Ping He (Hai Nam) Co. v. Nonferrous Metals

• Decision Date: 10 September 1998
• Docket Number: No. 94 CIV. 4105(SS).,No. 94 Civ. 6161(SS).,94 CIV. 4105(SS).,94 Civ. 6161(SS).
• Citation: 22 F.Supp.2d 94
• Parties: PING HE (HAI NAM) COMPANY LIMITED, an alien corporation, Plaintiff, v. NONFERROUS METALS (U.S.A.) INC., a New York corporation, Defendant. NONFERROUS METALS (U.S.A.) INC., a New York corporation, Plaintiff, v. AGRICULTURAL BANK OF CHINA, an alien corporation, Defendant.
• Court: U.S. District Court — Southern District of New York

22 F.Supp.2d 94

PING HE (HAI NAM) COMPANY LIMITED, an alien corporation, Plaintiff, v. NONFERROUS METALS (U.S.A.) INC., a New York corporation, Defendant.

NONFERROUS METALS (U.S.A.) INC., a New York corporation, Plaintiff, v. AGRICULTURAL BANK OF CHINA, an alien corporation, Defendant.

No. 94 CIV. 4105(SS).

No. 94 Civ. 6161(SS).

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

September 10, 1998.

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Curtis, Mallet-Prevost, Colt & Mosle, Samuel Rosenthal, Eliot Lauer, New York, for Plaintiff Ping He (Hai Nam), Company Limited and Agricultural Bank of China.

Tang & Associates, P.C., Weihua Tang, New York, for Defendant NonFerrous Metals (U.S.A.) Inc.

MEMORANDUM ORDER AND OPINION

SOTOMAYOR, District Judge.

The two instant actions arise from a dispute between plaintiff Ping He (Hai Nam) Company Limited ("Ping He") and defendant NonFerrous Metals (U.S.A.) Inc. ("NFM") over a commodity futures trading account opened by Ping He with NFM in 1993. Ping He moves for summary judgment pursuant to Fed.R.Civ.P. 56, seeking the return of $350,000 it deposited into the account, on the grounds that NFM defrauded Ping He into opening the account, engaged in unauthorized trading, falsified an invoice, and misappropriated Ping He's funds, all in violation of the Commodity Exchange Act, 7 U.S.C. § 1 et seq., and the regulations promulgated thereunder. In opposing the motion, NFM claims that Ping He owes it more than $650,000 in trading losses, and that triable issues of fact prevent the granting of summary judgment.

In the related action, defendant Agricultural Bank of China ("Bank of China") moves for summary judgment against NFM. NFM sues Bank of China for refusing it access to two letters of credit, totaling $800,000, which Ping He had established in favor of NFM upon opening the trading account. Bank of China now seeks dismissal of the action, arguing that it properly refused NFM access to the funds because NFM presented the Bank with fraudulent documentation.

Finally, by separate motion, Ping He and Bank of China, who are represented by the same counsel, jointly move for sanctions against NFM and NFM's counsel, pursuant to Fed.R.Civ.P. 11, based upon their alleged misconduct during this litigation.

For the reasons discussed, the Court grants Ping He's and Bank of China's respective motions for summary judgment, and imposes sanctions upon NFM's counsel.

BACKGROUND

The following facts are undisputed. Ping He and NFM are both entities owned by the People's Republic of China. Ping He is a foreign corporation with its principal place of business in China. NFM, although owned by the Chinese government, is a New York corporation with its principal place of business in Manhattan. NFM holds itself out as being in the business of soliciting orders for the purchase and sale of commodity futures. Once an order is placed with NFM, NFM arranges for the order to be executed on American and foreign markets through registered floor brokers. NFM, however, is not and has never been registered with the Commodity Future Trading Commission ("CFTC"), or with any federal or state regulatory body in the United States, in any capacity.

In or about April 1993, Ping He agreed to open a futures trading account with NFM. The parties did not reduce their agreement to writing. However, pursuant to their oral agreement, all trades were to be non-discretionary, meaning that NFM was only authorized to execute trades for Ping He upon the express instructions of Ping He or Ping He's designated agent. Toward that end, by letter dated April 27, 1993, Ping He advised NFM that it was authorizing Mr. Li Zheng of China National Metal Products Co. ("China Metals") to act as Ping He's agent in all matters relating to its futures trading account. (See Ex. 2 to Li Dep.). In the letter, Ping He specified that China Metals was authorized "to do some future business of metal products directly or through some agent with you on our behalf." Id. (emphasis added).

