Edward G. Murphy, Inc. Profit Sharing Plan v. Selheim Er & Co.

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 03-1829
EDWARD G. MURPHY, INC. PROFIT SHARING PLAN;
EDWARD G. MURPHY, INC. MONEY PURCHASE PENSION PLAN;
EDWARD G. MURPHY, III,
Appellants
v.
SELHEIM ER & CO.;
SECURITIES INVESTOR PROTECTION CORPORATION;
PERRY A. SELHEIMER
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
D.C. Civil Action No. 02-cv-06847
(Honorable Mary A. McLaughlin)
Submitted Pursuant to Third Circuit LAR 34.1(a)
February 13, 2004
Before: SCIRICA, Chief Judge, ROTH and McKEE, Circuit Judges
(Filed: April 6, 2004)
OPINION OF THE COURT

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1As a consequence of this investigation, S&C’s managing general partner, Perry A.
Selheimer, pled guilty to charges of mail fraud.
2
SCIRICA, Chief Judge.
Appellee Securities Investor Protection Corporation (“SIPC”) denied appellants’
claims in a direct payment procedure under the Securities Investor Protection Act of
1970, as amended, 15 U.S.C. § 78aaa, et seq. The Bankruptcy Court upheld the SIPC’s
claim denial, and the District Court affirmed. At issue is whether appellants were eligible
for compensation under SIPA. W e will affirm.
I.
Debtor Selheimer & Co. (“S&C”), a Pennsylvania partnership, was a licensed
securities broker-dealer with the Securities and Exchange Commission and registered
member of the SIPC. Beginning in the early 1980s, Appellant Edward G. Murphy, III
(“Murphy”) transferred certain municipal bonds to S&C. Murphy subsequently
transferred additional securities to S&C on behalf of appellants Edward G. Murphy Inc.
Profit Sharing Plan (“Profit Sharing Plan”) and Edward G. Murphy Inc. Money Purchase
Pension Plan (“Money Purchase Pension Plan”).
S&C ceased business operations on December 7, 1994, following an investigation
of the firm by the SEC, the National Association of Securities Dealers, and the Federal
Bureau of Investigation.1 At that time, S&C no longer held the securities previously
transferred by appellants to the firm. On September 8, 1997, SIPC commenced a direct

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2The Securities Investor Protection Act of 1970, as amended, 15 U.S.C. § 78aaa et seq.
(“SIPA”), provides partial protection to investors from financial losses resulting from the
insolvency of their stockbrokers. See Secs. Investor Prot. Corp. v. Barbour, 421 U.S.
412, 415-16 (1975). The statute provides a mechanism for returning property held by
insolvent broker-dealers to eligible investors, or partially compensating those investors
for the value of their assets. Section 78fff provides a general liquidation procedure,
conducted in accordance with certain provisions of the Bankruptcy Code, by which
securities and property are returned to the “customers” of a failed broker-dealer. 15
U.S.C. § 78fff. In the event the debtor’s general estate is insufficient to pay customer
claims, the SIPC will pay up to $500,000 per customer claim from a fund maintained by
SIPC members for this purpose. Id. at § 78fff-3(a). SIPA also allows for a direct
payment procedure when certain conditions—principally relating to the size of the
individual customer claims, the aggregate value of customer claims, and the relative cost
of a general liquidation proceeding—are satisfied. Id. § 78fff-4.
3Jeanne E. Murphy and Deborah J. Stone, Murphy’s mother and sister respectively,
also filed Statements of Customer Claims with the SIPC as part of the direct payment
procedure. SIPC denied their claims based on their association with Murphy. Ms.
Murphy and Ms. Stone challenged the SIPC’s claim denial as erroneous. The Bankruptcy
Court agreed, vacated the SIPC’s determination, and scheduled supplemental hearings to
determine the amount of their respective customer claims. The claims of Ms. Murphy and
Ms. Stone are not part of this appeal.
3
payment proceeding under 15 U.S.C. § 78fff-4, under which eligible “customers” of S&C
could request compensation from SIPC’s insurance fund for financial losses resulting
from S&C’s closure.2 On or about February 27, 1998, appellants filed Statements of
Customer Claims with the SIPC.3 Appellants sought to recover the value of the following
securities transferred to S&C:
Murphy
Bonds $ 430,000
Bond Fund $ 70,000
Profit Sharing Plan
4,717 shares, Madison Bank $ 37,736

