CarVal Investors UK Limited, as manager of CVF Lux Master S.a.r.l., the as-signee of Doral Bank and Doral Financial Capital (collectively, “Doral”), the Hudson City Savings Bank (“Hudson”), and the Federal Deposit Insurance Corporation (“FDIC”), as receiver of Westernbank Puerto Rico (“Westernbank”), appeal from a June 25, 2013 Order of the Bankruptcy Court denying them “customer” status under the Securities Investor Protection Act of 1970, 15 U.S.C. § 78aaa et seq. (“SIPA”), with respect to their repurchase transactions with Lehman Brothers Inc. (“LBI”) prior to its bankruptcy. See In re Lehman Bros. Inc.,
BACKGROUND
The following description of the transactions at issue is taken from the Bankruptcy Decision.
A repurchase agreement is a financial transaction consisting of two steps. First, a seller (here, the Banks) delivers securities to a buyer (here, LBI) in exchange for a quantity of cash that is generally less than the value of the securities. This difference in value is referred to as the “haircut.” Second, the parties agree that the buyer (LBI) will return those securities to the seller (Banks) on a future “repurchase date,” in exchange for a cash payment from the seller (Banks) in the amount originally transferred, plus a financing charge, called a “repo rate.”
In September 1999, Hudson entered into two repurchase transactions with LBI for $100 million in securities. Sometime prior to that date, LBI had offered Hudson long-term structured repurchase agreements as a means to finance Hudson’s acquisition of a position in highly liquid mortgage-backed securities. In 1998,
All three Banks believed that they owned the securities transferred through the Agreements. Hudson entered into the repurchase agreements with the expectation that it owned the underlying securities and that they would be returned. West-embank considered the securities that it transferred to LBI as its own and treated them accordingly. Similarly, Doral held the securities transferred to LBI as assets on its balance sheets and recorded the matching obligations to repurchase these securities on their respective repurchase dates as corresponding liabilities.
The securities transferred to LBI per the Agreements (“Purchased Securities”), were never returned to the Banks by LBI. The Purchased Securities form the basis of the claims at issue.
Several aspects of the Agreements are particularly relevant to the principal dispute between the parties. The Agreements were governed by an industry-standard Master Repurchase Agreement (“MRA”), which sets forth the basic rights of the parties to the transaction. The MRA described the relationship between the Banks and LBI as a “business and contractual relationship” and stated that each party represents and warrants that “it will engage in such transactions as principal.”
The MRA protected both parties against changes in the value of the Purchased Securities by including a mark-to-market provision in all repurchase transactions. If the value of the Purchased Securities fell, to ensure that LBI was fully collater-alized, the Banks were required to deliver additional securities or cash to LBI to make up the shortfall. Conversely, if the value of the Purchased Securities rose, the Banks were entitled to demand additional cash or Purchased Securities to rebalance the transaction.
Additionally, the MRA provided that LBI was free to use the Purchased Securities for its own purposes until the repurchase date. LBI acquired full legal title over the securities, and — subject to its obligation to provide the securities on the repurchase date — it was free to sell, transfer, pledge, or hypothecate the Purchased Securities as it desired. The Banks, for their part, retained an economic interest in the Purchased Securities, including the rights to receive all coupon interest and redemption payments.
These Agreements were “bilateral” repurchase arrangements. In contrast to “safekeeping” or “hold-in-custody” repurchase agreements where the underlying securities are kept in an internal safekeeping account by a buyer or seller throughout the duration of the agreement, in a “bilateral” repurchase agreement a seller actually delivers securities to a buyer. Accordingly, when the bilateral Agreements were initiated, the Banks transferred full legal title of the Purchased Securities to LBI and gave LBI discretion to use those securities in other repurchase agreements, sales, transfers, pledges, or hypothecations until the repurchase date.
LBI did just that. It established separate accounts for each of the Banks with respect to the Purchased Securities, which would record transaction activities but would not, and did not, hold any of the Purchased Securities while the Agreements were open. Accounts of this type
Following the bankruptcy of LBI, the Banks submitted timely claims asserting that they were entitled to recover under SIPA as “customers” of LBI. The Trustee denied these claims, and the Banks filed a notice of objection. The parties provided an agreed-upon record to the Bankruptcy Court and submitted extensive briefing on the issue of whether the Banks were entitled to “customer” status under SIPA.
