Straits Financial v. Ten Sleep Cattle, 2018 WL 328767 (N.D.Ill. 2018) examines some signature business litigation issues against the backdrop of a commodities futures and trading account dispute. Among them are the nature and scope of a guarantor’s liability, the ratification doctrine as applied to covert conduct and the reach of the Illinois consumer fraud statute.
The plaintiff brokerage firm sued a Wyoming cattle rancher and his company to recover an approximate $170K deficit in the defendants’ trading account. (The defendants previously opened a non-discretionary account with plaintiff for the purpose of locking in future livestock prices.)
The ranch owner counter-sued, alleging a rogue trader of plaintiff made unauthorized trades with defendants’ money over a three-month period. Defendants counter-sued for consumer fraud, breach of fiduciary duty and conversion. After a seven-day bench trial, the court entered a money judgment for the defendants and the plaintiff appealed.
In substantially affirming the trial court, the Seventh Circuit first tackled the plaintiff’s breach of guaranty claim. In Illinois, guarantees are strictly construed and a guarantor’s liability cannot extend beyond that which he has agreed to accept. A proverbial favorite of the law, a guarantor is given the benefit of any doubts concerning a contract’s enforceability. A guarantor’s liability is discharged if there is a “material change” in the business dealings between the parties and an increase in risk undertaken by a guarantor.
Here, the speculative trading account (the one where the broker made multiple unauthorized trades) differed vastly in form and substance from the non-discretionary account.
Since the two trading accounts differed in purpose and practice, the Court held that it would materially alter the guarantor’s risk if he was penalized for the plaintiff’s broker’s fraudulent trading spree. As a result, the Seventh Circuit affirmed the trial judge’s ruling for the defendant on the guarantee claim.
The Court then rejected plaintiff’s ratification argument: that defendants’ authorized the illegal churned trades by not timely objecting to them
An Illinois agency axiom posits that a person does not have an obligation to repudiate an illegal transaction until he has actual knowledge of all material facts involved in the transaction. Restatement (Third) of Agency, s. 4.06.
Illinois law also allows a fraud victim to seek relief as long as he renounces the fraud promptly after discovering it. A party attempting to undo a fraudulent transaction is excused from strict formalism, too.
Here, the ranch owner defendant immediately contacted the plaintiff’s broker when he learned of the improper trades and demanded the return of all money in the non-discretionary trading account. This, according to the Court, was a timely and sufficient attempt to soften the impact of the fraudulent trading.
The Court affirmed the trial court’s attorneys’ fees award to the defendants on its consumer fraud counterclaim. The Illinois Consumer Fraud Act, 815 ILCS 505/10a(c)(the “CFA”) allows a court to assess attorneys’ fees against the losing party.
The plaintiff argued that the trial judge errored by awarding attorneys’ fees expended by defendants in both CFA and non-CFA claims. Plaintiff contended the trial judge should have limited his fee award strictly to the CFA claim.
Rejecting this argument, the Seventh Circuit noted that under Illinois law, where statutory fraud (which allow for fees) and common law (which don’t) claims arise from the same operative facts and involve the same evidence at trial, a court can award all fees; even ones involved in prosecuting or defending non-fee claims. And since facts tending to prove fraudulent trading “were woven throughout [the] case and the work done to develop those facts [could] not be neatly separated by claim,” the District court had discretion to allow defendants’ attorneys’ fees claim incurred in all of its counterclaims and defenses.
The Court then reversed the trial judge’s holding that the defendants failed to mitigate their damages by not reading plaintiff’s trading statements or asking about his accounts. A breach of contract or tort plaintiff normally cannot stand idly by and allow an injury to fester without making reasonable efforts to avoid further loss.
But here, since the plaintiff’s broker committed fraud – an intentional tort – any “contributory negligence” resulting from defendant not reading the mailed statements wasn’t a valid defense to the rogue broker’s fraudulent conduct.
This case shows the length a court will go to make sure a fraud perpetrator doesn’t benefit from his improper conduct. Even if a fraud victim is arguably negligent in allowing the fraud to happen or in responding to it, the court will excuse the negligence in order to affix liability to the fraudster.
This case also illustrates how guarantors are favorites of the law and an increase in a guarantor’s risk or a marked change in business dealings between a creditor and a guarantor’s principal will absolve a guarantor from liability.
Finally, Ten Sleep shows that a prevailing party can get attorneys’ fees on mixed fee and non-fee claims where the same core of operative facts underlie them.