Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca2-14-00890/USCOURTS-ca2-14-00890-0/pdf.json

Parties Involved:
CarVal UK Limited
Appellant
James W. Giddens
Appellee
Hudson City Savings Bank
Appellant
Lehman Brothers Inc.

Securities Investor Protection Corporation
Appellee

Document Text:

14‐890

CarVal v. Giddens

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT      

_______________      

August Term, 2014

(Argued: February 26, 2015                           Decided: June 29, 2015)

Docket No. 14‐890

_______________        

IN THE MATTER OF: LEHMAN BROTHERS, INC.,

        Debtor,

_______________

CARVAL UK LIMITED, as manager of CVF Lux Master S.a.r.l., the assignee of Doral

Bank and Doral Financial Corporation,

      Claimant‐Appellant,

—v.—

JAMES W. GIDDENS, as Trustee for the SIPA Liquidation of Lehman Brothers Inc.,

SECURITIES INVESTOR PROTECTION CORPORATION,

          Appellees.

*

_______________        

 *

 On June 25, 2014, Claimant-Appellant Hudson City Savings Bank withdrew its appeal 

pursuant to Fed. R. App. P. 42(b). The Clerk of Court is directed to amend the caption as set forth 

above. 

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B e f o r e: KATZMANN, Chief Judge, WALKER and CHIN, Circuit Judges.

_______________  

The appellant in this case seeks protection under the Securities Investor

Protection Act (“SIPA”) as a “customer” of the failed broker‐dealer Lehman

Brothers. The appellant’s predecessor entered into a series of repurchase

agreements, which involved the sale of securities to Lehman, coupled with an

agreement to repurchase the securities back from Lehman at a future date. Before

the securities could be repurchased, Lehman failed and entered liquidation under

SIPA. We conclude that the appellant is not a customer for purposes of SIPA

because our precedents require that a customer must have “entrusted” assets to a

failed broker‐dealer, and the repurchase agreements did not involve any

entrustment of assets to Lehman. We accordingly AFFIRM the district court and

bankruptcy court orders denying the appellant customer status in Lehman’s SIPA

liquidation.

_______________        

LUC A. DESPINS (Bryan R. Kaplan, on the brief), Paul Hastings LLP,

New York, New York, for Claimant‐Appellant.

MICHAEL E. SALZMAN (James B. Kobak, Jr., Beatrice Aisha Hamza

Bassey, Savvas A. Foukas, Kathleen A. Walker, on the brief),

Hughes Hubbard & Reed LLP, New York, New York, for

Appellee James W. Giddens, as Trustee for the SIPA liquidation

of Lehman Brothers Inc.

KENNETH J. CAPUTO (Josephine Wang, on the brief), Securities Investor

Protection Corporation, Washington, D.C., for Appellee

Securities Investor Protection Corporation

_______________    

    

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KATZMANN, Chief Judge:

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

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securities, to the “buyer” for a fixed price.1 Second, the buyer agrees to resell

those same assets back to the seller at a later date and for a slightly higher price—

hence the name “repurchase agreement.”  

Viewed from the seller’s perspective, repos 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

 1

 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. 

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Doral as the seller, and Lehman Brothers Inc. (“Lehman”) as the buyer.2 These

transactions were governed by industry‐standard Master Repurchase Agreements

(“MRAs”). Notably, the MRAs describe the relationship between Doral and

Lehman as “contractual” and make not mention of a fiduciary relationship. The

MRAs gave Lehman full legal title over the underlying securities, and Lehman

was free—subject to its obligation to resell the securities on the repurchase date—

to sell, transfer, pledge, or hypothecate the securities as it desired. Doral, for its

part, received cash in exchange for the securities, and was free to use that cash for

its own purposes. Doral also retained an economic interest in the securities,

including the rights to receive all principal, interest, dividends, and other

distributions. The MRAs protected both Lehman and Doral against changes in the

value of the securities by marking the repos to market. If the value of the

securities fell, Doral was required to deliver additional securities or cash to

Lehman to ensure that the market value of the securities matched the cash held by

Doral. Conversely, if the value of the securities rose, Doral could demand

additional cash or securities to rebalance the transaction.

 2 Again, when viewed from Lehman’s perspective, these transactions were “reverse

repos.”

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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.  

