Bates v. Shearson Lehman

• Court: Court of Appeals for the First Circuit
• Decided: December 16, 1994
• Docket: 94-1300
• Status: Published

Opinion

USCA1 Opinion

UNITED STATES COURT OF APPEALS
                                FOR THE FIRST CIRCUIT
                                 ____________________

          No. 94-1300

                                DOROTHY BATES, THROUGH
                            HER GUARDIAN, BARBARA MURPHY,

                                Plaintiff - Appellant,

                                          v.

                           SHEARSON LEHMAN BROTHERS, INC.,

                                Defendant - Appellee.

                                 ____________________

                     APPEAL FROM THE UNITED STATES DISTRICT COURT

                           FOR THE DISTRICT OF RHODE ISLAND

                     [Hon. Francis J. Boyle, U.S. District Judge]
                                             ___________________

                                 ____________________

                                        Before

                               Torruella, Chief Judge,
                                          ___________

                           Campbell, Senior Circuit Judge,
                                     ____________________

                              and Stahl, Circuit Judge.
                                         _____________

                                _____________________

               Quentin Anthony, with  whom Sheffield & Harvey was  on brief
               _______________             __________________
          for appellant.
               David A.  Wollin, with whom  Paul V. Curcio,  Christopher C.
               ________________             ______________   ______________
          Whitney, and Adler Pollock &  Sheehan Incorporated were on  brief
          _______      _____________________________________
          for appellee.

____________________

                                  December 16, 1994
                                 ____________________



TORRUELLA,  Chief Judge.   Dorothy  Bates, through  her
                    TORRUELLA,  Chief Judge.
                                ___________

          guardian  Barbara Murphy  ("Bates"),  brought  an action  against

          Shearson Lehman Brothers, Inc.  ("Shearson").  Bates claimed that

          Shearson  was liable for the  acts of its  alleged agent, Carl P.

          Nykaza, a broker at  Shearson, who diverted approximately $70,000

          of  Bates'  funds,  for  his  own  personal  account.    A  trial

          commenced, and at the  conclusion of Bates' case,  Shearson moved

          for judgment  as a matter of  law.  The court  granted Shearson's

          motion,  finding  that Bates  had  failed  to present  sufficient

          evidence  to  support her  theory  that Shearson  should  be held

          liable  for  Nykaza's  actions   under  the  theory  of  apparent

          authority.  Bates now appeals.  Although Bates was the victim  of

          a tremendous inequity and we sympathize with her situation, we do

          not  believe  that  liability  can  be  attributed  to  Shearson.

          Therefore, for the following reasons, we affirm.  

                                    I.  BACKGROUND
                                    I.  BACKGROUND

                    In reviewing the  court's decision to grant  Shearson's

          motion for  judgment as a matter of law, we consider the evidence

          in  the light  most  favorable  to  Bates, the  nonmoving  party.

          Jordan-Milton Machinery, Inc.  v. F/V Teresa Marie,  II, 978 F.2d
          _____________________________     _____________________

          32, 34 (1st Cir. 1992).  

                    At  the time of trial,  Bates was an 82-year-old woman.

          In  1991,  Bates  entered  a nursing  home  in  Providence, Rhode

          Island.  Bates is mentally incompetent and unable to describe the

          events and transactions which form the basis of this lawsuit.  

                    Nykaza began  working in  the securities industry  as a

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broker for E.F.  Hutton in 1984.  E.F.  Hutton assigned Nykaza to

          Bates' account in 1985,  at which time Nykaza  met with Bates  at

          her home in Providence to discuss the status  of her accounts and

          to solicit money for investment.  

                    Nykaza left E.F. Hutton in  1988 and began working  for

          Thomson   McKinnon   Securities,   Inc.  ("Thomson").      Nykaza

          transferred Bates' account,  as well as  fifteen or twenty  other

          accounts, from  E.F. Hutton to  Thomson at  that time.   While at

          Thomson,  Nykaza continued  to  manage Bates'  account and  would

          visit her at her home two or three times a month.  

                    In the spring of 1989,  Nykaza closed Bates' account at

          Thomson.   Nykaza's employment with Thomson also ceased.  At this

          time, Nykaza  was  attempting  to secure  a  broker  position  at

          Shearson  in Westport, Connecticut.   Shearson hired  Nykaza as a

          broker  sometime in June or July, 1989.  Shearson policy required

          brokers to open  an account for a customer before  a broker could

          invest  any of that customer's money.   A branch manager then had

          to approve  all new  accounts.  Nykaza  transferred approximately

          twelve  accounts from Thomson to Shearson, but he never opened an

          account for Bates at Shearson.  

