Opinion ID: 483916
Heading Depth: 2
Heading Rank: 1

Heading: The Customer Claim

Text: 6 To succeed with its claim to customer status and the greater privileges over the debtor's estate which accompany this position, Resource must show that its transactions with ESM fit into the definition of a customer outlined in 11 U.S.C. Sec. 741(2). Subsection (2)(A) allows customer status when securities are held for the purchaser by the debtor, therefore this does not apply to Resource. Resource claims that it fits within subsection (2)(B)(ii), in that the principal and interest claimed were deposits of cash to be used for purchasing or selling a security. This is an invalid application of the statute. 7 Both parties agree 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. Securities Investor Protection Corp. v. Executive Sec. Corp., 556 F.2d 98 (2d Cir.1977). The agreements concerning this cash must bear the indicia of the fiduciary relationship between a broker and his public customer, [not] the characteristics of, at most, an ordinary debtor-creditor relationship. Id. at 99 (quoting SEC v. F.O. Baroff Co., 497 F.2d 280, 284 (2d Cir.1974)). 8 In the case at bar there is no indicia of a fiduciary relationship. ESM was not holding cash that rightfully belonged to Resource. As the contract pointed out, the seller (ESM) shall be entitled to each payment of any principal of, interest in or any other amount payable on or with respect to any Securities. ESM was to use this cash to repurchase the securities from Resource, however, until then, the cash belonged to ESM not Resource. Subsection (2)(B)(ii) contemplates a situation where the purchaser gives money to a broker, etc., to purchase securities for said purchaser. This is not the situation in this case. Moreover, the fact that Resource contracted a security interest in this cash further convinces this court that there was no entrustment of funds and that this was an ordinary debtor-creditor relationship. 9 Resource urges this court to follow the recent district court decision In re Bevill, Bresler & Schulman Asset Management Corp., 67 B.R. 557, Fed.Sec.L.Rep. (CCH) p 92,966 (D.N.J.1986). This case holds that participants in repurchase and reverse repurchase contracts for the sale of securities and their resale back to the original seller at a future date are customers. We agree with the holding in this case, however, the facts of the Resource/ESM transaction are distinguishable. The Bevill case emphasizes the importance of the fiduciary relationship between the broker-dealer and its customers. In Bevill, the key factor for the court was that the debtor maintained specific trading accounts in which the securities, while owned by the purchaser, were held for the purchaser by the debtor/seller. On the other hand, the Resource/ESM deal made it clear that the principal and interest belonged to ESM, not Resource. Therefore, no fiduciary relationship existed. For these reasons, we find that Resource was not a customer of ESM under the provisions of 11 U.S.C. Sec. 741(2)(A) or (B).