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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., 492 B.R. 379 (Bankr. S.D.N.Y. 2013). CarVal appealed

the bankruptcy court’s decision to the district court. On February 26, 2014, the

district court (Cote, J.) affirmed the bankruptcy court. In re Lehman Bros. Inc., 506

B.R. 346 (S.D.N.Y. 2014).  

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 Doral’s 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

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conclude by addressing (1) the appellant’s reliance on Matter of Bevill, Bresler &

Schulman Asset Mgmt. Corp. (Cohen v. Army Moral Support Fund), 67 B.R. 557

(D.N.J. 1986), and (2) the appellant’s contention that Congress spoke to the

treatment of repos in various statutes enacted since SIPA’s passage.3  

I. The Securities Investor Protection Act of 1970

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, 421 U.S. 412, 415 (1975).

These failures sent shockwaves through the securities market as investors who

had handed their assets over to broker‐dealers suddenly lost access to their

property. Existing bankruptcy safeguards did not adequately protect investors

because investor assets were frequently commingled with the broker‐dealer’s

 3 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 Prime

Brokerage Account Agreement that permitted Lehman Brothers to hypothecate the securities of a

non‐repo claimant who was later treated as a customer in the Lehman Brothers SIPA proceeding.

The bankruptcy court declined to admit the agreement, explaining: “I think we should be

dealing with the documentation that actually defines a relationship [before the Bankruptcy

Court], not documentation that defines somebody else’s rights.”  J.A. 5179.  The appellant argues

that the bankruptcy court should have admitted the document because “[n]o issues were raised

regarding its authenticity” and that it would not have prejudiced the Trustee.  Appellant’s Br. at

45‐46.   This argument is without merit.   The bankruptcy court did not abuse its discretion in

excluding a document it deemed irrelevant to the proceedings before it.

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other assets, and thus would be tied up for years in extended bankruptcy

proceedings. H.R. Rep. 91‐1613, 1970 U.S.C.C.A.N. 5254, 5257. As more and more

investors lost access to assets they had previously thought safe, the “situation . . .

threatened a ‘domino effect’ involving otherwise solvent brokers that had

substantial open transactions with firms that failed.” Barbour, 421 U.S. at 415.

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., 463 F.3d 125, 127 (2d Cir. 2006) (internal quotations

marks and citation omitted). If this fund of customer property is insufficient to

make investors whole, the trustee may dip into a special trust fund bankrolled by

fees assessed on the community of broker‐dealers. This fund is administered by

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the Securities Investor Protection Corporation (“SIPC”)—one of the appellees in

this case—which is a private nonprofit membership organization created by SIPA.

See Sec. Investor Prot. Corp. v. Morgan, Kennedy & Co., 533 F.2d 1314, 1316 (2d Cir.

1976).

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

on a transaction‐by‐transaction basis. See In re New Times, 463 F.3d at 127 (“[SIPA]

contemplates that a person may be a ‘customer’ with respect to some of his claims

for cash or shares, but not with respect to others.”).

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. 497 F.2d 280, 283 (2d Cir. 1974). In Baroff, the

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claimant had lent a substantial quantity of securities to a shaky broker‐dealer with

the intent of shoring up the broker‐dealer’s balance sheet. “It was understood that

the securities would be returned in a short period of time as soon as [the broker‐

dealer was] able to straighten out its situation.” Id. at 281 (internal quotation

marks omitted). Before the securities could be returned, however, the broker‐

dealer failed and entered SIPA liquidation. The claimant sought to get his

securities returned, but the trustee denied the claim, finding that the claimant did

not qualify as a customer under the statute. Id. at 282.

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 Baroff, 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

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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 Baroff, our cases have consistently hewed to this

entrustment requirement for protection under SIPA. See, e.g., In re New Times, 463

F.3d at 128; Sec. Investor Prot. Corp. v. Exec. Sec. Corp., 556 F.2d 98, 99 (2d Cir. 1977)

(per curiam). Most recently, in In re Bernard L. Madoff Investment Securities LLC, we

reaffirmed that the “critical aspect of the ‘customer’ definition is the entrustment

of cash or securities to the broker‐dealer for the purposes of trading securities.”

