Opinion ID: 334852
Heading Depth: 1
Heading Rank: 3

Heading: customer status of the employee-beneficiaries

Text: 14 The status of trust beneficiaries is not dealt with specifically in either the above-quoted section or elsewhere in the statute. However, both the relevant case law and our own interpretation of the term persuade us that the trust beneficiaries before us cannot come within the term customer, no matter how far that word is stretched in service to the equitable ends of SIPA. 4 15 In S. E. C. v. F. O. Baroff Company, Inc., 497 F.2d 280 (2d Cir. 1974), this Court held that a voluntary lender of securities to a failing brokerage house, who made his loan to solely help out the company, was not a customer within the meaning of SIPA. The rationale for the Court's decision was that the lender could in no wise be considered a public investor of the broker-dealer, the essential criterion for establishing customer status under the language of SIPA and within the intent of Congress. 16 The legislative history is clear that the 1970 Act was not designed to protect a lender in appellant's class. Most of the definition of customers, including subpart VI, was taken from section 60e(1) of the Bankruptcy Act, 11 U.S.C. § 96(e)(1), added in 1938, which established special rules (w)here the bankrupt is a stockbroker. Both the legislative history of that provision 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. 17 The 1970 Act carries through the same theme. The House Report states: The primary purpose of the reported bill is to provide protection for investors (emphasis supplied) if the broker-dealer with whom they are doing business encounters financial troubles. H.Rep.No.91-1613, 91st Cong., 2d Sess. (1970), 3 U.S.Code Congressional and Administrative News, 91st Cong., 2d Sess., p. 5255 (1970). Throughout the report investors is used synonymously with customers, indicating that, in the eyes of Congress, the Act would protect capital markets by instilling confidence in securities traders. 18 The emphasis throughout was on the customer as investor and trader . . . 497 F.2d at 282-3 (emphasis added; footnotes and citation omitted). 19 Emphasis on the customer as investor and purchaser/trader has been a consistent theme in cases in this Circuit. See, e. g., S. E. C. v. Packer, Wilbur & Co., 498 F.2d 978, 984 (2d Cir. 1974); S. E. C. v. Alan F. Hughes, Inc., 461 F.2d 974, 977 (2d Cir. 1972); S. E. C. v. Kelly, Andrews & Bradley, Inc., 385 F.Supp. 948, 950 (S.D.N.Y.1974); S. E. C. v. Kenneth Bove & Co., Inc., 378 F.Supp. 697, 700; (S.D.N.Y.1974). 5 Against this background, it is impossible to classify the Reading employees as customers of the debtor. 6 The one hundred and eight beneficiaries were neither investors nor traders. The funds in the trust account came from Reading; the decision to entrust those funds to the debtor was the Trustees'. Appellees' counsel conceded at oral argument that none of the one hundred and eight would have had any standing as a customer of the then-solvent broker-dealer to give any buy or sell order in the account. The financial relationship, insofar as the Plan is concerned, was entirely between the beneficiaries and their employer, not the broker-dealer. Moreover, with respect to the employees' participation in the Plan, we note that it amounted only to a bookkeeping matter on the Reading books. There could be an unlimited number of employee additions to, and subtractions from, the company's Profit Sharing Plan of which the broker would have no knowledge and with which no concern. The trust account itself was in the name of the Trustees who had the exclusive power to entrust the assets to the debtor, to invest and reinvest, and to purchase and trade securities in the account as they saw fit. In short, the single trust account, represented by the Trustees collectively, possessed the required attributes for customer status under SIPA; the Reading employees possessed none of those attributes. 20 Not only the relevant case law, but common sense as well, mandates this result. We are hard pressed to discern any of the usual traits of a customer relationship between the employee-beneficiaries and the debtor. Black's Law Dictionary (4th Ed., 1951) defines a customer as 21 One who regularly or repeatedly makes purchases of, or has business dealings with, a tradesman or business house. Ordinarily, one who has had repeated business dealings with another. A buyer, purchaser, or patron. (citations omitted) 22 The employee-beneficiaries in the case before us made no purchases, transacted no business, and had no dealings whatsoever with the broker-dealer in question respecting the trust account. Indeed, they could not have any such dealings since the broker-dealer held no property belonging to any individual employee, in which such employee could trade or invest. Calculable amounts were payable to Reading's employees only in the event that, pursuant to the terms of the Plan, they became entitled thereto. The argument that, notwithstanding their complete anonymity and total incapacity to have dealings with the broker-debtor, the Reading employees were customers of Morgan-Kennedy stretches that term wholly beyond its limits. 