source: Caselaw Access Project

author: STOTLER, District Judge.

license: Public Domain

text:
    MORGAN GUARANTY TRUST COMPANY OF NEW YORK, a New York Corp., Plaintiff, v. AMERICAN SAVINGS AND LOAN ASSOCIATION, a California Corp., Defendant. AMERICAN SAVINGS AND LOAN ASSOCIATION, a California Corp., Third-Party Plaintiff, v. The CHASE MANHATTAN BANK, N.A., Third-Party Defendant.
    No. CV-83-6925-AHS.
    United States District Court, C.D. California.
    March 26, 1985.

      Richard K. Simon, Randall S. Rothschild, Eric L. Dobberteen, Kadison, Pfaelzer, Woodard, Quinn & Rossi, Los Angeles, Cal., for plaintiff.
    Richard H. Cooper, William H. Jennings, Freshman, Mulvaney, Marantz, Comsky, Kahan & Deutsch, Beverly Hills, Cal., for defendant and third party plaintiff.
    Roger A. Ferree, McCutchen, Black, Verleger & Shea, Los Angeles, Cal., for third party defendant Chase Manhattan Bank, N.A.
   OPINION AND ORDER GRANTING SUMMARY JUDGMENT

STOTLER, District Judge.

SUMMARY

This action involves two bearer notes issued by plaintiff Morgan Guaranty Trust Company of New York (hereinafter, Morgan), each in the sum of $5,000,000 and evidencing an indebtedness of the Manville Corporation (hereinafter, Manville). The notes were purchased by defendant American Savings and Loan Association (hereinafter, American) when the maturity date was less than two months away. Before maturity, however, Manville filed a petition for bankruptcy which invoked the stay provisions of the Bankruptcy Act. On the date of maturity, American, through, its agent, third-party defendant Chase Manhattan Bank, N.A. (hereinafter, Chase), presented the two Manville notes to plaintiff for payment. Plaintiff paid the $10,-000,000, notwithstanding special measures which had been instituted by it to monitor all Manville negotiable instruments.

Plaintiff filed suit to recover the $10,-000. 000, alleging counts of conversion, unjust enrichment, and money had and received. Defendant answered and later filed a third-party claim against Chase on the theory that Chase may have agreed, purportedly on American’s behalf, to repay plaintiff, but was without authority to do so.

Morgan and American brought cross-motions for summary judgment, while Chase filed a motion to dismiss the complaint for failure to state a claim upon which relief can be granted. American then moved for partial summary judgment on the same issues raised by Chase.

The major question presented by these motions is whether, in a transaction governed by the Uniform Commercial Code, a bank which mistakenly pays on notes covered by insufficient funds has any right of restitution against a payee who presented the notes as a holder in due course.

The Court concludes that the Uniform Commercial Code compels a holding that the “final payment rule” embodied in U.C.C. § 3-418 bars recovery by a plaintiff on its claims for equitable relief.

Judgment in favor of defendant is granted.

FACTS

The facts necessary to resolution of these motions are not in dispute.

On July 8, 1982, defendant American purchased from Goldman, Sachs & Co. (hereinafter, Goldman, Sachs) two promissory notes of the Manville Corporation, each with a face value of $5,000,000 and each made payable on September 2, 1982 at plaintiff Morgan. The notes were delivered by Goldman, Sachs to Chase, which debited American’s account by the $9,760,-833.33 purchase price of the notes, paid the sum to Goldman, Sachs, and held the notes for American until their maturity.

On August 26, 1982, Manville filed a Chapter 11 petition in bankruptcy. Morgan, which held several Manville accounts, immediately effected special procedures to process the notes it anticipated would be presented on those accounts. The procedures were designed to ensure proper disposition on each and every check presented in compliance with the applicable New York Clearing House rules, and to involve bankruptcy counsel in all payment decisions. In the days following the Chapter 11 filing, Morgan received into these channels hundreds of items drawn by Manville. Many were timely returned unpaid, many others were paid despite Manville’s bankruptcy and despite the fact that payment caused an overdraft.

On September 2, 1982, without specific instruction from American, Chase presented the Manville notes to Morgan through the New York Clearing House 2:00 a.m. exchange. At that time, the aggregate of available funds in all of Manville’s accounts was only $1,398,282.60.

When the Manville notes passed through the New York Clearing House check exchange they became subject to the Clearing House rules. Under these rules, notes presented through the 2:00 a.m. exchange are subject to provisional settlement at 10:00 a.m. that same day. Once made, the provisional settlement can be revoked in one of only two ways: first, the settling bank may physically return the notes to the presenter before 3:00 p.m. that day; second, the settling bank may inform the presenter before 3:00 p.m. that the notes will be dishonored and return the notes through the 11:00 p.m. exchange. Rule 6b, Rules Governing the Return of Items Received through the Exchange of the New York Clearing House. The Morgan employees who usually handled such notes were well-versed in the Clearing House rules and deadlines. However, the special channels established by Morgan to handle the Man-ville accounts bypassed these employees and instead put the Manville notes in the hands of employees unfamiliar with these rules.

At 10:00 a.m. in the morning of September 2, Morgan effected a provisional settlement of $10,000,000 in Chase’s favor. In accordance with Morgan’s procedures, the Manville notes were forwarded to Cathleen O’Daniel, who, as head of Morgan’s Deposit Accounting Department, was responsible for monitoring the Manville accounts. O’Daniel tried twice between 10:00 and 12:00 that morning to contact David Deming, a Morgan official, for instruction in dealing with the notes. Deming, in turn, attempted contact with special counsel handling the Manville bankruptcy procedures for Morgan. Deming ultimately received instructions not to honor the Manville notes. Unfortunately, O’Daniel did not receive her reply until 4:00 p.m.—well past the 3:00 p.m. deadline for dishonoring such notes—when Deming told her to “bounce” the notes. O’Daniel immediately undertook to do so, but it was then too late.

On September 3, Chase transferred the $10,000,000 credit to American’s account and notified American of the transaction. On the same day, Morgan demanded repayment of the $10,000,000, first from Chase as agent for American, and then from American itself. American refused to return the payment.

On October 26,1983, Morgan filed a complaint against American, asserting causes of action for (1) conversion, (2) unjustment enrichment, and (3) money had and received. American answered, and, on May 4, 1984, filed a third-party complaint against Chase seeking indemnity in the event that American would be found liable on any promise, made by Chase as its agent, to return the money to Morgan.

American and Morgan subsequently filed cross-motions for summary judgment. Chase filed a motion to dismiss the complaint under Ped.R.Civ.P. 12(b)(6). American further moved for partial summary judgment on the complaint in support of the very issues raised in Chase’s motion. All motions were presented and heard contemporaneously, but only the cross-motions for summary judgment are considered in this opinion.

DISCUSSION

American has moved for summary judgment as to all three claims of Morgan’s complaint. Summary judgment is properly granted where there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed. R.Civ.P. 56; Aydin Corp. v. Loral Corp., 718 F.2d 897, 902 (9th Cir.1983).

1. Unjust Enrichment and Money Had and Received (Claims 2 and 3)

American posits four alternative theories why Morgan has no equitable right to recover its money paid and, thus, why Claims 2 and 3—for unjust enrichment and money had and received—must be dismissed: first, that Morgan’s payment on the Man-ville notes was not the result of a “mistake,” but was instead voluntary; second, that by signing the notes as agent at the date of their issuance, Morgan accepted the notes and assumed an independent obligation to pay as guarantor; third, that even if the payment was the result of Morgan’s mistake of fact, New York common law has never allowed equitable recovery of such payments; and, fourth, even if such recovery were permitted at common law in New York, that the New York Uniform Commercial Code bars all equitable recovery of such payments. Because the Court finds the fourth argument dispositive, resolution of the merits of the other arguments is unnecessary.

American’s argument centers on Section 3-418 of the New York U.C.C., which provides:

Except for recovery of bank payments as provided in the Article on Bank Deposits and Collections (Article 4) and except for liability for breach of warranty on presentment under the preceding section, payment or acceptance of any instrument is final in favor of a holder in due course, or a person who has in good faith changed his position in reliance on the payment.

The parties dispute the effect of the section and the circumstances under which that effect is brought to bear on a commercial transaction. Morgan contends that the preconditions to application of Section 3-418 have not been met in this case. Morgan further argues that, if the section does apply to this case, that the N.Y.U.C.C. preserves common law restitutionary rights for a bank that has mistakenly paid on an NSF note. American responds that this transaction falls within the ambit of Section 3-418, and that the section acts to bar restitutionary recovery of a final payment by Morgan.

a. Criteria for Application of Section 3-418

By its terms, Section 3-418 requires that two conditions be met before the “final payment” rule takes effect. First, there must be a “payment or acceptance.” Second, the payment must be in favor of a holder in due course or good faith relier.

(1) Payment

The “payment” referred to in Section 3-418 is defined in N.Y.U.C.C. Section 4-213:

(1) An item is finally paid by a payor bank when the bank has done any of the following, whichever happens first:
(d) made a provisional settlement for the item and failed to revoke the settlement in the time and manner permitted by statute, clearing house rule or agreement.

As discussed above, Morgan made a provisional settlement for the Manville notes at 10:00 a.m. on September 2, as specified by the New York Clearing House Check Exchange Rules; it failed to revoke the settlement by the 3:00 p.m. deadline provided by those same rules. Thus, the notes were “finally paid.”

(2) Holder in Due Course

“Holder in due course” is defined in N.Y. U.C.C. Section 3-302:

(1) A holder in due course is a holder who takes the instrument
(a) for value; and
(b) in good faith; and
(c) without notice that it is overdue or has been dishonored or of any defense against or claim to it on the part of any person.
(2) A payee may be a holder in due course.

The parties agree that, when American took the notes on July 8, 1982, it became a holder in due course: American paid full value for the notes and had no reason to know that Manville soon would be filing in bankruptcy. Yet Morgan apparently argues that American lost its status as holder in due course by allowing Chase to present the notes on September 2 with full knowledge of Manville’s intervening bankruptcy filing and the stay that automatically became effective on that filing. See 11 U.S.C. Section 362.

Unfortunately for Morgan, there is nothing in Section 3-302 or elsewhere in the Code that indicates that a person can be stripped of his status as a holder in due course by subsequent events. Indeed, Section 3-302 by its terms considers only the circumstances extant at the time of taking. It is thus irrelevant for purposes of Section 3-418 that American and/or Chase may have learned after the July 8, 1982, purchase of the notes of Manville’s August 26, 1982, Chapter 11 filing.

b. Effect of Section 3-4-18

American contends that Section 3-418 bars restitutionary action on a note finally paid to a holder in due course. Morgan, noting that N.Y.U.C.C. Section 1-103 authorizes the use of equitable principles available at common law “[u]nless displaced by the particular provisions of this Code,” counters that Section 3-418 does not displace equitable rights of recovery for a payment made under a mistake of fact.

