Becker v. PaineWebber, Inc. ( 1992 )

United States Court of Appeals,
Fifth Circuit.
No. 91–2568.
Gary M. BECKER, Plaintiff–Appellant,
v.
PAINEWEBBER, INC., Defendant–Appellee.
June 10, 1992.
Appeal from the United States District Court for the Southern District of Texas.
Before SNEED*, REAVLEY, and BARKSDALE, Circuit Judges.
SNEED, Circuit Judge:
Appellant Gary Becker appeals from the trial court's decision entering a directed verdict in
favor of the appellee, PaineWebber, on a claim of negligent misrepresentation. We affirm.
I.
FACTS AND PROCEEDINGS BELOW
In 1987, Gary Becker, who formerly worked in the crude oil trading business at Mosley
Securities, began discussions with various securities firms about creating a crude oil trading unit. In
August of that year, he went to New York to meet with PaineWebber representatives. According
to the trial testimony of one of these representatives, Becker described the proposed oil trading
venture as being relatively low-risk and requiring little capital. After additional meetings,
PaineWebber told Becker that his proposal would be submitted to its expense management committee
(the "EMC") for approval in September and that no one else needed to approve the plan.
PaineWebber informed Becker in late September that the plan had been approved by the
EMC, which anticipated start-up costs of $500,000, including Becker's compensation, rent, and
*
Senior Circuit Judge of the Ninth Circuit, sitting by designation.
communication expenses. In October, Becker accepted employment with PaineWebber, halted
negotiations with other firms, and moved to New York. According to an employment agreement
between the parties, Becker would receive an income for one year but none of the profits.
PaineWebber maintains that some months after the EMC approved the plan, it discovered
that, because of the large amounts which would be traded, a parent company guarantee and a separate
subsidiary would be needed for Becker's proposed oil trading business. This made board approval
a requirement.1 PaineWebber told Becker to compute the amount of the parent company guarantee
he believed he needed, and his prediction was $750 million. Becker claims that he was assured
repeatedly that board approval was a formality, "a rubber stamp," and that his proposed oil trading
unit was a "done deal." He maintains that he was told to advise his clients that the unit was delayed
temporarily.
After reviewing Becker's proposal, PaineWebber's Chairman of the Board returned it for
revisions. Becker's amended proposal called for a $100 million guarantee. Richard Falk, a
PaineWebber executive, testified that the drastic reduction from $750 million made him skeptical of
Becker's knowledge of the oil trading business. Becker claims that although PaineWebber's Chief
Financial Officer informed Falk in a memo that the proposal had been withdrawn, this news was not
relayed to him. Becker maintains he was assured that the project was on schedule and soon would
be ready for trading. He alleges that he did not learn of the proposal's defeat until September 1988.
One year after his starting date, Becker was terminated. He received a $120,000 salary and
an $173,000 bonus, which was later raised to $230,000. Becker claims that PaineWebber caused him
to lose credibility in the oil trading business and that this loss of credibility prevents him from finding
employment in the industry. PaineWebber maintains that Becker was terminated because he
1
At PaineWebber, the board of directors must approve any major company decision; the EMC
makes decisions involving lesser risk or capital.
conducted an unauthorized oil trade.
Becker brought an action in a Texas state district court for negligent misrepresentation under
the Restatement (Second) of Torts § 552, as adopted in Texas, alleging damages in excess of $11
million. PaineWebber removed the action to federal court on the basis of complete diversity of
citizenship.2 Thirteen months after removing the case, PaineWebber sought leave to file an amended
answer in the district court and provided two affirmative defenses: (1) New York law applied; (2)
the employment-at-will rule barred Becker's claim. The district court denied PaineWebber's motion
but granted leave to amend the Joint Pretrial Order. PaineWebber then added the above-mentioned
defenses as well as these two: (1) the statute of frauds barred Becker's claim; and (2) Becker was
not entitled to damages under the Restatement (Second) of Torts § 552.
A jury trial began on April 1, 1991. At the conclusion of the evidence, PaineWebber moved
for a directed verdict, which was granted by the district court on April 4th. The court entered its
Final Order on April 11, 1991. This appeal followed.
II.