                    On  June 13, 1989, Nykaza went to Bates' home to obtain

          money.    Nykaza  prepared a  check  from  her  account at  Fleet

          National Bank  ("Fleet")  in the  amount of  $25,000, payable  to

          Rhode Island Hospital Trust National Bank ("Hospital Trust"), and

          had  Bates sign it.   Nykaza  then deposited  the check  into his

          personal account at Hospital Trust, without endorsement.

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On  August  3, 1989,  Nykaza  went to  Bates'  home and

          prepared  a  second check  from Bates'  account  at Fleet  in the

          amount of $20,000,  made it  payable to Hospital  Trust, and  had

          Bates sign the check.   Nykaza then deposited the  check into his

          personal account at Hospital Trust.

                    On January 9, 1990,  Nykaza again went to Bates'  home,

          prepared a third check from Bates' account at Fleet in the amount

          of $25,000, and  made it payable to Hospital Trust.   After Bates

          signed  the check, Nykaza deposited it in his personal account at

          Hospital Trust.

                    Nykaza's employment with Shearson ended on February 16,

          1990.   During  Nykaza's  employment  with Shearson,  no  one  at

          Shearson was aware  that Nykaza was  receiving money from  Bates.

          Nykaza  never deposited at  Shearson the  funds he  received from

          Bates.  Nykaza also  never told Bates, or otherwise  represented,

          that he was going to deposit the funds reflected by her checks at

          Shearson.  Nykaza used all the funds obtained from  Bates for his

          own personal benefit. 

                    After   leaving  Shearson,  Nykaza  began  working  for

          Dominick and  Dominick, Inc.  ("Dominick") as  a broker.   Nykaza

          continued  to prepare checks from Bates' account at Fleet for her

          signature and deposit  them into his personal account at Hospital

          Trust.  These checks, prepared  after he left Shearson,  totalled

          $95,000.

                    On  June 12, 1990, Nykaza set up an account at Dominick

          in  the  name  of "D.M.  Bates."    Nykaza  listed Bates'  social

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security  number, but all of the other information on the account

          was false.  Nykaza signed Bates' name to the new account form and

          all  other  required   documentation.     Nykaza  then   invested

          approximately $5,000  from money he had  previously obtained from

          Bates.  His stated purpose  in opening the account was to  try to

          make some money through trading in order to repay Bates.

                    After Bates discovered Nykaza's diversion of her funds,

          she brought this  lawsuit against Nykaza and Shearson  to recover

          the  $70,000  allegedly  lost  during  Nykaza's  employment  with

          Shearson.   Nykaza  subsequently allowed  judgment to  be entered

          against him in the sum of $70,000.  Bates then proceeded to trial

          with her suit against  Shearson, claiming that it was  liable for

          the acts of its  agent Nykaza.  After Bates  concluded presenting

          her  case at trial,  Shearson moved for  judgment as  a matter of

          law.  The court  granted its motion.  Bates then moved  for a new

          trial, and the court denied her motion.  Bates now appeals.   

                                    II.  ANALYSIS
                                    II.  ANALYSIS

                     A.  The Court's Judgment as a Matter of Law
                     A.  The Court's Judgment as a Matter of Law

                     In granting Shearson's motion for judgment as a matter

          of law,  the court  found that  Shearson's liability  hinged upon

          whether Nykaza acted as  an agent of Shearson.   After concluding

          that there was no  evidence that there was an actual  agency, the

          court determined that the issue  was whether Nykaza had  apparent

          authority from Shearson.  The court stated:  

                      That  essentially there are two prongs to
                      a determination  as to  whether or  not a
                      principal is  liable for the  acts of its
                      agents    or     employees    in    these

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circumstances, that is,  that there  must
                      be   some  kind  of manifestation  to the
                      third  party from the  principal that the
                      agent  or employee is acting in the scope
                      or in the course of employment or agency.
                      Certainly there must be some  basis which
                      one  might believe  that indeed  this was
                      so.   So that there are  two prongs here,
                      (1) a manifestation by the principal, and
                      (2)  a reliance  to  some  extent by  the
                      third  party dealing  with  the agent  or
                      employee.

                        I  must consider  the evidence  at this
                      point in the point of view most favorable
                      to the Plaintiff.   However, having  said
                      that  the  evidence  it seems  to  me  is
                      totally lacking of  any manifestation  by
                      Shearson Lehman to the  putative investor
                      that Mr. Mykaza [sic]  was acting as  its
                      agent  or  employee  in receiving  funds.
                      Furthermore, there is no evidence at all,
                      even from  the point of  view of  viewing
                      the  evidence  most   favorable  to   the
                      Plaintiff,  of  any basis,  reasonable or
                      otherwise,  for a  belief  that this  was
                      indeed what was happening.

