United States District Court, S.D. New York
March 17, 2015
In re LEHMAN BROTHERS INC., Debtor.
JAMES W. GIDDENS, as Trustee for the SIPA Liquidation of Lehman Brothers Inc., Debtor MOORE CAPITAL MANAGEMENT, LP, on behalf of MOORE GLOBAL INVESTMENTS, L.P., Claimant,
For Moore Capital Management, LP, on behalf of Moore Global Investments, L.P., Claimant: Jeffrey M. Eilender, Esq., Erik S. Groothuis, Esq., Samuel L. Butts, Esq., Schlam Stone & Dolan LLP, New York, NY; Lauren Teigland-Hunt, Esq., Teigland-Hunt LLP, New York, NY.
For CFTC, Amicus Curiae: Jonathan L. Marcus, Esq., Robert R. Wasserman, Esq., Robert A. Schwartz, Esq., Anne W. Stukes, Esq., U.S. Commodity Futures Trading Commission, Washington, D.C.
For James W. Giddens, as Trustee for the SIPA Liquidation of Lehman Brothers, Inc.: Michael E. Salzman, Esq., Anson B. Frelinghuysen, Esq., Marlena C. Frantzides, Esq., Hughes Hubbard & Reed LLP, New York, NY.
OPINION AND ORDER
Shira A. Scheindlin, UNITED STATES DISTRICT JUGDE.
Before the Court are cross-motions for summary judgment in a dispute over the status of the claims asserted by Moore Capital Management, LP, on behalf of Moore Global Investments, L.P. (" MGI" ), against the estate of Lehman Brothers Inc. (" LBI" ). In addition, the Commodity Futures Trading Commission (" CFTC" ) has filed an amicus curiae brief urging this Court to deny MGI the " customer" status it seeks.
On September 19, 2008, LBI was placed into liquidation under the Securities Investor Protection Act (" SIPA" ) of 1970, and James W. Giddens was appointed Trustee. SIPA governs the liquidation of broker-dealers that are registered with the Securities Exchange Commission (" SEC" ). In addition to having the general duties and powers of a bankruptcy trustee, a SIPA trustee is charged with recovering " customer property" -- i.e., the cash and securities held in brokerage accounts -- which is then pooled and distributed to " customers" pro rata. With respect to LBI's brokerage business, the Trustee has satisfied in full all undisputed customer claims, and has also made significant distributions to general unsecured creditors.
Prior to being placed into liquidation, LBI was also a commodity broker registered as a futures commission merchant (" FCM" ) with the CFTC. When a debtor operates as both a broker-dealer and a commodity broker, SIPA trustees are authorized to administer the commodity broker estate -- separate from the SIPA estate -- in accordance with the Bankruptcy
Code's commodity broker liquidation provisions, subchapter IV of chapter 7 (" subchapter IV" ).
Subchapter IV provides that " customers" of a commodity broker business are entitled to receive a pro rata distribution from " customer property." Customer property is defined as " cash, a security, or other property, or proceeds of such cash, security, or property, received, acquired, or held by or for the account of the debtor, from or for the account of a customer."  Under subchapter IV, " customer" status hinges on whether a creditor's claim is on account of a " commodity contract," as defined by section 761(4).
Thus, in a liquidation of a broker-dealer that was also a commodity broker, separate pools of customer funds are created for broker-dealer and commodity broker customers. In this case, the Trustee has not separately administered an estate under subchapter IV because LBI's exchange-traded derivatives business was sold to Barclays Capital Inc. on September 22, 2008, and there have been no valid customer claims asserted against the estate. However, MGI contends that it is entitled to " customer" status because its claim against LBI is on account of funds held by LBI to margin commodity contracts.
The Trustee does not deny that MGI has a claim against the estate. But the Trustee argues that the transactions giving rise to MGI's claim -- over-thecounter (" OTC" ) foreign exchange contracts (" OTC FX Contracts" ) in which LBI and MGI were counterparties -- are " forward" contracts that do not qualify as commodity contracts under subchapter IV. Accordingly, the Trustee argues that MGI is not entitled to customer status and is instead a general unsecured creditor. For the following reasons, the Trustee's motion is GRANTED to the extent of confirming its determination that MGI's claim is not entitled to customer status, and MGI's motion is DENIED. Further proceedings are necessary to determine whether the funds used to margin the OTC FX Contracts are property of the estate.