JURISDICTION AND STANDARDS OF REVIEW
This court has jurisdiction under 28 U.S.C. § 1291 (1988).
A district court's award of a directed verdict is reviewed de novo. Lloyd v. John Deere Co.,
922 F.2d 1192, 1194 (5th Cir.1991). In ruling on a motion for directed verdict, a court must examine
the entire record in the light most favorable to the nonmovant and draw all inferences in that party's
favor. Treadaway v. Societe Anonyme Louis–Dreyfus, 894 F.2d 161, 164 (5th Cir.1990). The
standard of review on appeal is the same standard used by the trial court. Springborn v. American
Commercial Barge Lines, Inc., 767 F.2d 89, 94 (5th Cir.1985). A directed verdict is appropriate
2
Becker remained a Texas citizen while employed by PaineWebber.
only when the facts and inferences point so strongly in the movant's favor that no reasonable jury
could reach a contrary conclusion. See Fed.R.Civ.P. 50(a); Brady v. Southern R.R., 320 U.S. 476,
479–80, 64 S. Ct. 232, 234–35, 88 L. Ed. 239 (1943).
III.
DISCUSSION
A. Choice of Law
We first must decide whether to apply the substantive law of Texas or New York. Although
both the Texas and New York law of negligent misrepresentation are based on the Restatement
(Second) of Torts § 552, PaineWebber maintains that Texas's version is more favorable to Becker's
case. PaineWebber argues that under Texas choice of law principles, New York substantive law
should apply to this dispute. While we perceive no material difference to warrant PaineWebber's
contention that Texas law is more favorable to Becker, we agree that an application of New York
substantive law is appropriate and apply it on that basis.
Under Erie, a federal court sitting in diversity must apply the choice-of-law rules of the
jurisdiction in which it sits. See Klaxon Co. v. Stentor Elec. Mfg. Co., Inc., 313 U.S. 487, 496, 61
S. Ct. 1020, 1021, 85 L. Ed. 1477 (1941). Texas uses the "most significant relationship" test to
determine the applicable law in contract and tort cases. Duncan v. Cessna Aircraft Co., 665 S.W.2d
414, 421 (Tex.1984). Under that test, we have held that the law of the place of employment governs.
See Pruitt v. Levi Strauss & Co., 932 F.2d 458 (5th Cir.1991); Randall v. Arabian Am. Oil Co., 778
F.2d 1146 (5th Cir.1985).
Becker received his job offer in New York and moved there immediately. All discussions
regarding his proposed oil trading unit occurred in New York, with the exception of some telephone
conversations when Becker was still in Texas. During his one-year employment term, Becker
remained in New York and maintained an apartment. Therefore, under the "significant relationship"
test, we find that New York substantive law applies to this dispute.
B. Negligent Misrepresentation
New York recognizes a cause of action for negligent misrepresentation as set forth in section
552 of the Restatement (Second) of Torts.3 See Mallis v. Bankers Trust Co., 615 F.2d 68, 81–82
(2d Cir.1980), cert. denied, 449 U.S. 1123, 101 S. Ct. 938, 67 L. Ed. 2d 109 (1981); Ultramares
Corp. v. Touche, Nevin, & Co., 255 N.Y. 170, 174 N.E. 441 (1931); International Products Co. v.
Erie R.R., 244 N.Y. 331, 155 N.E. 662 (1927), cert. denied, 275 U.S. 527, 48 S. Ct. 20, 72 L. Ed.
408 (1927); Glanzer v. Shepard, 233 N.Y. 236, 135 N.E. 275 (1922). The elements of negligent
misrepresentation are: (1) a careless statement containing false information made by someone, such
as an employer, with a special relationship with the recipient; (2) the recipient's justifiable reliance
on the information; (3) injury proximately caused by the recipient's reliance on the information.
Mallis, 615 F.2d at 82.
Becker provided evidence to present a jury question on the first element because he showed
that he had a special relationship with PaineWebber, his employer, and that PaineWebber constantly
reassured him that his oil trading proposal would be approved when, in fact, PaineWebber knew that
approval was becoming increasingly unlikely. These reassurances could have had their origin in
carelessness, a deliberate intent to mislead Becker, or in an effort to prevent discouragement on the
part of Becker. Whatever the true source, a reasonable jury could have found the presence of a
negligent misrepresentation. It would have been error to direct a verdict on the sole ground that no
3
This section provides in pertinent part:
(1) 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.
