This case presents the challenging task of fitting a decades-old statute to a financial arrangement of more recent vintage. Enacted in 1970, the Securities Investor Protection Act (“SIPA”) seeks to protect investors who have entrusted their assets to a broker-dealer. If the broker-dealer runs into financial trouble, SIPA authorizes the speedy return of investors’ property and ensures that investors will be made whole if the assets are lost. In this case, we must consider how SIPA treats an investor who delivered securities to a broker-dealer as part of a now-common financial transaction known as a repurchase agreement. We conclude that an investor who delivers securities to a broker-dealer as part of a repurchase agreement is not protected by SIPA because the investor did not entrust assets to the broker-dealer.
BACKGROUND
A repurchase agreement—commonly known as a “repo”—involves a matched purchase and sale. First, the “seller” agrees to sell assets, usually securities, to the “buyer” for a fixed price.
Viewed from the seller’s perspective, re-pos offer a mechanism for converting idle securities into liquid cash for a limited period. The seller can then employ that cash for investments or other purposes, before returning the cash to the buyer in exchange for the securities at the conclusion of the repo. Viewed from the buyer’s perspective, repos provide an outlet for excess cash, and for the temporary acquisition of attractive securities. Moreover, because the resale price is higher than the original sale price, the buyer retains the difference—known as the “repo rate”—as a fee for the transaction. When viewed from a buyer’s perspective, the transaction is called a “reverse repo.”
Between January 2000 and May 2001, Doral Bank and Doral Financial Corporation (collectively, “Doral”) entered into six repurchase agreements, with Doral as the seller, and Lehman Brothers Inc. (“Lehman”) as the buyer.
Under these agreements, Doral sold several hundred million dollars’ worth of securities to Lehman, with the expectation that Lehman would resell the securities back to Doral at the conclusion of the transactions. Unfortunately for Doral, the financial crisis struck while the repurchase agreements were still outstanding, and Lehman fell apart before Doral could repurchase the securities from Lehman. Although Doral still had the cash that Lehman paid for the securities, those securities had apparently appreciated in the meantime such that Doral stood to profit if it had repurchased the securities at the agreed-upon price.
After Lehman entered into SIPA liquidation on September 19, 2008, Doral submitted timely claims asserting that it was entitled to recover this profit. The SIPA Trustee denied these claims, concluding that Doral was not a “customer” of Lehman, and therefore was not protected by SIPA. Doral promptly objected to the Trustee’s denial, but shortly thereafter transferred its claims to CVF Lux Master S.a.r.l. pursuant to Federal Rule of Bankruptcy Procedure 3001. CVF Lux Master S.a.r.l. is managed by CarVal Investors UK Limited (“CarVal”), the appellant in this case.
On June 25, 2013, the bankruptcy court (Peck, Bk. J.) affirmed the Trustee’s determination that the repos did not make Doral or CarVal a customer under SIPA. In re Lehman Bros. Inc.,
DISCUSSION
This appeal turns on a single issue: was Doral a “customer” of Lehman for purposes of SIPA? If Doral was a customer of Lehman, then under SIPA the appellant is entitled to the prompt return of any property that Lehman was holding on Dorals behalf—i.e., the securities that Lehman never resold to Doral as required by the repurchase agreements, less the contractual repurchase price. Conversely, if Doral was not a customer of Lehman, then the SIPA door is closed, and the appellant is relegated to pursuing a claim for those unreturned securities in the ordinary course of Lehman’s bankruptcy proceedings. We begin our analysis of this question by first reviewing the principles articulated by our SIPA caselaw. We then turn to how these principles treat repurchase agreements. We conclude by addressing (1) the appellant’s reliance on Matter of Bevill, Bresler & Schulman Asset Mgmt. Corp. (Cohen v. Army Moral Support Fund),
Congress enacted SIPA in 1970 in response to “a business contraction [in the securities industry] that led to the failure or instability of a significant number of brokerage firms.” Sec. Investor Prot. Corp. v. Barbour,
SIPA was designed “to arrest this process, restore investor confidence in the capital markets, and upgrade the financial responsibility requirements for registered brokers and dealers.” Id. To accomplish these goals, SIPA created special procedures for the liquidation of failed broker-dealers. SIPA trustees administer what is in effect a “bankruptcy within a bankruptcy” for investors who had property on account with the broker-dealer. See 15 U.S.C. § 78fff-2. The trustee amasses “customer property” and “[e]ach customer shares ratably in this fund of assets to the extent of the customer’s net equity at the time of filing.” In re New Times Sec. Servs., Inc.,
But a claimant only gets these special protections if it is a “customer” of the broker-dealer. SIPA defines a customer as:
any person (including any person with whom the debtor deals as principal or agent) who has a claim on account of securities received, acquired, or held by the debtor,in the ordinary course of its business as a broker or dealer from or for the securities accounts of such person for safekeeping, with a view to sale, to cover consummated sales, pursuant to purchases, as collateral, security, or for purposes of effecting transfer.
