Petition for Writ of Certiorari — National Union Fire Insurance v. Camp, 113 S. Ct. 1366 (1993) (No. 92-1046)

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In The

‘Supreme Court of the United States

October Term, 1992

NATIONAL UNION FIRE INSURANCE COMPANY

OF PITTSBURGH, PA.

Petitioner,

vs. >

JOHN B. CAMP, TRUSTEE,

SECURITIES INVESTOR PROTECTION CORPORATION,

Respondent.

Petition For Writ Of Certiorari

To The United States Court Of Appeals

For The Eleventh Circuit

PETITION FOR WRIT OF CERTIORARI

Guy W. Harrison

Counsel of Record

Cart K. HorrMANN

James F. Crowper, Jr.

KiMBRELL & HAMANN, P.A.

Suite 900 Brickell Centre

799 Brickell Plaza

Miami, Florida 33131

305-358-8181

Attorneys for Petitioner

COCKLE LAW BRIEF PRINTING CO., (800) 225-6964

OR CALL COLLECT (402) 342-2831

QUESTIONS PRESENTED

WHETHER CASE AND STATUTORY LAW PERMITS A

TRUSTEE, IN A STOCKBROKER LIQUIDATION PRO-

CEEDING COMMENCED BY THE SECURITIES

INVESTOR PROTECTION CORPORATION (“SIPC”)

PURSUANT TO THE SECURITIES INVESTOR PRO-

TECTION ACT, 15 U.S.C. § 78aaa, et. seq. (“SIPA”), TO

SELECTIVELY INVALIDATE PROVISIONS OF A

FIDELITY BOND WHICH SIPC HAS APPROVED AND

WHICH SIPA REQUIRES ALL SIPC MEMBERS TO

CARRY.

WHETHER SIPA § 78fff(b) PERMITS THE “ANTI-

IPSO-FACTO” PROVISION OF THE BANKRUPTCY

CODE, 11 U.S.C. § 541(c)(1)(B), TO BE USED IN A

SIPA STOCKBROKER LIQUIDATION PROCEEDING.

LIST OF INTERESTED PARTIES

Securities Investor Protection Corporation; Theodore H.

Focht; Michael E. Don: Josephine Wang

John H. Camp, Jr., Trustee, Blackwell, Walker & Hoehl; Neal

B. Shniderman

Carl K. Hoffmann; James F. Crowder, Jr.; Guy W. Harrison:

Kimbrell & Hamann, P.A.

The Honorable A. Jay Cristol, U.S. Bankruptcy Judge (The

Hon. Eugene Spellman, U.S. District Judge below, is

deceased)

National Union Fire Insurance Company of Pittsburgh, PA.

National Union is a wholly-owned subsidiary of American

International Group. National Union does not have any non-

wholly owned subsidiaries.

iii

TABLE OF CONTENTS

REFERENCE TO LOWER COURT OPINIONS .......

STATEMENT OF JURISDICTION ................ er

STATUTORY PROVISIONS INVOLVED IN THE CASE

STATEMENT OF THE CASE.......................

POINT I THE ELEVENTH CIRCUIT’S HOLDING

THAT A GOVERNMENT INSURER-LIQ-

UIDATOR MAY SELECTIVELY INVALI-

DATE PROVISIONS OF A STANDARD

BOND WHICH THE GOVERNMENT

INSURER HAS APPROVED AND WHICH

APPLICABLE STATUTES REQUIRE

INSURED ENTITIES TO CARRY

DIRECTLY CONFLICTS WITH DECI-

SIONS OF THE FIFTH, SIXTH AND

NINTH CIRCUIT COURTS OF APPEAL

ON THE SAME POINT OF LAW ........

A. SIPA ESTABLISHES A SYSTEM OF

INSURANCE FOR CUSTOMERS AND

REGULATION OF ITS MEMBER

EE Pa

B. THE INSURANCE/REGULATORY

ASPECTS OF SIPA AND SIPC ARE

SIMILAR IN ALL MATERIAL

RESPECTS TO THOSE OF THE FDIC/

DEN PAS 0a ob ok 6a wk vhs 000 nceccccs

C. SIPA REQUIRED GSC TO HAVE THE

STANDARD INDUSTRY FORM

FIDELITY BOND, WHICH CON-

TAINS THE PROVISION SIPC IS

ATTEMPTING TO SELECTIVELY

INVALIDATE DURING A TITLE 15

STOCKBROKER LIQUIDATION PRO-

TABLE OF CONTENTS - Continued

Page

BECAUSE THE STATUTORY

SCHEMES GOVERNING SIPA AND

THE FDIC/FSLIC ARE IDENTICAL

IN THAT THEY APPROVE OF AND

REQUIRE THEIR PARTICIPATING

MEMBERS TO CARRY THE STAN-

DARD BOND, CASES UPHOLDING

THE “AUTOMATIC TERMINATION

UPON TAKEOVER” PROVISION OF

THE STANDARD BOND AS

AGAINST FDIC/FSLIC MANDATE

THE SAME RESULT AGAINST SIPC

THE ELEVENTH CIRCUIT’S DECI-

SION DIRECTLY CONFLICTS WITH

THE DECISIONS OF THE FIFTH,

SIXTH AND NINTH CIRCUIT

COURTS OF APPEAL AND SHOULD

BE REVERSED BY THIS COURT ...

PERMITTING SIPC TO SELEC-

TIVELY INVALIDATE THE BOND BY

USING 11 U.S.C. § 541(c)(1)(B) ALSO

WOULD BE INCONSISTENT WITH

THE REQUIREMENTS OF 15 USC.

§ 78iii, AND WOULD VIOLATE 15

PAs BTU bes ewkvewcewecco..

TABLE OF CONTENTS - Continued

Page

POINT If THE ELEVENTH CIRCUIT’S HOLDING

THAT ALL OF THE BANKRUPTCY CODE

PROVISIONS DESIGNATED IN SIPA

§ 78fff(b) ARE COMPLETELY INCORPO-

RATED BY REFERENCE INTO SIPA CON-

FLICTS WITH CONTRARY STATEMENTS

BY THE SECOND AND THIRD CIRCUITS

ON THE SAME POINT OF LAW, AND

PURPORTS TO RESOLVE AN IMPOR-

TANT ISSUE OF FEDERAL LAW BEST

RESOLVED BY THIS COURT........... 21

A. THE PUBLIC POLICY AND PUR-

POSE OF SIPA DIFFERS SUBSTAN-

TIALLY FROM THE POLICY AND

PURPOSE OF LIQUIDATION UNDER

THE BANKRUPTCY CODE AND

THIS DIFFERENCE SUPPORTS LIM-

ITING SECTION 541(c)(1)(B) TO A

BANKRUPTCY CODE LIQUIDATION

ete Perey ee Sr eee 22

B. SECTION 78fff(b) ONLY INCORPO-

RATES PROCEDURAL AND JURIS-

DICTIONAL PROVISIONS OF THE

BANKRUPTCY CODE INTO SIPA,

AND THE ELEVENTH CIRCUIT’S

HOLDING TO THE CONTRARY

CONFLICTS WITH HOLDINGS OF

THE SECOND AND THIRD CIR-

CUITS ON THE SAME POINT OF

asada Vanek ses ca eeucce. 24

C. 11 U.S.C. § 541(c)(1)(B) IS A SUB-

STANTIVE PROVISION OF THE

BANKRUPTCY CODE WHICH IS

NOT INCORPORATED BY REFER-

SOE EWEN? SUPA... wo. occ nescence 26

See suse Gut deer Cau ae enna ci dele 29

TABLE OF AUTHORITIES

Page

CASEs:

California Union Insurance Co. v. American Diversified

Savings Bank, 948 F.2d 556 (9th Cir. | er passim

Federal Deposit Insurance Corp. y. Aetna Casualty and

Surety Company, 903 F.2d 1073 (6th Cir. oo eee passim

Federal Savings & Loan Corp. v. Transamerica Insur-

ance Company, 705 F.Supp. 1328 (N.D. Ill. 1989)

MEMES OE ee eee ee eye re Pe 13, 14, 15, 18, 19

Gunter v. M. Hutcheson, 674 F.2d 862 (11th Cir.

a) EP ETEE TET Serer Oey ee ko 8 gS eae 8

In re: Matter of Lewellyn, 26 Bankr. 246 (Bankr. D.

COWS, FOGE x 5.050cs cecnecerie ea ee 9

In re Securities and Exchange Commission v. White &

Co., Inc., 546 F.2d 789 (8th Cir. 1976) .............. 5

In re Stalvey & Associates, Inc. (Securities Investor

Protection Corporation v. Wise), 750 F.2d 464 (Sth

OS -) Pee er re As se a 5

Redington v. Touche Ross Co., 612 F.2d 68 (2d Cir.

st) SEP ETEE ER eT eS 25

Securities and Exchange Commission vy. Aberdeen

Securities Co., Inc., 526 F.2d 603 (3d Cir. 1975) ..9, 25

Securities and Exchange Commission y. Albert &

Maguire Securities Co., Inc., 560 F.2d 569 (3d Cir.

5 it) ere ee per i 9

Vii

TABLE OF AUTHORITIES —- Continued

Page

Securities and Exchange Commission y. Packer,

Wilbur & Co., 498 F.2d 978 (2d Cir. | hee apa 5

Securities Investor Protection Corporation v. Bar-

mn SEU SEM. Wie CON ee oo oo en ee ee 5

Securities Investor Protection Corporation v. Vigman,

803 F.2d 1513 (Sth Cir. 1986).......................! 5

Sharp v. Federal Savings & Loan Insurance Corpora-

tion, 858 F.2d 1042 (Sth Cir. 1988)............. passim

Touche Ross & Co. vy. Redington, 442 U.S. 560 (1979) ..... 5

OTHER AUTHORITIES

Pe i as Se ce sd bss Deka eee keel 28

TE Ree an en ce ae Ra a iY 23

RS 8 SR ee 23

OR: Meee OD 5 oe eae be Cah Seal kkk Scheel. 28

SO ES) a 28

Oe ee PO erie eee a oe 1, 20, 22, 24, 28

BE Winns © SOOUOM UMD oc ock k vk evs cw ecececcncx passim

ee eee ey eh at oe ob 28

OE MPs ns ow Nip kod wkd ova eenuabcusececcecnc 28

Vili

TABLE OF AUTHORITIES - Continued

Page

oe ee POs Neer b ean prayer 28

11 U.S.C. §§ 741-752... 0.2 cece. 24

Fe MN BRON ios sb sk vaindetseveusesiideccdes 14, 18

12 U.S.C. §§ 1724 and 1726 .......................... 8

12 U.S.C. §§ 1724(b) and 1728........................ 9

12 U.S.C. § 1725(a) and (c).......... ee re ee ere ie 8

AZ USC. § 1727) «2... cece ee cccceccecess.e.. 8

12 U.S.C. § 1813(b), (d) and (h) ...................... 8

12 U.S.C. §§ 1812 and 1819.00.00... 8

12 U.S.C. §§ 1814 and 1815 ........................... 8

12 U.S.C. § 1817(b) ... 2. eee. 8

NZ MEA 218) ccc eceeeceeee en, 9

ce |) ae 15

15 U.S.C. § 78aaa, et SS 44:46 0s kd aa wedges t-te 2

IS U.S.C. § PO ed cers on rr oe ne 5, 8

is USS. 3 78ccc(b) and (c).......................... 8

IS U.S.C. § 78ddd(c) 0.2.2... ee. 8

IS U.S.C. § 78ddd(h)... 2... eee. 5

I5 U.S.C. § 78eee(a)(3).....00.....0...0....... 2, 19, 23

Ao OBA. © TOMMY. ois scons aetelul. 2

IS U.S.C. § 78eee(b)(4)... 2. eee. 2

IS U.S.C. § 78eee(b)(I)(A). 2.00... eee cece. 28

is US. 6 78eee(b)(2)(B)(iii) .. 2 28

TABLE OF AUTHORITIES - Continued

Page

eg BS Oe ee) en ee i as

ie es RS ya x ted ay) ha ena ecs 1, 19, 21

Pe Stas OE PDs 54 Cewek oe ee ee passim

RD SBA. B FORD oink nds vc ccs cvicvccanccns 28, 29

15 U.S.C. § 78fff(c)(1) (repealed)................. 4, 25

Ba iis BFW oie ch ae be eC Rb ae kvie bosbaucciew: 28

BS Wie. G FOU SEMIID ogc nc ccc secccncabncvecne 23

er es ee 9

Pe Wes POD cs snk uu ak kaa ko ceo a daeewdwboen 23

oe FRR Ee: ae ee passim

We ees PE Nek oo 6s vay oa os Sh ae eevee cee 23

Pree I ee eg ie ie Gk ses 5 5

Bankruptcy Rule 3002(c).............. 0... cece ee eeee 23

Financial Institutions Reform, Recovery, and Enforce-

ment Act (F.I.R.R.E.A.) of 1989, Pub. Law 101-73,

Beene 3%, © Ser, FOS Stat B63. i... eek ccecccsese 9

FO NN I ss oS Gs edd CA Caw a wou back bvdwnivicn 25

costoeditacync LEER ee OCR er l

TABLE OF AUTHORITIES - Continued

Page

LEGISLATIVE MATERIALS:

