Lawarre v. Fifth Third Secs., Inc.

2012 Ohio 4016

• Court: Ohio Court of Appeals
• Decided: September 5, 2012
• Docket: C-110302
• Status: Published

Opinion

[Cite as Lawarre v. Fifth Third Secs., Inc., 2012-Ohio-4016.] IN THE COURT OF APPEALS FIRST APPELLATE DISTRICT OF OHIO HAMILTON COUNTY, OHIO

WILLIAM LAWARRE, : APPEAL NO. C-110302 TRIAL NO. A-0909076 JOHN PAPA, : O P I N I O N. EAGLE FLIGHT INVESTMENTS, : INC., : PROPERTY ASSET MANAGEMENT, LTD., :

and :

LAJ, INC., :

Plaintiffs-Appellants, :

vs. :

FIFTH THIRD SECURITIES, INC., :

FIFTH THIRD BANK, :

Defendants-Appellees. :

Civil Appeal From: Hamilton County Court of Common Pleas

Judgment Appealed From Is: Affirmed

Date of Judgment Entry on Appeal: September 5, 2012

Santen & Hughes, Charles E. Reynolds, J. Robert Linneman and Brian P. O’Connor, for Plaintiffs-Appellants,

Keating, Muething & Klekamp, PLL, James E. Burke and Joseph M. Callow, Jr., for Defendants-Appellees.

Please note: This case has been removed from the accelerated calendar. OHIO FIRST DISTRICT COURT OF APPEALS

D INKELACKER , Judge.

{¶1} Plaintiffs-appellants William LaWarre, John Papa, Eagle Flight

Investments, Inc., Property Asset Management, LTD, and LAJ, Inc., appeal the

decision of the Hamilton County Court of Common Pleas granting summary

judgment in favor of defendants-appellees Fifth Third Securities, Inc., and Fifth

Third Bank. We find no merit in their assignments of error, and we affirm the trial

court’s judgment.

I. Facts and Procedure

{¶2} The record shows that LaWarre and Papa were customers of Fifth

Third Bank and Fifth Third Securities. Papa was the sole owner of plaintiffs-

appellants Eagle Flight Investments, Inc., Property Asset Management, Ltd., and

LAJ, Inc. These companies were not operating business entities, but passive vehicles

through which Papa held investment funds. Consequently, we refer to them

collectively as “Papa,” where appropriate.

{¶3} Fifth Third Bank and Fifth Third Securities were separate

corporations, but they operated together informally as Fifth Third Financial

Advisors. They shared certain employees, including Dan Hughes, Kathy Collins, and

Jana Sturgeon. Consequently, we refer to them collectively as “Fifth Third” where

appropriate.

{¶4} Collins was LaWarre’s private banker at Fifth Third Bank and

Sturgeon was Papa’s. In 2006, Collins and Sturgeon introduced their clients to

Hughes, who was an investment advisor at Fifth Third Securities. Hughes

recommended that LaWarre and Papa invest their money in options trading. Both

Papa and LaWarre met with Hughes before agreeing to invest their funds with him.

2 OHIO FIRST DISTRICT COURT OF APPEALS

They both signed applications and other documents, which contained disclaimers

describing the risks of options trading. The disclaimers stated:

I specifically affirm the following disclosures

*** That both the purchase and the writing of options

contracts involve a high degree of risk, are not suitable

for many investors and, accordingly, should be entered

into only by investors who understand the nature and

extent of their rights and obligations and are fully aware

of the inherent risk involved, especially during extreme

market volatility or trading volumes.

That I should not purchase any option unless I am able

to sustain a total loss of the premium and transaction

costs * * *.

{¶5} Both LaWarre and Papa made substantial returns on their

investments in 2007 while Hughes was trading for Fifth Third. LaWarre stated that

he had had no problems with Hughes during the time that Hughes had been trading

for Fifth Third. Papa also testified in his deposition that he had been comfortable

with the trading activity by Hughes during that time.

{¶6} Fifth Third became concerned about the risk involved with Hughes’s

trading strategy. It became a subject of ongoing review by his supervisors.

Eventually, Fifth Third imposed a six-month supervisory restriction on Hughes and

all of his clients’ accounts. Any transactions he undertook were the subject of special

scrutiny. Eventually, Fifth Third’s legal-compliance department approved Hughes’s

3 OHIO FIRST DISTRICT COURT OF APPEALS

option-trading strategies for use in his clients’ accounts and released him from the

supervisory restriction.

{¶7} Subsequently, Fifth Third proposed to change the fee structure of

Hughes’s clients’ accounts. The change would have resulted in large increases in the

fees charged to his clients, which Hughes believed would adversely affect his ability

to retain and serve his clients. As a result, in September 2007, he left Fifth Third and

began working at a new firm, Fosset Hughes and Jabin Investments (“FHJ”).

{¶8} Fifth Third met with LaWarre and Papa and presented them with

alternative investment strategies, in an attempt to keep their business. But both of

them voluntarily transferred their investment accounts to FHJ so that they could

continue investing with Hughes. After that time, LaWarre and Papa did not receive

any further investment advice from Fifth Third.

{¶9} While their accounts were at FHJ, LaWarre and Papa suffered

substantial losses, totaling millions of dollars. For a while, Hughes sought to conceal

the losses by falsifying monthly account statements. Eventually, Hughes told his

clients about the losses. LaWarre continued to work with Hughes, who developed a

new investment strategy in early 2008 in an attempt to limit LaWarre’s losses.

Nevertheless, LaWarre continued to lose money. LaWarre lost over $6 million and

Papa lost over $2 million.

{¶10} LaWarre and Papa filed suit against Fifth Third, raising numerous

causes of action that included negligence, breach of fiduciary duty, and fraud. The

trial court granted summary judgment in favor of Fifth Third on all of LaWarre’s and

Papa’s claims based primarily on its analysis of Herbert v. Banc One Brokerage

Corp., 93 Ohio App.3d 271, 638 N.E.2d 161 (1st Dist.1994). This appeal followed.

4 OHIO FIRST DISTRICT COURT OF APPEALS

II. Tort Claims

{¶11} LaWarre and Papa each assert a single assignment of error. They

contend that the trial court erred in granting summary judgment in favor of Fifth

Third. First, they argue that the trial court improperly granted judgment on their

tort claims based on an unwarranted extension of dicta in Herbert. We find no merit

in this argument.

{¶12} LaWarre and Papa raised several tort claims against Fifth Third.

They included negligence in the giving of investment advice, negligent

misrepresentation, and negligent supervision. The elements of any negligence claim

are duty, a breach of that duty, and injury proximately resulting from that breach.

Menifee v. Ohio Welding Products, Inc., 15 Ohio St.3d 75, 76, 472 N.E.2d 707 (1984);

Vonderhaar v. Cincinnati, 191 Ohio App.3d 229, 2010-Ohio-6289, 945 N.E.2d 603, ¶

19 (1st Dist.).

{¶13} LaWarre and Papa also set forth claims for breach of fiduciary duty.

A fiduciary is “a person having a duty, created by his undertaking, to act primarily for

the benefit of another in matters connected to his undertaking.” Groob v. Keybank,

108 Ohio St.3d 348, 2006-Ohio-1189, 843 N.E.2d 1170, ¶ 16; Health Alliance of

Greater Cincinnati v. Christ Hosp., 1st Dist. No. C-070426, 2008-Ohio-4981, ¶ 20.

A fiduciary relationship is “a relationship in which special confidence and trust is

reposed in the integrity and fidelity of another and there is a resulting position of

superiority or influence, acquired by virtue of this special trust.” Groob at ¶ 16;

Health Alliance at ¶ 20. A broker or financial advisor has a fiduciary relationship

with his clients. Mathias v. Rosser, 10th Dist. Nos. 01AP-768 and 01AP-770, 2002-

Ohio-2772, ¶ 18; Byrley v. Nationwide Life Ins. Co., 94 Ohio App.3d 1, 18, 640

N.E.2d 187 (6th Dist.1994).

5 OHIO FIRST DISTRICT COURT OF APPEALS

{¶14} In Herbert, the case relied upon by the trial court, the plaintiffs were

customers of Bank One. The bank had a business relationship with Banc One

Brokerage Corporation in which the brokerage rented space in one of the bank’s

offices and the bank referred customers to the brokerage.

{¶15} The brokerage employed Randall Clark as a securities salesperson.

The bank’s employees referred customers to Clark, who sold investment securities,

life insurance, and annuities to the bank’s customers, including the plaintiffs. The

bank made financial information about its customers available to Clark without the

customers’ consent. It did not disclose to customers that Clark was not its employee.

{¶16} While employed by the brokerage, Clark developed a relationship

with Harry Fleischhauer, who was engaged in a scheme to sell unregistered and

worthless securities to investors. Clark began referring investors to Fleischhauer,

and eventually left the brokerage to work for him. Clark used the bank’s customer

lists to solicit investors. Some of the bank’s depositors brought letters that they had

received from Clark to the bank’s and the brokerage’s attention. But bank and the

brokerage did nothing to warn their customers about the bad investments. Clark

sold worthless securities to the plaintiffs and they lost the funds that they had

invested.

{¶17} The plaintiffs filed suit against the bank and the brokerage for

negligence and breach of fiduciary duty alleging that they had failed to protect the

plaintiffs or to notify them about the sale of the worthless securities. The trial court

granted the defendants’ motion to dismiss the complaint because it had been filed

outside the statutory limitations period and because it had failed to state a claim

upon which relief could be granted under Civ.R. 12(B)(6). While we held that the

trial court properly dismissed the complaint because it had been filed outside the

6 OHIO FIRST DISTRICT COURT OF APPEALS

limitations period, we also addressed the merits of the trial court’s decision to

dismiss the case for failure to state a claim.

{¶18} We noted that ordinarily no duty exists to prevent a third person from

causing harm to another, except in cases where a special relationship exists between

the actor and the third person that gives rise to a duty to control, or between the

actor and another that gives the other the right to protection. Herbert, 93 Ohio

App.3d at 276, 638 N.E.2d 161. Thus, there is no liability in the absence of a special

duty owed by a particular defendant. Id. “The fact that the actor realizes or should

realize that action on his part is necessary for another’s aid or protection does not of

itself impose upon him a duty to take such action.” Id. at 277, 638 N.E.2d 161,

quoting Hill v. Sonitrol of Southwestern Ohio, Inc., 36 Ohio St.3d 36, 39-40, 521

N.E.2d 780 (1988).

{¶19} We stated that “[a] principal is not liable for the actions of its agent

unless done while engaged in duties within the scope of his employment. Brokerage

owed no duty to [the plaintiffs] to protect them as to transactions with Clark

following his departure from Brokerage.” (Citations omitted.) Herbert, 93 Ohio

App.3d at 278, 638 N.E.2d 161.

{¶20} The same logic applies in this case. We agree with the trial court that:

Plaintiffs voluntarily transferred their investment

accounts to a new firm. Both wanted to follow their

broker to his new firm because they liked Mr. Hughes’

strategy and both were making money. They suffered no

losses while at Fifth Third and voluntarily allowed Mr.

