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Ironbeam, Inc. v. Papadopoulos

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

January 13, 2020

IRONBEAM, INC., a Delaware Corporation, Plaintiff,
v.
GREGORY PAPADOPOULOS, an individual, and GPPB, LLC, a limited liability company, Defendants.

          MEMORANDUM OPINION AND ORDER

          Steven C. Seeger United States District Judge.

         On February 5, 2018, the stock market suffered a historic fall. The Dow dropped nearly 1, 600 points, and the S&P 500 fell more than four percent. One of the traders caught up in the freefall was Defendant Gregory Papadopoulos, who traded commodity futures through his company, Defendant GPPB, LLC. GPPB's trading account lost nearly $500, 000 in a single day. Worse yet, the account suffered a negative balance - the value of GPPB's positions fell from $89, 476 to negative $409, 208.

         The broker for the account, Plaintiff Ironbeam, Inc., liquidated GPPB's positions to salvage any remaining value, and later filed suit against GPPB and Papadopoulos to collect on the unpaid balance. GPPB did not respond to the Complaint, so this Court entered a default judgment against the firm. Ironbeam now moves for summary judgment against Papadopoulos in his capacity as the guarantor of GPPB's account.

         Papadopoulos does not dispute the basic facts arrayed against him. He does not dispute that GPPB owes hundreds of thousands of dollars to Ironbeam, or that he guaranteed GPPB's obligations. Instead, Papadopoulos spins a tale that his broker conspired with the FBI and an organized crime family to cause the losses. That story, colorful as it may be, suffers from a complete lack of supporting evidence.

         Based on the undisputed facts, Papadopoulos breached his guarantee agreement with Ironbeam by failing to pay for GPPB's losses. Plaintiff's motion for summary judgment [58] is granted on the claim under the guarantee agreement.

         Background

         Commodity trading involves “highly leveraged and rapidly fluctuating markets” that may lead to “significant losses, ” including losses that “substantially exceed” a customer's margin deposits with the broker. See Dckt. No. 59, Ex. C, at ¶ 2. This case is case in point.

         On November 15, 2015, Papadopoulos signed a Customer Agreement and a Personal Guarantee Agreement with Ironbeam, a commodity broker registered with the Commodity Futures Trading Commission. See Plaintiff's Statement of Material Facts in Support of Summary Judgment Motion (“Statement of Facts”), at ¶¶ 1, 3-5 (Dckt. No. 59); see also Dckt. No. 59, Exs. B, C. The most basic fact - the identity of the customer - is not clear from the face of the Customer Agreement itself. The Customer Agreement refers to the “Customer, ” but for whatever reason, it does not define who the “Customer” is. See Dckt. No. 59, Ex. C. That is, the agreement itself does not reveal whether Papadopoulos signed on his own behalf, or on behalf of an entity.

         The Personal Guarantee Agreement - signed the very same day - fills the gap. That agreement provides that Ironbeam was “enter[ing] into the Customer Agreement . . . with GPPB LLC.” Id. Ex. B. The signature block also sheds some light. Papadopoulos signed the Personal Guarantee Agreement as the “GENERAL MANAGER” of the “Account Holder.” Id. (all caps in original). Taken together, the two agreements establish that GPPB was the Customer, and Papadopoulos was the guarantor.[1] That's consistent with the account statement, too, which identifies the customer as “GPPB LLC.” See Dckt. No. 59, Ex. D, at 1; see also Statement of Facts, at ¶ 5 (stating that GPPB “opened a commodity futures trading account with Ironbeam”).

         Under the Customer Agreement, Ironbeam agreed to serve as GPPB's broker for the trade of commodity futures. A commodity futures contract is an agreement to buy or sell a commodity at a specific price on a specific date. Each side of the contract basically makes a bet about the future price of a commodity. Buyers and sellers place their trades through registered brokers, who in turn execute the trades with a futures clearinghouse. See ADM Investor Services, Inc. v. Collins, 515 F.3d 753, 756 (7th Cir. 2008). The clearinghouse serves as the middleman: it is the buyer to each seller, and the seller to each buyer. Id.

