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UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF NEW YORK

In re

MF GLOBAL INC.,

Debtor.

FOR PUBLICATION

Case No. 11-2790 (MG) SIPA

MEMORANDUM OPINION AND ORDER DENYING MOTION FOR ORDER

AUTHORIZING THE APPOINTMENT OF AN OFFICIAL COMMITTEE OF

COMMODITY BROKER CUSTOMERS AND APPROVING COMPENSATION OF

ALLOWED FEES AND EXPENSES OF COMMMITTEE PROFESSIONALS

A P PEA RANC E So'

HUGHES HUBBARD & REED LLP

Counselfor James W. Giddens, Trustee for the SIPA Liquidation ofMF Global Inc.

One Battery Park Plaza

New York, New York 10004

By: Anson Frelinghuysen, Esq.

Christopher K. Kiplok, Esq.

Jeffrey S. Margolin, Esq.

Sarah K. Loomis Cave, Esq.

STROOCK & STROOCK & LAVAN LLP

Counselfor Certain Commodity Broker Customers

180 Maiden Lane

New York, New York 10038

By: Lewis Kruger

Andrew P. DeNatale

Curtis C. Mechling

Mark A. Speiser

DEWEY & LEBOEUF LLP

Counselfor Statutory Creditors' Committee ofMF Global Holdings Ltd., et al.

1301 Avenue ofthe Americas

New York, New York 10019

By: Martin Bienenstock, Esq.
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TRACY HOPE DAVIS

United States Trustee for Region 2

22 Whitehall Street, 21st Floor

New York, New York 10004

By: Linda Riffkin, Esq.

MARTIN GLENN

UNITED STATES BANKRUPTCY JUDGE

Pending before the Court is the motion of certain commodity broker customers of MF

Global Inc. ("MFGI"), requesting an Order Authorizing the Appointment of an Official

Committee of Commodity Broker Customers and Approving Compensation ofAllowed Fees and

Expenses of Committee Professionals ("Steering Committee Motion," ECF # 161).1 The

Steering Committee Motion is opposed by (1) James W. Giddens (the "Trustee"), as Trustee for

the liquidation ofthe business ofMFGI under the Securities Investor Protection Act of 1970, as

amended ("SIPA"), 15 U.S.C. §§ 78aaa-78111 (2006) ("MFGI Liquidation") (ECF Doc. #357);

(2) the Securities Investor Protection Corporation ("SIPC") (ECF Doc. #358); and (3) the

Statutory Creditors' Committee ofMF Global Holdings Ltd., et a1.2 (ECF Doc. #359). The

United States Trustee ("UST") also filed the Comments ofthe United States Trustee, as Amicus

Curiae, on Motion for Order Authorizing Appointment of an Official Committee of Commodity

Brokers and Approving Compensation ofAllowed Fees and Expenses of Committee

Professionals (ECF Doc. #371). While the UST acknowledges that she has no official role in the

The reference is to the first ofseveral similar motions-this one filed by a self-identified "Steering

Committee" of 66 MFGI customers-seeking the appointment of an official committee of commodities customers

and approval of compensation. Other similar motions, statements in support ofthe motion and letters from

customers ofMFGI seeking similar relief were also filed. See, e.g., ECF Doc. #354; ECF Doc. #362, ECF Doc.

#363. The arguments in suppOli ofthe motions and requests for authorization of an official committee are the same.

This opinion addresses the Steering Committee Motion, but in so doing it disposes of all similar motions and letter

requests.

2 MF Global Holdings Ltd. and one ofits unregulated affiliates are debtors in chapter 11 cases also filed in

this Court. See In re MF Global Holdings Ltd, Case No. 11-15059 (MG), filed on October 31, 2011.

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administration of a SIPA liquidation-that role instead is played by SIPC-the UST is interested

in the outcome ofthe Steering Committee Motion "because it seeks the formation of a creditors'

committee by a means not permitted by 11 U.S.C. § 705 and seeks an order improperly

providing that the fees and expenses ofsuch a committee's professionals would be entitled to

payment from the estate as administrative expenses under 11 U.S.C. §§ 503(b) and 105(a)." Id.

1-2.

The concerns expressed by customers in the MFGI Liquidation are real and substantial.

