Opinion
H042291
11-14-2017
JOHN C. SCRANTON, Plaintiff and Appellant, v. E*TRADE SECURITIES LLC, Defendant and Respondent.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Santa Clara County Super. Ct. No. CV245579)
In this putative class action, plaintiff John C. Scranton sued defendant E*Trade Securities LLC (E*Trade) for failing to exercise certain stock options on his behalf. He alleged the agreement between the parties required E*Trade to automatically exercise his options before they expired, and E*Trade's failure to do so caused him a financial loss. Based on those allegations, he asserted causes of action for breach of fiduciary duty and breach of the covenant of good faith and fair dealing. E*Trade demurred to the complaint on the ground that it failed to state facts sufficient to constitute a cause of action, and the trial court sustained the demurrer without leave to amend. Scranton appeals from the resulting judgment of dismissal. As we will explain, we conclude the demurrer was properly sustained and will therefore affirm the judgment.
I. BACKGROUND
A. E*TRADE AND STOCK OPTIONS
Scranton alleges in his complaint that E*Trade provides brokerage services for the trading of securities, such as stocks and bonds. E*Trade also offers brokerage services for options trading. An option is a contract giving the purchaser the right to either buy or sell an underlying asset at a specific price on or before a certain date. A commonly traded option is a stock option, which grants the right to buy or sell shares of stock in a corporation at a particular price.
A "call" option gives the option holder the right to purchase a specified quantity of stock at a specified price on or before the expiration date of the option. A "put" option, on the other hand, gives the option holder the right to sell a specified quantity of stock at a specified price on or before the expiration date. Neither of these option contracts requires the holder to exercise the right to buy or sell the stock before expiration; it simply gives the holder the option to do so.
A put option is profitable for the holder to exercise if, before the option expires, the price of the underlying stock is less than the price at which the option holder has the right to sell. When this occurs, the option is said to be "in the money." A trader might purchase put options to hedge a previous purchase of the underlying stock—if the stock goes down in value, the trader can recoup some of that loss by exercising the "in the money" options, which allow the specified quantity of shares to be sold for more than the current price of the stock.
B. THE CUSTOMER AGREEMENT
Scranton entered into a customer agreement with E*Trade to provide him brokerage services in connection with trading securities, including stock options. The 64-page agreement is attached as an exhibit to Scranton's complaint, and provides that it "govern[s] all aspects of [his] relationship with E*TRADE Securities."
Regarding options trading, the agreement provides E*Trade will automatically (meaning without instruction to do so from the customer) exercise any options that are in the money by at least $.01 at the time of expiration. That is, if an option is about to expire (thereby becoming worthless) but exercising the option will result in a profit for the customer of $.01 or more, E*Trade will exercise it to avoid the loss the customer would suffer if it expired.
The agreement contains a "Disclaimer of Liability," which reads, "I understand and agree that E*TRADE Securities and its affiliates will not be liable to me [...] or have any responsibility whatsoever, for: (a) any Losses arising out of or relating to a cause over which E*TRADE Securities or its affiliates do not have direct control, including the failure of electronic or mechanical equipment or communication lines, telephone or other interconnect problems, unauthorized access, theft, operator errors, government restrictions, force majeure (e.g., earthquake, flood, severe or extraordinary weather conditions, natural disasters or other act of God, fire, acts of war, terrorist attacks, insurrection, riot, strikes, labor disputes or similar problems, accident, action of government, communications, system or power failures and equipment or software malfunctions), exchange or market rulings or suspension of trading[.]"
The agreement also incorporates by reference a publication from the Options Clearing Corporation, entitled "Characteristics and Risks of Standardized Options" (OCC disclosure). The agreement provides that all options transactions are "subject to the constitution, rules, regulations, customs and usages of the OCC," as described in the OCC disclosure.
The OCC disclosure includes a section entitled "Options Nomenclature," which "contains a description of the standardized terms, and some of the special vocabulary, applicable to options." The Options Nomenclature section assigns a specific definition to the term "in the money:" "A put option is said to be in the money if the current market value of the underlying interest is below the exercise price of the option." (Underlining in original.)
