The United States Bankruptcy Court for the Southern District of New York recently entered a memorandum opinion in the Lehman Brothers Inc. (LBI) proceeding under the Securities Investor Protection Act (SIPA). The Bankruptcy Court’s opinion concerned the issue of whether claims asserted by counterparties in relation to bilateral repurchase agreements qualified for treatment as customer claims under SIPA. Judge James M. Peck concluded that such claims were not entitled to customer status because a necessary predicate to a customer claim is the entrustment of property with the broker-dealer, which the counterparties were unable to establish. The decision is significant because the Bankruptcy Court reached a different conclusion than the United States District Court for the District of New Jersey, the only other court to address the issue, albeit in the context of hold-in-custody repurchase agreements.

Background -

The decision arose from objections by numerous parties to the LBI Trustee’s determination that certain of their claims, based on repurchase agreements, should be categorized as general creditor claims, as opposed to customer claims. This distinction is important because under SIPA, only customers, and not general unsecured creditors, are entitled to receive a pro rata share of “customer property” (which generally means the failed broker-dealer’s pool of non-proprietary cash and securities) and to receive up to a certain amount of any shortfall from insurance provided by the Securities Investor Protection Corporation (SIPC).