Jelmoli Holding v. Raymond James Financial

• Decision Date: 17 November 2006
• Docket Number: No. 05-1903.,05-1903.
• Citation: 470 F.3d 14
• Parties: JELMOLI HOLDING, INC., Plaintiff-Appellee, v. RAYMOND JAMES FINANCIAL SERVICES, INC.; Raymond James & Associates, Inc.; Craig Robinson, Defendants-Appellants.
• Court: U.S. Court of Appeals — First Circuit

470 F.3d 14

JELMOLI HOLDING, INC., Plaintiff-Appellee, v. RAYMOND JAMES FINANCIAL SERVICES, INC.; Raymond James & Associates, Inc.; Craig Robinson, Defendants-Appellants.

No. 05-1903.

United States Court of Appeals, First Circuit.

Heard July 31, 2006.

Decided November 17, 2006.

COPYRIGHT MATERIAL OMITTED

Ruth T. Dowling with whom Daniel G. Cromack and Edwards Angell Palmer & Dodge LLP were on brief for defendants-appellants.

Peter F. Carr, II with whom Eckert Seamans Cherin & Mellott, LLC was on brief for plaintiff-appellee.

Before BOUDIN, Chief Judge, TORRUELLA and DYK,^* Circuit Judges.

BOUDIN, Chief Judge.

Jelmoli Holding, Inc. ("Jelmoli"), employed William Potts to handle the liquidation of various Jelmoli assets and the investment of the funds realized. Potts had worked for Jelmoli in various capacities from 1990 onward in a Massachusetts office, but Jelmoli's parent company was based in Switzerland. Jelmoli allowed Potts not only to sign checks on behalf of the company but also left him with the responsibility of verifying that the account in the United States was properly maintained.

Potts had a brokerage account on his own behalf with the Raymond James brokerage firm.¹ The Raymond James broker handling Potts' account was Craig Robinson, based in Raymond James' office in Texas. Potts was permitted to trade "on margin" (effectively paying a percentage for stocks purchased and borrowing the balance from Raymond James). In the stock market decline of 2000, the value of Potts' investments fell and, as Robinson knew, Potts began having difficulty meeting calls for additional cash to maintain the required margin between stock value and balance owed.

In April 2000, Potts for the first time delivered to Robinson checks drawn on a Jelmoli bank account and, when Robinson questioned him, Potts explained that he owned Jelmoli and could use the checks as he pleased. Between April and December 2000, Potts gave Raymond James checks totaling $1.5 million for Potts' personal account, both to cover his loans and to acquire additional stock.

In December 2000, Potts confessed to Jelmoli that he had been embezzling the funds. By the time Jelmoli (some months later) notified Raymond James of the fraud, Potts had removed all the funds from his Raymond James account. Thereafter, Jelmoli filed suit against Raymond James in the federal district court in Massachusetts to recover over $1.3 million taken by Potts and deposited in Potts' brokerage account. Jelmoli's two theories for recovery (a third one was voluntarily dismissed) were money had and received and unjust enrichment.²

In addition to denying that it had been unjustly enriched, Raymond James asserted that it had a statutory defense as a holder in due course. By motion, Raymond James also sought to limit Jelmoli's possible recovery to the amount (just over $105,000) that Raymond James had earned in commissions, fees, and interest on Potts' account in 2000. The district court denied the motion, and the case went to the jury on instructions disputed by Raymond James.

The jury found that Raymond James was a holder in due course for a small number of the checks received from Potts, but it found that Raymond James was otherwise liable to Jelmoli for $1.1 million. Raymond James now appeals. Its primary claims are that it was entitled to judgment limiting recovery to the commissions, interest, and fees and, independently, that it deserves a new trial on any amount arguably due to Jelmoli because of misinstruction on the holder in due course doctrine. On both issues our review is de novo. Borges Colón v. Román-Abreu, 438 F.3d 1, 14 (1st Cir.2006); SEC v. Happ, 392 F.3d 12, 28 (1st Cir.2004).

We begin with the holder in due course issue. The Uniform Commercial Code ("UCC") provides that a holder in due course of a negotiable instrument takes it free and clear of claims that might otherwise be made with respect to it. Mass. Gen. Laws ch. 106, § 3-306 (1999).³ Thus, if Raymond James were to prevail on that defense, it would defeat Jelmoli's claims entirely as to any check to which it applied, without regard to the terms of the two related common law claims or concern about whether Raymond James was enriched.

