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

OPINION AND ORDER

These cross-motions for summary judgment arise from a dispute between MG Mar *177 keting & Refining, Inc. (“MG”) and eighteen of its customers, including Knight Enterprises, Inc. (collectively the “Customers”), in which the Customers allege breaches of certain 45-day contracts. In its pleadings, MG has admitted non-performance but asserts the affirmative defenses of illegality and impossibility. MG now moves for summary judgment on the ground that the contracts at issue were illegal and therefore void. The Customers move for summary judgment dismissing MG’s illegality and impossibility defenses.

For the reasons discussed below, this Court denies both parties’ motions with respect to the defense of illegality, and grants the Customers’ motion with respect to the defense of impossibility.

BACKGROUND

The following facts are not disputed in any material way. The Customers are commercial entities that either use or engage in business activity relating to the wholesale, retail, supply, storage or distribution of diesel fuel and other petroleum products. (See Def.’s Rule 56.1 Statement ¶¶ 1-18.) MG was at one time the primary operating subsidiary of MG Corporation, and was at all relevant times herein a trader, distributor and marketer of oil and other oil related products. (See Def.’s Rule 56.1 Statement ¶ 19.)

Beginning as early as December 1991 and continuing through December 1993, MG marketed and sold to the Customers certain long-term contracts for the delivery of unleaded gasoline or heating oil at a fixed price and over a term of five or ten years. Without the use of a regulated exchange market, the parties entered into agreements with an aggregate stated volume of 160 million barrels by the end of 1993. The contracts themselves came in two forms. Under the first kind (the “ratables”), the Customers were required to take monthly deliveries on a ratable basis, and MG was required to meet the stated requirements. Except in a few cases where ratables were repudiated early in 1994, physical delivery occurred regularly under these contracts, (see Def.’s Rule 56.1 Statement ¶ 27), and all of the Customers had the physical capacity to take these deliveries.

The second kind of contract (the “flexie” or “45-day contract”) was nearly identical to the first, but the delivery requirements were modified to read as follows:

Delivery under this Agreement shall be made no earlier than the Term Commencement Date and no later than the Term End Date. Purchaser shall notify Seller in writing of each Lifting date, which shall be no earlier than forty-five (45) days after such written notification has been received by Seller. Such written notice shall also include the quantity of the Product to be transferred from Seller to Purchaser on such Lifting Date. If as of the day that is forty-five (45) days prior to the Term End Date (the “Last Notice Date”), Purchaser has not provided Seller with written notice of the Lifting Date with respect to any quantity of Product remaining to be delivered as of such Last Notice Date, the Lifting Date for such quantity of undelivered Product shall be the Term End Date

(E.g., Pl.’s Mem. Ex. 2 at ¶ 2.) Although MG sold flexies to the Customers with an aggregate stated volume of approximately 60 million barrels, none of the Customers has ever requested physical deliveries under a flexie, and few, if any, had the capacity to take the full stated volumes all at once. (See Def.’s Rule 56.1 Statement ¶ 8.)

Both the ratables and the flexies also contained a provision (the “blow out” provision), which allowed the Customers to cash out their contracts and terminate any remaining delivery requirements in the event of a “price spike” — i.e., if the price of petroleum futures on the New York Mercantile Exchange (“NYMEX”) rose higher than a level stated in the contracts. This provision reads as follows:

At any time during the Term of this Agreement that the Fixed Cash Price is less than the bid price for the applicable NYMEX Futures Contract ..., Purchaser may, in lieu of accepting all or part (in lots of 42,000 gallons) of the remaining deliveries of Product, accept cash payments from Seller based on the average of bid prices *178 obtained by Seller in totally or partially liquidating its long hedge positions for this Agreement (the “Average Bid Price”) in the applicable NYMEX Futures Contract. ... Upon Purchaser’s receipt of cash payments from Seller representing all of the remaining deliveries of Product, Seller shall have no obligation to deliver any further Product under this Agreement and this Agreement shall terminate.

(E.g., Pl.’s Mem. Ex. 2 at ¶ 16(a) (flexie language); Def.’s Mem. Ex. 45 ¶ 16(a) (ratable language).) The contracts specified that “[t]he cash payment to be received by Purchaser shall be an amount equal to [either 100% or 50%, depending on whether this is a flexie or a ratable, respectively, of] the product of the number of gallons represented by the long hedge positions to be liquidated multiplied by the difference between the Average Bid Price for the applicable NYMEX Futures Contract and the Fixed Cash Price.” (E.g., Pl.’s Mem. Ex. 2 at ¶ 16(a) (flexie language); Def.’s Mem. Ex. 45 ¶ 16(a) (ratable language).)