Public Law 95-598...... 06... ccceccecee 27

H.R. Report No. 91-1613, 91st Cong. 2d Sess., (1970)

U.S. Code. Cong. and Adm. News 7. 6

H.R. Report No. 97-420, 97th Cong. 2d Sess., (1982)

U.S. Code Cong. and Adm. News | 28

Senate Report No. 763, 95th Cong. 2nd Sess. 1978

U.S. Code Cong. & Adm. News 764................. 5

Senate Report No. 1218, 91st Cong., 2nd Sess. 1970..... 6

TREATISES:

4 Collier on Bankruptcy, Subchapter Three, Stock-

broker Liquidation, Introduction 2 and 5 (1Sth Ed.

iaisint ce eT CT ne 23

Couch on Insurance 2d. (Rev. Ed.) Section 1:2.......... 5

OTHER:

Brochure entitled “SICP and Customer Protection”

published by SIPC (2d ed. I Ne re 10

Brochure entitled “SIPC and Customer Protection”

published by SIPC (3rd ed. PE ROD cx cacsicccnch 7

SIPC’s 1971 Annual ME bixdckeeauucc ences 6, 7, 8, 11

SIPC’s 1972 Annual Sb vianecculsuieswetcr eee 11

SIPC’s 1973 Annual esc ETE TD Da eee 23

SIPC’s 1983 Annual “on gaa RUTTER CTE TORE Tree 9

Sowards and Mofsky, “The Securities Investor Protec-

tion Act of 1970,” 26 Bus.Law 127] ti) | i Q

“The Securities Investor Protection Act of 1970: An

Early Assessment”, 73 Colum.L.Rev. 802 (i: ee 5

REFERENCE TO LOWER COURT OPINIONS

1. In re Government Securities Corp., 972 F.2d 328 (11th

Cir. 1992)

2. In re Government Securities Corp., 111 B.R. 1007

(S.D.Fla. 1990)

3. In re Government Securities Corp., 101 B.R. 343

(S.D.Fla. 1989)

STATEMENT OF JURISDICTION

This is a petition for review by Writ of Certiorari of a

judgement of the United States Court of Appeals for the

Eleventh Circuit entered on September 14, 1992. Jurisdiction

is conferred upon this Court by 28 U.S.C. § 1254(1).

STATUTORY PROVISIONS INVOLVED IN THE CASE

11 U.S.C. § 541

1S U.S.C. § 78fff

1S U.S.C. § 78iii

Pursuant to Rule 14(f) of the Supreme Court Rules, these

Statutory provisions are included in the appendix.

Ww No —

STATEMENT OF THE CASE

National Union Fire Insurance Company of Pittsburgh,

PA (“National Union”) issued a standard form Securities

Dealer Blanket Bond No. 959-9000 (“bond”) to Government

Securities Corp. (“GSC”) on February 1, 1987, for the period

February 1, 1987 to November 1, 1987. Section 12(c) of the

bond provided for immediate termination of the bond upon

takeover of the bonded securities institution, as follows:

The bond shall be deemed terminated or cancelled

as an entirety . . . immediately upon the taking over

of the Insured by a receiver or other liquidator or by

State or Federal officials. . . .

Bond §12(c) (Exhibit “A” to Trustee’s Amended Complaint

served September 30, 1988).

On May 12, 1987, the Securities Investor Protection

Corporation (“SIPC”) filed an application in the District

Court for the Southern District of Florida seeking a protective

decree adjudicating that the customers of GSC, a securities

broker, were in need of protection under the Securities Inves-

tors Protection Act of 1970, as amended (“SIPA”), 15 U.S.C.

§§ 78aaa, et seq. Federal court jurisdiction was founded upon

15 U.S.C. § 78eee(a)(3) and (b)(2). GSC consented to the

entry of an order appointing a trustee for the liquidation of its

business pursuant to SIPA. (R1-8, item 9).

That same day, United States District Judge Alcee L.

Hastings entered an order commencing a liquidation proceed-

ing for GSC under SIPA. (R1-8, item 10). At the request of

SIPC, Judge Hastings appointed John R. Camp, Jr. as Trustee.

The May 12th order removed the Title 15 liquidation proceed-

ing to the bankruptcy court for the Southern District of

Florida pursuant to 15 U.S.C. § 78eee(b)(4).

On June 2, 1987, the SIPA Trustee wrote a letter to

National Union to inform it of a possible loss under the bond.

(Tr.Exh. 1). The Trustee filed a proof of loss on December 7,

1987. (Bankruptcy Trial Transcript, at 55). On December 23,

1987. National Union denied coverage on the ground that the

bond automatically terminated upon the May 12, 1987 filing

of the Application for a Protective Decree and appointment of

a SIPC trustee to liquidate GSC. R2-18-3.

On August 11, 1988, the Trustee filed an adversary

action in the bankruptcy court against National Union seeking

money damages for breach of the bond. (Trustee’s Com-

plaint). Thereafter, the Trustee amended its complaint to seek

a judgement declaring the ri ghts of the parties under the bond.

(Trustee’s Amended Complaint, served September 30, 1988).

On November 15, 1988, in an omnibus order, the bank-

ruptcy court denied inter alia National Union’s motion to

dismiss and held that “relevant portions of the Bankruptcy

Code which prevent an automatic termination or limitation of

the estate’s property rights upon the filing of a bankruptcy

proceeding or the appointment of a bankruptcy trustee are

applicable in this adversary matter filed in a SIPA proceed-

ing.” On March 15, 1989, the bankruptcy court entered its

Findings of Fact and Conclusions of Law and its Final Judg-

ment. In its conclusions of law, the oankruptcy court read-

opted its November 15, 1988 holding with respect to the

bond’s termination clause. National Union timely filed its

Notice of Appeal to the district court on March 27, 1989.

On March 16, 1990, the District Court entered an Order

Affirming Bankruptcy Court in which he affirmed the bank-

ruptcy court’s holding that the termination-upon-takeover

provision of the bond was invalid and void in Title 15 [SIPA]

liquidation proceedings.

On September 14, 1992, the Eleventh Circuit issued its

judgement affirming the bankruptcy court’s and the District

Court’s decisions.

REASONS FOR GRANTING THE WRIT

POINT I

THE ELEVENTH CIRCUIT’S HOLDING THAT A GOV-

ERNMENT INSURER-LIQUIDATOR MAY SELEC-

TIVELY INVALIDATE PROVISIONS OF A STANDARD

BOND WHICH THE GOVERNMENT INSURER HAS

APPROVED AND WHICH APPLICABLE STATUTES

REQUIRE INSURED ENTITIES TO CARRY DIRECTLY

CONFLICTS WITH DECISIONS OF THE FIFTH, SIXTH

AND NINTH CIRCUIT COURTS OF APPEAL ON THE

SAME POINT OF LAW.

This case presents a straightforward question of law: may

the government, having required a regulated company to carry

a government-approved fidelity bond, selectively invalidate

provisions of that bond which work to the government’s

disadvantage during liquidation proceedings? Three Circuit

Courts of Appeal have answered this question with a resound-

ing “no.” California Union Insurance Co. v. American Diver-

sified Savings Bank, 948 F.2d 556 (9th Cir. 1991); FDIC vy.

Aetna Casualty and Surety Co., 903 F.2d 1073 (6th Cir. 1990);

Sharp v. FSLIC, 858 F.2d 1042 (Sth Cir. 1988).

Only the Eleventh Circuit, in the present case, has stated

that such inconsistent conduct is acceptable. By so holding,

the court rejected fundamental principles of law and fairness.

The Eleventh Circuit’s cursory analysis also did not address

the factual similarities between the FDIC/FSLIC statutes and

SIPA which compel the same result in the Sharp cases and in

the present case. Both statutory schemes are identical in that

they require industry members to carry fidelity bond insur-

ance in the standard form negotiated between the industry

members, the Surety Association of America, and the regula-

tors themselves.

Sharp, Aetna and California Union all recognize that the

government cannot repudiate during liquidation proceedings

the very fidelity bonds which it has required pursuant to

regulation. There is no factual or legal distinction between the

present case and Sharp, Aetna and California Union which

justifies the Eleventh Circuit’s contrary and conflicting hold-

ing.

A. SIPA ESTABLISHES A SYSTEM OF INSUR-

ANCE FOR CUSTOMERS AND REGULATION

OF ITS MEMBER FIRMS.

The primary purpose of SIPA is to provide insurance

against customer loss. The financial stability and integrity of

SIPC members is crucial to minimize insured losses, and

SIPA does indeed provide for extensive regulation of the

affairs of SIPC members. In fact, SIPA’s requirement of

member compliance with “applicable financial responsibility

rules” is perhaps its most important aspect.

From the genesis of its legislative history through recent

court decisions, SIPC has been referred to as an insurer and

compared to other federal corporations charged with insuring

particular segments of the financial economy. The legislative

history of SIPA shows that SIPA was “enacted to provide to

customers of security broker-dealers protection against losses

which might occur as a result of the financial failure of

broker-dealers.”! The “most striking feature of the SIPA is the

insurance program, administered by the SIPC.” Note, “The

Securities Investor Protection Act of 1970: An Early Assess-

ment,” 73 Columbia Law Review 802, 803-804 (1973). This

Court and lower federal courts have consistently recognized

that the main purpose of SIPA is to protect members of the

investing public against individual hardship, and to restore

investor confidence. Securities Investor Protection Corpora-

tion v. Barbour, 421 U.S. 412 (1975); In Re Stalvey & Associ-

ates, Inc. (Securities Investor Protection Corporation v.

Wise), 750 F.2d 464 (Sth Cir. 1985); In Re Securities and

Exchange Commission v. White & Co., Inc., 546 F.2d 789 (8th

Cir. 1976); Securities and Exchange Commission v. Packer,

Wilbur & Co., Inc., 498 F.2d 978 (2d Cir. 1974).

SIPC functions as an insurance company funded by con-

tributions of its members for the purpose of protecting the

investors. All persons registered as brokers or dealers under

Section 15(b) of the 1935 Act [15 U.S.C. § 780(b)] are

required to be members of SIPC. 15 U.S.C. § 78ccc(a)(2). In

the event that the SIPC insurance fund is deemed inadequate

for the purposes of the Act, the Department of the Treasury is

authorized to make loans to SIPC not to exceed $1 billion. 15

U.S.C. § 78ddd(h). As the Ninth Circuit Court of Appeals

held in 1986, SIPC protects “the customers of securities

brokers by insuring the net equity of customers’ accounts up

to specified maxima.” Securities Investor Protection Corpo-

ration v. Vigman, 803 F.2d 1513, 1516 (9th Cir. 1986), citing

Touche Ross & Co. v. Redington, 442 U.S. 560, 564-565 n.5

(1979) (emphasis supplied). Although the Ninth Circuit rec-

ognized that SIPC insurance had various limits on the amount

of coverage, it is nevertheless an insurer. Vigman, 803 F.2d at

1516.2

' See S. Report. No. 95-763, 95th Cong., 2d Sess. (1978), reported in 1978

U.S. Code Cong. and Adm. News 764.

2 Protection is the general object and purpose of insurance by affording

indemnity or security. See Couch on Insurance 2d. (Rev. Ed.) Section 1:2. Limiting

coverage or the class of individuals who are protected in no way alters the fact that

insurance is provided.

SIPA’s purpose, however, is broader than simply having

the government, through SIPC, pick up the pieces after a

Stockbroker fails. An essential part of SIPA’s “insurance”

function is to assure that SIPC members continue as viable,

ongoing concerns. It is inconceivable that Congress would

create a stockbroker customer insurance program, backed by a

$1 billion federal line of credit, without taking some steps to

require the insured institutions to comply with strict standards

Of operation.

SIPA takes this self-evident principle into account. The

legislative history of SIPA confirms that a regulatory mecha-

nism was one of the primary purposes of the Act:

[SIPA] is intended to serve several Purposes: to

protect individual investors from financial hardship;

to insulate the economy from the disruption which

can follow the failure of major financial institu-

tions; and to achieve a general upgrading of finan-

ctal responsibility requirements Of brokers and

dealers to eliminate, to the maximum extent possi-

ble, the risks which lead to customer loss.

S. Rep. No. 1218, 91st Cong., 2d Sess. 4 (1970) (emphasis

added). See also H.R. Rep. No. 91-1613, 91st Cong., 2d Sess.

1 (1970) (same language as that emphasized above).

