Boyer v. Barney

162 P.3d 1016, 213 Or. App. 560, 2007 Ore. App. LEXIS 886

• Court: Court of Appeals of Oregon
• Decided: June 27, 2007
• Docket: 021212721; A123799
• Status: Published

Opinions

ARMSTRONG, J., concurring.

Plaintiff appeals a judgment on the pleadings that dismissed his negligence claim against Salomon Smith Barney and two of its employees, Howell and Morell, for conduct related to commodity trading services. ORCP 21 B. On review, our task is to determine whether the pleadings establish that plaintiff cannot prevail on his negligence claim against defendants. Withers v. State of Oregon, 133 Or App 377, 382, 891 P2d 675, rev den, 321 Or 284 (1995).

When a claim is resolved against a plaintiff on the pleadings, we accept as true the well-pleaded allegations of fact in the pleadings, Slogowski v. Lyness, 324 Or 436, 439, 927 P2d 587 (1996), with all inferences drawn favorably to the plaintiff. Rexius Forest By-Products v. A & R Lumber Sales, 112 Or App 114, 118, 827 P2d 1359 (1992).

Plaintiffs complaint alleges the following facts. Salomon Smith Barney markets itself as a full-service financial firm that, among other things, provides trained financial consultants to its customers to help its customers earn money. Howell, one of these consultants, represented to plaintiff that he would provide plaintiff with professional, high quality, personal financial services. Relying on Salomon Smith Barney’s marketing to the public, its expertise, Howell’s representations, and Salomon Smith Barney’s “touting [of] defendant Howell’s lengthy experience in the commodities trading markets,” plaintiff entered into an agreement with Salomon Smith Barney to establish a commodity trading account.

Howell worked to develop plaintiffs trust and confidence in defendants’ services by maintaining frequent contact with plaintiff. Regularly, for the period from June 2000 through December 13, 2000, Howell called plaintiff several times a day to tell him about market activity and the status of his account and to provide research results and investment recommendations.

As part of the relationship between defendants and plaintiff, defendants exercised complete control over the execution of plaintiffs commodity transactions, his margin trading limits, the amount of credit that they were willing to extend to plaintiff to allow him to trade, and the information that they gave him about his orders, trades, and margin status. Defendants knew that the services that they provided to plaintiff were for the purpose of helping plaintiff further his economic and financial interests.

In late summer 2000, Howell encouraged plaintiff to start trading a larger volume of commodity contracts in order for plaintiff to make more money. Howell asked for and received Salomon Smith Barney’s permission to raise plaintiffs trading limit from $10,000 to $100,000. In the fall of 2000, plaintiff began to trade larger volumes of commodity contracts. He also began to get margin calls, which required him to pay money to Salomon Smith Barney to bring his account back within his margin limit. Nonetheless, Salomon Smith Barney continued to extend margin credit to plaintiff, regularly allowing him to trade beyond his margin limit as long as he continued to pay the margin calls. On December 13, 2000, plaintiff received a margin call of $6,422; he delivered $7,422 to Salomon Smith Barney that day.

On the following morning, December 14,2000, plaintiff placed an order for 30 crude oil contracts and an order for three natural gas contracts. Defendants accepted both orders. The order for 30 crude oil contracts was filled. However, defendants did not tell plaintiff that they would not fill the natural gas order or that he might be forced to liquidate the crude oil positions within a day. Later that day, Howell cancelled the order for the three natural gas contracts without advance notice to plaintiff. Even though Howell’s action was unusual, he did not follow his routine practice of contacting plaintiff to tell him of the change in his account status. Defendants received a $2,250 commission on plaintiffs crude oil transaction, approximately 10 times the commission that the natural gas order would have generated.

The next day, December 15, 2000, defendants liquidated plaintiffs one-day-old crude oil contracts, because of his overextended margin position, by a forced sale without notice to plaintiff. Liquidating those contracts generated losses on plaintiffs account, increasing plaintiffs margin position to more than twice his trading limit. As a result of a domino effect on plaintiffs margin position from defendants’ liquidation of his contracts, defendants continued to conduct forced sales of plaintiffs commodity contracts and to liquidate his account. In contrast, if defendants had filled the natural gas order and not the crude oil order, plaintiffs account would have profited, he would have avoided the oil contract losses, and he would have stayed within his margin trading limits. If the implications of both orders had been explained to plaintiff, he would have chosen to place the natural gas order only, resulting in no violation of his margin limits. Plaintiff alleges that he sustained damages of more than $259,000 as a result of negligent conduct by defendants in their handling of his commodity trading account.

Defendants’ answer incorporated the contract by which plaintiff had established his commodity trading account with Salomon Smith Barney. Therefore, the contract is part of the pleadings and must be considered in assessing whether defendants were entitled to judgment in their favor on the pleadings. Cf. Jones v. Emerald Pacific Homes, Inc., 188 Or App 471, 480, 71 P3d 574, rev den, 336 Or 125 (2003) (“A ruling based on evidence outside of the pleadings cannot properly be a ruling on a motion for judgment on the pleadings.” (Emphasis in original.)).

