Duffy v. Cavalier

• Decision Date: 27 November 1989
• Docket Number: No. A035279,A035279
• Citation: 264 Cal.Rptr. 740,215 Cal.App.3d 1517
• Court: California Court of Appeals Court of Appeals
• Parties: Elmore DUFFY et al., Individually and as Trustees, etc., Plaintiffs, Cross-defendants, and Respondents, v. King CAVALIER et al., Defendants, Cross-complainants, and Appellants.

Page 740

264 Cal.Rptr. 740

215 Cal.App.3d 1517

Elmore DUFFY et al., Individually and as Trustees, etc., Plaintiffs, Cross-defendants, and Respondents, v. King CAVALIER et al., Defendants, Cross-complainants, and Appellants.

No. A035279.

Court of Appeal, First District, Division 3, California.

Nov. 27, 1989.

Certified for Partial Publication ^*

Review Denied Feb. 15, 1990.

Tod L. Gamlen, Robin L. Filion, Baker & McKenzie, Palo Alto, for defendants, cross-complainants, and appellants.

Howard M. Hoffman, Sacramento, for plaintiffs, cross-defendants, and respondents.

BARRY-DEAL, Associate Justice.

This appeal by King Cavalier (Cavalier), Lehman Brothers Kuhn Loeb, Inc. (Lehman Brothers), together with Shearson Lehman/American Express, Inc., and Shearson Lehman Brothers, Inc., the successor corporations to Lehman Brothers, is from a judgment entered on a jury verdict finding that appellants had breached their fiduciary duties to respondents Elmore Duffy (Duffy), Frank Ghilarducci (Ghilarducci), and Walter Chokan (Chokan), trustees of the Capital Wholesale Electric Company (Capital Wholesale) Profit Sharing and Trust Fund (the profit-sharing plan), in their handling of a stock brokerage account. We previously considered this appeal and affirmed the judgment in an opinion filed on May 31, 1989. Thereafter, in a petition for rehearing, appellants raised for the first time the argument that respondents' entire action was preempted by the Employee Retirement Income Security Act of 1974 (ERISA) (29 U.S.C. § 1001 et seq.). After carefully considering this newly raised issue, we denied the petition for rehearing. On September 5, 1989, our Supreme Court granted appellants' petition for review and transferred the matter to us "with directions to vacate [our] opinion and to consider whether this action is preempted by [ERISA]." In compliance with the directive of the Supreme Court, therefore, we have again considered the issue of preemption. Our conclusion remains the same. We therefore again affirm the judgment.

I

Capital Wholesale is a supplier of electrical materials. Duffy was employed by Capital Wholesale since 1952, starting out as a vice-president, becoming president in 1960 and chairman of the board in 1975. At the time of trial, Ghilarducci was president and Chokan was vice-president of Capital Wholesale; all three were participants in the profit-sharing plan.

In 1960, Capital Wholesale instituted a profit-sharing plan. The purpose of this plan was to share company profits with, and to provide for the retirement security of, Capital Wholesale's employees. Capital Wholesale made contributions of profits to a trust fund, which in turn were invested. The initial trustee of the profit-sharing plan was the Wells Fargo Bank. In 1963, Duffy, Ghilarducci, and Chokan became the trustees in place of Wells Fargo Bank.

When Duffy became the chairman of the board, he became the trustee principally involved in managing the profit-sharing plan and handling the trust fund's investments. At the outset, the profit-sharing plan funds were invested in real estate and in some stocks and bonds. In 1977, Duffy expressed an interest in options to Kidder Peabody & Co., Inc., which in turn asked Duffy to obtain a letter from an attorney approving of such investments by the profit-sharing plan. Around August 1977, Duffy asked Thomas E. Smail, Jr., the attorney for the profit-sharing plan, for a legal opinion as to whether it would be permissible for the profit-sharing plan to invest in options. In response, Smail warned Duffy about the risks of trading in stock options. Nevertheless, around June 1978, the trust agreement establishing and governing the profit-sharing plan was amended to permit investments of trust fund monies in options, commodities, and futures. ¹

Duffy began to ask stockbrokers if they would trade in options for him on behalf of the profit-sharing plan. At least one brokerage house would not permit him to trade in options; others permitted him to do so. He first traded in options on the profit-sharing plan's account in September 1978. By the end of 1979, Duffy had purchased over $300,000 worth of options and sold over $200,000 worth in the profit-sharing plan's Kidder Peabody account alone; in addition, he had already purchased approximately $60,000 in options in an account with Paine Webber. At that point, the profit-sharing plan's losses amounted to approximately $133,000, with profits of about $90,000.

