In re Blanton

• Decision Date: 30 May 1989
• Docket Number: Bankruptcy No. 88-0059-RT,Adv. No. 88-0083-RT.
• Citation: 105 BR 321
• Court: U.S. Bankruptcy Court — Eastern District of Virginia
• Parties: In re Thomas Vinson BLANTON, Jr., Debtor. Thomas Vinson BLANTON, Jr., Plaintiff, v. PRUDENTIAL-BACHE SECURITIES, INC., James E. Trice, Defendants.

105 B.R. 321 (1989)

In re Thomas Vinson BLANTON, Jr., Debtor.

Thomas Vinson BLANTON, Jr., Plaintiff, v. PRUDENTIAL-BACHE SECURITIES, INC., James E. Trice, Defendants.

Bankruptcy No. 88-0059-RT, Adv. No. 88-0083-RT.

United States Bankruptcy Court, E.D. Virginia, Richmond Division.

May 30, 1989.

H. Slayton Dabney, McGuire, Woods, Battle & Boothe, Richmond, Va., for plaintiff/debtor.

John S. Barr, Kevin R. Huennekens, Maloney, Yeatts & Barr, Richmond, Va., for defendants.

OPINION

DOUGLAS O. TICE, Jr., Bankruptcy Judge.

This litigation came before the Court upon the debtor's amended complaint seeking damages from the defendants on the basis of eight alleged counts or causes of action. A ninth count was withdrawn by the debtor as provided by order of the Court entered August 19, 1988. At the request of the parties, the Court held trial on the following six counts with the remaining two counts to be considered subsequently:

                Count I       Turnover of $1,226,161.98
                                and $11,923.00
                Count II      $1,350,000.00 preference
                Count III     $1,605,440.00 preference
                Count IV      Breach of contract—deferred
                               compensation account
                Count V       Duress
                Count VIII    Breach of fiduciary duty
                

In adversary proceedings that are to be tried before a bankruptcy judge, a complaint or counterclaim must contain a statement that the proceeding is core or noncore. See Bankr.R. 7008(a). In responding to a complaint or counterclaim in an adversary proceeding the responsive pleading must admit or deny the allegation that the proceeding is core or noncore and include a statement that the party does or does not consent to the entry of a final order or judgment by a bankruptcy judge. See Bankr.R. 7012(b).

Here Blanton's amended complaint contained an allegation that the proceedings were core proceedings. Prudential-Bache's amended answer to this allegation stated that the allegation was a legal conclusion that does not require a response under the Federal Rules of Civil Procedure and that to the extent an answer was required the allegation was denied. Prudential-Bache's response did not comply with the pleading requirements of Bankruptcy Rule 7012(b).

This Court observes that Prudential-Bache raised only two jurisdictional issues in this adversary proceeding: (1) the Court's jurisdiction to hear Count IV of the amended complaint and (2) the affirmative defense that the issues raised by this adversary proceeding are referable to arbitration under rules of the New York Stock Exchange. By order entered on September 13, 1988, this Court overruled the first jurisdictional contest. As to the second jurisdictional attack, although the defendants raised the issue of arbitration as an affirmative defense, the defendants did not pursue or legally explain this defense at trial or in argument. Since neither party further contested this Court's jurisdiction to hear any portion of the amended complaint, this Court will accept jurisdiction and hear the entire matter.

Summary of Decision

Facts. Plaintiff Blanton, while employed as a stock broker for defendant Prudential-Bache, traded for his own account and for clients in foreign currency options. Large sums were involved in these investments which were carried on margin financed by Prudential-Bache. From the currency investments Blanton earned substantial income, much of which was retained by Prudential-Bache under a deferred compensation plan it maintained for employees. In January 1987 a fall in the value of the U.S. dollar against Swiss francs resulted in Prudential-Bache's liquidation of Blanton's option positions in this currency at a substantial margin account deficit. The liquidation expenditures necessary to repurchase Blanton's option positions were only partly covered by funds withdrawn by Blanton from his deferred compensation account. Blanton remains indebted to Prudential-Bache in a sum in excess of $1,933,000.00. He has a present balance remaining with Prudential-Bache in his deferred compensation and another account in excess of $1,220,000.00.

Held: Count I, Turnover—Setoff. Blanton is not entitled to turnover from Prudential-Bache under § 542(b) of the balance of his deferred compensation account because Prudential-Bache has a superior right to offset the account against Blanton's indebtedness under § 553.

