I. GENERAL CONSIDERATION.

Section Constitutional. - This section is in furtherance of the declared public policy of North Carolina, and is constitutional and valid. Garseed v. Sternberger, 135 N.C. 501, 47 S.E. 603 (1904); State v. McGinnis, 138 N.C. 724, 51 S.E. 50 (1905); State v. Clayton, 138 N.C. 732, 60 S.E. 866 (1905); Rankin v. Mitchem, 141 N.C. 277, 53 S.E. 854 (1906); Randolph v. Heath, 171 N.C. 383, 88 S.E. 731 (1916).

The legislature can, in the exercise of the police power, prescribe when and under what circumstances and as to what offenses a certain act shall be prima facie evidence. Therefore, a provision that the purchase of commodities upon margin under certain circumstances shall raise a prima facie case that such purchases were void, and other circumstances shall not constitute such prima facie evidence, is not a discrimination forbidden by U.S. Const., Amend. 14. State v. McGinnis, 138 N.C. 724, 51 S.E. 50 (1905), decided under former § 2145 of the Consolidated Statutes.

Not Contrary to Federal Constitution. - When, in an action pending in the courts of this State to recover on a judgment in a sister state, the legislature amended this section by adding thereto: "nor shall the courts of this State have any jurisdiction to entertain any suit or action brought upon a judgment based upon any such contract," there can be no valid objection to such legislation on the ground that it impairs the obligation of contracts, and it would seem that no such objection can be made under U.S. Const., Art. IV, § 1 and 2, "the full faith and credit clause," if it is admitted or clearly appears that the judgment sued on was rendered on a transaction expressly forbidden by the statute on gaming, and that the question was not raised, investigated, or determined in the courts of the state in which the judgment was originally rendered. Mottu v. Davis, 151 N.C. 237, 65 S.E. 969 (1909).

The North Carolina statutes prohibiting gambling in futures and denying jurisdiction of the courts to suits on judgments based upon such contracts have been upheld as constituting an exception to the application of the full faith and credit clause of the Constitution, on the ground that the State had not provided a court with jurisdiction to entertain suit on such a judgment though properly rendered in another state. Lockman v. Lockman, 220 N.C. 95, 16 S.E.2d 670 (1941).

Section within Police Power. - This section, forbidding the business of running a "bucket shop," is clearly within the police power of the State. State v. McGinnis, 138 N.C. 724, 51 S.E. 50 (1905).

History of Section. - The act defining and declaring contracts in "futures" unlawful was passed in 1889, Chapter 221. In 1905, Chapter 538, the legislature enacted a law to suppress what is known, in popular phrase, as "bucket shops," and, having provided for this in G.S. 1 and 2, the statute contains several additional sections relating to the statute of 1889, all of them having reference to the mode or quantum of proof which should be required in enforcement of that act. The law of 1905 then, in its closing section, provided: "This act shall not be construed so as to apply to any person, firm, or corporation, etc." This is the first time these words appear in legislation of the State on this subject, and, so far as they had reference to the law of 1889, it is clear the legislature, in the original statutes, only intended that they should affect questions of proof. See Rodgers, McCabe & Co. v. Bell, 156 N.C. 378, 72 S.E. 817 (1911).

Intent of last sentence of present first paragraph. - The last sentence of the present first paragraph was inserted "unnecessarily and out of abundance of caution" - and it does not confer any exclusive right or privilege upon manufacturers or wholesale merchants; nor does it authorize them to engage in any business prohibited by the section. It simply provides that the courts shall not construe the section to have the effect of preventing them from buying and selling for future delivery the necessary commodities required in their ordinary business. See State v. McGinnis, 138 N.C. 724, 51 S.E. 50 (1905); State v. Clayton, 138 N.C. 732, 50 S.E. 866 (1905); Rodgers, McCabe & Co. v. Bell, 156 N.C. 378, 72 S.E. 817 (1911).

The 1931 act amended the "Bucket Shop Act" of 1889, now this section, so as to exempt contracts with respect to purchase or sale where they are made in accordance with the regulations of any exchange, and where the rules of the exchange permit either party to require delivery. It was intended to remove the ban of illegality from transactions on legitimate exchanges, as distinguished from "an establishment nominally for the transaction of a stock exchange business, or business of a similar character, but really for the registration of lots or wagers, usually for small amounts, on the rise or fall of stock, grain, etc., there being no transfer or delivery of the stocks or things dealt with." Gatewood v. North Carolina, 203 U.S. 531, 27 S. Ct. 167, 51 L. Ed. 305 (1906).

