Securities Investor Protection Corporation v. MF Global Inc.

1
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK 	NOT FOR PUBLICATION
In re
MF GLOBAL INC.,
Debtor.
Case No. 11-2790 (MG) SIPA
MEMORANDUM OPINION APPROVING STIPULATION AND RESOLVING
OBJECTIONS RELATING TO RELEASE OF CLAIMS FROM FUTURES
CUSTOMERS AND GRANTING SIPA TRUSTEE’S MOTION TO APPROVE FIRST
INTERIM DISTRIBUTION FOR ALLOWED COMMODITY FUTURES CLAIMS
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: 	James B. Kobak, Jr., Esq.
Christopher K. Kiplok, Esq.
Jeffrey S. Margolin, Esq.
Josiah S. Trager, Esq.
Anson B. Frelinghuysen, Esq.
Meaghan C. Gragg, Esq.
Dustin P. Smith, Esq.
COMMODITY FUTURES TRADING COMMMISSION
Three Lafayette Plaza
1155 21st Street N.W.
Washington, D.C. 20581
By: 	Dan M. Berkovitz, Esq.
Jonathan L. Marcus, Esq.
Robert B. Wasserman, Esq.
Martin B. White, Esq.
Robert A. Schwartz, Esq.
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ENTWISTLE & CAPPUCCI LLP
Counsel for Paradigm Global Fund I Ltd., Paradigm Equities Ltd.,
Paradigm Asia Ltd., Augustus International Master Fund, L.P., Zybr
Holdings, LLC, William Schur, Futures Capital Management, LLC,
Ali A. Rangchi Bozorki, MTrust Co. FBO James M. Mayer, MTrust
FBO James Mayer
280 Park Avenue, 26 th Floor West
New York, New York 10017
By: 	Andrew J. Entwistle, Esq.
Joshua K. Porter, Esq.
Jordan A. Cortez, Esq.
-and-
SUSMAN GODFREY LLP
Counsel for Paradigm Global Fund I Ltd., Paradigm Equities Ltd.,
Paradigm Asia Ltd., Augustus International Master Fund, L.P., Zybr
Holdings, LLC, William Schur, Futures Capital Management, LLC,
Ali A. Rangchi Bozorki, MTrust Co. FBO James M. Mayer, MTrust
FBO James Mayer
560 Lexington Avenue, 15th Floor
New York, New York 10022
By: 	William Christopher Carmody, Esq.
Jacob W. Buchdahl, Esq.
-and-
SUSMAN GODFREY LLP
Counsel for Paradigm Global Fund I Ltd., Paradigm Equities Ltd.,
Paradigm Asia Ltd., Augustus International Master Fund, L.P., Zybr
Holdings, LLC, William Schur, Futures Capital Management, LLC,
Ali A. Rangchi Bozorki, MTrust Co. FBO James M. Mayer, MTrust
FBO James Mayer
1901 Avenue of the Stars, Suite 950
Los Angeles, California 90067-6029
By: 	Marc M. Seltzer
NISEN & ELLIOT, LLC
Counsel for Henning-Carey Proprietary Trading, Charles Carey,
Joseph Niciforo, Robert Tierney, Brian Fisher, Shane McMahon,
Michael Mette, and Timothy Zaug
200 West Adams Street
Chicago, Illinois 60606
By: 	Michael H. Moirano, Esq.
Claire E. Gorman, Esq.
Brittany E. Kirk, Esq.
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LOUIS F. BURKE P.C.
Counsel for David Accomazzo and Roberto Calle Gracey
460 Park Avenue, 21 st Floor
New York, New York 10022
By: 	Louis F. Burke, Esq.
Leslie Wybiral, Esq.
FORD MARRIN ESPOSITO WITMEYER & GLESER, LLP
Counsel for Sapere Wealth Management, LLC, Granite Asset Management,
and Sapere CTA Fund, LP
Wall Street Plaza
New York, New York 10005
By: 	John J. Witmeyer III, Esq.
Jon R. Grabowski, Esq.
Stephen R. Chuk, Esq.
-and-
HOWARD, STALLINGS, FROM & HUTSON, P.A.
Counsel for Sapere Wealth Management, LLC, Granite Asset Management,
and Sapere CTA Fund, LP
5410 Trinity Road, Suite 210
P.O. Box 12347
Raleigh, North Carolina 27605
By: 	Joseph H. Stallings, Esq.
MCCARTER & ENGLISH, LLP
Counsel for Occidental Energy Marketing Inc.
245 Park Avenue
New York, New York 10167
By: 	David J. Adler, Esq.
-and-
MCCARTER & ENGLISH, LLP
Counsel for Occidental Energy Marketing Inc.
405 North King Street, 8 th Floor
Wilmington, Delaware 19801
By: 	Katharine L. Mayer, Esq.
ZACH ZUNSHINE
Counsel for Claimant Jill Zunshine
P.O. Box 231398
New York, New York 10023
By: 	Zach Zunshine, Esq.
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BARNES & THORNBURG LLP
Counsel for Patrick O’Malley, M.D., Matthew Johnson, and
Michael Dokupil
One N. Wacker Drive, #4400
Chicago, Illinois 60606
By: 	Vincent P. Schmeltz III, Esq.
