Banknorth, N.A. v. Littlefield ( 2005 )

Banknorth N.A. v. Littlefield, No. S0273-03 CnC (Norton, J., Sept. 1,
2005)
[The text of this Vermont trial court opinion is unofficial. It has been
reformatted from the original. The accuracy of the text and the
accompanying data included in the Vermont trial court opinion database is
not guaranteed.]
STATE OF VERMONT SUPERIOR COURT
Chittenden County, ss.: Docket No.S0273-03 CnC
BANKNORTH, N.A.
v.
LITTLEFIELD
ENTRY
This is a case about, stock, margin loans, portfolio management, and
questions about who bears responsibility when stock prices drop. Plaintiff
Bank moves for summary judgment on its primary claim of liability under
its 2001 promissory note. It also moves for summary judgment on several
of Defendant Borrower’s counterclaims and defenses. These include ,
promissory estoppel, fraudulent and negligent misrepresentation, consumer
fraud, breach of fiduciary duties, breach of an implied duty of care, and
breach of duty to maintain value under 9A V.S.A. § 9–207.
Facts
In 1998, Borrower opened an investment account with Stratevest, an
investment firm affiliated with Bank.1 This account was governed by a
Managing Agency Agreement, which established the terms of the
relationship, gave Stratevest some limited control over the account, and
defined what powers Borrower retained over her investments. The
agreement created what is known as a custody account. Stratevest was
responsible for holding Borrower’s shares, but it did not make any
independent investment decisions or give official recommendations. Under
this type of account, Borrower maintained control and discretion over her
stock investments as far as both a day-to-day basis as well as long term
planning were concerned. This account contained several of Borrower’s
stock holdings, including about 30,000 shares in Nortel Networks.
Borrower had worked at Nortel for 13 years and had earned several
thousand stock options.
The evidence shows that Stratevest through its employees began to
give Borrower informal recommendations and advice about her
investments. This information did not come with any imprimatur of
1
In 2002, Banknorth, N.A. became the successor to both the Howard
Bank, which had extended the line of credit to Borrower, and Stratevest, where
Borrower had her investments. Therefore, it is irrelevant whether liability in this
case attaches to either Stratevest or the Howard Bank. For the purpose of
determining liability, however, it is important to note that prior to the 2002
merger, the Howard Bank and Stratevest were corporate affiliates and separate
companies.
authority beyond its source or make any particular promise to Borrower but
appears now to have been the beginnings of a larger campaign by Stratevest
to convince Borrower to transfer more of her holdings to her Stratevest
accounts and engage more of Stratevest’s investment services. In late 1999
and 2000, Stratevest employees made several personalized pitches to
Borrower touting the firm’s acumen and the benefits to Borrower of
consolidating her accounts under one roof where Stratevest could provide
long term planning advice as well as day-to-day asset monitoring. As
before, none of Stratevest’s statements consisted of specific promises or
mischaracterizations of Stratevest’s current services. Stratevest did portray
themselves as financial experts who were well-equipped to manage
Borrower’s investments and structured debt situation.
While Stratevest was attempting to persuade her, Borrower had
another account with Merrill Lynch from which she borrowed $1,195,000
to purchase more of her Nortel stock options. Within a few months, in the
fall of 2000, Borrower had paid this debt down by nearly $350,000. A few
months later, she borrowed $600,000 more from Merrill Lynch to purchase
a house in England. Around this time, Borrower’s broker left Merrill
Lynch and Borrower accepted advice from Stratevest employees in making
her financing decisions. In early March 2001, Merrill Lynch demanded
Borrower provide more collateral or sell off some of her stock shares to
bring her debt to value ratio down. Borrower sold some stock, brought her
debt back down to $842,000, and decided to close her Merrill Lynch
accounts and move her assets to Stratevest. To complete this move,
Borrower had to pay off her debt to Merrill Lynch. Through Stratevest, she
obtained a line of credit from Bank for $1,044,000. This loan was secured
by two investment accounts Borrower was establishing with Stratevest.
Borrower used the money to pay off her loans at Merrill Lynch and to roll
over the remaining balance of an existing loan that she had guaranteed for
her film production company.
Simultaneously, Borrower entered into a series of agreements with
Stratevest and Bank. These agreements, like her 1998 agreement,
established the responsibilities, rights, and powers of each party to manage
and control the investment account and the line of credit. Unlike the earlier
agreement, the 2001 agreements gave Stratevest much more control over
Borrower’s assets and obliged them to manage the investments. Borrower
retain a certain amount of veto power over these decision, and Stratevest
was obliged to inform Borrower about certain transactions that it planned.
Within a month, Borrower’s investments had slipped below the
Bank’s required debt to value ratio. Bank, through its loan agreement,
ordered Stratevest to sell off some of Borrower’s shares. This reduced the
debt by $333,000. In April 2001, Borrower signed the last of her
agreements with Stratevest and Bank. As well, Merrill Lynch transferred
the last of Borrower’s assets to Stratevest. In June 2001, Borrower’s stocks
lost value again and Bank notified Borrower that it would order more
shares sold if Borrower did not provide additional collateral or provide
another way of paying down the loan balance. Borrower sought advice
from Stratevest who recommended that she sell more of her Nortel shares.