So far as pertinent, a holder in due course is one who "took the instrument (i) for value, (ii) in good faith, . . . [and] (v) without notice of any claim [by another] to the instrument." Mass. Gen. Laws ch. 106, § 3-302(a)(2). And notice, as defined by the UCC, can ordinarily be proved by either actual knowledge (here, that Potts was violating his fiduciary duty) or knowledge of facts and circumstances that would lead a reasonable person to so conclude. Mass. Gen. Laws ch. 106, § 1-201(25).

A more specific companion provision, addressed specifically to "notice of breach of fiduciary duty," lays down a set of special rules where the claim rests upon such a breach:

If (i) an instrument is taken from a fiduciary for payment or collection or for value, (ii) the taker has knowledge of the fiduciary status of the fiduciary, and (iii) the represented person makes a claim to the instrument or its proceeds on the basis that the transaction of the fiduciary is a breach of fiduciary duty, the following rules apply:

. . . (4) If an instrument is issued by the represented person or the fiduciary as such, to the taker as payee, the taker has notice of the breach of fiduciary duty if the instrument is (i) taken in payment of . . . a debt known by the taker to be the personal debt of the fiduciary, (ii) taken in a transaction known by the taker to be for the personal benefit of the fiduciary, or (iii) deposited to an account other than an account of the fiduciary, as such, or an account of the represented person.

Mass. Gen. Laws ch. 106, § 3-307(b) (emphasis added).

In this case, the conditions of subsection (4) were satisfied: the check was issued by the represented person and taken for Potts' apparent benefit and for deposit in his account. But both by its terms and the underlying logic, section 3-307(b) imputes notice of the breach only if "the taker has knowledge of the fiduciary status of the fiduciary." In its instructions, the district court refused to limit "notice" to a case where such knowledge was proved.

Instead, over objection by Raymond James, the district judge instructed the jury that Jelmoli could defeat holder in due course status for Raymond James as follows:

Next, the defendants must prove by a preponderance of the evidence that they did not have notice of Jelmoli's claim to each of the checks. In this context, the defendants had notice of Jelmoli's claim if they had actual knowledge of the claim or if the defendants had received notice or notification of the claim or if from all the facts and circumstances known to the defendants at the time in question they had reason to know that the claim existed. . . .

. . . Now, special rules apply if the defendants as to any Jelmoli check they received had actual knowledge of the fiduciary status of Potts. If the defendants had actual knowledge of the fiduciary status of Potts, they had notice of his breach of that fiduciary duty and notice of Jelmoli's claim to that check if they, one, took the check in payment of or as security for a debt known by the defendants to be the personal debt of Potts; or, two, took that check in a transaction known by the defendants to be for the personal benefits of Potts; or, three, deposited the check to an account other than an account of Jelmoli or an account of Potts as fiduciary of Jelmoli.

On appeal, Raymond James argues that (contrary to the instructions just quoted) the "special rules" of section 3-307 are the exclusive way of establishing notice where the claim rests upon breach of fiduciary duty. Jelmoli urges (and the district court agreed) that section 3-307 is merely one way (and not the only way) to defeat holder in due course status in the breach of fiduciary duty context. Section 3-307 is by its terms available to block holder in due course status where the taker has knowledge of the beneficiary's fiduciary status. According to Jelmoli, even if section 3-307 is unavailable, a "reason to know" of the competing claim (otherwise proved) will suffice to defeat holder in due course status even if actual knowledge does not exist.

On bare language alone, Jelmoli may have an edge because section 3-302 permits "notice" to defeat holder in due course status; and section 3-307, while it imputes notice (under specified conditions) based on knowledge of fiduciary status, does not say expressly that this is the only way that notice of a claim can be established. But the statute alone is far from clear and the commentary to section 3-307 appears to address this very question and squarely to support Raymond James:

This section states rules for determining when a person who has taken an instrument from a fiduciary has notice of a breach of fiduciary duty . . . . Section 3-307 is intended to clarify the law by stating rules that comprehensively cover the issue of when the taker of an instrument has notice of a breach of a fiduciary duty and thus notice of a claim to the instrument or its proceeds.

. . . .

. . . The requirement that the taker have knowledge rather than notice is meant to limit Section 3-307 to relatively uncommon cases in which the person who deals with the fiduciary knows all of the relevant facts: the fiduciary status and that the proceeds of the instrument are being used for the personal debt or benefit of the fiduciary . . . . Mere notice of these facts is not enough to put the taker on notice of the breach of fiduciary duty and does not give rise to any duty of investigation by the taker.

Mass. Gen. Laws ch. 106, § 3-307, cmts. 1-2 (emphasis added).

None of the various cases cited to us is conclusive,⁴ and policy arguments cut both ways: the district court was concerned that requiring knowledge (as opposed to notice) of fiduciary status would...