In an issue of first impression in the MF Global Inc. liquidation proceedings under the Securities Investor Protection Act of 1970 (SIPA), Judge Martin Glenn of the U.S. Bankruptcy Court for the Southern District of New York held that payments to non-attorney professionals hired by a SIPA trustee need only be approved by the Securities Investor Protection Corp. (SIPC)[1] and are not required to be approved by a bankruptcy court. However, Judge Glenn also held that a SIPA trustee “is required to disclose the fees and expenses of his non-attorney professionals … with sufficient detail to enable the [Bankruptcy] Court to assess the reasonableness of the Trustee’s fee applications.”[2]
Before its collapse, MF Global Holdings Ltd. and its affiliates, including MF Global Inc., comprised one of the world’s leading brokerage firms in the commodities and listed derivatives markets. The company’s failure has been described as “one of the largest and most complicated in the history of securities and commodities businesses.”[3] James W. Giddens was appointed as the SIPA trustee for the liquidation of MF Global Inc. Giddens, who also serves as SIPA trustee in the Lehman Brothers Inc. liquidation, was initially faced with a $1.6 billion shortfall in brokerage customer accounts, and it was unclear at the beginning of the case if there would be enough money in MF Global Inc.’s estate to pay back customers or pay administrative expenses.[4] The SIPA trustee hired professionals, such as accounting firms Deloitte & Touche LLP and Ernst & Young LLP, to assist with marshalling the estate’s assets.
In January 2014, Knighthead Capital Management LLC filed a motion to seek the entry of an order requiring that the costs of persons hired by the SIPA trustee be disclosed and subject to a bankruptcy court’s approval.[5] Knighthead stated that it was “extremely troubled” by the incurrence of expenses by non-attorney professionals that are not subject to creditor or bankruptcy court review and are paid from the same general fund from which creditors would receive their recoveries.[6] Knighthead contended that the fees and expenses paid to the trustee’s non-attorney professionals were disproportionately high compared to other major SIPA liquidations, such as that of Lehman Brothers Inc. In comparing MF Global Inc. to Lehman, Knighthead estimated that the costs and expenses that were incurred by non-attorney professionals represented a much larger share of both assets marshaled (5.38 percent vs. 1.08 percent) and total assets (2.59 percent vs. 0.20 percent).[7]
Unlike Lehman, the SIPA trustee in MF Global Inc. also did not disclose fees and expenses of non-attorney professionals in interim reports that were submitted to the bankruptcy court. Knighthead called on Judge Glenn to exercise a “gatekeeping function” in reviewing and approving the fees incurred by the SIPA trustee’s non-attorney professionals, cautioning that a bankruptcy court must place “‘considerable reliance’ on the views of SIPC when determining the ‘nature, extent, and value’ of the services rendered.”[8]
Judge Glenn held that SIPA does not contemplate approval by a bankruptcy court of payments to the SIPA trustee’s non-attorney professionals. In addition, Judge Glenn found that the legislative history and statutory framework of SIPA made it clear that Congress intended that the SIPA trustee have the authority, with the approval of SIPC, to fix the compensation of and pay non-attorney professionals from the general estate.[9] SIPA’s legislative history supported this finding, as it established two separate systems of compensation for persons who rendered services to a SIPA estate — one applicable to the SIPA trustee and trustee’s counsel (expressly requiring a bankruptcy court’s approval) and one applicable to non-attorney professionals engaged by the SIPA trustee (where oversight responsibility was placed solely in the hands of SIPC).
