Opinion ID: 1746370
Heading Depth: 1
Heading Rank: 3

Heading: Legality of the HTA Contracts.

Text: A. Scope of review. Whether the contracts at issue in this case are illegal under the Commodity Exchange Act (CEA) is a matter of statutory interpretation. Therefore, our review is for the correction of errors of law. See State v. Canas, 571 N.W.2d 20, 22 (Iowa 1997). Although we give respectful consideration to the decisions of federal district courts and federal courts of appeals on this issue, we have the authority to decide this case based on our own interpretation of federal law. See ASARCO Inc. v. Kadish, 490 U.S. 605, 617, 109 S.Ct. 2037, 2045, 104 L.Ed.2d 696, 715 (1989); Iowa Nat'l Bank v. Stewart, 214 Iowa 1229, 1246, 232 N.W. 445, 454 (1930). B. General principles. The primary goal in interpreting a statute is to ascertain the enacting body's intent. See State v. Casey's Gen. Stores, Inc., 587 N.W.2d 599, 601 (Iowa 1998). We begin with an examination of the language of the statute. See id. We look not only to the words used by Congress, but also to the context within which they appear. See id. The legislative history of the statute is also helpful in determining Congress's purpose in enacting a particular provision. See Henriksen v. Younglove Constr., 540 N.W.2d 254, 256-57 (Iowa 1995). Once we have determined Congress's intent, we interpret the statute so as to give effect to the purpose underlying the legislation. See DeLaMater v. Marion Civil Serv. Comm'n, 554 N.W.2d 875, 878 (Iowa 1996). C. Discussion of congressional intent. The CEA makes it unlawful ... to enter into ... any transaction in ... a contract for the purchase or sale of a commodity for future delivery unless, among other requirements, the transaction is conducted on a board of trade designated by the Commodity Futures Trading Commission. 7 U.S.C. § 6(a). The Act specifically excludes from the term future delivery any sale of any cash commodity for deferred shipment or delivery. Id. § 1a(11). Although the Act does not use labels to distinguish between contracts falling within the Act and those falling within the exclusion, courts and commentators have generally categorized contracts that must be transacted on a board of trade as futures contracts and contracts falling within the exception as cash forward contracts. See, e.g., Grain Land Coop v. Kar Kim Farms, Inc., 199 F.3d 983, 990-91 & n.15 (8th Cir.1999); Commodity Futures Trading Comm'n v. Noble Metals Int'l, Inc., 67 F.3d 766, 772 n.4 (9th Cir.1995); Commodity Futures Trading Comm'n v. Co Petro Mktg. Group, 680 F.2d 573, 576 (9th Cir.1982) (citing H.R.Rep. No. 93-975, at 129-30, U.S.Code Cong. & Admin.News 1974, p. 5843 (1974)). There is no dispute that unless the HTA contracts between Sime Farms and the Coop fall within the cash-forward-contract exception, they would violate the Act because they were not transacted on a board of trade. Consequently, we focus our analysis on the exception. In examining the cash-forward-contract exclusion, we have found the exclusion's legislative history to be most enlightening on the issue of congressional intent. The Ninth Circuit Court of Appeals reviewed the legislative history of this exclusion in the Co Petro case. As the court noted there, [t]he exclusion for cash forward contracts originated in the Future[s] Trading Act enacted in 1921. [4] 680 F.2d at 577. The Futures Trading Act was passed in response to excessive speculation and price manipulation in grain futures markets. See id. To prevent such abuses, the Act imposed a prohibitive tax on all futures contracts with two exceptions: (1) future delivery contracts made by owners and growers of grain, owners and renters of land on which grain was grown, and associations of such persons; and (2) future delivery contracts made by or through members of boards of trade which had been designated by the Secretary of Agriculture as contract markets. Id. Significantly, during hearings on this bill, concern was expressed that the exemption of owners, growers and renters was too narrow and that a variety of legitimate commercial transactions, such as cash grain contracts between farmers and grain elevators for future delivery of grain, should also be exempt. See id. (citing Hearings on H.R. 5676 Before the Senate Committee on Agriculture and Forestry, 67 Cong., 1st Sess. 8-9, 213-14, 431, 462 (1921)). As a result of this concern, any sale of cash grain for deferred delivery was excluded from the term future delivery. See id. (citing S.Rep. No. 67-212, at 1 (1921)). One senator stated during the hearings on this bill that the legislation did not concern itself at all with the sale or purchase of actual grain, either for present or future delivery. The entire business of buying and selling the actual grain, sometimes called cash or spot business, is expressly excluded. It deals only with the future or pit transaction in which the transfer of actual grain is not contemplated. See id. at 578 n.6 (quoting 61 Cong. Rec. 4762 (Aug. 9, 1921)). In 1936, when Congress enacted the CEA, it