The opinion of the court was delivered by: VICTOR Marrero, United States District Judge.
In the instant case, unlawful off-exchange contracts were clearly
unenforceable before the enactment of the CFMA.*fn12 To the extent that
the CFMA now renders certain off-exchange contracts enforceable, the
statute "eliminates a defense" to a breach of contract action and
"therefore changes the substance of the existing cause of action for
defendants by "attach[ing] a new disability, in respect to transactions
or considerations already past.'" Id.*fn13 Accordingly, the Court
concludes that the "presumption against retroactivity" applies to the
contract enforcement provision of the CFMA and that the flexie contracts
in the instant case are unenforceable. Id. at 952.
C. PIERCING THE CORPORATE VEIL OF MGAG AND MG CORP.
Having conducted an independent review of the record, the Court agrees
with these factual findings. The record presents a genuine issue of
material fact as to whether MGAG or MG Corp. completely dominated MGRM
and through such domination sought, in bad-faith, to evade the company's
obligations under the flexie contracts. If a jury were to make such
findings, it would support piercing the corporate veil to hold either one
or both companies liable.
In their objections, Defendants presume that the Magistrate Judge would
have granted their motion for summary judgment on piercing the corporate
veil had he only considered MGRM's decision to enter into the July 1995
Consent Order. (See Defs.' Obj. at 9-10.) According to Defendants'
reasoning, this explains why the Magistrate Judge "rewrote" Plaintiffs'
complaint to charge MGRM with earlier contract breaches in 1993 and
1994. (See id. at 10.) The Court disagrees.
Defendants contend that one particular sentence in the Report supports
this argument. The Report states that "there is very little evidence that
[MGAG or MG. Corp.] `procured' the CFTC Consent Order, or that MG Corp.
and MGAG dominated MGRM's negotiations with the CFTC investigators."
(Report at 45.) Reviewing the record, the Court does not fully agree with
this finding. Several pieces of evidence create a genuine issue of
material fact as to whether MGAG controlled the negotiations with the
CFTC. For example, in an internal letter dated January 9, 1996, the
Chairman of MGAG's board, Dr. Neukirchen, informed other board members of
(Letter of Dr. Neukirchen, dated January 9, 1996, attached as Ex. 10 to
Pls.' Opp., at 2. (emphasis added).) Plaintiffs allege that MGAG fired
certain members of MGRM and replaced them with "new management" to
facilitate the execution of their plan to eliminate the flexie
contracts. There is some evidence in the record that could support this
For example, some time in 1993, the President of MGRM, Arthur Benson,
was demoted and Nancy Kropp and Michael Hutchinson took over the
"day-to-day decision making" at MGRM. (Arb. Tr. at 9694 (testimony of
Arthur Benson); Arb. Tr. at 1369 (testimony of Hans Nolting).)
Hutchinson, in turn, reported to Hans Nolting, who was a Frankfurt based
director of MG Corp. (Deposition of William G. Romanello, dated January
25, 2001, at 149, 164.) In December 1993, Kropp oversaw the elimination
of the MGRM's hedge positions for the flexie contracts. Benson testified
that the following month, she called him and said that "she wanted me to
come up to New York immediately to talk about a meeting to see if we
could now get rid of those 45-day flexie contracts." (Arb. Tr. at 9696
(testimony of Arthur Benson).)
DOUGLAS F. EATON, United States Magistrate Judge.
In this diversity action, sometimes known as Customer II, discovery has
been completed and the defendants have moved for summary judgment. The
plaintiffs are 15 unrelated companies that sell gasoline and diesel fuel,
and operate primarily in the South and the Midwest. Each entered into one
or two "flexie" contracts with MG Refining & Marketing, Inc.
("MGRM"), a Delaware corporation with offices in New York, Texas and
Maryland. Alleging breach of contract, the plaintiffs have sued MGRM (now
defunct), and also its parent corporation Metallgesellschaft Corp. ("MG.
Corp."), a Delaware corporation with offices in New York, and also MGRM's
great-grandparent corporation, Metallgesellschaft AG ("MGAG"), a German
For the reasons set forth below, I recommend that Judge Marrero grant
summary judgment against four of the 15 plaintiffs, namely Dalton
Petroleum, Inc., RK Distributing, Inc., Merritt Oil Co., and Higginson
Oil Co. I also recommend that Judge Marrero deny the motion of MG Corp.
and MGAG for summary judgment on the issue of piercing the corporate
In the next several pages, I have copied (verbatim but in italics)
plaintiffs' entire Factual Statement from pages 3-12 of Plaintiffs'
11/7/01 Memorandum, including its footnotes. Although argumentative in
(9th Cir. 1991), and found that they did not change the test
set forth in Co Petro. Rejecting the customers' arguments, she wrote:
(MG Refining, 25 F. Supp.2d at 184.) After reviewing the depositions in
that case, Judge Sotomayor wrote:
(Id. at 187.)
