First Investors Corp. v. Rayner, 95-CA-00614-SCT.

• Citation: 738 So.2d 228
• Decision Date: 06 May 1999
• Docket Number: No. 95-CA-00614-SCT.,95-CA-00614-SCT.
• Parties: FIRST INVESTORS CORPORATION, Administrative Data Management Corporation and First Investors Insured Tax Exempt Fund, Inc. v. James W. RAYNER, M.D.
• Court: Mississippi Supreme Court

738 So.2d 228

FIRST INVESTORS CORPORATION, Administrative Data Management Corporation and First Investors Insured Tax Exempt Fund, Inc. v. James W. RAYNER, M.D.

No. 95-CA-00614-SCT.

Supreme Court of Mississippi.

May 6, 1999.

Rehearing Denied July 22, 1999.

William F. Ray, Jackson, Grady F. Tollison, III, Oxford, Attorneys for Appellants.

John H. Dunbar, Oxford, Attorney for Appellee.

EN BANC.

BANKS, Justice, for the Court:

¶ 1. In this case, we are confronted with allegations of conversion and Mississippi securities law violations, for which judgment was entered for the investor. We conclude that the investor was not estopped from bringing a claim and that the trial court properly allowed the jury to consider conversion. The trial court did not erroneously deny appellants of the right to allocate liability pursuant to Miss. Code Ann. § 85-5-7 (1991). Accordingly, we affirm the judgment of the trial court as to liability. We conclude, however, that there was error in instructing the jury with regard to damages. Therefore, we reverse as to damages and remand this case to the trial court for a new trial and damages only.

I.

¶ 2. This is a lawsuit filed by Dr. James W. Rayner against First Investors Insured Tax Exempt Fund, Inc. (hereinafter "the Fund"), a mutual fund; First Investors Corporation, a broker-dealer which serves as the Fund's principal underwriter; and Administrative Data Management Corporation, the Fund's transfer agent. The Fund was found liable for money stolen from Rayner by his broker, Bernie Smith.

¶ 3. The jury returned a verdict in favor of Rayner for $125,574.38, which was one-half of the value of the converted securities through January 31, 1995. Rayner was found to have been fifty percent (50%) negligent. Judgment was entered accordingly. The Fund appeals and Rayner cross-appeals. The following issues are raised:

DIRECT APPEAL

I. WHETHER THE TRIAL COURT ERRED IN FAILING TO DISMISS THE CASE AS A MATTER OF LAW, BASED ON ESTOPPEL.

II. WHETHER THE TRIAL COURT ERRED IN INSTRUCTING THE JURY ON CONVERSION.

III. WHETHER THE TRIAL COURT FAILED TO PROPERLY INSTRUCT THE JURY AS TO DAMAGES.

IV. WHETHER THE TRIAL COURT DEPRIVED THE FUND OF THE RIGHT TO ALLOCATION OF LIABILITY AMONG THE VARIOUS PARTIES, PURSUANT TO MISS. CODE ANN. § 85-5-7.

V. WHETHER THE TRIAL COURT ERRED IN INSTRUCTING THE JURY THAT RAYNER'S DAMAGES WERE TO BE DETERMINED BY THE VALUE OF THE SECURITIES AT THE TIME OF THE TRIAL.

CROSS-APPEAL

I. WHETHER THE LOWER COURT ERRED IN NOT GRANTING SUMMARY JUDGMENT, PEREMPTORY INSTRUCTION, AND MOTION FOR JUDGMENT NOTWITHSTANDING THE VERDICT, BASED ON ARTICLE 8 OF THE UCC AND THE COMMON LAW OF CONVERSION.

II.

¶ 4. Rayner began investing back in the early 1970's, with investments in over 15 mutual funds. Rayner gave Smith substantial discretion over a portion of his portfolio as Smith was a respected banker and investment advisor in the Oxford community. As much as $700,000 was invested in C.D.'s with the aid of Smith. Smith was allowed to open a bank account, as the sole signatory, to receive the interest paid on Rayner's C.D.'s. at the Merchants & Farmers Bank. Rayner did not keep up with the activity in this bank account, and he stated that he did not know that it still existed as late as 1992.

¶ 5. In early 1986, Rayner wanted to invest in a mutual fund that invested primarily in municipal bonds. These securities were recommended to Rayner by Smith, who was then a registered representative of Investment Management and Research. IM & R was an affiliate of the brokerage firm of Raymond James.

