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Advantage Futures LLC v. Herm LLC

United States District Court, N.D. Illinois, Eastern Division

August 8, 2019

ADVANTAGE FUTURES LLC, Plaintiff,
v.
HERM LLC, JOHN CORBETT, JR., KATHRYN SERGIO, GEORGE SMITH, MARK SERGIO, BRUCE AI, JANICE C. MARSCHEL, as trustee for the Janice C. Marschel Revocable Trust, KEVIN SCHMIDT, individually and as trustee for the Janice C. Marschel Revocable Trust, BARBARA HERMAN, JEROLD HERMAN, DARCY FROST, and FRED FROST, Defendants.

          MEMORANDUM OPINION AND ORDER

          Gary Feinerman Judge.

         Advantage Futures LLC alleges in this diversity suit that Defendants breached their respective contracts with it by failing to pay off the negative balances that had accrued on their futures trading accounts. Doc. 11. After the court denied their motion to dismiss, Doc. 50, Defendants answered and asserted affirmative defenses, Doc. 52. Advantage moved under Civil Rule 12(f) to strike the affirmative defenses, Doc. 53, and the court granted Defendants' request for leave to amend, Docs. 61, 63. Advantage now moves under Rule 12(f) to strike the amended affirmative defenses. Doc. 66. The motion is granted.

         Background

         In resolving Advantage's Rule 12(f) motion, the court assumes the truth of the well-pleaded factual allegations in Defendants' pleadings, though not their legal conclusions, and draws all reasonable inferences in Defendants' favor. See United States v. 416.81 Acres of Land, 514 F.2d 627, 631 (7th Cir. 1975) (Clark, J.). The court must also consider “documents attached to the [pleadings], documents that are critical to the [pleadings] and referred to in [them], and information that is subject to proper judicial notice, ” along with additional facts set forth in Defendants' opposition brief, so long as those facts “are consistent with the pleadings.” Phillips v. Prudential Ins. Co. of Am., 714 F.3d 1017, 1020 (7th Cir. 2013) (internal quotation marks omitted). The facts are set forth as favorably to Defendants as those materials allow. See Meade v. Moraine Valley Cmty. Coll., 770 F.3d 680, 682 (7th Cir. 2014). In setting forth those facts at this juncture, the court does not vouch for their accuracy. See Goldberg v. United States, 881 F.3d 529, 531 (7th Cir. 2018).

         Advantage is a futures commission merchant (“FCM”) registered with the Commodity Futures Trading Commission (“CFTC”). Doc. 52 at ¶ 2. Defendants held futures trading accounts with Advantage. Id. at ¶¶ 4-14. An FCM like Advantage is required each day to post sufficient margin to the pertinent trading exchange(s) to cover its clients' obligations regardless of whether they have sufficient funds in their accounts with the FCM. Id. at ¶ 23.

         When they opened their accounts, Defendants each signed a Commodity Futures Client Agreement. Id. at ¶¶ 16, 24. The Client Agreements are governed by Illinois law. E.g., Doc. 11-1 at § 28. Section 3 required Defendants to pay Advantage “any debit balance or deficiency in [their] Account[s].” E.g., id. at § 3. Section 10 required Defendants to “at all times maintain such margins and premiums … as required from time to time by Advantage, ” and to post margin at Advantage's demand, which could come with an hour's notice but also on shorter notice at Advantage's “sole and absolute discretion.” E.g., id. at § 10 (capitalization altered).

         Section 12 provided that if Defendants failed to meet a margin call, Advantage had the rights to:

cover or liquidate any position [Defendants] may have with Advantage (including but not limited to whole or partial liquidations of [Defendants'] Account[s]; buying in property which [Defendants'] Account[s] may be short; the exercise of any option; or the straddling of existing open positions if they cannot be satisfactorily liquidated because the market is illiquid or has reached a price limit, or for any other reason); or … cancel any or all pending orders and refuse to accept new orders, all without liability on Advantage's party to [Defendants] or any third party.

E.g., id. at § 12. Section 12 further provided that Advantage's remedies in the event of Defendants' failure to meet a margin call were “solely for Advantage's protection, ” such that its decision to use or not to use its remedies “shall not relieve [Defendants] of any of [their] obligations under [the] Agreement.” E.g., ibid. And Section 2 restricted Defendants' remedies in the event that Advantage violated any rule or law, providing:

Advantage's violation of any rule or law shall not provide [Defendants] in any legal, reparation, arbitration or other proceeding with (y) a defense to a claim by Advantage for money or other property due under this Agreement or (z) a basis for a claim by [Defendants] that money or other property is due from Advantage, unless such violation has been determined to be in relation to a transaction that [Defendants] did not give instructions to effect and is the direct cause of [Defendants'] claimed indebtedness to Advantage.

E.g., id. at § 2.

         Defendants each entered into Commodity Futures Discretionary Trading Authorization Agreements with JBJ Capital Management Inc., which authorized JBJ to place and enter trades on their accounts. Doc. 52 at ¶¶ 17-19; Doc. 63 at ¶ 1; e.g., Doc. 11-12. The JBJ Agreements provided that Defendants “will indemnify Advantage … and will pay Advantage promptly, on demand, for any losses arising from such trades and any debit balance due thereon.” E.g., Doc. 11-12.

         Advantage alleges that on February 2, 2018, “the net liquidating value of several of … Defendants' accounts fell below” their margin requirements. Doc. 11 at ¶ 31. Advantage did not receive funds from Defendants to meet their margin requirements. Doc. 52 at ¶ 32. Advantage alleges that by February 6, 2018, Defendants all had negative balances in their accounts. Doc. 11 at ¶ 33. Advantage emailed Defendants to ask that they remedy their margin deficits. Doc. 52 at ¶ 34; e.g., Doc. 11-23.

         Advantage further alleges that on February 5, 2018, it “began closing out the positions” in Defendants' accounts and that it continued to liquidate the accounts given their failure to meet their margin requirements. Doc. 11 at ¶¶ 37-38. According to Advantage, most of Defendants' positions had been closed by the end of the day on February 6, 2018. Id. at ΒΆ 39. Advantage emailed Defendants to ask that they pay the ...


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