In the case at bar, I find that no reasonable juror could find that RK
Distributing, Merritt Oil or Higginson Oil entered into their flexie
contracts "predicated upon the expectation that delivery of the actual
commodity by the seller to the original contracting buyer w[ould] occur
in the future." Co Petro, 680 F.2d at 579. On the contrary, their
underlying motivation was speculation; they intended to "blow out" these
contracts by obtaining one or more cash payments during times when the
price of gasoline and diesel fuel spiked, and it was highly likely that
these prices would spike during the next five or ten years. During the
five-year period immediately preceding the marketing of the flexies, the
relevant NYMEX price exceeded the blowout price 33 times for gasoline and
11 times for diesel fuel. (Defs. 56.1 St. ¶ 7, citing MG Ex. 2 ¶¶
Before describing the evidence with respect to each of these three
plaintiffs, I pause to discuss the decision of Administrative Law Judge
Bruce C. Levine in In the Matter of Cargill, Inc., 2000 WL 1728291
(C.F.T.C. Nov. 22, 2000) Plaintiffs' brief, at page 28, suggests that
Cargill's reasoning may undermine Judge Sotomayor's 1998 opinion. I
disagree. Cargill involved a grain purchase agreement consisting of a
typical "forward" contract for deferred delivery, plus an addendum
offering a premium price. But the addendum could go into effect only if
the seller made an extra delivery. By contrast, in our case, the cash
blow-out went into effect as a substitute for delivery.
a. RK Distributing, Inc.
Plaintiff RK Distributing's case is a sure loser in view of the 8/2/95
declaration of its President Thomas Cowden (MG Ex. 3), which he confirmed
as true and correct at his 9/13/00 deposition at Tr. 156-61. RK
Distributing never had a ratable contract with MGRM, and never took
delivery of any product from MGRM. It entered into one flexie contract.
Under penalty of perjury, Mr. Cowden declared:
Five years later, at his September 2000 deposition, Mr. Cowden was
taken through the pertinent language in Paragraphs 4 through 8 of his
declaration, and each time acknowledged that it was true. He modified his
declaration only with respect to one unusual possibility. He testified,
in essence, that if the supply of gasoline became so tight that he had no
other source, he would have taken gasoline from MGRM to supply his
customers, rather than simply taking the cash (which would have been a
temptingly huge amount if the supply were to become so tight). See his
deposition at Tr. 190 and 245:
A [If] The product got short.
Except for this one remote possibility, he made no modification, during
the discovery period, to his declaration's detailed revelation of his
motivations for entering into the flexie contract. After discovery
closed, and after the defendants moved for summary judgment, Mr. Cowden
belatedly attempted to modify his declaration a bit more. His 11/1/01
declaration, at ¶ 4, says:
Mr. Cowden is playing on words. He made no "investment" of money. He did
sign a contract that said he would purchase gasoline at an indefinite
time or times during the next ten years, at a fixed price of 62 cents per
gallon, a price that was higher than the market price at the signing
date. But he expected that the price would spike above 62 cents. His
recent statement does not quote the entire sentence from his 1995
declaration, a sentence which he testified at Tr. 157 to be true and
correct: "I saw the contract not as an avenue to take delivery of
gasoline, but as a speculative investment or gamble that the market price
of gasoline would rise above 62 cents." Even though he believed that such
a price spike was a "sure thing," his behavior is properly called
speculation, because his purpose was to obtain cash from market
fluctuations. In essence, he has answered "yes" to the question Judge
Sotomayor posed as the test of unlawfulness:
(25 F. Supp.2d at 188.) Mr. Cowden ignores this jugular issue, and
instead focuses on the capillaries; his 11/1/01 declaration goes on to
say, still at ¶ 4:
The last sentence is certainly true if we change the word "would" to
"could" (which is the verb used in the previous sentence, and three more
times in the next few sentences). But any attempt to say that he "would"
have taken delivery is a blatant
contradiction of the record he made
prior to the close of discovery. Even if Judge Marrero were to allow a
jury to hear this belated version, any reasonable jury would find that
Mr. Cowden has presented no rational explanation to undermine his 1995
declaration about his state of mind:
The option provision of the contract [the option
of taking cash "without taking any delivery of
gasoline"] was very attractive to me. I saw the
contract not as an avenue to take delivery of gasoline
. . . .I had no intention of taking delivery of
42,000,000 gallons . . . .
(MG Ex. 3, ¶ 5.)
I now move on to consider Merritt Oil Co. and Higginson Oil Co. The
evidence of their underlying purpose is very similar to the evidence of
RK Distributing's purpose. It is true that Merritt and Higginson had
ratable contracts with MGRM and therefore, unlike RK, they were taking
monthly delivery of some product from MGRM. However, the evidence shows
that their purpose in entering into their flexie contracts was to take
the cash blow-out, and not to take delivery of product.
b. Merritt Oil Co.
Merritt Oil, located in Mobile, Alabama and 50-percent owned by Richard
T. Merritt, was and is in the business of selling gasoline and diesel
fuel. "In 1993, our total sales volume was about 18 million gallons . .
. ." (10/23/01 Declaration of Mr. Merritt, ¶ 2.) In late 1992,
Merritt entered into two ratable contracts with MGRM, one running from
6/1/93 to 3/31/03 and totaling 5,040,000 gallons of gasoline, and the
second running from 9/1/93 to 8/31/03 and totaling 10,080,000 gallons of
diesel fuel. In 1993, Merritt entered into two additional ratable
contracts with MG, the third running from 11/1/93 to 10/31/03 and
totaling 5,040,000 gallons of diesel fuel, and the fourth running from
4/1/94 to 3/31/04 and totaling 10,080,000 gallons of gasoline. (Id. at
¶ 9; MG Ex. 16.) These four ratable contracts obligated Merritt to
take delivery, on a monthly basis, of unbranded product that each year
would total slightly more than 3,000,000 gallons — one-sixth of its
total 1993 volume, and more than one-third of its total 1993 unbranded
volume. (Merritt's volume was mostly branded; 10/31/01 Decl. of Mr.
