North Cent. F.S., Inc. v. Brown

951 F.Supp. 1383

NORTH CENTRAL F.S., INC., Plaintiff/Counterclaim Defendant, v. Alan L. BROWN, David Burmester, Don Butson, Steve Hackbarth, Ken Mutschler, Marlyn Tripp, Kurt Wolf, and Maurice Wolf, Defendants/Counterclaim Plaintiffs.

CEBAR FARMS, INC., Barbara Lyon, Jerry Lyon, and James Dean Krabbe, Plaintiffs/Counterclaim Defendants, v. NORTH CENTRAL F.S., INC., Defendant/Counterclaim Plaintiff.

No. C 96-3074-MWB.

No. C 96-3080-MWB.

United States District Court, N.D. Iowa, Central Division.

December 23, 1996.

Steven H. Hoeft and Steven S. Scholes, McDermott, Will & Emery, Chicago, IL, Roger T. Stetson and Edward M. Mansfield, Belin, Harris, Lamson, McCormick, Des Moines, IA, for Elevator.

Glenn L. Norris and George F. Davison, Jr., Hawkins & Norris, Des Moines, IA, for Producers.

MEMORANDUM OPINION AND ORDER REGARDING SUBJECT MATTER JURISDICTION AND DEFENDANT'S MOTION TO DISMISS CLAIMS

                                TABLE OF CONTENTS
I.    INTRODUCTION ................................................................... 1386
      A.  The Cases .................................................................. 1386
      B.  The Claims And Counterclaims ............................................... 1386
      C.  The Motions To Dismiss ..................................................... 1388
      D.  The Jurisdictional Question ................................................ 1390
II.   BACKGROUND ..................................................................... 1390
III.  LEGAL ANALYSIS ................................................................. 1391
      A.  Subject Matter Jurisdiction ................................................ 1391
          1. General principles ...................................................... 1391
             a. The "well-pleaded complaint" rule .................................... 1393
             b. Claims "arising under" federal law ................................... 1394
          2. Do the present claims "arise under" federal law? ........................ 1395
             a.   Declaratory judgment claims ........................................ 1395
             b.   Breach-of-contract claims .......................................... 1398
             c.   Other federal claims ............................................... 1400
      B.  The Motions To Dismiss ..................................................... 1403
          1. Standards for dismissal pursuant to Fed.R.Civ.P. 12(b)(6) ............... 1404
          2. The CEA fraud claims .................................................... 1404
             a.  Rescission as a remedy under the CEA ................................ 1405
             b.  Pleading of fraud with sufficient particularity ..................... 1405
                 i.  Fed.R.Civ.P. 9(b) ............................................... 1407
                 ii. The pleading of fraud here ...................................... 1408
          3. Adequacy of other claims ................................................ 1409
      C.  Subject Matter Jurisdiction Revisited ...................................... 1409
          1. Supplemental jurisdiction and compulsory counterclaims .................. 1409
          2. Disposition of all claims ............................................... 1411
IV.   CONCLUSION ..................................................................... 1412

BENNETT, District Judge.

This opinion is the court's third endeavor to answer the question, when does a federal court have subject matter jurisdiction over the issue of whether so-called "hedge-to-arrive" contracts (HTAs) for the sale and purchase of grain are illegal futures contracts under the Commodity Exchange Act (CEA), 7 U.S.C. §§ 1-25? In its prior decisions considering this question, the court was presented with breach-of-contract cases filed in state court by elevators, but removed to this federal court by the defendant grain producers, who asserted that the issue of the legality or illegality of the contracts under the CEA established the subject matter jurisdiction of the federal court. See Farmers Co-op. Elevator of Buffalo Center, IA v. Abels, 950 F.Supp. 931, (N.D.Iowa 1996) (fifty-three related cases); Farmers Co-op. Elevator v. Doden, 946 F.Supp. 718 (N.D.Iowa 1996). The court rejected that contention, because the federal question upon which subject matter jurisdiction was asserted was raised only as a defense to a state-law cause of action.

