Arthur Smith v. Powder Mountain, LLC

Case: 11-15136 Date Filed: 10/25/2012 Page: 1 of 11

[DO NOT PUBLISH]

IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT
________________________

Nos. 11-15136 & 11-15801
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D.C. Docket Nos. 9:08-cv-80820-DTKH,

9:08-cv-81185-DTKH

ARTHUR SMITH, et al.,

lllllllllllllllllllllllllllllllllllllll l Plaintiffs,

FDB II ASSOCIATES, LP,

llllllllllllllllllllllllllllllllllllllll Plaintiff - Appellee,

versus

POWDER MOUNTAIN, LLC, et al.,
a Delaware Limited Liability Company,

lllllllllllllllllllllllllllllllllllllllll Defendants,

PFP ASSET RECOVERY, LLC,

llllllllllllllllllllllllllllllllllllllll Third Party Claimant - Appellant.

________________________

Appeals from the United States District Court
for the Southern District of Florida
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(October 25, 2012)
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Before BARKETT and PRYOR, Circuit Judges, and LAWSON, ∗ District Judge.

PER CURIAM:

The issue presented in this appeal is whether a creditor becomes a “protected

purchaser,” Fla. Stat. § 678.5101(1), of investment security accounts when a

securities intermediary stops transfers from the accounts to the debtor/entitlement

holder, but requires an additional signature from the creditor before transferring the

accounts to the creditor’s designee. This appeal concerns a priority dispute

between two creditors, FDB II Associates, LP, and PFP Asset Recovery, LLC,

both of which settled complaints of fraud and breach of fiduciary duty against

Arnold Mullen. PFP contends that it enjoys priority over FDB as to Mullen’s

accounts at Fidelity Investments as a purchaser of those accounts. Id.

§§ 678.1061(4)(b), 678.5101(1). As part of Mullen’s settlement with PFP, a

Florida court ordered Mullen to transfer his interest in the Fidelity accounts to PFP,

and after PFP sent Fidelity that order, Fidelity agreed on June 30, 2010, to transfer

the accounts to the designee of PFP upon the receipt of an additional signature

from PFP. Fidelity also agreed, without condition, to end transfers from the

accounts to Mullen. FDB argues that PFP failed to reach an agreement with

Fidelity on June 30, 2010, so as to obtain control of the accounts before FDB

served writs of garnishment on Fidelity on July 1, 2010. The district court agreed

∗
Honorable Hugh Lawson, United States District Judge for the Middle District of Georgia,
sitting by designation.

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with FDB and entered summary judgment in its favor. Because we conclude that

PFP obtained control of the Fidelity accounts before service of the writs of

garnishment, we reverse and remand with instructions to enter a summary

judgment in favor of PFP.

I. BACKGROUND

On October 15, 2008, FDB II Associates, LP, filed in the district court a

complaint alleging fraud, breach of contract, and breach of fiduciary duty against

Arnold Mullen. The parties later settled. On March 5, 2010, the district court

entered a final consent judgment against Mullen in the amount of $1 million.

On January 23, 2009, Paul Fireman, individually doing business as PFP

Associates, and the Paul and Phyllis Fireman Charitable Foundation filed in a

Florida court a complaint alleging fraud, conversion, and breach of fiduciary duty

against Mullen. The complaint alleged that Mullen stole over $100 million from

Paul Fireman and the Fireman Charitable Foundation. The parties to this litigation

settled too. On June 11, 2010, Paul Fireman and Mullen entered a restitution and

property transfer agreement, in which Mullen agreed to transfer all of his rights,

title, and interest in certain assets, including the “Fidelity Restricted Accounts,” to

Paul Fireman or his assignee. Paul Fireman designated PFP Asset Recovery, LLC,

as the entity to receive all assets transferred under the agreement.

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On June 30, 2010, the Florida court approved the restitution agreement and

ordered Mullen to transfer various assets, including the Fidelity Restricted

Accounts, to an account of Paul Fireman or the designee of Paul Fireman, or to any

other account to be designated by Paul Fireman. On the same day, Paul Fireman

emailed Fidelity with instructions to “immediately transfer the accounts held by

Fidelity” to designated accounts held in the name of PFP Asset Recovery, LLC, at

the Bank of America. The law firm of Gunster Yoakley, counsel for PFP, and

Richelle Kennedy, Associate General Counsel for Fidelity, sent a series of emails

to each other to address the mechanics of the transfer.

