Sentinel Management Group, Inc.et al v. FC Stone LLC

Filing 339

MEMORANDUM Opinion and Order: Signed by the Honorable Rebecca R. Pallmeyer on 1/23/2018. Mailed notice. (etv, )

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
FREDERICK J. GREDE, not individually but as
Liquidation Trustee of the Sentinel Liquidation Trust,

)
)
)
Plaintiff,
)
v.
)
)
FCSTONE, LLC,
)
)
Defendant.
)
___________________________________________________ )
PENSON FINANCIAL FUTURES, INC. and
)
PENSON FUTURES f/k/a PENSON GHCO,
)
Defendants.
)
___________________________________________________ )
IFX MARKETS, INC. and IPGL, LTD.
)
Defendants.
)
___________________________________________________ )
FARR FINANCIAL, INC.,
)
Defendant.
)
___________________________________________________ )
CADENT FINANCIAL SERVICES,
)
Defendant.
)
___________________________________________________ )
COUNTRY HEDGING, INC.,
)
Defendant.
)
___________________________________________________ )
VELOCITY FUTURES, LP,
)
Defendant.
)
___________________________________________________ )
AMERICAN NATIONAL TRADING CORP.,
)
Defendant.
)
___________________________________________________ )
ABN AMRO CLEARING CHICAGO LLC
)
f/k/a FORTIS CLEARING AMERICAS, LLC,
)
Defendant.
)
___________________________________________________ )

No. 09 C 136
Judge Rebecca R. Pallmeyer

No. 09 C 101

No. 09 C 115

No. 09 C 120

No. 09 C 127

No. 09 C 130

No. 09 C 135

No. 09 C 137

No. 09 C 138

MEMORANDUM ORDER
These nine cases all arise from the decade-old bankruptcy of Sentinel Management
Group, Inc. The facts surrounding Sentinel’s collapse have been described in more than a
dozen published opinions dating back to 2010.

In short, Sentinel’s managers failed to

segregate client funds and securities in violation of federal law, regulations, and customer
agreements. Instead, Sentinel pledged its clients’ funds as collateral for loans from the Bank of
New York (“BONY”), which Sentinel used to purchase even more securities on its own “house”

account for the benefit of corporate insiders. When the financial markets began to crumble in
the summer of 2007, Sentinel was unable to both repay the BONY loan and return its clients’
money to them. Sentinel declared bankruptcy on August 17, 2007.
The Defendants are all financial institutions and former Sentinel clients assigned to its
“SEG 1” customer group (collectively, “the SEG 1 Defendants”). The SEG 1 Defendants consist
of FCStone, LLC (Case No. 09-cv-136); Penson Financial Futures, Inc. and Penson Futures
f/k/a Penson GHCO (together, No. 09-cv-101); IFX Markets, Inc. and IPGL, Ltd (together, No.
09-cv-115); Farr Financial, Inc. (No. 09-cv-120); Cadent Financial Services (No. 09-cv-127);
Country Hedging, Inc. (No. 09-cv-130); Velocity Futures, LP (No. 09-cv-135); American National
Trading Corp. (No. 09-cv-137); ABN AMRO Clearing Chicago LLC f/k/a Fortis Clearing
Americas, LLC (No. 09-cv-138). 1

Plaintiff Frederick J. Grede, is the Liquidation Trustee

administering Sentinel’s remaining assets.

Soon after his appointment, the Trustee filed

essentially identical five-count complaints against all of the SEG 1 Defendants seeking: the
avoidance and recovery of various post-petition transfers under 11 U.S.C. § 549 (Count I); the
avoidance and recovery of preferential pre-petition transfers under 11 U.S.C. § 547 (Count II); a
declaratory judgment as to the ownership of reserve funds (“the Property of the Estate
Reserves” or “the Reserves”) held by the Trustee under the confirmed bankruptcy plan (“the
Plan”) (Count III); unjust enrichment (Count IV); and reduction or disallowance of claims (Count
V). 2

(See Second Amended Complaint in Grede v. FCStone, LLC, No. 09-cv-136 [99]

1

Two further cases, Grede v. Rand Financial Services, No. 09-cv-128, and Grede
v. Crossland, LLC, No. 09-cv-140, were also included in pool of SEG 1 Defendants awaiting a
final disposition in the test case. In both cases, the parties agreed to a stipulated dismissal with
prejudice after briefing on their respective motions for judgment had concluded. (Stipulated
Dismissal with Prejudice [153] in Grede v. Rand Financial Services, No. 09-cv-128; Stipulated
Dismissal with Prejudice [162] in Grede v. Crossland, LLC, No. 09-cv-140.) The court
dismissed the Trustee’s complaint against Rand and closed the case on January 2, 2018.
(Order [154] in Grede v. Rand Financial Services, No. 09-cv-128.) The complaint against
Defendant Crossland, LLC, is dismissed today. (Order [163] in Grede v. Crossland, LLC, No.
09-cv-140.)
2
Grede’s complaint against Penson Financial Futures, Inc. (“PFFI”) and Penson
Futures f/k/a Penson GHCO (“Penson Futures,” and collectively with PFFI, “the Penson
2

(“FCStone Complaint”), 26–31.) All the SEG 1 Defendants raised the same core defenses in
opposition to these claims.
In light of the identical claims and common factual and legal issues, then-presiding
Judge Zagel decided to proceed with the SEG 1 litigation on a test-case basis. The parties
selected Grede v. FCStone, LLC, No. 09-cv-136, as a test case for all the SEG 1 cases. After
multiple appeals and reversals by the Seventh Circuit, all five counts in the Second Amended
Complaint [99] have been resolved in FCStone’s favor.

