In Re: Lloyd Securities, Inc.

Opinions of the United
1996 Decisions States Court of Appeals
for the Third Circuit

2-6-1996

In Re: Lloyd Securities, Inc.
Precedential or Non-Precedential:

Docket 95-1543

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Recommended Citation
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 UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 95-1543

IN RE: LLOYD SECURITIES, INC.,
Debtor

ARTHUR ALPERSTEIN, GLORIA BENTZ, GLORIANNE BENTZ,
HERMAN BERKOWITZ, LORRAINE BERKOWITZ, JAMES DEAMER,
EMPIRICAL ENTERPRISES, INC., KENNETH FELZER, RUTH HOFFMAN,
LLOYD HUMPHREY, RICHARD KATZ, LINDA KATZ, HARRIET KIRSCH,
JOHN KOCHERSPERGER, ALICE McCABE, JOSEPH McGUCKIN,
PHYLLIS NEWCOMER, TIMOTHY NYLAND, JAMES NYLAND,
VERNETTA NYLAND, LARRY ROTHSTEIN, FAYE ROTHSTEIN,
DWAYNE SIMPSON, KATHRYN SIMPSON, ALAN SMITH,
ESTATE OF RUSSELL SNYDER, MICHAEL SOROKER,
BARBARA SOROKER, and BAZELON & LESS, *
Appellants

* (Amended as per the Clerk's 7/18/95 Order)

ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
(D.C. Civil Action Nos. 94-01391 and 94-01416)

Argued September 13, 1995

Before: MANSMANN, SCIRICA and NYGAARD, Circuit Judges

(Opinion Filed February 6, 1996)

RICHARD L. BAZELON, ESQUIRE (Argued)
PAUL B. BECH, ESQUIRE
Bazelon & Less
1515 Market Street, 7th Floor
Philadelphia, PA 19102
Attorneys for Appellants

STEPHEN P. HARBECK, ESQUIRE (Argued)
KEVIN H. BELL, ESQUIRE
Securities Investor Protection Corporation
805 15th Street, N.W., Suite 800
Washington, DC 20005

1
Attorney for Appellee Securities Investor

WARREN T. PRATT, ESQUIRE (Argued)
DAVID A. SEARLES, ESQUIRE
Drinker, Biddle & Reath
1345 Chestnut Street
Philadelphia National Bank Building
Philadelphia, PA 19107-3496
Attorney for Appellee Shields

OPINION OF THE COURT

NYGAARD, Circuit Judge.
The customers of a failed securities dealer, Lloyd

Securities, Inc., and their attorneys sought fees from the res

created by the dealer's liquidation under the Securities Investor

Protection Act ("SIPA"). The district court denied the motion

and the customers and attorneys appeal. We will affirm.

I.

The facts of this case are well-stated in the opinions

of the district and bankruptcy courts. See In re Lloyd

Securities, Inc., 183 B.R. 386 (E.D. Pa. 1995); In re Lloyd
Securities, Inc., 163 B.R. 242 (Bankr. E.D. Pa. 1994). We will

assume the reader is familiar with those opinions and present

only a summary.

A.

The Securities and Exchange Commission sued Lloyd

Securities and several related entities. The SEC alleged that

Lloyd and its principals engaged in a scheme to defraud investors

2
in violation of the securities laws. The court granted the

requested relief and appointed a receiver. Shortly thereafter,

customers of Lloyd Securities brought a class action against

Lloyd Securities, its principals and other parties that had

participated in the customers' securities transactions. This

came to be known as the Deamer case.

The Securities Investor Protection Corporation ("SIPC")

filed an application in the SEC action for a protective decree,

turning the receivership into a liquidation. The liquidation

proceeding was then referred to the bankruptcy court. The

customers assert as a basis for their recovery that they were

instrumental in causing the SIPC to seek the liquidation of Lloyd

Securities, although this is disputed.

