Top of Iowa Cooperative v. Schewe
| Decision Date | 25 May 1998 |
| Docket Number | No. C 96-3146-MWB.,C 96-3146-MWB. |
| Citation | 6 F.Supp.2d 843 |
| Parties | TOP OF IOWA COOPERATIVE, an Iowa cooperative, Plaintiff, v. Virgil E. SCHEWE, Defendant. |
| Court | U.S. District Court — Northern District of Iowa |
Brenton D. Soderstrum, Brown, Winick, Graves, Gross, Baskerville and Schoenebaum, P.L.C., Des Moines, IA, for Plaintiff.
Matthew Benda, Peterson, Savelkoul, Schlichting & Davis, Ltd., Albert Lea, MN, for Defendant.
TABLE OF CONTENTS
I. INTRODUCTION ................................................. 847
A. Procedural Background ..................................... 847
B. Factual Background ........................................ 847
II. LEGAL ANALYSIS ............................................... 849
A. Standards For Summary Judgment ............................ 849
B. The Securities Exchange Act Claim ......................... 850
1. The Howey test ........................................ 850
2. Application of the Howey test to Schewe's HTAs ........ 851
C. The Commodities Exchange Act Claim ........................ 853
1. Schewe's HTAs ......................................... 854
2. Schewe's attempt to distinguish or dispute Oeltjenbrun 856
D. Inability To Recover Margin Calls ......................... 858
III. CONCLUSION .................................................. 859
In another episode in the continuing agony inflicted on the grain industry by disputes over the enforceability of so-called "Hedge-To-Arrive" contracts (HTAs) for the sale and purchase of grain, the parties to the present lawsuit, a grain elevator and a grain producer, have filed cross-motions for partial summary judgment raising the key question in almost all of the cases involving HTAs, are certain HTAs illegal off-exchange "futures" contracts under the Commodities Exchange Act (CEA), 7 U.S.C. §§ 1-25, or valid "cash forward" contracts not within the regulatory purview of the CEA? This is the second time the court has reached the merits of this key question. See Oeltjenbrun v. CSA Investors, Inc., 3 F.Supp.2d 1024 (N.D.Iowa 1998). However, as this court observed in Oeltjenbrun, the court must view each transaction or group of transactions separately, and, because the terms of HTAs differ from case to case, the results of the court's analysis may differ for each kind of contract. In addition, the present dispute raises a question this court has not yet confronted: Are the HTAs "securities" within the meaning of the Security Exchange Act (SEA) that were sold in violation of the terms of that Act?
This lawsuit was filed by plaintiff Top of Iowa Cooperative, which operates a grain elevator in Lake Mills, Iowa, in the Iowa District Court for Winnebago County on August 12, 1996, against defendant Virgil E. Schewe, a farmer in Freeborn County, Minnesota. Top of Iowa's complaint alleges that Schewe has repudiated certain HTAs he had entered into with Top of Iowa by failing to give adequate assurances of delivery of grain pursuant to the HTAs. As the result of that repudiation, Top of Iowa alleges that it has sustained damages corresponding to the amount it has paid in margin calls on the Chicago Board of Trade on transactions it entered into as hedges against delivery of Schewe's grain.
Schewe removed this action to this federal court on October 7, 1996, asserting diversity of citizenship and sufficient amount in controversy. On October 11, 1996, Schewe filed an answer and counterclaim also asserting various affirmative defenses. Schewe's counterclaims allege (1) that the HTAs were "securities" within the meaning of the SEA 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 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.
On March 12, 1998, Top of Iowa filed its motion for partial summary judgment asserting that there are no genuine issues of material fact and that it is entitled to judgment as a matter of law on Count I of Schewe's counterclaim, the SEA claim, Count II of the counterclaim, the CEA claim, and Schewe's affirmative defense asserting an illegal contract. On April 16, 1998, Schewe sought leave of court to file his own cross-motion for partial summary judgment. That leave was granted, and Schewe's motion was filed on April 23, 1998. Schewe seeks summary judgment, first, on his affirmative defense No. 20, which seeks a declaration that the HTAs at issue are illegal off-exchange futures contracts that are unenforceable against him, and, second, dismissing Top of Iowa's cause of action for failure to state a claim upon which relief can be granted, because Top of Iowa is barred by the terms of the HTAs from recovering amounts allegedly paid in margin calls on the elevator's hedge transactions that relate to Schewe's HTAs.
