Bybee, In re
| Decision Date | 27 September 1991 |
| Docket Number | A-M,A-MARK,No. 90-35604,90-35604 |
| Citation | 945 F.2d 309 |
| Parties | , Bankr. L. Rep. P 74,280 In re Keith D. BYBEE, Sr.; Eleonore J. Bybee, dba Keith Bybee Enterprises, Debtors. John E. KROMMENHOEK, Trustee, Appellant, v.PRECIOUS METALS, INC.;ark Financial Corporation; Spiral Metals, Inc., Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Blaine F. Evans and Jed W. Manwaring, Evans, Keane, Koontz, Boyd, Simko & Ripley, Boise, Idaho, for appellant.
John F. Kurtz, Jr., Hawley, Troxell, Ennis & Hawley, Boise, Idaho, for appellees.
David G. High and Marilyn T. Scanlan, Deputy Atty. Gen., Boise, Idaho, for amicus curiae State of Idaho.
Jay L. Witkin and Edward S. Geldermann, Washington, D.C., for amicus curiae Commodity Futures Trading Com'n.
Terence F. Gilheany, Cadwalader, Wickersham & Taft, New York City, for amicus curiae Commodities Corp. (U.S.A.) N.V.
Thomas E. Heftler, Melvin A. Brosterman, Marvin J. Goldstein and Elizabeth A. Mullins, Stroock & Stroock & Lavan, New York City, for amici curiae J. Aron & Co. and AIG Trading Corp.
Mark D. Young, John H. Stassen, Maureen A. Donley-Hoopes, Susan P. Potter, Kirkland & Ellis, Washington, D.C. and Chicago, Ill., for amici curiae The Bd. of Trade of the City of Chicago, Chicago Mercantile Exchange, Commodity Exchange, Inc. and New York Mercantile Exchange.
Before WRIGHT, FARRIS and THOMPSON, Circuit Judges.
Keith D. Bybee, Sr., acting in some instances for his own account and at other times for customers, bought gold and silver, bullion and coins, from A-Mark Precious The trustee-in-bankruptcy sought to rescind Bybee's purchases from A-Mark on the ground that these purchases constituted off-exchange future contracts in violation of the Commodity Exchange Act ("CEA"). 1 The trustee also sought to recover the value of the precious metals Bybee sold to A-Mark, asserting that the liquidation of the account constituted a fraudulent transfer under 11 U.S.C. §§ 544 and 548.
Metals ("A-Mark"). Bybee left a substantial amount of the precious metals on deposit with A-Mark. Unknown to Bybee's customers, A-Mark held a lien on all of this metal to secure amounts owed by Bybee for purchases on margin. The price of silver dropped, and Bybee liquidated his account, selling to A-Mark at the market price all of the precious metals A-Mark then held on deposit. This sale brought over $2 million, but when Bybee's debt to A-Mark was settled, only some $300,000 remained. Bybee needed much more than this to settle the accounts of his customers. He tried to make up the shortfall by investing in the commodities market. That effort failed, and he filed for protection under the Bankruptcy Act
The bankruptcy court granted summary judgment in favor of A-Mark on the fraudulent transfer claims. After a trial on the trustee's CEA claim, the bankruptcy court recommended findings of fact and conclusions of law that Bybee's purchases from A-Mark did not constitute off-exchange futures contracts, and thus did not violate the CEA.
The district court affirmed summary judgment on the fraudulent transfer claims, and adopted the bankruptcy court's findings of fact on the CEA claim. The district court concluded that no violation of the CEA had occurred because the transactions between Bybee and A-Mark were non-public transactions between commercial parties.
We have jurisdiction under 28 U.S.C. §§ 158(c) and 1291. We affirm in part and remand for further proceedings to award attorney fees to A-Mark for the defense of the fraudulent transfer claims, for which Idaho state law provides the rule of decision, but not for the defense of the claims resolved under federal law.
Bybee began buying silver from A-Mark in 1979. He resold the silver to his customers, earning a commission on the sales. Initially, Bybee bought no precious metals from A-Mark unless he had first made arrangements for its resale to one of his retail customers. Later, he bought precious metals for his own account as well as for his customers.
Bybee bought precious metals from A-Mark pursuant to a form Trading Agreement. This Agreement provided for two types of transactions: "Immediate Delivery Sales and Purchases" and "Deferred Delivery (margin) Sales." Until April of 1982, most of the purchases involved in this appeal took the form of Immediate Delivery Sales.
