In re Griffin Trading Co.
| Decision Date | 25 February 2000 |
| Docket Number | Bankruptcy No. 98 B 41742. |
| Parties | In re GRIFFIN TRADING COMPANY, Debtor. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois |
COPYRIGHT MATERIAL OMITTED
David N. Missner, Janice L. Duban, Piper, Marbury, Rudnick & Wolfe, Chicago, IL, for Movant.
Bryan Krakuer, Anne Marie Bredin, Sidley & Austin, Chicago, IL, for Respondent.
Catherine Steege, Jenner & Block, Chicago, IL, for Walsh Claimants.
R. Scott Alsterda, Robert H. Griffith, Ungaretti & Harris, Chicago, IL, for MDNH & Engmann Options.
Glynn L. Mays, Senior Assistant General Counsel, Office of General Counsel, Washington, DC, for CFTC.
This matter comes before the Court on the motion of the Trustee (the "Trustee") of the Estate of Griffin Trading Company ("Griffin"), a bankrupt commodities broker incorporated under Delaware law. Griffin's principal place of business was in Chicago, Illinois, but Griffin also had an established branch in London, England.
Because there is a shortfall in certain of Griffin's customers' accounts, the Trustee seeks authority to use all estate assets to pay the claims of Griffin's customers (the "Customer Claims") in full, in priority to all other unsecured creditors, pursuant to the provisions of Subchapter IV of Chapter 7 of the United States Bankruptcy Code, 11 U.S.C. § 101 et seq., the Commodities Exchange Act (the "CEA"), 7 U.S.C. § 1 et seq., and the rules and regulations of the Commodity Futures Trading Commission (the "CFTC"), 17 C.F.R. § 1.1 et seq. The CFTC supports the Trustee's position. The Customer Claims all arose through trading activities carried out, if not ordered, in Griffin's London office (the "London Office"). If the Trustee's motion is granted, all estate assets will be used to pay the Customer Claims; there will be no assets available for distribution to Griffin's general creditors.
One general (i.e., non-customer) creditor, MeesPierson N.V. ("MeesPierson"), has objected to the motion on two grounds. First, MeesPierson objects to the Trustee's choice of law, arguing that English, and not United States, bankruptcy law should apply to the distribution of estate assets to customers whose claims all arose as a result of trades executed in London. Secondly, MeesPierson asserts that even if U.S. law applies to the distribution of Griffin's assets, the CFTC has exceeded its statutory authority to regulate commodity broker bankruptcies, granted in 7 U.S.C. § 24.
Under U.S. law, which the Trustee seeks to apply, customer property comes under the trustee's control, see 11 U.S.C. § 761(10), 11 U.S.C. § 766. Customers receive the highest priority, subject only to payment of certain administrative expenses, 11 U.S.C. § 766(h), in the distribution of segregated customer accounts and other property that is "customer property," a term defined in the Code, 11 U.S.C. § 761(10), and in the CFTC Regulations, 17 C.F.R. § 190.08. The CFTC's definition is considerably broader than the Code's definition and the parties disagree about which one should apply.
Under either definition, only after the administrative expenses and customer claims have been paid in full would "customer property" be available to pay other creditors of the estate. 11 U.S.C. § 766(j)(1). Congress, in drafting § 766(j)(1), admitted that an excess of customer property would be an "unlikely event," H.R.REP. No. 95-595, at 393 (1977) reprinted in 1978 U.S.C.C.A.N. 5963, 6349 or a "rare case," 124 CONG. REC. H11099 (daily ed. Sept. 28, 1978); S 17416 (daily ed. Oct. 6, 1978) (statements of Rep. Edwards and Sen. DeConcini).
In the far more likely event that there are insufficient funds in customer accounts to pay customer claims in full, the Bankruptcy Code provides that "if a customer is not paid the full amount of such customer's net equity claim from customer property, the unpaid portion of such claim is a claim entitled to distribution under section 726 of this title." 11 U.S.C. § 766(j)(2). Section 726 of the Bankruptcy Code sets forth the scheme for distribution of the debtor's assets to unsecured creditors. However, the CFTC has expanded the Code's definition of "customer property." It has provided by regulation that when there is a shortfall in customer property as defined by the Code ("Code Customer Property"), virtually all estate property is to be treated as customer property, thus giving the customers first priority in its distribution, until all customer claims have been paid in full. 17 C.F.R. § 190.08(a)(1)(ii)(J). In this case, the shortfall in customer property exceeds the total amount available for distribution. If U.S. law applies, the customers would receive everything and the general unsecured creditors would receive nothing.
