R.J. O'Brien & Associates, Inc. v. Forman, 01-4026.

Citation298 F.3d 653
Decision Date29 July 2002
Docket NumberNo. 01-4026.,01-4026.
PartiesR.J. O'BRIEN & ASSOCIATES, INC., Plaintiff-Appellant, v. Ronald FORMAN, Defendant-Third Party Plaintiff-Appellee, v. Christopher Longworth, doing business as Ozark Futures & Options, Third Party Defendant-Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (7th Circuit)

Christopher L. Gallinari (argued), Bellows & Bellows, Chicago, IL, for plaintiff-appellant.

Christopher L. Gallinari (argued), Bellows & Bellows, Chicago, IL, for defendant-appellant.

Ronald H. Balson (argued), Hill, Gilstrap & Balson, Chicago, IL, for defendant-appellee.

BEFORE: RIPPLE, DIANE P. WOOD, and EVANS, Circuit Judges.

TERENCE T. EVANS, Circuit Judge.

At first glance, the verdicts in this case look inconsistent, so inconsistent, in fact, that both sides moved to have them set aside. And had this case been litigated differently, there is a chance — though far from a certainty — that we might have found them inconsistent. But as the case comes before us, we find that they are not. More than anything, the case is another illustration that the principles and rules by which the federal courts operate have teeth.

R.J. O'Brien and Associates, Inc. (RJO) is a futures commission merchant (FCM) that clears trades for commodity futures and options contracts on commodity exchanges such as the Chicago Mercantile Exchange and the Chicago Board of Trade. Christopher Longworth is an introducing broker who had a clearing and guarantee agreement with RJO. Ronald Forman is a Texas real estate developer who, in 1995, decided to enter the commodities market. His cousin introduced him to Longworth and, through Longworth, Forman opened an account with RJO. He signed a customer agreement which states in part:

Customer understands that RJO will not be responsible for delays or inaccuracies in the electronic preparation of statements or the distribution of market information.

Further, the agreement states:

Customer understands that RJO, among other requirements, is financially liable to the contract market clearing houses for debit balances occurring in the Customer's account. Because RJO is the guarantor to the clearing house, Customer agrees to hold RJO, its principals, officers, directors, employees, its affiliates and agents harmless with respect to any and all losses sustained by the latter resulting from the Customer's account, or any related activity, and to indemnify RJO for all costs incurred, including reasonable attorney's fees.

In commodities trading, speculators like Forman must pay what is a margin to the FCM when the contract is first entered. As time passes, it often becomes necessary for the speculator to make additional margin payments to cover payments that FCM would have to pay to the clearing houses to cover losses.

Forman's initial forays into the market were unsuccessful, and for a few months he dropped out of trading. But he reactivated his account with Longworth in April 1996. Then things really went south.

In the commodity futures market, the rules of the exchange establish trading limits which govern the amount of movement a particular commodity can sustain in any given day. At the time of Forman's trades, trading limits on corn were 12 cents or 18 cents a day. What this means is that the price of corn could not fluctuate either higher or lower than the limit amount from the prior day's closing figure. But immediately prior to the first day of the delivery month (May for May corn), there is a "first notice day," at which time there are no trading limits on a particular commodity and the price can fluctuate much higher or lower than the prior day's closing price.

At the close of the market on Friday, April 26, 1996, Forman's account had a market value of about $180,630, which he quite naturally wanted to protect. On Sunday, April 28, 1996, Forman called Longworth at home to discuss how to best protect his market position. Forman asked Longworth what the market limits would be on Monday, April 29, for May corn. Longworth said he did not know. He had not found out when Forman called him later that evening. Longworth said he would call RJO prior to the opening of trading on the 29th. In the morning, Longworth called RJO and was told that normal limits would apply, which Longworth thought would be 12 cents. He informed Forman, who promptly ordered an additional 250,000 bushels of May corn and 250,000 bushels of July corn.

As it turns out, April 29, 1996, was the first notice day for May corn. At about 10:15 in the morning, after Forman's order was placed, Longworth saw that the price for May corn had dropped below the 12 cent limit. At that point, Longworth again called RJO and was told that there were no limits on May corn that day. By 10:30, when Longworth called Forman, the price of May corn had dropped 17 to 18 cents below the Friday closing price. Forman was not happy about these developments and demanded that Longworth and RJO "fix it." He demanded reinstatement of the $180,630 he had in his account prior to the opening of the market.

