Miller v. Austin

• Decision Date: 27 April 1987
• Docket Number: No. 85 Civ. 3580 (CHT),85 Civ. 3581 (CHT).,85 Civ. 3580 (CHT)
• Citation: 72 BR 893
• Parties: Harvey R. MILLER, As Trustee for the liquidation of John Muir & Co., Debtor, Appellant, v. Nancy L. AUSTIN, Appellee. In re JOHN MUIR & CO., Debtor. Theodore H. FOCHT, As General Counsel for Securities Investor Protection Corp., Appellant, v. Nancy L. AUSTIN, Appellee. In re JOHN MUIR & CO., Debtor.
• Court: U.S. District Court — Southern District of New York

72 B.R. 893 (1987)

Harvey R. MILLER, As Trustee for the liquidation of John Muir & Co., Debtor, Appellant, v. Nancy L. AUSTIN, Appellee.

In re JOHN MUIR & CO., Debtor.

Theodore H. FOCHT, As General Counsel for Securities Investor Protection Corp., Appellant, v. Nancy L. AUSTIN, Appellee.

In re JOHN MUIR & CO., Debtor.

Nos. 85 Civ. 3580 (CHT), 85 Civ. 3581 (CHT).

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

April 27, 1987.

Weil, Gotshal & Manges, New York City, for appellant Harvey R. Miller; Richard P. Krasnow, Jeffrey L. Tanenbaum, Lori R. Fife, George G. Love, II, of counsel.

Theodore H. Focht, Gen. Counsel, Securities Investor Protection Corp., Washington, D.C., for appellant Theodore H. Focht; Michael E. Don, Deputy Gen. Counsel, Stephen P. Harbeck, Associate Gen. Counsel, of counsel.

Winthrop, Stimson, Putnam & Roberts, New York City, for appellee Nancy L. Austin; Julie D. Fay, of counsel.

OPINION

TENNEY, District Judge.

This is an appeal from an order of the bankruptcy court (Howard C. Buschman III, J.) dated March 28, 1985 allowing Nancy L. Austin's customer claim against John Muir & Co. ("Debtor" or "Muir"), a securities brokerage firm which closed down in August 1981. Acting on the application of the Securities Investor Protection Corporation ("SIPC"), the district court (Sofaer, J.) entered a decree dated August 17, 1981 stating that the customers of Muir were in need of the protections afforded by the Securities Investor Protection Act of 1970, as amended ("the Act" or "SIPA"), codified at 15 U.S.C. § 78aaa et seq. (1981). Harvey R. Miller ("the trustee") was thereafter appointed by the court to handle Muir's liquidation. The trustee set a deadline of November 9, 1981, subsequently extended to March 9, 1982 ("the bar date"), by which time customers and creditors of Muir were required to file claims, and published and mailed to them a notice dated September 8, 1981 explaining procedures and time limits and enclosing appropriate forms for filing claims.

On September 9, 1982, some six months after the bar date had passed, Austin filed a claim for $115,235.50, the net equity value of securities held in her account at Muir. The trustee disallowed Austin's claim on the ground that it had been untimely filed. The trustee and SIPC then moved for an order from the bankruptcy court confirming the propriety of disallowing Austin's claim. Austin moved for an order allowing it. A hearing concerning Austin's objection to the disallowance of her claim was held on October 4, 1984 and in a decision dated March 20, 1985 the bankruptcy court allowed Austin's late claim. SIPC and the trustee appeal from that decision.

The court concludes that the bankruptcy court erred as a matter of law in granting an equitable exception to the time limits established for filing claims. Accordingly, the decision of the bankruptcy court is reversed.

BACKGROUND

The facts concerning the filing of Austin's claim are, for the most part, undisputed. Austin is a housewife who placed nearly all her assets (with the exception of the home belonging to her and her husband) into a margin account at Muir. George James, a customer representative employed by Muir, was vested with responsibility for, and had discretion with respect to, trading the securities in Austin's account. On August 17, 1981, SIPC, a nonprofit corporation established pursuant to SIPA, filed for a protective decree on behalf of the customers of Muir.

Austin concedes that she received in due course the trustee's official notice to customers dated September 8, 1981 ("notice"), which stated in pertinent part:

If you are a customer of the Debtor with a valid claim relating to securities or cash you may be protected under the provisions of SIPA.

In order to expedite the liquidation process, the Trustee and SIPC are attempting to reach agreements with other stock brokerage firms to accept a transfer of the accounts of the Debtor\'s customers. The Trustee and SIPC believe that any such transfer of accounts will effect the return of your securities to your control as quickly and efficiently as possible.

* * * * * *

IN ORDER TO FULLY PROTECT YOUR RIGHTS YOU MUST FILE A CLAIM WITH THE TRUSTEE EVEN IF YOUR ACCOUNT IS TRANSFERRED.

