Hagstrom v. Breutman

• Decision Date: 03 October 1983
• Docket Number: No. 83 C 476.,83 C 476.
• Parties: William HAGSTROM, Victor Berger, Edwin Falloon, and Eduardo Nijensohn, Plaintiff, v. Martin E. BREUTMAN, MEB Investments, Ltd., and Beverly Associates, Defendant.
• Court: U.S. District Court — Northern District of Illinois

572 F. Supp. 692

William HAGSTROM, Victor Berger, Edwin Falloon, and Eduardo Nijensohn, Plaintiff, v. Martin E. BREUTMAN, MEB Investments, Ltd., and Beverly Associates, Defendant.

No. 83 C 476.

United States District Court, N.D. Illinois, E.D.

October 3, 1983.

Gregory A. Adamski, Martin A. Schultz, Winston & Strawn, Chicago, Ill., for plaintiff.

Dennis A. Bell, P.C., Chicago, Ill., for defendant.

MEMORANDUM OPINION

WILL, District Judge.

This is an action brought under section 4b of the Commodity Exchange Act ("CEA"), 7 U.S.C. § 6b and 28 U.S.C. § 1331, alleging fraud. In addition, as pendent state claims, plaintiffs charge, among other things, breach of fiduciary duty and unjust enrichment. Defendants have moved, pursuant to Rule 12(b), Fed.R.Civ.P., for the entry of an order dismissing plaintiffs' complaint. Defendants claim that 1) we lack jurisdiction over the subject matter of this suit¹; 2) plaintiffs have failed to join a party under Rule 19²; 3) plaintiffs have failed to state a claim upon which relief can be granted; and 4) the claims asserted are claims that the parties have previously agreed to arbitrate. For the reasons hereinafter stated, we 1) grant defendants' motion to dismiss count X of plaintiffs' complaint, without prejudice; 2) deny defendants' motion to dismiss count I; 3) stay the action pending arbitration; and 4) hold that Beverly Associates ("Beverly") is a properly joined party.

I.

On January 24, 1983, plaintiffs filed a complaint pursuant to section 4b of the CEA, 7 U.S.C. § 6b, alleging that defendants had committed fraud. Plaintiffs also claimed that defendants had breached their fiduciary duty and had been unjustly enriched. On April 14, 1983, defendants moved to dismiss the complaint based upon lack of subject matter jurisdiction, failure to state a claim upon which relief can be granted, failure to join a party required to be joined under Rule 19, Fed.R.Civ.P., and because the contract between the parties provided for arbitration of any claim arising out of their agreement. (R. 10)

On April 14, 1983, we entered defendants motion to dismiss and gave plaintiffs until April 25, 1983 to file an amended complaint. (R. 12) On April 27, we granted plaintiffs' first motion for an extension of time (R. 14), and on May 5, we granted plaintiffs' motion for a second extension of time. (R. 16) On May 6, 1983, plaintiffs filed an amended complaint. (R. 17) It is this complaint which is the subject of defendants' motions.

II.

On July 15, 1978, in an Agreement of Limited Partnership of Beverly Associates ("Agreement"), the plaintiffs, and other physicians, formed a limited partnership with MEB Investments, Ltd. ("MEB"), Martin E. Breutman, also a physician, and Morris A. Kravitz, as general partners, for the purpose of investing in commodity futures. The general partners were to have exclusive management and control of the partnership business. The general partners agreed to contribute $10,000 and each of the nine limited partners, $10,000. The four plaintiffs each contributed $10,000. The corporate general partner, MEB, was entitled to receive a management fee of 22% of the aggregate net cash profits from realized commodity transactions computed on a quarterly basis and to receive 50% of the commissions charged by the exclusive broker, Rufenacht, Bromagen & Hertz, Inc. MEB is wholly owned by Breutman and was formed for the purpose of participating in the commodity futures market.

Article XVI of the Agreement contained an arbitration clause which provided that:

Any controversy or claim of any kind or nature arising out of or relating to this agreement, or the relationship of the parties by virtue of this agreement or any breach thereof, shall be settled by arbitration in accordance with the rules then existing of the American Arbitration Association, and judgment upon the award rendered may be entered in any court having jurisdiction thereof.

Article XVII states that Illinois law will apply to any matters arising between the partners.

From 1978 through January 21, 1981, the general partners, Breutman and MEB, used the limited partners', Beverly, assets to trade commodities³ on the Chicago Mercantile Exchange, the Chicago Board of Trade and the Commodity Exchange through Rufenacht, Bromagen & Hertz, Inc., with Breutman and MEB acting as the sole account executives.

III.

Plaintiffs' Amended Complaint of May 6, 1983 contains eleven counts. Counts I and X allege that defendants violated section 4b of the CEA, 7 U.S.C. § 6b⁴, by (count I) cheating and defrauding plaintiffs and by (count X) excessively trading and churning plaintiffs' account. Jurisdiction is based upon 28 U.S.C. § 1331.

