Printy v. Dean Witter Reynolds, Inc.

• Decision Date: 03 March 1997
• Docket Number: No. 96-2195,96-2195
• Citation: 110 F.3d 853,37 C.B.C.2d 1370
• Parties: , 37 Collier Bankr.Cas.2d 1370, Bankr. L. Rep. P 77,330 David L. PRINTY, Appellant, v. DEAN WITTER REYNOLDS, INC., Appellee. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 853

110 F.3d 853

65 USLW 2726, 37 Collier Bankr.Cas.2d 1370,

Bankr. L. Rep. P 77,330

David L. PRINTY, Appellant, v. DEAN WITTER REYNOLDS, INC., Appellee.

No. 96-2195.

United States Court of Appeals,First Circuit.

Heard March 3, 1997.

Decided April 10, 1997.

Evan Slavitt, Boston, MA, with whom Joseph S.U. Bodoff, and Hinckley, Allen, & Snyder were on brief, for appellant.

Mary DeNevi, Boston, MA, with whom Bingham, Dana & Gould LLP were on brief, for appellee.

Before BOUDIN, Circuit Judge, BOWNES, Senior Circuit Judge, and LYNCH, Circuit Judge.

BOWNES, Senior Circuit Judge.

The overarching issue in this bankruptcy case is whether an arbitration award of $1,009,820.00, made by a panel of the National Association of Securities Dealers to appellee Dean Witter Reynolds, Inc., against appellant David L. Printy is a non-dischargeable debt under Chapter 11 of the Bankruptcy Code. The district court affirmed an opinion of the bankruptcy court holding, on a summary judgment motion, that the debt was non-dischargeable. We affirm. There are a number of subsidiary issues which we address in the course of our opinion.

Because the appeal is from the grant of a motion for summary judgment, our review is de novo on all issues. Hope Furnace Assocs., Inc. v. FDIC, 71 F.3d 39, 42-43 (1st Cir.1995); Alexis v. McDonald's Restaurants of Mass., 67 F.3d 341, 346 (1st Cir.1995); In re Varrasso, 37 F.3d 760, 762-63 (1st Cir.1994).

I. THE FACTS

We start with the facts, keeping in mind On August 26, 1992, Printy transferred the Trust's account to the office of Dean Witter in Minneapolis, Minnesota. The record shows that Printy made all the decisions about the Trust; the sons play no part in this case. Dean Witter is a national broker-dealer in securities. It is registered with the Securities and Exchange Commission and is a member of the National Association of Securities Dealers. The account was opened in the name of the Trust and funded with a deposit of $50,000.00.

                the strictures of Fed.R.Civ.P. 56(c). 1  Printy and his two sons were the co-trustees of The Andrea L. Printy Family Trust, (the Trust) which had been established in 1986 after the death of Printy's wife.  Printy was an experienced investor and knowledgeable in the finance field.  At the time of discovery in this case he was a business consultant with eighteen years' experience in financial services.  He had been issued a broker's license and had held management positions in several financial services companies
                

The account executive at Dean Witter in charge of the Trust account was Michael Krmpotich. He and Printy were acquainted. Printy had tried to persuade Krmpotich to join a broker-dealer company in New Ulm, Minnesota, with which Printy had been affiliated. It was Krmpotich who had solicited the Trust account.

Printy executed an Active Assets Account Agreement with Dean Witter, effective September 30, 1992. Under the terms of the agreement, any controversies relative to the account were subject to arbitration. The Active Assets Account permitted the holder to buy and sell securities. The account holder could also write checks on, or receive wire transfers from, the Account. Additionally, the securities held in the account could be used as collateral for borrowing funds from Dean Witter "on margin" in order to purchase additional securities or for other reasons. The amount of money Dean Witter would permit an account holder to borrow on margin was calculated based on the value of the assets held in the account. Under the agreement, if the Trust owed money to Dean Witter for margin borrowing or other reasons, Dean Witter was entitled to a security interest in any securities or property held in the Trust's account.

In early September of 1992, Dean Witter received the following assets from the Trust: a U.S. Treasury Note and stock holdings in: Baxter International, Inc., Marion Merrill Dow, Inc., Vital Heart Systems, Inc., Eastman Kodak Co., Weyerhaeuser Co., Bank America Corp., and J.P. Morgan & Co. In addition to these assets, Dean Witter received 150,000 shares of Health Concepts, Inc. and an interest in MCI Medical Seed Limited Partnership. Printy was the president, secretary, and a shareholder of Health Concepts. He knew that the stock was not traded on any exchange or over-the-counter market and had very little value, if any. The bankruptcy judge points out in connection with Printy's bankruptcy schedules that in Schedule B--Personal Property--Printy gave a zero value to his holdings in Health Concepts and did not discuss the stock at all in the liquidation analysis section of his Disclosure Statement submitted with his Plan of Reorganization.

