Source: http://masscases.com/cases/sjc/337/337mass287.html
Timestamp: 2019-04-20 20:13:03+00:00

Document:
JOHN A. FRANKS COMPANY, INC. vs. S. WILLARD BRIDGES & others.
CONTRACT. Writ in the Superior Court dated April 25, 1956.
The action was reported by Forte, J.
Harold B. Dondis, (Malcolm B. Bayliss with him,) for the plaintiff.
Donald R. Grant, (John R. Quarles & Edward B. Hanify with him,) for the defendants Bridges and others.
George N. Hurd, Jr., (Charles C. Cabot with him,) for the defendant Wool Associates of the New York Cotton Exchange, Inc.
WHITTEMORE, J. The judge in the Superior Court overruled the demurrer to count 1 of the declaration, sustained the demurrer to counts 6 and 7, and reported the case to this court for determination of the correctness of that action.
1. We think the demurrer to count 1 was good and should have been sustained.
of and agreement by . . . [the brokers] to hold such short contracts on behalf of the plaintiff subject to the by-laws and rules, specifically contrary to section 77 . . . [and] section 77W . . . [of the by-laws] and trading rule 19 . . ." (the by-laws and rules and regulations of the Exchange and the clearing house being sometimes hereinafter referred to as the rules); and the liquidation also violated these sections and hence the authority of and agreement by the brokers in that the liquidation was at prices above the wool and wool top price ceilings of the plaintiff, as determined by Sections 1 and 2 of the Office of Price Stabilization, Economic Stabilization Agency, General Ceiling Price Regulation, 16 Fed. Reg. 808 (1951), issued pursuant to the Defense Production Act of 1950, 64 U.S. Sts. at Large, 803-807, and unlawful under that act.
There are a number of grounds stated in the demurrer to count 1, including these: the declaration does not state concisely and with substantial certainty the substantive facts necessary for a cause of action; the matters alleged are insufficient in law; and the allegations are vague, confusing, uncertain and indefinite.
or (3) continuing his hedged position for a further period. . . . If the trader wishes to close out his short sale, he executes through his broker an offsetting future purchase transaction, that is, a long contract which is offset against his short contract on the Exchange . . .. If the trader wishes to continue his hedged position, he closes out his futures contract by an offsetting purchase and simultaneously sells another contract falling due in a subsequent month."
We understand count 1 to aver that in the delivery period, March, 1951, the brokers closed out the plaintiff's contract on the Exchange, that is, liquidated it, by executing an offsetting purchase transaction, and that as this was done without prior order of the plaintiff it was contrary to the authority and agreement of the brokers to hold the contract subject to the specified rules and by-laws.
We think the specified by-laws and rules do not make it a term of the contract between the brokers and the customer that the brokers will not liquidate the contract without the prior order of the customer.
While all the by-laws and rules are incorporated in the declaration by reference we need look only to those which are specified as material. Whitcomb v. Vigeant, 240 Mass. 359 , 362.
wool tops or wools are not to be delivered and received in accordance with said Section." Sections 77 and 77W specify the form for future delivery contracts for wool tops and wool between members including a provision that the "contract is made in view of, and in all respects subject to the By-Laws, Rules and Regulations of the Wool Associates of the New York Cotton Exchange Inc.," and also that "members shall offer their contracts for clearance to the New York Cotton Exchange Clearing Association Inc., which shall become by substitution a party thereto in place of a member, and thereupon such Association shall become subject to the obligations thereof and entitled to all the rights and privileges of a member in holding, fulfilling and disposing thereof."
It is manifest that so far as rule 19 is relevant to a broker-customer agreement, rule 13 has made the agreement subject to rule 19. The reference to sections 77 and 77W brings forward no other rule. These sections refer to no specific rule and for our purposes operate to make rule 19 a part of members' contracts with each other. The issue is the meaning of rule 19. We do not think its meaning is that which the plaintiff asserts.
they do not show that the short futures contracts were not performed. On the plaintiff's statement of the three optional ways of performing a short futures contract, the facts set forth show that the short futures contracts were performed, that is, by buying offsetting contracts.
The plaintiff's alleged grievance is that, the plaintiff being ready, able, and willing to perform its obligations under the contracts, that is, we take it, by delivery of the merchandise, the brokers deprived the plaintiff of the opportunity of discharging its obligations in this way. This is not alleged to be a violation of a custom of the trade or of an implication of the agency relationship or of an implication arising from the nature of the futures contract, as a contract to deliver merchandise. It is alleged to be wrongful on the very narrow ground that being without prior order of the plaintiff it was in violation of rule 19 and for this reason in violation of the broker-customer contract.
