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HISTORICAL
AND REVISION NOTES (11 U.S.C. § 766)
LEGISLATIVE
STATEMENTS
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Sections
765 and
766 of the House amendment represent
a consolidation and redraft of sections
765,
766, 767, and 768 of the House bill
and sections
765,
766, 767, and 768 of the Senate amendment.
In particular, section
765(a) of
the House amendment is derived from section
765(a) of the House bill and section
767(a) of the Senate amendment. Under section
765(a) of the House amendment
customers are notified of the opportunity
to immediately file proofs of
claim
and to identify specifically identifiable
securities, property, or
commodity contracts. The
customer is also afforded an opportunity
to instruct the Trustee regarding the
customer's desires concerning disposition
of the
customer's
commodity contracts. Section 767(b)
(probably should be
765(b)) makes
clear that the Trustee must comply with instructions received to the extent
practicable, but in the event the Trustee has transferred
commodity contracts to a
commodity broker, such instructions
shall be forwarded to the broker.
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Section
766(a) of the House amendment
is derived from section 768(c) of the House bill and section 767(f) of the
Senate amendment. Section
766(b)
of the House amendment is derived from section
765(d) of the House bill, and section
767(g) of the Senate amendment. Section
766(c) of the House amendment is
derived from section 768(a) of the House bill and section 767(e) of the
Senate amendment. Section
766(d)
of the House amendment is derived from section 768(b) of the House bill
and the second sentence of section 767(e) of the Senate amendment.
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Section
766(e) of the House amendment
is derived from section
765(c) of
the House bill and sections 767(c) and (d) of the Senate amendment. The
provision clarifies that the Trustee may liquidate a
commodity contract only if the
commodity contract cannot be transferred
to a
commodity broker under section
766(c), cannot be identified to a
particular
customer, or has been
identified with respect to a particular
customer, but with respect to which
the
customer's instructions have
not been received. |
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Section
766(f) of the House amendment
is derived from section
766(b) of
the House bill and section 767(h) of the Senate amendment. The term "all
securities and other property"
is not intended to include a
commodity
contract. Section
766(g) of the
House amendment is derived from section
766(a) of the House bill.
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Section
766(h) of the House amendment
is derived from section 767(a) of the House bill and section
765(a) of the Senate amendment. In
order to induce private Trustees to undertake the difficult and risky job
of liquidating a
commodity broker,
the House amendment contains a provision insuring that a pro rata share
of administrative
claims will be
paid. The provision represents a compromise between the position taken in
the House bill, subordinating
customer
property to all expenses of administration, and the position taken in
the Senate amendment requiring the distribution of
customer property in advance of
any expenses of administration. The position in the Senate amendment is
rejected since
customers, in any
event, would have to pay a brokerage commission or fee in the ordinary course
of business. The compromise provision requires
customers to pay only those administrative
expenses that are attributable to the administration of
customer property.
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Section
766(i) of the House amendment
is derived from section 767(b) of the House bill and contains a similar
compromise with respect to expenses of administration as the compromise
detailed in connection with section
766(h)
of the House amendment. Section
766(j)
of the House amendment is derived from section 767(c) of the House bill.
No counterpart is contained in the Senate amendment.
The provision
takes account of the rare case where the estate has
customer property in excess of
customer
claims and administrative expenses
attributable to those
claims. The
section also specifies that to the extent a
customer is not paid in full out
of
customer property, that the
unpaid
claim will be treated the
same as any other general unsecured
creditor.
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Section
768 of the Senate amendment was deleted from the House amendment
as unwise. The provision in the Senate amendment would have permitted the
Trustee to distribute
customer property
based upon an estimate of value of the
customer's account, with no provision
for recapture of excessive disbursements. Moreover, the section would have
exonerated the Trustee from any liability for such an excessive disbursement.
Furthermore, the section is unclear with respect to the
customer's rights in the event the
Trustee makes a distribution less than the share to which the
customer is entitled. The provision
is deleted in the House amendment so that this difficult problem may be
handled on a case-by-case basis by the courts as the facts and circumstances
of each case require.
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Section
769 of the Senate amendment is deleted in the House amendment
as unnecessary. The provision was intended to codify Board of Trade v.