Hughes to trade options on their behalf. When Mr.

Hughes left Fifth Third, they could have kept their

7 OHIO FIRST DISTRICT COURT OF APPEALS

investments with Fifth Third but decided to transfer

their accounts to FHJ. Unfortunately, they ultimately

suffered substantial losses while at FHJ. However, Fifth

Third cannot be held responsible for losses sustained

after Plaintiffs had left Fifth Third.

{¶21} Simply put, once Hughes had left Fifth Third, and LaWarre and Papa

had transferred their investments to Hughes’s new firm, Fifth Third no longer owed

them a duty. Therefore, it could not, as a matter of law, be held liable for negligence

or breach of fiduciary duty for Hughes’s conduct after he had left Fifth Third.

{¶22} LaWarre and Papa argue that even if Fifth Third was not responsible

for Hughes’s conduct after he left Fifth Third, they were responsible for what he had

done while he worked there. They presented evidence that while Hughes was at Fifth

Third, his superiors took issue with his risky investment strategies. Both LaWarre

and Papa testified that they had trusted their initial contacts at Fifth Third and they

had trusted Hughes. They stated that if Fifth Third had disclosed to them its

concerns about Hughes’s strategy, they might not have trusted Hughes so implicitly.

They argue that if they had understood the substantial amount of risk involved and

the concept that losses were inevitable, they might not have followed Hughes to his

new employer and might have stayed with Fifth Third.

{¶23} But Fifth Third had warned both LaWarre and Papa that options

trading was risky in general. The disclaimer in the documents they both signed

specifically stated that options trading involved a “high degree of risk.” They did not

suffer any losses while Hughes was employed at Fifth Third. They voluntarily

transferred their accounts to Hughes’s new firm, despite the fact that Fifth Third

tried to convince them to keep their investments with Fifth Third. Fifth Third’s

8 OHIO FIRST DISTRICT COURT OF APPEALS

employees called both LaWarre and Papa and discussed the risks of options trading.

They offered to help them with alternative investment strategies that involved less

risk, but less return. LaWarre and Papa turned down their offers, and did not seek

any investment advice from Fifth Third after September 2007. They signed new

disclosure agreements with FHJ and agreed to continue to invest in options trading

in 2008 and 2009. They did not sustain losses until 2008 and 2009, when Hughes

was employed at FHJ.

{¶24} The record shows that Fifth Third met its initial burden to

affirmatively demonstrate that its conduct did not cause LaWarre and Papa harm.

See Gedra v. Dallmer Co., 153 Ohio St. 258, 91 N.E.2d 256 (1950), paragraphs one

and three of the syllabus; Cipollone v. Hoffmeier, 1st Dist. No. C-060482, 2007-

Ohio-3788, ¶ 24. LaWarre and Papa failed to meet their reciprocal burden to set

forth specific facts showing that a genuine issue of material fact existed for trial. See

Dresher v. Burt, 75 Ohio St.3d 280, 293, 662 N.E.2d 264 (1996); Stinespring v.

Natorp Garden Stores, 127 Ohio App.3d 213, 216, 711 N.E.2d 1104 (1st Dist.1998).

{¶25} We find no material issue of fact. Construing the evidence most

strongly in LaWarre’s and Papa’s favor, we hold that reasonable minds can come to

but one conclusion—that any breach of duty by Fifth Third did not cause harm to

LaWarre and Papa. Fifth Third was entitled to judgment as a matter of law on their

negligence and breach-of-fiduciary-duty claims, and the trial court did not err in

granting summary judgment in Fifth Third’s favor on those claims. See Temple v.

Wean United, Inc., 50 Ohio St.2d 317, 327, 364 N.E.2d 267 (1977); Greene v.

Whiteside, 181 Ohio App. 3d 253, 2009-Ohio-741, 908 N.E.2d 975, ¶ 23 (1st Dist.);

Stinespring at 215.

9 OHIO FIRST DISTRICT COURT OF APPEALS

III. Breach of Contract

{¶26} Next, LaWarre and Papa argue that the trial court erred in granting

summary judgment in favor of Fifth Third on their breach-of-contract claims. They

argue that Herbert does not control contract claims, and that Fifth Third breached

the contract by recommending unsuitable investments and failing to warn them

about the risks of Hughes’s investment scheme. They also argue that Fifth Third

breached its obligation to act in good faith. While we agree that Herbert, which

involved tort claims, does not control the instant contract claims, we find no merit in

their other arguments.

{¶27} We first note that the option account agreement specifies that “[t]his

Agreement and its enforcement shall be governed by the laws of the Commonwealth

of Massachusetts[.]” Because the parties made an effective choice of law in the

agreement, we apply Massachusetts law in interpreting it. See Schulke Radio

Productions, Ltd. v. Midwestern Broadcasting Co., 6 Ohio St.3d 436, 453 N.E.2d

683 (1983), syllabus; Dubuc Lucke & Co., Inc. v. Walker, 143 Ohio App.3d 595, 598,

758 N.E.2d 738 (1st Dist.2001).

{¶28} The interpretation of a written instrument is a question of law for the

court, which will enforce unambiguous language according to its terms. Cody v.

Connecticut Gen. Life Ins. Co., 387 Mass. 142, 146, 439 N.E.2d 234 (1982);

Freelander v. G. & K. Realty Corp., 357 Mass. 512, 516, 258 N.E.2d 786 (1970).

Contracts are to be construed “according to the fair and reasonable meaning of the

words in which the agreement of the parties is expressed.” Cody at 146, quoting

MacArthur v. Massachusetts Hosp. Serv., Inc., 343 Mass. 670, 672, 180 N.E.2d 449

(1962). But courts must construe ambiguous language to give effect to the parties’

probable intent. Massachusetts Mun. Wholesale Elec. Co. v. Danvers, 411 Mass. 39,

10 OHIO FIRST DISTRICT COURT OF APPEALS

45-46, 577 N.E.2d 283 (1991); J.A. Sullivan Corp. v. Commonwealth, 397 Mass. 789,

795, 494 N.E.2d 374 (1986); Janeczek v. Heavey, Middlesex Sup.Ct. No. 88-6694,

1992 Mass.Super. LEXIS 1, *6.

{¶29} Courts must construe a contract to give reasonable effect to all of its

provisions. J.A. Sullivan Corp. at 795. “[E]very phrase and clause must be

presumed to have been designedly employed, and must be given meaning and effect,

whenever practicable, when construed with all the other phraseology contained in

the instrument, which must be considered as a workable and harmonious means for

carrying out and effectuating the intent of the parties.” Id., quoting Charles I.

Hosmer, Inc. v. Commonwealth, 302 Mass. 495, 501, 19 N.E.2d 800 (1939).

{¶30} To prevail on a breach-of-contract claim, a party must demonstrate by

a preponderance of the evidence: (1) that the parties reached a valid and binding

agreement; (2) that the defendants breached the terms of that agreement; and (3)

that the nonbreaching party suffered damages as a result of the breach of contract.

Towner v. Bennington Constr. Co., Inc., Plymouth Sup.Ct. No. 90724, 2005

Mass.Super. LEXIS 534, *30, citing Michelson v. Digital Fin. Servs., 167 F.3d 715,

720 (1st Cir.1999). Summary judgment is appropriate in breach-of-contract cases

because the court may interpret the meaning of the contract as a matter of law. New

England Power Co. v. Norwood, Worcester Sup.Ct. No. 98-2650A, 2001

Mass.Super. LEXIS 89, *30-31, citing ER Holdings, Inc. v. Norton Co., 735 F.Supp.

1094, 1097 (D.Mass.1990).

{¶31} The record does not demonstrate that Fifth Third failed to perform an

essential contractual obligation. See Marks v. Southcoast Hosp. Groups, Inc., 29

Mass.L.Rep. 277, 2011 Mass.Super. LEXIS 325, *37 (Plymouth Sup.Ct.2011). The

contract contains unambiguous language specifically warning LaWarre and Papa

11 OHIO FIRST DISTRICT COURT OF APPEALS

about the risks of options trading. Both LaWarre and Papa were sophisticated

investors and had relatively equal bargaining power with Fifth Third. See Harris v.

McIntyre, Suffolk Sup.Ct. No. 94-3597-H, 2000 Mass.Super. LEXIS 181, *30. By

signing the contract, they acknowledged that they were “fully aware” of the risks.

{¶32} Further, the record does not demonstrate that they incurred damages

as the result of Fifth Third’s failure to perform any of its obligations under the

contract. To establish a prima facie case of breach of contract, a party must show

that he suffered damages as a result of the other party’s breach of contract. Kilgallon

v. Clear Channel Communications, Inc., 23 Mass.L.Rep. 75, 2007 Mass.Super.

LEXIS 371, *11 (Norfolk Sup.Ct.2007).

{¶33} The undisputed facts show that LaWarre and Papa made money from

their investments while they invested with Hughes at Fifth Third. They voluntarily

followed Hughes to his new firm even though Fifth Third tried to persuade them to

stay with Fifth Third and put their money in safer investments. LaWarre and Papa

lost money only after they had taken their investments out of Fifth Third, and Fifth

Third had no control over what occurred.

{¶34} LaWarre and Papa also argue that that Fifth Third violated its duty to

act in good faith. Every contract contains an implied duty of good faith and fair

dealing. Anthony’s Pier Four, Inc. v. HBC Assoc., 411 Mass. 451, 473, 583 N.E.2d

806 (1991); Owen v. Kessler, 56 Mass.App.Ct. 466, 471, 778 N.E.2d 953 (2002).

Good faith performance or enforcement of a contract “emphasizes faithfulness to an

agreed common purpose and consistency with the justified expectations of the other

party.” Tufankjian v. Rockland Trust Co., 57 Mass.App.Ct. 173, 177, 782 N.E.2d 1

(2003). “The implied covenant of good faith and fair dealing provides that ‘neither

party shall do anything that will have the effect of destroying or injuring the right of

12 OHIO FIRST DISTRICT COURT OF APPEALS

the other party to receive the fruits of the contract[.]’ ” Anthony’s Pier Four at 471-

472, quoting Druker v. Roland Wm. Jutras Assoc., Inc., 370 Mass. 383, 385, 348

N.E.2d 763 (1976).

{¶35} A violation of this covenant usually requires more than a simple

breach of contract. Targus Group Internatl., Inc. v. Sherman, 76 Mass.App.Ct. 421,

435, 922 N.E.2d 841 (2010). Usually, a breach of the covenant involves bad-faith

conduct “implicating a dishonest purpose, consciousness of wrong, or ill will in the

nature of fraud.” Id., quoting Equip. & Sys. for Industry, Inc. v. Northmeadows

Constr. Co., 59 Mass.App.Ct. 931, 932-933, 798 N.E.2d 571 (2003). The covenant is

limited in scope and cannot create rights and duties not otherwise provided for in the

contract. Uno Restaurants, Inc. v. Boston Kenmore Realty Corp., 441 Mass. 376,

385, 805 N.E.2d 957 (2004); McQueen v. True Partners Consulting, LLC, 28 Mass.

