Elaborating on U.S. District Judge Gary S. Feinerman’s analysis of Illinois law on the implied covenant of good faith and fair dealing, Judge Steven C. Seeger — who joined the district court in September — denied a motion for reconsideration of Feinerman’s ruling in a case where a futures commission merchant (“basically a broker for derivatives”) sued a group of traders for “failing to pay off the negative balances that had accrued on their futures trading accounts” and their third affirmative defense alleged that the plaintiff, Advantage Futures, “breached the implied covenant of good faith and fair dealing by waiting to liquidate defendants’ accounts until ‘their net liquidating value became negative’ — that is, until Advantage’s own funds were placed at risk.”
“Because the client agreements gave Advantage the right to liquidate defendants’ accounts if they failed to meet their margin calls” and “the implied covenant of good faith and fair dealing is merely an interpretive rule” that “cannot override a contract’s express terms,” Feinerman struck the third affirmative defense.
With an order that “respectfully” denied the request for reconsideration, Seeger concluded that Feinerman was right. Advantage Futures v. Herm, No. 18-CV-2005 (Dec. 30, 2019).
Here are highlights Seeger’s opinion (with light editing and omissions not noted):
Motions for reconsideration are disfavored, and rightly so. See Minch v. City of Chicago, 486 F.3d 294 (7th Cir. 2007) (“A court ought not to revisit an earlier ruling in a case absent a compelling reason, such as manifest error or a change in the law, that warrants re-examination”); Caisse Nationale de Credit Agricole v. CBI Industries, 90 F.3d 1264 (7th Cir. 1996) (“Motions for reconsideration serve a limited function: [T]o correct manifest errors of law or fact or to present newly discovered evidence”); Solis v. Current Development Corp., 557 F.3d 772 (7th Cir. 2009) (“Motions to reconsider do not empower litigants to indefinitely prolong a case by allowing them to raise their arguments, piece by piece”); Quaker Alloy Casting Co. v. Gulfco, 123 F.R.D. 282 (N.D. Ill. 1988) (“This court’s opinions are not intended as mere first drafts, subject to revision and reconsideration at a litigant’s pleasure”).
District courts have enough work on their plates without collateral litigation about motions that they have already ruled upon. Motions about rulings on motions do not add much value, and slow down the wheels of progress (and justice) for everyone else. Ordinarily, a party who disagrees with a ruling by a district court should raise that issue with the Court of Appeals, rather than trying the same argument a second time before the same judge (let alone a different one).
Motions for reconsideration are even less welcome after the reassignment of a case from one district court judge to another. See Aparicio-Brito v. Lynch, 824 F.3d 674 (7th Cir. 2016).
Here, defendants’ motion is little more than a rehash, warmed over, of arguments that they advanced unsuccessfully before Judge Feinerman. In any event, Judge Feinerman’s ruling was right on the merits.
Defendants’ theme that plaintiff had a “license to steal” is little more than an empty catch phrase. No one is alleging that plaintiff stole anything. A futures commission merchant does not “steal” from a trader when it liquidates an account that has fallen below margin requirements. Instead, it is exercising an express contractual right.
The implied covenant of good faith and fair dealing is not a colorable defense here, either. That doctrine comes into play when a party abuses discretion afforded by the terms of a contract by acting “arbitrarily, capriciously, or in a manner inconsistent with the reasonable expectation of the parties.” Goldberg v. 401 N. Wabash Venture, 755 F.3d 456 (7th Cir. 2014). It “prevents one party from depriving another of the right to receive the benefit of the contract in a way the parties could not have contemplated at the time of drafting.” RBS Citizens, v. Sanyou, 525 Fed. Appx. 495 (7th Cir. 2013); see also In re Kmart Corp., 434 F.3d 536 (7th Cir. 2006) (“This doctrine is a rule of construction, not a stand-alone obligation”); Chrysler Credit Corp. v. Marino, 63 F.3d 574 (7th Cir. 1995) (“The contractual duty of good faith only applies as a method by which gaps in the contract are filled.”).
The contracts in question required the traders to satisfy margin requirements, meaning that they needed to post sufficient funds to cover their positions. The contracts also authorized the broker to sell the traders’ positions if they did not provide enough margin.