The OCC disclosure also describes "Principal Risks of Options Positions." In that section, the OCC sets forth a number of risks associated with options trading, including the risk that "[d]isruptions in the markets for underlying interests could result in losses for options investors. [¶] ... [¶] If the option is exercisable while trading has been halted in the underlying interest, option holders may have to decide whether to exercise without knowing the current market value of the underlying interest. This risk can become especially important if an option is close to expiration, and failure to exercise will mean that the option will expire worthless."
C. SCRANTON'S LOSS
In early 2011, Scranton purchased put options on 1,000 shares of stock in a company called Duoyuan Global Water, Inc. The expiration of the options was June 18, 2011 and the exercise price was $7.50, so if the share price of the underlying stock dipped below that price before June 18, 2011, Scranton's options would be in the money.
On April 19, 2011, the New York Stock Exchange suspended trading on shares of Duoyuan Global Water, Inc. At the time trading was halted, the share price was $3.88. Trading in the stock did not resume until January 26, 2012. In the interim, Scranton did not instruct E*Trade to exercise his options, nor did E*Trade automatically exercise them, and so the options expired.
Scranton never took any action to ensure his options were exercised because he relied on E*Trade's representation that it would automatically exercise expiring options that were in the money, and because E*Trade sent him account statements during the time trading in the stock was suspended indicating the market value for the shares was precisely $2.9250. Scranton incurred a loss of $7,500 as a result of the failure to exercise his options, and he alleges the existence of a class of similarly situated persons who suffered losses in the same manner.
D. THIRD AMENDED COMPLAINT AND THE TRIAL COURT'S RULING ON DEMURRER
The operative pleading in this appeal is the third amended complaint. (Scranton voluntarily amended his complaint once, and then twice more after the trial court sustained demurrers with leave to amend). The third amended complaint asserts causes of action for breach of fiduciary duty and breach of the covenant of good faith and fair dealing, based on E*Trade's failure to warn Scranton about several matters. Both causes of action allege that E*Trade was obligated to, but did not, warn him about certain issues related to options trading. Specifically, Scranton alleges E*Trade should have warned him that it could not determine the market value for a stock when trading had been halted, that he should not rely on the provided account statements indicating a current market value for his shares, and that E*Trade would not automatically exercise his options when trading in the underlying stock was halted.
E*Trade filed a general demurrer on the ground that the complaint failed to state facts sufficient to constitute a cause of action. Regarding the cause of action for breach of fiduciary duty, E*Trade argued (1) Scranton's options were not "in the money" as defined by the agreement; (2) there was no special relationship between the parties; (3) the claim is preempted by federal law (The Securities Litigation Uniform Standards Act of 1998, 15 U.S.C. § 78bb [SLUSA]); and (4) the disclaimer of liability contained in the agreement between the parties bars the claim. Regarding the cause of action for breach of the covenant of good faith and fair dealing, E*Trade argued (1) Scranton's options were not "in the money" as defined by the agreement; (2) the allegations contradict the express terms of the contract; (3) the claim is preempted by SLUSA; and (4) the disclaimer of liability bars the claim.
The trial court sustained the demurrer to the third amended complaint without leave to amend, finding that the disclaimer of liability in the customer agreement barred both causes of action. In light of that finding, the trial court did not reach the other bases for E*Trade's demurrer to the third amended complaint.
II. DISCUSSION
A. SCOPE AND STANDARD OF REVIEW
Our review of a judgment following an order sustaining a demurrer is de novo. (Martin v. Bridgeport Community Association (2009) 173 Cal.App.4th 1024, 1031.) We independently review the complaint to determine whether it states facts sufficient to constitute a cause of action; we are not bound by the trial court's construction of the pleading and we exercise our own judgment even as to matters it did not expressly rule on. (Miller v. Bakersfield News-Bulletin, Inc. (1975) 44 Cal.App.3d 899, 901.) In doing so, we assume the truth of the factual allegations in the complaint and draw all reasonable inferences from those facts in favor of the plaintiff. (Fremont Indemnity Co. v Fremont General Corp. (2007) 148 Cal.App.4th 97, 111 (Fremont Indemnity Co.) Because "it is the validity of the court's action, and not of the reason for its action, which is reviewable," we will affirm the judgment if it is correct for any reason. (Weinstock v. Eissler (1964) 224 Cal.App.2d 212, 225; see also Fremont Indemnity Co., supra, 148 Cal.App.4th at p. 111 [a reviewing court reviews the judgment rather than the reasons for the judgment and must affirm it if any of the grounds stated in the demurrer is well taken].)
