In Re: Lloyd Securities, Inc. , 75 F.3d 853 ( 1996 )

Opinions of the United
1996 Decisions States Court of Appeals
for the Third Circuit
2-6-1996
In Re: Lloyd Securities, Inc.
Precedential or Non-Precedential:
Docket 95-1543
Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1996
Recommended Citation
"In Re: Lloyd Securities, Inc." (1996). 1996 Decisions. Paper 227.
http://digitalcommons.law.villanova.edu/thirdcircuit_1996/227
This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova
University School of Law Digital Repository. It has been accepted for inclusion in 1996 Decisions by an authorized administrator of Villanova
University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 95-1543
IN RE: LLOYD SECURITIES, INC.,
Debtor
ARTHUR ALPERSTEIN, GLORIA BENTZ, GLORIANNE BENTZ,
HERMAN BERKOWITZ, LORRAINE BERKOWITZ, JAMES DEAMER,
EMPIRICAL ENTERPRISES, INC., KENNETH FELZER, RUTH HOFFMAN,
LLOYD HUMPHREY, RICHARD KATZ, LINDA KATZ, HARRIET KIRSCH,
JOHN KOCHERSPERGER, ALICE McCABE, JOSEPH McGUCKIN,
PHYLLIS NEWCOMER, TIMOTHY NYLAND, JAMES NYLAND,
VERNETTA NYLAND, LARRY ROTHSTEIN, FAYE ROTHSTEIN,
DWAYNE SIMPSON, KATHRYN SIMPSON, ALAN SMITH,
ESTATE OF RUSSELL SNYDER, MICHAEL SOROKER,
BARBARA SOROKER, and BAZELON & LESS, *
Appellants
* (Amended as per the Clerk's 7/18/95 Order)
ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
(D.C. Civil Action Nos. 94-01391 and 94-01416)
Argued September 13, 1995
Before: MANSMANN, SCIRICA and NYGAARD, Circuit Judges
(Opinion Filed February 6, 1996)
RICHARD L. BAZELON, ESQUIRE (Argued)
PAUL B. BECH, ESQUIRE
Bazelon & Less
1515 Market Street, 7th Floor
Philadelphia, PA 19102
Attorneys for Appellants
STEPHEN P. HARBECK, ESQUIRE (Argued)
KEVIN H. BELL, ESQUIRE
Securities Investor Protection Corporation
805 15th Street, N.W., Suite 800
Washington, DC 20005
1
Attorney for Appellee Securities Investor
WARREN T. PRATT, ESQUIRE (Argued)
DAVID A. SEARLES, ESQUIRE
Drinker, Biddle & Reath
1345 Chestnut Street
Philadelphia National Bank Building
Philadelphia, PA 19107-3496
Attorney for Appellee Shields
OPINION OF THE COURT
NYGAARD, Circuit Judge.
The customers of a failed securities dealer, Lloyd
Securities, Inc., and their attorneys sought fees from the res
created by the dealer's liquidation under the Securities Investor
Protection Act ("SIPA"). The district court denied the motion
and the customers and attorneys appeal. We will affirm.
I.
The facts of this case are well-stated in the opinions
of the district and bankruptcy courts. See In re Lloyd
Securities, Inc., 183 B.R. 386 (E.D. Pa. 1995); In re Lloyd
Securities, Inc., 163 B.R. 242 (Bankr. E.D. Pa. 1994). We will
assume the reader is familiar with those opinions and present
only a summary.
A.
The Securities and Exchange Commission sued Lloyd
Securities and several related entities. The SEC alleged that
Lloyd and its principals engaged in a scheme to defraud investors
2
in violation of the securities laws. The court granted the
requested relief and appointed a receiver. Shortly thereafter,
customers of Lloyd Securities brought a class action against
Lloyd Securities, its principals and other parties that had
participated in the customers' securities transactions. This
came to be known as the Deamer case.