Johnson, 264 U.S. 1 (1924) (Ill.1924, 44 S.Ct. 232). Board of Trade
against Johnson is codified in section
363(f) of the House amendment which
indicates the only five circumstances in which property may be sold free
and clear of an interest in such property of an
entity other than the estate.
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Section
770 of the Senate amendment is deleted in the House amendment
as unnecessary. That section would have permitted commodity brokers to liquidate
commodity contracts, notwithstanding
any contrary order of the court. It would require an extraordinary circumstance,
such as a threat to the national security, to enjoin a
commodity broker from liquidating
a
commodity contract. However, in
those circumstances, an injunction must prevail. Failure of the House amendment
to incorporate section 770 of the Senate amendment does not imply that the
automatic stay prevents liquidation of
commodity contracts by commodity
brokers. To the contrary, whenever by contract, or otherwise, a
commodity broker is entitled to
liquidate a position as a result of a condition specified in a contract,
other than a condition or default of the kind specified in section
365(b)(2) of title
11, the
commodity broker may engage in such
liquidation. To this extent, the
commodity
broker's contract with his
customer
is treated no differently than any other contract under section
365 of title
11.
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LEGISLATIVE
REPORTS
2005 Acts
(Pub. L.
109-8). House Report
No.
109-31.
1982 Acts
(Pub. L. 97-222). House Report No. 97-420.
1978 Acts
(Pub. L. 95-598).
Senate Report No. 95-989.
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(Section
765) Subsection (a) of
this section (enacted as section
766(h))
provides that with respect to liquidation of commodity brokers which are
not
clearing organizations, the
Trustee shall distribute
customer property
to
customers on the basis and to
the extent of such
customers' allowed
net equity
claims, and in priority to all other
claims. This section grants
customers'
claims first priority in the distribution
of the estate. Subsection (b) (enacted as section
766(i)) grants the same priority
to
member property and other
customer property in the liquidation
of a
clearing organization. A fundamental
purpose of these provisions is to ensure that the property entrusted by
customers to their brokers will
not be subject to the risks of the broker's business and will be available
for disbursement to
customers if
the broker becomes bankrupt. As a result of section
765, a
customer need not trace any funds
in order to avoid treatment as a general
creditor as was required by the
Seventh Circuit in In re Rosenbaum Grain Corporation.
Section
766 lists certain
transfers which are not voidable
by the Trustee of a
commodity broker.
Subsection (a) exempts
transfers
approved by the
Commission by rule
or order, either before or after the
transfer. It is expected that the
Commission will use this power sparingly
and only when necessary to effectuate the remedial purposes of this legislation,
bearing in mind that the immediate
transfer of
customer accounts
from bankrupt commodity brokers to solvent commodity brokers is one of the
primary goals of this subchapter. The committee considered and rejected
a provision in Subsection (b) that would have exempted payments made to
a
commodity broker. The
Commission
may not by rule exempt such
transfers. The
Commission's prompt attention to
the promulgation of such rules and regulations is expected.
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Subsection (b) (enacted as section
764(c)) provides for the nonavoidability of
margin payments made by a
commodity broker, other than a
clearing organization. If such payments
are made by or to a
clearing organization,
they are nonavoidable pursuant to subsection (c). All other
margin payments made by a
commodity broker, other than a
clearing organization, are nonavoidable
if they meet the conditions set forth in Subsection (b). Subsections (b)(1)
and (b)(2) parallel the requirements for avoidance of fraudulent
transfers and obligations under
section
548. Subsection (b)(3) adds
a requirement that there be collusion between the transferee and transferor
in order for such payments to be voidable. It would be unfair to permit
recovery from an innocent
commodity
broker since such brokers are, for the most part, simply conduits for
margin payments and do not retain
margin for use in their operations. Subsection (b)(4) would permit recovery
of a subsequent transferee only if it had actual knowledge at the time of
that subsequent
transfer of the
scheme to defraud. Again it should be noted that if the
transfer is a
margin payment and the subsequent
transferee is a
clearing organization,
the
transfer is nonavoidable under
section
766(c).
