United States District Court, D. New Jersey
October 6, 2005.
PINE BELT ENTERPRISES, INC., Plaintiff,
SC&E ADMINISTRATIVE SERVICES, INC., AMERICAN PRIME ASSET, INC., PRUDENTIAL SECURITIES, INC., Defendants.
The opinion of the court was delivered by: STANLEY CHESLER, District Judge
This matter comes before the Court on a Motion for Summary
Judgment (docket item #27) by Defendant, Prudential Securities,
Inc., with respect to Plaintiff's claims of (1) Breach of
Fiduciary Duty; (2) Breach of Implied Covenant of Good Faith and
Fair Dealing; (3) Breach of Trust Agreement; (4)
Misrepresentation; (5) Negligence; (6) Conversion; and (7)
Detrimental Reliance. Having considered the parties' written and
oral arguments, and for the reasons set forth below, the Court
grants Defendant's Motion for Summary Judgment.
I. FACTUAL BACKGROUND
Plaintiff Pine Belt Enterprises, Inc. ("Pine Belt") is an
automobile dealership and service center located in Lakewood, NJ.
On or about October 6, 2000, Pine Belt entered into a Smart
Choice Dealer Agreement with SC&E ("SC&E Agreement") authorizing
Pine Belt to sell extended warranty or service contracts to its customers. (Compl.
¶ 10.) The Smart Choice program was offered by National Warranty
Insurance Company ("National Warranty") and was marketed by SC&E.
The SC&E Agreement required SC&E to secure insurance
indemnification as well as to operate, coordinate and administer
the "Service Agreement Program" on Pine Belt's behalf. (Compl. ¶¶
11-12.) Under the program, Pine Belt sold Vehicle Service
Contracts ("VSC") that provided extended warranty or service
contracts to its customers. (Compl. ¶ 10.)
In addition to the SC&E Agreement, Pine Belt also entered into
a Smart Choice Profit Participation Addendum ("Addendum") with
American Prime Asset ("American Prime") and National Warranty
Insurance Company ("National Warranty"). (Compl. ¶ 14.) The
Addendum obligated American Prime to establish an Insurance
Premium Account with Prudential and to appoint an authorized
representative of National Warranty as a designated trustee of
the account. (Compl. ¶ 15.) The Addendum further provided that
upon the submission and payment of 100 VSCs by Pine Belt, an
authorized representative of Pine Belt would be named a
co-trustee on the account held with Prudential. (Compl. ¶ 16.)
Prudential was not a signatory to the Addendum. (Def.'s Br. 4.)
Pursuant to the Addendum, on January 22, 2001, American Prime
established an account with Prudential titled "American Prime
Assets/Escrow Agent FBO PEI Insurance/Escrow Account"
("Account"). (Def's. Stat. of Undisp. Mat. Facts ¶ 8.) Under the
Smart Choice program, Pine Belt would remit the proceeds of VSC
sales to National Warranty, and National Warranty would subtract
certain fees and expenses and remit the balance to Prudential.
(Cohen Dep. 19:17-20:13, July 21, 2004.) A portion of the
purchase price from each VSC sold by Pine Belt was deposited into
the Account to satisfy authorized claims submitted under the
plan. (Compl. ¶ 17.)
The documents opening the Account were signed only by John
Sauers of American Prime. (Decl. of Cohen, ¶ 3.) Among the
documents was a Fiduciary Certification of Investment Powers
("Fiduciary Certification") which listed four fiduciaries: Donald
G. Erway, R. Steven Miller, and Randal G. Erway of National
Warranty; and John Sauers of American Prime. (Decl. of Cohen Ex.
A; see also Pl. Stat. of Undisp. Mat. Facts in Opp'n 8 ¶ 4.)
Pine Belt was not listed as an authorized fiduciary on the
Account.*fn1 (Decl. Of Cohen Ex. A.) The Fiduciary
Certification authorized Prudential to accept instructions,
including authorization to receive and disburse monies, from
named fiduciaries only. (Id.) At the request of American Prime,
Prudential sent copies of the monthly statements for the Account
to both Donald Erway of National Warranty, and David Sicket of
Pine Belt. (Decl. of Cohen ¶ 6.)