A broker’s right to sell the positions is a form of self-protection, because a broker is on the hook to the clearinghouse for the trades of its customers. Margin requirements thus protect futures commission merchants from the traders.
Here, the accounts fell below margin requirements, and the traders failed to provide more capital when requested by the broker. So the broker did what the contracts expressly permitted: [I]t liquidated the positions when the traders did not post enough margin. The opportunity to sell the traders’ positions was not a gap in the contracts — it was a core part of the design itself.
The broker did not act in a manner that the parties did not reasonably expect. The liquidation of the positions was not an “unanticipated development.” Life Plans Inc. v. Security Life of Denver Insurance Co., 800 F.3d 343 (7th Cir. 2015). Quite the opposite — it was just what the contracts contemplated and what the parties expressly bargained for. See In re Kmart Corp., 434 F.3d 536 (7th Cir. 2006) (noting that the doctrine applies to “opportunistic behavior”); Kham & Nate’s Shoes No. 2 Inc. v. First Bank of Whiting, 908 F.2d 1351 (7th Cir. 1990) (“‘Good faith’ is a compact reference to an implied undertaking not to take opportunistic advantage in a way that could not have been contemplated at the time of drafting and which therefore was not resolved explicitly by the parties.”).
The agreements in question required the traders to provide sufficient funds to cover their positions. The contracts also entitled the broker to liquidate the traders’ positions if they did not satisfy margin requirements. And that is exactly what happened.
The broker did not behave “opportunistically” by doing what the contracts expressly permitted. Plaintiff was entitled to “advance its own interests, and it did not need to put the interests of defendants first.” Kham & Nate’s Shoes No. 2, 908 F.2d at 1358.
The implied covenant of good faith is not a tool to frustrate the enforcement of a contract when it conforms to the reasonable expectations of the parties. The implied covenant of good faith does not “block use of terms that actually appear in the contract.” Kham & Nate’s Shoes No. 2, 908 F.2d at 1357.
Defendants’ implicit theory seems to be that plaintiff had a legal obligation to look out for defendants’ financial interests. But the implied covenant of good faith “does not create an enforceable legal duty to be nice or to behave decently in a general way.” Beraha v. Baxter Health Care Corp., 956 F.2d 1436 (7th Cir. 1992); Market Street Associates Limited Partnership v. Frey, 941 F.2d 588 (7th Cir. 1991) (“Even after you have signed a contract, you are not obligated to become an altruist toward the other party and relax the terms if he gets into trouble in performing his side of the bargain”); Kham & Nate’s Shoes No. 2, 908 F.2d at 1357 (“Firms that have negotiated contracts are entitled to enforce them to the letter, even to the great discomfort of their trading partners, without being mulcted for lack of ‘good faith’”); Jordan v. Duff and Phelps Inc., 815 F.2d 429 (7th Cir. 1987) (“It is not a version of the Golden Rule, to regard the interests of one’s contracting partner the same way you regard your own”).
The broker did not take advantage of the traders by, say, liquidating their positions for spite, or by expropriating their money for some other purpose. The broker did not “penalize” the traders for some reason unrelated to the broker’s business. Instead, plaintiff sold their positions when the losses were so steep that plaintiff started suffering a loss, too.
The broker did not “act in bad faith” when it sold positions when its own funds were at risk. The implied covenant of good faith did not require the broker to continue losing money, or to sacrifice its own financial self-interest for the benefit of the traders.
Good faith does not require a party to take one for the team (or for the other party to the contract).
Defendants complain that plaintiff did not sell their positions on January 24, 2015, when there was still equity in the accounts. The traders fault the broker for allowing “trading to continue.” But the implied covenant of good faith did not create an affirmative duty to make trading decisions that would have prevented future losses, especially when viewed after the fact. And the implied covenant did not require plaintiff to stop defendants’ hand-picked agent from trading for the defendants.
“Contract law does not require parties to behave altruistically toward each other; it does not proceed on the philosophy that I am my brother’s keeper.” Original Great American Chocolate Chip Cookie Co., Inc. v. River Valley Cookies Ltd., 970 F.2d 273 (7th Cir. 1992).
Simply put, defendants received the “fruits of the bargain.” See Life Plans Inc. v. Security Life of Denver Insurance Co., 800 F.3d 343 (7th Cir. 2015). Defendants may have sour grapes, but that’s not a defense to a breach-of-contract claim.