The court heard oral arguments on the cross-motions for summary judgment on May 22, 1998. Plaintiff Top of Iowa was represented by counsel Brenton D. Soderstrum of Brown, Winick, Graves, Gross, Baskerville and Schoenebaum, P.L.C., in Des Moines, Iowa. Defendant Virgil E. Schewe was represented by counsel Matthew Benda of Peterson, Savelkoul, Schlichting & Davis, Ltd., in Albert Lea, Minnesota.
The court will discuss here only the nucleus of pertinent facts for this litigation. In its legal analysis, the court will address where necessary the parties' assertions of genuine issues of material fact that may preclude summary judgment in favor of either party. The nucleus of pertinent facts begins with an examination of the HTAs Schewe has entered into with Top of Iowa.
At issue are five contracts, each denominated a "HEDGE TO ARRIVE CONTRACT," that Schewe entered into with Top of Iowa in the Spring and Summer of 1995. Each is in the form of the contract entered into on March 13, 1995, with handwritten entries, which vary from contract to contract, shown as underlined and paragraph numbers added by the court:
[1.] BUYER and SELLER agree to the following:
[2.] BUYER confirms the following futures transaction was made for seller today on the Chicago Board of Trade, Seller agrees that said grain is yet to have the "CASH PRICE" determined for arrival;
[In tabular form:]
GRADE & GRAIN US 2y Corn ARRIVAL PERIOD [Dec] 95 DESTINATION Lake Mills or Joice QUANTITY 5,000 FUTURES OPTION [Dec 9]5 FUTURES OPTION PRICE 2.60
[3.] SELLER states knowledge of cash basis which is the difference between a designated futures option on the Chicago Board of Trade and the cash price of grain for the designated arrival period of this contract. SELLER understands that the Cash Basis has not been determined in establishing the "Cash Price" of said grain on arrival.
[4.] SELLER understands that the "Cash Basis" will be the difference between the price quoted for the futures options designated in this contract and the "Cash Price" of the grain for the designated arrival period in this contract on the date and time SELLER elects to set the cash price of said grain.
[5.] SELLER agrees to set the "Cash Basis" and determine the cash value of said grain on or before 11-15-95. Unless other terms have been agreed upon by both Buyer and Seller prior to said date, and grain has not been priced by Seller, Buyer is authorized to set the cash basis and to set the cash price of contract.
[6.] Buyer shall be responsible for commissions and margin requirements of this transaction. Buyer agrees that this transaction shall be subject to the rules of the Chicago Board of Trade and the marketing policies of the Buyer.
[7.] SELLER agrees to a service fee of .02 cents per bushel and the service charge will be assessed against the cash price of this contract.
[8.] Failure by the Seller to perform on this contract [sic], Seller shall be subject to all of the terms of the "Grain Purchase Contract and Confirmation" attached to and made a part of this contract.
[9.] This is NOT considered a credit sale contract as long as final price is determined before delivery.
Complaint Exhibit A; Exhibit A to Memorandum of Law of Plaintiff, Top of Iowa Cooperative, an Iowa Cooperative, In Support of Motion for Partial Summary Judgment. Although each of the contracts refers to a "Grain Purchase Contract and Confirmation" purportedly attached to the HTA, neither party has provided the court with a copy of such a document for any of the five HTAs.
Thus, the five contracts in question initially provided as follows: (1) Contract No. 0020, dated March 13, 1995, was for 5,000 bushels of corn with an "arrival period" of December 1995 at Lake Mills or Joice, Iowa, with a "futures option" of December 1995, at a "futures option price" of $2.60 per bushel; (2) Contract No. 0044, dated April 3, 1995, was for 5,000 bushels of corn with an "arrival period" of December 1995 at Lake Mills, Iowa, with a "futures option" of December 1995, at a "futures option price" of $2.65 per bushel; (3) Contract No. 0075, dated May 1, 1995, was for 10,000 bushels of corn with an "arrival period" of December 1995 at Lake Mills, Iowa, with a "futures option" of December 1995, at a "futures option price" of $2.64 per bushel; (4) Contract No. 0091, dated May 17, 1995, was for 5,000 bushels of corn with an "arrival period" of December 95 at Lake Mills, Iowa, with a "futures option" of December 1995, at a "futures option price" of $2.68 per bushel; (5) Contract No. 0372, dated June 28, 1995, was for 5,000 bushels of corn with an "arrival period" of December 1995...
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