IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
SECURE LEVERAGE GROUP, INC., et al.,
Plaintiffs-Appellants,
Appeal from the United States
Bankruptcy Court for the Northern
District of Illinois, Eastern Division,
Case No. I 2-Adv- 1572
Case No. 14 CV 05024
Honorable John Tharp
V.
IRA BODENSTEIN, TRUSTEE,.
Magistrate Michael Mason
Defendant-Appellee,
BRIEF FOR APPELLANTS
Vivian Drohan
John P. Drohan III
Christopher R. Riano
Drohan Lee LPP
489 Fifth Avenue
New York, NY 10017
(212)-710-004
Michael J. O’Rourke
Michael C. Moody
Robert E. Williams
O’Rourke & Moody
55 W. Wacker Drive, 14th Floor
Chicago, IL 60601
(312) 849-2020
Counsel for Plaintiffs-Appellants
TABLE OF CONTENTS
Table of Contents
.
Table of Authorities ............................................................iii
Index of Appendix .............................................................vii
Statement of the Case ..........................................................1
Statement of the Issues Presented on Appeal ........................................1
Statement of the Basis of Appellate Jurisdiction ......................................2
Standard of Review .............................................................2
Statement of Facts ..............................................................2
Argument.....................................................................4
I.
Appellants retained equitable interests in their accounts .............................4
A.
Resulting Trust Law Applies to this Case .................................... 5
B.
A Presumption of a Resulting Trust Exists by Customers’ Providing the Consideration
for Their Accounts at the Time They Were Created...........................................6
C. The Trustee Did Not Rebut the Presumption.....................................................7
1. Language of the Customer Agreement and the Risk Disclosure...........................7
II.
2.
The "Separate" v. "Segregated" Issue....................................................9
3.
The Funds in Customers ’Accounts Are Net of Any Offsets to PFG...................9
4.
A Debtor/Creditor Relationship Was Not Created....................................10
The Court Erred in Ignoring the "Similar Contracts Clause" of 11 U.S.C.761(4) ........ 11
A.
Defendants Reliance on Zelener is Incorrect as a Matter of Law...................12
B.
The Plan Language of section 761(4) Requires Inclusion of retail Forex and
Metals........................................................................................13
1.
The Record, and History, of Congressional Intent to Expand Federal
Protection of Markets and Market Participants is Manifest.................13
2.
The CFTC Deserves No Deference in its Failure to Follow Administrative
Procedure in Rulemaking .......................................................14
C.
Martin Doyle’s Testimony Should Not Have Been Stricken......................14
Conclusion..................................................................................................15
TABLE OF AUTHORITIES
CASES
Adas Construction v. Rutkowski,
2013 WL 6865417 (N.D. Iii. 2013) ...............................................................2
Alexander v. Mermel,
27111. App. 2d 1981 (1st Dist. 1960) .............................................................
6
American Nat’l Bank and Trust Co. of Rockfbrd v. United Stales,
832 F.2d 1032 (7t Cir. 1987)
............................................................... 7
Bowman v. Pettersen,
410 Iii. 519 (1951)....................................................................................1
Continental Casualty Co. v. American National Bank & Trust Co. of Chicago,
329 Iii. App. 3d 686 (2002).........................................................................10
CTFC v. Zelener,
373 F.3d 861 (7th Cir. 2004).......................................................................12
Demarest v. Manspeaker,
498 U.S. 184 (1991).................................................................................13
Denton v. Gurnett Co.,
69 F.2d 750 (1st Cir. 1934) ....................................................................... 6
Dixon, Laukitis and Downing, P. C. v. Busey Bank,
2013 IL App(3d) 120832............................................................................10
Goldstein v. S.E.C,
451 F.3d 873 (D.C. Cir. 2006).....................................................................13
Grede v. FCStone LLC,
746 F.3d 244 (7th Cir. 2014)......................................................................... 9
Gulfshore Development Corp. v. Nat’l Bank of Lee County,
144 B.R. 905 (Banks. M.D.Fla. 1992)..........................................................6
In re AB&C Group, Inc.,
2009 U.S.Dist.LEXIS 48792 (N.D.W.Va., May 28,2009) .................................. 5
In re Estate of Cowart v. Nicklos Drilling Co.,
505 U.S. 469 (1992) ................................................................................13
In re Estate of McCormick,
262 J11.App.3d 163 (2d Dist. 1994)............................................................... 6
In re Estate of Wilson,
81111. 2d 349 (Iii. 1980)........................................................................... 6,7
In re Estate of Koch,
297 Ill. App. 3d 786 (3d Dist. 1998) .............................................................7
In re Griffin Trading Co.,
245 B.R. 291, 315 (Banks. N.D. Iii. 2000) .......................................................11
In re Griffin Trading Co.,
270 B.R. 882 (Banks. N.D. Ill. 2001)
.............................................................11
In re Mayer,
173 B.R. 373 (Banks. N.D.I11. 1994) ..............................................................2
Jahn v. Equine Services, PSC,
233 F.3d 382 (6th Cir. 2000) .....................................................................14,15
Katz v. Belmont National Bank of Chicago,
112 I11.2d 64 (1986) .................................................................................10
Matter of Rigdon,
36 F.3d 1375 (7th Cir. 1994) ........................................................................2
New York Stock Exchange v. Pickard & Co.,
