Opposition Brief — Pine Street Baptist Church v. Securities Investor Protection Corp.

_ Supreme Court, US,

FIigcnga G

>

No. 86-79

IN THE

Supreme Court of the Gnited States

OCTOBER TERM, 1986

PINE STREET BAPTIST CHURCH, et al.,

Petitioners,

Vs.

SECURITIES INVESTOR PROTECTION CORPORATION

and Frep D. BrYAN, TRUSTEE,

Respondents.

On Petition For Writ Of Certiorari

To The United States Court Of Appeais

For The Sixth Circuit

BRIEF OF RESPONDENT

SECURITIES INVESTOR PROTECTION

CORPORATION

IN OPPOSITION TO THE PETITION FOR

A WRIT OF CERTIORARI

THEoporE H. Focut

Of Counsel General Counsel

SECURITIES INVESTOR PROTECTION

CORPORATION

900 Seventeenth Street, N.W.

STEPHEN P. HARBECK Suite 800

Associate General Counsel Washington, D.C. 20006

(202) 223-8400

MICHAEL E. Don

Deputy General Counsel

(NE RRC AEE TORE MN NY MPR, TIO

PRESS OF BYRON 8S. ADAMS, WASHINGTON, D.C. (202) 347-8203

COUNTERSTATEMENT OF THE QUESTIONS

PRESENTED FOR REVIEW

This suit arises in a proceeding to liquidate the

business of Ambassador Church Finance/Development

Group, Inc. (‘Debtor’) under the Securities Investor

Protection Act of 1970 (“SIPA’’), which created

Respondent Securities Investor Protection Corpora-

tion (“SIPC’’)'. Under SIPA the “‘customers”’ (as de-

fined) of a bankrupt broker-dealer are a preferred

class of creditors. Claims for cash or securities may

be satisfied from the Debtor’s estate in liquidation,

supplemented within limits by SIPC’s funds.

The Petitioners in this case, hereinafter referred to

as the ‘‘Issuers’’, were issuers of securities who were

held to be “customers” of the Debtor pursuant to a

determination by the United States Court of Appeals

for the Sixth Circuit.2 SIPC then advanced the max-

imum allowable amount under SIPA to the trustee

for the Debtor, on behalf of each Issuer. Subsequent

'15 U.S.C. sections 78aaa et seq. (1982). The liquidation of

the Debtor was conducted under SIPA as originally enacted in

1970. SIPA was amended by Pub. L. No. 95-283, 92 Stat. 249

(1978), Pub. L. No. 95-598, 92 Stat. 2549 (1978) and Pub. L.

No. 96-433, 94 Stat. 1855 (1980). Because “these amendments

do not affect the issues in this case,” the Sixth Circuit below

cited the current version of SIPA rather than the 1970 version.

SIPC v. Ambassador Church Finance/Development Group, Inc.

788 F.2d 1208, 1209, n.1 (6th Cir. 1976). The Petitioners fol-

lowed this convention in their Petition For A Writ of Certiorari

(p.2. n.1.). SIPC will therefore cite to current law as well, mak-

ing note of some linguistic changes which do not affect the

result. Pursuant to this court’s rule 28.1, SIPC states that it

has no parent companies, subsidiaries, or affiliates.

2 SEC v. Ambassador Church Finance/Development Group, Inc.,

679 F.2d 608 (6th Cir. 1982).

BEST AVAILABLE COPY |

to the receipt of funds advanced by SIPC to the

trustee on their behalf, the Issuers filed the instant

suit, seeking ‘‘interest’”’ directly from SIPC. The prin-

cipal question now presented to this Court is:

Whether the Issuers may be paid interest in

this liquidation proceeding, and if so, whether

it may be paid directly by SIPC.

SIPC submits that the United States Court of

Appeals for the Sixth Circuit correctly held that,

“SIPA does not authorize the SIPC to pay interest,

either to the trustee or directly to the debtor’s cus-

tomers. As the District Court noted in its opinion,

‘Congress could have specifically provided for pay-

ment of interest out of funds of SIPC, but did not

do so.’ ’’

The Sixth Circuit also held against petitioners for

other independent reasons. Thus, in order for this

Court to review the principal question presented, un-

der circumstances where that question is not mooted

by the other holdings below, it must also review the

following two questions:

Whether petitioners have an implied right of

action against SIPC, arising under SIPA,

where this Court held 11 years ago that no

such right of action exists;

Whether SIPC, which is statutorily immune

from liability “for any action taken or omit-

ted in good faith under or in connection with

any matter contemplated by’’ SIPA, can be

* SIPC v. Ambassador Church Finance/Development Group,

Inc., (Pine Street Baptist Church v. SIPC), 788 F.2d 1208, 1212

(6th Cir. 1986).

ill

held liable where (1) no evidence of lack of

good faith was introduced at trial and (2)

petitioners conceded at trial that SIPC had

acted in good faith.

TABLE OF CONTENTS

COUNTERSTATEMENT OF THE QUESTIONS PRESENTED

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a si

COUNTERSTATEMENT OF THE CASE .......cccecececeecececeees

I

Course of Proceedings, Disposition Below, and

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SUMMARY OR ATGUMIEIT cccccccccccccccccscccccsccscscenscccsscces

ei a

I. The Principal Question Presented Is A Well

Settled Point of Law Which Is Not Worthy

Of Review By This Court. Interest Is Not Al-

lowable Against SIPC. Interest Is Only Allow-

able Against The Debtor’s Estate, And Then

Only If There Is A Surplus After Payment Of

BE ee IS. sadineneniatairierensttiantiaocsassaszime

As a general rule, interest does not accrue

after the date of bankruptcy. ..............:::.000

Exceptions to the general rule concerning in-

terest are not applicable here. ...................6

The general rule applies to SIPA pro-

ROE SRE Neder PTT eR ON

SIPC may advance money only to pay «

tomers’ ‘“‘net equity” claims. ‘“‘Net equity’, as

defined in SIPA, does not include

SII Vocanddustuacusdsansmiaguaminacecenesnendieudemeneeueeess

The Issuers seek to substitute their notion of

equity for the equities mandated by

CITIES: ° sigicuaeishvasuadenbiaimeapdcenannapsinnceeeiiacnesnens

The cases cited by the Issuers are

Ps -cAsccstcarnidcexeckevesiunnerisseativtvabscecesvenses

II. The Miscellaneous Arguments Of The Issuers

GA Oe SRO - RO MRNIIRS | seccasessnentonstodcenceseces

Page

20

23

Oe

The Issuers have admitted that SIPC litigated

the issue of their ‘‘customer’” status in good

faith. SIPA section 15(c), 15 U.S.C. section

Fy BE TI, Sitccntcanecicssdpeuesemeticnseres 23

The Sixth Circuit correctly construed SIPC v.

BTN s. dasdccetiacncuicecsnssnssacnséaladisiie aacaaaeniaiaets 25

The Issuers’ reliance on 28 U.S.C. Section

Se AE MI, © cise ccinnscsteinscavirccvsenapsanpiens 27

CICR ANI : ciccdctascicccuecennicvidvstedtetcssiieniiinvuasauoument 28

TABLE OF AUTHORITIES

CASES: Page

In re Ahlswede, 516 F.2d 784 (9th Cir. 1975) _...... 18

American Iron Co. v. Seaboard Air Line, 233 U.S.

261, 34 S.Ct. 502, 58 L. Ed. 949 (1914) _....... 11

Badaracco v. Commissioner, 464 U.S. 386 (1984) 18

Bank of Marin v. England, 385 U.S. 99 (1966) ... 18

Borgenicht v. Creditors’ Committee, 479 F.2d 150 (2d

SCOMMITIIED. - cansusiasisnasinseubinnslancdehaniensianisaessoammainaincgention 18

In re Chantler Baking Co., 436 F.Supp. 169 (W. D.

DUET -sculchacncein ents Dpnasanceiniternnbbdeageminnemenannais 9

City of New York v. Saper, 336 U.S. 328

SEED. chascdauhhementonahicsubenhouiameciohssugcsrodiammasiacanon 8

Cre HAM, GE UB. GE RIT) ccccnnsenccsnsctnsnsesssness 26

Crooks v. Harrelson, 282 U.S. 55 (19380) ............. 18, 19

Debenturehoiders Protective Committee of Continental

Investment Corporation v. Continental Invest-

ment Corporation, 679 F.2d 264 (1st Cir. 1982)

edcleddiaialpadobschiinasaisatieknahiiahiniiganriiamuaicievnsaanaamaanmniase 10

Exchange National Bank v. Wyatt, 517 F.2d 453 (2d

SEs TUT UI: — saccckssnaacusavvavnscunsuoubassunasosensadeenubon 2

Farish v. Holley, 244 Ala. 19, 12 So. 2d 88 (Ala.