15 U.S.C. § 78lll(2)(A). Whether a claimant qualifies as a customer is determined
Beginning with SEC v. F.O. Baroff Co. we have consistently emphasized that to be a customer under this definition, an investor must have “entrusted” property to the broker-dealer.
On appeal, we explained that the claimant was not a customer because he never entrusted assets to the broker-dealer. “Both the legislative history of [the definition of ‘customer’] and its use since enactment have stressed protection to, and equality of treatment of, the public customer who has entrusted securities to a broker for some purpose connected with participation in the securities markets.” Id. at 283. The claimant in Banff, by contrast, had lent the securities to the broker-dealer to bolster the broker-dealer’s financial situation, rather than to trade on the claimant’s own account. Because the securities had not been handed over for the broker-dealer to use for business on the claimant’s behalf, the loan lacked “the indicia of the fiduciary relationship between a broker and his public customer.” Id. at 284. As such, the claimant was a creditor — in “the situation of a commercial bank, trade creditor, landlord, equipment lessor, or any other party who relies on the ability of a business enterprise to repay a business loan” — rather than a customer of the broker-dealer. Id.
In the decades since Banff, our cases have consistently hewed to this entrustment requirement for protection under SIPA. See, e.g., In re New Times,
II. Entrustment
Recognizing that it must satisfy this entrustment requirement, the appellant contends that repurchase agreements necessarily involve entrustment. The appellant attempts to characterize our en-
But mere delivery is not entrustment. Entrustment, as contemplated by Baroff, must bear “the indicia of the fiduciary relationship between a broker and his public customer.”
Under this framework, Doral did not entrust anything to Lehman. Instead, it sold the securities to Lehman, which acquired full legal title. See J.A. 479 ¶ 8 (paragraph of the MRAs providing that “[a]ll of Seller’s interest in the Purchased Securities shall pass to Buyer on the Purchase Date and, unless otherwise agreed by Buyer and Seller, nothing in this Agreement shall preclude Buyer from engaging in repurchase transactions with the Purchased Securities or otherwise selling, transferring, pledging or hypothecating the Purchased Securities”). At most, Doral retained a contractual right to repurchase the securities at the conclusion of the repos. Cf. SEC v. Drysdale Sec. Corp.,
In the meantime, however, Lehman owned the securities, and could do what it wanted with them. As the district court correctly found, Doral’s repos share many, if not most, of the characteristics that Ba-roff focused on in finding that the claimant there did not entrust securities to his broker-dealer:
[Lehman] did not sell the Purchased Securities to facilitate further securities trading on behalf of [Doral] or use the Purchased Securities to make margin purchases of further securities on behalf of [Doral], [Doral] had no reasonable expectation that [Lehman] would sell or use the Purchased Securities in the near future for these purposes on behalf of [Doral].... [Lehman] had acquired title to the Purchased Securities through the Agreements and, as was its right, used the Purchased Securities as collateral or for other repurchase agreements.
In re Lehman Bros. Inc.,
In short, Lehman and Doral were arms-length contractual counterparties, and each entered into the repos for its own benefit. Because Lehman was acting for its own interests, it had no obligation to use the securities on Doral’s behalf, and its relationship with Doral thus bore none of “the indicia of the fiduciary relationship between a broker and his public customer.” Baroff,
This conclusion aligns us with the Eleventh Circuit, the only other circuit to expressly consider whether repurchase agreements involve entrustment. In re ESM Gov’t Sec., Inc.,
The Eleventh Circuit denied the claimant customer status. Citing Barojf, the ESM court explained that “it is the act of entrusting the cash to the debtor for the purpose of effecting securities transactions that triggers the customer status provisions.” Id. at 1376 (alterations. omitted). Accordingly, a customer’s claim must “bear the indicia of [a] fiduciary relationship” rather than “an ordinary debtor-creditor relationship.” Id. (internal quotation marks omitted). The Eleventh Circuit concluded that the repurchase agreements in that case had no indicia of a fiduciary relationship. The failed broker-dealer “was not holding cash that rightfully belonged to” the claimant. Id. The claimant had the right to resell the securities to the broker-dealer for the cash at a later date; until then, “the cash belonged to [the broker-dealer,] not [the claimant].” Id. at 1377. As such, the claimant had no fiduciary relationship with the broker-dealer, and there was thus no entrustment.
