Lachmund v. ADM Investor Services, Inc.

Tom Lachmund (plaintiff) was a farmer who grew corn and soybeans. In January 1995, Lachmund entered into a consulting agreement with A/C Trading 2000 (A/C 2000) (defendant), a consulting firm operated by James Gerlach. Gerlach arranged for Lachmund to enter into various hedge-to-arrive (HTA) contracts with Demeter, Inc. (defendant), a corporation that operated a grain elevator, pursuant to which the parties agreed that Lachmund would sell a certain quantity of crops to Demeter at a specific price for delivery on a specific date. The terms contemplated actual delivery and were individualized for the specific transaction, as opposed to the terms in standardized contracts. Each contract governed the circumstances of delivery, the ability of the seller to fulfill delivery using other crop sources if necessary, conformance of the crops to federal regulations, confirmation that the crops would be free of liens, and specification that payment would be upon delivery. The crop quantities were based on Lachmund’s estimated crop yields. Gerlach also arranged for Lachmund to open an account with ADM Investor Services, Inc. (ADMIS) (defendant), a futures commission merchant registered with the Commodity Futures Trading Commission (CFTC). Through his ADMIS account, Lachmund entered into options transactions to hedge against loss on the HTA contracts, such as losses that would occur if contract prices fell below market prices. Lachmund also entered into over-the-counter options with Demeter for similar hedging purposes. Lachmund’s crop yields fell short, requiring Lachmund to roll over the contracts to future years. In exchange for cash payments, Demeter allowed the rolls despite being under no contractual obligation to do so. Eventually, however, Demeter demanded actual delivery. When Lachmund was unable to deliver, Demeter debited Lachmund’s trading account over $300,000. Lachmund’s options did not cover the losses. Subsequently, Lachmund sued ADMIS, A/C 2000, and Demeter in federal court for violations of the Commodity Exchange Act and other laws. Lachmund claimed that ADMIS, A/C 2000, and Demeter conspired to avoid CFTC regulations on futures contracts. ADMIS, A/C 2000, and Demeter moved to dismiss on the basis that the contracts were cash forward contracts exempt from CFTC regulation. The district court granted the motion, and Lachmund appealed.