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October 26, 1998

MG Refining & Marketing, Inc., Plaintiff, against Knight Enterprises, Inc. et al., Defendants.

The opinion of the court was delivered by: SOTOMAYOR


 SONIA SOTOMAYOR, U.S.D.J. by designation

 These cross-motions for summary judgment arise from a dispute between MG Marketing & Refining, Inc. ("MG") and eighteen of its customers, including Knight Enterprises, Inc. (collectively the "Customers"), in which the Customers allege breaches of certain 45-day contracts. In its pleadings, MG has admitted non-performance but asserts the affirmative defenses of illegality and impossibility. MG now moves for summary judgment on the ground that the contracts at issue were illegal and therefore void. The Customers move for summary judgment dismissing MG's illegality and impossibility defenses.

 For the reasons discussed below, this Court denies both parties' motions with respect to the defense of illegality, and grants the Customers' motion with respect to the defense of impossibility.


 The following facts are not disputed in any material way. The Customers are commercial entities that either use or engage in business activity relating to the wholesale, retail, supply, storage or distribution of diesel fuel and other petroleum products. (See Def.'s Rule 56.1 Statement PP 1-18.) MG was at one time the primary operating subsidiary of MG Corporation, and was at all relevant times herein a trader, distributor and marketer of oil and other oil related products. (See Def.'s Rule 56.1 Statement P 19.)

 Beginning as early as December 1991 and continuing through December 1993, MG marketed and sold to the Customers certain long-term contracts for the delivery of unleaded gasoline or heating oil at a fixed price and over a term of five or ten years. Without the use of a regulated exchange market, the parties entered into agreements with an aggregate stated volume of 160 million barrels by the end of 1993. The contracts themselves came in two forms. Under the first kind (the "ratables"), the Customers were required to take monthly deliveries on a ratable basis, and MG was required to meet the stated requirements. Except in a few cases where ratables were repudiated early in 1994, physical delivery occurred regularly under these contracts, (see Def.'s Rule 56.1 Statement P 27), and all of the Customers had the physical capacity to take these deliveries.

 The second kind of contract (the "flexie" or "45-day contract") was nearly identical to the first, but the delivery requirements were modified to read as follows:

Delivery under this Agreement shall be made no earlier than the Term Commencement Date and no later than the Term End Date. Purchaser shall notify Seller in writing of each Lifting date, which shall be no earlier than forty-five (45) days after such written notification has been received by Seller. Such written notice shall also include the quantity of the Product to be transferred from Seller to Purchaser on such Lifting Date. If as of the day that is forty-five (45) days prior to the Term End Date (the "Last Notice Date"), Purchaser has not provided Seller with written notice of the Lifting Date with respect to any quantity of Product remaining to be delivered as of such Last Notice Date, the Lifting Date for such quantity of undelivered Product shall be the Term End Date

 (E.g., Pl.'s Mem. Ex. 2 at P 2.) Although MG sold flexies to the Customers with an aggregate stated volume of approximately 60 million barrels, none of the Customers has ever requested physical deliveries under a flexie, and few, if any, had the capacity to take the full stated volumes all at once. (See Def.'s Rule 56.1 Statement P 8.)

 Both the ratables and the flexies also contained a provision (the "blow out" provision), which allowed the Customers to cash out their contracts and terminate any remaining delivery requirements in the event of a "price spike" -- i.e., if the price of petroleum futures on the New York Mercantile Exchange ("NYMEX") rose higher than a level stated in the contracts. This provision reads as follows:

At any time during the Term of this Agreement that the Fixed Cash Price is less than the bid price for the applicable NYMEX Futures Contract . . . , Purchaser may, in lieu of accepting all or part (in lots of 42,000 gallons) of the remaining deliveries of Product, accept cash payments from Seller based on the average of bid prices obtained by Seller in totally or partially liquidating its long hedge positions for this Agreement (the "Average Bid Price") in the applicable NYMEX Futures Contract. . . . Upon Purchaser's receipt of cash payments from Seller representing all of the remaining deliveries of Product, Seller shall have no obligation to deliver any further Product under this Agreement and this Agreement shall terminate.

 (E.g., Pl.'s Mem. Ex. 2 at P 16(a) (flexie language); Def.'s Mem. Ex. 45 P 16(a) (ratable language).) The contracts specified that "the cash payment to be received by Purchaser shall be an amount equal to [either 100% or 50%, depending on whether this is a flexie or a ratable, respectively, of] the product of the number of gallons represented by the long hedge positions to be liquidated multiplied by the difference between the Average Bid Price for the applicable NYMEX Futures Contract and the Fixed Cash Price." (E.g., Pl.'s Mem. Ex. 2 at P 16(a) (flexie language); Def.'s Mem. Ex. 45 P 16(a) (ratable language).)

 Relations between the parties continued normally and without interruption until 1994, when the CFTC's Division of Enforcement began investigating the flexies and announced in November that they might be illegal off-exchange futures contracts. The Commodity Exchange Act ("CEA"), 7 U.S.C. ยง 1 et seq., requires that futures contracts be marketed and entered into only through certain designated "contract markets," which meet very specific CEA requirements. To call the flexies "illegal off-exchange futures contracts" is thus to suggest that they are illegal because they are futures contracts, subject to CEA regulation, but were entered into without the aid of a contract market.