Deborah L. Thorne, Esq.
-and-
BARNES & THORNBURG LLP
Counsel for Patrick O’Malley, M.D., Matthew Johnson, and
Michael Dokupil
1000 N. West Street, Suite 1200
Wilmington, Delaware 19801
By: 	David M. Powlen, Esq.
STUTZMAN, BROMBERG, ESSERMAN & PLIFKA, P.C.
Counsel for Lee B. Stern, Jeffrey Stern, Daniel Stern, Richard Stark,
Transcend Investments LLC, the Steven M. Abraham Revocable Trust,
Murray Wise, and Carl Berg
2323 Bryan Street, Suite 2200
Dallas, Texas 75201-2689
By: 	Sander L. Esserman, Esq.
Robert T. Brousseau, Esq.
Peter C. D’Apice, Esq.
David A. Klingler, Esq.
MORRISON & FOERSTER LLP
Counsel for Louis J. Freeh, Chapter 11 Trustee of MF Global Holdings Ltd.
1290 Avenue of the Americas
New York, New York 10104
By: 	Brett H. Miller, Esq.
Lorenzo Marinuzzi, Esq.
Melissa A. Hager, Esq.
John A. Pinarelli, Esq.
FOLEY & LARDNER LLP
Counsel for John Supple, Thomas Ritter, and Greenbriar Partners L.P.
90 Park Avenue
New York, New York 10016
By: 	Richard J. Bernard, Esq.
Alissa M. Nann, Esq.
-and-
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FOLEY & LARDNER LLP
Counsel for John Supple, Thomas Ritter, and Greenbriar Partners L.P.
321 N. Clark Street, Suite 2800
Chicago, Illinois 60654
By: 	Geoffrey S. Goodman, Esq.
DEWEY & LEBOEUF LLP
Counsel for the Statutory Creditors’ Committee of
MF Global Holdings Ltd., et al.
1301 Avenue of the Americas
New York, New York 10019
By: 	Martin J. Bienenstock, Esq.
Michael P. Kessler, Esq.
Irena M. Goldstein, Esq.
MARTIN GLENN
UNITED STATES BANKRUPTCY JUDGE
Before the Court are two related issues. The first issue arises from the Motion of James
W. Giddens, SIPA Trustee for Liquidation of MF Global Inc., To Approve First Interim
Distribution for Allowed Commodity Futures Claims (the “Claim Distribution Motion”). (ECF
Doc. #1086.) Objections or responses were filed by: (1) the Commodities Futures Trading
Commission (ECF Doc. #1098); (2) Jill Zunshine (“Zunshine Objection”) (ECF Doc. #1190); (3)
Patrick O’Malley, M.D., Matthew Johnson, and Michael Dokupil (“O’Malley Objection”) (ECF
Doc. #1206); (4) Certain MF Global Inc. Claimants (“Stern Objection”)1 (ECF Doc. #1208); (5)
Louis J. Freeh, Chapter 11 Trustee of MF Global Holdings Ltd. (ECF Doc. #1215); (6) John
Supple, Thomas Ritter, and Greenbriar Partners, L.P. (“Greenbriar Objection”) (ECF Doc.
#1216); (7) certain former futures accounts customers (the “Paradigm Objection 2”)2 (ECF Doc.
1 	The Certain MF Global Inc. Claimants are Lee B. Stern, Jeffrey Stern, Daniel Stern, Richard Stark,
Transcend Investments LLC, the Steven M. Abraham Revocable Trust, Murray Wise, and Carl Berg.
2 	The objectors are Paradigm Global Fund I Ltd.; Paradigm Equities Ltd.; Paradigm Asia Fund Ltd.;
Augustus International Master Fund, L.P.; Zybr Holdings, LLC; Futures Capital Management, LLC; Pollack
Commodity Partners; MTrust Co. FBO James M. Mayer; MTrust FBO James Mayer; William Schur; Ali A.
Rangchi Bozorki; Henning-Carey Proprietary Trading, LLC; Charles Carey; Joseph Niciforo; James Groth; Robert
Teirney; Brian Fisher; and Shane McMahon.
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#1217); and (8) the Statutory Creditors’ Committee of MF Global Holdings Ltd. (ECF Doc.
#1277). The SIPA Trustee filed an Omnibus Reply addressing all of the objections and
responses. (ECF Doc. #1297.)
The second issue arose initially from a notice of presentment—Joint Notice of
Presentment of Stipulation and Order Resolving Objection Relating to Assignment and Release
of Claims from Futures Customers (the “Stipulation”). (ECF Doc. #1050.) Because two
objections were filed in response by certain former commodities futures account customers (the
“Paradigm Objection”)3 (ECF Doc. #1111) and Sapere Wealth Management, Granite Asset
Management, and Sapere CTA Fund, L.P. (the “Sapere Objection”) (ECF Doc. #1112), the
matter was scheduled for hearing on April 12, 2012. The SIPA Trustee filed a Response in
Further Support of the Stipulation (the “Response”), which included an Amended Stipulation,
drafted in coordination with some of the objectors. (ECF Doc. #1274.) On April 10, Occidental
Energy Marketing Inc. submitted a reservation of rights in response to the SIPA Trustee’s
Response. (ECF Doc. #1307.)