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4The Bankruptcy Court properly exercised subject matter jurisdiction pursuant to 15
U.S.C. § 78fff-4(e) and 28 U.S.C. § 1334(b).
4
Money Purchase Pension Plan
2,770 shares, Stokely Van Camp $ 91,116
The SIPC denied appellants’ claims after determining they were not “customers”
within the meaning of SIPA, or were otherwise ineligible to receive compensation. On
October 3, 2000, appellants commenced adversary proceedings in the United States
Bankruptcy Court for the Eastern District of Pennsylvania challenging the SIPC’s denial
of claims.4
On April 4, 2002, the Bankruptcy Court upheld the SIPC’s claim denial. The court
concluded Murphy was not a “customer” under SIPA after finding the securities on which
his claim was based were part of the capital of S& C. Edward G. Murphy, et al. v.
Selheimer & Co., et al., Adv. No. 00-670, slip op. at 15-17 (Bankr. E.D. Pa. April 4,
2002). The court determined Murphy was ineligible to receive compensation under SIPA
for the alternative reasons that he was either a general partner of S&C, a limited partner
with a participation in 5% or more of the firm’s net assets, or exercised a controlling
influence over the management or policies of the firm. Id. at 17-20. The court also
upheld the denial of claims by Profit Sharing Plan and Money Purchase Pension Plan
based on its conclusion that Murphy, as the trustee and sole beneficiary of the plans, was
individually ineligible for compensation. Id. at 21-22. On June 13, 2002, the Bankruptcy

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5The District Court exercised appellate jurisdiction over the final order of the
Bankruptcy Court pursuant to 28 U.S.C. § 158(a).
6The District Court did not consider the Bankruptcy Court’s alternative reasons for
denying M urphy’s claim.
5
Court denied appellants’ subsequent motion to amend its findings, or alter or amend its
judgment.
On June 18, 2002, appellants filed a notice of appeal with the United States
District Court for the Eastern District of Pennsylvania. SIPC subsequently commenced a
liquidation proceeding in the District Court concerning S&C under 15 U.S.C. §§ 78fff-
4(f), 78eee(a)(3). The District Court appointed SIPC as trustee and transferred the
proceeding to the Bankruptcy Court. On July 25, 2002, the Bankruptcy Court granted
SIPC’s motion for determination under Fed. R. Civ. P. 54(b) which allowed appellants’
appeal to proceed in the District Court.
On February 23, 2003, the District Court affirmed the order of the Bankruptcy
Court upholding SIPC’s denial of claims.5 Edward G. Murphy, et al. v. Selheimer & Co.,
et al., No. 02-6847, 2003 U.S. Dist. LEXIS 3205 (E.D. Pa. Feb. 24, 2003). While
acknowledging certain evidence supported Murphy’s “customer” status, the court
concluded the Bankruptcy Court appropriately weighed the evidence in making its factual
findings.6 Id. at *8. The District Court further held that the Bankruptcy Court properly
relied on In re Weis Secs., Inc., No. 73-Civ-2332, 1975 U.S. Dist. LEXIS 13146, at *9-10
(S.D.N.Y. March 27, 1975), in concluding Profit Sharing Plan and Money Purchase