L.Rep. 411, 2011 Mass.Super. LEXIS 108, *23 (Norfolk Sup.Ct.2011).

{¶36} The record shows that Fifth Third did not violate its duty of good

faith. The contract language specifically warned LaWarre and Papa that options

trading was risky and that they could lose their investment. By signing the contracts,

they affirmed that they understood the risks involved. Further, since the contract

specifically set forth the dangers of options trading, LaWarre and Papa cannot

contradict the plain language of the contract by arguing that Fifth Third failed to act

in good faith.

{¶37} We find no issues of material fact. Construing the evidence most

strongly in LaWarre’s and Papa’s favor, we hold that reasonable minds can come to

but one conclusion—that Fifth Third did not breach the contract and that it’s conduct

did not cause injury to LaWarre and Papa. Fifth Third was entitled to judgment as a

matter of law on the breach-of-contract claims, and the trial court did not err in

13 OHIO FIRST DISTRICT COURT OF APPEALS

granting summary judgment in Fifth Third’s favor on those claims. See Temple, 50

Ohio St.2d at 327, 364 N.E.2d 267; Greene, 181 Ohio App. 3d 253, 2009-Ohio-741,

908 N.E.2d 975, at ¶ 23; Stinespring, 127 Ohio App.3d at 215, 711 N.E.2d 1104.

IV. Statutory Claims

{¶38} LaWarre and Papa argue that the trial court erred in dismissing their

claims based on Ohio and Kentucky securities laws. They argue that Herbert is not

dispositive of those claims, and that Fifth Third failed to meet its initial burden to

show that it was entitled to summary judgment on those issues.

{¶39} The Ohio Securities Act, which is generally referred to as the Ohio

Blue Sky Law, was adopted to prevent the fraudulent exploitation of the investing

public through the sale of securities. In Re Columbus Skyline Securities, Inc., 74

Ohio St.3d 495, 498, 660 N.E.2d 427 (1996). LaWarre and Papa rely on provisions

of the Ohio and Kentucky statutes that prohibit fraud or fraudulent nondisclosure.

See R.C. 1707.44(B), (G) and (M); Ky.Rev.Stat.Ann. 292.320(1) and (2).

{¶40} R.C. 1707.01(J) states:

“Fraud,” “fraudulent,” “fraudulent acts,” “fraudulent

practices,” or “fraudulent transactions” means anything

recognized on or after July 22, 1929, as such in courts of

law or equity; any device, scheme, or artifice to defraud,

or to obtain money or property by means of any false

pretense, representation, or promise; any fictitious or

pretended purchase or sale of securities; and any act,

practice, transaction or course of business relating to the

purchase or sale of securities that is fraudulent or that

14 OHIO FIRST DISTRICT COURT OF APPEALS

has operated or would operate as a fraud upon the seller

or purchaser.

{¶41} The statute indicates that that the definition of fraud is to be derived

from case law. Columbus Skyline Securities at 498. Fraud is “a knowing

misrepresentation of the truth * * * to induce another to act for his or her detriment.”

Curran v. Vincent, 175 Ohio App.3d 146, 2007-Ohio-3680, 885 N.E.2d 964, ¶ 18 (1st

Dist.) The elements of civil fraud are (1) a misrepresentation, (2) material to the

transaction, (3) made falsely, knowingly, or recklessly, (4) with the intention of

misleading another into a justifiable reliance on those facts, (5) that causes the other

party injury. Burr v. Bd. of Cty. Commrs. of Stark Cty., 23 Ohio St.3d 69, 491

N.E.2d 1101 (1986), paragraph two of the syllabus; Curran at ¶ 18.

{¶42} Fifth Third sustained its initial burden to show that it did not commit

fraud. It specifically warned LaWarre and Papa of the inherent risks of options

trading. LaWarre and Papa failed to meet their reciprocal burden to show that they

justifiably relied on any misrepresentation by Fifth Third or that any

misrepresentation by Fifth Third caused them injury. The bottom line is that both of

them earned money on their investments while Hughes was at Fifth Third. It was

not until after he left to join another firm that LaWarre and Papa sustained financial

losses.

{¶43} As to a claim of fraudulent nondisclosure, the rule in Herbert applies.

Once Hughes had left Fifth Third and LaWarre and Papa were no longer its clients, it

no longer had a duty to disclose. See Blon v. Bank One, Akron, N.A., 35 Ohio St.3d

98, 101, 519 N.E.2d 363 (1988); Gator Dev. Corp. v. VHH, Ltd., 1st Dist. No. C-

080193, 2009-Ohio-1802, ¶ 28; Herbert, 93 Ohio App.3d at 277-278, 638 N.E.2d

161.

15 OHIO FIRST DISTRICT COURT OF APPEALS

{¶44} Before Hughes left Fifth Third, a fiduciary relationship existed and

Fifth Third had a duty to disclose. See Blon at 101; Gator Dev. Corp. at ¶ 28. We

have already held that Fifth Third did not violate that duty to disclose. But even if it

had, the record does not show that LaWarre or Papa changed their position in

reliance on any omission, or that they suffered any resulting injury from an omission,

both necessary elements of a fraudulent-nondisclosure claim. Gator Dev. Corp. at ¶

28-29.

{¶45} Kentucky law is similar to Ohio law in that violations of its Blue Sky

Law require a showing of a material misrepresentation or omission, and economic

loss caused by the omission or misrepresentation. See Brown v. Earthboard Sports

USA, 481 F.3d 901, 916-917 (6th Cir.2007); Republic Bank & Trust Co. v. Bear,

Stearns & Co., Inc., 707 F.Supp. 702, 714 (W.Dist.Ky.2010). Moreover, the

misrepresentation or omission must pertain to material information that the

defendant had a duty to disclose. Ashland Inc. v. Oppenheimer, 648 F.3d 461, 468

and 471 (6th Cir.2011). Therefore, we reach the same result on LaWarre’s and Papa’s

claims under Kentucky law.

{¶46} We find no issue of material fact. Construing the evidence most

strongly in Papa’s and LaWarre’s favor, we hold that reasonable minds could only

reach one conclusion—that Fifth Third did not act fraudulently, and, therefore, it did

not violate Ohio’s or Kentucky’s securities laws. Consequently Fifth Third was

entitled to judgment as a matter of law on LaWarre’s and Papa’s statutory claims,

and the trial court did not err in granting Fifth Third’s motions for summary

judgment as to those claims. See Temple, 50 Ohio St.2d at 327, 364 N.E.2d 267;

Greene, 181 Ohio App.3d 253, 2009-Ohio-741, 908 N.E.2d 975, at ¶ 23; Stinespring,

107 Ohio App.3d at 215, 711 N.E.2d 1104.

16 OHIO FIRST DISTRICT COURT OF APPEALS

V. Claims against Fifth Third related to Collins’s Conduct

{¶47} LaWarre separately alleged claims for breach of an oral contract,

breach of fiduciary duty, negligence, and promissory estoppel against Fifth Third

related to the conduct of Fifth Third’s employee Kathy Collins. LaWarre claimed that

after Hughes had left Fifth Third and he had followed Hughes to the new firm, he

had asked Collins to review his financial statements from Hughes when LaWarre was

in California on business. The undisputed evidence showed that Collins only

confirmed the account balances on the statements. Collins acknowledged that she

did not understand options trading or the specifics of the items reported in the

statements.

{¶48} Collins had been LaWarre’s personal banker. When he took his

investment accounts to FHJ, Fifth Third remained his bank, but it no longer gave

him investment advice. At that point, the relationship between Collins and LaWarre

was that of banker and customer. It was not a fiduciary relationship and Collins

owed him no fiduciary duty. See Groob, 108 Ohio St.3d 348, 2006-Ohio-1189, 843

N.E.2d 1170 at ¶ 16-26; Five Star Fin. Corp. v. Merchant’s Bank & Trust Co., 192

Ohio App.3d 544, 2011-Ohio-314, 949 N.E.2d 1016, ¶ 30-31 (1st Dist.). Therefore,

LaWarre’s claim for breach of fiduciary duty fails as a matter of law.

{¶49} As to LaWarre’s claim for breach of an oral contract, a meeting of the

minds is an essential prerequisite to the enforcement of an oral contract. Kostelnik

v. Helper, 96 Ohio St.3d 1, 2002-Ohio-2985, 770 N.E.2d 58, ¶ 16; Blair v.

McDonagh, 171 Ohio App.3d 262, 2008-Ohio-3698, 894 N.E.2d 377, ¶ 55 (1st Dist.).

The terms of a contract may be determined from the “words, deeds, acts, and silence

of the parties.” Blair at ¶ 55, quoting Kostelnik at ¶ 15. LaWarre acknowledged that

he did not rely on Collins to review the entire statement or to understand and advise

17 OHIO FIRST DISTRICT COURT OF APPEALS

him regarding his investments. During the time he was in California, he talked with

Hughes on a daily basis about his investments.

{¶50} Where the facts are undisputed and the only question to be resolved is

whether a breach of contract occurred, a question of law exists for the court to

decide. Id.; Blake Homes, Ltd. v. FirstEnergy Corp., 173 Ohio App.3d 230, 2007-

Ohio-4606, 877 N.E.2d 1041, ¶ 77 (6th Dist.). The undisputed facts in the record

show that the scope of the agreement was that Collins would inform LaWarre of the

account balances and nothing more. She fulfilled her obligations under the contract,

and, therefore, no breach of that contract occurred. See Stephen Bus. Ent. v. Lamar

Outdoor Advertising Co., 1st Dist. No. C-070373, 2008-Ohio-954, ¶ 16.

{¶51} LaWarre has also raised a negligence claim against Fifth Third related

to Collins’s conduct in which he contended that she was negligent in failing to

diligently review the statements and in failing to report their contents to him. But

this argument centers upon her agreement to review the documents. Therefore, any

negligence claim is barred by the economic-loss doctrine.

{¶52} The economic-loss doctrine prevents recovery of damages in tort for

purely economic loss. Corporex Dev. & Constr. Mgmt., Inc. v. Shook, Inc., 106 Ohio

St.3d 412, 2005-Ohio-5409, 835 N.E.2d 701, ¶ 6; Eysoldt v. Proscan Imaging, Inc.,

194 Ohio App.3d 630, 2011-Ohio-2359, 957 N.E.2d 780, ¶ 19 (1st Dist.). “Tort law is

not designed * * * to compensate parties for losses suffered as a result of a breach of

duties assumed only by agreement.” Corporex Dev. at ¶ 6, quoting Floor Craft Floor

Covering, Inc. v. Parma Comm. Gen. Hosp. Assn., 54 Ohio St.3d 1, 7, 560 N.E.2d

206 (1990).