654 F.3d 229, 236 (2d Cir. 2011) (further internal quotation marks and alterations

omitted). Several of our sister circuits have also joined us in requiring that a

claimant show that it entrusted property to a broker‐dealer to qualify as a

customer. See, e.g., In re Brentwood Sec., Inc., 925 F.2d 325, 327 (9th Cir. 1991)

(“[The] definition [of customer] embodies a common‐sense concept: An investor

is entitled to compensation from the SIPC only if he has entrusted cash or

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securities to a broker‐dealer who becomes insolvent . . . .”); In re Old Naples Sec.,

Inc., 223 F.3d 1296, 1304 (11th Cir. 2000); Appleton v. First Nat’l Bank of Ohio, 62

F.3d 791, 801 (6th Cir. 1995); SEC v. First Sec. Co. of Chi., 507 F.2d 417, 420 (7th Cir.

1974).

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 entrustment precedents as requiring SIPA

claimants to “show that they delivered securities or cash to the broker‐dealer ‘for

some purpose connected with participation in the securities market.’” Appellant’s

Br. 28 (quoting Baroff, 497 F.2d at 283). Doral met this standard, appellant argues,

because Doral delivered assets to Lehman when it sold the securities during the

first phase of the uncompleted repurchase agreements.

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.” 497 F.2d at 284. This “fiduciary relationship,” in turn, arises

out of the broker’s obligation to handle the customer’s assets for the customer’s

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benefit. Baroff offered several examples of behavior that would tend to show that

the broker was holding the assets as part of a fiduciary relationship with a

customer: (1) selling the assets for the customer; (2) using the assets as collateral

to make margin purchases of other securities for the customer; or (3) otherwise

using the assets “to facilitate securities trading by” the customer. Id. This list of

activities, while by no means exhaustive, illustrates what Baroff meant when it

used the term entrustment: the customer handing assets over to a broker‐dealer

so that the broker‐dealer may do business on the customer’s behalf. See, e.g., Exec.

Sec. Corp., 556 F.2d at 99; Appleton, 62 F.3d at 801.

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

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conclusion of the repos. Cf. SEC v. Drysdale Sec. Corp., 785 F.2d 38, 41 (2d Cir.

1986) (“The repo merely imposes a contractual obligation to deliver identical

securities on the settlement date set by the repo contract.”). 

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 Baroff 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., 506 B.R. at 354. Lehman’s discretion to use the securities as

it saw fit extended even to situations where Lehman and Doral’s interests would

become adverse. For example, if at the time of repurchase the securities are worth

less than the contractual repurchase price, then Doral’s obligation to repurchase

would be “out‐of‐the‐money,” and completing the sale would inflict a net loss on

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Doral; conversely, Lehman would make money on the sale because Doral would

repurchase the securities at an above‐market price. Rather than being required to

act in Doral’s interest by, for instance, canceling the repurchase of the securities,

Lehman would remain free—indeed, would be contractually obligated—to

pursue its own interests by reselling the shares at the contractual repurchase

price.

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, 497 F.2d at 284.

And without these indicia of a fiduciary relationship, we cannot say that Doral

entrusted securities to Lehman.

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., 812 F.2d 1374 (11th Cir. 1987) (“ESM”), dealt with a failed

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reverse repo transaction.4 The broker‐dealer had sold securities to the claimant as

part of a repo, but went bankrupt before it could repurchase the securities from

the claimant as agreed. Id. at 1375. The claimant was left holding the securities,

and had to resell them to a third party at a loss; the claimant subsequently filed

for protection as a customer. Id.

The Eleventh Circuit denied the claimant customer status. Citing Baroff, 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

 4 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. 812 F.2d at 1375. A stockbroker liquidation under the Bankruptcy Code is similar,

but not identical, to a broker‐dealer liquidation under SIPA. See 7 Collier on Bankruptcy ¶ 740.01

(15th ed.) (comparing and contrasting SIPA with the analogous provisions of the Bankruptcy

Code). However, while SIPA and the Bankruptcy Code define customer using almost exactly the

same language, compare 15 U.S.C. § 78lll(2), with 11 U.S.C. § 741(2), we have not yet expressly

decided whether Baroff’s entrustment requirement extends to the Bankruptcy Code. In ESM, the

parties did not dispute that the Bankruptcy Code required entrustment, and the Eleventh

Circuit’s analysis thus proceeded on that assumption. See 812 F.2d at 1376. Because ESM

considered entrustment within the framework set out by Baroff, we discuss its application of this

framework to repurchase agreements. We do not, however, rely on its broader holding that repo

counterparties are not customers under the Bankruptcy Code, as that question is not before us in

this SIPA case.