It now falls on this court to enter

judgment as to all the SEG 1 Defendants pursuant to the Seventh Circuit’s recent decision in
Grede v. FCStone, LLC, 867 F.3d 767 (7th Cir. 2017) (“FCStone II”).
PROCEDURAL HISTORY
The outcome of the test case has swung wildly with each new decision. At a bench trial,
Judge Zagel originally found in favor of the Trustee on Counts I, II, III, and V—dismissing only
the Trustee’s unjust enrichment claim in count IV as preempted by federal bankruptcy law.
Grede v. FCStone, LLC, 485 B.R. 854, 888–890 (N.D. Ill. 2013).

Defendant FCStone

appealed, and the Seventh Circuit reversed the judgments in favor of the Trustee.

Grede v.

FCStone, LLC, 746 F.3d 244, 260 (7th Cir. 2014) (“FCStone I”). The panel found that the postand pre-petition transfers underlying Counts I and II, respectively, fell within “safe harbors” in the
Bankruptcy Code and were not subject to avoidance. Id. at 251. This decision had the further
effect of rendering Count V (seeking disallowance of certain claims) moot.

Absent any

Defendants”) is the lone exception. (Second Amended Complaint [30] in Grede v. Penson, No.
09-cv-101 (“Penson Complaint”).) The Trustee asserts seven counts against Penson. These
counts are duplicate claims seeking the avoidance of post-petition transfers and pre-petition
preferences made to Pension Futures as well as PFFI. The Complaint’s numbering is
necessarily changed as a result. Counts I and III in the Penson Complaint correspond to Count
I in the complaints against the other SEG 1 Defendants, and Counts II and IV in the Penson
Complaint correspond to Count II in the other complaints. Counts V–VII in the Pension
Complaint correspond to Counts III–V in the other SEG 1 complaints. (See Penson’s
Memorandum of Law in Support of a Motion for Entry of Judgment on Counts I-VII of the
Penson Complaint [66] (“Penson Mot.”), 2 n.2.) In the interest of clarity, this order will use the
FCStone Complaint as a template for the complaints filed against each of the SEG 1
Defendants. All references to the FCStone Complaint apply equally to the analogous portions
of the Penson Complaint.
3

avoidable transfers to FCStone, the Trustee no longer had any legal grounds to disallow
FCStone’s claims against the estate under 11 U.S.C. § 502(d). See Grede v. FCStone, LLC,
556 B.R. 357, 366 (N.D. Ill. 2016) (“FCStone Remand”); 11 U.S.C. § 502(d) (directing courts to
disallow any claim by an entity that received and failed to return an avoidable preference).
The first appeal did not specifically address the appropriate disposition of the Reserves,
the subject of Count III. See FCStone II, 867 F.3d at 774 (discussing the scope of FCStone I).
The Reserves had been created by the approved Plan and involved four separate pots of
money: one for each of customer SEGs 1, 2, and 3, and another for disputed claims arising
under Section 7.20(b) of the Plan (“the Section 7.20(b) Disputed Claims Reserve”). FCStone
Remand, 556 B.R. at 363. The Reserves are the focus of an ongoing dispute over whether
certain funds are properly considered the property of the estate, or instead customer property
held in trust for the benefit of specific clients. The Trustee alleged that the Reserve funds were
property of the estate, and thus owed to all Sentinel’s creditors on a pro rata basis. FCStone II,
867 F.3d at 779. The SEG 1 Defendants countered that the Reserves were comprised of funds
protected by statutory trusts in favor of each of the SEG 1 Defendants and should only be
distributed pro rata among themselves. Id. The SEG 1 Defendants all objected to an early
version of the Plan which treated the funds as property of the estate, so the final Plan kept those
disputed funds in reserve pending judicial resolution. Id. at 771.
The money for these Reserves came from a last-minute sale of securities that Sentinel
made to a financial firm called Citadel the day before Sentinel filed for bankruptcy. FCStone
Remand, 556 B.R. at 361. Under the approved Plan, $15.6 million in proceeds of this sale were
held in the SEG 1 Reserve, along with a further $4.9 million in proceeds from late-settling
securities and other liquidations. FCStone II, 867 F.3d at 778–79. Accounting for accrued
interest, the balance in the SEG 1 Reserve account stood at $24,626,984 as of July 31, 2017.
(Reserve Account Summary, Ex. A to FCStone. LLC’s Motion for Entry of an Order Directing the
Trustee to Pay FCStone, LLC its Pro Rata Share of the Reserves [317] in Grede v. FCStone,
4

No. 09-cv-136 (“FCStone Mot.”).) The Section 7.20(b) Disputed Claims Reserve consists of
amounts withheld from distributions the Trustee made to other creditors after the Plan was
approved.

FCStone II, 867 F.3d at 790.

