900 F.3d 359
7th Cir.2018Background
- Ten Sleep Cattle Company (run by Richard Carter) used a futures account (the "33 Account") at R.J. O’Brien (RJO) to hedge cattle prices; Carter personally guaranteed Ten Sleep’s obligations under that RJO account.
- Broker Jason Perkins moved to Straits Financial and, via a bulk-transfer process, the 33 Account was transferred to Straits; Ten Sleep received a negative-consent notice but did not sign a new transfer agreement.
- Perkins opened a second Straits account for Carter (the "35 Account") purportedly for record-keeping and speculative profit-sharing; no clear written discretionary authorization was signed.
- After Perkins made $300,000 and Carter instructed him to close the 35 Account, Perkins continued unauthorized speculative trading in Treasury Bond futures, producing ≈$2M in losses by June 2012; Straits liquidated assets in the 33 Account to cover the shortfall and pursued a remaining deficiency against Ten Sleep.
- District court held Perkins committed fraud; Straits vicariously liable; Ten Sleep prevailed on ICFA, conversion, and unjust enrichment and received attorneys’ fees; but court reduced damages for failure to mitigate by not reading trade confirmations, fixing June 11 as the mitigation cutoff.
- Seventh Circuit affirmed liability and the ICFA fee award but reversed the mitigation-based reduction, holding Illinois law requires actual knowledge of fraud before a duty to mitigate arises and remanded for recalculation of damages.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether RJO account terms/guarantee transferred to make Ten Sleep liable for 35 Account losses | Carter: transfer did not clearly bind Ten Sleep to new terms or extend guarantee to unrelated speculative trading | Straits: bulk transfer and Related Account Authorization incorporated RJO terms (including guarantee/debit provisions) into 35 Account | Rejected Straits: guarantees construed narrowly under Illinois law; material change in risk (unauthorized discretionary trading) prevents extending the guarantee to 35 Account |
| Whether Ten Sleep ratified or is estopped from denying unauthorized trades by failing to object earlier | Carter: had no actual knowledge until June 20 and promptly disavowed; thus no ratification | Straits: silence and receipt of statements should be treated as ratification or estoppel | Held for Carter: actual knowledge required; prompt disavowal when informed prevents ratification; inquiry notice (mail pile) insufficient as a matter of law |
| Whether ICFA attorneys’ fees may cover work on non-ICFA claims | Ten Sleep: ICFA claim was inextricably intertwined with other claims; fees for common work appropriate | Straits: fee award should be limited to work strictly tied to ICFA claim | Affirmed: district court did not abuse discretion—claims shared a common core of facts and work could not be neatly separated |
| Whether damages should be reduced for failure to mitigate by not reading confirmations; proper mitigation start date | Ten Sleep: no duty to mitigate before actual knowledge (June 20); no reduction warranted | Straits: Ten Sleep should have discovered problems earlier (district court found June 11; Straits argued April 5) and damages should be reduced accordingly | Reversed district court reduction: under Illinois law duty to mitigate arises upon actual knowledge of fraud; mitigation reduction vacated and remanded for recalculation |
Key Cases Cited
- Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353 (U.S. 1982) (describing commodities trading and hedging)
- Grundstad v. Ritt, 166 F.3d 867 (7th Cir. 1999) (discussing effect of assignment on guarantor obligations)
- Teamsters Local 282 Pension Trust Fund v. Angelos, 762 F.2d 522 (7th Cir. 1985) (fraud victims not required to undertake costly self-help to avoid fraud; contributory negligence not a defense to intentional tort)
- Continental Concrete Pipe Corp. v. Century Road Builders, Inc., 195 Ill.App.3d 1 (Ill. App. Ct. 1990) (duty to mitigate arises only after awareness of facts making mitigation necessary)
- De Bouse v. Bayer, 235 Ill.2d 544 (Ill. 2009) (elements of ICFA: deceptive act, intent to induce reliance, proximate causation of damages)