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JAIRETT v. FIRST MONTAUK SECURITIES CORP.

March 14, 2001

WILLIAM JAIRETT, THOMAS SINIBALDI, BARRY BEAKLER, BETTY BEAKLER, RICHARD BIEDA, PETER HOET, KENNETH SINIBALDI, PLAINTIFFS,
v.
FIRST MONTAUK SECURITIES CORP., MONUMENT FINANCIAL SERVICES GROUP, INC., UNITED BANK OF PHILADELPHIA, HATFIELD BAILEY & WERTH, INC., HATFIELD FINANCIAL GROUP, INC., HATFIELD CAPITAL MANAGEMENT, INC., RONALD V. HATFIELD, ERIC KECK A/K/A ERIC KACK, HUBERT BURKAT, DEREK BAILEY, AND MR. WERTH, DEFENDANTS.



The opinion of the court was delivered by: Lowell A. Reed, Jr., Senior District Judge

  MEMORANDUM

Plaintiffs brought this law suit after losing money in an allegedly fraudulent investment scheme.*fn1 Defendant United Bank of Philadelphia ("United Bank") filed a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) (Document No. 12). Defendant First Montauk Securities Corporation ("First Montauk") filed a motion to dismiss or for summary judgment to dismiss claims brought by non-customer plaintiffs pursuant to Federal Rules of Civil Procedure 12(b)(6) and 56 and a motion to compel arbitration and for stay of judicial proceedings pursuant to Title 9 of the United States Code § 4 (Document No. 14). Upon consideration of the motion of defendant United Bank, and the response and reply thereto, defendant's motion will be denied. Upon consideration of the motion of defendant First Montauk, and the response and reply thereto, defendant's motion will be denied in part and granted in part.

• Background*fn2

Each plaintiff invested either $50,000 or $100,000 with Monument Financial and received a security equal to the amount of their respective investment. The total amount invested was $450,000. Each plaintiff received certificates from Monument Financial indicating a mortgage collateral in the amount of their investment. Each plaintiff also entered into a security agreement with Monument Financial. The plaintiffs were told that the securities were to be processed by Monument Financial's banking institute, United Bank. Two of the security agreements entered into with Monument Financial listed United Bank as the depository bank. After tendering the investment checks, plaintiffs received canceled checks indicating that their money was deposited in United Bank.

The Monument Financial account at United Bank was opened on January 11, 1999. The Bank was directed to disburse funds only upon the dual authorization of Hatfield and defendant Eric Kack ("Kack").*fn3 Contrary to those instructions, five checks with only the signature*fn4 of Kack, totaling approximately $132,000, were honored by the bank in February, 1999. Plaintiffs believe that additional disbursements were made without proper authorizations. United Bank eventually froze the account.

Plaintiffs aver that funds were diverted to non-investment entities without their knowledge, that their money was not invested in collateralized mortgage rollover, and that their security interests were not perfected.*fn5 Plaintiffs bring six claims against United Bank for negligence (Count III), constructive fraud (Count X), breach of fiduciary duty (Count XV), breach of contract (Count XX), and two claims arising under the Pennsylvania Commercial Code (Counts XXVI & XXVII). Plaintiffs also bring six claims against First Montauk for negligence (Count I), breach of fiduciary duty (Count XIV), two claims arising under federal securities law (Counts XXI & XXII), and two claims arising under Pennsylvania securities law (Counts XXIII & XXV).

