Mullinix v. Hubbard

Citation6 F.2d 109
Decision Date27 May 1925
Docket NumberNo. 6809.,6809.
PartiesMULLINIX et al. v. HUBBARD et al.
CourtUnited States Courts of Appeals. United States Court of Appeals (8th Circuit)

Robert E. Fuhr and Arthur L. Adams, both of Jonesboro, Ark. (H. M. Cooley, of Jonesboro, Ark., on the brief), for appellants.

Henry Craft, of Memphis, Tenn., for appellees.

Before LEWIS, Circuit Judge, and VAN VALKENBURGH and FARIS, District Judges.

LEWIS, Circuit Judge.

This is an appeal from a decree foreclosing a mortgage on lands in Arkansas. Appellant Mullinix is trustee of the bankrupt estate of the mortgagor. Appellant J. T. Fargason Co. is also mortgagee, though subsequent in lien to appellees' mortgage. The defense made below and relied on here by appellants is that the indebtedness of the bankrupt, Guy F. Bryant, which his mortgage to appellees purported to secure, is a gambling debt incurred by him in dealing in cotton, and cannot be recovered. The transactions out of which Bryant's indebtedness to Hubbard Bros. & Co. arose consisted in the purchase and sale of cotton on the New York Cotton Exchange for future deliveries, made in full compliance with the rules and regulations of the exchange and United States Cotton Futures Act (Comp. St. §§ 6309a-6309v). Hubbard Bros. & Co. were and had been for many years members of the exchange, acting as brokers for customers, and they made the purchases and sales for Bryant on telegraphic orders from their branch office at Memphis, in compliance with Bryant's request, and each purchase and sale as made was at once reported to Bryant. No cotton was delivered or received, but the transactions were all closed out in keeping with the rules and regulations of the exchange, resulting in losses to Bryant, which appellees had to pay, and these, with the broker's usual commissions, made up the amount of the mortgage debt.

The principles of law to be applied to such transactions have become firmly settled by repeated decisions of the Supreme Court and this court. Irwin v. Williar, 110 U. S. 499, 4 S. Ct. 160, 28 L. Ed. 225; Embrey v. Jemison, 131 U. S. 336, 9 S. Ct. 776, 33 L. Ed. 172; Bibb v. Allen, 149 U. S. 481, 13 S. Ct. 950, 37 L. Ed. 819; Clews v. Jamieson, 182 U. S. 461, 21 S. Ct. 845, 45 L. Ed. 1183; Board of Trade v. Christie Grain Co., 198 U. S. 236, 25 S. Ct. 637, 49 L. Ed. 1031; Ponder v. Jerome Hill Cotton Co., 100 F. 373, 40 C. C. A. 416; Cleage v. Laidley, 149 F. 346, 79 C. C. A. 284; Wilhite v. Houston, 200 F. 390, 118 C. C. A. 542; Gettys v. Newburger (C. C. A.) 272 F. 209; Browne v. Thorn (C. C. A.) 272 F. 950; Id., 260 U. S. 137, 43 S. Ct. 36, 67 L. Ed. 171; Lamson v. Turner (C. C. A.) 277 F. 680; Bond v. Hume, 243 U. S. 15, 37 S. Ct. 366, 61 L. Ed. 565.

The New York Cotton Exchange affords opportunity to buy and sell cotton for future delivery, and when the business there carried on is conducted in accordance with its rules and regulations there is legitimate aid and not obstruction to commerce. When a purchase or sale is made it can only be made by members of the exchange, called brokers, from one to the other as principals to the contract, and each is bound by security theretofore required and given to carry out the contract, unless before delivery date settlement is made in keeping with the requirements of the rules and regulations. These settlements and the way in which they may be made, to be within the law, are considered and stated in the cases referred to. But each broker, in making the contract, acted also as agent for his customer who gave the order to buy or sell. That was the manner in which the purchases and sales here involved were conducted. They were made in the usual and regular way by broker's signed slips and were prima facie valid contracts. Bryant as customer gave the orders to appellees as his brokers, who filled them; no deliveries were made, they were all closed out before delivery dates, in compliance with the rules, regulations and legal requirements stated in Gettys v. Newburger, which rests on the principles announced in the cases that preceded it, all presenting transactions of the kind here. Bryant's losses first fell on appellees, which they were compelled to pay and did pay. This suit is for reimbursement.