MINNIE \snincéusigdibavsopasilonsitaseueeuunsae temacremeaaaa sain lane )

In re Feenstra, 13 B.C.D. 370 (Bkrtcy. W.D.N.Y.

EINE ‘ctésasubinssotnnsacdnesgeesisiousasanaaneul scosmneduaen 19

First Empire Bank v. FDIC, 572 F.2d 1361 (9th Cir.

1978), cert. denied, 489 U.S. 919 (1978) _........ 21

Griffin v. Oceanic Contractors, Inc., 458 U.S. 564

SED: — skadinsossadnsnsbatcheinleidiniada dip abedsuden tae aeraue 19

Hermann v. Gleason, 126 F.2d 936 (6th Cir.

IEEE” ' dniticcsastesienssivvasiedsiietdanstuncummmnioemntomae ad 22

Jamison v. Federal Deposit Insurance Corporation,

fae 8 ei Be Ae |) enone 9, 12

In re Kerber Packing Co., 276 F.2d 245 (7th Cir.

SEE” Wassucinssssineniestanvsshciasvsaxssbaceecsnimenasaeienadaes 8

vii

Table of Authorities Continued

Page

In re King Resources Co., 528 F.2d 789 (10th Cir.

SE A bi ebaicash dissecans andadenceuabenneuiaesn cule mmsmidaiie 8

In re Leeds Homes, Inc., 332 F.2d 648 (6th Cir.

EET. | abasdanuchessnkedesnsnestnnakaansanensadiialatmaihansitisiiinaeiies 7

In re Leeds Homes, Inc., 222 F.Supp. 20 (E.D. Tenn.

1963), affd 332 F.2d 648 (6th Cir. 1964) ...... 12

In re Magnus Harmonica Corp., 262 F.2d 515 (3d

Cae MIN: > ciassbdssiosnsniciheiiesuahinieisenaieins aniabsagonennbiaseess 9

National Railroad Passenger Corp. v. National As-

sociation of Railroad Passengers, 414 U.S. 453

PRS ee Se A st RAT, PE 17

New York v. Saper, 336 U.S. 328, 69 S.Ct. 554, 93

Saleh, SEINE” dikccshacnavipionaaencneadusdeiainuanoas 11

Nicholas v. United States, 384 U.S. 678 (1966) _.... 8

In re OTC Net, Inc., 34 Bankr. 658 (Bankr. D. Co.

EEE * ic sdecaeuracsumenaerasthaledociandeaanbcsa Garendecaceninkns 11

Pepper v. Litton, 308 U.S. 295 (1989) — .........cccceeees 18

SEC v. Aberdeen Securities Corp., 480 F.2d 1121 (8d

Cir. 1973), cert. denied, 414 U.S. 1111 (1978)

SEC v. Ambassador Church Finance/Development

Group, Inc., 679 F.2d 608 (6th Cir.

PUNO. scctshasdiscmaphussapehsareunemmeenctumods i, 3, 22, 28, 27

SEC v. Ambassador Church Finance/Development

Group, Inc., 446 F.Supp. 844 (M.D. Tenn.

DINO UD sescteapuctpannsnetesabceandana sd nunchatadestadiebininaake 10

SEC v. Packer, Wilbur & Co., Inc., 498 F.2d 978

ee Pek TIE Reasiuisddbnciecsadeucaumnelseeeusvicaeasacoroiess 17

SEC v. Wick, 360 F.Supp. 312 (N.D. Ill. 1973) _... 2

Sexton v. Dreyfus, 219 U.S. 339 (1911) ...... ee. 8, 11

SIPC v. Ambassador Church Finance Development

Group, Inc., 788 F.2d 1208 (6th Cir.

REE |) chaloacactavachosarvaciiceaes i. a, 1, 4,6, 8, 1M, 2

viii

Table of Authorities Continued

Page

SIPC v. Associated Underwriters, Inc., 423 F.Supp.

BE Ta Te UE ~~ wiectiteresetetensiennimnmminic 13

SIPC v. Barbour, 421 U.S. 412 (1975) ..... 5, 16, 25, 27

SIPC v. Charisma Securities Corp., 506 F.2d 1191

Ce Sy PD; vinideceunsdstcsnienctectisiesnansdnndlcwesss 2

SIPC v. Morgan, Kennedy & Co., Inc., 533 F.2d 1314

(2d Cir. 1976), cert. denied, 426 U.S. 936

CRIPTED: _ sAdsiisancasnniicnisenenininaebiigabmnenanmenainneainens 17 -

State Board of Equalization v. Stodd, 500 F.2d 1208

SURGES PUTED ‘<itcistascuonhesnonsanaaeabesousiesnieucainceniccen 8

Tepper v. Chichester, 285 F.2d 309 (9th Cir.

UTE: ©,” bidcwteananheasiusciiairelaaeshieguaahicninaeseaienausaphualaiinainaiavbeininn 12

Thomas v. Western Car Co., 149 U.S. 95 (1898) .. 8

Ticonic National Bank v. Sprague, 308 U.S. 406

SEE’ scccageiaahiceeaid bi aicbaibvalehabbdiiseanlaiidbaiaseelabentbiaees 20

In re Time Sales Finance Corp., 491 F.2d 841 (8d

Rae ENED Gcecissacissadblicuauseahseuitasediaecunincuetulsbocmiaasbsaaatlaan 8

In re Twin Parks Limited Partnership, 720 F.2d

BE I E, SUEEEID seciccenonssnecscnersevoddchancestecees 16

United States v. Bass, 271 F.2d 129 (9th Cir.

SI biienbatiiciierielet nk ON es eas Sg a 11

United States v. Billings, 232 U.S. 261 (1914) _..... 21

Vanston Bondholders Protective Committee v. Green,

eT Ps BNO WIPE cchsvoncckenacuernecececnescaseoes 7, a0, 36

In re Weis Securities, Inc., (Claim of Fowler) 1

Bankr. Ct. Dec. 1572 (S.D.N.Y. 1975) _........... 18

STATUTES

Bankruptcy Act, 11 U.S.C. GOGO — ....ccccsccsccoseseseseeees 12

Bankruptcy Code section 726, 11 U.S.C. §726 _..... 11

Bankruptcy Code section 726(aX5}(6) ......... eee 16

Bankruptcy Reform Act, Pub. L. No. 95-598

BRINE ecciadcsanbuinetarliacas iinnicadendaininandaiomaecesioveinks i

Table of Authorities Continued

Page

SE ULB As. TO TE cxcneansearemceattirniennenes 27

Securities Investor Protec*ion Act of 1970, 15

UNIT 10,’ sui slettsabahaapcahes aeaationsaboesedehenaanaiontinbslibe i

SENET. - <sinsdupiucidantnbindiossiespacehanienieunnancenieamenauens 26

EE snsinnnnsnenncnninsdeneahsconannionatessinnadianctenbeahainanieanniies 13

| Og | eee ere ee 13

RIE. cnanscnasnartcscoveisnmicsindavandeismmucasiigaasnneiinnds 2

UII «.:csccanacaenisancnsinnminnambeabiiananeeneuiooiiun’ 11

SUITE” dicts cicteiacineigesnsichlssilahiediandanibidabbdusaaanaeanseaeaaseaat 2

IIE cacuvunsnuneonenpteneisssniedessiibeiainieanineien 15

PEIN. “ccenishaeuacktcnnnnannantanuantnrronereensiliarguniinn 16

§78fff-2(c) ...... si eatiapcnkdemananiadedonasnaiieceuianiaaaa 15

UTED Annascncsnatinncnintnvadeaeseneasactentesennenintenmnne 14, 15

RENTED SixRiisgsnnsanepenveunecendvectuonaunsnsbacuubhtenieeies 15

RII. 53. scanaiulenyioshindceescnnnteanepaeaiiandaieieaenins 15

NE Sian Ie Re CONT Pe OR 13, 15, 27

PUINITILD ° cicsisshipunchadesquspeabausatameaielbendihasumnialon 20

IY TREE OOD: ssnsecaiccitnanmnaniavaniaancive 13, 14, 15

a Os al ae 27

II iio asd eas okinen a es tubsnaconmesialin 5,6,23,24,25

SEI -ccns-ccusssscuastublestihuteneappleh nucsanneieiecuiniseiedimeaanilien 2

RI, iio cccisentesniiuctuanatncactauds erates 5

PEED evcacsncenses alealian tees decasmeieasasaaianbaaaaeeaaaias 16

LEN ORL OR BERNER iO 5, 15

RULES

UPON COMER BIRR BBE x .scvccsccsesecsssnvcccensnnsensnsacee i

OTHER AUTHORITIES

3A Collier on Bankruptcy, 463.16[1] (14th Ed.

