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SECOND DIVISION
August 21, 2001

The central incident in this appeal is plaintiff-appellantFirst American Discount Corporation's (FADC) liquidation ofdefendants George and Deena Jacobs' trading account, allegedlywithout notice, on October 27, 1997. Defendants claimed thatthis liquidation constituted unauthorized trading, and the CookCounty Circuit Court agreed, finding that FADC carried outunauthorized trading and thereby breached its fiduciary duty todefendants. Following a bench trial, the court entered judgmentin the amount of $106,511.74 (essentially the amount ofdefendants' equity balance plus securities on deposit prior tothe liquidation) against FADC and in favor of defendants.

FADC is a registered futures commission merchant (FCM)located in Chicago, with customers whose trades are cleared atthe Chicago Mercantile Exchange (CME). Among FADC's customerswere defendants, whose account was introduced to FADC by Kristian Capital Management, Inc. (KCM), of Naples, Florida, a registeredintroducing broker (IB). Defendants, also of Naples, Florida,opened a trading account with FADC in January 1997 and executed aCustomer Agreement with FADC. One of the agreement's provisionsauthorized FADC to liquidate the positions in defendants'accounts "without prior demand or notice."

On the morning of October 27, 1997, defendants held what arecalled strangle option positions in the December Standard &Poor's (S&P) 500 futures contract traded on the CME. They hadsold 10 November 1025 calls and 10 November 890 puts. Theseoptions gave the purchasers the right, but not the obligation, tobuy or sell the underlying S&P contract at a fixed price within aspecified time. Specifically, a put option is an option sold toa buyer giving him the right to sell the contract at the fixed,strike price even if the market declines below that price, whilea call option is an option sold to a buyer giving him the rightto buy at the strike price even if the market rises above thatlevel. In this case, the 10 November 1025 call options sold bydefendants gave the purchasers the right to purchase the contractat the strike price of 1025, even if the price rose above thatlevel, and the 10 November 890 put options gave the purchasersthe right to sell the contract at the strike price of 890, evenif the price fell below that level. Thus a "ceiling" of 1025 anda "floor" of 890 were created.

In engaging in this strategy, defendants were betting that the underlying S&P contract price would stay within the rangebetween this ceiling and floor until the options expired, whichwould mean they would expire worthless. So long as theunderlying contract price remained below 1025, the purchaser ofthe call option had no incentive to exercise it and purchase thecontract at the higher strike price of 1025. Similarly, if thecontract price remained above 890, the purchaser of the putoption had no incentive to exercise it and sell at the lower, 890strike price. If the options expired worthless, defendants wouldbe able to keep the entire amount (premium) which they hadcollected when they sold the options. However, defendants'positions were vulnerable to unlimited risk should the underlyingmarket move through either the ceiling or the floor.

Trading customers such as defendants are required to keep ondeposit with their FCM, in this case FACD, a certain amount ofwhat is called margin, which is a good faith deposit thatgenerally represents from 3 to 7 percent of the underlyingcontract value. When this margin dwindles and the customer'saccount goes "under margin," the FCM generally issues a "margincall" requiring the customer to deposit additional money to bringthe margin back up to the required level. According to documentsintroduced into evidence at trial, at the close of trading onFriday, October 24, 1997 (the last day of trading before Monday,October 27, 1997), defendants had total equity of $57,164.98 intheir trading account, plus T-bills with a market value of $48,846.76, for a sum of $106,011.74. The initial marginrequirement for the positions held by defendants was $94,776,which meant that they had on hand an excess margin of $11,235.74.

So long as the positions in their account did not lose more than $11,235.74 in value, the account had sufficient equity tomaintain the positions.