Morgan cites four cases in support of its contention. The first two, Demos v. Lyons, 151 N.J.Super. 489, 376 A.2d 1352 (1977), and National Savings and Trust Co. v. Park Corp., 722 F.2d 1303 (9th Cir.1983), cert. denied, — U.S. -, 104 S.Ct. 1916, 80 L.Ed.2d 464 (1984), do nothing to help Morgan’s ease. Demos involved a dispute among a payee bank, the bank’s customer who had written an NSF check, and the presenter of the check. The presenters concededly had not taken the check for value and acknowledged that “they were not holders in due course and did not change their position in reliance on the payment.” 151 N.J.Super. at 495, 376 A.2d 1352. Since the defendants had not met the threshold requirements of Section 3-418, the Demos court never even reached the issue of the possible effect of the section on that transaction.

The Park case similarly provides no support. There, as in Demos, the court began its analysis by finding that the payee was not a holder in due course. Indeed, the court reasoned that the payor had a restitutionary right only because “no value had been given [by the payee] for the instrument.” 722 F.2d at 1306.

The final two cases cited, Bank Leumi Trust Co. v. Bally’s Park Place, Inc., 528 F.Supp. 349 (S.D.N.Y.1981), and Greater Western Bank & Trust v. Nahat, 138 Ariz. 260, 674 P.2d 323 (Ariz.App.1983), although somewhat ambiguous, ultimately provide no more support for Morgan’s position. Bank Leumi involved a recovery action by a payor bank that mistakenly paid an NSF check. The court allowed the payor to maintain its action, announcing that:

[Section 3-418 applies] to interbank settlement procedures, and not to subsequent actions for restitution. A contrary reading ... would be inconsistent with Section 1-103, which retains the common law governing mistake. It would lead to the unintended result of allowing a payee, unjustly, to retain monies improperly obtained.

528 F.Supp. at 354.

Read by itself, this passage seems to indicate that Section 3-418 has no effect on any action for restitution. But closer examination of the Bank Leumi decision indicates that the discussion of Section 3-418 is limited to the case of a payee who is not a holder in due course. Indeed, the parties apparently did not argue the issue, and the court observed in a footnote:

Concepts having to do with bona fide holders of negotiable paper in due course without notice are not involved in this litigation. See New York U.C.C. Section 3-302.

528 F.Supp. at 350, n. 1. The Bank Leumi payee, then, could not avail himself of the protections of Section 3-418, since he could not show that he met its threshold requirements.

Like Bank Leumi, Nahat involved a restitutionary action by a bank that mistakenly paid on a check that the payee suspected was NSF. Reviewing the case on appeal from summary judgment for the defendant, the court found that a restitutionary action might properly be maintained if the payee was not a holder in due course. The court apparently remanded to determine whether the defendant had ever attained the status of holder in due course. Only if he had would summary judgment be appropriate: “The U.C.C. guarantees that an innocent holder, i.e., a holder in due course, is assured payment on an instrument if it is not dishonored within the statutory period.” 138 Ariz. at 265, 674 P.2d 323. The Nahat court, like those in Demos, Park, and Bank Leumi, did not proceed beyond the threshold question of whether the payee was a defendant contemplated by the language of Section 3-418, and thus did not consider the import of that section.

More persuasive is the position urged by American: even if New York allowed restitutionary recovery of such payments at common law, the drafters of Section 3-418 have ensured that a drawee bank that pays on a forged or NSF check now has “a rocky road to restitutionary recovery.” J. White and R. Summers, Handbook of the Law Under the Uniform Commercial Code (2d Ed.1980) Section 16-2, p. 610. Eschewing a more liberal policy toward equitable relief, they adopted instead the common law doctrine of Price v. Neal, 3 Burr. 1354 (1762), “under which a drawee who accepts or pays an instrument on which the signature of the drawer is forged is bound on his acceptance and cannot recover his payment.” Official Comment 1 to U.C.C. Section 3-418.

The rule of finality announced in Price v. Neal and embraced by the drafters of Section 3-418 has been justified by several policies, two of which are cited in the official comments. First, the “traditional justification ... is that the drawee is in a superior position to detect a forgery” or an NSF check because he has the drawer’s signature or information regarding the status of the drawer’s account. Official Comment 1 to U.C.C. § 3-418. The rule also facilitates the practical operation of the banking industry because it allows the parties to end “the transaction on an instrument when it is paid rather than reopen and upset a series of commercial transactions at a later date.” Id. Accordingly, Section 3-418 furthers the underlying goal of the U.C.C. to safeguard “the interest of society in an orderly banking system, with the rights and liabilities of participants in the world of finance spelled out in advance.” 1 Andersen, Uniform Commercial Code, Section 1-102:46 (3d Ed.1981).

Whatever the justification, however, one thing is clear: because of Section 3-418, a drawee that pays “an NSF check will sometimes have to absorb that loss itself and will often have no cause of action against the party who presented the check.” White & Summers, Handbook, Section 16-10. See Marine Midland Bank v. Umber, 96 Misc.2d 835, 410 N.Y.S.2d 25 (1978); Northern Trust Co. v. Chase Manhattan Bank, N.A., 582 F.Supp. 1380 (S.D.N.Y.1984); National Savings and Trust Co. v. Park Corp., 722 F.2d 1303 (9th Cir.1983), cert. denied, — U.S. -, 104 S.Ct. 1916, 80 L.Ed.2d 464 (1984). Here, the rule of finality bars Morgan’s equitable claims against American for return of money paid out.

2. Conversion (Claim 1)

Morgan’s first claim for relief is for conversion. The claim is based solely on American’s refusal, despite Morgan’s demand, to return the $10,000,000 paid on the notes. American is entitled to judgment on this claim as a matter of law.

Under New York law, a cause of action for conversion will lie where (1) the plaintiff can demonstrate legal ownership or an immediate superior right of possession to a specific identifiable thing, and (2) the defendant has exercised unauthorized dominion over the thing, to the exclusion of the plaintiff. AMF Inc. v. ALGO Distributors, Inc., 48 A.D.2d 352, 369 N.Y.S.2d 460, 464 (1975). In this case, Morgan has not demonstrated legal ownership or a superior right of possession to the $10,000,000. When Morgan paid on the Manville notes, it paid as a drawee of the notes. It has failed to demonstrate that it retained any legal right or, as discussed above, any equitable right to the money paid out. Nor has it any right of possession superior to American’s.

Moreover, Morgan has not shown that there is any “specific identifiable thing” in this case that can be the subject of a conversion. The transactions at issue were conducted by means of an electronic sorting system which apportions credits and debits at the close of each day’s business cycle and registers each member bank as payee or payor. Morgan’s money thus was not the subject of a specifically identifiable fund capable of being converted. A “mere claim for moneys paid out by mistake” will not support an action for conversion under New York law. Northern Trust Co. v. Chase Manhattan Bank, N.A., 582 F.Supp. 1380, 1386 (S.D.N.Y.1984); Marine Midland Bank v. John E. Russo Produce Co., 65 A.D.2d 950, 410 N.Y.S.2d 730, 733 (4th Dep’t 1978), modified on other grounds, 50 N.Y.2d 31, 405 N.E.2d 205, 427 N.Y.S.2d 961 (1980).

DISPOSITION

Defendant’s motion for summary judgment is granted. Plaintiff’s motion for summary judgment is denied. The third-party claim of American is dismissed. Chase’s motion to dismiss is moot as is American’s motion for partial summary judgment.

The Clerk is directed to enter judgment in favor of defendant and against plaintiff.

      . The filing invoked the automatic stay provisions of 11 U.S.C. Section 362, which provides:
      (a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302 or 303 of this title ... operates as a stay, applicable to all entities, of—
      (3) any act to obtain possession of property of the estate or of property from the estate
      (6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title...
      Concomitantly, the Bankruptcy Court issued a restraining order similar, in pertinent part, to the Section 362 stay.

      . Morgan and Chase are members. American is not.

      . The parties appear to agree that the dispute on Claims 2 and 3 is governed by the law of New York.

      . If Morgan had paid the notes voluntarily rather than by mistake, it would be ineligible for equitable relief. See, e.g., Demos v. Lyons, 151 N.J.Super. 489, 376 A.2d 1352 (1977). American argues that Morgan actually volunteered payment in the hope that Manville would reimburse them later. Alternatively, American argues that Morgan constructively volunteered payment on the notes by allowing the notes to pass into the hands of employees ignorant of the deadlines rather than those who were familiar with them.
      With regard to the first argument, American has presented no evidence that Morgan formed a conscious plan to pay the notes and seek repayment. To the contrary, all evidence indicates that Morgan knew that Manville would be unable to pay on the notes and that the failure to meet the 3:00 p.m. deadline was inadvertent. With regard to the second argument, American’s discussion is primarily based on contract law. At least some courts have indicated that a party will not be denied equitable relief though its error was caused by its own negligence if, in fact, the error was made in good faith. Gulf Oil v. Lone Star Producing Co., 322 F.2d 28 (5th Cir.1963).

      . American's argument seems to be that Morgan, by signing the notes on the date of their issuance, immediately became independently obligated to the holder. However, the primary case upon which American relies, Dziurak v. Chase Manhattan Bank, N.A., 44 N.Y.2d 776, 406 N.Y.S.2d 30, 377 N.E.2d 474 (1978) is inapposite to this case. Dziurak involved a cashier’s check, an instrument on which one bank can be both drawer and drawee. The court merely held that the issuing bank had already accepted the check as drawer at the time of issuance. In contrast, the instant case involves a liability that ran from Manville to American, made payable through Manville’s account at Morgan.

      . American cites Manufacturers Hanover Trust Co. v. Aetna Life & Casualty Co., N.Y.L.J., April 12, 1984, at 2, col. 1 (N.Y.Co. April 12, 1984) as support for this argument. Manufacturers is inapposite to the instant case because the court there found that the bank had volunteered payment with the expectation that it would recover its payment from the debtor. Because there was no mistake of fact concerning the payment—only a unmaterialized hope that the debt- or would pay—the court found that there could be no action for restitution.
      Other New York cases support the contention that a holder in due course has a duty to repay when he has reason to know that a payment was made by mistake. See, e.g., Manufacturer's Trust Co. v. Diamond, 17 Misc.2d 909, 186 N.Y.S.2d 917, 919 (N.Y.Sup.Ct.1959) (‘‘There is no reason why a bank ... should be denied recovery of money paid by mistake in circumstances which would justify recovery by anyone else.”).