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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 obligation to resell the securities at the end of the repos. Until the

repos ended, they continued to belong to Lehman, not Doral. Accordingly, as in

ESM, Doral’s relationship with Lehman did not have the hallmarks of the

fiduciary relationship between a customer and its broker‐dealer.  

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

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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 case holding that a

repo counterparty 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, 2757‐

928. Third, because Doral expected to pay a fixed contract price for the securities

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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, 979 F.2d 900, 902 (2d Cir.

1992) (“A repurchase agreement may expose the parties to market risk, since the

agreed‐upon repurchase price may be greater or less than the market price of the

[underlying asset] at the agreed‐upon date.”). Finally, under the MRAs governing

the repos, Doral received any principal or interest payments generated by the

securities during the course of the repos in the form of regular payments passed

on from Lehman. See J.A. 458 ¶ 5.  

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

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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 and his public customer.” Baroff, 497 F.2d

at 284. But as explained above, the repos assigned title over the securities to

Lehman, and that title carried with it the power to dispose of the securities as

Lehman saw fit.5 Doral’s continuing economic interests in the securities did not

constrain Lehman’s discretion over the securities, much less obligate Lehman to

use those securities on Doral’s behalf. Lehman’s obligation to pass on principal

and interest payments to Doral, for example, did not require Lehman to do

anything with the securities; rather, the repos simply provided for Lehman to pay

Doral an amount equal to the income generated by the securities. Similarly,

 5 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)

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Lehman’s contractual obligation to resell the securities at the conclusion of the

repo was akin to a common forward contract requiring Lehman to make a future

sale at a fixed price. Nothing about this resale of the security mandated Lehman

to act in Doral’s interest. Doral’s economic interests in the securities, however

strong they might have been, thus arose out of Lehman’s fixed contractual

obligations to Doral—that is, as features of the arms‐length deal struck between

Doral and Lehman—rather than out of any obligation for Lehman to use the

securities on Doral’s behalf. As such, those economic interests cannot form a basis

for finding that Doral entrusted the securities to Lehman.  

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.6

With this conclusion in mind, we now turn to the appellant’s other arguments: (1)

that we should follow the “seminal” decision In re Bevill, Bresler & Schulman Asset

 

(providing that, in the event of default by Doral, Lehman could either sell the underlying

securities on the open market or retain the securities).

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Mgmt. Corp. (Cohen v. Army Moral Support Fund), 67 B.R. 557 (D.N.J. 1986)

(hereinafter, “Bevill, Bresler”), and (2) that Congress has legislated directly on the

treatment of repos under 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. 67 B.R. at 598‐602. Although a decades‐old district court

decision from another circuit would normally be of limited relevance, Bevill,

Bresler has proven influential in subsequent courts’ analysis of this question. See,

e.g., ESM, 812 F.2d at 1377 (discussing Bevill, Bresler). As such, the bankruptcy

court, district court, and parties all devote substantial attention to Bevill, Bresler,

seeking either to invoke or distinguish its holding. Accordingly, we address Bevill,

Bresler separately here.

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

 6

 Our 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 

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securities. The transactions were left uncompleted when BBS disintegrated after

being charged with fraud by the SEC. BBS’s repo counterparties subsequently

sought protection as customers under SIPA.

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. § 78lll(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, 67 B.R. at 600. The district court explained that, for a

claimant to be a customer, “the transactions in which they were engaged and

which form the basis of their claim of customer status must have been related to

investment, trading or participation in the securities market, and [furthermore]

the transactions must have arisen out of the type of fiduciary relationship which

generally characterizes the relationship between a broker‐dealer and its

customers.” Id. (citing Baroff, 497 F.2d at 284). The district court reasoned that

these factors were “clearly present” in repo transactions, stressing the economic

importance of the repo markets, as well as the fact that “[t]he risks and potential

 

retained by a repo participant as part of a hold-in-custody repo. 

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rewards associated with repo and reverse repo transactions are unquestionably

market‐related risks and rewards which are entirely distinct from and additional

to any credit risk associated with the solvency of the broker as a financial

intermediary.” Id. at 600‐01 (alterations omitted). Accordingly, the district court

concluded that BBS’s disappointed counterparties were customers under SIPA.

