Top of Iowa Co-Op. v. Schewe

• Decision Date: 24 March 2003
• Docket Number: No. 01-2863.,No. 01-2859.,01-2859.,01-2863.
• Citation: 324 F.3d 627
• Parties: TOP OF IOWA COOPERATIVE, an Iowa cooperative, Cross-Appellant/Appellee, v. Virgil E. SCHEWE, Appellant/Cross-Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

324 F.3d 627

TOP OF IOWA COOPERATIVE, an Iowa cooperative, Cross-Appellant/Appellee, v. Virgil E. SCHEWE, Appellant/Cross-Appellee.

No. 01-2859.

No. 01-2863.

United States Court of Appeals, Eighth Circuit.

Submitted: March 14, 2002.

Filed: March 24, 2003.

COPYRIGHT MATERIAL OMITTED

Matthew L. Benda, argued, Albert Lea, MN (Robert Malloy, on the brief), for appellant/cross-appellee.

Sean Patrick Moore, argued, Des Moines, IA (Brentno D. Soderstrum, on the brief), for appellee/cross-appellant.

Before LOKEN and JOHN R. GIBSON, Circuit Judges, and GOLDBERG,¹ Judge.

GOLDBERG, Judge.

Appellant Virgil E. Schewe ("Schewe") appeals the district court's² entry of judgment as a matter of law against his claims that certain hedge-to-arrive ("HTA") contracts were cash forward contracts excluded from the regulations of the Commodity Exchange Act and not illegal futures contracts. Schewe also appeals the district court's denial of Schewe's post-trial motions to alter or amend the judgment and for judgment as a matter of law, based on the jury's verdict that Top of Iowa Cooperative ("Top of Iowa") breached its fiduciary duty to Schewe; and Schewe appeals the district court's denial of his motion for a new trial on Top of Iowa's successful breach-of-contract claim. Top of Iowa cross-appeals the district court's denial of Top of Iowa's motion for judgment as a matter of law on Schewe's breach of fiduciary duty counterclaim.

I. Statement of Facts

Schewe operates a 500-acre farm in Freeborn County, Minnesota. Between March 13 and June 28 of 1995, Schewe entered into the five subject HTAs with Top of Iowa, a cooperative in Iowa. The HTAs called for Schewe to deliver 30,000 bushels of corn to Top of Iowa on or before December of 1995. The price of the corn was established at the time of contract (at the Chicago Board of Trade ("CBOT") open market futures contract price for December of 1995, minus the "basis"). The "basis" is Top of Iowa's costs plus profit, and would not be set until Schewe elected to set the basis.

Top of Iowa sold a futures contract on the CBOT each time it entered into an HTA with Schewe. This protected Top of Iowa from changes in the open market cash price³ of corn at the HTA delivery date. The price of corn in a futures contract changes with the daily open market price. If the open market price of corn goes up, Top of Iowa must pay the margin amount⁴ on its futures contract to its broker on the CBOT. Top of Iowa would recover the margin amount when Schewe delivered the corn on the HTA and Top of Iowa sold that corn at the higher open market price. When corn prices rose throughout 1995, Top of Iowa was required to pay margin money to maintain its futures contracts on the CBOT.⁵

Schewe attempted delivery of the corn under the HTAs to Top of Iowa in the fall of 1995; however, the elevator lacked space and the lengthy wait in line to deliver forestalled actual delivery of the grain. The delivery date for Schewe's corn under the HTAs was rolled on September 26, 1995, to May of 1996. As a result of rolling the CBOT positions to May of 1996, Schewe gained 9 1/2¢ per bushel on his HTA contracts' prices. That same day, the CBOT positions were rolled by buying back the December of 1995 position and selling a May of 1996 short position. Between December 4, 1995, and February 22, 1996, Schewe delivered 20,000 bushels of corn to Top of Iowa on a cash basis, rather than delivering pursuant to the subject HTAs. As of February 22, 1996, Schewe was short 30,000 bushels of grain for the May of 1996 short position, and had only 10,000 bushels of grain remaining to deliver.

On April 10, 1996, Top of Iowa notified Schewe that he was responsible for reimbursing Top of Iowa for margin calls on the CBOT positions. Schewe responded to Top of Iowa the following day, and the parties agreed to resolve the dispute in court.

On April 16, 1996, the HTAs were rolled from May of 1996 to July of 1996. This would have required Schewe to deliver 30,000 bushels of corn in July. That same day the CBOT positions were rolled by purchasing back the May of 1996 positions and selling a July of 1996 short position. On May 31, 1996, Schewe wrote a letter to Top of Iowa canceling the subject HTA contracts; that same day Top of Iowa bought back the July of 1996 CBOT short position. Because no corn was delivered on the HTAs, Top of Iowa was not able to recover the margin money it had paid to its broker on the CBOT.

