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09/22/94 JOHN R. MARTIN v. HEINOLD COMMODITIES

September 22, 1994

JOHN R. MARTIN, ON HIS OWN BEHALF AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, APPELLEE,
v.
HEINOLD COMMODITIES, INC., APPELLANT.



Nickels, Freeman, McMORROW

The opinion of the court was delivered by: Nickels

JUSTICE NICKELS delivered the opinion of the court:

Defendant, Heinold Commodities, Inc., appeals from an appellate court decision affirming in part and reversing in part a judgment entered for plaintiffs andagainst defendant. Plaintiff filed a four-count complaint against Heinold for breach of fiduciary duty and violation of the Consumer Fraud and Deceptive Business Practices Act (Consumer Fraud Act) (Ill. Rev. Stat. 1979, ch. 121, par. 261 et seq.). Plaintiffs suit alleged that Heinold had misrepresentated the nature of a "foreign service fee" in the sale of London Commodity Options (LCO's) to class members from September 12, 1977, through May 31, 1978. On remand from this court in a previous appeal, the trial court found for the plaintiff class (hereinafter, plaintiffs) on both the breach of fiduciary counts and Consumer Fraud Act counts. The trial court also awarded plaintiffs punitive damages and prejudgment interest under both claims. The appellate court affirmed the award of compensatory damages, but reversed the award of punitive damages under both claims. The appellate court also reversed the award of prejudgment interest under the Consumer Fraud Act. We granted leave to appeal (134 Ill. 2d R. 315).

BACKGROUND

This is the second time this case has reached this court. Plaintiff, John Martin, originally filed a four-count complaint against Heinold for breach of fiduciary duty and for violation of the Consumer Fraud Act in 1980. Plaintiff alleged that Heinold had intentionally misrepresented the nature of a "foreign service fee" charged in connection with the sale of LCO's. The action was subsequently certified as a class action. After initial discovery, plaintiff moved for summary judgment on the fiduciary duty counts. The trial court granted plaintiffs' motion, finding a fiduciary relationship between Heinold and plaintiffs as a matter of law and that Heinold had breached its fiduciary duties to plaintiffs.

The appellate court reversed the trial court's decision finding a fiduciary relationship as a matter of law. On appeal from the appellate court, this court affirmed on that matter, and found a material question of fact to exist as to whether, at the time Heinold discussed its compensation with plaintiffs, a fiduciary duty existed for Heinold to breach. This court remanded for a factual determination as to whether a preagency fiduciary relationship existed between Heinold and plaintiffs at the time Heinold's compensation was discussed. Martin v. Heinold Commodities, Inc. (1987), 117 Ill. 2d 67, 109 Ill. Dec. 772, 510 N.E.2d 840.

Trial Court's Findings on Remand

On remand, the trial court made the following findings of fact and law.

Findings of Fact

LCO's were commodity option contracts obtained in London, England. The purchaser of such option had the right, but not the obligation, to buy or sell a commodity futures contract at a certain price. This right to either purchase or sell a futures contract was of limited duration, after which time the option would expire and become worthless. Purchasers of such options would only profit if the market moved favorably in their direction, enough to offset the price of the option plus any transaction costs. At that time, purchasers could buy or sell a futures commodity contract at a profit.

The Commodity Futures Trading Commission (Commission), a Federal commission established to regulate commodity and futures trading, banned the sale of LCO's effective June 1, 1978. The Commission's ban was necessitated by the fact that an overwhelming majority of firms engaged in the sale of LCO's at that time were employing fraudulent or unlawful practices. One of the specific practices cited by the Commission in banning the sale of LCO's was the use of terms such as "foreign service fee" to conceal markups. The Commission noted:

"The fact most scrupulously concealed by the vast majorityof firms is the full extent of fees and markups. * * * [The firms' confirmation statements] uniformly avoid disclosure and in fact conceal such fact by using various explanations or definitions. Mark-ups frequently are defined in promotional materials and customer confirmations as * * * [inter alia] 'foreign service fees' * * *." 43 Fed. Reg. 16162 (1978).

The trial court made the following specific findings concerning the trading of LCO's:

"[Trading was] an extremely complex undertaking for investors, with little or no information available to American purchasers from any source other than from their brokers. The mechanics of the options themselves, the workings of the various London exchanges, the impact of currency conversion rates, the lack of information concerning the underlying commodities and other factors all made LCO investing exceedingly complicated. Investing in LCOs * * * was more complicated and much less understood than the trading of securities.

During the relevant period, it was difficult for customers to compare potential transactions effected through different brokers. One of the problems causing such difficulty was that different brokers used differing terminology.

