Sterling Trust Co. v. Adderley
| Decision Date | 31 July 2003 |
| Docket Number | No. 2-00-336-CV.,2-00-336-CV. |
| Parties | STERLING TRUST COMPANY APPELLANT v. RODERICK ADDERLEY, INDIVIDUALLY APPELLEES AND ON BEHALF OF THE ESTATE OF ELSIE WESTMORELAND, JIM AND VICKI ALLISON, HILDA BANTA, SADYE MILLIE BARBEE, INDIVIDUALLY AND AS TRUSTEE OF THE SADYE M. BRIDGES BARBEE REVOCABLE LIVING TRUST, RAY AND BARBARA BISSELL, DIANA BOYD, MARGARET MANESS BRIDGES, INDIVIDUALLY AND ON BEHALF OF THE ESTATE OF J.T. MANESS, GEORGE EMORY BRIDGES, DOROTHY CLAUNCH, CLARENCE AND IVA DAVIS, CAROL ANN AND CHARLES DENSON, SR., PATSY AND RAYMOND DIXON, HERCULES AND RUBY ECHOLS, GARY FARISH, MARTIN AND PATSY HARDIN, NANCY HARRIS, WILLIE HARRIS, INDIVIDUALLY AND ON BEHALF OF THE ESTATE OF BENNIE HARRIS, JAMES E. AND INA DELL HILL, MAXINE JACKSON, NANCY KAUFMANN, WALTER AND GLENDA KAUFMANN, BILL AND GALYA KEITH, ESSIE LACY, INDIVIDUALLY AND ON BEHALF OF THE ESTATE OF SWARN LACY, JR., JOE LANGDON, MANUEL AND MARGARET MARIN, GARY AND WINIFRED MCDERMOTT, MARJORIE AND ARTHUR MCDONALD, W.C. AND ROSE MARY MCGEE, H.L. AND JANIS MERRILL, H.L. MERRILL & SON CONSTRUCTION CO., INC., DON AND EDITH MOBLEY, MARY K. PARHAM, BUCK AND MARTHA PIGG, GENE W. PRESTON, AS INDEPENDENT EXECUTOR OF THE ESTATE OF GLADYCE P. ACERS, JAQUITTA M. PUTMAN, JOANN RUSSELL, CAMILLE SANDERS, INDIVIDUALLY AND AS INDEPENDENT EXECUTRIX OF THE ESTATE OF FRED SANDERS, ROLLAND SANDERS, NORMAN G. AND EILEEN V. WATSON, DONNA WHITTENTON, JOE D. WILLCOX, JR., INDIVIDUALLY AND AS INDEPENDENT EXECUTOR OF THE ESTATE OF KENNETH R. WILLCOX, AND INTERVENORS JACK R. MANN, SR., EARL R. CRIDER AND LETA CRIDER. |
| Court | Texas Supreme Court |
Attorney for Appellant: Kelly, Hart & Hallman, P.C., and Donald E. Herrmann and Dee J. Kelly, Jr., Ft. Worth, TX.
Jenkens & Gilchrist, P.C., and Robert B. Gilbreath and V. Elizabeth Kellow, Dallas, TX.
Attorney for Appellee: Jose, Henry, Brantley & Keltner, L.L.P., and Ricky J. Brantley, David E. Keltner, and Karen S. Precella, Ft. Worth, TX.
Murphy, Mahon, Keffler & Farrier, L.L.P., and Thomas G. Farrier, Ft. Worth, TX.
PANEL A: CAYCE, C.J.; DAY and DAUPHINOT, JJ.
In this securities fraud case, the jury found that Sterling Trust Company materially aided Norman Cornelius in committing securities fraud and breached its fiduciary duty as a trustee. In three multi-faceted issues on appeal, Sterling challenges both of those jury findings and the trial court's damages calculations. We will affirm the trial court's judgment in part and reverse the judgment and render in part.
Appellees are elderly individuals who invested their retirement funds in an illegal Ponzi scheme1 operated by Cornelius, an investment advisor and broker with Sunpoint Securities. Cornelius convinced appellees to invest their savings and retirement funds in companies he owned, in exchange for promissory notes or company stock. Because appellees' retirement funds consisted of "qualified" savings such as IRAs or lump sum pension distributions, the investments had to be held by a third-party trustee to retain their qualified tax status. Sterling, who specializes in holding nonstandard and unregulated securities, served as the trustee, approving the notes and stock for rollover IRA accounts, then creating and administering self-directed IRA accounts for appellees. The funds in those accounts were invested in Cornelius's companies.
The SEC forced Cornelius's companies into receivership in 1997, rendering appellees' investments in the promissory notes and stock worthless. Appellees then sued Cornelius, Sunpoint, and Sterling to recoup their losses. Cornelius died in April 1999. The SEC forced Sunpoint into receivership in November 1999, and, as a result, appellees' claims against Sunpoint were severed from this lawsuit. Sterling was the only defendant at the time of trial.
