Are Emotional Damages Recoverable When A Creditor Violates The Automatic Stay?

MF Global Corzine ordered funds moved to JP Morgan, memo says

JP Morgan never received assurance that transfer was not customer money

March 24 (Bloomberg) — Jon S. Corzine, MF Global Holding Ltd.’s chief executive officer, gave “direct instructions” to transfer $200 million from a customer fund account to meet an overdraft in a brokerage account with JPMorgan Chase & Co., according to a memo written by congressional investigators.

Edith O’Brien, a treasurer for the firm, said in an e-mail quoted in the memo that the transfer was “Per JC’s direct instructions,” according to a copy of the memo obtained by Bloomberg News yesterday. The e-mail, dated Oct. 28, was sent three days before the company collapsed, the memo says. The memo does not indicate whether that phrase was the full text of the e-mail or an excerpt.

The account could have contained both client and company funds, the memo notes. Whether the transfered funds were those of the company, its clients or both is not known.

“If client funds were transferred at his direction, it raises new questions,” Seth Berenzweig, managing partner at Berenzweig Leonard LLP, a law firm in McLean, Virginia, said in an interview with Bloomberg Television. “This is a new storm cloud that is now headed for Jon Corzine and it raises a lot of issues.”

O’Brien’s internal e-mail was sent as the New York-based broker found intraday credit lines limited by JPMorgan, the firm’s clearing bank as well as one of its custodian banks for segregated customer funds, according to the memo, which was prepared for a March 28 House Financial Services subcommittee hearing on the firm’s collapse. O’Brien is scheduled to testify at the hearing after being subpoenaed this week.

‘Funds Were Safe’
“Over the course of that week, MF Global’s financial position deteriorated, but the firm represented to its regulators and self-regulatory organizations that its customers’ segregated funds were safe,” said the memo, written by Financial Services Committee staff and sent to lawmakers.

Steven Goldberg, a spokesman for Corzine, said in a statement that Corzine “never gave any instruction to misuse customer funds and never intended anyone at MF Global to misuse customer funds.”

Vinay Mahajan, global treasurer of MF Global Holdings, wrote an e-mail on Oct. 28 that said JPMorgan was “holding up vital business in the U.S. as a result” of the overdrawn account in London, which had to be “fully funded ASAP,” according to the memo.

Barry Zubrow, JPMorgan’s chief risk officer, called Corzine to seek assurances that the funds belonged to MF Global and not customers. JPMorgan drafted a letter to be signed by O’Brien to ensure that MF Global was complying with rules requiring customers’ collateral to be segregated. The letter was not returned to JPMorgan, the memo said.

Bernanke said the goal is to prevent community banks from wasting time and money trying to figure out if a new regulation applies to them.

“Although this change seems relatively simple, we hope it will help banks avoid allocating precious resources to poring over supervisory guidance that does not apply to them,” Bernanke said in a video message to an Independent Community Bankers of America conference in Nashville, Tennessee.

Bernanke said the Fed is also taking steps to improve communications with small banks and to better understand the challenges facing the industry, including the creation of a subcommittee to review how community banks are supervised.

Bernanke told the group that the outlook for small banks is improving but that the economy continues to pose challenges for the industry.

“Despite some recent signs of improvement, the recovery has been frustratingly slow, constraining opportunities for profitable lending,” Bernanke said.

Bernanke also sought to calm fears among community bankers that the 2010 Dodd-Frank financial oversight law will have a big impact on their businesses.

Bernanke warns lawmakers country headed for ‘massive fiscal cliff’

Delaware Bankruptcy Judge Sontchi Holds Subsequent New Value Defense Not Reduced by Post Petition Payments

In a case of apparent first impression, U.S. Bankruptcy Judge Christopher S. Sontchi considers whether post-petition “critical vendor” payments of pre-petition claims reduced “new value”. Judge Sontchi holds that such post petition payments do not reduce the amounts available for the subsequent new value defense under 11 U.S.C. § 547(c)(4).

Within the context of the facts before the Court, Judge Sontchi’s holding is of narrow import. However, it reaching this narrow holding, Judge Sontchi cuts a broad swath. First, Judge Sontchi rejects the notion that there is a distinction between payments by the “debtor” and the “debtor in possession” for purposes of preference analysis. Second, he holds that the filing of the bankruptcy “fixes” the preference analysis as of the petition date. “Neither the post-petition provision of new value by the creditor nor the post-petition payment of unpaid, pre-petition new value affects the preference calculation.”

The Facts

The facts before Judge Sontchi were undisputed. In the months preceding the bankruptcy of Friedman’s Inc. (“Friedman’s”), defendant Roth Staffing Companies, L.P. (“Roth”) provided temporary staffing services to Friedman’s. In the 90 days before its bankruptcy filing (the “Preference Period”), Roth received preferential payments totaling $81,997. Roth also provided in the Preference Period an additional $100,660 in services for which Roth was not paid.

Friedman’s did not dispute that Roth’s additional services during the preference period qualified as “subsequent new value” on the petition date. However, Friedman’s had moved the Court for authority to pay the prepetition wage claims of Friedman’s employees, including Roth’s staffers (the “Wage Motion”). The Court granted the Wage Motion, and Friedman’s paid Roth $72,412 for its pre-petition staffing services. This payment, Friedman’s now argued, reduced the $100,660 in subsequent new value provide by Roth to only $28,248, leaving a preference claim of $53,749.