BE Seka saiaakndcssts sine tendh taiciniasinnbaictalinachiovieintine 16

IN THE

Supreme Court of the Gnited States

OCTOBER TERM, 1986

No. 86-79

Pine STREET BAPTIST CHURCH, et al.,

Petitioners,

vs.

SECURITIES INVESTOK PROTECTION CORPORATION

and Frep D. BRYAN, TRUSTEE,

Respondents.

On Petition For Writ Of Certiorari

To The United States Court Of Appeals

For The Sixth Circuit

BRIEF OF RESPONDENT

SECURITIES INVESTOR PROTECTION CORPORATION

IN OPPOSITION TO THE PETITION FOR

A WRIT OF CERTIORARI

COUNTERSTATEMENT OF THE CASE

Nature of the Case

As the Sixth Circuit noted in this case, “[e]ssentially, a

liquidation proceeding under the SIPA is a bankruptcy

proceeding.” 788 F.2d 1208 at 1210 (6th Cir. 1986). It has

been repeatedly held that the liquidation of a brokerage

firm under SIPA is a bankruptcy proceeding for all prac-

tical purposes. See, e.g., Exchange National Bank v. Wyatt,

517 F.2d 453 (2d Cir. 1975); SIPC v. Charisma Securities

Corp., 506 F.2d 1191, 1193 (2d Cir. 1974); SEC v. Aberdeen

Securities Corp., 480 F.2d 1121, 1128 (3d Cir. 1973), cert.

denied., 414 U.S. 1111 (1973); SEC v. Wick, 360 F.Supp.

312 (N.D. Ill. 1973). SIPA section 6(b), 15 U.S.C. section

78fff(b) requires that a liquidation proceeding under SIPA

be conducted “in accordance with, and as though it were

being conducted under chapters 1, 3 and 5 and subchapters

I and II of chapter 7’’ of the Bankruptcy Code‘ which are

not inconsistent with the provisions of SIPA. A trustee

appointed in a SIPA proceeding has the same general pow-

ers and duties as a trustee in bankruptcy. SIPA section

7, 15 U.S.C. section 78fff-1.

Course of Proceedings, Disposition Below, and Facts

On November 7, 1974, the United States District Court

for the Middle District of Tennessee appointed Fred D.

Bryan as temporary receiver of the Debtor on the appli-

cation of the Securities and Exchange Commission (‘“SEC’’)

in its action for injunctive relief. On December 17, 1974,

on the application of SIPC, that court found that the cus-

tomers of the Debtor were in need of the protections af-

forded by SIPA and appointed Mr. Bryan as trustee for

the liquidation of the Debtor’s business.

The Issuers, the Petitioners herein, were claimants who

filed their respective claims with the trustee. The trustee

rejected them as the claims of “‘customers”’ of the Debtor,

as that term is defined in SIPA section 16(2), 15 U.S.C.

section 78/2), but allowed them as general creditor claims.

The basis for this rejection was that the Issuers had deait

with the Debtor as issuers of securities seeking to raise

‘The former Bankruptcy Act, 11 U.S.C. 1 et seg. controls this case,

rather than the Bankruptcy Code (Bankruptcy Reform Act, Pub. L.

No. 95-598 (1978)) which superseded the Act. Just as recent amend-

ments to SIPA do not affect the result (supra, note 1), neither does

enactment of the new Code.

- ee Oe ee re em

capital, as opposed to persons seeking to invest or trade

in securities. The Issuers filed objections to the trustee’s

determinations, asserting entitlement to “customer” sta-

tus.

The trustee, SIPC, and the Issuers agreed to proceed

to litigate one of the objections so as to obtain a judicial

determination as to whether such claims were eligible for

protection as “customers” of the Debtor. After extensive

pretrial proceedings, the trustee, SIPC, and one of the

Issuers, Pine Street Baptist Church (“Pine Street’’), stip-

ulated to all of the facts surrounding the transactions be-

tween Pine Street and the Debtor. .

On January 9, 1981, the District Court held that Pine

Street was entitled to “customer” status under SIPA. The

trustee and SIPC appealed that determination. On May

27, 1982, the United States Court of Appeals for the Sixth

Circuit affirmed. SEC v. Ambassador Church Finance/De-

velopment Group, Inc., 679 F.2d 608 (6th Cir. 1982).° As

a result of the foregoing litigation, the Issuers’ claims were

allowed as “customer” claims.

Supsequently, the trustee requested SIPC to advance

sufficient funds to satisfy the Issuers’ claims with interest.

SIPC thereafter advanced funds to the trustee to pay the

Issuers’ claims as allowed,® without interest.

Subsequent to their receipt of the funds advanced by

SIPC to the trustee, the Issuers filed an adversary pro-

* The Sixth Circuit carefully limited its opinion to the facts before

it, stating that “[w]e do not decide whether an issuer of securities who

deals with an investment banker or underwriter only in more traditional

ways may be a ‘customer’ under the Act.’”’ 679 F.2d 608 at 613.

* Since the claims of two of the Issuers, Randall Memorial Free Will

Baptist Church and Westgate Baptist Church were over the then ex-

isting $50,000 limit on SIPC advances specified in SIPA, SIPC advanced

only $50,000 for each of those two claims. The limits of protection

were raised at a later date.

ceeding within the liquidation proceeding, seeking interest

directly from SIPC. Trial was held on June 13, 1984. The

District Court, by a Memorandum and an Order dated

November 5, 1984, held that the Issuers were entitled to

interest directly from SIPC. The District Court noted that

Congress ‘‘must have known” that litigation would ensue

which might postpone payment of claims “for many years,”’

and that ‘Congress could have specifically provided for

payment of interest out of the funds of SIPC, but did not

do so.” Memorandum, November 5, 1984, p. 5. Neverthe-

less, applying ‘“‘equity,’’ and without reference to SIPA,

the District Court determined that “‘statutory interest’

was due from June 5, 1975, the date by which ail other

customer claims had been paid. Memorandum, November

5, 1984, p. 6. The District Court’s Order of November 5,

1984 did not specify the amount of interest, but did state:

“This case is closed.”” Both SIPC and the Issuers appealed

the November 5 Order. Both sides submitted proposals to

the District Court as to the amount of interest.

On January 9, 1985, by a Memorandum and an Order,

the District Court detailed the amount of interest each

Issuer was to be awarded as of January 31, 1985. SIPC

appealed the January 9, 1985 Order; the Issuers withdrew

their appeal from the November 5, 1984 Order.

The Sixth Circuit reversed the District Court, for four

independent reasons.’ First, noting that this is a bank-

ruptcy proceeding for all practical purposes, the Sixth Cir-

cuit held that interest is not allowable under bankruptcy

law unless the Debtor’s estate generates a surplus. Since

the Debtor’s estate was insolvent, no interest would accrue

in this case. SIPC v. Ambassador Church Finance Devel-

opment Group, Inc., 788 F.2d 1208, at 1210-1211 (9th Cir.

1986).

’ The Sixth Circuit did not present its reasons in the sequence given

here.

8 AN ee ncaa

lt.

Second, the Sixth Circuit held that in a SIPA proceed-

ing, SIPA section 9, 15 U.S.C. section 78fff-3 provides the

exclusive means for SIPC to advance funds to a trustee

on account of a customer’s ‘‘net equity’’ as defined in

SIPA section 16(11), 15 U.S.C. section 781111). The court

stated that “[sJince the ‘net equity’ definition does not

include interest, we hold that SIPA does not authorize the

SIPC to pay interest, either to the trustee or directly to

the debtor’s customers.”’ 788 F.2d 1208, at 1212.

Third, the Sixth Circuit noted that the Issuers did not

assert that SIPC had denied their claims to customer sta-

tus in bad faith. Consequently, the court held that SIPA

section 15(c), 15 U.S.C. section 78kkk(c), “excuses SIPC

from any obligation to pay interest under the circumstan-

ces of this case.”” 788 F.2d 1208, at 1213.

Fourth, citing SIPC v. Barbour, 421 U.S. 412 (1975),

the Sixth Circuit held that the District Court should have

dismissed the action, because ““SIPA does not give cus-

tomers of failing broker-dealers an implied private cause

of action to compel SIPC to take action under the SIPA.”

