UNITED STATES OF AMERICA
Commodity Futures Trading Commission
Lowell E. Harter,
Iowa Grain Company,
CFTC Docket No. 98-R095
OPINION AND ORDER
Iowa Grain Company ("Iowa Grain") seeks interlocutory review of the ruling of an Administrative Law Judge ("ALJ") denying its motion to dismiss the reparations action brought against it by complainant Lowell E. Harter ("Harter"). Iowa Grain argues that immediate review is necessary because the ALJ's ruling involves questions of comity between the Commission and the courts and because resolution of the issue raised after an initial decision has been rendered would result in unnecessary litigation and expense.
On the merits of the ALJ's ruling, Iowa Grain contends that dismissal is required because Harter unsuccessfully litigated the same complaint before an arbitration panel and therefore is precluded under the doctrine of collateral estoppel from litigating the same issues in another legal forum. It urges the Commission to grant its application for interlocutory review and to reverse the ALJ's ruling denying its motion to dismiss. In response, Harter argues that collateral estoppel should not apply because the arbitration proceeding did not comply with the Commission's requirements for arbitration and allegedly lacked fundamental due process safeguards. He urges the Commission to affirm the ALJ's ruling.
The ALJ certified his ruling for interlocutory review pursuant to Commission Rule 12.309, 17 C.F.R. § 12.309, and stayed the proceeding pending appeal in accordance with Rule 12.309(d). For reasons discussed below, we grant Iowa Grain's application for interlocutory review, reverse the ALJ's ruling on its motion to dismiss Harter's complaint, and dismiss the complaint with prejudice.
Complainant Harter filed a reparations complaint in February 1998 against respondent Iowa Grain, a futures commission merchant, alleging various violations of the Commodity Exchange Act ("CEA" or "Act") in connection with several hedge-to-arrive ("HTA") contracts that he entered into with another firm, the Andersons, Inc. ("Andersons"), a grain elevator company. Prior to filing this complaint, Harter initiated a legal action in the U.S. District Court for the Northern District of Illinois against Iowa Grain, Andersons, and a third firm, the Andersons Investment Services Corporation ("AISC"), a guaranteed introducing brokerage firm of Iowa Grain affiliated with Andersons, alleging inter alia that Andersons engaged in fraud in connection with the sale of the HTA contracts and that such contracts were illegal, off-exchange futures contracts. Resp. Ex. 4; Harter v. Iowa Grain Co, No. 96 C 2936, (N.D. Ill.) (Amended Complaint).
Following the dismissal of Iowa Grain and AISC as respondents to that action, the district court ordered the case to be heard by arbitration pursuant to a pre-dispute arbitration clause in the HTA contracts.1 Harter v. Iowa Grain Co, 1996 WL 556734 (N.D. Ill. Sep. 26, 1996). An arbitration panel of the National Grain and Feed Association ("NGFA") then ruled in favor of the sole remaining defendant, Andersons, rejecting all of Harter's allegations of liability. The panel concluded that Harter had defaulted on his contracts with Andersons and ordered him to pay Andersons damages of $55,350 for canceling the contracts and attorneys fees of $85,000 plus interest. NGFA Arb. Case No. 1788 (undated). This award was confirmed by the federal court which had ordered the matter into arbitration. Harter v. Iowa Grain Co., 1998 WL 440905 (N.D. Ill. July 27, 1998). In confirming the NGFA decision, the court rejected Harter's challenge to the award on the grounds of fairness, noting that none of his objections "passes muster." Id. The case is currently on appeal to the Seventh Circuit.
Harter's reparations action, which was filed during the course of his federal court action, named Iowa Grain as a respondent and asserted that it was liable for the alleged wrongdoing of both Andersons and AISC. Complaint at 2-4. As with his federal court complaint, Harter alleged that the HTA contracts that he had entered into were illegal off-exchange futures contracts and were marketed in a fraudulent manner. With respect to the latter charge, Harter alleged that Iowa Grain, through its guaranteed introducing broker, AISC, failed to provide him with the Commission-required risk disclosure statement, failed to provide him with proper confirmation statements and margin calls, and engaged in misrepresentations and other forms of solicitation fraud in violation of the CEA. Id. at 2. As damages, Harter sought the amount of money that he lost in the NGFA arbitration proceeding ($140,350) and the amount he lost on the HTA contracts ($16,941). Id. at 8.