274 A.2d 148 (Del.Ch. 1971) ..................................................................... 6
Nowak v. Dombrowski,
267 Ill. 103 (1915) .................................................................................... 8
PDK Labs. Inc. v. DEA,
362 F.3d 786 (D.C. Cir. 2004) ......................................................................13
Sacramento Real Estate Corp. v. First Chicago Bank, Ravenswood,
201 B.R. 225 (Bankr. N.D.I11. 1996)...............................................................5
Sanwa Business Credit Corp. v. Continental Illinois Nat’l Bank of Chicago,
247 I11.App.3d 155 (1st Dist. 1993)................................................................10
Skidmore v. Swift & Co.,
323 U.S. 134 (1944).................................................................................14
Target Market Publishing, Inc. v. AD VO, Inc.,
136 F.3d 1139 (7th Cir. 1998).....................................................................14
iv
Tennessee Valley Auth. v. Whitman,
336 F.3d 1236 (11th Cir. 2003)......................................................................14
United States v. Mead Corp.,
533 U.S. 218 (2001)....................................................................................14
Waner v. Maxwell,
146 B.R. 973 (Bankr. N.D.I11. 1992).................................................................
5
Weiner v. A.G. Minzer Supply Corp.,
301 B.R. 104 (Bankr. D.Mass. 2003) ......................................................... 6,8
Zack Co. v. Sims,
108 Iii. App. 3d 16(1st Dist. 1982)...................................................................6
Zimmerman v. Schuster,
14 Ill. App. 2d 535 (2d Dist. 1957) ................................................................6
STATUTES AND REGULATIONS
11U.S.C541(d) ........................................................................................ 1
11U.S.C761(4) ......................................................................................... I
11 U.S.C761(4)(F)(i) ................................................................................... 1
28 U.S.C. §158(a)(1)..................................................................................... 2
17CFR5................................................................................................ 12
17CFR.sc4d ...............................................................................................12
7U.S.C6d ........................................................................................................ 13
17 CFR §30.7...................................................................................................... 12
17CFR5.8(d) ................................................................................................... 12
7 U.S.0 §2(c)(2)(C)(iv)............................................................................................
13
7 U.S.C. §2(c)(2)(B)(iv)(IH) ....................................................................................
13
7 U.S.C. §2(c)(2)(B)(v)........................................................................................... 13
7 U.S.C. §2(c)(2)(C)(iii)(I11) ....................................................................................
ii
u.s.c.
13
761(4)(F)(ii)......................................................................................... 13
0
7U.S.C.5 .............................................................................................. 15
SECONDARY AUTHORITY
Am.Jur.2d Trusts §278...................................................................................9
vi
INDEX OF APPENDIX
Adversary Complaint (Dkt. Nos. 1, 1-1) .......................................... Ex. 1
Answer to Adversary Complaint (Dkt. No. 41) ....................................Ex.2
Memorandum Opinion (Motion to Dismiss) (Dkt. No. 37) ...........................Ex.3
Trustee Motion for Summary Judgment on Count IV (Dkt.Nos. 95, 95-1 through 95-3 1, 96. .Ex.4
Amended Response to Trustee’s Motion For Summary Judgment on Count IV (Dkt.Nos, 106,
108, 108-1 through 108-4 .....................................................Ex.5
Trustee’s Reply In Support of Motion For Summary Judgment on Count IV (Dkt.Nos. 112,
112-1 through 112-2 .........................................................Ex.6
Memorandum Opinion (Count IV of Summary Judgment) (Dkt. No. 121) ...............Ex.7
Plaintiffs Motion for Partial Findings and Judgment on Partial Findings on Counts I and II
(Dkt. No. 147)...............................................................Ex.8
Memorandum and Opinion (Judgment) (Dkt. No. 152) ..............................Ex.9
Judgment Order (Dkt. No. 10) .................................................Ex. 10
Order Denying Plaintiffs Motion for Partial Findings (Dkt. No. 154) ................. Ex. 11
Notice of Appeal (Dkt. No. 157) .............................................. Ex. 12
Amended Judgment Order (Dkt. No. 16 1) ....................................... Ex. 13
Amended Notice of Appeal (Dkt. No. 164) ......................................Ex. 14
VII
STATEMENT OF THE CASE
Prior to the bankruptcy, Plaintiffs-Appellants ("Customers") posited monies with PFG to
trade foreign currency ("Forex") and/or spot metals ("Metals") contracts. The Appellee Trustee
claimed Customers’ property as part of PFG’s estate. The Adversary Complaint sought
declaratory relief that, per 11 U.S.C. §541(d), Customers’ funds did not become part of the
estate, that Customers retained equitable ownership of their accounts under resulting trusts
(See,
e.g., Bowman v. Pettersen, 410 Ill. 519, 524 (1951). It also sought a declaratory judgment that
retail Forex and Metals contracts should be afforded the same treatment as futures because they
fall within the definition of "commodity contracts" now contained in 11 U.S.C. §761(4), a
definition substantially extended by (761(4)(F)(i))in 2005, which has, to date, been interpreted
neither by judicial decision nor by CFTC rulemaking - the latter despite a clear Congressional
mandate to do so, and public admission by regulators of the need for such interpretation.
