Court Opinion

ID: 213792
Source: CourtListenerOpinion
Date Created: 2011-04-01 17:19:29+00
Date Added: 2024-06-11T17:28:17.137194
License: Public Domain

Case: 10-40313 Document: 00511432117 Page: 1 Date Filed: 04/01/2011

             IN THE UNITED STATES COURT OF APPEALS
                      FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                      Fifth Circuit

                                                   FILED
                                                                                April 1, 2011

                                          No. 10-40313                         Lyle W. Cayce
                                                                                    Clerk

TERRY L. HILL, STEVE GARVIN

                                              Plaintiffs - Appellees

INSTITUTIONAL SECURITIES CORPORATION,

                                              Plaintiff - Appellee Cross-Appellant

v.

THOMAS W. ANDERSON; RS GROUP TRUST COMPANY; A.J. WALKER;
RETIREMENT SYSTEM DISTRIBUTORS, INC.,

                                              Defendants - Appellants Cross-Appellees

                      Appeals from the United States District Court
                            for the Eastern District of Texas
                                 USDC No. 4:07-CV-315

Before JONES, Chief Judge, and BENAVIDES, Circuit Judge and AYCOCK,
District Judge.* **
EDITH H. JONES, Chief Judge:
       This is an appeal from a judgment for tortious interference with business
relations and conversion governed by Texas law. Following a jury verdict,

       *
            District Judge, Northern District of Mississippi, sitting by designation.
       **
         Pursuant to 5TH CIR . R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR .
R. 47.5.4.
    Case: 10-40313 Document: 00511432117 Page: 2 Date Filed: 04/01/2011

                                  No. 10-40313

Appellants filed a motion for judgment as a matter of law, which the district
court granted in part and denied in part. On appeal, each side challenges the
portion of that ruling which it considers unfavorable. We affirm in part, reverse
in part, and render, holding that appellees did not prove a legally sustainable
case for tortious interference, defamation/negligence, or conversion.
                                        I.
      This case concerns 403(b) retirement savings accounts maintained for
employees of Texas state universities and the various entities that administer
them. Three roles are relevant. First, an account custodian registers with
employers—in this case, public universities—to make withdrawals from
employees’ paychecks. Employees cannot contribute to their 403(b) plan except
through a registered account custodian. Second, the account custodian uses a
broker-dealer to purchase securities. An investor might also maintain a direct
relationship with the broker-dealer. Third, the investing employee may choose
to enlist the services of a financial advisor to aid in selecting investments.
      Plaintiff-Appellee ISC is a broker-dealer. For years, ISC worked with an
account custodian called QUADS, which was the registered custodian for 403(b)
accounts at a number of Texas universities. Beginning in 2005, QUADS faced
financial difficulty. In 2006, QUADS terminated its relationship with ISC, and
Terry Hill, ISC’s president, relinquished his position on the QUADS board of
directors. The following year, the Maine Bureau of Financial Institutions forced
QUADS into conservatorship. The conservator hired RS Group to take over the
business of QUADS. In its new capacity, RS Group became an account custodian
at each university with which QUADS was previously registered. RS Group did
not, however, establish a relationship with ISC or Steve Garvin, who was a
financial advisor working with ISC and who had maintained a relationship with
QUADS prior to the dissolution of its relationship with ISC.

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      Concurrently with QUADS’s slide into conservatorship, ISC had been
trying to attract the clients it previously shared with QUADS. ISC sent letters
to these clients asking them to select a new account custodian, Mid-Atlantic
Trust Company, in order to continue working with ISC and its affiliated advisors
like Garvin.   The parties have stipulated that a majority of ISC’s clients
requested transfer to another custodian in order to continue working with ISC.
Although the record is unclear as to how many transfers QUADS completed
before entering conservatorship, a number of them remained outstanding when
RS Group took over as account custodian.          As part of its agreement with
QUADS, RS Group assumed responsibility for transferring accounts to other
custodians if the clients so desired.
      At trial, Appellees argued that RS Group impeded the transfer process in
order to buy itself time to persuade investors not to switch custodians. To that
end, RS Group sent a letter to its clients on May16, 2007, including those who
had requested transfers, explaining that it was now serving as the account
custodian for former QUADS clients. Additionally, representatives of RS Group
and its affiliated broker-dealer, RSDI, contacted the universities’ human
resources offices to promote their services. Hill argued at trial that in the course
of these meetings, RS Group’s employees defamed him. The jury partially
accepted this argument.      It found that Thomas Anderson (an RS Group
employee) defamed Hill, but it awarded no actual damages for the defamation.
The jury exonerated the other RS Group employee alleged to have defamed Hill.
None of the jury interrogatories asked about defamation of ISC.
      Dissatisfied with the pace of the transfer process and eager to retain as
many former clients as possible, ISC, Hill and Garvin filed suit alleging tortious
interference with their business relationships, defamation, and conversion of
fees. The jury returned a verdict favorable to the plaintiffs on virtually all
counts. In response, RS Group moved for judgment as a matter of law, which the