      . As Morgan and American point out in their papers, there has been some difference of opinion concerning the meaning of Section 4-213. Some authorities have concluded that Section 4-213 announces a rule of final payment, barring all restitutionary actions for monies "finally paid.” See Kirby v. First & Merchants National Bank, 210 Va. 88, 91 n. 4, 168 S.E.2d 273 (1969); and J. White and R. Summers, Handbook of the Law Under the Uniform Commercial Code (2d Ed.1980), Section 16-4. Others have concluded that the section does not bar actions in restitution, but marks the point at which a superior equitable right must be asserted by the payor to regain possession of the payment. See National Savings and Trust Co. v. Park Corp., 722 F.2d 1303 (9th Cir.1983), cert. denied, — U.S. -, 104 S.Ct. 1916, 80 L.Ed.2d 464 (1984); and Demos v. Lyons, 151 N.J.Super. 489, 492, 376 A.2d 1352 (1977) (“The moment when payment has thus become ‘finalized’ [under 4-213] often becomes important to establish priorities or to establish when the pay- or must have a prevailing equity to get back the money.”). Since Section 3-418 is also applicable to this case, however, the Court need not consider whether Section 4-213 announces the final payment rule.

      . Manville’s Chapter 11 filing apparently came without warning to those outside the company. Morgan concedes that American could not have had notice on July 8, 1982, that any such filing > was imminent.

      . N.Y.U.C.C. Section 1-103 provides in full: Unless displaced by the particular provisions of this Code, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other validating or invalidating cause shall supplement its provisions.

      . A preliminary issue is whether New York or California law governs the claim for conversion. Morgan argues that California law governs because the alleged conversion took place in California. However, few, if any, of the events in this transaction took place outside of New York. The presentment of the notes took place in New York between two New York banks, and the transaction was recorded on the accounts of the banks in the Federal Reserve Bank of New York. Only after the transaction between Chase and Morgan was consummated did Chase transfer the $10,000,000 credit to American’s California account. The alleged conversion therefore took place in New York. Furthermore, the choice of law provisions in the N.Y.U.C.C. favor application of New York law. N.Y.U.C.C. Section 4-102(2) provides that the law for determining the liability of a payor bank shall be the law of the forum in which the bank resides.


author: CONABOY, District Judge.

text:
    Robert W. KEIP, Plaintiff, v. TONOLLI CORPORATION, Defendant.
    Civ. No. 85-0129.
    United States District Court, M.D. Pennsylvania.
    March 26, 1985.

      Thomas Woodrow, Schuylkill County Legal Services, Pottsville, Pa., for plaintiff.
    William J. Flannery, David H. Allshouse, Morgan, Lewis & Bockius, Harrisburg, Pa., for defendant.
   MEMORANDUM AND ORDER

CONABOY, District Judge.

The above-captioned matter is before this Court on removal from the Court of Common Pleas of Carbon County pursuant to 28 U.S.C. § 1446(e). Plaintiffs complaint alleges that he was employed by Defendant on or about August 27, 1984, and remained employed until on or about October 6, 1984 when he was informed that he was “laid off”. Further, Plaintiff alleges that Defendant Tonolli Corporation (Tonolli) has hired employees to perform work substantially the same as had been performed by Plaintiff and that Defendant has either refused or ignored Plaintiffs request to be rehired. Plaintiff seeks lost wages, reinstatement and a sum uncertain for emotional and psychological trauma, embarrassment and humiliation.

The Defendant asserts Section 301 of the Labor Management Act of 1947, 29 U.S.C. § 185(a) as the basis for its federal jurisdiction claim. Section 185(a) provides that:

Suits for violation of contracts between an employer and a labor organization representing employees in an industry affecting commerce as defined in this chapter, or between any such labor organizations, may be brought in any district court of the United States having jurisdiction of the parties, without respect to the amount in controversy or without regard to the citizenship of the parties.

In support of its claim of federal jurisdiction, Defendant offers a collective bargaining agreement entered into by Defendant Tonolli and Local #96, Mid Atlantic Conference Board of International Molder and Allied Workers, AFL-CIO CLC (the Union).

Presently before the Court is Defendant’s motion to dismiss. The parties have submitted their respective briefs and this matter is now ripe for our consideration.

Defendant’s motion to dismiss rests on the contentions that Plaintiff was covered by the above-noted bargaining agreement, that therefore, jurisdiction is proper under 29 U.S.C. § 185(a), that § 185(a) is controlling and that this is a question of contractual right to dismiss a probationary employee.

I

We first must decide the applicability of the agreement to Plaintiff Keip. The bargaining agreement became effective on October 4, 1983 and continues in force until October 3,1985. Ergo, as to time, it was in effect before, throughout and after the occurrences here in question.

Article I, section one of the bargaining agreement recognizes the Union as the exclusive representative for grievances of employees of set classification, such classifications including the “floater” classification. Since Plaintiff had been employed by Tonolli as a “floater” the agreement pertains to him via his job classification.

Article VII, section three provides that: Employees shall be considered to be on probation for their first forty-five (45) days worked. During such period, an employee is subject to termination without cause or notice and without access to the grievance procedure. Upon successful completion of the probationary period, the employee will be placed on the seniority list effective the date of hire.

Further, the entire agreement uses the term “employees” as opposed the term “union members.”

Lastly, Article III, section one of the agreement stipulates that the agreement resulted from bargaining conducted pursuant to the National Labor Relations Act. The agreement is between the employer corporation and a labor organization representing employees in an industry affecting commerce. Thus the agreement falls within the parameters of 29 U.S.C. § 185(a).

It is Defendant’s position that the Plaintiff’s claim is one for breach of the agreement and must fail as Plainitiff falls within the scope of Article VII section three which specifically grants Tonolli the right to terminate an employee during his first forty five (45) days of work without cause or notice.

The Plaintiff asserts that he is not bound by the bargaining agreement and that the Court is without jurisdiction over this matter. In support, Plaintiff argues that he was never a member of the Molders Union and thus was not party to nor bound by the bargaining agreement. Further, Plaintiff argues that his claim is a state claim for wrongful discharge and not for breach of the bargaining agreement.

The International Molders and Allied Workers Union, is the selected bargaining agent for a set class of employees of Tonolli Corporation and as such it is the agent for all persons so employed. Wallace Corp. v. Labor Board, 323 U.S. 248, 255, 65 S.Ct. 238, 241, 89 L.Ed. 216 (1944). As agent, the Union not only has the right to enter into an agreement which binds the employees it represents, but also has the duty of representation of all covered employees. Humphrey v. Moore, 375 U.S. 335, 84 S.Ct. 363, 11 L.Ed.2d 370 (1963).

In the light of these decisions, it is our opinion that Plaintiff, by virtue of the position he held while employed by Defendant, was bound by the bargaining agreement between Tonolli and the Molders Union.

Plaintiff’s pleading attempts to put forth a claim under state law to the preemption of § 185(a). However, the Plaintiff may not avoid federal jurisdiction by phrasing his claim in state law terminology. Olguin v. Inspiration Consolidated Copper Co., 740 F.2d 1468 (1984).

This matter, by Plaintiff’s argument, is a suit against the employer for wrongful discharge. The Supreme Court has specifically held that a case such as this is the type specifically provided for by Congress in 29 U.S.C. § 185(a). Hines v. Anchor Motor Freight, 424 U.S. 554, 562, 96 S.Ct. 1048, 1055, 47 L.Ed.2d 231 (1976).

Therefore, this Court has jurisdiction over the matter before us and Plaintiff’s quest of a remand to the Court of Common Pleas is unfounded.

Based on the foundation that jurisdiction over the matter is proper in this Court and that Plaintiff was bound by the terms and provisions of the bargaining agreement we have reviewed the record and found that the Plaintiff had not completed forty five (45) days of work and thus fits well within the description of a probationary employee who may be discharged without cause or notice. Therefore, the Defendant’s duty pursuant to the bargaining agreement was not breached and the discharge cannot be characterized as wrongful. Van Leeuwen v. United States Postal Service, 628 F.2d 1093, 1097 (1980).

Plaintiff’s final argument is that he has a cause of action under state law for intentional infliction of emotional distress. The Restatement of Torts § 46 defines the tort of intentional infliction of mental distress as:

(1) One who by extreme and outrageous conduct intentionally or recklessly causes severe emotional distress to another is subject to liability for such emotional distress, and if bodily harm to the other results from it, for such bodily harm.

This definition has been adopted by the Pennsylvania Supreme Court. Papieves v. Kelly, 437 Pa. 373, 263 A.2d 118 (1970).

We find that Defendant acted within its contractual rights in dismissing a probationary employee. There is not a shadow, not the slightest scintilla of evidence or realistic assertion to indicate that Defendant acted in an extreme or outrageous manner so as to intentionally or negligently cause Plaintiff to suffer severe emotional distress.

In light of the foregoing discussion we find that Plaintiff has failed to state a claim upon which relief can be granted and we issue the following.


author: EDWARD WEINFELD, District Judge.

text:
    SONGBIRD JET LTD., INC. and Jet Leasing Corporation, Plaintiffs, v. AMAX INC., Defendant, v. Alan P. ROSEFIELDE, William F. Handy, and Songbird, Ltd., Counterclaim Defendants.
    No. 83 Civ. 585 (EW).
    United States District Court, S.D. New York.
    March 27, 1985.

      Lord Day & Lord, New York City, for plaintiffs and counterclaim defendants; Stephen M. Hudspeth, Darrell E. Prescott, Andrew S. Schein, New York City, of counsel.
    Sullivan & Cromwell, New York City, for defendant; John L. Warden, Jeffrey S. Parker, John L. Hardiman, Jonathan S. Geldzahler, New York City, of counsel.
   OPINION

FINDINGS OF FACT AND CONCLUSIONS OF LAW

EDWARD WEINFELD, District Judge.

Plaintiffs, Songbird Jet Ltd., Inc. (“Songbird Jet”) and Jet Leasing Corporation (collectively “Songbird” or plaintiffs), brought this diversity action against Amax, Inc. to recover damages upon claims for: (1) breach of contract by Amax for the sale to Songbird of a Falcon Jet plane Model 50, Serial No. 108 (the “108”); (2) fraudulent representations by Amax based upon its lack of intention to perform the agreement; (3) breach of a brokerage agreement for the sale of the 108; and (4) unjust enrichment of Amax at Songbird’s expense based upon the claimed agreement for the sale of the 108.

