Opinion
Civil Action No. 3:97-CV-0860-L
March 16, 2001
MEMORANDUM OPINION AND ORDER
Before the court are Defendant Teco Gas Marketing Company's ("Teco") Second Amended Motion for Summary Judgment, filed October 9, 1998; Defendant Peyton Feltus' ("Feltus") First Amended Motion for Summary Judgment, filed December 2, 1998; Defendant Fidelity Investment Management Corporation's ("Fidelity") Motion for Summary Judgment, filed December 18, 1998; and Defendant LFG, L.L.C.'s ("LFG") Motion for Summary Judgment, filed December 21, 1998. Only these Defendants ("moving Defendants") are seeking summary judgment; no dispositive motions have been filed by or on behalf of Defendants Danny Meister ("Meister") or Motor Works of Arlington, Inc. ("Motor Works"). After careful consideration of the motions, responses, replies, briefs, evidence submitted by the parties, and applicable law, the court grants in part and denies in part Feltus' motion for summary judgment, and grants the motions for summary judgment by Teco, Fidelity, and LFG/Linnco. I. Factual and Procedural Background
Also named as a defendant in this action is Linnco Futures Group, L.L.C. ("Linnco"). Linnco is the predecessor company to LFG, and LFG's motion for summary judgment is therefore applicable to both LFG and Linnco. All future references in this opinion to Linnco are intended to refer collectively to the predecessor company and the successor company.
The facts contained herein are either undisputed or, where they are disputed, presented in the light most favorable to Plaintiff as the nonmovant.
The backdrop for this case is an elaborate and highly regulated system of commodities futures trading. An "introducing broker" ("IB") solicits or receives trades from individual customers and sets up customer accounts with a separate business entity referred to as a "futures commission merchant" ("FCM"). The FCM is authorized to actually execute and clear trades of commodities futures and options, as requested by the customer and IB, on a commodity exchange. Any particular IB may deal with a number of different FCM's to execute the trades requested by the IB's customers, just as any particular FCM will execute and clear trades received from a number of different IB's. Both FCM's and IB's are registered with the Commodity Futures Trading Commission ("CFTC") and subject to regulations concerning their conduct of the commodities trading business. Regulations also govern the conduct of any natural person who qualifies as an "associated person" of an FCM or IB. FCM's and IB's have a duty to supervise an associated person's actions in handling accounts and "all other activities . . . relating to [the FCM's or IB's] business as a Commission registrant." 17 C.F.R. § 166.3.
An "associated person" is someone associated with either an FCM or an IB in a certain capacity. This includes a natural person associated with an FCM as "a partner, officer, or employee (or any natural person occupying a similar status or performing similar functions), in any capacity which involves (1) the solicitation or acceptance of customers' or option customers' orders (other than in a clerical capacity) or (11) the supervision of any person or persons so engaged." 17 C.F.R. § 1.3(aa). The definition for those associated with an IB is identical except that it extends not only to partners, officers, and employees but also agents. Id.
Plaintiff ("Stroud"), as president and sole owner of Phoenix Gas Liquids Company ("Phoenix"), traded petroleum futures from approximately 1990 through October, 1996. The trades were placed by Fidelity (the IB) through Linnco (the FCM). The individual with whom Phoenix dealt in trading commodities was Feltus, an associated person of Fidelity and the branch manager of the Fidelity office in Texas. In essence, Feltus would solicit customers, such as Phoenix, on behalf of the IB, Fidelity; Feltus would then open a customer commodity trading account with an FCM, such as Linnco; and trades would then be placed by the customer with Feltus, who would direct the FCM to execute the trades on the floor of the commodities exchange.
Teco, which also traded commodities in the natural gas business, hired Feltus to provide consulting advice concerning commodities trading. Feltus worked out of office space provided by Teco, which also provided support in the way of office equipment and staff. Feltus and Teco contend that Feltus was an independent contractor, not employee, of Teco. Stroud contends that Feltus either was, or appeared to be, an employee of Teco.
This lawsuit does not directly involve the commodity futures trading of Phoenix; the background is relevant primarily to the issue of whether the moving Defendants are liable for losses incurred by Stroud in connection with certain other transactions. The complaint concerns two investment transactions, denominated "joint venture agreements," in 1996 between Stroud and Motor Works. (Meister was the president of Motor Works.) The purported purpose of both transactions was to purchase luxury motorcoaches and Mercedes Benz sedans, under an existing agreement with the Federal Deposit Insurance Corporation ("FDIC"), at a reduced price and immediately resell them at a profit. Feltus solicited Stroud to invest in the transactions, and allegedly made various representations to Stroud concerning whether the investments were sound. Stroud invested a total of $250,000 in the transactions — $100,000 on March 27, 1996 and $150,000 on June 27, 1996. The money for the first transaction was withdrawn from Phoenix's commodity trading account with Linnco.
In fact, the joint venture agreements were apparently nothing but a sham — the FDIC had no such properties to be liquidated and Motor Works had no agreement with the FDIC to buy such properties. Stroud was notified of this by an FDIC investigator on or about August 22, 1996, and in turn notified Feltus and Meister of his discussion with the FDIC. Stroud lost the entire amount invested, and Meister subsequently was sentenced to a prison term for fraud in connection with these and similar transactions.
Meister and Motor Works deny any fraud, but none of the moving Defendants disputes that the actions of Meister and Motor Works constitute fraud. The motions for summary judgment simply assert that, for various reasons, even if Meister and Motor Works did perpetrate fraud on Stroud, the other Defendants are not liable for that fraud. The court therefore assumes, for purposes of these motions only, that the fraud is established.
Stroud subsequently filed this suit, seeking recovery of the $250,000 he lost plus interest, as well as other compensatory, statutory, or punitive damages and attorney's fees. He seeks recovery against Meister and Motor Works for selling unregistered securities in violation of the Texas Securities Act ("TSA"), Tex. Rev. Civ. Stat. Ann. art. 581-1 et seq. (Vernon 1964 Supp. 2001), and knowing and intentional deception in violation of the Texas Deceptive Trade Practices Act ("DTPA"), Tex. Bus. Comm. Code Ann. § 17.41 et seq. (Vernon 1987 Supp. 2001). Stroud apparently asserts five theories of recovery against Feltus (the only one of moving Defendants actually involved in the transactions): 1) for selling unregistered securities in violation of the TSA; 2) for fraudulent or negligent misrepresentations, or misleading omissions of material facts, in violation of the TSA; 3) for fraudulent or negligent misrepresentations, or misleading omissions of material facts, in violation of the Commodity Futures Trading Commission Act ("CFTCA"), 7 U.S.C. § 1 et seq.; 4) for fraudulent or negligent misrepresentations, or misleading omissions of material facts, in violation of the DTPA; and 5) common law fraud. Although, as discussed below, Stroud does not state a claim for breach of fiduciary duty, he does assert in the claim that Feltus was a fiduciary.
Stroud requests that he be awarded the $250,000 he invested, but the complaint also states that Meister made payments totaling $65,000 after suit was filed, which the court assumes would reduce his damages. Also, Feltus' motion for summary judgment mentions that Stroud subsequently assigned half of his interest in the second joint venture to a third party, John Hinsey. It is therefore unclear exactly how much Stroud really lost.
It is difficult at times to tell exactly what the amended complaint means to assert as theories of recovery. As noted below, some of the Defendants do not address all the claims against them, without any indication that they were filing only a partial motion for summary judgment. Also, Stroud and Feltus dispute a claim that the court concludes was not even made. The exact nature of Stroud's claims may have been unclear to the Defendants, as it was to the court. Because this amended complaint was submitted in response to the court's order of May 29, 1998, which identified several deficiencies in the original pleading, the court expected that more care would be devoted to clearly identifying the causes of action.
