MG Refining & Marketing, Inc. v. Knight Enterprises, Inc.

Beginning in December 1991, MG Refining & Marketing, Inc. (MG) (defendant) marketed and sold to its customers, including Knight Enterprises, Inc. (collectively, the customers) (plaintiffs), certain long-term contracts for the delivery of petroleum products at fixed prices, with terms of five or 10 years. Under the first type of these contracts, known as ratables, customers were obligated to accept monthly deliveries of petroleum products, and physical delivery took place on a regular basis. Under the second type of these contracts, known as flexies, customers had the right to accept physical delivery of the petroleum product, but if the market price of petroleum futures spiked within the term, the customers had the option to cash out their contracts and receive cash payments from MG in amounts correlated to the differences between the market prices and the contract prices. In practice, none of the customers who purchased flexies ever requested physical delivery, and many had no physical capacity to do so. Some customers, however, purchased both ratables and flexies as part of larger transactions that may have been intended for hedging purposes. In 1994, the Commodity Futures Trading Commission (CFTC) investigated MG for marketing and selling off-exchange futures contracts, the flexies, purportedly in violation of the Commodity Exchange Act (CEA). MG entered into a settlement with the CFTC pursuant to which the flexies were declared illegal off-exchange futures products. As a result, MG notified all its customers of the CFTC action and the position that all flexies were illegal and therefore void. MG thereby explained to the customers that MG was barred from performing its obligations under the flexies. When the market price of petroleum futures later spiked, all the customers requested that MG fulfill its cash-out obligation. MG refused to do so, and the customers sued. MG defended partly on the basis that performance was illegal because the flexies were illegal off-exchange futures. MG and the customers cross-moved for summary judgment.