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Metcalf v. Merrill Lynch, Pierce, Fenner & Smith, Inc.

United States District Court, M.D. Pennsylvania

August 1, 2019

LINDA METCALF, et al., Plaintiffs,
v.
MERRILL LYNCH, PIERCE, FENNER & SMITH, Inc., et al., Defendants.

          MEMORANDUM OPINION

          MATTHEW W. BRANN, UNITED STATES DISTRICT JUDGE.

         Defendants moved to preclude Plaintiffs from seeking punitive damages at the upcoming (but as-yet unscheduled) jury trial in the above-captioned case. That motion will be denied.

         I. BACKGROUND

         This Court provided a detailed explanation of the facts underlying this case in its October 10, 2017 Memorandum Opinion.[1] A short refresher of the relevant cast of characters is therefore sufficient.

         Solar Wind Productions (“SWP”) was a film production company in New Mexico. Michael Jacobs and Ruby Handler-Jacobs were SWP's principals, and John Galen Davis was its CFO.

         SWP offered a program designed to help independent film producers obtain the funding needed to produce their films. There were three main steps to this program. First, the producer would deposit 10% of their film's budget into a brokerage account. The producer and SWP would be co-signatories on the account. Second, the deposit would be converted to a certificate of deposit. And third, a line of credit would be obtained using the CD as collateral, which line of credit would (somehow) be used “to obtain total film financing.”[2]

         SWP utilized Merrill Lynch, Pierce, Fenner & Smith, Inc. (“Merrill Lynch”) as its brokerage firm in connection with its film financing program. Its financial advisor there was Larry Bellmore. Mr. Bellmore's immediate advisor was Terri Fought. Also above Mr. Bellmore in the corporate structure were Robin Brubacher, a client relationship manager, and Alvin Walton, an administrative manager.

         Linda Metcalf is a California-based writer; Michelle Hartley a California-based producer. Ms. Metcalf and Ms. Hartley teamed up in 2008 to work on one of Ms. Metcalf's film projects. In early 2009, the two women contracted with the Jacobses to use SWP's film financing program.

         A. Merrill Lynch's Knowledge of, and Involvement with, SWP's Film Financing Program

         From the beginning, Merrill Lynch was aware of SWP's business plan, and saw itself as playing some active role in SWP's film financing program.[3]

         On December 26, 2008, Mr. Bellmore told Mr. Davis that, “[w]hen the [producers'] accounts are opened with Merrill, I need to make sure they correspond with the financing agreement, the producers' expectations, and your . . . expectations.”[4] Mr. Bellmore noted his desire to “make sure [he] ha[d] the accounts established properly, ” since he didn't “want future issues with the producers.”[5]

         On December 31, 2008, Mr. Bellmore emailed Mr. Davis to tell him that a deposit from Trojan Productions, Inc., one of SWP's producer-clients, had arrived in SWP's brokerage account, and that the deposit was being held there while Trojan's subaccount application was “pending.”[6] In that same email, Mr. Bellmore stated that, in order for SWP “to obtain the earlier commitment of [other] producer[s], ” he “would suggest all funds be wired to SWP and then transferred to the [producer's] sub account once [the sub account] is opened.”[7] Mr. Bellmore recognized, however, that this might not be “preferable” to some producers, in which case “wiring of funds will have to wait until Merrill approves the sub account.”[8]

         On January 7, 2009, Mr. Bellmore emailed SWP's “Business Model” to Ms. Fought and Ms. Brubacher.[9] This “Business Model” indicated: (1) that “separate accounts will be opened for each [producer] for segregation of [the producer's] [d]eposit”; (2) that the subaccounts will be “established in the joint names of Solar Wind Productions and the [p]roducer[] . . . for the holding of the . . . [d]eposit”; (3) that producers' deposits “are [first] going to be received in” SWP's brokerage account; and (4) that the . . . [d]eposits will [then] be moved to the [sub] [a]ccounts.”[10]

         B. Merrill Lynch's Recognition of the Risks Inherent in SWP's Film Financing Program

         Also from the beginning, Merrill Lynch acknowledged that SWP's program created risks for itself and for SWP's clients.