This section clearly defines what is an illegal contract where there is no real sale, but merely an agreement for an adjustment upon the basis of differences in the prices of the commodity at the time fixed. Orvis Bros. & Co. v. Holt-Morgan Mills, 173 N.C. 231, 91 S.E. 948 (1917).

Example of "Margin". - A payment made on account by a customer to a stockbroker, under an agreement between the customer and the stockbroker in which the stockbroker agreed either to sell or to buy from the customer a certain number of shares of stock, but under which, in fact, no delivery or transfer of shares was contemplated, is known in stockbroker's parlance as a "margin." West v. Satterfield, 190 N.C. 89, 129 S.E. 177 (1925); McClain v. Fleshman, 106 F. 880 (3d Cir. Pa. 1901), decided under former § 2145 of the Consolidated Statutes.

"Bucket Shop" Defined. - A "bucket shop" has been defined as "an establishment nominally for the transaction of a stock exchange business, or business of a similar character, but really for the registration of lots or wagers, usually for small amounts, on the rise or fall of stock, grain, etc., there being no transfer or delivery of the stocks or things dealt with." Gatewood v. North Carolina, 203 U.S. 531, 27 S. Ct. 167, 51 L. Ed. 305 (1906).

For other definitions, see State v. McGinnis, 138 N.C. 724, 51 S.E. 50 (1905).

Test of Validity under Section. - The test of the validity of a contract for "futures" which this section requires is the "intention not to actually deliver" the articles bought or sold for future delivery. No matter how explicit the words in any contract which may require a delivery, if in fact there is no intention to deliver, but the real understanding is that on the stipulated date the losing party shall pay to the other the difference between the market price and the contract price, this is a gambling contract. State v. Clayton, 138 N.C. 732, 50 S.E. 866 (1905); Rodgers, McCabe & Co. v. Bell, 156 N.C. 378, 72 S.E. 817 (1911).

When there is no real transaction, no real contract for purchase or sale, but only a wager upon the rise or fall of the price of stock, or an article of merchandise in the exchange or market, one party agreeing to pay, if there is a rise, and the other party agreeing to pay if there is a fall in price, the agreement is a pure wager. No business is done - nothing is bought or sold or contracted for, there is only a bet. Orvis Bros. & Co. v. Holt-Morgan Mills, 173 N.C. 231, 91 S.E. 948 (1917).

Purchase and Sale on Margin. - This section does not render void a contract for the purchase and sale of stocks on margin when actual delivery of the stocks is made to the purchaser or to his agent, and the stocks are paid for in whole or in part. Cody v. Hovey, 216 N.C. 391, 5 S.E.2d 165 (1939).

Intention of Parties. - The true test of validity of a contract for future delivery is whether it can be settled only in money and in no other way, or whether the party selling can tender and compel acceptance of the particular commodity sold or the party buying can compel the delivery of the commodity purchased. The essential inquiry in every case is as to the necessary effect of the contract and the real intention of the parties. Williams v. Carr, 80 N.C. 295 (1879); State v. McGinnis, 138 N.C. 724, 51 S.E. 50 (1905); State v. Clayton, 138 N.C. 732, 50 S.E. 866 (1905); West v. Satterfield, 190 N.C. 89, 129 S.E. 177 (1925).

The contract, by its terms, not disclosing any gambling element, the matter is to be settled by ascertaining the true underlying purpose of the parties. Was it in the intention of both parties that the cotton should not be delivered, and did they conceal in the deceptive terms of a fair and lawful contract, a gambling agreement, by which they contemplated no real transaction as to the article contracted to be delivered? Rankin v. Mitchem, 141 N.C. 277, 53 S.E. 854 (1906); Burns v. Tomlinson, 147 N.C. 645, 61 S.E. 614 (1908); G.G. Edgerton & Son v. J.T. Edgerton & Bros., 153 N.C. 167, 69 S.E. 53 (1910); L. Harvey & Son v. Pettaway, 156 N.C. 375, 72 S.E. 364 (1911); Rodgers, McCabe & Co. v. Bell, 156 N.C. 378, 72 S.E. 817 (1911); Hold v. Wellons, 163 N.C. 124, 79 S.E. 450 (1913).

