Crowley v. Commodity Exchange

• Decision Date: 01 March 1944
• Docket Number: No. 167.,167.
• Citation: 141 F.2d 182
• Parties: CROWLEY, Allen Property Custodian, v. COMMODITY EXCHANGE, Inc., et al.
• Court: U.S. Court of Appeals — Second Circuit

141 F.2d 182 (1944)

CROWLEY, Allen Property Custodian, v. COMMODITY EXCHANGE, Inc., et al.

No. 167.

Circuit Court of Appeals, Second Circuit.

March 1, 1944.

Lemuel Skidmore, Sp. Asst. to Atty. Gen. (James B. M. McNally, U. S. Atty., of New York City, George A. McNulty, Chief, Alien Property Unit, War Division, Department of Justice, and A. Matt Werner, Gen. Counsel to Alien Property Custodian, both of Washington, D. C., on the brief), for plaintiff-appellant.

Donald Marks, of New York City (Baer & Marks and Julius B. Baer, all of New York City, on the brief), for defendants-appellees.

Before SWAN, CLARK, and FRANK, Circuit Judges.

CLARK, Circuit Judge.

This action was commenced on October 20, 1941, by Mitsui & Co., Ltd., a Japanese corporation, to enjoin the Commodity Exchange, Inc., and the Commodity Exchange Silk Clearing Association, Inc., from carrying out an alleged resolution of the Board of Governors of the Exchange of October 15, 1941, directing the liquidation and settlement of all outstanding raw silk contracts made on the Exchange at prices ranging from $3.55 to $3.65 per pound, and also to recover $150,949.50 paid to the Clearing Association by five brokers for the account of plaintiff as variation margins on 180 of plaintiff's raw silk future sales contracts. Upon the outbreak of the war with Japan, Mitsui became an alien enemy; and by an order issued August 17, 1942, title to its property and assets in the United States were vested in the Alien Property Custodian, who was thereupon substituted as plaintiff in this suit. After a trial the District Court dismissed the complaint and vacated the injunction which had been issued pending the action by consent. From this judgment plaintiff has appealed.

The defendant Exchange is a New York membership corporation which, prior to July 28, 1941, furnished facilities for trading in various commodities, including raw silk. The defendant Clearing Association is a New York stock corporation, the stock in which is owned by approximately thirty-six of its members, also members of the Exchange, who are known as "clearing members." In order to place contracts for the purchase and sale of raw silk futures on the Exchange it is necessary to act through the Clearing Association. Mitsui & Co., although a large dealer in raw silk futures, was neither a member of the Exchange nor a clearing member, possessing only what were known as revocable "corporation privileges," which granted the right to transact business at member rates of commission. All of its contracts were hence carried through five clearing members.

On July 25, 1941, when Mitsui was short 418 raw silk contracts on the Exchange, having sold for delivery in various future months a total of 4,180 bales of raw silk, the Office of Production Management in Washington issued General Preference Order M-22 to the effect that no person should thereafter deliver or accept delivery of raw silk unless authorized by the Director of Priorities. The following day, a Saturday, when the silk market was closed, the Exchange received a request from the Price Administrator in Washington to suspend all trading in silk. On Monday morning, July 28, therefore, the Board of Governors voted by unanimous vote of the seventeen members present to suspend trading in raw silk futures and deliveries pursuant thereto. Later the same week, on August 2, the Office of Price Administration and Civilian Supply issued Price Schedule 14 fixing the ceiling price for raw silk at $3.08 per pound, a considerable drop from the last trading price on the Exchange, which on July 25 had ranged from $3.55 to $3.65, depending on the delivery month. On August 11, the Governors of the Exchange met again and by a vote of nineteen to none adopted a resolution providing for the liquidation of all open silk contracts and authorizing the President, pursuant to § 409 of the By-Laws, to appoint a special committee to investigate the open position and to hold hearings, to which interested members should be invited, in order that the manners and terms upon which such open contracts should be liquidated might be determined by the Board. After hearings upon notice to all members and investigation, this committee reported back that the liquidation should be on the basis of the closing prices of July 25.