The Eleventh Circuit’s analysis applies with equal force to Doral’s repos here. As explained above, Lehman was “not holding [securities] that rightfully belonged to” Doral. Instead, Lehman owned the securities, subject only to its contractual obli
The appellant tries to evade this conclusion by invoking Lehman’s supposed general fiduciary duty to consummate the repurchase agreement. But, here, the repurchase agreements imposed, at most, a contractual obligation on Lehman to resell the underlying securities back to Doral at the conclusion of the repo. Notably, the appellant does not does not cite a single ease holding that a repo counter-party breached a fiduciary duty by failing to resell (or repurchase) securities at the conclusion of a repo. Moreover, even assuming that such a duty existed, it would not be the type of fiduciary relationship described by Baroff, in which a broker-dealer holds assets on a customer’s behalf.
More generally, the appellant argues that the securities were entrusted because Doral retained a continuing economic interest in the securities even after they were sold to Lehman. The appellant cites several features of the repo transactions to show that Doral had an economic interest in the securities. First, of course, was Doral’s expectation that it could repurchase the securities at the conclusion of the repos. According to the appellant, the repurchase agreements were, from Doral’s perspective, less a sale of the securities than a temporary parting with assets that remained, fundamentally, its property. Second, Doral’s books accounted for the securities as if it still owned them; conversely, Lehman’s books did not treat the securities as property of Lehman. See J.A. 2128-29, 2757928. Third, because Doral expected to pay a fixed contract price for the securities when it repurchased them at the end of the repo, Doral, not Lehman, bore the market risk associated with the securities: if the securities rose or fell in value over the course of the repo, Doral would reap the gain or suffer the loss, while Lehman stood to clear the same repo rate no matter what happened to the underlying securities. See id. at 3704 ¶ 7; cf. United States v. Manko,
For all these reasons, the . appellant contends that Doral retained a significant economic interest in the securities, even though the securities were formally owned by Lehman, and thus that Lehman must have had some obligation to act on Doral’s behalf in advancing that interest. In its strongest form, the appellant appears to argue that Doral’s continued interest in the securities amounted to “practical ownership” of the securities by Doral, even in the face of Lehman’s legal title. On this view, because Lehman possessed something that “belonged” to Doral, Doral must have entrusted the securities to Lehman.
But in this case, the fact that' Doral retained economic interests in the securities does not persuade us that Doral entrusted the securities to Lehman. To constitute entrustment, Doral’s economic interests must somehow constrain Lehman to use the securities on Doral’s behalf, so as to reflect “the indicia of [a] fiduciary relationship between a broker
In sum, we hold that Lehman’s unrestricted ownership of the securities defeats any suggestion that Doral entrusted the securities to Lehman when it entered into the repos. And because Doral did not entrust securities to Lehman, we further conclude that the appellant is not a customer for purposes of SIPA.
C. In re Bevill, Bresler & Schulman Asset Mgmt. Corp.
The appellant relies heavily on the District of New Jersey’s 1986 Bevill, Bresler decision, which held that certain repo participants were customers for purposes of SIPA.
Bevill, Bresler arose out of the massive SIPA liquidation of the New Jersey broker-dealer Bevill, Bresler, & Schulman (“BBS”) in 1985. BBS entered into -numerous repo and reverse repo transactions involving government and agency securi
The Bevill, Bresler district court found that the repo counterparties qualified as customers. The court began its analysis by concluding that repo counterparties fell within the facial definition of customer set forth in 15 U.S.C. § 78111(2). The district court then acknowledged, citing Baroff, that “[i]t may not be enough, however, merely to satisfy the literal requirements of the SIPA ‘customer’ definition.” Bevill, Bresler,
Bevill, Bresler’s analysis, however, conflicts with our holding in Baroff. At bottom, Bevill, Bresler never explains how repo participants satisfy Baroff s requirement that a customer must have “entrusted securities to a broker for some purpose connected with participation in the securities markets.” Baroff,
And while Bevill, Bresler strives to distinguish repo participants from the claimant in Baroff, this effort is unsuccessful. Bevill, Bresler reasons that “[u]nlike the stock lender in Baroff, the repo and reverse repo participants in the BBS, Inc. test cases were not contributing ‘to the capital of the broker-dealer.’ ”
In short, although Bevill, Bresler acknowledges Baroff and our other entrustment precedents, the decision does not actually demonstrate how repo parties entrust assets to failed broker-dealers. Accordingly, we find Bevill, Bresler to be
D. Subsequent Legislative Activity
Finally, the appellant moves beyond en-trustment, contending that Congress has settled the question of how repos should be treated under SIPA. First, the appellant argues that by not specifically excluding repo participants from the customer definition, Congress implicitly confirmed that repos fall within the protection of SIPA. Congress specifically amended SIPA in 1978 to exclude certain types of securities lending, but never passed a similar exclusion for repos. See Securities Investor Protection Act Amendments of 1978, Pub.L. No. 95-283, § 15. Invoking the well-known canon of expressio unius est exclusio atterius — “the express mention of one excludes the other” — the appellant reasons that Congress must have intended not to exclude repos from SIPA.