The contract defines the parties’ rights and obligations in connection with the trading account. It does not expressly address any of the services that plaintiff alleges that defendants provided to him, such as daily investment advice and information on his account and margin status, or Howell’s personal effort to increase plaintiffs trading limit. Despite defendants’ routine practice of allowing plaintiff to exceed his margin limits, the express contract terms obliged plaintiff not to exceed margin limits authorized by “any federal agency or exchange” and to immediately pay any amounts owing on margin as consideration for Salomon Smith Barney’s acceptance of his trading business.

Under the parties’ contract, Salomon Smith Barney had unilateral authority to “limit or reduce [plaintiffs] positions in accounts, to decline to accept any orders and to require that [his] accounts be transferred to another firm,” or to “liquidate positions in [his] accounts.” Salomon Smith Barney expressly acted as plaintiffs agent, but only in the sense that the firm’s role was to place his trades rather than to be a party to, or to guarantee obligations of any party to, plaintiffs commodities contracts. In the event that Salomon Smith Barney should “deem [it] appropriate based upon its own business judgment notwithstanding the rule of any exchange,” the contract gave it the right to liquidate plaintiffs positions, sell any of his property, or cancel any of his open orders to buy or sell property without prior notice in the event that plaintiff failed to deposit sufficient funds in his account to keep it within his margin limit. Plaintiff also expressly acknowledged that he was liable for losses in his account even if the losses arose from actions taken by Salomon Smith Barney that the parties’ contract authorized it to take.

Defendants moved pretrial for judgment on the pleadings on plaintiffs negligence claim, arguing that the conduct by defendants for which plaintiff sought to recover economic damages concerned actions that the parties’ contract expressly authorized defendants to take, or that defendants’ duties arose from the contract and not independently of it, and, consequently, that plaintiff could not prevail on his negligence claim. The court granted defendants’ motion, stating that plaintiff could not prevail on his negligence claim because it went “directly to the terms of the contract, and * * * the contract controls.” Plaintiff also alleged a claim against defendants for breach of contract. That claim was tried to a jury, which returned a verdict for defendants. Plaintiff challenges on appeal only the trial court’s ruling on the negligence claim.

The disposition of the parties’ dispute turns on whether plaintiff and defendants were in a “special relationship.” Because plaintiff seeks solely to recover economic damages from defendants for negligence arising from the parties’ contractual relationship, plaintiff must establish that there was a special relationship between the parties that imposed on defendants the obligation to pursue plaintiffs interests and not just their own. See Bennett v. Farmers Ins. Co., 332 Or 138, 160, 26 P3d 785 (2001) (breach of fiduciary duty and tortious breach of duty of good faith and fair dealing related to a contract both require a “special relationship”); Conway v. Pacific University, 324 Or 231, 237, 924 P2d 818 (1996) (same for claim of negligent misrepresentation).

Whether the nature of a relationship between parties is sufficient to support a negligence claim for economic damages — that is, “[w]hether a relationship is special[ — ]is driven by the facts.” Shin v. Sunriver Preparatory School, Inc., 199 Or App 352, 366, 111 P3d 762, rev den, 339 Or 406 (2005) (citation omitted). The sufficiency of the allegations of a special relationship is determined by examining whether, viewed as true, the pleaded facts would permit a factfinder to find that the defendant had entered into a relationship with the plaintiff in which the defendant would exercise judgment on the plaintiffs behalf or would assume an obligation to achieve a particular result on the plaintiffs behalf. Id. at 366-67.

Plaintiff contends that his allegations that defendants’ course of dealing with him gave them control of his economic interests and made him dependent on them for his financial success adequately allege that he and defendants were in a special relationship. Plaintiff is mistaken. The relationship that the contract established between defendants and plaintiff is not one that created a special relationship that imposed on defendants the obligation to act to secure or protect plaintiffs economic interests rather than their own. Bennett supports that conclusion.

Bennett involved claims by an insurance broker, Bennett, against Farmers Insurance Company for breach of contract, breach of fiduciary duty, and tortious breach of the duty of good faith and fair dealing arising from Farmers’ termination of Bennett’s agency relationship with it. Farmers had solicited Bennett to close his independent insurance agency and to become its district manager, recruiting and training agents to sell Farmers insurance. The parties’ agreement characterized Bennett as an independent contractor who maintained his own office, hired his own employees, paid his own expenses, and assumed all risk of business failure. It expressly provided that Farmers could terminate its contractual relationship with Bennett without cause. A contract term also provided, in part, that “ ‘[n]o control is to be exercised by [Farmers] over the time when, the place where, or the manner in which the District Manager shall operate in carrying out the objectives of this Agreement * * *.’ ” 332 Or at 162.