After denying the Trustee’s Motion to Dismiss (Dkt. 137), the court granted the Trustee’s
summary judgment on Count IV and excluded the testimony of Martin Doyle, Customers’
expert (Dkt. 121). At trial, the Trustee moved orally, and Customers moved in writing for
judgment pursuant to Rule 7052(c). On May 27, 2014, the court issued an opinion and entered
judgments, granting the Trustee’s motion and denying Customers’ cross-motion [Dkt. Nos. 152,
153 and 154]. On June 4, 2014, the court entered an Amended Judgment to include its grant of
summary judgment on Count IV. [Dkt. No. 161]. Customers appeal from these judgments.
STATEMENT OF THE ISSUES PRESENTED ON APPEAL
1.
Did the Bankruptcy Court err in finding that the Customers did not retain
equitable interest in their accounts through the creation of a resulting trust or that the Trustee
rebutted any presumption that a resulting trust was created (Counts I and II)?
2.
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 because such contracts are not similar to
the other contracts enumerated in §761(4) (count 4)?
STATEMENT OF THE BASIS OF APPELLATE JURISDICTION
This court has jurisdiction to hear this appeal pursuant to 28 U.S.C. §158(a)(1) from the
final Orders and Judgments entered by the Bankruptcy Court on May 7, 2014 [Dkt. Nos. 121 and
122], May 27, 2014 [Dkt. Nos. 152, 153 and 154], and from the Amended Judgment entered by
Judge Doyle on June 4, 2014 [Dkt. No. 161]. A timely Notice of Appeal was filed on June 2,
2014 [Adversary Docket No. 157] and an Amended Notice of Appeal to include the Amended
Judgment was filed on June 5, 2014 [Dkt. No. 164].
STANDARD OF REVIEW
When a District Court reviews the decision of a Bankruptcy Court, it reviews its legal
conclusions de novo and any factual findings for clear error.
See Adas Construction v.
Rutkowski, 2013 WL 6865417 (N.D. Iii. 2013); See also Matter of Rigdon, 36 F.3d 1375 (7th
Cir. 1994); See also In re Mayer, 173 B.R. 373, 377 (Bankr. N.D.I11. 1994).
STATEMENT OF FACTS
Russell L. Wasendorf, Sr. ("Wasendorf’), Chief Executive Officer and Chairman of the
Board of PFG, embezzled nearly $200 million from PFG’s segregated futures customer accounts
at U.S.Bank over a twenty year period. His actions caused PFG’s bankruptcy. (Dkt. 130-1).
Customers’ funds were held in a separate account at J.P. Morgan Chase Bank, with each
customer having a share of these funds in his or its PGF account. (Dkt. 141-1 at pp. 23, 35-36;
Dkt. 123, pp. 10-11. Their funds were never converted, commingled, or otherwise affected by
Wasendorfs fraud [Dkt.141-2, pp. 19-20; Dkt.175, p. 350]. Each customer testified that: (i)
2
Customer had a trading account at PFG [Dkt. 174, PP. 39, 85, 229, 294]; (ii) Customer’s property
was held at a creditworthy bank and separate from other PFG funds [Dkt.174, pp. 45, 90, 113,
146, 162, 214, 217, 259-260; Dkt.175, pp. 292-293]; (iii) Customer neither had nor expressed
any intent to give equitable ownership to PFG [Dkt. 174, pp. 40, 144, 153-154, 228-229]; (iv)
Customer’s property was to be used exclusively as collateral for trading and to pay PFG’s
commissions [Dkt. 174, pp. 126, 260]; and (v) each Customer was responsible for taxes and other
expenses associated with the account [Dkt. 175, p. 282; Dkt. 174, pp. 40, 100, 153].
PFG maintained the funds of its Forex and Metals customers in an account at JP Morgan
Chase (Dkt. 141-1, pp. 23, 35-36; Dkt. 123, pp. 10-il) and that PFG accounted for the funds in
its Forex account as a liability on its financial statements (Dkt. 141-3,
pp. 25-26).