The collapse of MFGI has given rise to a commodities broker liquidation of immense scope and

complexity. Since this case was filed the Trustee (with the required approval from SIPC and the

Commodity Future Trading Commission ("CFTC"», after obtaining approval ofthe Court, has

transferred (or is in the process of doing so) to other futures commissions merchants

approximately 40,000 customer accounts containing close to $2 billion in customer cash or

collateral, (ECF Doc. #14 & #316), giving those customers access to at least some ofthe value

that had been in their MFGI accounts. Other customers have not yet been able to gain access to

their funds or property.

While it was initially widely reported that approximately $600 million of customer

collateral held with MFGI-which should have been maintained in segregated accounts-has not

been located, the Trustee reported on November 22,2011 that the actual shortfall may be in

excess of $1.2 billion.3 Although SIPe replaces missing stocks and other securities-that is,

"money, stocks and other securities that are stolen by a broker or put at risk when a brokerage

fails for other reasons"-where it is possible to do so, SIPC does not protect commodity futures

Tiffany Kary & Linda Sandler, MF Global's Shortfall May Exceed $1.2 Billion, Trustee Says, BLOOMBERG

BUSINESSWEEK, Nov. 22, 2011, http.www.businessweek.com/news/2011-11-22/mf-global-s-shortfall-may-exceed1-2-billion-trustee-says.html.

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contracts. How SIPC Protects You, SECURITIES INVESTOR PROTECTION CORPORATION, 3 (2011),

http://www.sipc.org/pdffHSPY_English_2011.pdf; see also What SIPC Covers...What It Does

Not, http://www.sip.org/how/covers.cfm (last visited Nov. 22, 2011). The Trustee is required by

section 766(h) ofthe Bankruptcy Code "to distribute property ratably to customers on the basis

and to the extent ofsuch customers' allowed net equity claim ...." 11 U.S.C. § 766(h). Unless

the Trustee is able to recover the missing cash or property, MFGI's commodity broker customers

face the prospect of very substantial losses. The Trustee's reluctance to distribute a larger

percentage of customer property until the magnitude oflosses is known is understandable, even

ifit prolongs the financial distress ofMFGI's customers.

MFGI's customers have been very vocal in this case, and appropriately so-many joining

together to retain counsel for ad hoc groups, others separately represented by counsel and many

others acting pro se. The customers have played a useful role. Despite customers' frustration,

the Trustee has demonstrated that he is responsive to customers' concerns. The issue before the

Court, however, is whether SIPA or the Bankruptcy Code authorizes the appointment of an

official committee in a SIPA liquidation, with compensation for a committee's professionals

from estate property. For the reasons explained below, the Court concludes that no such

authority exists. In the absence ofstatutory authority, the Court concludes that it does not have

the power to grant the requested relief. Furthermore, even ifthe Court had the discretion to

authorize the appointment of an official committee in these circumstances, I would not do so.

Therefore, the Steering Committee Motion (and other motions seekingsimilar relief) is

DENIED.

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BACKGROUND

On October 31, 2011, the Honorable Paul A. Engelmayer ofthe United States District

Court for the Southern District ofNew Yark entered an Order Commencing Liquidation of

MFGI pursuant to the provisions of SIPA, 15 U.S.C. § 78aaa-78lll. That Order (i) appointed

JamesW. Giddens as Trustee for the liquidation ofthe business ofMFGI pursuant to

section 78eee(b)(3) of SIPA, (ii) appointed the law firm of Hughes Hubbard & Reed LLP as

counsel to the Trustee pursuant to section 78eee(b)(3) of SIPA, and (iii) removed the case to this

Court as required by section 78eee(b)(4) of SIPA.

On November 2,2011, this Court approved the transfer by the Trustee of certain

segregated customer commodity positions and authorized the Trustee to operate the business of

MFGI in the ordinary course. (ECF Doc. #14). On November 4,2011, the Court granted the

Trustee the authority to issue subpoenas for the production of documents and the examination of

MFGI's current and former officers, directors, employees and other related persons to facilitate

its investigation into the alleged shortfall in customer-segregated property. (ECF Doc. #34). On

November 17,2011, the Court approved a second partial transfer of certain customers' cash-only

accounts. (ECF Doc. #316). The Trustee has indicated that he hopes soon to make one or more

additional motions to transfer cash or other customer property, with the goal of equalizing the

distribution of customer property to all MFGI customers.

