Securities Investor Protection Corporation v. MF Global Inc.

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK 	FOR PUBLICATION
In re
MF GLOBAL INC.,
Debtor.
Case No. 11-2790 (MG) SIPA
MEMORANDUM OPINION AND ORDER DENYING MOTION FOR ORDER
AUTHORIZING THE APPOINTMENT OF AN OFFICIAL COMMITTEE OF
COMMODITY BROKER CUSTOMERS AND APPROVING COMPENSATION OF
ALLOWED FEES AND EXPENSES OF COMMMITTEE PROFESSIONALS
A P P E A R A N C E S:
HUGHES HUBBARD & REED LLP
Counsel for James W. Giddens, Trustee for the SIPA Liquidation of MF Global Inc.
One Battery Park Plaza
New York, New York 10004
By: 	Anson Frelinghuysen, Esq.
Christopher K. Kiplok, Esq.
Jeffrey S. Margolin, Esq.
Sarah K. Loomis Cave, Esq.
STROOCK & STROOCK & LAVAN LLP
Counsel for Certain Commodity Broker Customers
180 Maiden Lane
New York, New York 10038
By: 	Lewis Kruger
Andrew P. DeNatale
Curtis C. Mechling
Mark A. Speiser
DEWEY & LEBOEUF LLP
Counsel for Statutory Creditors’ Committee of MF Global Holdings Ltd., et al.
1301 Avenue of the Americas
New York, New York 10019
By: 	Martin Bienenstock, Esq.
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TRACY HOPE DAVIS
United States Trustee for Region 2
22 Whitehall Street, 21st Floor
New York, New York 10004
By: 	Linda Riffkin, Esq.
MARTIN GLENN
UNITED STATES BANKRUPTCY JUDGE
Pending before the Court is the motion of certain commodity broker customers of MF
Global Inc. (“MFGI”), requesting an Order Authorizing the Appointment of an Official
Committee of Commodity Broker Customers and Approving Compensation of Allowed Fees and
Expenses of Committee Professionals (“Steering Committee Motion,” ECF # 161). 1 The
Steering Committee Motion is opposed by (1) James W. Giddens (the “Trustee”), as Trustee for
the liquidation of the business of MFGI under the Securities Investor Protection Act of 1970, as
amended (“SIPA”), 15 U.S.C. §§ 78aaa-78lll (2006) (“MFGI Liquidation”) (ECF Doc. #357);
(2) the Securities Investor Protection Corporation (“SIPC”) (ECF Doc. #358); and (3) the
Statutory Creditors’ Committee of MF Global Holdings Ltd., et al.2 (ECF Doc. #359). The
United States Trustee (“UST”) also filed the Comments of the United States Trustee, as Amicus
Curiae, on Motion for Order Authorizing Appointment of an Official Committee of Commodity
Brokers and Approving Compensation of Allowed Fees and Expenses of Committee
Professionals (ECF Doc. #371). While the UST acknowledges that she has no official role in the
1 	The reference is to the first of several similar motions—this one filed by a self-identified “Steering
Committee” of 66 MFGI customers—seeking the appointment of an official committee of commodities customers
and approval of compensation. Other similar motions, statements in support of the motion and letters from
customers of MFGI seeking similar relief were also filed. See, e.g., ECF Doc. #354; ECF Doc. #362, ECF Doc.
#363. The arguments in support of the motions and requests for authorization of an official committee are the same.
This opinion addresses the Steering Committee Motion, but in so doing it disposes of all similar motions and letter
requests.
2 	MF Global Holdings Ltd. and one of its unregulated affiliates are debtors in chapter 11 cases also filed in
this Court. See In re MF Global Holdings Ltd., Case No. 11-15059 (MG), filed on October 31, 2011.
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administration of a SIPA liquidation—that role instead is played by SIPC—the UST is interested
in the outcome of the Steering Committee Motion “because it seeks the formation of a creditors’
committee by a means not permitted by 11 U.S.C. § 705 and seeks an order improperly
providing that the fees and expenses of such a committee’s professionals would be entitled to
payment from the estate as administrative expenses under 11 U.S.C. §§ 503(b) and 105(a).” Id.
1-2.
The concerns expressed by customers in the MFGI Liquidation are real and substantial.
