Sinclair & Co., Inc. v. Gurule

• Decision Date: 01 June 1988
• Docket Number: No. 16219,16219
• Citation: 757 P.2d 225,114 Idaho 362
• Court: Idaho Court of Appeals
• Parties: SINCLAIR & COMPANY, INC., an Idaho corporation, Plaintiff-Respondent, v. Raymond GURULE, Defendant-Appellant.

Page 225

757 P.2d 225

114 Idaho 362

SINCLAIR & COMPANY, INC., an Idaho corporation, Plaintiff-Respondent, v. Raymond GURULE, Defendant-Appellant.

No. 16219.

Court of Appeals of Idaho.

June 1, 1988.

[114 Idaho 363] Gleason D. Anderson, Burley, for defendant-appellant.

Harry Turner, Twin Falls, for plaintiff-respondent.

SWANSTROM, Judge.

Sinclair & Company, Inc., a futures commission merchant, obtained a judgment against Raymond Gurule for the debit balance of his customer account. On appeal, Gurule contends: the district court lacked subject matter jurisdiction; Sinclair's claim is not enforceable as a matter of public policy; Sinclair has no corporate authority to engage in the business of commodity trading or futures contracts; and the district court erred in refusing to quash Sinclair's writ of attachment. We affirm.

On February 2, 1983, Gurule executed a customer agreement with Sinclair, under which a trading account was opened in his name. For the next seven months, Gurule used the services of Sinclair to enter into a series of buying and selling silver futures contracts. The traditional futures contract is an agreement between a seller (called a "short") and a buyer (called a "long") that the seller will deliver a commodity to the buyer at a time and price specified in the agreement, and the buyer will accept and pay for the commodity at the specified time. 1 PHILLIP M. JOHNSON, COMMODITIES REGULATION § 1.03 at 8 (1982) (hereinafter cited as JOHNSON).

While futures contracts create a right to deliver or demand delivery, it is uncommon for the parties to exercise that right. Instead, approximately ninety-five percent of all futures contracts are extinguished through a market operation called "offset." Under this procedure, a party to a contract will enter the market a second time to acquire the same type of contract but bearing an obligation opposite to his first transaction. These two transactions are said to offset each other and the party is excused from both obligations. If a market price movement has occurred between the first and second transactions, however, so that different contract prices are involved, offset will not be complete until the money difference is settled. JOHNSON, supra, § 1.04 at 9. Gurule neither made nor took delivery of any silver; rather, each contract was settled by an offsetting transaction on the New York Commodity Exchange.

In August of 1983, Gurule bought three silver futures contracts with a December delivery date. During his ownership of these contracts the price of silver dropped dramatically. On October 5, 1983, Gurule sold his three futures contracts, realizing a loss of $43,600 which resulted in a debit balance in his customer account of $18,275. Sinclair was obligated to cover the debit balance and sued Gurule to recover it.

In November, 1984, Gurule moved to dismiss the action for lack of subject matter jurisdiction, and petitioned for removal to the United States District Court for Idaho. Gurule's motion to dismiss was denied, and the United States District Court for Idaho remanded the matter to the state court. The case proceeded to trial, resulting in judgment for Sinclair. Gurule timely filed notice of appeal and, pursuant to I.C. § 31-3220(1), requested a waiver of prepayment of fees and costs for appeal, claiming he was indigent. The district court determined that waiver of fees and costs was not appropriate and certified that Gurule's Gurule's issues on appeal present questions of law; in reviewing such questions we exercise free review. Standards of Appellate Review in State and Federal Courts, IDAHO APPELLATE HANDBOOK § 3.2 (Idaho Law Foundation, Inc. 1985).

[114 Idaho 364] appeal was not taken in good faith. See I.C. § 31-3220(2).

JURISDICTION

Gurule's challenge to the district court's subject matter jurisdiction is three-fold. First, Gurule maintains that the Commodity Exchange Act, 7 U.S.C. §§ 1 through 26, vests exclusive jurisdiction in all commodity trading actions in either the Commodity Futures Trading Commission or the federal district courts. Second, Gurule asserts that under the customer agreement the Illinois courts are the proper forum for this action. Finally, Gurule submits that no contract exists between the parties.

For ease of analysis we begin by examining Gurule's claim that no contract exists. Gurule asserts broadly that the "customer's agreement" which he signed at Sinclair's request is not a "contract" and Sinclair did not intend it to be a contract between the parties. In spite of this latter assertion, Gurule raises no real factual issue about either party's intentions. The only legal issues raised concerning the agreement, which need be discussed, are whether the contract is valid and enforceable in Idaho state courts. We will turn to those issues.