         On December 26, 2008, Mr. Bellmore scheduled a conference call with SWP to “discuss legal language of documents and the liability it creates for Merrill [Lynch] and others . . . [and] to make sure that the documents, the process, the liabilities were clear, protected, and understood by all.”[11] At that time, Mr. Bellmore was candid about the “internal issues with Merrill [Lynch] that have been raised here . . . as a result of reviewing the process.”[12] In fact, Merrill Lynch was “in compliance review because of the nature and structure of the business-frequency of expected wires, expected and existing 3rd party wire transfers to [SWP], . . . [and] authorized representatives and clients.”[13]

         A short while later, [14] Mr. Bellmore emailed Mr. Walton and Ms. Fought to tell them that SWP's “final production financing contract should be here today.”[15]Recognizing that the producers' deposits would be pledged against a line of credit, [16]Mr. Bellmore stated that he wanted to review the contract to “know whether the [producer's] deposit[s] [were] at risk, ” since he “want[ed] the business, but obviously not the legal problems if there is liability.”[17] Perhaps to assuage Mr. Walton's and Ms. Fought's concerns, Mr. Bellmore also mentioned that, “based upon [his] last understanding[, ] the [sub] account[s] require[] the producer[s'] signature[, ] [s]o[] only transactions approved by the producers . . . will be executed from the [their] deposit.”[18]

         On January 9, 2009, in an email to Mr. Jacobs discussing SWP's wire transfer requests, Mr. Bellmore conceded that “[t]here is concern in compliance about the process of this transaction . . . [m]oney wired in from 3rd parties in different locations and then wired out to other third parties in other locations . . . [t]he manner in which business is being transacted appears to be the pattern of money launderers.”[19]

         C. Trouble Brewing with Trojan Productions

         As noted above, by December 31, 2008, Trojan Productions had wired $250, 000 to SWP's Merrill Lynch account.[20] On January 20, 2009, SWP used $200, 000 of that money to purchase a 90-day CD, [21] which CD was pledged against a line of credit in SWP's name.[22] On February 11, 2009, the Jacobses told Mr. Bellmore to move the $200, 000 CD from its account to Trojan's sub account.[23] That request was never honored.

         On March 2, 2009, Mr. Bellmore-apparently in response to an inquiry from Trojan-wrote a letter to Trojan explaining that:

Solar Wind[] has a $200, 000 CD in their account and $50, 000 in their line of credit which they have pledged to you. . . I will work on moving the funds and the CD into Trojan Productions' account. I may have a short delay in moving the CD. I will explain if that occurs. The cash will be moved into your account as soon as I am able to do so.[24]

         That same day, Mr. Bellmore sent an email to the Jacobses coaching them on how to deal with Trojan.[25] Recognizing that it was “not for [him] to direct the [deposit] or reference the contract” in his communication with Trojan, Mr. Bellmore told the Jacobses to tell Trojan that:

Per your contract with Solar Wind[] Productions, The Trojan Productions production deposit is/was pledged to the Solar Wind Production LLC [line of credit]. The production deposit will be moved to your Trojan Productions, Inc. account but it will still be pledged to the [line of credit] per your contract with Solar Wind Productions.[26]

         The next day, March 3, 2009, Trojan copied Mr. Bellmore on an email sent to SWP.[27] The email indicated that Trojan “ha[d] a lot of issues, ” including “[n]ot knowing what's going on” despite all that “was said and promised.”[28] It noted that its “money was there in [Merrill Lynch] ¶ 12/30/08” and “at [SWP's] disposal, ” and that Trojan “now need[ed] to know more.”[29] Finally, it requested that SWP and its “team, legal and otherwise, call [Trojan] tomorrow” to bring it “up to par.”[30]

         D. The First Freeze

         While problems with Trojan were brewing, SWP was experiencing some corporate palace intrigue.

