Secure Leverage Grp., Inc. v. Bodenstein (In re Peregrine Fin. Grp., Inc.), 16-3424

866 F.3d 775 (Mem)

IN RE: PEREGRINE FINANCIAL GROUP, INC., Debtor,

Secure Leverage Group, Inc., et al., Appellants,

v.Ira Bodenstein, Appellee,andCommodity Futures Trading Commission, Intervenor-Appellee.

In re: Peregrine Financial Group, Inc., Debtor,

Robert Miller, et al., Appellants,

v.Ira Bodenstein, Trustee of Estate of Peregrine Financial Group, Inc., Appellee.

No. 16-3424

No. 16-3425

United States Court of Appeals, Seventh Circuit.

Argued May 30, 2017

Decided August 7, 2017

Amended August 8, 2017

Michael C. Moody, Michael John O'Rourke, for Null-Appellant.

Terence G. Banich, Robert M. Fishman, Carrie Ellen Davenport, Null-Appellee.

Before Wood, Chief Judge, and Ripple and Rovner, Circuit Judges.

Rovner, Circuit Judge.

This is a consolidated appeal from judgments entered by the bankruptcy court and affirmed by the district court, in favor of the defendant Ira Bodenstein, the Chapter 7 trustee of the estate of Peregrine Financial Group ("Peregrine"). Peregrine was a registered futures commissions merchant (FCM) and a registered forex dealer member of the National Futures Association. In addition to futures, Peregrine dealt in retail foreign currency transactions ("retail forex") and spot metal transactions. The plaintiffs are investors who executed retail forex and spot metal contracts with Peregrine.

This consolidated appeal arose out of a series of events which culminated in Peregrine's bankruptcy filing. In July 2012, the Commodity Futures Trading Commission notified Russell L. Wasendorf, Peregrine's Chief Executive Officer and the Chairman of the Board, that Peregrine's accounts were going to be electronically monitored. Wasendorf attempted suicide the next day, after penning a statement admitting to embezzling millions of dollars over a 20-year period. He was subsequently arrested, and in September 2012, pled guilty to four criminal charges, including admitting that he embezzled and misappropriated nearly $200 million from Peregrine's segregated customer futures accounts.

As a result of that loss, Peregrine filed for bankruptcy, and Bodenstein was appointed as trustee. Subchapter IV of Chapter 7 of the Bankruptcy Code, 11 U.S.C. §§ 761 – 767 governs the bankruptcy of a futures commissions merchant such as Peregrine, and provides for the distribution of "customer property" in priority to all other claims. "Customer property" is defined as including funds received in connection with a commodity contract, 17 C.F.R. § 190.08(a)(1)(i)(A), which in turn is defined in § 761(4) of the Bankruptcy Code. Bodenstein excluded the plaintiffs, Secured Leverage Group, et al., from that priority distribution based on his determination that forex and spot metal transactions did not constitute "commodity contracts" as so defined. The Secured Leverage plaintiffs then filed an...