SIPC itself was never intended to have direct regulatory

powers. Given the extensive authority of the SEC and the

longstanding regulatory practices of self-regulatory organiza-

tions (“SRO’s”) such as the stock exchanges and the National

Association of Securities Dealers (“NASD”), Congress

wanted to avoid adding yet another layer of expansive direct

regulation in the securities industry. SIPC First Annual

Report, 1971 p. 6. Nevertheless, Congress recognized that

regulation and improvement of industry financial practices

was essential in order to prevent insured losses from occur-

ring. Thus, Congress, through 15 U.S.C. § 78iii, imposed the

extant network of SEC/SRO rules and regulations on all SIPC

members, with SIPC given an advisory role in refining and

IEE _ Oe

developing the SROs’ standards. SIPA § 78iii(c) provides that

“[t}he self-regulatory organization of which a member of

SIPC is a member or in which it is a participant shall inspect

or examine such member for compliance with applicable

financial responsibility rules... .” (emphasis added). Thus,

the rules of the self-regulatory organizations are imposed, by

SIPA, directly on all SIPC members just as surely as if those

rules had been promulgated by SIPC itself.

SIPC itself has recognized the mandatory nature of SRO

rules when it stated that “financial responsibility rules”

include both the rules promulgated by the SEC and “rules

prescribed by a national securities exchange.” SIPC speci-

fically acknowledged that the existing rules of the Exchanges

and the National Association of Securities Dealers, Inc.

(“NASD”) were to be applied to SIPC members. SIPC 197]

Annual Report, pp. 30-31.

SIPC also has recognized SIPA’s success in regulating the

financial practices of SIPC members through the rules of the

SROs:

SELF-REGULATORS EXAMINE SIPC MEM-

BERS

SIPA’s Section 13 [78iii] was designed to

upgrade the financial practices and responsibility of

securities industry members over a period of time.

[citing to 78iii(e)].

- * 2

Improved broker-dealer operations and the

combination of more stringent requirements for

entering the securities business, new financial

responsibility rules, and noticeable improvement in

monitoring broker-dealer financial condition by the

SEC and SROs since SIPC’s inception contributed

to a sharp decline in the number of customer pro-

tection proceedings commenced in the late 1970s.

Brochure entitled “SIPC and Customer Protection” published

by SIPC (3rd Ed. April 1992) (emphasis added).

Even so, SIPC was not left without a role in the regula-

tion process. Section 78iii(e) gave SIPC a Statutory mandate

(“shall”) to review existing rules and regulations, and consult

with the SROs regarding strengthening of financial respon-

sibility requirements. One of SIPC’s first actions was to ask

the Exchanges and the NASD for data regarding their rules so

that SIPC could commence its review. SIPC First Annual

Report, 1971, at p. 30 n. 49. Thus, SIPC participation in the

regulatory process carries much weight in the development of

additional regulations. The best cxample of SIPC’s influence

Over the regulatory process is the instigation of the mandatory

fidelity bonding requirement which is at the heart of this case

and discussed in section “C”, infra.

B. THE INSURANCE/REGULATORY ASPECTS

OF SIPA AND SIPC ARE SIMILAR IN ALL

MATERIAL RESPECTS TO THOSE OF THE

FDIC/FSLIC.

The similarities between FDIC and SIPC are obvious.

Just as SIPA’s purpose is to protect individual customers from

stockbroker failures and restore public confidence in the secu-

rilics trading industry, “the policies [of the FDIC/FSLIC Stat-

ulory schemes] are promoting the Stability of, and confidence

in, the nation’s banking system.” Gunter vy. M Hutcheson, 674

F.2d 862, 870 (11th Cir. 1982),

The regulatory scheme for insurance under SIPA is simi-

lar to the regulatory scheme for insurance of FDIC/FSLIC

members. Each corporation has its membership of insured

institutions defined by statute. See 15 U.S.C. § 78ccc(a)(2),

(SIPC, ¢.g., persons registered as brokers and dealers under

1934 Securities Exchange Act); 12 U.S.C. §§ 1813(b), (d) and

(h), §§ 1814 and 1815, (FDIC, e.g., includes banks that are

members of Federal Reserve Board); and 12 U.S.C. §§ 1724

and 1726 (FSLIC). Each of these Statutory Corporations has

its powers prescribed by statute, as well as the details for

appointment of a board of directors. See 15 U.S.C. § 78ccc(b)

and (c) (SIPC), 12 U.S.C. §§ 1812 and 1819 (FDIC), and 12

U.S.C. § 1725(a) and (c) (FSLIC). And SIPC, FDIC, and

FSLIC all impose assessments on the respective member

institutions. See 15 U.S.C. § 78ddd(c) (SIPC), 12 U.S.C.

1817(b) (FDIC), and 12 U.S.C. § 1727(b) (FSLIC); and see

Sowards and Mofsky, “The Securities Investor Protection Act

of 1970", 16 Bus.Law 1271, 1277 (1971).3

Thus, as with FDIC and FSLIC, the securities dealer or

broker that is forced into a liquidation by SIPC has the

backing of a federal government-authorized insurance fund

for the payment of customer claims, with limits on the amount

of claims for each customer.‘ It is not surprising then, that

courts Often compare the functions of FDIC to SIPC. See

Securities and Exchange Commission v. Albert & Maguire

Securities Co., Inc., 560 F.2d 569, 571 (3d Cir. 1977); Securi-

ties and Exchange Commission vy. Aberdeen Securities Co.

Inc., 526 F.2d 603, 605 (3d Cir. 1975); In re: Matter of

Lewellyn, 26 Bankr. 246, 253 (Bankr. D. Vir. 1982).

Even SIPC has made the comparison.® SIPC’s 1986 infor-

mation brochure discusses SIPC’s legislative history:

Representatives of the securities industry, the Fed-

cral Reserve Board, Office of Management and

Budget, the Department of the Treasury, and the

SEC conferred on draft bills proposed by the indus-

try group and the SEC staff. Their joint proposal

would have created an organization performing a

role in the securities industry somewhat similar to

those established to insure depositors to banks, sav-

ings and loan associations and credit unions; that

is, the Federal Deposit Insurance Corporation

* The FSLIC provisions were repealed by the Financial Institutions Reform

Recovery, and Enforcement Act (FL RR EA.) of 1989, Pub. Law 101-73, Title [V.

§ 407, 103 Stat.363. All provisions set forth above with reference to FDIC are now

also applicable to RTC

4 See 15 USC. § 78fff-3(a) (SIPC limitation of $500,000 for cash and

securities per customer. with maximum of $100,000 in cash) 12 US.C 1821(a)

(FDIC maximum of $100,000), 12 U.S.C. §§ 1724(b) and 1728 (FSLIC. same)

> SIPC’s 1983 Annual Report compares FDIC, FSLIC and SIPC and states,

on p. 14 under the heading “SIPC Image and Awareness Study”, — “A majority of

brokers (77%) report that their average customer understands that his accounts are

insured.”

(FDIC), Federal Savings and Loan Insurance Cor-

poration (FSLIC) and National Credit Union

administration (NCUA).

“SIPC and Customer Protection”, (2d ed. April 1986), page 1.

Like FDIC/FSLIC, SIPC has extensive power to control

the affairs and conduct examinations of its member corpora-

tions. The only difference is the mechanism: FDIC/FSLIC

regulates and examines directly using their own rules and

personnel while SIPC uses the self-regulating organizations in

the securities industry (which have no parallel in the banking

industry) as its agents for promulgating financial respon-

Sibility rules, examining members for compliance and report-

ing on member compliance to SIPC. This difference in

mechanics, however, has no difference in substance. The

bottom line is that both Statutory schemes impose specific and

extensive regulatory requirements on their respective indus-

tries.

C. SIPA REQUIRED GSC TO HAVE THE STAN-

DARD INDUSTRY FORM FIDELITY BOND,

WHICH CONTAINS THE PROVISION SIPC IS

ATTEMPTING TO SELECTIVELY INVALI-

DATE DURING A TITLE 15 STOCKBROKER

LIQUIDATION PROCEEDING.

SIPA itself required GSC to have the industry standard

form fidelity bond. SIPC was instrumental in developing this

requirement, and was fully aware of the content of the stan-

dard bond negotiated between the securities industry and the

Surety Association of America, including the very provision

Of which SIPC now complains. One of SIPC’s first priorities

was the development of industry rules requiring bonding of

SIPC members:

SIPC recently received advice that some progress

was being made by the NASD and the Commission

with representatives of certain insurance companies

On the subject of requiring bonding of brokers, or

dealers doing a public securities business — a matter

raised by SIPC in 197].

C0 E_'SE?'’T™”’ST”=SCCU.14I<_ a

SIPC First Annual Report, 1971, at p. 32 (emphasis added). The

following year, SIPC reported that its efforts had been fruitful:

Finally, as indicated in our first annual report, the

Corporation has expressed concern that many bro-

kers do not carry basic fidelity bonds. We have

urged the Commission and the NASD to require

brokers to obtain blanket fidelity bonding, and we

are pleased to note that the membership of the

NASD recently approved a proposal which autho-

rized its board of Governors to require that NASD

members, who are members of SIPC . . . obtain such

bonds. . . . It is anticipated that the NASD will

finalize action on this rule in the near future.

SIPC Second Annual Report, 1972, at p. 37. Thus, SIPC

requested the SROs to develop bonding requirements, and had

full knowledge that the SROs and the Surety Association of

America worked together to develop the required bond.

The NASD rule developed in response to SIPC’s request

provides as follows:

Par. 2182 Fidelity Bonds

Sec.32

Application

(a) Every member shall be required to Carry a

blanket fidelity bond meeting requirements as to

form, amount and type of coverage as the Board of

Governors may prescribe pursuant to the authoriza-

tion granted by paragraph (b) hereof.

* *” *

Par. 2182A APPENDIX C

Coverage Required

(a) Each member required to join the Securi-

ties Investor Protection Corporation . . . shall:

(1) Maintain a blanket fidelity bond, in a

form substantially similar to the standard form of

Brokers Blanket Bond promulgated by the Surety

Association of America... .

(emphasis added). In the present case, the NASD was the self-

regulatory organization with authority over GSC. The bond

obtained by GSC was in fact the “standard form of Brokers

Blanket Bond.” Thus, through the “chain of command” set

forth in § 78iii, SIPA required, and SIPC approved, GSC’s

bond.

SIPC attempted to gloss over this fact in their brief to the

court below by stating that “maintenance of the bond is not a

prerequisite to SIPC membership” and that “S/PC itself has

no regulatory authority over its members, and no authority to

require its members to purchase a bond.” (SIPC Brief at 26)

(emphasis added). While these Statements are technically cor-

rect, they are deceptively phrased to divert attention from the

fact that SIPA makes the self-regulatory organizations the

“examining authorities” on behalf of SIPC, and gives those

authorities power to enforce their own “financial respon-

sibility rules” on behalf of SIPC.

Even more significant, SIPC concealed from the court its

active role in seeking rules requiring brokers to Carry bonds,

and its knowledge of the development and substance of those

rules. SIPC cited the applicable NASD rules, but failed to

disclose that NASD Promulgated those rules at SIPC’s

prompting and in full consultation with SIPC pursuant to

§ 78iii(e). In addition, SIPC did not quote the full language of

the NASD rule, thus concealing that the rule specifically

requires the “standard form of Brokers Blanket Bond” which

coniains the automatic termination provision SIPC now seeks

to avoid.

D. BECAUSE THE STATUTORY SCHEMES GOV.

ERNING SIPA AND THE FDIC/FSLIC ARE

IDENTICAL IN THAT THEY APPROVE OF

AND REQUIRE THEIR PARTICIPATING MEM-

BERS TO CARRY THE STANDARD BOND,

CASES UPHOLDING THE “AUTOMATIC TER-

MINATION UPON TAKEOVER” PROVISION

OF THE STANDARD BOND AS AGAINST

FDIC/FSLIC MANDATE THE SAME RESULT

AGAINST SIPC.

Cases involving the FDIC/FSLIC uniformly have upheld

the termination provisions of bonds, similar to Paragraph

EEE SUES SS

12(c) of National Union’s bond, upon takeover by state or

federal officials. California Union Insurance Co. v. American

Diversified Savings Bank, 948 F.2d 556 (9th Cir. 1991); FDIC

v. Aetna Casualty and Surety Co., 903 F.2d 1073 (6th Cir.

1990); Sharp v. FSLIC, 858 F.2d 1042 (Sth Cir. 1988); FSLIC

v. Transamerica Insurance Co., 705 F.Supp. 1328 (N.D.III.

1989). The rationale of all of these Cases is identical: where

the government requires regulated entities to have a standard

bond, the government cannot later selectively invalidate pro-

visions of the bond which may work to its disadvantage.

In Sharp v. FSLIC, 858 F.2d 1042 (Sth Cir. 1988), the

FSLIC relied on common law theories of contract interpreta-

tion to invalidate the automatic termination provision. In

rejecting these arguments the court observed that the FSLIC’s

position would fundamentally alter the contract:

First, terminations by receivership or takeover can

be distinguished from terminations by the insurer or

insured, in that a fidelity bond insures the fidelity of

the employees and officers of the bank. In the case

of a receivership or a takeover, the officials who

purchased the bond to insure their own honesty are

no longer in control of the institution. Takeover or

receivership would substantially alter the character

of the risk covered by the policy.

858 F.2d at 1045-46. By this language, the Court recognized

that takeovers pose special risks for insurers not contemplated

by the bond, justifying immediate relief from coverage.