Kennedy confirmed that Fidelity “received the court order and [was] placing

a stop on the monthly transfer . . . into Mr. Mullen’s unrestricted account” in

compliance with the order. Gunster Yoakley then provided Kennedy with a letter

of instruction regarding the transfer of the funds in the accounts affected by the

injunction. Kennedy also requested that Mrs. Fireman sign the instructions to

Fidelity in her capacity as trustee of the Charitable Foundation. The following day,

July 1, 2010, Gunster Yoakley again demanded Fidelity transfer the accounts as

instructed the previous day.

On July 1, 2010, FDB served Fidelity with two writs of garnishment from

the district court. On July 8, 2010, Kennedy reiterated to Gunster Yoakley that

Fidelity had concerns about transferring the accounts without first obtaining the

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signature of Mrs. Fireman. Although Gunster Yoakley did not concede that her

signature was necessary, Yoakley offered to have Mrs. Fireman sign the

instructions as Fidelity requested. On July 14, 2010, Fidelity filed an amended

answer to the writs of garnishment. FDB asserted that it held $3,459,960.13 and

$234,290.66 in the two garnished securities accounts.

On July 20, 2010, PFP Asset Recovery, LLC, as assignee of Paul Fireman,

filed a motion to dissolve the garnishment writs in favor of FDB. In support of its

motion, PFP filed an affidavit of Paul Fireman in which he asserted an ownership

interest in the restricted accounts under the restitution agreement. PFP also filed

an affidavit from Kennedy.

The affidavit of Kennedy recited the understanding of Fidelity that PFP

could require transfers from the accounts without Mullen’s consent:

On June 30, 2010, Fidelity agreed to follow PFP’s
instruction to place a stop of the monthly transfer of
$36,500 from, in part, the subject accounts into Mr.
Mullen’s unrestricted account.
...
On June 30, 2010, in light of the order furnished to
Fidelity, Fidelity agreed to act according to PFP’s
entitlement orders regarding the subject accounts without
Mullen’s consent.
On June 30, 2010, in light of the order furnished to
Fidelity, Fidelity understood that PFP could direct
transfer of the contents of the subject accounts to itself
without Mullen’s consent.

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At her deposition, Kennedy testified that Fidelity agreed to follow the

instructions of PFP “because of the language contained in [the state court] order.”

Kennedy testified that, “on June 30, 2010, Fidelity understood that PFP could

direct a transfer of the contents of the subject accounts to itself without Mullen's

consent.” Kennedy also testified that the Florida court order led Fidelity to

understand that Mullen had relinquished control of the accounts.

After PFP filed its motion to dissolve the writs of garnishment, the

magistrate judge concluded that, as of June 30, 2010, Fidelity had acknowledged

the interest of PFP in the accounts and had agreed to transfer the funds in the

accounts without further consent or input from Mullen. The magistrate judge

concluded that Mullen no longer owned accounts at Fidelity that were capable of

being garnished when the writs in favor of FDB were served on Fidelity on July 1.

The magistrate judge recommended that the writs be dissolved.

When FDB and PFP later filed cross-motions for summary judgment, the

district court disagreed with the recommendation of the magistrate judge and

instead granted summary judgment in favor of FDB. The district court ruled that

Florida law requires a binding control agreement between a financial intermediary

like Fidelity and a potential purchaser like PFP for the potential purchaser to have

“control” over an asset. The district court stated that “a contractual obligation is

required, as opposed to a mere expression of preliminary intent to acquiesce, to

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show that a securities intermediary has ‘agreed’ to follow the directions of a

security entitlement purchaser under [Florida law].” The district court determined

that the record interpreted in the light most favorable to PFP “reflects at best that

Fidelity simply gave a preliminary indication of its willingness to acquiesce with

PFP entitlement orders once certain essential terms and conditions were met, and

unequivocally demonstrates that there was no agreement on at least one of those

essential terms as of July 1, 2010.” The district court concluded that, “as a matter

of law, [] there was no express or implied control agreement between PFP and

Fidelity as of July 1, 2010.”

II. STANDARD OF REVIEW

This Court “reviews de novo a district court's grant of summary judgment,

applying the same legal standards as the district court.” J.F.K. v. Troup Cnty. Sch.

Dist., 678 F.3d 1254, 1255 (11th Cir. 2012). “The court shall grant summary

judgment if the movant shows that there is no genuine dispute as to any material

fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P.

56(a). “In making this assessment, we must view the evidence in the light most

favorable to the nonmoving party.” Standard v. A.B.E.L. Servs., Inc., 161 F.3d

1318, 1326 (11th Cir. 1998).

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III. DISCUSSION

This appeal turns on whether PFP obtained control of Mullen’s accounts at

Fidelity on June 30, 2010. Under the Florida version of Article 8 of the Uniform

Commercial Code, an individual must satisfy three requirements, the last of which

is “control,” to become a “protected purchaser” of an investment security:

an action based on an adverse claim to a financial asset or
security entitlement . . . may not be asserted against a
person who purchases a security entitlement . . . from an
entitlement holder if the purchaser gives value, does not
have notice of the adverse claim, and obtains control.

