Moss v. J.C. Bradford and Co.

• Decision Date: 29 July 1994
• Docket Number: No. 332PA93,332PA93
• Citation: 337 N.C. 315,446 S.E.2d 799
• Court: North Carolina Supreme Court
• Parties: Ezra V. MOSS, Jr., Evco Construction Co., Inc., Gary H. Watts, Troy D. Pollard, Bennie J. Springs and Audrey Springs, Plaintiffs-Appellees and Cross-Appellants, v. J.C. BRADFORD AND COMPANY and J.C. Bradford Futures, Inc., Defendants-Appellants and Cross-Appellees.

Page 799

446 S.E.2d 799

337 N.C. 315

Ezra V. MOSS, Jr., Evco Construction Co., Inc., Gary H.

Watts, Troy D. Pollard, Bennie J. Springs and Audrey Springs, Plaintiffs-Appellees and Cross-Appellants, v. J.C. BRADFORD AND COMPANY and J.C. Bradford Futures, Inc.,

Defendants-Appellants and Cross-Appellees.

No. 332PA93.

Supreme Court of North Carolina.

July 29, 1994.

Howard M. Widis, and Hedrick, Eatman, Gardner & Kincheloe by Hatcher B. Kincheloe, Charlotte, for plaintiffs-appellees/cross-appellants.

Moore & Van Allen by James P. McLoughlin, Jr., Charlotte, for defendants-appellants/cross-appellees.

Kennedy Covington Lobdell & Hickman by James P. Cooney III, Charlotte, for Interstate/Johnson Lane Corp., amicus curiae.

McDermott, Will & Emery by Paul J. Pantano, Jr., Washington, DC, and Patterson, Harkavay & Lawrence by Martha A. Geer, Raleigh, for The Futures Industry Ass'n, Inc., amicus curiae.

MITCHELL, Justice.

The issue before us in this case is whether the defendant-appellants (hereinafter "Bradford") wrongfully liquidated the accounts of the plaintiff-appellees (hereinafter "plaintiffs") on the Chicago Mercantile Exchange (hereinafter "CME"). We hold that they did not; therefore, we reverse the decision of the Court of Appeals.

The plaintiffs instituted this action on 15 February 1988. In their complaint, the plaintiffs alleged, inter alia, that by liquidating Before reviewing the evidence introduced at trial, we believe a brief discussion of certain uncontested facts and of the nature of futures trading would be helpful. The present case involves trading in stock index futures contracts. A stock index futures contract is an agreement to buy or sell a "basket" of certain stocks on a specific date in the future. 1988 Report of the Presidential Task Force on Market Mechanisms, Study VI, at 18. The basket of stocks in each of the plaintiffs' contracts consisted of stocks listed in the Standard & Poor's 500 Index. The Standard & Poor's 500 Index is based on the aggregate increase or decrease in the stock prices of 400 industrial companies, forty utilities, twenty transportation companies and forty financial institutions. Id. The owner of the futures contract does not hold any equity interest in any of these companies. Id. Similarly, no actual physical transfer of the stocks takes place on the date of delivery. Id. Rather, a cash transfer occurs with the owner of the contract either receiving or paying money depending upon whether the index on the date of delivery is above or below the index as it stood on the date the investor purchased the contract. Id. at 18-19.

their accounts, Bradford breached the terms of an agreement the parties had executed when the plaintiffs began trading on the CME using Bradford as their broker. The complaint sought both compensatory and punitive damages. Bradford filed a motion for summary judgment and the plaintiffs filed a motion for partial summary judgment. Judge Chase Saunders denied the plaintiffs' motion and granted Bradford's motion in part, dismissing the plaintiffs' claim for punitive damages. The Court of Appeals affirmed. See Moss v. J.C. Bradford and Co., 103 N.C.App. 393, 407 S.E.2d 902 (1991) (case reported without published opinion). The case was then tried before a jury at the 13 January 1992 Civil Session of Superior Court, Mecklenburg County.

While the stocks contained in each contract are "delivered" only on a quarterly basis, id. at 19, the stock index futures contracts are "traded" on a daily basis--that is, the daily fluctuation in the Standard & Poor's 500 Index is monitored and contract owners enjoy profits or incur losses depending upon whether the index has risen or fallen during the course of the trading day. Id. at 24. The CME values each index point at $500. Id. at 19. Thus, a one-point net increase in the index during the CME trading day would result in a $500 profit per stock index futures contract owned. A one-point net decrease in the index would result in a $500 loss per contract. The CME credits profits and debits losses at the conclusion of each trading day. Id. at 24. Any profits resulting from a rise in the index are immediately available to the customer. Id. Similarly, the day's losses are immediately due to the CME. Id.