{¶53} Further, even if Collins, as Fifth Third’s employee, had owed LaWarre

a duty, it was only to inform him of the account balances. Therefore, no breach of

18 OHIO FIRST DISTRICT COURT OF APPEALS

that duty occurred, and LaWarre’s negligence claim against Fifth Third related to

Collins’s conduct fails as a matter of law. See Menifee, 15 Ohio St.3d at 76, 472

N.E.2d 707; Hill, 36 Ohio St.3d at 39-40, 521 N.E.2d 780; Herbert, 93 Ohio App.3d

at 276-277, 638 N.E.2d 161.

{¶54} Finally, LaWarre raised a promissory-estoppel claim against Fifth

Third based on Collins’s conduct. The elements of promissory estoppel are (1) a

clear, unambiguous promise; (2) reliance upon the promise by the person to whom

the promise is made; (3) the reliance is reasonable and foreseeable; and (4) the

person claiming reliance is injured as a result of the reliance on the promise. Weiper

v. W.A. Hill & Assoc., Inc., 104 Ohio App.3d 250, 260, 661 N.E.2d 796 (1st

Dist.1995). “While the making, keeping and relying upon of alleged promises are

factual issues, typically for the jury, a court may deem certain circumstances

objectively unreasonable, as when it finds that ‘reasonable minds could come to but

one conclusion.’ ” Interstate Gas Supply, Inc. v. Calex Corp., 10th Dist. No. 04AP-

980, 2006-Ohio-638, ¶ 105, quoting Telxon Corp. v. Smart Media of Delaware, Inc.,

9th Dist. Nos. 22098 and 22099, 2005-Ohio-4931, ¶ 59.

{¶55} In this case, LaWarre simply did not rely on Collins to do anything

other than provide him with the balances on the statements. Again, he stated that he

did not rely on Collins to review the entire document or to understand and advise

him about his investments. In fact, he talked with Hughes on a daily basis about his

investments. Further, any reliance on her review of the statements would not have

been reasonable given her admission that she did not understand options trading or

the specifics of the statements. See Heinz & Assoc., Inc. v Diamond Cellar Holdings,

LLC, 10th Dist. No. 11AP-688, 2012-Ohio-1422, ¶ 21. Therefore, no material issues

19 OHIO FIRST DISTRICT COURT OF APPEALS

of fact exist for trial, and the trial court did not err in granting summary judgment in

favor of Fifth Third on LaWarre’s separate claims regarding Collins’s conduct.

VI. Summary

{¶56} In sum, we hold that the trial court did not err in granting summary

judgment in favor of Fifth Third on all of LaWarre’s and Papa’s claims. We overrule

the assignments of error and affirm the trial court’s judgment in all respects.

Judgment affirmed. SUNDERMANN, P.J., concurs. CUNNINGHAM, J., concurs in part and dissents in part.

CUNNINGHAM, J., concurring in part and dissenting in part.

{¶57} I concur in the majority’s decision to the extent that it affirms

summary judgment for Fifth Third Securities and Fifth Third Bank on LaWarre’s

separate negligence claim based on Kathy Collins’s conduct with respect to his

Fidelity investment account statements. That claim is barred by the economic loss

doctrine. But, for the reasons that follow, I dissent from the majority’s decision

affirming summary judgment on the other claims.

{¶58} At the summary judgment stage of the proceedings, we must view the

evidence in the light most favorable to the nonmovants, here William LaWarre and

John Papa. Accordingly, I have summarized the salient facts, as supported by the

record.

I. Background Facts

{¶59} In late 2004, LaWarre was introduced by Collins, a private banker in

Fifth Third’s Investment Advisor Group, to Dan Hughes, an investment advisor and

registered representative in the same group. In 2006, Jana Sturgeon, another

private banker in the same group, introduced Papa to Hughes. All of these

20 OHIO FIRST DISTRICT COURT OF APPEALS

Investment Advisor Group employees were dually employed by Fifth Third Bank and

Fifth Third Securities. They also shared a supervisor, Steve Brown, and the branch

office in Northern Kentucky.

{¶60} Collins had been LaWarre’s private banker for over 20 years.

Sturgeon had been Papa’s employee for many years before becoming his private

banker.

{¶61} LaWarre and Papa subsequently opened investment accounts at Fifth

Third Securities with Hughes as their investment advisor. Evidence in the record

indicates that Collins and Sturgeon were eligible for compensation for successful

referrals to Fifth Third Securities that varied according to the size and profitability of

the referral.

{¶62} Although the options contract that LaWarre and Papa had signed

generally disclosed the high risks of options trading, LaWarre and Papa asserted that

they had proceeded with Hughes’s specific options trading strategy based on

representations from the Investment Advisor Group employees that the strategy was

a “low-risk” investment course that did not expose significant investment principal to

loss.

{¶63} According to Papa, Hughes had specifically told him that he had

researched the fluctuation of the Standard & Poor’s 500 index (“S & P”) for the past

40 years, 35 more than Fifth Third required, and that based on this research, his

“trades” would have failed only six times in those 40 years.

{¶64} LaWarre and Papa claimed they told Hughes that their principal had

to be protected. Papa specified that no more than five percent of his principal could

be at risk. Hughes allegedly told both Papa and LaWarre that if the “trades” failed in

a particular month, the trades could be rolled over to the next month. As a result, in

21 OHIO FIRST DISTRICT COURT OF APPEALS

the worst case, they would get their principal back but would not make the one-to-

three percent “interest” for two months.

{¶65} LaWarre and Papa both claimed that they had not read the options

contract or filled in any of the requisite information before signing it because of their

trust in the Investment Advisor Group employees, particularly their private bankers,

and the rushed way that the contracts had been presented to them. They claimed

these employees had provided the necessary information on the forms, including

their acceptable risk levels.

{¶66} Allegedly at the recommendation of the Investment Advisor Group

employees, Papa funded the investment strategy with a home-equity line from Fifth

Third Bank, and LaWarre used Hughes’s options strategy to fund the purchase and

renovation of homes with multimillion dollar loans from Fifth Third Bank.

According to LaWarre, Hughes promised that the strategy would provide sufficient

monthly cash flow for him to repay his loans to Fifth Third Bank. These loans

included a $3.7 million mortgage, obtained in December 2004, to purchase property

in Montecito, California; a $1 million line-of-credit for improvements, suggested by

Collins; a $7 million residential mortgage, obtained in February 2006, to purchase

another property in California; and a $4.25 million line of credit that Fifth Third

Bank renewed in February 2007. The bank knew that LaWarre was relying on

income from Hughes’s strategy to stay current on these loans.

{¶67} While employed by Fifth Third Securities, Hughes allegedly exercised

discretionary control over Papa’s and LaWarre’s investment accounts. Both Papa

and LaWarre averred that Hughes executed transactions in their accounts without

first obtaining their approval.

22 OHIO FIRST DISTRICT COURT OF APPEALS

{¶68} Hughes was immediately supervised by Stephen Brown and Steve

Sherline, but these supervisors testified at their depositions that they did not

understand the options strategy employed by Hughes. They also testified that one

factor concerning the suitability of an investment is the source of the investment

funds. But neither knew that Papa was funding the strategy with hundreds of

thousands of dollars of liquified home equity.

{¶69} In the fall of 2006, Hughes was placed on heightened supervision

while employed by Fifth Third, in part because the timing of his trades raised

concerns. Sherline was aware that Hughes had also been placed on heightened

supervision with Fifth Third Securities in 2003. According to Hughes, Fifth Third

imposed the heightened supervision in 2006 due to Fifth Third’s concern over the

use of the options strategy. Sherline had weekly discussions with Hughes about the

risks associated with the strategy and felt that Hughes did not have a method to

avoid losses during periods of market volatility.

{¶70} Sherline testified at his deposition that he would personally discuss

with clients large losses under the protocol of Fifth Third Securities. However, at

about the time that Hughes was removed from heightened supervision in the spring

of 2007, LaWarre lost over one million dollars in his options trading account, and

Sherline did not discuss the loss with him.

{¶71} At least some evidence indicates that when Fifth Third Securities

finally appreciated the enormous risks presented by the options strategy Hughes

employed—the financial equivalent of “picking up pennies in front of a

steamroller”—it gave Hughes the choice to abandon the strategy or leave his job.

Hughes chose to leave.

23 OHIO FIRST DISTRICT COURT OF APPEALS

{¶72} At Hughes’s exit interview, Sherline told Hughes that his options

strategy would one day cause huge losses of clients’ funds. Additionally, he told

Hughes that his strategy required the multiple layers of supervision provided by Fifth

Third Securities but that Hughes would not receive at his new firm.

{¶73} Neither Fifth Third Securities nor Fifth Third Bank disclosed to Papa

or LaWarre any of this information, including the existence and circumstances of the

heightened supervision or the reason why their employment relationship with

Hughes was severed.

{¶74} LaWarre and Papa followed Hughes to his new investment advisory

firm, where their investments were held in security accounts with Fidelity Brokerage

Services (“Fidelity”). Papa claimed that Sturgeon encouraged him to follow Hughes

because she considered Hughes to be “the best.”

{¶75} Shortly after LaWarre and Papa moved their investment accounts

from Fifth Third Securities, Steve Seidl, an investment advisor at Fifth Third

Securities, contacted them and attempted to bring them back. Seidl testified at his

deposition that he had offered to execute, with Sherline’s approval, the same options

strategy employed by Hughes, even though he did not like the stress of executing the

strategy and Sherline had told him that he believed it was only a matter of when, not

if, the strategy would fail.

{¶76} Seidl also offered alternative investment strategies that provided less

of a return, but less stress, because he believed that Hughes’s “strategy was no better

than any other out there, that over time the returns were going to regress to the

mean.” He claimed he told LaWarre and Papa that Hughes’s strategy “may be high

flying now but when the volatility returns to the market you’re going to be looking at

returns that are similar to that of the S & P 500.” He also claimed to have told them

24 OHIO FIRST DISTRICT COURT OF APPEALS

that it was only a matter of time before it would fail, but he did not explain to either

the extreme loss of principal that was likely to result.

{¶77} LaWarre claimed that Seidl had been careful not to undermine the

value of Hughes’s strategy, but that Seidl did offer other investment options. These

other investment options, however, were insufficient to provide LaWarre with the

$125,000 to $150,000 monthly income that both Fifth Third Bank and Fifth Third

Securities knew LaWarre needed to pay down the lines of credit and loans.

{¶78} After this communication from Seidl in September 2007, Fifth Third

Securities and Fifth Third Bank did not give or offer to give investment advice to

LaWarre or Papa.

{¶79} Although LaWarre and Papa did not incur a net loss in their options

trading accounts over the period that they had invested with Hughes at Fifth Third

Securities, they both eventually incurred significant net losses in their Fidelity

options trading accounts when the market turned volatile.

{¶80} Papa’s first large loss after transferring his investment accounts from

Fifth Third Securities occurred in January 2008, about four months later, when he

lost over 50 percent of the value in one of his option accounts. The account value

dropped from $1.2 million to $440,000. This loss was far more than the five percent

loss of principal that Papa had authorized Hughes to expose him to.