23 Appellees point to provisions of the Federal Deposit Insurance Act (FDIA), 7 which provide insurance coverage to the beneficiaries of customer accounts, in urging that a similar result be reached here. We cannot accept appellees' analogy of the two statutes in the case at bar. SIPA and FDIA are independent statutory schemes, enacted to serve the unique needs of the banking and securities industries, respectively. The Congress recognized this when it rejected several early versions of the SIPA bill which were patterned on FDIA and which extended insurance coverage to certain beneficial interests represented by customer accounts. 8 Moreover, insofar as SIPA's definition of customer is concerned, this Court has held that its roots lie in Section 60(e) of the Bankruptcy Act, 9 a view which supports our interpretation of the definition of customer. 10 24 Both of the courts below relied heavily on SIPC's Series 100 Rules (the Rules), 3 CCH Fed.Sec.L.Rep. P 26,667, to support the conclusion that all of the employee-beneficiaries were customers of the debtor. This reliance was misplaced. The Rules set forth the circumstances under which accounts which are held by the same individual in different capacities shall be treated as the accounts of separate customers; the effect of treating the accounts in this fashion is to entitle each such account to the maximum protection available to a customer of the debtor. Only those accounts which are held by valid customers of the debtor can qualify for separate coverage. 11 Customer status under SIPA is therefore a prerequisite to the application of the Rules, and not a substitute therefor. Both of the courts below engaged in an analysis of the Rules which took no cognizance of this fact. 25 We note further that the specific provisions of the Rules belie rather than support appellees' position. Under Rule 104 a qualifying trust account 12 may be afforded coverage as the account of a separate customer; however, in no case may the beneficiaries of such a trust receive individual coverage as separate customers. 13 A similar result is reached by Rule 105 which provides that where co-owners of a qualifying joint account 14 also hold other accounts in different capacities, the joint account will be treated as belonging to a separate customer; maximum coverage available to a single customer only will be available to the joint account, and the co-owners will be required to divide the single award in proportion to their ownership interests in the account. 15 These provisions illustrate that, under SIPA, separate coverage for accounts held in different capacities is not to be confused with individual coverage for each individual owning some portion of, or interest in, the particular account. The former is explicitly provided for under the circumstances outlined in the Rules; the latter is as explicitly forbidden under the same Rules. 26 We find neither legislative nor judicial support for appellees' position, and we reject as inimical to our understanding of the term appellees' claim that the employee-beneficiaries of the trust account were customers of the broker-debtor.IV. CUSTOMER STATUS OF THE THREE TRUSTEES 27 The Trustees have argued alternatively that, if SIPC's definition of a customer is to prevail, each of the three Trustees must be considered a separate customer with separate claims against the debtor, based upon the debtor's dealings with each. This argument is without merit. 28 Under SIPA, the protection afforded to customers of the debtor is limited. 16 The dollar maximums for advances to customers under § 78fff(f)(1) were selected by Congress with the intent of fully protecting the small investor only. 17 Accounts in excess of $50,000 which were estimated to comprise over 90% of the total dollar value of all accounts at the time SIPA was enacted 18 were to be left unprotected to the extent of any loss in excess of the statutory maximum. 19 29 Appellees concede that SIPA was designed to give maximum coverage to the small investor rather than to the large account. Bondy's br. at 10; Trustees' br. at 12. Nevertheless, the Trustees by their argument seek to evade this legislative scheme by attempting to secure for the trust account protection in excess of the $50,000 limit established under SIPA. Any suggestion that each of the three Trustees has a separate customer claim against the debtor is untenable. The Trustees together managed the account for the trust, 20 which was the true customer of the broker-dealer; 21 the number of trustees sharing this responsibility was fortuitous. 30 If the available maximum of a SIPC advance depended upon the number of parties jointly holding an account, individuals could arbitrarily expand that figure at will. Such a result is obviously repugnant to the plain meaning of the statute and to the intent of Congress in passing it. Accordingly, we hold that the three trustees, by virtue of the trust account held by them collectively, may advance one customer claim only against the debtor. 31