Jay Gunderson v. ADM Investor Service

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________

No. 99-4032
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JAY GUNDERSON, et al., *
*
Appellants, *
* Appeal from the United States
v. * District Court for the
* Northern District of Iowa
ADM INVESTOR SERVICES, INC., *
a Delaware Corporation, *
* [UNPUBLISHED]
Appellee. *
___________

Submitted: June 12, 2000
Filed: August 16, 2000
___________

Before BOWMAN and MORRIS SHEPPARD ARNOLD, Circuit Judges, and
PANNER1 , District Judge.
___________

PER CURIAM.

Plaintiffs, more than fifty Iowa farmers, bring this interlocutory appeal,

contending that the district court erred in dismissing their claims against defendant

ADM Investor Services, Inc. (ADMIS) for fraudulent inducement, breach of fiduciary

1
The Honorable Owen M. Panner, United States District Judge for the District
of Oregon.
duty, and violations of the Racketeer Influenced and Corrupt Organizations Act

(RICO), 18 U.S.C. §§ 1961-1968, and the Commodity Exchange Act, 7 U.S.C. §§ 1-

25. See Gunderson v. ADM Investor Servs., Inc., 43 F. Supp. 2d 1058 (N.D. Iowa

1999) (opinion below). The district court reasoned that plaintiffs' allegations of an

agency relationship between ADMIS and other defendants were insufficient. We

reverse and remand.

BACKGROUND

Plaintiffs raise corn and soybeans in north central Iowa. ADMIS is a Futures

Commission Merchant, or FCM, registered with the Commodity Futures Traders

Commission (CFTC).

Plaintiffs allege that ADMIS's agents fraudulently induced plaintiffs to enter into

"flex" hedge-to-arrive (HTA) agreements with the defendant grain elevator

cooperatives. See Grain Land Coop v. Kar Kim Farms, Inc., 199 F.3d 983, 987 (8th

Cir. 1999) (describing HTA agreements). In a flex HTA agreement, the grain elevator

permits the farmer to postpone, or roll, the delivery date for the grain, which allows the

farmer to sell his grain on the cash, or spot, market, if the price is higher than the

agreed HTA price. Id. Unfortunately for both plaintiffs and defendant grain elevators,

corn prices unexpectedly rose throughout 1995 and early 1996, creating a market

inversion. Id.; Charles F. Reid, Note, Risky Business: HTAs, the Cash Forward

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Exclusion and Top of Iowa Cooperative v. Schewe, 44 Vill. L. Rev. 125, 125 & n.4

(1999).

Plaintiffs allege that ADMIS either knew or should have known that its agents

were promoting flex HTA agreements at seminars for farmers by concealing or

downplaying the financial risk inherent in such agreements. Plaintiffs allege that

ADMIS's agents included defendants FAC-MARC, a registered Commodity Trading

Advisor; Agri-Plan, Inc., a registered Introducing Broker (IB) for ADMIS; and CSA

Investor Services, Inc. (CSA), another IB. An IB's role is to "solicit commodity

customer accounts and introduce those accounts to a Futures Commission Merchant

such as ADMIS." Lachmund v. ADM Investor Servs., Inc., 191 F.3d 777, 780 n.1 (7th

Cir. 1999).

Plaintiffs allege that under CFTC rules, ADMIS was responsible for supervising

IBs. That responsibility included approving IBs' marketing materials and the content

of the IBs' seminars, and insuring that IBs did not misrepresent the risks of trading, or

sell illegal, off-exchange futures contracts. Plaintiffs allege that ADMIS had previously

approved the content of seminars promoting HTA agreements. Plaintiffs also allege

that ADMIS approved the form of the contracts between plaintiffs and defendant FAC-

MARC, a commodity trading advisor that shared offices and corporate officers with

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defendant Agri-Plan. Plaintiffs allege FAC-MARC required its customers to open

commodity accounts with ADMIS.

In granting ADMIS's motion to dismiss for failure to state a claim under Federal

Rule of Civil Procedure 12(b)(6), the district court concluded that plaintiffs failed to

allege that ADMIS had granted any other defendant actual or implied authority to make

representations about HTA agreements. The district court ruled that under Rule 9(b)'s

heightened pleading standard for fraud, plaintiffs' allegations that other defendants

promoted HTA agreements as agents of ADMIS were insufficient.

