Harter v. Iowa Grain Co., et al.

• Decision Date: 21 April 2000
• Docket Number: Nos. 98-3010,s. 98-3010
• Citation: 220 F.3d 544
• Parties: (7th Cir. 2000) Lowell E. Harter and Doretta Harter, Plaintiffs-Appellants, v. Iowa Grain Co., et al., Defendants-Appellees. & 98-3817
• Court: U.S. Court of Appeals — Seventh Circuit

Page 544

220 F.3d 544 (7th Cir. 2000)

Lowell E. Harter and Doretta Harter, Plaintiffs-Appellants, v. Iowa Grain Co., et al., Defendants-Appellees.

Nos. 98-3010 & 98-3817

In the United States Court of Appeals For the Seventh Circuit

Argued September 13, 1999

Decided April 21, 2000

Appeals from the United States District Court for the Northern District of Illinois, Eastern Division.

No. 96 C 2936--Milton I. Shadur, Judge.

[Copyrighted Material Omitted]

[Copyrighted Material Omitted] Before Posner, Chief Judge, and Cudahy and Kanne, Circuit Judges.

Cudahy, Circuit Judge.

The recent proliferation of so-called "hedge-to-arrive" contracts for the sale of grain has pitted many American farmers against their counterparts in the grain storage and marketing industry. The case before us involves these contracts, and these players, but it also wends its way into questions of arbitration and attorney's fees. A familiarity with hedge-to-arrive contracts will be helpful to understanding the issues in the case.

I. Introduction

Farmers often contract to sell grain to grain elevators at some specific time in the future. Such contracts guarantee farmers a buyer for their grain and guarantee grain elevators a supply of a commodity. The contracts generally specify the quantity and quality of grain to be sold, as well as a delivery date and a price for the grain. Both parties, by agreeing in advance to the grain price, take a risk that the market will move against them. The farmer's risk is that grain prices will be higher at the time of delivery, thus causing him to forego profit by selling at too low a price; the elevator's risk is that prices will drop, causing it to purchase unduly expensive grain. "Hedge-to-arrive" contracts (HTA contracts) attempt to alleviate these risks by introducing price flexibility. See The Andersons, Inc. v. Horton Farms, Inc., 166 F.3d 308, 319 (6th Cir. 1998). HTA contracts use two price indices--a "futures reference price," set by the Chicago Board of Trade for some time in the future, and a "local cash basis level," which is a local adjustment to the national price. See id. In an HTA contract, the parties generally agree at the time of contracting on the national portion of the price, and defer agreement on the local part of the price. See id. Many HTA contracts are "flexible," meaning the parties may "roll" the established delivery date to some point in the future. See id. When an elevator enters an HTA contract, it usually "hedges," or tries to offset the risk of paying unduly high prices, by buying an equal and opposite position in the futures market. See id. If either party to an HTA contract rolls the delivery date forward, the elevator buys back its original hedge and rehedges by purchasing a new futures contract. See id. The spread between the original hedge position and the "rolled" hedge position is attached to the price per bushel of the original HTA contract, and the farmer runs the risk of assuming a debit. See id.

The Commodity Exchange Act (CEA), codified at 7 U.S.C. sec. 1 et seq., and regulations promulgated under it govern contracts for sale of a commodity for future delivery--futures contracts. The CEA specifically excludes from the definition of futures contracts--and thus from its reach--the sale of a cash commodity for deferred shipment or delivery--cash forward contracts. See 7 U.S.C. sec. 1a(11); see also The Andersons, 166 F.3d at 318. "HTAs began as simple variants of cash forward contracts, but soon began to acquire more and more characteristics of futures contracts. This process has progressed to the point that it is now possible to argue that newer versions of HTAs are more like speculative futures contracts than cash forward contracts." Charles F. Reid, Note, Risky Business: HTAs, the Cash Forward Exclusion and Top of Iowa Cooperative v. Schewe, 44 Vill. L. Rev. 125, 134 (1999). Several courts have concluded that HTA contracts are cash forward contracts that may be sold off-exchange.¹ But the CFTC has leaned towards characterizing HTAs as futures contracts that must be sold on designated exchanges.²

II. Background

Lowell Harter was, until his retirement, a corn farmer in Grant County, Indiana. "The Andersons" is a corporation that operates grain elevators around the Midwest. The Andersons was not, at the time of the transactions in question, a futures commission merchant (FCM) registered with the Commodity Futures Trading Commission.³ In 1993, The Andersons began marketing HTA contracts. The Andersons solicited Harter, who entered into five such contracts in November 1994. Harter contends that an employee of The Andersons told him the contracts were "no risk" plays on the futures market. The Andersons counters that the contracts clearly stated that "the commodities represented under this contract will be tangibly exchanged." Appellee's Br. at 4. The Andersons implies that Harter understood that the contracts called for him to turn over corn or its cash equivalent at some point in the future, suggesting that the risk of loss was apparent.

