UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF … · 2014-06-05 · 6. In his opening account...

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UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

In re: ) Chapter 7 ) PEREGRINE FINANCIAL GROUP, INC., )

) Case No. 12-27488

) ) Honorable Judge Carol A. Doyle Debtor. ) )

) Hearing Date: June 25, 2014 Hearing Time: 10:30 a.m., C.T.

TRUSTEE’S REPLY IN SUPPORT OF FOURTH OMNIBUS OBJECTION

TO CLAIM NO. 11177 ASSERTED BY ROBERT DELANEY

Ira Bodenstein, not individually but solely as chapter 7 trustee (the “Trustee”) of the estate

(the “Estate”) of Peregrine Financial Group, Inc. (the “Debtor” or “PFG”), submits this Reply in

support of his Fourth Omnibus Objection to Claim No. 11177 asserted by Robert Delaney. In

support thereof, the Trustee respectfully states as follows:

INTRODUCTION

Delaney’s principal argument is that Claim No. 11177 is supported by his Demand for

Arbitration before the NFA (“Demand”), and that PFG is liable to him for losses associated with

trading activity on his commodity futures account. As of July 10, 2012 (the “Petition Date”),

Delaney’s trading account had a zero balance. Delaney has no valid claim against the Estate

because the Demand is barred by the Customer Agreement’s one-year statute of limitations

provision. If Delaney were not barred by the statute of limitations, Delaney would still have no

valid claim against the Estate because PFG is not liable to Delaney for the trading activities of his

Trading Agent. Even if the claim is not disallowed in its entirety, Delaney is not entitled to a

priority distribution of customer property as a futures customer because his futures account had no

value as of the Petition Date. Consequently, Claim No. 11177 should be disallowed in its entirety.

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BACKGROUND A. The Original Basis for Trustee’s Objection to Claim

1. On October 9, 2013, the Trustee filed his Fourth Omnibus Objection to Certain No

Liability Claims (the “Objection”). (Dkt. # 1732).

2. The basis for the Objection to claim no. 11177 (the “Claim”) was that Robert

Delaney’s (“Delaney”) commodity futures trading account had a zero balance as of July 10, 2012

(“Petition Date”).

3. On November 7, 2013, Delaney filed a response to the Objection (“Response”)

arguing that his Claim is based on his initiated National Futures Association (“NFA”) arbitration

action that was initiated against PFG prior to the Petition Date. (Dkt. # 1904). A true and correct

copy of Delaney’s Demand for Arbitration (“Demand”) is attached hereto as Exhibit A.

B. Trading Activity on Account No. 31016 and Account Documents

4. Delaney opened Account No. 31016 (the “Account”) in March 2010, and the

account traded until November 2010. The Account had a zero balance as of November 2010. See

Declaration of Susan O’Meara (“O’Meara Declaration”), Exhibit B, ¶¶ 5, 6.

5. The Account was introduced to PFG by Trinity Mercantile, LLC, a guaranteed

introducing broker. See O’Meara Declaration, ¶ 7.

6. In his opening account documents, applicable to the Account, Delaney indicated

that his investment objective for the Account was speculation. See O’Meara Declaration, ¶ 4, Ex.

3, p. 2.

7. Delaney also acknowledged in the account opening documents that he read, and

agreed to all of the terms of the Customer Agreement with PFG. See O’Meara Declaration, Ex. 3,

p. 2.


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8. The account was managed by David Mitchell Esch (“Esch”). See Ex. A., p.3, ¶ 6.

9. On March 29, 2010, Delaney executed a Limited Power of Attorney authorizing

Esch, his designated “Trading Agent,” “to buy and sell commodities and/or futures and/or options

on futures contracts on margin or otherwise for Customer’s account and risk.” See O’Meara

Declaration, ¶ 8, Ex. 6.

10. As stated in the Limited Power of Attorney, Delaney agreed “to indemnify and hold

Peregrine Financial Group, Inc. (“PFG”) harmless for all losses, costs, indebtedness and liabilities

arising therefrom.” O’Meara Declaration, Ex. 6.

