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The Fiduciary Litigator

Court Holds That Former Broker Did Not Owe Fiduciary Duties To Client Regarding An Investment

By David Fowler Johnson on August 18, 2017
Posted in Cases Decided, Texas Court of Appeals

In Holmes v. Newman, the plaintiff made an investment in a start-up internet company that provided betting tips to gamblers for a fee. No. 01-16-00311-CV, 2017 Tex. App. LEXIS 6177 (Tex. App.—Houston [1st Dist.] July 6, 2017, no pet. history). The defendant, Newman, worked at TD Ameritrade and the plaintiff, Holmes, was a customer. Newman left TD Ameritrade before the investment in the start-up company. After the investment did not turn out as hoped, the plaintiff sued the defendant for various claims, including breach of fiduciary duty. The defendant filed a no-evidence motion for summary judgment, which the trial court granted.

In the appellate court, the plaintiff did not contend that any formal relationship between him and the defendant gave rise to a fiduciary duty at the time of their agreement; rather, he argued that the prior broker/client relationship between the two gave rise to an informal fiduciary duty because that prior relationship of trust and confidence caused him to rely on the defendant for financial advice, including the decision to invest in the start-up business. The court of appeals analyzed the duties owed by brokers:

While a broker owes his investor-client a fiduciary duty, that duty varies in scope with the nature of their relationship. The nature of the account—whether nondiscretionary or discretionary—is one factor to be considered, as are the degree of trust placed in the broker and the intelligence and qualities of the consumer. A broker’s duty is usually restricted to executing the investor’s order when the investor controls a nondiscretionary account and retains the ability to make investment decisions. In a nondiscretionary account, the fiduciary relationship is one of principal/agent, and the agency relationship begins when the customer places the order and ends when the broker executes it; the broker’s duties in this type of account are only to fulfill the mechanical, ministerial requirements of the purchase or sale of the security or futures contracts on the market. As a general proposition, a broker’s duty in relation to a nondiscretionary account is complete, and his authority ceases, when the sale or purchase in made and the receipts therefrom accounted for. There is nothing in the record to show that Holmes’s account with TD Ameritrade was discretionary or that the broker/client relationship between the two gave rise to anything other than a principal/agent duty to execute the trades ordered. Thus, Holmes has not raised a fact question regarding whether Newman owed him any fiduciary duty other than fulfilling the trades authorized by Newman.

Because Newman’s fiduciary duty was satisfied once the trades were made in accordance with Holmes’s instructions, it is not the sort of preexisting relationship of trust and confidence that would give rise to a continuing, informal relationship imposing even broader fiduciary duties than Newman held under the prior relationship.

Id. The court of appeals affirmed the trial court’s judgment for the defendant.

Interesting Note: This case is consistent with existing Texas law. “In a non-discretionary account, the agency relationship begins when the customer places the order and ends when the broker executes it because the broker’s duties in this type of account, unlike those of an investment advisor or those of a manager of a discretionary account, are ‘only to fulfill the mechanical, ministerial requirements of the purchase or sale of the security or future[s] contracts on the market.’” Hand v. Dean Witter Reynolds Inc., 889 S.W.2d 483, 493 (Tex. App.—Houston [14th Dist.] 1994, writ denied). “As a general proposition, a broker’s duty in relation to a non-discretionary account is complete, and his authority ceases, when the sale or purchase is made and the receipts therefrom accounted for.”  Id. Indeed, Texas courts have generally held that self-directed accounts are not special deposits that require fiduciary duties between the holder and depositor. See Lee v. Gutierrez, 876 S.W.2d 382 (Tex. App.—Austin 1994, no writ); Sammons v. Elder, 940 S.W.2d 276 (Tex. App.—Waco 1997, no writ). In one case, the court held that a custodian had no right to approve a transaction, and that the customer had the legal right to transfer assets that were supposed to be in the account. See Colvin v. Alta Mesa Resources, 920 S.W.2d 688 (Tex. App.—Houston [14th Dist.] 2001, no pet.).

Notwithstanding, customers have sued financial institutions for doing as directed and not warning the customer of the impact of the directions. In Sterling Trust Co. v. Adderley, the Texas Supreme Court remanded an issue back to the trial court due to an improper jury instruction regarding breach of fiduciary duties. 168 S.W.3d 835 (Tex. 2004). The self-directed account custodian/defendant was originally found to be secondarily liable for aiding a fraudulent scheme that misappropriated money from investors. The jury instruction regarding a breach of fiduciary duty was held to be improper because it was overly broad and did not account for the contractual limitations on fiduciary duties, which the Court held were allowed under Texas law. See id. at 847.  The limiting provisions stated, “Sterling Trust has no responsibility to question any investment directions given by the individual regardless of the nature of the investment,” and that “Sterling Trust is in no way responsible for providing investment advice.”  Id.  Although the Texas Supreme Court did not analyze common-law duties owed by defendants, it did make clear that contractual limitations would impact duties owed between parties.

