Tamari v. Bache & Co. (Lebanon) S.A.L.

• Decision Date: 09 April 1984
• Docket Number: No. 83-2452,83-2452
• Citation: 730 F.2d 1103
• Parties: Abdallah W. TAMARI, Ludwig W. Tamari, Farah Tamari, co-partners d/b/a Wahbe Tamari & Sons Co., Plaintiffs-Appellees, v. BACHE & CO. (LEBANON) S.A.L., a Lebanese corporation, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1103

730 F.2d 1103

Abdallah W. TAMARI, Ludwig W. Tamari, Farah Tamari, co-partners d/b/a Wahbe Tamari & Sons Co., Plaintiffs-Appellees, v. BACHE & CO. (LEBANON) S.A.L., a Lebanese corporation,

Defendant-Appellant.

No. 83-2452.

United States Court of Appeals, Seventh Circuit.

Argued Jan. 18, 1984.

Decided March 30, 1984.

As Corrected April 9, 1984.

Lawrence M. Gavin, Boodell, Sears, Sugrue, Giambalvo & Crowley, Chicago, Ill., for defendant-appellant.

Donald C. Shine, Nisen, Elliott & Meier, Chicago, Ill., for plaintiffs-appellees.

Before BAUER and FLAUM, Circuit Judges, and SWYGERT, Senior Circuit Judge.

SWYGERT, Senior Circuit Judge.

The plaintiffs-appellees ("the Tamaris"), citizens of Lebanon, brought this suit under the Commodity Exchange Act ("CEA"), 7 U.S.C. Secs. 6b and 6c, for damages resulting from alleged fraud and mismanagement of their commodity futures trading accounts. The defendant-appellant, Bache & Co. (Lebanon) S.A.L. ("Bache Lebanon"), is a Lebanese corporation wholly owned by Bache & Co., Inc., a Delaware corporation ("Bache Delaware"). The issue presented in this interlocutory appeal is whether the district court has subject matter jurisdiction under the CEA over a dispute between nonresident aliens when the trading of commodity futures contracts giving rise to the suit took place on United States exchanges but the contacts between the parties occurred in Lebanon. ¹ The district court held that it had subject matter jurisdiction in ruling on Bache Lebanon's motion for judgment on the pleadings, or, in the alternative, for summary judgment. The court later denied Bache Lebanon's motion to reconsider its ruling, but certified for appeal those parts of its order dealing with its subject matter jurisdiction over the case. ² This court granted permission to take an interlocutory appeal pursuant to 28 U.S.C. Sec. 1292(b) on July 20, 1983. For the reasons stated below, we affirm the district court's denial of Bache Lebanon's motion.

I

A. Background of this Suit

When the Tamaris filed this action in December 1975, both Bache Lebanon and its parent, Bache Delaware, were named as defendants. The Tamaris alleged that Bache Lebanon solicited them to open two commodity futures trading accounts, which they did early in 1972. The Tamaris further alleged that in soliciting and trading for their accounts, Bache Lebanon, Bache Delaware, or both, violated the CEA, causing losses to the Tamaris' accounts of more than two million dollars. ³ The alleged violations include excessive trading and churning of the accounts; making false representations, false reports and false statements to the Tamaris; and deceiving the Tamaris as to the true condition of the accounts.

The district court dismissed the action against Bache Delaware on May 19, 1976, ⁴ because an arbitration proceeding between the Tamaris and Bache Delaware was pending at the time suit was filed. The proceeding was before the Chicago Board of Trade pursuant to an arbitration agreement between the parties. Bache Delaware sought an award of $376,366.96 against the Tamaris for the balance owed in the Tamaris' trading accounts; the Tamaris sought $2,150,000 in damages based on a counterclaim similar to the claims of this lawsuit. Bache Delaware ultimately prevailed in the arbitration proceeding, ⁵ and successfully defended against the Tamaris' later suit seeking to vacate the arbitration award. See Tamari v. Bache Halsey Stuart, Inc., 619 F.2d 1196 (7th Cir.), cert. denied, 449 U.S. 873, 101 S.Ct. 213, 66 L.Ed.2d 93 (1980). The only action remaining, therefore, is that against Bache Lebanon.

B. Motion for Judgment on the Pleadings

In light of the arbitration decision, Bache Lebanon filed its motion for judgment on the pleadings or summary judgment. The undisputed facts relevant to the question of subject matter jurisdiction raised by the motion can be briefly stated. The plaintiffs are citizens of Lebanon and reside outside the United States. Bache Lebanon, a wholly-owned subsidiary and agent of Bache Delaware, is a Lebanese corporation and has its sole office in Beirut, Lebanon. In the course of trading for the Tamaris' accounts, Bache Lebanon received futures orders from the Tamaris in Lebanon and transmitted them by wire to Bache Delaware for execution on the Chicago Board of Trade and the Chicago Mercantile Exchange. Bache Delaware, a member of both exchanges, then executed the contracts. Although there were daily conversations between the Tamaris, Bache Lebanon, and Bache Delaware, all communications and meetings between Bache Lebanon and the Tamaris regarding the commodity futures contracts traded in the United States took place in Lebanon.