E*Trade argues that Scranton forfeited his appeal by not including in his Opening Brief arguments against each ground for demurrer that E*Trade asserted in the trial court. But since the Opening Brief contains Scranton's arguments related to the trial court's basis for sustaining the demurrer, there was no forfeiture. (Performance Plastering v. Richmond American Homes of California, Inc. (2007) 153 Cal.App.4th 659, 671, fn. 9.)
B. CHOICE OF LAW
The customer agreement contains a choice of law provision stating it "will be deemed to have been made in the State of New York and will be construed, and the rights and duties of the parties determined, in accordance with the internal laws of the State of New York." As a threshold matter, we must determine the effect of that provision. That is, we must determine whether and to what extent to apply New York law in deciding the contentions before us.
Under Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal.4th 459 (Nedlloyd Lines B.V.), California has a strong policy favoring enforcement of choice of law agreements. So long as there is a reasonable basis for the application of the chosen state's law and doing so would not be contrary to a fundamental policy of California, the provision will be enforced. (Id. at p. 466.) Scranton offers no valid reason for not enforcing the choice of law provision here, and concedes it is enforceable as to his contract-based cause of action. He argues only that the provision does not govern his tort cause of action for breach of fiduciary duty and therefore California law must be applied to that claim.
The scope of a contractual choice of law provision is determined under the law of the jurisdiction chosen by the parties. (Nedlloyd Lines B.V., supra, 3 Cal.4th at p. 480, fn. 7.) We therefore look to New York law to decide whether the choice of law provision applies to the breach of fiduciary duty claim. "Under New York law, in order for a choice-of-law provision to apply to claims for tort arising incident to the contract, the express language of the provision must be 'sufficiently broad' as to encompass the entire relationship between the contracting parties." (Krock v. Lipsay (2nd Cir. 1996) 97 F.3d 640, 645.) When a plaintiff's tort claim requires construction of the terms of a contract and the enforcement of a party's rights and duties under that agreement, a contractual choice of law provision will apply to the tort. (Capital Z Fin. Servs. Fund II, L.P. v. Health Net, Inc. (2007) 840 N.Y.S.2d 16, 23 (Capital Z Fin. Servs. Fund II.)
Here, the language of the choice of law provision mandating that "the rights and liabilities of the parties" will be determined under New York law is broad enough to include the breach of fiduciary duty cause of action arising incidentally from the parties' contractual relationship. And because analyzing the tort claim requires us to construe the contract to determine what the rights and duties of the parties are, the tort claim comes within the scope of the choice of law provision. (Capital Z Fin. Servs. Fund II, supra, at p. 23.) Accordingly, we will apply New York law to resolve the contentions of the parties, with the exception of procedural issues. When confronted with a procedural issue (such as the manner in which to construe the allegations pleaded in the complaint), we apply California law. (Mave Enterprises, Inc. v. Travelers Indemnity Co. (2013) 219 Cal.App.4th 1408, 1429 [a state applies its own procedural law absent a choice of law provision expressly mandating the application of the procedural law of another jurisdiction].)
C. THE DISCLAIMER OF LIABILITY DOES NOT BAR SCRANTON'S CLAIMS
The trial court found that the disclaimer of liability in the customer agreement applied to bar both causes of action in the third amended complaint, and sustained E*Trade's demurrer on that basis. E*Trade maintains that ruling is correct because the disclaimer exempts it from liability for any "[l]osses arising out of or relating to a cause over which E*TRADE Securities or its affiliates do not have direct control, including ... suspension of trading." E*Trade argues that Scranton's causes of action, both of which arise from the allegation that he suffered a loss when his stock options were not exercised during a suspension of trading, are precisely the sort of claims barred by the disclaimer.
