Christensen Hatch Farms, Inc. v. Peavey Co.

• Decision Date: 13 January 1981
• Docket Number: No. Civil 3-80-287.,Civil 3-80-287.
• Citation: 505 F. Supp. 903
• Parties: CHRISTENSEN HATCH FARMS, INC., Alvin G. Ayers and Donald M. Schmitt, Plaintiffs, v. PEAVEY COMPANY, Cayman Associates, Inc., Cayman Associates-Murlas Brothers Commodities, Inc. and Ralph Goelz, Defendants.
• Court: U.S. District Court — District of Minnesota

505 F. Supp. 903

CHRISTENSEN HATCH FARMS, INC., Alvin G. Ayers and Donald M. Schmitt, Plaintiffs, v. PEAVEY COMPANY, Cayman Associates, Inc., Cayman Associates-Murlas Brothers Commodities, Inc. and Ralph Goelz, Defendants.

No. Civil 3-80-287.

United States District Court, D. Minnesota, Third Division.

January 13, 1981.

Maclay R. Hyde, Minneapolis, Minn., for plaintiffs.

Robert L. Schnell, Jr., Minneapolis, Minn., for Peavey Co.

Eric W. Ingvaldson, Minneapolis, Minn., Joseph Novak, Chicago, Ill., for Ralph Goelz.

Gerald Kennedy, Minneapolis, Minn., or Cayman Associates, Inc.

MEMORANDUM AND ORDER

RENNER, District Judge.

This matter comes before the Court on motions to dismiss by defendants Peavey Company, Cayman Associates, Inc., and Ralph Goelz. Pursuant to Fed.R.Civ.P. 12(b)(1) and 12(b)(6), defendants claim the court lacks subject matter jurisdiction and that the complaint fails to state a claim upon which relief can be granted. Defendant Cayman Associates, Inc. also moves for a change of venue pursuant to 28 U.S.C. § 1404(a) (1976). Robert L. Schnell, Jr., Esq., appeared for defendant Peavey Co., Eric Ingvaldson, Esq., and Joseph Novak, Esq., appeared for defendant Ralph Goelz. Gerald Kennedy, Esq., appeared for defendant Cayman Associates, Inc., Maclay R. Hyde, Esq., appeared for plaintiffs.

I.

Plaintiffs allege in their complaint thirty separate causes of action against some or all of the four named defendants. They premise jurisdiction of this action on 28 U.S.C. §§ 1331, 1337, alleging violations as follows: sections 4b(A) and 4b(C) of the Commodities Exchange Act, 7 U.S.C. §§ 6b(A) and 6b(C), as amended by the Commodity Futures Trading Commission Act of 1974, Pub.L.No.93-463, 88 Stat. 1389 (1974), and the Futures Trading Act of 1978, Pub.L.No.95-405, 92 Stat. 865 (1978) hereinafter referred to as CEA; section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a-78hh hereinafter referred to as the 1934 Act; and Rule 10b-5 promulgated under the 1934 Act. Plaintiffs also contend this Court has pendant jurisdiction over those causes of actions based upon state statutory and common law.

II.

Defendants assert as a ground for dismissal of the federal securities law claims that a commodity futures contract is not a security within the definition of the 1934 Act. Accordingly, defendants contend plaintiffs may not rely on the federal securities laws for relief or as a basis for jurisdiction since those laws are limited in their coverage to cases involving the purchase or sale of a "security". 15 U.S.C. § 78c(10).

Whether a particular financial arrangement is considered a security or, more precisely in this case, an investment contract, within the meaning of section 3(a)(10) of the 1934 Act, 15 U.S.C. § 78c(a)(10), is usually determined by applying the standards set forth in Securities & Exchange Commission v. Howey, 328 U.S. 293, 298-99, 66 S.Ct. 1100, 1102-1103, 90 L.Ed. 1244 (1946). In Howey, the Supreme Court defined an investment contract as

a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or third party ....

Id. at 298-99, 66 S.Ct. at 1102-1103. The Howey test may be distilled into three basic elements: (1) An investment of money, (2) in a common enterprise, with (3) profits to come solely from the efforts of others. The definition is intended to be flexible and adaptable to the countless schemes "devised by those who seek the use of money by others on the promise of profits." Id. at 299, 66 S.Ct. at 1103. See also United Housing Foundation v. Forman, 421 U.S. 837, 847-54, 95 S.Ct. 2051, 2057-2058, 44 L.Ed.2d 621 (1975). The first and last elements are uncontroverted and the issue turns on whether the common enterprise element is satisfied.

Although individual commodity futures contracts are generally not considered to be securities, some courts have determined that an investment contract is formed when commodity futures accounts are managed by the seller or affiliate. See, e. g., Securities & Exchange Commission v. Continental Commodities Corp., 497 F.2d 516, 520 n.9 (5th Cir. 1974); Glen-Arden Commodities, Inc. v. Constantino, 493 F.2d 1027, 1033-35 (2d Cir. 1974); Sinva, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 253 F.Supp. 359, 365-67 (S.D.N.Y.1966). An individual commodity futures contract, being no more or less than an option, clearly lacks the common enterprise element of the Howey test. Moody v. Bache & Co., 570 F.2d 523, 525 (5th Cir. 1978). The determination of whether managed commodity accounts are investment contracts is more difficult and generally focuses on whether a horizontal or a vertical relationship between investors satisfies the common enterprise test.