The intent of the parties that the merchandise contracted for should not be actually delivered is the cardinal element of a "futures" contract made illegal by this section and the courts will disregard the form and ascertain whether the intent of the parties was to speculate in the rise and fall of the price of the commodity. Fenner v. Tucker, 213 N.C. 419, 196 S.E. 357 (1938).

Both Parties Must Have Intent. - It was never held that when an innocent party had made a contract valid in its terms, his rights acquired thereunder should be denied him by reason of an undisclosed purpose or intent of the other. To avoid the contract the vitiating purpose or understanding must be shared in by both. Rodgers, McCabe & Co. v. Bell, 156 N.C. 378, 72 S.E. 817 (1911).

Parties to Contract. - The owner of a draft which he knows to have been given in the unlawful purchase of cotton futures, or in maintaining or purchasing margins in contracts of that character, is a party to the prohibited contract, the consideration is illegal and he cannot recover from the payee in his action on the draft. Burrus v. Witcover, 158 N.C. 384, 74 S.E. 11 (1912).

Unauthorized Act of Agent. - A bona fide wholesale dealer who sues upon a contract for the future delivery of cotton, which is resisted on the ground that the contract was a wagering one and void under the provisions of this section, is bound by the acts and statements of his agent in negotiating and closing the trade, to the effect that actual delivery was not contemplated or required; and the plaintiff may not recover on the contract merely because he was a bona fide wholesale dealer in cotton and only authorized his agent to make a contract for actual delivery, if the agent at the time entered into a contract with the vendor which was condemned by the statute as being a wagering one. Alex. Sprunt & Sons v. May, 156 N.C. 388, 72 S.E. 821 (1911).

Agent's Right to Recover. - An agent for a principal to a contract made in violation of this section, as to "futures," cannot recover for any loss he may have sustained on account thereof, as such act of agency would be in violation of G.S. 16-4, making it a misdemeanor. Burns v. Tomlinson, 147 N.C. 645, 61 S.E. 614 (1908).

Effect of Contract Made in Foreign State. - An action upon a wagering or "future contract" in cotton cannot be maintained in this State, though entered into in another state where it is lawful. Burrus v. Witcover, 158 N.C. 384, 74 S.E. 11 (1912).

Action upon judgment obtained in foreign state. See Cody v. Hovey, 217 N.C. 407, 8 S.E.2d 479 (1940).

Subsequent Promise to Repay Is Void. - A subsequent promise made by one of the contracting parties to the other to repay him for loss arising from a contract for "futures" is void. Burns v. Tomlinson, 147 N.C. 645, 61 S.E. 614 (1908).

Contracts Held Void. - Where the defendant has induced the plaintiff to purchase certain shares of stock, through himself, from his own broker, upon margin, the broker to carry the stock upon its hypothecation with him as collateral, and thereafter the defendant has his broker, unknown to the plaintiff, to sell the stock and place the proceeds to his own account, and uses the same and other moneys upon margin advanced from time to time by the plaintiff upon his representation that the price of this stock had decreased, it was held that the plaintiff may recover of the defendant in his action the moneys the defendant had thus converted to his own use; and this section, relating to gambling, etc., is not available to the defendant as a defense. Gladstone v. Swain, 187 N.C. 712, 122 S.E. 755 (1924).

A note given for margins upon an illegal contract for cotton futures, without intention of delivery of the cotton, cannot be collected by suit in the courts of North Carolina and the promisor's repeated promise to pay it cannot impart any validity to it. Garseed v. Sternberger, 135 N.C. 501, 47 S.E. 603 (1904); Burns v. Tomlinson, 147 N.C. 645, 61 S.E. 614 (1908); Burrus v. Witcover, 158 N.C. 384, 74 S.E. 11, 39 L.R.A. (n.s.) 1005 (1912); Cobb Bros. & Co. v. Guthrie, 160 N.C. 313, 76 S.E. 81 (1912); Orvis Bros. & Co. v. Holt-Morgan Mills, 173 N.C. 231, 91 S.E. 948 (1917).

Where there is evidence that contracts set up by certain defendants in an action by the receiver of a brokerage business were founded upon speculation and based upon "margins," and that no actual delivery of the stock was intended by the parties, the evidence is sufficient to support a finding that the contracts were void under this section and the finding is as conclusive as the verdict of a jury, and the judgment that such contracts were absolutely void will be sustained. Martin v. Bush, 199 N.C. 93, 154 S.E. 43 (1930).