New York law generally allows for contractual provisions that absolve a party from liability for its own negligent conduct. (Abacus Fed. Sav. Bank v. ADT Sec. Servs., Inc. (2012) 18 N.Y.3d 675, 682.) The question here is whether the language of the disclaimer of liability should be interpreted to encompass the conduct Scranton alleges in the third amended complaint. In construing the disclaimer, we follow well-settled principles of New York law to determine what the parties intended. " 'It is the primary rule of construction of contracts that when the terms of a written contract are clear and unambiguous, the intent of the parties must be found within the four corners of the contract, giving a practical interpretation to the language employed and the parties' reasonable expectations.' " (Weisberger v. Goldstein (1997) 662 N.Y.S.2d 544, 545.) The words and phrases used in the agreement must be given their plain meaning. (Bianco v. Bianco (2007) 830 N.Y.S.2d 21, 23.)
Giving the disclaimer provision its plain meaning and a practical interpretation, we conclude it does not cover Scranton's causes of action. The disclaimer provides that E*Trade is not liable for losses "arising out of or relating to" causes over which it does not have "direct control." But Scranton alleges that the cause of his harm was E*Trade's failure to warn him that it would not exercise his stock options under certain circumstances—conduct that was entirely within E*Trade's direct control. Indeed, E*Trade was the only party with control over whether it warned Scranton the options would not be exercised. As such, the financial loss alleged by Scranton does not arise out of or relate to a cause out of E*Trade's control.
E*Trade suggests Scranton conceded his loss was caused by the suspension of trading because the class definition he advanced in the original complaint and first amended complaint refers to a class of persons who suffered harm because their options expired "due to the suspension of trading." However, those previous versions of the complaint were superseded by the third amended complaint. On appeal from the sustaining of a demurrer to an amended complaint the reviewing court considers only the allegations of the amended pleading. (Hayter Trucking, Inc. v. Shell Western E&P, Inc. (1993) 18 Cal.App.4th 1, 12 (Hayter).) We therefore do not consider the allegations referenced by E*Trade from an earlier pleading that are not present in the most recent version.
E*Trade argues the disclaimer applies because the trading suspension was a "but-for" cause of the loss alleged by Scranton, but that argument misreads the allegations in the complaint. Nowhere does Scranton allege that the suspension of trading caused him a loss; to the contrary, he alleges the suspension of trading benefited him, by driving down the value of the stock and making his options more valuable. Assuming the truth of the allegations as we must on demurrer, it was not the suspension of trading which caused the loss, but rather E*Trade's failure to warn that it would not exercise the options during that suspension of trading—something Scranton alleges E*Trade easily could (and should) have done. E*Trade does not contend it was impossible to warn Scranton or impossible to exercise the options during a trading suspension, only that there was no obligation to do either under the automatic exercise provision of the customer agreement. But whether the agreement obligated E*Trade to exercise options or warn Scranton during a trading suspension is a different question from whether the trading suspension prevented E*Trade from doing so. Put another way, whether E*Trade committed any legal wrong when it did not exercise the stock options (something we address in the next section of this opinion) is a different question from whether the alleged failure to warn was out of its direct control such that the disclaimer of liability would apply.
The trial court seized upon language in the disclaimer stating that causes out of E*Trade's direct control include "suspension of trading," and found that language broad enough to encompass the claims here. But suspension of trading does not stand alone as an occurrence for which E*Trade is not liable, but rather is listed as an example of something that could fall within the "out of [E*Trade's] direct control" category. As Scranton correctly argues, while a suspension of trading could potentially cause a loss in certain situations (such as if a customer lost money because a trading suspension prevented E*Trade from selling shares of stock), that is not what is alleged here. Reading the entire provision, rather than simply carving out the "suspension of trading" language, indicates that the disclaimer covers only losses caused by an occurrence over which E*Trade does not have control. It is not enough that the circumstances surrounding the loss relate to a suspension of trading. The cause of the loss must relate to something E*Trade cannot control. The allegations here are sufficient to show that the cause of the loss—a failure to warn—was an occurrence within E*Trade's direct control.