Borrower claims that she told Stratevest to sell what it needed to sell. She
also expressed a concern about losing value in the stocks and ending up
with nothing after the loan was paid off. Stratevest sold more shares and
brought the loan-to-value ratio back into balance.
In the beginning of 2002, Banknorth became the successor to both
Stratevest and the Howard Bank. Borrower signed a new loan agreement
with it in February 2002, which extended the term of the loan to July 2002.
At this time, Borrower indicated that she might obtain funds from other
sources besides her Stratevest investment accounts to pay off the loan.
Borrower never provided any additional funds, and Bank sold her
remaining stock shares and securities in October 2002. With their sale,
Borrower’s debt was reduced again to a balance of $271,000. This is the
amount plus interest that Bank seeks to recover.
Standard for Summary Judgment
A brief note about the standard for summary judgment applied here.
The purpose of summary judgment “is intended to ‘smoke out’ the facts so
that the judge can decide if anything remains to be tried.” Donnelly v.
Guion, 467 F.2d 290, 293 (2d Cir. 1972). The standard for summary
judgment is that the movant can show (1) that is no dispute of material fact
and (2) that it is entitled to a judgment on the issue as a matter of law.
V.R.C.P. 56(c); Fireman’s Fund Ins. Co. v. CNA Ins. Co., 2004 VT 93, ¶ 8.
In this case, many of Borrower’s arguments are interrelated and dependent
upon each other for their validity. To the extent that there remain issues of
material fact or a question of a right to a judgment about the claims and
counterclaims discussed in Bank’s motion, the court has tried to clarify the
position that the claim has within the law and what its limitations are in
light of the established facts. In this respect the court hopes to narrow the
relevant questions for each of these claims and focus the parties toward a
final resolution. This is particularly important and noteworthy since much
of the Bank’s present motion and Borrower’s opposition are devoted to
clarifying or framing the legal theories of the parties’ more generalized
claims.
Borrower’s Liability and Regulation U of the federal Securities
Exchange Act
Bank’s sole question that it offers for summary judgment on its own
claims is whether Borrower is liable under the promissory note. Bank also
argues that it is eligible for $329,000, but it admits that this amount may
ultimately be offset or adjusted by a counterclaim from Borrower’s armada.
Borrower, in turn, argues that this issue cannot be decided, because the loan
is illegal and void as a matter of public policy under federal securities law.
Borrower’s argument is somewhat complex in that she simultaneously
argues that the court should not deal with the underlying federal claims
while at the same time ruling that the contract is illegal and void under the
same federal law.
Borrower cites 15 U.S.C. § 78aa, otherwise known as § 27 of the
federal Securities Exchange Act, which gives federal district courts
exclusive jurisdiction over claims raised under its substantive provisions.
At the same time, there is a well-established exception that,
notwithstanding § 27's grant of exclusivity, allows state courts to hear
affirmative defenses based on the Securities Exchange Act. E.g., Sherry v.
Diercks, 628 P.2d 1336, 1339 (Wash. App. 1981); see also 69 Am. Jur. 2d
Securities Regulation—Federal § 954. This exception is based in part on
the fact that an anticipated defense based on the Securities Exchange Act
will not support federal subject matter jurisdiction. 69 Am. Jur. 2d
Securities Regulation—Federal § 954. In this case, Bank brought two state
law claims that would not, in and of themselves, have supported federal
jurisdiction. The fact that Borrower has raised a defense that invokes
federal jurisdiction does not affect this court’s jurisdiction over the case or
its ability to adjudicate the claim.
Borrower’s claim that her loan agreement with Bank is illegal and
void is based on Bank’s alleged violations of federal statutes and
regulations governing what are known as margin or purpose loans. 12 CFR
part 221 (known as Regulation U); see generally Annot., What Constitutes
Violation of Margin Requirements for Banks under § 7 of Securities
Exchange Act of 1934 (15 U.A.C.A. § 78g) and Regulation U Promulgated
Thereunder (12 CFR §§ 221.1 et Seq.), 34 A.L.R. Fed. 32, at § 2 (1977,
Supp. 2004). These statutes apply only in narrow circumstances.
Specifically, Regulation U applies if and only if the “bank loans [were]
collateralized by stock where the proceeds are used for the purpose of
purchasing or carrying margin securities . . . .’”People’s Nat. Bank of New
Jersey v. Fowler, 372 A.2d 1096, 1101 n.5 (N.J. 1977) (citing 12 CFR §
221.1(a)). Margin securities or margin stocks are defined as any equity
security that is a stock registered on a national securities exchange. 12 CFR
§ 221.3(v). Such loans are required by statute not to exceed the maximum
loan value of the collateral. 15 U.S.C. § 78g. Presently, that maximum
value is 50% of the stock’s current market value at the time of the loan. 12
CFR § 221.4. The main purpose of these regulations is to control stock
market speculation and regulate by limiting the amount that banks can loan
based on stock collateral that is used to leverage itself or further stock
purchases. Fowler, 372 A.2d at 1100–01. It was not, as Borrower infers, to
protect borrower–investors. Stonehill v. Security Nat. Bank, 68 F.R.D. 24,
31 (S.D.N.Y. 1975).