Reduced bankruptcy court oversight in SIPA proceedings is consistent with the policy underlying the statute; requiring only SIPC to authorize the fees of non-attorney professionals allows a SIPA trustee “to act quickly and efficiently to return customer property and make customers whole, and avoids costly, duplicative layers of review.”[10] Judge Glenn observed, however, that the SIPA trustee does not have “free reign” to incur unreasonable expenses without any oversight, as SIPC is tasked with conducting a thorough review of all fee requests.[11]
On the other hand, Judge Glenn held that a SIPA trustee has a duty to disclose fees and expenses paid to non-attorney professionals, which a bankruptcy court could consider in connection with its review of a trustee’s own requests for compensation. A SIPA trustee’s responsibilities include overseeing the work of all professionals, and a trustee cannot properly be paid for work that was or could have been performed by non-attorney professionals or was duplicative of other work that had been performed. As such, Judge Glenn found that a bankruptcy court must take into account payments that were made by the SIPA trustee to his/her non-attorney professionals when reviewing fee applications of the trustee and his counsel.[12]
Although the SIPA trustee disclosed limited information about the fees that had been paid to Deloitte and Ernst & Young in its opposition brief, these disclosures were insufficient for Judge Glenn to evaluate the reasonableness of the SIPA trustee’s fees.[13] Judge Glenn did not establish the exact parameters of the required disclosure, but requested that information on the services provided, hours worked and amounts paid — broken down by time periods marking major milestones in the case — should be provided with the SIPA trustee’s next interim-fee application. Disclosures need not be in the form or detail required for attorney fee applications; however, the SIPA trustee must provide an explanation of the oversight of services provided by non-attorney professionals that was performed by either the SIPA trustee or his/her counsel.[14]
Several important takeaways should be noted in respect of Judge Glenn’s ruling. First, the fees of a SIPA trustee’s non-attorney professionals do not require approval by a bankruptcy court — only by the SIPC. Consequently, creditors and other interested parties in a SIPA liquidation will not be able to object directly to the fees of non-attorney professionals, which may be significant in amount in complicated proceedings. Second, the reasonableness of a SIPA trustee’s fees will be based, in part, on a trustee’s oversight of its non-attorney professionals’ incurrence of administrative costs. Although the exact nature and degree of disclosure has yet to be finally determined, SIPA trustees must include information regarding fees incurred by non-attorney professionals in the trustee’s own fee applications.
[1] SIPC is a federal corporation designed to protect customers of brokers or dealers from loss in case of financial failure of a SIPA-regulated member.
[2] Memorandum Opinion and Order Granting in Part and Denying in Part Knighthead Capital’s Motion for Order Requiring Disclosure and Approval of Payments to Trustee’s Non-Attorney Professionals, In re MF Global Inc., Case No. 11-2790 (MG) (SIPA) [Docket No. 7722] (the “Opinion”) at pp. 2-3.
[3] Opinion at p. 25, n.15.
[4] Opinion at p. 19.
[5] See Notice of Motion and Notice of Hearing on Motion for Order Requiring Costs and Expenses of Persons Hired by SIPA Trustee Pursuant to Section 78fff-1(a)(1) of SIPA to Be Disclosed and Subject to Court Approval, In re MF Global Inc., Case No. 11-2790 (MG) SIPA [Docket No. 7503]; Memorandum of Law in Support of Motion for Order Requiring Costs and Expenses of Persons Hired By SIPA Trustee Pursuant to Section 78fff-1(a)(1) of SIPA to Be Disclosed and Subject to Court Approval [Docket No. 7504] the (“Knighthead Memorandum of Law”).
[6] Knighthead Memorandum of Law ¶ 2. Knighthead estimated that non-attorney professionals had incurred fees of approximately $200 million.
[7] Knighthead Memorandum of Law ¶ 16.
[8] Knighthead Memorandum of Law ¶ 3.
[9] Opinion at p. 9.
[10] Opinion at pp. 17-18.
[11] Opinion at p. 19.
[12] See Opinion at p. 24.
[13] In its opposition to Knighthead’s motion, the SIPA trustee made disclosures regarding the amount of compensation to be paid to Deloitte and Ernst & Young through 2013. Deloitte had received approximately $76 million related to accounting, account transfers and claims-processing, and approximately $29 million related to technology and systems operating costs. Ernst & Young had received approximately $39 million, with $34 million being attributable to forensic and analytical work related to an investigation report that included extensive flow of funds exhibits, and the remaining $5 million relating to regulatory and third-party requests, among other tasks. Trustee’s Opposition to Knighthead Capital Management LLC’s Motion for Order Requiring Costs and Expenses of Persons Hired by SIPA Trustee Pursuant to Section 78fff-1(a)(1) of SIPA to Be Disclosed and Subject to Court Approval, In re MF Global Inc., Case No. 11-2790 (MG) SIPA [Docket No. 7541] ¶¶ 54-55.
[14] Opinion at pp. 26-27.