Modern Settings, Inc. v. Prudential-Bache Securities, Inc., PRUDENTIAL-BACHE

• Decision Date: 06 May 1991
• Docket Number: PRUDENTIAL-BACHE,1048,Nos. 1047,D,s. 1047
• Citation: 936 F.2d 640
• Parties: MODERN SETTINGS, INC. and Binder and Binder, as attorneys for Modern Settings, Inc., Plaintiffs-Appellees, Cross-Appellants, v.SECURITIES, INC., and Prudential-Bache Metal Co., Inc., Defendants-Appellants, Cross-Appellees, Modern Settings, Inc., Bialystock & Bloom Productions Inc. & Co., Counterclaim Defendants-Appellees, Cross-Appellants. ockets 90-7831, 90-7833.
• Court: U.S. Court of Appeals — Second Circuit

Page 640

936 F.2d 640

MODERN SETTINGS, INC. and Binder and Binder, as attorneys for Modern Settings, Inc., Plaintiffs-Appellees Cross-Appellants, v. PRUDENTIAL-BACHE SECURITIES, INC., and Prudential-Bache Metal Co., Inc., Defendants-Appellants, Cross-Appellees Modern Settings, Inc., Bialystock & Bloom Productions Inc. &amp Co., Counterclaim Defendants-Appellees, Cross-Appellants.

Nos. 1047, 1048, Dockets 90-7831, 90-7833.

United States Court of Appeals Second Circuit.

Argued Feb. 8, 1991.

Decided May 6, 1991.

Peter A. Jaffe, New York City (Jaffe and Asher, New York City, Ira N. Glauber, Gregory E. Galterio, of counsel) for plaintiffs-appellees, cross-appellants.

John M. Friedman, Jr., New York City (Dewey Ballantine, New York City, Susan C. Meaney, of counsel), for defendants-appellants, cross-appellees.

Before LUMBARD, NEWMAN, and ALTIMARI, Circuit Judges.

LUMBARD, Circuit Judge:

Modern Settings, Inc., and Binder and Binder, as attorneys for Modern Settings, which is bankrupt, brought suit in the Southern District of New York against Prudential-Bache Securities, Inc. (Securities) and Prudential-Bache Metal Co., Inc. (Metal) ¹ in 1983 alleging that Securities and Metal wrongfully liquidated Modern Settings's trading account with Securities engaged in unauthorized trading in that account in violation of Sec. 10(b) of the Securities Exchange Act, 15 U.S.C. Sec. 78j (1988), and Rule 10b-5 promulgated thereunder, 17 C.F.R. 240.10b-5 (1990), and negligently misvalued that account. ² The claims before us arise from Securities's handling of Modern Settings's brokerage account, and Modern Settings's failure to pay for gold consigned to it by Metal. ³

Modern Settings was a New York corporation engaged in the manufacture and sale of jewelry parts before being adjudged bankrupt on March 25, 1986. Harry Binder was its president and sole shareholder. Securities is a retail brokerage firm and a member of the New York and American Stock Exchanges. Metal, a sister corporation of Securities, is a commodities dealer engaged in the sale of precious metals.

In 1982, Binder invested $2,300,000 in a trading account at a Securities branch office in New York City. Operation of the account was governed by a customer agreement, signed by Binder on behalf of Modern Settings, which had several provisions relevant to this case:

5. Whenever in your discretion you (Securities) deem it desirable for your protection ... you may, without prior demand, tender, and without any notice of the time or place of sale, all of which are expressly waived, sell any or all securities ... which may be in your possession, or which you may be carrying for me....

10. Reports of the execution of orders and statements of my account shall be conclusive if not objected to in writing within five days and ten days, respectively, after transmittal to me (Modern Settings) by mail or otherwise.

13. I understand that no provision of this agreement can be amended or waived except in writing signed by an officer of [Securities], and that this agreement shall continue in force until its termination by me is acknowledged in writing by an officer of [Securities].

(parentheticals supplied).

In February 1983, Modern Settings entered into a consignment agreement whereby Metal advanced gold to Modern Settings for its jewelry business; the equity in the trading account with Securities served as collateral for the advances. Under this agreement, Modern Settings was to maintain at least $900,000 worth of equity in the trading account. If the equity fell below that amount, the agreement gave Metal the right to deem the consigned gold sold to Modern Settings at market price. It also provided that Metal was required to give Modern Settings written notice two business days before liquidation of the trading account.

Modern Settings's account broker at Securities at all relevant times was Gary Adornato. When Modern Settings moved from New York City to Melville, Long Island, it transferred its trading account to Securities's Melville branch in May 1983. Adornato then moved to the Melville branch to continue handling the Modern Settings account.