After the Court heard oral argument on April 12, 2012, the SIPA Trustee amended his
request for relief, (i) withdrawing his request for Court approval of an assignment of claims by
commodities customers against third parties in order for the customers to receive distributions on
net equity claims and (ii) modifying the form of release required from commodities customers
before receiving such distributions. That withdrawal and modification were consolidated into
3 	The objectors are Paradigm Global Fund I Ltd.; Paradigm Equities Ltd.; Paradigm Asia Fund Ltd.;
Augustus International Master Fund, L.P.; Zybr Holdings, LLC; Futures Capital Management, LLC; Pollack
Commodity Partners; MTrust Co. FBO James M. Mayer; MTrust FBO James Mayer; William Schur; Ali A.
Rangchi Bozorki; Henning-Carey Proprietary Trading, LLC; Charles Carey; Joseph Niciforo; James Groth; Robert
Teirney; Brian Fisher; and Shane McMahon.
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one proposed order, the Order in Furtherance of Claims Processing Order (the “Third Amended
Release”).
BACKGROUND
The background of this case has been discussed in numerous opinions of this Court and
will not be repeated here. On November 2, 2011, the Court approved the SIPA Trustee’s initial
request to complete a bulk transfer of customer accounts containing open U.S. commodity
contracts and a percentage of the associated margining collateral to futures commissions
merchants (“FCMs”) other than MFGI. (ECF Doc. #14.) On November 17, 2011, the Court
approved a second partial transfer of certain customers’ cash-only accounts. (ECF Doc. #316.)
On December 9, 2011, the Court approved a third bulk transfer of certain property of
commodities futures customers, including non-liquid assets such as warehouse receipts, precious
metal certificates, shipping certificates, and other certificates of title for commodities held by
MFGI for its customers (the “Physical Customer Property”) (ECF Doc. #717), and also a bulk
transfer of certain property of securities customers (ECF Doc. #718) (together, the “Third Bulk
Transfer Order”). Through the bulk transfers, the SIPA Trustee was ultimately able to distribute
approximately 72% of the net liquidating value of each domestic account based on the unaudited
books and records of MFGI, rather than on individual claims filed by customers.
On November 23, 2011, the Court entered an order approving the Trustee’s Expedited
Application To Establish Parallel Customer Claims Processes (the “Claims Process Order”).
(ECF Doc. #423.) That Order established a Bar Date for filing of claims by commodities and
securities customers and all other creditors against MFGI. It also established the process for the
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SIPA Trustee’s determination of customer claims (a “Finalized Claim”).4 The bulk transfers
allowed eligible customers to receive a 72% distribution of their property, except that those
transfers were subject to each claimant’s Finalized Claim, which is the final resolution of the
estate’s obligation to that customer.
DISCUSSION
A. 	The Claims Distribution Motion
1. 	Requested Relief
Through the Claims Distribution Motion, the SIPA Trustee seeks authority to (i)
distribute up to approximately $600 million of “Segregated Funds”;5 (ii) distribute up to
approximately $50 million of “Secured Funds”;6 and (iii) establish a “Delivery Class” and
distribute up to approximately $35 million of “Delivery Funds” to claimants with allowed claims
for property within the Delivery Class (the “First Interim Claims Distribution”). The SIPA
Trustee proposes to establish a Delivery Class comprised of all Physical Customer Property
accounts, including Physical Customer Property that has been or will be reduced to cash in any
manner, either before or after the Petition Date. This Delivery Class would include preexisting
“Delivery Credits”7 as well as “Frozen Proceeds”8 and funds obtained post-petition when
4 	A claim is not finalized until a claimant either agrees with the determination of his claim by the SIPA
Trustee or it has been resolved judicially. The Claims Process Order sets forth the mechanism for a customer to
object to the SIPA Trustee’s determination of his claim and to seek orderly resolution by the Court of the claim.
5 	“Segregated Funds” are funds within the class of assets used to support domestic futures trading, including
suspended funds. Segregated Funds are from the same pool of customer property that nearly exclusively made up
the funds transferred for the benefit of customers through the bulk transfer process.
6 	“Secured Funds” are funds within the class of assets used to support foreign futures trading. Only a small
portion of the Secured Funds has been recovered by the SIPA Trustee thus far, and no transfers or distributions from
that pool of assets have been authorized to date.
7 	As the Trustee explained in his moving papers:
All Physical Customer Property was, in fact, prominently designated in the
records of MFGI as associated with an “F/D” portion of the account.
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Physical Customer Property was either (i) delivered against a customer’s obligation to deliver via
restricted delivery; (ii) transferred to customers to effect the 72% distribution of the combined
value of their Physical Customer Property and other domestic assets (including cash deposits
posted by some customers to enable them to receive Physical Customer Property with an
aggregate value above the 72% pro rata distribution to which they were entitled); or (iii)
otherwise liquidated.
