Leroy Inskeep v. Farrel Griffin ( 2012 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 10-3607
IN RE:
G RIFFIN T RADING C OMPANY,
Debtor.
A PPEAL OF:
L EROY G. INSKEEP.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 10 C 1915—Ruben Castillo, Judge.
A RGUED S EPTEMBER 16, 2011—D ECIDED JUNE 25, 2012
Before E ASTERBROOK, Chief Judge, and W OOD and
T INDER, Circuit Judges.
W OOD , Circuit Judge. Griffin Trading Company, a
futures commission merchant, went bankrupt in 1998
after one of its customers, John Ho Park, sustained
trading losses of several million dollars and neither Park
nor Griffin Trading had enough capital to cover these
obligations. This case turns on whether Farrel Griffin and
Roger Griffin (whose first names we use for clarity), the
2 No. 10-3607
partners in control of Griffin Trading, breached their
fiduciary duties when they allowed segregated customer
funds to be used to help cover Park’s (and thus Griffin
Trading’s) losses. In deciding this question, the district
and bankruptcy courts applied Illinois’s version of
the Uniform Commercial Code (U.C.C.) to a series of
transactions that was initiated by the margin call that
spelled Griffin Trading’s downfall. They erred in doing
so. We can find no reason why the transactions at is-
sue—which involved banks in England, Canada, France,
and Germany, but notably not Illinois—would be
governed by Illinois law. This error, however, does not
stand in the way of our resolution of the appeal. We
find that the bankruptcy court’s first decision in this
case appropriately relied on Farrel’s and Roger’s own
admissions that they failed in their obligation to
protect customer funds. This admission was enough to
hold them liable for the entire value of the wire trans-
fer. Accordingly, we reverse the district court’s most
recent decision in this case and remand for further pro-
ceedings.
I
On December 21, 1998, Park began trading German
bonds out of Griffin Trading’s office in London. Griffin
Trading was not a clearing member of EUREX, the
relevant exchange for Park’s trades, and so its trades
were placed through MeesPierson (a company organ-
ized in the Netherlands), which was Griffin Trading’s
clearing broker. (At one point it was known as Fortis
No. 10-3607 3
MeesPierson, reflecting the fact that it was acquired
by Fortis Bank in 1997, but in 2009 the name changed
back to MeesPierson. For the sake of consistency with
the historical record, we refer to it here simply as
MeesPierson.) This arrangement created a chain of re-
sponsibility: If and when trading losses arose, EUREX
would seek to recover from MeesPierson, MeesPierson
from Griffin Trading, and Griffin Trading from Park.
In order for each party in the chain to reduce its
financial exposure, each one required its customers to
maintain margin funds in its customer accounts. Thus,
Griffin Trading had to keep some money on deposit
with MeesPierson, and Park was required to keep a
minimum amount of money in his account with
Griffin Trading. Park’s trades, however, far exceeded
his trading limit; in less than two days, Park lost over
$10 million.
As a result of these losses, MeesPierson issued a
margin call for 5 million Deutsche Marks (DM) on the
morning of December 22, payable the next day. (The
euro was not launched until January 1, 1999, but initially
it operated only as a virtual currency; it became fully
effective on January 1, 2002, when all participating
national currencies, including the DM, had to be con-
verted. See http://ec.europa.eu/economy_finance/euro/
index_en.htm.) This triggered a series of transactions
among Griffin Trading’s bank accounts. First, at
11:19 a.m. in London on December 22, £1.6 million
were transferred from Griffin Trading’s account of segre-
gated customer funds at the London Clearing House to
its account of customer funds at the Bank of Montreal.
4 No. 10-3607
That money was then transferred to its customer-fund
account at Crédit Lyonnais, apparently to take ad-
vantage of favorable rates.
On the morning of the next day, December 23, Griffin
Trading moved that money—converted from British
pounds to DM—back to the Bank of Montreal. Finally,
at 11:52 a.m. on the 23rd, Griffin Trading answered
the margin call by wiring 5 million DM from its
account of customer funds at the Bank of Montreal to
MeesPierson’s account at Commerzbank (a German
entity). In all, as a result of Park’s trades made in
London on a European bond exchange, £1.6 million (or
the equivalent in DM) bounced around among Griffin
Trading’s accounts holding customer segregated funds
in England, Canada, and France, until the funds were
finally transferred to MeesPierson’s account in Germany.