On defendant’s motion, this Court granted summary judgment dismissing all plaintiffs’ claims except that which alleged breach of contract for the sale of the 108, holding that with respect thereto there were issues of fact to be resolved upon a trial. A trial has now been held upon those issues and also upon Amax’s counterclaims against plaintiffs. The essential issues to be decided thereunder are: (1) whether, as Songbird alleges and Amax denies, an agreement was entered into whereby Amax agreed to sell and Songbird agreed to purchase the 108 for the net sum of $8,850,000; and (2) whether, as Amax alleges under its counterclaim and plaintiffs deny, plaintiffs breached an agreement to purchase from Amax the 108 for $9.4 million and a Falcon 50, Serial No. 8 (the “8”), for $7.5 million, and to lease to Amax a Falcon 50, Serial No. 87 (the “87”), for two years at a rental of $130,000 per month.

The terms of the alleged agreement for the sale of the 108 were negotiated on behalf of the plaintiffs by Alan P. Rosefielde, the sole shareholder and Chief Executive Officer of Songbird Jet, and on behalf of Amax by David Ayres, its Manager-Financings. In conducting these negotiations, Rosefielde acted in a close working relationship with Jet Leasing Corporation the co-plaintiff, and William F. Handy, its principal officer and controlling shareholder.

Apart from the basic dispute as to the alleged contracts, also at issue is the defense that plaintiffs’ claim is barred by the statute of frauds, which in large measure centers about the purpose for which a $250,000 check was remitted by plaintiffs to Amax. Another issue is the authority of Ayres, assuming that he and Rosefielde had agreed upon the terms for the sale of the 108, to act on behalf of and commit Amax thereto. With these issues sharply contested, about the only item the parties agree upon is that their resolution depends upon an assessment of the credibility of participants in the negotiations, principally of Rosefielde and Ayres.

Based upon a post-trial word by word study of the trial transcript and relevant exhibits, and upon the Court’s trial notes which include its contemporaneous appraisal of the demeanor and credibility of the witnesses, the Court concludes that plaintiffs have failed to sustain their burden of proof and that Amax, as counterclaim plaintiff, also has failed to sustain its claim. Their respective claims are dismissed upon the merits and judgment may be entered accordingly.

The origin of this litigation was Amax’s decision, following financial reverses, to reduce its fleet of aircraft which it either owned or leased for use by its corporate executives. In pursuit of that program, Amax and Songbird officials, who had had previous relationships involving the sale or leasing of corporate jets, met on June 15, 1982 (“June 1982 meeting”). At that meeting, Ayres was one of a number of Amax officials who conferred with Rosefielde and Handy. At the time, Amax owned two Falcon Model 50 corporate jets, Serial Nos. 8 and 69 (the “8” and “69”); it was the lessee from Songbird of a Falcon Model 20F, Serial No. 388 (the “388”); and it was the owner of the 108 which was then under construction by the Falcon Jet Corporation (“Falcon”) and was as yet undelivered.

SONGBIRD’S CLAIM AGAINST AMAX FOR BREACH OF CONTRACT FOR THE SALE OF THE 108

Familiarity is assumed with the Court’s opinion on the defendant’s summary judgment motion which sets forth the parties’ versions of what transpired at that meeting and of events subsequent thereto which led to the L.R. French, Jr. (“French”) proposal, first advanced in September 1982, upon which Songbird asserts its claim that Amax agreed to sell it the 108 for $8.85 million. French owned a Lear 35A aircraft which he sought to trade in upon the purchase of the 108. It was this situation which led to a proposal by Songbird for a restructuring of the contemplated sale of the 108. In consequence, Songbird proposed that it would purchase the plane from Amax for $9 million and that Songbird, by a separate and independent agreement with French, would sell the 108 to him and accept the Lear as a trade in with the expectation of selling it on the open market and applying the proceeds toward the purchase price to be paid to Amax. Also contemplated was a sale by Amax to a third party of the tax benefits of the 108 (still under construction) by the end of the year. The proceeds of this tax benefit transfer (“TBT”), estimated to be about $2.8 million, were to be applied toward Amax’s original asking price of $9 million, later reduced to $8.85 million by an allowance for the cost of shifting the lavatory on the plane, a condition also required by French.

At a meeting on October 8, 1982, Rosefielde submitted to Ayres the substance of a proposal, but without definitive terms, whereby Amax would sell the 108 directly to Songbird, which Ayres said he would “run ... up the flagpole with the senior management.” After consulting with R. Bern Crowl, Executive Vice President and Chief Financial Officer of Amax, Ayres indicated interest in the Rosefielde proposal and requested that he submit a copy of Songbird’s purported but yet unsigned agreement with French, and that Songbird send Amax a check for $250,000. At a meeting on October 28th, Rosefielde submitted a copy of a draft agreement with French to Ayres, who turned it over to Amax’s legal department to determine among other matters whether French was committed to plaintiffs for the purchase of the plane. On October 29th, John Kennedy, the Controller of Jet Leasing, upon instructions of Handy in response to Rosefielde’s request, forwarded a check payable to Amax for $250,000, accompanied by a letter the full text of which is set forth and discussed hereafter. The check was deposited by Amax and the proceeds entered on its books as an account payable to Jet Leasing Corporation. The plaintiffs contend that the events of October 28-29 constituted an oral agreement for the sale of the 108 and that subsequent events were intended to memorialize the terms agreed upon orally on those dates.

Thereafter, Rosefielde and Ayres continued their negotiations with respect to the proposed transaction. Their discussions covered a broad range of items including, but not limited to: (1) whether the 108 would be delivered to Amax by Falcon, the manufacturer, by the end of December 1982, a sine qua non, if the benefits of the TBT were to be realized; (2) the assumption of a leasehold interest by French with respect to the TBT; and (3) an indemnity agreement that Amax sought from French with respect to the TBT proposal. Another outstanding issue was transfer of warranties from Falcon of the yet undelivered 108 to run in favor of French as a prospective transferee of the plane. At no time during their negotiations was there any direct contact between French and Ayres or any representative of Amax. Rosefielde carried on separately all negotiations with French, as he did separately with Ayres.

During November and December 1982, drafts of proposed agreements were prepared by Amax’s legal department following discussions between Rosefielde and Ayres and sent to Rosefielde on November 16th, December 3rd, and December 7th; the last was not received by him until December 11,1982. The first two drafts were unacceptable to Rosefielde because, as he testified, they did not reflect the terms of the Songbird Jet-French agreement. He conceded that the last draft embodied the terms of the claimed oral agreement reached by him and Ayres on October 28-29. However, this draft was never executed by Rosefielde.

Ayres disputes that Rosefielde accepted the terms of the third draft, and instead claims that he advanced an additional proposal that $250,000 deposited by French under an escrow agreement with Songbird be taken by assignment by Amax who then was to return the $250,000 previously received by it from Songbird. Ayres requested an executed copy of the Songbird-French contract and escrow agreement, and Rosefielde, for the first time, submitted them. The proposal for substitution of the escrow money was sent by Ayres to the Amax legal department but no action was taken on it.

At this juncture of the negotiations, about mid-December 1982, while it appeared that a warranty transfer from Falcon to French was feasible, there was uncertainty that the 108 would be in service by the end of December 1982 so that Amax could transfer the tax benefits; Amax officials were just starting negotiations for the sale of the 108’s tax benefits to a third party; and no steps had been taken to negotiate with French an indemnity agreement with respect to his acceptance of a leasehold interest between him and the yet undetermined participant in the TBT plan. The third draft, which Rosefielde claims was ready for execution, reflects these uncertainties. Not only were the price terms left blank, so too were references to the name of the potential third party to whom Amax was to sell the 108’s tax benefits as well as the precise date in December 1982 that the TBT agreement with the unknown third party was to be executed.

Toward the latter part of December 1982 when Ayres submitted the terms of the proposed sale of the 108 to senior management and the Chairman of the Amax Board of Directors, they refused assent thereto or to submit the proposal for Board approval, and plaintiffs were notified of that fact on or about December 20th. On January 3, 1983 Ayres wrote Rosefielde that he was returning the $250,000 since no agreement had been or would be entered into. Thereupon plaintiffs instituted this action.

Plaintiffs, as noted, contend that an oral agreement was reached between Rosefielde and Ayres on October 28-29 which was intended to be operative, that any writings were only to memorialize that agreement, and that Ayres had authority to enter into such an agreement so as to bind Amax.

In this diversity action, the applicable law is that of New York State. Under its rule, the issue is the intent of the parties as revealed by their objective manifestations, taking into account the totality of the attendant circumstances. As our Court of Appeals recently noted:

Under New York law, if parties do not intend to be bound by an agreement until it is in writing and signed, then there is no contract until that event occurs. Scheck v. Francis, 26 N.Y.2d 466, 311 N.Y.S.2d 841, 843, 260 N.E.2d 493, 494 (1970). This rule holds even if the parties have orally agreed upon all the terms of the proposed contract. Schwartz v. Greenberg, 304 N.Y. 250, 107 N.E.2d 65 (1952). On the other hand, where there is no understanding that an agreement should not be binding until reduced to writing and formally executed, and “[wjhere all the substantial terms of a contract have been agreed on, and there is nothing left for future settlement,” then an informal agreement can be binding even though the parties contemplate memorializing their contract in a formal document. Municipal Consultants & Publishers, Inc. v. Town of Ramapo, 47 N.Y.2d 144, 417 N.Y.S.2d 218, 220, 390 N.E.2d 1143, 1145 (1979); V'Soske v. Barwick, 404 F.2d 495, 499 (2d Cir.1968), cert. denied, 394 U.S. 921, 89 S.Ct. 1197, 22 L.Ed.2d 454 (1969).... What matters are the parties’ expressed intentions, the words and deeds which constitute objective signs in a given set of circumstances....
Freedom to avoid oral agreements is especially important when business entrepreneurs and corporations engage in substantial and complex dealings. In these circumstances there are often forceful reasons for refusing to make a binding contract unless it is put in writing. The actual drafting of a written instrument will frequently reveal points of disagreement, ambiguity, or omission which must be worked out prior to execution. Details that are unnoticed or passed by in oral discussion will be pinned down when the understanding is reduced to writing. These considerations are not minor; indeed, above a certain level of investment and complexity, requiring written contracts may be the norm in the business world, rather than the exception. See International Telemeter Corp. v. Teleprompter Corp., 592 F.2d 49, 57-58 (2d Cir.1979) (Friendly, J., concurring).

Upon the totality of the record, the Court finds that no oral agreement was reached between Rosefielde and Ayres on October 28-29, 1982 upon the terms and conditions for the sale of the 108. Moreover, assuming contrary to the foregoing, that they had agreed orally upon all the terms of the proposed contract, the Court further finds that both Rosefielde and Ayres knew such an oral agreement was subject to approval by Amax’s Board of Directors and was not to be binding until reduced to writing and formally executed by the parties.