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district court granted in part and denied in part.        It reversed the jury’s
$2,500,000 award on the question whether RS Group negligently harmed the
plaintiffs and eliminated $400,000 of exemplary damages related to Hill’s
defamation claim.    The district court left undisturbed the jury’s award for
intentional interference with existing business relationships and conversion.
Hill does not challenge the conclusion that he was not entitled to exemplary
damages in the absence of actual damages. Otherwise, the parties appeal each
of the district court’s decisions on the motion for judgment as a matter of law.
                                       II.
      “We review de novo the district court’s denial of a motion for judgment as
a matter of law, applying the same standard as the district court.” Travelers
Cas. & Sur. Co. of Am. v. Ernst & Young LLP, 542 F.3d 475, 481 (5th Cir. 2008).
Where that standard concerns the sufficiency of the evidence supporting a jury
verdict, “[a] court should grant a post-judgment motion for judgment as a matter
of law only when the facts and inferences point so strongly in favor of the movant
that a rational jury could not reach a contrary verdict.” Allstate Ins. Co. v.
Receivable Fin. Co., 501 F.3d 398, 405 (5th Cir. 2007) (internal quotations
omitted). Where the appeal challenges the district court’s interpretation of state
law, review is de novo. Baily v. Shell W. E&P, Inc., 609 F.3d 710, 725 (5th Cir.
2010).
                                       III.
                  A. ISC’s Tortious Interference Claims
      Following the jury verdict in favor of ISC, the district court denied RS
Group’s motion for judgment as a matter of law and entered judgment in the
amount of $434,000.     According to the joint pre-trial order, ISC’s tortious
interference claim rests on RS Group’s intentional delay in transferring accounts
to Mid-Atlantic and other custodians who would continue to do business with

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ISC and Garvin. Neither Appellee predicates its tortious interference claim on
anything other than RS Group’s handling of account transfers.
       Under Texas law, “to recover for tortious interference with a prospective
business relation[,] a plaintiff must prove that the defendant’s conduct was
independently tortious or wrongful.” Wal-Mart Stores, Inc. v. Sturges, 52 S.W.3d
711, 726 (Tex. 2001). This requirement does not oblige the plaintiff to show that
the defendant is guilty of a tort, but rather that “the defendant’s conduct would
be actionable under a recognized tort.” Id. To borrow an example from Sturges,
a defendant is guilty of tortious interference if he makes a materially false
statement about the plaintiff to a third party with whom the plaintiff has a
business relationship. Id. The statement constitutes “tortious conduct” even if
other elements of fraud are absent (e.g., the third party’s reliance). Id. Unless
the defendant engages in conduct capable of giving rise to a tort, an action for
interference with business relationships will not lie.1
       Appellees present no argument on the existence of independently tortious
conduct. In neither of their briefs do they cite Sturges or confront the principle
it expounds. The only independently tortious conduct they identify is Anderson’s
defamation. While defamatory statements could support a claim for interference
with business relationships under some circumstances, they do not in this case.
Appellees introduced no evidence linking Anderson’s defamatory statements
with RS Group’s alleged delay in transferring accounts. Only the latter forms
the basis of ISC’s tortious interference claim against RS Group. Whatever harm
Anderson’s defamation of Terry Hill might have inflicted, it did not affect the
pace of transfers from RS Group to Mid-Atlantic.                   RS Group’s conduct in

       1
        The related tort of interference with a contract lacks the requirement of independently
tortious conduct. Coca-Cola Co. v. Harmar Bottling Co., 218 S.W.3d 671, 690 (Tex. 2006).
Here, both the pre-trial order and the jury interrogatories refer to interference with a business
relationship. ISC must therefore clear the higher threshold.

