Appeals from the Judgment entered March 9, 1983 in the Court of Common Pleas of Philadelphia County, Civil, No. 482 Jan. Term, 1979.
David E. Sandel Jr., Philadelphia, for appellant (at 706) and for appellee (at 759).
C. Clark Hodgson, Jr., and Stephen C. Baker, Philadelphia, for appellant (at 759) and for appellee (at 706).
Rowley, McEwen and Hoffman, JJ. Hoffman, J., files concurring opinion.
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Merrill Lynch, Pierce, Fenner & Smith, Inc. (hereinafter Merrill Lynch, appellant), a brokerage firm with offices in Philadelphia, instituted suit against appellee, Dr. Ira Perelle (hereinafter appellee), seeking sums allegedly due and owing to Merrill Lynch following liquidation of a margin account*fn1 maintained by appellee. Appellee counterclaimed for damages resulting from, inter alia, an alleged breach of the fiduciary duty owed by Merrill Lynch to appellee. Trial was held before the distinguished Judge Lois Forer sitting without a jury. The court awarded Merrill Lynch the sum of $20,191.77, representing the deficit which resulted when appellee's margin account was liquidated, plus interest, and awarded the sum of $13,715.50 to appellee on his counterclaim for breach of fiduciary duty. These awards resulted in the entry of a final judgment in the amount of $6,479.27 in favor of Merrill Lynch from which both parties have appealed.
Merrill Lynch argues that the trial court erred: (1) in finding that Merrill Lynch owed a fiduciary duty to appellee; (2) in finding the "shingle theory" of broker liability applicable; and (3) in finding that five days was a "reasonable
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time" for purposes of calculating damages on appellee's counterclaim for breach of fiduciary duty.
The trial court made the following findings of fact:*fn2
1. Plaintiff, Merrill Lynch, Pierce, Fenner & Smith, Inc. (hereinafter "Merrill Lynch") is a registered broker-dealer engaged in the business of purchase and sale of securities on behalf of its customers.
2. Merrill Lynch is a New York corporation with offices in Philadelphia.
3. Defendant, Ira B. Perelle, (hereinafter "Perelle") is a resident of Bronxville, New York. (Testimony of Perelle).
4. On or about April 17, 1977, Perelle opened an account with Merrill Lynch in Philadelphia by telephone for the purpose of buying and selling securities. (Exhibit P-1; Testimony of Kirkpatrick and Perelle).
5. Perelle was referred to Merrill Lynch by a friend, Dr. Stanford Bazilian who was a customer of Merrill Lynch. Both Perelle and Bazilian were interested in trading in high risk investments. (Exhibit P-1, Testimony of Kirkpatrick and Perelle).
6. In May, 1977, Perelle and Merrill Lynch entered into a margin agreement. (Plaintiff's Request for Admissions No. 1 Defendant's Answer; Testimony of Kirkpatrick; Exhibit P-2).
7. The written margin agreement, a form supplied by Merrill Lynch, provided that in consideration for Merrill Lynch's agreeing to lend Perelle money, partially secured by securities which he purchased, such "securities . . . now or hereafter carried by you [Merrill Lynch] in any of my accounts . . . are to be held by you as security for the
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payment of any liability to you in any of said accounts . . . ." (Exhibit P-2).
8. The margin agreement further provided that Merrill Lynch
"shall have the right, whenever in your discretion you consider it necessary for your protection . . . to sell any or all outstanding contracts, all without demand for margin or additional margin, notice of sale or purchase or other notice or advertisement, and such sales or purchases may be made at your discretion on any exchange or other market where such business is then usually transacted . . . it being further understood that I shall at all times be liable for the payment of any debit balance owing in any of my accounts with you upon demand, and that I shall be liable for any deficiency remaining in such accounts in the event of the liquidation thereof in whole or in part by you or by me."
9. The margin account further provided that the "monthly debit balance in my [i.e., Perelle's] account(s) shall be charged, in accordance with your [i.e. Merrill Lynch's] usual custom with interest at a rate which shall include the average rate paid by you on general loans during the period covered by such balances respectively, and any extra rates caused by market stringency, together with a charge to cover your credit service and facilities."
10. A margin account is a securities account in which a customer purchases securities with, in part, funds lent by the broker. Under the practice of the parties, when a customer purchases securities on margin, he is required to pay to the broker fifty percent (50%) of the price. The balance of the purchase price is lent to the customer by the broker, with interest at the broker's call loan rate. (Testimony of Kirkpatrick and Perelle).
