On or about July 12, 1972, a purchase order for one thousand shares of Pennsylvania Power & Light Company 8% preferred stock was given. On July 19, 1972, the debtor received from the Graduses $ 100,000, the full purchase price for the shares which were obtained by the debtor from another broker for $ 99,802,260.00.
On July 25, 1972, Pennsylvania Power & Light Company issued ten certificates in the names of the Graduses as joint tenants with the right of survivorship, each certificate being for 100 shares, and delivered them to the debtor, which converted them to its own use on July 27, 1972, when the debtor sold the shares to bona fide purchasers after having forged the signatures of the owners to the necessary stock transfer powers.
Signature guarantees were affixed to each of the forged powers by the debtor, by the Industrial Valley Bank and Trust Company (IVB) and others. IVB had no knowledge of the forgery, and was not a party to any fraudulent scheme or conversion by the debtor.
Upon receipt of the certificates and the forged stock powers, in good faith and in reliance on the IVB guarantees of the signatures, Pennsylvania Power & Light Company issued new certificates in the names of the bona fide purchasers.
The proceeds of the sale of the shares were received by the debtor and converted to its own use, no portion thereof being received by either IVB or the Graduses, whose demand for delivery of the stock during August and September, 1972, were unheeded by the debtor, which, on October 19, 1972 was adjudicated as a firm whose customers were in need of protection under the Securities Investor Protection Act (SIPA), and Donald M. Collins was appointed Trustee of the debtor. As a result of the conversion by the debtor of the stock, the Graduses were "customers" of the debtor, pursuant to the definition in Section 6(c)(2)(A)(ii) of SIPA, and entitled to the statutory benefits afforded by the Act to cash customers of the debtor.
On January 4, 1973, the Graduses filed a timely customer claim (claim no. 1217) in the instant proceedings for the shares. At the same time, the Graduses also made a claim against Pennsylvania Power & Light Company for the replacement of the shares, which company then advised IVB of the transfer of the stock to bona fide purchasers in reliance upon the forged signatures, and demanded that IVB reimburse it for any losses it might sustain, pursuant to its guarantee of said signatures.
The Graduses also asserted a claim against IVB based upon the latter's guarantee. Subsequently, on or about February 21, 1973, the Graduses and IVB entered into a written agreement, Exhibit L of the record, under which IVB agreed to obtain and deliver to the Graduses 1,000 shares of Pennsylvania Power & Light Company 8% preferred stock, registered in their names, to replace the converted stock, in consideration of which the Graduses assigned to IVB "any and all claims, rights or causes of action, and any proceeds thereof, which they or either of them have or may have against Broker or any other person, including, without limitation, SIPC, arising out of their purchase of the Preference Shares and the subsequent transfer thereof without the endorsement of Claimants . . . Any recovery by Bank on any Assigned Claim shall inure solely to the benefit of Bank . . .". (Record, Exhibit L, pp. 77-78)
Thereafter, IVB purchased 1,000 shares of stock of Pennsylvania Power & Light, paying a purchase price of $ 105,971.25 for the shares. Subsequently, on or about March 30, 1973, IVB delivered said stock to the Graduses, with the payment of $ 2,030, representing dividends payable on January, 1973, to shareholders of record on December 8, 1972 ($ 2,000 plus $ 30 interest thereon, and an additional sum of $ 500 in reimbursement for relevant counsel fees).
On June 14, 1973, IVB filed a proof of claim (claim no. 1326) in the instant proceedings, asserting, inter alia, a claim for $ 108,501.25, on account of the payment to the Graduses.
On December 20, 1973, and July 17, 1974, the Trustee filed objections to the Gradus' claim, neither of whom had been customers of IVB at any relevant time.
Pennsylvania Power and Light Company had at least one bank account with IVB and was at all relevant times a solvent corporation.
Bankruptcy Rule 302(d)(2) applies to the transfer of the Gradus' claim to IVB and the parties authorized the Trustee to petition the court herein to enter an order substituting IVB for the Graduses on claim no. 1217. Upon the entering of such an order, IVB will amend the claim it has filed in this proceeding in its own name, being claim no. 1326, to delete therefrom any claim with respect to the Graduses.
The Trustee acknowledges that IVB has a valid claim against the Estate of the Debtor herein to the extent of $ 108,501.25 on account of the Gradus' transaction but asserts that it is only a "general creditor claim". IVB contends, on the contrary, that the claim it owns is a "customer claim" which came to it by virtue of an assignment from the Graduses, whose status is "customer", therefor it is entitled to have the first $ 50,000 of its claim paid from funds advanced by SIPC in accordance with Sections 6(f) and 6(g) of SIPA, and the balance paid from the single and separate fund described in Section 6(c)(2)(B) of SIPA.
The difference between the Trustee's position and that of IVB, in terms of dollars and cents is that if the Trustee's position is upheld, the total distribution to IVB would be approximately $ 16,200 and if IVB's position is sustained, its total distribution will approximate $ 84,200, a difference of $ 68,000. Ninety-four percent of this additional distribution to IVB would be reflected in an increase of the net cost of these proceedings to SIPC; the remaining six percent of the additional distribution to IVB would be the result of the reduction of distribution from the fund to other customer creditors. (Brief of defendant-appellant, p. 4)
The bankruptcy judge, on the basis of the stipulated facts, held that since, admittedly, the Graduses were "customers" of the debtor, by virtue of the assignment IVB became the owner of a "customer claim" and issued an order appropriate to such conclusion from which the appeal was taken by SIPC and the Trustee.
The single issue involved in this case is whether the Gradus assignment was effective to vest the bank with a preferred claim against the debtor's "single and separate fund" and for the special protection afforded customers from SIPC's funds.
It appears to be an oversimplification of the problem to conclude that, merely because by definition the Graduses were "customers" of the debtor, they had an enforceable preferred claim against SIPC to which IVB would succeed as their assignee, under ordinary contract law. Since the Act of 1970, 15 U.S.C. § 78aaa, et seq. does not expressly cover the situation here, and absent case law on the point, it is necessary to refer to the background against which Congress passed the statute here involved which we must now interpret.
What was the intent of Congress in passing SIPA? As pointed out by the Trustee,
"In the late 1960's a large number of securities brokers went into bankruptcy, after nearly forty years without any significant brokerage bankruptcies. As a result hundreds of thousands of brokerage customers who had on deposit at those brokers securities or cash had their property placed in jeopardy and removed from their control for long periods of time, although fortunately various emergency measures preserved them from actual loss. This situation threatened to destroy investor confidence and thereby destroy the capital markets in the United States which had been so successful in promoting the entire economy.
"The Congressional purpose was to be achieved by the creation of a corporation, SIPC, which was to be financed [except in the most grave catastrophe] by all securities brokers. There was thus created an arrangement similar to that provided to the customers of banks through the Federal Deposit Insurance Corporation. In fact, SIPC has always been funded by assessments against securities brokers based upon the amount of their customer activity. Therefore, an advance by SIPC to the trustee of a bankrupt broker for payment by the trustee to a customer of such broker is payment of funds collected from customers of all other securities brokers. In other words, all customers of all securities brokers are sharing the risks of the bankruptcy of any particular securities broker." Trustee's brief on appeal, pp. 5, 6.