Engle v. Dinehart ( 2000 )

UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
__________________
No. 99-10087
__________________
FRANKLIN ENGLE; ROBERT GARBARINO,
Plaintiffs-Appellants,
versus
MASON A. DINEHART, III, Individually, doing business as
Financial Education Network Development, Inc.,
Defendant-Appellee.
_________________________________________________________________
Appeal from the United States District Court
for the Northern District of Texas
(4:97-CV-1058-A)
_________________________________________________________________
April 19, 2000
Before DUHÉ, BARKSDALE, and DENNIS, Circuit Judges.
PER CURIAM:*
At issue is whether a Rule 12(b)(6) dismissal for failure to
state a claim is proper when the complaint alleges an individual,
who uses another to present an educational financial planning
workshop, is liable to a workshop attendee for the presenter’s post-
workshop conversion of the attendee’s funds, liability having been
premised on negligent misrepresentation of the presenter’s
qualifications, negligence, vicarious liability for the presenter’s
criminal acts, violation of the Texas Deceptive Trade Practices Act,
TEX. BUS. & COM. CODE §§ 17.41-17.63, and violation of the Texas
*
Pursuant to 5TH CIR. R. 47.5, the Court has determined that
this opinion should not be published and is not precedent except
under the limited circumstances set forth in 5TH CIR. R. 47.5.4.
Securities Act, TEX. REV. CIV. STAT. arts. 581-1 through 581-37. We
AFFIRM.
I.
The third amended complaint alleges the following. Defendants
Ft. Worth Chapter of the National Management Association (NMA) and
General Dynamics Management Association jointly sponsored three-day
retirement planning workshops at General Dynamics’ facility. (NMA
and General Dynamics settled.)
On 31 January 1992, Defendant Successful Money Management
Seminars, Inc. (SMMS), entered into a license agreement with Turner
(“Financial Strategies for Successful Retirement Services License
Agreement”). Turner paid SMMS $4,500 “for the right to teach and
promote the investment advisory business of [his company] Annable
Turner & Company at certain pre-arranged seminars under the SMMS
trademark/service mark ... and use and distribute SMMS materials at
these seminars”. Accordingly, he “was allowed to hold himself out
as a financial planner and retirement specialist approved by SMMS”.
Defendant Mason A. Dinehart III, “as SMMS’ apparent agent and
licensee, represented himself to be an authorized representative of
the NMA”. Doing business as Financial Education Network Development
(FEND), Dinehart selected Turner to be his representative for
presenting the workshops. Dinehart introduced Turner at those
workshops as a “certified financial planner” or “c.f.p.” Turner was
not a “c.f.p.” Furthermore, he was promoting his own unregistered
advisory firm, Annable Turner & Co., at these workshops; Turner,
individually, was not registered, contrary to Texas law, as a fee-
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based financial planner; he had a disciplinary record with the
National Association of Securities Dealers; and he had been fired
by E.F. Hutton for engaging in improper financial transactions.
Dinehart knew, or should have known, these facts about Turner.
Turner agreed to pay Dinehart 25% of the fees he received from
each workshop. Dinehart negligently referred Turner to Franklin
Engle and Robert Garbarino (Plaintiffs).
Engle attended a workshop beginning 29 September 1992. It
included a free individualized financial plan worth $500. He
completed the financial history forms, and attended his free
consultation with Turner.
In September 1993 (almost a year after the workshop), Engle
transferred funds to Turner to purchase investment securities.
Turner, however, did not purchase any securities with the money;
instead, he converted it. In 1994, Engle transferred more than
$100,000 in assets to Turner for him to manage. On 24 July 1995,
Turner convinced Engle to liquidate a portion of these assets to
purchase a security; but, instead of buying the security, Turner
converted the liquidated portion to his own use. Finally, in 1996,
Engle transferred an IRA to Turner; he converted it. In April 1997,
Engle learned the investments he had with Turner had no value.
Garbarino attended a workshop at General Dynamics’ facility on
29 January 1992. Turner was introduced by Dinehart as “FEND’s
representative”; Garbarino also received the free financial plan.
In April and July 1992, Garbarino cashed his United States
Savings Bonds and gave the money, along with almost all of his and
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his wife’s other money, to Turner to manage. In October 1993,
Garbarino transferred his 401(k) funds to Turner. In November 1995
(more than three years after the workshop), Turner recommended that
Garbarino invest in a high-yield corporate bond. Once again,
instead of investing in a security, Turner converted the money
Garbarino transferred. In 1996 (four years after the workshop),
Garbarino transferred more assets to Turner. Once again, Turner
converted them.
The original complaint was filed in district court on 19
December 1997. Plaintiffs claim, inter alia, negligent
misrepresentation, negligence, vicarious liability, violation of the
Texas Deceptive Trade Practices Act, and violation of the Texas
Securities Act. The first amended complaint was filed on 13
February 1998.
In March 1998, Plaintiffs’ request to file a second amended
complaint was granted without opposition. It was filed on 23 March.
On 17 April, Dinehart moved to dismiss the second amended
complaint. On 9 June, pursuant to FED. R. CIV. P. 12(b)(6), the
district court tentatively dismissed the complaint for failure to
state a claim. The district court ruled that Plaintiffs had failed
to allege: (1) facts constituting a primary violation of the Texas
Securities Act, or, assuming a primary violation, aider and abettor
liability; (2) a contractual relationship supported by consideration
between Plaintiffs and Defendants; (3) a duty of care on the part
of Defendants to Plaintiffs; and (4) facts that would classify
Plaintiffs as consumers, that there was a false, misleading, or
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deceptive trade practice, and, that, if there was a deceptive trade
practice, it was the cause of Plaintiffs’ damages.
The court gave Plaintiffs until 9 July to file a third amended
complaint, reminding them of their obligations under Rule 11. On
22 June, instead of filing a third amended complaint, Plaintiffs
moved to transfer venue. The motion was denied four days later.
On 9 July, the third amended complaint was filed. Pursuant to
a comprehensive opinion, it was dismissed in January 1999 for
failure to state a claim. Engle v. Dinehart, No. 4:97-CV-1058-A
(N.D. Tex. 7 Jan. 1999).
Defendant SMMS settled just before oral argument here.
Dinehart is the only remaining Defendant.
II.
In addition to contesting the dismissal of their third amended
complaint, Plaintiffs challenge rulings on venue and discovery.