The plaintiffs purchased their stock index futures contracts on "margin," which is standard industry practice. A "margin" is a minimum deposit that an index futures contract buyer must place into an account with a merchant, ¹ such as Bradford, who trades on the CME. Id. at 23. It is intended to ensure the investor's ultimate performance of the contract and to offset losses in the meantime caused by daily fluctuations in the index. Id. At the time of the occurrences giving rise to this dispute, the CME had established an "initial margin" of $10,000 per stock index futures contract purchased. Id.

The CME had also established a "maintenance margin" of $5,000. ² Id. Under such a scheme, if losses at the end of a trading day We turn now to the evidence introduced at the trial of this matter, which tended to show the following. The plaintiffs are North Carolina residents who were engaged in futures contract trading on the CME. In September 1987, the plaintiffs purchased seven Standard & Poor's 500 Index futures contracts through the Charlotte, North Carolina, offices of Bradford, a national brokerage firm headquartered in Nashville, Tennessee.

cause a customer's account to fall below the $5,000 maintenance margin, the merchant pays the CME the amount of the losses and then issues a "margin call" to the losing customer. Id. The margin call requires the [337 N.C. 318] customer to restore his account to the initial margin level (i.e., the customer must restore his account to at least $10,000 per contract). Id. If the customer cannot "meet the margin," the merchant nevertheless is responsible to the CME for the amount of the customer's losses. Although the merchant is liable for its customers' losses, it does not share in its customers' daily profits. Rather, the merchant receives a commission only at the initial purchase of the contract and at the subsequent "delivery" of the stock.

This particular dispute arose out of the stock market crash of October 1987. Under normal trading conditions, the Standard & Poor's 500 Index moves up or down only three to five points during the trading day. On Monday, 19 October 1987, however, the index fell 80.75 points, resulting in an aggregate loss to the plaintiffs of $282,625. As a result, Bradford issued a margin call to the plaintiffs. One of the plaintiffs, Ezra Moss, represented himself and all of the other plaintiffs in their dealings with Bradford. To satisfy the Monday margin call, Moss brought 23,988 shares of stock in Southern National Corporation to Bradford's Charlotte offices. Under CME Rules, this type of "over-the-counter" stock cannot be used to satisfy a margin call. Therefore, this stock served as security for a loan from Bradford to Moss. Moss used this loan to meet the Monday margin call.

The market continued to spiral downward. Even with the loan the plaintiffs had secured using the Southern National stock as collateral, Bradford determined on Tuesday morning, 20 October 1987, that $105,000 was still needed to restore the plaintiffs' accounts to the $10,000 initial margin. Bradford employee Ed Caulfield contacted Moss by telephone at 8:00 a.m. EDT on Tuesday and informed him that the plaintiffs needed to meet an additional margin call of $105,000. Moss disputed this amount and indicated to Caulfield that the plaintiffs would have a difficult time satisfying a $105,000 margin call. Moss ultimately told Caulfield that he would be willing to bring $65,000 to Bradford's offices. Caulfield then informed Moss that Caulfield's superior, Roy Leslie, had issued the margin call and that Leslie wanted to speak with Moss. Moss, however, refused to contact Leslie because, as Moss later explained at trial, he wanted to remain in the index futures market and he believed that Leslie would try to convince him to get out of the market.

Following his conversation with Caulfield, Moss waited ninety minutes for the CME to open and then traveled to the offices of the other plaintiffs in an attempt to raise the $65,000. He telephoned Caulfield twice during this time from the offices of the other plaintiffs. During these conversations, Caulfield reiterated that his superiors were expecting the plaintiffs to pay around $100,000 and implored Moss to contact Roy Leslie. Moss continued to dispute the amount and again refused to telephone Leslie. When Moss finally collected the $65,000 around 10:55 a.m. EDT, he contacted Caulfield and the two men agreed to meet in the parking lot outside Bradford's offices. Moss later explained at trial that he preferred to meet with Caulfield in the parking lot because he was too embarrassed to go into Bradford's offices to meet a margin call and "wasn't much in a frame [of mind] to have any small talk."

After speaking with Moss, Caulfield relayed the subject matter of the conversation to Roy Leslie, who instructed Caulfield to sell $40,000 worth of Moss' Southern National stock in order to satisfy the remainder of the $105,000 margin call. Caulfield attempted In the meantime, the stock index futures market continued to plummet. Bradford determined that another margin call would be necessary when the index fell to 191.5. Bradford therefore decided to enter a "stop loss order" for the plaintiffs' contracts at an index of 190. This meant that if the index fell to 190, the plaintiffs' accounts would be liquidated, i.e., all of the plaintiffs' stock index futures contracts would be sold at the then-prevailing market price. Caulfield attempted to contact Moss to apprise him of Bradford's decision but could not reach him. Bradford entered the stop loss order at about 11:10 a.m. EDT. The index reached 190 at about 11:35 a.m. EDT and the plaintiffs'...