The present cases are upon different procedural footings. In these cases, it is the court, not one of the parties, that has raised the threshold question of subject matter jurisdiction. Furthermore, both of these cases are declaratory judgment actions originally brought in federal court, one by an elevator and the other by grain producers, and each presents additional claims or counterclaims ostensibly under the CEA upon which the parties assert the subject matter jurisdiction of the court may be based. In addition to the question of subject matter jurisdiction, the court is presented here with entirely new questions raised by the elevator's motions to dismiss the grain producers' claims or counterclaims in each case. The elevator asserts that fraud claims have not been pleaded with sufficient particularity and that other counts fail to state claims upon which relief can be granted.

I. INTRODUCTION

Although the present opinion addresses questions of subject matter jurisdiction and motions to dismiss claims or counterclaims in two cases, those two cases have not been formally consolidated in any way. Rather, the court and the parties, represented by the same counsel in each case, have recognized the near identity of issues presented, despite differences in whether the suit was filed by the elevator or the grain producers. Therefore, for the sake of convenience, the court conducted a joint hearing on subject matter jurisdiction and the motions to dismiss in each case on December 12, 1996, and now files a single opinion.

A. The Cases

The controversy in each of these cases centers on so-called "hedge-to-arrive" or HTA contracts entered into by the parties. In each of the cases, one or both of the parties raise the question of the legality or illegality of the HTAs under the CEA. Additionally, the cases involve claims arising from alleged breach of the contracts and alleged fraud or misrepresentation in the inducement to enter into the contracts. North Central F.S., Inc. (the Elevator), filed the first of these actions, Case No. C96-3074 (the North Central Case), on August 20, 1996, by filing a complaint for declaratory judgment and other relief against grain producers Alan L. Brown, David Burmester, Don Butson, Steve Hackbarth, Ken Mutschler, Marlyn Tripp, Kurt Wolf, and Maurice Wolf. The second of these actions, Case No. C96-3080 (the CeBar Farms Case), which also seeks declaratory judgment and other relief, was filed against the Elevator on September 10, 1996, by another group of grain producers, CeBar Farms, Inc., Barbara Lyon and Jerry Lyon, who are the principals of CeBar Farms, and James Dean Krabbe. All of the grain producers will be referred to herein collectively as the Producers, but where distinctions must be made, they will be identified as either the North Central Defendants or the CeBar Farms Plaintiffs.

The Elevator is represented in both of these cases by counsel Steven H. Hoeft and Steven S. Scholes of McDermott, Will & Emery in Chicago, Illinois, and by local counsel Roger T. Stetson and Edward M. Mansfield of Belin, Harris, Lamson, McCormick in Des Moines, Iowa. The Producers are represented in each case by counsel Glenn L. Norris and George F. Davison, Jr., of Hawkins & Norris in Des Moines, Iowa.

The North Central Defendants answered the Elevator's complaint in the North Central Case on August 27, 1996, asserting affirmative defenses and counterclaims. On September 16, 1996, the Elevator moved to dismiss all of the counterclaims in the North Central Case. Prior to answering the complaint in the CeBar Farms Case, the Elevator filed, on October 11, 1996, a motion to dismiss all but the first count of the complaint for failure to state a claim upon which relief can be granted. However, the Elevator eventually answered the complaint in the CeBar Farms Case on October 21, 1996, asserting various affirmative defenses and counterclaims. The court will detail the claims and counterclaims in these actions in the next section of this opinion.

B. The Claims And Counterclaims

In the North Central Case, the Elevator seeks, in Count I, declaratory judgment that the HTA contracts it has entered into with each of the North Central Defendants are valid, binding, and enforceable contracts exempt from the CEA and that each of the defendants is obligated under the HTAs to deliver corn to the Elevator under terms specified in the HTAs. As further relief on this count, the Elevator also seeks attorneys fees and costs incurred in pursuing this action and such other relief as the court deems just and proper. In Count II of its complaint, the Elevator seeks damages for repudiation of the HTAs, including lost revenues, as well as attorneys fees and costs. In Count III, the Elevator asserts a claim of promissory estoppel, and as relief asks the court to impose a constructive trust in favor of the Elevator on all corn the defendants currently have in storage or that they have planted, but not yet harvested; to impose an equitable lien in favor of the Elevator on all corn the defendants currently have in storage or have planted, but not yet harvested to order the defendants to account for any and all proceeds from sales of corn harvested in 1995; to compensate the Elevator for its actual damages from repudiation of the HTAs, including lost revenues; temporarily and permanently to enjoin the defendants from selling or otherwise transferring or encumbering in any way any interest...