In re Thomson McKinnon Securities, Inc.

• Decision Date: 31 January 1996
• Docket Number: 90 B 11805 (JJC) and 90 B 13820 (JJC).,Bankruptcy No. 90 B 10914 (JJC)
• Citation: 191 BR 976
• Parties: In re THOMSON McKINNON SECURITIES, INC., Thomson McKinnon Inc. and Realty International Corporation, Irene Robbins and Bert Shepherd, Trustees of the Davis Robbins Family Trust and the Davis Robbins Marital Trust, Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

191 B.R. 976 (1996)

In re THOMSON McKINNON SECURITIES, INC., Thomson McKinnon Inc. and Realty International Corporation, Irene Robbins and Bert Shepherd, Trustees of the Davis Robbins Family Trust and the Davis Robbins Marital Trust, Debtors.

Bankruptcy Nos. 90 B 10914 (JJC), 90 B 11805 (JJC) and 90 B 13820 (JJC).

United States Bankruptcy Court, S.D. New York.

January 31, 1996.

COPYRIGHT MATERIAL OMITTED

Donald G. McCabe, New York City, for Thomson McKinnon Securities, Inc.

Robert B. Eubank, Birmingham, AL, for claimants Irene Robbins and Bert Shepherd.

Norma Ortiz, Office of the United States Trustee, New York City.

DECISION ON ESTIMATION OF CLAIMS

JOHN J. CONNELLY, Bankruptcy Judge.

Irene Robbins and Bert Shepherd ("Trustees" or "claimants") filed proofs of claims against Thomson McKinnon Securities, Inc. ("TMSI"), alleging churning of two separate brokerage accounts. Trustees base their claims on Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b) and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, and Section 19(a) of the Alabama Securities Act, Code of Alabama § 8-6-19(a). TMSI was an investment and securities broker prior to the filing of their liquidating Chapter 11 cases with this court on March 28th, 1990. TMSI filed a timely objection to Trustees' claims on November 20, 1992. By order dated February 11, 1991, the late Honorable Howard Schwartzberg, directed that the claims be liquidated pursuant to 11 U.S.C. § 502(c) of the Bankruptcy Code.

I. Jurisdiction

This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a) and 1334, and in particular 11 U.S.C. § 502(c)(1), which requires the estimation of unliquidated claims, the liquidation of which would delay the administration of a bankruptcy case. Venue is proper under 28 U.S.C. § 1409(a). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B).

II. Background

Trustees' claims arise from two trusts established under the will of Davis Robbins, a family trust and a marital trust (individually, "Family Trust" and "Marital Trust," or collectively, "Trusts"). The Trusts were the source of funds for two accounts (individually, "Family Trust Account" and "Marital Trust Account" or collectively, "Robbins Trust Accounts" and "Accounts") opened in the Birmingham office of TMSI. Broadly stated, the Trustees are unsatisfied with TMSI's management of the Accounts during the period January 1, 1985 through October 31, 1987. Although the Trustees do not quarrel with the suitability of the securities purchased, they allege that the trading frequency was excessive in light of the Trusts investment objectives. In short, the Trustees allege that John Day, the broker primarily responsible for the Accounts, "churned" the Accounts by purchasing securities for the Accounts with the sole purpose of creating commissions. The Trustees seek redress for violations of federal and state securities laws.

Amidst this factual backdrop, this Court is charged with liquidating Trustees' claims against TMSI, the lodestar being the efficient and quick resolution of these bankruptcy proceedings. See Bittner v. Borne Chemical Co., 691 F.2d 134, 137 (3d Cir.1982) citing 124 Cong.Rec. H 11101-H 11102 (daily ed. Sept. 28, 1978). The Bankruptcy Code provides for the estimation of contingent or unliquidated claims, "the fixing or liquidation of which, as the case may be, would unduly delay the administration of the case . . ." 11 U.S.C. § 502(c)(1). The Code and the Federal Rules of Bankruptcy are silent as to an applicable procedures governing the estimation hearing. In filling the void, courts have determined that judges are to use ". . . whatever method is best suited to the circumstances." Addison v. Langston (In re Brints Cotton Marketing, Inc.), 737 F.2d 1338, 1341 (5th Cir.1984); In re Thomson McKinnon Securities, Inc., 143 B.R. 612, 619 (Bankr. S.D.N.Y.1992); In re Windsor Plumbing Supply Co., Inc., 170 B.R. 503, 520 (Bankr. E.D.N.Y.1994). A bankruptcy judge ". . . is bound by the legal rules which may govern the ultimate value of the claim. However, there are no other limitations on the court's authority to evaluate the claim save those general principles which should inform all decisions made pursuant to the Code." Bittner, 691 F.2d at 135-36.

