In re Financial Partners, Ltd.
| Decision Date | 26 July 1990 |
| Docket Number | 84 A 1251 and 84 A 1253.,82 B 14613,82 B 14354,Bankruptcy No. 82 B 14353 |
| Citation | 116 BR 629 |
| Parties | In re FINANCIAL PARTNERS, LTD., Financial Partners Brokerage, Ltd., and Robert B. Serhant, Debtors. Leroy G. INSKEEP, as Trustee, Plaintiff, v. Dan GROSSO, Alfred DiMonte, Antonette DiMonte, Phyllis DiMonte and Emil Barbato, Defendants. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
Leroy G. Inskeep, Philip V. Martino, Rudnick & Wolfe, Chicago, Ill., for plaintiff.
Eugene A. DiMonte, DiMonte & Lizak, Park Ridge, Ill., for defendants.
This matter comes before the Court on the Motion of the Trustee for Summary Judgment, the Memorandum in Support of the Trustee's Motion for Summary Judgment, the Joint Stipulation of Facts and Documents, the Objections of the Adversary Defendants, Dan Grosso, Alfred DiMonte, Antonette DiMonte, Phyllis DiMonte and Emil Barbato, (collectively "the Defendants") to the Trustee's Motion for Summary Judgment,1 the Motion of the Adversary Defendants for Summary Judgment, the Rule 12(f) Statement of Genuine Issues of Material Fact,2 the Trustee's Reply Memorandum in Further Support of His Motion for Summary Judgment and Memorandum in Opposition to the Defendants' Motion for Summary Judgment, the Adversary Defendants' Reply Memorandum to the Trustee's Memorandum in Opposition to the Defendants' Motion for Summary Judgment, and the Affidavits of Frank Przespolewski and Leroy Inskeep. Now, therefore, for the reasons set forth below, the Trustee's Motion for Summary Judgment is granted, and the Defendants' Cross Motion for Summary Judgment is denied.
On October 22, 1982, Financial Partners, Ltd. ("Financial"), an Illinois corporation organized to act as a financial consultant, advisor and business broker, and Financial Partners Brokerage, Ltd. each filed a Voluntary Petition for Relief under Chapter 7 of the Bankruptcy Code. Shortly thereafter, on October 29, 1982, Robert Serhant, an officer, director and shareholder of Financial, filed his Voluntary Petition for Relief under Chapter 7 of the Bankruptcy Code. The only other officers, directors and shareholders of Financial were Ralph F. Del Monico and Lawrence B. LaGrotteria. Financial also employed numerous other people.
On October 21, 1980 and on September 15, 1981, Grosso, an investor, deposited $53,000 and $25,000 respectively with Financial to be used to purchase T-Bills and T-Bill futures contracts. On October 1, 1981, Grosso authorized Financial to invest the $1,000 in interest which had accrued on his investments, and on October 5, 1981, Grosso authorized Financial to invest an additional $2,000 in interest which had accrued on his investments. Each time the funds were to be used to purchase T-Bills and T-Bill futures contracts. On June 1, 1982, Grosso deposited an additional $28,000 with Financial to purchase T-Bills and commodity future contracts which matured on August 16, 1982.
From January 21, 1981 through June 9, 1982, Grosso received and negotiated checks drawn on Financial's custodial account totalling $52,945.60, of which he reinvested $5,017.50. On August 16, 1982, Grosso received and negotiated another check from Financial for $28,000 drawn on the same account.
On February 12, 1981 Phyllis DiMonte ("DiMonte") deposited $10,000 with Financial to be used to purchase T-Bills and T-Bill futures contracts, and on November 17, 1981, she deposited an additional $3,000 with Financial to be used for the same purpose. On June 2, 1982, DiMonte deposited $13,000 with Financial to purchase T-Bills and commodity future contracts which matured on August 24, 1982.
From March 12, 1981 through June 2, 1982, Phyllis DiMonte received and negotiated checks drawn on Financial's custodial account totalling $6,721.50. On August 27, 1982, Phyllis DiMonte received and negotiated another check drawn on the same account for $1,228.50.
On September 15, 1980, Alfred DiMonte and Antonette DiMonte (the "DiMontes") deposited $15,000 with Financial to be used to purchase T-Bills and T-Bill futures contracts, and on January 8, 1981 the DiMontes deposited $10,000 with Financial for the same purpose. On November 17, 1981, the DiMontes deposited an additional $3,000 with Financial to be used to purchase T-Bills and T-Bill futures contracts, and on June 2, 1982, the DiMontes deposited $13,000 with Financial to purchase T-Bills and commodity future contracts which matured on August 24, 1982.