During the relevant period, potential customers were completely dependent upon the LCO broker for information about fees and commissions charged in connection with LCO transactions; during the relevant period, the investor was at the mercy of the broker to learn what the expenses charged in London were, and had to rely upon the broker to state very clearly what the compensation to the broker was, since the customer had no other source for such information.

During the relevant period, virtually no investor in America, regardless of how sophisticated, could truly understand London commodity options trading without the help of a broker. * * * During the relevant period, customers were uniquely dependent upon, and at the mercy of, their brokers in obtaining information relative to such transactions.

The Plaintiff class has established by clear and convincingevidence that during the relevant period the creation of the customer-broker relationship between Heinold and its LCO customers involved a special trust and confidence on the part of the customer in the subsequent fair dealing of Heinold."

In opening an LCO account, each class member executed a customer agreement and statement signifying that he or she had received and understood a summary disclosure statement from Heinold regarding LCO's. Two forms of summary disclosure statements were used by Heinold during the relevant time. The first was a typewritten form and the second was a printed form. Both forms indicated that the entire price of an LCO consisted of three components: (1) a premium for the option; (2) a commission; and (3) a foreign service fee. The typewritten version of the summary disclosure statement described the commission and foreign service fee as follows:

"[Heinold] adds a foreign service fee equivalent to 20% of the premium as well as 1/2 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, costs involved with the segregation of customer funds and use of Heinold funds to pay for London Commodity Options, and research costs involved with options transactions; as well as to compensate [Heinold] and the registered representative who services the options customer during the life of options for conducting such business."

The printed version was virtually identical to the typewritten disclosure form, except that the foreign service fee was changed from 20% of the premium to $1,200. The printed form also noted that the foreign service fee for options with shorter lives would be smaller.

The trial court further found that Heinold could operate profitably on LCO transactions by charging only the price of a standard commission. The court arrived atthis by noting that Heinold believed it could operate profitably by charging, and in fact only charged, a commission, and no foreign service fee, on London futures, the mechanics of which were indistinguishable from LCO's. Because Heinold had determined that it could pay all costs, compensate the registered representative who serviced the customer's account and still operate profitably by charging only a flat commission on a futures position, the trial court found the charging of a foreign service fee on LCO's a means by which to receive additional compensation for services already covered by the commission. The court further found that Heinold offered no credible explanation for the assessment of the foreign service fee. In fact, the foreign service fee was treated by Heinold internally as a commission.

The court further found that the word "commission" has a commonly understood meaning: a broker's compensation for a transaction as well as payment for the broker's general overhead. However, the term commission is not usually meant to include a broker's out-of-pocket expenses paid to third parties in connection with a particular transaction. In contrast to the understood meaning of commission, the court noted that the term foreign service fee has no common understanding. Thus, the court found that Heinold's use of the term "foreign service fee" was intended to give, and did give, the impression that this fee was not what would normally be known as a commission but, instead, was an additional expense the broker necessarily incurred in the transaction and had to pay to third parties.

The trial court found Heinold's use of the term foreign service fee misleading and deceptive. This information was material to the investor, the court found, and Heinold knew it would be material. The court also found that during the relevant period, Heinold soughtto instill confidence in the investing public by conveying to its customers that, unlike other firms, it was not charging exceedingly high commissions and markups on its LCO's. In fact, through the use of the foreign service fee, Heinold accomplished the very same thing.

The trial court concluded that investors would not have engaged in LCO trading through Heinold had they known the true purpose of the foreign service fee. The court then determined that the relief sought by the class, which involved determining how the monies deposited by the class in their Heinold accounts was used and what losses were suffered, required an equitable accounting. The court accepted the parties stipulation concerning the total amount of money plaintiffs paid to Heinold for the LCO's, $1,728,948.27, of which $597,800 was payment for foreign service fees.

Findings of Law

The trial court found that a preagency fiduciary relationship existed between Heinold and plaintiffs. Thus, Heinold was under an affirmative duty to inform plaintiff at the time LCO's were discussed all material facts concerning its compensation. Heinold did not disclose all material facts concerning its compensation and thus violated its fiduciary duty to plaintiffs. The court also noted that but for Heinold's misrepresentations, plaintiffs would not have purchased LCO's through Heinold. The court found this sufficient causation to award plaintiffs their full investment losses. The court further found an additional reason to award plaintiffs their full investment losses irrespective of causation: breaches of fiduciary duty with bad faith and malice. The court next found that Heinold violated the Consumer Fraud Act and awarded the same amount of damages.