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7We exercise appellate jurisdiction over the final decision of the District Court under
28 U.S.C. § 158(d) and 28 U.S.C. § 1291. Where the District Court acts in its capacity as
an appellate bankruptcy court, we independently review the decision of the Bankruptcy
Court. Krystal Cadillac-Oldsmobile GMC Truck, Inc. v. GMC, 337 F.3d 314, 316 n.1 (3d
Cir. 2003). We review the Bankruptcy Court’s factual findings for clear error and
conclusions of law de novo. Id.
6
Pension Plan were not entitled to compensation because Murphy—the trustee and sole
beneficiary of the appellant benefit plans—was not a “customer” within the meaning of
SIPA.
Appellants filed a timely notice of appeal.7
II.
Murphy challenges five of the Bankruptcy Court’s factual findings concerning
his eligibility for compensation under the SIPA: (1) that the securities transferred to S&C
by Murphy became the capital of S&C; (2) that Murphy was a partner of S&C; (3) that
Murphy received IRS Schedule K-1s from S&C; (4) that Murphy was a “controlling
person” of S&C; and (5) that S&C was a general partnership. Under the clear error
standard, we will reverse a factual determination of the Bankruptcy Court only if it “either
is completely devoid of minimum evidentiary support displaying some hue of credibility
or bears no rational relationship to the supportive evidentiary data.” Kool, Mann, Coffee
& Co. v. Coffey, 300 F.3d 340, 353 (3d Cir. 2002) (citation omitted).

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8SIPA’s statutory insurance scheme provides partial compensation to a limited class of
eligible investors for losses resulting from the insolvency of their securities broker-
dealers. Specifically, only “customers” of a registered broker-dealer are entitled to
protection under the Act. SIPA defines the term “customer” to include:
[A]ny person . . . who has a claim on account of securities received,
acquired, or held by the debtor in the ordinary course of its business as a
broker or dealer from or for the securities accounts of such person for
safekeeping, with a view to sale, to cover consummated sales, pursuant to
purchases, as collateral security, or for purposes of effecting a transfer. The
term “customer” includes any person who has a claim against the debtor
arising out of sales or conversions of such securities, and any person who
has deposited cash with the debtor for the purpose of purchasing securities.
15 U.S.C. § 78lll(2). The statute expressly excludes from this definition “any person to
the extent that person has a claim for cash or securities which by contract, agreement or
understanding, or operation of law, is part of the capital of the debtor.” Id. § 78lll(2)(b).
Claimants seeking “customer” status under SIPA bear the burden of proving they fit
within this statutory definition. Ahammed v. Secs. Investor Prot. Corp. (In re Primeline
Secs. Corp.), 295 F.3d 1100, 1107 (10th Cir. 2002).
7
A.
The Bankruptcy Court found the “weight of the evidence” supported the SIPC’s
determination that the securities transferred by Murphy to S&C were part of that firm’s
capital.8 Murphy v. Selheimer, slip op. at 15. In support of this finding, the court
observed that Murphy designated the securities as a capital contribution in his original
transmittal letter to S&C and “expressly directed that the firm establish a capital account.”
Id. Murphy’s subsequent transfers of securities to S&C were credited to the same
account. The court also found a “wholesale absence of the detail and documentation one
would typically expect to find in a traditional customer-broker relationship.” Id. at 16.

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9The Internal Revenue Code and related regulations require partnerships to file
Schedule K-1s with the Internal Revenue Service which report each partner’s share of the
partnership income and losses. See I.R.C. § 6031; Treas. Reg. §§ 1.6031(b)-1T(a)(1), (3).
8
For example, instead of receiving periodic customer account statements, Perry Selheimer
provided Murphy with handwritten lists describing his assets with S&C as “capital
bonds.” Id. at 15. According to the Bankruptcy Court, this documentation was consistent
with the treatment afforded to a limited partner of a broker-dealer, and belied Murphy’s
contention that he transferred the securities to S&C for purposes of collateralization or
safekeeping. Moreover, this documentation supported Selheimer’s testimony that S&C
treated Murphy’s securities as a capital contribution and sent IRS Schedule K-1s9 to all of
its partners, including Murphy. In rejecting Murphy’s testimony that he never received
Schedule K-1s from S&C, the court observed that S&C’s general ledger reflected
Murphy’s capital account, and the firm’s Schedule K-1s for tax years 1981 through 1990
indicated both a balance in Murphy’s account as well as the percentage of the firm’s total
capitalization this represented. In light of this evidence, the court found it significant that
Murphy acquiesced to the treatment and characterization of his assets as “capital bonds.”
On appeal, Murphy argues the Bankruptcy Court erred in finding this evidence
established that the transferred securities were part of S&C’s capital. First, Murphy
contends the Bankruptcy Court’s finding that he received a Schedule K-1 is not supported
by the evidence. Murphy asserts that had he received the Schedule K-1s, he would have
noticed the $84,424 discrepancy between the face amount of his capital account and the

