Mg Refining & Marketing v. Knight Enterprises, 94 CIV. 2512(SS).

• Decision Date: 26 October 1998
• Docket Number: No. 94 CIV. 2512(SS).,94 CIV. 2512(SS).
• Citation: 25 F.Supp.2d 175
• Parties: MG REFINING & MARKETING, INC., Plaintiff, v. KNIGHT ENTERPRISES, INC. et al., Defendants.
• Court: U.S. District Court — Southern District of New York

25 F.Supp.2d 175

MG REFINING & MARKETING, INC., Plaintiff, v. KNIGHT ENTERPRISES, INC. et al., Defendants.

No. 94 CIV. 2512(SS).

United States District Court, S.D. New York.

October 26, 1998.

Kaye, Scholer, Fierman, Hays & Handler, L.L.P., New York City, Randolph S. Sherman, Robert B. Bernstein, Jenny Pearlman, Roderick W. Chin, for Plaintiff.

Bode & Beckman, L.L.P., Washington, D.C., William H. Bode, James M. Ludwig, Daniel E. Cohen, Lane & Mittendorf, New York City, for Defendants.

OPINION AND ORDER

SOTOMAYOR, District Judge.

These cross-motions for summary judgment arise from a dispute between MG Marketing & Refining, Inc. ("MG") and eighteen of its customers, including Knight Enterprises, Inc. (collectively the "Customers"), in which the Customers allege breaches of certain 45-day contracts. In its pleadings, MG has admitted non-performance but asserts the affirmative defenses of illegality and impossibility. MG now moves for summary judgment on the ground that the contracts at issue were illegal and therefore void. The Customers move for summary judgment dismissing MG's illegality and impossibility defenses.

For the reasons discussed below, this Court denies both parties' motions with respect to the defense of illegality, and grants the Customers' motion with respect to the defense of impossibility.

BACKGROUND

The following facts are not disputed in any material way. The Customers are commercial entities that either use or engage in business activity relating to the wholesale, retail, supply, storage or distribution of diesel fuel and other petroleum products. (See Def.'s Rule 56.1 Statement ¶¶ 1-18.) MG was at one time the primary operating subsidiary of MG Corporation, and was at all relevant times herein a trader, distributor and marketer of oil and other oil related products. (See Def.'s Rule 56.1 Statement ¶ 19.)

Beginning as early as December 1991 and continuing through December 1993, MG marketed and sold to the Customers certain long-term contracts for the delivery of unleaded gasoline or heating oil at a fixed price and over a term of five or ten years. Without the use of a regulated exchange market, the parties entered into agreements with an aggregate stated volume of 160 million barrels by the end of 1993. The contracts themselves came in two forms. Under the first kind (the "ratables"), the Customers were required to take monthly deliveries on a ratable basis, and MG was required to meet the stated requirements. Except in a few cases where ratables were repudiated early in 1994, physical delivery occurred regularly under these contracts, (see Def.'s Rule 56.1 Statement ¶ 27), and all of the Customers had the physical capacity to take these deliveries.

The second kind of contract (the "flexie" or "45-day contract") was nearly identical to the first, but the delivery requirements were modified to read as follows:

Delivery under this Agreement shall be made no earlier than the Term Commencement Date and no later than the Term End Date. Purchaser shall notify Seller in writing of each Lifting date, which shall be no earlier than forty-five (45) days after such written notification has been received by Seller. Such written notice shall also include the quantity of the Product to be transferred from Seller to Purchaser on such Lifting Date. If as of the day that is forty-five (45) days prior to the Term End Date (the "Last Notice Date"), Purchaser has not provided Seller with written notice of the Lifting Date with respect to any quantity of Product remaining to be delivered as of such Last Notice Date, the Lifting Date for such quantity of undelivered Product shall be the Term End Date

(E.g., Pl.'s Mem. Ex. 2 at ¶ 2.) Although MG sold flexies to the Customers with an aggregate stated volume of approximately 60 million barrels, none of the Customers has ever requested physical deliveries under a flexie, and few, if any, had the capacity to take the full stated volumes all at once. (See Def.'s Rule 56.1 Statement ¶ 8.)

Both the ratables and the flexies also contained a provision (the "blow out" provision), which allowed the Customers to cash out their contracts and terminate any remaining delivery requirements in the event of a "price spike" — i.e., if the price of petroleum futures on the New York Mercantile Exchange ("NYMEX") rose higher than a level stated in the contracts. This provision reads as follows:

At any time during the Term of this Agreement that the Fixed Cash Price is less than the bid price for the applicable NYMEX Futures Contract ..., Purchaser may, in lieu of accepting all or part (in lots of 42,000 gallons) of the remaining deliveries of Product, accept cash payments from Seller based on the average of bid prices obtained by Seller in totally or partially liquidating its long hedge positions for this Agreement (the "Average Bid Price") in the applicable NYMEX Futures Contract.... Upon Purchaser's receipt of cash payments from Seller representing all of the remaining deliveries of Product, Seller shall have no obligation to deliver any further Product under this Agreement and this Agreement shall terminate.

