In re MF Global Inc.

• Decision Date: 02 June 2015
• Docket Number: Case No. 11–02790 MG SIPA
• Citation: 531 B.R. 424
• Parties: In re: MF Global Inc., Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

531 B.R. 424

In re: MF Global Inc., Debtor.

Case No. 11–02790 MG SIPA

United States Bankruptcy Court, S.D. New York.

Signed June 2, 2015

HUGHES HUBBARD & REED LLP, Counsel for James W. Giddens, Trustee for the SIPA Liquidation of MF Global Inc., One Battery Park Plaza, New York, New York 10004, By: James B. Kobak, Jr., Esq., Christopher K. Kiplok, Esq., Jeffrey S. Margolin, Esq., Dustin P. Smith, Esq., Kenneth J. Aulet, Esq.

COTI & SUGRUE, Attorneys for Charles V. Sonson, 20 Broad Street, Second Floor, Norwalk, Connecticut 06851, By: Stephen R. Sugrue, Esq.

MEMORANDUM OPINION AND ORDER SUSTAINING THE TRUSTEE'S OBJECTION TO GENERAL CREDITOR CLAIM NUMBER 50200 FILED BY CHARLES SONSON

MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE:

James W. Giddens (the “Trustee”), as Trustee for the liquidation of MF Global Inc. (“MFGI”)¹ under the Securities Investor Protection Act, 15 U.S.C. § 78aaa et seq. (“SIPA”) filed an objection (the “Objection,” ECF Doc. # 8107) to general creditor claim number 50200 (the “Claim,” ECF Doc. # 8108, Ex. 1) filed by Charles Sonson (“Sonson”).² The Claim is based on causes of action that Sonson has previously asserted against MFGI in an action filed in Illinois in 2010. Specifically, the Claim asserts causes of action for breach of contract, breach of the fiduciary duty of care, and misrepresentations in violation of the Commodities Exchange Act (the “CEA”) based on MFGI's allegedly improper liquidation of Sonson's customer account with MFGI. The Trustee's Objection seeks to disallow Sonson's Claim under section 502(d) of the Bankruptcy Code on the basis that Sonson's account has a negative balance that is subject to turnover, and until Sonson pays MFGI the amount of his account deficit, his Claim must be disallowed. Sonson filed a response in opposition to the Objection (the “Opposition,” ECF Doc. # 8157),³ and the Trustee filed a reply (the “Reply,” ECF Doc. # 8730).⁴ The Court held a hearing on the Objection on April 7, 2015 and took the matter under submission. This Opinion sustains the Objection to Sonson's Claim.

I. BACKGROUND

On October 31, 2011 (the “Filing Date”), the Honorable Paul A. Engelmayer, United States District Court Judge for the Southern District of New York, entered an order commencing the liquidation of MFGI pursuant to the provisions of SIPA (the “MFGI Liquidation Order”). (Obj.¶ 4.) On November 23, 2011, the Court entered the Order Granting Trustee's Expedited Application Establishing Parallel Customer Claims Processes and Related Relief (the “Claims Process Order,” ECF Doc. # 423), which, among other things, (1) approved the procedures for filing, determining, and adjudicating claims, and (2) established January 31, 2012 as the bar date for filing securities and commodity futures customer claims in the SIPA Proceeding and June 2, 2012 as the date by which all claims must be received by the Trustee. (See id. ¶¶ 6–7.)

A. Sonson's Account with MFGI

Sonson opened an investment trading account with MFGI through Lind–Waldock. (Obj.¶ 8.) On August 20, 2009, Sonson executed a customer agreement with MFGI (the “Customer Agreement,” Morisseau Decl. Ex. 2). (Obj.¶ 8.) The Customer Agreement governed the relationship between the parties and granted MFGI various rights, including, without limitation, the right to declare Sonson in default without declaring a margin call and the right to liquidate his account without affording him prior notice. (Id. (citing Morisseau Decl. Ex. 2 ¶ 5).)

According to the Trustee, there was a severe market disruption on May 6, 2010; a rapid decline in prices for many major exchange-listed stocks caused Sonson's account to become undermargined and exposed MFGI to risk. (Id. ¶ 9.) Although not contractually obligated to do so, MFGI attempted to notify Sonson three times on May 6 to inform him that his account was below margin and that he needed to deposit $154,000 into his account to maintain his minimum margin balance. (Id. ) MFGI was unable to speak with Sonson on each attempt to contact him. (See id. )

MFGI's attempts to contact Sonson on May 6, 2010 are summarized as follows. First, Tracy Schafroth, an MFGI-registered representative, telephoned Sonson's home number and left a voice message informing him about the margin demand. (Id. (citing Morisseau Decl. Ex. 3 at 14).) Second, Schafroth subsequently called Sonson's cell phone at approximately 1:25 p.m. (prevailing Central time) and left another voice message indicating that the margin call had been issued. (See id. (citing Morisseau Decl. Ex. 3 at 14); see Sonson Decl. ¶ 12.) Third, Schafroth sent Sonson an email stating the following: “Your account ... is on margin call for $154,000. Failure to meet this margin call may result in Lind–Waldock liquidating all or part of the positions in your account. You must notify the order desk in the event that you are going to meet this call.” (Id. (citing Morisseau Decl. Ex. 4).) After boarding a flight from Boston to Charlotte scheduled to depart at 1:45 p.m. (prevailing Central time), Sonson listened to the cell phone voice message left by Schafroth a few minutes after it was made. (See Sonson Decl. ¶¶ 11, 15.) Despite landing in Charlotte before the close of market on May 6, 2010, Sonson waited until after the market closed to contact MFGI. (See id. ¶ 20.)

