In re Hunt
| Decision Date | 09 May 1983 |
| Docket Number | 382-0134.,Bankruptcy No. 381-04076,Adv. No. 382-0133 |
| Citation | 30 BR 425 |
| Parties | In re William Everette HUNT, Debtor. HEINOLD COMMODITIES & SECURITIES, INC. and E.F. Hutton & Company, Inc., Plaintiffs, v. William Everette HUNT, Defendant. |
| Court | U.S. District Court — Middle District of Tennessee |
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William R. O'Bryan, Jr., Trabue, Sturdivant & DeWitt, Nashville, Tenn., for William Everette Hunt.
Robert J. Warner, Dearborn & Ewing, Nashville, Tenn., for plaintiffs.
REPORT OF STANDING MASTER1
At issue in this case is the dischargeability of losses incurred by the debtor through trading commodity futures in United States Treasury Bonds. The plaintiffs assert that the debtor's losses are nondischargeable because fraudulently procured by the issuing of bad checks and the making of a false financial statement. For the reasons discussed below, the standing master concludes that the debts to plaintiffs are dischargeable.
The plaintiffs, E.F. Hutton & Company, Inc. ("Hutton") and Heinold Commodities & Securities, Inc. ("Heinold") are brokerage firms which provide facilities for the trading of securities, including transactions in the futures markets for commodities.
The debtor, William Everette Hunt ("Hunt"), is 47-years old and has been a college physics instructor for approximately half of the 20 years since receiving his Ph.D. When not teaching, Hunt owned and operated a distributing company and traded in the stock market.
In 1979, Hunt went to work for Clayton Brokerage Company ("Clayton"), a St. Louis brokerage firm which briefly opened an office in Nashville. After a one-week course, Hunt took an examination and became a licensed stock broker. Prior to his employment with Clayton, Hunt had traded stocks and options for his personal account, but had never traded in the bond futures market. At Clayton, Hunt began trading in futures contracts for United States Treasury Bonds.2 Hunt was assisted by Mr. Bill Bowen ("Bowen"), a licensed commodities broker. Bowen met Hunt several years earlier when Hunt was teaching. At Clayton, Hunt never took delivery of the bonds for which he contracted. Rather, he bought and sold contracts mostly in day trades and made money or lost money on the swings of the market. Bowen was aware that Hunt maintained the role of speculator, not long term investor. At Clayton (and later at Heinold) Hunt's trades in bond futures were carried out through Bowen because Hunt was not a licensed commodities broker. In April of 1980, Clayton closed its Nashville office. Clayton was succeeded in its Nashville operations by the plaintiff, Heinold and Bowen became the manager of the Nashville Heinold office.
Hunt formally opened a bond trading account with Heinold in May of 1980. The account was opened through Bowen and designated as a "speculation account." Heinold never required or received a financial statement from Hunt. However, Bowen testified that he personally investigated Hunt's financial condition. Bowen determined that Hunt owned land, farms, several buildings and had access to large sums of cash. Bowen ascertained that Hunt had family wealth in the Trenton, Tennessee area. Heinold established no particular credit limit for Hunt. Instead, Heinold employed a concept of "risk capital" which, as Bowen explained, is the money Heinold determined a client could afford to lose. Bowen claimed, however, that Heinold never required its brokers to limit customers to "risk capital." Hunt specified "$50,000" as his risk capital on his account application at Heinold.
Bowen explained that Heinold and other commodity brokers impose margin requirements on their bond trading customers which are usually paid in advance of trading. The margin procedures are codified in the Rules and Regulations of the Board of Trade for the City of Chicago.3 Regulation 431.01(12) provides as follows:
Members shall not accept orders for new trades from a customer, unless the minimum initial margin on the new trades is deposited and unless the margin on old commitments in the account equals or exceeds the initial requirements on hedging and spreading trades and/or the maintenance requirements specified in Regulation 431.03 on all other trades. If the customer has a credit in excess of the initial margin requirements on all old commitments in his account, this may be used as part or all of the initial margins required on new commitments. However, credits in excess of maintenance margins and less than initial margin requirements may not be used. When a customer states that funds required to fully margin his account are being transmitted at once, the member may consider this assurance in lieu of cash for a reasonable period. Members are required to keep written records of all margin calls, whether made in writing or by telephone.
The rules further provide at 431.02(15) that:
A member may use his discretion in permitting a customer having an established account to trade during any day without margining each transaction, provided the net position resulting from the day\'s trading is margined as required by Rule 286.00, 431.00 and Regulation 431.02 and 431.03.
