Eastern Trading Company v. Refco, Inc., and Refco Capital Corporation

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 99-2362 & 99-3053
Eastern Trading Company, et al.,
Plaintiffs-Appellants, Cross-Appellees,
v.
Refco, Inc., and Refco Capital Corporation,
Defendants-Appellees, Cross-Appellants.
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 97 C 6815--Suzanne B. Conlon, Judge.
Argued February 24, 2000--Decided October 10, 2000
Before Cudahy, Posner, and Evans, Circuit Judges.
Posner, Circuit Judge. Eastern Trading Company,
a partnership located in Dubai that trades gold
and silver bullion in large quantities, brought
this suit against two commonly owned
corporations--Refco, Inc., a Chicago commodities
broker, and Refco Capital Corporation-- charging
fraud and related misconduct in violation of the
Commodity Exchange Act, 7 U.S.C. sec.sec. 1a et
seq., and the common law of Illinois. The
defendants counterclaimed for breach of contract.
The jury brought in a verdict for the defendants
on the main claim and a judgment for Refco, Inc.
of $14 million on the counterclaim, the judge
having dismissed Refco Capital Corporation as a
counterclaimant before the trial. Eastern
appeals. Refco (as we’ll refer to Refco, Inc.,
the broker, except when discussing its affiliate)
cross-appeals, seeking an award of attorneys’
fees, as provided for in its commodity trading
contract with Eastern, the basis for the
successful counterclaim. The issues that we need
to resolve are primarily ones of general law
rather than of anything peculiar to the Commodity
Exchange Act or Illinois law. In view of the jury
verdict, Refco gets the benefit of the doubt on
disputable facts.
The partners in Eastern are Haji Ashraf and his
four eldest sons. They are equal partners in the
sense of sharing the profits of the partnership

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equally. Although the firm does a substantial
business, its offices consist of a single large
room partitioned into separate cubicles for the
partners by means of sliding glass doors. The
partnership agreement authorizes each partner to
sign contracts on behalf of the firm. The father
is the chairman of the firm but during the period
relevant to this case his eldest son, Zahid
Ashraf, was the managing partner. Refco is
represented in Dubai by a commodities broker
called Ramada Financial Consultants that is owned
and operated by a distant cousin of the Ashrafs
named Zaheer Khawaja. Although Ramada is a
"foreign correspondent" of Refco (the meaning of
the term in this context is unclear), the
contract between the two firms disclaims any
intention of making Ramada an agent of Refco.
In January 1992 Eastern and Refco entered into
a customer agreement by which Refco was to broker
trades on U.S. commodities exchanges for Eastern.
Eastern’s trading account with Refco established
pursuant to the agreement was nondiscretionary,
meaning that Eastern was to make all the
decisions on what trades to make and Refco was
merely to execute them. The agreement authorized
Zahid and two of his brothers (the three being
identified as "general partners" in Eastern with
Zahid also being designated "Managing Director")
to act for Eastern and provided that "Refco may
assume conclusively that all actions taken by and
instructions from any one of the . . . named
general partners have been properly taken or
given pursuant to authority invested in them by
all the partners in the Partnership."
At first the trades that Refco executed for
Eastern involved options and futures contracts
designed to hedge Eastern against unexpected
changes in gold and silver prices between the
time that it bought gold and silver and the time
that it sold them. But after three years Zahid
Ashraf began placing orders with Refco through
Khawaja on behalf of Eastern for options and
futures contracts in much greater quantities than
required to hedge Eastern’s bullion trading; in
fact he was speculating, which is the opposite of
hedging. And not for the first time. In 1994 he
had opened a personal trading account (not an
Eastern account) with another U.S. commodities
broker, Republic Securities New York, through
Khawaja. In March of the following year, at about
the time that he started speculative trading
through Khawaja and Refco, Zahid lost millions of
dollars in his Republic account, which Republic
liquidated. Zahid had funded that account from
Eastern funds, and when his father got wind of
this he forced Zahid to repay the money to
Eastern and to promise never again to use
Eastern’s funds for commodities trading without