(E.g., Pl.'s Mem. Ex. 2 at ¶ 16(a) (flexie language); Def.'s Mem. Ex. 45 ¶ 16(a) (ratable language).) The contracts specified that "[t]he cash payment to be received by Purchaser shall be an amount equal to [either 100% or 50%, depending on whether this is a flexie or a ratable, respectively, of] the product of the number of gallons represented by the long hedge positions to be liquidated multiplied by the difference between the Average Bid Price for the applicable NYMEX Futures Contract and the Fixed Cash Price." (E.g., Pl.'s Mem. Ex. 2 at ¶ 16(a) (flexie language); Def.'s Mem. Ex. 45 ¶ 16(a) (ratable language).)

Relations between the parties continued normally and without interruption until 1994, when the CFTC's Division of Enforcement began investigating the flexies and announced in November that they might be illegal off-exchange futures contracts. The Commodity Exchange Act ("CEA"), 7 U.S.C. § 1 et seq., requires that futures contracts be marketed and entered into only through certain designated "contract markets," which meet very specific CEA requirements. To call the flexies "illegal off-exchange futures contracts" is thus to suggest that they are illegal because they are futures contracts, subject to CEA regulation, but were entered into without the aid of a contract market.

These investigations continued for some time, until MG submitted an offer of settlement that the CFTC accepted, and which was formally entered into on July 27, 1995. The resulting order stopped the initiation of any full-scale enforcement proceedings against MG, assessed MG a $2.25 million penalty, established a series of oversight requirements for the corporation, declared the contracts to be "illegal off-exchange futures contracts", and required MG to certify within five days that it had notified "all Purchasers of existing 45 Day Agreements that the Commission has entered this Order finding that the 45 Day Agreements are illegal and therefore void ... and directing [MG] to cease and desist from violating" the relevant sections of the CEA. (See Pl.'s Mem. Ex. 1, at 8-11 (hereinafter "CFTC Order").) On July 27, 1995, MG's President issued letters to the Customers explaining the CFTC's Order and claiming that MG was "barred ... from performance" under the flexies. (See, e.g., Def.'s Mem. Ex. 94.) In 1996, when the NYMEX reference price exceeded the fixed contract price, every Customer wrote in to MG and asked to exercise their contractual rights to cash out all of their flexies. (See Pl.'s Rule 56.1 Statement ¶ 10.) MG refused to perform.

Although disputes between the present parties began as early as April 8, 1994, when MG filed its original complaint against Knight Enterprises on a related matter, the Court consolidated all of the Customers' actions for pre-trial purposes on March 11, 1996. By then, the Customers had alleged breach of the 45-day contracts, and MG subsequently responded to these claims by moving to dismiss. In its motion, MG argued that the Customers were collaterally estopped from denying an affirmative defense of illegality because the CFTC had already declared the flexies illegal and therefore void, that the present action amounted to an illicit collateral attack on the CFTC Order, and that MG could not be held liable for damages because the Order made performance under the flexies impossible. The Customers countered that MG was judicially estopped from asserting the illegality of the flexies because MG had advanced an inconsistent position in a prior arbitration proceeding. The Customers also argued that MG waived its right to deny the legality of the flexies under the express terms of the contracts.

On January 22, 1997, this Court denied MG's motion to dismiss. See In re MG Refining & Marketing, Inc. Litigation, No. 94 Civ. 2512(SS), 1997 WL 23177 (S.D.N.Y. 1997). The Court held that although the CFTC Order declared the flexies "illegal and therefore void," the Customers were not collaterally estopped from challenging this determination because they were not parties to the CFTC action and the issue of legality had never been fully adjudicated. The Court also held that the absence of any full adjudication before the Commission implied that the present action could not be considered a collateral attack at all on the CFTC's proceedings, and so certainly could not be considered an illicit one. With regard to impossibility, the Court noted that the only Second Circuit case cited in which a consent order was deemed sufficient to ground a defense of impossibility — i.e., Harriscom Svenska AB v. Harris Corp., 3 F.3d 576 (2d Cir.1993) — seemed to require a finding that the consenting party had not acted in bad faith. The Customers' evidence "that MG solicited [the] Consent Order ..., with its language declaring the 45 day agreements illegal, specifically for...