MF Global: No Statutory Authority for Broker Customer Committee, Compensation from Estate, in SIPA Liquidation

by Cadwalader, Wickersham & Taft LLP

Judge Martin Glenn of the U.S. Bankruptcy Court for the Southern District of New York recently denied a motion filed by commodity broker customers of MF Global Inc. seeking the appointment of an official committee of commodity broker customers whose fees and expenses would be paid by the debtor’s estate.  Judge Glenn held that he lacked statutory authority to appoint an official customer committee in a broker-dealer liquidation under the Securities Investor Protection Act, and could not pay a chapter 7 official committee from estate expenses.  Further, Judge Glenn noted that customers’ interests were sufficiently protected by an experienced SIPA Trustee subject to significant oversight.  In re MF Global Inc., 462 B.R. 36 (Bankr. S.D.N.Y. 2011).

MFGI’s customers argued that, because the MFGI liquidation is comprised of both (1) a SIPA liquidation of a securities broker-dealer, and (2) a liquidation of a commodity broker under chapter 7 of the Bankruptcy Code, the provisions of chapter 7 of the Bankruptcy Code apply to the MFGI liquidation.  The Court rejected these arguments holding that chapter 7 only applies to the extent it is consistent with SIPA, and that even if chapter 7 did apply, there is no authority to fund payment of any committee fees from estate property.  To that end, Judge Glenn highlighted the competence and effectiveness of the SIPA Trustee in advocating for and protecting creditor interests.

In arguing that chapter 7 provisions applied, MFGI’s customers focused on section 705 of the Bankruptcy Code, which provides that “creditors that may vote for a trustee under section 702(a) of this title may elect a committee of not fewer than three, and not more than eleven creditors, each of whom holds an allowable unsecured claim of a kind entitled to distribution under section 726(a)(2) of this title.”  11 U.S.C. § 705(a).  Section 702(a) addresses the characteristics a creditor must possess to vote for a trustee.  Consequently, MFGI’s commodity broker customers maintained that pursuant to section 705, they were entitled to elect a creditors’ committee to assist in the liquidation of the commodity broker arm of MFGI.

Judge Glenn found that the customers’ argument “glosses over the actual language of section 705 and the interplay between the Bankruptcy Code and SIPA.”  Id. at *11.  He noted that, under section 705, only those creditors that may vote for a trustee are granted the ability to elect a committee in a chapter 7 proceeding.  In a SIPA liquidation, however, creditors have no vote in connection with the SIPA Trustee’s appointment, and the selection of the SIPA Trustee is in the sole discretion of the Securities Investor Protection Corporation.  Accordingly, because the commodity customers could not actually vote for a trustee, they had no right to elect a committee.

Further, Judge Glenn took particular issue with compensation of a committee’s fees from estate property.  Even if he could authorize election or appointment of a creditors’ committee under the Bankruptcy Code, Judge Glenn held that “nothing in the Bankruptcy Code provides for payment of a chapter 7 creditors’ committee’s counsel,” and that “this omission was not an oversight.”  Id. at *15.

Finally, Judge Glenn concluded that, even if there was statutory authority to appoint a creditors’ committee and approve its compensation from the estate property, he would not do so in the circumstances of the MFGI liquidation.  He found no need to “saddle” the Debtor’s estate with further expenses attendant to an official committee in light of the SIPA Trustee’s experience, the significant oversight of the SIPA Trustee’s conduct, and the ability of MFGI’s customers to actively participate in the case.

Judge Glenn’s decision recounts a matter well-settled in chapter 7: that the bankruptcy court cannot authorize payment of committee fees from estate property.  Additionally, it holds import by providing a solid reminder that Congress expressly sought to exempt broker-dealer liquidations from large swaths of the scheme envisioned by the Bankruptcy Code.  A SIPA Trustee with significant oversight, coupled with customers’ active participation in the case, may  provide an efficient and commercially desirable method for liquidating a broker-dealer and protecting the interests of securities investors.

This entry was posted in Claims.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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