The opinion of the court was delivered by: CARTER
Plaintiff, NRT Metals, Inc. ("NRT"), a New York corporation, is being voluntarily liquidated without court process. It has brought this declaratory judgment action against Manhattan Metals, Ltd. ("Manhattan"), Albourne Partners, Leicester Partners, and Worcester Partners ("the partnerships") to determine whether, as plaintiffs argue, defendants are to be treated as general creditors under the Liquidation Plan adopted by NRT, or as preferred creditors, as defendants urge.
For the reasons below, the Court finds that defendants were improperly classified as general creditors.
Concretely, the dispute in this case is over $220,000
that defendants transferred to plaintiff in connection with certain investment transactions. Plaintiff deposited those funds in its own accounts, which became part of plaintiff's general estate for purposes of liquidation. Plaintiff's Liquidation Plan provides that the estate will be distributed on an equal basis to defendants and other creditors (except those who have secured interests).
Defendants argue that the $220,000 in question should never have been considered as part of the plaintiff's funds, and therefore, should now be returned to defendants as a priority distribution in the liquidation proceedings.
Whether plaintiff properly treated defendants' funds as its own is, however, but one level of the issues in this case. As both parties concede, the propriety of plaintiff's actions can be judged only with reference to the nature of the transactions underlying the $220,000 transfer. These transactions resulted from discussions between the parties, which began in the second half of 1979. NRT was a merchant firm which engaged principally in buying and selling cash commodities, specifically metal. Manhatten was a registered futures commission merchant ("FCM"), which conducted trading activities on its own behalf and for the partnerships. The partnerships were formed for the purpose of making investments with tax consequences for those who invested therein. The parties, through Richard Illingworth, President of Manhatten and a general partner of the partnerships, and James Holme, Executive Vice President of NRT, mainly talked about possible investment transactions involving copper arbitrage on two markets: the Commodity Exchange ("COMEX") in New York and the London Metal Exchange ("LME").
After additional meetings between Illingworth and Michael Cameron, President of NRT, the parties came to an apparent agreement concerning the investments NRT would make for the partnerships.
On or about March 7, 1980, NRT purchased 22 futures contracts for 275 short tons of copper in New York (COMEX) and sold futures contracts for 250 metric tons of copper on the LME.
Again, on or about March 14, 1980, NRT purchased 22 futures contracts for 275 short tons of copper in New York (COMEX) and sold futures contracts for 250 metric tons of copper on the LME. It was in conjunction with these two transactions that defendants delivered to NRT checks totaling $220,000.
Plaintiff says that the transactions were structured by the parties as "physical trades", which involve the actual purchase and sale of commodities between merchants on what may be termed the physical market, which is unregulated. Its position with respect to the $220,000 is that the money represented "margin" that plaintiff would have to post in order to hedge its physical trades.Plaintiff claims that defendants were obligated to supply those funds, and once provided, defendants knew they would lose all indicia of belonging to defendants. According to defendants, however, they forwarded the $220,000 to plaintiff as original margin in compliance with the rules established by COMEX, a regulated exchange covered by the Commodity Exchange Act, ("the Commodity Act"), 7 U.S.C. § 1 et seq. They argue that the transactions were covered by the Commodity Act since the defendants were investing for trading or investment purposes only, with neither the intention nor the capability of accepting the vast amounts of copper involved in the transactions. Since section 4d of the Commodity Act, 7 U.S.C. § 6d(2), provides that such margin funds are to be separately accounted for, and treated as funds of the customer, defendants maintain that plaintiff, in the context of the liquidation proceeding, has no right to treat such funds on the same basis as its general estate.
To this plaintiff responds by invoking the policy of the Bankruptcy Code, 11 U.S.C. § 101 et seq. Even if it should have segregated defendants' funds, plaintiff maintains, to the extent it did not do so, defendants' claims remain on par with those of the general creditors of the plaintiff. As a corollary point, plaintiff also contends that to give defendants the requested relief in this case would be tantamount to creating a "trust fund" post hoc, in effect establishing a "secret lien" in violation of the Bankruptcy Code.
Despite the several sub-issues raised in this case, mainly by plaintiff, there are ultimately two questions that appear dispositive. First, do the transactions between the parties come within the scope of the Commodity Act, that question predicating the determination of whether the funds transferred by defendants to plaintiff were margin monies subject to § 4d of the Commodity Act; and second, does the fact that plaintiff commingled defendants' funds with its own prevent defendants from obtaining any relief in this case, necessarily deciding whether the Bankruptcy Code can control the Court's determination of this issue in the context of a voluntary, non-judicial liquidation proceeding. These questions are addressed in turn.
A. Broad Scope of the Commodity Act
Plaintiff makes a difficult argument in claiming exclusion from the Commodity Act's broad scope. The first version of the Act was passed in 1921.
It succeeded a series of federal and state legislative attempts to abolish entirely all futures trading activity, which efforts had been inspired by abuses resulting from speculative excesses on the newly developed exchanges for futures trading.
The idea of regulation having triumphed, it took hold firmly. For the past 60 years, Congress, through amendments and revisions, has consistently broadened the strength and scope of commodity futures trading regulation. See Leist v. Simplot, 638 F.2d 283, 294-96 (2d Cir. 1980), aff'd sub nom, Merrill Lynch v. Curran, Pierce, Fenner & Smith, 456 U.S. 353, 72 L. Ed. 2d 182, 102 S. Ct. 1825 (1982).
The purpose of the Act is stated expansively: to ensure fair practices and honest dealing on the Commodity Exchanges and to control manipulative activity and speculative excesses that undermine the markets.See S. Rep. No. 856, 95th Cong. 2d Session 12, reprinted in 1978 U.S. Code Cong & Ad. News 2087,2100.
While the immediate beneficiaires of healthy futures markets are the producers and processors of commodities who can minimize the risk of loss from wide fluctuations in cash market prices by hedging on the futures markets, the Supreme Court recently affirmed the necessarily broad reach of the Act's protections. The speculator, the Court held, was the beneficiary of the Act's regulatory scheme, as much as was the hedger. Merrill Lynch, Pierce, Fenner & Smith v. Curran, supra at 390.
Moreover, the Act casts a wide net in regulating different types of futures trading. The Act pertains not only to the agricultural commodities, which composed its original concern, but also to "all other goods and articles... and all services, rights and interests in which contracts for future delivery are presently or in the future dealt in," ...