 Trumball Investments Limited I v. WACHOVIA BANK, N.A., formerly known as First Union National Bank

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
 TRUMBALL INVESTMENTS LIMITED I;
TRUMBALL INVESTMENTS LIMITED II;
MOLINA INTERNATIONAL LIMITED;
IVYWILD INVESTMENT CORPORATION;
CORTLAND OVERSEAS LIMITED;
TERREL OVERSEAS, INCORPORATED,
No. 05-1536 Plaintiffs-Appellants, 
v.
WACHOVIA BANK, N.A., formerly
known as First Union National
Bank,
Defendant-Appellee. 
Appeal from the United States District Court
for the Eastern District of Virginia, at Alexandria.
Gerald Bruce Lee, District Judge.
(CA-05-15-GBL-BRP)
Argued: November 30, 2005
Decided: February 3, 2006
Before WILKINSON, KING, and SHEDD, Circuit Judges.
Affirmed by published opinion. Judge Wilkinson wrote the opinion,
in which Judge King and Judge Shedd joined.
COUNSEL
ARGUED: Donald James Enright, FINKELSTEIN, THOMPSON &
LOUGHRAN, Washington, D.C., for Appellants. Mary Catherine

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Zinsner, TROUTMAN SANDERS, L.L.P., McLean, Virginia, for
Appellee. ON BRIEF: Jonathan P. Lienhard, TROUTMAN SAND-
ERS, L.L.P., McLean, Virginia, for Appellee.
OPINION
WILKINSON, Circuit Judge:
A discretionary investment account, in which an investor permits
a broker to engage in trades without prior authorization, can be advan-
tageous because it allows the broker the freedom to exercise his
expertise on the investor’s behalf in accordance with the investor’s
stated objectives. In this case, the clients of a bank brought suit alleg-
ing that language in a discretionary investment contract compelled the
bank to follow certain oral investment instructions and that it failed
to do so. The district court dismissed the suit. We affirm, because the
parties failed to manifest an intention to tie the bank’s hands in an
agreement whose very purpose was to confer discretion on the bank
to make investment decisions.
I.
Plaintiffs are a group of six corporations, Trumball Investments
Limited I, Trumball Investments Limited II, Molina International
Limited, Ivywild Investment Corporation, Cortland Overseas Limited,
and Terrel Overseas, Incorporated. Plaintiffs contracted with First
Union National Bank ("First Union"), the predecessor in interest of
defendant Wachovia Bank, N.A. Each of the plaintiffs maintained an
investment account with First Union, which was entrusted with man-
aging the accounts.
A similarly worded agreement governed each account. First Union
was required to follow the instructions in the agreement and "such
other instructions as may from time to time be furnished in writing."
The relevant instructions in the original agreement provided as fol-
lows:
1. You [First Union] are to provide investment review and
management of the Account, taking such actions as you, in
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your discretion, deem best with respect to the investment
and reinvestment of the property held therein as though you
were the owner of such property.
. . .
8. You [First Union] may in your discretion, follow and
rely on any instructions given orally, by telephone, tele-
graph, cable or radio that you believe to be genuine. You
shall endeavor to obtain written confirmation of such
instructions.
The parties drafted an Addendum to the agreement. The applicable
provision of the Addendum provided:
B. It is agreed that Paragraph 8 . . . shall be modified to
annex the additional language: It is agreed that First Union
National Bank of Virginia ("Agent") shall in its discretion,
follow and rely on any instruction given by Humayun H.
Baigmohamed, given via facsimile transmission, or given
orally, by telephone, that Agent believes to be genuine.
Agent shall endeavor to obtain written confirmation of such
instructions.
Both the agreement and the Addendum were executed on June 8,
1998.
On approximately April 4, 2000, Humayun Baigmohamed, an
authorized agent of plaintiffs, met with Jim Lu, a First Union
employee, at First Union’s Virginia offices. Baigmohamed instructed
Lu to liquidate all the securities in the accounts because the federal
funds interest rate had risen. He further told Lu that First Union
should invest the proceeds of these sales in United States Treasury
issues. Plaintiffs have not indicated that Baigmohamed ever provided
this instruction in writing.