A.
1.
The court refused to transfer venue under 28 U.S.C. § 1404(a).
Such denial is reviewed for abuse of discretion. E.g., Peteet v.
Dow Chem. Co., 868 F.2d 1428, 1436 (5th Cir. 1989).
This action concerns Turner and educational workshops. An
action in another forum concerns Turner and several securities
accounts. The actions do not involve substantially similar issues.
There was no abuse of discretion.
2.
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Discovery was stayed, pending ruling on the motion to dismiss.
Appellants provide no authority in support of this issue.
FED. R. APP. P. 28(a)(9)(A) requires their brief to include
argument, which must include their “contentions and the reasons for
them, with citations to the authorities and parts of the record on
which appellant relies”. Of course, issues not properly briefed are
deemed abandoned. E.g., United States v. Guerrero, 169 F.3d 933,
943 (5th Cir. 1999).
In any event, the stay was proper, in the light of Plaintiffs’
frequent amendments to the complaint and the pending 12(b)(6)
motion.
B.
We review de novo dismissal of a complaint, pursuant to Rule
12(b)(6), for failure to state a claim. E.g., Blackburn v. City of
Marshall, 42 F.3d 925, 931 (5th Cir. 1995). A complaint survives
scrutiny “unless it appears beyond doubt that the plaintiff can
prove no set of facts in support of his claim which would entitle
him to relief”. Conley v. Gibson, 355 U.S. 41, 45-46 (1957). The
question is whether, “in the light most favorable to the plaintiff
and with every doubt resolved in his behalf, the complaint states
any valid claim for relief”. Lowrey v. Texas A&M Univ. Sys., 117
F.3d 242, 247 (5th Cir. 1997) (internal quotation marks and citation
omitted).
Dismissal was proper, essentially for the reasons stated in the
district court’s opinion. A few of the numerous reasons for our so
holding follow.
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1.
The third amended complaint fails to state a claim for
negligent misrepresentation, because there is no allegation Dinehart
gave any advice to Plaintiffs with respect to investment purchases
from Turner. Dinehart’s comments about Turner’s qualifications were
not a recommendation to make investments with him. Nor were
Plaintiffs justified in relying on them in trying to purchase
investments. In addition, Turner’s conversion, the cause of the
losses, is far too attenuated from Dinehart’s representing Turner
as a “certified financial planner”.
2.
For the negligence claim, the third amended complaint points
to no duty on the part of Dinehart to Plaintiffs. Dinehart did not
have a duty to investigate Turner and disclose the results of such
investigation to Plaintiffs. See Golden Spread Council, Inc. v.
Akins, 926 S.W.2d 287, 291 (Tex. 1996). Plaintiffs allege Turner’s
criminal acts were foreseeable to Dinehart. Foreseeability alone,
however, is not sufficient to justify the imposition of a duty. Id.
at 290-91.
3.
For the vicarious liability claim, Turner was not Dinehart’s
agent for the purchase of investments, the cause of the losses; and,
for the purchase of securities, Plaintiffs did not justifiably rely
on any statement or conduct by Dinehart representing that Turner was
his agent. Furthermore, the application to attend the workshop,
attached to the third amended complaint as an exhibit, states FEND
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was “a purely educational organization where only information is
provided”. (Emphasis in original.)
4.
Liability under the Texas Deceptive Trade Practices Act (DTPA),
is limited to those committing a deceptive trade practice or act in
connection with a consumer transaction in goods or services. E.g.,
Amstadt v. United States Brass Corp., 919 S.W.2d 644, 650 (Tex.
1996). The complaint does not allege a consumer transaction between
Dinehart and Plaintiffs.
5.
For the Texas Securities Act, the third amended complaint does
not allege Turner sold Plaintiffs securities. Instead, without
purchasing securities, he converted money they entrusted to him.
Assuming a securities transaction between Turner and
Plaintiffs, Dinehart cannot be liable as an aider and abettor unless
he was aware of the violation and recklessly disregarded it. E.g.,
Insurance Co. of N. Am. v. Morris, 981 S.W.2d 667, 675 (Tex. 1998).
There is no allegation of any knowledge by Dinehart of any security
transaction between Turner and Plaintiffs.
III.
For the foregoing reasons, the dismissal is
AFFIRMED.
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DENNIS, Circuit Judge, concurring in part and dissenting in part:
The plaintiffs-appellants, Franklin Engle and Robert Garbarino,
appeal from the district court’s judgment, which dismissed their
complaint, under FED. R. CIV. P. 12(b)(6), for failure of the
pleading to state a claim upon which relief can be granted. In my
opinion, the complaint stated claims against defendant-appellee,
Mason Dinehart, doing business as Financial Education Network
Development, Inc., based on the Texas Deceptive Trade Practices Act
and the Texas common law of negligence and negligent
misrepresentation, but failed to state a claim under the Texas
Securities Act. Accordingly, I respectfully dissent from the
majority’s affirmance of the district court’s judgment, except for
its dismissal of the Texas Securities Act claim.
I. BACKGROUND FACTS ALLEGED IN THE COMPLAINT
The plaintiffs’ petition alleges that: Dinehart, doing business
as Financial Education Network Development, Inc.(“FEND”), and as the
apparent agent and licensee of Successful Money Management Seminars,
Inc. (“SMMS”), represented to plaintiffs that he was an authorized
representative of the National Management Association (“NMA”) and
that he had contacts with virtually all of NMA’s chapters at major
corporations in the United States.2 Through his network of
financial planners and consultants, Dinehart, doing business as
FEND, was in the business of arranging for financial advisers to
conduct workshops for groups of corporate employees seeking expert
2
This court granted the parties’ joint motion to dismiss the
appeal without prejudice as to appellee Successful Money Management
Seminars, Inc. on October 28, 1999.
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knowledge, information and advice about financial planning and
investment of their 401(k) and other retirement funds. Dinehart had
the exclusive right to use the SMMS materials at NMA chapters across
the country. SMMS prohibited other licensees from competing with
Dinehart for the NMA account.
In 1992, Dinehart selected Roger E. Turner to be his and FEND’s
representative in the presentation of SMMS workshops to NMA chapters
in the Dallas-Ft. Worth area, including the NMA chapter at General
Dynamics Corporation. Dinehart introduced Turner at the workshops
that plaintiffs attended and represented to them that Turner was a
“certified financial planner,” or “c.f.p.”
