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Wong v. New York Mercantile Exchange


decided: May 11, 1984.


Appeals by two commodities traders, Sam Wong & Son, Inc. and Anthony Spinale, who had brought actions against the New York Mercantile Exchange and its governors and officers for conduct relating to the March, April and May 1979 Maine round white potato futures contracts, from orders of the District Court for the Southern District of New York, Abraham D. Sofaer, Judge, reported sub nom. Jordon v. New York Mercantile Exchange, 571 F. Supp. 1530 (S.D.N.Y. 1983). One order dismissed or, in the alternative, granted summary judgment to the defendants with respect to Wong's action; another granted summary judgment to the defendants with respect to Spinale's. Affirmed with respect to Wong's action; reversed and remanded to permit limited discovery with respect to Spinale's.

Friendly, Timbers and Meskill, Circuit Judges.

Author: Friendly

FRIENDLY, Circuit Judge:

We have here appeals by plaintiffs, Sam Wong & Son, Inc. (Wong) and Anthony Spinale, in two suits in the District Court for the Southern District of New York against the New York Mercantile Exchange (NYME or Exchange), its Board of Governors (the Board), and various NYME officers. Both suits concern action or inaction by the NYME relating to the March, April and May 1979 Maine round white potato futures contracts. After an all night meeting on March 8-9, 1979, the Board declared that, in consequence of large-scale failures of the March potatoes to meet delivery standards at the Hunts Point Terminal Market in the Bronx, New York, a market emergency existed with respect to the three contracts, suspended trading in the April and May contracts,*fn1 and ordered those contracts to be liquidated at the March 8 settlement price. The Board also ordered a two-day extension in the delivery period for the March contracts and provided that unfulfilled March contracts would be settled at a price to be determined by a special committee.

Wong's complaint, filed on behalf of himself and "all other producers, owners, processors or merchandizers [sic] of 1978 crop year potatoes grown in the United States who assumed short positions" in the 1979 Maine Potato contracts to hedge against a decline in the value of their crops,*fn2 made two principal claims. One was that, once the delivery problem had manifested itself in November, 1978, the NYME had failed to take proper action earlier than March 8-9. The other was that the NYME had failed in a duty to revise the Maine round white potato futures contract so that it would be a better vehicle for hedging and less susceptible to the problem that had developed in 1976*fn3 and again in the controversy here before us. Spinale held net long positions in the March, April and May contracts;*fn4 he attacked the action taken at the March 8-9 meeting, which had deprived him of further profits he would have obtained if the NYME had not acted or had acted less drastically. His complaint, almost the exact opposite of Wong's, was that the Exchange should not have taken emergency action when it did, and alternatively that any action should have been less drastic and should not have included the March contract, see supra note 1. Judge Sofaer, in a comprehensive and scholarly opinion, reported sub nom. Jordon v. New York Mercantile Exchange, 571 F. Supp. 1530 (S.D.N.Y. 1983), familiarity with which is assumed, directed that Wong's complaint should be dismissed for failure to state a claim on which relief can be granted, Fed. R. Civ. P. 12(b)(6), or, alternatively, that summary judgment should be granted to defendants under Fed. R. Civ. P. 56. He also granted summary judgment dismissing Spinale's complaint. These appeals followed.

The Facts*fn5

The NYME Maine Round White Potato Futures Contract calls for the delivery of 500 cwt. (hundredweight) of Maine grown potatoes of any but the Cobbler and Warba varieties, which are excluded because of their irregular shapes. The contract requires the potatoes to be packaged in 1000 fifty-pound bags. Delivery months are November, March, April and May. The Maine potato crop is harvested in the fall; thus the November contract marks the beginning of the crop year. Delivery may be made by rail or truck. In fact all deliveries have been made by truck since this was first permitted in the May 1977 contract. Each delivery generally consists of one truckload of potatoes, i.e., the contract amount of 50,000 pounds. The potatoes must grade U.S. No. 1 for par delivery, except that for the April and May contracts "commercials" are deliverable at a 25% discount from the settlement price for the last trading day of the delivery month. The contract requires two inspections -- one by a federally-authorized state inspector at the point of origin in Maine and the other by a federal inspector at the final point of destination at the Hunts Point Terminal Market, the Bronx, New York, or Everett, Massachusetts. The grading standard follows the United States Standards for Grade of Potatoes promulgated by the Secretary of Agriculture.

The first deliveries of Maine round white potatoes for the 1978-1979 crop year began for the NYME on November 6, 1978 and continued until November 20. An open interest of ninety-two contracts remained after the termination of trading in the November 1978 contract. Ultimately deliveries were tendered to close fifty contracts; the remaining contracts were liquidated pursuant to the Exchange's "EFP" procedure, see infra. Of the fifty deliveries, all of which had passed inspection in Maine, fifteen failed to pass inspection at Hunts Point.*fn6 Eleven loads failed because of apparent deterioration since inspection in Maine; the potatoes arrived at Hunts Point with high percentages of sunken and discolored areas that exceeded the Department of Agriculture's (USDA) specifications for the U.S. No. 1 grade. The other four failures were "reversals" based on grading characteristics that should have been detected at the point of origin.

The November rejections prompted the NYME to take a look. On November 21 the Exchange's Potato Control Subcommittee (Control Committee) reviewed the results of the delivery period and tentatively concluded that "no problems were foreseeable". Nevertheless, the Control Committee recommended sending a letter to the USDA relating to the inspection reversals and failures. On December 14, Richard Levine, president of the NYME, wrote such a letter to a USDA official, Ligon Johnson, head of the Grading Section, Fresh Products Branch of the Fresh Fruit and Vegetable Quality Division, in Washington, D.C., specifically asking an opinion on how the delivery problem arose and whether similar difficulties would occur in the future. After conducting a preliminary investigation, Johnson responded on January 18, 1979. He commented that apparently "this year's crop of Maine potatoes, even after being sorted, have [sic] a higher than usual percentage of borderline defective specimens." Regarding the inspection reversals, he assured Levine that steps had been taken to bring about uniformity in inspectors' grading standards. Lastly, he tried to assuage any of the Exchange's concerns by stating that the USDA was "prepared to take additional action if necessary to prevent a recurrence of the embarrassment encountered this past November."

During January and February, 1979 the NYME continued to monitor the situation with respect to the Maine potato crop and the 1979 futures contracts. Notwithstanding its initial concern over the November deliveries, the NYME concluded that this was not a serious portent. The Control Committee reconvened on January 29 to discuss the USDA's response; the group was concerned primarily with the discrepancies between the Maine and New York inspections, a problem which the USDA appeared to have under control. Neither the Control Committee nor the Board at its regular February meeting focused much attention on the quality of the year's potato crop. Exchange officials knew from experience, however, that farmers may have a tendency to be more lax in their own grading standards with respect to potatoes sold and delivered early in the season. Moreover, both the NYME's field representative in Maine and its monitoring staff based in New York reported during this period that there was a sufficient deliverable supply of potatoes.*fn7 As described by the CFTC report, during January and February, 1979, "with the November experience behind it, neither the Control Subcommittee nor the Board requested the Exchange staff to do anything other than their usual monitoring. Nor was anything other than the usual monitoring undertaken."