11. A margin account consists of the following three components:
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(a) "long market value" -- the present market value of the securities purchased on margin as of a given date,
(b) "debt" -- the amount or value of the loan made by the broker to the customer for purchase of the margined securities, and
(c) "equity" -- the value of the customer's account (cash or securities) that exceeds the amount of the margin loan as of a given date. (Testimony of Kirkpatrick).
12. Dr. Perelle's margin account was handled by Robert J. Kirkpatrick, III ("Kirkpatrick") at all material times.
13. At all material times prior to October 30, 1978, Dr. Perelle knew the general mechanics of opening and maintaining a margin account and the fact that the downward movement of the positions in his portfolio might require the deposit of additional equity in his account. Dr. Perelle did not know, however, the intricate details applicable to margin accounts, and he was unfamiliar with the mechanics of meeting Merrill Lynch's margin maintenance calls. (Testimony of Perelle).
14. Plaintiff's margin account with Merrill Lynch was one of a group of accounts of Dr. Bazilian's friends handled by Kirkpatrick. These customers relied to a great degree on the investment judgments and advice of Dr. Bazilian.
15. Perelle did not execute a power of attorney in favor of Dr. Bazilian. Perelle was solely responsible for all decisions with respect to his account. (Testimony of Kirkpatrick and Perelle).
16. There are occasions when Merrill Lynch will notify the customer of the need for additional equity in the margin account. This notification is referred to as a "call". There are:
(a) "Regulation T Calls" -- notice of the requirement that, upon the purchase of margined securities for the customer's account, the customer must deposit with the broker sufficient funds or securities so that the equity in the customer's account equals fifty percent (50%) of the purchase price of the margined securities, and
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(b) "Margin Maintenance Calls" -- notice to the customer that additional equity is required in his margin account. Margin maintenance calls are generated by Merrill Lynch when the equity in the customer's account falls below 30% of the value of the securities held in the account. (Testimony of Kirkpatrick).
17. The customer may satisfy or meet margin maintenance calls in the following ways:
(a) by market action, whereby appreciation in the value of the margined securities causes sufficient increase in long market value,
(b) by deposit with the broker of funds equal to the amount of the margin call,
(c) by sale of securities in the account having a value of three and one-third times the amount of the margin call, and
(d) by deposit with the broker of marginable securities having a value one and one-third times the amount of the margin call. (Testimony of Kirkpatrick).
18. The only information Merrill Lynch requested with respect to Dr. Perelle's financial status was the application on which Perelle stated that his income was $50,000 per year. (Testimony of Kirkpatrick; Exhibit No. P-1).
19. In the period from April of 1977 through October of 1978, Dr. Perelle actively traded securities in his Merrill Lynch margin account, consisting of approximately eighty transactions.
20. Most of the investment ideas for the purchase and sale of securities originated with Dr. Bazilian; Perelle had a few ideas of his own. No investment recommendation originated with Merrill Lynch; Merrill Lynch carried no investment opinion on any of the securities purchased or sold by Perelle. (Testimony of Kirkpatrick).
21. Kirkpatrick's service to Perelle as to investments was executing orders to buy or sell placed by Perelle and rendering advice as to the condition of the market or prices
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of securities held in the account. (Testimony of Kirkpatrick).
22. In the period from April of 1977 through October of 1978, Perelle promptly and faithfully met each of the approximately twelve Regulation T calls from Merrill Lynch requiring him to deposit additional equity in his account.
23. At no time prior to October of 1978, did Merrill Lynch have occasion to make a margin maintenance call on Dr. Perelle, and it had no reason to suspect that Dr. Perelle would not meet any such calls in a timely and faithful fashion if called upon to do so.
24. As of October 1, 1978, Merrill Lynch did not question Dr. Perelle's financial responsibility. (Testimony of Kirkpatrick).
25. During the period from May, 1977, through October 1, 1978, Perelle made substantial purchases of securities on margin. On or about October 1, 1978, the debt component of his margin account (i.e., the cumulative amount of loans made by Merrill Lynch to Perelle) was in excess of $80,000.00. (Testimony of Perelle; Exhibit 11(a)).
26. During the month of October, 1978, the stock market experienced a period of very severe decline. (Testimony of Kirkpatrick; Testimony of Derbyshire).
27. The decline in the stock market adversely affected the value of the securities in Perelle's account. (Testimony of Kirkpatrick; Testimony of Perelle).
28. Beginning on October 19, 1978, the following margin maintenance calls were made on Perelle's account:
Date Call Originated Date Call Due Amount of Call
10/19/78 10/26/78 $2,938.00
10/20/78 10/27/78 16,982.00
10/23/78 10/30/78 14 ,627.00
10/24/78 10/31/78 19,238.00
10/25/78 11/1/78 18,225.00
10/26/78 11/2/78 25,649.00