First Union did not carry out Baigmohamed’s request to sell the
securities. Plaintiffs did not notice this discrepancy until Baigmo-
hamed received the April account statements on May 10, 2000. In the
interim, the accounts decreased in value by $1,626,889.
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On January 11, 2005, plaintiffs brought suit in the Eastern District
of Virginia on the basis of diversity jurisdiction. See 28 U.S.C.
§ 1332(a)(2) (2000). They alleged that First Union breached its con-
tract with plaintiffs when it failed to follow Baigmohamed’s oral
instructions to sell the securities and buy United States Treasury
issues. They sought as damages the decline in the value of the securi-
ties. First Union filed a motion to dismiss under Rule 12(b)(6), which
the district court granted. Plaintiffs appeal.
II.
At the outset, we note that this case involves investment accounts,
of which there are two general types: non-discretionary and discre-
tionary. A non-discretionary account requires the broker to obtain
authorization before it makes any investment decisions. See Merrill
Lynch Pierce Fenner & Smith, Inc. v. Cheng, 901 F.2d 1124, 1128
(D.C. Cir. 1990); Hill v. Bache Halsey Stuart Shields Inc., 790 F.2d
817, 820 n.3 (10th Cir. 1986). A discretionary account, by contrast,
allows an investment broker to make account transactions without the
client’s prior approval. See Cheng, 901 F.2d at 1128; Hill, 790 F.2d
at 820 n.3.
In return for this grant of discretion, a broker operating a discre-
tionary account typically owes greater duties to his client than a bro-
ker who must receive authorization for each transaction. See, e.g.,
Indep. Order of Foresters v. Donald, Lufkin & Jenrette, Inc., 157 F.3d
933, 940-41 (2d Cir. 1998) (noting that typically a broker operating
a discretionary account has a general fiduciary duty to his client
whereas a broker operating a non-discretionary account has narrower
obligations); Hill, 790 F.2d at 824 (same); see also Leib v. Merrill
Lynch, Pierce, Fenner & Smith, Inc., 461 F. Supp. 951, 953 (E.D.
Mich. 1978) (describing a broker operating a discretionary account as
"the fiduciary of his customer in a broad sense"). Most notably, the
broker managing a discretionary account has to make investment
decisions that are faithful to the needs and objectives of his client.
Leib, 461 F. Supp. at 953.
Investors may prefer a discretionary account because it has the
potential to decrease the costs of transacting in financial markets.
Many individuals do not have the knowledge required to efficiently
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manage their investments. For them, an experienced broker has a
decided information advantage and can procure information relevant
to an investment decision at lower cost. A discretionary account
therefore allows experts to handle investment decisions with the result
that less informed investors are not foreclosed from participating in
complex markets. See, e.g., Frank H. Easterbrook & Daniel R. Fis-
chel, Optimal Damages in Securities Cases, 52 U. Chi. L. Rev. 611,
651 (1985) (noting that the purpose of giving a broker discretion is
"to use the broker’s comparative advantage"). While non-
discretionary accounts also allow an investor to rely on a broker’s rec-
ommendation and superior knowledge, discretionary accounts can be
of greater utility because any decision will be made solely on the bro-
ker’s first-hand knowledge and expertise.
In addition to informational advantages, discretionary trading
accounts also hold forth the promise of reduced administrative costs,
because brokers are not required to confer with clients prior to execut-
ing every transaction. Even some sophisticated investors, who pre-
sumably could manage their own accounts, simply may not have the
time or inclination to carefully consider and authorize each transac-
tion. Investment decisions can often require significant time, as bro-
kers must explain the decision and clients must mull it over. And
many investment opportunities have only a limited window; a broker
might not be able to obtain a client’s authorization before the opportu-
nity expires. See, e.g., Curran v. Merrill Lynch, Pierce, Fenner &
Smith, Inc., 622 F.2d 216, 221 (6th Cir. 1980) (noting that
"[d]iscretionary accounts are more common for commodities where
fast trading is required due to sharp movement in prices"), aff’d, 456
U.S. 353 (1982). Investors may thus see an advantage in delegating
the oversight of these accounts to a broker who specializes in portfo-
lio management and who has the necessary technology and personnel
to conduct transactions rapidly and on a large scale.