Relations between the parties continued normally and without interruption until 1994, when the CFTC’s Division of Enforcement began investigating the flexies and announced in November that they might be illegal off-exchange futures contracts. The Commodity Exchange Act (“CEA”), 7 U.S.C. § 1 ef seq., requires that futures contracts be marketed and entered into only through certain designated “contract markets,” which meet very specific CEA requirements. To call the flexies “illegal off-exchange futures contracts” is thus to suggest that they are illegal because they are futures contracts, subject to CEA regulation, but were entered into without the aid of a contract market.

These investigations continued for some time, until MG submitted an offer of settlement that the CFTC accepted, and which was formally entered into on July 27, 1995. The resulting order stopped the initiation of any full-scale enforcement proceedings against MG, assessed MG a $2.25 million penalty, established a series of oversight requirements for the corporation, declared the contracts to be “illegal off-exchange futures contracts”, and required MG to certify within five days that it had notified “all Purchasers of existing 45 Day Agreements that the Commission has entered this Order finding that the 45 Day Agreements are illegal and therefore void ... and directing [MG] to cease and desist from violating” the relevant sections of the CEA. (See Pl.’s Mem. Ex. 1, at 8-11 (hereinafter “CFTC Order”).) On July 27, 1995, MG’s President issued letters to the Customers explaining the CFTC’s Order and claiming that MG was “barred ... from performance” under the flexies. (See, e.g., Def.’s Mem. Ex. 94.) In 1996, when the NYMEX reference price exceeded the fixed contract price, every Customer wrote in to MG and asked to exercise their contractual rights to cash out all of their flexies. (See Pl.’s Rule 56.1 Statement ¶ 10.) MG refused to perform.

Although disputes between the present parties began as early as April 8, 1994, when MG filed its original complaint against Knight Enterprises on a related matter, the Court consolidated all of the Customers’ actions for pre-trial purposes on March 11, 1996. By then, the Customers had alleged breach of the 45-day contracts, and MG subsequently responded to these claims by moving to dismiss. In its motion, MG argued that the Customers were collaterally es-topped from denying an affirmative defense of illegality because the CFTC had already declared the flexies illegal and therefore void, that the present action amounted to an illicit collateral attack on the CFTC Order, and that MG could not be held hable for damages because the Order made performance under the flexies impossible. The Customers countered that MG was judicially estopped from asserting the illegality of the flexies because MG had advanced an inconsistent position in a prior arbitration proceeding. The Customers also argued that MG waived its right to deny the legality of the flexies under the express terms of the contracts.

On January 22, 1997, this Court denied MG’s motion to dismiss. See In re MG Refining & Marketing, Inc. Litigation, No. 94 Civ. 2512(SS), 1997 WL 23177 (S.D.N.Y.1997). The Court held that although the CFTC Order declared the flexies “illegal and therefore void,” the Customers were not col *179 laterally estopped from challenging this determination because they were not parties to the CFTC action and the issue of legality had never been fully adjudicated. The Court also held that the absence of any full adjudication before the Commission implied that the present action could not be considered a collateral attack at all on the CFTC’s proceedings, and so certainly could not be considered an illicit one. With regard to impossibility, the Court noted that the only Second Circuit case cited in which a consent order was deemed sufficient to ground a defense of impossibility' — i.e., Harriscom Svenska AB v. Harris Corp., 3 F.3d 576 (2d Cir.1993)—seemed to require a finding that the consenting party had not acted in bad faith. The Customers’ evidence “that MG solicited [the] Consent Order ..., with its language declaring the 45 day agreements illegal, specifically for purposes of evading its responsibility under the 45 day agreements” therefore “raise[d] a factual question as to MG’s good faith in procuring the CFTC’s Order, [which prevented] dismissal of the customers’ claims on the ground of impossibility at [that] stage of the proceedings.” MG Refining, 1997 WL 23177, at *7.

The Court also rejected the Customers’ two arguments concerning judicial estoppel and waiver. Noting the absence of any indication that MG had directly asserted the flexies’ legality in the prior cited arbitration proceedings, or that the arbitrator had in any way adopted this view, the Court held that MG was not judicially estopped from asserting illegality in the present action. The Court rejected the Customers’ argument on waiver as well, because even explicit agreements to waive a defense of illegality are ineffective under the law.

