Court: United States Bankruptcy Court, S.D. New York; November 23, 2011; Us Bankruptcy; United States Bankruptcy Court
The Court denied the motion for appointing an Official Committee of Commodity Broker Customers and approving the compensation for committee professionals related to MF Global Inc. (MFGI). The motion faced opposition from the Trustee for MFGI's liquidation, the Securities Investor Protection Corporation (SIPC), and the Statutory Creditors’ Committee. The United States Trustee (UST) also expressed concerns, particularly regarding the proposed committee's formation methods and the request for administrative expense payments from the estate, which are not permissible under existing bankruptcy laws.
The MFGI liquidation presents significant challenges, with approximately 40,000 customer accounts and nearly $2 billion in cash or collateral being transferred to other futures commission merchants, allowing some customers access to their funds. However, there remains a substantial shortfall of missing collateral, initially estimated at $600 million, but later reported to potentially exceed $1.2 billion. SIPC’s protections do not extend to commodity futures contracts, complicating recovery for customers.
The Trustee is mandated to distribute assets equitably based on customers' allowed claims, but has been cautious about distributing funds until the full extent of losses is determined. While MFGI's customers have actively voiced their concerns and engaged legal representation, the Trustee has shown responsiveness to their needs amidst the complexities of the case, even as the situation causes ongoing financial distress for many customers.
The Court determined that neither the Securities Investor Protection Act (SIPA) nor the Bankruptcy Code provides authority for appointing an official committee in a SIPA liquidation or for compensating committee professionals from estate property. The Court found it lacked the power to grant the requested relief due to the absence of statutory authority and stated that even if it had discretion, it would not authorize such an appointment. Consequently, the Steering Committee Motion and similar motions were denied.
Background details include an Order Commencing Liquidation of MFGI issued on October 31, 2011, which appointed James W. Giddens as Trustee and authorized the law firm Hughes Hubbard, Reed LLP as counsel to the Trustee. Subsequent Court approvals facilitated the operation of MFGI and the transfer of customer assets. The Steering Committee Motion sought the establishment of an official committee of commodity broker customers to oversee and expedite distribution of customer property, arguing it would ensure proper representation in potential disputes between commodity and securities customer interests. However, the Court found that the responsibilities claimed by the motion fall under the Trustee's purview, overseen by the Securities Investor Protection Corporation (SIPC) and the Commodity Futures Trading Commission (CFTC), with no legal basis for an official committee's role or compensation from estate assets. The motion's claim that the dual nature of the MFGI proceedings allows for a creditors' committee under Chapter 7 was rejected, as SIPA does not permit such an appointment in this context.
Section 705 of the Bankruptcy Code allows creditors eligible to vote for a trustee to elect a committee consisting of three to eleven creditors with allowable unsecured claims entitled to distribution. This committee can consult with the trustee or the United States trustee regarding estate administration and submit questions to the court. However, in a SIPA liquidation, creditors do not have the right to vote for a trustee, as the SIPA Trustee is appointed solely by the Securities Investor Protection Corporation (SIPC). Consequently, Section 705 does not apply in SIPA proceedings, preventing the election or appointment of a creditors' committee.
The Steering Committee Motion's alternative argument cites Section 105(a) of the Bankruptcy Code, suggesting it grants the court equitable power to appoint a commodity customer committee. However, the court emphasizes that Section 105 cannot extend powers beyond those explicitly provided in the Bankruptcy Code, aligning with case law that restricts equitable powers to the confines of the Code.
Regarding compensation, even if a committee could be formed, the court would not authorize the payment of committee professionals from estate property. Section 705 does not allow for the payment of fees and expenses for committee professionals, as established in past rulings.
Legislative history relevant to section 705 indicates that the omission of provisions for compensating creditors' committee professionals was deliberate. Two cases, Sable, Makoroff, Gusky, P.C. v. White (In re Lyons Transp. Lines, Inc.) and In re Wonder Corp. of Am., are referenced where such compensation was granted. In Lyons, the court allowed fee payments to the creditors' committee after conversion from chapter 11 to chapter 7 due to the case's complexities and the necessity of committee participation, framing the situation as one of judicial estoppel due to bad faith objections raised after services were rendered. In contrast, Wonder Corp involved a conversion from chapter 7 to chapter 11, where fees were awarded for both phases, although the court did not address objections to the authorization of counsel's employment or fees directly.
The Lyons decision acknowledged conflicting opinions from cases like In re Dominelli and In re Willbet Enters., which asserted that the Bankruptcy Code does not permit payment for a chapter 7 creditors’ committee’s counsel, emphasizing that Congress deliberately omitted such provisions. The Dominelli court argued that equitable powers could not be used to override this legislative intent. The Steering Committee Motion's attempt to reconcile these opposing views was found unconvincing. Ultimately, even if the Court could appoint a creditors’ committee and authorize their compensation, it declined to do so in this instance, citing the effectiveness of the experienced SIPA Trustee and counsel already overseeing the case, alongside active participation from MFGI’s customers. The motion for the appointment of a commodity customer committee was therefore denied, as no necessity for such an official committee was demonstrated.
A motion was filed by a Steering Committee representing 66 customers of MFGI, requesting the formation of an official committee for commodities customers and the approval of compensation. This motion is the first among several similar filings, which include supportive statements and letters from other MFGI customers seeking the same relief. While this opinion specifically addresses the Steering Committee Motion, it also resolves all related motions and requests. MF Global Holdings Ltd. and its unregulated affiliate are currently debtors in separate chapter 11 bankruptcy cases in the same court. MFGI is designated a 'joint broker-dealer' due to its involvement in both securities and commodities.
