Secure Leverage Grp., Inc. v. Bodenstein (In re Peregrine Fin. Grp., Inc.)

• Decision Date: 01 February 2013
• Docket Number: Adversary No. 12 A 01572.,Bankruptcy No. 12 B 27488.
• Citation: 487 B.R. 498
• Parties: In re PEREGRINE FINANCIAL GROUP, INC., Debtor. Secure Leverage Group, Inc., et al., Plaintiffs, v. Ira Bodenstein, not individually but solely as the duly appointed Ch. 7 trustee of the Estate of Peregrine Financial Group, Inc., Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

487 B.R. 498

In re PEREGRINE FINANCIAL GROUP, INC., Debtor.Secure Leverage Group, Inc., et al., Plaintiffs,

v.Ira Bodenstein, not individually but solely as the duly appointed Ch. 7 trustee of the Estate of Peregrine Financial Group, Inc., Defendant.

Bankruptcy No. 12 B 27488.

Adversary No. 12 A 01572.

United States Bankruptcy Court,

N.D. Illinois,

Eastern Division.

Feb. 1, 2013.

Michael C. Moody, O'Rourke & Moody, Chicago, IL, for Plaintiffs.

Robert M. Fishman, Shaw, Fishman, Glantz & Towbin LLC, Chicago, IL, for Defendant.

MEMORANDUM OPINION

CAROL A. DOYLE, Bankruptcy Judge.

The plaintiffs in this adversary proceeding were customers of Peregrine Financial Group, Inc. who traded in foreign currencies and metals through accounts with Peregrine. They allege four counts, three of which seek a declaratory judgment that Peregrine does not hold the equitable interest in the funds in their accounts based on the account agreement with Peregrine or by operation of a resulting trust or a constructive trust. The fourth count seeks a declaration that the contracts traded by the plaintiffs are “commodity contracts” under § 761(4) of the Bankruptcy Code and that the funds they deposited with Peregrine should be treated as “customer property” for purposes of the commodity broker liquidation provisions of Subchapter IV of Chapter 7 of the Bankruptcy Code.

The trustee of Peregrine, Ira Bodenstein, has moved to dismiss all four counts of the complaint. He argues that the claims in the Counts I, II and III seeking declarations that Peregrine does not hold the equitable interest in the funds the plaintiffs deposited with Peregrine must be dismissed as a matter of law based on certain provisions of the account agreement and a disclosure statement regarding potential risks of trading in foreign currencies. The trustee also moves to dismiss Count III seeking a constructive trust on the basis that no trust was imposed by a court pre-petition and bankruptcy courts should not impose post-petition constructive trusts. The trustee seeks dismissal of Count IV regarding the application of the commodity broker liquidation provisions of the Bankruptcy Code based on the same arguments he made with respect to Counts I through III regarding the account agreement and risk disclosure statement. For the reasons discussed below, none of the trustee's arguments is persuasive except with respect to the constructive trust sought in Count III. The court will grant the motion with respect to Count III but will deny the motion regarding Counts I, II and IV.

I. Background

This adversary proceeding arises from the chapter 7 liquidation of Peregrine, a registered “Futures Commission Merchant” (“FCM”) and a registered “Forex Dealer Member” of the National Futures Association (“NFA”). Before Peregrine filed for bankruptcy, the plaintiffs opened accounts with Peregrine for the purpose of trading retail foreign currency contracts (“forex”) and spot metal contracts (“metals”).

According to the complaint, each plaintiff executed a standard form customer agreement (the “Agreement”) with Peregrine. The Agreement was a master agreement covering all types of trading through Peregrine, not just forex and metals, including cash commodities, security futures products, commodities futures contracts, commodity swaps, currency swap transactions, and various options and derivatives. Some types of trading covered by the Agreement took place on regulated exchanges while some types, including forex transactions, did not. The Agreement states that the customer was given a copy of a Currency Forex Risk Disclosure Statement (“Forex Disclosure”) that Peregrine was required by law to provide to each forex customer. The Forex Disclosure identified various risks taken by parties trading in foreign currencies, including that the trades do not take place on regulated exchanges. The Agreement allowed customers to engage in all the types of trading specified in the contract using money they deposited with Peregrine and margin loans provided by Peregrine. Peregrine maintained an online trading system that allowed customers to place trade orders electronically. The plaintiffs allege that they deposited funds into specific accounts designated by Peregrine for purposes of forex trading.