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the permission of the other partners.
The promise was not kept. In fact the trades
that Zahid began making on Eastern’s behalf after
the Republic fiasco were ten times as large as
any of the previous trades that Eastern had made.
They were very risky; in three days in March,
Eastern lost $22 million in trades at Zahid’s
direction executed by Refco. Refco was of course
aware of the sudden and substantial increase in
the scale and riskiness of Eastern’s commodities
trading and it also learned from Khawaja of
Zahid’s disastrous experience with Republic. But
as the increase in scale translated into much
larger commissions for Refco, and Eastern was a
substantial and reputable firm and Zahid its
managing partner, Refco was content.
Refco mailed Eastern daily statements of the
trading results of the previous day, and Ramada
faxed similar statements ("recaps") to Eastern.
Zahid’s partners did not read any of these
documents, however; they left everything to do
with commodities trading to Zahid. At his
request, Ramada began sending Eastern two sets of
recaps, one reflecting routine hedging
transactions and the other the new, speculative
trading by Zahid. Zahid did not show these recaps
to his partners--in fact he destroyed them. When
one of Zahid’s brothers visited Refco’s chief
operating officer, the latter didn’t tell him
about the dramatic change in the amount of
trading in Eastern’s account.
Zahid informed Refco of a change in the mailing
address of Eastern’s account and also opened a
separate account with Refco at the new address in
Eastern’s name and switched his speculative
trading to that account. He did not consult his
partners about either the change of the mailing
address or the opening of the new account. He
later opened still another account with Refco and
switched his speculative trading to that account,
again without consulting his partners. And he was
no longer trading gold and silver futures and
options. He was speculating in foreign
currencies, at one point obtaining an exposure in
British pound futures and options that exceeded
$3 billion. Refco did not inform Zahid’s partners
of any of these developments.
Beginning in May 1996, the account (Zahid’s
third Eastern account) began experiencing large
trading losses which caused it to become
undermargined; nevertheless Refco continued
executing trades in it at Zahid’s direction.
Refco also allowed him to withdraw money from the
other accounts, even though the third was now
undermargined. When finally liquidated in July of
1996, that account had a debit balance of $28

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million, which Refco, Inc., as a clearing broker,
had to make good to the people on the other side
of Eastern’s commodities trades. To eliminate the
debit, Refco Capital, without advising Eastern,
Zahid, or Khawaja, lent Eastern that amount,
which was deposited in Eastern’s account with
Refco, Inc. Although the loan was from Refco
Capital, Eastern was asked to give, and gave, a
promissory note for the amount of the loan to
Refco, Inc., which assigned the note to Refco
Capital. Eastern repaid half the borrowed amount
to Refco, Inc., not to Refco Capital, the
assignee, but refused to repay the rest, and
Refco’s counterclaim is for the remaining debit
balance. As a result of the losses, Zahid was
stripped of his partnership interest in Eastern.
So far as its own claim, that of fraud, is
concerned, Eastern argues only that the judge
should not have instructed the jury on Refco’s
defenses of ratification, estoppel, and
mitigation (the parties focus on the first of
these, and we can ignore the others, which the
parties treat as synonyms for ratification),
because there was no evidence of ratification and
so the jury was confused. Eastern is right of
course that a jury should not be instructed on a
defense for which there is so little evidentiary
support that no rational jury could accept the
defense. E.g., United States v. Perez, 86 F.3d
735, 736 (7th Cir. 1996); Aerotronics, Inc. v.
Pneumo Abex Corp., 62 F.3d 1053, 1065-66 (8th
Cir. 1995); Farrell v. Klein Tools, Inc., 866
F.2d 1294, 1297 (10th Cir. 1989). Such a defense
should be excluded from the case altogether by a
grant of partial summary judgment or by a partial
directed verdict. Letting the jury consider it is
just an invitation to jury lawlessness. But it
doesn’t follow from this that the jury’s verdict
must be set aside. The invitation isn’t always
taken. It cannot just be assumed that the jury
must have been confused and therefore that the
verdict is tainted, unreliable. It’s not as if,
here, the judge had failed to give an instruction
to which Eastern was entitled, or had given an
erroneous instruction. This is just a case of
surplusage, where the only danger is confusion,
and reversal requires a showing that the jury
probably was confused. Griffin v. United States,
502 U.S. 46 (1991); Buhrmaster v. Overnite
Transportation Co., 61 F.3d 461, 463-64 (6th Cir.
1995); Free v. Peters, 12 F.3d 700, 703 (7th Cir.
1993); Dwoskin v. Rollins, Inc., 634 F.2d 285,
292-95 (5th Cir. 1981); cf. Gile v. United
Airlines, Inc., 213 F.3d 365, 374-75 (7th Cir.
2000); McCarthy v. Pennsylvania R.R., 156 F.2d
877, 882 (7th Cir. 1946); Lattimore v. Polaroid
Corp., 99 F.3d 456, 468 (1st Cir. 1996).
Buhrmaster suggests that such an error is
harmless as a matter of law, 61 F.3d at 463-64,

