Matter of SSIW Corp.

• Decision Date: 16 December 1980
• Docket Number: Bankruptcy No. 79 B 10343.
• Citation: 7 BR 735
• Parties: In The Matter of S S I W CORP., Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

7 B.R. 735 (1980)

In The Matter of S S I W CORP., Debtor.

Bankruptcy No. 79 B 10343.

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

December 16, 1980.

Guggenheimer & Untermyer, New York City, for Commercial Mortg. Co.; Robert E. Smith, William J. Cohen, New York City, of counsel.

Shea & Gould, New York City, for debtor and debtor-in-possession; Thomas E. Constance, Philip R. Mann, New York City, of counsel.

OPINION

JOEL LEWITTES, Bankruptcy Judge.

I

This is a cross-motion by Commercial Mortgage Company ("CMC")¹ seeking an order converting this Chapter 11 reorganization case to a stockbroker liquidation case under subchapter III of Chapter 7 of the Bankruptcy Reform Act of 1978 ("1978 Act").² The ground asserted by CMC, for such requested relief, is that since the Chapter 11 debtor, SSIW Corp. ("SSIW"), is a dealer engaged in the business of effecting transactions with institutional investors³ in loans or mortgages guaranteed by the Federal Government or its agencies,⁴ it is a "stockbroker" as that term is defined in the 1978 Act⁵ and, accordingly, is disabled from invoking the provisions of Chapter 11.⁶

Since both parties to this dispute, at least for purposes of this motion, agree that SSIW is not engaged in the business of effecting transactions in securities for the account of others, but deals rather from or for its own account, in order for CMC to establish that SSIW is a "stockbroker", as defined in § 101(39)(B) of the 1978 Act, it must demonstrate that SSIW has (1) a "customer" as defined in § 741(2) of the 1978 Act;⁷ and is (2) engaged in the business of effecting transactions in "securities" (3) "with members of the general public, from or for such . . . stockbroker's own account."⁸

We shall now proceed to an examination of the constituent elements of the "stockbroker" definition, although not in the sequence just presented.

II

Does SSIW, a dealer, inter alia, in Government National Mortgage Association certificates, deal in "securities"?

(a)

The term "security" is defined in the 1978 Act, in relevant part, to include a "note, bond or debenture".⁹ An examination of the nature of the Government National Mortgage Association certificates satisfies us that they fall within the plain meaning of the Act's definition of a "security."

The Government National Mortgage Association ("GNMA") was created pursuant to Title III of the National Housing Act of 1968.¹⁰ The avowed purpose behind the formation of GNMA was to attract new sources of investment in the residential mortgage market, particularly during periods of tight credit.¹¹ The creators of this Association recognized that since large sums of capital are required to invest in mortgages, investors, interested in a diversified portfolio, were often precluded from lending funds to cover more than a few properties.¹² More important, an investment in such property lacked a traditionally essential ingredient in the minds of many investors — liquidity.¹³

Thus, in the scheme of The National Housing Act, under a single family guarantee plan, the mortgage lender assembles a pool of FHA or VA home loans,¹⁴ carrying a single rate of interest and normally having an aggregate value of $1 million.¹⁵ The mortgage lender then issues Ginnie Mae certificates against the pool. Although GNMA is not the issuer, it guarantees the timely payment of interest and principal on the securities collateralized normally by the single family thirty year mortgages, one to four unit dwellings.¹⁶

The GNMA certificates are denominated as "pass through" "securities" since both principal and interest on the underlying mortgage pools are passed through to the certificate holders on a pro rata basis. Since GNMA, however, guarantees payment of principal and interest, "Ginnie Maes" are properly defined to be "modified pass throughs" — i.e. — the "Ginnie Mae" certificate holders will receive the monthly payment due them without regard to whether or not the homeowners actually remit their required payment to the mortgage lender-issuer.¹⁷

We must conclude, from the above, that Ginnie Maes clearly fall within the definition of "securities" in the 1978 Act since they partake of the essential ingredients of a note, bond or debenture.

III

Does SSIW have a "customer" as that term is defined in the 1978 Code?

(1)

On the basis of the papers submitted on this motion, it appears that SSIW is generally engaged in the business of effecting transactions in loans or mortgages guaranteed by the Federal Government or its agencies. In particular, in dealing with "Ginnie Maes", SSIW contracts to purchase these securities from one financial institution while contemporaneously contracting to sell the same "Ginnie Maes" to another at a greater or lesser price. Often these transactions take the form of "puts", whereby SSIW grants an option to one financial institution for a premium, to purchase "Ginnie Maes" for a given price on a given date in the future. In such case, SSIW would then seek to purchase a "put" from another financial institution for the sale of the same "Ginnie Maes" on the same date at the same price. SSIW's profit or loss in such transactions is dependent upon the difference between the premiums received by SSIW for the "put" it purchased.¹⁸ CMC is the holder of certain unexecuted "puts" given by SSIW.

