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MERRILL LYNCH, PIERCE, FENNER & SMITH, INC. v. CHE

August 2, 1988

MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Plaintiff,
v.
ROLANDO CHENG and ANITA ONG CHENG, Defendants and Third-Party Plaintiffs, v. WILLIAM J. GRACE, JR., Third-Party Defendant



The opinion of the court was delivered by: LAMBERTH

 ROYCE C. LAMBERTH, UNITED STATES DISTRICT JUDGE

 Plaintiff Merrill Lynch, Pierce, Fenner & Smith, Inc. brings this action against Rolando and Anita Ong Cheng to recover a debt they allegedly owe as a result of securities transactions. The Chengs have counterclaimed against Merrill Lynch, and brought a third party complaint against broker William J. Grace, Jr., for breach of fiduciary duty, negligence, fraud, and violations of federal securities laws. Grace has responded with a motion to dismiss and for summary judgment on all counts.

 FACTS

 In their amended third party complaint, the Chengs allege that Rolando Cheng contacted broker Grace in April, 1985, to discuss investment opportunities. It was agreed that Grace, an employee of Merrill Lynch, would act as the Chengs' broker in the purchase and sale of options for their account, under an agreement in which every transaction was to be subject to the Chengs' prior approval. In addition, Grace was evidently instructed to monitor the Chengs' Joint Standard Option Account against their trading activity, making sure that their potential liability on the put and call options they owned did not exceed their balance in the Joint Account.

 Grace acted as broker for the Chengs for approximately one year. They allege that he engaged in transactions on May 5, 1986 which they did not authorize, contrary to agreement, and which exceeded the balance in their Joint Standard Operating Account by over $ 119,000, contrary to their previous instruction to him. This forms the basis for count I of the Chengs' amended third party complaint (breach of fiduciary duty), as well as count III (fraud). In addition they allege that Grace failed to properly apprise himself of their financial situation, and based thereon, to advise and direct them on a financially prudent course. This forms the basis for count II (negligence) and count IV (violation of federal securities law).

 In an affidavit submitted with his motion, Grace states that Dr. Cheng represented himself as a sophisticated investor, that Dr. Cheng rarely followed Grace's recommendations, and that Dr. Cheng followed them not at all in his options trading, with Grace merely serving as a "sounding board" for Dr. Cheng's questions. The Chengs substantially dispute this in their response to interrogatories, stating that all transactions on their account, and especially their options trades, were the result of recommendations by Grace.

 DISCUSSION

 Summary judgment is properly granted only when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Federal Rule of Civil Procedure 56(c). In his motion for dismissal and for summary judgment, Grace's fact showing consists of a short affidavit. In it, he addresses only one of the fact issues raised by the Chengs in their third party complaint, to the effect that Grace advised and directed them along a financially imprudent course, by claiming that Grace's role was primarily a passive one and that the Chengs rarely followed his advice. This in turn is flatly contradicted by the Chengs in their response to interrogatories. Defendant's Answers to Plaintiff's Interrogatories, no. 7.

 Other than this, Grace's affidavit either sets forth facts that the Chengs have already pleaded (that the Chengs initiated the first contact with Grace in 1985, and that Grace had no discretionary power over their account at Merrill Lynch); or it asserts facts that are either immaterial or at most only tangential to the Chengs' claims (Dr. Cheng's original call to Grace was unsolicited, and during their relationship Dr. Cheng was using other brokerage firms including a discount brokerage house). There is nothing else. Grace addresses no other material fact pled by the Chengs. Nowhere does he challenge that he engaged in the alleged unauthorized transactions of May 5, 1986, or that such transactions exceeded the balance in the Chengs' Joint Standard Option Account. Further, there is no mention of the alleged terms of their working agreement, or that the alleged unauthorized transactions violated it, or any claim by Grace as to what other possible terms were contained in his agreement with the Chengs. Neither does Grace address the allegation that the recommendations even he implicitly acknowledges the Chengs followed were ill suited to their financial situation.

 Thus Grace has done nothing to materially alter the factual setting pled by the Chengs: he either fails to challenge, or agrees, with each of their averments except for the one he directly contradicts. He presents nothing that pierces their allegations, nor does he introduce facts that go beyond those pled by the Chengs which might present an alternate ground for disposition. In terms of Rule 56(c), it is not that there is no genuine issue of material fact: every fact issue before the court is either left exactly as the Chengs have pled it, or is in dispute. Therefore Grace's motion for summary judgment must be denied.

 Since Grace has also sought dismissal under FRCP 12, and since he has filed no pleading as yet, his motion will be regarded as brought under FRCP 12(b)(6) for failure to state a claim upon which relief can be granted. The Court therefore will consider only Grace's attacks on the legal sufficiency of the Chengs' third party complaint, under the facts as they have pled them.

 Count I: Breach of Fiduciary Duty

 Although not made explicit, it is apparent that the Chengs base the existence of a fiduciary relationship between themselves and Grace on the trust and confidence they placed in Grace's agreement that he would obtain their prior approval on all transactions, and that he would not allow their options purchases to exceed the balance in their Joint Standard Option Account. Thus they claim that the ...


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