The Securities Investor Protection Corporation ("SIPC")
filed an application in the SEC action for a protective decree,
turning the receivership into a liquidation. The liquidation
proceeding was then referred to the bankruptcy court. The
customers assert as a basis for their recovery that they were
instrumental in causing the SIPC to seek the liquidation of Lloyd
Securities, although this is disputed.
The trustee filed a number of chapter 11 cases on
behalf of Lloyd's principals and entities related to Lloyd
Securities. These cases were all administered jointly and were
known as the IBEX cases. The customers then moved to have the
IBEX cases administered jointly with the SIPA liquidation itself
in order to save administrative costs. Although the trustee and
the SIPC opposed the motion, the bankruptcy court indicated its
intention to grant it and the cases were ultimately administered
together.
The trustee instructed Lloyd's customers to submit
their net equity claims by April 1991; yet, by May 1992 payment
had been made on only five of them, leaving approximately 85
outstanding. This led the customers to file a motion to compel
the trustee to rule on their claims. The district court never
3
actually decided this motion, but by September 1992, the trustee
had ruled on most of the claims.
The trustee also filed adversary proceedings against
Newbridge Securities, Inc. and several banks. In response to
those defendants' allegations that the trustee lacked standing to
bring the claims, the customers intervened and participated
actively in that litigation, which ultimately settled in the
plaintiffs' favor.
B.
Because of their direct involvement in the above
litigation, the customers submitted to the bankruptcy court
applications for compensation under SIPA, specifically 15 U.S.C.
§ 78eee(b)(5). The first of these applications sought
approximately $22,000 for services rendered in connection with
the motion to administer the IBEX cases and the SIPA liquidation
jointly. The other requested almost $260,000 for all other
services they rendered in actually litigating both proceedings.
The SIPC opposed both applications.
The bankruptcy court held that, while compensation was
governed generally by SIPA § 78eee(b)(5)(C), Congress intended
the specific standards of the Bankruptcy Code as a substantive
overlay to SIPA. Accordingly, the court ruled that "the
standards established under the Code for compensation
applications, if not all of the Code's specific restrictions,
should be liberally borrowed in interpretation of [§
78eee(b)](5)(C) as well." 163 B.R. at 252.
4
Nevertheless, the bankruptcy court rejected SIPC's
contention that the customers' remedy was limited to
§503(b)(3)(D) of the Code. Although that section would appear to
contemplate a compensation claim on behalf of customer-creditors,
the court noted that it specifically does not apply to a chapter
7 proceeding, which is precisely how a SIPA liquidation is
conducted. See 15 U.S.C. § 78fff(b). SIPC's argument would thus
preclude recovery of compensation for customers in all SIPA
cases, a result the bankruptcy court thought that Congress could
not have intended without explicit statutory language to that
effect. See 163 B.R. at 252-53.
Even so, the bankruptcy court concluded that, while
§503(b)(3)(D)'s exclusion of chapter 7 proceedings could not be
applied literally, its substantive standards for recovery should
be applied in a case arising under SIPA. Id. at 254. Looking to
the caselaw interpreting that section, it held that recovery was
possible only if the applicants' services were not duplicative
and benefitted the estate itself.
The court also imported the standard of 11 U.S.C.
§506(c) as a criterion for determining the customers' eligibility
for compensation, even though that section was not literally
applicable by its terms, either. Applying the caselaw
interpreting § 506(c), the court concluded that recovery was
possible if the applicant proved that its efforts benefitted the
SIPC (the "objective test"), or if the SIPC consented to the
performance of the services (the "subjective test"). 163 B.R. at
255.
5
Applying these standards, the bankruptcy court held
that the customers would be awarded fees only on that portion of
their application dealing with the motion to jointly administer
the IBEX and SIPA proceedings. It rejected, on both legal and
factual grounds, the contention that the customers were
responsible for initiating the SIPA liquidation proceeding. Id.
at 255-56. It also held that the customers' intervention in the
Newbridge proceeding and their filing of the Deamer action
duplicated the trustee's efforts and were undertaken solely to
benefit themselves, not the estate. Id. at 257. And because the
customers' actions were both unsolicited and duplicated other
efforts, the bankruptcy court concluded that they met neither the
objective nor subjective standard of § 506(c). Id.
