McCurnin v. Kohlmeyer & Company

• Decision Date: 17 August 1972
• Docket Number: Civ. A. No. 71-2138.
• Citation: 347 F. Supp. 573
• Court: U.S. District Court — Eastern District of Louisiana
• Parties: Leo P. McCURNIN, Jr., Plaintiff, v. KOHLMEYER & COMPANY and Jack D. Drake, Defendants.

347 F. Supp. 573

Leo P. McCURNIN, Jr., Plaintiff, v. KOHLMEYER & COMPANY and Jack D. Drake, Defendants.

Civ. A. No. 71-2138.

United States District Court, E. D. Louisiana.

August 17, 1972.

COPYRIGHT MATERIAL OMITTED

Peter G. Burke, Paul M. Haygood, New Orleans, La., for plaintiff.

Charles Kohlmeyer, Jr., Earl S. Eichin, Jr., New Orleans, La., for defendants.

ALVIN B. RUBIN, District Judge:

McCurnin, a businessman, placed an order with Kohlmeyer, a stock and commodities broker, through Drake, Kohlmeyer's customer's representative, to buy 15 contracts for cotton futures at a price not to exceed 33.30 per pound. Later the same day, in violation of his instructions, Drake cancelled the orders that he had entered at 33.30, and placed new orders at a price of 34.10. The orders were executed at that price. Drake did this under the mistaken belief that McCurnin definitely wanted to purchase cotton that day even at a slightly higher price, and that cotton futures would continue to advance.

A short while later McCurnin, who was out of town, telephoned Drake and learned what had been done. As soon as he returned to New Orleans, still later on the same day, McCurnin went to Drake's office and expressed his displeasure. He asked what he could do about the purchase. In fact McCurnin had the right to reject the purchase. La.C.C. 3010. Drake did not know this, and told McCurnin nothing could be done; but he expressed his optimism about the upward movement of cotton futures, and persuaded McCurnin that there was a possibility of profit in the transaction.

The next day, when the market opened lower, McCurnin again expressed concern about the purchase and Drake again attempted to reassure him. McCurnin nonetheless delivered checks to cover margin requirements on the 15 contracts. By the following day, May 27, 1971, it was evident that the market would continue to fall. McCurnin conferred with Drake's supervisor, Tidmore, and was informed that he could have rejected the purchase had he done so when he first learned of it. Tidmore rebuked McCurnin for not knowing the rules, and told McCurnin that, in order to determine what relief, if any, Kohlmeyer would afford him, he must liquidate his position. McCurnin did so, at a loss of $26,725. He now seeks to recover $15,286.45 McCurnin's credit balance at the time of the loss, from Kohlmeyer and Drake. The defendant Kohlmeyer has counterclaimed for $11,438.55, the amount remaining due if McCurnin is responsible for the loss.

Drake had no intention to mislead, cheat or defraud McCurnin. He acted out of the ingenuous supposition that McCurnin really wanted to be "in cotton" and the erroneous belief that the price was advancing.

I. COMMODITIES EXCHANGE ACT CLAIMS

It is contended that Drake's conduct violated Section 6b of the Commodities Exchange Act,¹ 7 U.S.C.A. § 6b, which reads in part as follows:

"It shall be unlawful (1) for any member of a contract market . . . in connection with . . . any contract of sale of any commodity . . . for future delivery . . .

(A) to cheat or defraud or attempt to cheat or defraud such other person;

(B) wilfully to make or cause to be made to such other person any false report or statement thereof . . .;

(C) wilfully to deceive or attempt to deceive such other person . . . ."

That section is clearly directed only toward wilful misconduct. It cannot be rewritten into a mandate of "a philosophy of full disclosure" by chopping it into fine pieces as part of a stew composed of mingled bits of the Securities Act of 1933, the Securities Exchange Act of 1934, the Public Utility Holding Company Act of 1935, and the Investment Company Act of 1940, as plaintiff's counsel seeks to do. The Securities Exchange Act of 1934, for example, employs much broader language, forbidding "any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe." Section 10(b), 15 U.S.C.A. § 78j(b). The regulations, Rule 10-b-5, elaborate on what is forbidden. There is no counterpart of Section 10(b) in the C.E.A., nor any counterpart of Rule 10-b-5 in the Commodities Act regulations.

Nor is it either good logic or good law to assert that, because Section 6b was proposed in order "to insure fair practice and honest dealing in the commodity exchanges," (see Report of the Committee on Agriculture, House of Representatives, Report 421, 74th Congress), the C.E.A. was ipso facto amended thereby to require everything of commodity brokers that might be embraced within the concepts of "fairness" and "honesty." Counsel have pointed to no provision of the Act nor to any regulation that prescribes any penalties for a broker's honest error.