Even if the language of the disclaimer were also susceptible to the meaning urged by E*Trade, we would still be required to construe it against E*Trade and find that Scranton's claims are not barred. (Ace Wire & Cable Co. v. Aetna Casualty & Surety Co. (1983) 60 N.Y.2d 390, 398 [ambiguities in a contract must be construed against the drafter, particularly when found in an exculpatory clause].) Neither of Scranton's causes of action is barred by the disclaimer of liability in the customer agreement, and the trial court's sustaining of the demurrer on that ground is therefore incorrect. But that does not end our inquiry, since we must affirm the judgment if any of the grounds stated in the demurrer has merit.
D. THE CORRECT INTERPRETATION OF THE TERMS "IN THE MONEY" AND "CURRENT MARKET VALUE" PRECLUDES BOTH CAUSES OF ACTION
We now address a ground for demurrer not reached by the trial court in its ruling as to the third amended complaint: that the complaint fails to state a cause of action because the customer agreement only requires E*Trade to exercise expiring options that are "in the money," and Scranton's options were not in the money as defined by the agreement. Scranton concedes that since any duty for E*Trade to exercise his options arises only from the agreement, a finding that his options were not in the money would preclude both causes of action.
We note that the trial court did twice consider this ground when it ruled on E*Trade's demurrers to the first and second amended complaints (rulings not before us in this appeal), and in each instance reached the same conclusion we do here.
Because the viability of the claims turns on the manner in which the agreement is interpreted, we again look to principles of contract interpretation found in New York law to determine the intent of the parties. "A familiar and eminently sensible proposition of law is that, when parties set down their agreement in a clear, complete document, their writing should as a rule be enforced according to its terms." (W.W.W. Assocs. v. Giancontieri (1990) 77 N.Y.2d 157, 162.) We must examine the entire agreement as a whole and consider it in the context of the parties' relationship, rather than culling distinct provisions out of context. (Westmoreland Coal Co. v. Entech, Inc. (2003) 100 N.Y.2d 352, 358.) Where there is no ambiguity in a contractual term, interpretation of it is a question of law for the court to resolve; only when there is an ambiguity does determining the intent of the parties become a question of fact. (Brinson v. Kulback's & Assoc., Inc. (2002) 744 N.Y.S.2d 621, 623.) A term is considered ambiguous when it is reasonably susceptible of more than one interpretation. (MDW Enters. v. CNA Ins. Co. (2004) 772 N.Y.S.2d 79, 82.) A term is not ambiguous, however, simply because one of the parties attaches a different, subjective meaning to it. (Am. Guar. & Liab. Ins. Co. v. CNA Reinsurance Co. (2005) 791 N.Y.S.2d 525, 526 ["That one of the parties may have interpreted the provision differently does not make it ambiguous."].)
The disputed contract term here provides that E*Trade will automatically exercise any expiring option that is at least $0.01 in the money: "Equity options $0.01 or more in the money and index options $0.01 or more in the money will be automatically exercised for you unless you instruct us not to exercise them." (Bold in original.) It is this term that Scranton contends created E*Trade's obligation to automatically exercise his options, or at least warn him if it was not going to do so. E*Trade argues that it had no obligation to automatically exercise Scranton's expiring options because trading in the underlying stock had been halted at the time of expiration and therefore the options were not in the money.
We accordingly must determine whether a put option that expires when trading in the underlying stock is halted can be "in the money," within the meaning of that term as it is used in the parties' agreement. We observe that the term is specifically defined by the agreement, in the incorporated OCC disclosure document: "A put option is said to be in the money if the current market value of the underlying interest is below the exercise price of the option." (Underlining in original.) In addition, the OCC disclosure describes the effect of a halt in trading of the underlying stock, in the "Principal Risks of Options Positions" section: "Disruptions in the markets for underlying interests could result in losses for options investors. [¶] ... [¶] If the option is exercisable while trading has been halted in the underlying interest, option holders may have to decide whether to exercise without knowing the current market value of the underlying interest. This risk can become especially important if an option is close to expiration, and failure to exercise will mean that the option will expire worthless." (Bold added.)