{¶81} Papa did not discover the loss, however, until late 2008, when he first

read his January 2008 statement. Papa claimed that he did not typically read his

statements because he had been repeatedly told by both Hughes and Sturgeon that

his loss of principal was capped at five percent. When Papa questioned Hughes

about the loss, Hughes told him that he was reading his statement incorrectly and

that over $2 million remained in his account.

25 OHIO FIRST DISTRICT COURT OF APPEALS

{¶82} In January 2009, Papa asked Hughes to transfer money to pay off his

$1.3 million mortgage. Hughes told him that his account had dwindled to $180,000.

At that point, Papa closed his accounts with Hughes.

{¶83} LaWarre’s first large loss after transferring his investment account

from Fifth Third Securities also occurred in January 2008. Collins, who was

monitoring the on-going market value of LaWarre’s Fidelity options account for Fifth

Third Bank, discussed the loss of over $5 million with LaWarre because the value of

the account impacted LaWarre’s ability to repay on his obligations to Fifth Third

Bank.

{¶84} LaWarre told her that he had spoken to Hughes about the loss and

that Hughes had reassured him that the options strategy would still work and that he

would confine LaWarre’s loss to a lower amount. According to LaWarre, the amount

of loss was confined to $500,000 per month, and he told Collins this. Collins’s notes

indicate that she had relayed this information to the credit review division of the

bank. LaWarre again felt that he could not back out of the strategy at that point

because he needed the income flow to pay back his Fifth Third Bank obligations.

{¶85} At least by April 2008, LaWarre arranged for Collins to receive his

Fidelity statements directly from Hughes. LaWarre claimed that Collins had agreed

to “review” his account statements and “confirm the account balances” to him over

the telephone because he was out of town and not receiving the statements himself.

{¶86} In May 2008, LaWarre began to suffer more losses, and Hughes

concealed them on LaWarre’s Fidelity account statements. Hughes’s modification of

some of the figures left internal inconsistencies within the account statement. For

example, in the May 2008 statement, Hughes listed the core account holdings as

$3,052,508 on page three, but as $4,198,446 on page four. Collins received

26 OHIO FIRST DISTRICT COURT OF APPEALS

LaWarre’s modified May 2008 statement from Hughes in early July 2008, and she

continued to receive LaWarre’s statements from Hughes until October 2008. After

which time, she received LaWarre’s investment statements from Metro Cities

Mortgage.

{¶87} Collins claimed that she never noticed the fraud on the statements

and that she merely checked the ending “net-market value account balance” on the

first page of the statements. Although she conceded that she had conversations with

LaWarre in which she discussed the balances on the monthly statements, she never

acknowledged an express agreement with LaWarre to review the statements or to

report the ending balance.

{¶88} During this time, LaWarre was communicating regularly with

Hughes, who continued to falsify the account statements. Eventually, in March

2009, Hughes confessed to LaWarre that his account had almost no assets.

{¶89} LaWarre and Papa both presented evidence that they would not have

continued to allow Hughes to employ his options strategy after he left Fifth Third

had they known the true risks involved.

II. Expert-Witness Opinion

{¶90} In opposition to the motion for summary judgment, LaWarre and

Papa presented evidence from several expert witnesses. Steve Stern opined that

Collins’s review of LaWarre’s Fidelity statements was “negligent, insufficient, not

reasonably diligent and did not meet industry standards” to monitor a borrower’s

liquidity or to report on the account’s portfolio balance. He arrived at this

conclusion because she reviewed only the front page and did not reconcile the

summary total on the front page with the supporting page subtotals.

27 OHIO FIRST DISTRICT COURT OF APPEALS

{¶91} According to Stern, had Collins performed a reasonably diligent

review, she would have immediately discovered the fraud and, under industry

standards, she would have been required to report it to the relevant business and

government authorities.

{¶92} Stern also opined that Collins’s and Sturgeon’s receipt of “incentive

compensation” for referring LaWarre and Papa to Hughes violated an FDIC

regulation, was unethical, and created a conflict of interest that should have been

disclosed to LaWarre and Papa.

{¶93} Sean P. Kelly performed a “cash flow analysis” of LaWarre’s Fidelity

investment account and opined that the account suffered a net loss of $6,463,900.90

from its inception in September 2007 through March 2009. He also composed a

profit and loss summary for each individual security, including options, but he did

not provide a cumulative net profit/loss figure for the option trades. Kelly did not

factor in any gains from options trading at Fifth Third, compare the figures with

general market conditions, or separate out the profit-loss analysis for the different

investments in the account, which included options, bonds and security trading.

{¶94} Kelly performed the same analysis for all of Papa’s Fidelity accounts.

According to his report, Papa’s combined accounts suffered a net loss of

$2,114,869.901 from October 2007 through December 2008.

{¶95} LaWarre and Papa also presented the expert opinion of Gerald

Kuschuk, who concluded, after considering all the circumstances of the options

trading, including that Papa had invested home equity in options trading and

LaWarre had used the options strategy to generate income to pay a mortgage loan,

1 In Papa’s pretrial statement, he requested compensatory damages of $1,700,000. It is not clear how he derived this figure.

28 OHIO FIRST DISTRICT COURT OF APPEALS

that the options strategy Hughes used in LaWarre’s and Papa’s accounts while he

was employed by Fifth Third Securities and after was “unsuitable.” Kuschuk’s report

provides in part as follows:

I have reviewed the Fifth Third Securities and

Fidelity Investment account statements of the

Plaintiffs. All of these accounts essentially used the

same options strategy, first at Fifth Third and later at

Fidelity. At both brokerage firms, the clients

established short term options spreads on either the

S & P or the Nasdaq Index with average durations of a

month or less. They were usually done where the short

option (put or call or sometimes both) was

approximately 5% “out of the money.” That means

that the underlying index would have to move 5%

before the short option would have intrinsic value and

become “in the money.” In order to reduce the margin

requirements of these short options, an equal number

of options were typically purchased on the same index

with the same expiration month and with an exercise

price usually 25 points away from the short option.

The result is what is known as a spread position with a

25 point differential.

***

Sometimes both put and call spreads were established

where a profit would be earned as long as the index

29 OHIO FIRST DISTRICT COURT OF APPEALS

traded within a fixed range during the life of the

options.

{¶96} Kuschuk provided examples from several actual transactions to

demonstrate that on a monthly basis Hughes had employed option spread

transactions with high-risk-to-reward ratios and high leverage in the plaintiffs’

accounts with Fifth Third and Fidelity.

{¶97} To that end, on March 21, 2006, a day when the S & P fluctuated

between 1296 and 1310, the following transaction took place in Papa’s Eagle Flight

Fifth Third Securities account: bought “100 puts S & P 500 April 1220 at 1.58 each

for $15,800 total”; sold “100 puts S & P 500 April 1245 at 2.47 each for $24,685

total;” resulting in “a net credit of $8,885” ($24,685-$15,800).

{¶98} This transaction resulted in a “credit” of .89 points (2.47-158), while

the “spread differential” was 25 points. The “profit potential” was less than one point

while the risk potential was over 24 points. Therefore, if the S & P at expiration on

April 21, 2006, was over 1245, Eagle Flight would make a profit of $8,886 because all

of the options would expire “out of the money.” But the maximum risk exposure of

the trade was the 25-point spread differential less the initial credit—$2500

multiplied by 100, less $8,885, which equals $241,115—for a risk-to-reward ratio of

27 to 1.

{¶99} The maximum loss of $241,115 would have been incurred if the S & P

had dropped below 1220, or 6.5 percent from where it was when the position was

initiated. Because Eagle Flight’s account equity at the time was $356,000, a 6.5

percent drop in the S & P would have resulted in a 67 percent loss of equity.

30 OHIO FIRST DISTRICT COURT OF APPEALS

{¶100} Kuschuk found that the “pattern of selling out of the money put

and/or call spreads for relatively small credits versus the potential risk prevailed

throughout Plaintiffs’ accounts with Fifth Third and Fidelity.” He concluded that

[w]hile this strategy tends to result in relatively small

gains during periods of low to moderate volatility, the

potential risks are enormous should the market

become more volatile. With risk reward ratios of 10 to

over 25 to 1, the high leverage employed, and the

relatively large positions taken, an investor could

potentially lose all prior gains plus a significant

portion of his investment principal, if the underlying

index became volatile and moved against only one or

two option spread positions.

{¶101} He opined that the

options strategy employed in the Plaintiffs’ accounts at

Fifth Third and Fidelity amounted to nothing more

than highly leveraged, extreme speculation that was

not suitable for any investor due to the relatively large

positions, disproportionate risk/reward ratios, large

proportion of investment principal at risk, and

extreme leveraging employed. If options spread

transactions are to be employed, the size of the

positions should be modest compared to the size of the

accounts due to the large potential risk. It is my

understanding that some of the accounts invested

31 OHIO FIRST DISTRICT COURT OF APPEALS

home equity in the above described option strategy or

used the strategy to generate income to pay a mortgage

loan. That only exacerbated the unsuitability of the

options strategy employed in those accounts. It would

be entirely flawed to believe that the option strategy

employed * * * could result in a reliable source of

income.

{¶102} Kuschuk also opined that four documents describing the options

strategy that Hughes had created for clients while employed by Fifth Third were

“misleading in many ways.”

III. Claims Against Fifth Third Securities

{¶103} Unlike the majority, I would address separately the claims against

Fifth Third Bank and Fifth Third Securities. I begin with the claims against Fifth

Third Securities. The plaintiffs filed an amended complaint alleging that Fifth Third

Securities: (1) is liable for the breach of various fiduciary duties; (2) is liable under a

contract theory for recommending an “unsuitable investment;” (3) is liable for

negligent misrepresentation for representing Hughes’s options strategy as a “low-

risk suitable strategy”; (4) is liable for the negligent supervision of its employees,

including Hughes, Collins, and Sturgeon; (5) is liable for violations of the Kentucky

Securities Act; and (6) is liable for fraud for the misrepresentation and concealment

of facts. Additionally, LaWarre presented separate claims alleging that Fifth Third

Securities (1) is liable to him for violations of the Ohio Securities Act and (2) is liable

to him for Collins’s conduct in reporting his monthly portfolio balances under the

theories of breach of fiduciary duty, breach of contract, negligence, and promissory

estoppel.

32 OHIO FIRST DISTRICT COURT OF APPEALS

IV. Breach-of-Fiduciary-Duty Claims - Based on Conduct of Fifth Third Securities and Its Employees While Hughes was Employed by Fifth Third.

{¶104} In Ohio, a claim of breach of a fiduciary duty is essentially a claim of

negligence that involves a higher standard of care. Strock v. Pressnell, 38 Ohio St.3d

207, 216, 527 N.E.2d 1235 (1988). Thus, to recover on this claim, a plaintiff must

prove a breach of a fiduciary duty owed and an injury proximately caused by that

breach. Id.

{¶105} In moving for summary judgment on this claim, Fifth Third Securities

first focused on the timing of LaWarre’s and Papa’s losses that they claim as

damages. It argued that at the time of the losses, it had no duty to control the

harmful conduct of its former employee, Hughes, and it owed no fiduciary duty to

LaWarre and Papa, who were no longer receiving investment advice from Fifth Third

Securities.