The jury found that Sterling aided and abetted Cornelius in committing securities fraud and breached its fiduciary duty to appellees. The jury also found that Sterling acted with malice in breaching its fiduciary duty to appellees. Appellees elected to recover on their securities fraud theory and the trial court rendered judgment for over $6 million against Sterling based on the jury's actual damage findings. In addition, the trial court awarded appellees $249,999.50 — the amount of exemplary damages found by the jury — for Sterling's malicious breach of fiduciary duty. The trial court later denied Sterling's motion for new trial and motion for judgment notwithstanding the verdict. This appeal followed.
In its first issue, Sterling contends that it cannot be held secondarily liable as an aider-abettor under article 33(F)(2) of the Texas Securities Act (the TSA) because the jury found that it neither knew nor could have known of Cornelius's fraudulent representations or omissions. It is undisputed that this "reasonable care" finding would have constituted a defense for Sterling if it had been found by the jury to be primarily liable under the TSA as a seller, buyer, or control person.2 Sterling argues, however, that it is entitled to this defense as a secondarily liable aider because article 581-33(F)(2) makes aiders liable "to the same extent" as sellers.3
Our objective when construing a statute is to determine and give effect to the legislature's intent.4 To ascertain that intent, we look first to the statute's plain language and give words their ordinary meaning.5 We must view the statute's terms in context, and give them full effect. 6
In doing so, we look at the entire act and not a single section in isolation.7 Under the Code Construction Act, we may look to the statute's legislative history in gleaning the legislature's intent.8 We also bear in mind the circumstances under which the statute was enacted, and the consequences of any particular construction.9 Further, we presume that the legislature acted with knowledge of the common law and court decisions.10
The legislature directs us to construe the TSA "to protect investors." 11
Therefore, because article 581-33 is remedial in nature in the civil context, it "should be given the widest possible scope."12
Under article 581-33 of the TSA, sellers are strictly liable if they sell or buy a security "by means of an untrue statement of a material fact or an omission to state a material fact."13 Sellers have a defense to the strict liability provisions of the TSA if they establish that they "did not know, and in the exercise of reasonable care could not have known, of the untruth or omission."14
Persons who materially aid a seller are not held strictly liable under the TSA. To recover against an aider, the plaintiff must establish that the aider acted "with intent to deceive or defraud or with reckless disregard for the truth or the law."15 An aider who acts with such intent or recklessness is liable "to the same extent as if he were the seller."16 The express provisions of the TSA provide no defense to aiders who do not know or could not have known of a seller's untruth or omission.
It is clear from the express language of article 581-33 that the legislature intended to create separate and distinct standards of liability for sellers and for aiders. Under the strict liability provisions of sections 33(A)(2) and (B), a plaintiff may recover against a seller without proof that the seller knew or should have known of the untruth or omission on which the plaintiff's claim is based.17 The seller can only defeat liability by proving as an affirmative defense that he was unaware of the untruth or omission and exercised reasonable care.18 By contrast, a plaintiff who seeks to recover against an aider has the more difficult burden of proving that the aider had intent to deceive or defraud the buyer, or acted with reckless disregard for the truth or the law.19
Thus, while a seller may be strictly liable for a violation of the TSA without proof of scienter (that is, that he had knowledge of the untruth or omission and failed to exercise reasonable care), an aider is not liable unless scienter is proven (that is, intent to deceive or defraud, or reckless disregard for the truth or the law).20 When aider liability is established, however, the TSA allows the plaintiff to recover damages from the aider "to the same extent" as the plaintiff would be able to recover against a seller.21 In other words, while the burdens of proof for establishing seller and aider liability are different under the TSA, the extent of their liability is the same.
We therefore hold as a matter of law that the jury's finding that Sterling lacked knowledge of Cornelius's untrue statement or omission does not constitute a defense to Sterling's secondary liability as an aider. Thus the trial court did not err by denying Sterling's motion for judgment notwithstanding the TSA verdict against Sterling.
In the alternative, Sterling asserts that the trial court abused its discretion by refusing to give the jury a "general awareness" instruction. Sterling fails, however, to point us to any language in the TSA that would entitle Sterling to an instruction that it must have been "generally aware" of its role in Cornelius's securities violation to be held liable as an aider under the TSA. Instead, Sterling relies on two court of appeals opinions that include a general awareness requirement in listing the elements for aider liability Crescendo Investments, Inc. v. Brice, 61 S.W.3d 465, 472 (Tex.App.-San Antonio 2001, pet. denied), and Frank v. Bear, Stearns & Co., 11 S.W.3d 380, 384 (Tex.App.-Houston [14th Dist.] 2000, pet. denied).22 We find neither opinion persuasive. The Frank opinion relies heavily on a law review article that interprets the TSA in light of the federal securities act.23 The Brice opinion relies entirely on Frank.24
Interpretations of the federal securities act may be "reliable guides" in...
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