11. The Limited Power of Attorney provides that the customer “ratifies and confirms

any and all transactions with PFG heretofore and hereafter made by Trading Agent on behalf of or

for Customer’s account.” Id. The Limited Power of Attorney also states:

Customer acknowledges that the risk factor is high in futures trading and only genuine “risk” funds should be used in such trading…No ‘safe’ trading system has ever been devised, and no one can guarantee profits or freedom from loss. In fact, no one can ever guarantee to limit the extent of losses. Customer acknowledges that Trading Agent has made no representation concerning limiting loss or guarantying profit.”

Id.

12. Under the terms of the Customer Agreement, PFG would “in no way be responsible

for reviewing Customer’s choice of…Trading Agent, nor [make] any recommendations with

respect thereto.” The Customer Agreement further states, in pertinent part: “Customer understands

that [PFG] makes no warranties or representations concerning any Trading Agent; nor does PFG

by implication or otherwise, endorse or approve of the operating methods of the Trading Agent.”

O’Meara Declaration, Ex. 2, ¶ 22.


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13. The Customer Agreement cautioned the following: “If Customer gives Trading

Agent authority to exercise any of its rights over its accounts, Customer understands that Customer

does so at Customer’s own risk.” Id.

14. Additionally, the Customer Agreement states that “[no] action, regardless of form,

arising out of transactions under this Agreement may be brought by the Customer more than one

year after the cause of action arose.” O’Meara Declaration, Ex. 2, ¶ 41.

15. On March 29, 2010, Pursuant to NFA Rule 208(e), Delaney executed an

acknowledgment that Esch was not required to provide a Commodity Trading Advisor Disclosure

Document to Delaney because he was exempt from registering as a Commodity Trading Advisor

(“CTA”) with the NFA. See O’Meara Declaration, ¶ 9, Ex. 7.

16. While managing the Account, Esch was employed by Managed Capital Advisory

Group as the firm’s Senior Vice President of Trading. Esch was also an Associated Person with

the NFA, and an Associated Person of Global Leverage, an introducing broker. Id.

17. Esch was never an agent, or employee of PFG. See O’Meara Declaration, ¶ 10.

18. Only Esch was authorized to trade on the Account, and Esch was responsible for

all trading activity on the Account. See O’Meara Declaration, ¶ 12.

19. Delaney invested $100,000.00 in the Account, which he funded by opening a home

equity line of credit. Ex. A., p. 5, ¶ 17.

20. As a result of Esch’s trading, Delaney’s entire investment was lost by October 2010.

Ex. A, p. 7, ¶ 25. Delaney confronted Esch in October 2010 regarding the trading strategy, and

demanded that reparations be made. Id.

C. Demand for Arbitration and Support for Claim


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21. On June 1, 2012, Delaney filed his Demand before the NFA, naming Esch, PFG,

Managed Capital Advisory Group, Rakia Securities, Inc. and Global Leverage, Inc. as

Respondents.

22. In his Demand, Delaney claims that unbeknownst to him, Esch’s trading strategy

was “speculative and extremely aggressive.” Ex. A., p. 6, ¶ 20. Delaney also alleges that he was

uninformed about the speculative nature of the trading in his account, and the high volume of

trades that were being executed every month. Id.

23. The Demand seeks relief from PFG for violations of NFA Compliance Rule 2-30,

violations of Section 4b of the Commodity Exchange Act, 7 U.S.C. § 6b, common law fraud,

breach of fiduciary duty, and failure to supervise. Ex. A.

24. In support of his claims, Delaney makes the following allegations against

Respondents generally, including PFG: (i) PFG owed him a duty to manage his account and did

not provide the necessary risk disclosures to Claimant so that he was unaware of the risk level

associated with futures trading; (ii) PFG exercised complete control over Delaney’s Account and

executed excessive trades, creating substantial and unjustified commissions paid to PFG; (iii) PFG

made material misrepresentations relating to the expected performance of his account; (iv) because

the Account was discretionary in nature, Delaney relied on PFG to properly execute trades and he

was damaged by his reliance; (v) PFG owed Delaney a fiduciary duty on the basis that the Account

was managed by PFG and PFG breached that duty; (vi) PFG failed to adequately supervise, which

resulted in Esch executing negligent and fraudulent trading transactions. Ex. A, ¶¶ 29, 30, 34, 36,

43, 47, 51.


