In re Griffin Trading Co., Inc.

• Citation: 418 B.R. 714
• Decision Date: 30 October 2009
• Docket Number: Adversary No. 01 A 00007.,Bankruptcy No. 98 B 41742.
• Parties: In re GRIFFIN TRADING COMPANY, INC., Debtor. Leroy G. Inskeep, not individually but as Trustee for Griffin Trading Company, Inc., Plaintiff, v. Farrel J. Griffin and Roger S. Griffin, Defendants.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois

Page 714

418 B.R. 714

In re GRIFFIN TRADING COMPANY, INC., Debtor.

Leroy G. Inskeep, not individually but as Trustee for Griffin Trading Company, Inc., Plaintiff, v. Farrel J. Griffin and Roger S. Griffin, Defendants.

Bankruptcy No. 98 B 41742.

Adversary No. 01 A 00007.

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

October 30, 2009.

Catherine L. Steege, for Plaintiff-Trustee.

E. King Poor and Matthais A. Lydon, for Defendant.

Memorandum Opinion

BRUCE W. BLACK, Bankruptcy Judge.

This matter comes before the court pursuant to a Memorandum Opinion and Order dated January 23, 2008, from the United States District Court for the Northern District of Illinois, that vacated judgment entered for the trustee after a trial in 2004, and remanded for further findings, clarification, and analysis. A second trial of limited scope was held on July 13, 2009. For the reasons set forth herein, the court finds that the trustee has failed to prove causation and damages. Accordingly, judgment will be entered in favor of the Defendants.

Jurisdictional Statement

The court has jurisdiction over the parties and the subject matter of this adversary proceeding pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. This adversary is a core proceeding under 28 U.S.C. § 157. Therefore, this court has jurisdiction over the fiduciary duty count that is the subject of this memorandum opinion.

Facts and Background

This case began more than ten years ago when Griffin Trading Company ("Griffin" or "Debtor"), a futures commission merchant, collapsed virtually over-night. A futures commission merchant serves as a broker for trading in the futures markets. Trading "futures" involves buying or selling standardized contracts for future delivery of commodities or financial products. Griffin's collapse was caused by a single customer, John Ho Park ("Park"), who lost nearly $10.3 million on December 21 and 22, 1998. Neither Park nor Griffin, who shared financial responsibility for the losses, had the capital to cover the substantial losses. Shortly after, on December 30, 1998, Griffin filed for Chapter 7 bankruptcy and Leroy G. Inskeep was appointed as the trustee.

Griffin was incorporated in the state of Delaware on February 23, 1976. Griffin was located exclusively in Chicago from 1976 to 1993. It was a member of the Chicago Board of Trade, the Chicago Mercantile Exchange, and the Chicago Board of Options Exchange. It was regulated in the United States by the Commodities Futures Trading Commission ("CFTC") and the Chicago Board of Trade. See Joint Pretrial Statement filed September 20, 2004, Stipulation of Facts ¶¶ 1, 2 (hereinafter "Stip. ____") [Doc. 86]. Both defendants, Farrel J. Griffin and Roger S. Griffin (the "Defendants"), were principals in control of Griffin at all relevant times. (1/26/05 Oral Opinion Transcript at 3.)

In 1993, Griffin opened a branch office in London where it was a member of the Securities and Futures Authority. Stip. ¶ 2. It was also a member of the London Clearing House, a clearing member of the London International Financial Futures and Options Exchange, and a member, but not clearing member, of the German future exchange, Eurex Deutschland. Id. Park was a relatively new London-based customer. As of December 21, 1998, Park had approximately $1.56 million in his trading account with Griffin. Id. at ¶ 12. Although a customer's trading is generally controlled through trading limits, on December 21 and 22, 1998, Park traded well beyond his limits and incurred multi-million dollar losses trading on the German future exchange.

Because Griffin was not a clearing member of the German future exchange, it used MeesPierson N.V. ("MeesPierson") as its clearing broker. On December 22, 1998, at 11:19 a.m. London time (5:19 a.m. Chicago time), MeesPierson issued a margin call for DM 5 million (over $2.9 million) to the Debtor to cover the initial margin on Park's trades. The margin payment provided that it was to be for value as of the next day, December 23, 1998. PX 8. In response to the margin call, the London office initiated a wire transfer. The following sequence of events are not in dispute:

a. At 11:19 a.m. London time on December 22, 1998: £1.61 million was transferred from the Debtor's account at the London Clearing House to the Debtor's customer segregated account at the Bank of Montreal Limited ("Bank of Montreal").

b. Immediately after 11:19 a.m. London time on December 22, 1998: £1.61 million was transferred from the Debtor's customer segregated Bank of Montreal account to the Debtor's account at Credit Lyonnais Rouse Limited ("Credit Lyonnais") in London.

c. At 11:51 a.m. London time on December 23, 1998: DM 5 million was transferred from the Debtor's account at Credit Lyonnais to the Debtor's account at the Bank of Montreal.

d. At 11:52 a.m. London time on December 23, 1998: DM 5 million was transferred from the Debtor's customer segregated account at the Bank of Montreal to MeesPierson's bank, Commerzbank.

