U.S. Commodity Futures Trading Comm'n v. U.S. Bank, N.A.

• Decision Date: 19 November 2014
• Docket Number: No. 13-CV-2041-LRR,13-CV-2041-LRR
• Parties: UNITED STATES COMMODITY FUTURES TRADING COMMISSION, Plaintiff, v. U.S. BANK, N.A., Defendant.
• Court: U.S. District Court — Northern District of Iowa

UNITED STATES COMMODITY FUTURES TRADING COMMISSION, Plaintiff, v. U.S. BANK, N.A., Defendant.

No. 13-CV-2041-LRR

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF IOWA EASTERN DIVISION

November 19, 2014

ORDER

TABLE OF CONTENTS

I. INTRODUCTION.......................................3

II. PROCEDURAL HISTORY..................................3

III. SUBJECT MATTER JURISDICTION..........................4

IV. SUMMARY JUDGMENT STANDARD.........................4

V. FACTUAL BACKGROUND.................................5

A. Parties...........................................5

B. Overview of the Dispute...............................6

1. The 1845 Account...............................6

a. Opening of the 1845 Account................... 6

b. Funding of the 1845 Account................... 8

c. Wasendorf's fraud.......................... 9

d. U.S. Bank's knowledge of the nature of the 1845 Account........................ 10

2. U.S. Bank's knowledge of Wasendorf................. 12

a. Other accounts........................... 12

b. Finances and relationship.................... 13

3. Loans...................................... 14

a. Credit-approval process...................... 14

b. September 4, 2008 SCD...................... 15

c. 2008 Guaranty—Wasendorf Loan............... 16

d. July 28, 2011 SCD......................... 17

e. 2011 Guaranty—Construction Loan.............. 17

f. Peregrine references in SCDs.................. 18g. U.S. Bank's actions post-Peregrine bankruptcy...... 18

4. Transactions involving the 1845 Account............... 18

a. McCormack Declaration..................... 18

(1) Parties' arguments.................... 19

(2) Applicable law and application............. 20

b. Deposits................................ 22

c. Transfers and withdrawals.................... 22

d. Payments to U.S. Bank...................... 23

5. Audits of Peregrine............................. 24

VI. ANALYSIS........................................... 25

A. The Act and the Regulations........................... 25

B. Improper Use of Customer Funds........................ 26

1. Was the 1845 Account subject to the Guaranties?......... 27

a. Parties' arguments......................... 27

b. Applicable law............................ 27

c. Application.............................. 29

2. Is merely acquiring a right of set off unlawful, or were any other actions by U.S. Bank in enforcing the Guaranties unlawful?......................... 31

a. Parties' arguments......................... 31

b. Applicable law............................ 31

c. Application.............................. 33

3. Did U.S. Bank improperly use the customer funds in the 1845 Account to inform its decision on whether to issue the Loans?............................. 34

a. Parties' arguments......................... 35

b. Applicable law and application................. 35

4. Summary................................... 36

C. Improper Holding of Customer Funds..................... 36

1. Duty....................................... 37

a. Parties' arguments......................... 37

b. Applicable law............................ 38

c. Application.............................. 39

2. Trust accounts................................ 41

a. Parties' arguments......................... 41

b. Applicable law............................ 42

c. Application.............................. 47

(1) Transfers to U.S. Bank................. 47

(2) Transfers to other entities................ 51

(a) Knowledge..................... 51 i. Parties' arguments............ 51

ii. Applicable law and application. . . . 52

(b) Bad faith...................... 53

i. Parties' arguments............ 53

ii. Applicable law.............. 55

iii. Application................. 56

D. Unclean Hands.................................... 59

1. Parties' arguments............................. 59

2. Applicable law................................ 61

3. Application.................................. 65

E. Remedies........................................ 66

1. CFTC Motion................................. 66

2. U.S. Bank Motion............................. 66

VII. CONCLUSION........................................ 68

I. INTRODUCTION

The matters before the court are Plaintiff United States Commodity Futures Trading Commission's ("CFTC") Motion for Summary Judgment ("CFTC Motion") (docket no. 77) and Defendant U.S. Bank, N.A.'s ("U.S. Bank") Motion for Summary Judgment ("U.S. Bank Motion") (docket no. 80) (collectively, "Motions").

II. PROCEDURAL HISTORY

On June 5, 2013, CFTC filed a Complaint (docket no. 2) alleging that U.S. Bank improperly used (Count I) and held (Count II) customer funds in violation of: (1) Section 4d(b) of the Commodity Exchange Act ("Act"), codified as amended at 7 U.S.C. § 6d(b); and (2) Commission Regulation 1.20(a), codified at 17 C.F.R. § 1.20(a).¹ On April 18,2014, U.S. Bank filed an Amended Answer (docket no. 43) denying CFTC's claims and asserting affirmative defenses.