After this opinion was issued, discovery proceeded without interruption until a dispute arose a claim of attorney-client privilege late in 1997. At issue was whether MG had necessarily waived this privilege by invoking the doctrine of impossibility on the basis of a consent order. On December 17, 1997, the Court held a teleconference to discuss this matter with the parties. Realizing that the entire case might be disposed of on the basis of either an illegality or impossibility defense, the Court invited cross-motions addressed solely to these doctrines and stayed the pending discovery dispute until after these motions were decided. The present Opinion disposes of the arguments raised in the cross-motions.

DISCUSSION

Summary judgment is authorized when “the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Fed.R.Civ.P. 56(c); see Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). In examining the record, the court “must resolve all ambiguities and draw all reasonable inferences in favor of the nonmoving party.” Gibson v. American Broad. Cos., 892 F.2d 1128, 1132 (2d Cir.1989); see also Celotex, 477 U.S. at 330 n. 2, 106 S.Ct. at 2556 n. 2. The judge’s role in summary judgment is not “to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986).

Procedurally, Rule 56(c) thus places an initial burden on the moving party to make out a ease that there are no material facts in dispute and that it is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). Once this initial burden has been met, a limited burden of production shifts to the non-moving party, and this party can survive summary judgment only by showing that there is, in fact, still a “genuine” issue of material fact to be decided. See Fed.R.Civ.P. 56(c), (e); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 585-86, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986). The non-moving party must “do more than simply show that there is some metaphysical doubt as to the material facts.” Id. at 586, 106 S.Ct. at 1356. This party must come forward with “specific facts showing that there is a genuine issue for trial.” Fed.R.Civ.P. 56(e); Matsushita, 475 U.S. at 587, 106 S.Ct. at 1356.

*180 Where there are cross-motions for summary judgment, “the standard is the same as that for individual motions for summary judgment and the court must consider each motion independent of the other .... Simply because the parties have cross-moved, and therefore have implicitly agreed that no material issues of fact exist, does not mean that the court must join in that agreement and grant judgment as a matter of law for one side or the other.” Aviall, Inc. v. Ryder System, Inc., 913 F.Supp. 826, 828 (S.D.N.Y.1996), aff'd, 110 F.3d 892 (2d Cir.1997). “Only where one of the parties is entitled to judgment as a matter of law upon material facts not genuinely in dispute is the Court warranted in granting summary judgment.” Corsini v. Ross, No. 97 Civ. 0968(JGK), 1997 WL 539950, at *3 (S.D.N.Y. Aug.28, 1997).

Some of the issues in this motion for summary judgment will require this Court to engage in questions of contract interpretation. Generally, “summary judgment based upon construction of a contract is appropriate only if the meaning of the language is clear, considering all the surrounding circumstances and undisputed evidence of intent, and there is no genuine issue as to the inferences that might reasonably be drawn from the language.” Sharkey v. Ultramar Energy Ltd., 70 F.3d 226, 230 (2d Cir.1995) (emphasis added); see also Healy v. Rich Products Corp., 981 F.2d 68, 72 (2d Cir.1992). Whether a contractual provision is ambiguous is a question of law, however, see, e.g., Burger King Corp. v. Horn & Hardart Co., 893 F.2d 525, 527 (2d Cir.1990), and a provision will be considered ambiguous whenever it admits of more than one interpretation “when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in a particular trade or business.” Nowak v. Ironworkers Local 6 Pension Fund, 81 F.3d 1182, 1192 (2d Cir.1996). Courts cannot interpret ambiguous contractual language without looking to extrinsic evidence concerning the parties’ intent. This evidence will leave a genuine issue of material fact, which precludes summary judgment, whenever the evidence can support more than one reasonable interpretation of the relevant provisions, and whenever such differences are material to the outcome of the case. See Sayers v. Rochester Tel. Corp. Supplemental Management Pension Plan, 7 F.3d 1091, 1094 (2d Cir.1993); Seiden As socs. v. ANC Holdings, Inc., 959 F.2d 425, 428 (2d Cir.1992); Burger King Corp., 893 F.2d at 528; see also Chock Full O’Nuts Corp. v. Tetley, Inc., 152 F.3d 202, 204 (2d Cir.1998) (“Notwithstanding the existence of contractual ambiguities, summary judgment may be granted if under any of the reasonable interpretations the moving party would prevail.”)

