The opinion of the court was delivered by: WYATT
This is an appeal by the trustee for the liquidation of Weis Securities, Inc. (Weis) under the Securities Investor Protection Act of 1970 (SIPA, 15 U.S.C. § 78aaa and following) from an order of Bankruptcy Judge Babitt, filed November 20, 1975.
The order provides for allocation of the total of administrative expenses incurred by the trustee during the period of May 30, 1973 to May 31, 1974 between the "single and separate fund" (fund) and the "general estate" (15 U.S.C. § 78fff(c)(2)(B). Under SIPA, assets held in the single and separate fund are for the benefit of "customers" of the debtor as therein defined; assets held in the general estate are for the benefit of the general creditors of the debtor.
On May 10, 1974, the trustee applied to Judge Babitt for an order allocating 80% of the trustee's administrative expenses for the period in question to the fund and 20% to the general estate. In support of the application, the trustee submitted documentary data concerning the amount of time actually expended by the trustee's attorneys, accountants and the like for the benefit of (a) customers and (b) general creditors, respectively. The 80%-20% allocation between them was the trustee's best estimate, based upon the data, of the actual time required on their separate problems.
On notice to all interested parties, a hearing was held before BJ Babitt on June 18, 1974, to consider (among other things) the allocation of administrative expenses proposed by the trustee, 80% to the fund, 20% to the general estate. The BJ declared that he was satisfied that this formula was "an administrative determination based upon experience, based upon what appears to be a permissible range" (SM 43); and that a more exact allocation would require too much time and effort (SM 43-44). Counsel for SIPC supported the allocation proposed by the trustee (SM 44); the BJ indicated that he relied on "the considered judgment of those charged with the administration of the statute" (SM 47), namely, SIPC, and relied "very heavily on the expertise of the trustee and his own experiences" (SM 49). The BJ also declared that the 80-20 allocation seemed "rational", that the "sums sound right" from the papers and "the reasonable prognosis" (SM 51), that it is "not arbitrary", that "it bears a rational relationship to their experience" (SM 52), that "I have already ruled that eighty-twenty sounds reasonable" (SM 57), and that the application of the trustee for 80%-20% allocation "is granted" (SM 57).
As the Bankruptcy Judge noted at the hearing (SM 48), SIPC was the largest claimant against the "single and separate fund" because SIPC is a priority claimant against that fund for its "advances" (15 U.S.C. § 78fff(c)(2)(B)). Thus, in supporting an allocation of 80% of expenses to that fund (rather than a smaller percentage) SIPC was not only exercising its expertise but was also putting aside its own selfish money interest.
The following day (June 19, 1974) BJ Babitt signed an order in which the 80%-20% allocation was "approved and confirmed in all respects". This order was filed on June 20, 1974.
Subsequently, on July 11, 1974, Mizrahi filed with the Bankruptcy Court a complaint in which it sought the allocation of all administrative expenses to the general estate, or alternatively, an allocation "supported by objective, quantifiable criteria" (Mizrahi complaint, p. 2).
The trustee filed an answer to the complaint on August 19, 1974.
The BJ set the matter for trial on September 10, 1974. The record does not disclose what happened on that date but apparently the trustee and Mizrahi agreed that the matter would be submitted on the papers; what these papers were does not appear, other than the complaint and answer.
On September 17, 1975, Judge Babitt handed down his decision and opinion.
This decision ignores the express approval by the Bankruptcy Judge of the 80-20 allocation formula, an approval given in a written order (filed June 20, 1974) after a hearing and notice, an approval supported and asked for by SIPC (the largest claimant against the fund). Not only is such approval ignored but the 80-20 allocation is described as "arbitrary" and "contrary to the equities". Judicial officers can (and often should) ...