Citing the federal district court's confirmation of the NGFA arbitration award, Iowa Grain moved to dismiss Harter's reparations complaint, arguing that it was barred by the doctrine of collateral estoppel since the underlying issues in the two proceedings were the same.2 The ALJ denied this motion, ruling that collateral estoppel did not apply to issues relating to the Commission's jurisdiction, such as whether a contract is a futures contract. ALJ Order of Sept. 2, 1998. Such a "jurisdictional issue," the ALJ held, can be determined only by the Commission:
This Court does not believe that a jurisdictional issue, such as whether a contract is a futures contract, can be preclusively determined by federal district court or NGFA arbitration. Congress has granted this agency exclusive jurisdiction over futures contracts. 7 U.S.C. § 2. This Court does not believe that either of these forums may decide and impose subject matter jurisdiction, or lack thereof, on this forum in this case.
Id. at 2. Although rejecting Iowa Grain's collateral estoppel argument, the ALJ nevertheless stayed the proceeding and certified his ruling for interlocutory review in accordance with Commission Rule 12.309. Id.
Iowa Grain's application raises two issues: (1) whether the Commission should grant interlocutory review and (2) whether the prior judgment rendered by the NGFA arbitration panel and confirmed by the district court precludes Harter from bringing a subsequent action in reparations.
I. Interlocutory Review
As a general rule, we grant interlocutory review only in extraordinary circumstances. 17 C.F.R. 12.309(c); In re Abrams, [1987-1990 Transfer Binder] Comm.Fut.L.Rep. (CCH) ¶ 24,577 at 36,493-94 (CFTC Oct. 13, 1989). While the ALJ's certification of an issue for interlocutory appeal is of considerable importance, we exercise our own judgment in determining whether immediate review is appropriate. In re Siegel Trading Co., [1977-1980 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 20,527 at 22,181 (CFTC Dec. 16, 1977). In making this determination, we balance the benefits of immediate intervention against those flowing from our policy of discouraging piecemeal appeals, including conservation of Commission resources and preservation of the orderly conduct of Commission proceedings. Abrams, ¶ 24,577 at 36,494.
The party seeking immediate review has the burden of establishing extraordinary circumstances. To meet that burden, the petitioning party must demonstrate that there is a compelling need for us to correct an alleged error prior to the presiding officer's completion of his or her initial decision. In re Ashman, [Current Transfer Binder] Comm.Fut.L.Rep. (CCH) ¶ 26,221 at 41,980 (CFTC Aug. 4, 1994); In re Abrams, ¶ 24,577 at 36,495. For its part, Iowa Grain argues that such a need exists here because the ALJ's ruling implicates basic questions concerning the relationship between the Commission and the courts. It contends that important interests will be sacrificed if it is forced to relitigate an issue that already has been decided in another forum. Resp. Pet. at 22-25. Iowa Grain also contends that allowing the ALJ's holding to stand would deprive arbitration decisions as well as federal court decisions of their "normal and intended effect," while waiting until he issues his initial decision to address this issue will result in unnecessary adjudication. Id. Harter's response to Iowa Grain's application neither addresses nor contests Iowa Grain's arguments for interlocutory review.
Since the ALJ certified his ruling as appropriate for interlocutory review, the initial issue before us is whether Iowa Grain has made a sufficient showing of "extraordinary circumstances" to warrant immediate resolution of the issues raised. In re Grain Land Cooperative, [1996-1998] Comm. Fut. L. Rep. (CCH) ¶ 27,144 at 43,376 (CFTC Sept. 12, 1997). We have previously stated that we consider questions of comity between the Commission and the federal courts to be a matter of "greatest concern" and have found extraordinary circumstances to be present where such questions are raised. Dickerson Investment Co. v. Rosenthal & Co., CFTC Docket No. R79-63-79-228, 1983 WL 29444, *1 (CFTC Jan. 10, 1983). In addition, this concern dovetails with the very purpose of the collateral estoppel doctrine, which is intended to protect parties from the expense and vexation of defending multiple lawsuits as well as to conserve judicial resources and to foster reliance on judicial action by minimizing the possibility of inconsistent decisions. See Montana v. U.S., 440 U.S. 147, 153-154 (1979).
