Grede v. American National Trading Corp. et al

Filing 171

MOTION by Defendant American National Trading Corp. for judgment (Attachments: # 1 Memorandum of law, # 2 Exhibit Exhibit A, # 3 Exhibit Exhibit B, # 4 Notice of Filing Notice of Motion)(Becker, Henry)

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

Plaintiff,

Honorable Rebecca R. Pallmeyer

)
) Case No. 09-cv-00137

v.

)

AMERICAN NATIONAL TRADING CORP.,

)
)

Defendant.

)

AMERICAN NATIONAL TRADING CORP.’S MEMORANDUM OF LAW IN
SUPPORT OF ITS MOTION FOR ENTRY OF JUDGMENT ON COUNTS I
THROUGH V OF THE TRUSTEE’S SECOND AMENDED COMPLAINT
Defendant, American National Trading Corp. (“American National”), submits this
Memorandum of Law in Support of its Motion for Entry of Judgment on Counts I through V of
the Trustee’s Second Amended Complaint (“Complaint”).1
INTRODUCTION
This case is one of 11 closely related adversary proceedings brought by the Trustee
against former SEG 1 customers (collectively, the “SEG 1 Cases”) of Sentinel Management
Group, Inc. (“Sentinel”). The defendants in the SEG 1 Cases are FCStone LLC (“FCStone”)
IFX Markets, Inc., IPGL Ltd., Farr Financial, Inc., Cadent Financial Services, Rand Financial
Services, Country Hedging Inc., Velocity Futures, LLC, American National Trading Corp., ABN
AMRO Clearing Chicago LLC, Penson Financial Futures, Inc., Penson Futures f/k/a Penson
GHCO and Crossland LLC (collectively, the “SEG 1 Defendants”).

1

The Trustee is Frederick J. Grede as Liquidation Trustee for the Sentinel Liquidation Trust.

The Complaints in all the SEG 1 Cases contain identical counts, allege the same core
facts and transactions, raise the same issues, and make the same claims. These counts are:
(1) Count I for avoidance and recovery of post-petition transfer under § 549 of the of Title 11 of
the United States Bankruptcy Code (“Bankruptcy Code”); (2) Count II for avoidance and
recovery of prepetition preferential transfer under § 547 of the Bankruptcy Code; (3) Count III
for declaratory judgment regarding the ownership interest in the reserve funds held by the
Trustee (the “Reserves”); (4) Count IV for unjust enrichment; and (5) Count V for reduction or
disallowance of claims. All the SEG 1 Defendants have raised the same core defenses.
Because of identical claims and common factual and legal issues, then-presiding Judge
James B. Zagel concluded that the Sentinel SEG 1 litigation could best be resolved by using the
“test case” approach. Judge Zagel approved Grede v. FCStone, Case No. 09-cv-136, as the test
case for all the SEG 1 Cases.
After more than nine years of litigation, the Seventh Circuit has rendered rulings that
effectively dispose of the SEG 1 Cases. As explained below, the Seventh Circuit’s two opinions
in the FCStone test case—Grede v. FCStone, LLC (“FCStone I”), 734 F.3d 244, 246-47, 251260 (7th Cir. 2014) and Grede v. FCStone, LLC (“FCStone II”), 867 F.3d 767 (7th Cir. 2017)—
have decided all of the Trustee’s claims against the Trustee and in favor of FCStone and the
other SEG 1 Defendants. These two opinions are legally binding on the Trustee in all of the
SEG 1 Cases.
The Court, therefore, should enter judgment in favor of American National and against
the Trustee on Counts I through V of the Complaint, and order the Trustee to pay American
National its pro rata share of the SEG 1 Reserve and the Section 7.20(b) Disputed Claims
Reserve within seven days of the Court’s entry of judgment on Count III.

2

BACKGROUND
A.

The Bench Trial in the FCStone Test Case

During the Fall of 2012, Judge Zagel held a lengthy bench trial in the FCStone test case.
On January 4, 2013, Judge Zagel entered final judgment in favor of the Trustee on Count I (postpetition transfer), Count II (pre-petition preferential transfer), Count III (declaratory judgment
for reserve funds) and Count V (disallowance of claims), and for FCStone on Count IV (unjust
enrichment). FCStone appealed those counts decided against it and the Trustee cross-appealed
the finding as to Count IV.
B.

