Thomas v. N.A. Chase Manhattan Bank

• Decision Date: 27 August 1993
• Docket Number: No. 92-2613,92-2613
• Parties: James C. THOMAS, Individually, and as Trustee of the SLT Trust # 1, Plaintiff-Appellant, v. N.A. CHASE MANHATTAN BANK, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 320

1 F.3d 320

James C. THOMAS, Individually, and as Trustee of the SLT Trust # 1, Plaintiff-Appellant, v. N.A. CHASE MANHATTAN BANK, Defendant-Appellee.

No. 92-2613.

United States Court of Appeals Fifth Circuit.

Aug. 27, 1993.

Frederick L. Unger, Houston, TX, Bernard M. Jung, Kansas City, MO, for plaintiff-appellant.

Karen A. Oshman, Franci N. Crane, Susman & Godfrey, Houston, TX, for defendant-appellee.

Appeal from the United States District Court for the Southern District of Texas.

Before POLITZ, Chief Judge, REAVLEY, and BARKSDALE, Circuit Judges.

BARKSDALE, Circuit Judge:

In issue is the summary judgment awarded N.A. Chase Manhattan Bank in this action by James C. Thomas, individually and as trustee of the SLT Trust # 1 (SLT), arising out of Chase's referral of an investment partner, E. Lawrence Price. Previously, we held that Thomas lacked standing on certain claims, and as a result, affirmed the judgment as to them; remanded for factual findings on a standing issue; and deferred ruling on the remaining claims pending remand. Thomas v. N.A. Chase Manhattan Bank, 994 F.2d 236 (5th Cir.1993). The district court having promptly entered the requested findings, we now turn to the remaining claims. Finding genuine issues of material fact regarding the claims by both Thomas and SLT for fraud, negligent misrepresentation, and breach of fiduciary duty, we REVERSE and REMAND; on the conspiracy to defraud claims, we AFFIRM.

I.

The complex factual background to this case is set out at length in our prior opinion, 994 F.2d at 238-41; we need not repeat it here. ¹ Briefly, the claims arise from Chase's referral of Price as an investment partner for Thomas in a Texas private banking franchise. Thomas and Price entered their respective family trusts, SLT and the Elaine Price Trust (EPT) (of which Price is trustee) into a partnership (the Price-Thomas partnership), which in turn purchased the franchise from another partnership in which Thomas and SLT had been involved with the Cha family (the Chas). Additionally, Thomas in his individual capacity executed a management contract with the newly formed Price-Thomas partnership to continue to manage the bank following the sale. Price subsequently breached both the partnership agreement and the management contract and used the bank to commit a massive government securities tax fraud, driving it into insolvency. After the relationship with Price proved ruinous, Thomas learned that Chase allegedly knew of Price's history of bank fraud problems, including a serious incident involving Chase, yet Chase represented Price to Thomas as a valued Chase customer and misrepresented Price's troublesome history.

Thomas, individually and on behalf of SLT, sued Chase for fraud, negligent misrepresentation, breach of fiduciary duty, breach of contract, and conspiracy to defraud, alleging basically that Chase had "foisted" Price onto him pursuant to a cover-up of Price's fraudulent activities at Chase. The district court granted summary judgment for Chase on all claims. In our prior opinion, we upheld summary judgment for lack of standing on the breach of contract claim, and on the other claims to the extent that they related to the Stanhope indemnity agreements. Id. at 244. We remanded for the limited purpose of determining whether Thomas, as trustee, had the capacity to sue on behalf of SLT. Id.

On remand, Thomas submitted an affidavit and a copy of the SLT trust instrument. The district court found that the trust instrument "explicitly adopts the powers conferred by Missouri law allowing the trustee to bring suit". Accordingly, we now address the remaining claims: SLT's claims for damages resulting from its entering into partnership with EPT (fraud, conspiracy to defraud, negligent misrepresentation, and breach of fiduciary duty); and Thomas's claims for damages resulting from his entering into the management contract with the Price-Thomas partnership (same). Because the claims asserted by Thomas individually and on behalf of SLT arise from the same allegations, we address them together. ²

II.

As stated in our prior opinion, we review a summary judgment de novo, applying the same criteria as would a district court. Hanks v. Transcontinental Gas Pipe Line Corp., 953 F.2d 996, 997 (5th Cir.1992). "Summary judgment is proper only if 'there is no genuine issue as to any material fact and ... the moving party is entitled to judgment as a matter of law' ". Harbor Ins. Co. v. Trammell Crow Co., 854 F.2d 94, 98 (5th Cir.1988), cert. denied, 489 U.S. 1054, 109 S.Ct. 1315, 103 L.Ed.2d 584 (1989) (quoting Fed.R.Civ.P. 56(c)). "We consider all of the facts contained in the pleadings, depositions, admissions, answers to interrogatories, affidavits, and the inferences to be drawn therefrom in the light most favorable to the non-moving party". Harbor Ins. Co. v. Urban Constr. Co., 990 F.2d 195, 199 (5th Cir.1993). "Our review is not limited to the district court's analysis"; we may affirm on any basis presented to the district court. Id.

