In re Thomson McKinnon Securities Inc.
| Decision Date | 07 March 1991 |
| Docket Number | Bankruptcy No. 90B 10914,90 B 11805. |
| Citation | 125 BR 88 |
| Parties | In re THOMSON McKINNON SECURITIES INC. and Thomson McKinnon Inc., Debtors. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
Debevoise & Plimpton, New York City, for Thomson McKinnon Securities, Inc.; Michael E. Wiles, of counsel.
Robert Abrams, Atty. Gen. of the State of N.Y., New York City, for Office of New York State Comptroller; August L. Fietkau, Asst. Atty. Gen., of counsel.
DECISION ON MOTION FOR ORDER DISALLOWING CLAIM OF NEW YORK STATE COMPTROLLER
Thomson McKinnon Securities Inc. ("TMSI"), debtor and debtor in possession in one of the above-captioned cases, has moved pursuant to Section 502(a) of the Bankruptcy Code ("the Bankruptcy Code") and Bankruptcy Rules 3007, 9014 and 7012, for an order disallowing, in its entirety, the claim of the Office of the New York State Comptroller (the "State Comptroller"), filed herein on September 19, 1990. The background facts are as follows:
FACTS
1. On March 28, 1990 TMSI filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. On June 8, 1990, Thomson McKinnon Inc. ("TMI") filed its voluntary petition for Chapter 11 relief. Pursuant to an order of this court, dated June 8, 1990, the bankruptcy cases of TMSI and TMI are being jointly administered for procedural purposes only.
2. TMSI has continued in the operation and possession of its business and property as a debtor in possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code.
3. On September 19, 1990, the Office of the New York State Comptroller filed a proof of claim against TMSI pursuant to the New York State Abandoned Property Law (the "APL") in the amount of $36,657,551.00 (the "State Claim"). The State Claim seeks payment to the State Abandoned Property Fund of certain funds and securities that were segregated from TMSI's other assets pursuant to a court order dated March 28, 1990 and entitled "Order Authorizing the Segregation and Distribution of Property Held or Received for the Account of Former Customers" (the "Segregation Order"). The State seeks payment to it of any "amounts or securities which cannot be paid to any former customer whose last known address on the books and records of the Debtor was within New York State, due to an inability to locate such former customer."
4. The debtor reasons that the State Claim should be disallowed in full as a matter of law, on the grounds that the State Claim conflicts with the policies and provisions of federal bankruptcy law and of the Segregation Order itself. The debtor requests that this court exercise its discretion under Bankruptcy Rule 9014 to apply Bankruptcy Rule 7012 to this contested matter, and to expunge the State Claim.
5. TMSI formerly was a full-service broker and dealer in securities. Prior to the filing date, in anticipation of its impending bankruptcy case, TMSI had ceased all brokerage activities, sold most of its assets and disposed of the vast majority of the customer property in its possession. This included the transfer, in September 1989, of all of TMSI's active customer accounts to Prudential-Bache Securities, Inc. or, at the customers' instructions, to other brokers.
6. Due to the nature of its former business and record-keeping errors, TMSI found that it held cash and securities that it could not match with any firm positions or customer positions recorded on its books. TMSI also held other funds and securities that possibly were subject to future claims by former customers. The funds and securities that fell into these various categories were as follows:
(a) Outstanding Checks. Prior to December 8, 1989, TMSI made payments to its former customers through a checking account maintained with Manufacturers Hanover Trust Co. From December 8, 1989 to the Filing Date, TMSI made payments to its former customers through checking accounts maintained with Banque Paribas in New York City. As of March 23, 1990, 3,476 checks in the aggregate amount of $2,045,512.00 were outstanding. Of these checks, approximately 3,000, in the aggregate amount of approximately $1.7 million, had been outstanding for more than nine months.
(b) Dividends Payable. As of March 23, 1990, TMSI held $8,565,101.00 in cash and $1,309,760.00 in securities, representing dividends, principal and interest payments that TMSI had received with respect to securities that once were held in TMSI's name, but whose owner TMSI could no longer identify. Some of these dividends might be subject to claims by TMSI's former customers or other brokers, such as where securities were sold but, for one reason or another, were not re-registered in the new owner's name.
