SFM Holdings, Ltd. v. Banc of America Securities

• Decision Date: 25 March 2010
• Docket Number: No. 07-11178.,07-11178.
• Citation: 600 F.3d 1334
• Parties: SFM HOLDINGS, LTD., Plaintiff-Appellant, v. BANC OF AMERICA SECURITIES, LLC, Defendant-Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

600 F.3d 1334

SFM HOLDINGS, LTD., Plaintiff-Appellant, v. BANC OF AMERICA SECURITIES, LLC, Defendant-Appellee.

No. 07-11178.

United States Court of Appeals, Eleventh Circuit.

March 25, 2010.

Joel D. Eaton, Podhurst Orseck, P.A., Miami, FL, for Plaintiff-Appellant.

Norman A. Moscowitz, Moscowitz & Mascowitz, P.A., Miami, FL, Robert J. Anello, Morvilli, Abramovitz, Grand, Iason, Anello & Bohrer, P.C., New York City, for Defendant-Appellee.

Before TJOFLAT and CARNES, Circuit Judges, and THRASH,^* District Judge.

THRASH, District Judge:

SFM Holdings, Ltd. appeals the dismissal with prejudice of its complaint seeking damages for breach of fiduciary duty and constructive fraud. For the reasons set forth below, we affirm the judgment of the district court.

I. Facts and Procedural History

Appellant SFM Holdings, Ltd. ("SFM") is one of 178 investors defrauded in one of the largest securities fraud cases in Florida history. The perpetrators, John Kim and Won Lee, operated as investment advisers using various entities, including Shoreland Trading. Dr. Salomon Melgen is the president and general partner of SFM. John Kim convinced Dr. Melgen to set up a brokerage account with Banc of America Securities, LLC. (Compl. ¶ 14).¹ Dr. Melgen never had any direct contact with Banc of America Securities or its employees. When the account was set up, Dr. Melgen ceded a "limited" power of attorney to trade securities in the Banc of America Securities prime brokerage account. (Id. ¶¶ 14-17). Two of the documents completed to open the account were the Prime Broker Margin Account Agreement ("PB Agreement") and the Institutional Account Agreement ("IA Agreement"). The PB Agreement clearly and plainly stated that Banc of America Securities — referred to in the agreement as BofA — was not an adviser or fiduciary.

Customer acknowledges that none of the BofA Entities or their respective agents or affiliates is acting as a fiduciary for or an adviser to Customer in respect of this Agreement or any transaction it may undertake with the BofA Entities; Customer understands that the BofA Entities are not acting as investment advisers or soliciting orders, that the BofA Entities are not advising it, performing any analysis, or making any judgment on any matters pertaining to the suitability of any order, or offer any opinion, judgment or other type of information pertaining to the nature, value, potential, or suitability of any particular investment.

(Appellee's Br., Ex. A, ¶ 11(b)). The IA Agreement established Banc of America Securities as SFM's "agent for the purposes of buying and selling securities." (Appellee's Br., Ex. B, ¶ 3).

On September 28, 2004, SFM put $10 million into the account with Banc of America Securities. Soon thereafter another $2.3 million was put into the account. (Compl. ¶ 22). Within a month, SFM was losing money in the account, and Dr. Melgen told John Kim that he wanted to close the account. (Id. ¶ 23). In response, Kim convinced Dr. Melgen to leave his money in the account in exchange for a written guarantee of his principal by Kim and Shoreland Trading. (Id. ¶ 24). Won Lee was also a partner with Kim in Shoreland. The complaint alleges that Won Lee had been trading extensively in SFM's account. Shortly thereafter, Lee attempted to make an illegal trade — selling a large amount of stock short without arranging to borrow the stock first — in the account. (Compl. ¶ 42). Upon discovering the illegal trade the next day, Banc of America Securities ordered Lee to cover the short sale. The next day, Kim or Lee repeated the illegal short sale. Banc of America Securities then ordered Lee to remove all of his accounts (including SFM's) from Banc of America Securities. (Compl. ¶ 45). Nevertheless, Banc of America Securities permitted Lee and Shoreland to trade in the account for more than four weeks. (Compl. ¶ 47). According to the complaint, Banc of America Securities never notified Dr. Melgen of any suspicious trading activity in the account. (Compl. ¶ 51).

On November 2, 2004, Banc of America Securities received a letter signed by Dr. Melgen directing it to transfer SFM's assets to Shoreland's account. Dr. Melgen now claims that letter was a forgery. On the same day, Won Lee wrote Banc of America Securities confirming that he would accept SFM's assets into Shoreland's account with Banc of America Securities. Within two weeks, Shoreland transferred the money to another company, Wedbush Morgan Securities, LLC. This account was in the name of Shoreland only. (Compl. ¶ 29). All of the money was then stolen or lost in disastrous trading.