Stroud's claims against the other moving Defendants — Teco, Linnco, and Fidelity — are derivative of his claims against Feltus. He claims that they directly or indirectly controlled Feltus and therefore are jointly and severally liable with him pursuant to the TSA and the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78a et seq. He also asserts their liability based on Feltus' actions under common law theories of respondeat superior and vicarious liability, as well as for negligent supervision.
Feltus and Linnco asserted counterclaims against Stroud, on the basis that the claims against them were groundless and brought in bad faith, seeking attorney's fees and costs. Teco and Fidelity did not explicitly assert counterclaims, but their answers to the complaint also requested that they be awarded attorney's fees.
All of the Defendants other than Meister and Motor Works have now filed motions for summary judgment. Feltus asserts that all of Stroud's claims against him must fail because: 1) the joint venture agreements were partnerships rather than securities or commodity futures (and thus the Texas Securities Act and Commodity Futures Trading Commission Act do not apply); 2) he had no knowledge that the representations he made to Stroud were false, and thus cannot be liable for common law fraud or violations of the DTPA; and 3) with respect to the transactions at issue, he acted on behalf of Meister and Motor Works and thus had no fiduciary relationship with Stroud. The motions by Teco, Fidelity, and Linnco deny that there is any basis for derivative liability for Feltus' actions, as they had no relationship with him which created actual or apparent authority for him to act as their agent, and had no independent legal duty to supervise his actions, with respect to the transactions at issue.
II. Summary Judgment Standard
Summary judgment shall be rendered when 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 judgment as a matter of law. Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 323-25 (1986); Ragas v. Tennessee Gas Pipeline Co., 136 F.3d 455, 458 (5th Cir. 1998). A dispute regarding a material fact is "genuine" if the evidence is such that a reasonable jury could return a verdict in favor of the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). When ruling on a motion for summary judgment, the court is required to view all inferences drawn from the factual record in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio, 475 U.S. 574, 587 (1986); Ragas, 136 F.3d at 458.
Once the moving party has made an initial showing that there is no evidence to support the nonmoving party's case, the party opposing the motion must come forward with competent summary judgment evidence of the existence of a genuine fact issue. Matsushita, 475 U.S. at 586. Mere conclusory allegations are not competent summary judgment evidence, and thus are insufficient to defeat a motion for summary judgment. Eason v. Thaler, 73 F.3d 1322, 1325 (5th Cir. 1996). Unsubstantiated assertions, improbable inferences, and unsupported speculation are not competent summary judgment evidence. See Forsyth v. Barr, 19 F.3d 1527, 1533 (5th Cir.), cert. denied, 513 U.S. 871 (1994). The party opposing summary judgment is required to identify specific evidence in the record and to articulate the precise manner in which that evidence supports his claim. Ragas, 136 F.3d at 458. Rule 56 does not impose a duty on the court to "sift through the record in search of evidence" to support the nonmovant's opposition to the motion for summary judgment. Id., see also Skotak v. Tenneco Resins, Inc., 953 F.2d 909, 915-16 n. 7 (5th Cir.), cert. denied, 506 U.S. 832 (1992). "Only disputes over facts that might affect the outcome of the suit under the governing laws will properly preclude the entry of summary judgment." Anderson, 477 U.S. at 248. Disputed fact issues which are "irrelevant and unnecessary" will not be considered by a court in ruling on a summary judgment motion. Id. If the nonmoving party fails to make a showing sufficient to establish the existence of an element essential to its case and on which it will bear the burden of proof at trial, summary judgment must be granted. Celotex, 477 U.S. at 322-23. III. Analysis A. Feltus 1. Texas Securities Act and CFTCA Claims
The initial issue is whether the "joint venture agreements" were investment contracts, and thus securities subject to the Texas Securities Act, rather than true joint ventures. This is a matter of law to be determined by the court. Grotjohn Precise Connexiones Int'l, S.A. v. JEM Financial, Inc., 12 S.W.3d 859, 868 (Tex.App.-Texarkana 2000, no pet.). The term "security" encompasses an investment contract as well as a limited partner interest in a limited partnership. Tex. Rev. Civ. Stat. Ann. art. 581-4 (Vernon Supp. 2001). It generally does not encompass a true joint venture (other than an investment contract) or general partnership. Russell v. French Associates, Inc., 709 S.W.2d 312, 314 (Tex.App.-Texarkana 1986, writ ref'd n.r.e.). The elements of a true joint venture are "(1) a community of interest in the venture, (2) an agreement to share profits, (3) an agreement to share losses, and (4) a mutual right of control or management of the enterprise," and the elements of an investment contract are "(1) a common enterprise in which a person (2) expects profits (3) solely from the efforts of the promoter or a third party." Id. The Texas Supreme Court has recognized that the last element of an investment contract, "solely from the efforts of" others, should not be applied literally and mechanically, and that "the more realistic test is whether the efforts made by those other than the investor are undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise." Searsy v. Commercial Trading Corp., 560 S.W.2d 637, 641 (Tex. 1977) (citation and internal quotation marks omitted).
The agreements at issue here clearly satisfy all but the last element under both definitions. Motor Works and Stroud were to share in profits and losses at specified percentages, and the agreements involved a "community of interest" or "common enterprise" — the plan to purchase automobiles from the FDIC — from which the parties expected profits. At issue, therefore, is whether there was a mutual right of control or management (joint venture, not classified as a security) or whether the anticipated efforts of Motor Works and Meister were "those essential managerial efforts which affect the failure or success of the enterprise" (investment contract, classified as a security).
The court, in its order of May 29, 1998, declined to determine whether these agreements were securities because of inadequate development of the facts and circumstances, and required Stroud to replead and "allege facts which support his claim that the auto transaction agreements are security interests [sic] rather than joint venture agreements, as their titles clearly suggest." In support of the claim, Stroud's First Amended and Supplemental Complaint notes that "the contract[s] involved [no] rights of mutual control or management", ¶ 24, and that they "involved a common enterprise from which plaintiff Stroud expected profits, solely from the efforts of' Meister and Motor Works, who "were to pay the F.D.I.C. for the properties, take possession of the properties from the F.D.I.C. and take all steps necessary to arrange and complete the sales of these properties," ¶ 23.
Feltus points out that the agreements at issue here are self-described as joint ventures and, although designating Meister as the "manager" of the venture's activities, also provided certain rights to Stroud. For example, although Meister had "sole discretion" to incur expenses and determine the terms on which to sell the automobiles, at least some activities were to be "with consultation and agreement by Steve Stroud"; Stroud had the right to audit the venture's books and records; and neither "venturer" could sell or assign its interest in the venture without written consent from the other. Feltus' First Amended Motion for Summary Judgment, Exhibit A ¶¶ 4-6 and Exhibit B ¶¶ 4-6. The court concludes that the evidence is inconclusive as to the rights of control and management, and therefore turns to the question of whether the efforts to be performed by Meister and Motor Works were "those essential managerial efforts which affect the failure or success of the enterprise."
