A broker’s fiduciary duty to his client in a non-discretionary account is satisfied once he executes a trade and does not give rise to a continuing fiduciary duty that survives the termination of the broker-client relationship.
Holmes vs. Newman, No. 01-16-00311-CV (Tex. App., 1Dist., 7/6/17).
An Ex-Broker and His Ex-Customer
The defendant in this small business dispute, Holmes, was a former broker for TD Ameritrade. Plaintiff Newman had been his customer, but Holmes left TD Ameritrade before the events that gave rise to the litigation. Newman’s account was nondiscretionary, and he invested mainly in bonds. After Holmes left TD Ameritrade, he started a website business called SportsPicks.com that sold advice and information to sports bettors, and convinced his former customer, Newman, to invest in the business. Their agreement, memorialized in a series of e-mails, provided that Newman would invest $50,000 in return for 50% of the business, that “the first return of capital would go to (Newman) up to 50k… and then be split according to ownership perpetually,” and that “capital will be distributed quarterly, 4 times a year.” The business did not return a profit, and Newman did not receive any capital distributions. Newman, contending that the agreement required that he receive capital distributions regardless of profit, sued Holmes for breach of contract, fraud and breach of fiduciary duty. Holmes filed a combined traditional and no-evidence motion for summary judgment, which the trial court granted, disposing of the claims.
The Meaning of “Capital”
On appeal, the Court, reviewing de novo, first considers – although neither party asserted it – whether the agreement concerning return of capital is ambiguous. Under the ordinary and generally accepted meaning of “capital,” it holds, “return of capital” is not a dividend derived from profit, but rather the return of the amount invested. Here, the contract required Newman to return some unspecified portion of Holmes’ investment four times per year. However, there are also indications in the agreement that the parties meant something else by the term “capital.” The parties agreed that after Holmes’ full investment had been returned, they would then split the capital “according to ownership perpetually.” This suggests that the parties were referring to profits or dividends, as capital cannot be split perpetually once the amount of a shareholder’s investment has been returned. Also, capital is not generally returned quarterly, but remains invested until the company has shown a profit. For these reasons, the Court concludes that the agreement is ambiguous, and its meaning should be determined by a fact finder. Holmes’ fraud claim also hinges on the meaning of the term “capital,” as Newman’s defense to that claim is that the agreement does not require him to pay Holmes unless and until the company returned a profit, and that he therefore made no misrepresentations when convincing Holmes to invest. The summary judgment of each of these claims is reversed and remanded.
When Does the Duty End
However, as to the breach of fiduciary duty claim, the summary judgment is affirmed. Holmes is attempting to impose an informal fiduciary duty on Newman, based on their previous relationship at TD Ameritrade. He claims that the former relationship caused him to rely on Newman for financial advice, and testified that he did no due diligence on SportsPicks.com, but simply trusted Newman completely. However, mere subjective trust does not transform an arm’s length relationship into a fiduciary relationship. Additionally, as Newman did not exercise discretion over Holmes’ TD Ameritrade account, his fiduciary duty there was limited to fulfilling the mechanical, ministerial duty of executing trades as directed by Holmes. Newman’s fiduciary duty ended once those trades were made in accordance with Holmes’ instructions, and it cannot form the basis for a continuing, informal fiduciary relationship.
(SLC Ref. No. 2017-31-10)
NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA), from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis.
Like what you see here?
Twice a week we present blog posts consisting of one write-up from each of our two flagship weekly online Alert services. Consider a subscription to these publications to receive the full array of coverage right on your desktop every week. Give it a try and sign up for a free trial to the Securities Arbitration Alert and the Securities Litigation Alert.