Palmer v. Shearson Lehman Hutton, Inc.

• Decision Date: 04 August 1993
• Docket Number: 92-2692,Nos. 92-2115,s. 92-2115
• Citation: 622 So.2d 1085
• Parties: 18 Fla. L. Weekly D1726 Joan C. PALMER, Appellant, v. SHEARSON LEHMAN HUTTON, INC., Appellee. Luther E. YOUNG, Marlene W. Young, and Young Packaging Products, Inc., Appellants, v. SHEARSON LEHMAN HUTTON, INC., Appellee.
• Court: Florida District Court of Appeals

Page 1085

622 So.2d 1085

18 Fla. L. Weekly D1726

Joan C. PALMER, Appellant, v. SHEARSON LEHMAN HUTTON, INC., Appellee.

Luther E. YOUNG, Marlene W. Young, and Young Packaging

Products, Inc., Appellants, v. SHEARSON LEHMAN HUTTON, INC., Appellee.

Nos. 92-2115, 92-2692.

District Court of Appeal of Florida First District.

Aug. 4, 1993.

Rehearing Denied Sept. 2, 1993.

H. Michael Madsen and O'Bannon M. Cook of Messer, Vickers, Caparello, Madsen, Lewis, Goldman & Metz, P.A., Tallahassee, and John L. Fiveash, Jr., of Fiveash & Associates, P.A., Pensacola, for appellants.

Nicholas V. Pulignano, Jr., and William K. Thames, II, of Marks, Gray, Conroy & Gibbs, P.A., Jacksonville, for appellee.

ZEHMER, Chief Judge.

Joan C. Palmer (Palmer), and Luther E. Young, Marlene W. Young, and Young Packaging Products, Inc. (Young), appeal adverse summary final judgments entered in their separate actions against Shearson Lehman Hutton, Inc. (Hutton), a securities dealer registered in Florida under section 517.12, Florida Statutes. Appellants' respective causes of action were based on Hutton's alleged negligence in failing to report to the Department of Banking and Finance (the Department) that David Kury, a Hutton employee registered in Florida as an associated person pursuant to section 517.12, Florida Statutes, had defrauded several clients while representing Hutton and that these wrongful acts had caused Hutton to terminate Kury's employment. Palmer and Young are investors allegedly defrauded by Kury several years after Hutton had terminated Kury's employment and while Kury was registered as an associated person with subsequent dealers. They assert that the trial court erred in granting summary judgment for Hutton based on the ruling that their complaints did not allege any facts that would impose a legal duty owed by Hutton to Palmer and Young. They argue that their complaints, which were supported by the evidence in the record, allege facts showing that Hutton had both a common law duty and a statutory duty to correctly report the fact of Kury's termination of employment together with the reasons therefor. Although we agree with the trial court that the complaints are legally insufficient to show that Hutton owed a common law duty to Appellants independent of relevant statutes, we do not agree that the complaints fail to allege facts sufficient to show that Hutton owed a statutory duty to Appellants and can be held accountable in negligence for Appellants' alleged damages on that legal theory. Accordingly, we reverse.

These cases primarily arise out of relationships and responsibilities created and regulated under chapter 517, Florida Statutes (1983), at that time entitled the "Florida Securities Act." This act regulates the sale of securities in Florida and requires that dealers ¹ and associated persons ² be registered with the Department prior to selling or offering to sell securities to any persons in this state. Sec. 517.12, Fla.Stat. (1983). Registrations of associated persons are specific with respect to the securities dealer identified at the time the registration is approved. Thus, each time an associated person is terminated from employment with a dealer, whether voluntarily or involuntarily, the dealer must notify the Department of that person's termination and the reason therefor; and to become associated with another dealer, the terminated associated person must reregister with the Department. Sec. 517.12, Fla.Stat. (1983); Department of Banking & Finance v. Evans, 540 So.2d 884, 885 (Fla. 1st DCA 1989).