On the other hand, the court believed that the joint
administration of the IBEX and SIPA proceedings saved the SIPC
money. Thus, even though no general creditors of Lloyd
Securities benefitted, making the customers' efforts ineligible
for compensation under § 503(b)(3)(D), the bankruptcy court held
that compensation was proper under the standard of § 506(c). Id.
at 258.
Finally, the bankruptcy court rejected compensation
under the "common fund doctrine." Although it opined that the
doctrine could provide the basis for compensation in an
appropriate case, the court concluded that the "fund" in this
case was created for the customers themselves, not for the estate
generally or for the SIPC; hence, there was no basis for the
customers to demand compensation from the SIPC. Id. at 259.
6
C.
The customers appealed to the district court, which
agreed with the bankruptcy court's application of Code
§503(b)(3)(D), but disagreed with its analysis under § 506(c),
and held that § 506(c) did not apply in a SIPA liquidation. 183
B.R. at 394. It then concluded that the bankruptcy court's
reasons for denying compensation under § 503(b)(3)(D) were
legally and factually correct. Id. at 395-97. Accordingly,
because the circumstances of the case did not warrant
compensation under §503, and the bankruptcy court's award under §
506 was erroneous as a matter of law, the district court held
that the customers could not recover under SIPA § 78eee.
As a final matter, the court considered whether the
customers could recover under the common fund doctrine, but
concluded that, because the trustee and the SIPA were not the
passive beneficiaries of the customers' efforts, but litigated
the case vigorously, they could not be responsible for the
customers' expenses under the doctrine. Id. at 397. The
customers and their counsel now appeal.
II.
Appellants argue that the sole standard for
compensation of services in a SIPA proceeding is set forth in
§78eee(b)(5). They reject the conclusion of the district and
bankruptcy courts that this section of SIPA must be interpreted
in light of analogous provisions in the Bankruptcy Code. Section
78eee(b)(5)(A) provides that "[a]ny person seeking allowances
shall file with the court an application which complies in form
7
and content with the provisions of" the Code. Section
78eee(b)(5)(C) further states that "the court shall give due
consideration to the nature, extent, and value of the services
rendered[.]" According to appellants, this set of standards is
complete in itself and rests on its own, without any need to
engraft portions of the Bankruptcy Code.1
A.
Although appellants' argument does have some
superficial plausibility, it is difficult to reconcile with the
language of 15 U.S.C. § 78fff(b), which provides, in pertinent
part:
To the extent consistent with the provisions
of this chapter, a liquidation proceeding
shall be conducted in accordance with, and as
though it were being conducted under chapters
1, 3, and 5 and subchapters I & II of chapter
7 of Title 11.
The district court held that if appellants were entitled to
receive compensation under the provisions of the Bankruptcy Code,
they would have to meet the strictures of § 503(b)(3)(D).
1
Appellants rely on In re Busy Beaver Bldg. Ctrs., Inc., 19 F.3d
833, 848-49 (3d Cir. 1994), for the proposition that, "once an
applicant for compensation is deemed generally eligible for
compensation, the court must determine the amount of compensation
to be awarded by analyzing the factors set forth in the governing
statute, and may not engraft additional criteria." Busy Beaver
involved a district court that engrafted additional requirements
onto § 330(a) of the Bankruptcy Code itself. We held only that
§330 must be applied in accordance with its literal terms and
never decided the issue of whether the Bankruptcy Code forms a
substantive overlay to SIPA. Accord United States Trustee v.
Price Waterhouse, 19 F.3d 138 (3d Cir. 1994).
8
Appellants do not contend otherwise.2 Section 503 is part of
chapter 5 of the Bankruptcy Code and thus appears to be
incorporated into SIPA by the plain language of § 78fff(b).
