In re Kaiser Steel Corp.
| Decision Date | 25 September 1989 |
| Docket Number | Bankruptcy No. 87 B 1552 E,Adv. No. 87 E 137. |
| Citation | 105 BR 639 |
| Parties | In re KAISER STEEL CORPORATION, Debtor. KAISER STEEL CORPORATION, Plaintiff, v. Irwin L. JACOBS, et al., Defendants. |
| Court | U.S. Bankruptcy Court — District of Colorado |
Susan M. Freeman, Lewis & Roca, Phoenix, Ariz., H. Thomas Coghill, Coghill & Goodspeed, P.C., Denver, Colo., for plaintiff, Kaiser Steel Corp.
Thomas H. Young, Rothgerber, Appel, Powers & Johnson, Denver, Colo., for defendant, Charles Schwab & Co., Inc.
David I. Blejwas, Hahn & Hessen, New York City, Richard Vermeire, Moye, Giles, O'Keefe, Vermeire & Gorrell, Denver, Colo., for Bear Stearns & Co., Inc., et al.
Robert A. Zupkus, Zupkus & Ayd, P.C., Denver, Colo., for AmSouth Bank, N.A.
William D. Nelson, Denver, Colo., for Boettcher & Co., Inc.
J. Michael Morgan, Lohf, Shaiman & Ross, Denver, Colo., Howard, Darby & Levin, New York City, for Brown Bros. Harriman & Co.
James J. Moyland, James J. Moyland & Associates, Chicago, Ill., for Burke, Christensen, & Lewis Securities, Inc.
John S. Lutz, Salie B. O'Malley, Kelly, Stansfield & O'Donnell, Denver, Colo., for Chicago Corp., Piper, Jaffray & Hopwood, Spear, Leeds & Kellogg and SLK-SEG, and Tweedy Brown Clearing Corp. Barry L. Wilkie, Shaw, Spangler & Roth, Denver, Colo., Susan E. Harkins, Cahill Gordon & Reindel, New York City, for Dillon, Read & Co. Inc.
David B. Rosenman, Lewis, D'Amato, Brisbois, Bisgaard, for Bank of New England and Bank of New England-West.
John B. Moorhead, Baker & Hostetler, Denver, Colo., for Drexel Burnham Lambert, Inc.
Richard S. Vermeire, Dwight K. Shellman, III, Moye, Giles, O'Keefe, Vermeire & Gorrell, Denver, Colo., for Edward D. Jones & Co., Inc., Fahnestock & Co., Edward A. Viner & Co., First Albany Corp., Tucker, Anthony & R.L. Day, Inc., Thomson McKinnon & Co., Inc.
Richard S. Vermeire, Dwight K. Shellman, III, Moye, Giles, O'Keefe, Vermeire & Gorrell, Denver, Colo., Karen Johnson-McKewan, Brobeck, Phleger & Harrison, San Francisco, Cal., for Wells Fargo and Crocker Nat. Bank.
Richard S. Vermeire, Dwight K. Shellman, III, Moye, Giles, O'Keefe, Vermeire & Gorrell, Denver, Colo., Jeffrey A. Kehl, McGuire & Tiernan, New York City, for Kellner, DiLEO & Co., Inc.
John B. Moorhead, Baker & Hostetler, Denver, Colo., for Mabon, Nugent & Co.
Michael Heitner, Herrick, Feinstein, New York City, for Evans & Co., Inc.
Michael H. Du Boff, Salon, Marrow & Dyckman, New York City, for Ernst & Co.
Paul L. Matecki, Boca Raton, Fla., for JW Charles Securities, Inc.
Robert Swanson, Hamilton, Myer, Swanson, Faatz & Clark, Denver, Colo., for Josephthal & Co. Inc. and Herzfeld & Stern, nka JII Securities, Inc.
Edwin G. Perlmutter, M. Frances Cetrulo, Berenbaum & Weinshienk, Denver, Colo., for Nat. Bank of Detroit, May Financial Corp., Manufacturers and Traders Trust Co., and Bankers Trust of New York.
Michael H. Berger, Waldbaum, Corn, Koff and Berger, Denver, Colo., for National Financial Services Corp.
William C. Roush, Freud, Markus, Slavin & Galgan, Troy, Mich., for Roney & Co.
Jacques A. Machol, Jr., Jacques A. Machol, III, Machol and Machol, Denver, Colo., for U.S. Trust Co. of New York.
Jay G. Epstein, Shearman & Sterling, New York City, for Lewco Securities Corp.
Douglas R. Ferguson, Hopper, Kanouff, Smith, Peryam and Terry, Denver, Colo., for Olde Discount Corp.
Luke J. Danielson, Laurie K. Rottersman, Gersh & Danielson, Denver, Colo., for Stifel Nicolaus & Co.
Dennis C. Brown, Munger, Tolles & Olson, Los Angeles, Cal., Robert F. Hill, Hill & Robbins, Denver, Colo., for Pacific & Co.
Martin P. Unger, Gaston & Snow, New York City, James A. Shpall, Wolf & Slatkin, Denver, Colo., for Securities Settlement Corp.
Mark Grobmyer, Arnold, Grobmyer & Haley, Little Rock, Ark., Harold A. Feder, Feder, Morris, Tamblyn & Goldstein, Denver, Colo., for Stephens, Inc.