It “capture[s] the pro rata portions of litigation

recoveries and similar distributions that SEG 1 Objectors would have received had the parties
agreed up front that the Citadel sale proceeds were SEG 1 trust property[.]” Id. The balance of
the Section 7.20(b) Disputed Claims Reserve is $4,567,042. (Reserve Account Summary.)
On remand, Judge Zagel entered judgment in favor of Defendant FCStone on Counts I,
II, IV, and V, consistent with the Seventh Circuit’s decision in FCStone I. FCStone Remand,
556 B.R. at 366. Judge Zagel noted, however, that the Seventh Circuit had not reversed his
ruling on Count III, and he therefor reaffirmed his original judgment on that count in favor of the
Trustee. Id. at 363. He noted that the SEG 1 and SEG 3 customers were both protected by
statutory trusts, and concluded that “equity prevent[ed] [the court] from favoring one statutory
trust claim over another.” Id. at 365. Furthermore, Judge Zagel believed any attempt to trace
customer funds would be difficult, “if not impossible,” given Sentinel’s extensive comingling
across different accounts. Id. In FCStone I, the Seventh Circuit had proposed that courts faced
with competing statutory trust claimants should “require trust claimants to trace without the
benefit of tracing conventions, but [ ] place trust claimants who fail to trace in a class ahead of at
least unsecured creditors, giving them priority in bankruptcy proceedings.” 746 F.3d at 259.
Judge Zagel found this rule inapplicable, however, because as he saw it “[t]he dispute raised in
Count III is [ ] not a dispute between two statutory trust claimants, nor is it a dispute between
statutory trust claimants and a pool of unsecured creditors. It is more complicated.” FCStone
Remand, 556 B.R. at 366. Judge Zagel also stated that the Plan gave him broad discretion to
distribute the funds as he saw fit under Section 7.20(c)(i), which stated:
In the event the Court determines that the property in any of the Property Of The
Estate Reserves is not property of the estate, Sections 4.4 and 4.5 of the Plan
shall be deemed modified to provide that Customer Property shall be distributed
to the rightful owners of such property or to the Estate, as determined by the
Court.
5

Id. (quoting Fourth Amended Chapter 11 Plan of Liquidation, Section 7.20(c)(i), Ex. 1 to
Trustee’s Supplemental Objection to FCStone Mot. [330-1] (“Liquidation Plan”), 40.) Judge
Zagel interpreted this section as granting him the “discretion to distribute the Reserves to the
estate even if the Reserves are found not to be property of the estate.” Id. (emphasis added).
At each step along the way, the Trustee and the SEG 1 Defendants reacted to the most
recent decision in the test case by filing motions for judgment in their respective cases. (See,
e.g., Motions for Judgment [46, 67, 69, 88, 91, 109] in Grede v. IFX Markets, No. 09-cv-115.)
On March 28, 2016, Judge Zagel issued a blanket denial of all of these outstanding motions in
the cases against the SEG 1 Defendants.

(Denial and Stay Order [156] in Grede v. IFX

Markets, No. 09-cv-115.) He further ordered that any future motions for judgment be stayed
“until my [FCStone Remand Memorandum Opinion and Order] has been fully appealed and
decided, or the time to appeal it has expired.” (Id.) 3
On August 14, 2017, the Seventh Circuit reversed Judge Zagel again.

This time

squarely addressing the Reserves that are the subject of Count III, the panel found that because
the SEG 3 defendants had opted out of their trust claims by voting for the Plan and “agree[ing]
to be treated as unsecured creditors,” the issue of “parallel statutory trusts” was avoided.
FCStone II, 867 F.3d at 781–83 (“[T]he SEG 1 Objectors alone preserved their right to recover
trust property held in reserve, and the plan specifically contemplates that such property may be
restored to those customers. SEG 3 customers simply did not preserve a comparable right.”)
The Seventh Circuit also found that tracing a customer’s initial investment to the remaining
Reserve funds was not, in fact, impossible, given the “essentially unrebutted” testimony of
FCStone’s forensic accountant. Id. at 784–86. And even if any customer could not actually
trace its funds, the panel continued, “it should nevertheless be entitled to rely on reasonable

3

The stay order covered all of the SEG 1 cases except for Grede v. Penson, No.
09-cv-101, which was independently stayed by Penson’s own bankruptcy. (Suggestion of
Bankruptcy [44] and Status Report [56] in Grede v. Penson, No. 09-cv-101.)
6

tracing conventions (or ‘fictions’).” Id. at 783. The panel also rejected Judge Zagel’s purported
wide discretion under the Plan as “lead[ing] to a nonsensical result” wherein a judge could
ignore the law. Id. The Seventh Circuit ultimately held that the SEG 1 Reserve funds are trust
property of FCStone and the other SEG 1 Defendants and directed the district court on remand
to disperse the Reserves pro rata among the SEG 1 defendants. Id. at 771, 784. Based on this
decision, the panel instructed this court to order the Trustee to liquidate and disperse the
Section 7.20(b) Disputed Claims Reserve to FCStone and the other SEG 1 Defendants as well.
Id. at 791.
DISCUSSION
Defendant FCStone has already been granted judgment on Counts I, II, IV, and V of the
Trustee’s Second Amended Complaint. (Judgment Order of 3/30/16 [290] in Grede v. FCStone,
No. 09-cv-136.) The Seventh Circuit has now directed this court to enter judgment in FCStone’s
favor on Count III and thereby conclude the case. The amount due to FCStone from either of
the Reserve funds is not in dispute, but the parties have been unable to reach an agreement on
either the form or substance of the judgment order. (FCStone Mot. ¶ 4.)
The other SEG 1 Defendants’ requests for judgment present different challenges. The
SEG 1 Defendants seek judgment in their favor on all counts in their respective complaints,
based on a theory of collateral estoppel and by virtue of all parties’ agreement to treat
FCStone’s dispute as a test case.
1.

The Test Case: Grede v. FCStone, LLC, No. 09-cv-136
Despite the straightforward nature of the remaining dispute, the parties have been

unable to submit an agreed order.