The end result is that beneficial investments which might not other-
wise take place — due to either information deficiencies or adminis-
trative costs — may now occur. See also SEC v. Zandford, 535 U.S.
813, 823 (2002) (a discretionary account "enables individuals . . . who
lack the time, capacity, or know-how to supervise investment deci-
sions, to delegate authority to a broker who will make decisions in
their best interests without prior approval"). The costs of investing are
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reduced by allocating them to an agent who can bear them most
cheaply. And since investments drive general economic productivity
and growth, providing a broker with discretion can enhance both indi-
vidual and social welfare.
Plaintiffs do not dispute that their agreement with First Union cre-
ated discretionary investment accounts. Nor could they. The agree-
ment is captioned "Discretionary Account" and is replete with
language explicitly underscoring First Union’s discretionary powers.
Paragraph 1, for example, specifies that First Union is "to provide
investment review and management" of the accounts, to make invest-
ment decisions that it, in its discretion, deems best, and to handle the
property in the accounts "as though [it] were the owner of such prop-
erty." Furthermore, Paragraph 7 indicates that First Union is under no
obligation to take any action other than that already specified with
respect to any property in the accounts "unless specifically agreed to
by [it] in writing." Thus, keeping in mind that First Union was vested
with discretion in making investment decisions, we turn to the spe-
cific contractual provisions at issue.
III.
Plaintiffs argue that the Addendum set forth a mandatory duty, and
that First Union thus breached its obligations under the agreement
when it did not follow Baigmohamed’s oral instructions to liquidate
all securities in the accounts. The Addendum provided that First
Union "shall in its discretion, follow and rely on any instruction given
by Humayun H. Baigmohamed, given via facsimile transmission, or
given orally, by telephone." Under Virginia law, "when the terms of
a contract are clear and unambiguous, a court is required to construe
the terms according to their plain meaning." Golding v. Floyd, 539
S.E.2d 735, 736 (Va. 2001). We disagree with plaintiffs’ interpreta-
tion both because the plain language of the Addendum requires other-
wise, and because it runs counter to the undisputed discretionary
nature of the agreement.
A.
The Addendum unambiguously gives First Union discretion to fol-
low Baigmohamed’s investment instructions. Most importantly, the
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plain meaning of the phrase "shall in its discretion" allows First
Union to use its expert judgment. See The Random House Dictionary
of the English Language 563 (2d ed. 1987) (defining discretion as
"the power or right to decide or act according to one’s own judgment;
freedom of judgment or choice").
Plaintiffs are of course correct that "shall" typically is mandatory
in nature. See Ross v. Craw, 343 S.E.2d 312, 316 (Va. 1986) (noting
that "shall" is "primarily mandatory in its effect" and "may" is "pri-
marily permissive"). But courts must look to the context in which
"shall" is used in ascertaining its meaning. See id. (citing Pettus v.
Hendricks, 74 S.E. 191, 193 (Va. 1912)). The word "shall" cannot be
interpreted in a vacuum, as plaintiffs contend, and the words around
it help elucidate the overall meaning of the clause. "Shall in its discre-
tion" has an entirely different meaning than "shall" standing alone.
Any other interpretation would treat "in its discretion" as mere sur-
plusage, which courts are disinclined to do. See, e.g., Richfood, Inc.
v. Jennings, 499 S.E.2d 272, 276 (Va. 1998) ("No word or clause will
be treated as meaningless if a reasonable meaning can be given to it.")
(internal quotation marks omitted).
Moreover, other parts of the agreement utilize the word "shall"
without the modifier "in its discretion," indicating that the parties
knew how to draft a mandatory obligation. Paragraph 2, for example,
provides that registered securities "shall be registered in [First
Union’s] nominee or nominees, or [its] name as Agent." Similarly,
Paragraph 3 instructs that First Union "shall" dispose of any income
from the accounts according to the plaintiffs’ written directions. The
fact that the parties tempered "shall" with "in its discretion" in the
Addendum is telling evidence that they did not intend it to enact a
mandatory duty.
