 S.Ct. at 1955, that scienter is a necessary element of a section 10(b) and rule 10b-5 violation, Fawcett seemingly implies a Minn. Stat. § 80A.01 violation requires scienter. But we note the scienter element was not at issue in Fawcett. Thus, Sprangers is the controlling case on this issue.
III. Conversion
The elements of common-law conversion are (a) the plaintiff had a property interest and (b) the defendant deprived the plaintiff of that property interest. Lassen v. First Bank Eden Prairie, 514 N.W.2d 831, 838 (Minn.App. 1994), review denied (Minn. June 29, 1994).
Siler made two conversion claims. First, she asserted Principal converted her stock by its acts and omissions, including transferring the stock certificate into a street name without valid authorization, selling the shares without valid authorization, and transferring the proceeds to Orlins without valid authorization. Second, Siler alleged that because Principal served as the drawer and possibly the drawee on the check for the sale proceeds, Principal committed conversion.
The district court first concluded that because Principal returned the proceeds from the stock sale by issuing a check payable to the estate and sending it to Orlins's office, Principal did not deprive Siler of her property interest. The district court failed to observe, however, that Siler at least claimed Principal's actions or inactions permitted Orlins to defraud Siler. Thus, she has raised at least a colorable claim that Principal's actions deprived her of her property interest in the stock.
Relying on Halla v. Norwest Bank Minn., 601 N.W.2d 449 (Minn.App. 1999), review denied (Minn. Dec. 14, 1999), the district court also concluded that Siler's conversion claims were precluded by the Uniform Commercial Code. In Halla, this court held that common-law claims for conversion of negotiable instruments are now encompassed within Minn. Stat. § 336.3-420(a) (1998), and, thus, common-law claims are no longer available. Id. at 451. Halla precludes Siler's second conversion claim in which she asserted that because Principal served as drawer and possibly the drawee on the check endorsed by Orlins, Principal converted these funds. Thus, we affirm the district court's dismissal of Siler's second conversion claim, but Halla does not preclude Siler's claim that Principal converted her stock. Minn. Stat. § 336.3-420(a) applies only to negotiable instruments and does not apply to securities. Minn. Stat. § 336.3-102(a) (1998). Therefore, Siler's claim relating to conversion of the stock are not precluded by this court's decision in Halla.
Finally, the district court determined Siler did not raise valid conversion claims because she ratified Orlins's action when she agreed to the stock sale the day after Principal sold the stock and distributed the proceeds to Orlins.
The district court's decision on this issue is in conflict with the requirements for ratification. Ratification takes place
when one, having full knowledge of all the material facts, confirms, approves, or sanctions, by affirmative act or acquiescence, the originally unauthorized act of another, thereby creating an agency relationship and binding the principal by the act of his agent as though that act had been done with prior authority.
Anderson v. First Nat'l Bank, 303 Minn. 408, 410, 228 N.W.2d 257, 259 (1975) (citations omitted). Siler alleged that she did not have "full knowledge of all the material facts" when she agreed to sell the stock; she asserted she had no knowledge that the stock had already been sold and the proceeds sent to Orlins. Thus, the district court's decision on this issue was erroneous.
IV. Money Had and Received
The theory of money had and received or unjust enrichment may support claims of failed consideration, mistake, fraud in inducement, "or other situations where it would be morally wrong for one party to enrich itself at the expense of others." Fort Dodd Partnership v. Trooien, 392 N.W.2d 46, 48 (Minn.App. 1986) (citation omitted). In such cases, the defendant has received money that should "in equity and good conscience * * * be paid over to plaintiff and under such circumstances that he ought to pay it over." Van Valkenburg Moss Flaherty, Ltd. v. Buffalo Nat'l Bank, 303 Minn. 548, 549, 226 N.W.2d 918, 919 (1975) (citation omitted).
Siler asserted that Principal aided and abetted Orlins in committing the tort of money had and received. The supreme court recently stated:
We have long relied on the `well recognized' rule that all who actively participate in any manner in the commission of a tort, or who procure, command, direct, advise, encourage, aid, or abet its commission, or who ratify it after it is done are jointly and severally liable for the resulting injury.