In this analysis, the court finds instructive, although not directly on point, several cases involving real estate ventures. In these cases, the Texas courts have differentiated between ventures whose profits would come from natural market forces creating appreciation in value and ventures whose profits would come from active management of the land. In the former situation, the ventures were held to be true joint ventures; in the latter situation, the ventures were held to be investment contracts. Compare Wilson v. Lee, 601 S.W.2d 483, 484-85 (Tex.Civ.App.-Dallas 1980, no writ) ("the source of their expectations of profit or appreciation of their investment" came solely from "market value inflation" rather than "by virtue of development or operation of the property"; held not an investment contract); Adickes v. Andreoli, 600 S.W.2d 939, 945 (Tex.Civ.App.-Houston [1st Dist.] 1980, writ dism'd) (not an investment contract when there was "no evidence that it was the expectation of the parties that the success of the venture would depend upon those 'essential managerial efforts . . . which effect the failure or success of the enterprise'") (quoting Searsy); McConathy v. Dal Mac Commercial Real Estate, Inc., 545 S.W.2d 871, 875 (Tex.Civ.App.-Texarkana 1976, no writ) ("the essential element of reliance on the managerial, operational or developmental efforts of others" means more than "the mere holding of property in anticipation of appreciation in value"; no investment contract when the efforts by others were only "insuring the property, paying the taxes and the like — not for profit, but solely to protect and preserve the investment") with Anderson v. Vinson Exploration, Inc., 832 S.W.2d 657, 662 (Tex.App.-El Paso 1992, writ denied) (sufficient evidence that an oil and gas joint operating agreement was an investment contract, when the investors had little experience and the operator "selected the specific oil and gas lease to purchase, negotiated the terms of the lease, performed a geological study of the property, selected the drillsite, selected the formation to drill down to and oversaw the drilling and completion of the wells"); Mayfield v. Troutman, 613 S.W.2d 339, 342-44 (Tex.Civ.App.-Tyler 1981, writ ref'd n.r.e.) (agreement was an investment contract when it was not restricted to reselling the land but "contain[ed] a more expansive list of purposes, including the improvement and leasing of the property" and the general partner's "skill and efforts" and "rather extensive experience in the real estate business" would be "critical in actually consummating a profitable sale").
From these cases, the court concludes that the key question is whether the success of the proposed venture in this case would depend primarily on the skill and experience of Meister and Motor Works or on natural market forces. The court notes that the expressed sole purpose of the agreements was purchasing and then reselling automobiles. See Feltus' First Amended Motion for Summary Judgment, Exhibit A ¶ 1 and Exhibit B ¶ 1. In addition, the source of the profit to be derived, at least as Stroud understood it, was acquiring the automobiles from the FDIC at 20% of market value and immediately reselling them to a wholesaler. Id., Exhibit C (Deposition of Stroud) at 67-68, 80-82. While there may have been some value added by Meister's knowledge of automobile sales, his efforts — "to deal with the FDIC, pay for the property, make arrangements to obtain the property, remove the property, sell the property, and distribute all profits," Stroud's Memorandum in Opposition at 2 — were more ministerial in character than a critical component without which the venture would fail.
The court concludes as a matter of law that the joint venture agreements at issue in this case were true joint ventures rather than investment contracts, and are not subject to the Texas Securities Act. Accordingly, there is no genuine issue of material fact as to Stroud's claims against Feltus based on the Texas Securities Act, and Feltus is entitled to judgment as a matter of law as to those claims.
Stroud also provides an affidavit by an expert in the securities field who concludes that the agreements in question were "securities." The expert's opinion, of course, is irrelevant since it concerns a matter of law to be determined by the court.
Feltus also contends that the CFTCA is not applicable here. Stroud does not respond to this argument, but in any event it seems correct. The CFTCA prohibits misrepresentations "in or in connection with any order to make, or the making of, any contract of sale of any commodity" or "in or in connection with any order to make, or the making of, any contract of sale of any commodity for future delivery." 7 U.S.C. § 6b. A commodity is defined as follows:
The term "commodity" means wheat, cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums, mill feeds, butter, eggs, Solanum tuberosum (Irish potatoes), wool, wool tops, fats and oils (including lard, tallow, cottonseed oil, peanut oil, soybean oil, and all other fats and oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal, livestock, livestock products, and frozen concentrated orange juice, and all other goods and articles, except onions as provided in section 13-1 of this title, and all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in.7 U.S.C. § 1a(3). The court sees no basis for classifying the joint venture agreements, or the underlying automobiles that were the object of the transaction, as "commodities." Accordingly, the court concludes that there is no genuine issue of material fact with regard to Stroud's CFTCA claim against Feltus and that Feltus is entitled to judgment as a matter of law as to this claim. 2. DTPA Claim
Feltus challenges the DTPA claim on the basis that there is no evidence that he knowingly and intentionally made false, misleading, or deceptive statements. The DTPA prohibits "[f]alse, misleading, or deceptive acts or practices in the conduct of any trade or commerce," Tex. Bus. Comm. Code Ann. § 17.46(a) (Vernon Supp. 2001), which
includes, but is not limited to, the following acts: . . .
(5) representing that goods or services have sponsorship, approval, characteristics, ingredients, uses, benefits, or quantities which they do not have . . .
(23) the failure to disclose information concerning goods or services which was known at the time of the transaction if such failure to disclose such information was intended to induce the consumer into a transaction into which the consumer would not have entered had the information been disclosed; . . .Id. 17.46(b). The amended complaint in ¶ 31 cites only to § 17.46(b)(23), but it also refers to affirmative misrepresentations, not just omissions. Other sections of the amended complaint, for example ¶¶ 22 and 26, clearly refer to both affirmative misrepresentation and omissions. Paragraph 28 alleges violation of the DTPA (although the specific section is not cited) "by the statements and misrepresentations described above." Pursuant to Fed.R.Civ.P. 8, the court construes complaints liberally. See Gresham Park Community Org. v. Howell, 652 F.2d 1227, 1236 (5th Cir. Unit B 1981). The court therefore construes the complaint as asserting a cause of action under both § 17.46(b)(5) and (23).
A complaint under § 17.46(b)(23) must show that the omissions relate to facts that the defendant knew at the time he failed to disclose them, and that the defendant intended to deceive the consumer. Sidco Prods. Mktg., Inc. v. Gulf Oil Corp., 858 F.2d 1095, 1100 (5th Cir. 1988). A complaint under § 17.46(b)(5), however, is valid "without any showing that the defendant intended to deceive the plaintiff or knew the falsity of his statements." Pennington v. Singleton,
606 S.W.2d 682, 689 (Tex. 1980). The dispute over whether Feltus made the alleged misrepresentations "knowingly and intentionally" is therefore not a material fact as to the validity of the DTPA claim, see Anderson, 477 U.S. at 248, although it would affect the amount of damages recoverable if and when Feltus is found to have violated the DTPA. See § 17.50(b)(1). Because Feltus has advanced no other arguments against the DTPA claim, he has not shown the absence of a genuine issue of material fact with respect to this claim and therefore is not entitled to judgment as a matter of law with respect to it.
The amended complaint uses the "knowingly and intentionally" language in ¶ 31. Having construed the complaint to include a claim under § 17.45(b)(5), which has no "knowingly and intentionally" requirement, the court concludes that the language in question is surplusage which need not be proved by Stroud. In any event, such language is not included in the allegations in ¶¶ 22 and 26, to which the DTPA violation alleged in ¶ 28 apparently refers.
Another issue is whether Stroud is a "consumer" for purposes of the DTPA. A "consumer" is an individual who "who seeks or acquires by purchase or lease, any goods or services." Tex. Bus. Com. Code Ann. § 17.45(4). Although Feltus did not advance this argument as a basis for summary judgment on the DTPA claim, Stroud addresses it in his response. The response is unpersuasive, however, since he relies on cases involving the purchase of financial services and cattle, see Busse v. Pacific Cattle Feeding Fund No. 1 Ltd., 896 S.W.2d 807 (Tex.App. — Texarkana 1995, writ denied); Herndon v. First Nat. Bank of Tulsa, 802 S.W.2d 396 (Tex.App.-Amarillo 1991, writ denied), without explaining how those fact situations would apply to the purchase of an interest in a joint venture. The purchase of intangibles, such as securities, accounts receivable, commodity option contracts, and interests in limited partnerships, does not confer "consumer" status. Insurance Co. of North America v. Morris, 928 S.W.2d 133, 148 (Tex.App.-Houston [14th Dist.] 1996), aff'd in part and rev'd in part on other grounds, 981 S.W.2d 667 (Tex. 1998). An intangible is not a "good" even when the underlying subject matter constitutes a good. Id. Because Feltus did not raise this issue in his motion for summary judgment and the issue was not fully briefed, however, the court declines to consider this issue.