Prior to trial, Martin Doyle, Customer’s expert, submitted a declaration setting forth
similarities between exchange trading and OTC Forex trading. He testified that both are offered
to customers by the same broker and both are offered under the same customer agreement (like the
one in this case) that allows a customer to trade both OTC and exchange traded instruments. Both
products can usually be accessed through the same trade desk or the same front end trading system
and both are traded with the same margin policy, with customers being allowed to transfer funds
back and forth between their accounts without restriction. While both products typically require
delivery, it is rare that delivery is actually taken and, instead cash settlements occur when customers
offset the contracts with opposite transactions. From a regulatory standpoint, both OTC and onexchange products have historically received a similar amount of focus and treatment with the CFTC
and NFA each deploying substantial resources regulating OTC customers. He also testified about the
complex regulatory scheme governing OTC and on-exchange trading. From these facts, he opined
that exchange traded futures contracts and over the counter ("OTC") traded metals and Forex (foreign
exchange) contracts are similar instruments. [Dkt 108, pp. 10-13].
3
ARGUMENT
I.
APPELLANTS RETAINED EQUITABLE INTERESTS IN THEIR ACCOUNTS
The Bankruptcy Court, at the outset, in its Opinion on the Defendant’s Motion to Dismiss
(Dkt. 37), set the issue. The court, at page 5, opines:
Under Illinois law,"[a] resulting trust arises wherever the circumstances surrounding the
disposition of property raise an inference, not rebutted, that the transferor does not intend
that the person taking or holding the property.. should have the beneficial interest therein."
Hong Kong Electro- Chemical Works, Ltd. v. Less, 539 F.3d 795, 798 (7th Cir. 2008),
quoting from Kaibab Indus., Inc. v. Family Ready Homes, Inc., 111 I1l.App.3d 965 (1983).
The court held that resulting trusts are "intent enforcing devices that arise by operation of
and presumed intent of the parties distilled from their conduct," that "[a] resulting trust arises by
operation of law where one person furnishes the consideration for property and title is taken in
another" and that intent of the parties at the time of the conveyance is controlling. Dkt. 37 at 19.
It also held that the contract terms failed to establish that Customers relinquished equitable
interest in their accounts. Id. at 1 1-15.
The court addressed Customer Agreement language (at
p. 7) and found the repeated use of
"property of customer" reflective of the Customers’ retained ownership of their funds. It also
opined that the Trustee could not explain "how a sentence allowing Peregrine to pledge, sell or
loan property of a customer ’to itself as broker’ establishes that Peregrine had both legal and
equitable title to the customer property in the first place."
Id.
The court also rejected the Trustee’s argument that the Risk Disclosure statement, which
most Customers signed before being allowed to trade, impacted Customers’ rights and held that
it was not part of the contract and it did not give PFG the right to use customer funds as it chose.
Id. at 9. The court opined that the Risk Disclosure was a document written by regulators which
merely contained general warnings about the possible risks of Forex trading which used words
4
like "may’ commingle the customer’s funds and the customer’s claim ’may’ be treated as an
unsecured claim, not that they will be so treated under the customer agreement." It also noted
that the first sentence of the Disclosure stated that "all of your rights associated with your
retailing forex trading . . . are governed by the
contract terms established in your account
agreement . . . ." ( emphasis added). Thus, neither the terms of the Agreement nor the statements
in the Forex Disclosure support the trustee’s argument that the Forex Disclosure granted to
Peregrine full ownership of funds deposited by customers."
Id. at 10.
The court’s opinion laid a road map for trial. Having stipulated that all of the funds in
Customers’ accounts were net of any funds owed to PFG, under the court’s opinion, Customers
were only required to show that they supplied all of the consideration for their accounts and
intended to and maintained control of their accounts, paying all income taxes on their profits and
absorbing any losses. However, notwithstanding its earlier opinion, the court denied that
payment of consideration by Customers was relevant because Customers and PFG "entered into
a multifaceted business relationship governed by a complex contract and pervasive federal
regulation," and held that no presumption of a resulting trust arose in this case. (Dkt. 152 at 7).
A. Resulting Trust Law Applies to this Case
The trial court’s final opinion, the subject of this appeal, held that a Customer’s account
relationship with Peregrine was too complex and regulated to be encompassed in a resulting
trust. However, courts have repeatedly applied resulting trusts to a variety of business
transactions. See, e.g., Waner v. Maxwell,
146 B.R. 973 (Bankr. N.D.Ill. 1992) (life insurance
policy not part of estate under 11 U.S.C. § 541(d)); Sacramento Real Estate Corp. v. First
Chicago Bank, Ravenswood, 201 B.R. 225 (Bankr. N.D.Ill. 1996) (a real estate tax refund);
In re
AB&C Group, Inc., 2009 U.S.Dist.LEXIS 48792 (N.D.W.Va., May 28, 2009) (funds transmitted
5
to a payroll account found to be wages); Gulfshore Development Corp. v. Nat’l Bank of Lee
County, 144 B.R. 905 (Bankr. M.D.Fla. 1992) (certificate of deposit not property of the estate
under 11 U.S.C. § 541(d)); Weiner v. A.G. Minzer Supply Corp., 301 B.R. 104 (Bankr. D.Mass.
