Secure Leverage Grp., Inc. v. Ira Bodenstein, Not Individually But Solely 7 Tr. of the Estate of Peregrine Fin. Grp., Inc. (In re Peregrine Fin. Grp., Inc.)
| Decision Date | 07 May 2014 |
| Docket Number | Bankruptcy No. 12 B 27488.,Adversary No. 12 A 01572. |
| 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 | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois |
OPINION TEXT STARTS HERE
Michael C. Moody, O'Rourke & Moody, Chicago, IL, for Plaintiffs.
Terence Banich, Shaw Fishman Glantz & Towbin LLC, Chicago, IL, for Defendant.
Anne W. Stukes, U.S. Commodity Futures Trading Commission, Intervenor, Trustee.
The plaintiffs in this adversary proceeding were customers of Peregrine Financial Group, Inc. who traded in foreign currencies and over-the-counter metals through accounts with Peregrine. They allege four counts in their complaint, each seeking return of money they deposited with Peregrine under a different legal theory. In Count IV, plaintiffs seek a declaration that their transactions in foreign currency and metals are “commodity contracts” under § 761(4) of the Bankruptcy Code. The funds they deposited with Peregrine would then be treated as “customer property,” which is given high priority for distribution under the commodity broker liquidation provisions of the Bankruptcy Code.
The trustee has moved for summary judgment on Count IV, arguing that the plaintiffs' foreign exchange and metals trading does not fall within the definition of a “commodity contract.” He therefore contends that the funds they deposited with Peregrine are not “customer property” entitled to high priority under the Bankruptcy Code. The plaintiffs respond that their transactions fall within the definition of “commodity contract,” which specifically describes a number of types of transactions and also includes transactions that are “similar to” those specified types of transactions. 11 U.S.C. § 761(4). The plaintiffs argue that their transactions are “similar to” those specifically described in the definition. The court disagrees and concludes that the plaintiffs' foreign exchange and metals transactions do not fit within any of the specifically described transactions in the definition and are not “similar to” any of those transactions for purposes of § 761(4)(F)(i). The funds they deposited with Peregrine, therefore, are not “customer property,” and the trustee is entitled to judgment as a matter of law on Count IV.
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 it for the purpose of trading in retail foreign currency (“retail forex”) and over-the-counter spot metals (“OTC metals”).
Each plaintiff executed a standard customer agreement (“Agreement”) with Peregrine. The Agreement covered all types of potential trading through Peregrine, not just retail forex and OTC 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 retail forex and OTC metals, did not. Peregrine maintained an online trading system that allowed customers to place trade orders electronically, which Peregrine would then execute for them. The plaintiffs allege that they deposited funds into specific accounts designated by Peregrine for retail forex and OTC metals trading.
Peregrine filed for bankruptcy in July 2012, after theft of customer funds was disclosed. In September 2012, the trustee filed a motion seeking authority to make interim distributions of “customer property” under § 766(h) of the Bankruptcy Code, 11 U.S.C. § 766(h), to Peregrine's customers who traded “commodity contracts,” as defined in § 761(4) of the Bankruptcy Code. The trustee excluded Peregrine's retail forex and OTC metals customers, including the plaintiffs, from the partial distribution. The plaintiffs objected to the trustee's motion, arguing that they too traded commodities contracts and should be included in the interim distribution. The court overruled their objections and granted the trustee's motion. The plaintiffs then filed a motion seeking the same treatment as the customers who received interim distributions, but they withdrew that motion and filed this adversary proceeding against the trustee seeking the same relief. The Commodities Futures Trading Commission (“CFTC”) moved to intervene, and is now a party.
Count IV alleges that the trustee's determination that the plaintiffs are not entitled to the interim distributions because retail forex and metals transactions are not “commodity contracts” was erroneous. It states that these transactions fall within the “similar to” clause in § 761(4)(F)(i) in the definition of “commodity contract,” which includes transactions that are “similar to” the types of transactions specifically identified in the definition. 11 U.S.C. § 761(4)(F)(i). They seek a declaration to that effect, and that the money in their accounts with Peregrine must therefore be treated as “customer property” and distributed to them with the same priority given to customers to whom the trustee has already made interim distributions.
The trustee has moved for summary judgment on Count IV. He argues that there are no genuine issues of material fact and that the court can decide as a matter of law that the plaintiffs' retail forex and OTC metals trading does not fall within the definition of “commodity contract” in § 761(4). The CFTC filed briefs in support of the trustee's motion.