What followed is best presented by the description in the CFTC report:

During the week of March 5-8, 1979, the Exchange was faced with the failure of 29 out of 32 loads presented for the point of destination inspection in Hunts Point for condition defects, primarily sunken and discolored areas. . . . The April and May, 1979 contracts had closed on Friday, March 2, at $6.30 and $7.03, respectively. The close of trading on Thursday, March 8, found April at $7.60 and May at $8.14. In contrast, the cash price at Hunts Point for this period remained steady at $5.85. During these four days, the open interests in the May contract declined by nearly 3,000 to 10,000 contracts. Trading in both contracts locked up the limit of 50 cents on Monday and touched the limit on Wednesday. Otherwise, the market traded freely. (Emphasis supplied).*fn8

As the delivery failures unfolded during the week, the NYME made efforts to obtain information. Apart from utilizing its own staff, the Exchange contacted officials at the USDA, spoke with traders who were short hedgers, clearing members and representatives of the Maine potato industry, and consulted with the CFTC.

The NYME's discussions with the USDA focused on whether the Maine and New York inspectors were applying different standards. Although a definitive answer was not possible under such time pressures, the USDA found nothing to indicate inspection inconsistencies. Faced with the fact that potatoes making the grade in Maine failed inspection in New York, an unusual circumstance because the truck route lasted only twelve to eighteen hours, the USDA thought an explanation might be found in the crop's quality.

On Tuesday, March 6, the Administrative Committee of the NYME held an unusual meeting with a short hedger. The Committee customarily chose not to hear individual matters. The trader, who was well respected in the market, stated that he was making every effort to obtain good deliverable potatoes but was having difficulty in doing so. Subsequently, another trader notified the Exchange of his delivery problems. In addition, the NYME's field representative reported concerns expressed by members of the Maine potato industry over the recent delivery rejections.

The NYME was also in contact with the CFTC about the problem and what, if anything, should be done about it. Various courses of action were discussed back and forth, including the issuance of public statements by both organizations and the possibility of joint emergency action.*fn9

By the evening of Thursday, March 8, the Exchange staff had become convinced that the real problem was with the quality of the crop and that any inspection inconsistencies should be discounted.*fn10 If this was so, the situation could fairly be expected to worsen as the season advanced. The NYME staff was considering various emergency actions such as modifying the terms of delivery, temporary suspension of trading, increasing margins 100% and directing that trading be limited to liquidation of existing contracts. Although the Exchange's Maine field liaison had suggested to Levine to have the NYME stand pat, this idea was not seriously discussed.

In a telephone conversation late in the afternoon of March 8, Michel Marks, the chairman of the NYME, told Gary Seevers, the acting chairman of the CFTC, that he had considered calling the Board into session the following day to discuss the potato situation but deemed it to be so serious that he had decided instead to convoke the Board that evening. Apart from the immediate March delivery problem, the Exchange was concerned with maintaining viable futures contracts for April and May, i.e., those that reflect the real economic value of the potato crop. The meeting began at 9:15 p.m. on Thursday and lasted until 4:30 a.m. on Friday. Eleven of the fifteen governors were present as were the Exchange's president Levine, outside counsel and the Board's chairman emeritus. Four of the governors, Chairman Marks, Sam Fishberg, Salvatore Calcaterra and Stanley Meierfeld, were considered to be especially knowledgeable about the potato market.

President Levine began the meeting with a report reproduced in the margin.*fn11 After examination of reports of inspection on the March deliveries and information with respect to past inspection failures presented by the Clearing House Manager, the Board considered the question of possible conflicts of interest, with results indicated in the margin.*fn12 The abbreviated minutes of the meeting recite that after extensive discussion which "focused on the unusually high rate of failure of inspections in New York and the inability of potatoes to meet the contracts' standards" and advice from counsel, the Board adopted a series of resolutions.*fn13 One, which was passed unanimously, declared that "an emergency exists which threatens or may threaten the fair and orderly trading in and the liquidation of and delivery under the April 1979 and May 1979 Round White Potato Futures Contract[s] which emergency requires immediate action." A second, adopted by eight of the members present, with three abstaining, resolved that trading in the April and May 1979 contracts shall be suspended and that all open contracts be liquidated at a settlement price of $7.60 per cwt. for the April contract and $8.14 per cwt. for the May contract, these being the settlement prices at the close of trading on March 8, 1979. A third resolution, adopted by a vote of nine of the eleven members present, with two abstaining, declared the existence of an emergency requiring immediate action with respect to the March 1979 contract. Two further resolutions were adopted concerning the March contract by a vote of eight of the ten members present;*fn14 one member abstained and another voted in the negative. One resolution extended for two days, until March 23, the delivery period for the March contract; the other provided that with regard to all March contracts not fulfilled by delivery on March 23, the sellers shall be deemed not to have failed to perform and the contracts shall be liquidated at a settlement price to be determined by the Exchange. A special committee of three outside experts later fixed this at $6.34 per cwt., the settlement price of the March contract at the close of trading on February 28, 1979; the NYME adopted the committee's recommendation on May 23, 1979.

Pursuant to CFTC regulation 1.41(f)(2), 17 C.F.R. § 1.41(f)(2), discussed infra, the NYME, on Friday morning, March 9, promptly notified the Commission of the emergency resolutions adopted during the night. On March 19, the Exchange furnished the Commission with a written explanation of the emergency and the action taken to meet the problem; the Exchange thereafter supplemented this information by various correspondence over the next several months.*fn15

The Relevant Statutes, Regulations of the CFTC and By-Laws and Rules of the NYME

The Commodity Exchange Act (CEA), 7 U.S.C. §§ 1 et seq., has been accurately described as a "comprehensive regulatory structure to oversee the volatile and esoteric futures trading complex." H.R. Rep. No. 975, 93d Cong., 2d Sess. 1 (1974).*fn16 Section 5 of the CEA, 7 U.S.C. § 7, authorizes and directs the CFTC to designate a board of trade as a "'contract market'" "when, and only when, such board of trade complies with and carries out" the conditions and requirements listed in seven subparagraphs. One of these, § 5(a), is that, unless otherwise approved by the CFTC, the board of trade shall be "located at a terminal market where any cash commodity of the kind specified in the contracts of sale of commodity for future delivery to be executed on such board is sold in sufficient volumes and under such conditions as fairly to reflect the general value of the commodity and the differences in value between the various grades of such commodity, and where there is available to such board of trade, official inspection service approved by the Secretary of Agriculture or the Commission for the purpose."*fn17 Another condition and requirement of contract market designation, § 5(d), is that the board of trade "provides for the prevention of manipulation of prices and the cornering of any commodity by the dealers or operators upon such boards." A third relevant provision, § 5(g), is that the board of trade "demonstrates that transactions for future delivery in the commodity for which designation as a contract market is sought will not be contrary to the public interest."*fn18

Section 5a, 7 U.S.C. § 7a, imposes duties on contract markets. We quote § 5a(4), (8) and (10) in the margin.*fn19 Section 5a(12) requires the contract market to submit to the CFTC for its approval all by-laws, rules, regulations and resolutions which relate to terms and conditions in contracts of sale or other trading requirements except those relating to the setting of levels of margin. Also, of direct relevance here, it provides:

The Commission shall specify the terms and conditions under which a contract market may, in an emergency, as defined by the Commission, adopt a temporary rule dealing with trading requirements without prior Commission approval. In the event of such an emergency, as defined by the Commission, requiring immediate action, the contract market by a two-thirds vote of its governing board may place into immediate effect without prior Commission approval a temporary rule dealing with such emergency if it notifies the Commission of such action with a complete explanation of the emergency involved.*fn20

Pursuant to the authority conferred by § 8a(5), 7 U.S.C. § 12a(5), the CFTC has adopted Regulation 1.41, 17 C.F.R. § 1.41. Section 1.41(a)(4) broadly defines the term "emergency", as follows:

The term "emergency" means:

(i) Any occurrence or circumstance specifically defined as an "emergency" by the rules of a contract market which have been submitted to the Commission pursuant to section 5a(12) of the Act; and

(ii) Any other occurrence or circumstance which, in the opinion of the governing board of the contract market, requires immediate action and threatens or may threaten such things as the fair and orderly trading in, or the liquidation of or delivery pursuant to any contract for the future delivery of a commodity or any commodity option on such contract market. Occurrences and circumstances which a governing board of a contract market may deem emergencies include, but are not limited to:

(A) Any manipulative activity or attempted manipulative activity;

(B) Any actual, attempted, or threatened corner, squeeze, congestion, or undue concentration of positions;

(C) Any circumstances which may materially affect the performance of contracts or commodity options traded on the contract market;

(H) Any other unusual, unforeseeable and adverse circumstance with respect to which it is impracticable for the contract market to submit, in a timely fashion, a rule to the Commission for review under section 5a(12) of the Act.

Section 1.41(a)(6) provides, inter alia, that the requirement of a "two-thirds vote of a governing board" is satisfied by the affirmative vote of two or more persons constituting not less than two-thirds of the members of the governing board physically present and voting at a meeting at which a quorum of at least one-third of the members is physically in attendance. Section 1.41(f)(2) requires the contract market to notify the CFTC of the adoption of a temporary emergency rule by the fastest available means of communication and promptly thereafter to send the CFTC a written copy of the rule. Section 1.41(f)(3) provides, in pertinent part, that a temporary emergency rule may provide for actions necessary or appropriate to meet the emergency "including, but not limited to, such actions" as:

(i) Limiting trading to liquidation only, in whole or in part, or limiting trading to liquidation only except for new sales by parties who have the commodity to deliver pursuant to such sales;

(ii) Extending or shortening the expiration date for trading in contracts;

(iii) Extending the time of delivery;

(v) Ordering the liquidation of contracts, the fixing of a settlement price or the reduction in positions;

(viii) Suspending trading; and

(ix) Modifying or suspending any provision of the rules of the contract market.

Contract market emergency action may be overturned, modified or approved by the CFTC, see § 8a(9), 7 U.S.C. § 12a(9); CFTC regulation 1.41(f), 17 C.F.R. § 1.41(f), but the CFTC seems to be at liberty simply to refrain from acting, as it did here, see supra note 15.

A number of by-laws and rules of the NYME, which were approved by the CFTC, are also relevant. By-law 23.14, subtitled "Emergency Powers", and approved by the CFTC pursuant to § 5a(12) of the Act on April 29, 1977, declares in paragraph (A) that "the Exchange shall have power to take action in an emergency as set forth in this section." Paragraph (B) defines "emergency" as follows:

As used in this section the term "emergency" means:

(1) Any occurrence or circumstance specifically defined as an emergency in a By-Law or Rule of the Exchange which has been approved by the Commodity Futures Trading Commission.

(2) Any occurrence or circumstance which, in the opinion of a governing body of the Exchange, as defined herein, requires immediate action and threatens or may threaten such things as the fair and orderly trading in, or the liquidation of or delivery pursuant to, any contract for the future delivery of a commodity on the Exchange. Occurrences and circumstances which a governing body of the Exchange, as defined herein, may deem emergencies, include, but are not limited to, those occurrences or circumstances which are set forth in the Regulations of the Commodity Futures Trading Commission which define an emergency.

Rule 60.12, approved by the CFTC on November 2, 1976, authorizes what is called the "EFP" (exchange of futures for product or exchange for physicals) procedure. Section 60.12(A) describes this as follows:

Subject to approval of the President, an exchange of futures in connection with cash commodity transactions or futures for cash commodities may be permitted either before or after the termination of trading in a contract provided, however, that except in the case of an exchange in lieu of a replacement delivery, no exchange shall be made after the last day on which a Delivery Notice is required to be given and no exchange shall be made with respect to a contract if the seller has given a Delivery Notice or if the buyer has received a Delivery Notice from the Clearing House. No such exchange shall be made by a seller who does not, at the time of such exchange, have in his possession the cash commodity to be delivered and no such exchange shall be made which does not require delivery of the cash commodity within a reasonable period of time.*fn21

Finally, Rule 60.13 deals with the consequences of delinquency and default. A party who is delinquent in performance shall pay to the other party $200 per contract for each day of delinquency not exceeding five days, see Rule 60.13(A)(2)(a), and shall pay the Exchange an amount equal to 10% of the contract value for each contract for each day of delinquency not exceeding five days, see Rule 60.13(A)(2)(b). Rule 60.13(C)(1) defines "contract value" as "the value of the contract computed on the basis of the last settling price for the delivery month." Thus, if the settling price were $6.00 per cwt., the contract value would be $3,000. The latter charge may be reduced by the Board of Governors. A seller or buyer who does not perform his obligation with respect to delinquency within five days is in default, see Rule 60.13(B)(1). He then must pay the other party "as liquidated damages in lieu of all other damages, including consequential damages, 20% of the contract value for each contract in default", Rule 60.13(B)(2).

Finally, reference should be made to § 22 of the CEA, enacted by the Futures Trading Act of 1982, Pub. L. No. 97-444, § 235, 96 Stat. 2294, 2322-24 (Jan. 11, 1983), 7 U.S.C. § 25. This section, entitled "Private rights of action", provides for such actions against persons other than contract markets and similar organizations in subsection (a) and against the latter in subsection (b). Broadly speaking subsection (b) imposes liability for actual losses resulting from failure to enforce any by-law, rule, regulation or resolution required to be enforced by § 5a(8) or (9) of the CEA or by the CFTC, or from enforcement of any by-law, rule, regulation or resolution in a manner violating the CEA or any CFTC rule, regulation or order. Section 22(b)(4) provides:

A person seeking to enforce liability under this section must establish that the contract market, licensed board of trade, clearing organization, registered futures association, officer, director, governor, committee member, or employee acted in bad faith in failing to take action or in taking such action as was taken, and that such failure or action caused the loss.

Section 22(d) says:

The provisions of this section shall become effective with respect to causes of action accruing on or after the date of enactment of the Futures Trading Act of 1982 [January 11, 1983]: Provided, That the enactment of the Futures Trading Act of 1982 shall not affect any right of any parties which may exist with respect to causes of action accruing prior to such date.

(Brackets and emphasis in original).