¶ 6. To invest in the mutual fund through Smith, Rayner signed a "new account form" with Raymond James. Rayner knew the purpose of the new account form was to open the mutual fund account. Rayner provided Smith's post office box as his address on the form given to Raymond James. Rayner explained at trial that he did not provide his own address, because he did not want to deal with paperwork associated with this investment. Rayner wanted Smith to receive the monthly statements and provide him with an annual summary of the performance of his investment. Rayner knew that Smith's address was being used as the account address. Because the Fund only had Smith's address, no correspondence about the investments ever went to Rayner's true address. ¶ 7. Rayner paid $100,000 initially in 1986 for 9,960.159 shares. He later paid $45,000 in 1987 for another 4,237.288 shares. By 1990, he had received additional shares through the periodic reinvestment of stock dividends.

¶ 8. There were two ways in which these shares could be redeemed. First, a shareholder could elect the right to redeem them by telephone, by completing a special form to authorize telephone redemptions. If this option was chosen, the Fund was explicit that the risk of loss from any fraudulent telephone redemption was borne by the investors:

The Fund, FIC, and the Transfer Agent will not be responsible for the authenticity of redemption instructions received by telephone or any loss, damage, cost or expense arising out of any telephone instruction received for an account. Any financial losses arising as the result of a dispute about the interpretation or execution of a telephone redemption will be borne by the shareholder....

¶ 9. Alternatively, an investor could redeem his shares in writing by mail. The Fund was authorized to redeem Rayner's securities if he requested redemption in writing, with the request signed by him, and his signature guaranteed.

¶ 10. Approximately four years after the first purchase, on March 21, 1990, Smith prepared and mailed to the Fund written instructions to sell $150,000 of the shares of stock registered in Rayner's name. Smith admitted that he forged Rayner's signature on a "liquidation request form" and sent it to the Fund. The form, which appeared to have been signed by Rayner, requested the distribution to be sent to him at the account address. The "liquidation request form" included a forged stock power of attorney, also apparently signed by Rayner, and a forged "signature guaranteed" stamp. The stamp was presumed to have been a signature guarantee stamp from Raymond James. However, it was made at a local stamp shop in Oxford.

¶ 11. As a result of receiving the written instructions requesting the liquidation of the securities, the Fund issued a check payable to Rayner in the amount of $150,000. The check was sent by certified mail to the address provided in the Raymond James account application. A confirmation was also sent to Rayner at the same address, describing the transaction. The Fund stated that it had no way of knowing that Rayner had supplied Smith's address as his own.

¶ 12. Upon receipt of Rayner's check, Smith forged Rayner's endorsement, and deposited the funds into Rayner's account at the Merchants & Farmers Bank, which paid the check despite the forgery, and without an endorsement at all by Smith. Then Smith withdrew the $150,000 pursuant to the authority vested in him by Rayner.

¶ 13. On September 28, 1990, Smith prepared and mailed to the Fund written instructions to redeem the remaining securities in the Fund. Smith again forged Rayner's signature on the instructions and used the "signature guaranteed" stamp. The Fund issued a check payable to Rayner in the amount of $37,713.96, and mailed the check to Rayner at the account address. As before, the Fund sent a confirmation letter, showing the account balance of zero, to Rayner at the same address. Smith forged Rayner's endorsement on that check to the First National Bank in Oxford, where he deposited the proceeds into an account he had opened. It goes without saying that Smith never returned any of these funds to Rayner.

¶ 14. Smith terminated his agreement with Raymond James in April of 1987. Therefore, at the time Smith made the written requests to the Fund in which he forged Rayner's signature, he was not a registered representative affiliated with Raymond James.

¶ 15. Rayner did not authorize Smith to redeem the securities discussed above. Further, because Rayner relied on the annual summaries provided by Smith, he did not know what Smith had done until January of 1993. It was at that time that Smith was charged with and confessed to mail fraud in federal court in Oxford.

¶ 16. The Fund had received information from Smith that he was no longer associated with Raymond James in 1987. After being called as an adverse witness at trial by Rayner, Christine DiFabio, representative of the Administrative Data Management on behalf of the Fund, stated that ADM did receive information to change the dealer on the account because Smith had changed companies. However, she stated that the "redemption area" of the Fund might not receive the information about the change in dealers until it was processed and possibly showed up in the account records.

¶ 17. The signature on the written request accompanied by the "signature guarantee" stamp was what the Fund required to follow the redemption instructions. Accepting the signatures and the signature guarantee as genuine, the Fund redeemed Rayner's shares as per the written redemption instructions by issuing the two checks to the account address.

¶ 18. Rayner did not want his securities sold. He had intended for those securities to be tax-free income and potential, long-term growth in the number and value of his shares. Rayner claimed that he never wanted, nor did he agree to accept, any checks from the Fund in exchange for his securities.

¶ 19. Smith intercepted the checks and used the proceeds for his own purposes. After he sent the written requests to the Fund, Smith continued to send forged, annual account statements to Rayner, which purportedly were the statements of the value of Rayner's securities in the Fund. This continued until Smith confessed in 1993. After which, Rayner requested the Fund to restore his securities. By letter dated February 12, 1993, Rayner through one of his...