Before the court can examine the substance of Borrower’s defense,
there is a final threshold question concerning Borrower’s right to raise
Regulation U as a defense and whether she has a private right of action.
The question is one of apparent first impression for the Vermont courts, but
there is a great deal of guidance from the Second Circuit and the
neighboring jurisdiction of New York. Traditionally, federal courts found
an implied right of action in § 7 of the Securities Exchange Act of 1934.
See generally Annot., Civil Liability of Banks for Violation of Margin
Requirements of § 7 of Securities Exchange Act of 1934 (15 U.S.C.A. §
78g) and Regulation U Promulgated Thereunder (12 Cfr §§ 221.1 et Seq.),
34 A.L.R. Fed. 542 (1977, Supp. 2004) (collecting implied right cases). In
the 1980s, this approach shifted and reversed as the United States Supreme
Court tightened the guidelines to determine the existence of an implied
private right of action and Congress amended the Securities Exchange Act
to make borrowers as well as banks liable for margin violations under
Regulation X. The leading case under this revised approach comes from
the Second Circuit Court of Appeals. Bennett v United States Trust Co. of
New York, 770 F2d 308, 311–13 (2d Cir. 1985). The legal effect of
Bennett was a metaphorical opening of the gates as cases began to pour in
restricting the right of borrowers to bring private actions under § 7.
Berliner Handels–Und Frankfurter Bank, New York Branch v. Coppola,
626 N.Y.S. 2d 188, 189 (N.Y. App. Div. 1995); Banque Indosuez v.
Pandeff, 603 N.Y.S.2d 300, 303 (N.Y. App. Div. 1995) (collecting cases
from federal circuits). The Banque court even went as far as to say: “In
accordance with the unanimous view of the Federal circuit courts that have
considered the issue, defendant lacks the standing to assert such a claim
since section 7 (15 U.S.C. § 78g) does not afford a private right of action
for a violation of the margin rules.” Id. Commentators have similarly
picked up the drum beat of Bennett. See, e.g., R. Karmel, Mutual Funds,
Pension Funds, Hedge Funds and Stockmarket Volatility—What
Regulation by the Securities and Exchange Commission Is Appropriate?,
80 Notre Dame L. Rev. 909, 937–38 (2005) (noting that since 1984 even
the Federal Reserve Board has moved away from enforcing margin rates);
B. Black & J. Gross, Making It Up As They Go Along: The Role of Law in
Securities Arbitration, 23 Cardozo L. Rev. 991, 1041 (2002) (“Accordingly,
it has long been settled that a customer has no private right of action for
damages if the broker permits the account to be out of compliance with the
margin regulations.”).
What is perhaps the most persuasive about Bennett is that even
when courts disagree with its direct holdings, they have still applied its
underlying rationale to find that borrowers lack a private right of action
under § 7. See, e.g., Cohen v. Citibank, N.A., 954 F. Supp. 621, 626 n.3
(S.D.N.Y. 1996) (distinguishing plaintiff’s case brought under § 29b of the
Securities Exchange Act from the holding of Bennett). As the court in
Cohen reasoned,
[I]n order to establish a violation under Section 29(b), a plaintiff
must “show that (1) the contract involved a prohibited transaction,
(2) he is in contractual privity with the defendant, and (3) he is in
the class of persons the [1934] Act was designed to protect.”
. . . Additionally, plaintiff, an individual borrower, is not in
the class of persons the 1934 Act was designed to protect and thus
fails to meet the third prong necessary to assert her Section 29(b)
claim. See Bassler [v. Central National Bank, 715 F.2d 308,] 310–
11 [(7th Cir.1983)] (finding that the overriding purpose of margin
regulations is not to protect any individual, but to safeguard the
integrity of the markets and the nation's financial health) (holding
that Congress did not intend “to confer a right of action upon
investment borrowers as against investment lenders.”); Bennett,
770 F.2d at 312 (“Section 7 was clearly not passed for the especial
benefit of individual investors.”) Accordingly, plaintiff's first claim
is dismissed.
954 F. Supp. at 626. Since Bennett and its line of cases, no court has held
that a private right of action exists under § 7 or its brethren. Given this fact
and more importantly the fundamental reasoning this shift represents,
Borrower simply does not have a private right of action under Regulation
U. Therefore, her defense of illegality and void agreement is unenforceable
as a matter of law.
As this argument was Borrower’s only defense to Bank’s motion for
summary judgment on the issue of liability, summary judgment is
appropriate in Bank’s favor. Borrower has not produced any further
evidence that disproves or modifies her liability on the promissory note.
Notwithstanding this conclusion, the question of damages remains in
dispute and, depending on the merits and validity of Borrower’s
counterclaims, the question of whether Borrower will owe Bank or vice
versa in a final reckoning remains a live issue. For the meantime, Bank is
entitled to summary judgment as a matter of law on the issue of liability on
the promissory note.
