Brown v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 81-293

• Decision Date: 11 February 1982
• Docket Number: No. 81-293,81-293
• Citation: 640 P.2d 453,39 St.Rep. 305,197 Mont. 1
• Court: Montana Supreme Court
• Parties: James E. BROWN and Helen Brown, husband and wife, Plaintiffs and Appellants, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., a corporation; John E. Barbo, individually and as an employee or agent; & Dick Spalding, Defendants and Respondents.

Page 453

640 P.2d 453

197 Mont. 1

James E. BROWN and Helen Brown, husband and wife, Plaintiffs and Appellants, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., a corporation John E. Barbo, individually and as an employee or agent; & Dick Spalding, Defendants and Respondents.

No. 81-293.

Supreme Court of Montana.

Submitted Oct. 27, 1981.

Decided Feb. 11, 1982.

Wright, Tolliver, Guthals, Prater & Leroy, Pierre L. Bacheller argued, Billings, Bridger Law Office, Bridger, for plaintiffs and appellants.

Crowley, Haughey, Hanson, Toole & Dietrich, Robert Lee argued, Billings, for defendants and respondents.

HASWELL, Chief Justice.

Plaintiffs James and Helen Brown brought an action in negligence and fraud against the brokerage firm of Merrill Lynch, Pierce, Fenner & Smith, Inc., (Merrill Lynch) and its agents seeking to recover actual and punitive damages. Summary judgment was granted to the defendants by the District Court of Yellowstone County. Plaintiffs appeal.

In 1979 James Brown bought and sold gold coins at a profit of approximately $44,000. Brown learned from his brother-in-law that he might defer reporting the income from the gold for a year by means of a tax straddle. As neither Brown nor his wife were familiar with tax straddles, they met with one of Merrill Lynch's agents, John Barbo, on December 10, 1979, to discuss the applicability of a commodity straddle for tax deferral purposes.

The parties agree that during the December 10 meeting Barbo discussed the risks involved with a tax straddle. However they disagree as to what was said regarding the risks. Brown contends that Barbo represented to him that the only risk involved was the risk of having to pay Merrill Lynch a commission and yet not receive the desired benefit if the market was flat and did not move. Barbo contends that he explained that risk as well as other risks associated with a straddle position. Barbo also indicated in his deposition that he may have represented to the Browns that there was not much risk involved with a tax straddle.

Brown entered into a commodity account agreement with Merrill Lynch that same day and a couple of days later obtained the necessary funds to place the straddle. The commodity account agreement contained a general acknowledgment of the high degree of risk involved in commodity futures contracts. Brown also signed a risk disclosure statement and an authorization to transfer the customer's segregated funds. Brown did not read the documents he signed nor did he request copies of the documents.

A short time later Brown learned that Merrill Lynch was paying higher interest on deposited funds than local banks. He closed his bank account, and on December 18 he deposited $111,399 in a joint ready asset account with Merrill Lynch. On December 19, 1979, he and his wife executed a joint account form which gave Merrill Lynch authority to act upon the orders of either Brown or his wife with regard to the joint account.

Sometime between December 24 and December 26, Brown bought 2,000 shares of Keldon Oil Company stock upon the recommendation of one of his close friends. The Keldon Oil Company shares were purchased through an order at Merrill Lynch after Brown signed the necessary papers.

During the same time period, Barbo called Brown and told him that he had an unrealized loss of approximately $18,000 on his commodity straddle. Barbo told Brown at that time that he had nothing to worry about.

On Friday, January 11, 1980, Brown was again advised that his losses were approximately $18,000. At that time Barbo expressed concern about continuing the commodity straddle and explained that Brown could bail out and take the loss or possibly "lift a leg". "Lifting a leg" means abandoning the commodity straddle position and continuing in the commodity market on a single leg of the straddle. Barbo asked Brown if he wanted to liquidate. Brown indicated that he needed some time to think about it and that he would be unable to make a decision before the following Monday.

By the following Monday, the market had moved against Brown and his losses were fluctuating between $80,000 and $125,000. Brown decided not to do anything at that time. Approximately a week later, Brown and Barbo again discussed Brown's deteriorating commodity spread position. Brown instructed Barbo at that time to lift a leg.

Both Barbo and Brown contend that Brown's order to lift a leg was not followed immediately because Merrill Lynch's office manager told Barbo not to carry out the order until the risk of legging out was explained to Brown. The office manager stated that he could not recall whether Brown had given an order to lift a leg. After the meeting in which the risk was explained to Brown, it was no longer possible to lift a leg because of certain internal rules imposed by Merrill Lynch's corporate credit department.