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implying that there is to be no inquiry into the
likelihood that the jury was confused; that may
go too far.
It is different when, as in Sunkist Growers,
Inc. v. Winckler & Smith Citrus Products Co., 370
U.S. 19, 29-30 (1962), the jury is instructed on
an erroneous theory of liability and there is no
basis for determining whether it relied on that
theory. Since the jury is to take the law as the
judge instructs it, however erroneous the
instruction is, an erroneous theory of liability
supported by the facts is quite likely to commend
itself to the jury. The presumption is reversed
when, as in this case, the jury is instructed on
a theory (here of defense, but that is
immaterial) for which there is no evidence and
which probably, therefore, it rejected.
Eastern argues that the jury was confused. The
verdict states that Eastern first had notice of
Zahid’s fraud in July 1995, which is incorrect--
that was the date of the discovery of his fraud
against Republic Securities. But if this shows
confusion, still it is hard to see how it could
be due to the erroneous instruction, which is
about ratification rather than about notice.
Anyway, since by July 1995 all of Zahid’s trading
was in Eastern’s account in Refco, the jury may
simply have determined that by then Eastern must
(or should) have known about Zahid’s unauthorized
speculations.
We add that if Eastern had asked the district
judge to submit to the jury an interrogatory on
ratification, and the jury had checked the box
for that defense, indicating that it agreed that
Eastern had ratified the fraud committed by
Refco, Eastern would then have had a solid basis
for seeking a new trial (or further deliberations
by the jury) if indeed there was no evidence of
ratification. See Fed. R. Civ. P. 49; Abou-Khadra
v. Mahshie, 4 F.3d 1071, 1082-83 (2d Cir. 1993);
Chaney v. Falling Creek Metal Products, Inc., 906
F.2d 1304, 1308 (8th Cir. 1990); Foster v. Moore-
McCormack Lines, Inc., 131 F.2d 907, 908 (2d Cir.
1942). Eastern did not do this, and so has only
itself to blame for its inability to demonstrate
that the jury was confused by the instruction.
In any event there was enough evidence to
justify submitting a defense of ratification to
the jury after all, although actually the case
involves, as we’ll see, a mixture of consent and
ratification.
It is helpful to step back a bit and consider in
commonsensical rather than technical legal terms
the situation disclosed by the trial record.
Zahid Ashraf had speculative fever, and although

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he was speculating for the Eastern partnership
rather than on his own account (as he had been
doing through Republic Securities) he knew that
his partners would disapprove and so he took
steps with the aid of Ramada to conceal his
speculative trades from them. This was a breach
of his fiduciary duties to his partners,
Restatement of Agency (Second) sec.sec. 381, 383,
385 (1957), and hence a fraud. In re Gerard, 548
N.E.2d 1051, 1059 (Ill. 1989); Doner v. Phoenix
Joint Stock Land Bank, 45 N.E.2d 20, 24 (Ill.
1942); Conway v. Conners, 427 N.E.2d 1015, 1020
(Ill. App. 1981). True, he hoped that his
partners, members of his family, would benefit
along with himself (he would be entitled to one
fifth of the partnership’s profits from his
trading). But what he did was still fraud, just
as it is fraud to embezzle money from your
employer for the purpose of gambling at the
racetrack even though you expect to win and you
intend when you do win to return to your employer
more than you had "borrowed" from him. In other
words, deliberately imposing risk can be a breach
of fiduciary duty or a fraud. United States v.
Catalfo, 64 F.3d 1070, 1077 (7th Cir. 1995);
United States v. Schneider, 930 F.2d 555, 558
(7th Cir. 1991); United States v. Dial, 757 F.2d
163, 170 (7th Cir. 1985). More fundamentally,
motive does not equal intent; fraud, larceny,
embezzlement, and the other financial crimes and
their tort equivalents are actionable even when
the motive for the wrongful conduct is benign.
E.g., United States v. Kenrick, 221 F.3d 19, 28
(1st Cir. 2000); Reddy v. CFTC, 191 F.3d 109, 119
(2d Cir. 1999); United States v. Simpson, 950
F.2d 1519, 1524-25 (10th Cir. 1991); Buechin v.
Ogden Chrysler-Plymouth, Inc., 511 N.E.2d 1330,
1336 (Ill. App. 1987).
It appears that Zahid was aided and abetted in
his fraud by Ramada, although this is unclear and
Ramada is not a party. Eastern claims that Zahid
was also aided and abetted by Refco. We have said
that there is no tort of aiding and abetting,
Renovitch v. Kaufman, 905 F.2d 1040, 1049 (7th
Cir. 1990); Cenco, Inc. v. Seidman & Seidman, 686
F.2d 449, 452 (7th Cir. 1982), but of course
without meaning that one who aids and abets a
tort has no liability. The distinction is between
a separate tort of aiding and abetting, and
aiding and abetting as a basis for imposing tort
liability. Although a number of cases do speak of
a "tort of aiding and abetting," e.g., Hurley v.
Atlantic City Police Dept., 174 F.3d 95, 127 (3d
Cir. 1999); Rice v. Paladin Enterprises, Inc.,
128 F.3d 233, 251 (4th Cir. 1997); GCM, Inc. v.
Kentucky Central Life Ins. Co., 947 P.2d 143, 146
(N.M. 1997); Halberstam v. Welch, 705 F.2d 472,
479 (D.C. Cir. 1983), most of them also contain
language suggesting that aiding and abetting is a