Promissory Estoppel
Bank seeks to eliminate Borrower’s next claim of promissory
estoppel based on the existence of several agreements that define the
relationship and establish the duties and liabilities of each. To the extent
that there are valid agreements governing the relationship, promissory
estoppel is inappropriate. LoPresti v. Rutland Reg’l Health Servs., 2004
VT 105, ¶ 47. Borrower argues that this claim is merely an alternative
theory of recovery if the court should find any or all of the agreements void
as a matter of law. As Borrower’s defense of illegality and void agreement
based on Regulation U fails as a matter of law, Bank is entitled to summary
judgment in its favor on this issue as well. Since there is a valid agreement
between the parties, promissory estoppel is inappropriate.
Fraudulent Misrepresentation
Bank moves for summary judgment on Borrower’s fraudulent
misrepresentation claims. These claims are based on the statements made
by Stratevest employees to Borrower during the 2000–01 period when they
were soliciting her business. Borrower now claims that in light of their
failure to maintain the value of her account, these statements amount to
misrepresentation’s of Stratevest’s ability, services, and expertise. The
court will look at each standard separately and then at the consumer fraud
ramifications of each.
The standard for fraudulent (intentional) misrepresentation is:
An action for fraud and deceit will lie upon an intentional
misrepresentation of existing fact, affecting the essence of the
transaction, so long as the misrepresentation was false when made
and known to be false by the maker, was not open to the defrauded
party's knowledge, and was relied on by the defrauded party to his
damage.
Union Bank v. Jones, 138 Vt. 115, 121 (1980), quoted in Silva v. Stevens,
156 Vt. 94, 102 (1991). None of the facts in this case show that Stratevest
or its employees made intentionally false statements to Borrower during the
solicitation phase of their relationship.
The evidence shows that Stratevest worked very hard to get
Borrower to move her assets to Stratevest. The company through its
employees made statements to her that 1) spoke of the quality of
Stratevest’s services and 2) its intent to help Borrower increase her assets.
The bulk of these statements are generic and promise nothing specific. The
subsequent evidence does not show an intent on Stratevest’s part to mislead
Borrower about the nature of their investment services. In this sense, they
simply do not fit the definition of fraudulent misrepresentation. Silva, 156
Vt. at 103 (“Fraudulent [misrepresentation] involves concealment of facts
by one with knowledge, or the means of knowledge, and a duty to disclose,
coupled with an intention to mislead or defraud.”); see also Repucci v. Lake
Champagne Campground, Inc., 251 F. Supp. 2d 1235, 1238–39 (D.Vt.
2002).
None of the facts suggest that Stratevest wrongly presented itself as
an investment firm who in reality knew that it was not capable of providing
such services to Borrower. Stratevest offered to work in Borrower’s best
interest, and there is no evidence that it failed to do so in its investment
planning work. Likewise, Stratevest’s employees statements about their
expertise did not allege anything that they were not. That is the statements
did not portray the employees as having licenses, special certifications, or
any particular qualification that they did not actually have. Cf. Marbury
Management, Inc. v. Kohn, 629 F.2d 705, 707, 710 (2d Cir. 1980)
(affirming in general language the lower court’s imposition of liability on
an employee who represented himself as a fully licensed and registered
representative of a brokerage house when in fact he was a trainee
unauthorized to act); see also Hoffman v. TD Waterhouse Investor
Services, Inc., 148 F. Supp. 2d 289, 291 n.3 (S.D.N.Y. 2001) (noting that
any broader interpretation of Marbury is misleading as it must be read
within the context of federal rule 10-b claims of value); Laub v. Faessel,
745 N.Y.S.2d 534, 537 (N.Y. App. Div. 2002) (noting that reliance on
Marbury’s general liability language is misplaced in common law fraud
claims).
The Stratevest employees used only general terminology to describe
themselves and their services: “your professional money manager;” “loan
professional;” and a “one-stop set of professionals and experts to insure
your financial needs are met and exceeded.” Borrower’s argument is that
these statements are necessarily false because her expert says that the
employees actions and knowledge fall below the standard for experts. But
this is not enough for fraudulent misrepresentation as it goes to the
performance of the employees and not their status. Stratevest and its
employees did not represent themselves or their services as something they
were not. While Borrower may be disappointed in the difference between
Stratevest’s promise and its latter performance, there is no intentional
misrepresentation that rises to an actionable level. What is particularly
damning to Borrower’s fraudulent misrepresentation claim is that much of
the losses she alleges to have sustained came from later fluctuations in
Nortel stock prices. These were facts unknowable to either party when they
made their agreements in 2001. Therefore, Bank is entitled to summary
judgment on Borrower’s fraudulent misrepresentation claims.
