Lawarre v. Fifth Third Sec., Inc.

Decision Date05 September 2012
Docket NumberAPPEAL NO. C-110302,TRIAL NO. A-0909076
Citation2012 Ohio 4016
CourtOhio Court of Appeals

Civil Appeal From: Hamilton County Court of Common Pleas

Judgment Appealed From Is: Affirmed

Santen & Hughes, Charles E. Reynolds, J. Robert Linneman and Brian P. O'Connor, for Plaintiffs-Appellants,

Keating, Muething & Klekamp, PLL, James E. Burke and Joseph M. Callow, Jr., for Defendants-Appellees.

Please note: This case has been removed from the accelerated calendar.


{¶1} Plaintiffs-appellants William LaWarre, John Papa, Eagle Flight Investments, Inc., Property Asset Management, LTD, and LAJ, Inc., appeal the decision of the Hamilton County Court of Common Pleas granting summary judgment in favor of defendants-appellees Fifth Third Securities, Inc., and Fifth Third Bank. We find no merit in their assignments of error, and we affirm the trial court's judgment.

I. Facts and Procedure

{¶2} The record shows that LaWarre and Papa were customers of Fifth Third Bank and Fifth Third Securities. Papa was the sole owner of plaintiffs-appellants Eagle Flight Investments, Inc., Property Asset Management, Ltd., and LAJ, Inc. These companies were not operating business entities, but passive vehicles through which Papa held investment funds. Consequently, we refer to them collectively as "Papa," where appropriate.

{¶3} Fifth Third Bank and Fifth Third Securities were separate corporations, but they operated together informally as Fifth Third Financial Advisors. They shared certain employees, including Dan Hughes, Kathy Collins, and Jana Sturgeon. Consequently, we refer to them collectively as "Fifth Third" where appropriate.

{¶4} Collins was LaWarre's private banker at Fifth Third Bank and Sturgeon was Papa's. In 2006, Collins and Sturgeon introduced their clients to Hughes, who was an investment advisor at Fifth Third Securities. Hughes recommended that LaWarre and Papa invest their money in options trading. Both Papa and LaWarre met with Hughes before agreeing to invest their funds with him.They both signed applications and other documents, which contained disclaimers describing the risks of options trading. The disclaimers stated:

I specifically affirm the following disclosures

* * *

That both the purchase and the writing of options contracts involve a high degree of risk, are not suitable for many investors and, accordingly, should be entered into only by investors who understand the nature and extent of their rights and obligations and are fully aware of the inherent risk involved, especially during extreme market volatility or trading volumes. That I should not purchase any option unless I am able to sustain a total loss of the premium and transaction costs * * *.

{¶5} Both LaWarre and Papa made substantial returns on their investments in 2007 while Hughes was trading for Fifth Third. LaWarre stated that he had had no problems with Hughes during the time that Hughes had been trading for Fifth Third. Papa also testified in his deposition that he had been comfortable with the trading activity by Hughes during that time.

{¶6} Fifth Third became concerned about the risk involved with Hughes's trading strategy. It became a subject of ongoing review by his supervisors. Eventually, Fifth Third imposed a six-month supervisory restriction on Hughes and all of his clients' accounts. Any transactions he undertook were the subject of special scrutiny. Eventually, Fifth Third's legal-compliance department approved Hughes'soption-trading strategies for use in his clients' accounts and released him from the supervisory restriction.

{¶7} Subsequently, Fifth Third proposed to change the fee structure of Hughes's clients' accounts. The change would have resulted in large increases in the fees charged to his clients, which Hughes believed would adversely affect his ability to retain and serve his clients. As a result, in September 2007, he left Fifth Third and began working at a new firm, Fosset Hughes and Jabin Investments ("FHJ").

{¶8} Fifth Third met with LaWarre and Papa and presented them with alternative investment strategies, in an attempt to keep their business. But both of them voluntarily transferred their investment accounts to FHJ so that they could continue investing with Hughes. After that time, LaWarre and Papa did not receive any further investment advice from Fifth Third.

{¶9} While their accounts were at FHJ, LaWarre and Papa suffered substantial losses, totaling millions of dollars. For a while, Hughes sought to conceal the losses by falsifying monthly account statements. Eventually, Hughes told his clients about the losses. LaWarre continued to work with Hughes, who developed a new investment strategy in early 2008 in an attempt to limit LaWarre's losses. Nevertheless, LaWarre continued to lose money. LaWarre lost over $6 million and Papa lost over $2 million.