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Subsection (c) (enacted as section
548(d)(2)) overrules Seligson
v. New York Produce Exchange, and provides as a matter of law that
margin payments made by or to a
clearing organization are not voidable.
Section 767 sets forth the procedures to be followed by the Trustee. It
should be emphasized that many of the duties imposed on the Trustee are
required to be discharged by the Trustee immediately upon his appointment.
The earlier these duties are discharged the less potential market disruption
can result.
The initial duty of the Trustee is to endeavor to
transfer to another
commodity broker or brokers all
identified
customer accounts together
with the
customer property margining
such accounts, to the extent the Trustee deems appropriate. Although it
is preferable for all such accounts to be transferred, exigencies may dictate
a partial
transfer. The requirement
that the value of the accounts and property transferred not exceed the
customer's distribution share may
necessitate a slight delay until the Trustee can submit to the court, for
its disapproval, an estimate of each
customer's distribution share pursuant to section 768.
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Subsection (c) (enacted as section
766(e)) provides that contemporaneously with the estimate of the
distribution share and the
transfer
of identified
customer accounts
and property, subsection (c) provides that the Trustee should make arrangements
for the liquidation of all
commodity
contracts maintained by the
debtor
that are not identifiable to specific
customers. These contracts would,
of course, include all such contracts held in the
debtor's proprietory account.
At approximately the same time, the Trustee should notify each
customer of the
debtor's bankruptcy and instruct
each
customer immediately to submit
a
claim including any
claim to a specifically identifiable
security or other property, and advise the Trustee as to the desired disposition
of
commodity contracts carried by
the
debtor for the
customer.
This requirement is placed upon the Trustee to insure that producers who
have hedged their production in the commodities market are allowed the opportunity
to preserve their positions. The theory of the commodity market is that
it exists for producers and buyers of commodities and not for the benefit
of the speculators whose transactions now comprise the overwhelming majority
of trades. Maintenance of positions by hedges may require them to put up
additional
margin payments in the
hours and days following the
commodity
broker bankruptcy, which they may be unable or unwilling to do. In such
cases, their positions will be quickly liquidated by the Trustee, but they
must have the opportunity to make those
margin payments before they are
summarily liquidated out of the market to the detriment of their growing
crop. The failure of the
customer
to advise the Trustee as to disposition of the
customer's
commodity contract will not delay
a
transfer of a contract pursuant
to subsection (b) so long as the contract can otherwise be identified to
the
customer. Nor will the failure
of the
customer to submit a
claim prevent the
customer from recovering the
net equity in that
customer's account, absent a
claim the
customer cannot participate in the
determination of the
net equity
in the account.
If the
customer submits instructions
pursuant to subsection (a) after the
customer's
commodity contracts
are transferred to another
commodity
broker, the Trustee must transmit the instruction to the transferee.
If the
customer's
commodity contracts are not transferred
before the
customer's instructions
are received, the Trustee must attempt to comply with the instruction, subject
to the provisions of section 767(d).
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Under Subsection (d) (enacted as section
766(e)), the Trustee has discretion
to liquidate any
commodity contract
carried by the
debtor at any time.
This discretion must be exercised with restraint in such cases, consistent
with the purposes of this subchapter and good business practices. The committee
intends that hedged accounts will be given special consideration before
liquidation as discussed in connection with subsection (c).
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Subsection (e) (enacted as section
766(c)) instructs the Trustee as to the disposition of any security
or other property, not disposed of pursuant to subsection (b) or (d), that
is specifically identifiable to a
customer
and to which the
customer is entitled.
Such security or other property must be returned to the
customer or promptly transferred
to another
commodity broker for
the benefit of the
customer. If
the value of the security or other property retained or transferred, together
with any other distribution made by the Trustee to or on behalf of the
customer, exceeds the
customer's distribution share the
customer must deposit cash with
the Trustee equal to that difference before the return or
transfer of the security or other
property.
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Subsection (f) (enacted as section
766(a)) requires the Trustee to answer
margin calls on specifically
identifiable
customer
commodity contracts, but only to
the extent that the
margin payment,
together with any other distribution made by the Trustee to or on behalf
of the
customer, does not exceed
the
customer's distribution share.