• Analysis

1. Standard for Motion to Dismiss

Rule 12(b) of the Federal Rules of Civil Procedure provides that "the following defenses may at the option of the pleader be made by motion: . . . (6) failure to state a claim upon which relief can be granted." In deciding a motion to dismiss under Rule 12(b)(6), a court must take all well pleaded facts in the complaint as true and view them in the light most favorable to the plaintiff. See Jenkins v. McKeithen, 395 U.S. 411, 89 S.Ct. 1843, 23 L.Ed.2d 404 (1969). Because the Federal Rules of Civil Procedure require only notice pleading, the complaint need only contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a). A motion to dismiss should be granted if "it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81 L.Ed.2d 59 (1984). In considering a motion to dismiss, the proper inquiry is not whether a plaintiff will ultimately prevail, but rather whether a plaintiff is permitted to offer evidence to support its claims. See Children's Seashore House v. Waldman, 197 F.3d 654, 658 (3d Cir. 1999), cert. denied, 120 S.Ct. 2742 (2000) (quoting Nami v. Fauver, 82 F.3d 63, 65 (3d Cir. 1996)). The court may consider the allegations in the complaint, as well as any exhibits attached thereto. See Pension Benefit Guar. Corp. v. White Consol. Indus. Inc., 998 F.2d 1192, 1996 (3d Cir. 1993), cert. denied, 510 U.S. 1042 (1994). The defendant bears the burden of showing that plaintiffs have failed to state a claim for which relief can be granted. See Gould Elec. Inc. v. United States, 220 F.3d 169, 178 (3d Cir. 2000).

Although defendant First Montauk calls its filing a motion to dismiss or in the alternative, for summary judgment, I will address it only as a motion to dismiss. The language of First Montauk's brief is overwhelmingly that of a 12(b)(6) motion, and plaintiff has responded as if it were solely a motion to dismiss. See Vorhees v. Time Warner Cable Nat'l. Div., 109 F. Supp.2d 384, 386 (E.D.Pa. 2000). Furthermore, neither party has provided this Court with evidence from which the court might determine the presence or absence of a genuine issue of material fact, as it must on a motion for summary judgment.*fn6 See id.

2. United Banks' Motion to Dismiss

Plaintiffs bring six counts against United Bank arising out of the Bank's allegedly improper disbursements. United Bank moves to dismiss the action on the grounds that plaintiffs are creditors of Monument Financial and had no dealings with United Bank, the depository bank of Monument. From this argument, United Bank asserts that the Bank owed plaintiffs no fiduciary duty, no tort duty, no contract duty, and no duty giving rise to a constructive fraud claims or claims arising under Pennsylvania's Commercial Code because the Bank only owed a duty to Monument. Plaintiffs respond that a duty was created because the account was a "custodial account" rather than a "general account." In the alternative, plaintiffs assert that they are third party beneficiaries; a relationship was thus formed between plaintiffs and United Bank which gives rise to the claims brought. United Bank counters that the complaint fails to allege adequate facts to support those contentions.

Pennsylvania law recognizes two distinct bank accounts: custodial accounts, also known as special accounts, and general accounts. See United States v. Carlow, 323 F. Supp. 1310, 1315 (W.D.Pa. 1971) (citing R. M. Bourne & Co. v. Peoples Union Bank and Trust Co., 404 Pa. 519, 172 A.2d 814 (1961); Franklin Savings & Trust Co. v. Clark, 283 Pa. 212, 129 A. 56 (1925)). Where a special account exists, the bank is generally serving as a bailee or a trustee. See Royal Bank of Pennsylvania. v. Selig, 434 Pa. Super. 537, 546, 644 A.2d 741, 745 (1994), appeal denied, 540 Pa. 584 (1994). Where such an account exists, a "`bank cannot knowingly accept a deposit for a particular purpose and then act to defeat the purpose for which that deposit was made.'" Id. (quoting American Sec. Bank v. Kaneshiro, 67 Haw. 354, 688 P.2d 254, 255 (1984)) (emphasis added). For example, a bank holding fiduciary funds is liable for honoring checks contrary to the instructions of an account. See, e.g., Manfredi v. Dauphin Deposit Bank, 697 A.2d 1025, 1029-30 (Pa. Super. 1997), appeal denied, 553 Pa. 690 . However, the bank must be aware that the account contains money belonging to a third party. See Ryan Bros. Inc. v. Curwensville State Bank, 382 Pa. 248, 249, 114 A.2d 178, 179 (1955); Franklin Savings, 283 Pa. at 219. Whether an account is special or general depends on the circumstances of each case. See Franklin Savings, 283 Pa. at 218.