It is undisputed that the stock market fell precipitously onOctober 27, 1997, which the testimony disclosed was the date ofthe worst single-day point drop in the history of the U.S. stockmarket. See Great Northern Ry. Co. v. Weeks, 297 U.S. 135, 149(1936) (taking judicial notice of the stock market collapse of1929). As a result of this decline, defendants' account becameunder-margined. Plaintiff asserts, without contradiction, thatat the time it liquidated defendants' positions, the account hada deficit balance of $27,631, i.e., all of the margin had beendepleted, and the account balance had dropped an additional$27,631, an amount which plaintiff FACD paid to the CME at theclose of business on October 27. It is also undisputed thatearlier in the day, before defendants' account became under-margined, defendant George Jacobs instructed KCM, his introducingbroker, to execute a series of roll-down orders which wouldresult in a lowering of both the "ceiling" and the "floor" of hispositions. According to this "roll-down" strategy, which wasonly partially completed prior to the liquidation, defendantswould gradually buy back the 890 puts and 1025 calls, and replace them by selling the same number of 885 puts and 985 calls. Thusthe "floor" would be lowered from 890 to 885, and the "ceiling"would be lowered from 1025 to 985.

In November 1997 FADC filed suit against defendants Georgeand Deena Jacobs, seeking a judgment against them in the amountof $27,631.38. FADC alleged that under the terms of the CustomerAgreement entered into between defendants and FADC, defendantsagreed to pay any and all debit balances incurred in theirtrading account. According to the complaint, defendants' accountincurred a debit balance of $27,631.38 "[a]s a result ofunprofitable trades initiated by Defendants," and defendants hadfailed and refused to pay this amount to FADC. Thus FADC allegedthat defendants breached the agreement.

Defendants counterclaimed that plaintiff's liquidation oftheir positions constituted unauthorized trading, and that thisliquidation was a breach of plaintiff's fiduciary duty todefendants. Plaintiff moved for summary judgment, contendingthat it had both a legal and a contractual right to liquidatedefendants' under-margined positions with or without notice. Attached to defendants' response to this motion was an affidavitof defendant George Jacobs. In this affidavit, Jacobs statedthat prior to opening his account with FADC, he had spoken withKen Kristian of KCM, the Florida broker which introduceddefendants' account to FADC. According to Jacobs, Ken Kristiantold him at that time that FADC would never liquidate positions in Jacobs' account unless he failed to meet a margin call.

The trial court denied plaintiff's motion for summaryjudgment. A bench trial began on June 4, 1999, and it wasreconvened on October 14, 1999. The following relevant evidencewas presented at trial.

Carl Gilmore, the director of compliance for FADC, wascalled by both FADC and defendants. Gilmore stated that onOctober 27, 1997, he noticed a dramatic downward move in the S&P500 futures market. When the market declined to about 930,Gilmore became concerned about defendants' account, whosepositions, as noted, had a "floor" of 890. Gilmore called hisfirm's trading desk and asked them to contact KCM and expressGilmore's concerns about defendants' positions if the marketcontinued to decline. He told the trading desk to ask KCM whatdefendants' intentions were if the market continued to drop. Gilmore was told by the trading desk that defendants were unableto wire funds on that day because they were traveling. Thetrading desk informed Gilmore that defendants wanted to initiatea "roll-down" strategy which would lower the floor and ceiling oftheir positions, thereby reducing the potential marginconsequences to the account. It was Gilmore's understanding thatthe roll-down strategy was to be initiated when the underlyingfutures contract price hit 910.

Gilmore further stated that he told the trading desk theroll-down strategy was acceptable for the time being, but that if the market continued to decline, the positions would have to beliquidated, since additional funds apparently were notforthcoming from defendants. Gilmore told the trading desk toinform KCM about the possible liquidation.

Gilmore testified that they began to implement the roll-downstrategy but were unable to complete it. The market declinedrapidly, moving through the new floor, and FADC was forced toliquidate defendants' positions in an effort to reduce the riskand protect itself. At the time of liquidation, defendants'account showed a deficit balance of $27,631, which FADC wasrequired to pay to the CME at the close of business on October27. According to Gilmore, this deficit amount would have beenmuch greater had FADC not acted when it did. If FADC had simplycontinued the roll-down, the deficit in defendants' account wouldhave grown by another $54,850 prior to settlement, leaving adeficit in excess of $80,000 at the end of the day. At theopening the next day, this deficit would have increased not by$55,000 but instead by $177,050. Thus the actual deficit of$27,631 would have grown to a total of some $204,000. In thatevent, defendants' margin call at the opening on October 28,1997, would have exceeded $255,000.

