Grede v. UBS Secs., LLC

FREDERICK J. GREDE, not individually, but as Liquidation Trusteeand Representative of the Estate of Sentinel Management Group, Inc., Plaintiff, v. UBS SECURITIES, LLC, Defendant.

No. 09 C 5880

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

March 28, 2019

Judge Rebecca R. Pallmeyer

MEMORANDUM OPINION AND ORDER

One year ago, this court ruled on summary judgment that Plaintiff Frederick J. Grede, the Trustee of the Estate of Sentinel Management Group ("Trustee"), is not entitled to recover some $14 million dollars in interest that Sentinel had paid to a creditor, UBS Securities, LLC ("UBS"), before Sentinel filed for bankruptcy in 2007. See Grede v. UBS Secs., LLC, 303 F. Supp. 3d 638, 654-55 (2018). The court's opinion fills 34 pages in the Federal Supplement and was issued after full and extensive briefing; the Trustee filed a 39-page response, supported by dozens of exhibits and was granted leave to file a sur-reply of 16 pages as well. After the opinion issued, the Trustee promptly sought reconsideration, relying in part on testimony given in depositions that post-dated the original briefing. UBS has moved to strike that submission. As explained below, UBS's motion is granted, and the Trustee's motion is denied.

BACKGROUND

The factual background of the Sentinel bankruptcy in general, and of this dispute, is recounted in many published opinions and will not be summarized here in any detail. Briefly: before its bankruptcy, Sentinel was in the business of making safe, short-term investments of excess cash held by other investment firms called futures commission merchants ("FCMs"). Sentinel itself, as well as its investment firm clients, was governed by Commodity Futures Trading Commission ("CFTC") regulations. (Grede, 303 F. Supp.3d at 642.) That is, Sentinel was required to maintain its clients' funds in segregated accounts and to limit Sentinel's own use of those funds to investments in certain high-quality government and corporate securities. (Id.) Sentinel had purportedly segregated clients' assets into three distinct funds (referred to as SEG 1, SEG 2, and SEG 3), and promised its clients "an undivided, pro rata beneficial interest in the pool of securities" purchased using the money in each fund. (Id. at 646.) Sentinel did not always comply with CFTC segregation requirements; in addition, there is evidence that Sentinel falsified interest earned on investments in its customers' accounts, calculating the interest earned by all of the securities in all of the investment portfolios, and then approximating the yield its customers were expected to receive on the purportedly segregated securities portfolios. (Id.)

In early 2007, one of the SEG 1 customers, UBS, became concerned about what it suspected were overly favorable earnings projections, and requested return of its investments. On March 30, 2007, Sentinel honored UBS's request for withdrawal of its entire stated account balance: $108,387,950.97, including $14,401,342.15 in cumulative interest ("the March 30 transfer"). The Trustee filed his complaint in this case on June 24, 2009, seeking to avoid the transfer of interest payments in the March 30 transfer under Section 548 of the Bankruptcy Code. The Trustee alleged that the cumulative interest portion of the March 30 transfer constituted "false profits" that should be returned to Sentinel's estate. (Id. at 655.) As more fully explained in the court's earlier opinion, the Trustee did not identify "the specific securities that Defendant UBS was supposed to be earning interest on, nor [calculate] . . .the exact difference between the interest UBS was allegedly overpaid and the 'real' interest rate." (Id. at 647.) The court concluded that the evidence, viewed in the light most favorable to the Trustee, did not raise a genuine dispute regarding Sentinel's intent when making the March 30 transfer and instead, supported UBS's position that Sentinel paid UBS on demand because Sentinel was required by law to do so. (Id. at 671-72.) This court concluded that no reasonable jury could find that Sentinel made the March 30 transfer with the actual intent to hinder, delay, or defraud its other investors. (Id. at 672.)

After the court issued its decision, and after the Trustee filed his motion for reconsideration, the Trustee took the depositions of two former or current employees of the National Futures Association ("NFA"), Lauren Brinati ("Brinati") on May 16, 2018 and Dan Driscoll ("Driscoll") on April 26, 2018 in an unrelated case. (UBS Motion to Strike [148] ¶ 18.) Then, in his reply memorandum, the Trustee cited testimony given in these depositions in support of his motion for reconsideration. UBS moves to strike both depositions.