Merritt, ¶ 1.)
On top of these four ratable contracts, Merritt entered into two huge
flexie contracts in September 1993. (MG Ex. 1.) They each ran from 4/1/94
to 3/31/04. One flexie called for 84,000,000 gallons of unbranded
gasoline, and the other called for 84,000,000 gallons of unbranded diesel
fuel. Even if Merritt were to spread the deliveries equally among each of
the ten years, this would mean that each year it would have to pay for
16,800,000 gallons of unbranded product under the flexies, plus 3,000,000
gallons of unbranded product under the ratables. Yet its 1993 unbranded
volume was less than 9,000,000 gallons.
In 1995, Mr. Merritt gave a sworn declaration in the arbitration
between MGRM and MGRM's ousted president. (MG Ex. 4.) It is essentially
the same as the declaration given by Mr. Cowden of RK Distributing, but
the details are different. I will quote the following excerpts:
3. In September 1993, I met with a salesman from
MG Refining & Marketing ("MGRM") named John Nash, Jr.
4. . . . . Unlike the Firm Fixed contract, Mr.
Nash said that Merritt Oil would probably never have to
take delivery under the 45 Day contract. He further
explained that under this contract, if the market price
of gasoline went above 62 cents at anytime during the
ten-year term of the contract, Merritt Oil could sell
the contract and take 100 percent of the profit above
the contract price . . .
6. . . . . I fully expected the price to spike
above 62 cents sometime in the ten years. Mr. Nash
presented the 45 Day contract to me as a hedge or
speculative investment — the market price was likely
to rise above 62 cents, so Merritt Oil would never have
to take delivery under the contract and could make a
lot of money.
8. In entering into these contracts, I explained
to Mr. Nash that if the price did not go above 62
cents, Merritt Oil would have a very difficult time
taking delivery of the amount of gasoline that I was
contracting for (84,000,000 gallons) because this
volume was more than our un-branded sales (and, of
course, I could not sell this product at our branded
outlets) . Mr. Nash responded that if that occurred
(i.e., the price did not spike), he would "work
something out." He did not specify how he would work
this out, but I had no reason not to believe that what
Mr. Nash was saying was true.
9. I am aware that as a rule of thumb in my
business, you should not make a long-term contract for
more than ten percent of your un-branded volume. .
I did not follow this standard when Mr. Nash presented
me with the 45 Day contract because I fully expected
the market price to go above 62 cents, so that I would
never have to take delivery under the contract.
(MG Ex. 4.) This last sentence was read to Mr. Merritt at his 6/20/00
deposition at Tr. 174, and he conceded, "That was my thoughts at that
time." By contrast, earlier in his deposition, at Tr. 28, he asserted,
"We entered into the contract knowing that we were going to take that
product." But that assertion was undone when he was confronted with his
own September 1993 note:
Q Then you wrote ["]if the price on the MERC goes
over 62 cents they will sell within 45 days and each
penny is worth $840,000 to us. ["] What did you mean
when you wrote "each penny is worth $840,000 to us"?
A Each penny over our contract price[,] if we
chose to sell out of the contract rather than pull the
Q And then you wrote, "We don't ever pull any
product," right, that's what you wrote there? That was
based on what you and Mr. Nash had discussed about this
A That says we don't ever null any product. This
is simply a note on a portion of an explanation of this
contract, the option of selling out of it or cashing
out, whatever you want to call it.
(6/20/00 deposition of Mr. Merritt, Tr. 178, with my emphasis.)
Mr. Merritt's handwritten note (MG Ex. 34) shows what was important to
him in September 1993. It corroborates his 1995 declaration that he
"fully expected the market price to go above 62 cents, so that I would
never have to take delivery under the contract." No reasonable jury could
find that Merritt's purpose was to take delivery of these huge volumes of
unbranded product, which vastly exceeded his 1993 unbranded sales
After discovery closed, Mr. Merritt submitted his 10/31/01
declaration, mentioning some unlikely hypotheticals:
15. . . . But in some circumstances, I would have
wanted to take delivery. As an example, sometimes the
local rack prices are actually higher than the NYMEX
prices, and when this happened, it would be more
desirable to take physical barrels than cash out.
17. . . . If the market price ever exceeded the
contract price, however, it
would have been easy for
me to sell the entire contract volume. New and
existing customers would have lined up for the chance
to buy fuel at below-market prices, and I would have
been able to resell the product in a variety of ways,
particularly if I engaged the help of a broker or
But the flexie contracts provided that the customer could not take
physical barrels for 45 days after he gave notice to MGRM. During that
time, the market price might well fluctuate. And if Mr. Merritt undertook
"to sell the entire contract volume," he would tend to drive the market
price down. If, instead, he exercised the cash-out option, MGRM would not
delay for 45 days, but would act quickly to lock in his profit, as
required by Paragraph 16(a) of the flexie contract:
. . . At any time that [Merritt] exercises this
[cash-out] option, [MGRM] shall, as soon as practicable
after receipt of telephonic notice of such election,
liquidate the long hedge positions to the extent of the
number of contract units that is equivalent to the
number of gallons with respect to which [Merritt] has
exercised the option.
c. Higginson Oil Co.
Kim Wayne Higginson was Vice President, and is now President, of
Higginson Oil Company, a petroleum wholesaler and retailer in Mackey,
Indiana. In February 1992, Higginson Oil and MGRM entered into a one-year
"guaranteed margin" contract, later extended into January 1994. (10/31/01
Higginson Decl. ¶ 9.) This contract apparently was for gasoline, and
it did not have a cash blow-out option. In January 1993 Higginson Oil and
MGRM entered into a ratable contract for delivery of diesel fuel for ten
years beginning in September 1993, at an annual rate of 903,000 gallons.
