GREEN PLAINS TRADE GROUP, LLC, et al., Plaintiffs-Appellants, v. ARCHER DANIELS MIDLAND COMPANY, Defendant-Appellee.
No. 23-1185
United States Court of Appeals For the Seventh Circuit
DECIDED JANUARY 12, 2024
Before RIPPLE, JACKSON-AKIWUMI, and LEE, Circuit Judges.
A federal court sitting in diversity has a basic constitutional responsibility to ascertain correctly the content of state law. Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938). When the highest court of the state has not spoken on the matter, this inquiry can be difficult, but it cannot be avoided. In such situations, our case law, and that of the Supreme Court, instructs us to search elsewhere for a persuasive indication of how the highest court of the state would rule if the present case were before that tribunal today. Over time, we have articulated several “guardrails” to guide and discipline our decision-making process. One such maxim counsels district courts against accepting novel state law claims when the evidence concerning the content of state law is in equipoise. But this maxim has its limits and should not be overused. The district court‘s north star, and one constitutionally mandated by Erie, is to discern, as best it can, the content of state law as the highest court of the state would view it today.
If Green Plains adequately amends its complaint, the district court should revisit its decision on the content of Nebraska law in a manner consistent with this opinion.
I
BACKGROUND
A. Facts
This case comes to us from the district court‘s grant of a motion to dismiss under
Green Plains and ADM are two of the Country‘s largest ethanol producers, capable of producing, respectively, over 1 billion and 1.69 billion gallons of ethanol each year. Ethanol is a renewable fuel made primarily from corn and other grains. The United States produces over 16 billion gallons of ethanol annually. Federal law requires gasoline producers to blend renewable
Because most of the Country‘s ethanol production takes place in the Midwest, the industry treats the price set at the Kinder Morgan Argo Terminal (“Argo Terminal” or “Terminal” or “Argo“) in Argo, Illinois, as the key indicator of the value of ethanol. The pricing service S&P Global Platts (“Platts“) provides a benchmark price assessment that reflects the daily trading price of ethanol at the Argo Terminal. This “Chicago Benchmark Price” is calculated each day during the Argo Terminal‘s Market-on-Close (“MOC“) window. During the MOC window, buyers post bids and sellers post offers; when a bid and an offer match, a sale is consummated. Platts bases the Chicago Benchmark Price on the quantity and price of ethanol sold during the MOC window and deliverable to buyers between five and fifteen days forward from the date of sale. The Chicago Benchmark Price serves as a reference price for more than 70% of physical ethanol pricing locations around the country.
The price of ethanol futures contracts is also tied to the Chicago Benchmark Price.2 In its complaint, Green Plains alleges that ADM began manipulating downward the price of physical ethanol at the Argo Terminal in November 2017. ADM‘s manipulation of the price of physical ethanol led to reduced profits for ADM and other producers selling ethanol at prices tied to the Chicago Benchmark Price. But ADM shielded itself from this downward trend. Although ADM would ordinarily be vulnerable to decreased contract prices in the same way as the other producers, ADM protected its bottom line by holding outsized short positions in the ethanol futures market and therefore profiting when the price of ethanol fell.
When the price of an underlying commodity falls, short positions in futures contracts pegged to that price turn a profit. Participants in futures markets speculate on the future price of an underlying commodity by buying or selling futures contracts, which are “contract[s] for the sale of a commodity at a future date.” United States v. Dial, 757 F.2d 163, 164 (7th Cir. 1985). Futures contracts “rarely result[] in actual delivery of the commodity,” id., but instead are often “cash settled,” with payment occurring between the parties based on the difference between the original contract price and the final settlement price. See Commodity Futures Trading Comm‘n v. Zelener, 373 F.3d 861, 864 (7th Cir. 2004) (quoting Chicago Mercantile Exch. v. SEC, 883 F.2d 537, 542 (7th Cir. 1989)). Participants in the futures market can hold “long” or “short” positions. When the price of the underlying commodity rises, the “long” purchaser benefits; conversely, when the price of the underlying commodity falls, the “short” purchaser benefits. Kohen, 571 F.3d at 675. Short positions benefit from falling prices of the physical product because short sellers agree to sell a contract at the current going rate and then deliver at a later point. If the price of the product falls in the meantime, the short seller can then buy and deliver the contract at that lower price, profiting from
Most commodity producers have an incentive to hedge their supply via short futures contracts in a manner consistent with their monthly production schedule, a practice that aims to reduce volatility in revenue. Hedging consistent with production ensures that producers are not overexposed to downturns in the market; if the price of ethanol declines, falling revenue will be partially offset by short sale gains. But Green Plains has alleged that ADM‘s behavior greatly exceeded expected hedging: ADM consistently held futures contracts that represented quantities more than twice as large as its monthly production of ethanol.4 Because ADM held large quantities of short positions that increased in value when the price of ethanol decreased, ADM was not only protected from the falling price of ethanol, but profited from it.