{¶106} LaWarre and Papa countered in part that this breach of fiduciary duty

claim was based on the breach of the duties that Fifth Third Securities owed to

LaWarre and Papa while they invested with Fifth Third Securities and its agent at

that time, Hughes.

{¶107} The Third District Court of Appeals has explained the scope of

fiduciary duties owed by a broker to a client in providing financial advice:

In general, the duties of a broker associated with a

non-discretionary account * * * include: the duty to

recommend a stock only after studying it sufficiently to

become informed as to its nature, price, and financial

prognosis; the duty to inform the customer of the risks

involved in purchasing or selling a particular security;

the duty not to misrepresent any fact material to the

33 OHIO FIRST DISTRICT COURT OF APPEALS

transaction; and the duty to transact business only

after receiving prior authorization from the customer.

Leib v. Merrill Lynch, Pierce, Fenner & Smith, Inc.

(E.D.Mich.1978), 461 F. Supp. 951, 953, aff’d (6th

Cir.1981), 647 F.2d 165. On the other hand,

brokers who handle discretionary accounts

become a fiduciary in the broad sense and have

increased duties to keep customers informed

regarding the changes in the market which

affect the customer's interest and to explain

the practical impact and potential risks of the

course of dealing in which the broker is

engaged. Id. (Emphasis added.)

Burns v. Prudential Sec., Inc., 167 Ohio App.3d 809, 2006-Ohio-3550, 857 N.E.2d

621 (3rd Dist.).

{¶108} On the evidenced submitted in opposition to the motion for summary

judgment, I agree with the majority that the plaintiffs presented sufficient evidence

that Fifth Third Securities owed LaWarre and Papa a fiduciary duty while Hughes

was in its employ. Not only did Fifth Third Securities provide investment advice to

LaWarre and Papa, but the evidence suggests that Hughes exercised discretionary

control over their accounts. Thus, there was evidence that Hughes, and, therefore,

his employer, became fiduciaries with heightened duties.

{¶109} Further, there is evidence that Fifth Third Securities and its agent

Hughes breached these fiduciary duties, including the duty to recommend only

suitable investments and the duty to disclose information that is adverse to the

34 OHIO FIRST DISTRICT COURT OF APPEALS

interest of its principal. For example, Kuschuk opined that the options strategy

Hughes used while employed by Fifth Third Securities was unsuitable for anyone,

including LaWarre and Papa, because of the size of the positions, the large risk

involved for small gains, the amount of principal at risk, and the extreme leveraging

employed. And there was evidence that Hughes’s supervisors did not initially know

enough about the strategy themselves to condone the use of it.

{¶110} Further, LaWarre and Papa presented evidence that Fifth Third

Securities did not sufficiently disclose to their clients the true risks involved in the

options strategy employed by Hughes. Thus, a genuine issue of material fact

remains as to whether Fifth Third Securities breached the fiduciary duties owed to

LaWarre and Papa.

{¶111} The critical issue in this case is whether a broker-dealer such as Fifth

Third Securities may be held responsible for investment losses that are caused by its

own misconduct, but that are not realized until after the client transfers his

brokerage account to another institution. This raises the issue of proximate cause.

{¶112} This court’s prior decision in Herbert v. Banc One Brokerage Corp.,

93 Ohio App.3d 271, 638 N.E.2d 161 (1st Dist.1994), did not reach the issue of

proximate cause. In Herbert, this court held that a bank and a securities brokerage

did not have a fiduciary duty to customers to warn them that their former employee

was selling them worthless securities after the broker had left the brokerage’s

employ. Id. at 278. When the former employee sold the worthless securities, and

thus breached his fiduciary duty to his customers, he was no longer an agent of the

bank and brokerage, and the bank and brokerage were no longer providing

investment advice to the customers.

35 OHIO FIRST DISTRICT COURT OF APPEALS

{¶113} The Herbert court did not address whether the bank and brokerage

had breached a fiduciary duty to the customers while the former employee was still

employed by the bank and brokerage, as those claims were barred by the statute of

limitations. See id. at 273-274. Thus, Herbert did not involve what a plaintiff must

demonstrate to establish that a bank’s and a brokerage’s breach of fiduciary duties

proximately caused losses that occurred after the employee left the employ.

Therefore, I believe the majority’s reliance on Herbert in resolving the issue of

causation is erroneous.

{¶114} The concept of proximate cause limits an actor’s liability for the

consequences of his conduct. “As a practical matter, legal responsibility must be

limited to those causes which are so closely connected with the end result and of such

a significance that the law is justified in imposing liability.” Keeton, Dobbs, Keeton &

Owen, Prosser and Keeton on the Law of Torts Section 41, 264 (5th Ed.1984), cited

in Black’s Law Dictionary, at 234 (8th Ed.2004).

{¶115} Fifth Third Securities also claimed that LaWarre’s and Papa’s losses

were caused by their own conduct, Hughes’s misconduct, and the shift in volatility in

the market in general.

{¶116} But Kuschuk opined that the strategy Hughes employed when

LaWarre and Papa suffered their net losses in their Fidelity accounts was the same

strategy that Hughes had used while employed at Fifth Third. And Papa and

LaWarre both testified that they stayed with the strategy because Fifth Third

employees had so strongly endorsed it and because they were dependent on the

strategy to continue to produce the necessary income flow to pay back their Fifth

Third loans, which the Investment Advisory Group employees had recommended.

36 OHIO FIRST DISTRICT COURT OF APPEALS

{¶117} Assuming that the existence of intervening and superseding causes of

injury can be a defense to actions brought for the breach of a fiduciary duty, the Ohio

Supreme Court has acknowledged that the issue of intervening causation generally

presents factual issues to be decided by the trier of fact. Leibreich v. A.J.

Refrigeration, Inc., 67 Ohio St.3d 266, 269, 617 N.E.2d 1068 (1993). The issue is

whether the intervening act was “foreseeable” and, therefore, a consequence of the

original negligent act, or whether the intervening act is both “new and independent,”

and, thus, a superseding cause, which operates to absolve the original actor. Id.,

citing Cascone v. Herb Kay Co., 6 Ohio St.3d 155, 160, 451 N.E.2d 815 (1983). An

intervening negligent act is “new” where it could not have been reasonably foreseen

and “independent” where there is no connection or relationship of cause and effect

between the original and subsequent acts of negligence. R.H. Macy & Co., Inc. v.

Otis Elevator Co., 51 Ohio St.3d 108, 111, 554 N.E.2d 1313 (1990), quoting 1 Ohio

Jury Instructions, Section 11.30 (1983), now OJI CV 405.05.

{¶118} Fifth Third Securities’s fiduciary duties ended in September 2007,

after LaWarre and Papa transferred their investment accounts to Fidelity and no

longer sought or received investment advice from Fifth Third Securities. But the

facts present a genuine issue of material fact on the issue of whether the alleged

breach of fiduciary duties by Fifth Third Securities before that time, if proved, is so

closely connected to LaWarre’s and Papa’s continued trust in Hughes and reliance on

the options strategy as used by Hughes, such that a reasonable person could find that

those breaches proximately caused the financial losses ultimately incurred,

notwithstanding any intervening causes, including LaWarre’s and Papa’s own

conduct and Hughes’s misconduct.

37 OHIO FIRST DISTRICT COURT OF APPEALS

{¶119} Thus, the trial court erroneously granted summary judgment to Fifth

Third Securities on LaWarre’s and Papa’s breach-of-fiduciary-duty claims based on

alleged breaches that occurred when LaWarre and Papa were receiving investment

advice from Fifth Third Securities.

V. Breach-of-the-Account-Agreement Claim

{¶120} The Options Account Agreement that LaWarre and Papa signed

provides in part that “Your Broker/Dealer is responsible for * * * (4) determining the

suitability of investment recommendations and advice, (5) operating and supervising

your brokerage account and its own activities in compliance with applicable laws and

regulations * * *.” The agreement, which is governed by Massachusetts law, thus

incorporates various laws and regulations by the governing organizations, including

the Financial Industry Regulatory Authority (“FINRA”).2 These laws and regulations

required Fifth Third Securities (1) to diligently supervise all accounts and registered

representatives, (2) to deal fairly with all customers, and (3) to recommend only

suitable investments, among other duties.

{¶121} Fifth Third Securities maintains that summary judgment was

appropriate on the breach-of-the-account-agreement claim because of Herbert’s no

duty rule and because LaWarre and Papa failed to establish a causal connection

between their investment losses in 2008-2009 and Fifth Third Securities’s pre-

September 2007 conduct. According to Fifth Third Securities, the causal connection

was broken when LaWarre and Papa (1) voluntarily transferred their investment

accounts; (2) executed new options trading agreements and written disclosure forms

2 The options account agreement also contained an arbitration clause for the resolution of disputes. LaWarre’s and Papa’s claims against Fifth Third Securities were originally presented for arbitration. After Fifth Third Securities waived its right to arbitrate, the plaintiffs added Fifth Third Securities as a defendant in this case.

38 OHIO FIRST DISTRICT COURT OF APPEALS

with a new firm and new compliance regime; and (3) made investment decisions

with Hughes and his new investment firm, without consulting Fifth Third Securities.

But it should not prevail on these arguments.

{¶122} As a preliminary matter, Herbert involves tort duties under Ohio law

and does not govern a breach-of-contract claim governed by Massachusetts law.

Under Massachusetts law, damages recoverable for a breach of contract are limited

to those that (1) are the “natural and proximate result” of the breach and (2) are

“such as reasonably might have been expected to be within the contemplation of the

parties when the contract was entered into as the probable result of a breach of it.”

Wheelock v. Postal Tel. Cable Co., 197 Mass. 122, 126, 83 N.E. 313 (1908). Fifth

Third Securities moved for summary judgment only on the first issue, proximate

cause.

{¶123} Here LaWarre and Papa presented evidence that Fifth Third

Securities had breached the options contract by designing and implementing an

unsuitable investment strategy that involved not just highly-risky, highly-leveraged,

and large-position options trading, but the use of liquidated home equity, in Papa’s

case, and the promise of sufficient income from the options trading to pay a

mortgage loan, in LaWarre’s case. Thus, the strategy encompassed more than just

the monthly options trades.

{¶124} The alleged breaches by Fifth Third Securities also include the failure

to supervise its employees and adequately disclose risks to its clients. And LaWarre

and Papa presented evidence that because of these breaches, they were compelled to

continue with the strategy even after they transferred their accounts from Fifth Third

Securities, and they subsequently suffered great financial loss. Therefore, the record

contains sufficient evidence of proximate cause to demonstrate the existence of a

39 OHIO FIRST DISTRICT COURT OF APPEALS

genuine issue of material fact and defeat Fifth Third Securities’s motion for summary

judgment on this claim.