In truth, however, as Dinehart knew or should have known,
Turner had never been certified by the Certified Financial Planner
Board of Standards, Inc. to use the federally registered trademark
“c.f.p.” or “certified financial planner,” and he was not licensed
to provide fee based advisory services in Texas; Turner had a
disciplinary record with the NASD for engaging in private
transactions and selling unregistered financial products without the
knowledge of his broker-dealer; Turner had been fired by E.F. Hutton
in 1986 for such conduct; Turner had misappropriated almost a
million dollars from victims through the sale of “Towers Financial”
collateralized notes; and Turner’s investment advisory firm, Annable
Turner and Company, was not registered to provide investment advice
in Texas.
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Dinehart concealed from or did not disclose to plaintiffs that,
prior to the 1992-1993 workshops, Dinehart and Turner had agreed
that Turner would pay Dinehart approximately 25% of the fees Turner
collected from the workshop participants; and that Dinehart and
Turner carried out this plan and agreement while Turner conducted
regular workshops in 1992-1993 at General Dynamics Corporation and
Lockheed Corporation under the trademark “Financial Strategies for
Successful Retirement Seminar.”
In 1992, Frank Engle, almost sixty years old, and Robert
Garbarino, aged fifty years, were veteran engineers employed by
General Dynamics. They worked at a plant which Lockheed planned to
acquire from General Dynamics. The sale was expected to trigger
lump sum distributions of retirement funds to many General Dynamics
employees. Dinehart and FEND organized and presented comprehensive
retirement planning workshops at the General Dynamics plant to
assist employees in financial planning and investment of retirement
funds. Engle and Garbarino participated in workshops conducted at
their plant by Turner, acting as Dinehart/FEND’s representative.
As part of the workshops each participant received an
individualized financial plan and consultation, valued by the
organizers at $500, designed to prepare them for the anticipated
sale of the plant to Lockeed and the distribution of retirement
funds by General Dynamics. At the close of their workshops, Turner
had each plaintiff fill out forms disclosing his confidential
personal financial data and history. The forms were drafted and
disseminated by SMMS, bearing the SMMS logo and trademark. The SMMS
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materials represented to the plaintiffs that the information would
be treated as confidential and analyzed by a SMMS financial planner.
SMMS represented that each plaintiff could receive a personalized
retirement plan including recommendations for specific investments
and other financial planning tools to help them meet their families’
needs and achieve their goals. In fact, however, Turner used the
SMMS materials and his position as the Dinehart/FEND representative
to gain the confidence of the plaintiffs and their authorization to
advise, recommend and execute the investment of their IRA and other
retirement assets. During that process, however, Turner converted
the plaintiffs’ assets to his own use and benefit. From 1993 to
1996, plaintiffs lost over $200,000 of their retirement funds
through the fraudulent conduct of Roger E. Turner. The plaintiffs
relied to their detriment on the false information provided them by
Dinehart/FEND to the effect that Turner was a qualified and reliable
retirement specialist, certified financial planner or accredited
investment adviser. On the basis of these and other representations
by Dinehart/FEND, the plaintiffs entrusted their retirement funds
to Turner for investment. Dinehart/FEND knew or should have known
that Turner was corrupt, had a disciplinary record, did not have
valid credentials as a retirement or financial planner, and was
likely to commit intentional misconduct and abuses of trust to the
plaintiffs’ detriment. But for the false information about Turner
provided by Dinehart/FEND, the plaintiffs would not have relied on
Turner’s advice or guidance and would not have entrusted him with
the investment of their IRA and other retirement funds.
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Turner’s registration as an investment adviser in Texas expired
on December 31, 1991 and was not renewed. The Annable Turner and
Company’s registration with the Texas Securities Board as an
investment adviser lapsed before Turner began the workshops. Turner
violated the Texas Securities Act, TEX. REV. CIV. STAT. art. 581-
19(C)(6), by conducting a fee-based investment advisory business in
Texas through which he recommended and executed the purchase of
unregistered securities on behalf of the plaintiffs. Turner also
violated the Texas Securities Act, TEX. REV. CIV. STAT. art. 581-
33(a)(1) and (2) by selling unregistered securities and securities
by means of untrue statements of material facts and fraudulent
omissions. On May 12, 1998, Turner was convicted of federal
securities fraud under 15 U.S.C. §§ 77q(a) and 77x.
II. ANALYSIS
A. Negligent Misrepresentation
The Texas Supreme Court, in Federal Land Bank Ass’n of Tyler
v. Sloane, 825 S.W.2d 439, 442 (Tex. 1991), adopted the common law
cause of action for negligent misrepresentation that results in
pecuniary loss as set out in the RESTATEMENT (SECOND) OF TORTS § 552
(1977). See also McCamish, Martin, Brown & Loeffler v. F.E. Appling
Interests, 991 S.W.2d 787, 791 (Tex. 1999); First Nat’l Bank of
Durant v. Trans Terra Corp. Int., 142 F.3d 802, 808 (5th Cir. 1998).
Section 552(1) of the Restatement provides:
One who, in the course of his business, profession or
employment, or in any other transaction in which he has
a pecuniary interest, supplies false information for the
guidance of others in their business transactions, is
subject to liability for pecuniary loss caused to them by
their justifiable reliance on the information, if he
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fails to exercise reasonable care or competence in
obtaining or communicating the information.
Although the Texas Supreme Court, in Sloane and McCamish, did
not quote or paraphrase section 552(2) & (3), as it did section
552(1), the opinions indicate an intention to adopt section 552 as
a whole. This court has interpreted the decisions accordingly. See
First National, 142 F.3d at 808-09; Scottish Heritable Trust, PLC
v. Peat Marwick Main & Co., 81 F.3d 606, 612-14 (5th Cir. 1996).
Because Engle and Garbarino do not allege that Dinehart and FEND
were under a public duty to give the information in question, the
liability in the present case is limited by section 552(2) which,
in pertinent part, provides:
[T]he liability stated in Subsection (1) is limited to
loss suffered
(a) by the person or one of a limited group of persons
for whose benefit and guidance he intends to supply the
informartion or knows that the recipient intends to
supply it; and
(b) through reliance upon it in a transaction that he
intends the information to influence or knows that the
recipient so intends or in a substantially similar
transaction.