Peregrine filed a bankruptcy petition in July 2012, after potential fraud and theft of customer funds was disclosed. In September 2012, the trustee filed a motion seeking authority to begin distributions of “customer property” pursuant to § 766(h) of the Bankruptcy Code, 11 U.S.C. § 766(h), to Peregrine's customers who traded commodities contracts. The trustee excluded Peregrine's forex and metals customers, including the plaintiffs, from the customers who would receive a partial distribution of funds at that time. The plaintiffs objected to the trustee's motion on the basis that they should be included in the interim distribution. The court overruled their objections and granted the motion. The plaintiffs then filed a motion seeking to compel the trustee to abandon the funds which they deposited with Peregrine because they are not property of the bankruptcy estate. In the alternative, the plaintiffs requested that the trustee be required to treat funds in their accounts as “customer property” like the funds in accounts of commodities customers. In effect, the plaintiffs were saying that they were entitled to the same kind of distributions under § 766(h) as the trustee was making to other customers of Peregrine. The court suggested that it might be more appropriate to address these issues, particularly those seeking declarations of resulting and constructive trusts, in an adversary proceeding. The plaintiffs therefore withdrew their motion and filed the complaint in this adversary proceeding.

Count I seeks a declaratory judgment that the funds the plaintiffs deposited with Peregrine are not property of the estate under § 541(d) of the Bankruptcy Code because Peregrine does not hold the equitable interest in the funds under the Agreement. Count II seeks a declaratory judgment that the circumstances surrounding the plaintiffs' deposit of funds with Peregrine created a pre-petition resulting trust over the funds that arose when the deposits were made. The plaintiffs contend that these funds held in trust are not property of the estate under § 541(d). Count III seeks the imposition of a constructive trust over the funds in the plaintiffs' accounts and a declaration that the funds are not property of the estate under § 541(d). Plaintiffs allege that Peregrine owed a fiduciary duty to the plaintiffs and that, to the extent Peregrine failed to hold the plaintiffs' funds in a separate accounts or otherwise committed fraud or misrepresentation, the court should impose a constructive trust on the funds. Count IV seeks a declaratory judgment that the forex and metals contracts the plaintiffs traded fall within the definition of “commodity contract” in § 761(4) of the Bankruptcy Code, so the funds in the plaintiffs' accounts should be treated the same as the funds in accounts of commodities customers.

The trustee moved to dismiss all four counts, arguing primarily that the Agreement and the Forex Disclosure preclude the relief sought. Each count is addressed below.

II. Standard for Motion to Dismiss

The trustee has moved to dismiss for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure, which applies to adversary proceedings through Rule 7012(b) of the Federal Rules of Bankruptcy Procedure. In ruling on a motion to dismiss under Rule 12(b)(6), a court must accept the factual allegations of the complaint as true and draw all reasonable inferences in the plaintiff's favor. Massey v. Wheeler, 221 F.3d 1030, 1034 (7th Cir.2000). While a complaint need not contain “detailed allegations,” the plaintiff must provide “more than labels and conclusions, and a formulaic recitation of a cause of action's elements will not do.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Twombly, 550 U.S. at 570, 127 S.Ct. 1955, 167 L.Ed.2d 929).

When a party moves to dismiss a complaint for failure to state a claim based on contract interpretation, courts examine whether or not the clear, unambiguous language of a contract contradicts the plaintiffs' allegations. See, e.g., Nathan v. Morgan Stanley Renewable Dev. Fund, LLC, No. 11 C 2231, 2012 WL 1886440, at *12 (N.D.Ill. May 22, 2012); Facility Wizard Software, Inc. v. Se. Technical Servs., LLC, 647 F.Supp.2d 938, 942, 946–47 (N.D.Ill.2009). When the clear terms of a contract conflict with the plaintiffs' allegations in their complaint, the contract controls. Appert v. Morgan Stanley Dean Witter, Inc., No. 08–CV–7130, 2010 WL 5186765, at *1 (N.D.Ill. Dec. 9, 2010) (citing Ogden Martin Sys. of Indianapolis, Inc. v. Whiting Corp., 179 F.3d 523, 529 (7th Cir.1999)). When the language of the contract is ambiguous or unclear with respect to the plaintiff's claim, however, the court will not dismiss at this stage of the proceedings. See Nathan v. Morgan Stanley, 2012 WL 1886440, at *12 (citing Quake Constr., Inc. v. Am. Airlines, Inc., 141 Ill.2d 281, 152 Ill.Dec. 308, 565 N.E.2d 990, 994 (Ill.1990)) (noting that when a contract is unclear, the intent of the parties is a question of fact which cannot be determined on a motion to dismiss).

III. Count I—Declaratory Relief for Return of Property Pursuant to Section 541(d)

Plaintiffs allege in Count I that Peregrine has no equitable interest in the funds the plaintiffs deposited with Peregrine so the funds are excluded from property of the bankruptcy estate under § 541(d) of the Bankruptcy Code, 11 U.S.C. § 541(d)...