The trustee filed a number of chapter 11 cases on

behalf of Lloyd's principals and entities related to Lloyd

Securities. These cases were all administered jointly and were

known as the IBEX cases. The customers then moved to have the

IBEX cases administered jointly with the SIPA liquidation itself

in order to save administrative costs. Although the trustee and

the SIPC opposed the motion, the bankruptcy court indicated its

intention to grant it and the cases were ultimately administered

together.

The trustee instructed Lloyd's customers to submit

their net equity claims by April 1991; yet, by May 1992 payment

had been made on only five of them, leaving approximately 85

outstanding. This led the customers to file a motion to compel

the trustee to rule on their claims. The district court never

3
actually decided this motion, but by September 1992, the trustee

had ruled on most of the claims.

The trustee also filed adversary proceedings against

Newbridge Securities, Inc. and several banks. In response to

those defendants' allegations that the trustee lacked standing to

bring the claims, the customers intervened and participated

actively in that litigation, which ultimately settled in the

plaintiffs' favor.

B.

Because of their direct involvement in the above

litigation, the customers submitted to the bankruptcy court

applications for compensation under SIPA, specifically 15 U.S.C.

§ 78eee(b)(5). The first of these applications sought

approximately $22,000 for services rendered in connection with

the motion to administer the IBEX cases and the SIPA liquidation

jointly. The other requested almost $260,000 for all other

services they rendered in actually litigating both proceedings.

The SIPC opposed both applications.

The bankruptcy court held that, while compensation was

governed generally by SIPA § 78eee(b)(5)(C), Congress intended

the specific standards of the Bankruptcy Code as a substantive

overlay to SIPA. Accordingly, the court ruled that "the

standards established under the Code for compensation

applications, if not all of the Code's specific restrictions,

should be liberally borrowed in interpretation of [§

78eee(b)](5)(C) as well." 163 B.R. at 252.

4
 Nevertheless, the bankruptcy court rejected SIPC's

contention that the customers' remedy was limited to

§503(b)(3)(D) of the Code. Although that section would appear to

contemplate a compensation claim on behalf of customer-creditors,

the court noted that it specifically does not apply to a chapter

7 proceeding, which is precisely how a SIPA liquidation is

conducted. See 15 U.S.C. § 78fff(b). SIPC's argument would thus

preclude recovery of compensation for customers in all SIPA

cases, a result the bankruptcy court thought that Congress could

not have intended without explicit statutory language to that

effect. See 163 B.R. at 252-53.

Even so, the bankruptcy court concluded that, while

§503(b)(3)(D)'s exclusion of chapter 7 proceedings could not be

applied literally, its substantive standards for recovery should

be applied in a case arising under SIPA. Id. at 254. Looking to

the caselaw interpreting that section, it held that recovery was

possible only if the applicants' services were not duplicative

and benefitted the estate itself.

The court also imported the standard of 11 U.S.C.

§506(c) as a criterion for determining the customers' eligibility

for compensation, even though that section was not literally

applicable by its terms, either. Applying the caselaw

interpreting § 506(c), the court concluded that recovery was

possible if the applicant proved that its efforts benefitted the

SIPC (the "objective test"), or if the SIPC consented to the

performance of the services (the "subjective test"). 163 B.R. at

255.

5
 Applying these standards, the bankruptcy court held

that the customers would be awarded fees only on that portion of

their application dealing with the motion to jointly administer

the IBEX and SIPA proceedings. It rejected, on both legal and

factual grounds, the contention that the customers were

responsible for initiating the SIPA liquidation proceeding. Id.

at 255-56. It also held that the customers' intervention in the

Newbridge proceeding and their filing of the Deamer action

duplicated the trustee's efforts and were undertaken solely to

benefit themselves, not the estate. Id. at 257. And because the

customers' actions were both unsolicited and duplicated other

efforts, the bankruptcy court concluded that they met neither the

objective nor subjective standard of § 506(c). Id.