3. Fraud Claim
The amended complaint includes the reference to "common law fraud" in the same paragraph as the assertion of the DTPA cause of action and bases it on the same alleged misrepresentations. Feltus does not explicitly move for summary judgment on the fraud claim, but the court concludes that it is appropriate to grant summary judgment sua sponte on this claim. The key issue, whether there is evidence of any knowing and intentional misrepresentations, has been addressed by the parties in connection with the DTPA claim. "[I]t is well-settled that a district court may grant summary judgment sua sponte, so long as the losing party has ten days notice to come forward with all of its evidence in opposition to summary judgment." Love v. National Medical Enterprises, 230 F.3d 765, 770-71 (5th Cir. 2000). Stroud was clearly on notice as a result of Feltus' challenge to the DTPA claim and had the requisite ten days to present all of his evidence, or at least evidence adequate to raise a genuine issue of material fact, of knowing and intentional misrepresentations.
A cause of action for common law fraud requires
(1) a material misrepresentation was made; (2) it was false; (3) when the representation was made, the speaker knew it was false or the statement was recklessly asserted without any knowledge of its truth; (4) the speaker made the false representation with the intent that it be acted on by the other party; (5) the other party acted in reliance on the misrepresentation; and (6) the party suffered injury as a result.Chapman Children's Trust v. Porter Hedges, L.L.P., 32 S.W.3d 429, 441 n. 9 (Tex.App.-Houston [14th Dist.] 2000, pet. denied) (emphasis added). Accordingly, Feltus' argument that there is no evidence that he knew the representations were false or that he intended to deceive Stroud, although not applicable to the DTPA claim, is applicable to the fraud claim.
Stroud fails to answer adequately this argument. He mentions his belief that Feltus may have been aware of Meister's fraudulent scheme, but offers no evidence to support that belief. The only statements that he specifically points to as "false, misleading, and deceptive" are Feltus' statements that he had "checked out" Meister, that Meister was solid, and that the contracts were good investments. Stroud does not provide summary judgment evidence that such statements were made by Feltus, but Feltus does not deny saying them in his reply brief, so the court assumes arguendo that the statements were in fact made.
Those statements without more, however, do not prove that Feltus made knowing and intentional misrepresentations. It is questionable whether the statements that Meister was "solid" and that the joint ventures were good investments would support a fraud claim even if Feltus knew the statements were false when he made them. A fraud cause of action requires a misrepresentation which "must concern a material fact as distinguished from a mere matter of opinion, judgment, probability or expectation." Ryan v. Collins, 496 S.W.2d 205, 210 (Tex.Civ.App. — Tyler 1973, writ ref'd n.r.e.) (citations and internal quotation marks omitted). Representations as to the value of a prospective investment, such as that it "was 'hot'; that it had 'unlimited possibilities;' and was a 'solid buy,'" constitute "an opinion, judgment, probability or expectation" rather than a material fact, and are not actionable fraud. Id. "This rule is particularly applicable where there is nothing to indicate the statement was other than the expression of an honest opinion." Id. The statements that Meister was "solid" and that the joint ventures were good investments constitute exactly this sort of representations as to the value of an investment, and Stroud has offered no summary judgment evidence indicating that this was not Feltus' honest opinion. It is equally questionable whether Feltus' statement that he had "checked out" Meister could constitute a misrepresentation of material fact. Such a statement, without more detail, is so ambiguous as to be virtually meaningless. "If the representation is vague . . ., it is not a material fact." Peterson v. Barron, 401 S.W.2d 680, 687 (Tex.Civ.App.-Dallas 1966, no writ) (citing 25 Tex. Jur.2d § 15, p. 630).
The court need not decide, however, whether such statements could constitute misrepresentations of material fact. Even if some or all of these statements were misrepresentations, Stroud has provided no summary judgment evidence to show that Feltus knew the statements were false and intended to deceive Stroud. As noted above, knowledge of falsity and intent to deceive are not necessarily required for a DTPA claim, but they are necessary elements of a fraud cause of action. Accordingly, the court concludes that Stroud has not established a genuine issue of material fact with respect to the fraud claim. The court therefore sua sponte grants Feltus judgment as a matter of law with respect to the fraud claim.
In his response, Stroud states that the "court has already determined there are material issues of fact" concerning "whether Feltus' actions constitute fraud" as well as "whether Stroud is a consumer within the meaning of the D.T.P.A." This is simply not the case. In its order of May 29, 1998, the court concluded that claims for breach of fiduciary duty and violation of the DTPA were deficient, but declined to dismiss for failure to state a claim upon which relief can be granted, Fed.R.Civ.P. 12(b)(6), and required Stroud to replead. The court made no finding concerning material issues of fact with respect to those claims. The only reference to a question of fact concerning the claims against Feltus concerned whether the joint venture agreements were "securities."
4. Breach of Fiduciary Duty Claim
Stroud's response to Feltus' motion for summary judgment seems to assume that his First Amended and Supplemental Complaint includes a claim for breach of fiduciary duty. The court disagrees. In its order of May 29, 1998, the court concluded that the original complaint was deficient with respect to the claim for breach of fiduciary duty (as well as several other claims) and directed Stroud to submit an amended complaint to rectify the deficiencies. If he intended to include a claim for breach of fiduciary duty, he did not do so clearly. The amended complaint includes several paragraphs concerning Feltus using language such as "is liable," "violated," or "in violation of":
¶ 22 — "is liable as a result" of misrepresentations within the meaning of the TSA
¶ 25 — "liable for this violation of the" TSA (soliciting a transaction in an unregistered security)
¶ 26 — "in violation of" the TSA and CFTCA by offering a security by means of misrepresentation
¶ 28 — "violated" the DTPA by misrepresentations
¶ 31 — misrepresentations "caused actual damages within the meaning of' the DTPA and "constitute common law fraud"
These allegations are sometimes duplicative and disorganized, but at least they (relatively) clearly assert a cause of action. By contrast, the only reference to a fiduciary relationship is in ¶ 19, which asserted that Feltus was "acting as a fiduciary" but includes no words of culpability or liability. There is no reference to "fiduciary duty" or "breach," either in ¶ 19 or elsewhere in the amended complaint. The original complaint, by contrast, included in ¶ 18 an allegation that Feltus "breached fiduciary duties owed to" Stroud. That complaint is no longer the operative pleading, however, as the amended complaint replaced it. If Stroud wished to assert a cause of action for breach of fiduciary duty, he failed to do so. Although the court construes complaints liberally, there are limits to how far the actual language of the complaint can be stretched. Particularly after Stroud was advised of multiple deficiencies in his original complaint and given the opportunity to amend, the court simply cannot construe the amended complaint as having pleaded a cause of action for breach of fiduciary duty. B. Teco
The amended complaint was filed pursuant to the court's order of May 29, 1998, which found that Stroud had failed to adequately state a claim for breach of fiduciary duty. Rather than dismiss the claim outright, the court gave Stroud an opportunity to amend the complaint and cure the defect. In doing so, he neglected to keep the operative language from the original complaint.
Although not directly relevant to its holding, the court also notes that Stroud's response brief identifies Dilling v. NationsBank, N.A., 897 S.W.2d 451 (Tex.App.-Waco 1995) as allowing recovery under a "breach of fiduciary duty" cause of action. Stroud's citation of this case is unpersuasive for two reasons: 1) the only reference to a fiduciary relationship is the statement that "[t]he lack of a contractual, fiduciary, or any other such relationship between the defrauded third party and the putative principal should have no bearing on whether the principal is vicariously liable for his agent's frauds," id. at 455 (emphasis added); and 2) the ruling by the appellate court was reversed in NationsBank, N.A. v. Dilling, 922 S.W.2d 950 (Tex. 1996). For future reference, the court fully expects that the parties will at a minimum exercise the diligence required not only to ensure that cited cases say what they are represented to say but also that they are still good law. Even if a case was reversed on other grounds, that fact should be disclosed.