(2)

Section 741(2) of the 1978 Code defines the term "customer", for purposes of the Code's Stockbroker Liquidation provisions, as including an

"(A) entity with whom the debtor deals as principal or agent and that holds a claim against the debtor on account of a security received, acquired, or held by the debtor in the ordinary course of business as a stockbroker from or for the securities account or accounts of such entity —

(i) for safekeeping;

(ii) with a view to sale;

(iii) to cover a consumated sale;

(iv) pursuant to a purchase;

(v) as collateral under a security agreement; or

(vi) for the purpose of effecting registration of transfer; and

"(B) entity that holds a claim against the debtor arising out of —

(i) a sale or conversion of a security received, acquired or held as specified in subparagraph (A) of this paragraph; or

(ii) a deposit of cash, a security, or other property with the debtor for the purpose of purchasing or selling a security;"

CMC, preferring to litigate this motion solely on the ground that it is a "member of the general public", boldly states, without more, that "CMC meets the definition of `customer' as defined in § 741(2)" quoted above.¹⁹ SSIW tentatively argues, however, that CMC "is not necessarily"²⁰ a "customer" because (1) SSIW does not hold securities belonging to CMC and (2) CMC does not have a claim against SSIW arising from the sale or conversion of a security or a deposit of cash, securities or other property.

The sole legislative statement addressed to the Code definition of "customer" reveals that such descriptive term comprehends "anybody that interacts with the debtor in a capacity that concerns security transactions.²¹ The term embraces cash or margin customers of a broker or dealer in the broadest sense."^21a In view of the provisions of § 60(e) of the 1898 Bankruptcy Act²² and the relevant sections of the Security Investors Protection Act of 1970 ("SIPA"),²³ from which it is clear that the 1978 Act sections relating to stockbroker and stockbroker liquidations quite naturally evolved,²⁴ as well as the plain language of 11 U.S.C. § 741(2),²⁵ CMC is not a "customer" of SSIW, as defined, and therefore is not entitled to the relief it now requests.

The circumstance that invariably triggered "customer" status under both § 60(e) of the Bankruptcy Act and the SIPA was the act of entrusting securities by the claimant "to a broker for some purpose connected with participation in the securities market."²⁶ Thus the Court stated in S.E.C. v. Kenneth Bove & Co., Inc.²⁷

"The definition of customer in the 1898 Bankruptcy Act and SIPA sections is in identical language. Under each law, the preferential protection is accorded to a person who can trace and identify the trust property or funds in the hands of the stockbroker;. . . . "²⁸

Although the 1978 Act provisions extended the definition of a "customer" to one who advances monies to a broker in order that the broker purchase securities for the former,²⁹ the Code does not, in any manner, depart from the precept that "customer" status is accorded only to a claimant who entrusts either cash or securities with the broker-dealer in connection with a securities transaction. Because CMC has neither contended, nor demonstrated, that it or any other entity entrusted either cash or securities with SSIW, in connection with the latter's trading activities in "Ginnie Maes", SSIW is not a stockbroker since it does not have a statutorily defined customer. Accordingly, the relief sought here by CMC must be denied.

Even if the definition of "customer" be read to encompass CMC and other entities dealing with SSIW, which we are convinced would be improper, we now must turn to CMC's contention that SSIW is a "stockbroker", as defined in the 1978 Act, engaged in the business of effecting transactions in securities "with members of the general public."

IV

Assuming arguendo that SSIW has a statutorily defined "customer", does it deal "with members of the general public", in the context of the stockbroker definition of the 1978 Bankruptcy Reform Act?

We return, once more, to the roots of the stockbroker liquidation provisions of the 1978 Bankruptcy Code; this time to discover therefrom, if possible, what Congress deemed to be "members of the general public" for purposes of 11 U.S.C. § 101(39).³⁰

(A)

Former Bankruptcy Act § 60(e) and the genesis of the definition of "stockbroker" in the Bankruptcy Reform Act of 1978.

It is well-established and reported that prior to the 1938 Chandler amendments to the Bankruptcy Act of 1898, the provisions of the Bankruptcy Act were not structured to properly cope with broker...