Opinion ID: 779897
Heading Depth: 2
Heading Rank: 2

Heading: california's bucket shop law

Text: 44 As its second argument, Thrifty claims the bankruptcy court erred in finding that the interest rate swaps did not violate California's Bucket Shop Law. See Cal. Corp.Code §§ 29000 et seq. Thrifty contends the bankruptcy court should have found the interest rate swaps unenforceable and disallowed the Swap Claim.
45 The term bucket shop refers to an illegitimate gambling operation, common at the end of the nineteenth century, that permitted investors to place bets based upon fluctuations in the market prices of stocks and commodities. See, e.g., Bryant v. Western Union Telegraph Co., 17 F. 825, 828 (C.C.D.Ky.1883). In 1906, the Supreme Court described a bucket shop as an establishment, nominally for the transaction of a stock exchange business, or business of similar character, but really for the registration of bets, or wagers, usually for small amounts, on the rise or fall of the prices of stocks, grain, oil, etc., there being no transfer or delivery of the stock or commodities nominally dealt in. Gatewood v. North Carolina, 203 U.S. 531, 536, 27 S.Ct. 167, 168, 51 L.Ed. 305 (1906); Joslyn v. Downing, Hopkins & Co., 150 F. 317, 318 (9th Cir.1906) (describing typical early twentieth-century bucket shop). Because the stock and commodity purchases were entirely fictitious, bucket shops frequently assumed the risk of fluctuations in market prices. See generally William L. Stein, The Exchange-Trading Requirement of the Commodity Exchange Act, 41 Vand. L.Rev. 473, 477 (1988). If prices moved significantly against a bucket shop's position, the shop would often close its doors or file for bankruptcy, leaving behind uncollectible debts. Id. 46 Many states, including California, responded to these perceived abuses by enacting statutes designed to eradicate bucket shops. California's Bucket Shop Law, enacted in 1923, defines bucketing or bucket shopping as contracting for the sale or purchase of securities or commodities, where the parties intend to settle the contract according to public market price quotations, but without a bona fide sale or purchase. See Cal. Corp.Code § 29008(ac). The statute imposes criminal penalties on those who operate or assist in the operation of a bucket shop. See Cal. Corp. Code §§ 29100 & 29101; see generally People v. Gardner, 72 Cal.App.3d 641, 644-46, 140 Cal.Rptr. 238, 240-42 (Cal.Ct.App. 1977). Here, Thrifty seeks to invalidate the three interest rate swaps because the periodic payments under the swaps allegedly involved the sale and purchase of fictitious debt obligations that meet the Bucket Shop Law's statutory definition of a security or commodity. 47 BofA responds with two arguments. First, BofA asserts that state bucket shop laws were expressly preempted by a 1992 amendment to the Commodities Exchange Act, 7 U.S.C. § 1 et seq. Second, BofA argues that California's Bucket Shop Law does not apply because the interest rate swaps obligated both parties to perform, did not involve a fictitious transaction and did not relate to the purchase or sale of a security or commodity. Because the Court agrees with BofA's former argument, it need not address the latter. 48 2. THE FUTURES TRADING PRACTICES ACT OF 1992 AND PREEMPTION OF STATE BUCKET SHOP LAWS 49 As discussed in the previous section, market-wide concerns over the treatment of swap agreements in bankruptcy led Congress to enact the Swap Amendments, which removed much of the legal uncertainty that loomed over the rights of nondebtor swap counterparties in bankruptcy. Two years later, similar concerns prompted Congress to enact the Futures Trading Practices Act of 1992 (FTPA), which sought to eliminate uncertainties surrounding application of the Commodities Exchange Act (CEA) to several innovative financial instruments, including swaps. See Pub.L. No. 102-546, 106 Stat. 3590 (1992). The FTPA empowered the Commodities Futures Trading Commission (CFTC), the administrative agency charged with administering the CEA, to exempt specific instruments and transactions from coverage under the CEA. Specifically, Section 502(a) of the FTPA added Section 4(c) to the CEA, authorizing the CFTC to immediately adopt an exemption for swap agreements. 