Debtor “in Possession” – An Adjective not a Temporal Restriction

Roth sought to make, and Friedman’s sought to refute, the argument that a there is a fundamental distinction between a pre-petition payment made by a “debtor” and a post-petition payment made by a “debtor in possession”. Roth claimed that a post petition payment by a “debtor in possession” could not reduce subsequent new value provided pre-petition to the “debtor”. The payments, in essence, were made by different entities. In response, Friedman’s argued that the no debtor can exist until the bankruptcy petition is filed, and accordingly, a debtor cannot be a pre-petition entity.

Judge Sontchi rejected both parties’ arguments as being “based upon a fallacious assumption, i.e. that the debtor and the debtor in possession are separate entities.” He concluded that the qualification “in possession” is an adjective and not a temporal limitation – i.e. a payment by a debtor and a payment by a debtor in possession are made by the same entity. However, Judge Sontchi expressly reserved any holding on this issue. The answer was far simpler.

The Third Circuit Favors The “Fixed” Approach

Judge Sontchi held that, in the Third Circuit, preference analysis becomes fixed on the petition date. In support, he relied on an unlikely source – the Third Circuit decision in New York City Shoes, Inc. v. Bentley Int’l Inc., 880 F.2d 679 (3d Cir. 1989) (“NYC Shoes“). In that decision, the Third Circuit articulated the following three part test for determining the availability of the subsequent new value defense.

First, the creditor must have received a transfer that is otherwise voidable as a preference under § 547(b). Second, after receiving the preferential transfer, the preferred creditor must advance “new value” to the debtor on an unsecured basis. Third, the debtor must not have fully compensated the creditor for the new value as of the date that it filed its bankruptcy petition.

Judge Sontchi focused upon the phrase “as of the date that it filed its bankruptcy petition” in the third test. This language in NYC Shoes, as well as the identical formulation in Schubert v. Lucent Techs, Inc. (In re Winstar Comm’n., Inc.), 554 F.3d 382, 402 (3d Cir. 2009), are the basis for Judge Sontchi’s conclusion that:

The clear implication of the Circuit’s inclusion of “as of the date that it filed its bankruptcy petition” is that subsequent provision or payment of new value does not affect the preference analysis even if the debtor completely compensates the creditor for its pre-petition claim. This is consistent with the purpose of the preference law-to reduce damaging, pre-petition opt out behavior and to level the pre-bankruptcy playing field for all creditors. Once the bankruptcy is filed the preference law becomes unnecessary. The automatic stay steps in to stop the race to the assets and the supervision of the case by the court, among other things, ensures that similar claims receive similar treatment.

Is there Another Shoe Yet to Drop?

Judge Sontchi’s opinion would seem, at first read, to be good news. The opinion certainly provides new defensive ammunition for those few preference claim defendants who received post petition payments on pre-petition claims whether by reason of administrative expense claims under Section 503(b)(9), critical vendor payments or otherwise. However, the decision also may breath new life into language from the same NYC Shoes decision that, for years, was frequently cited as the basis for the argument that the Third Circuit required the use of the restrictive “remains unpaid” approach to the analysis of subsequent new value. For this reason, Judge Sontchi’s embracing of NYC Shoes is discomforting.

Click on the following links to see more articles on the “, bankruptcy preference, subsequent new value defense “. The above article was first published on Sunday, December 18th, 2011, by burbageweddell. Both comments and pings are currently closed.

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According to The Wall Street Journal, Michael Roseman, who was in charge of controlling risks, expressed serious concerns to both Corzine and MF Global’s board of directors several times last year before eventually resigning.

The revelation that MF Global had $6.3 billion in net exposure to the bonds of troubled countries like Italy and Spain triggered a run on the bank that eventually forced the futures brokerage into bankruptcy on October 31.

Roseman, who was brought on in 2008 to overhaul MF Global’s risk systems after a rogue trader cost the company $140 million, warned that MF Global didn’t have enough cash to buffer against these risky positions and also presented scary scenarios about the ripple effects of a credit rating downgrade, the Journal reported.

However, Corzine argued these scenarios were too extreme and likely impossible and that the company’s exposure was limited and worth the risks, the paper reported. Corzine also suggested he might leave MF Global if the board didn’t trust his judgment about the bets, the Journal said.

Corzine, the former governor of New Jersey and CEO of Goldman Sachs (GS: 105.13, +3.97, +3.92%), is expected to testify on the MF Global collapse at a House Agriculture Committee hearing on Thursday.

Each time Corzine wanted to increase the bullish eurozone bets above previously-established risk thresholds, Roseman had to ask the board for permission, the Journal reported. Roseman detailed the risks that made him feel uncomfortable, the paper reported.

Eventually, Roseman was replaced by a new chief risk officer in January, prompting him to leave the company in March.

Corzine was denied permission by the board at least one time this year to increase the eurozone bets further, the Journal reported.

After suffering key ratings downgrades in October, MF Global eventually succumbed to the pressures, becoming one of the top 10 bankruptcies in U.S. history.