On the other hand, the court believed that the joint

administration of the IBEX and SIPA proceedings saved the SIPC

money. Thus, even though no general creditors of Lloyd

Securities benefitted, making the customers' efforts ineligible

for compensation under § 503(b)(3)(D), the bankruptcy court held

that compensation was proper under the standard of § 506(c). Id.

at 258.

Finally, the bankruptcy court rejected compensation

under the "common fund doctrine." Although it opined that the

doctrine could provide the basis for compensation in an

appropriate case, the court concluded that the "fund" in this

case was created for the customers themselves, not for the estate

generally or for the SIPC; hence, there was no basis for the

customers to demand compensation from the SIPC. Id. at 259.

6
 C.

The customers appealed to the district court, which

agreed with the bankruptcy court's application of Code

§503(b)(3)(D), but disagreed with its analysis under § 506(c),

and held that § 506(c) did not apply in a SIPA liquidation. 183

B.R. at 394. It then concluded that the bankruptcy court's

reasons for denying compensation under § 503(b)(3)(D) were

legally and factually correct. Id. at 395-97. Accordingly,

because the circumstances of the case did not warrant

compensation under §503, and the bankruptcy court's award under §

506 was erroneous as a matter of law, the district court held

that the customers could not recover under SIPA § 78eee.

As a final matter, the court considered whether the

customers could recover under the common fund doctrine, but

concluded that, because the trustee and the SIPA were not the

passive beneficiaries of the customers' efforts, but litigated

the case vigorously, they could not be responsible for the

customers' expenses under the doctrine. Id. at 397. The

customers and their counsel now appeal.

II.

Appellants argue that the sole standard for

compensation of services in a SIPA proceeding is set forth in

§78eee(b)(5). They reject the conclusion of the district and

bankruptcy courts that this section of SIPA must be interpreted

in light of analogous provisions in the Bankruptcy Code. Section

78eee(b)(5)(A) provides that "[a]ny person seeking allowances

shall file with the court an application which complies in form

7
and content with the provisions of" the Code. Section

78eee(b)(5)(C) further states that "the court shall give due

consideration to the nature, extent, and value of the services

rendered[.]" According to appellants, this set of standards is

complete in itself and rests on its own, without any need to

engraft portions of the Bankruptcy Code.1

A.

Although appellants' argument does have some

superficial plausibility, it is difficult to reconcile with the

language of 15 U.S.C. § 78fff(b), which provides, in pertinent

part:
To the extent consistent with the provisions
of this chapter, a liquidation proceeding
shall be conducted in accordance with, and as
though it were being conducted under chapters
1, 3, and 5 and subchapters I & II of chapter
7 of Title 11.

The district court held that if appellants were entitled to

receive compensation under the provisions of the Bankruptcy Code,

they would have to meet the strictures of § 503(b)(3)(D).

1
Appellants rely on In re Busy Beaver Bldg. Ctrs., Inc., 19 F.3d
833, 848-49 (3d Cir. 1994), for the proposition that, "once an
applicant for compensation is deemed generally eligible for
compensation, the court must determine the amount of compensation
to be awarded by analyzing the factors set forth in the governing
statute, and may not engraft additional criteria." Busy Beaver
involved a district court that engrafted additional requirements
onto § 330(a) of the Bankruptcy Code itself. We held only that
§330 must be applied in accordance with its literal terms and
never decided the issue of whether the Bankruptcy Code forms a
substantive overlay to SIPA. Accord United States Trustee v.
Price Waterhouse, 19 F.3d 138 (3d Cir. 1994).

8
Appellants do not contend otherwise.2 Section 503 is part of

chapter 5 of the Bankruptcy Code and thus appears to be

incorporated into SIPA by the plain language of § 78fff(b).