2003) (year-end rebates of buying pool to purchase wholesale office supplies);
see also, Denton
v. Gurnett Co., 69 F.2d 750 (1St Cir. 1934) (debtor broker did not obtain equitable interest to
stock held in a margin account); New York Stock Exchange v. Pickard & Co.,
274 A.2d 148
(Del.ch. 1971) (broker did not obtain equitable interest in stock held in margin account).
In Illinois, courts have applied resulting trusts to personal property without limitation.
The doctrine has been applied to ownership of bank accounts (In re Estate of McCormick, 262
Ill.App.3d 163 (2d Dist. 1994)); to stock ownership [In re Estate of Wilson, 81111. 2d 349 (Iii.
1980); Zack Co. v. Sims, 108 Ill. App. 3d 16, 27 (1St Dist. 1982)] and to proceeds from savings
bonds. [Alexander v. Mermel, 27 Ill. App. 2d 1981 (1st Dist. 1960); Zimmerman v. Schuster, 14
Ill. App. 2d 535, 546 (2d Dist. 1957) (federal regulation does not prevent a resulting trust)].
A resulting trust under Illinois law arises at the instant the legal title is taken, not at a later
date where the transferor (the party providing the consideration) does not intend that the person
holding the property (the transferee) own the beneficial interest in the property.
(Estate of
Wilson, 81111. 2d at 355-56; Estate of McCormick, 262 Ill.App.3d at 167-68). The transferor’s
intent is controlling and, where the transferor furnishes the consideration, a presumption arises
that the party furnishing the consideration retains equitable ownership unless it can be shown that
it was intended that the transferee take the beneficial interest.
B.
Estate of Wilson, 81111. at 356.
A Presumption of a Resulting Trust Exists by Customers’ Providing the
Consideration for Their Accounts at the Time They Were Created
After it is established that one party has paid consideration, the burden of proof shifts to
the recipient of the transfer of property. Estate of Wilson, 81111. 2d at 356; Zack Co., 108 Ill.
App. 3d at 18-19. Indeed, while a claimant of a resulting trust must meet a high burden of proof,
the payment of consideration by itself meets that burden and shifts the burden to the opponent to
prove an intent to relinquish equitable ownership.
Estate of Wilson, 81111. 2d at 356; American
Nat’l Bank and Trust Co. of Rock,fbrd v. United States, 832 F.2d 1032, 1035-36 (7th Cir. 1987).
The presumption is stronger in dealings with strangers than with family members.
Id. at 1036.
Here, the Customers supplied all of the consideration when their accounts were funded
with the intent that their funds would support their trading of Forex and Metals. They did not, as
all testified at trial, intend to convey to PFG equitable ownership of their funds. The
presumption is bolstered by the fact that each Customer paid all taxes on profits and exclusively
controlled their accounts without any input from PFG. This created a presumption that cannot be
rebutted. See In re Estate of Koch, 297 111. App. 3d 786, 789 (3d Dist. 1998). PFG, for its part,
treated the accounts as liabilities on its financial statements, maintained each account separately,
and put in the Customer Agreement a commission structure, where commissions were to come
from the customer accounts, to compensate it for its services. Because Customers proved they
paid full consideration in creating their accounts, each Plaintiff established a
prima facie
presumption, bolstered by the parties subsequent conduct, of a resulting trust under Illinois law.
C. The Trustee Did Not Rebut the Presumption
The court ruled that, even if Customers were entitled to a presumption, the Trustee had
"rebutted" the presumption, identifing several items for which there was either no evidence
presented by the Trustee or which contradicted the rulings in the court’s prior opinion.
1.
Language of the Customer Agreement and the Risk Disclosure
As set forth above, the trial court ruled that the language of Paragraph 8 of the Customer
Agreement supported Customers’ claim that they retained equitable ownership of their accounts.
7
It also ruled that the Risk Disclosure was "intended only as a general warning to Forex
customers, not a document that creates specific rights regarding specific customer accounts."
Without any contradictory testimony, the court’s final opinion reversed its prior rulings.
It is only through a tortured interpretation of the Contract and Customers’ testimony that
the Court in its final opinion could find the countervailing burden satisfied. First, Paragraph 8 of
the Agreement, drafted by PFG, is replete with references to Customers’ ownership of their
property. Consistent with the initial ruling, such references clearly support the interpretation that
accounts defined as "customer property" were property of the Customers. Further, if Customers
had transferred equitable ownership to PFG, why would the Agreement provide for commissions
to PFG if it already owned the funds? The Agreement, which is ambiguous in many of its terms
(which must be construed against PFG, its drafter) was interpreted by Customers through
unrebutted testimony reflecting their intent to retain equitable ownership of their accounts.
Similarly, the court initially rejected the Trustee’s argument that the Risk Disclosure had
any relevance. It was a general warning, required by the government, which expressly referred
the customers to their Customer Agreement for their rights and which informed customers what
"may" happen if their funds were commingled with PFG’s funds (which they were not) or 1fPFG
went into bankruptcy - not what would happen.’ There was no evidence which could have
compelled the court to reverse its initial interpretation and application of the Risk Disclosure.
