Grede v. Fcstone, LLC
| Citation | 584 B.R. 238 |
| Decision Date | 23 January 2018 |
| Docket Number | No. 09 C 101,No. 09 C 135,No. 09 C 137,No. 09 C 130,No. 09 C 120,No. 09 C 138,No. 09 C 127,No. 09 C 136,No. 09 C 115,09 C 136,09 C 101,09 C 115,09 C 120,09 C 127,09 C 130,09 C 135,09 C 137,09 C 138 |
| Parties | Frederick J. GREDE, not individually but as Liquidation Trustee of the Sentinel Liquidation Trust, Plaintiff, v. FCSTONE, LLC, Defendant. Penson Financial Futures, Inc. and Penson Futures f/k/a Penson GHCO, Defendants. IFX Markets, Inc. and IPGL, Ltd., Defendants. Farr Financial, Inc., Defendant. Cadent Financial Services, Defendant. Country Hedging, Inc., Defendant. Velocity Futures, LP, Defendant. American National Trading Corp., Defendant. ABN AMRO Clearing Chicago LLC f/k/a Fortis Clearing Americas, LLC, Defendant. |
| Court | United States District Courts. 7th Circuit. United States District Court (Northern District of Illinois) |
Chris C. Gair, Jeffrey Scott Eberhard, Gair Law Group Ltd., Angela M. Allen, Vincent E. Lazar, Jenner & Block LLP, Chicago, IL, for Plaintiff.
Stephen Patrick Bedell, David Barry Goroff, Geoffrey S. Goodman, Jill L. Nicholson, Joanne Lee, Robert S. Bressler, Thomas Paul Krebs, William J. McKenna, Jr., Peter James O'Meara, Foley & Lardner LLP, Chicago, IL, for Defendant.
These nine cases all arise from the decade-old bankruptcy of Sentinel Management Group, Inc. The facts surrounding Sentinel's collapse have been described in more than a dozen published opinions dating back to 2010. In short, Sentinel's managers failed to segregate client funds and securities in violation of federal law, regulations, and customer agreements. Instead, Sentinel pledged its clients' funds as collateral for loans from the Bank of New York ("BONY"), which Sentinel used to purchase even more securities on its own "house" account for the benefit of corporate insiders. When the financial markets began to crumble in the summer of 2007, Sentinel was unable to both repay the BONY loan and return its clients' money to them. Sentinel declared bankruptcy on August 17, 2007.
The Defendants are all financial institutions and former Sentinel clients assigned to its "SEG 1" customer group (collectively, "the SEG 1 Defendants"). The SEG 1 Defendants consist of FCStone, LLC (Case No. 09–cv–136); Penson Financial Futures, Inc. and Penson Futures f/k/a Penson GHCO (together, No. 09–cv–101); IFX Markets, Inc. and IPGL, Ltd. (together, No. 09–cv–115); Farr Financial, Inc. (No. 09–cv–120); Cadent Financial Services (No. 09–cv–127); Country Hedging, Inc. (No. 09–cv–130); Velocity Futures, LP (No. 09–cv–135); American National Trading Corp. (No. 09–cv–137); ABN AMRO Clearing Chicago LLC f/k/a Fortis Clearing Americas, LLC (No. 09–cv–138).1 Plaintiff Frederick J. Grede, is the Liquidation Trustee administering Sentinel's remaining assets. Soon after his appointment, the Trustee filed essentially identical five-count complaints against all of the SEG 1 Defendants seeking: the avoidance and recovery of various post-petition transfers under 11 U.S.C. § 549 (Count I); the avoidance and recovery of preferential pre-petition transfers under 11 U.S.C. § 547 (Count II); a declaratory judgment as to the ownership of reserve funds ("the Property of the Estate Reserves" or "the Reserves") held by the Trustee under the confirmed bankruptcy plan ("the Plan") (Count III); unjust enrichment (Count IV); and reduction or disallowance of claims (Count V).2 (See Second Amended Complaint in Grede v. FCStone, LLC , No. 09–cv–136 [99] ("FCStone Complaint"), 26–31.) All the SEG 1 Defendants raised the same core defenses in opposition to these claims.
In light of the identical claims and common factual and legal issues, then-presiding Judge Zagel decided to proceed with the SEG 1 litigation on a test-case basis. The parties selected Grede v. FCStone, LLC , No. 09–cv–136, as a test case for all the SEG 1 cases. After multiple appeals and reversals by the Seventh Circuit, all five counts in the Second Amended Complaint [99] have been resolved in FCStone's favor. It now falls on this court to enter judgment as to all the SEG 1 Defendants pursuant to the Seventh Circuit's recent decision in Grede v. FCStone, LLC , 867 F.3d 767 (7th Cir. 2017) (" FCStone II ").