SFM filed this action against Banc of America Securities, claiming damages due to violations of federal and state securities laws, breach of fiduciary duty, and constructive fraud.² On the Defendant's motion, the district court dismissed the claims with prejudice. SFM appeals the dismissal of the breach of fiduciary duty and constructive fraud claims.

II. Jurisdiction and Standard of Review

We have jurisdiction over the appeals of final decisions of the district court pursuant to 28 U.S.C. § 1291. We exercise de novo review as to the district court's decision to grant a motion to dismiss. Cachia v. Islamorada, 542 F.3d 839, 841-42 (11th Cir.2008). We review the district court's refusal to grant leave to amend for abuse of discretion, although we exercise de novo review as to the underlying legal conclusion that an amendment to the complaint would be futile. Harris v. Ivax Corp., 182 F.3d 799, 802 (11th Cir. 1999).

III. Discussion

A.

First, SFM argues that the district court erred in converting the Defendant's Rule 12(b)(6) motion to dismiss into a motion for summary judgment without giving notice to the Plaintiff. Reading the Order of the district court, it is clear that the court did not do that. The district court did, however, consider and rely upon the PB Agreement in granting the Defendant's motion to dismiss. According to SFM, consideration of the document converted the Rule 12(b)(6) motion to dismiss into a Rule 56 motion for summary judgment, which would have required notice of the conversion to the parties. SFM claims it was prejudiced by the lack of notice and the lack of opportunity for discovery.

The Defendant argues that the district court's consideration of the PB Agreement was proper because the document was incorporated by reference into the complaint and the document was central to the Plaintiff's claim. In general, if it considers materials outside of the complaint, a district court must convert the motion to dismiss into a summary judgment motion. See Fed.R.Civ.P. 12(b). There is an exception, however, to this general rule. In ruling upon a motion to dismiss, the district court may consider an extrinsic document if it is (1) central to the plaintiff's claim, and (2) its authenticity is not challenged. Day v. Taylor, 400 F.3d 1272, 1276 (11th Cir.2005); see also Maxcess, Inc. v. Lucent Technologies, Inc., 433 F.3d 1337, 1340 (11th Cir.2005) ("a document outside the four corners of the complaint may still be considered if it is central to the plaintiff's claims and is undisputed in terms of authenticity."). SFM does not dispute the authenticity of the PB Agreement. It does argue that the document was not incorporated by reference into the complaint and that, even if it was, the document was not central to its claims.

Although the PB Agreement was not attached to the complaint, the complaint noted that the brokerage account was opened by "documents provided to John Kim and Won Lee by Banc of America Securities." (Compl. ¶ 18). These documents were repeatedly described as "account opening documents." (Id.) SFM does not deny that the PB Agreement is one of the account opening documents mentioned in the complaint. The Defendant argues that the agreement was the account opening document that established Banc of America Securities as a prime broker for SFM and absolved Banc of America Securities from any fiduciary duty as to the account. According to SFM, another document, the IA Agreement, established Banc of America Securities as its executing broker. Under SFM's theory, Banc of America Securities's role as an executing broker imposes upon it a fiduciary duty. However, there is no doubt that the PB Agreement determined the terms of the relationship between SFM and Banc of America Securities. The agreement set forth the "terms and conditions" on which Banc of America Securities will "open and maintain accounts for and otherwise transact business with the customer. ..." (Appellee's Br., Ex. A at 1). Further, to the extent that the terms of the PB Agreement conflicted with another agreement, it stated that it controlled over any other agreements between Banc of America Securities and its customer. (Appellee's Br., Ex. A ¶ 20). We have previously held that such relationship-forming contracts are central to a plaintiff's claim. Maxcess, 433 F.3d at 1340 n. 3. The district court did not err in considering the PB Agreement in ruling on the motion to dismiss.

In its briefing on appeal, SFM relies on the other account opening document, the IA Agreement, to argue that Banc of America Securities had a fiduciary duty. Specifically, SFM argues that such a duty was established because the IA Agreement made Banc of America Securities its "agent for the purposes of buying and selling securities." (Appellee's Br., Ex. B, ¶ 3). The Defendant argues that SFM never relied on the IA Agreement to establish an agency in the district court proceedings, and that it cannot do so now. See, e.g., Access Now, Inc. v. Southwest Airlines Co., 385 F.3d 1324, 1331 (11th Cir.2004) ("This Court has repeatedly held that an issue not raised in the district court and raised for the first time in an appeal will not be considered by this court.") (citations omitted). In this case, SFM did not waive this argument. Rather, it made its agency argument relying on the PB Agreement, which the Defendant ...