         On March 1, 2009, the Jacobses told Mr. Bellmore that Mr. Davis had been removed as CFO of Solar Wind, and asked Mr. Bellmore to remove Mr. Davis as an authorized signer on SWP's Merrill Lynch accounts.[31] The next day, however, Ms. Handler-Jacobs reversed course, telling Mr. Bellmore that SWP “ha[d] decided to give [Mr. Davis] one more week to complete some tasks as the acting CFO, ” and to “please disregard the [previous] letter removing [Mr. Davis's] authorities” on the Merrill Lynch Accounts.[32] Alarmed by these developments, Merrill Lynch temporarily froze SWP's account.[33]

         E. Ms. Metcalf's Application

         In the middle of March 2009-around the time the first freeze was instituted- Mr. Bellmore had been communicating with Ms. Metcalf about the SWP film financing program and what steps Ms. Metcalf needed to take to set up her account at Merrill Lynch.

         In a March 16, 2009 email, Mr. Bellmore sent Ms. Metcalf an application to open a brokerage account.[34] Mr. Bellmore noted the application was sent at the Jacobses' request, and asked Ms. Metcalf to “[p]lease call me to complete the documents for your Merrill account.”[35] Ms. Metcalf sent her completed application back the same day.[36] Late in the evening on March 16, 2009, Mr. Bellmore-once again displaying his intimate knowledge of SWP's film financing program-sent another email to Ms. Metcalf and others, stating:

The contract calls for wiring funds to the Solar Wind Account and having 2 signatures on the account for the protection of the producer. That cannot be accomplished as it then gives Linda authority over other client accounts and assets beyond the CD in the Solar Wind account and other sub accounts.
Therefore, I setup the sub account for wiring funds directly to it. For the moment, Linda Metcalf is the only signature on the account and will be on control of the funds. Once the account is established we can add the CFO as the other signature on the sub-account and require two signatures from that point out.
If you have any questions as to the structure and how it works, call me. (Mr. Bellmore then provided his direct phone number at Merrill Lynch and his cell phone number.)[37]

         Mr. Bellmore and Ms. Metcalf continued their discussion about opening a Merrill Lynch account in a string of emails sent March 17 and 18, 2009.[38]

         F. Mr. Bellmore's Attempts to Unfreeze SWP's Account

         Because Mr. Bellmore understood the logistics of SWP's film financing program, he also understood that a freeze on SWP's accounts would curtail SWP's ability to conduct business. Therefore, while discussions with Ms. Metcalf were occurring, he stressed the need to unfreeze SWP's account to his superiors.

         In a March 17, 2009 email to Ms. Brubacher and Ms. Fought, he noted that the Jacobses “have movies which want to wire in now, ” and that the freeze would “put them out of business if they can't setup accounts and fund operations.”[39] On March 18, 2009, Mr. Bellmore emailed Ms. Brubacher about Ms. Metcalf's application and emphasized that “[w]e need to open this account and hold the funds until we have resolved the issues else [SWP] may lose this opportunity.”[40] A March 19, 2009 email sent on Mr. Bellmore's behalf to Ms. Brubacher noted that Ms. Metcalf was “requesting wiring inst[ructions] to wire . . . [her] funds into [Merrill Lynch], ” which funds would “just go into the money market until the other matters with Solar Wind[] are settled.”[41] That email warned, however, that “if we decide that we cannot open [Ms. Metcalf's] account soon [she] may go elsewhere, ” and queried whether there was “any way to approve [her] acc[ount] at this time.”[42] And in a March 23, 2009 email, Mr. Bellmore noted that Ms. Metcalf “ha[d] $200[, 000] being held for wire transfer” and that Merrill Lynch “need[s] to allow this account to be opened and documentation for the pledge to the LMA to begin or [SWP] could lose this account.”[43]

         SWP's account was apparently unfrozen on March 27, 2009.[44]

         G. Change of Procedures and Ms. Metcalf's Deposit

         At some point along the way, someone decided that-despite previous representations and the contractual requirements between SWP and its producers- the producers would no longer have any authority over their sub accounts at Merrill Lynch.