This argument fails for exactly the reason stated by the district court: Doral has “failed to identify any basis to conclude that, in 1978, Congress was considering repurchase agreements, or that securities lending and repurchase agreements necessarily go hand in hand.” In re Lehman Bros. Inc.,
The appellant next argues that when Congress enacted the Dodd-Frank financial reform bill, it considered expressly excluding repos from customer protection under SIPA, but ultimately decided against enacting an express exclusion. The appellant cites a version of Dodd-Frank that was passed by the House, and which specifically excluded repos from SIPA. See H.R. 4173, 111th Cong. § 7509(b)(1) (as passed by the House, Dec. 11, 2009) (“The term ‘customer’ does not include ... (iii) any person to the extent such person has a claim relating to any open repurchase or open reverse repurchase agreement”). The final, enacted versión of Dodd-Frank did not include this provision, and instead expressly endorsed the preexisting SIPA definition. See Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub.L. No. 111-203, § 201(a)(10) (2010) (“The term[] ‘customer,’ ... in the context of a covered broker or dealer, [has] the same meaning[ ] as in section 16 of the Securities Investor Protection Act of 1970 (15 U.S.C. 78111).”). Again, the appellant reasons by negative implication that the failure to enact the express exclusion presented in the earlier version of the bill demonstrates Congress’s intent to protect repos under SIPA.
Finally, the appellant points out that Dodd-Frank specifically excluded repos from the -definition of customer in the portion of the Bankruptcy Code that governs the liquidation of stockbrokers. See 15 U.S.C. § 78c-5(g).
CONCLUSION
For the foregoing reasons, we conclude that the lower courts correctly determined that the appellant is not a customer for purposes of SIPA. Accordingly, we AFFIRM the decisions below.
Notes
. In the species of repo at issue in this case— known as a ‘‘bilateral” repo—the seller delivers the assets to the buyer. "Hold-in-custody” repos, by contrast, provide for the seller to maintain custody of the assets in a segregated account, even after selling the assets to the buyer.
. Again, when viewed from Lehman's perspective, these transactions were ‘‘reverse re-pos.”
. In addition to its principal arguments, the appellant also asserts in a page and a half that the bankruptcy court committed "reversible error” by declining to accept into evidence a
. In ESM, the broker was not liquidated under SIPA, but rather under Subchapter III, Chapter 7 of the Bankruptcy Code, which sets forth special provisions for the liquidation of stockbrokers.
. In fact, one reason that the repo contract awarded title to Lehman was to guard against the eventuality that Doral would breach the repos. In the event of such a breach, Lehman could retain ownership of the securities and thereby minimize its losses. See J.A. 461 ¶ 11(d)(i) (providing that, in the event of default by Doral, Lehman could either sell the underlying securities on the open market or retain the securities).
. Oar holding is limited to situation where, as here, the claimant delivered cash or assets to a broker-dealer as part of a repo. We need not, and do not, decide how SIPA would treat assets retained by a repo participant as part of a hold-in-custody repo.
. The appellant challenges this conclusion, invoking the presumption that Congress is aware of the existing law against which it legislates. See, e.g., Miles v. Apex Marine Corp.;
. We note that the appellant slightly misstates the effect of this provision of Dodd-Frank. Dodd-Frank did not directly amend the Bankruptcy. Code's definition of customer. Instead, Dodd-Frank appears to have tacked on a supplemental definition that incorporates and expands upon the Bankruptcy Code’s definition of customer, but which only applies in the very specific context of how certain swap transactions are governed under the Securities and Exchange Act. See 15 U.S.C. § 78c-5 (section located in Securities and Exchange Act and entitled “Segregation of assets held as collateral in security-based swap transactions”).