(Id. ¶ 12; MG Ex. 16.)
In 1995, Mr. Higginson gave a sworn declaration in the arbitration
between MGRM and MGRM's ousted president. (MG Ex. 6.) It described his
motivation for entering into a flexie contract for 63,000,000 gallons of
gasoline in September 1993:
4. Mr. Gelvin presented the 45 Day contract to me as
one under which it was not likely that I would ever
have to take delivery of gasoline. His emphasis and
primary selling point was the likelihood that the
market price of gasoline would rise above 62 cents,
and therefore that there would be no obligation to
take any delivery under the contract. * * * 6. Based
on Mr. Gelvin's representations regarding the 45 Day
contract, as well as Mr. Lecompte's earlier
presentation of numbers showing the history of
pricing, and my own experience in the business, I felt
certain that the market price of gasoline would rise
above 62 cents sometime during the term of the 45 Day
contract. Therefore, I entered into a 45 Day contract
with MGR&M (dated September 15, 1993) for Higginson
Oil to purchase 63,000,000 gallons of gasoline at
$.6200 per gallon. * * * 9. In January 1994, I agreed
on behalf of Higginson Oil with MGR&M to cancel this
At his 7/5/00 deposition, at Tr. 137, Mr. Higginson reaffirmed the
correctness of Paragraph 4; he was apparently asked about the other
paragraphs, but I do not have those pages of the transcript. He now makes
a minor change to Paragraph 6: "I, too, thought it likely (in a previous
affidavit drafted by a[n] MG lawyer, I said I was `certain,' but that
word is really too strong) that the price would rise above the contract
price." (10/31/01 Higginson
declaration ¶ 20.) He goes on to repeat
the same hypothetical given by Mr. Merritt:
If the market price ever exceeded the contract
price, it would have been easy for me to sell the
entire contract volume. New and existing customers
would have lined up for the chance to buy fuel at
below-market prices, and I would have been able to
resell the product in a variety of ways, particularly
if I engaged the help of a broker or trader.
. . .We could have financed through any one
of dozens of refiner-suppliers, pipelines, or through
established financial institutions.
(Id. ¶ 21-22.) No reasonable jury could believe this hypothetical. If
Higginson purchased "the entire contract volume" of 63,000,000 gallons,
it would have owed MGRM $39,060,000 — compared to Higginson's
assets of roughly $1,000,000, net income of $33,000 in 1992, and a
negative book value in 1993. (Id. ¶ 8; MG Ex. 2 at p. 11; Docket Item
#137, 11/26/01 Supp. Aff. at Exh. A.) Also, anyone thinking of lending
money to Higginson would realize that Higginson had to wait 45 days for
delivery of product and had to bear any drop in the market price during
those 45 days.
In short, any reasonable jury would find that Higginson's underlying
motivation for entering the contract was to exercise the cash blow-out.
The expectation of both parties to the contract was "that the market
price of gasoline would rise above 62 cents, and therefore that there
would be no obligation to take any delivery under the contract." (8/14/95
Higginson Decl. ¶ 4.) Higginson's flexie contract was unlawful under
the Co Petro test quoted by Judge Sotomayor: This contract was "not
predicated upon the expectation that delivery of the actual commodity by
the seller to the original contracting buyer will occur in the future."
CFTC v. Co Petro Mktg. Group, Inc., 680 F.2d 573, 579 (9th Cir. 1982),
quoted in MG Refining, 25 F. Supp.2d 175, 182 (S.D.N.Y. 1998).
d. The Other Plaintiffs
In contrast to RK Distributing, Merritt Oil and Higginson Oil, the
other plaintiffs apparently were much more guarded in describing their
motivations and the conversations they had with the salesmen about the
flexie contracts. I think several of these other plaintiffs will have a
difficult task to show that they contemplated taking delivery, especially
M.M. Satterfield Oil Co., Inc., a very small company which signed two
flexies for a total of 126,000,000 gallons, second only to Merritt Oil
among all the plaintiffs. Nevertheless, I cannot say that the evidence
concerning the motivations of these other plaintiffs is so one-sided as
to call for summary judgment.
e. The Argument that Some Flexies May Have Been Negotiated as Part of
In Customer I, discovery was never completed. Judge Sotomayor denied
summary judgment in order to allow those plaintiffs to attempt to flesh
out "evidence that the flexies may have been negotiated as part of larger
transactions, which included the sale not only of flexies but of certain
ratable contracts." MG Refining, 25 F. Supp.2d at 187.
That one possible twist cannot salvage the claims of RK Distributing,
Merritt Oil or Higginson Oil. RK Distributing's flexie was its only
transaction with MGRM — it simply never had a ratable contract with
MGRM. (Def. 56.1 St. ¶ 23.) Higginson Oil had one ratable and one
flexie, but they were for different products — a ratable for
9,030,000 gallons of diesel fuel, and a flexie for 63,000,000 gallons of
gasoline. (See MG Ex. 16, prepared by plaintiffs.) Merritt Oil did have
ratables and flexies for
both products, but Mr. Merritt testified as follows:
Q When the flexies were being marketed to you,
were they being marketed to you as part of any other
contracts that MG was offering?
A As part of?
Q or did they stand on their own?
A They had nothing to do with any of the contracts
that I was aware of.