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basis for imposing liability for the tort aided
and abetted rather than being a separate tort.
E.g., id. at 481; Hurley v. Atlantic City Police
Dept., supra, 174 F.3d at 126; GCM, Inc. v.
Kentucky Central Life Ins. Co., supra, 947 P.2d
at 148. That is the approach taken by the
Commodity Exchange Act and the cases interpreting
it, 7 U.S.C. sec. 25(a)(1); Damato v. Hermanson,
153 F.3d 464, 470, 473 (7th Cir. 1998); Nicholas
v. Saul Stone & Co., 2000 WL 1093319, at *4-8 (3d
Cir. Aug. 7, 2000); Tatum v. Legg Mason Wood
Walker, Inc., 83 F.3d 121, 123 n. 3 (5th Cir.
1996) (per curiam), and it is also the dominant
approach in Illinois, see, e.g., Congregation of
the Passion v. Touche Ross & Co., 636 N.E.2d 503,
508 (Ill. 1994); Freese v. Buoy, 576 N.E.2d 1176,
1182 (Ill. App. 1991); Sklan v. Smolla, 420
N.E.2d 575, 578 (Ill. App. 1981), although a
couple of cases have language (weakly) consistent
with the separate-tort idea. Carter Coal Co. v.
Human Rights Comm’n, 633 N.E.2d 202, 205 (Ill.
App. 1994); Wolf v. Liberis, 505 N.E.2d 1202,
1208 (Ill. App. 1987).
The dominant approach is also the better
approach. There is nothing to be gained by
multiplying the number of torts, and specifically
by allowing a tort of aiding and abetting a fraud
to emerge by mitosis from the tort of fraud,
since it is apparent that one who aids and abets
a fraud, in the sense of assisting the fraud and
wanting it to succeed, is himself guilty of
fraud, McClellan v. Cantrell, 217 F.3d 890, 894-
95 (7th Cir. 2000); Cenco, Inc. v. Seidman &
Seidman, supra, 686 F.2d at 452-53, in just the
same way that the criminal law treats an aider
and abettor as a principal. E.g., 18 U.S.C. sec.
2; United States v. Loscalzo, 18 F.3d 374, 383
(7th Cir. 1994); United States v. Hodge, 211 F.3d
74, 77 (3d Cir. 2000). Law should be kept as
simple as possible. One who aids and abets a
fraud is guilty of the tort of fraud (sometimes
called deceit); nothing is added by saying that
he is guilty of the tort of aiding and abetting
as well or instead.
Eastern argues that Refco knew that Zahid was
acting without authority in making these huge
speculative trades and that it turned a blind eye
because huge trades generate huge commissions. If
this is the correct description of the situation
(a big if, however), Refco was guilty of
participating in Zahid’s fraud. The point is not
that Refco failed to blow the whistle on Zahid;
there is no general duty in tort law, a variant
of a "good Samaritan" duty, to report someone
else’s fraud or other misconduct to the victim of
it, IIT v. Cornfeld, 619 F.2d 909, 927 (2d Cir.
1980); cf. Chiarella v. United States, 445 U.S.
222, 234-35 (1980); Lightning Lube, Inc. v. Witco