1. The Affirmative Defense of Illegality

The issue of illegality arises in this case because § 4 of the CEA makes it “unlawful for any person to offer to enter into, to enter into, to execute, [or] to confirm the execution of ... a contract for the purchase or sale of a commodity for future delivery ... unless ... such transaction is conducted on or subject to the rules of a board of trade which has been designated by the Commodity Futures Trading Commission as a ‘contract market’ for such commodity .... ” 7 U.S.C. § 6(a)-(a)(1). MG’s illegality defense rests on the fact that the flexies, which appear to be “contracts for the purchase or sale of a commodity for future delivery,” were never entered into in accordance with the rules that this section specifies. Absent some exception to § 4a, the flexies would therefore qualify as illegal off-exchange futures contracts.

a. The Customers’ Motion for Summary Judgment on MG’s Illegality Defense

The Customers argue that MG’s illegality defense must fail as a matter of law because the flexies fit into one or more of the following three exceptions to § 4a: the “trade option” exception, see 17 C.F.R. § 32.4(a) (exempting commodity options when the offeror has a “reasonable basis to believe” that it is offering the option to “a producer, or commercial user of, or merchant handling, the commodity which is the subject of the com *181 modity option transaction ... and that such producer, processor, or commercial user or handler is offered or enters into the commodity option transaction solely for purposes related to its business as such”), the “swaps” exception, see 17 C.F.R. § 35.2 (exempting certain swap agreements, as specified therein), or the “forward contract” exception, see 7 U.S.C. § 2 (1988) 1 (exempting transactions for “any sale of any cash commodity for deferred delivery or shipment”).

The first two of these contentions can be dismissed with little difficulty. As MG points out in its papers, the trade option exception was meant to be a “narrowly defined” and “very limited exception” to the general rule set forth in § 4a of the CEA, which prohibits the trading of commodity options through unregulated markets. See Policy Statement Concerning Swap Transactions, 54 Fed.Reg. 30694, 30694 (CFTC July 21, 1989) (referring to trade option exemption as “narrowly defined” exception to CEA); CFTC Interpretive Letter No. 84-7, [1982-1984 Transfer Binder Comm. Fut. L. Rep. (CCH) ¶ 22,025, at 28,595 (Feb. 22, 1984)] (referring to trade option exemption as “very limited exception” to CEA’s general ban on unregulated options trading). To qualify as a “commodity option” at all, however, an instrument must give the offeree a right, but no obligation, to make or take delivery of a physical commodity at a fixed price and within a specified time. See United States v. Bein, 728 F.2d 107, 111-12 (2d Cir.1984); CFTC v. U.S. Metals Depository Co., 468 F.Supp. 1149, 1154-55 (S.D.N.Y.1979); Characteristics Distinguishing Cash and Forward Contracts and Trade Options, 50 Fed.Reg. 39656, 39658 (CFTC Sept. 30, 1985). Although the Customers suggest that the flexie language makes them “offerees” of a “trade option”, § 2 of these contracts unambiguously places an obligation on each Customer to take delivery sometime within the five or ten year terms set by the individual instruments. The blow-out provisions of these contracts are, moreover, only triggered in the event of a price spike. Because the flexies contain an obligation in all other circumstances, they cannot be considered options at all under the law, and so cannot meet an important threshold requirement for application of the CEA’s trade option exception.

The flexies similarly fail to meet the very basic definition of a “swap” under the law, and so fail to meet the threshold requirement for application of the CEA’s swap exception. As MG correctly points out, the CFTC has defined a “swap” as “an agreement between parties to exchange a series of cash flows measured by different interest rates, exchange rates, or prices with payments calculated by reference to a principal base.” Policy Statement Concerning Swap Transactions, 54 Fed.Reg. at 30695; see also 17 C.F.R. § 35; Exemption for Certain Swap Agreements, [1992-94 Transfer Binder] Comm. Fut. L. Rep. § 25,539, at 39,592; Exemption for Certain Swap Agreement, 58 Fed.Reg. 5587, 5589 (CFTC January 22, 1993); Procter & Gamble Co. v. Bankers Trust Co., 925 F.Supp. 1270, 1275 (S.D.Ohio 1996) (“[A] swap is an agreement between two parties (‘counterparties’) to exchange cash flows over a period of time.”). By contrast, the flexies do either one of two things. Either they oblige the Customers to take delivery of petroleum at a set price in the future, in which case they function as agreements for the simple sale and delivery of commodities. Or, during a price spike, they give the Customers the right to cash out the contracts, in which case the Customers are entitled to receive a cash settlement based on a principal amount but are obliged to give MG no similar cash flow in return. In either case, although the CFTC has tended to take a rather liberal view of swaps in order to recognize “the diversity and evolving nature of swap transactions”, see Exemption for Certain Swap Agreements, 58 Fed.Reg. at 5589, 5593, it would stretch the definition of a “swap” beyond recognition to include these transactions within its purview. The flexies therefore fail to meet the basic requirement *182 for exemption under the swaps exception as well.

