Read This Post and Bill 1.4 Hours To “Professional Development.”

Well it’s been an interesting week, and it suddenly got more interesting with this fascinating 11th Circuit opinion on fiduciary duty, motions to dismiss, and when consideration of an agreement referenced in a complaint converts a motion to dismiss into a motion for summary judgment.

The 11th affirmed an order of dismissal by Judge Ryskamp in a securities fraud case where the Judge relied on a brokerage agreement to find on a motion to dismiss that the brokerage could not, under any set of facts, owe any fiduciary duties to the plaintiff.

Here is the core holding from Judge Ryskamp’s order:

Finally, the Complaint fails to allege that Banc of America breached a fiduciary duty owed to SFM. Here, the parties’ Prime Brokerage Agreement states unequivocally that Banc of America was not “acting as a fiduciary,” and was not “advising [SFM], performing any analysis, or… offer[ing] any opinion, judgment or other type of information pertaining to the nature, value, potential or suitability of any particular invest[ment].” (Anello Decl., ¶ 11(b)). Banc of America thus owed SFM no fiduciary duties and cannot be sued for alleged failure to disclose. Although SFM alleges that Dr. Melgen believed Kim to be Banc of America’s agent, the language of the brokerage agreement clearly demonstrates that Banc of America owed SFM no fiduciary duty.

On appeal the 11th affirmed, basically saying if you reference a document in your complaint you better be ready to deal with it at the motion to dismiss stage.In addressing the general exception that permits consideration of extrinsic materials at the 12(b)(6) stage if they are central to the complaint and their authenticity not challenged, the 11th held:

Although the PB Agreement was not attached to the complaint, the complaint noted that the brokerage account was opened by “documents provided to John Kim and Won Lee by Banc of America Securities.” (Compl. ¶ 18). These documents were repeatedly described as “account opening documents.” (Id.) SFM does not deny that the PB Agreement is one of the account opening documents mentioned in the complaint. The Defendant argues that the agreement was the account opening document that established Banc of America Securities as a prime broker for SFM and absolved Banc of America Securities from any fiduciary duty as to the account. According to SFM, another document, the IA Agreement, established Banc of America Securities as its executing broker. Under SFM’s theory, Banc of America Securities’s role as an executing broker imposes upon it a fiduciary duty. However, there is no doubt that the PB Agreement determined the terms of the relationship between SFM and Banc of America Securities. The agreement set forth the “terms and conditions” on which Banc of America Securities will “open and maintain accounts for and otherwise transact business with the customer…. ” (Appellee’s Br., Ex. A at 1). Further, to the extent that the terms of the PB Agreement conflicted with another agreement, it stated that it controlled over any other agreements between Banc of America Securities and its customer. (Appellee’s Br., Ex. A ¶ 20). We have previously held that such relationship-forming contracts are central to a plaintiff’s claim. Maxcess, 433 F.3d at 1340 n.3. The district court did not err in considering the PB Agreement in ruling on the motion to dismiss.

I find this ruling very interesting, because it is at the outer edge of this doctrine in my opinion.As a jurisprudential matter, and in light of the important policy reasons behind Rule 56, would it have been better for the district judge to convert the motion to an SJ anyways, in order to allow the parties to fully address the impact and interaction of the two competing agreements?

Wow, how’d I get so wonky (and on a Friday no less!)