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Peregrine Emerging CTA Fund, LLC v. Tradersource

February 19, 2008


The opinion of the court was delivered by: Samuel Der-yeghiayan, District Judge


This matter is before the court on Defendant TraderSource, Inc.'s ("TraderSource") and Defendant David Welch's ("Welch") motion to dismiss. For the reasons stated below, we grant the motion to dismiss in its entirety.


Plaintiff Peregrine Emerging CTA Fund, LLC ("Fund") alleges that it is a limited liability company that operates as a commodity pool investing in commodities, options, single stock futures, futures contracts, spot contracts, and foreign currencies. The Fund alleges that it entered into an agreement with TraderSource and Welch (the president and owner of TraderSource) in which TraderSource agreed to be a "Manager" of the Fund with responsibilities, including selecting and monitoring the advisors who would be trading the Fund's assets, as well as constructing the Fund's portfolios. (Compl. Ex. A § 1.24).

The Fund alleges that Wintech Research, Inc. ("Wintech") was one of the trading advisors that TraderSource had an obligation to monitor. The Fund alleges that TraderSource and Welch became aware in June 2005, that Wintech had agreed to enter trades for the Fund through a third party even though Wintech maintained an existing account to enter trades through another futures commission merchant. The Fund alleges that Wintech's use of two different futures commission merchants materially increased the risk parameters associated with Wintech's trading on behalf of the Fund. The Fund alleges that Defendants' failure to notify the Fund of the increased risk parameters caused by Wintech's use of two futures commission merchants was a breach of their contractual obligations and duties to the Fund. The Fund also alleges that other factors such as the nature of Wintech's trading strategy, Wintech's unfamiliarity with the third party's account trading platform, and stop-loss orders that Defendants were advising Wintech to place, all increased the risk parameters associated with Wintech's trading on behalf of the Fund. Defendants were allegedly aware of the increased risk and failed to notify the Fund.

The Fund alleges that on June 16, 2005 and June 17, 2005, Wintech "lost track" of the open positions and stop-loss orders that it had entered for the Fund and this error resulted in losses to the Fund of $183,910.63. (Compl. Par 16). The Fund, was allegedly unable to recover any of its losses from Wintech.

The agreement between TraderSource and the Fund was allegedly governed under a Limited Liability Company Operating Agreement ("Operating Agreement") that was attached to the Fund's complaint. Pursuant to the terms of the Operating Agreement, Managers of the Fund such as TraderSource are excluded from liability for all conduct except criminal wrongdoing, fraud, gross negligence, or intentional misconduct ("Exculpatory Provision"). The Operating Agreement also states that Manager Associates such as Welch cannot be held liable for any act or omission that is done in the performance of the Manager's duties to the Fund ("Manager Associates Exculpatory Provision").

On September 5, 2007, the Fund filed a three-count complaint in the Illinois state court against TraderSource and Welch and included in the complaint breach of contract claims (Count I), negligence claims (Count II), and breach of fiduciary duty claims (Count III). Defendants subsequently removed the instant action to federal court. Defendants now move to dismiss all claims.


In ruling on a motion to dismiss brought pursuant to Federal Rule of Civil Procedure 12(b)(6), the court must draw all reasonable inferences that favor the plaintiff, construe the allegations of the complaint in the light most favorable to the plaintiff, and accept as true all well-pleaded facts and allegations in the complaint. Thompson v. Ill. Dep't of Prof'l Regulation, 300 F.3d 750, 753 (7th Cir. 2002); Perkins v. Silverstein, 939 F.2d 463, 466 (7th Cir. 1991). In order to withstand a motion to dismiss, a complaint must allege the "operative facts" upon which each claim is based. Kyle v. Morton High Sch., 144 F.3d 448, 454-55 (7th Cir. 1998); Lucien v. Preiner, 967 F.2d 1166, 1168 (7th Cir. 1992). A plaintiff is required to include allegations in the complaint that "plausibly suggest that the plaintiff has a right to relief, raising that possibility above a 'speculative level'" and "if they do not, the plaintiff pleads itself out of court." E.E.O.C. v. Concentra Health Services, Inc., 496 F.3d 773, 776 (7th Cir. 2007)(quoting in part Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955, 1965 (2007)). Under current notice pleading standard in federal courts a plaintiff need not "plead facts that, if true, establish each element of a 'cause of action. . . .'" See Sanjuan v. Amer. Bd. of Psychiatry and Neurology, Inc., 40 F.3d 247, 251 (7th Cir. 1994)(stating that "[a]t this stage the plaintiff receives the benefit of imagination, so long as the hypotheses are consistent with the complaint" and that "[m]atching facts against legal elements comes later"). The plaintiff need not allege all of the facts involved in the claim and can plead conclusions. Higgs v. Carver, 286 F.3d 437, 439 (7th Cir. 2002); Kyle, 144 F.3d at 455. However, any conclusions pled must "'provide the defendant with at least minimal notice of the claim,'" Kyle, 144 F.3d at 455(quoting Jackson v. Marion County, 66 F.3d 151, 153-54 (7th Cir. 1995)), and the plaintiff cannot satisfy federal pleading requirements merely "by attaching bare legal conclusions to narrated facts which fail to outline the bases of [his] claims." Perkins, 939 F.2d at 466-67. The Seventh Circuit has explained that "[o]ne pleads a 'claim for relief' by briefly describing the events." Sanjuan, 40 F.3d at 251; Nance v. Vieregge, 147 F.3d 589, 590 (7th Cir. 1998)(stating that "[p]laintiffs need not plead facts or legal theories; it is enough to set out a claim for relief").


I. Choice of Law

As an initial matter, there is a dispute between the parties regarding the applicable substantive law that should be applied to each claim. The Operating Agreement contains a provision stating that the Operating Agreement "is governed by and to be construed in accordance with the law of Delaware without regard for its conflict of law provisions." (Compl. Ex. A § 34.4).

The Fund argues that Illinois substantive law should be applied to all three counts and should be used to resolve important legal issues such as the definition of "gross negligence," and the issue of whether the Fund has a cause of action for breach of fiduciary duty. The Fund acknowledges that it was organized under the law of Delaware, but states that it is a resident of Illinois and states that all of the alleged conduct and losses occurred in Illinois. The Fund argues that Illinois has the most significant relationship to the cause of action and that under Illinois choice of law provisions, Illinois law should actually govern substantive legal issues of all three claims. Defendants point to the fact that the ...

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