On June 25, 2013, the Bankruptcy Court affirmed the Trustee’s determination that the Agreements did not entitle the Banks to SIPA “customer” status. Relying in relevant part on the Second Circuit’s decision in In re Bernard L. Madoff Inv. Secs. LLC,
Hudson and Doral filed a notice of appeal of the Bankruptcy Decision on August 1. On August 12, Hudson and Doral moved to certify a direct appeal to the Second Circuit pursuant to 28 U.S.C. § 158(d)(2)(A). At the request of the parties, briefing on the merits was stayed pending a determination of the motion for certification. By Stipulation and Order of September 12, the FDIC indicated that it would neither oppose nor join the instant motion, but agreed that the Court’s decision regarding certification will apply equally to the FDIC. The Securities Investor Protection Corporation (“SIPC”) filed an opposition to the motion for certification on August 30.
By an Opinion of September 18, the motion for certification was denied (“September Opinion”). In re Lehman Bros. Inc., 13 Civ. 538KDLC) & 13 Civ. 5964(DLC),
The standard of review applicable to matters within core bankruptcy jurisdiction is governed by the Federal Rules of Bankruptcy Procedure. On appeal, the court “may affirm, modify, or reverse a bankruptcy judge’s judgment, order, or decree or remand with instructions for further proceedings.” Fed. R. Bankr.P. 8013.
“Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous.” Id.; see Solow v. Kalikow (In re Kalikow),
“In construing a statute, [courts] begin with the plain language, giving all undefined terms their ordinary meaning.” Fed. Housing Fin. Agency v. UBS Americas Inc.,
The issues the Banks raise on appeal center exclusively on the definition of “customer” under SIPA. In essence, the Banks challenge the Bankruptcy Decision’s interpretation of the “entrustment” requirement for customer claims under SIPA.
Congress enacted SIPA in 1970 to provide special protections in bankruptcy to a specific class of individuals who were harmed when a broker-dealer became insolvent:
Following a period of great expansion in the 1960’s, the securities industry experienced a business contraction that led to the failure or instability of a significant number of brokerage firms. Customers of failed firms found their cash and securities on deposit either dissipated or tied up in lengthy bankruptcy proceedings. In addition to its disastrous effects on customer assets and investor confidence, this situation also threatened a “domino effect” involving otherwise solvent brokers that had substantial open transactions with firms that failed. Congress enacted the SIPA to arrest this process, restore investor confidence in the capital markets, and upgrade the financial responsibility requirements for registered brokers and dealers.
Secs. Investor Prot. Corp. v. Barbour,
As of the Commencement Date, SIPA provided the following statutory definition of “Customer”:
any person (including any person with whom the debtor deals as principal or agent) who has
[1] a claim on account of securities received, acquired, or held by the debtor*352 in the ordinary course of its business as a broker or dealer
[2] from or for the securities accounts of such person
[3] for safekeeping, with a view to sale, to cover consummated sales, pursuant to purchases, as collateral security, or for purposes of effecting transfer.
The term ‘customer’ includes any person who has a claim against the debtor arising out of sales or conversions of such securities, and any person who has deposited cash with the debtor for the purpose of purchasing securities, but does not include—
(A) any person to the extent that the claim of such person arises out of transactions with a foreign subsidiary of a member of SIPC; or
(B) any person to the extent that such person has a claim for cash or securities which by contract, agreement, or understanding, or by operation of law, is part of the capital of the debtor, or is subordinated to the claims of any or all creditors of the debtor, notwithstanding that some ground exists for declaring such contract, agreement, or understanding void or voidable in a suit between the claimant and the debtor.
15 U.S.C. § 78lll(2) (2006) (emphasis added).
In Baroff, the seminal case regarding the SIPA definition of “customer,” the Second Circuit rejected a “literal” reading of the definition as failing “to accommodate the patent legislative purposes.”
In explaining this entrustment requirement, the Baroff court noted that Congress’s emphasis in enacting SIPA protections was “on the customer as investor and trader, not on others who might become creditors of the broker-dealer for independent reasons.”
Although Baroff did not state a definition for a “fiduciary relationship,” this Circuit has since described the relationship, as recognized at common law, as follows:
At the heart of the fiduciary relationship lies reliance, and de facto control and dominance. The relation exists when confidence is reposed on one side and there is resulting superiority and influence on the other. One acts in a “fiduciary capacity” when
the business which he transacts, or the money or property which he han-*353 dies, is not his own or for his own benefit, but for the benefit of another person, as to whom he stands in a relation implying and necessitating great confidence and trust on the one part and a high degree of good faith on the other part.
Black’s Law Dictionary 564 (5th ed. 1979).