The right of A. to sell to B. for future delivery and to buy from C. for delivery to be made at the same time is not questioned, nor the right of all of them by mutual consent to provide before delivery is due that there shall be delivery only from C. to B., where the amount and quality of the commodity in both sales is the same. A step further, if B. should make a like sale to C., why delivery at all, an idle, useless and expensive performance? Set-offs of sales against purchases and payment of the differences if any in the prices agreed on is the sensible, practicable, legal and economic procedure. The number of like transactions may be indefinitely multiplied, but as they increase adjustment by mutual consent becomes impossible without centralized agencies and a common clearing house. This and other lawful methods of adjusting and settling such transactions is the service that exchanges and their memberships render, and we find no reason to look upon them with suspicion with a view to discovering if possible some ground on which it might be said there was a secret purpose to merely gamble on the future price of the commodity, thus making them void. It is, of course, plain that facilities thus extended for legitimate business may be abused, and customer and broker intend only a wager on price of the commodity at the time named for delivery. That supposable condition is hardly conceivable here as to the broker, inasmuch as he was bound by security deposited beforehand and expulsion from the exchange to perform or adjust and settle within the law. However, to make sure of keeping transactions on the exchange within its lawful purpose the rule established in the cases supra is that if both customer and broker intended, when the purchases and sales were made, that there should be no delivery and no lawful settlement before delivery came due, but a wager whether the market would be above or below the named price on that day, it would be a gambling transaction and no recovery could be had. One cannot gamble with himself, a sinister intent must be mutual to render the formal contract void. In Irwin v. Williar, supra, an instruction to the jury was accepted as a correct statement of the law which in part read:

"A contract for the sale of personal property which the vendor does not own or possess, but expects to obtain by purchase or otherwise, is binding if an actual transfer of property is contemplated. A transaction which on its face is legitimate cannot be held void as a wagering contract by showing that one party only so understood and meant it to be. The proof must go further, and show that this understanding was mutual — that both parties so understood the transaction. If, however, at the time of entering into a contract for a sale of personal property for future delivery it be contemplated by both parties that at the time fixed for delivery the purchaser shall merely receive or pay the difference between the contract price and the market price, the transaction is a wager, and nothing more. It makes no difference that a bet or wager is made to assume the form of a contract. Gambling is none the less such because it is carried on in the form or guise of legitimate trade."

This was reannounced in Bibb v. Allen, and followed in Gettys v. Newburger and Browne v. Thorn.

Transactions on boards of trade where cotton, grain and other commodities are bought and sold are presumptively lawful and binding, and the burden is on those who challenge them as unlawful, and as being mere wagers, to establish that fact before the parties to them may be relieved from their obligations. The purchases and sales were made and closed out in New York and were all valid and lawful transactions under the laws of that State, and also under the laws of Tennessee, where Bryant first turned in his orders to buy and sell, and knew they were to be executed by the appellees as his brokers on the New York Cotton Exchange. Counsel for appellants do not deny liability if the case on its facts comes within and is to be regarded according to the rules repeatedly announced in the authorities cited; but they rely on an Arkansas statute (Act April 11, 1907 Laws 1907, p. 388 which denounces as unlawful every sale or purchase of wheat, cotton, corn or other commodity when in fact it is not in good faith intended by the parties or either of them that an actual delivery of the article or thing purchased shall be made. This Act repealed and took the place of an Act of three sections approved March 30, 1883 (Laws 1883, p. ___), which, in its first section, declared:

"That the buying or selling or otherwise dealing in what is known as futures, either in cotton, grain or anything whatsoever, with a view to profit, is hereby declared to be gambling."

The second section made a violation of the first a criminal offense. The present Act (1907) is leveled at the same evil, though more extended, consisting of sixteen sections. Its first section expresses its general purpose, declaring it to be unlawful to engage in the business commonly called dealing in futures on margins. The second section reads thus:

"That every contract or agreement, whether or not in writing, whereby any person or corporation shall agree to buy, or sell and deliver, or sell with an agreement to deliver, any wheat, cotton, corn, or other commodity, stock, bond, or other security to any person or corporation, when in fact it is not in good faith intended by the parties, or either of them that an actual delivery of the article or thing shall be made, is hereby declared to be unlawful, whether made or to be performed wholly within this State or partly within and partly without this State; it being the intent of this Act to prohibit any or all contracts and agreements...

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