STANDARD OF REVIEW

We review de novo the district court's dismissal for failure to state a claim.

Hanten v. School Dist. of Riverview Gardens, 183 F.3d 799, 805 (8th Cir. 1999). We

affirm a dismissal for failure to state a claim "only if it appears beyond a reasonable

doubt that [the plaintiffs] can prove no set of facts entitling [them] to relief." LaBarre

v. Credit Acceptance Corp., 175 F.3d 640, 642 (8th Cir. 1999). We take "the

well-pleaded allegations in the complaint as true and view the complaint, and all

reasonable inferences arising therefrom, in the light most favorable to the plaintiff." St.

Croix Waterway Ass'n v. Meyer, 178 F.3d 515, 519 (8th Cir. 1999).

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 DISCUSSION

In determining whether an agency relationship exists, the primary issue is the

principal's right to control the agent. Benson v. Webster, 593 N.W.2d 126, 130 (Iowa

1999). If an agency relationship exists and the principal puts its agent in a position to

defraud innocent third parties, the principal is liable for the agent's fraud. First

American State Bank v. Continental Ins. Co., 897 F.2d 319, 326 (8th Cir. 1990) (citing

Mechanicsville Trust & Sav. Bank v. Hawkeye-Security Ins. Co., 158 N.W.2d 89, 91

(Iowa 1968)). The existence of an agency relationship, nature and scope of the agent's

authority, and whether the alleged acts were within the scope of the agent's authority,

are ordinarily questions of fact. Agri-Stor Leasing v. Farrow, 826 F.2d 732, 734 (8th

Cir. 1987).

Here, ADMIS contends that plaintiffs rely only on the IBs' status to show that

the IBs were ADMIS's agents in promoting HTA agreements. See Lachmund, 191

F.3d at 783 (IB's status "by itself, is not sufficient to give an IB the status of an agent").

Plaintiffs also allege, however, that ADMIS supervised the content of the IBs' seminars

promoting HTA agreements to plaintiffs, and knew or should have known that the

seminars misrepresented the risks involved.

ADMIS argues that its responsibility as a Futures Commission Merchant over

the IBs extended only to regulated commodity trading, not to HTA contracts. We note

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that the district court determined that there are issues of fact whether the HTA

contracts here should be treated as regulated futures contracts. See Gunderson v. ADM

Investor Servs., Inc., 85 F. Supp. 2d 892, 911-13 (N.D. Iowa 2000) (denying grain

elevators' motion to dismiss because issue of fact existed "whether the HTAs are

futures contracts or cash forward contracts"). Even if the HTA agreements here were

unregulated cash forward contracts, see Haren v. Conrad Coop., 198 F.3d 683, 684

(8th Cir. 1999), plaintiffs have sufficiently alleged that ADMIS was responsible as a

principal for the fraudulent promotion of HTA agreements.

ADMIS contends that the heightened pleading requirement for allegations of

fraud and mistake applies to plaintiffs' allegations of agency. See Fed. R. Civ. P. 9(b).

Assuming, without deciding, that Rule 9(b) applies to the pleading of the agency

relationship here, we conclude that plaintiffs' allegations are sufficient to meet even the

heightened pleading standard. Plaintiffs have alleged more than the bare legal

conclusion of agency. They need not plead fraud "with complete insight before

discovery is complete." Maldonado v. Dominguez, 137 F.3d 1, 9 (1st Cir. 1998)

(quotation marks and citation omitted). Rule 9(b) must be read in harmony with the

principles of notice pleading. See Michaels Bldg. Co. v. Ameritrust Co., N.A., 848

F.2d 674, 679 (6th Cir. 1988).

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 Because plaintiffs' second amended complaint sufficiently alleges agency, we

need not address whether the district court abused its discretion in denying plaintiffs'

motion for leave to file a third amended complaint. We deny as moot plaintiffs' motion

to supplement the record on appeal.

REVERSED AND REMANDED.

A true copy.

ATTEST:

CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.

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