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Litton Loan Servicing, L.P. v. Dennis Schubert

Summarizing by Amir Shachmurove

Secure Leverage Group, Inc. v. Bodenstein (In re Peregrine Financial Group, Inc.)

Case Type:
Case Status:
16-3424 (7th Circuit, Aug 07,2017) Not Published
Where forex contract accounts can be comingled, and used to pay the futures commissions merchant’s liabilities, they are not considered “customer property” deserving priority over all other claims in the Chapter 7 Bankruptcy of the futures commissions merchant. Forex is a term that references foreign exchange market trading, which includes spot market, forward market and futures market trading.
Procedural context:
Peregrine, a registered futures commissions merchant, filed a Chapter 7 bankruptcy petition, and Bodenstein was appointed as trustee. Chapter 7 of the Bankruptcy Code, 11 U.S.C. §761-767, governs the bankruptcy of a futures commission merchant such as Peregrine, and provides for the distribution of “customer property” in priority to all other claims. “Customer property” is defined as including funds received in connection with a commodity contract. The trustee excluded Secure Leverage Group, Inc. from the priority distribution based on his determination that forex transactions did not constitute “commodity contracts” as defined. The plaintiffs filed an adversary complaint against Bodenstein. After the adversary proceeding was terminated, another group of customers filed a class action against Bodenstein, alleging fraud, breach of fiduciary duty, unjust enrichment, and conversion, seeking imposition of a constructive trust. Because the class action was filed two years after the bar date for proofs of claim, and involved claims based on facts unrelated to the timely filed contract-based claims, the bankruptcy court dismissed the class action claims as untimely. On this consolidated appeal, the Secured Leverage plaintiffs allege that their funds were held in a resulting trust and therefore not included in the bankruptcy estate, and that their forex contracts constituted commodity contracts under the similar contracts clause (11 U.S.C. §761(4)(F)(i)). The class action plaintiffs alleged that the courts erred in holding that the claims were untimely and did not constitute an amended claim. The Seventh Circuit affirmed the district court’s holding, but did not set forth its own analysis, citing its agreement with the reasoning set forth in Secure Leverage Grp., Inc. v. Bodenstein, 558 B.R. 226, 231 (N.D.Ill. 2016).
Peregrine Financial Group, Inc. (“Peregrine”) was a registered futures commissions merchant and a registered forex dealer. In addition to futures, Peregrine dealt on retail foreign currency transactions (“retail forex”). The plaintiffs are investors who executed retail forex contracts with Peregrine. After being informed by the Commodity Futures Trading Commission that Peregrine’s accounts were going to be monitored, Peregrine’s CEO admitted to embezzling approximately $200 million from Peregrine’s segregated customer futures accounts. As a result of this loss, Peregrine filed Chapter 7, and Bodenstein was appointed as trustee.
John T. Tharp

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