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                                 No. 10-40313

transferring accounts was not wrongful independent of its interference with
Appellees’ business relationships.    Absent any other allegations of tortious
conduct, ISC failed to present evidence on this element of its interference claim.
The omission is fatal, and the district court erred in denying RS Group’s motion
for judgment as a matter of law on this point.
      A separate basis for reversing the judgement concerns ISC’s inadequate
showing of causation and damages. Texas law requires the plaintiff in an
intentional interference case to establish that the defendant’s “intentional
interference was the proximate cause of damage . . . .” Weakly v. East, 900
S.W.3d 755, 759 (Tex. App. 1995). If a plaintiff succeeds in establishing
causation, he must also show with reasonable certainty the amount of harm
caused: “There can be no recovery for damages that are speculative or
conjectural.” U.S. Bank Nat. Ass’n v. Stanley, 297 S.W.3d 815, 822 (Tex. App.
2009). ISC failed to meet these standards.
      In approving the jury’s finding, the district court observed that “there was
some evidence—which was largely not objected to on admission—to support the
jury’s verdict, and the court will not disturb these findings.” Although Appellees
presented some evidence to support their theory of causation and harm, the
evidence was conclusory and failed to establish a budgetary baseline from which
a reasonable jury could assess damages. Indeed, the jury’s award of $434,000
corresponds to testimony from ISC’s executive vice president and chief
compliance officer, Scott Hayes, who reached his estimate by comparing the
“normal amount of time it should take . . . versus what we actually encountered.”
He did not, however, introduce evidence demonstrating the “normal” cost of
administering account transfers. On cross-examination, Hayes admitted that
he did not compare expenses between the RS Group transfer process and those
of a similar-sized process in 2006.

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      Concluding that RS Group’s actions caused any additional expenditures
requires, at a minimum, evidence of (1) the expenses in this case and (2) an
estimate of what would be reasonable under the circumstances.           Without
demonstrating that its costs exceeded the reasonable amount for conducting a
transfer of this scale, ISC failed to meet its burden. For the same reasons, the
$434,000 award is speculative and therefore improper under Texas law.
                 B. Garvin’s Tortious Interference Claims
      According to the pre-trial order, Garvin’s claims against RS Group parallel
those of ISC.    Because he makes the same allegation of interference with
business relationships, Garvin stumbles on the same failure to identify
independently tortious conduct. His problems in establishing causation are
equally fatal.
      The divorce between QUADS and ISC caused most—if not all—of Garvin’s
damages, but it predated RS Group’s involvement in the case by approximately
one year. Garvin admitted that he lost the vast majority of his customers when
QUADS terminated its relationship with ISC. In response to questioning by the
district court, Garvin stated that without a relationship with QUADS in 2006
and 2007, “I would have to look for another approved vendor . . . .” RS Group
could not have caused whatever damages Garvin suffered as a result of QUADS
and ISC parting ways.
      This oversight regarding causation also infects the jury’s calculation of
damages. Garvin’s testimony concerning damages stated only that his fees at
the University of North Texas “varied year to year, but I would probably say
about 150,000 from UNT.” An estimate of total fees is insufficient, however,
when RS Group caused much less than all of Garvin’s loss. At the very least, the
$150,000 figure would seem to impose a cap on the amount he could recover.
Instead, the jury awarded $260,000. In his briefing on appeal, Garvin defends
his award as the sum of his lost fees and “approximately $45,000 - $52,500 per