Stroud asserts claims against Teco based on: 1) joint and several liability for Feltus' actions, pursuant to the TSA and the Exchange Act, because Teco directly or indirectly controlled Feltus; 2) respondeat superior/vicarious liability for actions by Feltus as an agent or employee; and 3) negligent supervision of Feltus. Teco moves for summary judgment as to the second and third claims, arguing that Feltus was an independent contractor rather than employee, and had never clothed Feltus with actual or apparent authority to act on its behalf to create an agency relationship.
1. Texas Securities Act and Exchange Act Claim
Teco addressed the claim under the TSA only in its reply brief, and did not address the claim under the Exchange Act at all. Nevertheless, dismissal of these claims is a necessary result of the court's finding above that the joint venture agreements at issue are not "securities." Normally when a plaintiff asserts the same claim against two or more defendants and only one defendant moves for summary judgment on that claim, the court would grant summary judgment only to the moving defendant. This is a result of the notice requirement underlying the summary judgment rule. A plaintiff is on "notice to come forward with all of its evidence," see Love, 230 F.3d at 770-71, that pertains to the moving defendant, but if the argument for summary judgment involves a fact question that depends on specific characteristics of the defendants (such as whether they were negligent), the plaintiff is not on notice to present corresponding evidence pertaining to the other defendants. That is, A's motion for summary judgment arguing that there was no evidence of A's negligence would not put the plaintiff on notice to submit evidence of B's negligence.
Normally "parties may not raise new grounds for summary judgment in their reply brief." Lovell v. Glen Oaks Hosp., Inc., 1998 WL 417774, at *4 n. 4 (N.D. Tex. July 21, 1998).
When the argument for summary judgment is based on a fact question independent of any specific characteristics of the defendants, however, the evidence required from the plaintiff as to that fact question is the same regardless of which defendant moves for summary judgment. A motion for summary judgment by any defendant that raises that fact question therefore puts the plaintiff on notice, and the court's conclusion as to that fact question is applicable to all defendants. Because Feltus raised the issue of whether the joint venture agreements were "securities," and that determination is not defendant-specific, the court's finding that they were not securities is applicable to all defendants.
The TSA provision upon which Stroud relies, Tex. Rev. Civ. Stat. Ann. art. 581-33(F)(1) (Vernon Supp. 2001), establishes joint and several liability for someone "who directly or indirectly controls a seller, buyer, or issuer of a security," but that liability depends on a violation of art. 581-33(A), (B), or (C). All of those provisions concern actions taken with respect to securities, and therefore are not applicable in this case. Similarly, the Exchange Act provision on which Stroud relies, 15 U.S.C. § 78t(a), establishes that "[e]very person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable." Liability under the Exchange Act is also limited to actions or omissions with respect to securities, and thus not applicable here. In addition, since Stroud asserted no cause of action against Feltus under the Exchange Act and Teco's liability would only be "with and to the same extent as" Feltus, Teco cannot be liable to Stroud under the Exchange Act. Accordingly, the court concludes that there is no genuine issue of material fact with respect to the claims asserted against Teco pursuant to the TSA and Exchange Act, and grants summary judgment sua sponte on these claims.
2. Respondeat Superior /Vicarious Liability Claim
"Under the doctrine of respondeat superior, an employer is vicariously liable for the negligence of an agent or employee acting within the scope of his or her agency or employment, although the principal or employer has not personally committed a wrong." Espalin v. Children's Medical Center of Dallas, 27 S.W.3d 675, 683 (Tex.App.-Dallas 2000, no pet.). The doctrine applies to acts of agents and employees, but not those of independent contractors. Id. "In order to impose liability upon an employer for the tort of its employee under the doctrine of respondeat superior, the act of the employee must fall within the scope of the general authority of the employee and must be in furtherance of the employer's business for the accomplishment of the object for which the employee was hired." Mackey v. U. P. Enterprises, Inc., 935 S.W.2d 446, 453 (Tex.App.-Tyler 1996, no writ). "Furthermore, when the servant turns aside, for however a short time, from the prosecution of the master's work to engage in an affair wholly his own, he ceases to act for the master, and the responsibility for that which he does in pursuing his own business or pleasure is upon him alone." Id.
Stroud and Teco dispute the relationship between Teco and Feltus upon which this claim is based. Stroud asserts that Feltus was Teco's employee, or at least that there is a genuine issue of material fact as to the relationship, while Teco asserts that Feltus was an independent contractor. Stroud further contends (and Teco disputes) that, even if Feltus were not an employee of Teco, he was Teco's agent as a result of apparent authority. Teco further contends that, even if Feltus were an agent or employee of Teco, Feltus was not acting within the scope of his employment or agency in soliciting Stroud to invest in the joint ventures.
a. Employee
The distinction between an employee and an independent contractor is clear, if not always easy to apply:
Proof of agency requires a showing that the alleged principal has the right to assign the agent's task and the right to control the means and details of the process to be used to accomplish the task. On the other hand, an independent contractor is one who, in the pursuit of an independent business, undertakes a specific job for another person, using his own means and methods, without submitting himself to the other's control regarding details of the job. Thus, the primary test used to decide whether a party is an independent contractor involves determination as to which of the parties to the relationship possesses the "right of control" over the details of the work. Factors used to determine whether one is an independent contractor include: (1) the independent nature of the contractor's business; (2) his obligation to supply necessary tools, supplies, and materials; (3) his right to control the progress of the work except as to final results; (4) the time for which he is employed; and (5) the method by which he is paid, whether by the time or by the job.Ross v. Texas One Partnership, 796 S.W.2d 206, 210 (Tex.App. — Dallas 1990) (citations omitted), writ denied, 806 S.W.2d 222 (1991) (per curiam). Teco offers, as proof that Feltus was an independent contractor, a Consultation and Non-Competition Agreement between them, which specifies in Section 4:
(a) Consultant shall employ his own means, methods, and discretion in accomplishing the projects and tasks assigned to him from time to time by the Corporation and shall not be subjected to the control of the Corporation with respect to the details of such work. Consultant shall be furnished with such office, secretarial help, and other facilities and services necessary for the accurate performance of his consultative duties.
(b) It is understood and agreed that Consultant shall act as an independent contractor in the undertaking of this Agreement. It is expressly understood and stipulated that no employer-employee relationship exists between the Corporation and the Consultant. With the exception of the duties created by this Agreement, it is agreed by the Consultant and the Corporation that neither party is the agent of the other, and neither has any authority whatsoever to bind or obligate the other party in any way.
Feltus asserts that he paid Teco $1,700 per month for the office space and support services.
The agreement further provided, in Section 3, that:
Other than as provided in Section 9 of this Agreement, Consultant is not prohibited from engaging in business activities involving advising on hydrocarbon pricing, trading, purchasing or selling hydrocarbon financial instruments or other like activities for third party individuals, companies, corporations or associations, including Consultant's current client base or new clients as Consultant may from time to time secure. . . . Consultant agrees to notify [its third party clients] that Consultant is not an agent nor holds himself out to be an agent for Corporation nor represents Corporation in any manner. . . .
Feltus was paid a flat monthly fee for his services, and was to receive at Teco's discretion a portion of Teco's "Incentive Bonus Pool."
The agreement specifies Feltus' relationship to Teco as that of an independent contractor. Although such language in a contract may be self-serving or deceptive, Texas law provides that if the contract does not explicitly provide the company a right of control, there is no employer-employee relationship unless other evidence shows that the company did in fact exercise control over the details of the work in a manner inconsistent with the contract. Bennack Flying Service, Inc. v. Balboa, 997 S.W.2d 748, 751 (Tex.App.-Corpus Christi 1999, pet. dism'd w.o.j.); Ross, 796 S.W.2d at 210. Stroud therefore must present evidence that Teco exercised control over the details of the work sufficient to support a conclusion that Feltus was an employee.