On a one contract U.S. Treasury Bond future purchase (face value $100,000), Heinold required a margin of $2,000. By requiring a customer to post the $2,000 per bond margin, the brokerage house protects itself from liability for losses incurred by the customer. Regulations prohibit the market for Treasury Bond futures contracts from shifting more than two points up or down on any one day of trading. A two point maximum shift computes to approximately $2,000 per contract. Thus, the standard margin requirement for bond futures trading is a single day's maximum swing— $2,000 per bond contract.
Bowen disclosed it was common for Heinold to ignore the Board of Trade Regulation regarding margins in advance of bond trading. A bond trader who is an established customer in the Heinold office may day trade by merely covering account deficits at the close of the day. An established customer who tenders a check to cover the deficit in his trading account is permitted to immediately trade again without posting a margin against the possibility of future losses. Bowen testified that Heinold had a rule that a customer would not be allowed to trade if the customer's account was in an uncovered deficit position. The proof at trial, however, demonstrated that on numerous occasions Bowen permitted Hunt to buy and sell bond futures contracts without first covering the deficit in his trading account.
Hunt advanced a "very sufficient" amount of money when he opened his bond trading account with Bowen. Bowen testified that Hunt would trade as many as 50 bond contracts on day trades and 50 more on position trades three or four times a week. The same procedure was employed for all trades: Hunt would give Bowen a check to cover any deficit in his trading account and Bowen would allow Hunt to trade at will in the bond futures market. Bowen testified that Hunt wrote checks for $40,000, $66,000, and $90,000 to meet margin requirements or as payments of deficits. At one point, Hunt's trading account reflected a surplus of $120,000. Hunt became Bowen's largest bond trader and as manager of the Heinold office, Bowen received a percentage of the commissions earned on Hunt's transactions.
In June or July of 1981, one of Hunt's checks given to Bowen failed to clear Hunt's account. Hunt covered that check with a cashier's check and for some time Hunt was required to meet his margin calls and cover his account deficits with cashier's checks. Thereafter, the practice of using cashier's checks was discontinued and payments were again accepted by personal check. Bowen acknowledged that Heinold could verify a personal check given by a customer before accepting the check and allowing the customer to trade further. In fact, Bowen called Hunt's bankers in Trenton and in Nashville, Tennessee to verify Hunt's checks during the early days of Hunt's bond trading.
The series of Heinold trades at issue in this case began on December 2, 1981. Hunt's trading account at Heinold was apparently in a deficit position on December 2. Nonetheless, Bowen permitted Hunt to day trade 40 bond contracts without requiring him to pay the deficit. The market moved in Hunt's favor and his gain on the trade was $32,812.50. The fees and commissions generated for Heinold were $1,980. After payment of the beginning deficit, Hunt's trading account at Heinold showed a net credit in the amount of $28,010.48 at the close of trading on December 2. By check dated December 7, 1981, Heinold remitted to Hunt the sum of $26,000, leaving a credit balance of approximately $2,000.
Bowen testified that Hunt did not trade at Heinold again until December 9, 1981. The exhibits submitted by Heinold indicate that Hunt's account stood in a deficit position in the amount of $2,817.77 at the opening of trading on December 9, 1981. There is no explanation of what caused the $2,000 credit in Hunt's account to disappear between December 7 and December 9. Nevertheless, with Hunt's account again in a deficit position, and without requiring him to cover the deficit, Bowen permitted Hunt to trade. Bowen testified that Hunt traded 80 bond contracts on December 9. One exhibit submitted by Heinold indicates that in fact Hunt traded only 40 bond contracts on December 9. Notwithstanding this discrepancy, the market did not favor Hunt and he closed the day with a net loss of $10,730, including commissions of $1,980. Combined with the beginning (unexplained) deficit, Hunt's account reflected a deficit of $13,547.77 at the close of business on December 9.
On December 10, Hunt came into the Heinold office "very enthusiastic" and ready to trade again. This time, Bowen required Hunt to cover the deficit in his account...
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Van Horne, Matter of, 86-1817
...so inconsistent with [his] self-serving statement of intent that the proof leads the court to disbelieve the debtor." In re Hunt, 30 B.R. 425, 441 (M.D.Tenn.1983). Van Horne contends that Caspers failed to prove intent to deceive by clear and convincing evidence. The bankruptcy court and th......