Elsasser v. DV Trading, LLC

• Decision Date: 16 March 2020
• Docket Number: Case No. 17-cv-04825
• Citation: 444 F.Supp.3d 916
• Parties: Brandon ELSASSER, Seth Rubin, and Collins Brown, Plaintiffs, v. DV TRADING, LLC, Defendant.
• Court: U.S. District Court — Northern District of Illinois

444 F.Supp.3d 916

Brandon ELSASSER, Seth Rubin, and Collins Brown, Plaintiffs,

v.DV TRADING, LLC, Defendant.

Case No. 17-cv-04825

United States District Court, N.D. Illinois, Eastern Division.

Signed March 16, 2020

Renato T. Mariotti, Holly Hannah Campbell, Thompson Coburn LLP, Jacob L. Kahn, Riley Safer Holmes & Cancila LLP, Chicago, IL, for Plaintiffs.

Seth Aaron Stern, Funkhouser Vegosen Liebman & Dunn Ltd., Chicago, IL, for Defendant.

MEMORANDUM OPINION AND ORDER

Joan B. Gottschall, United States District Judge

In 2016, the Commodity Futures Trading Commission ("CFTC") assessed a $5 million monetary penalty ("the penalty") against DV Trading, LLC ("DV"), to settle allegations that its predecessors' traders engaged in prohibited wash trading of Eurodollar futures contracts between 2013–15.¹ See CFTC Order 2–5, 6–7, ECF No. 46-1, Ex. B (describing violations; 7 U.S.C. § 6C(a) ; 17 C.F.R. § 1.38(a) ). Plaintiffs Brandon Elsasser, Seth Rubin, and Collins Brown traded futures for DV until August 2016. They brought this suit in their individual capacities seeking damages and a judgment declaring that they have no obligation to reimburse DV for any portion of the penalty. DV moves to dismiss three counts of the complaint for lack of standing and, alternatively, to compel DV to arbitrate any remaining claims and to stay any nonarbitrable claims. The motion requires the court to delve into the relationships among DV, each plaintiff's respective trading company, and DV's holding company, RCG Holdings, LLC ("RCG"). Each plaintiff incorporated a separate S-corporation ("trading company") when he began trading with DV.

I. Partial Procedural History

Plaintiffs' complaint, ECF No. 1, has four counts. In Count I, plaintiffs seek a declaratory judgment that DV may not obtain contribution or indemnification from plaintiffs for fines imposed on DV by the CFTC. Counts II and III arise under the Commodity Exchange Act ("CEA"), 7 U.S.C. § 25. Both counts seek damages allegedly caused by DV's unlawful wash trading activities (Count II) and alleged fraudulent activities (Count III). Count IV alleges that DV retaliated against plaintiffs for engaging in protected activity in violation of the CEA's whistleblower protections, 7 U.S.C. § 26.

Not counting notices of supplemental authority, the present motion marks the third round of briefing on issues similar to those now before the court. The first came after DV received the complaint. DV moved under §§ 3 and 4 of the Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 1 – 16, to compel plaintiffs to arbitration under the terms of RCG's operating agreement ("the operating agreement"). ECF No. 9. The court found that Count I likely fell within the scope of the operating agreement's arbitration clause and that the CEA, 7 U.S.C. § 26(n), made the whistleblower claim in Count IV nonarbitrable. Elsasser v. DV Trading, LLC , order at 1–2, 2018 WL 3647110 (N.D. Ill. July 31, 2018) (ECF No. 16). The parties were given an opportunity to submit supplemental briefing because the record showed that plaintiffs had raised an important argument in related arbitration proceedings, namely that they were not bound by the operating agreement because they did not sign it in their individual capacities.² Id. (citing Ruling on Respondents' Rule 11(b) Mot. at 6, ECF No. 15).

After receiving supplemental briefing, the court denied the motion to compel arbitration without prejudice in an opinion and order dated September 25, 2018. 2018 WL 4694364 (N.D. Ill. Sept. 25, 2018), ECF No. 27. Each plaintiff produced an agreement between his individual trading company and RCG to be bound by RCG's operating agreement, which contains the arbitration clause at issue. Id. at *2. See Assignments of Interest, ECF No. 24-1, Ex. B. DV argued in the supplemental briefing (1) that the individual plaintiffs lacked standing because the claims asserted in the complaint belong to their trading companies; and (2) that the operating agreement's arbitration clause binds the plaintiffs because they "effectively pierced their own corporate veil by attempting to bring individual claims here." Id. (quoting Def.'s 2d Supp. Mem. 4, ECF No. 23).

The opinion and order entered September 25, 2018, resolved several issues. First, "If the plaintiffs are bound by the arbitration clause, Counts I, II and III must be arbitrated." Id. at *2. The court also rejected plaintiffs' argument that their claims are nonarbitrable because they severed their relationship with DV before they filed this suit. Id. ("The law is.... clear that an arbitration clause covering contractual disputes applies even when the parties' relationship which gave rise to the arbitration agreement has been terminated.") Id. (citing Sweet Dreams Unlimited, Inc. v. Dial-A-Mattress Int'l , 1 F.3d 639, 642 (7th Cir. 1993) ). Finally, the opinion resolved the standing argument raised in the supplemental briefing. The court ruled, "True or false, the allegations of the complaint assert that plaintiffs individually were injured and thus, at least based on the allegations of the complaint, have standing." Id. at *3 (noting that DV has not filed a motion to dismiss the complaint for lack of standing).

