MEMORANDUM OF DECISION
JAMES N. BARR, Bankruptcy Judge.
SUMMARY
On June 9, 1982, eighty-four days before Comark was drawn into this Chapter 7 bankruptcy case involuntarily, it wired defendant Farmer Brothers Company (FBC) the sum of $4,963,351.25. The bankruptcy trustee (the Trustee) charges that the payment was a preferential repayment of debt.
FBC contends it was a payment from its stockbroker, Comark, “settling” the sale of securities for FBC’s account, at FBC’s request but in accordance with oral agreements (“repurchase agreements” or “repos”) compelling Comark to do so. In that, FBC relies on 11 U.S.C. § 546(e) and (f) as a shield against the Trustee’s powers.
FBC also challenged the adequacy of the Trustee’s proof, and raised affirmative defenses afforded by Section 547(c).
The evidence proves that the payment was a “preference,” as defined in 11 U.S.C. § 547, but the Trustee may not recover those funds because FBC proved its defenses thereto are sound.
JURISDICTION
This court has jurisdiction in this proceeding pursuant to 28 U.S.C. § 1334(a) (granting the district courts original and exclusive jurisdiction of all cases under Title 11); 28 U.S.C. § 157(a) (authorizing the district courts to refer all Title 11 cases and proceedings to the bankruptcy judges for the district); and General Order No. 266, dated October 9, 1984 (referring all Title 11 cases and proceedings to the bankruptcy judges for the Central District of California). This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2).
STATEMENT OF FACTS
Comark was formed as a limited partnership in 1977. It was licensed as a securities broker, but did not “broker” the sale of securities between independent parties, for commissions. Instead, Comark became a dealer in securities under what are known as “repos” (Repurchase
Agreements);
and attempted to become a player in the “Money Market.”
Typically, Comark would enter into a “reverse repo” by which it purchased a security for its own account.
Then it would “match” that “reverse” with a repo whereby it sold that security to one of its customers. The security would typically be transferred to Comark (either physically or through a “book entry” at the Federal Reserve Bank) and would usually remain in Comark’s “clearing account” at Marine Midland Bank throughout the reverse repo and matching repo transaction, i.e., until the “back end” of the repo was settled by repayment of funds to the customer or by a “roll-over” of those funds into another repo or other transaction.
The reverse repo price Comark paid for the security was usually slightly lower than the price at which it was sold to Comark’s customer, and the difference was Comark’s income from the transactions.
In such matched transactions, the same security was used to satisfy the back end of both the repo and the reverse repo. Under the reverse repo, Comark was obligated to deliver the security to the entity from which it was purchased, on the date agreed to at the time of the purchase; and under the corresponding repo, Comark was obligated to return the customer’s money (which was often used to make the reverse repo purchase in the first place), on the predetermined date.
Comark had a “clearing account” at Marine Midland Bank and at Bradford Trust (i.e., whereby those banks agreed to hold securities deposited by Comark subject to its instructions). However Comark had no “safekeeping account” (i.e., whereby a financial institution might have agreed to hold securities owned by Comark’s customers, segregated from Comark’s securities and identified specifically to the customer’s account). Marine Midland and Comark could each readily determine what securities were held in the clearing account on a given day, and the customer/transaction to which they related. Such scrutiny was important to both the bank and to Comark; for Comark used the securities in that account to collateralize its debt to Marine Midland and to conduct repo transactions with its customers. The account at Bradford Trust was seldom used by Comark, and the relationship there played no significant part in this adversary proceeding.
Comark routinely delivered repo securities to one of its “clearing accounts” upon their purchase of the securities by Comark or by its customer (unless the customer required physical delivery of the securities); and the clearing bank would hold them until it received further instructions from Comark as to their disposition.
THE REPOS
On June 1, 1982, with proceeds from the sale and/or maturity of other securities held for FBC, plus additional cash wired by FBC that day, Comark purchased, then sold to FBC, a $2,000,000.00 CD issued by the Industrial Bank of Japan (IBJ), for that amount; and a Federal National Mortgage Association (FNMA) bond, with a par value of $2,000,000.00, for $1,960,000.00, as part of two separate “open repos.”
Comark agreed to repurchase those securities for the $3,960,000.00 paid by FBC, plus interest at about 12.25% per annum.
Two days later, while the IBJ and FNMA repos were still open, Comark and FBC entered into another open repo involving a Treasury Note, par value $1,000,000.00, which Comark sold to FBC for $990,000.00. Comark agreed to repurchase it for that amount plus about 13% interest.
