In re Lloyd Securities, Inc.

Citation163 BR 242
Decision Date21 January 1994
Docket NumberAdv. No. 90-0985DAS.
PartiesIn re LLOYD SECURITIES, INC., Debtor.
CourtUnited States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania


Robert E. Shields, Drinker Biddle & Reath, Philadelphia, PA, Trustee.

Warren Pratt, Drinker, Biddle & Reath, Philadelphia, PA, for trustee.

Richard L. Bazelon, Bazelon & Less, Philadelphia, PA, for customers.

Michael E. Don, Asst. Gen. Counsel, Washington, DC, for SIPC.

Michael T. Scott, Reed Smith Shaw & McClay, Philadelphia, PA, for certain other claimants.

Frederic Baker, Philadelphia, PA, Asst. U.S. Trustee.


DAVID A. SCHOLL, Bankruptcy Judge.


The matter before this court raises issues of first impression as to whether compensation for attorney fees and costs incurred by certain of the alleged former customers ("the Customers") of a brokerage firm liquidated under the Securities Investor Protection Act, 15 U.S.C. §§ 78aaa, et seq. ("SIPA"), are recoverable and, to the extent such compensation is allowed, the extent to which the provisions of the Bankruptcy Code regarding compensation of non-appointed professional persons are relevant thereto.

We conclude that the Customers and their counsel are conceivably eligible to obtain a recovery of compensation, but only if they are able to satisfy the demanding criteria of either 11 U.S.C. § 503(b)(3)(D) or 11 U.S.C. § 506(c) of the Bankruptcy Code. This court adds the reference to § 506(c), despite the parties' failure to make mention of it, because we believe that the applicable SIPA provisions are broad enough to allow a recovery against the Securities Investor Protection Corp. ("SIPC") in the event that it has benefitted from the Customers' actions, and that SIPC would typically be the principal beneficiary of aggressive actions by customers to collect assets in a SIPA proceeding.

Applied to the instant proceeding, we find that the Customers are entitled to compensation for only those services provided in connection with their successful litigation of a Motion for Joint Administration of the instant SIPA proceeding with nineteen (19) related bankruptcy cases. These services were performed over the objection of SIPC and the SIPA Trustee, but ultimately benefitted SIPC. However, we find that the other services for which compensation is sought benefitted only or principally the Customers themselves, if anyone; were duplicative of the services performed by the Trustee; and/or, especially given the "considerable reliance" which we must place upon SIPC's recommendation that no compensation be granted, insufficiently significant to merit compensation.


The issues before us arise in connection with two separate Applications for Compensation for Services Rendered filed by certain customers of a Debtor brokerage firm, LLOYD SECURITIES, INC. ("the Debtor"), on behalf of the Customers' counsel, the law firm of Bazelon & Less ("Bazelon").

In June, 1990, the federal Securities and Exchange Commission ("the SEC") filed a request for injunctive relief against the Debtor in the district court as a result of alleged widespread misappropriations of customers' funds by the Debtor's two principals, Michael Lloyd and Warren C. Nachmann. Justin Klein, Esquire, was appointed by the district court as the receiver ("the Receiver") for the Debtor shortly thereafter.

Robert E. Shields, Esquire, was appointed to succeed the Receiver as Trustee of the Debtor ("the Trustee") under a protective decree entered by the district court on December 27, 1990. The SEC proceeding was transferred by the district court to this court on December 30, 1990, under the above-captioned adversary number, to administer the liquidation of the Debtor.

On or about July 31, 1990, the Customers brought a class action in the local district court against the Debtor, its principals, and numerous other parties, entitled Deamer, et al. v. Lloyd, et al., C.A. No. 90-5030 (E.D.Pa.) ("the Deamer Case"). Accurately predicting that the Debtor and its principals could not repay the money they had taken, the Deamer plaintiffs also sued, in that same action, various other parties involved in transactions with the Debtor.

On May 30, 1991, the Trustee filed nineteen voluntary Chapter 11 cases on behalf of Lloyd, Nachmann, and various corporate entities other than the Debtor owned and operated by them. These cases were themselves jointly administered in the case of In re IBEX International, Inc., Bankr. No. 91-12986DAS, and hence are referenced as "the IBEX Cases." The Receiver was appointed as the trustee in all of the IBEX Cases rather than the Trustee, who felt that the separate appointment was necessary to avoid potential conflicts of interest.

