Nattrass v. Rosenthal and Co.

• Citation: 641 S.W.2d 675
• Decision Date: 07 October 1982
• Docket Number: No. 2-81-035-CV,2-81-035-CV
• Parties: Ralph NATTRASS, et al., Appellant, v. ROSENTHAL AND COMPANY, Appellee.
• Court: Court of Appeals of Texas

Page 675

641 S.W.2d 675

Ralph NATTRASS, et al., Appellant, v. ROSENTHAL AND COMPANY, Appellee.

No. 2-81-035-CV.

Court of Appeals of Texas Fort Worth.

Oct. 7, 1982.

Rehearing Denied Nov. 4, 1982.

Brown, Herman, Scott, Dean & Miles and Randall Schmidt, R. David Broiles, Fort Worth, for appellant.

Barlow, Gardner, Tucker & Garsek and Michael T. Watson, Fort Worth, for appellee.

Before MASSEY, C.J., and SPURLOCK and JORDAN, JJ.

OPINION

MASSEY, Chief Justice.

Ralph Nattrass, George Panagopoulos, Dionysios Panagopoulos, Dennis Mouzakis and Betty Calame, plaintiffs, brought suit in district court seeking damages from their broker, Rosenthal & Company, based upon the failure of the latter, through its employee, Larkin, to follow plaintiffs' instructions to take them out of the commodities market. Following trial to a jury, the trial court on September 21, 1981, rendered judgment in favor of plaintiffs, the broker's customers, for $36,745.00 plus attorney's fees. Although they obtained a favorable judgment, all of them have appealed. They present, as their principal contention, that the trial court erred in submitting to the jury a damages issue and rendering judgment thereon when the amount of damages prayed for (totaling $76,712.00) was uncontradicted and admitted. The broker has also perfected its own appeal in the contention, primarily, that Texas State courts have no jurisdiction to hear disputes in the commodities trading field when there exists an extensive federal regulatory scheme; that provision therefor has preempted and foreclosed State court jurisdiction.

Judgment is reformed as to amount so as to conform to that for which the plaintiffs sued, and, as so reformed, is affirmed.

In October, 1976, plaintiffs purchased September 1977 Brazilian coffee options through the London Commodity Exchange. Rosenthal & Company, a Chicago-based broker with a branch office in Fort Worth, procured the options for the plaintiffs' accounts through the efforts of its agent, Chris Larkin, personal broker for plaintiffs. Each option had a "striking price" at which plaintiffs could exercise their options. Only upon the exercise of an option are traders like plaintiffs obligated to take physical delivery of a commodity under the contract underlying each option. If market price for September 1977 coffee rose above the price at which an option holder could exercise, the holder could exercise at his low price and resell his contracts for delivery at the higher market value. In this case, the plaintiffs held nineteen options purchased at prices varying between 1925 British pounds sterling and 2010 pounds per ton. (Options and contracts for commodities are expressed in per ton prices, but each option or contract represents five tons of any certain commodity.) These plaintiffs, owning options for 95 metric tons of coffee, had upwards of $200,000.00 invested in September 1977 options. They collectively saw their profit potential in coffee climb fortuitously because of unexpected climatic conditions in Brazil during the winter of 1976-77. As a result of the hardships facing Brazilian growers and coffee suppliers, the value of plaintiffs' options increased approximately 100%. Traders were willing to pay 4000 pounds per ton for Brazilian coffee available for delivery in September, 1977.

The plaintiffs were all acquainted with one another. The Panagopoulos clan operated Mr. Nattrass' favorite restaurant and meeting place in Arlington. Dennis Mouzakis is related by marriage to Nattrass. Betty Calame worked for Nattrass' retail mobile home firm. All were account holders with Rosenthal & Company, but Nattrass would instruct the broker concerning transactions in Calame's account, George Panagopoulos would speak for Dionysios Panagopoulos, and Dennis Mouzakis for the most part would instruct Rosenthal concerning his own account. Nattrass, however, was apparently the moving force in the trading circle, but he professed having limited knowledge of the often confusing mechanics of the commodities market. Nattrass was the first plaintiff solicited by Chris Larkin to set up an account with Rosenthal. Each plaintiff followed suit at the behest of Nattrass, and each traded in other commodities with resultant successes and failures.

The events of late April, 1977, become crucial to this case. Plaintiffs had been advised that they would be required to hold on to their options for six months in order to receive more favorable tax treatment for long-term capital gains. A meeting with Larkin was arranged for Friday, April 22nd. At this meeting, (Larkin, Nattrass, George Panagopoulos, and Mouzakis all being present) Larkin was instructed that April 23rd was the first day after six months at which the desired tax treatment could be obtained, and that he should get the plaintiffs out of the market as soon as possible after that date because of rapidly decreasing prices for September 1977 coffee.