The Court also noted that the bankers’ blanket bond was

jointly drafted by the sureties and FSLIC members. The Court

refused to invalidate the termination clause on the grounds

that “[iJndeed, FSLIC, which in this case has Stepped into the

shoes of the insured, is the very institution which required

that Underwriters issue their coverage under Form 22 in the

first place.” 858 F.2d at 1046,

In its conclusion, the Court noted the equitable problems

raised by FSLIC’s attempt to selectively invalidate provisions

of the bond:

We are aware that the conclusion we have reached

may seem harsh to FSLIC, an institution

beleaguered by thousands of thrift failures nation-

wide. The harshness of the rule is softened by two

considerations. First, it is FSLIC itself that has

chosen to require coverage under Form 22 as a

condition of FSLIC membership. If it wishes an

additional time period for discovering losses subse-

quent to establishment of a conservatorship, FSLIC

need only alter its regulations.

* * ”

In the face of the clear language of Form 22,

we hesitate to rewrite judicially a standard form

bond that has had a longer existence than FSLIC. If

FSLIC finds the coverage provided by Form 22

inadequate, it need Only require member banks to

purchase an additional discovery period in the event

Of a type (c) termination.

Id. at 1048. By this latter language, the court recognized that

requiring, through regulation, additional coverage after a fed-

eral takeover would at least give the sureties notice of their

expanded obligations, and enable them to reassess their risks

and their premiums accordingly. To force the sureties to

provide such additional coverage with no compensation, by

governmental elimination of their bargained-for limitations

On such coverage, would be inequitable and unwarranted.

The bottom line of Sharp is basic fairness: the govern-

ment Cannot give with one hand and take away with the other.

The principles set forth in Sharp consistently reappear in

every case where the FDIC/FSLIC has attempted to selec-

tively invalidate the automatic termination clauses. Perhaps

most important, courts have applied these principles to defeat

the FDIC/FSLIC’s efforts to invalidate the automatic termina-

tion provisions even where the FDIC/FSLIC relies upon its

broad statutory authority to act as a receiver and liquidator of

troubled banks.

In FSLIC v. Transamerica Insurance Co., 705 F.Supp.

1328 (N.D.Ill. 1989), the FSLIC argued that its powers as a

receiver to collect all obligations owing to the insured institu-

tion were only limited by regulation of the Federal Home

Loan Bank Board, citing 12 U.S.C. § 1279. Since the auto-

matic termination provisions placed limits on FSLIC’s ability

to collect obligations owing under a fidelity bond, they vio-

lated FSLIC’s broad statutory authority and could be invali-

dated. /d. at 1336. The court disagreed:

For the same reasons [stated in Sharp], FSLIC’s

arguments regarding the unenforceability of [the

automatic termination provision] must fail. Having

required Glenn Ellyn [Savings and Loan] to procure

a Form 22 bond, FSLIC simply cannot now be heard

to complain about the enforceability of its provi-

sions.

Id. at 1337. Subsequent appellate authority has consistently

agreed with the approach in Transamerica.

In FDIC vy. Aetna Casualty and Surety Co., 903 F.2d 1073

(6th Cir. 1990), the FDIC, instead of relying on a specific

Statutory provision, successfully asserted in the district court

that the termination clauses were “contrary to public policy

because they ‘preclude the FDIC from discharging its respon-

sibility in connection with marshalling the assets of the failed

bank.’ " /d. at 1077. The Sixth Circuit rejected this position,

and upheld the termination provisions.

The court noted that 12 U.S.C. § 1828(e) stated that the

FDIC “may” require insured institutions to Carry a fidelity

bond. Thus, even though no evidence had been presented to

indicate that the FDIC had in fact exercised that authority, /d.

at 1078, the Court concluded that:

It is clear from § 1828 that Congress is aware of

fidelity insurance and could, if it so desired, require

its procurement and could set terms which would

avoid the problem created by [the automatic termi-

nation clauses].

7 - *

The FDIC also has statutory authority to require

bond coverage and could require that such bond

continue upon the appointment of FDIC as a

receiver. To rule otherwise would be to force Aetna

to take on a risk for which it did not bargain.

Id. The court found that the reasoning in Sharp was applicable

even (1) where the bond was not mandated by the statutory

scheme and (2) where the FDIC was relying on its Statutory

powers as receiver and not on the common law of contracts as

the source of its authority to invalidate the termination clause.

“[T]he FDIC’s contention that existing laws justify the

invalidation of [the automatic termination Clauses] must fail.

The dominant public policy exposed by this review is that the

Parties’ freedom of contract must not be disturbed.” /d.

In California Union Insurance Co. v. American Diver-

sified Savings Bank, 948 F.2d 556 (9th Cir. 1991), FSLIC also

argued that the automatic termination Clause “violate[d] pub-

lic policy because it ‘infringe[d] on the power of the FSLIC to

act as a receiver for failed institution.’ ” Jd. at 562. The Court

rejected this position, holding that:

In this case, FSLIC required, pursuant to federal

regulation, that the Participating institutions main-

tain bond coverage in the form of Standard Form

22, or its equivalent. See 12 C.F.R. § 563.19(a)

(1988)... . FSLIC must be deemed to be aware of

the provisions in the bond, and therefore in a posi-

tion to alter the provisions and/or its regulations in

order to provide additional time periods for it to

discover losses. Consequently, we conclude that the

Form 22 bond, with all of its provisions, is endorsed

by the federal government by way of the federal

agency responsible for the regulation of the Savings

and loan industry . . . through its requirement that

the Standard Form 22 bond be used.

Id. The Court concluded that Public policy supported the

bond’s automatic termination provisions.

The principles established in the Sharp line of cases are

crucial to the present case because they preclude the govern-

ment from invalidating bond Provisions which it accepts

under a statutory scheme, regardless of the breadth of its

Statutory authority as receiver and liquidator under other

Provisions of that scheme.

The Sharp cases should have compelled the same result

in the present case. Sharp recognized that the fidelity insur-

ance risk created by the installation of new management is

Substantially different from that Originally bargained for by

the surety. Sharp, 858 F.2d at 1045-46; Aetna 903 F.2d at

1078. This increased risk justifies automatic termination

because the FDIC/FSLIC appoints receivers or conservators

to manage the bank who are different persons from the man-

agement which the surety agreed to insure. Like FDIC/FSLIC

Situations, SIPA liquidation proceedings require takeover of

the institution and appointment of trustees by SIPC. See 15

U.S.C. § 78eee(b)(3). Thus, the enhanced insurance risk is

identical to that which justifies automatic termination in the

FDIC/FSLIC context.

The Sharp cases also recognized that these clauses are

part of the standard fidelity policy developed through indus-

try-wide negotiation between surety companies and the

bonded companies. As the NASD standards and SIPC state-

ments set forth above show, the sureties, SROs and securities

dealers follow the exact same procedure for negotiating the

standard Stockbrokers Blanket Bond. These facts are well

known to Congress and to SIPC, and SIPC was the very entity

which required member entities to have fidelity bonds. See

also Sharp at 1046; Aetna at 1078; California Union at 562.

Thus, SIPC had the power to require expanded coverage upon

takeover, but did not do so, Id. See also 15 U.S.C. 7B8iii(e)

(requiring SIPC to consult with the SROs concerning devel-

opment of financial responsibility rules).

Finally, and most important, the Sharp cases establish

that no matter how broad SIPC’s liquidation authority might

be, it is not broad enough to permit SIPC to invalidate

contacts which SIPA has required and SIPC has accepted.

SIPC specifically requested the development of bonding

requirements, which directly led to the NASD rules applicable

in this case. SIPC was fully aware of the SRO/insurance

industry negotiations leading to the standard bond form. SIPA

then imposed the bond form used in the present case on all

SIPC members. Having accepted this standard bond as

drafted, SIPC has no right to selectively invalidate provisions

which do not suit its purpose during liquidation proceedings.

The Sharp cases all mandate this obligation of consistency

and basic fairness.

E. THE ELEVENTH CIRCUIT’S DECISION

DIRECTLY CONFLICTS WITH THE DECI-

SIONS OF THE FIFTH, SIXTH AND NINTH

CIRCUIT COURTS OF APPEAL AND SHOULD

BE REVERSED BY THIS COURT.

The Eleventh Circuit, in its opinion, offerred only the

following explanation of why it refused to apply the rationale

of the Sharp cases:

That analogy is inapposite; the cited cases do not

involve the bankruptcy code, and those institutions

[FDIC/FSLIC] are not debtors in title 11 bankruptcy

proceedings.

In re: Government Securities Corp., 972 F.2d at 331, n. 6. Not

Only did the Court ignore all of the facts which make this case

identical to the Sharp cases, the one reason which it gave for

distinguishing those cases is not a valid legal basis for making

such a distinction.

It is true that FDIC/FSLIC liquidation proceedings do not

rely on the provisions of the bankruptcy code. Application of

Bankruptcy Code provisions, however, would not have made

any difference in the Sharp cases, and there is no legally valid

reason why it should make a difference here. In Aetna, Cali-

fornia Union and Transamerica, the FDIC/FSLIC claimed

that their own broad Statutory authority to act as receiver and

collect obligations owing to the failed bank permitted them to

invalidate the automatic termination provisions of the bond.

Although Bankruptcy Code provisions were not involved, the

FDIC/FSLIC relied on Statutory liquidation authority which

was at least as broad as 11 U.S.C. § 541(c)(1)(B). See, Aetna,

supra, 903 F.2d at 1077 (statutory power to marshall assets);

California Union, supra, 948 F.2d at 562 (FDIC statutory

power to act as receiver); Transamerica, supra, 709 F.Supp. at

1337 (FSLIC cited 12 U.S.C. § 1279, giving it plenary author-

ity to collect obligations Owing to the bank).

In each case, however, the courts ruled that these broad

Statutory powers during liquidation were not the controlling

issue. The relevant inquiry was not the Scope of government

power under a single liquidation provision, but the consistent

exercise of government power under the overall Statutory

scheme. See, Sharp, supra, 858 F.2d at 1048: Aetna, supra,

903 F.2d at 1078; California Union, supra, 948 F.2d at 562;

Transamerica, supra, 705 F.Supp. at 1337.

Thus, the reason advanced by the Eleventh Circuit for

distinguishing this case from the Sharp cases is legally

invalid.’ Since the court offerred no legally supportable justi-

fication for its different conclusion, its decision must be seen

as in direct conflict with the Sharp decisions. For all of the

reasons set forth above, the Sharp cases reach reasonable, just

and inevitable conclusions given their facts. Since the facts in

the present case are identical in all material respects, this

Court should reverse the decision of the Eleventh Circuit, and

rule that SIPC is bound to accept the terms of the bond.

F. PERMITTING SIPC TO SELECTIVELY

INVALIDATE THE BOND BY USING 11 U.S.C.

§ 541(c)(1)(B) ALSO WOULD BE INCONSIS-

TENT WITH THE REQUIREMENTS OF 15

U.S.C. § 78iii, AND WOULD VIOLATE 15 U.S.C.

§ 78fff.

In addition to the case law set forth above, SIPA itself

prohibits SIPC from acting inconsistently with the provisions

of SIPA during a stockbroker liquidation proceeding. The

fundamental flaw in SIPC’s entire position is its belief that

the broad bankruptcy powers granted to SIPC permit SIPC to

do anything, even if it is inconsistent with actions required or

approved of in other sections of SIPA.

It bears emphasizing that 15 U.S.C. § 78fff provides as

follows:

7 The Court’s statement that FDIC/FSLIC are not “debtors in title 11 bank-

ruptcy proceedings” is both an irrelevant statement, and incorrect insofar as it

implies that SIPC is such a debtor. The failed SIPC member is the debtor.

§ 78eee(a)(3). SIPC is the federally established and backed insurer of the failed

firm's customers. SIPC is the instigator of the liquidation proceedings. SIPC is no

more a “debtor” than is FDIC/FSLIC. In any event, the Court offerred absolutely no

explanation of how SIPC’s supposed “debtor” status should lead to a different result

from the Sharp cases.

(b) Application of Title 11]

To the extent consistent with the provisions of this

chapter, a liquidation proceeding shall be conducted

in accordance with and as though it were being

conducted under Chapters 1, 3, and 5 and subchap-

ters I and II of Chapter 7 of Title 11.

(emphasis added). Although SIPA’s Provisions governing liq-

uidation of firms are important, they comprise only one aspect

Of SIPA’s overall scheme for Protection of customers. Thus,

the SIPA liquidation trustee may Only “conduct” the liquida-

tion using Bankruptcy Code powers if his “conduct” pursuant

to those powers does not undo requirements imposed by other

Provisions of SIPA. It is critical to note that the Policy

expressed in SIPA is identical to the policy of consistency

which underlies the Sharp cases.