         On March 25, 2009, Mr. Bellmore sent an email to Ms. Brubacher bearing the subject line “Solar Wind Productions Revised Procedures.”[45] Under the heading “General Procedures for Account Opening of Solar Wind [Sub] Accounts, ” the email noted: (1) that the sub accounts would be “opened with Solar Wind['s] Tax ID”; (2) that the sub accounts “c[an] have [the] name of the [proposed] film incorporated [into the] account name”; (3) that “[m]anagers of [the] [s]ub[]account must be the same as the [m]embers of Solar Wind”; and (4) that “[t]here must be common control of the [s]ub[ account] and the Solar Wind[] [m]ain account.”[46]

         Solar Wind apparently agreed to this new setup on March 30, 2009.[47] It is unclear, however, whether Ms. Metcalf was informed of this change. Arguably, she would have found the new information alarming, since-as noted in this Court's earlier Memorandum Opinion-she testified that “the $200, 000 [deposit] was supposed to be in my sole control.”[48] Nevertheless, Mr. Bellmore continued to facilitate Ms. Metcalf's business relationship with SWP.

         On March 30, 2009-the same day SWP agreed to the new procedures giving it sole authority over the sub accounts-Mr. Bellmore told Ms. Fought that Ms. Metcalf was “having a bank check issued and [was] bringing [it] to a Merrill branch and depositing it in the Solar Wind[] account.”[49] Two days later-April 1, 2009- Ms. Metcalf purchased a cashier's check made out to SWP and deposited it into SWP's account at a Merrill Lynch branch in Escondido, California.[50] At noon that day, Ms. Metcalf emailed Mr. Bellmore, told him about the deposit, and asked for “verification of [her] sub-account and purchase of CD.”[51]

         H. Trouble Erupts from Trojan Productions-“The Feared Has Begun”

         While negotiating new procedures for opening brokerage accounts at Merrill Lynch for the SWP film financing program, and while continuing to facilitate Ms. Metcalf's business relationship with SWP, Mr. Bellmore remained in contact with Trojan Productions about its deposit. And Trojan was not happy.

         On March 25, 2009, apparently responding to an inquiry by Trojan about its deposit, Mr. Bellmore stated in an email that he was “[w]orking on the process, ” and that “it involves more than just your account.”[52] The next day, March 26, 2009, Trojan wrote back stating that it was “getting very worried” because its “money was never in [its] own account” even though it “sent it to be in [its] own account.”[53] It implored Mr. Bellmore to “let [it] know that [the] money is safe.”[54]

         Late in the afternoon on April 1, 2009-the same day Ms. Metcalf made her deposit-Trojan's attorney emailed Mr. Bellmore about Trojan's deposit, demanding an accounting of Trojan's funds.[55] At 6:30am the next morning-April 2, 2009-Mr. Bellmore forwarded that email to Ms. Brubacher, commenting that “The feared has begun.”[56]

         Mr. Bellmore apparently spoke with Trojan's attorney sometime later that day in an attempt to clarify the situation.[57] The conversation presumably did not assuage Trojan's concerns, however, because Trojan's attorney immediately sent Mr. Bellmore an email indicating that Trojan had terminated its agreement with SWP and demanding that Trojan's deposit “be frozen . . . until this matter is resolved as it appears that [Trojan's] funds are in the Solar Wind Productions LLC account instead of where they belong, which is in the Trojan Productions, Inc. account.”[58]

         I. Ms. Metcalf's (?) Account is Opened

         On April 6, 2009, Mr. Bellmore initialed a document approving a sub account to SWP's main brokerage account.[59] That same day, Ms. Fought-presumably in reference to this document-sent an email to Ms. Brubacher, asking her to “please review this new account for Solar Wind[], ” indicating that “[w]e need to [move] $200, 000 over from the main account upon opening.”[60] Ms. Brubacher signed the document on April 15, 2009.[61] The next day, April 16, 2009, Mr. Bellmore told Ms. Fought and Mr. Walton that Merrill ...


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