Capital Options Investments, Inc. v. Goldberg Bros. Commodities, Inc.

• Decision Date: 19 March 1992
• Docket Number: No. 90-3594,90-3594
• Citation: 958 F.2d 186
• Parties: CAPITAL OPTIONS INVESTMENTS, INCORPORATED, a Delaware corporation, Plaintiff-Appellant, v. GOLDBERG BROTHERS COMMODITIES, INCORPORATED and Linnco Futures, Incorporated, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 186

958 F.2d 186

60 USLW 2652

CAPITAL OPTIONS INVESTMENTS, INCORPORATED, a Delaware corporation, Plaintiff-Appellant, v. GOLDBERG BROTHERS COMMODITIES, INCORPORATED and Linnco Futures, Incorporated, Defendants-Appellees.

No. 90-3594.

United States Court of Appeals Seventh Circuit.

Argued Jan. 29, 1992.

Decided March 19, 1992.

Richard P. Campbell, Anthony S. DiVincenzo (argued), Campbell & DiVincenzo, Chicago, Ill., for plaintiff-appellant.

Walter C. Greenough, Paul A. Scrudato, Schiff, Hardin & Waite, Chicago, Ill., for Goldberg Bros. Commodities, Inc.

Pamela R. Hanebutt, William J. Nissen (argued), Joseph H. Harrison, Brian J. Sullivan, Sidley & Austin, Chicago, Ill., for Linnco Futures, Inc.

Before FLAUM and KANNE, Circuit Judges, and PELL, Senior Circuit Judge.

KANNE, Circuit Judge.

Capital Options Investments ("Capital") brought this diversity suit, 28 U.S.C. § 1332, alleging breach of contract and tortious interference with its prospective economic advantage by Goldberg Brothers Commodities, Inc. ("Goldberg") and Linnco Futures, Inc. ("Linnco"). The district court granted summary judgment in favor of the defendants. We affirm.

BACKGROUND

During the period relevant to this suit, Capital was an introducing broker for commodity options investments sold to the retail public. Goldberg, a futures commission merchant, had a contractual agreement with Linnco, an introducing broker, whereby Goldberg cleared trades for Linnco's customers and Linnco administered the clearing arrangement for Goldberg with respect to these customers and guaranteed the payment of any unpaid losses in these customer accounts. In turn, Goldberg guaranteed the payment of any such losses to the applicable commodity exchange. Under this arrangement, Goldberg and Linnco together acted as clearing broker for the accounts of Capital's customers. As such, they received customer orders from Capital, arranged for the execution of trades on the exchange floors, processed the trades, issued account statements, and held customer funds in segregated accounts. Both the clearing agreement between Goldberg and Capital and the letter agreement between Capital and Linnco were expressly subject to the Goldberg Customer Agreement ("Agreement"). ¹

Capital's customers traded primarily on margin, that is to say, they only paid a fraction of the actual cost on a trade in advance. Under the terms of the Agreement, Goldberg and Linnco had sole discretion to determine the amount of margin and authority to liquidate the customers' accounts if the requested margin was not met. Pursuant to its clearing agreement with Goldberg, Capital was required to communicate the margin requests to its customers and to use its best efforts to assure payment of the margin requirements.

At the time in question, most of Capital's customers held naked short gold options ² positions in their accounts in combinations known as "strangles." ³ Gold strangles can result in a profit if the price of gold is traded in the range established by the options but can result in a loss if the price of gold goes either above or below the strangle range. Therefore, while strangle positions can be profitable in calm markets, they are much riskier in volatile markets. Capital's customers had opened these positions prior to the stock market crash of October 19, 1987, and they were not due to expire until late in 1987 and early in 1988.

On the day of the crash, Linnco increased the margins for Capital's customers from $1300 to $2600 with five days to meet the margin. On November 4, 1987, Linnco informed Capital that it wished to terminate their relationship and refused Capital's request to employ trading strategies to avoid termination. The next day, Linnco advised Capital that the margin requirements on the naked short gold options positions held by Capital's customers were being raised to $15,000 per option and gave Capital's customers one hour to satisfy the increased margin requirements. None of Capital's customers satisfied the increased margin requirements, and consequently their positions were closed out. The margin call of November 5, 1987 is the subject of this law suit.

The district court determined that Capital had not met the legal standard for bad faith and that Goldberg and Linnco acted within their contractual rights in increasing the margin requirement, in providing one hour in which to meet the margin requirement, and in liquidating the accounts for failure to meet the margin call. The district court further concluded that Capital failed to establish actual malice for the tortious interference claim.