788 F.2d 1208, at 1210.

As noted above, the Debtor’s general estate is insolvent,

and the trustee was not able to recover any assets for the

fund of “customer property” as defined in SIPA section

16(4), 15 U.S.C. section 78lll(4). There is, consequently, no

surplus in either the general estate or the fund of ‘‘cus-

tomer property.’* (Testimony of Fred Bryan, Trustee,

Transcript p. 37, 1.13-25).

SUMMARY OF ARGUMENT

The Issuers have failed to present an issue which is

worthy of review by this court. This court should not grant

* Prior to 1978, SIPA referred to a “single and separate fund.’’ The

1978 amendments altered this concept to ‘customer property,” which

encompassed a broader range of assets than the single and separate

fund.

the Petition for a Writ of Certiorari in this case for the

following reasons.

1. The Sixth Circuit simply followed two centuries of

consistent precedent which holds that interest is not pay-

able in bankruptcy, absent a surplus in the bankruptcy

estate. SIPC’s presence in the bankruptcy does not alter

this result. Had any other customer or general creditor

(as distinguished from SIPC) objected to “‘customer”’ status

for the Issuers, the Issuers would have been put to the

same test in litigation. There is simply no law which there-

after permits the Issuers to sue the objecting creditor for

damages or interest.

2. SIPA sets forth a “net equity” definition, which is

a precise formula as to the amount a “customer” may

receive in a SIPA proceeding. Congress did not provide

for interest to be paid on a customer’s net equity and this

court cannot alter that precise formula established by Con-

gress.

3. The Sixth Circuit correctly held that there is no pri-

vate right of action implied in SIPA to circumvent the

limitations of how much a customer may receive from

SIPC.

4. The Sixth Circuit was also correct in holding that

since there was no allegation at trial that SIPC disputed

the Issuers’ ‘“‘customer’’ status in bad faith, SIPA section

15(c), 15 U.S.C. section 78kkk(c), prohibited a suit for in-

terest by the Issuers.

5. There is no conflict among the United States Circuit

Courts of Appeals concerning any holding of the Sixth

Circuit in this case, nor is there any conflict with prior

decisions of this Court.

:

4

|

<

ARGUMENT

I. The Principal Question Presented Is A Well Settled

Point Of Law Which Is Not Worthy Of Review By

This Court. Interest Is Not Allowable Against SIPC.

Interest Is Only Allowable Against The Debtor’s Es-

tate, And Then Only If There Is A Surplus After

Payment Of All Valid Claims.

As A General Rule, Interest Does Not Accrue After The

Date Of Bankruptcy.

How a debtor’s assets are to be distributed, and the

circumstances under which interest may be allowed against

a debtor’s estate, are determined by federal rather than

state law. Vanston Bondholders Protective Committee v.

Green, 329 U.S. 156 (1946); In re Leeds Homes, Inc., 332

F.2d 648, 649 (6th Cir. 1964).

The Vanston Bondholders case states the prevailing legal

principle involved in this case: ‘‘[I]nterest on the debtor’s

obligations ceases to accrue at the beginning of the pro-

ceeding.”” 329 U.S. at 163. This Court stated the reason

for this rule as follows:

Exaction of interest, where the power of a debtor

to pay even his contractuai obligations is sus-

pended by law, has been prohibited because it

was considered in the nature of a penalty im-

posed because of delay in prompt payment—a

delay necessitated by law if the courts are prop-

erly to preserve and protect the estate for the

benefit of all interests involved.

Id. As stated by Mr. Justice Holmes:

The rule is not unreasonable when closely con-

sidered. It simply fixes the moment when the

affairs of the bankrupt are supposed to be wound

up.

Sexton v. Dreyfus, 219.U.S. 339, 344 (1911). As early as

1911, the Sexton court stated: “‘For more than a century

and a half the theory of the English bankrupt system has

been that everything stops at a certain date. Interest was

not computed beyond the date of the commission.” Jd. The

opinion in Sexton demonstrates the deep historical roots

of this rule. The court stated “We take our bankruptcy

system from England, and we naturally assume that the

fundamental principles upon which it was administered

were adopted by us when we copied the system, somewhat

as the established construction of a law goes with the

words where they are copied by another state. No one

doubts that interest on unsecured debts stops.’”’ Id. See

also, Thomas v. Western Car Co., 149 U.S. 95, 116-117

(1893).

The rationale of Sexton reflects ‘‘the broad equitable

principle that creditors should not be disadvantaged vis-a-

vis one another by legal delays attributable solely to the

time-consuming process inherent ir the administration of

the bankruptcy laws.” Nicholas v. United States, 384 U.S.

678, 683 (1966).? The long-standing rule against post-bank-

ruptcy interest is implicit in the Bankruptcy Act. City of

New York v. Saper, 336 U.S. 328, 332 (1949).

This “black letter law,”’ that interest on unsecured debts

stops on the date of bankruptcy, has been consistently

recognized. See, e.g., In re King Resources Co., 528 F.2d

789 (10th Cir. 1976); State Board of Equalization v. Stodd,

500 F.2d 1208 (9th Cir. 1974); In re Time Sales Finance

Corp., 491 F.2d 841 (8d Cir. 1974); In re Kerber Packing

Co., 276 F.2d 245 (7th Cir. 1960); In re Magnus Harmonica

*It is indicative of the weakness of the Issuers’ argument that, not-

withstanding the Sixth Circuit’s direct reliance on this Court’s opinions

in the Vanston Bondholders and Nicholas cases, see 788 F.2d 1208, at

1211, the Issuers do not even mention them in their Petition to this

Court.

Cerne OA redeem wre Mena bila

nee

Corp., 262 F.2d 515 (8d Cir. 1959); In re Chantler Baking

Co., 486 F.Supp. 169 (W. D. Pa. 1977).

In Jamison v. Federal Deposit Insurance Corporation,

149 F.2d 199, 200 (5th Cir. 1945), the court applied the

prevailing law to an insured bank:

The general rule is that where the assets of an

insolvent bank in receivership are more than suf-

ficient to pay all debts, then the creditors are

allowed dividends to pay the interest due from

the debtor bank, but where the assets are not

sufficient to pay the principal of all debts, inter-

est on general claims will not be computed for

the period after the receiver took control. In

measuring the share of each creditor in the fund,

interest beyond the date of suspension is not cal-

culated. This rule was the outgrowth of the es-

tablished principles that the rights of creditors in

assets are fixed as of the date said assets are

transferred by operation of law to a trustee for

creditors; and that the delay in distribution is

an act of the law and a necessary incident to the

settlement of the estate, for which delay no interest

by way of damages accrues. [Emphasis supplied;

footnotes omitted.]

While federal law provides the rule of decision, general

state law is in accord. Thus, in Farish v. Holley, 244 Ala.

19, 12 So. 2d 88, 92 (Ala. 1943) the court held that the

creditors of an insolvent bank in liquidation could not be

penalized by forcing the estate to pay interest where the

defunct bank had litigated the validity of a claim and lost.

© The court stated:

Delay in the payment of a claim against an insolvent bank in liquidation

is not ground for allowing interest thereon where it is occasioned by

litigation over the right of a claim to a preference. The defunct bank

has a right to the litigation of questions involved in a claim made

10

The rule in Farish is designed to allow creditors to chal-

lenge questionable claims against an estate. That rationale

has seen application in this liquidation."

The decision of the Sixth Circuit conforms with ordinary

bankruptcy law as applied to a SIPA proceeding. Had any

customer or general creditor (as distinguished from SIPC)

objected to ‘‘customer’’ status, the Issuers would have been

put to the same test in litigation. Had the Issuers emerged

successfully, there is simply no law which would permit

them to sue the objecting creditor for damages or interest.

The Issuers cite no case to the contrary. The Sixth Circuit

simply recognized this standard rule.

A recent pronouncement on the subject of postpetition

interest under the Bankruptcy Act (as distinguished from

the Bankruptcy Code) is found in Debentureholders Pro-

tective Committee of Continental Investment Corporation v.

Continental Investment Corporation, 679 F.2d 264 (1st Cir.

1982). In that case, the court adhered to the rule in Van-

ston Bondholders, supra, concerning interest:

If CIC were insolvent, the indenture provision

allowing the post-petition interest on the install-

ments which fell due either before or after the

petition was filed would not be enforceable, re-

gardless of State law. Vanston, 329 U.S. p. 159

lines 23-24, pp. 163-166, 67 S.Ct. p. 238, pp. 240-

41. The federal pankruptcy rule, derived from

English law, provides that in the case of insolvent

against it, and the general creditors should not be penalized because

of the exercise of this prerogative. Id.