Negligent Misrepresentation
One question that lingers unanswered in Borrower’s complaint is
what service Stratevest provided instead of what it promised. Borrower’s
central complaint against Bank and Stratevest is that they mismanaged the
portfolio to debt relationship by choosing not to sell or convert more of
Borrower’s Nortel shares in June 2001. Nowhere in the facts does
Borrower show evidence that Stratevest failed to monitor Nortel’s stock
position or provide a quantifiably substandard investment service that
would qualify as a different service than the one promised. To be perfectly
clear, Stratevest promised Borrower an investment management program
that would monitor the Nortel stock and the rest of her portfolio. From the
available evidence, that is exactly what Stratevest did. Moreover, the
distinction that Borrower sets up between a promised service and the
performance of that service confuses contractual obligations with factual
representations. Howard v. Usiak, 172 Vt. 227, 231–32 (2001). As with
the Howard case, Borrower’s theory in this area is so broad as to subsume
any contractual relationship where a customer does not receive the exact
service that she was promised into the realm of negligent misrepresentation
and consumer fraud.
Borrower’s further claims concerning Stratevest’s “representations”
and “inducements” fail to make out a case for negligent misrepresentation.
Vermont has adopted the Restatement (Second) of Torts’s definition of
negligent misrepresentation. Hedges v. Durrance, 2003 VT 63, ¶ 10
(mem.). This definition states that:
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 upon the information, if
he fails to exercise reasonable care or competence in obtaining or
communicating the information.
Restatement (Second) of Torts § 552(1). The key word in this definition is
“information.” All of the alleged misrepresentations that Borrower points
out in her brief are either broad statements of “expertise” or promises to
provide future services. As with fraudulent misrepresentation, Borrower
conflates future performance with these past statements. The evidence does
not show that Bank or Stratevest knew or should have known that
Borrower’s investments would continue to fail when they promised to care
for her investments. While Borrower’s evidence creates an inference that
Stratevest should have chosen differently, that goes to the quality of
Stratevest’s service. It does not show that Stratevest misrepresented its
general services as investment and loan providers.
Stratevest’s statements do not create an inference that Stratevest
guaranteed a particular outcome to Borrower. Broad statements such as
“[we] will insure that your financial needs are met and exceeded” do not
create a responsibility to guarantee outcomes when both parties know that
the investments at stake are subject to fluctuations and contingencies.
Opinions can be considered “information” under § 552 but only in limited
circumstances where an expert is making a reasoned and intelligent
judgment on a set of discrete facts. Restatement (Second) of Torts § 552
cmt. e (noting that opinions considered “information”must be based on
expert knowledge and careful consideration of the underlying facts); see
also Howard, 171 Vt. at 232 n. 1 (“Even if plaintiff could base a negligent
misrepresentation claim on a showing that defendant had no intention of
fulfilling a promise to perform, he cannot establish defendant's intent solely
by proof of nonperformance of the promise.”). Thus, Borrower’s negligent
representation claims must fail for lack of any “information” upon which
Stratevest or Bank could have made misrepresentations.
Notwithstanding these shortcomings, there is a kernel to Borrower’s
negligent misrepresentation argument in the question of what service
Stratevest had to offer for margin loan financing. Borrower claims that
Stratevest left much of the loan-to-value planning to employees of the Bank
who merely monitored her loan for the Bank and did not participate in her
financial planning.2 In this respect, Borrower raises an issue of material
2
Borrower’s evidence shows that Stratevest employees Sandy Kidwell
and Matthew Malaney lacked even a basic understanding of loan-to-value
calculations or its relevance to Borrower’s account. As a corporate partner of
Bank, Stratevest appears for the purpose of summary judgment to have been a
servant of two masters. In contrast to Borrower’s previous relationship with
Merrill Lynch where all services went through one office and a single employee
fact. Stratevest may have behaved as it promised on the investment end of
its business, but its alleged lack of knowledge about loan-to-value ratios
and expertise in monitoring and planning for these contingencies create an
issue about their ability to provide Borrower with complete financial
planning and “expert” advice in this area. If Stratevest induced Borrower to
move her assets based, at least in part, on their ability to manage her assets
and if part of that management included balancing her margin loans, which
were secured by her investments, then there is a material question whether
Stratevest was truly qualified and an “expert” in this area as they portrayed
themselves to be. Limoge v. People’s Trust Co., 168 Vt. 265, 267–68
(1998).
What distinguishes this claim of misrepresentation from Borrower’s
previous claims is that rather than being based on a promise of future
performance, the misrepresentation is a specific service that Stratevest did
not allegedly provide. According to Borrower, Stratevest knew or should
have known that Borrower’s portfolio included a rather large line of credit
and would require sophisticated loan-to-value management. This, she
argues, is a part of a competent, comprehensive investment management
program. Stratevest’s failure to provide this to her, presumably as Merrill
Lynch had done, represents a misrepresentation of what Stratevest offered.
Stratevest counters with evidence that it provided the type of loan-to-value
service required of it required, but this merely disputes, rather than refutes,
Borrower’s evidence. This makes summary judgment inappropriate on the
who dealt with Borrower, Stratevest and Bank were originally bifurcated entities
with multiple employees who each carried only specific knowledge of their area.