The securities involved here, were delivered to Comark’s clearing account at Marine Midland upon their purchase, and remained there until they were sold. All three repos remained open until June 9, 1982, when FBC put Comark to their obligation to repurchase those securities. Co-mark sold the subject securities that day. The next day, FBC’s bank received all sums due from Comark (i.e., the $4,963,-351.29).
THE TRUSTEE’S CASE IN CHIEF
The Trustee met his burden of proving that the subject payment was a preferential transfer under Section 547(b) of the Code; for it proved that on June 9, 1982,
i.e., within 90 days before the date of the filing of the involuntary bankruptcy petition in this case, Comark transferred an interest of the debtor in property, to a creditor, on account of an antecedent debt owed by the debtor before the transfer was made and while the debtor was insolvent, and that the payment enabled that creditor (FBC) to receive more than it would receive in this Chapter 7 case had the transfer not occurred.
FBC asserted that it was not a “creditor,” as that term is defined in 11 U.S.C. § 101(9) and as the term is used in section 547(b)(1); but FBC clearly had a valid “claim” to the funds which Comark paid it on June 9, 1982,
therefore, at that time, FBC was Comark’s “creditor.”
FBC's contention that the June 9, 1982 payment was not “on account of an antecedent debt” fails; for Comark was obligated to repay the subject funds to FBC when the repo transaction was initiated (i.e., on June 1, 1982 and June 2, 1982).
That is the very nature of repo transactions. Thus, an “antecedent debt” was extinguished with the subject payment.
Comark’s solvency at the time of the subject transfer of funds, was raised by FBC; but it failed to overcome the presumption of insolvency derived from 11 U.S.C. § 547(f).
FBC received all that it was due from Comark on June 9, 1982, and FBC would not receive payment in full in this Chapter 7 case had they not been so paid.
Therefore, FBC’s hope for a refuge within Section 547(b)(5), which measures a transfer against the creditor’s aliquot share of a debtor’s estate had the transfer not occurred, is also unavailing.
However, despite its characterization as “preferential,” the Trustee may not avoid that transfer; for FBC proved it is entitled to the insulation afforded by 11 U.S.C. § 547(c)(1) and (2).
ACKNOWLEDGEMENTS
Before discussing FBC’s defenses to the trustee’s action, I must pay homage to those who have laid the legal pavement through the money market maze. This portion of my opinion could justifiably be entitled “Bevill, Bresler, etc. Revisited” or perhaps “Shades of Bevill, Bresler,” for both plaintiff and defendant variously relied upon or attempted to distinguish the opinion of the district court in
Matter of Bevill, Bresler & Schulman Asset Management Corp.,
67 B.R. 557 (D.N.J. 1986), and the Third Circuit opinion in the case of
Bevill, Bresler & Schulman v. Spencer Savings & Loan,
878 F.2d 742 (3rd Cir.1989).
And justifiably so. The district court opinion is an excellent discourse on the money market in general and on repos specifically. That court also provided the analytical spadework for part of my analysis of the parties’ rights under 11 U.S.C. § 547(c)(1). The later appellate court opinion serves as an authoritative exposition, with an historical perspective, on congressional intent in enacting Sections 546(e) and (f).
THE CONTEMPORANEOUS EXCHANGE FOR NEW VALUE DEFENSE
With regard to the applicability of Section 547(c)(1), I find there was a “contemporaneous exchange of new value” from FBC to Comark, June 9, 1982. FBC exchanged its rights in and to the securities it purchased June 1 and 2, 1982, for the money it received a few days later.
Section 547(a)(2) defines “new value” to mean “money or money’s worth in goods, services, or new credit,
or release by a transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the debtor or the trustee under applicable
law_” [Emphasis added.]
The Trustee did not argue that the transfer in which FBC purchased the securities from Comark was a preferential transfer, or that it was otherwise avoidable; and, in fact, it was not.
The Trustee did argue, however, that because the securities were never “transferred” to FBC during the first half of the repos, Comark received no “new value” in exchange for the subject payment.