The appellant lauds Bevill, Bresler as the “seminal case” on the issue of whether

repos are protected under SIPA, and urges us to follow it. Appellant’s Br. 1‐2; see

also id. at 47‐48 (listing cases that cite 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, 497 F.2d at

283. Nor does Bevill, Bresler explain how BBS’s repo counterparties shared a

relationship with BBS that had “the indicia of the fiduciary relationship between a

broker and his public customer.” Id. at 284. Instead, Bevill, Bresler only uses the

word “fiduciary” a single time, when explaining Baroff, and then never returns to

the concept of a fiduciary relationship.

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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.’” 67 B.R. at

602 (quoting Baroff, 497 F.2d at 284). But this is a distinction without a difference:

Bevill, Bresler does not explain why “contributing to . . . capital” should bear on

whether the repo participant entrusted securities to the failed broker‐dealer.

Although contributing capital to a failed broker‐dealer may be one way to deliver

assets to a broker‐dealer without entrusting those assets as required by SIPA, that

does not mean there are not many other ways to deliver assets without entrusting

them—here, by selling those assets to a broker‐dealer as part of a repo.

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 inconsistent with our caselaw, and decline to follow it here.

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D. Subsequent Legislative Activity

Finally, the appellant moves beyond entrustment, 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 alterius—“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., 506 B.R. at 357.

“[E]xpressio unius . . . does not apply ‘unless it is fair to suppose that Congress

considered the unnamed possibility and meant to say no to it.’” Marx v. Gen.

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Revenue Corp., 133 S. Ct. 1166, 1175 (2013) (quoting Barnhart v. Peabody Coal Co.,

537 U.S. 149, 168 (2003)).7

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 version of Dodd‐Frank did not include this provision, and instead

expressly endorsed the preexisting SIPA definition. See Dodd‐Frank Wall Street

 7 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., 498 U.S.

19, 32 (1990). But when Congress amended SIPA in 1978, there was no existing law against

which Congress could legislate. No court considered repos in the context of SIPA until Bevill,

Bresler in 1986. Instead, the appellant can at best argue that Congress’s failure to pass additional

amendments overriding the result in Bevill, Bresler reflects an endorsement of that decision. But,

here, congressional inaction is a shaky basis on which to interpret a statute. Cf. Zuber v. Allen, 396

U.S. 168, 185‐186 n.21 (1969). And even if we were to consider congressional inaction, an isolated

district court decision, however “seminal,” is hardly a firm baseline against which to read that

inaction. If anything, our decision in Baroff stands as the baseline, and we should interpret

congressional inaction in this area as endorsing Baroff’s entrustment requirement.

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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. 78lll).”). 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.

At the outset, we note that Congress enacted Dodd‐Frank in 2010, after the

SIPA liquidation of Lehman commenced in September 2008. Because customer

status is determined as of the SIPA filing date, see In re New Times, 463 F.3d at 128,

Dodd‐Frank cannot make the appellant a customer. But more broadly, that

Congress did not enact a specific provision is at best “marginal evidence” that it

was rejecting the exclusion of repos from SIPA. Riverkeeper, Inc. v. U.S. EPA, 358

F.3d 174, 191 (2d Cir. 2004). This is especially true here, where, in light of Baroff

and the Eleventh Circuit’s decision in ESM, Congress may well have rejected the

proposed amendment because it thought the amendment was superfluous in light

of preexisting law. See Pension Ben. Guar. Corp. v. LTV Corp., 496 U.S. 633, 650

(1990) (“Congressional inaction lacks persuasive significance because several

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equally tenable inferences may be drawn from such inaction, including the

inference that the existing legislation already incorporated the offered change.”

(internal quotation marks omitted)). The appellant does not offer any explanation

for why Congress rejected the proposed amendment of the customer definition,

and the legislative history of Dodd‐Frank appears to be silent on the question.  

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).8 As explained

above, the Bankruptcy Code adopts a definition of customer that tracks the

statutory definition in SIPA. The appellant once more reasons by negative

implication that if Congress amended the Bankruptcy Code to exclude repos, but

did not similarly amend SIPA, then SIPA must protect repos. But the amendment

of the Bankruptcy Code does not supply a sound basis for drawing any inferences

about the SIPA provision at issue here. As explained above, SIPA and the

 8 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”).

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Bankruptcy Code are two different statutory schemes. Despite the similarities of

the customer definition, the Bankruptcy Code lacks many of the other features of

SIPA, including most importantly the SIPC trust fund. These dissimilarities, in

turn, fatally undermine any attempt to draw inferences about SIPA from

Congress’s modification of the Bankruptcy Code.

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.

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