Bank's Lack Of Diligence Results In Denial Of Late Claim
COMMODITY FUTURES TRADING COMMISSION v. LAKE SHORE ASSET MANAGEMENT LTD. (May 11, 2011)
A bank located in tiny Andorra invested over $7 million in Lake Shore Asset Management's commodity trading pools. Instead of receiving account statements, the Bank monitored its account on Lake Shore's website. When the website was taken down in late 2007, the Bank made inquiry. It learned that Lake Shore's assets were frozen and that it was under investigation for fraud. The bank made some assumptions about the similarity of U.S. and Andorran law and did nothing. Meanwhile, the CFTC sued Lake Shore, obtained a default judgment, and placed Lake Shore’s remaining assets with a receiver. In early 2009, the receiver notified Lake Shore’s creditors that they had 45 days within which to file a claim. Although the notice to the Bank was addressed properly, it contained no individual's name. The Bank claims that it never received the notice. By the time it contacted the receiver, the claims window had closed and the receiver denied the claim. The Bank sought permission from the district court. Judge Manning (N.D. Ill.) rejected the request to be included in the asset distribution. GAMAG, another Lake Shore investor, did file a claim that was allowed on the same pro-rata basis as the other investors’ claims. GAMAG, however, claims that it is a creditor rather than a shareholder and is entitled to priority. Judge Manning rejected GAMAG's position. The Bank and GAMAG both appeal.
In their opinion, Judges Posner, Kanne, and Sykes affirmed. The Court first determined that the correct standard for deciding whether to allow the late claim is the "excusable neglect" standard contained in Rule 60(b)(1). The excusable neglect standard is an "all relevant circumstances" one, which the Court simplified: on the one hand are the excuse’s validity and the negative consequences to the Bank of denying the late claim -- on the other hand is the negative consequences to the other parties of granting the late claim. The Court concluded that the district court did not err in finding that the Bank did not have a good excuse. It knew about Lake Shore’s troubles and did nothing, it didn't include the name of a bank officer on its account statement to ensure successful notice, and it made inexcusable assumptions about the similarity of U.S. and Andorran law. Although the adverse consequences of losing its entire claim are great, they are not enough to conclude that the district court erred in denying the claim. The prejudice to the others is not having to pay the Bank’s claim, since all agree that the claim is valid if timely. Rather, it is the delay resulting from the recalculation of shares, additional approval of the district court, and the potential "hornets nest" that could be created by the recalculations. The Court concluded that the district court did not abuse its discretion in denying the claim. With respect to the GAMAG claim, the Court rejected the creditor-versus-shareholder argument. Although GAMAG did have a different kind of arrangement with Lake Shore than most of the other investors, the Court concluded that the differences were not of the kind to make it a creditor. Creditors enjoy priority because they give up any upside benefit. Here, GAMAG's deal with Lake Shore was identical to other shareholders in terms of the allocation of risk.
Midwest Title Loans is a "title lender." Title loans are high-cost, high-risk loans. Car owners, generally from the lower income segment of the population, pay triple digit interest rates to borrow against their car titles. Midwest is located in Illinois but loaned to Indiana residents. All the loans were made in-person in Illinois. Midwest did advertise in Indiana and, when necessary, executed repossessions in Indiana. The State of Indiana considered Midwest's practices predatory. In 2007, it amended its Uniform Consumer Credit Code to provide the a loan is deemed to occur in Indiana if an Indiana resident enters into such loan with an out-of-state company that advertised or solicited in Indiana. Once a loan is deemed to occur in Indiana, the lender is subject to the provisions of the code, including interest rate caps and license requirements. Indiana advised Midwest of this amendment in August of 2007. Midwest was not licensed in Indiana and its products exceeded the interest rate cap. Midwest brought suit under §1983, alleging that the amendment violated the commerce clause. The district court permanently enjoined application of the amendment. Indiana appeals.