On April 27th, seemingly during the first trading week for their capital gains purposes, Larkin took one step toward the plaintiffs' goal of leaving the volatile market. He sold nineteen contracts for September 1977 coffee to some unknown trader. This obligated each plaintiff to physically deliver 95 tons of coffee to the trader in September, 1977. At this point, the plaintiffs actually did not have the coffee to satisfy their obligations, but it would have been a simple enough procedure for Larkin to procure the coffee contracts by exercising the nineteen options held collectively by the plaintiffs. Had Larkin performed this second step, he would have been exercising options at a price of approximately 2000 British pounds per ton to satisfy the contracts sold to the unknown trader at 3800 pounds.

Instead of exercising the options, Larkin simply bought nineteen contracts for the plaintiffs at a price of 3700 pounds per metric ton in order to satisfy the plaintiffs' commitment to the unknown trader. The result was a short-swing profit of 100 pounds per ton, or a total of 9500 pounds collective profit for the plaintiffs' accounts. The options purchased in October, 1976, remained unexercised in a market that was plummeting. Finally, on May 4th, Larkin did as instructed and got the plaintiffs out of the market by selling contracts to a trader for either 3290 or 3300 pounds, satisfying them with the contracts underlying the plaintiffs' options by exercising the same. Once again, the plaintiffs made substantial profits, some 1300 pounds per ton. They were, however, dissatisfied with Larkin's trading for their accounts. They felt they could have made an additional 400 pounds profit per ton of coffee had he exercised their October options to accomplish a sale on April 27th.

Plaintiffs' suit was filed in order to recoup the difference between 3700 and 3300 British pounds. This was the amount, in the opinion of plaintiffs, which was lost due to Larkin's unauthorized trading, which had left their options unexercised for over a week. In other words they sued for the amount in excess of that received, which they would have realized had Larkin "taken them out of the market" at the time he was instructed.

Trial was to a jury, which found that plaintiffs instructed Larkin to take them out of the market after April 23, 1977. It found that Larkin failed to follow these instructions. It found that none of the plaintiffs had waived their rights to assert that Rosenthal had entered into an unauthorized transaction, and that none had ratified Rosenthal's purchase of coffee futures after April 23, 1977. The jury also found that financial loss was suffered by the plaintiffs as a result of the events complained of. Submitted over objection by plaintiffs was a special issue in answer to which the jury found that $35,745.00 (collectively grouped here) was the amount of plaintiffs' damages.

JURISDICTION OF THE DISTRICT COURT

Rosenthal & Company contends that it was error for the district court to take jurisdiction of the claims of plaintiffs Nattrass, et al. The claims, failure to follow instructions, breach of fiduciary duty, supplying false information, negligence, gross negligence, and misrepresentation of services in violation of Tex.Bus. & Comm.Code secs. 17.46(b)(5)(7) & (21), and 17.50(a)(1)(2) & (3) (the Texas Deceptive Trade Practices--Consumer Protection Act) (Supp.1982), being based solely on the common and statutory law of Texas, are contended by Rosenthal & Company to be in conflict with the Commodity Exchange Act, 7 U.S.C.A. sec. 1, et seq. (1980). Proposed by the broker is that Texas state courts lack jurisdiction to adjudicate private damage claims because Congress intended that the Commodity Exchange Act, through the Commodity Futures Trading Commission, should exclusively govern the trading of commodity options. Represented is that Texas courts as well as those of other states have recognized the exclusive jurisdiction of the federal regulatory and reparation scheme over claims arising from the trading of commodity options.

Texas decisions cited by Rosenthal & Company are not on point. In State v. Monex International, Limited, 527 S.W.2d 804 (Tex.Civ.App.--Eastland 1975, writ ref'd.), the State of Texas sought to enjoin certain commodity transactions which did not comply with the registration requirements of the Texas Securities Act, Tex.Rev.Civ.Stat.Ann. art. 581-1 through 581-39 (1964). The trial court refused to enter the requested injunction. The Court of Civil Appeals, in affirming the trial court's action, stated:

"We think it is clear that the newly established Commodity Futures Trading Commission now has exclusive jurisdiction to regulate Pacific's margin account sales. Hines v. Davidowitz, 312 U.S. 52, 61 S.Ct. 399, 85 L.Ed. 581 (1940); Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 67 S.Ct. 1146, 91 L.Ed. 1447 (1946); See also: Conference Report Commodity Futures Trading Commission Act of 1974, S.Rep. No. 93-1194, 93rd Cong. 2nd Series...