Accepting all well-pleaded facts as true and viewing them in
the light most favorable to the plaintiffs, with every doubt
resolved in their behalf, I believe that their complaint states a
cause of action against the defendants under the Texas common law
of negligent misrepresentation causing pecuniary loss as described
by the RESTATEMENT (SECOND) OF TORTS § 552. Dinehart, doing business as
FEND, was acting in the course of his business, profession or
employment when he planned and organized the retirement investment
workshops, selected Turner as his representative and as the expert
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to conduct them, and solicited the plaintiffs’ participation and
reliance on Turner for financial advice and instruction. Dinehart
also had a pecuniary interest in the fees charged the workshop
participants and in the quality and reputation of the workshops he
organized and promoted nationwide in the scope and course of his
business. Dinehart, personally and doing business as FEND, supplied
false information directly to the plaintiffs for the guidance of the
plaintiffs in their business transactions. He incorrectly
represented to them that Turner was a reputable, qualified, and
certified expert upon whom they could rely for sound information and
beneficial advice in their financial, investment and retirement
planning transactions. The plaintiffs, inexperienced and
unsophisticated in financial planning and investments, justifiably
relied upon the information supplied them about Turner by Dinehart,
who had bolstered his own credibility by advertising his experience
and relations with the NMA chapters at major corporations, SMMS, and
his own organization, FEND. The plaintiffs suffered losses of their
assets due to their justifiable reliance upon the false information
about Turner supplied them by Dinehart/FEND, as well as
Dinehart/FEND’s endorsement of Turner as their representative, which
caused the plaintiffs to justifiably rely on Turner’s fraudulent
advice, information and services. Dinehart is liable to the
plaintiffs for these losses because he did not exercise the
reasonable care and competence, professed by and expected of a
person engaged in his business or profession, in engaging Turner to
conduct the workshops without an adequate investigation of his
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reliability, and in obtaining and communicating to the plaintiffs
the false information and impressions concerning the trustworthiness
of Turner. Engle and Garbarino were among a limited group of
persons for whose benefit and guidance Dinehart and FEND intended
to supply the false information about Turner. The plaintiffs
suffered losses through reliance upon the false information in
transactions Dinehart intended the information to influence, viz.,
the plaintiffs’ participation for a fee in the workshops under
Turner’s tutelage; the plaintiffs’ reliance on Turner for
instruction, advice and information regarding their financial,
investment, and retirement planning and transactions; the
plaintiffs’ disclosures of personal financial data to Turner and
receipt from him of individualized financial plans and
consultations; and in substantially similar transactions.
The damages recoverable for a negligent representation,
however, are limited to those necessary to compensate Engle and
Garbarino for the pecuniary losses to them of which the
misrepresentations were a legal cause. In Sloane, 825 S.W.2d at
443, the Texas Supreme Court declined to extend damages beyond those
limits provided in Restatement section 552B. The court adopted the
pertinent part of that section in its opinion, as follows:
The Restatement provides damages for this tort as
follows:
(1) The damages recoverable for a negligent
misrepresentation are those necessary to compensate the
plaintiff for the pecuniary loss to him of which the
misrepresentation is legal cause, including
(a) the difference between the value of what he has
received in the transaction and its purchase price or
other value given for it; and
(b) pecuniary loss suffered otherwise as a consequence of
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the plaintiff’s reliance upon the misrepresentation.
(2) the damages recoverable for a negligent
misrepresentation do not include the benefit of the
plaintiff’s contract with the defendant.
Id. at 442. The court pointed out that “[t]he Restatement advances
several policy reasons for limiting damages, including a lower
degree of fault indicated by a less culpable mental state and the
need to keep liability proportional to risk.” Id. at 442-43 (citing
RESTATEMENT (SECOND) OF TORTS § 552, comment a (1977)). Accordingly,
the court rejected the Sloanes’ argument that they should be allowed
damages for mental anguish because Restatement 552B “limits damages
to pecuniary loss alone.” Sloane, 825 S.W.2d at 442.
Consequently, I conclude that Engle and Garbarino have stated
a claim against Dinehart and FEND for which relief may be granted
based upon an action for negligent misrepresentation under the
common law of Texas, by virtue of the Texas Supreme Court’s adoption
of the provisions and limitations of sections 552 and 552B of the
RESTATEMENT (SECOND) OF TORTS.
B. Negligence
In their third amended complaint, the plaintiffs made the
following allegations with regard to the defendant’s negligence:
[Dinehart and FEND] knew or should have known the
following about Turner when they selected him to present
comprehensive retirement planning workshops to retiring
employees at General Dynamics:
1) Mr. Turner had a disciplinary record with the NASD for
securities offenses;
2)Mr. Turner was not licensed or registered to provide
investment advice in Texas in 1992;
3) Mr. Turner and/or his businesses had tax liens and
other financial difficulties which would affect the
advice given to General Dynamics employees; and
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4) Mr. Turner had numerous outside business interests
which created a dangerous conflict of interest in
advising retiring employees as to investment
alternatives.
Defendants[] owed Plaintiffs a duty to exercise
reasonable care in selecting and employing financial
planners and advisers appearing before a targeted
audience of General Dynamics employees receiving lump sum
distributions of retirement funds. It was reasonably
foreseeable to [the Defendants] that Plaintiffs would
base investment decisions about their retirement funds on
the presentations they received at the workshops.
Defendants knew or should have known that Plaintiffs
would utilize the workshop (which included a confidential
consultation with Turner purportedly worth $500.00) to
purchase services from Turner.
The complaint states a valid claim for relief under the Texas
common law of negligence. The pleadings, taken in the light most
favorable to the plaintiffs, set forth several sets of facts that
would support their negligence claim.
Under the doctrine of respondeat superior, a master is subject
to liability for the torts of his servants committed while acting
within the scope of their employment. See Baptist Memorial Hosp.
Sys. v. Sampson, 969 S.W.2d 945, 947 (Tex. 1998)(citing DeWitt v.
Harris County, 904 S.W.2d 650, 654 (Tex. 1995); RESTATEMENT (SECOND) OF
AGENCY § 219 (1958));3 Durand v. Moore, 879 S.W.2d 196, 199
3
RESTATEMENT (SECOND) OF AGENCY § 219, in pertinent part,
provides:
(1) A master is subject to liability for the torts of his
servants committed while acting in the scope of their
employment.
