In re Investment Bankers, Inc.

• Decision Date: 15 May 1990
• Docket Number: Adv. No. 82-M-0087.,Civ. A. No. 86-C-1945
• Citation: 136 BR 1008
• Parties: In re the INVESTMENT BANKERS, INC., Debtor. James H. TURNER, Trustee, Plaintiff, v. DAVIS, GILLENWATER & LYNCH, Gilbert K. Davis, individually and as a partner of Davis, Gillenwater & Lynch, and O'Connor & Hannan, a partnership, Defendants.
• Court: U.S. District Court — District of Colorado

136 B.R. 1008 (1989)

In re the INVESTMENT BANKERS, INC., Debtor.

James H. TURNER, Trustee, Plaintiff, v. DAVIS, GILLENWATER & LYNCH, Gilbert K. Davis, individually and as a partner of Davis, Gillenwater & Lynch, and O'Connor & Hannan, a partnership, Defendants.

Civ. A. No. 86-C-1945, Adv. No. 82-M-0087.

United States District Court, D. Colorado.

October 5, 1989.

On Motion to Amend and Supplement May 15, 1990.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Robert E. Warren, Gorsuch, Kirgis, Campbell, Walker and Grover, Denver, Colo. and Josephine Wang, Gen. Counsel, Washington, D.C., for plaintiffs.

George W. Vaught, William Tucker, Tucker & Vaught, Denver, Colo., Robert T. Copeland, Copeland, Molinary & Bieger, Abington, Va., and Joe A. Walters and Larry D. Gallegos, O'Connor & Hannan, Denver, Colo., for defendants.

ORDER

CARRIGAN, District Judge.

The Securities Investor Protection Corporation (hereinafter "SIPC") and James H. Turner, as trustee (hereinafter "Trustee") appealed from a bankruptcy court decision in an adversary proceeding. The SIPC objects to the bankruptcy court's determination that bankruptcy courts do not have jurisdiction over liquidations conducted pursuant to the Securities Investor Protection Act, 15 U.S.C. § 78aaa et seq. (hereinafter "SIPA"). The Trustee objects to the bankruptcy court's conclusion that a payment, made by The Investment Banker's, Inc. (hereinafter "IBI") to the law firm of O'Connor & Hannan, was not voidable as a preferential transfer under 11 U.S.C. § 547(b). Davis, Gillenwater & Lynch appeal the bankruptcy court's conclusion that two payments they received from IBI were voidable as preferential and fraudulent transfers under 11 U.S.C. §§ 547(b) and 548, respectively. O'Connor & Hannan assert that the bankruptcy court correctly determined that the payment they received from IBI fell within the voidable preference exception in 11 U.S.C. § 547(c)(2).

The adversary proceeding was filed by the Trustee during liquidation of IBI in order to recover payments for legal services allegedly voidable as preferential and fraudulent transfers under 11 U.S.C. §§ 547(b) and 548(a)(2), respectively. The Trustee was appointed under the Securities Investor Protection Act, 15 U.S.C. § 78aaa et seq. (hereinafter "SIPA"), and sued under the above cited sections of the Bankruptcy Code made applicable in a SIPA liquidation by 15 U.S.C. § 78fff(b).

The parties have fully briefed the issues and oral argument would not materially assist my decision. Jurisdiction exists pursuant to 28 U.S.C. § 158 (1988).

Background.

IBI, a Colorado corporation, had acted as a securities broker dealer beginning October 23, 1980. The liquidation proceeding was commenced against the debtor, IBI, by the SIPC, pursuant to authority granted it in the SIPA. The proceeding seeking liquidation of IBI was commenced on July 10, 1981. The application for appointment of a receiver and trustee for the purpose of liquidating IBI was based upon the SIPC's determination that IBI had failed to meet its obligations to customers imposed by the SIPA. The SIPC also justified its decision to liquidate IBI upon its determination that IBI was in violation of the "net capital" requirements of the Securities Exchange Act of 1934 and Rule 17 CFR 240.15C3-1.

In the order of July 15, 1981 appointing Turner as trustee, the liquidation proceeding was removed to the United States Bankruptcy Court for the District of Colorado, pursuant to § 5(b)(4) of SIPA, 15 U.S.C. § 78eee(b)(4) (Supp.1979). After removal to the bankruptcy court, Turner filed a complaint seeking to avoid the transfer of four checks totaling $87,517.80 to the law firms of Davis, Gillenwater & Lynch and O'Connor and Hannan. Those four checks are as follows:

(a) Check # 13417, dated July 10, 1981, payable to Gilbert K. Davis, Esquire, in the amount of $11,858.00;

(b) Check # 13418, dated July 10, 1981, payable to O\'Connor & Hannan, in the amount of $25,659.80;

(c) Check # 13419, dated July 10, 1981, payable to O\'Connor & Hannan Trust Account in the amount of $25,000.00;

(d) Check # 13432, dated July 10, 1981, payable to Gilbert K. Davis, Esquire, of Davis, Gillenwater & Lynch, in the amount of $25,000. (Bankruptcy Opinion at 2-4, Record at 303-05) (hereinafter "Op. at, R. at")

The bankruptcy court made the following findings of fact: On July 8, 1981, Gilbert Davis was contacted by a representative of IBI, to represent the debtor and two of its officers, Belknap and Chandler. Davis went to Denver with two other attorneys from Virginia. A fee of $10,000 was arranged, to be divided among the three attorneys. Conferences were held on July 8 through 10, 1981. The evidence indicates that the parties and these attorneys were aware during the entire course of Davis' representation, of at least the possibility that the SEC would file a liquidation proceeding and seek injunctive relief against IBI in the United States District Court. A $25,000 retainer was agreed upon for further work. The fee included Davis' appearance at the hearing of July 10, 1981 concerning the SEC's application for an injunction and the SIPC's action to liquidate IBI.