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Corp., 4 F.3d 1153, 1185 (3d Cir. 1993); National
Union Fire Ins. Co. v. Woodhead, 917 F.2d 752,
757 (2d Cir. 1990), any more than there is a
general duty to warn or otherwise assist a victim
or potential victim of an injury tortious or
otherwise. Gust K. Newberg Construction Co. v.
E.H. Crump & Co., 818 F.2d 1363, 1367 (7th Cir.
1987); see generally Richard A. Epstein, Torts
sec. 11.2 (1999); W. Page Keeton et al., Prosser
and Keeton on the Law of Torts sec. 56, pp. 375-
76 (5th ed. 1984). But that’s a rule about the
duty, or rather lack of duty, of a bystander. If
Refco was the paid executant of the fraud, it
could not describe itself as a bystander. Indeed,
as the agent of the partnership, Refco, if it
knew of Zahid’s unfaithful dealing with his
partners, had a duty to inform those partners.
See Rookard v. Mexicoach, 680 F.2d 1257, 1262
(9th Cir. 1982); Charlotte Aircraft Corp. v.
Purdue Airlines, Inc., 498 F.2d 152, 156 (8th
Cir. 1974); Restatement of Agency (Second) sec.
381 and comment a (1957). It could not hide
behind the customer agreement, which authorized
it to execute trades ordered by any of the
general partners, including Zahid. That was not
authorization to connive with one of the partners
to defraud the partnership.
We may assume, therefore, that Eastern made out
a prima facie case of fraud (if not, its claim
should have been dismissed before trial). It was
not a strong case, so it is unlikely that, in
finding that Refco did not in fact commit fraud,
the jury was confused by the instruction on
ratification. But in any event, as we have said
and must now explain, there was enough evidence
of ratification to justify the giving of such an
instruction, though not for two of the three
reasons given by Refco. The first is that Zahid’s
knowledge is imputed to the partnership and so
his partners necessarily approved of his
speculative trading; that is, the partnership was
doing the trading, and it couldn’t defraud
itself. This reasoning obviously is wrong, Ash v.
Georgia-Pacific Corp., 957 F.2d 432, 436 (7th
Cir. 1992); Marine Midland Bank v. John E. Russo
Produce Co., Inc., 405 N.E.2d 205, 212-13 (N.Y.
1980); Restatement of Agency, supra, sec. 282(1),
as it would provide a legal immunity for anyone
who assisted one partner to defraud another.
The second bad ground for ratification is the
carelessness of Zahid’s partners in failing to
monitor his activities, especially after the
Republic episode. Their carelessness would be a
defense had Zahid been defrauding a third party,
such as customers of Eastern, on behalf of
Eastern, as in our Cenco case, 686 F.2d at 454-
56; see also Restatement of Agency, supra,
sec.sec. 282(2)(a), (c) and comment h; cf. In re