Restatement (Second) of Torts § 552 (1977).
negligent representation was made.
Before turning to the appropriate ground on which the directed verdict rested, it is proper to
point out that Becker never sought to establish that PaineWebber promised to create an oil trading
unit to be operated by him. Had he done so he would have sought a recovery measured by the benefit
of his bargain, i.e. the monetary equivalent to him of the promised trading unit. Instead he seeks only
such damages as would be necessary to compensate him "for the pecuniary loss to him of which the
misrepresentation is a legal cause."4
It is here that Becker failed to establish his case sufficiently to entitle him to get to the jury.
His failure was that he established neither his losses in reliance nor any link between the amounts he
sought to recover and the alleged negligent representation. We reach this conclusion for the
following reasons.
First, Becker's claims are in no way based upon any losses incurred in the year in which he
was associated with PaineWebber. He was compensated generously for that year.5
4
Restatement (Second) of Torts; section 552B. That section provides:
(1) The damages recoverable for a negligent misrepresentation are those necessary
to compensate the plaintiff for the pecuniary loss to him of which the
misrepresentation is a legal cause, including
(a) the difference between the value of what he has received in the
transaction and its purchase price or other value given for it; and
(b) pecuniary loss suffered otherwise as a consequence of the plaintiff's
reliance upon the misrepresentation.
(2) The damages recoverable for a negligent misrepresentation do not include the
benefit of the plaintiff's contract with the defendant.
Restatement (Second) of Torts § 552B (1977).
5
He was paid a total of $350,000.
Second, Becker does claim to have lost $1.4 million annually by reason of not becoming an
oil trader. This figure suggests a contractual recovery more than losses in reliance recovery. To the
thousands of law students who were introduced to contract law by studying the case of Hawkins v.
McGee, 84 N.H. 114, 146 A. 641 (1929), Becker will appear to be using $1.4 million as the measure
of damages that will give him the "perfect hand" the doctor in that case promised to provide. That,
as the professor repeated over and over, was the contractual measure of damages.
Quite properly, subsection (2) of section 552B of the Restatement (Second) of Torts expressly
prohibits a recovery of the "benefit of the plaintiff's contract with the defendant." That is, Becker's
reliance on "negligent misrepresentation" limits his recovery when expressed in terms of Hawkins v.
McGee, supra, to the difference between the hand before the doctor operated and the hand he was
left with after the doctor had bungled the operation. This distinction Becker does not seem to have
understood.
Third, even assuming that the above characterization falsely represents Becker's intent in
pleading $1.4 million and that it is a sum that Becker puts forward as true losses in reliance and not
the benefit of his supposed bargain, the amount is not supported by his evidence. His annual earnings
during the four years preceding his employment was only $300,000.6 Moreover, during the three
months of trading for PaineWebber losses in t he amount of $526,000 were incurred.7 It is
unreasonable to believe that in the light of these figures Becker would have earned $1.4 million
annually even if PaineWebber had proceeded with its plans.
Fourth, Becker failed to show that he could have earned the $1.4 million or any lesser figure
by becoming an oil trader for another firm had not PaineWebber failed to carry out its original plans.
6
In his past three jobs he received annual salaries averaging about $70,000. Even according to
Becker's estimates, his income averaged almost $300,000 annually during the four years prior to
his employment at PaineWebber.
7
He lost $55,000 in April, $10,000 in June, and $451,000 in July.
It is true that a "lost opportunity" can be a basis for damages in a negligent misrepresentation action.
See Nassau Trust Co. v. Montrose Concrete Prod. Corp., 56 N.Y.2d 175, 451 N.Y.S.2d 663, 436
N.E.2d 1265, 1269 (1982). Once more Becker only asserts that he could have earned $1.4 million;
he offers no substantial proof. The figure is no more persuasive in this setting than it was when
considered as proof of what Becker would have earned as an oil trader at PaineWebber.
These conclusions make it unnecessary to reach PaineWebber's employment at will argument
or the statute of frauds issue.
The district court did not err in directing a verdict against Becker.
AFFIRMED.