                        The checks  were drawn to  Rhode Island
                      Hospital Trust Company.  We might have  a
                      different  situation  if  they  had  been
                      drawn to Shearson Lehman but any dealings
                      that were had  here were with Mr.  Mykaza
                      [sic]  and Hospital  Trust and  the third
                      party.    It  seems  to  me  given  those
                      circumstances I  have  no choice  but  to
                      grant   the     Defendant's   motion  for
                      judgment  as a  matter of  law and  it is
                      granted.

          Bates took exception to this ruling.   On appeal, she now  claims

          that the court  erred, and  that the evidence  was sufficient  to

          permit the  jury  to reasonably  conclude  that Nykaza  did  have

          "apparent authority" to act as an agent of Shearson.1
                              
          ____________________

          1    On appeal,  Bates does  not  challenge the  district court's
          ruling  that Nykaza lacked actual authority to act as an agent of
          Shearson in his dealings with Bates.

                                         -6-



As a  preliminary matter, we set  forth the appropriate

          standard of review.   Appellate review of a motion for a judgment

          as a  matter of law  is de novo.   Jordan-Milton Machinery,   978
                                  __ ____    _______________________

          F.2d at 34.  When a motion for a  judgment as a matter of law has

          been  granted,   we  review  the  evidence   and  the  inferences

          reasonably drawn  therefrom, in the  light most favorable  to the

          nonmoving party.   Id; Fashion House,  Inc. v. K  Mart Corp., 892
                             __  ____________________    _____________

          F.2d 1076,  1088 (1st Cir. 1989).   To affirm, we  must find that

          the  evidence led  to only  one reasonable  conclusion.   Jordan-
                                                                    _______

          Milton Machinery, 978 F.2d  at 34; Fashion House, Inc.,  892 F.2d
          ________________                   ___________________

          at 1088; see Commercial Assocs. v. Tilcon Gammino, Inc., 998 F.2d
                   ___ __________________    ____________________

          1092, 1099 (1st Cir. 1993).  In performing this analysis, we will

          not make credibility determinations or evaluate the weight of the

          evidence.    Jordan-Milton Machinery,  978  F.2d  at 34;  Fashion
                       _______________________                      _______

          House,  Inc., 892 F.2d at  1088.  "Nevertheless,  the evidence to
          ____________

          which the  nonmovant points  must comprise more  than fragmentary

          tendrils: a mere scintilla of evidence is not enough to forestall

          [judgment as a matter of law],  especially on a claim or issue as

          to which the  burden of  proof belongs to  the objecting  party."

          Fashion House, Inc., 892 F.2d at 1088 (citations omitted).       
          ___________________

Under  Rhode  Island  law,  agency may  be  based  upon

          apparent authority.2  Commercial Assocs., 998 F.2d at 1099.
                                __________________

                      "To establish the  apparent authority  of
                      an agent to do  a certain act, facts must
                              
          ____________________

          2   The parties both  agree that Rhode  Island law controls  this
          diversity action.

                                         -7-



be   shown   that   the   principal   has
                      manifestly     consented  to the exercise
                      of  such  authority   or  has   knowingly
                      permitted   the   agent  to   assume  the
                      exercise of such  authority; that a third
                      person knew  of the  fact and, acting  in
                      good faith had reason to believe  and did
                      actually believe that the agent possessed
                      such  authority;  and   that  the   third
                      person,  relying  on  such appearance  of
                      authority, has changed  his position  and
                      will be injured or suffer loss if the act
                      done or transaction executed by the agent
                      does not bind the principal."

          American Title Ins.  Co. v.  East West Financial  Corp., 16  F.3d
          ________________________     __________________________

          449, 454 (1st Cir.  1994) (quoting Calenda v. Allstate  Ins. Co.,
                                             _______    __________________

          518  A.2d  624,  628  (R.I.  1986))  (other  citations  omitted).

          Apparent authority  arises from the principal's  manifestation of

          such  authority  to the  party  with  whom  the agent  contracts.

