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02/20/87 John R. Martin, v. Heinold Commodities

February 20, 1987

JOHN R. MARTIN, APPELLANT

v.

HEINOLD COMMODITIES, INC., APPELLEE

DEFENDANT ANSWERED AND MOVED FOR JUDGMENT ON THE PLEADINGS, ASSERTING PLAINTIFF'S FAILURE TO STATE A CAUSE OF ACTION (ILL. REV. STAT. 1981, CH. 110, PAR. 45(1), NOW ILL. RE

v.

STAT. 1985, CH. 110, PAR. 2-615(A)). AFTER CONSIDERING MEMORANDA AND ORAL ARGUMENTS OF THE PARTIES, DEFENDANT'S MOTION WAS DENIED.



SUPREME COURT OF ILLINOIS

510 N.E.2d 840, 117 Ill. 2d 67, 109 Ill. Dec. 772 1987.IL.186

Appeal from the Appellate Court for the First District; heard in that court on appeal from the Circuit Court of Cook County, the Hon. Albert Green, Judge, presiding.

APPELLATE Judges:

JUSTICE MORAN delivered the opinion of the court. JUSTICE SIMON, Dissenting. CHIEF JUSTICE CLARK and JUSTICE MILLER join in this Dissent.

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE MORAN

Plaintiff, John R. Martin, a resident of Oklahoma, on behalf of himself and all others similarly situated, filed a four-count complaint in the circuit court of Cook County against defendant, Heinold Commodities, Inc. . Counts I and II alleged defendant's breach of its fiduciary duty in connection with plaintiff's purchases of London Commodities Options (LCOs) in that defendant failed to disclose facts material to these purchases. Specifically, plaintiff alleged that defendant charged substantial additional commissions on each LCO which it concealed in a fee labeled "foreign service fee." Counts III and IV alleged that defendant's failure to disclose constituted a deceptive business practice in violation of the Consumer Fraud and Deceptive Business Practices Act (Ill. Rev. Stat. 1979, ch. 121 1/2, par. 261 et seq.).

The court then granted plaintiff's motion to certify the cause as a class action. (Ill. Rev. Stat. 1981, ch. 110, par. 57.2, now Ill. Rev. Stat. 1985, ch. 110, par. 2-801.) Following certification and after initial discovery, the named plaintiff moved for summary judgment on counts I and II as provided by Supreme Court Rule 192 (73 Ill. 2d R. 192). Defendant moved for summary judgment on all counts (Ill. Rev. Stat. 1981, ch. 110, par. 57, now Ill. Rev. Stat. 1985, ch. 110, par. 2-1005). After considering memoranda and oral argument for and against both motions, the court denied defendant's motion and allowed the named plaintiff's motion for summary judgment on counts I and II. In granting the motion, the court found that the foreign-service fee was used to pay commissions on LCO transactions; that this fact was material to the decision to invest in LCOs; that failure to disclose this material fact violated, as a matter of law, defendant's fiduciary duty to avoid self-dealing; and that the plaintiff class was entitled to recover its investment losses. The court awarded damages in the amount of $1,728,948.27 and prejudgment interest in the amount of $458,219.05.

Defendant unsuccessfully moved to vacate the court's order granting partial summary judgment. Following entry of the court's "express written finding that there [was] no just reason for delaying enforcement or appeal" pursuant to Supreme Court Rule 304(a) (87 Ill. 2d R. 304(a)), defendant appealed.

The appellate court reversed, concluding that partial summary judgment was improper because "the question of the materiality of the information present[ed] a genuine issue of material fact." (139 Ill. App. 3d 1049, 1057.) The appellate court also reversed the award of damages, holding that the defendant could be held liable only for losses actually caused by its failure to disclose. The court further held that certification of the class merited reconsideration to determine whether or not "in a multistate action such as this . . ., there is a possibility that differing questions of law will predominate over the common question of fact." 139 Ill. App. 3d 1049, 1061.