For purposes of this appeal, the allegations in the complaints and evidence filed of record establish the following material facts. ³ From 1978 until January 1984, David Kury was registered as an associated person of E.F. Hutton & Co., Inc., ⁴ and was the manager of Hutton's Pensacola branch office under the direct supervision of Hutton's Montgomery, Alabama, office manager. In early 1983, Kury's supervisor, Fred Brown, discovered that Kury had taken money from several of his customers in exchange for personal and corporate promissory notes. ⁵ Brown immediately notified Hutton's regional vice president and legal department. Acting on the advice of the Hutton legal department, Brown requested that Kury furnish him a list of the people to whom Kury or his corporation owed money and the amounts owed. Hutton then sent letters to all of these people, asking them to acknowledge that Hutton was not obligated on Kury's promissory notes. ⁶ Brown testified in the administrative disciplinary proceeding against Kury that he was aware that Kury's actions violated SEC regulations as well as Hutton's internal rules, and that in January 1984, he asked for and obtained Kury's resignation. Subsequently, Hutton filed a Uniform Termination Notice For Securities Industry Registration (a "Form U-5") with the Central Registration Depository System stating that Kury had voluntarily resigned. On this form, Hutton falsely reported that it had no reason to believe that Kury had violated any state or federal law or regulation, or that Kury had engaged in any conduct inconsistent with just and equitable principles of trade.

Soon after leaving Hutton, Kury was reregistered by the Department as an associated person of Prudential-Bache Securities Corporation (Bache) and obtained employment with Bache. In March 1985, Kury left Bache and began working for Associated Planners Securities Corporation (Associated) as an associated person and was again reregistered by the Department.

In 1986, Appellants Luther and Marlene Young visited Kury at his Associated office and employed him to provide them with financial planning services. In early 1987, Kury induced Luther and Marlene Young, as representatives of Young Packaging Products, Inc., to purchase a $50,000 corporate promissory note issued by Kury Financial.

Kury left his employment with Associated in April 1987, and in May 1987 obtained employment with and reregistered as an associated person of American Capital Equities Corporation (American). In July 1987, while Kury was working for American, he induced Young to personally purchase a $30,000 promissory note from Kury Financial. Also, in July 1987, Appellant Palmer visited Kury at his American office and hired him to provide her with financial planning services. In December 1987, Kury induced Palmer to pay $20,000 for a promissory note from Kury Financial.

In May 1988, the Department commenced an investigation of Kury's activities and as a consequence filed an administrative complaint against Kury and Kury Financial seeking to revoke his registrations as an "associated person" and an "investment advisor" on the grounds, inter alia, that he had engaged in the sale of unregistered securities, i.e., promissory notes issued by Kury or Kury Financial to investors. In January 1989, a hearing officer with the Division of Administrative Hearings (DOAH) entered a recommended order wherein he found, inter alia, that 50 persons were holding notes from Kury and/or Kury Financial in amounts ranging from $5,000 to $200,000; that Kury used the proceeds of the notes to pay business expenses for himself and the corporations he controlled as well as his personal expenses, including the financing of his home (at a cost of approximately $1,000,000); that Kury had sold the notes or offered them for sale without registering them as required by law; that Kury had failed to maintain books and records required by law; and that Kury had sold the notes without making disclosures of certain material facts. ⁷ By final order entered in April 1989, the Department permanently revoked Kury's securities license.

In March 1989, Appellants filed complaints against Kury, Hutton, and other securities dealers. Count V of each complaint alleged Hutton's negligence in covering up Kury's fraud and falsely advising the Department regarding his termination. Hutton moved for summary final judgment, and in support of its motion attached a copy of an order wherein the United States District Court for the Northern District of Florida granted partial summary judgment in related cases on identical causes of action based on identical facts (the only difference being the identity of the plaintiffs). The trial court entered summary final judgment in each action, ruling that the complaints did not allege facts giving rise to any legal duty owed by Hutton to Appellants and for that reason failed to state a cause of action upon which relief could be granted. (This ruling was consistent with the federal court order filed with Hutton's motion.)

On this appeal, Appellants first argue that Kury's conduct while he was employed by and represented Hutton created a foreseeable zone of risk that Kury might continue to defraud securities investors even after leaving Hutton. According to Appellants, because Hutton was aware of Kury's fraudulent activities at the time it terminated his employment, it had a common law duty to take sufficient precautions at that time to ensure that other prospective investors were protected from similar harm by Kury after he left Hutton's employ, citing McCain v. Florida Power Corp., 593 So.2d 500 (Fla.1992). We construe this argument by Appellants as urging the existence of a legal duty independent of any statutory provisions regulating persons in the securities business, as Appellants argue the statutory duty as a separate point. We reject this argument.

Under the common law, a person has no duty to control the tortious or criminal conduct of another or to warn those placed in danger by such conduct unless there is a special relationship between the defendant and the person whose behavior needs to be controlled or the person who is a foreseeable victim of such conduct. Boynton v. Burglass, 590 So.2d 446 (Fla. 3d DCA 1991). See also Trianon Park Condominium Ass'n, Inc. v. City of Hialeah, 468 So.2d 912, 918 (Fla.1985). Implicit in the special relationship...