Secure Leverage Grp., Inc. v. Bodenstein

Decision Date15 August 2016
Docket NumberNo. 15 CV 04260,No. 15 CV 00344,No. 14 CV 05024,14 CV 05024,15 CV 04260,15 CV 00344
Citation558 B.R. 226
Parties Secure Leverage Group, Inc., Treasure Island Coins, Inc., David G. Beyerleing, Richard W. Medley, Michael Krall, James Landrum, Jr., Plaintiffs-Appellants, v. Ira Bodenstein, Defendant-Appellee; v. U.S. Commodity Futures Trading Commission, Intervenor. Robert Miller, Fargo 500 LLC, Gainesville Coins, Inc., Plaintiffs-Appellants, v. Ira Bodenstein, Defendant-Appellee. Robert Miller, Fargo 500 LLC, Gainesville Coins, Inc., Plaintiffs-Appellants, v. Ira Bodenstein, Defendant-Appellee.
CourtU.S. District Court — Northern District of Illinois

Michael C. Moody, Michael J. O'Rourke, O'Rourke & Moody, Chicago, IL, Christopher Robert Riano, Drohan Lee LLP, New York, NY, for Plaintiffs-Appellants.

Terence G. Banich, Carrie E. Davenport, David Richard Doyle, Robert Michael Fishman, Shaw Fishman Glantz & Towbin LLC, Chicago, IL, for Defendant-Appellee.

Anne W. Stukes, U.S. Commodity Futures Trading Commission, Washington, DC, for Intervenor.


John J. Tharp, Jr.

, United States District Judge

Pending before the Court are the bankruptcy appeals brought by two groups of former customers of the now defunct Peregrine Financial Group (“Peregrine”) against its trustee, and appellee here, Ira Bodenstein. The first appeal, 14 C 05024, raises two primary issues. First, the appellants in that case challenge the bankruptcy court's ruling that their retail foreign exchange (“forex”) and OTC metal contracts were not commodity contracts within the meaning of 11 U.S.C. § 761(4)

, and therefore did not receive Chapter 7 protection as “customer funds.”1

In re Peregrine Fin. Group, Inc. , 510 B.R. 190, 205 (Bankr.N.D.Ill.2014). Second, they appeal the bankruptcy court's finding, after the conclusion of a bench trial, that their funds were not held in a resulting trust by Peregrine and, thus, were properly included in the bankruptcy estate. See In re Peregrine Fin. Group, Inc. , 12 B 27488, 2014 WL 2197945, at *23 (Bankr.N.D.Ill. May 27, 2014)


After the bankruptcy court entered its judgment, a second group of customers, represented by the same attorney, filed a class action complaint (“the FOREX Class Action”) against Bodenstein, which the bankruptcy court dismissed as untimely. See In re Peregrine Fin. Group, Inc. , No. 12 B 27488, 2015 WL 2237201, at *3 (Bankr.N.D.Ill. May 13, 2015)

. That dismissal forms the basis of the second appeal, 15 C 04260, in which the customers argue that the court should have construed their class action claims as amended proofs of claim that relate back, under Rule 15(c), to their timely filed initial proofs of claim.

Not content merely to defend on appeal these victories in the bankruptcy court, Bodenstein has, for his part, moved for sanctions against the customers and their counsel. That motion is pending in case 15 C 344, which was opened when the customers moved to withdraw the reference in the Forex Class Action. For the reasons that follow, the bankruptcy court's judgments are affirmed and Bodenstein's motion for sanctions is denied.


Peregrine was a registered Future Commission Merchant (“FCM”) and a registered “Forex Dealer Member” of the National Futures Association. FCMs are similar to stock brokerages but instead of dealing in stocks they deal primarily in financial instruments known as futures contracts.2 FCMs also may deal in instruments other than futures. Peregrine, in addition to futures, dealt in retail foreign currency transactions (“retail forex”) and spot metal transactions.3 These instruments are often referred to as “over the counter” transactions because, among other things, unlike futures they are not traded on an exchange or cleared by a clearing organization.

The appellants are investors who executed a number of retail forex and spot metals contracts with Peregrine.4 In executing these contracts, Peregrine required all of the appellants to sign a Customer Agreement (or “Agreement”) before they could open a trading account. Brief of Appellee 4, 14-CV-05024, ECF No. 13. The Agreement required customers to wire the funds they wished to trade to an account at JPMorgan Chase Bank in the name of “PFG, Inc.,” before Peregrine would execute the trade for them. Id. Per the Agreement, Peregrine was not required to hold the appellants' forex and spot metals funds separate from its operating funds. Indeed, when the forex bank accounts' assets exceeded Peregrine's obligations to its retail forex customers, Peregrine would use the excess balance to pay off its own liabilities. Id. This stands in contrast to Peregrine's customers' futures funds, which by law were required to be held in separate accounts. The Agreement also contained a risk disclosure, which informed the plaintiffs that their forex deposits lacked the regulatory protections given to futures funds and warned that if Peregrine filed for bankruptcy, the plaintiffs might be treated as unsecured creditors. Id.

