Miller v. Merrill Lynch, Pierce, Fenner & Smith

• Decision Date: 07 October 1983
• Docket Number: Civ. A. No. C82-72A.
• Citation: 572 F. Supp. 1180
• Parties: Keren Sanders MILLER, as Administratrix De Bonis Non With Will Annexed of the Estate of Sara Johnson Turner, Deceased, Plaintiff, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., and James K. Harper, Jr., Defendants.
• Court: U.S. District Court — Northern District of Georgia

572 F. Supp. 1180

Keren Sanders MILLER, as Administratrix De Bonis Non With Will Annexed of the Estate of Sara Johnson Turner, Deceased, Plaintiff, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., and James K. Harper, Jr., Defendants.

Civ. A. No. C82-72A.

United States District Court, N.D. Georgia, Atlanta Division.

October 7, 1983.

Donald B. Deloach, Harold T. Daniel, Jr., Webb, Daniel & Betts, Atlanta, Ga., Will R. Ford, Ford & Cornelius, New Albany, Miss., for plaintiff.

Thomas S. Richey, Powell, Goldstein, Frazer & Murphy, Atlanta, Ga., for defendants.

ORDER

FORRESTER, District Judge.

This action is before the court now on defendants' motion for summary judgment. Plaintiff's claim seeks compensatory and punitive damages for violations of federal securities laws, fraud, and breach of a fiduciary duty owed by defendants to Sara Johnson Turner. Defendants' motion, originally filed as a motion to dismiss and converted to one for summary judgment by this court's order of December 15, 1982, asserts four grounds for dismissal. Defendants argue that plaintiff lacks standing to assert these claims, that she has failed to join necessary and indispensable parties, that she has failed to allege with sufficient particularity the facts upon which her claims of fraud are based, and that she is barred by the applicable statutes of limitations.

The facts in this case are relatively straightforward. Mrs. Sara Johnson Turner had two securities accounts with the defendant Merrill Lynch. Although advanced in years, Mrs. Turner appears to have been a dynamic and strong-willed woman who was actively involved in the management of her financial affairs, at least in the early 1970's. After 1976 Mrs. Turner's health and eyesight began to fail, and there is some controversy about the extent to which she was able to monitor her affairs thereafter. She died as a result of arteriosclerosis on November 26, 1979, at the age of 94. During the last three years of her life, the value of her accounts at Merrill Lynch decreased dramatically from an amount close to $200,000 to about $70,000 or $80,000. During this period Merrill Lynch conducted very active trading of the securities in her accounts, resulting in short term capital losses of almost $75,000 for the three years. During this period Merrill Lynch received approximately $35,000 in commissions.

There is substantial controversy about Mrs. Turner's awareness of the activities in her accounts during the last three years of her life. A temporary guardian was appointed for Mrs. Turner for 90 days in 1976, at her request, apparently for the purpose of protecting her from her relatives who she believed planned to remove her and her belongings from Atlanta against her will. Mrs. Jonabelle Conway-Carter was Mrs. Turner's close friend, accountant, and financial manager during the last years of her life and exercised Mrs. Turner's power of attorney during this period. She has testified that Mrs. Turner, even during the last years, was actively involved in decisions concerning trading in her accounts. Mrs. Conway-Carter examined all the statements sent by Merrill Lynch concerning Mrs. Turner's account and prepared the tax returns showing the capital losses. She has testified that she went over these tax returns with Mrs. Turner "line by line." As contradiction to this evidence of Mrs. Turner's competency, plaintiff relies solely on testimony by Mrs. Turner's doctors that she was legally blind and unable to handle all her business affairs.

After Mrs. Turner's death in 1979 Mrs. Conway-Carter was appointed temporary administratrix of her estate. She was appointed permanent executrix of the estate on May 28, 1981. As early as November 1980, plaintiff appears to have believed that a claim for churning could be asserted against Merrill Lynch. She asked and then demanded that Mrs. Conway-Carter file suit against Merrill Lynch, but Mrs. Conway-Carter declined to do so for the stated reason that, based upon her knowledge of Mrs. Turner's involvement in her financial affairs, she did not believe that a valid claim existed. Mrs. Conway-Carter testifies that after investigation of the facts, she concluded that filing suit would be a waste of the estate's assets. Plaintiff then filed suit as an heir and for the benefit of the estate on January 11, 1981. Defendants filed their motion to dismiss shortly thereafter, asserting the grounds stated above. On May 28, 1981 Mrs. Conway-Carter presented Mr. David Betts, who claimed to represent all of Mrs. Turner's heirs who lived in Mississippi, with the sole exception of a Mrs. Clara McNutt, a check for $36,000 as settlement for all claims those heirs might have relating to Sara Johnson Turner's estate. On May 25, Mrs. Conway-Carter, with the approval of the probate court, resigned as executrix of the estate, and Mrs. Miller was appointed administratrix D.B.N., C.T.A. On June 23, 1982 Mrs. Miller was granted full power to represent the estate. Merrill Lynch appealed the order of the probate court, but its appeal was dismissed on December 14, 1982.