2
By merely informing the customer of what "may" happen, the Risk Disclosure could have no legal impact on
the parties’ intent in forming the resulting trusts. It could not even rise to the level of a condition subsequent
because its language is not clear and unambiguous. See Nowak v. Dombrowski, 267 III. 103, 108 (1915)
("conditions subsequent, in order to be relied on to work forfeitures, must be in express terms or by clear implication
and construed strictly.")
2
Indeed, even if the risk disclosure or the general warnings in emails which Customers received when they
logged into their accounts are considered relevant, which they are not, the alleged right to commingle funds at some
date in the future does not affect the creation of the resulting trust. See, Weiner, supra, 301 B.R. at 114 ("[T]he fact
that UDI failed to segregate the funds does not amount to a rebuttal of the inference that a trust was intended.").
Commingling of trust funds with other funds does not in itself destroy the identity of the trust funds and equity will
2.
The "Separate" v. "Segregated" Issue
The fact that PFG maintained the Forex accounts in a "separate" account rather than in
"segregated" accounts is irrelevant to whether a resulting trust was created. The court’s opinion,
by focusing on the distinction under the CFTC regulations, removed the focus from how the
funds were maintained in the context of a resulting trust. It ignores the clear testimony of
Customers as to their understanding of how PFG would keep their funds separate from PFG’s
operating funds and the testimony of Brenda Cuypers, PFG’s CFO, that Forex funds were kept in
an account separate from PFG’s operating account, were not commingled with PFG’s operating
account, and were listed on PFG’s financial statements as a liability, not an asset. The fact that
Customers’ funds were not kept in a "segregated" account is irrelevant to whether the Trustee
rebutted the presumption that resulting trusts were created.
3.
The Funds in Customers’ Accounts Are Net of Any Offsets to PFG
The court’s discussion of PFG’s setting prices and margins, of when PFG acted as a
counterparty versus a pass-through broker and of the agency status of Foremost are irrelevant to
whether a resulting trust was created. It was stipulated before trial that the amounts in
Customers’ accounts are net of any funds owed to PFG for any trading. These issues do not
rebut the presumption that Customers supplied consideration for accounts through which they
bought and sold Forex or Metals contracts, exercised control over their accounts, paid all taxes
and have balances unencumbered by Wasendorf’s fraud. These accounts hold Customers’ own
money, including profits generated from their trades. The simple explanation is that Customers
deposited money, exercised control by making their own trades using PFG’s services and owed
PFG no fees. They did not relinquish their equitable interests when their accounts were created.
follow money and take the amount of any indistinguishable mass. Am.Jur.2d Trusts §278 (2005).
See also, Grede
v. FCStone LLC, 746 F.3d 244 (7th Cir. 2014) (a resulting trust was available to claimants to trace their assets).
4.
A Debtor/Creditor Relationship Was Not Created
The trial court, opining on an argument never raised, misinterpreted Illinois law,
concluding that Customers lost their equitable interest by depositing their money in an account
analogous to a bank account thereby creating a debtor/creditor relationship. While the
relationship between a bank and its depositors is that of a debtor/creditor, the relationship is
contractual in nature, created by a deposit agreement.
Dixon, Laukitis and Downing, P. C. v.
Busey Bank, 2013 IL App(3d) 120832 at P. 13; Continental Casualty Co. v. American National
Bank & Trust Co. of Chicago, 329 Ill. App. 3d 686, 692 (2002); Sanwa Business Credit Corp. v.
Continental Illinois Nat’l Bank of Chicago, 247 I1l.App.3d 155, 160 (1st Dist. 1993).
In this case, Customers deposited their funds directly with Chase into the Forex account
maintained by PFG at Chase. Thus any debtor/creditor relationship existed between PFG and
Chase, not between Customers and PFG.
See, Katz v. Belmont National Bank of Chicago,
112
I11.2d 64 (1986) (where payroll company had account with a bank and employer sent his check to
the payroll company, employer had no debtor/creditor relationship with the bank).
The court erred by concluding that resulting trusts do not apply to cases subject to federal
regulation and by rejecting the presumption of a resulting trust. There is no evidence of rebuttal
of that presumption and subsequent conduct reflected that the Customers had exclusive control
of their accounts and paid all taxes on their profits. The language of Customer Agreement
reflects the intent of the parties that the Customers retained their equitable interest in the funds
and PFG’s intent was clearly reflected in its separation of the funds and listing them as liabilities
on its financial statements. The court’s judgment on Counts I and II should be reversed.
10
III.
The Court Erred in Ignoring the "Similar Contracts Clause" of 11 U.S.C.
