Inskeep v. Griffin et al

Filing 47

MOTION by Appellee Leroy G Inskeep for judgment , MOTION by Appellee Leroy G Inskeep for taxation of costs (Attachments: # 1 Exhibit A, # 2 Exhibit B, # 3 Exhibit C, # 4 Exhibit D, # 5 Exhibit E, # 6 Exhibit F, # 7 Exhibit G, # 8 Exhibit H)(Steege, Catherine)

EXHIBIT A

IN THE UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

GRIFFIN TRADING COMPANY, INC.,

No. 98B41742
Chicago, Illinois

Debtor.
LEROY INSKEEP, not individually
but as Trustee for
GRIFFIN TRADING COMPANY, INC.,
Plaintiff,
vs.
FARREL J. GRIFFIN and
ROGER S. GRIFFIN, et al. ,

No. 01A00007

January 26, 2005
10 : 30 a.m.

Defendants

TRANSCRIPT OF PROCEEDINGS
BEFORE THE HONORABLE BRUCE W. BLACK
APPEARANCES:
For Debtor:

Mr. Matthew Lydon;
Mr. Matthew Wawrzyn;

For the U. S. Trustee

Ms. Catherine Steege;
Mr. Peter Siddiqui;

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THE CLERK:

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Griff in Tradi ng Company, Enskeep

versus Griffin
MR. LYDON:

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Good morning, Your Honor.

Matt

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Lydon and Matt Wawrzyn , Winston and Strawn, on b<ahalf of

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the Griffins.

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MS. STEEGE:

Good morning , Your Honor •

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Catherine Steege and Peter Siddiqui on behalf of the

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trustee.
THE COURT:

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a seat.

Good morning. all.

You can have

I will give you an oral decision in the matter.
This is an adversary complaint. most of

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which has been ruled on in various motions for summary

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judgment before the trial, which was conducted back in

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September.

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the trial, and Count IV alleges breach of fiduciary duty

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and four elements to that cause of action, two of them

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were determined in the trustee's favor through a partial

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summary judgment motion.

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The parties have argued on paper and I've reviewed the

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matters and now been fully advised in the matter.

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conclude that the trustee has met the burden of proof

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for the cause of action alleged in Count IV.

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following will be my findings of fact and conclusions of

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law.

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Only one part of Count IV was the subject of

The trial has been conducted.

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And the

I will enter a written judgment later today.
First of all, the stipulated facts 1

through 16 in the joint pretrial statement are accepted
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and have been considered and won't be recited now.

In

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spite of the time that's transpired in this case and

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despite of the reams of paper that have been devoured

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and the time that's been spent in court, this is really

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a simple case.

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do, what did they know, and what did they not do that

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they should have done on September 22, 1998.

It comes down to what did the defendants

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Both defendants, Farrel Griffin and

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Roger Griffin, were in control of the debtor.

Both

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defendants knew that the debtor had to segregate the

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customers' money and couldn't use one customer's money

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to pay another customer's debts or to pay the debtor's

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debts.

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actions on September 22nd, some of the prior actions are

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illuminating in some way.

Although I've determined that the case hinges on

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The September interchange between

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Farrel Griffin and Mr. Szach regarding the London

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computer and the glitch in that computer I don't believe

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proves any gross negligence prior to the 22nd of

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December, but it's one of several things that should

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have made the defendants know immediately on

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December 22, 1998 when the problem arose that they had

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to take charge; that they could no longer delegate to

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their employees.

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I also believe that the Plaintiff's

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Exhibit 9, the report that was hand-delivered to the

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debtor on December 15th of 1998, was a significant

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document.

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funds that the debtor maintained were, quote,

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"extremely low" end quote.

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prove negligence, but it is something that the

It pointed out that the excess segregated

Again, that fact doesn't

defendants are charged with knowing, even though they
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testified that they didn't read that report until after

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the bankruptcy was filed.

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stockholders, officers, and directors, they are charged

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with knowledge of that document.

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knowledge of che corporation's financial documents and

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with knowledge of the corporation's financial condition,

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and all of those chings should have influenced their

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actions on the 22nd of December.

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But as the controlling

They are charged with

Prior to December 22, 1998, the

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defendants' risk management procedures and actions

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running the debtor were within their business judgment

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parameters.

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procedures zo limit risks and delegated the oversight of

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those procedures within the scope of their business

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judgment.