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Bonnanzio, 91 F.3d 296, 303 (2d Cir. 1996); New
England Tank Industries of New Hampshire, Inc. v.
United States, 861 F.2d 685, 693 n. 16 (Fed. Cir.
1988); but cf. Prudential-Bache Securities, Inc.
v. Citibank, N.A., 536 N.E.2d 1118, 1125-26 (N.Y.
1989). They would then be the beneficiaries of a
successful fraud suit against Refco and would
thus be seeking to profit from a fraud that they
could have prevented had they exercised due care.
But Zahid was defrauding his partners, and
contributory negligence is not a defense to
fraud. E.g., Dexter Corp. v. Whittaker Corp., 926
F.2d 617, 620 (7th Cir. 1991); Astor Chauffeured
Limousine Co. v. Runnfeldt Investment Corp., 910
F.2d 1540, 1546 (7th Cir. 1990); Douglas County
Bank & Trust Co. v. United Financial Inc., 207
F.3d 473, 479 (8th Cir. 2000).
The good ground for a defense of ratification
(or, better, consent) here is that the
partnership, though warned of Zahid’s speculative
propensities and unilateralism by the Republic
episode, decided to leave the management of the
commodities trading side of Eastern’s business to
him. They gave him carte blanche, not only in the
terms of the customer agreement with Refco but
also in their refusal to review his transactions
or otherwise monitor or supervise, let alone
participate in, his trading activities. They
trusted him, and authorized him, to speculate
responsibly. Although in the end his speculative
trading was a flop, during much of the 18-month
period of his trading through Refco he made money
for the partnership. The partners were happy when
things were going well, and they cannot, by a
retroactive cancellation of his authority, shift
the cost when things went badly to Refco, which
in following Zahid’s directions thought it was
doing what the partnership wanted it to do. The
partners were not defrauded if they authorized
the conduct that they now denounce as fraud,
either knowing exactly what Zahid was doing or
choosing to turn a blind eye to it, e.g.,
Chauffeured Limousine Co. v. Runnfeldt Investment
Corp., supra, 910 F.2d at 1547, or if they led
Refco to believe that Zahid’s risky trades were
authorized. If the partners did not originally
authorize his speculations, they either ratified
them by failing to repudiate them upon discovery
of them, e.g., Progress Printing v. Jane Byrne
Political Committee, 601 N.E.2d 1055, 1067-68
(Ill. App. 1992); Chalet Ford, Inc. v. Red Top
Parking, Inc., 379 N.E.2d 88, 91 (Ill. App.
1978); Restatement of Agency, supra, sec. 82 and
comment b, or misled Refco into thinking they had
ratified them. If Refco was misled, it was not a
defrauder, since fraud is an intentional tort.
We turn now to Eastern’s challenge to the
counterclaim. The counterclaim resulted in an

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award of $14 million to Refco, Inc. for breach of
contract. The loan to Eastern giving rise to the
debt that precipitated the counterclaim was made
not by Refco, Inc., however, but by Refco
Capital, which was dismissed before trial on the
ground that there was no consideration for the
promissory note that Eastern had given Refco,
Inc. and the latter had assigned to Refco
Capital, furnishing the only basis for Refco
Capital’s claim. Because the customer agreement
already obligated Eastern to repay any debit in
its account with Refco, Inc., the promissory note
that Eastern gave Refco, Inc. and the latter in
turn gave Refco Capital was not supported by
consideration. That is to say, there was no fresh
consideration for it; it was just a repetition of
an already existing obligation. It is true that
the doctrine of "moral consideration" makes
enforceable, without any fresh consideration, the
promise of a debtor to pay a debt that is no
longer enforceable (maybe because the statute of
limitations has run), E. Allan Farnsworth,
Contracts sec. 2.8, pp. 56-57 (3d ed. 1999), but
Refco never mentioned the doctrine; so it was
waived and Refco Capital was out as a
counterclaimant. But that left the customer
agreement, which Refco, Inc. did not assign to
Refco Capital. That agreement, as we said,
required Eastern to make good on its debit. But,
says Eastern, there was no debit; it was erased
by the loan from Refco Capital. The loan made
Refco, Inc. whole and Refco Capital the only
creditor. And Refco Capital is no longer a party.
Questions of "veil piercing" ordinarily arise
when a creditor is trying to go after a
shareholder or affiliate of his debtor, and when
that is so the veil can be pierced and the
shareholder or affiliate reached only in
circumstances not relevant to this case. Here we
have a case in which the creditor’s affiliate
(Refco Capital is the creditor, and Refco, Inc.,
the only remaining counterclaimant, is the
affiliate) is trying to pierce the veil that
would ordinarily separate it from the creditor,
in order to defeat a defense to the creditor’s
suit--the lack of consideration for the
promissory note, which, in the absence of any
invocation of the doctrine of moral
consideration, bars Refco Capital from suing to
collect the note. There is nothing to prevent
using the concept of piercing the corporate veil
in this way to accomplish elementary justice,
however. It isn’t done very often, but there is
ample authority for doing it when appropriate.
United States v. Scherping, 187 F.3d 796, 801-04
(8th Cir. 1999); McCall Stock Farms v. United
States, 14 F.3d 1562, 1568 (Fed. Cir. 1993); Towe
Antique Ford Foundation v. IRS, 999 F.2d 1387,
1390-94 (9th Cir. 1993); Roepke v. Western
National Mutual Ins. Co., 302 N.W.2d 350, 352-53