A contract for "cotton futures" in which no actual delivery is intended or contemplated is void and no action may be maintained thereon. Bodie v. Horn, 211 N.C. 397, 190 S.E. 236 (1937).

Applied in Marx v. Maddrey, 94 F. Supp. 784 (E.D.N.C. 1951).

Cited in Meyer v. Fenner, 196 N.C. 476, 146 S.E. 82 (1929); Royster v. Hancock, 235 N.C. 110, 69 S.E.2d 29 (1952); Bache Halsey Stuart, Inc. v. Hunsucker, 38 N.C. App. 414, 248 S.E.2d 561 (1978).

II. PRACTICE AND PROCEDURE.

Burden of Proof. - Where in an action by an assignee and trustee under G.S. 23-1, et seq., it is alleged that one of the defendants was a partner in the business of the assignor and liable for the debts of the firm, and the other defendants admit this allegation and set up and seek to recover of the plaintiff and the alleged partner on contract with the assignor, the alleged partner is a defendant in the action on the contracts and her answer setting up the defense that the contracts were void under this section, as gambling contracts, places the burden on the other defendants to prove that the contracts were lawful. Martin v. Bush, 199 N.C. 93, 154 S.E. 43 (1930).

When the defendant pleads in a verified answer that a contract, the subject of suit, for buying and selling cotton was void for being one for "futures," the burden of proof is upon the plaintiff to show that it was a lawful one, i.e., that actual delivery was intended by the parties, and not merely that either had the privilege of calling therefor. Burns v. Tomlinson, 147 N.C. 645, 61 S.E. 614 (1908), decided under former § 2146 of the Consolidated Statutes.

Burden Not upon Administrator. - Where an administrator paid certain notes and it was later alleged by the legatees that the notes were given for a gambling contract which should not have been paid, the burden of proving that the notes were given for a valid contract was not upon the administrator. Overman v. Lanier, 157 N.C. 544, 73 S.E. 192 (1911), decided under former § 2146 of the Consolidated Statutes.

Parol Evidence. - The section, rendering void and unenforceable a contract for the sale of futures upon margin covered by the purchaser, that does not contemplate the delivery of the thing bargained for, but only a payment to be made for the loss incurred or a profit to be received in accordance with the fall or rise of the market, looks to the substance of the contract and not to its form, and parol evidence is competent to show the intention of the parties entering therein. West v. Satterfield, 190 N.C. 89, 129 S.E. 177 (1925).

Evidence Sufficient. - The purchaser makes out a prima facie case upon evidence that the contract was founded upon a gambling or wagering consideration in violation of this section. West v. Satterfield, 190 N.C. 89, 129 S.E. 177 (1925), decided under former § 2145 of the Consolidated Statutes.

Where the plaintiff himself testified that he did not buy certain cotton in the ordinary course of his business as a cotton manufacturer for use in his mill, this was prima facie a "future contract." Burns v. Tomlinson, 147 N.C. 634, 61 S.E. 615 (1908), decided under former § 2145 of the Consolidated Statutes.

When Jury Question Presented. - Where the contract is not a gambling one on its face the underlying purpose and intent of the parties should be left to the jury. Harvey v. Pettaway, 156 N.C. 375, 72 S.E. 364 (1911).

Where there was evidence offered by the plaintiffs tending to show that they were wholesale dealers in cotton as a commodity, and that they purchased certain cotton as a commodity and sold it to manufacturers and exporters, and dealt in actual spot cotton and were in no wise dealers in futures, they were entitled to have this issue submitted to a jury. Eure v. Sabiston, 195 F. 721 (4th Cir. 1912).

Upon conflicting evidence as to whether or not the contract is a gambling contract, it becomes a question for the jury under proper instructions from the court. West v. Satterfield, 190 N.C. 89, 129 S.E. 177 (1925), decided under former § 2146 of the Consolidated Statutes.

Judgment by Default Void. - A judgment rendered by default of an answer upon notes regular and valid upon their face, but growing out of transactions in cotton futures made void by this section which also declares that actions thereon may not be maintained in the courts of this State, will be set aside as utterly void, irrespective of whether it was obtained through excusable neglect, etc. Randolph v. Heath, 171 N.C. 383, 88 S.E. 731 (1916).