The Rulings of the District Court

Judge Sofaer ruled that both parts of Wong's complaint -- NYME's failure to insist upon amendments to the Maine round white potato futures contract and failure to take action between the delivery failure in November, 1978 and promulgation of the emergency rules on March 8-9, 1979 -- failed to state a claim on which relief could be granted. While not questioning that the latter claim might be brought as a private right of action under Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 72 L. Ed. 2d 182, 102 S. Ct. 1825 (1982), he ruled that the standard of liability was bad faith, which the complaint did not allege, and the claim was thus deficient as a matter of law, 571 F. Supp. at 1541-42. With respect to the NYME's failure to amend the futures contract, Judge Sofaer based his ruling on the non-existence of a private right of action. Id. at 1554-61. Alternatively, he concluded that even if such a private right of action existed, the bad faith standard would apply and this was again not sufficiently alleged. Id. at 1561-62.*fn22 Judge Sofaer also did not question that Spinale's claim of injury from the adoption of the Emergency Resolutions was of the general sort for which a private right of action would lie under Curran. He ruled that the standard of liability again was bad faith and that Spinale had not made a showing, sufficient to resist summary judgment, that the alleged financial interests of the Governors on the short side of the contract, their alleged personal animus against Spinale, or the alleged irrationality of the emergency action, constituted the bad faith needed to sustain an action for damages against the Exchange, its governors or officers.

Wong and Spinale have appealed. The CFTC has filed an amicus brief urging us to disapprove the holding of the District Court that Wong's claim as to NYME's failure to propose amendments to the Maine round white potato futures contract was not of the sort for which there is a private right of action; nine commodity exchanges have filed an amicus brief in opposition to this view.


Wong's Appeal

(1) Private right of action for failure to propose amendments to contract

We agree with the district court's well-reasoned conclusion that there is no private right of action for failure by an exchange to propose amendments to the futures contracts traded upon it. In contending that the NYME's failure to revise the Maine round white potato futures contract violated the CEA, Wong relies primarily on §§ 5(a), 5(g) and 5a(10). He claims as defects in the contract its provision for delivery of exclusively Maine-grown U.S. No. 1 grade potatoes and its requirement of inspections both at point of origin and point of destination. These alleged defects are said to have rendered the contract unsuitable for hedging and thus breached the Exchange's "special duty to . . . producers, owners, processors and merchandizers [sic] of potatoes to ensure that the contract which [the NYME] offered for trading was fit for the purpose of hedging." Complaint para. 27. The CFTC, taking a somewhat different stance, urges that a privately enforceable duty to amend the terms of a futures contract may be found in § 5(d), which it reads as requiring an exchange to maintain an orderly market.*fn23 Our review of the CEA and the statutory scheme it creates with respect to contract revisions leads us to conclude that a private damages remedy is unavailable against an exchange for failing to amend the terms of its future contracts.

As our exposition of the statutes has shown, § 5, upon which Wong and the CFTC primarily rely for their arguments that a contract market has a duty to maintain continuous observation of and take corrective action concerning its contracts, is found in that section of the CEA, stemming from the Grain Futures Act, ch. 369, § 5, 42 Stat. 998, 1000-01 (1922), which describes the conditions under which the CFTC may grant and continue designation as a contract market. In stark contrast stands § 5a, added by the Act of June 15, 1936, ch. 545, § 7, 49 Stat. 1491, 1497-98, which sets forth the duties of contract markets to the public -- duties which notably do not include that of amending the terms of a contract. The CEA thus draws a distinction between the requirements for contract market designation in § 5, which is directed to the CFTC, and the operational duties of designated contract markets in § 5a, which is addressed to each exchange. We see no reason to disregard the framework Congress established by wrenching the provisions in § 5 out of context to create an exchange duty expressly omitted from § 5a.*fn24 When Congress wished to impose duties on a contract market, it knew how to do so as shown by § 5a. Cf. NLRB v. Bildisco & Bildisco, 465 U.S. 513, 104 S. Ct. 1188, 1195, 79 L. Ed. 2d 482 (1984).

The statutory scheme with respect to revisions of futures contracts traded upon designated contract markets highlights the incongruity of implying a private right of action for failure to make such revisions. In order to receive designation as a contract market, an exchange must submit, pursuant to § 5a(12) and CFTC regulation 1.41(b), 17 C.F.R. § 1.41(b), a proposed futures contract which complies with the requirements for designation as set forth in § 5 and further explained by CFTC Guideline No. 1, 17 C.F.R. Part 5, Appendix A. Once the CFTC approves the contract and designates the exchange as a contract market under § 6, the exchange must enforce all of its by-laws, rules, regulations and resolutions, including contract terms, which have been duly submitted to and approved by the CFTC under § 5a(12), see § 5a(8). If an exchange wishes to amend the terms of an approved futures contract, it must seek the CFTC's subsequent approval pursuant to § 5a(12); in turn, the CFTC according to the statute must afford "interested persons", namely traders, an opportunity to participate in the approval process, see id. ; CFTC regulations 13.1-13.6, 17 C.F.R. §§ 13.1-13.6.

There are other indications that the CEA contemplates that revision of contract terms should be a matter for the CFTC and the exchanges, not for the courts in private litigation. CFTC regulation 13.2, 17 C.F.R. § 13.2, at 176, provides that "any person may file a petition with [the CFTC] for the issuance, amendment or repeal of a rule of general application." When acting within § 5a(10), the Commission must first notify the exchange of its concern and "afford the contract market an opportunity to make appropriate changes." If the exchange, after such notification, fails to act, the statute authorizes the Commission to "change or supplement" the contract rules, but only "after granting the contract market an opportunity to be heard." Id. According to one commentator, "the Commission [as of late 1981] has not formally exercised its authority under Section 5a(10) but, like the gunboat in the harbor, its existence has proven effective in encouraging the markets to rethink certain of their contracts." 1 P. Johnson, supra, § 2.10, at 221. This provision affords no basis for finding the privately enforceable exchange duty Wong wishes to imply, especially since § 5a(10) expressly provides that the CFTC may not revise contracts that "are currently outstanding and open".

Similarly, § 8a(7), which was added by the Commodity Futures Trading Commission Act of 1974, Pub. L. No. 93-463, § 213, 88 Stat. 1389, 1404, lodges broad authority in the CFTC with regard to the alteration of contract market rules. This provision authorizes the Commission "to alter or supplement the rules of the contract market", specifically including "terms or conditions in contracts of sale to be executed on or subject to the rules of such contract market", § 8a(7)(A). As with the procedures set forth in § 5a(10), this provision requires the Commission first to request the exchange to make the change "on its own behalf". If the exchange balks, the Commission may act, but only after affording the contract market "appropriate notice and opportunity for hearing". Finally, any change in a contract proposed by the exchange requires approval by the CFTC, § 5a(12), 7 U.S.C. § 7a(12).