In January of 2001, the bankruptcy trustee brought a five-count adversary complaint against the Defendants and their wives. Nearly all the matters were ruled on in various motions for summary judgment before the trial which occurred on September 27, 2004, and the only remaining defendants at the time of trial were Roger Griffin and Farrell Griffin. Only Count IV was the subject of the trial.

Count IV alleges breach of fiduciary duty, listing four elements to that cause of action. More specifically, Count IV alleges that the Defendants breached their fiduciary duties to creditors when they failed to stop the wire transfer of customer funds to MeesPierson after the Defendants knew or should have known that if the Debtor made the DM 5 million payment to MeesPierson, then the Debtor would be unable to return customer funds to customer-creditors and that customer-creditors would be left with a shortfall.

The parties have agreed, and the court accepts, that to prevail on the claim for breach of fiduciary duty, the trustee must prove:

1. that Defendants were officers and directors of the Debtor 2. that the Debtor was insolvent or within the zone of insolvency, and, thus, the Defendants' respective fiduciary duties ran in favor of creditors of the Debtor;

3. that the Defendants' actions or failures to act breached their duties of good faith, due care, or loyalty; and

4. that such breach proximately caused the damage of which the Trustee complains.

(Joint Pretrial Statement filed September 20, 2004 at 2.)

The first two elements were determined in the trustee's favor through a partial summary judgment entered on June 30, 2004.

After the first trial, the court issued an Oral Opinion on January 26, 2005, ruling in favor of the trustee. Among other things, the court found that the trustee met the burden of proof for the cause of action alleged in Count IV. On appeal, the District Court vacated the judgment and ordered a remand for clarification of the court's ruling that the trustee met the burden of proof. More specifically, the District Court sought clarification on whether the trustee proved the causation element of liability. Inskeep v. Griffin, No. 05 C 1834, 2008 WL 192322, *3-4 (N.D.Ill. Jan. 23, 2008) ("Dist.Ct.Opinion").

In response to the remand, this court found it appropriate to reopen the evidence in order to clarify its previous findings of fact and conclusions of law, entering a Preliminary Pretrial Order on July 30, 2008. That order stated that:

The January 26, 2005, oral ruling is vacated to the extent it is inconsistent with the District Court memorandum opinion dated January 23, 2008. Specifically, the conclusion of law regarding segregation of customer accounts being governed by 7 U.S.C. § 6d and 17 C.F.R. § 1.20 is vacated. Further, the mixed conclusions of law and fact that "the law allowed the defendants to abort the wire transfer up until the time that the money was actually transferred" is vacated. Finally, the legal conclusion "that the amount of the transfer was the amount of damage to the estate" is vacated. All other findings and conclusions are reaffirmed.

Pursuant to that same order, the parties were ordered to brief the question of what law applied on remand to determine the question of whether "the law allowed the defendants to abort the wire transfer up until the time the money was actually transferred." On January 29, 2009, the court entered its Memorandum of Decision in which it found that Article 4A of the Illinois Uniform Commercial Code (810 ILCS 5/Art. 4A) was the applicable law, concluding that the Defendants had waived the right to argue that foreign law applied because they failed to give notice that they intended to argue that foreign law applied and they failed to show that there is a conflict between foreign law and the law of the forum — the Illinois U.C.C.

The Preliminary Pretrial Order also limited the scope of the evidentiary hearing:

The evidentiary hearing will be of limited scope to address two issues. The first issue is the element of causation, as it is influenced by proof of whether the law allowed the defendants to abort the wire transfer, as a matter of both law and fact. Several sub-issues related to the ability to stop the wire transfer include, but are not limited to: (1) what roles the banks played, (2) what bank(s) accepted the payment order and at what time, and (3) how these facts apply to governing law. These sub-issues are within the limited scope of the evidentiary hearing.

The second issue, if causation is proved and liability found, is the amount of damages. The determination of damages will depend on, among other things, whether the defendants maintained a separate account to cover or satisfy all its current obligations to foreign futures or foreign options customers denominated as the foreign futures or foreign options secured...