7 U.S.C. § 6(c)(5)(B). The House Conference Committee Report explained: 50 The goal of providing the Commission with broad exemptive powers is not to provide a wide-scale deregulation of markets falling within the ambit of the [CEA]. Rather, it is to give the Commission a means of providing certainty and stability to existing and emerging markets so that financial innovation and market development can proceed in an effective and competitive manner.... 51 [T]he Conferees expect and strongly encourage the Commission to use its exemptive powers promptly upon enactment of this legislation in four areas where significant concerns of legal uncertainty have arisen: (1) hybrids, (2) swaps, (3) forwards, and (4) bank deposits and accounts. 52 H.R. Conf. Rep. No. 102-978, at 81 (Oct. 2, 1992), reprinted in 1992 U.S.C.C.A.N. 3179, 3213. 22 In January 1993 the CFTC, exercising its exemptive authority and following this directive, promulgated regulations exempting eligible swap agreements from CEA coverage. See Exemption for Certain Swap Agreements, 58 Fed.Reg. 5,587 (1993) (codified in 17 C.F.R. Part 35) (Swap Exemption). The Swap Exemption applies retroactively to swap agreements entered into on or after October 23, 1974. See 17 C.F.R. § 35.1(a). 23 53 The FTPA also sought to remove the legal uncertainty created by state bucket shop laws. Section 502(c) of the FTPA amended Section 12(e)(2) of the CEA to preempt state bucket shop laws as applied to any transaction or class of transactions that has received or is covered by the terms of any exemption previously granted by the [CFTC] under [Section 4(c)]. 7 U.S.C. § 16(e)(2)(A). As explained by the House Conference Committee Report: 54 Section 502(c) of the [FTPA] amends section 12(e)(2)(A) of the [CEA] to provide that any State or local law that prohibits or regulates gaming or the operation of bucket shops (other than anti-fraud provisions of general applicability) shall not apply with respect to a transaction or class of transactions that has received or is covered by an exemption granted by the Commission under section 4(c). It thus provides legal certainty under both the [CEA] and state gaming and bucket shop laws for transactions covered by the terms of an exemption. 55 H.R. Conf. Rep. No. 102-978, at 80 (Oct. 2, 1992), reprinted in 1992 U.S.C.C.A.N. 3179, 3212. In other words, where the CFTC exempts transactions from the CEA pursuant to Section 4(c), those same transactions benefit from preemption of state bucket shop laws under Section 12(e)(2)(A). Thus, Section 12(e)(2)(A) preempts state bucket shop laws as to swap agreements covered by the Swap Exemption. 3. RETROACTIVITY OF THE FTPA PREEMPTION 56 Thrifty does not dispute that the three GWR — BofA interest rate swaps meet the specific eligibility requirements of the Swap Exemption. 17 C.F.R. §§ 35.1(b)(1)-(b)(2) & 35.2 (detailing requirements for the exemption); Procter & Gamble Co. v. Bankers Trust Co., 925 F.Supp. 1270, 1285 (S.D.Ohio 1996) (discussing criteria for Swap Exemption). However, Thrifty contends the FTPA does not retroactively preempt state bucket shop laws as applied to swap agreements entered into and terminated before the enactment date of the FTPA. Thrifty relies on the language of Section 12(e)(2), which preempts state bucket shop laws as applied to a transaction or class of transactions that has received or is covered by the terms of any exemption previously granted by the Commission under [Section 4(c)]. 7 U.S.C. § 16(e)(2)(A) (emphasis added). Thrifty claims the phrase previously granted limits the preemptive effect of the Swap Exemption to swap agreements entered into or terminated after October 1992, the enactment date of the FTPA. Because the three interest rate swaps here terminated before October 1992, Thrifty contends, California's Bucket Shop Law still applies to them. 57 In interpreting a federal statute, the Court must first determine whether the language is clear and unambiguous, and if so, apply it as written. Connecticut Nat. Bank v. Germain, 503 U.S. 249, 253-54, 112 S.Ct. 1146, 1149, 117 L.Ed.2d 391 (1992). The plainness or ambiguity of statutory language is determined by reference to the language itself, the specific context in which that language is used, and the broader context of the statute as a whole. Robinson v. Shell Oil Co., 519 U.S. 337, 341, 117 S.Ct. 843, 846, 136 L.Ed.2d 808 (1997). The Court must consider not only the bare meaning of the critical word or phrase but also its placement and purpose in the statutory scheme. Holloway v. United States, 526 U.S. 1, 6, 119 S.Ct. 966, 969, 143 L.Ed.2d 1 (1999) (internal quotations omitted). If the Court finds the statute ambiguous, it may then look to legislative history to aid in the interpretation. Blum v. Stenson, 465 U.S. 886, 896, 104 S.Ct. 1541, 1548, 79 L.Ed.2d 891 (1984). 