Thus, the trustee and SIPC successfully prevented one claimant in

this proceeding, Geraldine Burns, from asserting customer status. SEC

v. Ambassador Church Finance/Development Group, Inc., 446 F.Supp.

844 (M.D.Tenn. 1977). The effect of this was to prevent Ms. Burns

from sharimg in the “single and separate fund’’ (now known as “‘cus-

tomer property’’) which is divided, pro rata, among all persons (such

as the Issuers) who successfully assert “‘customer’’ status.

debtors interest, whether stipulated in a contract

; or not, stops at the moment the petition in bank-

; ruptcy is filed. Sexton v. Dreyfus, 219 U.S. 339,

344, 31 S.Ct. 256, 257, 55 L.Ed. 244 (1911);

American Iron Co. v. Seaboard Air Line, 233

U.S. 261-267-268, 34 S.Ct. 502, 504-05, 58 L. Ed.

949 (1914); See New York v. Saper, 336 U.S. 328,

330, 69 S.Ct. 554, 555, 938 L. Ed. 710 (1949).

679 F.2d at 268-269. Since there is no question that the

Debtor’s estate is insolvent, the same rule applies here.

ee ce rant eeeer Bary Wenae ae

Exceptions To The General Rule Concerning Interest Are

Not Applicable Here.

There are certain very limited exceptions to the general

rule that post-petition interest is not allowable. See, e.g.,

United States v. Bass, 271 F.2d 129 (9th Cir. 1959). Those

exceptions were well summarized by the Sixth Circuit in

this case. 788 F.2d 1208, at 1211, n.4. After reciting the

general rule that post-bankruptcy interest is not allowed,

the court noted that interest can be awarded (1) where the

debtor ultimately proves solvent, and generates a surplus,

or (2) in certain instances where the creditor is a secured

creditor and the security itself is either sufficient to pay

interest or generates additional funds from which interest

may be paid. Jd. It is evident that these exceptions are

inapplicable on the facts of this case. First, there will be

no “‘surplus” in this Debtor’s estate. The Debtor is hope-

lessly insolvent.'? Second, the Issuers have no security in-

terest in any asset.'*

'2In cases arising under SIPA subsequent to the 1978 amendments

to that statute, Bankruptcy Code section 726, 11 U.S.C. 726, was spe-

cifically incorporated into SIPA. See SIPA section 6, 15 U.S.C. section

78fff(e) (1980). Bankruptcy Code section 726 is a detailed program for

the distribution of a debtor’s general estate, including a provision for

the payment of interest after all other claims are paid in full. Thus,

in In re OTC Net, Inc., 34 Bankr. 658, 661 (Bankr. D. Colo. 1983),

ee RA ere eve ti, at

hs aeeeennieciemeaieemesitetaniene eam

12

Congress did not enact SIPA in a fashion which permits

annexation of SIPC’s assets to the Debtor’s estate. Nor

is there any remotely analogous law which supports such

a notion. Thus, for example, no cases support the prop-

osition that the assets of the Federal Deposit Insurance

Corporation (FDIC) or the Federal Savings and Loan In-

surance Corporation (FSLIC) are considered part of an

estate for the purpose of establishing a “surplus” out of

which to pay post-petition interest under their respective

statutory schemes. Indeed, the opposite is true. Implicit

in the cited quotation from Jamison v. Federal Deposit

Insurance Corporation, supra, p. 9, is the fact that any

“surplus” must come from the debtor’s estate—not from

the FDIC.

The Generai Rule Applies To SIPA Proceedings.

The presence of SIPC in the insolvency does not change

any of the foregoing. As noted above, SIPA proceedings

are conducted as bankruptcy proceedings. The operative

portions of SIPA were adopted, virtually word for word,

from former section 60e of the Bankruptcy Act, 11 U.S.C.

96e. That section of the Bankruptcy Act was “intended

to provide an exclusive procedure for determining conflict-

ing claims between the broker’s customers.” Tepper v.

Chichester, 285 F.2d 309, 311 (9th Cir. 1960). Section 60e

defined ‘“‘customers’’, who were entitled to share ratably

in a “‘single and separate fund” (now known as ‘‘customer

property’’) to the extent of their “net equity.’’ SIPC is

not an insurer. SIPC v. Associated Underwriters, Inc., 423

SIPC recognized and supported payment of untimely filed claims where

there is a surplus in the estate. SIPC has supported the payment of

interest to claimants in cases where there has been a surplus. Unfor-

tunately, this is not the case here.

‘8 Even where the facts might allow a secured creditor to obtain

interest from the security, the court will not always permit it. Jn re

Leeds Homes, Inc., 222 F.Supp. 20, 31 (E.D. Tenn.), affd, 332 F.2d

648 (6th Cir. 1964).

BEST AVAILABLE COPY

13

F.Supp. 168, 171 (D. Utah 1975). SIPC advances merely

augment ‘‘customer property” within statutory limits.

As noted, SIPA carried forward the basic framework of

section 60e. However, in addition to the fund of ‘“‘customer

property,’ administered by the trustee of a defunct broker,

SIPA created the ‘SIPC Fund.” The “SIPC Fund,” ad-

ministered by SIPC, is funded by means of assessments

on virtually all brokerage firms, SIPA section 4(a), 15

U.S.C. section 78ddd(a), and ultimately secured by a line

of credit on the United States Treasury. SIPA sections

4(f), (zg), and (h), 15 U.S.C. section ddd(f), (g), and (h). -

SIPC’s obligation and authority to distribute the SIPC fund

is strictly circumscribed by SIPA. SIPC advances to the

trustee do not enhance the Debtor’s estate. Further, to

the extent of its advances to customers, SIPC is subro-

gated to all of the rights of the customers it pays. SIPA

| section 9(a), 15 U.S.C. section 78fff-3(a). Thus, any ad-

vances made by SIPC for customers increases SIPC’s pro-

portionate share of a debtor’s estate by the amount of the

advance. If interest was paid by SIPC, other creditors’

claims would therefore be eligible for a smalier propor-

tional share.

SIPC May Advance Money Only To Pay Customers’ ‘Net

Equity”’ Claims. ‘‘Net Equity’’, As Defined In SIPA, Does

Not Include Interest.

As noted by the Sixth Circuit, 788 F.2d 1208, at 1211-

1212, SIPA section 9, 15 U.S.C. section 78fff-3, is the

exclusive provision which authorizes SIPC to advance funds

in a liquidation proceeding.'* SIPC may advance funds for

‘4 SIPA section 9, 15 U.S.C. section 78fff-3 provides:

SIPC ADVANCES

(a) ADVANCES FOR CUSTOMERS’ CLAIMS

In order to provide for prompt payment and satisfaction of net equity

claims of customers of the debtor, SIPC shall advance to the trustee

nists caceeneeieiaanmimnaans tian

14

administrative expenses of the liquidation and for the com-

pletion of certain ‘‘open contractual commitments” under

SIPA section 9(b) and (c), 15 U.S.C. section 78fff-3(b) and

such moneys, not to exceed $500,000 for each customer, as may be

required to pay or otherwise satisfy claims for the amount by which

the net equity of each customer exceeds his ratable share of customer

property, except that—

(1) if all or any portion of the net equity claim of a customer in

excess of his ratable share of customer property is a claim for cash,

as distinct from a claim for securities, the amount advanced to satisfy

such claim for cash shall not exceed $100,000 for each such customer;

(2) a customer who holds accounts with the debtor in separate ca-

pacities shall be deemed to be a different customer in each capacity:

(3) if all or any portion of the net equity claim of a customer in

excess of his ratable share of customer property is satisfied by the

delivery of securities purchased by the trustee pursuant to section

78fff-2(d) of this title, the securities so purchased shall be valued as

of the filing date for purposes of applying the dollar limitations of

this subsection;

(4) no advance shall be made by SIPC to the trustee to pay or

otherwise satisfy, directly or indirectly, any net equity claim of a

customer who is a general partner, officer, or director of the debtor,

a beneficial owner of five per centum or more of any class of equity

security of the debtor (other than a nonconvertible stock having fixed

preferential dividend and liquidation rights), a limited partner with

a participation of five per centum or more in the net assets or net

profits of the debtor, or a person who, directly or indirectly and

through agreement or otherwise, exercised or had the power to

exercise a controlling influence over the management or policies of

the debtor; and

(5) no advance shall be made by SIPC to the trustee to pay or

otherwise satisfy any net equity claim of any customer who is a

broker or dealer or bank, other than to the extent that it shall be

established to the satisfaction of the trustee, from the books and

records of the debtor or from the books and records of a broker or

dealer or bank, or otherwise, that the net equity claim of such broke

or dealer or bank against the debtor arose out of transactions for

customers of such broker or dealer or bank (which customers are

not themselves a broker or dealer or bank or a person described in

paragraph (4)), in which event each such customer of such broker

15

(c). But the only method by which SIPC may advance funds

to satisfy or pay claims of any person eligible for “‘cus-

tomer” status is clearly stated in SIPA section 9a), 15

U.S.C. section 78fff-3(a). That section permits SIPC to

advance funds to the trustee for satisfaction of “net equity

claims of customers.”” The term “net equity” is, in turn,

defined in SIPA section 16(11), 15 U.S.C. section 78//(11).*®

or dealer or bank shall be deemed a separate customer of the debtor.