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boundaries several times prior to December of 1998, I do

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net believe that the evidence proves that the defendants

The defendants adequately formulated

Although Mr. Park exceeded his creating

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knew or should have known of those excesses before

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December 21, nor do I believe the evidence proves that
the defendants knew or should have known of their

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subordinates' failure to implement some of the risk

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management procedures that they had articulated.

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I believe the evidence that I've just

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recited, the things prior to December 22nd, are

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instructional as to the evidence presented about the

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actions and motivations of the defendants on December

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22nd.

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safety procedures were imperative in their business.

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The defendants repeatedly describe the events of

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December 21 and 22 as a debacle.

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of and involved with the debacle, their duties changed.

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The defendants clearly knew risk management and

Once they became aware

It's clear that the defendants

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understood the overwhelming importance of what they

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learned on the morning of December 22nd.

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became aware of the situation, coupled with the fact

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that they knew as much or as little about the situation

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as anyone else, their knowledge and their subsequent

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actions involved them in the situation to such an extent

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as to eliminate Mr. Szach as a intermediary or

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insulation to their own responsibility.

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that the defendants may have had in their business

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judgment to rely on Mr. Szach became moot when the

Once they

Any reliance

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circumstances unfolded on December 22nd and when the

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defendants involved themselves so intimately with the

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facts and control of the situation.

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business judgment rule that the defendants rely on

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simply provides no defense to the defendants or cheir

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conduct on December 22, 1998.

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Consequently, the

I find that Farrel Griffin got to his

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Chicago office on December 22, 1998 between 6:00 and

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7:00 o'clock in the morning, Chicago time.

I find that

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he and Roger Griffin were on the telephone essentially

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all day on a continuing conference call.

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that what Farrel Griffin knew, Roger Griffin knew.

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I find that Roger Griffin, although he was removed from

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the Chicago office, was required to be in charge just as

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Farrel Griffin was, and being on vacation was no excuse

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to provide him a defense because the problems were in

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London and both defendants had telephone access to the
London office on an equal basis.

And I find
And

I find that Farrel

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Griffin realized early on December 22nd that the debtor

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would have to file bankruptcy; that is, he knew that the

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risk management devices had failed.

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reflected in his deposition which was the Defendants'

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Exhibit 2.

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That knowledge is

It's pages 63 through 65.
I find that the defendants should have

realized that their risk management devices were not

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place as ordered, and I find that they should have

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realized that they had to check on any instructions they

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gave that day, to implement them themselves, and to

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assume total control of the situation.

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it became the defendants' duty at this point to inform

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themselves as much as possible of the situation and to

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then begin to take action based upon that information.

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I also find that

I quote from the Smith and Gorkom,
G-o-r-k-o-m, case in the Delaware Supreme Court in 1985

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at 488 Atlantic 2d 858 at 872.

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the fiduciary function requires more than mere absence

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of bad faith or fraud.

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interests of others imposes on a director an affirmative

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duty to protect those interests and to proceed with a

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critical eye in assessing information of the type and

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under the circumstances present."

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Quote, "Fulfillment of

Representation of the financial

The defendants bore that responsibility

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and cannot deflect it to others.

There are a couple of

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areas where

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into great question.

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the defendants would not have learned of the first

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margin call from their employees in the London office.

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The size of the margin call, the emergency nature of the

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events, the defendants' experience in these matters,

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including margin calls, all suggest that the defendants

the defendants' credibility has been called
It seems to me very unlikely that

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would inquire as to any margin calls and, indeed, as

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they testified, they did expect one.

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Following Farrel Griffin's phone call
to Mees Pierson on December 22nd, their protestation

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that they did not know of the first margin call rings

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completely hollow.

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this point.

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people in their position would call the bank that had

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issued a margin call of that size and not discuss the

The defendants are not credible on

It's a strange reason to believe that

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margin call and yet discuss the company's financial

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position and the company's need for, quote, "more time"

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end quote.

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The defendants' duties to their

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creditors, including their customers, included

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maintaining strict observance of the customers'

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segregated accounts.

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regulates their handling of money deposited by their

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customers.

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at 7 U.S.C. Section 6 (d){A)(2) provides that a

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commodity, or a futures commission merchant, shall treat

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all money received from customers to margins, trades, or

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contracts of the customer as belonging to the customer.

