Blunt, Ellis & Loewi, Inc. v. Igram, 65899

• Decision Date: 19 May 1982
• Docket Number: No. 65899,65899
• Citation: 319 N.W.2d 189
• Parties: BLUNT, ELLIS & LOEWI, INCORPORATED, a Corporation, Appellee, v. Charles IGRAM, Appellant.
• Court: Iowa Supreme Court

Page 189

319 N.W.2d 189

BLUNT, ELLIS & LOEWI, INCORPORATED, a Corporation, Appellee, v. Charles IGRAM, Appellant.

No. 65899.

Supreme Court of Iowa.

May 19, 1982.

Max Putnam, Des Moines, and R. Fred Dumbaugh, Cedar Rapids, for appellant.

Thomas P. Ward, Chicago, Ill., and James F. Pickens of Pickens, Barnes & Abernathy, Cedar Rapids, for appellee.

Considered by LeGRAND, P. J., and McCORMICK, ALLBEE, McGIVERIN, and LARSON, JJ.

ALLBEE, Justice.

This litigation arises from a dispute growing out of substantial losses sustained by defendant Charles Igram in the commodities futures market. Igram has appealed from judgment against him awarding plaintiff Blunt, Ellis & Loewi, Incorporated (BEL), the sum of $137,542. That sum represents the deficit balance in Igram's commodity account when BEL unilaterally closed the account on August 6, 1979, after five of Igram's checks in the aggregate of $96,600 delivered to BEL to meet margin calls were returned because of insufficient funds. Igram also appeals from the dismissal of his counterclaim, and BEL has cross-appealed asserting that it should have been awarded prejudgment interest.

Igram, a long-time speculator in commodities futures, opened an account at the BEL Cedar Rapid's branch office in March 1978. He represented that he had equity in assets worth $1.25 million, and annual income in the range of $80-100,000. No limitations were requested by Igram on either the amount he should be permitted to expose to risk or the losses he was willing to sustain. Igram engaged in only a few futures trades in 1978. Beginning in February 1979, however, Igram became active in trading following employment by BEL of an acquaintance of Igram's, one Michael Langer, who joined BEL's Cedar Rapid's office as a registered commodities broker. At Igram's request, his account was switched to Langer, and Igram began heavy speculation in futures traded on the Chicago Board of Trade and the Chicago Mercantile Exchange. Frequently, Igram's account became undermargined for short intervals, and on eleven occasions prior to the end of June 1979, he deposited new funds by check in response to calls for more margin. Two of those checks were initially dishonored by the drawee bank because of insufficient funds, but each was resubmitted and cleared on the second presentment. Igram's eleven margin deposits totaled $184,000. As the result of trading between February and the end of June 1979, Igram incurred a sizeable loss.

On July 5, 1979, Igram varied his trading pattern. That day he sold extensively, retaining primarily long positions in live cattle contracts, but spread that position by selling short an equal number of live cattle contracts in another month. This action substantially reduced his margin requirement, and the equity in his account, thus having been increased by the liquidations on that day, rose to $137,330. The following day Igram demanded that BEL wire $100,000 from his commodity account to his bank account; BEL complied. At the close of trading on July 6, Igram had an equity credit of $31,670, considerably more than the amount needed to cover the positions he then held.

The next business day, Monday, July 9, Igram took off all of his spreads and returned to his more familiar course of trading, dealing primarily in live cattle and soybean meal contracts. By the following day, his account was undermargined and a call was made for him to meet the margin requirement. During the remaining days of that week Igram took more positions and the undermargined condition of his account increased. Meanwhile, Langer was reminding Igram that he must meet the margin calls being made, and Igram was giving assurances that those calls would be met.

On Monday, July 16, the first of several ultimately dishonored checks was delivered by Igram to BEL to meet margin calls. Having met his margin requirement with a $20,000 check, Igram was permitted to maintain and add to his market positions. Days later, when Igram's check reached his bank, the funds in his account were insufficient to cover the check. Consequently, that bank marked the check "NSF" and returned it to BEL's bank, where it was received on Monday, July 23. Langer, upon being informed of this, asked the bank to resubmit the check as had been successfully done in at least two prior instances. Also on July 16, the market price of live cattle began a decline. That adverse price movement not only reduced Igram's equity, but worsened the undermargined condition of his account.