Also in connection with opening the account, on April 19 and April 23, 1993, Ping He established two standby letters of credit in favor of NFM with Bank of China, in the amounts of $300,000 and $500,000, to cover trading margin maintenance, losses and expenses associated with the account. The terms of the letters of credit provided that NFM could draw upon the funds only after presenting Bank of China with certain documentation, including (i) a signed declaration by NFM stating that the amount being drawn was owed to NFM in relation to Ping He's commodity dealings, and (ii) a certified copy of a telex dispatched to Ping He within five working days prior to drawing from the standby letters of credit. (See Ex. A to Rosenthal Aff.) In May 1993, Ping He also made an initial deposit of $50,000 into the account held by NFM.

Unfortunately, nearly all facts concerning what actually happened to Ping He's trading account after it was opened are in dispute, including: whether NFM conducted any trading for Ping He; when such trading began and ended; whether trades on Ping He's account were authorized or unauthorized; and whether trades conducted for Ping He resulted in profits or losses. The parties additionally dispute whether Ping He knew when it opened the account that NFM was not registered with the CFTC.

What is clear and uncontroverted, however, is that on May 4, 1993, NFM tried to draw down on the two letters of credit, claiming that Ping He had lost $800,000 as the result of trading. Bank of China refused NFM access to the funds. Approximately one month later, on June 8, 1993, China Metals sent NFM a fax suspending the account. The letter stated:

We are very pleased to see that we have made a little profits [sic] through those deals done with your brokerage.... As a result of our internal arrangements, we would like to inform you that we have suspended our future trading account with your brokerage effective from today. Therefore, the said standby L/Cs [letters of credit] will be canceled by an official notice given tomorrow [to Bank of China].

(Ex. C to Rosenthal Aff.) China Metals' June 8 letter also requested that NFM provide it with a list of all trades executed on the account, together with a list of all commissions charged. Id.

Soon afterwards, NFM sent China Metals an account invoice, dated June 16, 1993 (hereafter "the June 16 invoice"). (Ex. D to Rosenthal Aff.) The June 16 invoice stated that $344,893 was due on Ping He's account (not $800,000, as NFM had contended when it sought to draw upon the letters of credit). That figure consisted of $104,500 in alleged trading losses and $240,393 in commissions and interest, for trading activity between the dates of April 22 and April 29, 1993. Thereafter, NFM repeatedly wrote to China Metals in June and July of 1993, demanding payment of the $344,893. (See June 28, June 30, and July 8, 1993 letters from NFM to China Metals; Ex. E to Rosenthal Aff.) Several months later, on December 9, 1993, Ping He wired NFM the sum of $300,000. It is also undisputed that at some point during 1993, NFM converted for its own use Ping He's $50,000 initial deposit.

Ping He brought the instant suit against NFM on June 2, 1994, claiming that NFM defrauded it at every step of their dealings. First, Ping He claims, NFM misrepresented itself as a registered commodity broker in order to induce Ping He to open an account with NFM. (Complaint ¶ 7.) Ping He further claims that, after the account opened, neither it nor China Metals ever authorized NFM to execute trades on its behalf, but that NFM nevertheless improperly charged it for large trading losses. According to Ping He, NFM either engaged in unauthorized trading on Ping He's account, charged Ping He for fictitious trades, or fraudulently allocated to Ping He's account losing trades that had been undertaken for other customers. Whichever was the case, Ping He contends that NFM's fraudulent conduct is evinced by the fact that NFM has been unable to produce any records reflecting trades ordered by Ping He or China Metals, or showing that the losing trades charged to Ping He were in fact made for Ping He's account. In addition, Ping He contends that NFM falsified the June 16 invoice, charged it grossly excessive commissions in violation of their agreement, and presented fraudulent documents to Bank of China in an attempt to draw upon the two standby letters of credit. Finally, Ping He contends that documents produced by NFM during discovery show that any trades conceivably executed by NFM on Ping He's behalf resulted in profits, not losses. By its Complaint, Ping He seeks the return of the $350,000 it paid NFM (the $50,000 May 1993 payment and the $300,000 December 1993 payment) based upon NFM's alleged fraud, unauthorized trading, conversion of funds, breach of contract and breach of fiduciary duty.

Not surprisingly, NFM offers a rather different version of events. While conceding that it never received trading instructions from Ping He or China Metals (see Wang Aff. ¶ 31), NFM maintains that all of the trades it conducted for Ping He were authorized by NonFerrous B.M. Corp. ("B.M.Corp."), a private New Jersey corporation (unrelated to NFM and Ping He) that China Metals allegedly retained to give trading instructions for Ping He's account. In effect, NFM claims that a two-tiered agency structure existed: Ping He authorized China Metals to act as its agent, which in turn authorized B.M. Corp. to act as its agent. NFM contends that it traded for Ping He upon the specific instructions of B.M. Corp., that it kept track of the trades for Ping He in an account labeled the "ZZ" account, and that such trades resulted in large losses. Furthermore, NFM maintains that Ping He knew from the outset that NFM was not registered with the CFTC. According to NFM, it had no reason to misrepresent its registration status because it was at...