The opinion of the court was delivered by: Chin, D.J.
In 1995, plaintiff Thermal Imaging, Inc. ("Thermal") decided to seek
financing for an affiliated company, Computerized Thermal Imaging, Inc.
("CTI"). After a series of negotiations, Thermal entered into a loan
agreement with Keystone Financial, Inc. ("Keystone"), a commercial lender
specializing in loans secured by shares of stock. Under the terms of the
agreement, Keystone agreed to loan Thermal $1,400,000 and Thermal
"pledged" a certain amount of CTI stock as collateral. Thermal obtained
the stock from plaintiff Paul Holt, a stock certificate was issued in
Keystone's name, and the CTI shares (the "Pledged Shares") were deposited
into Keystone's account at defendant Sandgrain Securities ("Sandgrain").
Keystone did not, however, fund the loan as required by the loan
agreement. When pressed by Thermal representatives, Keystone made several
small disbursements, but did not provide the full amount. Thermal became
increasingly suspicious that Keystone was wrongfully selling the Pledged
Shares, and eventually discovered that Keystone had sold more than
600,000 of the Pledged Shares that had been deposited in Keystone's
account at Sandgrain.
Upon review of the evidence presented by the parties, I conclude that
no reasonable jury could find defendants Sandgrain and Marchant liable
for the improper sales of the Pledged Shares. If plaintiffs' allegations
are true, then they were indeed harmed — but not by Sandgrain.
Sandgrain had no duty, contractual or otherwise, to Thermal. It was not
legally obligated to inform Thermal that sales of the Pledged Shares were
taking place. In fact, it had an obligation to follow Keystone's
instructions and complete whatever sales Keystone instructed it to make.
plaintiffs' recourse is against Keystone — not Sandgrain. The fact
that Keystone is now apparently insolvent, while unfortunate, does not
shift liability to Sandgrain.
For the reasons that follow, defendants' motion for summary judgment is
granted and the complaint is dismissed.
A. Keystone and its Predecessor
Keystone was incorporated in 1992, and became active in March 1995,
when it acquired certain assets of First Financial, a company that
specialized in funding stock-secured loans. (Deposition of Edwin D. Wood,
II ("Wood Dep.") at 12, 64-65, 202; Deposition of Jacqueline Johnson
("Johnson Dep.") at 97-98). At the time, Keystone was owned by Edwin
Wood, an individual serving time in federal prison for securities fraud
who had served as "advisor" to First Financial. (Wood Dep. at 10, 13-15,
20-23, 27-28). Jacqueline Johnson, a sometime attorney for First
Financial, became the company's president. (Wood Dep. at 22-23, 79;
Johnson Dep. at 14). Like First Financial, Keystone made loans to
individuals and businesses that were to be secured by shares of stock
pledged as collateral. (Wood Dep. at 81-83; Johnson Dep. at 15). Despite
his incarceration, Wood maintained regular contact with Johnson, who was
supposed to receive instruction from him with respect to each loan. (Wood
Dep. at 81).
In March 1995, Keystone opened an account at Sandgrain (the "Keystone
Account"), into which First Financial transferred certain securities.*fn1
(Deposition of Paul Chinchar ("Chinchar Dep.") at 20-21, 25; Affidavit of
Paul Chinchar ("Chinchar Aff.") ¶ 15). Johnson, Wood, and Janetta
Hatfield, a Keystone employee who serviced the individual loans, retained
authority over the Keystone Account.*fn2 (Chinchar Dep. at 24;
Deposition of Eliot Marchant ("Marchant Dep.") at 47). The account was
"non-discretionary," which meant that trades could only be made at
Keystone's direction: in other words, Marchant, the broker on the
account, could not sell stock without Keystone's authorization or refuse
to comply with Keystone's order to sell. (Marchant Dep. at 103-04;
Chinchar Aff. ¶ 15). Pursuant to Sandgrain policy, Marchant was also
prohibited from sharing information about a client's account with anyone
other than the client.*fn3 (Id. ¶ 19).