Meanwhile, back in the United States, Farrel learned
of Park’s losses between 6:00 and 7:00 a.m. Chicago
time (noon to 1:00 p.m. UTC) on December 22. He
called his partner, Roger, and both of them quickly
realized that this “debacle” (their word) was going to
send Griffin Trading into bankruptcy unless they
quickly found a solution. Their first step was, as they
put it, to take charge of Griffin Trading’s activities. Farrel,
with Roger available by phone, contacted Park, had
several conversations with the London office, and,
notably, called MeesPierson directly. The bankruptcy
court determined that both Roger and Farrel at that time
discovered that MeesPierson had issued the 5 million
DM margin call to cover Park’s initial losses (another
No. 10-3607 5
margin call for over 13 million DM would come later that
day for the rest of the loss, but it was not satisfied), and
that they failed in their primary obligation to protect
customer funds by not blocking the 11:52 a.m. wire trans-
fer.
After unsuccessfully attempting to cover the remaining
shortfall, Griffin Trading filed for bankruptcy in the
Northern District of Illinois on December 30, 1998. The
trustee in bankruptcy initiated this adversary action
against Roger and Farrel in 2001, and the suit went to
trial in 2004. At trial, the bankruptcy court found that
Roger’s and Farrel’s failure to “stop the wire transfer
paying the margin call constituted gross negligence and
constituted a violation of their fiduciary duties to their
creditors.” Inskeep v. Griffin (In re Griffin Trading Co.),
No. 01A00007 (Bankr. N.D. Ill. Jan. 26, 2005). Farrel and
Roger appealed the bankruptcy court’s decision to the
District Court for the Northern District of Illinois, arguing
that the application of Illinois’s U.C.C., rather than
foreign law, was error. The district court found this
argument forfeited, but it nevertheless thought the bank-
ruptcy court applied the wrong law—in particular, the
wrong section of the U.C.C. See No. 05 C 1834, 2008 WL
192322, at *7 (N.D. Ill. Jan. 23, 2008). On remand, the
bankruptcy court reversed its earlier course, holding
that the trustee failed to establish, as a matter of Illinois
law, that Farrel and Roger actually caused the loss of
customer funds. 418 B.R. 714, 718-21 (Bankr. N.D. Ill. 2009).
The court further held that the trustee failed to establish
damages. Id. at 721. The district court affirmed, 440 B.R.
148, 164 (N.D. Ill. 2010), and the trustee now appeals.
6 No. 10-3607
II
Even though this case is over a decade old and has
generated at least four judicial decisions, this is the first
time that it has reached the court of appeals. Under 28
U.S.C. § 158(d)(1), our jurisdiction extends to “all final
decisions” issued by the bankruptcy and district courts.
After carefully reviewing the several opinions before us,
we regret to say that the bankruptcy and district courts
erred from the outset by applying Illinois law. Despite
this error, however, we agree with the result in the bank-
ruptcy court’s initial decision: Roger and Farrel are liable
for causing the creditor loss alleged in this case.
A
The bankruptcy court’s first decision concluded that
Farrel and Roger were liable for damages because they
could have stopped the wire transfer and their failure to
do so constituted a breach of their fiduciary duties. It
based this finding on the authority that the two would
have had under the U.C.C. On appeal to the district court,
Farrel and Roger contested that ruling, asserting that
the U.C.C. could not provide the operative rule of law
for “a series of four transfers between Griffin Trading’s
bank in England to MeesPierson’s bank in Germany.”
2008 WL 192322, at *5. The district court rejected that
argument. Citing cases that considered appeals from
district courts to the court of appeals, the district court
chided the defendants for waiting until its first appeal
to raise the question of choice of law (especially foreign
law) and ruled the argument forfeited. Id. at *5-*6. This
No. 10-3607 7
ruling failed to appreciate the nature of Federal Rule
of Civil Procedure 44.1, and amounted to an abuse of
discretion.