Unfortunately for appellants, § 503(b)(3)(D), by its

terms, applies only to chapter 9 and 11 bankruptcy cases, while

§78fff(b) expressly provides that a SIPA liquidation is to be

treated as a chapter 7 bankruptcy. Taken literally, then, if

§503 of the Bankruptcy Code is incorporated into SIPA, there can

be no recovery for customer expenses in this (or any other) SIPA

liquidation. See Lebron v. Mechem Financial, Inc., 27 F.3d 937,

945 (3d Cir. 1994) (§ 503(b)(3)(D) does not permit creditors

recovery of expenses after chapter 11 case is converted to

chapter 7).

The bankruptcy court recognized this problem, but chose

to incorporate the principles of § 503 into SIPA anyway. See 163

B.R. at 252-53. The district court agreed, adding that

incorporation of the Bankruptcy Code is only required to the

extent the Code is consistent with SIPA and opining that Congress

could not have intended that customers of a failed securities

dealer could never recover their expenses. 183 B.R. at 394.

B.

Appellants argue that § 503 was not incorporated into

SIPA, relying on our opinion in SEC v. Aberdeen Securities Co.,

526 F.2d 603 (3d Cir. 1975), which they believe stands for the

2
The bankruptcy court awarded compensation under § 506(c), but
the district court held that § 506(c) was inapplicable in a SIPA
case. Appellants do not challenge that ruling on appeal.

9
proposition that only the procedural aspects of the Bankruptcy

Code were incorporated into SIPA. There, interpreting earlier

versions of SIPA and the 1898 Bankruptcy Act, we opined:
Thus § 6(c) [of SIPA] is intended to
make the flexible Chapter X procedures
available for SIPA liquidations. This does
not mean that every provision of Chapter X,
including provisions not related to
procedures for the operation of a bankrupt,
has been incorporated into the SIPA. Only
those provisions relating to the procedures
for conducting the affairs of the estate
during bankruptcy administration, except as
inconsistent with the provision of SIPA, have
been incorporated.

Id. at 606. In Aberdeen, the issue was whether the provisions of

§ 243 of chapter X of the 1898 Bankruptcy Act (which authorized

compensation for services incurred by creditors and stockholders)

was incorporated into SIPA. It is notable in that context that

the SIPA statute then in existence incorporated a chapter of the

Bankruptcy Act that explicitly permitted reorganization rather

than liquidation, even though SIPA itself required liquidation.3

Faced with this apparent inconsistency between the
statutory purposes of SIPA and chapter X, we looked to the

legislative history of SIPA and found considerable evidence that

Congress intended only to "make the flexible Chapter X procedures

available for SIPA liquidations." 526 F.2d at 606. Because §243

of the Bankruptcy Act did not "relate to the conduct of the

3
Indeed, the statutory text of § 6(c) provided for the
incorporation of chapter X "[e]xcept as inconsistent with the
provisions of this chapter and except that in no event shall a
plan of reorganization be formulated."

10
administration or liquidation procedures to be followed," id. we

held that it was not incorporated into SIPA.

The statutory scheme today is different. In 1978,

§6(c) of SIPA was repealed and replaced by § 78fff(b), which

requires that SIPA liquidations be conducted as chapter 7

bankruptcies under the Bankruptcy Code. Chapter 7, in contrast

to the repealed chapter X, provides only for liquidation. There

is therefore no inconsistency between the two statutes that would

cause us to look to the legislative history to help us interpret

the plain language of § 78fff(b).

The statutory framework that led the Aberdeen court to

its holding no longer exists. In light of the supervening

statutory changes to both SIPA and the bankruptcy laws, we are

not bound by Aberdeen. Rather, we adopt the reasoning of the

Eleventh Circuit. In In re Government Securities Corp., 972 F.2d

328, 330 n.1 (11th Cir. 1992), cert. denied, 507 U.S. 952, 113 S.