All that Stroud provides as rebuttal are conclusory assertions. For example, he states in his response brief that "Teco did control Feltus' activities, directing where he was to work and when he was to work in different cities." Even if this were supported by competent summary judgment evidence, it is hardly persuasive. Control over where and when services are to be rendered, in this general sense, is common in independent contractor relationships particularly where, as here, the contractor's services involve interaction with the company's employees. Directing that the contractor provide services such as training where the employees are located and at a time convenient for the training is not unusual, and does not constitute control over the details of the work. Stroud also asserts in his response brief that "Teco seems to be in the business of gas marketing. Feltus works in the gas marketing business in Teco's office. By this very description, he is their employee." The predicate facts he relies on, however, are equally consistent with the contrary conclusion that Feltus was an independent contractor, as is the fact that Feltus has a key to the office space that Teco supplied him under the terms of the agreement. The degree of control exerted over Feltus' actions is the key factor, not that Feltus and Teco were engaged in the same business or that Feltus was provided office space in Teco's office.
It would be surprising if Teco had hired a consultant, even as an independent contractor, whose expertise was in, for example, aircraft manufacturing to provide training about trading petroleum futures.
The only probative evidence supporting an employment, rather than independent contractor, relationship that Stroud supplies is that Feltus participated in a bonus pool based on Teco's overall profitability. The court concludes, however, that this is insufficient to raise a genuine issue of material fact with respect to the relationship between Feltus and Teco. Varying the amount paid for services, or paying a bonus, based on the results obtained by the company is not necessarily indicative of an employment relationship. For example, a "results based" payment is not that different from contingent fee agreements, long used by law firms without making them employees of their clients. Also, the court notes that "although many factors, such as benefits, or training, or paycheck deductions for social security and taxes, may contribute to the determination of whether a person is an employee or an independent contractor, the fundamental factor is the right of control." Alvarado v. Old Republic Ins. Co., 951 S.W.2d 254, 259 (Tex.App.-Corpus Christi 1997, no writ). The participation in the bonus pool, the amount of which was at the discretion of Teco management, is simply not enough to offset Teco's lack of control over the details of the work.
The court's order of May 29, 1998 concluded that there was a genuine issue of material fact as to whether Feltus was an employee or independent contractor. Based on the arguments and evidence submitted with this motion for summary judgment, however, the court reconsiders and determines that the earlier ruling is no longer appropriate. The court concludes that there is no genuine issue of material fact concerning the relationship and that Feltus was an independent contractor, rather than an employee of Teco, as a matter of law.
b. Agent
An employer is vicariously liable not only for the negligence of its employees, but also for the negligence of its agents, as long as the negligent acts are within the scope and authority of the agency relationship. Espalin, 27 S.W.3d at 683. An agency relationship can be established by either actual or apparent authority. Munoz v. II Jaz Inc., 863 S.W.2d 207, 210 (Tex.App.-Houston [14th Dist.] 1993, no writ). Stroud bases his vicarious liability claim, in the alternative to an employment relationship, on apparent rather than actual authority. "[A]pparent authority is based on estoppel, whereby a third party relies upon conduct by the principal which would lead a reasonable person to believe the agent had authority to act and to bind the principal. When considering a question of apparent authority, one must look only to the acts of the principal; the acts of the agent are irrelevant." Id. (citations omitted); see also Baptist Memorial Hosp. Sys. v. Sampson, 969 S.W.2d 945, 948 (Tex. 1998) ("a representation by the principal causing justifiable reliance and resulting harm"). "To hold the principal liable under this agency theory, a party must establish that it has been induced to act in good faith upon certain representations made to it by the principal." Wells Fargo Bus. Credit v. Ben Kozloff, Inc., 695 F.2d 940, 945 (5th Cir. 1983) ("representations must point unmistakably to an agency relation"). In addition, "a party must show that, when dealing with the supposed agent, he has relied on the agent's authority in good faith, in the exercise of reasonable prudence." Id. The reliance must be based "on the facts and circumstances which give rise to the agent's apparent powers." Id.
As acts by Teco which would lead a reasonable person to believe that Feltus was its agent, Stroud asserts that "Teco provided offices, staff, telephones, fax machines, and typewriters/computers which generate documents" to Feltus, and that a draft of the second joint venture agreement was transmitted to him from a Teco facsimile machine with a "TECO GAS MKTG" fax banner. Stroud also visited Feltus at the Teco office. The court agrees that these facts and circumstances could lead a reasonable person to conclude that Feltus had authority as Teco's agent to solicit transactions involving natural gas. It is less clear whether these facts and circumstances could lead a reasonable person to conclude that soliciting investments in joint ventures to purchase and resell automobiles was within the scope of Feltus' alleged agency authority. The court has seen no evidence to suggest that Teco, or gas marketing companies in general, routinely market such joint ventures as part of their business. For liability under the doctrine of respondeat superior, the act must be within the agent's authority and in furtherance of the principal's business. Mackey, 935 S.W.2d at 453.
The court need not determine, however, whether a reasonable person would conclude from these facts and circumstances that Feltus was Teco's agent specifically with respect to the joint ventures at issue in this case. Apparent authority also requires that the third party (Stroud) have justifiably relied on the perceived authority, based on those facts and circumstances. Although Teco disputed apparent authority on three different occasions, Stroud has never submitted evidence in his responses to Teco's motions showing that he relied on any perceived authority (that is, that his decision to invest in the joint ventures was influenced in part by the relationship between Feltus and Teco) and that such reliance was justified. His failure to present such evidence is fatal to his assertion that Feltus had apparent authority to act as Teco's agent.
Teco's Motion to Dismiss under Rule 12(b)(6) Based on Failure to State a Claim, or Alternatively, Motion for Summary Judgment, filed June 2, 1997; Teco's First Amended Motion for Summary Judgment, filed August 18, 1997; and Teco's Second Amended Motion for Summary Judgment, filed October 9, 1998.
In fact, Stroud's previous dealings with Feltus, in trading petroleum futures for Phoenix, suggest that Stroud's decision to invest in the joint ventures was more likely based either on the details of the proposed investment or on his previous (successful) dealings with Feltus in petroleum futures, rather than Feltus' apparent relationship with Teco.
Stroud's respondeat superior/vicarious liability claim against Teco is based, assuming no employment relationship, on agency pursuant to apparent authority. The court's order of May 29, 1998 concluded that there was a genuine issue of material fact as to whether Teco clothed Feltus with apparent authority to act for it. Based on the arguments and evidence submitted with this motion for summary judgment, however, the court reconsiders and determines that the earlier ruling is no longer appropriate. The court concludes that, as a matter of law, Feltus did not have apparent authority on behalf of Teco to solicit the transaction at issue, and therefore was not Teco's agent. Because the court ruled above that Feltus was not an employee of Teco, there is no genuine issue of material fact as to the respondeat superior/vicarious liability claim, and Teco is entitled to judgment as a matter of law as to that claim. 3. Negligent Supervision Claim
A negligent supervision claim "is based on an employer's direct negligence instead of the employer's vicarious liability for the torts of its employees." Verinakis v. Medical Profiles, Inc., 987 S.W.2d 90, 97 (Tex.App.-Houston [14th Dist.] 1998, pet. denied). Such a claim is "subject to analysis as a negligence cause of action. The elements of a negligence cause of action are a duty, a breach of that duty, and damages proximately caused by the breach of duty." Castillo v. Gared, Inc., 1 S.W.3d 781, 786 (Tex.App.-Houston [1st Dist.] 1999, pet. denied). In a negligence cause of action, "[t]he plaintiff must prove the existence and violation of a duty owed to him by the defendant. A duty is a legally enforceable obligation to conform to a particular standard of conduct." San Benito Bank Trust Co. v. Landair Travels, 31 S.W.3d 312, 317 (Tex.App.-Corpus Christi 2000, no pet.) (citations omitted) (emphasis added). The scope of this tort is not limited, as is vicarious liability, to injuries resulting from the employee's actions within the scope of employment, but it does not extend to all actions by an employee.
