Shelley v. Noffsinger

• Decision Date: 15 April 1981
• Docket Number: No. 80 C 4335.,80 C 4335.
• Court: U.S. District Court — Northern District of Illinois
• Parties: Rosemary SHELLEY, Plaintiff, v. Howard NOFFSINGER and Madda Trading Company, a Delaware corporation, Defendants.

511 F. Supp. 687

Rosemary SHELLEY, Plaintiff, v. Howard NOFFSINGER and Madda Trading Company, a Delaware corporation, Defendants.

No. 80 C 4335.

United States District Court, N. D. Illinois, E. D.

April 15, 1981.

COPYRIGHT MATERIAL OMITTED

F. John Cushing, Ambrose & Cushing, Chicago, Ill., for plaintiff.

Joel J. Bellows and Charles B. Bernstein, Chicago, Ill., for defendants.

ORDER

BUA, District Judge.

The matter at bar involves purported violations of the Commodity Exchange Act, as amended by the Commodity Futures Trading Commission CFTC Act of 1974, 7 U.S.C. § 6b. The plaintiff, in addition, seeks in a pendent state claim to recover for the defendants' alleged breach of their common law fiduciary duty to her. Subject matter jurisdiction with respect to the plaintiff's federal claim properly lies pursuant to 28 U.S.C. § 1337. Hofmayer v. Dean Witter & Co., Inc., 459 F.Supp. 733, 738 (N.D.Cal.1978); Gould v. Barnes Brokerage Co., Inc., 345 F.Supp. 294, 295 (N.D.Tex. 1972).

Rosemary Shelley, the plaintiff herein, contends in Count I of her complaint that the defendants, registered commodity brokers/dealers within the State of Illinois: (a) "churned" her account, i. e. traded excessively in the account; and (b) purchased and sold volatile and speculative commodities contracts with the knowledge that such transactions were not in keeping with her financial needs and investment objectives. As to this latter point, Ms. Shelley further alleges that the defendants knew or should have known that her investment objectives were in stable commodity contracts, to be used as a means of generating income upon which she intended to live. In Count II of her complaint, the plaintiff argues that the defendants' actions also constituted a breach of the common law fiduciary duty they the defendants owed to her.

Presently before the court is the defendants' motion for dismissal of the plaintiff's complaint. In support of said motion, several grounds for dismissal have been advanced.

Count I

A. Statute of Limitations

The defendants first contend that Count I of the plaintiff's complaint must be dismissed as untimely, because it is barred by the two year statute of limitations for reparations claims set forth in the Commodity Exchange Act, as amended. 7 U.S.C. § 18(a). As regards this contention of the defendants, however, it first must be noted that the claim raised in Count I is for statutory damages under the Commodity Exchange Act, as such was amended in 7 U.S.C. § 6b—Contracts designed to defraud or mislead. No statute of limitations is set forth in that provision.

That there was a private right of action for enforcement of the antifraud provisions of the Commodity Exchange Act, as they existed prior to the 1974 amendments, is well established. Booth v. Peavey Company Commodity Services, 430 F.2d 132, 133 (8th Cir. 1970); Arnold v. Bache & Co., Inc., 377 F.Supp. 61, 65 (M.D.Pa.1973); Goodman v. H. Hentz & Co., 265 F.Supp. 440, 447 (N.D.Ill.1967). It also is well settled that this implied right of action survived the 1974 amendments to the Commodity Exchange Act. Smith v. Groover, 468 F.Supp. 105, 114 (N.D.Ill.1979); R. J. Hereley & Son Co. v. Stotler & Co., 466 F.Supp. 345, 347-48 (N.D.Ill.1979); Hofmayer v. Dean Witter & Co., Inc., supra at 737-38. See also Ames v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 567 F.2d 1174, 1176 (2d Cir. 1977). Cf. Remarks of Sen. Herman Talmadge, 120 Cong.Rec. 30459 (Sept. 9, 1974) (vesting of civil and criminal authority in the CFTC is not intended to interfere with the courts in any way.). In this regard, it has been specifically held that the 1974 amendments to the Commodity Exchange Act were not intended by Congress to interfere with the pre-1974 judicial interpretations of an implied private right of action. E. g., Hofmayer v. Dean Witter & Co., Inc., supra at 737-38. Indeed, the statute itself explicitly states that "nothing in this section shall supersede or limit the jurisdiction conferred on courts of the United States or any State." 7 U.S.C. § 2.

Thus, neither the legislative history, the statute nor the cases interpreting 7 U.S.C. § 18 require a finding that § 18 is the exclusive remedy available to an aggrieved customer. Smith v. Groover, supra at 114; R. J. Hereley & Son Co. v. Stotler & Co., supra at 347. Actions for violations of 7 U.S.C. § 6b have not been deemed ones requiring the CFTC's special expertise. On the contrary, such actions have been viewed as ones for fraud; actions for which the courts are generally considered the appropriate forum. R. J. Hereley & Son Co. v. Stotler & Co., supra at 348; Hofmayer v. Dean Witter & Co., Inc., supra at 738. Although there have been holdings questioning this interpretation, National Super Spuds, Inc. v. New York Mercantile Exchange, 470 F.Supp. 1256, 1259-60 (S.D.N. Y.1979); see Rivers v. Rosenthal & Co., 634 F.2d 774 (5th Cir. 1980), the majority position continues to be that an implied private right of action exists for violations of the Commodity Exchange Act, as amended. See National Super Spuds, Inc. v. New York Mercantile Exchange, supra at 1259 n.11.

