Thropp v. Bache Halsey Stuart Shields, Inc.

• Decision Date: 27 May 1981
• Docket Number: No. 79-3625,79-3625
• Citation: 650 F.2d 817
• Parties: Phyllis Ann THROPP, Plaintiff-Appellee, v. BACHE HALSEY STUART SHIELDS, INCORPORATED, Defendant-Appellant, v. Jack A. THROPP, Third-Party Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 817

650 F.2d 817

Phyllis Ann THROPP, Plaintiff-Appellee, v. BACHE HALSEY STUART SHIELDS, INCORPORATED, Defendant-Appellant, v. Jack A. THROPP, Third-Party Defendant-Appellee.

No. 79-3625.

United States Court of Appeals Sixth Circuit.

Argued July 9, 1980.

Decided May 27, 1981.

Richard C. Graham, Isaac, Graham & Nester, Frederick M. Isaac, Columbus, Ohio, for defendant-appellant.

Gary D. Greenwald, Schottentein, Gabel, Suedlow & Zox, Columbus, Ohio, for Phyllis Ann Thropp.

Kenneth Gamble, Gamble & Drake, Columbus, Ohio, for third-party defendant-appellee.

Before KENNEDY, BOYCE F. MARTIN, Jr. and JONES, Circuit Judges.

BOYCE F. MARTIN, Jr., Circuit Judge.

Bache, Halsey Stuart Shields, Inc. (Bache) appeals a judgment in favor of Phyllis Thropp for breaches of fiduciary duty and contract, and conversion. Jurisdiction is based on diversity of citizenship and is uncontested. The principal issues on appeal are: 1) whether the District Court erred as a matter of law in concluding that Bache negligently mismanaged Mrs. Thropp's securities account; and 2) whether her claims are barred by laches. Upon review, we uphold the District Court's findings that Bache is liable to Mrs. Thropp for its negligence and that her claims are not barred by laches.

In this appeal, Bache contests virtually every finding of fact made by the District Court. In so doing, it invites us to reinterpret the evidence in a manner more favorable to Bache. However, the scope of our review is limited by the "clearly erroneous" standard of Rule 52(a), Federal Rules of Civil Procedure. With this stricture in mind, we have reviewed the entire record, and we conclude that none of the facts found by the District Court are clearly erroneous. United States v. United States Gypsum Co., 333 U.S. 364, 68 S.Ct. 525, 92 L.Ed. 746 (1948). In the course of the trial, conflicts between Mrs. Thropp's testimony and that of Bache's witnesses inevitably raised questions of credibility. However, the District Court's resolution of those questions in Mrs. Thropp's favor was a proper exercise of its discretion.

The pertinent findings of the District Court follow. On June 21, 1971, Mrs. Thropp opened a margin trading account with Bache, placing in its care securities worth approximately $40,000.00. Mrs. Thropp's husband Jack encouraged her to open the account through his friend Richard Gregory, a broker in Bache's Columbus, Ohio office.

Mrs. Thropp is not a sophisticated investor. Although she has owned securities for many years, she has always relied on the investment acumen of her father and other advisors. She expected Gregory to manage her account and make investment decisions on her behalf.

Mrs. Thropp opened the Bache account in her name alone, although her husband was present at her initial meeting with Gregory. She did not indicate to Gregory that he was authorized to discuss the account with Mr. Thropp, nor did she mention giving Mr. Thropp a power of attorney over the account. Subsequently, however, Jack Thropp forged his wife's signature on a completely blank power of attorney form, which he then either mailed or delivered to Gregory.

Between September 21, 1971 and April 21, 1972, Jack Thropp ordered Gregory to sell his wife's stock for cash, in a series of transactions which eventually depleted the margin account. During this seven-month period, Mr. Thropp ordered Bache to issue seven checks in his wife's name, which he picked up at Bache's operations section. He then forged his wife's endorsement, cashed the checks, and spent the money.

Bache's internal operating rules require brokers to keep a "booksheet" for each customer account. This document contains the name of the account owner and a record of account transactions. A separate booksheet, bearing on its face the notation "Not a Client," must be kept for any person holding a power of attorney over another's account. Gregory failed to keep a separate booksheet with a proper notation for Thropp's power of attorney until September, 1972, when he asked Thropp to "update" his power of attorney. All seven checks that depleted Mrs. Thropp's account were drawn and cashed before September, 1972, on the strength of the invalid power of attorney. Gregory also failed to process the power of attorney form according to standard Bache procedures which required him to transmit a copy of the notarized form to the New York office.

Mrs. Thropp and her husband often saw Gregory socially. She frequently questioned him about her account, wanting to know "how it was doing." Gregory always gave vague, general answers about the condition of the stock market. He never mentioned the numerous sales for cash.