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(Minn. 1981); Olen v. Phelps, 546 N.W.2d 176,
180-81 (Wis. App. 1996); Crum v. Krol, 425 N.E.2d
1081, 1087-89 (Ill. App. 1981); Earp v. Schmitz,
79 N.E.2d 637, 639-40 (Ill. App. 1948). The
purpose of limited liability is to encourage
investment, Frank H. Easterbrook & Daniel R.
Fischel, The Economic Structure of Corporate Law,
ch. 2 (1991), and is not engaged by the effort of
an affiliate to collect a debt nominally owed
another affiliate. Eastern inflicted a loss of
$14 million on Refco which, the jury could and
did find, the contract between Eastern and Refco
made it the obligation of Eastern to bear. The
customer agreement gave Refco, Inc. a prima facie
claim that Eastern owed it $14 million. Eastern’s
defense is that the money was paid--by Refco
Capital. To that, Refco, Inc. rebuts that Refco
Capital is as a practical matter the same entity
as Refco, Inc., and so the payment was illusory
and the defense fails. We agree.
Now it is true that for reasons having to do
with reporting requirements imposed by the
commodities exchanges, Refco did not want to
reveal the debit in Eastern’s account, and that
is why it funded it with a loan from its
affiliate, with which it has a complete identity
of interest by virtue of the fact that both Refco
corporations are wholly owned by a third
corporation. Eastern points us to nothing
indicating that what Refco did was illegal,
however, and the jury was not required to find,
and did not find, that it was a fraud against
Eastern (which argues that the infusion of cash
into the account delayed the discovery by Zahid’s
partners of his huge losses), for the jury
rejected Eastern’s claim of fraud. Why Eastern
should escape its contractual obligation because
of intercorporate transactions that have no
economic significance or relation to Eastern’s
rights escapes us.
All this rigamarole would have been avoided if
instead of arranging a loan to Eastern to cover
the deficit in Eastern’s account, Refco, Inc.,
the creditor on the account, had gone after
Eastern directly, without bringing Refco Capital
into the picture. Although the rigamarole may
have been for the disreputable purpose of fooling
the Board of Trade or the Commodity Futures
Trading Commission, we do not think an
appropriate sanction is a forfeiture of Refco,
Inc.’s valid claim and a windfall to its
defaulting customer.
The last issue concerns the attorneys’ fees that
the district court refused to award Refco,
precipitating the cross-appeal. The court refused
on the ground of waiver, the issue of attorneys’
fees not having been specified in the pretrial

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order as an issue for trial. The refusal was
error, because the issue of attorneys’ fees was
not a triable issue. The customer agreement
obligated Eastern to reimburse Refco for the cost
(including reasonable attorneys’ fees) of
collecting any unpaid debit in the account. There
was no issue of entitlement to attorneys’ fees to
submit to the jury. Compare McGuire v. Russell
Miller, Inc., 1 F.3d 1306, 1313-14 (2d Cir.
1993). Either Refco prevailed on its claim for
the unpaid debit of $14 million and was therefore
entitled to reasonable attorneys’ fees, or
Eastern prevailed and Refco therefore was
entitled to no attorneys’ fees. The issue of
attorneys’ fees (including amount) was therefore
an issue to be resolved after the trial on the
basis of the judgment entered at the trial,
Rissman v. Rissman, No. 00-2141 (7th Cir. Oct. 2,
2000); Jannotta v. Subway Sandwich Shops, Inc.,
2000 WL 1222052, at *3 (7th Cir. Aug. 29, 2000);
Capital Asset Research Corp. v. Finnegan, 216
F.3d 1268 (11th Cir. 2000) (per curiam); Ideal
Electronic Security Co. v. International Fidelity
Ins. Co., 129 F.3d 143, 150 (D.C. Cir. 1997),
just as in cases in which statutory rather than
contractual entitlements to attorneys’ fees are
involved. E.g., Hensley v. Eckerhart, 461 U.S.
424, 433 and n. 7 (1983); Hamilton v. Daley, 777
F.2d 1207, 1212 (7th Cir. 1985); MidAmerica
Federal Savings & Loan Ass’n v. Shearson/American
Express, Inc., 962 F.2d 1470, 1475 (10th Cir.
1992).
The judgment against Eastern on the main claim
and in favor of Refco, Inc. on the counterclaim
is affirmed, but the denial of attorneys’ fees is
reversed with directions to the district court to
award Refco its attorneys’ fees in accordance
with the terms of the customer agreement.
Affirmed in Part, Reversed in Part,
and Remanded with Directions.

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