FCStone believes that any judgment must include two

additional terms beyond a simple order directing distribution of its pro rata share of the
Reserves. First, FCStone wants the district court to enter an order retaining jurisdiction over the
dispute to (a) enforce the terms of the judgment order and (b) adjudicate any future issues
relating to the distribution of FCStone’s share of the Reserves.
7

(FCStone Mot.)

Second,

FCStone requests that the court enter an injunction directing the Trustee to pay FCStone its
share within seven days of the entry of judgment, while reserving FCStone’s right to challenge
the amount due. (Id.) The Trustee describes these provisions as unjustified “bells and whistles”
that seek to circumvent the Plan and exceed the Seventh Circuit’s mandate.

(Trustee’s

Objection to FCStone Mot. [322], 1.)
This court sees no reason to include either of FCStone’s additional terms. FCStone’s
request that this court retain jurisdiction over future disputes is inconsistent with the language of
the confirmed Plan. The Plan states that the Bankruptcy Court retains jurisdiction over “any
dispute arising under or related to the implementation, execution, consummation, or
interpretation of the Plan and/or Confirmation Order, and the making of distributions hereunder
and thereunder[.]” (Liquidation Plan Art. 9.1(f), 42.) As the Seventh Circuit stated regarding this
exact same document in FCStone II, confirmed plans of reorganization are binding agreements
with “consequences that we cannot overlook.” 867 F.3d at 781–82 (citing Ernst & Young LLP v.
Baker O’Neal Holdings, Inc., 304 F.3d 753, 755 (7th Cir. 2002)). Even if the Plan did not say so
explicitly, the Bankruptcy Court shepherded the dispute central to all the SEG 1 cases
(Sentinel’s bankruptcy), approved the Plan, and continued to address Plan-related disputes
throughout these proceedings.

The parties withdrew the reference in this case to resolve

questions concerning specific property of the estate, not to override the Plan entirely.

If

FCStone had issues with the jurisdictional provisions of the Plan, it should have objected to
them at the time. See Ernst & Young, 304 F.3d at 755–56.
FCStone’s second request is no more convincing. FCStone has not made the requisite
showing necessary to support an injunction. Nor has it shown a compelling reason for the
seven-day time limit it seeks to impose on the Trustee. FCStone’s Proposed Injunctive Order is
appears to be the sort of opportunistic piling-on that F.R.C.P. 58 was designed to avoid. See 11
Wright, Miller, & Kane, Fed. Prac. & Proc. Civ. § 2786 (3d ed. 2017) (describing the aims of
amendments to Rule 58); see also Matteson v. United States, 240 F.2d 517, 519 (2d Cir. 1956)
8

(cautioning judges against “yielding to counsel” the responsibility of crafting judgments and
thereby “accepting the normal excess of detail supplied by zealous advocates in their natural
desire to press home all conceivable ad hoc advantages from the judgment.”) The Seventh
Circuit’s final directive in the test case was for this court to enter judgment in favor of FCStone
and the other SEG 1 Defendants. See FCStone II, 867 F.3d at 791. The panel’s more detailed
language stating that, for example, “the Section 7.20(b) funds should be liquidated and the
funds dispersed” merely describes the consequences of a judgment in the SEG 1 Defendants’
favor. Id. It is not a command to hold the Trustee’s feet to the fire absent additional reasons.
Overall, FCStone directs most of its arguments at why this court can enter its requested
relief, but offers little support for why the court should. (See FCStone, LLC’s Reply in Favor of
FCStone Mot. [326] (“FCStone Reply Br.”), 9) (devoting a single page to explain why “the
proposed orders are necessary at this time” and providing no legal support).

FCStone is

entitled to a judgment order on Count III of the Second Amended Complaint and nothing more.
FCStone asserts that its “Proposed Orders merely provide for a suggested timetable to
accomplish the Seventh Circuit’s mandate,” (Id. at 4), but from the court’s perspective, the
existing post-judgment procedures are perfectly adequate. See FED. R. CIV. P. 60 (Relief from a
Judgment or Order), 69 (Execution).
Furthermore, the Plan itself establishes a timeline for distributions. As the Trustee points
out, “Section 7.10 of the Plan governs when the Trustee will make distributions on account of
‘Disputed Claims.’” (Trustee’s Supplemental Objection to FCStone Mot. [330], 3) (emphasis in
original). Section 7.10 states that distributions on account of “Disputed Claims” must be made
“as soon as practicable after an order, judgment, decree or settlement . . . becomes a Final
Order[.]” (Liquidation Plan § 7.10, 35.) The Plan defines “Final Orders” as an order or judgment
for which “the time to appeal, petition for certiorari, or seek review or rehearing has expired and
as to which no appeal, petition for certiorari, or petition for review or rehearing was filed, or, if
filed, remains pending[.]” (Id. at § 1.1, 10.) The Trustee asserted that he intended to file a
9

petition for a writ of certiorari with the Supreme Court by January 2, 2018. (See Trustee’s
Supplemental Objection to FCStone Mot. 3.) That date has since been extended to February 1,
2018. (Letter Granting Extension of Time to File Petition for Writ of Certiorari of 12/20/17 [69] in
Grede v. FCStone, LLC, No. 16-1896.) FCStone is entitled to judgment on Count III, but it must
wait to see if the Supreme Court either denies certiorari or issues an opinion in the case before
being entitled to recover.
FCStone, for its part, argues that the Reserve funds are not “Disputed Claims” within the
meaning of Section 7.10, so it cannot control the timing of Reserve distributions. Instead,
FCStone claims that Section 7.20(c)(i) controls due to the holding in FCStone II that the
Reserves are property held in trust for customers.