Despite his involvement with First Financial's and Keystone's
accounts, Marchant claims that he never inquired as to the specifics of
Keystone's business and thus did not realize the precise nature of
Keystone's business (other than the fact that it "ma[de] loans").
Marchant further claims that he did not know that Keystone typically
secured its loans with shares of stock. (Marchant Dep. at 44). Chinchar,
on the other hand, understood, based on Marchant's representations, that
Keystone, like First Financial, loaned money in exchange for securities.
(Chinchar Dep. at 33-34). He was not told, however, until Thermal's
complaints that the securities were pledged as collateral or restricted
in any way. (Id. at 34-37).
B. The Thermal/Keystone Loan
Thermal, an Oregon corporation, develops and sells medical diagnostic
devices used to detect cancer and other physiological disorders.
(Affidavit of David B. Johnston ("Johnston Dep.") at 14-15). In 1988,
Thermal transferred its diagnostic technology to CTI, a publicly traded
company; Thermal eventually became CTI's largest shareholder. (Id. at
Thermal, through its president, David Johnston, decided to seek
financing for CTI in early 1995.*fn4 To do so, it enlisted the services
of Jim Forbes, a consultant to CTI who in turn sought help from another
broker named Mike Heitz. (Johnston Dep. at 31-33, 38; Deposition of James
R. Forbes ("Forbes Dep.") at 35-36, 39; Deposition of Michael E. Heitz
("Heitz Dep.") at 24). Through the efforts of Heitz, Thermal was put in
contact with Keystone. (Forbes Dep. at 35-36; Heitz Dep. at 25).
Heitz first learned of Keystone through an ad in Barron's magazine and
thereafter contacted the company about its stock loan program. (Id. at
26). In response to Heitz's inquiry, Jacqueline Johnson, the President of
Keystone, proposed a loan transaction secured by shares of stock. (Id. at
26). Under the plan described by Johnson, Keystone would make a loan
based on a percentage of a certain stock's market value, Thermal would
pledge free-trading shares of that stock as collateral, and the shares
— which were not to be sold unless Thermal defaulted on the loan
— would be deposited in a brokerage account for safekeeping. (Id.
at 36, 178-79; Johnston-Dep. at 46).
Thermal expressed interest, and in May 1995, began negotiating with
Keystone for a $1,400,000 loan to be secured with free trading shares of
CTI stock. (Heitz Dep. at 37-39; Johnston Dep. at 44-46). On July 19,
1995, representatives from Thermal and CTI met with Johnson to finalize
the details. (Johnston Dep. at 41-43, 103). At the meeting, Johnston
indicated his concern that the shares be held in a reputable brokerage,
and eventually agreed to deposit the shares with A.G. Edwards, a
brokerage he recognized as credible. (Heitz Dep. at 66-67; Johnston Dep.
at 139-140). The parties then executed a series of documents, including a
security and pledge agreement and a promissory note, setting forth the
terms of the loan. (Declaration of Robert A. Giacovas ("Giacovas
Decl."), Exs. D-E; Johnston Dep. at 41-43). By the terms of these
documents, Thermal acknowledged receipt of $1,400,000 from Keystone and
granted Keystone a security interest in 2,000,000
unrestricted shares of CTI.*fn5 (Giacovas Decl., Ex. D at 1, Ex. E at
1). At the time the documents were signed, Johnson specifically assured
Johnston that the Pledged Shares would only be used as collateral and
would not be sold. (Johnston Dep. at 107).
Because Thermal's own shares in CTI were restricted, Johnston arranged
for Thermal to borrow 2,000,000 shares of unrestricted stock from
plaintiff Paul Holt, a former consultant to Thermal.*fn6 (Johnston Dep.
at 47, 58-59, 64-65; Deposition of Paul D. Holt ("Holt Dep.") at 14-16,
33-35). As Keystone had required, a stock certificate for the 2,000,000
shares was issued in Keystone's name. (Giacovas Decl., Ex. K; Johnston
Dep. at 83; Johnson Dep. at 33-35). The certificate did not indicate ...