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Martin v. Heinold Commodities

OPINION FILED DECEMBER 30, 1985.

JOHN R. MARTIN, PLAINTIFF-APPELLEE,

v.

HEINOLD COMMODITIES, INC., DEFENDANT-APPELLANT.



Appeal from the Circuit Court of Cook County; the Hon. Albert Green, Judge, presiding.

JUSTICE RIZZI DELIVERED THE OPINION OF THE COURT:

Plaintiff, John R. Martin, on his own behalf and on behalf of all others similarly situated, sought certification of his cause as a class action, declaratory and injunctive relief, an accounting and damages resulting from the payment of foreign service fees in connection with London commodity options purchased through defendant, Heinold Commodities, Inc., subsequent to September 12, 1977. *fn1 The court granted plaintiff's motion for class certification. Subsequently, the court granted the class' motion for partial summary judgment on counts I and II of the complaint, which were based on breach of fiduciary duty. The court ordered that "[t]he Plaintiff class will recover from defendant the entire amount of its investment in London Commodity Options, the amount to be determined by stipulation of the parties." Defendant appealed. During the pendency of the appeal, the trial court continued to exercise jurisdiction of the remainder of the case, i.e., the issue of the amount of damages. Without a trial or evidentiary hearing, the trial court granted the plaintiff class' request for damages in its entirety and entered a judgment in favor of the plaintiff class for $1,728,948.27 in damages, and $458,219.05 for prejudgment interest. Defendant filed a second appeal. We consolidated the appeals, and we are treating the entire matter as a single appeal. We reverse both judgments and remand.

In counts I and II of his complaint, plaintiff alleged that defendant breached fiduciary duties owed to plaintiff and the class. *fn2 Specifically, plaintiff alleged that he signed a customer agreement with defendant for the purpose of engaging in London commodity option transactions and that he received from defendant a "Summary Disclosure Statement Concerning London Commodity Options." The summary disclosure statement, which is attached to the complaint as an exhibit, recites, in pertinent part:

"The purchase price of a London Commodity Option consists of three components. One is a premium which is charged in London by the grantor or seller of the option. * * * H.C.I. adds a foreign service fee of $1,200 to the London premium as well as one half the commodity futures commission rate normally charged on futures transactions. These charges have the following purpose: to recover costs of telephone, telex, bookkeeping, floor brokerage, clearing fees, and research costs involved with options transactions; as well as to compensate H.C.I. and the registered representative who services the options customer during the life of options for conducting such business."

The summary disclosure statement included a tear-off section to be signed, dated and returned to defendant "signifying the reader has read [the disclosure statement] and understands its contents." *fn3

Plaintiff further alleged that he purchased certain London commodity options through defendant, and, in connection with each purchase, he was assessed a foreign service fee. In connection with his transactions, plaintiff received a statement from defendant confirming the trade made for his account, listing the price of the option premium, the commission and the foreign service fee for the trade and showing the account balance. One of plaintiff's confirmation statements, which is attached to the complaint as an exhibit, shows, with regard to one trade, debits to his account in the amount of $47.50 for commission and $900 for foreign service fee. Plaintiff alleged that he paid at least $1,650 in foreign service fees. Plaintiff also alleged that without disclosure to or authorization by him, 75% of each foreign service fee was rebated to defendant through an undisclosed arrangement between defendant and its London subsidiary and that the individual broker handling the transaction and the office manager personally received approximately 75% of the rebate. Further, plaintiff alleged that as a result of London commodity option transactions effected through defendant, he sustained losses of approximately $7,000.

Defendant answered the complaint and set forth various affirmative defenses. Defendant then moved for judgment on the pleadings on the grounds that the complaint failed to state a cause of action and that the court lacked subject matter jurisdiction. Defendant asserted that plaintiff's action was preempted by Federal law and Federal regulation. The court issued a memorandum in which it rejected defendant's preemption argument and an order denying defendant's motion for judgment on the pleadings. On September 14, 1981, the court granted plaintiff's motion for class certification. Subsequently, the court denied defendant's motion to decertify the class.

The class moved for partial summary judgments on counts I and II of the complaint, which alleged breach of fiduciary duty, and defendant moved for summary judgment. Defendant's submissions in opposition to partial summary judgment included a copy of a study done by Market Facts, Inc., "designed to test the understanding of the disclosure statement by a random sample of persons chosen on the basis of their similarity to the class members in this case." In its memorandum and order of October 6, 1982, the trial court stated that the parties do not dispute the fact that defendant "occupies a position of fiduciary with respect to its clients by virtue of its agency relationship to them." The court indicated that it had to determine "whether the facts and policies concerning the `foreign service fee' were material to the transactions and then whether these facts were disclosed properly to the customer." The court found that knowledge that the foreign service fee "would be split on a percentage basis between the defendant's entities based upon the volume of trading would have been important to investor's decisions regarding whether and with whom to place their accounts." The court noted that proper disclosure is based on an objective standard and must be full and complete between the agent and the principal, and the court found the consumer survey inappropriate under an objective standard. The court then concluded that "defendant as a matter of law failed to disclose information material to the transaction in question in violation of its fiduciary duty to the plaintiff class." The court granted the class' motion for partial summary judgment and assessed damages in the entire amount of the class' investment.

Defendant moved to vacate the partial summary judgment order. In support of its motion, defendant submitted the affidavit of James B. Cloonan, president of the American Association of Individual Investors, who set forth his conclusions regarding a customer's understanding of the disclosure statement and of the effect of the disclosure of additional facts on the desirability of the purchase of London commodity options from the purchaser's viewpoint. The court denied defendant's motion to vacate the partial summary judgment order.