The court also explained that DV bore the burden of proof on its claims that the trading companies' corporate veils should be pierced. Elsasser , 2018 WL 4694364 at *1 (citing Judson Atkinson Candies, Inc. v. Latini-Hohberger Dhimantec , 529 F.3d 371, 379 (7th Cir. 2008) ). DV did not carry its burden because its arguments were neither "well-developed.... [nor] supported by evidence)."³ Id. In denying the motion, the court explained that additional briefing or discovery might lead it to grant the motion if the court were persuaded that "(1) despite the clear allegations of the complaint, the individual plaintiffs lack standing to prosecute this suit and/or (2) even though the individual plaintiffs were not signatories to the operating agreement, they are bound by it pursuant to one of the exceptions, such as veil piercing, that under Illinois law binds non-signatories to an arbitration clause." Id. at *3.

Following the September 25, 2018, ruling, the court granted DV's request for permission to conduct limited discovery on standing, estoppel, and corporate veil piercing. Minute entry, Oct. 10, 2018, ECF No. 28. After limited discovery closed, DV filed the pending motion and accompanying exhibits. DV contends that plaintiffs lack standing to bring Counts II–IV and that the court should relinquish supplemental jurisdiction over the declaratory judgment claim in Count I. Alternatively, DV seeks to compel plaintiffs to arbitrate Counts I–III under theories of estoppel and veil piercing.

II. Motion to Dismiss

DV maintains that discovery has revealed that the plaintiffs lack Article III standing to bring the CEA claims in Counts II–IV. U.S. Const. Art. III § 2. Standing must be considered before reaching defendant's motion to compel because the FAA "bestows no federal jurisdiction but rather requires for access to a federal forum an independent jurisdictional basis over the parties' dispute." Vaden v. Discover Bank , 556 U.S. 49, 59, 129 S.Ct. 1262, 173 L.Ed.2d 206 (2009) (quoting Hall Street Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576, 581–82, 128 S.Ct. 1396, 170 L.Ed.2d 254 (2008) ) (brackets omitted). Standing must therefore be established before proceeding to the merits of DV's motion to compel or stay under §§ 3 and 4 of the FAA. See Kawasaki Heavy Indus., Ltd. v. Bombardier Recreational Prods., Inc. , 660 F.3d 988, 999 (7th Cir. 2011) ; Pa. Chiropractic Ass'n v. Blue Cross Blue Shield Ass'n , 713 F. Supp. 2d 734, 743–45 (N.D. Ill. 2010).

A. Standing Principles

To establish Article III standing, "... the plaintiff must allege an injury in fact that is traceable to the defendant's conduct and redressable by a favorable judicial decision." Casillas v. Madison Ave. Assocs., Inc. , 926 F.3d 329, 333 (7th Cir. 2019) (citing Lujan v. Defenders of Wildlife , 504 U.S. 555, 560–61, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992) ). The complaint must contain enough factual material "to plausibly suggest" each element of standing. Silha v. ACT, Inc. , 807 F.3d 169, 174 (7th Cir. 2015). The Supreme Court has explained that these three requirements comprise "the irreducible constitutional minimum of standing." Lujan , 504 U.S. at 560, 112 S.Ct. 2130 (citing Allen v. Wright , 468 U.S. 737, 751, 104 S.Ct. 3315, 82 L.Ed.2d 556 (1984) ) (other citation omitted).

In the instant motion, DV contends that evidence produced during limited discovery proves that plaintiffs lack standing. Mem. Supp. Mot. to Dismiss 5–7, ECF No. 40. Because DV raises a factual challenge to subject matter jurisdiction (as contrasted with a facial challenge to the complaint), this court "may properly look beyond the jurisdictional allegations of the complaint and view whatever evidence has been submitted on the issue to determine whether in fact subject matter jurisdiction exists." Apex Digital, Inc. v. Sears, Roebuck & Co. , 572 F.3d 440, 444 (7th Cir. 2009) ; see also Lujan , 504 U.S. at 561, 112 S.Ct. 2130 (explaining that the party invoking a federal court's jurisdiction must establish standing "with the manner and degree of evidence required at the successive stages of the litigation" and cannot "rest on" the complaint's "mere allegations" at summary judgment).

The third-party standing rule frames the parties' arguments. A plaintiff may not ordinarily assert the legal rights of others. See Kawasaki, supra , 660 F.3d at 999 ("[The Supreme Court has] adhered to the rule that a party generally must assert his own legal rights and interests and cannot rest his claim to relief on the legal rights or interests of third parties." (quoting Kowalski v. Tesmer , 543 U.S. 125, 129, 125 S.Ct. 564, 160 L.Ed.2d 519, (2004) )).

B. Undisputed Facts

No party contests the relevant facts discussed in the briefing. Plaintiffs describe themselves as "traders for DV" in...