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Frederick J. Grede, Liquidation Trustee of Sentinel Liquidation v. Jacques De Saint Phalle and Ftn Financial Securities

March 9, 2011

FREDERICK J. GREDE, LIQUIDATION TRUSTEE OF SENTINEL LIQUIDATION TRUST
v.
JACQUES DE SAINT PHALLE AND FTN FINANCIAL SECURITIES CORP.



Name of Assigned Judge Judge Zagel Sitting Judge if Other or Magistrate Judge than Assigned Judge

CASE TITLE

DOCKET ENTRY TEXT:

Defendants' Motion to Dismiss the Complaint [38] is denied.

The tale of Sentinel's collapse is, by now, well-told. This specific action is one brought by Frederick J. Grede as the Trustee of a Delaware Business Trust set up to liquidate Sentinel post-Chapter 11. Here, he pursues claims assigned to him by certain former customers of Sentinel. The four specific counts are 1) aiding and abetting Sentinel's Breach of Fiduciary Duty; 2) aiding and abetting Charles Mosley's Breach of Fiduciary Duty (Mosely was Sentinel's head trader); 3) unjust enrichment; and 4) negligence. The Trustee sums up his theories of liability as "that Sentinel and Defendants breached duties to customers by misusing funds deposited by customers to finance the purchase of risky and illiquid securities from Defendants." This case is active again following the lifting of a stay I instituted while the legal landscape was formed in a related case. See Grede v. Bank of New York Mellon, 598 F.3d 899 (7th Cir. 2010).

I. Objections to the Trustee's Ability to Bring the Claims

Defendants raise two generalized objections to these claims. The first is that the claims assigned by the customers are not "personal" to the customers; rather, they are said to be "general" claims of the Estate and therefore only properly brought in an action on behalf of the whole Estate by the Trustee. The second is that the Trustee lacks "prudential standing" to bring these sorts of claims. With regard to the latter claim, the Seventh Circuit expressly rejected this argument in the related case that prompted the stay here. See id.

The first objection fails because its fundamental assumption was also rejected in Bank of New York. Defendants begin their analysis by stating: "because a bankruptcy trustee is the only party who can sue to represent the interests of creditors as a class, common claims...are reserved to the trustee to pursue." Defendants rely on three principal cases to make this argument, all of which consider the scope of a Bankruptcy trustee's powers and responsibilities. See Levey v. Sys. Div., Inc. (In re Teknek, LLC), 563 F.3d 639, 646-47 (7th Cir. 2009); Fisher v. Apostolou, 155 F.3d 876, 879 (7th Cir. 1998); Koch Refining v. Farmers Union Cent. Ex., 831 F.2d 1339, 1342-43 (7th Cir. 1987). But in Bank of New York the court emphasized that a liquidation trust is no longer governed by the Bankruptcy Code. Bank of New York, 598 F.3d at 902. The analyses in In re Teknek, Fisher, and Koch Refining are each founded on the policy undergirding the Code, and are therefore inapplicable to Plaintiff as Trustee of a Delaware business trust.

In re Teknek, Fisher, and Koch Refining were all cited in Defendants' briefs from before the stay and, hence, before the Seventh Circuit's opinion in Bank of New York. But they have refreshed the argument by offering supplemental authority. See SIPC v. Bernard L. Madoff Inv. Sec. LLC, 429 B.R. 423 (Bankr. S.D.N.Y. 2010); SIPC v. Bernard L. Madoff Inv. Sec. LLC, 2011 WL 439532 (Bankr. S.D.N.Y. Feb. 9, 2011); In re Landmark Fence Co., Inc., 2010 WL 4924739 (C.D. Cal. Dec. 3, 2010). The cases do not advance the argument, as they all rest on the law and underlying policy of the Bankruptcy code as well. Landmark was explicitly a Bankruptcy case, while the Madoff matters concerned a liquidation under the Securities Investor Protection Act, 15 U.S.C. § 78fff-1(a), (b) ("SIPA"). SIPA Trustees have "the general powers and duties of a bankruptcy trustee," so that law and policy is implicated by those cases as well.

Importantly, none of the cases imply that the plaintiffs asserting "general" claims simply did not have those claims. Rather, under the Code, it was the Trustee who was statutorily empowered to bring them. As the court in the later Madoff case explained "[a] trustee's exclusive ability to bring causes of action that generally affect all creditors fosters the goals of the automatic stay by promoting orderly resolution of claims and preventing single creditors from achieving preferential recoveries." Madoff, 2011 WL 439532 at *38. This is Bankruptcy law and policy, and the Seventh Circuit has duly reminded us that a business trust is not governed by the Code. Bank of New York, 598 F.3d at 902.

II. Substantive Objections

In addition to the generalized challenges to the Trustee's complaint, Defendants have made challenges to specific aspects of the substantive counts.

Causation

Defendants rely on Holmes v. SIPC, 503 U.S. 258 (1992) to show that the Trustee failed to allege causation. But Holmes stands apart from this case for three important reasons. First, it is a summary judgment appeal and so the implications for a case at the dismissal stage are not entirely clear. See id. at 264. Second, the Court was analyzing causation under RICO. Id. Third, the plaintiffs were customers of a collapsed broker dealer who had specifically not bought the alleged tainted securities at the heart of the case. The theory of causation in that case was simply that the scheme collapsed the broker-dealer, and that therefore there was no money for the plaintiffs to recoup on the securities they had purchased. Id. at 261.

The Trustee here has alleged that the Assigning Customers' funds were directly used to buy the inappropriate investments. For purposes of pleading (as opposed to ...


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