Fla. Stat. § 678.5101(1). PFP contends that it satisfied these requirements for the

Fidelity accounts before FDB served its writs of garnishment on Fidelity, but FDB

contends that PFP failed to obtain control of the Fidelity accounts. See Fla. Stat. §

77.06. FDB contends that its service of the writs of garnishment on July 1, 2010,

instead created a lien in favor of FDB on any of Mullen’s property in the

possession of Fidelity.

Under Florida law, “[a] purchaser has ‘control’ of a security entitlement if

. . . [t]he securities intermediary has agreed that it will comply with entitlement

orders originated by the purchaser without further consent by the entitlement

holder . . . .” Fla. Stat. § 678.1061(4)(b). The district court reasoned that, for

Fidelity to “agree” to comply with the entitlement orders of PFP, there would have

to have been “a meeting of the minds resulting in a contractual undertaking

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between the securities intermediary and the creditor/purchaser of the securities

entitlement.” The district court determined that “Fidelity was willing to comply

with PFP’s directions regarding securities entitlements titled in Mullen’s name

only upon execution of documentation acceptable to Fidelity (a letter of instruction

signed by both Mr. and Mrs. Fireman).” But the district court misinterpreted

section 678.1061(4)(b).

The comments to section 678.1061(4)(b) explain that, for a purchaser to

obtain control of a securities entitlement, there is no “requirement that the

purchaser’s powers be unconditional, provided that further consent of the

entitlement holder is not a condition.” Id. § 678.1061(4)(b) cmt.7. “The key to the

control concept is that the purchaser has the ability to have the security sold or

transferred without further action by the transferor.” Id. And the comments

provide a useful example of how a purchaser can “control” a securities entitlement

even when a securities intermediary like Fidelity places conditions on its

compliance with entitlement orders by the purchaser:

Debtor grants to Alpha Bank a security interest in a
security entitlement that includes 1000 shares of XYZ
Co. stock that Debtor holds through an account with Able
& Co. Able agrees to act on the entitlement orders of
Alpha, but Alpha's right to give entitlement orders to the
securities intermediary is conditioned on the Debtor's
default. Alternatively, Alpha's right to give entitlement
orders is conditioned upon Alpha's statement to Able that
Debtor is in default. Because Able's agreement to act on
Alpha's entitlement orders is not conditioned on Debtor's

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further consent, Alpha has control of the securities
entitlement under either alternative.

Id. ex.11. The key issue here then is whether Fidelity agreed that PFP could

control the accounts without further consent from Mullen.

PFP obtained control of Mullen’s accounts on June 30, 2010. After Gunster

Yoakley sent the state court order to Fidelity and instructed Fidelity to cease

sending funds from the accounts to Mullen and to transfer those accounts to PFP,

Fidelity agreed that PFP controlled the accounts without any further consent from

Mullen even though Fidelity requested that Mrs. Fireman sign the instructions to

transfer the accounts. Kennedy testified that Fidelity agreed to follow the

instructions of PFP “because of the language contained in [the state court] order.”

Kennedy testified that, “on June 30, 2010, Fidelity understood that PFP could

direct a transfer of the contents of the subject accounts to itself without Mullen's

consent.” The understanding of Fidelity that PFP could direct transfers of the

Mullen accounts from Mullen to PFP, as Kennedy testified, establishes PFP had

control over the accounts. The district court erred in granting summary judgment

in favor of FDB.

By rejecting the understanding of control agreements expressed by the

district court, we necessarily reject the contention that PFP lacked control because

it failed to provide adequate consideration to Fidelity. The district court did not

address whether consideration was necessary to establish a control agreement

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between PFP and Fidelity and, if so, whether PFP provided adequate consideration

to Fidelity. FDB contends that PFP was required to exchange consideration with

Fidelity before PFP established control over the accounts. This contention fails.

PFP controlled the accounts when Fidelity agreed that PFP could direct transfer of

the Mullen accounts without consent from Mullen regardless of whether

consideration was exchanged between PFP and Fidelity. Because we hold that

PFP established “control” within the meaning of Florida Statutes section

678.5101(1), there is no remaining issue as to whether PFP is a protected purchaser

of the accounts.

IV. CONCLUSION

We REVERSE the summary judgment in favor of FDB and REMAND to

the district court with orders to enter summary judgment in favor of PFP dissolving

the writs of garnishment. We VACATE the final cost judgment in favor of FDB.

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