Before the


CFTC Docket No. 95-R 151




The complainants Harish and Indra Pal commenced this reparation proceeding in September 1995 by filing a complaint alleging damages in excess of $1.2 million proximately caused by respondents' violations of the Commodity Exchange Act ("Act"). The respondents generally denied wrongdoing, and asserted defenses, and respondent Refco, Inc. ("Refco") counterclaimed for approximately $347,000 plus costs, attorneys' fees, and interest due to a debit balance in the Pals' account. The ALJ dismissed the Pals' complaint for a failure of proof and granted Refco's counterclaim to the extent of the debit balance plus interest. The ALJ denied Refco an award of costs and attorneys' fees.(1)

The Pals appeal the dismissal of their complaint and the award of the counterclaim against them. Refco appeals on the issues of costs and attorneys' fees.(2) For the reasons discussed, we affirm the ALJ's liability determination and his award of damages against the Pals,(3) but we reverse the ALJ's denial of an award of attorneys' fees and costs to Refco.

The ALJ denied Refco's counterclaim for attorneys' fees and costs. Refco's counterclaim for fees and costs is based upon a clause in its customer agreement with the Pals which provides for the recovery of fees and costs in connection with a deficit balance in their account.(4) The ALJ declined to apply this provision of the customer agreement and ruled that Commission Rule 12.314(c), 17 C.F.R. 12.314(c) (1997), permits an award of attorneys' fees and costs "only when the losing party acts in bad faith during the course of the adjudication." Pal, 26, 945 at 44,580. We disagree.

The American rule governs an award of attorneys' fees in reparation proceedings. Sherwood v. Madda Trading Co., [1977-1980 Transfer Binder] Comm. Fut. L. Rep. (CCH) 20,728 at 23,025 (CFTC Jan. 5, 1979) (applying the American rule in Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240 (1975), as the standard governing awards of attorneys' fees in Commission reparation proceedings). In Sherwood, we adopted the American rule in the context of an award of attorneys' fees against a party that had engaged in litigation-related misconduct in the reparation forum. This appeal presents the question whether the American rule shall also apply in reparation proceedings to permit the award of attorneys' fees and costs pursuant to a contractual agreement between the parties.

Our analysis begins with the general proposition of law that in federal court under the American rule attorneys' fees may be awarded pursuant to an enforceable contract. Alyeska, 421 U.S. at 257. Just as we follow the American rule in assessing attorneys' fee awards for litigation-related misconduct in the reparation forum, we hereby adopt that same rule as the standard governing our award of contractually based counterclaims for attorneys' fees.

In 1974, Congress granted the Commission jurisdiction in reparation proceedings to adjudicate customer account debit balance counterclaims arising under state law. See CFTC v. Schor, 478 U.S. 833, 857 (1986). Implicit in that authority was the jurisdiction to adjudicate a demand for attorneys' fees incidental to the deficit balance claim under the customer account agreement. Indeed, the rules governing the reparation process expressly state that an ALJ may award reasonable attorneys' fees and costs (including the cost of instituting the proceeding) when warranted as a matter of law. See Rule 12.314(c).

In this case, Refco's customer agreement provides for the award of reasonable fees and costs incurred in connection with the collection of a delinquent debit balance in the customer's account. Our exercise of jurisdiction over the contract provision at issue is consistent with the authority that Congress granted us under Section 14 of the Act, 7 U.S.C. 18 (1994).(5) We therefore reverse the ALJ and exercise our counterclaim jurisdiction to grant Refco the attorneys' fees and costs due under the customer agreement. See Commission Rule 12.19, 17 C.F.R. 12.19(b) (1997).

A remand to the ALJ for a determination of the amount of the attorneys' fees and costs due (including fees and costs incurred on appeal to the Commission) is warranted. Accordingly, the Initial Decision is reversed as to the denial of attorneys' fees and costs, and this proceeding is remanded to the ALJ to determine the amount of the reasonable attorneys' fees and costs due to Refco. The Initial Decision in all other respects is affirmed.


By the Commission (Chairperson BORN and Commissioners TULL, HOLUM, and SPEARS).

Jean A. Webb
Secretary of the Commission
Commodity Futures Trading Commission

Dated: February 2, 1998


1 Pal v. Reifler Trading Corp., [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) 26,945 at 44,580 (ALJ Jan. 28, 1997).


2 Both the complainants and the respondents requested oral argument to the Commission. These requests are denied.

3. 3 Based upon our review of the record and the parties' appellate submissions, we conclude that the ALJ committed no material error with respect to his dismissal of the Pals' claim and his award of damages against the Pals pursuant to the counterclaim. The parties have not raised issues of law or policy that merit extended discussion with respect to the foregoing. Accordingly, we adopt the findings and conclusions of the Initial Decision with respect to the ALJ's liability determinations against the complainants and in favor of respondents. See Commission Rule 12.406(b), 17 C.F.R. 12.406(b) (1997).

We also have reviewed the record and the parties' appellate submissions with respect to the issue of whether the ALJ erred in his determination that the Pals did not act in bad faith so as to warrant an award of attorneys' fees and costs for litigation-related misconduct in this proceeding. We find no abuse of discretion and accordingly affirm that determination. See Rule 12.406(b).


4 Paragraph 5 of the customer agreement between Refco and the Pals governs the liquidation of the Pal account and provides that in the event a deficiency remains in the Pal account after liquidation by Refco, the Pals "promptly shall pay, upon demand, the deficit and all unpaid liabilities, together with interest thereon and all costs of collection including reasonable attorneys' fees."


5 We find it unnecessary to decide at this time whether other, broader contractual provisions with respect to attorneys' fees might be contrary to public policy and therefore unenforceable in a reparation proceeding. See, e.g., Joan Kirshberg Davis, Annotation, When May Federal Courts Decline to Award to Prevailing Party Attorneys' Fees Authorized by Contract, 56 A.L.R. Fed. 871 (1982).