King Cavalier first joined Lehman Brothers as a "registered representative," or stockbroker, in March 1978. In October or November 1979, Cavalier contacted Duffy by telephone to solicit him as a client.

At this point, the parties' versions of the facts diverge sharply. Duffy testified that Cavalier was already aware of the profit-sharing plan at the time that he first called and represented himself as an expert and specialist in options. According to Duffy, Cavalier never proposed an investment in stocks, as distinguished from options; instead, Cavalier solicited the business of the profit-sharing plan for trading exclusively in options. Cavalier, on the other hand, testified that he did not consider himself an expert on options, that he never represented himself as such, and that he was unaware of the profit-sharing plan at the time of his first brief introductory telephone call to Duffy as an individual "prospect." According to Cavalier, Duffy emphatically stated that "he had absolutely no interest in buying stock," and insisted that he wanted to trade in options only on the profit-sharing plan. Cavalier testified that when he told Duffy that he "had never seen a trust agreement that allowed for the trustees to trade options in it," Duffy told him that the trust agreement had been amended to permit the profit-sharing plan to trade options "or anything else they wanted." Cavalier allegedly did his "level darndest to discourage" Duffy from trading in options, telling Duffy that options were not "appropriate" for a profit-sharing plan, that they were too risky, that they expired worthless unless traded, and that four out of five option trades resulted in losses; he then told Duffy that he would only make recommendations as to stocks, and that "[i]f [Duffy] wanted to trade options, that was his business."

At some point, the subject of discretionary authority was raised and discussed. According to Duffy, an individual identifying himself as Cavalier twice visited Duffy in the latter's office, on or about November 19 and December 3, 1979. This individual gave Duffy blank application forms for a Lehman Brothers' client option account and a business card bearing the name "King Cavalier," told Duffy that he needed the forms signed in order to open an options account at Lehman Brothers, and said that he only traded in options and was in a better position to monitor the volatility in options accounts than his clients could be. Duffy signed the forms, obtained the signatures of the other two trustees, and returned the forms to the individual. During his second visit to Duffy's office, this individual told Duffy that he needed a letter from the trustees authorizing him to handle the profit-sharing plan's account on a discretionary basis, which was the only way that he could handle the account because "he had to have the ability to make decisions." Duffy testified that he had never heard the term "discretionary authority" before this. According to Duffy, the letter, dated December 3, 1979, was typed and given to the individual while he was in Duffy's office. According to Duffy, he never discussed the nature and risks of options trading with Cavalier or anyone else from Lehman Brothers at any time. ²

Cavalier denied ever visiting Duffy in Sacramento, or sending anyone else to visit him; he denied telling Duffy that he only handled accounts on a discretionary basis; and he denied ever requesting the trustees' December 3, 1979, letter authorizing him to handle the profit-sharing plan's account on a discretionary basis. He testified that this letter "just came in the mail one day," unsolicited. According to Cavalier, the subject of discretionary authority was raised by Duffy in a telephone conversation on November 15, 1979. Cavalier, who had no other discretionary accounts, tried to discourage the idea. Cavalier testified that he went over the Lehman Brothers' new account and option account application forms with Duffy over the telephone, and then mailed them to Capital Wholesale, where the trustees of the profit-sharing plan signed them. On the client option account application executed by the individual trustees, the available "investment assets" of the profit-sharing plan were stated to be $2 million. Cavalier gave these documents to his supervisor, Robert Glavor, to review.

Coincidentally, on December 4, 1979, Lehman Brothers made the initial deposit in respondents' account by depositing a cashier's check dated November 21, 1979, in the amount of $50,000 from the trust. Cavalier testified that after receiving notification of the receipt of the check and discussing it with Duffy, he purchased 50 Inexco call options on the profit-sharing plan's account the same day. A series of options transactions occurred thereafter in the profit-sharing plan's account with Lehman Brothers. According to Cavalier, each of these transactions was made only after consulting with Duffy over the telephone, with the single exception of the sale of the Inexco call options on December 6, 1979, which was made only after an unsuccessful attempt to reach Duffy. That particular transaction resulted in a net profit of $2,432; subsequent transactions had mixed results, but primarily ended in losses for the profit-sharing plan.

Cavalier testified that on December 14, 1979, he telephoned Duffy to inform him that Lehman Brothers would not accept discretionary authority in the profit-sharing plan's account. Duffy gave Cavalier his home telephone...