FCStone I: The Seventh Circuit Rules Against the Trustee on Counts I-V

On March 19, 2014, the Seventh Circuit found in favor of FCStone and reversed Judge
Zagel’s judgment on Counts I, II, III and V. FCStone I, 734 F.3d at 246-47, 251-260. The
Seventh Circuit held that the post-petition transfer2 (Count I) was authorized by the Bankruptcy
Court (id. at 246-47, 254-58)—and therefore that no avoidance action could be brought by the
Trustee under 11 U.S.C § 549(a).

Id. at 246-47. The Seventh Circuit also held that the pre-

petition preferential transfer (Count II) fell within both the “settlement payment” and “securities
contract” safe harbor exceptions to claw back in § 546(e) of the Bankruptcy Code. Id. at 251-54.
The Seventh Circuit also denied the Trustee’s cross-appeal for reinstatement of his unjust
enrichment claim (Count IV), affirming Judge Zagel’s holding that the Trustee’s unjust
enrichment claim is preempted by federal bankruptcy law. Id. at 259-60. While the Seventh
Circuit reversed Judge Zagel’s judgment for the Trustee on Count III, the Seventh Circuit did not
specifically rule on the disposition of the Reserves.
2

The transfer at issue in Count I (in the FCStone test case and in the SEG 1 Cases) was the August 21,
2007 transfer of funds to the SEG 1 Defendants constituting the proceeds of Sentinel’s sale of SEG 1
securities to Citadel minus a holdback amount (the “Post-Petition Transfer”).

3

C.

The SEG 1 Proceedings Before Judge Zagel Following FCStone I

On remand, both FCStone and the SEG 1 Defendants filed motions for entry of judgment
on Counts I, II, IV and V of the Trustee’s Complaints.3 (See FCStone Dkt. No. 276; American
National Dkt. No. 91). The Trustee and the SEG 1 Defendants (including FCStone) also filed
competing motions for summary judgment on Count III (the Reserves).
On March 28, 2016, Judge Zagel entered judgment for FCStone on Counts I, II, IV and
V, but for the Trustee on Count III. [FCStone Dkt. Nos. 289-90].
As for the SEG 1 Defendants’ related motions for judgment on Counts I, II, IV and V,
and for summary judgment on Count III, Judge Zagel denied them “with leave to reinstate after
common issues of law and fact have been fully resolved in the SEG 1 ‘test case,’ Grede v. FC
Stone LLC, 9-cv-136. (Dkt. No. 154). Expanding further on the subject, Judge Zagel ordered
that the ”[p]arties should not refile until my March 28, 2016 Memorandum Opinion and Order in
FCStone has been appealed and decided, or the time to appeal it has expired.” Id.
D.

FCStone II: The Seventh Circuit Rules Against the Trustee

The Trustee then appealed Judge Zagel’s judgment on Count I (but not Counts II and IV).
FCStone appealed Judge Zagel’s judgment on Count III. On August 14, 2017, the Seventh
Circuit ruled in favor of FCStone and against the Trustee on all the arguments presented by the
parties on appeal. FCStone II, 867 F.3d at 767.

3

On January 11, 2013, Penson Financial Futures, Inc. and Penson GHCO filed petitions for relief under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware
and did not file motions for entry of judgment or competing motions for summary judgment when filed
thereafter by the other SEG 1 Defendants.

4

With respect to Count I, the Seventh Circuit rejected the Trustee’s collateral estoppel
argument and affirmed Judge Zagel’s judgment against the Trustee on the Trustee’s Post-Petition
Transfer claim (Count I). FCStone II, 867 F.3d at 770-71.
With respect to Count III, the Seventh Circuit reversed Judge Zagel’s judgment in favor
of the Trustee and ruled in favor of FCStone and the other SEG 1 Defendants. The Seventh
Circuit held that: (a) the money maintained by the Trustee in the SEG 1 Reserve4 was customer
property (as opposed to property of Sentinel’s estate); (b) as a result, FCStone and the other SEG
1 Defendants are entitled to the funds in the SEG 1 Reserve and the funds in the Section 7.20(b)
Disputed Claims Reserve5; and (c) the SEG 1 Reserve funds and the funds in the Section 7.20(b)
Disputed Claims Reserve must be distributed pro rata to FCStone and the other SEG 1
Defendants:
The question concerns the proper distribution of nearly $25 million
held in reserve under the confirmed bankruptcy plan. FCStone
argues that these funds are trust property belonging to it and other
creditors in its customer class who are protected by statutory trusts
under the Commodity Exchange Act. The district court disagreed,
treating the funds instead as property of the bankruptcy estate
subject to pro rata distribution among all Sentinel customers and
other unsecured creditors. On this cross-appeal, we reverse. Under
the Bankruptcy Code, property held by the debtor in trust for
4