The collapse of MFGI has given rise to a commodities broker liquidation of immense scope and
complexity. Since this case was filed the Trustee (with the required approval from SIPC and the
Commodity Future Trading Commission (“CFTC”)), after obtaining approval of the Court, has
transferred (or is in the process of doing so) to other futures commissions merchants
approximately 40,000 customer accounts containing close to $2 billion in customer cash or
collateral, (ECF Doc. #14 & #316), giving those customers access to at least some of the value
that had been in their MFGI accounts. Other customers have not yet been able to gain access to
their funds or property.
While it was initially widely reported that approximately $600 million of customer
collateral held with MFGI—which should have been maintained in segregated accounts—has not
been located, the Trustee reported on November 22, 2011 that the actual shortfall may be in
excess of $1.2 billion.3 Although SIPC replaces missing stocks and other securities—that is,
“money, stocks and other securities that are stolen by a broker or put at risk when a brokerage
fails for other reasons”—where it is possible to do so, SIPC does not protect commodity futures
3 	Tiffany Kary & Linda Sandler, MF Global’s Shortfall May Exceed $1.2 Billion, Trustee Says, BLOOMBERG
BUSINESSWEEK, Nov. 22, 2011, http.www.businessweek.com/news/2011-11-22/mf-global-s-shortfall-may-exceed-
1-2-billion-trustee-says.html.
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contracts. How SIPC Protects You, SECURITIES I NVESTOR P ROTECTION CORPORATION , 3 (2011),
http://www.sipc.org/pdf/HSPY_English_2011.pdf; see also What SIPC Covers. . .What It Does
Not, http://www.sip.org/how/covers.cfm (last visited Nov. 22, 2011). The Trustee is required by
section 766(h) of the Bankruptcy Code “to distribute property ratably to customers on the basis
and to the extent of such customers’ allowed net equity claim . . . .” 11 U.S.C. § 766(h). Unless
the Trustee is able to recover the missing cash or property, MFGI’s commodity broker customers
face the prospect of very substantial losses. The Trustee’s reluctance to distribute a larger
percentage of customer property until the magnitude of losses is known is understandable, even
if it prolongs the financial distress of MFGI’s customers.
MFGI’s customers have been very vocal in this case, and appropriately so—many joining
together to retain counsel for ad hoc groups, others separately represented by counsel and many
others acting pro se. The customers have played a useful role. Despite customers’ frustration,
the Trustee has demonstrated that he is responsive to customers’ concerns. The issue before the
Court, however, is whether SIPA or the Bankruptcy Code authorizes the appointment of an
official committee in a SIPA liquidation, with compensation for a committee’s professionals
from estate property. For the reasons explained below, the Court concludes that no such
authority exists. In the absence of statutory authority, the Court concludes that it does not have
the power to grant the requested relief. Furthermore, even if the Court had the discretion to
authorize the appointment of an official committee in these circumstances, I would not do so.
Therefore, the Steering Committee Motion (and other motions seeking similar relief) is
DENIED.
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BACKGROUND
On October 31, 2011, the Honorable Paul A. Engelmayer of the United States District
Court for the Southern District of New York entered an Order Commencing Liquidation of
MFGI pursuant to the provisions of SIPA, 15 U.S.C. § 78aaa-78lll. That Order (i) appointed
James W. Giddens as Trustee for the liquidation of the business of MFGI pursuant to
section 78eee(b)(3) of SIPA, (ii) appointed the law firm of Hughes Hubbard & Reed LLP as
counsel to the Trustee pursuant to section 78eee(b)(3) of SIPA, and (iii) removed the case to this
Court as required by section 78eee(b)(4) of SIPA.
On November 2, 2011, this Court approved the transfer by the Trustee of certain
segregated customer commodity positions and authorized the Trustee to operate the business of
MFGI in the ordinary course. (ECF Doc. #14). On November 4, 2011, the Court granted the
Trustee the authority to issue subpoenas for the production of documents and the examination of
MFGI’s current and former officers, directors, employees and other related persons to facilitate
its investigation into the alleged shortfall in customer-segregated property. (ECF Doc. #34). On
November 17, 2011, the Court approved a second partial transfer of certain customers’ cash-only
accounts. (ECF Doc. #316). The Trustee has indicated that he hopes soon to make one or more
additional motions to transfer cash or other customer property, with the goal of equalizing the
distribution of customer property to all MFGI customers.