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Subsection (g) (enacted as section
766(b)) requires the Trustee to liquidate all commodity futures
contracts prior to the close of trading in that contract, or the first day
on which notice of intent to deliver on that contract may be tendered, whichever
occurs first. If the
customer desires
that the contract be kept open for delivery, the contract should be transferred
to another
commodity broker pursuant
to subsection (b).
If for some reason the Trustee is unable to
transfer a contract on which delivery
must be made or accepted and is unable to close out such contract, the Trustee
is authorized to operate the business of the
debtor for the purpose of accepting
or making tender of notice of intent to deliver the physical commodity underlying
the contract, facilitating delivery of the physical commodity or disposing
of the physical commodity in the event of a default. Any property received,
not previously held, by the Trustee in connection with its operation of
the business of the
debtor for
these purposes, is not by the terms of this subchapter specifically included
in the definition of
customer property.
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Finally, subsection (h) (enacted as section
766(f)) requires the Trustee
to liquidate the
debtor's estate
as soon as practicable and consistent with good market practice, except
for specifically identifiable
securities
or other property distributable under subsection (e).
Section 768 is an integral part of the
commodity broker liquidation procedures
outlined in section 767. Prompt action by the Trustee to
transfer or liquidate
customer
commodity contracts is necessary
to protect
customers, the
debtor's estate, and the marketplace
generally. However,
transfers of
customer accounts and property valued
in excess of the
customer's distribution
share are prohibited. Since a determination of the
customer's distribution share requires
a determination of the
customer's
net equity and the total dollar
value of
customer property held
by or for the account of the
debtor,
it is possible that the
customer's
distribution share will not be determined, and thus the
customer's contracts and property
will not be transferred, on a timely basis. To avoid this problem, and to
expedite
transfers of
customer property, section 768
permits the Trustee to make distributions to
customers in accordance with a preliminary
estimate of the
debtor's
customer property and each
customer's distribution share.
It is acknowledged that the necessity for prompt action
may not allow the Trustee to assemble
all relevant facts before such an estimate is made. However, the Trustee
is expected to develop as accurate an estimate as possible based on the
available facts.
Further, in order to permit expeditious action, section 768 does not require
that notice be given to
customers
or other
creditors before the court
approves or disapproves the estimate. Nor does section 768 require that
customer
claims be received pursuant to section
767(a) before the Trustee may act upon and in accordance with the estimate.
If the estimate is inaccurate, the Trustee is absolved of liability for
a distribution which exceeds the
customer's
actual distribution share so long as the distribution did not exceed the
customer's estimated distribution
share. However, a Trustee may have a
claim back against a
customer
who received more than its actual distribution share.
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House Report No. 95-595.
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Section
765(a) indicates that
a
customer must file a proof of
claim, including any
claim to specifically identifiable
property, within such time as the court fixes.
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Subsection (c) (of section 765 (enacted as section
766(e))) sets forth the general
rule requiring the Trustee to liquidate contractual commitments that are
either not specifically identifiable or with respect to which a
customer has not instructed the
Trustee during the time fixed by the court.
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Subsection (d) (enacted as section
766(b)) indicates an exception to the time limits in the rule by
requiring the Trustee to liquidate any open contractual commitment before
the last day of trading or the first day during which delivery may be demanded,
whichever first occurs, if
transfer
cannot be effectuated.
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Section 766(a) (enacted as section
766(g)) indicates that the Trustee may distribute
securities or other property only
under section 768. This does not preclude a distribution of cash under section
767(a) or distribution of any excess
customer property under section
767(c) to the general estate.
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Subsection (b) (enacted as section
766(f)) indicates that the Trustee shall liquidate all
securities and other property that
is not specifically identifiable property as soon as practicable after the
commencement of the case and in accordance with good market practice. If
securities are restricted or trading
has been suspended, the Trustee will have to make an exempt sale or file
a registration statement. In the event of a private placement, a
customer is not entitled to "bid
in" his
net equity
claim. To do so would enable him
to receive a greater percentage recovery than other
customers.