This case involves the duties that a commodities broker owes to his customer. Defendant argues that a commodities broker does not have a fiduciary relationship with his customer as a matter of law, but, at most, the nature of the relationship presents an issue of fact. Defendant further contends that the court erred in applying fiduciary standards here. We disagree.

• 1-3 A commodities broker may be the fiduciary of his customer in a broad sense or a limited sense (see Leib v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (E.D. Mich. 1978), 461 F. Supp. 951) depending on the nature of the account, the relative status of the parties and other circumstances peculiar to a particular case (see American Mortgage Investment Co. v. Hardin-Stockton Corp. (Mo. App. 1984), 671 S.W.2d 283, 293). Generally, the scope of affairs entrusted to a broker is limited to the completion of a transaction. (See Schenck v. Bear, Stearns & Co. (S.D.N.Y. 1979), 484 F. Supp. 937, 947.) Thus, a broker may have a limited duty to serve his customer's financial interest within the framework of a single transaction, as, for example, when the customer has a non-discretionary account in which the customer rather than the broker determines which purchases and sales to make. (See Leib v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (E.D. Mich. 1978), 461 F. Supp. 951, 952.) However, a broker may become the fiduciary of his customer in a broad sense, as, for example, when he handles a discretionary account or a hybrid-type account in which the broker has usurped actual control over a technically non-discretionary account. (See Leib v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (E.D. Mich. 1978), 461 F. Supp. 951, 953-54.) Regardless of the extent of the relationship between a broker and a particular customer, we believe that a commodities broker is the agent of his customer at least with regard to the execution of a transaction and, as such, as a matter of law, he owes his customer certain fiduciary duties within the realm of the execution of the transaction. (See In re Rosenbaum Grain Corp. (7th Cir. 1939), 103 F.2d 656, 660.) We believe that the assessment of a foreign service fee is within the realm of the execution of the transactions here.

• 4 Defendant admits that it stood as a fiduciary when acting on its customers' behalf in purchasing London commodity options. However, defendant asserts that what is involved here is the terms of its compensation, and it does not owe its customers a fiduciary duty when dealing with them over the terms of its compensation. We agree that in most cases a broker is not subject to a fiduciary duty in making terms as to his compensation. (See Restatement (Second) of Agency sec. 390, Comment e (1958).) Nevertheless, we believe that as an agent, a broker has a duty to disclose material facts, and this duty necessarily encompasses disclosure of the terms of his compensation to the extent that they are material. The Restatement cannot be interpreted so as to permit a broker to call a commission by another name at the time of the transaction and subsequently assert that it is a commission, simply part of the broker's compensation, in order to avoid liability for nondisclosure. Defendant cites Action Real Estate Corp. v. Bulechek (Iowa 1981), 309 N.W.2d 502, in support of its position. However, in Bulechek, the breach of fiduciary duty claim was based upon a real estate broker's failure to make disclosures prior to the listing, and the court refused to recognize a fiduciary relationship between a real estate broker and a prospective seller prior to the listing. In contrast, under the circumstances here, the alleged breach was not an isolated event that took place prior to the establishment of the broker-customer relationship, but, rather, it involved each transaction, as evidenced by the confirmation statement which the customers received. Thus, we conclude that the court properly applied fiduciary standards here.

Having determined that defendant owed plaintiff certain fiduciary duties within the realm of the execution of the transaction, we must consider the nature of those duties, specifically, the nature of the broker's duty to disclose. The class asserts that the fiduciary nature of the broker-customer relationship requires that the broker fully and completely disclose everything known by the broker concerning the transaction and the broker's self-interest therein. The class maintains that the question is, what did the broker know about the transaction and what did he tell the customer, and, if the latter is not completely coextensive with the former, a breach of fiduciary duty must be found. We disagree.

• 5, 6 As an agent, a broker owes his customer various fiduciary duties. A spirit of trust and fidelity necessarily pervades the entire dealing between a broker and his customer. (In re Rosenbaum Grain Corp. (7th Cir. 1939), 103 F.2d 656, 661.) As an agent, the broker has a duty to use reasonable efforts to give his customer information which is relevant to the affairs entrusted to him. (Robinson v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (N.D. Ala. 1971), 337 F. Supp. 107, 110-11, quoting Restatement (Second) of Agency sec. 381 (1958), aff'd (5th Cir. 1972), 453 F.2d 417.) Thus, the broker must communicate those material facts within his knowledge which might affect his customer's decision concerning a pending transaction (see Cecka v. Beckman & Co. (1972), 28 Cal.App.3d 5, 11, 104 Cal.Rptr. 374, 377), or in any way affect the transaction and the subject matter of his agency (see Moehling v. W.E. O'Neil Construction Co. (1960), 20 Ill.2d 255, 267, 170 N.E.2d 100, 107). In addition, as an agent, the broker has a duty of good faith and loyalty toward his customer which prohibits him from discharging the duties of his position in such a manner as to make a secret profit for himself. (See 12 Am.Jur.2d Brokers sec. 86 (1964); Restatement (Second) of Agency sec. 387 (1958).) Thus, before acting for his own benefit in a transaction, the broker must disclose to the customer all material facts fully and completely (see Moehling v. W.E. O'Neil Construction Co. (1960), 20 Ill.2d 255, 267, 170 N.E.2d 100, 107). When a broker is acting for his own benefit, material facts are those which the broker should realize would be likely to affect the judgment of the customer in giving consent to the broker to enter into the particular transaction on the specified terms. (See Moehling v. W.E. O'Neil Construction Co. (1960), 20 Ill.2d 255, 267, 170 N.E.2d ...


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