The SIPA Trustee states that the First Interim Claims Distribution would be made on a
rolling basis to customers with Finalized Claims. See Claim Distribution Mot., ¶ 19. The SIPA
Trustee also contends that the amount of the First Interim Claims Distribution would not
interfere with the SIPA Trustee’s maintenance of contingency amounts for each class of
customer property, ensuring fair treatment of all of MFGI’s futures customers (including MFGI’s
former foreign affiliates on behalf of those affiliates’ customers). See id. ¶ 8. The SIPA Trustee
expects to maintain approximately $700 million in Segregated
Funds (of which about one-half is claimed by foreign affiliates on
behalf of their customers), approximately $10 million in Delivery
Funds, and approximately $40 million in Secured Funds, in each
case, to address potential disputes and, when practicable, make
other interim distributions or a final distribution.
Id.
Additionally, in the ordinary course, when a customer sought to deliver Physical
Customer Property to fulfill a contractual obligation to sell, the proceeds of such
sale (once cleared and posted to MFGI) were ultimately recorded in the “F/D”
portion of the account. Indeed, some customers had pre-existing “F/D” credits
as of the Filing Date (“Delivery Credits”)—the result of previous proceeds from
making delivery.
Claim Distribution Mot., ¶ 24.
8 	“Frozen Proceeds” are the proceeds of delivery transactions that were processed in the days immediately
around the Petition Date, but were suspended due to MFGI’s liquidation and held at derivative clearing
organizations.
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2. 	The Objections
Objections were filed to the Claims Distribution Motion, primarily objecting to the SIPA
Trustee’s requirement that commodities customers assign to the SIPA Trustee their claims
against third parties before receiving a distribution of customers’ allowed claims.9 Because the
SIPA Trustee has withdrawn his request for the assignments, the Court will first discuss the
remaining objection to the Claims Distribution Motion.
The O’Malley Objection (ECF Doc. #1206) asserts that the SIPA Trustee incorrectly
attempts to include Delivery Credits and Frozen Proceeds within the Delivery Class. The
objectors argue that because the Delivery Credits and Frozen Proceeds are not “specifically
identifiable property,” and, therefore, not within the definition of “delivery account,” the
Delivery Class should only be comprised of physical commodities. Including Delivery Credits
and Frozen Proceeds in the Delivery Class increases the total claims in that class. But because
the SIPA Trustee has so far been unable to recover all of the cash associated with Delivery
Credits and Frozen Proceeds, the inclusion of Delivery Credits and Frozen Proceeds in that Class
dilutes the potential recovery of customers with claims to property in the Delivery Class, as the
amount of claims is increased but the amount available to satisfy these claims remains fixed.
The objectors also assert that the inclusion of Delivery Credits and Frozen Proceeds within the
Delivery Class does not follow the intent of the Commodity Futures Trading Commission
9 	The Zunshine Objection (ECF Doc. #1190), Stern Objection (ECF Doc. #1208), and Paradigm Objection 2
(ECF Doc. #1217) deal with the assignment provision of the DRA. The Trustee has withdrawn his request for the
assignments and the Court concludes below that the assignments obtained by the Trustee without court approval are
void. See Part B.2, infra. At the hearing, Jill Zunshine’s counsel also objected to the propriety of the release itself,
but the Court overruled the objection during the hearing. The Court concludes that theThird Amended Release is
fully appropriate and warranted in the circumstances. See Part B.1, infra.
In addition to objecting to the Assignment provision in the DRA, the Stern Objection requested that the
Court set a deadline for the completion of the Trustee’s determination of all claims. The Court overruled the
objection, finding that Trustee and his team have been working expeditiously to resolve claims. Any deadline the
Court sets would be arbitrary and detrimental to a fair and accurate determination of net equity claims.
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(“CFTC”) regarding the creation of the “delivery account” class—shielding customers holding
specifically identifiable property from the otherwise dilutive effect of the Part 190 Regulations’
pro rata distribution scheme. The objectors note that Delivery Credits and Frozen Proceeds
were not required to be segregated nor in fact segregated and should not be allowed to be part of
a “delivery account” class.
3. 	Legal Standard
Liquidation of an FCM is subject to two separate regulatory regimes: the Securities
Investor Protection Act (“SIPA”) and the Commodities Exchange Act (the “CEA”). Under both
regimes, customers are entitled to a pro rata share of the applicable pools of customer property
from separate customer account classes. Within the context of a SIPA liquidation, determining
the claims of, and allocating customer property to, former MFGI commodity customers
incorporates the interplay of subchapter IV of title 11 of the Bankruptcy Code, the CEA, and, as
discussed below, 17 C.F.R. Part 190 (the “Part 190 Regulations”). See In re MF Global Inc., No.
11-2790, 2012 WL 1146019, at *5 (Bankr. S.D.N.Y. Apr. 6, 2012).
The CFTC has enacted a set of procedures to guide trustees and assist courts in
implementing the CEA and subchapter IV of title 11 of the Bankruptcy Code. See 17 C.F.R.