This was no run-of-the-mill, over-the-counter transaction where terms and conditions of a sales contract are fairly well established and, in effect, are recognized as a custom of the trade. It was a structured, multi-faceted deal of magnitude, with a purchase price of some $9,000,000—no small change even in the life of a modern day giant corporation. The proposed transaction encompassed and required resolution of numerous and complex details, involving five separate and independent entities with commitments to be made that had to satisfy the requirements of Amax and were subject to approval of its counsel. That plaintiffs themselves did not intend to be bound based upon oral discussions taking place on October 28th or 29th is reflected in the agreement they signed with French four days later. That agreement, signed by Rosefielde on November 4, 1982, provides in part:

Seller [Songbird Jet] agrees to enter into a binding wrij.ken contract to acquire the Falcon 50-108 from Amax, Inc., the terms and conditions of which are entirely satisfactory to Purchaser [French]. [T]he parties acknowledge that no claim for liquidated damages shall arise in the event Amax, Inc. refuses to enter into an agreement of sale with Seller on mutually acceptable terms and conditions.

And entirely apart from the foregoing, Rosefielde knew that Ayres was without authority, express, implied, or apparent, to bind Amax to any contract absent Amax Board approval. He was aware of this because of other transactions with Amax which antedated the one at issue. Further, because Amax officials were of the view that plaintiffs and their principals had failed to live up to what Amax deemed prior commitments, shortly prior to Rosefielde’s advancing the proposal to purchase the 108, plaintiffs were put on notice by telex on September 14, 1982 that the sale of the 108 was “conditional upon Amax Board approval and upon the execution of documentation satisfactory to Amax.” This telex was addressed to Handy. It is idle for Rosefielde to contend he was unaware of it in view of his testimony of his relationship to Handy with respect to the prospective transaction.

Finally, while the foregoing findings make it unnecessary, it is desirable to dispose of plaintiffs’ contention that the statute of frauds does not bar recovery since the $250,000 forwarded to Amax constituted a partial payment on account of the purchase price and, hence, partial performance of the claimed contract under N.Y.U.C.C. § 2-201(3)(c). The Court finds, contrary to plaintiffs’ contention, that the $250,000 was not a payment on account of the purchase price but a good faith deposit to induce Amax to take the plane off the market pending negotiations between Rosefielde and Ayres to conclude an agreement for its sale. The $250,000 check, which carried on its face the legend, “Refundable Deposit,” was accompanied by a letter which reads:

Mr. David Ayres
Amax, Inc.
Amax Center
Greenwich, CT 06830
Re: Falcon 50, Serial # 108
Dear Mr. Ayres:
Attached is our check for $250,000 representing a refundable deposit for the purchase of above referenced aircraft.
Said deposit will be immediately refunded to Jet Leasing Corporation in the event, for any reason, that Jet Leasing Corporation would request in writing said deposit refunded.
Should Jet Leasing Corporation not request refund before final agreement on said aircraft and should agreement be finalized on said aircraft between Jet Leasing Corporation and Amax Inc., and at the sole discretion of Jet Leasing Corporation, said deposit will be credited towards final aircraft purchase price or refunded to Jet Leasing Corporation.
Very truly yours,
/s/ John Kennedy
John Kennedy
Controller

The letter, apart from the fact that it notes “should agreement be finalized,” provides an escape hatch for plaintiffs—a “heads I win, tails you lose” situation in their favor—since it requires an immediate refund of the deposit “for any reason” upon plaintiffs’ demand. Plaintiffs seek to attenuate the force of the clear language of this document upon a contention that Kennedy sent the check upon instructions of Handy who did not inform him of the substance of negotiations between plaintiffs and Amax; that Kennedy in drafting the letter acted upon his own initiative without knowledge of the terms of the transaction; and that it was Kennedy’s “brainchild” and unrelated to the actual transaction as it was conducted by the immediate negotiators. Indeed, upon the trial it was argued on behalf of plaintiffs, in Alice-in-Wonderland style, that the word “refundable” appearing on the check had no meaning.

The explanation does not wash. These arguments suggest that Kennedy, the Controller of Jet Leasing, was a witless robot, entirely unaware of events, who automatically carried out Handy’s instructions. It is not without interest that when Handy instructed Kennedy to issue the check, following Rosefielde’s request, Handy told Kennedy to “use an abundance of caution.” The fact is that Kennedy sent copies of the letter which accompanied the check to Rosefielde following their dispatch to Amax and that Rosefielde, the negotiator, who now contends that the letter did not accurately reflect the parties’ arrangement, never attempted to correct the letter. Indeed, it is not without significance that, although a practicing lawyer for a number of years until he became active in the jet aircraft business, Rosefielde’s comment, with respect to the terms of the Kennedy letter, was to ask Handy “what law school he [Handy] went to.” Finally, there is the fact that the $250,000 when received by Amax was entered on its books as an account payable to Jet Leasing.

Accordingly, plaintiffs’ claim fails and defendant is entitled to judgment upon the merits.

AMAX’S COUNTERCLAIMS AGAINST PLAINTIFFS

Amax’s counterclaims for breach of contract and fraudulent representations with respect thereto are based upon discussions between its officials and Rosefielde and Handy at the June 15, 1982 meeting. It contends that at the meeting Rosefielde and Handy on behalf of plaintiffs made a package offer (1) to buy the 108 for $9.4 million; (2) to buy the 8 for $7.5 million; and (3) to lease to Amax a Falcon Jet Model 50, Serial No. 87, for two years at a rental of $130,000 per month. It is further contended that plaintiffs’ proposal was accepted by Amax as a “package” deal by its Board of Directors on July 1, 1982 by an appropriate and recorded resolution, notice of which was given by Ayres to Handy on or about July 12, 1982.

Plaintiffs deny they made any offer at the June 1982 meeting. The evidence sustains their position. The June meeting was a discussion session where the participants exchanged views and sounded one another out on Amax’s contemplated program of reducing its corporate jet fleet. Indeed, Amax’s own officials who were participants made it clear that no offer, such as is the predicate for defendant’s counterclaims, was made. Thus, Edward S. Miller, its Senior Vice President-Administration, questioned that “we had a deal, but that we would seek authority to negotiate such a deal as a package and would recommend to our board and management entering into such a transaction.” Similarly, John Anthony Esposito, Flight Operations Manager for Amax, testified that while there was a lot of conversation, the meeting was inconclusive.

The resolution passed by the Board thereafter was authorization by Amax to its officers to enter into an agreement with plaintiffs. The evidence does not sustain Amax’s claim that the resolution was acceptance of an offer by plaintiffs of a “package” deal. The resolution itself specifies that the authorization is “to enter into an agreement or agreements” with respect to the various planes described therein. Indeed, Pierre Gousseland, Amax’s Chief Executive Officer, acknowledged that under the resolution, Amax “could either choose to enter into the contract or could choose not to enter into the contract.”

Moreover, subsequent events negate the claim of a package deal or that the resolution was acceptance of any offer. Thereafter, plaintiffs and defendant each were separately engaged in activities on the open jet plane market with respect to each of the planes that had been the subject of discussions at the June meeting. In fact, Amax complained that during the summer of 1982, it received offers from plaintiffs to purchase one or both of the Falcon 50 jets which differed from and were far below the amounts discussed at the June meeting. It was this situation that led to a lack of confidence by Amax in plaintiffs and to the specific notice to them that any contract for the sale of the 108 was “conditional upon Amax Board approval and upon execution of documentation satisfactory to Amax.”

Finally, that Ayres himself was of the view that there was no agreement, such as is now contended by Amax in its counterclaim, is evident from defense counsel’s response to the Court’s inquiry as to why no contract was ever executed following the passage of the July 1, 1982 resolution and Ayres’s notification to Rosefielde on July 12, 1982 of its passage. Counsel stated: “Ayres simply dropped the ball frankly and he didn’t do it.... [He] probably should have gone ahead and asked the Amax lawyers to begin drafting agreements. He simply failed to do so.”

The fact is that the events in July and August leading up to the French proposal indicate neither party considered a contract was in effect. In sum, Amax has failed to sustain its burden of proof upon its counterclaims and plaintiff is entitled to a dismissal thereof upon the merits.

So ordered.

      . Songbird Jet Ltd., Inc. v. Amax Inc., 581 F.Supp. 912 (S.D.N.Y.1984).

      . While there is some disagreement between the parties as to the exact interrelationship of the plaintiff corporations, for the purposes of this litigation they may be referred to collectively; see infra note 14 and accompanying text.

      . Id. at 915-18. The factual situation covering the period between the June 15, 1982 meeting and up to the French offer is discussed hereafter under Amax’s counterclaim since it presents different issues.

      . Record at 538.

      . This date is given to preserve the chronology of events under the claim as advanced by plaintiffs. Payment was stopped on this check; Amax did not receive the proceeds until November 10th when it received a third and corrected check from plaintiffs. See infra note 17.

      . The provision reads:
      Purchaser acknowledges that its purchase of the Aircraft will be subject to the terms and provisions of an Agreement dated December -, 1982 (the "Tax Benefit Transfer Agreement”), between Seller and_(“Tax Lessor"), a copy of which has heretofore been furnished to Purchaser by Seller, and agrees to deliver to Tax Lessor, as a condition precedent to its right to purchase the Aircraft hereunder, its written consent to acquire the Aircraft subject to the Tax Benefit Transfer Agreement in the form thereof attached hereto as Appendix 5.
      Plaintiffs’ Exhibit 42, Article 7.1.

      . Amax deducted $53,789.68 which it claimed was due it with respect to other transactions and enclosed a check for the difference. Plaintiffs initially disputed the deduction and this was one of the claims advanced in this litigation but was compromised by the parties.

      . Brown Bros. Elec. Contractors, Inc. v. Beam Construction Corp., 41 N.Y.2d 397, 361 N.E.2d 999, 1001-02, 393 N.Y.S.2d 350, 351-52 (1977).

      . R.G. Group, Inc. v. Horn & Hardart Co., 751 F.2d 69, 74-75 (2d Cir.1984).

      . Plaintiffs’ Exhibit 43.

      . See Masuda v. Kawasaki Dockyard Co., 328 F.2d 662, 664-65 (2d Cir.1964); Lind v. Schenley Indus., Inc., 278 F.2d 79, 84 (3d Cir.1960); Greene v. Hellman, 51 N.Y.2d 197, 412 N.E.2d 1301, 1305, 433 N.Y.S.2d 75, 79 (1980).