Whether the flexies qualify for the “forward contract” exception thus presents the critical, and ultimately much more difficult, question. As both parties acknowledge, until at least 1990, the forward contracts exception was meant to exempt from CFTC jurisdiction any transaction in which “the desire to acquire or dispose of a physical commodity [was] the underlying motivation for entering [the] contract, [but in which] delivery may be deferred for purposes of convenience or necessity.” In re Stovall, [1977-1980 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 20,941, at 23,778; see also Statutory Interpretation Concerning Forward Transactions, 55 Fed.Reg. 39188, 39190 (CFTC Sept. 25, 1990). By contrast, the “exclusion [was] unavailable to contracts of sale for commodities which [were] sold merely for speculative purposes and which [were] not predicated upon the expectation that delivery of the actual commodity by the seller to the original contracting buyer [would] occur in the future.” CFTC v. Co Petro Mktg. Group, Inc., 680 F.2d 573, 579 (9th Cir.1982). To determine whether a given contract was entered for one or the other reason, each transaction was “viewed as a whole, with a critical eye towards its underlying purpose.” Id. at 581.

Given the nature of this test, the CFTC made it quite clear that there was no exhaustive list of elements that would serve to establish the existence of a forward contract. See Policy Statement Concerning Swap Transactions, 54 Fed.Reg. at 30694-95. Rather, the “overall effect” of a transaction as well as “what the parties intended” had to be examined in most cases. See id. Certain factors did, however, commonly contribute to a favorable finding, such as: non-standardized, individually negotiated terras, capacities on the part of the buyer to take and the seller to make delivery, routine physical delivery of the underlying commodities, absence of exchange-style offset provisions granting the counterparties a right to cash out the contracts, absence of any other settlement systems or rights of assignment under the contracts themselves, and marketing or sales only to commercial entities, who regularly dealt in the commodities at issue, rather than to the general public. See, e.g., Co Petro, 680 F.2d at 578, 580. Each of these factors were deemed to lend support to the notion that the underlying purpose of a given transaction was to effect physical delivery.

The Customers argue, however, that in its 1990 Statutory Interpretation Concerning Forward Transactions, 55 Fed.Reg. 39188, the CFTC radically revised this underlying purpose test and replaced it with a more “objective” one, under which MG’s illegality defense must fail as a matter of law. Under this objective test, contracts should be considered legal forward contracts whenever they are entered into between commercial parties in connection with their businesses, and when the contracts set forth specific delivery obligations’imposing on the parties substantial economic risks of a commercial nature. (See Def.’s Mem. at 27.) The first question to address is thus whether the underlying purpose test has been replaced.

The Customers cite the 1990 Statutory Interpretation because it effectively reversed the holding of Judge Conner in Transnor (Bermuda) Ltd. v. BP North America Petroleum, 738 F.Supp. 1472 (S.D.N.Y.1990), a case which involved the legality of the so-called “15-day Brent market”, and upon which MG has partly relied in arguing for the relevance of the underlying purpose test. This case involved an unregulated and highly complex set of transactions, which were something of “a hybrid of a future contracts] and forward contracts].” Id. at 1489. Employing the traditional criteria and principles identified above, but emphasizing the routine physical delivery requirement, Judge Conner noted that there was an extremely low ratio of actual to negotiated deliveries in this market. See id. at 1490-91 (noting that contracts were “routinely settled by means other than delivery”). This ratio suggested to him that the underlying purposes of the transaction must have been “hedging, speculating and tax spinning.” Id. at 1490. Judge Conner therefore held that the unregulated Brent activity was illegal under the CEA.