Q When you said that the flexie contracts could
be regarded as a hedge, was there any specific product
that you had sold that the flexie would be a hedge
(6/20/00 Merritt Depo. Tr. 221-22.)
f. The Argument that Some Flexies May Have Been Exempt "Trade" Options
Plaintiffs' 11/7/01 Memorandum, at pages 38-39, argues that, even if
the flexies are not exempt "forward" contracts, perhaps they were exempt
"trade options." Judge Sotomayor held that the flexies "cannot be
considered options at all," 25 F. Supp.2d at 181, but plaintiffs say
maybe they can be if one views them as "hybrids." The next step is an
unattractive argument that "there is at the very least a disputed issue
as to the reasonableness of MG's beliefs when it marketed the contracts."
(Pls. Mem. at 39, emphasis added.) Thus, for example, if RK Distributing
duped MGRM, the flexie might still be lawful if it was "offered by a
person which has a reasonable basis to believe that the commercial user or
merchant . . . enters into the commodity option transaction solely for
purposes related to its business as such." (17 C.F.R. § 32.4 (a),
quoted in full at Pls. Mem. at 38.) The last nine words in that
regulation have a very narrow meaning when applied to gasoline
merchants; see 17 C.F.R. § 1.3 (z)(2) (ii) (A) and (B) , quoted in
the 11/26/01 Reply Mem. at 17 n. 17. In any event, the 1995 declarations
of the principals of RK Distributing, Merritt Oil and Higginson Oil
describe their conversations with MGRM salesmen, and make it obvious that
those salesmen knew that, at least as to those three customers, the
flexies were not being entered into for purposes of delivery of product.
The salesmen's knowledge is imputed to MGRM. Therefore, as to those
flexies, MGRM could not have a reasonable basis for any belief such as
described in 17 C.F.R. § 32.4 (a).
For the reasons stated in this Section 2, any reasonable jury would
find that the flexie contracts involving RK Distributing, Merritt Oil,
and Higginson Oil were unlawful under 7 U.S.C. § 6 (a).
3. To the Extent that Any of the Flexie Contracts Were Unlawful, May
Any of those Customers Enforce Them?
In Customer I, the customers did not dispute that the flexie contracts
would be unenforceable to the extent that they were unlawful. MG
Refining, 1997 WL 231777, * 2-3. In the case at bar, however, the
customers argue that each flexie contract is enforceable regardless of
its lawfulness. At the summary judgment stage, I have found that the
flexie contracts entered into by three of the customers were unlawful. I
shall now discuss whether any of those three customers may nevertheless
enforce the unlawful contracts.
The Restatement (Second) of Contracts provides as follows at §§
§ 178. When a Term is Unenforceable on Grounds of
(1) A promise or other term of an agreement is
unenforceable on grounds of public policy if
legislation provides that is unenforceable or the
interest in its enforcement is clearly outweighed in
the circumstances by a public policy against the
enforcement of such terms.
(2) In weighing the interest in the enforcement
of a term, account is taken of
(a) the parties' justified expectations,
(b) any forfeiture that would result if
enforcement were denied, and
(c) any special public interest in the enforcement
of the particular term.
(3) In weighing a public policy against enforcement
of a term, account is taken of
(a) the strength of that policy as manifested
by legislation or judicial decisions,
(b) the likelihood that a refusal to enforce
the term will further that policy,
(c) the seriousness of any misconduct involved
and the extent to which it was deliberate, and
(d) the directness of the connection between
that misconduct and the term.
§ 180. Effect of Excusable Ignorance
If a promisee is excusably ignorant of facts or
of legislation of a minor character, of which the
promisor is not excusably ignorant and in the
absence of which the promise would be enforceable,
the promisee has a claim for damages for its breach
but cannot recover damages for anything that he
has done after he learns of the facts or legislation.
"The strength of the public policy involved is a critical factor
in the balancing process." Id. at § 178, comment c.
Here, we are dealing with a public policy strongly expressed in the
Commodity Exchange Act. This is not "legislation of a minor character."
At the time the flexie contracts were signed in 1993, the Commodity
Exchange Act provided that entering into an off-exchange futures contract
was a felony punishable by a fine of up to $1,000,000 and imprisonment
for up to five years. 7 U.S.C. § 13 (a)(5). It is true that (a) this
conduct was only malum prohibitum, and (b) in 1993 the Act did not
specifically say that such unlawful contracts were unenforceable. But both
points were also true in United States v. Mississippi Valley Generating
Co., 364 U.S. 520, 563, 81 S.Ct. 294, 316 (1960), yet the Supreme Court
said, "a statute frequently implies that a contract is not to be enforced
when it arises out of circumstances that would lead enforcement to offend
the essential purpose of the enactment." The Court held that the contract
was unenforceable "even though the party seeking enforcement ostensibly
appears entirely innocent." 81 S.Ct. at 317.
I turn now to § 178(2) of the Restatement, to see whether there are
countervailing interests that tend to favor allowing these three
plaintiffs to enforce their flexie contracts.
First. Did "the parties' justified expectations" call for keeping the
flexie in force for the ten-year period from April 1994 through March
2004? The answer is no. In January 1994, before the ten-year period even
began, MGRM sent letters to these three customers (among others), stating
that MGRM understood that the flexies were canceled. (First Am. Cplt.
¶ 85.) These letters would have estopped MGRM from any attempt to
enforce those flexies. It is true that the letters were not countersigned
by any of these customers, and hence were not instruments of bilateral
cancellation. But they were instruments of anticipatory repudiation.