During his testimony, Gilmore referred to an individualinformation form which was included in the Customer Agreementbetween defendants and FADC. According to this form, which aspart of the agreement was admitted into evidence, George Jacobs listed his residence as Naples, Florida. The residence telephonenumber listed on the form had a Florida area code. On October27, 1997, based on conversations between FADC and KCM, FADC knewthat Jacobs was "on the road." Gilmore stated that since hecould not have reached Jacobs at the Florida telephone number onOctober 27^th, he did not call Jacobs at that number and give hima margin call. According to Gilmore, Jacobs never gave him anumber where he could be reached on that day.

Defendant George Jacobs, who also was called by FADC anddefendants, testified that on October 27, 1997, he was travelingsomewhere in Maryland (apparently en route from his home inConnecticut to his home in Florida) when he heard on the carradio that the market had moved down ("toward [his] put positionsfrom the start of the day"). He went to the nearest telephoneand called KCM. Jacobs talked to Kirk Kristian (Ken Kristian'sbrother), a KCM broker, about the market. Kirk Kristian toldJacobs that FADC was concerned about the market, and Jacobs askedKirk if he, Jacobs, needed to send any additional money. Kirksaid he would find out. Also at this time, Jacobs instructedKirk Kristian to begin a roll-down strategy if the market fell to910. Jacobs testified that he did not have a cell phone, and hecould not be sure that he would come to another pay telephonebefore 15 or 20 miles had passed. He wanted to prepare himself incase the market dropped, which is why he told Kirk to institutethe roll-down strategy. According to Jacobs, there was nodiscussion at this time about a margin call.

Jacobs stated further that he called Kirk Kristian a shortwhile later, and Kirk told him that FADC would not tell him(Kirk) that Jacobs "need[ed to send] any money." Jacobs calledKirk a third time and asked him if there was a problem with themargin, and Kirk told him that FADC would not tell him. WhenJacobs called Kirk a fourth time,⁽¹⁾ Kirk told him that FADC hadliquidated his positions.

Jacobs maintained throughout his testimony that he neverreceived a margin call from FADC. He also insisted that he nevertold Kirk Kristian on October 27, 1997, that he would not meet amargin call, or that he would not wire money. Jacobs testifiedthat he had $103,000 in his bank account which he could havewired. There were 32 branches of this bank in Maryland, andJacobs stated that he was prepared to go to the closest one and"see what arrangements [he] could make." He never did thatbecause, according to Jacobs, he was never asked to put up anyadditional money. Jacobs also stated that the marketsubsequently recovered and that by the end of the next day(October 28), the November 890 and 885 S&P options "were veryclose to the *** positions that we had [previously]."

Jacobs conceded that, since his account was liquidated at adeficit on October 27^th, at some point on that day it was under-margined. He also conceded that at the point when his accountbecame under-margined, FADC could not have reached him at hisresidence in Florida. Jacobs did not have a cell phone, and hedid not give Kirk Kristian a number where he could be reached. He also acknowledged that he signed the Customer Agreement withFADC, and that by signing it he represented to FADC that he hadread and understood its terms, and agreed to be bound by them. Jacobs said he believed that Ken Kristian of KCM had orallyamended the agreement. Jacobs attempted to testify, as indicatedin his earlier affidavit attached to his response to FADC'ssummary judgment motion, that he had been assured by Ken Kristianthat he would always receive a margin call prior to anyliquidation. However, the trial court sustained FADC's objectionthat this testimony was barred by the parol evidence rule. Jacobs conceded that no one from FADC ever told him that KenKristian worked for FADC or that he had the authority to amendthe agreement, which was between FADC and defendants.