As part of its services, Dean Witter sent Printy monthly statements detailing and summarizing the Trust's assets. As of September 30, 1992, the Dean Witter statement showed the market value of the Trust's assets to be $191,533.33, with a borrowing limit of $141,104.50. The statement did not reflect the receipt of the Health Concepts stock or the interest in the MCI Medical Seed Partnership.

Next comes the event that led to this law suit. The Dean Witter statement for the month of October 1992 showed receipt by the Trust on October 28, 1992 of 150,000 shares of Coastal HealthCare stock with a value of $3,637,500.00. Coastal HealthCare stock is publicly traded. In his deposition testimony Printy stated that he did not authorize the purchase of the Coastal HealthCare stock On November 16, 1992, Printy sent a fax to the Trust's account broker, Krmpotich, and his assistant, Lynn Jorgenson, asking that 15,000 shares of Coastal HealthCare be delivered to him but left in the name of the Trust. Jorgenson informed Printy that Dean Witter could not deliver anything but the entire holding of 150,000 shares. Printy authorized the delivery of the 150,000 shares. In due time, he received a certificate for 150,000 shares of Health Concepts, not the Coastal HealthCare shares he had requested.

and never received stock-purchase confirmation slips. The reason for this obviously mistaken increase of over three and one half million dollars in the asset value of the Trust was a computer error by Dean Witter. The Trust's virtually worthless Health Concepts shares had been given the computer code for Coastal HealthCare shares, thus attributing to the Trust ownership of Coastal HealthCare stock, which it did not own.

The computer mix-up between Health Concepts and Coastal HealthCare continued through November of 1992. The November 1992 statement showed that 150,000 shares of Coastal HealthCare valued at $3,712,500.00 had been debited from the account. As a result, the total asset value of the Trust shrunk to $100,475.00 from the October value of $3,775,925.00.

Printy returned the 150,000 shares certificate of Health Concepts to Dean Witter on December 1, 1992. The computer continued on its merry way in the wrong direction. The Dean Witter December 1992 statement showed the Trust's receipt on December 2 of 150,000 shares of Coastal HealthCare, with an increase in asset value from $100,475.00 to $4,984,275.00.

The December statement, however, showed more than the return of the Coastal HealthCare stock to the Trust account. It showed that Printy purchased a total of 22,409 shares of stock in twelve companies and withdrew through wire transfers or checks, $262,501.11 from the account. In January of 1993, Printy bought a total of 16,763 shares of stock in eight companies and withdrew $373,670.14 from the account. In both months, the Coastal HealthCare stock was used to calculate the authorized limit for margin borrowing and these purchases and withdrawals were made against these erroneously inflated margin limits.

It is true, as Printy asserts, that Krmpotich and other brokers from Dean Witter urged Printy to make stock purchases on the basis of the Trust's borrowing limits. But none of the brokers at Dean Witter knew of the error that inflated the value of the Trust's assets. They assumed that Dean Witter's monthly statements were accurate. The only one who knew the monthly statements were grossly inaccurate was Printy. In his deposition Printy testified that he had questions about how his account was being handled. But he never told Krmpotich that he did not own any stock in Coastal HealthCare and that the authorized borrowing limits were wrong.

Dean Witter finally corrected the error in the February 1993 statement. The 150,000 shares of Coastal HealthCare, with a value of $2,962,500.00, were debited from the Trust account, and the 150,000 shares of Health Concepts, with no value, were credited to it. Dean Witter also made a margin call. After the margin call, the Trust's account had a deficit of $600,230.82 that was not repaid to Dean Witter.

II. LEGAL PROCEEDINGS

On March 30, 1993, Dean Witter commenced an arbitration proceeding against Printy, his sons, and the Trust before the National Association of Securities Dealers. The Statement of Claim consisted of eight counts, which included counts for theft and receiving stolen property, common-law fraud, violations of Minnesota securities law, common-law conversion, and common-law replevin. Dean Witter sought $603,548.00 in compensatory damages, plus interest and attorney's fees, against all respondents. Punitive damages were sought against Printy only.

Printy responded to the Statement of Claim and raised a number of affirmative allegations. The defense consisted of denial The arbitration award was issued on January 20, 1994. It found Printy, his sons as co-trustees, and the Trust liable for compensatory damages in the amount of $634,820.00 plus interest, from February 1, 1993, through the date of payment of the award. The arbitration panel also found Printy liable for punitive damages in the amount of $375,000.00.

of wrongdoing and shifting the blame to Dean Witter.

Printy filed a voluntary petition under Chapter 11 of the Bankruptcy Code prior to Dean Witter having...