§ 190 et seq. Those regulations: (1) define what constitutes customer property, see id. § 190.08;
(2) establish a system of customer classes and account classes, which ensures a fair and orderly
process of pro rata distribution, id. §§ 190.01(a), (m), (bb), & (hh); and (3) provide a formula for
calculating allowable “net equity claims,” id. § 190.07.
In establishing a system of customer and account classes, the Part 190 Regulations
identify six potential account classes: futures accounts, foreign futures accounts, leverage
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accounts, commodity option accounts, delivery accounts, and cleared OTC derivatives accounts.
See id. § 190.01(a). “Delivery accounts” are defined as
any account prominently designated as such in the records of the
debtor which contains only the specifically identifiable property
associated with delivery set forth in § 190.01(kk)(3), (4), and (5),
except that with respect to § 190.01(kk)(4) and (5), delivery need
not be made or taken and exercise need not be effected for such
property to be included in a delivery account.
Id. § 190.05(a)(2).10
10 	“Specifically identifiable property” is defined as
(3) With respect to warehouse receipts, bills of lading or other documents of
title, or physical commodities received, acquired, or held by or for the account
of the debtor for the purpose of making or taking delivery or exercise from or
for the account of a customer, any such document of title or commodity which
as of the entry of the order for relief can be identified on the books and records
of the debtor as received from or for the account of a particular customer as held
specifically for the purpose of delivery or exercise.
(4) Any cash or other property deposited prior to the entry of the order for relief
to pay for the taking of physical delivery on a long commodity contract or for
payment of the strike price upon exercise of a short put or a long call option
contract on a physical commodity, which cannot be settled in cash, in excess of
the amount necessary to margin such commodity contract prior to the notice date
or exercise date, which cash or other property is identified on the books and
records of the debtor as received from or for the account of a particular customer
on or after three business days before the first notice date or three calendar days
before the exercise date specifically for the purpose of payment of the notice
price upon taking delivery or the strike price upon exercise, respectively, and
such customer takes delivery or exercises the option in accordance with the
applicable contract market rules.
(5) The cash price tendered for any property deposited prior to the entry of the
order for relief to make physical delivery on a short commodity contract or for
exercise of a long put or a short call option contract on a physical commodity,
which cannot be settled in cash, to the extent it exceeds the amount necessary to
margin such contract prior to the notice date or exercise date, which property is
identified on the books and records of the debtor as received from or for the
account of a particular customer on or after three calendar days before the first
notice date or three calendar days before the exercise date specifically for the
purpose of a delivery or exercise, respectively, and such customer makes
delivery or exercises the option in accordance with the applicable contract
market rules.
17 C.F.R. § 190.01(ll)(3)-(5) (2012) (effective April 9, 2012). This definition was previously located in section
190.01(kk)(3)-(5) in the prior version of the Code of Federal Regulations.
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The Court finds that Delivery Credits, Delivery Debits, and Frozen Proceeds properly
belong in the Delivery Class pursuant to 17 C.F.R. §§ 190.05(a)(2) (defining “delivery account”)
and 190.01(ll)(3)-(5) (defining “specifically identifiable property” to include cash or other
property identified on the books and records of the debtor as related to delivery of Physical
Customer Property or exercise of the related contracts), along with Physical Customer Property,
despite the effect that they may have on the shortfall of that class. To the extent that Delivery
Credits, Delivery Debits, and Frozen Proceeds were identified on the books and records of MFGI
as related to the delivery of Physical Customer Property or exercise of the related contracts, the
SIPA Trustee has properly classified this category of property.
There is no requirement in the applicable statutes or regulations that Delivery Credits and
Frozen Funds be segregated. MFGI’s failure to segregate this property does not exclude it from
the definition of “specifically identifiable property” under 17 C.F.R. §§ 190.01(ll)(3)-(5).
Section 190.08(c)(1) states that
property held by or for the account of a customer, which is segregated
on behalf of a specific account class, or readily traceable on the filing
date to customers of such account class, must be allocated to the
customer estate of the account class for which it is segregated or to
which it is readily traceable.
17 C.F.R. § 190.08(c)(1) (emphasis added). The SIPA Trustee concluded that the Delivery
Credits, Delivery Debits, and Frozen Proceeds are traceable to Physical Customer Property and
are, therefore, properly classified in the Delivery Class even though the property was not
segregated. Indeed, if they are excluded from the Delivery Class, their presence in another class
would create a shortfall in that class.11
11 	The CFTC’s comments in the Federal Register on the final rules for the Part 190 Regulations state:
Delivery Accounts. The question remains in most cases as to how to mitigate
the dilution effect of the pro rata provisions of the Code with respect to property
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During the hearing, counsel for the O’Malley objectors argued that 17 C.F.R. § 1.21
mandates that trading proceeds not required to be segregated be allocated across customer
classes rather than allocated to a single customer class. That argument was not contained in the
O’Malley written objection, but counsel asserted that the argument was made in response to the
SIPA Trustee’s Omnibus Reply. The Court allowed counsel to file a sur-reply (ECF Doc.
#1374), limited to the impact of section 1.21 on the determination of the Claim Distribution
Motion. The sur-reply mentions section 1.21 largely in passing and unpersuasively. Instead, the
sur-reply improperly raises new and untimely arguments. The Court specifically concludes that
section 1.21 is inapplicable to the issues here.