Enclosed is a form which should be completed by you and mailed to the Trustee in the enclosed envelope. A second copy is for your files. THE CLAIM MUST BE RECEIVED BY THE TRUSTEE ON OR BEFORE THE DATE SPECIFIED ON THE CLAIM FORM. While your claim is being processed, you may be requested to file with the Trustee additional information or supporting documents.

You are advised that it is your responsibility to accurately report all securities positions and money balances in connection with your account with the Debtor. An improper claim or retention of property to which you are not entitled may make you liable for criminal penalties under SIPA.

* * * * * *

Your cooperation in returning your completed form promptly is in your best interests and will facilitate our delivery of any securities and cash to which you are entitled under SIPA. If you have any questions please write to the Trustee; telephone calls will only slow distribution to all customers.

A customer claim form enclosed with the notice stated that "ALL CUSTOMER CLAIMS MUST BE RECEIVED BY THE TRUSTEE ON OR BEFORE November 9, 1981." The deadline for receipt of claims was subsequently changed to March 9, 1982 ("the bar date"), although it appears that Austin was never notified that the period of time in which to file claims had been extended. Transcript of Hearing ("Tr.") 34-35.

Austin did not file her customer claim form until September 14, 1982. The form she filed listed the securities held in her Muir account as of July 31, 1981. Attached was a copy of her July 31, 1981 account statement and a memorandum from James indicating position changes in the account from July 31 to August 20, 1981.

On June 15, 1983, the trustee disallowed Austin's claim because she had filed it after the bar date. Austin objected to the trustee's disallowance of her claim. The bankruptcy court held a hearing concerning the objection.

At that hearing Austin testified that she had understood from the notice that she was required to file a claim within a designated period of time, but had failed to file for several reasons. First, she contended she was unable to file a proper claim form because Muir and/or the trustee had failed to send her a current statement of her account as of the date of the notice, and she feared that filing an improper claim would subject her to penalties. The last statement Austin had received reflecting the positions in her account was dated July 31, 1981. It is undisputed that she did not receive a confirmation of trades made in the account between July 31 and September 8, 1981 until well after the deadline for filing.

In addition, Austin asserted that she failed to file a timely claim form in reliance on James' advice. She testified that when she asked James to provide her with information concerning recent trades in her account so she could file a proper claim form, he advised her that her account was being transferred to another brokerage house, and it was therefore unnecessary for her to file a claim form. James' testimony confirmed that he had related this incorrect information to Austin. Tr. 51.

While Austin cited the transmission of misinformation by James, admittedly after consulting with the trustee's representative at Muir, as evidence that the trustee was negligent in failing to properly instruct the Muir brokers, she never wrote to James or the trustee for confirmation. Instead, she and her husband repeatedly telephoned James to inquire on the status of her account, and he mistakenly assured them that it was being taken care of.

Although other Austin family members had had their accounts transferred to another brokerage house, Nancy Austin's account was never so transferred.¹ In August or September 1982, James told Austin's husband that Austin should attempt to file a late claim form, and that there was a possibility that the trustee was going to disallow the claim. Tr. 45.

Disposition Below

In its decision allowing Austin's claim, the bankruptcy court acknowledged the undisputed evidence that Austin (i) timely received notice of SIPA's six-month time limit for filing customer claims, 15 U.S.C. § 78fff-2(a)(3) (1981), and (ii) filed an untimely claim. However, the bankruptcy court held that equitable exceptions to the time limits can be recognized when SIPA's underlying policies are not harmed by allowance of late claims.

The bankruptcy court concluded that Austin's claim should be allowed because it would not undermine SIPA's policies. Reasoning in support of this conclusion, the bankruptcy court specifically (i) noted the absence of any evidence that Austin had purposely delayed filing a claim to avail herself of an advantageous change in the market, 81 B 11761, slip op. at 6 (Bankr.S.D.N.Y. March 20, 1985); (ii) observed that the Muir estate was solvent after satisfying all timely filed customer claims and that SIPC had been fully reimbursed for its outlays, id. at 6, 8; and (iii) emphasized that Austin possessed a "concededly meritorious" claim relating to property that was "rightfully hers," id. at 8, 14.

The bankruptcy court's decision in effect held that the bar date of § 78fff-2(a)(3) should be immutable for limited, insolvent estates, but in the instance of estates remaining solvent after satisfaction of timely customer claims, untimely customer claims should be allowed on an equitable basis in order to achieve the overall purpose of SIPA "to maintain confidence in the securities markets by providing customers of securities broker-dealers protection against losses which might occur as a result of the financial failure of broker-dealers." Id. at 8. Such an exception allows tardily filed customer claims to be satisfied prior to timely filed general creditor...