Witzman v. Lehrman, Lehrman Flom, 601 N.W.2d 179, 185-86 (Minn. 1999) (quotations omitted). Liability under this theory requires scienter, and "the defendants must know that the conduct they are aiding and abetting is a tort." Id. (citation omitted).
The district court determined that because Principal made the check payable to the estate, Principal returned the property to Siler and not Orlins. The court concluded that sending the check in care of Orlins at his office does not support a claim that Principal is liable for money had and received. The district court also concluded Siler did not allege that Principal "actually knew" Orlins was committing a tort.
Siler alleged she did not instruct Principal to open the account, cash the stock, or send the proceeds to Orlins. She did not specifically assert that Principal knew its actions were aiding and abetting Orlins's tort. She did contend, however, that Principal altered the fiduciary-certification-of-investment-powers form and client-opening-account agreement to state that the account was in the trust's name. This step permitted the sale of the stock, which was held by the trust. These actions could support a finding that Principal knew Orlins was committing a tort and that Principal actively assisted him in doing so, and we need only decide whether Siler's case can survive a rule 12 motion. See 614 Co., 547 N.W.2d at 405 (stating "[p]leadings are adequate unless it appears `to a certainty' that there are no facts, consistent with the pleadings, sufficient to establish a right for relief" (citation omitted)). Thus, the district court erred in dismissing this claim. V.UFA and UASFST
The district court also concluded Siler's claims are barred by Minnesota's Uniform Fiduciaries Act (UFA), Minn. Stat. §§ 520.01-.13 (1998), and the Uniform Act for the Simplification of Fiduciary Security Transfers (UASFST), Minn. Stat. §§ 520.21-.31 (1998). The district court relied in part on Minn. Stat. § 520.02, which states:
A [corporation] who in good faith pays or transfers to a fiduciary any money or other property which the fiduciary as such is authorized to receive, is not responsible for the proper application thereof by the fiduciary; and any right or title acquired from the fiduciary in consideration of such payment or transfer is not invalid in consequence of a misapplication by the fiduciary.
The district court determined that a fiduciary relationship existed between Orlins and Siler as a result of his position as her agent. The court noted that when Siler agreed to the stock sale after the fact, she instructed Orlins to act on her behalf. The court then determined that Principal "behaved honestly" when it made the check payable to Siler and sent it to Orlins.
Siler asserted that she did not authorize Orlins to sell her stock until after he had already sold it. Thus, whether Orlins was acting as Siler's fiduciary when he dealt with Principal is at issue. See PMH Properties, 263 N.W.2d at 802 (stating the existence of agency relationship is question of fact). If Orlins was not authorized to receive the proceeds from the trust, and/or Principal did not act in good faith, then Minn. Stat. § 520.02 would not apply. Therefore, the district court erred by determining on a rule 12.02(e) motion that Minn. Stat. § 520.02 bars Siler's claims.
The district court also concluded that Minn. Stat. § 520.27(a) bars this action. This statute states:
No [corporation that] participates in the acquisition, disposition, assignment or transfer of a security by or to a fiduciary, including a person who guarantees the signature of the fiduciary, is liable for participation in any breach of fiduciary duty by reason of failure to inquire whether the transaction involves a breach unless it is shown that the [corporation] acted with actual knowledge that the proceeds of the transaction were being or were to be used wrongfully for the individual benefit of the fiduciary or that the transaction was otherwise in breach of duty.
Minn. Stat. § 520.27(a). The district court determined Siler alleged no facts on which she could base a conclusion that Principal had actual knowledge of Orlins's intent.
Again, the district court neglected to recognize that this statute does not apply unless Orlins was acting as Siler's fiduciary when he made the transactions in question. This fact is in dispute. As such, this issue should not have been resolved on a rule 12.02(e) motion.
VI. Conclusion
Based on the foregoing, we affirm the district court's dismissal of Siler's second conversion claim in which she asserted Principal is liable for conversion because it was the drawer and possibly the drawee of the check for the stock sale proceeds. We reverse the district court's dismissal of all of Siler's other claims and remand for further proceedings.