I find for FBC on that question, by recourse to nearly the same reasoning applied by the district court in
Matter of Bevill, Bresler & Schulman Asset Management Corp.,
67 B.R. 557, 603-616 (D.N.J.1986).
There the court analyzed the New York and New Jersey versions of the Uniform Commercial Code, and concluded that (a) the debtor (AMC) was a “broker”/“financial intermediary” for purposes of applying those states’ versions of UCC § 8-313(l)(c), and that (b) for transfer of the repo securities from the broker to its customers to have occurred, three requirements must have been met:
(1) the broker/financial intermediary must send confirmation of the purchase;
(2) the broker/financial intermediary by book entry or otherwise must identify a specific security as belonging to the purchaser; and
(3) the security must be in the broker/financial intermediary’s possession.
Id.
at 606.
The court there concluded that the customers in that case had no ownership interest in the repo securities, to the extent the securities were not held in a segregated “safekeeping” account; for the debtor (broker) there did not have sufficient indicia of control over securities in its “clearing account” to conclude that they were within the debtor’s “possession.” Without possession there was no “delivery” and thus no “transfer,” reasoned the court. [See UCC § 8313.]
In that case, the clearing bank had a lien on securities in that broker’s clearing account, to secure the broker’s debt to the bank; and the clearing account agreement between those parties provided the bank with “total discretion to refuse to deliver securities or transfer them to safekeeping ... if [the bank] deemed itself to be less than adequately secured, and it could do so without notice to [the broker/debtor].”
Bevill, Bresler, etc.,
67 B.R. at 610.
The California version of the applicable sections of the Uniform Commercial Code do not differ materially from the versions relied upon in
Bevill, Bresler, etc.,
and the facts here satisfy all the criteria applied by the district court in that case to establish that the subject securities were “transferred” to FBC prior to June 9, 1982.
It was proven that Comark never re-registered the securities or transferred them physically to FBC (or even to a segregated “safekeeping” account for FBC’s benefit). However, as noted immediately above, “transfer” of securities may be accomplished by complying with the requisites of UCC § 8313.
Comark, admittedly a “broker,” sent confirmations to FBC of its purchases of the subject securities;
Comark maintained sufficient records to satisfy the requisite of “identification” of the securities as being those of FBC;
and Comark had sufficient possession and control of the securities to satisfy the requisite of “possession” imposed by Cal. UCC § 8313. As to the latter conclusion, Comark’s arrangement with Marine Midland Bank was similar to the relationship of Bevill, Bresler, etc. with its clearing bank, in that in both cases the broker’s clearing bank had a lien on the securities on deposit in the broker’s clearing account.
The difference here is the degree of control asserted by the bank over the securities in the clearing account.
No specific “clearing account agreement” existed between Comark and Marine Midland. At least none was put in evidence. However, there was a “General Loan and Security Agreement,” dated January 21,1981, between Marine Midland and Comark. By that agreement, the bank was granted “a security interest and a lien in
and upon any personal property of the undersigned or in which the undersigned may have an interest which is now or may at any time hereafter come into the possession or control of the Bank ... whether for the express purpose of being used by the Bank as collateral security or for safekeeping or for any other different purpose
That agreement then goes on to provide the bank with various powers to sequester and liquidate such collateral as Comark might deposit with the bank, and those powers are summarized in the last sentence of the first paragraph of the agreement: “The undersigned hereby authorizes the Bank, in its discretion, at any time, whether or not the Collateral is deemed by it adequate, to appropriate and apply upon any of the Obligations, whether then due or not due, any of the Collateral of the undersigned and to charge any of the Obligations against any balance of account standing to the credit of the undersigned on the books of the Bank.”
However, unlike the clearing account agreement in
Bevill, Bresler, etc.,
the agreement in this case does not grant Marine Midland the right to ignore Comark’s instructions to transfer securities into or out of Comark’s clearing account; and there was no evidence that such ever occurred. Only by foreclosing on the securities in that account could Marine Midland protect itself. And that is precisely what the bank did on June 4, 1982, when it liquidated most of the securities in the clearing account and used the proceeds thereof to pay its loan to Comark in full. Thereafter, it no longer had any control over the securities in Comark’s clearing account, which included the subject securities held for FBC until the June 9, 1982, transaction. Thus even if the General Loan and Security Agreement did deprive Comark of “control” over the subject securities, by June 4, 1982, Comark had obtained the control needed to accomplish transfer of the subject securities to FBC.
THE ORDINARY COURSE OF BUSINESS DEFENSE
Section 547(c)(2) also provides a haven for FBC to the extent the June 9, 1982, payment to FBC was the repayment of a debt.