We think the plaintiff's position is not strengthened by the allegation of violation of the price ceiling. For the reasons stated we find no implication in rule 19 of an obligation not to close out a futures contract in violation of law or a price regulation. Rule 19 does not deal with the issue.
rule which "permits relief to be voted by the board of governors where delivery is impossible." The plaintiff asserts that to show authority to liquidate under this rule the defendants would have to prove that rule 12A had come into operation and that the facts to prove this could not be shown on demurrer. In our view of the case nothing turns on rule 12A, but it does perhaps suggest a possible difficulty in the way of proving a case under a general averment that a liquidation without an order of the plaintiff was a violation of implied terms of the broker-customer contract. [Note p293-1] In any event we rule that the averments of count 1 do not state a violation of that contract.
If count 1 is intended to state a different or broader cause of action than that which we have discussed above, it fails for uncertainty and vagueness.
2. The demurrer to counts 6 and 7 was properly sustained.
the liquidation was a violation of the by-laws of the Exchange in that it was above the ceiling prices of the plaintiff and a violation of the defense production act. Additionally it is alleged: "Since the liquidation was unlawful and without permission of the plaintiff, it constituted a violation of the by-laws of the Exchange, more specifically . . . by-laws section 77, . . . by-laws section 77W . . . and trading rule 19 . . .."
Count 7 was similar but included the allegation that the "plaintiff paid fees to the Exchange . . . and the Exchange, by acceptance of said fees, impliedly agreed to administer such contracts in accordance with the by-laws, rules and regulations of the New York Cotton Exchange Clearing Association, Inc.," and of the Exchange. The concluding allegation was similar to that in count 6.
The grounds of the demurrer were similar to those specified in the demurrer to count 1.
We need not decide the status of a count which merely alleges that the Exchange, without the plaintiff's permission, ordered the liquidation of the contracts without justification or at illegal, over-ceiling, prices. Counts 6 and 7 specify the only ways in which such action was wrongful, that is, because in violation of the specified by-laws and rules of the Exchange. As in the case of count 1, the issue is the meaning of the reference to sections and rules which operate to include rule 19, the only one of those specified which the defendants' conduct, as alleged, may be thought to violate. We do not think that rule 19 provides that the Exchange will not order a closing out of a futures contract without the assent of the customer, or at a price in violation of the price ceiling regulation or statute. It does not deal with that subject matter.
We do not reach the question whether in the circumstances the law of New York in respect of third party beneficiary contracts would apply and if so would give the plaintiff a right under the contract between the broker and the Exchange.
effect of the price ceiling regulation on Exchange transactions. As we view the case that issue is not presented.
So far as it may be suggested that counts 6 and 7 intend to state a broader claim than that which we find therein they fail, as does count 1, for uncertainty and vagueness.
3. The order overruling the demurrer to count 1 is reversed and an order sustaining the demurrer is to be entered in the Superior Court. The order sustaining the demurrer to counts 6 and 7 is affirmed.
[Note p292-1] "Whenever through any exceptional contingency not provided for in the By-Laws and Rules, deliveries are not possible, and an extraordinary situation arises wherein a rigid enforcement of contracts generally would be grossly at variance with just and equitable principles of trade or the public interest, then upon application of any member, and after investigation, the Board of Governors, by a two-thirds vote of the whole Board, may accord relief in such manner as in their judgment the emergency may demand, with due regard, however, to upholding the rights of both buyer and seller and the fulfillment of their just obligations and to the best interests of the Exchange."
[Note p293-1] For an indication that action of the Exchange, in accordance with its by-laws, ordering liquidation of futures contracts at a fixed settlement price after the enactment of price control legislation would be sustained if taken impartially, honestly, and in good faith, see Crowley v. Commodity Exchange, Inc. 141 Fed. (2d) 182, 185, 186 (C. C. A. 2); Daniel v. Board of Trade of Chicago, 164 Fed. (2d) 815 (C. C. A. 7); Cargill v. Board of Trade of Chicago, 164 Fed. (2d) 820 (C. C. A. 7); Thomson v. Thomson, 315 Ill. 521; Garcia Sugars Corp. v. New York Coffee & Sugar Exchange, Inc. 7 N. Y. Sup. (2d) 532.

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