(2) A master is not subject to liability for the torts of his
servants acting outside the scope of their employment, unless:
* * *
(d) the servant purported to act or to speak on behalf of the
principal and there was reliance upon apparent authority, or
he was aided in accomplishing the tort by the existence of the
agency relation.
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(Tex.App.-Houston [14th Dist.] 1994, no writ); McMurrey Corp. v.
Yawn, 143 S.W.2d 664, 666 (Tex.Ct.Civ.App.-Texarkana 1940, writ
refused); Cameron Compress Co. v. Kubecka, 283 S.W. 285, 286
(Tex.Ct.Civ.App.-Austin 1926, no writ). The most frequently
proffered justification for imposing such liability is that the
master has the control or right to control the physical conduct of
the servant in the performance of the services or work. See Baptist
Memorial, 969 S.W.2d at 947 (citing Newspapers, Inc. v. Love, 380
S.W.2d 582, 585-86 (Tex. 1964); RESTATEMENT (SECOND) OF AGENCY §
220, cmt. d). But because an independent contractor usually has
sole control over the means and methods of the work to be
accomplished, the general rule is that an employer or principal who
hires an independent contractor is not vicariously liable for the
contractor’s tort or negligence. See id. (citing Enserch Corp. v.
Parker, 794 S.W.2d 2, 6 (Tex. 1990); Redinger v. Living, Inc., 689
S.W.2d 415, 418 (Tex. 1985)). Nevertheless, an employer or
principal may act so as to be subjected to liability because of the
conduct of a person who is not its agent, or who, although an agent,
has acted outside the scope of his or her authority. See id. at
947. Under the doctrine of ostensible agency, the employer or
principal may be held liable under circumstances in which his own
conduct should equitably prevent him from denying the existence of
an agency.4 See id. at 947-48 (citing, e.g., Marble Falls Hous.
4
As a practical matter, there is no distinction between
ostensible agency, apparent agency, apparent authority, and agency
by estoppel. See Baptist Memorial, 969 S.W.2d at 947, n.2 (citing
authorities).
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Auth. v. McKinley, 474 S.W.2d 292, 294 (Tex.Civ.App.-Austin 1971,
writ ref'd n.r.e.)); McWhorter v. Sheller, 993 S.W.2d 781, 786
(Tex.App.-Houston[14th Dist.] 1999) (persons who defrauded plaintiff
had apparent authority as defendant’s agents)(citing Baptist
Memorial, 969 S.W.2d at 949; Biggs v. United States Fire Ins. Co.,
611 S.W.2d 624, 629 (Tex. 1981)); cf. Lane v. Security Title & Trust
Co., 382 S.W.2d 326, 330 (Tex.App.-Dallas 1964, no writ)(Insurer
held liable for its local agent’s misrepresentations) (citing
RESTATEMENT OF LAW OF AGENCY, §§ 257, 258). “Ostensible agency in Texas
is based on the notion of estoppel, that is, a representation by the
principal causing justifiable reliance and resulting harm.” Baptist
Memorial, 969 S.W.2d at 948 (citing Ames v. Great S. Bank, 672
S.W.2d 447, 450 (Tex. 1984); RESTATEMENT (SECOND) OF AGENCY § 267;
KEETON ET AL., PROSSER AND KEETON ON THE LAW OF TORTS § 105, at 733-34 (5th
ed.1984) [hereinafter PROSSER]).
Texas has adopted RESTATEMENT (SECOND) OF AGENCY § 267 (1958), under
which a person “asserting ostensible agency must demonstrate that
(1) the principal, by its conduct, (2) caused him or her to
reasonably believe that the putative agent was an employee or agent
of the principal, and (3) that he or she justifiably relied on the
appearance of agency.” Baptist Memorial, 969 S.W.2d. at 948; see
also Ames, 672 S.W.2d at 450. The Texas Supreme Court, in Baptist
Memorial Hospital, repeated its earlier explanation of ostensible
agency:
Apparent authority in Texas is based on estoppel. It may
arise either from a principal knowingly permitting an
agent to hold herself out as having authority or by a
principal's actions which lack such ordinary care as to
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clothe an agent with the indicia of authority, thus
leading a reasonably prudent person to believe that the
agent has the authority she purports to exercise....
A prerequisite to a proper finding of apparent authority
is evidence of conduct by the principal relied upon by
the party asserting the estoppel defense which would lead
a reasonably prudent person to believe an agent had
authority to so act.
Baptist Memorial, 969 S.W.2d at 948 (quoting Ames, 672 S.W.2d 447,
450 (Tex. 1984)).
The plaintiffs’ complaint alleges facts from which, in the
light most favorable to them, it reasonably may be found or inferred
that Dinehart, doing business as FEND, by his own communications
directly to the plaintiffs and the other workshop participants,
proclaimed Turner, and continuously held him out to be, the agent
and representative of FEND and himself, caused the plaintiffs to
reasonably believe that Turner was his agent and representative, and
that the plaintiffs justifiably relied on the appearance of agency.
Consequently, the plaintiffs alleged facts stating a claim upon
which relief may be granted on the ground that Dinehart, by his
conduct, made Turner his ostensible agent in all matters pertaining
to the workshops, and, in the process, subjected himself to
liability for Turner’s alleged torts against the plaintiffs.
Further, quite apart from any question of vicarious liability,
the employer may be held liable for his own negligence in certain
situations relevant to the present case. See generally PROSSER, §
71 at 510. Where there is a foreseeable risk of harm to others
unless precautions are taken, it is the employer’s duty to exercise
reasonable care to select a competent, experienced, and careful
contractor, and to provide for such precautions as reasonably appear
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to be called for. See Ross, 796 S.W.2d at 216; Wasson v. Stracener,
786 S.W.2d 414, 422 (Tex.App.–Texarkana 1990, writ denied); King v.
Associates Commercial Corp., 744 S.W.2d 209, 213 (Tex.App.–Texarkana
1987, writ denied) (citing Jones v. Southwestern Newspapers Corp.,
694 S.W.2d 455, 458 (Tex.App.-Amarillo 1985, no writ); Texas
American Bank v. Bogess, 673 S.W.2d 398, 400 (Tex.App.–Fort Worth
1984, dism. agr); Moore v. Roberts, 93 S.W.2d 236, 238-39
(Tex.Civ.App.–Texarkana 1936, writ ref’d); Simmonton v. Perry, 62
S.W. 1090 (Tex.Civ.App. 1901, no writ)); see also Estate of
Arringtion v. Fields, 578 S.W.2d 173, 178 (Tex.Civ.App. 1979,
refused n.r.e.); Read v. Scott Fetzer Co., 990 S.W.2d 732, 739-40
(Tex. 1999)(Hecht, J.,dissenting); PROSSER, § 33 at 203.