The SEG 1 Reserve was created by Section 7.20(a) of Sentinel’s bankruptcy plan. It consists of a holdback of $15.6 million (about five percent of the Citadel sale proceeds), $4.9 million in proceeds from a
late-settling security and certain proceeds of subsequent liquidations, and interest accrued. FCStone II,
867 F.3d at 778–79.
5

The Section 7.20(b) Disputed Claims Reserve was created by Section 7.20(b) of Sentinel’s bankruptcy
plan. It “consists of funds that ‘any Citadel–Beneficiary Customer Claim which voted against the Plan
and/or lodged objections thereto [ ] would be entitled to receive’ but for language in Section 4.5(a) that
requires SEG 1 Citadel sale beneficiaries to wait on further distributions until other customers catch up to
their level of recovery. The 7.20(b) Disputed Claims Reserve was designed to capture 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 (and therefore should
not count against the SEG 1 Objectors' pro rata share in the property of the estate).” FCStone II, 867
F.3d at 790.

5

others is by definition not property of the bankruptcy estate.
Pursuant to the confirmed bankruptcy plan, FCStone and similarly
situated customers preserved their right to re-cover their trust
property. These creditors are entitled to the benefit of reasonable
tracing conventions. Moreover, FCStone introduced essentially
unrebutted evidence at trial showing that it can trace a portion of
the reserve funds back to its investment.
***
FCStone is therefore entitled to judgment on Count III, and
FCStone and the other SEG 1 objectors are entitled to share pro
rata in the SEG 1 reserve.
***
In light of these provisions [of Sentinel’s bankruptcy plan] and our
conclusions about the post-petition transfer and SEG 1 reserve
funds, the Section 7.20(b) Disputed Claims Reserve should be
liquidated and the funds disbursed to the SEG 1 Objectors who
would have received these funds but for the property of the estate
dispute.6
Id. at 771, 790-91 (emphasis added).7
ARGUMENT
The sole reason why Judge Zagel chose the FCStone case as a test case was to allow that
case to resolve all the SEG 1 Cases without having to hold repetitive and wasteful trials on
common issues and facts. Indeed, that is why Judge Zagel vacated the parties’ cross-motions for
summary judgment in March 2016 and directed the parties not to refile them until the Seventh
Circuit had issued an opinion in FCStone II. That has now happened.
The Seventh Circuit has ruled against the Trustee in the FCStone test case on Counts I, II,
III, IV and V of the Trustee’s Complaint and ordered the Trustee to disburse the funds held in the
SEG 1 Reserve and the Section 7.20(b) Disputed Claims Reserve to FCStone and the other SEG
6

The “SEG 1 Objectors” include all of the SEG 1 Defendants.

7

On October 2, 2017, the Seventh Circuit denied the Trustee’s petition for rehearing and rehearing en
banc. It issued its mandate in the FCStone case (09-cv-136) on October 10, 2017.

6

1 Defendants. FCStone II, 867 F.3d at 771, 790-91. These rulings are binding on the Trustee in
all the other SEG 1 Cases. See Ank v. Koppers Co., No. 89-16579, 1991 U.S. App. LEXIS 5381,
*6 (9th Cir. 1991) (“the situations that are most likely to create an implied agreement to be
bound involve a shared understanding that a single action is to serve as a test case that will
resolve the claims or defenses of nonparties as well as parties.”); Grubbs v. United Mine
Workers, 723 F. Supp. 123 (W.D. Ark. 1989) (holding that test case collaterally estopped losing
party from re-ligating same issue).
For all these reasons, the Court should: (a) enter judgment in American National’s favor
and against the Trustee on Counts I through V of the Trustee’s Complaint; and (b) direct the
Trustee to pay American National its pro rata share of the SEG 1 Reserve and the
Section 7.20(b) Disputed Claims Reserve within seven days of the Court’s entry of judgment on
Count III.
The Court should note that American National’s total pro rata share of these Reserves is
readily ascertainable.