The foregoing description of the "regulatory scheme designed by congress", Cutner v. Fried, 373 F. Supp. 4, 9 (S.D.N.Y. 1974), with respect to revision of futures contracts, admits of no room for a privately enforceable duty on the part of an exchange to amend such contracts. CFTC regulation 1.51(a)(1), 17 C.F.R. § 1.51(a)(1), requires each exchange to monitor market activity "for indications of possible congestion or other market situations conducive to possible price distortion", and a breach of the duty to do this in good faith will give rise to a private cause of action under Curran and now under § 22(b). The form of a contract may augment the need for monitoring, as indeed may have been the case here, but Wong did not allege, and hardly could have alleged, that the Exchange failed in bad faith to monitor. In its own self-interest, a contract market will wish to maintain contracts that are appropriate vehicles for hedging. If an exchange fails to take appropriate action, the CFTC may step in and force its hand pursuant to § 8a(7) or may take more drastic measures such as suspending or revoking the market's designation under § 5b, 7 U.S.C. § 7b. While an exchange's responsibility in this respect may be considered a duty in the colloquial sense, in light of the CEA itself it is not the kind of duty for breach of which Congress can reasonably be assumed to have intended to authorize a private action for damages.*fn25

Other considerations reinforce this conclusion. Since the number and kinds of changes that may be made in contracts are infinite, damage claims for an exchange's failure to effect such changes, even under a bad faith standard, would likewise be. Almost every disgruntled trader could think of a change in the contract that would have benefitted him although it would likely have hurt others. Private litigation would require courts to decide just when the exchange should have altered the contract, in what manner, and whether the exchange could or would have made the alteration applicable to existing contracts. Serious problems in proving causation and establishing damages would likewise be encountered. For one thing, a rule change would require approval by the CFTC, § 5a(12), 7 U.S.C. § 7a(12). How could a court predict whether this would have been forthcoming, save perhaps if it later had been? How could it predict when the CFTC would have acted? The proposal for an implied private right of action for failure of an exchange to propose contract changes would embark the courts on a sea of difficulties, in a situation where Congress has provided an orderly system of coordinate action by the exchanges and the CFTC.

Moreover, in contrast to the cases of traders' violations of the statutory prohibition against fraudulent and deceptive conduct and price manipulation and of an exchange's failure to enforce its own rules, where private causes of action were sustained in Curran, supra, 456 U.S. 353, 102 S. Ct. 1825, 72 L. Ed. 2d 182, there was no established line of precedent upholding a private suit against exchanges for failure to revise their own contracts similar to the cases cited in footnotes 93 and 94 to Justice Stevens' opinion in Curran, id. at 391-92.*fn26 Finally, we disagree with the CFTC that the provision in the recently enacted § 22(b)(1)(A) affording a private right of action against a contract market that "in enforcing any such bylaw, rule, regulation, or resolution violates this chapter or any Commission rule, regulation, or order" should be read as creating a right of action when the only default by the contract market is in failing to propose an amendment to its contracts. To the contrary we think the failure of Congress, as we read its language, to make any such provision, in an enactment intended to recognize but also to set bounds on private causes of action, argues against holding that one had theretofore been implied, see infra p. 676.

(2) Wong's claims for failure to monitor and for delay in taking emergency action

In contrast to Wong's claim of a private right of action against the Exchange for failure to amend the Maine round white potato futures contract, the portion of his complaint which alleges failure by the Exchange to monitor came well within the Supreme Court's decision in Curran.

Wong charged that the Exchange violated § 5a(8) by failing to enforce CFTC regulation 1.51(a)(2), 17 C.F.R. § 1.51(a)(2), which requires an exchange to monitor the market to detect "situations conducive to possible price distortions." See also CFTC Guideline No. 2, reprinted in 1 Comm. Fut. L. Rep. (CCH) para. 6430, at 6211 ("The purpose of market surveillance is to detect adverse situations as they are developing, before the market can be disrupted."). In this regard, the complaint, construed liberally, falls within the line of precedents endorsed in Curran that hold a private right of action may be brought against an exchange for failing to maintain an orderly market by not enforcing provisions of the CEA, CFTC regulations or contract market rules. See, e.g., Deaktor v. L.D. Schreiber & Co., 479 F.2d 529, 534 (7 Cir.), rev'd on other grounds sub nom. Chicago Mercantile Exchange v. Deaktor, 414 U.S. 113, 94 S. Ct. 466, 38 L. Ed. 2d 344 (1973); Miller v. New York Produce Exchange, 550 F.2d 762, 766-67 (2 Cir.), cert. denied, 434 U.S. 823, 54 L. Ed. 2d 80, 98 S. Ct. 68 (1977). The question whether a private right of action should be available for failure by the Exchange to take emergency action as soon as it should is closer. Although Miller assumed such a right of action, substantial arguments can be made to the contrary. No rule of the Exchange expressly required it to take such action. Just as we have concluded that Congress deemed § 8a(7), 7 U.S.C. § 12a(7), empowering the CFTC to order the making of new rules, to be a sufficient remedy for an exchange's failure to do this, it could well have considered § 8a(9), 7 U.S.C. § 12a(9), empowering the CFTC to direct a contract market to take emergency action, to be sufficient to deal with the problem of an exchange's dilatoriness in exercising its own powers. Here again the silence of the 1982 statute is evidence that Congress has no wish for a private cause of action for a failure by an exchange to exercise its discretionary power to declare an emergency as soon as a plaintiff thinks it should. We find it unnecessary to decide this question since even if there is a private cause of action for failure to declare or undue delay in declaring an emergency, this portion of Wong's complaint falls, as does the portion relating to monitoring, for want of allegations of bad faith. That bad faith is the standard of liability for suits against an exchange with respect to its taking action authorized by applicable law has been established at least since Daniel v. Board of Trade, 164 F.2d 815 (7 Cir. 1947) -- a principle now expressly adopted by Congress for actions accruing after January 11, 1983, §§ 22(b)(4) and (d), 7 U.S.C. § 25(b)(4) and (d). The standard of liability for not taking discretionary action cannot reasonably be lower. The new legislation makes bad faith the standard both as regards taking action and failing to take it, and we can see no reason for thinking there was ever a differentiation between the two.

For reasons stated at length by the district court, 571 F. Supp. at 1541, Wong's allegations concerning the NYME's failure to act with respect to what Wong considers to have been a developing crisis concerning the March, April and May contracts do not measure up to the requirements of the bad faith standard. Although the complaint claims the existence of a conspiracy of unnamed corporations and individuals to increase prices in the potato futures market through manipulation, it does not allege that the defendants knew this, let alone that their failure to act was based on ulterior motives. Nothing in the record suggests that the complaint could have been amended to overcome these deficiencies. To the contrary, the CFTC report shows that the NYME promptly investigated the failure of the November deliveries and concluded, after further monitoring of the situation, that the probability was that the problem would work itself out. Although, armed with the benefit of hindsight, one might criticize the Exchange for not launching a more searching investigation, its conduct was far removed from bad faith. A similar analysis applies to Wong's claim with respect to NYME's delay in taking emergency action. The dimensions of the emergency became apparent only during the week of March 5, and the Exchange acted during the night of March 8-9. Wong does not -- and on this record could not -- allege that this delay was in bad faith.

Spinale's Appeal

There is no dispute that Spinale's case is within the private right of action recognized by the Supreme Court in Curran. There can likewise be no dispute that the standard of liability is "bad faith". The close question is whether the district court erred in foreclosing further discovery in contravention of Fed. R. Civ. P. 56(f).*fn27

As analyzed by the district judge, 571 F. Supp. at 1544-45, Spinale's complaint outlined two "relatively specific theories" of bad faith. The first theory was alleged in the Sixth and Seventh Claims for Relief. Taking these in inverse order, the Seventh Claim asserted that virtually all members of the Board were affiliated with Exchange clearing members firms that would have been required to cover margin requirements of the shorts if the latter were unable to do this as prices rose and also to guarantee the profits of the longs in the event of a default by the shorts; hence all Board members holding shares in or in any way employed by clearing firms were sufficiently interested in the emergency action of March 8-9, 1979, that their failure to disqualify themselves constituted bad faith. The Sixth Claim asserted that various Board members

"controlled, advised, and/or had a financial interest in short positions respecting Potato Futures Contracts held in the names of their friends, relatives, employees, nominees, partners, stockholders, business associates, agents or customers."