At about 1 p.m., with the market having continued to fall throughout the day, Longworth informed Forman that he would be facing huge margin calls because the market had moved against his position. Forman told Longworth to sell the May corn; Longworth was able to sell 230,000 bushels of May corn by the end of trading that day. On April 30 the remaining May corn was sold. Forman still had the July corn, which also was moving against his position. Longworth informed Forman that he needed to deposit a $100,000 maintenance margin into his RJO account. Forman did not pay the margin. In a conference call with persons from RJO, Forman again refused to pay the $100,000 margin. When all was said and done after Forman failed to furnish the margin and his positions were liquidated, there was a net deficit in his account of $152,002.

RJO sued Forman for breach of contract and fraud to collect the deficit which occurred when Forman failed to meet margin calls. Forman counterclaimed and brought several third-party claims against Longworth and RJO. The case was tried to a jury, and the jury found, as relevant here, that Forman had breached the contract with RJO and awarded RJO compensatory damages of $152,002.10. The jury also found for Forman on his counterclaims and third-party complaint against RJO and Longworth for negligent misrepresentation to the tune of $139,143.00.

The issue is, how can this be? How can both sides win? The answer supplied by the district judge is that the negligent misrepresentation and the breach of contract claims are entirely separate animals. The negligent representation grew, not out of the contract, but rather out of the common law duty owed by Longworth (and RJO because Longworth is its agent) to Forman. They were negligent in their failure to inform Forman that there were no limits on April 29th. The judge stated:

The duty plaintiffs [a reference to RJO and Longworth] owed Forman to provide accurate information was an extra-contractual duty arising from the professional obligations plaintiffs owed their clients. Congregation of the Passion v. Touche Ross & Co., 159 Ill.2d 137, 201 Ill.Dec. 71, 636 N.E.2d 503, 514 (1994). Forman's duty to meet his margin call was a contractual duty. Consistent with the case as it was argued and proved by the parties, the jury could have concluded that despite his (ultimately correct) belief that he had been caused losses by plaintiffs' negligent advice, Forman nevertheless was contractually obligated to meet his margin call, and hash out later with plaintiffs whether their negligence led to the margin call in the first place. [Emphasis in original.]

We agree with this explanation, especially, as we shall see, with its emphasis on the manner in which the case "was argued and proved by the parties."

Yet RJO and Longworth profess to be stunned by the result. It runs counter, they say, to the well-established Illinois Moorman doctrine, the law of Illinois being the governing authority for the negligent misrepresentation claim. In Moorman Manufacturing Co. v. National Tank Co., 91 Ill.2d 69, 61 Ill.Dec. 746, 435 N.E.2d 443 (1982), the Illinois Supreme Court set out its economic loss doctrine, barring tort recovery for economic losses. As with most doctrines, however, Moorman is subject to exceptions. An exception exists for instances in which the allegedly negligent party is in the "business of supplying information for the guidance of others...."...

To continue reading

Request your trial
13 cases
  • CustomGuide v. Careerbuilder, LLC
    • United States
    • U.S. District Court — Northern District of Illinois
    • 24 Agosto 2011
    ...of ruling on CareerBuilder's motion, the court assumes that the Agreement expired on February 4, 2009. 2. R.J. O'Brien & Associates, Inc. v. Forman, 298 F.3d 653, 657 (7th Cir.2002), also cited by CareerBuilder, does not support the opposite result. In R.J. O'Brien, the court did not addres......
  • Moore v. United States
    • United States
    • U.S. District Court — Western District of North Carolina
    • 30 Septiembre 2020
  • Nixon v. United States
    • United States
    • U.S. District Court — Northern District of Illinois
    • 4 Enero 2013
    ...(“The Moorman doctrine, however, does not apply when a duty arises that is extracontractual.”); R.J. O'Brien & Assocs., Inc. v. Forman, 298 F.3d 653, 656 (7th Cir.2002) (“Moorman dictates that, when a contract sets out the duties between the parties, recovery should be limited [916 F.Supp.2......
  • ST George Invs. LLC v. Quamtel, Inc.
    • United States
    • U.S. District Court — Northern District of Illinois
    • 3 Marzo 2014
    ...to contract damages, even though recovery in tort would otherwise be available under the common law." R.J. O'Brien & Associates, Inc. v Forman, 298 F.3d 653, 657 (7th Cir. 2002). In other words, the Moorman doctrine "bars recovery in tort for purely economic losses arising out of a failure ......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT