In re Cannon

• Decision Date: 14 April 1999
• Docket Number: Adversary No. 96-0200.,Bankruptcy No. 94-21918
• Citation: 232 BR 701
• Parties: In re William Dunlap CANNON, III, Debtor. George W. Stevenson, Trustee for William Dunlap Cannon, III, Plaintiff, v. J.C. Bradford & Company, J.C. Bradford & Co. Futures, Inc. and Charlie Ross, Defendant.
• Court: U.S. Bankruptcy Court — Western District of Tennessee

232 B.R. 701 (1999)

In re William Dunlap CANNON, III, Debtor George W. Stevenson, Trustee for William Dunlap Cannon, III, Plaintiff, v. J.C. Bradford & Company, J.C. Bradford & Co. Futures, Inc. and Charlie Ross, Defendant.

Bankruptcy No. 94-21918, Adversary No. 96-0200.

United States Bankruptcy Court, W.D. Tennessee, Western Division.

April 14, 1999.

Michael P. Coury, Saul C. Belz, Quitman R. Ledyard, Memphis, TN, for plaintiff.

Linda Gibbons Willis, Claude O. Ramer II, Nashville, TN, Bobby M. Leatherman, Carl H. Langschmidt, Jr., Memphis, TN, for defendants.

MEMORANDUM OPINION AND ORDER AMENDING THE COURT'S "PROPOSED FINDINGS OF FACT AND CONCLUSIONS OF LAW RE: COMPLAINT FOR MONEY DAMAGES AND TO RECOVER FRAUDULENT TRANSFERS — COUNTS I-VII and MEMORANDUM OPINION AND ORDER RE COMPLAINT FOR MONEY DAMAGES AND TO RECOVER FRAUDULENT TRANSFERS — COUNT VIII" ISSUED ON FEBRUARY 22, 1999

G. HARVEY BOSWELL, Bankruptcy Judge.

On February 22, 1999, the Court issued a document styled "Proposed Findings of Fact and Conclusions of Law re: Complaint for Money Damages and To Recover Fraudulent Transfers — Counts I-VII and Memorandum Opinion and Order re: Complaint for Money Damages and to Recover Fraudulent Transfers — Count VIII." In response to these proposed findings and conclusions, the parties to this adversary proceeding have filed various objections and replies. Such filings include the following:

1. Trustee\'s Objections to Proposed Findings of Fact & Conclusions of Law Pursuant to Rule 9033 of the Federal Rules of Bankruptcy Procedure;

2. Motion of Defendants to Alter or Amend Judgment Under Rule 9023 and Motion to Amend or Make Additional Findings of Fact Under Rule 7052;

3. J.C. Bradford\'s Response to Trustee\'s Objections;

4. Defendants\' Motion to Amend Pleadings to Conform to Evidence;

5. Trustee\'s Objection to Defendants\' Motion to Alter or Amend Judgment and Motion to Amend or Make Additional Findings of Fact;

6. Trustee\'s Objection to Defendants\' Motion to Amend Pleadings to Conform to Evidence;

7. Defendants\' Objections to Bankruptcy Court\'s Proposed Findings of Fact and Conclusions of Law; and

8. Defendants\' Reply to Trustee\'s Objection to Defendants\' Motion to Alter or Amend Judgment.

This Memorandum Opinion and Order will resolve all eight of these matters.

The Court conducted a hearing on these matters on March 30, 1999. FED. R.BANKR.P. 9014. After reviewing the testimony from the hearing and the record as a whole, the Court makes the following amendments to its February 22, 1999, "Proposed Findings of Fact and Conclusions of Law re Complaint for Money Damages and To Recover Fraudulent Transfers — Count I-VII." FED.R.BANKR.P. 7052.

Defendants, J.C. Bradford & Company and J.C. Bradford Futures, Inc., Were Grossly Negligent

Under Tennessee law, gross negligence is defined as "a negligent act done with utter unconcern for the safety of others, or done with such a reckless disregard for the rights of others that a conscious indifference to consequences in implied in law." See, Kennedy v. Perry, 688 S.W.2d 74, 78 (Tenn.Ct.App.1984) quoting Ruff v. Memphis Light, Gas & Water Div., 619 S.W.2d 526, 528 (Tenn.Ct.App.1981); see also, Sumner v. United States, 794 F.Supp. 1358, 1367 (M.D.Tenn.1992).

The proof adduced at trial clearly demonstrates that Bradford acted with such a reckless disregard for the rights of Cannon and Cannon's creditors that a conscious indifference to the consequences that befell Cannon and his creditors arises by implication. (See, Proposed Findings of Fact and Conclusions of Law, February 22, 1999, pp. 11-17, 20-21, 38-40, 48-50, 53, 65-66, 74, 79, 82, 111.)

Churning Losses are the Proper Measure of Damages for Defendants' Churning

The CFTC generally awards two types of damages in proven churning cases: (1) commissions and fees charged the customer and (2) the customer's trading losses. Lehman v. Madda Trading Co., 1984-1986 Transfer Binder Comm. Fut.L.Rep. (CCH) ¶ 22,417, at 29,869-29,871 (CFTC 1984). Absent certain conditions, the first measure of damages is usually applied. Id. at 29,869-29,871; however, where churning losses which would not have occurred but for the churning, or where churning has exposed the account to greater risk of market loss than the customer agreed to undertake, recovery of net trading losses, i.e., losses over and above interest, commissions, and other "direct" charges resulting from the churning, is allowed. See, Hinch v. Commonwealth Fin. Group, Inc., 1997 WL 244320, at *7 1997 Com.Fut.L.Rep. (CCH) ¶ 27,056 (CFTC May 13, 1997).

As the record clearly demonstrates, Cannon was fraudulently induced to commence and continue trading with Defendants using a technical trading system which generated excessive day trades and commissions. As a result, Cannon was exposed to significantly higher risk of market loss. Accordingly, under the preponderant weight of the foregoing authorities, the Court awards the Trustee Cannon's net trading losses of $1,046.489, on the Trustee's churning count (Count II), as an alternative award which is subsumed in the Court's award under Counts I and III-VII.

Trustee's Entitlement to Fees and Expenses Associated with Retaining Expert Witnesses and Consultants

The Trustee is entitled to collect from Defendants the fees and costs associated with retaining expert witnesses and consultants for this case. See, Wood v. Shearson Lehman Hutton, Inc., 1992-1994 Transfer Binder Comm.Fut.L.Rep. (CCH) ¶ 25,771 at 40,543 (fees and costs); O'Connell v. Shearson Lehman Hutton, Inc., 1993 WL 280771 1992-1994 Transfer Binder Comm.Fut.L.Rep. (CCH) ¶ 25,559 at 39,713 (CFTC 1993) (fees only); Drew v. Shearson Lehman Hutton, Inc., 1992 WL 48917, 1990-1992 Transfer Binder Comm. Fut.L.Rep. (CCH) ¶ 25,248 at 38,738 (CFTC 1992) (fees and costs for experts, plus costs associated with retention of CPA).

The Trustee retained two experts, Ronald Johnson and Dr. Richard Teweles, to advance the Trustee's position in this adversary proceeding. The Court specifically found the reports and testimony of Messrs. Johnson and Teweles to be valuable, credible and persuasive. Accordingly, the Court finds that Defendants are liable for the Trustee's fees and costs associated with the retention of these experts.

Defendants' Request to Substitute "Bradford & Co., Incorporated" for "J.C. Bradford & Co., J.C. Bradford Futures, and J.C. Bradford Futures, Inc."

Defendants, J.C. Bradford & Co, J.C. Bradford Futures, Inc. and Charles Ross (collectively "Defendants"), have moved the Court to amend its Memorandum Opinion respecting Count VIII of the Amended Complaint by substituting "Bradford & Co., Incorporated" for J.C. Bradford & Co., J.C. Bradford Futures, and/or J.C. Bradford Futures, Inc. Defendants have also requested the Court make the same substitution in its Proposed Findings of Fact and Conclusions of Law ("Proposed Findings") with respect to Counts I-VII of the Amended Complaint. Prior to filing its "Motion to Alter or Amend Judgment," the defendants had not affirmatively raised the issue of substitution.

J.C. Bradford & Co., is a Tennessee limited liability company. See Answer ¶ 3; Affidavit of R. Patrick Shepherd ("Shepherd Aff."), ¶ 2. Prior to January 1, 1996, J.C. Bradford & Co., was a Tennessee limited partnership. See Answer ¶ 3, Shepherd Aff. ¶ 2. J.C. Bradford & Co was named as a defendant in the Amended Complaint and was adjudged liable both in the Memorandum Opinion (Count VIII) and in the Proposed Findings (Counts I-VII). J.C. Bradford & Co., has a net worth of $168,875,000.

Bradford & Co., Incorporated ("Bradford & Co., Inc." or the "Corporation") is a corporation chartered under the laws of the State of Tennessee. See Shepherd Aff. ¶ 3. Bradford and Co., Inc., was incorporated in 1946 under the name "J.C. Bradford & Co., Incorporated," and changed its name to "Bradford & Co., Inc." in 1989. See Shepherd Aff. ¶ 3. Bradford & Co., Inc. was not named as a defendant in the Amended Complaint, and therefore was not specifically adjudged liable either in the Memorandum Opinion (Count VIII) or in the Proposed Findings (Counts I-VII). As successor-in-interest to all liabilities of J.C. Bradford Futures, Inc., Bradford & Co., Inc., in nonetheless jointly and severally liable on the judgment contained in the Memorandum Opinion (Count VIII) and potentially liable on the recommendations contained in the Proposed Findings (Counts I-VII).

Bradford & Co., Inc. — the corporation — is a wholly-owned subsidiary of J.C. Bradford & Co. — the LLC. See Tr. At 2107, 11.16-21 (Sept. 3, 1998 Testimony of Douglas Kitchen). Under the terms of a shareholders' agreement, J.C. Bradford & Co. controls all the outstanding capital stock of Bradford & Co., Inc. See Tr.Ex. 41, June 30, 1997 Combined Financial Statement of J.C. Bradford & Co. and Affiliated Companies, ¶ 1, at 3. Bradford & Co., Inc., has a net worth of only $10,454,000.

J.C. Bradford Futures, Inc., was incorporated in Tennessee in 1983 under the name "Bradford Commodities, Inc.," and changed its name in 1985 to "J.C. Bradford Futures, Inc." Until 1989, J.C. Bradford Futures, Inc. was a wholly owned subsidiary of Bradford & Co., Inc. See Shepherd Aff. ¶ 5. In 1989, J.C. Bradford Futures, Inc., merged into its parent Bradford & Co., Inc., and ceased to exist as a separate legal entity. See Shepherd Aff. ¶ 5.

The proof in the record demonstrates that J.C. Bradford & Co. is properly included as a liable entity in the February 22, 1999, Memorandum Opinion and Proposed Findings of Fact:

1. All checks drawn from Cannon\'s escrow accounts which form the basis of the transfers under Count VIII were made payable to "J.C. Bradford" and were deposited into an account styled "J.C. Bradford & Company Customer Segregated Commodity Funds" which is included in the "Cash and Securities Segregated for Regulatory Purposes" entry on the asset-side of the Bradford Financial Statement. See Tr.Ex. 10.

2. All checks

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