Also, under another closely related Texas tort law theory, a
person’s act or omission may be negligent if he realizes or should
realize that it involves an unreasonable risk of harm to another
through the intentional tort or crime of a third person.
Accordingly, the Texas Supreme Court, in Golden Spread Council, Inc.
v. Akins, 926 S.W.2d 287, 290-91 (Tex. 1996), held that a local Boy
Scouts council’s affirmative act of recommending a person as a
potential scoutmaster to a church sponsor of a scout troop created
a duty on the part of the council to use reasonable care in light
of the information the council had received about that person’s
alleged prior molestation of boys while he was an assistant
scoutmaster in a different troop. The court stated that the local
council’s “duty is best expressed in comment e to Section 302B of
the RESTATEMENT (SECOND) OF TORTS, which recognizes that there may be
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liability ‘[w]here the actor has brought into contact or association
with the other a person whom the actor knows or should know to be
peculiarly likely to commit intentional misconduct, under
circumstances which afford a peculiar opportunity or temptation for
such misconduct.’” Id. at 291 (quoting RESTATEMENT (SECOND) OF TORTS
§ 302B, cmt. e, par. D). Similarly, the court, in Nixon v. Mr.
Property Management Co., 690 S.W.2d 546, 550 (Tex. 1985), in
reversing the trial court’s summary judgment dismissing plaintiff’s
claim, held that a genuine issue of material fact existed as to
whether an apartment building owner breached his duty under a
municipal ordinance to securely close the vacant portions of his
structure against unauthorized entry, resulting in the rape of a 10
year old girl in an empty apartment by an offender who abducted and
brought the victim to the apartment building. With respect to the
issue of proximate cause, the court concluded that, although usually
the criminal conduct of a third party is a superseding cause
relieving a negligent actor from liability, his negligence will not
be excused where the third person’s criminal conduct is a
foreseeable result of his negligence. Id. at 549-50 (citing
Castillo v. Sears Roebuck & Co., 663 S.W.2d 60 (Tex.App.–San Antonio
1983, writ ref’d n.r.e.); Walkoviak v. Hilton Hotel Corp., 580
S.W.2d 623 (Tex.Civ.App.–Houston [14th Dist.] 1979, writ ref’d
n.r.e.)). In support of the holding, the court quoted RESTATEMENT
(SECOND) OF TORTS § 448 (1965), which, in pertinent part, provides:
“The act of a third person in committing an intentional tort or
crime is a superseding cause of harm to another...unless the actor
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at the time of his negligent conduct [creating a situation making
another vulnerable to such tort or crime] realized or should have
realized the likelihood that such a situation might be created, and
that a third person might avail himself of the opportunity to commit
such a tort or crime.”5
Moreover, the court in Nixon pointed out that evidence of a
previous rape in the apartment building is not a prerequisite to
recovery: “All that is required is ‘that the injury be of such a
general character as might reasonably have been anticipated; and
that the injured party should be so situated with relation to the
wrongful act that injury to him or to one similarly situated might
reasonably have been foreseen.’” Id. at 551 (quoting Carey v. Pure
Distributing Corp., 124 S.W.2d 847, 849 (Tex. 1939)). Texas courts
have also followed the principle underlying RESTATEMENT (SECOND) OF
TORTS § 499: “If the likelihood that a third person may act in a
particular manner is the hazard or one of the hazards which makes
the actor negligent, such an act whether innocent, negligent,
intentionally tortious, or criminal does not prevent the actor from
being liable for harm caused thereby.” See Hale v. Burgess, 478
S.W.2d 856, 858 (Tex.Civ.App.-Waco 1972, no writ); Texas-N.M. & Okl.
Coaches v. Williams, 191 S.W.2d 66, 71 (Tex.Civ.App.-El Paso 1945,
writ ref. w.m); Reeves v. Tittle, 129 S.W.2d 364, 367 (Tex.Civ.App.-
5
See also RESTATEMENT (SECOND) OF TORTS § 448, cmt. c (“This is
true although the likelihood that such a crime would be committed
might not be of itself enough to make the actor’s conduct
negligent, and the negligent character of the act arises from the
fact that it involves other risks which of themselves are enough to
make it unreasonable, or from such risks together with the
possibility of crime.”).
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Eastland 1939, writ refused); Jesse French Piano & Organ Co. v.
Phelps, 105 S.W. 225 (Tex.Civ.App. 1907, no writ).6
The Texas courts have applied the principles underlying the
foregoing cases and RESTATEMENT (SECOND) OF TORTS §§ 302B and 448 to
allow recovery by plaintiffs for negligently inflicted harm or loss
of personal property, including money, through the intentional torts
or crimes of third persons. See Hoenig v. Texas Commerce Bank,
N.A., 939 S.W.2d 656, 660 (Tex.Civ.App.-San Antonio 1996, no
writ)(negligently inflicted loss of rents upon trust through
conversion by third person); Byrd v. Woodruff, 891 S.W.2d 689, 701-
02 (Tex.Civ.App.--Dallas 1994, writ denied, order withdrawn; dism.
agr.)(attorney negligently caused loss to client through conversion
by third persons); Gilstrap v. Beakley, 636 S.W.2d 736, 741
(Tex.Civ.App.-Corpus Christi 1982, no writ)(negligently inflicted
loss of ownership of oil rig through fraud of third person); cf.
Jesse French Piano, 105 S.W. 225 at 227 (negligent cause of loss of
personal property through theft by thrid person). Similarly, in the
present case, Engle and Garbarino seek to recover damages from
Dinehart and FEND for the negligently inflicted harm they suffered
through the fraud of Turner and the loss of their personal property,
viz., their retirement funds and securities. See, e.g., RESTATEMENT
6
The RESTATEMENT (SECOND) OF TORTS cites Jesse French Piano in
support of the last two sentences of comment b accompanying section
449: “The duty to refrain from the act committed or to do the act
omitted is imposed to protect the other from this very danger. To
deny recovery because the other’s exposure to the very risk from
which it was the purpose of the duty to protect him resulted in
harm to him, would be to deprive the other of all protection and to
make the duty a nullity.”
