In re Adler Coleman Clearing Corp.

• Decision Date: 08 May 1996
• Docket Number: Bankruptcy No. 95-08203.
• Citation: 195 BR 266
• Parties: In re ADLER COLEMAN CLEARING CORP., Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

195 B.R. 266 (1996)

In re ADLER COLEMAN CLEARING CORP., Debtor.

Bankruptcy No. 95-08203.

United States Bankruptcy Court, S.D. New York.

May 8, 1996.

COPYRIGHT MATERIAL OMITTED

Cleary, Gottlieb, Steen & Hamilton, New York City, for SIPC Trustee.

Kenneth J. Caputo, Washington, DC, for Securities Investor Protection Corporation.

MEMORANDUM DECISION ON TRUSTEE'S MOTION FOR ORDER UPHOLDING TRUSTEE'S DETERMINATIONS DENYING CERTAIN CUSTOMER CLAIMS FOR MARKET LOSSES AND EXPUNGING OBJECTIONS WITH RESPECT TO THOSE DETERMINATIONS AND ON TRUSTEE'S MOTION FOR ORDER UPHOLDING TRUSTEE'S DETERMINATIONS DENYING CERTAIN CUSTOMER CLAIMS FOR LOSSES DUE TO ALLEGED FAILURE TO EXECUTE CUSTOMER ORDERS AND EXPUNGING OBJECTIONS WITH RESPECT TO THOSE DETERMINATIONS

JAMES L. GARRITY, Jr., Bankruptcy Judge.

In this Securities Investor Protection Act ("SIPA") liquidation proceeding, and in accordance with the procedures established by our March 10, 1995 order (the "March Order"), Edwin B. Mishkin, Esq., as Trustee ("Trustee") for the liquidation of Adler, Coleman Clearing Corp. ("debtor"), denied alleged preferred SIPA claims filed by the Market Loss and Failure To Sell Claimants (as those terms are defined below). Certain of those claimants objected to these determinations and by separate motions the Trustee seeks orders upholding his findings and expunging those objections. Several customers oppose the motions and the Securities Investor Protection Corp. ("SIPC") supports them. For the reasons stated herein, the motions are granted.¹

Background

Congress enacted SIPA in response to customer losses that resulted from the failure of broker-dealers in 1969 and 1970. Matter of Bevill, Bresler & Schulman, Inc., 83 B.R. 880, 886 (D.N.J.1988). In doing so, it sought to restore investor confidence in the securities markets and avoid a domino effect involving solvent brokers that had substantial open transactions with firms that had failed. SIPC v. Barbour, 421 U.S. 412, 415, 95 S.Ct. 1733, 1736, 44 L.Ed.2d 263 (1975); Barton v. SIPC, 182 B.R. 981, 984 (Bankr.D.N.J.1995). Thus, SIPA is intended:

to protect individual investors from financial hardship; to insulate the economy from the disruption which can follow the failure of major financial institutions; and to achieve a general upgrading of financial responsibility requirements of brokers and dealers to eliminate, to the maximum extent possible, the risks which lead to customer loss.

S.Rep. No. 1218, 91st Cong., 2d Sess. at 4 (1970). In this respect, the protection offered customers under SIPA is akin to that provided to bank depositors by the Federal Deposit Insurance Corporation. Barton v. SIPC, 182 B.R. at 984 (citing SEC v. Aberdeen Securities Co., Inc., 480 F.2d 1121, 1123 (3d Cir.), cert. denied sub nom. Seligsohn v. SEC, 414 U.S. 1111, 94 S.Ct. 841, 38 L.Ed.2d 738 (1973)); In re MV Securities, Inc., 48 B.R. 156, 160 (Bankr.S.D.N.Y.1985) (quoting SEC v. S.J. Salmon & Co., Inc., 375 F.Supp. 867, 871 (S.D.N.Y.1974)).

SIPC is a non-profit corporation whose members include most interstate broker-dealers. SIPA establishes SIPC and, among other things, sets forth the procedures for liquidating financially troubled SIPC members. A broker or dealer automatically becomes a member of SIPC upon registration as a broker or dealer with the Securities and Exchange Commission ("SEC") under § 15(b) of the Securities Exchange Act of 1934. See 15 U.S.C. § 78ccc(a)(2)(A). SIPC initiates a SIPA liquidation by filing an application for a customer protective decree in federal district court. 15 U.S.C. § 78eee(a)(3).

SIPA protects customers of registered broker-dealers who have entrusted those broker-dealers with cash or securities in the ordinary course of business. Matter of Oberweis Securities, Inc., 135 B.R. 842, 845 (Bankr.N.D.Ill.1991). For these purposes, a "customer" is

any person . . . who has a claim on account of securities received, acquired, or held by the debtor in the ordinary course of is business as a broker or dealer from or for the securities accounts of such person for safekeeping, with collateral security, or for purposes of effecting a transfer. The term `customer\' includes any person who has a claim against the debtor arising out of sales or conversions of such securities, an any person who has deposited cash with the debtor for the purpose of purchasing securities. . . .