While the employee need not be acting in the scope of his employment to impose liability on the employer, the theory of negligent hiring and supervision does require that a plaintiff's harm be the result of the employment. If the law did not require such a connection, an employer would essentially be an insurer of the safety of every person who happens to come into contact with his employee simply because of his status as an employee.Houser v. Smith, 968 S.W.2d 542, 544 (Tex.App.-Austin 1998, no writ) (citations and internal quotation marks omitted).
Teco moves for summary judgment on the negligent supervision claim, asserting that Teco owed no separate and independent duty to Stroud with respect to Feltus' actions. Stroud advances no evidence supporting the existence of a legally enforceable obligation, owed to Stroud by Teco, to supervise Feltus' actions. Other than references to responsibility under the TSA for someone who directly or indirectly controls a seller or issuer of a security, rejected above, Stroud makes only conclusory statements in his response brief: "[Teco] could have, and should have, controlled the activities conducted by Feltus out of Teco's office. . . . Alternatively, at a minimum, there are factual issues involving the breach of this duty which preclude summary judgment." Stroud offers nothing more, and those conclusory statements are insufficient to satisfy his burden of demonstrating a genuine issue of material fact. See Ragas, 136 F.3d at 458; Forsyth, 19 F.3d at 1533.
Linnco points out that, even if the joint venture agreements were securities, Meister and Motor Works were the "seller or issuer," not Feltus.
"Could have" is irrelevant to this determination. "As a general rule, a person does not have a duty to control the conduct of another even when the person has the practical ability to do so." Ianni v. Loram Maintenance of Way, Inc., 16 S.W.3d 508, 514 (Tex.App. — El Paso 2000, pet. denied).
The court further notes that, if Stroud intended to base this claim on the fact that Feltus was an employee or agent of Teco, the court's determination above that Feltus was an independent contractor and not acting within the scope of an agency relationship, if any, would foreclose a duty to supervise on that basis. Texas courts have sometimes imposed a duty to supervise/control on the person who hires an independent contractor, but such a determination is limited to those actions by the independent contractor over which the contractee retains control. See, e.g., Read v. Scott Fetzer Co., 990 S.W.2d 732, 735-36 (Tex. 1998). The contract between Feltus and Teco, by its terms, did not encompass sales of joint venture agreements for the purchase and resale of luxury automobiles, and Stroud has offered no evidence to the contrary. Feltus' actions with respect to the joint venture agreements therefore were not within the scope of the relationship between independent contractor and contractee, let alone something over which Teco retained control, and the court sees no basis for concluding that Stroud's injuries resulted from Teco's hiring Feltus. As such, Teco owed no duty to supervise Feltus' actions. Cf. Houser, 968 S.W.2d at 544 (to extend liability for negligent supervision beyond injuries resulting from the employment would improperly make the employer a general insurer).
Teco advances several other arguments that it is not liable for negligent supervision, but the court need not consider those other arguments. The court concludes that Stroud has not demonstrated a duty, owed by Teco to Stroud, to supervise Feltus' actions with respect to the joint venture agreements. Accordingly, there is no genuine issue of material fact with respect to the negligent supervision claim, and Teco is entitled to judgment as a matter of law for that claim.
C. Fidelity and Linnco
The court's order of May 29, 1998 denied a motion for summary judgment by Linnco and struck a motion for summary judgment by Fidelity. That ruling, however, was based on deficiencies in an affidavit offered by Linnco and the fact that Fidelity had not at that time been named as a defendant. Stroud's amended complaint added Fidelity as a defendant, and Linnco has submitted with its latest motion for summary judgment a new affidavit correcting the previous deficiencies. The court therefore concludes that the order of May 29, 1998 is no longer controlling as to the claims against Linnco and Fidelity.
Stroud's claims against Fidelity and Linnco, like those against Teco, are apparently based on: 1) joint and several liability for Feltus' actions, pursuant to the TSA and the Exchange Act, because Fidelity and Linnco directly or indirectly controlled Feltus; 2) respondeat superior/vicarious liability for actions by Feltus; and 3) negligent supervision of Feltus. Although neither Fidelity nor Linnco moved for summary judgment on the first claim, it must nevertheless fail for the same reason it failed against Teco. The court's ruling above that the joint venture agreements are not "securities" necessarily means that there can be no liability under the TSA and the Exchange Act, and Stroud was on sufficient notice (Feltus' motion for summary judgment) to bring forward all of his evidence, or at least evidence adequate to raise a genuine issue of material fact, that the joint venture agreements were "securities." Because Stroud has not demonstrated a genuine issue of material fact with respect to whether the agreements were "securities," the court sua sponte grants Linnco and Fidelity summary judgment on those claims.
1. Negligent Supervision Claim
Both Linnco and Fidelity argue that they had no duty to supervise Feltus' actions, and therefore cannot be liable to Stroud for negligent supervision. See Castillo, 1 S.W.3d at 786 (requirements of negligent supervision claim are a duty, breach of that duty, and damages proximately caused by the breach); see also San Benito Bank Trust Co., 31 S.W.3d at 317 (for purposes of negligence, "[a] duty is a legally enforceable obligation to conform to a particular standard of conduct") (emphasis added). As the source of Linnco's and Fidelity's duty to supervise Feltus, Stroud points to: 1) their internal procedures and manuals, and 2) the requirements of 17 C.F.R. § 166.3, promulgated under the authority of the CFTCA.
a. Internal Procedures and Manuals
The first asserted source is insufficient for a negligent supervision claim in these circumstances. Assuming arguendo that Linnco's and Fidelity's internal procedures and manuals mandate the supervision of Feltus' actions, Stroud does not explain how that constitutes a legally enforceable obligation. Stroud identifies no contractual relationship between him and Linnco or Fidelity that would create a legal obligation. The court's research has been unable to identify any common law requirements that might create a duty to supervise under these circumstances other than those relating to a voluntary or gratuitous undertaking. Such an undertaking establishes liability to the person to whom services are rendered:
One who undertakes, gratuitously or for consideration, to render services to another which he should recognize as necessary for the protection of the other's person or things, is subject to liability to the other for physical harm resulting from his failure to exercise reasonable care to perform his undertaking, if
(a) his failure to exercise such care increases the risk of such harm, or
(b) the harm is suffered because of the other's reliance upon the undertaking.
Restatement (Second) of Torts § 323 (1965) (emphasis added). A voluntary undertaking can also establish liability to a third party:
One who undertakes, gratuitously or for consideration, to render services to another which he should recognize as necessary for the protection of a third person or his things, is subject to liability to the third person for physical harm resulting from his failure to exercise reasonable care to protect his undertaking, if
(a) his failure to exercise reasonable care increases the risk of such harm, or
(b) he has undertaken to perform a duty owed by the other to the third person,
or
(c) the harm is suffered because of reliance of the other or the third person upon the undertaking.Id. § 324A (emphasis added). Texas law recognizes both of these principles. Seay v. Travelers Indem. Co., 730 S.W.2d 774, 776 (Tex.App.-Dallas 1987, no writ). Both of these Restatement sections, however, refer to a duty to protect against "physical harm." See also Wal-Mart Stores, Inc. v. Lane, 31 S.W.3d 282, 293 (Tex.App.-Corpus Christi 2000, pet. denied) (cases recognizing a duty arising from a voluntary undertaking have involved "situations where bodily injury or injury to property belonging to the party is involved"). Stroud has suffered economic losses, not physical harm, and therefore cannot rely on voluntary undertakings, such as Linnco's and Fidelity's internal procedures and manuals, as a basis for a negligent supervision claim. b. 17 C.F.R. § 166.3
It is also unclear whether these internal procedures and manuals would satisfy other requirements of the Restatement. See, e.g., Texas Drydock, Inc. v. Davis, 4 S.W.3d 919, 922 (Tex.App. — Beaumont 1999, no pet.) (under § 323, mere promise can constitute an "undertaking," but liability is also dependent on "either an increased risk of harm or reliance"). Stroud has not shown that these procedures increased the risk of harm over what it would be without supervision, or that he was aware of and relied on the procedures.