The question for this Court is whether the complaint in this case includes sufficient facts to demonstrate not only that a fiduciary relationship exists between plaintiffs and Monument Financial, but that the bank knew of that relationship. As to the first showing, "[f]iduciary or confidential relationships arise when one party places confidence in another with resulting superiority and influence on the other." Temp-Way Corp. v. Continental Bank, 139 B.R. 299, 317-18 (E.D.Pa. 1992), aff'd by, 981 F.2d 1248 (citing Yohe v. Yohe, 466 Pa. 405, 412, 353 A.2d 417, 421 (1976) and Maritrans G.P. Inc. v. Pepper, Hamilton & Scheetz, 529 Pa. 241, 260, 602 A.2d 1277, 1286 (1992)). Brokers are one example of a fiduciary. See Gouger v. Bear Stearns & Co, Inc., 823 F. Supp. 282, 286 (E.D. Pa. 1993) (citing See Merrill Lynch, Pierce, Fenner & Smith v. Perelle, 356 Pa. Super. 165, 514 A.2d 552, 560 (1986)) (securities broker); In re Barker, 251 B.R. 250 (E.D.Pa. 2000) (mortgage broker). A broker is defined generally as "`one whose business it is to bring buyer and seller [or borrower and lender] together.'" City of Phila. Tax Review Bd. v. Toben, 32 Pa. Commw. 523, 530, 379 A.2d 1361, 1365 (1977) (quoting Williams and Co. v. School Dist. of Pittsburgh, 430 Pa. 509, 511, 244 A.2d 37, 38 (1968), appeal dismissed by, 393 U.S. 319 (1969) (citing Keys v. Johnson, 68 Pa. 42, 1871 WL 10912, at *3 (Pa. Feb. 28, 1871)). Blacks Law Dictionary provides broader definitions:

Broker. An agent employed to make bargains and contracts for compensation. A dealer in securities issued by others. . . . A middle man or negotiator between parties. . . . A person whose business it is to bring buyer and seller together.
 
Broker-dealer. A securities brokerage firm, usually registered with the S.E.C. and with the state in which it does business, engaging in the business of buying and selling securities to or for customers.
Securities broker. Brokers employed to buy and sell for their principals stocks, bonds, government securities, etc. Any person engaged in the business of effecting transactions in securities for the account of others, but does not include a bank [citing Securities Exchange Act of 1934, § 3] . . . . A person engaged . . . in the business of buying and selling securities, who in the transaction concerned, acts for or buys a security from or sells a security to a customer [citing U.C.C. § 8-303.]
Mortgage broker. Person or firm who functions as intermediary between borrower and lender in securing loan, or places loans with investors.

Black's Law Dictionary 193, 1011 (6th ed. 1990).

It can be inferred from the facts alleged in the complaint that Monument Financial acted as a broker, despite the fact that the complaint is somewhat inconsistent with respect to this point. At times, plaintiffs aver that securities were offered in Monument Financial, (Compl. at ¶¶ 29, 36), suggesting that plaintiffs were investing directly in Monument itself, an argument United Bank vigorously supports. At other times, however, plaintiffs allege that they invested money with Monument Financial (Compl. at ¶¶ 38-39), suggesting that Monument was acting as broker. In addition, plaintiffs aver that the securities purchased were actually offered through First Montauk. (Compl. at ¶ 36; Compl. at Ex. C.) Plaintiffs also aver that Hatfield represented to plaintiffs that Monument Financial purchased collateralized mortgage rollover and offered a "full array" of mortgage services. (Compl. at ¶¶ 29, 36, 37; Compl. at Ex. B, C, D.) Finally, the complaint characterizes the account as holding fiduciary funds and that United Bank knew of its status and its purpose. (Compl. at ¶¶ 205, 209.) It seems to this Court that plaintiffs are not entirely sure what form their investment took and what role Monument played or are pleading in the alternative to some extent. Nonetheless, this Court must view the alleged facts in the complaint as a whole and in the light most favorable to the plaintiffs. In light of this standard, I find that plaintiffs have alleged a set of facts showing that Monument was acting as a broker and that the Bank was aware of fiduciary nature of the funds in the account.

