Top of Iowa Cooperative v. Sime Farms, Inc.
2000 Iowa Sup. LEXIS 44, 608 N.W.2d 454, 41 U.C.C. Rep. Serv. 2d (West) 1 (2000)
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Rule of Law:
Hedge-to-arrive (HTA) contracts for commodities are legal and enforceable cash-forward contracts under the Commodity Exchange Act (CEA) if the parties contemplate physical delivery of the commodity. Under Iowa Code § 554.2609 (UCC § 2-609), a party may demand adequate assurances of performance if objective commercial circumstances create reasonable grounds for insecurity, and such demands are not rendered unreasonable merely because they require actions beyond the original contract terms.
Facts:
- Top of Iowa Cooperative (Coop) is a farmer-owned cooperative, and Sime Farms, Inc. is an Iowa corporation wholly owned by Mark Sime, engaged in farming and a member of the Coop.
- In late 1994 and early 1995, Sime Farms entered into four hedge-to-arrive (HTA) contracts with the Coop for the delivery of a total of 60,000 bushels of corn in December 1995 and May 1996.
- In November 1995, Sime Farms rolled its December 1995 delivery dates to March 1996, selling its 1995 crop on the cash market at a higher price and using the HTA contracts to price its future (1996) crop.
- By February and April 1996, Sime Farms rolled the contracts again to May 1996 and then July 1996; the April roll to July resulted in a thirteen-cent-per-bushel loss (inverse) due to market conditions.
- By late April 1996, the inverse between July 1996 and December 1996 was around $1.30 per bushel, meaning Sime Farms faced significant losses if it had to roll again (which it would, as it had no grain for July delivery).
- In May 1996, the Coop's manager, Paul Nesler, spoke with Mark Sime about the inverse situation and the effect of rolling into December, but Sime never followed up with a plan, and the Iowa Attorney General's office publicly questioned the legality of these types of contracts.
- On June 6, 1996, the Coop sent a letter to Sime Farms, demanding assurances of performance, including payment of commissions and margins or a binding letter of credit, and a signed letter agreeing to delivery.
- Mark Sime visited the Coop the next day, and Nesler offered alternatives such as rolling to December without margin reimbursement or a buy-out, but Sime stated his lawyer would send a letter.
- Sime Farms' attorney sent a letter asserting the illegality of the contracts under the Commodity Exchange Act and stating that Sime Farms did not intend to deliver at a price including unfavorable margin losses.
- Sime Farms did not deliver grain under any of the contracts.
Procedural Posture:
- Top of Iowa Cooperative sued Sime Farms, Inc. in district court (trial court) for damages arising from Sime Farms' failure to deliver corn under four hedge-to-arrive (HTA) contracts.
- Sime Farms asserted several counterclaims, including a request for a declaratory judgment that the contracts were illegal and unenforceable under the Commodity Exchange Act, and also claimed as an affirmative defense that the Coop breached the contracts by making an unwarranted and unreasonable demand for assurances.
- At the close of the evidence, Sime Farms moved for a directed verdict, asserting (1) the Coop did not have reasonable grounds for insecurity as a matter of law, (2) the Coop, by insisting on new terms, materially breached the contract, and (3) the contracts were illegal.
- The district court denied Sime Farms’ motion for directed verdict, ruling that the HTA contracts were legal and that factual questions existed on the other issues.
- The jury returned a general verdict in favor of the Coop and awarded damages in the amount of $118,125.
- Upon entry of judgment, Sime Farms moved for judgment notwithstanding the verdict and for a new trial, arguing, among other things, that the court could not consider parol or extrinsic evidence of conversations between the parties that would change or modify the Coop’s written demand for assurances.
- The trial court denied Sime Farms’ post-trial motions.
- Sime Farms appealed the district court's judgment to the Iowa Supreme Court.
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Issue:
1. Are hedge-to-arrive (HTA) contracts for grain considered illegal futures contracts under the Commodity Exchange Act, or do they fall within the "cash commodity for deferred shipment or delivery" exclusion, and thus are legal and enforceable? 2. Did Top of Iowa Cooperative have reasonable grounds for insecurity, allowing it to demand assurances of performance from Sime Farms under Iowa Code § 554.2609? 3. Did Top of Iowa Cooperative's demand for assurances constitute an unreasonable demand and thus a repudiation of the contract as a matter of law, excusing Sime Farms' performance?
Opinions:
Majority - TERNUS, Justice
Yes, the hedge-to-arrive (HTA) contracts are legal and enforceable and fall within the "cash commodity for deferred shipment or delivery" exclusion of the Commodity Exchange Act (CEA). The court affirmed that the hallmark of an unregulated cash-forward contract is the contemplation of physical delivery of the actual commodity, distinguishing it from speculative futures contracts. Reviewing legislative history, the court determined that the exclusion was intended to cover legitimate commercial transactions like those between farmers and grain elevators. The court rejected Sime Farms' arguments that the U.C.C. definition of "sale" or a single crop year delivery restriction should apply to the CEA exclusion, finding them inconsistent with congressional intent and practicality. Applying factors from Grain Land Coop v. Kar Kim Farms, Inc., the court concluded that actual delivery was anticipated by both parties given their business relationship, the individualized contract terms, the Coop's business of buying grain, and Sime Farms' role as a producer. The ability to "roll" contracts merely delayed, rather than avoided, the delivery obligation. Yes, the trial court was correct in ruling that the Coop had generated a jury question on whether it had reasonable grounds for insecurity concerning Sime Farms’ performance. Under Iowa Code § 554.2609, reasonable grounds for insecurity are determined by objective commercial standards and can arise from circumstances not directly tied to the specific party or contract. The significant market inverse, making delivery unprofitable for Sime Farms, combined with public statements from the Iowa Attorney General's office questioning the legality of HTA contracts, provided a sufficient objective basis for the Coop's concern. Mark Sime's failure to propose a plan after discussions with the Coop manager further supported the grounds for insecurity. The court clarified that the manager's personal belief about Sime's likelihood to deliver did not negate the Coop's broader concerns. No, the Coop's demand for assurances was not unreasonable as a matter of law and did not constitute a repudiation of the contract. Iowa Code § 554.2609 explicitly authorizes a party, when reasonable grounds for insecurity arise, to insist upon greater security or performance than initially stipulated in the contract. The very purpose of this UCC section is to allow parties to modify contract terms to provide greater security in the face of insecurity. The court distinguished cases cited by Sime Farms, finding they either lacked reasonable grounds for insecurity or did not address whether demands beyond original contract terms constitute repudiation in this context. Additionally, Sime Farms failed to preserve error on its objection to the admission of oral testimony regarding modifications to the Coop's written demand for assurances. The court reiterated that even for substantive rules like the parol evidence rule, an objection must be raised at trial to be preserved for appeal, not in post-trial motions.
Analysis:
This case provides crucial clarification on the legality of hedge-to-arrive contracts, solidifying their status as legitimate cash-forward contracts under the Commodity Exchange Act when physical delivery is truly contemplated. It reinforces the broad applicability of UCC § 2-609, establishing that reasonable grounds for insecurity can arise from general commercial conditions and public commentary, not solely from the direct actions of the other contracting party. The decision further clarifies that demands for assurances, even if they require actions beyond the original contract terms, are permissible under UCC § 2-609, empowering parties to seek increased security in volatile commercial environments without risking repudiation. This ruling significantly impacts how agricultural contracts are structured and enforced, particularly in mitigating risk for cooperatives and elevators.