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(SECOND) OF TORTS § 927 (Conversion or Destruction of a Thing or of a
Legally Protected Interest In It); RESTATEMENT (SECOND) OF TORTS § 927,
illus. 4, 5 (recovery of damages for the embezzlement of stock
entrusted to a broker).7
The plaintiffs Engle and Garbarino have alleged facts under
which Dinehart and FEND may be held liable, not only vicariously for
the torts of Turner as their ostensible agent, but also for their
own negligence in exposing the plaintiffs to the intentional torts
and crimes of Turner. The complaint alleges that Turner, under the
guise of a helpful financial planner and workshop counselor, gained
access to their personal financial information, induced them to
entrust him with control of their retirement assets for the
7
The present case is not one in which a plaintiff is seeking
to recover for negligently inflicted, purely economic loss, without
harm to his person or legally protected property interest. The
traditional rule is that a plaintiff cannot recover for pure
economic loss in such cases. See Rodriquez v. Carson, 519 S.W.2d
214, 217 (Tex.App.-Amarillo 1979, ref. n.r.e.) (truck driver could
not recover loss of salary and commissions due to defendant’s
negligent damage to truck owned by driver’s employer); DAN B. DOBBS,
LAW OF REMEDIES § 6.6(2), at 142, n.55 (2d ed. 1993) (citing Robins
Dry Dock & Repair Co. v. Flint, 275 U.S. 303 (1927); State of
Louisiana ex rel. Guste v. M/V Testbank, 752 F.2d 1019 (5th Cir.
1985), cert. denied, 477 U.S. 903 (1986); General Public Utilities
v. Glass Kitchens of Lancaster, Inc., 374 Pa.Super. 203 (1988);
Hale v. Groce, 744 P.2d 1289 (1987)); see also RESTATEMENT (SECOND) OF
TORTS § 766C (Negligent Interference with Contract or Prospective
Contractual Relation)(Comment a:“[]Thus far there has been no
general recognition of any liability for a negligent
interference...with the plaintiff's acquisition of prospective
contractual relations[.]”); William Powers, Jr. and Margaret Niver,
Negligence, Breach of Contract, and the “Economic Loss” Rule, 23
TEX. TECH L. REV. 477, 517 (1992). On the contrary, Dinehart and
Garbarino are seeking recovery for the harm and loss of their
legally vested protected property rights.
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ostensible purpose of financial planning and reinvestment; that
Turner fraudulently converted their funds to his own use and thereby
caused them to suffer the harm of the total loss of their personal
property, that is, their retirement funds and assets; that they
relied on Dinehart’s false representations that Turner was a
certified, competent, experienced and reliable financial and
retirement investment planner; that, in fact, Turner had little more
than a high school education, had been discharged by a national
stock broker for financial misconduct, had been disciplined for such
misconduct by a national securities exchange, had never been
certified as a financial planner, and had lost his registration and
license as a securities dealer; that Dinehart, as a prudent and
reasonable organizer of retirement planning and investment
workshops, should have discovered these facts by conducting a
routine pre-employment investigation of Turner’s qualifications and
experience as an investment, financial, and retirement counselor;
that Dinehart negligently employed Turner, whom he knew or should
have known was neither competent nor trustworthy, and negligently
exposed the plaintiffs to an unreasonable risk of harm by the loss
of their assets through the fraud, misconduct and incompetence of
Turner; that Dinehart’s false misrepresentations, negligent hiring,
affirmative actions in promoting the workshops and vouching for
Turner’s professional qualifications, and negligent exposure of the
plaintiffs to the risk of intentional tortious and criminal conduct
by Turner, caused them to suffer the loss of their property; that
they justifiably relied on Dinehart and Turner to their detriment
- 27 -
because, in the absence of Dinehart’s negligent acts and omissions,
the plaintiffs would not have entrusted Turner with their retirement
assets.
C. Texas Deceptive Trade Practices Act
To recover under the Texas Deceptive Trade Practices Act
(DTPA), a plaintiff must establish (1) that he was a consumer; (2)
that the defendant engaged in false, misleading, or deceptive acts;
(3) that he relied on the false, misleading, or deceptive practices
to his detriment; and (4) that the defendant’s conduct was a
producing cause of his damage. See TEX. BUS. & COM. CODE ANN.
§17.50(a) (West 1987); Doe v. Boys Clubs of Greater Dallas, Inc. 907
S.W.2d 472, 478 (Tex. 1995); Weitzel v. Barnes, 691 S.W.2d 598, 600
(Tex. 1985). A producing cause is “an efficient, exciting or
contributing cause, which in a natural sequence, produced injuries
or damages.” Rourke v. Garza, 530 S.W.2d 794, 801 (Tex. 1975). To
qualify as a consumer, a plaintiff must have sought or acquired
goods or services by purchase or lease; and the goods or services
sought, purchased, or leased must form the basis of the complaint.
See Ins. Co. of N. Am. v. Morris, 981 S.W.2d 667, 675 (Tex. 1998);
Cameron v. Terrell & Garrett, Inc., 618 S.W.2d 535, 539 (Tex. 1981);
TEX. BUS. & COM. CODE §§ 17.45(4) and 17.50(a). Furthermore, the
Texas Supreme Court has clearly established that the DTPA definition
of “consumer” is not limited to the actual provider of the goods or
services at issue:
We find no indication in the definition of consumer in
section 17.45(4), or any other provision of the Act, that
the legislature intended to restrict its application only
to deceptive trade practices committed by persons who
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furnish the goods or services on which the complaint is
based. Nor do we find any indication that the legislature
intended to restrict its application by any other similar
privity requirement... The Act is designed to protect
consumers from any deceptive trade practice made in
connection with the purchase or lease of any goods or
services... We, therefore, hold that a person need not
seek or acquire goods or services furnished by the
defendant to be a consumer as defined in the DTPA.
Cameron, 618 S.W.2d at 540-41; see also Amstadt v. United States
Brass Corp., 919 S.W.2d 644, 649-50 (Tex. 1996) (reaffirming Cameron
while finding that the DTPA does not “reach upstream manufacturers
and suppliers when their misrepresentations are not communicated to
the consumer.” Id. at 649.).