Section 1.21, entitled “Care of money and equities accruing to customers,” states:
All money received directly or indirectly by, and all money and
equities accruing to, a futures commission merchant from any
clearing organization or from any clearing member or from any
member of a contract market incident to or resulting from any
trade, contract or commodity option made by or through such
futures commission merchant on behalf of any commodity or
option 	customer 	shall 	be 	considered 	as 	accruing 	to 	such
commodity or option customer within the meaning of the Act and
these regulations. 	Such money and equities shall be treated and
or cash captured by the estate in the absence of any category of property which
can be reclaimed in full. In this connection, the Commission believes that the
best solution—and the one suggested by the commentators—is the creation of a
separate class of accounts denominated “Delivery Accounts.” The Commission
is, therefore, adding in § 190.05(a)(2), an account class denominated “delivery
accounts,” to the other account classes. 	This account class contains only the
property referred to in §§ 190.01(kk)(3), (4), and (5).
Property segregated on behalf of a delivery account, under the allocation
provisions, will be allocated only to that account class. 	This means that
although this property will not be distributed to the extent its value exceeds a
claimant’s net equity claim and will be distributed pro rata among claimants
with delivery claims with are of the same class, it will not be diluted by other
types of customer claims. This solution reduces the dilution effect of proration
without offending the basic principles of proration of equivalent claims. 	The
Commission’s broad authority with respect to deliveries should be noted in this
connection.
Final Rules, Commodity Futures Trading Commission, 17 CFR Part 190, 48 Fed. Reg. 8716, 8731 (Mar. 1, 1983)
(codified at 17 C.F.R. Part 190) (footnotes omitted).
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dealt with as belonging to such commodity or option customer in
accordance with the provisions of the Act and these regulations.
Money and equities accruing in connection with commodity or
option customers’ open trades, contracts, or commodity options
need not be separately credited to individual accounts but may be
treated and dealt with as belonging undivided to all commodity or
options customers having open trades, contracts, or commodity
option positions which if closed would result in a credit to such
commodity or option customers.
17 C.F.R. § 1.21 (emphasis added). That provision does not deal with the distribution of
specifically identifiable property in an FCM liquidation. Moreover, the language in section 1.21
is permissive, stating that money and equity incident to a trade or contract “may be treated and
dealt with as belonging undivided to all commodity or options customers”; it does not require
that property to be treated as such. For these reasons, the Court overrules the O’Malley
Objection.
4. 	Conclusion
Because the Part 190 Regulations include Delivery Credits and Frozen Proceeds in the
definition of “specifically identifiable property,” the SIPA Trustee has correctly included them in
the Delivery Class.
B. 	The Amended Stipulation
Without seeking Court approval or disclosing the condition, the SIPA Trustee required
claimants to sign a “Declaration, Release and Assignment” form (the “DRA”) before receiving
any distribution of allowed net equity claims. See Paradigm Obj., ¶¶ 2, 9; Resp., ¶ 5. To date,
the SIPA Trustee has sent individual claim determination letters to over 21,000 claimants and
has received in excess of 7,500 executed DRAs in response. Resp., ¶ 5. Neither the Claims
Process Order nor any of the Bulk Transfer Orders provided for any release or assignment
agreement; nor did the Claim Distribution Motion seek approval of a mandatory release and
assignment agreement.
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The DRA required claimants to release their claims against the estate and assign their
claims against third parties to the SIPA Trustee before receiving payment of their allowed
claims. Only the numerous objections filed by claimants brought this issue to the Court’s
attention. The SIPA Trustee Response did not provide any legal authority for requiring
commodities customers to assign the customers’ claims against third parties to the SIPA Trustee.
The objectors argued that customers receiving distributions required by applicable statutes and
regulations cannot be compelled to transfer their claims in return for the distributions. The Court
took the Motion under submission at the hearing. Several days after the hearing, the SIPA
Trustee advised the Court that he withdraws his request for approval for the assignments.
Further negotiations with the objectors have largely resolved the issues concerning the proposed
release.
1. 	The Release Provision
The SIPA Trustee initially submitted for the Court’s approval a proposed Amended
Stipulation that modified the original release language. The Amended Stipulation attempted to
clarify that some claims are “carved out” of the DRA; namely the DRA shall not release
any claims against any current or former employee, officer, or director
of MF Global Holdings, Ltd., or any of its subsidiaries or affiliates,
including MFGI, except with respect to any work performed by such
employee, officer, or director in connection with the Liquidation
Proceeding under the supervision of the Trustee.
Resp., ¶ 21; Am. Stipulation, ¶ 3.