The outcome of the test case has swung wildly with each new decision. At a bench trial, Judge Zagel originally found in favor of the Trustee on Counts I, II, III, and V—dismissing only the Trustee's unjust enrichment claim in count IV as preempted by federal bankruptcy law. Grede v. FCStone, LLC , 485 B.R. 854, 888–890 (N.D. Ill. 2013). Defendant FCStone appealed, and the Seventh Circuit reversed the judgments in favor of the Trustee. Grede v. FCStone, LLC , 746 F.3d 244, 260 (7th Cir. 2014) (" FCStone I "). The panel found that the post- and pre-petition transfers underlying Counts I and II, respectively, fell within "safe harbors" in the Bankruptcy Code and were not subject to avoidance. Id. at 251. This decision had the further effect of rendering Count V (seeking disallowance of certain claims) moot. Absent any avoidable transfers to FCStone, the Trustee no longer had any legal grounds to disallow FCStone's claims against the estate under 11 U.S.C. § 502(d). See Grede v. FCStone, LLC , 556 B.R. 357, 366 (N.D. Ill. 2016) (" FCStone Remand "); 11 U.S.C. § 502(d) ().
The first appeal did not specifically address the appropriate disposition of the Reserves, the subject of Count III. See FCStone II , 867 F.3d at 774 (). The Reserves had been created by the approved Plan and involved four separate pots of money: one for each of customer SEGs 1, 2, and 3, and another for disputed claims arising under Section 7.20(b) of the Plan ("the Section 7.20(b) Disputed Claims Reserve"). FCStone Remand , 556 B.R. at 363. The Reserves are the focus of an ongoing dispute over whether certain funds are properly considered the property of the estate, or instead customer property held in trust for the benefit of specific clients. The Trustee alleged that the Reserve funds were property of the estate, and thus owed to all Sentinel's creditors on a pro rata basis. FCStone II , 867 F.3d at 779. The SEG 1 Defendants countered that the Reserves were comprised of funds protected by statutory trusts in favor of each of the SEG 1 Defendants and should only be distributed pro rata among themselves. Id. The SEG 1 Defendants all objected to an early version of the Plan which treated the funds as property of the estate, so the final Plan kept those disputed funds in reserve pending judicial resolution. Id. at 771.
The money for these Reserves came from a last-minute sale of securities that Sentinel made to a financial firm called Citadel the day before Sentinel filed for bankruptcy. FCStone Remand , 556 B.R. at 361. Under the approved Plan, $15.6 million in proceeds of this sale were held in the SEG 1 Reserve, along with a further $4.9 million in proceeds from late-settling securities and other liquidations. FCStone II , 867 F.3d at 778–79. Accounting for accrued interest, the balance in the SEG 1 Reserve account stood at $24,626,984 as of July 31, 2017. The Section 7.20(b) Disputed Claims Reserve consists of amounts withheld from distributions the Trustee made to other creditors after the Plan was approved. FCStone II , 867 F.3d at 790. It "capture[s] the pro rata portions of litigation recoveries and similar distributions that SEG 1 Objectors would have received had the parties agreed up front that the Citadel sale proceeds were SEG 1 trust property[.]" Id. The balance of the Section 7.20(b) Disputed Claims Reserve is $4,567,042. (Reserve Account Summary.)
On remand, Judge Zagel entered judgment in favor of Defendant FCStone on Counts I, II, IV, and V, consistent with the Seventh Circuit's decision in FCStone I. FCStone Remand , 556 B.R. at 366. Judge Zagel noted, however, that the Seventh Circuit had not reversed his ruling on Count III, and he therefor reaffirmed his original judgment on that count in favor of the Trustee. Id. at 363. He noted that the SEG 1 and SEG 3 customers were both protected by statutory trusts, and concluded that "equity prevent[ed] [the court] from favoring one statutory trust claim over another." Id. at 365. Furthermore, Judge Zagel believed any attempt to trace customer funds would be difficult, "if not impossible," given Sentinel's extensive comingling across different accounts. Id. In FCStone I , the Seventh Circuit had proposed that courts faced with competing statutory trust claimants should "require trust claimants to trace without the benefit of tracing conventions, but [ ] place trust claimants who fail to trace in a class ahead of at least unsecured creditors, giving them priority in bankruptcy proceedings." 746 F.3d at 259. Judge Zagel found this rule inapplicable, however, because as he saw it FCStone Remand , 556 B.R. at 366. Judge Zagel also stated that the Plan gave him broad discretion to distribute the funds as he saw fit under Section 7.20(c)(i), which stated:
In the event the Court determines that the property in any of the Property Of The Estate Reserves is not property of the estate, Sections 4.4 and 4.5 of the Plan shall be deemed modified to provide that Customer Property shall be distributed to the rightful owners of such property or to the Estate, as determined by the Court.
Id. () Judge Zage...
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...Inc. Group Hosp. Med. & Surgical Ins. Plan, 501 U.S. 1301, 1302 (1991) (Scalia, J., in chambers)); see also Grede v. FCStone, LLC, 584 B.R. 238, 248 (N.D. Ill. 2018) (applying the Philip Morris standard at the district court level). Though the Court provided the statutory language and artic......
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