§ 761(4)
Section 761(4) of the Bankruptcy Code deals with liquidations of commodity brokers,
such as the Debtor. Courts have found that, "Congress intended to protect
bankrupt commodity broker by creating a commodity broker subchapter."
customers of a
In re Griffin Trading
Co., 245 B.R. 291, 315 (Bankr. N.D. Ill. 2000)(emphasis added) (rev’d on other grounds, In re
Griffin Trading Co., 270 B.R. 882 (Bankr. N.D. Ill. 2001). This section’s definition a
"commodity contract" is inclusive of a number of enumerated instruments, with varying terms
and structural features. Congress substantially expanded upon this definition in 2005 by adding
§ 761(4)(F)(i): "commodity contract means . . . any other contract, option, agreement, or
transaction that is similar to a contract, option, agreement, or transaction referred to in this
paragraph. ,3 ("Similar Contracts Clause"). This language is manifestly broad, and reflects a
general and inclusive intent to protect all consumers in bankruptcy proceedings involving future
commission merchants. The court erred by (i) failing to posit any interpretation of the Similar
Contracts Clause assigning it any effect - reasonable, consistent or otherwise; (ii) ignoring its
plain meaning (iii) and by striking the testimony of Customers’ expert which demonstrated the
factual similarities between exchange trading of commodities and retail Forex.
The Trustee placed great weight on what he views as the superior regulatory surveillance
and reporting requirements applicable to statutorily "segregated" futures accounts as compared
to Forex. He cites this alleged distinction as a primary reason why futures accounts should also
receive bankruptcy priority over Forex and Metals. The facts however point to the contrary
conclusion: had the Forex and Metals Customers ’funds been in §4d and §30. 7 futures accounts
at PEG they would have been stolen as well, along with the futures monies.
Forex Customers’
Congress also has included in 761(G): "commodity contract means . . . any combination of the agreements or
transactions referred to in this paragraph." Further supportive of the Congressional intent for a broad definition of
the term "commodity contract" within this provision of the Bankruptcy Code.
11
property remains intact precisely because, as required by the Forex rules embodied in 17 CFR
§5, it was placed in a separate account at a qualified bank and was subject to frequent
independent verification by regulators of Forex bank balances. 4 Clearly, "superior" regulatory
protections cannot be a logical argument for priority of futures over Forex under the Code.
A.
Defendants Reliance on Zelener is Incorrect as a Matter of Law
The reliance of the court on CTFC v. Zelener, 373 F.3d 861 (7th Cir. 2004) was incorrect.
Contrary to the court’s decision, Zelener only compared retail Forex contracts and exchange
traded futures contracts. At no point did the 7th Circuit consider whether or not Forex and Metal
contracts are "commodity contracts" under the Similar Contracts Clause, nor did
Zelener touch
upon the similarity of Forex contracts to any of the numerous other specified categories of
protected commodity contracts in §761(4).
Zelener therefore provides no dispositive analysis
and minimal relevance to the application of the Similar Contracts Clause in this case.
Additionally, proper application of the Zelener rule, even to the single class of "other
contract" considered in that case - exchange traded futures - would provide a result contrary to
that assumed by the lower Court. As the 7th Circuit Court pointed out, the fungibility
requirement of a futures contract exists where "the seller of the contract promises to sell another
contract against which the buyer can offset the first contract." Zelener, 373 F.3d at 868. The
broker in Zelener (a mere introducing broker, not a registered FCM like PFG), sought out
tradable Forex prices for its customers from outside counterparties on a "best efforts" and
discretionary basis. The Zelener broker undertook only to "attempt to execute all Orders that it
may, in its sole discretion, accept from Customer,"
Id. In contrast, PFG promised categorically
"It is instructive to note that this requirement exceeded those imposed on futures accounts by 7 U.S.0 §6d and 17
CFR §30.7 at the time, and in the wake of the PFG case, congress is now attempting to remediate this disparity.
H.R. 4413 §103 (April, 2014) would require regulators to electronically verify balances in client futures bank
accounts - the direct verification already applicable to retail Forex accounts under procedures put forth in 17 CFR §
5.8(d) prior to the PFG bankruptcy.
12
that "PFGBEST will provide prices to be used in trading." Customer Agreement, ¶ 7(b)
(emphasis added). The court erred in ignoring this dispositive distinction.
B.
The Plain Language of Section 761(4) Requires Inclusion of Retail Forex and Metals
In a statutory construction case, when a statute speaks with clarity to an issue judicial
inquiry into the statue’s meaning, in all but the most extraordinary circumstance, the analysis is
finished. Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469, 475 (1992), see also Demarest
v. Manspeaker, 498 U.S. 184, 190 (1991). "[T]he words of [Congressional] statutes should be
read in context, the statute’s place in the overall statutory scheme should be considered, and the
problem Congress sought to solve should be taken into account." Goldstein v. S. E. C, 451 F. 3d
873, 878 (D.C. Cir. 2006), citing to PDK Labs. Inc. v. DEA, 362 F.3d 786, 796 (D.C. Cir. 2004)
(internal quotation marks omitted). Intended to extend priority to the broadest possible spectrum
of consumers, the plain language of the Similar Contracts Clause requires the inclusion of any
contract similar to the other instruments enumerated in §761(4) and the refusal by the lower
Court to even consider such similarities constitutes reversible error.
1.