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25. PFG was required to file an answer to the Demand on or before August 13, 2012.

In light of PFG’s bankruptcy filing and the imposition of the automatic stay, PFG never answered

the Demand.

ARGUMENT

A. Standard of Review

26. When asserting a proof of claim against a bankruptcy estate, a claimant must allege

facts that, if true, would support a finding that the debtor is legally liable to the claimant. In re

Pringle Engineering and Mfg., Co., 164 F.2d 299, 302 (7th Cir. 1947); Matter of Int’l Match Corp.,

69 F.2d 73, 76 (2d Cir. 1934)(finding that a proof of claim should at least allege facts from which

legal liability can be seen to exist). Where the claimant alleges sufficient facts to support its claim,

its claim is afforded prima facie validity. In re Carlson, 126 F.3d 915, 921-22 (7th Cir. 1997). A

party which disputes such a claim must produce evidence in sufficient force to negate the claim’s

prima facie validity. Id. In practice, the objecting party must produce evidence that would refute

at least one of the allegations essential to the claim’s legal sufficiency. Id. Once the objecting party

produces such evidence, the burden shifts back to the claimant to prove the validity of his or her

claim by a preponderance of the evidence. Id.

B. Delaney’s Claim Should be Disallowed in Its Entirety

27. Delaney has no claim against the Estate because the Demand is barred by the

Customer Agreement’s one-year statute of limitations provision. Even if the Demand were not

barred by the statute of limitations, however, Delaney would still have no claim against the Estate

because PFG is not liable to Delaney for the acts of his Trading Agent.

28. Delaney is bound by the one-year statute of limitations provision in the Customer

Agreement. Even though the Commodity Exchange Act provides for a two-year limitation period


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for plaintiffs to bring actions under the Act, this circuit has held that the two-year limitations period

may be shortened by contract. See Stephan v. Goldinger, 325 F.3d 874, 876-77 (7th Cir.

2003)(holding that a one year limitations period in an investor’s contract with his broker was

enforceable, and not unreasonable).

29. Delaney admits that in September 2010 he knew his account was in “severe

trouble,” and that he confronted Esch about the trading losses in October 2010. Ex. A, ¶¶ 24, 26.

As such, Delaney was aware of any cause of action he may have had against Esch or PFG as early

as October 2010. Under the Customer Agreement, Delaney was required to bring any action

against PFG on or before October 2011. O’Meara Declaration, Ex. 2, ¶ 41. The Demand was filed

June 1, 2012. Accordingly, Delaney’s Demand against PFG is barred by the one-year limitations

period and the Claim based on Delaney’s NFA Demand is unenforceable against the Debtor.

30. Even if Delaney were not barred by the one-year statute of limitations and the Court

were to consider the Demand’s substantive allegations, Delaney still does not have a valid claim

against the Estate because PFG is not liable to Delaney for the acts of his Trading Agent. PFG

cannot be liable for a violation of NFA Compliance Rule 2-30 because Delaney admits that he was

provided with, and understood the risk disclosure statements provided to him. O’Meara

Declaration, Ex. 3, p. 2. Pursuant to NFA Compliance Rule 2-30, NFA members are required to

provide individual customers with disclosures of the risks of futures trading. These documents

were provided to Delaney.

31. PFG cannot be liable for a violation of Section 4b of the Commodity Exchange Act,

common law fraud, or breach of fiduciary duty because it was Esch, not PFG, who made

representations to Delaney regarding his account and was solely responsible for trading the

account. Esch was never an agent or employee of PFG, and the Limited Power of Attorney


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executed by Delaney gave Esch, as Delaney’s Trading Agent, the authority as “agent and attorney-

in-fact” to trade on the Account. O’Meara Declaration, ¶ 10, Ex. 6.