*183 The CFTC ultimately disagreed with this holding. In its 1990 Statutory Interpretation, the CFTC explained that Congress had not yet provided enough guidance on the scope of the forward contracts exclusion:

in the content [sic] of today’s commercial environment, including with regard to the concept of what constitutes delivery for the purposes of the exclusion ... From 1974 and with increasing frequency, there have evolved in the commercial segments of the economy a diverse variety of transactions involving commodities .... These transactions, which are entered into between commercial counterparties in the normal commercial channels, serve the same commercial functions as did those forward contracts which were originally the subject of the section 2(a)(1) exclusion notwithstanding the fact that, in specific cases and as separately agreed to between the parties, the transactions may ultimately result in performance through the payment of cash as an alternative to actual physical transfer or delivery of the- commodity.

Statutory Interpretation Concerning Forward Transactions, 55 Fed.Reg. at 39191. The CFTC then held that the forward contract exclusion applied to transactions in the 15-day Brent market, as well as any other markets with analogous delivery mechanisms.

Although the Customers are correct to note that the 1990 Statutory Interpretation clarified that routine physical delivery under a contract is not an absolute precondition for application of the forward contract exception, the Customers overstate the CFTC’s holding when they contend that this opinion marks an abandonment of the underlying purpose test altogether. The transactions examined in the 1990 Statutory Interpretation involved commercial buyers and sellers of crude oil, who entered into sometimes lengthy “chains” of transactions rather than simple bilateral agreements. Because of the chain-like structure of this activity, counterparties in a given series would sometimes find themselves in multiple, offsetting positions with respect to one another, thus making it more convenient and less risky simply to cash out these positions and allow delivery to pass through one less layer of exchange. Still, “the market [itself] remain[ed] one based on physical trading”, and each chain normally effectuated the delivery of crude oil. Transnor, 738 F.Supp. at 1489. The CFTC noted that title and bills .of lading passed between the various members of a chain, as did “substantial risk[s] of a commercial nature”, including those of “demurrage, damage, theft or deterioration of the commodity as well as other risks associated with owning the commodity delivered.” Statutory Interpretation Concerning Forward Transactions, 55 Fed.Reg. at 39191. It was only in this specific context that the CFTC concluded that cashed-out 15-day Brent contracts ought to be considered agreements appurtenant to the more primary goal of obtaining deferred delivery of underlying commodities.

In fact, far from undermining the traditional forward contract analysis, the CFTC explicitly reiterated the proposition that to identify a forward contract, the “transaction[s] must be viewed as a whole, with a critical eye towards [their] underlying purpose.” Id. at 39190 (quoting Co Petro, 680 F.2d at 581). The CFTC also reconfirmed that there is no definitive list of elements for determining this purpose, and that “[s]uch an assessment entail[s] ... a review of the ‘overall effect’ of the transaction as well as a determination of *what the parties intended’ ” Id. Although the CFTC decided to de-empha-size the importance of routine physical delivery in discerning the purposes of the 15-day Brent contracts, the CFTC found it particularly salient, in reaching this decision, that the 15-day Brent contracts contained “no right of offset, [did] not rely on a variation margining and settlement system, and [did] not permit assignment of contractual obligations without counterparty consent.” Id. at 39189 (emphasis added); see also id. at 39192 (noting that offsets resulted from “separate, individually negotiated, new agreements, [that] there [was] no obligation or arrangement to enter into such agreements, [and that they were] not provided for by the terms of the contracts as initially entered into”). The CFTC’s decision thus indicated its expert opinion that contracts containing no rights to offset, but that are nevertheless *184 cashed out pursuant to separately negotiated agreements, should not be deemed to serve a speculative purpose just because they do not end in physical delivery. 2

