In Badger v. Southern Farm Bureau Life Insurance Co., 612 F.3d 1334 (11th Cir. 2010)(Subscription required to access Federal Reporter Third), the Eleventh Circuit Court of Appeals held firmly that there is simply no Fiduciary Duty to disclose any and all nonpublic information about a security that is the subject of a transaction. The Eleventh Circuit panel based its holding in this case on what it said is clearly settled Federal and Florida law.
The District Judge in that case, Judge Mary Scriven of the Middle District of Florida in Orlando, seems to have reached beyond the allegations and contentions of the parties and their Claims and Defenses. That case was a shareholders' derivative suit filed on behalf of Plaintiffs' Shareholders Corporation ("PSC") against Southern Farm Bureau Life Insurance Company ("Southern Farm"). Southern Farm purchased a "debenture held by PSC, which was PSC's primary asset. In the course of negotiations, Southern Farm gave to PSC an actuarial valuation it had commissioned of the debenture and stated that the valuation [which was $3.3 Million] represented a 'fair price.'" Id. at 1336. Not to be outbid by a fair price, PSC and Southern Farm agreed to pay a higher price than Southern Farm's evaluation -- $4.4 Million. Id. at 1336-37.
The Plaintiffs sued on various Fraud theories on the alleged grounds that Southern Farm omitted certain material facts "about the debenture sale". See id. at 1338. The District Court gave Jury Instructions consistent with the idea of a legal duty to disclose the information. However, in that case, "the parties agree that Southern Farm and PSC were engaged in an arm's-length transaction; PSC has not asserted the existence of a fiduciary relationship or other similar relationship of trust and confidence between PSC shareholders and Southern Farm." Id. at 1341. [Emphasis added.] For good measure, the Eleventh Circuit's opinion repeated this fact:
The Plaintiffs have never asserted the existence of any fiduciary relationship between Southern Farm and PSC.
Id. at 1345.
Under both Federal Securities Law (Rule 10b-5) and Florida Common Law, the Eleventh Circuit pointed out that "such a duty 'arises when one party has information "that the other [party] is entitled to know because of a fiduciary or other similar relation of trust and confidence between them."'" Id. at 1340-41. [Emphasis added.]
The Eleventh Circuit accordingly reversed a Jury Verdict based on a finding of Fraud, under erroneous Jury Instructions which included an Instruction that to the contrary, such a legal duty existed in that case, holding:
This is an incorrect statement of the law.
Id. at 1343. The Appellate Court cited to nine (9) decided Cases, including one decided by the United States Supreme Court, in which Courts across the Nation previously and uniformly rejected such a legal duty. Id. at 1343-44.
In short, the Eleventh Circuit held, the correct rule "is that a party to a transaction has a duty to disclose to the counterparty's shareholders only when failure to disclose would result in the breach of a fiduciary or other duty." Id. at 1345.
The implications for all Fiduciaries facing fulfillment of their respective duties, perhaps, and in particular for Insurance Companies' Fiduciary Duties are clear: Alleged Failures to Disclose will be actionable at Common Law when they rest upon a preexisting Fiduciary or other relationship of trust and confidence between the parties involved.
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