In re First Interregional Equity Corp.

• Decision Date: 19 February 2003
• Docket Number: Adversary No. 97-02165(SIPA)(RG).
• Citation: 290 B.R. 265
• Parties: In re FIRST INTERREGIONAL EQUITY CORPORATION, Debtor.
• Court: U.S. Bankruptcy Court — District of New Jersey

290 B.R. 265

In re FIRST INTERREGIONAL EQUITY CORPORATION, Debtor.

Adversary No. 97-02165(SIPA)(RG).

United States Bankruptcy Court, D. New Jersey.

February 19, 2003.

COPYRIGHT MATERIAL OMITTED

McCarter & English, by Hayden Smith, Jr., Esq., Newark, NJ, for Richard W. Hill, Esq., SIPA Trustee for First Interregional Equity Corporation.

Bonnie P. Josephs, Esq., New York City, Claimant Appearing Pro Se.

Stephen P. Harbeck, Esq., General Counsel, Securities Investor Protection Corporation, by Josephine Wang, Esq., Senior Associate General Counsel, Washington, DC, for Securities Investor Protection Corporation (SIPC).

OPINION

ROSEMARY GAMBARDELLA, Chief Judge.

Presently before the Court is a Motion of Richard W. Hill, Esq., SIPA Trustee, for First Interregional Equity Corporation to Affirm the Trustee's Claim Determination on a claim filed by Bonnie P. Josephs. Ms. Josephs has filed Objections to the Trustee's Determination of Claim. The Securities Investor Protection Corporation (SIPC) has filed a Memorandum in Support of the SIPA Trustee's Motion. This Court conducted a hearing on the matter on April 20, 2001. The following constitutes this Court's findings of fact and conclusions of law.

FACTUAL BACKGROUND AND PROCEDURAL HISTORY

This matter stems from a liquidation proceeding pursuant to the Securities Investor Protection Act of 1970 ("SIPA"). On March 6, 1997, the Securities and Exchange Commission (SEC) filed a Complaint in the United States District Court for the District of New Jersey against FIEC, First Interregional Advisors Inc. and Richard Goettlich, alleging inter alia, that the defendants participated in a massive fraudulent "Ponzi" scheme. This liquidation proceeding commenced on March 10, 1997 when, following the filing by the Securities Investor Protection Corporation (SIPC) of an Order to Show Cause, the Honorable Maryanne Trump Barry, U.S.D.J. for the District of New Jersey, entered an Order adjudicating that the customers of First Interregional Equity Corporation ("FIEC") were in need of the protection afforded by the Securities Investors Protection Act (SIPA). On the same day, Richard W. Hill, Esq. was appointed Trustee ("Trustee") for the liquidation of FIEC and the matter was removed to this Court commencing Adversary Proceeding 97-02165, SIPC v. First Interregional Equity Corp., et al. See 15 U.S.C. § 78eee(b)(4).

Under SIPA, the Debtor's customers, upon notice, must file timely written statements of claims with the Trustee, but in most cases, need not file a formal proof of claim. See 15 U.S.C. § 78fff-2(b). Subsequently, the Trustee discharges the debtor's obligations to customers who have cash, securities or net equity claims. These obligations must be evidenced on the debtor's books and records of the Debtor or in some method satisfactory to the Trustee. See 15 U.S.C. § 78fff-4(e).

Pursuant to this Court's Order issued on May 19, 1997, the Trustee published notice of the FIEC's liquidation and mailed notice and claims forms to all customers and creditors listed in FIEC's books and records. Bonnie Josephs ("Claimant" or "Josephs") timely filed a "Customer Claim" on June 26, 1997 for the following securities other than leases claimed to be securities:

                Security                                              Percent
                No.       Name                     Amount             Due        Due Date
                # 1       Port Authority of NY/NJ  $100,000.00        6.75%      10/01/2019
                # 2       NYS Dorm Authority       $115,000.00        5.50%      07/01/2014
                # 3       Port Authority NY/NJ     $100,000.00
                # 4       NYC B/E                  $175,000.00        6.00%      10/15/2026
                # 5       NYC                      $125,000.00        7.40%      02/01/2006
                # 6       NYC                      $100,000.001  6.25%      04/15/20072
                

See Certification of Eduardo J. Glas, Esq., Exh. A ("Glas Certification, Exh. ___").

Additionally, Ms. Josephs claimed a credit balance of $185,000.00 for certain Urban Development Corporation (UDC) bonds that FIEC allegedly called and redeemed. The $185,000 credit balance consists of $175,000 for cash that was to be used to purchase the NYC B/E Bonds and $10,000 for a called Puerto Rico Bond, I.M.E.P.C. 10.500% due 6/01/10.

