Hossain v. Rauscher Pierce Refsnes, Inc. , 15 F. App'x 745 ( 2001 )

F I L E D
United States Court of Appeals
Tenth Circuit
UNITED STATES COURT OF APPEALS
AUG 3 2001
FOR THE TENTH CIRCUIT
PATRICK FISHER
Clerk
MOHAMMED SHAFAYET
HOSSAIN,
Plaintiff-Appellant,
No. 00-3291
v. (D.C. No. 97-1380-JTM)
(D. Kan.)
RAUSCHER PIERCE REFSNES,
INC., doing business as RPR Clearing
Service; REGIONAL OPERATIONS
GROUP, INC.,
Defendants-Appellees.
ORDER AND JUDGMENT *
Before EBEL , PORFILIO, and KELLY , Circuit Judges.
After examining the briefs and appellate record, this panel has determined
unanimously to grant the parties’ request for a decision on the briefs without oral
argument. See Fed. R. App. P. 34(f); 10th Cir. R. 34.1(G). The case is therefore
ordered submitted without oral argument.
*
This order and judgment is not binding precedent, except under the
doctrines of law of the case, res judicata, and collateral estoppel. The court
generally disfavors the citation of orders and judgments; nevertheless, an order
and judgment may be cited under the terms and conditions of 10th Cir. R. 36.3.
Mohammad Shafayet Hossain, an investor, appeals from the district court’s
disposition of his claims against Rauscher Pierce Refsnes, Inc. and Regional
Operations Group, Inc., clearing brokers (collectively referred to in this order and
judgment as RPR). On Hossain’s bailment claim, the district court granted
summary judgment in favor of RPR. See Hossain v. Rauscher Pierce Refsnes,
Inc. , 46 F. Supp. 2d 1164 (D. Kan. 1999). On his third-party beneficiary contract
claim, the district court entered a defense verdict after conducting a trial to the
court. See Hossain v. Rauscher Pierce Refsnes, Inc. , 97 F. Supp. 2d 1237 (D.
Kan. 2000). We have reviewed the grant of summary judgment de novo, Butler v.
City of Prairie Village, Kansas , 172 F.3d 736, 745 (10th Cir. 1999), and,
concerning the bench trial, we have reviewed the district court’s “findings of fact
for clear error and the court’s conclusions of law de novo ,” EEOC v. WilTel, Inc. ,
81 F.3d 1508, 1513 (10th Cir. 1996). We affirm.
BACKGROUND
Beginning in November 1993 and continuing through February 1997,
Hossain gave funds to Asif Ameen, a rogue stockbroker employed as a registered
representative at Primeline Securities Corporation, a retail broker-dealer in
Wichita, Kansas. Ameen never had Hossain complete Primeline’s account
opening paperwork. As a consequence, Primeline did not carry Hossain’s name in
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its records and did not send Hossain any account statements, trade confirmations,
or income tax forms. 1
Ameen convinced Hossain that, with an investment placed with Primeline,
Ameen could guarantee a fixed monthly return of six to seven percent per month,
with an eventual return of the principal. Pursuant to Ameen’s instructions,
Hossain wrote checks to various entities, which he believed were “ad hoc”
companies, or “Primeline compan[ies] for the purpose of trading and purpose of
buying a stock.” Appellant’s Supp. App. at 38-39. For a time, Hossain received
the promised return. In reality, Ameen was running a Ponzi scheme at the
1
The parties’ briefs present differing versions of Hossain’s relationship with
Primeline. Hossain states that he was a Primeline customer, based on a
stipulation included in the pretrial order and accepted by the district court in its
summary judgment ruling. Relying on trial testimony from Hossain himself and
Primeline’s president, RPR asserts that Hossain was not a Primeline customer.
The court stated that evidence had been presented showing that Hossain “never
was a customer in a formal sense.” Appellant’s Supp. App. at 221-22.
Hossain did not object to the testimony; RPR did not seek to withdraw the
stipulation. Accordingly, neither party requested an exercise of the district
court’s discretion concerning the admission of testimony contrary to the terms of
a pretrial stipulation. See Kirtley v. Sovereign Life Ins. Co. (In re Durability,
Inc. ), 212 F.3d 551, 556 (10th Cir. 2000) (stating that pretrial orders may be
modified at trial only to present manifest injustice); Roberts v. Roadway Express,
Inc. , 149 F.3d 1098, 1108 (10th Cir. 1998) (requiring consideration of factors
such as prejudice or surprise, the ability of the offended party to cure the
prejudice, the disruption of an orderly trial, and bad faith or willfulness).
Ultimately, the district court’s determination did not turn upon Hossain’s status as
a customer. On appeal, we decline to address an evidentiary issue not raised at
trial.
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expense of Hossain and other individuals. Ameen paid early investors with funds
obtained from subsequent investors.
The involvement of defendant RPR, a clearing broker, arose in September
1995, when it entered into a clearing agreement with Primeline, an introducing
broker which takes securities orders from individual customers. 2
Under the terms
of the clearing agreement, RPR performed ministerial tasks for Primeline
customer accounts, based on information provided by Primeline. RPR maintained
a bank account in Wichita, into which Primeline was required to deposit funds it
received each business day. RPR would then credit and debit transactions to
individual Primeline customer accounts. The agreement also provided that:
“[t]he imposition or allocation of any burden or duty on or to one or the other
party by this Agreement does not and is not intended to impose or create any
burden, right or duty in favor of or for the benefit of any person or entity not a
party to this Agreement.” Appellant’s App. at 26, ¶ 10.8.