In November 2002, John Sauers of American Prime instructed
Prudential to create another account entitled "Consolidation
Number 2." (Cohen Dep. 46:1-3.) By letter dated November 11,
2002, Donald Erway of National Warranty instructed Prudential to
move the assets from the Account, as well as other American Prime
accounts, to the Consolidation Number 2 account. (Def.'s Stat. of
Undisp. Mat. Facts ¶ 18.) Another letter, sent by Donald Erway on
November 26, 2002, instructed Prudential to move all the assets
from the Consolidation Number 2 account to a National Warranty
account at Prudential. (Id. ¶ 20.) On December 30, 2002, Barry
Lake, the new president of National Warranty, instructed
Prudential to wire all the money from the National Warranty
account to a National Warranty account at Wells Fargo. (Cohen Dep. 57:5-19.)
National Warranty has not authorized payment for any claims
tendered pursuant to a VSC since November of 2002. (Compl. ¶ 23.)
In June of 2003, National Warranty was declared insolvent under
the laws of the Cayman Islands and filed bankruptcy in United
States Bankruptcy Court in Nebraska. (Pl. Stat. of Undis. Mat.
Facts in Opp'n ¶ 19.) Pine Belt claims to have incurred damages
as a result of claims that National Warranty would no longer
honor under the VSCs. (Compl. ¶¶ 24-25.)
Pine Belt filed its Complaint in this action on January 8, 2004
against SC&E, American Prime, and Prudential. On February 14,
2005, this Court entered an Order granting Pine Belt a default
judgment against both SC&E and American Prime. The remaining
causes of action against Prudential are for breach of fiduciary
duty, breach of the implied covenant of good faith and fair
dealing, breach of trust agreement, misrepresentation,
negligence, conversion, and detrimental reliance.
II. PRUDENTIAL'S MOTION FOR SUMMARY JUDGMENT
A. Standard of Review
Federal Rule of Civil Procedure 56(c) provides that summary
judgment should be granted "if pleadings, depositions, answers to
interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to any
material fact and that the moving party is entitled to a judgment
as a matter of law." Fed.R.Civ.P. 56(c); see also Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 248, (1986); Kreschollek v.
Southern Stevedoring Co., 223 F.3d 202, 204 (3d Cir. 2000). In
deciding a motion for summary judgment, a court must construe all
facts and inferences in the light most favorable to the nonmoving
party. See Boyle v. Allegheny Pennsylvania, 139 F.3d 386, 393 (3d Cir. 1998). The
moving party bears the burden of establishing that no genuine
issue of material fact remains. See Celotex Corp. v. Catrett,
477 U.S. 317, 322-23 (1986).
The Supreme Court has stated that in evaluating a defendant's
motion for summary judgment:
[t]he judge must ask . . . not whether . . . the
evidence unmistakably favors one side or the other
but whether a fair-minded jury could return a verdict
for the plaintiff on the evidence presented. The mere
existence of a scintilla of evidence in support of
the plaintiff's position will be insufficient; there
must be evidence on which the jury could reasonably
find for the plaintiff. The judge's inquiry,
therefore, unavoidably asks whether reasonable jurors
could find by a preponderance of evidence that the
plaintiff is entitled to a verdict. . . .
Anderson, 477 U.S. at 252. A fact is "material" only if it will
affect the outcome of a lawsuit under the applicable law, and a
dispute over a material fact is "genuine" if the evidence is such
that a reasonable fact finder could return a verdict for the
nonmoving party. See id.
Once the moving party has properly supported its showing of no
triable issue of fact and of an entitlement to judgment as a
matter of law, the non-moving party "must do more than simply
show that there is some metaphysical doubt as to material facts."
