Sterner v. Penn

• Decision Date: 05 August 2003
• Docket Number: No. COA02-827.,COA02-827.
• Citation: 159 NC App. 626,583 S.E.2d 670
• Parties: Eva M. STERNER, Plaintiff, v. Delmar S. PENN, Regina Gunn Penn, Ameritrade, Inc., Advanced Clearing, Inc., Deutsche Banc Alex. Brown, Inc. and Wall Street Access, Defendants.
• Court: North Carolina Court of Appeals

583 S.E.2d 670

159 NC App. 626

Eva M. STERNER, Plaintiff, v. Delmar S. PENN, Regina Gunn Penn, Ameritrade, Inc., Advanced Clearing, Inc., Deutsche Banc Alex. Brown, Inc. and Wall Street Access, Defendants.

No. COA02-827.

Court of Appeals of North Carolina.

August 5, 2003.

S. Mark Rabil, Winston-Salem, for plaintiff-appellant.

Womble, Carlyle, Sandridge & Rice, P.L.L.C., by Ronald R. Davis and Allison R. Bost, Winston-Salem, for defendant-appellees Ameritrade, Inc. and Advanced Clearing, Inc.

Wilson & Iseman, L.L.P., by G. Gray Wilson and Maria C. Papoulias, Winston-Salem, for defendant-appellees Deutsche Banc Alex. Brown, Inc. and Wall Street Access.

HUDSON, Judge.

Plaintiff Eva M. Sterner lost more than $160,000 that she had entrusted to defendant Delmar Penn, believing that he would invest the money for her. Penn used the services of defendants Ameritrade, Inc. ("Ameritrade"); Advance Clearing, Inc. ("Advanced Clearing"); Deutsche Banc Alex. Brown, Inc. ("Deutsche Banc"); and Wallstreet Access ("Wallstreet Access"), brokerage firms and securities clearing companies. Sterner sued the defendants, asserting claims for negligence, constructive fraud, and unfair and deceptive trade practices. Defendants moved to dismiss the suit, and the trial court granted the motion. For the reasons set forth below, we affirm the decision of the trial court.

BACKGROUND

According to the complaint, in the fall of 1998, plaintiff, a widow, met Penn, who told her that he was a highly successful investor. Penn and his wife promised to invest plaintiff's money and guaranteed plaintiff that they would double or even triple her investment. Plaintiff agreed and, in September 1998, transferred a total of $170,700.00 to Penn for him to invest.

Penn placed plaintiff's money into accounts that he had opened with defendants Ameritrade and Deutsche Banc, both brokerage firms. The accounts were in the names of Delmar Penn and an entity known as BTL Worldwide Unlimited, Inc., which was not a valid corporation. Penn executed trades on plaintiff's behalf through Ameritrade and Deutsche Banc and through their respective securities clearing companies, Advanced Clearing and Wall Street Access. Penn traded through these accounts and lost all of plaintiff's money except for $2000, which he returned to her.

On 30 July 1999, plaintiff sued Penn and his wife for breach of contract, negligence, constructive fraud, and unfair trade practices. Because of criminal charges pending against Penn, the trial court stayed plaintiff's case. In September 2001, plaintiff moved to amend the complaint to add Ameritrade, Advanced Clearing, Deutsche Bank, and Wallstreet Access. The trial court allowed the motion, and plaintiff filed her amended complaint on 6 November 2001, adding claims of negligence, constructive fraud, and unfair and deceptive trade practices against these additional defendants.

On 11 January 2002, Ameritrade and Advanced Clearing moved to dismiss for failure to state a claim upon which relief can be granted, pursuant to Rule 12(b)(6). Shortly thereafter, Deutsche Banc and Wallstreet Access likewise filed a Rule 12(b)(6) motion. The trial court granted both motions, and plaintiff appealed to this Court. Plaintiff moved to voluntarily dismiss Penn and his wife without prejudice pending the outcome of this appeal, and the trial court granted the motion.

ANALYSIS

Plaintiff assigns error to the trial court's grant of defendants' motions to dismiss. A Rule 12(b)(6) motion tests the legal sufficiency of the pleading. N.C.G.S. § 1A-1, Rule 12(b)(6) (2001); Shaut v. Cannon, 136 N.C.App. 834, 834-35, 526 S.E.2d 214, 215, disc. rev. denied, 352 N.C. 150, 543 S.E.2d 892 (2000). A Rule 12(b)(6) motion will be granted "`(1) when the face of the complaint reveals that no law supports plaintiff's claim; (2) when the face of the complaint reveals that some fact essential to plaintiff's claim is missing; or (3) when some fact disclosed in the complaint defeats plaintiff's claim.'" Walker v. Sloan, 137 N.C.App. 387, 392, 529 S.E.2d 236, 241 (2000) (quoting Peterkin v. Columbus County Bd. Of Educ., 126 N.C.App. 826, 828, 486 S.E.2d 733, 735 (1997)). We treat all factual allegations of the pleading as true but not conclusions of law. Id. In sum, a Rule 12(b)(6) motion asks the court to "determine whether the complaint alleges the substantive elements of a legally recognized claim." Embree Const. Group v. Rafcor, Inc., 330 N.C. 487, 490, 411 S.E.2d 916, 920 (1992).

