Sam Wong & Son, Inc. v. New York Mercantile Exchange, s. 894

• Citation: 735 F.2d 653
• Decision Date: 11 May 1984
• Docket Number: D,895,Nos. 894,s. 894
• Parties: SAM WONG & SON, INC., a Corporation, on behalf of itself and all others similarly situated, Plaintiffs-Appellants, v. NEW YORK MERCANTILE EXCHANGE; Richard B. Levine; Howard Gabler; Melvyn Falis; Jayne Ball; Alfred S. Pennisi; Peter Johnston; Michel Marks; Victor Buccellato; Salvatore Calcaterra; Horace De Podwin; Sam Fishberg; Richard Jarecki; Stanley Meierfeld; Charles Miller; Henry Polan; Jack Schwager; Ira Shein; Jacob Stern; Dennis Suskind; Sol Tanne; Harvey Wachman; Norton Waltuck; Joe Doe; Jane Roe; Richard Coe; Mary Smith; ABC, Inc.; DEF, Inc.; GHI, Inc.; JKL, Inc.; MNO, Inc.; and PQR, Inc. (the last ten names being fictitious), Defendants-Appellees. Anthony SPINALE, Plaintiff-Appellant, v. NEW YORK MERCANTILE EXCHANGE, Michel Marks, Dennis Suskind, Sal Calcaterra, Norton Waltuck, George Gero, Stanley Meierfeld, Horace De Podwin, Jack Schwager, Sam Fishberg, Ira Shein, Jack Place, Harvey Wachman, and Charles Miller, Defendants-Appellees. ockets 83-7885, 83-7891.
• Court: U.S. Court of Appeals — Second Circuit

Page 653

735 F.2d 653

SAM WONG & SON, INC., a Corporation, on behalf of itself and all others similarly situated, Plaintiffs-Appellants, v. NEW YORK MERCANTILE EXCHANGE; Richard B. Levine; Howard

Gabler; Melvyn Falis; Jayne Ball; Alfred S. Pennisi;

Peter Johnston; Michel Marks; Victor Buccellato;

Salvatore Calcaterra; Horace De Podwin; Sam Fishberg;

Richard Jarecki; Stanley Meierfeld; Charles Miller; Henry

Polan; Jack Schwager; Ira Shein; Jacob Stern; Dennis

Suskind; Sol Tanne; Harvey Wachman; Norton Waltuck; Joe

Doe; Jane Roe; Richard Coe; Mary Smith; ABC, Inc.; DEF,

Inc.; GHI, Inc.; JKL, Inc.; MNO, Inc.; and PQR, Inc.

(the last ten names being fictitious), Defendants-Appellees.

Anthony SPINALE, Plaintiff-Appellant, v. NEW YORK MERCANTILE EXCHANGE, Michel Marks, Dennis Suskind, Sal Calcaterra, Norton Waltuck, George Gero, Stanley

Meierfeld, Horace De Podwin, Jack Schwager, Sam Fishberg,

Ira Shein, Jack Place, Harvey Wachman, and Charles Miller,

Defendants-Appellees.

Nos. 894, 895, Dockets 83-7885, 83-7891.

United States Court of Appeals Second Circuit.

Argued March 12, 1984.

Decided May 11, 1984.

Wayne D. Greenstone, Greenstone & Greenstone, P.A., and Kirsten, Friedman & Cherin, Newark, N.J., for plaintiff-appellant Sam Wong & Son, Inc.

Richard A. Miller, Cadwalader, Wickersham & Taft, and Newman, Tannenbaum, Helpern & Hirschtritt, New York City, for plaintiff-appellant Anthony Spinale.

William E. Hegarty, Henry G. Bisgaier, Peter Leight, Cahill Gordon & Reindel, New York City, and Charles S. Horgan, General Counsel, New York Mercantile Exchange, for defendants-appellees.

Kenneth M. Raisler, Gen. Counsel, Commodity Futures Trading Com'n, Pat G. Nicolette, Deputy Gen. Counsel, Whitney Adams, Deputy Gen. Counsel, Nancy E. Yanofsky, Atty., Washington, D.C., for Commodity Futures Trading Commission, amicus curiae.

Baer Marks & Upham, New York City Mark A. Buckstein, Barry J. Mandel, William A. Brandt, Jr., New York City, of counsel, for Commodity Exchange, Inc., amicus curiae.

Kirkland & Ellis, Chicago, Ill. (John E. Angle, T. Webster Brenner, John H. Stassen, Chicago, Ill., of counsel), for the Board of Trade of the City of Chicago, amicus curiae.

James M. Bruchs, Chicago, Ill., for the MidAmerica Commodity Exchange, amicus curiae.

Dorsey & Whitney, Minneapolis, Minn. (James H. O'Hagan, Minneapolis, Minn., of counsel), for the Minneapolis Grain Exchange, amicus curiae.

Freeman, Freeman & Salzman, P.C., Chicago, Ill. (Jerrold E. Salzman, Lee A. Freeman, Jr., Chicago, Ill., of counsel), for the Chicago Mercantile Exchange, amicus curiae.

Barrett Smith Schapiro Simon & Armstrong, New York City (Edmund R. Schroeder, New York City, of counsel), for Coffee, Sugar & Cocoa Exchange, Inc. and New York Futures Exchange, Inc. amici curiae.

Shughart, Thomson & Kilroy, Overland Park, Kan. (William B. Jensen, Overland Park, Kan., of counsel), for Board of Trade of Kansas City, Missouri, Inc., amicus curiae.

Rein Mound & Cotton, New York City (Maurice Mound, New York City, of counsel), for New York Cotton Exchange, amicus curiae.

Before FRIENDLY, TIMBERS and MESKILL, Circuit Judges.