Matsushita, 475 U.S. at 586; see also Anderson,
477 U.S. at 247-48. The non-moving party must "go beyond the pleadings and by
[its] own affidavits, or by the `depositions, answers to
interrogatories, and admissions on file,' designate `specific
facts showing that there is a genuine issue for trial.'" Celotex,
477 U.S. at 324; Big Apple BMW, Inc. v. BMW of N. Am., Inc.,
974 F.2d 1358, 1363 (3d Cir. 1992) ("to raise a genuine issue of
material fact . . . the [non-moving party] need not match, item
for item, each piece of evidence proffered by the movant," but
rather "must exceed the `mere scintilla' threshold"), cert.
denied, 507 U.S. 912 (1993). B. Breach of Fiduciary Duty
Count Three of the Complaint claims that Prudential owed Pine
Belt a fiduciary duty to ensure that all payments made from the
Account were duly authorized by Pine Belt as a co-trustee.
(Compl. ¶ 50.) Plaintiff claims this duty was breached by acts
and/or omissions of Prudential that resulted in the Account being
entirely depleted without notice to, or the authorization of,
Pine Belt. (Id. ¶ 51.)
Prudential contends it owed no fiduciary duty to Pine Belt as a
matter of law. Prudential argues they had no relationship with
Pine Belt and no representative of Pine Belt was an account
holder nor named fiduciary on the Account. (Def. Br. 7.) In
response, Pine Belt argues that Prudential's involvement with the
Account may have risen to a level creating a quasi-fiduciary
duty. (Pl. Br. 18.)
Under New Jersey law, a fiduciary relationship exists where one
party is "under a duty to act for or give advice for the benefit
of another on matters within the scope of their relationship."
In re Cendant Corp. Sec. Litig., 139 F. Supp. 2d 585, 609
(D.N.J. 2001). To succeed on a claim for breach of a fiduciary
duty a plaintiff must demonstrate that the relationship between
the parties presumes a fiduciary duty, or because of the
circumstances of the parties specific relationship, a fiduciary
relationship has arisen or can be implied. See Nicholas v.
Saul Stone & Co., LLC, 1998 WL 34111036 *20-21 (D.N.J. 1998).
Pine Belt relies on Kronfeld v. First Jersey Nat. Bank,
638 F. Supp. 1454 (D.N.J. 1986), arguing that a quasi-fiduciary duty
may have arisen due to Prudential's role in managing the Account.
(Pl. Br. 18.) In Kronfeld, the court relied heavily on a line
of cases holding that a stockbroker "may have a quasi-fiduciary
duty toward his customer, depending on the facts of the individual relationship." 638 F. Supp. at 1467. The court also
noted that a fiduciary duty may arise if the defendant-broker
serves in an advisory capacity or is under an obligation of trust
or confidence. Id.
This argument does not advance Pine Belt's claim because
American Prime, not Pine Belt, was the Account holder. Moreover,
Plaintiff has not produced evidence showing that Pine Belt
reposed trust or confidence in Prudential from which a
relationship of trust and confidence could be inferred. Pine Belt
was not named as a co-trustee on the Account despite the
Addendum. Prudential was not a party to the Addendum and there is
no evidence that it had knowledge of the existence of the
Addendum. The only communication between Prudential and Pine Belt
in reference to the Account was monthly statements sent by
Prudential at the behest of its client, American Prime.
Moreover, a broker will generally not owe a fiduciary duty to
its client when the account held is non-discretionary.*fn2
See McAdam v. Dean Witter Reynolds, Inc., 896 F.2d 750, 767
(3d Cir. 1990); Commodity Futures Trading Comm'n v. Heritage
Capital Advisory Servs., Ltd., 823 F.2d 171, 173 (7th Cir 1987).
American Prime's Account with Prudential was non-discretionary;
American Prime made all investment decisions. (Def.'s Stat. of
Undisp. Mat. Facts ¶ 8; Decl. of Cohen Ex. A.) Therefore, since
Prudential likely did not owe a fiduciary duty even to its
customer American Prime, it certainly owed no duty to Pine Belt.