The Board of Governors, with twenty of the twenty-eight members present, met on October 15, 1941, to consider the committee's report. It was decided, by a vote of thirteen to four, that the liquidation of the raw silk contracts should be carried out through the fixing of a settlement price and, by a vote of sixteen to none, that the settlement date should be October 22, 1941. An amendment to the resolution for approval of the report was proposed that the price should be pegged at $3.08 per pound, the OPA price ceiling; but this amendment was defeated, seven to ten, and instead, the resolution approving the committee's recommendation was adopted by a vote of nine to seven, four members registering themselves as not voting. After this vote one member from the minority requested that the Board interpret § 409 of the By-Laws to determine whether the resolution required a majority or a two-thirds vote, whereupon another minority member moved that it was the interpretation of the Board that only a majority was necessary to put into effect the recommendations of a committee appointed under § 409. The chair, after consulting counsel, ruled the motion out of order. Then, immediately and apparently without further discussion, the meeting unanimously adopted a resolution that upon the settlement and liquidation of outstanding contracts for silk the prescribed commissions for buying and selling should be charged.

These actions of the Board of Governors were damaging to Mitsui & Co., because its short contracts, originally purchased at prices which the court found averaged $2.88 per pound, were liquidated at prices between $3.55 and $3.65 per pound, and it was also left with physical raw silk which could only be sold to the Government at the ceiling price of $3.08. By stipulation made after the action was brought and approved by the court, Mitsui was permitted to liquidate by private settlement such of these contracts as it could; and it did make such settlements, obtaining the release of the margins previously put up, for all but 180 of its contracts.¹ It is these contracts and the protecting margins which are now the subject of the claims of law made in its behalf. The claims are that the Board had no authority under the By-Laws of the Exchange to suspend trading and other liquidation; that the resolution of October 15, 1941, setting the liquidation price was not accepted by the number of votes required by New York law and § 409 of the By-Laws; that the performance of plaintiff's outstanding contracts was rendered illegal by General Order M-22, thereby rendering them invalid and unenforceable from their inception; and that such liquidation proceedings would, if carried out, violate the National Defense Act and Regulation No. 1 of the Office of Production Management. The first two of these four objections to the action of the Exchange comprise the real crux of the case.

The action of the Board of Governors regarding silk futures can be roughly divided into two steps. Trading in silk on the Exchange was first suspended, under the general authority of the Board, at the meeting of July 28; the liquidation procedure was then established at the meetings of August 11 and October 15, pursuant to the powers granted in § 409 of the By-Laws. There is no doubt of the general power of the Board of Governors of the Exchange to compel members and their customers to cease trading and accept a reasonable settlement of their contracts. In Thomson v. Thomson, 315 Ill. 521, 146 N.E. 451, the Illinois Supreme Court held that a rule of the Chicago Board of Trade conferring upon its Board of Directors the power to regulate "the use of the Exchange rooms" was sufficient authority for the Board to suspend trading in corn futures after the entry of the United States into World War I and order the settlement of all open contracts at a reasonable price. This doctrine was expressly affirmed in Garcia Sugars Corp. v. New York Coffee & Sugar Exchange, Inc., Sup., 7 N.Y.S. 2d 532, affirmed w. o. op. sub nom. Rifkind v. New York Coffee & Sugar Exchange, Inc., 258 App.Div. 871, 16 N.Y.S.2d 1023, regarding a suspension of sugar trading due to the operation of the Jones-Costigan Quota Law. In the present case, § 103 of the By-Laws grants to the Board of Governors control over the Exchange rooms and power to "adopt such rules and regulations as it may deem advisable for carrying out the objects of the Exchange"; and § 408 gives the Board power with or without notice to close the Exchange for trading or all business or to suspend trading, "as may, in its judgment, serve to promote the best interests of the Exchange or of the public." Hence the resolution of July 28 ordering the suspension of trading was undoubtedly valid.

Under the authorities cited, the general corporate authority of the Governors would also sanction the liquidation procedure; but since § 409 of the By-Laws deals specifically with the matter of liquidation, it must be considered a limitation upon the terms of any general law. Each corporation certainly has the power to delimit by provision in the by-laws the power of its board of governors, and it is § 409 which the Board purported to follow in settling the details of liquidation. Hence we test the validity of the resolutions passed at the August 11 and October 15 meetings of the Board in the light of its provisions. It first provides, "Whenever it shall appear" that a situation exists which "may endanger the normal functioning of the Exchange or of the market, or that conditions have arisen that jeopardize the maintenance of a free, open and orderly market, or that jeopardize the...