In June 1983, Binder met with Adornato and his assistant, Lewis Klee, and told them that he needed money for gold and wanted Adornato to sell the account's options for Coleco stock. In July, when Binder asked Adornato whether the Coleco stock options had been sold, Adornato answered negatively, and said that he would sell the options by the end of the week. Instead, Adornato got Modern Settings more deeply involved in the Coleco options market, and began to avoid Binder. In July, Binder complained about Adornato to Frederic Wasserspring, vice-president of Metal, and in mid-August, he also complained to Felix McCarthy, Adornato's supervisor at the Melville Securities branch. Neither complaint was in writing. Despite his complaints about the Coleco trading transactions, on August 25, Binder signed a power of attorney, back-dated to June 15, 1983, in favor of Adornato, with whom he had become friends. Binder testified that the reason he signed the back-dated power of attorney was because "it was not my intent to see anybody go to jail" for unauthorized trading.

In early August 1983, Securities discovered that the Modern Settings's trading account was overvalued by some $300,000, and as a result, the account was undermargined. During the August meeting at which Binder complained of Adornato's Coleco options trading, McCarthy received a telephone call from Securities's margin department informing him of the misvaluation in the trading account. McCarthy told Binder of the error, and later passed this information on to Wasserspring.

On August 18 and 19, Wasserspring spoke with Binder over the telephone to advise him that the Modern Settings account was undercollateralized in terms of the gold consignment agreement. On August 19, Wasserspring sent a hand delivered written notice to Binder informing him that he had two business days (until Tuesday, August 23) to restore the account to the equity level required by the agreement. On Monday, August 22, Adornato telephoned Binder to advise him that Securities was liquidating the account. Liquidation reduced the account value to $130,000. Securities also froze the assets in the account until February 15, 1985.

Meanwhile, in July 1983, Binder asked Wasserspring if he could increase his consignment, then 1,500 ounces of gold, by 200 ounces. Wasserspring told him that he would have to check the equity in the trading account to determine whether Metal could consign additional gold to Modern Settings. Binder testified that he was told in late July by Joe DeJohn, Wasserspring's assistant, that the equity in the account was only about $900,000 or slightly more, ⁴ and hence, Metal could not increase the amount of consigned gold. Consequently, Binder knew in July that he could not withdraw money from the account without violating the gold consignment agreement.

Binder decided that Modern Settings should expand into the "finished goods" side of the jewelry business. At the end of July, he attended the Retail Jewelers of America Trade Show, and aggressively solicited orders for the coming Christmas season, and secured $800,000 worth of orders for finished goods alone. Modern Settings requested additional gold from Metal to meet the Christmas orders as it had already processed into finished goods the 1,500 ounces of gold consigned to it. In response to this request for more gold, Metal advanced Modern Settings 100 ounces of gold on August 24, 1983 and 305.74 ounces on September 1. Nevertheless, these amounts were insufficient to meet the orders solicited by Binder. Modern Settings had to decline renewal orders and to revoke orders already accepted. Modern Settings never recovered from these 1983 losses, and business steadily contracted until its bankruptcy in 1986.

After a series of bench trials, ⁵ Judge Carter held Securities and Metal liable (I) for unauthorized trading in the account, resulting in damages of $134,849.69, (II) for wrongfully liquidating the account, resulting in damages of $105,000.00, and (III) for negligence in misvaluing Modern Settings's trading account, resulting in damages of $1,133,953.00. He further held that (IV) the total award of liability against Securities and Metal was to be off-set by the value of gold loaned by Metal to Modern Settings which was worth $816,604.72.

Both sides appeal the district court judgment. Securities and Metal contend that the case should be remanded for a determination of whether Binder's conduct contributed to Modern Settings's damages, that the district court's calculation of Modern Settings's post-liquidation value was clearly erroneous, that Securities was justified in liquidating Modern Settings's trading account and that Binder waived his claim to, or ratified, any unauthorized trading. Securities and Metal do not contest the district court's finding that they were negligent in misrepresenting the value of the Modern Settings trading account.

Bialystock, the assignee of Modern Settings's claims, argues that the set-off was improper, that the district court should have granted separate judgments against each defendant, that the district court erred in computing damages for wrongful liquidation and that it erred in awarding costs to both sides.

We affirm in part, reverse in part and remand for further proceedings. We reverse the district court's decision insofar as it held Securities and Metal liable for unauthorized trading and wrongful liquidation of the Modern Settings trading account. We also reverse the award of a set-off in favor of Securities and Metal. Because we reverse the wrongful liquidation holding, we remand for findings as to whether the misvaluation of the account alone caused any of the $1,133,953.00 in damages awarded by the district court for negligent misrepresentation. We also remand the issue of whether...