Moreover, in circumstances virtually identical to those here, we found that extraordinary circumstances were present and accordingly granted interlocutory review of an ALJ's refusal to accord collateral estoppel to an arbitration decision. Protzko v. Shearson Hayden Stone, Inc., CFTC Docket No. R77-515-78-120, 1979 WL 11584 (CFTC July 25, 1979). For these reasons, we find that, pursuant to Section 12.309(c) of the Commission's Reparations Rules, extraordinary circumstances exist and, therefore, grant respondent's application for interlocutory review.
II. Collateral Estoppel
We turn next to Iowa Grain's claim that the ALJ erred in refusing to apply the doctrine of collateral estoppel to Harter's reparations complaint. Resp. Pet. at 1, 6-21. Although the ALJ acknowledged that the issues underlying Harter's reparations action were identical to those at issue in the arbitration proceeding, he nevertheless ruled that collateral estoppel did not apply to the "jurisdictional issue" of "whether a contract is a futures contract." ALJ Order of Sept. 2, 1998 at 2. Citing Section 2 of the CEA, the ALJ held that, since Congress granted the CFTC "exclusive jurisdiction over futures contracts," the issue of what constituted such a contract could not "be preclusively determined by [a] federal district court or NGFA arbitration." Id.
The ALJ's ruling is erroneous on several grounds. First, both courts and this agency have indicated that preclusive effect may be given to arbitration decisions. See Greenblatt v. Drexel Burnham Lambert, Inc., 763 F.2d 1352, 1360 (11th Cir. 1985) (determination of issues in arbitration proceeding should be treated as conclusive in subsequent proceedings, just as determinations of court would be treated); In re Clark, [1996-1998] Comm. Fut. L. Rep. (CCH) ¶ 27,032 at 44,929 (CFTC Apr. 22, 1997) (arbitration decisions and determinations made by futures exchanges may warrant preclusive effect in appropriate circumstances). Second, collateral estoppel applies to jurisdictional issues and to the issues of fact and law relevant thereto. Fehlhaber v. Fehlhaber, 681 F.2d 1015, 1020 (5th Cir. 1982). Third, the "exclusive jurisdiction" language of Section 2 of the CEA relied upon by the ALJ pertains to the CFTC's regulatory jurisdiction over such financial instruments, not to its adjudicatory jurisdiction over CEA claims. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 386 (1982).3 Finally, although the agency's interpretation of its authorizing statute is entitled to deference, interpretation of the CEA is clearly a proper role for the judiciary. In re Grain Land Coop, 978 F. Supp. 1267, 1277 (D. Minn. 1997).
Although the ALJ may have erred in his analysis, that does not resolve the question of whether collateral estoppel should be applied here. Collateral estoppel precludes relitigation of an issue that has been previously litigated involving a party to the first case. Allen v. McCurry, 449 U.S. 90, 94 (1980). As with the closely related doctrine of res judicata, collateral estoppel is based on the proposition that a party who has unsuccessfully litigated an issue before a court of competent jurisdiction ordinarily should not be permitted to relitigate the issue in a subsequent proceeding. See Charles Alan Wright, Law of Federal Courts, § 100A at 721 (1994).4 It precludes such relitigation in a subsequent proceeding when: (1) the precise issue has been raised and litigated in a prior proceeding; (2) determination of the issue was necessary to the outcome of the prior proceeding; (3) the prior proceeding resulted in a final judgment on the merits; and (4) the party against whom estoppel is sought has had a full and fair opportunity to litigate the issue in the prior proceeding. Hess v. Mount, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,039 at 37,885 n.14 (CFTC Apr. 17,1991), citing Moore v. City of Paducah, 890 F.2d 831, 832 n.4 (6th Cir. 1989).5
This standard requires us to examine both the parties to the proceedings and the issues that were actually litigated. Focusing first on the parties, we note that, in his reparations action, Harter seeks to litigate several claims against Iowa Grain that were prevously decided against him in his lawsuit against Andersons. Although Iowa Grain was not a party to the original action, it may invoke collateral estoppel to preclude relitigation of any issues that were decided against Harter. See Blonder-Tongue Laboratories, Inc. v. University of Illinois Foundation, 402 U.S. 313(1971) (eliminating the "mutuality" requirement in collateral estoppel litigation and permitting a defendant in a second suit who was not a party to the first suit to invoke estoppel against a plaintiff who lost on the same claim in an earlier suit).6
In both proceedings, Harter alleged that he was defrauded when he purchased HTA contracts from Andersons and that those contracts constituted illegal, off-exchange futures contracts. In addition, Harter argues here as he did before the federal district court that NGFA's arbitration procedure is unfair and does not meet the standards set by the Commission.7
All of these issues were previously resolved against Harter by the NGFA arbitration panel or by the federal district court on review. The NGFA arbitration panel, for example, explicitly rejected Harter's argument concerning the legality of the HTA contracts, ruling that they were "valid cash contracts." NGFA Arb. Case No. 1788 at 5. The panel concluded that Harter's claims against Andersons (including fraud and the illegal nature of the contracts) were not supported by the evidence. Id. at 7. The district court upheld the panel's decision. The district court also specifically rejected Harter's objections to the fairness of the NGFA proceeding, including his argument that the arbitration provisions were invalid because they violated the Commission's regulations for such proceedings. Harter, 1998 WL 440905; Harter, 1996 WL 556734.