The manner chosen for the claim at bar was an estimation hearing. Each side was entitled to the presentation of one witness and the introduction of one deposition. This opportunity was seized by both the Trustees and TMSI. Each side introduced an expert witness as well as placing into the record relevant portions of earlier depositions. Furthermore, this court has been supplied with extensive memoranda and affidavits by the parties upon which a reasonable estimation may be based.

III. Findings of Fact

1. Davis Robbins, Sr. invented a coal mining device, the sale of which yielded him several million dollars of stock in the purchasing company, Joy Manufacturing Company. Upon his death in 1976, the two trusts, one of which benefitted his wife, the other benefitting his adult children were funded, primarily with the Joy Manufacturing Company stock, and several thousand acres of land. (Shepherd at 27-5).¹ All of the active participants under the trust, including Davis Robbins, Sr., the beneficiaries of both trusts, and the Trustees, reside in Oneonta, Alabama, a small town roughly 45 miles northeast of Birmingham, Alabama.

2. By 1983 the Trustees had fully liquidated the stock contained in the trusts. The Trustees then opened two Accounts at TMSI's Birmingham office. In funding the Accounts, the Trustees transferred over $4,000,000 in cash and securities.² TMSI's role in the Accounts terminated in late October, 1987, when the Trustees elected to transfer the Accounts with Day to his new employer Paine Webber, Inc. ("Paine Webber"), another brokerage firm.

3. Trustee Bert Shepherd was 69 years old when the Accounts were opened in 1983. Possessing a high school education supplemented by correspondence school classes in accounting, Shepherd spent many years as an accountant at various companies. (Shepherd at 9-19). His acquaintance with the elder Robbins stemmed from his employment with one of the companies owned by Robbins.

4. Trustee Irene Robbins was also 69 years old when the Account with TMSI were first opened. She possessed a grammar school education and had no financial training. She played no role in the oversight of the Robbins Trust Accounts. (Shepherd at 45-9).

5. The Accounts at TMSI were opened in early 1983, and at that time were the primary responsibility of John Strauss, a broker employed by TMSI. In 1984 John Day, then roughly 23 years old and the son of branch manager Roland Day, began assisting Strauss with the Robbins Trust Accounts. Initially, Day received twenty percent of the gross commissions earned by Strauss from the Accounts. (Strauss at 25-2). However, from approximately the end of 1985 through the end of October, 1987, Day received fifty percent of the gross commissions earned by Strauss. (Strauss at 63-19).

6. When the Accounts were opened, the Trustees communicated to Strauss that the Accounts represented the chief source of income to the beneficiaries of the Trusts. Five families, including an office staff, relied upon the income from the Trusts for their livelihood. (Strauss at 14-7). Accordingly, the Trustees selected growth and income as the Trusts' investment objectives on the new account forms. (Strauss at 16-13). The Trustees declined to check boxes labelled "speculation" and "trading" since that was inconsistent with the Trusts more conservative investment goals. (Strauss at 18-5 and Trial Exhibits C-1 and C-2).

7. The Accounts were opened at TMSI as "non-discretionary." In order to enter trades, the placing broker was required to seek approval from the Trustees prior to the actual placement of the order. (Strauss at 26-14).

8. During the relevant period, TMSI complied with federal securities law³ by mailing confirmation slips. These slips indicated the trade date and settlement date of each transaction, the number of shares, the price of the shares and the commission earned by the trade. Upon receipt of a confirmation, Shepherd would routinely enter the information contained therein in a private ledger. When he received monthly account statements on the Accounts, he would check them against his ledger and reconcile the accounts to the month-end statements. (Shepherd at 39-1).

9. Over time, Day's role in managing the Robbins Trust Accounts grew. Strauss was engaged in a lengthy divorce proceedings during 1985, and was only sporadically present during that time period. (Strauss at 49-8). Additionally, in early 1987, physical injuries resulted in Strauss' repeated absence from the office. (Strauss at 54-12). Accordingly, from early 1985, the management of the Robbins Trust Accounts were almost entirely in the hands of John Day.

10. By July of 1986, Day had cultivated a close personal relationship with several of the beneficiaries of the trust. (Strauss at 38-14). His temerity growing with the passage of time, Day commenced a trading pattern of buying and selling stocks without seeking the prior approval of the Trustees, despite the fact that the accounts were non-discretionary. (Shepherd at 37-15). Day however would communicate his actions to Shepherd shortly after making such trades. Shepherd apparently had no objection to this method of handling the accounts as long as the transactions produced a profit. (Shepherd at 48-3). Additionally, Shepherd believed that the beneficiaries did not care about the method used in handling the accounts as long as they received income and lived comfortably. (Shepherd at 51-11). On the several occasions that Shepherd did voice his displeasure with particular purchases, the purchases were cancelled. (Shepherd at 78-5).

11. By July of 1986, Strauss grew increasingly alarmed at the...