In January 2003, MGI and LBI entered into a Master Institutional Futures Customer
Agreement (the " Customer Agreement" ), which resulted in the opening of two accounts. The Customer Agreement permitted MGI to trade both OTC FX Contracts and exchange-traded futures contracts.
Under paragraph 2 of the Customer Agreement, MGI " agree[d] to maintain such collateral and/or margin in its account as LBI in its reasonable discretion may require." Paragraph 5 states that " [a]ll Contracts and other Property belonging to [MGI] which LBI . . . may at any time be carrying for [MGI] or holding in its . . . possession or control on behalf of [MGI] for any purpose, including safekeeping, shall be held by LBI as security and be subject to a general lien and right of setoff for the discharge of all liabilities and obligations of [MGI] owed to LBI . . ."
MGI booked OTC FX Contracts in its accounts between 2003 and the commencement of LBI's liquidation in September 2008. In addition, " [a]t least thirteen [f]utures [c]ontracts were booked into one of the MGI Accounts, each of which was subsequently reversed."  At the time LBI was placed into liquidation, MGI had approximately thirty open OTC FX Contracts as well as cash balances.
In the year preceding LBI's collapse, MGI became concerned about a possible default by LBI and the implications of such a default for customer assets held by LBI. During this period, MGI asked for, and received, " assurances that the assets of LBI customers like MGI would be protected in the event of LBI's insolvency."  Zurma Vargas, a director in LBI's futures department, told MGI representatives during phone conversations from late 2007 through September 2008, that MGI's funds would be protected. MGI claims, but the Trustee disputes, that " [w]ith respect to cash that was margining MGI's [OTC] FX Contracts, Ms. Vargas told MGI that those funds would be protected because they were held in a futures account." 
LBI never provided MGI with a written statement pursuant to SEC Rule 15c3-2 (2008). A document sent by LBI to its customers entitled " Client Asset Protection Overview" informed customers that LBI, as an FCM, was required to maintain three types of customer fund accounts: a " Segregated Funds" account; a " Secured Amount Funds" account; and a " Non-Regulated Funds" account. The description of the " Non-Regulated Funds" account provided that " [t]he assets held in this account can not [sic] be commingled with LBI's proprietary funds and are maintained in a designated Special Custody Account for the 'Exclusive Benefit of
Customers (EBOC Account)['] held at Chase."  The overview further provided that " creditors of LBI's bankruptcy estate would have no claim to any of the assets held in these three accounts," and that " the assets held in these accounts at Chase do not fall within the bankrupt estate and are reserved for payments to customers if LBI would ever file for bankruptcy." 
MGI's OTC FX Contracts and exchange-traded foreign exchange futures (" FX Futures" ) are both agreements to buy or sell currency in the future at a pre-determined rate and call for physical delivery of the underlying currencies at maturity. Positions in both contracts can be closed out early by offsetting contracts, in which case any gains or losses will be settled in cash without physical delivery of the underlying currencies. In addition, both types of contracts present counterparty credit risk. MGI was exposed to LBI's credit risk when engaging in the OTC FX Contracts. Had it traded FX Futures, MGI would have been exposed primarily to the credit risk of a clearinghouse such as the Chicago Mercantile Exchange.
LBI required MGI to post margin on the OTC FX Contracts. MGI entered into the OTC FX Contracts to hedge currency fluctuation risk. Whenever MGI needed to decrease one of the hedging positions it had in the MGI Accounts, MGI and LBI would enter into an offsetting FX Contract to decrease the net open position.
Pursuant to protocols issued by the Trustee, the OTC FX Contracts were deemed terminated as of the commencement of LBI's liquidation. MGI had outstanding gross cash balances in its accounts of $70,576,023.06 and $6,055,385.09. Upon termination of the OTC FX Contracts, $59,179,357.27 and $5,320,485.94 was owed to LBI in respect of the OTC FX Contracts in each account, reflecting the values of the contracts in favor of LBI. The remaining $11,396,647.79 and $734,899.15 (the " Net Cash Balances" ), respectively, represent the excess cash margin held by LBI.
It is this money -- roughly twelve million dollars -- as to which MGI seeks preferred customer status. On January 27, 2009, MGI filed two customer claims seeking the Net Cash Balances. After the Trustee denied the claims and reclassified them as general creditor claims, MGI filed an objection, asserting it was entitled to customer status.