Therefore, to the extent that Harter seeks to establish the liability of Iowa Grain based on the actions of Andersons, this claim is precluded by the findings that the Harters have failed to prove a cause of action against Andersons. See 18 C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure § 4463, p. 567 (1981) (recognizing the general rule that "judgment in an action against either party to a vicarious liability relationship establishe[s] preclusion in favor of the other"). Moreover, to the extent that the reparations complaint can be construed as a claim that Iowa Grain is liable as a result of the action or inactions of AISC,8 this claim is precluded by the panel's finding that the contracts at issue were valid cash contracts and thus outside the jurisdiction of these reparations proceedings. Id. See also Harter v. Iowa Grain Co, 1997 WL 97693 at *4 (N.D. Ill., 1997)(court notes only predicate for recovery was the sale of the HTA contracts by Andersons).
Collateral estoppel also requires that the party against whom the earlier decision is being asserted must have had a "full and fair opportunity" to litigate the disputed issues in the earlier case. Montana, 440 U.S. at 153; Grain Land Coop v. CFTC, [1996-1998] Comm. Fut. L. Rep. (CCH) ¶ 27,240 at 45,982, No. 97-2410 (D. Minn. Jan 7, 1998). Where a party was not provided such an opportunity to press an issue, an exception to the normal rules of preclusion may be justified. Montana, 440 U.S. at 162-64. Indeed, the Supreme Court regards the provision of such an opportunity for the party against whom an estoppel is asserted as "a most significant safeguard." Blonder-Tongue Laboratories, 402 U.S. at 329.
A party resisting estoppel bears the burden of showing that preclusion would be unfair as applied to him. Clark, ¶ 27,032 at 44,930. Harter attempts to avoid preclusion by arguing that the NGFA arbitration proceeding was invalid because it (1) "offers none of the safeguards required by the Commission," (2) "lacks fundamental due process safeguards," and (3) "does not provide a fair opportunity to be heard." Harter Mem. at 6, 10.
In ordering the case to arbitration and in confirming the arbitration award, however, the district court rejected Harter's claims that the NGFA proceeding was procedurally unfair and that it should be required to comply with the Commission's regulatory standards for arbitration. The district court considered and rejected Harter's argument that the NGFA arbitration procedure lacks fundamental due process safeguards, in particular, that the NGFA panel was not impartial because all of the arbitrators were members of the NGFA and that the NGFA procedure failed to provide a fair opportunity to be heard. See Harter, 1998 WL 440905. Accord, The Andersons, Inc. v. Horton Farms, Inc., 166 F.3d 308, 328-30 (6th Cir. 1998). Indeed, the court found Harter's claim of alleged structural bias in the composition of the arbitration panel to be "without merit" and lacking "any real factual support." Harter, 1998 WL 440905 at *1. As to Harter's allegation that the NGFA proceeding failed to afford him an oral hearing, the court noted that "it was Harter that voluntarily withdrew his prior request for such a hearing." Id. at *1, n.1.9 Thus, Harter is collaterally estopped on these issues as well.10
In short, the principal issues upon which Harter's reparations complaint is based have previously been resolved against him in the NGFA arbitration proceeding and affirmed by the federal district court. Those rulings are binding in this reparations proceeding.