That section protects even a preferential transfer to the extent it was in the ordinary course of both the debtor’s and the transferee’s business or financial affairs, according to ordinary business terms, and in payment of a debt incurred in the ordinary course of the debtor’s business or financial affairs within 45 days before the payment. [11 U.S.C. § 547(c)(2) ]
Comark and FBC regularly wired money back and forth from July 1981 through June 6, 1982, to the end that FBC could keep its available cash reserves earning interest daily, until it was needed for FBC’s operations as a coffee producer/distributor. Comark regularly used FBC’s funds to purchase securities, such as those involved here; then sold them when FBC needed cash. The debt satisfied by the subject payment was incurred by Comark in the regular course of its business as a broker/ dealer; for it dealt extensively in money market transactions such as those here. Such transactions were common and “ordinary” in the conduct of the businesses of both FBC and Comark; and the transaction in question (i.e., the repurchase and payment to FBC) was made in accordance with ordinary business practices of those dealing in the money market at that time.
Finally, as noted earlier, the subject payment was made within 45 days after the debt was incurred.
Thus FBC is entitled to the protection of 11 U.S.C. § 547(c)(2).
In addition, I find within 11 U.S.C. § 546 another valid defense to the Trustee’s action.
THE MONEY MARKET DEFENSE
Trustee’s counsel used the word “repos” to describe the parties’ transactions, with the greatest reluctance. But there was no other way to tag the transactions; for the evidence was overwhelming that all three were conducted as “repos” and considered such by Comark and FBC.
Ms. Stigum, the most authoritative of the experts, testified that if a delivery of securities is not made, the customer who buys securities in a repo transaction has made “the equivalent of an unsecured loan.” She did not say that a HIC repo “is” an unsecured loan, and on cross examination she admitted it was not. She noted that “the repo market has operated for years without a definition of what a repo is.” However, FBC and its contact at Comark (Mr. Tisdale) intended the subject transactions be repos. They defined the term functionally. And that is about the best even Ms. Stigum could do.
Clearly, a repo is a hybrid transaction, made up of equal parts of security transaction and loan.
Another expert, Robert Pouyerow, a CPA working for the Trustee in this case, testified that accountants would not consider a HIC repo as a generator of gains or losses, for the securities are considered the assets of the one who
should have
delivered them to the other repo participant. That accounting practice was developed to prevent the “selling” party from “creating” gains or losses. However, the protective devices developed by accountants for their purposes do not serve to transform “repos” into “loans.”
The awareness that repos can be used for chicanery, merely helps focus my inquiry on whether the transactions were truly “repos.” If they were repos, they carried the indicia of both securities transactions and loans. In this instance, securities were actually transferred between Co-mark and FBC as part of the subject transactions. There were no sham or bogus transactions here. They were repos, not just loans; and the payment from Comark to FBC on June 9, 1982 was not just the repayment of a loan. It was the culmination of a transaction commonly transacted between stockbroker and customer in the money market of that day.
From all before me, it is clear that in 1982, HIC repos were common if not wise.
It was also common then for repos to be agreed to on the telephone, without any written agreement and with written confirmations which the customer might not receive until days after the entire transaction had been consummated (just because in some instances, both ends of the repo were consummated faster than the postal service could deliver the confirmation of even the front end of the deal.) In other words, HIC repos were merely one way to keep funds flowing through the money market.
A more astute and careful person might have required delivery (at least to a safekeeping account in its name) of each security in each repo transaction with Comark.
But FBC’s failure to do so did not change the character of the transactions.
In addition, the evidence overwhelmingly favored the conclusion that FBC, through its Treasurer (Mr. Uhley), and Comark, through Mr. Tisdale, intended that the subject transactions be repos, not merely loans. In addition to the testimony of both Uhley and Tisdale as to their conversations about repos in general and, specifically the requisites of repos with FBC, both testified that it was the intent of both parties that the subject transactions be repos. That is borne out by Comark’s documentation of those transactions.
My reasoning on that point was affected little by the Trustee’s evidence aimed at casting Mr. Uhley in the role of the uninformed, uncaring guardian of FBC’s funds. While I accept as proven, that Mr. Uhley was not always concerned about the specific security employed in a given repo transaction, and probably relied too heavily on oral representations of Comark’s personnel, it was also proven that he knew the basics of a repo transaction and justifiably expected standard repo procedures would be followed in each instance.
Having determined that the subject transactions were repos, and thus securities transactions, I must still analyze the applicability and impact of 11 U.S.C. § 546, i.e., provisions which limit the avoidance powers of bankruptcy trustees as to certain stock, commodities and money market transactions.