During the four months since the signing of the flexie contracts, the
market price had not risen. In fact, it had fallen sharply. (Pl. Ex. 20,
p. 10.) Hence the anticipatory repudiation did not impose any severe
prejudice upon the customers. If they truly wanted an additional long-term
supply of product, this was a good time to seek such a commitment from a
competitor of MGRM. There is no evidence that any of these three
plaintiffs sought any
alternative supply. And in August 1995, each of
these three plaintiffs swore in a declaration that in January 1994 it had
agreed with MGRM to cancel its flexie contract (two contracts in the case
of Merritt Oil). (MG Ex. 3 at ¶ 8; MG Ex. 4 at ¶ 11; MG Ex. 6 at
¶ 9.) In 1999, MGRM argued that these 1995 sworn statements canceled
those particular flexies, even if it were later determined that the
flexies were lawful. Judge Kaplan rejected that argument, and said that
"the sworn statements themselves are not instruments of cancellation, but
merely attest to a prior, apparently unwritten, agreement to cancel."
Cary Oil, 90 F. Supp.2d at 416-17. I am referring to these 1995 sworn
statements to make a different point — now that discovery has been
completed, it is clear that the flexie contracts entered into by these
three plaintiffs were unlawful, and the evidence shows that these three
had no justified expectation that they ought to be able to enforce the
contracts during the ten years beginning in April 1994.
Second. If enforcement is denied, would this result in any forfeiture
as to these three plaintiffs? Again, the answer is no. In connection with
these flexie contracts, these three plaintiffs gave no money to MGRM, and
there is no evidence that they even acted to their detriment in reliance
on the flexies.
It is fair to assume that these three plaintiffs had less knowledge
than MGRM had concerning the requirements of the Commodity Exchange Act.
Nevertheless, these three plaintiffs were not innocent parties. They knew
that their motive was speculation, and they knew that they had no
expectation of taking delivery of product under the flexies. Weighing all
of the factors set forth in the Restatement, I find no good reason to
allow these three plaintiffs to enforce their unlawful ten-year
This result is entirely consistent with the dictum in Nagel v. ADM
Investor Services, Inc., 217 F.3d 436, 439-40 (7th Cir. 2000). Writing
for the Seventh Circuit, Judge Posner said (with my emphasis):
. . . [T]he parties assume that futures contracts
rendered unlawful by section 6(a) are indeed
We cannot find any case that holds this, although
several cases require disgorgement of profits obtained
under such unlawful contracts, . . . . The Supreme
Court has stated flatly that "illegal promises will not
be enforced in cases controlled by federal law." . . .
Yet despite this ringing declaration, many cases
continue to treat the defense of illegality to the
enforcement of a contract as presumptive rather than
absolute, forgiving minor violations and not allowing
the defense to be used to confer windfalls.
The "presumptive" unenforceability of these particular flexies is
not overcome by any of plaintiffs' arguments.
The plaintiffs seek to analogize to Section 29(b) of the Securities
Exchange Act of 1934, 15 U.S.C. § 78cc(b), which says, "Every
contract made in violation of any provision of this chapter . . . shall
be void (1) as regards the rights of any person who, in violation of any
such provision, rule, or regulation, shall have made or engaged in the
performance of any such contract . . . ." The courts have read this
statute "as rendering the contract merely voidable at the option of the
innocent party." Mills v. Electric Auto-Lite Co., 396 U.S. 375, 387, 90
S.Ct. 616, 623 (1970). Section 29(b) and Mills were not cited by Judge
Posner in Nagel, and I believe there was good reason not to cite them.
Most violations of the 1934 Act consist of fraudulent representations,
e.g., in the sale of securities or in obtaining proxy votes. The
Act is different from the 1934 Act in many ways, but
some of its violations also consist of fraudulent sales practices. In
such cases it makes sense to analogize to Section 29(b) of the 1934 Act.
Judge Kaplan did this is CFTC v. Hanover Trading Corp., 34 F. Supp.2d 203,
206 (S.D.N.Y. 1999), where Hanover sold futures contracts by means of
fraudulent representations. By contrast, in the case at bar (as in Nagel)
there is no claim that the contract was entered into because of any
misrepresentations. Hence it would be too glib to talk about an "innocent
party," at whose option the contract is voidable.
These three plaintiffs argue that, even if they entered into unlawful
contracts, they should be deemed to be innocent parties because they were
less familiar with the Commodity Exchange Act than MGRM was. This
argument has far-reaching consequences, especially with an executory
contract that runs for ten years. Each plaintiff argues that, even though
he paid no money in connection with the flexie, and even though MGRM
repudiated prior to the contract's start date and again in July 1995,
nevertheless he was entitled to wait, watch the market, sue in 1999, and
in 2000 demand his "blow-out" cash payment on an unlawful contract.
Plaintiffs' brief (at p. 18, n. 11) cites three CFTC decisions. Two of
them were default judgments. Connolly v. Domestic Oil Corp., 1982 WL
30298 (C.F.T.C.); Matenaer v. Drexel, Ryan & Brown, Inc., 1982 WL
30254 (C.F.T.C.). The third has a disclaimer that "the order shall not be
binding as a Commission decision i[n] other cases." Dick v. Jonlyn
Investors, Inc., 1983 WL 29469 (C.F.T.C.). In each case, the customer was
awarded his lost profit on an unlawful, off-exchange commodity option.