ORDER ON MOTION FOR SUMMARY JUDGMENT
This matter comes before the Court on the Motion for Summary Judgment and supporting brief ("Motion") filed by Charles Schwab & Co., Inc. ("Schwab") and responses thereto filed by Kaiser Steel Corporation ("Kaiser"). A number of other Defendants have filed simple pleadings merely stating their joinder in the substance of Schwab's Motion and Reply. Others, however, have filed briefs joining in the substance of Schwab's Motion and supplementing it with additional legal argument.
On February 27, 1987, Kaiser commenced this litigation seeking to recover from certain defendants funds transferred in early 1984 and thereafter as part of the leveraged buyout ("LBO") of Kaiser which occurred in 1984.1 In September, 1987 Kaiser amended its complaint to add as defendants over 150 brokerage houses. The Amended Complaint is brought pursuant to 11 U.S.C. §§ 541, 544, 548 and 550; Cal.Civil Code § 3439.01 et seq. (1985); and common law. The defendants include: (1) several who attempted a hostile takeover of Kaiser in advance of the LBO; (2) nominees of clearing houses and clearing houses; (3) discount brokers; and (4) full-service brokerage houses. Schwab is and was a discount securities broker at all times relevant to this matter.
A. Arguments of the Parties.
Schwab, in its Motion, asserts that because it is a discount securities broker and does not generally buy and sell securities for its own account nor act as a market-maker in any security, it should be found to be a "mere conduit" and not subject to liability as an initial transferee within the context of 11 U.S.C. § 550. Schwab also asserts that while it held securities in "street name"2 it did so solely as a nominee for the beneficial owners of the securities, its customers. Schwab argues alternatively that if the Court construes the language of 11 U.S.C. § 550 strictly and finds that Schwab is a transferee, the Court should exercise its equitable powers granted under 11 U.S.C. § 105 to prevent recovery from Schwab, an innocent party who derived nothing from the LBO.
Bear Stearns & Co., Inc., Cowen & Co., Inc., Doft & Co., Inc., L.F. Rothschild & Co., Inc., Unterberg, Towbin, Shearson Lehman Brothers/American Express, Inc. and Smith, Barney, Harris, Upham & Co., Inc. ("Bear Defendants") have filed a separate brief joining in Schwab's Motion ("Bear Joinder"). The majority of joining pleadings filed by other defendants have echoed the arguments presented by Schwab. The Bear Defendants, however, have raised a novel argument. They argue the applicability of 11 U.S.C. § 546(e) which limits the trustee's ability to recover either a margin or settlement payment from a broker.
Kaiser, in response, argues that Schwab is a "transferee" within the meaning of § 550 as follows: (1) Schwab had sufficient dominion and control over the LBO funds, not only because Schwab held the shares in "street name," but also because Schwab and its beneficial owners had agreements whereby the beneficial owners granted Schwab a lien against the LBO funds it received from one of the clearing houses and the disbursing agent; (2) the Court should construe literally the language of section 550 and refrain from "equitable redrafting;" and (3) Schwab cannot rely on its agency relationship as a defense to its liability when its principals were undisclosed at the time of the transfer and when Kaiser dealt with Schwab directly.
In their Reply to the Bear Joinder, Kaiser contends that section 546(e) is inapplicable because section 546(e) does not apply unless the debtor is a stock or commodities broker. If it does apply, the LBO Consideration is not a settlement payment, but payment for a mandatory redemption of stock. Kaiser also urges that the application of section 546(e), in this instance, would lead to the absurd result of precluding the avoidance of any transfers made in the course of a leveraged buyout that passes through securities' brokers or clearing houses.
The parties have filed a Joint Statement of Facts concerning Schwab's Motion ("Joint Statement of Facts"). The following relevant and uncontested facts are taken from the Joint Statement of Facts and briefs of the parties. They are as follows:
A. Schwab.
1. Schwab is and was a discount securities broker which executes securities' transactions on an agency basis for its customers.
2. Schwab has a corporate policy against recommending specific securities and offering investment and voting advice to its customers.
3. Schwab has represented that during the period of time in question (i.e., prior to March 1986), it was using account agreements with its customers in one or more of the forms attached as Exhibits 1-16 to the Joint Statement of Facts.
4. All of the customer agreements provide that Schwab does not act as an investment counselor or advisor.
5. All of the customer agreements used by Schwab provide that all securities and money held in Schwab accounts are subject to a lien for the discharge of all customer indebtedness to Schwab.
6. Each Schwab margin and short account agreement authorizes Schwab to pledge and repledge all securities in Schwab's possession held for the account of a customer for the amount due Schwab from the customer or for a greater sum.3
7. Schwab executes trades on a principal basis in certain limited circumstances.4 It does not, however, generally buy and sell securities for its own account and does not act as a marketmaker in any security.
8. Schwab owns securities as a nominee for its customers, the beneficial owners of the securities.
B. 1984 Kaiser LBO.
9. Kaiser prepared and issued a proxy statement and prospectus to its shareholders on December 9, 1983, advising them of the annual shareholders' meeting to be held on January 18, 1984, and the proposed LBO transaction.
10. At the shareholders' meeting on January 18, 1984, the majority of shareholders of Kaiser common stock approved the proposed LBO. As a result, on February 29, 1984, all shareholders, including Schwab's...
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