The opinion of the court was delivered by: CARTER
ROBERT L. CARTER, District Judge.
Defendants New York Produce Exchange ("Exchange") and New York Produce Exchange Clearing Association ("Association") renew their motions for summary judgment with respect to the third count of the amended complaint ("complaint").
Of the facts found to be undisputed on the original motion and set out in detail at 378 F. Supp. 1076, only those which are relevant to the third count of the complaint are summarized here. Plaintiff is the trustee in bankruptcy of Ira Haupt & Co. ("Haupt"), which was the principal commodities broker for Allied Crude Vegetable Oil Refining Corporation ("Allied") for purposes of Allied's cottonseed oil futures trading on the Exchange during the latter part of 1963.
The Exchange is a self-regulated contract market on which commodities futures are traded. A broker generally purchases futures through the Association, initially by paying to the Association a fixed percentage of the purchase price as "original margin." Thereafter, in the event of a price decline, the purchaser may be required by the Association to provide such additional "variation margin" as is necessary to protect the Association from the effects of such price decline.
A futures contract is "cleared" through the Association when the Association "accepts" it, thereby gaining the rights and assuming the obligations of both parties to the contract.
During the latter part of 1963, Haupt and other brokers acting on behalf of Allied acquired a substantial "long" position in cottonseed oil futures.
By November 14, 1963, Allied was the purchaser in approximately 90% of the futures contracts traded on the Exchange. On that day, the Board of Managers of the Exchange learned of the magnitude of Allied's holdings from the Commodity Exchange Authority, and at a meeting held that day, the Board appointed a Control Committee to determine the precise extent of Allied's position.
From November 14-November 19, 1963, the market for cottonseed oil futures declined sharply. In its extraordinary long position, Allied was highly vulnerable to the price decline. During this period, the Association repeatedly called upon Haupt to furnish variation margin and Haupt in turn requested reimbursement from Allied. By November 19, 1963, Allied was unable to meet Haupt's margin calls, and that day it filed a petition under Chapter XI of the Bankruptcy Act.
Later in the day on November 19, representatives of Haupt informed a joint meeting of the Executive Committee of the Exchange and the Board of Directors of the Association that it would be unable to meet its margin obligations if the market continued to drop.
After consultation with members of the Board of Managers of the Exchange, the Executive Committee of the Exchange recommended to the Board of Managers that trading in cottonseed oil futures be suspended until further notice and that settlement prices be fixed. On November 20, the Exchange did not open, and the Board of Managers formally adopted the Executive Committee's recommendations of the previous day.
On or about November 22, 1963, Haupt discovered that warehouse receipts, which Allied had given it as collateral for Allied's indebtedness, were worthless. The receipts were forged, and the vegetable oils purportedly represented by the receipts were non-existent. On March 23, 1964, an involuntary petition in bankruptcy was filed against Haupt.
In the third count of the complaint, the plaintiff trustee, acting pursuant to § 70(e) of the Bankruptcy Act, 11 U.S.C. § 110(e), seeks to set aside Haupt's payments of over $12 million in variation margin to the Association from November 14 to November 20. The trustee alleges that the payments were fraudulent transfers under §§ 273-275 of the New York Debtor and Creditor Law, Consol. Laws, c. 12. It is alleged that the variation margin was transferred without fair consideration at a time when Haupt was insolvent, and that both the Association and the Exchange were fraudulent transferees.
Section 273 of the New York Debtor and Creditor Law provides that any conveyance made "by a person who is or will be thereby rendered insolvent * * * without a fair consideration" is fraudulent.
The definition of "fair consideration" is given in § 272 which provides that fair consideration is given for property "[when] in exchange for such property, * * * as a fair equivalent therefor, and in good faith, property is conveyed or an antecedent debt is satisfied * * *."
The definition of "insolvency" is given in § 271 which provides, in pertinent part:
"1. A person is insolvent when the present fair salable value of his assets is less than the amount that will be required to pay his probable liability on his existing debts as they become absolute and matured."
In determining whether a defendant may be held liable under § 273, at least three issues must be resolved: (1) whether the transferor was "insolvent" within the meaning of § 271 at the time of the transfer or was rendered insolvent thereby; (2) whether the transferor received "fair consideration" for the transfer within the meaning of § 272; and (3) whether the defendant sought to be held liable is indeed the transferee of the fraudulent transfer.
