Wells Fargo Securities, LLC v. LJM Investment Fund, L.P.

Background

Wells Fargo Securities, LLC brought a breach-of-contract action against LJM Investment Fund, L.P. and LJM Partners, Ltd. The agreement made Wells Fargo a futures commission merchant that provided clearing and execution services for LJM’s options trades. It required LJM to maintain margin and allowed either side to terminate the relationship by written notice. After termination, LJM was required to close out its open positions or arrange for their prompt transfer to another futures commission merchant.

Wells Fargo alleged that LJM’s account suffered heavy losses in early February 2018 and that LJM failed to reimburse more than $16 million Wells Fargo paid to the exchange on LJM’s behalf. LJM counterclaimed for breach of contract, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, and negligence. LJM alleged that, during an unusually unstable options market, Wells Fargo demanded margin and then directed LJM to immediately liquidate its positions. LJM alleged that Wells Fargo’s direction caused the managed and affiliated funds to lose more than $266 million.

Earlier rulings and proposed amendment

The court had previously dismissed LJM’s counterclaims. On reconsideration, the court granted relief in part concerning the breach-of-contract counterclaim, vacated its dismissal with prejudice, and allowed LJM to seek permission to replead that claim. The court had denied reconsideration concerning LJM’s other counterclaims, which remained dismissed with prejudice.

LJM’s proposed amended counterclaim alleged that it had experience exiting positions during periods of high volatility and that, after receiving Wells Fargo’s termination notice, it intended to close some positions in an orderly way while asking other futures commission merchants to accept transfers of other positions. LJM also alleged that the margin demanded by Wells Fargo was not yet due on the morning of February 6, 2018, and that LJM was still complying with its contractual obligations.

Legal standard

Under Federal Rule of Civil Procedure 15(a)(2), courts should generally allow amendments when justice requires. Leave may be denied for undue delay, bad faith, undue prejudice, or futility. An amendment is futile if it could not survive a motion to dismiss for failure to state a legally sufficient claim. At this stage, the court accepted non-conclusory factual allegations as true and drew reasonable inferences for LJM.

Bad-faith argument

Wells Fargo argued that LJM acted in bad faith because the proposed pleading allegedly conflicted with letters written by LJM’s founder and chairman and with LJM’s earlier pleadings and arguments. The court declined to consider the letters because they were not attached to or incorporated into the proposed pleading. It also concluded that the new allegations supplemented and clarified LJM’s earlier allegations rather than directly contradicting them. The court therefore rejected Wells Fargo’s bad-faith argument.

Futility arguments

Wells Fargo argued that LJM still had not plausibly alleged that it intended to close out or transfer its positions promptly. The court disagreed. LJM’s allegations about its prior experience, its intended orderly liquidation, and the possibility of transferring positions to other futures commission merchants were enough to raise a plausible inference that LJM intended to close out or transfer its positions promptly on February 6, 2018.

Wells Fargo also argued that “promptly” in the termination clause necessarily meant “immediately.” The court rejected that conclusion at the pleading stage. It noted that dictionaries and legal authorities do not always treat the two words as equivalent, and that other provisions of the agreement suggested the parties understood “promptly” and “immediately” to have different meanings. The court held that LJM plausibly alleged that Wells Fargo’s demand for immediate liquidation breached the termination clause.

Finally, Wells Fargo argued that Chicago Mercantile Exchange Rule 930.K and related authorities gave it the legal right to liquidate LJM’s account immediately. The court explained that Rule 930.K permits liquidation when an account holder fails to comply with a performance-bond, or margin, call within a reasonable time. LJM alleged that the margin demand was not yet due and that it remained in compliance with the agreement. The court therefore concluded that LJM plausibly alleged that the rule did not authorize the forced liquidation at that time. The cases cited by Wells Fargo involved agreements that expressly allowed liquidation in the circumstances presented, unlike LJM’s allegations concerning the termination clause here.

Disposition

The court granted LJM’s motion for leave to replead its breach-of-contract counterclaim. It ordered LJM to file amended counterclaims substantially in the proposed form within 14 days. This was a pleading-stage ruling on whether LJM could amend its claim; the court did not decide whether Wells Fargo ultimately breached the agreement or what damages, if any, LJM could recover.