The Trustee asserts that Sonson's account was overdrawn within 30 minutes from the time Schafroth left Sonson the initial voice message. (Obj.¶ 10.) Sonson failed to contact MFGI, and MFGI was forced to cover Sonson's debit to protect itself. (Id. ) Accordingly, MFGI began liquidating Sonson's account. (Id. ) By the following day, Sonson's customer account was fully liquidated and had a debit balance in the amount of $51,093.46. (Id. ) According to the Trustee, the Customer Agreement provided that Sonson was “unconditionally obligated” to pay MFGI the amount of any debit balance in his account regardless of how it was incurred. (Id. (citing Morisseau Decl. Ex. 2 ¶ 5).)

MFGI demanded that Sonson pay the debit balance, but Sonson refused to pay. (Id. ¶ 11.) Sonson contends that MFGI improperly liquidated his account. (Id. ) Rather than pay MFGI the debit balance, on June 22, 2010, Sonson commenced a lawsuit (the “Prepetition Litigation”) against MFGI in the United States District Court for the Northern District of Illinois (the “District Court”) seeking $284,543 in damages and asserting causes of action for breach of contract, breach of the fiduciary duty of care, and misrepresentations in violation of the CEA. (Id. ) MFGI counterclaimed for breach of contract alleging that Sonson failed to pay MFGI the debit balance as well as fees and costs pursuant to the terms of the Customer Agreement. (Id. ) The Prepetition Litigation was stayed by entry of the MFGI Liquidation Order.⁵ (Id. ) Sonson has not sought relief from the automatic stay. (Id. )

B. The Claim

On March 30, 2012, Sonson submitted his Claim seeking approximately $545,000. (Id. ¶ 12.) Sonson asserts that the damage award of $284,543 that he sought in the Prepetition Litigation was a minimum amount, and the amount he seeks in his Claim is based on a hypothetical valuation of his MFGI account based on similar positions he held at Tradestation Securities (“Tradestation”). (Id. (citing Morisseau Decl. Ex. 8).)

C. The Objection

The Trustee argues that section 502(d) of the Bankruptcy Code requires the disallowance of any claim from a claimant from which property is recoverable unless the claimant pays the amount for which it is liable. (Id. ¶ 14 (citing 11 U.S.C. § 502(d) ).) According to the Trustee, the debit balance of Sonson's account, which has a fair and reasonable value of approximately $51,093.46, constitutes estate property subject to turnover pursuant to SIPA section 78fff(b) and section 542 of the Bankruptcy Code. (Id. ) The Trustee asserts that Sonson has refused to turn over any portion of this property to MFGI or otherwise agree to a consensual resolution of the debit balance. (Id. ¶ 15.) Accordingly, the Trustee argues that Sonson's Claim should be disallowed unless and until he has paid or turned over this property to the Trustee. (Id. )

D. The Opposition

Sonson asserts four arguments in his Opposition. First, Sonson argues that the Customer Agreement incorporates federal law, regulations, and market practices, and MFGI's conduct did not meet what was required under federal law and market custom. (See Opp. at 2–3.) Second, Sonson argues that he was entitled to address the margin call by the close of trading on May 6, 2010, as was understood by Sonson and Schafroth. (See id. at 7–8.) Sonson also asserts that the Customer Agreement incorporates a reasonable notice requirement, and MFGI did not provide Sonson with reasonable notice before liquidating the positions in his account. (See id. at 8.) Third, Sonson disputes that his account was in debit when liquidated by MFGI, arguing that “no reliable intraday valuation of an account holding such positions could be made, and certainly not on the day in question.” (Id. at 9.) Sonson claims he held positions similar to those in his MFGI account in two other accounts with Tradestation, actual margin calls were not received from Tradestation until the morning of May 7, 2010, and those margin calls were quickly met. (Id. ) Sonson contends that the indiscriminate manner in which MFGI liquidated his account led to the disputed deficit, rather than his actions or inactions. (See id. at 10.) Finally, Sonson argues that he is not obligated to pay the disputed deficit as a condition to maintaining his Claim. (Id. ) According to Sonson, the Trustee must first obtain a determination that Sonson owes money to the estate before the Claim may be disallowed under Bankruptcy Code section 502(d). (See id. at 10–13.)

E. The Reply

According to the Trustee, the material facts regarding Sonson's Claim are not in dispute. (Reply ¶ 2.) On May 6, 2010, many financial markets experienced an extremely rapid decline later referred to as...