The opinion of the court was delivered by: Hon. Mark Filip
MEMORANDUM OPINION AND ORDER VACATING THE JUDGMENT OF THE BANKRUPTCY COURT AND REMANDING THE CASE FOR FURTHER PROCEEDINGS
After Griffin Trading Company filed for Chapter 7 bankruptcy, the bankruptcy trustee (also, "Trustee") brought an adversary complaint against Defendants-Appellants, Farrel and Roger Griffin (also, "Defendants"), the directors and sole shareholders of Griffin Trading. The complaint alleged that Defendants breached their duty of care to creditors, and the bankruptcy court agreed, concluding that Defendants were grossly negligent in failing to stop a wire transfer of customer funds to a third party. The bankruptcy court entered judgment for the bankruptcy trustee, and Defendants appeal the judgment and award of damages. For the reasons explained herein, the Court vacates the judgment of the bankruptcy court and remands for further proceedings or explication on the issue of liability.
Defendants Farrel Griffin and Roger Griffin were directors and sole shareholders of Griffin Trading Company. (J.A. 4, Stip. ¶ 8.) Griffin Trading was a futures commission merchant, that is, a broker for those who trade commodities futures. (Id. ¶ 1; J.A. 44, Trial Tr. at 49-50.) The company was headquartered in Chicago, with an additional office in London. (J.A. 4, Stip. ¶ 2.)
Parties trade commodities futures by forming a contract to buy or sell a commodity on a future date, at a price the parties agree upon at the time they make the contract. (Id. ¶ 3.) Traders act through brokers who are members of a commodities exchange. (J.A. 44, Trial Tr. at 49.) When a trader places an order to make a trade, his or her broker executes the trade by forming a contract with another broker. (Id. at 49-50.) The buying broker and selling broker then "clear" the trade by submitting details of the trade to the exchange's clearing house. (Id. at 58-59.) Only a clearing member of an exchange may submit trades for clearing to that exchange's clearing house. (J.A. 4, Stip. ¶¶ 4, 6.) If a customer's broker is not a clearing member of an exchange, the broker must submit its customer's trades through a clearing member or broker. (Id.)
The members who clear a trade are the actual parties to the contract and bear principal financial responsibility for the trade. (J.A. 43, O'Connell Aff. ¶ 31.) Trading thus creates a chain of liability, with clearing members recovering any losses by collecting from the non-clearing brokers or the customers on whose behalf the clearing members made the trade. (J.A. 4, Stip. ¶¶ 4, 6; J.A. 43, O'Connell Aff. ¶ 41.) To ensure payment, exchanges require clearing members to deposit funds, which are called the "margin." (J.A. 43, O'Connell Aff. ¶¶ 33-35.) In turn, brokers require their customers to maintain margin funds in customer trading accounts held by the brokers. (J.A. 4, Stip. ¶¶ 4, 12; J.A. 44, Trial Tr. at 54-56.) Both British and American law require brokers to hold their customers' margin deposits in a segregated client account, separate from the broker's "house" account. (7 U.S.C. § 6d(a)(2); J.A. 43, O'Connell Aff. ¶ 42.) Approximately one week before the events at issue in this case, Griffin Trading received a report informing it that its segregated client account was "extremely low." (J.A. 45, 1/26/05 Ruling Tr. at 4.)
On December 21-22, 1998, John Ho Park, a customer in Griffin Trading's London office, substantially exceeded his trading limits and suffered losses that eventually bankrupted Griffin Trading. (J.A. 43, O'Connell Aff. ¶ 47.) Park traded bonds on the German futures exchange, EUREX. (J.A. 4, Stip. ¶ 11.) Because Griffin Trading was not a clearing member of EUREX, it used a clearing member, MeesPierson N.V., as its clearing broker. (Id. ¶ 6.) Thus, EUREX looked to MeesPierson to cover any losses, MeesPierson looked to Griffin Trading, and Griffin Trading looked to Park. (Id.) At the time of the trades, Park had approximately $1.56 million in his margin account with Griffin Trading. (Id. ¶ 12.)