After he realized that he would not be allowed to leg out of the tax straddle, Brown withdrew what money he could from the joint ready asset account he and his wife maintained with Merrill Lynch. Prior to that time certain funds had been transferred out of that account by Merrill Lynch to meet margin calls on the commodity straddle.

Shortly thereafter Merrill Lynch liquidated Brown's commodity straddle position to cover certain other margin calls that Brown had failed to meet. After liquidating Brown's position Merrill Lynch continued Brown's account with a deficiency balance for approximately three weeks, after which time a number of shares of Brown's Keldon Oil Company stock were liquidated by Merrill Lynch to cover the deficiency.

On March 7, 1980, Brown and his wife filed a complaint against Merrill Lynch, John Barbo, and the office manager, Dick Spalding. An amended complaint was filed on July 11 in response to defendants' motion for a more definite statement.

The amended complaint contained five counts: (1) a count in fraud in regard to an alleged misrepresentation of the risk involved with a tax straddle, (2) a count in negligence based on an alleged failure to disclose the true risk involved with a tax straddle, (3) a count in negligence based on an alleged failure of Merrill Lynch's agents to execute orders, (4) a count in fraud based on Merrill Lynch's alleged improper use of funds in the Browns' ready asset account to cover margin calls and (5) a count based on an alleged improper liquidation of Brown's Keldon Oil Company stock. In the amended complaint the Browns prayed for actual damages of $18,000, a refund of all monies invested or lost based on the above counts, a return of the stock that was liquidated, plus $100,000 in punitive damages.

Various depositions were taken and interrogatories were filed and answered. Then on April 6, 1981, the defendants filed a motion for summary judgment which was granted on April 20. The plaintiffs appeal from the order granting summary judgment to defendants.

The following issues are raised in this appeal:

1. Whether evidence of oral statements regarding the risk involved in a tax straddle would violate the parol evidence rule.

2. Whether the District Court properly granted summary judgment on the plaintiffs' count in negligence in regard to the alleged failure of Merrill Lynch's agent to disclose the true risk involved in a tax straddle.

3. Whether the District Court properly granted summary judgment on plaintiffs' count in negligence based on an alleged failure of Merrill Lynch's agents to properly execute orders.

4. Whether the District Court properly granted summary judgment on the plaintiffs' count in fraud based on an alleged misrepresentation of the risk involved in a tax straddle.

5. Whether the District Court properly granted summary judgment on the plaintiffs' count in fraud based on an alleged improper transfer of funds by Merrill Lynch's agents from the plaintiffs' joint ready asset account, and if summary judgment was properly granted on this count whether Helen Brown should be dismissed as a party plaintiff.

6. Whether the District Court properly granted summary judgment on the plaintiffs' count in fraud based on an alleged improper liquidation by Merrill Lynch's agents of the Keldon Oil Company stock.

7. Whether damages should be limited in the event this case proceeds to trial.

The first issue deals with the parol evidence rule. In reaching a decision regarding a summary adjudication a court is to exclude from its consideration extrinsic evidence which would violate the parol evidence rule. On a motion for summary judgment only admissible evidence can be considered. Gazette Printing Company v. Carden (1973), 163 Mont. 401, 517 P.2d 361.

The defendants contend that the District Court properly held that evidence of Barbo's oral statements regarding the risk involved with a tax straddle would be inadmissible as being inconsistent with the terms of the documents executed by Brown. The commodity account agreement signed by Brown contained a general acknowledgment of the high degree of risk involved in commodity futures contracts.

In Montana the parol evidence rule has been codified. Section 28-2-905, MCA, provides in part:

"(1) Whenever the terms of an agreement have been reduced to writing by the parties, it is to be considered as containing all those terms. Therefore, there can be between the parties and their representatives or successors in interest no evidence of the terms of the agreement other than the contents of the writing except in the following cases:

"(a) when a mistake or imperfection of the writing is put in issue by the pleadings;

"(b) when the validity of the agreement is the fact in dispute.

"(2) This section does not exclude other evidence of the circumstances under which the agreement was made or to which it relates, as described in 1-4-102, or other evidence to explain an extrinsic ambiguity or to establish illegality or fraud." (Emphasis added.)

Subsection (2) of the above quoted statute contains the statutory exceptions...