506 B.R. 346
S.D.N.Y.2014Background
- Banks seek SIPA customer protection for long-term repurchase agreements with Lehman Brothers Inc.; LBI failed, and Purchased Securities were not held by LBI on the Commencement Date.
- Agreements were bilateral repurchase arrangements under an MRA, with LBI taking title toPurchased Securities and using them in its own business; Banks retained an economic interest and coupon rights.
- LBI maintained DVP accounts rather than custodial accounts, so Purchased Securities were not in LBI’s possession on Commencement Date.
- Court denied Banks’ SIPA customer status, applying entrustment doctrine from Baroff and Madoff to conclude no fiduciary relationship existed.
- Banks relied on Bevill Bresler’s short-term context and argued broader entrustment; court distinguished facts as long-term and not fiduciary.
- Court affirmed Bankruptcy Decision, holding Banks failed to prove entrustment and thus are not SIPA customers
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Banks are SIPA customers given entrustment requirements | Banks argue entrustment exists under Baroff for market participation | LBI-broker relationship not fiduciary; no entrustment | No; Banks fail entrustment requirement under Baroff and Madoff |
| Whether the bilateral nature of the Agreements negates fiduciary status | Two-sided transfer supports fiduciary duties | Contractual debtor–creditor relationship; no fiduciary duty | No; bilateral structure negates fiduciary status under SIPA |
| Impact of Bevill Bresler on entrustment analysis | Bevill Bresler shows fiduciary relation in repurchase context | Bevill Bresler involves short-term, not applicable here | Distinguished; Bevill Bresler not controlling for long-term, non-investment accounts |
| Effect of post-1978 SIPA amendments and Dodd-Frank history on interpretation | Congress intended exclusions beyond securities lending | Negative implication and post-enactment history not valid for this issue | Rejected; no basis to infer broader exclusions or rely on post-enactment history |
| Whether the pre-Dodd-Frank SIPA definition governs in this case | Pre-Dodd-Frank text applies | Dodd-Frank history not available; cannot construe. | Pre-Dodd-Frank governs; decision affirmed |
Key Cases Cited
- Baroff Co. v. Sec. Investor Prot. Corp., 497 F.2d 280 (2d Cir. 1974) (entrustment required for SIPA customer status; fiduciary relationship central)
- In re Lehman Bros. Inc., 492 B.R. 379 (S.D.N.Y. 2013) (Bankruptcy decision discussed entrustment under SIPA)
- In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229 (2d Cir. 2011) (entrustment requirement central to SIPA customer status)
- Exec. Secs. Corp., 556 F.2d 98 (2d Cir. 1977) (secured loan did not bear fiduciary relationship; no SIPA customer status)
- New Times Sec. Servs., Inc., 463 F.3d 125 (2d Cir. 2006) (Baroff and entrustment guidance; focus on trustee-customer relationship)
- Baroff, SEC v. Baroff Co., 497 F.2d 280 (2d Cir. 1974) (establishes entrustment concept for SIPA; public customer protection)
- Secs. Investor Prot. Corp. v. Morgan, Kennedy & Co., Inc., 533 F.2d 1314 (2d Cir. 1976) (illustrates fiduciary relationship considerations)