According to Green Plains‘s complaint, ADM was able to effect this scheme by taking advantage of weaknesses at the Argo Terminal to drive down the price of physical ethanol. First, ADM fabricated an appearance of a surplus of ethanol by overwhelming the Terminal with conveniently-timed barges. The Terminal receives ethanol shipments via rail, truck, and barge. But its ability to handle large numbers of barge deliveries at once is limited: it has manpower and space to load and unload, on average, only two barges each day. Aware of the Terminal‘s limitations, ADM sent multiple barges into Argo at the same time, overloading its supply and unloading capabilities. And because Argo‘s ethanol capacity is limited to 1 to 1.2 million gallons of ethanol, the Terminal was then forced to store ethanol in tanks, creating the appearance of an ethanol surplus and depressing prices.
Next, ADM began selling high quantities of ethanol at low prices during the MOC window. Prior to its alleged manipulation, ADM was a consistent buyer at the Argo Terminal. But ADM changed course beginning in November 2017. From then until October 2019, ADM was a frequent seller and accounted for nearly 70% of the total volume of physical ethanol sales at the Terminal during the MOC window. Under normal circumstances, ethanol sellers “negotiate” with buyers in the MOC window by gradually decreasing offers while buyers gradually increase bids until the two parties match. But ADM eschewed this established practice and aggressively and routinely offered the lowest prices and quickly accepted buyers’ opening low-priced bids. Further, ADM frequently sold more ethanol during the MOC window than it could physically deliver and was often forced to purchase ethanol at a loss later in the month to satisfy its obligations. Finally, ADM repeatedly chose to sell at
ADM‘s actions, the allegations continue, depressed the price of physical ethanol. Green Plains and the third parties that purchased ethanol from Green Plains used the Chicago Benchmark Price as a reference point for their contracts. Because ADM unlawfully depressed the price of ethanol, Green Plains received a lower price for its physical ethanol sales contracts tied to the Chicago Benchmark Price than it would have in the absence of ADM‘s manipulation.
B. Proceedings in the District Court
In October 2021, Green Plains brought this action against ADM in the United States District Court for the District of Nebraska. It predicated federal jurisdiction on diversity of citizenship. See
First, the district court concluded that Green Plains was required to allege specific contracts with which ADM had interfered. Although Green Plains had “alluded to various contracts,” it had “not identified the third parties with whom [Green Plains] had the contracts, any other terms of those contracts, or what specific losses [Green Plains] suffered.” Green Plains Trade Grp., LLC v. Archer Daniels Midland Co., 648 F. Supp. 3d 1028, 1033 (C.D. Ill. 2022). The district court held that, without such specificity, ADM did not have sufficient knowledge of the contracts with which it was alleged to have interfered.
Next, the district court determined that Green Plains had failed to plead a breach of contract. In its view, Green Plains could not state such a claim for relief because Nebraska tortious interference law ordinarily requires plaintiffs to prove that an actual breach occurred. Green Plains had not alleged that ADM had caused the third parties to breach; rather, it alleged that ADM caused Green Plains‘s completed contracts to be less profitable.
But absence of breach was no impediment to Green Plains‘s theory that, under Nebraska law, tortious interference does not always require a breach. This theory relied on section 766A of the Restatement (Second) of Torts. This provision allows a plaintiff to bring a successful tortious interference with contract claim on the ground that the defendant interfered with
In their submissions to the district court, the parties disputed whether Nebraska state law recognized section 766A claims. Both parties relied on the Nebraska Supreme Court‘s decisions in Pettit v. Paxton, 583 N.W.2d 604 (Neb. 1998), and Recio v. Evers, 771 N.W.2d 121 (Neb. 2009). The district court analyzed both decisions and reasoned that although “the Nebraska Supreme Court has not explicitly adopted or recognized § 766A and applied it to the facts under consideration, it has also not rejected that section out of hand or refused to recognize it as a cause of action under Nebraska tort law.” Green Plains, 648 F. Supp. 3d at 1036. Later, the court continued: “[I]t could be inferred that, under the proper factual circumstances, the Nebraska Supreme Court would recognize § 766A-style claims as legitimate actions for tortious interference with contract.” Id. at 1037.
Despite this conclusion, the district court refused to allow Green Plains to proceed on a section 766A claim. Notably, its refusal was based largely on its reading of our cases cautioning district courts sitting in diversity against expanding state law. These cases, in the district court‘s view, required that it “choose the narrower interpretation that restricts liability.” Id. at 1038.
Consequently, the district court dismissed Green Plains‘s complaint with prejudice but noted that if it had determined that Nebraska law recognized section 766A claims, it would have allowed Green Plains to amend its complaint and attach specific contracts. Green Plains timely appealed.