reworded the exclusion to except any cash commodity for deferred shipment or delivery. See id. (quoting Commodity Exchange Act, Pub.L. No. 74-675, § 2, 49 Stat. 1491 (1936)). Congress also deleted the express exemption for owners and growers as redundant. See id. (citing H.R. Rep. No. 74-421, at 4-5 (1935)). In a 1974 House Report on amendments to the CEA, the retained exemption was described as involving, for example, a farmer who wants to convert 5000 bushels of wheat into cash and so sells it to the elevator for a guaranteed price but with a deferred delivery date. See id. (citing H.R.Rep. No. 93-975, at 129-30 (1974)). In view of the legislative history of the exclusion, the court in Co Petro concluded that a cash forward contract exempt from the Act is one in which the parties contemplate physical transfer of the actual commodity. Id.; accord Salomon Forex, Inc. v. Tauber, 8 F.3d 966, 970 (4th Cir.1993) (`[F]utures' regulated by the Act do not include transactions involving actual physical delivery of the commodity, even on a deferred basis.). This conclusion is similar to that reached by the Commodity Futures Trading Commission in drawing a distinction between futures contracts and cash forward contracts: Commodity futures transactions involve standardized contracts for the purchase or sale of commodities which provide for future, as opposed to immediate, delivery, and which are directly or indirectly offered to the general public and generally secured by earnest money, or margin. They are entered into primarily for the purpose of assuming or shifting the risk of change in value of commodities, rather than for transferring ownership of the actual commodities. ... . . . [T]he cash commodity exclusion was intended to cover only contracts for sale which are entered into with the expectation that delivery of the actual commodity will eventually occur through performance on the contracts. The seller would necessarily have the ability to deliver and the buyer would have the ability to accept delivery in fulfillment of the contract. Although the desire to acquire or dispose of a physical commodity is the underlying motivation for acquiring such a contract, delivery may be deferred for purposes of convenience or necessity. Thus, a major difference between an excluded cash commodity-deferred delivery contract and contracts of sale of a commodity for future delivery is that the former entails not only the legal obligation to perform, but also the generally fulfilled expectation that the contract will lead to the exchange of commodities for money. In contrast, parties to a futures contract do not usually expect delivery and it rarely occurs. In re Stovall, [1977-1980 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 20,941, at 23,778 (C.F.T.C. Dec. 6, 1979) (emphasis added) (citations omitted); accord Salomon Forex, 8 F.3d at 971 (noting that futures contracts are standardized and transferable and seldom result in physical delivery of the subject commodity). A similar rationale distinguishing cash forward contracts from futures contracts was recently adopted by the Eighth Circuit Court of Appeals: [I]t is the contemplation of physical delivery of the subject commodity that is the hallmark of an unregulated cash-forward contract. Kar Kim Farms, 199 F.3d at 990. In determining whether the parties contemplated physical delivery in that case, the court examined the intentions of the parties, the terms of the contract, the course of dealing between the parties, and any other relevant factors. Id. at 991. Other factors it considered relevant included whether the parties are in the business of obtaining or producing the subject commodity; whether they are capable of delivering or receiving the commodity in the quantities provided for in the contract; whether there is a definite date of delivery; whether the agreement explicitly requires actual delivery, as opposed to allowing the delivery obligation to be rolled indefinitely; whether payment takes place only upon delivery; and whether the contract's terms are individualized, rather than standardized. Id. It is helpful to briefly examine the court of appeals' analysis leading to its conclusion that the HTA contracts involved in the Kar Kim Farms case were excluded transactions. The contracts required the producer to deliver at an unspecified time a fixed quantity and grade of grain to the cooperative. Id. at 987. The price was determined by reference to the CBOT price for March 1996 corn, minus the variable component known as basis. Id. The farmer was allowed to choose when to set the basis so long as it was done within the time frame specified in the contract. Id. The contract specifically provided that the cooperative would hedge the transaction by selling an equal amount of grain on the CBOT. Id. The cooperative was responsible for any margins or commissions paid on the hedge. Id. The contract allowed the producer to roll, or postpone, delivery to a later date for a per-bushel fee of two cents. Id. When a producer rolled his contract, the cooperative