As described by the district judge,

Spinale claims that, given these short positions, Board members and their various cohorts "would have suffered substantial economic losses" had the Board not taken emergency action which forstalled [sic] both delivery defaults by March contract "shorts" and a drastic appreciation in the price of the April and May contracts. Thus, Spinale alleges, the emergency actions were taken in a bad-faith effort to preserve the assets of Board members and their "short" friends, relatives, and associates.

571 F. Supp. at 1545 (quoting portions of complaint).

The district judge characterized Spinale's second theory as having been raised "outside his complaint", id. at 1548, but nevertheless considered it. This theory contains a number of allegations, only two of which we deem worthy of discussion additional to Judge Sofaer's. These were a claim that the emergency action was motivated by personal animosity of certain Board members to Spinale, id. at 1551-52, and a claim that the Board's "emergency action was so negligent and irresponsible as to support independently a finding of bad faith," id. at 1552.

Judge Sofaer quickly dispatched the Seventh Claim for Relief. He found that the fund referred to in the complaint "has never been used and, given the solvency of most of the clearing members with 'short' positions in the potato contract, its use in the event of trader defaults on the 1979 contracts was highly unlikely." Id. at 1545. He further concluded that

if such a degree of self-interest were allowed to demonstrate bad faith, then exchange-board members involved in futures markets would inevitably be subject to bad-faith charges, and the concept of exchange self-regulation would be undermined.

Id. We agree. The concept of exchange self-regulation necessarily implies that the boards of exchanges shall contain a substantial number of persons with first-hand knowledge of the market and that these persons shall be free to share in important deliberations. A principle requiring them to disqualify themselves simply because of the obligations of clearing house membership would run counter to this concept.

The Sixth Claim for Relief received more extensive analysis. Apparently taking it as a given that a showing that members of the Board had predominant and extensive short interests would at least create a triable issue of fact, Judge Sofaer concluded that nevertheless there was none. In reaching this conclusion he drew on the factual findings in the CFTC report*fn28 and on fifteen affidavits concerning the interests of each Board member. He summarized the latter as follows, id. at 1546 (footnotes omitted):

These documents indicate that no Board members present at the March 8, 1979 meeting held a personal position in the March, April, or May 1979 contracts at the time of the meeting or at any subsequent time; that the majority of the firms with which these members were associated held no position in the March, April, or May contract on March 8, 1979, or at any subsequent time; that four of these members' firms held positions in the March, April, or May contracts on March 8, 1979, but three of the four were long; that customers of seven of these members' firms held positions in the March, April, or May contract[s] on March 8, 1979, but none of these customer positions was under the control of a Board member, and five of the seven firms held net-long customer positions; that only one of the four Board members not at the March 8 meeting held a personal position on or subsequent to March 8, 1979, but it was net long; that the firms or firm customers of only two of these four absent members held positions, but these positions were both net long; and, finally, that all the fourteen (of fifteen) governors named by Spinale as defendants deny ever having any knowledge of any "close friends or relatives" holding positions in the March, April, or May contracts. Thus, the only apparent evidence of financial self-interest among Board members present at the March 8, 1979 meeting consists of (1) the house positions for four members' firms and (2) the customer positions of seven members' firms. See Defendants' Memorandum (July 23, 1982), Ex. 1 (detailed summary of house and customer positions relating to each Board member).

The judge found that the evidence of the house positions was insufficient to raise an issue of bad faith since all but one of the four were short and the customer positions of the four were predominantly long. Id. at 1546-47. With respect to the customer positions, after referring to Judge Clark's opinion for this court in Crowley v. Commodity Exchange, Inc., 141 F.2d 182, 188 (1944), he made an intensive study and concluded:

These instances of potential conflict, in the context of legislatively sanctioned self-regulation, do not raise an issue of fact concerning bad faith. In each individual instance of potential conflict, the likelihood of ulterior motive is substantially negated by lack of control, abstention, or offsetting interests. Moreover, even if each instance of potential conflict in fact represented an instance of bad faith, the three instances combined could not be deemed to taint the entire Board's actions, especially in light of the offsetting instances of potential conflict with short interests in the Board as a whole.

571 F. Supp. at 1547-48.

Spinale does not seriously challenge the correctness of the judge's factual findings on the material the judge had before him; his point is rather that he was entitled to depose the Governors in the hope of developing that a significant number of them were in fact motivated by financial self-interest in protecting the shorts. The judge's answer to this was that

the bad-faith standard can be satisfied only by substantial evidence supporting more than mere suspicion or speculation about a Board's ulterior motives for taking emergency action. Inasmuch as a system of self-regulation inevitably will provide dissatisfied traders with some evidence consistent with self-interest, the existence of bad faith must be tested by an objective standard, rather than a subjective standard that would permit trial on the issue of board members' state of mind virtually without regard for the insubstantiality of the objective, circumstantial evidence of ulterior motive.

Id. at 1548.

With respect to Spinale's animosity claim, the record confirms that, as said by Judge Sofaer, id. at 1551, "Spinale was undoubtedly on the minds of some Board members on the night of March 8, 1979." The owner of a large fresh fruit and vegetable packaging firm, with over thirty years of experience in the business, and a shrewd trader, he had established substantial long positions in the fall of 1978 after surmising that the quality of that year's March potato crop was not up to par. By March 8 he held, on the long side, apparently all sixty-six of the outstanding open March contracts, approximately 100 of the 207 outstanding open April contracts, and perhaps as many as 150 of the 10,000 outstanding May contracts. He had utilized the EFP procedure advantageously, see supra note 21, to realize a substantial profit by negotiating a basis price with the shorts that, nor surprisingly, considerably exceeded the prevailing cash market price. Naturally this did not endear Spinale to the shorts or to NYME officials, who considered him to be "overreaching" and taking "unfair" advantage of the crisis even though his actions were entirely legal.

A supplemental affidavit of Spinale's details some manifestations of this hostility. He recalled that one of the Governors, Sam Fishberg, pulled him aside on the floor of the Exchange during the week of March 5-8, 1979, and said that Spinale's long position in the market and his expressed desire to stay with his position and accept deliveries of the potatoes threatened to ruin everything that NYME had done over the years to build up trading volume. Spinale also cited adverse comments on him by members and staff of the CFTC at meetings before and after the Board's March 8-9 meeting which, he urges, could reasonably be deemed to have reflected remarks by the staff of the NYME, particularly President Levine and Chairman Marks, the chief architects of the emergency action. Spinale's floor broker, Leon Grappel, submitted an affidavit stating that during the week of March 5-8, 1979, members of the Board complained to him on the floor about Spinale's behavior in insisting upon deliveries of the March contract or exchanges for physicals at prices ranging up to $9.00 per cwt. Grappel added that it was his impression that these members, whom he was prepared to identify under a protective order, "did not like Mr. Spinale. Therefore their judgment whether or not a crisis existed may have been influenced by personal prejudice toward him."