In an Immediate Delivery Sale, A-Mark required Bybee to pay cash in full within 48 hours of the purchase. A-Mark then delivered the goods to Bybee or Bybee's customer. When A-Mark bought metal from Bybee, Bybee was required to deliver the metal to A-Mark within five days. From 1979 until April of 1982, 98% of these transactions resulted in the physical delivery of precious metal to Bybee or his customers.
In a Deferred Delivery Sale, Bybee made an immediate down payment of 20% (later reduced to 10%) and obtained physical delivery upon paying the balance. The balance due A-Mark was secured with a lien on all undelivered metals bought under the Deferred Delivery plan.
Bybee advised his customers that they did not have to take actual delivery but could instead store their metal at A-Mark for up to two years at no cost. In fact, the "storage" was a Deferred Delivery Sale and A-Mark held a lien on the stored metal As silver declined in value, A-Mark made margin calls on Bybee. After exhausting his own assets, Bybee borrowed from friends and customers in an effort to reduce the A-Mark debt. By May 1986, Bybee was unable to raise more money or provide additional metals to satisfy A-Mark's margin calls. He then sold to A-Mark for $2,126,692.70 all metal it held for deferred delivery. This price represented the current value of the metals at the time sold.
securing all of Bybee's purchases, both for himself and for his customers, even though a customer may have paid 100% of the purchase price.
After offsetting Bybee's debt, A-Mark paid Bybee approximately $300,000 in cash. Bybee did not advise his customers of this sale. Instead, he invested the $300,000 in commodity futures with the hope of quickly recovering his losses. This failed, and on February 27, 1987 he filed for relief under the Bankruptcy Code.
The CEA makes it "unlawful for any person to offer or enter into ... a contract for the purchase or sale of a commodity for future delivery ... unless ... such transaction is conducted on or subject to the rules of a board of trade which has been designated by the Commodity Futures Trading Commission as a 'contract market' for such commodity...." 7 U.S.C. § 6(a). A futures contract that violates this provision is deemed an illegal "off-exchange" futures contract.
To avoid application of the CEA to every executory contract, 2 Congress limited its reach in section 2(a)(1)(A). This section, known as the "cash forward contract" exclusion, provides: "The term 'future delivery' ... shall not include any sale of any cash commodity for deferred shipment or delivery." 7 U.S.C. § 2 (1988).
The trustee contends Bybee's margin purchases were illegal off-exchange futures contracts. 3 A-Mark argues that the transactions were cash forward contracts, exempt from the exchange trading requirements of the CEA. We consider the parties' contentions in order, determining first whether the transactions were futures contracts under the CEA. 4
"Commodity futures transactions involve standardized contracts for the purchase or sale of commodities which provide[ ] for future, as opposed to immediate, delivery, and which are directly or indirectly offered to the general public and generally are secured by earnest money, or 'margin.' " In re Stovall, [1977-1980 Transfer Binder], Comm.Fut.L.Rep. (CCH) p 20,941, at 23,777. Each element need not be present for a transaction to be a futures contract. Id. Instead, "[t]he transaction must be viewed as a whole with a critical eye toward its underlying purpose." CFTC v. Co Petro Marketing Group, Inc., 680 F.2d 573, 581 (9th Cir.1982).
A-Mark argues the contracts are not futures contracts because they lack standardized terms and are not accompanied by a clearinghouse, standardized or exchange-style variation margining, a settlement system or the right to assign the contracts. We disagree.
We recognized in Co Petro that a contract that does not contain wholly standardized terms can still be considered a futures contract if the seller implicitly guarantees that it will provide for offset. Id. at 580. In Co Petro, we stressed "the rationale for standardization in futures trading." Id. We noted that, "The ability to form offsetting contracts [in the futures market] is essential, since investors rarely take delivery against the contracts." Id. In Co Petro, the seller provided a contractual right of offset. Co Petro's customers, "like customers who trade on organized futures exchanges," received the benefit of offset, and the contracts' degree of standardization could be disregarded. Id.
A similar situation exists here. The district court found that A-Mark implicitly represented that it would provide for offsetting contracts, even though the contracts it sold were not entirely standardized. As in Co Petro, this is enough to satisfy the standardization requirement.
A-Mark also argues the transactions at issue cannot be futures contracts because a number of factors generally associated with organized futures exchanges are not present. But as the CFTC has noted, "[T]he requirement that a futures contract be executed on a designated contract market is what makes the contract legal, not what makes it a futures contract." First Nat'l Monetary Corp., [1984-1986 Transfer Binder] Comm.Fut.L.Rep. (CCH) p 22,698, at 30,970 (1985).
We conclude the margin purchase transactions between A-Mark and Bybee were futures contracts.
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