15 U.S.C. § 78lll(2). See In re Omni Mutual, Inc., 193 B.R. 678, 681 (S.D.N.Y.1996). Notwithstanding the special protection afforded customers under SIPA, a SIPA liquidation is essentially a bankruptcy liquidation tailored to achieve the special purposes of SIPA. See 15 U.S.C. § 78fff(b) (to the extent consistent with SIPA, a liquidation "shall be conducted in accordance with, and as though it were being conducted under chapters 1, 3 and 5 and subchapters I and II of chapter 7 of the Bankruptcy Code"). See also SIPC v. Ambassador Church Finance/Development Group, Inc., 788 F.2d 1208, 1210 (6th Cir.) (district court erred in its award of post-petition interest to customers for period during which SIPC withheld funds while unsuccessfully challenging their status as customers; SIPA liquidation akin to proceeding under chapters 1, 3, 5 and subchapters I and II of chapter 7 of the Code and under bankruptcy law a court cannot award post-petition interest against the debtor's estate absent a surplus), cert. denied sub nom. Pine Street Baptist Church v. SIPC, 479 U.S. 850, 107 S.Ct. 177, 93 L.Ed.2d 113 (1986); Matter of Bevill, Bresler & Schulman, Inc., 83 B.R. at 886 (SIPA liquidation akin to proceeding under chapters 1, 3, 5 and subchapters I and II of chapter 7 of the Code). Thus, SIPA liquidations generally involve customer claims and claims of general unsecured creditors, which are satisfied out of a customer estate and general estate, respectively. The customer estate — which is not available to satisfy the claims of general unsecured creditors — is a fund consisting of customer-related assets. See 15 U.S.C. § 78lll(4). It is distributed pro-rata among customers. See 15 U.S.C. § 78fff-2(c)(1).

A SIPA trustee discharges a debtor's obligations to customers to the extent that they may be determined to the trustee's satisfaction from the debtor's books and records. 15 U.S.C. § 78fff-2(b). SIPC advances funds to the trustee — limited to $500,000 per customer of which no more than $100,000 may be based on a customer claim to cash, as opposed to securities — as necessary to enable him to satisfy customer claims, within the limits of SIPA protection, and becomes subrogated to customer claims paid to the extent of advances. See 15 U.S.C. §§ 78fff-3(a), 78fff-2(c)(1), 78lll(11). See also Matter of Oberweis Securities, Inc., 135 B.R. at 845 (SIPC only advances funds to the extent that the broker's assets are insufficient to satisfy obligations to clients; SIPC's exposure is limited to allowable SIPA claims up to $500,000 per customer of which no more than $100,000 may represent reimbursement of cash); In re MV Securities, Inc., 48 B.R. at 159 (same). Those advances are repaid from funds in the general estate prior to payment on account of general unsecured claims. 15 U.S.C. § 78fff-3(a).

The value of a customer's account, or its "net equity", is the measure of the preferred SIPA customer claim. "Net equity" is the dollar amount of the customer's account or accounts, to be determined by —

(A) calculating the sum which would have been owed by the debtor to such customer if the debtor had liquidated, by sale or purchase on the filing date, all securities positions of such customer (other than customer name securities reclaimed by such customer); minus

(B) any indebtedness of such customer to the debtor on the filing date; plus

(C) any payment by such customer of such indebtedness to the debtor which is made with the approval of the trustee and within such period as the trustee may determine (but in no event more than sixty days after the publication of notice under section 78fff-2(a) of this title). . . .

15 U.S.C. § 78lll(11). A customer's account is valued as of the date the SIPA liquidation is commenced. 15 U.S.C. § 78fff-2(b). See, e.g., SIPC v. Vigman, 803 F.2d 1513, 1516 (9th Cir.1986) (claimant's net equity equivalent to amount that broker would have owed claimant had it liquidated holdings on the date SIPC filed protective decree, less outstanding debt owed by claimant to debtor). See also SEC v. Aberdeen Securities Co., Inc., 480 F.2d at 1123-24 (SIPA customer account valued as of the filing date); Matter of Atkeison, 446 F.Supp. 844, 847 (M.D.Tenn. 1977) (in determining what securities are owed to customer, trustee must examine books and records of debtor as of filing date); Matter of Bevill, Bresler & Schulman, Inc., 83 B.R. at 892 ("When distributing securities to customers in satisfaction of net equity claims, `all securities shall be valued as of the close of business on the filing date.'") (quoting 15 U.S.C. § 78fff-2(b)). For these purposes, "accounts held by a customer in separate capacities shall be deemed to be accounts of separate customers." 15 U.S.C. § 78lll (11).

Facts

On February 27, 1995 (the "Filing Date"), the Honorable Loretta A. Preska, United States District Court, Southern District of New York, entered an order pursuant to the provisions of SIPA § 5(b) appointing the Trustee for liquidation of the debtor's business and removing the liquidation proceedings to this court. Debtor was a member of SIPC and a broker-dealer registered with the Securities and Exchange Commission ("SEC"). It acted primarily as a clearing firm serving approximately 42 introducing firms on a fully disclosed basis and handled approximately 61,000 active customer accounts. As of the Filing Date, those accounts were frozen and the customers could not trade in, or otherwise access, their accounts. Between March 18 and April 26, 1995, the Trustee transferred all but approximately 1,500 customer accounts to third pa...