Defendants submit that in the commodity futures contract area the common enterprise test must be met by proving the plaintiff is a member of a commodity pool or other horizontal arrangement of investors. This concept was set forth in Milnarik v. M-S Commodities, Inc., 457 F.2d 274 (7th Cir.), cert. denied, 409 U.S. 887, 93 S.Ct. 113, 34 L.Ed.2d 144 (1972). In that case the Seventh Circuit held that a discretionary trading account in commodity futures is not a security because such accounts lack a common enterprise: although various customers may be represented by a common agent, the customers are not "joint participants in the same investment enterprise." Id. at 276. The Milnarik horizontal commonality approach has been reaffirmed by the Seventh Circuit and adopted by other courts. Curran v. Merrill Lynch, Pierce, Fenner & Smith, 622 F.2d 216, 221-24 (6th Cir. 1980) petition for cert. filed, 49 U.S. L.W. 3053 (U.S. Aug. 9, 1980) (No. 80-203); Hirk v. Agri-Research Council, Inc., 561 F.2d 96, 99-102 (7th Cir. 1977); Berman v. Bache, Halsey, Stuart, Shields, Inc., 467 F.Supp. 311, 315-20 (S.D.Ohio 1979); Arnold v. Bache & Co., 377 F.Supp. 61, 63-65 (M.D.Pa.1973); Stevens v. Woodstock, Inc., 372 F.Supp. 654, 659 (N.D.Ill.1974); Wasnowic v. Chicago Board of Trade, 352 F.Supp. 1066, 1069-70 (M.D.Pa.1972), aff'd without opinion, 491 F.2d 752 (3rd Cir.), cert. denied, 416 U.S. 994, 94 S.Ct. 2407, 40 L.Ed.2d 773 (1974); Stuckey v. duPont Glore Forgan, Inc., 59 F.R.D. 129, 131 (N.D. Cal.1973).

Agreement on the horizontal commonality approach is not, however, unanimous. A vertical commonality approach, advanced in the leading case of Securities & Exchange Commission v. Continental Commodities Corp., 497 F.2d 516 (5th Cir. 1974), has also attracted support. In Continental Commodities the Fifth Circuit rejected the Milnarik approach in holding that a pro rata sharing of profits is not critical to a finding of commonality. Id. at 520-23. Seeking a more expansive standard that would comport with the remedial purposes of the federal securities laws, the court applied the test the Ninth Circuit¹ had used in determining whether various pyramid-type investment schemes were securities: "`a common enterprise is one in which the fortunes of the investor are interwoven with and dependent upon the efforts and success of those seeking the investment or of third parties.'" Id. at 522 (quoting Securities & Exchange Commission v. Glen W. Turner Enterprises, 474 F.2d 476, 482 n.7 (9th Cir.), cert. denied, 414 U.S. 821, 94 S.Ct. 117, 38 L.Ed.2d 53 (1973)). Criticizing the elevation of the pooling requirement to exalted status, the Fifth Circuit stated that

the critical inquiry is confined to whether the fortuity of the investments collectively is essentially dependent upon promoter expertise.... That it may bear more productive fruits in the case of some options than it does in others should not vitiate the essential fact that the success of the trading enterprise as a whole and customer investments individually is contingent upon the sagacious investment counselling of the commodities broker.

Id. at 522. This view has found support elsewhere as well. See Commercial Iron & Metal Co. v. Bache & Co., 478 F.2d 39, 42-43 (10th Cir. 1973), cert. denied, 440 U.S. 914, 99 S.Ct. 1229, 59 L.Ed.2d 463 (1979); Alvord v. Shearson Hayden Stone, Inc., 485 F.Supp. 848, 852-53 (D.Conn.1980); Troyer v. Karcagi, 476 F.Supp. 1142, 1147 (S.D.N.Y.1979); Rochkind v. Reynolds Securities Inc., 388 F.Supp. 254, 255-57 (D.Md.1975); Marshall v. Lamson Brothers & Co., 368 F.Supp. 486, 488-89 (S.D.Iowa 1974) (emphasis on "pooling" of funds in Milnarik found to be a too strict or literal limitation on definition of "investment contract"); Johnson v. Arthur Espey, Shearson, Hammill & Co., 341 F.Supp. 764, 765-66 (S.D.N.Y.1972); Berman v. Orimex Trading, Inc., 291 F.Supp. 701, 702 (S.D.N.Y.1968); Anderson v. Francis I. duPont & Co., 291 F.Supp. 705, 708-09 (D.Minn.1968); Maheu v. Reynolds & Co., 282 F.Supp. 423, 426 (S.D.N.Y.1968).

Defendants argue that the horizontal commonality approach should be followed since it more closely comports with the Howey common enterprise requirement. Furthermore, defendants assert plaintiffs have failed to satisfy this test since they have not alleged a sufficient horizontal commonality.

The Eighth Circuit addressed this issue in 1970, before either Milnarik or Continental Commodities was decided. In Booth v. Peavey Co. Commodities Services, 430 F.2d 132 (8th Cir. 1970), it was held sua sponte "that a private remedy for churning a commodity account is permitted by ... the applicable portions of the Securities Act of 1933, 15 U.S.C. §§ 77a et seq., and the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a et seq." 430 F.2d at 133. By implication, the court found that the commodity futures account constituted a security for purposes of the 1934 Act.

Defendant Peavey Company contends the relevant language in Booth is dictum as the court was addressing an issue not raised by the parties. Moreover, Peavey contends the remarks were an aside, predating the thorough consideration given to this issue recently by other...