In re MF Global Inc.
| Decision Date | 01 January 2014 |
| Docket Number | Case No. 11–2790 (MG) SIPA |
| Citation | 506 B.R. 582 |
| Parties | In re: MF Global Inc., Debtor. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
OPINION TEXT STARTS HERE
Hughes Hubbard & Reed LLP, One Battery Park Plaza, New York, New York 10004, By: James Kobak, Esq., William Maguire, Esq., Counsel for James W. Giddens, Trustee for the SIPA Liquidation of MF Global Inc.
Quinn Emanuel Urquhart & Sullivan LLP, 51 Madison Avenue, 22nd Floor, New York, New York 10010, By: Susheel Kirpalani, Esq., Securities Investor Protection Corp. 605 15th Street NW, Suite 600, Washington, D.C. 20005 By: Christopher Larosa, Esq., Counsel for Knighthead Capital Management LLC
Knighthead Capital Management LLC (“Knighthead”) filed the Motion for Order Requiring Costs and Expenses of Persons Hired by SIPA Trustee Pursuant to Section 78fff–1(a)(1) of SIPA to be Disclosed and Subject to Court Approval (the “Motion,” ECF Doc. # 7503). The Motion is supported by a Memorandum of Law (the “Mem.,” ECF Doc. # 7504) and the Declaration of Susheel Kirpalani (the “Kirpalani Decl.,” ECF Doc. # 7505).1 Knighthead seeks an order requiring disclosure and court approval of the fees and expenses incurred by the non-attorney professionals hired by James W. Giddens (the “Trustee”), who serves as the trustee for the liquidation of MF Global Inc. (“MFGI”) under the Securities Investor Protection Act of 1970, as amended (“SIPA”), 15 U.S.C. § 78aaa et seq. Knighthead is a large indirect creditor of MF Global Holdings, Ltd. (“Holdings”), a debtor in a chapter 11 proceeding before this Court, Case No. 11–15059. On January 15, 2014, Knighthead purchased a $75,000 portion of an allowed claim against MFGI, and two weeks later, Knighthead filed the Motion. The Trustee filed an opposition (the “Trustee's Opposition,” ECF Doc. # 7541), and so did the Securities Investor Protection Corporation (“SIPC”) (the “SIPC Opposition,” ECF Doc. # 7539). Knighthead filed a reply (the “Reply,” ECF Doc. # 7568). The Court held a hearing on February 27, 2014, after which the Court took the matter under submission.
This is the first time in the forty-three year history of SIPA that a creditor of a failed broker-dealer has asked for this relief. For the reasons that follow, the Motion is GRANTED IN PART and DENIED IN PART. SIPA does not require court approval of payments to a SIPA trustee's non-attorney professionals. Only SIPC need authorize those payments. But the Court, in assessing the reasonableness of the Trustee's own fees and expenses, must consider the Trustee's oversight of his non-attorney professionals. In that context, the Trustee is required to disclose the fees and expenses of his non-attorney professionals in this case, with sufficient detail to enable the Court to assess the reasonableness of the Trustee's fee applications.
Before its bankruptcy, MF Global 2 was one of the world's leading brokerage firms in markets for commodities and listed derivatives. The history of MF Global's collapse has been abundantly covered by the media and fully recounted in previous opinions of this Court. The Court will recount only those facts relevant to this Opinion.
On October 31, 2011 (the “Filing Date”), the Honorable Paul A. Engelmayer, of the United States District Court for the Southern District of New York, entered an Order (the “MFGI Liquidation Order”) commencing the liquidation of MFGI pursuant to the provisions of SIPA in the case captioned Securities Investor Protection Corp. v. MF Global Inc., Case No. 11–cv07750 (PAE). The MFGI Liquidation Order: (1) appointed James W. Giddens as the Trustee for the liquidation of the business of MFGI pursuant to 15 U.S.C. § 78eee(b)(3); (2) appointed Hughes Hubbard & Reed LLP (“HHR”) as counsel to the Trustee pursuant to 15 U.S.C. § 78eee(b)(3); and (3) removed the case to this Court pursuant to 15 U.S.C. § 78eee(b)(4). Under SIPA, this Court has “all of the jurisdiction, powers, and duties conferred by [SIPA] upon the court to which the application for the issuance of the protective decree was made.” 15 U.S.C. § 78eee(b)(4).
Within days of the commencement of this SIPA proceeding, “the Trustee transferred approximately three million open commodity futures contracts, with notional values exceeding $100 billion, and associated clearing level margin for tens of thousands of accounts, or about 40 percent of the total futures market volume.” (Trustee's First Interim Report, ECF Doc. # 1864, ¶ 15.) “Within eight weeks of the Filing Date, approximately $4 billion in customer margin had been transferred on a pro rata basis to nearly all former MFGI commodity futures customers, allowing these former customers, during the eighth largest bankruptcy in United States history, to receive a seventy-two cent on the dollar recovery before they had even filed claims.” ( Id.)