ANALYSIS

Our review of a district court's grant of summary judgment is de novo. Renovitch v. Kaufman, 905 F.2d 1040, 1044 (7th Cir.1990). Summary judgment is appropriate where there is no genuine issue as to any material fact and where the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). In reviewing the record, we accept all facts and inferences in the light most favorable to the party that opposes the motion. Stokes v. City of Madison, 930 F.2d 1163, 1168 (7th Cir.1991). "When a contract is the subject of a summary judgment motion, 'the appropriateness of summary judgment will turn on the clarity of the contract terms under scrutiny.' " Old Republic Ins. Co. v. Federal Crop Ins. Corp., 947 F.2d 269, 274 (7th Cir.1991) (quoting International Surplus Lines Ins. Co. v. Fireman's Fund Ins. Co., No. 88-C320, 1991 WL 74582, at *3, 1991 U.S. Dist. LEXIS 6139, at * 7 (N.D.Ill. May 4, 1991)).

The parties do not dispute that Illinois law governs this diversity suit. Under Illinois law, a covenant of good faith and fair dealing is implied in every contract. LaScola v. US Sprint Communications, 946 F.2d 559, 565 (7th Cir.1991). Contractual discretion must be exercised reasonably and not arbitrarily or capriciously. Greer Properties, Inc. v. LaSalle Nat'l Bank, 874 F.2d 457, 460 (7th Cir.1989). The term "good faith" refers to "an implied undertaking not to take opportunistic advantage in a way that could not have been contemplated at the time of drafting." Kham & Nate's Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351, 1357 (7th Cir.1990) (regarding equitable subordination of priority claims in bankruptcy). As applied to the commodities area, a margin call is not made in good faith when it is "contrived ... to penalize [the customer] for some reason unrelated to [the broker's] business." Baker v. Edward D. Jones & Co., Comm.Fut.L.Rep. (CCH) p 21,167, at 24,772 n. 10 (CFTC 1981) (describing the legal standard for bad faith as it relates to margin calls) (emphasis added).

Proof of tortious interference with prospective economic advantage requires, among other things, a showing that the tortfeasor acted with actual malice. Langer v. Becker, 176 Ill.App.3d 745, 751, 126 Ill.Dec. 203, 207, 531 N.E.2d 830, 834 (1st Dist.1988). "To demonstrate malice, ... the evidence must establish that the individual acted with a desire to harm which was unrelated to the interest he was presumably seeking to protect by bringing about the contract breach." Id.

On appeal, Capital asserts that Goldberg and Linnco breached their respective contracts with Capital and tortiously interfered with Capital's economic advantage by: (1) increasing the margin requirements only for Capital's customers and not for the customers of any other introducing broker doing business with Goldberg and Linnco; (2) giving Capital's customers just one hour to meet the margin call in contravention of their customary policy of allowing customers to cover them the following day; and (3) liquidating those accounts when the margins were not met. Capital concedes that the Agreement gave Goldberg and Linnco discretion to increase the margin requirements. However, Capital argues that the contractual power to increase margins was not unlimited and that the focus of the inquiry should be whether Goldberg and Linnco exercised their discretion reasonably. Rao v. Rao, 718 F.2d 219, 223 (7th Cir.1983). Capital contends that the district court erroneously ruled on issues of good faith, reasonableness, and credibility. Stumph v. Thomas & Skinner, Inc., 770 F.2d 93, 97 (7th Cir.1985) (summary judgment is inappropriate for determination of claims in which issues of good faith and intent dominate). Capital argues that it presented sufficient specific evidence to raise a genuine issue of material fact regarding the reasonableness of Goldberg's and Linnco's actions from which bad faith could be inferred: (1) the margin increase on one-hour notice applied only to plaintiff's customers, even though other accounts also contained options positions posing unlimited risk; (2) the margin increase far exceeded previous margin increases imposed under much more volatile market conditions; (3) there were no adverse market movements on the day defendants increased margins; (4) defendants offered a different justification on the day of the margin increase than offered in support of the motion for summary judgment; and (5) defendants refused to allow plaintiff to take steps short of liquidation to lessen the perceived risks.

Goldberg and Linnco counter that they used their contractual power to increase the margin requirements because they no longer wished to bear the high risks associated with the strangles without additional margin. They perceived the market to be more volatile and uncertain in the aftermath of the crash and thus believed that Capital's business held more risks than the businesses of their other customers. They argue that they were entitled to judgment as a matter of law because Capital's evidence did not create a genuine issue of material fact regarding unreasonable conduct, bad faith, or actual malice.

One-hour notice to post additional margin, despite previous practices, is reasonable where a contract specifically provides for margin calls on options at any time and without notice....