Accordingly, summary judgment as to Count Three is granted. C. Breach of the Implied Covenant of Good Faith and Fair
Count Four of the Complaint claims that SC&E and American
Prime, through their acts and omissions in relation to the SC&E
Agreement, breached the covenant of good faith and fair dealing
they owed to Pine Belt. (Compl. ¶ 56.) Plaintiff appears to seek
a judgment and damages against Prudential for this
Absent evidence of a contract, there can be no breach of an
implied covenant of good faith. Fregara v. Jet Aviation Bus.
Jets, 764 F. Supp. 940, 954 (D.N.J. 1991). Here, Pine Belt has
introduced no evidence that it and Prudential were parties to any
contract. Indeed, Prudential was not a party to the SC&E
Agreement nor the Addendum and Pine Belt was not a signatory on
the Account and was not named as a trustee. In response,
Plaintiff argues they are a third-party beneficiary to the
contract between Prudential and American Prime. (Pl. Br. 14.)
Even drawing all reasonable inferences in Plaintiff's favor, Pine
Belt has failed to assert facts necessary to create an issue of
fact as to whether or not a contract existed between it and
Plaintiff's third-party beneficiary theory is similarly
deficient. Under New Jersey law, a third-party beneficiary may
sue upon a contract made for their benefit without privity of
contract. Houdaille Constr. Materials, Inc. V. Am. Tel. & Tel.
Co., 166 N.J. Super 172, 184-185 (Law Div. 1979). To qualify as
a third-party beneficiary a claimant must demonstrate that the
contract was made for its benefit "within the intent and
contemplation of the contracting parties." First Nat'l State
Bank of New Jersey v. Commonwealth Fed. Sav. & Loan Ass'n,
610 F.2d 164, 170 (3d Cir. 1980). The claimant must show something more than that
"the contracting parties acted against a backdrop of knowledge
that the plaintiff would derive benefit from the agreement . . .
[T]he benefit to plaintiff must have been, to some extent, a
motivating factor in the parties' decision to enter the
contract." Grand Street Artists v. General Elec. Co.,
19 F. Supp. 2d 242, 253 (D.N.J. 1998) (internal quotations omitted). A
third-party who merely stands to benefit from a contract is
nothing more than an incidental beneficiary who possesses no
contractual right to enforce the contract. Id.
The Court finds that Plaintiff was not an intended third-party
beneficiary to the American Prime contract with Prudential. The
evidence, viewed in a light most favorable to the Plaintiff,
shows only that Pine Belt may have derived some benefit from the
Account. No evidence in the record shows that Prudential entered
into the agreement with American Prime opening the Account
intending to provide a benefit to Pine Belt. The only evidence
offered by Plaintiff to suggest that Pine Belt was an intended
beneficiary to the agreement is the title of the Account. The
fact that Prudential may have known that Pine Belt existed is
insufficient to convert Pine Belt into an intended third-party
Plaintiff also points to the Addendum in support of its
third-party beneficiary theory. (Pl. Br. 13.) The Addendum,
however, was signed only by Pine Belt and American Prime, not by
Prudential. Indeed, Pine Belt would not need to be construed as a
third-party beneficiary to enforce the Addendum because they were
a signatory on the document. Thus, Plaintiff's third-party
beneficiary theory does not apply to the Addendum.
The Court therefore finds that no implied covenant of good
faith and fair dealing existed between Prudential and Pine Belt
and, therefore, summary judgment as to Count Four is granted. D. Breach of Trust Agreement
Count Five of the Complaint claims that Prudential breached a
Trust Agreement with Pine Belt. (Compl. ¶ 63.) Plaintiff argues
that Pine Belt was intended to serve as a co-trustee on the
Account opened by American Prime and the distribution of funds
from that account without Pine Belt's authorization was therefore
a breach of a Trust Agreement. (Id. ¶ 60-62.)
It is not clear what agreement Plaintiff is referring to as a
Trust Agreement. The allegations in Count Five suggest Plaintiff
is referring to either the SC&E Agreement or the Addendum.
