Straits Fin. LLC v. Ten Sleep Cattle Co.

• Decision Date: 13 August 2018
• Docket Number: 17-2100,No. 16-3860,Nos. 16-3903,16-3967,16-3860,s. 16-3903
• Citation: 900 F.3d 359
• Parties: STRAITS FINANCIAL LLC, Plaintiff-Appellant, v. TEN SLEEP CATTLE COMPANY and Richard Carter, Defendants-Appellees. Ten Sleep Cattle Company and Richard Carter, Counter-Plaintiffs/Third-Party Plaintiffs-Appellees/ Cross-Appellants, v. Straits Financial LLC, Counter-Defendant-Appellant/Cross-Appellee, and Jason Perkins, Third-Party Defendant-Appellant/Cross-Appellee
• Court: U.S. Court of Appeals — Seventh Circuit

900 F.3d 359

STRAITS FINANCIAL LLC, Plaintiff-Appellant,

v.TEN SLEEP CATTLE COMPANY and Richard Carter, Defendants-Appellees.

Ten Sleep Cattle Company and Richard Carter, Counter-Plaintiffs/Third-Party Plaintiffs-Appellees/ Cross-Appellants,

v.Straits Financial LLC, Counter-Defendant-Appellant/Cross-Appellee,andJason Perkins, Third-Party Defendant-Appellant/Cross-Appellee

No. 16-3860

Nos. 16-3903

16-3967

17-2100

United States Court of Appeals, Seventh Circuit.

Argued December 5, 2017

Decided August 13, 2018

Rehearing and Suggestion for Rehearing En Banc Denied September 12, 2018

Howard J. Stein, Attorney, LAW OFFICE OF HOWARD J. STEIN, Chicago, IL, for Plaintiff-Appellant STRAITS FINANCIAL LLC.

Nancy L. Hendrickson, Attorney, KAUFMAN DOLOWICH & VOLUCK LLP, Chicago, IL, for Defendants-Appellees.

Nancy L. Hendrickson, Attorney, KAUFMAN DOLOWICH & VOLUCK LLP, Chicago, IL, for Plaintiffs-Appellees TEN SLEEP CATTLE CO., RICHARD CARTER.

James A. McGurk, Attorney, LAW OFFICES OF JAMES A. MCGURK P.C., Chicago, IL, for Defendant-Appellant JASON PERKINS.

Howard J. Stein, Attorney, LAW OFFICE OF HOWARD J. STEIN, Chicago, IL, for Defendant-Appellee STRAITS FINANCIAL LLC.

Before Wood, Chief Judge, and Rovner and Hamilton, Circuit Judges.

Hamilton, Circuit Judge.

Atop the Chicago Board of Trade Building in downtown Chicago stands Ceres, the Roman goddess of agriculture and grain. She faces north, but her reach extends at least as far west as Ten Sleep, Wyoming, to the family cattle ranch of defendant-appellee Richard Carter. In 2010, through a broker in Scottsbluff, Nebraska, Carter opened a commodities futures and options trading account with a Chicago-based financial institution. Carter intended to use the account to secure the prices his ranch—defendant-appellee Ten Sleep Cattle Company—would receive for its cattle using various financial instruments.¹

At the same broker's behest, Carter opened another account in 2011 with plaintiff-appellant Straits Financial to speculate in other investment categories. After Carter and the broker split a tidy profit of $300,000, Carter instructed the broker to close out the account in March 2012. The broker did not follow those instructions. Instead, he continued speculating on U.S. Treasury Bond futures, losing approximately $2 million over the course of the next three months before his unauthorized trading was stopped. Straits Financial then liquidated Carter's livestock commodities holdings to satisfy most of that $2 million shortfall, and turned to the courts for the remaining deficiency. After a bench trial, Carter prevailed on most points and established his ranch's right to the seized funds and an award of attorney fees. However, the district court significantly reduced the amount of damages, finding that Carter had failed to mitigate his ranch's damages by not closely reading account statements and trading confirmations during his broker's trading spree.

Straits Financial and Perkins have appealed, and Carter and Ten Sleep have cross-appealed. We must decide three principal issues: whether the district court correctly interpreted and applied the contracts governing Ten Sleep's relationship with Straits Financial; whether the award of attorney fees was proper; and whether Ten Sleep's damages should have been reduced under Illinois law. We affirm the district court's judgment on the first two questions, but we reverse and remand in part for recalculation of Ten Sleep's damages.

I. Factual Background and Procedural History

A. The 33 Account and 35 Account

As our western colleagues know, "cattle ranching is a hazardous business." Wootten v. Wootten , 159 F.2d 567, 574 (10th Cir. 1947). Unexpected fluctuations in the price of cattle can wipe out a family-run cattle operation. Covering the expenses of feeding, trucking, and pasturing cattle—plus all the other costs of running a ranch—is a perennial challenge. Ten Sleep's annual gross revenues in 2010 and 2011 were between $24 and $26 million, but the profit margins even in good years were less than 5%. To protect his business, in March 2010, Carter opened a commodity futures and options trading account with a futures commission merchant, R.J. O'Brien (RJO for short). Carter intended to use this account to protect his profit by locking in the price Ten Sleep would receive for its cattle later in the year. He did so by using options and other risk-reducing investment positions. In other words, Carter initially sought to "hedge" cattle. See generally Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran , 456 U.S. 353, 357–60, 102 S.Ct. 1825, 72 L.Ed.2d 182 (1982) (describing commodities trading and hedging).