(c) Record-keeping Differences. Although the institutional accounts formerly maintained by TMSI had been closed or transferred prior to the filing date, in many cases there were unreconciled credit or deficit positions in these accounts as of the transfer date. TMSI's records showed an aggregate equity in these accounts of $1,262,249.00 as of March 23, 1990.
(d) Patten Securities. Pending resolution of a litigation between TMSI and Patten Securities, TMSI had frozen certain accounts controlled by principals of Patten Securities, which held $125,606.00 cash and $116,700.00 in securities. The dispute with Patten Securities has since been resolved.
(f) Accounts with Unidentified Owners. TMSI possessed $521,607.00 in funds and $375,516.00 in securities in accounts for which no customer's identity or address could be ascertained.
7. Some of these funds and securities might belong to TMSI and the balance would then be subject to valid claims by former customers. Under the provisions of the Securities Investor Protection Act of 1970 ("SIPA"), TMSI's former customers were entitled to priority in their claims to such funds or securities. 15 U.S.C. §§ 78111, 78fff-2. Thus, if the Securities Investor Protection Corporation ("SIPC") had elected to commence proceedings under SIPA, such funds and securities would have been distributed "as promptly as possible" to former customers, 15 U.S.C. § 78fff(a)(1), and prior to any distribution to general creditors. 15 U.S.C. § 78fff-2(c)(1).
8. SIPC informed TMSI that it would commence a SIPA proceeding if such a proceeding were needed to protect the rights of the debtor's former customers to receive funds and securities belonging to them. However, both SIPC and the debtor recognized that a SIPA proceeding would complicate and delay the administration of the debtor's estate and would increase the cost of administration. This was principally because, under SIPA, a Trustee must be appointed to administer distributions of customer property. 15 U.S.C. § 78eee(b)(3). In order to avoid unnecessary expense and delay, and with the approval of SIPC, the Staff of the SEC, the United States Trustee and the debtor's major creditors, the debtor applied for an order authorizing it to segregate funds and securities sufficient to satisfy any potential customer claims, and to distribute funds and securities to former customers in satisfaction of customer claims on an ongoing basis, just as a SIPA Trustee would otherwise have done.
9. The court entered the Segregation Order on TMSI's filing date. The Segregation Order authorized TMSI (i) to segregate and keep separate from its other assets funds in the aggregate amount of $12,719,402.00 deposited in seven bank accounts at United States Trust Company of New York (the "U.S. Trust Accounts") and (ii) to segregate on its books and records securities with an aggregate value of $9,357,921.00 as of March 23, 1990.
10. The Segregation Order provided that these segregated funds and securities (collectively, the "Segregated Property") could be used during the pendency of the bankruptcy case to satisfy valid claims by former customers of TMSI to "customer property" (as that term is defined in 15 U.S.C. § 78lll(4)) or "customer name securities" (as that term is defined in 15 U.S.C. 78lll(3)). The Segregation Order further provided that TMSI could make distributions and disbursements from the Segregated Property upon the filing by a former customer of a proof of claim in such form as authorized by the Bankruptcy Court. TMSI was directed to file weekly reports with the court, the Creditors' Committee, SIPC and the United States Trustee, describing all distributions of "customer property" and "customer name securities" made during the prior week.
11. On March 28, 1990 the court also entered an Order Setting a Bar Date for Claims of Former Customers and Approving Notice and Proof of Claim Forms (the "Bar Date Order"). The Bar Date Order was revised, on April 3, 1990, to correct certain clerical errors. The Bar Date Order, in conjunction with the Segregation Order, established a mechanism for the uniform resolution of customer claims. The court set October 30, 1990 (the "Bar Date") as the date by which former customers of TMSI were required to file claims to "customer property" or "customer name securities" (as those terms are defined in SIPA) or their claims to such property "shall be forever barred." The Bar Date Order also approved a form of notice and Proof of Claim forms.
12. As directed by the court pursuant to the Bar Date Order, TMSI sent notice, proof of claim forms and instructions by first class mailed to (i) all former customers of TMSI to whom checks had been issued, but not presented for payment prior to the filing of TMSI's petition, (ii) all holders of open institutional accounts, and (iii) all former customers of TMSI who had sent TMSI inquiries regarding property that might constitute customer property. TMSI also caused notice (in a form approved by the court) to be published on three consecutive Mondays in two national, six regional and three foreign newspapers.
13. Pursuant to the Segregation Order and the Bar Date Order, TMSI has been paying valid claims...
To continue reading
Request your trial