According to a reserve account summary that the Trustee recently

provided to the SEG 1 Defendants, American National’s pro rata share of the funds in the SEG 1
Reserve was $1,117,074 as of July 31, 2017.8

(See Trustee’s Reserve Account Summary, Ex.

8

Although the Reserve Account Summary from the Trustee includes a header referencing Fed. R. Evid.
408, the document summarizes reserve account balances, along with supporting facts and numbers that
are otherwise discoverable and not subject to Fed. R. Evid. 408’s protections. (Trustee’s Reserve
Account Summary, Ex. A). The Trustee has the fiduciary duty and is required to provide the SEG 1
Defendants with the information set forth in the Reserve Account Summary (i.e., the amount of funds
being held in reserve), and the information contained in Exhibit A is obviously otherwise discoverable,
and thus not subject to protection under Rule 408. See Rule 408, Advisory Committee’s note to 2006
amendment (“[t]he sentence of the Rule referring to evidence ‘otherwise discoverable’ has been deleted
as superfluous”); see also Ramada Dev. Co. v. Rauch, 644 F.2d 1097, 1107 (5th Cir. 1981) (the sentence
regarding otherwise discoverable information in the pre-2006 iteration of Rule 408 “was intended to
prevent one from being able to immunize from admissibility documents otherwise discoverable merely by
offering them in a compromise negotiation”); Bamber v. Elkhart Cmty. Sch., No. 2005 WL 957331, *2
(N.D. Ind. Mar. 28, 2005) (finding that Rule 408 did not bar the court from considering a computerized
printout of time entries offered with a settlement letter where the entries were not discounted or changed

7

A). The SEG 1 Defendants do not dispute this calculation. Indeed, the reserve account summary
is a statement of account that the Trustee, as the fiduciary of Sentinel’s Liquidating Trust, is
required to provide to the SEG I Defendants.
Moreover, according to the calculations of the SEG 1 Defendants, American National’s
pro rata share of the Section 7.20(b) Disputed Claims Reserve was $135,802 as of June 30,
2017.

(Goodman Aff. ¶10, Ex. B)

Each SEG 1 Defendant’s pro rata share of the

Section 7.20(b) Disputed Claims Reserve is based on such customer’s SEG 1 (and SEG 2, if
applicable) balances as of the petition date divided by the aggregate SEG 1 and SEG 2 balances
of the SEG 1 Defendants as of the petition date. (Id. at ¶6)
Thus, based on these calculations, the Trustee owes American National a total of
$1,252,876, plus interest accruing from the date of the calculations.
CONCLUSION
For the foregoing reasons, the Court should: (a) enter judgment in American National’s
favor and against the Trustee on Counts I through V of the Trustee’s Second Amended
Complaint; (b) direct the Trustee to pay American National its pro rata share of the SEG 1
Reserve and the Section 7.20(b) Disputed Claims Reserve within seven days of the Court’s entry
of judgment on Count III; and (c) grant all other just relief.

for settlement). American National has redacted two footnotes from the Summary because those
footnotes arguably refer to the Trustee’s settlement proposals related to other SEG 1 Objectors.

8

Dated: October 16, 2017

Respectfully submitted,
AMERICAN NATIONAL TRADING CORP.
By: /s/ Henry K. Becker
Its Attorney

Henry K. Becker, atty at law
227 South Blvd.
Oak Park, IL 60302
312-278-3004
[e-mail]
No. 6187414

9

CERTIFICATE OF SERVICE
I, Henry K. Becker, an attorney, hereby certify that on October 16, 2017, I electronically
filed the foregoing AMERICAN NATIONAL TRADING CORP.’S MOTION FOR ENTRY OF
JUDGMENT ON COUNTS I THROUGH V with the Clerk of the Court using the CM/ECF
system, and further caused the same to be served on all counsel of record via ECF filing.

By: /s/ Henry K. Becker