Nevertheless, some objections remained. During the hearing the scope of the
disagreement between the SIPA Trustee and objectors narrowed further, and the parties agreed to
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confer in an effort to find acceptable language, resulting in the proposed Third Amended Release
that is now before the Court.12
The Third Amended Release clarifies that claimants receiving a distribution based on
their net equity claims must agree to release the SIPA Trustee, the Securities Investor Protection
Corporation (“SIPC”), and MFGI from any net equity claim in any amounts other than as
approved in the claim determination and agreed to by the claimant. The principle is simple: once
the SIPA Trustee and a claimant reach agreement on a net equity claim, the claimant cannot later
12 	The Third Amended Release provides, in pertinent part:
(ii) The release language contained in the prior Declaration, Release and
Assignment form shall be deemed amended for all purposes as reflected in
Exhibit A to releasing claims for actual payments or distributions to a
commodities customer only to the extent of funds such commodities customer
actually receives on account of the customer’s allowed commodities net equity
claim from the Trustee in connection with this proceeding.
(iii) the prior Declaration, Release and Assignment and the amended form of the
Declaration and Release shall not release any claims against any current or
former employee, officer, or director of MF Global Holdings, Ltd., or any of its
subsidiaries or affiliates, including MFGI, except with respect to any work
performed by such employee, officer, or director in connection with this
proceeding under the supervision of the Trustee.
(iv) There are and shall be no third-party beneficiaries of the prior Declaration,
Release and Assignment form and/or the amended Declaration and Release and
only Released Persons (as defined therein) may assert any release contained
therein.
(v) The Declaration, Release and Assignment form and the amended Declaration
and Release will not alter or limit any rights a commodities customer has, or any
standing the commodities customer has, to assert claims against third parties
other than the Released Persons (as defined therein), and to recover against such
third parties on such claims.
(vi) The Declaration, Release and Assignment form and the amended
Declaration and Release will not alter the relative priority of a commodities
customer and the Trustee to assert or recover on any claims against third parties
other than the Released Persons (as defined therein).
(vii) The Declaration, Release and Assignment form and the amended
Declaration and Release shall not release or extend to any general unsecured
claims asserted by a commodities customer in this proceeding in addition to the
commodities net equity claim subject to the form.
Third Am. Release, at 2–3.
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contest that determination. Any claimant that objects to the SIPA Trustee’s claim determination
remains free to contest it in accordance with the procedures set forth in the Claims Process
Order; it is only where the claimant agrees with the claim determination and will receive a pro
rata distribution based on the net equity claim that a release is required.
The Court concludes the proposed release is fully appropriate and warranted in the
circumstances; no one really argues to the contrary. The objections to the release focused on the
specific language used, not to the concept. But still remaining is the issue of how to deal with
signed DRAs already received by the SIPA Trustee from claimants containing language the
SIPA Trustee has now agreed to change. The Third Amended Release attempted to address
those 7,500-plus customers who signed and returned the earlier version of the DRA to the SIPA
Trustee:
[T]hose commodities claimants who already signed and returned
the prior Declaration, Release and Assignment form to the Trustee
or filed it with the Court need not take further measures as the
prior Declaration, Release and Assignment form which is hereby
modified and clarified by this Order shall be in full force and effect
in such modified form upon entry of this Order . . . .
Third Am. Release, at 3. The clarification of the Release language benefits the claimants, and
the SIPA Trustee agrees that the modified Release provisions apply to all claimants who agree
upon the claim determination. But must the SIPA Trustee have claimants sign new releases, or
may the Release language be deemed changed and effective as to all claimants who executed the
prior Release?
If this were the only issue concerning the document containing the release, the Court
might be prepared simply to deem the release modified. But the same document contains the
Assignment provision, which as explained below, is void and unenforceable. The Court,
therefore, concludes that the SIPA Trustee must obtain new releases from all claimants that will
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receive a distribution, even though imposing this requirement will add to the SIPA Trustee’s
administrative burden and expense. This requirement is, in short, a self-inflicted wound.
2. 	The Assignment Provision
During oral argument, considerable colloquy focused on the Assignment provision in the
DRA that the SIPA Trustee required all claimants receiving a distribution to sign. The original
assignment language in the DRA provided:
Further, Claimant hereby assigns and transfers to the Trustee and SIPC
all rights, including any and all claims and causes of action, and any
proceeds derived therefrom, that Claimant may have against any party,
arising out of or relating to the Claim, the circumstances that gave rise
to the Claim and the Account, to the extent of the Consideration.
Resp., Ex. A. The Amended Stipulation sought to make clear that the SIPA Trustee is permitted
to take assignments of the portion of a customer’s claims against third parties in the amount of
actual payments received from the SIPA Trustee in satisfaction of those claims. See Resp., ¶ 20;
Am. Stipulation, ¶ 4. The Amended Stipulation also stated that the DRA would not limit a
customer’s right to assert claims against third parties (other than the SIPA Trustee, his agents and
professional, MFGI, and SIPC and its agents, employees, and professionals) and to recover
against such third parties on any such unsatisfied claims. See Resp., ¶ 20; Am. Stipulation, ¶ 7.
But the SIPA Trustee still maintained that customers’ assignment of their claims would be a
prerequisite to receiving any payment in satisfaction of net equity claims.