The Record, and History, of Congressional Intent to Expand Federal
Protection of Markets and Market Participants is Manifest
There can be no dispute that Congress has consistently, over time, enlarged the scope of
protection afforded to consumers of financial services. The record shows that §761(4)(F)(i) was
added to the Code in 2005 under the Bankruptcy Abuse Prevention and
Consumer Protection Act
of 2005 ("BAPCPA")(emphasis added). Since then, Congress has consistently expanded
protections to consumers of all financial services, including retail Forex. 5
See 7 U.S.0 §2(c)(2)(c)(iv); 7 U.S.C. §2(c)(2)(B)(iv)(1II), 7 U.S.C. §2(c)(2)(B)(v), and 7 U.S.C.
§2(c)(2)(c)(iii)(11I) (standards for counterparties in Forex transactions); 11 U.S.C. 761(4)(F)(ii) (adding a broad
array of derivative contracts, including Forex-based swaps and options.
13
2.
The CFTC Deserves No Deference in its Failure to Follow Administrative
Procedure in Rulemaking
"When Congress has ’explicitly left a gap for an agency to fill, there is an express
delegation of authority to the agency to elucidate a specific provision of the statute by
regulation." United States v. Mead Corp., 533 U.S. 218, 227 (2001) (citing Chevron v. NRDC,
Inc., 467 U.S. 837, 843-44 (1984). At no point has the CFTC, in reference to §761(4)(F)(i),
"render[ed] its interpretation in the course of a rulemaking proceeding or adjudication."
Tennessee Valley Auth. v. Whitman, 336 F.3d 1236 1250 (11th Cir. 2003). As such, "The fair
measure of deference to an agency.. .has been understood to vary with circumstances, and courts
have looked to the degree of the agency’s care, its consistency, formality, and relative
expertness, and to the persuasiveness of the agency’s position" Mead, 533 U.S. at 228 (citing
Skidmore et al. v. Swift & Co., 323 U.S. 134, 139-40 (1944). Nearly 10 years after the passage
of §761 (4)(F)(i), in lieu of rulemaking and providing procedural due process to the public via
notice and comment as required of all Federal agencies, the CFTC merely submits judicial briefs
arguing that the section is meaninglessness. Its failure to follow proper procedure should not
prejudice the rights of the very customers it is charged with protecting.
C.
Martin Doyle’s Testimony Should Not Have Been Stricken
The court improperly struck the testimony of Martin Doyle, Customers’ expert, who
testified on the factual similarities between over the counter Forex and Metals contract trading
and exchange trading. There was no briefing or hearing on this issue. The question of the
admissibility of his testimony arose only through a short argument in the Trustee’s reply in
support of summary judgment. Although there is no obligation to hold a
Daubert hearing, a trial
court should not make a Daubert determination when the record is inadequate. Target Market
Publishing, Inc. v. ADVO, Inc., 136 F.3d 1139, 1143 (7th Cir. 1998); Jahn v. Equine Services,
14
PSC, 233 F.3d 382, 393 (6th Cir. 2000). A trial court should not make a
Daubert ruling
prematurely, but should only do so when the record is complete enough to measure the proffered
testimony against the proper standards of reliability and relevance. Id. In the absence of a
Daubert hearing, a reviewing court must review the record to determine whether the trial court
erred in its assessment of the relevance and reliability of the expert testimony.
Id.
Here, the court erred in striking the proffered testimony as "legal conclusion" where, on
its face, the testimony supplied facts, based upon Doyle’s qualifications and experience (which
were not questioned). Whether his opinion on the ultimate issue is admissible may be subject to
argument, no hearing was held Customers were not even allowed to respond. Because the
court’s decision to grant summary judgment was based upon an improper exclusion of Mr.
Doyle’s proffered expert testimony, the court’s summary judgment ruling should be reversed.
See, Jahn v. Equine Services, supra.
CONCLUSION
The court’s judgment should be reversed because it erred in its application of Illinois law
and failed to find that Customers’ Accounts are protected by resulting trusts. Further, the court
erred when it ignored §761(4)(F)(i), by failing to uphold Congress’ intent to enact legislation to
further the mission of the CFTC, to "ensure the financial integrity of all transactions subject to
this chapter . . . [and] to protect all market participants from fraudulent or other abusive sales
practices and misuses of customer assets." 7 U.S.C.A. § 5 (emphasis added).
Respectfully Submitted,
By
Vivian Drohan
489 Fifth Avenue
New York, NY 10017
Is!
Michael C. Moody
One of Appellants’ Attorneys
Michael J. O’Rourke
55 West Wacker Drive, Suite 1400
Chicago, Illinois 60601
15
CERTIFICATE OF SERVICE
I, Michael C. Moody, an attorney, hereby certify that on Thursday July 24, 2014, I
caused true and correct copies of the Appellants’ Opening Brief and Appendix to
Appellants Opening Brief to be served upon to be served via the Court’s CM/ECF System.
Dated: July 24, 2014
/s/Michael C. Moody
Michael C. Moody

Download Report