Carter set up this hedging account through his broker, Jason Perkins, who at the time was affiliated with RJO. This account, which the parties refer to as the "33 Account" for the last two digits of the account number, was established by an account agreement with RJO. The RJO agreement included a personal guarantee that required Carter to assume any debts owed by Ten Sleep to RJO. Specifically, that guarantee pledged "full and prompt payment to RJO of all sums owed to RJO by Customer pursuant to the [foregoing] Account Agreement, whether such sums are now existing or are hereafter created." In a section titled "DEBIT BALANCES," the agreement also allowed RJO to use any account balances or deposits to offset losses and expenses, and empowered RJO to pursue Ten Sleep for any remaining deficiencies. RJO also reserved the right to assign the account to another registered futures commission merchant. The RJO agreement did not include a mandatory arbitration clause, though it required Ten Sleep to dispute transactions within one year of the transaction date either through an administrative proceeding at the Commodity Futures Trading Commission or through a lawsuit or arbitration in the Northern District of Illinois. The RJO agreement provided that Illinois law would govern. Through the RJO agreement, Ten Sleep consented to the jurisdiction of the state and federal courts and arbitration forums in the Northern District of Illinois.

The 33 Account existed solely to protect against losses in Ten Sleep's cattle business and was used in accordance with that purpose. After about a year, in April 2011 Perkins moved his brokerage from RJO to plaintiff-appellant Straits Financial, where he became an employee and the manager of a branch office. As part of the "bulk transfer process" of moving accounts from RJO to Straits Financial, all of Perkins's customers, including Ten Sleep, received a "negative consent letter." The letter advised them that their accounts would be transferred unless they objected. See 17 C.F.R. § 1.65(a)(2) (2011) (requiring notice and "a reasonable opportunity to object" to such transfers). By a separate assignment agreement with RJO, which Carter did not see, Straits Financial took control of the 33 Account and its associated personal guarantee. Ten Sleep did not sign any transfer agreement with Straits Financial, and Carter did not give any explicit personal guarantees directly to Straits Financial at any time.

A few months later, in May 2011, Perkins approached Carter with a new idea: opening a speculative trading account with Straits Financial where Perkins would have discretion to invest Carter's money without prior authorization. Perkins assured Carter that he would simply "nibble around the edges" using this freedom, and that there would be "no margin calls," i.e., no demands for Carter to put new capital into the account in light of Perkins's speculative trades. Dkt. 83 at 3 (Judge Zagel's findings of fact); see also ADM Investor Services, Inc. v. Ramsay , 558 F.Supp.2d 855, 857 n.3 (N.D. Ill. 2008) (explaining "margin call" in context of futures trading) (citation omitted). In this conversation, Perkins proposed that he and Carter share the profits equally, and Carter agreed.²

No written authorizations or contracts documented this agreement, aside from Carter's signature on Straits Financial's one-page Related Account Authorization form, on which Perkins indicated that the new account was merely for "Record Keeping Purposes." The authorization form attempted to incorporate by reference "existing account documentation including but not limited to agreements ... maintained and existing on file with Straits," and all existing "terms and conditions." The authorization form did not, however, specifically identify any of the documentation, terms, or conditions that would carry over to the new account. Within a few days, Perkins began trading in what the parties call the "35 Account."

B. "We Kinda Have a Problem"

One might guess what happened next. After sustaining some initial setbacks from trading various commodities futures contracts, in early 2012 Perkins turned his speculative attention to Treasury Bond futures, and accumulated several hundred thousand dollars in profits. By mid-March, the net profit from Perkins's Treasury Bond trading in the 35 Account reached $300,000. On March 16 Perkins called Carter to share the good news. Carter instructed Perkins to "send [the $300,000] to me," and "I will send you your half back," which Carter later did by mailing Perkins a $150,000 check. Carter then told his broker, "close it out, don't do anything more ... Shut it down and don't do anything more."³

But Perkins did more. On twenty different days between March 16 and June 4, Perkins executed trades in the 35 Account, wagering hundreds of thousands of dollars on Treasury Bond futures even though the two accounts were nominally for livestock hedging and "Record Keeping Purposes." By mid-June, and without Carter's actual knowledge of them, the losses in the 35 Account exceeded $2 million. Carter did not realize there was a problem in his Straits Financial accounts until he tried to cash out a sizable position in the 33 Account and received no response. Carter finally got Perkins on the phone around June 20. Perkins admitted: "we kinda have a...