Thus instead of providing sophisticated loan management, Bank and Stratevest
appear to have provided services that may have belied Stratevest’s initial
description.
issue of negligent misrepresentation for this specific question.
Consumer Fraud
Borrower makes two separate claims for consumer fraud based on
representations and inducements that she claims Stratevest and its
employees made that caused her to move her assets from Merrill Lynch.
The first claim of consumer fraud is based on what Borrower alleges is the
difference between the services Stratevest promised and what it actually
provided. In her complaint, Borrower claims that Stratevest through its
employees promised to “relieve [Borrower] of the day to day concern over
the movement of Nortel” and “actively monitor and act on Nortel
positions.” Borrower argues that these “promises” were not bona fide in
the sense that they described a quality of service that she did not receive.
This argument is founded upon the Vermont Attorney General’s Rule CF
103, which was promulgated to further define unfair acts and deceptive
practices. 9 V.S.A. § 2453(c).
Rule CF 103 reads in its relevant section:
(a) A solicitation is not bona fide when the seller or solicitor uses a
statement or illustration in any advertisement which would create
in the mind of a reasonable consumer a false impression of the
grade, quality, quantity, make, value, model year, size, color,
usability or origin of the goods or services offered or which
otherwise misrepresents the goods or services in such a manner
that, on subsequent disclosure or discovery of the true facts, the
consumer may be switched from the advertised goods or services
to other goods or services.
This describes the practice known as “bait and switch” where one type of
good or service is promised and a lesser equivalent is delivered. E.g.,
Winey v. William E. Dailey, Inc., 161 Vt. 129, 136 (1993) (describing “the
classic bait-and-switch technique by which a seller induces consumer
interest with an attractive offer and switches to other merchandise or terms,
considerably less advantageous to the consumer.”). Here, as in the
fraudulent misrepresentation analysis, the facts do not show such a “bait
and switch” situation. Stratevest offered investor services, and it provided
investor services. Notwithstanding Borrower’s surviving claim of
negligent misrepresentation on the loan-to-value service, Stratevest did not
offer Borrower a general investment service that differed fundamentally
from what it eventually delivered. See Winey, 161 Vt. at 136–37 (noting
that 9 V.S.A. § 2457 should be read narrowly in analyzing contract
formation). Therefore, Bank is entitled to summary judgment on
Borrower’s “bait and switch” consumer fraud claims.
The sole remaining claim mirrors Borrower’s negligent
representation argument. That is, she argues that Stratevest’s self-described
full service investment management did not include long-term, competent
loan-to-value management. As with the misrepresentation arguments, the
difference between this claim and the “bait and switch” arguments are
critical. Unlike the other, more generalized claims, the argument here is
cogent and raises issues of material fact. Bank characterizes Stratevest’s
services as satisfying its promises. It says that its March and June sales of
Borrower’s stock were required by the terms of the loan and the plunging
market. But Borrower’s expert and other evidence suggest that the terms of
Bank’s loan and the coordination with the investment decisions failed to
meet the level of investment strategy and long-term planning that Stratevest
used (and uses) to characterize its service, which initially induced Borrower
to shift her assets to Stratevest.
As the court has noted, Borrower’s characterizations do suggest a
negligent misrepresentations. These alleged misrepresentations, if proven
true, rise to the level of consumer fraud violations. 9 V.S.A. § 2453; Silva,
156 Vt. at 102. There is a reasonable inference that Stratevest knew or
should have known that a normal brokerage house would be able to offer
different services—taking a more long-term view on a margin loan or
planning for further stock share growth in its plans to sell or retain it—than
what it could and that the investor would have no way of knowing this.
Stratevest, by its bifurcated nature, could only offer a bank/investment
hybrid that may have had more restrictive features and less cooperation. If
so, then this and this alone represents a consumer fraud violation.
Stratevest may have made negligent misrepresentations about its loan and
investment services, which induced Borrower to switch her assets and lose
them in the process. Summary judgment on this particular claim is
inappropriate at this time.
Fiduciary Duty Before 2001
Borrower argues that Stratevest had a fiduciary duty to her based on
their 1998 custody account agreement. She bases this argument on 1) the
agreement she had with Stratevest; 2) the informal counsel and advice
Stratevest employees gave her; 3) the fact that her sister worked for
Stratevest; and 4) her reliance on the informal advice. The facts at this
point in the case and show a clear picture of what the parties relationship
was prior to 2001 and what actions either side made. In this respect, the
record demonstrates that this issue is ripe for summary judgment. Cf.
Ascension Tech. Corp. v. McDonald Invs., Inc., 327 F. Supp. 2d 271, 277
(D.Vt. 2003) (refusing summary judgment where the nature and details of
the parties relationship had not been developed for the purpose of
establishing or disproving a fiduciary duty).