(FCStone’s Response to Trustee’s

Supplemental Objection to FCStone Mot. [331] (“FCStone Sur-Response”), ¶¶ 5–6.) In the
court’s view, FCStone’s reliance on this section is misplaced.

Section 7.20 covers the

“Resolution of the Property of the Estate Issues” and establishes the SEG 1–3 Reserves and
the Section 7.20(b) Disputed Claims Reserve.

Section 7.20 does not provide any indication as

to when distributions of the Reserves should be made. The disputed passage states only that,
after a determination that the Reserves are not property of the estate, “Customer Property shall
be distributed to the rightful owners of such property or to the Estate, as determined by the
Court.” (Liquidation Plan § 7.20(c)(i), 40.) This language dictates to whom the distributions
should be made, not when they should be made. It does not obviously contradict Section 7.10.
Furthermore, even if Section 7.10 instructions to delay distributions until all avenues of appeal
have been exhausted are inapplicable, Section 7.20(c)(i) clearly leaves the question of
distribution to the court’s reasonable discretion.
It appears that FCStone believes that once its property interest in the Reserves was
established through litigation, it was removed from the Plan’s purview. (FCStone Sur-Response
¶¶ 5–6.) But this argument makes little sense. At the time the Plan was made, all of the
Reserve funds were “disputed.” The Plan accordingly outlines a procedure for what do to once
10

those disputes end—in Section 7.10. A contextual reading of the Plan supports this view: in
particular, the connection between the Section 7.20(b) Disputed Claims Reserve and the
timeline established in Section 7.10 for the “Distribution of Disputed Claims.” 4 Sections 4.4 and
4.5 regarding customer claims, which Section 7.20(c)(i) is said to modify in the event a claim is
said to be “Customer Property,” also use the language of “Disputed” or “Allowed Claims” to
describe the distribution process. Since the Plan provides no directives on when to distribute
funds later found to be “Customer Property” (despite that term’s presence throughout the Plan
and definition in Section 1.1), it appears clear to this court that property only determined to be
“Customer Property” after a dispute still falls within the scope of Section 7.10’s instruction to
wait until that determination becomes a “Final Order.”
Count III sought a judgment “declar[ing] that all of the cash held by the Trustee in
accounts denominated as SEG 1, SEG 2, or SEG 3 accounts is property of the Debtor’s estate
under § 541 of the Bankruptcy Code.” (FCStone Complaint 28.) A judgment in FCStone’s favor
on Count III simply declares that the property held in the Reserve accounts is trust property held
for FCStone’s benefit. The court therefore grants FCStone, LLC’s Motion for Judgment on
Count III [317], but declines to include the additional provisions suggested by FCStone. The
Plan governs distributions of such funds, and the court is confident that the Trustee will not
require additional arm-twisting before turning over funds to which no other party is entitled.
2.
The SEG 1 Defendants: Penson Financial Futures, Inc. and Penson Futures f/k/a
Penson GHCO, No. 09-cv-101; Farr Financial, Inc., No. 09-cv-120; Cadent Financial
Services, No. 09-cv-127; Country Hedging Inc., No. 09-cv-130; Velocity Futures, LP, No.
09-cv-135; American National Trading Corp., No. 09-cv-137; and ABN AMRO Clearing
Chicago LLC (f/k/a Fortis Clearing Americas, LLC), No. 09-cv-138
The remaining SEG 1 Defendants have all moved for judgment in their favor based on
the results of the test case. (See, e.g., Penson Mot. 2–3.) The issues raised in their motions

4

Section 7.11 (“Disputed Claims Reserve”) also addresses the Section 7.20(b)
Disputed Claims Reserve, and specifically states that “[n]o payments or distributions shall be
made with respect to a claim which is a Disputed Claim pending the resolution of the dispute by
Final Order.” (Liquidation Plan § 7.11, 35.)
11

were identical, and the Trustee responded to all of the SEG 1 Defendants—apart from IFX
Markets and IPGL, Ltd., which will be addressed in the following section—in a single, Omnibus
Objection brief.

(See Trustee’s Omnibus Objection to Defendants’ Motions for Entry of

Judgment [71] in Grede v. Penson, No. 09-cv-101 (“Trustee’s Omnibus Objection”).) The SEG
1 Defendants assert that collateral estoppel binds the Trustee across all the SEG 1 cases. The
Trustee does not dispute the binding nature of the FCStone test case. Nor are the Reserve
accounts involved or the amounts due in question. As they did with respect to the form of
judgment sought by Defendant FCStone, however, the parties have now asserted new issues
as well.
One of the arguments can be easily rejected. The SEG 1 Defendants argue for the
same additional judgment terms that FCStone sought to include: namely, the injunction
requiring the Trustee to disperse the funds within one week, and an order retaining the district
court’s jurisdiction over future Reserve disputes. (Penson Mot. 11–12; The SEG 1 Defendants’
Omnibus Reply in Support of their Motion for Entry of Judgment [72] in Grede v. Penson, No.
09-cv-101 (“Defendants’ Omnibus Reply”), 8–11.) 5 For the same reasons discussed above,
those requests are denied.
The Trustee, however, raises a unique issue against the SEG 1 Defendants. While
recognizing the preclusive effect of the Seventh Circuit’s two FCStone decisions in its other
disputes, the Trustee claims that the stay order imposed by Judge Zagel in 2016 has not yet run
its course, and will not expire until the Supreme Court acts in response to the Trustee’s planned
petition for a writ of certiorari. (Trustee’s Omnibus Objection 1–2.) Alternatively, the Trustee

