Commercial Iron & Metal Co. v. Bache & Co., Inc.

• Decision Date: 26 April 1973
• Docket Number: No. 72-1383.,72-1383.
• Parties: COMMERCIAL IRON & METAL CO., Plaintiff-Appellant, v. BACHE & CO., INC., and Irving J. Louis, Jr., Defendants-Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

478 F.2d 39 (1973)

COMMERCIAL IRON & METAL CO., Plaintiff-Appellant, v. BACHE & CO., INC., and Irving J. Louis, Jr., Defendants-Appellees.

No. 72-1383.

United States Court of Appeals, Tenth Circuit.

Argued and Submitted March 27, 1973.

Decided April 26, 1973.

Rehearing Denied May 22, 1973.

David G. Palmer, Denver, Colo. (Edwin S. Kahn and James C. Bull, Denver, Colo., on the brief), for plaintiff-appellant.

George H. Colin, New York City (Raymond J. Turner, Denver, Colo., on the brief), for defendants-appellees.

Before PICKETT, HILL and BARRETT, Circuit Judges.

HILL, Circuit Judge.

Appellant Commercial Iron & Metal Co. (Commercial) brought suit in Colorado federal district court to recover money damages against or rescind its contract with the metals department of Bache & Co., Inc. (Bache). Commercial is a limited partnership engaged in the metal and iron business in Denver, Colorado. Bache is a Wall Street corporation which, among other things, engaged in the metals business and has its principal place of business in New York City. Jurisdiction was invoked under diversity of citizenship, 28 U.S.C. § 1332, and the exclusive jurisdiction of federal courts over securities violations, 15 U.S.C. § 78aa. The trial court, after viewing the pleadings, affidavits and exhibits, granted Bache's motion for summary judgment on the ground that Commercial's action in federal district court was improperly brought since the parties mutually agreed in their contracts to submit disputes to arbitration.

The principal parties in this action are Morey S. Duman (Duman), the sole general partner of Commercial, and Irving J. Louis, Jr. (Louis), a first vice president of Bache and head of its metals department. During May, 1969, Louis telephoned Duman to urge him to open an account with Bache. Duman followed this suggestion and traded in general commodities through Commercial's margin account. Duman later switched the account to one not requiring marginal deposits and traded in electrolytic copper. During the four month period from April 7 to August 7, 1970, Bache sold three million pounds of electrolytic copper to Commercial at an average price of nearly 66 cents per pound, a financial undertaking of two million dollars. Between April and the first scheduled delivery in December, 1970, copper prices plunged. As a result Commercial refused to accept delivery of the shipments. Bache thereafter liquidated the contracts at a loss of $537,175.

Commercial promptly instituted this action. Its position was that Louis on behalf of Bache induced Commercial to enter into a discretionary account with Bache in early 1970 by means of untrue and misleading representations. Commercial alleged these misrepresentations to be: (1) the price of copper was bound to rise; (2) Louis had special information and contacts which would assure Commercial a profit; and (3) the account would be carefully managed and supervised in all respects by Louis and Bache. Commercial further alleged that while Louis was buying the electrolytic copper for Commercial he failed to disclose that: (1) from a technical standpoint it appeared likely that copper prices would fall rather than rise; (2) from a fundamental standpoint it appeared likely that copper prices would fall rather than rise; (3) Bache's sophisticated customers were generally selling rather than buying copper; and (4) Bache and Louis failed at any time up through December 14, 1971, to hedge or close out plaintiff's open position, despite the fact that primary and other copper prices had experienced the sharpest decline in years. Commercial charges that Louis' misrepresentations violate Rule 10B-5(1), (2) and/or (3)¹ and were perpetrated by use of the mails and interstate telephone calls. Commercial further asserts that Louis' wrongful conduct violated the fiduciary duty of a broker to his customers, and violated New York's Blue Sky Law (the Martin Act).

Appellees in their answer deny acting as broker for Commercial during the period in question. Bache contends that it sold as principal to Commercial the electrolytic copper; in support of this assertion it introduced the 15 contracts between Bache and Commercial for the copper. These contracts, all of which are identical and are signed by Duman, expressly and unequivocally identify Bache as seller and Commercial as buyer. In corroboration of the charge that Commercial understood the buyer-seller relationship, a contract identical to those in dispute was introduced showing that in 1969 Commercial purchased and accepted delivery on electrolytic nickel cathodes from Bache. Other exhibits were introduced demonstrating that on previous occasions Commercial had accepted delivery on electrolytic copper. Finally appellees attacked the jurisdiction of a federal district court to hear the action since all the contracts in dispute provide for arbitration of any claim or controversy arising out of or in connection with the agreement.

The trial court after reading through the pleadings, exhibits and affidavits held there was no genuine issue of material fact with respect to (a) federal jurisdiction and the arbitration clauses contained in the contracts; (b) the execution and delivery of the 15 contracts; and (c) the absence in the transactions between the parties of discretionary authority or dealings and of the common enterprise and promotional efforts necessary to find an "investment contract." As no material issues of fact were alleged, summary judgment for appellees was accordingly granted.

Our court has been explicit in defining under what conditions summary judgment may be granted. The ultimate purpose of summary judgment is to pierce the allegations of the pleadings to show there are no genuine issues of material fact. If there is an absence of material issues then the movant is entitled to judgment as a matter of law. 6 J. Moore, Federal Practice, ¶ 56.02 10, at 2043 (2d ed. 1972). Because the effect of summary judgment is a judgment in bar, however, the courts should be careful in granting such motions.

. . . While it is the duty of the trial court to grant a motion for summary judgment in an appropriate case, the relief contemplated by Rule 56 is drastic, and should be applied with caution to the end that litigants will have a trial on bona fide factual disputes. Under the rule no margin exists for the disposition of factual issues, and it does not serve as a substitute for a trial of the case nor require the parties to dispose of the litigation through the use of affidavits. The pleadings are to be construed liberally in favor of the party against whom the motion is made. . . .

Machinery Center, Inc. v. Anchor National Life Insurance Co., 434 F.2d 1, 6 (10th Cir. 1970); Bushman Construction Co. v. Conner, 307 F.2d 888 (10th Cir. 1962).

The lower court, in granting summary judgment, was forced to determine whether the disputes arising out of the contracts signed by Bache and Commercial would be resolved in federal court or by arbitration as provided by the United States Arbitration Act of 1925, 9 U.S.C. §§ 1-14. If the contracts are no more than contracts to purchase copper at a future date, the arbitration clause found in each contract is binding on our court and precludes us from exercising jurisdiction. See Caloric Stove Corp. v. Chemical Bank & Trust Co., 205 F.2d 492 (2d Cir. 1953). If the contracts are investment contracts, however, the judicial forum cannot be waived by the contracting parties. Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953).

Determining what constitutes an investment contract is no easy matter. As used in the Securities Acts, "investment contract" is a "nebulous term, difficult of definition and even more...