Hossain v. Rauscher Pierce Refsnes, Inc.

Decision Date09 April 1999
Docket NumberNo. 97-1380-JTM.,97-1380-JTM.
Citation46 F.Supp.2d 1164
PartiesMohammed Shafayet HOSSAIN, Plaintiff, v. RAUSCHER PIERCE REFSNES, INC., d/b/a Clearing Service; and Regional Operations Group, Inc., Defendants.
CourtU.S. District Court — District of Kansas

Akexander B. Mitchell, II, Klenda, Mitchell Austerman & Zuercher, L.L.C., Wichita, KS, for plaintiff.

John W. Shaw, Matthew V. Bartle, Jeffrey A. Ziesman, Berkowitz, Feldmiller, Stanton, Brandt, Williams & Stueve, LLP, Kansas, MO, for defendants.


MARTEN, District Judge.

Mohammad Shafayet Hossain sued Rauscher Pierce Refsnes, Inc. (RPR) and Regional Operations Group, Inc. (ROG) seeking to recover funds defendants allegedly withdrew from the plaintiff's account without his permission. In Count 1 of his complaint, plaintiff contends he was a third-party beneficiary to a clearing agreement between defendants and Primeline Securities, the introducing broker. In Count 2 plaintiff contends defendants were bailees who, without either authority or his consent, negligently allowed plaintiff's funds to be deposited into an account other than his own and electronically wired to others. Defendants move for judgment on the pleadings with respect to Count I and summary judgment with respect to Count II.

Both parties have included, along with their pleadings, other materials such as a copy of the disputed contract, various affidavits, and other documents. Fed. R.Civ.P. Rule 12(c) states:

If, on a motion for judgment on the pleadings, matters outside the pleadings are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56, and all parties shall be given reasonable opportunity to present all material made pertinent to such a motion by Rule 56.

Accordingly, the court will treat both motions as motions for summary judgment.

I. Standard for Summary Judgment

Summary judgment is appropriate if the pleadings, depositions, answers to interrogatories and admissions on file, together with affidavits, show that there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). The moving party has the initial burden to show that there is an absence of evidence to support the non-moving party's case. Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).

Once the moving party has made this initial showing, the burden shifts to the non-moving party to designate specific facts showing there is a genuine issue for trial. Celotex, 477 U.S. at 324, 106 S.Ct. 2548. A party may not simply rely on the allegations of its pleadings, but must present evidence that establishes the existence of a genuine issue of material fact. Panis v. Mission Hills Bank, N.A., 60 F.3d 1486, 1490 (10th Cir.1995), cert. denied, 516 U.S. 1160, 116 S.Ct. 1045, 134 L.Ed.2d 192 (1996). The non-moving party's evidence is to be believed; all justifiable inferences are to be drawn in its favor; and its non-conclusory version of any disputed facts is assumed to be correct. Multistate Legal Studies, Inc. v. Harcourt Brace Jovanovich Legal Publ., Inc., 63 F.3d 1540, 1545 (10th Cir.1995), cert. denied, 516 U.S. 1044, 116 S.Ct. 702, 133 L.Ed.2d 659 (1996).

II. Facts

Plaintiff was a customer of Primeline Securities Corp., a securities broker dealer. On or about September 7, 1995, the defendants and Primeline entered into a "Fully Disclosed Clearing Agreement". Under the agreement, the defendants were to perform cashiering and various trade clearing functions for Primeline and its customers, including maintenance of customer accounts.

Section 10.8 of the clearing agreement provides as follows:

The imposition or allocation of any burden or duty on or to one or the other party by this Agreement does not and is not intended to impose or create any burden, right or duty in favor of or for the benefit of any person or entity not a party to this Agreement.

Between March 25, 1996 and February 17, 1997, plaintiff wrote checks totaling $151,000 payable to RPR, and delivered them to Primeline. Primeline then forwarded the checks to the defendants, who, at Primeline's direction, deposited the checks into an account in the name of "Nasir Siddiqi and Mohammad Hossaria," effectively converting plaintiff's funds to the use and benefit of Primeline. The plaintiff claims he has never used either name as an alias. Ultimately, Primeline was in bankruptcy, plaintiff discovered the loss of his funds, and brought this action seeking to recover from defendants. Additional facts are discussed as necessary in the analysis.

III. Analysis
A. Choice of Law

Section 10.1 of the agreement contains a choice of law provision which states:

This agreement shall be governed by and construed in accordance with the laws applicable to contracts made and to be performed within the State of New York.