         Commodity futures traders must put money down as a deposit with their brokers. Known as “margin, ” this deposit represents “only . . . a fraction of the actual cost on a trade.” Capital Options Investments, Inc. v. Goldberg Bros. Commodities, 958 F.2d 186, 188 (7th Cir. 1992). “Margins in the futures markets are not down payments like stock margins, but are performance bonds designed to ensure that traders can meet their financial obligations.” See Economic Purpose of Futures Markets and How They Work, U.S. Commodity Futures Trading Commission, https://www.cftc.gov/ConsumerProtection/EducationCenter/economicpurpose.html (last visited Jan. 10, 2020). Margin helps protect brokers from holding the bag when the traders suffer losses. See In re MF Global Inc., 531 B.R. 424, 435 (Bankr. S.D.N.Y. 2015) (“Margin is a security deposit to insure that futures commission merchants have adequate customer funds to settle open positions and is required by brokerage houses and exchanges to assure their own financial integrity and the financial integrity of the entire market place.”) (quoting Friedman v. Dean Witter and Company, Inc. et al., Comm. Fut. L. Rep. (CCH) ¶ 21, 307, 1981 WL 26050, at *1 (Nov. 13, 1981)).

         Traders can buy positions worth many times more than the margin they have deposited. But if the value of the positions declines, the broker can demand more margin from the trader to protect itself against the risk of loss. See ADM Investor Services, 515 F.3d at 756. Traders must provide enough margin so that “short-term price movement[s]” on the futures contracts won't wipe out their account balances. Id. Margin reduces the risk posed by default, particularly given that a “futures contract is executory; no asset changes hands when the contract is formed.” Id. (citation omitted).

         The clearinghouse settles the trades between buyers and sellers, and sets the minimum margin requirements for all futures contracts. Id. The brokers, in turn, are responsible to the clearinghouse for the trades. If a trader suffers losses that it cannot pay, the broker must pay the clearinghouse from its own funds. Id. (“The futures commission merchant then is on the hook, for it is a condition of participation in these markets that each dealer guarantee customers' trades.”). To protect themselves, brokers enter into contracts with their customers that impose margin requirements and entitle the brokers to liquidate the customers' positions when necessary.

         The agreement between Ironbeam and GPPB reflected this industry practice. Ironbeam's Customer Agreement required GPPB to keep enough money in its account to meet “applicable . . . margin requirements, ” as determined by Ironbeam. Dckt. No. 59, Ex. C, at ¶ 7. “Customer shall, without notice or demand, maintain adequate margin at all times so as to continuously meet the margin requirements established by Ironbeam.” Id.

         The agreement gave Ironbeam substantial remedies if GPPB did not provide enough funds to comply with margin requirements. Ironbeam had the right to close out GPPB's positions - that is, liquidate them - if GPPB did not post enough margin. “If at any time Customer's account does not contain the amount of margin required, Ironbeam may, in its sole and absolute discretion, without notice or demand to Customer, close out Customer's open position(s) in whole or in part, in any manner Ironbeam deems fit, or take any other action it deems necessary to satisfy such margin requirements.” Id.

         The next paragraph of the agreement - entitled “Liquidation of Accounts” - gave Ironbeam the power to protect itself by selling GPPB's positions:

In the event of . . . (i) Ironbeam's determination that any collateral deposited to protect one or more of the Customer's accounts is inadequate, regardless of current market quotations to secure the account; or (j) Ironbeam, for any reason whatsoever, deems itself insecure or if necessary for Ironbeam's protection, then Ironbeam is hereby authorized, in its sole discretion, to sell any or all of the Commodity Interests or other property of Customer which may be in Ironbeam's possession, or which Ironbeam may be carrying for Customer, or to buy in any Commodity Interests or other property of which the account or accounts of Customer may be short, or cancel any outstanding order, in order to close out the account ...

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