The evidence is that the 1998 agreement with Stratevest was limited
to the custody account and was non-discretionary. This meant that the firm
exercised only limited control over Borrower’s investments and provided
no formal planning or maintenance. Borrower remained in charge of her
investments, and Stratevest was bound to seek her approval for all
transactions. The intent of the relationship was to allow Stratevest to hold
the stock shares but not to give it power or discretion over those assets—in
sharp contrast to the parties relationship under the 2001 agreements. This
relationship does not in and of itself create any additional fiduciary duty
beyond the terms of the agreement. See McGee v. Vermont Fed. Bank,
FSB, 169 Vt. 529, 530 (1999) (mem.) (suggesting that a fiduciary
relationship is dependent upon a party actively cultivating reliance in the
other).
Rather, Borrower’s central argument on this issue is about the
informal advice Stratevest gave her during this time and how much she
claims to have relied on it. Stratevest’s advice to Borrower began with
standard investment recommendations that were given as part of the firm’s
communication with client when it sought her approval for stock
transactions. This advice changed as Stratevest employees and Borrower
got to know one another and Borrower lost her broker at Merrill Lynch.
The advice at this point breaks down into two categories: advice from the
employee to Borrower about present investment decisions and suggestions
about how Stratevest could serve Borrower’s over-all needs better if
Borrower shifted her portfolio over. The first, while it may at times have
exceeded the literal terms of Borrower’s 1998 agreement, does not rise
above the level of a normal investor–client relationship. The facts do show
Borrower’s growing reliance on the firm as investment advisors, but this
relationship did not generate any excessive reliance or alter the relationship
such that an additional fiduciary duty arose. McGee, 169 Vt. at 530 (noting
that a fiduciary duty requires the relationship “to ripen into one in which
the [clients] were dependent on, and reposed trust and confidence in, the
Bank in the conduct of its affairs.”). When the relationship did alter, the
parties drew up a new agreement that expanded Stratevest’s responsibility
and vest greater power in them. Thus, as a matter of law, Stratevest had no
particular fiduciary duty stemming from its 1998 agreement with Borrower.
Fiduciary Duty After 2001and an Implied Duty of Care
Borrower’s claims for a breach of fiduciary duty is based on her
2001 agreements with Stratevest. Under these agreements, the parties
established a discretionary account that vested greater power and discretion
in the hands of Stratevest. Borrower now claims that these obligations
amounted to a fiduciary duty that Stratevest breached when it failed to take
reasonable care of her investments, which caused their loss. This argument
is a question of duty and breach under the parties’ contract and does not
establish a separate claim. Breslauer v. Fayston Sch. Dist., 163 Vt. 416,
422 (1995). Borrower is free to argue that her 2001 agreements must be
interpreted in such a way that they vested in Stratevest a high duty of care
towards Borrower’s investments, but this does not create a separate claim;
it remains a breach of contract issue. Id. As such, Borrower’s claim must
be dismissed as repetitive and a part of her breach of contract claim.
Implied Duty of Care
Along with every contract there is an implied duty to perform “with
care, skill, reasonable expedience and faithfulness.” S. Burlington Sch.
Dist. v. Calcanei-Frazier-Zajchowski, 138 Vt. 33, 44 (1980). This is not a
tort claim but another breach of contract claim similar to the breach of good
faith and fair dealing. These claims are allowable as separate contract
claims so long as the facts support their existence. In support of this claim,
Borrower’s evidence shows that Stratevest may not have properly
communicated with Borrower at critical points in their relationship or have
made proper long-term decisions about stock investment and
diversification. To the extent that these claims demonstrate an alleged
failure by Stratevest to perform its investment monitoring duties under the
2001 agreements with care and skill, summary judgment is inappropriate
for this claim.
9A V.S.A. § 9–207
Borrower’s next counterclaim is that Bank had a duty to preserve the
value of her Nortel stock under the U.C.C. provisions for secured
transactions, specifically § 9–207. Bank challenges this claim on the basis
that the purpose and provisions of § 9–207 do not create a general duty in
the secured party to maintain the exact value of a volatile collateral. For the
purposes of this claim, Bank’s status would be as a secured party. 9A
V.S.A. § 9–102(a)(75). Borrower’s argument relies upon language in the
section that reads: “a secured party shall use reasonable care in the custody
and preservation of collateral in the secured party’s possession. In the case
of chattel paper or an instrument, reasonable care includes taking necessary
steps to preserve rights against prior parties unless otherwise agreed.” 9A
V.S.A. § 9–207(a).
As the official comment to § 9–207 notes this obligation comes from
an older common law duty of care. 9A V.S.A. § 9–207, cmt. 2. The
comment cites to §§ 17 and 18 of the Restatement, Security for further
definition. Id. The first of these two sections refers strictly to maintenance
of physical care over chattel such as a horse or a piece of jewelry.
Restatement, Security § 17, cmt. a. As such it is inapposite in the present
case. The second, § 18, has been held to apply to stock and other equity
investments. E.g., Layne v. Bank One, Ky., N.A., 395 F.3d 271, 276 (6th
Cir. 2005). Like § 17 though, § 18 is limited in its scope of application.
The comment to the section notes that the secured party “is not liable for a
decline in the value of pledged instruments, even if timely action could
have prevented such decline.” Restatement, Security § 18, cmt. a.