With respect to the Association alone, the court denied its original motion for summary judgment without prejudice to its renewal on the ground that the record was inadequate to permit a determination of any of these three issues. In its original opinion the court set forth the nature of these three issues in the specific context of this case as follows (378 F. Supp. at 1107-08):
First, the record was inadequate to permit proper consideration of whether Haupt was "insolvent" within § 271 at the time of the margin payments, from November 14-19, or whether it was rendered insolvent by those payments.
Second, there remained the issue of whether "fair consideration," within the meaning of § 272, was given in exchange for Haupt's transfer of $12 million to the Association.
Third, the court was unable to consider properly whether under the principle of United States v. Cambridge Trust Co., 300 F.2d 76 (1st Cir. 1962), the court should find that the Association was not the transferee of the payments. Applying Cambridge Trust, the issue was whether the Association was a known agent which had received money paid to it by mistake and had innocently and in good faith paid the money over to its members, its principals. However, the record was insufficient to permit a determination of whether the Association acted as agent for its members in receiving the payments; whether it acted in good faith; or whether Haupt was "mistaken" in paying variation margin to the Association.
With respect to the Exchange's motion for summary judgment on the third count, the court's previous opinion first found that there was no dispute that the Exchange was neither the transferee nor the transferee's grantee of the variation margin. The court therefore concluded that "liability if it exists must be premised on the principle enunciated in Board of Trade [of City of Chicago] v. Wallace, [67 F.2d 402 (7th Cir.), cert. denied, 291 U.S. 680, 54 S. Ct. 529, 78 L. Ed. 1067 (1933)], that the act of a clearing house is, in certain circumstances, deemed to be the act of the contract market with which it is affiliated." 378 F. Supp. at 1108. However, the court was unable to consider properly whether the relationship between the Association and the Exchange was similar to the relationship in Wallace.
(1) Haupt's Insolvency between November 14 and 19, 1963
The following facts concerning Haupt's financial condition appear to be substantially undisputed. Between November 14 and 19, Haupt paid to the Association variation margin in the amount of over $12 million. Allied never reimbursed Haupt for these payments. The payments of commodity margin to the Association and the Chicago Board of Trade were the only significant changes in Haupt's financial condition from November 14-20. Haupt's accounts receivable from Allied for this and Allied's other indebtedness were secured by warehouse receipts. After the payments of variation margin, Allied's total indebtedness to Haupt was approximately $31.8 million. The warehouse receipts given to Haupt as collateral were spurious, and Haupt discovered that fact on or about November 22, 1963.
On November 25, 1963, Haupt had a deficit of approximately $25.25 million in its net worth account reflecting the application of a reserve of approximately $31.8 million for the indebtedness of Allied, then in bankruptcy.
With respect to Allied, it is undisputed that by its own admission, it had a capital deficiency as of July 31, 1963, of $34 million. As noted above and in the court's previous opinion, Allied held an extraordinary long position in cottonseed futures prior to and during the period, November 14-19. During that period, there was a substantial decline in the price of such futures.
Plaintiff's sworn answers to interrogatories in the case of Seligson v. The Fidelity & Casualty Co. of New York, 8510/1965 (Sup.Ct. N.Y. County),
the accuracy of which is not disputed by the Association, indicate that a senior Haupt employee, Jack E. Stevens, received certain information bearing on Allied's financial condition and hence on the value of the Allied receivables. Specifically, Stevens was informed on November 15, 1963, that Allied was experiencing financial difficulties, and that Allied officers would meet the following day to attempt to work out these difficulties. On November 16, he was informed that the officers of Allied had met but that they had failed to arrive at any solution to Allied's problems. On November 18 and 19, Stevens was informed of the failure of Allied to meet outstanding margin calls of November 14, 15 and 18. Also on November 18 and 19, several Haupt employees reported to Stevens concerning the financial predicament of Allied, the deteriorating condition in the commodity market, and the status of the Allied account. (Answers to Interrogatories Nos. 3(b)(xv)-(xviii)).
In addition, Stevens was repeatedly warned from September, 1963, through November 19, 1963, by officials of the Exchange and the Association and by numerous other persons of the magnitude of Haupt's financial exposure and of the need for establishing the legitimacy of Allied's position. (Answers to Interrogatories Nos. 3(b)(vi-xiii)). Stevens was also aware of Allied's withdrawal from Haupt of excess variation margin generated by the rising market through November 14. (Answer to Interrogatory No. ...