791 F.3d 277
2d Cir.2015Background
- Doral Bank (and successor CarVal) entered into six bilateral repurchase agreements (repos) with Lehman Brothers Inc., where Doral sold securities to Lehman with a contractual right to repurchase later; MRAs gave Lehman legal title and freedom to sell/hypothecate the securities.
- The repos were marked-to-market and provided Doral economic rights (to income, gains/losses via margining) but Lehman retained title and discretion over the securities until repurchase.
- Lehman entered SIPA liquidation in September 2008 before repurchases occurred; Doral (then CarVal by assignment) filed SIPA customer claims seeking profit from appreciated securities.
- The SIPA Trustee denied customer status; the bankruptcy court and district court affirmed, finding no entrustment; CarVal appealed to the Second Circuit.
- The controlling legal question: whether a repo seller who delivers securities to a broker-dealer has “entrusted” them such that it qualifies as a SIPA “customer.”
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Doral was a SIPA “customer” because it delivered securities in repos | Repos involve delivery for market participation; Doral retained economic interest and expected repurchase, so delivery equals entrustment | Repos were arm’s-length sales; Lehman acquired legal title and acted for its own benefit, so no entrustment | No — Doral was not a SIPA customer because it did not entrust assets to Lehman |
| Whether economic interests/contractual rights amount to practical ownership/entrustment | Doral’s continuing economic exposure and receipt of income show practical ownership and a fiduciary-like relationship | Economic interests arose from contractual terms only and did not constrain Lehman’s discretion to act for Doral | No — economic interests alone do not create the fiduciary indicia of entrustment |
| Whether Bevill, Bresler requires a different result (repo counterparties are customers) | Bevill, Bresler supports treating repo counterparties as customers under SIPA | Bevill conflicts with Second Circuit entrustment precedents and fails to show fiduciary indicia | Bevill is inconsistent with Baroff and not followed here |
| Whether subsequent Congressional action (or inaction) shows repos are covered by SIPA | Congress did not exclude repos from SIPA and later considered but omitted explicit carve-outs, implying repos are covered | Legislative history does not show Congress considered repos in 1978; post-filing statutes (Dodd-Frank) cannot change status as of filing date | No persuasive legislative signal; statutory amendments do not alter customer status as of Lehman’s filing |
Key Cases Cited
- SEC v. F.O. Baroff Co., 497 F.2d 280 (2d Cir. 1974) (establishes entrustment/fiduciary indicia requirement for SIPA customer)
- Sec. Investor Prot. Corp. v. Barbour, 421 U.S. 412 (U.S. 1975) (context for SIPA’s enactment and purpose)
- In re New Times Sec. Servs., Inc., 463 F.3d 125 (2d Cir. 2006) (customer status determined transaction-by-transaction)
- In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229 (2d Cir. 2011) (reaffirms entrustment as critical to customer definition)
- In re ESM Gov’t Sec., Inc., 812 F.2d 1374 (11th Cir. 1987) (holding that repos lack fiduciary indicia and denying customer status)
- SEC v. Drysdale Sec. Corp., 785 F.2d 38 (2d Cir. 1986) (treats repo as imposing contractual forward obligation rather than conveyance of fiduciary custody)