Based on our review of the record, we believe that the ALJ erred in ruling that collateral estoppel did not apply on the grounds that only the Commission could address an issue relating to its jurisdiction. Accordingly, we grant Iowa Grain's application for interlocutory review, reverse the ALJ's ruling denying Iowa Grain's motion to dismiss Harter's reparations complaint, and dismiss the complaint with prejudice.
IT IS SO ORDERED
By the Commission (Chairperson BORN, and Commissioners HOLUM, SPEARS, and NEWSOME).
Jean A. Webb
Secretary of the Commission
Commodity Futures Trading Commission
Dated: May 20, 1999
1 The agreement between Harter and Andersons stated that "any disputes or controversies arising out of this contract shall be arbitrated by the National Grain & Feed Association, pursuant to its arbitration rules."
2 Iowa Grain also argued that the NGFA arbitration proceeding was not subject to the Commission's rules on arbitration.
3 Indeed, Section 2 goes on to state that "[n]othing in this section shall supersede or limit the jurisdiction conferred on the courts of the United States or any State." Moreover, claims arising under the CEA may be subject to arbitration. See Gans v. Merrill Lynch Futures, Inc., 814 F.2d 493, 495 (8th Cir. 1987).
4 Under res judicata, "a judgment on the merits in a prior suit bars a second suit involving the same parties, or their proxies, based on the same cause of action." Parklane Hosiery Co., Inc., v. Shore, 439 U.S. 322, 326 n.5 (1979). While collateral estoppel bars relitigation of those issues of fact or law that were actually litigated and decided in the prior proceeding, res judicata bars relitigation not only of those issues that were raised and decided in the earlier litigation, but also of those issues which could have been raised in the prior action. Allen, 449 U.S. at 94; Migra v. Warren City School Dist. Bd. of Educ., 465 U.S. 75, 77 n.1 (1984).
5 Courts articulate a similar standard: See, e.g., In re Bilzerian, 100 F.3d 886, 892 (11th Cir. 1996), cert. denied, __ U.S. __, 118 S. Ct. 1559 (1998) (collateral estoppel requires that: (1) the issue be identical in both the prior and current action; (2) the issue was actually litigated; (3) the determination of the issue was critical and necessary to the judgment in the prior action; and (4) the burden of persuasion in the subsequent action was not significantly heavier).
6 Unlike collateral estoppel, res judicata can be asserted as a bar to subsequent litigation only against parties to the prior action or those in privity with them. Rudell v. Comprehensive Accounting Corp., 802 F.2d 926, 933 (7th Cir. 1986); see Nwosun v. General Mills Restaurants, Inc., 124 F.3d 1255, 1257 (10th Cir. 1997) (res judicata requires that the parties in the two matters be identical or in privity). Collateral estoppel merely requires that the second action involve a single party to the first case against whom the estoppel is asserted. Allen, 449 U.S. at 94.
7 In contrast to his federal suit which alleged several additional causes of action including RICO, fiduciary duty, and state law claims, Harter's reparations complaint is limited solely to alleged CEA violations.
8 In two letters addressed to the ALJ, Harter argues that, even if he is precluded from proceeding against Andersons in his reparation action, he is not barred from proceeding against Iowa Grain for the activities of AISC which, like Iowa Grain, was not a party to the NGFA arbitration proceeding. Resp. Exs. 13, 15.
9 In a related action, the U.S. District Court for the District of Columbia found that Harter "presented no objective basis to conclude that the arbitration was biased." Harter v. Iowa Grain Co., No. 98-014, slip op. at 5 (D.D.C., May 12, 1998) (granting NGFA's motion to quash subpoena issued by Harter).
10 Harter's appeal of the NGFA arbitration award to the Seventh Circuit does not affect the collateral estoppel effect of the decision. See Kurek v. Pleasure Driveway & Park District, 557 F.2d 580, 595 (7th Cir. 1977) (pendency of an appeal does not suspend operation of a final judgment for collateral estoppel purposes), vacated on other grounds, 435 U.S. 992 (1978).