S.E.C. v. Securities Northwest, Inc.

• Decision Date: 14 April 1978
• Docket Number: No. 76-1556,76-1556
• Parties: Fed. Sec. L. Rep. P 96,413 SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, and Securities Investor Protection Corporation, Applicant-Appellee, v. SECURITIES NORTHWEST, INC., a Washington Corporation, Defendant, and James F. Lonergan, Intervening Petitioner-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 622

573 F.2d 622

Fed. Sec. L. Rep. P 96,413

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee and Securities Investor Protection Corporation, Applicant-Appellee, v. SECURITIES NORTHWEST, INC., a Washington Corporation, Defendant and James F. Lonergan, Intervening Petitioner-Appellant.

No. 76-1556.

United States Court of Appeals Ninth Circuit.

April 14, 1978.

I. Franklin Humsaker, III (argued), Portland, Or., for James F. lonergan.

Theodore H. Focht, Gen. Counsel, Washington, D.C., for S.E.C.

Appeal from the United States District Court for the Western District of Washington at Seattle.

Before KOELSCH and ELY, Circuit Judges, and VAN PELT, ^* District Judge.

KOELSCH, Circuit Judge:

On December 7, 1971, the Securities Investor Protection Corporation (SIPC) applied to the United States District Court for the Western District of Washington for a decree adjudicating that the customers of Securities Northwest, Inc., (Debtor), were in need of the protection provided by the Securities Investor Protection Act of 1970 (SIPA), 15 U.S.C. § 78aaa et seq. ¹ The district court granted the application after making the finding required by section 78eee(b)(1)(A) and appointed a trustee for the purpose of conducting the liquidation of the business of the debtor as provided by section 78eee(b)(3). ²

Liquidation under the Act proceeded, and on October, 24, 1975, the district court entered orders approving the trustee's final report and accounting, discharging the trustee and closing the estate of the debtor. From those orders "appellant" ³ seeks to prosecute this appeal. Having concluded that appellant lacks standing to maintain the appeal, we do not reach the merits of his claim.

Congress enacted the SIPA to provide, in the words of the House Committee Report, "protection for (securities) investors if the broker-dealer with whom they are doing business encounters financial troubles . . . (by providing) . . . for the establishment of a fund to be used to make it possible for the public customers in the event of the financial insolvency of their broker, to recover that to which they are entitled . . . ." H.R.Rep. No. 91-1613, 91st Cong., 2d Sess. 1 (1970), U.S.Code Cong. & Admin.News 1970, pp. 5254, 5255. Broadly described, the Act establishes a private, non-profit, membership corporation the SIPC charged with administering an insurance fund to provide coverage against customer losses resulting from the failure of broker-dealers registered under the Securities Exchange Act of 1934.

The Act prescribes a procedure for the orderly liquidation of financially insolvent SIPC members and payment of valid customer claims, borrowing heavily on provisions of the Bankruptcy Act. The SIPA thus provides financial protection to brokerage house customers not unlike that afforded bank depositors by the Federal Deposit Insurance Corporation. Somewhat more detailed expositions of the statutory scheme and purpose are given in Securities and Exchange Comm'n v. Albert & Maguire Securities Co., Inc., 560 F.2d 569 (3d Cir. 1977); Securities and Exchange Comm'n v. Aberdeen Securities Co., Inc., 526 F.2d 603 (3d Cir. 1975); Exchange National Bank of Chicago v. Wyatt, 517 F.2d 453 (2d Cir. 1975); Securities Investor Protection Corp. v. Charisma Securities Corp., 506 F.2d 1191 (2d Cir. 1974); Securities and Exchange Comm'n v. Aberdeen Securities Co., Inc., 480 F.2d 1121 (3d Cir. 1973), cert. denied, 414 U.S. 1111, 94 S.Ct. 841, 38 L.Ed.2d 738 (1973); and 3 Collier on Bankruptcy P 60.77 et seq. (14th ed.).

Appellant, a former officer and putative stockholder ⁴ of the debtor, purports to prosecute this appeal on alternative grounds. First, as an alleged stockholder of the debtor, appellant claims that he is entitled to a hearing "on all matters arising in a proceeding" under the SIPA by virtue of section 206 of Chapter X of the Bankruptcy Act (11 U.S.C. § 606), ⁵ a provision appellant maintains is incorporated into SIPA by section 78fff(c)(1) of the Act. Alternatively, appellant contends that he is directly and financially aggrieved by the district court orders complained of and thus entitled to seek this court's review. See Mayer v. National Missile and Electronics, Inc., 326 F.2d 401 (9th Cir. 1964). We dispose of these grounds in turn.