Ct. 1366 (1993), the court of appeals rejected the precise

argument appellants make here. It opined:
[Appellant] claims that § 78fff(b) of SIPA
incorporates only the procedural and not the
substantive aspects of the Bankruptcy Code
insofar as they are consistent with SIPA.
This argument is entirely meritless. The
plain language of § 78fff(b) makes no such
distinction, and explicitly incorporates . .
. the Bankruptcy Code.

972 F.2d at 330 n.14
4
In addition, subchapter III of chapter 7 (which was not
incorporated by § 78fff(b), governs stockbroker liquidations in
cases where the SIPC does not initiate a liquidation proceeding
under SIPA. Such stockbrokers also have customers, yet (because
it is a chapter 7 proceeding) customer claims for attorney's fees
cannot be recovered. Subchapter III was enacted within months

11
 We therefore conclude that SIPA incorporates § 503 of

the Bankruptcy Code and requires that a SIPA proceeding be

treated like a chapter 7 bankruptcy case. Because the customer

expenses at issue are not recoverable in a chapter 7 proceeding,

they are not recoverable here.5

III.

Appellants also argue that they are entitled to

compensation under the common fund doctrine. They assert that

their efforts resulted in additional recovery to the SIPC, a

benefit it is not entitled to simply receive without paying just

compensation. Both the bankruptcy and district courts concluded

that this theory of recovery is available in a SIPA case, but

found as a factual matter that appellants were not entitled to

compensation. See 183 B.R. at 397; 163 B.R. at 258-59. The

district court treated appellants' argument as follows:
The customers assert that SIPC was the
primary beneficiary of the customers' labors,
and that it should be made to compensate them
accordingly. It cannot be said, however,
that SIPC and the Trustee have been unjustly
enriched as a result of the customers'
efforts. Indeed, as the Bankruptcy Court
concluded, the Trustee was an active
participant, and not some passive
beneficiary, who "retained very competent
control" over the matters at hand. Lloyd,
163 B.R. at 256. Accordingly, we conclude

after SIPA was amended. It is therefore not anomalous (as
appellants suggest) that no fees can be recovered by customers in
a SIPA proceeding. In fact, as appellees point out, it would be
strange if Congress did intend for one class of claims to be
compensable while the other was not.
5
Because of our conclusion, we need not consider whether, as a
factual matter, appellants' efforts met the standard for
compensation under § 503.

12
 that SIPC and the Trustee are not proper
targets of a bid to recover under the common
fund doctrine.

Lloyd, 183 B.R. at 397.
On appeal, appellants argue that "[t]he claims which

created the lion's share of the fund would have been lost had the

customers, through their counsel, not performed the services."

The courts below, however, found as a matter of fact that this

was not true because the trustee either had tolling agreements or

had filed the appropriate lawsuits, and because the customers'

efforts duplicated the trustee's. We conclude that these

findings are not clearly erroneous.

Additionally, the bankruptcy court noted that the

"fund" recovered by the customers' efforts was customer property,

not property recovered for the debtor's estate or the SIPC. 163

B.R. at 259. And although this property may well have offset

some of the money that the SIPC was required to advance to those

customers, the SIPC was well-represented by counsel and was

entitled to make its own litigation decisions without being

surcharged later by customers who chose to second-guess those

decisions.

Furthermore, in spite of the litigation pursued by the

customers, the Lloyd Securities general estate still contains no

assets. The customers' efforts simply conferred no benefit upon

the general creditors of Lloyd Securities; accordingly, they have

no legitimate grounds to recover fees from the estate. Finally,

appellants themselves disclaim their entitlement to any portion

of the customer property fund that has been allocated to Lloyd

13
customers, presumably seeking to recover from the general estate.

Because that estate is, as already stated, empty, appellants

would be unable to collect their expenses in any event. We

therefore agree with the district and bankruptcy courts that

appellants have no claim under the common fund doctrine.6

IV.

We will therefore affirm the judgment of the district

court.

6
Because we decide the issue on factual grounds, we need not and
do not decide whether the common fund doctrine is legally
applicable in a SIPA liquidation.

14