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Subsection (b) (enacted as section
766(i)) indicates that if the
debtor is a
clearing organization,
customer property is to be segregated
into
customers' accounts and proprietary
accounts and distributed accordingly without offset. This protects a member's
customers from having their
claims offset against the member's
proprietary account. Subsection (c)(1) (enacted as section
766(j)(1)) indicates that any excess
customer property will pour over
into the general estate. This unlikely event would occur only if
customers fail to file proofs of
claim. Subsection (c)(2) (enacted
as section
766(j)(2)) indicates
that to the extent
customers are
not paid in full, they are entitled to share in the general estate as unsecured
creditors, unless subordinated
by the court under proposed 11 U.S.C.
510. Section 768(a) (enacted as section
766(c)) requires the Trustee to return
specifically identifiable property to the extent that such distribution
will not exceed a
customer's
net equity
claim.
Thus, if the
customer owes money
to a
commodity broker, this will
be offset under section
761(15)(A)(ii).
If the value of the specifically identifiable property exceeds the
net equity
claim, then the
customer may deposit cash with the
Trustee to make up the difference after which the Trustee may return or
transfer the
customer's property.
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Subsection (c) (enacted as section
766(a)) permits the Trustee to answer all
margin calls, to the extent
of the
customer's
net equity
claim, with respect to any specifically
identifiable open contractual commitment. It should be noted that any payment
under subsections (a) or (c) will be considered a reduction of the
net equity
claim under section 767(a). Thus
the
customer's
net equity
claim is a dynamic amount that varies
with distributions of specifically identifiable property or
margin payments on such property.
This approach differs from the priority given to specifically identifiable
property under subchapter III of chapter
7 by limiting the priority effect to a right to receive specific property
as part of, rather than in addition to, a ratable share of
customer property. This policy
is designed to protect the small
customer
who is unlikely to have property in specifically identifiable form as compared
with the professional trader. The CFTC is authorized to make rules defining
specifically identifiable property under section 302 of the bill, in title
III.
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1982
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Subsec.
(a). Pub. L. 97-222,
Sec. 19(a), inserted "to such
customer"
after "distribution".
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Subsec.
(b). Pub. L. 97-222,
Sec. 19(b), struck out "that is being actively traded as of the date of
the filing of the petition" after "any open
commodity contract" and inserted
"the" after "rules of".
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Subsec.
(d). Pub. L. 97-222,
Sec. 19(c), substituted "the amount to which the
customer of the
debtor is entitled under subsection
(h) or (i) of this section, then such" for "such amount, then the" and "the
Trustee then shall" for "the Trustee shall".
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EFFECTIVE
DATES
2005 Acts.
Pub. L.
109-8,Title XV, § 1501, Apr. 20, 2005, provided
that, except as otherwise specifically provided, all amendments, except
for amendments provided in Pub. L.
109-8,Title III, §§ 308,
322, and
330 are effective 180 days after
enactment of the Act on April 20, 2005 (which occurs on October 17, 2005),
and are inapplicable with respect to cases commenced under Title
11 before the effective date.
1984 Acts.
Amendment by Pub. L. 98-353 effective with respect to cases filed 90 days
after July 10, 1984, see section 552(a) of Pub. L. 98-353, set out as a
note under section
101 of this title.
SECTION REFERRED
TO IN OTHER SECTIONS
This section
is referred to in sections
365,
702,
761,
765 of this title; title 7 section
24.
REFERENCES
IN TEXT
Section 3 of
the Federal Deposit Insurance Act, referred to in par. (2), is classified
to section 1813 of Title 12, Banks and Banking.
Section 25A
of the Federal Reserve Act, referred to in par. (3), popularly known as
the Edge Act, is classified to subchapter II (Sec. 611 et seq.) of chapter
6 of Title 12, Banks and Banking. For complete classification of this Act
to the Code, see Short Title note set out under section 611 of Title 12
and Tables.
Section 409
of the Federal Deposit Insurance Corporation Improvement Act of 1991, referred
to in par. (3), is classified to section 4422 of Title 12, Banks and Banking.
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©2005-2013 - WEBER LAW FIRM, P.C. - All
Rights Reserved
Page Last Updated:
June 17, 2013
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