On September 3, 2014, CFTC filed the CFTC Motion. On September 30, 2014, U.S. Bank filed U.S. Bank's Resistance (docket no. 93). On October 7, 2014, CFTC filed the CFTC Reply (docket no. 102).

On September 3, 2014, U.S. Bank filed the U.S. Bank Motion. On September 30, 2014, CFTC filed CFTC's Resistance (docket no. 94). On October 14, 2014, U.S. Bank filed U.S. Bank's Reply (docket no. 105).

The parties request oral argument, but the court finds that oral argument is unnecessary. The Motions are fully submitted and ready for decision.

III. SUBJECT MATTER JURISDICTION

The court has federal question jurisdiction over CFTC's claims against U.S. Bank, which arise under Section 4d(b) of the Act and Commission Regulation 1.20. See 28 U.S.C. § 1331 ("The district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States.").

IV. SUMMARY JUDGMENT STANDARD

Summary judgment is appropriate "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). "A dispute is genuine if the evidence is such that it could cause a reasonable jury to return a verdict for either party; a fact is material if its resolution affects the outcome of the case." Amini v. City of Minneapolis, 643 F.3d 1068, 1074 (8th Cir. 2011) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 252 (1986)). "[U]nsupported, self-serving allegations and denials are insufficient to create a genuineissue of material fact." Anuforo v. Comm'r of Internal Revenue, 614 F.3d 799, 807 (8th Cir. 2010). "To survive a motion for summary judgment, the nonmoving party must substantiate [its] allegations with sufficient probative evidence [that] would permit a finding in [its] favor based on more than mere speculation, conjecture, or fantasy." Barber v. C1 Truck Driver Training, LLC, 656 F.3d 782, 801 (8th Cir. 2011) (second alteration in original) (quoting Putman v. Unity Health Sys., 348 F.3d 732, 733-34 (8th Cir. 2003)) (internal quotation marks omitted). If there is a genuine dispute about a material fact, the court must view the record in the light most favorable to the nonmoving party and afford it all reasonable inferences. See Ricci v. DeStefano, 557 U.S. 557, 586 (2009). However, "[w]here the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial." Id. at 586 (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986)) (internal quotation marks omitted).

V. FACTUAL BACKGROUND

The following factual background sets forth the uncontested material facts. Additional contested material facts are discussed in the court's legal analysis. When considering the Motions, the court viewed the evidence in the light most favorable to the nonmoving party and afforded it all reasonable inferences.

A. Parties

CFTC is "an independent federal regulatory agency charged by Congress with the administration and enforcement of the Act and the Regulations thereunder." Complaint ¶ 7; Amended Answer ¶ 7.

U.S. Bank is a nationally chartered bank with its main office located in Cincinnati, Ohio. Amended Answer ¶ 8. U.S. Bank has several branches in the Northern District of Iowa, including in Cedar Falls, Iowa. U.S. Bank is a wholly-owned subsidiary of U.S. Bancorp. Id.

B. Overview of the Dispute

1. The 1845 Account

a. Opening of the 1845 Account

Russell Wasendorf, Sr.² incorporated Peregrine Financial Group, Inc. ("Peregrine") in 1990 and in so doing, became its CEO. Wasendorf remained its CEO at all times and always held a dominant and controlling interest in Peregrine, even though other individuals and entities at times held minor amounts of Peregrine stock. From its inception until its bankruptcy, Peregrine was a registered futures commission merchant ("FCM"). An FCM is an entity authorized to solicit and accept orders to buy or sell futures contracts or options on futures contracts, and accepts money and other assets from customers to support those orders. FCMs receive money, securities and other property from their customers to margin, guarantee or secure the customers' futures and options trades. FCMs may keep their own funds ("excess funds") in customer segregated accounts. An FCM reports both its customer funds and its excess funds daily via a daily segregation filing to the National Futures Association ("NFA"), a not-for-profit self-regulatory agency for the United States futures industry, and monthly to the CFTC. Peregrine was regulated by the CFTC and the NFA.

On August 3, 1992, Peregrine opened a business checking account, designated as "Peregrine Financial Group, Inc. Customer Segregated Account," with Firstar Bank Cedar Falls ("Firstar"), a depository bank.³ See Firstar Signature Card, CFTC Fact Appendix ("CFTC Fact App'x") (docket nos. 77-4 through -7) at 3; see also August 3, 1992Acknowledgment Letter, CFTC Fact App'x at 39. The last four digits of the account initially ended in 9434, but...