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Securities and Exchange Commission v. Alan F. Hughes Inc.

decided: June 21, 1973.


Moore, Friendly and Feinberg, Circuit Judges.

Author: Feinberg

FEINBERG, Circuit Judge:

In August 1971, the Securities and Exchange Commission (SEC) filed a complaint in the United States District Court for the Northern District of New York alleging that Alan F. Hughes, Inc., a registered broker-dealer, aided and abetted by its president, Alan F. Hughes, had violated various provisions of the Securities Exchange Act of 1934. The complaint sought an injunction and appointment of a receiver. This relief was granted. Thereafter, the Securities Investor Protection Corporation (SIPC) determined that Hughes, Inc. was in danger of failing to meet its obligations to its customers and that there existed one or more of the conditions specified by section 5(b)(1)(A) of the Securities Investor Protection Act of 1970 (the 1970 Act), 15 U.S.C. § 78eee(b)(1)(A). In January 1972, Chief Judge James T. Foley, agreeing with SIPC's conclusions, granted its application for appointment of a trustee for liquidation of Hughes, Inc. under the 1970 Act.*fn1 The application by SIPC was hotly contested both in the district court and on appeal to this court on a number of grounds. The decision of this court, with which familiarity will be assumed, was the first to interpret the 1970 Act in a number of important respects. SEC v. Alan F. Hughes, Inc., 461 F.2d 974 (2d Cir. 1972). Among other things, we held that a broker-dealer resisting an application by SIPC for liquidation is entitled to a de novo judicial determination that "the broker-dealer has failed or is in danger of failing to meet its obligations to its customers." 461 F.2d at 979.

So much is prologue to this proceeding, in which counsel for defendants in the prior litigation claim that for their services in resisting the SIPC application they are entitled to attorneys fees*fn2 as a matter of first priority from the estate of Hughes, Inc. or from SIPC funds, or from both. Their fee application was denied by Judge Foley on the ground that there was no legal basis for allowing such a fee,*fn3 and this appeal followed. Appellants argue that the 1970 Act and the Bankruptcy Act both authorize the compensation requested and that failure to so construe these Acts denies due process of law to those against whom SIPC proceeds, and is arbitrary, capricious and a denial of the equal protection of the laws.

The 1970 Act

In pressing their claim for compensation, appellants rely upon subsection 6(f)(2) of the 1970 Act, 15 U.S.C. § 78fff(f)(2), which provides that in addition to advancing funds for claims of customers against the broker-dealer being liquidated, "SIPC may advance to the trustee such moneys as may be required to effectuate subsection (b)(1)(A) of this section." Subsection 6(b)(1)(A) sets forth the powers of a trustee under the 1970 Act, which include the power, with SIPC approval, to

hire and fix the compensation of all personnel . . . and other persons (including but not limited to accountants) that are deemed by such trustee necessary for all or any purposes of the liquidation proceeding. . . . [Emphasis added.]

Appellants argue that since this court held in its prior opinion that a de novo judicial hearing is an integral aspect of an SIPC liquidation proceeding, one of the "purposes" of that proceeding must be to give a broker-dealer a chance to show that the claims against it are insufficient or incorrect. For legal services in that endeavor, they claim, the 1970 Act thus clearly authorizes compensation. However, this argument confuses a defendant's rights at an SIPC hearing with the congressionally-defined powers of an SIPC trustee. Section 6(a) of the 1970 Act, 15 U.S.C. § 78fff(a), enumerates the "purposes of the liquidation proceeding" to which subsection 6(b)(1)(A) refers. These are to return specifically identifiable property to the debtor's customers, to pay customers, to operate the debtor's business in order to complete open contractual commitments, to enforce rights of subrogation, and to liquidate the debtor's business. The legal services in question do not fit into any of these categories. Appellants' argument in its simplest form is that resisting liquidation is a purpose of the liquidation proceeding. While Congress could so provide we do not believe that it has.

Appellants also argue that unless we accept their construction of the 1970 Act, respondents to SIPC liquidation applications will be unconstitutionally deprived of the assistance of counsel. Appellants point out that the SEC and SIPC frequently act in tandem to tie up a firm's assets pending judicial determination of the application for a trusteeship and liquidation,*fn4 and argue that counsel will not undertake a defense without assurance of subsequent payment. Defendants obviously suffered no deprivation of legal services here, and the same willingness of attorneys to represent a debtor resisting involuntary proceedings under the Bankruptcy Act is a frequent phenomenon. Quite apart from the observation that we do not understand the law to be that, as a general matter, the Constitution requires the appointment of counsel for litigants in civil cases,*fn5 the analogy to the Bankruptcy Act is compelling. We have long held that legal services in resisting a bankruptcy petition are not compensable under that Act, see, e.g., In re Evenod Perfumer, Inc., 67 F.2d 878 (2d Cir. 1933), cert. denied, 291 U.S. 671, 54 S. Ct. 455, 78 L. Ed. 1060 (1934), and it has not been seriously doubted that this interpretation is constitutional. Moreover, if the Constitution does not require exemption from a filing fee for an indigent who seeks to take advantage of the bankruptcy laws, see United States v. Kras, 409 U.S. 434, 93 S. Ct. 631, 34 L. Ed. 2d 626 (1973), it surely does not require that a brokerage firm resisting an application under SIPC be entitled to have its attorneys paid out of the estate.

The Bankruptcy Act

Appellants also rely upon sections 60d and 64a of the Bankruptcy Act, 11 U.S.C. §§ 96(d), 104(a), both of which, under section 6(c)(1) of the 1970 Act, 15 U.S.C. § 78fff(c)(1), apply to SIPC liquidations. Section 64a gives a first priority claim against the estate of the debtor for

one reasonable attorney's fee . . . irrespective of the number of attorneys employed, to the bankrupt in voluntary and involuntary cases . . . in such amount as the court may allow.

Appellants concede that the cases take a narrow view of the protection offered attorneys' fees by section 64, limiting compensation to services that "aid in the administration of the estate." Despite the authority that resisting a bankruptcy application does not so "aid" the estate, see In re Evenod Perfumer, Inc., supra; 3A Collier on Bankruptcy para. 62.31[4] (14th ed. 1972), appellants argue that in the context of an SIPC liquidation the section should be construed differently to allow compensation for such services. The reasons given for distinguishing the two situations are that an SIPC proceeding is initiated by a public, not a private, body; that the proceeding may commence even though the broker-dealer may be solvent; and that allowing such attorneys' fees could greatly reduce the amount available for creditors in a straight bankruptcy proceeding, but would not affect the moneys going to broker-dealer customers in an SIPC proceeding.

The first of these arguments is, in this context, a distinction without a difference. The second is no distinction at all, since a creditor petitioning in bankruptcy and SIPC seeking a liquidation may each err in their allegations. Perhaps appellants' point is that SIPC may base a petition upon "technical" violations, such as bookkeeping deficiencies or an inability to meet net capital requirements,*fn6 whereas a creditor in straight bankruptcy must allege something more substantial. The two-fold answer is that "technical" violations under the 1970 Act are frequently most significant, and, in any event, an SIPC liquidation cannot be ordered unless the court finds that the broker-dealer has failed or is in danger of failing to meet its obligations to its customers, surely not just a "technical" matter. The final point is the only one that gives pause at all -- although not for long. It may be true that allowing fees to the attorneys for defendants in an SIPC proceeding would not reduce the fund available for most broker-dealer ...

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