Section 78fff(c)(1) of the SIPA provides in pertinent part that "(e)xcept as inconsistent with the provisions of (the Act)" a liquidation proceedings under the SIPA "shall be conducted in accordance with, and as though it were being conducted under, the provisions of Chapter X . . . of the Bankruptcy Act . . . ." As indicated, appellant's claim is that section 206 of Chapter X, as incorporated into SIPA by section 78fff(c)(1), grants him, as a "stockholder of the debtor," the "right to be heard on all matters arising" in a SIPA liquidation proceeding. It is clear that, were this a Chapter X reorganization proceeding, the right to be heard on all matters arising in such a proceeding conferred on stockholders of the debtor by section 206 would encompass the right to appeal from an adverse determination. Young v. Higbee Co., 324 U.S. 204, 65 S.Ct. 594, 89 L.Ed. 890 (1945); In Re Wonderbowl, Inc., 515 F.2d 18 (9th Cir. 1975).

However, the right of a stockholder of the debtor to be heard in Chapter X reorganization proceedings and to maintain an appeal therefrom has been characterized as "contrary to the general bankruptcy procedure" (Young v. Higbee, supra, 324 U.S. at 210, 65 S.Ct. at 597) and intended to "encourage and promote individual participation in the reorganization by . . . stockholders, and to foster 'democratization of the proceeding.' " 6A Collier on Bankruptcy P 9.23 at 302 (14th ed.). Chapter X is remedial in intent and "designed to effect the rehabilitation of corporate debtors through a legal method of reorganization which conserves the going-concern values of the property, avoids foreclosures and forced sales and enables the debtor to continue operations, yet affords full consideration of the rights of creditors and stockholders." 6 Collier on Bankruptcy P 0.11 at 116-117 (14th ed.).

The right to be heard conferred by section 206 on stockholders of Chapter X corporations is manifestly intended to provide those with a palpable financial interest in the future of the corporation following reorganization with an opportunity to participate in the proceedings in order to promote and protect those present and continuing interests. However, the formulation of any plan of reorganization in a SIPA proceeding is expressly prohibited by section 78fff(c) of the Act, and proceedings under the SIPA are for practical purposes bankruptcy liquidation proceedings. Securities and Exchange Comm'n v. Aberdeen Securities Co., Inc., supra, 526 F.2d at 605-606; Exchange National Bank of Chicago v. Wyatt, supra. Thus, although a stockholder possesses a substantial and continuing financial interest where the object of the proceeding is the formulation of a corporate reorganization plan and a continuation of the corporation's existence as in the case of Chapter X proceedings we perceive no such interest where, as in the case of proceedings under the SIPA, the object is a winding up of the corporation's business affairs.

Moreover, permitting stockholders of insolvent brokerage houses to participate in matters arising in the course of SIPA liquidation proceedings would needlessly enlarge the scope of such proceedings and impede the achievement of the primary aims of the Act, the orderly liquidation of the business of the debtor and the payment of valid customer claims. Cf. Securities Investor Protection Corp. v. Charisma Securities Corp., supra, 506 F.2d at 1195. We thus conclude and accordingly hold that the procedural rights accorded stockholders by section 206 of Chapter X are "inconsistent with the provisions" of the SIPA and therefore inapplicable.

Nor is appellant's "interest" in the liquidation proceeding of sufficient immediacy to confer standing. Appellant does not purport to have participated in the proceedings below and to prosecute this appeal as a creditor seeking allowance of a claim against the debtor. Rather, his complaint is that, as a responsible officer of the debtor corporation, he was personally assessed a civil penalty by the Internal Revenue Service for accrued federal withholding taxes owing and unpaid by his employer. ⁶ Under such circumstances, appellant's contention is that, had the trustee accorded the claims of the IRS against the debtor for the unpaid taxes a higher priority than that actually approved, the government's tax claims would have been satisfied out of the estate of the debtor corporation in the liquidation proceeding, thus relieving appellant of any personal liability for the unpaid taxes. ⁷

However, appellant's liability for unpaid withholding taxes was imposed under 26 U.S.C. § 6672 ⁸ and is "a totally independent liability from that of the corporation." Teel v. United States, 529 F.2d 903, 906 (9th Cir. 1976). See also Bloom v. United States, 272 F.2d 215, 221 (9th Cir. 1959), cert. denied, 363 U.S. 803, 80 S.Ct. 1236, 4 L.Ed.2d 1146 (1960) ("a distinct and separate liability"). Appellant himself presented no claim against the debtor in the SIPA liquidation proceeding. He seeks instead to upset the priority of claims accorded by the trustee to others in the hope of thereby reducing an independent personal liability imposed in a collateral proceeding having no material bearing on the debtor's liquidation. See Lonergan v. United States, 37 AFTR2d 76-449 (D.Wash.1975).

The short of the matter is that appellant seeks to champion the rights of another, the IRS, to priority satisfaction among those claims allowed in the liquidation proceeding. His interest in the priorities accorded by the trustee and approved by the district court, although indirectly pecuniary, is remote and consequential rather than direct and immediate; he thus lacks standing to maintain the...