To the extent moneys are advanced by SIPC to the trustee to pay or

otherwise satisfy the claims of customers, in addition to all other rights

it may have at law or in equity, SIPC shall be subrogated to the claims

of such customers with the rights and priorities provided in this chapter,

except that SIPC as subrogee may assert no claim against customer

property until after the allocation thereof to customers as provided in

section 78fff-2(c) of this title.

(b) OTHER ADVANCES

SIPC shall advance to the trustee—

(1) such moneys as may be required to carry out section 78fff-2(e)

of this title; and

(2) to the extent the general estate of the debtor is not sufficient

to pay any and all costs and expenses of administration of the estate

of the debtor and of the liquidation proceeding, the amount of such

costs and expenses.

(c) DISCRETIONARY ADVANCES

SIPC may advance to the trustee such moneys as may be required

to—

(1) pay or guarantee indebtedness of the debtor to a bank, lender,

or other person under section 78fff-1(bX2) of this title;

(2) guarantee or secure any indemnity under section 78fff-2(f) of this

title; and

(3) purchase securities under section 78fff-2(d) of this title.

6 SIPA section 16(11), 15 U.S.C. Section 781111) provides:

NET EQUITY

The term “net equity” means the dollar amount of the account or

accounts of a customer, to be determined by—

(A) calculating the sum which would have been owed by the debtor

to such customer if the debtor had liquidated, by sale or purchase

~

16

“‘Net equity’ requires the obligations of the Debtor to its

customers to be quantified on the “filing date’, SIPA sec-

tion 16(7), 15 U.S.C. section 78llU(7). In this case, Novem-

ber 7, 1974 is the filing date. The relationship between a

claimant and a debtor in a SIPA proceeding is measured

at that) one precise point in time. As was noted in SEC

v. Aberdeen Securities Co., Inc., 480 F.2d 1121, 1127 (3rd

Cir. 1973) cert. denied, 414 U.S. 1111 (1978) the question

thus posed is: What did the debtor owe the customer on

the filing date?_Interest, therefore, cannot be computed

subsequent to that date against this Debtor’s insolvent

estate. This is wholly consistent with the law under the

former Bankruptcy Act and the present Bankruptcy Code.

See Vanston Bondholders, supra p. 7; 3A Collier on Bank-

ruptcy, 463.16[1] (14th Ed. 1978).'*

This Court has held that in interpreting SIPA, one must

draw inferences “from the structure of SIPC.”’ SIPC v.

Barbour, 421 U.S. 412, 420 (1975). The only inference one

on the filing date, all securities positions of such customer (other

than customer name securities reclaimed by such customer); minus

(B) any indebtedness of such customer to the debtor on the filing

date; plus

(C) any payment by such customer of such indebtedness to the debtor

which is made with the approval of the trustee and within such

period as the trustee may determine (but in no event more than

sixty days after the publication of notice under section 78fff-2(a) of

this title).

In determining net equity under this paragraph, accounts held by a

customer in separate capacities shall be deemed to be accounts of sep-

arate customers.

‘* The law under the present Bank uptcy Code is virtually identical,

in that post-petition interest is allowed a priority inferior to all other

debts, and is paid only when to do otherwise would return money to

the Debtor. See Bankruptcy Code section 726(aX5)}(6). See In re Twin

Parks Limited Partnership, 720 F.2d 1374, 1377 (4th Cir. 1983) which

held that under the Bankruptcy Code, the vitality of the principles of

Vanston Bondholders, supra p. 7, is undiminished.

17

can draw from SIPC’s limited power to advance funds for

certain purposes is that Congress did not authorize SIPC

to advance funds except as specifically set forth in the

statute. Under the doctrine of statutory construction ez-

pressio unius est exclusio alterius,

when legislation expressly provides a particular

remedy or remedies, courts should not expand

the coverage of the statute to subsume other

remedies. ‘When a statute limits a thing to be

done in a particular mode, it includes the nega-

tive of any other mode....’

National Railroad Passenger Corp. v. National Association

of Railroad Passengers, 414 U.S. 453, 458 (1974). As a

consequence, the Sixth Circuit correctly held that, under

SIPA, the District Court was not free to compel an award

based on notions of equity. Any award of interest would

do violence to the statute which controls this proceeding.

The Issuers seek to substitute their notion of equity for

the equities mandated by Congress.

At bottom, the Issuers ask this court to ignore SIPA’s

explicit statutory provisions in favor of some supposed

concept of equity. An equitable argument which seeks to

avoid the plain mandate of SIPA will not prevail. As was

noted in SEC v. Packer, Wilbur & Co., Inc., 498 F.2d 978,

983 (2d Cir. 1974):

[Ajrguments based solely on the equities are not,

standing alone, persuasive. If equity were the cri-

terion, most customers and creditors of ... the

bankrupt, would be entitled to reimbursement for

their losses. Experience, on the other hand,

counsels that they will have to settle for much

less. SIPA was not designed to provide full pro-

tection to all victims of a brokerage collapse.

Accord, SIPC v. Morgan, Kennedy & Co., Inc., 533 F.2d

1314 n. 4 (2d Cir. 1976), cert. denied, 426 U.S. 936 (1976).

18

Since Congress has limited what is to be advanced by SIPC

to satisfy customer claims, the courts may not alter the

statutory formula. It has been noted with respect to a

claim in a liquidation under SIPA:

Although this court, as it has been again and

again reminded, may apply equitable principles in

the exercise of its bankruptcy jurisdiction, Bank

of Marin v. England, 385 U.S. 99 (1966), Pepper

v. Litton, 308 U.S. 295 (1939), the exercise of

judicial equity power must yield where Congress’

plain words mandate otherwise. Borgenicht v.

Creditors’ Committee, 479 F.2d 150 (2d Cir. 1973).

In re Weis Securities, Inc., (Claim of Fowler) 1 Bankr. Ct.

Dec. 1572 at 1573 (S.D.N.Y. 1975). It is beyond the eq-

uitable power of a bankruptcy court to say ‘“‘No, the dis-

tribution scheme provided by the Act is a mistake, the

rules... and the definition... are absurd and obsolete.”

In re Ahlswede, 516 F.2d 784, 788 (9th Cir. 1975). “‘Courts

are not authorized to rewrite a statute because they might

deem its effects susceptible of improvement.’ Badaracco

v. Commissioner, 464 U.S. 386, 398 (1984).

The Sixth Circuit’s refusal to award interest against

SIPC is simply a recognition that to award interest on a

customer’s “net equity’’ would vitiate the precise “‘net eq-

uity’” formula used by Congress, which measures the

amount to be paid to a customer as of the “filing date.”

It is the exclusive remedy for customers to receive SIPC

funds. Allowing post filing date interest would effectively

alter the “net equity” definition to exclude reference to

the filing date of the case. This would be tantamount to

judicial legislation. This court has said:

Courts have sometimes exercised a high degree

of ingenuity in the effort to find justification for

wrenching from the words of a statute a meaning

which literally they did not bear in order to es-

19

cape consequences thought to be absurd or to

entail great hardship. But an application of the

principle so nearly approaches the boundary be-

tween the exercise of the judicial power and that

of the legislative power as to call rather for great

caution and circumspection in order to avoid

usurpation of the latter.

Crooks v. Harrelson, 282 U.S. 55, 60 (1930); accord, In re

Feenstra, 13 B.C.D. 370, 373 (Bkrtcy. W.D.N.Y. 1985).