We need not recount in detail what the evidence discloses of ensuing events; a summary will suffice. By July 25, BEL was demanding $60,000 additional margin. On July 26, Igram wrote and handed Langer two checks of $30,000 each. Late that same day, BEL's bank reported to Langer that the $20,000 check presented to Igram's bank for the second time had again been dishonored. There followed in short order the delivery of a replacement check of $20,000 drawn by Igram upon a different account--a check which he declared to be "as good as gold"--and also Igram's tender of a $16,600 check in response to yet another margin call. After July 26, no additional credit was extended to Igram. His account was then long fifty live cattle contracts and short three soybean oil contracts, and it remained in those positions until liquidation began. Throughout this entire period, Igram appeared daily and spent time at BEL's office during trading hours.

The culmination of these events occurred after the market closed on Thursday, August 2, when BEL learned that all of Igram's checks were being returned dishonored. At that time, Igram's account was in deficit by $47,000, even before reversing credits of $96,600 previously entered for the four dishonored checks. Upon being notified of this, the BEL home office directed that all of Igram's positions were to be liquidated. This directive was modified, however, to permit Igram to benefit from an upward price movement then underway in live cattle futures by putting stop-loss orders under his positions rather than selling them out immediately. The price rally continued to the closing on August 3, and held during the early trading on Monday, August 6. Later in the Monday session, however, the prices broke downward, hit the stop-loss prices put in the previous week, and Igram's positions were sold out. The account deficit after the sell-out was $40,942. Two days later, the dishonored checks were returned to BEL and debited to Igram's account, thus reflecting Igram's total deficit to be $137,542.

Shortly after liquidation was completed, BEL commenced this action. Trial to the court was conducted in July 1980, and judgment was entered on September 22, 1980. This case having been tried to the court, the scope of our review is for correction of errors of law. Iowa R.App.P. 4. We are mindful that trial court's findings of fact have the force of a special verdict, id., and are binding on us if supported by substantial evidence, Iowa R.App.P. 14(f)(1). Evidence reviewed for its substantiality is to be viewed in the light most favorable to the judgment. E.g., Packwood Elevator Co. v. Heisdorffer, 260 N.W.2d 543, 544 (Iowa 1977). We are not bound by trial court's determinations of law, however, nor precluded from inquiry into whether trial court applied erroneous rules of law which materially affected its decision. E.g., Kurtenbach v. TeKippe, 260 N.W.2d 53, 55 (Iowa 1977).

I. Determination of issues presented by Igram's appeal.

A. Igram first insists that BEL is barred from recovering his account deficit because BEL breached the commodity account agreement entered into with Igram by failing either to close the account within a reasonable time after it became undermargined or to liquidate a portion of it to restore the required margin. The commodity account agreement between these parties provided that all transactions were subject to the rules and regulations of the commodity exchanges on which they were executed. The agreement also gave the broker authority to liquidate the account whenever it deemed the margin deposits inadequate, and further provided that the customer would be liable to the broker for resulting deficiencies.

In support of his assertion that BEL is barred from recovering his account deficit, Igram alleged that BEL violated rules of the commodity exchanges pertaining to undermargined accounts. Specifically, Igram affirmatively pleaded:

Under Rule 928c of the Chicago Mercantile Exchange, when the customer's margins are depleted below the minimum amount and the customer fails to comply with the demand for more, "the clearing member must close out the customer's trades or sufficient thereof to restore the customer's account to required margin status". Under Rule 210 of the Chicago Board of Trade "No member may accept or carry an account for a customer, whether a member or non-member, without proper and adequate margin". So the Plaintiff herein is precluded from recovering any of the claim made because it is seeking to profit from its own wrong in violating the rules of the Exchange in which it was operating, besides breaching its contract.

It is settled that "[a] broker's covenant with its customer that it will follow exchange rules and customs establishes a contractual duty to the customer." Iowa Grain v. Farmers Grain and Feed Co., 293 N.W.2d 22, 25 (Iowa 1980). Furthermore, the breach of a contractual duty to liquidate an undermargined account has been recognized as a defense to a broker's action on a commodity account. First Mid America, Inc. v. Palmer, 197 Neb. 224, 230, 248 N.W.2d 30, 34-35 (1976).

Under the evidence in this case, however, we cannot accept Igram's proposition that he is free to repudiate his losses. The record discloses that whenever Igram's account became undermargined, BEL made margin calls; we note that Igram does not contend otherwise. In addition, Igram acknowledges that Langer also kept him informed of...