III. LEGAL STANDARD
Summary judgment is appropriate " only where, construing all the evidence in the light most favorable to the non-movant and drawing all reasonable inferences in that party's favor, there is 'no genuine issue as to any material fact and . . . the movant is entitled to judgment as a matter of law.'"  " A fact is material if it might affect the outcome of the suit under the governing law, and an issue of fact is genuine if the evidence is such that a reasonable jury
could return a verdict for the nonmoving party." 
" [T]he moving party has the burden of showing that no genuine issue of material fact exists and that the undisputed facts entitle [it] to judgment as a matter of law."  To defeat a motion for summary judgment, the non-moving party must " do more than simply show that there is some metaphysical doubt as to the material facts,"  and " may not rely on conclusory allegations or unsubstantiated speculation." 
In deciding a motion for summary judgment, " [t]he role of the court is not to resolve disputed issues of fact but to assess whether there are any factual issues to be tried."  " 'Credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge.'" 
IV. APPLICABLE LAW
A. Derivatives, the Commodities Exchange Act, and the CFTC
1. Common Law Treatment of Derivatives
" Derivatives" can be defined as " complex financial contracts in which one party pays another party if 'something' happens in the future . . . . "  One early use of derivatives in the United States was " forward contracting" in which farmers would hedge against price fluctuations in agricultural products by setting price terms in advance, with delivery of the product in the future. Not surprisingly, " [t]he opportunity to make a profit as a result of fluctuations in the market price of commodities covered by contracts for future delivery motivated speculators to engage in the practice of buying and selling 'futures contracts'" even though they had no interest in the underlying commodity.
Under the common law, courts would not enforce speculative futures contracts, although they were not illegal per se.
Speculators solved the enforcement problem by trading futures contracts in private venues -- commodity exchanges -- whose members guaranteed performance. In Board of Trade of Chicago v. Christie Grain & Stock Co., the Supreme Court gave legitimacy to exchange traded derivatives. While the contracts were not settled by actual delivery, their standardized terms enabled them to be settled by set-off. The Supreme Court found that, " [s]et-off has all the effects of delivery."  Meanwhile, OTC trading -- unless it involved actual or forward delivery -- remained illegal.
2. The Commodity Exchange Act and the CFTC
Prior to 2000, the upshot of then-sections 4, 4b, and 4h of the CEA was that most domestic commodities contracts were required to be executed on a regulated commodities market. This meant that, consistent with the common law, most OTC derivatives were illegal. Accordingly, the CFTC's regulatory focus was on exchange-traded or other cleared " transactions involving contracts of sale of a commodity for future delivery . . . ." 
But whether executed by an FCM or not, certain types of commodity transactions are not subject to CFTC regulation. Forward contracts and spot contracts -- which are contracts for " the immediate sale and delivery of a commodity"  -- were not regulated. In 1992, OTC " swaps" -- " agreement[s] between two parties to exchange a series of cash flows measured by different interest rates, exchange rates, or prices with payment calculated by reference to a principal base"  -- and other hybrid derivatives were exempted from regulation.
And, as a result of the 1975 " Treasury Amendment," OTC foreign currency exchange contracts are not subject to regulation:
Nothing in this chapter shall be deemed to govern or in any way be applicable to transactions in foreign currency, security warrants, security rights, resales of installment loan contracts, repurchase options, government securities, or mortgages and mortgage purchase commitments, unless such transactions involve the sale thereof for future delivery conducted on a board of trade.
In 2000, Congress enacted the Commodities Futures Modernization Act, which lifted the CEA's ban on OTC derivative products at least when eligible contract participants (" ECPs" ) -- e.g., banks, corporations, and mutual funds -- were involved. Thus, at all times relevant to this case, most OTC transactions involving ECPs were legal. However, they were exempt from CEA regulations, including segregation requirements and other customer protections.
3. Regulation of FCMs
As of the filing date, and in keeping with the CFTC's focus on regulation exchange-traded derivatives, the CEA defined FCM to mean an entity " engaged in soliciting or in accepting orders for the purchase or sale of any commodity for future delivery on or subject to the rules of any contract market or derivatives transaction execution facility. . . ."  The CFTC's regulation of FCMs is extensive, and includes registration, disclosure, recordkeeping, and reporting requirements.
Furthermore, the CEA imposes strict segregation requirements for customer funds. Property held by an FCM in connection with a customers' exchange-traded domestic futures is required to be held in a segregated account. The CEA requires that FCMs
treat and deal with all money, securities, and property received by such [FCM] to margin, guarantee, or secure the trades or contracts of any customer of such [FCM], or accruing to such customer as the result of such trades or contracts, as belonging to such customer. Such money, securities, and property shall be separately accounted for and shall not be commingled with the funds of such commission merchant or be used to margin or guarantee the trades or contracts, or to secure or extend the credit, of any customer or person other than the one for whom the same are held . . . .