As opposed to a self-directed account, a discretionary account allows the custodian to make investment and other decisions for the customer. A discretionary account is one where the broker makes the investment decisions and manages the account. As one court described, “[a]n unsophisticated investor is necessarily entrusting his funds to one who is representing that he will place the funds in a suitable investment and manage the funds appropriately for the benefit of his investor/entrustor. The relationship goes well beyond a traditional arms’-length business transaction that provides ‘mutual benefit’ for both parties.” Western Reserve Life Assur. Co. v. Graben, 233 S.W.3d 360 (Tex. App.—Fort Worth 2007, no pet.) (affirmed breach of fiduciary duty claim against defendant).

Whereas a self-directed account custodian or broker can simply execute the trades directed by the customer without fear of liability, the same cannot be said of a discretionary account custodian. As one court stated, the custodian “acted as a financial advisor whom the Clients trusted to monitor the performance of their investments and recommend appropriate financial plans to them. Accordingly, the duty that Hutton owed the Clients went well beyond the ‘narrow’ duty of executing trade orders.” Western Reserve Life Assur. Co. v. Graben, 233 S.W.3d at 374.

The custodian of a discretionary account has to meet a higher duty of care.  See Anton v. Merrill Lynch, 36 S.W.3d 251, (Tex. App.—Austin 2001, pet. denied).  In Anton, the court described these duties as:

(1) manage the account in a manner directly comporting with the needs and objectives of the customer as stated in the authorization papers or as apparent from the customer’s investment and trading history; (2) keep informed regarding the changes in the market which affect his customer’s interest and act responsively to protect those interests; (3) keep his customer informed as to each completed transaction; and (4) explain forthrightly the practical impact and potential risks of the course of dealing in which the broker is engaged.

Id. at 257-58.

Tags: broker, broker's duties, discretionary account, investment advisor duties, self-directedaccount
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Photo of David Fowler Johnson David Fowler Johnson

[email protected]
817.420.8223

David maintains an active trial and appellate practice and has consistently worked on financial institution litigation matters throughout his career. David is the primary author of the The Fiduciary Litigator blog, which reports on legal cases and issues impacting the fiduciary…

[email protected]
817.420.8223

David maintains an active trial and appellate practice and has consistently worked on financial institution litigation matters throughout his career. David is the primary author of the The Fiduciary Litigator blog, which reports on legal cases and issues impacting the fiduciary field in Texas. Read More

David’s financial institution experience includes (but is not limited to): breach of contract, foreclosure litigation, lender liability, receivership and injunction remedies upon default, non-recourse and other real estate lending, class action, RICO actions, usury, various tort causes of action, breach of fiduciary duty claims, and preference and other related claims raised by receivers.

David also has experience in estate and trust disputes including will contests, mental competency issues, undue influence, trust modification/clarification, breach of fiduciary duty and related claims, and accountings. David’s recent trial experience includes:

  • Representing a bank in federal class action suit where trust beneficiaries challenged whether the bank was the authorized trustee of over 220 trusts;
  • Representing a bank in state court regarding claims that it mismanaged oil and gas assets;
  • Representing a bank who filed suit in probate court to modify three trusts to remove a charitable beneficiary that had substantially changed operations;
  • Represented an individual executor of an estate against claims raised by a beneficiary for breach of fiduciary duty and an accounting; and
  • Represented an individual trustee against claims raised by a beneficiary for breach of fiduciary duty, mental competence of the settlor, and undue influence.

David is one of twenty attorneys in the state (of the 84,000 licensed) that has the triple Board Certification in Civil Trial Law, Civil Appellate and Personal Injury Trial Law by the Texas Board of Legal Specialization.

Additionally, David is a member of the Civil Trial Law Commission of the Texas Board of Legal Specialization. This commission writes and grades the exam for new applicants for civil trial law certification.

David maintains an active appellate practice, which includes:

  • Appeals from final judgments after pre-trial orders such as summary judgments or after jury trials;
  • Interlocutory appeals dealing with temporary injunctions, arbitration, special appearances, sealing the record, and receiverships;
  • Original proceedings such as seeking and defending against mandamus relief; and
  • Seeking emergency relief staying trial court’s orders pending appeal or mandamus.

For example, David was the lead appellate lawyer in the Texas Supreme Court in In re Weekley Homes, LP, 295 S.W.3d 309 (Tex. 2009). The Court issued a ground-breaking opinion in favor of David’s client regarding the standards that a trial court should follow in ordering the production of computers in discovery.

David previously taught Appellate Advocacy at Texas Wesleyan University School of Law located in Fort Worth. David is licensed and has practiced in the U.S. Supreme Court; the Fifth, Seventh, and Eleventh Federal Circuits; the Federal District Courts for the Northern, Eastern, and Western Districts of Texas; the Texas Supreme Court and various Texas intermediate appellate courts. David also served as an adjunct professor at Baylor University Law School, where he taught products liability and portions of health law. He has authored many legal articles and spoken at numerous legal education courses on both trial and appellate issues. His articles have been cited as authority by the Texas Supreme Court (twice) and the Texas Courts of Appeals located in Waco, Texarkana, Beaumont, Tyler and Houston (Fourteenth District), and a federal district court in Pennsylvania. David’s articles also have been cited by McDonald and Carlson in their Texas Civil Practice treatise, William v. Dorsaneo in the Texas Litigation Guide, and various authors in the Baylor Law Review, St. Mary’s Law Journal, South Texas Law Review and Tennessee Law Review.

Representative Experience

  • Civil Litigation and Appellate Law
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