Griffin v. Oceanic Contractors, Inc., 458 U.S. 564 (1982)

stands for the proposition that courts may not alter a

statutory formula for measuring an amount due under a

federal statute, even where the result may be unjust or

absurd. Thus, under a federal statute which measures dam-

ages for withholding wages for seamen, where the statute

calls for ‘‘a sum equal to two days pay for each and every

day during which payment is delayed,” this court upheld

an award of “over $300,000 simply because respondent

improperly withheld $412.50 in wages.” Id. at 575.

Griffin holds that where Congress has fixed a formula,

the courts may not alter the formula, even if the result

does an extreme hardship. Congress has measured the

amount owed to the Issuers by enacting a specific formula,

to wit, the customer’s ‘‘net equity.’’ Congress knows how

to enact a draconian penalty for late payment—witness

the Griffir: case—but chose not to do so with SIPA. That

is determinative of the issue here.

Any so called ‘‘equitable’” argument to compel SIPC to

pay interest in this particular case cannot be considered

in a vacuum. If interest were allowed here, it would be

in contravention of the general rule in bankruptcy that

delays incident to litigation do not give rise to a claim for

interest. Vanston Bondholders, supra, p. 7. More than that,

however, allowance of interest against SIPC, where SIPA

makes no provision for interest, would have a number of

20

by SIPC would effectively raise the statutory ceiling placed

on the amounts SIPC is authorized to advance on behalf

of any one customer.” The limits of SIPA protection are

established (and periodically reviewed) by Congress in light

of historical experience, legislative judgment, and parity

with other parallel protective statutory plans administered

by the Federal Deposit Insurance Corporation, the Federal

Savings and Loan Insurance Corporation, and the National

Credit Union Administration.'* The court should not upset

this matrix. If post-petition interest is to be paid directly

from the FDIC, FSLIC, NCUA, or SIPC, beyond the limits

of any of those statutory formulas, the Congress should

make this determination, not the courts.

The cases cited by the Issuers are irrelevant.

The cases cited by the Issuers in support of their po-

sition are irrelevant to the facts presented here. For ex-

ample, the Issuers rely (Issuers’ Petition, p.12-13) upon

Ticonic National Bank v. Sprague, 303 U.S. 406 (1938).

Ticonic holds that a secured creditor of a national bank

in receivership may enforce his lien against his security,

“where it is sufficient to cover both principal and interest,

until his claim for both is satisfied.”” 303 U.S. at 413.

Further, although that case involved the liquidation of a

national bank, neither the FDIC nor any similar corpo-

ration was a party to the case. Even if the FDIC had

been a party, it would not have expended any funds for

‘7 On the facts of this case, an award of interest would compel SIPC

to advance sums in excess of the then existing $50,000 limits set forth

in SIPA as to some, if not all, of the plaintiffs. See note 6, supra p.

3. Two Issuers have already been paid their maximum SIPA advance;

“‘interest’’ would cause other Issuers to receive an amount in excess

of the statutory limits as well.

'* SIPA presently provides that SIPC may advance up to $500,000

for each customer claim for cash or securities of which not more than

$100,000 may be advanced on claims for cash. See SIPA section 78fff-

3(aX 11982). The latter sum is identical to the maximum advances

allowed by the FDIC, FSLIC, and NCUA.

21

either principal or interest with respect to the disputed

claim because that claimant was a secured creditor seeking

satisfaction from the security alone. Ticonic simply has no

bearing on this case.

The Issuers also rely upon First Empire Bank v. FDIC,

572 F.2d 1361 (9th Cir. 1978), cert. denied, 439 U.S. 919

(1978). That case did not involve depositors insured by the

FDIC. Rather, it involved some of the failed bank’s genera!

creditors. The FDIC, as receiver, had in effect distributed

nearly all of the failed bank’s assets to other general cred-

itors, thereby depriving the aggrieved general creditors of

their ratable share in the distribution as required under

the National Banking Act. Because of this failure, the

aggrieved creditors were entitled to contractual interest.

However, SIPC is not the fiduciary liquidating the Debtor’s

estate, nor did SIPC or the trustee distribute any assets

in derogation of the Issuers’ rights. The Sixth Circuit con-

sidered First Empire and correctly held it to be inappl-

icable.

Finally, none of the cases cited by Issuers in Point II

of their Petition hold that a creditor, such as SIPC, can

be required to pay interest as the “‘price”’ of a good faith

challenge to the validity of another creditor’s claim. There

are no such cases.

Instead of discussing the relevant bankruptcy prece-

dents, the Issuers’ Petition cites several non-bankruptcy

damage cases for the general and obvious proposition that

federal courts have the power to award interest. But even

these cases are not supportive of the Issuers’ position. For

example, the Issuers cite United States v. Billings, 232

U.S. 261 (1914), which is clearly irrelevant to the case at

hand. (Issuer’s Petition, pp. 7, 15, 19.) Billings involved

interest on overdue taxes.

In Billings the court noted “the obvious unsoundness’’

of the taxpayer’s position, and that the taxpayer’s con-

tentions contained ‘‘the self-evident demonstration of their

22

want of merit.’’ 232 U.S. 261 at 283. The court also stated

previous decisions on the subject had made the result be-

yond dispute. Jd. at 284. In contrast, as the Sixth Circuit

stated, the question of whether the Issuers were entitled

to customer status at all was a case of first impression

under SIPA. SEC v. Ambassador Church Finance/Devel-

opment Group, Inc., 679 F.2d 608, 609 (6th Cir. 1982).

Indeed, the Sixth Circuit decided the matter on the narrow

facts of the case, stating that “w]e do not decide whether

an issuer of securities who deals with an investment banker

or underwriter only in more traditional ways may be a

‘customer’ under the Act.” 679 F.2d 608 at 613. It can

hardly be said, therefore, that SIPC owed a “clear obli-

gation” to the Issuers, as existed in Billings.

Second, there was no evidence in the court below that

SIPC ‘‘unreasonably withheld payment on an overdue ac-

count,” as required by Billings. SIPC, joined by the

trustee, made a reasonable, good faith argument which did

not prevail. The Issuers simply did not demonstrate at

trial that the delay was either unreasonable or caused by

SIPC.

Similarly, the Issuers make repeated mention of an “‘un-

just enrichment” theory. (Issuers’ Petition, pp. 15, 16, 18).

Suffice it to say that none of these cases deals with in-

terest in the bankruptcy context. Further, to cite one of

the cases relied upon by the Issuers, an interest award

based upon unjust enrichment is “to prevent one from

retaining a benefit conferred upon him by another.”’ Her-

mann v. Gleason, 126 F.2d 936 at 940, (6th Cir. 1942).

But the Issuers never conferred any benefit whatsoever

upon SIPC. SIPC never received funds from the Issuers;

the Debtor did. SIPC did not convert the Issuers’ funds;

the Debtor did.

Finally, the Issuers are unable to demonstrate that there

is a conflict between any of the United States Circuit

Courts of Appeals on any point germaine to the above.

BEST AVAILABLE COPY

ARS Fo

FO Gi ed Ream

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Nothing in the Sixth Circuit’s construction of SIPA is in

conflict with the opinion of any other circuit. Nothing in

the Sixth Circuit’s construction of general bankruptcy law

is at variance with the controlling precedents long estab-

lished by this Court. The Issuers have not presented an

issue worthy of review by this Court.

II. The Miscellaneous Arguments Of The Issuers Do

Not Alter The Result.

The Issuers raise a number of purported errors by the

Sixth Circuit. None of these errors are directly related to

the “‘Question Presented” as stated at page (i) of the Is-

suers’ Petition. Indeed, the Issuers’ Petition spends very

little time whatever on the central issue in the case.

Rather, the Issuers focus on auxilliary arguments which

relate to holdings made by the Sixth Circuit which are

separate and independent reasons for that court’s deter-

mination that SIPC should not pay interest to the Issuers

on the facts of this case. Three comments are in order.

First, the Sixth Circuit was correct on each point. Second,

these points are not worthy of review by this Court. Third,

since the Sixth Circuit determined that interest cannot be

paid in this case for four independent reasons, even if

three were incorrect, the end result would not be altered.

The Issuers have admitted that SIPC litigated the issue of

their “‘customer’’ status in good faith. SIPA section 15(c),

15 U.S.C. section 78kkk(c), is applicable.

The Sixth Circuit noted in its first opinion in this case

that the legal question of whether an issuer of securities

is a “customer” of a broker as to securities being sold to

the public was a case of first impression. SEC v. Ambas-

sador Church Finance/Development Group, Inc., 679 F.2d

608, 609 (6th Cir. 1982). In the subsequent pleadings on

the ‘‘interest’’ question, SIPC repeatedly asserted, as a

complete defense, that “SIPC exercised good faith in ail

its dealings with the plaintiffs.’ Answer, p.3; First

Amended Answer, p. 4; Second Amended Answer, p. 9.