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And then it says, "Specifically, such money shall be

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separately accounted for and shall not be used to margin

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or guarantee the trades or contracts or to secure or

The Commodity Exchange Act

Section 4 (d)(2) of the Act which is found

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extend the credit of any customer or person other than

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the one for whom the same are held."

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The companion federal regulation,

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Regulation 1.20 (c), provides essentially the same

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thing.

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Yet after they learned of, or should have learned of the

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margin call and subsequent to the order to their bank to

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transfer the funds, their clear duty was to take steps

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to stop the payment before their bank executed the

This is what the defendants testified they knew.

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transfer.

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transfer in spite of the fact that it's clear that the

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transferred funds came from monies held by the company

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on behalf of other customers from the company.

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Defendants' Exhibit 4, paragraph 51, finds that the

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testimony reflected that and is simply not subject to

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doubt.

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Instead, they took no action to prevent the

And

I do not believe that the evidence

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proves that the defendants knew that the five million

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Deutsche mark wire transferred in advance of the order

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for that was placed by Mr. Rose in the London office,

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but I do find that the evidence proves that they knew

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about it while there was still time to stop it.

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simply incredible that Mr. Rose would not have

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volunteered the information to Farrel Griffin at che

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outset.

It is

And it is also incredible that the defendants

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didn't ask Mr. Rose about any margin calls.

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And I conclude that the law allowed the

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defendants to abort the wire transfer up until the time

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that the money was actually transferred.

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A-211 (b) of the Uniform Commercial Code provides the

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operative rule of law.

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the Szach consent order, S-z-a-c-h, nothing in those

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consent orders precludes the trustee from proceeding

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with this litigation.

Section 5/4

I also conclude that nothing in

The trustee is not collaterally

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estopped.

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Farrel and Roger Griffin with anything simply proves

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nothing regarding this case.

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And the fact that the CFTC has not charged

In short, my decision is that the

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defendants' failure to discover and stop the wire

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transfer paying the margin call constituted gross

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negligence and constituted a violation of their

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fiduciary duties to their creditors; that is, to their

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customers.

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should not have been made and was in violation of the

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applicable statutes and regulations.

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The transfer of the money to Mees Pierson

I conclude that the amount of the

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transfer was the amount of damage to the estate and the

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transfer was the proximate cause of damage to the

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estate.

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I also conclude that the trustee is

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entitled to prejudgment interest and I've calculated

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that amount to be $1,704,997.36.

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days since December 22nd, which was the date

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Ms. Steege's computations were made.

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also awarded costs of this proceeding.

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entered in favor of the trustee for the principal sum of

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$2,985,074.63.

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$4,690,071.99.

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That's figuring 35

The trustee is
Judgment will be

Adding the interest, the total amount is

As I've indicated, I will enter a
written judgment in that amount today.

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MS. STEEGE:

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THE COURT:

Thank you. Your Honor.
Thank you, all.

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(Which were all the proceedings

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had in the above-entitled cause

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as of January 26, 2005.)

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I, Barbara A. Casey, do hereby
certify that the foregoing is
a true and accurate transcript
of proceedings had in the
above-entitled cause.

UNITED STATES* BANKRUPTCY COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
Chapter 7
Bankruptcy Case No- 98 B 41742
Honorable Bruce W. Black

IN RE:
GRIFFIN TRADING COMPANY, INC.,
Debtor.
LEROY G. INSKEEP, TRUSTEE,

Adv. Case No. 01 A 7

Plaintiff,
v.
FARREL J. GRIFFIN AND
ROGER S. GRIFFIN,
Defendants.
JUDGMENT
At the conclusion of a trial on September 27, 2004, a decision on count IV of this
adversary proceeding was taken under advisement, subject to the parties submitting written
arguments. The arguments having been received and considered, the court now being fully
advised in the premises, and the court having recited oralfindingsof fact and conclusions of law
in open court, JUDGMENT IS ENTERED in favor of the plaintiff and against the defendants,
Farrel J. Griffin and Roger S. Griffin, in the amount of $2,985,074.63, plus prejudgment interest
of $ 1,704,997.36, for a total of $4,690,071.99, plus costs.
This concludes this adversary proceeding.

Entered:

-ife^*^ 2~L>t06>
Bruce W. Black, Bankruptcy Judge