The other case that the Customers cite as overturning the underlying purpose test is In re Bybee, 945 F.2d 309 (9th Cir.1991). This case is, however, consistent with the above conclusion, and so is equally unavailing to the Customers’ position. In In re Bybee, the Ninth Circuit examined a set of contracts for the delivery of precious metals that were entered into between Keith D. Bybee and A-Mark Precious Metals, Inc. Under one type of contract (the “Immediate Delivery or Sales Purchases”), Bybee routinely took delivery of the underlying commodities and paid for them up front. Under the other (the “Deferred Delivery (margin) Sales”), Bybee was given the right to buy the goods by paying an initial down payment, and was then given a two year period to pay the remaining balance. Delivery was only to be effectuated upon full payment, however, and A-Mark was to hold the goods in storage and retain a hen on them until that time. After entering into a number of these Deferred Delivery (margin) Sales, Bybee began to encounter extreme financial hardships, which ultimately forced him to settle his debt with A-Mark by selling A-Mark all of the goods that were still held in his name. Although these contracts never ended in physical delivery, Bybee’s contracts were cashed out pursuant to individually negotiated agreements, much like the 15-day Brent contracts, and Bybee never had a right to cash settle in lieu of taking delivery. See id. at 314 (noting that “there is no obligation to enter into such [offsetting] agreements, [and] they are not provided for by the terms of the [original] contracts”). When the Ninth Circuit held that the Deferred Delivery (margin) Sales should be deemed legal forward contracts, it cited the 1990 Statutory Interpretation. Thus In re Bybee seconds the proposition already established in the CFTC’s 1990 Statutory Interpretation, that when contracts for future delivery give neither party a right to cash out, but are still cash settled pursuant to independently negotiated agreements, absence of physical delivery alone should not be deemed to imply that the contracts served merely speculative purposes. The underlying purpose of a transaction is, however, still the touchstone of the forward contract analysis. See, e.g., CFTC v. Noble Metals Int’l, Inc., 67 F.3d 766, 772-73 (9th Cir.1995); CFTC v. Standard Forex, 1996 WL 435440, at 10* (E.D.N.Y. July 25, 1996) (Sifton, C.J.). 3

The Customers also present an alternative, but equally unavailing, argument for the contention that the flexies’ unambiguous language makes them legal forward contracts under the law. Namely, the Customers point out that the petroleum products specified in the flexies qualify as “cash commodities,” that section 3 of the flexies refers to a “sale” of these commodities, and that section 2 allows any deliveries under the flexies to be deferred. The Customers argue on this basis that the flexies fit squarely within CEA § 2(a)(1)(A)’s definition of a legal forward *185 contract as one for “any sale of any cash commodity for deferred shipment or delivery.” The features that the Customers point to are, however, insufficient to justify this classification. Indeed, if these features were enough, then every illegal off-exchange futures contract would fit within the exception for legal forward contracts because an illegal off-exchange futures contract is itself defined as a “contract of a sale of a commodity for future delivery.” 7 U.S.C. § 6(a)(1). The CFTC has thus explained in In re Stovall:

[W]ere we unable to look beyond the terms of an instrument drafted in clear and unambiguous language to determine the true intent of the parties to a contract, it might be impossible for us to distinguish between a commodity futures contract and those falling within the exclusionary language of Section 2(a)(1). Indeed, the language in futures contracts presently traded on markets designated by the Commission does on its face appear to fall within the Section 2(a)(1) exclusion. Surely, Congress would not have charged us with the responsibility of discriminating between two classes of transactions yet left us without the ability to do so.

[1979-1980 Transfer Binder] Comm. Fut. L. Rep. (CCH) at 23,782-83 (emphasis added). Thus, to see if a contract qualifies as a legal forward contract, courts must examine its underlying purposes, even when the contract’s provisions seem to qualify it for an exemption under the language of § 2(a)(1).

Because the Customers have failed to establish either of the arguments necessary to undermine the underlying purpose test and show that the fiexies are legal forward contracts, and because the Customers have also failed to establish that the fiexies are either exempt swaps or trade options, this Court denies the Customers’ motion for summary judgment on the issue of illegality.

b. MG’s Motion for Summary Judgment on the Illegality Defense

MG argues that when applied to the facts produced thus far in discovery, the underlying purpose test entitles MG, rather than the Customers, to summary judgment on the defense of illegality. If the fiexies were viewed in isolation, this Court might be inclined to grant MG’s motion against most of the Customers in this case. This is because the record contains overwhelming and nearly uncontradicted evidence that the flex-ies were never thought of as ways independently to effectuate physical deliveries. Although the right to cash out the fiexies was triggered only during price spikes, the record contains ample evidence, for example, that the chance of a price spike occurring within the terms of the fiexies was objectively very high, 4 and price spikes sufficient to trigger the blow-out provisions did in fact occur in every case. Moreover, when these spikes occurred in 1996, every single Customer asked to cash out the fiexies, and no delivery has ever occurred under a flexie. Unlike in the 15-day Brent market and In re Bybee, however, all of the relevant cash settlements were requested pursuant to entitlements laid out in the blow-out provisions of the original contracts. Because the rights to cash out derived from the original contracts, rather than from individually negotiated agreements, this overwhelming absence of physical deliver