However, unlike the case at bar, the customer had paid money, and there
is no indication that the contract was long-term (it was four months in
Matenaer). Moreover, Connolly and Dick suggest that misrepresentations
were made to the customer; they say, in almost identical language, "there
is no evidence in the record that complainant was even aware that the
transactions were prohibited options, given the misleading
characterizations of the transactions by respondent in this proceeding."
Hence there were good reasons for the CFTC to take a different view of
the contracts in the case at bar. The CFTC's Consent Order said:
[T]he Commission . . . further finds that the 45 Day
Agreements are illegal, and therefore void . . . .
* * * . . .MGR&M shall certify that it has 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 . . .
(MG Ex. 21, pp. 7, 10.)
The plaintiffs assert that the CFTC's Consent Order was unfair, because
it voided the flexies but did not void the ratable contracts. But the
ratable contracts were different; they involved monthly deliveries of
product. The Consent Order's result was consistent with Kelly v. Kosuga,
358 U.S. 516, 79 S.Ct. 429 (1959). Kelly and Kosuga entered into two
agreements. They mutually agreed that neither would deliver any onions to
the futures market for the balance of the trading season; this agreement
was unlawful under the Sherman Act and hence unenforceable. At the same
time, Kelly agreed to purchase a quantity of onions from Kosuga; this was
a lawful agreement, and the courts enforced it.
Next, the plaintiffs argue that the flexie contracts are enforceable in
legislation enacted on December 21, 2000, more than seven years
after the flexies were signed. The Supreme Court has held:
When a case implicates a federal statute enacted
after the events in suit, the court's first task is to
determine whether Congress has expressly prescribed the
statute's proper reach. If Congress has done so, of
course, there is no need to resort to judicial default
rules. When, however, the statute contains no such
express command, the court must determine whether the
new statue would have retroactive effect, i.e., whether
it would impair rights a party possessed when he acted,
increase a party's liability for past conduct, or
impose new duties with respect to transactions already
completed. If the statute would operate retroactively,
our traditional presumption teaches that it [the new
statute] does not govern absent clear congressional
intent favoring such a result.
Landgraf v. USI Film Products, 511 U.S. 244, 280, 114 S.Ct. 1483,
In December 2000, Congress passed a series of amendments to the
Commodity Exchange Act. One amendment created the phrase "eligible
contract participant"; its definition lists many alternatives, and the
plaintiffs allegedly meet one of them because, they assert, they each had
a net worth exceeding $1,000,000 in 1993. 7 U.S.C. § 1a(12) (A)(v)
(III) . Another amendment inserted a new sub-subsection in the middle of
7 U.S.C. § 25. (It should be noted that the case at bar is not
brought under Section 25; it is brought under New York law for breach of
contract.) Section 25 now reads in pertinent part as follows:
§ 25. Private rights of action
(a) Actual damages; actionable transactions; exclusive
* * * (4) Contract enforcement between
No agreement, contract, or transaction between
eligible contract participants . . . shall be void,
voidable, or unenforceable, . . . based solely on
the failure of the agreement, contract,
transaction, or instrument to comply with the terms
or conditions of an exemption or exclusion from any
provision of this chapter or regulations of the
The plaintiffs argue that this new sub-subsection (4) applies to the 1993
flexies because, two pages later, Section 25 still contains subsection
(d), enacted in 1983:
(d) Dates of application to actions
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
It seems to me that the first four lines refer only to causes of action
created by Section 25 (private rights of action against any person "who
violates this chapter"), and hence not to the causes of action in the
case at bar. It is unclear why Congress chose Section 25 as the place to
insert the new sub-subsection about contract enforcement. Whatever the
reason may have been, this insertion does not constitute "clear
congressional intent" that the new sub-subsection applies to a contract
entered into in 1993 and breached prior to December 2000. Accordingly,
, 26-27 (2d Cir. 1993), which applied
New York law and said:
The Second Circuit noted that the parent's chairman believed, in good
faith, that CBS had breached the contract first. But the majority of the
arbitrators later found to the contrary. Id. at 28. See also Simplicity
Pattern Co., Inc. v. Miami Tru-Color Off-Set Service, Inc., 210 A.D.2d 24,
619 N.Y.S.2d 29 (1st Dep't 1994) (although not a party to the lease,
defendant's "domination caused the wrong to plaintiff by stopping payment
of rent and breaching the lease").
The Defendants' Memorandum cites, instead, two other cases applying New
York law, Puma Indus. Consulting, Inc. v. Daal Associates, Inc.,
808 F.2d 982, 986 (2d Cir. 1987), and New York Assoc. for Retarded
Children v. Keator, 199 A.D.2d 921, 606 N.Y.S.2d 784 (3d Dep't 1993).
Those two cases talked about piercing the corporate veil in a different
context, namely individual owners. As noted in Keator, "a business
lawfully can be incorporated for the very purpose of enabling its
proprietor to escape personal liability," i.e., to shelter his personal
assets and keep them separate from his business assets. MG Corp. and MGAG
have no personal assets.
But at pages 42-43, Plaintiffs' Memorandum essentially says that the
"transaction" they are attacking was a year-and-a-half-long campaign from
December 1993 to July 1995:
That evidence was then set forth at pages 46-50. A reasonable jury could
find as follows. In December 1993, MGAG planned to get rid of the flexie
contracts, because "those contracts definitely are not good for us."