Plaintiffs nonetheless contend that the only relevant distinction
between the Addendum and Paragraph 8 is the use of the word "shall"
instead of "may," and that interpreting the Addendum’s language as
permissive makes it superfluous. But there are other salient differ-
ences between the two clauses that do not require us to read out the
Addendum’s discretionary language. Most notably, Paragraph 8 does
not detail precisely who will give the instructions. In contrast, the
Addendum provides greater specificity — the instructions will be
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given by Baigmohamed. In addition, Paragraph 8 specifies that First
Union may follow "instructions given orally, by telephone, telegraph,
cable or radio." The Addendum, however, modifies this list to include
instructions "given via facsimile transmission." Plaintiffs, therefore,
have provided no persuasive reason to construe "shall in its discre-
tion" contrary to its plain meaning.
B.
Our interpretation of the contract also finds support in the undis-
puted nature of the agreement itself. See Quadros & Assocs., P.C. v.
City of Hampton, 597 S.E.2d 90, 93 (Va. 2004) ("We consider the
contract as a whole and do not place emphasis on isolated terms.").
These are, after all, discretionary accounts — in which the operating
presumption in the parties’ relationship is that an expert broker will
make appropriate investments on behalf of and without prior authori-
zation from its client. The accounts by definition give the broker sub-
stantial discretion to use its best judgment. Had the parties intended
the Addendum to depart from this understanding and transform the
entire nature of their relationship, we expect they would have done so
in a less opaque manner. Otherwise, the potential gains the parties
attempted to generate with their use of discretionary accounts would
go for naught.
A contrary presumption would moreover place a broker in an
untenable Catch-22. In this case, for example, First Union might have
been subjected to litigation and potential liability whether or not it
followed Baigmohamed’s dramatic oral instructions to liquidate all
the securities holdings and place the proceeds in Treasury issues. On
the one hand is the present situation — First Union did not follow the
instructions, the value of the securities in the accounts decreased, and
First Union now confronts plaintiffs’ action.
If, on the other hand, First Union had honored Baigmohamed’s
extraordinary oral request and the value of the released securities had
subsequently increased, plaintiffs might still have filed suit. They
could now contend that First Union failed to take appropriate care in
not making further inquiry before embarking on the drastic step of
liquidating all the securities in all the accounts and changing the
entire nature of the investments from equity to fixed-income — a
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move potentially in conflict with plaintiffs’ investment objectives.
This is cause for real concern, since a broker operating a discretionary
account generally owes greater duties to its client than a broker who
must receive authorization for each transaction. See, e.g., Indep.
Order of Foresters, 157 F.3d at 940-41; Hill, 790 F.2d at 824; Leib,
461 F. Supp. at 953. First Union would have no written proof to show
that it did not take the extreme step itself, but merely followed Baig-
mohamed’s liquidation instructions. This scenario is most likely the
reason that other provisions in the agreement actually requiring First
Union to follow plaintiffs’ commands do so clearly and specify that
plaintiffs will give the instructions in writing.*
IV.
In sum, we are loath to limit First Union’s discretion in managing
the investment accounts absent some clear direction to the contrary.
Since the parties did not provide any such language in their agree-
ment, and instead unambiguously allowed First Union to use its dis-
cretion, the judgment of the district court is
AFFIRMED.
*The parties also dispute whether the exculpatory clause in Paragraph
7 of the agreement barred the suit. This paragraph provided in relevant
part that First Union "shall be liable only for losses caused by gross neg-
ligent management or actual wrongdoing." Plaintiffs argue that this
clause does not apply because First Union’s failure to follow their
express trading instructions represented gross negligence. First Union
counters that plaintiffs did not allege gross negligence or actual wrong-
doing in their complaint and that, in any event, the challenged actions did
not amount to gross negligence. Because of our disposition of the case,
we do not reach this issue.
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