Harter claims that a few months later, presumably at the delivery obligation date, The Andersons notified him that he owed them $16,941.69 (we assume--neither party specifies-- that The Andersons requested and Harter refused delivery of the corn, thus giving rise to an obligation to furnish its cash equivalent). Harter was surprised he says, because he thought the HTAs were "no risk." Harter says that the parties agreed he would tender a check for the amount, and they would simultaneously enter into new HTA contracts designed to capitalize on the market and generate enough profit to cover the initial loss. See Appellant's Br.I at 3.⁴ The Andersons does not directly respond to this, but states that the parties agreed to extend the delivery periods for the contracts, or roll the contracts forward.

In May of 1995, apparently when the new delivery obligation date arrived, The Andersons sought delivery of the corn, which Harter again refused. The Andersons then told Harter he owed it approximately $50,000. The Andersons explains that this figure represents "the difference between the market price of corn and the price for the corn established by the contracts." Appellee's Br. at 6-7. Harter says that the figure represents the entire loss throughout the HTA contract period, less a $16,000 payment Harter made to cover the initial loss. Appellant's Br.I at 3.

Harter filed a class action lawsuit in the Northern District of Illinois against The Andersons, its subsidiary AISC and introducing broker Iowa Grain. Appellant's Supp. App.I at 24- 35 (Harter v. Iowa Grain Co., No. 96 C 2936 (N.D. Ill. July 26, 1999) (first amended complaint)). Harter later dropped Iowa Grain, which Harter had erroneously believed to be The Andersons' principal, from the suit. See Appellant's Supp. App.II at 218-225 (Harter v. Iowa Grain, No. 97- 2671 (7th Cir. July 15, 1998) (unpublished order reversing award of sanctions against Harter's attorney)). Harter alleged that The Andersons had violated the Commodity Exchange Act, the federal Racketeer Influenced and Corrupt Organizations Act (RICO), the Indiana RICO statute, and had committed common law fraud, breach of fiduciary duty and intentional infliction of emotional distress. The contracts Harter had signed expressly provided that in the event of a dispute, the National Grain & Feed Association (NGFA) would arbitrate. After Harter filed suit, The Andersons petitioned the district court, pursuant to the Federal Arbitration Act, 9 U.S.C. sec. 1 et seq., to stay proceedings and to compel arbitration. The district judge granted the motion. The NGFA arbitrators entered an award in favor of The Andersons, and ordered Harter to pay contract damages of $55,350 plus interest, as well as $85,000 in attorney's fees plus interest. Harter moved to vacate or modify the award; The Andersons moved to confirm it. On July 24, 1998, the district court entered an order confirming the arbitration award in its entirety. It subsequently granted The Andersons' request that Harter bear the attorney's fees that The Andersons incurred in non-arbitration portions of the litigation. Harter now appeals the district court's order compelling arbitration, its order affirming the award and its order regarding attorney's fees.

III. The Order Compelling Arbitration

The contracts at issue provide for the arbitration of "any disputes or controversies arising out of" those contracts. See, e.g., Appellant's Supp. App.I at 71-82 (duplicates of Harter HTA contracts). The Federal Arbitration Act provides that a court must stay its proceedings and compel arbitration if it is satisfied that an issue before it is arbitrable under the parties' agreement. See 9 U.S.C. sec. 3. The district court in the present case did just that, and Harter protests. We review the district court's order compelling arbitration de novo. See Matthews v. Rollins Hudig Hall Co., 72 F.3d 50, 53 (7th Cir. 1995).

"The primary issue before the court," Harter explains, "is whether [CFTC regulations governing predispute arbitration] invalidate[ ] the arbitration clause in the . . . contracts." Appellant's Reply Br. at 1. Harter does not identify any respect in which the clauses themselves violate CFTC regulations, for instance by excluding required consumer protection language. However, Harter insists that "the . . . contracts violate the prohibition of the Commodity Exchange Act . . . against the sale of off-exchange futures contracts . . . by unregistered persons or entities through fraud." Id. (citations omitted). We understand him to argue that the contracts themselves are illegal; if this argument is correct, he posits, the contracts are void and the arbitration clauses in them are ineffective. Consequently, the district court order compelling arbitration would have been in error.

Under section 4 of the Federal Arbitration Act, 9 U.S.C. sec. 4, a federal court...