II
DISCUSSION
Green Plains first submits that the district court‘s requirement that it plead specific contracts was excessive in light of
A. Pleading Standards
We review a district court‘s dismissal of a complaint under
In the circumstances presented here, the district court was on solid ground in requiring Green Plains to plead more than the generalized allegation that it had valid contracts with third parties for the sale of physical ethanol tied to the Chicago Benchmark Price. A claim for tortious interference with contract requires the plaintiff to plead that a valid contract existed and that the defendant knew about the contract. Pettit, 583 N.W.2d at 609. Although ADM conceivably could have a general understanding of the contracts to which Green Plains refers, “[a]n inadequate complaint will not survive a motion to dismiss simply because the defendants managed to figure out the basic factual or legal grounds for the claims.” Adams v. City of Indianapolis, 742 F.3d 720, 729 (7th Cir. 2014). Something more than Green Plains‘s initial complaint is required. We do, however, caution the district court against requiring particularity akin to a
The district court specifically stated that, had it concluded that the Nebraska Supreme Court would recognize section 766A claims, it would have allowed Green Plains leave to amend its complaint. As we will explain below, the district court employed improper methodology in determining the content of Nebraska state law. On remand, if Green Plains satisfactorily amends its complaint, the district court should revisit its section 766A analysis, guided by the following clarification.
B. Ascertaining the Content of State Law
In determining whether the district court erred in its assessment of Nebraska law, we set forth at the outset the fundamental principles governing this area. Indeed, resolution of this appeal turns on these basic principles, which are deeply rooted in our constitutionally-based federalism. As one treatise has emphatically stated, “[b]ecause of the important federalism concerns implicated in the application of state law by the federal courts, the accurate ascertainment of that law is extremely important.” 19 Charles Alan
When a district court‘s jurisdiction is predicated on diversity of citizenship, it must apply the law of the state in which it sits, including that state‘s choice of law rules. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941); Erie, 304 U.S. at 78. We review a district court‘s interpretation of state law de novo. Salve Regina Coll. v. Russell, 499 U.S. 225, 231–32 (1991).6 We must apply state law as we believe the highest court of the state would apply it if the case were now before that tribunal rather than before our court. See Bernhardt v. Polygraphic Co. of America, 350 U.S. 198, 203 (1956); Todd v. Societe Bic, S.A., 21 F.3d 1402, 1405 (7th Cir. 1994) (en banc). When the state‘s highest court has squarely addressed the issue, a federal court‘s task is straightforward: apply the law as determined by that court.7 But when the highest court of the state has not spoken, ascertaining the present content of state law is often a delicate and, at times, arduous process. Frequently, we encounter significant ambiguity; our obligation, however, remains constant: We must ascertain, as best we can, the rule of law that the highest court of the state would apply if the case were now before it. We must “decide, not avoid” the question. Daily v. Parker, 152 F.2d 174, 177 (7th Cir. 1945). Accuracy in the determination of the content of state law is, moreover, a most serious responsibility because, as Erie makes clear, our determination implicates one of the most essential aspects of our constitutional federalism: the right of a state to determine, within constitutional bounds, the content of its state law. See Allstate Ins. Co. v. Menards, Inc., 285 F.3d 630, 634–35 (7th Cir. 2002) (noting the constitutional basis of Erie‘s holding); Bernhardt, 350 U.S. at 202 (same).
Given the importance of the undertaking, it is not surprising that the case law sanctions, indeed encourages, a broad
inquiry by federal courts when faced with untangling ambiguity. We may consult “other persuasive authority” to determine what the highest court of the state would do if the case was before it. Todd, 21 F.3d at 1405; see also McKenna v. Ortho Pharm. Corp., 622 F.2d 657, 662–63 (3d Cir. 1980).8 We may look to the decisions of the state‘s other courts, including “considered dicta,”9 for clues as to how the
reveal fundamental policy choices and therefore cast a significant crosslight on the issue now before the federal court. See, e.g., Toro Co. v. Krouse, Kern & Co., Inc., 827 F.2d 155, 161–62 (7th Cir. 1987) (relying on the Indiana Supreme Court‘s general approach to privity to resolve the appropriate standard with respect to accountant‘s liability). Finally, we may consult learned treatises and articles and, of course, the applicable Restatements.10
While canvassing these sources is helpful and necessary, the wide-ranging nature of the inquiry also presents the danger of it becoming undisciplined. Consequently, the federal courts have developed, over the years, certain maxims of self-discipline designed to ensure that our inquiry remains focused on its sole legitimate objective: ascertaining the law that the highest court of the state would articulate if our case were before it today.