58 For several reasons, the Court finds Thrifty's interpretation of the FTPA's preemption provision unsupported by the statute's language, structure or legislative history. First, the Court finds the phrase previously granted, in Section 12(e)(2)(A) and within the context of the FTPA, hopelessly ambiguous. The statute provides no guidance as to whether this phrase requires a temporal sequence of events, nor does it identify any event or events the CFTC exemption must precede. Section 12(e)(2)(A) broadly covers any exempted transaction or class of transactions, indicating that it does not turn on the execution or termination dates of any specific transaction. If the enactment date of the FTPA served as the temporal pivot for Section 12(e)(2)(A), as Thrifty suggests, an absurdity would result; the CFTC could not possibly have granted exemptions under Section 4(c) previous[] to the enactment of the FTPA, because Section 4(c) was part of the FTPA. 59 Second, other provisions of the FTPA plainly reveal that Congress sought to encourage — if not require — retroactive treatment of swap agreements. Section 12(e)(2)(A) refers to the CFTC's authority under Section 4(c), which empowers the agency to exempt a transaction or class of transactions for stated periods and either retroactively or prospectively, or both[.] 7 U.S.C. § 6(c)(1). A more specific subdivision in Section 4(c) encourages the CFTC to promptly promulgate an exemption for swap agreements, provided the exemption is effective as of October 23, 1974[.] 7 U.S.C. § 6(c)(5)(B). In other words, Congress authorized the CFTC to promulgate retroactive exemptions, but expressed a specific desire for retroactivity as applied to swaps. 60 The CFTC followed this directive in promulgating the Swap Exemption, noting that retroactivity was necessary to implement Congressional intent that the exemption from the [CEA] be available for all eligible swap agreements, regardless of when (subsequent to October 23, 1974) the agreements may have been entered into. See 58 Fed.Reg. 5,587, 5,588 (1993). 24 Given the clear desire for retroactivity expressed in Section 4(c) and reflected in the Swap Exemption, the Court finds it exceedingly unlikely that Congress intended to abrogate retroactive preemption in Section 12(e)(2)(A) by using the ambiguous phrase previously granted. 61 Finally, the legislative history of the FTPA undermines Thrifty's argument. As discussed above, Congress intended Section 12(e)(2)(A) to provide legal certainty under both the [CEA] and state gaming and bucket shop laws for transactions covered by the terms of an exemption. H.R. Conf. Rep. No. 102-978, at 80 (Oct. 2, 1992), reprinted in 1992 U.S.C.C.A.N. 3179, 3212. In other words, Congress intended the CFTC's exemptive authority to simultaneously eliminate the legal uncertainty created by the CEA and state bucket shop laws. Construing the FTPA to permit retroactive exemption from the CEA but only prospective preemption of state bucket laws would create a layer of legal uncertainty where none existed before. Counterparties with long-term swap agreements entered into prior to October 1992, perhaps subject to amendments or modifications, could not determine with certainty whether their swaps would benefit from the FTPA's preemption of state bucket shop laws. Nothing in the FTPA's legislative history suggests Congress intended such an anomalous result. 62 For these reasons, the Court holds that the FTPA's language, structure and legislative history compel the conclusion that Congress preempted state bucket shop laws to the full extent the CFTC exempts transactions from coverage under the CEA. Thus, the Swap Exemption preempts state bucket shop laws as to covered swap agreements entered into on or after October 23, 1974. Because GWR and BofA entered into the three interest rate swap agreements after this date, they are not subject to California's Bucket Shop Law, and the Bankruptcy Court did not err in rejecting this objection.