FRIENDLY, Circuit Judge:

We have here appeals by plaintiffs, Sam Wong & Son, Inc. (Wong) and Anthony Spinale, in two suits in the District Court for the Southern District of New York against the New York Mercantile Exchange (NYME or Exchange), its Board of Governors (the Board), and various NYME officers. Both suits concern action or inaction by the NYME relating to the March, April and May 1979 Maine round white potato futures contracts. After an all night meeting on March 8-9, 1979, the Board declared that, in consequence of large-scale failures of the March potatoes to meet delivery standards at the Hunts Point Terminal Market in the Bronx, New York, a market emergency existed with respect to the three contracts, suspended trading in the April and May contracts, ¹ and ordered those contracts to be liquidated at the March 8 settlement price. The Board also ordered a two-day extension in the delivery period for the March contracts and provided that unfulfilled March contracts would be settled at a price to be determined by a special committee.

Wong's complaint, filed on behalf of himself and "all other producers, owners, processors or merchandizers [sic] of 1978 crop year potatoes grown in the United States who assumed short positions" in the 1979 Maine Potato contracts to hedge against a decline in the value of their crops, ² made two principal claims. One was that, once the delivery problem had manifested itself in November, 1978, the NYME had failed to take proper action earlier than March 8-9. The other was that the NYME had failed in a duty to revise the Maine round white potato futures contract so that it would be a better vehicle for hedging and less susceptible to the problem that had developed in 1976 ³ and again in the controversy here before us. Spinale held net long positions in the March, April and May contracts; ⁴ he attacked the action taken at the March 8-9 meeting, which had deprived him of further profits he would have obtained if the NYME had not acted or had acted less drastically. His complaint, almost the exact opposite of Wong's, was that the Exchange should not have taken emergency action when it did, and alternatively that any action should have been less drastic and should not have included the March contract, see supra note 1. Judge Sofaer, in a comprehensive and scholarly opinion, reported sub nom. Jordon v. New York Mercantile Exchange, 571 F.Supp. 1530 (S.D.N.Y.1983), familiarity with which is assumed, directed that Wong's complaint should be dismissed for failure to state a claim on which relief can be granted, Fed.R.Civ.P. 12(b)(6), or, alternatively, that summary judgment should be granted to defendants under Fed.R.Civ.P. 56. He also granted summary judgment dismissing Spinale's complaint. These appeals followed.

The Facts ⁵

The NYME Maine Round White Potato Futures Contract calls for the delivery of 500 cwt. (hundredweight) of Maine grown potatoes of any but the Cobbler and Warba varieties, which are excluded because of their irregular shapes. The contract requires the potatoes to be packaged in 1000 fifty-pound bags. Delivery months are November, March, April and May. The Maine potato crop is harvested in the fall; thus the November contract marks the beginning of the crop year. Delivery may be made by rail or truck. In fact all deliveries have been made by truck since this was first permitted in the May 1977 contract. Each delivery generally consists of one truckload of potatoes, i.e., the contract amount of 50,000 pounds. The potatoes must grade U.S. No. 1 for par delivery, except that for the April and May contracts "commercials" are deliverable at a 25% discount from the settlement price for the last trading day of the delivery month. The contract requires two inspections--one by a federally-authorized state inspector at the point of origin in Maine and the other by a federal inspector at the final point of destination at the Hunts Point Terminal Market, the Bronx, New York, or Everett, Massachusetts. The grading standard follows the United States Standards for Grade of Potatoes promulgated by the Secretary of Agriculture.

The first deliveries of Maine round white potatoes for the 1978-1979 crop year began for the NYME on November 6, 1978 and continued until November 20. An open interest of ninety-two contracts remained after the termination of trading in the November 1978 contract. Ultimately deliveries were tendered to close fifty contracts; the remaining contracts were liquidated pursuant to the Exchange's "EFP" procedure see infra. Of the fifty deliveries, all of which had passed inspection in Maine, fifteen failed to pass inspection at Hunts Point. ⁶ Eleven loads failed because of apparent deterioration since inspection in Maine; the potatoes arrived at Hunts Point with high percentages of sunken and discolored areas that exceeded the Department of Agriculture's (USDA) specifications for the U.S. No. 1 grade. The other four failures were "reversals" based on grading characteristics that should have been detected at the point of origin.

The November rejections prompted the NYME to take a look. On November 21 the Exchange's Potato Control Subcommittee (Control Committee) reviewed the results of the delivery period and tentatively concluded that "no problems were foreseeable". Nevertheless, the Control Committee recommended sending a letter to the USDA relating to the inspection reversals and failures. On December 14, Richard Levine, president of the NYME, wrote such a letter to a USDA official, Ligon Johnson, head of the Grading Section, Fresh Products Branch of the Fresh Fruit and Vegetable Quality Division, in Washington, D.C., specifically asking an opinion on how the delivery problem arose and whether similar difficulties would occur in the future. After conducting a preliminary investigation, Johnson responded on January 18, 1979. He commented that apparently "this year's crop of Maine potatoes, even after being sorted, have [sic] a higher than usual percentage of borderline defective specimens." Regarding the inspection reversals, he assured Levine that steps had been taken to bring about uniformity in inspectors' grading standards. Lastly, he tried to assuage any of the Exchange's concerns by stating that the USDA was "prepared to take additional action if necessary to prevent a recurrence of the embarrassment encountered this past November."

During January and February, 1979 the NYME continued to monitor the situation with respect to the Maine potato crop and the 1979 futures contracts. Notwithstanding its initial concern over the November deliveries, the NYME concluded that this was not a serious portent. The Control Committee reconvened on January 29 to discuss the USDA's response; the group was concerned primarily with the discrepancies between the Maine and New...