I find it necessary, however, to address the two arguments which plaintiffs present to this Court in support of their assertion that United Bank actually had knowledge of the fiduciary relationship because I find neither one the least bit persuasive. Plaintiffs first argue that the bank was or should have been on notice that the funds in the account belonged to plaintiffs because the entity is titled "Monument Financial Services Group, Inc." and somehow the words "financial services" should alert the Bank that the account contained special funds. (Pls.' Reply at 19.) I find that argument wholly unworthy. Plaintiffs do not contend, for example, that Monument opened two bank accounts and titled one, "Monument Financial Services Group, Inc, Broker." See Sherts v. Fulton Nat. Bank of Lancaster, 342 Pa. 337, 339-40, 21 A.2d 18, 19-20 (1941) (finding bank had notice of fiduciary funds because one account name used the word "attorney"); but cf. Franklin Savings, 283 Pa. at 218 (placing word "special" on account does not in itself create special account). Second, plaintiffs contend that the "Business New Account Worksheet" imputes knowledge onto the bank. (Pls.' Reply at 19; Compl. at Ex. H.) Having combed this application form myself, I find no such indication. The plaintiffs names are nowhere to be found, and Monument Financial merely characterizes itself as a corporation involved in the service industry. While I find these two arguments completely lacking persuasiveness, it is possible through discovery or otherwise that plaintiffs can prove the allegations of the complaint. Thus, this case does not present a situation where no set of facts could be proved to support the claims.

Plaintiffs also contend that their claims survive because they were third party beneficiaries of the account. In order to succeed on the third party beneficiary theory, plaintiffs would need to show that United Bank intended for plaintiffs to benefit from the bank account agreement. See, e.g., Drummond v. University of Pa., 651 A.2d 572, 578 (Pa.Commw.Ct. 1994), appeal denied by, 541 Pa. 628 (1995). Plaintiffs plead that there was such an intention. (Compl. at ¶ 178). This allegation satisfies the plaintiffs' burden at this stage of the proceedings.

The next task for this Court is to identify which claims can be sustained upon a showing that United Bank was aware that it held fiduciary funds or that plaintiffs were third party beneficiaries. I conclude that United Bank has failed to meet its burden in showing that any claims should be dismissed. Defendant contends that the negligence claim cannot be sustained because the Bank owed a duty only to Monument. The above analysis demonstrates that the complaint pleads facts that create a duty running from the Bank to plaintiffs. See Gerace v. Holmes Prot. of Phila., 357 Pa. Super. 467, 473-74, 516 A.2d 354, 358 (1986), appeal denied by, 515 Pa. 580 (1987) (noting that fundamental tort rule is that defendant must owe duty of care). Defendant contends that plaintiffs have no constructive fraud claim because the Bank owed no duty to plaintiffs. However, the complaint alleges sufficient facts showing that the Bank owed such a duty. See Noyes v. Cooper, 396 Pa. Super. 592, 604, 579 A.2d 407, 413 (1990), appeal denied by, 527 Pa. 667 (explaining elements of claim of constructive fraud which "usually arises from a breach of duty when a relationship of trust and confidence exists") (citation omitted). As to arguing that the claim for breach of fiduciary duty should be dismissed, United Bank contends that because plaintiffs did not hold an account with the Bank, no such duty existed. However, as explained above, if the Bank knew that account held fiduciary funds, then the bank was acting as bailee or trustee. See Royal Bank, 434 Pa. Super. at 546. The claim for breach of implied and express contract was outlined above and plaintiffs sustain this claim on the third-party beneficiary theory. See Drummond, 651 A.2d at 578.

The claims brought under the Pennsylvania Commercial Code, 13 Pa.C.S.A. §§ 3300-3400 et. seq., survive for similar reasons. United Bank contends that claims brought under sections 3403*fn7 and 3420, covering conversion, cannot be sustained because plaintiffs are creditors of Monument. However, as outlined above, plaintiffs have adequately plead that they were not simply creditors. Whether or not they were creditors cannot be disposed of by this motion to dismiss. Likewise, United Bank's contention that claims brought under sections 3306 and 3307, covering fiduciaries, must be dismissed because the account did not contain fiduciary funds ...


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