 These investigations continued for some time, until MG submitted an offer of settlement that the CFTC accepted, and which was formally entered into on July 27, 1995. The resulting order stopped the initiation of any full-scale enforcement proceedings against MG, assessed MG a $ 2.25 million penalty, established a series of oversight requirements for the corporation, declared the contracts to be "illegal off-exchange futures contracts", and required MG to certify within five days that it had notified "all Purchasers of existing 45 Day Agreements that the Commission has entered this Order finding that the 45 Day Agreements are illegal and therefore void . . . and directing [MG] to cease and desist from violating" the relevant sections of the CEA. (See Pl.'s Mem. Ex. 1, at 8-11 (hereinafter "CFTC Order").) On July 27, 1995, MG's President issued letters to the Customers explaining the CFTC's Order and claiming that MG was "barred . . . from performance" under the flexies. (See, e.g., Def.'s Mem. Ex. 94.) In 1996, when the NYMEX reference price exceeded the fixed contract price, every Customer wrote in to MG and asked to exercise their contractual rights to cash out all of their flexies. (See Pl.'s Rule 56.1 Statement P 10.) MG refused to perform.

 Although disputes between the present parties began as early as April 8, 1994, when MG filed its original complaint against Knight Enterprises on a related matter, the Court consolidated all of the Customers' action for pre-trial purposes on March 11, 1996. By then, the Customers had alleged breach of the 45-day contracts, and MG subsequently responded to these claims by moving to dismiss. In its motion, MG argued that the Customers were collaterally estopped from denying an affirmative defense of illegality because the CFTC had already declared the flexies illegal and therefore void, that the present action amounted to an illicit collateral attack on the CFTC Order, and that MG could not be held liable for damages because the Order made performance under the flexies impossible. The Customers countered that MG was judicially estopped from asserting the illegality of the flexies because MG had advanced an inconsistent position in a prior arbitration proceeding. The Customers also argued that MG waived its right to deny the legality of the flexies under the express terms of the contracts.

 On January 22, 1997, this Court denied MG's motion to dismiss. See In re MG Refining & Marketing, Inc. Litigation, 1997 U.S. Dist. LEXIS 444, No. 94 Civ. 2512 (SS), 1997 WL 23177 (S.D.N.Y. 1997). The Court held that although the CFTC Order declared the flexies "illegal and therefore void," the Customers were not collaterally estopped from challenging this determination because they were not parties to the CFTC action and the issue of legality had never been fully adjudicated. The Court also held that the absence of any full adjudication before the Commission implied that the present action could not be considered a collateral attack at all on the CFTC's proceedings, and so certainly could not be considered an illicit one. With regard to impossibility, the Court noted that the only Second Circuit case cited in which a consent order was deemed sufficient to ground a defense of impossibility -- i.e., Harriscom Svenska AB v. Harris Corp., 3 F.3d 576 (2d Cir. 1993) -- seemed to require a finding that the consenting party had not acted in bad faith. The Customers' evidence "that MG solicited [the] Consent Order . . . , with its language declaring the 45 day agreements illegal, specifically for purposes of evading its responsibility under the 45 day agreements" therefore "raised a factual question as to MG's good faith in procuring the CFTC's Order, [which prevented] dismissal of the customers' claims on the ground of impossibility at [that] stage of the proceedings." MG Refining, 1997 WL 23177, at *7.

 The Court also rejected the Customers' two arguments concerning judicial estoppel and waiver. Noting the absence of any indication that MG had directly asserted the flexies' legality in the prior cited arbitration proceedings, or that the arbitrator in had in any way adopted this view, the Court held that MG was not judicially estopped from asserting illegality in the present action. The Court rejected the Customers' argument on waiver as well, because even explicit agreements to waive a defense of illegality are ineffective under the law.

 After this opinion was issued, discovery proceeded without interruption until a dispute arose a claim of attorney-client privilege late in 1997. At issue was whether MG had necessarily waived this privilege by invoking the doctrine of impossibility on the basis of a consent order. On December 17, 1997, the Court held a teleconference to discuss this matter with the parties. Realizing that the entire case might be disposed of on the basis of either an illegality or impossibility defense, the Court invited cross-motions addressed solely to these doctrines and stayed the pending discovery dispute until after these motions were decided. The present Opinion disposes of the arguments raised in the cross-motions.


 Summary judgment is authorized when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c); see Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S. Ct. 2548, 2552, 91 L. Ed. 2d 265 (1986). In examining the record, the court "must resolve all ambiguities and draw all reasonable inferences in favor of the nonmoving party." Gibson v. American Broad. Cos., 892 F.2d 1128, 1132 (2d Cir. 1989); see also Celotex, 477 U.S. at 330 n.2, 106 S. Ct. at 2556 n.2. The judge's role in summary judgment is not "to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S. Ct. 2505, 2511, 91 L. Ed. 2d 202 (1986).

 Procedurally, Rule 56(c) thus places an initial burden on the moving party to make out a case that there are no material facts in dispute and that it is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c). Once this initial burden has been met, a limited burden of production shifts to the non-moving party, and this party can survive summary judgment only by showing that there is, in fact, still a "genuine" issue of material fact to be decided. See Fed. R. Civ. P. 56(c), (e); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 585-86, 106 S. Ct. 1348, 1356, 89 L. Ed. 2d 538 (1986). The nonmoving party must "do more than simply show that there is some metaphysical doubt as to the material facts." Id. at 586, 106 ...

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