The defendants, however, argue further that, even if the § 18 two year statute of limitations on proceedings for reparations is not looked upon as controlling, it still must be considered instructive as to the intent of Congress regarding the limitations period to be applied in common law actions brought under 7 U.S.C. § 6b. 7 U.S.C. § 18, though, provides only for administrative relief. R. J. Hereley & Son Co. v. Stotler & Co., supra at 347. Accordingly, a § 18 reparations proceeding is of a different character and nature than formal judicial proceedings.

Because that is true, this court believes that the situation at bar can more appropriately be viewed as one in which Congress created a federal right, but was silent as to a specific statute of limitations to govern actions brought for enforcement of that right. In this type of situation, it is well settled that, absent special circumstances not present here, courts are to apply that statute of limitations of the forum state governing the state law most analogous to the federal right being asserted.¹ Chevron Oil Co. v. Huson, 404 U.S. 97, 104, 92 S.Ct. 349, 354, 30 L.Ed.2d 296 (1971); United Auto Workers v. Hoosier Cardinal Corp., 383 U.S. 696, 701-04, 86 S.Ct. 1107, 1111-1112, 16 L.Ed.2d 192 (1966); Holmberg v. Armbrecht, 327 U.S. 392, 395, 66 S.Ct. 582, 584, 90 L.Ed. 743 (1946); Sackett v. Beaman, 399 F.2d 884, 890 (9th Cir. 1968).

In private actions brought for violations of 15 U.S.C. § 78j(b) § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, the statute of limitations deemed controlling generally is the most analogous limitations provision of the forum state. Parrent v. Midwest Rug Mills, Inc., 455 F.2d 123, 125 (7th Cir. 1972). In the absence of a corresponding state commodity fraud statute, it has been held in this district that the statute of limitations provided by local securities laws should be utilized. Smith v. Groover, 468 F.Supp. 105, 119-120 (N.D.Ill. 1979) (Grady, J.). This conclusion was based both upon the "similar purposes" of the respective statutes and upon the court's belief that "the three year limitation period `best effectuated' the policies underlying the Commodities Exchange Act." Id. at 120.

In light of Smith, this court believes that the three year limitations provision in the Illinois securities laws, Ill.Rev.Stat. ch. 121½, § 137.13, should be applied in the case at bar, and accordingly that plaintiff Shelley's complaint must be considered timely. Although the 1974 amendments to the Commodity Exchange Act were designed to avoid the overlapping and duplicative regulation which might result from application of diverse and often conflicting state and federal laws, State Regulation of Commodity Options Preempted, CFTC Interpretive Letter No. 76-19, CCH Comm.Fut.L.Rep. ¶ 20,213 (Sept. 29, 1976), when the analysis performed by the Supreme Court in United Auto Workers v. Hoosier Cardinal Corp., supra, 383 U.S. at 701-04, 86 S.Ct. at 1111-1112, is utilized, it can be seen that the lack of uniformity resulting from application of state statutes of limitation would not, in this circumstance, significantly or unduly frustrate Congressional policy concerning national regulation of commodities trading.²

B. Failure to State a Claim

In the alternative, the defendants charge that Count I fails to state a claim for relief for churning because the plaintiff has not alleged that the defendants had sufficient control over her trading account. In this regard, the defendants correctly note that a dealer must be shown to have had extensive control over the transactions in the plaintiff's account before a finding that the account had been churned can properly be made. See Note, Churning by Securities Dealers, 80 Harv.L.Rev. 869 (1967).

As to this point, however, it also must be noted that churning actions are no longer limited to accounts which are purely or formally discretionary in nature. Norris & Hirschberg, Inc., 21 SEC 865, 890 (1946); E. H. Rollins & Sons, Inc., 18 SEC 347, 380 n.48 (1945). Because that is true, in order to hold a dealer liable for overtrading, it is not necessary to first find that he had formal discretionary power with respect to the plaintiff's trading account. Rather, the essential question to be resolved is whether the dealer occupied such a status in respect to the customer that he may reasonably be held responsible for any of the excessive trading complained of. Thomas & McKinnon, Inc., 35 SEC 451, 454 (1953); E. H. Rollins & Sons, Inc., supra at 380. This is a question of fact, requiring inquiry into the particular circumstances of the parties' relationship.³ E. H. Rollins & Sons, Inc., supra at 380.

Because, though, the essence of a churning claim is not a particular trade or group of trades, but rather is the overall amount of trading in the...