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year . . . as a result of the conduct of Anderson.” This argument is no help,
however, because the jury found that Anderson defamed only Terry Hill.
Moreover, as explained above, the jury saw no evidence linking defamatory
statements about Hill with delay in transferring accounts.
       RS Group deserves judgment as a matter of law on Garvin’s tortious
interference claim for two reasons. First, the missing element of independently
tortious conduct discussed above applies here as well. Second, Garvin’s business
relationships had already ended when Appellants delayed transferring accounts
to other custodians. Either of these reasons supports the conclusion that it was
error for the district court to enter judgment in Garvin’s favor on tortious
interference.
                                    C. Defamation
       In coss-appeal, ISC argues that the district court erred in granting
Appellants’ motion for judgment as a matter of law on its defamation claim.
Although allegations of defamation of ISC appear in the pre-trial order, they did
not reach the jury. No jury interrogatory asked whether anyone defamed ISC.
Appellees maintain, however, that defamation was the unnamed cause of action
behind the negligence interrogatory on which the jury awarded ISC $2,500,000.2
We are skeptical that negligence ever referred to defamation, but even assuming
it did, the jury’s findings did not establish all the elements of defamation.
       The connection between negligence and defamation is tenuous and seems
unique to this appeal. In the pre-trial order, ISC invoked negligence as a theory

       2
         The jury interrogatory that ISC would construe as raising the issue of defamation
stated: “Do you find by a preponderance of the evidence that the negligence, if any, of those
named below proximately caused harm to INSTITUTIONAL SECURITIES CORPORATION?”
In contrast, the district court included conventional defamation interrogatories regarding
Terry Hill. These jury questions began by identifying a set of statements and defining
defamation. They then expressly asked about the offense: “Do you find that the statements
listed in Question G were defamatory concerning Terry Hill?” The jury faced no similar
questions or instructions about ISC.

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of liability unconnected to defamation. The order stated that RS Group had “a
common law duty to accomplish [account] transfers, as requested by the account
owners . . . . The conduct of RS Group, as described herein, was a breach of that
duty of care and caused material financial loss to ISC because of the unnecessary
amount of work caused by RS Group for which ISC now sues.” In closing
arguments, counsel for Appellees again connected negligence with the delay in
transferring accounts: “[RS Group] made these transfers come to a screeching
halt. As a result of that, it cost ISC a lot of money and a lot of trouble with
respect to their customers. And that’s nothing but negligence.”3 Finally, the
district court understood ISC’s negligence argument to relate to the process of
transferring accounts. In granting RS Group judgment as a matter of law, the
court spoke exclusively in terms of the transfer process. It explained that “any
duty of care, if such existed, ran to the account holders, not Plaintiffs.” The
court added several alternative grounds for its holding (e.g., economic loss rule,
speculative nature of damages), each of which confirms that the district court
understood negligence with reference to account transfers rather than
defamation. In light of numerous discussions of negligence in connection with
account transfers, it is hard to credit counsel’s claim at oral argument that “[t]he
jury knew exactly what was going on. They knew that . . . we were arguing the
defamation on behalf of ISC.          They understood that.         There was no other
negligence in the record.” (emphasis added).
       As a substantive matter, the district court correctly held that any duty
that RS Group might have breached ran exclusively to the account owners.
Despite the assertion that “ISC was requested by a great majority of the account

       3
         Defense counsel likewise addressed negligence only in the context of delayed
transfers: “Let’s talk about the negligence question, because Mr. Springer specifically
addressed that. . . . You’ve heard no testimony of what would be expected coming out of other
conservatorships with trust companies, what -- what that process should be, what the delay
should be.”

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owners to act for . . . the account owner in accomplishing the transfers,” ISC has
no right to press negligence claims on their behalf.
      Even assuming the negligence jury question was a camouflaged component
of ISC’s defamation claim, the jury’s affirmative response is insufficient to
establish RS Group’s culpability.       Texas law allows a cause of action for
defamation where the defendant: (1) published a statement, (2) that was
defamatory as to the plaintiff, (3) “while acting with either actual malice, if the
plaintiff was a public official or public figure, or negligence, if the plaintiff was
a private individual, regarding the truth of the statement.” WFAA-TV, Inc. v.
McLemore, 978 S.W.2d 568, 571 (Tex. 1998). RS Group does not dispute that
ISC is a private entity or the resulting negligence threshold for fault. Under
these circumstances, negligence appears in the formula for defamation, but so
do other elements. The interrogatory to which the jury responded affirmatively
says nothing about (1) the statement in question, (2) publication, (3) whether the
statement was defamatory, and (4) the connection between negligence and truth
or falsity. ISC cannot import the missing elements from the jury’s conclusions
in Questions G through L, as those findings related to Terry Hill alone, not his
company.    Finally, as the district court observed, “there was absolutely no
evidence that anyone in this case had been damaged by the amount rendered by
the jury.” Our review of the record confirms that the jury’s award of $2,500,000
was speculative.
      Only on appeal has the jury’s finding of negligence on the part of RS Group
been asserted to have a connection to defamation. Conventionally, defamation
would have been its own question for the jury. If, as ISC’s counsel maintained
at oral argument, the district court refused to include such an instruction, then
ISC had the responsibility to object and, if necessary, appeal the denial of their
requested jury instructions.     F ED. R. C IV. P. 51.   Instead, ISC attempts to
shoehorn defamation into general negligence. But defamation is larger than