In the present case, SIPA, through § 78iii and applicable

SRO rules, has required SIPC members to Carry the standard

bond. SIPC, pursuant to its mandate under § 78iii, specifically

requested the SROs to develop rules for mandatory bonding

of SIPC members. The SROs responded, with SIPC’s

approval, by negotiating standard bonding requirements with

the surety companies. Once the SROs promulgated their rules

requiring the standard bond, SIPA § 78iii made those rules

and those bonds mandatory for SIPC members. This history of

the bonding requirement shows Congressional and SIPC

approval of the bond and “all of its Provisions,” California

Union, 948 F.2d at 562.

However broad SIPC’s powers are under the “liquida-

tion” provisions, they are not broad enough to allow SIPC to

repudiate statutory requirements contained in other Parts of

SIPA itself, including the bonding requirements imposed by

§ 78iii. Thus, SIPC’s actions in invoking 11 U.S.C. § 541 to

invalidate the automatic termination provisions of the bond

may be overturned without addressing the issue of whether

Section 541 is “incorporated” into SIPA wholesale. Even if it

was, the particular “conduct” of the SIPC trustee pursuant to

section 541 is inconsistent with other provisions of SIPA.

The Eleventh Circuit, in its opinion, expressed concern

about not adopting a position which would render provisions

of SIPA “essentially meaningless.” Jn re Government Securi-

ties Corp., 972 F.2d at 331. The Eleventh Circuit, however,

did that very thing when it allowed SIPC to use § 78fff to

override the requirements of § 78iii. The decision opens the

way for SIPC and its trustees to invalidate a variety of

regulatory requirements which have been imposed on SIPC

members, including contracts involving the rights of third

parties. This point of law — the reconciling of SIPA’s liquida-

tion provisions with its regulatory scheme - is a critical

question of law which should be formally resolved by this

Court.

POINT II

THE ELEVENTH CIRCUIT’S HOLDING THAT ALL OF

THE BANKRUPTCY CODE PROVISIONS DESIG-

NATED IN SIPA § 78fff(b) ARE COMPLETELY INCOR-

PORATED BY REFERENCE INTO SIPA CONFLICTS

WITH CONTRARY STATEMENTS BY THE SECOND

AND THIRD CIRCUITS ON THE SAME POINT OF

LAW, AND PURPORTS TO RESOLVE AN IMPORTANT

ISSUE OF FEDERAL LAW BEST RESOLVED BY THIS

COURT.

The Eleventh Circuit held that the SIPC trustee could

invalidate the automatic termination provisions of National

Union’s bond because the anti-ipso-facto provisions of 11

U.S.C. § 541(c)(1)(B) are incorporated by reference into SIPA

by means of 15 U.S.C. § 78fff. The Eleventh Circuit’s deci-

sion did not take into account the different policy objectives

and structures of SIPA and the Bankruptcy Code, and the

language and legislative history of the respective statutes.

Section 78fff does not incorporate all of the referenced

provisions of the Bankruptcy Code. By referring only to the

“conduct” of SIPA liquidation proceedings, Congress only

intended to make bankruptcy procedures available in SIPA

proceedings. A bankruptcy trustee’s substantive rights are not

incorporated in toto. The Eleventh Circuit's adoption of

“wholesale” incorporation of all procedural and substantive

Provisions of the Bankruptcy Code directly conflicts with the

decisions of the Second and Third Circuits.

Next, the language and legislative history of Section

541(c)(1)(B) itself indicates that Congress did not intend to

make its provisions applicable in SIPA liquidation proceed-

ings. More important, although many Provisions of SIPA and

the Bankruptcy Code expressly make provisions of the Code

applicable in SIPA Proceedings, none refer to § 541. The

extent of the Bankruptcy Code’s incorporation into SIPA is an

important issue of federal law which should be resolved by

this Court.

A. THE PUBLIC POLICY AND PURPOSE OF SIPA

BANKRUPTCY CODE LIQUIDATION.

There is a fundamental and Significant difference

between liquidation proceedings under SIPA and under the

Bankruptcy Code.

The institution of a case under SIPA brings a pend-

ing bankruptcy liquidation to a halt and from that

point forward, while in many respects Paralleling a

bankruptcy liquidation, the liquidation proceeds

separate from the Bankruptcy Code with a different

primary policy orientation, that Of protection of

certain public customers. For Protection, such pub-

lic customers through the SIPA trustee may look to

the Securities Investors Protection Corporation

(SIPC) for Satisfaction of their Claims. .. .

x * *

The essential difference between a liquidation under

the Bankruptcy Code and One under SIPA is that

under the Code the trustee is charged with convert-

ing securities to cash as quickly as possible and,

with the exception of the delivery of customer name

securities, making cash distributions to customers

of the debtor in satisfaction of their claim. A SIPC

trustee, on the other hand, is required to distribute

;

securities to customers to the greatest extent practi-

cable in satisfaction of their claims against the

debtor. There is, manifestly, a fundamental differ-

ence in orientation between the two proceed-

ings. ... (emphasis supplied) (citations omitted)

4 Collier on Bankruptcy, Subchapter Three, Stockbroker Liq-

uidation, Introduction 2 and 5 (15th ed. 1979).

SIPC has previously candidly recognized the distinction

in its own publication:

“The liquidation is carried out under the special

procedures of the 1970 act which, while they draw

upon certain aspects of the Bankruptcy Act, are

_ quite different in their operation from the latter Act.

These procedures give effect to the unique nature of

the securities business and the intent of the Con-

gress to make evident to investors the governmental

concern with and commitment to the public interest

and public confidence in our securities markets.”

(emphasis supplied)

SIPC’s 1973 Annual Report, p. 6.

Reflecting this difference in purpose, a SIPA liquidation

differs considerably in its operation from a bankruptcy pro-

ceeding. For example, in a SIPA liquidation, the court must

appoint the persons that SIPC specifies as the liquidation

trustee and its counsel. 15 U.S.C. § 78eee(b)(3). Customer

claims in a SIPA proceeding must be filed within sixty (60)

days publication of the SIPA liquidation notice,

§ 78fff-2(a)(3), but in a Chapter 7 bankruptcy the proofs of

claim are to be filed within ninety (90) days after the first

date for the section 341(a) meeting of creditors which meet-

ing is set at a reasonable time after the order for relief. 11

U.S.C. § 341(a); Bankruptcy Rule 3002(c).

The Bankruptcy Code defines debtor as “[a] person or

municipality concerning which a case under this title [Title

11] has been commenced,” 11 U.S.C. § 101(12). The SIPA

definition of debtor is much narrower: “a member of SIPC

with respect to whom an application for a protective decree

has been filed under section 5(a)(3) [15 U.S.C. § 78eee(a)(3)]

or a direct payment procedure which has been instituted under

section 10(b) [15 U.S.C. § 78fff-4(b)].” 15 U.S.C. § 78111(5).

It is quite clear that a SIPA proceeding is not an ordinary

bankruptcy proceeding. SIPA does not even apply the Bank-

ruptcy Code’s specific provisions for a stockbroker liquida-

tion contained in 11 U.S.C. § 741-752. The two proceedings

are entirely distinct. Thus, Substantive provisions of the

Bankruptcy Code such as 1] U.S.C. § 541 should not be

incorporated into SIPA absent clear direction from Congress

to do so.

B. SECTION 78fff(b) ONLY INCORPORATES PRO-

CEDURAL AND JURISDICTIONAL PROVISIONS

OF THE BANKRUPTCY CODE INTO SIPA, AND

THE ELEVENTH CIRCUIT’S HOLDING TO THE

Section 78 fff(b)’s emphasis on the “conduct” of proceed-

ings and “consistency” shows that it Only incorporates those

procedural provisions of the Bankruptcy Code which are

consistent with SIPA.

Courts consistently have recognized that the phrasing of

§ 78fff(b) does not amount to a wholesale incorporation by

reference of all of the referenced provisions of the bankruptcy

code:

We note that (78fff(c)(1)}® does not in express terms

incorporate the provisions of Chapter X, but merely

States that the SIPA “liquidation proceeding shall be

conducted in accordance with, as as though it were

being conducted under, the provisions of Chapter

* * *

Thus, § (78fff(c)(1)} is intended to make the flex-

ible Chapter X procedures available for SIPA liq-

uidations. . . . Only those Provisions relating to the

procedures for conducting the affairs of the estate

8 The cite is to SIPA Prior to the 1978 amendments to the bankruptcy code

and the associated change in SIPA now set forth in 78fff(b). The relevant wording

of § 78fff(c)(1) is identical to the wording of § 78fff(b).

during bankruptcy administration, except as incon-

Sistent with the provisions of SIPA, have been

incorporated.

S.E.C. v. Aberdeen Securities, Inc., 526 F.2d 603, 605 (3rd

Cir. 1975) (emphasis by the court). Aberdeen went on to

holding that Bankruptcy Act provisions for an award of attor-

neys fees in connection with services rendered to the estate is

not incorporated into SIPA.

In Redington v. Touche, Ross & Co., 612 F.2d 68 (2d Cir

1979), the court faced the issue of whether SIPA incorporated

the Bankruptcy Act’s provisions allowing shareholders to be

heard in connection with bankruptcy proceedings. The court

noted that:

Congress’ clear purpose in writing § (78 fff(c)(1)] of

SIPA in the manner chosen was to structure SIPA

liquidations, insofar as the SIPA court's powers with

regard to jurisdiction and procedure are concerned,

on the model [fof a bankruptcy court]. Thus,

§ [78fff(c)(1)] gives SIPA liquidation courts the

procedural and jurisdictional powers conferred on a

{bankruptcy court].

Id. at 71-72 (emphasis added). Although Touche, Ross

involved jurisdictional issues and not procedural ones, the

court’s discussion emphasizes that the specific language used

by Congress in § 78fff means that Congress has a “clear

purpose” not to incorporate non-procedural aspects of bank-

ruptcy law into SIPA.

Although Aberdeen and Touche, Ross were decided under

SIPA and the Bankruptcy Act prior to the 1978 amendments

creating the Bankruptcy Code, the reasoning of the cases is

still applicable. There is no indication in the legislative his-

tory of the 1978 amendments to the Bankruptcy Code, or in

the 1978 amendments to SIPA (see Public Law 95-598),

indicating that the new substantive provisions of the Bank-

ruptcy Code, including section 541(c)(1)(B), were to be incor-

porated wholesale into SIPA. The amendments to 15 U.S.C.

§ 78fff(b) were merely to change the cross-reference of Chap-

ter X of the Bankruptcy Act to instead reference the new

Bankruptcy Code. Congress, presumably aware of the Aber-

deen court’s reasoning, elected to use exactly the same rele-

vant language in § 78fff(b).

Thus, the “incorporation” inquiry in all instances must

proceed on a case-by-case basis focusing on (1) whether the

Bankruptcy Code provision is procedural, (2) whether the text

of the provision is on its face inconsistent with SIPA, and (3)

whether the “conduct” sought to be justified by the provision

is inconsistent with SIPA. In the present Case, the trustee’s

use of il U.S.C. § 541(c)(1)(B) does not meet the first

element, and most definitely does not meet the third.

The Eleventh Circuit ignored the above case law in favor

of an eyes-closed “blanket incorporation” approach:

The plain language of § 78fff(b) makes no such

[procedural-substantive] distinction, and explicitly

incorporates Chapters 1, 3, 5, and subchapters I and

II of Chapter 7 of the Bankruptcy Code.

972 F.2d at 330, n.1. Not Only does this language directly

conflict with the reasoning of the Second and Third Circuits,

it ignores the careful phrasing of the statute itself.

C. 11 U.S.C. § 541(c)(1)(B) IS A SUBSTANTIVE PROVI-

SION OF THE BANKRUPTCY CODE WHICH IS

NOT INCORPORATED BY REFERENCE INTO

SIPA,.

The Eleventh Circuit's conclusion that section

541(c)(1)(B) applies to a SIPA liquidation proceeding is erro-

neous for two reasons. Section 541(c)(1)(B) Clearly states,

twice, that its application is limited to the commencement of a

Case under Title 11. Nothing in the section’s legislative his-

tory supports a reading that extends its application to SIPA

Proceedings. Second, both SIPA and the Bankrutpcy Code

explicitly designate which Code Provisions are applicable in

SIPA — Section 541 is not among them.

Section 541(c)(1)(B) states that:

(c)\(1) . . . [A]n interest of the debtor in property

becomes property of the estate... . notwithstanding

any provision in an agreement .. .

(B) that is conditioned on the insolvency of finan-

cial condition of the debtor, on the commencement

of a case under this title [i.e., Title 11 U.S.C. 1, or

on the appointment of or taking possession by a

trustee in a case under this title [i.e., Title 1]

U.S.C.]. . . . (emphasis added)

The language of section 541(c)(1)(B) Clearly and without

ambiguity provides that an ipso facto clause triggered by a

filing of a case under Title 11 is void. No mention is made of

a case commenced under Title 15. If Congress had intended

for section 541(c)(1)(B) to apply to a SIPA proceeding it

easily could have stated “the commencement of a case under

this Title or Title 15”.

