Robert Miller, Fargo 500 LLC v. Ira Bodenstein, Not Individually But Solely of the Eperegrine Fin. Grp., Inc. (In re Peregrine Fin. Grp., Inc.), Case No. 12 B 27488
| Decision Date | 13 May 2015 |
| Docket Number | Adversary No. 14 A 00837,Case No. 12 B 27488 |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois |
| Parties | In Re: Peregrine Financial Group, Inc. Debtor. Robert Miller, Fargo 500 LLC and Gainesville Coins, Inc., on behalf of themselves and on behalf of all persons and entities similarly situated, Plaintiffs, v. Ira Bodenstein, not individually but solely as the duly appointed Chapter 7 trustee of the estate of Peregrine Financial Group, Inc., Defendant. |
MEMORANDUM OPINION
The plaintiffs in this adversary proceeding are former customers of Peregrine Financial Group, Inc. who traded foreign currencies ("forex") and over-the-counter metals ("OTC metals"). They allege claims against Ira Bodenstein, the chapter 7 trustee of Peregrine, based on the prepetition theft of millions of dollars from Peregrine committed by its founder and former CEO - Russell Wasendorf, Sr. The complaint alleges four claims: breach of fiduciary duty, common law fraud, unjust enrichment, and conversion. The plaintiffs seek damages in the amountsattributed to their forex and OTC metals trading accounts, as well as punitive damages, attorneys' fees, and the imposition of a constructive trust. They also seek to represent a class of Peregrine's forex and OTC metals customers.
The trustee moved to dismiss the complaint under Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure. He contends that: (1) this adversary proceeding is really a time-barred proof of claim against the Peregrine bankruptcy estate; (2) the fraud and embezzlement committed by Wasendorf cannot be imputed to the debtor; and (3) the claims are barred by collateral estoppel and law of the case. The court agrees that the plaintiffs are asserting claims against the bankruptcy estate that are time-barred under the bar date order, so they must be dismissed. The court therefore need not address the other arguments raised in the trustee's motion.
This adversary proceeding is within the court's core bankruptcy jurisdiction under 28 U.S.C. § 157(b)(2)(B), and the court has the authority to enter a final judgment. The plaintiffs seek allowance of claims against the bankruptcy estate based on their prepetition contracts with Peregrine and the prepetition actions of Peregrine's former CEO. As discussed below, the causes of action alleged in the complaint fall squarely within the definition of a "claim" in 11 U.S.C. § 101(5) and should have been alleged in timely proofs of claim filed in the bankruptcy case, not in an adversary proceeding. The court has both the jurisdiction and authority to adjudicate claims against the bankruptcy estate. See, e.g., In re Woods, 517 B.R. 106, 114 (Bankr. N.D. Ill. 2014) (); In re Schmid, 494 B.R. 737, 744 (Bankr. W.D. Wis.) appeal dismissed sub nom. Schmid v. Bank of Am., N.A., 498 B.R. 221 (W.D. Wis. 2013), appeal dismissed (Jan. 23, 2014) ("There is no question that the allowance of a creditor's proof of claim is a core matter under 28 U.S.C. § 157(b)(2)(B) that this Court may hear and finally determine.") The court may therefore enter a final judgment in this adversary proceeding.
The trustee seeks dismissal of the complaint primarily under Rule 12(b)(6) of the Federal Rules of Civil Procedure, which applies to adversary proceedings through Rule 7012 of the Federal Rules of Bankruptcy Procedure. Fed. R. Bankr. P. 7012. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 556). The court takes all well-pleaded allegations of the complaint as true and views them in the light most favorable to the plaintiff. Santiago v. Walls, 599 F.3d 749, 756 (7th Cir. 2010).
In ruling on a motion to dismiss under Rule 12(b)(6), a court usually considers only the facts alleged in the complaint. The court may also "take judicial notice of matters of public record" without converting a motion based on Rule 12(b)(6) into a motion for summary judgment. Henson v. CSC Credit Servs., 29 F.3d 280, 284 (7th Cir. 1994). Although courtsgenerally do not grant motions to dismiss based on affirmative defenses because a complaint "need not contain any information about defenses and may not be dismissed for that omission," Xechem, Inc. v. Bristol-Myers Squibb Co., 372 F.3d 899, 901 (7th Cir. 2004) (emphasis in original), a plaintiff may plead himself out of court by admitting all the elements of an impenetrable defense. Id. See also, Indep. Trust Corp. v. Stewart Info. Servs. Corp., 665 F.3d 930, 942 (7th Cir. 2012) ().
