Inskeep v. Griffin
| Decision Date | 19 October 2010 |
| Docket Number | No. 10 C 1915,10 C 1915 |
| Citation | 440 B.R. 148 |
| Parties | Leroy G. INSKEEP, not individually but as Trustee for Griffin Trading Company, Inc., Plaintiff/Appellant, v. Farrel J. GRIFFIN and Roger S. Griffin, Defendants/Appellees. |
| Court | U.S. District Court — Northern District of Illinois |
Catherine L. Steege, Jenner & Block LLP, David N. Missner, DLA Piper U.S. LLP, Chicago, IL, for Plaintiff/Appellant.
Edward King Poor, Quarles & Brady LLP, Matthew Michael Wawrzyn, Wawrzyn LLC, Matthias A. Lydon, Winston & Strawn LLP, Chicago, IL, for Defendants/Appellees.
After Griffin Trading Company ("Griffin Trading") filed for Chapter 7 bankruptcy, the bankruptcy trustee, Leroy G. Inskeep, ("Trustee") brought an adversary complaint against Farrel J. Griffin and Roger S. Griffin (collectively, "Defendants"), Griffin Trading's directors and sole shareholders. The adversary complaint alleged, inter alia, that Defendants breached the fiduciary duties they owed to their creditors. (R. 1, Appeal R. at 29-30.) Although a bankruptcy court initially ruled in favor of the Trustee on his breach of fiduciary duty claim, its ruling was subsequently vacated and remanded. See Inskeep v. Griffin, No. 05 C 1834, 2008 WL 192322, at *13 (N.D.Ill. Jan.23, 2008). On remand, the bankruptcy court ruled in favor of Defendants. See In re Griffin Trading Co., Inc., 418 B.R. 714, 726 (Bankr.N.D.Ill.2009). Presently beforethe Court is the Trustee's appeal from the bankruptcy court's second ruling. For the reasons stated below, the Court affirms the bankruptcy court's judgment.
Defendants were the directors and sole shareholders of Griffin Trading Company, a futures commission merchant. .) The Commodities Exchange Act defines a futures commission merchant as an entity that: "(A) is engaged in soliciting or in accepting orders for the purchase or sale of any commodity for future delivery on or subject to the rules of any contract market or derivatives transaction execution facility; and (B) in or in connection with such solicitation or acceptance of orders, accepts any money, securities, or property (or extends credit in lieu thereof) to margin, guarantee, or secure any trades or contracts that result or may result therefrom." 7 U.S.C. § 1a(20). During the relevant time period, Griffin Trading had its headquarters in Chicago, along with a branch office in London. .)
A future is a standardized contract to purchase ("go long") or to sell ("go short") the subject matter of the contract on a future date ("the delivery date") at a price agreed upon at the time the contract is entered into. (R. 13, App., Ex. 8 at 7.) Futures contracts may be settled by delivery of the underlying subject matter on the delivery date. ( Id.) In the vast majority of cases, however, futures contracts are settled by entering into an equal and opposite transaction; the settlement price will be a payment between the parties of the difference between the contract price and the price for the subject matter on the delivery date. ( Id.) The difference between the contract price and the price on the delivery date represents a profit or a loss on the transaction. ( Id.)
Futures traders act through brokers—specifically, futures commission merchants—who are members of a commodities exchange. ( See R. 13, App., Ex. 1 at 49.) These members can either be clearing or non-clearing members of an exchange. ( See id., Ex. 8 at 12.) When a trader places an order to make a trade, his or her broker executes the trade by forming a contract with another broker. ( See id., Ex. 8 at 49-50.) Details of the trade are then submitted to the exchange's clearing house by both the buying and selling broker. ( Id., Ex. 8 at 12.) The exchange clearing house subsequently attempts to match up the details of the trade for registration. ( Id.) Once the trade details are matched, the trade is accepted by the exchange's clearing house. ( Id.) After acceptance or, as it is also known, clearance of the trade, the transaction is registered and the original contract between the buying and selling broker is novated so that the exchange's clearing house becomes the counterparty to both the buyer and seller. ( Id.) In other words, after registration, two parallel contracts are created: one between the clearing house and the purchaser clearing member, and another between the clearing house and the buyer clearing member. ( Id.) Upon clearance, each of the original counterparties no longer carries the risk of the other original counterparty's default; instead, they are in a contractual relationship only with the clearing house. ( Id.) Importantly, only a clearing member of an exchange may submit trades to that exchange's clearing house. ( Id.) If a customer's broker is not a clearing member of an exchange, the broker must submit its customer's trades through a clearing member. ( Id.)
By virtue of their contractual relationship with the clearing house, clearingmembers bear principal financial responsibility for the cleared trade. This contractual relationship, however, is only the beginning of the chain of liability. ( See id., Ex. 8 at 13.) Where a non-clearing member utilizes a clearing member to clear a trade on an exchange, the non-clearing member becomes liable to the clearing member. ( See id.) To recover for its liability, the non-clearing member looks to the futures trader for reimbursement. ( See id.) In contrast, where a clearing member enters into an agreement directly on behalf of a futures trader, the former looks to the latter for payment. ( See id.)