Counts II, III; Preference. Blanton may not recover, as preferential transfers under § 547(b), the two transfers of deferred earnings to Prudential-Bache used to finance liquidation of his currency investments. The payments were margin or settlement payments excepted by § 546(e) from preference avoidance.

Counts IV, VIII; Breach of Contract, Breach of Fiduciary Duty. Prudential-Bache breached its contract with Blanton under the deferred compensation contract and also breached a fiduciary duty to Blanton by its failure to withhold sufficient Federal income withholding taxes from the deferred earnings withdrawals. Additional sums as determined by the Court must be remitted by Prudential-Bache to the Internal Revenue Service as Blanton's damages.

Count V, Duress. There was no legal duress in Prudential-Bache's requiring Blanton to withdraw deferred earnings to cover his margin losses as a condition to continued employment and under threat of lawsuit.

Findings of Fact

Defendant James E. Trice is a Senior Vice President of defendant Prudential-Bache Securities, Inc. (Prudential-Bache), where he has been employed since 1963. He has had extensive management experience with Prudential-Bache and since March 1986 has served as regional manager for the company's southeastern region, which includes the Richmond and Lynchburg offices in Virginia. As regional manager, Trice has management supervisory responsibilities over all branch offices located in the southeastern region.

The debtor, Thomas Vinson Blanton, Jr., was employed as a securities account executive (commonly referred to as a stock broker) with Prudential-Bache in its Richmond, Virginia, branch office from May 1984 until his resignation on July 16, 1987. Blanton is married and has three children. He holds a college degree in business administration.

Blanton joined Prudential-Bache after having worked as a securities broker since the 1970's for other, smaller firms. He brought with him to Prudential-Bache one major client, a wealthy physician who was interested in various types of trading in foreign currencies. Blanton had changed brokerage firms because he believed Prudential-Bache's size and international reputation presented much better opportunity for the types of investments in which he and his principal client were interested.

At Prudential-Bache, Blanton's predominant activity involved foreign currency trading. His was a highly sophisticated and complex investment practice, much of which required extensive and time consuming mathematical calculations. Blanton was essentially a workaholic, spending long days in his office and often working late at home.

A major type of trading engaged in by Blanton for approximately ten clients and also for his own account involved his sale of options for the purchase and sale (straddles) of foreign currency, including Swiss francs. It was this trading which contributed so much to Blanton's initial success with Prudential-Bache and which led to his bankruptcy and the instant litigation.

Trading in currency options was done on an options exchange located in Philadelphia. In its fundamental form this type of trading was described by Blanton as follows:

Well, the basic strategy in just a very broad sense is, you have the Swiss francs at a spot rate in U.S. cents of, we will use an arbitrary number of 65 cents, which means one Swiss franc is equal to 65 cents. The strategy was that we would sell a call which is whereby you give the right for someone to call the Swiss franc away from you at a specific strike price for a specific period of time and you would sell the call above the 65 cents. For argument\'s sake we will use it, we each sell it at a specific period of time. You have given someone the right to call away Swiss francs from you at 70 cents U.S. terminology. For that right they paid you a premium. Simultaneously you would sell a put which gave someone the right to put that Swiss franc to you at a specific price for a period of time.

Well, say that we used the strike price of 60, you would also try to keep a band around it so at the spot of 65, you would sell a 70 call and 60 put, and from that you would receive a premium which premium you would invest in treasury bills.

The records of these complex transactions were maintained by Prudential-Bache on an extensive system of computer records.

As explained by Blanton, he and his clients typically sold option straddles (both puts and calls) for Swiss francs. These types of investments were in highly leveraged blocks and involved large sums of money. At least in hindsight, currency options trading was also highly speculative in presenting potential for huge gains or losses. That substantial sums were involved is demonstrated as follows: One option contract gave the purchaser a right to purchase (call) or to sell (put) 62,500 Swiss francs. At one time, Blanton was obligated on 2,000 Swiss franc straddles, that is, 2,000 calls and 2,000 puts. At an assumed price of 65 cents per franc, the total investment would approximate $80,000,000.00 (62,500 francs times $.65 times 2,000).

Through 1986, Blanton's commission and bonus income from Prudential-Bache were approximately as follows:

                   1984    $  350,000.00
                   1985    $  650,000.00
                   1986    $3,500,000.00
                

As a result of his success as an account executive, Blanton received a number of letters from senior officials of Prudential-Bache recognizing and commending his outstanding performance. In February 1985, Blanton was notified that company management had appointed him a vice president-investments in recognition of his ability and contributions; in ...