Liquidation of Broker-Dealer Related to 8th Largest Bankruptcy

On October 31, 2011, MF Global Holdings Ltd. filed the eigth largest chapter 11 bankruptcy in U.S. History.  MF Global, Inc. was the broker-dealer unit of MF Global Holdings, Ltd. and, by law, could not legally file for bankruptcy or even be included in the bankruptcy of its parent.  As a result, Securities Protection and Investment Corp. (SIPC) moved to begin an orderly liquidation under the Securities Investor Protection Act (SIPA) immediately following the parent company’s bankruptcy filing.  SIPC maintains a reserve fund authorized by Congress to help securities customers of failed brokerage firms such as MF Global, Inc.

Section 742 of the Bankruptcy Code recognizes that SIPC may file an application for a protective decree under SIPA, notwithstanding the automatic stay in a related bankruptcy case.  The filing of such application stays all proceedings in any related bankruptcy proceeding until such application is dismissed.  If SIPC completes the liquidation of the broker-dealer, then the court can dismiss the case. 

Here, while the chapter 11 bankruptcy case of the MF Global Holdings is separate from the SIPA liquidation of the MF Global Inc., the inter-company obligations between both entities tie the two proceedings together, leaving to guess which law (Bankruptcy Code or SIPA) will prevail on matters affecting both proceedings.  One would assume the Bankruptcy Code trumps SIPA in most cases.  Indeed, the bankruptcy court in the Holdings’ case recently appointed counsel to assist the liquidating trustee in the SIPA case.

It’s always interesting when securities laws and bankruptcy laws cross paths.



Categories: Bankruptcy Filings, Recent News

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