To reduce their financial exposure, exchanges require clearing members to deposit funds, which are called the "margin." ( Id.) For a similar reason, clearing and non-clearing members of an exchange will, in turn, require their customers to maintain margin funds in their customer trading accounts. ( Id.) There are two types of margin payments: (1) an initial margin payment, which is essentially a good faith deposit made to ensure performance under the contract and is paid at the time the contract is entered into; and (2) a variation margin call, which may be required when the clearing member has shown a loss on the day's trading. ( Id., Ex. 8 at 13-14.)
Beginning on Monday, December 21, 1998 and continuing into the morning of Tuesday, December 22, 1998, John Ho Park ("Park"), a trader who operated out of Griffin Trading Company's London office, substantially exceeded his trading limits and suffered losses. ( Id., Ex. 8 at 17; Ex. 1 at 89-90.) During these two days, Park executed a series of trades in German Bund futures contracts on the Eurex exchange using the execution services of another broker, Tullet & Tokyo Futures and Trades Options ("Tullet"). ( Id., Ex. 8 at 17.) Because Griffin Trading was not a clearing member of Eurex, it used MeesPierson N.V. ("MeesPierson") as its clearing broker for these trades. .) Unfortunately, Park suffered losses when overnight changes in the market rendered his trading positions unprofitable. (R. 13, App., Ex. 1 at 91.) Pursuant to the previously described chain of liability, Eurex first looked to MeesPierson for any margin call or payment in settlement of Park's realized losses. .) MeesPierson, in turn, looked to Griffin Trading for payment. ( See id.) Finally, Griffin Trading requested payment from Park. ( See id.) At the time of the relevant transactions, Park did not have sufficient funds on deposit with Griffin Trading to pay the losses suffered by his unprofitable trading. ( Id. ¶ 13.) Additionally, Griffin Trading did not have the funds needed to cover the losses incurred by Park. ( Id.)
Griffin Trading's London office first became aware of Park's losses on the morning of December 22. ( Id., Ex. 8 at 19.) That same morning, MeesPierson issued a margin call for 5 million Deutsche Marks ("DM") (equivalent to approximately £1.8 million), a large part of which was to cover the initial margin on Park's December 21 trades. ( Id.) According to banking conventions, where instructions for a foreign currency transaction are given to a bank after 9:30 a.m., the transaction will be for value the next day. ( Id.) Thus, because the MeesPierson margin call was received after 9:30 a.m. on December 22, its payment would be due on December 23.
On the morning of December 22, the first two of four transactions occurred in response to the MeesPierson margin call. ( Id., Ex. 8 at 19; Ex. 1 at 128-29.) First, at 11:19 a.m. GMT, Griffin Trading's London office transferred £ 1.61 million fromGriffin Trading's account at the London Clearing House to its account at the Bank of Montreal. ( Id.) Next, £1.6 million were immediately transferred from Griffin Trading's Bank of Montreal account to its account at Credit Lyonnais Rouse Limited. ( Id.) The following day, at 11:51 a.m. GMT, the funds were converted into DM 5 million and sent back to the Bank of Montreal. ( Id.) Finally, at 11:52 a.m. on December 23, DM 5 million were transferred from the Bank of Montreal to MeesPierson's bank in Germany, Commerzbank. ( Id.; Ex. 4 at 44.)
Farrel Griffin arrived at the Chicago office between 12:00 and 1:00 p.m. GMT (6:00-7:00 a.m. Chicago time) on December 22, over half an hour after the initial movement of funds. ( Id., Ex. 2 at 6.) It was upon his arrival to the office that Farrel Griffin first learned of Park's losses. ( Id., Ex. 1 at 108-11.) In response to the information he received regarding these losses, Farrel Griffin called Roger Griffin and spoke with him on a conference call throughout the day. ( Id.) That day, Farrel Griffin took a series of additional steps in response to this information, including transferring customer accounts to other...
To continue reading
Request your trial
-
In re Don E. Patterson And Diane M. Patterson
... ... See Inskeep v. Griffin, 440 B.R. 148 (N.D.Ill.2010) (law of the case presumption against reopening matters already decided reflects interests in consistency, ... ...
-
In re Griffin Trading Co.
...683 F.3d 81982 Fed.R.Serv.3d 125256 Bankr.Ct.Dec. 178In re GRIFFIN TRADING COMPANY, Debtor.Appeal of Leroy G. Inskeep.No. 103607.United States Court of Appeals,Seventh Circuit.Argued Sept. 16, 2011.Decided June 25, 2012.Rehearing and Rehearing En Banc Denied Aug. 7, 2012.* ... [683 F.3d 820]Edward King Poor (argued), Attorney, Quarles & Brady LLP, Chicago, IL, for Farrel J. Griffin and Roger S ... ...