By the one-year mark, the Trustee had: (1) effected transfers and distributions of billions of dollars of customer property; (2) completed many of his investigative and recovery efforts; (3) substantially completed processing more than 27,000 customer claims—which involved determining the validity of claims and their net equity in accordance with SIPA, the commodity broker liquidation provisions of chapter 7 of the Bankruptcy Code (1 1 U.S.C. §§ 761–67), and 17 C.F.R. §§ 190.01–190.10; (4) responded to hundreds of third-party document requests, including those by Congress, the Securities and Exchange Commission (“SEC”), the Commodity Futures Trading Commission (“CFTC”), and others investigating MFGI's collapse; and (5) begun processing thousands of general estate claims. (Trustee's Second Interim Report, ECF Doc. # 4763, at 1–3, ¶¶ 71–72, 106.)
Throughout this SIPA proceeding, the Trustee and HHR have sought compensation through interim fee applications (“Interim Fee Applications”).3 The Interim Fee Applications—filed periodically by HHR—contain hourly fee breakdowns for both the Trustee and other HHR professionals, including attorneys, paralegals, and litigation support personnel. For each Interim Fee Application, HHR totals all fees for services rendered and expenses incurred, and then applies a ten percent public interest discount from HHR's standard rates, per SIPC's request. The requested compensation in the Interim Fee Applications reflects this discounted rate in addition to other fee reductions. As of the March 14, 2014 filing date for HHR's Sixth Interim Fee Application, the Court had previously approved $48,074,620.12 in fees and expenses requested by the Trustee and HHR. ( See Summary Sheet, HHR Sixth Interim Fee Application, ECF Doc. # 7706.)
According to the Trustee, his success in this case, especially during the first year, “would not have been possible without significant support from the Trustee's teams of accountants and non-attorney professionals.” (Trustee's Opp. ¶ 53.) But while the Interim Fee Applications detail services rendered and expenses incurred by HHR, the Applications do not disclose fees and expenses incurred by non-attorney professionals hired by the Trustee, such as the accounting firms of Deloitte & Touche LLP (“Deloitte”) and Ernst & Young LLP (“Ernst & Young”). The Trustee does not submit to the Court separate applications or reports disclosing expenses for these non-attorney professionals.4
Knighthead contends that the fees and expenses paid to the Trustee's non-attorneyprofessionals in this case are disproportionate compared to other major SIPA liquidations, such as Lehman Brothers Inc., In reLehman Brothers Inc., Case No. 08–01420(JMP) SIPA (Bankr.S.D.N.Y.). (Mem.¶ 10.) Despite lacking specific information about total administrative expenses disbursed to date, Knighthead estimated those expenses by reviewing publicly filed documents. ( Id.) Knighthead asserts that, when compared to Lehman, the costs and expenses of non-attorney professionals in this case represent a much larger share of both assets marshaled (5.38% vs. 1.08%) and total assets (2.59% vs. 0.20%).5 ( Seeid. at 10, Fig. 1.) Without additional disclosure, Knighthead argues, it is unclear why these funds are being paid. Knighthead therefore seeks the entry of an order directing that the fees and expenses of the Trustee's non-attorney professionals be disclosed in public court filings and subject to this Court's approval.
The Trustee asserts that he has never refused to disclose the administrative expenses incurred by non-attorney professionals in this case—he simply was not asked. (Trustee's Opp. ¶ 4.) The Trustee's Opposition discloses the total compensation paid to non-attorney professionals, including to Deloitte and Ernst & Young:
Through 2013, professional compensation to Deloitte—at highly discounted rates negotiated by the Trustee and SIPC—has totaled approximately $76 million related almost entirely to accounting, account transfers, and claims processing (commodity, securities, and general creditor claims, including affiliate claims), and approximately $29 million related to technology and systems operating costs.... Approximately eighty percent of all Deloitte costs were incurred in the first year of the liquidation.... Through 2013, Ernst & Young's fees are approximately $39 million. Approximately $34 million of this total is attributable to the long-concluded necessary forensic and analytical work in support of producing [a] June 2012 Investigation Report with its extensive flow of funds exhibits. The remainder of Ernst & Young's compensation pertains to responses to additional regulatory and third-party requests, and managing electronic data storage.
( Id. ¶¶ 54–55.)
The Court must decide whether the disclosure of payments to non-attorney professionals contained in the Trustee's Opposition is sufficient and whether the Trustee...
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