Kirk Kristian, a commodities broker with KCM, testified onbehalf of FADC. He said Jacobs was a client of his brother, KenKristian, but that Ken was out of the office on October 27. KirkKristian stated that his first conversation with Jacobs on thatday was at 1:17 p.m. eastern time. Jacobs told Kirk that he wastraveling south to Naples, Florida, for the winter and that he had heard on the radio that the market was falling and he wasvery concerned. Kirk explained to Jacobs what FADC's concernswere. He told Jacobs that FADC wanted to know if he had moneyavailable should the market continue to move downward. Kirk andJacobs discussed implementing a roll-down strategy if the marketcontinued to decline, and Kirk told Jacobs that he would presentthat option to FADC. However, he asked Jacobs if money wasavailable in case the roll-down strategy proved insufficient. According to Kirk Kristian, Jacobs was confident that the marketwould not move much further downward, and he (Jacobs) was not ina position to wire money. Jacobs told Kirk that his bank was inConnecticut and that he was not going to send money.

Kirk Kristian testified further that FADC called him onOctober 27, 1997, and expressed concern about defendants'positions. FADC was concerned that if the market continued tofall, Jacobs might be on margin call or he could possibly "godebit." FADC asked Kirk Kristian what funds Jacobs had availablein case they were needed. After talking to Jacobs, Kirk toldFADC about the roll-down strategy and that it was unlikely thatJacobs would be sending money. FADC told Kirk that they could dothe roll-down but that if the market continued lower, that mightnot be enough. FADC told Kirk to tell Jacobs that if he wasunable to wire funds or if the roll-down position became under-margined, his positions could be liquidated. Kirk relayed thisinformation to Jacobs the next time Jacobs called him, which was at about 1:47 p.m. eastern time.

Kirk Kristian also testified that the market continued todecline, and when it reached 910, the roll-down sequence wasinitiated. However, the market continued downward and tradedthrough the new "floor" of 885. FADC then called Kirk to saythat they were liquidating Jacobs' "put" positions (the "floor"positions) because Jacobs was in deficit at that point. Kirk wasnot able to call Jacobs and give him this information becauseJacobs was on the road, traveling from town to town, and was notat a telephone booth. He did not have a cell phone. Jacobs'"call" positions (the "ceiling" positions) subsequently wereliquidated as well.

Linda Frazier testified as an expert witness on behalf ofdefendants. She stated that, according to custom and practice inthe industry, as well as under CME and Commodity Futures TradingCommission (CFTC) rules, a customer is entitled to notice thathis account positions are at risk of being liquidated, and isentitled to an opportunity to meet the margin call in order toprevent liquidation. Frazier averred that failure to issue amargin call prior to liquidating an account is a violation of CMErules pertaining to liquidation of accounts. According toFrazier, even if the broker knew that the customer was not at hisresidence in Florida but was instead traveling by car fromConnecticut to Florida, the broker still must attempt to call thecustomer at his Florida residence.

On April 17, 2000, the trial court entered a judgment orderfinding that FADC "did unauthorized trading and did break [sic]its fiduciary duty to George & Deena Jacobs." The court awardeddefendants $106,511.74 in damages. The court also rejecteddefendants' contention that KCM was an agent of FADC. Theinstant appeal followed.

FADC urges on appeal that it had a legal and contractualright to liquidate defendants' under-margined positions evenwithout prior notice. Thus FADC contends that the trial courterred in finding for defendants on their counterclaim that thisliquidation constituted unauthorized trading and a breach offiduciary duty. FADC also asserts that it was entitled tojudgment in its favor on its affirmative complaint for breach ofcontract against defendants.

The question which must be determined in this decision iswhether plaintiff FADC, the brokerage firm, was entitled toliquidate defendants' positions without a prior margin call at atime when defendants were inaccessible. Our conclusion is thatthe brokerage firm was so entitled as a matter of law. Whilethere are no cases specifically on point from our jurisdiction,there is a decision from the Supreme Court of North Carolina (seeMoss v. J.C. Bradford & Co., [1992-1994 Transfer Binder] Comm.Fut. L. Rep. (CCH)