Similarly, an FCM must hold exchange-traded foreign-futures customer funds " under an account name that clearly identifies the funds as belonging to [the] customers," and such funds " may not be commingled
with the money, securities or property of such futures commission merchant . . . or used to guarantee the obligations of . . . such futures commission merchant."  There are also segregation requirements for commodity options and leverage transactions.
The CFTC has stated that:
The segregation provisions of the Act and the regulations are intended to insure that customer funds are preserved intact for the benefit of the customers regardless of any financial reverses experienced by the FCM. Proper segregation of customer funds also assures that if bankruptcy occurs, sufficient customer funds can be identified so that an orderly and expeditious transfer of open customer accounts to another FCM can be made, and so that customers may receive their funds promptly. 
In furtherance of these objectives, section 1.22 of the CFTC's regulations prohibits the use of one customer's funds to finance the trades of another customer. Thus, one customer's funds cannot be used to meet the margin calls, settlements, or other obligations of another customer. An FCM may deposit its own funds in the customer-segregated account to meet a customer's margin requirement, but may not withdraw its own funds if it would leave any customer undermargined.
C. Commodity Broker Liquidation
Under subchapter IV, customers are entitled to a pro rata distribution from customer property. A " customer" is an entity that holds a claim on account of a " commodity contract."  Accordingly, the definition of " commodity contract" is crucial to the determination of customer status.
On September 19, 2008, the Bankruptcy Code defined " commodity contract" to mean:
(A) with respect to a futures commission merchant, contract for the purchase or sale of a commodity for future delivery on, or subject to the rules of, a contract market or board of trade;
(B) with respect to a foreign futures commission merchant, foreign future; 
(C) with respect to a leverage transaction merchant, leverage transaction; 
(D) with respect to a clearing organization, contract for the purchase or sale of a commodity for future delivery on, or subject to the rules of, a contract market or board of trade that is cleared by such clearing organization, or commodity option traded on, or subject to the rules of, a contract market or board of trade that is cleared by such clearing organization;
(E) with respect to a commodity options dealer, commodity option; 
(F) any other agreement or transaction that is similar to an agreement or transaction referred to in this paragraph . . . .
Section 761(4)(F) -- the " similar to" provision -- was added in 2005. In discussing an analogous change to the definition of " swap agreement," Congress explained:
The definition of " swap agreement" originally was intended to provide sufficient flexibility to avoid the need to amend the definition as the nature and uses of swap transactions matured. To that end, the phrase " or any other similar agreement" was included in the definition. ( The phrase " or any similar agreement" has been added to the definitions of " forward contract," " commodity contract," " repurchase agreement" and " securities contract" for the same reason.)
Customer property is defined to mean property held on behalf of the FCM's customers. Under the Part 190 Rules, " customer property" is ratably distributed to customers divided into five account classes: futures accounts, foreign futures accounts, leverage accounts, cleared swap accounts, and " delivery accounts." 
D. The Customer Protection Rule and SIPA
Under the Securities Exchange Act of 1934, broker-dealers are required to comply with the SEC's Customer Protection Rule (" Rule 15c3-3" ), promulgated pursuant to section 15(c)(3) of the Exchange Act. Among other things, this Rule protects customer funds by mandating segregated customer bank accounts. And it protects customer securities by directing brokerages to obtain possession (or control) of such securities and by precluding use of them in the firm's proprietary business.
Rule 15c3-3 thus helps to ensure that customer property is available for distribution if the broker-dealer is liquidated. SIPA, enacted shortly after Rule 15c3-3, establishes the Securities Investor Protection Corporation, a " nonprofit corporation consisting of registered broker-dealers and members of national securities exchanges," and a framework for the orderly liquidation of brokerage firms. " SIPA serves dual purposes: to protect investors, and to protect the securities market as a whole." 
As explained by the Second Circuit:
SIPA establishes procedures for liquidating failed broker-dealers and provides their customers with special protections. In a SIPA liquidation, a fund of " customer property," separate from the general estate of the failed broker-dealer, is established for priority distribution exclusively among customers. The customer property fund consists of cash and securities received or held by the broker-dealer on behalf of customers, except securities registered in the name of individual customers. 15 U.S.C. § 78lll(4). Each customer shares ratably in this fund of assets to the extent of the customer's " net equity." Id. § 78fff-2(c)(1)(B).