The judge's answer to this was that any animosity of Board members toward Spinale "was not improperly motivated by concerns foreign to the Board's self-regulating duties", that the Board "may well have been justified in focusing concern on Spinale, since the Board arguably should prevent members from acts of excessive greed in a time of artificially created crisis", and that therefore "the personal animosity alleged by Spinale does not create an issue of fact concerning Exchange bad faith." 571 F. Supp. at 1552. Spinale replies that he was not alleged to have been doing anything prohibited by statute, regulation or rule but was simply realizing on his acumen in taking seriously reports as to the poor quality of the 1979 potato crop and the November 1978 delivery failures whereas the shorts had not; that his conduct thus created no justifiable basis for animosity; and that in any event he was entitled, under Fed. R. Civ. P. 56(f), to further discovery to explore what actually occurred.

Spinale also asserts that he is entitled to further discovery with respect to his claim that the Board's emergency action was so irresponsible as to support a finding of bad faith. He contends that the Board's declaring "an unprecedented sweeping emergency on the basis of incomplete and conflicting data respecting the actual condition of the Maine potatoes", including its decision to treat the March contract on the same footing as those of April and May, even though trading had ceased in the former,*fn29 created a triable issue of whether the Exchange's actions were so inappropriate as to support a finding of bad faith. Judge Sofaer concluded that "only a demonstration of reckless and virtually irrational exchange behavior could conceivably be permitted to raise independently an issue of fact concerning bad faith," 571 F. Supp. at 1552, and found, largely on the basis of the CFTC report, that Spinale had failed to make such a showing.

This case requires a more refined analysis of what constitutes "bad faith" by a contract market or its governors and of how far such bad faith creates liability for otherwise legitimate action than has generally been made. Specifically, can defendants in such a case be found liable if their action was prompted in part by self-interest or animosity but still was within the range of discretion accorded them by the regime of exchange self-regulation?

We begin our analysis with Daniel, supra, 164 F.2d 815, which has long been the leading case in this area. The case came before the court on a motion to dismiss the complaint, and the allegations thus had to be taken as true. The allegations were strong. The complaint averred that enactment of the challenged regulations was in violation of the duty and of the prior course of conduct of the defendants, the directors, governors and officers of the Chicago Board of Trade and the Board's clearing house; that by them the defendants "'willfully, maliciously, and for their own personal gain through profits accruing to them through their individual brokerage houses continued said Board of Trade in operation when the open and free and orderly market had ceased to exist '", and that the regulations "'were adopted for the purpose of continuing the operation on the Board of Trade for the personal advantage and gain of the defendants as hereinbefore alleged'" and for the added purpose of attempting to protect themselves against liability in an antitrust suit. Id. at 818. The court said that if the regulations were in accordance with the exchange's rules and by-laws, defendants had violated no rights of the plaintiffs "in the absence of an averment of bad faith amounting to fraud." Id. at 819. It then went on to say that "because of the Board's relation to the public, it must . . . act with the utmost objectivity, impartiality, honesty, and good faith". Id. at 819-20. The Board owed that duty because of the confidence reposed in it by its members, "and the further fact that the directors, governors and officers . . . may themselves be members of the market, and as such have to act where their own private interests are concerned." Id. at 820.

The opinion seems to speak with two different voices. On the one hand, in a phrase beloved by defendants, a complaint must be dismissed "in the absence of an averment of bad faith amounting to fraud" -- more colloquially that in order for defendants to be found liable, they must have acted very badly indeed. On the other hand, in a phrase equally beloved by plaintiffs, the governors must "act with the utmost objectivity, impartiality, honesty, and good faith" -- more colloquially that in order for defendants to escape liability, they must have acted very nobly, almost as nobly as limned in Chief Judge Cardozo's famous description of the duties of a trustee in Meinhard v. Salmon, 249 N.Y. 458, 464, 164 N.E. 545, 546 (1928), despite -- or even because of -- the fact that they must often act "where their own private interests are concerned."

The opinion makes three more statements which do little to clear up how far the plaintiff must show the action was motivated by ulterior rather than legitimate interests. One is that if the individual defendants "did not act in good faith, but acted to further their own selfish interests and for their personal gain, the corporate defendants' action cannot be bona fide." Another is that "in the absence of such infidelity to their trust by said directors, governors, and officers of the Board and Clearing as to amount to fraud, the acts and conduct of the defendants as set forth in the amended complaint are insufficient to entitle the plaintiffs to any relief." Finally, and this is the only holding, "the plaintiffs' allegations are sufficient to charge fraudulent conduct." 164 F.2d at 820.

Later decisions have shed little light on the question whether the self-interest or ulterior motive of the governors of an exchange must be the sole or at least a dominant factor in the exchange's action or whether it suffices that such factor may have played a not insignificant part. Usually there has been no occasion to do this, since rulings have come upon motions to dismiss complaints which either alleged that an action was taken solely to advance board members' interests, e.g., Seligson v. New York Produce Exchange, 378 F. Supp. 1076, 1083 (S.D.N.Y. 1974), to conceal and protect illegal traders, e.g., Smith v. Groover, 468 F. Supp. 105, 107, 118 (N.D. Ill. 1979), to further a board members' conspiracy to manipulate the market, e.g., Strobl v. New York Mercantile Exchange, 561 F. Supp. 379, 382-83, 384 (S.D.N.Y. 1983), or to line board members' pockets, e.g., Gordon v. Hunt, 558 F. Supp. 122, 123 (S.D.N.Y. 1983), or, on the other hand, failed to make any adequate allegation of "ulterior motive", as in P.J. Taggares Co. v. New York Mercantile Exchange, 476 F. Supp. 72, 77 (S.D.N.Y. 1979) (Weinfeld, J.). The only case we have found which addresses the problem here under discussion is Bishop v. Commodity Exchange, Inc., 564 F. Supp. 1557, 1562 (S.D.N.Y. 1983). In a thoughtful opinion, Judge Lasker held that "if an exchange enacted a rule for the sole purpose of advancing the private interests of its members, and if the rule damaged the plaintiffs, it would not be a defense for the exchange to allege that the rule was reasonable", id. at 1562 (emphasis in original), but, on the other hand, "should a Governor vote in favor of such a rule in the belief that the rule served the public interest, even if also in the expectation and hope that it would serve his personal interest, his behavior would not give rise to liability . . .," id. After plaintiff filed an amended complaint, Judge Lasker clarified his earlier ruling:

The deficiency of the original complaint was that it alleged only that the Governors had enacted the [challenged] rule in order to advance their own interests, an allegation which left open the possibility that the furtherance of their own interests was merely incidental to their attempt to advance the public interest. The amended complaint, on the other hand, clearly alleges that the Governors' advancement of their own interests was the dominant, not merely the incidental, motivation for their actions. Such an allegation adequately states a cause of action.

Bishop v. Commodity Exchange, Inc., 581 F. Supp. 1278, 1279 (S.D.N.Y. 1984).

We have also sought illumination in the legislative history of the 1982 provision, § 22(b)(4), 7 U.S.C. § 25(b)(4), in regard to bad faith,*fn30 without having gained much thereby.

