Interstate Securities Corp. v. Hayes Corp.

• Citation: 920 F.2d 769
• Decision Date: 07 January 1991
• Docket Number: Nos. 89-3620,s. 89-3620
• Parties: INTERSTATE SECURITIES CORPORATION, Plaintiff-Counterclaim Defendant-Appellee, v. HAYES CORPORATION, Roger Haendiges, Defendant-Counterclaim Plaintiffs-Appellants, Smith, Barney, Harris, and Uptem & Company, Counterclaim-defendant. & 89-3729.
• Court: United States Courts of Appeals. United States Court of Appeals (11th Circuit)

Page 769

920 F.2d 769

59 USLW 2496

INTERSTATE SECURITIES CORPORATION, Plaintiff-Counterclaim Defendant-Appellee, v. HAYES CORPORATION, Roger Haendiges, Defendant-Counterclaim

Plaintiffs-Appellants,

Smith, Barney, Harris, and Uptem & Company, Counterclaim-defendant.

Nos. 89-3620 & 89-3729.

United States Court of Appeals, Eleventh Circuit.

Jan. 7, 1991.

Philip J. Snyderburn, William M. Rishoi, Snyderburn, Rishoi & Swann, Winter Park, Fla., and Arthur R. Louv, Louv & Heinkel, Orlando, Fla., for defendant-counterclaim, plaintiffs-appellants.

Jacqueline R. Griffin, Peirsol, Boroughs, Grimm, Bennett & Griffin, Orlando, Fla., and Stanley T. Padgett, Marvin E. Barkin, Marie Tomassi, Trenam, Simmons, Kemker, Scharf, Barkin, Frye & O'Neill, Tampa, Fla., for plaintiff-counterclaim, defendant-appellee.

Appeal from the United States District Court for the Middle District of Florida.

Before KRAVITCH and ANDERSON, Circuit Judges, and GODBOLD, Senior Circuit Judge.

ANDERSON, Circuit Judge:

I. BACKGROUND

In September, 1985, Hayes Corporation entered into three contracts with Interstate Securities Corporation, a securities brokerage firm, that enabled Hayes to trade options, commodities and commodities options through an account at Interstate. The agreements also permitted Hayes Corporation to trade securities and write options on margin. ¹ Before agreeing to permit Hayes Corporation to trade on margin, Interstate required Roger Haendiges, the president and sole shareholder of Hayes, to execute a written personal guaranty to cover any obligations incurred by the account.

In October, 1985, Hayes Corporation began writing uncovered options through its account at Interstate. ² In March, 1986, Haendiges opened a personal securities trading account at Smith, Barney, Harris & Upton, another brokerage house, and began to write uncovered options in that account as well. On May 19, 1986, Haendiges wrote 1,100 uncovered call options ³ for stock in Reebok International in the Hayes account at Interstate. That same day, Haendiges wrote 1,000 uncovered call options for Reebok stock in his own account at Smith, Barney. When Haendiges attempted to write 1,000 additional put options ⁴ for Reebok stock ⁵ in his personal account, Smith Barney refused to permit Haendiges to add to his position without investing an additional $500,000 in cash. Unwilling to provide that money, Haendiges asked Interstate if it would accept his personal account from Smith, Barney and combine it with the Hayes account. Despite the large and highly speculative position of Haendiges's account, Interstate accepted the account on May 23, 1986, on the condition that Haendiges reduce his exposure and execute additional promissory notes pledging his personal property to cover any shortfall.

On Friday, May 30, 1986, executives from Interstate met with Haendiges in Orlando, Florida to discuss strategies for reducing the risk in the Hayes account. Interstate informed Haendiges that if he failed to meet a future margin call, ⁶ his account would be liquidated within twenty-four hours. At the close of business on that day, the Hayes account had a positive liquidation value between $1,800,000 and $2,000,000.

On Monday, June 2, 1986, the first day of trading following the May 30 meeting, the price of Reebok stock rose quickly, and the equity in the Hayes account was rapidly depleted. ⁷ In response, Interstate issued a margin call to Hayes Corporation for $217,522.00. From June 2 until July 18, Interstate issued numerous margin calls for various amounts in response to the changes taking place in the account. Despite the issuance of these additional margin calls, Haendiges did not deposit any additional funds into the Hayes account, except for a $5,000.00 good faith deposit.

The parties dispute whether Haendiges asked Interstate not to liquidate the account. Interstate argues that Haendiges "repeatedly urged Interstate not to liquidate the Hayes account." Appellee's brief at 8. Haendiges denies that he ever asked Interstate to keep the account open and contends that Interstate improperly assumed control of his account as of June 2, 1986, and that he fully expected Interstate to liquidate the account at that time. In any event, on July 18, 1986, forty-nine days after the initial margin call, Interstate elected to liquidate the Hayes account. At the time of liquidation, the account had a debit balance of approximately $1,800,000.00.