I. PLAINTIFF KEREN MILLER'S STANDING.

Defendants originally asserted two reasons for finding that plaintiff Miller had no standing to bring this action. First, defendant asserted that plaintiff was neither a purchaser nor a seller of securities and thus had no standing to bring an action under 15 U.S.C. § 78j(b) or Rule 10b-5 of the SEC. Second, defendant asserted that plaintiff had no standing to bring her state law claims against Merrill Lynch because she was not legally entitled to represent the estate. Although Mrs. Miller was only one of many heirs of Mrs. Turner when she filed the suit on January 11, 1981, the probate court's order of June 23, 1982 clearly gives her standing to represent the estate at this time. This cures this defect in her original complaint.

As to plaintiff's federal securities law claims the law is clear-cut. In order for a plaintiff to have standing to assert a claim under 15 U.S.C. § 78j(b) or Rule 10b-5, he must be either a purchaser or a seller of securities. Blue Chip Stamps v. Manor Drugstores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975); Herpich v. Wallace, 430 F.2d 792, 806 (5th Cir.1970); Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir. 1952). This is true even where plaintiff, who did not purchase or sell securities, can show harm as a result of defendants' illegal conduct. Blue Chip Stamps, supra. Plaintiff in this case is clearly neither a purchaser nor a seller of securities, and she therefore lacks standing to assert claims on her own behalf.

However, a finding that Mrs. Miller lacks individual standing does not end the inquiry, for she is asserting this claim on behalf of the estate of Mrs. Turner. As administratrix she is entitled to bring any action Mrs. Turner could have brought in her lifetime and which does not abate at death. Mrs. Turner was clearly a purchaser and seller of securities within the meaning of the securities laws, and she therefore had standing to assert this claim. The question then becomes whether a cause of action for churning brought under Rule 10b-5 abates at death. The court has found no case which directly addresses this issue, but the court believes that such a cause of action does not abate at death. An action for churning is essentially a suit claiming a tort against property. Such suits ordinarily survive the death of the plaintiff because that property constitutes a part of her estate. See Arent v. Bray, 371 F.2d 571 (4th Cir. 1967). Cf. Cinnamon v. Abner A. Wolf, Inc., 215 F.Supp. 833 (E.D.Mich.1963) (death of plaintiff during pendency of private antitrust suit did not abate the action, and executor could be substituted as party plaintiff). The court therefore holds that an action brought under 15 U.S.C. § 78j(b) and Rule 10b-5 does not abate at the death of the plaintiff, and that Mrs. Miller, as administratrix de bonis non with will annexed, has standing to assert this claim on behalf of the estate of Mrs. Turner.

II. FAILURE TO JOIN NECESSARY AND INDISPENSABLE PARTIES.

Defendant argued in his motion to dismiss that plaintiff as only one of "numerous" heirs of Mrs. Turner should not be entitled to bring an action without joining those heirs as parties to the suit. While this was a valid complaint at the time, it has since been cured by Mrs. Miller's appointment as administratrix de bonis non with will annexed and the grant by the probate court of authority to bring actions on behalf of the estate. Since this action is brought on behalf of the estate of Mrs. Turner, there is no need to join any of the heirs as parties. This concern is therefore moot.

III. FAILURE TO PLEAD FRAUD WITH REQUISITE PARTICULARITY.

Defendant asserted that plaintiff had failed to plead the facts upon which the claims of fraud were based with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure. After several amendments to the complaint, there is now an abundance of factual allegations in support of her claims of churning, fraud, and breach of a fiduciary duty. The complaint asserts facts concerning the nature of Mrs. Turner's investments prior to 1973, her investment objectives, her alleged disability, excessive numbers of transactions in her account, which generated suspiciously high commissions, and allegations about the particular conduct of defendant Harper in particular circumstances. The amended complaint contains lists of all transactions in Mrs. Turner's accounts, including dates and the prices at which the securities were bought and sold. There are also allegations about specific misrepresentations made by defendant Harper.

In Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), the Supreme Court held that an action brought under Rule 10b-5 required an allegation of "scienter" which was defined as "a mental state embracing intent to deceive, manipulate, or defraud." Id. at...