The complaint alleges that prior to July 10, 2012, the petition date in this case, the plaintiffs and proposed class members opened accounts with Peregrine to trade forex and OTC metals. Complaint, ¶ 11. On July 8, 2012, the Commodity Futures Trading Commission notified Wasendorf that Peregrine's bank accounts were going to be electronically monitored. Complaint, ¶ 19. The next day, Wasendorf attempted suicide. Prior to this attempt, he drafted and signed a statement in which he admitted embezzling millions of dollars from Peregrine over a period of 20 years by using falsified bank statements, intercepting balance confirmation forms from regulators, forging a bank officer's signature, and intentionally misreporting information to regulators. Complaint, ¶ 20. Wasendorf was arrested on July 13, 2012 and charged with numerous crimes, including lying to federal regulators and defrauding customers out of $100 million. Wasendorf's suicide attempt, confession and arrest were widely reported in the news media. See e.g., Exhibit B to Trustee's Reply. Wasendorf entered into a plea agreement in September 2012, and he was sentenced in January 2013 to 50 years in prison and ordered to paymore than $215 million in restitution. Complaint, ¶ 22.
In September 2012, this court entered an order in the Peregrine bankruptcy case setting November 16, 2012 as the last day for customers and general creditors to file proofs of claim against Peregrine. Peregrine Docket no. 200. In November 2012, the court entered an order extending the bar date to December 14, 2012. Peregrine Docket no. 281. Each plaintiff filed an individual proof of claim before the bar date. Exhibits 3, 4 and 5 to Trustee's Motion. The plaintiffs filed proofs of claim only on behalf of themselves, not on behalf of a putative class. Each proof of claim was submitted on a forex customer claim form that identified basic information about the account, stated an account balance, and contained a copy of an account statement as an attachment. The proof of claim form contained the question: "Do you assert any claims against PFG based on your forex account at PFG that are not reflected in your account balance ...?" Each plaintiff responded "no" to this question. The plaintiffs filed this adversary proceeding on December 16, 2014.
The trustee argues that the complaint must be dismissed because it is a poorly disguised attempt to bring new claims against the Peregrine bankruptcy estate long after the claims bar date passed. The court agrees.
A. Claims Allowance Process in Chapter 7
The plaintiffs allege that Peregrine is liable to them for breach of fiduciary duty (Count I), common law fraud (Count II), unjust enrichment (Count III), and conversion (Count IV), allbased on Wasendorf's theft of millions of dollars from Peregrine's bank accounts. They seek compensatory damages, punitive damages, attorneys' fees, and the imposition of a constructive trust. All four claims are based on the plaintiffs' rights under the Peregrine customer agreement and the prepetition criminal acts committed by Wasendorf. Each claim fits within the definition of a "claim" in the Bankruptcy Code.
11 U.S.C. § 101(5). Thus, a "claim" includes not only a right to payment but also a right to an equitable remedy that gives rise to a right to payment. See In re Chateaugay Corp., 944 F.2d 997, 1008 (2d Cir.1991).
In each claim, the plaintiffs assert a right to payment from the Peregrine bankruptcy estate based on the amounts attributed to their forex and OTC metals accounts. Their requests for compensatory and punitive damages fall within § 101(5)(A) because they direct assert a right to payment. Their request for equitable relief in the form of a constructive trust also gives rise to a request for payment of the amounts attributed to their accounts, so it fits squarely within § 101(5)(B). Thus, all four counts of the complaint assert "claims" against the Peregrine estate under § 101(5).
The Bankruptcy Code creates a clearly-defined process for a creditor holding a "claim" toseek payment from a chapter 7 bankruptcy estate. Section 501(a) provides that a creditor "may file a proof of claim." 11 U.S.C. § 501(a). Section...
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