Reading the agreement as a whole, we find it reflects a clear expression of intent that a put option expiring at a time when trading in the underlying stock is halted cannot be considered in the money because the current market value of the stock is unknown. Scranton urges that the phrase "current market value," when used in the context of an underlying stock trading halt, actually means "equal to the 'last trading price' ([] the price on the last day the stock was traded.)" But that definition is at odds with the plain meaning of the OCC disclosure's explanation that an investor whose options are exercisable when trading in the underlying stock has been halted "may have to exercise without knowing the current market value of the underlying interest." If we were to accept Scranton's interpretation, the OCC disclosure's warning would become nonsensical, because a halt in trading would never render the current market value of the stock unknown—its value would simply be equal to the last trading price.
Scranton argues that the term "current market value" is ambiguous and therefore the contract cannot be interpreted as a matter of law. We are not persuaded there is an ambiguity. The term is defined with sufficient precision by the agreement as to not create a danger of misconception as to its meaning, and is accordingly not ambiguous. (White v. Continental Cas. Co. (2007) 9 N.Y.3d 264, 267 ["It is well settled that '[a] contract is unambiguous if the language it uses has "a definite and precise meaning, unattended by danger of misconception in the purport of the [agreement] itself, and concerning which there is no reasonable basis for a difference of opinion." ' "].) In the context of the language of the parties' agreement, the phrase "current market value" is not reasonably susceptible of the definition "equal to the last trading price."
Further, our interpretation of the phrase "current market value" is consistent with the manner in which that term was understood in a federal district court case that E*Trade cites, Piemonte v. Chicago Board Options Exchange, Inc. (S.D.N.Y. 1975) 405 F.Supp. 711. There the court held that a prospectus was not misleading for failing to disclose the risks attendant to an option expiring when trading in the underlying stock was halted. Notably, the court's holding was based on the reasoning that because investors were on notice there may at times be trading interruptions in the underlying stock, an "investor should realize that at certain times there may be no current market price for the underlying stock and that as a result he must guess as to both the value of his option, and whether he should exercise." (Id. at pp. 716-717.) Scranton attempts to distinguish Piemonte because it did not involve the modern options market (though he does not elaborate on why that matters) and because the court did not explicitly hold that a stock never has a current market value when trading is suspended. Regardless, the Piemonte court's view that an options trader "should realize" (even without being specifically told) that a stock does not have a current market value when trading has been suspended is a persuasive indicator that Scranton's definition of current market value is not an objectively reasonable one.
Scranton also argues his interpretation is correct because E*Trade sent him account statements which he alleges showed a "current market value" for the underlying stock during the time trading in the stock was suspended. We assume the truth of Scranton's allegations at this stage in the proceedings, but, even so, he cannot vary the express and unambiguous terms of a contract by using extrinsic evidence purporting to show the parties' intent. (New York City Off-Track Betting Corp. v. Safe Factory Outlet, Inc. (2006) 809 N.Y.S.2d 70, 73 [the court's task is to enforce a clear agreement according to the plain meaning of its terms, without looking to extrinsic evidence to create ambiguities not present on the face of the document].)