From February 2, 1981 through June 14, 1982, the DiMontes received and negotiated checks which were drawn on Financial's custodial account totalling $17,186. Additionally, on August 27, 1982, the DiMontes received and negotiated two checks drawn on Financial's custodial account for $1,228.50 and $13,000. The checks cleared on August 30, 1982.
On June 28, 1981, Emil Barbato ("Barbato") deposited $2,000 with Financial to be used to purchase T-Bills and T-Bill futures contracts, and on November 23, 1982, Barbato deposited $15,000 with Financial for the same purpose. On June 2, 1982, Barbato deposited $17,000 with Financial to purchase T-Bills and commodity future contracts which matured on August 24, 1982. Sometime prior to August 27, 1982, Barbato deposited an additional $25,000 with Financial.
From February 11, 1981 through June 9, 1982, Barbato received and negotiated checks drawn on Financial's "custodial account" at the Berwyn National Bank ("Bank"), totalling $17,829.50, and on August 27, 1982 he received and negotiated two additional checks drawn on the same account for $1,606.50 and $12,000. The last two checks cleared on August 30, 1982.
Financial used the custodial account for the sole purpose of depositing its clients' funds and repaying its clients. As is the standard and customary business practice, a separate ledger was prepared and kept for each client whose funds were deposited into the custodial account. From July 6, 1982 until September 23, 1982, the custodial account was continuously overdrawn. The overdraft ranged from $79,674.49 on July 6, 1982 to $662,195.19 on September 7, 1982. Neither the Defendants or Financial ever intended for title to the funds in the custodial account to pass to Financial. Additionally, Financial maintained a separate "operating account" at the Bank to pay its business expenses.
In essence, Serhant was operating an investment program pursuant to which customers would deposit funds with Financial to be used to purchase T-Bills and T-Bill futures contracts in the customers' names. In fact, however, the money received was not invested as set forth above. Instead, Serhant used the funds to purchase a high percentage of T-Bill futures contracts in the customers' names or cover margin calls on contracts already purchased. Serhant was charged with and pleaded guilty to a crime involving the wrongful use of clients' funds, and he was sentenced to eleven years in prison. No other officer, director, shareholder or employee of Financial was indicted.
The investors filed several lawsuits against Serhant, Financial and Financial Partners Brokerage, Ltd, including a class action suit in the United States District Court for the Northern District of Illinois. The Defendants herein are unnamed plaintiff class members in the class action. The class action suit was tried before a jury, and the jury returned a verdict in favor of the plaintiff class and against Serhant. The jury found that Serhant violated the Commodities Exchange Act, the Racketeer Influenced and Corrupt Organizations Act, and the Illinois Consumer Fraud and Deceptive Practices Act and breached his fiduciary duty. The jury also found that Financial and Financial Partners Brokerage, Ltd. violated the Commodities Exchange Act and the Illinois Consumer Fraud and Deceptive Practices Act, and breached their fiduciary duty. The Defendants filed proofs of claim to the approximately $8,000,000.00 in the class action judgment and settlement pool. The claims of Grosso and the DiMontes were denied, however, because they received a net profit from the investment program. Barbato's and Phyllis DiMonte's claims were allowed, and they have received an initial distribution from the class action proceeds.
On appeal, the Seventh Circuit Court of Appeals upheld the jury verdict in pertinent part. The Court limited any further recovery of compensatory damages because the plaintiffs had been more than fully compensated by the settlements. The Court, however, did not limit the recovery of any punitive damages. Bosco v. Serhant, 836 F.2d 271 (7th Cir.1987).
The Trustee alleges that the total claims against Financial exceed $25,000,000. Excluding attorneys fees and Trustee's fees, the priority claims allegedly exceed $314,000. According to the Trustee, the estate is valued at $725,000 and consists almost entirely of proceeds from preference actions and fraudulent conveyance actions.
On October 29, 1984, the Trustee filed an adversary proceeding against each of the Defendants seeking to avoid the payments made by Financial to the Defendants within the ninety days preceding the filing as preferences under Section 548 of the Bankruptcy Code. In response, the Defendants allege five affirmative defenses. First, the Defendants argue that the funds are not property of the estate. Second, the Defendants contend that there is no antecedent debt, and third, the Defendants argue that the payments were made in the ordinary course of business and thus, are not subject to the Trustee's avoidance powers. Fourth, the Defendants argue that the trustee is estopped from recharacterizing the transactions between the parties, and fifth, the Defendants contend that the Trustee cannot avoid the transfers because of...
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