II. PROCEDURAL HISTORY

In August, 1986, Interstate filed suit against Hayes Corporation to recover $1,867,061.00, the amount allegedly owed to Interstate following the liquidation of Hayes' account. Interstate also sued Haendiges as the guarantor of that account. In addition, Interstate claimed that Hayes Corporation and Haendiges made fraudulent misrepresentations that induced Interstate to accept the transfer of Haendiges' personal account from Smith, Barney and to permit the Hayes account at Interstate to remain open after its liquidation value was insufficient to cover its margin.

Hayes Corporation and Haendiges asserted numerous counterclaims against Interstate, including breach of contract, breach of fiduciary duty, and negligent handling of accounts. In addition, appellants alleged that Interstate had violated Regulation T, the federal regulation governing the issuance of credit by securities firms to investors who trade securities on margin. ⁸

It is not clear from the record what happened to the breach of contract claim, but Hayes Corporation and Haendiges did not raise it in the pretrial stipulation and apparently did not pursue it at trial. Prior to the commencement of trial and during the trial, the district court ruled that evidence of violations of Regulation T was irrelevant and therefore inadmissible. At the close of the trial, the district court ruled that the Florida Supreme Court's decision in AFM Corporation v. Southern Bell Telephone and Telegraph Co., 515 So.2d 180 (Fla.1987), indicated that, as a matter of law, Hayes Corporation's and Haendiges's counterclaim of negligence could not go forward. Thus, breach of fiduciary duty was the only issue that reached the jury.

At the close of evidence, the district court instructed the jury regarding the breach of fiduciary duty claims. During jury deliberations, the jury submitted these questions to the court:

If it is a federal regulation that an account must be closed immediately, why was the account left open until 23 July, 1986 with marginal [sic] calls coming in almost daily? End of question. And, does this affect the fiduciary relationship?

R11-555. Counsel for Hayes Corporation and Haendiges suggested to the court that perhaps the jury was referring to regulation T, which requires accounts to be liquidated within seven days after an investor fails to meet a margin call. ⁹ See 12 C.F.R. 220.4 (1988). Counsel for Interstate argued that there was no requirement that an account must be liquidated "immediately" so that the answer to the first question must be that no such regulation exists. The court agreed that there was no regulation that required "immediate" liquidation and ultimately issued the following answer to the jury's questions:

There was no federal regulation requiring the account to be closed immediately. As to why the account was left open so long with marginal (adopting the jury's language) calls coming almost daily, that is something which you, the jury, must determine from the evidence before you. In determining any issue, you should consider all the evidence before you.

R11-560. (parenthetical added).

The jury returned a verdict in favor of Interstate for the balance due on the liquidated account and rejected Hayes Corporation's and Haendiges's counterclaims that Interstate had breached its fiduciary duty. The district court later granted Interstate's motion for interest and attorneys' fees, so that a final judgment was entered in favor of Interstate in the amount of $2,883,886.95. It is from that judgment that Hayes Corporation and Haendiges appeal.

III. ISSUES ON APPEAL

Two primary issues are raised in this appeal. First, whether the district court properly applied the holding in AFM Corp. v. Southern Bell Telephone & Telegraph Co., 515 So.2d 180 (Fla.1987), to determine, as a matter of law, that Hayes Corporation and Haendiges cannot sue Interstate for negligence. Second, whether the district court erred in ruling that evidence of violations of regulation T is irrelevant and inadmissible and in failing to instruct the jury regarding regulation T in response to jury questions during deliberations.

We affirm the district court's holding that the AFM doctrine bars Hayes Corporation's and Haendiges's negligence claims. We further hold that AFM also bars the claims regarding breach of fiduciary duty. Because we find that, as a matter of law, the breach of fiduciary duty claim should not have been submitted to the jury, the regulation T issues are rendered moot.

IV. DISCUSSION

In AFM Corp. v. Southern Bell Telephone & Telegraph Co., 515 So.2d 180 (Fla.1987), the Florida Supreme Court held that without evidence of personal injury or property damage, a plaintiff cannot raise tort claims to recover solely economic damages flowing from a breach of contract. The court determined that parties to a contract can only seek tort damages if conduct occurs that establishes a "tort 'distinguishable from or independent of [the] breach of contract.' " Id. at 181 (citing Lewis v. Guthartz, 428 So.2d 222, 224 (Fla.1982)).

In AFM, AFM Corporation entered into an agreement with Southern Bell that would place AFM's advertisement and phone number in the Southern Bell yellow pages. See id. at 180. AFM later moved its offices and changed its phone number, and the parties agreed to employ a referral service to help prospective customers contact AFM's new offices. Id. When the new yellow pages were distributed, Southern Bell listed AFM's old number in its advertisement. Id....