Bennett’s theory of the case was that Farmers had recruited him to build a successful Farmers agency and then had wrongfully terminated their relationship to obtain the fruits of his investment in the agency. His business contributed $27 million to Farmers’ gross revenues over a 12-year period. During that time, Farmers had gradually tightened control over the agency by introducing aggressive performance goals, agent recruiting targets, and requirements for client-contact reporting. According to Bennett, the control that Farmers exercised over his agency created a special relationship between him and Farmers that required Farmers to act as a fiduciary toward him to protect his interest in his agency.

The Supreme Court disagreed. It explained that it is a defendant’s exercise of independent judgment on behalf of a plaintiff, not the defendant’s exercise of control of the plaintiffs activities, that is the gravamen of a special relationship giving rise to a tort duty. Id. at 161-62. Noting that Bennett focused on proving that defendants exercised increasing control over his business, the court explained that

“plaintiff misunderstands the fundamental focus of our inquiry in Georgetown Realty [v. The Home Ins. Co., 313 Or 97, 110-11, 831 P2d 7 (1992)] and other ‘special relationship’ cases. The focus is not on the subject matter of the relationship, such as one party’s financial future; nor is it on whether one party, in fact, relinquished control to the other. The focus instead is on whether the nature of the parties’ relationship itself allowed one party to exercise control in the first party’s best interests.”

332 Or at 161 (emphasis in original). Most importantly, “the law does not imply a tort duty simply because one party to a business relationship begins to dominate and to control the other party’s financial future.” Id. at 161-62. Instead, “the law implies a tort duty only when that relationship is of the type that, by its nature, allows one party to exercise judgment on the other party’s behalf.” Id. at 162 (citing Conway, 324 Or at 241) (emphasis added).

Under Bennett, a court’s first task is to examine the parties’ contract “to determine whether its terms created the type of relationship that gave rise to a duty in tort.” Id. Noting that a contract term expressly forbade Farmers from interfering in Bennett’s business affairs, the court concluded that the contract did not allow for the existence of a special relationship that could give rise to a tort duty:

“Nothing about the relationship as defined in the agreement suggested that [the] plaintiff would relinquish control over his business or that [the defendant] would exercise independent judgment on [the] plaintiffs behalf. * * * As defined by the agreement, the nature of their relationship was not one in which [the defendant] was to step into plaintiff’s shoes and to manage his business affairs. Accordingly, the parties were not in a ‘special relationship,’ and [the defendant] did not owe [the] plaintiff a duty in tort.”

Id. at 162-63 (emphasis added).

Similarly, the relationship that the commodity futures trading contract established between plaintiff and defendants is not one in which defendants assumed any obligation to exercise independent judgment on plaintiffs behalf or to act to secure or protect plaintiffs economic interests. Trading in commodity futures is a highly risky undertaking. See, e.g., B. Apostolou & N. Apostolou, Investing in Options and Futures: A Primer, 54 Oil, Gas & Energy Quarterly 317, 323-28 (2005) (describing commodity futures market as the “most risky and speculative of all the markets in the investment arena”). It also is highly regulated by the federal government and by the exchanges through which the trading occurs. See, e.g., 7 USC §§ 1-27; 17 CFR pts 1-171. Here, the contract between plaintiff and Salomon Smith Barney seeks to place all risk of loss as a result of trades in plaintiffs account on plaintiff and to minimize any risk of loss to Salomon Smith Barney. The control that the contract gave defendants over plaintiffs trading activities was control to protect Salomon Smith Barney’s interests, not plaintiffs. Under those circumstances, defendants cannot be understood to have had a fiduciary obligation to act to protect plaintiffs economic interests.

In concluding otherwise, the dissent relies on, among other things, our decision in Wallace v. Hinkle Northwest, Inc., 79 Or App 177, 717 P2d 1280 (1986). In Wallace, we concluded that, for stockbrokers and their clients, a “special relationship” may exist where “[a] stockbroker is a fiduciary [because] his client trusts him to manage and control the client’s account and he accepts that responsibility.” Id. at 181. The favorable result for the plaintiffs in Wallace depended on a key distinction from the circumstances here: The plaintiffs alleged that the stockbroker took over trading on their behalf and made most or all trades “without either prior approval or acquiescence by [the] plaintiffs.” Id. at 180. The express terms of the parties’ contract granted the broker no discretion to trade for the clients. In contravention of the contract, however, the broker allegedly did manage the plaintiffs’ stock portfolio for them at his discretion. For that reason, the contractual terms were not dis-positive. Id. at 181. The complaint sufficiently alleged that the stockbroker took responsibility for the clients’ financial affairs by making their trading decisions for them.

Here, in contrast, the control that the contract gave defendants over plaintiffs commodity futures trading account and trading activity was control to protect their economic interests, not plaintiffs. In other words, the relationship that the contract created was not a relationship in which defendants assumed any responsibility to act on plaintiffs behalf for plaintiffs benefit. Hence, the trial court did not err in entering judgment on the pleadings in favor of defendants.

Brewer, C. J., Schuman and Ortega, JJ., and Murphy, J. pro tempore, join in this concurrence.