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9
capital contribution for the year ending December 31, 1981. Similarly, Murphy observes
that the IRS never audited him for failing to file a Schedule K-1. Murphy suggests the
Bankruptcy Court erred in crediting Selheimer’s testimony for the additional reason that
he is a convicted felon who admitted to defrauding S&C’s investors. Moreover, Murphy
argues the court should not infer he made contributions to S&C’s capital because he
derived no benefit whatsoever from the alleged capital contributions to the firm.
As the District Court recognized, there is evidence in the record which supports
Murphy’s argument that the transferred securities were not part of S&C’s capital. For
example, Murphy testified he transferred the securities to S&C for safekeeping, never
received IRS Schedule K-1s, and met periodically with Selheimer to review his account.
But there is also significant documentary and testimonial evidence which supports a
finding that these securities were indeed part of S&C’s capital. As stated, we will reverse
a factual finding by the trial court only if that finding is “completely devoid of minimum
evidentiary support displaying some hue of credibility or bears no rational relationship to
the supportive evidentiary data.” Kool, Mann, 300 F.3d at 353; see also Anderson v. City
of Bessemer City, 470 U.S. 564, 574 (1985) (“[T]he court of appeals may not reverse . . .
even though convinced that had it been sitting as the trier of fact, it would have weighed
the evidence differently.”). Given the significant evidence in the record which supports
the finding of the Bankruptcy Court, that threshold has not been crossed.

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10Because the District Court concluded Murphy was not an eligible “customer” based
upon the characterization of the transferred securities as capital of S&C, the District
Court declined to consider the Bankruptcy Court’s alternative rationale for denying
Murphy compensation because he was a general partner, limited partner with 5% of the
net assets of the firm, or otherwise held a controlling interest. Murphy’s partnership
status may impact his eventual liability to reimburse the SIPC for payments made to S&C
customers. As such, we review the Bankruptcy Court’s alternative findings to the extent
they relate to Murphy’s partnership status.
10
Moreover, even though the Bankruptcy Court credited the testimony of Perry
Selheimer, who apparently defrauded S&C investors, we defer to the Bankruptcy Court’s
determinations of witness credibility. See Bankruptcy R. 8013 (“On an appeal the district
court or bankruptcy appellate panel [shall give] due regard . . . to the opportunity of the
bankruptcy court to judge the credibility of witnesses.”). We find no basis for disturbing
the Bankruptcy Court’s credibility determination.
In sum, the Bankruptcy Court made no clear error in finding the securities
transferred by Murphy were part of S&C’s capital. Based on this finding, we will affirm
the Bankruptcy Court’s conclusion that Murphy was not a “customer” within the meaning
of 15 U.S.C. § 78lll(2), and therefore was ineligible to receive compensation in the SIPC
direct payment proceeding.
B.
The Bankruptcy Court upheld the SIPC’s denial of Murphy’s claim for the
alternative reason that Murphy was a limited partner of S&C, and therefore ineligible for
compensation per the exceptions set forth in 15 U.S.C. § 78fff-3(a)(4).10 The court relied