As such, several courts have held that § 9–207 does not create a duty
of care for secured parties that holds them responsible for a decline in
market value of securities. E.g., Layne, 395 F.3d at 276–77 (collecting
cases); Solfanelli v. Corestates Bank, N.A., 203 F.3d 197, 201 (3d Cir.
2000). There are exceptions to this, according to the nature of individual
agreements. Layne notes that some courts have held secured parties liable
under § 9–207 where the securities held were convertible debentures (a
bond or instrument that the holder may change into some other security).
Layne, 395 F.3d at 277 n.7. But in each of those cases, the duty attached
because “the losses occasioned by the secured creditor’s failure to convert
the debentures were clearly foreseeable, because the creditors had specific
knowledge of an event that would materially affect the value of the
securities.” Id. (quoting approvingly from the lower court opinion).
In a similar vein, Borrower cites to a class of case that hold a secured
party responsible for losses under § 9–207 when a loan is over-
collateralized an Borrower requests that the collateral be redeemed. Id. at
278–79; Solfanelli, 203 F.3d at 201. The leading case that Borrower cites
is FDIC v. Caliendo. 802 F.Supp. 575, 583–84 (D.N.H.1992). In that case,
the court found that the lender might have had a duty to protect the value of
stock shares so long as the original value exceeded the amount of the loan
and the borrower had requested liquidation. Id. at 584. The court
emphasized the need to establish over-collateralization and the request for
liquidation as a necessary precursors to any § 9–207 duty. Id. (“Whether
the loan is over-collateralized is a genuine issue of material fact that must
be known with complete certainty before the court may impose the duty to
preserve the value of collateral upon the plaintiff FDIC.”); Solfnelli, 203
F.3d at 201 (emphasizing the need for the borrower to request
redeemption).
While the facts of this case arguably show—at least for the purposes
of summary judgment—that Borrower’s collateral securities may have
exceeded the value of her loan at the time the line of credit was extended,
they also show quite clearly that Borrower did not request liquidation.
Borrower brushes over this element in her argument by arguing that she put
her total faith in the judgment of Stratevest, but this does not satisfy the
critical feature of the Caliendo exception. As the court in that case noted,
its imposition of this duty was a balanced result of fairness and equity. 802
F. Supp. at 585. The court applied the exception because of the nature of
the collateral, specifically that the original value of the collateral exceeded
the value of loan. Id. at 583. This meant that some of the collateral did not
belong to the lender, and the lender had a duty to protect this excess so long
as it was within its control and the lender made his interests clearly known.
Id.Caliendo speaks of a “hesitant[cy] to place the [secured party] in the
position of an investment advisor or insurer of the securities pledged.” Id.It only does so because the lender holding the excess collateral is
controlling something beyond the scope of its right under article 9. It must,
therefore, consider the rights of the borrower in its decisions and
monitoring of the collateral so that the borrower’s rights are preserved.
Without this additional right, the borrower’s interest is no greater than the
lender’s, and their right to the collateral is equal. In such a situation, § 9–
207 will not impose additional duties on the lender. While Stratevest may
have been Borrower’s investment advisor, Bank was her lender and § 9–
207 attaches only to the latter. By ignoring this necessary portion of the
exception, Borrower is essentially arguing to expand § 9–207 to apply
beyond the realm of secured transactions and into their relationship
between Bank and Borrower as investment advisor and advisee. This is a
very different argument than Caliendo and is not supported by any legal
precedent.
Moreover, this argument confuses the status of the parties under a §
9–207 claim. As a secured party, Bank did not have inherent investment
advisory duties—those were separate contractual obligations and should not
be considered when evaluating its duties as a secured party under article 9.
Instead, it had access to the stock shares as secured collateral to a loan and
a limited duty to care for the stocks that had more to do with keeping
physical control than maintaining value. Section 9–207 does not create an
inherent duties in a secured party to monitor the value of securities or
similar volatile collateral. It does not go to relationships that a borrower
and lender may have outside the secured transaction. In Caliendo-type
situations, the secured party has a duty to protect value, but this is due to
the nature of the collateral and the rights that attach to it. Caliendo, 802 F.
Supp. at 583 (discussing the reasoning of Fidelity Bank & Trust Co. v.
Production Metals Corp., 366 F.Supp. 613 (E.D.Pa.1973)). That is not the
case here and Borrowers arguments provide no compelling reason to
expand the law beyond it.
Finally, Borrower’s argument is not really about Bank’s care, or lack
thereof, of the Nortel shares, but Stratevests’ failure to properly maintain
her account so that her overall stock shares (and their potential for future
income) were not completely sacrificed for a hasty sale. This has nothing
to do with the Bank’s role and duty as a secured lender under article 9 of
the UCC. Rather it appears to be a restatement of Borrower’s more
straightforward contract and fiduciary claims. Therefore, Borrower’s
counterclaim under 9A V.S.A. § 9–207 is dismissed.
Based on the foregoing, Plaintiff Bank’s motion for summary
judgment is Granted in part and Denied in part.
Dated at Burlington, Vermont________________, 2005.
______________________________
Richard W. Norton, Judge