DISCUSSION

I. UBS's Motion to Strike

"Motions for reconsideration serve a limited function: to correct manifest errors of law or fact or to present newly discovered evidence." Caisse Nationale de Credit Agricole v. CBI Indus., Inc., 90 F.3d 1264, 1269 (7th Cir. 1996). Such a motion may not be used "as a vehicle to introduce new evidence that could have been adduced during the pendency of the summary judgment motion." CBI Indus., Inc., 90 F.3d at 1269. In order to support a motion for reconsideration with newly discovered evidence, the moving party must "show not only that this evidence was newly discovered or unknown to it until after the hearing, but also that it could not with reasonable diligence have discovered and produced such evidence [during the pendency of the motion]." Id. at 1269.

As UBS notes, the Trustee's Corrected Reply cites depositions taken years after UBS first filed its motion for summary judgment. (UBS Motion to Strike [148] ¶¶ 4-14.) This suit was filed in 2009, and UBS filed its motion and requested a briefing schedule in December 2011. Judge Zagel, before whom the case was then pending, entered a stay pending the outcome of other cases, and then in 2016, the parties filed supplemental summary judgment briefs. When the case was reassigned to this court in April 2017, the parties agreed to a briefing schedule and re-briefed the motion, a process that spanned several months and included a response and sur-reply brief filed by the Trustee. In response to the summary judgment motion, the Trustee did not make a request for further discovery, nor did he seek to depose witnesses from the National FuturesAssociation. More than four months after briefing was completed, this court issued a lengthy opinion in March 2018, and the Trustee promptly filed a brief in support of reconsideration of that opinion. Only then—more than six years after the motion was filed—did the Trustee take the depositions of Driscoll (on April 26, 2018), and Brinatti (on May 15, 2018). (UBS Motion to Strike [148] ¶¶ 4, 7, 18.)

As noted, the case was transferred to this court in April 2017. At no time since then did the Trustee ask leave to take additional discovery. Nor did the Trustee invoke FED. R. CIV. P. 56(d) or otherwise argue that he needed additional discovery before responding to UBS's motion for summary judgment. The Trustee now suggests that UBS blocked the Trustee's efforts to take depositions in this case or "hid the ball" by raising a key argument in a reply brief (Trustee's Objection to UBS Securities, LLC's Motion to Strike [150] (hereinafter "Trustee's Objection"), at 2-3), but the court is not moved. The argument that the Trustee refers to—UBS's contention that the Trustee is wrong in asserting that funds transferred to UBS on March 30 belonged to other customers—does appear in a footnote in UBS's reply brief (UBS Reply [120] at 17-18 n. 6.), likely because it is not central to UBS's argument, just as it was not central to the court's ruling. In any event, the Trustee sought and was granted leave to file a sur-reply memorandum. Had the footnote genuinely triggered a need for additional depositions, the court would have expected the Trustee to sound the alarm then.

In short, the Trustee's reliance on the Brinati and Driscoll depositions was an afterthought, not a basis for reconsideration of the court's opinion. If the circumstances described above are not sufficient to demonstrate this, the court notes one more: the Trustee noticed and took those depositions in a different case, without so much as providing UBS with notice or an opportunity to participate in those depositions. UBS contends that the deposition testimony does not rebut the conclusions reached in the court's earlier opinion (UBS Motion to Strike [148] ¶¶ 27-29), but the court need not reach that argument. A Rule 59(e) motion is "appropriately used to fix errors," Miller v. Safeco Ins. Co. of Am., 683 F.3d 805, 815 (7th Cir. 2012) (citing Moro v. Shell Oil Co.,91 F.3d 872, 876 (7th Cir. 1996) ), but does not "provide a vehicle for a party to undo its own procedural failures, and it certainly does not allow a party to introduce new evidence or advance arguments that could and should have been presented to the district court prior to the judgment." Moro, 91 F.3d at 876.

The motion to strike the Brinati and Driscoll depositions [145] is granted. The court will not consider the substance of those depositions, nor any portions of the Trustee's reply that refer to or rely on them.

II. Trustee's Motion for Reconsideration

As noted, the court entered a lengthy decision granting UBS's motion for summary judgment. The court concluded that the Trustee's effort to claw back $14 million dollars in interest it paid UBS in the March 30 transfer was best understood as a "disguised preference claim" barred by timing; the transaction preceded the 90-day period. To establish that the interest payment to UBS constituted a fraudulent transfer under 11 U.S.C. § 548(a)(1)(A), the Trustee would have to show that it was made "with actual intent to hinder, delay, or defraud" other creditors. This court concluded that showing was not made. Along the way, the court rejected several of UBS's defenses; not surprisingly, ...