On July 19, 1991, the Customers filed a motion seeking to jointly administer the IBEX Cases with the Debtor's SIPA proceeding in order to save costs by preventing administrative duplication of services ("the Motion"). After a hearing of September 4, 1991, at which SIPC and the Trustee opposed the Motion, this court, in an Order reported at 1991 WL 173319 (Bankr.E.D.Pa. Sept. 5, 1991), expressed its intention to grant the Motion upon the parties' joint preparation of an Order allowing for a smooth transition in accordance therewith. Accordingly, on September 25, 1991, the Trustee was appointed as trustee in the IBEX Cases as well as the instant SIPA proceeding, and the IBEX Cases were converted to Chapter 7 cases.

Thereafter, the Trustee administered the cases with reasonable promptness. Several pieces of major litigation emerged. On December 4, 1991, in the midst of the Trustee's sales and settlements with mortgagees of various parcels of New Jersey shore properties owned principally by Lloyd or partnerships formed by him included among the IBEX Cases, the Customers objected to the Trustee's recognition of a mortgage on property owned by Peach Orchard Land Association II ("PO II"). When the Trustee refused to challenge the validity of the mortgage, the Customers proceeded to do so successfully in a proceeding reported at 1992 WL 165962 (Bankr.E.D.Pa. July 10, 1992) ("the PO II Case"). The PO II realty was ultimately sold by the Trustee at an auction, with an adjoining parcel, for $182,500.

On December 19, 1991, the Trustee brought suit on fidelity bonds issued by National Union Fire Insurance Co. of Pittsburgh, PA. ("National") on behalf of Lloyd and Nachmann. The Customers intervened. After this court's Recommendation, reported at 1992 WL 236162 (Bankr.E.D.Pa. Sept. 17, 1992), that summary judgment be entered in the amount of $500,000 in favor of the Trustee on the Lloyd bond was accepted by the district court, as reported at 153 B.R. 677 (E.D.Pa.1993), this matter was settled as to all matters between the parties for $595,000.

Among the principal targets of the Deamer litigation was Newbridge Securities, Inc. ("Newbridge"), the "clearing broker" for the Debtor in New York Stock Exchange transactions for its customers, which allegedly negligently allowed Lloyd and Nachmann to make withdrawals from customers' accounts to improperly feed their personal enterprises. Related targets were Newbridge's parent, Citibank, the drawee bank of its checks drawn to Lloyd and Nachmann; Equibank and its predecessor, Liberty Bank, the Debtor's bank which paid the checks; and Delaware Charter Guarantee & Trust Co. ("Delaware"), with which some of the Customers had entered into agreements appointing it as a trustee or custodian of certain personal and other retirement program accounts (collectively Citibank, Equibank, and Delaware are referenced as "the Banks").

The complex, multi-party nature of the Deamer action and several other related civil proceedings instituted in the district court in 1990 apparently caused them to become bogged down in discovery and cross-pleading. The Trustee, in order to spur resolution of the disputes with Newbridge and the Banks, who were key targets among the defendants named in the Deamer case, filed several new, discrete adversary proceedings in the Debtor's bankruptcy case which he believed would isolate and hopefully permit resolution of the claims against these entities.

The first of these proceedings was filed against Newbridge on June 4, 1992. On July 17, 1992, the Trustee filed a separate proceeding against the Banks. After a mini-trial on liability in the Newbridge case, in which the Customers had intervened, on August 6-7, 1992, we filed a Memorandum and Order of October 29, 1992, reported at 1992 WL 318588 (Bankr.E.D.Pa. Oct. 29, 1992), declaring that Newbridge may be liable to the Trustee; allowing the consumers to intervene in the suit against the Banks; declaring that the suit against the Banks would proceed; and scheduling a joint status/settlement conference on both proceedings. Ultimately, the Trustee settled the matters against Newbridge and the Banks for payments totalling $1.25 million.

A process for creditors to make claims against the Debtor was established by the Trustee in the SIPA proceeding. A bar date of July 31, 1991, was set. The SIPA procedure contemplates that, if a broker-dealer's estate has insufficient funds to do so, SIPC will reimburse the estate up to $500,000 cash and securities on account per customer, but no more than $100,000 per cash account. 15 U.S.C. § 78fff-3(a). Apparently a question arose as to whether SIPC would agree to reimburse the Debtor's estate in whole or even in part for many of the Customers' claims as "customer property," because there was a question as to whether the Debtor was holding cash or securities for the Customers, or whether Lloyd and Nachmann had been holding and investing customers' assets on their own behalfs. On June 16, 1992, the Customers in issue, followed by other alleged customers, became impatient with the delays in the claims process and their lack of receipt of payment, and they moved this court to order the Trustee to rule on their...

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