II. Statement of the Case

Top of Iowa filed suit in Iowa District Court for Winnebago County on August 12, 1996, against Schewe, claiming Schewe had repudiated the subject HTAs, and claiming damages corresponding to the amount Top of Iowa paid in margin calls on short positions on the CBOT. Schewe removed this action to Federal Court based upon 28 U.S.C. § 1332, and filed his answer and counterclaim, and affirmative defense of illegal contract. Schewe's counterclaims were summarized by the district court as follows: "(1) that the HTAs were `securities' within the meaning of the [Security Exchange Act] and that they were not offered, engaged in, or sold in compliance with that Act; (2) that the HTAs are illegal off-exchange futures contracts in violation of the Commodity Exchange Act ("CEA") and hence are unenforceable; (3) that Top of Iowa has violated the Racketeer Influenced and Corrupt Organizations Act (RICO); (4) that Top of Iowa's actions constitute negligence, breach of fiduciary duty, and breach of contract; and (5) that Top of Iowa has engaged in fraud and misrepresentation." Top of Iowa Cooperative v. Schewe, 6 F.Supp.2d 843, 847 (N.D.Iowa 1998). Top of Iowa filed its motion for partial summary judgment on March 12, 1998, requesting summary judgment on Schewe's first (1) and second (2) counts, and Schewe's affirmative defense of illegal contract. Id. Schewe filed a cross-motion for summary judgment for a declaration that the HTAs were illegal futures contracts and thus unenforceable. He also filed for dismissal of Top of Iowa's cause of action for failure to state a claim upon which relief can be granted because the terms of the HTAs barred recovery of the amounts paid in margin calls. Id. On May 25, 1998, the district court granted Top of Iowa's motion for partial summary judgment, and dismissed Schewe's cross-motions, ruling that the HTAs were not illegal future contracts, but rather were valid "cash forward" contracts.

The jury trial began on April 2, 2001, on Schewe's breach of contract claim, and Top of Iowa's breach of contract and breach of fiduciary duty claims. On April 5, 2001, the jury returned a verdict in favor of Top of Iowa for $60,900 on the breach of contract claim; against Schewe on his breach of contract claim, and in favor of Schewe on his counterclaim of breach of fiduciary duty, with an award of $3,400 in damages. On April 9, 2001, the district entered judgment against Schewe for $60,900 and against Top of Iowa for $3,400.

Schewe filed a motion for post-trial relief on April 18, 2001, seeking an order to set aside Top of Iowa's breach of contract judgment, an order to amend the judgment to eliminate Top of Iowa's judgment; an order granting Schewe's renewed motion for judgment as a matter of law; or an order for a new trial due to an inconsistent and contradictory jury verdict. Top of Iowa filed its post-trial renewed motion for judgment as a matter of law on Schewe's breach of fiduciary duty counterclaim. All post-trial motions were denied by the district court on June 19, 2001.

Schewe appeals to this Court the district court's denial of his motion for judgment as a matter of law on the CEA claims. Schewe also appeals the district court's denial of his post-trial motions to alter or amend the judgment, his renewed motion for judgment as a matter of law, and his motion for a new trial. Top of Iowa cross-appeals its renewed motion for judgment as a matter of law on Schewe's breach of fiduciary duty counterclaim.

III. DISCUSSION

A. Schewe's Motion for Judgment as a Matter of Law on the CEA Claim

Schewe first challenges the district court's order of May 25, 1998, denying Schewe's cross-motion that the HTAs were illegal futures contracts under the CEA. The Court reviews the district court's denial of summary judgment to Schewe's CEA claim de novo. Grain Land Coop v. Kar Kim Farms, 199 F.3d 983, 990 (8th Cir.1999).

In Grain Land this Court established the test for determining whether the contracts at issue are unregulated cash-forward contracts or futures contracts regulated by the CEA: "In order to determine whether a transaction is an unregulated cash-forward contract, we must decide `whether there is a legitimate expectation that physical delivery of the actual commodity by the seller to the original contracting buyer will occur in the future.'" 199 F.3d at 991 (quoting Andersons, Inc. v. Horton Farms, Inc., 166 F.3d 308, 318 (6th Cir.1998)); see also Haren v. Conrad Cooperative, 198 F.3d 683 (8th Cir.1999) ("As we observed in Grain Land, while an obligation to deliver is not necessary to place a contract within the cash-forward exception, it is sufficient."). The Court in Grain Land looked to the parties' intentions, contract terms, course of dealing, "and any other relevant factors to determine whether the parties contemplated physical delivery." 199 F.3d at 991.

Schewe argues that the test set forth in Grain Land should be expanded to include consideration of the underlying purpose of the HTAs to determine whether they are regulated by the CEA. He alleges this will avoid the pitfall under the Grain Land test that any agreement between a farmer and a cooperative would fall outside the scope of the CEA, regardless of the riskiness of the agreement. This is simply a misreading by Schewe of the decision in Grain Land. The test articulated in Grain Land does not hold that the businesses engaged in by the parties is dispositive of the issue; rather, it looks to whether the parties expected...