Next, the court found that an award of prejudgment interest was proper under both the breach of fiduciary duty counts and the Consumer Fraud Act. The court also awarded punitive damages under both claims.

The appellate court affirmed the trial court's decision in part, and reversed concerning the award of punitive damages and the award of prejudgment interest under the Consumer Fraud Act.

ISSUES

Heinold presents four issues for review and argues that the appellate court erred in: (1) finding a preagency fiduciary duty; (2) holding that Heinold violated the Consumer Fraud Act; (3) upholding a damages award of investment losses where no proof of loss causation was shown; and (4) holding Heinold had no right to a jury trial on plaintiffs Consumer Fraud Act or fiduciary duty claims. Plaintiffs have requested cross-relief, arguing that the appellate court erred in: (1) reversing the trial court's award of punitive damages; and (2) reversing the trial court's award of prejudgment interest under the Consumer Fraud Act.

I.

Preagency Fiduciary Duty

We first address Heinold's contention that the appellate court erred in affirming the trial court's finding that Heinold owed plaintiffs a preagency fiduciary duty. Heinold argues: (1) plaintiffs did not prove such a duty; and (2) the appellate court erred in creating a new basis for the existence of a fiduciary duty in focusing on the complexity of the LCO transactions rather than on any relationship between the parties.

In Martin, 117 Ill. 2d 67, 109 Ill. Dec. 772, 510 N.E.2d 840, this court remanded the cause to the trial court to make a factual determination as to whether Heinold owed plaintiffs a preagency fiduciary duty at the time Heinold discussed its compensation with plaintiffs. In doing so, this court noted the general rule that

"an 'agent is subject to no fiduciary duty in making the agreement by which he becomes [an] agent and may thereafteract in accordance with its terms.' (Restatement (Second) of Agency sec. 389, comment b (1958) * * *.)" ( Martin, 117 Ill. 2d at 78.)

However, this court also adopted the exception to this rule found in the Restatement:

"We are unwilling to conclude, as a matter of law, that a fiduciary duty can never be imposed upon a prospective agent prior to the formal creation of an agency relationship. Thus, while the general rule governing preagency contracts does not require disclosure of the terms of a prospective agent's compensation, we believe that facts could be established which would support imposition of a fiduciary duty upon a prospective agent applicable to preagency contracts. * * *

We also note that, where the very creation of the agency relationship involves a special trust and confidence on the part of a principal in the subsequent fair dealing of an agent, the prospective agent may be under a fiduciary duty to disclose the terms of his employment as an agent. (Restatement (Second) of Agency sec. 390, comment e (1958) * * *.)" Martin, 117 Ill. 2d at 78-79.

Whether Plaintiff Class Failed to Prove Relevant Factors

Heinold first argues that plaintiffs failed to prove relevant factors from which the court could find an exception to the general rule that no fiduciary duty exists at the time an agent's compensation is negotiated prior to the existence of the agency relationship. Heinold argues:

"A fiduciary relationship exists where there is special confidence reposed in one who, in equity and good conscience, is bound to act in good faith and with due regard to the interests of the one reposing the confidence. It exists where confidence is reposed on one side and resulting superiority and influence is found on the other. [Citations.] The relationship may exist as a matter of law between attorney and client, guardian and ward, principal and agent, and the like, or it may be moral, social, domestic, or even personal. Where the relationship does not exist as a matter of law or is sought to be established by parol evidence, the proof must be clear, convincing, and so strong, unequivocal, and unmistakable as to lead to but one Conclusion." ( Kolze v. Fordtran (1952), 412 Ill. 461, 468, 107 N.E.2d 686.)

Heinold further notes the factors to be considered when determining whether a fiduciary relationship exists where one does not exist as a matter of law:

"When a confidential or fiduciary relationship does not exist as a matter of law, it must be proved by clear and convincing evidence in order to establish a basis for raising a constructive trust. Factors to be taken into consideration are degree of kinship, if any, disparity in age, health, mental condition, education and business experience between the parties, and the extent to which the allegedly servient party entrusted the handling of his business and financial affairs to the other and reposed faith and confidence in him. [Citation.]" ( Cunningham v. Cunningham (1960), 20 Ill. 2d 500, 504, 170 N.E.2d 547.)

Heinold argues that none of the factors pertinent to a showing of fiduciary duty were shown by the plaintiffs.