also rolled its hedge. Id. Any gain or loss incurred by the cooperative in rolling its hedge was added to or subtracted from the CBOT futures price referenced in the contract between the producer and the cooperative. Id. The contract also contained a cancellation provision allowing the producer to cancel the contract for five cents per bushel plus or minus the accumulated spread. Id. Finally, the contract provided that the producer must deliver grain in order to be paid any gains. Id. In evaluating this contract, the court concluded that actual delivery of the grain was contemplated for several reasons: (1) the cooperative was in the business of buying grain for resale; (2) the cooperative entered into HTA contracts only with grain farmers and producers, not the general public; (3) the other party to the contract was a producer in the business of growing and selling grain; (4) the contract terms were individually negotiated, unlike standardized futures contracts; (5) the producer did not engage in an offsetting transaction; and (6) the producer was not required to guarantee his performance by the payment of margins. Id. at 991-92. The fact that the producer could roll the contracts did not detract from the court's conclusion because the producer's ability to roll the contracts merely allowed him to delay his delivery obligation rather than avoid it altogether. Id. at 992; accord Andersons, 166 F.3d at 321 n.20 ([T]he mere possibility of infinite rolling is not dispositive; whether actual delivery is contemplated remains the focal point.); Oeltjenbrun v. CSA Investors, Inc., 3 F.Supp.2d 1024, 1040 (N.D.Iowa 1998) (same). Not even the contract's cancellation provision was viewed by the court as sufficient to transform the HTA contract into a futures contract subject to the Act. Kar Kim Farms, 199 F.3d at 992. The court rejected the producer's contention that HTA's can only fall within the cash-forward exception if [the] obligations of the parties to make or to accept delivery are inescapable, concluding instead that the congressional policy underlying the exemption merely required `a legitimate expectation that physical delivery of the actual commodity by the seller to the original contracting buyer will occur in the future.' Id. (quoting Andersons, 166 F.3d at 318). D. Sime Farms' arguments re interpretation of the exclusion. Before we turn to an application of the law to the facts of this case, we address Sime Farms' argument that the foregoing authorities should be rejected in favor of an interpretation of the exemption consistent with the law of sales under the Uniform Commercial Code (U.C.C.). Sime Farms focuses on the language of the exemption excluding any sale of any cash commodity for deferred shipment or delivery. 7 U.S.C. § 1a(11) (emphasis added). Under the U.C.C., [a] `sale' consists in the passing of title from the seller to the buyer for a price. Iowa Code § 554.2106(1). The U.C.C. further provides that [g]oods must be both existing and identified before any interest in them can pass. Id. § 554.2105(2). Based on these principles, Sime Farms argues that only contracts dealing in existing and identified grain would qualify as cash forward contracts under the Commodity Exchange Act exemption. We reject this argument for several reasons. First, as already noted, to qualify as a sale under the U.C.C., title must pass. In the case of grain, however, title does not generally pass until the grain is delivered. See Production Credit Ass'n v. Farm & Town Indus., Inc., 518 N.W.2d 339, 346-47 (Iowa 1994) (citing Iowa Code § 554.2401(2)). The requirement of actual delivery can, however, be avoided by an express agreement that title will pass at the time the contract is executed. Id. at 347. If we were to apply this law, the exclusion for cash forward contracts would be effectively eliminated. See generally Edward M. Mansfield, Textualism Gone Astray: A Reply to Norris, Davison, and May on Hedge to Arrive Contracts, 47 Drake L.Rev. 745, 749 (1999). It is exceedingly unlikely that grain elevators or cooperatives would agree to take title to growing crops, and therefore assume the risk of loss of the undelivered grain. See id. In addition, as one court has noted, [t]he relevant statutory language came into existence long before the U.C.C. [and]... serves a different function from identification to the contract under the U.C.C. Nagel v. ADM Investor Servs., Inc., 65 F.Supp.2d 740, 755 (N.D.Ill.1999) (rejecting argument that the word sale as used in the federal exemption should be given the same meaning as sale under the U.C.C.). Finally, we agree with the Eighth Circuit Court of Appeals that application of the U.C.C. definition of sale is inconsistent with the congressional policies underlying the CEA. See Haren v. Conrad Coop., 198 F.3d 683, 684 (8th Cir.1999). In an attempt to undermine the persuasiveness of the authorities discussed in the preceding section of our opinion, Sime Farms also relies on a guidance statement made in an interpretive letter issued by the Commission. See CFTC Interpretive