Prudential was not a party to either agreement. Furthermore, the
undisputed facts show that Prudential did not have an obligation
to notify Pine Belt or to receive its authorization before
releasing funds in the Account. Prudential's obligation was to
follow the directions given to it by named fiduciaries on the
Account. No principal from Pine Belt was ever named, or added as
a fiduciary on the Account.
The Court finds that no Trust Agreement existed between
Prudential and Pine Belt. Accordingly, summary judgment as to
Count Five is granted.
Plaintiff claims in the Sixth Count of it's Complaint that
Prudential misrepresented that funds deposited into the Account
would be segregated from all other Program accounts and be used
exclusively for the payment of authorized claims submitted under
VSCs. (Compl. ¶ 65.) Plaintiff claims that as a result of these
misrepresentations, and the ultimate depletion of the Account for
reasons other than the payment of authorized claims, Plaintiff
has suffered, and will continue to suffer, damages. (Id. ¶¶
66-67.) The record before this Court does not contain any
representations by Prudential to Pine Belt regarding how the
Account would be administered. Further, the record contains no
evidence that Prudential promised anyone that the funds in the
Account would be segregated at all times or be used solely for
payment of claims. Rather, the Account fiduciaries had control of
the use and transfer of funds.
The undisputed facts show that Prudential made no
misrepresentations to Pine belt. Accordingly, Plaintiff's
misrepresentation claim is without merit and must fail. Summary
judgment as to Count Six is granted.
Count Eight of the Complaint claims that Prudential owed a duty
to Pine Belt to ensure that its actions with respect to the
Account were in accordance with reasonably accepted standards of
an entity holding funds under trust. (Compl. ¶ 75.) Plaintiff
claims that Prudential breached this duty through negligent acts
and omissions in the administration and maintenance of the
Account. (Id. ¶ 76.)
Before a party may be held liable for breach of an obligation,
"it must first be established that the party in fact owed a duty
to act in a certain manner." Riggs v. Schappell,
939 F. Supp. 321, 329 (D.N.J. 1996). There is no evidence to support a claim
that Prudential had any duty to Pine Belt. Further, banking
institutions generally do not owe any duty to non-customers
absent a special relationship. See City Check Cashing, Inc. v.
Mfr. Hanover Trust Co., 166 N.J. 49, 60 (2001). The undisputed
facts show that Prudential's role was limited to opening and
maintaining accounts for its client American Prime. Any duty
owned by Prudential were owed to American Prime and the record
demonstrates that Prudential fulfilled them. The Court, therefore, finds that Prudential did not owe a duty
to Pine Belt with respect to the Account. Accordingly, summary
judgment as to Count Eight is granted.
Count Nine of the Complaint alleges that Prudential converted
Pine Belt's funds for their own use and benefit without the
authorization of Pine Belt. (Compl. ¶ 80.)
To succeed on a claim for conversion, a plaintiff must show
that he was "deprived of his property by the act of another
assuming an unauthorized dominion and control over it." Erit v.
Judge, Inc., 961 F. Supp. 774, 781 (D.N.J. 1997). Plaintiff has
introduced no evidence to show that Prudential's control over the
Account was unauthorized. To the contrary, the undisputed facts
show that Prudential transferred money from the Account as
directed by National Warranty, an authorized fiduciary. The
Fiduciary Certification authorizes Prudential to accept orders
and instructions relative to the Account from any of the named
fiduciaries. In fact, the Fiduciary Certification states that any
document executed by a named fiduciary on the Account "shall be
conclusive evidence that the fiduciary is authorized to enter
into the transactions contemplated." Prudential was fully
authorized to comply with the instructions of Donald Erway, a
Additionally, Prudential argues that New Jersey law provides a
defense against Plaintiff's claim of conversion. The relevant
Uniform Commercial Code ("UCC") provision provides that:
[a] securities intermediary that has transferred a
financial asset pursuant to an effective entitlement
order, or a broker or other agent or bailee that has
dealt with a financial asset at the direction of its
customer or principal, is not liable to a person
having an adverse claim to the financial asset. . . .