While Heinold correctly cites the law applicable in instances where no fiduciary relationship exists as a matter of law and must be proven by facts, it does not focus on the law applicable here, where a future principal and agent are discussing terms of the agency, specifically compensation, for a relationship that will be fiduciary as a matter of law. Restatement (Second) of Agency, section 390, comment e, adopted by this court in the previous appeal, addresses this specific factual situation and provides:

"If * * * the creation of the relation involves peculiar trust and confidence, with reliance by the principal upon fair dealing by the agent, it may be found that a fiduciary relation exists prior to the employment and, if so, the agent is under a duty to deal fairly with the principal in arranging the terms of the employment." (Restatement (Second) of Agency § 390, Comment e (1958).)

We find this to be a different inquiry than the factualinquiry on which Heinold relies. While the general inquiry determines whether a fiduciary relationship exists at all, the inquiry here determines at what time that relationship attached concerning the agent's disclosures about his compensation. Thus, while Heinold argues that the inquiry must include a determination as to the parties' relationship, that relationship is already known: future principal and agent discussing the agent's compensation. And, while Heinold argues that the evidence did not show that it accepted the trust and confidence plaintiffs placed in it, this inquiry is not required under comment e. All that is required is that the creation of the agency relationship involve peculiar trust and confidence, with reliance by the principal on the fair dealing by the agent. This is a factual determination to be made by the trial court. The trial court found peculiar trust and confidence to exist here, and we cannot say that the court's finding was manifestly erroneous. Findings of fact will not be overturned on appeal "unless they are palpably against the weight of the evidence, even though we might be inclined to find otherwise." Kolze, 412 Ill. at 468-69.

Plaintiffs' evidence demonstrated that few, if any, investors at the time could understand the complexities of LCO transactions, including the mechanics involved in the purchase and trading of such commodities. Because of this, the trial court found that plaintiffs could not have known what expenses a broker would incur in the overseas transactions and subsequently pass on to the investors. As the trial court found, plaintiffs were "at the mercy of the broker to learn what the expenses charged in London were, and had to rely upon the broker to state very clearly what the compensation to the broker was." Moreover, plaintiffs could not determine this information from other brokers because brokers used different terminology for their fees. Thus, plaintiffshad a peculiar trust and confidence in Heinold during these negotiations and relied on Heinold to deal fairly. It should also be noted that Heinold failed to present any evidence to contradict plaintiffs' evidence on this point.

Heinold relies heavily on Apple v. Apple (1950), 407 Ill. 464, 95 N.E.2d 334, where the issue was whether a fiduciary relationship existed prior to one party's granting another party the power of attorney, which resulted in a fiduciary relationship as a matter of law. We note, however, that Apple is not controlling here because: (1) Apple did not involve negotiations for compensation prior to an agency relationship: and (2) this court had not yet adopted comment e to section 390 of the Restatement.

Whether the Appellate Court Erred in Affirming the Trial Court

Heinold also argues that the appellate court erred in holding that a fiduciary duty exists simply where the subject matter of a contract is complicated. Heinold's argument is based on its belief that the traditional criteria for the existence of a fiduciary duty was not met here and that the appellate court created a new basis on which to find a fiduciary duty. The appellate court affirmed the trial court on this point, stating:

"The record indicates that members of the Class were uniquely dependant upon information obtained from defendant and its soliciting brokers in order to make a profit on LCO transactions. The trading of LCO's during the relevant period was exceedingly complicated due to the mechanics of LCO's and the London exchanges, the volatility of the commodity options market, the impact of currency conversion rates and the differing terminology used among brokers offering LCO's to the public." (240 Ill. App. 3d 536, 541.)

The appellate court's opinion merely summarizes the trial court's findings that few investors, including plaintiffs, could have understood the mechanics of LCOtrading or known what type of charges were proper. The appellate court's finding is not that a preagency fiduciary duty attaches when a transaction is complex, but that under these unique circumstances, where a future principal and agent are discussing compensation, and where the plaintiffs were uniquely depend ant upon Heinold for information concerning the proper charges in the transaction, a duty attached. There was no error by the appellate court on this issue.

II.

Consumer Fraud Act

Heinold next argues that the appellate court erred in affirming the trial court's finding that Heinold violated the Consumer Fraud Act through the use of its misleading summary disclosure statement. Heinold argues that it literally complied with the Commission's disclosure regulations by disclosing the various elements of the LCO's, and thus could not have violated the Consumer Fraud Act.

Heinold first argues that the Consumer Fraud Act does not apply to "actions or transactions specifically authorized by laws administered by any regulatory body or officer acting under statutory authority of this State or the United States." (815 ILCS 505/10b(1) (West 1992).) Moreover, Heinold argues, this court has held that "compliance with the disclosure requirements of [Federal statutes and regulations] is a defense to liability under the Illinois Consumer Fraud Act." Lanier v. Associates Finance, Inc. (1986), 114 Ill. 2d 1, 18, 101 Ill. Dec. 852, 499 N.E.2d 440.