The evidence establishes that Davis received checks # 13417 and # 13432 at about noon on July 10, 1981. These were promptly exchanged for cashier's checks at the First National Bank of Denver. Davis claims that he did not learn of the SEC's action, that was commenced the same day, until after he had negotiated these checks.

O'Connor and Hannan had represented IBI since 1980. Of the two checks received by this firm, # 13418, was given to O'Connor and Hannan for previously rendered legal services. The second check, # 13419, was paid to O'Connor and Hannan as a retainer for legal services to be performed in connection with IBI's trading suspension. The O'Connor and Hannan checks were received at approximately 10:00 a.m. on July 10, 1984 and were cashed soon thereafter. These checks were taken to the bank immediately because O'Connor and Hannan had previously received an insufficient funds check from IBI.

I will address the following issues in the order presented.

(1) Whether bankruptcy judges were constitutionally appointed?

(2) Whether bankruptcy courts have jurisdiction over SIPA liquidations?

(3) Whether the payment of $25,659.80 to O\'Connor & Hannan, check # 13418, fell within the voidable preference exception in 11 U.S.C. § 547(c)(2) as it existed before the Bankruptcy Amendments and Federal Judgeship Act of 1984?

(4) Whether the payment of $11,858.00 to Davis, Gillenwater & Lynch, check # 13417, constituted a voidable preference under 11 U.S.C. § 547(b)?

(5) Whether the payment of $25,000 to Davis, Gillenwater & Lynch, check # 13432, constituted a fraudulent transfer under 11 U.S.C. § 548(a)(2)?

Under Rule 8013, Rules of Bankruptcy Procedure,¹ the district court may affirm, modify, reverse or remand a bankruptcy court judgment. In re Brown, 68 B.R. 670 (D.Colo.1986). This procedural authority was stated by the Brown court as follows:

"The District Court is bound to accept the Bankruptcy Judge\'s findings of fact unless they are clearly erroneous. Similarly, due regard in this context must be given to the lower court\'s opportunity to hear firsthand the testimony of the witnesses. However, this same presumption does not apply to conclusions of law, and this Court may make an independent examination and determination of the ultimate legal conclusions to follow from the facts. . . .

The `clearly erroneous\' standard was explained by the Supreme Court in Comm. v. Duberstein, 363 U.S. 278, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960), wherein the Court stated: `A finding is "clearly erroneous" when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed. . . . The rule itself applies also to factual inferences from undisputed basic facts . . .\'" Id. at 671 (citations omitted).

Thus, the bankruptcy court's factual findings are not to be disturbed on appeal unless they are clearly erroneous. However, the bankruptcy court's conclusions of law will be reviewed under a de novo standard. In re Mullet, 817 F.2d 677-79 (10th Cir.1987).

The Constitutionality of the Bankruptcy Judges' Terms.

The Davis defendants first address the constitutionality of the bankruptcy judges' terms. (Davis brief, at 6). These defendants assert that the bankruptcy court did not have jurisdiction to hear this matter because when BAFJA became law all bankruptcy judge positions were vacant. They contend that this occurred because the Bankruptcy Act of 1978 expired on June 27, 1984 but the Bankruptcy Amendments and Federal Judgeship Act of 1984 (hereinafter "BAFJA")² was not signed into law until July 10, 1984. The Davis defendants further assert that BAFJA, sections 121(e)³ and 106(a),⁴ is an attempt by Congress to retroactively reinstate bankruptcy judges whose terms had expired on June 27, 1984, thus violating the Appointments Clause of the United States Constitution.⁵

Numerous courts interpreting the of BAFJA provisions that extended the terms of bankruptcy judges, have held that they did not violate the appointments clause. See In re Sweetwater, 55 B.R. 724, 726-28 (D.Utah 1985). The Sweetwater court stated:

"This court agrees with Judge Schnacke\'s conclusion in that case In re Benny, 44 Bankr. 581, 587-88 (N.D.Cal 1984) that there was no `gap\' between June 27, 1984, and July 10, 1984, during which the bankruptcy courts ceased to exist. The hold-over provisions of the 1978 Act, sections 404(b) and (d) (as amended), authorized the bankruptcy judges to continue in office until June 27, 1984, or until their successors were appointed or took office. Because no bankruptcy judges were appointed or took office between June 27 and July 10, 1984, the bankruptcy judges serving on June 27, 1984, continued in office at least until July 10, 1984. Thus, the

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