      . Lind v. Schenley Indus., Inc., 278 F.2d 79, 85 (3d Cir.1960); Greene v. Hellman, 51 N.Y.2d 197, 412 N.E.2d 1301, 1306, 433 N.Y.S.2d 75, 80 (1980); Ford v. Unity Hospital, 32 N.Y.2d 464, 299 N.E.2d 659, 664, 346 N.Y.S.2d 238, 244 (1973).

      . Defendant's Exhibit EE. This telex was the first response by Ayres to a series of telexes by Handy registering certain customers to whom plaintiffs could offer the 108 exclusively. On September 29, 1982, Handy telexed Ayres that he was registering French as a potential purchaser of the 108, stating that he was "reiterat[ing] our understanding.”
      It should also be noted that the third draft upon which plaintiffs rely includes a provision referring to Board resolutions as follows: "At the closing, Seller [Amax] shall deliver to Buyer a Certified Resolution of Seller [Amax] authorizing the transaction contemplated by this Agreement ...” Plaintiffs’ Exhibit 42, Art. 2.7. In addition, the agreement Rosefielde entered into with French on November 4, 1982 also provides that French was not "obligated to close the transaction to purchase the ... 108 unless.... [he] received certified copies of the corporate resolutions of Amax, Inc. and Seller authorizing the sale ..." Plaintiffs’ Exhibit 43.

      . Record at 1012-13 ("Jet Leasing Corporation was to find a purchaser for either No. 8 or No. 108, and ... Songbird Jet Ltd. Inc. ... would, in turn negotiate, complete all agreements and provide whatever funds were necessary to make performance possible, and ... the net profit would be split 50-50.") (Rosefielde testimony); see also id. at 94-95, 1021 (same); id. at 912-20 (Handy testimony); id. at 324, 468 (Ayres testimony).

      . See Official Comment, N.Y.U.C.C. § 2-201(3)(c) (McKinney 1964) ("Part performance by the buyer requires the delivery of something by him that is accepted by the seller as such performance”); Presti v. Wilson, 348 F.Supp. 543, 546 (E.D.N.Y.1972); see also Gross v. Vogel, 81 A.D.2d 576, 437 N.Y.S.2d 431 (2d Dep't 1981) (part performance exception is based on theory of equitable estoppel; acts must have been performed in reliance); cf. Thomaier v. Hoffman Chevrolet, Inc., 64 A.D.2d 492, 410 N.Y.S.2d 645, 647 (2d Dep’t 1978) (substantial down payment); Acuri v. Figliolli, 91 Misc.2d 831, 398 N.Y.S.2d 923, 925 (Nassau Co.1977) (payments made “on account" of the purchase price).

      . Plaintiffs’ Exhibit 47.

      . November 4th was the last date of three letters, each substantially the same, with which were enclosed the check with its legend. The first check dated October 29th was returned to plaintiffs since Kennedy had issued a stop payment order; the second check was made payable to Amax, Australia, Inc., an incorrect payee; the third check was not received and deposited by Amax until November 10, 1982.

      . Record at 805.

      . In response to the Court's comment: ”[y]ou have to take the position the word ‘refundable’ has no meaning there,” counsel for plaintiffs responded: "That’s right. The word ‘refundable’ has not the meaning that was the purpose of the 1250,000 payment ...” Id. at 812.

      . Id. at 975-76.

      . Id. at 62.

      . A fourth plane, a Falcon Model 20F, the 388, had been discussed at the June meeting, but at the time the corporate resolution had passed, its lease had been cancelled.

      . Id. at 738.

      . Plaintiffs’ Exhibit 83 (emphasis added).

      . Record at 487.

      . Defendant's Exhibit EE.

      . Record at 1133.


author: VINING, District Judge.

text:
    Peter J. MALLEN, Plaintiff, v. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, d/b/a Merrill Lynch Futures, Inc., f/k/a Merrill Lynch Commodities, Inc., and Robert P. Spanos, Defendants.
    Civ. A. No. C 83-1786 A.
    United States District Court, N.D. Georgia, Atlanta Division.
    March 27, 1985.
    See also, D.C., 102 F.R.D. 801.

      Gilbert Deitch and Gerald Kline, Bauer, Deitch & Raines, P.C., Atlanta, Ga., for plaintiff.
    Paul W. Stivers and Robert Axelrod, Rogers & Hardin, Atlanta, Ga., for defendants.
   ORDER

VINING, District Judge.

The plaintiff, Peter Mallen, opened an account on March 3, 1983, with Merrill Lynch Futures, Inc., which was formerly known as Merrill Lynch Commodities, Inc. The corporate defendant will be hereinafter referred to as “Merrill Lynch.” Mr. Mallen’s original account executive was William Knochel. In the first month that the account was open, the plaintiff bought and sold futures in gold and silver. All account activity was in traditional commodity futures at the plaintiff’s direction. The plaintiff alleges that in April of 1983, he was approached by another Merrill Lynch account executive, Robert Spanos. Mallen authorized this second account executive to purchase and sell commodity futures in Mallen’s name without limitation. Beginning in May 1983, the account activity, accordingly, became a newer and riskier form of speculation, with Spanos buying and selling contracts for future delivery based not on traditional commodities such as gold and silver but on two stock indices, the K.C. Value Line and the Standard and Poor 500 Index. By the end of May the account showed a loss of $28,000. The plaintiff alleges that he told Spanos to liquidate the account at that point, but Spanos convinced him to maintain “straddle” positions as insurance. The plaintiff acquiesced for several weeks. When the plaintiff finally closed the account at the end of May, his year-to-date losses had grown to more than $60,000.

In August 1983, the plaintiff filed a complaint with seven counts based on violations of federal securities laws, state securities laws, and on several common law theories as follow: Count I, section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder; Count II, section 17 of the Securities Act of 1933; Count III, section 12(2) of the Securities Act of 1933; Count IV, the Georgia Securities Act, O.C.G.A. § 10-5-1 et seq.; Count V, common law fraud; Count VI, common law breach of fiduciary duty; and Count VII, common law negligence.

On July 13, 1984, the defendants moved to dismiss the first four counts of the complaint on the ground that the application of the federal and state securities laws to Mallen’s account has been precluded and preempted by the operation of the Commodity Exchange Act. The defendants argue that transactions in “stock index futures” are “commodities”; the plaintiff argues that the same transactions involve “securities.”

The court will consider first whether the investment vehicles at issue in this case are “securities” and subject to the regulatory jurisdiction of the Securities and Exchange Commission (hereinafter the “SEC”) or “commodities” and subject to the regulatory jurisdiction of the Commodity Futures Trading Commission (hereinafter the “CFTC”). The court will then consider the basis of its jurisdiction to hear this case.

1. Securities. The SEC has regulatory authority over “securities.” 15 U.S.C. § 77b(1); 15 U.S.C. § 78c(a)(10). The word “security” is used in those statutes to refer to a list of investments. The list includes the traditional form of stock in corporations but also includes the open-ended concept of an “investment contract.” The phrase “investment contract” has been applied on a case-by-case basis to less traditional schemes when the schemes (1) involve an investment of money; (2) function as a “common enterprise;” and (3) derive profits solely from the efforts of individuals other than the investors. See SEC v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946); SEC v. Glenn W. Turner Enterprises, 474 F.2d 476 (9th Cir.), cert. denied, 414 U.S. 821, 94 S.Ct. 117, 38 L.Ed.2d 53 (1973).

2. Commodities. Commodities in the traditional sense were tangible things with inherent value for consumption or processing, such as coin, copper, and cattle. The sale of certain agricultural commodities on exchanges called “contract markets” has been subject to federal regulation longer than the sale of securities. Before the 1974 amendments to the commodities laws, the regulatory function was handled by the Department of Agriculture.

The shorthand term “commodity future” refers to a standardized contract for purchase and sale of a fixed quantity of a commodity of designated grade, for delivery in a specified future month, at a price agreed on when the contract is made. The individual contract for future delivery of a commodity has never been considered a “security.” SEC v. Continental Commodities Corp., 497 F.2d 516, 520 n. 9 (5th Cir.1974); Sinva, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 253 F.Supp. 359, 366-67 (S.D.N.Y.1966).

3. Discretionary Commodity Future Accounts. Before the revamping of the commodities laws in 1974, 1978, and 1982, the regulatory jurisdiction of the SEC was stretched to reach certain scandals in the sale of futures for non-regulated commodities. While the underlying contract for future delivery of a commodity was not a security regulated by the SEC, the accounts in which the futures contracts were traded were sometimes found to be “securities.” Many courts held that when an investor granted authority to his broker to make purchases and sales of commodity futures contracts, the investor’s reliance on his broker’s efforts supplied the third element of the test for an “investment contract.” The first element of investment of money was almost always present. Therefore, the treatment of a “discretionary commodity futures account” as an “investment contract,” and consequently as a “security,” depended on how strictly courts interpreted the second element. The requirement of a “common enterprise” has been variously satisfied in different circuits by the following:

a. Vertical Commonality. In precedent that is binding on this court, the vertical relationship between the customer and broker was recognized as creating a “common enterprise” although there was no pooling with other customers’ accounts. SEC v. Continental Commodities Corp., 497 F.2d 516, 520-23 (5th Cir.1974).
b. Horizontal Commonality. Other circuits took a stricter view, insisting on pooling of customers’ accounts before the courts would find a “common enterprise.” Curran v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 622 F.2d 216, 224-25 (6th Cir.1980), aff’d on other grounds, 456 U.S. 353, 102 S.Ct. 1825, 72 L.Ed.2d 182 (1982); Milnarik v. M-S Commodities, Inc., 457 F.2d 274 (7th Cir.), cert. denied, 409 U.S. 887, 93 S.Ct. 113, 34 L.Ed.2d 144 (1972).
c. Vertical Commonality Plus Sharing of Profits. Another circuit took the strictest view, requiring that the broker share in the enterprise apart from the payment of his commissions before the court would find a “common enterprise.” Meyer v. Thomas & McKinnon Auchincloss Kohlmeyer, Inc., 686 F.2d 818 (9th Cir.1982), cert. denied, 460 U.S. 1023, 103 S.Ct. 1275, 75 L.Ed.2d 495 (1983). See L. Loss, Fundamentals of Securities Regulation 253-258 (1983) (hereinafter cited as Loss) (Professor Loss sets out in more detail the split among the circuits on the commonality requirement.)