DISCUSSION
The Steering Committee Motion asks the Court to authorize the appointment of an
official committee comprised of commodity broker customers and to approve compensation of
fees and expenses of committee professional as administrative expenses of the commodity
customer property estate. The motion claims many potential benefits of such a committee during
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the MFGI Liquidation, including (i) ensuring that the commodity customer priority is properly
and fairly applied, (ii) representing the interests of commodity customers in any issues that may
arise between the commodity customer and securities customer estates, (iii) and assisting in
expediting distributions of commodity customer property. See Steering Committee Motion ¶¶ 9-
13. Whether these supposed benefits are real or ephemeral is uncertain at best. Each of these is
clearly the responsibility of the Trustee, with oversight by SIPIC and the CFTC, subject to
approval of the Court. There is no role to be played by an official committee.
What is principally lacking in the Steering Committee Motion is any legal authority
supporting the requested relief. The motion relies on sections 105 and 705 of the Bankruptcy
Code. But a plain reading of SIPA and the Bankruptcy Code shows a complete absence of
authority for appointment of a customers’ committee in a SIPA liquidation, and even more
clearly the absence of authority for compensation from estate assets of committee professionals
of a committee properly elected in a chapter 7 case.
The motion is premised upon the argument that the MFGI Liquidation is comprised of
two separate matters: (1) a SIPA liquidation of a securities broker-dealer and (2) a liquidation of
a commodity broker under chapter 7 of the Bankruptcy Code.4 The customers argue that the
dual-track nature of the proceedings means that provisions of chapter 7 apply and authorize a
creditors’ committee under chapter 7 to assist in the liquidation of the commodity broker arm of
MFGI. According to the motion, “[n]othing in SIPA prevents the appointment of an official
committee in such a dual-track proceeding.” Id. ¶ 1.
4 	Because MFGI deals in both securities and commodities, it is known as a “joint broker-dealer.”
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Section 705 of the Bankruptcy Code provides:
(a) At the meeting under section 341(a) of this title, creditors that may
vote for a trustee under section 702(a) of this title may elect a
committee of not fewer than three, and not more than eleven, creditors,
each of whom holds an allowable unsecured claim of a kind entitled to
distribution under section 726(a)(2) of this title.
(b) A committee elected under subsection (a) of this section may consult
with the trustee or the United States trustee in connection with the
administration of the estate, make recommendation to the trustee or the
United States trustee respecting the performance of the trustee’s duties,
and submit the court or the United States trustee any question affecting
the administration of the estate.
11 U.S.C. § 705 (emphasis added). Relying on section 705 and also citing section 702
(addressing the characteristics a creditor must possess to be eligible to vote for a trustee), the
motion concludes: “Thus, commodity broker customers are entitled to elect a committee
pursuant to section 705 of the Bankruptcy Code.” Steering Committee Motion ¶ 8 n.8.
A. 	Election of Committees in a SIPA Proceeding
The motion glosses over the actual language of section 705 and the interplay between the
Bankruptcy Code and SIPA. See 15 U.S.C. § 78fff(b) (“[T]o 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 of subchapters I and II of chapter 7 of
title 11.”). Section 705 provides that “creditors that may vote for a trustee . . . may elect a
committee . . . .” 11 U.S.C. § 705(a). In a SIPA liquidation, however, no creditors may vote for
a trustee; rather, selection of the SIPA Trustee is solely at the discretion of SIPIC. See 15 U.S.C.
§ 78eee(b)(3); see also 6 COLLIER ON BANKRUPTCY ¶ 760.08 (Alan N. Resnick & Henry J.
Somme eds., 16th ed. 2011) (“[I]n the event of the bankruptcy of a commodity broker that
becomes the subject of a SIPA proceeding, there is a single bankruptcy trustee who is selected by
the Securities Investor Protection Corporation.”). The provisions of the Bankruptcy Code are
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only applicable in a SIPA proceeding to the extent that they are consistent with the provisions of
SIPA. See 15 U.S.C. § 78fff(b). Therefore, the Court concludes that section 705 of the
Bankruptcy Code is not applicable in a SIPA liquidation and does not provide a basis for the
election or appointment of a creditors’ committee in this case.
Alternatively, the Steering Committee Motion argues that section 105(a) of the
Bankruptcy Code provides the Court with equitable power to appoint a commodity customer
committee. But section 105 cannot be used to expand the powers not otherwise provided in the
Bankruptcy Code. See In re Dairy Mart Convenience Stores, Inc., 351 F.3d 86, 91-92 (2d Cir.
