The United States Bankruptcy Court for the Southern District of New York issued an important ruling on March 1, 2010 in the Securities Investor Protection Act (SIPA) liquidation of Bernard L. Madoff Investment Securities LLC (Madoff Securities), adopting the trustee’s method of determining “net equity” for purposes of distributing “customer property” and Securities Investor Protection Corporation (SIPC) funds under SIPA.3

Securities Investor Protection Act

Seeking to have an independent examiner investigate a debtor or its management can be a powerful tool available to creditors and other interested parties in a bankruptcy case. Typically, a party might request that an examiner be appointed if the debtor or its management is suspected of fraud or other misconduct. The low cost associated with making the request, together with recent positive outcomes for requesting creditors, may help to increasingly popularize the use of examiner requests by parties seeking leverage in bankruptcy plan negotiations.

IN RE: ALTHEIMER & GRAY (April 15, 2010)

On April 26th, the Eleventh Circuit held that the anti-injunction provision of the Financial Institutions Reform, Recovery and Enforcement Act prohibits a federal district court from enjoining the FDIC. A trial court had initially imposed a TRO against a failing bank prohibiting it from taking any action with respect to $1 billion worth of mortgage proceeds it held in trust for petitioner, Bank of America, who held legal title. When the FDIC was appointed receiver, the FDIC moved to dissolve the TRO. The trial court refused converting the TRO into a preliminary injunction.

This case and its companion cases involved contentious construction disputes surrounding the interplay of the Massachusetts Mechanics' Lien Statute in the context of a bankrupt general contractor and a building owner’s claims for offset damages. In this instance, the dispute centered on the fact that a contractor’s bankruptcy filing left approximately 28 subcontractors unpaid for work they had already performed.

Yesterday, the Washington Department of Financial Institutions closed Frontier Bank, headquartered in Everett, Washington, and appointed the FDIC receiver.

Yesterday, the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico closed Eurobank, headquartered in San Juan, Puerto Rico, and the FDIC was appointed receiver.

Yesterday, the Office of the Comptroller of the Currency closed BC National Banks, headquartered in Butler, Missouri, and appointed the FDIC receiver.

Yesterday, the Department of Insurance, Financial Institutions & Professional Regulation of the Missouri Division of Finance closed Champion Bank, headquartered in Creve Coeur, Missouri, and appointed the FDIC receiver.

The recent financial collapse has provided a strategic opportunity for healthy financial institutions, and non-traditional investors, to capitalize on the misfortune of failing banks. The FDIC is accelerating this process by revamping its loss share program. This program gives prospective buyers of failing institutions billions of dollars in government guarantees for risking the purchase of a failing bank, inclusive of all “toxic” assets.