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negligence. It includes other elements, which the jury did not find. Moreover,
no rational jury could connect (unidentified) statements by RS Group with
$2,500,000 in damages to ISC. For these reasons, RS Group was entitled to
judgment as a matter of law on negligence.
                               D. Conversion
      The district court entered judgment in favor of ISC on its conversion cause
of action.   Although the contours of conversion are difficult to define, the
payments in question are most akin to commissions and therefore ineligible for
conversion under Texas law.
      Conversion under Texas law requires that the plaintiff owned or had a
legal right to possess some property, over which the defendant unlawfully
assumed control, to the exclusion of the plaintiff’s rights. J.P. Morgan Chase
Bank, N.A. v. Tex. Contract Carpet, Inc., 302 S.W.3d 515, 536 (Tex. App. 2009)
(listing elements).   Not all property can support an action for conversion,
however. “Money is subject to conversion only when it is a specific chattel, and
not where an indebtedness may be discharged by the payment of money
generally.” Newsome v. Charter Bank Colonial, 940 S.W.2d 157, 161 (Tex. App.
1996). Examples of money as a specific chattel include funds “delivered for safe
keeping” or money “intended to be kept segregated.” Id. One class of money
payments that are not a specific chattel are commissions earned by an employee.
Wheat v. Am. Title Ins. Co., 751 S.W.2d 943, 944 (Tex. App. 1988); see generally
15 Tex. Jur. 3d Conversion § 21 (2011).
      In the present case, ISC succeeded in its claim that RS Group converted
so-called “12b-1 fees.” Those fees, paid by investment companies, reward broker-
dealers who steer clients toward the companies’ funds. Because the 12b-1 fees
operate as a reward for generating business, they are most akin to commissions,
which Wheat concluded are not a specific chattel. The district court did not
analyze the specific chattel requirement and appears unconcerned with the

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chattel-versus-debt taxonomy: “No matter what label is attached to them, the
commissions belonged to Plaintiffs . . . .” Appellees do not contest their debt, but
merely its characterization as conversion.      Amy Morneweck, an RS Group
employee familiar with 12b-1 fee payments, responded affirmatively to the
following question: “RSDI ended up with a substantial amount of broker-dealer
fees that should -- should have been paid to Mr. Hill . . . . Is that what you’re
saying?” Even if RS Group owes ISC the amounts it received in 12b-1 fees, it is
not guilty of conversion.
      Texas law provides a cause of action for conversion only where the
defendant takes a specific chattel. Because general debts are not claims to
specific funds, Appellees have the better argument on conversion. The withheld
12b-1 fees should be treated as a general debt.
                                        IV.
      Several nuances of Texas law resolve the issues in this case.           First,
tortious interference with business relationships requires a showing of
independently wrongful conduct. We therefore REVERSE the district court’s
denial of judgment as a matter of law on both ISC’s and Hill’s claims of tortious
interference with business relationships. We likewise REVERSE the entry of
judgment in favor of ISC on the issue of conversion, holding that 12b-1 fees are
not specific chattels and thus ineligible for conversion under Texas law. Finally,
we AFFIRM the district court’s refusal to enter judgment on the jury’s
negligence verdict. In sum, Terry Hill, Steve Garvin and ISC take nothing from
the defendants.
                         Affirmed in part, reversed in part, and rendered.

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