2003) (“This Court has long recognized that [s]ection 105(a) limits the bankruptcy court’s
equitable powers, which must and can only be exercised within the confines of the Bankruptcy
Code.” (internal quotations and citation omitted)).
B. Compensation of Committees in a SIPA Proceeding
Even if this Court could authorize election or appointment of a commodity customers
creditors’ committee in this case, the Court could not authorize compensation for the
committee’s professionals from estate property. In those chapter 7 cases where a creditors’
committee is elected, section 705 does not contemplate the payment of fees and expenses of
committee professionals as administrative expenses. See In re Dominelli, 788 F.2d 584, 586 (9th
Cir. 1986); 6 COLLIER ON BANKRUPTCY ¶ 705.03[3] (“Section 705 does not provide for
compensation or reimbursement to counsel to a chapter 7 creditors’ committee. Legislative
history accompanying section 705 confirms that the absence of any such provision was
intentional.”).
The Steering Committee Motion points to two cases in which compensation to creditors’
committee professionals was approved. See Sable, Makoroff & Gusky, P.C. v. White (In re
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Lyons Transp. Lines, Inc.), 162 B.R. 460 (Bankr. W.D. Pa. 1994); In re Wonder Corp. of Am., 72
B.R. 580, 583 n.3 (Bankr. D. Conn. 1987). The result in Lyons is questionable, but the case is in
any event distinguishable. The committee in that case was formed while the debtor was
attempting to reorganize under chapter 11. Upon conversion to chapter 7, the court found that
committee participation and assistance in the case was necessary due to the complexities of the
case and approved the continuance of fee payments pursuant to its discretionary authority under
section 105(a). Id. at 463. An objection to counsel fees was pressed, arguably in bad faith, only
after substantial services were performed in reliance on the order. Lyons can therefore be read as
a case involving judicial estoppel.
Wonder Corp. is also distinguishable. A chapter 7 case was converted to chapter 11, and
a chapter 11 plan was confirmed. Counsel for the chapter 11 creditors’ committee, that was
initially created when the case was administered under chapter 7, was awarded fees mostly for
his work representing the chapter 11 creditors’ committee, but also including a smaller amount
for his work representing the committee when the case was under chapter 7. The court stated in
a footnote that “[a]lthough the Code does not specifically provide for the employment of counsel
by a creditors’ committee elected pursuant to Code § 705(a), . . . upon application of the
creditors’ committee, this court authorized such employment in this case in accordance with
Code § 105(a).” Wonder Corp., 72 B.R. at 583 n.3. There is no indication whether anyone
objected to the authorization to employ counsel for the chapter 7 committee. No objection was
made and no analysis was provided for approving the payment of counsel’s fees for work for the
pre- or post-conversion committee. Id. at 586.
The Lyons court also acknowledged contrary authority. See In re Dominelli, 788 F.2d
584 (9th Cir. 1986); In re Willbet Enters., Inc., 43 B.R. 90 (Bankr. E.D. Pa. 1984) (finding that
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court did not have authority under section 105 to authorize committee professional fees, an issue
which Congress had specifically considered and limited). The Dominelli court squarely rejected
the argument made here, concluding that nothing in the Bankruptcy Code provides for payment
of a chapter 7 creditors’ committee’s counsel, and pointing to the legislative history of section
705 as demonstrating that this omission was not an oversight. Id. at 586 (citing S. REP . NO. 989,
95 th Cong., 2d Sess. 94 (1978) (“There is no provision for compensation or reimbursement of
[committee] counsel.”)). The Dominelli court held that a court could not use its general
equitable power to authorize something that Congress considered and rejected. Id. The effort in
the Steering Committee Motion to distinguish or explain those contrary authorities is
unconvincing.
But even if the Court could authorize election or appointment of a creditors’ committee,
and further approve compensation for such a committee’s professionals from estate property, I
would not do so in the circumstances present in this case. Mr. Giddens is a very experienced
SIPA Trustee, represented by very experienced counsel, with mandated oversight provided by
SIPC and the CFTC, and, of course, by this Court. MFGI’s customers can continue to participate
actively in this case, as they have to date, with or without the assistance of counsel. There is no
demonstrated need or justification to saddle this already heavily burdened estate with the
expenses attendant to an official committee.
For all of these reasons, the Motion requesting the appointment of a commodity customer
committee is DENIED.
Dated: November 23, 2011
New York, New York.
_____/s/Martin Glenn_______
MARTIN GLENN
United States Bankruptcy Judge
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