32. Delaney alleges no specifics about any representations specifically made to him

regarding the expected performance of his Account, and the Customer Agreement itself disclaims

any warranties regarding customers’ Trading Agents or their performance. O’Meara Declaration,

Ex. 2, ¶ 22. By agreeing to be bound by the Customer Agreement, Delaney also agreed that PFG

could not be held responsible for any losses occasioned by the Trading Agent’s performance. Id.

33. Lastly, and for the same reasons as above, PFG owed no duty to supervise

Delaney’s appointed Trading Advisor. The Limited Power of Attorney expressly stated that

Delaney ratified every transaction made by the Trading Agent, and Delaney never notified PFG’s

compliance department about any improper activity. O’Meara Declaration, ¶ 13; Id., Ex. 6. As any

losses or improper conduct surrounding the account are solely attributable to Esch, PFG is not

liable to Delaney for any claim of relief under the Demand.

34. Accordingly, the Claim based on Delaney’s NFA Demand is unenforceable against

the Debtor and should be disallowed in its entirety.

C. The Claim is Not a Futures Claim Entitled to Priority Distribution

35. Even if the Claim is not disallowed in its entirety, Delaney is not entitled to share

in the pro rata distribution of “customer property” because his futures account had a zero balance

as of the Petition Date, and his futures clam is solely premised on pre-petition conduct of the

Debtor.

36. Pursuant to the Commodity Exchange Act, Congress authorized the CFTC to enact

regulations to implement commodity broker liquidations under subchapter IV of chapter 7. See 7


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U.S.C. § 24. The CFTC enacted those regulations in its Part 190 Rules. See 17 C.F.R. §§ 190.01

et seq.

37. Section 766 of the Bankruptcy Code provides that the trustee in a commodity broker

liquidation proceeding “shall distribute customer property ratably to customers on the basis and to

the extent of such customers’ allowed net equity claims, and in priority to all other claims” except

for certain administrative expenses. See 11 U.S.C. § 766(h)(emphasis added). “Net equity” is

defined by the Bankruptcy Code, in relevant part, as;

(A) The balance remaining in such customer’s accounts

immediately after—

(i) All commodity contracts of such customer have been

transferred, liquidated or become identified for

delivery; and

(ii) All obligations of such customer in such capacity to

the debtor have been offset[.]

11 U.S.C. § 761(17).

38. Customers with commodity accounts with zero value at the time of the debtor’s

bankruptcy do not have an allowed net equity claim entitled to a pro rata distribution of customer

property. See MF Global Inc., 491 B.R. 355, 362 (Bankr. S.D.N.Y. 2013)(upholding Trustee’s

determination that customers with zero balance accounts at the time of bankruptcy should be

“denied a customer priority under the Commodity Broker Liquidation Subchapter and the Part 190

Regulations.”). Delaney has provided no records evidencing that the Account had an account value

as of the Petition Date. Consequently, Delaney does not hold a claim entitled to distribution of

customer property.

39. The Claim is not entitled to priority distribution for the additional reason that claims

premised on pre-petition misconduct of the debtor are not entitled to “customer priority protection


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under the Commodity Broker Liquidation Subchapter and the Part 190 Regulations because 17

C.F.R. § 190.08(a)(2)(i) specifically excludes claims against [debtors] for misconduct and fraud.”

MF Global Inc., 491 B.R. at 363. To the extent the Claim is premised on PFG’s pre-petition

misconduct and not the value of the Account as of the Petition Date, the Claim is not for “customer

property” and is not entitled to priority distribution as a futures claim. Accordingly, if the Claim

is not disallowed in its entirety, it must be reclassified as a general unsecured claim.

CONCLUSION

WHEREFORE, the Trustee respectfully requests that this Court enter an order (a)

sustaining the Objection with respect to claim no. 11177, (b) disallowing claim no. 11177 in its

entirety, and (c) granting such other and further relief as this Court deems just and proper.