From March 1996 to February 1997, Hossain delivered eleven checks on
his account to Ameen at Primeline. Based on Ameen’s statement that Primeline
had a “new alliance and [was] part of a bigger company, b[y] the name of RPR,”
2
“A clearing broker performs back office services such as clearing stock,
handling customer funds, holding customer securities, dealing with transfer
agents, and matching of trades with the exchanges and market makers for firms
that do not have the capacity to perform these functions.” Graham v. SEC , 222
F.3d 994, 998 n.9 (D.C. Cir. 2000) (quotation omitted).
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id. at 45-46, Hossain made the checks out to RPR. He signed the checks but left
the date and amount lines blank. Ameen completed the checks, writing them out
for a total of $151,000, then turning them over to Primeline’s cashier for deposit
into RPR’s bank account. Without Hossain’s knowledge or consent, but in
accordance with Ameen’s representations, the cashier instructed RPR to credit the
checks to the account of Primeline customers Nassir Siddiqi and Mohammad
Hossaria. The entire balance of the Siddiqi-Hossaria account was later wired to
other bank accounts.
Ameen’s scheme was discovered in June 1997. He was charged with and
convicted of several counts of securities fraud and theft. Primeline became the
subject of involuntary bankruptcy and liquidation proceedings initiated by the
Securities Investor Protection Corporation. In the aftermath of these events,
Hossain instituted this lawsuit against RPR to obtain reimbursement of the
$151,000 amount. He now appeals the district court’s entry of judgment in favor
of RPR.
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DISCUSSION 3
Bailment claim
Hossain argues that the district court improperly granted RPR’s summary
judgment motion on his claim that “[t]he delivery of plaintiff’s funds to the
defendants created a bailment.” Appellant’s Br. at 8. “A bailment is the delivery
of personal property by one person to another for a specific purpose, with an
express or implied contract that when the purpose has been fulfilled the property
will be returned or accounted for.” West v. Collins , 840 P.2d 435, 441 (Kan.
1992) (quotation omitted). The relationship of a clearing broker to deposits made
by an introducing broker is analogous to that of a bank to deposits made by
customers. Under Kansas law, a cash deposit is not generally considered a
bailment because “[t]he identical money deposited is not to be returned--only its
equivalent; and the money deposited becomes the money of the bank.”
Bloomheart v. Foster , 221 P. 279, 281 (Kan. 1923) (quotation omitted). An
ordinary cash deposit, which becomes commingled with the general funds of the
financial institution, creates the relation of debtor and creditor, not bailor and
bailee. See id.3
Because the district court’s jurisdiction is based upon diversity of
citizenship under 28 U.S.C. § 1332(a)(1), we apply state law to the substantive
issues in this appeal. See Peck v. Horrocks Eng’rs, Inc. , 106 F.3d 949, 952 (10th
Cir. 1997)
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Like a typical bank depositor, Hossain had no expectation of a return of the
identical property he delivered to Ameen. His intention was to increase his
investment and obtain regular returns, not to receive the same property back at a
later time. Cf. Rich v. Touche Ross & Co. , 415 F. Supp. 95, 99 & n.2 (S.D.N.Y.
1976) (distinguishing between investors’ buying shares through a broker and their
leaving the purchased certificates in the broker’s care: only the latter decision
created a bailment).
Further, we note a fundamental factual problem with Hossain’s bailment
theory. Hossain did not actually make a deposit with Primeline. When Hossain
parted with his checks, they were incomplete and nonnegotiable. See Kan. Stat.
Ann. § 84-3-104(a) (requiring a negotiable instrument to contain “an
unconditional promise or order to pay a fixed amount of money”). Funds were
transferred only after Ameen stepped in and furthered his fraudulent scheme by
filling in the dates and amounts. As the district court found, Ameen was not
acting with the scope of his employment, and, in fact, made every effort to hide
his activities from Primeline. Appellant’s Supp. App. at 224.
Under the circumstances of this case, RPR cannot be held accountable as a
bailee of Hossain’s personal property. The district court properly determined that
no bailment relationship existed between Hossain and RPR and entered summary
judgment on this claim.
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Third-party beneficiary contract claim
Hossain’s alternative theory is that he is a third-party beneficiary of the
clearing agreement between Primeline and RPR and, as such, he may enforce the
terms of the contract. “Contracting parties are presumed to act for
themselves and therefore an intent to benefit a third person must be clearly
expressed in the contract.” Fasse v. Lower Heating & Air Conditioning, Inc.
736 P.2d 930, 932 (Kan. 1987). If the parties make promises intended for the
direct benefit of a third person, however, that person may maintain an action to
enforce the contract. See Bodine v. Osage County Rural Water Dist. , 949 P.2d
1104, 1114 (Kan. 1997).
“[T]he right of a third-party beneficiary rests chiefly upon the fact that the
contract will create reasonable expectations on his part and will induce him to
change his position in reliance.” Noller v. GMC Truck & Coach Div. , 772 P.2d
271, 275 (Kan. 1989) (quotation omitted). As a matter of Kansas law, Hossain is
incorrect in arguing that the concept of reliance is irrelevant to a third-party
beneficiary claim. There is no contradiction between requiring a third party’s
reliance on the terms of the contract but not his “knowledge of the contract when
it was made ,” Cornwell v. Jespersen, , 708 P.2d 515, 520 (Kan. 1985) (emphasis
supplied).
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The district court concluded that Hossain’s showing at trial had failed to
satisfy the Kansas third-party beneficiary requirements. The district court found
that Hossain’s evidence failed to: (1) show that the contracting parties intended to
benefit third parties; (2) contradict the express contractual disclaimer of such an
intent; or (3) demonstrate that Hossain knew of and relied on the contract. We
find no fault with the district court’s determination.
Accordingly, we AFFIRM the judgment of the district court for
substantially the same reasons as stated in the district court’s orders of April 8,
1999, and May 15, 2000.
Entered for the Court
John C. Porfilio
Circuit Judge
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