(Nolting Arb. Tr. 1372-73.) MGAG directed the firing of the officers of
MGRM, who believed that the flexies were lawful and appropriate. MGAG
directed MG Corp. to hire Nancy Kropp Galdy, who promptly unwound all of
MGRM's hedges securing the flexie contracts. At her direction, MGRM sent
a form letter to its flexie customers purporting "to confirm our
agreement" that the flexies were canceled. (Judge Kaplan held that these
letters constituted anticipatory repudiation, and that "under the UCC an
aggrieved party is free to await performance following an anticipatory
repudiation." Cary Oil, 90 F. Supp.2d at 411-12.)
Such a jury finding would establish the cause of action stated against
MG Corp. and MGAG in the Amended Complaint at Count One (¶¶ 109-13).
Count One reads in part:
I read the phrase "control over the foregoing" to include control over
described in certain of the paragraphs that ¶ 109
incorporates by reference (particularly ¶¶ 61, 70-72 and 85,
describing the hedges, their liquidation, and the cancellation letters).
Those acts significantly prevented MGRM from maintaining readiness to
perform the flexie contracts.
To summarize, I find that, as to each plaintiff, the transaction at
issue was the dishonoring of a ten-year contract. The plaintiffs allege
that there was a long campaign to get rid of the flexie contracts,
including the December 1993 unwinding of the hedges, the January 1994
cancellation letter, the July 1995 Consent Order, and the refusal to make
the "blow out" payments demanded by plaintiffs' June 2000 letters (MG
Ex. 32). If the jury finds that MGAG and MG Corp. dominated the acts in
December 1993 and January 1994, but not the later acts, it may still find
that those two corporations are liable for causing damage to any
plaintiff whose flexie was lawful. The defendants have produced no
authority to the contrary. They cite Lowendahl, which is the obverse of
the case at bar. In Lowendahl the wrong was a fraudulent conveyance to a
new corporation; the defendant corporations owned most of the stock of
the new corporation, but they did not exercise domination over it until
four or five months later. The fraudulent conveyance was the culmination
of a plan "conceived and developed by [the new corporation's president]
long before [he had] any contact with the defendants or their officers."
(247 A.D. at 158, 287 N.Y.S. at 77.) By contrast, in the case at bar,
there is evidence that MGAG and MG Corp. conceived and developed a plan
to dishonor long-term contracts, and then directed an act of anticipatory
repudiation before the time for performance began.
For the reasons stated in this Section 4, I recommend that Judge
Marrero rule that MG Corp. and MGAG are not entitled to summary judgment
as to any plaintiffs other than Dalton Petroleum, RK Distributing,
Merritt Oil, and Higginson Oil.
5. The Plaintiffs' Expert Witnesses
Defendants' 10/1/01 Memorandum, at pages 58 through 77, moved to strike
most of the opinions offered by plaintiffs' experts. However, the
plaintiffs' opposing papers then chose not to rely on those opinions.
(11/7/01 Pl. Mem. at 71.) Accordingly, the defendants have requested the
Court to defer ruling on those opinions, and have reserved the right to
reinstitute this motion if Judge Marrero denies summary judgment in whole
or part. (11/26/01 Reply Mem. at 30, n. 36.) I think this request is
appropriate. I have considered the summary judgment motion in the
framework chosen by the plaintiffs, with no reliance on the opinions of
plaintiffs' experts. I recommend that Judge Marrero (a) defer ruling on
the plaintiffs' experts, and (b) permit the defendants to re-institute a
motion on this topic at a later date.
CONCLUSION AND RECOMMENDATION
I recommend that Judge Marrero grant summary judgment against Dalton
Petroleum on the ground of release, but deny summary judgment as to any
other plaintiffs on that ground.
I recommend that Wise Petroleum not be permitted to sue on its alleged
second flexie contract. (See page 20 of this Report)
I recommend that Judge Marrero grant summary judgment against RK
Distributing, Merritt Oil, and Higginson Oil on the ground that their
flexie contracts were unlawful and unenforceable. I recommend that
summary judgment be denied as to the remaining plaintiffs.
I recommend that Judge Marrero rule that MG Corp. and MGAG are not
entitled to summary judgment as to any plaintiffs
Petroleum, RK Distributing, Merritt Oil, and Higginson Oil.
I recommend that Judge Marrero (a) defer ruling on plaintiffs' expert
witnesses, and (b) permit the defendants to re-institute a motion on this
topic at a later date.
Pursuant to 28 U.S.C. § 636 (b)(1) and Rule 72(b) of the Federal
Rules of Civil Procedure, any party may object to this recommendation
within 10 business days after being served with a copy, by filing written
objections with the Clerk of the U.S. District Court and mailing copies
(a) to the opposing party, (b) to the Hon. Victor Marrero, U.S.D.J. at
Room 414, 40 Foley Square, New York, N.Y. 10007 and (c) to me at Room
1360, 500 Pearl Street, New York, N.Y. 10007. Failure to file objections
within 10 business days will preclude appellate review. Thomas v. Am,
474 U.S. 140 (1985); Wesolek v. Canadair Ltd., 838 F.2d 55, 58 (2d Cir.
1988). Any request for an extension of time must be addressed to the
Douglas F. Eaton
DOUGLAS F. EATON
United States Magistrate Judge
Dated: New York, New York
January 4, 2002
Copies of this Report and Recommendation were sent by mail on
this date to:
William H. Bode, Esq. Robert B. Bernstein, Esq.
Bode & Grenier, LLP Kaye, Scholer, Fierman,
Connecticut Building, 9th Floor Hays & Handler, L.L.P.
1150 Connecticut Ave., N.W. 425 Park Avenue
Washington D.C. 20036 New York, New York 10022-3598