Park's losses began on December 21, and he continued to suffer losses when the market shifted against him overnight. (J.A. 43, O'Connell Aff. ¶¶ 47-49; see also J.A. 42, CFTC Order at 7.) Personnel at Griffin Trading's London office first became aware of Park's losses on the morning of December 22, but they were unaware of their full extent, and Griffin Trading allowed Park to continue to trade that morning and to incur more losses. (J.A. 43, O'Connell Aff. ¶¶ 51, 54; J.A. 42, CFTC Order at 7.) Sometime after 9:30 a.m. London time on December 22, MeesPierson issued a margin call instructing Griffin Trading to transfer five million Deutsche Marks ("DM") (over $2.9 million) to MeesPierson's bank in Germany to cover Park's known losses up to that point. (J.A. 21; J.A. 43, O'Connell Aff. ¶¶ 50-51; D.E. 14 at 13 n.3.) According to banking conventions, this payment was due on December 23. (J.A. 21; J.A. 43, O'Connell Aff. ¶ 50.)
At 11:19 a.m. GMT on December 22, Griffin Trading's London office initiated a wire transfer in response to MeesPierson's margin call, which in turn thereafter triggered a series of related wire transfers to effect the funds transfer. (J.A. 43, O'Connell Aff. ¶ 50.) First, Griffin Trading transferred £ 1.6 million from its account at the London Clearing House to its account at the Bank of Montreal. (Id.) The funds were then immediately transferred to Griffin Trading's account at another bank, Credit Lyonnais Rouse Limited. (Id.) The next day, December 23, at 11:51 a.m. GMT, the funds were converted into DM 5 million and sent back to the Bank of Montreal. (Id.) At 11:52 a.m. GMT, the funds were transferred to MeesPierson's bank in Germany. (Id.)
Defendants entered the picture shortly after Griffin Trading's London office initiated the funds transfer on the morning of December 22. The initial wire transfer was made at 11:19 a.m. London time, and Farrel Griffin arrived for work in the Chicago office a short time later, between 12 and 1 p.m. (6-7 a.m. Chicago time). (J.A. 45, 1/26/05 Ruling Tr. at 6.) Defendant Roger Griffin was on vacation in Florida, but he spoke to Farrel Griffin on a conference call throughout the day and was equally responsible for the decisions that followed. (Id.) When Farrel Griffin learned about Park's losses, he took a number of steps, including contacting his counsel, contacting the Chicago Board of Trade's Office of Investigation and Audit, stopping all trades by Park, and instructing the London office to transfer other customers' funds to other brokers in Chicago and London. (J.A. 44, Trial Tr. at 149-51.) However, Farrel Griffin stated that he did not know about MeesPierson's DM 5 million margin call made the morning of December 22. (Id. at 131.) He and Roger Griffin further testified that they did not ask their employees or their banks whether there had been any margin calls or wire transfers, and did not instruct anyone to stop any such transfers. (Id. at 131, 137, 170, 217.)
As the day wore on, it became clear that Park's losses were far greater than Griffin Trading had first imagined. (J.A. 43, O'Connell Aff. ¶¶ 51, 54; J.A. 42, CFTC Order at 7.) Eventually, it became clear that Park's losses had destroyed Griffin Trading.
On December 30, 1998, Griffin Trading filed a Chapter 7 bankruptcy petition and Leroy G. Inskeep was appointed as the Chapter 7 Trustee. (J.A. 4, Stip. ¶ 15.) The Trustee filed a five-count adversary complaint against the Griffins and their wives. (J.A. 1.) At issue in this appeal is Count IV, which alleged that Defendants breached their fiduciary duties to creditors by, among other things, transferring some $2.6 million of customer funds to MeesPierson. (Id. at 5-6.) Before trial, the bankruptcy court entered partial summary judgment on Count IV; the bankruptcy court found that during the relevant period Griffin Trading was insolvent, and that Defendants therefore owed a fiduciary duty to Griffin Trading's creditors, including its customers. (J.A. 3 at 11.)
After a bench trial on the extant issues, the bankruptcy court issued an oral opinion in favor of the Trustee. (J.A. 45, 1/26/05 Ruling Tr.) The court rejected Defendants' testimony that they did not know about the margin call or wire transfer, stating that such claims "ring completely hollow." (Id. at 8.) The bankruptcy court found that Defendants did not know about the wire transfer before the London office initiated it on December 22 and that there was no gross negligence-the liability standard at play-before December 22. (Id. at 3, 5.) But the court found that Defendants did know about the funds transfer it before it was completed on December 23, and while there was still time to stop it. (Id. at 9-10.) The court found that Defendants had a "clear duty . . . to take steps to stop the payment before their bank executed the transfer" because it was "clear that the transferred funds came from monies held by the company on behalf of other customers. . . ." (Id. at 9.) The bankruptcy court stated that "defendants' failure to discover and stop the wire transfer paying the margin call constituted gross negligence and constituted a violation of their fiduciary duties to their creditors; that is, to their customers." (Id. at 10.)