We previously held that New York law governs the claims by Thomas and SLT. Thomas, 994 F.2d at 241-42. The summary judgment record is described in our prior opinion, 994 F.2d at 238 n. 1. Most revealing about the record is the scant evidence submitted by Chase.

A.

The fraud claims relate to Chase's alleged misrepresentations that Price was a long-time, highly valued Chase client, when in fact Chase had terminated Price's accounts and was trying to rid itself of him; that, based on Chase's long-term dealings with and extensive due diligence on Price, Chase knew him to be an appropriate investment partner for Thomas; and that Price's banking problem in Chicago was mere "unpleasantness"--"simply a routine banking relationship that didn't work out", when in fact Price had perpetrated a massive government securities tax fraud there for which he later suffered a tax court judgment. Additionally, when Thomas inquired of Chase regarding information ("second-hand rumors") he had learned from William Wu (his former partner's (the Chas) agent who had investigated Price), Chase allegedly encouraged Thomas to rely on its superior knowledge regarding Price and urged him not to listen to rumors. The district court granted summary judgment on these claims, based on its determination that Thomas could not justifiably rely on the alleged misrepresentations.

"New York requires proof of the traditional five elements of fraud: misrepresentation of a material fact, falsity of that representation, scienter, reliance and damages". Mallis v. Bankers Trust Co. (Mallis I ), 615 F.2d 68, 80 (2d Cir.1980) (emphasis omitted), cert. denied, 449 U.S. 1123, 101 S.Ct. 938, 67 L.Ed.2d 109 (1981). Justifiable reliance is the only element in issue; it is not disputed that material fact issues exist regarding the other four elements.

To satisfy the requirement of justifiable reliance, a plaintiff must establish that his reliance on the defendant's misrepresentations was justifiable "both in the sense that [he] was justified in believing the representation, and that he was justified in acting upon it". Compania Sud-Americana de Vapores, S.A. v. IBJ Schroder Bank & Trust Co., 785 F.Supp. 411, 419 (S.D.N.Y.1992). When the matters represented are "peculiarly within the [defendant's] knowledge", the plaintiff is not required to investigate them, "as he has no independent means of ascertaining the truth". Mallis I, 615 F.2d at 80 (internal quotations omitted). When the plaintiff "has the means of knowing, by the exercise of ordinary intelligence, the truth", however, he will be barred as a matter of law from asserting justifiable reliance. Id. at 80-81 (emphasis added); Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 184 N.Y.S.2d 599, 603, 157 N.E.2d 597, 600 (1959). Apart from this principle, the question of justifiable reliance is one of fact. See Country World, Inc. v. Imperial Frozen Foods Co., 186 A.D.2d 781, 589 N.Y.S.2d 81, 82 (1992); Freschi v. Grand Coal Venture, 583 F.Supp. 780, 785 (S.D.N.Y.1984). Accordingly, it bears repeating that it is a summary judgment we are reviewing; we determine whether there are material fact issues.

Chase's representations regarding its dealings with Price were "peculiarly within its knowledge". Thomas would have no means of ascertaining independently (certainly not "by the exercise of ordinary intelligence", see infra ) whether Price was a long-time, highly valued Chase customer, or whether Chase believed Price to be a worthy investment partner for Thomas. Therefore, at least with respect to those representations, Thomas is not barred as a matter of law from establishing justifiable reliance.

With respect to its alleged representations about Price's bank fraud in Chicago, Chase contends that Thomas had independent access to that information and therefore cannot assert justifiable reliance on Chase. It emphasizes that Thomas was alerted to a problem by Wu, and should have pursued further investigation. Citing Most v. Monti, 91 A.D.2d 606, 456 N.Y.S.2d 427, 428 (1982); Marine Midland Bank v. Palm Beach Moorings, Inc., 61 A.D.2d 927, 403 N.Y.S.2d 15 (1978); and Grumman Allied Indus., Inc. v. Rohr Indus., Inc., 748 F.2d 729 (2d Cir.1984), Chase asserts that a sophisticated businessman like Thomas could not, as a matter of law, justifiably rely on Chase's verbal assurances in entering into a business deal of the magnitude involved here.

For several reasons, we conclude that the cases cited do not support the summary judgment. First, each of them involved representations made by the opposing party to a transaction. Most involved the seller of a health club who allegedly misrepresented to the buyer that the property was fully assessed for tax purposes. See 456 N.Y.S.2d at 428. Marine Midland involved a bank that allegedly misrepresented the status of corporate loans to a potential guarantor in order to obtain the guaranty obligation. See 403 N.Y.S.2d at...