The C.E.A. does not use sweeping terms. Its pejoratives are simple and pointed: it uses the words "cheat" and "defraud" and "wilfully." By any definition these connote deliberate acts or a degree of negligence that is so gross as to approach wilfulness. This interpretation is strengthened by the fact that criminal penalties are attached to a violation of Section 6b, 7 U.S.C. § 13. Such penalties are not usually attached to good faith actions merely because they are negligent or uninformed. Nor did Congress in the C.E.A. employ any general prohibitions against untrue statements of material facts or omissions to state material facts such as those found in the Securities Act of 1933. 15 U.S.C. § 77a et seq.

For purposes of this case it is unnecessary to explore the full reach of Section 6b. It is sufficient to determine that it does not extend either to the act of an agent who purchases a commodity for his principal at a price in excess of his authority without intent to cheat or defraud, or to the agent's innocent albeit negligent lack of familiarity with his principal's remedies thereafter.

II. SECURITIES ACT CLAIMS

Although McCurnin alleged violations of the Securities Act and the Securities Exchange Act, all of his claims under these laws were dismissed by opinion on March 10, 1972, D.C., 340 F. Supp. 1338, on motion for summary judgment, save one relating to the application of the balance in McCurnin's securities account to pay the loss resulting from commodities transactions. There has been no showing of any improper act in this connection; indeed there has been no real claim of impropriety. The sole claim is that, because funds in a securities account were applied to pay a debt incurred in a commodities transaction, the Securities Act should retroactively apply to whatever occurred before that time in connection with the commodities transactions. No authority has been cited for this unusual doctrine, which smacks something of a quasi bill of attainder of commodities transactions by virtue of later association with a securities account.

Finally, it is unnecessary to dwell at length on the proposition that Kohlmeyer's conduct may have violated some rule of the New York Stock Exchange, hence McCurnin can recover damages. The authority is of course clearly to the contrary. Colonial Realty Corp. v. Bache & Co., 2d Cir. 1966, 358 F.2d 178; cf. Buttrey v. Merrill Lynch, 7 Cir. 1969, 410 F.2d 135 (a knowing and callous disregard for exchange rules gives rise to civil liability).

III. PENDENT JURISDICTION

What remains is a suit between two Louisiana residents based on an alleged violation of the Louisiana law of agency. But this result has been reached only after a full trial without a jury, at which all of the evidence necessary to decide the state as well as the federal claims was introduced.

This court would ordinarily have no jurisdiction of these claims, but their joinder with a claim arising under federal law provides pendant jurisdiction. United Mine Workers v. Gibbs, 1966, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218. See full discussion in 3A Moore's Federal Practice ¶ 18.07 1.-3 et seq. The power to adjudicate a claim by virtue of pendent jurisdiction "need not be exercised in every case in which it is found to exist."

It has consistently been recognized that pendent jurisdiction is a doctrine of discretion, not of plaintiff's right. Its justification lies in considerations of judicial economy, convenience and fairness to litigants; if these are not present a federal court should hesitate to exercise jurisdiction over state claims, even though bound to apply state law to them . . . . Needless decisions of state law should be avoided both as a matter of comity and to promote justice between the parties, by procuring for them a surer-footed reading of applicable law. Certainly, if the federal claims are dismissed before trial, even though not insubstantial in a jurisdictional sense, the state claims should be dismissed as well. Similarly, if it appears that the state issues substantially predominate, whether in terms of proof, of the scope of the issues raised, or of the comprehensiveness of the remedy sought, the state claims may be dismissed without prejudice and left for resolution to state tribunals. There may, on the other hand, be situations in which the state claim is so closely tied to questions of federal policy that the argument for exercise of pendent jurisdiction is particularly strong. U.M.W. v. Gibbs, 383 U.S. at 726, 86 S.Ct. at 1139.

These considerations weigh toward the court's assuming jurisdiction of, and deciding the issues of state law. The federal question was not "unsubstantial and frivolous." See Elberti v. Kunsman, 3 Cir. 1967, 376 F.2d 567. The state claims arise not only "from a . . . nucleus of operative facts" common to the federal ones, United Mine Workers v. Gibbs, supra, 383 U.S. at 725, 86 S.Ct. at 1138, but indeed, as in Hurn v. Oursler, 1933, 289 U.S. 238, 53 S.Ct. 586, 77 L.Ed. 1148, from the identical facts on which the federal remedies were sought. The case has been fully tried. It is in the interest of justice, as well as of judicial economy, that the issue be decided on what is already a complete record. See discussion in Sauls v....