5

The SEG 1 Defendants did not request the jurisdictional order in their original
motions for entry of judgment. They did discuss of the appropriateness of such an order,
however, in their Omnibus Reply when responding to the Trustee’s arguments against
expanded relief. (See Defendants’ Omnibus Reply 10–11) (“It would thus be entirely proper for
this Court to retain jurisdiction over any post-judgment disputes concerning the amount and
timing of the Reserve distributions.”)
12

urges the court to withhold judgment in these cases until the Supreme Court takes action in two
other, unrelated lawsuits the Trustee believes could impact the SEG 1 cases.
The Trustee’s argument that the stay remains in effect is without merit. This court has
already permitted the parties to refile their motions. And regardless of whether the language of
the stay contemplated a petition for a writ of certiorari or merely through direct appeal to the
Seventh Circuit (the SEG 1 Defendants argue for the latter interpretation), the Seventh Circuit’s
instructions in FCStone II are clear: “FCStone and the other SEG 1 Objectors are entitled to
share pro rata in the [ ] reserve[s].” FCStone II, 867 F.3d at 790.
Though the Trustee attempts to link the two in support of his position, Judge Zagel’s stay
order is independent of the Trustee’s duty to disperse funds under the Plan. As discussed, the
Plan states that distributions shall only be made once a claim is established by a Final Order—
which involves the exhaustion of all avenues of appeal. (Liquidation Plan § 7.10, 35.) Entering
judgment now will not run afoul of the Plan, nor force the Trustee to claw back funds in the
event he is victorious before the Supreme Court. The Trustee argues that entering judgment
now “will only result in forcing the Trustee to appeal every judgment that is entered to the
Seventh Circuit in order to preserve his claims” in the event the Supreme Court reverses
FCStone II. (Trustee’s Omnibus Objection 2.) That may indeed be required, but this court is
not at liberty to ignore the directions of the Court of Appeals.
The Trustee’s alternative argument for delaying judgment warrants even less attention.
As recognized by the SEG 1 Defendants, the Trustee has not met his burden of establishing
why delay is proper here. (Defendants’ Omnibus Reply 5.) The Supreme Court states:
It is our settled practice to grant a stay only when three conditions are met: First,
there must be a reasonable probability that certiorari will be granted (or probable
jurisdiction noted). Second, there must be a significant possibility that the
judgment below will be reversed. And third, assuming the applicant's position on
the merits is correct, there must be a likelihood of irreparable harm if the
judgment is not stayed.

13

Philip Morris USA, Inc. v. Scott, 131 S. Ct. 1, 3 (2010). This standard applies to the lower court
that enters the judgment as well. See 28 U.S.C. § 2101(f) (“The stay may be granted by a judge
of the court rendering the judgment or decree or by a justice of the Supreme Court[.]”). The
Trustee urges that the SEG 1 Defendants would not be prejudiced if this court withholds
judgment pending action by the Supreme Court (see Trustee’s Omnibus Objection 6), but that is
not the standard.

The Trustee has failed to make a case for why he himself would be

prejudiced if the court enters judgment at this time. Furthermore, the Trustee makes only bare
assertions that Supreme Court is likely to rule in a way favorable to him in Merit Management
Group, LP v. FTI Consulting, Case No. 16-784; or both grant certiorari and also rule favorably in
either of Deutsche Bank Trust Company Americas v. Robert McCormick Foundation, Case No.
16-317, or his own case, FCStone II. SEG 1 Defendants have also raised serious questions
about the relevance of Merit Management and Deutsche Bank to these proceedings.
(Defendants’ Omnibus Reply 5–8.) In short, the Trustee’s seemingly endless string of “what ifs”
does not provide a sound basis for delaying judgment.
The court will enter judgment in favor of the SEG 1 Defendants (apart from IFX Markets
and IPGL, Ltd.) on Counts I–V of the Second Amended Complaint. In the case of the Penson
Defendants, the court will enter judgment in their favor on Counts I–VII of the Second Amended
Complaint.
3.

Grede v. IFX Markets, Inc. and IPGL, Ltd., No. 09-cv-115
Defendants IFX Markets, Inc. and IPGL, Ltd. (“the IFX Defendants”) filed an essentially

identical motion for judgment as the rest of the SEG 1 Defendants. (See IFX Markets, Inc.’s
and IPGL, Ltd.’s Motion for Entry of Judgment [152] in Grede v. IFX Markets, No. 09-cv-115
(“IFX Mot.”).) To the extent the IFX Defendants’ motion raises the same issues and seeks the
same, overly complex judgment order as the other SEG 1 Defendants, that request is denied.
The same goes for the Trustee’s desire to continue the stay on litigation in this case, as
addressed above.
14

The Trustee, however, also objected to the IFX Defendants’ motion for judgment on
unique grounds: the Trustee claims that the FCStone II decision does not apply to the IFX
Defendants’ claim to the Reserves at all. (Trustee’s Objection to IFX Mot. [156], 2.) Unlike the
rest of the SEG 1 Defendants, the IFX Defendants’ investments consisted of funds derived from
foreign currency exchanges (“Forex”). (Id.) According to the Trustee, “assets relating to Forex
trading are not entitled to any trust protection under the CEA [Commodities Exchange Act]”
because Forex transactions are not “commodity contracts.” (Id. at 2–3) (citing In re Peregrine
Fin. Group, Inc., 866 F.3d 775 (7th Cir. 2017)) (emphasis in original). Therefore, the Trustee
concludes, “IFX has no property that it can assert belongs to it at the exclusion of other
similarly-situated creditors” and is not entitled to judgment based on the test case. (Id. at 4.)
The Trustee bases his argument on a recent decision from the Seventh Circuit, In re
Peregrine Financial Group, Inc., 866 F.3d 775 (7th Cir. 2017), which affirmed a lower court
decision holding that Forex funds are not “commodity contracts” within the definition of the CEA
or regulations promulgated by the Commodity Futures Trading Commission (“CFTC”). Id. at
776.