Under SIPA, " [t]he term 'customer' includes . . . any person who has deposited cash with the debtor for the purpose of purchasing securities."  A customer is a person who has a claim based on ownership of securities. SIPA defines " security" to include " any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency . . . ."  But, " [e]xcept as specifically provided [in the statute], the term 'security' does not include any currency, or any commodity or related contract . . . ." 
A. Because MGI's OTC FX Contracts Are Not " Commodity Contracts," It Is Not a " Customer"
" [T]he plainness or ambiguity of statutory language is determined not only by reference to the language itself, but as well by the specific context in which that language is used, and the broader context of the statute as a whole."  Under section 761(4)(A) a commodity contract is defined, with respect to an FCM, as a " contract for the purchase or sale of a commodity for future delivery on, or subject to the rules of, a contract market or board of trade."
MGI concedes that to be a customer under subchapter IV it must have deposited
cash for the purpose of making or margining a commodity contract. MGI also accepts that the OTC FX Contracts do not satisfy section 761(4)(A) because they were not delivered on or subject to the rules of a contract market or board of trade. Instead, MGI argues that the OTC FX Contracts were similar to FX Futures and thus satisfy section 761(4)(F).
According to MGI, the OTC FX Contracts were " virtually identical to FX Futures from an economic perspective."  However, similarity from an economic perspective is beside the point. Reading section 761 in its entirety as it existed at the time LBI was placed into liquidation, the salient feature of the types of transactions that are defined as " commodity contracts" in subparagraph 4 -- futures, foreign futures, leverage transactions, and commodity options -- is that they are exchange traded or cleared and thus subject to CFTC regulation, including the mandatory segregation of customer property.
A subsequent amendment to the definition of commodity contract further illustrates this point. " Swaps historically were not subject to regulation under the CEA, and swaps customers were not entitled to any special customer protections under the commodity broker liquidation subchapter."  However, in 2010 the Dodd-Frank Act amended the definition of commodity contract to include " any other contract, option, agreement or transaction, in each case, that is cleared by a clearing organization."  Among other things, this subsection brought cleared swap transactions into the definition of " commodity contract." Not surprisingly therefore, the Dodd-Frank Act also amended the CEA to require FCMs to segregate money received in connection with cleared swaps.
In enacting subchapter IV, Congress sought to " maintain consistency" with the protections afforded by segregated customer funds requirements in the CEA and provide stability to the futures markets. As explained by another court, " [w]ith the exception of delivery accounts, which deal with specifically identifiable property associated with delivery, the [Part 190] account classes correspond directly to the classes of transactions protected by segregation requirements."  Accordingly, the OTC
FX Contracts do not qualify as commodity contracts because, as OTC derivatives, they were not subject to the CFTC's core regulatory requirements. For purposes of subchapter IV, any similarities between the OTC FX Contracts and exchange-traded futures are outweighed by this important difference.
MGI notes that both " leveraged transactions" offered by a leveraged transaction merchant and " commodity options" offered by a commodity options dealer qualify as commodity contracts under section 761 " despite the fact that such transactions generally are not executed on exchanges or cleared by clearinghouses."  However, both leverage contracts and commodity option trading are regulated by the CFTC, and both are subject to segregation requirements. In fact, commodity options highlight the connection between customer protection under subchapter IV and CFTC regulation -- the reason commodity options were added to the list of commodity contracts in section 761 was that " [a]lthough commodity option trading on exchanges is currently prohibited, it is anticipated that [the] CFTC may permit such trading in the future." 
Both parties focus on the distinction between forwards and futures by citing to various characteristics. The Trustee does so because the OTC FX Contracts are similar to forward contracts and the Bankruptcy Code defines " forward contracts" specifically to exclude " commodity contracts."  MGI does so because the
CFTC, in an attempt to expand its regulatory jurisdiction, has argued over the years that contracts similar to the OTC FX Contracts are not forwards but (illegal OTC) futures.
However, this debate is not particularly helpful. It mainly adds undue complexity to this case, while also ignoring the historical distinctions between forwards and futures. The CFTC has historically regulated the legal exchange-traded futures. Forwards have also been legal, but have historically not been exchange traded. The term " futures" has thus became synonymous with exchange-traded transactions, and " forward contracts" have become synonymous with OTC transactions.