Where jurisdiction is founded on diversity, the court will determine the enforceability of the provision through the forum state's choice of law rules. Vitkus v. Beatrice Co., 127 F.3d 936, 941 (10th Cir.1997).

In Kansas, parties to a contract generally may determine which state's laws will govern the rights and duties of the parties, as long as the chosen state bears a "reasonable relation" to the transaction. Central Kansas Credit Union v. Mutual Guar. Corp., 102 F.3d 1097, 1108 (10th Cir.1996); see also K.S.A. § 84-1105(1). Given the current state of the record, the court cannot determine whether or not New York has some reasonable relation to the transactions in question. However, if the law in Kansas does not conflict with the law of the other jurisdiction, the court may apply Kansas law. Shutts v. Phillips Petroleum Co., 240 Kan. 764, 767, 732 P.2d 1286 (1987) (citing Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 816, 105 S.Ct. 2965, 86 L.Ed.2d 628 (1985)). Kansas will not apply the law of another state if such application is contrary to the settled public policy of Kansas. Hartford Accident & Indem. Co. v. American Red Ball Transit Co., 262 Kan. 570, 574, 938 P.2d 1281 (1997).

The parties both argue there are no material inconsistencies between Kansas and New York law in this area and that the same outcome will obtain using either state's laws. However, the court's own research indicates that New York law and Kansas law do not so clearly lead to the same conclusion and that the Kansas Supreme Court would likely decline to apply New York law for public policy reasons as further discussed below. The court will thus apply Kansas law.

B. Third-Party Beneficiary Claim

Plaintiff claims the defendants are liable for failing to keep and hold his money in trust for his account pursuant to the clearing agreement with Primeline. The defendants raise two defenses: (1) Kansas would not recognize a third-party beneficiary claim against a clearing house broker; and (2) Section 10.8 of the clearing agreement clearly disallows third-party beneficiaries.

One may sue for damages resulting from the breach of a contractual obligation as a third-party beneficiary if he or she was an intended beneficiary of that obligation. Wolfgang v. Mid-America Motorsports, Inc., 111 F.3d 1515, 1524 (10th Cir.1997)(applying Kansas law). The person need not have been a party to the contract or to even have been aware of it when it was made. Id. The person must show, however, not only that there has been a breach of the contract, but that there exists a provision in the contract that operates to his or her benefit. United States v. United Servs. Automobile Ass'n, 968 F.2d 1000, 1002 (10th Cir.1992)(applying Kansas law).

Kansas has recognized third-party beneficiary claims in circumstances similar to those in this case. The plaintiffs in Keith v. Schiefen-Stockham Ins. Agency, Inc., 209 Kan. 537, 538-39, 498 P.2d 265 (1972) were the survivors of workers who were killed on the job. They sued the decedents' employer's insurance broker for failing to purchase workmen's compensation policies pursuant to a contract between the insurance broker and the employer. Id. The court noted it had long recognized the rule that "a person may avail himself of a promise made by a second party to a third party for the benefit of the first, although the first was not a party to it and had no knowledge of it when made." Id. at 544-45, 498 P.2d 265. The court held that the allegations in the plaintiff's petition were sufficient to state a cause of action against the defendant broker for failing to procure insurance. Id. at 541, 498 P.2d 265.

The relationship between a clearing house broker and the introducing broker is analogous to the employer/insurance broker relationship in Keith. As a result, the court believes the Kansas Supreme Court would recognize third-party beneficiary claims against a clearing house broker under the facts of this case.

Defendants next argue that section 10.8 of the clearing agreement precludes third-party beneficiary claims. Clearing brokers are regulated both internally by the National Association of Securities Dealers and externally by the Securities and Exchange Commission. Plaintiff claims these regulations establish a fiduciary relationship between the broker and the customer. SEC Rule 15c 3-3 and NASD Rule 2330(d) impose duties on brokers to take certain measures to safeguard a customer's funds and securities. See, e.g., 17 C.F.R. § 240.15c3-3(b)(1); NASD Manual Rule 2330(d).

"Generally, in a fiduciary relationship, the property, interest or authority of the other is placed in the charge of the fiduciary." Arst v. Stifel, Nicolaus & Co., 86 F.3d 973, 979 (10th Cir.1996). The fiduciary has the primary duty to act for the benefit of another. Id. Section 1.4(d) of the clearing agreement provides as follows:

For the purposes of the Securities Investor Protection Act of 1970 and the Securities and Exchange Commission financial responsibility rules, Customers are Customers of ROG...

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