The district court denied Bache Lebanon's motion, holding that subject matter jurisdiction exists over a cause of action arising from trading on United States exchanges even though the parties are nonresident aliens and the contacts between them occurred in a foreign country. The court reached its decision by applying two doctrines used to analyze jurisdictional questions that arise from transnational disputes--the effects test and the conduct test. ⁶ Under both tests, the court concluded that jurisdiction exists over this case.

Bache Lebanon now challenges this determination. It first contends that the district court failed to consider whether Congress intended the CEA to apply to nonresident aliens when the alleged illegal acts occurred in a foreign country, and then argues that subject matter jurisdiction is lacking because Congress did not intend such application. Bache Lebanon also contends that subject matter jurisdiction does not exist under either the conduct test or the effects test.

II

We agree with Bache Lebanon's contention that legislative intent must be considered. See, e.g., Psimenos v. E.F. Hutton & Co., 722 F.2d 1041, 1044-45 (2d Cir.1983); Bersch v. Drexel Firestone, Inc., 519 F.2d 974, 985 (2d Cir.), cert. denied sub nom. Bersch v. Arthur Andersen & Co., 423 U.S. 1018, 96 S.Ct. 453, 46 L.Ed.2d 389 (1975). Subject matter jurisdiction exists over this dispute only if the antifraud provisions of the Commodity Exchange Act were intended to apply to foreign brokers or agents of commodity exchange members whenever they facilitate futures trading on United States exchanges. ⁷ Looking to the language of the statute and its legislative history, we find no indication, however, that Congress intended to prohibit fraudulent dealings connected with futures trading on domestic exchanges only if the futures transactions originate in the United States.

One of Congress's fundamental purposes in enacting the CEA was to ensure fair practice and honest dealings on commodity exchanges, for the protection of the market itself as well as those who could be injured by unreasonable fluctuations in commodity prices. S.Rep. No. 93-1131, 93d Cong., 2d Sess. 14, reprinted in 1974 U.S.Code Cong. & Admin.News 5843, 5856. See also 7 U.S.C. Sec. 5. To effectuate this purpose, the Act creates a comprehensive regulatory scheme premised on control over domestic futures exchanges and the trading of futures contracts on those exchanges. ⁸ The specific provisions of the CEA upon which this suit is based broadly proscribe fraudulent commodity futures transactions. Under 7 U.S.C. Sec. 6b, any member of a contract market, or its agents, is prohibited from defrauding any person in connection with the making of a futures contract on any contract market. ⁹ Under 7 U.S.C. Sec. 6c, it is unlawful for any person to enter into or confirm the execution of a meretricious commodity futures transaction.

We recognize that the Act does not expressly state that the term "agent" includes, or excludes, agents doing business in foreign countries, or that "person" includes, or excludes, nonresident aliens. See 7 U.S.C. Sec. 2. Nor does the legislative history provide any guidance on whether these provisions should be applied to all agents of commodity exchange members, regardless of their location. In support of their respective positions, the parties and the Commodity Futures Trading Commission, as amicus curiae, have referred to congressional reports on the 1974 and 1982 amendments to the CEA, and to subsequent regulations promulgated by the Commission. ¹⁰ Bache Lebanon attaches particular significance to the Commission's decision to exclude foreign associated persons of domestic firms from registration requirements. However, we do not regard this decision as an indication of congressional intent on the jurisdictional limits of the antifraud provisions, especially when the Commission has taken the position that the CEA confers subject matter jurisdiction over this dispute. Likewise, the other references illustrate specific legislative and administrative responses to increased international trading in commodity futures, but do not address the intended jurisdictional scope of the antifraud provisions of the Act.

Finding nothing in the Act or its legislative history to indicate that Congress did not intend the CEA to apply to foreign agents, but recognizing there also is no direct evidence that Congress intended such application, we believe it is appropriate to rely on the "conduct" and "effects" tests in discerning whether subject matter jurisdiction exists over this dispute. ¹¹ Both tests were developed in cases brought under the antifraud provisions of the federal securities laws and have recently been applied in similar cases arising under the Commodity Exchange Act. See, e.g., Psimenos, supra, 722 F.2d at 1044-48 (CEA); Grunenthal GmbH v. Hotz, 712 F.2d 421 (9th Cir.1983); SEC v. Kasser, 548 F.2d 109 (3d Cir.), cert. denied sub nom. Churchill Forest Industries (Manitoba), Ltd. v. SEC, 431 U.S. 938, 97 S.Ct. 2649, 53 L.Ed.2d 255 (1977); Bersch, supra, 519 F.2d 985-93; ITT v. Vencap, Ltd., 519 F.2d 1001, 1015-19 (2d Cir.1975); Leasco, supra, 468 F.2d at 1333-39; Schoenbaum, supra, 405 F.2d at 206-08; Alemano v. ACLI...