In re First Interregional Equity Corp.
| Decision Date | 30 November 1998 |
| Docket Number | Bankruptcy No. 97-02165 (SIPA)(RG). |
| Parties | In re FIRST INTERREGIONAL EQUITY CORPORATION, Debtor. |
| Court | U.S. Bankruptcy Court — District of New Jersey |
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Rabinowitz, Trenk, Lubetkin & Tully, P.C. by Jonathon I. Rabinowitz, West Orange, NJ, for Thomas Hessert, Marilyn Hessert, TJH Investment Corporation and TJ Hessert Construction Salaried Employees Trust.
Sills Cummis Zuckerman Radin, Tischman Epstein & Gross, P.A. by Jack M. Zackin and Eric W. Sleeper, Newark, NJ, for Harrison J. Goldin, Chapter 11 Trustee of First Interregional Advisors Corp.
Cole, Schotz, Meisel, Forman & Leonard, P.C. by Stuart Komrower, Hackensack, NJ, for Official Committee of Unsecured Creditors of First Interregional Advisors Corporation.
McCarter & English, L.L.P. by Hayden Smith, Jr., Newark, NJ, for Richard W. Hill, SIPA Trustee for First Interregional Equity Corporation.
Securities Investor Protection Corporation by William M. Seckinger, Washington, DC, for Securities Investor Protection Corporation.
Presently before this Court is the motion of Thomas Hessert, Marilyn Hessert, TJH Investment Corporation and TJ Hessert Construction Salaried Employees Trust (the "Hesserts" or Proposed Class Plaintiffs) seeking approval of a Class Proof of Claim and Certification of the Class action pursuant to Bankruptcy Rules 7023 and 9014 and F.R.C.P. 23. The Chapter 11 Trustee for First Interregional Advisors Corp. ("FIAC") and the Official Committee of Unsecured Creditors for FIAC have joined in support of the motion to approve the propriety of a class claim and to certify the putative class in the First Interregional Equity Corp. ("FIEC") liquidation. According to the Verified Statement of the Proposed Class representatives, each claim of each member of the putative class arises from a transaction whereby each member purchased interests in lease(s) with government entities and/or municipalities for office equipment and/or vehicles purportedly from FIAC. The Proposed Class Representatives assert that each member of the proposed class is a customer of FIEC with claims for cash and/or securities and should be entitled to the protection of SIPA. Movants argue that a Class Proof of Claim is appropriate in the instant matter as over two thousand (2000) creditors of FIAC, with possible claims not only against the FIAC estate but also potentially the SIPA liquidation proceedings of FIEC, have been identified. Movants offer that the Chapter 11 Trustee for FIAC has received responses to an informal questionnaire to all of FIAC's known potential creditors. Arthur Andersen, the Chapter 11 Trustee's accountants and financial advisor, has reviewed, correlated and prepared summaries of the questionnaire responses. (See Affidavit of Brian T. Moore). These responding creditors, numbering approximately thirteen hundred (1300) have claims totaling in excess of $108 million with individual claims ranging from amounts from less than $1,000 to in excess of $1,000,000. Based solely on these questionnaires, movants assert that it appears that approximately 97% of all investors responding have claims below $500,000 (the limit for claims for securities under SIPA), approximately 18% have claims between $100,000 and $500,000 and approximately 79% have claims below $100,000 (the limit for claims for cash under SIPA). Under SIPA, SIPC may advance to a SIPA trustee in order to satisfy net equity claims of customers not more than $500,000 per customer, of which no more than $100,000 may be used to satisfy that portion of the claims which is for cash rather than securities. 15 U.S.C. § 78fff-3(a).
Movants continue that certification of the Class is equally appropriate as the proposed class satisfies the requirements of Federal Rule of Civil Procedure 23, made applicable to a bankruptcy proceeding pursuant to Federal Bankruptcy Rule 7023. Movants assert that the prerequisites to a class action outlined in Rule 23(a) are satisfied as joinder of all members of the proposed class is impracticable, there are issues of law and fact common to class members, the claims of the Proposed Class Plaintiffs are typical of the Claims of the Class, and that the Proposed Class Plaintiffs will fairly and adequately protect the interests of the Class members. Further, that the proposed Class satisfies the predominance and superiority requirements of Rule 23(b).
