56 F.3d 825 (7th Cir. 1995), 94-3778, Frietsch v. Refco, Inc.

Docket Nº:94-3778.
Citation:56 F.3d 825
Party Name:Comm. Fut. . 26,427 Helmut FRIETSCH, Horst Gerhard Hess, Manfred Schneider, Siegfried Koegler, and Martin Gerweck, individually and on behalf of all others similarly situated, et al., Plaintiffs-Appellants, v. REFCO, INCORPORATED, Stuart Trading Company, and William A. Stuart, III, Defendants-Appellees.
Case Date:June 07, 1995
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

Page 825

56 F.3d 825 (7th Cir. 1995)

Comm. Fut. . 26,427

Helmut FRIETSCH, Horst Gerhard Hess, Manfred Schneider,

Siegfried Koegler, and Martin Gerweck,

individually and on behalf of all others

similarly situated, et al.,



REFCO, INCORPORATED, Stuart Trading Company, and William A.

Stuart, III, Defendants-Appellees.

No. 94-3778.

United States Court of Appeals, Seventh Circuit

June 7, 1995

Argued April 19, 1995.

Rehearing and Suggestion for Rehearing

En Banc Denied

July 12, 1995.[*]

Page 826

Edward T. Joyce, Arthur W. Aufmann (argued), Rowena T. Paras, Rowena T. Parma, Howard Brian Prossnitz, William D. Anthony, Jr., John E. Dolkart, Chicago, IL, for plaintiffs-appellants.

Roger Pascal, Paul E. Dengel (argued), Scott C. Tomassi, Schiff, Hardin & Waite, Thomas Bradley, Laner, Muchin, Dombrow, Becker, Levin & Tominberg, James A. McGurk, McConnell & Mendelson, Chicago, IL, for defendants-appellees.

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Before POSNER, Chief Judge, FLAUM, Circuit Judge, and SHABAZ, District Judge. [**]

POSNER, Chief Judge.

The plaintiffs, who are citizens and residents of Germany, brought this suit for federal securities fraud against Refco, a U.S. commodities broker headquartered in Chicago. (There are two other defendants, but we need not discuss them separately.) Refco moved to dismiss the suit on the ground that the forum selection clause in the plaintiffs' investment contracts made Germany the exclusive venue for any suit arising out of the contracts. The district judge granted the motion, precipitating this appeal.

The background to the dispute can be sketched briefly. Several years ago Refco agreed with several German businessmen to establish nine commodity pools as unincorporated associations in Germany. The businessmen owned three corporations, which became the promoters of the pools and in this capacity solicited Germans, through prospectuses printed in German, to invest in the pools. The management of the pools is in the hands of German trustees. The pools raised $35 million from several thousand German investors, who constitute the class on behalf of whom this suit is brought. The pools planned to trade commodities on U.S. commodity exchanges; that is why Refco had been involved in the creation of the pools. The pools signed brokerage agreements with Refco, and the prospectuses that the pools issued to prospective investors touted the employment of "the most respected brokerage firms" and noted that, "like all exchange transactions, all aspects of trading in so-called futures are closely regulated by law and supervised by government authorities. In the U.S., a special federal agency supervises the strict observance of these regulations." The complaint alleges--we must assume truthfully, of course without vouching for its truth--that the promoters and trustees were entirely controlled by Refco and that Refco's goal was to operate a Ponzi scheme. Unsophisticated investors would be enticed into investing in the commodity pools by false promises of low risk and high return, and the inevitable losses would be concealed by the use of money from new investors to pay the high returns promised to the old investors. The scheme collapsed in 1992 and this suit ensued.

The plaintiffs made their investments in the pool pursuant to contracts that they signed with both the promoters and the trustees. Each contract contained a clause providing that "place of jurisdiction ... is the registered office of the trustee, to the extent permissible under the law." That office is, of course, in Germany. Refco was not a party to either sort of contract. But its brokerage agreements with the pools contained a clause in which "the parties agree that all disputes, claims, actions or proceedings arising directly, indirectly or otherwise in connection with, out of, related to or from this Agreement and any related agreement shall be litigated at the discretion and election of Refco only in a court in Chicago, Illinois."