The legislative history of section 541(c)(1)(B) also does

not support the district court’s conclusion.? The legislative

history of section 541(c)(1)(B) states as follows:

Subsection (c) invalidates restrictions on the trans-

fer of property of the debtor, in order that all of the

interests of the debtor in property will become

property of the estate. The provisions invalidated

are those that restrict or condition transfer of the

debtor’s interest, and those that are conditioned on

the insolvency or financial condition of the debtor,

on the commencement of a bankruptcy case, or on

the appointment of a custodian of the debtor’s prop-

erty.!° (emphasis added)

The legislative history is completely consistent with the lit-

eral wording of the statute. Moreover, Congress had three

opportunities to clearly expand section 541(c)(1)(B) to SIPA

proceedings: when it was first enacted in 1978, and in the

1982 and 1984 amendments to the Bankruptcy Code. It did

not do so.

9 Legislative History P.L. 95-598 U.S. Code Congressional and Administra-

tive News, 95th Cong. 2d Sess., p. 5869.

10 Id.

In addition, an examination of SIPA and the Bankruptcy

Code Specifically shows that Congress did explicitly incorpo-

rate into SIPA those substantive Code provisions which Con-

gress deemed appropriate. By not so incorporating § 541,

Congress must have intended to exclude it.

SIPA explicitly incorporates Specific substantive provi-

Sions of the Code. See § 78eee(b)(1)(A) (adopting Code

definition of insolvency in 1] U.S.C. § 101;

§ 78eee(b)(2)(B)(iii) (permitting trustee to abrogate right of

set-off as provided in 11 U.S.C. § 553); 78fff(e) (adopting

Priorities of distribution in 11] U.S.C. § 726 and providing for

SIPC to recoup funds as set forth in 1] U.S.C. § 507(a)(1));

and 78fff-1(b) (imposing on trustee Same duties set forth in 1]

U.S.C. Chapter 7). Most important to the present case, SIPA

Specifically incorporates the Code’s powers for a trustee to

avoid preferences. 11 U.S.C. § 547, and to invalidate certain

transfers, 11 U.S.C. § 549. These Powers are very similar in

nature and purpose to that established in § 541, yet Congress

specifically included these provisions in SIPA while Omitting

§ 541. In addition, in 1982, Congress amended the “automatic

Stay” provision of the Code, 11 U.S.C. § 362(a), so as to make

it expressly applicable in SIPA proceedings.

Thus, Congress Clearly felt that 15 U.S.C. § 78fff(b) with

its “conducted in accordance with” provision failed to incor-

porate either the automatic Stay for SIPA cases, or the

numerous substantive Code provisions set forth above. Sec-

tion 78fff(b) is not as all-encompassing as SIPC contends.!!

All of this is consistent with the limited scope of § 78fff's

careful language, as the Aberdeen and Touche, Ross Cases

have explained.

The Eleventh Circuit repeatedly expressed concern that

§ 78fff(b) would be rendered meaningless if either SIPA or

'! Indeed, SIPC was concerned with this omission and accordingly Theodore

H. Focht, the General Counsel of SIPC, testified at the 1981 hearing of a House

the Bankruptcy Code had to specify which substantive provi-

sions of the Code were applicable in SIPA proceedings. Yet,

ironically, all of the SIPA and Code provisions set forth above

would have absolutely no purpose, and indeed would be

totally extraneous and unnecessary, if the Eleventh Circuit’s

(and SIPC’s) interpretation of § 78fff(b) are correct.

The Eleventh Circuit’s “all or nothing” approach is inap-

posite. SIPA § 78fff(b) does make Bankruptcy Code provi-

sions applicable in SIPA liquidation proceedings, but only to

a limited degree and subject to specific conditions. Only

procedural and jurisdictional provisions of the Code are appli-

cable, and these must be actually applied only in a manner

consistent with other provisions of SIPA. Substantive provi-

sions of the Code will only apply where either SIPA or the

Code itself so provides. Since no such language makes

§ 541(c)(1)(B) applicable, and since the use of § 5$41(c)(1)(B)

to invalidate provisions of National Union’s bond would be

inconsistent with SIPA provisions requiring that bond,

§ 541(c)(1)(B) is not applicable in the present case.

CONCLUSION

NATIONAL UNION FIRE INSURANCE COMPANY OF

PITTSBURGH, PA. respectfully submits that the judgment of

the Court of Appeals should be reversed.

Respectfully submitted,

KimBrec_. & HAMANN, PA.

Suite 900 - Brickell Centre

799 Brickell Plaza

Miami, Florida 33131-2805

(305) 358-8181

By: /s/ Guy W. Harrison

Guy W. Harrison

Cart K. HorrMan

James F. Crowper, Jr.

Attorneys for Petitioner,

‘VWATIONAL UNION FIRE

INSURANCE COMPANY OF

PITTSBURGH, PA.

In re GOVERNMENT SECURITIES

CORPORATION, Debtor.

NATIONAL UNION FIRE INSURANCE

COMPANY OF PITTSBURGH, PA.,

Defendant-Appellant,

Vv.

John R. CAMP, Jr., Trustee, Securities

Investor Protection Corporation,

Plaintiffs-Appellees.

No. 90-5356.

United States Court of Appeals,

Eleventh Circuit.

Sept. 14, 1992.

Appeal from the United States District Court for the

Southern District of Florida.

Before TJOFLAT, Chief Judge, DUBINA, Circuit

Judge, and HENDERSON, Senior Circuit Judge.

TJOFLAT, Chief Judge:

In this case, we affirm the district court’s holding that

the Bankruptcy Code anti-termination provision, 11

U.S.C. § 541(c)(1)(B) (1988), applies to a liquidation pro-

ceeding under the Securities Investor Protection Act of

1970, 15 U.S.C. §§ 78aaa-78lll (1988) (SIPA), to invalidate a

fidelity bond clause that purports to terminate liability

under the bond automatically upon the takeover of the

bonded entity by a receiver or other liquidator.

The appellant, National Union Fire Insurance Com-

pany of Pittsburgh, PA. (NUFIC), issued a fidelity bond in

February 1987 to the Government Securities Corporation

(GSC), a securities broker, to protect it against losses

resulting from, among other things, dishonest acts of its

employees. Section 12(c) of the bond Purports to termi-

nate or cancel the bond “upon the taking over of [GSC]

by a receiver or other liquidator.”

On May 12, 1987, the Securities Investor Protection

Corporation (SIPC) applied to the United States District

Court for the Southern District of Florida for an order

placing GSC into SIPA liquidation Proceedings because of

substantial shortfalls in GSC’s accounts. That same day,

SIPA. The district court ordered the GSC liquidation to

commence under SIPA, appointed John R. Camp, Jr.

(Trustee) as trustee to administer the Proceeding, and

referred the case to the Bankruptcy Court for the South-

ern District of Florida.

On June 2, 1987, the Trustee, acting on behalf of GSC,

notified NUFIC of a Possible loss arising from employee

dishonesty, and on December 1, 1987, filed a proof of loss.

In response, NUFIC refused coverage under the bond on

the ground that by virtue of section 12(c), the bond termi-

nated on May 12, 1987, upon the appointment of the

Trustee to oversee GSC’s liquidation.

In August of 1988 the Trustee initiated an adversary

Proceeding against NUFIC within the SIPA liquidation

Proceeding, seeking a declaration of the rights of the

parties under the bond. The Trustee argued that NUFIC

remained liable on the bond despite the commencement

of the SIPA liquidation proceeding because the bond’s

automatic termination provision was invalidated by 11

U.S.C. § 541(c)(1)(B), the Bankruptcy Code anti-termina-

tion provision, which is made applicable to SIPA liquida-

tion proceedings by 15 U.S.C. § 78fff(b). Section

541(c)(1)(B) forbids the courts from enforcing contract

provisions that are conditioned upon the financial condi-

tion of the debtor. That section provides in relevant part:

(c)(1) . . . an interest of the debtor in prop-

erty becomes property of the estate .. . not-

withstanding any provision in an agreement .. .

(B) that is conditioned on the insol-

vency or financial condition of the debtor,

on the commencement of a case under this

title, or on the appointment of or taking

possession by a trustee in a case under this

title or a custodian before such commence-

ment, and that effects or gives an option to

effect a forfeiture, modification, or termina-

tion of the debtor’s interest in property.

11 U.S.C. § 541(c)(1)(B).

The Trustee argued that SIPA proceedings import

this, among other Bankruptcy Code provisions, through

15 U.S.C. § 78fff(b) which provides: “To the extent consis-

tent with the provisions of [SIPA], a [SIPA] liquidation

proceeding shall 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].”

The bankruptcy court agreed, and accordingly

entered judgment for the Trustee reasoning that:

the Trustee’s rights under the bond constitute

and constituted Property of the estate under

Section 541 of the [Bankruptcy] Code and the

automatic termination Provision contained in

Section 12(c) of the bond is and was ineffective

by virtue of Section 541(c)(1)(B) notwithstand-

ing the commencement of the liquidation of

GSC under S.I.P.A. and the appointment of Mr.

Camp as Trustee. The rights, powers, and pro-

tection given to a bankruptcy trustee by the

[Bankruptcy] Code are adopted by reference

into S.I.P.A., 15 U.S.C. Sections 78fff(b),

78fff-1(a).

In re Government Sec. Corp., 101 B.R. 343, 346-47

(Bankr.S.D.Fla. 1989).

NUFIC appealed the bankruptcy court’s decision to

the district court, and that court affirmed. The district

court found that “11 U.S.C. Section 541(c)(1)(B) applies to

SIPA liquidation Proceedings, thereby invalidating Sec-

tion 12(c), the automatic termination clause of the bond

NUFIC issued to GSC.” In re Government Sec. Corp., 111

B.R. 1007, 1010 (S.D.Fla.1990). NUFIC then lodged this

appeal. We agree with the district court and therefore

affirm.

II.

The sole issue presented in this appeal is whether

section 541(c)(1)(B) of the Bankruptcy Code applies in a

SIPA liquidation proceeding. NUFIC makes several argu-

ments contending that the bond Provision terminating

‘

coverage upon a takeover should not be affected by sec-

tion 541(c)(1)(B). We reject them all.

First, NUFIC posits that the plain meaning of section

541(c)(1)(B) demonstrates that it does not apply in a SIPA

proceeding.' It argues that since this section speaks only

of cases commenced under title 11 and not of cases com-

menced under title 15,2 this section does not apply to the

latter. In effect, NUFIC argues that in order to apply toa

SIPA proceeding, a Bankruptcy Code provision must state

specifically that it applies.

Apart from misreading the language of section

541(c)(1)(B), this argument completely ignores section

78fff(b) which plainly states that SIPA liquidation pro-

ceedings shall be conducted in accordance with certain

Provisions of title 11, including Chapter 5 in which sec-

tion 541(c)(1)(B) is located. NUFIC’s interpretation of sec-

tion 541(c)(1)(B) would render section 7 8fff(b)

meaningless. There would be no need for section 78fff(b)

if each Bankruptcy Code section that applied in a SIPA

' In addition, the appellant contends that the plain meaning

of § 78fff(b) of SIPA shows that § 541(c)(1)(B) of the Bankruptcy

Code is not incorporated into a SIPA liquidation proceeding.

NUFIC claims that § 78fff(b) incorporates only the procedural

and not the substantive aspects of the Bankruptcy Code insofar

as they are consistent with SIPA. This argument is entirely

meritless. The plain language of § 78fff(b) makes no such dis-

tinction, and explicitly incorporates Chapters 1, 3, 5, and sub-

chapters I and II of Chapter 7 of the Bankruptcy Code.

? The appellant highlights the phrases “commencement of

a case under this title [title 11],” and “taking possession by a

trustee in a case under this title [title 11]” in § 541(c)(1)(B) to

make this argument.

Proceeding had to indicate it. It is a standard rule of

construction that “a court should interpret a statute so as

to give effect to each of its Provisions.” United States ex

rel. Williams v. NEC Corp., 931 F.2d 1493, 1502 (11th

Cir.1991) (citing United States v. Menasche, 348 U.S. 528,

538-39, 75 S.Ct. 513, 519-20, 99 L.Ed. 615 (1955)). We

Cannot construe section 541(c)(1)(B) such that section

78fff(b), an integral component of SIPA, is rendered use-

less. We thus agree with the lower courts in holding that

section 78fff(b) specifically incorporates section

541(c)(1)(B) into a SIPA Pproceeding.3

Similarly, NUFIC contends that Congress’ amending

of the automatic stay provision of the Bankruptcy Code,

11 U.S.C. § 362(a), in 1982 to make it applicable upon the

filing of a SIPA Proceeding,* but neglecting to amend

3 This reasoning answers two other arguments that NUFIC

puts forth. First, NUFIC claims that the legislative history of

§ 541(c)(1)(B) shows that the section was not to apply to a SIPA

Proceeding. They cite the Senate Report which states that “[t]he

Provisions invalidated are those that restrict or condition trans-

fer of the debtor’s interest, and those that are conditioned on the

insolvency or financial condition of the debtor, on the com-

mencement of a bankruptcy case, or on the appointment of a

Custodian of the debtor’s Property.” S.Rep. No. 989, 95th Cong.,

2d Sess. 83 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5869.