The district court suggested that the defendants’ alleged
forfeiture was especially “problematic” because it impli-
cated Rule 44.1, which was made applicable in bank-
ruptcy court by Federal Rule of Bankruptcy Procedure
9017. 2008 WL 192322, at *5. Bankruptcy Rule 9017 is a
rule of evidence, however, not a rule of procedure or
pleading. The Bankruptcy Rule simply clarifies that the
Federal Rules of Evidence and those Civil Rules that
pertain to evidentiary questions—Rule 43 (Taking Testi-
mony), Rule 44 (Proving an Official Record), and Rule 44.1
(Determining Foreign Law)—“apply to cases under the
[Bankruptcy] Code.” Although it is true that Rule 44.1
requires any party who intends to present evidence of
foreign law to “give notice by a pleading or other writ-
ing,” the language of the rule itself reveals that no par-
ticular formality is required. Any “other writing” will do,
as long as it suffices to give proper notice of an intent
to rely on foreign law. As applicable here, Bankruptcy
Rule 9017 and Civil Rule 44.1 govern the admission and
review of different types of evidence of foreign law, and
they confirm that this is an issue of law for the court, not
an issue of fact.
Even strictly adhering to Rule 44.1’s notice requirement,
we conclude that the court and the parties were ade-
quately alerted to the possible applicability of foreign
law in a timely manner. As the notes to the Rule explain,
the required notice need only be “reasonable” so as to
8 No. 10-3607
avoid an “unfair surprise.” FED. R. C IV. P. 44.1, advisory
committee’s note, 1966 adoption. Furthermore, the advi-
sory committee’s note suggests that “the pertinence of
foreign law [may be] apparent from the outset,” and so
“notice can be given conveniently in the pleadings.” In
this case, the trustee’s own complaint sufficed to give
notice about the applicability of foreign law. Count IV of
the Adversary Complaint, an “Action For Breach of
Fiduciary Duty,” explicitly cites Park’s trading activity
in London as the precipitating event, and points to the
transfer to MeesPierson, a Netherlands entity that used
a German bank, as the cause for liability. This was
enough to put all parties on notice that the transactions
might be governed by foreign law. Nor does it matter
that the defendants’ answer denied the trustee’s allega-
tions, even though it was the defendants who later
sought to raise the question of foreign law: “If notice
is given by one party it need not be repeated by any
other and serves as a basis for presentation of material
on the foreign law by all parties.” FED. R. C IV . P. 44.1,
advisory committee’s note ¶3, 1966 adoption.
Moreover, even if these references in the complaint
were not as clear then as they now seem, the notes to
the rule eliminate any remaining question. The notes
show that the rule expressly contemplates the possibility
that the need to answer questions of foreign law may
become “apparent” even as late as trial. Id. Thus, if the
reference to the foreign activity and foreign payment
in the complaint was not enough to reveal that all
relevant activity took place outside the United States, by
the time all of the transactions at issue had been ex-
No. 10-3607 9
plored at trial, it would have been obvious that it was
at a minimum very unlikely that a court in Illinois
would have concluded that local law applied. Id.; see also
Yessenow v. Executive Risk Indemn., Inc., 953 N.E.2d 433,
438 (Ill. App. Ct. 2011). Every relevant action took place
outside the United States. The losing trades originated
in England. Griffin Trading’s various bank accounts
were in England, Canada, and France. MeesPierson is
based in the Netherlands, and its bank account was in
Germany. The bankruptcy and district courts erred by
applying Illinois law.
B
Having established that the U.C.C. should not have
been used, one might think that we need to choose
an alternative among the various legal systems affected
by Griffin Trading’s demise. We conclude, however, that
this is not necessary. The important point is that the
U.C.C., under which a wire transfer can be reversed
until the receiving bank accepts a payment order, cannot
provide the operative rule of law. See U.C.C. § 4A-211,
codified in Illinois at 810 ILCS § 5/4A-211. The bank-
ruptcy and district courts believed that the trustee’s
inability to pin down the precise moment of acceptance
allowed the Griffins to argue that there was no proof
that they could have stopped the transfer. But that
assumes that the trustee had the burden of demon-
strating compliance with the U.C.C. In fact, he had no
such burden because the U.C.C. does not provide the
applicable rule of law. Nor is this a case in which there is
10 No. 10-3607
no real difference among legal systems. Our research
reveals, for example, that the European Union has a
Directive on Payment Services in the Internal Market
(adopted in 2007) that permits a payer to revoke by the
end of the business day preceding the day agreed
for debiting the funds. See http://eur-lex.europa.eu/
LexUriServ/LexUriServ.do?uri=OJ:L:2007:319:0001:01:EN
:HTML, Art. 66.3 (last visited June 21, 2012). The
UNCITRAL Model Law on International Credit Trans-
fers offers another approach: It provides that “[a]
payment order may not be revoked by the sender unless
the revocation order is received by a receiving bank . . .
at a time and in a manner sufficient to afford the
receiving bank a reasonable opportunity to act . . . .” art.