Like Sentinel, Peregrine was a futures commissions merchant (“FCM”) that invested

money for its clients until it too was brought down by executive malfeasance. Id. at 775. After it
declared bankruptcy, Peregrine’s customers sought the return of their funds, and, just as in the
FCStone test case, fought with the trustee over whether certain funds should be treated as
customer property or property of the estate. In re Peregrine Fin. Group, Inc., 510 B.R. 190, 191
(Bankr. N.D. Ill. 2014). After examining the law and regulations surrounding different forms of
investment property, the Bankruptcy Court determined that nothing in the CEA or CFTC
regulations requires segregation of funds from customers trading in retail forex[.]” Id. at 201–02
(“Segregation of customer funds is the highest level of customer protection provided under the
CEA and CFTC regulations. FCMs must treat customer funds as the property of the customer,
not the FCM.”)

Such funds, the court found, were not statutorily protected as “‘customer

property’ and do not get any special priority in bankruptcy.” Id. The District Court and Seventh
15

Circuit both affirmed this decision and adopted the lower courts’ opinions.

See Secure

Leverage Group, Inc. v. Bodenstein, 558 B.R. 226, 250 (N.D. Ill. 2016), aff’d Peregrine, 866
F.3d at 776 (affirming summary judgment in favor of the trustee).
The Defendants argue that Peregrine did not establish a blanket rule excluding Forex
funds from statutory trust protection.

(See IFX Markets, Inc. and IPGL, Ltd’s Reply in Support

of IFX Mot. [157] (“IFX Reply.”), 8–9.) This argument is not convincing. While the District Court
opinion did indeed acknowledge that the contracts in Peregrine gave the broker power to
commingle investor’s funds and use them for its own purposes—a key distinction between
Peregrine and the contracts the SEG 1 Defendants signed with Sentinel—there is no support for
IFX’s proposition that the contractual language was the dispositive factor.

See Secure

Leverage Group, 558 B.R. at 238. Instead, the District Court observed that statutory trust
protection was the critical question in the case precisely because no contractual protection
existed:
The Agreement, which was used with respect to all Peregrine accounts, does not
define when funds in a customer account constitute customer property and when
they do not.
That question is answered not by the Agreement, but by reference to the
statutory and regulatory context that governed the types of financial instruments
Peregrine traded. The Agreement states that the parties “shall be bound by all
applicable laws, rules, and regulations, including the commodity exchange act,”
and these laws shed light on what can reasonably be considered customer
property under the Agreement. [Citation to record omitted.] The Commodities
Exchange Act requires that futures accounts are segregated, which strongly
indicates that equitable title to those futures is never transferred to the broker.
See In re Dreier LLP, 544 B.R. 760, 769 (Bankr.S.D.N.Y.2016). Because title is
never transferred, those futures contracts remain “customer property.”
Appellants' retail forex accounts, by contrast, are not required to be held in
segregated accounts and could be comingled with other funds and used to pay
Peregrine's liabilities.
Id. at 237–38 (emphasis in original). Furthermore, the Bankruptcy Court had noted earlier that
the contractual language at issue simply echoed CFTC statements that warned Forex
customers that the laws and regulations protecting customers trading in futures contracts did not
apply to Forex transactions. See Peregrine, 510 B.R. at 201–02. The District Court’s extended
16

discussion of the CEA’s language and legislative history reinforces this point. See Secure
Leverage Group, 558 B.R. at 239–43. Funds derived from Forex transactions do not fall within
the statutory trusts created by the CEA and given priority under the Bankruptcy Code.
The Defendants also argue that, even if Peregrine does establish what the Trustee
claims, the Trustee has waived his right to object to IFX’s motion for entry of judgment by failing
to raise this earlier on in litigation and by entering into stipulations that proactively waived most
potential defenses. (IFX Reply 7, 11–13.) Neither of these attacks sway the court. First, none
of the numerous cases IFX cites for the “law of the case” doctrine or the mandate rule are
applicable here. (Id. at 7) (citing United States v. Adams, 746 F.3d 734, 744 (7th Cir. 2014), and
United States v. Whitlow, 740 F.3d 433, 438 (7th Cir. 2014), among other cases, for the
proposition that issues that were decided or that could have been raised on appeal may not be
revisited on remand). The FCStone test case never addressed whether or not Forex funds
qualified for statutory trust protection. The Seventh Circuit may have held that “the funds in the
SEG 1 Reserve account are trust property belong to FCStone and other SEG 1 Objectors,”
FCStone II, 867 F.3d at 779, but that is only because it—and the litigants—were still under the
impression that all of the SEG 1 Defendants were, in fact, similarly situated. Furthermore,
contrary to IFX’s assertion that the Trustee knew about Peregrine for “months” yet did nothing,
(IFX Reply 8), the Trustee could not have raised this issue before. Grede’s action against IFX
was stayed by Judge Zagel’s order until recently, and the Seventh Circuit decided Peregrine just
one week before it decided FCStone II. The controlling authority did not exist throughout most
of this litigation, so earlier missed “opportunities” (such as the Trustee’s failure to raise it as an
issue unique to the IFX case in a hearing on May 17, 2017) are not relevant. (See IFX Reply 6
n.2; Transcript of Proceedings, Ex. L to IFX Reply [157-6], 7:12–28:14.) The Trustee appears to
have acted prudently. He raised it in the first motion he could, and in the proper context: against
the lone SEG 1 Defendant to whom the defense applied.