DISCUSSION

The Steering Committee Motion asks the Court to authorize the appointment of an

official committee comprised of commodity broker customers and to approve compensation of

fees and expenses of committee professional as administrative expenses ofthe commodity

customer property estate. The motion claims many potential benefits ofsuch a committee during

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the MFGI Liquidation, including (i) ensuring that the commodity customer priority is properly

and fairly applied, (ii) representing the interests of commodity customers in any issues that may

arise between the commodity customer and securities customer estates, (iii) and assisting in

expediting distributions of commodity customer property. See Steering Committee Motion ,-r,-r 9-

13. Whether these supposed benefits are real or ephemeral is uncertain at best. Each ofthese is

clearly the responsibility ofthe Trustee, with oversight by SIPIC and the CFTC, subject to

approval ofthe Court. There is no role to be played by an official committee.

What is principally lacking in the Steering Committee Motion is any legal authority

supporting the requested relief. The motion relies on sections 105 and 705 ofthe Bankruptcy

Code. But a plain reading of SIPA and the Bankruptcy Code shows a complete absence of

authority for appointment of a customers' committee in a SIPA liquidation, and even more

clearly the absence of authority for compensation from estate assets of committee professionals

of a committee properly elected in a chapter 7 case.

The motion is premised upon the argument that the MFGI Liquidation is comprised of

two separate matters: (1) a SIPA liquidation of a securities broker-dealer and (2) a liquidation of

a commodity broker under chapter 7 ofthe Bankruptcy Code.4 The customers argue that the

dual-track nature ofthe proceedings means that provisions of chapter 7 apply and authorize a

creditors' committee under chapter 7 to assist in the liquidation ofthe commodity broker arm of

MFG!. According to the motion, "[n]othing in SIPA prevents the appointment of an official

committee in such a dual-track proceeding." Id.,-r 1.

Because MFGI deals in both securities and commodities, it is known as a "joint broker-dealer."

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Section 705 ofthe Bankruptcy Code provides:

(a) At the meeting under section 341(a) of this title, creditors that may

vote for a trustee under section 702(a) of this title may elect a

committee of not fewer than three, and not more than eleven, creditors,

each of whom holds an allowable unsecured claim of a kind entitled to

distribution under section 726(a)(2) ofthis title.

(b) A committee elected under subsection (a) of this section may consult

with the trustee or the United States trustee in connection with the

administration ofthe estate, make recommendation to the trustee or the

United States trustee respecting the performance ofthe trustee's duties,

and submit the court or the United States trustee any question affecting

the administration ofthe estate.

11 U.S.C. § 705 (emphasis added). Relying on section 705 and also citing section 702

(addressing the characteristics a creditor must possess to be eligible to vote for a trustee), the

motion concludes: "Thus, commodity broker customers are entitled to elect a committee

pursuant to section 705 ofthe Bankruptcy Code." Steering Committee Motion 8 n.8.

A. Election of Committees in a SIPA Proceeding

The motion glosses over the actua11anguage ofsection 705 and the interplay between the

Bankruptcy Code and SIPA. See 15 U.S.C. § 78fff(b) ("[T]o the extent consistent with the

provisions ofthis chapter, a liquidation proceeding shall be conducted in accordance with, and as

though it were being conducted under chapters 1, 3 and 5 ofsubchapters I and II of chapter 7 of

title 11."). Section 705 provides that "creditors that may vote for a trustee ... may elect a

committee ...." 11 U.S.C. § 705(a). In a SIPA liquidation, however, no creditors may vote for

a trustee; rather, selection ofthe SIPA Trustee is solely at the discretion ofSIPIC. See 15 U.S.C.

§ 78eee(b)(3); see also 6 COLLIER ON BANKRUPTCY 760.08 (Alan N. Resnick & Henry J.

Somme eds., 16th ed. 2011) ("[I]n the event ofthe bankruptcy of a commodity broker that

becomes the subject of a SIPA proceeding, there is a single bankruptcy trustee who is selected by

the Securities Investor Protection Corporation."). The provisions ofthe Bankruptcy Code are

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only applicable in a SIPA proceeding to the extent that they are consistent with the provisions of

SIPA. See 15 U.S.C. § 78fff(b). Therefore, the Court concludes that section 705 ofthe

Bankruptcy Code is not applicable in a SIPA liquidation and does not provide a basis for the

election or appointment of a creditors' committee in this case.

Alternatively, the Steering Committee Motion argues that section 105(a) ofthe

Bankruptcy Code provides the Court with equitable power to appoint a commodity customer

committee. But section 105 cannot be used to expand the powers not otherwise provided in the

Bankruptcy Code. See In re Dairy Mart Convenience Stores, Inc., 351 F.3d 86, 91-92 (2d Cir.