The argument in the written objections and at the hearing focused on whether the SIPA
Trustee can condition receipt of distributions required by SIPA, the Bankruptcy Code, the CEA,
and the Part 190 Regulations on claimants’ assigning their rights to assert claims against third
parties for any losses the claimants suffered. Numerous class actions have already been filed by
MFGI commodities customers against third parties seeking recovery of the claimants’ losses. At
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the conclusion of the hearing, the Court took the matter under submission. Several days later,
however, the SIPA Trustee’s counsel advised the Court that the SIPA Trustee withdraws the
requirement that claimants execute the assignment.13 Because the SIPA Trustee has withdrawn
his demand that claimants assign their claims against third parties to the SIPA Trustee, it is
unnecessary for the Court to decide whether such a requirement could be imposed by the SIPA
Trustee with Court approval before customers can receive distributions on otherwise agreed
claims. The issue remains, however, about the status of the assignments already received by the
SIPA Trustee. As explained below, the Court concludes that the assignments already received
are void and shall be of no further force or effect.
A SIPA trustee’s standing to assert claims that belong to customers of a defunct firm has
been a subject of contention and decisions by other courts. See, e.g., Picard v. HSBC Bank PLC,
454 B.R. 25 (S.D.N.Y. 2011). That issue has not been presented to this Court, and nothing in
this Opinion addresses that issue. No doubt seeking to avoid that issue, the SIPA Trustee
apparently imposed the requirement that claimants assign their claims against third parties to the
SIPA Trustee. Whether the Assignment provision drafted by the SIPA Trustee would avoid the
problem that SIPA trustees have had in other cases is a question that need not be addressed
here.14
13 	The Third Amended Release states that “[a]ny and all assignments to the Trustee contained in the prior
Declaration, Release and Assignment form are and shall be null and void and given no force and effect by any court
of competent jurisdiction.” Third Am. Release, at 2.
14 In Bankruptcy Services, Inc. v. Ernst & Young (In re CBI Holding Co., Inc.), 529 F.3d 432 (2d Cir. 2008),
the Second Circuit addressed whether a distribution trust under a confirmed chapter 11 plan could assert an assigned
claim that had belonged to a creditor against a third party and that had been assigned to the trust as part of the plan.
The court stated:
Allowing a debtor’s creditors to assign their claims for the benefit of the
debtor’s estate permits debtors, creditors, and bankruptcy courts the flexibility in
reorganizing or liquidating a debtor's assets necessary to achieve efficient
administration of the reorganization or liquidation. 	Indeed, the voluntary and
court-approved assignment at issue in this case perfectly illustrates how both a
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Although the Court need not decide whether the SIPA Trustee can compel an assignment,
it is clear that the SIPA Trustee could not obtain the assignments of claims belonging to
commodity customers in exchange for distributions from the estate without first obtaining court
approval. Section 363 of the Bankruptcy Code provides that a debtor “after notice and hearing,
may use, sell, or lease, other than in the ordinary course of business, property of the estate.” 11
U.S.C. § 363(b)(1) (emphasis added). 	Section 363(b)(1) applies because the SIPA Trustee is
acquiring commodity customers’ claims using property of the estate “other than in the ordinary
course of business.” See, e.g., In re The Colad Grp., Inc., 324 B.R. 208, 215 (Bankr. W.D.N.Y.
2005) (requiring bankruptcy court approval for use of estate resources outside the ordinary
course of the debtor’s business pursuant to section 363(b)(1)). Because the SIPA Trustee
obtained the assignments without first obtaining Court approval, all of the assignments already
obtained are void and of no further force or effect. To avoid any confusion or uncertainty arising
from the approximately 7,500 DRA forms already returned to the SIPA Trustee, containing
release language that has now been changed and an assignment of claims that is void, the SIPA
Trustee must obtain new signed forms from all claimants.
debtor and its creditors can benefit from the flexibility that § 541(a)(7) of the
Bankruptcy Code facilitates. 	The Barnes [v. Schatzkin, 215 A.D. 10, 212
N.Y.S. 536 (1 st Dep’t 1925)] view would unnecessarily hamstring those parties
on the basis of an outdated version of the Bankruptcy Code.
Id. at 459. Whether the CBI holding applies to a SIPA trustee need not be decided, but it is important to recognize
that the court in CBI dealt with “the voluntary and court-approved assignment,” id., rather than a compelled
assignment that was not presented to the Court for approval before insisting on the assignments from claimants.
It should also be noted that in CBI a significant claim of a single creditor was assigned as part of a
settlement with that creditor resolving the amount of the creditor’s allowed claim against the estate. Here, MFGI
has approximately 23,000 commodity customer claims. If fewer than all claimants voluntarily assign their claims,
questions would then arise whether estate assets should be used by the Trustee to prosecute claims of only some
claimants. Whether the Trustee can compel claimants to assign their claims is now moot as the Trustee has
withdrawn the request for the assignments.
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CONCLUSION
For the reasons explained above, the Court GRANTS the Claims Distribution Motion.
The Court also finds that the proposed Third Amended Release is appropriate and warranted in
the circumstances, but finds that the Assignments executed by claimants to be void and without
effect. 	The SIPA Trustee should submit proposed orders to the Court consistent with this
Opinion.
Dated: April 24, 2012
New York, New York
_____/s/Martin Glenn_______
MARTIN GLENN
United States Bankruptcy Judge
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