Unfortunately for appellants, § 503(b)(3)(D), by its
terms, applies only to chapter 9 and 11 bankruptcy cases, while
§78fff(b) expressly provides that a SIPA liquidation is to be
treated as a chapter 7 bankruptcy. Taken literally, then, if
§503 of the Bankruptcy Code is incorporated into SIPA, there can
be no recovery for customer expenses in this (or any other) SIPA
liquidation. See Lebron v. Mechem Financial, Inc., 27 F.3d 937,
945 (3d Cir. 1994) (§ 503(b)(3)(D) does not permit creditors
recovery of expenses after chapter 11 case is converted to
chapter 7).
The bankruptcy court recognized this problem, but chose
to incorporate the principles of § 503 into SIPA anyway. See 163
B.R. at 252-53. The district court agreed, adding that
incorporation of the Bankruptcy Code is only required to the
extent the Code is consistent with SIPA and opining that Congress
could not have intended that customers of a failed securities
dealer could never recover their expenses. 183 B.R. at 394.
B.
Appellants argue that § 503 was not incorporated into
SIPA, relying on our opinion in SEC v. Aberdeen Securities Co.,
526 F.2d 603 (3d Cir. 1975), which they believe stands for the
2
The bankruptcy court awarded compensation under § 506(c), but
the district court held that § 506(c) was inapplicable in a SIPA
case. Appellants do not challenge that ruling on appeal.
9
proposition that only the procedural aspects of the Bankruptcy
Code were incorporated into SIPA. There, interpreting earlier
versions of SIPA and the 1898 Bankruptcy Act, we opined:
Thus § 6(c) [of SIPA] is intended to
make the flexible Chapter X procedures
available for SIPA liquidations. This does
not mean that every provision of Chapter X,
including provisions not related to
procedures for the operation of a bankrupt,
has been incorporated into the SIPA. Only
those provisions relating to the procedures
for conducting the affairs of the estate
during bankruptcy administration, except as
inconsistent with the provision of SIPA, have
been incorporated.
Id. at 606. In Aberdeen, the issue was whether the provisions of
§ 243 of chapter X of the 1898 Bankruptcy Act (which authorized
compensation for services incurred by creditors and stockholders)
was incorporated into SIPA. It is notable in that context that
the SIPA statute then in existence incorporated a chapter of the
Bankruptcy Act that explicitly permitted reorganization rather
than liquidation, even though SIPA itself required liquidation.3
Faced with this apparent inconsistency between the
statutory purposes of SIPA and chapter X, we looked to the
legislative history of SIPA and found considerable evidence that
Congress intended only to "make the flexible Chapter X procedures
available for SIPA liquidations." 526 F.2d at 606. Because §243
of the Bankruptcy Act did not "relate to the conduct of the
3
Indeed, the statutory text of § 6(c) provided for the
incorporation of chapter X "[e]xcept as inconsistent with the
provisions of this chapter and except that in no event shall a
plan of reorganization be formulated."
10
administration or liquidation procedures to be followed," id. we
held that it was not incorporated into SIPA.
The statutory scheme today is different. In 1978,
§6(c) of SIPA was repealed and replaced by § 78fff(b), which
requires that SIPA liquidations be conducted as chapter 7
bankruptcies under the Bankruptcy Code. Chapter 7, in contrast
to the repealed chapter X, provides only for liquidation. There
is therefore no inconsistency between the two statutes that would
cause us to look to the legislative history to help us interpret
the plain language of § 78fff(b).
The statutory framework that led the Aberdeen court to
its holding no longer exists. In light of the supervening
statutory changes to both SIPA and the bankruptcy laws, we are
not bound by Aberdeen. Rather, we adopt the reasoning of the
Eleventh Circuit. In In re Government Securities Corp., 972 F.2d
328, 330 n.1 (11th Cir. 1992), cert. denied, 507 U.S. 952, 113 S.