Engle and Garbarino allege that they acquired or sought to
purchase the services of a retirement planning specialist and
incorporate by reference all of the other facts asserted in the
complaint. Thus, they allege that Dinehart/FEND committed false,
misleading or deceptive acts in violation of the DTPA which
constituted a producing cause of the plaintiffs’ loss of their
retirement funds, including the following:
(a) causing confusion or misunderstanding as to the
source, sponsorship, approval, or certification of Turner
as a financial planner, adviser and retirement specialist
by making the representations set forth in paragraphs 17-
22, 24-29, 45-45, and 58 above, without making a
reasonable investigation of Turner’s financial history
and background, qualifications, licenses, and
registrations;
(b) causing confusion or misunderstanding as to Turner’s
affiliation, connection or association with Dinehart,
FEND and SMMS as a retirement specialist and SMMS
financial planner, and his certification and/or
accreditation as a financial planner and adviser
authorized to do business in Texas by committing the
conduct set forth in paragraphs 17-29, 40-45, 58 above
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and by passing off the services of Roger Turner as being
those of SMMS and FEND;
(c) expressly and implicitly representing that Turner’s
qualifications, skill, and background were approved and
suitable for employees seeking advice and rudent
investment of retirement funds;
(d) failing to disclose to Plaintiffs the financial
relationships between the Defendants; and
(e) representing to Plaintiffs that Turner’s services
were specially accredited without having conducted any
independent investigation of his qualifications,
background, and credentials and failing to disclose to
Plaintiffs that Defendants had conducted no independent
review of Turner’s qualifications, background and
credentials.
The plaintiffs aver that Dinehart/FEND’s foregoing conduct was the
producing cause of their loss or harm because, but for such conduct,
plaintiffs would not have entrusted their IRA and other retirement
funds to Turner’s custody and control.
Accepting the facts alleged as true, and construing them in the
light most favorable to the plaintiffs, I conclude that Engle and
Garbarino have stated a claim satisfying all of the DTPA
requirements. The plaintiffs aver that they purchased and acquired
from Dinehart/FEND and Turner for their immediate use what they
believed were the services of an expert planning specialist within
the context of a retirement workshop program supported by a
nationally known organization with professionally crafted materials
and methodology and specifically designed for their individual
retirement needs. From the plaintiffs’ perspective, they did not
pay for a general survey or academic enrichment course. Instead,
as fifty and sixty year old employees anticipating early retirements
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or layoffs and lump sum distributions of retirement funds, they
sought and paid to receive sound, personal advice and counseling
from a qualified, reliable expert suitable to their individual
financial and retirement situations. Thus, the plaintiffs’
complaint is based on Dinehart/FEND’s false, deceptive
representations of the quality and character of the retirement
workshop and its counselor, as well as Turner’s fraudulent conduct.
Consquently, the false, misleading and deceptive practices of each
Dinehart/FEND and Turner were a producing cause that contributed to
each plaintiff’s grievous loss of his life’s savings in retirement
assets and missed opportunity to acquire what he earnestly sought,
a soundly planned, structured, and funded retirement program fitting
his personal and family needs. Accordingly, the plaintiffs have
stated a valid claim under the DTPA as consumers who relied on the
false, misleading and deceptive practices of the defendant, which
were a producing cause of their severe loss and harm.
D. Texas Securities Act
I agree that the district court’s dismissal of the plaintiffs’
claims under the Texas Securities Act should be affirmed. The
plaintiffs allege that Turner violated the Texas Securities Act
(TSA), TEX. REV. CIV. STAT. art. 581-19(C)(6) by conducting a fee-
based investment advisory business through which he recommended and
purchased unregistered securities, and violated TEX. REV. CIV. STAT.
art. 581-33(A)(1) and (2) by selling improperly registered
securities by use of untrue statements of material facts and
fraudulent omissions. They allege that Dinehart/FEND materially
- 31 -
aided and abetted Turner’s TSA violations by acting in reckless
disregard of the law in failing to conduct a review of Turner’s
licenses, registrations, and disciplinary record before representing
to plaintiffs that he was a retirement planning specialist;
promoting services they knew or should have known were illegal and
likely to cause harm or loss to the plaintiffs; recklessly failing
to conduct an investigation of the applicable licensing rules in
Texas and Turner’s failure to comply with them; failing to disclose
that Turner was not legally authorized to conduct a fee-based
investment advisory business in Texas; and failing to disclose
Turner’s outside business activities and private transactions in
securities.
TEX. REV. CIV. STAT. art. 581-33 F(2) imposes joint and several
liability on any person who directly or indirectly with intent to
deceive or defraud or with reckless disregard for the truth or the
law materially aids a seller, buyer, or issuer of a security. See
Morris, 981 S.W.2d at 675. For aider liability to attach, Turner
as the seller had to be liable for a violation of the TSA and
Dinehart/FEND had to have been aware of the violation but had to
have recklessly disregarded the fact of the violations. See id.
The plaintiffs have not alleged any facts from which it
reasonably may be found or inferred that Dinehart/FEND was aware of
the alleged illegal securities transactions between Turner and the
plaintiffs. The complaint alleges that after attending a three week
workshop conducted by Turner beginning on September 29, 1992, Engle
transferred to Turner for investment $25,000 on September 20, 1993,
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$100,000 in 1994, rolled over $45,000 from a mutual fund to Turner
on July 24, 1995, and rolled over $50,000 from a Schwab account to
securities offered by Turner in October 1996. The complaint alleges
that after attending a three week workshop conducted by Turner
beginning on January 29, 1992, Garbarino and his wife turned over
to Turner unspecified sums in April and July of 1992, $77,476 in
October 1993, $50,000 on November 14, 1995, and $35,000 on July 5,
1996 and September 10, 1996. The complaint does not allege that any
of Turner’s alleged TSA violations occurred during the three week
workshops, that any agency or other relationship between
Dinehart/FEND and Turner continued after the workshops, or that any
particular fact or event tends to show that Dinehart/FEND was aware
of or recklessly disregarded Turner’s alleged TSA violations.
III. CONCLUSION
For the reasons assigned, I concur in affirming the district
court’s dismissal of the plaintiffs’ Texas Securities Act claims,
but I respectfully dissent from the majority’s affirmance of the
dismissal of the plaintiffs’ other claims.
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