11 U.S.C. § 747 — Subordination of certain customer claims

Page 212 TITLE 11—BANKRUPTCY § 745 Editorial Notes AMENDMENTS 1982—Pub. L. 97–222 inserted ‘‘but’’ after ‘‘relief,’’. § 745. Treatment of accounts (a) Accounts held by the debtor for a par- ticular customer in separate capacities shall be treated as accounts of separate customers. (b) If a stockbroker or a bank holds a cus- tomer net equity claim against the debtor that arose out of a transaction for a customer of such stockbroker or bank, each such customer of such stockbroker or bank shall be treated as a separate customer of the debtor. (c) Each trustee’s account specified as such on the debtor’s books, and supported by a trust deed filed with, and qualified as such by, the In- ternal Revenue Service, and under the Internal Revenue Code of 1986, shall be treated as a sepa- rate customer account for each beneficiary under such trustee account. (Pub. L. 95–598, Nov. 6, 1978, 92 Stat. 2613; Pub. L. 97–222, § 11, July 27, 1982, 96 Stat. 238; Pub. L. 98–353, title III, § 483, July 10, 1984, 98 Stat. 383; Pub. L. 103–394, title V, § 501(d)(28), Oct. 22, 1994, 108 Stat. 4146.) HISTORICAL AND REVISION NOTES SENATE REPORT NO. 95–989 Section 745(a) indicates that each account held by a customer in a separate capacity is to be considered a separate account. This prevents the offset of accounts held in different capacities. Subsection (b) indicates that a bank or another stockbroker that is a customer of a debtor is consid- ered to hold its customers accounts in separate capac- ities. Thus a bank or other stockbroker is not treated as a mutual fund for purposes of bulk investment. This protects unrelated customers of a bank or other stock- holder from having their accounts offset. Subsection (c) effects the same result with respect to a trust so that each beneficiary is treated as the cus- tomer of the debtor rather than the trust itself. This eliminates any doubt whether a trustee holds a per- sonal account in a separate capacity from his trustee’s account. Editorial Notes REFERENCES IN TEXT The Internal Revenue Code of 1986, referred to in sub- sec. (c), is classified generally to Title 26, Internal Rev- enue Code. AMENDMENTS 1994—Subsec. (c). Pub. L. 103–394 substituted ‘‘Inter- nal Revenue Code of 1986’’ for ‘‘Internal Revenue Code of 1954 (26 U.S.C. 1 et seq.)’’. 1984—Subsec. (a). Pub. L. 98–353 inserted ‘‘the debtor for’’ after ‘‘by’’. 1982—Subsec. (c). Pub. L. 97–222 substituted ‘‘Each’’ for ‘‘A’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1994 AMENDMENT Amendment by Pub. L. 103–394 effective Oct. 22, 1994, and not applicable with respect to cases commenced under this title before Oct. 22, 1994, see section 702 of Pub. L. 103–394, set out as a note under section 101 of this title. EFFECTIVE DATE OF 1984 AMENDMENT Amendment by Pub. L. 98–353 effective with respect to cases filed 90 days after July 10, 1984, see section 552(a) of Pub. L. 98–353, set out as a note under section 101 of this title. § 746. Extent of customer claims (a) If, after the date of the filing of the peti- tion, an entity enters into a transaction with the debtor, in a manner that would have made such entity a customer had such transaction oc- curred before the date of the filing of the peti- tion, and such transaction was entered into by such entity in good faith and before the quali- fication under section 322 of this title of a trust- ee, such entity shall be deemed a customer, and the date of such transaction shall be deemed to be the date of the filing of the petition for the purpose of determining such entity’s net equity. (b) An entity does not have a claim as a cus- tomer to the extent that such entity transferred to the debtor cash or a security that, by con- tract, agreement, understanding, or operation of law, is— (1) part of the capital of the debtor; or (2) subordinated to the claims of any or all creditors. (Pub. L. 95–598, Nov. 6, 1978, 92 Stat. 2613; Pub. L. 97–222, § 12, July 27, 1982, 96 Stat. 238.) HISTORICAL AND REVISION NOTES SENATE REPORT NO. 95–989 Section 746(a) protects entities who deal in good faith with the debtor after the filing of the petition and be- fore a trustee is appointed by deeming such entities to be customers. The principal application of this section will be in an involuntary case before the order for re- lief, because § 701(b) requires prompt appointment of an interim trustee after the order for relief. Subsection (b) indicates that an entity who holds se- curities that are either part of the capital of the debtor or that are subordinated to the claims of any creditor of the debtor is not a customer with respect to those securities. This subsection will apply when the stock- broker has sold securities in itself to the customer or when the customer has otherwise placed such securities in an account with the stockbroker. Editorial Notes AMENDMENTS 1982—Pub. L. 97–222, § 12(c), substituted ‘‘claims’’ for ‘‘claim’’ in section catchline. Subsec. (a). Pub. L. 97–222, § 12(a), substituted ‘‘enters into’’ for ‘‘effects, with respect to cash or a security,’’, struck out ‘‘with respect to such cash or security’’ wherever appearing, and substituted ‘‘the date of the filing of the petition’’ for ‘‘such date’’, and ‘‘entered into’’ for ‘‘effected’’. Subsec. (b). Pub. L. 97–222, § 12(b), substituted ‘‘trans- ferred to the debtor’’ for ‘‘has a claim for’’ in provisions preceding par. (1), and struck out ‘‘is’’ in par. (2). § 747. Subordination of certain customer claims Except as provided in section 510 of this title, unless all other customer net equity claims have been paid in full, the trustee may not pay in full or pay in part, directly or indirectly, any net eq- uity claim of a customer that was, on the date the transaction giving rise to such claim