In 2012, it was discovered that over a twenty-year period Peregrine's CEO, Russel L. Wasendorf, had embezzled nearly $200 million from Peregrine's segregated customer future accounts. Brief of Appellants 2, 14-CV-05024, ECF No. 8. In July 2012, as a result of this defalcation, Peregrine filed for bankruptcy. Ira Bodenstein was appointed as Peregrine's trustee. In September 2012, Bodenstein filed a motion seeking authority under section 766(h) of the Bankruptcy Code

to make interim distributions of “customer property” to Peregrine customers who had traded in “commodity contracts,” as that term is defined in section 761(4) of the Bankruptcy Code. See

In re Peregrine Fin. Group, Inc. , 510 B.R. at 192. Bodenstein excluded Peregrine's retail forex and OTC metal customers from the partial distribution, however, on the ground that forex and OTC metal accounts did not qualify as “commodity contracts.” Id.

The customers objected and filed an adversary complaint against Bodenstein arguing that their forex and OTC metal transactions with Peregrine qualified as commodity contracts under section 761

and that the funds in those accounts should have been included in the interim distribution. Id. They argued that although their transactions were not futures contracts—which are expressly included within the definition of commodity contracts—they were close enough to futures contracts to fall within section 761(4)(F)(i), which includes as commodity contracts transactions that are “similar to” the other types of transactions specifically defined section 761(4). 11 U.S.C. § 761(4)(F)(i). In the alternative, the customers also argued that their funds had been held in a resulting trust by Peregrine and, thus, should be distributed apart from the bankruptcy estate. Because title to their funds was never transferred to Peregrine, the customers argued, they should have their funds paid in full immediately.

On summary judgment, the court rejected the customers' contention that their forex and OTC metal transactions shared enough features with futures contracts to fall within the “similar to” provision of Section 761

and therefore dismissed the related counts of the customers' complaint. In re Peregrine Fin. Group, Inc. , 510 B.R. at 205

. After a bench trial on the remaining counts,5 the court went on to find that the customers had failed to meet their burden of proof with respect to their argument that the funds had been held in a resulting trust and concluded that once the customers transferred their funds to Peregrine they no longer retained title to those funds. See

In re Peregrine Fin. Group, Inc. , 2014 WL 2197945 at *23.

After the first adversary proceeding was terminated, the second group of customers filed the FOREX Class Action adversary proceeding against Bodenstein, alleging breach of fiduciary duty, fraud, unjust enrichment, and conversion; they also sought the imposition of a constructive trust. After filing their class action complaint, the customers filed a motion to withdraw the proceeding from the bankruptcy court to the district court, arguing that they had a right to a jury trial on their claims and that their claims against the trustee were non-core under 28 U.S.C. § 157(b)

. That motion was mooted, however, on May 13, 2015, when the Bankruptcy Court dismissed the class action complaint as untimely. See

In re Peregrine Fin. Group, Inc. , 2015 WL 2237201, at *3. Bodenstein's motion for sanctions in that case, however, survives the dismissal of the motion to withdraw the reference and is addressed herein.


District courts have jurisdiction to hear appeals from final judgments, orders, and decrees of bankruptcy judges entered in Chapter VII bankruptcy proceedings. 28 U.S.C. § 158(a)

. Because [d]istrict courts sit as appellate courts when hearing appeals from bankruptcy courts,” Hijjawi v. Five North Wabash Condo. Ass'n , 491 B.R. 876, 880 (N.D.Ill.2013) (citing In re Neis , 723 F.2d 584, 588 (7th Cir.1983) ), the district court applies a dual standard of review that “examine[s] the bankruptcy court's determinations of law de novo and its findings of facts for clear error.” In re Smith , 582 F.3d 767, 777 (7th Cir.2009).

In their consolidated appeals, appellants present the following issues for review:

a. Did the bankruptcy court err in finding that Peregrine's forex and spot metal customers were not placed in a resulting trust?
b. Did the bankruptcy court err in finding that 11 U.S.C. § 761(4)(F)(i)

(the “similar contracts clause”) does not extend to forex and metals contracts because such contracts are not “similar to” futures contracts?

c. Did the bankruptcy court err in dismissing the customers' class action complaint as untimely because they brought it after the bar date for filing a proof of claim?

d. Did the Bankruptcy Court err in refusing to consider the class action complaint as an amendment of customers' proofs of claim which related back to the date those claims were filed?

These issues are addressed in turn below.


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