2003) ("This Court has long recognized that [s]ection 105(a) limits the bankruptcy court's

equitable powers, which must and can only be exercised within the confines ofthe Bankruptcy

Code." (internal quotations and citation omitted)).

B. Compensation of Committees in a SIPA Proceeding

Even ifthis Court could authorize election or appointment of a commodity customers

creditors' committee in this case, the Court could not authorize compensation for the

committee's professionals from estate property. In those chapter 7 cases where a creditors'

committee is elected, section 705 does not contemplate the payment offees and expenses of

committee professionals as administrative expenses. See In re Dominelli, 788 F.2d 584,586 (9th

Cir. 1986); 6 COLLIER ON BANKRUPTCY 705.03[3] ("Section 705 does not provide for

compensation or reimbursement to counsel to a chapter 7 creditors' committee. Legislative

history accompanying section 705 confirms that the absence of any such provision was

intentionaL").

The Steering Committee Motion points to two cases in which compensation to creditors'

committee professionals was approved. See Sable, Makoroff& Gusky, P. C. v. White (In re

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Lyons Transp. Lines, Inc.), 162 B.R. 460 (BanIa. W.D. Pa. 1994); In re Wonder Corp. ofAm., 72

B.R. 580, 583 n.3 (Banl<r. D. Conn. 1987). The result in Lyons is questionable, but the case is in

any event distinguishable. The committee in that case was formed while the debtor was

attempting to reorganize under chapter 11. Upon conversion to chapter 7, the court found that

committee participation and assistance in the case was necessary due to the complexities ofthe

case and approved the continuance offee payments pursuant to its discretionary authority under

section 105(a). Id. at 463. An objection to counsel fees was pressed, arguably in bad faith, only

after substantial services were performed in reliance on the order. Lyons can therefore be read as

a case involving judicial estoppel.

Wonder Corp. is also distinguishable. A chapter 7 case was converted to chapter 11, and

a chapter 11 plan was confirmed. Counsel for the chapter 11 creditors' committee, that was

initially created when the case was administered under chapter 7, was awarded fees mostly for

his work representing the chapter 11 creditors' committee, but also including a smaller amount

for his work representing the committee when the case was under chapter 7. The court stated in

a footnote that "[a]lthough the Code does not specifically provide for the employment of counsel

by a creditors' committee elected pursuant to Code § 705(a), ... upon application ofthe

creditors' committee, this court authorized such employment in this case in accordance with

Code § 105(a)." Wonder Corp., 72 B.R. at 583 nJ. There is no indication whether anyone

objected to the authorization to employ counsel for the chapter 7 committee. No objection was

made and no analysis was provided for approving the payment of counsel's fees for work for the

pre- 01' post-conversion committee. Id. at 586.

The Lyons court also acknowledged contrary authority. See In re Dominelli, 788 F.2d

584 (9th Cir. 1986); In re Willbet Enters., Inc., 43 B.R. 90 (Banl<r. E.D. Pa. 1984) (finding that

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court did not have authority under section 105 to authorize committee professional fees, an issue

which Congress had specifically considered and limited). The Dominelli court squarely rejected

the argument made here, concluding that nothing in the Bankruptcy Code provides for payment

of a chapter 7 creditors' committee's counsel, and pointing to the legislative history ofsection

705 as demonstrating that this omission was not an oversight. Id. at 586 (citing S. REp. No. 989,

95th Cong., 2d Sess. 94 (1978) ("There is no provision for compensation or reimbursement of

[committee] counsel.")). The Dominelli court held that a court could not use its general

equitable power to authorize something that Congress considered and rejected. Id. The effort in

the Steering Committee Motion to distinguish or explain those contrary authorities is

unconvincing.

But even ifthe Court could authorize election or appointment of a creditors' committee,

and further approve compensation for such a committee's professionals from estate property, I

would not do so in the circumstances present in this case. Mr. Giddens is a very experienced

SIPA Trustee, represented by very experienced counsel, with mandated oversight provided by

SIPC and the CFTC, and, of course, by this Court. MFGI's customers can continue to participate

actively in this case, as they have to date, with or without the assistance of counsel. There is no

demonstrated need or justification to saddle this already heavily burdened estate with the

expenses attendant to an official committee.

For all ofthese reasons, the Motion requesting the appointment of a commodity customer

committee is DENIED.

Dated: November 23,2011

New York, New York.

/s/Martin Glenn

MARTIN GLENN

United States Bankruptcy Judge

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