Under English law, customer property in segregated accounts never becomes part of the bankruptcy estate, but remains segregated to the customers to the extent that those accounts are actually funded. However, if there is a shortfall in those accounts, the injured customer is treated as a general unsecured creditor as to the shortfall. Thus, under English law, the customers and MeesPierson would share in a pro rata distribution of estate property. MeesPierson's $4.7 million dollar claim is by far the largest claim against the estate. If English law applies, the customers would receive a substantially smaller distribution on their claims, but MeesPierson might receive as much as half of its claim.
In the alternative to its choice of law argument, MeesPierson argues that the CFTC's definition of "customer property," 17 C.F.R. § 190.08, impermissibly alters and expands the definition of "customer property" provided in the Bankruptcy Code at 11 U.S.C. § 761(10). MeesPierson further argues that the CFTC's definition of "customer property" renders meaningless § 766(j)(2) of the Bankruptcy Code, which provides that customer claims not paid out of customer property are claims entitled to distribution only as general unsecured claims. 11 U.S.C. §§ 766(j)(2), 726, 510, 502. It should be noted that except for the provisions of 17 C.F.R. § 190.08(a)(1)(ii)(J) (the "Challenged Regulation"), English and U.S. laws governing the distribution of assets in the event of a shortfall in customer property are functionally equivalent.
For the reasons expressed in the following opinion, the Court concludes that U.S. law is the applicable law in this case. The Court further concludes that the CFTC exceeded its statutory grant of rulemaking authority and that the provisions of 17 C.F.R. § 190.08(a)(1)(ii)(J) are invalid. Pursuant to the provisions of Subchapter IV of Chapter 7 of the Bankruptcy Code, any shortfall in customer property as defined in that Subchapter must be treated as a general unsecured claim. The Trustee's Motion to Use Estate Assets to Pay Customer Claims in Full is accordingly denied.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 157(b) and 28 U.S.C. § 1334. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (O). Venue lies under 28 U.S.C. § 1409.
Griffin was what is known in the U.S. as a "futures commission merchant" ("FCM") and in the United Kingdom ("U.K.") as a "futures broker." The Commodities Exchange Act defines an FCM as:
7 U.S.C. § 1a(12). In the U.S., Griffin's trading activities were regulated by the CFTC. In the U.K., Griffin's trading activities were regulated by the Securities and Futures Authority ("SFA").
A "future" or "futures contract" is:
an agreement to purchase or sell a commodity for delivery in the future: (1) at a price that is determined at initiation of the contract; (2) which obligates each party to the contract to fulfill the contract at the specified price; (3) which is used to assume or shift price risk; and (4) which may be satisfied for delivery or offset.
Commodity Futures Trading Commission, The CFTC Glossary: A Layman's Guide to the Language of the Futures Industry . Futures transactions are highly leveraged and very risky. Commodity Futures Trading Commission, Futures and Options-What You Should Know Before You Trade .
An individual may not trade directly on a commodities exchange unless he or she is a member of that exchange. Further, anyone executing trades in the U.S. must be registered with the CFTC as a floor trader. 7 U.S.C. § 6e. Individuals who want to trade commodities must do so through a "broker" as the broker's "customers." A "broker" is a person or entity paid a fee or commission for executing buy and sell orders for a customer. CFTC Glossary . The term "broker" may refer to "floor brokers," who actually execute trades on an exchange floor, "account executives," who are the in-office contacts for customers of FCMs, and FCMs themselves. Id.
When a customer places an order with the broker, the broker executes the trade by forming a contract with another exchange member on the appropriate exchange. The buying member and the selling member then "clear" the trade by separately submitting details of the trade for matching by the exchange "clearing house." A "clearing house" settles exchange transactions and oversees compliance with the exchange's delivery procedures and financing of the trade. Id. "Clearing" is the novation process through which "the clearing house or association becomes the buyer to each seller of a futures contract and the seller to each buyer, and...
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