Plaintiff sought review in this court, pursuant to Supreme Court Rule 315 (103 Ill. 2d R. 315), which was allowed. This court also accepted amicus curiae briefs from the Attorney General of the State of Oklahoma and the Attorney General of the State of Illinois pursuant to Supreme Court Rule 345 (87 Ill. 2d. R. 345).

The underlying facts of this appeal are as follows. During a period from September 1977 through May 31, 1978, defendant acted as broker to the plaintiff class in the purchase of LCOs. Defendant conducted LCO transactions through its London subsidiary, Heinold Commodities Limited. In connection with these transactions, members of the plaintiff class completed and executed a "Customer Agreement" (Agreement) and received a "Summary Disclosure Statement" (Disclosure Statement). At such time as an LCO was purchased by a member of the plaintiff class, execution of the purchase was confirmed by defendant through a document referred to as a "Combined Commodity Statement Confirmation and/or Purchase and Sale" (Confirmation).

The Agreement executed by members of the plaintiff class provided inter alia that: (1) "[c]ustomer . . . acknowledges that he has received and read the Disclosure Statement(s) relating to trading in commodity options and understands that brokerage commissions, mark-ups and foreign service fees of commodity options vary substantially among brokerage firms" and (2) "[t]his greement shall not be deemed to be accepted by or become a binding contract between [c]ustomer and until approved at 222 South Riverside Plaza, Chicago, Illinois 60606 by (i) [H.C.I.'s] New Accounts Department and (ii) the Regional Manager of the office of which furnished this Agreement to [c]ustomer."

The Disclosure Statement received by members of the plaintiff class provided in pertinent part that "[t]he 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. Such premiums are determined in the open exchange market through competitive bidding or between dealers in accordance with the rules and regulations in force on the exchanges on which such options are available. 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 foreign service fee for options which expire a relatively short time after their purchase, e.g. one week or one month options, may have a service fee of less than $1,200." (Emphasis added.) The Disclosure Statement also included a "tear-off" section which was signed by each member of the plaintiff class, indicating that the Disclosure Statement had been read and its contents understood.

Each confirmation of a transaction listed the following charges: an option premium (i.e., the actual cost of a commodity futures option); the foreign-service fee; and a commission. The commission assessed on most transactions was a standard charge of $47.50. As noted, the foreign-service fee assessed varied by the length of the option period.

The complaint alleged that, subsequent to completing an Agreement and receiving a Disclosure Statement, the named plaintiff purchased at least one LCO for $3,547.38. The complaint further alleged that the Confirmation of this transaction received by the named plaintiff listed the following charges: $3,547.38 representing the cost of the option; $47.50 representing a commission on the transaction; and $900 representing the foreign-service fee assessed for the purchase. The complaint also alleged that 75% of the foreign-service fee assessed on LCOs was allocated to the defendant and disbursed as commissions.

Subsequent discovery confirmed that the defendant did receive 75% of the foreign-service fee. Discovery established the following facts with respect to the internal distribution of the foreign-service fee assessed on each LCO transaction. On a "typical" LCO purchase, as described in defendant's Disclosure Statement, the foreign-service fee would be $1,200. Twenty-five percent of the fee, or $300, was allocated to defendant's London subsidiary, Heinold Commodities Limited. Seventy-five percent of the fee, or $900, was allocated to the defendant. Depending upon the arrangement between the defendant, the registered representative servicing an account, and the manager of the servicing office, between $500 and $600 would be allocated to the servicing office for distribution as commission to the registered representative and manager of the service office. The remainder, approximately $300 or $400, was retained by the defendant. It is undisputed that the amount of the foreign-service fee controlled by the defendant and the distribution of the fee as outlined was not disclosed to members of the plaintiff class.

The complaint is silent with respect to several points of significance to this litigation. First, there is no allegation that representatives of the defendant initiated Discussions between the named plaintiff and members of the plaintiff class, Discussions eventually culminating in the purchase of LCOs. Second, there is no allegation of what specifically was discussed with the named plaintiff and members of the plaintiff class by representatives of the defendant. Third, there is no allegation that the named plaintiff or any member of the plaintiff class sought additional information from defendant's representatives concerning the exact amount of the foreign-service fee actually allocated to compensation or to whom the ...


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