Ct. 1366 (1993), the court of appeals rejected the precise
argument appellants make here. It opined:
[Appellant] claims that § 78fff(b) of SIPA
incorporates only the procedural and not the
substantive aspects of the Bankruptcy Code
insofar as they are consistent with SIPA.
This argument is entirely meritless. The
plain language of § 78fff(b) makes no such
distinction, and explicitly incorporates . .
. the Bankruptcy Code.
972 F.2d at 330 n.14
4
In addition, subchapter III of chapter 7 (which was not
incorporated by § 78fff(b), governs stockbroker liquidations in
cases where the SIPC does not initiate a liquidation proceeding
under SIPA. Such stockbrokers also have customers, yet (because
it is a chapter 7 proceeding) customer claims for attorney's fees
cannot be recovered. Subchapter III was enacted within months
11
We therefore conclude that SIPA incorporates § 503 of
the Bankruptcy Code and requires that a SIPA proceeding be
treated like a chapter 7 bankruptcy case. Because the customer
expenses at issue are not recoverable in a chapter 7 proceeding,
they are not recoverable here.5
III.
Appellants also argue that they are entitled to
compensation under the common fund doctrine. They assert that
their efforts resulted in additional recovery to the SIPC, a
benefit it is not entitled to simply receive without paying just
compensation. Both the bankruptcy and district courts concluded
that this theory of recovery is available in a SIPA case, but
found as a factual matter that appellants were not entitled to
compensation. See 183 B.R. at 397; 163 B.R. at 258-59. The
district court treated appellants' argument as follows:
The customers assert that SIPC was the
primary beneficiary of the customers' labors,
and that it should be made to compensate them
accordingly. It cannot be said, however,
that SIPC and the Trustee have been unjustly
enriched as a result of the customers'
efforts. Indeed, as the Bankruptcy Court
concluded, the Trustee was an active
participant, and not some passive
beneficiary, who "retained very competent
control" over the matters at hand. Lloyd,
163 B.R. at 256. Accordingly, we conclude
after SIPA was amended. It is therefore not anomalous (as
appellants suggest) that no fees can be recovered by customers in
a SIPA proceeding. In fact, as appellees point out, it would be
strange if Congress did intend for one class of claims to be
compensable while the other was not.
5
Because of our conclusion, we need not consider whether, as a
factual matter, appellants' efforts met the standard for
compensation under § 503.
12
that SIPC and the Trustee are not proper
targets of a bid to recover under the common
fund doctrine.
Lloyd, 183 B.R. at 397.
On appeal, appellants argue that "[t]he claims which
created the lion's share of the fund would have been lost had the
customers, through their counsel, not performed the services."
The courts below, however, found as a matter of fact that this
was not true because the trustee either had tolling agreements or
had filed the appropriate lawsuits, and because the customers'
efforts duplicated the trustee's. We conclude that these
findings are not clearly erroneous.
Additionally, the bankruptcy court noted that the
"fund" recovered by the customers' efforts was customer property,
not property recovered for the debtor's estate or the SIPC. 163
B.R. at 259. And although this property may well have offset
some of the money that the SIPC was required to advance to those
customers, the SIPC was well-represented by counsel and was
entitled to make its own litigation decisions without being
surcharged later by customers who chose to second-guess those
decisions.
Furthermore, in spite of the litigation pursued by the
customers, the Lloyd Securities general estate still contains no
assets. The customers' efforts simply conferred no benefit upon
the general creditors of Lloyd Securities; accordingly, they have
no legitimate grounds to recover fees from the estate. Finally,
appellants themselves disclaim their entitlement to any portion
of the customer property fund that has been allocated to Lloyd
13
customers, presumably seeking to recover from the general estate.
Because that estate is, as already stated, empty, appellants
would be unable to collect their expenses in any event. We
therefore agree with the district and bankruptcy courts that
appellants have no claim under the common fund doctrine.6
IV.
We will therefore affirm the judgment of the district
court.
6
Because we decide the issue on factual grounds, we need not and
do not decide whether the common fund doctrine is legally
applicable in a SIPA liquidation.
14