The court concludes that 17 C.F.R. § 166.3 is also insufficient to establish a legally enforceable obligation by Linnco and Fidelity to supervise Feltus' actions with respect to the transaction at issue. The regulation imposes a requirement to "diligently supervise the handling . . . of all commodity interest accounts . . . and all other activities . . . relating to its business as a Commission registrant" by "its partners, officers, employees and agents (or persons occupying a similar status or performing a similar function)." 17 C.F.R. § 166.3.
Assuming arguendo that Feltus was one of Linnco's and Fidelity's "partners, officers, employees and agents (or persons occupying a similar status or performing a similar function)," there is still no duty to supervise under § 166.3 unless Feltus' actions with respect to the joint venture agreements related to Linnco's or Fidelity's "business as a Commission registrant." Linnco and Fidelity point out that their business related to the trading of commodity futures and options. As the court noted above, the joint venture agreements (and the automobiles that were the subject of the underlying transactions) are not commodities or related futures and options.
Stroud argues that Feltus' actions "relate to Stroud's commodity account with [Linnco] and [Fidelity's] business as commission registrant," because "the funds used by Stroud in the initial transaction were wired directly from the commodity account of his solely owned company, to him, and then immediately to [Motor Works], as directed by Feltus." Response Brief at 8. That slight connection simply cannot support a duty to supervise. The court's research indicates that alleged violations of § 166.3 involve activities that had a much closer connection with commodity futures and options than simply withdrawing funds from a trading account. See, e.g., Commodity Futures Trading Comm'n v. Sidoti, 178 F.3d 1132 (11th Cir. 1999) (solicitations concerning commodity futures contracts and options); JCC, Inc. v. Commodity Futures Trading Comm'n, 63 F.3d 1557 (11th Cir. 1995) (solicitations concerning managed commodities futures trading program); Crothers v. Commodity Futures Trading Comm'n, 33 F.3d 405 (4th Cir. 1994) (unauthorized trades in commodity futures trading account); Monieson v. Commodity Futures Trading Comm'n, 996 F.2d 852 (7th Cir. 1993) (fraudulently allocating customer trades); Farmland Industries v. Frazier-Parrott Commodities, Inc., 871 F.2d 1402 (8th Cir. 1989) (unauthorized trades in commodity futures and options, and associated kickbacks/bribery); Khalid Bin Alwaleed Found. v. E. F. Hutton Co., Inc., 709 F. Supp. 815 (N.D. Ill. 1989) (excessive trading, or "churning," in commodity trading account). While the court finds it conceivable that § 166.3 would require an IB or FCM to supervise or control withdrawals from trading accounts to verify that the withdrawals were authorized by the account holder, that is not the situation here. Stroud does not assert that the withdrawal from Phoenix's trading account with Linnco was unauthorized. Requiring an IB or FCM not only to monitor withdrawals from trading accounts for authorization but also to verify that the withdrawal was not for purposes of a totally unrelated transaction injurious to the account holder would expand the scope of responsibility of § 166.3 far beyond reason. Stroud presents no authorities finding a duty to supervise actions relating to transactions so far removed from the commodity trading business, and the court concludes that this connection to the alleged fraudulent transactions is simply too attenuated.
Although not entirely clear, it appears that the wire transfer from the account was actually initiated/requested by Stroud, at Feltus' "direction."
Because both of Stroud's arguments for imposing a duty to supervise on Linnco and Fidelity are defective, the court concludes that neither Linnco nor Fidelity had a duty to supervise Feltus' actions with regard to the joint venture agreements. Accordingly, there is no genuine issue of material fact with respect to the negligent supervision claim, and Linnco and Fidelity are entitled to judgment as a matter of law with respect to that claim.
2. Respondeat Superior /Vicarious Liability Claim
Stroud bases his vicarious liability claim against Fidelity and Linnco on an alleged agency relationship between those two companies and Feltus, either under general agency principles or pursuant to the CFTCA:
For the purpose of this chapter the act, omission, or failure of any official, agent, or other person acting for any individual, association, partnership, corporation, or trust within the scope of his employment or office shall be deemed the act, omission, or failure of such individual, association, partnership, corporation, or trust, as well as of such official, agent, or other person.
7 U.S.C. § 4. Fidelity and Linnco both deny that Feltus was their agent with respect to the transactions at issue.
Fidelity admits that it engaged Feltus to act as an "associated person" or "AP." Stroud argues that Feltus was also an AP of Linnco, but the argument is unpersuasive. Stroud asserts that "Feltus did solicit and accept customer orders" and therefore "fits the definition of an 'associated person' of' Linnco. Response Brief at 4. Granting the first part of Stroud's argument, that would make Feltus an AP of Linnco only if associated with Linnco, and Stroud makes no such showing. The court also notes that the definition of an AP includes "a partner, officer, employee, or agent" of an IB, but only "a partner, officer, or employee" of an FCM. 17 C.F.R. § 1.3(aa). An agent can be an AP of an IB such as Feltus, but cannot be an AP of an FCM such as Linnco. Stroud presents no evidence that Feltus was a partner, officer, or employee of Linnco, and the court therefore concludes that Feltus was not an AP of Linnco. Because Stroud presents no other evidence that Feltus was an agent of Linnco, the court concludes that there is no genuine issue of material fact with respect to the respondeat superior claim against Linnco and that Linnco is entitled to judgment as a matter of law with respect to this claim.
Although Feltus was an AP of Fidelity, that is insufficient to establish vicarious liability for the transactions at issue. Vicarious liability is only available for actions by an agent that are within the scope of the agency relationship. As noted above, the CFTCA regulates actions relating to commodities, and the transactions at issue here do not involve commodities. Stroud has advanced no other evidence to support a determination that Feltus was Fidelity's agent with respect to these transactions. Accordingly, the court concludes that there is no genuine issue of material fact with respect to the respondeat superior claim against Linnco and that Linnco is entitled to judgment as a matter of law with respect to this claim.
IV. Conclusion
Stroud has cast a wide net in search of defendants from whom to recover his losses. There is, of course, nothing at all wrong with that. Before casting the net, however, one should try to ensure that it has no gaping holes.
For the above-stated reasons, there is no genuine issue of material fact with respect to Stroud's claims against Feltus for common law fraud or under the TSA or CFTCA. Feltus is entitled to judgment as a matter of law as to those claims. Feltus has not demonstrated the absence of a genuine issue of material fact with respect to the DTPA claim, however, and he is not entitled to judgment as a matter of law as to that claim. In addition, there is no genuine issue of material fact with respect to Stroud's claims against Teco, Fidelity, and Linnco (derivative of his claims against Feltus) for joint and several liability under the TSA or Exchange Act, respondeat superior, and negligent supervision. Teco, Fidelity, and Linnco are entitled to judgment as a matter of law for those claims. Feltus' First Amended Motion for Summary Judgment is granted in part and denied in part. Teco's Second Amended Motion for Summary Judgment, Fidelity's Motion for Summary Judgment, and Linnco's Motion for Summary Judgment are granted. Stroud's claims against Feltus, other than the DTPA claim, and all of his claims against Teco, Fidelity, and Linnco are hereby dismissed with prejudice. The claims remaining for trial are: 1) all of Stroud's claims against Meister and Motor Works; 2) Stroud's DTPA claim against Feltus; and 3) Feltus' and Linnco's counterclaims against Stroud, asserting that the claims against them were groundless and brought in bad faith.
It is so ordered this 16th day of March, 2001.