12(1) (1994); see also id. art. 12(2) (beneficiary’s bank).
More importantly, it was neither the trustee’s burden
or the court’s to canvass all possible foreign laws. It was
the Griffins’s responsibility to do so. Banque Libanaise
Pour Le Commerce v. Khreich, 915 F.2d 1000, 1006 (5th Cir.
1990) (the party seeking to rely on foreign law must
provide “clear proof of the relevant . . . legal principles” to
the trial court, even though the issue is reviewed as a
question of law on appeal). As the parties seeking to rely
on foreign law, they have not pointed to any possible
option applicable at the time of these transactions
under which they would have been disabled from
revoking the transfers before the margin call was
answered on December 23.
In any event, it appears to us that Farrel and Roger
would not have been able to meet this burden: Every one
of the possible applicable laws requires a causal link
No. 10-3607 11
between the challenged activity (or inactivity) and the
alleged injury, and none attaches the significance to the
moment of acceptance that—we assume for the sake of
argument—U.C.C. Article 4A does. We see no need to
delve further into the details of the different possible
applicable laws. See Prudential Ins. Co. of Am. v. Kamrath,
475 F.3d 920, 924 (8th Cir. 2007) (“Before applying . . .
choice-of-law rules . . . [a] court must first determine
whether a conflict exists.”). The only question properly
before us is whether Farrel’s and Roger’s inaction
caused Griffin Trading to lose its customers’ money. This
question has two parts: (1) Did Farrel and Roger know
about the scheduled wire transfer to MeesPierson; and
(2) if so, could Farrel and Roger have stopped it under
governing principles of commercial law? These are both
mixed questions of fact and law that the bankruptcy
court addressed in its first decision, and so our review
is only for clear error. Levenstein v. Salafsky, 414 F.3d 767,
773 (7th Cir. 2005) (clear error typically applies except
in limited instances, such as cases presenting constitu-
tional questions).
The bankruptcy court’s first ruling answered both of
these questions in the affirmative. Judge Black discredited
the defendants’ contention that they did not know about
the 5 million DM margin call. The court found it “very
unlikely that the defendants would not have learned of
the first margin call from their employees in the London
office.” Their assertion was further undermined by evi-
dence showing that Farrel and Roger called MeesPierson
directly. The court found it “strange” that the defendants
would ask the court to “believe that people in their posi-
12 No. 10-3607
tion would call the bank that had issued a margin
call of that size and not discuss the margin call and yet
discuss the . . . need for, quote, ‘more time,’ end quote.”
The bankruptcy court found as a fact that after that
phone conversation Farrel and Roger knew about the
scheduled transfer of customer funds.
The bankruptcy court further determined that both
Farrel and Roger “took no action to prevent the transfer”
despite having “time to stop it.” This is consistent with
the evidence presented at the first trial. Farrel learned
of Park’s trades between noon and 1:00 p.m. UTC on
December 22. Yet the actual transfer to MeesPierson
was not executed until nearly a full day later, just before
noon on December 23. As we have already noted,
the Griffins have not suggested, and we cannot find,
any legal standard under which this would not have
provided ample opportunity for them to prevent
the transfer of customer funds to MeesPierson. See
UNCITRAL Model Law on International Credit Transfers, art.
12(1), 12(2) (1994) (a transferor needs to give a bank only
a “reasonable opportunity to act” in order to cancel a
wire transfer); Benjamin Geva, The Wireless Wire: Do
M-Payments and UNCITRAL Model Law on International
Credit Transfers Match?, 27 B ANKING & F IN. L. R EV. 249, 254-
55 (2012) (same). Indeed, the defendants have never
argued that under U.K., or German, or Canadian, or
Dutch law that they were powerless to take corrective
action. To the contrary, they conceded that they “had
the ability to contact Griffin Trading Company’s banks
and direct them not to go through with the wire trans-
fer.” See 1 Cresswell, P.J., ed., T HE E NCYCLOPAEDIA OF
No. 10-3607 13
B ANKING L AW, Div. D1 ¶ 224 (the duties that arise
between a payer and a payer’s bank regarding a funds
transfer are predominantly contractual). Their failure to
take advantage of this window of opportunity caused
the creditor loss at issue in this case.