While federal courts were expanding the jurisdiction of the SEC to deal with certain abuses in commodities trading, Congress took a different tack. In the 1970’s there was growing dismay over rising food prices and devastating grain shortages. There was also a public perception that manipulation of trading in commodities futures had caused or exacerbated the economic problems. See Van Wart, Preemption and the Commodity Exchange Act, 58 Chi.-Kent L.Rev. 657, 672 (1982). Following extensive hearings, Congress enacted the Commodity Futures Trading Commission Act of 1974, which extensively amended the existing Commodity Exchange Act. 88 Stat. 1389 (1974). The act transferred commodity regulation from the Department of Agriculture to the newly created CFTC and, perhaps too broadly, expanded the concept of a commodity beyond the edible to the intangible. In a section of the 1974 act which was destined to create jurisdictional chaos, “commodity” was defined to include not only specific items such as peanuts and frozen concentrated orange juice but also the following:

[A]ll services, rights, and interests in which contracts for future delivery are presently or in the future dealt in:
Provided, That the CFTC shall have exclusive jurisdiction with respect to accounts, agreements (including any transaction which is of the character of, or is commonly known to the trade as, an “option,” “privilege,” “indemnity,” “bid,” “offer,” “put,” “call,” “advance guarantee,” or “defined guarantee,”) and transactions involving contracts of sale of a commodity for future delivery, traded or executed on a contract market designated pursuant to section 7 of this title or any other board of trade, exchange or market ...:
And provided further, That except as hereinabove provided, nothing contained in this section shall
(i) supersede or limit the jurisdiction at any time conferred on the Securities and Exchange Commission or other regulatory authorities under the laws of the United States or any State or
(ii) restrict the Securities and Exchange Commission and such other authorities from carrying out their duties and responsibilities in accordance with such laws.
Nothing in this section shall supersede or limit the jurisdiction conferred on courts of the United States or any State.

7 U.S.C. § 2. [Spacing between the clauses supplied by the court.]

In the hearings on the proposed 1974 amendments, Congress was specifically asked to resolve whether the CFTC would have exclusive jurisdiction over discretionary commodity accounts, those managed by the broker rather than by the customer. 58 Chi.-Kent L.Rev. at 684-85. Congress subsequently gave the CFTC exclusive jurisdiction over “accounts ... involving contracts of sale of a commodity for future delivery.” Since the final version of the 1974 amendments did not distinguish between regular trading accounts and managed, or discretionary, accounts, several district courts held that the 1974 legislation placed sole regulatory control of discretionary commodity accounts under the CFTC. See, e.g., Hofmayer v. Dean Witter & Co., 459 F.Supp. 733 (N.D.Cal.1978). See also Westlake v. Abrams, 504 F.Supp. 337, 344 (N.D.Ga.1980) (which agrees with Hofmayer on regulatory but not judicial jurisdiction).

It should be noted that statements in SEC v. Continental Commodities Corp., 497 F.2d 516 (5th Cir.1974) and Moody v. Bache & Co., 570 F.2d 523 (5th Cir.1978), to the effect that a discretionary commodity account may be a “security” are no longer vital. The decision in Continental Commodities interpreted only the securities acts and concerned pending litigation which the recent amendments to the commodities act would not have reached. The decision in Moody v. Bache & Co. assumed arguendo that both the securities acts and commodities act could apply to a discretionary commodities account in deciding that the jury’s finding that no causation existed under either theory precluded recovery. The court’s citation of Continental Commodities in that hypothetical context does not indicate its continued vitality after the 1974 amendments.

The complaint describes Mr. Mallen’s account as a “discretionary commodity futures account.” The use of that label is misleading but understandable since Merrill Lynch’s trading authorization forms and its computer reports of activity used that term generically. Mr. Mallen’s account was originally a regular trading account with transactions in the traditional commodities described above. Such accounts have never been treated as “securities.” When Mr. Mallen authorized his broker’s speculation in “stock index futures,” the account became “discretionary.” For purposes of regulatory jurisdiction, the 1974 amendments made it clear that such a discretionary commodity account is now a “commodity” and not a “security.” The individual transactions in the account, however, were in investment vehicles radically different from any traded in 1974.

4. Stock Index Futures. The 1974 expansion of the jurisdiction of the CFTC to futures contracts on intangible interests created an inevitable jurisdictional conflict with the SEC. The investment vehicle which would create the greatest jurisdictional problem would be a contract of sale for future delivery of broad-based stock indices, colloquially known as a “stock index future.” The CFTC’s new authority to regulate such investments was a direct incursion on the SEC’s regulatory turf.

Following jurisdictional skirmishes caused by the broad language of the 1974 amendments, the two agencies announced an accord in December 1981. SEC and CFTC Jurisdictional Agreement: Proposed Legislation, [1981-1982 Transfer Binder] Fed.Sec.L.Rep. (CCH) ¶ 83,096 (Joint Explanatory Statement Feb. 2, 1982). One writer described this unique document as an “estimable example of administrative harmony.” Loss at 257. The agencies’ jurisdictional treaty granted the CFTC exclusive jurisdiction over the trading of futures contracts on boards of trade and made the SEC the sole federal regulator of the securities options markets. In view of the SEC’s strong regulatory concern with respect to the trading of futures on securities groups and indices, the two agencies worked out joint responsibility in the designation of contract markets for the trading of these new instruments. The CFTC would approve futures trading in a group or index of such securities subject to criteria specified by both agencies. For trading to be approved, the group or index of securities (1) had to be a widely published and accurate measure of a broad segment of the corporate or municipal securities markets, (2) could not be susceptible to manipulation of the underlying securities market or securities options market and (3) had to be settled by cash or by other means not involving the delivery of municipal securities or securities subject to the registration requirements of the federal securities laws. The CFTC would be required to consult with the SEC when determining that any contract market for futures contracts involving a securities group or index met these criteria. An SEC objection would be entitled to judicial review. In effect, there would be joint designation of boards of trade as contract markets for stock index futures followed by exclusive regulatory jurisdiction over the new investment vehicle in the CFTC. Meanwhile, the SEC would have exclusive regulatory authority with respect to options directly on underlying securities and securities groups or in-dices.

The efficacy of this unique jurisdictional treaty was questioned by a federal court in Board of Trade of the City of Chicago v. SEC, 677 F.2d 1137, 1142 n. 8 (7th Cir.1982), prompting the agencies to submit to Congress proposed legislation in February 1982 which embodied the essence of the accord. The agencies’ division of their jurisdiction was ratified by the enactment, with few changes, of the proposed amendments to the federal securities and commodities laws. See Pub.L. No. 97-303, 96 Stat. 1409 (1982), and the Futures Trading Act of 1982, Pub.L. No. 97-444, 96 Stat. 2295 (1983).

In ratifying the agencies’ jurisdictional treaty, Congress amended the jurisdictional statute for the CFTC, 7 U.S.C. § 2 quoted extensively above, by inserting after the grant of exclusive jurisdiction to the CFTC, the phrase “except to the extent otherwise provided in section 2a of this title.” The new section 2a included the following:

Notwithstanding any other provision of law—
(i) This chapter shall not apply to and the [Commodity Futures Trading] Commission shall have no jurisdiction to designate a board of trade as a contract market for any transaction whereby any party to such transaction acquires any put, call, or other option on one or more securities (as defined in section 77b(l) or 78c(a)(10) of Title 15 on January 11, 1983), including any group or index of such securities, or any interest therein or based on the value thereof.
(ii) This chapter shall apply to and the Commission shall have exclusive jurisdiction with respect to accounts, agreements ... and transactions involving, and may designate a board of trade as a contract market in, contracts of sale (or options on such contracts) for future delivery of a group or index of securities (or any interest therein or based upon the value thereof).

The new section continues with the procedure for joint designation of contract markets for stock index futures.

Simultaneously, Congress amended the jurisdictional statutes concerning the SEC in both the 1933 and 1934 acts so that “security” would also include the following:

Any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof).

The 1982 amendments to the jurisdictional statutes of the respective agencies made it clear that “stock index futures” are “commodities” while “stock index options” are “securities.” Following the congressional ratification of the agencies’ jurisdictional treaty, each agency tentatively allowed trading in these radically different forms of investment.

The Kansas City Board of Trade had presented a proposal to the CFTC in June 1979 for the trading of futures on its “Value Line Index,” a group of 1,700 stocks. Architzel & Connolly, Delivery on Futures Contracts as a Legal Requirement, 36 Bus.Law. 935, 935 n. 1 (1981). The Chicago Mercantile Exchange had submitted a similar proposal to the CFTC in February 1980 based on Standard and Poor’s index of 500 stocks. Id. The CFTC granted final approval of trading on such stock index futures in February 1982.

Meanwhile, the SEC approved trading in broad-based “stock index options.” Recently, the SEC tentatively approved trading of options on narrow-based stock indices, ones with stocks of a limited industry group such as the “Computer Tech Index,” and the “Oil and Gas Index.” Phase-In Program for Options on Narrow-Based, Stock Indices, [1983-84 Transfer Binder] Fed.Sec.L.Rep. (CCH) 1183-415 (Exchange Act Release No. 20076 August 12, 1983).

When Mr. Mallen authorized Mr. Spanos to trade the K.C. Value Line and the Standard & Poor 500 index, Mallen engaged in a form of speculation made possible only by the expansion of the regulatory jurisdiction of the CFTC in 1974 and the recognition of the jurisdictional border between the CFTC and the SEC in 1982. His individual purchases and sales of “stock index futures” were clearly “commodities” regulated exclusively by the CFTC. The account in which those “commodities” were traded was also a “commodity” under the exclusive jurisdiction of the CFTC, regardless whether it was managed by Mr. Mallen or by his broker.

Having determined that both the stock index futures and the account in which they were traded were subject to the exclusive regulatory jurisdiction of the CFTC, the court now turns to the question of its jurisdiction to adjudicate the dispute concerning those “commodities.” Some courts have held that the jurisdictional provisos and the savings clause in the 1974 amendments to the Commodity Exchange Act created a distinction between agency jurisdiction and court jurisdiction. See, e.g., Mullis v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 492 F.Supp. 1345 (D.Nev.1980). Another judge in this district, citing the Mullís case with favor, held in 1980 that the grant of exclusive jurisdiction to the CFTC to regulate commodity transactions did not preclude judicial application of the federal securities statutes to those transactions. Westlake v. Abrams, 504 F.Supp. 337 (N.D.Ga.1980). In that opinion, Judge Moye allowed the purchaser of two commodity options futures to bring suit against his broker under the 1933 and 1934 securities acts, but not under the SEC’s regulations interpreting those acts. In a subsequent case, Judge Forrester allowed an investor to proceed against a brokerage firm for fraud concerning an account with mixed securities and commodities transactions under the securities acts as well as the regulations promulgated thereunder. Taylor v. Bear Stearns & Co., 572 F.Supp. 667 (N.D.Ga.1983). This court finds that the legislative history of the savings clause does not support either result.