A.

Plaintiff argues first that the complaint sufficiently alleges a negligence claim against the four corporate defendants because it asserts that they negligently allowed Penn, an unlicensed broker, to transfer plaintiff's money from her account to the brokerage accounts and also because defendants failed to supervise the manner in which Penn invested plaintiff's funds. Because we can find no authority in North Carolina law for imposing a duty upon defendants to oversee Penn in these respects, we conclude that the trial court properly dismissed the claims for negligence.

To withstand a motion to dismiss, plaintiff's negligence complaint must allege "the existence of a legal duty or standard of care owed to the plaintiff by the defendant, breach of that duty, and a causal relationship between the breach of duty and certain actual injury or loss sustained by the plaintiff." Peace River Elec. Coop., Inc. v. Ward Transformer Co., 116 N.C.App. 493, 511, 449 S.E.2d 202, 214 (1994), disc. rev. denied, 339 N.C. 739, 454 S.E.2d 655 (1995). The sine qua non of a negligence claim is a legal duty owed by defendant to the plaintiff. Eisenberg v. Wachovia Bank, N.A., 301 F.3d 220, 224 (4th Cir.2002).

In North Carolina, securities broker/dealers like defendants have long been subject to liability for negligence to customers. Folger v. Clark, 198 N.C. 44, 150 S.E. 618 (1929). This case, however, presents a different question—whether a securities broker/dealer has a legal duty to "supervise" and "monitor" the investments ordered by its customer on behalf of that customer's client. Because our courts have not yet answered this question, we begin our analysis with authority from other jurisdictions.

Plaintiff's brief cites no persuasive authority indicating that securities broker/dealers are charged with such a broad duty, and we have found none. To the contrary, other courts have declined to impose the broad duty that plaintiff asks us to recognize and impose today.

In Cumis Insurance Society, Inc. v. E.F. Hutton & Co., 457 F.Supp. 1380 (1978), for example, a federal district court in New York faced a similar situation. There, the plaintiff was an assignee of two credit unions who were the victims of a fraud perpetrated by an investment advisor named George Oppenheimer. The complaint named E.F. Hutton & Co., ("Hutton") a broker with which Oppenheimer did business, and several other parties as defendants, in part because Oppenheimer used Hutton's broker/dealer services to execute trades on behalf of his clients. Cumis, 457 F.Supp. at 1382-83. Specifically, the plaintiff alleged that Hutton knew or should have known about inappropriate investment orders that Oppenheimer had placed. Id. at 1387. The plaintiff premised the alleged constructive knowledge on Hutton's alleged duty to investigate all the clients of all its customers to ascertain the appropriateness of their customers' orders. Id.

The New York court held that no such duty existed for two persuasive reasons. First, the plaintiff itself had "no reason or right to expect [Hutton] to supervise the use of [its money], for they dealt with Oppenheimer, not Hutton." Id. Second, the plaintiff could find no precedent to support its argument that such a duty should be imposed on broker/dealers. Id.

Similarly, other courts have refused to impose a duty on broker/dealers to supervise and monitor the investment orders of their customers. The policy justifications for these decisions range from ethical considerations to simple economics. See Unity House v. North Pacific Investments, 918 F.Supp. 1384, 1393 (D.Hawai'i 1996) (holding it would be unethical to require a broker/dealer to inquire into all the agreements between its customer and his or her clients); Chee v. Marine Midland Bank, N.A., 1991 WL 15301 *4 (E.D.N.Y.1991) (stating that "[t]here is even greater reason to reject monitoring liability in the case of discount brokers whose admitted function is not to give advice so investors can save money on commissions").

In Eisenberg, 301 F.3d 220, the Fourth Circuit, applying North Carolina law, held that a bank does not owe a duty to a noncustomer with no relationship to the bank who is defrauded by the bank's customer through use of its services. Eisenberg, 301 F.3d at 225. The court found that the plaintiff fell "into the undefined and unlimited category of strangers who might interact with [defendant's] customer." Id. at 226. To extend defendant's duty to include strangers like plaintiff, the court reasoned, "would expose banks to unlimited liability for unforeseeable frauds." Id.

Although the facts in Eisenberg are distinguishable from those before us, we find the logic of the decision and its public policy considerations analogous and persuasive. Plaintiff alleges that defendants "owed a duty to exercise reasonable care and diligence in their relationship with the Plaintiff" and that they breached this duty when they failed to properly supervise Penn, their customer, or to "monitor the funds or investments of the Plaintiff," which were ordered by Penn. We cannot agree that this could state a claim under North Carolina law, as we see no basis to impose such a "wide-ranging duty on brokers." Cumis, 457 F.Supp. at 1387. Plaintiff alleges that defendants executed Penn's investment orders. There are neither allegations that defendants acted as investment advisors to Penn, nor to plaintiff. Because defendants had no duty to supervise and monitor Penn's...