VI. Fraud and Negligent-Misrepresentation Claims

{¶125} An action for fraud requires proof of a false material representation,

or a similar concealment where there is a duty to disclose; an intent of misleading

another into relying upon the representation or omission; and damages proximately

caused by the reliance. See Burr v. Bd. of Commrs., 23 Ohio St.3d 69, 491 N.E.2d

1101 (1986), paragraph two of the syllabus, limited on other grounds by the Political

Subdivision Tort Liability Act.

{¶126} LaWarre’s and Papa’s negligent-misrepresentation claim was based

on 3 Restatement of the Law 2d, Torts, Section 522 (1965), which the Ohio Supreme

Court adopted in a claim against an accounting firm. Haddon View Invest. Co. v.

Coopers & Lybrand, 70 Ohio St.2d 154, 214, 436 N.E.2d 212 (1982). That section

provides the following:

One who, in the course of his business,

profession, or employment, or in any other transaction

in which he has a pecuniary interest, supplies false

information for the guidance of others in their business

transactions, is subject to liability for pecuniary loss

caused to them by their justifiable reliance upon the

information, if he fails to exercise reasonable care or

competence in obtaining or communicating the

information.

3 Restatement of the Law 2d, Torts, Section 522 (1965).

40 OHIO FIRST DISTRICT COURT OF APPEALS

{¶127} Important to both of these claims is that a party to a business

transaction in a fiduciary relationship with another is required to make full

disclosure of material facts known to him but not the other, and to dispel misleading

impressions that are or might have been created by partial revelation of the facts.

See Blon v. Bank One, 35 Ohio St.3d 98, 101, 519 N.E.2d 363 (1988).

{¶128} Fifth Third Securities moved for summary judgment on the ground

that LaWarre and Papa could not demonstrate a misrepresentation, because (1) the

options contract set forth a sufficient warning concerning the risks, (2) it did not fire

Hughes, and (3) it never determined that the options strategy was unsuitable, as

demonstrated by its continued allowance of options trading by its employees even

after Hughes left.

{¶129} But the evidence presented in opposition demonstrated that Fifth

Third Securities employees had represented to LaWarre and Papa that the options

strategy, as implemented for them, was a “low-risk investment,” that Fifth Third

Securities knew before Hughes left and took LaWarre’s and Papa’s investments with

him that the investment strategy was the “equivalent of picking up pennies in front of

a steam roller,” and that Fifth Third Securities did not disclose to their fiduciaries the

unsuitability of the investments or the heightened supervision of Hughes and the

facts of his termination. This evidence presented a genuine issue of material of fact

on the misrepresentation elements of the fraud and negligent-misrepresentation

claims.

{¶130} Fifth Third Securities also moved for summary judgment on these

claims on the ground that the plaintiffs failed to present an issue of fact as to the

element of justifiable reliance. First, it argued that LaWarre’s and Papa’s admitted

failure to read the disclosure documents provided by Fifth Third Securities destroys

41 OHIO FIRST DISTRICT COURT OF APPEALS

the justifiable reliance element. The plaintiffs signed a document with the following

general disclosure that did not reference the particular strategy actually employed:

[T]he purchase and writing of options contracts

involve a high degree of risk, and are not suitable for

many investors and, accordingly, should be entered into

only by investors who understand the nature and extent

of their rights and obligations and are fully aware of the

inherent risk involved, especially during extreme market

volatility or trading volumes.* * * [I] should not

purchase any option unless I am able to sustain a total

loss of the premium and transaction costs * * *.

(Emphasis added.)

{¶131} Generally, willful ignorance cannot be equated with reasonable

reliance. As the Ohio Supreme Court has stated, “A person of ordinary mind cannot

be heard to say that he was misled into signing a paper which was different from

what he intended, when he could have known the truth by merely looking at what he

signed.” McAdams v. McAdams, 80 Ohio St. 232, 240-241, 88 N.E. 542 (1909). But

here, as in McAdams, there is an allegation of a special relationship of trust and

confidence, which is supported by facts in the record, which alters the general rule of

willful ignorance.

{¶132} In McAdams, the plaintiff-father sought to reform a deed in which he

had granted land to his son, an attorney who advised him in making the deed. Id. at

236. The burden rested on the plaintiff-father to show by clear-and-convincing proof

that the deed was fraudulent, but only after the son at trial had rebutted the

42 OHIO FIRST DISTRICT COURT OF APPEALS

“presumption” of undue influence that arose from the existence of a fiduciary

relationship. Id. at paragraphs one and two of the syllabus.

{¶133} Further, as LaWarre and Papa have emphasized, the general

disclaimer did not warn of massive loss of principal. See generally In re Prudential

Securities Inc. Ltd. Partnerships Litigation, 930 F.Supp. 68 (S.D.N.Y.1996) (holding

that genuine issue of material fact remained as to whether the defendant’s “carefully

masked general warnings” were inadequate “in the face of specific known risks which

border on certainties.”) Thus, under these circumstances, LaWarre’s and Papa’s

failure to read the options agreement is not the “death knell” of their claim of

justifiable reliance.

{¶134} LaWarre and Papa both stated in their deposition testimony that they

had relied on Fifth Third Securities’s representation that Hughes’s options strategy

as implemented for them was “low risk” and suitable, and the continued condoning

of the strategy and Hughes by Fifth Third Securities’s employees, in remaining with

the strategy and Hughes. The evidence also demonstrates that neither LaWarre nor

Papa understood the strategy.

{¶135} Further, because of the fiduciary relationship between the parties

during the representations, and because Fifth Third Securities failed to unequivocally

correct the misrepresentations, the facts, when construed in the light most favorable

to LaWarre and Papa, support a finding that this continued reliance was justifiable.

{¶136} Similarly meritless is Fifth Third Securities’s argument that LaWarre

and Papa could not establish justifiable reliance as a matter of law because they had

relied on representations from Hughes, and not Fifth Third Securities, when they

chose to invest with Hughes from September 2007 until 2009.

43 OHIO FIRST DISTRICT COURT OF APPEALS

{¶137} LaWarre and Papa both presented evidence that they relied on Fifth

Third Securities’s prior representations in making the decision to continue investing

in the strategy that Hughes had implemented for them while he had been employed

by Fifth Third. And Papa presented evidence that Sturgeon had encouraged him to

transfer his Fifth Third Securities accounts and remain investing with Hughes.

Because of this evidence, the issue presented by the fact of Hughes’s subsequent

advice is one of causation, not justifiable reliance.

{¶138} And, as already discussed, the record contains sufficient facts on

proximate causation to defeat the motion for summary judgment on the tort claims.

Herbert does not address the liability of a financial institution under these

circumstances, where the loss does not occur until after the fiduciary relationship has

terminated, but the loss is allegedly caused by the earlier breach of those fiduciary

and common law duties. Therefore, the trial court’s grant of summary judgment to

Fifth Third Securities on the fraud and negligent-misrepresentation claims should be

reversed.

VII. Negligent-Supervision Claim

{¶139} Fifth Third Securities argued for summary judgment on LaWarre’s

and Papa’s negligent-supervision claim based on Herbert. But because LaWarre and

Papa presented some evidence of Fifth Third Securities’s failure to properly

supervise its employees, who breached their fiduciary duties to LaWarre and Papa,

and that this failure proximately caused their losses, even after the fiduciary

relationship ended, Herbert does not apply.

44 OHIO FIRST DISTRICT COURT OF APPEALS

VIII. Economic-Loss Rule

{¶140} Fifth Third Securities argued that the economic-loss rule barred the

plaintiffs’ breach of fiduciary duty, negligent-misrepresentation, and negligent-

supervision claims because the dispute was the subject of an existing contract

between the parties.

{¶141} A party suffering only economic loss from the breach of an express or

implied contractual duty may not assert a tort claim for such a breach absent an

independent duty of care under tort law. See Battista v. Lebanon Trotting Assn.,

538 F.2d 111, 117 (6th Cir.1976) (citing Ketcham v. Miller, 104 Ohio St. 372, 136 N.E.

145 [1922]). See also Motorist Mut. Ins. Co. v. Said, 63 Ohio St.3d 690, 590 N.E.2d

1228 (1992) (recognizing that a bad faith claim against an insurer arises separately

from a claim based on the breach of the insurance contract, as the duty of good faith

towards its insured is implied by law, even though the tort of bad faith arises as a

consequence of a breach of a duty established by a particular contractual

relationship), overruled in part on other grounds, Zoppo v. Homestead Ins. Co., 71

Ohio St.3d 552, 644 N.E.2d 397 (1994), paragraph one of the syllabus.

{¶142} Admittedly, there is overlap in the contractual and tort-based claims

because the contracts incorporate the regulatory rules of the relevant governing

authorities and the fiduciary duties alleged by LaWarre and Papa are defined in part

by those regulatory rules. But to the extent that the tort claims are founded upon an

independent legal duty arising out of the relationship of the parties, rather than

contractual duties, they are not barred by the economic-loss rule.

IX. Statutory-Violation Claims

{¶143} Both LaWarre and Papa alleged that Fifth Third Securities violated

the Kentucky Securities Act in its sale of securities from its branch office in

45 OHIO FIRST DISTRICT COURT OF APPEALS

Burlington, Kentucky. LaWarre alleged also that Fifth Third Securities’s provision

of investment advice and sale of securities in Ohio violated Ohio’s Securities Act.

Fifth Third Securities moved for summary judgment on these claims without

addressing the substance of the statutory claims, instead arguing, in general terms,

that summary judgment was warranted under Herbert, and that the plaintiffs had

failed to establish causation as a matter of law because the losses had occurred after

the plaintiffs’ fiduciary relationship with Fifth Third Securities had ended.

{¶144} But Fifth Third Securities’s arguments are not supported by the law.

The court in Herbert did not discuss liability under Ohio’s or Kentucky’s Securities

Acts. And Fifth Third Securities failed to identify a provision in either act that

precludes an award of damages for losses incurred after the termination of the

fiduciary relationship. Thus, the trial court erred by granting summary judgment to

Fifth Third Securities on those grounds.

X. Claims Based on Collins’s Failure to Accurately Report Balances

{¶145} The final claims against Fifth Third Securities are based on Collins’s

receipt and review of LaWarre’s monthly Fidelity investment statements in 2008 and

2009. LaWarre alleged that Fifth Third Securities was liable to him for the breach of

an oral contract, or alternatively, under a theory of negligence or promissory

estoppel. Fifth Third Securities moved for summary judgment on these claims on

the ground that there was no evidence in the record that LaWarre spoke with anyone

at Fifth Third Securities regarding a review of account statements or a reporting of

monthly balances. But LaWarre presented evidence that Collins was dually

employed by the bank and the securities firm. Therefore, Fifth Third Securities was

not entitled to summary judgment on this ground.

46 OHIO FIRST DISTRICT COURT OF APPEALS

{¶146} Next, Fifth Third Securities argued that summary judgment was

warranted because there was no evidence that LaWarre sustained any damages

caused by any alleged breach of a duty or promise by Fifth Third Securities. But

LaWarre presented evidence that he would have stopped investing with Hughes

before suffering massive losses in January 2009 if he had been aware that Hughes

was fraudulently concealing his monthly losses, which were greater than $500,000.