In addition to arguing that it listed all the elements comprising the purchase price of the LCO's in its summary disclosure statement as required by the Commission's regulations, Heinold also notes the great lengths to which it went in order to ensure that all disclosures were made. Thus, Heinold asserts, it could not have violated the Consumer Fraud Act.

Heinold's deception was neither specifically authorized by the Commission, nor in compliance with the Commission's regulations. The Commission has noted that literal compliance with disclosure regulations will not necessarily ensure that a violation of the Commission's regulations has not occurred. In certain circumstances, "a customer may be deceived about [material facts] despite receipt of the information required by [the Commission's regulations]." (Hammond v. Smith Barney, Harris Upham & Co. [1987-1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) par. 24,617 (C.F.T.C. 1990).) In Hammond, the Commission noted that it had reviewed "the overall message conveyed by" the solicitation in question in determining whether a violation of Commission disclosure regulations had occurred. It has also been noted:

"Information is imparted not just through the use of individual words-information is also gained from the context in which those words are placed. When determining what has been disclosed, therefore, it is wrong to treat each individual piece of information separately, as if it had no relation to the other pieces which surround it." Isquith v. Middle South Utilities, Inc. (5th Cir. 1988), 847 F.2d 186, 201 n.9.

The pertinent Commission regulations are found at section 32.5 of the Code of Federal Regulations:

"(a) Except as provided in paragraph (b) of this section, prior to the entry into a commodity option transaction, each option customer or prospective option customer shall be furnished a summary disclosure statement by the person soliciting or accepting the order therefor. The disclosure statement shall contain the following:

(1) A brief description of the commodity option transactions being offered including:

(ii) A listing of the elements comprising the purchase price to be charged, including the premium, mark-ups on the premium, costs, fees and other charges, as well as the method by which the premium is established;

(iii) The services to be provided for the separate elements comprising the purchase price * * *." 17 C.F.R. § 32.5(a)(1) (1977).

As the trial court found, "Heinold's Summary Disclosure Statement, which concealed and failed to disclose an additional commission by using the misleading and deceptive term "Foreign Service Fee," failed to satisfy these requirements." By labeling a commission a foreign service fee rather than an additional commission, Heinold deceived the plaintiff class into believing the foreign service fee was an additional separate charge Heinold necessarily incurred and paid to third parties in LCO transactions.

Moreover, we note that Commission regulation 32.9 provides:

"It shall be unlawful for any person directly or indirectly:

(a) To cheat or defraud or attempt to cheat or defraud any other person;

(b) To make or cause to be made to any other person any false report or statement thereof or cause to be entered for any person any false record thereof;

(c) To deceive or attempt to deceive any other person by any means whatsoever; in or in connection with an offer to enter into, the entry into, or the confirmation of the execution of, any commodity option transaction." (17 C.F.R. § 32.9 (1977).)

Again, as the trial court noted, "Heinold violated this provision when it cheated, defrauded and deceived the class."

We note that this finding is supported by the fact that the Commission banned the offer and sale of commodity options, including LCO's, to the general public effective June 1, 1978. This ban was due, inter alia, to the fact that firms were using such terms as "foreign service fee" to conceal the true extent of fees and markups. 43 Fed. Reg. 16162 (1978).

Heinold also argues that the Commission inspected its summary disclosure form and did not object to theforeign service fee. Thus, Heinold argues, the disclosure was proper. This argument is without merit, as is seen by the following which Heinold was required to have printed on the summary disclosure form:

"THESE COMMODITY OPTIONS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE COMMODITY FUTURES TRADING COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A VIOLATION OF THE COMMODITY EXCHANGE ACT AND THE REGULATIONS." (Emphasis added.)

Heinold also argues that the appellate court erred in holding that Heinold violated the Consumer Fraud Act "because [the summary disclosure statement] does not disclose the full extent of compensation [Heinold] derived in LCO transactions." (240 Ill. App. 3d at 544.) Heinold argues that it was impossible to know and disclose at the time plaintiffs signed the summary disclosure forms how much compensation Heinold would derive from the transaction. Heinold also argues that the Commission's regulations do not require that it state the full amount of its compensation. However, we simply note that Heinold's deception was not in failing to disclose the exact amount of its compensation, but in failing to disclose that the foreign service fee was a commission, from which it would derive compensation. We further note the ease ...


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