The remaining nine counts are based upon alleged violations of state law. They are brought under the doctrine of pendent jurisdiction. United Mine Workers v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966). Count II alleges a duty to account for and a fiduciary duty in the conduct of commodities trading for plaintiffs' benefit. Count III alleges that Breutman breached his contracts with plaintiffs by failing to execute trades in commodity futures contracts in accordance with duly authorized instructions and by using or permitting the use of plaintiffs' assets to benefit other persons. Counts IV, V, VI and VIII allege breach of fiduciary duty. Count VII alleges that MEB breached its contract with plaintiffs by using or permitting the use of plaintiffs' assets to finance the unauthorized purchase and sale of commodities for other persons. Count IX asserts that MEB has been unjustly enriched. Count XI asks for the establishment of a constructive trust on all funds transferred to Breutman and MEB for the benefit of plaintiffs.

IV. Failure to State a Claim for Relief

Defendants have moved to dismiss Plaintiffs' Amended Complaint. First, they contend that plaintiffs fail to state a claim for relief under 7 U.S.C. § 6b, and thus we lack jurisdiction over the subject matter of this case. Defendants base this assertion on an analogy to Rule 10b-5 of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), relying on a footnote in the recent Supreme Court decision, Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 389 n. 88, 102 S.Ct. 1825, 1845 n. 88, 72 L.Ed.2d 182 (1982):

The language of § 4b is similar to that of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and this Court has recognized an implied cause of action under the Securities and Exchange Commission's Rule 10b-5 on behalf of all securities traders. Superintendent of Insurance v. Bankers Life & Cas. Co., 404 U.S. 6 at 13, n. 9 92 S.Ct. 165, 169, n. 9, 30 L.Ed.2d 128 (1971); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975) (1975). We recognized in Cannon v. University of Chicago, 441 U.S. 677 99 S.Ct. 1946, 60 L.Ed.2d 560 (1979), that the implication of a cause of action under Rule 10b-5 could be "explained historically"; "the Court explicitly acquiesced in the 25-year-old acceptance by the lower federal courts of a Rule 10b-5 cause of action." Id., at 692, n. 13 99 S.Ct. at 1954, n. 12. In terms of the number of years and the number of decisions in which an implied cause of action was recognized, the CEA action does not compare favorably with the Rule 10b-5 action. On the other hand, Congress comprehensively reexamined the CEA in 1974 and did not amend the sections under which the cause of action had been implied; no comparable legislative approval or acquiescence exists for the Rule 10b-5 remedy.

However, in the sentence immediately preceding the footnote, the Court stated that "all purchasers or sellers of futures contracts — whether they be pure speculators or hedgers — necessarily are protected by § 4b." Id. at 389, 102 S.Ct. at 1845. It also said "The legislative history of the CEA quite clearly indicates that Congress intended to protect all future traders from price manipulation and other fraudulent conduct violative of the statute." Id. at 390, 102 S.Ct. at 1845.

Defendants claim, however, that plaintiffs cannot be purchasers or sellers of the commodities futures contracts which are the subject of the alleged misconduct because under the terms of the partnership agreement Breutman had total discretion to make trades for the partnership. See Agreement, art. V, § A. In short, defendants say that plaintiffs' complaint is not "in connection with" any futures transactions, but concerns merely alleged mismanagement of a limited partnership by a general partner.

Defendants urge that claims of mismanagement of an entity, including one engaged in commodities trading, are state claims and may not be asserted under the provisions of the CEA, relying on several Rule 10b-5 cases brought under the Securities Exchange Act of 1934. The gist of their argument is that the relationship between the limited partners and the general partners is akin to that between a trust beneficiary and the trustee of a discretionary trust. In O'Brien v. Continental Illinois National Bank & Trust Co. of Chicago, 431 F.Supp. 292 (N.D.Ill.1977), aff'd in part and rev'd in part, 593 F.2d 54 (7th Cir.1979), the district court refused to read into all discretionary trusts, pursuant to Rule 10b-5, a requirement that trustees inform their beneficiaries of information prior to making investments totally within the trustees' discretion; Rule 10b-5 protects market transactions, not trust relationships. O'Brien, 431 F.Supp. at 296-97. Cf. Blackmar v. Lichtenstein, 438 F.Supp. 803, 807 (E.D.Mo. 1977), aff'd, 603 F.2d 1306 (8th Cir.1979) ("For the same reasons stated in O'Brien, any claims based upon nondisclosure by the trustee would have to fail.")

Defendants' argument is intriguing. Nevertheless, when considering a motion to dismiss, the allegations of a complaint must be viewed in the light most favorable to the plaintiff. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40...