Analysis and reason compel me to agree with the conclusions of both the Third Circuit Court in
Bevill, Bresler & Schulman v. Spencer Savings & Loan,
878 F.2d 742 (3rd Cir.1989), and the Tenth Circuit in
Kaiser Steel Corp. v. Charles Schwab & Co., Inc.,
913 F.2d 846 (10th Cir.1990), that Congress enacted § 546 “to minimize the displacement. caused in the commodities and securities markets in the event of a major bankruptcy affecting those industries.”; and that the term “settlement payment” was to be interpreted broadly to give effect to that congressional intent. (See
Kaiser Steel,
913 F.2d at 849-50; and
Bevill, Bresler, etc.,
878 F.2d at 751-2.)
In both of those cases, the courts dealt with the interpretation of 11 U.S.C. § 546(f). The Trustee would have me ignore Section 547(f) because it was not in effect when this case was commenced. FBC contends Section 547(f) is merely the “clarification” of congressional intent expressed when it enacted Section 546(e), July 27,1982 (i.e., before commencement of the case); and that, in any case, Section 546(e) insulates FBC from the avoiding powers of the Trustee.
I note that 11 U.S.C. § 546(e), (which makes no specific reference to “repos,” but is the first embodiment of the congressional intent noted above), was enacted July 27, 1982, in the same legislative package as
Sections 741(8).
This bankruptcy case was commenced September 1, 1982. Thus, at that time Section 546(e) was effective; and I find it applicable and dispositive. Therefore, I need not wrestle with the applicability of Section 546(f).
Section 546(e) was enacted “to protect margin payments and
settlement payments
made by and to participants in the securities market generally.” [Emphasis added.]
Bevill, Bresler,
878 F.2d at 747. Prior to that time, Section 546 had applied to commodity brokers and markets but made no mention of securities markets or stockbrokers.
Ms. Stigums testified that the.term “settlement payment” is not generally used in the money market. However, she went on to confirm that in each repo there are two settlement opportunities. One at the time the security is sold (i.e., on the “front end” of the repo), and the second at the time the security is repurchased (i.e., at the “back end”). If either the securities or the payment therefor are not “delivered” (by either physical delivery to the customer, delivery to the control of the customer’s broker, or by “book entry” delivery) during each phase of the repo, a “fail” occurs entitling the non-defaulting party to specific legal rights (which are not material to this opinion). The terms “settlement” and “settlement payment” have been addressed extensively by the Third and Tenth Circuit Courts in the cases I have repeatedly relied upon in this opinion.
“Settlement is the completion of a securities transaction.”
Kaiser Steel Corp.,
913 F.2d at 849 (10th Cir.1990).
Two separate panels of judges of the Third Circuit have analyzed the expansiveness of the term “settlement payment” in the context of repo transactions and have concluded that it “may be the deposit of cash by the purchaser or the deposit or transfer of the securities by the dealer, and ... includes transfers which are normally part of the settlement process, whether they occur on the trade date, the scheduled settlement day, or any other date in the settlement process for the particular type of transaction.”
Matter of Bevill, Bresler & Schul-man Asset Management Corp.,
896 F.2d at 59 (quoting from
Bevill, Bresler & Schulman v. Spencer Savings & Loan,
878 F.2d at 752).
As noted earlier, by enacting Section 546(e), in 1982, Congress sought to protect the entire securities market. Comark was a “stockbroker” when the subject transactions with FBC were “settled” (i.e., by the payment on June 9, 1982), and when Section 546(e) was enacted. The subject transactions were “securities transactions,” entitled to inclusion in its protective scheme initiated with that enactment. The fact that those securities transactions were “re-pos,” dealt with more specifically in Section 546(f), does not obviate the application of Section 546(e). If anything, enactment of Section 546(f) reinforces the view that Section 546(e) is to be interpreted broadly; for
Section 546(f) is further evidence that Congress has consistently expanded the purview of Section 546 to give effect to its protective purpose. I should not restrict its application unless the facts warrant it. Here they do not.
CONCLUSION
In this case, both the plaintiff and the defendant have met their burdens of proof. The Trustee proved that the payment of monies by Comark to FBC was a preferential transfer. However, FBC proved its entitlement to the protections of affirmative defenses afforded by Sections 547(c)(1) and (2) and by Section 546(e). Therefore, the monies Comark paid to FBC on June 9, 1982 may not be recovered by the Trustee; and judgment will issue for the defense.