N.J. Stat. Ann. § 12A:8-115 (West 2005). Under § 8-102(a)(14)(b),
Prudential qualifies as a securities intermediary because it maintained a securities
account for American Prime and was acting in that capacity.
American Prime qualifies as an entitlement holder since it was
identified in Prudential's records as having a security
entitlement against the securities intermediary. Id.. §
8-102(a)(7). Further, Prudential transferred the funds in the
Account pursuant to an effective entitlement order; defined by
statute as notification directing transfer or redemption of a
financial asset from an entitlement holder. Id. § 8-102(a)(8).
In response to Prudential's statutory defense, Plaintiff
alleges that Prudential acted in collusion with American Prime
thereby making § 8-115 inapplicable. Pursuant to § 8-115(2), a
securities intermediary who "acted in collusion with the
wrongdoer in violating the rights of the adverse claimant," will
not be shielded from liability under the statute. Plaintiff
appears to base its allegations of collusion on the fact that
Prudential conducted no due diligence before transferring funds
from the Account. (Pl. Br. 10.) Plaintiff's bare allegations of
collusion are not sufficient to remove Prudential from the scope
of the statute.
Comment 5 to § 8-115 specifically addresses the collusion
exception and states "[i]t is not the role of the record-keeper
to police whether the transactions recorded are appropriate, so
mere awareness that the customer may be acting wrongfully does
not itself constitute collusion." N.J. Stat. Ann. § 12A:8-115
cmt. 5. Comment 5 makes clear that Prudential had no duty to
inquire into the reasons motivating instructions of an account
Similarly, comment 3 to section 8-115 explains that the section
applies even if the intermediary*fn4 has notice or knowledge
that another person asserts a claim to the securities. The comment advises that even where a firm may have direct knowledge
of an adverse claim to the securities "the firm should not be
placed in the position of having to make a legal judgment about
the validity of the claim at the risk of liability either to its
customer or the third party for guessing wrong." Id. cmt. 3. In
this case, Prudential's obligation was to follow the instructions
of a named fiduciary, Donald Erway of National Warranty, which it
Finally, Prudential argues that the transfer of funds from the
Account did not constitute a conversion of Plaintiff's assets
because the funds in the Account were not Pine Belt's property.
(Def. Br. 12.) In response, Plaintiff argues they held legal
title to the funds under principles of escrow. (Pl. Br. 15.)
Because this Court has already concluded that no conversion
occurred because Prudential's actions were authorized, it is not
necessary to make this determination.
The Court finds that Prudential's transfer of funds out of the
Account at the direction of an authorized fiduciary, as a matter
of law, did not constitute a conversion of Plaintiff's assets.
Accordingly, summary judgment as to Count Nine is granted.
H. Detrimental Reliance
Count Ten of the Complaint alleges a claim of detrimental
reliance. Plaintiff avers that Prudential made certain promises
and representations to Pine Belt regarding the Smart Choice
Warranty Program. (Compl. ¶ 82.) Plaintiff further alleges that
it relied to its detriment on Prudential's promises and
representations and suffered damages as a result. (Id. ¶¶
To recover on a claim for promissory estoppel a plaintiff must
show (1) that a clear and definite promise was made; (2) the
promise was made with the expectation that it would be relied upon; (3) the promise was in fact relied up by the promisee; and
(4) the promisee incurred a detriment because of said reliance.
Swider v. Ha-Lo Indus., Inc., 134 F. Supp. 2d 607 (D.N.J.
2001). Because Plaintiff has produced no evidence of any promise,
statement, or representation made by Prudential to Pine Belt in
reference to the Smart Choice Program summary judgment as to
Count Ten is granted.
For the foregoing reasons, the Court will grant Defendant
Prudential's motion for summary judgment. An appropriate form of
order will be filed herewith.
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