          Commercial Assocs., 998 F.2d at 1099 (citing Menard & Co. Masonry
          __________________                           ____________________

          Bldg. Contractors  v. Marshall Bldg. Systems Inc.,  539 A.2d 523,
          _________________     ___________________________

          526 (R.I. 1988)).  The  focus is therefore on the conduct  of the

          principal, and  not on the  putative agent.   Commercial Assocs.,
                                                        __________________

          998 F.2d at 1099.   Additionally, a  third party's belief in  the

          agent's authority to  act on  behalf of the  principal must be  a

          reasonable one.   Id. (citing  Rodr gues v. Miriam  Hospital, 623
                            __           _________    ________________

          A.2d 456 (R.I. 1993)).

                    In the present case, there is simply no evidence of any

          representation or conduct by Shearson that would suggest to Bates

          that Nykaza had authority to  act for it.  When  Nykaza commenced

          working  at Shearson, Nykaza never opened up an account for Bates

          at  Shearson.  Thereafter, when  Nykaza would go  to Bates' home,

          and prepare checks for Bates to sign, he never had her issue them

                                         -8-



to Shearson.  Rather, the checks were made out to Hospital Trust.

          Nykaza  never  deposited  any  of  Bates'  funds  with  Shearson.

          Additionally,   Nykaza   never   expressly  told   or   otherwise

          represented to  Bates  that  her funds  would  be  invested  with

          Shearson.

                     Shearson did not give  Nykaza any authority to solicit

          money from  Bates in such a  fashion.  Shearson policy  in no way

          countenanced  Nykaza's  actions.   Rather,  its  policy  required

          brokers to  open a customer  account before investing  a client's

          money.   A Shearson  branch manager then  had to approve  any new

          account.   Furthermore, Shearson  required that all  money placed

          into an  account  for  investment  purposes be  made  payable  to

          Shearson.   Moreover,  Shearson had  no way  to know  of Nykaza's

          dealings with Bates -- Nykaza never opened an account at Shearson

          for Bates,  and all of  his dealings with  her took place  at her

          home. 

                    Even if Bates in  fact believed that Nykaza represented

          Shearson,  no  reasonable  jury  could  have  found  that  belief

          justifiable.  A  generous reading of  the evidence would  suggest

          that Bates gave Nykaza money to invest for her, and  while Nykaza

          was working at Shearson,  Bates learned, "at one point,"  that he

          was working there.  Based on this reading, Bates contends that by

          virtue of  Shearson hiring Nykaza to work as a broker for it, she

          assumed  that  the money  she gave  Nykaza  would be  invested at

          Shearson.   See Restatement  (Second) of Agency,    261.  A third
                      ___

          party's  belief in  an agent's  authority to act  on behalf  of a

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principal, however, must be  reasonable.  Commercial Assocs., 998
                                                    __________________

          F.2d  at 1099; see American Soc. of Mechanical Engineers, Inc. v.
                         ___ ___________________________________________

          Hydrolevel Corp.,  456 U.S.  556, 566 (1982)  (citing Restatement
          ________________

          (Second)  of Agency   261  and explaining that  under an apparent

          authority theory, liability can  be based upon the fact  that the

          agent's position facilitates the consummation of the fraud, where

          from the point of view of the third person, the transaction seems

          regular  on its face  and the agent  appears to be  acting in the

          ordinary  course of  the business  confided to  him).   Here, the

          reasonableness  of Bates'  contention is  undermined by  the fact

          that the alleged investments with Shearson did not appear regular

          on their face -- Nykaza never  told her that he was investing her

          money  at Shearson, Bates never filled out an application to open

          an account at Shearson, and  the checks she gave Nykaza were  not

          made out to Shearson.  See Veranda Beach Club Ltd. Partnership v.
                                 ___ ___________________________________

          Western Surety Co.,  936 F.2d  1364, 1378 (1st  Cir. 1991)  (when
          __________________

          applying   analogous   Massachusetts   law,   court   found  that

          plaintiff's knowledge  that employee  was officer of  company did

          not  create  a  reasonable  belief  that  employee  had  apparent

          authority to act for  employer).  There is simply  no evidentiary

          basis from which to reasonably conclude that Nykaza  had apparent

          authority to act  as an agent  of Shearson  in his dealings  with

          Bates.

                             B.  The Evidentiary Rulings
                             B.  The Evidentiary Rulings

                    Bates claims that the district court erred in excluding

          certain  testimony.   Before we  analyze  the substance  of these

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claims,  we  set  forth  the  standard  of  review  and   certain

          evidentiary principles.  The  admission and exclusion of evidence

          is  primarily committed to the discretion of the trial court, and

          we will not  disturb this  determination absent a  showing of  an

          abuse of  discretion.  Doty v.  Sewall, 908 F.2d 1053,  1058 (1st
                                 ____     ______

          Cir. 1990).   In general, "[a]ll relevant evidence is admissible"

          and "[e]vidence which is  not relevant is not admissible."   Fed.