It is this commonly accepted usage of " futures" that informs section 761(4). For this reason, MGI's citation to authority distinguishing between cash forwards and futures in the context of CFTC enforcement actions is not helpful. The cases cited by MGI do not address section 761, the Part 190 Rules, or the exclusion of futures contracts from the definition of forward contracts in the Bankruptcy Code.
Rather, the underlying issue in the cases cited by MGI was whether the CFTC had authority to prosecute misconduct in connection with OTC transactions. In order
to expand its anti-fraud jurisdiction, the CFTC argued that the trades at issue were illegal OTC futures. In determining whether the contracts were forwards or futures these courts primarily relied on whether the contracts contemplated actual delivery of the commodity.
Not only are these cases not on point, they are stale. More recent cases recognize that standardization and fungibility are more important factors than whether the contracts contemplated actual delivery. For purposes of subchapter IV, standardization and fungibility are important to the extent that they are predicates for exchange trading -- what the CFTC has historically regulated.
Lastly, MGI's reliance on a CFTC release in which it interpreted the term " commodity contract" under section 761(4) to include contracts that are not executed on an exchange is also misplaced. Although the contracts at issue were not executed on an exchange, they were submitted for clearing to a derivatives clearing organization. Accordingly, the transactions were subject to the rules of a regulated derivatives clearing organization.
Because MGI did not deposit cash for the purpose of margining a commodity contract within the meaning of section 761(4), it is not entitled to customer status. While the Customer Agreement required MGI to post margin, neither the CEA nor any CFTC regulation required that this margin be segregated from other funds. In short, the OTC FX Contracts were not regulated by the CFTC and therefore do not qualify for customer protection under section 761(4).
B. The Customer Agreement Is Not a Commodity Contract Under Section 761(4)(J)
Section 761(4)(J) defines " commodity contract" to include
any security agreement or arrangement or other credit enhancement related to any agreement or transaction referred to in this paragraph, including any guarantee or reimbursement obligation by or to a commodity broker or financial participant in connection with any agreement or transaction referred to in this paragraph, but not to exceed the damages in connection with any such agreement or transaction, measured in accordance with section 562.
According to MGI its claim arises from a commodity contract under section 761(4)(J) because the Customer Agreement expressly authorizes MGI to trade futures contracts, provides security arrangements for such contracts, and includes reimbursement obligations by and to LBI as a commodity broker.
There is no merit to this argument. MGI did not actually trade futures contracts. Section 761(4)(J) cannot be read so broadly as to include an account agreement that simply refers to transactions that qualify as commodity contracts.
C. MGI Is Not Entitled to Customer Status Under SIPA
MGI argues that because its account balances were included in the non-regulated commodity component of LBI's 15c3-3 reserve calculation, it is entitled to customer status under SIPA. However, under SIPA " customer" is defined as " any person who has deposited cash for the purpose of purchasing securities. "  There is no genuine dispute of material fact that MGI did not purchase securities. Accordingly, MGI is not a customer entitled to customer status under SIPA.
D. MGI Is Not Entitled to Summary Judgment on the Property of Estate Issue
MGI argues that the Trustee does not have a legal or equitable right to the Net Cash Balances under section 541(a) of the Bankruptcy Code. MGI claims that either the account documents or SEC Rules 15c3-3 and 15c3-2 are sufficient to create a trust for its benefit that precludes inclusion of the funds into the estate.
MGI has not sufficiently developed this argument. For example, MGI has not shown the creation of an actual or constructive trust by virtue of the Customer Agreement under applicable state law. In addition, there appears to be a genuine dispute of material fact as to how the SEC Rules applied to MGI's margin funds. For these and other reasons, MGI is not entitled to summary judgment on the issue of whether the margin funds are property of the estate.
However, contrary to the Trustee's contentions, there is no apparent conflict between MGI's property-of-the-estate argument and either SIPA's or subchapter IV's customer protection regime. The Trustee has already paid all uncontested SIP A customer claims, has made significant payments to general creditors, and has not administered a subchapter IV estate.
For the foregoing reasons, the Trustee's motion is GRANTED to the extent of confirming its determination that MGI's claim is not entitled to customer status, and MGI's motion is DENIED. Further proceedings are necessary to determine whether the Net Cash Balances are property of the estate. A status conference is scheduled for March 26, 2015 at 3 :30 p.m. The Clerk of the Court is directed to close these motions [Docket Nos. 36 and 41].