A fiduciary relationship involves discretionary authority and dependency: One person depends on another — the fiduciary — to serve his interests. In relying on a fiduciary to act for his benefit, the beneficiary of the relation may entrust the fiduciary with custody over property of one sort or another. Because the fiduciary obtains access to this property to serve the ends of the fiduciary relationship, he becomes duty-bound not to appropriate the property for his own use.... These characteristics represent the measure of the paradigmatic fiduciary relationship.
United States v. Chestman,
A fiduciary relationship was found lacking in Baroff when the claimant conveyed securities to a broker-dealer but the securities “had nothing at all to do with conventional investment, trading or participation in the securities market,” “[t]here was no actual or likely use of the shares as collateral for margin purchases by [the claimant] of other securities,” “the proceeds [were not] used to facilitate securities trading by [the claimant],” “there was no reasonable expectation that the shares would be sold for [the claimant’s] account in the near future,” “the proceeds of the [transaction] were used ... by [the broker-dealer] without restriction in its day-to-day business,” and when the transaction “had no connection with [the claimant’s] trading activity in the securities market.” Baroff,
SIPA places the burden of proof to establish “customer” status on the claimant by requiring that a debtor’s obligations to its customers be “ascertainable from the books and records of the debtor” or “otherwise established to the satisfaction of the trustee.” 15 U.S.C. § 78fff — 2(b); see also In re Primeline Secs. Corp.,
The Banks do not qualify as “customers” under SIPA. The Banks have not met their burden of demonstrating the existence of a fiduciary relationship between the Banks and LBI. Fundamentally, the two-sided nature of the Agreements belies any inference of a fiduciary relationship. A fiduciary relationship between a customer and a broker-dealer ordinarily arises because the customer makes a transfer of cash or securities to the broker-dealer. With that transfer, the customer becomes vulnerable and will suffer a loss if the broker-dealer appropriates the money or becomes insolvent. The customer thus places trust and confidence in the broker-dealer to properly manage his cash or securities, giving rise to a fiduciary duty for the broker-dealer to act loyally for the customer’s benefit. See Chestman,
The transactions here were not, however, one-sided transfers. In the Agreements, the Banks conveyed the Purchased Securities in exchange for cash from LBI,
Further evidence in the record confirms this conclusion. The MRA describes the relationship between the Banks and LBI as “contractual” and disavows any fiduciary, principal-agent relationship. LBI’s use of DVP accounts, as opposed to custodial accounts, demonstrates that the Purchased Securities were not to be used for “conventional investment, trading or participation in the securities market.” Baroff,
The Agreements are akin to the secured loans that were denied “customer” status in Secs. Investor Prot. Corp. v. Exec. Secs. Corp.,
Appellants entered into secured loan agreements with Executive Securities Corporation, a broker-dealer, whereby they lent securities to Executive in return for cash collateral equal to the market value of the shares. Each party retained the right to “mark to market,” that is, on one day’s notice, appellants could demand additional cash if the market value of the shares had increased. Similarly, Executive could demand a return of cash collateral if the value of the securities declined.
Id. (emphasis added). Observing that “Appellants were secured creditors and retained a contractual right to demand additional cash collateral from Executive in the event the securities lent rose in value,” the Second Circuit concluded that these secured loan agreements did not “bear the indicia of the fiduciary relationship between a broker and his public customer” and denied “customer” status to the Appellants. Id. (citing Baroff). The Agreements have the same mark-to-market protection as the secured loans at issue in Exec. Secs. Corp. Like the appellants in Exec. Secs. Corp., the Banks are not SIPA customers.
The Banks make essentially three arguments, none of which is persuasive. In their first and principal argument, the Banks argue that Baroff held that entrustment exists when the claimant conveys the cash or securities to the broker-dealer for “some purpose connected with participation in the securities markets.” Baroff,
In making this argument, the Banks read the fiduciary relationship requirement out of entrustment. The argument fails on a number of accounts. First, an entrustment requires a fiduciary relationship. See Chestman,
Furthermore, in making this argument, the Banks ignore the full context of the words in Baroff on which they rely. According to Baroff, Congress intended for SIPA to protect the “public customer who has entrusted securities to a broker for some purpose connected with participation in the securities markets.”