Finally, Scranton asserts that his definition of "current market value" as used in connection with in the money options (i.e., "equal to the last trading price"), is a recognized trade usage. He contends that since he specifically alleged this custom and trade usage in the complaint, it creates a question of fact regarding the proper interpretation that cannot be resolved on demurrer. As an initial matter, E*Trade correctly points out that the trade usage allegations are not contained in the operative third amended complaint. After a demurrer was sustained with leave to amend as to the second amended complaint (which did contain the usage allegations), Scranton elected to amend the pleading, but did not include in the amended version the allegations on which he now relies. Since we consider only the allegations of the amended pleading on an appeal from the sustaining of a demurrer to an amended complaint, we cannot consider Scranton's trade usage allegations from the second amended complaint for the purpose of determining whether the operative pleading states a cause of action. (Hayter, supra, 18 Cal.App.4th at p. 12.) But Scranton alternatively requests leave to amend his complaint to reinsert the trade usage allegations, so we must address the merits of the argument to decide whether that proposed amendment would cure the defect we have identified in the pleading. (See Connerly v. State of California (2014) 229 Cal.App.4th 457, 460 [the issue of whether leave to amend should be granted remains open on appeal, and leave to amend should be granted if the proposed amendment will change the legal effect of the pleading].)
As we have explained, we resolve this purely procedural issue by applying California law.
At oral argument, counsel for Scranton cited Code of Civil Procedure section 472c, subdivision (b)(1) as authority for the proposition that allegations from a previous version of a complaint can be considered on appeal to determine if the trial court erred by sustaining a demurrer to an amended complaint that does not include those allegations. That provision does not apply to these circumstances. It only allows for an order sustaining a demurrer to a cause of action—but not to the entire complaint—to be reviewable on appeal from the final judgment. Here, the demurrer to the second amended complaint (which contained the trade usage allegations) was sustained to the entire complaint, with leave to amend as to certain causes of action. But we still reach the merits of the trade usage issue, based on Scranton's request for leave to amend.
Even if Scranton amended to include an allegation that the trade usage of "current market value" means "equal to the last trading price," the complaint still would not survive because evidence of custom and usage cannot be used to contradict, alter, or vary the express terms of an unambiguous contract. (Albany Discount Corp. v. Basile (1969) 300 N.Y.S.2d 464, 466.) We will not create an ambiguity where one otherwise does not exist by looking outside of the agreement. (New York City Off-Track Betting Corp. v. Safe Factory Outlet, Inc., supra, 809 N.Y.S.2d at p. 73.) Scranton relies heavily on Hayter, supra, 18 Cal.App.4th 1, for the proposition that extrinsic evidence of a trade usage is allowable to supplement the meaning of a contract term, even when the term is unambiguous. But the issue of whether extrinsic (or parol) evidence is allowed to interpret an agreement is a matter of substantive law, as Hayter makes clear: "The parol evidence rule is not merely a rule of evidence concerned with the method of proving an agreement. Rather, it is a principle of substantive law." (Id. at p. 14.) And as we have already discussed, since the parties agreed to be bound by the law of New York, we must apply New York law to decide all such substantive issues. Scranton alternatively cites Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co. (2d Cir. 2004) 375 F.3d 168, which applied New York law, and argues that it stands for the "same principle" as Hayter. But Eternity Glob. Master Fund Ltd. held, consistent with New York principles of contract interpretation, that extrinsic evidence of the parties' intent is not admissible unless the relevant term is first shown to be ambiguous. (Id. at pp. 177-178.)
We note on this point that under California law, evidence of trade usage is admissible to explain or supplement an unambiguous term, but not to contradict it, and therefore California law might well generate the same result on these facts. (Hayter, supra, 18 Cal.App.4th at pp. 14-15.) But Scranton's argument clearly fails under New York law, which does not allow extrinsic evidence at all when a contractual term is unambiguous.
The parties' agreement, when read as a whole and taken in context, is not reasonably susceptible of the meaning urged by Scranton. We must therefore enforce the agreement according to its express terms. Under those terms, E*Trade had no obligation to automatically exercise Scranton's options because they were not "in the money," as that term is used in the contract, at the time they expired. As a result, the complaint fails to allege facts sufficient to constitute a cause of action and the demurrer must be sustained. Because we find it is properly sustained for that reason, we need not address the other grounds asserted for the demurrer.
III. DISPOSITION
The judgment is affirmed. Defendant shall recover costs on appeal.
/s/_________
Grover, J.
WE CONCUR:
/s/_________ Premo, Acting P. J. /s/_________ Elia, J.