The legislative history of the 1974 amendments to the Commodity Exchange Act is set out in detail in two law review articles. Johnson, The Commodity Futures Trading Commission Act: Preemption as Public Policy, 29 Vand.L.Rev. 1 (1976) [hereinafter cited as Johnson]; Van Wart, Preemption and the Commodity Exchange Act, 58 Chi.-Kent L.Rev. 657 (1982) [hereinafter cited as Van Wart]. The legislative history of the 1974 amendments is also discussed at length in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 102 S.Ct. 1825, 72 L.Ed.2d 182 (1982).

Each of the following clauses in section 2 of the Commodity Exchange Act was added in succession to clarify the prior clause, but instead the clauses created a jurisdictional controversy:

Provided, That the [CFTC] shall have exclusive jurisdiction with respect to [commodity futures contracts] ...
And provided further, That except as hereinabove provided, nothing contained in this section shall
(i) supersede or limit the jurisdiction at any time conferred on the Securities and Exchange Commission or other regulatory authorities under the laws of the United States or any State or
(ii) restrict the Securities and Exchange Commission and such other authorities from carrying out their duties and responsibilities in accordance with such laws.
Nothing in this section shall supersede or limit the jurisdiction conferred on courts of the United States or any State.

7 U.S.C. § 2. [Spacing between the clauses supplied by the court.]

The primary object of the amendments to the Commodity Exchange Act was to create a new, powerful federal regulatory agency to deal with scandals in the sale of commodity futures. The congressional hearings focused on the need for sole regulatory power of commodities to be placed in one federal agency, unlike the regulation of securities which is shared by a federal agency and state agencies. There was testimony that some states were already experimenting with commodities regulation in the wake of grain shortages and certain notorious abuses. Van Wart at 672-83. The states’ regulatory efforts have been characterized as “eccentric.” A. Bromberg & L. Lowenfels, Securities Fraud and Commodities Fraud, § 4.6(471) at p. 82.-385 (Supp.1975).

The grant of exclusive jurisdiction to the CFTC in the first clause quoted above was meant to ensure that federal preemption of regulatory authority was complete. Johnson at 17. This exclusive jurisdiction language would both displace incipient state regulation and warn other federal agencies, such as the Department of Commerce and Department of Interior, that they were also displaced by the new federal agency. Johnson at 19.

The second proviso resulted from the difficulty Congress faced in realigning power between the new federal agency and the SEC. Controversy over the division of regulatory turf between those two federal agencies continued until the jurisdictional accord was adopted in 1982. Johnson at 11-12.

The final clause quoted above, the savings clause for federal and state court jurisdiction, was added in response to several concerns voiced during the circulation of the proposed bill among legislative committees and between the two houses of Congress.

First, some legislators made clear their desire that pending investigations by the SEC of abuses not previously under the CFTC’s jurisdiction and pending court proceedings should continue unabated. Johnson at 7; Van Wart at 689. The fear that the enactment of the amendment would affect pending proceedings proved well-founded. One court subsequently found that the SEC was stripped of standing to file suit based on violations uncovered in an investigation which was pending when the 1974 amendments were enacted. SEC v. Univest, Inc., 405 F.Supp. 1057 (N.D.Ill.1975). One state held that suits brought under securities laws for a commodities transaction were made moot, even if the suit was in the appeals process when the amendments were enacted. See Clayton Brokerage Co. v. Mouer, 531 S.W.2d 805 (Tex.1975); State v. Monex Int’l, Ltd., 527 S.W.2d 804 (Tex.Civ.App.1975).

The chairman of the House Judiciary Committee, Representative Peter Rodino, also questioned whether the legislation, as proposed, would eliminate state court jurisdiction over commodities disputes as simple contract claims. Johnson at 34; Van Wart at 683; Curran, 456 U.S. at 406-407 n. 15, 102 S.Ct. at 1854 n. 15. Both Rodino and Senator Talmadge, Chairman of the Senate Committee on Agriculture and Forestry, were concerned that the legislation might affect federal antitrust jurisdiction. Van Wart at 683-87.

Senator Hart had proposed that the amendments include a new remedy for individual investors. His version of the 1974 amendments would include specific authorization of civil actions by individuals for treble damages. Curran, 456 U.S. at 408, 102 S.Ct. at 1855 (chart comparing features of four proposed versions of the bill is attached as Appendix A to the dissenting opinion). Other proposals included upper and lower limits on amounts recoverable through civil court actions. Neither the treble damages remedy nor the limit on civil recovery was accepted. The Commodity Exchange Act was left with two unusual remedies, a reparations procedure to be pursued in the agency, 7 U.S.C. § 18, and an arbitration procedure to be pursued in the exchange, 7 U.S.C. § 7a(ll). This left the legislation with no clear statement that civil actions for actual damages were still available. Senator Clark who had introduced one of the unsuccessful versions of the bill pointed out that the absence of any reference to civil actions in the bill and the exclusive jurisdiction language might inadvertently prohibit all court actions. Curran, 456 U.S. at 385, 102 S.Ct. at 1843.

The addition of the savings clause for federal and state court jurisdiction could have dealt with all of these concerns.

In Curran, the Supreme Court held that the savings clause was evidence that Congress intended to retain a private cause of action for investors under the commodities laws, a cause of action which had previously been accepted by lower federal courts, albeit under “erroneous” reasoning. In response to the uncertainty concerning investors’ rights during the appeal of Curran, Congress belatedly added an express cause of action to the Commodity Exchange Act in 1982. 7 U.S.C. § 25.

After considering the legislative history of the 1974 amendments and the Supreme Court’s treatment of that history, this court finds that the savings clause was meant to protect pending SEC investigations and on-going court proceedings, to protect state court jurisdiction over the contracts claims which form the basis of a futures contract and federal court jurisdiction over antitrust claims, and to preserve private causes of action in federal courts under the commodities laws. To the extent to which Westlake v. Abrams and Taylor v. Bear Stearns & Co., hold that the savings clause preserves a private cause of action under the federal securities statutes although the underlying transaction is clearly a “commodity” the court expressly declines to follow those decisions.

First, both Westlake v. Abrams and Taylor v. Bear Stearns & Co. begin by asking whether an “investment contract” could be extended under the test of SEC v. W.J. Howey Co., to include the investment vehicles at issue, commodity futures options in Westlake v. Abrams and mixed transactions in both securities and commodity futures in a discretionary account in Taylor v. Bear Stearns. This analysis is challenging—the application of the Howey test may be the intellectual mainstay of many securities lawyers—but it is faulty. In focusing on the most general term in the SEC statute, this analysis ignores specific terms in the jurisdictional statutes of the SEC and the CFTC. It is a basic rule of construction, for complex regulatory legislation as well as simple legal documents, that the specific controls the general. Of course, this court unlike Judge Moye has the benefit of the 1982 refinements which finetuned the description of the specific investments which fall under each agencies’ jurisdiction.

Second, both eases posit that Congress, in enacting the savings clause, intended to create judicial jurisdiction at odds with regulatory jurisdiction. That analysis of congressional intent, presented previously in Mullis, 492 F.Supp. 1345, is not consistent with the legislative history discussed above nor with the Supreme Court’s treatment of the savings clause in Curran. This court holds that the savings clause was added merely to clarify that the previous provisos on regulatory jurisdiction did not remove all jurisdiction from federal courts. As pointed out by the minority in Curran, the source of a litigant’s rights is still the substantive provision of the act which he seeks to enforce. See Curran, 456 U.S. at 406, 102 S.Ct. at 1854.

Finally, the ultimate effect of the decisions in Westlake v. Abrams and Taylor v. Bear Stearns & Co. defeats the fundamental congressional design in revamping the Commodity Exchange Act in 1974 and granting exclusive jurisdiction to the new CFTC—to avoid a duplicative or contradictory regulatory structure. Russo and Lyon, The Exclusive Jurisdiction of the Commodity Futures Trading Commission, 6 Hofstra L.Rev. 57 (1977). Under the prior cases in this jurisdiction, individuals and corporations like the defendants in this case would be subject to regulation by the CFTC under the Commodity Exchange Act, subject to suit by the CFTC or by states in a parens patriae capacity under the Commodity Exchange Act, see 7 U.S.C. § 13a-2 (1978), subject to arbitration and reparations claims under the Commodity Exchange Act, but subject to suit by private investors under the securities acts without the interpretative regulations promulgated thereunder. Such defendants would be vulnerable to this last, unworkable lawsuit only in jurisdictions within the Fifth and Eleventh Circuits. If an investor sued in the alternative under the securities and commodities acts and regulations in any other jurisdiction, the securities counts would be dismissed due to those jurisdictions’ stricter requirements for “commonality.” The suit would proceed under the commodities counts. See, e.g., Curran v. Merrill Lynch, Pierce, Fenner & Smith, 622 F.2d 216 (6th Cir.1980) (The Court of Appeals affirmed the dismissal of claims under the securities acts before the Supreme Court considered whether a cause of action existed the commodities act). See also Mordaunt v. Incomco, 686 F.2d 815 (9th Cir.1982), cert. denied, — U.S. -, 105 S.Ct. 801, 83 L.Ed.2d 793 (1985) (Court of Appeals dismissed securities claims). In contrast, in this jurisdiction, courts before Curran would dismiss the commodities claims but retain the securities claims. After the Supreme Court’s decision in Cur-ran, Judge Moye reinstated the commodities claims in the continuing Westlake litigation. Westlake v. Abrams, 565 F.Supp. 1330 (N.D.Ga.1983). See also Westlake v. Abrams, 575 F.Supp. 58 (N.D.Ga.1983). The case proceeded with both securities and commodities claims. Such judicial application of a securities statute to a commodity transaction would force careful commodity brokers to see that the investment vehicle is registered as if it were regulated by the SEC at the same time that the board of exchange is seeking approval as a contract market under actual regulation by the CFTC. This judicial creation of a dual system of regulatory compliance is antithetical to the congressional purpose in creating the CFTC.

This court holds that, due to the preclusive and preemptive operation of the federal commodities laws, this plaintiff has no claim under the federal or state securities laws. Accordingly, Counts 1 through 4 of his complaint are hereby DISMISSED.

The court is concerned that its disposition of the defendants’ motion to dismiss affects its jurisdiction of the other counts. The court DIRECTS the parties to submit further legal memoranda within 30 days from the filing of this order discussing whether the court now has jurisdiction over Counts 5 through 7 and whether the exclusive application of federal commodities laws preempts state common law recovery as well.