17

IFX’s appeals to the stipulations signed by the Trustee in August 2010 are also
misguided. (IFX Reply 12; Stipulation and Order Fixing Amount of Claim Nos. 154, 156, and
164, Ex. N to IFX Reply [157-8] “Stipulations”).) IFX claims that it and the Trustee entered into
three stipulations “so as to avoid ‘[unnecessary costs] and expenses associated with any
litigation pertaining to the Claim.’”

(IFX Reply 12) (quoting Stipulations 2) (alterations in

original). IFX reads too much into these documents. The Stipulations merely “calculate and fix
the claims in an amount consistent with the terms of the Plan.” (Stipulations 2.) IFX argues that
“[n]othing in the stipulations permits the Trustee to challenge [IFX’s] assertion that [IFX’s funds
were held in trust],” but nothing in the Stipulations stops the Trustee from doing so either. (IFX
Reply 12.) In the end, the Stipulations are irrelevant to this dispute. Judge Zagel already
rejected a similar argument advanced by Defendant FCStone in the test case, stating that the
Stipulations themselves even included language that they were to “‘have no effect on’ nor ‘be
admissible or constitute evidence’ in this lawsuit.” Grede v. FCStone, LLC, No. 09-cv-136, 2012
WL 3263986, at *4 (N.D. Ill. Aug. 9, 2012) (quoting Stipulations ¶ 5).
Finally, IFX asserts that its funds are nevertheless protected by “an express written trust”
per the terms of its investment agreements with Sentinel. (IFX Reply 1, 9–11.) This begs the
question that this litigation must answer. FCStone II held that the SEG 1 Defendants whose
funds were protected by statutory trusts are entitled to recover their pro rata portions of the
Reserves based on the Defendants’ abilities to trace their initial investments to those Reserves.
FCStone II, 867 F.3d at 779. These trusts were established by the requirements of the CEA,
and the tracing fictions adopted by the Seventh Circuit apply only to those protected funds.
Without those statutory trusts, the issues of dueling trusts and trust priority that led to the
second FCStone appeal resurface.

Because the Trustee argues—and Peregrine clearly

states—that IFX is not entitled to that same trust protection, it would be improper for this court to
grant judgment based on the test case.

18

The SEG 1 Defendants all relied on the doctrine of collateral estoppel in filing their
motions for judgment. But if the issues addressed are not truly identical, then collateral estoppel
does not apply to bind the Trustee in this dispute. See Matrix IV, Inc. v. American Nat. Bank
and Trust Co. of Chicago, 649 F.3d 539, 547 (7th Cir. 2011) (describing the elements of
collateral estoppel). By using its reply brief to argue for the existence of an express written trust
under Illinois state law, IFX sends a clear signal that additional proceedings are required. (See
id.) For his part, the Trustee admits that IFX may well be protected by an express written trust,
but notes that IFX still must establish that fact “after discovery and a trial or summary judgment
proceedings.” (Trustee’s Sur-Reply to IFX Mot. [160] in No. 09-cv-115 (“Trustee’s Sur-Reply”),
3.) The Peregrine case does not prove that IFX cannot establish a trust at all; it does, however,
establish that IFX cannot establish a statutory trust in the same fashion as its fellow SEG 1
Defendants, which renders judgment on Count III inappropriate at this time.
IFX Markets, Inc. and IPGL, Ltd.’s Motion for Judgment [152] on Count III of the Second
Amended Complaint is denied.

The Defendants’ Motion for Judgment [152] on remaining

Counts I, II, IV, and V is granted.
CONCLUSION
Defendant FCStone, LLC’s motion for entry of judgment on count III [317 in No. 09-cv136] is granted. The remaining SEG 1 Defendants’ motions for entry of judgment are granted
on all counts in the following cases: Grede v. Penson Financial Futures, Inc. and Penson
Futures f/k/a Penson GHCO [65 in No. 09-cv-101]; Grede v. Farr Financial, Inc. [152 in No. 09cv-120]; Grede v. Cadent Financial Services [160 in No. 09-cv-127]; Grede v. Country Hedging,
Inc. [152 in No. 09-cv-130]; Grede v. Velocity Futures, LP [168 in No. 09-cv-135]; Grede v.
American National Trading Corp. [171 in No. 09-cv-137]; and Grede v. ABN AMRO Clearing
Chicago LLC f/k/a Fortis Clearing Americas, LLC [176 in No. 09-cv-138]. IFX Markets, Inc. and
IPGL, Ltd.’s motion for entry of judgment [152 in No. 09-cv-115] is granted on counts I, II, IV,
and V; but denied on count III.
19

The Trustee is directed to submit forms of judgment for each of the pending cases,
consistent with this court’s opinion, within seven days.
ENTER:

Dated: January 23, 2018

_________________________________________
REBECCA R. PALLMEYER
United States District Judge

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