Mrs. Thropp inadvertently discovered her husband's forgeries in December, 1972, when she found a letter from Bache addressed to Jack Thropp. She opened it and found inside a blank form which apparently required Mr. Thropp's signature. She called Gregory at once to ask why Bache had sent correspondence to her husband, and why her account balance seemed low. Gregory refused to discuss the matter and told her to talk to Mr. Thropp.

When Mrs. Thropp confronted her husband, he "confessed" that he had stolen nearly $40,000.00 from her account and had used the money to pay his gambling debts. He also told her that he held a power of attorney over her account, and assured her that Gregory had not been involved in depleting her account.

Mrs. Thropp was seven months pregnant at the time she discovered her husband's forgeries. She apparently accepted his explanation of the matter because she hoped to save their failing marriage. In 1975, however, she filed for divorce and raised the issue of the stolen securities. During discovery in the divorce proceedings, Mrs. Thropp first learned that Bache may have mishandled her account when she took Gregory's deposition. In December, 1975, she filed this suit against Bache.

I. Standard of Care

Under Ohio law, a stockbroker is an agent or bailee. Southern Ohio Bank v. Merrill Lynch Pierce Fenner & Smith, Inc., 479 F.2d 478 (6th Cir. 1973). Both parties here have agreed that Bache was a fiduciary concerning matters within the scope of its agency relationship with Mrs. Thropp. As a fiduciary, a broker stands in a special relationship to a client and owes him a duty to use reasonable care and to act in good faith. Garl v. Nihuta, 50 Ohio.App.2d 142 (1975). See also Henricksen v. Henricksen, 640 F.2d 880 (7th Cir. 1981). Similarly, an agent is subject to a duty not to act in his principal's affairs "except in accordance with the principal's manifestation of assent." Falls Lumber Co. v. Heman, 114 Ohio.App. 262, 181 N.E.2d 713 (1961), quoting 2 Restatement (Second) of Agency § 383 (1957).

An agent's negligence may give rise to a breach of fiduciary duty. Inherent in every agency relationship is the agent's obligation to use the skills and diligence necessary to protect the client's interest. The District Court recognized Bache's duty to exercise due care, noting that "every agent must possess a competent degree of skill to enable him to perform the duties he assumes, and if he undertakes such duties without the requisite skill, or is guilty of negligence whereby money of his principal is lost, he is liable in damages," quoting 3 Ohio Jur.3d Agency § 104 at 161-162.

We reject Bache's argument that the District Court erred as a matter of law in concluding that Bache was negligent in handling Mrs. Thropp's security account. Bache challenges the District Court's reliance on Bache's internal rules, codified in its Standard Practice Instruction manual, ("SPI") as evidence of the proper standard of care. Bache also suggests that Mrs. Thropp failed to prove that Bache deviated from any minimum standard of conduct.

This argument fails for two reasons. First, although evidence of custom or professional practice does not automatically establish a standard of care, a court may consider such evidence in determining the proper standard. Hageman v. Signal L.P. Gas, Inc., 486 F.2d 479 (6th Cir. 1973); Thompson v. Ohio Fuel Gas Co., 9 Ohio St.2d 116, 224 N.E.2d 131 (1967). These cases state the Ohio rule that conformity to custom is not conclusive on the question of negligence. The instant case involves evidence of violations of custom and internal rules. When a defendant has disregarded rules that it has established to govern the conduct of its own employees, evidence of those rules may be used against the defendant to establish the correct standard of care. The content of such rules may also indicate knowledge of the risks involved and the precautions that may be necessary to prevent the risks. Montgomery v. Balt. & Ohio R.R., 22 F.2d 359 (6th Cir. 1927). See also Prosser, The Law of Torts § 33 (4th ed. 1971). The District Court correctly measured Bache's conduct by the standard of prudence it has established for its own employees. See Henricksen v. Henricksen, supra.

Second, ample evidence shows that Gregory fell below the standard of conduct that Bache requires of its brokers. Gregory testified that he did not even know all the requirements of Bache's rules governing powers of attorney, and admitted that he may have been "remiss" in his failure to ensure that a form was filled out properly for Mrs. Thropp's account. Mr. Gibson, an assistant manager at Bache, testified that internal supervisory procedures require an account executive to fill out a "New Account Information Sheet" and a Customer Account Card for anyone who holds a power of attorney over a client's account. Bache could not produce either of these documents for Jack Thropp's power of attorney. Mr. Gibson also testified that a Bache broker would not be authorized to take directions to trade in an account from one who claimed to hold a power of attorney on the strength of the document forged by Thropp.

This evidence persuades us that Bache was not diligent in enforcing its own rules. A reasonably diligent broker would have...