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At the subsequent trial of the “‘interest’’ question, counsel

for the Issuers specifically stated that no fault attached

to SIPC for the delays in litigating the question of whether

the Issuers were customers. Counsel for the Issuers also

stated that SIPC litigated the question of ‘‘customer”’ sta-

tus in good faith. This is contrary to the position which

the Issuers apparently take now. (Issuers’ Petition, p.17.)

The trial transcript reflects counsel’s statement with re-

spect to whether any of the parties was at fault for the

litigation delays. Counsel for the Issuers told the trial court

“we are not, Your Honor, saying that there is any fault

here.” Trial transcript, June 13, 1984, p.48, J. 25 through

p.49, J. 1. Further, on the question of whether SIPC lit-

igated the question of the Issuers’ “‘customer’’ status in

good faith, counsel for the Issuers noted that “‘SIPC is

investing its funds comfortably at the U.S. Treasury bill

rate, while SIPC unsuccessfully litigates a claim in good

faith, but unsuccessfully.”’ Trial transcript, June 13, 1984,

p.51 l. 25 through p.52, l. 2. (Emphasis supplied.) At trial,

counsel for SIPC noted that “‘there has been a statement

by counsel that litigation was not conducted in bad faith,

but rather the opposite.” Trial transcript, June 13, 1984,

p.58 1. 4-8.

Based on the foregoing, the Sixth Circuit was entirely

justified in referring to SIPA section 15(c), 15 U.S.C. sec-

tion 78kkk(c),!9 as an independent reason for holding that

Congress did not intend SIPC to pay interest in this case.

On the foregoing record, it is inexplicable that the Issuers

'® SIPA section 15(c), 15 U.S.C. section 78kkk(c), provides:

LIABILITY OF SIPC AND DIRECTORS, OFFICERS, OR EMPLOY-

EES

Neither SIPC nor any of its Directors, officers, or employees shall

have any liability to any person for any action taken or omitted in

good faith under or in connection with any matter contemplated by

this chapter.

BEST AVAILABLE COPY

25

should suggest (Issuers’ Petition, p.17) that ‘“‘the case

should have been remanded to the District Court for dis-

covery and argument on the issue of bad faith.’’ The Sixth

Circuit did not “render an underlying de novo factual ad-

judication based on an incomplete record,”’ as is stated at

page 17 of the Issuers’ Petition. Further, SIPC specifically

argued the statutory immunity point to the Sixth Circuit

in its main brief. The Issuers chose not to address this

point.

The Issuers allege that SIPA section 15(c), 15 U.S.C.

section 78kkk(c) is somehow not applicable because the

legislative history of that section demonstrates that SIPC

is not relieved of its liability for its contractual obligations.

(Issuers’ Petition, p.18). Yet the plain and simple fact is

that there is no contract between SIPC and the Issuers.

In short, the Sixth Circuit made no error in relying on

SIPA section 15(c), 15 U.S.C. section 78kkk(c), as a sep-

arate and distinct reason for its decision. There is no basis

for this court to review the Sixth Circuit on this ground.

The Sixth Circuit correctly construed SIPC v. Barbour.

The Sixth Circuit stated yet another independent reason

for rejecting the Issuers’ claims for interest. In reliance

upon SIPC v. Barbour, 421 U.S. 412 (1975) the Sixth Cir-

cuit heid that the District Court should have dismissed this

action, because ‘“‘SIPA does not give customers of failing

broker-dealers an implied private cause of action to compel

SIPC to take action under the SIPA.” 788 F.2d 1208 at

1210. The Sixth Circuit was correct.

The Issuers did not seek an award of ‘‘interest’’ directly

against the Debtor’s estate. The bankruptcy law cases,

cited above pp. 7-11, provide an insurmountable barrier to

such recovery. Instead, by suing SIPC, the Issuers sought

to do indirectly that which they could not do directly.

SIPA’s ‘“‘net equity” definition limits what SIPC can ad-

vance in a SIPA liquidation. To allow a private right of

action to compel SIPC to advance more than a customer’s

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‘“‘net equity’’ would frustrate the proper administration of

SIPA, and render that definition meaningless. This would

lead to wholly contradictory results, at variance with SIPA.

The Sixth Circuit simply refused to allow a private suit

against SIPC where SIPA plainly limits the Issuers to a

“net equity” against the Debtor’s estate.

To be sure, SIPC v. Barbour does not preclude al! suits

against SIPC. Actions on contracts, employment discrim-

ination, or a myriad of other types of suits could surely

be brought, and nothing in SIPC v. Barbour is to the

contrary. That is the “‘plain meaning’ of SIPA section

3(bX1), 15 U.S.C. section 78ccce(bX1). Where, however, a

suit pertains to the amount of funds which SIPC may

advance in a SIPA liquidation proceeding, litigants are not

free to initiate a suit directly against SIPC.

The Issuers assert (Issuers’ Petition, p. 8) that an im-

plied right of action permitting them to sue SIPC directly

for interest can be found in SIPA, under the test set forth

in Cort v. Ash, 422 U.S. 66 (1975). This situation is clearly

outside the bounds of Cort. In order to permit an implied

private right of action under SIPA, Cort requires an ex-

amination of whether such a remedy is consistent with

SIPA itself. It is not.

The implied private right of action which the Issuers

seek to impose here is in direct conflict with those portions

of SIPA which limit, with mathematical specificity, the

amount a customer may receive in a SIPA proceeding.

First, as noted above, the Issuers seek to impose a re-

quirement upon SIPC to advance funds beyond the amount

of each customer’s ‘‘net equity.’”’ SIPA’s “net equity”’ def-

inition is a manifest expression of Congressional intent to

limit SIPC’s advances. It would be utterly inconsistent

with the legislative intent of SIPA to circumvent this

clearly defined limit by allowing a separate suit against

SIPC for additional advances.

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Second, any implied private right of action permitting

recovery directly from SIPC, is at odds with SIPA section

9(a), 15 U.S.C. section 78fff-3(a) which states that SIPC

may only advance funds to the trustee—not to customers

directly.

Third, SIPA as presently enacted does permit customers

to initiate a suit in one specific situation: when SIPC is

acting in a “Direct Payment Procedure.”’ See SIPA section

10(e), 15 U.S.C. section 78fff-4(e). It would therefore be

contrary to the expressio unius doctrine to permit cus-

tomer lawsuits in other contexts. For the foregoing rea-

sons, a private right of action is not consistent with SIPA.

In short, when interpreting SIPA, and drawing infer-

ences “from the structure of SIPC,”’ SIPC v. Barbour, 421

U.S. 412 at 420, (1975), no implied right of action is con-

sistent with SIPA in this case. In light of (1) the fact that

the Sixth Circuit correctly construed SIPC v. Barbour and

(2) the other independent reasons for denying relief to the

Issuers, this ancillary question raised in the Issuers’

Petition (pp. 6-11) is not worthy of review by this court.

The Issuers’ reliance on 28 U.S.C. Section 1961(a) is mis-

placed.

A final point deserves brief mention. The Issuers main-

tain (Issuers’ Petition, p.20) that the Sixth Circuit erred

in not awarding interest to them for the period between

the judgment in the “‘Pine Street” test cuse on ‘‘customer”’

status, and the advances by SIPC to the trustee on their

behalf. The short answer to this is that Sixth Circuit’s

first opinion on this matter, 679 F.2d 608 (6th Cir. 1982),

did not award a specific dollar amount to any Issuer. In-

deed, the trustee requested that SIPC advance sums be-

yond the amount of the Issuers’claims for their ‘net

equity.” First, there was an active dispute as to the

amount. Second, the “net equity” definition limits, with

mathematical precision, the maximum amount SIPC may

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advance in this liquidation. This issue is not worthy of

review by this court.

CONCLUSION

THIS COURT SHOULD DENY THE PETITION

FOR A WRIT OF CERTIORARI.

Dated: August 21, 1986 Respectfully submitted,

THEODORE H. FOCHT

Of Counsel: General Counsel

SECURITIES INVESTOR

MICHAEL E. DON PROTECTION CORPORATION

Deputy General Counsel 900 Seventeenth Street, N.W.

Suite 800

STEPHEN P. HARBECK Washington, D.C. 20006

Associate General Counsel (202) 223-8400

ee

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