{¶147} Finally, Fifth Third Securities argued that summary judgment was

appropriate on the negligence-in-reporting claim based on the economic-loss

doctrine. I agree with the majority that summary judgment was proper on that

ground. Fifth Third Securities did not owe a fiduciary duty to LaWarre at that point

in time, and LaWarre did not pursue the claim as a negligent-misrepresentation

claim. Thus, under these circumstances, any duty that Fifth Third Securities owed

to LaWarre to exercise reasonable care in reporting the account balances arose only

by contract.

XI. Claims Against Fifth Third Bank

{¶148} The plaintiffs filed an amended complaint alleging that defendant

Fifth Third Bank: (1) is liable for the breach of various fiduciary duties; (2) is liable

under common law negligence theory for recommending an “unsuitable investment;”

(3) is liable for negligent misrepresentation for representing the Options Strategy as

a “low-risk suitable strategy”; (4) is liable for the negligent supervision of its

employees, including Hughes, Collins, and Sturgeon; (5) is liable for violations of the

Kentucky Securities Act; and (6) is liable for fraud for the misrepresentation and

concealment of facts. Additionally, LaWarre presented separate claims alleging that

Fifth Third Bank (1) is liable to him for violations of the Ohio Securities Act and (2)

is liable to him for Collins’s conduct in reporting his monthly portfolio balances

47 OHIO FIRST DISTRICT COURT OF APPEALS

under the theories of breach of fiduciary duty, breach of contract, negligence, and

promissory estoppel.

XII. The Bank’s Motion for Summary Judgment

{¶149} Fifth Third Bank moved for summary judgment on all of the plaintiffs’

claims. With respect to the breach-of-fiduciary-duty claim, it argued that it owed no

fiduciary duty to the plaintiffs because the facts demonstrated a mere “debtor-

creditor relationship.” Under Ohio law, a mere debtor-creditor relationship does not

create a fiduciary relationship, absent special circumstances. See, e.g., Groob v.

KeyBank, 108 Ohio St.3d 348, 351, 2006-Ohio-1189, 843 N.E.2d 1170, ¶ 22.

{¶150} This principle has been codified in R.C. 1109.15(E), formerly R.C.

1109.15(D), which provides that “[u]nless otherwise expressly agreed in writing, the

relationship between a bank and its obligor, with respect to any extension of credit, is

that of a creditor and debtor, and creates no fiduciary or other relationship between

the parties.”

{¶151} In response, LaWarre and Papa argued that the bank was liable for

the breach of fiduciary duties normally imposed on a broker-dealer because of the

specific facts in this case. For example, there was evidence that Fifth Third Bank and

Fifth Third Securities held themselves out to the public as a single entity called Fifth

Third Investment Advisors; that private bankers Sturgeon and Collins referred the

plaintiffs to Hughes and received or at least were eligible to receive incentive

compensation because of the referral; Sturgeon, Collins, and Hughes had dual

employment agreements and were supervised by the same supervisor; the

refinancing of Papa’s home loan with Fifth Third Bank and the investment of his

home equity were part of the investment strategy of the Fifth Third Investment

Advisors; the use of options trading to fund LaWarre’s payback of a loan with Fifth

48 OHIO FIRST DISTRICT COURT OF APPEALS

Third Bank was part of the investment strategy of the Fifth Third Investment

Advisors; and the plaintiffs testified that they were unaware that there were two

separate Fifth Third entities.

{¶152} Neither the trial court nor the majority have reached the merits of this

argument, instead holding that Herbert controls the resolution of the claims because

no losses were suffered until LaWarre and Papa voluntarily transferred their

investment accounts from Fifth Third Securities. In my opinion, however, the

Herbert court did not address whether a bank and brokerage could be liable for

losses caused by the breach of fiduciary duties, but not occurring until after the

termination of the fiduciary relationship, and therefore, the case does not determine

the claims in favor of the bank. Thus, the liability of Fifth Third Bank must be

addressed.

{¶153} To that end, I agree with the plaintiffs that, on this record, which

demonstrates that the Investment Advisory Group employees were agents for both

the bank and the broker-dealer, Fifth Third Bank could be liable for the alleged

breach of fiduciary duties. The blurring of the lines between the broker-dealer and

the bank was such that Fifth Third Bank could be treated as a broker-dealer. See

Scott v. Dime Sav. Bank of New York, FSB, 886 F.Supp. 1073, 1079 (S.D.N.Y.1995).

Thus, Fifth Third Bank was not entitled to summary judgment on the breach of

fiduciary duty claim.

XIII. Fraud and Negligent-Misrepresentation Claims

{¶154} I would also reverse the granting of summary judgment for the bank

on the fraud and negligent-misrepresentation claims. The bank, like Fifth Third

Securities, argued that LaWarre and Papa could not establish the justifiable-reliance

elements of these claims. But as previously discussed, the record contains sufficient

49 OHIO FIRST DISTRICT COURT OF APPEALS

evidence that LaWarre and Papa justifiably relied on the misrepresentations of the

Investment Advisor Group employees, who were dually employed by the bank and

Fifth Third Securities. Therefore, summary judgment was not appropriate on these

XIV. Economic Loss

{¶155} Finally, the bank argued that the economic-loss rule barred LaWarre’s

and Papa’s negligence-based claims pertaining to the investment services because

they did not have a contract with the bank for investment services. But the record

contains evidence that the bank and the securities firm acted as “one in the same,”

and that the bank owed the plaintiffs a fiduciary duty. Thus, the record contains

evidence of privity or a sufficient nexus that could serve as its substitute. Moreover,

Ohio courts have allowed the recovery of purely economic losses for professional

negligence in the absence of actual privity when the plaintiff is the member of a

limited class whose reliance on the representation is specifically foreseen. See

Haddon View Inv. Co. v. Coopers & Lybrand, 70 Ohio St.2d 154, 436 N.E.2d 212

(1982), syllabus (holding that “[a]n accountant may be held liable by a third party for

professional negligence when that third party is a member of a limited class whose

reliance on the accountant’s representation is specifically foreseen.”)

XV. Statutory-Violation Claims

{¶156} LaWarre’s and Papa’s claims based on violations of Ohio’s and

Kentucky’s Securities Acts also survive summary judgment. The Bank generally

moved for summary judgment on these claims, arguing that Herbert was controlling.

But as previously discussed, Herbert did not involve claims under these securities

acts. And the Bank failed to demonstrate that the securities acts precluded the

50 OHIO FIRST DISTRICT COURT OF APPEALS

recovery of losses occurring after the Fifth Third investment accounts were closed.

Accordingly, summary judgment was not appropriate on these claims.

XVI. Claims Based on Collins’s Failure to Accurately Report Balances

{¶157} I would affirm the grant of summary judgment to Fifth Third Bank on

LaWarre’s negligence claim based on Collins’s alleged failure to accurately report

account balances to him beginning in May 2008. By September 2007 and onward,

neither Fifth Third Bank nor Fifth Third Securities was providing investment advice

to LaWarre. Thus, there was no evidence that at that point in time LaWarre had a

fiduciary relationship with the bank or any of its employees. Thus, the common law

duty that LaWarre based this claim on did not exist as a matter of law, and any

alleged duty of reasonable care arose solely by Collins’s agreement to review the

documents. Therefore, as recognized by the majority, the negligence claim is barred

by the economic-loss rule.

{¶158} But I would reverse the grant of summary judgment to Fifth Third

Bank on LaWarre’s separate claim against Fifth Third Bank for breach of contract, or

in the alternative, promissory estoppel, based on Collins’s receipt and review of

LaWarre’s monthly Fidelity brokerage statements beginning in mid-2008 to early

2009.

{¶159} LaWarre presented evidence that Collins, as an agent of Fifth Third

Bank, had orally agreed to review his monthly Fidelity statements sent to her by

Hughes and to “confirm the account balances” to him by telephone. As LaWarre

knew, Collins was monitoring the market value of the Fidelity investment account

because the value impacted LaWarre’s ability to repay his loan to Fifth Third.

Further, it is undisputed that Collins was actually receiving and reviewing the

51 OHIO FIRST DISTRICT COURT OF APPEALS

statements and that she had had conversations with LaWarre concerning the

{¶160} LaWarre additionally produced evidence that the contract was

breached and that he suffered damages as a result of the breach. It is undisputed

that Collins failed to detect Hughes’s fraud. And LaWarre presented an affidavit

from a banking expert who opined that Collins’s cursory review of the first page of

the statement fell below industry standards and that she should have detected

Hughes’s fraud from her review of the first statement.

{¶161} This, coupled with evidence that LaWarre had undiscovered losses of

more than $500,000 in options trades beginning in May 2008, an amount that

LaWarre had previously said would result in the termination of his investment

relationship with Hughes and his strategy, creates a genuine issue of material fact as

to whether Collins’s alleged breach contributed to LaWarre’s losses.

{¶162} In sum, summary judgment is not appropriate on the breach-of-the-

oral contract claims because material issues of fact exist as to whether LaWarre and

Collins made such an agreement, the scope of such an agreement, whether Collins

breached the agreement, and whether LaWarre suffered damages as a result of the

breach.

{¶163} Relatedly, if LaWarre cannot prove the existence of an enforceable

contract, he should be able to proceed on his promissory-estoppel claim, which he

pled in the alternative. Four elements must be met for a promissory-estoppel claim

to succeed: (1) a clear and unambiguous promise; (2) reliance upon the promise by

the person to whom the promise is made; (3) the reliance is reasonable and

foreseeable; and (4) the party seeking to enforce the agreement is injured as a result

of his reliance. Weiper v. W.A. Hill & Assoc., 104 Ohio App.3d 250, 260, 661 N.E.2d

52 OHIO FIRST DISTRICT COURT OF APPEALS

796 (1st Dist.1995), citing Healey v. Republic Powdered Metals, Inc., 85 Ohio

App.3d 281, 284-285, 619 N.E.2d 1035 (9th Dist.1992); Restatement of the Law 2d,

Contracts, Section 90, (1973).

{¶164} LaWarre unequivocally averred that Collins had agreed to “review”

the statements and to “confirm the account balances” to him. Further, he presented

evidence that Collins knew he was not receiving his Fidelity statements at that time,

and that he was relying on her to help him monitor the portfolio value and check on

Hughes. Finally, LaWarre presented evidence that Collins should have discovered

the fraud and that his reliance on her false information caused him to continue

investing with Hughes in the options investment strategy. Accordingly, I would

reverse the entry of summary judgment on the promissory-estoppel claim.

XVII. Conclusion

{¶165} The trial court misapplied the law with respect to the liability of a

bank and broker-dealer for the breach of fiduciary or contractual duties that cause

economic losses to clients. Thus, I would reverse the trial court’s judgment granting

summary judgment to Fifth Third Securities and Fifth Third Bank on all claims, with

the exception of LaWarre’s separate negligence claim that was based on Collins’s

review of his Fidelity Investment statements.

Please note: The court has recorded its own entry this date.