The question whether federal law preempts state actions is a question of law. The 1974 Commodity Exchange Act (CEA) created the Commodity Futures Trading Commission (CFTC) and granted the CFTC "exclusive jurisdiction" over the regulation of commodities. This preempted all would-be regulators at every level of government. See Mallen v. Merrill Lynch Futures, Inc., 623 F.Supp. 203 (N.D.Ga.1985). While Congress granted the CFTC exclusive regulatory jurisdiction, it also provided broader judicial jurisdiction: "Nothing in this section shall supersede or limit the jurisdiction conferred on courts of the United States or any State." 7 U.S.C. § 2. Gurule also cites 7 U.S.C. § 25 as providing exclusive federal court jurisdiction. That section provides federal district courts with original jurisdiction for actions "brought under this section." See 7 U.S.C. § 25(c).

Several federal and state courts have concluded that state common law claims are not preempted by the CEA. See Kerr v. First Commodity Corp. of Boston, 735 F.2d 281 (8th Cir.1984); Mallen v. Merrill Lynch Futures, Inc., supra; Zieg v. Shearson/American Express, Inc., 592 F.Supp. 612 (E.D.Va.1984); Patry v. Rosenthal & Company, 534 F.Supp. 545 (D.Kan.1982); Rupert v. Clayton Brokerage Co. of St. Louis, Inc., 705 P.2d 988 (Colo.App.1985), rev'd on other grounds, 737 P.2d 1106, (Colo.1987); Schlatter v. Mo-Comm Futures, Ltd., 233 Kan. 324, 662 P.2d 553 (1983). The CFTC is not authorized to entertain claims other than those alleging violations of the CEA or CFTC regulations. State courts have subject matter jurisdiction over traditional contract actions, a garden variety matter of state common law. Schor v. Commodity Futures Trading Commission, 740 F.2d 1262 (D.C.Cir.1984), vacated and remanded, 473 U.S. 922, 105 S.Ct. 3551, 87 L.Ed.2d 674 (Mem.) (1985), reinstated, 770 F.2d 211 (D.C.Cir.1985) (construing Thomas v. Union Carbide Agricultural Products Co., 473 U.S. 568, 105 S.Ct. 3325, 87 L.Ed.2d 409 (1985)), cert. denied, 474 U.S. 1083, 106 S.Ct. 853, 88 L.Ed.2d 893 (1986). We agree with these decisions and hold that the CEA has not preempted this contract action.

Finally, Gurule claims that the parties agreed to be subject to the jurisdiction of Illinois courts, not Idaho courts. This is based on a clause in the customer agreement that states: "The provisions of this agreement shall in all respects be construed according to, and the rights and liabilities of the parties hereto shall in all respects be governed by, the laws of the state of Illinois." This boilerplate clause merely specifies the applicable substantive law; it does not purport to confer exclusive jurisdiction on the Illinois courts. See Sall v.

G.H. Miller & Co., 612 F.Supp. 1499 (D.Colo.1985) (construing a clause with similar language). Idaho district courts have original jurisdiction over claims arising from contracts executed within this state for the purpose of transacting any business within this state. IDAHO CONST. art. V, § 20. Compare I.C. § 5-514 (acts providing personal jurisdiction). We hold that the district court had subject matter jurisdiction in this case. We have not been presented with any issue involving a conflict between Idaho and Illinois substantive law.

ENFORCEABILITY OF CONTRACT

Gurule maintains that futures transactions, in which delivery of the commodity is not intended, constitute gambling and wagering. Such contracts, he claims, are void and unenforceable as against public policy. This presents a question of law.

The United States Supreme Court has held that offsetting transactions on the exchange have the legal effect of a delivery and thus are not invalidated by state wagering statutes. Board of Trade v. Christie Grain and Stock Co., 198 U.S. 236, 25 S.Ct. 637, 49 L.Ed. 1031 (1905). Moreover, with passage of the CEA, the federal government has moved to occupy the entire field of commodities futures traded on federally regulated exchanges. The purpose is to foster commodity markets. Consequently, a state should not treat commodity transactions as "gambling" because such treatment could destroy the market. See Paine, Webber, Jackson & Curtis, Inc. v. Conaway, 515 F.Supp. 202 (N.D.Ala.1981). We decline to hold that commodity transactions are unenforceable as a matter of public policy. We think just the opposite is true.

Furthermore, we find the contract here was enforceable.

In futures contracts, whether satisfied by offset or delivery, the party is responsible for the total change in value of the contract while he owned it. For instance, if a person acquires a silver futures contract to buy the commodity at $20 per ounce, and the price of silver declines to $15 per ounce during his ownership of the contract, he will be obligated--whether on offset or delivery--for the entire $5 per ounce loss that he has incurred. [Emphasis original.]

JOHNSON, § 1.07 at 17. Under the customer agreement executed by Gurule, he agreed to "discharge all his obligations" and "pay in full his debit balance or indebtedness" to Sinclair. We hold that Sinclair had an enforceable contract claim against Gurule.

SINCLAIR'S AUTHORITY

Gurule...