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11
on Selheimer’s testimony that S&C sent Schedule K-1s to all partners, including Murphy,
and designated Murphy as a partner on Form BD statements filed with the SEC. The
court also observed the 1975 Amendment to the Selheimer Partnership Agreement stated
Murphy would become a limited partner of S&C. Although the Amendment did not
specify how or when Murphy would become a limited partner, the court found this “[did]
not negate a finding that [Murphy] became a limited partner immediately upon signature
of the Amendment (under the title ‘Limited Partner’).” Edward G. Murphy, et al. v.
Selheimer & Co., et al., Adv. No. 00-670, slip op. at 6-7 (Bankr. E.D. Pa. June 13, 2002).
Notwithstanding this evidence, the Bankruptcy Court accepted the SIPC’s argument that
Murphy should be considered a general partner because no certificate of limited
partnership was filed for S&C with the Pennsylvania Department of State. Like the
District Court, we see no error in this conclusion.
In order to form a limited partnership under Pennsylvania law, a certificate of
limited partnership must be executed and filed with the Pennsylvania Department of
State. 15 Pa. Cons. Stat. § 8511. Where parties intend to enter into a limited partnership,
but fail to file the appropriate certificate of partnership, they are treated as a general
partnership as to third parties and creditors. Ruth v. Crane, 392 F. Supp. 724, 733 (E.D.
Pa. 1975), aff’d, 564 F.2d 90 (3d Cir. 1977). The 1975 Amendment to the Selheimer
Partnership Agreement, signed by Murphy, indicates the parties intended to form a
limited partnership. But there is no certificate of limited partnership for S&C on file with

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11The parties do not contest that Murphy is the trustee and sole beneficiary of
appellants Profit Sharing Plan and Money Purchase Pension Plan.
12Appellants characterize this determination as a factual finding subject to the clear
error standard. Appellants’ Br. 2. However, this determination ultimately hinges on the
application of law to fact, and therefore, our review is plenary. United States v.
Robertson, 305 F.3d 164, 168 (3d Cir. 2002), cert. denied, 123 S. Ct. 2104 (2003).
12
the Pennsylvania Department of State, and Murphy and Selheimer both testified they do
not recall ever filing any such certificate. Based on this evidence, the Bankruptcy Court
made no error in finding S&C did not file a certificate of limited partnership in
Pennsylvania. As such, we see no reason to disturb the Bankruptcy Court’s conclusion
that S&C should be treated as a general partnership, and Murphy as a general partner.
III.
After concluding M urphy was an ineligible “customer,” the Bankruptcy Court
found the SIPC properly denied the claims of Profit Sharing Plan and Money Purchase
Plan because Murphy was the sole beneficiary of those plans.11 We review this
conclusion de novo.12
Like the District Court and the Bankruptcy Court, we find the reasoning of In re
Weis Secs., convincing. In reviewing the SIPA proceeding at issue in that case, the court
denied compensation to a customer account held in the name of a trust whose current
income beneficiary was an ineligible officer of the debtor. 1975 U.S. Dist. LEXIS 13146,
*9-10. The court rejected a “technically-based construction” of SIPA that would allow a
person otherwise ineligible for SIPA protection to receive compensation for financial

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13
losses resulting from the debtor’s insolvency. Id. at *10. Similarly, we see no reason to
provide SIPA protection to a person “not meant to be within the class [of persons]
Congress chose to protect.” Id. As trustee and sole beneficiary of the appellant benefit
plans, Murphy directed the plan investments with S&C primarily for his own benefit. To
find Profit Sharing Plan and Money Purchase Pension Plan eligible to participate in the
SIPC compensation fund would stretch the statutory meaning of the term “customer”
“wholly beyond its limits.” Secs. Investor Prot. Corp. v. Morgan, Kennedy & Co., Inc.,
533 F.2d 1314, 1318 (2d Cir. 1976).
IV.
For the foregoing reasons, we will affirm the judgment of the District Court.

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