In the final analysis, the bankruptcy court concluded
that Farrel and Roger “knew about [the wire transfer]
while there was still time to stop it.” Given the evidence
that the defendants were in constant contact with the
London office and had called MeesPierson themselves,
coupled with their admissions at trial that they had
the opportunity to cancel the transfer, we cannot say
that this determination was clearly erroneous.
III
Having concluded that the defendants’ inaction caused
the creditor loss at issue, we turn now to the question
of damages. The trustee alleges that the defendants
violated 17 C.F.R. § 30.7, which requires futures com-
mission merchants to protect customer funds, when
they transferred customer funds to MeesPierson, and
thus that the full extent of this violation—i.e., the
whole wire transfer—represents damages. One might
wonder why U.S. law should apply here, given the
earlier discussion about choice of law. The answer is that
the discussion above considered Griffin Trading’s legal
rights vis-á-vis its foreign agents (its banks), and we
have concluded that these private arrangements are not
governed by Illinois law. Here, in contrast, we consider
Griffin Trading’s obligations to its customers under a
14 No. 10-3607
regulatory regime, in its capacity as a futures commis-
sion merchant registered with the U.S. Commodity
Futures Trading Commission (CFTC) and subject to the
CFTC’s domestic and extraterritorial regulations. Griffin
Trading is subject to the Commodity Exchange Act,
which imposes requirements on futures commission
merchants for the handling of customer funds and gives
the CFTC authority to impose special regulations to
“safeguard customers’ funds” in connection with trading
activity on foreign exchanges. 7 U.S.C. § 6(b)(2)(A); 17
C.F.R. § 30.7; see also Morrison v. National Austl. Bank, 130
S. Ct. 2869, 2882-83 (2011) (discussing when statutes
have extraterritorial effect).
Specifically, § 30.7(a) requires that a futures commis-
sion merchant “maintain in a separate account or
accounts money, securities and property in an amount
at least sufficient to cover or satisfy all of its current
obligations to foreign futures.” That section also
provides that such segregated funds “may not be com-
mingled with the money, securities or property of such
futures commission merchant . . . or used to guarantee
the obligations of . . . such futures commission mer-
chant.” That is, merchants that are entrusted with
their customers’ money have special obligations, and
those merchants are liable for losses arising out of vio-
lations of those obligations.
In its second ruling, the bankruptcy court held that
the trustee had failed to prove that Farrel and Roger
had violated this regulation, and thus that the trustee
had not proven any damage to the estate. The court
No. 10-3607 15
faulted the trustee for providing “no evidence of the
amount in the accounts before or after the wire trans-
fer” and “no evidence regarding the calculation of the
foreign futures secured amount.” 418 B.R. at 725. The
record, however, belies these findings. In fact, it reveals
that the wire transfer necessarily transmitted customer
funds to MeesPierson in order to satisfy Griffin Trading’s
own obligations.
At the second trial, Farrel testified that Griffin
Trading’s London account of segregated customer
funds existed to secure customer activity out of its
London office; that is, those funds were supposed to
“satisfy all of its current obligations to foreign futures.”
This means that all of the money in that account was
subject to the strictures of § 30.7. Yet the CFTC re-
ported that, at the close of the day on December 22,
Griffin Trading’s account was underfunded by over
$7 million. Because the margin call was valued at ap-
proximately $3 million, the entire transfer must have
been made using customer funds. And, despite the bank-
ruptcy court’s concern, this would be the case whether
or not the $7 million shortfall was the reason for the
pending wire transfer. Furthermore, Park’s account with
Griffin Trading was running a deficit at the time of the
wire transfer, and so it cannot be the case that Griffin
Trading used Park’s money to satisfy the margin call.
(If Park’s account had not been in the red, it would have
been perfectly allowable for Griffin Trading to draw on
it, since, as we explained earlier, the debt was actually
Park’s.) This evidence demonstrates that Griffin Trading
necessarily used restricted funds that its customers
16 No. 10-3607
had entrusted to it in order to satisfy its own obligations
to MeesPierson.
The defendants’ failure to stop the wire transfer to
MeesPierson was a breach of their fiduciary duties.
That breach caused a loss to Griffin Trading’s cus-
tomers equivalent to the amount of the entire transfer.
The bankruptcy estate of Griffin Trading is thus entitled
to proceed against Farrel and Roger for the damages
they caused. We R EVERSE and R EMAND to the district
court for proceedings consistent with this opinion.
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