Most prominent among these “guardrails” is the principle that, in the absence of persuasive reasons to the contrary, we will follow a holding of the state‘s intermediate appellate court. Allstate, 285 F.3d at 637. This safeguard is anchored in the very reasonable notion that a state‘s intermediate appellate courts engage in constant dialogue with the state‘s highest court and therefore have a sophisticated idea of the jurisprudential
vectors that its high court is setting.11 Any state‘s jurisprudence contains, moreover, many rules of decision that never receive the scrutiny of the state‘s highest tribunal. These rules are, nevertheless, an integral part of the law of the state, and a federal court is not free to ignore their substance when seeking to ascertain the content of state law. See West v. Am. Tel. & Tel. Co., 311 U.S. 223, 236–37 (1940).
Of course, a “guardrail‘s” role is to assist in staying on course. An overly rigid deference to the decision of an intermediate appellate court can easily distract a federal court from the constitutionally-based north star of its inquiry: what would the highest court of the state do if the present case was now before that court? Consequently, a federal court must be alert to indications that the highest court of the state might well reject the view of the intermediate appellate court. See McGeshick v. Choucair, 9 F.3d 1229, 1234 (7th Cir. 1993) (declining to follow intermediate appellate court‘s interpretation when it was contrary to the clear intent of the
We also have regularly employed another “guardrail.” We have said, albeit in varying formulations, that a federal court, faced with two equally plausible readings of state law, should not choose the alternative that requires us to predict a change or an expansion in extant state legal doctrine. These cases suggest it is not our place to alter state law, but simply to apply it. See Shaw v. Republic Drill Corp., 810 F.2d 149, 150 (7th Cir. 1987) (“[O]ur policy will continue to be one that requires plaintiffs desirous of succeeding on novel state law claims to present those claims initially in state court.“).
The district court relied on this decisional “guardrail” in deciding the present case, even though it predicted that the Nebraska Supreme Court would apply section 766A in an appropriate case. In short, it read our case law to say that a district court must always opt for the interpretation of state law that is the most restrictive, even when the evidence as to the content of state law is not in equipoise and, in fact, points to the less restrictive option.
Such an approach has troubling implications. It suggests that, in making the ”Erie guess,” a district court must choose the most restrictive interpretation of state law, even if the evidence before it indicates that the state court would choose a less restrictive alternative. This approach would render of secondary importance the basic constitutional mandate of Erie that we must ascertain and apply state law as the highest court of the state would articulate it today. Our cases counseling that we avoid expanding state law simply state the prudential rule that where the decisions of the state courts do not
reveal a clear result and other traditional sources of information are also ambiguous about the present state of state law, we should not presume, without solid evidentiary support, that the state court would take a significant leap away from its established jurisprudence.13 Any other course would risk interfering, based on significantly little support, with the state court‘s right to make policy choices on fundamental jurisprudential questions.14
Here, the district court seemed to believe that the Nebraska Supreme Court might well be willing to apply section 766A. Yet, it also believed that it could not take that course because it required applying section 766A for the first time in Nebraska without explicit direction from the Nebraska Supreme Court. But there is no such impediment to a district court applying the rule it believes the highest court of the state would apply. As we have noted
approach and ruling that section 766A did not apply. But a district court should not fear adopting the “less restrictive” approach if it believes the state‘s highest court would adopt that approach.
We think that, if Green Plains satisfactorily amends its complaint, the district court should reexamine its earlier determination of the content of Nebraska law. On remand, the district court may determine, unburdened of any misapprehension about the contours of its duty to ascertain state law, that the information before it reasonably establishes that the Nebraska Supreme Court would adopt section 766A. But if it should believe that equally plausible arguments remain on both sides of the question, it may resort to the “guardrail” that it invoked in its earlier decision. The north star of the district court‘s decision-making process must always be to ascertain, as best it can, what the highest court of the state would do if the issue were before it today.
Finally, we respectfully invite the district court‘s attention to the possibility of certifying the section 766A issue to the Nebraska Supreme Court.15 Use of this avenue to determine the content of state law might well become more viable if the
issue of the specificity of the complaint were resolved beforehand.
Conclusion
The judgment of the district court is vacated and the case is remanded for further proceedings consistent with this opinion.
The parties will bear their own costs of this appeal.
IT IS SO ORDERED.
Notes
Todd, 21 F.3d at 1411 (quoting Northwestern, 976 F.2d at 323). On the other hand, there is a significant difference between “mere obiter” and a “carefully considered statement by the state court.” McKenna, 622 F.2d at 662 n.21 (quoting Charles Alan Wright, Law of Federal Courts, § 58, at 270 (3d ed. 1976)).Judicial opinions are frequently drafted in haste, with imperfect foresight, and without due regard for the possibility that words or phrases or sentences may be taken out of context and treated as doctrines. We shouldn‘t like this done to our opinions and are therefore reluctant to do it to the opinions of other courts. No court, even a federal court in a diversity suit, is obliged to treat a dictum of another court (or, for that matter, its own dicta) as binding precedent.