This quotation does not Support the weight of their argument.

Further, NUFIC asserts that the legislative history of

§ 541(c)(1)(B) is “in derogation of the common law,” requiring

the statute to be Strictly construed. No matter how strictly we

construe § 541(c)(1)(B), it cannot entirely negate the effect of

§ 78fff(b).

* Section 362(a) now provides:

Except as provided in subsection (b) of this section, a

petition filed under section 301, 302, or 303 of [title

section 541(c)(1)(B) shows that Congress did not intend

that section 541(c)(1)(B) apply in a SIPA proceeding. This

argument too must fail. Apart from the technical reasons

for section 362(a)’s amendment,5 this argument suffers

from the fatal flaw discussed above. That is, NUFIC’s

contention also requires each Bankruptcy Code provision

specifically to state that it applies in a SIPA proceeding.

We reiterate that this reasoning renders section 78fff(b)

essentially meaningless, and is unacceptable.

Finally, NUFIC claims that the public policy and pur-

pose of SIPA differ substantially from the policy and

purpose of liquidation under the Bankruptcy Code. This

distinction, NUFIC contends, supports the proposition

that Congress intended to limit application of section

541(c)(1)(B) to a Bankruptcy Code liquidation. Speci-

fically, the customer protection aspect of SIPA renders the

proceeding so different from a proceeding in ordinary

bankruptcy that section 541(c)(1)(B) cannot be deemed to

apply.

11], or an application filed under section 5(a)(3) of the

Securities Investor Protection Act of 1970 (15 U.S.C.

78eee(a)(3)), operates as a stay, applicable to all enti-

ties....

11 U.S.C. § 362(a) (1988).

° The legislative history indicates that 11 U.S.C. § 362(a)

(1988) was amended for technical clarification in order to pro-

tect further the securities consumer in the event of a brokerage

house liquidation. Congress clearly meant to increase, not

decrease, protection to the consumer and the availability of the

Bankruptcy Code in a SIPA proceeding. See H.R. 420, 97th

Cong., 2d Sess. (1982), reprinted in, 1982 U.S.C.C.A.N. 583.

This argument is inapposite to tive intent of SIPA. The

Purpose of SIPA is to return to customers of brokerage

firms their property or money. 15 U.S.C. § 78fff(a) pro-

vides that “[t]he Purposes of a liquidation Proceeding

Shall be . . . to deliver customer name securities to or on

behalf of the Customers of the debtor . | . ; and... to

distribute customer Property and . . . otherwise Satisfy

net equity claims of Customers. .. . ” Congress wanted

creditors.6

ITT.

For the foregoing reasons, the order of the district

court is AFFIRMED.

IT IS SO ORDERED.

10a

UNiTED STATES DISTRICT COURT

SOUTHERN DISTRICT OF FLORIDA

CASE NO. 89-1211-CIV-SPELLMAN

In re

GOVERNMENT SECURITIES

ee MEMORANDUM

Debtor OPINION

JOHN R. CAMP, JR., Trustee, and (Entered March 16,

the SECURITIES INVESTOR 1990)

PROTECTION CORP

Appellees,

NATIONAL UNION FIRE

INSURANCE CO. OF

PITTSBURGH, PA,

Appellant.

ORDER AFFIRMING BANKRUPTCY COURT

THIS CAUSE comes before the Court upon the

appeal of National Union Fire Insurance Company of

Pittsburgh, Pennsylvania (hereinafter “NUFIC”), from a

decision of the Bankruptcy Court for the Southern Dis-

trict of Florida, in a declaratory judgment action brought

by John R. Camp, Jr., as Trustee for the liquidation of

Government Securities Corporation (hereinafter “aa”)

seeking a determination of the estate’s rights under a

fidelity bond in light of 11 U.S.C. Section 541(c)(1)(B).

lla

BASIS OF APPELLATE JURISDICTION

This Court has jurisdiction of this appeal pursuant to

28 U.S.C. Section 158(a).

STANDARD OF APPELLATE REVIEW

On an appeal from a proceeding pursuant to the

Securities Investor Protection Act (hereinafter “SIPA”) a

district court is to conduct a de novo review of the bank-

ruptcy court’s conclusions of law. In re Stalvey & Assocs.,

750 F.2d 464, 468 (Sth Cir. 1985). However, the bankruptcy

court’s “[flindings of fact, whether based on oral or docu-

mentary evidence, shall not be set aside unless clearly

erroneous, and due regard shall be given to the oppor-

tunity of the bankruptcy court to judge the credibility of

the witnesses.” Bankr. R. 8013.

BACKGROUND

On February 1, 1987, NUFIC issued a Securities

Dealer Blanket Bond No. 959-9000 to GSC. Coverage on

the bond was to commence on February 1, 1987 and

continue through November 1, 1987. GSC paid the pre-

mium on the bond in full prior to its issuance.

On an application and complaint by the Securities

Investor Protection Corporation (hereinafter “SIPC”), this

Court (per Hastings, J.) entered an order on May 12, 1987,

pursuant to 15 U.S.C. Section 78 aaa(5)(a), placing GSC, a

broker-dealer in U.S. government securities, into liquida-

tion under SIPA and appointing John R. Camp, Jr., Esq.,

as Trustee to administer the liquidation of GSC. This

Court (per Hastings, J.) ordered the case removed to the

12a

Bankruptcy Court for the Southern District of Florida

(Cristol, 5D. '

On June 2, 1987, the Trustee provided written notice

to NUFIC of a Possible loss under the bond. Thereafter,

the bond.

In the normal course of business, NUFIC Provides a

form for its insureds to complete as part of filing a proof

of loss. Despite repeated requests by the Trustee, NUFIC

reads in pertinent part:

This bond shall be deemed terminated or can-

celled as an entirety:

insured by a receiver or other liquidator or

by State or Federal Officials.

As a result of NUFIC’s denial of Coverage, the Trustee

initiated this adversary Proceeding, seeking a declaration

of the parties’ rights under the bond in light of 11 U.S.C.

Section 541 (c)(1)(B), which invalidates automatic termi-

nation provisions.

NUFIC argued that Section 541 of the Bankruptcy

Code is inapplicable to SIPA liquidation Proceedings

13a

maintained that this language limits application of that

section to cases arising under Title 11 (i.e. straight bank-

ruptcy cases). In addition, NUFIC argued that the fidelity

bond in question was an executory contract, and there-

fore subject to 11 U.S.C. Section 365(d)(1), which requires

a trustee to assume or reject executory contracts within 60

days of the filing of a petition for relief in bankruptcy.

NUFIC maintains that because the Trustee failed to

assume the so-called executory contract by July 13, 1987

(60 days after the filing of the petition for relief), it was

deemed rejected, relieving NUFIC of any liability under

the bond.

On November 15, 1988, the bankruptcy court held

that the adversary action was a “core proceeding” and

that “[rJelevant portions of the Bankruptcy Code which

prevent an automatic termination or limitation of the

estate’s property rights upon the filing of a bankruptcy

proceeding or appointment of a trustee are applicable in

this adversary matter filed in a SIPA proceeding.” In re

Government Sec. Corp., No. 87-0245-BKC-AJC-A (Bankr.

S.D. Fla. Nov. 15, 1988) (Order on National Union’s:

Motion for Stay of Proceedings; Motion to Dismiss

Amended Complaint; Motion for Determination of

Nature of Proceedings; and Motion to Abstain). On

March 15, 1989, the bankruptcy court issued its findings

of fact and conclusions of law. The court determined that:

a) Section 541(c)(1)(B) of the Bankruptcy Code was appli-

cable to SIPA liquidation proceedings by virtue of 15

U.S.C. Section 78 fff-1(a) which provides that “a trustee

shall be vested with the same powers and title with

respect to the debtor and the property of the debtor as a

14a

trustee in a case under Title 11;” b) an automatic termina-

tion provision of the fidelity bond NUFIC issued to GSC

was void and unenforceable against the Trustee by virtue

of 11 U.S.C. Section 541(c)(1)(B); c) the bond was not an

executory contract for purposes of 11 U.S.C. Section

365(d)(1), and therefore, the Trustee was not obligated to

assume the contract by July 13, 1987, the date upon which

an executory contract must have been assumed by the

Trustee in order to avoid being deemed rejected pursuant

to 11 U.S.C. Section 365(d)(1); and d) even if the bond

were executory on May 12, 1987 (the date which the

petition for relief was filed), it ceased to be executory by

July 13, 1987. Thereafter, the bankruptcy court issued its

final judgment from which Appellant NUFIC appeals the

following holdings: a) that the adversary Proceeding was

a “core” matter giving the bankruptcy court jurisdiction

to hear and determine the Proceeding pursuant to 28

U.S.C. Section 157(b)(1); b) that 11 U.S.C. Section

541(c)(1)(B) applies to SIPA liquidation proceedings,

thereby invalidating the automatic termination provision

contained in Section 12(c) of the bond issued by NUFIC

to GSC; and c) that the bond was not an executory con-

tract which the Trustee was required to assume or reject

within sixty days.

DISCUSSION

Nature of Proceeding

First, this Court finds that NUFIC’s Position that the

instant action was a “non-core” Proceeding to be without

merit. Core proceedings are those matters which “arise

under Title 11” or that “arise in a case under Title 11.” 28

15a

U.S.C. Section 157 (b)(1). Moreover, 28-U.S.C. Section 157

(b)(2)(0) states that core proceedings include, but are not

limited to, “other proceedings affecting the liquidation of

the assets of the estate or the adjustment of the debtor-

creditor or the equity security holder relationship. .. . ”

Non-core related proceedings are those matters that

are traditional state law actions, not made subject to a

federal rule or decision, but that are related, though only

peripherally, to a pending bankruptcy case. Related mat-

ters are those non-core proceedings “that in the absence

of .. . bankruptcy, could have been brought in a district

court or a state court.” In re Colorado Energy Supply, 728

F.2d 1283, 1286 (10th Cir. 1984).

11 U.S.C. Section 541 (c)(1)(B) creates substantive

rights unknown at state law. Although GSC’s right to

recovery was pursuant to the bond, a legal right created

under state law, the Trustee’s ability to preserve rights

under the bond exists solely under the Bankruptcy Code.

Indeed, operation of Section 12(c) of the bond, the auto-

matic termination provision, would not be an issue but

for the existence of the Bankruptcy Code provision which

precludes the operation of such clauses upon “insolvency,

financial condition of debtor or on the commencement of

a case under this title.” 11 U.S.C. Section 541(c)(1)(B). As

the Trustee correctly argues, this is not simply a state law

contract action which, had there been no bankruptcy,

could have proceeded in a state court. In re Wood, 825 F.2d

90, 97 (5th Cir. 1987).

Application of Section 541(c)(1)(B) could not be con-

templated outside of bankruptcy, and the controversy

involving payment on the bond affects the liquidation of

l6a

debtor’s assets. Accordingly, this matter comes within the

ambit of “core” proceedings, giving the bankruptcy court

Subject matter jurisdiction to hear and determine the

instant case.

Application of 11 U.S.C. Section 541(c)(1)(B)

to SIPA Liquidation Proceedings

Secondly, this Court finds that 11 U.S.C. Section

541(c)(1)(B) applies to SIPA liquidation proceedings,

thereby invalidating Section 12(c), the automatic termina-

tion clause of the bond NUFIC issued to GSC.

The stated purposes of a SIPA liquidation proceed-

ings are:

(1)(B) To distribute customer property and oth-

erwise satisfy net equity claims of cus-

tomers to the extent provided in this

section.

* * *

(4) To liquidate the business of the debtor.

15 U.S.C. Section 78fff(a).

15 U.S.C. Section 78 fff(b) provides:

To the extent consistent with the Provisions of

this chapter, a liquidation Proceeding shall be

conducted in accordance with, and as though

it were being conducted under, chapters 1, 3

and 5, and subchapters I and II of Chapter 7

of Title 11... .

Under 11 U.S.C. Section 541 (c)(1)(B):

‘

17a

. an interest of the debtor in property

becomes property of the estate under sub-

section (a)(1), (a)(2), or (a)(5) of this section,

notwithstanding any provision-

B) that is conditioned on the insolvency or

financial condition of the debtor, on the

commencement of a case under this title, or

on the appointment of or taking possession

by a trustee in a case under this title or a

custodian before such commencement, and

that effects or gives an option to effect a

forfeiture, modification, or termination of

the debtor’s interest in property.

This Court finds that the application of 11 U.S.C.

Section 541(c)(1)(B) is consistent with the purposes of

SIPA as delineated in Section 78 fff(a)(1)(B). A bankruptcy

provision is “inconsistent” with SIPA if it conflicts with

an explicit provision of the Act, or if application would

substantially impede fair and effective operation of the

Act without providing significant countervailing benefits.

SIPC v. Charisma Sec. Corp., 506 F.2d 1191 (2d Cir. 1974).

However, a bankruptcy provision does not become

“inconsistent” simply because it is not absolutely neces-

sary for the operation of the Act. Id.