It might seem that neither forum-selection clause would be relevant to this suit: the one in the investment contracts because the suit is against a nonparty to them, Refco; the one in the brokerage contracts both because the suit does not arise out of those contracts and because they permit only Refco to invoke the clause and it is not doing so. Regarding the first point, courts in this country (the significance of this qualification will become clear shortly) enforce forum selection clauses in favor of non-parties "closely related" to a signatory. Hugel v. Corporation of Lloyd's, 999 F.2d 206, 209 (7th Cir.1993); Manetti-Farrow, Inc. v. Gucci America, Inc., 858 F.2d 509, 514 n. 5 (9th Cir.1988). That is not an illuminating phrase; nor is recasting it as an issue of "foreseeability" much of a help. But these vague formulas can be given meaning by reference to the principle of mutuality. Rejected in recent times in areas of the law ranging from contract to collateral estoppel, the principle of mutuality retains undeniable appeal in regard to the scope of forum selection clauses. This case shows why. Suppose the plaintiffs wanted to sue Refco in Germany. Since the basis of their claim is that

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Refco totally controlled the promoters and trustees who are the nominal signatories of the investment contracts, the plaintiffs could argue as a justification for enforcing the forum selection clause in the investment contracts that the clause binds Refco as the secret principal of the signatories. See Hodes v. S.N.C. Achille Lauro, 858 F.2d 905, 912 (3d Cir.1988); General Electric Co. v. Siempelkamp GmbH & Co., 809 F.Supp. 1306, 1310 (S.D.Ohio 1993), aff'd, 29 F.3d 1095 (6th Cir.1994); cf. Certain Interested Underwriters at Lloyd's v. Layne, 26 F.3d 39, 43 (6th Cir.1994); Kirno Hill Corp. v. Holt, 618 F.2d 982, 985 (2d Cir.1980) (per curiam); Restatement (Second) of Agency Sec. 186 (1958). If so, mutuality requires that Refco be allowed to invoke the clause. Otherwise the plaintiffs would have a choice of venues but Refco would not, and there is no reason for such an asymmetry of procedural choices. All Refco is doing in invoking the forum selection clause to which it is not a party is accepting one of the premises of the plaintiff's suit--that the promoters and trustees are indeed simply cat's paws of Refco--and pointing out that the implication is that the investment contracts, including the forum selection clause, are really between the plaintiffs and Refco. So the plaintiffs would be arguing if they preferred to sue in Germany rather than the United States, as well they might, being German citizens.

The existence of mutuality would be pretty academic were it clear that the plaintiffs could sue Refco in Germany even without a forum selection clause. But we do not know whether Refco would be suable there, under the German equivalent of our long-arm statutes, apart from the forum selection clause.

Our analysis to this point has suggested that Refco is indeed "closely related," in the relevant sense, to the signatories of the forum selection clause contained in the investment contracts and is therefore entitled to invoke the clause. Against this conclusion the plaintiffs argue, first, that they could not have enforced the forum selection clause against Refco. They tell us that whatever the situation may be under American law, German law would not permit a nonparty to a contract containing a forum selection clause to enforce the clause; and it would be German law that controlled if the plaintiffs were trying to sue in Germany. This argument is important not only for its bearing on the issue of mutuality and hence on Refco's right as a nonparty to the forum selection clause nevertheless to take advantage of it, but also because of the qualification that the clause is effective only "to the extent permissible under the law" of Germany. Unless the forum selection clause is enforceable against Refco, Refco might not be suable in Germany at all, in which event the clause by its own terms would authorize the plaintiffs to sue Refco elsewhere.

Critical as the argument is, we cannot consider it. The plaintiffs failed to lay the requisite foundation and have thus waived it. Granted, the meaning of foreign law is no longer treated as a strict question of...

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