          R.  Evid.  402.   A trial  court  has appreciable  flexibility in

          admitting or  excluding evidence  on relevancy grounds.   Veranda
                                                                    _______

          Beach  Club, 936 F.2d at 1373.   Evidence is "relevant" if it has
          ___________

          "any  tendency  to make  the  existence of  any fact  that  is of

          consequence  to the determination of the  action more probable or

          less probable than it  would be without the  evidence."  Fed.  R.

          Evid. 401. 

                      1.  The Proffered Testimony Regarding Justin Grace
                      1.  The Proffered Testimony Regarding Justin Grace

                    Bates  claims   that  the  court  erred   by  excluding

          testimony from Nykaza regarding funds he had received from Justin

          Grace.   To  support this  contention, Bates  argues that  Nykaza

          testified that the first check he  received from Bates was a loan

          in  anticipation of  his move  to Connecticut  and his  temporary

          unemployment.  To rebut the credibility of this  testimony, Bates

          offered to prove that one month prior to Nykaza's solicitation of

          Bates  for a loan,  Nykaza had deposited  into his own  account a

          check in the amount of $21,000 from another client, Justin Grace,

          and that these funds were still available to Nykaza on June 13th.

          Therefore, Bates argues that  because Nykaza did not need  a loan

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from Bates on June 13, 1983, he had other purposes for her check,

          such as investment.

                    The court excluded this testimony because it determined

          that the  evidence was irrelevant.   We do  not believe that  the

          court abused its discretion in so finding.   The central issue in

          this case was whether  or not Nykaza had apparent  authority from

          Shearson  in  his dealings  with Bates.    As we  have previously

          stated,  the focus in  determining whether an  agent has apparent

          authority  from  its  principal is  not  on  the  conduct of  the

          putative  agent,  but rather  on  the conduct  of  the principal.

          Commercial  Assocs.,  998  F.2d  at  1099.    Nykaza's  testimony
          ___________________

          regarding  Grace  in  no  way  related  to  conduct by  Shearson.

          Nykaza's alleged  diversion of  Grace's funds occurred  before he

          was employed by Shearson. Additionally, Grace was  not a Shearson

          client.   Moreover, Bates'  overly speculative argument  fails to

          have  any  tendency  to show  that  Nykaza  somehow had  apparent

          authority to act on behalf of Shearson. 

                      2.  The Proffered Testimony of William Harvey
                      2.  The Proffered Testimony of William Harvey

                    Bates  claims that  the  court erred  in excluding  the

          testimony of William Harvey,  who had two telephone conversations

          with Nykaza in July 1991, over a year after Nykaza left Shearson.

          Harvey's testimony, if allowed, was to the effect that Nykaza had

          told him that part of  the funds he had obtained from  Bates were

          for  personal  use and  part of  the  funds were  for investment.

          Harvey's testimony also  would have  shown that  Nykaza told  him

          that the purpose  of the Dominick account he  subsequently opened

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with $5,000 was to regain the monies he had previously taken from

          Bates.   Bates argues that  this evidence was  necessary to prove

          that  Nykaza  obtained  the   funds  from  Bates  for  investment

          purposes, presumably at Shearson.  

                    The court  excluded this  testimony because it  did not

          believe that Harvey's testimony added anything to assist the jury

          with respect  to the  issue of  whether Nykaza was  acting as  an

          agent of  Shearson in his dealings with Bates.  We do not believe

          that the  court abused its  discretion in excluding  the evidence

          because it was cumulative and only marginally relevant at best.  

                    The  issue in this case was whether or not Shearson had

          engaged in any conduct that gave Nykaza apparent authority to act

          as  its  agent in  his dealings  with  Bates.   None  of Harvey's

          proposed testimony was  to the  effect that Nykaza  was going  to

          invest  Bates' money  at  Shearson.   In  fact, Harvey's  proffer
                                ____________

          indicated that Nykaza never mentioned Shearson at all to him.  

                    As a final matter, we note that even if we were to find

          error  in the court's two evidentiary decisions, which we do not,

          we would  be bound  to hold  the error  harmless on  this record.

          Even  if this evidence had  been admitted, none  of the testimony

          was sufficient to establish that Shearson engaged in  any conduct

          that gave Nykaza  apparent authority to act  as its agent in  his

          dealings with Bates.

                    For the foregoing reasons, the decision of the district

          court is affirmed.
                   ________

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