Summary judgment “should be rendered if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c); seeFed. R. Bankr.P. 7056 (); Bellaver v. Quanex Corp., 200 F.3d 485, 491 (7th Cir.2000). A genuine issue of material fact exists when “the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
The bankruptcy and liquidation of a commodity broker is governed by subchapter IV of chapter 7 of the Bankruptcy Code, 11 U.S.C. § 761–784, and the CFTC's Part 190 regulations, 17 C.F.R. § 190. Under the Bankruptcy Code and the Part 190 regulations, “customer property” is afforded high priority for distributions from the bankruptcy estate of an FCM. “Customer property” is defined as “property received, acquired or held to margin, guarantee, secure, purchase, or sell a commodity contract.” 11 U.S.C. § 761(10)(A)(i); 17 C.F.R. § 190.08(a)(i)(A). “Commodity contract” is defined in 11 U.S.C. § 761(4), which lists various specific types of contracts or transactions, and any contract or transaction that is “similar to” the listed contracts and transactions. The plaintiffs seek a determination that their retail forex and OTC metals transactions fall within the definition of a “commodity contract” so that they can share in the distributions of “customer property” that the trustee has made in this case. Thus, the definition of “commodity contract” in § 761(4) is at the center of this dispute.
Section 761(4) contains nine subparagraphs describing specific types of contracts and transactions that are “commodity contracts.” Subparagraph (F) also includes “any other contract, option, agreement, or transaction that is similar to a contract, option, agreement or transaction referred to in this paragraph.” 11 U.S.C. § 761(4)(F)(i). Count IV of the complaint alleges that the plaintiffs' retail forex and OTC metals transactions are “similar to” those described in § 761(4)(A)-(E).1 Subparagraphs (A) through (E) describe the following transactions:
(A) with respect to an FCM, futures traded on a contract market or board of trade (domestic futures);
(B) with respect to a foreign futures commission merchant, foreign futures (traded on a foreign contract market or board of trade);
(C) with respect to a leverage transaction merchant, leverage transactions (long term contracts for the purchase or sale of certain precious metal bullion or coins);
(D) with respect to a clearing organization, cleared futures and options;
(E) with respect to a commodity options dealer, commodity options.
The parties' arguments focus primarily on the first category of commodity contracts listed in § 761(4)—futures The trustee contends that In re Zelener, 373 F.3d 861 (7th Cir.2004), is controlling and compels the conclusion that plaintiff's retail forex and OTC metals transactions are not “similar to” futures contracts. In Zelener, the court held that retail forex transactions are not futures. In their response, the plaintiffs argue that Zelener is no longer good law and that, in any event, the retail forex transactions in this case should be considered futures under Zelener, or at least “similar to” the categories listed in § 761(A)-(E), which includes futures.2Zelener is thus central to the analysis in this case.
In Zelener, the Seventh Circuit considered whether “speculative transactions in foreign currency are ‘contracts of sale of a commodity for future delivery’ regulated by the Commodity Futures Trading Commission....” Id. at 862. The issue arose in the context of determining whether contracts for sale of foreign currency were within the CFTC's regulatory authority in 2004. The court was interpreting § 2(a)(1)(A) of the CEA, 7 U.S.C. § 2(a)(1)(A), which describes...
To continue reading
Request your trial
-
Secure Leverage Grp., Inc. v. Bodenstein
...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 558 B.R. 231bankruptcy court's finding, after the conclusion of a bench trial, that thei......
-
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
...is contrary to earlier decisions of the Sixth Circuit and many lower courts (including a decision by this court in the Secure Leverage Group, Inc. v. Bodenstein, adversary proceeding, No. 12 A 01572, which the court reconsidered after the Mississippi Valley decision). See In re Omegas Group......
-
Moore Capital Mgmt., L.P. v. Giddens (In re Lehman Bros. Inc.)
...added).76 See 7 U.S.C. § 6d(f)(2)(A), (B).77 S. Rep. No. 95–989, at 7–8 & fn. 1 (citing 7 U.S.C. § 6d ).78 In re Peregrine Fin. Grp. Inc., 510 B.R. 190, 202 (Bankr.N.D.Ill.2014), appeal docketed sub nom. Secure Leverage Grp., Inc. v. Bodenstein, No. 14 Civ. 5024 (N.D.Ill. July 2, 2014). Acc......
-
Grede v. Fcstone, LLC
...the trustee over whether certain funds should be treated as customer property or property of the estate. In re Peregrine Fin. Group, Inc. , 510 B.R. 190, 191 (Bankr. N.D. Ill. 2014). After examining the law and regulations surrounding different forms of investment property, the Bankruptcy C......