No Exceptions Late Filed Claims in SIPA Proceedings

No Exceptions Late Filed Claims in SIPA Proceedings

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t can be bad enough that one’s client has invested in securities with a brokerage firm that fails financially and is placed into liquidation under the Securities Investor Protection Act of 1970 (SIPA). It can become even worse for that client if it does not protect its investment by following the proper procedures. A customer whose brokerage firm is placed in liquidation under SIPA has a substantial remedy beyond that provided by common law. Funds of the Securities Investor Protection Corp. (SIPC) are available to satisfy claims of each customer of the failed firm up to a maximum of $500,000, including up to $100,000 on claims for cash. That remedy, though, can be forfeited through carelessness or inactivity on the customer’s part.

Because brokerage bankruptcy is an esoteric subset of insolvency law, it behooves counsel to a customer of an insolvent brokerage to be familiar with the law regarding the filing of claims. As demonstrated by two cases in 1997, that law is strict and inflexible Missing a deadline can mean the difference between total satisfaction of your client’s claims and complete denial of the claim. Failure to comply with these time limitations can bar a claim entirely, or cause the claimant to receive less than his full entitlement under the law.

The most severe penalty is exacted of those who fail to file a claim within six months of the publication of notice of the initiation of the SIPA proceeding. Failure to file a claim within this period operates as an absolute bar to participation in either the fund of "customer property" or advances from SIPC. This time bar is mandatory. In light of the statutory requirement that notice be published (as well as mailed to the last known address of each active customer), it is immaterial whether the notice mailed by the trustee was actually received by the customer or whether the customer saw the published notice.

It is also the responsibility of the customer to assure that the trustee actually receives the customer’s claim. It is therefore crucial that the customer have some form of proof that the trustee did, in fact, receive the claim. To assure that the customer has such evidence, all claim forms should be mailed by a method that provides the customer with a receipt indicating that his claim form arrived at its destination in a timely fashion. If this course is followed, and the customer does not receive a receipt from the postal service, the customer is on notice that the trustee has not received the claim, and should take action to remail a claim.

Recent decisions have been rendered involving the various aspects of the untimely filing of customer and broker-dealer claims. One of the decisions addressed the constitutionality of SIPA notice and claims procedures.

In In re Blinder, Robinson & Co. Inc., 124 F. 3d 1238 (1997), the Court of Appeals for the Tenth Circuit made significant rulings regarding the time-bar provisions of SIPA as they applied to certain customers who had filed claims after the statutory bar date. The trustee rejected the claims as untimely. The trustee had mailed notice of the commencement of the SIPA proceeding to more than 220,000 customers of the debtor, including the claimants, at the addresses listed on the debtor’s computer records, and published the notice in newspapers of general circulation where the debtor had branch offices, as well as in all editions of The Wall Street Journal.

The claimants asserted they neither saw the published notices nor received the mailed notices. The bankruptcy court held that in the absence of actual notice, it would be unconstitutional to apply SIPA as written so as to deny these objecting claimants equal status with other timely filed claims. The district court affirmed on a different basis without reaching this constitutional issue.

The court of appeals reviewed the Supreme Court’s holding in Mullane v. Central Hanover Bank & Trust Co. and its own holdings in United States v. Clark and United States v. 51 Pieces of Real Property. In Mullane, the Supreme Court had held that "[a]n elementary and fundamental requirement of due process in any proceeding which is to be accorded finality is notice reasonably calculated, under all circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections." 339 U.S. at 314.

The court of appeals held that the procedure followed by the trustee for the dissemination of notice, which had been approved by the bankruptcy court, was consistent with the requirements of SIPA, and gave the claimants sufficient notice of the SIPA case. The court stated that the mailing and publication "were reasonably calculated to apprise interested parties of the SIPA liquidation and afford them an opportunity to be heard. Thus, the trustee’s actions satisfied due process requirements." 124 F.3d at 1243. The court of appeals expressly held that the SIPA provisions for notice and mailing were constitutional.

One of the late-filed claimants had been in an automobile accident soon after the trustee was appointed and had two surgeries to repair her injuries. Although she returned to work months before the end of the customer claims period, she filed after the mandatory bar and requested an exception to the filing deadline. The district court held that SIPA should be construed liberally and allowed the late-filed claim.

The court of appeals held that the six-month time bar in SIPA is mandatory and absolute and reversed the district court’s holding that SIPA’s incompetent person exception was applicable to a claimant with physical hardships who failed to apply for an extension of time to file a claim within the six-month time period, as "contrary to the plain language of the statute."

Another decision was rendered involving various aspects of the untimely filing of customer claims in In re Adler, Coleman Clearing Corp., 204 B.R. 99 (Bankr. S.D.N.Y. 1997). In this case, the bankruptcy court was faced with the trustee’s denial of three separate late-filed customer claims. First, the bankruptcy court held that the claimants did not fall within the narrow exceptions to the statutory time bar and had failed to file a timely claim. The claimants’ account—with securities and a debit—was transferred post-filing date by the trustee to a receiving broker-dealer as part of a bulk account transfer but, because of the non-payment of the debit, the account was returned to the trustee. The court found that the claimants had ignored the trustee’s explicit notice that claimants should file claims even though their account was transferred to another broker-dealer. Second, the bankruptcy court held that (i) the publication of notice in the national editions of The New York Times and The Wall Street Journal on a single day is reasonable under the circumstances with regard to certain late-filed claimants who asserted they had not received notice, (ii) the publication supplemented the mailing of claims packages to addresses where the claimants reside and (iii) the fact that the claimants may not have actually received notice by this means or otherwise is irrelevant. Third, the bankruptcy court held that the "mailbox rule" applies in SIPA liquidation proceedings. That rule states that a timely and accurate mailing raises a rebuttable presumption that the mailed material was received and thereby filed. The court however, upheld the trustee’s denial of the late-filed claim because the trustee presented evidence that rebutted the presumption of receipt and the claimants failed to adduce evidence that the trustee received their claim.

Some Practice Tips

In the event of a failure of a client’s brokerage firm, careful adherence by the customer to the statutory scheme is required to make the available benefits a reality. Counsel should make sure—

•the customer files a claim promptly;

•the claim is mailed return receipt requested in the manner and to the place specified by the notice;

•the claim is fully supported by customer statements, confirmations, even a narrative;

•the customer files even where the customer’s account is part of a post-filing date bulk transfer of customer accounts to another brokerage; and

•the claimant, who is an infant or incompetent, takes advantage of an extension of time within the mandatory filing period.

Journal Date: 
Wednesday, April 1, 1998