oc- curred— (1) an insider; (2) a beneficial owner of at least five percent of any class of equity securities of the debtor, other than— Page 213 TITLE 11—BANKRUPTCY § 751 (A) nonconvertible stock having fixed pref- erential dividend and liquidation rights; or (B) interests of limited partners in a lim- ited partnership; (3) a limited partner with a participation of at least five percent in the net assets or net profits of the debtor; or (4) an entity that, directly or indirectly, through agreement or otherwise, exercised or had the power to exercise control over the management or policies of the debtor. (Pub. L. 95–598, Nov. 6, 1978, 92 Stat. 2613; Pub. L. 97–222, § 13, July 27, 1982, 96 Stat. 238.) HISTORICAL AND REVISION NOTES SENATE REPORT NO. 95–989 Section 747 subordinates to other customer claims, all claims of a customer who is an insider, a five per- cent owner of the debtor, or otherwise in control of the debtor. Editorial Notes AMENDMENTS 1982—Pub. L. 97–222 substituted ‘‘the transaction giv- ing rise to such claim occurred’’ for ‘‘such claim arose’’ in provisions preceding par. (1). § 748. Reduction of securities to money As soon as practicable after the date of the order for relief, the trustee shall reduce to money, consistent with good market practice, all securities held as property of the estate, ex- cept for customer name securities delivered or reclaimed under section 751 of this title. (Pub. L. 95–598, Nov. 6, 1978, 92 Stat. 2614.) HISTORICAL AND REVISION NOTES SENATE REPORT NO. 95–989 Section 748 requires the trustee to liquidate all secu- rities, except for customer name securities, of the es- tate in a manner consistent with good market practice. The trustee should refrain from flooding a thin market with a large percentage of shares in any one issue. If the trustee holds restricted securities or securities in which trading has been suspended, then the trustee must arrange to liquidate such securities in accordance with the securities laws. A private placement may be the only exemption available with the customer of the debtor the best prospect for such a placement. The sub- section does not permit such a customer to bid in his net equity as part of the purchase price; a contrary re- sult would permit a customer to receive a greater per- centage on his net equity claim than other customers. § 749. Voidable transfers (a) Except as otherwise provided in this sec- tion, any transfer of property that, but for such transfer, would have been customer property, may be avoided by the trustee, and such prop- erty shall be treated as customer property, if and to the extent that the trustee avoids such transfer under section 544, 545, 547, 548, or 549 of this title. For the purpose of such sections, the property so transferred shall be deemed to have been property of the debtor and, if such transfer was made to a customer or for a customer’s ben- efit, such customer shall be deemed, for the pur- poses of this section, to have been a creditor. (b) Notwithstanding sections 544, 545, 547, 548, and 549 of this title, the trustee may not avoid a transfer made before seven days after the order for relief if such transfer is approved by the Commission by rule or order, either before or after such transfer, and if such transfer is— (1) a transfer of a securities contract entered into or carried by or through the debtor on be- half of a customer, and of any cash, security, or other property margining or securing such securities contract; or (2) the liquidation of a securities contract entered into or carried by or through the debt- or on behalf of a customer. (Pub. L. 95–598, Nov. 6, 1978, 92 Stat. 2614; Pub. L. 97–222, § 14, July 27, 1982, 96 Stat. 238; Pub. L. 111–16, § 2(8), May 7, 2009, 123 Stat. 1607.) HISTORICAL AND REVISION NOTES SENATE REPORT NO. 95–989 Section 749 indicates that if the trustee avoids a transfer, property recovered is customer property to any extent it would have been customer property but for the transfer. The section clarifies that a customer who receives a transfer of property of the debtor is a creditor and that property in a customer’s account is property of a creditor for purposes of the avoiding pow- ers. Editorial Notes AMENDMENTS 2009—Subsec. (b). Pub. L. 111–16 substituted ‘‘seven days’’ for ‘‘five days’’ in introductory provisions. 1982—Pub. L. 97–222 substituted ‘‘(a) Except as other- wise provided in this section, any’’ for ‘‘Any’’, and ‘‘but’’ for ‘‘except’’, inserted ‘‘such property’’, sub- stituted ‘‘or 549’’ for ‘‘549, or 724(a)’’, and added subsec. (b). Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2009 AMENDMENT Amendment by Pub. L. 111–16 effective Dec. 1, 2009, see section 7 of Pub. L. 111–16, set out as a note under section 109 of this title. § 750. Distribution of securities The trustee may not distribute a security ex- cept under section 751 of this title. (Pub. L. 95–598, Nov. 6, 1978, 92 Stat. 2614.) HISTORICAL AND REVISION NOTES SENATE REPORT NO. 95–989 Section 750 forbids the trustee from distributing a se- curity other than a customer name security. The term ‘‘distribution’’ refers to a distribution to customers in satisfaction of net equity claims and is not intended to preclude the trustee from liquidating securities under proposed 11 U.S.C. 748. § 751. Customer name securities The trustee shall deliver any customer name security to or on behalf of the customer entitled to such security, unless such customer has a negative net equity. With the approval of the trustee, a customer may reclaim a customer name security after payment to the trustee, within such period as the trustee allows, of any claim of the debtor against such customer to the extent that such customer will not have a nega- tive net equity after such payment. (Pub. L. 95–598, Nov. 6, 1978, 92 Stat. 2614.)