Respectfully submitted, IRA BODENSTEIN, not personally, but as

chapter 7 trustee for the estate of Peregrine Financial Group, Inc. d/b/a PFG Best

Dated: June 4, 2014 By: /s/ Allison B. Hudson One of his attorneys Robert M. Fishman (#3124316) Allen J. Guon (#6244546) Allison B. Hudson (#6313079) Shaw Fishman Glantz & Towbin LLC 321 North Clark Street, Suite 800 Chicago, Illinois 60654 Tel: (312) 541-0151


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CERTIFICATE OF SERVICE Allison B. Hudson certifies that she caused to be served a true copy of the above and foregoing Trustee’s Reply in Support of His Fourth Omnibus Objection to Claim No. 11177 Asserted by Robert Delaney upon the attached Electronic Mail Notice List through the ECF System in the manner so indicated on this 4th day of June, 2014. /s/ Allison B. Hudson CM/ECF Email Notice List for Case 12-27488:

The following is the list of parties who are currently on the list to receive email notice/service for this case.

Terence G Banich [email protected], [email protected] Lawrence M. Benjamin [email protected], [email protected] Stephen T. Bobo [email protected] Ira Bodenstein [email protected],

[email protected];[email protected] Ira Bodenstein [email protected], [email protected] Paul Catanese [email protected], [email protected] David E Cohen [email protected] Brooke E Conner [email protected],

[email protected];[email protected] Jerome F Crotty [email protected], [email protected] Carrie E Davenport [email protected], [email protected] Michael C Dell'Angelo [email protected], [email protected] David R Doyle [email protected], [email protected] Michael M. Eidelman [email protected], [email protected] Joseph O Enright [email protected] Robert M Fishman [email protected], [email protected] Robert M Fishman [email protected], [email protected] Geoffrey S. Goodman [email protected], [email protected];[email protected] Geoffrey S. Goodman [email protected], [email protected];[email protected] Ava Gould [email protected] Gordon E. Gouveia [email protected],

[email protected];[email protected] Gordon E. Gouveia [email protected],

[email protected];[email protected] Joshua M Grenard [email protected], [email protected] Allen J Guon [email protected], [email protected] Allen J Guon [email protected], [email protected] John W Guzzardo [email protected], [email protected] John W Guzzardo [email protected], [email protected] David Paul Holtkamp [email protected], [email protected] Stephanie K. Hor-Chen [email protected], [email protected]


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Allison Hudson [email protected], [email protected] Kevin M Hyde [email protected] Cindy M. Johnson [email protected], [email protected] Thomas S Kiriakos [email protected], [email protected] James C. Koutoulas [email protected] Vincent E. Lazar [email protected],

[email protected];[email protected];[email protected] Vincent E. Lazar [email protected],

[email protected];[email protected];[email protected] Randall M Lending [email protected],

[email protected];[email protected] Kyle A Lindsey [email protected], [email protected] James J McNamara [email protected] Michael C. Moody [email protected],

[email protected],[email protected] Michael C. Moody [email protected],

[email protected],[email protected] Michael J O'Rourke [email protected], [email protected] Michael J O'Rourke [email protected], [email protected] James A Pope [email protected] Mark L Radtke [email protected], [email protected] Mark L Radtke [email protected], [email protected] Jack A Raisner [email protected] Marc S Reiser [email protected], [email protected] Steven Robinson [email protected], [email protected] Mark J Rose [email protected] Rene S Roupinian [email protected],

[email protected];[email protected];[email protected] Rene S Roupinian [email protected],

[email protected];[email protected];[email protected] Richard A. Saldinger [email protected], [email protected] Jessica M Scheller [email protected] Vincent Paul Schmeltz III [email protected],

[email protected];[email protected] Sean T Scott [email protected], [email protected] Scott A Semenek [email protected], [email protected] Brian L Shaw [email protected], [email protected] Anne W Stukes [email protected], [email protected] William W Thorsness [email protected],

[email protected];[email protected] Rue K Toland [email protected] John Edward Waters [email protected] Thomas C. Wolford [email protected],

[email protected];[email protected] Jonathan Zinman [email protected]


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By US Mail

Robert Delaney 550 Camino De La Reina #315 San Diego, CA 92108


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