Additionally, adoption of the Banks’ position would contravene Congress’s intent in enacting SIPA. Claimants may enter into many different kinds of transactions that are motivated by the desire to participate in the securities market. Permitting all such claimants to qualify for “customer” protection under SIPA would undermine Congress’s purpose that SIPA protect customers “as investor and trader, not ... others who might become creditors of the broker-dealer for independent reasons.” Baroff,
Finally, it bears repeating that the facts cited by the Banks do not suggest a fiduciary relationship with LBI. The Banks emphasize certain rights they had with respect to the securities, such as the right to demand return of the securities at any time and the right to demand return of the exact same securities. But these are contractual rights, which do not create a fiduciary relationship. See Restatement (Third) Of Agency § 1.01 cmt. g (“In any relationship created by contract, the parties contemplate a benefit to be realized through the other party’s performance. Performing a duty created by contract may well benefit the other party but the performance is that of an agent only if the elements of agency are present.”). Thus, the Banks have failed to establish the indi-cia of a fiduciary relationship necessary to prove entrustment and thereby to acquire “customer” status under SIPA.
In making their second principal argument, the Banks rely on Bevill Bresler, in which claimants who had entered repurchase agreements with the bankrupt entity were deemed “customers” under SIPA. Bevill Bresler, however, concerned the short-term repurchase agreement market, which “performs several vital roles in the nation’s economy.”
Bevill Bresler is not helpful to the Banks. Unlike the short-term repurchase agreements at issue in that case, the Agreements here were long-term repurchase agreements, spanning at least five years and with terms as long as fifteen years. Moreover, LBI’s involvement in
Finally, the Banks argue that the Bankruptcy Court erred by misconstruing congressional intent. The Banks argue that, because Congress amended SIPA in 1978 to exclude securities lending but failed to exclude repurchase agreements, it should be presumed that Congress did not intend any exclusions beyond that of securities lending. The Banks further argue that, because the House of Representatives version of the recent Dodd-Frank Act amended the SIPA “customer” definition to exclude repurchase agreements, but the final version of the Act made no such amendment, it should be presumed that Congress considered and rejected the exclusion of repurchase agreements from SIPA’s “customer” definition.
These arguments fail under basic principles of statutory interpretation. The Banks’ argument of negative implication regarding the 1978 amendments relies on the interpretive canon, expressio unius est exclusio alterius, i.e., “expressing one item of an associated group or series excludes another left unmentioned.” Chevron U.S.A. Inc. v. Echazabal,
The Banks’ argument regarding the Dodd-Frank Act fails for a different reason. It is undisputed that the version of SIPA prior to the passage of the Dodd-Frank Act is applicable to this case. By invoking the legislative history of the Dodd-Frank Act, the Banks seeks to rely on post-enactment legislative history. It is well established, however, that “[p]ost-en-actment legislative history (a contradiction in terms) is not a legitimate tool of statutory interpretation.” Bruesewitz v. Wyeth LLC, — U.S.-,
CONCLUSION
The Bankruptcy Decision of June 25, 2013 is affirmed.
SO ORDERED.
Notes
. Although the Banks object to the Bankruptcy Court's failure to augment the record regarding an issue related to hypothecation, they make no other objection to the Bankruptcy Decision's description of the factual background to this dispute. This Opinion does not reach the hypothecation issue. Thus, for purposes of this Opinion, the facts set forth in the Bankruptcy Decision are undisputed and not objected to in this appeal.
. While the Banks often refer to the Agreements as “reverse” repurchase agreements, the only difference between a regular and reverse repurchase agreement is one of perspective: a transaction is a repurchase agreement when viewed from the seller’s side, and a reverse repurchase agreement when viewed from the buyer’s side.
. SIPC is deemed to be a party in interest in all matters arising under a SIPA litigation proceeding, and has "the right to be heard on all such matters.” 15 U.S.C. § 78eee(d).
. The scope of the fiduciary duty varies with the nature the broker-dealer relationship. There is a general fiduciary duty in discretionary brokerage accounts, see United States v. Skelly,
. The Banks attempt to distinguish Baroff as turning solely on the absence of investment intent, which they assert exists here. The absence of investment intent was just one of the many indicia on which Baroff relied as demonstrating the absence of a fiduciary relationship. Even if investment intent existed here, such intent is insufficient on its own to conclude that a fiduciary relationship exists.
. The weight of authority in this Circuit supports the conclusion that repurchase agreements are more akin to secured loans. See, e.g., Capital Management Select Fund Ltd. v. Bennett,
. The Banks attempt to distinguish Exec. Secs. Corp. as turning solely on the absence of trading accounts. While the absence of trading accounts was mentioned in Exec. Secs. Corp., the clear thrust of the decision was the Court of Appeals’ determination that the holder of a secured loan is a creditor, not a fiduciary.
. Having affirmed the Bankruptcy Decision on the dispositive issue that the Banks fail to meet the entrustment requirement for "customer” status under SIPA, the remaining issues raised by the patties on appeal — which are extensive — need not be resolved.