As originally introduced, neither the House bill, H.R. 5447, 97th Cong., 2d Sess. (Feb. 3, 1982), nor the companion bill in the Senate, S. 2109, 97th Cong., 2d Sess. (Feb. 11, 1982), provided for a private right of action. The private right of action based on bad faith first appeared in the amended version of the House bill, as reported by the Agriculture Committee on May 17 (doubtless hastened by the Court's Curran decision announced two weeks earlier), and referred to the Energy and Commerce Committee for further hearings, see H.R. 5447, 97th Cong., 2d Sess. § 236 (May 17, 1982).

Once the House passed H.R. 5447, supra, as amended, on September 23, 1982, see 128 Cong. Rec. H7523 (daily ed. Sept. 23, 1982), the Senate chose one week later formally to consider the House bill in lieu of S. 2109, supra. The Senate passed the House bill in an "amended form", which eliminated the provision containing the private right of action and was, in essence, the original Senate bill. See 128 Cong. Rec. S13104 (daily ed. Oct. 1, 1982). The Senate ultimately adopted legislation which provided for the private right of action after the House and Senate conferees hammered out the final version of H.R. 5447, see infra.

At the House hearings a New York attorney objected to the bad faith limitation; he thought that the burden of showing good faith should be placed on the exchanges or that the standard of liability should be left for judicial elaboration. SEC/CFTC Jurisdictional Issues and Oversight -- Part 2: Joint Hearings on H.R. 5447, H.R. 5515 and H.R. 6516 Before the Subcomm. on Telecommunications, Consumer Protection, and Finance and the Subcomm. on Oversight and Investigations of the House Comm. on Energy and Commerce, 97th Cong., 2d Sess. 587, 588, 601 (1982). At the Senate hearings, Chairman Philip Johnson of the CFTC, responding to a question by Senator Lugar concerning the proposed private right of action, stated:

As far as private right of action is concerned, the Commission's position is that we favor a private right of action against those industry professionals who are found to have violated the substantive provisions of the act, such as having committed fraud, engaged in manipulation, conducted prearranged trading or matters of that nature . . . .

We draw a distinction in the case of self-regulatory organizations. Our view is against private rights of action as a rule in this instance, except where the exchange itself is engaged in the type of business conduct that I described, or where the exchange's action is motivated by conflict of interest -- self-dealing, rather than a conscientious attempt to do what is best for the market as a whole.

CFTC Reauthorization: Hearings on S. 2109 Before the Subcomm. on Agricultural Research and General Legislation of the Senate Comm. on Agriculture, Nutrition and Forestry, 97th Cong., 2d Sess. 35 (1982). The amended House version, substantially what was advocated by Chairman Johnson, prevailed in the conference committee, see H.R. Conf. Rep. No. 964, 97th Cong., 2d Sess. 53, reprinted in 1982 U.S. Code Cong. & Ad.News 4055, 4071, with Senator Helms reporting to his colleagues:

The conferees decided to adopt the House provisions because this area of the law is new and unchartered, and it was felt that the provision would clarify the limits of liability for violations of the [Commodity Exchange Act],

128 Cong. Rec. S14814 (daily ed. Dec. 15, 1982).

We believe that Judge Lasker's opinion in Bishop, supra, 564 F. Supp. at 1562, takes substantially the right approach toward passing on the sufficiency of complaints. It takes into account the competing needs of exchanges and their officials and of the trading public. Although governors must be able to police the markets effectively with the broad discretion accorded by Congress, traders must not be deprived of their right to challenge illegitimate regulatory action. The Commodity Exchange Act, which embodies the statutory model of exchange self-regulation, mandates us to strike a balance that does not insulate exchange officials from answering serious questions posed by injured traders. To do otherwise would drastically curtail the private right of action deemed essential to the regulatory framework established by Congress. Therefore, when self-interest or other ulterior motive unrelated to proper regulatory concerns is alleged to constitute the sole or the dominant reason for the exchange action, a complaint is sufficient even though the action was not beyond the bounds of reason. On the other hand, if the governors sincerely and rationally believe their action is in the public interest, there should not be liability simply because the action has the incidental effect of advancing their private interests or damaging someone whom they do not like.

Once there has been a sufficient complaint and the court must deal with the merits, it may find help in the recent decision of the Supreme Court with respect to discriminatory discharges of pro-union employees in NLRB v. Transportation Management Corp., 462 U.S. 393, 103 S. Ct. 2469, 76 L. Ed. 2d 667 (1983), which in turn derived from the Court's decision in Mount Healthy City Board of Education v. Doyle, 429 U.S. 274, 50 L. Ed. 2d 471, 97 S. Ct. 568 (1977) (discharge motivated by disapproval of employee's exercise of First Amendment rights). Under that test a plaintiff like Spinale would have the initial burden of showing that ulterior motive, e.g., financial gain or personal animosity was "a substantial or motivating factor", 103 S. Ct. at 2473, in the taking of or failure to take action. If he fails to do that, the case is at an end. If he succeeds, the exchange could escape liability if it proved by a preponderance of the evidence that the action or inaction would have occurred anyway because that course was reasonably believed to be in the public interest.

If we were reviewing a judgment against Spinale after a bench trial which had produced only the record now before us, we would readily affirm. The issue on Spinale's appeal, however, is the different one whether it was proper to grant summary judgment without allowing him to conduct some discovery on the issue of bad faith, including the sub-issue, just discussed, of the effect of bad faith on the emergency action. His counsel appropriately relies on our statement in Friedman v. Meyers, 482 F.2d 435, 439 (2 Cir. 1973), citing Cali v. Eastern Airlines, Inc., 442 F.2d 65, 71 (2 Cir. 1971), that summary judgment is "particularly inappropriate" where it is sought on the basis of "the inferences which the parties seek to have drawn [as to] questions of motive, intent, and subjective feelings and reactions." With great respect we simply cannot agree with the district court's conclusion that Spinale's papers "fail to raise a genuine issue of fact concerning the bad faith Spinale must show to recover from Exchange defendants." 571 F. Supp. at 1544. In particular, we do not agree with the judge's conclusion that Spinale's accusations of animosity can be rubbed off simply because the alleged animosity related not to personal factors but to Spinale's business conduct. However distasteful this was to defendants, it seems to have been merely capitalizing on Spinale's successful assessment of the risks. The Exchange is not a social club. We see no reason to believe that if a surplus of potatoes had developed, the shorts would have exhibited a higher quality of mercy to Spinale than he did to them. Our elaboration of the causality of "bad faith" enhances the importance of determining how far, if at all, the Governors were motivated into taking the emergency action by impermissible factors. Having shown some financial interest and some personal animosity, Spinale should not be precluded from probing this further because of the surface plausibility of defendants' affidavits, the bare minutes of the Governors' meeting, or the CFTC report; he is entitled to limited discovery as to just what interests the defendants had and as to what actually occurred at the Governor's meeting, however unlikely it is that this probing will be fruitful.*fn31 He is entitled also to some limited discovery as to the rationality of the emergency action*fn32 -- particularly insofar as this included the March contract as to which trading had ceased.*fn33 We leave the precise scope and manner of the discovery to the good judgment of the able and experienced district judge.

In No. 83-7885 the judgment dismissing the complaint is affirmed, with costs to appellee. In No. 83-7891 the grant of summary judgment is reversed and the cause is remanded for further proceedings under Fed. R. Civ. P. 56(f) consistent with this opinion, with costs to abide the event.

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