Gordon v. duPont Glore Forgan Incorporated, 73-1382.

• Decision Date: 10 January 1974
• Docket Number: No. 73-1382.,73-1382.
• Citation: 487 F.2d 1260
• Parties: William H. GORDON and Fern Gordon, his wife, Plaintiffs-Appellees-Cross Appellants, v. duPONT GLORE FORGAN INCORPORATED, Defendant-Appellant-Cross Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

487 F.2d 1260 (1973)

William H. GORDON and Fern Gordon, his wife, Plaintiffs-Appellees-Cross Appellants, v. duPONT GLORE FORGAN INCORPORATED, Defendant-Appellant-Cross Appellee.

No. 73-1382.

United States Court of Appeals, Fifth Circuit.

December 10, 1973.

Rehearing Denied January 10, 1974.

Earl D. Waldin, Jr., Paul M. Stokes, Miami, Fla., for defendant-appellant.

Richard B. Marx, Miami, Fla., for plaintiffs-appellees.

Before THORNBERRY, SIMPSON and CLARK, Circuit Judges.

THORNBERRY, Circuit Judge:

The court below awarded the Gordons $20,000 for damages resulting from defendant brokerage firm's failure to notify them that their account was undermargined, a breach of its fiduciary duty. On appeal duPont contends that the Gordons' knowledge of their account's undermargined condition operates as ratification and a bar to this suit, and duPont is entitled to recover the deficiency remaining after it closed the Gordons' account. On cross appeal the Gordons find error in the trial court's dismissing their claim alleging a cause of action under the rules of the New York Stock Exchange. We reverse the judgment against duPont and deny its counterclaim and appellees' cross appeal.

New York Stock Exchange Rule 431¹ sets the minimum permissible margin maintenance level at twenty-five percent. That is, if one chooses to trade on margin, he must always have equity in his margin account equal to at least twenty-five percent of his stock's market value. Appellant set its own margin maintenance requirement at thirty percent, and its computer is programmed to give a warning when margin accounts fall below that level.

In this case, however, duPont did not utilize the computer because it had granted the Gordons a special dispensation by lowering their margin requirement to twenty-five percent. The task of overseeing the Gordons' margin status fell to Morton Frank, their broker. He inadvertently allowed their account to become undermargined on July 14, 1971, and they became aware of the undermargining a "reasonable period of time" afterwards.² Frank finally discovered his error on November 22, 1971, and immediately asked Mr. Gordon for more margin. Gordon declined to meet this margin call, and negotiations ensued. When Frank made one last margin call on November 29, Gordon demurred, saying he would like to wait until 3:30 p. m. that day before making a decision. Unable to wait any longer, Frank liquidated the Gordons' account. The sale fell $1550 short of satisfying the Gordons' debt to duPont, and duPont's counterclaim seeks to recover this deficit.

The trial court found that duPont breached its common law fiduciary duty to the Gordons when it failed to notify them promptly after their account became undermargined. The court awarded damages of $20,000, the account's equity value when it first became undermargined on July 14, 1971. In other words, if duPont had liquidated the Gordons' account on the day it first became undermargined, their debt to duPont would have been satisfied with $20,000 to spare.

In determining whether the Gordons are entitled to recover damages for duPont's breach of its fiduciary duty we must remember that they knew their account's true condition for several months while they waited silently for Frank to discover his mistake. The effect of such behavior on their right to recover is a state law question.

While no Florida case is directly in point, a Florida appellate court dealt with an analogous situation in Hayden, Stone, Inc. v. Brown, Fla.Ct.App.1969, 218 So.2d 230, cert. denied, 225 So.2d 539 (Sup.Ct.Fla.). In that case plaintiff charged that his stockbroker negligently recommended speculative, volatile stocks and failed to supervise his account properly. However, the evidence showed that plaintiff was aware of the nature of the stocks bought for him, and he approved each purchase. He received monthly statements showing the status of his account, and he never objected to the way his account was being handled. In light of that evidence the court adopted the view of the court in Carr v. Warner, D.Mass.1955, 137 F.Supp. 611.

Even if there had been a breach of duty . . . plaintiff by repeatedly accepting confirmations and accounts, which fully disclosed all aspects of the transactions, elected not to rely upon that breach. Moreover, by failing seasonably to make complaints of facts of which she was informed, she would in any event be barred from her later assertion of wrong done unto her by the partnership or corporation.

137 F.Supp. at 615.

As we read Hayden, Stone, under Florida law a customer who knows of his broker's breach of duty and takes no action will be barred from bringing suit. In the instant case Mr. Gordon knew "a reasonable period of time after July 14" that his account was undermargined and merely waited for his broker to discover the mistake. He did not rely upon the breach, and he did not seasonably complain. He knew of the breach of duty and he acquiesced. Such behavior must bar his recovery here.

In its counterclaim duPont seeks to recover the $1550 deficiency that remained after the Gordons' account was closed. When the Gordons opened their account, they authorized duPont to sell all their securities if they failed to meet a margin call, and they agreed to be liable for any deficiency that remained after the sale.

While it is true that the Gordons had a contractual obligation to make up the $1550 deficit, it is also true that the deficit was at least partially the result of duPont's failure to compute the margin status correctly and give prompt notice of the undermargining. We cannot allow duPont to recover indebtedness that resulted from its own breach of duty, and therefore we must reject its counterclaim. See Goldenberg v. Bache and Co., 5th Cir. 1959, 270 F.2d 675, 681.

Perhaps anticipating our negative ruling on their common law claim, the Gordons urge that we find an implied private right of action under N.Y.S.E. rules 431 and 432³ governing margin maintenance and brokers' record keeping. They acknowledge that no circuit court has found such a right of action under these particular rules, but they fashion a precedent for us by reading two...