Application of Section 541(c)(1)(B) invalidates the

automatic termination clause of the bond, thereby leaving

coverage of the debtor intact. Since the purpose of the

bond is to insure the debtor against dishonest acts, as

occurred in the instant case, it is difficult to imagine how

application of Section 541(c)(1)(B) could be deemed any-

thing but consistent with SIPA, the purpose of which is to

protect customers of securities brokerages.

18a

NUFIC contends that Section 541(c)(1)(B) only

applies to cases arising under Title 11. NUFIC cites the

plain language of the statute. which reads:

“4

-.. on the commencement of a case under this

title or on the appointment of or taking posses-

sion by a trustee in a case under this title or a

custodian. ... ”

Given that the instant case arose under Title 15, NUFIC

argues that Section 541 is inapplicable.

The plain language of the Bankruptcy Code indicates

that while an application for liquidation is filed pursuant

to Title 15 U.S.C. Section 78eee(a)(3), the liquidation pro-

cess commences under Title 11 U.S.C. Section 362 of the

Bankruptcy Code states in pertinent part:

“...an application filed under section 5(a)(3) of

SIPA operates as a stay, applicable to all entities,

of —- (1) the commencement or continua-

tion . . . of process . . . or other action or

Proceeding . . . that was or could have been

commenced before the commencement of the

case under this title, or to recover a claim

against the debtor that arose before the com-

mencement of the case under this title.”

Accordingly, this Court holds that Section 541(c)(1)(B) is

applicable in the instant case, thereby invalidating the

automatic termination provision of the bond.

Executory Contracts

11 U.S.C. Section 365(a) provides that a trustee may

assume or reject any executory contract or unexpired

lease of the debtor. Pursuant to Section 365(d)(1), a

—

19a

trustee has sixty days after the filing of the petition for

relief within which to assume or reject an executory con-

tract. Any contract not assumed during that period is

automatically deemed rejected.

The Bankruptcy Code does not define an executory

contract. However, the legislative history of Section 365

States that an executory contract is one in which perfor-

mance remains due to some extent on both sides. H.R.

Rep. No. 595, 95th Cong., 1st Sess. 347, reprinted in 1978

U.S. Code Cong. & Admin. News, 5787, 5844. Courts have

frequently held that an executory contract is one in

which:

[T]he obligations of both the bankrupt and the

other party to the contract are “so far unper-

formed that failure of either to complete perfor-

mance would constitute a material breach

excusing the performance of the other.”

Countryman, Executory Contracts in Bankruptcy, Part 1, 57

Minn. L. Rev. 439, 460 (1973), cited in In re Arrow Air. Inc.,

60 Bankr. R. 117, 120 (Bankr. S.D. Fla. 1986); In re Charter

Co., 52 Bankr. R. 267, 270 (Bankr. M.D. Fla. 1985).

Other courts have adopted the so-called “Functional”

approach in determining whether a contract is executory.

Under this approach, a court considers the purpose

behind allowing the debtor or trustee to assume or reject

a contract. As the court stated in In re G-N Partners, 48

Bankr. R. 462, 465 (Bankr. Minn. 1985), “the purpose of

the provision allowing a trustee to assume or reject any

executory contract or unexpired lease is to allow a trustee

to pick and choose among the debtor’s agreements and

assume those which benefit the estate. .. . ” Likewise in

20a

In re Norguist, 43 Bankr. R. 224, 225 (Bankr. Wash. 1984),

the court stated that “[rjejection of an executory contract

serves two purposes. It relieves the debtor of burdensome

future obligations . . . and it constitutes a breach of

contract which permits the other party to file a creditor’s

claim.”

The bankruptcy court determined that under either

the “Countryman” approach (significant performance

due on both sides) or the “Functional” approach (benefit

of assumption or rejection to the estate), the bond was not

an executory contract. As such, the Trustee was not

required to assume or reject the Bond within 60 days of

filing the petition for relief. This Court finds that the

bankruptcy court correctly analyzed the nature of the

fidelity bond at issue in determining that it was not an

executory contract.

Under the first approach, the so-called “Country-

man” approach, the bond was not an executory contract

because the obligations of both parties were not so far

unperformed that failure of either to complete perfor-

mance would constitute a material breach. There were no

obligations under the bond on GSC’s part for which

failure to perform would constitute a material breach

giving rise to a claim by NUFIC against GSC.

Under Florida law, fidelity bonds are considered to

be insurance contracts, and insurance contracts have been

held to be executory. In re Evans Prods. Co., 91 Bankr. R.

1003 (S.D. Fla. 1988). However, the sole basis for deter-

mining that an insurance contract is executory has been

the fact that the bankrupt had a continuing obligation to

make premium payments under the contract. In re Evans,

2la

91 Bankr. R. at 1006; In re Pester Refining Co., 58 Bankr. R.

189, 191 (Bankr. S.D. Iowa 1985); In re B. Siegel Co., 51

Bankr. R. 159, 161 (Bankr. E.D. Mich. 1985).

The facts of those cases differ from the instant case in

one crucial respect. In the present case, the debtor paid

the premium in full prior to issuance of the bond. The

only remaining duties to be performed by GSC were

duties necessary to initiate the filing of a claim of loss

under the bond. GSC’s failure to do so could not consti-

tute a material breach giving rise to a claim by NUFIC

against the estate. Rather, GSC’s failure to perform those

duties necessary to the filing of a claim could only benefit

NUFIC, which would avoid liability to which it would

otherwise be subject. Therefore, using the “Countryman”

approach, the bond was not an executory contract.

Applying the second approach, the so-called “Func-

tional” approach, the bond was not an executory contract.

Under this approach, whether a contract is executory is

determined by the benefits that assumption or rejection

would produce for the estate. In re Norquist, 43 Bankr. R.

at 225. Using the “Functional” approach, the bond in the

instant case is clearly not executory, since rejection could

not have possibly benefitted the estate. In fact, if the

Court were to find that the bond was an executory con-

tract, and thus deemed rejected by the Trustee’s failure to

assume, the only party to benefit from this determination

would be NUFIC, which would be relieved from liability

under the bond. As the bankruptcy court correctly noted,

GSC, as the insured, would have given up valuable,

bargained-for protection against losses. Because a finding

that the bond was executory would be detrimental to

22a

customers of GSC, such a finding would be Clearly incon:

sistent with the stated Purposes of SIPA.

Based on the above and foregoing, it is hereby

ORDERED AND ADJUDGED that the FINAL JUDG

MENT of the bankruptcy court is AFFIRMED,

Done and ordered in Chambers at Miami, Florida,

this 16 day of March, 1990.

/s/ Eugene P. Spellman

EUGENE P. SPELLMAN

UNITED STATES DISTRICT

JUDGE

cc: all counsel of record

23a

con- UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF FLORIDA

(S.1.P.A. Proceeding)

Case No. 87-0910-C-KEHOE

UG- 87-0245-BKC-AJC-A

ida, In Re:

GOVERNMENT SECURITIES

CORPORATION,

Debtor.

ICT

JOHN R. CAMP, JR., TRUSTEE,

Plaintiff,

NATIONAL UNION FIRE

INSURANCE COMPANY ADV. NO.

OF PITTSBURGH, 88-0427-BKC-

PA., AJC-A

Defendant.

Nee eee eee eee ee ee ee

FINDINGS OF FACT AND

CONCLUSIONS OF LAW

On February 1, 1989, the Court conducted a trial

without a jury in the captioned proceeding. The Court

has considered all of the evidence presented, facts admit-

ted in the pleadings, and the argument of counsel. In

accordance with Rule 7052 of the Bankruptcy Rules and

Rule 52 of the Federal Rules of Civil Procedure, the Court

24a

makes the following findings of fact, conclusions of law,

and Order for Judgment.!

FINDINGS OF FACT

1. National Union Fire Insurance Company of Pitts-

burgh, PA., New York, New York (hereafter “NUFIC”)

issued a Securities Dealer Blanket Bond to Government

Securities Corporation (hereafter “GSC”), which became

effective on February 1, 1987 and was scheduled to expire

on November 1 1987. Amended Complaint ] 5; NUFIC

Answer ¥ 3. The premium for the bond period, i.e.,

February 1, 1987 through November 1, 1987 had been

paid prior to the issuance of the bond. Trial Tr. at 31, 58.

2. On May 12, 1987, the Honorable Alcee L. Hast-

ings, as the Duty Judge, entered an order commencing

the liquidation of GSC under the Securities Investor Pro-

tection Act of 1970 as amended (S.I.P.A.), 15 U.S.C. §§ 78

aaa et seq. in Case No. 87-910-CIV-KEHOE (S.D. Fla.).

Amended Complaint ¥ 3; NUFIC Answer ; 2.

3. Under the terms of Judge Hastings’ Order, John

R. Camp, Jr. was appointed Trustee for the liquidation of

GSC and the liquidation proceeding was removed to this

Court. Id; Trial Tr. at 36.”

4. By letter dated June 2, 1987, the Trustee acting on

behalf of GSC, the insured, put NUFIC on notice of a

possible loss under the bond. Trial Tr. at 37, 39-40, 44, 56;

' Any finding of fact incorrectly denominated as a conclu-

sion of law shall be deemed a finding of fact; any conclusion of

law incorrectly denominated as a finding of fact shall be

deemed a conclusion of law.

25a

Plaintiff’s Ex. 1. The Trustee’s letter, which describes and

attaches a copy of Judge Hastings’ Order of May 12, 1987,

states in part:

In the course of our review of the files of GSC,

we have determined that your firm issued a

Securities Dealer Blanket Bond, which became

effective on February 1, 1987. This letter is sent

in accordance with the terms of Section 4 of the

Bond, and is designed to serve as notice of a

possible loss covered by that bond.

Plaintiff’s Exhibit 1. The Trustee further advised NUFIC

that his investigation would continue and he desired the

maximum period of time under the bond for submission

of affirmative proof of loss. Id. In so doing, the Trustee

clearly manifested his intent to seek all available cover-

age afforded by the bond.

5. In response to the Trustee’s letter, counsel for

NUFIC advised the Trustee that it had been retained and

further communications should be directed to counsel.

Trial Tr. at 37-38.

6. Counsel for NUFIC thereafter conducted an

investigation on behalf of NUFIC into the possible loss,

and NUFIC’s investigation was substantially completed

on or about July 2, 1987. Trial Tr. at 30, 60.

7. In the normal course of business, NUFIC pro-

vides a form to the insured to complete as a part of the

filing of a proof of loss with NUFIC. Trial Tr. at 66.

Notwithstanding repeated efforts to obtain NUFIC’s

assistance in the filing of the proof of loss and to deter-

mine NUFIC’s procedures for filing the proof of loss,

26a

NUFIC did not provide the forms to the Trustee or his

counsel. Trial Tr. at 66-67.

8. Notwithstanding the Trustee’s actions, NUFIC

has refused to provide coverage under the bond claiming

that the bond was terminated upon appointment of the

Trustee on May 12, 1987, by virtue of Section 12 (c) of the

bond, the so-called automatic termination provision.

Amended Complaint { 7; NUFIC Answer { 3; NUFIC

Affirmative Defense | 4. This section of the bond pro-

vides:

Section 12. This bond shall be deemed ter-

minated or canceled as an entirety:

* + ©

Insured by a receiver or other liquidator or by

State or Federal officials,. . . .

Id. The Securities Dealer Blanket Bond issued by NUFIC

to GSC provides coverage, inter alia, for “loss sustained

by the Insured at any time but discovered during the

Bond Period. ...” Amended Complaint, Exhibit A (open-

ing paragraph). NUFIC takes the position that the bond

terminated under Section 12 (c) of the bond upon

appointment of the Trustee. Thus, NUFIC argues any

discovery occurred after the bond period ceased and no

coverage existed.

9. Section 12 of the bond also provides, in relevant

part, that:

This bond shall be deemed terminated or can-

celled as to any Employee: (a) as soon as the

Insured shall learn of any dishonest or fraudu-

lent act on the part of such Employee... .

27a

10. Under the terms of the bond, NUFIC has an

obligation to pay claims made under a bond within 48

hours of a decision that the claim is clear and undisputed.

Trial Tr. at 27-28. The presence of the automatic termina-

tion provision, i.e., Section 12 (c) of the bond, constitutes

the principal basis for NUFIC’s claim that the Trustee’s

claim is not clear and undisputed. Id. at 64.

11. By virtue of NUFIC’s position on Section 12 (c)

of the bond, the Trustee filed this adversary proceeding.

The Trustee relies on Section 541 (c) (1) (B) of the Code,

the so called anti-ipso facto provision, arguing:

The basis for the declaratory relief sought by the

trustee is simple. The bond and the trustee’s

rights under it are property of the estate, [f/n

omitted] and § 541 (c) (1) (b) of the Bankrupicy

Code specifically invalidates bankruptcy termi-

nation provisions which impair the trustee’s

property rights. [f/n omitted].

Plaintiff’s Response to Defendant’s Motion for Stay of

Proceedings, Motion for Determination of Nature of Pro-

ceedings, Motion to Dismiss and Motion to Abstain at 14.