The bankruptcy court entered judgment in favor of the Trustee in the amount of the wire transfer, $2,985,074.63, plus prejudgment interest, for a total of $4,690,071.99, plus costs. (J.A. 8.) Defendants filed a motion to alter or amend the judgment under Fed. R. Bankr. P. 9023 and Fed. R. Civ. P. 59, (J.A. 9), which the bankruptcy court denied. (J.A. 12.) Defendants now appeal the bankruptcy court's judgment and the order denying the motion to amend. (J.A. 13.) Defendants make three arguments: (1) the Trustee failed to prove causation because he failed to carry his burden of showing that it was possible for Defendants to stop the wire transfer(s) after they learned of them; (2) even if Defendants could have stopped the wire transfer(s), their failure to do so was not gross negligence; and (3) even if it was gross negligence, the bankruptcy court's award of damages was too high. The Court vacates the judgment of the bankruptcy court and remands on the first issue. Given the uncertainty concerning the first issue, the Court does not reach issues two and three, and expresses no opinion about them.
Rule 8013 of the Federal Rules of Bankruptcy Procedure states that in the course of the district court's appellate review of a bankruptcy court order, "[f]indings of fact . . . shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses." Fed. R. Bankr. P. 8013; accord Mungo v. Taylor, 355 F.3d 969, 974 (7th Cir. 2004). Seventh Circuit precedent instructs that "a bankruptcy court's factual findings cannot be disturbed 'simply because the district court is convinced it would have decided the case differently.'" Mungo, 355 F.3d at 974 (quoting In re Weber, 892 F.2d 534, 538 (7th Cir. 1989)) (further internal punctuation and citation omitted).
On the other hand, the district court reviews questions of law and mixed questions of law and fact de novo. Id. (citing In re Ebbler Furniture & Appliances, Inc., 804 F.2d 87, 89 (7th Cir. 1986)).*fn1
Defendants make a threshold argument that the Trustee failed to prove the causation element of liability because he failed to prove it was possible for Defendants to stop the funds transfer. (D.E. 13 at 10-12.) If stopping the funds transfer was impossible (or at least not adequately shown by the Trustee to be possible), Defendants claim, then Defendants could not have been grossly negligent for failing to stop the funds transfer after they learned of it.
The bankruptcy court's ruling on this point is terse. Although this Court fully appreciates why the bankruptcy court issued an oral ruling, the unfortunate reality is that the basis for the bankruptcy court's ruling, as evaluated against the issues raised on appeal-including, in particular, the causation issue and related sub-issues-is not clear. See generally Travelers Cas. & Sur. Co. of Am. v. Wells Fargo Bank N.A., 374 F.3d 521, 524 (7th Cir. 2004) (admonishing trial courts, in a commercial suit involving a U.C.C. issue, to "beware [of] oral opinions in [such] complex cases," and reversing and remanding case for further proceedings in the trial court). To give the case fair treatment on appeal-and to give the trial judge's views and evidentiary assessments appropriate respect and consideration-requires a remand for further proceedings before the bankruptcy court. See id., 374 F.3d at 529 (remanding case and leaving to the trial court's informed discretion whether further proceedings would involve evidentiary ones).
By way of background, with respect to the causation issue, the bankruptcy court stated that "the law allowed the defendants to abort the wire transfer up until the time that the money was actually transferred. Section 5/4 A-211(b) of the Uniform Commercial Code provides the operative rule of law." (J.A. 45, 1/26/05 Ruling Tr. at 10.) The oral ruling does not address any of the complicated issues presented under the applicable and various provisions of the U.C.C. (as discussed further below)-which to be fair to the bankruptcy court, appears to be substantially the fault of the parties, as the Trustee seemingly only flagged the U.C.C. as relevant at the reply-brief stage of the post-trial briefing. (J.A. 7 at 5.) That was unfortunate, with all respect, on the part of the Trustee, but it is a foundational basis for the bankruptcy court's oral ruling, and thus must be evaluated on those terms. Furthermore, with respect to analysis potentially reflecting application of the U.C.C. (including, in particular, U.C.C. Section 5/4A-211(b), as well as other potentially relevant sections), the oral ruling simply states: "I do not believe that the evidence proves that the defendants knew that the five million Deutsche mark wire transferred in advance of the order for that [which] ...