{¶10} LaWarre and Papa filed suit against Fifth Third, raising numerous causes of action that included negligence, breach of fiduciary duty, and fraud. The trial court granted summary judgment in favor of Fifth Third on all of LaWarre's and Papa's claims based primarily on its analysis of Herbert v. Banc One Brokerage Corp., 93 Ohio App.3d 271, 638 N.E.2d 161 (1st Dist.1994). This appeal followed.

II. Tort Claims

{¶11} LaWarre and Papa each assert a single assignment of error. They contend that the trial court erred in granting summary judgment in favor of Fifth Third. First, they argue that the trial court improperly granted judgment on their tort claims based on an unwarranted extension of dicta in Herbert. We find no merit in this argument.

{¶12} LaWarre and Papa raised several tort claims against Fifth Third. They included negligence in the giving of investment advice, negligent misrepresentation, and negligent supervision. The elements of any negligence claim are duty, a breach of that duty, and injury proximately resulting from that breach. Menifee v. Ohio Welding Products, Inc., 15 Ohio St.3d 75, 76, 472 N.E.2d 707 (1984); Vonderhaar v. Cincinnati, 191 Ohio App.3d 229, 2010-Ohio-6289, 945 N.E.2d 603, ¶ 19 (1st Dist.).

{¶13} LaWarre and Papa also set forth claims for breach of fiduciary duty. A fiduciary is "a person having a duty, created by his undertaking, to act primarily for the benefit of another in matters connected to his undertaking." Groob v. Keybank, 108 Ohio St.3d 348, 2006-Ohio-1189, 843 N.E.2d 1170, ¶ 16; Health Alliance of Greater Cincinnati v. Christ Hosp., 1st Dist. No. C-070426, 2008-Ohio-4981, ¶ 20. A fiduciary relationship is "a relationship in which special confidence and trust is reposed in the integrity and fidelity of another and there is a resulting position of superiority or influence, acquired by virtue of this special trust." Groob at ¶ 16; Health Alliance at ¶ 20. A broker or financial advisor has a fiduciary relationship with his clients. Mathias v. Rosser, 10th Dist. Nos. 01AP-768 and 01AP-770, 2002-Ohio-2772, ¶ 18; Byrley v. Nationwide Life Ins. Co., 94 Ohio App.3d 1, 18, 640 N.E.2d 187 (6th Dist.1994).

{¶14} In Herbert, the case relied upon by the trial court, the plaintiffs were customers of Bank One. The bank had a business relationship with Banc One Brokerage Corporation in which the brokerage rented space in one of the bank's offices and the bank referred customers to the brokerage.

{¶15} The brokerage employed Randall Clark as a securities salesperson. The bank's employees referred customers to Clark, who sold investment securities, life insurance, and annuities to the bank's customers, including the plaintiffs. The bank made financial information about its customers available to Clark without the customers' consent. It did not disclose to customers that Clark was not its employee.

{¶16} While employed by the brokerage, Clark developed a relationship with Harry Fleischhauer, who was engaged in a scheme to sell unregistered and worthless securities to investors. Clark began referring investors to Fleischhauer, and eventually left the brokerage to work for him. Clark used the bank's customer lists to solicit investors. Some of the bank's depositors brought letters that they had received from Clark to the bank's and the brokerage's attention. But bank and the brokerage did nothing to warn their customers about the bad investments. Clark sold worthless securities to the plaintiffs and they lost the funds that they had invested.

{¶17} The plaintiffs filed suit against the bank and the brokerage for negligence and breach of fiduciary duty alleging that they had failed to protect the plaintiffs or to notify them about the sale of the worthless securities. The trial court granted the defendants' motion to dismiss the complaint because it had been filed outside the statutory limitations period and because it had failed to state a claim upon which relief could be granted under Civ.R. 12(B)(6). While we held that the trial court properly dismissed the complaint because it had been filed outside thelimitations period, we also addressed the merits of the trial court's decision to dismiss the case for failure to state a claim.

{¶18} We noted that ordinarily no duty exists to prevent a third person from causing harm to another, except in cases where a special relationship exists between the actor and the third person that gives rise to a duty to control, or between the actor and another that gives the other the right to protection. Herbert, 93 Ohio App.3d at 276, 638 N.E.2d 161. Thus, there is no liability in the absence of a special duty owed by a particular defendant. Id. "The fact that the actor realizes or should realize that action on his part is necessary for another's aid or protection does not of itself impose upon him a duty to...

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    ... ... Lawarre v. Fifth Third Securities, Inc ., 2012 Ohio 4016 at ¶ 54 ... ...

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