In response, the SIPA Trustee for First Interregional Equity Corporation ("FIEC") argues that the Third Circuit has not approved the use of Class Proofs of Claim. Further, since all lease investors have been identified and provided with claim forms, and the SIPA Trustee has received responses from approximately 1500 FIAC lease investors seeking protection as customers in the FIEC SIPA liquidation proceeding, no need exists for the certification of a class of lease investors seeking customer status.
The SIPA Trustee asserts that more than 5000 claims have been filed against the SIPA Trustee asserting customer status, of which approximately 1500 constitute or contain claims based upon the purchase of leases or lease assignments. (See Affidavit of Richard Hayes, ¶ 2). On or about September 30, 1997, representatives of the SIPA Trustee forwarded to all lease investors a lease questionnaire. To date, the SIPA Trustee has received approximately 1300 lease questionnaires preliminarily reviewed by Deloitte & Touche. (See Affidavit of Marlo Karp). According to the SIPA Trustee, of that group approximately forty percent (40%) of the lease questionnaires do not refer to any purchase of bonds, stocks, mutual funds or limited partnership interests from FIEC and appear to have been submitted by lease investors who only purchased leases or lease assignments from FIAC. (See Karp Affidavit at ¶ 4). While Deloitte & Touche have not completed its review, the SIPA Trustee asserts that it would appear that a sizeable percentage of lease investors never purchased securities from FIEC and only purchased leases or lease assignments from FIAC.
Alternatively, the SIPA Trustee asserts that a Class Proof of Claim is procedurally defective as it was not certified prior to the inception of the SIPA proceeding and the SIPA Trustee afforded adequate notice to investors of the Claims bar date. Finally, the SIPA Trustee maintains that the proposed Class Plaintiffs fail to meet the requirements of F.R.C.P. 23(a) and (b).
Initially, General Counsel for the Securities Investors Protection Corporation ("SIPC") objects to certification of the Class Proof of Claim on the basis that class action procedures and a class claim are in direct contravention to the specific procedures set forth in SIPA. Alternative, similarly to the SIPA Trustee, SIPC argues that class certification would serve no useful purpose, will unnecessarily increase the costs of this case and that the proposed Class Action Plaintiffs are inappropriate representatives of a class seeking "customer" status with FIEC on account of the purchase of Lease Assignments.
The Court heard oral argument on June 22, 1998. This Opinion follows.
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). The within opinion constitutes this Court's findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.
FIEC was a registered broker-dealer engaged primarily in the retail sale of securities and the sale of fixed-income investment products, including municipal bonds. FIEC was a member of the Securities Investor Protection Corporation. FIEC later became involved in the sale of personal property in which municipal governmental entities were the lessees. Initially, FIEC purchased leases from "brokers" and sold assignments to those leases to the public. The leasing companies which acted as brokers to FIEC would service the leases and collect payments on behalf of FIEC which, in turn, would forward the income stream from the leases to its investors.
First Interregional Advisors Corporation ("FIAC") was originally a subsidiary of FIEC created in 1992 to handle the leasing aspects of FIEC's business. Eventually, based upon regulatory concerns and the growth of the leasing operations, FIAC was spun off into a separate corporation. FIAC was not a registered broker-dealer nor was FIAC a member of SIPC.
FIAC would enter into master financing agreements and/or master lease agreements with manufacturers or dealers of office equipment and automobiles. Pursuant to these master agreements, FIAC and the manufacturer or dealer agreed that FIAC could acquire the leases or similar financial instruments. If FIAC subsequently acquired a lease, FIAC would pay the manufacturer or dealer a lump sum in exchange for title to the leased equipment or vehicle and the stream of income due under the lease or instrument.
Following its acquisition of the leases, FIAC would purport to "sell" or "assign" the leases to investors such as the Hesserts. The "sales" or "assignments" to investors were documented by confirmation slips and lease assignment documents generated by FIAC and, in the case of the assignment documents, executed by the investors and returned to FIAC. Once the investor paid FIAC, the investor would receive an executed "lease assignment" document.
On March 5, 1997, FIAC filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code (the "Code") in the United States Bankruptcy Court for the District Of New Jersey.
As of the date FIAC filed its Chapter 11 petition, there were approximately 2000 investors who purchased what they believed to be interest in leases...
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