By a "Notice of Trustee's Determination of Claim" dated December 3, 1999, the Trustee only allowed Ms. Josephs' claim for Security # 1, and disallowed her other claims. Regarding Security # 2, FIEC's records indicate that Ms. Josephs only made a partial payment of $64,874.09 for the bonds. Ms. Josephs admits to an outstanding balance of $49,570.91 on Security # 2. Ms. Josephs asserts that she is willing to pay the balance due or set off the amount against her other claims in this matter for delivery of the bonds. The Trustee disallowed the claim for Security # 3 because it duplicated the Security # 1 claim. Ms. Josephs does not dispute the Trustee's determination regarding Securities # 1 and # 3.

At issue are Ms. Josephs claims regarding Securities # 2, # 4, # 5, # 6, and the credit balance. The Trustee disallowed Securities # 4, # 5, and # 6 because FIEC's books and records do not indicate that, as of March 6, 1997, the claimed securities were registered in any FIEC account maintained in Ms. Josephs' name. The second basis on which the Trustee disallowed the claims for Securities # 4, # 5, and # 6 was his determination that Ms. Josephs loaned the Securities to FIEC. Loans of securities do not qualify as "Customer Claims" as that term is defined by SIPA. The Trustee disallowed the claim for the credit balance of $185,000.00 on the basis that it was not reflected in FIEC's books and records, and the securities were loaned by Ms. Josephs to FIEC and so do not qualify as "customer claims", and at least $175,000 of the cash claim was a duplicate of the claim for Security # 4.³ Additionally, the Trustee determined that FIEC loaned in the amount of $150,000.00 plus interest at the prime rate to Josephs on December 13, 1993. Ms. Josephs admits that FIEC loaned her $150,000 and that the sum remains to be paid, but that this sum may be set off against her recovery in this matter. The Trustee has reserved all rights of set-off and collection to recover this debt plus interest from Ms. Josephs.

In the case at bar, the Trustee asks this Court to affirm his determination that Ms. Josephs was not a "customer" of FIEC as that term is defined under SIPA, because she lent securities to FIEC in return for interest payments higher than the coupon interest rate and his subsequent determination of her claims. The Securities Investor Protection Corporation ("SIPC") supports the Trustee's argument. Ms. Josephs argued that she maintained a customer/broker relationship with FIEC for many years, and specifically that she gave FIEC physical custody of the securities at issue for "safekeeping" rather than "lending" purposes.

Ms. Josephs argues that FIEC redeemed $175,000.00 worth of Urban Development Corporation bonds and deposited the cash in her reserve account in February 1997 (Account 500-71-162), Exh. 7. She alleges that she directed FIEC to purchase the bonds listed above as Security # 4 with this money. Ms. Josephs states that because FIEC's records do not reflect the purchase or registration of $175,000.00 worth of NYC B/E bonds on her behalf, her claim for Security # 4 is really a cash claim for monies deposited in her reserve account. Ms. Josephs testified that at that time, she anticipated that FIEC would continue to pay her an additional four percent (4%) interest with respect to the new bonds as with previously purchased bonds. (Tr. at 89). Ms. Josephs further argues her reserve account balance should reflect $10,000.00 for a Puerto Rico Bond (I.M.E.P.C. 10.500% due 6/01/10) which FIEC called and redeemed in 1993.

This Court conducted a hearing on April 20, 2001. At that time Ms. Josephs asserted an additional claim for $35,000.00 of Municipal Assistance Corporation Bonds ("MAC Bonds"), arguing their initial omission from her written statement of claims resulted from FIEC's failure to list the MAC Bonds in any report provided to the Claimant, with the exception of a single listing in a 1989 report. Ms. Josephs asserts she first became aware of the MAC Bonds in the pre-trial discovery leading up the April 20, 2001 hearing. Ms. Josephs argues the $35,000.00 MAC Bonds are directly related to other items in her claim and do not present any new issues of fact or law. Ms. Josephs further argues the additional sum of $35,000.00 places no undue burden on the parties. The Trustee objects to the assertion of the claim as untimely. The Trustee further asserts that the claim, if allowed, does not qualify as a customer claim based on the same asserted lending relationship between the parties. SIPC objects, arguing Ms. Josephs' late assertion raises the issue of whether, in the context of a SIPA proceeding where the original claim is timely filed, a claim may be amended after the claims bar date. SIPC further argues Claimant's request is a new claim that is time barred by statute. Alternatively, SIPC argues that even if this claim is deemed an amendment, there is no basis to allow it on equitable grounds.

JURISDICTION

The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and the Standing Order of Reference by the United States District Court of New Jersey dated July 23, 1984. The issues raised by this contested matter are core proceedings as defined by Congress in 28 U.S.C. § 157(b)(2)(A), (B), (K) and (O).

1. Bonnie Josephs' Relationship with FIEC.

Ms. Josephs is an experienced attorney of over thirty years, with her own general practice concentrating primarily in the area of family law and related fields. (Transcript of April 20, 2001 at 38) ("Tr. at ___"). In the early 1970's, Ms. Josephs' mother Helen Josephs, a successful businesswoman, began investing in tax-free, municipal bearer bonds under the advice of her broker, Herbert N. Goettlich. (Tr. at...