Letter No. 96-41, [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,691, at 43,852 (May 15, 1996). In this letter, the Commission sets forth a statement of guidance regarding certain contracting practices, and lists characteristics of contracts that the Division of Economic Analysis would construe as falling within the forward contract exclusion. Id. In general, these characteristics describe a contract that contemplates delivery within a single crop year. Id. We note that the Commission clearly expresses in its interpretive letter that it is not taking a position on the legality of any individual contract. Id. at 43,849. Moreover, its discussion that delivery should occur within the same crop year as harvest is merely the view of the Division of Economic Analysis with respect to prudent risk-reduction. Id. at 43,852. Even if this guidance statement were interpreted as the Commission's view of the legality of certain HTA contracts, nowhere in the statutory language of the CEA is there a restriction [on the exemption] to deferment of delivery within a single crop year. Oeltjenbrun, 3 F.Supp.2d at 1043. For these reasons, we do not find the Commission's letter helpful in deciding whether the contracts before us fall within the exclusion. See Kar Kim Farms, 199 F.3d at 993 (rejecting the producers' reliance on the Commission's interpretive letter); Oeltjenbrun, 3 F.Supp.2d at 1043 (same). In summary, we are not persuaded by Sime Farms' arguments that a contract must constitute a sale as defined in the U.C.C. in order to fall within the exclusion. In addition, we find nothing in the legislative history or the language of the exclusion itself that would limit application of the exclusion to contracts contemplating delivery in the same crop year as the year in which the grain is grown. Rather, we find the interpretation placed on the exclusion by the Eighth Circuit Court of Appeals to be most consistent with the intent of Congress as shown by the legislative history of this exclusion. In general, that interpretation would draw the following distinction between futures contracts and cash forward contracts. Contracts that merely serve as an investment vehicle to the public are futures contracts. In contrast, contracts that are clearly intended to enable a producer to price his grain in advance of harvest in order to facilitate the ultimate exchange of grain for money are cash forward contracts. With this distinction in mind, we now proceed to apply these principles to the contracts at issue here. E. Application of law. When we apply the test, factors, and relevant considerations discussed in the Kar Kim Farms case to the facts before us, we conclude that the HTA contracts between the parties anticipated the actual delivery of corn by Sime Farms to the Coop. Although Sime Farms' obligation to deliver grain is not explicitly stated in the contracts, it is clearly implied by the insertion of an arrival period and destination. The evidence in the record also establishes that Sime Farms had entered into these contracts in the past and had delivered grain to the Coop in fulfillment of its contractual obligations. Although rolling was permitted, nothing in the record suggests that the parties did not anticipate actual delivery at some time. In addition, unlike the contracts in Kar Kim Farms, the HTA contracts at issue here did not contain a cancellation provision. Finally, both Sime Farms and the Coop were in the business of buying and selling grain, a circumstance that also supports a finding that actual delivery of corn by Sime Farms to the Coop was expected. Sime Farms relies on a decision of the Commodity Futures Trading Commission in In re Competitive Strategies for Agriculture, Ltd., to support its contention that the Sime Farms contracts were illegal futures contracts. [1998-1999 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 27,771, at 48,678 (C.F.T.C. Sept. 17, 1999). Although the Commission held that the HTA contracts involved in the Competitive Strategies case were futures contracts, the characteristics of the contracts at issue there were significantly different from the contracts at issue here. In Competitive Strategies, the contracts between the cooperative and so-called sellers were marketed by an investment service to sellers who would never have grain to sell; some were not even farmers and did not own farmland. Id. at 48,685-87. Moreover, the surrounding circumstances of the transactions showed that delivery was never anticipated. Id. at 48,687. That is simply not the situation here, as we have just discussed. In conclusion, we hold that the HTA contracts between Sime Farms and the Coop constituted the sale of a cash commodity for deferred shipment or delivery within the meaning of the statutory exemption. See Oeltjenbrun, 3 F.Supp.2d at 1045-47 (holding as a matter of law that contracts nearly identical to those at issue in this case were cash forward contracts falling within the statutory exemption). Therefore, we affirm the trial court's ruling that the contracts were legal.